-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ltlmm+MNkFgX9RYrU2fYWmghc41fw1+y5rK7T+0SCT2iv79155f5MlI5qOeRyXpB Rwq0yzuyXG8a8LnD/JJJFw== 0000950146-99-000656.txt : 19990402 0000950146-99-000656.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950146-99-000656 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981212 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED INDUSTRIAL CORP /DE/ CENTRAL INDEX KEY: 0000101271 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 952081809 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04252 FILM NUMBER: 99580284 BUSINESS ADDRESS: STREET 1: 18 E 48TH ST CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2127528787 MAIL ADDRESS: STREET 1: 18 E 48TH STREET CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: TOPP INDUSTRIES CORP DATE OF NAME CHANGE: 19710510 FORMER COMPANY: FORMER CONFORMED NAME: HAYES MANUFACTURING CORP DATE OF NAME CHANGE: 19660911 10-K 1 ================================================================================ 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 - -------------------------------------------------------------------------------- (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] 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] 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 2 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, 3 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. 4 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. 5 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.
Approximate Area Owned Location Principal Use in Square Feet or Leased - -------- ------------- -------------- --------- 1510 East First Street Machine shop, steel fabrication, 194,910 floor space Owned in fee Monroe, MI engineering and sales facilities of on 14.4 acres of land Detroit Stoker (East Building) 1426 East First Street Assembly, shipping and administrative 101,000 floor space Owned in fee Monroe, MI facilities of Detroit Stoker on 2.2 acres of land (West Building) 15290 Fifteen Mile Road Foundry, 59,386 floor space Owned in fee Marshall, MI Midwest Metallurgical on 28.4 acres of land 2735 W Fifth Assembly and Administrative Facility 59,000 Leased to North Street of AAI November 30, 2002 Summerville, SC 21945 Three Noch Road Office Space of AAI 1,100 Leased to 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 6 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
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 7 $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. 8 EXECUTIVE OFFICERS OF THE REGISTRANT Annual elections are held in May to elect officers for the ensuing year. Interim elections are held as required. Except as otherwise indicated, each executive officer has held his current position for the past five years.
Age at Name Position, Office December 31, 1998 ---- ---------------- ----------------- 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.
- -------------------- * Member of the Company's Board of Directors 9 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. 10 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. 11 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). 12 (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. 13 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) 14 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 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 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 Schedule II -- Valuation and Qualifying Accounts United Industrial Corporation and Subsidiaries December 31, 1998
COL. A COL. B COL. C COL. D COL. E (1) (2) BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS END OF DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) (DESCRIBE) PERIOD ----------- --------- -------- ---------- ---------- ------ YEAR ENDED DECEMBER 31, 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 ========= ============ =========
(A) Uncollectible accounts written off, net of recoveries. (B) Reduction of valuation account. F-4 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). (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. EX-3.A 2 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. 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, 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, 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 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 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. 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 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. 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 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 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 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 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. 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 EX-10.J 3 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 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 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 (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 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 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 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 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 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 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 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 EX-10.L 4 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. 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 EX-11 5 EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES
Year ended December 31, 1998 1997 1996 ---- ---- ---- 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 ======== ======== =======
EX-13 6 1998 ANNUAL REPORT UIC ANNUAL REPORT 1998 UNITED INDUSTRIAL CORPORATION 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 Financial Highlights
(Dollars in thousands, except per share data) 1998 1997 1996 - --------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------
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 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 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 [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 [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 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 [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 [Photo Omitted] 8 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 [Photo Omitted] 10 [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 [Photo Omitted] Symtrons advanced firefighter training systems enable live firetraining in a safe and controlled environment. 12 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 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 [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 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 [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 [Photo Omitted] 18 [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 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 [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 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 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 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. 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. 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:
Fair Market Value (In thousands, December except average contract rate) 1999 2000 2001 2002 2003 Thereafter Total 31, 1998 - ----------------------------------------------------------------------------------------------------------------------- Firmly committed sales contracts 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)
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 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. Consolidated Statements of Operations United Industrial Corporation
Year ended December 31 (Dollars in thousands, except per share data) 1998 1997 1996 ---- ---- ---- 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 ======================================================================================
See notes to financial statements Consolidated Balance Sheets United Industrial Corporation
December 31 (Dollars in thousands) 1998 1997 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 ====================================================================================
December 31 (Dollars in thousands) 1998 1997 - ---------------------- ---- ---- 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 =====================================================================================
See notes to financial statements Consolidated Statements of Cash Flows United Industrial Corporation
Year ended December 31 (Dollars in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------ Operating Activities - ------------------------------------------------------------------------------------------ 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) ==========================================================================================
See notes to financial statements 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. 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. 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. 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. 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:
================================================================================== (Dollars in thousands, except per share amounts) Year ended December 31 1998 1997 1996 - ---------------------------------------------------------------------------------- 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 ==================================================================================
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. 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 =============================================================================
================================================================================== (In thousands) December 31 1998 1997 1996 - ---------------------------------------------------------------------------------- Exercisable 411 155 57 Available for future grants 615 546 728 ==================================================================================
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. Note 10 Changes in Shareholder's Equity
Common Retained Share- Shares Common Additional Earnings Treasury holder's (In thousands) Outstanding Stock Capital (Deficit) Stock Equity - ------------------------------------------------------------------------------------------------------------------------------ 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 ==============================================================================================================================
*Shareholder surrendered 565,444 common shares in exchange for 530,444 shares. This transaction affected treasury shares. 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.
========================================================================================================== Pension Benefits Other Benefits ------------------------------------------------ (Dollars in thousands) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------- 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% -- -- ==========================================================================================================
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.
======================================================================================================================= Pension Benefits Other Benefits (Dollars in thousands) 1998 1997 1996 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Components of Net Periodic Benefit Cost 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 =======================================================================================================================
Two subsidiaries of the Company sponsor non-funded defined benefit health care plans. Both plans are non-contributory for retirees and one is contributory for spouses whose contributions increase periodically so that the entire cost for spouses will be covered by January 2003. The assumed health care cost trend rate has a significant effect on the amounts reported. A one-percentage-point change in the assumed health care cost trend rate would have the following effects:
============================================================================================================ 1-Percentage 1-Percentage Point Point (Dollars in thousands) Increase Decrease - ------------------------------------------------------------------------------------------------------------ Effect on total of service and interest cost components in 1998 $ 150 $ (143) Effect on postretirement benefit obligation as of December 31, 1998 $1,453 $(1,401) ============================================================================================================
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. 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.
========================================================================================================================== (Dollars in thousands) Defense Transportation Energy Other Reconciliations Totals - -------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1998 - -------------------------------------------------------------------------------------------------------------------------- Revenues from external customers $153,201 $16,650 $34,454 $ -- $ -- $204,305 Intersegment revenues 3,759 -- -- -- (3,759) -- Equity profit (loss) in ventures 483 (3,060) -- -- -- (2,577) Interest income 4,637 -- 374 10,958 (12,294) 3,675 Interest expense 1,195 257 4 11,008 (12,294) 170 Depreciation 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 ==========================================================================================================================
=============================================================================================== 1998 1997 1996 - ----------------------------------------------------------------------------------------------- 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 ===============================================================================================
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:
==================================================================================================== (Dollars in thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- 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 ====================================================================================================
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:
================================================================================================================ (Dollars in thousands) December 31 1998 1997 - ---------------------------------------------------------------------------------------------------------------- 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) ================================================================================================================
Note 14 Selected Quarterly Data (Unaudited)
==================================================================================================================================== (Dollars in thousands, 1998 1997 except per share data --------------------------------------------------------------------------------------------- and stock prices) Fourth Third Second First Fourth Third Second First - ------------------------------------------------------------------------------------------------------------------------------------ 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 ====================================================================================================================================
(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. 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.) 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:
==================================================================================================== 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- 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 ====================================================================================================
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. 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:
==================================================================================================== (Dollars in thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- 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) ====================================================================================================
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 Five-Year Financial Data United Industrial Corporation
Year ended December 31 (Dollars in thousands, except per share data) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Operating Data - ------------------------------------------------------------------------------------------------------------------- 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 ===================================================================================================================
(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." 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 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 United Industrial Corporation 570 Lexington Avenue New York, NY 10022 212.752.8787 212.838.4629 fax www.unitedindustrial.com EX-21 7 EXHIBIT 21 SUBSIDIARIES OF UNITED INDUSTRIAL CORPORATION March 3, 1999
State Approximate Percentage of (or jurisdiction) Voting Securities Owned by Name in which Incorporated Immediate Parent - -------------------------------------------------------------------------------------------------------------------- AAI Corporation Maryland 100% (a) A.A.I. Engineering Support, Inc. Maryland 100 (b) A.A.I. International, Inc. Delaware 100 (b) Seti, Inc. Pennsylvania 100 (b) AAI Medical, Inc. Maryland 100 (b) AAI MICROFLITE Simulation International Corporation Maryland 100 (b) AAI/ACL Technologies, Inc. Maryland 100 (b) AAI/ACL Technologies Europe Limited Britain 100 (c) AAI California Carshells, Inc. Maryland 100 (b) AAI Aerospace Services Corp. Maryland 100 (b) AAI Romania Technologies, S.R.L. Romania 100 (b) Detroit Stoker Company Michigan 100 (a) Midwest Metallurgical Laboratory, Inc. Michigan 100 (d) 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)
- ----------------------------------- (a) Percentage owned by United Industrial Corporation ("United"). (b) Percentage owned by AAI Corporation. (c) Percentage owned by AAI/ACL Technologies, Inc. (d) Percentage owned by Detroit Stoker Company. All of the subsidiaries listed above are included in the consolidated financial statements of United. EX-23 8 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 EX-27 9
5 This Schedule contains summary financial information extracted from the financial statements contained in the body of the accompanying Form 10-K and is qualified in its entirety by reference to such financial statements. 0000101271 United Industrial Corporation 1,000 12-MOS DEC-31-1998 DEC-31-1998 21,126 4,702 34,316 0 23,569 97,459 113,209 82,643 184,446 40,644 4,175 0 0 14,374 95,067 184,446 204,305 212,898 152,034 194,065 2,783 0 170 15,880 2,869 13,011 0 0 0 13,011 1.06 1.03
-----END PRIVACY-ENHANCED MESSAGE-----