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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
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Commission file number #1-4252
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UNITED INDUSTRIAL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 95-2081809
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(State or other jurisdiction of (I.R.S. Identification No.)
incorporation or organization)
570 Lexington Avenue, New York, NY 10022
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(Address of principal executive offices)
Not Applicable
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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
<PAGE>
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
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
---- ----
<S> <C> <C>
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
======== ========
</TABLE>
See accompanying notes
1
<PAGE>
UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(Unaudited)
1999 1998 1999 1998*
---- ---- ---- ----
<S> <C> <C>
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
===== ===== ===== =====
</TABLE>
See accompanying notes
*Restated to conform with 1999 classifications
2
<PAGE>
UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
1999 1998
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
See accompanying notes
3
<PAGE>
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
<TABLE>
<CAPTION>
Trans- Reconci-
(Dollars in thousands) Defense portation Energy Other liations Totals
- ---------------------- ------- --------- ------ ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
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
<PAGE>
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
--------
</TABLE>
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
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
========== ========== ========== ==========
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES
INDEX OF EXHIBITS FILED HEREWITH
Exhibit No. Page
- ----------- ----
27 Financial Data Schedule 16
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE BODY OF THE ACCOMPANYING FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 8,955
<SECURITIES> 0
<RECEIVABLES> 47,825
<ALLOWANCES> 0
<INVENTORY> 47,825
<CURRENT-ASSETS> 111,324
<PP&E> 120,788
<DEPRECIATION> 87,381
<TOTAL-ASSETS> 199,652
<CURRENT-LIABILITIES> 53,343
<BONDS> 4,115
0
0
<COMMON> 14,374
<OTHER-SE> 97,377
<TOTAL-LIABILITY-AND-EQUITY> 199,652
<SALES> 153,196
<TOTAL-REVENUES> 154,697
<CGS> 109,464
<TOTAL-COSTS> 144,358
<OTHER-EXPENSES> 1,686
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49
<INCOME-PRETAX> 8,604
<INCOME-TAX> 2,770
<INCOME-CONTINUING> 5,834
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<NET-INCOME> 5,834
<EPS-BASIC> .48
<EPS-DILUTED> .47
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