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