Other operating expenses—net, increased
$269,000 or 62.0% to $703,000 in 2002 from $434,000 primarily due to the expenses related to the closing of the foundry operated by
Midwest.
During 2002, the Company also recorded a provision
of $31,852,000 for estimated asbestos-related defense and indemnity costs, offset by estimated insurance recoveries of $20,343,000.
Other income decreased $1,021,000 or 94.1% to
$64,000 in 2002 from $1,085,000 in 2001. The decrease was primarily due to an insurance recovery in 2001 of $842,000.
Other expenses decreased $30,000 or 7.3% to $382,000
in 2002 from $412,000 in 2001.
Interest expense increased to $843,000 or 4,858.8%
in 2002 from $17,000 in 2001 primarily due to interest paid on borrowings and interest paid to the Internal Revenue Service resulting from increased
profits on long-term contracts.
Interest income decreased $491,000 in 2002 from
$618,000 in 2001 due to lower investments.
Income Before Income Taxes from Continuing
Operations
|
|
|
|
2002
|
|
% of Sales
|
|
2001
|
|
% of Sales
|
|
Increase/(Decrease)
|
|
Defense |
|
|
|
$ |
17,113,000 |
|
|
|
7.5 |
% |
|
$ |
18,422,000 |
|
|
|
8.8 |
% |
|
$ |
(1,309,000 |
) |
|
|
(7.1 |
%) |
Energy |
|
|
|
|
(10,108,000 |
) |
|
|
(34.2 |
%) |
|
|
3,042,000 |
|
|
|
10.2 |
% |
|
|
(13,150,000 |
) |
|
|
(432.3 |
%) |
Other |
|
|
|
|
(2,567,000 |
) |
|
|
— |
% |
|
|
547,000 |
|
|
|
— |
% |
|
|
(3,114,000 |
) |
|
|
(569.3 |
%) |
Total |
|
|
|
$ |
4,438,000 |
|
|
|
1.7 |
% |
|
$ |
22,011,000 |
|
|
|
9.2 |
% |
|
$ |
(17,573,000 |
) |
|
|
(79.8 |
%) |
Income from continuing operations before income
taxes in 2002 decreased $17,573,000 or 79.8% to $4,438,000 from $22,011,000 in 2001.
The defense segment income from continuing
operations before income taxes in 2002 decreased $1,309,000 in 2002 compared to 2001. However, the Company recorded a pension expense of $2,952,000 in
2002 and pension income as well as a post-retirement curtailment gain of $566,000 and $1,933,000, respectively in 2001.
The energy segment loss from continuing operations
before income taxes was $10,108,000 in 2002 compared to a profit of $3,042,000 in 2001. The decrease of $13,150,000 in 2002 was primarily due to an
asbestos litigation provision to cover the estimated liability through 2012 net of estimated probable insurance recoveries, of $11,509,000, and
$4,707,000 of expenses related to the closing of the energy segment’s foundry, partially offset by other efficiencies in gross profit and selling
and administrative expenses.
In 2002, the other segment income from continuing
operations before income taxes decreased $3,114,000 primarily due to an increase in professional and consulting fees related to matters concerning the
Company’s environmental matters, sale process and proxy contest. Included in 2001 is a reduction of a reserve for local taxes of $1,000,000
related to the favorable settlement of a tax issue and an $842,000 insurance recovery.
Income After Taxes from Continuing
Operations
Income after taxes from continuing operations was
$3,864,000 or $0.28 per diluted share in 2002, a decrease of $10,764,000 or $0.82 per diluted share from $14,628,000 or $1.10 per diluted share in
2001. The 2002 results include a net charge for asbestos litigation of $7,330,000 or $0.53 per diluted share, a restructuring charge of $3,100,000 or
$0.23 per diluted share and a decrease of $3,721,000 or $0.27 per diluted share in pension results and curtailment gain. These were partially offset by
operating efficiencies.
Discontinued Transportation
Operations
Sales in the discontinued transportation operations
decreased $19,992,000 during 2002 to $27,447,000 from $47,439,000 during 2001. This was due primarily to reduced production on the San Francisco
electric trolley bus contract of $16,458,000.
The loss, before taxes, during the year ended
December 31, 2002 of the discontinued transportation operations was $66,053,000 (or a loss of $42,941,000 net of tax, or $3.13 per diluted share)
compared to a loss of $14,886,000 (or a loss of $9,265,000 net of tax, or $0.70 per diluted share) during 2001. Included in the 2002 pre-tax loss was a
$21,500,000 provision related to the sale of the Company’s two overhaul contracts with the New Jersey Transit
17
Corporation and the Maryland Transit Administration, as well as related assets and
liabilities, to ALSTOM. The transaction closed on July 26, 2002. Also included in the 2002 pre-tax loss was an increase of $7,818,000 in estimated
costs to complete contracts, $4,799,000 of general and administrative expenses, and $5,376,000 of other disposition costs related to the conveyed
contracts. Further, the Company recorded a pre-tax provision of $9,296,000 related to its 35% equity share of estimated losses by ETI, which AAI (a
Company subsidiary) owns jointly with Skoda, a.s. In addition, although ETI is owned 35% by AAI and 65% by Skoda, during 2002 the discontinued
transportation operation recorded 100% of the ETI loss. AAI and the Company have agreed to partially indemnify the surety for certain of ETI’s
performance and payment obligations under the MUNI contract and these potential indemnity obligations exceed the amount of the losses recorded. These
indemnity obligations are described in further detail in Note 16 to the Financial Statements included in Item 8 of this Annual Report. The additional
losses recorded by the Company for Skoda’s 65% share of ETI ‘s pre-tax losses totaled $17,264,000 during 2002.
Included in the $7,818,000 increase for the 2002
year in estimated costs to complete contracts is a loss provision of $4,730,000 recorded in the fourth quarter of 2002 regarding a higher estimate to
complete the Company’s San Francisco electric trolley bus subcontract from ETI. This increase is generally due to a four-month schedule delay
caused by production material issues and shortages.
Also included in the 2002 year results are
provisions resulting from cost growth concerning ETI’s final assembly scope of work on the San Francisco electric trolley bus program. During the
fourth quarter, material issues started to substantially impact the production line and technical issues with some of the major subassemblies
contributed to an extension of the program schedule. These events resulted in a replanning of the production line and the related cost increases.
Consequently, during the fourth quarter the Company recorded pre-tax provisions of $6,155,000 and $11,432,000, representing the Company’s 35%
equity share of the additional loss and Skoda’s 65% equity share in ETI, for the reasons noted above.
Pension
As a result of the decline in overall stock market
values and interest rates, the Company was required, under accounting regulations, to record a minimum pension liability of approximately $8,276,000 as
of December 31, 2002, compared to a net pension asset of $46,901,000 at December 31, 2001. The adjustment resulted in a non-cash charge to Accumulated
Other Comprehensive Loss in stockholders’ equity of approximately $32,262,000, net of a deferred tax benefit of $17,333,000 and an intangible
asset of $4,268,000. The adjustment does not affect the Company’s income statement or earnings.
Backlog
The Company’s funded backlog related to
continuing operations was $301,416,000 at December 31, 2002 compared to $207,343,000 at December 31, 2001. Funded backlog in the defense segment
increased $94,896,000 or 47.2% to $296,117,000 at December 31, 2002 from $201,221,000 at December 31, 2001. Funded backlog in the energy segment
decreased $823,000 or 13.5% to $5,299,000 at December 31, 2002 compared to $6,122,000 at December 31, 2001. Backlog represents products or services
that the Company’s customers have committed by contract to purchase from the Company. Cancellation of purchase orders or reductions of product
quantities in existing contracts could substantially and materially reduce backlog and, consequently, future revenues. Moreover, the Company’s
failure to replace canceled or reduced backlog could result in lower revenues.
Liquidity and Capital Resources
Cash and cash equivalents increased $20,503,000, or
564.0%, to $24,138,000 at December 31, 2003 from $3,635,000 at December 31, 2002. Operating cash flow from continuing operations was $40,835,000.
Income from continuing operations increased $11,242,000 to $15,106,000. In 2003, income from continuing operations included higher non-cash pension
expense in 2003 caused by lower interest rates and stock market values. Also, the Company received a tax refund of $16,822,000 related to the
Company’s 2002 net loss from discontinued operations. Further, depreciation and amortization decreased in 2003 mainly due to the accelerated
depreciation associated with the closure of the foundry in the energy segment in 2002. The discontinued transportation operations used net cash of
$7,946,000 for its operating activities primarily related to work performed for ETI under its MUNI subcontract and secunded labor arrangement for which
payment has not been made.
18
The following analysis relates only to continuing
operations. Trade receivables decreased $4,311,000 at December 31, 2003 from December 31, 2002. Included in trade receivables are U.S. Government
receivables, which decreased $1,970,000. Inventories were $3,983,000 lower at December 31, 2003 than at December 31, 2002. The inventory decrease was
primarily in the defense segment and resulted from higher inventory levels at December 31, 2002 in preparation for Shadow 200 TUAV full-rate
production. Accounts payable decreased $1,594,000. Customer advances decreased $3,759,000 at December 31, 2003 from December 31, 2002, in accordance
with the contractual terms of certain defense contracts.
Cash used for investing activities was $6,213,000 in
2003, primarily due to the acquisition of equipment and tooling in the defense segment in order to support increased production associated with various
government contracts. In 2002 the cash provided by investing activities was $15,166,000 primarily due to proceeds from the sale of two contracts for
the discontinued transportation operations partially offset by the acquisition of property and equipment. In 2001 cash used by investing activities was
$2,594,000. The Company currently has no significant fixed commitment for capital expenditures, however, the Company currently is considering the
acquisition of about $6,600,000 in capital assets and $1,700,000 of other costs over the next four years related to the implementation of a new
enterprise resource planning (“ERP”) information system.
Net cash used for financing activities was
$6,173,000. This was primarily due to dividend payments of $5,315,000 and the repurchase of the Company’s common stock of $6,036,000, partially
offset by the receipt of $5,178,000 from the exercise of stock options. Cash received from the exercise of stock options in 2002 was $1,825,000 as cash
dividends paid were $3,912,000.
In November 2003 the Board of Directors of the
Company authorized the repurchase of up to $10,000,000 of common stock. At December 31, 2003, the Company had repurchased 357,600 shares of common
stock for an aggregate amount of $6,036,000 or $16.88 per share. On January 27, 2004 the purchases under this plan were completed with approximately
$1,000 remaining available under the authorization. At that date, the Company had repurchased 576,100 shares for an aggregate amount of $9,999,000 or
$17.36 per share. On March 10, 2004 the Company’s Board of Directors authorized the repurchase of up to an additional $10,000,000 of common stock
pursuant to this plan.
As of December 31, 2003, the Company has recorded
net deferred tax assets of approximately $17,643,000. Management believes the Company will generate sufficient taxable income in future years to
realize this benefit based upon the historical performance of the Company’s defense and energy segments, existing backlog, and the anticipated
near term exit from the discontinued transportation operations.
Although the Company experienced higher pension plan
expense in 2003 generally due to the downward trend in interest rates and pension asset losses in the securities markets as of the measurement date at
December 31, 2002, which was the basis for the expense in 2003, the Company does not anticipate having to contribute cash to its pension plan during
2004. However, it plans to contribute $259,000 to the union pension plan that covers certain employees in the energy segment. The Company also expects
to contribute $2,744,000 to the other postretirement benefits plans for the fiscal year ending December 31, 2004.
On June 28, 2001, the Company and certain of its
subsidiaries entered into a Loan and Security Agreement (the “Credit Agreement”) with Fleet Capital Corporation (“Fleet”). The
Credit Agreement has a term of three years and provides for letters of credit and cash borrowings, subject to a borrowing base. The Credit Agreement
provides for up to $25,000,000 of credit advances, with a sub limit of $10,000,000 for cash borrowings. Credit advances may increase to $32,000,000
provided that amounts in excess of $25,000,000 are cash-collateralized. At December 31, 2003 there were no cash borrowings under the Credit Agreement.
The letter of credit obligations outstanding at December 31, 2003 under the Credit Agreement were $3,627,000. During 2003, amendments to the Credit
Agreement were entered into whereby, among other things, the financial covenants were modified, the amount of the Company’s common stock that may
be repurchased during the term of the Credit Agreement was increased from $5,000,000 to $20,000,000, and a borrowing base reserve of $6,000,000 on the
total credit facility was instituted, with a $3,000,000 reserve being applied to the $10,000,000 cash sub limit. The covenants that the Company agreed
to included a minimum ratio of total liabilities to tangible net worth, a limitation to the pre-tax losses of the discontinued transportation
operations and a minimum amount of tangible net worth. The Credit Agreement is scheduled to expire on June 28, 2004, however, management is in
discussions with Fleet to extend and expand its existing facility as well as other potential lenders in order to obtain a new facility. The Company
believes that it will be successful in its ability to negotiate an extended or new credit agreement with Fleet or to enter into a new credit agreement
with another party.
19
Detroit Stoker also has a $2,000,000 line of credit
with a bank that may be used for cash borrowings or letters of credit. This agreement expires May 1, 2004. The Company believes that it will be able to
obtain an extension of such agreement. At December 31, 2003, Detroit Stoker had no cash borrowings and $395,000 of letters of credit
outstanding.
Based on the existing Credit Agreement and current
initiatives and operations, the Company expects that available cash and existing lines of credit will be sufficient to meet its cash requirements for
the next twelve months.
In accordance with its previously disclosed
strategic initiatives, the Company intends to sell non-core assets, maximize efficiency, evaluate a recapitalization, and consider select acquisitions
to grow its core defense businesses. Accordingly, in October 2003 the Company engaged Imperial Capital LLC to assist the Company in a potential sale of
the Detroit Stoker energy segment. No assurances can be given regarding whether Detroit Stoker will be sold nor as to the timing or proceeds from any
such sales.
The Company conducts a significant amount of
business with the U.S. Government. Sales to agencies of the U.S. Government were $249,327,000, $161,569,000 and $149,047,000 for 2003, 2002 and 2001,
respectively. Although there are currently no indications of a significant change in the status of government funding of certain programs, should this
occur, the Company’s results of operations, financial position and liquidity could be materially affected. Such a change could have a significant
impact on the Company’s profitability and stock price. This could affect the Company’s ability to acquire additional funds from our revolving
credit facility or from other sources.
The Company paid cash dividends of $0.40 per share
in 2003, $0.30 per share in 2002 and $0.40 per share in 2001. Aggregate dividend payments amounted to $5,315,000 in 2003, $3,912,000 in 2002 and
$5,069,000 in 2001.
The ratio of current assets to current liabilities
was 1.9 at the end of 2003 and 2.0 at the end of 2002.
The following table sets forth the contractual
obligations of the Company at December 31, 2003:
|
|
|
|
Payments due by period
|
|
Contractual Obligations
|
|
|
|
Total
|
|
Less than
1 year
|
|
1–3 years
|
|
3–5 years
|
|
More than
5 years
|
Long Term
Debt |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Capital Lease
Obligations |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Operating
Leases |
|
|
|
$ |
8,812,000 |
|
|
$ |
2,996,000 |
|
|
$ |
3,281,000 |
|
|
$ |
2,193,000 |
|
|
$ |
342,000 |
|
Purchase
Obligations |
|
|
|
|
1,064,000 |
|
|
|
1,064,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Severance
Obligations |
|
|
|
|
605,000 |
|
|
|
605,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other Long
Term Liabilities |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total |
|
|
|
$ |
10,481,000 |
|
|
$ |
4,665,000 |
|
|
$ |
3,281,000 |
|
|
$ |
2,193,000 |
|
|
$ |
342,000 |
|
Restructuring Charges
Detroit Stoker ceased its foundry operation
conducted by its formerly wholly-owned subsidiary, Midwest, effective May 17, 2002. During 2002, Detroit Stoker incurred severance and other cash
charges totaling approximately $1,287,000 related to the restructuring, including operating losses of Midwest. In addition, the Company accelerated
depreciation of its foundry facility assets during the foundry’s operating period in 2002. Depreciation of this facility was $3,420,000 during
2002. No additional expenses were incurred in 2003.
On October 31, 2003, the Company closed its New York
City office and relocated the administrative activities conducted at that location to its headquarters in Hunt Valley, Maryland. Accordingly, the
Company recorded a charge of $546,000 during 2003 related to severance costs for the former employees at that location and an additional $355,000
related to lease termination expenses and other closure costs.
Contingent Matters
Off Balance Sheet
Arrangements
In connection with certain of its contracts, the
Company commits to certain performance guarantees. The ability of the Company to perform under these guarantees may, in part, be dependent on the
performance of other parties, including partners and subcontractors. If the Company is unable to meet these performance obligations,
the
20
performance guarantees could have a material adverse effect on the Company’s
results of operations, liquidity or financial position. The Company monitors the progress of its partners and subcontractors and does not believe that
their performance will adversely affect these contracts as of December 31, 2003. No assurances can be given, however, as to the Company’s
liability if the Company’s partners or subcontractors are unable to perform their obligations.
For a discussion of AAI’s and the
Company’s indemnity obligations relating to ETI, 35% of which is owned by AAI, see Notes 16 and 18 to the Financial Statements included in Item 8
of this Annual Report.
Other Contingent Matters
On July 26, 2002, the Company sold two
transportation overhaul contracts with the New Jersey Transit Corporation and Maryland Transit Administration and related assets and liabilities to
ALSTOM. The Company agreed to indemnify ALSTOM against certain breaches by AAI of representations and covenants pursuant to the Master Agreement
(“Agreement”). Certain of such indemnity claims are subject to a requirement that notice be given within nine months of the closing and are
subject to a maximum exposure of $4,250,000. Other indemnification claims are not so limited. On March 3, June 5 and November 5, 2003, and on January
15, 2004, ALSTOM made certain indemnification claims to the Company to be discussed by ALSTOM’s and the Company’s respective managements.
ALSTOM’s claims currently total approximately $8,500,000. The Company has requested further documentation concerning ALSTOM’s claims. These
matters are still pending and the Company is unable to determine whether and to what extent the Company may have any liability with respect to such
claims.
The Company is involved in various lawsuits and
claims, including asbestos-related litigation and environmental matters. For further information, refer to Note 16 to the Financial Statements included
in Item 8 of this Annual Report.
Critical Accounting Policies
The preparation of financial statements in
conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as
reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Judgments and assessments of
uncertainties are required in applying the Company’s accounting policies in many areas. For example, key assumptions are particularly important in
developing the Company’s projected liabilities for pension and other postretirement benefits. Other areas in which significant uncertainties exist
include, but are not limited to, projected costs to be incurred in connection with legal matters. The Company recognizes a liability for legal
indemnification and defense costs when it believes it is probable a liability has been incurred and the amount can be reasonably estimated. The
liabilities are developed based on currently available information. The accruals are recorded at undiscounted amounts if the Company cannot reliably
determine timing of the cash payments, and the amounts are classified as liabilities on the accompanying consolidated balance sheets. The Company also
has insurance that covers certain losses and records a receivable to the extent that the claim can be reasonably estimated and realization is deemed
probable. This receivable is recorded at undiscounted amounts and is classified as a non-current receivable in the accompanying consolidated balance
sheets.
The Company generally follows the
percentage-of-completion method of accounting for its long-term contracts. Sales and gross profit are principally recognized as work is performed based
on the relationship between actual costs incurred and total estimated costs, at completion. Alternatively, certain contracts provide for the production
of various units throughout the contract period, and sales and gross profit on these contracts are accounted for based on the units delivered. Amounts
representing contract change orders, claims or other items are included in sales only when they can be reliably estimated and realization is probable.
Incentives or penalties, estimated warranty costs and awards applicable to performance on contracts are considered in estimating sales and profit
rates, and are recorded when there is sufficient information to assess anticipated contract performance. When adjustments in contract value or
estimated costs are determined, any changes from prior estimates are reflected in earnings in the current period. Anticipated losses on contracts or
programs in progress are charged to earnings when identified. Although management believes that the profits are fairly stated and that adequate
provisions for losses on certain of the fixed price contracts have been recorded in the financial statements, revisions to such estimates do occur and
at times are material to the Company’s results of operations and financial position.
21
Inventory is recorded at the lower of cost or
market. Inventoried costs associated with long-term contracts include costs and earnings of incomplete contracts not yet billable to the customer.
These amounts represent the difference between the percentage-of-completion method of accounting for long-term contracts used to record operating
results by the Company’s defense segment and the amounts billable to the customer under the terms of the specific contracts. Estimates of final
contract costs and earnings (including earnings subject to future determination through negotiation or other procedures) are reviewed and revised
periodically throughout the lives of the contracts.
The Company files income tax returns and estimates
income taxes in each of the taxing jurisdictions in which it operates. The Company is subject to tax audits in each of these jurisdictions, which could
result in changes to the estimated taxes. The amount of these changes would vary by jurisdiction and would be recorded when known. Management has
recorded valuation allowances to reduce its deferred tax assets to the amount that is more likely than not to be realized. In doing so, management has
considered future taxable income and on-going tax planning strategies in assessing the need for a valuation allowance.
New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No.
46, “Consolidation of Variable Interest Entities” which requires the consolidation of variable interest entities, as defined. This
interpretation is applicable to variable interest entities created after January 31, 2003. Variable interest entities created prior to February 1,
2003, must be consolidated effective December 15, 2003. The adoption of Statement No. 148 did not have a material effect on the Company’s
financial position or results of operations.
In December 2002, the Financial Accounting Standards
Board issued FASB Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. Statement No. 148 amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to Statement No. 123’s fair value method of
accounting for stock-based employee compensation. Statement No. 148 also amends the disclosure provisions of Statement No. 123 and APB Opinion No. 28,
Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting
policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements.
While Statement No. 148 does not amend Statement No. 123 to require companies to account for employee stock options using the fair value method, the
disclosure provisions of Statement No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account
for that compensation using the fair value method of Statement No. 123 or the intrinsic value method of Opinion No. 25. The adoption of Statement No.
148 did not have a material effect on the Company’s financial position or results of operations.
Risk Factors
Important risk factors that could cause the
Company’s actual results to differ materially from those suggested by the Company’s forward-looking statements contained herein
include:
The Company depends on government contracts for substantially all of its
sales.
The Company derives approximately 77% of its revenue
from sales to the U.S. Government and its agencies. The Company expects that the U.S. Government sales will continue to be the primary source of its
revenue for the foreseeable future. The loss of U.S. Government contracts or a delay or decline in funding of existing and future U.S. Government
programs are subject to uncertain future funding levels, which can also result in the deferral or termination of programs. The Company’s business
is also highly sensitive to changes in national and international priorities and the U.S. Government budgets.
In addition, U.S. Government contracts typically
contain provisions and are subject to laws and regulations that give the government agencies rights and remedies not typically found in commercial
contracts, including providing the government agency with the ability to unilaterally terminate, reduce the value of and modify some of the terms and
conditions of existing contracts, suspend or permanently prohibit the Company from doing business with the U.S. Government or with any specific
government agency, control and potentially prohibit the export of the Company’s products, and claim rights in technologies and systems invested,
developed or produced by the Company.
22
If a U.S. Government agency terminates a contract
with the Company for convenience, the Company generally may recover only its incurred or committed costs, settlement expenses and profit on the work
completed prior to termination. If an agency terminates a contract with the Company for default, the Company is denied any recovery and may be liable
for excess costs incurred by the agency in procuring undelivered items from an alternative source. The Company may receive show-cause or cure notices
under contracts that, if not addressed to the agency’s satisfaction, could give the agency the right to terminate those contracts for default or
to cease procuring the Company’s services under those contracts.
In the event that any of the Company’s
contracts were to be terminated or adversely modified, there may be significant adverse effects on the Company’s revenues, operating costs and
income that would not be recoverable.
As a U.S. Government contractor, the Company is subject to a number of
procurement rules and regulations.
The Company must comply with and is affected by laws
and regulations relating to the formation, administration and performance of U.S. Government contracts. These laws and regulations, among other things,
require certification and disclosure of all cost and pricing data in connection with contract negotiations, define allowable and unallowable costs and
otherwise govern the Company’s right to reimbursement under certain cost-based U.S. Government contracts, and restrict the use and dissemination
of classified information and the exportation of certain products and technical data.
These laws and regulations affect how the Company
does business with its customers and in some instances, impose added costs on our businesses. A violation of specific laws and regulations could result
in the imposition of fines and penalties or the termination of our contracts.
The Company’s businesses could be adversely affected by a negative audit by
the U.S. Government.
U.S. Government agencies such as the Defense
Contract Audit Agency (“DCAA”) routinely audit and investigate government contractors. These agencies review a contractor’s performance
under its contracts, cost structure and compliance with applicable laws, regulations and standards. The DCAA also reviews the adequacy of, and a
contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating,
compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed, while such
costs already reimbursed must be refunded. If an audit uncovers improper or illegal activities, the Company may be subject to civil and criminal
penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or
prohibition from doing business with the U.S. Government. In addition, the Company could suffer serious harm to its reputation if allegations of
impropriety were made against it.
The Company’s revenues will be adversely affected if the Company fails to
receive renewal or follow-on contracts.
Renewal and follow-on contracts are important
because the Company’s contracts are for fixed terms. These terms vary from shorter than one year to over five years, particularly for contracts
with options. The typical term of the Company’s contracts with the U.S. Government is between one and three years. The loss of revenues from the
Company’s possible failure to obtain renewal or follow-on contracts may be significant because the Company’s U.S. Government contracts
account for a substantial portion of the Company’s revenues.
Cost over-runs on the Company’s contracts could subject it to losses and
adversely affect its future business.
Approximately 70% of the Company’s contracts in
2003 were firm fixed-price contracts. Under firm fixed-price contracts, the Company performs services under a contract at a stipulated price. If the
Company’s initial estimates used for calculating the contract price are incorrect, the Company can incur losses on those contracts because any
costs in excess of the fixed price are absorbed by the Company. Under time and materials contracts, the Company is paid for labor at negotiated hourly
billing rates and for certain expenses. Under cost reimbursement contracts, which are subject to a contract-ceiling amount, the Company is reimbursed
for allowable costs and paid a fee, which may be fixed or performance based. However, if costs exceed the contract ceiling or are not allowable under
the provisions of the contract or applicable regulations, the Company may not be able to obtain reimbursement for all such costs. The Company’s
ability to manage costs on each of these contract types may materially and adversely
23
affect its financial condition. Cost over-runs also may adversely affect the
Company’s ability to sustain existing programs and obtain future contract awards.
Due to the size and nature of many of the
Company’s contracts, the estimation of total revenues and cost at completion is complicated and subject to many variables. Assumptions have to be
made regarding the length of time to complete the contract because costs also include expected increases in wages and prices for materials. Incentives
or penalties related to performance on contracts are considered in estimating sales and profit rates, and are recorded when there is sufficient
information for the Company to assess anticipated performance. Estimates of award fees are also used in estimating sales and profit rates based on
actual and anticipated awards.
Because of the significance of the judgments and
estimation processes described above, it is likely that materially different amounts could be recorded if the Company used different assumptions or if
the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may adversely affect future period financial
performance. For additional information on accounting policies we have in place for recognizing sales and profits, see Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Critical Accounting Policies in Item 7 of this Annual Report and Note 2 of the Notes to
Financial Statements included in Item 8 of this Annual Report.
Failure to perform by one of the Company’s subcontractors, partners or
suppliers could materially and adversely affect the Company’s performance and the Company’s ability to obtain future business.
Many of the Company’s contracts involve
subcontracts or partnerships with other companies upon which the Company relies to perform a portion of the services the Company must provide to its
customers. There is a risk that the Company may have disputes with the Company’s subcontractors, including disputes regarding the quality and
timeliness of work performed by the subcontractor, customer concerns about the subcontractor, the Company’s failure to extend existing task orders
or issue new task orders under a subcontract or the Company’s hiring of personnel of a subcontractor. A failure by one or more of the
Company’s subcontractors to satisfactorily provide on a timely basis the agreed-upon services may materially and adversely impact the
Company’s ability to perform the Company’s obligations as the prime contractor. Subcontractor performance deficiencies could expose the
Company to liability and have a material adverse effect on the Company’s ability to compete for future contracts and orders.
In addition, in connection with certain of its
contracts, the Company commits to certain performance guarantees. The ability of the Company to perform under these guarantees may in part, be
dependent on the performance of other parties, including partners and subcontractors. If the Company is unable to meet these performance obligations,
the performance guarantees could have a material adverse effect on product margins and the Company’s results of operations, liquidity or financial
position. The Company monitors the progress of its partners and subcontractors and does not believe that their performance will adversely affect these
contracts as of December 31, 2003. No assurances can be given, however, as to the Company’s liability if the Company’s partners or
subcontractors are unable to perform their obligations.
In addition, although the Company can obtain
materials and purchase components generally from a number of different suppliers, several suppliers are the Company’s sole source of certain
components. If a supplier should cease to deliver such components, the Company would probably find other sources; however, this could result in added
cost and manufacturing delays, which may affect the Company’s ability to meet customer needs and may have an adverse impact on the Company’s
profitability.
The Company operates in highly competitive and rapidly changing
markets.
The defense industry in which the Company primarily
participates is highly competitive and characterized by rapid technological change. If the Company does not continue to improve existing product lines
and develop new products and technologies, the Company’s business could be materially and adversely affected. In addition, the Company’s
competitors could introduce new products with greater capabilities which could also have a material adverse effect on the Company’s business. In
addition, in connection with certain of its contracts, the Company commits to certain performance guarantees. The ability of the Company to perform
under these guarantees may, in part, be dependent on the performance of other parties, including partners and subcontractors. If the Company is unable
to meet these performance obligations, the performance guarantees could have a material adverse effect on product margins and the Company’s
results of operations, liquidity or financial position. The Company monitors
24
the progress of its partners and subcontractors and does not believe that their
performance will adversely affect these contracts as of December 31, 2003. No assurances can be given, however, as to the Company’s liability if
the Company’s partners or subcontractors are unable to perform their obligations.
The Company competes primarily for government
contracts against many companies that are larger than the Company, devote greater resources to research and development, and generally have greater
financial and other resources. Consequently, these competitors may be better positioned to take advantage of economies of scale and develop new
technologies. In order to remain competitive, the Company must keep the Company’s capabilities technically advanced and compete on price and on
value added to its customers. The Company’s ability to compete may be adversely affected by limits on its capital resources and its ability to
invest in maintaining and expanding the Company’s market share. If the Company is unable to compete effectively, its business and prospects will
be adversely affected.
In addition, the Company’s international
business is subject to changes in import and export policies, technology transfer restrictions, limitations imposed by U.S. law that are not applicable
to foreign competitors, and other legal, financial and governmental risks.
The Company and its subsidiaries are subject to asbestos-related and
environmental litigation and other liabilities.
The Company’s financial condition and
performance may be affected by pending litigation, including asbestos and environmental matters, and other loss contingencies, and by unanticipated
liabilities. These litigation matters and contingencies are described in Note 16 of the Notes to Financial Statements included in Item 8 of this Annual
Report.
Although the Company accounts for its transportation business as a discontinued
operation, the Company remains subject to significant obligations in connection with such operations.
The Company accounts for its transportation business
as a discontinued operation. As such, the Company is attempting to complete its obligations under its remaining contract in this business in such a way
as not to expose the Company to further losses. However, as discussed in Note 16 to the Notes to Financial Statements included in Item 8 of this Annual
Report, the remaining obligations and potential obligations, which include performance and indemnity obligations, are significant. Therefore, although
the Company anticipates that ETI’s current program will be completed during the third quarter of 2004 and that it has adequately provided for the
estimated losses including warranty obligations to be incurred by ETI, there can be no assurances that the Company will, in fact, be able to
successfully extricate itself from its obligations and potential obligations within the stated time frame or within the established
reserves.
The Company’s level of returns on pension plan assets could affect the
Company’s earnings in future periods.
The Company’s net income or loss may be
positively or negatively impacted by the amount of income or expense the Company records for its pension plan. An example of how changes in the
Company’s assumptions related to the Company’s pension plan can affect the Company’s financial statements occurred in 2002. For a
discussion regarding how the Company’s financial statements can be affected by pension plan accounting policies, see Management’s Discussion
and Analysis of Financial Condition and Results of Operations in Item 7 of this Annual Report and Note 11 of the Notes to Financial Statements included
in Item 8 of this Annual Report.
| ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK |
At times, the Company enters into forward exchange
contracts to manage its exposure against foreign currency fluctuations on sales transactions denominated in foreign currencies. The contract obligates
the Company to exchange predetermined amounts of the foreign currency at certain dates, or to make an equivalent U.S. dollar payment equal to the value
of such exchanges. The purpose of the Company’s foreign exchange currency activities is to protect the Company from the risk that the eventual
U.S. dollar cash flows resulting from the sale of products to international customers will be adversely affected by changes in exchange rates. Gains
and losses for effective hedging activities are included in Other Comprehensive Income and recognized in earnings when the future sales occur. Gains
and losses for ineffective hedges are recorded in income. At December 31, 2003 the Company had two foreign currency forward contracts with large
financial institutions. One for Australian dollars having maturities
25
of three years to hedge contract payments scheduled to be received within three
years. The aggregate notional value of this contract was $1,500,000, with an aggregate loss of $96,000 based on fair market value. The second contract
is for the delivery of Euros in 2004 has a notional value totaling $2,250,000, with an aggregate loss of $336,000 based on fair market value. Both of
these have been recorded in income.
The Company is exposed to credit loss in the event
of nonperformance by counterparties on foreign exchange contracts. The amount of such exposure is generally the unrealized gain or loss on such
contracts. The Company does not hold or issue financial instruments for trading purposes.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
|
|
2003
|
|
2002
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents |
|
|
|
$ |
24,138 |
|
|
$ |
3,635 |
|
Trade
receivables |
|
|
|
|
|
|
|
|
|
|
U.S.
Government |
|
|
|
|
24,570 |
|
|
|
26,540 |
|
Other, less
allowance for doubtful accounts of $556 and $235 for 2003 and 2002, respectively |
|
|
|
|
8,807 |
|
|
|
11,148 |
|
|
|
|
|
|
33,377 |
|
|
|
37,688 |
|
Federal
income tax receivable |
|
|
|
|
— |
|
|
|
15,509 |
|
Inventories |
|
|
|
|
16,968 |
|
|
|
20,951 |
|
Prepaid
expenses and other assets |
|
|
|
|
2,660 |
|
|
|
1,351 |
|
Deferred
income taxes |
|
|
|
|
6,757 |
|
|
|
4,528 |
|
Assets of
discontinued operations |
|
|
|
|
6,139 |
|
|
|
15,092 |
|
Total Current
Assets |
|
|
|
|
90,039 |
|
|
|
98,754 |
|
Deferred income
taxes |
|
|
|
|
10,886 |
|
|
|
11,531 |
|
Other
assets |
|
|
|
|
7,710 |
|
|
|
7,421 |
|
Insurance
receivable—asbestos litigation |
|
|
|
|
20,317 |
|
|
|
20,343 |
|
Property and
equipment
|
|
|
|
|
|
|
|
|
|
|
Land |
|
|
|
|
459 |
|
|
|
459 |
|
Buildings and
improvements |
|
|
|
|
38,020 |
|
|
|
35,244 |
|
Machinery and
equipment |
|
|
|
|
68,394 |
|
|
|
67,002 |
|
Furniture and
fixtures |
|
|
|
|
4,715 |
|
|
|
4,891 |
|
|
|
|
|
|
111,588 |
|
|
|
107,596 |
|
Less: Allowance
for depreciation and amortization |
|
|
|
|
89,372 |
|
|
|
86,400 |
|
|
|
|
|
|
22,216 |
|
|
|
21,196 |
|
Total
Assets |
|
|
|
$ |
151,168 |
|
|
$ |
159,245 |
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable |
|
|
|
$ |
10,117 |
|
|
$ |
11,711 |
|
Accrued
employee compensation and taxes |
|
|
|
|
11,920 |
|
|
|
12,043 |
|
Customer
advances |
|
|
|
|
2,452 |
|
|
|
6,211 |
|
Reserve for
contract losses |
|
|
|
|
1,681 |
|
|
|
2,050 |
|
Other
liabilities |
|
|
|
|
5,654 |
|
|
|
3,682 |
|
Liabilities
of discontinued operations |
|
|
|
|
16,611 |
|
|
|
12,563 |
|
Total Current
Liabilities |
|
|
|
|
48,435 |
|
|
|
48,260 |
|
Minimum pension
liability |
|
|
|
|
6,755 |
|
|
|
8,276 |
|
Post retirement
benefits other than pensions |
|
|
|
|
21,970 |
|
|
|
22,361 |
|
Reserve for
asbestos litigation |
|
|
|
|
31,595 |
|
|
|
31,852 |
|
Other
liabilities |
|
|
|
|
1,466 |
|
|
|
865 |
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
Common
stock—par value $1.00 per share
Authorized shares 30,000,000; Issued 14,374,148 shares;
Outstanding 13,267,218 shares in 2003 and
13,067,918
shares in 2002 |
|
|
|
|
14,374 |
|
|
|
14,374 |
|
Additional
capital |
|
|
|
|
88,125 |
|
|
|
92,085 |
|
Retained
deficit |
|
|
|
|
(22,095 |
) |
|
|
(16,254 |
) |
Cost of
shares in treasury:
|
|
|
|
|
|
|
|
|
|
|
1,106,930
shares in 2003 and 1,306,230 shares in 2002 |
|
|
|
|
(11,345 |
) |
|
|
(10,312 |
) |
Accumulated
other comprehensive loss |
|
|
|
|
(28,112 |
) |
|
|
(32,262) |
|
Total
Shareholders’ Equity |
|
|
|
|
40,947 |
|
|
|
47,631 |
|
Total
Liabilities and Shareholders’ Equity |
|
|
|
$ |
151,168 |
|
|
$ |
159,245 |
|
See notes to consolidated financial statements.
27
UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Dollars in Thousands, except per share amounts)
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
Net
sales |
|
|
|
$ |
310,947 |
|
|
$ |
258,767 |
|
|
$ |
238,495 |
|
Cost of
sales |
|
|
|
|
243,589 |
|
|
|
202,650 |
|
|
|
184,530 |
|
Gross
profit |
|
|
|
|
67,358 |
|
|
|
56,117 |
|
|
|
53,965 |
|
Selling &
administrative expenses |
|
|
|
|
42,717 |
|
|
|
38,532 |
|
|
|
32,880 |
|
Asbestos
litigation provision—net |
|
|
|
|
717 |
|
|
|
11,509 |
|
|
|
— |
|
Other
operating expenses—net |
|
|
|
|
667 |
|
|
|
703 |
|
|
|
434 |
|
Total
operating income |
|
|
|
|
23,257 |
|
|
|
5,373 |
|
|
|
20,651 |
|
Non-operating
income and (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
|
|
|
463 |
|
|
|
127 |
|
|
|
618 |
|
Other
income |
|
|
|
|
389 |
|
|
|
64 |
|
|
|
1,085 |
|
Equity in net
income of joint venture |
|
|
|
|
57 |
|
|
|
99 |
|
|
|
86 |
|
Interest
expense |
|
|
|
|
(92 |
) |
|
|
(843 |
) |
|
|
(17 |
) |
Other
expenses |
|
|
|
|
(557 |
) |
|
|
(382 |
) |
|
|
(412 |
) |
|
|
|
|
|
260 |
|
|
|
(935 |
) |
|
|
1,360 |
|
Income from
continuing operations before income taxes |
|
|
|
|
23,517 |
|
|
|
4,438 |
|
|
|
22,011 |
|
Provision for
income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
current |
|
|
|
|
9,274 |
|
|
|
5,432 |
|
|
|
8,145 |
|
Federal
deferred |
|
|
|
|
(1,525 |
) |
|
|
(4,933 |
) |
|
|
(152 |
) |
State |
|
|
|
|
662 |
|
|
|
75 |
|
|
|
(610 |
) |
Total income
taxes |
|
|
|
|
8,411 |
|
|
|
574 |
|
|
|
7,383 |
|
Income from
continuing operations |
|
|
|
|
15,106 |
|
|
|
3,864 |
|
|
|
14,628 |
|
Loss from
discontinued operations—net of income tax benefit of $11,274, $23,112 and $5,621 for 2003, 2002 and 2001, respectively |
|
|
|
|
(20,947 |
) |
|
|
(42,941 |
) |
|
|
(9,265 |
) |
Net (loss)
income |
|
|
|
$ |
(5,841 |
) |
|
$ |
(39,077 |
) |
|
$ |
5,363 |
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
continuing operations |
|
|
|
$ |
1.14 |
|
|
$ |
0.30 |
|
|
$ |
1.15 |
|
Loss from
discontinued operations |
|
|
|
$ |
(1.58 |
) |
|
$ |
(3.30 |
) |
|
$ |
(0.73 |
) |
Net (loss)
income |
|
|
|
$ |
(0.44 |
) |
|
$ |
(3.00 |
) |
|
$ |
0.42 |
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
continuing operations |
|
|
|
$ |
1.10 |
|
|
$ |
0.28 |
|
|
$ |
1.10 |
|
Loss from
discontinued operations |
|
|
|
$ |
(1.53 |
) |
|
$ |
(3.13 |
) |
|
$ |
(0.70 |
) |
Net (loss)
income |
|
|
|
$ |
(0.43 |
) |
|
$ |
(2.85 |
) |
|
$ |
0.40 |
|
See notes to consolidated financial statements.
28
UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
income |
|
|
|
$ |
(5,841 |
) |
|
$ |
(39,077 |
) |
|
$ |
5,363 |
|
Adjustments
to reconcile net (loss) income to net cash
provided by (used for) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
discontinued operations, net of income tax benefit |
|
|
|
|
20,947 |
|
|
|
42,941 |
|
|
|
9,265 |
|
Net asbestos
litigation expense |
|
|
|
|
— |
|
|
|
11,509 |
|
|
|
— |
|
Pension
expense (income), net |
|
|
|
|
6,119 |
|
|
|
1,321 |
|
|
|
(2,385 |
) |
Income tax
refund |
|
|
|
|
16,822 |
|
|
|
— |
|
|
|
— |
|
Depreciation
and amortization |
|
|
|
|
5,415 |
|
|
|
8,763 |
|
|
|
6,413 |
|
Noncash
compensation charge |
|
|
|
|
— |
|
|
|
— |
|
|
|
346 |
|
Deferred
income taxes |
|
|
|
|
(1,525 |
) |
|
|
(4,933 |
) |
|
|
152 |
|
Equity in net
income of joint venture |
|
|
|
|
(57 |
) |
|
|
(99 |
) |
|
|
(86 |
) |
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in
trade receivables |
|
|
|
|
4,311 |
|
|
|
87 |
|
|
|
12,443 |
|
Decrease
(increase) in inventories |
|
|
|
|
3,983 |
|
|
|
(4,763 |
) |
|
|
11,792 |
|
(Increase)
decrease in prepaid expenses and other current assets |
|
|
|
|
(1,309 |
) |
|
|
404 |
|
|
|
1,223 |
|
Decrease in
customer advances |
|
|
|
|
(3,759 |
) |
|
|
(831 |
) |
|
|
(2,329 |
) |
(Decrease)
increase in accounts payable, accruals and other current liabilities |
|
|
|
|
(1,427 |
) |
|
|
7,054 |
|
|
|
5,665 |
|
Other—net |
|
|
|
|
(2,844 |
) |
|
|
490 |
|
|
|
(4,692 |
) |
Net Cash
Provided by Continuing Operations |
|
|
|
|
40,835 |
|
|
|
22,866 |
|
|
|
43,170 |
|
Net Cash Used
for Discontinued Operations,
exclusive of income taxes |
|
|
|
|
(7,946 |
) |
|
|
(37,806 |
) |
|
|
(45,459 |
) |
Net Cash
Provided by (Used for) Operating Activities |
|
|
|
|
32,889 |
|
|
|
(14,940 |
) |
|
|
(2,289 |
) |
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
sale of assets for discontinued operations |
|
|
|
|
— |
|
|
|
20,756 |
|
|
|
— |
|
Increase in
amount due from investee for discontinued operations |
|
|
|
|
(2,122 |
) |
|
|
(3,648 |
) |
|
|
(2,986 |
) |
Repayment of
advances by investee of discontinued operations |
|
|
|
|
2,122 |
|
|
|
1,917 |
|
|
|
2,730 |
|
Purchase of
property and equipment |
|
|
|
|
(6,213 |
) |
|
|
(5,219 |
) |
|
|
(2,028 |
) |
Capital
expenditures of discontinued operations |
|
|
|
|
— |
|
|
|
— |
|
|
|
(2,610 |
) |
Repayment of
advances and dividend received by investee |
|
|
|
|
— |
|
|
|
1,360 |
|
|
|
2,300 |
|
Net Cash
(Used for) Provided by Investing Activities |
|
|
|
|
(6,213 |
) |
|
|
15,166 |
|
|
|
(2,594 |
) |
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
exercise of stock options |
|
|
|
|
5,178 |
|
|
|
1,825 |
|
|
|
4,063 |
|
Dividends |
|
|
|
|
(5,315 |
) |
|
|
(3,912 |
) |
|
|
(5,069 |
) |
Purchase of
treasury shares |
|
|
|
|
(6,036 |
) |
|
|
— |
|
|
|
— |
|
Proceeds from
borrowings |
|
|
|
|
— |
|
|
|
— |
|
|
|
6,300 |
|
Payments on
long term debt and financing |
|
|
|
|
— |
|
|
|
— |
|
|
|
(6,300 |
) |
Net Cash Used
for Financing Activities |
|
|
|
|
(6,173 |
) |
|
|
(2,087 |
) |
|
|
(1,006 |
) |
Increase
(decrease) in cash and cash equivalents |
|
|
|
|
20,503 |
|
|
|
(1,861 |
) |
|
|
(5,889 |
) |
Cash and cash
equivalents at beginning of period |
|
|
|
|
3,635 |
|
|
|
5,496 |
|
|
|
11,385 |
|
Cash and cash
equivalents at end of period |
|
|
|
$ |
24,138 |
|
|
$ |
3,635 |
|
|
$ |
5,496 |
|
See notes to consolidated financial statements.
29
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS
Note 1. Nature of Operations
United Industrial Corporation is an advanced
technology company applying its resources to the research, development and production of aerospace and military systems, electronics and components
under defense contracts, and to a lesser extent to energy systems for industry and utilities.
The principal business segments are defense and
related products, and energy generating systems. The ground transportation systems business is included as a discontinued operation. See Notes 2 and
16.
Note 2. Summary of Significant Accounting
Policies
Use of Estimates in the Preparation of
Financial Statements
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the
amounts reported in the Financial Statements and the accompanying notes. Actual results could differ from these estimates and such differences may be
material to the Financial Statements.
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. 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%. During 2002, the discontinued transportation operations of the Company began recording 100%, instead of 35%, of Electric Transit
Inc.’s (“ETI’s”) losses because of the apparent inability of Skoda, a.s., the majority owner, to meet its financial obligations
under ETI’s shareholder agreement and AAI’s contractual indemnification of the surety concerning certain of ETI’s performance
criteria.
Fair Value Information
The carrying amounts for cash, accounts receivable
and accounts payable approximate fair value because of the short term nature of these instruments.
Discontinued Operations
The Company accounts for the remaining
transportation operations as discontinued operations including its 35% ownership in ETI.
During 2002, the Company sold two transportation
overhaul contracts and related assets. The Company recorded a loss of $21,500,000 associated with this transaction. The proceeds of this sale were
approximately $20,756,000. In addition, the agreement provided for the Company to be released under all performance bonds and obligations under the
conveyed contracts. Further, the Company received a cost plus fee contract to perform work on the conveyed contracts for the purchaser during a
transition period not to exceed six months. These divested overhaul contracts, and the efforts undertaken by AAI to assist ETI to complete its one
remaining contract, as well as AAI’s equity interest in ETI, are included in the accounting for discontinued operations. See Notes 16 and 17 for
additional information.
Cash Equivalents and Marketable
Securities
The Company considers all highly liquid investments
with maturity of three months or less when purchased to be cash equivalents.
30
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
Inventories
Inventories are stated at the lower of cost or
market. At December 31, 2003 and 2002, approximately 14% and 21%, respectively, of total inventory were priced by the last-in, first-out (LIFO) method
with the remainder priced at actual or average cost. If the first-in, first-out (FIFO) method of inventory pricing had been used, inventories would
have been approximately $3,149,000 and $2,984,000 higher than reported on December 31, 2003 and 2002, respectively.
Revenue and Gross Profit
Recognition
The Company generally follows the
percentage-of-completion method of accounting for its long-term contracts. Sales and gross profit are principally recognized as work is performed based
on the relationship between actual costs incurred and total estimated costs at completion. Alternatively, certain contracts provide for the production
of various units throughout the contract period, and sales and gross profit on these contracts are accounted for based on the units delivered. Amounts
representing contract change orders, claims or other items are included in sales only when they can be reliably estimated and realization is probable.
Incentives or penalties, estimated warranty costs and awards applicable to performance on contracts are considered in estimating sales and profit
rates, and are recorded when there is sufficient information to assess anticipated contract performance. When adjustments in contract value or
estimated costs are determined, any changes from prior estimates are reflected in earnings in the current period. Anticipated losses on contracts or
programs in progress are charged to earnings when identified.
Noncontract revenue is recorded when the product is
shipped and the title passes or when the services are provided.
Property and Equipment
Property and equipment are stated at cost. The
policy of the Company is to provide for depreciation on the straight-line and declining-balance methods, by annual charges to operations calculated to
amortize the cost over the estimated useful lives of the various classes of property and equipment.
Earnings per Share
Basic earnings per share is based on the weighted
average number of common shares outstanding. Diluted earnings per share gives effect to the assumed exercise of dilutive options, using, where
appropriate, the treasury stock method.
Stock-Based Compensation
The Company has elected to continue to account for
its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”
(APB 25), whereby compensation cost for stock options is recognized in income based on the excess, if any, of the quoted market price of the stock at
the grant date of the award or other measurement date over the amount an employee must pay to acquire the stock. In addition, the Company furnishes the
proforma disclosures required under FASB Statement No. 148, “Accounting for Stock Based Compensation Transition and Disclosure” (FAS 148),
a
31
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
reconciliation of net earnings and related proforma income and income per common
share from continuing operations is as follows:
|
|
|
|
December 31,
|
|
(Dollars in thousands, except per share
amounts)
|
|
|
|
2003
|
|
2002
|
|
2001
|
Income from
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported |
|
|
|
$ |
15,106 |
|
|
$ |
3,864 |
|
|
$ |
14,628 |
|
Total
employee stock compensation expense determined
under fair value method, net of tax |
|
|
|
|
(716 |
) |
|
|
(785 |
) |
|
|
(746 |
) |
Proforma |
|
|
|
$ |
14,390 |
|
|
$ |
3,079 |
|
|
$ |
13,882 |
|
|
Income per
common share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
$ |
1.14 |
|
|
$ |
0.30 |
|
|
$ |
1.15 |
|
Diluted |
|
|
|
$ |
1.10 |
|
|
$ |
0.28 |
|
|
$ |
1.10 |
|
Proforma:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
$ |
1.09 |
|
|
$ |
0.24 |
|
|
$ |
1.09 |
|
Diluted |
|
|
|
$ |
1.05 |
|
|
$ |
0.23 |
|
|
$ |
1.04 |
|
The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2003, 2002 and 2001,
respectively: dividend yields of 2.4%, 2.0% and 3.0%; expected volatility of 26%, 44% and 29%; risk-free interest rates of 4.3%, 4.6% and 5.2%; and
expected lives of ten years in 2003, 2002 and 2001. In 2003, some of the options granted had an exercise price that was greater than the current market
price on the date of grant, while all of the other options were granted with an exercise price equal to the market price on the date of the grant. In
2003, the weighted-average fair value of options granted with their exercise price equal to the current market price at the date of grant was $4.91.
The weighted-average fair value of options granted with their exercise price greater than the current market price at the date of grant was $4.87. The
weighted-average fair value of an option granted was $8.95 and $4.09 for the years ended December 31, 2002 and 2001, respectively.
Reclassification
Certain financial statement amounts in the prior
years have been reclassified to conform to current year’s presentation.
Foreign Currency Contracts
At times, the Company enters into forward exchange
contracts to manage its exposure against foreign currency fluctuations on sales transactions denominated in foreign currencies. The contract obligates
the Company to exchange predetermined amounts of the foreign currency at certain dates, or to make an equivalent U.S. dollar payment equal to the value
of such exchanges. The purpose of the Company’s foreign exchange currency activities is to protect the Company from the risk that the eventual
U.S. dollar cash flows resulting from the sale of products to international customers will be adversely affected by changes in exchange rates. Gains
and losses for effective hedging activities are included in Other Comprehensive Income and recognized in earnings when the future sales occur. Gains
and losses for ineffective hedges are recorded in income. At December 31, 2003, the Company had two foreign currency forward contracts with large
financial institutions. One is for Australian dollars having maturities of three years to hedge contract payments scheduled to be received within three
years. The aggregate notional value of this contract was $1,500,000, with an aggregate loss of $96,000 based on fair market value. The second contract
is for the delivery of Euros in 2004 and has a notional value totaling $2,250,000, with an aggregate loss of $336,000 based on fair market value. The
losses on both of these foreign currency forward contracts have been recorded in income.
32
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
The Company is exposed to credit loss in the event
of nonperformance by counterparties on foreign exchange contracts. The amount of such exposure is generally the unrealized gain or loss on such
contracts. The Company does not hold or issue financial instruments for trading purposes.
Legal Matters
The Company recognizes a liability for legal
indemnification and defense costs when it believes it is probable a liability has been incurred and the amount can be reasonably estimated. The
liabilities are developed based on currently available information. The accruals are recorded at undiscounted amounts if the Company cannot reliably
determine the timing of the cash payments and the amounts are classified as liabilities on the accompanying consolidated balance sheets. The Company
also has insurance that covers losses on certain claims and legal matters and records a receivable to the extent that the realization of the insurance
is deemed probable. This receivable is recorded at undiscounted amounts and is classified as a noncurrent receivable in the accompanying consolidated
balance sheets.
New Accounting
Pronouncements
In December 2002, the Financial Accounting Standards
Board issued FASB Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. Statement No. 148 amends FASB Statement No.
123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to Statement No. 123’s fair value method of accounting for
stock-based employee compensation. Statement No. 148 also amends the disclosure provisions of Statement No. 123 and APB Opinion No. 28, Interim Financial
Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While the Statement does
not amend Statement No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of Statement
No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair
value method of Statement No. 123 or the intrinsic value method of Opinion No. 25. The adoption of Statement No. 148 did not have a material effect on the
Company’s financial statements or results of operations.
In January 2003, the FASB issued Interpretation No.
46,“Consolidation of Variable Interest Entities” which requires the consolidation of variable interest entities, as defined. This
interpretation is applicable to variable interest entities created after January 31, 2003. Variable interest entities created prior to February 1,
2003, must be consolidated effective December 15, 2003. The adoption of Interpretation No. 46 did not have a material effect on the Company’s
financial statements or results of operations.
During December 2003, the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (“the Act”) was signed into law. The Act incorporates a prescription drug benefit under
Medicare as well as federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to
Medicare Part D. In January 2004, the FASB issued FASB Staff Position (“FSP”) No. FAS 106-1, “Accounting for Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” As permitted under FSP 106-1, the Company has elected to
defer accounting for the effects of the Act until authoritative guidance on the accounting for the federal subsidy is issued. Additionally, the accrued
benefit obligation and the net periodic postretirement benefit costs included in the Company’s consolidated financial statements does not reflect
the effects of the Act on the Company’s post retirement benefit plan. Upon issuance of authoritative guidance, and adoption of such guidance, the
Company may have to adjust amounts previously reported in the financial statements.
33
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
Note 3. Trade Receivables
Amounts due from the U.S. Government primarily
related to long-term contracts of the Company’s defense segment were as follows:
|
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
|
|
2003
|
|
2002
|
Amounts
billed |
|
|
|
$ |
8,348 |
|
|
$ |
10,179 |
|
Unbilled
recoverable costs and earned fees |
|
|
|
|
15,963 |
|
|
|
15,676 |
|
Retainage per
contract provisions |
|
|
|
|
259 |
|
|
|
685 |
|
|
|
|
|
$ |
24,570 |
|
|
$ |
26,540 |
|
Billed and unbilled amounts include $3,991,000 and
$2,617,000 at December 31, 2003 and 2002, respectively, related to contracts for which a subsidiary of the Company is a subcontractor to other
government contractors. Unbilled recoverable costs and earned fees represent amounts that will be substantially collected within one year. Retainage
amounts will generally be billed over the next twelve months.
Other Accounts Receivable, net of allowance for
doubtful accounts was $8,807,000 and $11,148,000, at December 31, 2003 and 2002, respectively, and consisted of receivables from industrial and other
non-U.S. Government customers. The Company continuously evaluates the credit worthiness of its non-U.S. Government customers and generally does not
require collateral.
Note 4. Inventories
|
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
|
|
2003
|
|
2002
|
Finished goods
and work in progress |
|
|
|
$ |
3,136 |
|
|
$ |
6,151 |
|
Costs and
earnings related to long-term contracts |
|
|
|
|
55,984 |
|
|
|
65,031 |
|
Deduct progress
payments related to long-term contracts |
|
|
|
|
(43,218 |
) |
|
|
(51,667 |
) |
Costs and
earnings in excess of billings |
|
|
|
|
12,766 |
|
|
|
13,364 |
|
Total finished
goods and work in progress |
|
|
|
|
15,902 |
|
|
|
19,515 |
|
Materials and
supplies |
|
|
|
|
1,066 |
|
|
|
1,436 |
|
|
|
|
|
$ |
16,968 |
|
|
$ |
20,951 |
|
The inventoried costs associated with incomplete
long-term contracts not yet billed to customers include costs and earnings of $12,766,000 in 2003 and $13,364,000 in 2002. These amounts represent the
percentage-of-completion method of accounting for long-term contracts in excess of the amounts billable to the customer under the terms of the specific
contracts. Estimates of final contract costs are reviewed and revised periodically throughout the lives of the contracts. Adjustments to the contract
costs resulting from the revisions are recorded on a current basis. The Company recognized pre-tax losses of $4,222,000 and $4,610,000 during 2003 and
2002, respectively, resulting primarily from revision of cost estimates on certain major long-term contracts.
Note 5. Other Assets
|
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
|
|
2003
|
|
2002
|
Intangible
pension asset |
|
|
|
$ |
4,085 |
|
|
$ |
4,268 |
|
Patents and
other intangible assets, net |
|
|
|
|
718 |
|
|
|
940 |
|
Other |
|
|
|
|
2,907 |
|
|
|
2,213 |
|
|
|
|
|
$ |
7,710 |
|
|
$ |
7,421 |
|
34
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
Patents and other intangible assets represent assets
acquired in connection with the purchase of ACL Technologies Inc., an indirect wholly owned subsidiary of the Company, and are being amortized
primarily on a straight-line basis through 2007. Amortization expense amounted to $222,000 in 2003, $226,000 in 2002 and $318,000 in 2001. Accumulated
amortization amounted to $4,888,000 and $4,666,000 at December 31, 2003 and 2002, respectively. Other includes the investment in a joint
venture.
Note 6. Long-Term Debt and Credit
Arrangements
On June 28, 2001, the Company and certain of its
subsidiaries (collectively, the “Borrowers”) entered into a Loan and Security Agreement (the “Credit Agreement”) with Fleet Capital
Corporation. The Credit Agreement has a term of three years and provides for letters of credit and cash borrowings, subject to a borrowing base. The
Credit Agreement provides for up to $25,000,000 of credit advances, with a $10,000,000 cash borrowing sublimit. Credit advances may increase to
$32,000,000 provided that amounts in excess of $25,000,000 are cash-collateralized. All assets of the Borrowers are pledged as collateral under the
Credit Agreement. At December 31, 2003 there were no cash borrowings under the Credit Agreement. The letter of credit obligations outstanding at
December 31, 2003 under the Credit Agreement were $3,627,000. During 2003, amendments to the Credit Agreement were entered into whereby, among other
things, financial covenants were modified, the amount of the Company’s Common Stock that may be repurchased during the term of the Credit
Agreement was increased from $5,000,000 to $20,000,000, and a borrowing base reserve of $6,000,000 on the total credit facility was instituted, with a
$3,000,000 reserve being applied to the $10,000,000 cash sublimit. The covenants that the Company agreed to included a minimum ratio of total
liabilities to tangible net worth, a limitation to the pre-tax losses of the discontinued transportation operations, a minimum fixed charge coverage
ratio, a maximum balance sheet leverage ratio and a minimum amount of tangible net worth. The Company believes that it will be successful in its
ability to negotiate an extended or new credit agreement with Fleet Capital Corporation or to enter into a new credit agreement with another
party.
A subsidiary of the Company, Detroit Stoker, also
has a $2,000,000 line of credit with a bank which may be used for cash borrowings or letters of credit. This agreement expires May 1, 2004. The Company
believes that it will be able to obtain an extension of such agreement. At December 31, 2003, the subsidiary had no cash borrowings and $395,000 of
letters of credit outstanding.
Interest expense was $92,000 in 2003, $843,000 in
2002 and $17,000 in 2001. Interest paid was $92,000 in 2003, $456,000 in 2002 and $36,000 in 2001.
Note 7. Stock Options
In May 1994, the shareholders approved the 1994
Stock Option Plan as amended, (the “Plan”). The Plan provides for the granting of options to key employees with respect to the purchase of an
aggregate of 2,700,000 shares of common stock. Options granted may be either “incentive stock options,” within the meaning of Section 422A of
the Internal Revenue Code, or non-qualified options.
The options are granted at not less than market
value at the date of grant, and in accordance with APB Opinion No. 25 and related interpretations, no compensation cost has been recognized for grants made under
the Plan at the time of grant. Options are exercisable over a period determined by the Board of Directors, but no longer than ten years after the date
they are granted. Options generally vest one-third each year after a one-year waiting period.
In May 1997, the shareholders approved the 1996
Stock Option Plan for Non-employee Directors, which provides for the granting of options with respect to the purchase of an aggregate of up to 300,000
shares of common stock of the Company. Options may be exercised up to one-third as of the date of grant of an option and up to an additional one-third
may be exercised as of the date of each subsequent annual meeting of shareholders, but no longer than ten years after the date they are granted. The
options are granted at not less than market value at the date of grant.
35
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
A summary of stock option activity under all plans
is as follows:
(Shares in thousands)
|
|
|
|
Number of Shares
|
|
Weighted Average
Exercise Price
|
Balance at
January 1, 2001 |
|
|
|
|
1,764 |
|
|
$ |
9.17 |
|
Granted |
|
|
|
|
349 |
|
|
|
13.37 |
|
Exercised |
|
|
|
|
(436 |
) |
|
|
9.31 |
|
Cancelled |
|
|
|
|
(128 |
) |
|
|
8.88 |
|
Balance at
December 31, 2001 |
|
|
|
|
1,549 |
|
|
|
10.10 |
|
Granted |
|
|
|
|
170 |
|
|
|
19.25 |
|
Exercised |
|
|
|
|
(195 |
) |
|
|
9.36 |
|
Cancelled |
|
|
|
|
(1 |
) |
|
|
8.71 |
|
Balance at
December 31, 2002 |
|
|
|
|
1,523 |
|
|
|
11.22 |
|
Granted |
|
|
|
|
155 |
|
|
|
16.71 |
|
Exercised |
|
|
|
|
(555 |
) |
|
|
9.32 |
|
Cancelled |
|
|
|
|
(14 |
) |
|
|
10.81 |
|
Balance at
December 31, 2003 |
|
|
|
|
1,109 |
|
|
$ |
12.94 |
|
|
|
|
|
December 31,
|
|
(Shares in thousands)
|
|
|
|
2003
|
|
2002
|
|
2001
|
Exercisable |
|
|
|
|
770 |
|
|
|
1,070 |
|
|
|
977 |
|
Available for
future grants |
|
|
|
|
264 |
|
|
|
105 |
|
|
|
274 |
|
The weighted average remaining life for options
outstanding as of December 31, 2003, is approximately six years.
The following table summarizes information about
stock options outstanding at December 31, 2003:
(Shares in thousands)
|
|
|
|
Shares
|
|
Range of Exercise Prices
|
|
|
|
Exercisable
|
|
Outstanding
|
$ 4.50 to
$ 7.00 |
|
|
|
|
39 |
|
|
|
39 |
|
$7.50 to
$ 9.81 |
|
|
|
|
332 |
|
|
|
332 |
|
$10.25 to
$13.00 |
|
|
|
|
237 |
|
|
|
308 |
|
$13.99 to
$20.12 |
|
|
|
|
162 |
|
|
|
430 |
|
|
|
|
|
|
770 |
|
|
|
1,109 |
|
Note 8. Leases
Total rental expense for all operating leases
amounted to $3,778,000 in 2003, $3,699,000 in 2002 and $3,566,000 in 2001. Contingent rental payments were not significant.
The future minimum rental commitments as of December
31, 2003, for all non-cancelable leases are $2,996,000 in 2004; $1,839,000 in 2005; $1,442,000 in 2006; $1,149,000 in 2007; $1,044,000 in 2008; and
$342,000 thereafter.
36
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
Note 9. Changes in Shareholders’
Equity
(Dollars in thousands)
|
|
|
|
Common
Shares
Outstanding
|
|
Common
Stock
|
|
Additional
Capital
|
|
Retained
Earnings
(Deficit)
|
|
Treasury
Stock
|
|
Accumulated
other
Comprehensive
Loss
|
|
Shareholders’
Equity
|
Balance,
January 1, 2001 |
|
|
|
|
12,435 |
|
|
$ |
14,374 |
|
|
$ |
89,384 |
|
|
$ |
26,441 |
|
|
$ |
(15,306 |
) |
|
|
|
|
|
$ |
114,893 |
|
Net
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,363 |
|
|
|
|
|
|
|
|
|
|
|
5,363 |
|
Cash dividends
declared ($0.40 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,069 |
) |
|
|
|
|
|
|
|
|
|
|
(5,069 |
) |
Stock options
exercised |
|
|
|
|
436 |
|
|
|
|
|
|
|
624 |
|
|
|
|
|
|
|
3,439 |
|
|
|
|
|
|
|
4,063 |
|
Noncash
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
638 |
|
Stock options,
tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
448 |
|
Employee awards |
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
8 |
|
Balance,
December 31, 2001 |
|
|
|
|
12,872 |
|
|
|
14,374 |
|
|
|
91,094 |
|
|
|
26,735 |
|
|
|
(11,859 |
) |
|
|
|
|
|
|
120,344 |
|
Net
(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,077 |
) |
|
|
|
|
|
|
|
|
|
|
(39,077 |
) |
Minimum pension
liability, net of tax benefit of $17,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,262 |
) |
|
|
(32,262 |
) |
Total
comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71,339 |
) |
Cash dividends
declared ($0.30 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,912 |
) |
|
|
|
|
|
|
|
|
|
|
(3,912 |
) |
Stock options
exercised |
|
|
|
|
195 |
|
|
|
|
|
|
|
287 |
|
|
|
|
|
|
|
1,538 |
|
|
|
|
|
|
|
1,825 |
|
Stock options,
tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
692 |
|
Employee awards |
|
|
|
|
1 |
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
21 |
|
Balance,
December 31, 2002 |
|
|
|
|
13,068 |
|
|
|
14,374 |
|
|
|
92,085 |
|
|
|
(16,254 |
) |
|
|
(10,312 |
) |
|
|
(32,262 |
) |
|
|
47,631 |
|
Net
(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,841 |
) |
|
|
|
|
|
|
|
|
|
|
(5,841 |
) |
Minimum pension
liability, net of tax expense of $3,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,150 |
|
|
|
4,150 |
|
Total
comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,691 |
) |
Cash dividends
declared ($0.40 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
(5,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,315 |
) |
Stock options
exercised |
|
|
|
|
555 |
|
|
|
|
|
|
|
187 |
|
|
|
|
|
|
|
4,991 |
|
|
|
|
|
|
|
5,178 |
|
Stock options,
tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
1,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,162 |
|
Treasury stock
purchases |
|
|
|
|
(358 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,036 |
) |
|
|
|
|
|
|
(6,036 |
) |
Employee awards |
|
|
|
|
2 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
18 |
|
Balance,
December 31, 2003 |
|
|
|
|
13,267 |
|
|
$ |
14,374 |
|
|
$ |
88,125 |
|
|
$ |
(22,095 |
) |
|
$ |
(11,345 |
) |
|
$ |
(28,112 |
) |
|
$ |
40,947 |
|
The exercise of stock options that have
been granted under the Company’s various stock option plans give rise to compensation which is includable in the taxable income of the applicable
employees and deductible by the Company for federal and state income tax purposes. Such compensation results from increases in the fair market value of
the Company’s common stock subsequent to the date of grant of the applicable exercised stock options and, accordingly, in accordance with
Accounting Principles Board Opinion No. 25, such compensation is not recognized as an expense for financial accounting purposes and the related tax
benefits are recorded directly in Additional Capital.
Note 10. UIC Stock Repurchase
In November 2003, the Board of Directors of the
Company authorized the repurchase of up to $10,000,000 of the Company’s common stock. At December 31, 2003, the Company had repurchased 357,600
shares of common stock for an aggregate amount of $6,036,000 or $16.88 per share. On January 27, 2004, the purchases under this plan were completed
with approximately $1,000 remaining available under the authorization. At that date, the Company had repurchased 576,100 shares for an aggregate amount
of $9,999,000 or $17.36 per share.
37
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
Note 11. Pensions and Other Postretirement
Benefits
The Company sponsors one qualified and several
non-qualified pension plans and other postretirement benefit plans for its employees. The qualified pension plan is funded through a trust.
Contributions to this plan is based upon the projected unit credit actuarial funding method and are limited to amounts that are currently deductible
for tax reporting purposes. Two subsidiaries of the Company sponsor unfunded postretirement health care plans. Both of these plans are non-contributory
for retirees and one is contributory for spouses whose contributions increased periodically so that the entire cost for spouses was covered by January
2003.
The following table illustrates the range of target
allocation percentages and the actual relative percentage of plan assets for each major category of plan assets presented on a weighted-average basis
as of December 31, 2003 and 2002.
|
|
|
|
Percentages of Plan Assets
|
|
|
|
|
|
Target Allocation
|
|
At December 31
|
|
Plan Assets
|
|
|
|
2004
|
|
2003
|
|
2002
|
Equity
Securities |
|
|
|
|
55–65% |
|
|
|
65 |
% |
|
|
46 |
% |
Debt
Securities |
|
|
|
|
35–45% |
|
|
|
33 |
% |
|
|
52 |
% |
Real
Estate |
|
|
|
|
0% |
|
|
|
0 |
% |
|
|
0 |
% |
Other |
|
|
|
|
0–5% |
|
|
|
2 |
% |
|
|
2 |
% |
Total |
|
|
|
|
100% |
|
|
|
100 |
% |
|
|
100 |
% |
UIC employs a total return investment approach
whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Risk
tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The investment
portfolio contains a diversified blend of equity and fixed income investments. Furthermore, equity investments are diversified across U.S. and non-U.S.
stocks, as well as small and large capitalizations. U.S. equities also are diversified across actively managed and passively invested portfolios. Other
assets such as real estate, private equity, and hedge funds are not used by UIC at this time. Derivatives may be used to gain market exposure in an
efficient and timely manner; however, derivatives may not be used to leverage the portfolio beyond the market value of the underlying investments.
Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and
periodic asset/liability studies. The assets will be reallocated quarterly or more often to meet the target allocations. Pension investment policies
are reviewed by the Investment Committee at least annually and are updated when necessary.
UIC employs a building block approach in determining
the long-term rate of return for plan assets. Historical markets are studied and long-term historical relationships between equities and fixed-income
securities are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over
the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. The
long-term portfolio return is established via a building block approach with proper consideration of diversification and rebalancing. Peer data and
historical returns are reviewed to check for reasonability and appropriateness. Equity securities are expected to return 10% to 11% over the long-term,
while cash and fixed income is expected to return between 4% and 6%. Based on historical experience, the Investment Committee expects that the
Plan’s asset managers will generate a modest (.5% to 1.0% per annum) premium to their respective market benchmark indices.
38
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
The following table provides a reconciliation of the
changes in the pension and other postretirement benefit plans’ benefit obligations and fair value of assets during each of the years in the
two-year period ended December 31, 2003, and a statement of the funded status as of December 31 of both years:
|
|
|
|
Pension Benefits
|
|
Other Postretirement
Benefits
|
|
(Dollars in thousands)
|
|
|
|
2003
|
|
2002
|
|
2003
|
|
2002
|
Change in
Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year |
|
|
|
$ |
155,753 |
|
|
$ |
148,864 |
|
|
$ |
23,636 |
|
|
$ |
23,555 |
|
Service
cost |
|
|
|
|
2,679 |
|
|
|
2,579 |
|
|
|
179 |
|
|
|
320 |
|
Interest
cost |
|
|
|
|
10,369 |
|
|
|
10,521 |
|
|
|
1,587 |
|
|
|
1,647 |
|
Amendments |
|
|
|
|
— |
|
|
|
19 |
|
|
|
— |
|
|
|
(437 |
) |
Settlements |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(216 |
) |
Actuarial
loss |
|
|
|
|
12,178 |
|
|
|
5,611 |
|
|
|
1,394 |
|
|
|
1,035 |
|
Plan
participant’s contributions |
|
|
|
|
— |
|
|
|
— |
|
|
|
590 |
|
|
|
293 |
|
Benefits
paid |
|
|
|
|
(10,934 |
) |
|
|
(11,841 |
) |
|
|
(2,742 |
) |
|
|
(2,561 |
) |
Benefit
obligation at end of year |
|
|
|
|
170,045 |
|
|
|
155,753 |
|
|
|
24,644 |
|
|
|
23,636 |
|
Change in
Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of
plan assets at beginning of year |
|
|
|
$ |
139,019 |
|
|
$ |
161,268 |
|
|
|
— |
|
|
|
— |
|
Actual return
on plan assets |
|
|
|
|
25,712 |
|
|
|
(10,408 |
) |
|
|
— |
|
|
|
— |
|
Administrative expenses |
|
|
|
|
— |
|
|
|
— |
|
|
|
(62 |
) |
|
|
— |
|
Participant
contributions |
|
|
|
|
— |
|
|
|
— |
|
|
|
590 |
|
|
|
293 |
|
Employer
contributions |
|
|
|
|
118 |
|
|
|
— |
|
|
|
2,214 |
|
|
|
2,268 |
|
Benefits
paid |
|
|
|
|
(10,934 |
) |
|
|
(11,841 |
) |
|
|
(2,742 |
) |
|
|
(2,561 |
) |
Fair value of
plan assets at end of year |
|
|
|
|
153,915 |
|
|
|
139,019 |
|
|
|
— |
|
|
|
— |
|
(Underfunded)
funded status of plans |
|
|
|
|
(16,130 |
) |
|
|
(16,734 |
) |
|
|
(24,644 |
) |
|
|
(23,636 |
) |
Unrecognized
net transition obligation asset |
|
|
|
|
— |
|
|
|
(4 |
) |
|
|
— |
|
|
|
— |
|
Unrecognized
net actuarial loss |
|
|
|
|
51,659 |
|
|
|
58,057 |
|
|
|
2,996 |
|
|
|
1,637 |
|
Unrecognized
prior service cost |
|
|
|
|
4,085 |
|
|
|
4,268 |
|
|
|
(322 |
) |
|
|
(362 |
) |
Net amount
recognized |
|
|
|
$ |
39,614 |
|
|
$ |
45,587 |
|
|
$ |
(21,970 |
) |
|
$ |
(22,361 |
) |
The following table provides the amounts recognized
in the statements of financial position as of December 31, 2003 and 2002:
|
|
|
|
Pension Benefits
|
|
Other Postretirement
Benefits
|
|
(Dollars in thousands)
|
|
|
|
2003
|
|
2002
|
|
2003
|
|
2002
|
Accrued
benefit liability |
|
|
|
$ |
(6,755 |
) |
|
$ |
(8,276 |
) |
|
$ |
(21,970 |
) |
|
$ |
(22,361 |
) |
Intangible
asset |
|
|
|
|
4,085 |
|
|
|
4,268 |
|
|
|
N/A |
|
|
|
N/A |
|
Accumulated
other comprehensive loss |
|
|
|
|
42,284 |
|
|
|
49,595 |
|
|
|
N/A |
|
|
|
N/A |
|
Net amount
recognized |
|
|
|
$ |
39,614 |
|
|
$ |
45,587 |
|
|
$ |
(21,970 |
) |
|
$ |
(22,361 |
) |
The accumulated benefit obligation of the defined
benefit pension plans was $160,671,000 and $147,296,000 at December 31, 2003 and 2002, respectively. As required by accounting standards, a minimum
pension liability is recorded to the extent the accumulated benefit obligation exceeds plan assets. A related intangible asset based on unrecognized
prior service cost and an adjustment to accumulated comprehensive loss (a reduction of shareholders’ equity) is also recorded. A reduction in
shareholders’ equity, net of related income tax benefit, has been separately reported in the amount of $28,112,000 and $32,262,000 as of December
31, 2003 and 2002, respectively.
39
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
The expected employer contributions to the pension
and other postretirement benefits for the fiscal year ending December 31, 2004 are $259,000 and $2,744,000 respectively.
Weighted-average Assumptions Used to Determine Benefit
Obligations
|
|
|
|
Pension Benefits
|
|
Other Postretirement
Benefits
|
|
(Dollars in thousands)
|
|
|
|
2003
|
|
2002
|
|
2003
|
|
2002
|
Discount
rate |
|
|
|
6.25% |
|
6.75% |
|
6.25% |
|
6.75% |
Rate of
compensation increase |
|
|
|
4% |
|
4% |
|
N/A |
|
N/A |
Current
healthcare trend rate* |
|
|
|
N/A |
|
N/A |
|
7.00%/5.91%* |
|
7.50%/6.81%* |
Ultimate
healthcare trend rate |
|
|
|
N/A |
|
N/A |
|
5.00% |
|
5.00% |
Years of
ultimate healthcare trend rate* |
|
|
|
N/A |
|
N/A |
|
2008/2005* |
|
2008/2005* |
* |
|
defense/energy segments, respectively |
Net periodic benefit costs include the following components:
Components of Net Periodic Benefit Cost
|
|
|
|
Pension Benefits
|
|
Other Postretirement
Benefits
|
|
(Dollars in thousands)
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
2003
|
|
2002
|
|
2001
|
Service
cost |
|
|
|
$ |
2,679 |
|
|
$ |
2,579 |
|
|
$ |
1,981 |
|
|
$ |
179 |
|
|
$ |
320 |
|
|
$ |
360 |
|
Interest
cost |
|
|
|
|
10,369 |
|
|
|
10,521 |
|
|
|
10,361 |
|
|
|
1,587 |
|
|
|
1,647 |
|
|
|
1,651 |
|
Expected
return on plan assets |
|
|
|
|
(11,339 |
) |
|
|
(13,321 |
) |
|
|
(14,835 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Amortization
of prior service cost |
|
|
|
|
183 |
|
|
|
183 |
|
|
|
196 |
|
|
|
(41 |
) |
|
|
10 |
|
|
|
18 |
|
Amortization
of unrecognized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
transition
assets |
|
|
|
|
(4 |
) |
|
|
(88 |
) |
|
|
(88 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Amortization
of net loss (gain) |
|
|
|
|
4,427 |
|
|
|
1,625 |
|
|
|
— |
|
|
|
93 |
|
|
|
— |
|
|
|
— |
|
Settlement—curtailment |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(287 |
) |
|
|
(1,933 |
) |
Benefit cost
(income) |
|
|
|
$ |
6,315 |
|
|
$ |
1,499 |
|
|
$ |
(2,385 |
) |
|
$ |
1,818 |
|
|
$ |
1,690 |
|
|
$ |
96 |
|
Weighted-average Assumptions Used to Determine Net Periodic Benefit Cost for
Year
|
|
|
|
Pension Benefits
|
|
Other Postretirement
Benefits
|
|
(Dollars in thousands)
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
2003
|
|
2002
|
|
2001
|
Discount
rate |
|
|
|
6.75% |
|
7.25%/
7.50%1 |
|
7.50%/
8.00%1 |
|
6.75% |
|
7.25%/
7.50%1 |
|
7.50%/
7.75%1 |
Expected
return on plan assets |
|
|
|
8.50% |
|
8.50%/
10.00%1 |
|
8.50%/
10.00%1 |
|
N/A |
|
N/A |
|
N/A |
Rate of
compensation increase |
|
|
|
4.00% |
|
4.00% |
|
4.00% |
|
N/A |
|
N/A |
|
N/A |
Current
healthcare trend rate |
|
|
|
N/A |
|
N/A |
|
N/A |
|
7.50%/
6.81%1 |
|
8.00%/
7.72%1 |
|
5.25%/4.00%/
8.46%2 |
Ultimate
healthcare trend rate |
|
|
|
N/A |
|
N/A |
|
N/A |
|
5.00% |
|
5.00%/
5.50%1 |
|
5.25%/4.00%/
6.50%2 |
Years of
ultimate healthcare trend rate |
|
|
|
N/A |
|
N/A |
|
N/A |
|
2008/20051 |
|
2008/20051 |
|
2001/20051 |
| 2 |
|
UIC Medical/UIC Dental/Detroit Stoker |
40
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
Net periodic benefit costs for the defense segment
are considered contract costs and are included in cost of sales in the consolidated Statements of Operations. Net periodic benefit costs for other
segments are included in selling and administrative expenses in the consolidated Statements of Operations.
The assumed health care cost trend rate has an
effect on the amounts reported. A one-percentage-point change in the assumed health care cost trend rate would have the following
effects.
|
|
|
|
1-percent point
|
|
(Dollars in thousands)
|
|
|
|
Increase
|
|
Decrease
|
Effect on total
of service and interest cost components in 2003 |
|
|
|
$ |
41,192 |
|
|
$ |
(41,187 |
) |
Effect on
postretirement benefit obligation as of December 31, 2003 |
|
|
|
$ |
383,746 |
|
|
$ |
(382,339 |
) |
Defined Contribution Plans
The Company sponsors a 401(k) plan with employee and
employer matching contributions based on specified formulas. The Company’s contribution to the 401(k) plan was $3,866,000 in 2003, $3,728,000 in
2002 and $3,488,000 in 2001.
Note 12. Industry Segment Data
The Company has two reportable segments: defense and
energy systems. Other includes the corporate office. The defense segment’s products include unmanned aerial vehicles, training and simulation
systems, automated aircraft test and maintenance equipment, and combat vehicles and ordnance systems. The energy segment manufactures combustion
equipment for biomass and refuse fuels. The transportation business is reflected as a discontinued operation in the Company’s consolidated
financial statements.
The Company evaluates performance and allocates
resources based on profit or loss from operations before income taxes. The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies.
The Company’s reportable segments are business
units that offer different products. The reportable segments are each managed separately because they manufacture and distribute products with
different production processes.
Sales to agencies of the U.S. Government, primarily
by the defense segment, were $249,547,000 in 2003, $161,569,000 in 2002 and $149,047,000 in 2001. No single customer, other than the U.S. Government,
accounted for ten percent or more of net sales in any year. Export sales were $40,064,000 in 2003, $66,366,000 in 2002 and $54,670,000 in
2001.
(Dollars in thousands)
|
|
|
|
Defense
|
|
Energy
|
|
Other
|
|
Reconciliations
|
|
Totals
|
Year Ended
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales |
|
|
|
$ |
282,425 |
|
|
$ |
28,522 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
310,947 |
|
Equity profit
in joint venture |
|
|
|
|
57 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
57 |
|
Interest
income |
|
|
|
|
1,565 |
|
|
|
53 |
|
|
|
361 |
|
|
|
(1,518 |
) |
|
|
463 |
|
Interest
expense |
|
|
|
|
92 |
|
|
|
60 |
|
|
|
1,458 |
|
|
|
(1,518 |
) |
|
|
92 |
|
Depreciation
and amortization expense |
|
|
|
|
4,866 |
|
|
|
382 |
|
|
|
167 |
|
|
|
— |
|
|
|
5,415 |
|
Segment
profit (loss) |
|
|
|
|
21,980 |
|
|
|
3,897 |
|
|
|
(2,360 |
) |
|
|
— |
|
|
|
23,517 |
|
Segment
assets |
|
|
|
|
125,646 |
|
|
|
42,345 |
|
|
|
62,970 |
|
|
|
(79,793 |
) |
|
|
151,168 |
|
Capital
expenditures |
|
|
|
|
5,992 |
|
|
|
221 |
|
|
|
— |
|
|
|
— |
|
|
|
6,213 |
|
41
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
(Dollars in thousands)
|
|
|
|
Defense
|
|
Energy
|
|
Other
|
|
Reconciliations
|
|
Totals
|
Year Ended
December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales |
|
|
|
$ |
229,215 |
|
|
$ |
29,552 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
258,767 |
|
Equity profit
in joint venture |
|
|
|
|
99 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
99 |
|
Interest
income |
|
|
|
|
1,124 |
|
|
|
25 |
|
|
|
234 |
|
|
|
(1,256 |
) |
|
|
127 |
|
Interest
expense |
|
|
|
|
776 |
|
|
|
27 |
|
|
|
1,296 |
|
|
|
(1,256 |
) |
|
|
843 |
|
Depreciation
and amortization expense |
|
|
|
|
4,730 |
|
|
|
3,967 |
|
|
|
66 |
|
|
|
— |
|
|
|
8,763 |
|
Segment
profit (loss) |
|
|
|
|
17,113 |
|
|
|
(10,108 |
) |
|
|
(2,567 |
) |
|
|
— |
|
|
|
4,438 |
|
Segment
assets |
|
|
|
|
134,426 |
|
|
|
39,290 |
|
|
|
109,958 |
|
|
|
(124,429 |
) |
|
|
159,245 |
|
Capital
expenditures |
|
|
|
|
4,963 |
|
|
|
256 |
|
|
|
— |
|
|
|
— |
|
|
|
5,219 |
|
|
Year Ended
December 31, 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales |
|
|
|
$ |
208,575 |
|
|
$ |
29,920 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
238,495 |
|
Equity profit
in joint venture |
|
|
|
|
86 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
86 |
|
Interest
income |
|
|
|
|
1,223 |
|
|
|
107 |
|
|
|
265 |
|
|
|
(977 |
) |
|
|
618 |
|
Interest
expense |
|
|
|
|
232 |
|
|
|
— |
|
|
|
762 |
|
|
|
(977 |
) |
|
|
17 |
|
Depreciation
and amortization expense |
|
|
|
|
5,589 |
|
|
|
755 |
|
|
|
69 |
|
|
|
— |
|
|
|
6,413 |
|
Segment
profit |
|
|
|
|
18,422 |
|
|
|
3,042 |
|
|
|
547 |
|
|
|
— |
|
|
|
22,011 |
|
Segment
assets |
|
|
|
|
120,735 |
|
|
|
32,379 |
|
|
|
128,878 |
|
|
|
(28,417 |
) |
|
|
253,575 |
|
Capital
expenditures |
|
|
|
|
1,601 |
|
|
|
426 |
|
|
|
1 |
|
|
|
— |
|
|
|
2,028 |
|
|
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
|
|
2003
|
|
2002
|
|
2001
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
for reportable segments |
|
|
|
$ |
230,961 |
|
|
$ |
283,674 |
|
|
$ |
281,992 |
|
Elimination
of intercompany tax receivable |
|
|
|
|
(8,948 |
) |
|
|
— |
|
|
|
— |
|
Elimination
of intercompany receivable |
|
|
|
|
(383 |
) |
|
|
(21,719 |
) |
|
|
— |
|
Reclassification of receivables from ETI |
|
|
|
|
— |
|
|
|
— |
|
|
|
(1,828 |
) |
Assets of
discontinued operations |
|
|
|
|
6,139 |
|
|
|
15,092 |
|
|
|
109,734 |
|
Elimination
of investment in consolidated subsidiaries |
|
|
|
|
(61,024 |
) |
|
|
(98,157 |
) |
|
|
(126,413 |
) |
Reclassification of deferred tax liabilities |
|
|
|
|
(15,578 |
) |
|
|
(19,645 |
) |
|
|
(9,910 |
) |
Total
consolidated assets |
|
|
|
$ |
151,168 |
|
|
$ |
159,245 |
|
|
$ |
253,575 |
|
|
Other
Significant Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination
of intercompany interest |
|
|
|
$ |
1,518 |
|
|
$ |
1,256 |
|
|
$ |
977 |
|
Segment profit (loss) includes research
and development costs amounting to $5,013,000 in 2003, $4,588,000 in 2002 and $5,520,000 in 2001, principally in the defense segment.
Note 13. Income Taxes
The liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. In
addition, the effect on deferred taxes of a change in tax rates is recognized in the period that includes the enactment date.
42
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
Following is a reconciliation of the difference
between total tax expense and the amount computed by applying the federal statutory income tax rate to income from continuing operations before income
taxes for the years ended December 31:
(Dollars in thousands)
|
|
|
|
2003
|
|
2002
|
|
2001
|
Federal
income taxes at statutory rate |
|
|
|
$ |
7,996 |
|
|
$ |
1,508 |
|
|
$ |
7,884 |
|
State and
local income taxes, net of federal income tax benefit
(including a reduction of $651 in 2001 of a $1,000
tax reserve established in
1997) |
|
|
|
|
434 |
|
|
|
50 |
|
|
|
(519 |
) |
Non-taxable
income |
|
|
|
|
(412 |
) |
|
|
(772 |
) |
|
|
— |
|
Other—net |
|
|
|
|
393 |
|
|
|
(212 |
) |
|
|
18 |
|
Income
Taxes—Continuing Operations |
|
|
|
$ |
8,411 |
|
|
$ |
574 |
|
|
$ |
7,383 |
|
The Company recorded income tax benefits from its
discontinued operations during 2003, 2002 and 2001. Current income taxes receivable associated with these benefits in 2002 are classified as income
taxes receivable in the accompanying consolidated balance sheets at December 31, 2002. During 2003, the Company received a tax refund of $16,822,000
related to the net carryback of the tax loss from discontinued operations in 2002 to prior years.
No Federal income tax payments were made in 2003,
2002 and 2001.
The Company has approximately $3,998,000 of federal
and $12,000,000 of state net operating loss carry forwards that expire in various years beginning in 2010. The Company also has a state research and
development credit carry forward of approximately $340,000, which expires in 2007. For financial reporting purposes, a valuation allowance of
$1,200,000 has been recognized to offset the deferred tax assets related to these carry forwards.
Deferred income tax balances:
|
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
|
|
2003
|
|
2002
|
Deferred Tax
Assets
|
|
|
|
|
|
|
|
|
|
|
Net Operating
Loss and credit carry forwards |
|
|
|
$ |
2,560 |
|
|
$ |
990 |
|
Asbestos
litigation reserve |
|
|
|
|
4,100 |
|
|
|
4,179 |
|
Pension plans |
|
|
|
|
442 |
|
|
|
660 |
|
Losses on
long-term contracts not currently deductible |
|
|
|
|
2,422 |
|
|
|
2,298 |
|
Postretirement
benefits and other employee benefits other than pensions |
|
|
|
|
7,899 |
|
|
|
7,683 |
|
Product warranty
and other provisions |
|
|
|
|
933 |
|
|
|
1,097 |
|
Vacation pay
accruals |
|
|
|
|
1,252 |
|
|
|
1,007 |
|
Other |
|
|
|
|
676 |
|
|
|
249 |
|
Total Deferred
Tax Assets |
|
|
|
|
20,284 |
|
|
|
18,163 |
|
Valuation
allowance for deferred tax assets |
|
|
|
|
(1,200 |
) |
|
|
(990 |
) |
Net deferred tax
assets |
|
|
|
|
19,084 |
|
|
|
17,173 |
|
|
Deferred Tax
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Tax over book
depreciation |
|
|
|
|
(898 |
) |
|
|
(435 |
) |
Other |
|
|
|
|
(543 |
) |
|
|
(679 |
) |
Total Deferred
Tax Liability |
|
|
|
|
(1,441 |
) |
|
|
(1,114 |
) |
Net Deferred Tax
Asset |
|
|
|
$ |
17,643 |
|
|
$ |
16,059 |
|
The net deferred
tax asset is classified as follows:
|
|
|
|
|
|
|
|
|
|
|
Net current
deferred income tax assets |
|
|
|
$ |
6,757 |
|
|
$ |
4,528 |
|
Net noncurrent
deferred income tax assets |
|
|
|
$ |
10,886 |
|
|
$ |
11,531 |
|
43
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
Note 14. Other Operating Expenses, Net, Other Income,
Net, and Other Expenses
|
|
|
|
Year Ended December 31,
|
|
(Dollars in thousands)
|
|
|
|
2003
|
|
2002
|
|
2001
|
Other
Operating Expenses, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
deferred compensation liability |
|
|
|
$ |
238 |
|
|
$ |
(232 |
) |
|
$ |
(212 |
) |
Amortization
of intangibles |
|
|
|
|
222 |
|
|
|
226 |
|
|
|
318 |
|
Amortization
of facility consolidation costs |
|
|
|
|
302 |
|
|
|
284 |
|
|
|
328 |
|
Expenses
related to the closing of an indirect subsidiary |
|
|
|
|
— |
|
|
|
425 |
|
|
|
— |
|
Other |
|
|
|
|
(95 |
) |
|
|
— |
|
|
|
— |
|
Total other
operating expenses, net |
|
|
|
$ |
667 |
|
|
$ |
703 |
|
|
$ |
434 |
|
|
Other
Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
recovery—net |
|
|
|
$ |
34 |
|
|
$ |
— |
|
|
$ |
842 |
|
Royalties and
commissions |
|
|
|
|
70 |
|
|
|
13 |
|
|
|
127 |
|
Exchange rate
fluctuations |
|
|
|
|
122 |
|
|
|
— |
|
|
|
— |
|
Rental
income |
|
|
|
|
56 |
|
|
|
— |
|
|
|
— |
|
Other |
|
|
|
|
107 |
|
|
|
51 |
|
|
|
116 |
|
Total Other
Income, net |
|
|
|
$ |
389 |
|
|
$ |
64 |
|
|
$ |
1,085 |
|
|
Other
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange rate
fluctuations |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
182 |
|
Uncollectible
interest receivable |
|
|
|
|
214 |
|
|
|
— |
|
|
|
— |
|
Write-off of
proposed acquisition costs |
|
|
|
|
— |
|
|
|
— |
|
|
|
159 |
|
Professional
fees for environmental remediation |
|
|
|
|
334 |
|
|
|
309 |
|
|
|
— |
|
Miscellaneous
items |
|
|
|
|
9 |
|
|
|
73 |
|
|
|
71 |
|
Total Other
Expense |
|
|
|
$ |
557 |
|
|
$ |
382 |
|
|
$ |
412 |
|
Note 15. Selected Quarterly Data
(Unaudited)
|
|
|
|
|
|
2003
Quarter
|
|
|
|
|
|
2002
Quarter
|
|
(Dollar amounts in thousands, except
per share data and stock
prices)
|
|
|
|
4th
|
|
3rd
|
|
2nd
|
|
1st
|
|
4th
|
|
3rd
|
|
2nd
|
|
1st
|
Net sales
from
continuing operations |
|
|
|
$ |
83,195 |
|
|
$ |
69,273 |
|
|
$ |
86,037 |
|
|
$ |
72,442 |
|
|
$ |
69,463 |
|
|
$ |
67,109 |
|
|
$ |
65,328 |
|
|
$ |
56,867 |
|
Gross profit
from
continuing operations |
|
|
|
|
20,267 |
|
|
|
15,540 |
|
|
|
17,505 |
|
|
|
14,046 |
|
|
|
18,288 |
|
|
|
15,406 |
|
|
|
11,618 |
|
|
|
10,805 |
|
Income (loss)
from
continuing operations |
|
|
|
|
6,473 |
|
|
|
2,801 |
|
|
|
4,194 |
|
|
|
1,638 |
|
|
|
(3,312 |
) |
|
|
4,462 |
|
|
|
1,683 |
|
|
|
1,031 |
|
Loss from
discontinued
operations |
|
|
|
|
(1,936 |
) |
|
|
(16,751 |
) |
|
|
(1,286 |
) |
|
|
(974 |
) |
|
|
(16,407 |
) |
|
|
(1,844 |
) |
|
|
(12,430 |
) |
|
|
(12,260 |
) |
Net income
(loss) |
|
|
|
|
4,537 |
|
|
|
(13,950 |
) |
|
|
2,908 |
|
|
|
664 |
|
|
|
(19,719 |
) |
|
|
2,618 |
|
|
|
(10,747 |
) |
|
|
(11,229 |
) |
Basic
earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations |
|
|
|
$ |
0.48 |
|
|
$ |
0.21 |
|
|
$ |
0.32 |
|
|
$ |
0.13 |
|
|
$ |
(0.25 |
) |
|
$ |
0.34 |
|
|
$ |
0.13 |
|
|
$ |
0.08 |
|
Discontinued
operations |
|
|
|
|
(0.14 |
) |
|
|
(1.26 |
) |
|
|
(0.10 |
) |
|
|
(0.08 |
) |
|
|
(1.26 |
) |
|
|
(0.14 |
) |
|
|
(0.96 |
) |
|
|
(0.95 |
) |
Net income
(loss) |
|
|
|
|
0.34 |
|
|
|
(1.05 |
) |
|
|
0.22 |
|
|
|
0.05 |
|
|
|
(1.51 |
) |
|
|
0.20 |
|
|
|
(0.83 |
) |
|
|
(0.87 |
) |
Diluted
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations |
|
|
|
|
0.47 |
|
|
|
0.21 |
|
|
|
0.31 |
|
|
|
0.12 |
|
|
|
(0.25 |
) |
|
|
0.32 |
|
|
|
0.12 |
|
|
|
0.08 |
|
Discontinued
operations |
|
|
|
|
(0.14 |
) |
|
|
(1.23 |
) |
|
|
(0.09 |
) |
|
|
(0.07 |
) |
|
|
(1.26 |
) |
|
|
(0.13 |
) |
|
|
(0.90 |
) |
|
|
(0.90 |
) |
Net income
(loss) |
|
|
|
|
0.33 |
|
|
|
(1.03 |
) |
|
|
0.21 |
|
|
|
0.05 |
|
|
|
(1.51 |
) |
|
|
0.19 |
|
|
|
(0.78 |
) |
|
|
(0.82 |
) |
Dividends
declared per share
|
|
|
|
|
0.10 |
|
|
|
0.10 |
|
|
|
0.10 |
|
|
|
0.10 |
|
|
|
0.10 |
|
|
|
0.10 |
|
|
|
— |
|
|
|
0.10 |
|
Stock
Prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
|
$ |
18.25 |
|
|
$ |
17.86 |
|
|
$ |
16.90 |
|
|
$ |
16.15 |
|
|
$ |
21.00 |
|
|
$ |
23.90 |
|
|
$ |
26.05 |
|
|
$ |
22.96 |
|
Low |
|
|
|
$ |
15.90 |
|
|
$ |
14.80 |
|
|
$ |
12.10 |
|
|
$ |
11.36 |
|
|
$ |
12.02 |
|
|
$ |
16.60 |
|
|
$ |
21.30 |
|
|
$ |
15.04 |
|
44
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
The Company’s common stock is listed on the New
York Stock Exchange. The approximate number of shareholders of record as of February 15, 2004 was 1,752.
Note 16. Commitments and Contingencies
Asbestos
History
The Company and its Detroit Stoker subsidiary have
been named as defendants in asbestos-related personal injury litigation. Neither the Company nor Detroit Stoker fabricated, milled, mined, manufactured
or marketed asbestos, and neither the Company nor Detroit Stoker made or sold insulation products or other construction materials that have been
identified as the primary cause of asbestos-related disease in the vast majority of claimants. Rather, Detroit Stoker made several products, some of
the parts and components of which used asbestos-containing material fabricated and provided by third parties. Detroit Stoker stopped the use of
asbestos-containing materials in connection with its products in 1981.
As of this date, the Company and Detroit Stoker have
not gone to trial with respect to any asbestos-related personal injury claims, although there is no assurance that trials may not occur in the future.
Accordingly, as of this date, neither the Company nor Detroit Stoker have been required to pay any punitive damage awards, although there can be no
assurance this might not occur in the future. Cases involving the Company and Detroit Stoker typically name 80 to 120 defendants, although some cases
have as few as 6 and as many as 250 defendants.
Defenses
Management continues to believe that a majority of
the claimants in pending cases will not be able to demonstrate that they have been exposed to the Company’s and Detroit Stoker’s
asbestos-containing products or suffered any compensable loss as a result of such exposure. This belief is based in large part on two factors: the
limited number of asbestos-containing products and betterments manufactured by the Company and Detroit Stoker and the Company’s and Detroit
Stoker’s access to historical sales, service, and other historical business records going back over 100 years, which allow the Company and Detroit
Stoker to determine to whom Detroit Stoker’s products were sold, the date of sale, the installation site and the date products were removed from
service. In addition, because of the limited and restricted placement of the asbestos containing products, even at sites where a claimant can verify
his or her presence during the same period those products were installed, liability of the Company and Detroit Stoker cannot be presumed because even
if an individual contracted an asbestos-related disease, not everyone who was employed at a site was exposed to the Company’s and Detroit
Stoker’s asbestos-containing products. These factors have allowed the Company and Detroit Stoker to effectively manage their asbestos-related
claims.
Settlements
Settlements are made without any admission of
liability. Settlement amounts may vary depending upon a number of factors, including the jurisdiction where the action was brought, the nature and
extent of the disease alleged and the associated medical evidence, the age and occupation of the claimant, the existence or absence of other possible
causes of the claimant’s alleged illness, and the availability of legal defenses, as well as whether the action is brought alone or as part of a
group of claimants. Before paying any settlement amount, the Company and Detroit Stoker require proof of exposure to their asbestos-containing products
and proof of injury to the plaintiff. In addition, the claimant is required to execute a full and unconditional release of the Company, Detroit Stoker
and associated parties, from any liability for asbestos-related injuries or claims.
45
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
Insurance Coverage
The insurance coverage available to the Company and
Detroit Stoker is substantial. Following the institution of asbestos litigation, an effort was made to identify all of its primary and excess insurance
carriers from 1940 through 1990. There were approximately 40 such carriers, all of which were put on notice of the litigation. In November of 1999, a
Participation Agreement was entered into among the Company, Detroit Stoker and its primary insurance carriers. The Participation Agreement is an
advance understanding that supplements all of the contracts of insurance, without altering the coverage of the contracts, that creates an
administrative framework within which the insurers and the Company and Detroit Stoker can more efficiently and effectively manage the large quantity of
on-going litigation. Any party may terminate the Participation Agreement, without cause, by giving the other parties 60 days prior written notice.
Termination of the Participation Agreement does not affect any rights or obligations of the parties that have accrued under the agreement on or before
the effective date of the termination, nor does it affect any rights outside of the agreement.
Although the carriers can opt out of the
Participation Agreement on 60 days notice, management does not believe that this will occur in the immediate or near term. For example, unless a
carrier professes to have met the limits of its liability, it would have to consider the potentially greater costs of permitting the Company and
Detroit Stoker to handle their own cases. Further, opting out of the Participation Agreement does not exculpate liability on the part of the
carrier.
The Company retained a consulting firm with
expertise in the field of evaluating insurance coverage and the likelihood of recovery for claims, such as costs incurred in connection with
asbestos-related injury claims. In 2002, that firm worked with the Company to project the insurance coverage of the Company and Detroit Stoker for
asbestos-related claims. The insurance consultant’s conclusions were based primarily on a review of the Company’s and Detroit Stoker’s
coverage history, application of reasonable assumptions on the allocation of coverage consistent with industry standards, an assessment of the
creditworthiness of the insurance carriers, and the experience of and a review of the report of the asbestos consultant described below. The insurance
consultant also considered the Participation Agreement.
Based on the assumptions employed by and the report
prepared by the insurance consultant, other variables, and the report prepared by the asbestos consultant, the Company recorded an estimated insurance
recovery as of December 31, 2002, of $20,343,000 reflecting the estimate determined to be probable of being available to mitigate the Company’s
and Detroit Stoker’s potential asbestos liability through 2012.
Quantitative Claims Information
As of December 31, 2003, the Company and Detroit
Stoker were named in asbestos litigation pending in Maryland, Michigan, Mississippi and North Dakota. As of December 31, 2003, there were approximately
19,117 pending claims, compared to approximately 13,608 pending claims as of December 31, 2002, and approximately 295 pending claims as of December 31,
2001. Because claims are often filed and disposed of by dismissal or settlement in large numbers, the amount and timing of settlements and the number
of open claims during a particular period can fluctuate from period to period. In addition, most of these lawsuits do not include specific dollar
claims for damages, and many include a number of plaintiffs and multiple defendants. Therefore, the Company cannot provide any meaningful disclosure
about the total amount of the damages sought. In addition, the direct asbestos-related expenses of the Company and Detroit Stoker for defense and
indemnity for the past five years were not material.
A significant increase in the volume of
asbestos-related bodily injury cases arose in Mississippi beginning in 2002 and extended through mid-year 2003. This peak in the volume of claims in
Mississippi was apparently due to the passage of tort reform legislation (applicable to asbestos-related injuries), which became effective at the end
of 2002 and which resulted in a large number of claims being filed in Mississippi by plaintiffs seeking to ensure their claims would be governed by the
law in effect prior to the passage of tort reform. As of December 31, 2003, all 18,652 claims pending in Mississippi are associated with cases filed
before January 1, 2003.
46
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
The Company and Detroit Stoker have obtained
dismissals of many pending claims. In 2003 and 2002, the Company and Detroit Stoker were able to have approximately 461 and 65 claims, respectively,
dismissed. Those dismissals included 80 claims out of 83 claims in Michigan that had been scheduled for trial in October 2003. The remaining three
claims were subsequently dismissed in January 2004. During 2003, the Company and Detroit Stoker settled two pending claims, and during 2002, they
settled one pending claim. Although these historical figures provide some insight into the Company’s and Detroit Stoker’s experience with
asbestos litigation, no guarantee can be made as to the dismissal and settlement rate the Company and Detroit Stoker will experience in the
future.
In 2002, the Company engaged a consulting firm with
expertise in the field of evaluating asbestos bodily-injury claims to assist the Company in projecting the future asbestos-related liabilities and
defense costs of the Company and Detroit Stoker. The methodology used by this asbestos consultant to project future asbestos-related costs is based
primarily on estimates of the labor force exposed to asbestos in the Company’s and Detroit Stoker’s products, epidemiological modeling of
asbestos-related disease manifestation, and estimates of claim filings and settlement and defense costs that may occur in the future. Using this
information, the asbestos consultant estimated the number of future claims that would be filed, as well as the related costs that would be incurred in
resolving those claims. The Company’s and Detroit Stoker’s claims history prior to 2002 was not a significant variable in developing the
estimates because such history was not significant as compared to the number of claims filed in 2002.
Projecting future asbestos costs is subject to
numerous variables that are extremely difficult to predict. In addition to the significant uncertainties surrounding the number of claims that might be
received, other variables include the type and severity of the disease alleged by each claimant, the long latency period associated with asbestos
exposure, dismissal rates, costs of medical treatment, the impact of bankruptcies of other companies that are co-defendants in claims, uncertainties
surrounding the litigation process from jurisdiction to jurisdiction and from case to case, and the impact of potential changes in legislative or
judicial standards. Furthermore, any predictions with respect to these variables are subject to even greater uncertainty as the projection period
lengthens. In light of these inherent uncertainties, the Company’s and Detroit Stoker’s limited claims history prior to 2002 and consultation
with its asbestos and insurance consultants, the Company believes that ten years is the most reasonable period for recognizing a reserve for future
costs, and that costs that might be incurred after that period are not reasonably estimable. As a result, the Company also believes that its ultimate
net asbestos-related contingent liability (i.e., its indemnity or other claim disposition costs plus related legal fees less insurance recoveries)
cannot be estimated with certainty.
Given the inherent uncertainty in making future
projections, the Company plans to have the projections of current and future asbestos claims periodically re-examined, and the Company will update them
if needed based on the experience of the Company and Detroit Stoker and other relevant factors such as changes in the tort system and the resolution of
bankruptcies of various asbestos defendants.
Based on the assumptions employed by and the report
prepared by the asbestos consultant and other variables, the Company recorded a reserve for its estimated bodily injury liabilities for
asbestos-related matters through 2012 in the amount of $31,852,000 as of December 31, 2002, including damages and defense costs.
The asbestos liability for the twelve months ended
December 31, 2003 decreased by $257,000 due to the payment of claim-related expenses.
Asbestos-related balances are included in the
following balance sheet accounts:
|
|
|
|
December 31,
|
|
|
|
|
|
2003
|
|
2002
|
Insurance
receivables for asbestos related liabilities |
|
|
|
$ |
20,317,000 |
|
|
$ |
20,343,000 |
|
Asbestos-related
liabilities |
|
|
|
$ |
31,595,000 |
|
|
$ |
31,852,000 |
|
After considering the efforts of both consultants
and based upon the facts as now known, including the reasonable possibility that claims will be received and paid over the next 50 year period, the
Company believes that although asbestos claims could have a material adverse effect on the Company’s financial condition or
results
47
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
of operations in a particular reporting period, asbestos claims should not have a
material adverse effect on the Company’s long term financial condition, liquidity or results of operations. No assurances can be given, however,
as to the actual amount of the Company’s and Detroit Stoker’s liability for such present and future claims or insurance recoveries, and the
differences from estimated amounts could be material.
Reform Legislation
The outlook for federal legislation to provide
national asbestos litigation reform continues to be uncertain. The Company is not certain as to what contributions and the duration of such
contributions that the Company and Detroit Stoker would be required to make pursuant to such legislation. No assurances can be given, however, that the
proposed bill or any other asbestos legislation will ultimately become law, or when such action might occur.
State of Arizona Department of Environmental Quality v. UIC, et
al.
On May 19, 1993, the Company was named as one of
three defendants in a civil action brought pursuant to the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”) by
the Arizona Department of Environmental Quality (“ADEQ”) in the United States District Court for the District of Arizona. ADEQ sought
remediation of a manufacturing site in the State of Arizona operated by U.S. Semiconductor Products, Inc. (“U.S. Semiconductor”), a
manufacturer of semiconductors formerly owned by the Company. ADEQ alleged that from 1959 until the Company sold U.S. Semiconductor in 1961, U.S.
Semiconductor disposed of tricholoroethylene, a “hazardous substance,” and other hazardous substances under CERCLA, onto the ground and into
various pits and drains located on the site.
In 1996, the Company entered into a consent decree
with ADEQ. Pursuant to the consent decree, the Company is required to complete a Remedial Investigation/Feasibility Study (“RI/FS”), pay
$125,000 for past response costs, pay quarterly Arizona oversight costs (averaging less than $10,000 annually) and pay $125,000 for future response
costs plus a graduated percentage of the cleanup costs for the site if those costs are in excess of $10,000,000 but less than $40,000,000. The
Company’s liability for future response costs under the consent decree is capped at $1,780,000 in addition to the $125,000 that the Company has
already paid. In connection with the RI/FS, the Company has retained a consultant at an average annual cost of $200,000. The Company understands that
the Remedial Investigation will be submitted for ADEQ approval during the month of March 2004. Assuming timely ADEQ approval, the Company will submit
the Feasibility Study in June 2004. Management believes that it will reach closure with ADEQ on an acceptable basis to the Company following approval
of the Feasibility Study. No assurances can be given, however, as to the actual extent to which the Company may be determined to have further
liability, if at all.
Michigan Department of Natural Resources
Detroit Stoker was notified in March 1992 by the
Michigan Department of Natural Resources (“MDNR”) that it is a potentially responsible party in connection with the cleanup of a former
industrial landfill located in Port of Monroe, Michigan. MDNR is treating the Port of Monroe landfill site as a contaminated facility within the
meaning of the Michigan Environmental Response Act (“MERA”). Under MERA, if a release or potential release of a discarded hazardous substance
is or may be injurious to the environment or to the public health, safety or welfare, MDNR is empowered to undertake or compel investigation and
response activities in order to alleviate any contamination threat. Management believes it would be considered a de minimus potentially responsible
party and does not believe that the resolution of this matter will have a materially adverse effect on the Company’s financial condition or
results of operations. Detroit Stoker intends to aggressively defend these claims. No assurances can be given, however, as to the actual extent to
which the Company may be determined to be liable if at all.
Other Performance Guarantees
In connection with certain of its contracts, the
Company commits to certain performance guarantees. The ability of the Company to perform under these guarantees may, in part, be dependent on the
performance of other parties,
48
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
including partners and subcontractors. If the Company is unable to meet these
performance obligations, the performance guarantees could have a material adverse effect on product margins and the Company’s results of
operations, liquidity or financial position. The Company monitors the progress of its partners and subcontractors and does not believe that their
performance will adversely affect these contracts as of December 31, 2003. No assurances can be given, however, as to the Company’s liability if
the Company’s partners or subcontractors are unable to perform their obligations.
Discontinued Transportation Operations Performance and Payment Indemnity
Obligations
In connection with the discontinued transportation
operations, AAI owns a 35% share of ETI. Skoda a.s. owns the remaining 65% share of ETI. ETI’s one remaining production contract is with MUNI and
involves the design and manufacture of 273 electric trolley buses (ETBs). In executing its contract with MUNI, ETI has entered into subcontracts with
AAI, certain Skoda operating affiliates and others. Both AAI and the Skoda operating affiliates have essentially completed their initial delivery
requirements and are now subject to warranty requirements, which will continue through 2014. Currently, ETI is in the process of completing the final
assembly and delivery of the remaining ETB’s. At March 1, 2004, ETI had delivered 271 of the 273 ETB’s in the MUNI order. In addition, ETI is
completing a retrofit program that incorporates final design changes for many of the previously delivered buses. The Company expects ETI’s
retrofit program to be completed during the third quarter of 2004.
The Company and AAI have agreed to certain
indemnification obligations related to surety bonds required by the MUNI customer.
The first of these surety bond indemnification
obligations is associated with advance payments received by ETI that related to the MUNI contract. In January 2003, this advance payment bond was
reduced from $20,000,000 to $9,100,000 and reduced again in August of 2003 to $1,350,000. In February 2004, MUNI authorized the release of this bond in
its entirety. The release of this bond is related to the MUNI customer’s acceptance of certain deliveries.
In addition, there is a surety bond that guarantees
ETI’s performance under the MUNI contract. AAI has agreed to indemnify the surety, if necessary, for up to approximately $14,800,000 (or 35% of
the original bond amount). Unless a claim is made against this bond, AAI’s related indemnification obligation is contractually required to be
released upon ETI providing a warranty bond at the conclusion of the production phase of the MUNI contract.
Thirdly, there is a surety bond that guarantees
payment to subcontractors and vendors for labor and materials provided to ETI under the MUNI contract, for which AAI has also agreed to indemnify the
surety, if necessary, for up to approximately $14,800,000 (again, 35% of the original bond amount). During the fourth quarter of 2003 it became
apparent that ETI would be unable to pay AAI amounts due on its subcontract and seconded services receivables. At December 31, 2003, the Company
believes it has adequately provided for the uncollectibility of these receivables. As a result of the non-payment of the receivables, AAI filed a claim
with the surety of the labor and materials bond seeking recovery. Because the claim is still pending, the Company cannot at this time estimate the
amount of such a recovery, if any, or when it may be received.
Finally, AAI previously executed an indemnity
agreement to indemnify the surety up to 35% of the warranty bond amount, which would be expected to be about $20,000,000 in total. It is possible that
the warranty bond surety may demand that the Company indemnify for a greater percentage of such amount, and perhaps up to 100%, and to provide
collateral for such indemnity.
The ability of ETI to perform under its obligations
is, in part, dependent on the performance of other parties, including AAI, the Skoda operating affiliates and other subcontractors. Thus, the ability
to timely perform under the MUNI contract is, to a significant extent, outside of ETI’s control. Skoda’s operating affiliates have delivered
products and services under their subcontracts with ETI through January 2004. Following the bankruptcy declaration by Skoda a.s. in 2001 in the Czech
Republic, effective in 2002, the discontinued transportation operations of the Company began recording 100%, instead of 35%, of ETI’s losses. This
was necessitated by the Company’s and AAI’s various indemnity obligations described in detail above, which exceed the amount of the losses
recorded. The additional losses recorded by the Company for Skoda’s 65% share of ETI’s losses totaled
49
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
$16,171,000 and $17,264,000 during 2003 and 2002, respectively. Since January 1,
2002, AAI has recorded $33,435,000 of losses related to ETI that represent Skoda’s 65% share. If Skoda continues to fail to provide ETI with
additional funding, or if ETI is unable to meet its performance or payment obligations, the AAI indemnification obligations to the surety could have a
material adverse effect on the Company’s results of operations, liquidity and/or financial condition. For this reason, AAI monitors the progress
of ETI, the Skoda subcontractors, and ETI’s other subcontractors.
AAI has agreed to provide up to $3,000,000 of funds
to ETI pursuant to a callable on demand revolving credit agreement. At December 31, 2003 this credit agreement expired and there were no borrowings
under this agreement by ETI.
As noted above, although AAI has essentially
completed its subcontract with ETI on the MUNI program, it has continued to support ETI as a provider of secunded services, to allow ETI to satisfy its
remaining commitments to MUNI. The apparent inability of Skoda a.s. to fund its obligations to ETI under the shareholders’ agreement, coupled with
the additional losses expected to be incurred by ETI have caused the Company to reassess its continued support of ETI while ETI pursues opportunities
to mitigate the cost growth of the MUNI program.
In February 2004, an agreement in principle was
reached among ETI, AAI and MUNI to settle ETI’s contract disputes with MUNI. Pursuant to the proposed settlement, MUNI would relieve ETI of its
warranty and bonding obligations, as well as other obligations under the contract, except for delivery of all electric trolley buses ordered and
performance of a defined scope of work related to the deliveries. In exchange, MUNI would receive a release from any claims that ETI might assert, a
cash payment (to be offset by MUNI from payments remaining due under the contract), and certain other consideration. AAI would agree to guaranty
certain obligations of ETI, make a cash payment to MUNI, and provide other consideration, in exchange for a release from its warranty and all further
obligations under its subcontract with ETI. As a result of the release of ETI from its performance bonding obligation, AAI would be released from its
indemnification of the surety. The proposed settlement is subject to the approval of the Board of Directors of San Francisco’s Municipal
Transportation Agency and the Company’s Board of Directors. Management believes that these agreements, if executed, will not have a material
adverse effect on the Company’s liquidity or results of operations. No assurances can be given as to whether the settlement will be executed or
its timing.
ETI’s Dayton electric trolley bus contract
required a performance bond of about $16,000,000 that was outstanding at December 31, 2002. The Company had agreed to jointly and severally indemnify
the surety, if necessary, under that bond. In February 2003, the Company was released from this $16,000,000 bond.
On July 26, 2002, the Company sold two
transportation overhaul contracts with the New Jersey Transit Corporation and Maryland Transit Administration and related assets and liabilities to
ALSTOM Transportation, Inc. (“ALSTOM”). The Company agreed to indemnify ALSTOM against certain breaches by AAI of representations and
covenants pursuant to the Master Agreement (“Agreement”). Certain of such indemnity claims are subject to a requirement that notice be given
within nine months of the closing and are subject to a maximum exposure of $4,250,000. Other indemnification claims are not so
limited.
On March 3, June 5 and November 5, 2003, and on
January 15, 2004, ALSTOM raised certain indemnification matters totaling about $8,500,000 to the Company to be discussed by ALSTOM’s and the
Company’s respective managements. The Company continues to evaluate documentation concerning ALSTOM’s original and three revisions detailing
alleged claims. These matters are still pending and the Company is unable to determine whether the Company may have any liability with respect thereto,
and if so, to what extent. AAI is also evaluating its counterclaims against ALSTOM. If the respective senior management representatives should fail to
resolve the issues informally, the Agreement requires the parties to submit to mediation and then binding arbitration in lieu of
litigation.
50
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
Other Lawsuits and Claims
In the normal course of its continuing and
discontinued business, various lawsuits, claims and procedures have been or may be instituted or asserted against the Company. Based on currently
available facts, except as otherwise set forth above, the Company believes that the disposition of matters pending or asserted will not have a material
adverse effect on our consolidated financial position, results of operations or liquidity.
Note 17. Discontinued Transportation
Operation
Summary results of the transportation segment that
have been classified separately as discontinued operations, were as follows:
|
|
|
|
Year Ended December 31,
|
|
(Dollars in thousands)
|
|
|
|
2003
|
|
2002
|
|
2001
|
Sales |
|
|
|
$ |
13,204 |
|
|
$ |
27,447 |
|
|
$ |
47,439 |
|
|
Loss before
income taxes |
|
|
|
$ |
(32,221 |
) |
|
$ |
(66,053 |
) |
|
$ |
(14,886 |
) |
Income tax
benefit |
|
|
|
|
(11,274 |
) |
|
|
(23,112 |
) |
|
|
(5,621 |
) |
Net loss from
discontinued operations |
|
|
|
$ |
(20,947 |
) |
|
$ |
(42,941 |
) |
|
$ |
(9,265 |
) |
|
|
|
|
Year Ended December 31,
|
|
(Dollars in thousands)
|
|
|
|
2003
|
|
2002
|
|
2001
|
Net cash,
after tax, used for discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
|
$ |
(20,947 |
) |
|
$ |
(42,941 |
) |
|
$ |
(9,265 |
) |
Loss on sale
of assets |
|
|
|
|
— |
|
|
|
21,500 |
|
|
|
— |
|
Decrease
(increase) in trade receivable |
|
|
|
|
908 |
|
|
|
16,473 |
|
|
|
(9,772 |
) |
Decrease
(increase) in inventories |
|
|
|
|
9,003 |
|
|
|
(5,104 |
) |
|
|
(21,974 |
) |
(Decrease)
increase in customer advances |
|
|
|
|
(1,087 |
) |
|
|
(4,556 |
) |
|
|
491 |
|
Decrease in
income taxes |
|
|
|
|
(958 |
) |
|
|
(22,641 |
) |
|
|
(5,380 |
) |
(Decrease)
increase in accounts payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and other
current liabilities |
|
|
|
|
(1,733 |
) |
|
|
(5,785 |
) |
|
|
14 |
|
Increase
other |
|
|
|
|
6,868 |
|
|
|
5,248 |
|
|
|
427 |
|
Net cash,
after tax, used for discontinued operations |
|
|
|
$ |
(7,946 |
) |
|
$ |
(37,806 |
) |
|
$ |
(45,459 |
) |
51
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
Assets and liabilities of the discontinued operations were as
follows:
|
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
|
|
2003
|
|
2002
|
|
2001
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
receivables from ETI |
|
|
|
$ |
39,322 |
|
|
$ |
25,961 |
|
|
$ |
20,895 |
|
Less
allowances |
|
|
|
|
(39,322 |
) |
|
|
(25,053 |
) |
|
|
(1,673 |
) |
Inventories |
|
|
|
|
10 |
|
|
|
9,013 |
|
|
|
73,236 |
|
Prepaid
expenses and other current assets |
|
|
|
|
51 |
|
|
|
51 |
|
|
|
51 |
|
Deferred
taxes |
|
|
|
|
5,028 |
|
|
|
4,070 |
|
|
|
7,497 |
|
Investment in
ETI |
|
|
|
|
1,050 |
|
|
|
1,050 |
|
|
|
1,050 |
|
Other
receivables from ETI |
|
|
|
|
9,111 |
|
|
|
2,935 |
|
|
|
1,205 |
|
Less
allowances |
|
|
|
|
(9,111 |
) |
|
|
(2,935 |
) |
|
|
(1,205 |
) |
Property and
equipment |
|
|
|
|
— |
|
|
|
— |
|
|
|
5,800 |
|
Total
Assets |
|
|
|
$ |
6,139 |
|
|
$ |
15,092 |
|
|
$ |
106,856 |
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable |
|
|
|
$ |
376 |
|
|
$ |
1,674 |
|
|
$ |
7,118 |
|
Accrued
employee compensation and taxes |
|
|
|
|
617 |
|
|
|
1,052 |
|
|
|
1,393 |
|
Customer
advances |
|
|
|
|
— |
|
|
|
1,087 |
|
|
|
35,983 |
|
Provision for
contract losses |
|
|
|
|
11,266 |
|
|
|
1,450 |
|
|
|
6,522 |
|
Other |
|
|
|
|
4,352 |
|
|
|
7,300 |
|
|
|
6,511 |
|
Total
Liabilities |
|
|
|
$ |
16,611 |
|
|
$ |
12,563 |
|
|
$ |
57,527 |
|
The Company has provided for ETI’s
inability to pay the trade receivables from ETI ($39,322,000 in 2003, relating to AAI’s subcontract on the MUNI program) and the other receivables
from ETI ($9,111,000 in 2003, relating to AAI’s secunded services arrangement) as part of its recognition of 100% of ETI’s
losses.
Note 18. Investment in Unconsolidated
Investees
Discontinued Transportation Operations
During the years ended December 31, 2003, 2002 and
2001, the sales, cost of sales, gross loss and cash drain recognized by the discontinued transportation operation on subcontracts with ETI are as
follows:
(Dollars in thousands)
|
|
|
|
2003
|
|
2002
|
|
2001
|
Sales |
|
|
|
$ |
15,040 |
|
|
$ |
13,614 |
|
|
$ |
29,975 |
|
Cost of
sales |
|
|
|
|
15,040 |
|
|
|
20,175 |
|
|
|
31,351 |
|
Gross
loss |
|
|
|
$ |
— |
|
|
$ |
(6,561 |
) |
|
$ |
(1,376 |
) |
|
Cash
drain |
|
|
|
$ |
(4,357 |
) |
|
$ |
(11,729 |
) |
|
$ |
(8,946 |
) |
AAI also performs work for ETI pursuant to a unit
rate secunded services agreement. During 2003, 2002 and 2001 the discontinued transportation operation experienced a cash drain related to this
arrangement of $195,000, $1,730,000 and $6,176,000, respectively.
In 2003 the transportation operation recorded a loss
of $24,879,000 related to its equity interest in the net loss of ETI and the estimated losses through completion of the remaining contract. This loss
included a provision of $8,708,000 related to the Company’s 35% equity share of the estimated losses by ETI, and a $16,171,000 provision related
to the 65% equity share of Skoda of ETI’s estimated losses for the reasons specified in Note 16 above. In 2002 the transportation operation
recorded a loss of $26,560,000 (net of a $1,828,000 reserve previously recorded
52
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
by the Company) related to the net loss of ETI and the estimated losses of ETI
through completion of the remaining contract. This loss included a provision of $9,296,000 related to the Company’s 35% equity share of estimated
losses by ETI, and a $17,264,000 provision related to the 65% equity share of Skoda of ETI’s estimated losses, again for the reasons specified in
Note 16 above. The transportation operation recorded a loss of $180,000 in 2001 related to its equity interest in the net loss of ETI.
Summary financial information of the ETI entity is
as follows:
|
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
|
|
2003
|
|
2002
|
|
2001
|
Current
Assets |
|
|
|
$ |
13,032 |
|
|
$ |
72,542 |
|
|
$ |
131,794 |
|
Plant
Property and Equipment and Other Assets |
|
|
|
|
193 |
|
|
|
1,482 |
|
|
|
3,058 |
|
Current
Liabilities |
|
|
|
|
83,708 |
|
|
|
119,627 |
|
|
|
152,070 |
|
Net
Sales |
|
|
|
|
82,828 |
|
|
|
64,766 |
|
|
|
14,580 |
|
Gross
Loss |
|
|
|
|
(24,879 |
) |
|
|
(28,388 |
) |
|
|
(514 |
) |
Net
Loss |
|
|
|
$ |
(24,879 |
) |
|
$ |
(28,388 |
) |
|
$ |
(514 |
) |
Included in the current liabilities above are
amounts due to the Company’s subsidiary, AAI, of $53,764,000, $52,687,000 and $20,683,000 in 2003, 2002 and 2001, respectively. These amounts have
been fully reserved for, as future collectibility is not expected.
Continuing Operations
The Company also has a 50% interest in Pioneer UAV,
Inc. The Company’s investment was $1,519,000, $1,462,000 and $2,724,000 in 2003, 2002 and 2001, respectively. The Company had no advances to the
investee at December 31, 2003, 2002 or 2001. The Company’s share of the venture’s profits were $57,000, $99,000 and $86,000 in 2003, 2002 and
2001, respectively.
Note 19. Earnings per Share
The following table sets forth the computation of
basic and diluted earnings per share:
|
|
|
|
2003
|
|
2002
|
|
2001
|
Basic
Weighted Average Shares |
|
|
|
|
13,219,000 |
|
|
|
13,021,000 |
|
|
|
12,697,000 |
|
Effect of
Dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee and
non-employee director stock options |
|
|
|
|
443,000 |
|
|
|
677,000 |
|
|
|
592,000 |
|
Diluted
Weighted Average Shares |
|
|
|
|
13,662,000 |
|
|
|
13,698,000 |
|
|
|
13,289,000 |
|
|
Basic
Earnings (Loss) per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
continuing operations |
|
|
|
$ |
1.14 |
|
|
$ |
0.30 |
|
|
$ |
1.15 |
|
Loss from
discontinued operations |
|
|
|
|
(1.58 |
) |
|
|
(3.30 |
) |
|
|
(0.73 |
) |
Net (loss)
income |
|
|
|
|
(0.44 |
) |
|
|
(3.00 |
) |
|
|
0.42 |
|
Diluted
Earnings (Loss) per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
continuing operations |
|
|
|
|
1.10 |
|
|
|
0.28 |
|
|
|
1.10 |
|
Loss from
discontinued operations |
|
|
|
|
(1.53 |
) |
|
|
(3.13 |
) |
|
|
(0.70 |
) |
Net (Loss)
income |
|
|
|
$ |
(0.43 |
) |
|
$ |
(2.85 |
) |
|
$ |
0.40 |
|
Note 20. Restructuring Charge
On October 31, 2003, the Company closed its New York
City office and relocated the corporate activities handled at that location to its existing facility in Hunt Valley, Maryland. Accordingly, the Company
recorded a charge of $546,000 related to severance costs for the former employees at that location and a charge of $355,000 related to the closure of
the New York City office, for a total charge of $901,000, which is included in selling and administrative expenses in the consolidated statement of
operations. The total related reserve was $822,000 as of December 31, 2003.
53
UNITED INDUSTRIAL CORPORATION
NOTES TO FINANCIAL
STATEMENTS—(Continued)
Effective May 17, 2002, Detroit Stoker ceased the
foundry operation conducted by its wholly owned subsidiary, Midwest Metallurgical Laboratory, Inc. (Midwest). In conjunction with the ceased operations
the Company wrote off the value of all of Midwest’s assets and incurred severance and other cash charges totaling approximately $1,287,000 related
to the restructuring including operating losses of Midwest. In addition, the Company accelerated depreciation of its foundry facility during the
foundry’s operating period in 2002. Depreciation of this facility was $3,420,000 during 2002. There was no related reserve as of December 31, 2003
and 2002.
54
Report of Independent Auditors
Board of Directors and Shareholders
United Industrial Corporation
Hunt Valley, Maryland
We have audited the accompanying consolidated balance sheets of United Industrial
Corporation and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations and cash flows for each of the
three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in
the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of United Industrial Corporation and subsidiaries at December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
March 10, 2004
Harrisburg, Pennsylvania
55
| ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company’s management evaluated, with the
participation of the Company’s principal executive and principal financial officers, the effectiveness of the Company’s disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as
of December 31, 2003. Based on their evaluation, the Company’s principal executive and principal financial officers concluded that the
Company’s disclosure controls and procedures were effective as of December 31, 2003.
There has been no change in the Company’s
internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company’s
fiscal quarter ended December 31, 2003, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control
over financial reporting.
56
PART III
| ITEM 10. |
|
DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT |
Reference is made to the information to be set forth
in the section entitled “Election of Directors” in the definitive proxy statement involving the election of directors in connection with the
2004 Annual Meeting of Shareholders of United (the “Proxy Statement”), which section (other than the Compensation Committee Report, Audit
Committee Report and Performance Graph) is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 2003, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended.
The information required with respect to executive
officers is set forth in Part I of this report under the heading “Executive Officers of the Registrant,” pursuant to Instruction 3 to
paragraph (b) of Item 401 of Regulation S-K.
The Company has adopted a Code of Ethics for the
Chief Executive Officer, Chief Financial Officer, and certain other Senior Officers (the “Code of Ethics”). The Code of Ethics is publicly
available on the Company’s website at http://www.unitedindustrial.com. Amendments to the Code of Ethics and any grant of a waiver from a provision
of the Code of Ethics requiring disclosure under applicable Securities and Exchange Commission or New York Stock Exchange rules will be disclosed on
the Company’s website. The Code of Ethics may also be requested in print by writing to the Company’s Investor Relations Department at United
Industrial Corporation, 124 Industry Lane, Hunt Valley, MD 21030.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information to be set forth
in the section entitled “Election of Directors” in the Proxy Statement, which section (other than the Compensation Committee Report, Audit
Committee Report and Performance Graph) is incorporated herein by reference.
| ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS |
Securities Authorized for Issuance Under Equity Compensation
Plans
The following table provides information with
respect to compensation plans (including individual compensation arrangements) under which equity securities of United are authorized for issuance to
employees or non-employees (such as directors, consultants, advisors, vendors, customers, suppliers or lenders), as of December 31,
2003:
Plan category
|
|
|
|
Number of securities
to be issued
upon exercise of
outstanding options,
warrants and rights
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
|
Number of securities
remaining available for
future issuance
under
equity compensation plans
(excluding securities
reflected in column (a))
|
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
Equity
compensation plans approved by security holders |
|
|
|
|
1,109,300 |
|
|
$ |
12.94 |
|
|
|
263,517 |
|
Equity
compensation plans not approved by security holders |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total |
|
|
|
|
1,109,300 |
|
|
$ |
12.94 |
|
|
|
263,517 |
|
Reference is made to the information to be
set forth in the section entitled “Voting Rights” and “Security Ownership of Management” in the proxy statement, which sections are
incorporated herein by reference.
57
| ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
Reference is made to the information to be set forth
in the section entitled “Election of Directors” in the Proxy Statement, which section (other than the Compensation Committee Report, Audit
Committee Report and Performance Graph) is incorporated herein by reference.
| ITEM 14. |
|
PRINCIPAL ACCOUNTING FEES AND SERVICES |
Reference is made to the information to be set forth
in the section entitled “Appointment of Auditors” or relating to accounting fees and services in the Proxy Statement, which section is
incorporated herein by reference.
58
PART IV
| ITEM 15. |
|
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K |
| (a) |
|
(1) and (2) – The response to this portion of Item 15 is
submitted as a separate section of this report entitled “List of Financial Statements and Financial Statement Schedules”. |
(3) |
|
|
|
Exhibits |
(3)(a)(i)
– |
|
|
|
Restated Certificate of Incorporation of United (1). |
(3)(a)(ii)
– |
|
|
|
Certificate of Amendment of Restated Certificate of Incorporation of United (2). |
(3)(b)
– |
|
|
|
Amended and Restated By-Laws of United (3). |
(10)(a)
– |
|
|
|
United Industrial Corporation 1994 Stock Option Plan, as amended (4). |
(10)(b)
– |
|
|
|
United Industrial Corporation 1996 Stock Option Plan for Nonemployee Directors (5). |
(10)(c)
– |
|
|
|
Loan and Security Agreement dated as of June 28, 2001 among United and certain of its subsidiaries, as Borrowers, and Fleet Capital
Corporation, as Lender (the “Loan Agreement”) (6). |
(10)(d)
– |
|
|
|
Pledge Agreement dated as of June 28, 2001 among United and certain of its subsidiaries, as Pledgors, and Fleet Capital Corporation, as Lender
(6). |
(10)(e)
– |
|
|
|
Waiver, Amendment and Consent Agreement dated as of March 6, 2002 among United and certain of its subsidiaries, as Borrowers, and Fleet
Capital Corporation, as Lender, to the Loan Agreement (7). |
(10)(f)
– |
|
|
|
Second Amendment and Consent Agreement dated as of June 28, 2002 among United and certain of its subsidiaries, as Borrowers, and Fleet Capital
Corporation, as Lender, to the Loan Agreement (8). |
(10)(g)
– |
|
|
|
Third Amendment and Waiver Agreement dated as of March 21, 2003 among United and certain of its subsidiaries, as Borrowers, and Fleet Capital
Corporation, as Lender, to the Loan Agreement (9). |
(10)(h)
– |
|
|
|
Fourth Amendment dated as of March 31, 2003 among the Company and certain of its subsidiaries, as Borrowers, and Fleet Capital Corporation, as
Lender, to the Loan Agreement (10). |
(10)(i)
– |
|
|
|
Fifth Amendment dated as of September 30, 2003 among the Company and certain of its subsidiaries, as Borrowers, and Fleet Capital Corporation,
as Lender, to the Loan Agreement (10). |
(10)(j)
– |
|
|
|
Letter from Fleet Capital Corporation to the Company dated November 12, 2003, amending the Loan Agreement (10). |
(10)(k)
– |
|
|
|
Sixth Amendment dated as of November 17, 2003 among the Company and certain of its subsidiaries, as Borrowers, and Fleet Capital Corporation,
as Lender, to the Loan Agreement. |
(10)(l)
– |
|
|
|
Seventh Amendment dated as of December 31, 2003 among the Company and certain of its subsidiaries, as Borrowers, and Fleet Capital
Corporation, as Lender, to the Loan Agreement. |
(10)(m)
– |
|
|
|
Employment Agreement dated as of June 18, 2003 between the Company and Frederick M. Strader (11). |
(10)(n)
– |
|
|
|
Employment Agreement, dated December 8, 1998, between United and Richard R. Erkeneff (1). |
(10)(o)
– |
|
|
|
Amendment No. 1 dated as of June 1, 2001 to the Employment Agreement dated as of December 8, 1998 by and between United and Richard R.
Erkeneff (6). |
(10)(p)
– |
|
|
|
Amendment No. 2 and Amendment No. 3 dated as of December 20, 2002 to the Employment Agreement dated as of December 8, 1998 by and between
United and Richard R. Erkeneff (9). |
(10)(q)
– |
|
|
|
Employment Agreement, dated March 3, 2000, between United and Susan Fein Zawel (12). |
(10)(r)
– |
|
|
|
Amendment to Employment Agreement, dated January 2, 2003, between United and Susan Fein Zawel (9). |
(10)(s)
– |
|
|
|
Employment Agreement, dated March 3, 2000, between United and Robert Worthing (12). |
(10)(t)
– |
|
|
|
Success Bonus Agreement, dated April 10, 2002, between United and Robert Worthing (13). |
59
(10)(u)
– |
|
|
|
Amendment to Employment Agreement, dated January 2, 2003, between United and Robert Worthing (9). |
(10)(v)
– |
|
|
|
Employment Agreement, dated March 3, 2000, between United and James H. Perry (12). |
(10)(w)
– |
|
|
|
Success Bonus Agreement, dated April 10, 2002, between United and James H. Perry (13). |
(10)(x)
– |
|
|
|
Amendment to Employment Agreement, dated January 2, 2003, between United and James H. Perry (9). |
(10)(y)
– |
|
|
|
Master Agreement, dated as of March 27, 2002, between ALSTOM Transportation Inc. and AAI Corporation (7). |
(10)(z)
– |
|
|
|
Amendment to Master Agreement, dated as of July 26, 2002, between ALSTOM Transportation Inc. and AAI Corporation (14). |
(14)
– |
|
|
|
United’s Code of Ethics for the Chief Executive Officer, Chief Financial Officer and certain other Senior Officers — available on
United’s website at http://www.unitedindustrial.com. |
(21)
– |
|
|
|
Subsidiaries of United. |
(23)
– |
|
|
|
Consent of Independent Auditors. |
(31.1)
– |
|
|
|
Certification of Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
(31.2)
– |
|
|
|
Certification of Chief Financial Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
(32.1)
– |
|
|
|
Certification of the Chief Executive Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(32.2)
– |
|
|
|
Certification of the Chief Financial Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(1) |
|
Incorporated by reference to United’s Annual Report on Form
10-K for the year ended December 31, 1998. |
(2) |
|
Incorporated by reference to United’s Registration
Statement Form S-8 filed with the Securities and Exchange Commission on July 21, 1998. |
(3) |
|
Incorporated by reference to United’s Annual Report on Form
10-K for the year ended December 31, 1995. |
(4) |
|
Incorporated by reference to United’s Registration
Statement on Form S-8, filed with the Securities and Exchange Commission on November 20, 2003. |
(5) |
|
Incorporated by reference to United’s Registration
Statement on Form S-8 filed with the Securities and Exchange Commission on June 26, 1997. |
(6) |
|
Incorporated by reference to United’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001. |
(7) |
|
Incorporated by reference to United’s Annual Report on Form
10-K for the year ended December 31, 2001. |
(8) |
|
Incorporated by reference to United’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002. |
(9) |
|
Incorporated by reference to United’s Annual Report on Form
10-K for the year ended December 31, 2002. |
(10) |
|
Incorporated by reference to United’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2003. |
(11) |
|
Incorporated by reference to United’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003. |
(12) |
|
Incorporated by reference to United’s Annual Report on Form
10-K for the year ended December 31, 1999. |
(13) |
|
Incorporated by reference to United’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002. |
(14) |
|
Incorporated by reference to United’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on August 12, 2002. |
On November 13, 2003, the Company filed a Current
Report on Form 8-K announcing the financial results for the quarter ended September 30, 2003.
60
Annual Report on Form 10-K
Item 15(a) (1) and (2)
List of Financial Statements and Financial Statement
Schedules
Certain Exhibits
Financial Statement Schedules
Year ended December 31, 2003
United Industrial Corporation
Hunt Valley, Maryland
61
Form 10-K—Item 15(a) (1) and (2)
UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES
List of Financial Statements and Financial Statement Schedules
The following consolidated financial statements of
United Industrial Corporation and subsidiaries are included in Item 8 of this Annual Report:
Consolidated
Balance Sheets—December 31, 2003 and 2002 |
|
|
|
|
|
|
Consolidated
Statements of Operations—
Years Ended December 31, 2003, 2002 and 2001
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
Years Ended December 31, 2003, 2002 and 2001
|
|
|
|
|
|
|
Notes to
Financial Statements |
|
|
|
|
|
|
The following consolidated financial statement
schedule of United Industrial Corporation and subsidiaries is included in Item 15(d):
Schedule II Valuation and Qualifying
Accounts
All other schedules for which provision is made in
the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and,
therefore, have been omitted.
62
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial
statements of United Industrial Corporation and subsidiaries as of December 31, 2003 and 2002, and for each of the three years in the period ended
December 31, 2003, and have issued our report thereon dated March 10, 2004. Our audits also included the financial statement schedule listed in Item
15(a) of this Annual Report (Form 10-K). This schedule is the responsibility of the Company’s management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
March 10, 2004
Harrisburg, Pennsylvania
63
Schedule II—Valuation and Qualifying Accounts
United
Industrial Corporation and Subsidiaries
December 31, 2003
Col. A
|
|
|
|
Col. B
|
|
Col. C
|
|
Col. D
|
|
Col. E
|
|
Description
|
|
|
|
Balance at
Beginning
of Period
|
|
(1)
Charged to
Costs and
Expenses
|
|
(2)
Charged to
Other Accounts
(Describe)
|
|
Deductions
(Describe)
|
|
Balance at
End of
Period
|
Year ended
December 31, 2003:
Deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful accounts |
|
|
|
$ |
235,000 |
|
|
$ |
321,000 |
|
|
|
|
|
|
|
|
|
|
$ |
556,000 |
|
Product
warranty liability |
|
|
|
$ |
960,000 |
|
|
|
|
|
|
|
|
|
|
$ |
120,000 |
(A) |
|
$ |
840,000 |
|
Year ended
December 31, 2002:
Deducted from asset account:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful accounts |
|
|
|
$ |
235,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
235,000 |
|
Product
warranty liability |
|
|
|
$ |
1,650,000 |
|
|
$ |
566,000 |
|
|
|
|
|
|
$ |
1,256,000 |
(A) |
|
$ |
960,000 |
|
Year ended
December 31, 2001:
Deducted from asset account:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful accounts |
|
|
|
$ |
235,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
235,000 |
|
Product
warranty liability |
|
|
|
$ |
5,154,000 |
|
|
|
|
|
|
|
|
|
|
$ |
3,504,000 |
(A) |
|
$ |
1,650,000 |
|
(A) |
|
Product warranty expenditures. |
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
|
UNITED INDUSTRIAL
CORPORATION
(Registrant)
|
|
|
|
|
|
|
|
|
|
By: /s/
Frederick M. Strader
Frederick M. Strader, President
|
|
|
|
|
|
|
|
|
Date: March
12, 2004 |
|
|
|
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the date indicated.
Name
|
|
|
|
Date
|
/s/ Warren G.
Lichtenstein
Warren G. Lichtenstein,
Chairman of the Board and Director |
|
|
|
March 12,
2004 |
| |
/s/ Thomas A.
Corcoran
Thomas A. Corcoran, Director |
|
|
|
March 12,
2004 |
| |
/s/ Richard
R. Erkeneff
Richard R. Erkeneff, Director |
|
|
|
March 12,
2004 |
| |
/s/ Glen
Kassan
Glen Kassan, Director |
|
|
|
March 12,
2004 |
| |
/s/ Robert F.
Mehmel
Robert F. Mehmel, Director |
|
|
|
March 12,
2004 |
| |
/s/ Joseph S.
Schneider
Joseph S. Schneider, Director |
|
|
|
March 12,
2004 |
| |
/s/ Frederick
M. Strader
Frederick M. Strader,
President and Chief Executive Officer |
|
|
|
March 12,
2004 |
| |
/s/ James H.
Perry
James H. Perry,
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer) |
|
|
|
March 12,
2004 |
65
EXHIBIT INDEX
(3)(a)(i)
– |
|
|
|
Restated Certificate of Incorporation of United (1). |
(3)(a)(ii)
– |
|
|
|
Certificate of Amendment of Restated Certificate of Incorporation of United (2). |
(3)(b)
– |
|
|
|
Amended and Restated By-Laws of United (3). |
(10)(a)
– |
|
|
|
United Industrial Corporation 1994 Stock Option Plan, as amended (4). |
(10)(b)
– |
|
|
|
United Industrial Corporation 1996 Stock Option Plan for Nonemployee Directors (5). |
(10)(c)
– |
|
|
|
Loan and Security Agreement dated as of June 28, 2001 among United and certain of its subsidiaries, as Borrowers, and Fleet Capital
Corporation, as Lender (the “Loan Agreement”) (6). |
(10)(d)
– |
|
|
|
Pledge Agreement dated as of June 28, 2001 among United and certain of its subsidiaries, as Pledgors, and Fleet Capital Corporation, as Lender
(6). |
(10)(e)
– |
|
|
|
Waiver, Amendment and Consent Agreement dated as of March 6, 2002 among United and certain of its subsidiaries, as Borrowers, and Fleet
Capital Corporation, as Lender, to the Loan Agreement (7). |
(10)(f)
– |
|
|
|
Second Amendment and Consent Agreement dated as of June 28, 2002 among United and certain of its subsidiaries, as Borrowers, and Fleet Capital
Corporation, as Lender, to the Loan Agreement (8). |
(10)(g)
– |
|
|
|
Third Amendment and Waiver Agreement dated as of March 21, 2003 among United and certain of its subsidiaries, as Borrowers, and Fleet Capital
Corporation, as Lender, to the Loan Agreement (9). |
(10)(h)
– |
|
|
|
Fourth Amendment dated as of March 31, 2003 among the Company and certain of its subsidiaries, as Borrowers, and Fleet Capital Corporation, as
Lender, to the Loan Agreement (10). |
(10)(i)
– |
|
|
|
Fifth Amendment dated as of September 30, 2003 among the Company and certain of its subsidiaries, as Borrowers, and Fleet Capital Corporation,
as Lender, to the Loan Agreement (10). |
(10)(j)
– |
|
|
|
Letter from Fleet Capital Corporation to the Company dated November 12, 2003, amending the Loan Agreement (10). |
(10)(k)
– |
|
|
|
Sixth Amendment dated as of November 17, 2003 among the Company and certain of its subsidiaries, as Borrowers, and Fleet Capital Corporation,
as Lender, to the Loan Agreement. |
(10)(l)
– |
|
|
|
Seventh Amendment dated as of December 31, 2003 among the Company and certain of its subsidiaries, as Borrowers, and Fleet Capital
Corporation, as Lender, to the Loan Agreement. |
(10)(m)
– |
|
|
|
Employment Agreement dated as of June 18, 2003 between the Company and Frederick M. Strader (11). |
(10)(n)
– |
|
|
|
Employment Agreement, dated December 8, 1998, between United and Richard R. Erkeneff (1). |
(10)(o)
– |
|
|
|
Amendment No. 1 dated as of June 1, 2001 to the Employment Agreement dated as of December 8, 1998 by and between United and Richard R.
Erkeneff (6). |
(10)(p)
– |
|
|
|
Amendment No. 2 and Amendment No. 3 dated as of December 20, 2002 to the Employment Agreement dated as of December 8, 1998 by and between
United and Richard R. Erkeneff (9). |
(10)(q)
– |
|
|
|
Employment Agreement, dated March 3, 2000, between United and Susan Fein Zawel (12). |
(10)(r)
– |
|
|
|
Amendment to Employment Agreement, dated January 2, 2003, between United and Susan Fein Zawel (9). |
(10)(s)
– |
|
|
|
Employment Agreement, dated March 3, 2000, between United and Robert Worthing (12). |
(10)(t)
– |
|
|
|
Success Bonus Agreement, dated April 10, 2002, between United and Robert Worthing (13). |
(10)(u)
– |
|
|
|
Amendment to Employment Agreement, dated January 2, 2003, between United and Robert Worthing (9). |
66
(10)(v)
– |
|
|
|
Employment Agreement, dated March 3, 2000, between United and James H. Perry (12). |
(10)(w)
– |
|
|
|
Success Bonus Agreement, dated April 10, 2002, between United and James H. Perry (13). |
(10)(x)
– |
|
|
|
Amendment to Employment Agreement, dated January 2, 2003, between United and James H. Perry (9). |
(10)(y)
– |
|
|
|
Master Agreement, dated as of March 27, 2002, between ALSTOM Transportation Inc. and AAI Corporation (7). |
(10)(z)
– |
|
|
|
Amendment to Master Agreement, dated as of July 26, 2002, between ALSTOM Transportation Inc. and AAI Corporation (14). |
(14)
– |
|
|
|
United’s Code of Ethics for the Chief Executive Officer, Chief Financial Officer and certain other Senior Officers — available on
United’s website at http://www.unitedindustrial.com. |
(21)
– |
|
|
|
Subsidiaries of United. |
(23)
– |
|
|
|
Consent of Independent Auditors. |
(31.1)
– |
|
|
|
Certification of Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
(31.2)
– |
|
|
|
Certification of Chief Financial Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
(32.1)
– |
|
|
|
Certification of the Chief Executive Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(1) |
|
Incorporated by reference to United’s Annual Report on Form
10-K for the year ended December 31, 1998. |
(2) |
|
Incorporated by reference to United’s Registration
Statement Form S-8 filed with the Securities and Exchange Commission on July 21, 1998. |
(3) |
|
Incorporated by reference to United’s Annual Report on Form
10-K for the year ended December 31, 1995. |
(4) |
|
Incorporated by reference to United’s Registration
Statement on Form S-8, filed with the Securities and Exchange Commission on November 20, 2003. |
(5) |
|
Incorporated by reference to United’s Registration
Statement on Form S-8 filed with the Securities and Exchange Commission on June 26, 1997. |
(6) |
|
Incorporated by reference to United’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001. |
(7) |
|
Incorporated by reference to United’s Annual Report on Form
10-K for the year ended December 31, 2001. |
(8) |
|
Incorporated by reference to United’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002. |
(9) |
|
Incorporated by reference to United’s Annual Report on Form
10-K for the year ended December 31, 2002. |
(10) |
|
Incorporated by reference to United’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2003. |
(11) |
|
Incorporated by reference to United’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003. |
(12) |
|
Incorporated by reference to United’s Annual Report on Form
10-K for the year ended December 31, 1999. |
(13) |
|
Incorporated by reference to United’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002. |
(14) |
|
Incorporated by reference to United’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on August 12, 2002. |
67