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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, 1998.
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from
___________ to ___________
Commission file number: 1-4252
UNITED INDUSTRIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-2081809
- -------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
570 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022
(212) 752-8787
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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
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].
[Cover page 1 of 2 pages]
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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 15, 1999,
computed by reference to the closing sale price of the registrant's Common Stock
on the New York Stock Exchange on such date: $123,730,626. On March 15, 1999,
the registrant had outstanding 12,264,013 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, 1998 are incorporated by reference
into Parts I and II of this report.
2. Certain portions of the registrant's definitive Proxy Statement to be
filed pursuant to Regulation 14A of the Securities Exchange Act of
1934, as amended, in connection with the Annual Meeting of Shareholders
of the registrant to be held on May 11, 1999 are incorporated by
reference into Part III of this report.
[Cover page 2 of 2 pages]
<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.
At December 31, 1998, the operations of United consist of three principal
business segments: defense, transportation and energy systems, and related
products conducted through three wholly-owned subsidiaries.
Forward Looking Information
This Annual Report contains "forward looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward looking
statements are based on management's expectations, estimates, projections and
assumptions. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "estimates," and variations of such words and similar expressions
are intended to identify such forward looking statements which include, but are
not limited to, projections of revenues, earnings, segment performance, cash
flows and contract awards. These forward looking statements are subject to risks
and uncertainties which could cause the Company's actual results or performance
to differ materially from those expressed or implied in such statements. These
risks and uncertainties include, but are not limited to, the following: the
Company's successful execution of internal performance plans; performance issues
with key suppliers, subcontractors and business partners; legal proceedings;
product demand and market acceptance risks; the effect of economic conditions;
the impact of competitive products and pricing; product development,
commercialization and technological difficulties; capacity and supply
constraints or difficulties; legislative or regulatory actions impacting the
Company's energy segment and transportation business; changing priorities or
reductions in the U.S. government defense budget; contract continuation and
future contract awards; and U.S. and international military budget constraints
and determinations.
Defense
AAI Corporation
AAI Corporation ("AAI") is engaged in engineering, development and manufacture
in the following major areas: (1) training and simulation systems; (2) automatic
test equipment for electronic systems and components; (3) unmanned air vehicle
systems; (4) ordnance systems; and (5) mechanical support systems for
industrial, military, and marine applications. Since its inception, AAI's
business has been primarily in support of the U.S. Department of Defense
("DOD"). Since 1990, the Company has emphasized diversification into other
markets to reduce its dependence on the DOD. The United States defense budget
has been significantly reduced in recent years and this trend is expected to
continue. In 1998 approximately 70% of the sales volume of AAI consisted of
research, development and production of military items under domestic defense
contracts compared to 57% in 1997. 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
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the U.S. Army. International defense contracts accounted for 14% of sales in
1998 as compared to 15% in 1997. These contracts generally related to unmanned
air vehicle systems and weapon training systems for foreign governments. The
balance of AAI's business consists of work performed in the non-defense markets.
These areas include hydraulic test equipment.
Because of the variety of its activities, it is not possible to state precisely
the competitive position of AAI with respect to each of its product lines. In
the area of training and simulation systems, AAI is one of approximately ten
leading organizations developing equipment for the U.S. Government. AAI's
ability to obtain orders for training and simulation systems is dependent
principally on the ability, expertise and training of its employees and the
level of funding by the DOD and foreign military users. A number of large and
small companies produce automatic test equipment that compete with AAI for
market share. In the area of weapons and munitions, AAI ranks among
approximately ten leading companies engaged in development work. However, AAI's
production activity in this field is less significant. AAI began development in
the Unmanned Air Vehicle ("UAV") business in 1986. The Company produces the
highly successful Pioneer Unmanned Air Vehicle employed by the United States
during Operation Desert Storm, and in conflicts in Somalia and Bosnia. In
addition, AAI has other UAV systems and products which it markets
internationally. AAI is one of several large and small competitors in this
field.
AAI's administrative offices and its principal manufacturing and engineering
facilities are located in Hunt Valley, Maryland.
Symtron Systems, Inc.
Symtron Systems, Inc. ("Symtron") is a world leader in the development and sale
of advanced, computer controlled, gas fueled, live fire, firefighter training
systems for public and private industry. Symtron started development of its
computer controlled, live fire, firefighter training systems under an initial
contract with the U.S. Army in 1978. It was purchased by United in 1994.
Contingent purchase price amounts are payable if certain pretax profits, as
defined in the purchase agreement, are earned for each of the years in the five
year period ended December 31, 1998. Included in general and administrative
expenses in 1998, 1997 and 1996 are such contingent payments totaling $265,000,
$723,000 and $254,000, respectively. Furthermore, in 1995 the Company recorded a
$1,000,000 contingent payment based on profits on contracts existing at the
acquisition date and the net worth of Symtron at specified dates which was
likewise classified as general and administrative expense. Symtron's 1998 sales
consisted of production for military and commercial customers. The main office
and plant of Symtron are located in Fair Lawn, New Jersey. In the international
markets, Symtron is faced with significant competition from several small firms.
Energy Systems
Detroit Stoker Company
Detroit Stoker Company ("Detroit Stoker") is engaged in the design, manufacture
and sale of industrial stokers, gas/oil burners, municipal solid waste
combustion systems for waste to energy plants, rotary seal feeders for the
metering of fuel to fluidized bed combustors and handling of granular materials,
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replacement parts, construction services and aftermarket services. Its products
are used for the generation of process steam and electric power in a wide range
of industrial and municipal applications. Principal customers include pulp and
paper mills, public utilities, independent power producers (non-utility
generators), industrial manufacturing plants, universities and sugar mills. Its
waste to energy technology is used extensively in both public and private plants
which generate steam and power from municipal waste. Its solid fuel combustion
technologies are particularly well suited to the burning of biomass fuels. The
primary raw materials used by Detroit Stoker are iron and steel which are
available from many sources. The main office and plant of Detroit Stoker are
located in Monroe, Michigan.
The products of Detroit Stoker compete with those of several other
manufacturers. Detroit Stoker is presently marketing a liquid and gaseous fuel
burning product line with low emissions for the power industry, primarily for
boiler applications. Potential customers for these products consist of original
boiler manufacturers as well as all major industrial and institutional energy
consumers. Competition is based on several factors including price, features and
performance.
Midwest Metallurgical Laboratory, Inc. ("Midwest"), a subsidiary of Detroit
Stoker, is a foundry engaged in the manufacture of grey and ductile iron,
stainless steel and special alloy iron castings. The majority of the sales of
Midwest are to Detroit Stoker. Midwest's plant and offices are located in
Marshall, Michigan.
Transportation
AAI Transportation Systems, a division of AAI, is engaged in the manufacturing
and integration of transit systems primarily for municipal customers within the
United States. Its products and services are focused in overhaul, fabrication,
assembly and systems integration.
Electric Transit, Inc. (ETI), a corporation owned 35% by AAI and 65% by Skoda, a
Czech Republic firm, has become one of the domestic market leaders in
manufacturing electric trolley buses. It has won contracts in both Dayton, Ohio
for the Miami Valley Regional Transit Authority and the city and county of San
Francisco, the only such contracts awarded in the United States since 1994. ETI
is an unconsolidated affiliate of AAI and accordingly, AAI records its equity
share of income or loss in ETI. However, under these contracts which are valued
at $32 million and $168 million, respectively, AAI has received subcontracts of
$9.6 million and $53 million, respectively.
In addition to its electric trolley bus business, AAI performs overhaul and
remanufacturing work for a variety of transit customers and produces an
assortment of transit equipment including fabricated trucks for both heavy and
light railcars.
The products and services of Transportation Systems compete with those of
several other larger as well as smaller manufacturers. The main office and
operating facilities are located in Hunt Valley, Maryland.
For additional information concerning United's subsidiaries reference is made to
information set forth in the Letter to Shareholders contained in United's 1998
Annual Report to Shareholders (the "Annual Report"), which letter is
incorporated herein by reference.
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General
Employees
As of March 1, 1999 United and its subsidiaries had approximately 1,800
employees. Approximately 133 of these employees are represented by several
unions under contracts expiring between July 2000 and January 2001. United
considers its employee relationships to be satisfactory.
Patents
United and its subsidiaries own more than 100 United States patents relating to
various products, including stokers, marine equipment, ordnance and electronic
equipment, and firefighter trainers. In addition, United has numerous pending
applications for patents. There is no assurance as to how many patents will be
issued pursuant to these pending applications. The applications relate to a wide
variety of fields, including automation control systems, ordnance devices, and
electronic developments. No patent is considered to be of material importance to
United.
Research and Development
During 1998, 1997 and 1996 the subsidiaries of United (exclusive of AAI)
expended approximately $201,000, $144,000 and $639,000, respectively, on the
development of new products and the improvement of existing products. All of the
programs and the funds to support such programs are sponsored by the subsidiary
involved. In addition to the above amount, AAI is engaged in research and
development primarily for the U.S. Government.
Backlog
The backlog of orders by industry segment at December 31, 1998 and 1997 was as
follows:
1998 1997
---- ----
Defense $146,634,000 $121,891,000
Energy Systems 9,334,000 9,016,000
Transportation 53,860,000 57,309,000
Except for approximately $77,000,000, substantially all of the backlog orders at
December 31, 1998 are expected to be filled in 1999.
Government Contracts
No single customer other than the U.S. Government, principally the Department of
Defense, accounted for 10% or more of net sales during the year. Sales to the
U.S. Government normally carry a lesser margin of profit than commercial sales
and may be subject to price redetermination under certain circumstances.
Contracts for such sales can be terminated for the convenience of the U.S.
Government.
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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 1998,
1997 and 1996 export sales by United and its subsidiaries amounted to
approximately $40,994,000, $41,832,000 and $28,458,000, respectively.
ITEM 2. PROPERTIES
United maintains executive and administrative offices at leased premises at 570
Lexington Avenue, New York, N.Y., which lease expires in August 2008. The
following is a tabulation of the principal properties owned or leased by
United's subsidiaries as at March 25, 1999.
<TABLE>
<CAPTION>
Approximate
Area Owned
Location Principal Use in Square Feet or Leased
- -------- ------------- -------------- ---------
<S> <C> <C> <C>
1510 East First Street Machine shop, steel fabrication, 194,910 floor space Owned in fee
Monroe, MI engineering and sales facilities of on 14.4 acres of land
Detroit Stoker (East Building)
1426 East First Street Assembly, shipping and administrative 101,000 floor space Owned in fee
Monroe, MI facilities of Detroit Stoker on 2.2 acres of land
(West Building)
15290 Fifteen Mile Road Foundry, 59,386 floor space Owned in fee
Marshall, MI Midwest Metallurgical on 28.4 acres of land
2735 W Fifth Assembly and Administrative Facility 59,000 Leased to
North Street of AAI November 30, 2002
Summerville, SC
21945 Three Noch Road Office Space of AAI 1,100 Leased to May 31,
Lexington Park, MD 2000
562 A&B North Dixie Blvd. Office Space of AAI 6,000 Leased to
Radcliffe, KY April 30, 1999
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Approximate
Area Owned
Location Principal Use in Square Feet or Leased
- -------- ------------- -------------- ---------
Industry Lane Manufacturing, engineering and 429,750 floor space Owned in fee
Hunt Valley, MD administrative facilities of AAI on 64 acres of land
Clubhouse Road Manufacturing, engineering and 148,000 Leased to
Hunt Valley, MD administrative facilities of AAI October 31, 2003
1701 Pollitt Drive Administrative, engineering and 30,000 Leased to June 30,
Fair Lawn, NJ manufacturing facilities 2001
of Symtron
1505 East Warner Avenue Manufacturing, engineering and 103,200 Leased to
Santa Ana, CA administrative facilities September 30, 1999
of ACL Technologies
1035 Semoran Boulevard Sublet 900 Leased to April
Winter Park, FL 30, 1999
</TABLE>
For information with respect to obligations for lease rentals, see Note 9 of the
Notes to Financial Statements in the Annual Report, which Note is incorporated
herein by reference. United considers its properties to be suitable and adequate
for its present needs. The properties are being substantially utilized.
ITEM 3. LEGAL PROCEEDINGS
The Company, along with numerous other parties, has been named in five tort
actions in Maricopa County Superior Court relating to environmental matters
based on allegations partially related to a predecessor's operation of a small
facility at a site in the State of Arizona that manufactured semi-conductors
between 1959 and 1960. All such operations of the Company were sold by 1961.
These tort actions seek recovery for personal injury and property damage among
other damages based on exposure to solvents allegedly released at the site.
These suits allege that the plaintiffs have been exposed to contaminated
groundwater in the Phoenix/Scottsdale, Arizona area and suffer increased risk of
disease and other physical effects. They also assert property damages under
various theories; seek to have certain scientific studies performed concerning
health risks, preventative measures and long-term effects; and seek incidental
and consequential damages, punitive damages, and an injunction against actions
causing further exposures.
The Company recently reached a written agreement in principle to settle all of
these matters with the plaintiffs for, among other items, a cash payment of
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$4,250,000. The settlement is subject to formal execution of a settlement
agreement and approval by the Superior Court of Maricopa County.
Detroit Stoker was notified in March 1992 by the Michigan Department of Natural
Resources ("MDNR") that it is a potentially responsible party in connection with
the clean-up of a former industrial landfill located in Port of Monroe,
Michigan. MDNR is treating the Port of Monroe landfill site as a contaminated
facility within the meaning of the Michigan Environmental Response Act ("MERA").
Under MERA, if a release or a potential release of a discarded hazardous
substance is or may be injurious to the environment or to the public health,
safety, or welfare, MDNR is empowered to undertake or compel investigation and
response activities in order to alleviate any contamination threat. Detroit
Stoker intends to aggressively defend these claims. At this time, no estimate
can be made as to the amount or range of potential loss, if any, to Detroit
Stoker with respect to this action.
The Company is involved in various other lawsuits and claims, including certain
other environmental matters, arising out of the normal course of its business.
In the opinion of management, the ultimate amount of liability, if any, under
pending litigation, including claims described above, will not have a materially
adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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.
<TABLE>
<CAPTION>
Age at
Name Position, Office December 31, 1998
---- ---------------- -----------------
<S> <C> <C>
Richard R. Erkeneff* -- President of the Company (since October 1995) and AAI 63
(since November 1993).
Robert Worthing -- Vice President and General Counsel of the Company (since 53
July, 1995); General Counsel of AAI (since April, 1992).
Susan Fein Zawel* -- Vice President, Corporate Communications and Associate 44
General Counsel (since June 1995), Secretary (since May
1994) and Counsel (1992 to 1995) of the Company.
James H. Perry -- Vice President (since May 1998), Chief Financial Officer 37
(since October, 1995) and Treasurer (since December 1994)
of the Company; and Senior Manager
(October 1992 to November 1994) at Ernst & Young LLP, an
accounting firm.
</TABLE>
- --------------------
* 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 number of record holders, which information is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Reference is made to the information set forth in the sections entitled
"Five-Year Financial Data" on page 49 of the Annual Report, which section is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to the information set forth in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" commencing on page 23 of the Annual Report, which section is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the information regarding Quantitative and Qualitative
Disclosures About Market Risk contained in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
commencing on page 23 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 29 through 47 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 Shareholders of United to
be held on May 11, 1999 (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, 1998, 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.
(3)(b)- Amended and Restated By-Laws of United (2).
(10)(a)- United Industrial Corporation 1994 Stock Option Plan, as
amended (3).
(10)(b) United Industrial Corporation 1996 Stock Option Plan for
Nonemployee Directors (4).
(10)(c)- Purchase Agreement, dated January 18, 1994, between
United and Symtron Systems, Inc. (1).
(10)(d)- Revolving Line of Credit Loan Agreement, Term Loan
Agreement and Security Agreement dated as of June 11,
1997 (amending and restating Credit Agreement dated as
of October 13, 1994) by and among First Union Commercial
Corporation and the Company, AAI Corporation, AAI
Engineering Support, Inc., AAI Systems Management, Inc.,
AAI/ACL Technologies, Inc., Detroit Stoker Company,
Midwest Metallurgical Laboratory, Inc., Neo Products
Co., Symtron Systems, Inc., UIC-Del. Corporation and AAI
MICROFLITE Simulation International Corporation (5).
(10)(e)- Pledge and Security Agreement dated as of October 13,
1994 by AAI in favor of the Agent (6).
(10)(f)- Pledge and Security Agreement dated as of October 13,
1994 by the Company in favor of the Agent (6).
(10)(g)- Security Agreement dated as of October 13, 1994 between
AAI and the Agent (6).
(10)(h)- Security Agreement dated as of October 13, 1994 between
each subsidiary of AAI, certain subsidiaries of the
Company and the Agent (6).
(10)(i)- Guaranty dated as of October 13, 1994 by the Company and
certain of its subsidiaries and by each subsidiary of
AAI in favor of the Agent (6).
(10)(j)- Employment Agreement dated December 8, 1998, between
United and Richard R. Erkeneff.
(10)(k)- Employment Agreement, dated January 8, 1996, between
United and Susan Fein Zawel (the "Zawel Employment
Agreement") (2).
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(10)(l)- Amendment dated as of January 11, 1999, between United
and Susan Fein Zawel to the Zawel Employment Agreement.
(10)(m)- Employment Agreement, dated February 9, 1996, between
United and James H. Perry (the "Perry Employment
Agreement") (2).
(10)(n)- Amendment dated as of September 29, 1996, between United
and James H. Perry to the Perry Employment Agreement
(7).
(10)(o)- Stock Purchase Agreement between All Weather, Inc. and
AAI Corporation dated September 30, 1997 (8).
(11)- Computation of Earnings Per Share.
(13)- United's 1998 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, filed
with the Securities and Exchange Commission on March 31,
1994, File No. 1-4252.
(2) Incorporated by reference to United's Annual Report on
Form 10-K for the year ended December 31, 1995.
(3) Incorporated by reference to United's Registration
Statement on Form S-8, filed with the Securities and
Exchange Commission on January 10, 1997.
(4) Incorporated by reference to United's Registration
Statement on Form S-8 filed with the Securities and
Exchange Commission on June 26, 1997.
(5) Incorporated by reference to United's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997.
(6) Incorporated by reference to United's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1994.
(7) Incorporated by reference to United's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996.
(8) Incorporated by reference to United's Current Report on
Form 8-K filed on October 17, 1997.
(b) - Reports on Form 8-K - United did not file any
reports on Form 8-K during the quarter ended December 31,
1998.
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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 30, 1999
-----------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Name Date
---- ----
/s/ Harold S. Gelb March 30, 1999
- -----------------------------------------------
Harold S. Gelb,
Chairman of the Board and Director
/s/ Joseph S. Schneider March 30, 1999
- -----------------------------------------------
Joseph S. Schneider, Director
/s/ Richard R. Erkeneff March 30, 1999
- -----------------------------------------------
Richard R. Erkeneff, President and
Chief Executive Officer and Director
/s/ Edward C. Aldridge, Jr. March 30, 1999
- -----------------------------------------------
Edward C. Aldridge, Jr., Director
/s/ E. Donald Shapiro March 30, 1999
- -----------------------------------------------
E. Donald Shapiro, Director
/s/ Susan Fein Zawel March 30, 1999
- -----------------------------------------------
Susan Fein Zawel,
Vice President and Director
/s/ James H. Perry March 30, 1999
- -----------------------------------------------
James H. Perry,
Vice President, Treasurer and
Chief Financial Officer (Principal
Financial and Accounting Officer)
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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, 1998
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, 1998, are incorporated by reference
in Item 8:
Consolidated Balance Sheets--December 31, 1998 and 1997
Consolidated Statements of Operations--
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
Notes to Financial Statements
The following consolidated financial statement schedule of United Industrial
Corporation and subsidiaries is included in Item 14(d):
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
F-2
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REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of United Industrial
Corporation and subsidiaries as of December 31, 1998 and 1997, and for each of
the three years in the period ended December 31, 1998, and have issued our
report thereon dated March 2, 1999. Our audits also included the financial
statement schedule listed in Item 14(d) of this Annual Report (Form 10-K). This
schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
New York, New York
March 2, 1999
F-3
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Schedule II -- Valuation and Qualifying Accounts
United Industrial Corporation and Subsidiaries
December 31, 1998
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
(1) (2)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) (DESCRIBE) PERIOD
----------- --------- -------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Deducted from asset account:
Allowance for doubtful accounts $ 240,000 $ 5,000 (B) $ 235,000
========= =========== =========
Product warranty liability $1,072,000 $ 432,000 (B) $ 640,000
========== ============= =========
Year ended December 31, 1997:
Deducted from asset account:
Allowance for doubtful accounts $ 245,000 $ 5,000(B) $ 240,000
========= ========== =========
Product warranty liability $ 579,000 $ 493,000 $1,072,000
========= ========= ==========
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $ 310,000 $ 65,000 (A) $ 245,000
========= ============ =========
Product warranty liability $ 650,000 $ 71,000 (B) $ 579,000
========= ============ =========
</TABLE>
(A) Uncollectible accounts written off, net of recoveries.
(B) Reduction of valuation account.
F-4
<PAGE>
EXHIBIT INDEX
Exhibit No.
-----------
(3)(a)- Restated Certificate of Incorporation of United.
(3)(b)- Amended and Restated By-Laws of United (2).
(10)(a)- United Industrial Corporation 1994 Stock Option Plan, as
amended (3).
(10)(b) United Industrial Corporation 1996 Stock Option Plan for
Nonemployee Directors (4).
(10)(c)- Purchase Agreement, dated January 18, 1994, between
United and Symtron Systems, Inc. (1).
(10)(d)- Revolving Line of Credit Loan Agreement, Term Loan
Agreement and Security Agreement dated as of June 11,
1997 (amending and restating Credit Agreement dated as
of October 13, 1994) by and among First Union Commercial
Corporation and the Company, AAI Corporation, AAI
Engineering Support, Inc., AAI Systems Management, Inc.,
AAI/ACL Technologies, Inc., Detroit Stoker Company,
Midwest Metallurgical Laboratory, Inc., Neo Products
Co., Symtron Systems, Inc., UIC-Del. Corporation and AAI
MICROFLITE Simulation International Corporation (5).
(10)(e)- Pledge and Security Agreement dated as of October 13,
1994 by AAI in favor of the Agent (6).
(10)(f)- Pledge and Security Agreement dated as of October 13,
1994 by the Company in favor of the Agent (6).
(10)(g)- Security Agreement dated as of October 13, 1994 between
AAI and the Agent (6).
(10)(h)- Security Agreement dated as of October 13, 1994 between
each subsidiary of AAI, certain subsidiaries of the
Company and the Agent (6).
(10)(i)- Guaranty dated as of October 13, 1994 by the Company and
certain of its subsidiaries and by each subsidiary of
AAI in favor of the Agent (6).
(10)(j)- Employment Agreement dated December 8, 1998, between
United and Richard R. Erkeneff.
(10)(k)- Employment Agreement, dated January 8, 1996, between
United and Susan Fein Zawel (the "Zawel Employment
Agreement") (2).
(10)(l)- Amendment dated as of January 11, 1999, between United
and Susan Fein Zawel to the Zawel Employment Agreement.
(10)(m)- Employment Agreement, dated February 9, 1996, between
United and James H. Perry (the "Perry Employment
Agreement") (2).
<PAGE>
(10)(n)- Amendment dated as of September 29, 1996, between United
and James H. Perry to the Perry Employment Agreement
(7).
(10)(o)- Stock Purchase Agreement between All Weather, Inc. and
AAI Corporation dated September 30, 1997 (8).
(11)- Computation of Earnings Per Share.
(13)- United's 1998 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, filed
with the Securities and Exchange Commission on March 31,
1994, File No. 1-4252.
(2) Incorporated by reference to United's Annual Report on
Form 10-K for the year ended December 31, 1995.
(3) Incorporated by reference to United's Registration
Statement on Form S-8, filed with the Securities and
Exchange Commission on January 10, 1997.
(4) Incorporated by reference to United's Registration
Statement on Form S-8 filed with the Securities and
Exchange Commission on June 26, 1997.
(5) Incorporated by reference to United's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997.
(6) Incorporated by reference to United's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1994.
(7) Incorporated by reference to United's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996.
(8) Incorporated by reference to United's Current Report on
Form 8-K filed on October 17, 1997.
RESTATED CERTIFICATE OF INCORPORATION
OF
UNITED INDUSTRIAL CORPORATION
Pursuant to the laws of the State of Delaware (particularly
Chapter 1, Title 8 of the Delaware Code, identified and referred to as the
"General Corporation Law of Delaware"), the undersigned, Bernard Fein and Howard
M. Bloch, being respectively the President and Secretary of UNITED INDUSTRIAL
CORPORATION, a corporation organized and existing under the laws of the State of
Delaware, do hereby certify as follows:
1. The name of the corporation is United Industrial
Corporation (the "Corporation") and the name under which the Corporation was
originally incorporated is Topp Industries Corporation.
2. The original Certificate of Incorporation of the
Corporation was filed with the Secretary of State of the State of Delaware on
September 14, 1959.
3. This Restated Certificate of Incorporation only restates
and integrates and does not further amend the provisions of the Certificate of
Incorporation of the Corporation as heretofore amended or supplemented and there
is no discrepancy between those provisions and the provisions of this Restated
Certificate of Incorporation.
4. The text of the Certificate of Incorporation as amended or
supplemented heretofore is hereby restated without further amendments or changes
to read as herein set forth in full:
"First. The name of the Corporation is United Industrial
Corporation.
Second. The address of the registered office of the
Corporation in the State of Delaware is 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name and address of the registered agent
of the Corporation in the State of Delaware is The Corporation Trust Company,
Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801.
Third. The nature of the business, or objects or purposes to
be transacted, promoted or carried on are:
A. To manufacture, purchase or otherwise acquire,
invest in, own, mortgage, pledge, sell, assign and transfer or
otherwise dispose of, trade, deal in and deal with aircraft
component parts and goods, wares and merchandise and personal
property of every class and description.
<PAGE>
B. To conduct researches, investigations and
examinations of businesses and enterprises of every kind and
description throughout the world with the aim of securing
information and particulars for the investment and employment
of capital.
C. To undertake and transact all kinds of business
relating to the gathering and distribution of financial and
investment information and statistics throughout the world.
D. To carry on the general business of managing and
operating businesses, investment companies, plants,
properties, investments, real estate and tangible and
intangible personal property of every class and description in
any of the States, districts, territories or colonies of the
United States, and in any and all foreign countries, subject
to the laws of such State, district, territory, colony or
country.
E. To maintain executive and operating personnel for
the purpose of advising and assisting others in accordance
with the purposes hereof.
F. To furnish plans and programs, to propose policies
and generally to advise and assist under contracts, or
otherwise, others in the management of their businesses,
plants, properties, investments, real estate and tangible and
intangible personal property of every class and description.
G. To conduct investigations in the fields of business,
engineering, mechanics and inventions, and to make reports
thereon.
H. To engage in consultant and advisory work in
connection with the organization, financing, management,
operation and reorganization of industrial and commercial
enterprises.
I. To manage and to provide management for and to
conduct, operate and supervise all or part of any and every
kind of business and to contract or arrange with any
corporation, association, partnership or individual for the
management, conduct, operation and supervision of all kinds of
businesses.
J. To acquire, and pay for in cash, stock or bonds of
this Corporation or otherwise, the good will, rights, assets
and property, and to undertake or assume the whole or any part
of the obligations or liabilities of any person, firm,
association or corporation.
K. To apply for, obtain, register, purchase, lease or
otherwise acquire, and to hold, use, pledge, lease, sell,
assign, or otherwise dispose of formulae, secret processes,
<PAGE>
distinctive marks, improvements, processes, trade names,
trade-marks, copyrights, patents, licenses, concessions and
the like, whether used in connection with or secured under
Letters Patent of or issued by any country or authority; and
to issue, exercise, develop and grant licenses in respect
thereof or otherwise turn the same to account.
L. To acquire by purchase, subscription or otherwise,
and to receive, hold, own, guarantee, sell, assign, exchange,
transfer, mortgage, pledge or otherwise dispose of or deal in
and with any of the shares of the capital stock, or any voting
certificates in respect of the shares of capital stock, scrip,
warrants, rights, bonds, debentures, notes, trust receipts,
and other securities, obligations, choses in action and
evidences of indebtedness or interest issued or created by any
corporations, joint stock companies, syndicates, associations,
firms, trusts or persons, public or private, or by the
government of the United States of America, or by any foreign
government, or by any state, territory, province, municipality
or other political subdivision or by any governmental agency,
and as owner thereof to possess and exercise all the rights,
powers and privileges of ownership, including the right to
execute consents and vote thereon, and to do any and all acts
and things necessary or advisable for the preservation,
protection, improvement and enhancement in value thereof.
M. To promote, cause to be organized, finance and aid
by loan, subsidy, guaranty or otherwise, any corporation,
association, partnership, syndicate, entity, person, or
governmental, municipal or public authority, domestic or
foreign, located in or organized under the laws of any
authority in any part of the world, any security of which is
held directly or indirectly by or for the Corporation, or in
the business, financing or welfare of which the Corporation
shall have any interest; and in connection therewith to
guarantee or become surety for the performance of any
undertaking or obligation of any of the foregoing, and to
guarantee by endorsement or otherwise the payment of the
principal of, or interest or dividends on, any such security,
and generally to do any acts or things designed to protect,
preserve, improve, or enhance the value of any such security.
N. To have one or more offices, to carry on all or any
of its operations and business and without restriction or
limit as to amount to purchase or otherwise acquire, hold,
own, mortgage, sell, convey or otherwise dispose of, real and
personal property of every class and description in any of the
states, districts, territories or colonies of the United
States, and in any and all foreign countries, subject to the
laws of such state, district, territory, colony or country.
O. To enter into any lawful arrangement for sharing
profits, union of interest, reciprocal concession or
cooperation with any corporation, association, partnership,
<PAGE>
syndicate, entity, person, or governmental, municipal or
public authority, domestic or foreign, located in or organized
under the laws of any authority in any part of the world, in
the carrying on of any business which the Corporation is
authorized to carry on, or any business or transaction deemed
necessary, convenient or incidental to carrying out any of the
purposes of the Corporation.
P. To enter into, make and perform contracts of every
kind and description with any person, firm, association,
corporation, municipality, county, state, body politic or
government or colony or dependency thereof.
Q. To borrow or raise moneys for any of the purposes of
the Corporation and, from time to time without limit as to
amount, to draw, make, accept, endorse, execute and issue
promissory notes, drafts, bills of exchange, warrants, bonds,
debentures and other negotiable or non-negotiable instruments
and evidences of indebtedness, and to secure the payment of
any thereof and of the interest thereon by mortgage upon or
pledge, conveyance or assignment in trust of the whole or any
part of the property of the Corporation, whether at the time
owned or thereafter acquired, and to sell, pledge or otherwise
dispose of such bonds or other obligations of the Corporation
for its corporate purposes.
R. To lend money, either without any collateral
security or on the security of real or personal property.
S. To make any guaranty respecting securities,
indebtedness, dividends, interest, contracts or other
obligations so far as the same may be permitted to be done
under the laws of the State of Delaware.
T. To purchase or otherwise acquire, hold, sell,
pledge, transfer or otherwise dispose of, and to reissue or
cancel the shares of its own capital stock or any securities
or other obligations of the Corporation in the manner and to
the extent now or hereafter permitted by the laws of the State
of Delaware.
U. To do everything necessary, proper, advisable or
convenient for the accomplishment of any of the purposes or
the attainment of any of the objects or the furtherance of any
of the powers herein set forth and to do every other act and
thing incidental thereto or connected therewith, provided the
same be not forbidden by the laws of the State of Delaware.
V. In general, to carry on any business and to have and
exercise all of the powers conferred by the laws of the State
of Delaware; and to do any and all the acts and things herein
set forth to the same extent as natural persons could do, and
<PAGE>
in any part of the world, as principal, factor, agent,
contractor, trustee or otherwise, either alone or in
syndicates or otherwise in conjunction with any person,
entity, syndicate, partnership, association or corporation,
governmental, municipal, or public authority, domestic or
foreign; to establish and maintain offices and agencies and to
exercise all or any of its corporate powers and rights
throughout the world.
The foregoing clauses shall be construed as powers as well as
objects and purposes, and the matters expressed in each clause shall, unless
herein otherwise expressly provided, be in nowise limited by reference to or
inference from the terms of any other clause, but shall be regarded as
independent objects, purposes and powers; and the enumeration of specific
objects, purposes and powers shall not be construed to limit or restrict in any
manner the meaning of general terms or the general powers of the Corporation;
nor shall the expression of one thing be deemed to exclude another not
expressed, although it be of like nature.
Fourth. The total number of shares of all classes of stock
which the Corporation shall have authority to issue is fifteen million
(15,000,000) shares, all of which shall be Common Stock, par value one dollar
($1.00) per share.
A. At all meetings of stockholders held for the election of
directors, voting shall be cumulative. Each holder of a share of stock shall be
entitled to cast as many votes as shall equal the number of votes to which his
shares would (except for this provision as to cumulative voting) be entitled in
voting for the election of directors multiplied by the number of directors for
whose election such shares are entitled to be voted, and such holder may cast
all of such votes for a single director or may distribute them among the number
to be voted for, or for any two or more of them, as he may see fit.
B. No holder of shares of any class of stock of the
Corporation shall be entitled, as such, to any preemptive rights to subscribe
for the purchase of or to receive any part of any issue of shares or of bonds,
notes, debentures or other securities convertible into shares of the Corporation
whether now or hereafter authorized or issued; and the Corporation shall have
the right from time to time, without offering the same to the holders of shares
of any class then outstanding, to issue and sell shares of any class or any such
bonds, notes, debentures or other securities convertible into shares, to such
person or persons as the Board of Directors shall from time to time determine.
As used in this Paragraph B, the expression "securities convertible into shares"
shall be deemed to include all bonds, notes, debentures or other evidences of
indebtedness to which are attached, or with which are issued, warrants or other
instruments evidencing the right to purchase or otherwise acquire shares of any
class of stock of the Corporation.
C. The number of directors of the Corporation shall be fixed
by the by-laws and may be altered from time to time as may be provided therein,
but in no event shall the number of directors of the Corporation be less than
five nor more than twenty. At the annual election of directors to be held at the
annual meeting of stockholders in 1970, the directors to be elected by the
<PAGE>
holders of all classes of stock entitled to vote therein shall be divided into
three classes, as nearly equal in number as may be, the term of office of each
class to expire at the third annual meeting of stockholders held after the
election of each class except that at the annual meeting of stockholders in 1970
the term of office of those of the first class shall expire at the first annual
meeting of stockholders after their election and the term of office of those of
the second class shall expire at the second annual meeting of stockholders after
their election. At each annual election held after such classification and
election to be held in 1970, each director shall be elected to a term of office
to expire at such future annual meeting of stockholders as is appropriate for
the class of directors to which he is elected. Any vacancies created in the
Board of Directors may be filled in accordance with the provisions of Section
223 of the General Corporation Law of Delaware. The affirmative vote of the
holders of not less than eighty percent (80%) of the outstanding shares of stock
of the Corporation entitled to vote shall be required to amend, alter or repeal
any of the provisions of this Paragraph C.
Fifth. The Corporation is to have perpetual existence.
Sixth. The private property of the stockholders shall not be
subject to the payment of corporate debts to any extent whatever.
Seventh. For the management of the business and for the
conduct of the affairs of the Corporation it is further provided:
A. In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized:
1. To make, alter or repeal the by-laws of the
Corporation, but any by-laws so made, altered or amended by
the Board of Directors may be altered, amended and repealed by
either the Board of Directors or the stockholders of the
Corporation.
2. To authorize and cause to be executed mortgages and
liens upon the real and personal property of the Corporation.
3. By resolution passed by a majority of the whole
Board, to designate one or more committees, each committee to
consist of two or more of the directors of the Corporation,
which, to the extent provided in the resolution or in the
by-laws of the Corporation, shall have and may exercise the
powers of the Board of Directors in the management of the
business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers which may
require it. Such committee or committees shall have such name
or names as may be stated in the by-laws of the Corporation or
as may be determined from time to time by resolution adopted
by the Board of Directors.
<PAGE>
4. To fix and determine and vary from time to time the
amount of working capital and reserve funds of the
Corporation; to determine whether any and, if any, what part
of the net profits of the Corporation or of its surplus or of
its net assets in excess of its capital shall be declared in
dividends and paid to the stockholders, and to direct and
determine the use and disposition of any such net profits or
of any such surplus or of any such net assets in excess of
capital.
5. To set apart out of any of the funds of the
Corporation available for dividends on any class of stock of
the Corporation a reserve or reserves of any proper purpose
and to abolish any such reserve in the manner in which it was
created.
6. To determine, from time to time, whether and to what
extent, and at what times and places and under what conditions
and regulations, the accounts and books of the Corporation
(other than the stock ledger) or any of them shall be open to
the inspection of the stockholders, and no stockholder shall
have any right to inspect any account, book or document of the
Corporation, except as conferred by the laws of the State of
Delaware, unless authorized by resolution of the Board of
Directors of the Corporation.
7. From time to time, to the extent now or hereafter
permitted by the laws of the State of Delaware, to sell,
lease, exchange, or otherwise dispose of any part of the
property and assets of this Corporation which the Board of
Directors deems it expedient and for the best interests of the
Corporation to dispose of, or disadvantageous to continue to
own, without assent of the stockholders by vote or otherwise;
and, pursuant to the written consent of the holders of a
majority of the shares of stock issued and outstanding having
voting power, or pursuant to the affirmative vote of the
holders of a majority of stock issued and outstanding having
voting power, given at a stockholders' meeting duly called for
that purpose, the Board of Directors shall have power and
authority, at any meeting, to sell, lease or exchange all of
the property and assets of the Corporation, including its
good-will and its corporate franchises, upon such terms and
conditions as the Board of Directors deems expedient and for
the best interests of the Corporation.
8. To remove at any time, for cause or without cause,
any officer or employee of the Corporation, or to confer such
power on any Committee or officer; provided, however, that any
officer elected or appointed by the Board of Directors may be
removed only by the affirmative vote of a majority of the
Board of Directors then in office.
9. To establish bonus, profit-sharing or other types of
incentive or compensation plans for the employees (including
officers) of the Corporation and to fix the amount of profits
<PAGE>
to be distributed or shared and to determine the persons to
participate in any such plans and the amounts of their
respective participations.
B. No director or officer of this Corporation shall, in the
absence of fraud and after disclosure, be disqualified by his office from
dealing or contracting with this Corporation either as vendor, purchaser or
otherwise, nor, in the absence of fraud, shall any transaction or contract of
this Corporation be void or voidable or affected by reason of the fact that any
such director or officer, or in any firm of which any such director or officer
is a member or an employee or any corporation of which any such director or
officer is an officer, director, stockholder or employee, has any interest in
such transaction or contract, whether or not adverse to the interest of the
Corporation, even though the vote of the director or directors or officer or
officers having such interest shall have been necessary to obligate the
Corporation upon such contract or transaction; and no director or directors or
officer or officers having such interest shall be liable to the Corporation or
to any stockholder or creditor thereof or to any other person for any loss
incurred by it under or by reason of any such contract or transaction; or shall
any such director or directors or officer or officers be accountable for any
gains or profits realized thereon.
C. Any contract, transaction or act of the Corporation or of
the Board of Directors or any Committee which shall be approved, ratified or
adopted by a majority of quorum of the stockholders entitled to vote at any
annual meeting or at any special meeting called for such purpose, shall be as
valid and binding as though ratified by every stockholder of the Corporation,
provided, however, that the fact that any such contract, transaction or act
shall not have been so approved, ratified or adopted, shall not be deemed in any
way to invalidate the same or to deprive the Corporation, its directors or
officers, of their right to proceed with such contract, transaction or action.
D. The Corporation shall indemnify any and all of its
directors or officers or former directors or officers or any person who may have
served at its request as a director or officer of another corporation in which
the Corporation owns shares of capital stock or of which it is a creditor
against expenses actually and necessarily incurred by them in connection with
the defense of any action, suit or proceeding in which they, or any of them, are
made parties, or a party, by reason of being or having been directors or
officers or a director or officer of the Corporation, or of such other
corporation, except in relation to matters as to which any such director or
officer or former director or officer or person shall be adjudged in such
action, suit or proceeding to be liable for negligence or misconduct in the
performance of duty. Such indemnification shall not be deemed exclusive of any
other rights to which those indemnified may be entitled under any by-law,
agreement, vote of stockholders, or otherwise. The Corporation shall have the
right to intervene in and to defend all such actions, suits or proceedings
brought against any such director or officer or former director or officer or
person. Whenever in this paragraph a director or officer or former director or
officer or a person is referred to, such reference shall be inclusive of his
heirs, executors and administrators.
<PAGE>
E. Each director of the Corporation and each member of any
committee designated by the Board of Directors shall, in the performance of his
duties, be fully protected in relying in good faith upon the books of account or
reports made to the Corporation by any of its officials, or by an independent
certified public accountant, or by an appraiser, selected with reasonable care
by the Board of Directors or by any such committee, or in relying in good faith
upon other records of the Corporation.
F. At all meetings of stockholders the voting for the election
of directors may be viva voce, but any qualified voter may demand a stock vote
whereupon such stock vote shall be taken by ballot, each of which shall state
the name of the stockholder voting and the number of shares voted by him, and if
such ballot be cast by proxy, it shall also state the name of such proxy.
This Corporation may by its by-laws confer powers on the Board
of Directors in addition to the foregoing and in addition to the powers and
authorities expressly conferred by law.
Eighth. Whenever a compromise or arrangement is proposed
between this Corporation and its creditors or any class of them and/or between
this Corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may, on the application in a
summary way of this Corporation or of any creditor or stockholder thereof, or on
the application of any receiver or receivers appointed for this Corporation
under the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
Ninth. Meetings of stockholders and directors may be held
outside the State of Delaware, if the by-laws so provide. The books of the
Corporation may be kept (subject to any provision contained in the statutes)
outside the State of Delaware at such place or places as may be designated from
time to time by the Board of Directors or in the by-laws of the Corporation.
Tenth. The Board of Directors may from time to time offer for
subscription, or otherwise issue or sell, or grant options for the subscription
to or purchase of, any or all of the authorized stock of the Corporation not
<PAGE>
then issued or which may have been issued and reacquired as Treasury stock by
the Corporation, except as provided in Article FOURTH, and any or all of any
increased stock of any class that may hereafter be authorized, for such
consideration as the directors may determine. The Board of Directors may, at the
time of such issue and sale, or at the time of granting of such options, specify
in amount or value the part of the consideration received on such issue and sale
over and above the par value of such stock, which shall be capital, and which
shall be surplus, respectively. Bonds, debentures, certificates of indebtedness,
or other securities may be issued, sold or disposed of pursuant to resolution of
the Board of Directors, for such consideration and upon such terms and
conditions as may be deemed advisable by the Board of Directors in the exercise
of its discretion.
Eleventh. If so determined by the Board of Directors, the
Corporation may from time to time receive money and/or other property as a
contribution to surplus, which contribution may consist of an undivided part of
moneys and/or other property, for another undivided part of which money and/or
other property, bonds, debentures, obligations and/or shares of stock, with
and/or without par value, of any class or classes of the Corporation are issued.
Against any surplus there may be charged from time to time any losses incurred
by the Corporation or any items of debt or stock discount and expense. Such
surplus may also be reduced from time to time by dividends or by transfer to
capital or to some other appropriate account, and the amount of capital may be
increased from time to time by the capitalization of surplus or net profits
without the issuance of additional shares.
Twelfth. A. The affirmative vote of the holders of not less
than eighty percent (80%) of the outstanding shares of stock of the Corporation
entitled to vote shall be required to authorize, adopt or approve:
1. any agreement for the merger or consolidation of the
Corporation or any subsidiary (as hereinafter defined) with or
into any Related Person (as hereinafter defined) or any
subsidiary of a Related Person;
2. any sale, lease, transfer, exchange, mortgage,
pledge or other disposition, directly or indirectly, to any
Related Person or any subsidiary of a Related Person of all or
substantially all of the assets of the Corporation or any
subsidiary of the Corporation, or any portion of such assets
having a fair market value at the time of the proposed
transaction equal to or greater than fifty percent (50%) of
the then fair market value of the total assets of the
Corporation or of such subsidiary of the Corporation; or
3. the issuance or delivery by the Corporation or any
subsidiary of the Corporation of any voting securities of the
Corporation or such subsidiary having a fair market value at
the time of such transaction of $1,000,000 or more in exchange
or payment for securities, property or other assets of any
Related Person. For the purposes hereof, the term Related
<PAGE>
Person shall mean a person (as hereinafter defined) who or
which, either alone or together with his or its affiliates (as
hereinafter defined) and associates (as hereinafter defined),
is, as of the date the proposed transaction is approved by the
Board of Directors of the Corporation or such subsidiary, the
beneficial owner (as hereinafter defined) of five percent (5%)
or more of the outstanding securities of the Corporation
entitled at the time to vote for the election of directors,
but the term Related Person shall specifically exclude any
corporation a majority of the outstanding voting securities of
which is, at the time, owned of record or beneficially by the
Corporation or any one or more of its subsidiaries. In making
the foregoing determination, the outstanding securities of the
Corporation shall not include shares owned by the Corporation
or any of its subsidiaries or shares or other voting
securities which may be issuable pursuant to any agreement or
upon the exercise of any conversion rights, warrants or
options.
B. As used in this Article TWELFTH, the following terms
shall have the meanings set forth below:
1. an "affiliate" of a specified person shall mean any
person who or which directly, or indirectly through one or
more intermediaries, controls, or is controlled by, or is
under common control with, the specified person;
2. an "associate" of a specified person shall mean (i)
any person of which such specified person is an officer,
director, partner or the beneficial owner, directly or
indirectly, of ten percent (10%) or more of any class of
equity securities, (ii) any trust or other estate in which
such specified person has a substantial or beneficial interest
or as to which such specified person serves as trustee or in a
similar fiduciary capacity, (iii) any relative or spouse of
such specified person, or any relative of such spouse, who has
the same home as such specified person or who is a director or
officer of such specified person or any corporation which
controls or is controlled by such specified person, or (iv)
any other member or partner of or in a partnership, limited
partnership, syndicate or other group of which the specified
person is a member or partner and which is acting together for
the purpose of acquiring, holding or disposing of securities
of the Corporation;
3. any specified person shall be deemed to be the
"beneficial owner" of securities of the Corporation which (i)
such specified person or any of its affiliates or associates
owns, directly or indirectly, whether of record or not, (ii)
such specified person or any of his or its affiliates or
associates has the right to acquire pursuant to any agreement,
upon the exercise of conversion rights, warrants or options,
or otherwise, or (iii) are beneficially owned, directly or
indirectly (including securities deemed owned through
<PAGE>
application of clauses (i) and (ii) above), by any other
person with whom or which such specified person or any of his
or its affiliates or associates has any agreement, arrangement
or understanding for the purpose of acquiring, holding, voting
or disposing of securities of the Corporation;
4. the term "person" shall include a natural person,
corporation, trust, partnership, joint venture, association or
other entity; and
5. a "subsidiary" of a specified person shall mean a
corporation of which fifty percent (50%) or more of the
outstanding voting securities are owned, directly or
indirectly, with power to vote by such specified person or a
subsidiary of such specified person.
C. The Board of Directors of the Corporation shall have the
power and duty to determine, for purposes of this Article TWELFTH, on the basis
of information known to such Board:
1. the fair market value of any assets of the
Corporation or any subsidiary thereof proposed to be disposed
of in a transaction of the character referred to in paragraph
(1)(b) of this Article TWELFTH and the fair market value of
the total assets of the Corporation or such subsidiary;
2. whether any person referred to in paragraph (1) of
this Article TWELFTH owns beneficially five percent (5%) or
more of the outstanding securities of the Corporation entitled
to vote for the election of directors;
3. the fair market value of any voting securities
issuable or deliverable by the Corporation or any subsidiary
thereof in a transaction of the character referred to in
paragraph (1)(c) of this Article TWELFTH; and
4. whether any person is an affiliate or associate of
any other person.
Any such determination shall be conclusive and binding for all
purposes of this Article TWELFTH.
D. The affirmative vote of the holders of not less than eighty
percent (80%) of the outstanding shares of stock of the Corporation entitled to
vote shall be required to amend, alter or repeal any of the provisions of this
Article TWELFTH.
Thirteenth. The Corporation reserves the right to create any
additional preferred or special stocks or to amend, alter, change or repeal any
<PAGE>
provisions contained in this instrument, or any amendment of the provisions
thereof, in the manner now or hereafter provided by the laws of the State of
Delaware, and all rights of the stockholders of the Corporation, except as in
this instrument otherwise provided, are granted subject to these reservations.
Fourteenth. No director shall be personally liable to the
Corporation or any stockholder for monetary damages for breach of fiduciary duty
as a director, except for any matter in respect of which such director shall be
liable under Section 174 of Title 8 of the Delaware Code (relating to the
Delaware General Corporation Law) or any amendment thereto or successor
provision thereto or shall be liable by reason that, in addition to any and all
other requirements for such liability, he (i) shall have breached his duty of
loyalty to the Corporation or its stockholders, (ii) shall not have acted in
good faith or, in failing to act, shall not have acted in good faith, (iii)
shall have acted in a manner involving intentional misconduct or a knowing
violation of law or, in failing to act, shall have acted in a manner involving
intentional misconduct or a knowing violation of law or (iv) shall have derived
an improper personal benefit. Neither the amendment nor repeal of this Article
FOURTEENTH, nor the adoption of any provision of the Certificate of
Incorporation inconsistent with this Article FOURTEENTH, shall eliminate or
reduce the effect of this Article FOURTEENTH, in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article
FOURTEENTH, would accrue or arise, prior to such amendment, repeal or adoption
of an inconsistent provision."
5. This Restated Certificate of Incorporation was duly adopted
by the Board of Directors of the Corporation in accordance with Section 245 of
the General Corporation Law of Delaware.
6. This Restated Certificate of Incorporation shall be
effective upon filing with the Secretary of State of the State of Delaware
pursuant to Section 103 of the General Corporation Law of Delaware.
<PAGE>
IN WITNESS WHEREOF, UNITED INDUSTRIAL CORPORATION has caused
this Restated Certificate of Incorporation to be signed by Bernard Fein, its
President, and attested by Howard M. Bloch, its Secretary, this 13th day of
October, 1993.
UNITED INDUSTRIAL CORPORATION
By: /s/ Bernard Fein
------------------------------
Bernard Fein
President
Attest:
By: /s/ Howard M. Bloch
-------------------------------
Howard M. Bloch
Secretary
EMPLOYMENT AGREEMENT
AGREEMENT made this 8th day of December, 1998, by and between
UNITED INDUSTRIAL CORPORATION, a Delaware corporation having an address at 570
Lexington Avenue, New York, New York 10022 (hereinafter called "Employer"), and
RICHARD R. ERKENEFF, having an address at 1901 Corbridge Lane, Monkton, Maryland
21111 (hereinafter called "Employee").
W I T N E S S E T H :
In consideration of the mutual covenants hereinafter
contained, the parties hereto agree as follows:
1. Employment. Employer agrees to employ Employee and Employee
agrees to serve Employer upon the terms and conditions hereinafter set forth.
2. Term. Subject to Employee being employed by Employer as its
Chief Executive Officer on December 31, 1998, the employment of Employee
hereunder shall be effective and shall commence on January 1, 1999 (the
"Effective Date") and shall terminate as of the close of business on June 30,
2001 (the "Termination Date"). The period from the Effective Date through the
Termination Date is referred to as the term of this Agreement.
3. Duties and Extent of Services. Employee agrees to serve
Employer and its subsidiary companies faithfully and to the best of his ability
under the direction of the Board of Directors of Employer, devoting his entire
business time, energy and skill to his duties hereunder; provided that, subject
to the approval of the Board of Directors of Employer, Employee may serve on the
board of directors of companies other than Employer and its subsidiaries. The
principal place of employment of Employee shall be at the offices of AAI
Corporation ("AAI"), a
<PAGE>
subsidiary of Employer, which are currently located in Hunt Valley, Maryland.
Employee understands and agrees, however, that in connection with his employment
hereunder, he may be required from time to time to travel on behalf of Employer.
The principal duties of Employee shall be to serve as
President and Chief Executive Officer of Employer and AAI and, in such capacity,
to render such managerial, administrative and other services to Employer and AAI
and their subsidiaries as normally are associated with and incident to such
positions as Employer from time to time may require of him. If, during the term
of this Agreement, the Board of Directors of Employer so determines, in its
absolute discretion, to elect Employee to any additional office of Employer or
its subsidiary companies consistent with his position, or a director of Employer
or its subsidiary companies, Employee agrees to accept and serve in such office
or capacity, for no additional compensation or remuneration.
4. Compensation.
(a) Salary. Employer agrees to pay (or to cause AAI to pay) to
Employee, as compensation for all of the services to be rendered by Employee
under or pursuant to this Agreement, a salary at the rate of four hundred forty
thousand dollars ($440,000) per annum, commencing as of the Effective Date,
payable in accordance with Employer's normal payroll practices. Such salary
shall be subject to annual review by Employer's Board of Directors and, at the
discretion of the Board, may be increased, but not decreased below such amount.
Employee shall also be eligible to receive annual bonuses as may be granted by
Employer's Board of Directors pursuant to Employer's Performance Sharing Plan
("PSP") formula, plus an amount up to forty percent (40%) of the PSP formula in
the sole
2
<PAGE>
discretion of Employer's Board of Directors; provided, however, that the total
bonus to which Employee is entitled pursuant to this Section 4(a) shall in no
event be greater than three hundred thirty thousand dollars ($330,000) per
annum.
(b) Employee Benefit Plans. During the term of this Agreement,
Employee shall be eligible to participate in any life insurance, medical,
retirement, pension or profit-sharing, disability or other benefit plans or
arrangements now or hereafter generally made available by Employer or AAI to
executive employees of Employer or AAI to the extent Employee qualifies under
the provisions of any such plans. Subject to the foregoing, Employer and AAI
shall have the right to change insurance companies and modify insurance policies
covering employees of Employer and AAI. Employer agrees to provide (or to cause
AAI to provide) medical coverage to Employee after retirement at age 65 1/2
consistent with such coverage then provided to Employer's executive employees.
Such coverage shall be provided either through Employer's or AAI's plan or a
private plan, at Employer's option, but only if and to the extent Employee does
not receive such coverage from another source. Employer shall purchase and keep
in effect during the term of this Agreement a key man life insurance policy with
respect to Employee in the amount of not less than $200,000, provided that
Employer is able to obtain a policy in the amount of $5,000,000 and that
Employee is insurable at normal premium rates for such a policy. Employee shall
designate the beneficiary as to $200,000 of such policy, and Employer shall be
the beneficiary as to any portion of such policy in excess of such amount.
3
<PAGE>
(c) Stock Options. Employer shall grant to Employee on the
first business day after the Effective Date options to acquire 100,000 shares of
common stock of Employer pursuant to the terms of Employer's 1994 Stock Option
Plan (the "Plan") and the grant letter in the form annexed hereto as Exhibit A.
The exercise price of such options shall be equal to the fair market value of
such common stock as of the grant date.
(d) Vacation. Employee shall be entitled to four (4) weeks
vacation with pay per year.
(e) Taxes. Employee understands that any and all payments
described in this Agreement will be subject to such tax treatment as applies
thereto, and to such withholding as may be required under applicable tax laws.
5. No Competition. Employee agrees that during the term of
this Agreement he will not, within the continental United States, directly or
indirectly, engage or participate or make any financial investments in or become
employed by or render advisory or other services to or for any person, firm or
corporation, or in connection with any business activity, other than that of
Employer and its subsidiary companies, directly or indirectly in competition
with any of the business operations or activities of Employer and its subsidiary
companies. Nothing herein contained, however, shall restrict Employee from
making any investments in any company whose stock is listed on a national
securities exchange or actively traded in the over-the-counter market, so long
as such investment does not give him the right to control or influence the
policy decisions of any such business or enterprise which is or might be
directly or indirectly in competition with any of such business operations or
activities of Employer or any of its subsidiary companies.
4
<PAGE>
6. Confidentiality; etc.
(a) Employee will not divulge, furnish or make accessible to
anyone (other than in the regular course of business of Employer or any of its
subsidiary companies) any knowledge or information with respect to confidential
or secret methods, processes, plans or materials of Employer or any of its
subsidiary companies, or with respect to any other confidential or secret
aspects of the business of Employer or any of its subsidiary companies.
(b) Employee agrees to communicate and to make known to
Employer all knowledge possessed by him relating to any methods, developments,
inventions and/or improvements, whether patented, patentable or unpatentable
which concerns in any way the business of Employer or any of its subsidiary
companies or the general industry of which they are a part, from the time of
entering upon employment until the termination thereof, and whether acquired by
Employee before or during the term of his employment; provided, however, that
nothing herein shall be construed as requiring any such communication where the
method, development, invention and/or improvement is lawfully protected from
disclosure as the trade secret of a third party, including, without limitation,
any former employer of Employee or by any other lawful bar to such
communication.
(c) Any methods, developments, inventions and/or improvements,
whether patentable or unpatentable, along the lines of the business of Employer
or any of its subsidiary companies, which Employee may conceive of or make while
in the employ of Employer, shall be and remain the property of Employer.
Employee agrees promptly to communicate and disclose all such methods,
developments, inventions and/or improvements to Employer and to
5
<PAGE>
execute and deliver to Employer any instruments deemed necessary by Employer to
effect disclosure and assignment thereof to it. Employee further agrees, on
request of Employer, to execute patent applications based on such methods,
developments, inventions and/or improvements, including any other instruments
deemed necessary by Employer for the prosecution of such patent applications or
the acquisition of Letters Patent in the United States and/or any foreign
countries.
(d) Employee agrees that for a period of three (3) years from
and after the termination or expiration of his employment by Employer, whether
pursuant to the terms of this Agreement or otherwise, he will not:
(i) directly or indirectly solicit, raid, entice or induce any
employee of Employer or of any of its subsidiary companies to be employed by any
person, firm or corporation which is, directly or indirectly, in competition
with the business or activities of Employer or any of its subsidiary companies;
or
(ii) directly or indirectly approach any such employee for
these purposes; or
(iii) authorize or knowingly approve the taking of such
actions by other persons on behalf of any such person, firm or corporation, or
assist any such person, firm or corporation in taking such action; or
(iv) directly or indirectly solicit, raid, entice or induce
any person, firm or corporation (other than the U.S. Government or its agencies)
who or which on the date hereof is, or at any time during the period of
employment hereunder shall be, a customer of Employer or of any of its
subsidiary companies to become a customer for the same or similar products which
6
<PAGE>
it purchased from Employer or any of its subsidiary companies, of any other
person, firm or corporation, and Employee shall not approach any such customer
for such purpose or authorize or knowingly approve the taking of such actions by
any other person.
(e) Employee agrees that during the term of his employment by
Employer, whether under this Agreement or otherwise, he will not at any time
enter into, on behalf of Employer or any of its subsidiary companies, or cause
Employer or any of its subsidiary companies to enter into, directly or
indirectly, any transactions with any business organization in which he or any
member of his immediate family may be interested as a partner, trustee,
director, officer, employee, shareholder, lender of money or guarantor.
7. Injunctive Relief. Employee acknowledges that the services
to be rendered by him hereunder are of a special, unique and extraordinary
character and that it would be very difficult or impossible to replace such
services and further that irreparable injury would be sustained by Employer and
its subsidiary companies in the event of a violation by Employee of any of the
provisions of this Agreement, and by reason thereof Employee consents and agrees
that if he violates any of the provisions of this Agreement, Employer shall be
entitled to an injunction to be issued by any court of competent jurisdiction
restraining him from committing or continuing any violation of this Agreement.
8. Survival of Provisions. The provisions of Sections 5, 6 and
7 hereof shall survive the termination or expiration of this Agreement,
irrespective of the reason therefor.
7
<PAGE>
9. Expenses. Employer shall reimburse Employee for all
reasonable expenses properly incurred by him on behalf of Employer in the
performance of his duties hereunder, provided that proper vouchers are submitted
to Employer by Employee evidencing such expenses and the purposes for which the
same were incurred.
10. Disability. If Employee shall be incapacitated by reason
of mental or physical disability or otherwise during the term of this Agreement
so that he is prevented from performing his principal duties and services
hereunder for a period of three (3) consecutive months or one or more periods
aggregating three (3) months during any twelve (12) month period, Employer shall
have the right to terminate this Agreement by sending written notice of
termination to Employee, and thereupon his employment pursuant to this Agreement
shall terminate and Employee shall be entitled to no further payments hereunder,
other than (i) for any compensation due pursuant to Section 4 hereof through the
date of such termination, (ii) the reimbursement, pursuant to Section 9 hereof,
of any expenses incurred prior to the date of such termination, and (iii) the
continuation of Employee's base salary pursuant to Section 4(a) hereof for a
period of six (6) months from the date of such termination, but not beyond the
Termination Date or the date on which Employee shall commence to receive
benefits pursuant to Employer's long term disability plan, as then in effect.
11. Death. In the event of the death of Employee during the
term hereof, this Agreement shall automatically terminate and Employer shall
have no further obligations hereunder, other than to pay to Employee's estate
any compensation due pursuant to Section 4 hereof through the date of such
termination and to reimburse, pursuant to Section 9 hereof, any expenses
incurred by Employee through the date of such termination. Employer, however,
may pay to Employee's
8
<PAGE>
estate an additional amount equal to up to six (6) months' salary and bonus, in
the sole discretion of Employer's Board of Directors.
12. Termination by Employer for Cause. Employer shall have the
right to terminate the employment of Employee under this Agreement as well as
any and all payments to be made hereunder, other than for any compensation due
pursuant to Section 4 hereof through the date of such termination and any
reimbursement, pursuant to Section 9 hereof, of expenses incurred by Employee
through the date of such termination, if Employee shall commit any of the
following acts of default:
(i) Employee shall have committed any material breach of any
of the provisions or covenants set forth herein; or
(ii) Employee shall have committed any act of gross negligence
in the performance of his duties or obligations hereunder; or
(iii) Employee shall have committed any material act of
dishonesty or breach of trust against Employer or any of its subsidiary
companies; or (iv) Employee's conviction of, or plea of nolo contendere to, a
felony.
If Employer elects to terminate this Agreement as set forth
above, Employer shall send written notice to Employee terminating this Agreement
and describing the action of Employee constituting the act of default, and
thereupon no further payments of any type shall be made or shall be payable to
Employee hereunder notwithstanding any other provisions of this Agreement,
except as set forth in the first sentence of this Section 12.
9
<PAGE>
13. No Conflicting Agreements. Employee represents and
warrants that he is not a party to any agreement, contract or understanding,
whether employment or otherwise, which would in any way restrict or prohibit him
from undertaking or performing employment in accordance with the terms and
conditions of this Agreement.
14. Entire Agreement. This Agreement and Exhibit A hereto set
forth the entire understanding of the parties with respect to the subject matter
hereof, and no statement, representation, warranty or covenant has been made by
either party except as expressly set forth herein. This Agreement shall not be
changed or terminated orally. This Agreement supersedes and cancels all prior
agreements between the parties, whether written or oral, relating to the
employment of Employee on or after the Effective Date. Upon the Effective Date,
the Employment Agreement dated March 26, 1996 between Employer and Employee
shall be cancelled and shall be of no further force or effect.
15. Applicable Law. This Agreement shall be governed by,
construed and enforced in accordance with the laws of the State of New York,
without regard to its conflict of laws principles.
16. Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if personally delivered, telecopied or mailed, first class, postage
prepaid, certified mail, return receipt requested, to each of the parties at its
or his address above written or as set forth beneath their signatures below or
at such other address or telecopy number as either of the parties may designate
in conformity with the foregoing.
17. Section Headings. The section headings set forth in this
Agreement are for convenience only and shall not be considered as part of this
Agreement in any respect nor shall they in any way affect the substance of any
provisions contained in this Agreement.
10
<PAGE>
18. Successors and Assigns. This Agreement shall not be
assignable by Employee. All of the terms and provisions of this Agreement shall
be binding upon and inure to the benefit of and be enforceable by the respective
heirs and personal representatives of Employee and the successors and assigns of
Employer.
19. Severability. If, at any time subsequent to the date
hereof, any provision of this Agreement shall be held by any court of competent
jurisdiction to be illegal, void or unenforceable, such provision shall be of no
force and effect, but the illegality or unenforceability of such provision shall
have no effect upon and shall not impair the enforceability of any other
provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
UNITED INDUSTRIAL CORPORATION
By: /s/ Robert W. Worthing
------------------------------------
Name: Robert W. Worthing
Title: VP & General Counsel
Telecopy No.: (212) 838-4629
/s/ Richard R. Erkeneff
------------------------------------
RICHARD R. ERKENEFF
January 11, 1999
Ms. Susan Fein Zawel
31 Harrows Lane
Purchase, New York 10577
Dear Ms. Fein Zawel:
Reference is made to the Employment Agreement (the "Agreement") dated
January 8, 1996 between United Industrial Corporation and you. Terms defined in
the Agreement are used herein as so defined. The Agreement is hereby amended as
follows:
1. Paragraph 2 is amended to change the Termination Date to June 30,
2001.
2. Clause (iii) at the end of Paragraph 3 is amended to delete the
reference to six (6) months and to substitute one (1) year
therefor.
3. Paragraph 4(a) is amended to change Employee's salary effective
as of January 1, 1999 to one hundred fifty-one thousand four
hundred ten dollars (151,410).
4. Paragraph 16 is amended to change the Employer's address for
notices to the address set forth above.
Except as amended hereby the Agreement is hereby ratified and confirmed
and shall remain in full force and effect.
<PAGE>
Ms. Susan Fein Zawel
January 11, 1999
Page 2
Kindly confirm your agreement to the foregoing by signing below where
indicated and returning a signed copy to the undersigned.
Very truly yours,
UNITED INDUSTRIAL CORPORATION
By: /s/ Richard R. Erkeneff
-----------------------------------
Richard R. Erkeneff, President
Confirmed and Agreed To:
Susan Fein Zawel
- -------------------------
Susan Fein Zawel
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income $13,011,000 $14,825,000 $6,404,000
============ ============== ==============
Basic:
Weighted average shares 12,306,763 12,194,885 12,172,697
Dilutive stock options--based on
treasury stock method using
average market price 302,076 225,236 38,376
------------ -------------- --------------
Dilutive potential Common Shares 12,608,839 12,420,121 12,211,073
============ ============== ==============
Earnings per share:
Basic $ 1.06 $ 1.22 $ .53
======== ======== =======
Diluted $ 1.03 $ 1.19 $ .52
======== ======== =======
</TABLE>
UIC
ANNUAL REPORT
1998
UNITED INDUSTRIAL
CORPORATION
<PAGE>
United Industrial Corporation
United Industrial Corporation is a high technology company focused on the design
and production of defense, training, transportation, and energy systems.
Its products include unmanned air vehicles, training and simulation systems,
automated aircraft test and maintenance equipment, and ordnance systems.
It also manufactures ground transportation components, combustion equipment for
biomass and refuse fuels, and specialized firefighter training installations.
Contents
1 Financial Highlights
2 Letter to Shareholders
6 Simulation and Test Systems
14 Unmanned Air Vehicles
16 Engineering and Maintenance Services
18 Transportation Systems
20 Energy Systems
22 Board of Directors
23 Management's Discussion
29 Consolidated Financial Statements
33 Notes to Financial Statements
48 Report of Independent Auditors
49 Five-Year Financial Data
50 Corporate Organization
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 204,305 $ 235,183 $ 220,822
- ---------------------------------------------------------------------------------------
Net income 13,011 14,825 6,404
- ---------------------------------------------------------------------------------------
Earnings per share
basic 1.06 1.22 .53
diluted 1.03 1.19 .52
- ---------------------------------------------------------------------------------------
Earnings before special items(a) 10,343 6,981 5,850
- ---------------------------------------------------------------------------------------
Dividends paid per share .40 .29 .20
- ---------------------------------------------------------------------------------------
Shareholders equity 109,441 102,024 90,145
Shareholders equity per share 8.93 8.33 7.40
- ---------------------------------------------------------------------------------------
Sales backlog as of year end $ 210,000 $ 188,000 $ 159,000
- ---------------------------------------------------------------------------------------
Shares outstanding 12,250,000 12,249,000 12,174,000
- ---------------------------------------------------------------------------------------
</TABLE>
Return on Shareholders' Earnings per Diluted Share Backlog(b)
Equity(a) before Special Items(a) As of December 31
For the Year For the Year Ending Dollars in millions
Ending December 31 December 31
Percent In dollars
'96 '97 '98 '96 '97 '98 '96 '97 '98
- --- --- --- --- --- --- --- --- ---
6.5 6.8 9.5 $.48 $.56 $.82 $128 $188 $210
- ------------------ ------------------- -------------------
'97-'98 40% '97-'98 46% '97-'98 12%
Defense
Transportation
Energy
(a)Excludes the effect of special items and income from divested businesses.
See pages 23-25 for further information.
(b)Excludes Weather Systems backlog in 1996.
1
<PAGE>
To Our Shareholders
1998 was a year of great accomplishment for United Industrial Corporation. We
achieved growth in key business areas, generated a significant increase in
earnings, and delivered on our commitments to meet, if not exceed, our
customers expectations. At the same time, weve been laying the groundwork to
continue our momentum in the years ahead by building a healthy backlog of
work, by reinforcing our leadership positions in key markets, and by making
changes in our organization to further improve our performance. Above all, we
have remained firmly focused on the objectives laid out in our Strategic
Business Plan two years ago.
Under this program, we have been concentrating our resources and energies
on building our core defense and technology businesses, as well as improving
Transportation Systems and Energy Systems. Through targeted strategies that take
advantage of our strengths in niche markets, we have been successful in growing
many key businesses, expanding our customer base, and broadening our
international reach. As part of the Plan, we exited non-core business areas, and
we are making selected investments to enhance our existing competencies,
including strengthening our research and development efforts.
EARNINGS BEFORE SPECIAL ITEMS INCREASED 47%;
BALANCE SHEET REMAINS STRONG
The successful implementation of our business strategy led to a substantial
increase in earnings in 1998. Net income, before special items, increased 47% to
$10,343,000, or $.82 per diluted share,
compared to net income, before special items
Revenues by Segment and excluding income from operations divested
(Pie Chart Omitted) in Fall 1997, of $6,981,000, or $.56 per
diluted share, reported in 1997. The 1998
Transportation Systems $16.7m results include a $2,696,000 after-tax gain
Energy Systems $34.5m related to the sale of property and after-tax
Defense Systems $153.2m income of $2,920,000 related to the favorable
resolution of a tax matter, partially offset
by a $2,948,000 after-tax charge related to
the settlement of an environmental lawsuit in Arizona. Including these items,
net income for 1998 was $13,011,000 or $1.03 per diluted share, compared to net
income, including special items and income from divested businesses, of
$14,825,000, or $1.19 per diluted share,
2
<PAGE>
in 1997. This excellent performance reflects the ongoing strength of our core
defense-related businesses, as well as significant growth in some of our newer
enterprises, including Engineering Support Inc., which provides engineering and
maintenance services to government customers; AAI/ACL Technologies, which
produces fluid test equipment; and Symtron
Systems, which manufactures firefighter training
systems. In addition, we have continued to control We are laying the
our costs very carefully, contributing to the groundwork to continue
strong earnings increase. our momentum
Net sales in 1998 reached $204.3 million, compared to net sales, excluding
businesses divested in Fall 1997, of $205.3 million last year. Including sales
from those divested businesses, net sales in 1997 were $235.2 million. While
1998 sales were affected by the timing of certain contracts, a key priority of
our management team in 1999 is to generate profitable revenue growth that will
continue in the years ahead. The solid 12% increase in our backlog to $210
million at year-end 1998 from $188 million at year-end 1997 gives us a head
start in meeting this goal.
The Companys excellent balance sheet Our excellent balance
continues to be a great strength and we have no sheet remains a great
borrowings. In fact, based on our sound financial strength
position, in August 1998 the Board of Directors
authorized the Company to repurchase up to $1.5
million of its common stock for cash, as a means to enhance value for our
shareholders. We continue to believe the repurchase of United Industrial common
stock is an excellent investment and will consider buying back additional shares
in the future.
STRATEGIC FOCUS ON CORE BUSINESSES
In line with our Strategic Business Plan, we have been building our presence in
the following primary areas:
o Simulation & Test Systems, including defense contracts for the U.S.
government, foreign governments, and other commercial customers, as
well as simulation systems for firefighter training;
o Unmanned Air Vehicles (UAVs), including the successful Pioneer and
Shadow UAV programs;
3
<PAGE>
[Photo of Richard R.
Erkeneff Omitted]
Richard R. Erkeneff,
President and Chief
Executive Officer
o Engineering & Maintenance Services, a growing market due to customers
increased outsourcing of non-core, technical services;
o Transportation Systems, including the overhaul of rail passenger
transit vehicles, an emerging U.S. market;
o Energy Systems, a market with new opportunities in the production of
equipment for alternative energy sources.
We made important strides in each of these areas and are optimistic about
the contribution each will make to United Industrials future growth.
The transportation systems market has presented challenges and
opportunities during the last three years. In Fall 1998, we initiated a major
realignment of this business, to better focus our operations and achieve
profitability. While we have been very successful in recent years in winning new
contracts, we needed to do a better job on execution and, particularly, on
controlling costs. As a result, we brought on board a transportation industry
veteran, Raleigh L. Huntsman, with 40 years of experience. With his leadership,
we are now targeting specific segments of the transportation industry where we
see the most growth potential, particularly the vehicle overhaul business. In
addition, we are making additional changes in our organization to maximize
productivity and lower operating costs. We believe these steps will enable us to
build a stronger, profitable business in the transportation systems marketplace.
In conjunction with focusing on our key business areas, an important
element of our growth strategy has been to expand the international component of
our business. We have actively targeted new opportunities abroad, particularly
in Europe, the Far East, Egypt and Canada, and
have established a greater presence in markets
International sales where we see considerable potential. Due to our
rose in several of our efforts, we achieved increases in international
business areas sales in several of our business areas, most
significantly in our AAI/ACL Technologies
subsidiary. Among the programs underway are
contracts for British Airways, the Spanish Navy, the Republic of China Air
Force, and the Romanian Ministry of Defense.
4
<PAGE>
[Photo of Harold S.
Gelb Omitted]
Harold S. Gelb,
Chairman of the Board
AWARDED DEFENSE DEPARTMENT'S HIGHEST CERTIFICATION
Beyond these initiatives, at the very core of our success in 1998 was the
continued commitment of each of our Associates to deliver a high-quality product
that meets - or exceeds - our customers needs. We were greatly honored when our
efforts were recognized by the Department of Defense in January 1999. Our AAI
Corporation subsidiary was awarded the Defense Department's highest level of
certification for design and manufacturing quality. In our view, there is no
greater compliment. Moreover, this award follows the ISO 9001 certifications
received by AAI and our Engineering and Maintenance Services business in 1995
and 1997, respectively. Issued by the International Standards Organization, the
ISO 9001 certification represents the highest level of certification and is
internationally recognized as a measure of quality.
We are confident that if we maintain this level of excellence, while
continuing to pursue the opportunities that lie ahead in each of our business
areas, United Industrial will achieve further growth and greater value for
shareholders in the years ahead. We have a strong, experienced management team
in place, a solid financial position, and a sound business strategy that is
producing results.
We thank all of our Associates for their hard work in 1998 and our
customers for their continued trust and support. To our shareholders, we
look forward to reporting on our progress in 1999 and beyond.
Sincerely,
/s/ Richard R. Erkeneff /s/ Harold S. Gelb
Richard R. Erkeneff Harold S. Gelb
President and Chief Executive Officer Chairman of the Board
5
<PAGE>
Simulation and Test Systems
Simulation and Test
United Industrial continued to distinguish itself in the simulation and test
systems market in 1998. By drawing upon our historical strengths in this area
and by consistently developing new technologies and programs, we are
successfully expanding relationships with existing customers, while attracting
exciting new business. These efforts are highlighted by the 32% increase in
bookings achieved by our simulation and test systems businesses in 1998.
Our expertise in this highly specialized market has been developed, in
part, through our many years of collaboration with the U.S. government on its
defense programs. Our AAI Corporation subsidiary has been involved in some of
the militarys most important projects, and we continue to provide a range of
services. At the same time, we are taking advantage of our core competencies in
simulation and test systems and related areas to broaden our customer base and
expand into new markets.
In U.S. defense systems, we initiated work on two major contracts last
year for production of the Surveillance Radar Training Set and the Generic Navy
Stimulator/Simulator (GNSS). With a contract value of $22.5 million, the
Surveillance Radar Training Set will be used to train technicians in the
maintenance of sophisticated radar equipment for the AWACS E-3 aircraft fleet.
The Generic Navy Stimulator/Simulator is a critical component of the U.S. Navys
Battle Force Training System. By stimulating a warship's onboard radar, the GNSS
system will create a realistic combat environment in order to train shipboard
radar operators. This contract is initially valued at $12.7 million and, with
options, could reach $26 million.
The receipt of the GNSS contract, as well as our ongoing work on the Carry
On Combat Systems Trainer (COCST), has reinforced AAIs position as the worlds
leading supplier of shipboard training equipment. The COCST will incorporate the
advanced features of the GNSS system, while repackaging the design for
transportability. This contract is valued at
Our expertise has been approximately $8 million, with additional funding
developed through years of expected. Moreover, given increased international
collaboration on U.S. interest in On-Board Training Systems, we believe
defense programs this area offers significant growth potential.
Work continued during 1998 on our Joint
Service Electronic Combat Systems Tester (JSECST)
for the U.S. Air Force, with the award of $9.1 million in incremental funding,
bringing the total contract value to $22.7 million. In addition, we delivered
ahead of schedule to Robins Air Force Base training equipment under our program
for the JointSTARS Prime Mission Equipment Maintenance Trainer System, and
on-site testing has gone extremely well. Also for the U.S. Air Force, we
completed our $4.2 million contract to upgrade MHU-204/M-50 Munition Handling
Units for use with the B-2 and B-52 aircraft, and we expect an option valued at
$3.1 million for additional units to be exercised during 1999.
6
<PAGE>
[Photo Omitted] AAI's Generic Navy Stimulator/
Simulator will be used to train
shipboard radar operators,
through the creation of a
realistic combat environment.
Here, engineers work on a
trainer in AAI's On-Board
Training Systems Lab.
7
<PAGE>
[Photo Omitted]
8
<PAGE>
Stimulation and Test Systems
An airborne Air Force technician
operates sophisticated radar
equipment on the AWACS E-3
aircraft. AAIs Surveillance
Radar Training Set is used
to train technicians in the
operation and maintenance of
this complex equipment.
[Photo Omitted]
We also completed long-running production programs for the San Antonio Air
Logistics Center in Texas, for Radar Beacon Test Sets, and for Northrop Grumman
Corporation, for a redesigned Antenna System Test Set.
Outside of the United States, we have moved forward on the $6.8 million
contract to produce a Moving Target Simulator for the Romanian Ministry of
Defense. In Japan, we completed the installation of our fifth Moving Target
Simulator system in Misawa. Based on the strength of our relationships to date,
we are well-positioned to win future business in Japan.
AAI/ACL Technologies, inc.
As part of our growth strategy, we have actively sought opportunities to apply
our technical skills to enter new market segments, and our AAI/ACL Technologies
(ACL) subsidiary has been very successful in this regard. Leveraging our
competencies in hydraulics and pneumatics, we have
targeted suitable areas for expansion and built an
increasing portfolio of business. The majority of Simulation and test systems
these contracts have come from commercial bookings grew 32%
customers with many from commercial airlines. In
addition, our efforts to expand internationally have
paid off, with 63% of our bookings now generated outside of the U.S.
For example, we have a significant contract underway for British Airways,
valued at $11 million, to provide a pneumatic test cell center and hydraulic
test equipment for its new facility in the United
Kingdom. In conjunction with this program, ACL won
a new ten-year contract, valued at $2.5 million, We're using our technical
to maintain and support its equipment for British skills to enter new markets
Airways at the new facility. We have also received
contracts from the Republic of China Air Force for
the design and
9
<PAGE>
[Photo Omitted]
10
<PAGE>
[Photo Omitted]
ACL engineers evaluate aircraft
components for British Airways'
new pneumatic test cell center
in the United Kingdom. The
valve skid, pictured here,
adjusts airflow, pressure, and
temperature in response to
flight conditions.
11
<PAGE>
[Photo Omitted]
Symtrons advanced firefighter training
systems enable live firetraining in a safe
and controlled environment.
12
<PAGE>
Simulation and Test Systems
construction of a turnkey pneumatic system and Mexicana Airlines for the
production of test stands. In addition, we are currently studying requirements
for an F-16 maintenance depot in Egypt and are optimistic these efforts will
lead to a multi-million dollar contract to provide fluid test equipment.
The receipt of a key contract award from Boeing last Fall marked another
important step in our expansion of this business. ACL will provide hydraulic and
pneumatic factory test equipment to support the Delta IV rocket manufacturing
facility, and we are currently bidding on a contract to provide similar
equipment for the rocket launch site. This contract, initially valued at $1.8
million, has the potential to reach $5 million.
We believe there are opportunities for our subsidiaries to work together
on programs as well, drawing upon their individual areas of expertise. In fact,
ACL was awarded a $6.7 million contract in November 1998 to relocate equipment
from the McClellan Air Force Base to Hill Air Force Base and to complete
installation and recertification of the equipment. ACL subcontracted a
significant portion of this effort to its affiliate, Engineering Support, Inc.
SYMTRON SYSTEMS
The manufacture of simulation systems for use in training firefighters is a
further offshoot of our simulation and test systems business and, like ACL, has
generated very strong results. Revenues for Symtron Systems, our firefighter
simulation subsidiary, reached record levels
in 1998. This performance was driven by solid Symtron Systems' revenues
demand for Symtrons state-of-the-art training reached record levels, driven
systems. by demand for firefighter
Symtrons customers primarily include the training systems
U.S. government, including various branches of
the Armed Forces, foreign governments, and
state and local municipalities. During 1998, we were awarded contracts from a
wide range of customers, including the U.S. Armys Simulation, Training and
Instrumentation Command; the Borough of Paramus, New Jersey; Collin County
Community College, Texas; Wayne Township, Indiana; and San Francisco,
Californias Treasure Island fire facility, among others. Internationally, we
and our Spanish partner Insimar were awarded a major contract from the Spanish
Navy to construct a multi-million dollar live firefighter training system, to be
installed in the second half of 1999. We also continue to build our business in
Germany, working with our partner Krantz-TKT.
During the year, Symtron achieved certification from Equipment Testing
Laboratories (ETL) for all major components of its firefighter training systems.
Receipt of certification from this nationally recognized test laboratory should
benefit future marketing efforts and reinforce Symtrons strong competitive
position.
13
<PAGE>
UAVs
Unmanned Air Vehicles
The production of unmanned air vehicles (UAVs) continues to be an exciting area
for United Industrials AAI subsidiary. As the only U.S. company that
manufactures tactical UAVs for the U.S. military in significant volumes, we are
in a unique competitive position in a growing market.
Our record of leadership has been firmly established through our Pioneer
UAV program for the U.S. government over the past thirteen years. Through
ongoing innovations and technological advancements, we continue to enhance the
Pioneers capabilities and applications, providing a more effective and
versatile means of surveillance and reconnaissance.
For example, following a successful demonstration in 1998, we have moved
forward on the integration of the production Modular Integrated Avionics Group
into the Pioneer. This $2.5 million program will improve the Pioneers
capabilities and reliability, while lowering its operating costs. In addition,
we are working with the U.S. government, under a $2 million program, to develop
the Pioneer Datalink Control Module, which will allow the Pioneer to be operated
by the Governments new Tactical Control System.
At the same time, there continues to be steady demand for new UAVs and
replacement parts. Under a $3.8 million contract for the U.S. government, we are
producing 15 new Pioneer UAVs. We are also at work on a $2.4 million government
contract for additional spare parts to support the Pioneer system, following our
completion of a $9 million spare parts program in August 1998.
Significant tactical UAV program opportunities are also emerging from the
U.S. military. Both the Navy/Marine Corps and the Army are considering new
programs for the next generation of tactical UAVs. AAI is fully engaged in these
developments and working closely with both customers as these projects evolve.
There are considerable opportunities outside of the United States as well.
In April 1998, we delivered significantly ahead of schedule a Shadow 600 UAV
system to the Romanian Ministry of Defense, and the customer is very pleased
with the results of initial tests. Among our
programs currently underway is a $4 million
Our record of leadership contract for UAV upgrades from an Asian aerospace
in UAVs has been company. The program will involve upgrades to the
firmly established customers existing system using technologies
developed at AAI, and is expected to be completed
by September 1999.
The capabilities and cost efficiency of our UAVs, and particularly the
Shadow 600, have made AAI an attractive partner to a growing number of emerging
international customers interested in acquiring UAV capability. To reinforce our
competitive position in these markets, we are now revamping and broadening our
Shadow UAV product line, to make improvements and offer customers a greater
ability to customize UAVs to meet their individual needs. We expect our expanded
UAV line to play an important role in winning new international business.
14
<PAGE>
[Photo Omitted] Technicians measure weight
and balance of a Shadow
200 UAV. The advanced
capabilities and cost efficiency
of the Shadow have made
AAI an attractive partner to
a growing number of
international customers.
15
<PAGE>
Engineering and Maintenance Services
Engineering and Maintenance
Engineering and Maintenance Services (ESI) achieved outstanding results last
year. Sales jumped more than 30%, while earnings doubled. Moreover, with backlog
up 24%, we are poised for continued growth in 1999.
This strong performance has been driven by our ability to capitalize on
the increasing demand for responsive, high-quality outsourcing partners. With
our technical expertise and ongoing improvements in our organization including
the 1997 receipt of ISO 9001 Certification customers are increasingly turning
to us for engineering and maintenance support. Since very few service companies
in the world have received ISO 9001 Certification, an internationally recognized
quality measure, this has been a major competitive advantage in winning new
business.
One of our greatest successes has been our $35 million contract for the
U.S. Air Force, to upgrade Maintenance Training Devices for the C-17 Aircraft
and provide maintenance support services for a five-year period. Based on our
solid performance on this contract in 1998, further incremental bookings of $13
million have been received, and this program has the potential to reach a total
value of $75 million over the five-year period.
We also began work on a new $4.9 million contract, received in November
1998, to upgrade Gunnery Maintenance Trainers for the U.S. Armys Simulation,
Training and Instrumentation Command. A follow-on contract, valued at
$3.2 million, is anticipated for award in the third quarter of 1999.
Additional new contracts won in 1998 include a five-year contract, valued
at $2.1 million, from Raytheon Aircraft Services for operation and maintenance
support of their mission trainers for the Undergraduate Naval Flight Officer
program. In addition, ESI is collaborating with its affiliate, ACL Technologies,
on a $6.7 million contract to relocate equipment from the McClellan Air Force
Base in Sacramento, California to Hill Air Force Base in Ogden, Utah.
ESIs proven record in handling automated test equipment and government
depot move logistics made it a natural choice for this project.
Outside of the defense systems market, we have successfully entered the
area of firefighter training and maintenance support. To complement our Symtron
Systems subsidiary, which manufactures firefighter
training equipment, ESI is providing support
ESI's ISO 9001 Certification services to maintain the equipment, while also
is a major competitive conducting training. Toward that end, ESI
advantage completed and opened a firefighter training
facility in Kenai, Alaska in September 1998 and
has conducted training for British Petroleum
Firefighters, among others. We were also awarded a five-year contract to
maintain, operate, and upgrade the fire training facility at Treasure Island in
San Francisco, California, reinforcing our competitive position in this market
segment.
16
<PAGE>
[Photo Omitted] Under a major contract, ESI
is upgrading maintenance
trainers for the C-17 Aircraft
engine. As shown here, the
trainers provide Air Force
technicians with realistic,
hands-on experience.
17
<PAGE>
[Photo Omitted]
18
<PAGE>
[Photo Omitted]
One of 14 airport transit
system vehicles overhauled
by United Industrial, shown
in service at Chicagos OHare
Airport. Vehicle overhaul
services is a growing area of
our Transportation Systems
business.
Under a strategic realignment, announced in November 1998, we are narrowing the
focus of our Transportation Systems business to take greater advantage of growth
opportunities, particularly in vehicle overhaul services. This is a very
promising segment of the transportation market that is growing steadily due to
the advanced age of U.S. rail passenger cars. Our objective is to establish
United Industrial as a significant competitor in this market. With a revamped
management team and a more streamlined organization, we are aggressively
pursuing this goal.
Our receipt of a major contract from the New Jersey Transit Corporation in
February 1999 represents an important step in this direction. Under this
contract, valued at $71 million, we will overhaul and upgrade 116
locomotive-hauled commuter cars.
Our successful work for the Chicago OHare Airport Transit System also
exemplifies the type of work we are now targeting. Under this contract, we have
overhauled eleven people mover vehicles used in the airport transit system and
have three additional cars to be completed under the initial contract.
We also have made significant headway on a range of contracts underway,
including programs for the Miami Valley Regional Transit Authority in Ohio and
the San Francisco Municipal Railway. Working with
our Czech partner Skoda through our joint venture,
Electric Transit, Inc. (ETI), we have completed We are narrowing our focus
and delivered 32 of the 54 electric trolley buses to take greater advantage
required under the contract for Miami Valley. We of growth opportunities
expect to deliver the remaining buses by mid-1999.
Under ETIs $172 million contract for San
Francisco to design, manufacture, and deliver 250 electric trolley buses, we
have delivered and are now testing a vehicle prototype. United Industrials
portion of the contract is valued at approximately $53 million, and the program
is scheduled for completion in the first quarter of 2001.
Transportation
Transportation Systems
19
<PAGE>
Energy Systems
Energy Systems
Detroit Stoker, our energy systems subsidiary, turned in a solid performance in
1998, driven by successful international expansion initiatives as well as key
contracts in its U.S. business. The year also marked the celebration of Detroit
Stokers 100th anniversary, capping off a century of leadership in the
combustion industry. Moreover, as a leading supplier of equipment that utilizes
renewable energy sources, which do not contribute to the production of
"greenhouse gases" and are cost-effective, we are well-positioned at a time of
heightened environmental concern and rising fossil fuel prices.
Product innovation and our flexibility in meeting customer needs play
a vital role in our strategy. Nowhere is this more apparent than in our
international growth initiatives. By helping customers take advantage of a wide
range of renewable energy sources, which are more environmentally advanced and
less expensive than traditional fossil fuels, we are providing attractive new
energy sources market-by-market.
For example, in Argentina, we are constructing a Hydrograte(R) stoker that
will consume sunflower and peanut hulls as fuel, eliminating this natural waste
and producing power to be used by local food companies. In Canada, our
Hydrograte(R) stoker will consume wood waste from lumber and plywood mills to
generate electricity for a local power plant. These sorts of innovative
solutions have been an integral part of our success in entering new worldwide
markets, contributing to our substantial increase in international contract
bookings in 1998. Including new projects in Germany, Italy, Chile, Argentina,
and Canada, more than one-third of Detroit Stokers new contract orders are now
generated abroad.
At the same time, Detroit Stokers domestic business remains strong, led
by new contract orders and increased aftermarket sales of stoker upgrades and
retrofits. One of our most important wins during
1998 was a contract, valued at $2.6 million, for
Product innovation plays a the Central Wayne County Sanitation Authority,
vital role in our strategy located near Detroit, Michigan. Under the
contract, we will provide a new Detroit
Reciprograte(R) stoker and related combustion
equipment, as part of a larger effort to convert the existing municipal solid
waste incineration plant to a waste-to-energy facility.
In addition, our new product line for natural gas and oil burners has
registered steady growth. This line features an advanced burner technology,
recently honored by R&D magazine for its technological significance, that
greatly reduces emissions from stoker-fired boilers. Among the key contracts
received last year was a substantial order from Congentrix Energy for six
additional boilers, featuring the advanced burner technology, for its Richmond,
Virginia facility.
With a healthy backlog of work, increasing interest in alternative energy
sources and a successful strategy in place, Detroit Stoker is well-positioned
for growth in 1999. We plan to take advantage of new opportunities, both in the
U.S. and overseas, through ongoing product improvements and aggressive marketing
programs.
20
<PAGE>
[Photo Omitted] This recently completed co-
generation plant uses Detroit
Hydrograte(R) stokers to convert
biomass and pulverized coal
to electricity and process steam
for a Southeastern U.S. pulp
and paper facility.
21
<PAGE>
Board of Directors
President of JSA
Partners, Inc. and Chairman and
Co-Founder of JSA Research, Inc.
Director since 1998.
[photo omitted]
Joseph S. Schneider
Vice President
Corporate
Communications,
Associate General
Counsel and Secretary
of United Industrial
Corporation.
Director since 1995.
[photo omitted]
Susan Fein Zawel
President and Chief
Executive Officer
of the Aerospace
Corporation.
Director since 1995.
[photo omitted]
Edward C. Aldridge, Jr.
President of United
Industrial Corporation
and AAI Corporation.
Director since 1995.
[photo omitted]
Richard R. Erkeneff
President and CEO
Chairman of the
Board of United
Industrial Corporation.
Director since 1995.
[photo omitted]
Harold S. Gelb
Chairman of the Board
The Joseph Solomon
Distinguished
Professor of Law and
former Dean/Professor
of Law of New York
Law School.
Director since 1996.
[photo omitted]
E. Donald Shapiro
22
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997.
Net sales of $204,305,000 in 1998 decreased 13% from $235,183,000 in 1997.
The 1997 sales included $29,838,000 of sales from the Neo Products Co., the
operating assets of which were sold in August 1997 and the Weather Systems
business (together the "Disposed Businesses") sold in September 1997. Excluding
the sales from the Disposed Businesses, net sales decreased $1,040,000 or less
than 1% from 1997 to 1998.
Excluding the disposed Weather Systems business, the net sales in the
defense segment increased 2% or $2,770,000 to $153,201,000 in 1998 from
$150,431,000 in 1997. Sales in 1998 were negatively affected by the delayed
commencement of certain programs caused by procurement deferments. However,
these delays had a positive effect on the Company's 1998 backlog. Backlog in the
defense segment at December 31, 1998 was $146,634,000, which was an increase of
$24,743,000 or 20.3% from $121,891,000 at December 31, 1997. 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 $106,763,000 in 1998 and $128,423,000 in 1997. Included in these
figures are Weather Systems business sales of $25,233,000 in 1997. Export sales
by the defense segment were $31,117,000 in 1998 and $33,025,000 in 1997, a
decrease of $1,908,000, or 5.8%. This decrease reflected a $6,800,000 reduction
of shipments on an export contract of $1,600,000 in 1998 as compared to
$8,400,000 in 1997.
Net sales in the energy segment decreased 9%, or $3,473,000, to $34,454,000
in 1998 from $37,927,000 in 1997, due primarily to the reduction of replacement
parts sales. Backlog in the energy segment was $9,334,000 at December 31, 1998,
representing an increase of $318,000 or 3.5%, greater than the backlog of
$9,016,000 at the 1997 year-end.
Net sales in the transportation segment were $16,650,000 during 1998 as
compared to $16,987,000 during 1997. In addition, transportation's backlog
decreased by $3,449,000, or 6.0%, to $53,860,000 at year-end 1998 from
$57,309,000 at year-end 1997.
Gross profit decreased to $52,271,000 in 1998 from $58,628,000 in 1997. The
gross margin percentage increased to 25.6% in 1998 from 24.9% in 1997. Excluding
the Disposed Businesses, the gross profit was $52,697,000 in 1997. The gross
margin percentage decreased from 25.7% to 25.6%. In the defense segment, the
gross margin percentage decreased to 26.2% in 1998 from 26.9% in 1997. Excluding
the Weather Systems business from the defense segment, the gross margin
percentage decreased to 26.2% in 1998 from 27.7% in 1997. This reduction in
gross margin was primarily due to significant profitability recorded during 1997
regarding major contracts to deliver an unmanned air vehicle system and an air
defense training system. The 2.3% decrease in the gross margin percentage in the
energy segment to 36% in 1998 from 38.3% in 1997 was generally attributable to
decreased sales and competitive market conditions. The transportation segment
experienced negative gross margins of $347,000 in 1998 and $3,568,000 in 1997.
The transportation segment is experiencing high initial costs to establish
itself in the marketplace.
Selling and administrative expenses as a percentage of net sales were 20.6%
in 1998 and 18.3% in 1997. Excluding the Disposed Businesses, the selling and
administrative expenses as a percentage of net sales were 19.3% in 1997. Selling
and administrative expenses decreased $976,000 in 1998 compared to
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
1997. Excluding the Disposed Businesses, the selling and administrative expenses
increased $2,394,000, or 6%. The increase was generally attributable to
litigation expenses, partially offset by various operating efficiencies.
Interest expense was $170,000 in 1998 and $915,000 in 1997. The decrease was due
to reduced borrowings.
Other expense (income) - net amounted to a net expense of $2,783,000 in
1998 compared to income of $1,150,000 in 1997. The increase in net expenses of
$3,933,000 is due to an increase in the equity in the loss of investees of
$2,577,000 in 1998 and $764,000 in 1997. The Company's interest in Electric
Transit, Inc. ("ETI"), a company owned 35% by AAI and 65% by Skoda, a Czech
Republic firm, has resulted in losses of $3,060,000 and $1,020,000 recorded by
AAI during 1998 and 1997, respectively. The losses incurred by ETI were caused
by costs necessary to establish itself in the industry, cost growth on ETI's
scope of work regarding its contract to deliver electric trolley buses to the
Miami Valley Regional Transit Authority as well as increased selling, general
and administrative expenses. Also, 1997 other income included the proceeds from
a favorable litigation settlement, net of related legal expenses of
approximately $3,000,000, partially offset by an increase in a charge related to
a contingent payment of $664,000 to the sellers of an acquired subsidiary. In
1998 the contingent payment was $268,000.
Interest income increased $2,231,000 due to increased investments.
In 1998, net income decreased $1,814,000, or 12.2%, to $13,011,000, or
$1.03 per diluted share, from $14,825,000, or $1.19 per diluted share, in 1997.
The 1998 net income includes gains on sales of several buildings and related
land of $4,332,000 ($2,696,000, net of taxes, or $.22 per diluted share), a tax
contingency reduction of $4,458,000 ($2,920,000, net of taxes, or $.23 per
diluted share) partially offset by a litigation settlement expense of $4,500,000
($2,948,000, net of taxes, or $.24 per diluted share). Included in the 1997 net
income was income from a favorable litigation settlement, a net gain on the
sales of the Disposed Businesses of $8,470,000, net of taxes, or $.68 per
diluted share, partially offset by a reserve recorded in the third quarter
related to a local tax matter. For 1997, income, net of taxes, related to the
Disposed Businesses totaled $1,595,000, or $.13 per diluted share. Excluding the
above special items and income from divested businesses, net income increased to
$10,343,000, or $.82 per diluted share, for the year ended 1998 from $6,981,000,
or $.56 per diluted share, for 1997.
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996.
Net sales of $235,183,000 in 1997 rose by 7% from $220,822,000 in 1996. The
1997 sales included $29,838,000 of sales from the Disposed Businesses. In 1996
the sales from the Disposed Businesses amounted to $42,331,000. Excluding the
sales from the Disposed Businesses, net sales increased by $26,854,000, or 15%,
from 1996 to 1997.
Excluding the disposed Weather Systems business, net sales in the defense
segment increased 4%, or $5,847,000, to $150,431,000 in 1997 from $144,584,000
in 1996. The growth was attributable to a general increase in sales including a
major contract to deliver an Unmanned Air Vehicle System and an Air Defense
Training System to the Government of Romania. Sales to agencies of the U.S.
Government, primarily by the defense segment, were $128,423,000 in 1997 and
$142,782,000 in 1996. Included in these figures are Weather Systems business
sales of $25,233,000 in 1997 and $37,000,000 in 1996. Export sales by the
defense segment were $33,025,000 in 1997 and $24,367,000 in 1996, an increase of
$8,658,000, or 36%.
Net sales in the energy segment increased 26%, or $7,915,000, to
$37,927,000 in 1997 from $30,012,000 in 1996, due primarily to installations of
stoker equipment.
Net sales in the transportation segment increased 336%, or $13,092,000, to
$16,987,000 in 1997 from $3,895,000 in 1996, due primarily to orders for
electric trolley buses in Dayton, Ohio, under a subcontract from ETI, and for
light rail carshells in Baltimore, Maryland.
<PAGE>
Gross profit and gross margin percentage increased to $58,628,000 and
24.9%, respectively, in 1997 from $54,209,000 and 24.5%, respectively, in 1996.
Excluding the Disposed Businesses, the gross profit and gross margin percentage
were $52,697,000 and 25.7%, respectively, in 1997 and $46,607,000 and 26.1%,
respectively, in 1996. In the defense segment, the gross margin percentage
increased to 26.9% in 1997 from 26.3% in 1996. Excluding the Weather Systems
business from the defense segment, the gross margin percentage decreased to
27.7% in 1997 from 28.1% in 1996. The 7.8% increase in the gross margin
percentage in the energy segment to 38.3% in 1997 from 30.5% in 1996 was
generally attributable to an improved pricing structure, a more favorable
product mix and improved operating efficiencies. The transportation segment
experienced negative gross margins of $3,568,000 in 1997 and $3,213,000 in 1996.
This was primarily due to the initial costs required to establish the
transportation segment in the marketplace.
Selling and administrative expenses as a percentage of net sales were 18.3%
in 1997 and 19.3% in 1996. Excluding the Disposed Businesses, selling and
administrative expenses as a percentage of sales were 19.3% in 1997 and 21.2% in
1996. Selling and administrative expenses increased $458,000 in 1997 compared to
1996. Excluding the Disposed Businesses, selling and administrative expenses
increased $1,781,000, or 4.7%. The increase was generally attributable to
expenses relating to increased sales in the transportation and energy segments.
Other income-net, increased $2,340,000 to $1,150,000 in 1997 from a net
expense of $1,190,000 in 1996. The increase in income was primarily due to a
favorable litigation settlement of approximately $3,000,000, net of legal
expenses, ($1,779,000, net of taxes, or $.14 per diluted share), partially
offset by an increase in a charge related to a contingent payment to the sellers
of a subsidiary. The Company's interest in ETI resulted in losses of $1,020,000
in 1997 and $1,235,000 in 1996.
Interest income increased $411,000, or 40%, due to increased investments.
Interest expense was $915,000 in 1997 and $1,997,000 in 1996. The decrease
was due to reduced borrowings.
In 1997, net income increased $8,421,000, or 131.5%, to $14,825,000, or
$1.19 per diluted share, from $6,404,000, or $.52 per diluted share, in 1996.
Included in the 1997 net income was the above-mentioned favorable litigation
settlement and a net gain on the sales of Disposed Businesses of $8,470,000, net
of taxes, or $.68 per diluted share, partially offset by a reserve recorded in
the third quarter related to a local tax matter. The 1996 year-end results
included charges of approximately $2,100,000, net of taxes, or $.17 per diluted
share, related to a contract dispute that was settled during 1996 and
approximately $573,000, net of taxes, or $.05 per diluted share, regarding
non-contract inventory reserves, partially offset by favorable contract
adjustments totaling approximately $1,400,000, net of taxes, or $.11 per diluted
share. For 1997, net income related to Disposed Businesses totaled $1,595,000,
or $.13 per diluted share, compared to $1,827,000, or $.15 per diluted share, in
1996. Excluding the above-mentioned special items and the operating results from
the Disposed Businesses in both years, net income for 1997 increased 19.3% to
$6,981,000, or $.56 per diluted share, from $5,850,000, or $.48 per diluted
share, in 1996.
Liquidity and Capital Resources
Cash and cash equivalents amounted to $21,126,000 at the end of 1998 and
$23,098,000 at the end of 1997. In addition, the Company had invested $4,702,000
and $6,102,000 in marketable securities at December 31, 1998 and 1997,
respectively.
The Company expects to meet its cash requirements for 1999, including
amounts necessary to fund business ventures, from current cash and marketable
securities, operations and borrowings available under its existing line of
credit. Factors relating to the amounts of cash from operating, financing and
investing activities are presented in detail in the Consolidated Statements of
Cash Flows.
The Company paid cash dividends of $.40 per share in 1998, $.29 per share
in 1997 and $.20 per share in 1996. Aggregate payments amounted to $4,927,000 in
1998, $3,536,000 in 1997 and $2,434,000 in 1996.
The ratio of current assets to current liabilities was 2.4 at the end of
1998 and 3.0 at the end of 1997. During 1998, the Company repurchased 148,300
shares of stock in the open market at a cost of $1,475,000.
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Capital expenditures were $14,032,000 in 1998 and $6,926,000 in 1997. The
$7,106,000 increase in capital expenditures was due primarily to a facilities
consolidation at the defense segment during 1998. There were no material
commitments for acquisition of capital assets as of December 31, 1998.
ETI, a company owned 35% by AAI and 65% by Skoda, intends to utilize
additional customer advances and is currently negotiating a credit facility with
a bank to meet its working capital requirements. At December 31, 1998, these
financing arrangements were not in place. If ETI is unable to secure such
financing, it could have a material adverse effect on the Company's results of
operations, liquidity or financial condition because contract performance by ETI
will depend on AAI and Skoda advancing working capital funds as required. In
addition, the Company understands that Skoda and its affiliates have experienced
and may continue to experience difficulties in obtaining financing. The Company
believes that ETI will be able to obtain sufficient financing and the contracts
will not be adversely affected. See Note 18.
On June 11, 1997, the Company and its subsidiaries entered into a Revolving
Line of Credit Loan Agreement, Term Loan Agreement and Security Agreement
("Agreements") (amending and restating a credit agreement, dated as of October
13, 1994) with an institutional lender. At December 31, 1998, the Company had no
outstanding borrowings under the Agreements. In July 1997, the Company borrowed
$6,250,000 under the Term Loan Agreement, at LIBOR plus a fluctuating margin.
The principal was payable in sixty consecutive monthly installments. At December
31, 1997, the outstanding borrowings were $5,729,000, none of which were
revolving credit borrowings. The amount available under the Revolving Line of
Credit Loan Agreement is $17,500,000 with various interest rate options, and is
reduced by the letter of credit obligations, which may not exceed $12,500,000.
The Agreement provides for restrictive covenants among which are debt service
coverage ratio, quick ratio, senior debt ratio and a tangible net worth
requirement, all as defined. All assets now owned or hereafter acquired by the
Company and its subsidiaries are pledged as collateral under the Agreement.
Qualitative and Quantitative Disclosures about Market Risk
A portion of the Company's operations consists of manufacturing and sales
activities in foreign jurisdictions, and some of these transactions are
denominated in foreign currencies. As a result, the Company's financial results
could be affected by changes in foreign exchange rates. To mitigate the effect
of changes in these rates, the Company has entered into two foreign exchange
forward contracts.
The following table presents firmly committed sales exposures and related
derivative contracts for each of the next five years, and thereafter:
<TABLE>
<CAPTION>
Fair Market
Value
(In thousands, December
except average contract rate) 1999 2000 2001 2002 2003 Thereafter Total 31, 1998
- -----------------------------------------------------------------------------------------------------------------------
Firmly committed sales contracts
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Spanish Pesetas $2,593 $ 219 $ -- $ -- $ -- $ -- $2,812
British Sterling 1,136 386 473 203 234 1,173 3,605
Related forward contracts to
sell currencies for U.S. dollars
Spanish Peseta
Notional amount (USD) $2,224 $ 197 -- -- -- -- $2,421
Average contract rate (ESP/USD) 143.9 143.9 -- -- -- -- -- ($62)
British Sterling
Notional amount (USD) $1,926 -- -- -- -- -- $1,926
Average contract rate (USD/GBP) 1.582 -- -- -- -- -- -- ($90)
</TABLE>
<PAGE>
Environmental and Other Litigation
The Company, along with numerous other parties, has been named in five tort
actions relating to environmental matters based on allegations partially related
to a predecessor's operations. These tort actions seek recovery for personal
injury and property damage among other damages. One tort claim is a certified
property and medical class action. The Company intends to vigorously contest
these actions and believes that the resolution of these actions will not be
material to the Company. The Company recently reached a written agreement in
principle to settle all of these matters with the plaintiffs for, among other
items, a cash payment of $4,250,000. The settlement is subject to formal
execution of a settlement agreement and approval by the Superior Court of
Maricopa County, Arizona. See Note 15.
Year 2000
The Year 2000 issue exists because many currently installed computer
systems and software programs were designed to use only a two-digit date field.
These date fields will need to accept four digits to distinguish 21st century
dates from 20th century dates. Until the date fields are revised, the systems
and programs could fail or give erroneous results when referencing dates
subsequent to December 31, 1999. Such failures or errors could occur prior to
the actual change in century.
The Company is currently implementing a six phase plan to address this
problem: Awareness, Assessment, Remediation, Validation/Test, Implementation,
and Contingency Planning. The Awareness phase is a communication phase to inform
employees, suppliers and customers of the Year 2000 issue. The Assessment phase
is an inventory and analysis of those systems which may have a problem. The
Remediation phase is the correction phase for the problem. The Validation/Test
phase is used to verify that corrections have been made properly and completely.
The Implementation phase is to actually put the changed systems into production
use. The Contingency planning phase is the development of a plan to detail the
Company's reactions to possible future scenarios concerning the Year 2000 issue.
These plans are being implemented on both the Information Technology (IT)
areas and the non-IT areas for the transition to the 21st century. IT areas
include all computer system hardware and software. Non-IT areas include systems
that have embedded computer chips or microprocessors.
The Awareness and Assessment phases are complete for the IT and non-IT
systems. The IT systems are estimated to be 95% complete in the Remediation
phase and are expected to be completed through the Implementation phase by April
1999. Non-IT systems are estimated to be 95% complete in the Remediation phase
and are expected to be completed through the Implementation phase by May 1999.
Many of the Company's products do not require computer systems or do not
perform any data processing. These products are currently compliant. Other
products have been remediated and are currently compliant. Still other products
cannot be remediated because they are based on obsolete computer systems. The
Company is working on a case by case basis with its customers to alleviate Year
2000 issues with these products. Although the Company's products continue to
undergo normal quality testing procedures, there can be no assurance that these
products will contain all necessary date code changes. Any system malfunctions
due to the onset of the Year 2000 and any disputes with customers relating to
Year 2000 compliance could have a material adverse effect on the Company's
business, financial condition or results of operations.
The Company has contacted its IT suppliers asking for Year 2000 compliance
statements and status. Each vendor has responded with information necessary to
ensure their products compliance. The Company is in the process of completing
the steps necessary to make these hardware and software systems compliant by May
1999.
Significant non-IT suppliers to the Company were contacted to determine
their compliance during the fourth quarter of 1998. This is necessary to ensure
that the Company's products are not delayed due to lack of parts or services.
Also, embedded chips in process control equipment, lighting controls, and
security systems are being inspected to assure that they will operate properly
in the Year 2000.
While the Company has not fully identified all the impacts of the Year 2000
issue or whether all related problems can be resolved without disrupting its
business and incurring significant expense, the Company's current estimate is
that the costs associated with the Year 2000 issue, and the consequences
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
of incomplete or untimely resolution of the Year 2000 issue, will not have a
material adverse effect on the Company's business, operating results or
financial condition. The current estimate of the costs of remediating Year 2000
issues is $700,000. Of the $700,000 approximately $435,000 is budgeted to
replace existing hardware and software and $265,000 is budgeted to fix or
upgrade existing hardware or software. Of these budgets $540,000 has been spent
to date. These costs are less than 10% of the normal IT budgets for the Company.
These costs are being budgeted through the normal operating budgets of the
Company and should not have a major impact on other IT projects or systems.
The Company is currently in the process of identifying potential
consequences to the Company if its IT and non-IT systems do not function
properly on account of the Year 2000 issue (i.e., most reasonably likely worst
case scenarios). Management expects to complete this process by mid-1999. If the
Company determines that such consequences could have a material adverse effect
on the business, operating results or financial condition, it intends to
establish a contingency plan to address the most reasonably likely worst case
scenarios. However, in cases beyond the control of the Company there could be
some adverse effects. This would be particularly true if major infrastructure
systems such as electric distribution grids or major telephone switching centers
are disrupted by the Year 2000 issue. Every reasonable effort will be made to
minimize these effects.
The costs of the Company's year 2000 project and dates on which the Company
believes it will complete such efforts are based on management's current best
estimates, which were derived using numerous assumptions regarding future
events. There can be no assurances that these estimates will prove to be
accurate, and therefore actual results could differ materially from those
anticipated. Specific factors that could cause material differences with actual
results include, but are not limited to, the results of testing and the
timeliness and effectiveness of remediation efforts of third parties.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. Management does
not anticipate that the adoption of the new Statement will have a significant
effect on earnings or the financial position of the Company.
Forward Looking Information
This Annual Report contains forward looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward looking
statements are based on management's expectations, estimates, projections and
assumptions. Words such as "expects", "anticipates", "intends", "plans",
"believes", "estimates", and variations of such words and similar expressions
are intended to identify such forward looking statements which include, but are
not limited to, projections of revenues, earnings, segment performance, cash
flows and contract awards. These forward looking statements are subject to risks
and uncertainties which could cause the Company's actual results or performance
to differ materially from those expressed or implied in such statements. These
risks and uncertainties include, but are not limited to, the following: the
Company's successful execution of internal performance plans; performance issues
with key suppliers, subcontractors and business partners; legal proceedings;
product demand and market acceptance risks; the effect of economic conditions;
the impact of competitive products and pricing; product development,
commercialization and technological difficulties; capacity and supply
constraints or difficulties; legislative or regulatory actions impacting the
Company's energy segment and transportation business; changing priorities or
reductions in the U.S. Government defense budget; contract continuation and
future contracting awards; U.S. and international military budget constraints
and determinations; and the ability of the Company and third parties to address
the Year 2000 issues adequately.
<PAGE>
Consolidated Statements of Operations
United Industrial Corporation
<TABLE>
<CAPTION>
Year ended December 31
(Dollars in thousands, except per share data) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Sales $204,305 $235,183 $220,822
Operating costs and expenses:
Cost of sales 152,034 176,555 166,613
Selling and administrative 42,031 43,007 42,549
Gains on sale of assets - net (4,918) (13,306) (1,135)
Other expense (income) - net 2,783 (1,150) 1,190
Interest income (3,675) (1,444) (1,033)
Interest expense 170 915 1,997
- --------------------------------------------------------------------------------------
Total Operating Costs and Expenses 188,425 204,577 210,181
- --------------------------------------------------------------------------------------
Income Before Income Taxes 15,880 30,606 10,641
Provision (credit) for income taxes
Federal
Current 8,950 6,802 3,192
Deferred (3,109) 1,176 198
State (2,972) 7,803 847
- --------------------------------------------------------------------------------------
Income Taxes 2,869 15,781 4,237
- --------------------------------------------------------------------------------------
Net Income $13,011 $14,825 $ 6,404
- --------------------------------------------------------------------------------------
Earnings Per Share
Basic $ 1.06 $ 1.22 $ .53
Diluted $ 1.03 $ 1.19 $ .52
======================================================================================
</TABLE>
See notes to financial statements
<PAGE>
Consolidated Balance Sheets
United Industrial Corporation
<TABLE>
<CAPTION>
December 31
(Dollars in thousands) 1998 1997
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $21,126 $23,098
Marketable securities 4,702 6,102
Trade receivables
U.S. Government 13,294 11,238
Other 21,022 16,581
- ------------------------------------------------------------------------------------
34,316 27,819
Inventories 23,569 31,790
Prepaid expenses and other current assets 8,295 11,282
Deferred income taxes 5,451 4,982
Assets held for sale -- 12,516
- ------------------------------------------------------------------------------------
Total Current Assets 97,459 117,589
- ------------------------------------------------------------------------------------
Other Assets 56,421 40,126
Property and Equipment
Land 501 631
Buildings and improvements 36,277 28,404
Machinery and equipment 71,449 69,064
Furniture and fixtures 4,982 4,784
- ------------------------------------------------------------------------------------
113,209 102,883
Less allowances for depreciation and amortization 82,643 77,307
- ------------------------------------------------------------------------------------
30,566 25,576
- ------------------------------------------------------------------------------------
$184,446 $183,291
====================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31
(Dollars in thousands) 1998 1997
- ---------------------- ---- ----
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $12,235 $7,604
Accrued employee compensation and taxes 8,320 7,777
Customer advances 4,303 3,542
Provision for contract losses 4,558 5,776
Federal income taxes 2,973 630
Current portion of long-term debt -- 1,250
Other liabilities 8,255 13,134
- ------------------------------------------------------------------------------------
Total Current Liabilities 40,644 39,713
- ------------------------------------------------------------------------------------
Long-term Debt, Less Current Portion -- 4,479
Postretirement Benefits Other Than Pensions 23,136 22,356
Other Liabilities 4,175 5,029
Deferred Income Taxes 7,050 9,690
Shareholders' Equity
Common stock - par value $1.00 per share
Authorized shares - 30,000,000
Outstanding shares:
1998 - 12,250,063; 1997 - 12,249,309 14,374 14,374
Additional capital 89,583 89,929
Retained earnings 22,249 14,165
Cost of shares in treasury:
1998 - 2,124,085 shares; 1997 - 2,124,839 shares (16,765) (16,444)
- ------------------------------------------------------------------------------------
Total Shareholders' Equity 109,441 102,024
- ------------------------------------------------------------------------------------
$184,446 $183,291
=====================================================================================
</TABLE>
See notes to financial statements
<PAGE>
Consolidated Statements of Cash Flows
United Industrial Corporation
<TABLE>
<CAPTION>
Year ended December 31
(Dollars in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------
Operating Activities
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 13,011 $(14,825) $(6,404)
Adjustment to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 7,816 9,559 8,306
Deferred income taxes (3,109) 1,176 198
Gains on sale of assets (4,918) (13,306) (1,135)
Changes in operating assets and liabilities - net
Increase (decrease) in current income taxes 2,343 (333) 1,024
(Increase) decrease in trade receivables (6,497) 7,855 (7,223)
Decrease in inventories 8,221 5,839 8,415
(Increase) decrease in prepaid expenses and
other current assets (425) (494) 544
(Decrease) increase in accounts payable, accruals,
advances and other current liabilities (162) (890) 2,218
Other - net (1,412) (96) (1,514)
- ------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 14,868 24,135 17,237
- ------------------------------------------------------------------------------------------
Investing Activities
- ------------------------------------------------------------------------------------------
Advances to investee (12,735) (9,639) --
Sale (purchase) of marketable securities 1,400 (6,102) --
Purchase of property and equipment (14,032) (6,926) (6,299)
Net proceeds from sale of assets 19,850 19,183 2,250
- ------------------------------------------------------------------------------------------
Net Cash Used For Investing Activities (5,517) (3,484) (4,049)
- ------------------------------------------------------------------------------------------
Financing Activities
- ------------------------------------------------------------------------------------------
Proceeds from borrowings -- 6,250 9,000
Payments on long-term debt and borrowings (5,729) (14,271) (18,250)
Dividends (4,927) (3,536) (2,434)
Purchase of treasury shares (1,475) -- --
Proceeds from exercise of stock options 808 577 8
- ------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (11,323) (10,980) (11,676)
- ------------------------------------------------------------------------------------------
(Decrease) Increase in Cash and Cash Equivalents (1,972) 9,671 1,512
- ------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Year 23,098 13,427 11,915
- ------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 21,126 $(23,098) $(13,427)
==========================================================================================
</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 its
resources to the research, development, and production of military electronics
and aerospace systems and components under defense contracts. Resources are also
applied to other products including transportation systems, firefighter training
systems, and energy systems for industry and utilities.
The principal business segments are defense and related products, ground
transportation systems and energy generating systems.
Note 2 Summary of Significant Accounting Policies
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation. Certain amounts in prior years have been
reclassified to conform to the current year's classifications. The Company
includes in income its proportionate share of the net earnings or losses of
unconsolidated investees, when the Companys ownership interest is between 20%
and 50%. See Note 18.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Marketable securities,
which generally mature within one year, consist primarily of investment grade
bonds, commercial paper and other short-term investment funds.
Inventories
Inventories are stated at the lower of cost or market. At December 31, 1998 and
1997, approximately 9% 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 $2,117,000 higher than reported on
December 31, 1998 and $3,863,000 higher than reported on December 31, 1997.
Inventories include amounts principally related to long-term contracts of
the Company's defense segment, as determined by the percentage-of-completion
method of accounting. Sales and gross profit are principally recognized as work
is performed based on the relationship between actual costs incurred and total
estimated costs at completion. Alternatively, certain contracts provide for the
production of various units throughout the contract period and, sales and gross
profit on these contracts are accounted for based on the units delivered. See
Note 5.
<PAGE>
Notes to Financial Statements (continued)
United Industrial Corporation
Property and Equipment
Property and equipment are stated at cost. The policy of the Company is to
provide for depreciation on the straight-line, sum-of-the-years digits, and
declining-balance methods, by annual charges to operations calculated to
amortize the cost over the estimated useful lives of the various classes of
property and equipment.
Earnings per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share". Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate restated, to conform to the Statement 128 requirements.
Stock-Based Compensation
The Company has elected to continue to account for its stock-based compensation
Plan in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), whereby compensation cost for stock
options is recognized in income based on the excess, if any, of the quoted
market price of the stock at the grant date of the award or other measurement
date over the amount an employee must pay to acquire the stock. See Note 8.
Foreign Currency Contracts
The Company enters into forward exchange contracts to manage its exposure
against foreign currency fluctuations on sales transactions denominated in
foreign currencies. The contract obligates the Company to exchange predetermined
amounts of the foreign currency at certain dates, or to make an equivalent U.S.
dollar payment equal to the value of such exchanges. The Company does not hold
or issue financial instruments for trading purposes. At December 31, 1998 the
Company had entered into foreign currency forward contracts with a large
financial institution for Spanish pesetas and British sterling with an aggregate
notional value of $4,348,000, and an aggregate loss of $152,000 based on fair
market value. The Company accounts for these contracts under the accrual method.
New Accounting Pronouncements
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Boards Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("Statement 131"). Statement 131 superseded FASB Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise." Statement 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. Statement 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of Statement 131 did not affect results of operations or financial
position, but did affect the disclosure of segment information. See Note 12.
<PAGE>
Note 3 Marketable Securities
At December 31, 1998 and 1997, the Company's short-term investments consist of
debt securities, whose carrying amounts of $4,702,000 and $6,102,000,
respectively, approximates market value and are classified as held-to-maturity
securities. Management determines the appropriate classification of debt
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Debt securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to maturity.
Note 4 Trade Receivables
Amounts due from the U.S. Government primarily related to long-term contracts of
the Company's defense segment were as follows:
================================================================================
(Dollars in thousands) December 31 1998 1997
- --------------------------------------------------------------------------------
Amounts billed $ 8,589 $9,221
Unbilled recoverable costs and earned fees 4,413 1,704
Retainage per contract provisions 292 313
- --------------------------------------------------------------------------------
$ 13,294 $11,238
================================================================================
Billed and unbilled amounts above include $1,738,000 and $2,176,000 at
December 31, 1998 and 1997, respectively, related to contracts for which a
subsidiary of the Company is a subcontractor to other government contractors.
Unbilled recoverable costs and earned fees represent amounts that will be
substantially collected within one year. Retainage amounts will generally be
billed over the next twelve months.
Note 5 Inventories
================================================================================
(Dollars in thousands) December 31 1998 1997
- --------------------------------------------------------------------------------
Finished goods and work in progress $ 5,173 $ 4,023
- --------------------------------------------------------------------------------
Costs and earnings relating to long-term contracts 29,094 45,537
Deduct progress payments related to long-term contracts (14,116) (21,009)
- --------------------------------------------------------------------------------
Costs and earnings in excess of billings 14,978 24,528
- --------------------------------------------------------------------------------
Total finished goods and work in progress 20,151 28,551
Materials and supplies 3,418 3,239
- --------------------------------------------------------------------------------
$ 23,569 $31,790
================================================================================
The inventoried costs associated with long-term contracts include costs and
earnings ($14,978,000 in 1998 and $24,528,000 in 1997) of incomplete contracts
not yet billable to the customer. These amounts represent the difference between
the percentage-of-completion method of accounting for long-term contracts used
to record operating results by the Company's defense segment and the amounts
billable to the customer under the terms of the specific contracts. Estimates of
final contract costs and earnings (including earnings subject to future
determination through negotiation or other procedures) are reviewed and revised
periodically throughout the lives of the contracts. Adjustments of earnings
resulting from the revisions are recorded on a current basis. The Company
recognized losses of $1,999,000 ($1,236,000 net of tax benefit, or $.10 per
diluted share) and $6,009,000 ($3,745,000 net of tax benefit, or $.30 per
diluted share) during 1998 and 1997, respectively, resulting primarily from
revision of cost estimates on certain major long-term contracts.
Included in the 1998 and 1997 costs and earnings in excess of billings were
$2,150,000 and $1,700,000, respectively, on certain government contracts in
excess of the negotiated contract values which are, or will be, the subject of
formal claims if not resolved by negotiation.
<PAGE>
Notes to Financial Statements (continued)
United Industrial Corporation
In connection with certain of its contracts, the Company commits to certain
performance guarantees. The ability of the Company to perform under these
guarantees may, in part, be dependent on the performance of other parties,
including partners and subcontractors. If the Company is unable to meet these
performance obligations, the performance guarantees could amount to a
significant portion of the contract value and would have a material adverse
effect on product margins and the Company's results of operations, liquidity or
financial position. The Company monitors the progress of its partners and
subcontractors and does not believe that their performance will adversely affect
these contracts as of December 31, 1998.
Inventories do not include any significant amounts of unamortized tooling,
learning curve, and other deferred costs, claims, or other similar items whose
recovery is uncertain.
Note 6 Other Assets
============================================================================
(Dollars in thousands) December 31 1998 1997
- ----------------------------------------------------------------------------
Net pension asset $34,799 $31,070
Receivable from investee 16,147 --
Patents and other intangible assets 4,730 6,256
Other 745 2,800
- ----------------------------------------------------------------------------
$56,421 $40,126
============================================================================
Patents and other intangible assets represent assets acquired in connection
with purchased businesses and are being amortized primarily on a straight-line
basis over 5 to 10 years. Amortization expense amounted to $1,526,000 in 1998,
$1,543,000 in 1997, and $1,704,000 in 1996. Accumulated amortization amounted to
$9,085,000 and $7,559,000 at December 31, 1998 and 1997, respectively.
Intangible assets were decreased by $342,000 (net of accumulated amortization of
$690,000) in connection with the disposal of businesses in 1997. Receivables
from an investee in the amounts of $6,228,000 and $9,639,000 were classified as
other current assets as of December 31, 1998 and 1997, respectively.
Note 7 Long-Term Debt and Credit Arrangements
On June 11, 1997, the Company and its subsidiaries entered into a Revolving Line
of Credit Loan Agreement, Term Loan Agreement and Security Agreement
("Agreement") (amending and restating a credit agreement, dated as of October
13, 1994) with an institutional lender. In July 1997, the Company borrowed
$6,250,000 under the Term Loan Agreement, at LIBOR plus a fluctuating margin.
The principal was payable in sixty consecutive monthly installments. At December
31, 1998, there were no borrowings under the Agreement. At December 31, 1997,
the outstanding borrowings were $5,729,000, none of which were revolving credit
borrowings. The amount available under the Revolving Line of Credit Loan
Agreement is $17,500,000 with various interest rate options, and is reduced by
the letter of credit obligations which may not exceed $12,500,000. The Revolving
Line of Credit Loan Agreement expires June 11, 2001. The letter of credit
obligations outstanding at December 31, 1998 and 1997 under the Agreement were
$7,129,000, and $7,700,000, respectively. The Agreement provides for restrictive
covenants among which are debt service coverage ratio, quick ratio, senior debt
ratio and a tangible net worth requirement, all as defined. All assets now owned
or hereafter acquired are pledged as collateral under the Agreement.
<PAGE>
Interest expense was $170,000 in 1998, $915,000 in 1997 and $1,997,000 in
1996. Interest paid was $494,000 in 1998, $1,290,000 in 1997 and $2,122,000 in
1996.
Note 8 Stock Options
In May 1994, the shareholders approved the 1994 Stock Option Plan (the "Plan"),
which provides for the granting of options with respect to the purchase of an
aggregate of up to 600,000 (increased in May 1996 to 1,200,000 and May 1998 to
1,800,000) shares of common stock of the Company from time to time to key
employees of the Company and its subsidiaries. Options granted may be either
"incentive stock options," within the meaning of Section 422A of the Internal
Revenue Code, or non-qualified options.
The options are granted at not less than market value at the date of grant,
and in accordance with APB 25 and related interpretations, no compensation cost
has been recognized for grants, made under the Plan. Options are exercisable
over a period determined by the Board of Directors, but no longer than ten years
after the date they are granted. Options generally vest one-third each year
after a one-year waiting period.
In May 1997, the shareholders approved the 1996 Stock Option Plan for
Non-employee Directors, which provides for the granting of options with respect
to the purchase of an aggregate of up to 300,000 shares of common stock of the
Company. Options may be exercised up to one-third as of the date of grant of an
option and up to an additional one-third may be exercised as of the date of each
subsequent annual meeting of shareholders, but no longer than ten years after
the date they are granted. The options are granted at not less than market value
at the date of grant.
Had compensation cost been determined consistent with the fair value method
set forth under FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), for all awards during 1998, 1997 and 1996 under the
plans, net income and net income per common share would have decreased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
==================================================================================
(Dollars in thousands,
except per share amounts) Year ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income:
As reported $13,011 $14,825 $6,404
Pro forma 12,406 14,536 6,248
Net income per common share:
As reported:
Basic 1.06 1.22 .53
Diluted 1.03 1.19 .52
Pro forma:
Basic 1.01 1.19 .52
Diluted .98 1.17 .52
==================================================================================
</TABLE>
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 1998, 1997 and 1996, respectively: dividend
yields of 3.5%, 3.7% and 4%; expected volatility of 31%, 37% and 36%; risk-free
interest rates of 5%, 6.2% and 6%; and expected lives of five years in all
periods. The weighted-average fair value of an option granted was $2.78, $2.19
and $1.51 for the years ended December 31, 1998, 1997 and 1996, respectively.
<PAGE>
Notes to Financial Statements (continued)
United Industrial Corporation
A summary of stock option activity under all plans is as follows:
=============================================================================
Weighted-
Number Average
of Exercise
(Shares in thousands) shares Price
- -----------------------------------------------------------------------------
Balance at January 1, 1996 114 $4.94
Granted 368 5.30
Exercised (2) 4.75
Canceled (13) 4.75
- -----------------------------------------------------------------------------
Balance at December 31, 1996 467 5.23
- -----------------------------------------------------------------------------
Granted 483 7.35
Exercised (109) 5.31
Canceled (1) 4.75
- -----------------------------------------------------------------------------
Balance at December 31, 1997 840 6.44
- -----------------------------------------------------------------------------
Granted 538 12.01
Exercised (148) 5.38
Canceled (4) 7.50
- -----------------------------------------------------------------------------
Balance at December 31, 1998 1,226 9.01
=============================================================================
<TABLE>
<CAPTION>
==================================================================================
(In thousands) December 31 1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Exercisable 411 155 57
Available for future grants 615 546 728
==================================================================================
</TABLE>
The weighted-average remaining life for options outstanding as of December
31, 1998, is 7.7 years.
The following table summarizes information about stock options outstanding
at December 31, 1998:
===============================================================================
Shares (In thousands)
===============================================================================
Range of Exercise Prices Exercisable Outstanding
- -------------------------------------------------------------------------------
$4.50 to $7.00 203 360
$7.50 to $9.50 98 483
$10.25 to $13.00 110 383
--------------------------------
411 1,226
===============================================================================
Note 9 Leases
Total rental expense for all operating leases amounted to $2,178,000 in
1998, $1,543,000 in 1997, and $2,391,000 in 1996. Contingent rental payments
were not significant.
The future minimum rental commitments as of December 31, 1998, for all
noncancellable leases are $2,770,000 in 1999; $2,161,000 in 2000; $1,477,000 in
2001; $1,224,000 in 2002; and $815,000 in 2003.
<PAGE>
Note 10 Changes in Shareholder's Equity
<TABLE>
<CAPTION>
Common Retained Share-
Shares Common Additional Earnings Treasury holder's
(In thousands) Outstanding Stock Capital (Deficit) Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 12,171 $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 2 -- (8) -- 23 15
Employee awards 1 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 12,174 14,374 90,196 2,876 (17,301) 90,145
Net income -- -- -- 14,825 -- 14,825
Cash dividends declared ($.29 per share) -- -- -- (3,536) -- (3,536)
Stock options 109 -- (267) -- 857 590
Employee awards 1 -- -- -- -- --
Exchange of shares* (35) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 12,249 14,374 89,929 14,165 (16,444) 102,024
Net income -- -- -- 13,011 -- 13,011
Cash dividends declared ($.40 per share) -- -- -- (4,927) -- (4,927)
Shares repurchased (148) -- -- -- (1,475) (1,475)
Stock options 148 -- (346) -- 1,154 808
Employee awards 1 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 12,250 $14,374 $89,583 $22,249 $(16,765) $109,441
==============================================================================================================================
</TABLE>
*Shareholder surrendered 565,444 common shares in exchange for 530,444 shares.
This transaction affected treasury shares.
<PAGE>
Notes to Financial Statements (continued)
United Industrial Corporation
Note 11 Pensions and Other Postretirement Benefits
The Company sponsors several qualified and non-qualified pension plans and other
postretirement benefit plans for its employees. The following tables provide a
reconciliation of the changes in the plans' benefit obligations and fair value
of assets over the two-year period ending December 31, 1998, and a statement of
the funded status as of December 31 of both years.
<TABLE>
<CAPTION>
==========================================================================================================
Pension Benefits Other Benefits
------------------------------------------------
(Dollars in thousands) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of year $144,370 $145,893 $ 22,476 $ 21,975
Service cost 1,377 912 612 555
Interest cost 10,618 10,388 1,662 1,568
Amendments 1,008 -- -- --
Actuarial loss 11,897 637 1,846 12
Administrative expenses (38) (12) -- --
Benefits paid (13,333) (13,448) (1,524) (1,634)
- ----------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $155,899 $144,370 $ 25,072 $ 22,476
- ----------------------------------------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets at beginning of year $184,120 $169,020 -- --
Actual return on plan assets 22,975 28,560 -- --
Administrative expenses (38) (12) -- --
Benefits paid (13,333) (13,448) -- --
- ----------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $193,724 $184,120 -- --
- ----------------------------------------------------------------------------------------------------------
Funded (underfunded) status of the plan $37,825 $39,750 $(25,072) $(22,476)
Unrecognized net transition (asset) obligation (357) (445) -- --
Unrecognized net actuarial loss (gain) 559 (3,586) 1,455 (406)
Unrecognized prior service cost (3,228) (4,649) 481 526
- ----------------------------------------------------------------------------------------------------------
Prepaid benefit (accrued cost) $ 34,799 $ 31,070 $(23,136) $(22,356)
- ----------------------------------------------------------------------------------------------------------
Weighted-average Assumptions
Discount rate 7% 7.5% 6.75% 7.25%
Expected return on plan assets 8.5% 8.5% -- --
Rate of compensation increase 4% 4% -- --
==========================================================================================================
</TABLE>
<PAGE>
For measurement purposes, an 8.1 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1998. The rate was
assumed to decrease gradually to 5.2 percent in 2001 and remain at that level
thereafter.
<TABLE>
<CAPTION>
=======================================================================================================================
Pension Benefits Other Benefits
(Dollars in thousands) 1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Components of Net Periodic
Benefit Cost
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 1,377 $ 912 $ 903 $ 612 $ 555 $ 498
Interest cost 10,618 10,388 11,133 1,662 1,568 1,540
Expected return on plan assets (15,250) (13,928) (23,191) -- -- --
Net amortization and deferral -- -- 8,194 -- -- --
Amortization of prior service cost (413) (497) -- 46 43 40
Amortization of unrecognized
transition assets (88) (88) -- -- -- --
Recognized net actuarial loss (3) (5) -- -- -- --
Benefit (income) cost $ (3,759) $(3,218) $(2,961) $2,320 $2,166 $2,078
=======================================================================================================================
</TABLE>
Two subsidiaries of the Company sponsor non-funded defined benefit health
care plans. Both plans are non-contributory for retirees and one is contributory
for spouses whose contributions increase periodically so that the entire cost
for spouses will be covered by January 2003.
The assumed health care cost trend rate has a significant effect on the
amounts reported. A one-percentage-point change in the assumed health care cost
trend rate would have the following effects:
<TABLE>
<CAPTION>
============================================================================================================
1-Percentage 1-Percentage
Point Point
(Dollars in thousands) Increase Decrease
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost components in 1998 $ 150 $ (143)
Effect on postretirement benefit obligation as of December 31, 1998 $1,453 $(1,401)
============================================================================================================
</TABLE>
The Company sponsors a 401(k) plan with employee and employer matching
contributions based on specified formulas. The Company's contribution to the
401(k) plan was $1,309,000 in 1998, $1,304,000 in 1997, and $1,208,000 in 1996.
Note 12 Industry Segment Data
The Company has three reportable segments: defense, transportation and energy
systems. Other includes the corporate office and dormant corporations. The
defense segment's products include unmanned air vehicles, training and
simulation systems, automated aircraft test and maintenance equipment,
specialized firefighter training installations, and combat vehicles and
ordinance systems. The transportation segment manufactures and overhauls transit
systems and components. The energy segment manufactures combustion equipment for
biomass and refuse fuels.
The Company evaluates performance and allocates resources based on profit
or loss from operations before income taxes. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies.
Intersegment sales and transfers are recorded at the Company's cost; there
is no intercompany profit or loss in intersegment sales or transfers.
The Company's reportable segments are business units that offer different
products. The reportable segments are each managed separately because they
manufacture and distribute products with different production processes.
<PAGE>
Notes to Financial Statements (continued)
United Industrial Corporation
Sales to agencies of the United States Government, primarily by the defense
segment, were $106,763,000 in 1998, $128,423,000 in 1997, and $142,782,000 in
1996. No single customer, other than the United States Government, accounted for
10 percent or more of net sales in any year. Export sales were $40,994,000 in
1998, $41,832,000 in 1997, and $28,458,000 in 1996.
<TABLE>
<CAPTION>
==========================================================================================================================
(Dollars in thousands) Defense Transportation Energy Other Reconciliations Totals
- --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers $153,201 $16,650 $34,454 $ -- $ -- $204,305
Intersegment revenues 3,759 -- -- -- (3,759) --
Equity profit (loss) in ventures 483 (3,060) -- -- -- (2,577)
Interest income 4,637 -- 374 10,958 (12,294) 3,675
Interest expense 1,195 257 4 11,008 (12,294) 170
Depreciation expense 5,004 498 751 37 -- 6,290
Gain on sale of assets 4,332 -- -- 586 -- 4,918
Segment profit (loss) 23,239 (5,807) 6,160 (7,712) -- 15,880
Segment assets 140,089 27,285 33,399 218,779 (235,106) 184,446
Capital expenditures 11,593 928 1,075 436 -- 14,032
- --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
- --------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $175,664 $16,987 $37,927 $4,605 $ -- $235,183
Intersegment revenues 1,402 -- -- -- (1,402) --
Equity profit (loss) in ventures 256 (1,020) -- -- -- (764)
Interest income 3,207 -- 166 9,668 (11,597) 1,444
Interest expense 2,876 180 20 9,436 (11,597) 915
Depreciation expense 6,492 526 815 183 -- 8,016
Gain (loss) on sale of assets 14,169 -- -- (863) -- 13,306
Segment profit (loss) 33,592 (6,767) 7,661 (3,880) -- 30,606
Segment assets 152,599 16,793 32,435 200,215 (218,751) 183,291
Capital expenditures 5,405 1,009 486 26 -- 6,926
- --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
- --------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $181,584 $3,895 $30,012 $5,331 $ -- $220,822
Intersegment revenues 376 -- -- -- (376) --
Equity profit (loss) in ventures 452 (1,235) -- -- -- (783)
Interest income 2,388 -- 112 9,099 (10,566) 1,033
Interest expense 3,366 287 -- 8,910 (10,566) 1,997
Depreciation expense 5,222 179 805 214 -- 6,420
Gain on sale of assets 1,135 -- -- -- -- 1,135
Segment profit (loss) 15,216 (5,878) 3,710 (2,407) -- 10,641
Segment assets 158,908 12,570 27,748 194,812 (214,070) 179,968
Capital expenditures 3,824 1,009 959 507 -- 6,299
==========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Total external revenues for reportable segments $204,305 $235,183 $220,822
Intersegment revenues for reportable segments 3,759 1,402 376
Elimination of intersegment revenues (3,759) (1,402) (376)
- -----------------------------------------------------------------------------------------------
Total Consolidated Revenues $204,305 $235,183 $220,822
- -----------------------------------------------------------------------------------------------
Profit or Loss
Income before income taxes for reportable segments $15,880 $30,606 $10,641
- -----------------------------------------------------------------------------------------------
Assets
Total assets for reportable segments $419,552 $402,042 $394,038
Elimination of intercompany receivables (29,957) (35,103) (39,372)
Elimination of investment in consolidated subsidiaries (189,174) (170,901) (162,472)
Reclassification of deferred tax liabilities (15,975) (12,747) (12,226)
- -----------------------------------------------------------------------------------------------
Total Consolidated Assets $184,446 $183,291 $179,968
- -----------------------------------------------------------------------------------------------
Other significant items
Elimination of intercompany interest $12,294 $11,597 $10,566
===============================================================================================
</TABLE>
Segment profit (loss) includes research and development costs amounting to
$989,000 in 1998, $2,067,000 in 1997, and $2,641,000 in 1996.
Note 13 Income Taxes
The liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. In addition, the effect on deferred taxes of a change
in tax rates is recognized in the period that includes the enactment date.
Following is a reconciliation of the difference between total tax expense
and the amount computed by applying the federal statutory income tax rate to
income from operations before income taxes:
<TABLE>
<CAPTION>
====================================================================================================
(Dollars in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 5,481 $10,712 $3,618
State and local income taxes, net of federal income
tax benefit (including a reduction of $2,920 in 1998
of a $4,000 tax contingency established in 1997 (1,961) 5,072 480
Provision for nondeductible expenses (including
$94, $238 and $86 related to contingent payments
in 1998, 1997 and 1996 on an acquisition) 378 537 119
Non-taxable income (651) (632) --
Other - net (378) 92 20
- ----------------------------------------------------------------------------------------------------
Income Taxes $ 2,869 $15,781 $4,237
====================================================================================================
</TABLE>
<PAGE>
Notes to Financial Statements (continued)
United Industrial Corporation
Income tax payments were $6,000,000 in 1998, $6,875,000 in 1997 and
$2,000,000 in 1996. Deferred income tax balances:
<TABLE>
<CAPTION>
================================================================================================================
(Dollars in thousands) December 31 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets
Losses on long-term contracts not currently deductible $ 1,571 $ 2,257
Postretirement benefits other than pensions and other employee benefits 9,989 9,945
Product warranty and other provisions 4,550 2,107
Vacation pay accruals 739 730
Basis differences for asset sales 3,925 2,092
Other 75 42
- ----------------------------------------------------------------------------------------------------------------
Total Deferred Tax Assets 20,849 17,173
- ----------------------------------------------------------------------------------------------------------------
Deferred Tax Liability
Pension plans and other employee benefits (14,246) (12,902)
Excess tax depreciation (6,688) (7,314)
Patent amortization (1,156) (1,349)
Other (358) (316)
- ----------------------------------------------------------------------------------------------------------------
Total Deferred Tax Liability (22,448) (21,881)
- ----------------------------------------------------------------------------------------------------------------
Net Deferred Tax Liability $(1,599) $(4,708)
- ----------------------------------------------------------------------------------------------------------------
The net deferred tax liability is classified as follows:
Net current deferred income tax assets $ 5,451 $ 4,982
- ----------------------------------------------------------------------------------------------------------------
Net non-current deferred income tax liability $(7,050) $(9,690)
================================================================================================================
</TABLE>
Note 14 Selected Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
====================================================================================================================================
(Dollars in thousands, 1998 1997
except per share data ---------------------------------------------------------------------------------------------
and stock prices) Fourth Third Second First Fourth Third Second First
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $57,159 $49,979 $49,940 $47,227 $69,001 $52,089 $55,649 $58,444
Gross profit 15,229 11,634 12,006 13,402 19,043 11,659 11,483 16,443
Net income 6,029(a) 2,361 2,298 2,323 4,714(c) 6,678(b) 1,670 1,763
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per share
Basic $ .49 $ .19 $ .19 $ .19 $.38 $.55 $.14 $.14
Diluted $ .48 $ .19 $ .18 $ .18 $.37 $.54 $.14 $.14
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends declared
per share $ .10 $ .10 $ .10 $ .10 $.08 $.07 $.07 $.07
- ------------------------------------------------------------------------------------------------------------------------------------
Stock prices:
High $ 11 3/4 $ 13 1/2 $13 15/16 $ 13 9/16 $11 3/8 $9 15/16 $9 1/8 $8
Low $8 7/16 $9 10/16 $ 1 11/16 $9 1/4 $9 3/4 $ 8 5/16 $6 7/8 $5 7/8
====================================================================================================================================
</TABLE>
(a)Includes net gain on sale of assets of $4,332,000 ($2,696,000 net of taxes)
and a tax contingency reduction of $4,458,000 ($2,920,000 net of taxes) and a
litigation settlement expense of $4,500,000 ($2,948,000 net of taxes)
(b)Includes net gain on sale of assets of $13,306,000 ($8,470,000 net of taxes)
(c)Includes income from a favorable litigation settlement of $3,000,000
($1,779,000 net of taxes)
The Company's common stock is listed on the New York Stock Exchange. The
approximate number of shareholders of record as of February 16, 1999 was 2,400.
<PAGE>
Note 15 Litigation
The Company, along with numerous other parties, has been named in five tort
actions in Maricopa County Superior Court relating to environmental matters
based on allegations partially related to a predecessor's operation of a small
facility at a site in the State of Arizona that manufactured semi-conductors
between 1959 and 1960. All such operations of the Company were sold by 1961.
These tort actions seek recovery for personal injury and property damage among
other damages based on exposure to solvents allegedly released at the site.
These suits allege that the plaintiffs have been exposed to contaminated
groundwater in the Phoenix/Scottsdale, Arizona area and suffer increased risk of
disease and other physical effects. They also assert property damages under
various theories; seek to have certain scientific studies performed concerning
health risks, preventative measures and long-term effects; and seek incidental
and consequential damages, punitive damages, and an injunction against actions
causing further exposures.
The Company recently reached a written agreement in principle to settle all
of these matters with the plaintiffs for, among other items, a cash payment of
$4,250,000. The settlement is subject to formal execution of a settlement
agreement and approval by the Superior Court of Maricopa County.
Detroit Stoker was notified in March 1992 by the Michigan Department of
Natural Resources ("MDNR") that it is a potentially responsible party in
connection with the clean-up of a former industrial landfill located in Port of
Monroe, Michigan. MDNR is treating the Port of Monroe landfill site as a
contaminated facility within the meaning of the Michigan Environmental Response
Act ("MERA"). Under MERA, if a release or a potential release of a discarded
hazardous substance is or may be injurious to the environment or to the public
health, safety, or welfare, MDNR is empowered to undertake or compel
investigation and response activities in order to alleviate any contamination
threat. Detroit Stoker intends to aggressively defend these claims. At this
time, no estimate can be made as to the amount or range of potential loss, if
any, to Detroit Stoker with respect to this action.
The Company is involved in various other lawsuits and claims, including
certain other environmental matters, arising out of the normal course of its
business. In the opinion of management, the ultimate amount of liability, if
any, under pending litigation, including claims described above, will not have a
materially adverse effect on the Company.
Note 16 Disposed Businesses
In August 1997, the Company sold substantially all the operating assets of
Neo Products Co. for $587,000 in cash and promissory notes of $853,000 secured
by a mortgage on all fixed assets sold. The contract contains an "earn out"
provision based on net income earned through August 2002. The sale resulted in a
loss of $340,000, after taxes.
In September 1997, the Company sold all the capital stock of AAI Systems
Management, Inc., its Weather Systems Business, for $18,500,000 in cash and a
promissory note of $2,375,000. The sale resulted in a realized gain of
$14,169,000 ($8,810,000 net of taxes or $.71 per diluted share.)
<PAGE>
Notes to Financial Statements (continued)
United Industrial Corporation
The Consolidated Statements of Operations include the combined net sales of
the two divested companies, totaling $29,838,000 and $42,331,000, and the
combined net income totaling $1,595,000 ($.13 per diluted share) and $1,827,000
($.15 per diluted share) for the years ended December 31, 1997 and 1996,
respectively.
Note 17 Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
====================================================================================================
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $13,011,000 $14,825,000 $6,404,000
Basic earnings per share -
weighted-average shares 12,307,000 12,195,000 12,173,000
Effect of dilutive securities:
employee stock options 302,000 225,000 38,000
- ----------------------------------------------------------------------------------------------------
Diluted earnings per share
adjusted weighted-average
and assumed conversions 12,609,000 12,420,000 12,211,000
- ----------------------------------------------------------------------------------------------------
Basic earnings per share $1.06 $1.22 $.53
- ----------------------------------------------------------------------------------------------------
Diluted earnings per share $1.03 $1.19 $.52
====================================================================================================
</TABLE>
Note 18 Investment in Unconsolidated Investees
In 1993, AAI Corporation, a wholly owned subsidiary of the Company ("AAI"),
organized a new subsidiary Electric Transit, Inc., to manufacture electric
trolley buses for the U.S. market. In 1994 and again in 1995, ETI conveyed
equity interests (in ETI) to Skoda, a Czech Republic firm. Consequently, ETI is
owned 35% by AAI, and 65% by Skoda. Accordingly, the Company records its equity
share of income or loss in ETI. ETI has won contracts in both Dayton, Ohio for
the Miami Valley Regional Transit Authority and the city and county of San
Francisco, California. Under these contracts, which are valued at $32,000,000
and $168,000,000, respectively, AAI has received subcontracts of $9,600,000 and
$53,000,000 respectively.
In connection with these contracts, AAI has guaranteed attainment of
certain performance criteria. The ability of ETI to perform under these
contracts may, in part, be dependent on the performance of other parties,
including AAI, Skoda and other subcontractors. Thus, the ability to timely
deliver such equipment may be outside AAI's control. If ETI is unable to meet
its performance obligations, these performance guarantees could amount to a
significant portion of the contract value and could have a material adverse
effect on product margins and the Company's results of operations, liquidity or
financial condition. AAI monitors the progress of Skoda and ETI's other
subcontractors and does not believe that their performance will adversely affect
these contracts.
<PAGE>
Further, to meet its working capital requirements, ETI intends to utilize
additional customer advances and is currently negotiating a credit facility with
a bank. At December 31, 1998, these financing arrangements were not in place. If
ETI is unable to secure such financing, it could have a material adverse effect
on the Company's results of operations, liquidity or financial condition because
contract performance by ETI will depend on AAI and Skoda advancing working
capital funds as required. In addition, the Company understands that Skoda and
its affiliates have experienced and may continue to experience difficulties in
obtaining financing. The Company believes that ETI will be able to obtain
sufficient financing and the contracts will not be adversely affected. ETI is
owned 35% by the Company and is accounted for by the equity method.
Summary financial information of the Electric Transit Inc. entity is as
follows:
<TABLE>
<CAPTION>
====================================================================================================
(Dollars in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $23,123 $27,672 $ 4,720
Plant, property and equipment
and other assets 4,643 216 427
Current liabilities 40,058 35,200 7,027
Long-term debt -- -- 2,018
Net sales 20,922 1,655 1,582
Gross profit (loss) (7,357) (1,800) (2,359)
Net loss (7,981) (3,415) (3,897)
====================================================================================================
</TABLE>
<PAGE>
Report of Independent Auditors
United Industrial Corporation
Board of Directors and Shareholders
United Industrial Corporation
New York, New York
We have audited the accompanying consolidated balance sheets of United
Industrial Corporation and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations and cash flows for each of the
three years in the period ended December 31, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
[Ernst & Young LLP signature]
New York, New York
March 2, 1999
<PAGE>
Five-Year Financial Data
United Industrial Corporation
<TABLE>
<CAPTION>
Year ended December 31
(Dollars in thousands, except per share data) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Operating Data
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $204,305 $235,183 $220,822 $227,398 $209,727
Operating costs 194,065 219,562 209,162 223,385 202,766
Interest (income) expense - net (3,505) (529) 964 1,159 1,362
Income before income taxes 15,880 30,606 10,641 2,645 8,427
Income taxes 2,869 15,781 4,237 1,757 3,215
Net income 13,011 14,825 6,404 888 5,212
Earnings per Share:(a)
Basic 1.06 1.22 .53 .07 .43
Diluted 1.03 1.19 .52 .07 .43
Cash dividends paid on
common stock 4,927 3,536 2,434 3,165 3,425
Cash dividends declared per
common share .40 .29 .20 .26 .21
Shares outstanding as of year end
(in thousands) 12,250 12,249 12,174 12,171 12,167
- -------------------------------------------------------------------------------------------------------------------
Financial Position
- -------------------------------------------------------------------------------------------------------------------
Total assets $184,446 $183,291 $179,968 $183,106 $188,794
Property and equipment 30,566 25,576 41,534 42,586 45,214
Long-term debt -- 4,479 -- 13,750 20,000
Shareholders' equity 109,441 102,024 90,145 86,160 88,421
Shareholders' equity per share 8.93 8.33 7.40 7.08 7.27
- -------------------------------------------------------------------------------------------------------------------
Financial Ratios
- -------------------------------------------------------------------------------------------------------------------
Return on shareholders - equity 11.9% 14.5% 7.1% 1.0% 6.0%
Net income as a percent of sales 6.4 6.3 2.9 .4 2.5
Long-term debt as a percent of
total capitalization -- 4.2 -- 13.8 18.4
- -------------------------------------------------------------------------------------------------------------------
Statistical Data
- -------------------------------------------------------------------------------------------------------------------
Sales backlog as of year end $210,000 $188,000 $159,000 $206,000 $218,000
Capital expenditures 14,032 6,926 6,299 5,705 4,146
Depreciation and amortization 7,816 9,559 8,306 8,300 8,291
Number of employees 1,800 1,800 1,900 2,000 1,900
===================================================================================================================
</TABLE>
(a)The 1994 through 1996 earnings per share amounts have been restated to comply
with Statement of Financial Accounting Standards No. 128 "Earnings per Share."
<PAGE>
Corporate Organization
United Industrial Corporation
BOARD OF DIRECTORS
Harold S. Gelb
Chairman of the Board
Richard R. Erkeneff
President and Chief Executive
Officer of the Company and
AAI Corporation
Edward C. Aldridge, Jr.
President and Chief
Executive Officer
The Aerospace Corporation
Joseph S. Schneider
President
JSA Partners, Inc.
E. Donald Shapiro
Professor of Law
New York Law School
Susan Fein Zawel
Vice President Corporate
Communications,
Associate General
Counsel and Secretary
Honorary Director (nonvoting)
Bernard Fein
Chairman Emeritus
Retired Chairman
and Chief Executive Officer
CORPORATE OFFICERS
Richard R. Erkeneff
President and
Chief Executive Officer
James H. Perry
Vice President,
Chief Financial Officer
and Treasurer
Robert W. Worthing
Vice President and
General Counsel
Susan Fein Zawel
Vice President Corporate
Communications, Associate General
Counsel and Secretary
Edward A. Smolinski
Assistant Treasurer and
Assistant Secretary
SENIOR MANAGEMENT
AAI CORPORATION
Richard R. Erkeneff
President and
Chief Executive Officer
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
Thomas E. Wurzel
President
AAI/ACL Technologies, Inc.
Raleigh S. Huntsman
Executive Vice President
and General Manager,
Transportation Systems
John T. Merry
Vice President and General
Manager, Hunt Valley
Operations
G. Russell Zink
Vice President
Business Development
DETROIT STOKER COMPANY
Michael J. DiMonte
President and
Chief Executive Officer
Mark A. Eleniewski
Executive Vice President
Gary K. Ludwig
Vice President Finance
SYMTRON SYSTEMS, INC.
John J. Henning
President and Chief
Executive Officer
James W. Hanson
Vice President and
General Manager
Richard A. Brandt
Treasurer
<PAGE>
Corporate and Shareholder Information
United Industrial Corporation
CORPORATE HEADQUARTERS
570 Lexington Avenue
New York, New York 10022
212.752.8787
SUBSIDIARIES
AAI CORPORATION
P.O. Box 126
Hunt Valley, Maryland 21030
410.666.1400
www.aaicorp.com
DETROIT STOKER COMPANY
1510 East First Street
Monroe, Michigan 48161
734.241.9500
www.detroitstoker.com
SYMTRON SYSTEMS, INC.
17-01 Pollitt Drive
Fair Lawn, New Jersey 07410
201.794.0200
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT
Shareholders may obtain information relating to their share position, dividends,
transfer requirements, lost certificates and other related matters by
contacting:
American Stock Transfer
and Trust Company
40 Wall Street
New York, New York 10005
800.937.5449
www.amstock.com
For information about the Company's Dividend Reinvestment and Share Purchase
Plan, contact:
American Stock Transfer and Trust Company
800.278.4353
www.amstock.com
SHAREHOLDER RELATIONS
Security analysts, investment professionals and shareholders should direct their
inquiries to:
Investor Relations
United Industrial Corporation
570 Lexington Avenue
New York, New York 10022
INDEPENDENT AUDITORS
Ernst & Young LLP
787 Seventh Avenue
New York, New York 10019
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 10:00 a.m. on Tuesday, May
11, 1999, at:
The Park Lane Hotel
36 Central Park South
New York, New York
CORPORATE COUNSEL
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
FORM 10-K REPORT
A copy of the United Industrial Corporation Annual Report on Form 10-K as filed
with the Securities and Exchange Commission may be obtained without cost by
writing to:
Susan Fein Zawel, Secretary
United Industrial Corporation
570 Lexington Avenue
New York, New York 10022
STOCK LISTING
United Industrial Corporation common stock is traded on the New York Stock
Exchange
(Ticker Symbol: UIC)
INTERNET ADDRESS
http://www.unitedindustrial.com
<PAGE>
United Industrial Corporation
570 Lexington Avenue
New York, NY 10022
212.752.8787
212.838.4629 fax
www.unitedindustrial.com
EXHIBIT 21
SUBSIDIARIES OF UNITED INDUSTRIAL CORPORATION
March 3, 1999
<TABLE>
<CAPTION>
State Approximate Percentage of
(or jurisdiction) Voting Securities Owned by
Name in which 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 Medical, Inc. Maryland 100 (b)
AAI MICROFLITE Simulation International
Corporation Maryland 100 (b)
AAI/ACL Technologies, Inc. Maryland 100 (b)
AAI/ACL Technologies Europe Limited Britain 100 (c)
AAI California Carshells, Inc. Maryland 100 (b)
AAI Aerospace Services Corp. Maryland 100 (b)
AAI Romania Technologies, S.R.L. Romania 100 (b)
Detroit Stoker Company Michigan 100 (a)
Midwest Metallurgical Laboratory, Inc. Michigan 100 (d)
UIC Products Co. Illinois 100 (a)
Symtron Systems, Inc. New Jersey 100 (a)
U.I.C.-Del. Corporation Delaware 100 (a)
U.I.C. International, Ltd. Barbados 100 (a)
</TABLE>
- -----------------------------------
(a) Percentage owned by United Industrial Corporation ("United").
(b) Percentage owned by AAI Corporation.
(c) Percentage owned by AAI/ACL Technologies, Inc.
(d) Percentage owned by Detroit Stoker Company.
All of the subsidiaries listed above are included in the consolidated financial
statements of United.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of United Industrial Corporation and in the Registration Statement (Form S-8,
No. 33-57065) pertaining to the United Industrial Corporation 401(k) Retirement
Savings Plan, in the Registration Statements (Form S-8, Nos. 33-53911, 333-19517
and 333-59487) pertaining to the United Industrial Corporation 1994 Stock Option
Plan, and in the Registration Statement (Form S-8, No. 333-30103) pertaining to
the United Industrial Corporation 1996 Stock Option Plan for Nonemployee
Directors, of our reports dated March 2, 1999, with respect to the consolidated
financial statements of United Industrial Corporation included in the Annual
Report To Shareholders of United Industrial Corporation for the fiscal year
ended December 31, 1998, and with respect to the financial statement schedule
included in this Annual Report (Form 10-K).
ERNST & YOUNG LLP
New York, New York
March 29, 1999
<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>
<CIK> 0000101271
<NAME> United Industrial Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 21,126
<SECURITIES> 4,702
<RECEIVABLES> 34,316
<ALLOWANCES> 0
<INVENTORY> 23,569
<CURRENT-ASSETS> 97,459
<PP&E> 113,209
<DEPRECIATION> 82,643
<TOTAL-ASSETS> 184,446
<CURRENT-LIABILITIES> 40,644
<BONDS> 4,175
0
0
<COMMON> 14,374
<OTHER-SE> 95,067
<TOTAL-LIABILITY-AND-EQUITY> 184,446
<SALES> 204,305
<TOTAL-REVENUES> 212,898
<CGS> 152,034
<TOTAL-COSTS> 194,065
<OTHER-EXPENSES> 2,783
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 170
<INCOME-PRETAX> 15,880
<INCOME-TAX> 2,869
<INCOME-CONTINUING> 13,011
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,011
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.03
</TABLE>
