-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UhPv4gGuCxOVz9mOv/zQEYEIR70W2SufJZm12G39adT7DtgHXmemxtyYndOXr3xC BRi36FiTqyE1DJpjWn2NEQ== 0000909518-99-000656.txt : 19991117 0000909518-99-000656.hdr.sgml : 19991117 ACCESSION NUMBER: 0000909518-99-000656 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED INDUSTRIAL CORP /DE/ CENTRAL INDEX KEY: 0000101271 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 952081809 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04252 FILM NUMBER: 99753702 BUSINESS ADDRESS: STREET 1: 18 E 48TH ST CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2127528787 MAIL ADDRESS: STREET 1: 18 E 48TH STREET CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: TOPP INDUSTRIES CORP DATE OF NAME CHANGE: 19710510 FORMER COMPANY: FORMER CONFORMED NAME: HAYES MANUFACTURING CORP DATE OF NAME CHANGE: 19660911 10-Q 1 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 -------------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------- -------------------- Commission file number #1-4252 ------- UNITED INDUSTRIAL CORPORATION - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 95-2081809 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Identification No.) incorporation or organization) 570 Lexington Avenue, New York, NY 10022 - ------------------------------------------------------------------------------- (Address of principal executive offices) Not Applicable - -------------------------------------------------------------------------------- FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT. Indicate by check mark whether the registrant (1)has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 12,294,138 shares of common stock as of November 3, 1999. 78495.0001 UNITED INDUSTRIAL CORPORATION INDEX Page # Part I - Financial Information Item 1. Financial Statements Consolidated Condensed Balance Sheets - Unaudited September 30, 1999 and December 31, 1998 1 Consolidated Condensed Statements of Operations - Three Months and Nine Months Ended September 30, 1999 and 1998 2 Consolidated Condensed Statements of Cash Flows Nine Months Ended September 30, 1999 and 1998 3 Notes to Consolidated Condensed Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 5 Item 3. Qualitative and Quantitative Disclosures about Market Risk 12 PART II - Other Information 13 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in Thousands)
SEPTEMBER 30 DECEMBER 31 1999 1998 ---- ---- ASSETS (Unaudited) Current Assets Cash & cash equivalents $ 8,955 $ 21,126 Marketable securities - 4,702 Trade receivables 38,611 34,316 Inventories Finished goods & work in progress 44,380 20,151 Materials & supplies 3,445 3,418 -------- -------- 47,825 23,569 Deferred income taxes 5,451 5,451 Prepaid expenses & other current assets 10,482 8,295 -------- -------- Total Current Assets 111,324 97,459 Other assets 54,921 56,421 Property & equipment - less allowances for depreciation (1999-$87,381; 1998-$82,643) 33,407 30,566 -------- -------- $199,652 $184,446 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 6,040 $ 12,235 Accrued employee compensation & taxes 9,512 8,320 Customer advances 24,742 4,303 Federal income taxes 584 2,973 Other liabilities 10,059 8,255 Provision for contract losses 2,406 4,558 -------- -------- Total Current Liabilities 53,343 40,644 Long-term liabilities 4,115 4,175 Deferred income taxes 6,836 7,050 Postretirement benefits other than pensions 23,607 23,136 Shareholders' Equity Common stock $1.00 par value Authorized - 30,000,000 shares; outstanding 12,277,138 and 12,250,063 shares - 1999 and 1998 (net of shares in treasury) 14,374 14,374 Additional capital 89,527 89,583 Retained earnings 24,402 22,249 Treasury stock, at cost, 2,097,010 shares at 1999 and 2,124,085 shares at 1998 (16,552) (16,765) -------- -------- 111,751 109,441 -------- -------- $199,652 $184,446 ======== ========
See accompanying notes 1 UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- (Unaudited) 1999 1998 1999 1998* ---- ---- ---- ---- Net sales $ 52,094 $ 49,979 $153,196 $147,146 Operating costs & expenses Cost of sales 37,522 38,345 109,464 109,931 Selling & administrative 11,218 8,623 34,894 28,227 Other expense 343 1,269 1,686 956 Interest expense 25 - 49 119 Interest income (415) (1,369) (1,501) (2,814) Gain on sale of assets - (575) - ) (575) -------- -------- -------- -------- Total operating costs & expenses 48,693 46,293 144,592 135,844 -------- -------- -------- -------- Income before income taxes 3,401 3,686 8,604 11,302 Income taxes 1,305 1,325 2,770 4,320 -------- -------- -------- -------- Net income $ 2,096 $ 2,361 $ 5,834 $ 6,982 ======== ======== ======== ======== Net earnings per share Basic $ .17 $ .19 $ .48 $ .57 ===== ===== ===== ----- Diluted $ .17 $ .19 $ .47 $ .55 ===== ===== ===== =====
See accompanying notes *Restated to conform with 1999 classifications 2 UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in Thousands)
NINE MONTHS ENDED SEPTEMBER 30 (Unaudited) 1999 1998 -------- -------- OPERATING ACTIVITIES Net income $ 5,834 $ 6,982 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,099 6,411 Decrease in federal income tax (2,389) (1,114) Deferred income taxes (214) (30) Gain on sale of assets - (575) Decrease in contract loss provision (2,152) (753) Changes in operating assets and liabilities (13,498) (2,846) -------- -------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (6,320) 8,075 INVESTING ACTIVITIES Decrease in marketable securities 4,702 631 Proceeds from sale of assets - 19,617 Purchase of property and equipment - net (8,283) (8,788) Decrease (increase) in other assets - net 861 (1,868) -------- --------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (2,720) 9,592 FINANCING ACTIVITIES Increase (decrease) in long-term liabilities 411 (404) Payments on long-term debt & borrowings - (5,729) Dividends (3,681) (3,698) Proceeds from exercise of stock options 139 798 Purchase of treasury stock - (486) -------- -------- NET CASH USED IN FINANCING ACTIVITIES (3,131) (9,519) -------- -------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (12,171) 8,148 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,126 23,098 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,955 $ 31,246 ======== ========
See accompanying notes 3 UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements September 30, 1999 NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. NOTE B - SEGMENT INFORMATION
Trans- Reconci- (Dollars in thousands) Defense portation Energy Other liations Totals - ---------------------- ------- --------- ------ ----- -------- ------ Three months ended September 30, 1999 - ------------------------------------- Revenues from external customers $41,398 $ 1,685 $ 9,011 $ - $ - $ 52,094 Intersegment revenues 807 - - - (807) - Equity profit (loss) in ventures 94 (661) - - - (567) Segment profit (loss) 4,926 (2,264) 1,334 (595) - 3,401 ======== Income before income taxes $ 3,401 -------- Nine months ended September 30, 1999 - ------------------------------------ Revenues from external customers $120,308 $ 7,501 $25,387 $ - $ - $153,196 Intersegment revenues 1,415 - - - (1,415) - Equity profit (loss) in ventures 309 (2,806) - - - (2,497) Segment profit (loss) 13,700 (7,469) 3,888 (1,515) - 8,604 ======== Income before income taxes $ 8,604 -------- Three months ended September 30, 1998 - ------------------------------------- Revenues from external customers $37,925 $ 4,047 $ 8,007 $ - $ - $ 49,979 Intersegment revenues 883 - - - (883) - Equity profit (loss) in ventures 176 (1,577) - - - (1,401) Segment profit (loss) 5,972 (3,521) 1,355 (120) - 3,686 ======== Income before income taxes $ 3,686 -------- 4 Nine months ended September 30, 1998 - ------------------------------------ Revenues from external customers $109,915 $11,187 $26,044 $ - $ - $147,146 Intersegment revenues 2,310 - - - (2,310) - Equity profit (loss) in ventures 533 (1,684) - - - 1,151 Segment profit (loss) 14,065 (5,420) 4,770 (2,113) - 11,302 ======== Income before income taxes $ 11,302 --------
Assets in the Transportation segment increased $8,070,000 from December 31, 1998. Inventory increased $8,738,000. NOTE C - DIVIDENDS A quarterly dividend of $.10 per share is payable November 30, 1999. NOTE D - WEIGHTED AVERAGE SHARES
Three Months Ended Nine Months Ended September 30 September 30 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Weighted average shares 12,277,097 12,369,381 12,268,841 12,316,425 Dilutive effect of stock options 260,408 295,832 274,707 326,404 ---------- ---------- ---------- ---------- Diluted weighted average shares 12,537,505 12,665,213 12,543,548 12,642,829 ========== ========== ========== ==========
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Information This report contains "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements are based on management's expectations, estimates, projections and assumptions. Words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," and variations of such words and similar expressions are intended to identify such forward looking statements which include, but are not limited to, projections of revenues, earnings, segment performance, cash flows and contract awards. These forward looking statements are subject to risks and uncertainties which could cause the Company's actual results or performance to differ materially from those expressed or implied in such statements. These risks and uncertainties include, but are not limited to, the following: the Company's successful execution of internal performance plans; performance issues with key suppliers, subcontractors and business partners; legal proceedings; product demand and market acceptance risks; the effect of economic conditions; the impact of competitive products and pricing; product development, commercialization and technological difficulties; capacity and supply constraints or difficulties; legislative or regulatory actions impacting the Company's energy segment and transportation business; changing priorities or reductions in the U.S. Government defense budget; contract continuation and future contract awards; U.S. and international military budget constraints and determinations; and the ability of the Company and third parties to address the Year 2000 issues adequately. 5 Results of Operations Consolidated net sales during the third quarter of 1999 increased $2,115,000 or 4% to $52,094,000 from $49,979,000 in the third quarter of 1998. The Defense segment experienced growth of $3,473,000 or 9.2% due to a general increase in volume. This increase was partially offset by lower sales in the Transportation segment caused by delays on the San Francisco electric trolley bus (ETB) program. The delay is caused by financing difficulties at Skoda a.s., a Czech Republic firm and 65% shareholder of Electric Transit, Inc. (ETI) and certain of its subsidiaries that are major subcontractors of ETI. For the nine months ended September 30, 1999 net sales totaled $153,196,000 which was $6,050,000 or 4% higher than the $147,146,000 recorded during the like period in 1998. An increase of $10,393,000 or 9.5% was generated by the Defense segment. The Transportation segment had a $3,686,000 or 33% reduction in sales from the same period last year. The decrease was caused by delays at ETI. The backlog at September 30, 1999 was $278,000,000, an increase of $80,000,000 or 40% from $198,000,000 at September 30, 1998. The Transportation segment experienced a $63,000,000 increase generally due to an award to overhaul railcars for New Jersey Transit. The Defense segment increased its backlog by $21,000,000. The gross margin percentage increased for the three months ended September 30, 1999 to 28% compared to 23.3% for the same period in 1998. The Defense segment gross margin increased to 30% from 26% in the same period last year due to improved profitability on certain contracts. The Energy segment gross margin decreased to 30.3% from 35.5% in the same period last year due to competitive forces in the new equipment and retrofits market. The Transportation segment experienced a loss at the gross profit level primarily caused by electric trolley bus production delays at Skoda which resulted in inadequate production volume at AAI (a wholly owned subsidiary of the Company) for the current levels of overhead expenses. The gross margin percentage increased for the nine months ended September 30, 1999 to 28.6% compared to 25.3% for the same period in 1998. The Defense segment gross margin increased to 29.7% from 26.3% in the same period last year due to improved profitability on certain contracts. The Energy segment had a 2.4% decrease in gross margin percentage from the same period last year. The loss in the Transportation segment gross margin was primarily caused by delays at ETI which resulted in inadequate production volume for the current levels of overhead expenses. Selling and administrative expenses for the three months ended September 30, 1999 increased $2,595,000 or 30.1% to $11,218,000 from $8,623,000 during the same period in 1998. The Defense segment's expenses increased $2,658,000 or 50.6% due mostly to increased research and development expense and marketing expenses. This increase is primarily due to efforts associated with certain activities in the unmanned air vehicle (UAV) line of business including the pursuit of the U.S. Army's Tactical UAV program. The Transportation segment's expenses increased $183,000 or 22.4%. Selling and administrative expenses for the nine months ended September 30, 1999 increased $6,667,000 or 23.6% to $34,894,000 from $28,227,000 during the same period in 1998. The Defense segment increased selling and administrative expenses by $6,517,000 or 37.7%. The increase resulted 6 mostly from increased research and development and marketing efforts in the unmanned air vehicle line of business including the pursuit of the U.S. Army's Tactical UAV program. Transportation segment costs increased $1,426,000 or 58.2% due to expenses of $700,000 relating to the possible acquisition of Skoda Ostrov, s.r.o. and the remaining shares of ETI, not owned by AAI, and other various expenses. Other expense decreased $926,000 to $343,000 in the three months ended September 30, 1999 compared to $1,269,000 for the same period in 1998. The venture losses were $661,000 in the Transportation segment compared with $1,577,000 for the same period in 1998. Other expense (excluding ventures) increased $135,000 in the Defense segment and other income increased $202,000 in the Energy segment from the same period last year. Other expense increased $730,000 to $1,686,000 during the nine months ended September 30, 1999 compared to $956,000 for the same period in 1998. Income from ventures decreased $224,000 in the Defense segment and the venture losses increased by $1,122,000 in the Transportation segment. Other expense (excluding ventures) decreased $635,000 in the Defense segment and other income increased $256,000 in the Energy segment from the same period last year. For the first nine months of 1999 compared to the same period in 1998 interest expense decreased by $70,000 due to reduced borrowings. Interest income decreased by $1,313,000 due to reduced investments. Net income decreased 11% to $2,096,000 or $.17 per diluted share, in the third quarter of 1999 as compared to $2,361,000 or $.19 per diluted share in the third quarter of 1998. The decrease was primarily due to increased selling and administrative and other expense partially offset by increased gross margins. The 1998 third quarter net income included a pre-tax gain on sale of assets of $575,000. During the third quarter of 1999 the Company's Transportation segment recorded a loss of $2.3 million ($1.4 million, net of taxes). This loss included $.7 million ($.4 million, net of taxes) related to the Company's interest in ETI. ETI's Dayton electric trolley bus program experienced cost growth that resulted in a $463,000 loss ($290,000, net of taxes) during the three month period ended September 30, 1999. Although ETI is owned 35% by AAI Corporation and 65% by Skoda a.s., beginning in 1999 the Transportation segment has recorded 100% of the ETI loss because of Skoda's inability to meet its financial obligations under ETI's shareholder agreement. All the trolley buses for Dayton have been delivered to and accepted by the customer although certain items including spare parts and manuals must still be delivered. Additionally, AAI's subcontract effort on the San Francisco ETB program has been delayed by financing difficulties at Skoda (see Liquidity and Capital Resources.) Consequently, an inadequate volume of production has resulted in revenues insufficient to overcome AAI's current levels of overhead and general and administrative expenses. The lack of sufficient volume is likely to continue throughout 1999 at AAI and as a result management expects these losses to continue through 1999. The Company is currently reviewing opportunities to curtail its cost structure until the San Francisco production effort is started and 7 evaluating its strategic options in the Transportation segment in light of the continuing losses and financing difficulties. Net income decreased 16.4% to $5,834,000 or $.47 per diluted share in the first nine months of 1999 compared to $6,982,000 or $.55 per diluted share in the first nine months of 1998. The decrease was primarily due to increased selling and administrative expenses and other expense, partially offset by increased gross margins. The 1998 third quarter net income included a pre-tax gain on sale of assets of $575,000. During the first nine months of 1999 the Company's Transportation segment recorded a loss of $7.5 million ($4.7 million, net of taxes.) This loss included $2.8 million ($1.8 million, net of taxes) related to the Company's interest in ETI and $700,000 ($439,000, net of taxes) of costs related to the proposed acquisition of Skoda Ostrov (see Liquidity and Capital Resources.) For the three months ended September 30, 1999, diluted earnings per share attributable to the Company's Defense, Energy, Transportation, and Other segments were $.28, $.07, $(.11), and $(.07) compared to $.29, $.07, $(.17), and $(.00) during the like period in 1998. For the nine months ended September 30, 1999, diluted earnings per share attributable to the Company's Defense, Energy, Transportation, and Other segments were $.72, $.20, $(.37), and $(.08) compared to $.70, $.23, $(.27), and $(.11) during the like period in 1998. Liquidity and Capital Resources Cash and cash equivalents decreased by $12,171,000 and marketable securities decreased by $4,702,000 from December 31, 1998. Major items accounting for the changes in operating assets and liabilities were increases in trade receivables of $4,295,000 and inventories of $24,256,000, and a decrease in payables of $5,003,000, offset by an increase in customer advances of $20,439,000. The Company currently has no significant fixed commitment for capital expenditures. The Company expects that available cash and existing lines of credit will be sufficient to meet its cash requirements until at least June 11, 2000, the expiration date of its existing line of credit. The Company is currently negotiating a replacement line of credit and expects such negotiation to be successful. Its cash requirements consist primarily of its obligations to fund operations. During the first quarter of 1999 Management learned that Skoda was unable to secure the necessary financing to execute its subcontract on the San Francisco electric trolley bus program and to meet its funding obligations to ETI. As a result, contract performance by ETI has been adversely affected. Contract performance on the electric trolley bus program currently depends on AAI advancing working capital funds as required. After negotiations with a private Czech bank to provide a source of financing to both ETI and Skoda failed during the first quarter of 1999, Management believed that it needed an option to gain full control of ETI and the ability to implement steps to put the business on a sound footing if alternative financing could not be obtained. Consequently, in May 1999 the Company announced that its AAI Corporation subsidiary had signed a letter of intent to acquire Skoda Ostrov, s.r.o., as well as Skoda's 65% interest in ETI. After conducting negotiations with Skoda management, the 8 Company determined that it was not practical to pursue this option. As a result, during the second quarter of 1999, the Company expensed $700,000 of costs related to the proposed transaction. These costs primarily included investment banking, accounting and legal services. In early June 1999, Skoda and ETI identified the Czech Export Bank (CEB) a Czech government owned entity, as a source of financing. United Industrial Corporation and Skoda have made significant progress in obtaining financing that will enable Skoda and ETI to execute production on the San Francisco electric trolley bus contract. On November 12, 1999 the Czech Export Bank (CEB) approved credit facilities partially guaranteed by the Czech government's Export Guarantee and Insurance Corporation (EGAP), to ETI and two Skoda subsidiaries subject to borrower approval, review by the San Francisco project's surety and receipt of a certain milestone payment from the customer. In conjunction with the ETI credit facility the Company has agreed to subordinate certain amounts already due it and assume the responsibility of new supplemental funding, if necessary, to ensure contract performance as well as assume joint and several liability on progress payment bonds. Execution of a contract framework agreement that formulates and reduces to writing the understandings, responsibilities and obligations between AAI, ETI and Skoda, including the Skoda subsidiaries that are suppliers to ETI was a precondition established by the Company before it would agree to permit ETI to enter into the credit facility with CEB. On November 13, 1999 AAI, ETI and the Skoda companies executed the framework agreement that enabled AAI, ETI and the Skoda companies to approve the pending CEB credit facilities. Once the surety issues an additional bond, the credit facility is executed by CEB, and the related milestone payment is received, it is expected that there will be sufficient working capital to complete the program. UIC expects all of the financing arrangements to be completed in the fourth quarter. However, if these financing arrangements cannot be completed and a reasonable alternative solution cannot be implemented, there is likely to be a materially adverse effect on the Company's results from operations, liquidity and financial condition. Due to Skoda's inability to fund ETI as required by ETI's shareholder agreement, until November 8, 1999 AAI had assumed that responsibility in its entirety. While Skoda still has the obligation to provide funding, beginning in 1999 AAI has recorded 100% of ETI's loss totaling $660,000 ($414,000, net of taxes) and $2,806,000 ($1,824,000, net of taxes) during the three and the nine month periods ended September 30, 1999, respectively. These losses were primarily generated by cost growth on the Dayton ETB program. All the trolley buses for Dayton have been delivered to and accepted by the customer although certain items including spare parts and manuals must still be delivered. At September 30, 1999, AAI had advanced, net of its investment and cumulative losses in ETI, $6 million to ETI. In addition, AAI has accounts receivable from ETI for work performed on both the Dayton and San Francisco projects of $7.3 million. These amounts totaling $13.3 million are recoverable out of proceeds from the Dayton and San Francisco customers. This amount includes $1.8 million ($1.1 million, net of taxes) that represents the loss recorded in excess of AAI's 35% equity interest in ETI. Skoda's financial situation and related production delays on the San Francisco program will diminish the profitability on ETI's contract. Also, because sales and gross margin are recorded when the units are delivered, delays in trolley bus deliveries are expected to result in continued losses at ETI throughout 1999. 9 Year 2000 The Year 2000 issue exists because many currently installed computer systems and software programs were designed to use only a two-digit date field. These date fields will need to accept four digits to distinguish 21st century dates from 20th century dates. Until the date fields are revised, the systems and programs could fail or give erroneous results when referencing dates subsequent to December 31, 1999. Such failures or errors could occur prior to the actual change in century. The Company is currently implementing a six phase plan to address this problem: Awareness, Assessment, Remediation, Validation/Test, Implementation, and Contingency Planning. The Awareness phase is a communication phase to inform employees, suppliers and customers of the Year 2000 issue. The Assessment phase is an inventory and analysis of those systems which may have a problem. The Remediation phase is the correction phase for the problem. The Validation/Test phase is used to verify that corrections have been made properly and completely. The Implementation phase is to actually put the changed systems into production use. The Contingency Planning phase is the development of a plan to detail the Company's reactions to possible future scenarios concerning the Year 2000 issue. These plans are being implemented on both the Information Technology (IT) areas and the non-IT areas for the transition to the 21st century. IT areas include all computer system hardware and software. Non-IT areas include systems that have embedded computer chips or microprocessors. The Awareness and Assessment phases are complete for both IT and non-IT systems. The Company is pleased to state that all mission critical systems are fully remediated, tested and implemented. Approximately 99% of the Company's non-mission critical systems are also fully remediated, tested and implemented. The remaining systems will be completed by the end of the year 1999. Many of the Company's products do not require computer systems or do not perform any data processing. These products are currently compliant. Other products have been remediated and are currently compliant. Still other products cannot be remediated because they are based on obsolete computer systems. The Company is working on a case by case basis with our customers to alleviate Year 2000 issues with these products. Although the Company's products continue to undergo normal quality testing procedures, there can be no assurance that these products will contain all necessary date code changes. Any system malfunctions due to the onset of the Year 2000 and any disputes with customers relating to Year 2000 compliance could have a material adverse effect on the Company's business, financial condition or results of operations. The Company has contacted its IT suppliers asking for Year 2000 compliance statements and status. Each vendor has responded with information necessary to ensure their products compliance. A few vendors have missed their remediation dates and the Company will be implementing their changes to IT systems by the end of 1999. None of these systems are considered mission critical. Significant non-IT suppliers to the Company were contacted to determine their compliance during the fourth quarter of 1998. This was necessary to ensure that the Company's products are not delayed due to lack of parts 10 or services. Also, embedded chips in process control equipment, lighting controls, and security systems are being inspected to assure that they will operate properly in the Year 2000. While the Company has not fully identified all the impacts of the Year 2000 issue or whether all related problems can be resolved without disrupting its business and incurring significant expense, the Company's current estimate is that the costs associated with the Year 2000 issue, and the consequences of incomplete or untimely resolution of the Year 2000 issue, will not have a material adverse effect on the Company's business, operating results or financial condition. The current estimate of the costs of remediating Year 2000 issues is $790,000. Of the $790,000 approximately $480,000 is budgeted to replace existing hardware and software and $310,000 is budgeted to fix or upgrade existing hardware or software. Of these budgets $599,000 has been spent to date. These costs are less than 10% of the normal IT budgets for the Company. These costs are being budgeted through the normal operating budgets of the Company and should not have a major impact on other IT projects or systems. The Company is currently in the process of identifying potential consequences to the Company if its IT and non-IT systems do not function properly on account of the Year 2000 issue (i.e., most reasonably likely worst case scenarios). The Company has developed a three phase contingency plan for minimizing any material impacts during the coming year due to the Year 2000 problem. The phases of this plan will only be executed if some adverse condition presents itself during the next 4 to 6 months. However, in cases beyond the control of the Company there could be some adverse effects. This would be particularly true if major infrastructure systems such as electric distribution grids or major telephone switching centers are disrupted by the Year 2000 issue. Every reasonable effort will be made to minimize these effects. The costs of the Company's Year 2000 project and dates on which the Company believes it will complete such efforts are based on management's current best estimates, which were derived using numerous assumptions regarding future events. There can be no assurances that these estimates will prove to be accurate, and therefore actual results could differ materially from those anticipated. Specific factors that could cause material differences with actual results include, but are not limited to, the results of testing and the timeliness and effectiveness of remediation efforts of third parties. 11 Contingent Matters Reference is made to Item 3. Legal Proceedings, in the Annual Report on Form 10-K for the year ended December 31, 1998 which is incorporated herein by reference except as set forth below. As indicated in the Annual Report on Form 10-K for the year ended December 31, 1998, the Company, along with numerous other parties, has been named in five tort actions in Maricopa County Superior Court relating to environmental matters based on allegations partially related to a predecessor's operation of a small facility at a site in the State of Arizona that manufactured semi-conductors between 1959 and 1960. All such operations of the Company were sold by 1961. These tort actions seek recovery for personal injury and property damage among other damages based on exposure to solvents allegedly released at the site. These suits allege that the plaintiffs have been exposed to contaminated groundwater in the Phoenix/Scottsdale, Arizona area and suffer increased risk of disease and other physical effects. They also assert property damages under various theories; seek to have certain scientific studies performed concerning health risks, preventative measures and long-term effects; and seek incidental and consequential damages, punitive damages, and an injunction against actions causing further exposures. The Company recently reached a settlement of all of these matters with the plaintiffs for, among other items, a cash payment of $4,250,000. On October 8, 1999 the Superior Court of Maricopa County gave preliminary approval to the settlement, subject to notice and a hearing for all class members. ITEM 3 - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK A portion of the Company's operations consists of manufacturing and sales activities in foreign jurisdictions, and some of these transactions are denominated in foreign currencies. As a result, the Company's financial results could be affected by changes in foreign exchange rates. To mitigate the effect of changes in these rates, the Company has entered into two foreign exchange contracts. There has been no material change in the firmly committed sales exposures and related derivative contracts from December 31, 1998. (See Item 7A - - Form 10-K for December 31, 1998.) 12 PART II - OTHER INFORMATION UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 - Financial Data Schedule (b) The Registrant did not file any reports on Form 8-K during the quarter ended September 30, 1999. 13 SIGNATURE Pursuant to the requirements 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 Date November 15, 1999 By: /s/ James H. Perry -------------------------------- James H. Perry Chief Financial Officer Vice President and Treasurer 14 UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES INDEX OF EXHIBITS FILED HEREWITH Exhibit No. Page - ----------- ---- 27 Financial Data Schedule 16 15 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS CONTAINED IN THE BODY OF THE ACCOMPANYING FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 SEP-30-1999 8,955 0 47,825 0 47,825 111,324 120,788 87,381 199,652 53,343 4,115 0 0 14,374 97,377 199,652 153,196 154,697 109,464 144,358 1,686 0 49 8,604 2,770 5,834 0 0 0 5,834 .48 .47
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