-----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, OVFPyubJ/gzzGRJQv9fIs9L9zF/SRH9tFq1deDmvw9yySZtgvrFovAgvj4Qfo/7A N5Rwon6j8Agfx00echkg4Q== 0001132072-03-000090.txt : 20030331 0001132072-03-000090.hdr.sgml : 20030331 20030331153736 ACCESSION NUMBER: 0001132072-03-000090 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED INDUSTRIAL CORP /DE/ CENTRAL INDEX KEY: 0000101271 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 952081809 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04252 FILM NUMBER: 03630294 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: HAYES MANUFACTURING CORP DATE OF NAME CHANGE: 19660911 FORMER COMPANY: FORMER CONFORMED NAME: TOPP INDUSTRIES CORP DATE OF NAME CHANGE: 19710510 10-K 1 s15-3474_10k.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, 2002. 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] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes [x] No [_] Aggregate market value of the voting stock (which consists solely of shares of Common Stock) held by non-affiliates of the registrant as of June 28, 2002, computed by reference to the closing sale price of the registrant's Common Stock on the New York Stock Exchange on such date: $273,546,639. On March 10, 2003, the registrant had outstanding 13,067,918 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, 2002 are incorporated by reference into Parts I and II 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; outcome of current and future litigation; the accuracy of the Company's analysis of its potential asbestos related exposure and insurance coverage; 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 discontinued transportation operation; 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. The Company makes no commitment to update any forward looking statement or to disclose any facts, events or circumstances after the date hereof that may affect the accuracy of any forward looking statements. ITEM 1. BUSINESS At December 31, 2002, the operations of United Industrial Corporation ("United" or the "Company") consist of two business segments: defense and energy, principally conducted through two wholly-owned subsidiaries. The transportation operation is treated as a discontinued operation and complete cessation of production operations is scheduled during 2003. The Company will continue to have warranty obligations thereafter. Defense AAI Corporation AAI Corporation ("AAI") is engaged in engineering, development and manufacturing of Unmanned Aerial Vehicle ("UAV") platforms, Electronic Warfare ("EW") test and training systems, military and commercial simulators, automated test systems, and advanced boresight equipment. In addition, AAI provides sophisticated engineering, logistics, and maintenance services, which complement its key product platforms, as well as those of other original equipment manufacturers. AAI's advanced products designed for military customers include such high profile programs as the Shadow UAV system, recently selected as the U.S. Army's Tactical Unmanned Aerial Vehicle platform, and the Joint Services Electronic Combat Systems Tester, employed by all U.S. military branches to ensure optimal airborne EW operations. AAI's aerospace products, utilized by numerous military and commercial customers worldwide, offer superior test and maintenance capabilities for the F-16, many Boeing airframes, various General Electric and Pratt & Whitney aircraft engines, and other aviation equipment. AAI supplies its high quality aerospace test equipment to provide depot maintenance services to foreign and domestic military aviation customers. In 2002 and 2001 approximately 77% of the sales volume of AAI consisted of research, development and production of military items under domestic defense contracts. International defense contracts including foreign military sales through the U.S. government, accounted for 19.7% of company sales in 2002 as compared to 18.2% in 2001. These contracts generally related to unmanned aerial vehicle systems and weapon test and training systems for foreign governments. 1 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 UAV business area, AAI is one of the few companies to have successfully fielded an operational UAV system for the U.S. Department of Defense. AAI first began development work in the UAV business in 1986, producing the highly successful RQ-2 Pioneer UAV through a joint venture with Israel Aircraft Industries. The Pioneer has been employed by the United States in Operation Desert Storm and in the conflicts in Somalia and Bosnia. In 1999, AAI was awarded a contract to provide the next generation of tactical UAV's to the U.S. Army, the RQ-7 Shadow 200. In addition, AAI has other UAV systems and products which it markets internationally. Competitors include Northrop-Grumman Corporation, General Atomics and Israel Aircraft Industries. In the area of training and simulation systems, AAI competes with many large and small organizations developing equipment for the U.S. Government. AAI has a leading position in the development of aircraft maintenance simulators for the U.S. Air Force, having produced trainers for the Boeing E-3 Airborne Warning and Control System (AWACS); Northrop-Grumman E-8 Joint Stars wide-area surveillance aircraft and Boeing C-17 Globemaster cargo aircraft. AAI is also a leader in shipboard training and simulation systems, having produced its first systems, the 20B4 and 20B5 "Pierside" trainers, in the 1970's time frame. AAI currently provides the permanently installed radar stimulator/simulators for all ships that are part of the U.S. Navy's Battle Force Tactical Training (BFTT) System and the portable Carry-on Combat Systems Trainers (COCST) that are configurable to any combat ship and are fully BFTT compatible. Major competitors include: Northrop-Grumman Corporation, L-3 Communications and CAE Inc. AAI also develops and manufactures a variety of automated test systems to support military aviation requirements. These include the AN/USM-670 Joint Service Electronic Combat Systems Tester (JSECST), an organizational level (O-level) test system that assures aircraft electronic warfare systems are ready for use, and Advanced Boresight Equipment (ABE), a gyro-stabilized, electro-optical, angular measurement system that is used to align avionics and weapon systems on-board military aircraft and helicopters. Major competitors in the military test market include: BAE Systems PLC, DRS Technologies, Inc. and EDO Corporation. AAI's administrative offices and its principal manufacturing and engineering facilities are located in Hunt Valley, Maryland. 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. 2 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 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. On May 17, 2002 Detroit Stoker ceased its foundry operation and is purchasing its necessary castings from lower cost sources. This decision has improved operating margins. During 2002 Detroit Stoker incurred severance and other cash charges totaling approximately $1,286,721. In addition, the Company wrote off the net book value of the assets related to its foundry facility of $3,420,245 during the foundry's operating period in 2002. Transportation On July 26, 2002 the Company closed a transaction in which it sold two rail car overhaul contracts, as well as related assets and liabilities, with the New Jersey Transit Corporation and the Maryland Mass Transit Administration to Alstom Transportation Inc. Complete cessation of transportation's production operations is scheduled during 2003. The Company will continue to have warranty obligations thereafter. AAI Transportation Systems is being accounted for as discontinued operations. See Note 16 to the Financial Statements included in Item 8 of this Report. For additional information concerning the Company, 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 Company's 2002 Annual Report to Shareholders (the "Annual Report"), which section is incorporated herein by reference. General Employees As of March 1, 2003 United and its subsidiaries had approximately 1,600 employees. Approximately 50 of these employees are represented by two unions under contracts expiring 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. 3 Research and Development During 2002, 2001 and 2000, the defense segment expended approximately $4,431,000, $5,041,000 and $3,835,000, respectively, on the independent research and development of new products and improvements of existing products. In addition to the above amounts, the defense segment has contracts, primarily with the U.S. government, to conduct research and development. During 2002, 2001 and 2000, the energy segment expended approximately $157,000, $479,000 and $166,000, respectively, on research and development of new products and improvements of existing products. All of the programs and funds to support such programs are sponsored by the subsidiary involved. Backlog The backlog of orders by industry segment at December 31, 2002 and 2001 was as follows: 2002 2001 ---- ---- Defense $296,117,000 $201,221,000 Energy Systems 5,299,000 6,122,000 The backlog in the discontinued transportation operations was $17,811,000 and $164,891,000 at December 31, 2002 and 2001, respectively. The year 2001 transportation backlog includes $137,923,000 of backlog in respect of the two overhaul contracts that the Company sold. Except for about $100,000,000, substantially all of the backlog orders at December 31, 2002 are expected to be filled in 2003. During 2002 and 2001, respectively, the defense sales were comprised of 69% and 67% fixed price contracts and 31% and 33% cost type contracts. 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 11 of the Notes to Financial Statements included in Item 8 of this Report, which Note is incorporated herein by reference. Foreign Operations and Export Sales United and its subsidiaries have no significant foreign operations. During 2002, 2001 and 2000, export sales by United and its subsidiaries amounted to approximately $66,366,000, $54,670,000 and $57,110,000, respectively. 4 Available Information Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports, are available free of charge on our internet website at http://www.unitedindustrial.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange Commission. 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, 2003.
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 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 153,727 October 31, 2003 82,430 April 30, 2005 22,410 November 30, 2003 55,987 February 29, 2004 28,827 October 31, 2003 3200 Enterprise Street Manufacturing, engineering and 131,544 Leased to April 2009 Brea, CA administrative facilities of ACL Technologies 1213 Jefferson Davis Highway Office Space 2,211 Leased to February 28, Arlington, VA 22202 2006 1601 Paseo San Luis Office Space 3,408 Leased to June 30, 2007 Sienna Vista, AZ 13501 Ingenuity Drive Office Space 2,000 Leased to February 28, Orlando, FL 2005
5
Approximate Area Owned Location Principal Use in Square Feet or Leased 4141 Colonel Glenn Hwy Office Space 1,454 Leased to July 31, 2004 Beavercreek, OH 555 Sparkman Drive Office Space 2,650 Leased to January 14, Huntsville, AL 2004 Kenia, AK Training School Approximately 1 acre Leased to November 6, of land 2027 2850 West 5th North Street Office Space 15,105 Leased to October 31, Summerville, SC 2004 2745 West 5th North Street Warehouse 12,000 Leased to November 30, Summerville, SC 2003 2735 W Fifth Assembly and Administrative Facility 59,000 Leased to December 31, North Street of AAI 2006 Summerville, SC
For information with respect to obligations for lease rentals, see Note 8 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. Reference is made to the information concerning asbestos litigation set forth in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report, which information is incorporated herein by reference. 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 Reference is made to Item 4 of Part II to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, which information is hereby incorporated by reference. 6 EXECUTIVE OFFICERS OF THE REGISTRANT Annual elections are held following the annual meeting of shareholders to elect officers for the ensuing year. Interim elections are held as required. Except as otherwise indicated, each executive officer has held his current position for the past five years.
Age at Name Position, Office December 31, 2002 ---- ---------------- ----------------- Richard R. Erkeneff* -- President and Chief Executive Officer of the Company 67 (since October 1995); President (from November 1993 to January 2003) and Chief Executive Officer (since November 1993) of AAI Corporation, a wholly-owned subsidiary of the Company. Robert Worthing -- Vice President and General Counsel of the Company (since 57 July 1995); General Counsel of AAI Corporation, a wholly-owned subsidiary of the Company (since April 1992). Susan Fein Zawel -- Vice President, Corporate Communications and Associate 48 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 41 (since October 1995) and Treasurer (since December 1994) of the Company; Vice President, Chief Financial Officer and Treasurer of AAI Corporation, a wholly-owned subsidiary of the Company (since July 2000). Frederick M. Strader -- President and Chief Operating Officer of AAI Corporation, 49 a wholly-owned subsidiary of the Company (since January 2003); Executive Vice President of AAI, and Vice President and General Manager of AAI's Defense Systems unit and Engineering Services unit (May 2001 to December 2002); Vice President of United Defense LP, Armament Systems Division (1994 to April 2001) (responsible for all aspects of the division in designing, producing and supporting large caliber armament for the Navy, Army and Marine Corp, with a $500 million budget and 1,800 employees). - -------------------- * Member of the Company's Board of Directors
7 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER MATTERS Reference is made to the information set forth in Note 14 to the Financial Statements included in Item 8 of this Report concerning dividends, stock prices, stock listing and number of record holders, which information is incorporated herein by reference. Reference is made to the section entitled Equity Compensation Plan Information in Item 12 to this Form 10-K, which information is hereby incorporated 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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 8 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with respect to each director of the Company. Except as otherwise indicated, each director has held his or her present principal occupation for the past five years.
Age (at Became Name December 31, 2002) Principal Occupation Director --------- ------------------ ----------------------- ---------- Richard R. Erkeneff 67 President of the Company (since October 1995); President 1995 (from November 1993 to January 2003) and Chief Executive Officer (since November 1993) of AAI Corporation, a wholly-owned subsidiary of the Company ("AAI"); Senior Vice President of the Aerospace Group at McDonnell Douglas Corporation, an aerospace firm (January to November 1993); and President (March 1992 to October 1992) and Executive Vice President (1988 to 1992) of McDonnell Douglas Electronics Systems Company. Harold S. Gelb 82 Chairman of the Board of the Company (since November 1995); private 1995 investor (since 1985); and retired senior partner of Ernst & Young LLP, an accounting firm. Paul J. Hoeper 56 Business consultant (since February 2001); Assistant Secretary of the Army 2002 for Acquisition, Logistics and Technology (May 1998 to January 2001); Deputy Under Secretary of Defense, International and Commercial Programs (May 1996 to May 1998); Director of AAI Corporation, a wholly-owned subsidiary of the Company (since June 2001); Director of Versar Inc. Glen M. Kassan 59 Executive Vice President of Steel Partners, Ltd. ("SPL"), a management and 2002 advisory company that provides management services to Steel Partners II, L.P. ("Steel") and other affiliates of Steel (since March 2002); Executive Vice President (June 2001 to March 2002) and Vice President (October 1999 to May 2001) of Steel Partners Services, Ltd. ("SPS"), a management and advisory company (which provided management services to Steel and other affiliates of Steel until March 2002, when SPL acquired the rights to provide certain management services from SPS); Vice President, Chief Financial Officer and Secretary of WebFinancial Corporation, a consumer and commercial lender (since June 2000); director (since January 2002) and President (since February 2002) of SL Industries, Inc., a designer and producer of proprietary advanced systems and equipment for the power and data quality industry; Vice Chairman of the Board of Directors of Caribbean Fertilizer Group Ltd., a private company engaged in the production of agricultural products in Puerto Rico and Jamaica (since June 2000); Chairman and Chief Executive Officer of Long Term Care Services, Inc., a privately owned healthcare services company which Mr. Kassan co-founded in 1994 and initially served as Vice Chairman and Chief Financial Officer (1997 to 1998); director of Puroflow Incorporated, a designer and manufacturer of precision filtration devices (since August 2001).
9 Warren G. Lichtenstein 37 Chairman of the Board, Secretary and the Managing Member 2001 of Steel Partners, L.L.C. ("Steel LLC"), the general partner of Steel Partners II, L.P. ("Steel") (since January 1, 1996); Chairman and a director of Steel Partners, Ltd., the general partner of Steel Partners Associates, L.P., which was the general partner of Steel (1993 to January 1996); acquisition/risk arbitrage analyst at Ballantrae Partners, L.P., a private investment partnership formed to invest in risk arbitrage, special situations and undervalued companies (1988 to 1990). Mr. Lichtenstein is a director of Gateway Industries, Inc., WebFinancial Corporation, Puroflow Incorporated, ECC International Corp. and CPX Corp. Joseph S. Schneider 52 President of JSA Partners, Inc., a consulting firm in the 1998 aerospace and defense industry (since September 1997); Consultant with A.T. Kearney, a subsidiary of Electronic Data Systems Corporation (September 1995 to March 1997); President of EDS/JSA International, Inc., a management consulting firm (August 1994 to September 1995) and successor company to JSA International, Inc. of which he was President (1981-1994); Chairman and Co-founder of JSA Research, Inc., an independent aerospace and defense research firm serving institutional investors (since 1993). Mr. Schneider is a director of Signal Technology Corporation.
None of the directors is a director of any other company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940, except as set forth above. 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. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors and any persons who own more than ten percent of the Company's Common Stock to file reports of initial ownership of the Company's Common Stock and subsequent changes in that ownership with the Securities and Exchange Commission and the New York Stock Exchange. Such persons are also required to furnish the Company with copies of all Section 16(a) forms they file. Based solely upon a review of the copies of the forms furnished to the Company, or written representations from certain reporting persons that no Form 5's were required, the Company believes that during 2002 all Section 16(a) filing requirements were complied with, except that a report for one transaction occurring during 2002 was or will be filed late by each of Harold S. Gelb, Susan Fein Zawel, James H. Perry and Robert W. Worthing, and a report for one transaction occurring during 2001 was or will be filed late by Joseph S. Schneider. There are no family relationships between any director or executive officer of the Company. ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth information concerning the annual compensation for services in all capacities to the Company for the fiscal years ended December 31, 2002, 2001 and 2000 of the chief executive officer and each of the other executive officers of the Company whose annual compensation exceeded $100,000. 10
Long-Term Compensation Annual Compensation Awards ----------------------------------------------- ------------------------------- Securities Other Annual Underlying All Other Name and Principal Position Year Salary ($) Bonus ($)(1) Compensation ($)(2) Options Compensation ($)(3) --------------------------- ---- ---------- ------------ ------------------- ------- ------------------- Richard R. Erkeneff 2002 528,000 369,116 -- 30,618 President and Chief 2001 484,000 96,871 -- 27,300 Executive Officer of the 2000 440,000 -- -- 21,238 Company and AAI James H. Perry 2002 262,600 246,021 10,000 23,045 Vice President, Chief 2001 250,120 10,468 10,000 20,157 Financial Officer and 2000 200,720 -- 21,000 14,652 Treasurer of the Company and AAI Robert W. Worthing 2002 275,558 259,033 10,000 32,309 Vice President and General 2001 265,158 11,097 10,000 27,316 Counsel of the Company 2000 220,043 -- 21,000 20,821 and AAI Susan Fein Zawel 2002 200,000 190,444 5,000 25,837 Vice President Corporate 2001 200,000 8,370 5,000 21,066 Communications, Secretary 2000 170,512 -- 9,000 15,063 and Associate General Counsel of the Company - ------------------------------------------------------------------------------- (1) Included in amounts under this heading are bonus awards of $80,796, $85,655 and $64,606 for Mr. Perry, Mr. Worthing and Ms. Zawel, respectively, related to the sale of two rail car overhaul contracts described under Part I, Item 1 above. (2) The aggregate amount of other compensation represents perquisites that exceed the lesser of $50,000 or 10% of the total annual salary and bonus reported for such executive officer. (3) All amounts under this heading represent employer match contributions made to the Company's 401(k) plan and contributions to the Company's Retirement Plan.
Options Granted in Last Fiscal Year The following table sets forth certain information concerning options granted during 2002 to the named executives.
Potential Realizable Individual Grants Value at Assumed ------------------------------------------------------ Annual Rates of Number of % of Total Stock Price Securities Options Appreciation for Underlying Granted to Exercise or Option Term Options Employees in Base Price -------------------- Name Granted Fiscal Year ($/Share) Expiration Date 5% ($) 10% ($) - ---- ------- ----------- --------- --------------- ------ ------- James H. Perry 10,000 8 19.05 March 1, 2012(1) 119,825 303,657 Robert W. Worthing 10,000 8 19.05 March 1, 2012(1) 119,825 303,657 Susan Fein Zawel 5,000 4 19.05 March 1, 2012(1) 59,912 151,829 - -------------------------------------------------------------------------------- (1) One-third of the options are exercisable upon the first anniversary of the date of grant, which was March 1, 2002, an additional one-third of the options are exercisable upon the second anniversary of the date of grant and the balance of the options are exercisable upon the third anniversary of the date of grant.
11 Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities Value of Unexercised Underlying In-the-Money Unexercised Options Options at Shares at Fiscal Year-End Fiscal Year-End ($) Acquired on Value Exercisable (E)/ Exercisable (E)/ Name Exercise # Realized ($) Unexercisable (U) Unexercisable (U) ------------------------------------------------------------------------ Richard R. Erkeneff 0 0 510,000(E) 3,385,000(E) -0-(U) -0-(U) James H. Perry 0 0 77,000(E) 522,450(E) 32,000(U) 102,900(U) Robert W. Worthing 0 0 71,000(E) 508,200(E) 32,000(U) 102,900(U) Susan Fein Zawel 0 0 55,000(E) 393,550(E) 15,000(U) 48,350(U)
Employment Agreements Mr. Erkeneff is employed as President and Chief Executive Officer of the Company and Chief Executive Officer of AAI pursuant to an employment agreement dated December 8, 1998 and amended as of June 1, 2001 and as of December 20, 2002 that provides he be paid a salary at the annual rate of $792,000 commencing January 1, 2003 (increased from an annual rate of $528,000 for 2002), and participate in all life insurance, medical, retirement, pension, disability and other employee benefit plans generally made available to other executive officers of the Company or AAI. The employment agreement terminates on July 31, 2003, unless Mr. Erkeneff's employment is terminated prior thereto by the Company for cause or Mr. Erkeneff resigns prior thereto with good reason, subject to the Company's right to extend the term of the agreement for up to five months upon 60 days prior written notice. Pursuant to the employment agreement, Mr. Erkeneff received a cash bonus of $369,116 for 2002 pursuant to the Company's Performance Sharing Plan. Mr. Erkeneff will not be eligible to receive a bonus for 2003. On January 4, 1999, in accordance with his employment agreement, Mr. Erkeneff received an option to acquire 100,000 shares of the Company's common stock pursuant to the terms of the Company's 1994 Stock Option Plan, at $913/16 per share, at an exercise price equal to the fair market value of the common stock as of the grant date, terminating on June 30, 2003. The 100,000 shares subject to this option are vested. In the event that the Company terminates the employment of Mr. Erkeneff without cause (as such term is defined in the employment agreement) or Mr. Erkeneff terminates his employment for good reason (as such term is defined in the employment agreement), Mr. Erkeneff will be entitled to continue to receive his salary through July 31, 2003. Mr. Erkeneff has agreed to resign as a director of the Company upon the request of the Board at any time after the termination of his employment. Mr. Perry is employed by the Company pursuant to an employment agreement, amended as of January 2, 2003, that provides he be paid a salary at the annual rate of $200,720, adjusted as of January 1, 2002 to $262,600, and participate in all life insurance, medical, retirement, pension or profit sharing, disability or other employee benefit plans generally made available to other executive officers of the Company (and at least equivalent to those provided to Mr. Perry during 2002). The employment agreement terminates on February 28, 2004, unless Mr. Perry's employment is terminated prior thereto by the Company for cause. Pursuant to the employment agreement, Mr. Perry is eligible to receive annual discretionary salary increases and cash bonuses as may be granted by the Company's Board of Directors. In the event that the Company terminates the employment of Mr. Perry without cause (as such term is defined in the employment agreement), or if Mr. Perry terminates his employment for Good Reason (as such term is defined in the employment agreement), Mr. Perry will be entitled to (a) 150% of his annualized base salary, plus (b) an incentive compensation award equal to 35% of the amount specified in (a) above, payable over a period of 18 months following cessation of employment. This provision survives the expiration of the employment agreement. Pursuant to an agreement dated as of April 10, 2002, Mr. Perry will be entitled to receive on the closing date of a Change of Control of the Company (as defined in the agreement) an amount equal to 50% of his base salary. 12 Mr. Worthing is employed by the Company pursuant to an employment agreement, amended as of January 2, 2003, that provides he be paid a salary at the annual rate of $220,043, adjusted as of January 1, 2002 to $275,558, and participate in all life insurance, medical, retirement, pension or profit sharing, disability or other employee benefit plans generally made available to other executive officers of the Company (and at least equal to those provided to Mr. Worthing in 2002). The employment agreement terminates on February 28, 2004 unless Mr. Worthing's employment is terminated prior thereto by the Company for cause. Pursuant to the employment agreement, Mr. Worthing is eligible to receive annual discretionary salary increases and cash bonuses as may be granted by the Company's Board of Directors. In the event that the Company terminates the employment of Mr. Worthing without cause (as such term is defined in the employment agreement), or if Mr. Worthing terminates his employment for Good Reason (as such term is defined in the employment agreement), Mr. Worthing will be entitled to (a) 150% of his annualized base salary, plus (b) an incentive compensation award equal to 42% of the amount specified in (a) above, payable over a period of 18 months following cessation of employment. This provision survives the expiration of the employment agreement. Pursuant to an agreement dated as of April 10, 2002, Mr. Worthing will be entitled to receive on the closing date of a Change of Control of the Company (as defined in the agreement) an amount equal to 50% of his base salary. Ms. Fein Zawel is employed by the Company pursuant to an employment agreement, amended as of January 2, 2003, that provides she be paid a salary at the annual rate of $170,512, adjusted as of January 1, 2001 to $200,000, and participate in all life insurance, medical, retirement, pension or profit sharing, disability or other employee benefit plans generally made available to other executive officers of the Company (and at least equivalent to those provided to Ms. Fein Zawel during 2002). The employment agreement terminates on February 28, 2004, unless Ms. Fein Zawel's employment is terminated prior thereto by the Company for cause. Pursuant to the employment agreement, Ms. Fein Zawel is eligible to receive annual discretionary salary increases and cash bonuses as may be granted by the Company's Board of Directors. In the event that the Company terminates the employment of Ms. Fein Zawel without cause (as such term is defined in the employment agreement), or if Ms. Fein Zawel terminates her employment for Good Reason (as such term is defined in the employment agreement), Ms. Fein Zawel will be entitled to (a) 150% of her annualized base salary, plus (b) an incentive compensation award equal to 34% of the amount specified in (a) above, payable over a period of 18 months following cessation of employment. This provision survives the expiration of the employment agreement. Retirement Benefits All employees of the Company and its subsidiaries are eligible to participate in the UIC Retirement Plan, a cash balance plan (the "Retirement Plan") upon commencement of employment. In accordance with the Retirement Plan, a participant's accrued benefit includes the actuarial equivalent of the participant's accrued benefit under the applicable predecessor defined benefit plan as of December 31, 1994 plus annual allocations based upon a percentage of salary and interest earned on such participant's account thereafter. The Retirement Plan also has options for early retirement and alternative forms of payment, including lump sum benefits and benefits for surviving spouses. The estimated annual benefit to be provided by the UIC Retirement Plan and payable to Messrs. Erkeneff, Perry and Worthing and Ms. Fein Zawel, commencing at normal retirement age, are $15,061, $22,512, $21,456 and $18,813, respectively. United Industrial Corporation Health-Care Plan for Retired Directors The Company has implemented the United Industrial Corporation Health-Care Plan for Retired Directors (the "Plan"), which was adopted by the Company's Board of Directors on December 18, 1995. The Board may, in its sole discretion, amend, suspend or terminate the Plan, at any time, with or without prior notice. A director of the Company is eligible to participate in the Plan if he or she: (i) ceases to be a member of the Board; (ii) has served as a member of the Board for 15 full years; (iii) has attained the age of 65; (iv) is eligible for Medicare Part A; and (v) has enrolled in both Medicare Part A and Medicare Part B and any other available supplemental medical or hospitalization coverage by reason of entitlement under any government entitlement, including, without limitation, that provided under Title XVIII of the Social Security Act. A director who participates in the Plan is entitled to coverage under the group medical plan available to the executive officers of the Company on the same terms and 13 conditions as such coverage is available to such executive officers and their spouses and dependents. If a director who participates in the Plan resides outside the service area of the Company's group medical plan, such director and his or her spouse and dependents will receive medical benefit coverage under a medical plan or health insurance policy which provides benefits that are reasonably comparable to the benefits under the Company's group medical plan; however, if no such coverage is reasonably available (whether due to geography or the physical condition of the director or his or her spouse or dependents), then the Company will reimburse such director for any reasonable expense that would have been covered under the Company's group medical plan. Benefits provided under the Plan will be secondary to any benefits under any other hospitalization or major medical plan or arrangement provided to such director under government entitlements or provided to such director (either directly or indirectly through such director's spouse) by any other personal or employer-provided health-care plan or health insurance policy. Director Compensation Directors received $20,000 per year and $1,000 for each meeting attended, and a fee of $500 for each committee meeting attended. In lieu of such fees, Mr. Gelb, Chairman of the Board, received $12,500 per month and a $10,000 per year automobile allowance. In addition, Mr. Schneider and Mr. Hoeper also served as directors of AAI, for which each received compensation of $2,000 per meeting. Effective January 1, 2003, directors (other than Mr. Gelb, whose compensation as indicated above will remain the same) will receive $23,000 per year and $1,150 for each meeting attended and a fee of $575 for each committee meeting attended. Mr. Schneider and Mr. Hoeper will receive a $5,000 fee as Chairman of the Audit and Compensation/Stock Option Committees, respectively. All current directors are eligible to participate in the medical plan available to the executive officers of the Company. The Company also has a medical plan for retired directors as described above. Nonemployee directors also participate in the Company's 1996 Stock Option Plan for Nonemployee Directors (the "1996 Plan"). Pursuant to the 1996 Plan, each Eligible Director (as defined in the 1996 Plan) is granted an option to purchase 15,000 shares of Common Stock upon their initial appointment to the Board of Directors, exercisable at the market price of the Company's Common Stock on the date of grant. The options granted under the 1996 Plan expire ten years after the date of grant and become exercisable (i) as to one-third of the total number of shares subject to the grant on the date of grant (the "First Vesting Date"), (ii) as to an additional one-third of the total number of shares subject to the grant on the date of the next annual shareholders' meeting after the First Vesting Date (the "Second Vesting Date"), and (iii) as to the remaining one-third of the total number of shares subject to the grant on the date of the next annual shareholders' meeting after the Second Vesting Date (the "Final Vesting Date"). On the date of the annual shareholders' meeting which takes place during the calendar year in which the first anniversary of the Final Vesting Date occurs, each Eligible Director shall automatically be granted an option to purchase 15,000 shares of Common Stock, provided such grantee is an Eligible Director in office immediately following such annual meeting. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Security Ownership of Certain Beneficial Owners On March 10, 2003, there were outstanding and entitled to vote 13,067,918 shares of Common Stock. At March 10, 2003, more than 5% of the Company's outstanding voting securities was beneficially owned by each of the persons named in the following table, except that the information as to Kennedy Capital Management, Inc. is as of December 31, 2002 and is based upon information furnished to the Company by such person in a Schedule 13G, and the information as to Steel Partners II, L.P. is based upon information furnished by such entity in a Schedule 13D. 14
Name and Address of Amount and Nature of Percent Title of Class Beneficial Owner Beneficial Ownership of Class - -------------------------------------------------------------------------------------------------------- Common Stock Kennedy Capital Management, Inc. 1,595,450(1) 12.2% 10829 Olive Boulevard St. Louis, Missouri 63141 Common Stock Steel Partners II, L.P. 1,582,050 12.2% 150 East 52 Street New York, New York 10022 - -------------------------------------------------------------------------------------------------------- (1) Kennedy Capital Management, Inc., a registered investment advisor, has sole voting power as to 1,550,650 shares of Common Stock and sole dispositive power as to 1,595,450 shares.
Security Ownership of Management The following table sets forth, as of March 1, 2003, the number of shares of Common Stock of the Company beneficially owned by each director of the Company, each executive officer named in the Summary Compensation Table above, and by all directors and executive officers of the Company as a group. Except as otherwise indicated all shares are owned directly. Amount and Nature of Beneficial Percent Name or Group Ownership(1)(2) of Class ------------------ ------------------------------------ Richard R. Erkeneff 646,000 4.76% Harold S. Gelb 40,000 (3) Paul J. Hoeper 7,000 (3) Glen M. Kassan 5,000 (3) Warren G. Lichtenstein 1,592,050(4) 12.17% James H. Perry 101,338 (3) Joseph S. Schneider 30,000 (3) Robert W. Worthing 98,922(5) (3) Susan Fein Zawel 406,122(6) 3.09% All directors and executive officers as a group, consisting of 10 persons 2,981,432 21.36% - ----------------------------------------------------------------------------- (1) The information as to securities owned by directors and executive officers was furnished to the Company by such directors and executive officers. Includes units in the Company's 401(k) plan, which consist of shares of Common Stock and cash. (2) Includes shares which the following persons have the right to acquire within 60 days through the exercise of stock options: Mr. Erkeneff, 510,000 shares; Mr. Gelb, 35,000 shares; Mr. Lichtenstein, 10,000 shares; Mr. Perry, 95,333; Mr. Schneider, 25,000 shares; Mr. Worthing, 89,333 shares; Ms. Fein Zawel, 63,666 shares; Mr. Kassan, 5,000 shares; Mr. Hoeper, 5,000 shares; and all directors and executives as a group, 893,332 shares. (3) Less than 1%. (4) All of such shares are owned by Steel Partners II, L.P. ("Steel") (other than Mr. Lichtenstein's stock options). Mr. Lichtenstein is the Chairman of the Board, Secretary and Managing Member of the general partner of Steel. Mr. Lichtenstein disclaims beneficial ownership of the shares owned by Steel, except to the extent of his pecuniary interest therein. (5) Does not include 500 shares of Common Stock owned by Mr. Worthing's spouse, as to which he disclaims beneficial ownership. (6) Includes 11,440 shares of Common Stock owned by Ms. Fein Zawel's spouse, 4,772 shares of Common Stock owned by Ms. Fein Zawel jointly with her spouse, and 32,634 shares of Common Stock held in trust for her minor children. 15 Equity Compensation Plan Information
Number of securities Number of securities remaining available to be issued upon for future issuance exercise of Weighted-Average under equity outstanding options, exercise price of compensation plans warrants outstanding (excluding securities and options, warrants reflected in Plan Category rights and rights column (a)) ------------- -------------------- ----------------- -------------------- (a) (b) (c) Equity compensation plans approved by security holders ..................... 1,523,000 $11.22 105,000
The Company has no equity compensation plans not approved by security holders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. ITEM 14. CONTROLS AND PROCEDURES (a) The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Company's management, including its principal executive officer and principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this annual report on Form 10-K, the Company has carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's principal executive officer and the Company's principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on such evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective. (b) There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this annual report on Form 10-K. 16 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) and (2) - The response to this portion of Item 15 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)- Loan and Security Agreement dated as of June 28, 2001 among United and certain of its subsidiaries, as Borrowers, and Fleet Capital Corporation, as Lender (5). (10)(d)- Pledge Agreement dated as of June 28, 2001 among United and certain of its subsidiaries, as Pledgors, and Fleet Capital Corporation, as Lender (5). (10)(e)- Waiver, Amendment and Consent Agreement dated as of March 6, 2002 among United and certain of its subsidiaries, as Borrowers, and Fleet Capital Corporation, as Lender (9). (10)(f)- Second Amendment and Consent Agreement dated as of June 28, 2002 among United and certain of its subsidiaries, as Borrowers, and Fleet Capital Corporation, as Lender (8). (10)(g)- Third Amendment and Waiver Agreement dated as of March 21, 2003 among United and certain of its subsidiaries, as Borrowers, and Fleet Capital Corporation, as Lender. (10)(h)- Employment Agreement, dated December 8, 1998, between United and Richard R. Erkeneff (1). (10)(i)- Amendment No. 1 dated as of June 1, 2001 to the Employment Agreement dated as of December 8, 1998 by and between United and Richard R. Erkeneff (5). (10)(j)- Amendment No. 2 and Amendment No. 3 dated as of December 20, 2002 to the Employment Agreement dated as of December 8, 1998 by and between United and Richard R. Erkeneff. (10)(k)- Employment Agreement, dated March 3, 2000, between United and Susan Fein Zawel (6). (10)(l)- Amendment to Employment Agreement, dated January 2, 2003, between United and Susan Fein Zawel. (10)(m)- Employment Agreement, dated March 3, 2000, between United and Robert Worthing (6). 17 (10)(n)- Success Bonus Agreement, dated April 10, 2002, between United and Robert Worthing (7). (10)(o)- Amendment to Employment Agreement, dated January 2, 2003, between United and Robert Worthing. (10)(p)- Employment Agreement, dated March 3, 2000, between United and James H. Perry (6). (10)(q)- Success Bonus Agreement, dated April 10, 2002, between United and James H. Perry (7). (10)(r)- Amendment to Employment Agreement, dated January 2, 2003, between United and James H. Perry. (10)(s)- Master Agreement, dated as of March 27, 2002, between ALSTOM Transportation Inc. and AAI Corporation (9). (10)(t)- Amendment to Master Agreement, dated as of July 26, 2002, between ALSTOM Transportation Inc. and AAI Corporation (10). (13)- United's 2002 Annual Report to Shareholders. (21)- Subsidiaries of United. (23)- Consent of Independent Auditors. (99)(a)- Certification of the Chief Executive Officer of the Company pursuant to 18 U.S.C.ss.1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. (99)(b)- Certification of the Chief Financial Officer of the Company pursuant to 18 U.S.C.ss.1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. - ---------------------- (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, 2001. (6) Incorporated by reference to United's Annual Report on Form 10-K for the year ended December 31, 1999. (7) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. (8) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. (9) Incorporated by reference to United's Annual Report on Form 10-K for the year ended December 31, 2001. (10) Incorporated by reference to United's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 12, 2002. (b) Reports on Form 8-K On October 7, 2002, the Company filed a Current Report on Form 8-K relating to its Annual Meeting. 18 Annual Report on Form 10-K Item 15(a) (1) and (2), (c) and (d) List of Financial Statements and Financial Statement Schedules Certain Exhibits Financial Statement Schedules Year ended December 31, 2002 United Industrial Corporation New York, New York Form 10-K--Item 15(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, 2002, are incorporated by reference in Item 8: Consolidated Balance Sheets--December 31, 2002 and 2001 Consolidated Statements of Operations-- Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows Years Ended December 31, 2002, 2001 and 2000 Notes to Financial Statements The following consolidated financial statement schedule of United Industrial Corporation and subsidiaries is included in Item 15(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, 2002 and 2001, and for each of the three years in the period ended December 31, 2002, and have issued our report thereon dated March 10, 2003. Our audits also included the financial statement schedule listed in Item 15(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 March 10, 2003 F-3 Schedule II -- Valuation and Qualifying Accounts United Industrial Corporation and Subsidiaries December 31, 2002
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, 2002: Deducted from asset accounts: Allowance for doubtful accounts $235,000 $235,000 ======== ======== Product warranty liability $1,650,000 $306,000 $1,256,000(A) $700,000 ========== ======== ========== ======== Year ended December 31, 2001: Deducted from asset account: Allowance for doubtful accounts $235,000 $235,000 ======== ======== Product warranty liability $5,154,000 $3,504,000(A) $1,650,000 ========== ========== ========== 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 $1,746,000(A) $5,154,000 ========== ========== ========== ========== (A) 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 28, 2003 ----------------------------- 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 28, 2003 - -------------------------------------------- Harold S. Gelb, Chairman of the Board and Director /s/ Joseph S. Schneider March 28, 2003 - -------------------------------------------- Joseph S. Schneider, Director /s/ Richard R. Erkeneff March 28, 2003 - --------------------------------------------- Richard R. Erkeneff, President and Chief Executive Officer and Director March 28, 2003 - -------------------------------------------- Warren G. Lichtenstein, Director /s/ Paul J. Hoeper March 28, 2003 - -------------------------------------------- Paul J. Hoeper, Director March 28, 2003 - -------------------------------------------- Glen M. Kassan, Director /s/ James H. Perry March 28, 2003 - -------------------------------------------- James H. Perry, Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer)
CERTIFICATIONS I, Richard R. Erkeneff, certify that: 1. I have reviewed this annual report on Form 10-K of United Industrial Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ Richard R. Erkeneff ----------------------- Richard R. Erkeneff Chief Executive Officer I, James H. Perry, certify that: 1. I have reviewed this annual report on Form 10-K of United Industrial Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ James H. Perry ------------------------ James H. Perry Chief Financial Officer EXHIBIT INDEX (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)- Loan and Security Agreement dated as of June 28, 2001 among United and certain of its subsidiaries, as Borrowers, and Fleet Capital Corporation, as Lender (5). (10)(d)- Pledge Agreement dated as of June 28, 2001 among United and certain of its subsidiaries, as Pledgors, and Fleet Capital Corporation, as Lender (5). (10)(e)- Waiver, Amendment and Consent Agreement dated as of March 6, 2002 among United and certain of its subsidiaries, as Borrowers, and Fleet Capital Corporation, as Lender (9). (10)(f)- Second Amendment and Consent Agreement dated as of June 28, 2002 among United and certain of its subsidiaries, as Borrowers, and Fleet Capital Corporation, as Lender (8). (10)(g)- Third Amendment and Waiver Agreement dated as of March 21, 2003 among United and certain of its subsidiaries, as Borrowers, and Fleet Capital Corporation, as Lender. (10)(h)- Employment Agreement, dated December 8, 1998, between United and Richard R. Erkeneff (1). (10)(i)- Amendment No. 1 dated as of June 1, 2001 to the Employment Agreement dated as of December 8, 1998 by and between United and Richard R. Erkeneff (5). (10)(j)- Amendment No. 2 and Amendment No. 3 dated as of December 20, 2002 to the Employment Agreement dated as of December 8, 1998 by and between United and Richard R. Erkeneff. (10)(k)- Employment Agreement, dated March 3, 2000, between United and Susan Fein Zawel (6). (10)(l)- Amendment to Employment Agreement, dated January 2, 2003, between United and Susan Fein Zawel. (10)(m)- Employment Agreement, dated March 3, 2000, between United and Robert Worthing (6). (10)(n)- Success Bonus Agreement, dated April 10, 2002, between United and Robert Worthing (7). (10)(o)- Amendment to Employment Agreement, dated January 2, 2003, between United and Robert Worthing. (10)(p)- Employment Agreement, dated March 3, 2000, between United and James H. Perry (6). (10)(q)- Success Bonus Agreement, dated April 10, 2002, between United and James H. Perry (7). (10)(r)- Amendment to Employment Agreement, dated January 2, 2003, between United and James H. Perry. (10)(s)- Master Agreement, dated as of March 27, 2002, between ALSTOM Transportation Inc. and AAI Corporation (9). (10)(t)- Amendment to Master Agreement, dated as of July 26, 2002, between ALSTOM Transportation Inc. and AAI Corporation (10). (13)- United's 2002 Annual Report to Shareholders. (21)- Subsidiaries of United. (23)- Consent of Independent Auditors. (99)(a)- Certification of the Chief Executive Officer of the Company pursuant to 18 U.S.C.ss.1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. (99)(b)- Certification of the Chief Financial Officer of the Company pursuant to 18 U.S.C.ss.1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. - ---------------------- (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, 2001. (6) Incorporated by reference to United's Annual Report on Form 10-K for the year ended December 31, 1999. (7) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. (8) Incorporated by reference to United's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. (9) Incorporated by reference to United's Annual Report on Form 10-K for the year ended December 31, 2001. (10) Incorporated by reference to United's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 12, 2002. EX-10 3 s15-3474_ex10g.txt EXHIBIT 10G THIRD AMENDMENT AND WAIVER AGREEMENT THIS THIRD AMENDMENT AND WAIVER AGREEMENT (this "Agreement") is made and entered into as of the 21st day of March, 2003, by and among FLEET CAPITAL CORPORATION ("Lender"), a Rhode Island corporation with an office at 200 Glastonbury Boulevard, Glastonbury, Connecticut 06033; and UNITED INDUSTRIAL CORPORATION, a Delaware corporation, and the following of its subsidiaries: AAI CORPORATION ("AAI"), a Maryland corporation, DETROIT STOKER COMPANY, a Michigan corporation; AAI ENGINEERING SUPPORT INC., a Maryland corporation, AAI/ACL TECHNOLOGIES, INC., a Maryland corporation, and MIDWEST METALLURGICAL LABORATORY, INC., a Michigan corporation (each a "Borrower" and collectively the "Borrowers"). Capitalized terms used, but not defined, herein shall have the meanings given to such terms in the Credit Agreement (defined below). WHEREAS, the Borrowers and the Lender are parties to the Loan and Security Agreement, dated as of June 28, 2001, as amended by the Waiver, Amendment and Consent Agreement dated as of March 6, 2002 and the Second Amendment and Consent Agreement dated as of June 28, 2002 (the "Credit Agreement"); and WHEREAS, the Borrowers have requested and the Lender has agreed to waive certain of the provisions of the Credit Agreement, and the Borrowers and the Lender have agreed to amend the Credit Agreement, all on the terms and conditions set forth herein. NOW THEREFORE, in consideration of the premises, and in reliance thereon, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. WAIVER. The Lender hereby retroactively waives the non-compliance by Borrowers with Sections 8.3.1 and 8.3.2 of the Credit Agreement as of December 31, 2002. Nothing in this Section 1 is intended to waive (a) any Default or Event of Default other than those that would have occurred under Section 8.3.1 and 8.3.2 but for the waiver set forth in this Section 1, or (b) the Default and Event of Default that would arise upon the failure of the Borrowers to satisfy the covenants set forth in Sections 8.3.1 and 8.3.2 of the Credit Agreement as of March 31, 2003 or any subsequent date. SECTION 2. AMENDMENTS. Subject to the satisfaction in full, on or prior to the Agreement Effective Date, of the conditions precedent set forth in Section 3 below, the Credit Agreement is hereby amended as follows: (i) The third sentence of Section 1.1.1 is amended and restated in its entirety as follows: Notwithstanding the amount of the Maximum Credit Facility referred to above and anything to the contrary stated in this Agreement, but subject to the right of the Lender to demand repayment at any time of any Overadvance, if the aggregate of all Loans outstanding hereunder and all LC Amounts exceeds at any time $25,000,000 (the "Minimum Credit Facility"), the Borrowers shall deliver to the Lender Cash and Cash Equivalents equal to the excess of the sum of the Loans and LC Amounts over $25,000,000, which Cash and Cash Equivalents shall be held by the Lender as additional cash collateral for the Obligations and which may be applied by the Lender to the Obligations upon the occurrence and during the continuance of any Event of Default. (ii) The second sentence of Section 1.2 is amended and restated in its entirety as follows: No Letter of Credit or LC Guarantee (i) may have an expiration date that is more than one week after the last day of the Original Term (or, if a Renewal Term is then in effect, such Renewal Term), or (ii) will be issued if the issuance thereof would cause the sum of the LC Amount and outstanding Loans to exceed the lesser of (a) the Maximum Credit Facility and (b) the Borrowing Base. (iii) The following Section 1.1.3 is added after Section 1.1.2 of the Credit Agreement: 1.1.3 Foreign Exchange Facility. At the request of any Borrower, the Lender will, from time to time, make available (or cause the Bank to make available) to the Borrowers up to US$1,000,000 of foreign exchange contracts on terms acceptable to the Lender, provided that the amount of Revolving Loans that are available to the Borrowers under Section 1.1.1 shall be reduced by the amount of any such outstanding foreign exchange contracts. The terms and conditions applicable to each such foreign exchange contract shall be those terms and conditions set forth in the standard form of foreign exchange contract of the Lender or Bank, as applicable, as modified or otherwise amplified by the terms of any documents or confirmations applicable to any specific transaction. (iv) Section 4.2.1 of the Credit Agreement is amended and restated in its entirety as follows: 4.2.1 Termination at End of Term or Termination by Lender. This Agreement, and the right of the Borrowers to request Loans, Letters of Credit and foreign exchange contracts hereunder, shall automatically terminate at the end of the Original Term or any Renewal Term unless, prior to the end of the Original Term or Renewal Term then in effect, as applicable, the Lender consents in writing to extend the term hereof. The Lender shall also have the right to terminate this Agreement and the right of the Borrowers to request Loans, Letters of Credit and foreign exchange contracts hereunder at any time that an Event of Default has occurred and is continuing. (v) The following Section 4.2.5 is added after Section 4.2.4 of the Credit Agreement: 4.2.5 Effect of Termination on Letters of Credit. Upon the termination of the Lender's commitment to make Letters of Credit and LC Guaranties available to the Borrowers, or the acceleration of the Obligations with respect to all Letters of Credit and/or LC Guaranties, the Borrowers will either (i) pay to the Lender an amount equal to LC Amount as cash collateral for all Letters of Credit and LC Guaranties or (ii) deliver to the Lender a Qualifying Letter of Credit. (vi) The following Section 8.1.9 is added after Section 8.1.8: 8.1.9 Summerville Landlord Waiver. Use commercially reasonable efforts to provide to the Lender on or before May 31, 2003, a landlord waiver, in form and substance reasonably satisfactory to the Lender, executed by the landlord of the properties located at 2735 and 2745 West 5th North Street, Summerville, South Carolina. (vii) Sections 8.3.1 and 8.3.2 of the Credit Agreement are amended and restated in their entirety as follows and the following Sections 8.3.3 and 8.3.4 are added after Section 8.3.2: 8.3.1 Minimum Fixed Charge Coverage Ratio: not permit the Consolidated Fixed Charge Coverage Ratio of UIC and its Subsidiaries to be less than (a) 1.00 to 1.00 for the fiscal quarter ending March 31, 2003; (b) 1.00 to 1.00 for the period of two fiscal quarters ending June 30, 2003; (c) 1.30 to 1.00 for the period of three fiscal quarters ending September 30, 2003; or (d) 1.50 to 1.00 for the period of four fiscal quarters ending on December 31, 2003 or ending on any March 31, June 30, September 30 or December 31 thereafter. 8.3.2 Maximum Balance Sheet Leverage Ratio: not permit the ratio of UIC and its Subsidiaries' (a) total liabilities, as determined on a consolidated basis in accordance with GAAP (but, without duplication, including all LC Amounts as liabilities), to (b) Tangible Total Net Worth, to exceed 3.50 as at March 31, 2003 or as at the end of any fiscal quarter thereafter. 8.3.3 Losses From Discontinued Transportation Division: not permit the pre-tax losses incurred by UIC and its Subsidiaries as a result of the cessation of business of their transportation division to be more than $10,000,000 in the aggregate at any time. 8.3.4 Variance of Audited Statements From Management Statements: not permit the net income or Tangible Total Net Worth of UIC and its Subsidiaries as of and for the fiscal year ended December 31, 2002, as determined on a consolidated basis in accordance with GAAP, as set forth in the audited financial statements delivered to the Lender pursuant to Section 8.1.3, to be more than 5% less than the net income or Tangible Total Net Worth of UIC and its Subsidiaries as set forth in the unaudited financial statements delivered to the Lender pursuant to Section 8.1.3 prior to the Third Amendment Date. (viii) The second sentence of the definition of "Appraised Machinery and Equipment" in Appendix A to the Credit Agreement is deleted and the following sentence is substituted therefor: Such appraisal shall set forth the liquidation value of such machinery and equipment and shall be in form and substance acceptable to the Lender. (ix) The first paragraph of the definition of "Borrowing Base" in Appendix A to the Credit Agreement is amended and restated in its entirety as follows: Borrowing Base - as at the date of determination thereof an amount equal to 75% of the aggregate amount of Eligible Accounts arising from Government Contracts; plus 70% of the aggregate amount of Eligible Accounts arising from Non-Government Contracts; plus 30% of Eligible Inventory; plus up to $2,703,000 of Appraised Machinery and Equipment; plus up to $10,000,000 of Cash or Cash Equivalents to be held at the Bank or such higher amount as is required by the third sentence of Section 1.1.1 of the Agreement; plus the Real Property Overadvance; minus, at any time that any contracts or transactions are outstanding under any foreign exchange facility provided by the Bank or the Lender or any Affiliate thereof to any of the Borrowers, $750,000; minus the aggregate amount of Landlord Waiver Reserves; provided that the Borrowing Base shall be increased by an amount equal to the Real Property Valuation in accordance with Section 10.3 hereof and shall be decreased by the amount of any payments of the Real Property Overadvance pursuant to Section 3.3.1 or any other provision of this Agreement. (x) The words "Initial Term" are deleted from the definition of "Termination Date" in Appendix A to the Credit Agreement and the words "Original Term" are substituted therefor. (xi) The following definitions in Appendix A are amended and restated in their entirety as follows: Applicable Margin - the margin applied to each LIBOR Advance and Base Rate Advance, which margin shall fluctuate in accordance with the then existing Fixed Charge Coverage Ratio, as follows: Fixed Charge Base Rate LIBOR Level Coverage Ratio Advances Advances ---------- ------------------------- --------- -------- I Greater than 2.00 to 1.00 0.00% 1.75% II Greater than or equal to 0.00% 2.00% 1.75 to 1.00 but less than 2.00 to 1.00 III Greater than or equal to 0.25% 2.25% 1.50 to 1.00 but less than 1.75 to 1.00 IV Greater than or equal to 0.50% 2.50% 1.30 to 1.00 but less than 1.50 to 1.00 V Less than 1.30 to 1.00 0.75% 2.75% The Applicable Margin shall be determined on the basis of the financial statements required to be delivered to the Lender pursuant to Section 8.1.3 and any change in the Applicable Margin shall be effective at the time of the delivery of such financial statements. Anything in this Agreement to the contrary notwithstanding, the Applicable Margin shall be (a) the rates listed for Level V above if the financial statements required to be delivered by Section 8.1.3 shall not be delivered when due, and the rates listed in Level V above shall remain in effect until the delivery of such financial statements, and (b) the rates listed for Level V above between the Third Amendment Date and the first date thereafter that financial statements are delivered pursuant to Section 8.1.3. Consolidated Fixed Charge Coverage Ratio - means for the period in question, for UIC and its Subsidiaries, the ratio of (i) the sum of (a) earnings before interest, taxes, depreciation and amortization, plus (b) the Transportation Division Addback Amount, minus (c) Unfunded Capital Expenditures, divided by (ii) the sum of (a) taxes paid in Cash during such period, (b) dividends, (c) stock repurchases and redemptions, (d) scheduled principal payments of the Loans and any other Indebtedness, including Capitalized Lease Obligations, (e) all interest in respect of Indebtedness accrued or paid during such period (whether or not actually paid during such period), and all fees and expenses payable under this Agreement, (f) amounts paid in Cash or Cash Equivalents with respect to asbestos litigation or claims, and (g) amounts paid in Cash or Cash Equivalents with respect to pension plans or other ERISA plans, each of the foregoing as determined on a consolidated basis without duplication in accordance with GAAP. Other Agreements - any and all agreements, instruments and/or documents (other than this Agreement and the Security Documents), heretofore, now or hereafter executed by any Borrower, or any other third party on any such Borrower's behalf and delivered to Lender and/or Bank in respect of the transactions contemplated by this Agreement, including, without limitation, any Hedging Agreements. (xii) The following new definitions are added to Appendix A of the Credit Agreement in alphabetical order: Hedging Agreement - means any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement. Landlord Waiver Reserve - at any time of reference, with respect to the leases by Kores Nordic (USA) Corporation and Capital Imaging Incorporated of the properties located at 2735 and 2745 West 5th North Street, respectively, each in Summerville, South Carolina, an amount equal to the rental obligations under such leases for a period of 90 days, as reasonably determined by the Lender, as a reserve against inventory located at the leasehold created by such leases. Qualifying Letter of Credit - means an irrevocable letter of credit in form and substance satisfactory to the Lender in an amount equal to 105% of the LC Amount which is issued by a bank acceptable to the Lender and which provides that such letter of credit may be drawn upon by the Lender by delivery of a sight draft in the amount by which any outstanding Letter of Credit and/or LC Guaranty has been drawn. Third Amendment Date - the "Agreement Effective Date" as defined in the Third Amendment and Waiver Agreement with respect to this Agreement. Transportation Division Addback Amount - with respect to any fiscal period, the amount of losses incurred by UIC and its Subsidiaries during such period as a result of the cessation of business of their transportation division, provided that the Transportation Division Addback Amount shall not exceed $1,500,000 with respect to the fiscal quarter ending March 31, 2003; $3,000,000 in the aggregate with respect to the two fiscal quarters ending June 30, 2003; $4,500,000 in the aggregate with respect to the three fiscal quarters ending September 30, 2003; and $5,500,000 in the aggregate with respect to the fiscal year ending December 31, 2003. Unfunded Capital Expenditures - all Capital Expenditures which are paid in cash and not financed with Indebtedness for borrowed money; provided that Capital Expenditures financed with the proceeds of Revolving Loans or with the proceeds of Indebtedness that is supported by Letters of Credit shall be deemed to constitute "Unfunded Capital Expenditures" for purposes of this Agreement. SECTION 3. CONDITIONS TO EFFECTIVENESS OF AGREEMENT. This Agreement shall become effective as of the date hereof only when the following conditions shall have been satisfied (the date of satisfaction of such conditions being referred to herein as the "Agreement Effective Date"): (i) The Lender shall have executed this Agreement and shall have received a copy of this Agreement duly executed by the Borrowers. (ii) The Borrowers shall have paid a fee of $25,000 to Lender in consideration of the waiver set forth herein. (iii) The Borrowers shall have paid to counsel for the Lender the amount of reasonable fees and disbursements owed to such counsel in connection with this Agreement and matters related hereto. (iv) The Lender shall have received such other information, approvals, opinions, documents or instruments as it may reasonably request. SECTION 4. REPRESENTATIONS AND WARRANTIES. In order to induce the Lender to enter into this Agreement, the Borrowers jointly and severally represent and warrant to the Lender that, as of the Agreement Effective Date, after giving effect to the effectiveness of this Agreement, the following statements are true and correct in all material respects: (i) Authorization of Agreements. The execution and delivery of this Agreement by each Borrower and its performance under the Credit Agreement as amended by this Agreement (the "Amended Agreement") are within each such Borrower's corporate powers and have been duly authorized by all necessary corporate action on the part of each such Borrower. (ii) No Conflict. The execution and delivery by each Borrower of this Agreement and the performance by each Borrower of the Amended Agreement do not contravene any such Borrower's certificate of incorporation or by laws or any other contractual restriction where such a contravention has a reasonable possibility of having a Material Adverse Effect or contravening any law or governmental regulation or court decree or order binding on or affecting any such Borrower. (iii) Binding Obligation. This Agreement has been duly executed and delivered by each Borrower and this Agreement and the Amended Agreement constitute the legal, valid and binding obligations of each Borrower, enforceable against each Borrower in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally and by general principles of equity. (iv) Governmental Approval, Regulation, etc. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other Person is required for the due execution, delivery or performance of this Agreement by any Borrower. (v) Incorporation of Representations and Warranties from Credit Agreement. Other than as amended hereby each of the representations and warranties set forth in Section 7 of the Credit Agreement is true and correct. SECTION 5. ACKNOWLEDGEMENT. Each Borrower acknowledges and agrees that each of the Security Documents to which it is a party or otherwise bound shall continue in full force and effect. Each Borrower hereby agrees and confirms that each Security Document to which it is a party or otherwise bound and all Collateral encumbered thereby will continue to guaranty or secure, as the case may be, the payment and performance of all obligations guaranteed or secured thereby, as the case may be, and that none of the Borrowers has any defense, offset, counterclaim or right of recoupment with respect to the Obligations of the Borrowers under the Amended Agreement. SECTION 6. MISCELLANEOUS. (i) Effect on the Credit Agreement and the Other Loan Documents. Except as specifically set forth herein, the terms, provisions and conditions of the Credit Agreement and the other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed and the Borrowers remain bound to pay and perform their obligations thereunder. (ii) Applicable Law. THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO SUCH LAWS RELATING TO CONFLICTS OF LAWS. (iii) Headings. The various headings of this Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or any provision hereof. (iv) Counterparts and Incorporation. This Agreement may be executed by the parties hereto in several counterparts and by the different parties on separate counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same instrument. Following execution and delivery of this Agreement, any reference to the Credit Agreement shall be deemed a reference to such document as hereby amended. (v) Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provisions in any other jurisdiction. IN WITNESS WHEREOF, this Third Amendment and Waiver Agreement has been duly executed and delivered as of the day and year first above written. FLEET CAPITAL CORPORATION By: /s/ Matthew Bourgeois --------------------------------------------- Name: Matthew Bourgeois Title: Vice President UNITED INDUSTRIAL CORPORATION By: /s/ James H. Perry --------------------------------------------- Name: James H. Perry Title: Vice President AAI CORPORATION By: /s/ James H. Perry --------------------------------------------- Name: James H. Perry Title: Vice President DETROIT STOKER COMPANY By: /s/ James H. Perry --------------------------------------------- Name: James H. Perry Title: Vice President AAI ENGINEERING SUPPORT INC. By: /s/ James H. Perry --------------------------------------------- Name: James H. Perry Title: Vice President AAI/ACL TECHNOLOGIES, INC. By: /s/ James H. Perry --------------------------------------------- Name: James H. Perry Title: Vice President MIDWEST METALLURGICAL LABORATORY, INC. By: /s/ James H. Perry --------------------------------------------- Name: James H. Perry Title: Vice President EX-10 4 s15-3474_ex10j.txt EXHIBIT 10J AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT AMENDMENT NO. 2 (this "Amendment") dated as of December 20, 2002 by and between United Industrial Corporation, a Delaware corporation, and Richard R. Erkeneff. W I T N E S S E T H : - - - - - - - - - - WHEREAS, the parties hereto are parties to that certain Employment Agreement dated December 8, 1998, as amended pursuant to Amendment No. 1 thereto dated June 1, 2001 (the "Employment Agreement"), and they desire to further amend the Employment Agreement as provided herein. NOW THEREFORE, in consideration of the premises and mutual covenants hereinafter contained, the parties hereto agree as follows: 1. Section 2 of the Employment Agreement is hereby amended in its entirety to read as follows: "2. Term; Termination. (a) Subject to Employee being employed by Employer as its Chief Executive Officer on December 31, 1998, the employment of Employee hereunder shall be effective and shall commence on January 1, 1999 (the "Effective Date") and shall terminate as of the close of business on July 31, 2003; provided, that Employer shall have the right to extend the termination date of the employment of Employee hereunder for a period not to exceed five months upon at least 60 days prior written notice to Employee. The date upon which the employment of Employee hereunder terminates is referred to herein as the "Termination Date". The period from the Effective Date through the Termination Date is referred to herein as the term of this Agreement. (b) Upon the Termination Date or at any time thereafter, at the request of the Board of Directors of Employer, Employee shall resign as a director of Employer." 2. Section 4(a)(i) of the Employment Agreement is hereby amended in its entirety to read as follows: "(i) Employee shall receive a salary at the rate of (x) four hundred forty thousand dollars ($440,000) per annum, commencing as of the Effective Date and until June 30, 2001, (y) five hundred twenty-eight thousand dollars ($528,000) per annum commencing as of July 1, 2001 and until December 31, 2002, and (z) seven hundred ninety two thousand dollars ($792,000) per annum, commencing as of January 1, 2003 and until the Termination Date, in each case payable in accordance with Employer's normal payroll practices. Such salary shall be subject to annual review by Employer's Board of Directors and, at the discretion of the Board, may be increased, but not decreased below such amount. Employee shall also be eligible to receive a 2002 annual bonus as may be granted by Employer's Board of Directors pursuant to Employer's Performance Sharing Plan ("PSP") formula, but is not eligible to receive a PSP bonus for services in 2003. 3. Section 4(b) of the Employment Agreement is hereby amended in its entirety to read as follows: "(b) Employee Benefit Plans. During the term of this Agreement, Employee shall be eligible to participate in any life insurance, medical, retirement, pension or profit-sharing, disability or other benefit plans or arrangements now or hereafter generally made available by Employer or AAI to executive employees of Employer or AAI to the extent Employee qualifies under the provisions of any such plans. Subject to the foregoing, Employer and AAI shall have the right to change insurance companies and modify insurance policies covering employees of Employer and AAI. Employer agrees to provide (or to cause AAI to provide) medical coverage to Employee after retirement at age 67 consistent with such coverage then provided to Employer's executive employees under Employer's plan. Such coverage shall be provided either through Employer's or AAI's plan or a private plan, at Employer's option, but only if and to the extent Employee does not receive such coverage from another source." 4. Except as amended hereby, the Employment Agreement shall remain in full force and effect and is hereby ratified and confirmed. 5. This Amendment may be executed in one or more counterparts, each which shall constitute an original and all of which together shall constitute one agreement. 6. This Amendment shall be governed by, construed and enforced in accordance with the laws of the State of New York, without regard to its conflict of laws principles. IN WITNESS WHEREOF, this Amendment No. 2 has been duly executed by the parties hereto as of the day and year first above written. UNITED INDUSTRIAL CORPORATION By: /s/ James H. Perry --------------------------------------------- Name: James H. Perry Title: Vice President /s/ Richard R. Erkeneff --------------------------------------------- RICHARD R. ERKENEFF AMENDMENT NO. 3 TO EMPLOYMENT AGREEMENT AMENDMENT NO. 3 (this "Amendment") dated as of December 20, 2002 by and between United Industrial Corporation, a Delaware corporation, and Richard R. Erkeneff. W I T N E S S E T H : - - - - - - - - - - WHEREAS, the parties hereto are parties to that certain Employment Agreement dated December 8, 1998, as amended pursuant to Amendment No. 1 thereto dated as of June 1, 2001 and Amendment No. 2 thereto dated as of December 20, 2002 (the "Employment Agreement"), and they desire to further amend the Employment Agreement as provided herein. NOW THEREFORE, in consideration of the premises and mutual covenants hereinafter contained, the parties hereto agree as follows: 1. Section 4(a)(ii) of the Employment Agreement is hereby amended by replacing the first paragraph thereof with the following: "If during the term of this Agreement Employee's employment ceases for any reason other than "for cause," death, disability or Employee's voluntary departure (other than for "Good Reason" as defined below), Employee shall be entitled to continue to receive his salary at the rate of $792,000 per year through July 31, 2003, payable in accordance with the normal payroll practices of Employer." 2. Except as amended hereby, the Employment Agreement shall remain in full force and effect and is hereby ratified and confirmed. 3. This Amendment may be executed in one or more counterparts, each which shall constitute an original and all of which together shall constitute one agreement. 4. This Amendment shall be governed by, construed and enforced in accordance with the laws of the State of New York, without regard to its conflict of laws principles. [Signatures Follow] IN WITNESS WHEREOF, this Amendment No. 3 has been duly executed by the parties hereto as of the day and year first above written. UNITED INDUSTRIAL CORPORATION By: /s/ James H. Perry ------------------------------------ Name: James H. Perry Title: Vice President /s/ Richard R. Erkeneff ------------------------------------ RICHARD R. ERKENEFF EX-10 5 s15-3474_ex10l.txt EXHIBIT 10L AMENDMENT TO EMPLOYMENT AGREEMENT AMENDMENT (this "Amendment") dated as of January 2, 2003 by and between United Industrial Corporation, a Delaware corporation, and Susan Fein Zawel. W I T N E S S E T H : - - - - - - - - - - WHEREAS, the parties hereto are parties to that certain Employment Agreement dated March 3, 2000 (the "Employment Agreement"), and they desire to amend the Employment Agreement as provided herein. NOW THEREFORE, in consideration of the premises and mutual covenants hereinafter contained, the parties hereto agree as follows: 1. Section 2 of the Employment Agreement is hereby amended by replacing the text "three (3) years" appearing therein with the text "four (4) years". 2. Section 4(b) of the Employment Agreement is hereby amended by inserting the following text at the end of the first sentence thereof (before the period): "; provided, however, that such benefits, individually and in the aggregate, shall be at least equivalent to those benefits provided to Employee during 2002". 3. Except as amended hereby, the Employment Agreement shall remain in full force and effect and is hereby ratified and confirmed. 4. This Amendment may be executed in one or more counterparts, each which shall constitute an original and all of which together shall constitute one agreement. 5. This Amendment shall be governed by, construed and enforced in accordance with the laws of the State of New York, without regard to its conflict of laws principles. IN WITNESS WHEREOF, this Amendment has been duly executed by the parties hereto as of the day and year first above written. UNITED INDUSTRIAL CORPORATION By: /s/ Richard R. Erkeneff -------------------------------------------- Name: Richard R. Erkeneff Title: President & CEO /s/ Susan Fein Zawel -------------------------------------------- SUSAN FEIN ZAWEL EX-10 6 s15-3474_ex10o.txt EXHIBIT 10O AMENDMENT TO EMPLOYMENT AGREEMENT AMENDMENT (this "Amendment") dated as of January 2, 2003 by and between United Industrial Corporation, a Delaware corporation, and Robert W. Worthing. W I T N E S S E T H : - - - - - - - - - - WHEREAS, the parties hereto are parties to that certain Employment Agreement dated March 3, 2000 (the "Employment Agreement"), and they desire to amend the Employment Agreement as provided herein. NOW THEREFORE, in consideration of the premises and mutual covenants hereinafter contained, the parties hereto agree as follows: 1. Section 2 of the Employment Agreement is hereby amended by replacing the text "three (3) years" appearing therein with the text "four (4) years". 2. Section 4(b) of the Employment Agreement is hereby amended by inserting the following text at the end of the first sentence thereof (before the period): "; provided, however, that such benefits, individually and in the aggregate, shall be at least equivalent to those benefits provided to Employee during 2002". 3. Except as amended hereby, the Employment Agreement shall remain in full force and effect and is hereby ratified and confirmed. 4. This Amendment may be executed in one or more counterparts, each which shall constitute an original and all of which together shall constitute one agreement. 5. This Amendment shall be governed by, construed and enforced in accordance with the laws of the State of New York, without regard to its conflict of laws principles. IN WITNESS WHEREOF, this Amendment has been duly executed by the parties hereto as of the day and year first above written. UNITED INDUSTRIAL CORPORATION By: /s/ Richard R. Erkeneff ---------------------------------------- Name: Richard R. Erkeneff Title: President & CEO /s/ Robert W. Worthing ---------------------------------------- ROBERT W. WORTHING EX-10 7 s15-3474_ex10r.txt EXHIBIT 10R AMENDMENT TO EMPLOYMENT AGREEMENT AMENDMENT (this "Amendment") dated as of January 2, 2003 by and between United Industrial Corporation, a Delaware corporation, and James H. Perry. W I T N E S S E T H : - - - - - - - - - - WHEREAS, the parties hereto are parties to that certain Employment Agreement dated March 3, 2000 (the "Employment Agreement"), and they desire to amend the Employment Agreement as provided herein. NOW THEREFORE, in consideration of the premises and mutual covenants hereinafter contained, the parties hereto agree as follows: 1. Section 2 of the Employment Agreement is hereby amended by replacing the text "three (3) years" appearing therein with the text "four (4) years". 2. Section 4(b) of the Employment Agreement is hereby amended by inserting the following text at the end of the first sentence thereof (before the period): "; provided, however, that such benefits, individually and in the aggregate, shall be at least equivalent to those benefits provided to Employee during 2002". 3. Except as amended hereby, the Employment Agreement shall remain in full force and effect and is hereby ratified and confirmed. 4. This Amendment may be executed in one or more counterparts, each which shall constitute an original and all of which together shall constitute one agreement. 5. This Amendment shall be governed by, construed and enforced in accordance with the laws of the State of New York, without regard to its conflict of laws principles. IN WITNESS WHEREOF, this Amendment has been duly executed by the parties hereto as of the day and year first above written. UNITED INDUSTRIAL CORPORATION By: /s/ Richard R. Erkeneff ---------------------------------------- Name: Richard R. Erkeneff Title: President & CEO /s/ James H. Perry ---------------------------------------- JAMES H. PERRY EX-13 8 s15-3474_ex13.txt ANNUAL REPORT [logo] UNITED INDUSTRIAL CORPORATION Annual Report ----------------2002 Defense Sales* $193,080 $208,575 $229,215 00 01 02 Defense Backlog* $190,161 $201,221 $296,117 00 01 02 Defense Segment EBITDAP*+ $13,567 $15,923 $20,065 00 01 02 * For the year ending December 31 (Excludes divested business) *+ Earnings before interest, taxes, depreciation, amortization, pension and curtailment gain
FINANCIAL HIGHLIGHTS (Dollars in thousands, except per share data) Year Ended December 31 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------- Net Sales-Continuing Operations $ 258,767 $ 238,495 $ 236,283 Net(Loss) Income (39,077) 5,363 7,779 (Loss) Earnings Per Share Basic (3.00) .42 .63 Diluted (2.85) .40 .62 Dividends Per Share .30 .40 .40 Shareholders' Equity 47,631 120,344 114,893 Shareholders' Equity Per Share 3.64 9.35 9.24 Sales Backlog-Continuing Operations $ 301,000 $ 207,000 $ 195,000 Shares Outstanding 13,068,000 12,872,000 12,435,000 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
Before Income Taxes Per Diluted Share (Unaudited) (Unaudited) ------------------------------- ---------------------------- Year Ended December 31 2002 2001 2000 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------- GAAP earnings from continuing operations $ 4,438 $ 22,011 $ 32,861 $ 0.28 $ 1.10 $ 1.68 Plus: Asbestos related provision 11,509 - - 0.53 - - Plus: Restructuring charge 4,707 - - 0.23 - - Plus: Pension expense 1,321 - - 0.06 - - Less: Pension income - (2,385) (5,277) - (.12) (.28) Less: Post-retirement curtailment gain - (1,933) - - (.09) - Less: Income from litigation settlement - (842) (3,483) - (.04) (.18) Less: Income tax benefit - (1,000) - - (.05) - Less: Gain on sale of subsidiary net of operating loss - - (3,851) - - (.20) - ------------------------------------------------------------------------------------------------------------------- Pro forma earnings from continuing operations $ 21,975 $ 15,851 $ 20,250 $ 1.10 $ .80 $ 1.02 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
This table provides a reconciliation of United Industrial Corporation's Generally Accepted Accounting Principles (GAAP) to Pro forma earnings before taxes and per diluted share from continuing operations United Industrial is a company focused on the design and production of defense systems. * Its products include unmanned aerial vehicles, training and simulation systems, and automated aircraft test and maintenance equipment. * The Company also offers logistical/engineering services for government-owned equipment and manufactures combustion equipment for biomass and refuse fuels. [PHOTO] Letter to Shareholders ............... 2 Unmanned Aerial Vehicles ............. 8 Simulation and Test Systems .......... 14 Engineering and Maintenance Services . 20 Financial Information ................ 25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ^ UNITED INDUSTRIAL CORPORATION AR02 TO OUR SHAREHOLDERS 2002 was quite a year for our Company, highlighted by the award of the Tactical Unmanned Aerial Vehicle full-rate production contract from the U.S. Army, perhaps the most significant program in our history. The year also included important strategic decisions about the future of United Industrial as well as major operating achievements across a number of our business platforms. Moreover, these developments came against a backdrop in which interest and investment in our nation's defense capabilities have shown continued growth. From a financial perspective, our results reflect the solid operating momentum we have generated across our defense businesses, but were negatively affected on the bottom line by a number of special items and events, discussed below. Consistent with our strategy to exit the transportation business in the near future, revenue and income figures from continuing operations include the results of our defense and energy businesses only. The Company's transportation operations have been reported as discontinued. For the 2002 year, revenues from continuing operations rose 8.5% to $258.8 million from $238.5 million in 2001. The Company's income from continuing operations, including a restructuring charge of $4.7 million ($3.1 million net of tax), or $.23 per diluted share, associated with closing the Company's foundry operations and a net provision of $11.5 million ($7.3 million net of tax) or $.53 per diluted share recorded for asbestos-related liabilities, was $3.9 million, or $.28 per diluted share (on a weighted average of 13,698,000 diluted shares outstanding), for 2002. Excluding the restructuring charge and the asbestos-related provision, the 2002 income from continuing operations was $14.2 million, or $1.04 per diluted share. This compares to income from continuing operations in 2001 of $14.6 million, or $1.10 per diluted share (on a weighted average of 13,289,000 diluted shares outstanding), though the 2001 results included a number of special gains totaling $2.6 million, net of tax, or $0.18 per share. Excluding the impact of the restructuring charge and asbestos-related provision in 2002, the special gains in 2001, and the pension results and curtailment gains in both years, the Company's income from continuing operations before tax for 2002 was $22.0 million ($15.1 million net of tax) or $1.10 per diluted share, compared to $15.9 million ($10.5 million net of tax) or $.80 per diluted share, in 2001. Reflecting the Company's growing book of business, backlog for continuing operations climbed 34% at 2002 year-end to $301 million, up from $207 million a year earlier. This robust increase underscores our commitment to grow United Industrial over the long term and is a strong endorsement of our products and services from the marketplace. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ^ UNITED INDUSTRIAL CORPORATION AR02 From Left to Right Richard R. Erkeneff President and Chief Executive Officer Harold S. Gelb Chairman of the Board [PHOTO] 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ^ UNITED INDUSTRIAL CORPORATION AR02 STRATEGIC PROGRESS AND GROWTH During 2002, United Industrial's long-term strategic plan continued to bear fruit in delivering results and best positioning the Company for future growth. For several years now, we have been executing a strategy of refocusing on our core defense businesses, while divesting non-core operations. This strategy has enabled us to leverage our capabilities and expertise in select segments of the defense marketplace, and it has allowed us to focus our energies and resources most productively. A major thrust of this effort has been to assure that our strategies are well attuned to the objectives and priorities of our customers, including, most importantly, the U.S. military. Strong Defense Results. Reflecting this focus, the Company's defense operations turned in an excellent performance in 2002. Contributing to these gains were strong results from our unmanned aerial vehicle business, simulation and test systems, and engineering and maintenance services. In particular, the Unmanned Aerial Vehicle programs, the P-3 Aircraft Avionics Tester Program and our C-17 Maintenance Training program were standout performers. These and our other programs are discussed in the pages that follow, but let us here acknowledge the outstanding accomplishments of our TUAV team. Based on their efforts, the U.S. Army awarded our AAI Corporation subsidiary in December 2002 a historic full-rate production contract for the next generation TUAV. This is the first full-rate production contract ever awarded by the U.S. military for an unmanned aerial vehicle program and represents the beginning of a long-term production program by the Army to field AAI's Shadow(TM) TUAV system. With an initial value of $86 million, this program has a potential value in excess of $500 million in the upcoming years, excluding logistical support. Transportation Divestiture. On July 26, 2002, United Industrial completed the divestiture of its transportation overhaul contracts with the New Jersey Transit Corporation and the Maryland Transit Administration for approximately $20.8 million. This sale marked a major milestone in the Company's long-term strategy of divesting non-core operations. We are now moving forward to complete the one remaining active contract in the transportation sector. We expect to complete production on this contract for the San Francisco Municipal Railway during the second half of 2003. For the year, the discontinued transportation operations reported a loss of $42.9 million, or a loss of $3.13 per diluted United Industrial's long-term strategic plan continued to bear fruit in delivering results and best positioning the Company for future growth. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ^ UNITED INDUSTRIAL CORPORATION AR02 share, compared to a loss of $9.3 million, or a loss of $.70 per diluted share, in 2001. The loss for the 2002 period includes a $21.5 million provision recorded in connection with the sale of the transportation overhaul contracts. Strategic Review. With the sale of the transportation overhaul contracts in July, the timing was right for United Industrial's Board of Directors to re-assess the Company's strategy and long-term direction. Prior to the sale, the Board had engaged Wachovia Securities, a well-known investment bank specializing in companies like United Industrial, to help us analyze strategic alternatives to enhance shareholder value. The Board determined that, simultaneously with the Company's long-term strategy of building its core defense businesses, it would initiate a process to explore a potential sale of all or part of the Company. Since last summer, the Company has heldwith a variety of potential purchasers, and the Board continues to explore the possibility of a sale as a means to maximize shareholder value. We have found, however, that while we do not believe the existence of the asbestos litigation will materially affect the Company in the long term, it has impeded the interest of certain potential buyers. At the same time, we continue to focus on the substantial organic growth opportunities before us. The actions we have taken over the past years and several recent high- profile program wins have positioned us well for the future. In addition, recent events and the Bush Administration's commitment to increase defense spending and continue to modernize our country's armed forces have created additional potential for companies such as ours. THE DEFENSE INDUSTRY LANDSCAPE United Industrial's defense systems subsidiary, AAI Corporation, has a long and distinguished history of working with the U.S. military. Our approach has been to target specific specialized niches of the defense marketplace, such as unmanned aerial vehicles and simulation and test systems, where we have unique strengths and to build leadership positions in these areas. Consistent with this focus, we have also worked hard to assure our products and services are aligned with the needs of all of our customers. Today, we believe our portfolio of technologies and platforms is well in tune with key priorities including: 1. the transformation of our nation's Armed Forces to a more accurate and mobile force that will be better able to deal with today's global crises. We are leveraging our unmanned aerial vehicle systems and our ammunition and armaments capabilities to actively pursue roles in the U.S. Army's Future Combat System (FCS). Well-positioned as the exclusive U.S. technology licensee for the highly effective Advanced Mortar System (AMOS(TM)) developed by the Finnish firm, Patria Hagglunds, AAI's first market for AMOS will be FCS. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ^ UNITED INDUSTRIAL CORPORATION AR02 [PHOTO] Frederick M. Strader, President and COO, AAI Corp. 2. the leveraging of information technology, to give our joint forces a common operational picture. Our engineering and systems integration capabilities, particularly in the area of unmanned aerial vehicles, have established AAI as a world- class leader in acquiring, integrating and disseminating real-time, tactical, battlefield intelligence. 3. the projection and sustainment of U.S. forces in distant theaters, as the U.S. increases its ability and flexibility to engage in combat at any given time and location around the world. The U.S. Air Force's C-17 and C-130 transports are the linchpin of the U.S. quick reaction capabilities, resulting in increased demand for these aircraft, which we service through our Maintenance Training programs. 4. the enhancement of interoperability for coalition operations with our Allies. Through our leadership in the development of On Board Training Systems, for example, we are benefiting as countries such as Australia embrace U.S. Navy standards that enable our joint forces to train together and become a cohesive coalition. These initiatives provide a strong tailwind as United Industrial continues to leverage its capabilities and know-how to grow its business and expand its presence in the defense industry. ENHANCING DETROIT STOKER'S PERFORMANCE Outside of our core defense business, we took steps in 2002 to increase the profitability of our energy systems subsidiary, Detroit Stoker Company. These actions included the closure of Detroit Stoker's foundry operations and a decision to outsource our castings requirements. We have already begun to see the benefits of this change including a significant improvement in profitability. ASSURING THE BEST LEADERSHIP TEAM A vital part of our efforts to assure United Industrial's future success is having a talented and experienced management team. We have placed a high priority on attracting and retaining the right people, from our executive ranks to our engineers to our administrative personnel, who can contribute positively to the Company's growth and development. Early in 2003, we took an important step in assuring the strength and continuity of the Company's senior management team, by appointing Frederick M. Strader 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ^ UNITED INDUSTRIAL CORPORATION AR02 to the newly created position of President and Chief Operating Officer of AAI Corporation, with responsibility for day-to-day operations. Since joining AAI in 2001 as Executive Vice President and General Manager of the Company's Defense Systems business, Fred has distinguished himself as an effective leader and strategic thinker. He brings 20 years of experience in the defense industry, and we look forward to his continued contributions. Our commitment to having the best people extends to our Board of Directors as well. That's why we took strong action when one of our shareholders challenged our Board's composition through a proxy fight during 2002. Certainly, we place a priority on being responsive to our shareholders' input, and we hope to avoid any such similar situation in the future. Following the proxy fight, Glen Kassan, a second representative of Steel Partners II, L.P., joined our Board of Directors. In addition, the Board reelected Paul J. Hoeper, a seasoned defense industry executive and former Assistant Secretary of the Army and Under Secretary of Defense, as a Director, replacing Susan Fein Zawel, who resigned from the Board following seven years of distinguished service in order to enable Mr. Hoeper to continue in his valuable role as a Director. FOCUSED ON BUILDING SHAREHOLDER VALUE As we look to the future, our number one priority remains constant: to maximize long-term shareholder value. We are confident that the strategies we have underway have put us on a strong path to meet that objective, and our Board continually evaluates our progress in this regard. We are clearly focused on our obligations and are committed to assuring that United Industrial's assets and resources are applied for optimal returns. In closing, we would like to thank the 1,600 men and women of United Industrial for their hard work and dedication over the past year. They are directly responsible for the important strides we made in 2002. To our customers, we appreciate your continued support, and, to our shareholders, we remain energized and committed to delivering on the promise of your investment. Sincerely, /s/ Richard R. Erkeneff Richard R. Erkeneff President and Chief Executive Officer /s/ Harold S. Gelb Harold S. Gelb Chairman of the Board 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ^ UNITED INDUSTRIAL CORPORATION AR02 UNMANNED AERIAL VEHICLES OUR UAV BUSINESS: Leadership, Growth and Success. The market for Unmanned Aerial Vehicles (UAVs) - powered, aerial vehicles that do not carry human operators, and which are used for surveillance, reconnaissance and target acquisition purposes - continues to expand at a rapid pace. Recent global events continue to highlight the importance and effectiveness of UAV use, particularly in combat situations where the military's use of UAVs can save solders' lives by minimizing their exposure to enemy fire while maximizing intelligence gathering. 2002 proved to be a banner year for our AAI subsidiary's Unmanned Aerial Vehicle business, capping off a three-year period in which this business has grown six-fold. Our recognized two decades of leadership within this field, combined with the tremendous military and commercial potential of the UAV technology we offer, have translated into significant contracts both in the United States and across key foreign markets. This work has showcased the unparalleled skills we bring to UAV development, particularly on the U.S. Army's next- generation Tactical UAV, and continues to position our UAV business as a major growth driver for years to come. OUR ARMY TUAV PROGRAM: Full-Rate Production Achieved. The centerpiece of our UAV business remains our Tactical Unmanned Aerial Vehicle (TUAV) program for the U.S. Army, through which we have been delivering a new generation of UAVs for use by the Army. The TUAV program is an excellent example of our strategy of assuring that our business is well attuned to the forward direction of the U.S. Department of Defense (DoD) and major DoD customers, and has met with great success on multiple fronts. The undisputed highlight of the year was our historic receipt of the first full-rate production award for the TUAV, marking the first full-rate production contract ever awarded by the U.S. Department of Defense for an Unmanned Aerial Vehicle system. This contract signals the Army's long-term commitment for use and fielding of United Industrial's TUAV system and underscores the significant future opportunities available to us in support of this pivotal program. This initial contract is the first in what will be a series of full-rate production contracts in upcoming years and was achieved only after successfully meeting a sequence of testing and contractual milestones over the past three years. AAI received its first full-rate production TUAV contract, valued at $86 million, to produce nine systems. This is the first in what will be a series of full-rate production contracts in upcoming years with a potential value of $500 million, excluding logistical support. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ^ UNITED INDUSTRIAL CORPORATION AR02 AAI/UAV Systems (left to right) Suzanne Schwitalla Director, Program Support Pete Mullowney Deputy for Technology and Systems Development Joe Thomas Vice President and General Manager Kirk Slenker Technical Director, Chief Engineer Steve Reid Deputy for Production & Support Allie Waldron Director, International Programs Jim Christner Director, International Marketing "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." Joe Thomas Vice President and General Manager, AAI/UAV Systems 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ^ UNITED INDUSTRIAL CORPORATION AR02 [PHOTO] Shadow 200 The Shadow 200 TUAV system is the newest addition to AAI's family of Shadow UAV systems. The system sees targets 125 kilometers away from the brigade tactical operations center and transmits imagery and telemetry data directly to Joint STARS, All Sources Analysis Systems and the Army Field Artillery Targeting and Direction System. Providing near real-time targeting data for precision weapons using "leap ahead" technology and deployable in the military theater using only three C-130 aircraft, the Shadow 200 has been chosen by the U.S. Army to be "the eyes of brigade commanders to see first, understand first, and act first-decisively." [PHOTO] Shadow 400 The Shadow 400 UAV system is deployed for intelligence, surveillance, targeting, reconnaissance, observation and battle-damage assessment missions primarily in support of naval operations. Shadow 400's can be launched and recovered from ships or land, and air vehicle control can be transferred between ship-based or land-based control stations. The system includes multiple air vehicles, a ground control station, hydraulic launcher, logistics support, payloads, net recovery system with automatic landing, ground support equipment, shipboard integration, stabilization equipment and radome antenna set. Shadow 400 UAV systems are currently deployed with U.S. allied naval forces. [PHOTO] Shadow 600 The Shadow 600 UAV system, the largest of AAI's UAVs, was developed following the successful deployment of AAI's Pioneer UAV during the 1991 Gulf War. Based on recommendations from battlefield operators, the Shadow 600 system includes such key upgrades as increased endurance to 12-14 hours, ability to carry payloads up to 90 pounds, powerful 52 horsepower engines, and digital electronics and autopilot. With an airframe manufactured to ISO 9001 standards and designed to carry multiple payloads, the versatile Shadow 600 is supporting military requirements in several U.S. allied nations where the systems operate in diverse and rigorous climate and terrain conditions. [PHOTO] Pioneer AAI's Pioneer was the first U.S. tactical UAV system used to gather intelligence, initial targeting data, adjust artillery, and conduct battle-damage assessment during conventional armed conflict. Used during the 1991 Gulf War, Pioneer UAVs are still in service with the U.S. Navy and Marine Corps. Beginning in FY-03, improvements to the system will enhance Pioneer functionality by reducing the system footprint and increasing system interoperability with other UAV programs. In preparing for a mission launch, U.S. Army soldiers check the payload of a Shadow 200 Tactical UAV, which includes an infrared sensor and a special radar package. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ^ UNITED INDUSTRIAL CORPORATION AR02 [PHOTO] Valued at $86 million, this first full-rate production contract provides for the production of nine TUAV systems, including spare parts, maintenance, ground and other equipment, from December 2003 through August 2004. While the current Army procurement objective is 41 systems, our analysis indicates a likely need for 80 or more systems through fiscal year 2010. In addition to the production of the TUAV systems, we will also spearhead a range of additional services, from logistics support to research and development, under separate contracts. With the first of these contracts expected to be awarded in the first half of 2003, we believe that the ultimate value of these "support contracts" may eventually be worth as much as the production portion of the program, now estimated to have a potential value in excess of $500 million in the upcoming years. Equally important, the progression of our TUAV program to this more advanced production phase provides us with increased visibility in the UAV marketplace to support our business development efforts and demonstrate the unique skills and expertise we offer in this field. OTHER TUAV PROGRAM ACHIEVEMENTS: Continuing Innovation and Flexibility. The award of the full-rate production contract was predicated on an enormous amount of work on the TUAV throughout 2002, including the successful completion of low-rate initial production (LRIP) contracts. These included a contract, awarded in March 2002, authorizing the production of five TUAV systems, with accompanying ground and support equipment, spare parts and tools. We also received contract modifications on existing LRIP contracts, encompassing orders for further support and AAI technician assembling a new Shadow Tactical UAV for the U.S. Army in the production phase of the contract. *17 maintenance work, as well as additional hardware and equipment. These LRIP contract awards totalled $63 million. Moreover, our commitment to constant innovation in meeting the specific needs of our customers is clearly displayed in much of the engineering development work that we have achieved on the TUAV program. For example, [PHOTO] 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ^ UNITED INDUSTRIAL CORPORATION AR02 under a $9.8 million contract, we are now developing Tactical Common Data Link (TCDL) equipment for the TUAV, including a new flight computer, while creating more efficient wing assemblies. In addition, consistent with the Army's "One System" concept in which our Shadow TUAV system's ground control equipment would be capable of controlling various other UAVs, we are also working to develop integrated ground control equipment with the Hunter UAV system. A flight test is scheduled later in 2003, and if successful, we may proceed with integration development with other major UAV systems, including the Pioneer and Predator platforms. We are confident that, by continuing to prove the flexibility of our UAV system, we will create other UAV platform integration opportunities with the Army in the future. ACROSS THE MILITARY AND THROUGHOUT THE WORLD In addition to the strong relationship our UAV business maintains with the Army through our TUAV program, we have seen demand for our UAV expertise across other service branches of our Armed Forces. We received contracts in 2002 for continuing engineering and logistics support of the Pioneer UAV system for the U.S. Navy and Marine Corps, including a contract for on-call engineering support for 2003. This latter contract marks the 17th year of annual UAV support that we have provided to both the Navy and Marine Corps, and reflects how the momentum we have built in our UAV business is grounded in decades of solid experience. We also continue to build a powerful global franchise, winning new contracts and customers throughout the world. Among other achievements, in 2002 our UAV business completed hardware and software modifications, finalizing acceptance testing of a second Shadow 600 UAV system for delivery to Romania. We also completed testing for a Shadow 400 UAV system for delivery to an Asian customer, under a $25.8 million contract. MOMENTUM IS ON OUR SIDE As we enter 2003, positive momentum is clearly on our side. Our Shadow systems are now in the hands of U.S. combat troops, and the TUAV is an integral part of the Army's strategy of moving to an "Objective Force." We have embraced this challenge and look forward to a long collaboration with the Army. Moreover, the outstanding progress we have made in UAV development for the Army, as well as for other customers, has allowed us to tap into a deep wellspring of potential in this field, with the promise of much more to come. We remain excited about the consistently rising demand for UAVs worldwide, our ability to continue to capitalize on our leadership position in this field and our prospects for continuing to grow our share of this key niche market. AAI technician assembling a new Shadow Tactical UAV for the U.S. Army in the production phase of the contract. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ^ UNITED INDUSTRIAL CORPORATION AR02 SIMULATION AND TEST SYSTEMS The production and support of simulation and test systems remains a cornerstone of our AAI subsidiary's business, comprised of a strong mix of growth platforms encompassing cutting-edge U.S. Department of Defense (DoD) projects, as well as long-standing, industry-leading products that have generated steady demand for years. From projects associated with the ongoing transformation of America's Armed Forces for the twenty-first century, to serving core ongoing personnel training needs, we continue to leverage our expertise and leadership in this niche market to win new customers and contracts domestically and overseas. JSECST: A Key Growth Driver At the forefront of our simulation and test systems business is our work on the high-profile Joint Service Electronic Combat Systems Tester (JSECST). This program has been designated by the DoD as the standard flight-line electronic warfare test system, with plans to support all branches of the Armed Forces. Under our contract, currently valued at $87 million, we developed a state-of-the-art test system that stimulates electronic warfare radar detection devices and measures radar jammer responses to assure mission readiness. We have made steady progress, and based on our results, this program has now entered its production phase. Due to the scope and potential of JSECST, we expect this program to be a major contributor to our performance over the next six years and a key driver of future growth. Among some of the highlights of our JSECST work in 2002 was a $41.6 million contract for 144 JSECST core test sets, with 65 for the U.S. Air Force, 76 for the U.S. Navy and 3 for the Kuwaiti military. Our contract includes test software and interface hardware sets that adapt the JSECST system to a range of aircraft types, including the F-15C, F-16, A-10, F-14, AV-8B, and all variants of the F/A-18. Also included were test program sets for the AN/ALQ-184 and AN/ALQ-131 self-protection jammer pods. Delivery of the test sets will begin in mid-2003 and be completed in 2005. Further, we have also received additional contract funds of $1.8 million for our JSECST Test Program Set development program. Under this contract, we are developing test program sets supporting electronic combat systems on board all U.S. Fighter aircraft, and this most recent award brings the total current value of this contract to $6.8 million. Importantly, we are building our presence in key overseas markets as JSECST continues to be adopted internationally. The JSECST program, now valued at about $87 million, features the most advanced electronic warfare test technology ever developed and the first test set designed for compatibility with electronic combat and avionics systems in all branches of worldwide military forces. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ^ UNITED INDUSTRIAL CORPORATION AR02 [PHOTO] AAI Test and Electronic Warfare Systems (left to right) John Allen Boresight Equipment Program Manager Michael Browne Director, Test and EW Systems Joe Auer AN/USM-449 Program Manager Linda P. Zimmerman JSECST Support Leader Ray Sherry JSECST Program Manager Bill Chambliss JSECST Test Program Set Leader John Kuhl JSECST CTS Leader "Our team's commitment to constant innovation and excellence accounts for our successful track record in applying high technology solutions to satisfy complex military needs. Defining attributes of our corporate culture, innovation and excellence have spawned an entire new generation of cutting-edge products like the JSECST, which has been designated by the U.S. Defense Department as the standard flight-line electronic warfare test system, supporting all branches of the U.S. military." Michael Browne Director, AAI Test and Electronic Warfare Test Systems 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ^ UNITED INDUSTRIAL CORPORATION AR02 For example, our AAI subsidiary recently received its first order for $1.25 million from the Swiss government for six JSECST Core Test Sets to be used in support of electronic warfare systems on board its F/A-18 Hornet aircraft. We are also in ongoing discussions with other overseas operators of electronic warfare aircraft and electronic warfare system manufacturers. Most significantly, we expect the growing worldwide popularity of the JSECST system to position us well for continuing opportunities, and we intend to aggressively pursue this potential. SHIPBOARD TRAINING SYSTEMS Reinforcing our traditionally close ties with the U.S. Navy, we continue to solidify our position as a leader in the field of shipboard training systems through the wide array of high-technology systems and products that we offer. We are particularly proud of our ongoing involvement with the Navy's Battle Force Tactical Training (BFTT) program, under which we continue to receive additional contract orders for Generic Navy Stimulator/Simulator (GNSS) units and engineering support services. Since 1998, we have designed 17 GNSS variants and produced 398 units, bringing the total program value to over $35 million. Also in connection with this program, we received two new contracts in August 2002, valued in total at $3.4 million, for new GNSS units and 23 of our Navigation Simulators of varying configurations. Reflecting how integral our products have become under this program, upon delivery of these latter contracts, 63 U.S. Navy ships will have AAI-designed and [PHOTO] AAI Training and Simulation Systems (left to right) Bob Wilhite Director, Training and Simulation Systems Don Wright Program Manager II Scott Waldron Fellow Engineer Mike Bitner Fellow Engineer Robin Rouleau Principal Systems Engineer Tom Jones Program Director 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ^ UNITED INDUSTRIAL CORPORATION AR02 produced Navigation Simulators on board. Over 150 ships will eventually have AAI-products on board. We also continue to pursue opportunities in support of growth projects with our cutting-edge shipboard training offerings. This year, we were awarded a $3.6 million contract to develop seven Tactical Data Link Stimulators for the Navy's BFTT program. Importantly, the U.S. Navy has a requirement for approximately 150 Tactical Data Link Stimulators over the next four years, and we believe the initial work we are doing lays the groundwork for capturing much of this business going forward. In addition, the Navy has announced its intention to purchase 10 on-board Gun Fire Support (NGFS) systems over the next 18 months, and we have received a contract for the development of the first three of these training systems. The NGFS will be utilized to enhance Naval Gun Fire Support when current live-fire ranges are closed down. Building upon our GNSS product line for the BFTT program, we were also awarded a contract to produce two Radar Environment Stimulators for a groundbase air defense radar system, the first of many awards expected over the course of the next several years. OTHER KEY HIGHLIGHTS We also continue to build on our relationships with major military contractors across a range of areas. Our work with Northrop [PHOTO] AAI/ ACL Technologies (left to right) David Abood Vice President, Egyptian Program Mike Perry Director of Programs and Customer Service Tom Wurzel President Scott Konter Vice President, Finance Ted Marwitz Director, Operations Mark Krusemark Director, Marketing 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ^ UNITED INDUSTRIAL CORPORATION AR02 Grumman now spans a number of key projects, including the development of a Radar Simulator for initial test use in a Sensor Fusion Product, with further orders expected in 2003; contract awards to provide logistics and trainer support for the JointSTARS Prime Mission Equipment Maintenance Trainer System at Robins Air Force Base, Georgia; and a contract from Northrop Grumman's Ship Systems Ingalls Operation for a monorail system for a Navy ship. This year, we also completed the second phase of a three-phase effort with NLX Corporation for development of an F-16C Modular Simulator Aircraft Maintenance Trainer (MSAMT) program. We have been awarded the contract for phase three of this effort, which will include model integration and test and verification activities. Also, building on our long successful P-3 Aircraft Avionics Tester, we completed delivery and installation of a service life upgrade for the Japanese Navy which is designed to extend the system's life through at least 2015. Other highlights for the year include the receipt of a $1.6 million modification for our ongoing work in developing the PDCue(TM) Mobile Counter Fire System for the USMC Warfighting laboratory; the receipt of a $1.0 million contract from the U.S. Army Research Laboratory to install AAI's TDCue(TM) Infantry Target Scoring System at its Aberdeen Proving Ground M-Range facility; the successful completion of testing and receipt of additional contract modifications to incorporate changes in our Guided Missile Maintenance Platform (GMMP) program with Hill Air Force Base; and a contract to develop an integrated artillery training system for the Marine Corps Closed Loop Artillery Simulation System (CLASS) program, for which additional contracts and follow-on production activities are in the planning stages. PDCue(TM) and TDCue(TM) are both acoustic sensing systems designed to detect and track bullets. The MCFS combines AAI's PDCue(TM) sniper detection system with a remote weapon station mounted on a Humvee, and is one of the USMC Warfighting Laboratory's key technology programs, which could lead to installation of the system on over 600 vehicles. The MCFS system not only detects incoming shots, but also automatically slews the weapon to point in the direction of the sniper, providing invaluable time to help keep the war fighter alive. The TDCue(TM) Infantry Target scoring system is used to provide instantaneous feedback on where each round hits an infantry-size target during training, and fits the U.S. Army's vision to outfit all future training ranges with "non-contact" scoring systems. The sale of our TDCue(TM) Infantry Target scoring system represents the first sale of this new product, which we hope becomes the U.S. Army standard for all training ranges. ACL TECHNOLOGIES ACL Technologies, our hydraulic, fuel and pneumatic testing business, continues to transition from a focus on manufacturing test equipment to providing fluid test systems services. Although ACL has been impacted by both an ongoing downturn in the commercial airline market as well as international contract award delays, opportunities for performance improvement are clearly in sight, with a number of strong potential programs being pursued. A major program for ACL remains our ongoing contract to construct an F-16 Maintenance Depot in Egypt. Under this program, now valued at $40 million, we recently received $2.2 million in initial funding for an engineering support contract and have been selected to integrate a Surface Treatment Facility into the Maintenance Depot. We are pleased with the outstanding progress on this project, and we will continue our efforts to win opportunities at other depot maintenance facilities. ON A CONTINUING SUCCESS VECTOR From partnering with America's Armed Forces, to working with major defense contractors, and from building on our core competencies to embarking on a range of cutting-edge projects, our simulation and test businesses are capturing market share throughout the world. The superior expertise and specialized skills that we bring to this market, and the mix of legacy businesses and forward-looking platforms that we possess, have placed us on a continuing success vector going forward. Members of the 33rd Fighter Wing at Eglin Air Force Base work with AAI to test the JSECST system for the F-15 C Air Superiority Aircraft. [PHOTO] 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ^ UNITED INDUSTRIAL CORPORATION AR02 ENGINEERING AND MAINTENANCE SERVICES Our engineering and maintenance services business, ESI, delivered another year of solid results and outstanding achievements. Our core strategy of focusing on specialized engineering and logistics services for the defense and aerospace industry continues to differentiate us in the marketplace and attract new customers. Particularly well-attuned to the DoD's priority of increasing combat engagement flexibility and mobility is our flagship C-17 Maintenance Training System (MTS) program with the U.S. Air Force, a key growth platform for the Company. ESI'S C-17 AND C-130 PROGRAMS: A Landmark Year Based on an increased emphasis on quick-reaction capabilities for strategic and tactical airlift purposes, we are experiencing rising demand for the specialized services we provide in developing and maintaining training systems for such critical military transport aircraft as the C-17 and C-130 airplanes. Our C-17 program, with $51.5 million in backlog, is now the largest single program in ESI's 21-year history, reaching a landmark milestone this year with total contract value surpassing the $200 million threshold. In addition, as a result of our role as prime contractor on the Air Force's Training System Acquisition II (TSA II) program, we anticipate a new contract in 2003 that will increase the total value of the contract. Moreover, through our successful execution, this pivotal program has opened the door to an array of additional opportunities with other parties. For example, we are now at work on a $14.3 million program for the Mississippi Air National Guard, under which we are developing a Training Evaluation Performance Aircraft Training Set. This contract is proceeding smoothly, and we are optimistic about further growth opportunities in this area. We also continue to build on our strong overseas franchise by providing C-17 maintenance training under Foreign Military Sales (FMS) contracts, such as our contract to train the United Kingdom's Royal Air Force. Where the C-17 performs a strategic airlift mission, the C-130 serves as the Air Force's primary aircraft for tactical airlift, and we have been active in its support as well. We are currently serving as subcontractor to Boeing on the Air Force's C-130 Avionics Modernization Program under a program valued at $2.5 million. This work, focused on ESI's flagship C-17 program, with $51.5 million in backlog and a total contract value now surpassing $200 million, has opened the door to additional opportunities, both in the U.S. and abroad. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ^ UNITED INDUSTRIAL CORPORATION AR02 [PHOTO] ESI (left to right) David Warner Director, Charleston Operations John Foster Training Requirements Manager, Charleston Operations Mike Boden Vice President and General Manager, ESI Paul Mueller Deputy Program Manager, Charleston Operations Patrick Truitt Director, Logistics Programs "ESI's excellent performance on our key C-17 program, the wide range of logistical capabilities we offer, and the rapid, customer-focused responsiveness of our organization have all contributed to our strong results, our considerable growth potential and our reputation as a market leader." Mike Boden Vice President and General Manager, ESI 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ^ UNITED INDUSTRIAL CORPORATION AR02 analysis of maintenance training systems requirements, positions us well for future C-130 maintenance trainer work. In fact, we believe that the C-130 program has the potential to ultimately be as large as our C-17 program. CONTINUING SUCCESS IN LOGISTICS AND FIELD SUPPORT A mainstay of ESI's business remains the provision of logistics and field support products and services. Among ESI's major contracts this year was the award of a four-year, $1.9 million contract from the Federal Highway Administration to provide engineering and maintenance support for its Highway Simulator (HYSIM), used to develop experimental driving scenarios for testing planned safety changes to our nation's highways. This is an exciting new area, and we are delighted to apply our capabilities to promote greater safety for all. In addition, ESI has provided critical support for a number of important programs our Company is currently involved with, including developing new performance-based logistics contracts in support of the JSECST project and our TUAV program with the U.S. Army. In fact, ESI has provided field support for the Navy's Pioneer system for more than 10 years, and we will continue to leverage our unparalleled staff deployment capabilities in pursuit of additional opportunities. As a complement to its field work, ESI has capitalized on its logistics expertise through the operation of technical and training centers. For example, we just completed our second successful year of operation of our Utah Technical Center (UTC), which continues to attract growing numbers of customers seeking an increasingly diverse range of services. Among our recent programs, the U.S. Air Force engaged the UTC in support of its procurement of a construction contract for a major new facility. And with a backlog of over 50 work requests, ESI's UTC is poised for a very strong year in 2003. Looking forward, our technical centers offer an exciting platform for the future, particularly to the extent we can help coordinate collaborative efforts on large, more geographically dispersed projects. For example, by integrating our existing federal supply schedule contracts with the General Services Administration (GSA) into our Alaska Technical Center's (ATC) work base, we can cultivate opportunities to grow our GSA contracts, while reaching out to expanding government units such as the new Department of Homeland Security. A FUTURE OF OPPORTUNITY We are delighted with the ongoing success of our ESI business. From flagship programs such as our C-17 contract with the Air Force, to ongoing logistical and field support projects in key growth areas, to the continuing strong potential offered by our technical centers, ESI is on-track in reinforcing its market leadership, enhancing its network of opportunities and growing its customer base. Our success on the C-17 program positions us well for maintenance trainer work on the C-130, the Air Force's primary aircraft for tactical airlift. This program, we believe, has the potential to ultimately be as large as our C-17 contract. The use of an actual C-17 Engine in the Aircraft Engine Cowling Trainer, being checked here by ESI technicians, further enhances the maintenance training experience. [PHOTO] FINANCIAL REVIEW Managment's Discussion ................... 25 Consolidated Balance Sheets .............. 36 Consolidated Statements of Operations .... 38 Consolidated Statements of Cash Flows .... 39 Notes to Financial Statements ............ 40 Report of Independent Auditors ........... 59 Five Year Financial Data ................. 60 Corporate Organization ................... 61 Corporate and Shareholder Information .... 62 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 ^ UNITED INDUSTRIAL CORPORATION AR02 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following information primarily relates to the continuing operations of United Industrial Corporation and consolidated subsidiaries that are conducted through three business segments; defense, energy and other. The transportation operations are reflected as a discontinued operation in the Company's consolidated financial statements as of and for the years ended December 31, 2002, 2001 and 2000. See Notes 2 and 16. YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001 Net sales of $258,767,000 in 2002 increased $20,272,000 or 8.5% from $238,495,000 in 2001. The defense segment sales increased $20,640,000 or 9.9% to $229,215,000 in 2002 from $208,575,000 in 2001. The sales growth in the defense segment was driven by increases in the unmanned aerial vehicle, and simulation and test systems product areas. Sales to agencies of the U.S. Government, by the defense segment, were $161,406,000 in 2002 and $148,732,000 in 2001. Export sales by the defense segment were $60,910,000 in 2002 and $50,455,000 in 2001, an increase of $10,455,000 or 20.7%. 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 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 $29,552,000 in 2002, a decrease of $368,000 or 1.2% from $29,920,000 in 2001, due to decreased spending by our customers in the pulp and paper industry. Gross profit increased $2,152,000 to $56,117,000 in 2002 from $53,965,000 in 2001. The gross margin percentage was 21.7% in 2002 and 22.6% in 2001. The defense segment gross margin percentage decreased to 20.8% in 2002 from 21.1% in 2001. Included in the defense segment's cost of sales is pension expense of $2,952,000 in 2002 and pension income of $566,000 during 2001. Also included in the 2001 defense segment's cost of sales is a curtailment gain of $1,933,000 resulting from changes the Company made to its postretirement benefits plan that reduced the Company's future liabilities. Excluding the pension plan performance in both years and the curtailment gain in 2001, the gross margin in the defense segment would have been 22.1% during 2002 and 19.9% during 2001. During 2002, the defense segment benefitted from higher margins on certain foreign contracts. The energy segment gross margin percentage decreased to 28.9% in 2002 from 33.4% in 2001 due to a charge of $3,420,000 for accelerated depreciation of assets related to the closing of the foundry operated by Midwest Metallurgical Laboratory, Inc., a wholly owned indirect subsidiary of the Company in the energy segment. Excluding the depreciation charge, the energy segment gross margin in 2002 would have been 40.4%. The energy segment's increase in 2002 is attributable to lower cost castings, the manufacturing of which was outsourced in connection with the decision to close the foundry. Selling and administrative expenses increased $5,464,000 or 15.8% in 2002 to $40,163,000 from $34,699,000 in 2001. Selling and administrative expenses as a percentage of net sales was 15.5% in 2002 and 14.6% in 2001. The defense segment's selling and administrative expenses increased $4,761,000 or 18.6% to $30,411,000. The increase in the defense segment is due to approximately $1,930,000 of reallocated corporate expenses primarily caused by a reduced allocation base in the discontinued transportation operations. The remainder of the cost growth was generally due to higher insurance costs and salary increases. The decrease in the energy segment of approximately $671,000 to $8,400,000 was due to a reduction in research and development expense and the closing of the foundry. The increase of $1,374,000 in the other segment resulted primarily from increased professional and consulting fees. Generally, these fees related to matters concerning the Company's environmental issues, sale process, and proxy contest. Other operating expenses, net increased $313,000 to $419,000 in 2002 from $106,000 in 2001. The increase was primarily due to the expenses related to the closing of the foundry operated by Midwest Metallurgical Laboratory, Inc., an indirect subsidiary of the Company in the energy segment. As discussed in more detail below, during 2002 the Company recorded a provision of $31,852,000 for estimated asbestos related defense and indemnity costs, offset by estimated insurance recoveries of $20,343,000. 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 ^ UNITED INDUSTRIAL CORPORATION AR02 MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED Other income, net decreased $1,021,000 to $64,000 in 2002 from $1,085,000 in 2001. The decrease was primarily due to an insurance recovery in 2001 of $842,000. Other expenses decreased $74,000 to $666,000 in 2002 from $740,000 in 2001. Interest expense increased to $843,000 in 2002 from $17,000 in 2001, primarily due to interest paid on borrowings and lookback interest paid to the Internal Revenue Service resulting from increased profits on long term contracts. Interest income decreased $491,000 in 2002 from $618,000 in 2001 due to lower investments. Income from continuing operations before income taxes decreased $17,573,000 to $4,438,000 in 2002 from $22,011,000 in 2001. The defense segment income from continuing operations before income taxes decreased $1,309,000, to $17,113,000 in 2002 from $18,422,000 in 2001. However, the Company recorded a pension expense of $2,952,000 in 2002 and pension income as well as a postretirement curtailment gain of $566,000 and $1,933,000, respectively in 2001. Excluding the pension results in both years and the curtailment gain in 2001, income from continuing operations before taxes in the defense segment increased during 2002 by $4,142,000 or 26%. This increase was generally the result of improved gross margin, partially offset by higher general and administrative expenses. The energy segment loss from continuing operations before income taxes was $10,108,000 in 2002 compared to a profit of $3,042,000 in 2001. The decrease of $13,150,000 in 2002 was primarily due to an asbestos litigation provision to cover the estimated liability through 2012 net of estimated probable insurance recoveries, of $11,509,000 (see Environmental and Other litigation below), and $4,707,000 of expenses related to the closing of the energy segment's Midwest Metallurgical Laboratory, Inc. foundry which ceased operations effective May 17, 2002, partially offset by other efficiencies in gross profit and selling and administrative expenses. Excluding the net asbestos litigation provision and the foundry closure costs, income from operations before tax in the energy segment was $6,108,000 in 2002, an increase of $3,066,000 or 100.8% from 2001. This increase was generally due to lower costs from outsourcing the manufacturing of castings. The other segment income from continuing operations before income taxes decreased $3,114,000 to a loss of $2,567,000 in 2002 from income of $547,000 in 2001 primarily due to an increase in professional and consulting fees related to matters concerning the Company's environmental matters, sale process and proxy contest. Included in 2001 is a reduction of a reserve for local taxes of $1,000,000 related to the favorable settlement of a tax issue and an $842,000 insurance recovery. Income after taxes from continuing operations was $3,864,000 or $.28 per diluted share in 2002, a decrease of $10,764,000 or $.82 per diluted share from $14,628,000 or $1.10 per diluted share in 2001. The year 2002 includes a net charge for asbestos litigation of $7,330,000 or $.53 per diluted share, a restructuring charge of $3,100,000 or $.23 per diluted share and a decrease of $3,721,000 or $.27 per diluted share in pension results and curtailment gain. These were partially offset by operating efficiencies. 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 ^ UNITED INDUSTRIAL CORPORATION AR02 The following table provides a reconciliation of United Industrial Corporation's Generally Accepted Accounting Principles (GAAP) to Pro forma earnings before taxes and per diluted share from continuing operations.
Twelve Months Ended Twelve Months Ended December 31, December 31, - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands, except per share data) 2002 2001 2000 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Before Income Taxes Per Diluted Share (unaudited) (unaudited) GAAP earnings from continuing operations $4,438 $22,011 $32,861 $ .28 $1.10 $1.68 Plus: Asbestos related provision-- net 11,509 .53 Plus: Restructuring charge 4,707 .23 Plus: Pension expense 1,321 .06 Less: Pension income (2,385) (5,277) (.12) (.28) Less: Post-retirement curtailment gain (1,933) (.09) Less: Income from litigation settlement (842) (3,483) (.04) (.18) Less: Income tax benefit (1,000) (.05) Less: Gain on sale of subsidiary net of loss from operations (3,851) (.20) - ------------------------------------------------------------------------------------------------------------------------------------ Pro forma earnings from continuing operations $21,975 $15,851 $20,250 $1.10 $.80 $1.02 - ------------------------------------------------------------------------------------------------------------------------------------
Sales in the discontinued transportation operations decreased $19,992,000 during 2002 to $27,447,000 from $47,439,000 during 2001. This was due primarily to a reduction in production on the San Francisco electric trolley bus contract of $16,458,000. The loss, before taxes, during the year ended December 31, 2002 of the discontinued transportation operations was $66,053,000 (or a loss of $42,941,000 net of tax or $3.13 per diluted share) compared to a loss of $14,886,000 (or a loss of $9,265,000 net of tax or $.70 per diluted share) during 2001. Included in the 2002 loss was a $21,500,000 provision related to the sale of the Company's two overhaul contracts with the New Jersey Transit Corporation and the Maryland Transit Administration, as well as related assets and liabilities, to ALSTOM Transportation, Inc. The transaction closed on July 26, 2002. Also included in the 2002 loss was an increase of $7,818,000 in estimated costs to complete contracts, $4,799,000 of general and administrative expenses, and $5,376,000 of other disposition costs related to the conveyed contracts. Further, the Company recorded a provision of $9,296,000 related to its 35% equity share of estimated losses by Electric Transit, Inc. (ETI), the Company's joint venture with Skoda a.s. (Skoda), a Czech Republic company. In addition, although ETI is owned 35% by AAI Corporation (AAI), a wholly owned subsidiary of the Company, and 65% by Skoda, during 2002 the transportation segment recorded 100% of the ETI loss because of Skoda's perceived inability to meet its financial obligations under ETI's shareholder agreement. The additional losses recorded by the Company for Skoda's 65% share of ETI's losses totaled $17,264,000 during 2002. Included in the $7,818,000 increase for the 2002 year in estimated costs to complete contracts is a loss provision of $4,730,000 recorded in the fourth quarter of 2002 regarding a higher estimate to complete the Company's San Francisco electric trolley bus subcontract from ETI. This increase is generally due to a four-month schedule delay caused by production material issues and shortages. At February 28, 2003 the Company has delivered 245 of the contracted 273 coaches to ETI. The last of the remaining 28 coaches are expected to be delivered during the third quarter of 2003. 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 ^ UNITED INDUSTRIAL CORPORATION AR02 Management's Discussion and Analysis Continued Also included in the 2002 year results are provisions resulting from cost growth concerning ETI's final assembly scope of work on the San Francisco electric trolley bus program. During the fourth quarter material issues started to substantially impact the production line, and technical issues with some of the major subassemblies contributed to an extension of the program schedule. These events resulted in a replanning of the production line and the related cost increases. Consequently, during the fourth quarter the Company recorded provisions of $6,155,000 and $11,432,000, representing the Company's 35% equity share of the additional loss and Skoda's 65% equity share in ETI. At February 28, 2003, ETI had delivered to the customer 139 of 273 contracted coaches. The remaining 134 coaches are expected to be delivered by December 2003. During the completion of the existing transportation work, the Company anticipates that the amount of overhead to be absorbed by the San Francisco electric trolley bus contract will not be sufficient to cover the total overhead incurred. The Company will expense the unabsorbed overhead as incurred. These charges are expected to be in the range of $4,500,000 to $5,500,000 subsequent to December 31, 2002. Further, general and administrative expenses that will be expensed as incurred are expected to be about $3,500,000. In addition, upon completion of transportation's production operations the Company contemplates a charge associated with the idle facility, primarily future operating lease costs, of approximately $750,000. Subleasing the facility space may mitigate these costs. No assurances can be given, however, as to the actual amount of the Company's liability to complete the one remaining contract for the San Francisco electric trolley buses, and exit the discountinued operations. As a result of the decline in overall stock market values and interest rates, the Company was required, under accounting regulations, to record a minimum pension liability of approximately $8,276,000 as of December 31, 2002, compared to a net pension asset of $46,901,000 at December 31, 2001. The adjustment resulted in a non-cash charge to stockholders' equity of approximately $32,262,000, net of a deferred tax benefit of $17,333,000 and an intangible asset of $4,268,000. The adjustment does not affect the Company's income statement or earnings. The Company's backlog related to continuing operations was $301,416,000 at December 31, 2002 compared to $207,343,000 at December 31, 2001. Backlog in the defense segment increased $94,896,000 or 47.2% to $296,117,000 at December 31, 2002 from $201,221,000 at December 31, 2001. Backlog in the energy segment decreased $823,000 or 13.5% to $5,299,000 at December 31, 2002 compared to $6,122,000 at December 31, 2001. YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000 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 of 2000 are included in the results of operations in the year 2000. Net sales of $238,495,000 in 2001 increased $2,212,000 or 0.9% from $236,283,000 in 2000. Excluding Symtron's sales from 2000, sales would have increased $9,875,000 or 4.3%. The defense segment sales increased $7,832,000 or 3.9% to $208,575,000 in 2001 from $200,743,000 in 2000. Excluding Symtron's sales from 2000, the defense segment sales would have increased $15,495,000 or 8.0%. The sales growth in the defense segment was primarily in the unmanned aerial vehicles line of business partially offset by a decrease in simulation and test system sales. Sales to agencies of the U.S. Government, by the defense segment, were $148,732,000 in 2001 and $132,930,000 in 2000. Export sales by the defense segment were $50,455,000 in 2001 and $51,161,000 in 2000, a decrease of $706,000 or 0.1%. Net sales in the energy segment were $29,920,000 in 2001, a decrease of $5,620,000 or 15.8% from $35,540,000 in 2000, due to the completion of two large contracts totaling approximately $6,335,000 in 2000. Gross profit decreased $6,924,000 to $53,965,000 in 2001 from $60,889,000 in 2000. Excluding Symtron's gross profit from 2000, the gross profit would have decreased $4,641,000 or 7.9%. The gross margin percentage was 22.6% in 2001 and 25.8% in 2000. Excluding Symtron's operations, the gross margin percentage would have been 25.6% in 2000. The defense segment gross margin percentage decreased to 21.1% in 2001 from 24.7% in 2000, due to low gross margin percentage on a large competitively awarded program as well as the volume, product mix and cost structure in the fluid test systems line of business. A higher cost structure has been maintained in pursuit of significant aircraft depot maintenance opportunities. Excluding Symtron's operations from the defense segment, the 2000 defense segment gross mar- 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 ^ UNITED INDUSTRIAL CORPORATION AR02 gin percentage would have been 24.5%. The pension plan income in both years and curtailment gain on post retirement benefits of $1,933,000 in 2001, related to the defense segment are included in the cost of sales and amounted to $2,499,000 in 2001 and $3,151,000 in 2000. The energy segment gross margin percentage increased to 33.4% in 2001 from 31.2% in 2000 due to product mix. Selling and administrative expenses decreased $5,264,000 or 13.2% to $34,699,000 from $39,963,000 in 2000, primarily due to the inclusion of Symtron's selling and administrative expenses of $3,384,000 in 2000. Selling and administrative expenses as a percentage of net sales was 14.6% in 2001 and 16.9% in 2000. Excluding Symtron's operations from 2000, selling and administrative expenses as a percentage of net sales would have been 16.1%. The defense segment's selling and administrative expenses decreased $4,631,000 or 15.3% to $25,650,000, primarily due to the inclusion of Symtron's selling and administrative expenses in 2000. Excluding Symtron's selling and administrative expenses from the defense segment in 2000 would have resulted in a decrease of $1,247,000 or 4.6%. The decrease in the defense segment is due to lower bid and proposal costs and lower marketing expenses during 2001. Other operating expenses, net decreased $563,000 to $106,000 in 2001 from $669,000 in 2000. The decrease was primarily due to a reduction in the amortization of intangible assets due to the disposition of Symtron in September 2000. Other income, net decreased $2,642,000 to $1,085,000 in 2001 from $3,727,000 in 2000. The decrease was primarily due to an insurance recovery of $3,483,000 in 2000. Pension plan income decreased $307,000 to $1,819,000 in 2001 from $2,126,000 in 2000 in the energy segment. Other expenses increased $39,000 to $740,000 in 2001 from $701,000 in 2000. The increase was primarily due to a foreign currency exchange rate fluctuations and a write-off of proposed acquisition costs included in 2001. In 2000 other expenses included legal fees of $271,000 related to a potential disposition. Interest expense decreased to $17,000 in 2001 from $28,000 in 2000. Interest income decreased $879,000 in 2001 from $1,497,000 in 2000 due to decreased investments. Income from continuing operations before income taxes decreased $10,850,000 to $22,011,000 in 2001 from $32,861,000 in 2000. Excluding the Symtron loss of $1,688,000 in 2000, the income from continuing operations would have decreased $12,538,000 or 36.3%. The defense segment income from continuing operations before income taxes decreased $2,147,000 to $18,422,000 in 2001 from $20,569,000 in 2000. Excluding the Symtron loss in 2000, the defense segment income before income taxes would have decreased $3,835,000 or 17.2%. The energy segment income from continuing operations before income taxes was $3,042,000 in 2001 and $4,718,000 in 2000. The other segment income from continuing operations before income taxes decreased $7,027,000 to $547,000 in 2001 from $7,574,000 in 2000. Included in 2001 is a reduction of a reserve for local taxes of $1,000,000 related to the favorable settlement of a tax issue. Included in 2000 was a gain on the sale of Symtron of $5,539,000 and income from an insurance recovery which increased income by $3,483,000. Sales in the transportation segment increased $27,364,000 to $47,439,000 in 2001 from $20,075,000 in 2000. The loss before taxes decreased $6,497,000 to $14,886,000 in 2001 from $21,383,000 in 2000. The year 2000 pretax loss included a charge of $19,700,000 to establish a reserve for estimated increased contract costs on several programs. In the fourth quarter of 2001, the loss includes a charge of $6,339,000 for increased contract costs due to anticipated severance and accelerated depreciation resulting from the discontinuance of operations. The Company's backlog related to continuing operations was $207,343,000 at December 31, 2001 compared to $194,794,000 at December 31, 2000. Backlog in the defense segment increased $11,060,000 or 5.8% to $201,221,000 at December 31, 2001 from $190,161,000 at December 31, 2000. Backlog in the energy segment increased $1,489,000 or 32.0% to $6,122,000 at December 31, 2001 compared to $4,633,000 at December 31, 2000. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased $1,861,00 to $3,635,000 at the end of 2002 from $5,496,000 at the end of 2001. The cash used in 2002 for operating activities of the discontinued transportation operations was $37,806,000 or $7,653,000 less than the cash used 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 ^ UNITED INDUSTRIAL CORPORATION AR02 Management's Discussion and Analysis Continued in 2001 of $45,459,000. Net cash provided in 2002 from operating activities by the continuing operations was $22,866,000 or $20,304,000 less than the cash provided in 2001 of $43,170,000. There were no capital expenditures of the discontinued operations in 2002 and $2,610,000 in 2001. Capital expenditures for continuing operations were $5,219,000, $2,028,000 and $4,921,000 in 2002, 2001 and 2000, respectively. There were no material commitments for the acquisition of capital assets as of December 31, 2002. However, the Company expects to acquire about $12,500,000 in capital assets during 2003. The following analysis relates only to continuing operations. Trade receivables decreased $87,000 at December 31, 2002 from December 31, 2001. Included in trade receivables are U.S. Government receivables which increased $2,381,000. Inventories were $4,763,000 higher at December 31, 2002 than at December 31, 2001. The inventory increase was primarily in the defense segment and resulted from the procurement of significant amounts of material necessary for production on major programs. Accounts payable increased $310,000. Customer advances decreased $831,000 at December 31, 2002 from December 31, 2001, in accordance with the contractual terms of certain defense contracts. The Company is in the process of preparing an application for tax refund for about $15,000,000 regarding the Company's 2002 net loss. The cash benefit is expected to be received during 2003. Although the Company has experienced lower pension results due to a decline in stock market values and interest rates, the Company does not anticipate having to contribute the cash to its pension plans during 2003. As of December 31, 2002, the Company has recorded a net deferred tax asset of approximately $16,000,000. Management believes the Company will generate sufficient taxable income in future years to realize this benefit. During the completion of the existing transportation work, the Company anticipates that the amount of overhead to be absorbed by the San Francisco electric trolley bus contract will not be sufficient to cover the total over head incurred. The Company will expense the unabsorbed overhead as incurred. These charges are expected to be in the range of $4,500,000 to $5,500,000 subsequent to December 31, 2002. Further, general and administrative expenses that will be expensed as incurred are expected to be about $3,500,000. In addition, upon completion of transportation's production operations the Company contemplates a charge associated with the idle facility, primarily future operating lease costs, of approximately $750,000. Subleasing the facility space may mitigate these costs. The Company paid cash dividends of $.30 per share in 2002 and $.40 per share in 2001 and 2000. Aggregate payments amounted to $3,912,000 in 2002, $5,069,000 in 2001 and $4,954,000 in 2000. The ratio of current assets to current liabilities was 2.1 at the end of 2002 and 1.8 at the end of 2001. On July 26, 2002, the Company completed the previously announced sale of its transportation overhaul contracts with the New Jersey Transit Corporation and the Maryland Transit Administration and related assets and liabilities (such as accounts receivable, inventory, special tools and supplier contracts), to ALSTOM Transportation Inc. The purchase price received by the Company was approximately $20,756,000 in cash. Pursuant to the sale agreement, the Company was released from all obligations under the conveyed contracts and the performance bonds relating thereto, which bonds totaled approximately $156,000,000. In addition, the Company entered into a cost plus fee contract to perform work on the conveyed contracts for the purchaser during a transition period not to exceed six months. On June 28, 2001, the Company and certain of its subsidiaries (the Borrowers) entered into a Loan and Security Agreement (the Agreement) with Fleet Capital Corporation, which replaced the Company's loan agreement with First Union Commercial Corporation. The Agreement has a term of three years and provides for letters of credit and cash borrowings of up to $25,000,000, with a sublimit of $10,000,000 for cash borrowings, subject to a borrowing base. Credit advances may increase to $32,000,000, provided that amounts in excess of $25,000,000 are cash-collateralized. The Agreement contains certain restrictive covenants, among which are a minimum fixed charge coverage ratio and a maximum balance sheet leverage ratio. All assets of the Borrowers are pledged as collateral under the Agreement. The stock of the Borrowers (other than the Company) and AAI's Hunt Valley property are also pledged as collateral pursuant to a pledge agreement and a deed of trust. In March 2003, the Company and the lender entered into a waiver and amendment agreement pursuant to which the financial covenant violations as of December 31, 2002 were waived and the financial covenants were 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 ^ UNITED INDUSTRIAL CORPORATION AR02 amended. At December 31, 2002 there were no cash borrowings under the Agreement. The letter of credit obligations outstanding at December 31, 2002 were $8,736,000. A subsidiary of the Company also has a $2,000,000 line of credit with a bank which may be used for cash borrowings or letters of credit. This agreement expires April 18, 2003. At December 31, 2002, the subsidiary had no cash borrowings and $342,000 letters of credit outstanding. The Company expects that available cash and existing lines of credit will be sufficient to meet its cash requirements for the next twelve months. The cash requirements consist primarily of obligations to fund operations. The Company conducts a significant amount of business with the United States Government. Sales to agencies of the U.S. Government were $161,569,000, $149,047,000 and $132,975,000 for 2002, 2001 and 2000, respectively. Although there are currently no indications of a significant change in the status of government funding of certain programs, should this occur, our results of operations, financial position and liquidity could be materially affected. Such a change could have a significant impact on our profitability and our stock price. This could affect our ability to acquire additional funds from our revolving facility or from other sources. At December 31, 2002, the Company has outstanding commitments under advance payment and performance bonds. The Company has a commitment on a progress payment bond in the discontinued transportation operations totaling approximately $22,000,000 at December 31, 2002. In January 2003, the bond was reduced to $9,100,000. The remaining commitment is expected to be eliminated when the customer accepts certain deliveries in 2003. Further, the Company is obligated to indemnify certain sureties under various performance bonds also primarily in the discontinued transportation operations in the event of non-performance on particular contracts up to approximately $49,000,000. In February 2003, the Company was released from $16,000,000 of these bonds. The Company expects satisfactory performance under each of these contracts. In addition, the Company has operating leases. The minimum rental commitments as of December 31, 2002 for non-cancellable leases are: 2003 -- $3,970,000; 2004 -- $2,183,000; 2005 -- $1,620,000; 2006 -- $1,286,000; 2007 -- $1,015,000 and $1,154,000 thereafter. RESTRUCTURING Detroit Stoker Company (Detroit Stoker), a wholly owned subsidiary of the Company in the energy segment, ceased the foundry operation conducted by its wholly owned subsidiary, Midwest Metallurgical Laboratory, Inc. (Midwest), effective May 17, 2002. In conjunction with the ceased operations the Company has written off the value of all Midwest's assets. During 2002 Detroit Stoker incurred severance and other cash charges totaling approximately $1,287,000 related to the restructuring including operating losses of Midwest. In addition, the Company accelerated depreciation of its foundry facility during the foundry's operating period in 2002. Depreciation of this facility was $3,420,000 during 2002, and is included in cost of sales. ENVIRONMENTAL AND OTHER LITIGATION Like many other companies, UIC and Detroit Stoker have been named as defendants in asbestos-related personal injury litigation. Neither UIC nor Detroit Stoker fabricated, milled, mined, manufactured or marketed asbestos. Detroit Stoker stopped the use of asbestos-containing materials in connection with its products sometime in 1981. The litigation is pending in Michigan, Mississippi, New York and North Dakota. During 2002, UIC and Detroit Stoker experienced a significant increase in the volume of asbestos bodily-injury claims and as of December 31, 2002, the Company is a named defendant in 422 active cases involving approximately 15,105 claimants. Most of these lawsuits do not include specific dollar claims for damages, and many include a number of plaintiffs and multiple defendants. Based on historical data and the large increase in claimants over and above the projected incidence of disease relative to the Company's products, management believes the claimants in the vast majority of these cases will not be able to demonstrate that they have been exposed to the Company's asbestos-containing products or suffered any compensable loss as a result of such exposure. The direct asbestos-related expenses of the Company for defense and indemnity for the past five years was not material. The Company engaged a consulting firm (the Asbestos Consultant) with expertise in evaluating asbestos bodily-injury claims to work with the Company to project the amount that the Company may pay for its asbestos-related liabilities and defense costs. The methodology employed by the Consultant to project the Company's asbestos- 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 ^ UNITED INDUSTRIAL CORPORATION AR02 Management's Discussion and Analysis Continued related liabilities and defense costs is primarily based on (1) estimates of the labor force exposed to asbestos in the Company's products, (2) epidemiological modeling of asbestos-related disease manifestation, and (3) estimates of claim filings and settlement and defense costs that may occur in the future. The Company's limited claims history was not a significant variable in developing the estimates because such history was not significant as compared to the number of claims filed in 2002. The Company also retained another consultant (the Insurance Consultant) to work with the Company to project its insurance coverage, including a non-binding sharing agreement with certain of its primary insurance carriers that has been in effect for approximately five years. The Insurance Consultant has prepared a report evaluating the Company's potential insurance coverage for defense costs and indemnification for asbestos bodily-injury claims. The Insurance Consultant's conclusion was primarily based on a review of the Company's coverage history, application of reasonable assumptions on the allocation of coverage consistent with industry standards, an assessment of the creditworthiness of the insurance carriers, experience and a review of the report of the Asbestos Consultant. Based on these assumptions, other variables, and the reports of both the Asbestos and Insurance Consultants, the Company has recorded a reserve for its bodily injury liabilities for asbestos-related matters through 2012 in the amount of $31,852,000 as of December 31, 2002, including damages and defense costs. The Company has also recorded an estimated insurance recovery as of December 31, 2002 of $20,343,000 reflecting the estimate determined to be probable of being available to mitigate the Company's potential asbestos liability through 2012. These figures represent a net pretax charge of $11,509,000 for the year ended December 31, 2002. The Company has previously reported that its total asbestos damages and defense costs could be about $75,000,000 and the liability projected by the Asbestos Consultant through 2055 is materially consistent with that preliminary estimate. In addition, the estimate prepared by the Insurance Consultant indicates that after 2012, the Company's potential insurance recoveries will be reduced. Although the extent of that reduction is not currently determinable, the Company believes, based on the estimate of its Insurance Consultant, the available insurance coverage from 2003 to 2055 would be about 50% of the liability. The year 2055 was chosen because it is projected to be the last year in which an asbestos-related claim is expected to be filed in the United States. Nevertheless, management has concluded that consideration of asbestos-related activity through 2012 represents a period for which a reasonable and reliable forecast of liability and insurance recoveries can be projected. That conclusion is based upon a number of factors, including 1) the uncertainties inherent in estimating asbestos claims, payments and insurance recoveries, 2) knowledge that prior to 2002 the number of claims filed against the Company and the related average settlement costs were not significant, and 3) consultations with the Asbestos and Insurance Consultants. Accordingly, the net provision does not take into account either asbestos liabilities or insurance recoveries for any period past 2012. The Company believes that its ultimate net asbestos-related contingent liability (i.e., its indemnity or other claim disposition costs plus related legal fees less insurance recoveries) cannot be estimated with certainty. Projecting future events, such as the number of new claims expected to be filed each year, the average cost of resolving each claim, coverage issues among layers of insurers and the continuing solvency of various insurance companies is subject to many uncertainties which could cause the actual liabilities and insurance recoveries to be higher or lower than those recorded or projected, and such differences could be material. Moreover, were Federal tort reform legislation to be enacted, the assumptions used in determining the potential liability could be materially impacted. After considering the efforts of both consultants and based upon the facts as now known, including the reasonable possibility that claims will be received and paid over the next 50 year period, the Company's management believes that although asbestos claims could have a material adverse effect on the Company's financial condition or results of operations in a particular reporting period, asbestos claims should not have a material adverse effect on the Company's long term financial condition, liquidity or results of operations. No assurance can be given, however, as to the actual amount of the Company's liability for such present and future claims or insurance recoveries, and the differences from estimated amounts could be material. 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 ^ UNITED INDUSTRIAL CORPORATION AR02 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 cleanup 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 material adverse effect on the Company's financial position, results of operations or cash flows. See Note 15. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Judgments and assessments of uncertainties are required in applying the Company's accounting policies in many areas. For example, key assumptions are particularly important in developing the Company's projected liabilities for pension and other postretirement benefits. Other areas in which significant uncertainties exist include, but are not limited to, projected costs to be incurred in connection with legal matters. The Company recognizes a liability for legal indemnification and defense costs when it believes it is probable a liability has been incurred and the amount can be reasonably estimated. The liabilities are developed based on currently available information. The accruals are recorded at undiscounted amounts if the Company cannot reliably determine timing of the cash payments, and the amounts are classified as liabilities on the accompanying consolidated balance sheets. The Company also has insurance that covers losses on certain legal matters and records a receivable to the extent that the realization of the insurance is deemed probable. This receivable is recorded at undiscounted amounts and is classified as a noncurrent receivable in the accompanying consolidated balance sheets. 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. 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. 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 in earnings in the current period. Anticipated losses on contracts or programs in progress are charged to earnings when identified. Although management believes that the profits are fairly stated and that adequate provisions for losses on certain of the fixed price contracts have been recorded in the financial statements, revisions to such estimates do occur and at times are material to our results of operations and financial position. Inventory is recorded at the lower of cost or market. Inventoried costs associated with long-term contracts include costs and earnings of incomplete contracts not yet billable to the customer. These amounts represent the difference between the percentage-of-completion method of accounting for long-term contracts used to record operating results by the Company's defense segment and the amounts billable to the customer under the terms of the specific contracts. Estimates of final contract costs and earnings 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 ^ UNITED INDUSTRIAL CORPORATION AR02 Management's Discussion and Analysis Continued (including earnings subject to future determination through negotiation or other procedures) are reviewed and revised periodically throughout the lives of the contracts. See Note 4. NEW ACCOUNTING PRONOUNCEMENTS In December 2002, the Financial Accounting Standards Board issued FASB Statement No. 148, Accounting for Stock-Based Compensation-- Transition and Disclosure. Statement 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to Statement 123's fair value method of accounting for stock-based employee compensation. Statement 148 also amends the disclosure provisions of Statement 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While the Statement does not amend Statement 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of Statement 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of Statement 123 or the intrinsic value method of Opinion 25. The adoption of Statement 148 did not have a material effect on the Company's financial position or results of operations. In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. FAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company adopted FAS 144 during the fourth quarter of 2001. The impact on the Company's financial position and results of operations is reported in Notes 2 and 16, "Discontinued Operations." In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite useful lives are no longer amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The adoption of Statement 142 did not have a material effect on the Company's financial position or results of operations. In June 2001, the Financial Accounting Standards Board issued Statement No. 143, Accounting for Asset Retirement Obligations, (FAS 143). The standard addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company will adopt the provisions of FAS 143 effective January 1, 2003. The adoption of this new statement is not expected to have a material impact on the Company's financial statements. 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 a foreign exchange forward contract. At December 31, 2002, the Company had a foreign exchange contract for delivery of Australian dollars between 2003 and 2005 with notional values totaling $1,500,000, with an aggregate gain of $167,000 based on fair market value, which has been recorded in earnings. 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 ^ UNITED INDUSTRIAL CORPORATION AR02 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; outcome of current and future litigation; the accuracy of the Company's analysis of its potential asbestos related exposure and insurance coverage; 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 discontinued transportation operation; 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. The Company makes no commitment to update any forward looking statement or to disclose any facts, events, or circumstances after the date hereof that may affect the accuracy of any forward looking statements. CONSOLIDATED BALANCE SHEET 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 ^ UNITED INDUSTRIAL CORPORATION AR02 Consolidated Balance Sheets
December 31 (Dollars in thousands) 2002 2001 - -------------------------------------------------------------------------------------- Assets Current Assets Cash and cash equivalents $ 3,635 $ 5,496 Trade receivables U.S. Government 23,923 21,542 Other 13,765 16,233 - -------------------------------------------------------------------------------------- 37,688 37,775 Federal income tax receivable 15,509 -- Inventories 20,951 16,188 Prepaid expenses and other current assets 1,351 1,755 Deferred income taxes 4,528 5,436 Assets of discontinued operations 14,042 108,684 - -------------------------------------------------------------------------------------- Total Current Assets 97,704 175,334 - -------------------------------------------------------------------------------------- Deferred income taxes 11,531 -- Other Assets 7,421 52,677 Insurance receivable -- asbestos litigation 20,343 -- Property and Equipment Land 459 501 Buildings and improvements 35,244 36,166 Machinery and equipment 67,002 71,298 Furniture and fixtures 4,891 5,109 - -------------------------------------------------------------------------------------- 107,596 113,074 Less allowances for depreciation and amortization 86,400 88,560 - -------------------------------------------------------------------------------------- 21,196 24,514 - -------------------------------------------------------------------------------------- $158,195 $252,525 - --------------------------------------------------------------------------------------
25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 ^ UNITED INDUSTRIAL CORPORATION AR02
December 31 (Dollars in thousands) 2002 2001 - -------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current Liabilities Accounts payable $11,711 $ 11,401 Accrued employee compensation and taxes 12,043 9,282 Customer advances 6,211 7,042 Reserve for contract losses 2,050 2,398 Federal income taxes -- 3,003 Other liabilities 3,682 3,480 Liabilities of discontinued operations 11,513 59,355 - -------------------------------------------------------------------------------------- Total Current Liabilities 47,210 95,961 - -------------------------------------------------------------------------------------- Minimum Pension Liability 8,276 -- Postretirement Benefits Other Than Pensions 22,361 22,939 Reserve for Asbestos Litigation 31,852 -- Other Liabilities 865 1,639 Deferred Income Taxes -- 11,642 Shareholders' Equity Common stock -- par value $1.00 per share Authorized shares -- 30,000,000 Outstanding shares: 2002 -- 13,067,918; 2001 -- 12,871,868 14,374 14,374 Additional capital 92,085 91,094 Retained (deficit) earnings (16,254) 26,735 Cost of shares in treasury: 2002 -- 1,306,230 shares; 2001 -- 1,502,280 shares (10,312) (11,859) Accumulated other comprehensive loss (32,262) -- - -------------------------------------------------------------------------------------- Total Shareholders' Equity 47,631 120,344 - -------------------------------------------------------------------------------------- $158,195 $252,525 - -------------------------------------------------------------------------------------- See notes to financial statements
26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 ^ UNITED INDUSTRIAL CORPORATION AR02 Consolidated Statement of Operations
Year Ended December 31 (Dollars in thousands) 2002 2001 2000 - ----------------------------------------------------------------------------------- -------------------------- Net sales $258,767 $238,495 $236,283 Cost of sales 202,650 184,530 175,394 - ------------------------------------------------------------------------------------------------------------- Gross Profit 56,227 53,965 60,889 Selling and administrative expenses 40,163 34,699 39,963 Other operating expenses--net 419 106 669 Asbestos litigation provision--net 11,509 -- -- - ------------------------------------------------------------------------------------------------------------- Total Operating Income 4,026 19,160 20,257 - ------------------------------------------------------------------------------------------------------------- Non-operating Income and (Expenses) Interest income 127 618 1,497 Gains on sale of assets -- net -- -- 5,511 Pension income 1,631 1,819 2,126 Equity in net income of joint venture 99 86 472 Other income -- net 64 1,085 3,727 Interest expense (843) (17) (28) Other expenses (666) (740) (701) - ------------------------------------------------------------------------------------------------------------- 412 2,851 12,604 - ------------------------------------------------------------------------------------------------------------- Income From Continuing Operations Before Income Taxes 4,438 22,011 32,861 Provision (credit) for income taxes Federal Current 5,432 8,145 10,308 Deferred (4,933) (152) 82 State 75 (610) 1,285 - ------------------------------------------------------------------------------------------------------------- Income Taxes 574 7,383 11,675 - ------------------------------------------------------------------------------------------------------------- Income From Continuing Operations 3,864 14,628 21,186 Loss from discontinued operations net of income tax credit of $23,112, $5,621 and $7,976 for 2002, 2001 and 2000, respectively (42,941) (9,265) (13,407) - ------------------------------------------------------------------------------------------------------------- Net (Loss) Income $(39,077) $ 5,363 $ 7,779 - ------------------------------------------------------------------------------------------------------------- Earnings Per Common Share Net (Loss) Income Basic $(3.00) $ .42 $ .63 Diluted (2.85) .40 .62 Income From Continuing Operations Basic .30 1.15 1.71 Diluted .28 1.10 1.68 - ------------------------------------------------------------------------------------------------------------- See notes to financial statements
25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 ^ UNITED INDUSTRIAL CORPORATION AR02 Consolidated Statements of Cash Flows
Year Ended December 31 (Dollars in thousands) 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------------- Operating Activities Net (loss) income $(39,077) $5,363 $ 7,779 Adjustments to reconcile net income to net cash (used for) provided by continuing operating activities: Loss from discontinued operations, net of income taxes 42,941 9,265 13,407 Net asbestos litigation expense 11,509 -- -- Pension expense (income) 1,321 (2,385) (5,277) Depreciation and amortization 8,763 6,413 8,086 Noncash compensation charge -- 346 -- Deferred income taxes (4,933) 152 1,088 Gains on sale of assets -- -- (5,511) Equity in income of investee company (99) (86) (472) Changes in operating assets and liabilities-- net Increase in income taxes 4,129 8,383 6,271 Decrease (increase) in trade receivables 87 12,443 (5,882) (Increase) decrease in inventories (4,763) 11,792 474 Decrease in prepaid expenses and other current assets 404 1,223 246 (Decrease) increase in customer advances (831) (2,329) 7,185 Decrease (increase) in accounts payable, accruals, and other current liabilities 2,925 (2,718) 4,836 Other -- net 490 (4,692) 3,559 - --------------------------------------------------------------------------------------------------------------------------- Net Cash Provided By Continuing Operations 22,866 43,170 35,789 - --------------------------------------------------------------------------------------------------------------------------- Net Cash (Used For) Discontinued Operations (37,806) (45,459) (40,145) - --------------------------------------------------------------------------------------------------------------------------- Net Cash (Used For) Operating Activities (14,940) (2,289) (4,356) Investing Activities - --------------------------------------------------------------------------------------------------------------------------- Proceeds from sale of assets of discontinued operations 20,756 -- -- Net proceeds from sale of assets -- -- 5,277 Advances to investee by discontinued operations (3,648) (2,986) (4,544) Repayment of advances by investee to discontinued operations 1,917 2,730 12,978 Repayment of advances and dividend received by investee 1,360 2,300 -- Purchase of property and equipment (5,219) (2,028) (4,921) Capital expenditures of discontinued operations -- (2,610) (2,187) - --------------------------------------------------------------------------------------------------------------------------- Net Cash Provided By (Used For) Investing Activities 15,166 (2,594) 6,603 Financing Activities - --------------------------------------------------------------------------------------------------------------------------- Payments on long-term debt and borrowings -- (6,300) (2,300) Proceeds from borrowings -- 6,300 2,300 Dividends (3,912) (5,069) (4,954) Proceeds from exercise of stock options 1,825 4,063 1,000 - --------------------------------------------------------------------------------------------------------------------------- Net Cash Used for Financing Activities (2,087) (1,006) (3,954) - --------------------------------------------------------------------------------------------------------------------------- Decrease in Cash and Cash Equivalents (1,861) (5,889) (1,707) Cash and Cash Equivalents at Beginning of Year 5,496 11,385 13,092 - --------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $3,635 $ 5,496 $11,385 - --------------------------------------------------------------------------------------------------------------------------- See notes to financial statements
26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 ^ UNITED INDUSTRIAL CORPORATION AR02 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 energy systems for industry and utilities. The principal business segments are defense and related products, and energy generating systems. Ground transportation systems business is included as a discontinued operation. See Notes 2 and 16. 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. Discontinued Operations On July 26, 2002, the Company sold two transportation overhaul contracts and related assets. The Company recorded a loss of $21,500,000 associated with this transaction. The proceeds of this sale were approximately $20,756,000. In addition, the agreement provided for the Company to be released under all performance bonds and obligations under the conveyed contracts. Further, the Company received a cost plus fee contract to perform work on the conveyed contracts for the purchaser during a transition period not to exceed six months. Following the sale, the Company's transportation operations primarily include one remaining program to deliver 273 electric trolley buses to the San Francisco Municipal Railway. This program, which is well into its production phase and is expected to be completed during 2003, is being performed by Electric Transit, Inc. (ETI), a joint venture between the Company's AAI subsidiary (AAI) and the Czech Republic firm, Skoda a.s. (Skoda), under which AAI has a major subcontract. The divested overhaul contracts, along with efforts required to complete the one remaining contract, are accounted for as discontinued operations. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts in prior years have been reclassified to conform to the current year's classifications. The Company includes in income its proportionate share of the net earnings or losses of unconsolidated investees, when the Company's ownership interest is between 20% and 50%. Cash Equivalents and Marketable Securities The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Marketable securities, 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, 2002 and 2001, approximately 21% and 15%, respectively, of total inventory were 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 $2,984,000 higher than reported on December 31, 2002 and $3,285,000 higher than reported on December 31, 2001. 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. 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. 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 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 ^ UNITED INDUSTRIAL CORPORATION AR02 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 in earnings in the current period. Anticipated losses on contracts or programs in progress are charged to earnings when identified. Noncontract revenue is recorded when the product is shipped or when the services are provided. See Note 4. Property and Equipment Property and equipment is 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. See Note 17. 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. 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 2002, 2001, and 2000 under the plans, income per common share from continuing operations would have decreased to the pro forma amounts indicated below:
December 31 (Dollars in thousands, except per share data) 2002 2001 2000 - ------------------------------------------------------------------------------------- Income from continuing operations: As reported $3,864 $14,628 $21,186 Total employee stock compensation expense determined under fair value method, net of tax (785) (746) (756) ----- ----- ----- Pro forma 3,079 13,882 20,430 Income per common share from continuing operations: As reported: Basic .30 1.15 1.71 Diluted .28 1.10 1.68 Pro forma: Basic .24 1.09 1.65 Diluted .23 1.04 1.62 - ---------------------------------------------------------------------------------------
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 2002, 2001 and 2000, respectively: dividend yields of 2.0%, 3.0% and 4.7%; expected volatility of 44%, 29% and 46%; risk-free interest rates of 4.6%, 5.2% and 6.4%; and expected lives of ten years in 2002 and 2001 and eight years in 2000. The weighted-average fair value of an option granted was $8.95, $4.09 and $2.97 for the years ended December 31, 2002, 2001 and 2000, respectively. 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 ^ UNITED INDUSTRIAL CORPORATION AR02 Reclassification Certain financial statement amounts in the prior years have been reclassified to conform to current year's presentation. Foreign Currency Contracts At times, 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 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. Gains and losses for effective hedging activities are included in Other Comprehensive Income and recognized in earnings when the future sales occur. Gains and losses for ineffective hedges are recorded in income. At December 31, 2002 the Company has a foreign currency forward contract with a large financial institution for Australian dollars having maturities of three years to hedge contract payments scheduled to be received within three years. The aggregate notional value of this contract was $1,500,000, with an aggregate gain of $167,000 based on fair market value has been recorded in earnings. 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. Legal Matters The Company recognizes a liability for legal indemnification and defense costs when it believes it is probable a liability has been incurred and the amount can be reasonably estimated. The liabilities are developed based on currently available information. The accruals are recorded at undiscounted amounts if the Company cannot reliably determine the timing of the cash payments, and the amounts are classified as liabilities on the accompanying consolidated balance sheets. The Company also has insurance that covers losses on certain claims and legal matters and records a receivable to the extent that the realization of the insurance is deemed probable. This receivable is recorded at undiscounted amounts and is classified as a noncurrent receivable in the accompanying consolidated balance sheets. New Accounting Pronouncements In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations, for a disposal of a segment of a business. FAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company adopted FAS 144 during the fourth quarter of 2001. The impact on the Company's financial position and results of operations is reported in "Discontinued Operations." See Note 16. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite useful lives are no longer amortized but will be subject to annual impairment tests in accordance with the State ments. Other intangible assets will continue to be amortized over their useful lives. The adoption of Statement 142 did not have a material effect on the Company's financial position or results of operations. In June 2001, the Financial Accounting Standards Board issued Statement No. 143, Accounting for Asset Retirement Obligations (FAS 143). The Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company will adopt the provisions of FAS 143 effective January 1, 2003. The adoption of this new statement is not expected to have a material impact on the Company's financial statements. In December 2002, the Financial Accounting Standards Board issued FASB Statement No. 148, Accounting for Stock-Based Compensation --Transition and Disclosure. Statement 148 amends FASB Statement No. 123, Accounting for 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 ^ UNITED INDUSTRIAL CORPORATION AR02 Stock-Based Compensation, to provide alternative methods of transition to Statement 123's fair value method of accounting for stock-based employee compensation. Statement 148 also amends the disclosure provisions of Statement 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While the Statement does not amend Statement 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of Statement 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of Statement 123 or the intrinsic value method of Opinion 25. The adoption of Statement 148 did not have a material effect on the Company's financial statements or results of operations. NOTE 3 | Trade Receivables December 31, (Dollars in thousands) 2002 2001 - ----------------------------------------------------------------------------- Amounts billed $15,189 $12,645 Unbilled recoverable costs and earned fees 8,049 4,668 Retainage per contract provisions 685 4,229 - ----------------------------------------------------------------------------- $23,923 $21,542 - ----------------------------------------------------------------------------- Amounts due from the U.S. Government primarily related to long-term contracts of the Company's defense segment were as follows: Billed and unbilled amounts include $2,617,000 and $5,016,000 at December 31, 2002 and 2001, 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) 2002 2001 - ----------------------------------------------------------------------------- Finished goods and work in progress $6,151 $ 2,660 - ----------------------------------------------------------------------------- Costs and earnings relating to long-term contracts 65,031 47,166 Deduct progress payments related to long-term contracts (51,667) (35,210 - ----------------------------------------------------------------------------- Costs and earnings in excess of billings 13,364 11,956 - ----------------------------------------------------------------------------- Total finished goods and work in progress 19,515 14,616 Materials and supplies 1,436 1,572 - ----------------------------------------------------------------------------- $20,951 $ 16,188 - -----------------------------------------------------------------------------
The inventoried costs associated with long-term contracts include costs and earnings of $13,364,000 in 2002 and $11,956,000 in 2001 of incomplete contracts not yet billable to the customer. These amounts represent the difference between the percentage-of-completion method of accounting for long-term contracts used to record operating results by the Company's defense segment and the amounts billable to the customer under the terms of the specific contracts. Estimates of final contract costs and earnings (including earnings subject to future determination through negotiation or other procedures) are reviewed and revised periodically throughout the lives of the contracts. Adjustments of earnings resulting from the revisions are recorded on a current basis. The Company recognized losses of $4,610,000 ($3,043,000 net of tax benefit) and $2,081,000 ($1,305,000 net of tax benefit) during 2002 and 2001, respectively, resulting primarily from revision of cost estimates on certain major long-term contracts. 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. 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 ^ UNITED INDUSTRIAL CORPORATION AR02 Notes to Financial Statements Continued NOTE 5 | Other Assets
December 31, (Dollars in thousands) 2002 2001 - ----------------------------------------------------------------------------- Intangible pension asset $4,268 $ -- Net pension asset -- 46,901 Patents and other intangible assets, net 940 1,166 Other 2,213 4,610 - ----------------------------------------------------------------------------- $7,421 $52,677 - -----------------------------------------------------------------------------
Patents and other intangible assets represent assets acquired in connection with the purchase of ACL Technologies Inc., an indirect wholly owned subsidiary of the Company, and are being amortized primarily on a straight-line basis over 5 to 10 years. Amortization expense amounted to $226,000 in 2002, $318,000 in 2001 and $715,000 in 2000. Accumulated amortization amounted to $4,666,000 and $4,440,000 at December 31, 2002 and 2001, respectively. Other includes the investment in Pioneer UAV, Inc. of $1,462,000 which increased during 2002 by $99,000, the Company's share of profits, and decreased by a dividend of $1,000,000 and repayment of an advance of $360,000. See Note 10 for information concerning pension benefits. NOTE 6 | Long-Term Debt and Credit Arrangements On June 28, 2001, the Company and certain of its subsidiaries (the Borrowers) entered into a Loan and Security Agreement (the Agreement) with Fleet Capital Corporation, which replaced the Company's loan agreement with First Union Commercial Corporation. The Agreement has a term of three years and provides for letters of credit and cash borrowings of up to $25,000,000, with a sublimit of $10,000,000 for cash borrowings, subject to a borrowing base. Credit advances may increase to $32,000,000, provided that amounts in excess of $25,000,000 are cash-collateralized. The Agreement contains certain restrictive covenants, among which are a minimum fixed charge coverage ratio and a maximum balance sheet leverage ratio. All assets of the Borrowers are pledged as collateral under the Agreement. The stock of the Borrowers (other than the Company) and AAI's Hunt Valley property are also pledged as collateral pursuant to a pledge agreement and a deed of trust. In March 2003, the Company and the lender entered into a waiver and amendment agreement pursuant to which the financial covenant violations as of December 31, 2002 were waived and the covenants were amended. At December 31, 2002 there were no cash borrowings under the Agreement. The letter of credit obligations outstanding at December 31, 2002 were $8,736,000. A subsidiary of the Company also has a $2,000,000 line of credit with a bank which may be used for cash borrowings or letters of credit. This agreement expires April 18, 2003. At December 31, 2002, the subsidiary had no cash borrowings and $342,000 letters of credit outstanding. The Company expects that available cash and existing lines of credit will be sufficient to meet its cash requirements for the next twelve months. The cash requirements consist primarily of obligations to fund operations. Interest expense was $843,000 in 2002, $17,000 in 2001 and $28,000 in 2000. Interest paid was $456,000 in 2002, $36,000 in 2001 and $64,000 in 2000. 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 at the time of grant. 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. 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 ^ UNITED INDUSTRIAL CORPORATION AR02 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. Upon the termination of certain individuals the Board of Directors accelerated the vesting of certain of their grants and extended certain exercise periods. These modifications resulted in a noncash compensation charge to continuing operations of $14,000 and $346,000 in 2002 and 2001, respectively. A summary of stock option activity under all plans is as follows: - -------------------------------------------------------------------------------- Number of Weighted Average (Shares in thousands) shares Exercise Price - -------------------------------------------------------------------------------- Balance at January 1, 2000 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 - -------------------------------------------------------------------------------- Granted 349 13.37 Exercised (436) 9.31 Canceled (128) 8.88 - -------------------------------------------------------------------------------- Balance at December 31, 2001 1,549 10.10 - -------------------------------------------------------------------------------- Granted 170 19.25 Exercised (195) 9.36 Canceled (1) 8.71 - -------------------------------------------------------------------------------- Balance at December 31, 2002 1,523 $11.22 - -------------------------------------------------------------------------------- December 31 (Shares in thousands) 2002 2001 2000 - -------------------------------------------------------------------------------- Exercisable 1,070 977 1,125 Available for future grants 105 274 496 - -------------------------------------------------------------------------------- The weighted average remaining life for options outstanding as of December 31, 2002, is six years. The following table summarizes information about stock options outstanding at December 31, 2002: Shares (Shares in thousands) ------------------------ Range of Exercise Prices Exercisable Outstanding - -------------------------------------------------------------------------------- $4.50 to $7.00 189 189 $7.50 to $9.81 473 552 $10.25 to $13.00 348 507 $13.99 to $20.12 60 275 - -------------------------------------------------------------------------------- 1,070 1,523 - -------------------------------------------------------------------------------- NOTE 8 | Leases Total rental expense for all operating leases amounted to $3,699,000 in 2002, $3,566,000 in 2001 and $3,612,000 in 2000. Contingent rental payments were not significant. The future minimum rental commitments as of December 31, 2002, for all noncancellable leases are $3,970,000 in 2003; $2,183,000 in 2004; $1,620,000 in 2005; $1,286,000 in 2006; $1,015,000 in 2007; and $1,154,000 thereafter. 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 ^ UNITED INDUSTRIAL CORPORATION AR02 NOTE 9 | Changes in Shareholders' Equity
Accumulated Other Retained Comprehen- Share- Common Shares Common Additional Earnings Treasury sive holders' (In thousands) Outstanding Stock Capital (Deficit) Stock (Loss) Equity - ------------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 2000 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 exercised 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 Net income -- -- 5,363 -- -- 5,363 Cash dividends declared ($.40 per share) -- -- (5,069) -- -- (5,069) Stock options exercised 436 -- 624 -- 3,439 -- 4,063 Noncash compensation -- 638 -- -- -- 638 Tax benefit arising from early dispositions of--stock issued upon exercise of stock options -- 448 -- -- -- 448 Employee awards 1 -- -- -- 8 -- 8 - ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2001 12,872 14,374 91,094 26,735 (11,859) -- 120,344 Net loss -- -- (39,077) -- -- (39,077) Minimum pension liability-- net of tax -- -- -- -- (32,262) (32,262) Total comprehensive loss -- -- -- -- -- (71,339) Cash dividends declared ($.30 per share) -- -- (3,912) -- -- (3,912) Stock options exercised 195 -- 287 -- 1,538 -- 1,825 Stock options--tax benefit -- 692 -- -- -- 692 Employee awards 1 -- 12 -- 9 -- 21 - ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2002 13,068 $14,374 $92,085 $(16,254) $(10,312) $(32,262) $47,631 - -------------------------------------------------------------------------------------------------------------------------------
The exercise of stock options which have been granted under the Company's various stock option plans give rise to compensation which is includable in the taxable income of the applicable employees and deductible by the Company for federal and state income tax purposes. Such compensation results from increases in the fair market value of the Company's common stock subsequent to the date of grant of the applicable exercised stock options and, accordingly, in accordance with Accounting Principles Board Opinion No. 25, such compensation is not recognized as an expense for financial accounting purposes and the related tax benefits are recorded directly in Additional Capital. 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 ^ UNITED INDUSTRIAL CORPORATION AR02 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 table provides a reconciliation of the changes in the plans' benefit obligations and fair value of assets during each of the years in the two-year period ending December 31, 2002, and a statement of the funded status as of December 31 of both years.
Pension Benefits Other Postretirement Benefits - ---------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------- Change in Benefit Obligation Benefit obligation at beginning of year $148,864 $144,024 $23,555 $26,095 Service cost 2,579 1,981 320 360 Interest cost 10,521 10,361 1,647 1,651 Amendments 19 250 (437) -- Curtailments -- -- (216) (2,621) Actuarial loss 5,611 4,770 1,035 213 Administrative expenses (95) (2) -- -- Benefits paid (11,746) (12,520) (2,268) (2,143) - ---------------------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year 155,753 148,864 23,636 23,555 - ---------------------------------------------------------------------------------------------------------------------------- Change in Plan Assets Fair value of plan assets at beginning of year 161,268 177,147 Actual return on plan assets (10,408) (3,357) Administrative expenses (95) (2) Benefits paid (11,746) (12,520) - ---------------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year 139,019 161,268 - ---------------------------------------------------------------------------------------------------------------------------- (Underfunded) funded status of the plans (16,734) 12,404 (23,636) (23,555) Unrecognized net transition obligation asset 2,163 748 -- -- Unrecognized net actuarial loss 55,890 29,317 1,637 544 Unrecognized prior service cost 4,268 4,432 (362) 83 - ---------------------------------------------------------------------------------------------------------------------------- Prepaid benefit (accrued cost) $ 45,587 $ 46,901 $(22,361) $(22,928) - ---------------------------------------------------------------------------------------------------------------------------- Weighted-average Assumptions Discount rate 6.75% 7.25% 6.75% 7.5% Expected return on plan assets 8.5% 8.5% Rate of compensation increase 4% 4% - ----------------------------------------------------------------------------------------------------------------------------
26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 ^ UNITED INDUSTRIAL CORPORATION AR02 Notes to Financial Statements Continued The following table provides the amounts recognized in the statements of financial position as of December 31, 2002 and 2001.
Pension Benefits Other Postretirement Benefits ---------------------------------------------------------------------------- (Dollars in thousands) 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------- Prepaid benefit cost $45,587 $46,901 $ -- $ -- Accrued benefit liability -- -- (22,361) (22,928) Unrecognized prior service cost (4,268) -- -- -- Excess adjustment for minimum pension liability (49,595) -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Net amount recognized $ (8,276) $46,901 $(22,361) $(22,928) - -------------------------------------------------------------------------------------------------------------------------------
The accumulated benefit obligation of the defined benefit pension plans was $147,397,000 and $141,909,000 at December 31, 2002 and 2001, respectively. As required by Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions," the Company recorded an additional pension liability of $49,595,000 at December 31, 2002, to reflect the excess of the accumulated benefit obligation over the fair value of plan assets of its defined benefit pension plans. A reduction in shareholders' equity ($32,262,000, net of related income tax benefit) has been separately reported at December 31, 2002. For the purpose of measuring the other postretirement benefit obligations, a 7.5 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2002. The rate was assumed to decrease to 5 percent in 2008 and remain at that level thereafter.
Pension Benefits Other Postretirement Benefits - ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 2002 2001 2000 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------------- Components of Net Periodic Benefit Cost Service cost $ 2,579 $ 1,981 $ 1,229 $320 $360 $550 Interest cost 10,521 10,361 9,988 1,647 1,651 1,915 Expected return on plan assets (13,498) (14,835) (16,029) -- -- -- Amortization of prior service cost 183 196 (357) 12 18 76 Amortization of unrecognized transition assets (88) (88) (88) -- -- -- Amortization of net loss (gain) 1,616 -- -- (2) -- -- Settlement-- curtailment -- -- -- -- (1,933) -- Recognized net actuarial loss 8 -- (31) -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Benefit cost (income) $ 1,321 $ (2,385) $ (5,288) $1,977 $96 $2,541 - ----------------------------------------------------------------------------------------------------------------------------------
25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 ^ UNITED INDUSTRIAL CORPORATION AR02 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 separately in the consolidated statements of operations. 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 is covered by January 2003. One of these plans was amended effective December 31, 2001. Eligibility for benefits was increased from age 55 with 10 years of service to age 62 with 10 years of service. In one subsidiary the life insurance benefit for union participants was increased from $3,000 to $4,000 and prescription drug co-pay for non-union participants was increased from $3 to $10 generic and $20 for brand name. This change had no impact on the current year costs. One plan was amended effective January 1, 2001 so that employees hired after December 31, 2000 will not be eligible for retiree medical benefits. Employees on December 31, 2000, who do not meet the grandfathered requirements, may purchase retiree medical benefits if they meet certain other requirements. The effect of these changes was a decrease in the 2001 net periodic benefit cost of $531,000 and an additional curtailment gain of $1,933,000. The assumed health care cost trend rate has a significant effect on the amounts reported. A one-percentage-point change in the assumed health care cost trend rate would have the following effects: 1-Percentage Point 1-Percentage Point (Dollars in thousands) Increase Decrease - -------------------------------------------------------------------------------- Effect on total of service and interest cost components in 2002 $ 56 $ (55) Effect on postretirement benefit obligation as of December 31, 2002 $615 $(610) - -------------------------------------------------------------------------------- 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 $3,728,000 in 2002, $3,488,000 in 2001 and $1,377,000 in 2000. NOTE 11 | Industry Segment Data The Company has two reportable segments: defense 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. The energy segment manufactures combustion equipment for biomass and refuse fuels. The transportation business is reflected as a discontinued operation in the Company's consolidated financial statements. See Note 16. 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. 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 $161,569,000 in 2002, $149,047,000 in 2001 and $132,975,000 in 2000. No single customer, other than the United States Government, accounted for ten percent or more of net sales in any year. Export sales were $66,366,000 in 2002, $54,670,000 in 2001 and $57,110,000 in 2000. 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 ^ UNITED INDUSTRIAL CORPORATION AR02 Notes to Financial Statements Continued
(Dollars in thousands) Defense Energy Other Reconciliations Totals - -------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2002 - -------------------------------------------------------------------------------------------------------------------------------- Revenues from external customers $229,215 $29,552 $ -- $ -- $258,767 Equity profit in joint venture 99 -- -- -- 99 Interest income 1,124 25 234 (1,256) 127 Interest expense 776 27 1,296 (1,256) 843 Depreciation and amortization expense 4,730 3,967 66 -- 8,763 Segment profit (loss) 17,113 (10,108) (2,567) -- 4,438 Segment assets 134,426 39,290 109,958 (125,479) 158,195 Capital expenditures 4,963 256 -- -- 5,219 - -------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2001 - -------------------------------------------------------------------------------------------------------------------------------- Revenues from external customers $208,575 $29,920 $ -- $ -- $238,495 Equity profit in ventures 86 -- -- -- 86 Interest income 1,223 107 265 (977) 618 Interest expense 232 -- 762 (977) 17 Depreciation and amortization expense 5,589 755 69 -- 6,413 Segment profit 18,422 3,042 547 -- 22,011 Segment assets 120,735 32,379 128,878 (29,467) 252,525 Capital expenditures 1,601 426 1 -- 2,028 - -------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2000 - -------------------------------------------------------------------------------------------------------------------------------- Revenues from external customers $200,743 $35,540 $ -- $ -- $236,283 Equity profit in ventures 472 -- -- -- 472 Interest income 2,445 354 193 (1,495) 1,497 Interest expense 458 11 1,054 (1,495) 28 Depreciation and amortization expense 7,270 746 70 -- 8,086 Gain (loss) on sale of assets -- (28) 5,539 -- 5,511 Segment profit 20,569 4,718 7,574 -- 32,861 Segment assets 144,083 36,247 136,286 (68,231) 248,385 Capital expenditures 4,237 673 11 -- 4,921 - --------------------------------------------------------------------------------------------------------------------------------
25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 ^ UNITED INDUSTRIAL CORPORATION AR02 (Dollars in thousands) 2002 2001 2000 - -------------------------------------------------------------------------------- Assets Total assets for reportable segments $283,674 $281,992 $316,616 Elimination of intercompany tax receivable (21,719) -- -- Reclassification of receivables from ETI -- (1,828) (1,648) Assets of discontinued operations 14,042 108,684 74,326 Elimination of investment in consolidated subsidiaries (98,157) (126,413) (127,822) Reclassification of deferred tax liabilities (19,645) (9,910) (13,087) - -------------------------------------------------------------------------------- Total Consolidated Assets $158,195 $252,525 $248,385 - -------------------------------------------------------------------------------- Other Significant Items Elimination of intercompany interest $1,256 $977 $ 1,495 - -------------------------------------------------------------------------------- Segment profit (loss) includes research and development costs amounting to $4,588,000 in 2002, $5,520,000 in 2001 and $4,001,000 in 2000, principally in the defense segment. 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 for the years ended December 31: - -------------------------------------------------------------------------------- (Dollars in thousands) 2002 2001 2000 - -------------------------------------------------------------------------------- Federal income taxes at statutory rate $1,508 $ 7,884 $11,193 State and local income taxes, net of federal income tax benefit (including a reduction of $651 in 2001 of a $1,000 tax reserve established in 1997) 50 (519) 850 Non-taxable income (772) -- (576) Other -- net (212) 18 208 - -------------------------------------------------------------------------------- Income Taxes -- Continuing Operations $ 574 $ 7,383 $11,675 - -------------------------------------------------------------------------------- The Company recorded income tax benefits for its discontinued operations during 2002, 2001 and 2000. Current income taxes receivable associated with these benefits are classified as income taxes receivable in the accompanying consolidated balance sheets. No income tax payments were made in 2002 and 2001 based on the Company's tax estimate offset by an overpayment of $1,810,000 in 2000. Income tax payments were $4,000,000 in 2000. 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 ^ UNITED INDUSTRIAL CORPORATION AR02 Notes to Financial Statements Continued Deferred income tax balances: December 31 (Dollars in thousands) 2002 2001 - -------------------------------------------------------------------------------- Deferred Tax Assets Asbestos litigation reserve $ 4,179 $ -- Minimum pension liability 17,333 -- Losses on long-term contracts not currently deductible 2,298 2,631 Postretirement benefits and other employee benefits other than pensions 7,683 8,716 Product warranty and other provisions 1,097 962 Vacation pay accruals 1,007 879 Other 249 120 - -------------------------------------------------------------------------------- Total Deferred Tax Assets 33,846 13,308 - -------------------------------------------------------------------------------- Deferred Tax Liability Pension plans (16,673) (17,220) Excess tax depreciation (435) (1,823) Other (679) (471) - -------------------------------------------------------------------------------- Total Deferred Tax Liability (17,787) (19,514) - -------------------------------------------------------------------------------- Net Deferred Tax Asset (Liability) $16,059 $ (6,206) - -------------------------------------------------------------------------------- The net deferred tax asset (liability) is classified as follows: Net current deferred income tax assets $ 4,528 $ 5,436 - -------------------------------------------------------------------------------- Net noncurrent deferred income tax asset (liability) $11,531 $(11,642) - -------------------------------------------------------------------------------- NOTE 13 | Other Operating Expenses, Net, Other Income, Net, and Other Expenses Year ended December 31 (Dollars in thousands) 2002 2001 2000 - -------------------------------------------------------------------------------- Other Operating Expenses, Net Reduction of deferred compensation liability $(232) $ (212) $ (208) Amortization of intangibles 226 318 715 Write-off of receivable -- -- 162 Expenses related to the closing of an indirect subsidiary 425 -- -- - -------------------------------------------------------------------------------- Total other operating expenses, net $ 419 $ 106 $ 669 - -------------------------------------------------------------------------------- Other Income, Net Insurance recovery -- net $ -- 842 3,183 Royalties and commissions 13 127 408 Other 51 116 136 - -------------------------------------------------------------------------------- Total other income, net $ 64 $1,085 $3,727 - -------------------------------------------------------------------------------- Other Expenses Exchange rate fluctuations $ -- $ 182 $ -- Write-off of proposed acquisition costs -- 159 -- Professional fees -- environmental remediation 309 -- -- potential disposition -- -- 271 Miscellaneous items 357 399 430 - -------------------------------------------------------------------------------- Total other expense $ 666 $ 740 $ 701 - -------------------------------------------------------------------------------- 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 ^ UNITED INDUSTRIAL CORPORATION AR02 NOTE 14 | Selected Quarterly Data (Unaudited)
(Dollars in thousands, except per share data 2002 2001 and stock prices) Fourth Third Second First Fourth Third Second First - ------------------------------------------------------------------------------------------------------------------------------- Net sales from continuing operations $69,463 $67,109 $65,328 $56,867 $62,052 $66,103 $56,457 $53,883 Gross profit from continuing operations 18,288 15,406 11,618 10,805 15,752 13,806 12,370 12,037 (Loss) income from continuing operations (3,312) 4,462 1,683 1,031 4,489 3,571 3,588 2,980 Loss from discontinued operations (16,409) (1,844) (12,430) (12,260) (5,607) (1,545) (1,694) (419) Net (loss) income (19,719) 2,618 (10,747) (11,229) (1,118) 2,026 1,894 2,561 - ------------------------------------------------------------------------------------------------------------------------------- Basic (loss) earnings per share Continuing Operations $ (.25) $ .34 $ .13 $ .08 $ .35 $ .28 $ .28 $ .24 Discontinued Operations (1.26) (.14) (.96) (.95) (.44) (.12) (.13) (.03) Net (loss) Income (1.51) .20 (.83) (.87) (.09) .16 .15 .21 Diluted (loss) earnings per share Continuing Operations (.25) .32 .12 .08 .33 .27 .27 .23 Discontinued Operations (1.26) (.13) (.90) (.90) (.41) (.12) (.13) (.03) Net (loss) Income (1.51) .19 (.78) (.82) (.08) .15 .14 .20 - ------------------------------------------------------------------------------------------------------------------------------- Dividends declared per share .10 .10 -- .10 .10 .10 .10 .10 - ------------------------------------------------------------------------------------------------------------------------------- Stock prices: High $ 21.00 $ 23.90 $ 26.05 $ 22.96 $ 19.90 $ 16.73 $ 17.77 $ 14.00 Low $ 12.02 $ 16.60 $ 21.30 $ 15.04 $ 14.85 $ 12.95 $ 12.40 $ 11.00 - -------------------------------------------------------------------------------------------------------------------------------
The Company's common stock is listed on the New York Stock Exchange. The approximate num ber of shareholders of record as of February 5, 2003 was 1,900. NOTE 15 | Commitments and Contingencies Detroit Stoker Company (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 cleanup 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. UIC and its Detroit Stoker subsidiary have been named as defen dants in asbestos-related personal injury litigation. Neither UIC nor Detroit Stoker 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 ^ UNITED INDUSTRIAL CORPORATION AR02 Notes to Financial Statements Continued fabricated, milled, mined, manufactured or marketed asbestos. The Com pany stopped the use of asbestos-containing materials in connection with its products in 1981. The litigation is pending in Michigan, Mississippi, New York and North Dakota. During 2002 UIC and Detroit Stoker experienced a significant increase in the volume of asbestos bodily-injury claims and as of December 31, 2002, the Company is a named defendant in 422 active cases involving approximately 15,105 claimants. Most of these lawsuits do not include specific dollar claims for damages, and many include a number of plaintiffs and multiple defendants. Based on historical data and the large increase in claimants over and above the projected incidence of disease relative to the Company's products, management believes the claimants in the vast majority of these cases will not be able to demonstrate that they have been exposed to the Company's asbestos-containing products or suffered any compensable loss as a result of such exposure. The direct asbestos-related expenses of the Company for defense and indemnity for the past five years was not material. The Company engaged a consulting firm (Asbestos Consultant) with expertise in evaluating asbestos bodily-injury claims to work with the Company to project the amount that the Company would pay for its asbestos-related liabilities and defense costs. The methodology employed by the Consultant to project the Company's asbestos-related liabilities and defense costs is primarily based on (1) estimates of the labor force exposed to asbestos in the Company's products, (2) epidemiological modeling of asbestos-related disease manifestation, and (3) estimates of claim filings and settlement and defense costs that may occur in the future. The Company's limited claims history was not a significant variable in developing the estimates because such history was not significant as compared to the number of claims filed in 2002. The Company also retained another consultant (Insurance Consultant) to work with the Company to project its insurance coverage, including a non-binding sharing agreement with certain of its primary insurance carriers that has been in effect for approximately five years. The Insurance Consultant has prepared a report evaluating the Company's potential insurance coverage for defense costs and indemnification for asbestos bodily-injury claims. The Insurance Consultant's conclusion was primarily based on a review of the Company's coverage history, application of reasonable assumptions on the allocation of coverage consistent with industry standards, an assessment of the creditworthiness of the insurance carriers, experience and a review of the report of the Asbestos Consultant. Based on these assumptions, other variables, and the reports of both the Asbestos and Insurance Consultants, the Company has recorded a reserve for its bodily injury liabilities for asbestos-related matters through 2012 in the amount of $31,852,000 as of December 31, 2002, including damages and defense costs. The Company has also recorded an estimated insurance recovery as of December 31, 2002 of $20,343,000 reflecting the estimate determined to be probable of being available to mitigate the Company's potential asbestos liability through 2012. These figures represent a net pretax charge of $11,509,000 for the year ended December 31, 2002. Management has concluded that consideration of asbestos-related activity through 2012 represents a period for which a reasonable and reliable forecast of liability and insurance recoveries can be projected. That conclusion is based upon a number of factors, including 1) the uncertainties inherent in estimating asbestos claims, payments and insurance recoveries, 2) knowledge that prior to 2002 the number of claims filed against the Company and the related average settlement costs were not significant, and 3) consultations with the Asbestos and Insurance Consultants. Accordingly, the net provision does not take into account either asbestos liabilities or insurance recoveries for any period past 2012. The Company believes that its ultimate net asbestos-related contingent liability (i.e., its indemnity or other claim disposition costs plus related legal fees less insurance recoveries) cannot be estimated with certainty. Projecting future events, such as the number of new claims expected to be filed each year, the average cost of resolving each claim, coverage issues among layers of insurers and the continuing solvency of various insurance companies is subject to many uncertainties which could cause the actual liabilities and insurance recoveries to be higher or lower than those recorded or projected, 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 ^ UNITED INDUSTRIAL CORPORATION AR02 and such differences could be material. Moreover, were Federal tort reform legislation to be enacted, the assumptions used in determining the potential liability could be materially impacted. After considering the efforts of both consultants and based upon the facts as now known, including the reasonable possibility that claims will be received and paid over the next 50 year period, the Company's management believes that although asbestos claims could have a material adverse effect on the Company's financial condition or result of operations in a particular reporting period, asbestos claims should not have a material adverse effect on the Company's long term financial condition, liquidity or results of operations. No assurance can be given, however, as to the actual amount of the Com pany's liability for such present and future claims or insurance recov-eries, and the differences from estimated amounts could be material. 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 lia bility, if any, under pending litigation, including claims described above, will not have a material 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, 2002. In connection with the discontinued transportation operations, AAI Corporation (AAI), a wholly owned subsidiary of the Company, has guaranteed certain performance criteria associated with the contractual obligations of ETI, a company owned 35% by AAI and 65% by Skoda, a.s. (Skoda), a Czech Republic company. 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. In addition, while its operating affiliates performed under their contracts during the year, during 2001 Skoda declared bankruptcy. During 2002, the transportation segment recorded 100% of the ETI loss because of Skoda's inability to meet its financial obligations under ETI's shareholder agreement. The additional losses recorded by the Company for Skoda's 65% share of ETI totaled $17,264,000 during 2002. If Skoda is required to provide ETI with additional funding beyond the amounts already provided for by AAI on Skoda's behalf and it fails to do so, or if ETI is unable to meet its performance obligations, the performance guarantees by AAI could have a material adverse effect on the Company's results of operations, liquidity or financial condition. AAI monitors the progress of Skoda and ETI's other subcontractors. In February 2000, the Czech Export Bank (CEB) approved credit facilities to 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 which were repaid during 2002 were partially guaranteed by the Czech Govern ment's Export Guarantee and Insurance Corporation (EGAP). In addition, the Company previously agreed to assume joint and several liability on a progress payment bond totaling approximately $22,000,000 at December 31, 2002. In January 2003, this bond was reduced to $9,100,000. This progress payment bond is expected to be eliminated when the MUNI customer accepts certain deliveries during 2003. Although the Company has accepted full responsibility under the progress payment bond, Skoda retains its 65% obligation that is partially guaranteed by EGAP. In addition, previously existing bonds that guarantee performance under the MUNI contract obligate the Company to indemnify the surety, if necessary, for up to approx imately $33,000,000. These bonds are expected to be released upon ETI's issuance of a warranty bond. It is expected that there will be sufficient working capital to complete the MUNI program. The Dayton electric trolley buses contract required a performance bond of about $16,000,000 that was outstanding at Decem ber 31, 2002. The Company was 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 ^ UNITED INDUSTRIAL CORPORATION AR02 Notes to Financial Statements Continued jointly and severally liable. In February 2003, the Company was released from this $16,000,000 bond. On July 26, 2002, the Company sold two transportation overhaul contracts and related assets. See Note 16. 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 pretax gain of $5,539,000. The Consolidated Statements of Operations include Symtron's net sales of $7,663,000 in 2000. Symtron had a net loss of $950,000 in 2000. On July 26, 2002, the Company sold two transportation overhaul contracts with the New Jersey Transit Authority and Maryland Mass Trans portation Authority and related assets. The proceeds of this sale were approximately $20,756,000. The Company recorded a loss of $21,500,000 associated with this transaction. The agreement of sale released the Company under all performance bonds and obligations under the conveyed contracts. The agreement of sale also included a cost plus a fee contract to perform work on the conveyed contracts for the buyer during a transition period not to exceed six months. Following the sale, the Company's transportation operations include primarily one ongoing program to deliver 273 electric trolley buses to the San Francisco Municipal Railway. This program, which is well into its production phase, is being performed by ETI under which AAI has a major subcontract. The divested overhaul contracts, along with efforts to complete the one remaining transportation contract, are accounted for as discontinued operations. Summary results of the transportation segment which have been classified separately, were as follows: Year ended December 31 (Dollars in thousands) 2002 2001 2000 - -------------------------------------------------------------------------------- Revenue $ 27,447 $ 47,439 $ 20,075 Loss before income taxes $(66,053) $(14,886) $(21,383) Credit for income taxes (23,112) (5,621) (7,976) - -------------------------------------------------------------------------------- Net Loss from discontinued operations $(42,941) $ (9,265) $(13,407) - -------------------------------------------------------------------------------- Year ended December 31 (Dollars in thousands) 2002 2001 2000 - -------------------------------------------------------------------------------- Net Cash (Used for) Provided by Discontinued Operations Net loss $(42,941) $ (9,265) $(13,407) Loss on sale of assets 21,500 -- -- Decrease (increase) in Trade receivable 16,473 (9,772) (7,064) (Increase) in Inventories (5,104) (21,974) (37,529) (Decrease) increase in Customer advances (4,556) 491 11,883 (Decrease) in income taxes (22,641) (5,380) (6,907) (Decrease) increase in Accounts payable & other current liabilities (5,785) 14 12,706 Increase (decrease) other 5,248 427 173 - -------------------------------------------------------------------------------- Net Cash (Used for) discontinued operations $(37,806) $(45,459) $(40,145) - -------------------------------------------------------------------------------- 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 ^ UNITED INDUSTRIAL CORPORATION AR02 Assets and liabilities of the discontinued operations reclassified as current were as follows: Year ended December 31 (Dollars in thousands) 2002 2001 2000 - -------------------------------------------------------------------------------- Assets Current Assets Trade receivables $ 908 $ 20,895 $11,123 Inventories 9,013 73,236 51,262 Prepaid expenses and other current assets 51 51 52 Deferred taxes 3,034 6,460 5,487 - -------------------------------------------------------------------------------- Total Current Assets 13,006 100,642 67,924 Non-current Assets Deferred taxes 1,036 1,037 972 Other assets -- 1,205 1,010 Property and equipment -- 5,800 4,420 - -------------------------------------------------------------------------------- Total Assets $14,042 $108,684 $74,326 - -------------------------------------------------------------------------------- Liabilities Current Liabilities Accounts payable $1,674 $ 7,118 $ 4,181 Accrued employee compensation and taxes 1,052 1,393 1,489 Customer advances 1,087 35,983 35,402 Provision for contract losses 7,300 12,861 15,604 Other 400 2,000 2,000 - -------------------------------------------------------------------------------- Total Liabilities $11,513 $ 59,355 $58,676 - -------------------------------------------------------------------------------- NOTE 17 | Earnings per Share The following table sets forth the computation of basic and diluted earnings per share: Year ended December 31 (Dollars in thousands) 2002 2001 2000 - -------------------------------------------------------------------------------- Basic earnings per share-- weighted average shares 13,021,000 12,697,000 12,384,000 Effect of dilutive securities: employee and non-employee director stock options 677,000 592,000 225,000 - -------------------------------------------------------------------------------- Diluted earnings per share-- adjusted weighted average and assumed conversions 13,698,000 13,289,000 12,609,000 - -------------------------------------------------------------------------------- Basic earnings (loss) per share: Income from Continuing Operations $ .30 $ 1.15 $ 1.71 Loss from Discontinued Operations (3.30) (.73) (1.08) - -------------------------------------------------------------------------------- Net (loss) Income (3.00) .42 .63 - -------------------------------------------------------------------------------- Diluted earnings (loss) per share: Income from Continuing Operations .28 1.10 1.68 Loss from Discontinued Operations (3.13) (.70) (1.06) - -------------------------------------------------------------------------------- Net (loss) Income $ (2.85) $ .40 $ .62 - -------------------------------------------------------------------------------- 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 ^ UNITED INDUSTRIAL CORPORATION AR02 Notes to Financial Statements Continued 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. 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 $192,000,000, respectively, the transportation segment received subcontracts of $9,350,000 and $65,800,000, respectively. See Note 16. Although ETI is owned 35% by AAI, a wholly owned subsidiary of the Company, and 65% by Skoda, during 2002 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 the years ended December 31, 2002, 2001 and 2000, the sales, cost of sales and gross loss recognized by the transportation seg ment on subcontracts with ETI are as follows: - -------------------------------------------------------------------------------- (Dollars in thousands) 2002 2001 2000 - -------------------------------------------------------------------------------- Sales $13,614 $29,975 $2,360 Cost of sales 20,175 31,351 4,082 - -------------------------------------------------------------------------------- Gross loss $(6,561) $(1,376) $(1,722) - -------------------------------------------------------------------------------- During 2000 ETI repaid to AAI $3,605,000 that was previously advanced to ETI by AAI on behalf of Skoda. The transportation segment recorded a loss of $180,000 and $335,000 in 2001 and 2000, respectively, related to its equity interest in the net loss of ETI. In 2002 the transportation segment recorded a loss of $26,560,000 (net of a $1,828,000 reserve previously recorded by the Company) related to its equity interest in the net loss of ETI and the estimated losses through completion of the remaining contract. This loss included a provision of $9,296,000 related to its 35% equity share of esti mated losses by ETI, and a $17,264,000 provision related to the 65% equity share of Skoda, since it is unlikely that Skoda will have the financial capability to fund its share of such losses. Summary financial information of the Electric Transit, Inc. entity is as follows: (Dollars in thousands) 2002 2001 2000 - -------------------------------------------------------------------------------- Current assets $ 99,042 $131,794 $43,008 Plant, property and equipment and other assets 1,482 3,058 8,118 Current liabilities 146,127 152,070 68,015 Net sales 64,766 14,580 4,673 Gross loss (28,388) (698) (637) Net loss $(28,388) $ (514) $ (956) - -------------------------------------------------------------------------------- The Company also has a 50% interest in Pioneer UAV, Inc. The Company's investment was $1,462,000 and $2,724,000 in 2002 and 2001, respectively. The Company had no advances to the investee at December 31, 2002 and December 31, 2001. The Company's share of the venture's profits were $99,000, $86,000 and $472,000 in 2002, 2001 and 2000, respectively. NOTE 19 | Restructuring Charge Detroit Stoker ceased the foundry operation conducted by its wholly owned subsidiary, Midwest Metallurgical Laboratory, Inc. (Midwest), effective May 17, 2002. In conjunction with the ceased operations the Company has written off the value of all Midwest's assets. During 2002 Detroit Stoker incurred severance and other cash charges totaling approximately $1,287,000 related to the restructuring including operating losses of Midwest. In addition, the Company accelerated depreciation of its foundry facility during the foundry's operating period in 2002. Depreciation of this facility was $3,420,000 during 2002. 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 ^ UNITED INDUSTRIAL CORPORATION AR02 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, 2002 and 2001, and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 2002. 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, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States. New York, New York March 10, 2003 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 ^ UNITED INDUSTRIAL CORPORATION AR02 Five-Year Financial Data
Year ended December 31 (Dollars in thousands, except per share data) 2002 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Operating Data Continuing Operations Net Sales $ 258,767 $ 238,495 $ 236,283 $207,683 $187,655 Operating costs 254,741 219,335 216,026 189,503 176,968 Interest expense (income)-- net 716 (601) (1,469) (1,903) (3,762) Income before income taxes 4,438 22,011 32,861 22,210 21,687 Income taxes 574 7,383 11,675 7,712 5,134 Income from continuing operations 3,864 14,628 21,186 14,498 16,553 Loss from discontinued operations (42,941) (9,265) (13,407) (8,221) (3,542) Net (loss) income (39,077) 5,363 7,779 6,277 13,011 Basic Earnings (Loss) per Share Income from continuing operations .30 1.15 1.71 1.18 1.35 Loss from discontinued operations (3.30) (.73) (1.08) (.67) (.29) Net (loss) income (3.00) .42 .63 .51 1.06 Diluted Earnings (Loss) per Share Income from continuing operations .28 1.10 1.68 1.16 1.31 Loss from discontinued operations (3.13) (.70) (1.06) (.66) (.28) Net (loss) income (2.85) .40 .62 .50 1.03 Cash dividends paid on common stock 3,912 5,069 4,954 4,910 4,927 Cash dividends declared per common share $ .30 $ .40 $ .40 $ .40 $ .40 Shares outstanding as of year end (in thousands) 13,068 12,872 12,435 12,294 12,250 Financial Position - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $ 158,195 $ 252,525 $ 248,385 $ 201,792 $ 180,521 Property and equipment-- continuing operations 21,196 24,514 28,581 32,329 28,115 Shareholders' equity 47,631 120,344 114,893 111,055 109,441 Shareholders' equity per share 3.64 9.35 9.24 9.03 8.93 Financial Ratios - ---------------------------------------------------------------------------------------------------------------------------------- Return on shareholders' equity (net income) --% 4.5% 6.8% 5.7% 11.9% Income from continuing operations as a percentage of sales 1.5 6.1 9.0 7.0 8.8 Statistical Data -- continuing operations - ---------------------------------------------------------------------------------------------------------------------------------- Sales backlog as of year end $ 301,000 $ 207,000 $ 195,000 $ 158,000 $ 156,000 Capital expenditures 5,219 2,028 4,921 10,563 13,534 Depreciation and amortization 8,763 6,413 8,086 6,780 7,318 Number of employees 1,600 1,500 1,400 1,500 1,600 - ----------------------------------------------------------------------------------------------------------------------------------
CORPORATE ORGANIZATION Board of Directors Harold S. Gelb Chairman of the Board Richard R. Erkeneff President and Chief Executive Officer of the Company and Chief Executive Officer of AAI Corporation Paul J. "Page" Hoeper Business Consultant and Former Assistant Secretary of the Army Glen M. Kassan Executive Vice President Steel Partners, Ltd. Warren G. Lichtenstein Managing Partner Steel Partners, Ltd. Joseph S. Schneider President JSA Partners, Inc. 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 Chief Executive Officer Frederick M. Strader President and Chief Operating Officer James H. Perry Vice President, Chief Financial Officer and Treasurer Robert W. Worthing Vice President, General Counsel and Secretary Francis X. Reinhardt Vice President and Corporate Controller Joseph G. Thomas Vice President and General Manager, AAI/UAV Systems Thomas E. Wurzel President, AAI/ACL Technologies, Inc. Michael A. Boden Vice President and General Manager, Engineering Support, Inc. Detroit Stoker Company Mark A. Eleniewski President and Chief Executive Officer Gary K. Ludwig Vice President, Finance and Treasurer 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 40 Wall Street New York, New York 10005 800.937.5449 www.amstock.com For information about the Company's Dividend Reinvestment and Share Purchase Plan, contact: American Stock Transfer and Trust Company 800.278.4353 www.amstock.com Shareholder Relations Security analysts, investment professionals and shareholders should direct their inquiries to: Investor Relations United Industrial Corporation 570 Lexington Avenue New York, New York 10022 Independent Auditors Ernst & Young LLP Five Times Square New York, New York 10036 Annual Meeting The Annual Meeting of Shareholders will be held at 10:00 a.m. on Wednesday, October 8, 2003, 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 Available Information United Industrial Corporation's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports, are available free of charge on our internet website at http://www.unitedindustrial.com as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission. Stock Listing United Industrial Corporation common stock is traded on the New York Stock Exchange (Ticker Symbol: UIC) Internet Address www.unitedindustrial.com Designed and produced by Taylor & Ives., NYC [LOGO] UNITED INDUSTRIAL CORPORATION United Industrial Corporation 570 Lexington Ave., New York, NY 10022 212.752.8787 www.unitedindustrial.com EX-21 9 s15-3474_ex21.txt EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF UNITED INDUSTRIAL CORPORATION March 4, 2003
State Approximate Percentage of (or jurisdiction) Voting Securities Owned by Name in which Incorporated Immediate Parent - ----------------------------------------------------------------------------------------------- AAI Corporation Maryland 100% (a) A.A.I. Engineering Support, Inc. Maryland 100 (b) A.A.I. International, Inc. Delaware 100 (b) Seti, Inc. Pennsylvania 100 (b) AAI Medical, Inc. Maryland 100 (b) AAI MICROFLITE Simulation International Corporation Maryland 100 (b) AAI/ACL Technologies, Inc. Maryland 100 (b) AAI/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 10 s15-3474_ex23.txt EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of United Industrial Corporation and in the Registration Statement (Form S-8, No. 33-57065) pertaining to the United Industrial Corporation 401(k) Retirement Savings Plan, in the Registration Statements (Form S-8, Nos. 333-85819, 33-53911, 333-19517 and 333-59487) pertaining to the United Industrial Corporation 1994 Stock Option Plan, and in the Registration Statement (Form S-8, No. 333-30103) pertaining to the United Industrial Corporation 1996 Stock Option Plan for Nonemployee Directors, of our reports dated March 10, 2003, 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, 2002, 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, 2003 EX-99 11 s15-3474_ex99a.txt EXHIBIT 99A EXHIBIT 99(a) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Richard R. Erkeneff, as Chief Executive Officer of United Industrial Corporation (the "Company") certify, pursuant to 18 U.S.C. ss. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) the accompanying Form 10-K report for the period ended December 31, 2002 as filed with the U.S. Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 28, 2003 /s/ Richard R. Erkeneff ------------------------------ Richard R. Erkeneff, Chief Executive Officer of the Company A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-99 12 s15-3474_99b.txt EXHIBIT 99B EXHIBIT 99(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, James H. Perry, as Chief Financial Officer of United Industrial Corporation (the "Company") certify, pursuant to 18 U.S.C. ss. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) the accompanying Form 10-K report for the period ended December 31, 2002 as filed with the U.S. Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 28, 2003 /s/ James H. Perry ------------------------------- James H. Perry, Chief Financial Officer of the Company A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----