EXHIBIT 13
United Industrial Corporation makes
training and simulation systems,
unmanned air vehicles, automated
aircraft test and maintenance equipment,
and combat vehicles and ordnance
systems.
It manufactures ground transportation
components, automated weather reporting
systems, and specialized firefighter
training installations for domestic and
international markets.
The Company also produces energy systems
and specialized plastic products.
CONTENTS
Financial Highlights 1
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Letter to Shareholders 2
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Year in Review 5
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Management's Discussion 17
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Consolidated Financial Statements 20
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Report of Independent Auditors 37
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Corporate Organization 39
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Corporate and Shareholder Information 40
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Financial Highlights
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United Industrial Corporation
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(Dollars in thousands, except per share data) 1995 1994
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Net sales $ 227,398 $ 209,727
Net Income $ 888 $ 5,212
Earnings per share $ .07 $ .43
Dividends paid per share $ .26 $ .28
Shareholders' equity $ 86,160 $ 88,421
Shareholders' equity per share $ 7.08 $ 7.27
Sales backlog as of year end $ 206,000 $ 218,000
Shares outstanding 12,171,000 12,167,000
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1
To Our Shareholders
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United Industrial Corporation's net income in 1995 was $888,000 (7(cents)
per share) compared with $5,212,000 (43(cents) per share) in 1994. Sales
were $227 million in 1995 compared with $210 million in 1994. Business
backlog at the end of 1995 was $206 million compared with $218 million at
the end of 1994. During the year quarterly cash dividends of 7(cents),
7(cents), 7(cents), and 5(cents) were paid, totaling 26(cents) a share.
After a long and distinguished tenure that began in 1960, Bernard Fein
retired as President and Chairman of the Board of United Industrial
Corporation. Harold S. Gelb, a private investor and a former senior partner
of Ernst & Young, was elected Chairman. In the latter part of 1995, I
accepted the position of UIC's President and Chief Executive Officer. I
will continue to serve as President and CEO of AAI Corporation, UIC's
largest subsidiary.
United Industrial Corporation in 1995 experienced a year of both
disappointment and promise. The disappointments are evident from the
figures above, which show a steep decline in earnings. Profits were
depleted by a number of charges arising largely from reserves taken on
several contracts. The primary problem is an ongoing AAI program to upgrade
four SH-60 helicopter training simulators for the U.S. Navy. This program
has a long history going back to 1991. Over the years, substantial cost
overruns have occurred principally as a result of actions by the customer,
including requests for the performance of additional work and expensive
schedule delays. We have filed a legal claim in the Armed Services Board of
Contract Appeals, seeking monetary damages plus interest. While awaiting
the outcome of this appeal, we have set aside reserves that we estimate
will be adequate to finish the program in 1998. This has resulted in a
pretax charge to 1995 earnings of approximately $6.6 million, which
includes amounts to cover the costs of consolidating our helicopter
simulator operations from Florida and North Carolina to our main facility
at Hunt Valley, Maryland. To minimize the potential financial risk on
future contracts, AAI has improved its processes for the acquisition of new
business and the management of ongoing programs.
AAI's crucial Defense Systems business increased this year despite
massive industry consolidation. There was steady growth in sales for
Pioneer unmanned air vehicles and for the widely used Moving Target
Simulator (MTS II). The value of the JointSTARS simulator project was
augmented. AAI's subsidiary Engineering Support, Inc. (ESI) had a notable
competitive win in 1995, with the attainment of a contract for support of
the Army's Gunnery Maintenance Trainer. ACL Technologies, an AAI subsidiary
that manufactures fluid test systems, garnered strong bookings and sales.
Weather Systems scored successes not only with its well-known ASOS,
which has been installed at hundreds of U.S. airports, but also with its
newer NEXWOS and ASOS II systems. The latter chalked up sales in both Saudi
Arabia and Latvia. Transportation Systems progressed towards its goal of
becoming a leading American producer of transit components, expanding its
position in both overhaul and manufacturing. However, when the Los Angeles
Transit Authority reduced by 25 percent its order for light rail cars from
Siemens Transportation Systems, it became unprofitable for AAI to produce
the car shells for this project. Consequently, in line with our
determination to ensure profitability, we agreed with Siemens to terminate
our subcontracting arrangement.
In an auspicious event this year, the International Standards
Organization granted AAI its highest level of certification, ISO 9001. This
quality standard is recognized by more than 100
2
countries, and thus is vital to AAI's effort to grow its international
sales. Moreover, since the U.S. military is urging defense contractors to
use commercial standards, AAI's top ISO ranking will strengthen our
position in the increasingly competitive Department of Defense marketplace.
As for UIC's other subsidiaries, all three showed outstanding results
in 1995. For Symtron Systems, Inc., major sales of its Airport Rescue Fire
Fighter Trainers to Chicago O'Hare International Airport, Washington Dulles
International Airport, and the Helena, Montana, regional airport were the
chief contributors to a banner year. Detroit Stoker Company registered a 17
percent increase in sales, the lion's share attributable to its versatile
Hydrograte(R) stoker that can create energy from an amazing variety of
biomass fuels, ranging from paper mill wood waste to sunflower hulls.
Lastly, Neo Products, aided by new injection-molding equipment, nearly
doubled the previous year's operating income.
I am pleased to announce three important corporate appointments: James
H. Perry, UIC's Treasurer, as Chief Financial Officer; Robert W. Worthing,
an experienced member of AAI's senior management team, as UIC's Vice
President and General Counsel; and Susan Fein Zawel, UIC's Secretary and
Associate General Counsel, as Vice President Corporate Communications.
The future--1996 and beyond--holds promise for UIC. In 1995 a
comprehensive strategic plan was formulated. The plan identified the
Company's core competencies, its markets and strategies for growth. In the
near term, we will focus on increasing market share in transit, firefighter
training, and weather reporting systems while maintaining a strong position
in the defense and stoker businesses. And, of course, the overall goal is
the enhancement of shareholder value.
/s/ Richard R. Erkeneff
Richard R. Erkeneff March 3, 1996
President and Chief Executive Officer
A Message from Harold S. Gelb, Chairman of the Board
As the new Chairman of the Board of United Industrial Corporation, I
welcome this opportunity to tell you about important changes in Board
membership. Bernard Fein retired after 35 years of outstanding
contributions to UIC and was named Chairman Emeritus. I was elected
Chairman of the Board and Howard M. Bloch was elected Vice Chairman.
Following the resignations of directors Maurice Rosenthal and Rick Bierman,
we were fortunate to add to our Board Edward C. "Pete" Aldridge, Jr.,
Richard R. Erkeneff, and Susan Fein Zawel. Pete Aldridge is a former
Secretary of the Air Force and is President and CEO of The Aerospace
Corporation. Myron Simons will retire in May 1996 after years of diligent
service, and the Board has nominated as his replacement E. Donald Shapiro,
former dean and a Professor of Law at New York Law School and a director of
a number of companies, including Loral Corporation. As you can see, we have
broadened the Board with outside directors whose diverse experience and
independent judgment will help us achieve our corporate objectives. With
the Board's direction, our new President, Dick Erkeneff, and his management
team are taking actions aimed at improving the Company's financial
performance and increasing the value of your investment.
3
Within the huge dome
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of a Moving Target
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Simulator, a computer [PHOTOGRAPH OMITTED]
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directs the action
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as soldiers practice
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aiming and firing
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antiaircraft missiles.
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The Year in Review
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AAI CORPORATION
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For AAI, 1995 was a year in which sales were up and the company became more
profitable and competitive. But charges related to past contracts eroded
earnings.
Most serious was the charge on a single defense program that AAI was
awarded years ago. Management in 1995 set aside financial reserves that are
expected to be sufficient to offset the substantial added costs incurred on
this contract. Legal claims have been filed to recover contract
expenditures to which AAI believes it is entitled.
On the positive side, AAI in 1995 achieved the coveted ISO 9001
Certification, an internationally recognized quality standard for both
commercial and defense work. Certification will give the company an edge in
the struggle for competitive contracts. In its core Department of Defense
(DOD) business, AAI maintained leadership in computerized training
simulators and unmanned air vehicles. In the non-DOD marketplace, AAI grew
its weather monitoring business, with the introduction of an important new
product, and its transit business, with contracts for the refurbishing of
passenger rail cars. AAI's wholly owned subsidiaries, Engineering Support,
Inc. and ACL Technologies, both enhanced their market share.
Defense Systems
AAI's highly regarded computerized training simulators contribute
significantly to the company's defense sales. Designed and built-to-order
for military customers, AAI simulators provide a superior, cost-effective
way for troops to master the intricacies of sophisticated weapons systems.
An example is AAI's popular Moving Target Simulator (MTS II), which enables
trainees to practice aiming and firing antiaircraft missiles without danger
to themselves or others. Within a 40-foot-diameter dome, the MTS II
computer projects graphic images with realistic infrared signatures of
air-combat scenarios. As simulated missiles are fired, the computer records
hits and misses. MTS II systems are presently in service in the U.S. and
five other countries. A $6 million order from Japan was received in 1995
and will be delivered in 1996.
AAI's computerized training
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simulators help troops master [PHOTOGRAPH OMITTED]
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sophisticated weapons systems.
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AAI is currently building an important new simulator for the U.S. Air
Force: the computerized maintenance trainer for the Joint Surveillance
Target Attack Radar System (JointSTARS). An airborne ground-surveillance
system, JointSTARS employs a specially equipped E-8C aircraft to monitor
troop maneuvers and other ground activity, then relays the information to a
command center. Using the JointSTARS maintenance trainer, Air Force
5
technicians learn how to service the radar sensor and computers that are
the heart of the apparatus. In 1995 the Air Force expanded the AAI project
by enlarging the trainer's specifications and exercising an option for a
second one. Total value of the contract is now over $17 million.
Most of the electronic combat trainers used by the U.S. armed forces
were built by AAI; at present, two different systems are in production. The
Simulator for Electronic Combat Training, a computer-based system that
generates a synthetic electronic combat environment, is scheduled for
completion and delivery in August 1996. And the Compass Call Mission
Simulator is receiving major modification under a 1995 Air Force contract
worth $3.5 million, with an additional $4 million anticipated in 1996.
AAI is part of a team that in 1995 was awarded the first phase of an
innovative program to develop the Fire Support Combined Arms Tactics
Trainer (FSCATT), a simulator that provides tactical experience to howitzer
crews. FSCATT is an example of what many regard as the next generation in
training simulators: distributive interactive systems. Thus, howitzer crews
using FSCATT will be able to interact with soldiers using other simulator
training systems--such as drivers of simulated tanks, or pilots of
simulated airplanes--all within the same virtual reality battlefield. AAI's
share of the initial development contract is $4 million. Production
contracts will be awarded in 1996.
Pioneer UAV, Inc., a joint venture between AAI and Israel Aircraft
Industries, has had a busy year filling U.S. Navy orders for 30 of the
Pioneer unmanned air vehicles that won plaudits in the Persian Gulf War. In
September 1995, two months ahead of the scheduled delivery date to the
Navy, the men and women of the Pioneer production team at AAI proudly
rolled out the first of the 14-foot-long, 463-pound reconnaissance
aircraft. The remaining Pioneers will be delivered through September 1996.
Further orders are expected in 1996, and annual sustainment orders are
anticipated for the foreseeable future. AAI also has increased its UAV
business with contracts to augment the capabilities of the Pioneer system,
refurbish existing aircraft, provide logistical support, and produce spare
parts. Pioneer pilotless drones are now in use by the U.S. Navy and Marine
Corps, based on land and aboard ships. In addition, a test system and a
training system are operational.
AAI's Pioneer production team is
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filling U.S. Navy orders for the [PHOTOGRAPH OMITTED]
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unmanned air vehicles that won
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plaudits in the Persian Gulf War.
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6
The complex internal
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components of this
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Pioneer unmanned air [PHOTOGRAPH OMITTED]
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vehicle are checked
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out meticulously by
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an experienced AAI
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production team.
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Skilled technicians
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calibrate sensors [PHOTOGRAPH OMITTED]
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for AAI's Next
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Generation Weather
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Observation System.
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ESI
Engineering Support, Inc. (ESI), a wholly owned AAI subsidiary with nearly
300 employees, enjoyed an outstanding year in 1995, with over $21 million
in sales and higher earnings. ESI markets on-site logistical support for
government-owned equipment, especially simulation systems. The subsidiary
scored a major win in 1995, overcoming competition to capture a $15.4
million contract from the U.S. Army's Simulation Training and
Instrumentation Command for support of Gunnery Maintenance Trainers. ESI
also won 1995 contracts for logistical support of the Air Force's EF/F-111
flight simulator at Cannon Air Force Base, New Mexico, and SIMNET, the
simulation networking system headquartered at Fort Knox, Kentucky, and
deployed worldwide.
ACL Technologies
AAI's Santa Ana, California, subsidiary, ACL Technologies, a leading
producer of hydraulic test equipment for the commercial aviation market and
the Department of Defense, had an excellent year with sales of $13.8
million, up 35 percent from 1994. Now underway is a project for the
automation of Hamilton Standard's facility for producing fuel controls for
jet aircraft. Domestically 1995 orders included contracts from American
Airlines, Moog, and Aeroquip, the world's largest manufacturer of pressure
hoses. International orders, about a third of total business, came from
Korea, Brunei, Turkey, Indonesia, Singapore, United Kingdom, South Africa,
Brazil, and China.
Weather Systems
In 1995 AAI deployed 148 additional Automated Surface Observing Systems
(ASOS) at the nation's airports, as specified by the company's recently
restructured contract with the National Oceanographic and Atmospheric
Administration (NOAA). Nearly 700 airports now have ASOS installations. The
revised contract extends the NOAA-funded program to run through 1997 and
increases its total value by $10 million. AAI is also actively pursuing
several other ASOS markets and has booked 15 sales to the U.S. Air Force
for 1996.
AAI is proud of ASOS. Designed and assembled at the company's Hunt
Valley, Maryland, facility, it has proved its effectiveness under the most
severe climatic conditions on the planet. In 1995 AAI shipped two systems
for Greenland--the fifth and sixth systems to be installed there--and the
Navy has already set up two systems in Antarctica. Repeat orders for ASOS
from such demanding locations attest to the reliability and durability of
the product.
AAI's newly introduced Next Generation Weather Observation System
(NEXWOS) meets the need for a technologically advanced but lower-priced
product. The cost advantage of NEXWOS makes it especially attractive for
smaller airports, heliports, and offshore oil platforms. During its first
year, NEXWOS was certified by the Federal Aviation Administration and won
contracts from customers in North Carolina, Tennessee, Kentucky, Louisiana,
Virginia,
9
South Dakota, and Connecticut. Preliminary indications are that sales will
grow significantly in 1996.
ASOS II, an international version of NEXWOS, was successfully launched
in 1995 with a 22-system sale to Saudi Arabia and a contract from Latvia
for Riga International Airport. ASOS II was displayed at the World
Meteorological Organization Conference in Geneva and also at the Paris Air
Show.
Transportation Systems
AAI's transportation subsidiary, Electric Transit, Inc. (ETI), has
fulfilled the first phase of its contract to produce a fleet of 61 electric
trolley buses for the Miami Valley Regional Transit Authority in Dayton,
Ohio. A joint venture between AAI and a Czech Republic firm, SKODA, ETI
accomplished the on-time delivery of three production prototype trolley
buses. These nonpolluting vehicles are funded in large part by Federal
Transit Administration clean air funds. After customer evaluation and
approval, full-scale production will begin in late spring 1996. Meanwhile,
ETI is competing for a sizable trolley contract to be awarded by San
Francisco in 1996 and is seeking other opportunities elsewhere in the U.S.
market.
AAI transportation is expanding
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its position in both transit [PHOTOGRAPH OMITTED]
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overhaul and manufacturing.
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During 1995 AAI's transportation division expanded its position in
both transit overhaul and transit manufacturing. This work requires precise
heavy fabrication and welding skills that AAI has perfected over the years
while working on Department of Defense hardware.
In transit overhaul, a $2.4 million contract to refurbish 28 MARC II
heavy rail cars for the Maryland Department of Transportation commuter rail
service was successfully completed as scheduled. Another transit project
now in progress calls for the repair of 111 trucks--the assembly to which
train axles and wheels are attached--for Maryland's light rail system that
connects Baltimore and its suburbs.
In transit manufacturing, AAI is fabricating a large number of trucks
and bolster beams for the Southeast Pennsylvania Transit Authority under a
$4.1 million contract from ABB Australia. The new heavy commuter rail cars
will serve Philadelphia on the Market-Frankford subway.
Another manufacturing project, to produce 18 new light rail cars for
Maryland's Central Light Rail Line, brought AAI $6 million in subcontracts
from ABB Sweden to build the car shells, and from Adtranz in Elmira, New
York, to build the trucks. After the propulsion systems and other interior
equipment are installed, AAI will complete the assembly of the cars. The
finished trains will provide improved transportation to the
Baltimore-Washington International Airport, Penn Station (Baltimore), and
the industrial base around Hunt Valley, Maryland.
10
Workers test the
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wiring panel and
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other features on a [PHOTOGRAPH OMITTED]
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production prototype
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electric trolley bus,
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preparing it for
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delivery on schedule.
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SYMTRON SYSTEMS, INC.
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United Industrial's producer of computer-based simulation systems for
training firefighters achieved record sales of $11.6 million in 1995, more
than double the sales of the previous year. Bookings soared 62 percent,
reflecting substantial contract awards for the company's patented Aircraft
Rescue Fire Fighter Trainer (ARFFT).
Symtron's computer-controlled
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Aircraft Rescue Fire Fighter [PHOTOGRAPH OMITTED]
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Trainer is environmentally
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friendly and safer to use.
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The new contracts came from Chicago O'Hare International Airport,
Washington Dulles International Airport, and the Helena, Montana, regional
airport. Installation of these state-of-the-art systems is currently in
progress at all three sites, with work scheduled to be completed in 1996.
In contrast to older training systems that burned highly polluting and
hazardous aviation fuel, Symtron's computer-controlled liquid propane
system is environmentally friendly and safer to use. The ARFFT includes a
large mock-up of a crashed fuselage situated in a 125-foot-diameter burn
area. A computer operator can ignite or extinguish the flames with a single
keystroke, lessening risk to trainees learning how to rescue passengers
from burning planes.
A Structural Fire Fighter Trainer ordered in 1995 for Henderson,
Nevada, will serve as a regional center at which local firefighters can
upgrade their skills in combating home and other building fires. Structural
systems also were purchased this year by a community college in Clinton,
Michigan, and a fire department in Kassell, Germany.
Symtron's Military Fire Fighter Trainer Program was awarded $2.7
million in increased payments on U.S. Navy contracts for systems that teach
sailors how to deal with shipboard blazes. The recently passed Defense
Appropriation bill offers the company the prospect of orders for a
significant number of structural fire trainers to be installed on U.S. Army
bases.
In development at Symtron is a Mobile Aircraft Rescue Fire Fighter
Trainer (MARFFT), a portable system that will be transported from site to
site on two trailers and shared inexpensively among smaller airports.
12
An airport rescue
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crew uses Symtron's
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ARFFT to learn how to [PHOTOGRAPH OMITTED]
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extinguish intense
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fuel-spill fires.
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This Hydrograte
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stoker in Flint,
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Michigan, burns [PHOTOGRAPH OMITTED]
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biomass wood waste to
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generate electricity.
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DETROIT STOKER COMPANY
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United Industrial's energy-systems subsidiary registered a sharp gain in
operating income in 1995 as a result of a 17 percent increase in sales
coupled with savings from cost containment measures.
More than 75 percent of Detroit's 1995 contracts were for
Hydrograte(R) stokers and upgrading of existing stoker installations. The
Hydrograte has long been popular in the pulp and paper industry, where wood
waste is burned to generate process steam and electricity. This year the
largest Hydrograte ever built at Detroit's Monroe, Michigan, facility was
exported to Fraser Paper in New Brunswick, Canada. In addition to wood
waste, other renewable biomass fuels are finding increasing favor
worldwide, including such agricultural waste products as bagasse, olive
pits, chicken litter, and sunflower hulls. A Hydrograte now being installed
by Detroit in Bahia Blanca, Argentina, for the Cargill Corporation will be
fueled with sunflower hulls. Combustion of biomass generally produces
extremely little pollution, as compared with the fossil fuels.
Detroit's Hydrograte can burn
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renewable biomass fuels that [PHOTOGRAPH OMITTED]
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produce very little pollution.
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Aftermarket sales of stoker replacement parts and retrofits remained
strong in 1995, delivering profit margins that contributed significantly to
earnings. Over the past two years Detroit's experienced sales and service
personnel boosted the company's market share of this business by about 6
percent.
Detroit's product line of natural gas and oil burners are being
successfully installed on both new and older industrial boilers. The
burners are designed to meet federal and state environmental laws requiring
low emission levels of nitrous oxides. A recent contract from General
Motors involved the repowering and fuel conversion of two existing boilers
at the firm's Pontiac, Michigan, fabrication plant.
NEO PRODUCTS COMPANY
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United Industrial's Chicago-based producer of custom thermoplastic parts
saw record sales in 1995 and operating income nearly double that of 1994.
Neo is molding all of the fuel tank reservoirs for two 1997 General Motors
car models. A $4.7 million supply agreement with Tenex Corporation calls
for the fabrication of a variety of office wastebaskets. Neo expects to
continue its investment in modern capital equipment.
15
CONTENTS
Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
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Consolidated Balance Sheets 20
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Consolidated Statements of Operations 22
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Consolidated Statements of Cash Flows 23
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Notes to Consolidated Financial Statements 24
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Report of Independent Auditors 37
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Five-Year Financial Data 38
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Management's Discussion and Analysis
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of Financial Condition and Results of Operations
Results of Operations
Net sales of $227,398,000 in 1995 rose by 8% from 1994. The increase was
attributable to all segments. In the defense segment, which recorded a 7%
increase, the Company's diversification into transportation systems has resulted
in initial program sales, and the recovery of the commercial airline industry
has boosted sales of hydraulic test equipment. The synergies achieved through
the combination of Symtron's engineering capabilities and AAI's manufacturing
and installation capabilities have contributed to a better than twofold increase
in sales of firefighter systems. In 1994, due to an overall reduction in defense
spending, net sales of $209,727,000 were $43,266,000 lower than 1993 net sales
of $252,993,000. 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 (DOD) 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 $154,346,000 in
1995, $159,766,000 in 1994, and $172,169,000 in 1993. The Company's energy
segment recorded a 17% increase in sales in 1995 as compared to 1994, primarily
due to increased volume of sales of Hydrograte stokers. Sales in 1994 trailed
those in 1993 by $2,559,000 generally due to lower stoker sales.
Gross profit amounted to $45,259,000 or 19.9% in 1995, $46,951,000 or 22.4%
in 1994, and $43,503,000 or 17.2% in 1993. In 1995, the reduction of gross
profit in the defense segment resulted primarily from the recognition of
approximately $10,200,000 of losses on contracts compared to $5,600,000 of
losses in 1994. In 1993, such contract losses were $28,000,000. In 1995, these
losses primarily pertain to reserves taken on one contract: a helicopter
simulator program that eroded the current year's pretax earnings by about
$6,600,000, of which approximately $5,100,000 was recorded in December when the
Company finished its latest estimate to complete. The integration phase of this
project has started and remains on schedule. The Company is optimistic that it
has sufficiently reserved for costs to complete this contract. Also in the
fourth quarter of 1995, the Company recorded a $2,000,000 charge to reflect
certain finished goods and work in progress inventories related to a particular
program at net realizable value. Partially offsetting these charges was the
increased profitability of the Company's hydraulic test equipment business
and growth in sales of certain highly profitable operational and maintenance
training simulators. The increased gross profit in the energy segment was
essentially due to the increased volume and profit margins on sales of
Hydrograte stokers. The increase in gross profit in 1994 compared to 1993
represents improved profit performance by the defense subsidiary, including the
Company's efforts to control costs on certain major long-term contracts,
partially offset by lower sales of stoker equipment at the energy segment.
Selling and administrative expenses as a percentage of sales were 18.1% in
1995, 19.1% in 1994, and 17.2% in 1993. The decrease in 1995 has resulted from
the elimination of certain expenses produced by the Company's organizational
changes in 1994 and 1993, partially offset by a $1,000,000 charge related to the
1994 acquisition of Symtron (see Note 7). The increased percentage in 1994 was
due to the reduction in sales in that year. Interest income was $1,201,000 in
1995, $1,840,000 in 1994, and $3,650,000 in 1993. The decrease in interest
income was principally due to the reduced note receivable balance resulting from
the installment payments on such note receivable which had a 14% interest rate.
17
Interest expense was $2,360,000 in 1995, $3,202,000 in 1994, and $3,011,000
in 1993. Decreased borrowings in 1995 resulted in lower interest expense. In
1994, decreased average borrowings were offset by higher interest rates.
In 1995, net income of $888,000 decreased $4,324,000 from $5,212,000 in
1994. These results compare to a loss of $12,017,000, before the effect of
changes in accounting, in 1993. The reduction of net income in 1995 resulted
primarily from the recognition of losses of approximately $12,200,000 by the
defense subsidiary on certain long-term contracts and inventory write-offs
mentioned earlier. In the Company's energy segment, increased sales volume and
improved profit margins were the primary reasons behind its improved results.
Net income in 1994 includes a net pension curtailment gain of $928,000 (see Note
11). In 1993, the net loss included a restructuring charge at AAI Corporation of
$22.5 million (see Note 17). A major portion of the charge resulted from the
termination of operations of AAI/MICROFLITE, a business acquired in 1991. Also
in 1993, the net loss was reduced by $1,288,000 for tax credits for research and
experimental expenditures and $994,000 resulting from a net cumulative effect of
changes in accounting principles.
Liquidity and Capital Resources
Cash and cash equivalents amounted to $11,915,000 at the end of 1995,
$6,132,000 at the end of 1994, and $3,906,000 at the end of 1993. The Company's
principal uses of capital during the past several years related to acquisitions,
new projects and the repayment of long-term debt. In January 1994, the Company
acquired Symtron Systems, Inc., a business engaged in the development and
production of patented firefighter trainers (see Note 7). Symtron serves both
government and commercial markets. Net advances of $9,316,000 have been made to
Symtron since its acquisition. The Company anticipates that the receipt of new
contracts will enable Symtron to become self-financing. Symtron's backlog at
December 31, 1995 has more than doubled from a year earlier. In 1995, the
Company made a $1,000,000 payment to the previous shareholders of Symtron based
on the profits on contracts existing at the acquisition date in accordance with
the purchase agreement. Additionally, contingent amounts are payable if certain
pretax profits, as defined in the purchase agreement, are earned for each of
the years in the four year period ending December 31, 1998. Other new
commercial ventures include AAI's entry into the transit systems market and
introduction of the Next Generation Weather Observing System (NEXWOS)and
ASOS II. In 1995, AAI's transportation subsidiary, Electric Transit, Inc.
(ETI), a joint venture between AAI and a Czech Republic firm, SKODA, delivered
on schedule the first pre-production electric trolley bus to the Miami Valley
Regional Transit Authority (MVRTA) for service in the Dayton, Ohio, area.
In 1994, ETI emerged the winner of a competition to build a fleet of 63
(subsequently reduced to 61) electric trolley buses for the MVRTA. Also in
1995, ASOS II sales were recorded to Saudi Arabia and Latvia. The Company
intends to continue increasing its diversification into non-DOD markets.
The Company expects to meet its cash requirements for 1996, including
amounts necessary to fund new business ventures described above, from operations
and borrowings under its exisiting lines of credit. The Company's defense
subsidiary has a revolving credit arrangement and note agreement that contain
restrictive covenants with respect to payment of dividends or advances and loans
to the Company. These restrictions have not materially affected the Company's
ability to meet its cash requirements. Annual installment payments of $8,540,000
on the Company's note receivable concluded in February 1995; interest income
related to this note decreased by approximately $997,000 in 1995 and $1,196,000
in 1994. Factors relating to the amounts of cash from operating, financing and
investing activities are explained in detail in the Consolidated Statements of
Cash Flows.
The Company's cash dividends of $.26 per share in 1995, $.28 per share in
1994, and $.44 per share in 1993, amounted to aggregate payments of $3,165,000
in 1995, $3,425,000 in 1994, and $5,381,000 in 1993. In 1994, the Company's
customary fourth quarter dividend was declared in February 1995 ($.07 per
share).
The ratio of current assets to current liabilities was 2.1 at the end of
1995, 2.3 at the end of 1994, and 2.0 at the end of 1993. The current ratio
decreased in 1995 principally due to the increase in the current portion of
long-term debt and increased in 1994, principally due to reductions in accounts
receivable from the U.S. Government and short-term borrowings.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
Capital expenditures were $5,705,000 in 1995, $4,146,000 in 1994, and
$5,931,000 in 1993. There are no material commitments for acquisition of capital
assets as of December 31, 1995.
On October 13, 1994, AAI entered into a two-year revolving credit agreement
with two banks for $20,000,000, including a commitment for up to $10,000,000 for
commercial letters of credit. The revolving credit is limited to a percentage of
the eligible accounts receivable, as defined. Immediately prior to entering into
this credit facility, AAI prepaid $5,000,000 of the $25,000,000 notes payable
with certain insurance companies, thereby reducing the outstanding principal
balance to an aggregate of $20,000,000. (See Note 6 for further information
concerning these agreements.)
At December 31, 1995 and 1994, AAI's net assets of approximately
$68,400,000 and $66,000,000, respectively, were restricted under debt
agreements.
Under an additional $9,000,000 line-of-credit agreement with a bank, which
expires June 30, 1996, the Company may borrow up to $9,000,000 including a
commitment for up to $4,000,000 of commercial letters of credit. A wholly owned
subsidiary is also a party to this agreement and may use up to $1,000,000 of the
line-of-credit. At December 31, 1995 the unused portion of this credit line was
$4,000,000. This agreement incorporates the covenants of the note purchase
guarantee agreement and is guaranteed by a subsidiary of the Company. The
Company believes it will be able to renew this agreement or obtain comparable
financing on substantially similar terms.
Long-term debt less the current portion amounted to $13,750,000,
$20,000,000, and $25,000,000 at December 31, 1995, 1994 and 1993, respectively.
The debt amounted to 13.8%, 18.4% and 22.6% of total capitalization in 1995,
1994, and 1993, respectively.
Earnings per share has been computed using the weighted average number of
the common and common equivalent shares outstanding and the assumed exercise of
all stock options having exercise prices less than the average market price of
the common stock using the treasury stock method.
Environmental and Other Litigation
The Company and the State of Arizona signed a Consent Decree and Work Plan
to settle a suit related to a small manufacturing facility operated by the
Company between 1959 and 1960. Without admitting liability, and in exchange for
a full release from liability by the State of Arizona Department of
Environmental Quality, the Company has agreed to undertake and pay for a
Remedial Investigation and Feasibility Study plus amounts for past and future
costs. The total estimated cost to the Company is approximately $1,900,000,
including the Company's best estimate of its share of the clean-up costs, which
are capped at $1,120,000 (see Note 16).
In May 1995, a subsidiary of the Company submitted a Request for Equitable
Adjustment to the U.S. Government for approximately $11,800,000 related to a
helicopter simulator contract (see Note 16). While the Company believes that
the formal claims asserted against the customer are meritorious, the customer
has asserted substantive defenses to these claims. Because the proceedings are
currently in the discovery phase, it is not possible at this time to determine
the ultimate amount of recovery of these costs.
19
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
United Industrial Corporation
================================================================================
(Dollars in thousands) December 31 1995 1994
- --------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 11,915 $ 6,132
Trade receivables:
U.S. Government 20,650 24,613
Other 12,261 8,951
- --------------------------------------------------------------------------------
32,911 33,564
Inventories 47,922 53,486
Note receivable -- current portion -- 8,540
Prepaid expenses and other
current assets 1,761 1,667
Deferred income taxes 6,487 3,169
- --------------------------------------------------------------------------------
Total Current Assets 100,996 106,558
- --------------------------------------------------------------------------------
Other Assets 39,524 37,022
Property and Equipment
Land 1,886 2,471
Buildings and improvements 48,106 47,736
Machinery and equipment 73,978 72,157
Furniture and fixtures 5,253 5,360
- --------------------------------------------------------------------------------
129,223 127,724
Less allowances for depreciation
and amortization 86,637 82,510
- --------------------------------------------------------------------------------
42,586 45,214
- --------------------------------------------------------------------------------
$183,106 $188,794
================================================================================
20
================================================================================
(Dollars in thousands) December 31 1995 1994
- --------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Short-term borrowings $ 3,000 $ 4,200
Accounts payable 10,132 8,769
Accrued employee compensation and taxes 6,536 6,526
Customer advances 6,384 6,981
Provision for contract losses 10,751 10,474
Federal income taxes -- 3,333
Current portion of long-term debt 6,250 --
Other liabilities 4,472 5,664
- --------------------------------------------------------------------------------
Total Current Liabilities 47,525 45,947
- --------------------------------------------------------------------------------
Long-Term Debt, Less Current Portion 13,750 20,000
Postretirement Benefits Other Than Pensions 21,322 20,618
Other Liabilities 4,529 4,580
Deferred Income Taxes 9,820 9,228
Shareholders' Equity
Common stock-par value $1.00 per share
Authorized shares -- 15,000,000
Outstanding shares:
1995 -- 12,170,793; 1994 -- 12,167,493 14,374 14,374
Additional capital 91,421 94,596
Retained earnings (deficit) (2,311) (3,199)
Cost of shares in treasury:
1995 -- 2,203,355 shares; 1994 -- 2,206,655 shares (17,324) (17,350)
- --------------------------------------------------------------------------------
Total Shareholders' Equity 86,160 88,421
- --------------------------------------------------------------------------------
$ 183,106 $ 188,794
================================================================================
See notes to financial statements
21
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
United Industrial Corporation
================================================================================
(Dollars in thousands,
except per share data) Year ended December 31 1995 1994 1993
- --------------------------------------------------------------------------------
Net Sales $ 227,398 $ 209,727 $ 252,993
Operating costs and expenses:
Cost of sales 182,139 162,776 209,490
Selling and administrative 41,246 39,990 43,429
Pension plan curtailment
income -- net -- (928) --
Loss (gain) on sale of assets -- net 336 (1,166) (1,595)
Other income -- net (127) (734) (41)
Interest income (1,201) (1,840) (3,650)
Interest expense 2,360 3,202 3,011
Restructuring charge -- -- 22,500
- --------------------------------------------------------------------------------
Total Operating Costs and Expenses 224,753 201,300 273,144
- --------------------------------------------------------------------------------
Income (Loss) Before Income Taxes
and Cumulative Effect of
Accounting Changes 2,645 8,427 (20,151)
Provision (credit) for income taxes
Federal:
Current 4,139 2,232 (3,705)
Deferred (2,726) 522 (4,405)
State 344 461 (24)
- --------------------------------------------------------------------------------
Income Taxes (Credit) 1,757 3,215 (8,134)
- --------------------------------------------------------------------------------
Income (Loss) Before Cumulative
Effect of Accounting Changes 888 5,212 (12,017)
- --------------------------------------------------------------------------------
Cumulative effect as of January 1, 1993
of changes in method of accounting for:
Postretirement benefits other
than pensions, net of taxes -- -- (12,890)
Income taxes -- -- 13,884
- --------------------------------------------------------------------------------
Net Income (Loss) $ 888 $ 5,212 $ (11,023)
- --------------------------------------------------------------------------------
Earnings (Loss) Per Share:
Earnings (loss) per share
before cumulative effect of
accounting changes $ .07 $ .43 $ (.98)
Cumulative effect of
accounting changes for:
Postretirement benefits
other than pensions -- -- (1.05)
Income taxes -- -- 1.13
- --------------------------------------------------------------------------------
Earnings (Loss) Per Share $ .07 $ .43 $ (.90)
================================================================================
See notes to financial statements
22
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
United Industrial Corporation
================================================================================
(Dollars in thousands) Year ended December 31 1995 1994 1993
- --------------------------------------------------------------------------------
Operating Activities
- --------------------------------------------------------------------------------
Net income (loss) $ 888 $ 5,212 $(11,023)
Adjustment to reconcile net income (loss)
to net cash provided by
operating activities:
Cumulative effect of changes in accounting for:
Postretirement benefits other than pensions -- -- 19,531
Income taxes -- -- (13,884)
Depreciation and amortization 8,300 8,291 7,430
Deferred income taxes (2,726) 1,223 (10,905)
Restructuring charge,
net of expenditures of $7,928 -- -- 14,572
Loss (gain) on disposal of property
and equipment 336 (1,166) (1,595)
Changes in operating assets and liabilities, net:
(Decrease) increase in current income taxes (3,333) 6,951 (6,602)
Decrease in trade receivables 653 12,611 4,313
Decrease (increase) in inventories 5,564 (6,218) 8,791
(Increase) decrease in prepaid
expenses and other current assets (94) 1,019 (964)
Decrease in accounts payable, accruals,
advances and other current liabilities (139) (6,081) (9,222)
Other -- net (3,175) (7,495) 536
- --------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 6,274 14,347 978
- --------------------------------------------------------------------------------
Investing Activities
- --------------------------------------------------------------------------------
Purchase of property and equipment (5,705) (4,146) (5,931)
Acquisition of business -- net of cash received -- (2,291) --
Net proceeds from disposals of property
and equipment 370 7,264 2,374
Other -- net -- 590 (2,165)
Decrease in note receivable 8,540 8,540 8,540
- --------------------------------------------------------------------------------
Net Cash Provided By Investing Activities 3,205 9,957 2,818
- --------------------------------------------------------------------------------
Financing Acitivities
- --------------------------------------------------------------------------------
Increase in long-term liabilities 653 2,468 1,951
Proceeds from borrowings 9,000 12,000 12,721
Payments on long-term debt and borrowings (10,200) (33,500) (12,880)
Dividends (3,165) (2,571) (4,290)
Purchase of treasury shares -- (475) --
Proceeds from exercise of stock options 16 -- --
- --------------------------------------------------------------------------------
Net Cash Used in Financing Activities (3,696) (22,078) (2,498)
- --------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 5,783 2,226 1,298
- --------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 6,132 3,906 2,608
- --------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 11,915 $ 6,132 $ 3,906
================================================================================
See notes to financial statements
23
Notes to Financial Statements
- --------------------------------------------------------------------------------
United Industrial Corporation
NOTE 1. NATURE OF OPERATIONS
- --------------------------------------------------------------------------------
United Industrial Corporation is a high technology company applying the
majority of its resources to the research, development and production of
military electronics and aerospace systems and components under defense
contracts. Other products include weather monitoring systems, transportation
systems, firefighter training systems, energy systems for industry and
utilities, and plastic products.
The principal lines of business are defense and related products, energy
generating systems and plastic products.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities 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 the prior years have been
reclassified to conform to the current year's classifications. The Company
includes in income its proportionate share of the net earnings or losses of
unconsolidated investees, when the Company's ownership interest is between 20%
and 50%.
Cash Equivalents:
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying amount
of these investments reported in the balance sheet approximates their fair
value.
Inventories:
Inventories are stated at the lower of cost or market. At December 31, 1995
and 1994, approximately 7% of total inventory was priced by the last-in,
first-out (LIFO) method with the remainder priced at actual, average, or
standard cost. If the first-in, first-out (FIFO) method of inventory pricing had
been used, inventories would have been approximately $4,177,000 higher than
reported on December 31, 1995 and $4,174,000 higher than reported on December
31, 1994. In 1994 certain inventory quantities were reduced, resulting in
liquidations of LIFO inventory quantities carried at lower costs prevailing in
prior years. The effect was to increase net income by $159,000 ($.01 per share)
in 1994.
Inventories include amounts principally related to long-term contracts of
the Company's defense subsidiary, as determined by the percentage-of-completion
method of accounting. Sales and gross profit are principally recognized as work
is performed based on the relationship between actual costs incurred and total
estimated costs at completion. Alternatively, certain contracts provide for the
production of various units throughout the contract period and these contracts
are accounted for based on the units delivered. See Note 4.
Property and Equipment:
Property and equipment are stated at cost. The policy of the Company is to
provide for depreciation on the straight-line, sum-of-the-years digits, and
declining-balance methods, by annual charges to operations calculated to
amortize the cost over the estimated useful lives of the various classes of
property.
24
Earnings per Share:
Earnings per share has been computed using the weighted average number of
the common and common equivalent shares outstanding, and assuming exercise of
all stock options having exercise prices less than the average market price of
the common stock using the treasury stock method: 12,193,179 in 1995, 12,241,503
in 1994, and 12,258,693 in 1993.
Stock Based Compensation:
The Company grants stock options for a fixed number of shares to employees
with an exercise price not less than market value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and intends to
continue to do so.
New Accounting Pronouncements:
In March 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. The Company will adopt SFAS
No. 121 in the first quarter of 1996 and, based on current circumstances, does
not believe the effect of adoption will be material.
NOTE 3. TRADE RECEIVABLES
- --------------------------------------------------------------------------------
Amounts due from the U.S. Government primarily related to long-term
contracts of the Company's defense subsidiary were as follows:
(Dollars in thousands) December 31 1995 1994
- --------------------------------------------------------------------------------
Amounts billed $13,882 $18,741
Unbilled recoverable costs and earned fees 6,521 5,500
Retainage per contract provisions 247 372
- --------------------------------------------------------------------------------
$20,650 $24,613
================================================================================
Billed and unbilled amounts above include $4,405,000 and $4,415,000 at
December 31, 1995 and 1994, respectively, related to contracts for which the
Company's defense subsidiary is a subcontractor to other government contractors.
Unbilled recoverable costs and earned fees substantially represent amounts that
will be collected within one year. Retainage amounts will generally be billed
over the next twelve months.
NOTE 4. INVENTORIES
- --------------------------------------------------------------------------------
(Dollars in thousands) December 31 1995 1994
- --------------------------------------------------------------------------------
Finished goods and work in progress $ 13,642 $ 16,537
- --------------------------------------------------------------------------------
Costs and earnings relating to long-term contracts 61,906 67,105
Deduct progress payments related to long-term contracts (32,363) (34,608)
- --------------------------------------------------------------------------------
Costs and earnings in excess of billings 29,543 32,497
- --------------------------------------------------------------------------------
Total finished goods and work in progress 43,185 49,034
Materials and supplies 4,737 4,452
- --------------------------------------------------------------------------------
$ 47,922 $ 53,486
================================================================================
The inventoried costs associated with long-term contracts include costs and
earnings ($29,543,000 in 1995 and $32,497,000 in 1994) of incomplete contracts
not yet billable to the customer. These amounts represent the difference between
the percentage-of-completion method of accounting for long-term contracts used
to record operating results by the Company's defense subsidiary and the amounts
billable to the customer under the terms of the specific contracts. Estimates of
final
25
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
$10,200,000 ($6,059,000, net of tax benefit, or $.50 per share) during 1995 and
$5,600,000 ($3,461,000 net of tax benefit, or $.28 per share) during 1994,
resulting primarily from revision of cost estimates on certain major long-term
contracts. Some of these losses represent charges for costs incurred in excess
of earnings under a certain government fixed price contract as a result of
changes, delays and disruptions to that contract and that are currently the
subject of formal claims asserted by the Company against the customer.
Costs and earnings in excess of billings include amounts on certain government
contracts in excess of negotiated contract value. These amounts totalled
approximately $12,000,000 at December 31, 1995 and $11,205,000 at December 31,
1994 and are or will be the subject of formal claims if not resolved via
negotiation. The carrying amounts in costs and earnings in excess of billings
are based on costs incurred to date and management's best estimate of the costs
that will be incurred to complete performance of the related contract. Regarding
a certain helicopter simulator program for the U.S. Government, the Company
believes that the formal claims asserted against the customer are meritorious.
The customer has asserted substantive defenses to these claims. Because the
proceedings are currently in the discovery phase, it is not possible at this
time to determine the ultimate amount of recovery of these costs. It is
reasonably possible that the Company's estimates of recoverable costs may change
in the near term as a result of the proceedings with respect to the Company's
formal claims and other ongoing negotiations with the customer. 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.
The Company has estimated $7,700,000 as the net realizable value of certain
non-contract related finished goods and work in progress inventory. The Company
has identified a number of potential buyers for a substantial portion of the
inventory. However, the Company faces significant competition from other
producers of similar products. It is reasonably possible that the Company may
not be able to finalize an agreement for the sale of this inventory due to
competition and technological limitations. If this occurs, the net realizable
value of this inventory could be reduced in the near term.
NOTE 5. OTHER ASSETS
- --------------------------------------------------------------------------------
(Dollars in thousands) December 31 1995 1994
- --------------------------------------------------------------------------------
Net pension asset $25,534 $22,337
Patents and other intangible assets 9,771 11,464
Other 4,219 3,221
- --------------------------------------------------------------------------------
$39,524 $37,022
================================================================================
Patents and other intangible assets represent assets acquired in connection
with purchased businesses and are being amortized primarily on a straight-line
basis over 5 to 15 years. Amortization expense amounted to $1,694,000 in 1995,
$1,683,000 in 1994, and $538,000 in 1993. Accumulated amortization amounted to
$5,003,000 and $3,309,000 at December 31, 1995 and 1994, respectively.
During 1994, the Company acquired approximately $7 million of patents and
other intangible assets related to the purchase of Symtron Systems, Inc.
NOTE 6. LONG-TERM DEBT AND CREDIT ARRANGEMENTS
- --------------------------------------------------------------------------------
In 1992, AAI Corporation (a wholly owned subsidiary) entered into a note
purchase agreement with certain insurance companies for $25,000,000. The
proceeds of the note were principally used to repay
26
the then outstanding borrowings of AAI. The interest rate is 8.65% and is
payable semi-annually. AAI prepaid $5,000,000 of the note in 1994. The remaining
principal is to be repaid in three equal annual payments of $6,250,000
commencing July 31, 1996, and a final payment of $1,250,000 in 1999.
The Company is a guarantor of the agreement and together with AAI must
comply with certain covenants including, but not limited to, provisions related
to dividends, indebtedness, working capital, net worth, interest coverage and
debt to equity ratios.
On October 13, 1994, AAI entered into a two year revolving credit agreement
with two banks for $20,000,000, including a commitment for up to $10,000,000 of
commercial letters of credit. The revolving credit is limited to a percentage of
the eligible accounts receivable, as defined. The agreement provides that AAI
may select among several interest rate options. The agreement provides for
restrictive covenants among which are the maintenance of a certain capital base,
as defined; leverage and cash flow coverage ratios; limitations on indebtedness;
and limitations on transfers of funds and use of such funds by the Company or
its wholly owned subsidiaries. Borrowings under the credit agreement and the
outstanding notes with the insurance companies are collateralized by the capital
stock and assets of AAI and its wholly owned subsidiaries and certain wholly
owned subsidiaries of the Company. Such borrowings are guaranteed by the
Company, certain of its wholly owned subsidiaries and all AAI wholly owned
subsidiaries. There were no borrowings outstanding under the credit agreement at
December 31, 1995.
At December 31, 1995 and 1994, AAI's net assets of approximately
$68,400,000 and $66,000,000, respectively, were restricted under debt
agreements.
Under an additional line-of-credit agreement with a bank, the Company may
borrow up to $9,000,000 including a commitment for up to $4,000,000 of
commercial letters of credit. Detroit Stoker Company, a wholly owned subsidiary,
also a party to the agreement, may use up to $1,000,000 of the line-of-credit
including commercial letters of credit. At December 31, 1995, the unused portion
of this credit line was $4,000,000 of which $2,000,000 may be used for
commercial letters of credit. The credit agreement expires June 30, 1996, and
requires commitment fees which are not material. The agreement incorporates the
covenants of the note purchase guaranty agreement and is guaranteed by a
subsidiary of the Company.
The carrying amounts of the Company's borrowings under its short-term
revolving credit agreements and long-term debt approximate their fair value.
Interest expense was $2,360,000 in 1995, $3,202,000 in 1994, and $3,011,000
in 1993. Interest paid was $2,270,000 in 1995, $3,323,000 in 1994, and
$2,950,000 in 1993.
The weighted average interest rate on short-term borrowings outstanding at
December 31, 1995 and 1994, was 7.14% and 7.67%, respectively.
NOTE 7. ACQUISITIONS
- --------------------------------------------------------------------------------
On January 18, 1994, the Company purchased all the outstanding shares of
Symtron Systems, Inc. (Symtron), a producer of firefighter training simulators
for government and commercial markets. The purchase price consisted of cash
payments of $2,000,000, assumption of certain liabilities of approximately
$5,900,000, and a contingent payment of up to $1,000,000, based on profits on
contracts existing at the acquisition date. In 1995, the Company made the
contingent payment of $1,000,000, which was classified as selling and
administrative expense in the 1995 financial statements. Additionally,
contingent amounts are payable if certain pretax profits, as defined in the
purchase agreement, are earned for each of the years in the four year period
ending December 31, 1998. Funds generated from operations and an existing line
of credit were utilized to finance the purchase of Symtron.
The acquisition was accounted for as a purchase; accordingly, the
operations of Symtron are included in the Company's 1994 financial statements
from the date of acquisition. Total revenues of Symtron in 1993 and 1992 were
less than 3% of the consolidated sales of the Company and total assets were less
than 2% of consolidated assets.
27
NOTE 8. STOCK OPTIONS
- --------------------------------------------------------------------------------
In May 1994, the shareholders approved the 1994 Stock Option Plan, which
provides for the granting of options with respect to the purchase of an
aggregate of up to 600,000 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
are exercisable over a period determined by the Board of Directors, but no
longer than ten years after the date they are granted. During 1994, options were
granted for 94,000 shares at exercise prices of $4.50 and $4.75 per share.
(Number of shares)
- --------------------------------------------------------------------------------
Outstanding, December 31, 1994 $4.50 and $4.75 94,000
Granted $5.50 and $6.25 139,000
Cancelled $4.75 to $6.25 (115,700)
Exercised $4.75 (3,300)
- --------------------------------------------------------------------------------
Outstanding, December 31, 1995 $4.50 to $5.50 114,000
- --------------------------------------------------------------------------------
Exercisable, December 31, 1995 $4.50 and $4.75 85,000
- --------------------------------------------------------------------------------
Available for grant, end of year 482,700
================================================================================
NOTE 9. LEASES
- --------------------------------------------------------------------------------
Total rental expense for all operating leases amounted to $2,632,000 in
1995, $2,714,000 in 1994, and $2,803,000 in 1993. Contingent rental payments
were not significant.
The future minimum rental commitments as of December 31, 1995, for all
noncancelable leases were $2,200,000 in 1996; $765,000 in 1997; $532,000 in
1998; $315,000 in 1999; $240,000 in 2000; and $120,000 thereafter.
NOTE 10. CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Minimum
Retained Pension Share-
Common Additional Earnings Treasury Liability holders'
(Dollars in thousands) Stock Capital (Deficit) Stock Adjustment Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 $ 14,374 $ 99,496 $ 4,573 $ (16,875) -- $ 101,568
Net loss -- -- (11,023) -- -- (11,023)
Cash dividends declared ($.35 per share) -- (2,329) (1,961) -- -- (4,290)
Adjustment for minimum pension liability -- -- -- -- $ (901) (901)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 14,374 97,167 (8,411) (16,875) (901) 85,354
Net income -- -- 5,212 -- -- 5,212
Cash dividends declared ($.21 per share) -- (2,571) -- -- -- (2,571)
Purchase of 91,200 shares -- -- -- (475) -- (475)
Adjustment for minimum pension liability -- -- -- -- 901 901
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 14,374 94,596 (3,199) (17,350) -- 88,421
Net income -- -- 888 -- -- 888
Cash dividends declared ($. 26 per share) -- (3,165) -- -- -- (3,165)
Stock options -- (10) -- 26 -- 16
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ 14,374 $ 91,421 $ (2,311) $ (17,324) -- $ 86,160
===================================================================================================================================
28
NOTE 11. PENSION ARRANGEMENTS AND SPECIAL TERMINATION BENEFITS
- --------------------------------------------------------------------------------
The Company and its subsidiaries have a number of noncontributory defined
benefit pension plans covering substantially all employees. Plans covering
salaried and management employees provide pension benefits that are based on the
employee's average compensation for the highest five consecutive years before
retirement and years of service. Plans covering hourly employees and union
members generally provide benefits of stated amounts for each year of service.
The Company's funding policy for the plans is to make the minimum annual
contributions required by applicable regulations.
A summary of the components of net periodic pension cost for the plans is
as follows:
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Service cost--benefits earned during the period $ 682 $ 3,238 $ 3,045
Interest cost on projected benefit obligation 10,689 10,507 10,388
Actual return on plan assets (29,770) (1,891) (12,671)
Net amortization and deferral 19,075 (8,898) 2,168
Curtailment (gain) expense -- (928) 698
- --------------------------------------------------------------------------------
Total pension costs $ 676 $ 2,028 $ 3,628
================================================================================
Assumptions primarily used in the accounting for the plans were:
1995 1994 1993
- --------------------------------------------------------------------------------
Weighted-average discount rates 7.3% 8.5% 7.5%
Rates of increase in compensation levels 4% 4% 4%
Expected long-term rate of return on assets 8.5% 8.5% 8.5%
================================================================================
The following table sets forth the funded status and amounts recognized in
the Consolidated Balance Sheets at December 31, 1995 and 1994, for the Company's
pension plans:
Plans with assets in excess of accumulated benefit obligation:
(Dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $ 146,015 $ 118,900
- --------------------------------------------------------------------------------
Accumulated benefit obligation $ 147,838 $ 122,407
- --------------------------------------------------------------------------------
Projected benefit obligation $ 148,024 $ 122,469
Plan assets at fair value 158,663 135,511
- --------------------------------------------------------------------------------
Projected benefit obligation less
than plan assets 10,639 13,042
Unrecognized net loss including prior service cost 15,427 9,861
Unrecognized net asset at beginning of year,
net of amortization (532) (566)
- --------------------------------------------------------------------------------
Net pension asset recognized in the
Consolidated Balance Sheets $ 25,534 $ 22,337
================================================================================
The plans' assets are invested in listed stocks and bonds and
interest-bearing cash equivalents.
On November 30, 1994, the energy systems segment suspended future benefit
accruals by freezing the non-union employees' defined benefit plan. This
resulted in a pension curtailment gain of $1,092,000 ($675,000 net of taxes or
$.06 per share). The Company replaced the defined benefit plan with a defined
contribution benefit plan. Employee contributions and employer matching are
based on specified formulas. In addition, a curtailment loss of $164,000
($101,000 net of tax benefit or $.01 per share) was recognized for another plan
due to reductions of staffing levels at the Company's defense segment. On
December 31, 1994, the defense segment merged its two defined benefit plans, and
in 1995 converted them into a single cash balance plan. In accordance with the
Cash Balance Plan, a participant's benefit includes the actuarial equivalent of
the participant's accrued benefit under the applicable predecessor
29
plan, annual allocations based upon a percentage of salary, and interest earned
on such participant's account. The defense segment also amended its 401 (k) plan
in 1995 to provide for employer matching contributions based on specified
formulas. The effect of the changes in the plans' status has been reflected as
of December 31, 1994.
During 1993, the curtailment expense was included in the restructuring
charge (see Note 17).
NOTE 12. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
- --------------------------------------------------------------------------------
In addition to the Company's defined benefit pension plans, a subsidiary of
the Company sponsors a defined benefit health care plan that provides
postretirement medical benefits to full-time employees who have worked 10 years
and attained age 62 or 30 years of service with the Company. The plan is
non-contributory for retirees and contributory for spouses. The retiree spousal
contributions are adjusted annually. Both the retiree and spousal plan contain
cost-sharing features such as deductibles and coinsurance. The accounting for
the plan anticipates future cost sharing changes to the written plan that are
consistent with the Company's expressed intent to increase the spousal
contribution to the point that the entire cost for spouses will be contributory
at the end of 7 years commencing from January 1, 1996, and limit the amount it
will contribute for retiree insurance costs, as well as each active employee who
later becomes a retiree, to no more than double the amount which the Company
paid for coverage on January 1, 1993. The actuarial and recorded liabilities for
these benefits have not been funded. The accumulated benefit obligation was
determined using the unit credit method and an assumed discount rate of 7.5% in
1995 and 8.5% in 1994. The assumed health care cost trend rate used was 11.6%
for medical and 6.2% for dental decreasing to 6% and 5%, respectively, in the
year 2003. An increase of 1% in the health care trend rate would not materially
increase the cost or accumulated postretirement benefit due to the limit of the
Company not being obligated to pay more than double the amount which the Company
was paying for coverage on January 1, 1993.
Another subsidiary also sponsors a defined benefit health care plan that
provides postretirement medical and dental benefits to full-time employees who
have worked 10 years and attained age 60. Dental benefits cease for both retiree
and spouse once the retiree reaches age 65. Surviving spouses are eligible for
pre-retirement death benefits. Employees aged 55, but less than 60, with at
least 20 years of service receive only medical benefits commencing when the
retiree reaches age 65. No dental benefit is provided. The accumulated benefit
obligation was determined using the unit credit method and an assumed discount
rate of 7.25% in 1995 and 8.5% in 1994. The assumed health care cost trend rate
was 11.3% decreasing to 6% in 10 years. The health care cost trend rate
assumption has a significant effect on the amounts reported. A 1% increase in
the health care trend rate would increase the accumulated postretirement benefit
obligation at December 31, 1995 by $1,256,000 at year-end 1996. The effect of a
1% increase in the health care trend rate would not materially increase the net
periodic cost.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," which requires that the projected future cost of providing
postretirement benefits, such as health and life insurance, be recognized as an
expense as employees render service instead of when the benefits are paid. The
effect of adopting the new rules increased the 1993 loss before the cumulative
effect of accounting changes by $693,000 ($441,000, or $.04 per share net of tax
benefit). The cumulative effect of this change in accounting increased the 1993
net loss by $12,890,000 or $1.05 per share net of tax benefit.
The costs of certain health care provided by the Company for eligible
retired employees were $1,694,000 in 1995, $1,719,000 in 1994, and $1,177,000 in
1993.
30
The following table shows the two plans' combined funded status reconciled
with the amounts recognized in the Company's statements of financial position:
(Dollars in thousands) December 31 1995 1994
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 15,184 $ 12,516
Fully eligible active plan participants 1,378 1,345
Other active plan participants 9,083 6,949
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation 25,645 20,810
Unrecognized net loss (4,323) (192)
- --------------------------------------------------------------------------------
Accrued postretirement benefit obligation $ 21,322 $ 20,618
================================================================================
Net periodic postretirement benefit cost included the following components:
(Dollars in thousands) Year ended December 31 1995 1994 1993
- --------------------------------------------------------------------------------
Service cost $ 548 $ 516 $ 522
Interest cost 1,824 1,615 1,613
Curtailment gain -- -- (265)
- --------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 2,372 $ 2,131 $ 1,870
================================================================================
NOTE 13. INDUSTRY SEGMENTS DATA
- --------------------------------------------------------------------------------
The Company is engaged in the design, development, manufacture, and sale of
products in three principal industries: electronics, aerospace, firefighter
training, and ordnance systems for defense and other government and
non-government entities in the United States and abroad; energy systems for
industries and utilities; and specialty plastic products.
Sales to agencies of the United States Government, primarily by the defense
segment, were $154,346,000 in 1995, $159,766,000 in 1994, and $172,169,000 in
1993. No single customer, other than the United States Government, accounted for
10 percent or more of net sales in any year. In 1993, export sales amounted to
$31,258,000 and were composed primarily of sales to Asia and Europe. Export
sales in 1995 and 1994 amounted to less than 10% of net sales in those years.
31
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Net Sales
Defense $ 188,111 $ 175,535 $ 216,436
Energy Systems 32,549 27,835 30,394
Plastic Products 6,738 6,357 6,163
- --------------------------------------------------------------------------------
Total Net Sales $ 227,398 $ 209,727 $ 252,993
================================================================================
Operating Income (Loss)
Defense $ 6,436 $ 10,831 $ (20,396)(a)
Energy Systems 2,598 1,884 3,720
Plastic Products 389 219 474
Corporate (6,778) (4,507) (3,949)
- --------------------------------------------------------------------------------
Total Operating Income (Loss) $ 2,645 $ 8,427 $ (20,151)(a)
================================================================================
Identifiable Assets
Defense $ 150,507 $ 151,202 $ 155,822
Energy Systems 23,103 21,313 20,414
Plastic Products 2,943 2,899 2,645
Corporate 6,553 13,380 23,772
- --------------------------------------------------------------------------------
Total Identifiable Assets $ 183,106 $ 188,794 $ 202,653
================================================================================
Capital Expenditures
Defense $ 4,572 $ 3,304(b)(c) $ 4,395
Energy Systems 805 624 1,387
Plastic Products 289 149 149
Corporate 39 69 --
- --------------------------------------------------------------------------------
Total Capital Expenditures $ 5,705 $ 4,146(b)(c) $ 5,931
================================================================================
Depreciation Expense
Defense $ 5,616 $ 5,470 $ 4,999
Energy Systems 839 917 840
Plastic Products 134 101 90
Corporate 17 8 7
- --------------------------------------------------------------------------------
Total Depreciation Expense $ 6,606 $ 6,496 $ 5,936
================================================================================
(a) Includes restructuring charge of $22,500,000 as described in Note 17.
(b) Excludes assets acquired in the Symtron acquisition of $8,761,000 in 1994.
(c) Excludes $1,322,000 of assets transferred from inventory.
Operating income for each segment is total revenue less operating expenses,
excluding interest and corporate management fees. Research and development costs
included in costs and expenses amounted to $2,270,000 in 1995, $1,839,000 in
1994, and $1,518,000 in 1993. Corporate income (loss) includes net interest
(expense) income of ($1,159,000) in 1995, ($1,362,000) in 1994, and $639,000 in
1993. Corporate assets consist primarily of cash and cash equivalents.
32
NOTE 14. INCOME TAXES
- --------------------------------------------------------------------------------
Effective January 1, 1993, the Company adopted the Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, 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. Prior to the adoption of this statement, income tax expense was determined
using the deferred method whereby deferred tax expense was based on items of
income and expense that were reported in different years in the financial
statements and tax returns and were measured at the tax rate in effect in the
year the difference originated and reversed.
The Company elected to adopt SFAS No. 109 by reporting the cumulative
effect of the change in the method for accounting for income taxes as of the
beginning of 1993. The cumulative effect of this accounting change amounted to
$13,884,000 ($1.13 per share), which reduced the 1993 net loss. The effect of
the change in accounting for the years ended December 31, 1994 and 1993 was not
material. Prior years' financial statements have not been restated to apply the
provision of SFAS No. 109.
Following is a reconciliation of the difference between total tax expense
(benefit) and the amount computed by applying the federal statutory income tax
rate (34%) to income or (loss) from operations before income taxes:
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Federal income taxes (benefit) at statutory rate $ 899 $ 2,865 $(6,851)
State income taxes, net of federal income tax benefit 227 304 (16)
Provision for nondeductible expenses
(including $340 related to contingent payment
on Symtron acquisition) 460 -- --
Research credit -- -- (1,288)
Other -- net 171 46 21
- --------------------------------------------------------------------------------
Income Taxes (Credit) $ 1,757 $ 3,215 $(8,134)
================================================================================
In 1993, credits for research and experimental expenditures (research
credit) of $1,288,000 were recognized, thereby increasing the current federal
income tax credit. Approximately $726,000 of this research credit resulted from
payments received in 1993 related to amended returns of prior years and $562,000
principally resulted from the extension of the research credit which had
previously expired in June 1992. No research or experimental credits were
recognized in the provision for income taxes in 1995 and 1994.
Income tax payments were $7,400,000 in 1995, $3,609,000 in 1993, and a
refund of $2,879,000 in 1994.
33
Deferred income tax balances:
(Dollars in thousands) December 31 1995 1994
- --------------------------------------------------------------------------------
Deferred Tax Asset
Losses on long-term contracts not currently deductible $ 4,145 $ 3,575
Postretirement benefits other than pensions
and other employee benefits 9,562 10,231
Product warranty and other provisions 1,504 1,463
Vacation pay accruals 539 468
Basis differences for asset sales 1,803 1,697
Other 64 248
- --------------------------------------------------------------------------------
Total Deferred Tax Asset 17,617 17,682
================================================================================
Deferred Tax Liability
Pension plans and other employee benefits (11,487) (11,380)
Excess tax depreciation (7,681) (9,716)
Patent amortization (1,594) --
Installment gain -- (2,643)
Other (188) (2)
- --------------------------------------------------------------------------------
Total Deferred Tax Liability (20,950) (23,741)
- --------------------------------------------------------------------------------
Net Deferred Tax Liability $ (3,333) $ (6,059)
================================================================================
The net deferred tax liability is classified as follows:
Net current deferred income tax asset $ 6,487 $ 3,169
- --------------------------------------------------------------------------------
Net non-current deferred income tax liability $ (9,820) $ (9,228)
- --------------------------------------------------------------------------------
The acquisition of Symtron had the effect of increasing deferred tax
liabilities in 1994 by approximately $1,859,000 for the difference between the
book and tax basis of assets and liabilities assumed on the date of acquisition.
NOTE 15. SELECTED QUARTERLY DATA (UNAUDITED)
- --------------------------------------------------------------------------------
(Dollars in thousands,
except per share data 1995 1994
and stock prices) Fourth Third Second First Fourth Third Second First
- -----------------------------------------------------------------------------------------------------------------------
Net sales $ 64,308 $ 53,568 $ 57,869 $ 51,653 $ 57,725 $ 59,710 $ 42,216 $ 50,076
Gross profit 9,059(a) 10,735 12,692 12,773 11,628 12,782 11,272 11,269
Net income (loss) (1,999)(a) 423 1,324 1,140 1,212 1,538 1,408 1,054
=======================================================================================================================
Earnings (loss) per share $ (.16)(a) $ .04 $ .11 $ .09 $ .10 $ .13 $ .11 $ .09
=======================================================================================================================
Dividends declared per share $ .05 $- $ .14 $ .07 $- $ .07 $ .07 $ .07
- -----------------------------------------------------------------------------------------------------------------------
Stock prices:
High $ 6 1/8 $ 7 1/8 $ 7 1/4 $ 5 3/4 $ 5 7/8 $ 6 $ 6 1/8 $ 6 5/8
Low $ 4 3/8 $ 5 5/8 $ 5 1/4 $ 4 7/8 $ 4 1/2 $ 4 1/4 $ 4 1/8 $ 5 1/8
=======================================================================================================================
(a) The Company recorded charges of $6,261,000 for the revision of contract
loss estimates and $2,000,000 to write down certain non-contractual work in
progress and finished goods inventory to net realizable value in the fourth
quarter of 1995.
The Company's common stock is listed on the New York Stock Exchange. The
approximate number of shareholders of record as of February 29, 1996, was 4,000.
The debt covenants recited in Note 6 have certain restrictions on the
payment of dividends.
34
NOTE 16. 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 owned and operated 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. Although this facility may have
used trichloroethylene (TCE) in small quantities, there is no evidence that
this facility released or disposed of TCE at this site.
On May 18, 1993, the State of Arizona filed suit against the Company
seeking the recovery of investigative costs, injunctive relief to require the
Company to perform a Remedial Investigation and Feasibility Study (RI/FS), and
ultimately to require the remediation of alleged soil and groundwater
contamination at and near a certain industrial site. Since then the State has
brought in co-defendants whose operations at the site were substantially larger
than those of the Company.
On June 20, 1995 the Company and the State of Arizona executed an agreement
in principle to settle the litigation. In exchange for a full release from
liability by the State and the Arizona Department of Environmental Quality, the
Company without admitting liability, has agreed to the following:
o Undertake and pay for the costs of an RI/FS Work Plan, estimated at
$1,300,000.
o Pay $125,000 towards past costs incurred by the State of Arizona and the
Department of Environment Quality.
o Pay $125,000 towards costs of future remediation and clean-up of the site.
In addition, at the time the State selects a remedy, the Company agrees to
an additional contribution in the amount of a percentage of the total
estimated clean-up cost not to exceed an additional $1,120,000.
o The Company reserves all rights to seek contribution from other responsible
parties.
The Company and the State have signed a Consent Decree and Work Plan
incorporating these terms and conditions. The Consent Decree has been lodged
with the United States District Court for the District of Arizona for a 30-day
public comment period, at the conclusion of which the parties will seek court
approval of the settlement. Resolution of this matter will not have a materially
adverse effect on the consolidated financial position of the Company. The
Company has provided approximately $1,900,000 based on estimates of the total
cost for the RI/FS, estimates of amounts specified for past costs, and estimates
of future remediation and clean-up costs.
In May 1995, AAI Systems Management, Inc. (the "subsidiary"), an indirect
subsidiary of the Company, submitted to the U.S. Government (the "customer") a
Request for Equitable Adjustment (REA) totaling approximately $11,800,000 in
connection with a certain contract with the subsidiary. The REA seeks monetary
damages based on costs incurred by the subsidiary arising out of or in
connection with customer directed suspension of work and resulting schedule
delays, additional work directives, and other actions by the customer in
connection with the contract for which contractors are allowed recovery under
the Federal Acquisition Regulations. On July 14, 1995, the subsidiary received
the final decision of the customer rejecting the REA in its entirety. To fully
protect the Company's interest, on October 10, 1995, a Notice of Appeal of the
final decision was filed with the Armed Services Board of Contract Appeals
seeking monetary damages plus interest. While the Company believes that the
formal claims asserted against the customer are meritorious and the Company will
vigorously pursue recovery of the monies claimed, the customer has asserted
substantive defenses to these claims. Because the proceedings are currently in
the discovery phase, it is not possible at this time to determine the ultimate
amount of recovery of these costs.
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.
35
NOTE 17. RESTRUCTURING
- --------------------------------------------------------------------------------
On March 29, 1993, the Company's Board of Directors approved a plan of
reorganization and restructuring of the operations of its defense industry
subsidiary, AAI Corporation. The Company estimated and recorded in the first
quarter a restructuring charge of $23,000,000 ($14,700,000 or $1.20 per share
net of tax benefit). The plan of reorganization and restructuring, which was
considered necessary due to the declining Department of Defense budget and
continuing financial problems of the airline industry, included costs of
organizational and product-line changes, consolidation of facilities and work
force reductions of approximately 300 at AAI and its four subsidiaries. A major
portion of the charge resulted from the termination of the operations of
AAI/MICROFLITE, a manufacturer of flight simulators and training devices, due to
a lack of significant new orders. AAI/MICROFLITE was acquired in 1991.
AAI/MICROFLITE had net sales of $646,000 and incurred pretax losses of
$2,561,000 ($1,690,000 or $.14 per share, net of tax benefit) in 1993.
As of December 31, 1993, the restructuring program was substantially
completed. During 1994, $750,000 related to the consolidation and
discontinuation of certain manufacturing activities was expended. The net loss
for 1993 includes $22,500,000 of pretax charges ($14,370,000 or $1.17 per share
net of tax benefit) which consisted of $13,822,000 of write-downs to reduce the
carrying value of affected assets, including certain inventories, intangibles
and an office/manufacturing complex at AAI/MICROFLITE, to net realizable value,
$6,683,000 of employee-related expenses associated with the consolidation,
relocation, and termination of certain operations, and $1,995,000 of other
expenses.
Assets held for sale of $5,439,000 at December 31, 1993, relate to the
remaining assets of AAI/MICROFLITE, including the office/manufacturing complex.
The Company sold these assets in 1994, which resulted in a gain of $1,304,000.
The restructuring program was completed in 1994.
36
Report of Independent Auditors
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
United Industrial Corporation
New York, New York
We have audited the accompanying consolidated balance sheets of United
Industrial Corporation and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations and cash flows for each of the
three years in the period ended December 31, 1995. 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, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Notes 12 and 14 to the consolidated financial statements,
effective January 1, 1993 the Company changed its method of accounting for
postretirement benefits other than pensions and income taxes.
ERNST & YOUNG LLP
New York, New York
February 21, 1996
37
Five-Year Financial Data
- --------------------------------------------------------------------------------
United Industrial Corporation
===============================================================================================================================
(Dollars in thousands,
except per share data)
Year ended December 31 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------------
Operating Data
- -------------------------------------------------------------------------------------------------------------------------------
Net Sales $227,398 $209,727 $ 252,993 $ 251,315 $ 258,012
Operating costs 223,385 202,766 252,919 242,304 238,767*
Interest (income) expense -- net 1,159 1,362 (639) (686) (1,587)
Income (loss) before income taxes 2,645 8,427 (20,151)(a) 10,071(b) 21,276*
Income taxes (credit) 1,757 3,215 (8,134) 3,678 11,817(c)
Income (loss) from continuing
operations before cumulative
effect of accounting changes 888 5,212 (12,017)(a) 6,393(b) 9,459(c)*
Cumulative effect of accounting
changes -- -- 994 -- --
Income (loss) from continuing
operations 888 5,212 (11,023)(a) 6,393(b) 9,459(c)*
Earnings (loss) per share:
Income (loss) before cumulative
effect of accounting changes .07 .43 (.98)(a) .52(b) .77(c)*
Cumulative effect of accounting
changes -- -- .08 -- --
Earnings (loss) .07 .43 (.90)(a) .52(b) .77(c)*
Cash dividends paid on
common stock 3,165 3,425 5,381 7,845 7,840
Cash dividends declared per
common share .26 .21 .35 .64 .64
Shares outstanding as of year end
(in thousands) 12,171 12,167 12,259 12,259 12,252
- -------------------------------------------------------------------------------------------------------------------------------
Financial Position
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $183,106 $188,794 $ 202,653 $ 226,958 $ 208,885
Property and equipment 42,586 45,214 46,635 57,074 61,789
Long-term debt 13,750 20,000 25,000 25,880 7,365
Shareholders' equity 86,160 88,421 85,354 101,568 102,963
Shareholders' equity per share 7.08 7.27 6.96 8.29 8.40
- -------------------------------------------------------------------------------------------------------------------------------
Financial Ratios
- -------------------------------------------------------------------------------------------------------------------------------
Return on shareholders' equity 1.0% 6.0% -- 6.3% 9.2%
Net income as a percent of sales .4 2.5 -- 2.5 3.7
Long-term debt as a percent
of total capitalization 13.8 18.4 22.6 20.3 6.7
- -------------------------------------------------------------------------------------------------------------------------------
Statistical Data
- -------------------------------------------------------------------------------------------------------------------------------
Sales backlog as of year end $206,000 $218,000 $ 208,000 $ 239,000 $ 235,000
Capital expenditures 5,705 4,146 5,931 5,547 4,885
Depreciation and amortization 8,300 8,291 7,430 9,200 8,416
Number of employees 2,000 1,900 2,300 2,600 2,700
===============================================================================================================================
(a) Includes restructuring charge of $22,500,000 ($14,400,000 or $1.17 per
share net of income tax benefit)
(b) Includes special termination benefits cost of $1,191,000 ($786,000 or $.06
per share).
(c) Includes a charge for prior years' federal income tax and interest of
$2,670,000 or $.22 per share.
* Includes income of $4,556,000 ($3,007,000 or $.25 per share, net of taxes)
related to a claim settlement and special termination benefits cost of
$3,638,000 ($2,401,000 or $.20 per share, net of tax benefit).
38
Corporate Organization
- --------------------------------------------------------------------------------
United Industrial Corporation
Board of Directors
- --------------------------------------------------------------------------------
Harold S. Gelb,
Chairman of the Board
Howard M. Bloch,
Vice Chairman of the Board
Edward C. Aldridge, Jr.,
President and Chief
Executive Officer
The Aerospace Corporation
Richard R. Erkeneff,
President and Chief Executive
Officer of the Company and
AAI Corporation
Myron Simons,
Business Consultant
Susan Fein Zawel,
Vice President Corporate
Communications, Associate General
Counsel and Secretary of the Company
Honorary Director (nonvoting)
Bernard Fein,
Chairman Emeritus
Retired Chairman and
President of the Company
Corporate Officers
- --------------------------------------------------------------------------------
Richard R. Erkeneff,
President and Chief Executive
Officer
Robert W. Worthing,
Vice President and
General Counsel
James H. Perry,
Chief Financial Officer
and Treasurer
Susan Fein Zawel,
Vice President Corporate
Communications, Associate General
Counsel and Secretary
Edward A. Smolinski,
Assistant Treasurer and
Assistant Secretary
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
Maurice P. Ranc,
Vice President and General
Manager, Defense Systems
G. Russell Zink,
Vice President and
General Manager, Weather Systems
Jackson R. Bell,
Vice President and General
Manager, Transportation Systems
Thomas E. Wurzel,
Vice President and General
Manager, Fluid Test Systems
Joseph F. Burger,
Vice President and General
Manager, Operations
Howard E. Butz,
Director, Total Quality
David A. Powell,
Director, Information Technology
Suzan J. Feild,
Director, Human Resourses
Detroit Stoker Company
James M. Ballentine,
Acting President and
Chief Executive Officer
Mark A. Eleniewski,
Executive Vice President
Gary K. Ludwig,
Vice President, Finance
Alan H. Miller,
Director, Human Resources
Neo Products Company
Michael A. Schillaci,
President and
Chief Executive Officer
Leonard M. Peznowski,
Controller
Symtron Systems, Inc.
John J. Henning,
President and Chief
Executive Officer
James W. Hanson,
Vice President and
General Manager
J. Thomas Roeder,
Vice President of Marketing
and Sales
Hy Luft,
Vice President, Programs
Richard A. Brandt,
Treasurer and Secretary
39
Corporate and Shareholder Information
- --------------------------------------------------------------------------------
United Industrial Corporation
Corporate Headquarters
18 East 48th Street
New York, New York 10017
(212) 752-8787
Subsidiaries
AAI Corporation
P.O. Box 126
Hunt Valley, Maryland 21030
(410) 666-1400
Detroit Stoker Company
1510 East First Street
Monroe, Michigan 48161
(313) 241-9500
Symtron Systems, Inc.
17-01 Pollitt Drive
Fair Lawn, New Jersey 07410
(201) 794-0200
Neo Products Company
5400 South Kilbourn Avenue
Chicago, Illinois 60632
(312) 585-2500
Transfer Agent, Registrar and
Dividend Disbursing Agent
Shareholders may obtain
information relating to their
share position, dividends,
transfer requirements, lost
certificates and other related
matters by telephone or by
writing to:
American Stock Transfer and Trust Company
40 Wall Street
New York, New York 10005
(718) 234-2700
Shareholder Relations
Security analysts, investment
professionals and shareholders
should direct their inquiries to:
Shareholder Relations
United Industrial Corporation
Independent Auditors
Ernst & Young LLP
787 Seventh Avenue
New York, New York 10019
Annual Meeting
The Annual Meeting of
Shareholders will be held at
10:00 a.m. on Tuesday, May 14,
1996, 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 Annual
Report on Form 10-K as filed with the
Securities and Exchange Commission may
be obtained without cost by writing to:
Shareholder Relations
United Industrial Corporation
Stock Listing
United Industrial Corporation common stock
is traded on the New York Stock Exchange
(Symbol: UIC)
Designed and Produced by Taylor & Ives, Inc., NYC
Writing: Walter Schneir
Major photography: Ted Horowitz, Kay Chernush pages 4 and 13
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