** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

#### **FORM 10-Q**

 

**ý****                                ****QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31, 2005**

 

**or**

 

**o****                                ****TRANSITION REPORT PURSUANT TO SECTION13 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 incorporation or organization)                     |       | (I.R.S.  Employer Identification No.) |
|                                                                                |       |                                  |
| **124 Industry Lane, Hunt Valley, Maryland**                                        | ** ** | **21030**                             |
| (Address  of principal executive offices)                                           |       | (Zip  Code)                           |
|                                                                                |       |                                  |
| **(410) 628-3500**                                                                  |
| (Registrant’s telephone number, including area code)                           |
|                                                                                |       |                                  |
| **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 allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.                                                       Yesý   Noo

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).                                                           Yesý   Noo

 

# **Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date: 12,354,551 shares of common stock as of May 5, 2005.**

# ** **

# ****

 

# **UNITED INDUSTRIAL CORPORATION**

 

INDEX

 
| ** **                                                                                          | **Page**                                              |
|-----------------------------------------------------------------------------------------------------|-------------------------------------------------------|
|                                                                                                |                                                  |
| PART I - FINANCIAL INFORMATION                                                                      |                                                  |
|                                                                                                |                                                  |
| Item 1. Financial Statements                                                                        |                                                  |
|                                                                                                |                                                  |
|                                                                                                | Consolidated Condensed Balance Sheets -               |   |
|                                                                                                | March 31, 2005 and December 31, 2004                  | 2 |
|                                                                                                |                                                  |   |
|                                                                                                | Consolidated Condensed Statements of  Operations -    |   |
|                                                                                                | Three Months Ended March 31, 2005 and 2004            | 3 |
|                                                                                                |                                                  |   |
|                                                                                                | Consolidated Condensed Statements of Cash  Flows -    |   |
|                                                                                                | Three Months Ended March 31, 2005 and 2004            | 4 |
|                                                                                                |                                                  |   |
|                                                                                                | Notes to Consolidated Condensed Financial  Statements | 5 |
|                                                                                                |                                                  |   |
| Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations | 25                                                    |
|                                                                                                |                                                  |
| Item 3. Quantitative and Qualitative  Disclosures About Market Risk                                 | 35                                                    |
|                                                                                                |                                                  |
| Item 4. Controls and Procedures                                                                     | 35                                                    |
|                                                                                                |                                                  |
| PART II - OTHER INFORMATION                                                                         |                                                  |
|                                                                                                |                                                  |
| Item 1. Legal Proceedings                                                                           | 36                                                    |
|                                                                                                |                                                  |
| Item 6. Exhibits                                                                                    | 36                                                    |
|                                                                                                |                                                  |
| SIGNATURE                                                                                           | 37                                                    |

 

1

----

 

**PART I - FINANCIAL INFORMATION**

 

**Item1. - Financial Statements**

 

UNITED INDUSTRIAL CORPORATION ANDSUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

 
| **(Dollars  in thousands)**                                                                                                                                                                              | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                               | ** ** | **(Unaudited)**     | ** ** | ** **             | ** ** |
| ASSETS                                                                                                                                                                                                   |       |                |       |                   |       |
| Current assets:                                                                                                                                                                                          |       |                |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                                |       | $                   | 121,852    |                   | $          | 80,679 |   |
| Securities pledged to creditors                                                                                                                                                                          |       | —              |       | 124,626                |       |
| Deposits and restricted cash                                                                                                                                                                             |       | 4,798               |       | 33,845                 |       |
| Trade receivables, net                                                                                                                                                                                   |       | 50,497              |       | 46,658                 |       |
| Inventories                                                                                                                                                                                              |       | 25,016              |       | 34,639                 |       |
| Prepaid expenses and other current assets                                                                                                                                                                |       | 8,897               |       | 12,465                 |       |
| Assets of discontinued operations                                                                                                                                                                        |       | 12,293              |       | 13,545                 |       |
| Total current  assets                                                                                                                                                                                    |       | 223,353             |       | 346,457                |       |
| Deferred income taxes                                                                                                                                                                                    |       | 11,387              |       | 13,930                 |       |
| Other assets                                                                                                                                                                                             |       | 11,572              |       | 11,953                 |       |
| Insurance receivable - asbestos litigation                                                                                                                                                               |       | 20,343              |       | 20,343                 |       |
| Property and equipment - less accumulated  depreciation (2005 -$86,772; 2004-$85,762)                                                                                                                    |       | 33,751              |       | 27,645                 |       |
|                                                                                                                                                                                                     |       | $                   | 300,406    |                   | $          | 420,328 |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                                |       |                |       |                   |       |
| Current liabilities:                                                                                                                                                                                     |       |                |       |                   |       |
| Current portion of long-term debt                                                                                                                                                                        |       | $                   | 958        |                   | $          | 958 |   |
| Payable under securities loan agreement                                                                                                                                                                  |       | —              |       | 124,619                |       |
| Accounts payable                                                                                                                                                                                         |       | 21,363              |       | 21,664                 |       |
| Accrued employee compensation  and taxes                                                                                                                                                                 |       | 13,852              |       | 13,706                 |       |
| Other current liabilities                                                                                                                                                                                |       | 11,804              |       | 14,942                 |       |
| Liabilities of discontinued operations                                                                                                                                                                   |       | 14,527              |       | 18,566                 |       |
| Total current liabilities                                                                                                                                                                                |       | 62,504              |       | 194,455                |       |
| Long-term debt                                                                                                                                                                                           |       | 121,688             |       | 122,000                |       |
| Postretirement benefit obligation, other  than pension, and other long-term liabilities                                                                                                                  |       | 22,232              |       | 22,942                 |       |
| Minimum pension  liability                                                                                                                                                                               |       | 18,777              |       | 17,513                 |       |
| Reserve for asbestos litigation                                                                                                                                                                          |       | 31,852              |       | 31,852                 |       |
| Total liabilities                                                                                                                                                                                        |       | 257,053             |       | 388,762                |       |
| Shareholders’ equity:                                                                                                                                                                               |       |                |       |                   |       |
| Preferred stock, par value $1.00 per share;  1,000,000 shares authorized; none issued and outstanding                                                                                                    |       | —              |       | —                 |       |
| Common stock, par value $1.00 per share;  30,000,000 shares authorized; 12,327,151 and 12,291,951 shares outstanding at  March 31, 2005 and December 31, 2004, respectively (net of shares in  treasury) |       | 14,374              |       | 14,374                 |       |
| Additional capital                                                                                                                                                                                       |       | 83,964              |       | 84,296                 |       |
| Retained earnings                                                                                                                                                                                        |       | 14,938              |       | 3,499                  |       |
| Treasury stock, at cost; 2,046,997 and  2,082,197 shares at March 31, 2005 and December 31, 2004, respectively                                                                                           |       | (39,343             | )          | (40,019                | )          |
| Accumulated other comprehensive loss, net  of tax                                                                                                                                                        |       | (30,580             | )          | (30,584                | )          |
| Total shareholders’ equity                                                                                                                                                                          |       | 43,353              |       | 31,566                 |       |
|                                                                                                                                                                                                     |       | $                   | 300,406    |                   | $          | 420,328 |   |

 

See accompanying notes to the consolidated condensed financialstatements.

 

2

----

 

UNITED INDUSTRIAL CORPORATION ANDSUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Dollars in Thousands, except per shareamounts)

 
| ** **                                                                                                                                                                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                                                  | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                                  | ** ** | **(Unaudited)**                  | ** ** |
| Net sales                                                                                                                                                                                   |       | $                                | 107,548    |   | $ | 81,648 |   |
| Cost of sales                                                                                                                                                                               |       | 81,505                           |       | 64,161 |   |
|                                                                                                                                                                                        |       |                             |       |   |   |
| Gross profit                                                                                                                                                                                |       | 26,043                           |       | 17,487 |   |
| Selling and administrative expenses                                                                                                                                                         |       | 13,635                           |       | 10,228 |   |
| Asbestos litigation expense                                                                                                                                                                 |       | 90                               |       | — |   |
| Other operating expenses, net                                                                                                                                                               |       | 80                               |       | 96 |   |
|                                                                                                                                                                                        |       |                             |       |   |   |
| Operating income                                                                                                                                                                            |       | 12,238                           |       | 7,163 |   |
|                                                                                                                                                                                        |       |                             |       |   |   |
| Non-operating income and (expense):                                                                                                                                                         |       |                             |       |   |   |
| Interest income                                                                                                                                                                             |       | 1,051                            |       | 64 |   |
| Interest expense                                                                                                                                                                            |       | (1,828                           | )          | (13 | ) |
| Gain on sale of property                                                                                                                                                                    |       | 7,152                            |       | — |   |
| Other income, net                                                                                                                                                                           |       | 636                              |       | 134 |   |
|                                                                                                                                                                                        |       | 7,011                            |       | 185 |   |
| Income from continuing operations before  income taxes                                                                                                                                      |       | 19,249                           |       | 7,348 |   |
|                                                                                                                                                                                        |       |                             |       |   |   |
| Provision for income taxes                                                                                                                                                                  |       | 6,625                            |       | 2,626 |   |
|                                                                                                                                                                                        |       |                             |       |   |   |
| Income from continuing operations                                                                                                                                                           |       | 12,624                           |       | 4,722 |   |
|                                                                                                                                                                                        |       |                             |       |   |   |
| Income (loss) from discontinued operations,  net of income tax expense of $529 for the three months ended March 31, 2005  and tax benefit of $256 for the three months ended March 31, 2004 |       | 48                               |       | (475 | ) |
| Net income                                                                                                                                                                                  |       | $                                | 12,672     |   | $ | 4,247 |   |
|                                                                                                                                                                                        |       |                             |       |   |   |
| Basic earnings per share:                                                                                                                                                                   |       |                             |       |   |   |
| Income from continuing operations                                                                                                                                                           |       | $                                | 1.03       |   | $ | 0.36 |   |
| Income (loss) from discontinued operations                                                                                                                                                  |       | —                           |       | (0.03 | ) |
| Net income                                                                                                                                                                                  |       | $                                | 1.03       |   | $ | 0.33 |   |
|                                                                                                                                                                                        |       |                             |       |   |   |
| Diluted earnings per share:                                                                                                                                                                 |       |                             |       |   |   |
| Income from continuing operations                                                                                                                                                           |       | $                                | 0.84       |   | $ | 0.35 |   |
| Income (loss) from discontinued operations                                                                                                                                                  |       | —                           |       | (0.03 | ) |
| Net income                                                                                                                                                                                  |       | $                                | 0.84       |   | $ | 0.32 |   |

 

Seeaccompanying notes to the consolidated condensed financial statements.

 

3

----

 

UNITED INDUSTRIAL CORPORATION ANDSUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASHFLOWS

(Dollars inThousands)

 
| ** **                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(Unaudited)**                  | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                          |       |                             |       |   |   |
| Net income                                                                         |       | $                                | 12,672     |   | $ | 4,247 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                             |       |   |   |
| (Income) loss from discontinued operations,  net of taxes                          |       | (48                              | )          | 475 |   |
| Depreciation and amortization                                                      |       | 1,944                            |       | 1,324 |   |
| Gain on sale of property                                                           |       | (7,152                           | )          | — |   |
| Pension expense                                                                    |       | 1,265                            |       | 1,210 |   |
| Deferred income taxes                                                              |       | 2,833                            |       | (413 | ) |
| Income from equity investment in joint  venture                                    |       | (14                              | )          | (15 | ) |
| Changes in operating assets and  liabilities:                                      |       |                             |       |   |   |
| (Increase) decrease in trade receivables                                           |       | (3,839                           | )          | 2,031 |   |
| Decrease (increase) in inventories                                                 |       | 9,623                            |       | (9,031 | ) |
| Decrease (increase) in prepaid expenses and  other current assets                  |       | 3,278                            |       | (255 | ) |
| (Decrease) increase in customer advances                                           |       | (2,502                           | )          | 1,377 |   |
| (Decrease) increase in accounts payable,  accruals and other current liabilities   |       | (792                             | )          | 7,637 |   |
| Other – net                                                                   |       | (742                             | )          | (246 | ) |
| Net cash provided by operating activities  from continuing operations              |       | 16,526                           |       | 8,341 |   |
| Net cash (used in) provided by discontinued  operations                            |       | (2,738                           | )          | 584 |   |
| Net cash provided by operating activities                                          |       | 13,788                           |       | 8,925 |   |
|                                                                               |       |                             |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                          |       |                             |       |   |   |
| Purchases of property and equipment                                                |       | (7,994                           | )          | (661 | ) |
| Proceeds from sale of available-for-sale  securities                               |       | 124,619                          |       | — |   |
| Proceeds from sale of property                                                     |       | 7,555                            |       | — |   |
| Net cash provided by (used in) investing activities                                |       | 124,180                          |       | (661 | ) |
|                                                                               |       |                             |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                          |       |                             |       |   |   |
| Repayment of long-term debt                                                        |       | (334                             | )          | — |   |
| Repayment of collateral received from  securities lending transaction              |       | (124,619                         | )          | — |   |
| Decrease in deposits and restricted cash                                           |       | 29,047                           |       | — |   |
| Proceeds from exercise of stock options                                            |       | 344                              |       | 1,166 |   |
| Dividends paid                                                                     |       | (1,233                           | )          | (1,316 | ) |
| Purchase of treasury shares                                                        |       | —                           |       | (7,141 | ) |
| Net cash used in financing activities                                              |       | (96,795                          | )          | (7,291 | ) |
| Increase in cash and cash equivalents                                              |       | 41,173                           |       | 973 |   |
| Cash and cash equivalents at beginning of  year                                    |       | 80,679                           |       | 24,138 |   |
| Cash and cash equivalents at end of period                                         |       | $                                | 121,852    |   | $ | 25,111 |   |
|                                                                                    |            |                                  |            |  |  |  |  |  |  |

 

See accompanying notes to theconsolidated condensed financial statements.

 

4

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UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

**NoteA - Basis of Presentation**

 

The accompanying unaudited ConsolidatedCondensed Financial Statements of United Industrial Corporation (“United Industrial”)and its subsidiaries (collectively, the “Company”) have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and with the instructions to Form 10-Q andRule 10-01 of Regulation S-X. Accordingly, they do not include all of theinformation and notes required by accounting principles generally accepted inthe United States for complete financial statements. In the opinion ofmanagement, all adjustments (consisting of normal recurring items) considerednecessary for a fair presentation have been included. Operating results for thethree-month period ended March 31, 2005, are not necessarily indicative of theresults that may be expected for the year ending December 31, 2005. Theseunaudited Consolidated Condensed Financial Statements should be read inconjunction with the Consolidated Financial Statements and notes theretoincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2004.

 

**NoteB - Segment Information - Continuing Operations**

 

The Company has two reportablesegments: Defense and Energy. The operations of the Defense and Energy segmentsare conducted principally through two wholly-owned subsidiaries, AAICorporation and its subsidiaries (“AAI”) and Detroit Stoker Company (“DetroitStoker”), respectively. Costs related to the continuing operations that are notidentified with the two business segments are grouped under the heading Other. TheCompany has a transportation operation that is accounted for as discontinuedoperations in the accompanying Consolidated Condensed Financial Statements.

 
| **(Dollars  in thousands)**           | ** ** | **Defense** | ** ** | **Energy** | ** ** | **Other** | ** ** | **Totals** | ** ** |
|---------------------------------------|------------|-------------|------------|------------|------------|-----------|------------|------------|------------|
|                                  |       |        |       |       |       |      |       |       |       |
| Three Months Ended March 31, 2005     |       |        |       |       |       |      |       |       |       |
| Net sales                             |       | $           | 100,157    |       | $          | 7,391     |       | $          | —     |   | $ | 107,548 |   |
| Gross profit                          |       | 23,561      |       | 2,482      |       | —    |       | 26,043     |       |
| Interest income (expense), net        |       | 7           |       | 39         |       | (823      | )          | (777       | )          |
| Depreciation and amortization expense |       | 1,869       |       | 75         |       | —    |       | 1,944      |       |
| Income (loss) before income taxes     |       | 19,447      |       | 175        |       | (373      | )          | 19,249     |       |
|                                  |       |        |       |       |       |      |       |       |       |
| Three Months Ended March 31, 2004     |       |        |       |       |       |      |       |       |       |
| Net sales                             |       | $           | 74,806     |       | $          | 6,842     |       | $          | —     |   | $ | 81,648 |   |
| Gross profit                          |       | 14,825      |       | 2,662      |       | —    |       | 17,487     |       |
| Interest income (expense), net        |       | 394         |       | 11         |       | (354      | )          | 51         |       |
| Depreciation and amortization expense |       | 1,239       |       | 85         |       | —    |       | 1,324      |       |
| Income (loss) before income taxes     |       | 7,189       |       | 404        |       | (245      | )          | 7,348      |       |

 

5

----

 

##### **Note C - Earnings Per Share**

 

Basic earnings per share forall periods presented was computed by dividing net earnings for the respectiveperiod by the weighted-average number of shares of the Company’s par value$1.00 per share common stock (“Common Stock”) outstanding during the period. Dilutedearnings per share was computed by dividing (i) net earnings during the period,adjusted in 2005 to add back the after-tax interest charges incurred on theCompany’s $120,000,000 aggregate principal amount of 3.75% convertible seniornotes due September 15, 2024, unless earlier redeemed, repurchased, purchasedor converted (the “3.75% Convertible Senior Notes”), by (ii) theweighted-average number of shares of Common Stock outstanding during theperiod, adjusted to add the weighted-average number of potential dilutivecommon shares that would have been outstanding upon the assumed exercise ofstock options and conversion of the 3.75% Convertible Senior Notes for CommonStock.

 

Options to purchase 144,000shares of the Company’s Common Stock were not included in the computation ofdiluted earnings per share for the three months ended March 31, 2005 becausethe options’ exercise price was in excess of the average market price of theCommon Stock during the period and therefore would be anti-dilutive. These144,000 options, which were granted on March 4, 2005 and expire five years fromthe grant date, were outstanding at March 31, 2005.

 

Basic and diluted earnings pershare amounts were computed as follows:

 
| ** **                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| **(Dollars  in thousands, except per share data)** | ** ** | **Earnings**                     | ** ** | **Shares** | ** ** | **Per Share** | ** ** | **Earnings** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|                                               |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Basic Earnings Per Share                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Income from continuing operations                  |       | $                                | 12,624     |   | 12,316,153 |   | $ | 1.03 |   | $ | 4,722 |   | 13,136,464 |   | $ | 0.36 |   |
|                                               |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Effect of Dilutive Securities                      |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Stock Options                                      |       | —                           |       | 443,849 |   |   |   | — |   | 270,304 |   |   |   |
| 3.75% Convertible Senior Notes                     |       | 606                              |       | 3,058,356 |   |   |   |   |   | — |   |   |   |
|                                               |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Diluted Earnings Per Share                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Income from continuing operations                  |       | $                                | 13,230     |   | 15,818,358 |   | $ | 0.84 |   | $ | 4,722 |   | 13,406,768 |   | $ | 0.35 |   |

 

6

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##### **Note D - Stock-Based Compensation**

 

Foreach of the three-month periods ended March 31, 2005 and 2004, the Companyaccounted for its stock-based compensation plans in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APBNo. 25”), and its related implementation guidance, whereby compensation costfor stock options is recognized in earnings based on the excess, if any, of thequoted market price of the stock at the grant date of the award or othermeasurement date over the amount an employee must pay to acquire the stock. Hadcompensation cost been determined consistent with the fair value method setforth under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accountingfor Stock-Based Compensation” (“SFAS No. 123”), as amended by SFAS No. 148, “Accountingfor Stock-Based Compensation – Transition and Disclosure” (“SFAS No. 148”), forall awards under the plans, income and earnings per share from continuingoperations would have decreased to the pro forma amounts indicated below:

 
| ** **                                                                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **(Dollars  in thousands, except per share data)**                                                                      | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Income from continuing operations:                                                                                      |       |                              |       |   |   |
| As reported                                                                                                             |       | $                                 | 12,624     |   | $ | 4,722 |   |
| Deduct: Total employee stock-based  compensation expense determined under fair value method for all awards, net  of tax |       | (208                              | )          | (96 | ) |
| Pro forma                                                                                                               |       | $                                 | 12,416     |   | $ | 4,626 |   |
| Earnings per share from continuing  operations:                                                                         |       |                              |       |   |   |
| As reported:                                                                                                            |       |                              |       |   |   |
| Basic                                                                                                                   |       | $                                 | 1.03       |   | $ | 0.36 |   |
| Diluted                                                                                                                 |       | 0.84                              |       | 0.35 |   |
| Pro forma:                                                                                                              |       |                              |       |   |   |
| Basic                                                                                                                   |       | $                                 | 1.01       |   | $ | 0.35 |   |
| Diluted                                                                                                                 |       | 0.79                              |       | 0.34 |   |

 

OnDecember 16, 2004, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), whichreplaced SFAS No. 123 and superseded SFAS No. 148 and APB No. 25 and itsrelated implementation guidance. SFAS No. 123R requires entities to recognizein their financial statements the cost of employee services received inexchange for awards of equity instruments based on the grant-date fair value ofthose awards (with limited exceptions). SFAS No. 123R is effective for theCompany as of the interim period that begins January 1, 2006.

 

7

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##### **Note E - Supplemental Balance Sheet and CashFlow Information**

 

Inventories consisted of thefollowing components:

 
| **(Dollars  in thousands)**        | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------|------------|---------------------|------------|------------------------|------------|
| Finished goods and work-in-process |       | $                   | 23,836     |                   | $          | 33,384 |   |
| Materials and supplies             |       | 1,180               |       | 1,255                  |       |
| Total inventories                  |       | $                   | 25,016     |                   | $          | 34,639 |   |

 

Other assets consisted of thefollowing components:

 
| **(Dollars  in thousands)** | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------|------------|---------------------|------------|------------------------|------------|
| Intangibles, net            |       | $                   | 4,005      |                   | $          | 4,060 |   |
| Debt issuance costs, net    |       | 4,375               |       | 4,620                  |       |
| Investment in affiliate     |       | 1,630               |       | 1,616                  |       |
| Other                       |       | 1,562               |       | 1,657                  |       |
| Total other assets          |       | $                   | 11,572     |                   | $          | 11,953 |   |

 

Other current liabilitiesconsisted of the following components:

 
| **(Dollars  in thousands)**     | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------|------------|---------------------|------------|------------------------|------------|
| Customer advances               |       | $                   | 3,074      |                   | $          | 5,576 |   |
| Reserve for contract losses     |       | 1,645               |       | 1,680                  |       |
| Accrued interest expense        |       | 224                 |       | 1,364                  |       |
| Other accrued costs             |       | 2,702               |       | 2,864                  |       |
| Other                           |       | 4,159               |       | 3,458                  |       |
| Total other current liabilities |       | $                   | 11,804     |                   | $          | 14,942 |   |

 

Nocash was paid for Federal income taxes during the three months ended March 31,2005 and 2004. Cash paid for interest during the three months ended March 31,2005 and 2004 was $2,268,000 and $13,000, respectively.

 

##### **Note F – Secured Borrowing**

 

On December 29, 2004, theCompany purchased $125,000,000 aggregate principal amount at maturity of U.S.treasury bills for $124,619,000, which matured on February 24, 2005. TheCompany classified this investment as available-for-sale, which required it tobe reported at estimated fair value, with unrealized gains and losses, net oftax, reported as a separate component of Accumulated Other Comprehensive Lossin Shareholders’ Equity until realized. Concurrently with the purchase of theU.S. treasury bills on December 29, 2004, the Company entered into a securitieslending transaction with its broker-dealer, which matured on February 23, 2005and was accounted for as a secured borrowing. In exchange for lending the U.S.treasury bills to its broker-dealer, the Company received cash collateral fromits broker-dealer in an amount equal to 100% of the fair value of thesecurities loaned, net of a $25,000,000 refundable deposit that remained at itsbroker-dealer in a segregated, interest-bearing account. At maturity onFebruary 23, 2005, the Company repaid the cash collateral received, togetherwith approximately $444,000 of related interest charges. Also at maturity, theCompany collected its $25,000,000 refundable deposit, together withapproximately $86,000 of related interest income earned. During the firstquarter of 2005, the Company realized a $7,500 loss on this investment, andreceived approximately $373,000 of interest income.

 

8

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**NoteG - Pension and Other Postretirement Benefits**

 

Thefollowing table provides the components of net periodic pension and otherpostretirement benefits cost for each of the three months ended March 31, 2005and 2004:

 
| ** **                            | ** ** | **Pension Benefits  Three Months Ended  March 31,** | ** ** | **Other Postretirement  Benefits  Three Months Ended  March 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| **(Dollars  in thousands)**           | ** ** | **2005**                                            | ** ** | **2004**                                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                  |       |                                                |       |                                                              |       |   |   |   |   |
| Service cost                          |       | $                                                   | 809        |                                                              | $          | 749 |   | $ | 48 |   | $ | 45 |   |
| Interest cost                         |       | 2,579                                               |       | 2,572                                                             |       | 297 |   | 313 |   |
| Expected return on plan assets        |       | (3,209                                              | )          | (3,157                                                            | )          | — |   | — |   |
| Net amortization and deferral:        |       |                                                |       |                                                              |       |   |   |   |   |
| Amortization of prior service cost    |       | 69                                                  |       | 45                                                                |       | (5 | ) | (10 | ) |
| Amortization of actuarial loss (gain) |       | 1,054                                               |       | 841                                                               |       | 3 |   | (20 | ) |
|                                  |       |                                                |       |                                                              |       |   |   |   |   |
| Net periodic pension benefit cost     |       | $                                                   | 1,302      |                                                              | $          | 1,050 |   | $ | 343 |   | $ | 328 |   |

 

The following table providesthe Company’s contributions to and benefits paid under pension and otherpostretirement benefit plans:

 
| ** **                                                                 | ** ** | **Pension Benefits  Three Months Ended  March 31,** | ** ** | **Other Postretirement  Benefits  Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| **(Dollars  in thousands)**                                                | ** ** | **2005**                                            | ** ** | **2004**                                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                       |       |                                                |       |                                                              |       |   |   |   |   |
| Expected fiscal year contributions reported  at the end of the prior year: |       |                                                |       |                                                              |       |   |   |   |   |
| Employer                                                                   |       | $                                                   | 244        |                                                              | $          | 259 |   | $ | 3,007 |   | $ | 2,572 |   |
| Employee                                                                   |       | —                                              |       | —                                                            |       | — |   | 172 |   |
|                                                                       |       | 244                                                 |       | 259                                                               |       | 3,007 |   | 2,744 |   |
|                                                                       |       |                                                |       |                                                              |       |   |   |   |   |
| Actual contributions made in the current  year                             |       | 37                                                  |       | —                                                            |       | 838 |   | 686 |   |
| Remaining contributions expected to be made  in the current year           |       | 207                                                 |       | 259                                                               |       | 2,255 |   | 2,058 |   |
| Total expected current year contributions                                  |       | 244                                                 |       | 259                                                               |       | 3,093 |   | 2,744 |   |
| Difference from expectations at end of the  prior year                     |       | $                                                   | —     |                                                              | $          | — |   | $ | 86 |   | $ | — |   |

 

EffectiveJuly 1, 2004, the Company adopted FSP No. FAS 106-2 and includes the effects ofthe Medicare Act of 2003 in its measurement of net periodic postretirementbenefit cost and accumulated postretirement benefit obligations (“APBO”).

 

9

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**NoteH - Other Operating Expenses, Net and Other Non-Operating Income, Net**

 
| ** **                                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **(Dollars  in thousands)**                                                       | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| OTHER OPERATING EXPENSES, NET                                                     |       |                              |       |   |   |
|                                                                              |       |                              |       |   |   |
| Amortization of intangibles                                                       |       | $                                 | 55         |   | $ | 55 |   |
| Amortization of facility consolidation  costs                                     |       | 42                                |       | 73 |   |
| Amortization of deferred compensation  liability                                  |       | (16                               | )          | (32 | ) |
| Other income, net                                                                 |       | (1                                | )          | — |   |
| Total other operating expenses, net                                               |       | $                                 | 80         |   | $ | 96 |   |
|                                                                              |       |                              |       |   |   |
| OTHER NON-OPERATING INCOME, NET                                                   |       |                              |       |   |   |
|                                                                              |       |                              |       |   |   |
| Royalties and commissions                                                         |       | $                                 | 18         |   | $ | 37 |   |
| Rental income                                                                     |       | 14                                |       | 14 |   |
| Gain from change in fair value of embedded  derivatives underlying long-term debt |       | 438                               |       | — |   |
| Other income, net                                                                 |       | 166                               |       | 83 |   |
| Total other income, net                                                           |       | $                                 | 636        |   | $ | 134 |   |

 

**NoteI - Comprehensive Income**

 

The following table sets forththe components of other comprehensive income and total comprehensive income:

 
| ** **                                                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(Dollars  in thousands)**                                                                | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                                                                                 | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income                                                                                 |       | $                                | 12,672     |   | $ | 4,247 |   |
|                                                                                       |       |                             |       |   |   |
| Other comprehensive income:                                                                |       |                             |       |   |   |
| Reclassify unrealized loss on  available-for-sale securities to earnings, net of tax of $3 |       | 4                                |       | — |   |
| Total comprehensive income                                                                 |       | $                                | 12,676     |   | $ | 4,247 |   |

 

10

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**NoteJ - Discontinued Operations**

 

Assets and liabilities of thediscontinued transportation operations, which have been reclassified andsummarized in the accompanying Consolidated Condensed Balance Sheets as Assetsand Liabilities of discontinued operations, respectively, were as follows:

 
| **(Dollars  in thousands)**               | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------|------------|---------------------|------------|------------------------|------------|
| Current assets:                           |       |                |       |                   |       |
| Trade receivables from affiliate          |       | $                   | 39,322     |                   | $          | 39,322 |   |
| Less allowances                           |       | (39,322             | )          | (39,322                | )          |
| Prepaid expenses and other current assets |       | 51                  |       | 51                     |       |
| Deferred taxes                            |       | 12,242              |       | 13,494                 |       |
| Other receivables from affiliate          |       | 13,347              |       | 11,278                 |       |
| Less allowances                           |       | (13,347             | )          | (11,278                | )          |
| Total current assets                      |       | $                   | 12,293     |                   | $          | 13,545 |   |
|                                      |       |                |       |                   |       |
| Current liabilities:                      |       |                |       |                   |       |
| Accounts payable                          |       | $                   | 353        |                   | $          | 937 |   |
| Accrued employee compensation and taxes   |       | 126                 |       | 164                    |       |
| Other current liabilities                 |       | 11,270              |       | 11,270                 |       |
| Accrual for contract losses               |       | 2,762               |       | 6,164                  |       |
| Other                                     |       | 16                  |       | 31                     |       |
| Total current liabilities                 |       | $                   | 14,527     |                   | $          | 18,566 |   |

 

Summaryresults of the transportation operations, which have been classified separatelyas discontinued operations, were as follows:

 
| ** **                                                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **(Dollars  in thousands)**                                                     | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Revenue                                                                         |       | $                                 | —     |   | $ | — |   |
|                                                                            |       |                              |       |   |   |
| Income (loss) before income taxes                                               |       | $                                 | 577        |   | $ | (731 | ) |
| Provision for (benefit from) income taxes                                       |       | 529                               |       | (256 | ) |
|                                                                            |       |                              |       |   |   |
| Income (loss) from discontinued  transportation operations, net of income taxes |       | $                                 | 48         |   | $ | (475 | ) |

 
| ** **                                                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **(Dollars  in thousands)**                                            | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Net cash (used in) provided by discontinued  operations:               |       |                              |       |   |   |
| Net income (loss)                                                      |       | $                                 | 48         |   | $ | (475 | ) |
| Changes in operating assets and liabilities                            |       | (622                              | )          | (40 | ) |
| Deferred income taxes                                                  |       | 1,253                             |       | — |   |
| (Decrease) increase in accrual for contract  losses and other          |       | (3,417                            | )          | 1,099 |   |
| Net cash (used in) provided by discontinued  transportation operations |       | $                                 | (2,738     | ) | $ | 584 |   |

 

11

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**Note K - Commitments and Contingencies**

 

Inthe normal course of its continuing and discontinued business, variouslawsuits, claims and procedures have been or may be instituted or assertedagainst or by the Company. Based on currently available facts, the Companybelieves, except as otherwise set forth below, that the disposition of matterspending or asserted against the Company will not have a material adverse effecton the Company’s financial position, results of operations or liquidity.

 

ASBESTOS

 

History

 

United Industrial and DetroitStoker Company (“Detroit Stoker”), a wholly-owned subsidiary of UnitedIndustrial, have been named as defendants in asbestos-related personal injurylitigation. Neither United Industrial nor Detroit Stoker fabricated, milled,mined, manufactured or marketed asbestos, and neither United Industrial norDetroit Stoker made or sold insulation products or other construction materialsthat have been identified as the primary cause of asbestos-related disease inthe vast majority of claimants. Rather, United Industrial and Detroit Stokermade several products, some of the parts and components of which usedasbestos-containing material fabricated and provided by third parties. The useof asbestos-containing materials ceased in approximately 1981.

 

Cases involving UnitedIndustrial and Detroit Stoker typically name 80 to 120 defendants, althoughsome cases have as few as 6 and as many as 250 defendants. As of this date,United Industrial and Detroit Stoker have not gone to trial with respect to anyasbestos-related personal injury claims, although there is no assurance that trialsmay not occur in the future. Accordingly, as of this date, neither UnitedIndustrial nor Detroit Stoker have been required to pay any punitive damageawards, although there can be no assurance this might not occur in the future.In addition, as of this date, some previously pending claims have been settledor dismissed (with or without prejudice). There is no assurance, however, thatdismissals and settlements will occur at the same rate, if at all, or thatclaims that have been dismissed without prejudice will not be refiled.

 

Defenses

 

Management continues to believethat a majority of the claimants in pending cases will not be able todemonstrate that they have been exposed to United Industrial’s or DetroitStoker’s asbestos-containing products or suffered any compensable loss as aresult of any such exposure. This belief is based in large part on two factors:the limited number of asbestos-containing products and betterments sold byUnited Industrial and Detroit Stoker and United Industrial’s and Detroit Stoker’saccess to sales, service, and other historical business records going back over100 years, which allow United Industrial and Detroit Stoker to determine towhom products were sold, the date of sale, the installation site and, in someinstances, the date products were removed from service. In addition, because ofthe limited and restricted placement of the asbestos-containing products, evenat sites where a claimant can verify his or her presence during the same periodthose products were installed, liability cannot be presumed because, even if anindividual contracted an asbestos-related disease, not everyone who wasemployed at a site was exposed to United Industrial’s or Detroit Stoker’sasbestos-containing products.

 

These factors have allowedUnited Industrial and Detroit Stoker to effectively manage theirasbestos-related claims.

 

Settlements

 

To date, settlements of claimsagainst United Industrial and/or Detroit Stoker have been made without anyadmission of liability by United Industrial and/or Detroit Stoker. Settlementamounts may vary depending upon a number of factors, including the jurisdictionwhere the action was brought, the nature and extent of the disease alleged andthe associated medical evidence, the age and occupation of the claimant, theexistence or absence of other possible causes of the claimant’s allegedillness, and the availability of legal defenses, as well as whether the actionis brought alone or as part of a group of claimants. Before paying anysettlement amount, United Industrial and/or Detroit Stoker require proof ofexposure to their asbestos-containing products and proof of injury to theplaintiff. In addition, the claimant is required to execute a full andunconditional release of United Industrial, Detroit Stoker and associatedparties, from any liability for asbestos-related injuries or claims.

 

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InsuranceCoverage

 

The insurance coveragepotentially available to United Industrial and Detroit Stoker is substantial.Following the institution of asbestos litigation, an effort was made toidentify all of United Industrial’s and Detroit Stoker’s primary and excessinsurance carriers from 1940 through 1990. There were approximately 40 suchcarriers, all of which were put on notice of the litigation. In November of1999, a Participation Agreement was entered into among United Industrial,Detroit Stoker and their primary insurance carriers. The ParticipationAgreement is an advance understanding that supplements all of the contracts ofinsurance, without altering the coverage of those contracts, that creates anadministrative framework within which the insurers and United Industrial andDetroit Stoker can more efficiently and effectively manage the large quantityof on-going litigation.

 

Any party may terminate theParticipation Agreement, without cause, by giving the other parties 60 daysprior written notice. Termination of the Participation Agreement does notaffect any rights or obligations of the parties that have accrued under theParticipation Agreement on or before the effective date of the termination, nordoes it affect any rights outside of the Participation Agreement.

 

Although the carriers can optout of the Participation Agreement on 60 days notice, management does notbelieve that this will occur in the immediate or near term. For example, unlessa carrier professes to have met the limits of its liability, it would have toconsider the potentially greater costs of permitting United Industrial andDetroit Stoker to handle their own cases. Further, opting out of theParticipation Agreement does not exculpate liability on the part of thecarrier.

 

United Industrial’s counselretained a consulting firm with expertise in the field of evaluating insurancecoverage and the likelihood of recovery for claims, such as costs incurred inconnection with asbestos-related injury claims. In 2002, that firm worked withUnited Industrial to project the insurance coverage of United Industrial andDetroit Stoker for asbestos-related claims. The insurance consultant’sconclusions were based primarily on a review of United Industrial’s and DetroitStoker’s coverage history, application of reasonable assumptions on theallocation of coverage consistent with industry standards, an assessment of thecreditworthiness of the insurance carriers, and the experience of and a reviewof the report of the asbestos consultant described below. The insuranceconsultant also considered the Participation Agreement.

 

Based on the assumptions employedby and the report prepared by the insurance consultant, other variables, andthe report prepared by the asbestos consultant, which is discussed below, theCompany recorded an estimated insurance recovery as of December 31, 2002, of$20,343,000 reflecting the estimate determined to be probable of beingavailable to mitigate United Industrial’s and Detroit Stoker’s potentialasbestos liability through 2012. The Company continuously evaluates thisinsurance receivable and believes it is appropriately valued at March 31, 2005.

 

QuantitativeClaims Information

 

As of March 31, 2005, UnitedIndustrial and/or Detroit Stoker were named in asbestos litigation pending inArkansas, California, Illinois, Louisiana, Michigan, Minnesota, Mississippi,New York and North Dakota. As of March 31, 2005, there were approximately19,447 pending claims, compared to approximately 21,123 pending claims as ofDecember 31, 2004 and approximately 20,313 pending claims as of March 31, 2004.During 2004, Detroit Stoker was named as a defendant in two cases in Arkansasalleging personal injuries to one and approximately 199 plaintiffs,respectively, as a result of silica and/or refractory ceramic fiber exposure inaddition to asbestos exposure. The pleadings in these two cases name approximately32 and 68 defendants, respectively, and include no allegations specific toDetroit Stoker. Because claims are often filed and disposed of by dismissal orsettlement in large numbers, the amount and timing of settlements and thenumber of open claims during a particular period can fluctuate from period toperiod. In addition, most of these lawsuits do not include specific dollarclaims for damages, and many include a number of plaintiffs and multipledefendants. Therefore, the Company cannot provide any meaningful disclosureabout the total amount of the damages sought. In addition, the directasbestos-related expenses of United Industrial and Detroit Stoker for defenseand indemnity for the past five years were not material.

 

A significant increase in thevolume of asbestos-related bodily injury cases arose in Mississippi beginningin 2002 and extended through mid-year 2003. This peak in the volume of claimsin Mississippi was apparently due to the passage of tort reform legislation(applicable to asbestos-related injuries), which became effective at the end of2002 and which resulted in a large number of claims being filed in Mississippiby plaintiffs seeking to ensure their claims would be governed by the law ineffect prior to the passage of tort reform.

 

13

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In 2002, United Industrial’scounsel engaged a consulting firm with expertise in the field of evaluatingasbestos bodily-injury claims to assist United Industrial in projecting thefuture asbestos-related liabilities and defense costs of United Industrial andDetroit Stoker. The methodology used by this asbestos consultant to projectfuture asbestos-related costs is based primarily on estimates of the laborforce exposed to asbestos in United Industrial’s and Detroit Stoker’s products,epidemiological modeling of asbestos-related disease manifestation, andestimates of claim filings and settlement and defense costs that may occur inthe future. Using this information, the asbestos consultant estimated thenumber of future claims that would be filed, as well as the related costs thatwould be incurred in resolving those claims. United Industrial’s and DetroitStoker’s claims history prior to 2002 was not a significant variable indeveloping the estimates because such history was not significant as comparedto the number of claims filed in 2002.

 

Projecting future asbestoscosts is subject to numerous variables that are extremely difficult to predict.In addition to the significant uncertainties surrounding the number of claimsthat might be received, other variables include the type and severity of thedisease alleged by each claimant, the long latency period associated withasbestos exposure, dismissal rates, costs of medical treatment, the impact of bankruptciesof other companies that are co-defendants in claims, uncertainties surroundingthe 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 toeven greater uncertainty as the projection period lengthens. In light of theseinherent uncertainties, United Industrial’s and Detroit Stoker’s limited claimshistory prior to 2002 and consultation with the asbestos and insuranceconsultants, the Company believes that ten years is the most reasonable periodfor recognizing a reserve for future costs, and that costs that might beincurred after that period were not reasonably estimable. As a result, theCompany also believes that its ultimate net asbestos-related contingentliability (i.e. its indemnity or other claim disposition costs plus relatedlegal fees less insurance recoveries) cannot be estimated with certainty.

 

Based on the assumptionsemployed by and the report prepared by the asbestos consultant and othervariables, the Company recorded an undiscounted liability for its best estimateof bodily injury liabilities for asbestos-related matters in the amount of$31,852,000 as of December 31, 2002, including damages and defense costs.

 

Given the inherent uncertaintyin making future projections and that United Industrial and Detroit Stokerperiodically receive potentially material new information from claimants andtheir counsel that relates to the factual basis of their asserted andunasserted claims, United Industrial plans, on a periodic basis, to have either(1) the key assumptions used in projecting the future asbestos-relatedliabilities and defense costs of United Industrial and Detroit Stoker validatedor (2) the projections of current and future asbestos claims re-examined, andUnited Industrial will update them if needed based on the experience of UnitedIndustrial and Detroit Stoker and other relevant factors, such as changes in thetort system and the resolution of bankruptcies of various asbestos defendants.

 

In connection with thepreparation of its annual report on Form 10-K for the year ended December 31,2004, United Industrial provided the asbestos consulting firm with updatedinformation regarding asbestos cases filed against United Industrial and/orDetroit Stoker, and asked the consulting firm to perform a validation of its2002 report. In particular, the consulting firm was asked if it would use thesame methodology to calculate future asbestos liability and if the assumptionsused in 2002 are still valid. The consulting firm reported that nothing hadcome to their attention in the intervening period that would call into questionthe central assumptions underlying the report, or the report’s ten-yearestimate of United Industrial’s and Detroit Stoker’s future potentialliability.

 

The Company’s asbestosliability was $31,852,000 and $31,541,000 at March 31, 2005 and 2004,respectively, and its insurance receivables for asbestos-related liabilitieswere $20,343,000 and $20,317,000 at March 31, 2005 and 2004, respectively. Thesefigures reflect the Company’s policy to maintain a ten-year estimate of futureliability, the period in which such costs are deemed to be reasonably estimable.

 

In light of the asbestosconsultant’s reports and based upon the facts as now known, including thereasonable possibility that claims will be received and paid over the next 50year period, the Company believes that although asbestos claims could have amaterial adverse effect on the Company’s financial condition or results ofoperations in a particular reporting period, asbestos claims should not have amaterial adverse effect on the Company’s long term financial condition,liquidity or results of operations. No assurances can be given, however, as tothe actual amount of United Industrial’s and Detroit Stoker’s liability forsuch present and future claims or the amount of insurance recoveries (includingany recoveries from liquidating excess insurance carriers), and the differencesfrom estimated amounts could be material.

 

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ReformLegislation

 

The outlook for federallegislation to provide national asbestos litigation reform continues to be uncertain.Also uncertain is whether, and to what extent, United Industrial and DetroitStoker would be required to make contributions to a prospective nationalasbestos trust pursuant to such legislation. No assurances can be given that aproposed trust or any other asbestos legislation will ultimately become law, orwhen such action might occur.

 

STATE OF ARIZONA DEPARTMENT OFENVIRONMENTAL QUALITY V. UIC, ET AL.

 

On May 19, 1993, UnitedIndustrial was named as one of three defendants in a civil action broughtpursuant to the Comprehensive Environmental Response Compensation and LiabilityAct (“CERCLA”) by the Arizona Department of Environmental Quality (“ADEQ”) inthe United States District Court for the District of Arizona. ADEQ soughtremediation of a manufacturing site in the State of Arizona operated by U.S.Semiconductor Products, Inc. (“U.S. Semiconductor”), a manufacturer ofsemiconductors formerly owned by United Industrial. ADEQ alleged that from 1959until United Industrial sold U.S. Semiconductor in 1961, U.S. Semiconductordisposed of tricholoroethylene, a “hazardous substance,” and other hazardoussubstances under CERCLA, onto the ground and into various pits and drainslocated on the site.

 

In 1996, United Industrialentered into a consent decree with ADEQ. Pursuant to the consent decree, UnitedIndustrial 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 responsecosts plus a graduated percentage of the cleanup costs for the site if thosecosts are in excess of $10,000,000 but less than $40,000,000. United Industrial’sliability for future response costs under the consent decree is capped at$1,780,000 in addition to the $125,000 that United Industrial has already paid.In connection with the RI/FS, United Industrial has retained a consultant at anaverage annual cost of approximately $200,000. The Remedial Investigation wassubmitted to ADEQ for approval on March 31, 2004 and was approved by ADEQ onAugust 9, 2004. United Industrial expects to submit the Feasibility Studysometime in July of 2005. Management believes that it will reach closure withADEQ on all RI/FS issues on an acceptable basis to United Industrial followingapproval of the Feasibility Study. No assurances can be given, however, as tothe actual extent to which United Industrial may be determined to have furtherliability, if at all.

 

MICHIGAN DEPARTMENT OF NATURALRESOURCES

 

DetroitStoker was notified in March 1992 by the Michigan Department of NaturalResources (“MDNR”) that it is a potentially responsible party in connectionwith the cleanup of a former industrial landfill located in Port of Monroe,Michigan. MDNR is treating the Port of Monroe landfill site as a contaminatedfacility within the meaning of the Michigan Environmental Response Act (“MERA”).Under MERA, if a release or potential release of a discarded hazardoussubstance is or may be injurious to the environment or to the public health,safety or welfare, MDNR is empowered to undertake or compel investigation andresponse activities in order to alleviate any contamination threat. Managementbelieves Detroit Stoker would be considered a de minimis potentiallyresponsible party and does not believe that the resolution of this matter willhave a materially adverse effect on United Industrial’s or Detroit Stoker’sfinancial condition or results of operations. Detroit Stoker intends toaggressively defend these claims. No assurances can be given, however, as tothe actual extent to which Detroit Stoker may be determined to be liable, if atall.

 

OTHER LEGAL MATTERS

 

Departments and agencies of theU.S. Government have the authority at many levels to investigate transactionsand operations of the Company, and the results of such investigations may leadto administrative, civil, or criminal proceedings, the ultimate outcome ofwhich could be fines, penalties, repayments or compensatory or treble damages.Agencies that oversee contract performance include: the Defense Contract AuditAgency, the Department of Defense Inspector General, the General AccountingOffice, the Department of Justice, the Department of State, and CongressionalCommittees. U.S. Government regulations provide that certain findings against acontractor may lead to suspension or debarment from future U.S. Governmentcontracts or the loss of export privileges for a company or an operatingdivision or subdivision.

 

The Company has in place internationaland domestic compliance policies and procedures, including training ofemployees.

 

15

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From time to time, the Companyreceives allegations of improper conduct relating to its operations, includingoperations subject to the U.S. Foreign Corrupt Practices Act and similar U.S.domestic and international laws. When the Company receives any suchallegations, it conducts internal (and if necessary, external) investigationsto determine whether there is support for any such allegations. Aninvestigation is ongoing in response to allegations provided to Companymanagement of improper payments directly and indirectly to foreign governmentofficials. External counsel has been retained by the Audit Committee of theCompany’s Board of Directors to determine if there is support for any suchallegations, and to review the Company’s compliance policies and procedures,and the Company is cooperating fully with counsel. In addition, appropriategovernment agencies have been advised of this investigation. The investigationby external counsel, which is continuing, has thus far not revealed any priorinvolvement or knowledge regarding the allegations by any officer or directorof United Industrial. At the current stage of this investigation, any ultimateliability is not presently determinable.

 

PERFORMANCE GUARANTEES

 

In connection with certaincontracts, United Industrial’s operating subsidiaries committed to certainperformance guarantees at March 31, 2005. The ability to perform under theseguarantees may, in part, be dependent on the performance of other parties,including partners and subcontractors. If United Industrial’s operatingsubsidiaries are unable to meet these performance obligations, the performanceguarantees could have a material adverse effect on profit margins and theCompany’s results of operations, liquidity or financial position. UnitedIndustrial’s operating subsidiaries monitor the progress of their partners andsubcontractors, and United Industrial and its operating subsidiaries do notbelieve that the performance of these partners and subcontractors willadversely affect these contracts as of March 31, 2005. No assurances can begiven, however, as to the liability of United Industrial’s operating subsidiariesif partners or subcontractors are unable to perform their obligations.

 

DISCONTINUED TRANSPORTATIONOPERATION

 

## MUNI Contract

##  

In connection with thediscontinued Transportation operations, AAI owns 35% of Electric Transit, Inc.(“ETI”). Skoda a.s. (“Skoda”), a Czech company, owns the remaining 65% of ETI. ETI’sone remaining production contract with the San Francisco Municipal Railway (“MUNI”)involves the design and manufacture of 273 electric trolley buses (“ETBs”). Inexecuting its contract with MUNI, ETI entered into subcontracts with AAI,certain Skoda operating affiliates and others. Both AAI and the Skoda operatingaffiliates have completed their delivery requirements and the Skoda operatingaffiliates are now subject to warranty requirements.

 

The ability of ETI to satisfyits remaining obligations is, in part, dependent on the performance of otherparties, including AAI, the Skoda operating affiliates and othersubcontractors. Thus, the ability to timely perform under the MUNI contract is,to a significant extent, outside of ETI’s control. Skoda’s operating affiliateshave continued to deliver products and services under their subcontracts withETI through March 2005. Following Skoda’s bankruptcy declaration in 2001 in theCzech Republic, effective as of 2002, AAI began recording 100%, instead of 35%,of ETI’s losses and income in accordance with the equity method accountingapplicable to minority shareholders. Although AAI has completed performance onits subcontract with ETI on the MUNI contract, AAI has continued to provide ETIwith personnel and other financial support in order to enable ETI to satisfycertain of its remaining commitments to MUNI.

 

As of April 22, 2004, ETI andMUNI finalized an agreement to modify the original MUNI contract (“ModificationNo. 6”) under which MUNI relieved ETI of its warranty, performance and certainrelated bonding obligations, as well as other obligations under its ETBcontract with MUNI, except for the performance of a defined scope of workrelated to modifications of ETB hardware.

 

In conjunction withModification No. 6, AAI executed a guaranty agreement with MUNI as of April 22,2004 (the “Guaranty Agreement” and, together with Modification No. 6, the “2004Agreements”) that assures performance of certain of ETI’s obligations underModification No. 6. In conjunction with the Guaranty Agreement, AAI obtained arelease from its subcontractor warranty and all further obligations under itssubcontract with ETI in exchange for a cash payment to MUNI of $500,000 andother consideration. The Company believes that it has adequately provided forits obligations under the 2004 Agreements in its existing loss reserves. Noassurances can be given, however, as to the actual amount of AAI’s liability toexit the discontinued Transportation operations.

 

16

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As required by MUNI, ETIobtained a surety bond to guarantee payment to all those providing labor,materials, provisions or other supplies to ETI in furtherance of itsperformance under the MUNI contract. AAI agreed to indemnify the surety, ifnecessary, for up to $14,800,000, representing 35% of the original face valueof the labor and materials bond (in proportion to AAI’s equity interest inETI). On November 18, 2003, AAI provided the surety with notice of its claim onthe labor and materials bond for unpaid receivables in connection with AAI’s MUNIsubcontract from ETI, totaling in excess of $47,000,000, the maximum penal sumof the labor and materials bond. AAI’s payment rights under the labor andmaterials bond (among other claims) are currently at issue in a case before theFederal court in the Northern District of California. Prior to finaladjudication of this case, there can be no assurances as to the amount or timingof a recovery by AAI, if any, on its claim on the labor and materials bond.

 

##### **Note L - Dividends**

#####  

OnMarch 10, 2005, the Company’s Board of Directors declared a dividend of $0.10per share to shareholders of record on the close of business on March 21, 2005,which was paid on March 31, 2005.

 

**NoteM – Issuer Purchases of Equity Securities**

 

In November 2003, the Board ofDirectors of the Company authorized the purchase of up to $10,000,000 of theCompany’s Common Stock. On March 10, 2004, the Company’s Board of Directorsextended the plan for one additional year through March 15, 2005, andauthorized the purchase of up to an additional $10,000,000 of Common Stock. Frominception of this plan in November 2003 to its expiration on March 15, 2005,the Company had purchased a total of 917,700 shares for $16,522,000, or anaverage of $18.00 per share. The remaining $3,478,000 was not used and expiredon March 15, 2005.

 

On March 10, 2005, the Company’sBoard of Directors authorized a new stock purchase plan for up to $25,000,000. Theexact number of shares to be purchased under the new plan will depend on marketconditions. The Company did not purchase any of its equity securities duringthe three months ended March 31, 2005, and $25,000,000 was available under thesubject authorization for future purchases at March 31, 2005.

 

17

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**NoteN - Restructuring Charges**

 
| **(Dollars  in thousands)**          | ** ** | **Severance** | ** ** | **Employee  Relocation** | ** ** | **Facility  Relocation** | ** ** | **Facility  Closing  Costs** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|---------------|------------|--------------------------|------------|--------------------------|------------|------------------------------|------------|-----------|------------|
|                                 |       |          |       |                     |       |                     |       |                         |       |      |       |
| **Defense segment**                  |       |          |       |                     |       |                     |       |                         |       |      |       |
| Reserve balance at December 31, 2004 |       | $             | 160        |                     | $          | 169                      |       | $                            | 74         |      | $          | — |   | $ | 403 |   |
|                                 |       |          |       |                     |       |                     |       |                         |       |      |       |
| Restructuring charges                |       | 25            |       | 305                      |       | —                   |       | —                       |       | 330       |       |
|                                 |       |          |       |                     |       |                     |       |                         |       |      |       |
| Payments                             |       | (113          | )          | (472                     | )          | (52                      | )          | —                       |       | (637      | )          |
|                                 |       |          |       |                     |       |                     |       |                         |       |      |       |
| Reserve balance at March 31, 2005    |       | $             | 72         |                     | $          | 2                        |       | $                            | 22         |      | $          | — |   | $ | 96 |   |
|                                 |       |          |       |                     |       |                     |       |                         |       |      |       |
| **Energy segment**                   |       |          |       |                     |       |                     |       |                         |       |      |       |
| Reserve balance at December 31, 2004 |       | $             | —     |                     | $          | —                   |       | $                            | —     |      | $          | — |   | $ | — |   |
|                                 |       |          |       |                     |       |                     |       |                         |       |      |       |
| Restructuring charges                |       | 44            |       | —                   |       | 37                       |       | —                       |       | 81        |       |
|                                 |       |          |       |                     |       |                     |       |                         |       |      |       |
| Payments                             |       | (44           | )          | —                   |       | (37                      | )          | —                       |       | (81       | )          |
|                                 |       |          |       |                     |       |                     |       |                         |       |      |       |
| Reserve balance at March 31, 2005    |       | $             | —     |                     | $          | —                   |       | $                            | —     |      | $          | — |   | $ | — |   |

 

**NoteO - Subsequent Event**

 

OnApril 4, 2005, the Company acquired ESL Defence Limited (“ESL”), an electronicwarfare systems company based in the United Kingdom. The purchase price wasapproximately $10,000,000 in cash. ESL is a world market leader in the designand production of electro-optic test and simulation products for use on flightlines and in aircraft maintenance facilities.

 

**NoteP - Supplemental Guarantor Information**

 

InSeptember 2004, United Industrial issued and sold $120,000,000 aggregateprincipal amount of 3.75% Convertible Senior Notes, which are fully andunconditionally guaranteed by AAI, the Company’s wholly-owned subsidiary thatconstitutes the Defense segment. The 3.75% Convertible Senior Notes are notguaranteed by Detroit Stoker, the Company’s wholly-owned subsidiary thatconstitutes the Energy segment. The following condensed consolidating financialinformation sets forth supplemental information for United Industrial, theparent company, AAI, the guarantor subsidiary, and Detroit Stoker, thenon-guarantor subsidiary, as of March 31, 2005 and December 31, 2004, and forthe three-month periods ended March 31, 2005 and 2004.

 

18

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CONDENSED CONSOLIDATING FINANCIAL INFORMATION(UNAUDITED)

 

CONDENSED CONSOLIDATING BALANCE SHEETS

As of March 31, 2005

 
| **(Dollars  in thousands)**                     | ** ** | **United  Industrial  Corporation  (Parent)** | ** ** | **AAI  Corporation  and  Subsidiaries  (Guarantor)** | ** ** | **Detroit  Stoker  Company  (Non-Guarantor)** | ** ** | **Eliminations** | ** ** | **United  Industrial  Corporation  and  Subsidiaries** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------|------------|------------------|------------|--------------------------------------------------------|------------|
|                                            |       |                                          |       |                                                 |       |                                          |       |             |       |                                                   |       |
| ASSETS                                          |       |                                          |       |                                                 |       |                                          |       |             |       |                                                   |       |
| Current Assets                                  |       |                                          |       |                                                 |       |                                          |       |             |       |                                                   |       |
| Cash and cash equivalents                       |       | $                                             | 367        |                                                 | $          | 113,518                                       |       | $                | 7,967      |                                                   | $          | — |   | $ | 121,852 |   |
| Securities pledged to creditors                 |       | —                                        |       | —                                               |       | —                                        |       | —           |       | —                                                 |       |
| Deposits and restricted cash                    |       | —                                        |       | 4,798                                                |       | —                                        |       | —           |       | 4,798                                                  |       |
| Trade receivables                               |       | 441                                           |       | 46,620                                               |       | 3,436                                         |       | —           |       | 50,497                                                 |       |
| Inventories                                     |       | (431                                          | )          | 22,860                                               |       | 2,587                                         |       | —           |       | 25,016                                                 |       |
| Other current assets                            |       | 570                                           |       | 7,499                                                |       | 851                                           |       | (23              | )          | 8,897                                                  |       |
| Assets of discontinued operations               |       | —                                        |       | 12,293                                               |       | —                                        |       | —           |       | 12,293                                                 |       |
| Total Current  Assets                           |       | 947                                           |       | 207,588                                              |       | 14,841                                        |       | (23              | )          | 223,353                                                |       |
| Insurance receivable – asbestos litigation |       | —                                        |       | —                                               |       | 20,343                                        |       | —           |       | 20,343                                                 |       |
| Property and equipment, net                     |       | —                                        |       | 31,794                                               |       | 1,957                                         |       | —           |       | 33,751                                                 |       |
| Other assets                                    |       | 12,010                                        |       | 25,593                                               |       | 2,494                                         |       | (17,138          | )          | 22,959                                                 |       |
| Intercompany receivables                        |       | —                                        |       | 160                                                  |       | —                                        |       | (160             | )          | —                                                 |       |
| Investment in consolidated subsidiaries         |       | 76,806                                        |       | —                                               |       | —                                        |       | (76,806          | )          | —                                                 |       |
|                                            |       | $                                             | 89,763     |                                                 | $          | 265,135                                       |       | $                | 39,635     |                                                   | $          | (94,127 | ) | $ | 300,406 |   |
|                                            |       |                                          |       |                                                 |       |                                          |       |             |       |                                                   |       |
| LIABILITIES AND SHAREHOLDERS’EQUITY        |       |                                          |       |                                                 |       |                                          |       |             |       |                                                   |       |
| Current portion of long-term debt               |       | $                                             | —     |                                                 | $          | 958                                           |       | $                | —     |                                                   | $          | — |   | $ | 958 |   |
| Liabilities of discontinued operations          |       | —                                        |       | 14,527                                               |       | —                                        |       | —           |       | 14,527                                                 |       |
| Other current liabilities                       |       | 5,184                                         |       | 43,155                                               |       | 3,808                                         |       | (5,127           | )          | 47,020                                                 |       |
| Long-term debt                                  |       | 120,000                                       |       | 1,688                                                |       | —                                        |       | —           |       | 121,688                                                |       |
| Reserve for asbestos litigation                 |       | —                                        |       | —                                               |       | 31,852                                        |       | —           |       | 31,852                                                 |       |
| Other long-term liabilities                     |       | 2,060                                         |       | 44,260                                               |       | 11,986                                        |       | (17,298          | )          | 41,008                                                 |       |
| Intercompany (receivables) payables             |       | (66,699                                       | )          | 61,546                                               |       | 25                                            |       | 5,128            |       | —                                                 |       |
| Shareholders’ equity                       |       | 29,218                                        |       | 99,001                                               |       | (8,036                                        | )          | (76,830          | )          | 43,353                                                 |       |
|                                            |       | $                                             | 89,763     |                                                 | $          | 265,135                                       |       | $                | 39,635     |                                                   | $          | (94,127 | ) | $ | 300,406 |   |
|                                                 |            |                                               |            |                                                      |            |                                               |            |                  |            |                                                        |            |  |  |  |  |  |  |  |  |  |  |  |

 

19

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CONDENSED CONSOLIDATING FINANCIAL INFORMATION- CONTINUED

 

CONDENSED CONSOLIDATING BALANCE SHEETS

As of December 31, 2004

 
| **(Dollars in thousands)**                  | ** ** | **United  Industrial  Corporation  (Parent)** | ** ** | **AAI  Corporation  and  Subsidiaries  (Guarantor)** | ** ** | **Detroit  Stoker  Company  (Non-****Guarantor)** | ** ** | **Eliminations** | ** ** | **United  Industrial  Corporation  and  Subsidiaries** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------------|------------|------------------|------------|--------------------------------------------------------|------------|
|                                        |       |                                          |       |                                                 |       |                                              |       |             |       |                                                   |       |
| ASSETS                                      |       |                                          |       |                                                 |       |                                              |       |             |       |                                                   |       |
| Current  assets:                            |       |                                          |       |                                                 |       |                                              |       |             |       |                                                   |       |
| Cash and cash  equivalents                  |       | $                                             | 129        |                                                 | $          | 72,269                                            |       | $                | 8,281      |                                                   | $          | — |   | $ | 80,679 |   |
| Securities pledged  to creditors            |       | 124,626                                       |       | —                                               |       | —                                            |       | —           |       | 124,626                                                |       |
| Deposits and  restricted cash               |       | 25,000                                        |       | 8,845                                                |       | —                                            |       | —           |       | 33,845                                                 |       |
| Trade receivables,  net                     |       | 17                                            |       | 44,152                                               |       | 2,489                                             |       | —           |       | 46,658                                                 |       |
| Inventories                                 |       | —                                        |       | 31,957                                               |       | 2,682                                             |       | —           |       | 34,639                                                 |       |
| Other current assets                        |       | 3,295                                         |       | 8,283                                                |       | 909                                               |       | (22              | )          | 12,465                                                 |       |
| Assets of  discontinued operations          |       | —                                        |       | 13,545                                               |       | —                                            |       | —           |       | 13,545                                                 |       |
| Total  current assets                       |       | 153,067                                       |       | 179,051                                              |       | 14,361                                            |       | (22              | )          | 346,457                                                |       |
| Insurance receivable  - asbestos litigation |       | —                                        |       | —                                               |       | 20,343                                            |       | —           |       | 20,343                                                 |       |
| Property and  equipment, net                |       | —                                        |       | 25,643                                               |       | 2,002                                             |       | —           |       | 27,645                                                 |       |
| Other assets                                |       | 12,258                                        |       | 25,844                                               |       | 2,499                                             |       | (14,718          | )          | 25,883                                                 |       |
| Intercompany  receivables                   |       | —                                        |       | 141                                                  |       | —                                            |       | (141             | )          | —                                                 |       |
| Investment in  consolidated subsidiaries    |       | 78,050                                        |       | —                                               |       | —                                            |       | (78,050          | )          | —                                                 |       |
|                                        |       | $                                             | 243,375    |                                                 | $          | 230,679                                           |       | $                | 39,205     |                                                   | $          | (92,931 | ) | $ | 420,328 |   |
|                                        |       |                                          |       |                                                 |       |                                              |       |             |       |                                                   |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY  |       |                                          |       |                                                 |       |                                              |       |             |       |                                                   |       |
| Current liabilities:                        |       |                                          |       |                                                 |       |                                              |       |             |       |                                                   |       |
| Current portion of  long-term debt          |       | $                                             | —     |                                                 | $          | 958                                               |       | $                | —     |                                                   | $          | — |   | $ | 958 |   |
| Payable under  securities loan agreement    |       | 124,619                                       |       | —                                               |       | —                                            |       | —           |       | 124,619                                                |       |
| Other current  liabilities                  |       | 5,466                                         |       | 41,179                                               |       | 3,689                                             |       | (22              | )          | 50,312                                                 |       |
| Liabilities of  discontinued operations     |       | —                                        |       | 18,566                                               |       | —                                            |       | —           |       | 18,566                                                 |       |
| Total current  liabilities                  |       | 130,085                                       |       | 60,703                                               |       | 3,689                                             |       | (22              | )          | 194,455                                                |       |
| Long-term debt                              |       | 120,000                                       |       | 2,000                                                |       | —                                            |       | —           |       | 122,000                                                |       |
| Reserve for asbestos  litigation            |       | —                                        |       | —                                               |       | 31,852                                            |       | —           |       | 31,852                                                 |       |
| Other long-term  liabilities                |       | 2,152                                         |       | 41,253                                               |       | 11,768                                            |       | (14,718          | )          | 40,455                                                 |       |
| Intercompany  (receivables) payables        |       | (40,428                                       | )          | 40,528                                               |       | 41                                                |       | (141             | )          | —                                                 |       |
| Shareholders’ equity  (deficit)        |       | 31,566                                        |       | 86,195                                               |       | (8,145                                            | )          | (78,050          | )          | 31,566                                                 |       |
|                                        |       | $                                             | 243,375    |                                                 | $          | 230,679                                           |       | $                | 39,205     |                                                   | $          | (92,931 | ) | $ | 420,328 |   |

 

20

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CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) - CONTINUED

 

CONDENSED CONSOLIDATING STATEMENTS OFOPERATIONS

Three Months Ended March 31, 2005

 
| **(Dollars  in thousands)**                                         | ** ** | **United  Industrial  Corporation  (Parent)** | ** ** | **AAI  Corporation  and  Subsidiaries  (Guarantor)** | ** ** | **Detroit  Stoker  Company  (Non-  Guarantor)** | ** ** | **Eliminations** | ** ** | **United  Industrial  Corporation  and  Subsidiaries** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------|------------|------------------|------------|--------------------------------------------------------|------------|
|                                                                |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Net sales                                                           |       | $                                             | —     |                                                 | $          | 100,157                                         |       | $                | 7,391      |                                                   | $          | — |   | $ | 107,548 |   |
| Cost of sales                                                       |       | —                                        |       | 76,596                                               |       | 4,909                                           |       | —           |       | 81,505                                                 |       |
| Gross profit                                                        |       | —                                        |       | 23,561                                               |       | 2,482                                           |       | —           |       | 26,043                                                 |       |
| Selling and administrative expenses                                 |       | —                                        |       | 11,346                                               |       | 2,289                                           |       | —           |       | 13,635                                                 |       |
| Other operating (income) expense - net                              |       | (16                                           | )          | 98                                                   |       | 88                                              |       | —           |       | 170                                                    |       |
| Total operating income                                              |       | 16                                            |       | 12,117                                               |       | 105                                             |       | —           |       | 12,238                                                 |       |
| Non-operating income and (expense):                                 |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Interest income                                                     |       | 915                                           |       | 98                                                   |       | 38                                              |       | —           |       | 1,051                                                  |       |
| Interest expense                                                    |       | (1,736                                        | )          | (92                                                  | )          | —                                          |       | —           |       | (1,828                                                 | )          |
| Intercompany interest income (expense)                              |       | (1                                            | )          | —                                               |       | 1                                               |       | —           |       | —                                                 |       |
| Income from equity investment                                       |       | —                                        |       | 14                                                   |       | —                                          |       | —           |       | 14                                                     |       |
| Other income - net                                                  |       | 432                                           |       | 7,310                                                |       | 32                                              |       | —           |       | 7,774                                                  |       |
|                                                                |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
|                                                                |       | (390                                          | )          | 7,330                                                |       | 71                                              |       | —           |       | 7,011                                                  |       |
| (Loss) income from continuing operations  before income taxes       |       | (374                                          | )          | 19,447                                               |       | 175                                             |       | —           |       | 19,249                                                 |       |
| (Benefit from) provision for income taxes                           |       | (131                                          | )          | 6,688                                                |       | 67                                              |       | —           |       | 6,625                                                  |       |
| (Loss) income from continuing operations                            |       | (243                                          | )          | 12,759                                               |       | 108                                             |       | —           |       | 12,624                                                 |       |
| Loss from discontinued operations – net of  income tax benefit |       | —                                        |       | 48                                                   |       | —                                          |       | —           |       | 48                                                     |       |
| Income from investment in subsidiaries                              |       | 12,915                                        |       | —                                               |       | —                                          |       | (12,915          | )          | —                                                 |       |
| Net income (loss)                                                   |       | $                                             | 12,672     |                                                 | $          | 12,807                                          |       | $                | 108        |                                                   | $          | (12,915 | ) | $ | 12,672 |   |

 

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CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) - CONTINUED

 

CONDENSED CONSOLIDATING STATEMENTS OFOPERATIONS

Three Months Ended March 31, 2004

 
| **(Dollars  in thousands)**                                   | ** ** | **United  Industrial  Corporation  (Parent)** | ** ** | **AAI  Corporation  and  Subsidiaries  (Guarantor)** | ** ** | **Detroit  Stoker  Company  (Non-  Guarantor)** | ** ** | **Eliminations** | ** ** | **United  Industrial  Corporation  and  Subsidiaries** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------|------------|------------------|------------|--------------------------------------------------------|------------|
|                                                          |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Net sales                                                     |       | $                                             | —     |                                                 | $          | 74,806                                          |       | $                | 6,842      |                                                   | $          | — |   | $ | 81,648 |   |
| Cost of sales                                                 |       | —                                        |       | 59,981                                               |       | 4,180                                           |       | —           |       | 64,161                                                 |       |
| Gross profit                                                  |       | —                                        |       | 14,825                                               |       | 2,662                                           |       | —           |       | 17,487                                                 |       |
| Selling and administrative expenses                           |       | (80                                           | )          | 7,988                                                |       | 2,320                                           |       | —           |       | 10,228                                                 |       |
| Other operating (income) expense, net                         |       | (32                                           | )          | 129                                                  |       | (1                                              | )          | —           |       | 96                                                     |       |
| Total operating income                                        |       | 112                                           |       | 6,708                                                |       | 343                                             |       | —           |       | 7,163                                                  |       |
| Non-operating income and (expense):                           |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Interest income                                               |       | —                                        |       | 50                                                   |       | 14                                              |       | —           |       | 64                                                     |       |
| Interest expense                                              |       | —                                        |       | (13                                                  | )          | —                                          |       | —           |       | (13                                                    | )          |
| Intercompany interest (expense) income                        |       | (354                                          | )          | 357                                                  |       | (3                                              | )          | —           |       | —                                                 |       |
| Other (expense) income, net                                   |       | (3                                            | )          | 87                                                   |       | 50                                              |       | —           |       | 134                                                    |       |
|                                                          |       | (357                                          | )          | 481                                                  |       | 61                                              |       | —           |       | 185                                                    |       |
| (Loss) income from continuing operations  before income taxes |       | (245                                          | )          | 7,189                                                |       | 404                                             |       | —           |       | 7,348                                                  |       |
| (Benefit from) provision for income taxes                     |       | (85                                           | )          | 2,410                                                |       | 301                                             |       | —           |       | 2,626                                                  |       |
| (Loss) income from continuing operations                      |       | (160                                          | )          | 4,779                                                |       | 103                                             |       | —           |       | 4,722                                                  |       |
| Loss from discontinued operations, net of  income tax benefit |       | —                                        |       | (475                                                 | )          | —                                          |       | —           |       | (475                                                   | )          |
| Income from investment in subsidiaries                        |       | 4,407                                         |       | —                                               |       | —                                          |       | (4,407           | )          | —                                                 |       |
| Net income (loss)                                             |       | $                                             | 4,247      |                                                 | $          | 4,304                                           |       | $                | 103        |                                                   | $          | (4,407 | ) | $ | 4,247 |   |

 

22

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CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) - CONTINUED

 

CONDENSED CONSOLIDATING STATEMENTS OF CASHFLOWS

Three Months Ended March 31, 2005

 
| **(Dollars  in thousands)**                                           | ** ** | **United  Industrial  Corporation  (Parent)** | ** ** | **AAI  Corporation  and  Subsidiaries  (Guarantor)** | ** ** | **Detroit  Stoker  Company  (Non-  Guarantor)** | ** ** | **Eliminations** | ** ** | **United  Industrial  Corporation  and  Subsidiaries** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------|------------|------------------|------------|--------------------------------------------------------|------------|
|                                                                  |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| OPERATING ACTIVITIES:                                                 |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Cash flows from continuing operations                                 |       | $                                             | 1,127      |                                                 | $          | 15,690                                          |       | $                | (291       | )                                                      | $          | — |   | $ | 16,526 |   |
| Cash flows used in discontinued operations                            |       | —                                        |       | (2,738                                               | )          | —                                          |       | —           |       | (2,738                                                 | )          |
| Net cash provided by (used in) operating  activities                  |       | 1,127                                         |       | 12,952                                               |       | (291                                            | )          | —           |       | 13,788                                                 |       |
|                                                                  |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| INVESTING ACTIVITIES:                                                 |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Purchase of property and equipment                                    |       | —                                        |       | (7,971                                               | )          | (23                                             | )          | —           |       | (7,994                                                 | )          |
| Proceeds from sale of available-for-sale  securities                  |       | 124,619                                       |       | —                                               |       | —                                          |       | —           |       | 124,619                                                |       |
| Proceeds from sale of property                                        |       | —                                        |       | 7,555                                                |       | —                                          |       | —           |       | 7,555                                                  |       |
| Net cash (used in) provided by investing  activities                  |       | 124,619                                       |       | (416                                                 | )          | (23                                             | )          | —           |       | 124,180                                                |       |
|                                                                  |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| FINANCING ACTIVITIES:                                                 |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Repayment of collateral received from  securities lending transaction |       | (124,619                                      | )          | —                                               |       | —                                          |       | —           |       | (124,619                                               | )          |
| Repayment of long-term debt                                           |       | —                                        |       | (334                                                 | )          | —                                          |       | —           |       | (334                                                   | )          |
| Proceeds from exercise of stock options                               |       | 344                                           |       | —                                               |       | —                                          |       | —           |       | 344                                                    |       |
| Dividends paid                                                        |       | (1,233                                        | )          | —                                               |       | —                                          |       | —           |       | (1,233                                                 | )          |
| (Increase) decrease in deposits and  restricted cash                  |       | 25,000                                        |       | 4,047                                                |       | —                                          |       | —           |       | 29,047                                                 |       |
| Intercompany                                                          |       | (25,000                                       | )          | 25,000                                               |       | —                                          |       | —           |       | —                                                 |       |
| Net cash (used in) provided by financing  activities                  |       | (125,508                                      | )          | 28,713                                               |       | —                                          |       | —           |       | (96,795                                                | )          |
| (Decrease) increase in cash and cash  equivalents                     |       | 238                                           |       | 41,249                                               |       | (314                                            | )          | —           |       | 41,173                                                 |       |
| Cash and cash equivalents at beginning of  year                       |       | 129                                           |       | 72,269                                               |       | 8,281                                           |       | —           |       | 80,679                                                 |       |
| Cash and cash equivalents at end of period                            |       | $                                             | 367        |                                                 | $          | 113,518                                         |       | $                | 7,967      |                                                   | $          | — |   | $ | 121,852 |   |

 

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CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) - CONTINUED

 

CONDENSED CONSOLIDATING STATEMENTS OF CASHFLOWS

Three Months Ended March 31, 2004

 
| **(Dollars  in thousands)**                       | ** ** | **United  Industrial  Corporation  (Parent)** | ** ** | **AAI  Corporation  and  Subsidiaries  (Guarantor)** | ** ** | **Detroit  Stoker  Company  (Non-  Guarantor)** | ** ** | **Eliminations** | ** ** | **United  Industrial  Corporation  and  Subsidiaries** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------|------------|------------------|------------|--------------------------------------------------------|------------|
|                                              |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| OPERATING ACTIVITIES:                             |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Cash flows from continuing operations             |       | $                                             | 2,183      |                                                 | $          | 5,592                                           |       | $                | 566        |                                                   | $          | — |   | $ | 8,341 |   |
| Cash flows provided by discontinued  operations   |       | —                                        |       | 584                                                  |       | —                                          |       | —           |       | 584                                                    |       |
| Net cash provided by operating activities         |       | 2,183                                         |       | 6,176                                                |       | 566                                             |       | —           |       | 8,925                                                  |       |
|                                              |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| INVESTING ACTIVITIES:                             |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Purchase of property and equipment                |       | —                                        |       | (618                                                 | )          | (43                                             | )          | —           |       | (661                                                   | )          |
|                                              |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| FINANCING ACTIVITIES:                             |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Proceeds from exercise of stock options           |       | 1,166                                         |       | —                                               |       | —                                          |       | —           |       | 1,166                                                  |       |
| Dividends paid                                    |       | (1,316                                        | )          | —                                               |       | —                                          |       | —           |       | (1,316                                                 | )          |
| Purchase of treasury shares                       |       | (7,141                                        | )          | —                                               |       | —                                          |       | —           |       | (7,141                                                 | )          |
| Intercompany                                      |       | 5,795                                         |       | (5,668                                               | )          | (127                                            | )          | —           |       | —                                                 |       |
|                                              |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Net cash used in financing activities             |       | (1,496                                        | )          | (5,668                                               | )          | (127                                            | )          | —           |       | (7,291                                                 | )          |
| Increase (decrease) in cash and cash  equivalents |       | 687                                           |       | (110                                                 | )          | 396                                             |       | —           |       | 973                                                    |       |
| Cash and cash equivalents at beginning of  year   |       | 648                                           |       | 17,482                                               |       | 6,008                                           |       | —           |       | 24,138                                                 |       |
| Cash and cash equivalents at end of period        |       | $                                             | 1,335      |                                                 | $          | 17,372                                          |       | $                | 6,404      |                                                   | $          | — |   | $ | 25,111 |   |

 

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**Item 2. - Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

**Forward-Looking Information**

 

This Quarterly Report on Form 10-Q contains “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of1995.  Such forward-looking statementsare based on management’s expectations, estimates, projections andassumptions.  Words such as “expects,” “anticipates,”“intends,” “plans,” “believes,” “estimates,” and variations of such words andsimilar expressions are intended to identify such forward-looking statementswhich include, but are not limited to, projections of revenues, earnings,segment performance, cash flows and contract awards.  These forward-looking statements are subjectto risks and uncertainties, which could cause the actual results or performanceof United Industrial Corporation (“United Industrial”) and its subsidiaries(collectively, the “Company”) to differ materially from those expressed orimplied in such statements.  These risksand uncertainties include, but are not limited to, the following:

 

•                  the Company’ssuccessful execution of internal performance plans;

•                  performanceissues with key suppliers, subcontractors and business partners;

•                  the abilityto negotiate financing arrangements with lenders;

•                  the outcomeof current and future litigation, proceedings and investigations;

•                  the accuracyof the Company’s analysis of its potential asbestos-related exposure andinsurance coverage;

•                  productdemand and market acceptance risks;

•                  the effectof economic conditions;

•                  the impactof competitive products and pricing;

•                  productdevelopment, commercialization and technological difficulties;

•                  capacity andsupply constraints or difficulties;

•                  legislativeor regulatory actions impacting the Company’s Defense segment, Energy segmentand discontinued transportation operation;

•                  changingpriorities or reductions in the U.S. Government’s defense budget;

•                  contractcontinuation and future contract awards; and

•                  U.S. andforeign military budget constraints and determinations.

 

The Company intends that all forward-looking statements it makes willbe subject to the safe harbor protection of the Federal securities laws foundin Section 27A of the Securities Act of 1933, as amended, and Section 21E ofthe Securities Exchange Act of 1934, as amended.

 

These statements speak only as to the date when they are made.  The Company makes no commitment to update anyforward-looking statement or to disclose any facts, events, or circumstancesafter the date hereof that may affect the accuracy of any forward-lookingstatements.  See “Risk Factors” underItem 7 of the Company’s Annual Report on Form 10-K for the year ended December31, 2004, for important factors that could cause the Company’s actual resultsto differ materially from those suggested by the Company’s forward-lookingstatements contained in this Quarterly Report on Form 10-Q.

 

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**Management Overview**

 

United Industrial Corporation (“UnitedIndustrial”) and its subsidiaries (collectively, the “Company”) design,develop, manufacture and support defense systems and training and testsystems.  The Company is committed tocreating innovative solutions, disciplined program management and continuousoperational improvements.  Its productsand services include unmanned aerial vehicle (“UAV”) systems, training andsimulation systems, automated aircraft test and maintenance equipment, armamentsystems, logistical and engineering services, and other leading-edge technologysolutions for defense needs.  The companyalso manufactures combustion equipment for biomass and refuse fuels.

 

Thecontinuing operations of the Company consist of two business segments: Defenseand Energy.  Costs related to thecontinuing operations that are not identified with the two business segmentsare grouped under the heading Other.  Theoperations of the Defense and Energy segments are conducted principally throughtwo wholly-owned subsidiaries, AAI Corporation and its subsidiaries (“AAI”) andDetroit Stoker Company (“Detroit Stoker”), respectively.  The following information primarily relatesto the continuing operations of the Company and its consolidatedsubsidiaries.  The Company has atransportation operation that is accounted for as discontinued operations, andis discussed separately in the information that follows.

 

The Company’s net salesincreased to $107,548,000 the first quarter of 2005 from $81,648,000 in thefirst quarter of 2004.  In addition, theCompany continued to focus on its core Defense segment, which accounted forapproximately 93.1% and 91.6% of total consolidated net sales from continuing operationsduring the first quarter of 2005 and 2004, respectively.  In the first quarter of 2005, the Defensesegment reported a 33.9% increase in net sales compared to the correspondingquarter in the prior year primarily due to a higher level of production of andsupport for the Shadow Tactical UAV (“TUAV”) systems for the U.S. Army, andsales related to activities on the Biological Detection Systems program thatwas awarded in the third quarter of 2004.

 

TheCompany’s income from continuing operations increased to $12,624,000 in thefirst quarter of 2005 from $4,722,000  inthe first quarter of 2004.  This increaseincludes a $7,152,000 pre-tax gain from the sale of property partially offsetby higher pre-tax net interest charges of $828,000 primarily related to theissuance of the $120,000,000 3.75% Convertible Senior Notes in September 2004,and $411,000 of pre-tax charges related to the Company’s restructuringactivities for the Defense segment’s fluid test systems product area andDetroit Stoker.

 

**Gain on Sale of Property**

 

InJanuary 2005, the Company sold approximately 26 acres of undeveloped propertyadjacent to its Hunt Valley, Maryland facility for $8,105,000, which yieldedproceeds of $7,555,000, net of selling expenses and closing costs.  The Company recognized a pre-tax gain on thesale of this property in the first quarter of 2005 of approximately$7,152,000.  On March 4, the Companypurchased a new facility for $5,085,000 in South Carolina for AAI ServicesCorporation (“AAI Services”), a wholly-owned subsidiary of AAI, to support the growthin their operations.  The remaining netproceeds are being held in an account owned by a qualified intermediary andwill be used for improvements to the facility. As a result, the Company expects that it will be able to defer payingthe income tax obligation incurred in connection with the gain on the sale ofthe property in Hunt Valley, in accordance with Section 1031(b) of the InternalRevenue Code.

 

**RestructuringActivities**

 

During the fourth quarter of 2004, the Company’s management developed plansto maximize efficiencies by streamlining certain of its operations, inaccordance with the Company’s previously disclosed strategic initiatives.  The Company began reorganizing the operationsof the fluid test systems product area in the Defense segment in order torealize certain operating efficiencies. These activities are expected to result in total cash charges ofapproximately $3,000,000, of which approximately $600,000 was expensed and$200,000 was paid in 2004.  In the firstquarter of 2005, an additional $330,000 was expensed and $637,000 waspaid.  The remaining expenses ofapproximately $2,100,000 and cash charges of approximately $2,200,000 areexpected to be recognized in and paid by the Defense segment’s operationsduring the remainder of 2005 as the obligations are incurred.

 

26

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Additionally, as a result of the planned reduction in its work force,Detroit Stoker recognized a curtailment charge of approximately $1,959,000 toaccelerate the amortization of prior service cost and recognize enhancedbenefits for one of its pension benefit plans in the fourth quarter of2004.  In the first quarter of 2005,Detroit Stoker eliminated the employees contemplated under this plan.  Most of the manufacturing operationspreviously performed at Detroit Stoker’s facilities  are expected to be outsourced to lower-costproducers.  As a result of the reductionin Detroit Stoker’s workforce, the company recognized severance charges in theEnergy segment of approximately $44,000 in the first quarter of 2005.  The company also recognized $37,000 infacility relocation cost in the first quarter of 2005.  Other costs associated with Detroit Stoker’srestructuring plan will be paid and charged to operations in 2005 as theliabilities are incurred, which are estimated to be approximately $700,000.

 

**DefinitiveAgreement to Acquire ESL**

 

On April 4, 2005, the Companyacquired ESL Defence Limited (“ESL”), an electronic warfare (“EW”) systemscompany based in the United Kingdom.  Thepurchase price was approximately $10,000,000 in cash.  ESL is a world market leader in the designand production of electro-optic (“EO”) test and simulation products for use onflight lines and in aircraft maintenance facilities. The simulators are used toassess the operational readiness of sophisticated missile warning andcountermeasures self-protection systems used on military aircraft. ESL’s EOsimulators are also used at military test, evaluation, and training ranges toevaluate the effectiveness of new self-protection systems and to train pilotsfor combat readiness.  In addition, ESLspecializes in EW related research, study, and in-service support activity forU.K. government agencies and prime contractors both in the United Kingdom andin the United States.

 

**Results of Operations**

 

Thefollowing discussion should be read in conjunction with the Company’sConsolidated Financial Statements and related notes thereto contained in thisQuarterly Report on Form 10-Q for the quarterly period ended March 31, 2005,and the discussion included in its Annual Report on Form 10-K for the yearended December 31, 2004.

 

**Overviewof Consolidated Results**

 

#### ***Three Months Ended March 31, 2005 Compared to the ThreeMonths Ended March 31, 2004***

 
| ** **                                              | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase (Decrease)** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------|------------|-------------------------|------------|
| **(Dollars  in thousands)**                             | ** ** | **2005**                          | ** ** | **2004**                | ** ** | **$** | ** ** | **%** | ** ** |
|                                                    |       |                              |       |                    |       |   |   |   |   |
| Net sales                                               |       | $                                 | 107,548    |                    | $          | 81,648 |   | $ | 25,900 |   | 31.7 | % |
| Gross profit                                            |       | 26,043                            |       | 17,487                  |       | 8,556 |   | 48.9 | % |
| Selling and administrative expenses                     |       | 13,635                            |       | 10,228                  |       | 3,407 |   | 33.3 | % |
| Non-operating income                                    |       | 7,011                             |       | 185                     |       | 6,826 |   | 3,689.7 | % |
| Income from continuing operations, net of  income taxes |       | 12,624                            |       | 4,722                   |       | 7,902 |   | 167.3 | % |
|                                                         |            |                                   |            |                         |            |  |  |  |  |  |  |  |

 

TheCompany’s net sales increased 31.7% for the three months ended March 31, 2005compared to 2004, including  $25,351,000and $549,000 higher net sales for the Defense and Energy segments,respectively.  The increase in net salesfor the Defense segment was primarily due to a greater level of production ofand support for Shadow Tactical Unmanned Aerial Vehicle (“TUAV”) systems,including approximately $13,522,000 higher net sales generated as the result ofproviding support and logistical services for delivered TUAV systems, includingdeployed systems in Operation Iraqi Freedom. Approximately $5,064,000 higher sales volume from the BiologicalDetection Systems program awarded in the third quarter 2004, also contributedto the increase in net sales for the Defense segment in 2005.

 

Thegross margin percentage for continuing operations increased to 24.2% in thefirst quarter of 2005 from 21.4% during the same period in 2004.

 

27

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Inline with the increase in sales, selling and administrative expenses increasedto $13,635,000 or 12.7% of sales in the first quarter of 2005 compared to$10,228,000 or 12.5% of sales in the first quarter of 2004.  The $3,407,000 increase was primarily due toincreased research and development expenses and bid and proposal costs.

 

Theincrease in non-operating income is primarily due to the $7,152,000 pre-taxgain on the sale of the Hunt Valley property, as discussed under “*Gain on Sale of Property*” in the “*Management Overview*” section above,partially offset by $828,000 higher interest expense, net of interestincome.  The Company’s interest chargesin the first quarter of 2005 included approximately $1,370,000  related to its $120,000,000 3.75% ConvertibleSenior Notes issued in September 2004.

 

Theincrease in income from continuing operations in 2005 compared to 2004 wasprimarily due to the increase in net sales and the recognition of $7,152,000 ofpre-tax profit due to the sale of the Hunt Valley property.  These favorable items were partially offsetby higher selling and administrative expenses primarily for the Defense segmentand higher interest expense as the result of the issuance of the $120,000,0003.75% Convertible Senior Notes on September 15, 2004.

 

**SegmentResults**

 

***Defense Segment***

 

#### ***Three Months Ended March 31, 2005Compared to the Three Months Ended March 31, 2004***

 
| ** **                          | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase (Decrease)** | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|-------------------------|------------|
| **(Dollars  in thousands)**         | ** ** | **2005**                          | ** ** | **2004**                | ** ** | **$** | ** ** | **%** | ** ** |
|                                |       |                              |       |                    |       |   |   |   |   |
| Net sales                           |       | $                                 | 100,157    |                    | $          | 74,806 |   | $ | 25,351 |   | 33.9 | % |
| Gross profit                        |       | 23,561                            |       | 14,825                  |       | 8,736 |   | 58.9 | % |
| Selling and administrative expenses |       | 11,346                            |       | 7,988                   |       | 3,358 |   | 42.0 | % |
| Income before income taxes          |       | 19,447                            |       | 7,189                   |       | 12,258 |   | 170.5 | % |
|                                     |            |                                   |            |                         |            |  |  |  |  |  |  |  |

 

Theincrease in net sales for the Defense segment was primarily due to a greaterlevel of production of and support for TUAV systems, including approximately$13,522,000 higher net sales generated as the result of providing support andlogistical services for delivered TUAV systems, including deployed systems inOperation Iraqi Freedom.  Approximately$5,064,000 sales volume for the Biological Detection Systems program, awardedin the third quarter of 2004, also contributed to the increase in net sales forthe Defense segment in 2005.

 

TheDefense segment gross margin percentage was 23.5% in the first quarter of 2005and 19.8% during the first quarter of 2004. The increase was primarilyattributable to production efficiencies and the favorable resolution oftechnical risks in the execution of both the TUAV and Joint Service ElectronicCombat System Tester programs.The Biological Detection Systems program volume also contributed to theincrease in gross profit.

 

Sellingand administrative expenses in the Defense segment increased to $11.4 millionor 11.3% of sales in the first quarter of 2005 compared to $8.0 million or10.7% of sales in the first quarter of 2004. The $3.4 million increase wasprimarily due to higher research and development expenses, and bid and proposalcosts.

 

Theincrease in income from continuing operations in 2005 compared to 2004 includesthe recognition of $7,152,000 of pre-tax gain due to the sale of the HuntValley property.

 

28

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***Energy Segment***

 

#### ***Three Months Ended March 31, 2005Compared to the Three Months Ended March 31, 2004***

 
| ** **                          | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase (Decrease)** | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|-------------------------|------------|
| **(dollars  in thousands)**         | ** ** | **2005**                          | ** ** | **2004**                | ** ** | **$** | ** ** | **%** | ** ** |
|                                |       |                              |       |                    |       |   |   |   |   |
| Net sales                           |       | $                                 | 7,391      |                    | $          | 6,842 |   | $ | 549 |   | 8.0 | % |
| Gross profit                        |       | 2,482                             |       | 2,662                   |       | (180 | ) | (6.8 | )% |
| Selling and administrative expenses |       | 2,289                             |       | 2,320                   |       | (31 | ) | (1.3 | )% |
| Income before income taxes          |       | 175                               |       | 404                     |       | (229 | ) | (56.7 | )% |
|                                     |            |                                   |            |                         |            |  |  |  |  |  |  |  |

 

Theincrease in net sales for the Energy segment was primarily due to higher demandfor stokers and related combustion equipment as steam producers areincreasingly looking for alternative fuel sources in response to the high andvolatile energy prices experienced recently, especially for oil and naturalgas.

 

TheEnergy segment gross margin percentage was 33.6% in the first quarter of 2005and 38.9% during the first quarter of 2004. The decrease was primarilyattributable to restructuring activities and higher raw material prices.

 

Sellingand administrative expenses for the Energy segment were essentially unchangedin the first quarter of 2005 compared to the first quarter of 2004.

 

**DiscontinuedTransportation Operations**

 

Income from the Company’sdiscontinued operations for the first quarter of 2005 was $48,000, compared toa loss of ($475,000), in the first quarter of 2004.  During the first quarter of 2005, ElectricTransit, Inc. (“ETI”), an entity owned 35% by AAI and 65% by Skoda a.s. (“Skoda”),a Czech company, sold its remaining inventory of spare parts and was able tofavorably resolve certain operational challenges associated with its lastremaining program.  AAI recorded 100%, orapproximately $533,000, net of tax, of ETI’s results due to the recording of100% of ETI’s losses in recent prior years. Offsetting this income was approximately $485,000, net of tax, ofgeneral and administrative expenses consisting primarily of professional feesrelated to a certain litigation matter involving a recovery claim initiated bythe Company.

 

The ability of ETI to satisfyits remaining obligations under its one remaining production contract is, inpart, dependent on the performance of other parties, including AAI, the Skodaoperating affiliates and other subcontractors. Thus, the ability to timelyperform under the remaining contract is, to a significant extent, outside ofETI’s control. Skoda’s operating affiliates have continued to deliver productsand services under their subcontracts with ETI through March 2005. FollowingSkoda’s

 

29

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bankruptcy declaration in 2001in the Czech Republic, effective as of 2002, AAI began recording 100%, insteadof 35%, of ETI’s losses in accordance with the equity method accounting applicableto minority shareholders.  As a result,AAI recorded $24,879,000 of losses related to ETI during 2003, $2,321,000 ofincome related to ETI during 2004 and $1,323,000 of income related to ETI inthe first quarter of 2005.  Since January1, 2002, AAI has recorded $47,795,000 of losses related to ETI.  Although AAI has completed performance on itssubcontract with ETI on the contract, AAI has continued to provide ETI withpersonnel and other financial support in order to enable ETI to satisfy certainof its remaining commitments under the contract.

 

Foradditional information regarding the discontinued transportation operations,see Note K to the Consolidated Condensed Financial Statements included in thisQuarterly Report on Form 10-Q.

 

**Funded Backlog**

 
| **(Dollars  in thousands)** | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------|------------|---------------------|------------|------------------------|------------|
| Defense segment             |       | $                   | 366,028    |                   | $          | 380,622 |   |
| Energy segment              |       | 10,174              |       | 7,296                  |       |
| Total                       |       | $                   | 376,202    |                   | $          | 387,918 |   |

 

For the three months ended March 31, 2005, theCompany’s funded backlog, defined as orders placed for which funds have beenappropriated or purchase orders received, decreased $11,716,000 or 3.0%,including a decrease in the Defense segment of $14,594,000 and an increase inthe Energy segment of $2,878,000, respectively. The decrease in funded backlog for the Defense segment was primarily dueto the timing of funding by the U.S. Army for the Shadow TUAV full-rateproduction program, which was fully funded at the end of 2004, when awarded.

 

The increase in the Energy segment’s funded backlogwas primarily due to an increase in orders received during the first quarter of2005.

 

**Liquidity and Capital Resources**

 

**Overview**

 

The Company’s principal source of liquidity is cash on hand and cashgenerated from operations.  On March 31,2005, the Company had cash and cash equivalents of $121,852,000.  Effective December 23, 2004, the Companyterminated its Loan and Security Agreement dated June 28, 2001, as amended,with Bank of America Business Capital (formerly Fleet CapitalCorporation).  The Company is currentlynegotiating a larger and more flexible credit facility.  However, no assurances can be given as towhether the Company will be able to obtain new financing.

 

On December 29, 2004, the Company invested $124,619,000 in U.S.treasury bills maturing on February 24, 2005. The U.S. treasury bills were concurrently loaned to the Company’sbroker-dealer in a securities lending transaction in exchange for cashcollateral in an amount equal to 100% of the fair value of the securitieslent.  The securities lending transactionterminated on February 23, 2005, at which time the Company redeemed the U.S.treasury bills and received approximately $373,000 of interest thereon, repaidthe cash collateral to its broker-dealer together with $444,000 of relatedinterest charges, and collected the $25,000,000 deposit plus $86,000 of accruedinterest thereon.

 

As more fully discussed under the subheading “*Gain on Sale of Property*” in the “*Management Overview*” section above, inJanuary 2005, the Company sold approximately 26 acres of undeveloped propertyadjacent to its Hunt Valley, Maryland facility for $8,105,000, which yieldedproceeds of $7,555,000, net of selling expenses and closing costs.  The Company reinvested approximately$5,085,000 of the net proceeds from this sale in a new facility in SouthCarolina for AAI Services 

 

30

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to support the growth in their operations.  The remaining net proceeds are being held inan account owned by a qualified intermediary and will be used primarily forimprovements to the facility.

 

In accordance with its strategic initiativesto enhance shareholder value, the Company is continuing to focus its efforts onthe profitability and growth of its core Defense product areas, seeking tomaximize operating efficiencies, and exploring the sale of non-core assets.

 

The Company intends to complement its growthstrategy for its Defense segment through select acquisitions that broaden itsproduct and service offerings, deepen its capabilities and allow entry into newmarkets.  Acquisition candidates mayinclude public and private companies and divisions, subsidiaries and productlines of such companies.  On April 4,2005, the Company acquired ESL Defence Limited, an EW systems company based inthe United Kingdom, as more fully discussed in the “Management Overview”section above.

 

During the fourth quarter of 2003, as part ofthe Company’s strategy to explore the sale of non-core assets, the Companyengaged Imperial Capital, LLC, an investment-banking firm, to act as exclusivefinancial advisor to assist in exploring strategic alternatives for DetroitStoker, including a possible sale (the “Transaction”).  The Company and Imperial Capital are continuingto explore potential Transactions involving Detroit Stoker.  From time to time, the Company and potentialbuyers may (i) have discussions regarding a potential Transaction, (ii)negotiate the preliminary terms of a potential Transaction, and (iii) enterinto customary non-binding agreements in order to facilitate any suchdiscussions and negotiations.  Noassurances can be given regarding whether a Transaction involving DetroitStoker will occur or the timing or proceeds from any such Transaction.

 

**Sources and Uses of Cash**

 

Thefollowing is a discussion of the Company’s major operating, investing, andfinancing activities for each of the three-month periods ended March 31, 2005and 2004.  The financial informationpresented in the table below is summarized from the Company’s Consolidated CondensedStatements of Cash Flows.

 
| ** **                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------|------------|
| **(dollars  in thousands)**                             | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Operating activities:                                   |       |                              |       |   |   |
|                                                    |       |                              |       |   |   |
| Net cash provided by continuing operations              |       | $                                 | 16,526     |   | $ | 8,341 |   |
|                                                    |       |                              |       |   |   |
| Net cash (used in) provided by discontinued  operations |       | (2,738                            | )          | 584 |   |
|                                                    |       |                              |       |   |   |
| Net cash provided by operating activities               |       | 13,788                            |       | 8,925 |   |
|                                                    |       |                              |       |   |   |
| Net cash provided by (used in) investing  activities    |       | 124,180                           |       | (661 | ) |
|                                                    |       |                              |       |   |   |
| Net cash used in financing activities                   |       | (96,795                           | )          | (7,291 | ) |
|                                                    |       |                              |       |   |   |
| Increase in cash and cash equivalents                   |       | $                                 | 41,173     |   | $ | 973 |   |

 

***Operating Activities***

 

Net cash providedby continuing operations in the first quarter of 2005 increased $8,185,000compared to the same period in 2004 primarily due to higher income fromcontinuing operations before non-cash depreciation and other charges.  The favorable changes in operating assets andliabilities in 2005 of $5,316,000 included a decrease in inventory and prepaidexpenses and other current assets of $9,623,000 and $3,278,000 respectively, partiallyoffset by an increase in accounts receivable of $3,839,000, due to higherproduction levels in the Defense segment and the timing of payments, and othernet 

 

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unfavorablechanges in operating assets and liabilities of $3,746,000.  Inventory was lower and accounts receivablehigher at March 31, 2005 than at the end of 2004 primarily due to theachievement of certain billing milestones that had been delayed in the Defensesegment.

 

Netcash used by the discontinued transportation operations in the period endingMarch 31, 2005 was primarily related to unreimbursed services rendered to, andother financial support to ETI in connection with the MUNI contract guarantyagreement as discussed in Note K.

 

***Investing Activities***

 

On December 29, 2004, theCompany invested $124,619,000 of cash in U.S. treasury bills, which matured onFebruary 24, 2005.  The U.S. treasurybills were concurrently loaned to the Company’s broker-dealer in a securitieslending transaction, which is discussed in the “*Liquidity Overview*” section above.  Cash used for the purchase of property andequipment was $7,994,000, including $5,085,000 for the purchase of a buildingin South Carolina, and $661,000 in 2005 and 2004, respectively, as discussedunder “*Capital Expenditures*”above.

 

Net cash provided by investingactivities in 2005 included proceeds of $7,555,000 from the sale of certainundeveloped property at the Company’s Hunt Valley, MD corporate headquarters.

 

***Financing Activities***

 

The Company’s financingactivities in 2004 used $96,795,000 of cash, including approximately$124,619,000 for the repayment of collateral received from a securities lendingtransaction of U.S. treasury bills that were sold concurrently.  In connection with this securities lendingtransaction, which is discussed more fully in the “*Liquidity Overview*” section above, the Company also receivedthe $25,000,000 refundable deposit from its broker-dealer.  This deposit, together with a decrease of$4,047,000 in collateral the Company was required topost in connection with outstanding letters of credit and a cash managementsecurity arrangement with Bank of America Business Capital, is presented as a$29,047,000 decrease in deposits and restricted cash in the accompanyingConsolidated Statements of Cash Flows for the period ending March 31,2005.  Financing activities in 2005 alsoincluded $344,000 of cash receipts from the exercise of stock options,$1,233,000 of cash used for the payment of dividends, and $334,000 used for therepayment of long-term debt, primarily related to the financing of AAI’s newEnterprise Resource Planning (“ERP”) System.

 

**Debt and Related Covenants**

 

For a complete description ofthe Company’s long-term debt, including the terms and conditions of each debtinstrument, please see Note 6 to the Consolidated Financial Statements includedin Part II, Item 8 of the Company’s Annual Report on Form 10-K for the yearended December 31, 2004.

 

**Cash Requirements**

 

***Capital Expenditures***

 

The Company expects that capital expendituresin 2005 will be significantly higher than in 2004 primarily due to (i) thepurchase of the $5,085,000 new facility in South Carolina, and approximately$3,500,000 of improvements to be made to that facility, (ii) approximately$3,200,000 of enhancements to the Company’s UAV production facilities,including the purchase of new manufacturing equipment, to increase productionoutput and efficiency, and, (iii) $4,800,000 related to the continuingimplementation of the Company’s ERP System.

 

As of March 31, 2005, the Company had nosignificant commitments for capital expenditures except for the continuingimplementation of its new ERP System and improvements to be made to therecently acquired facility in South Carolina. In addition to the capital assets to be acquired, the Company expects toincur approximately $2,000,000 of expenses related 

 

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to the implementation of its ERP System,which exclude ongoing annual maintenance fees of approximately $400,000 peryear.  As of March 31, 2005, the Companyhad capitalized a total of approximately $3,809,000 related to theimplementation of the ERP System.

 

***Other Cash Requirements***

 

OnMarch 10, 2005, the Company’s Board of Directors authorized a new stockpurchase plan for up to $25,000,000.  Thetiming of the buy-back and the exact number of shares repurchased will dependon market conditions.  As of March 31,2005, the Company did not make any purchases under this authorization and,accordingly, had $25,000,000 available under the subject authorization forfuture purchases.

 

On April 4, 2005, the Companypurchased ESL Defence Limited, an electronic warfare systems company, forapproximately $10,000,000 in cash.

 

For the first quarter of 2005,the Company paid a cash dividend of $0.10 per share, or an aggregate amount of$1,230,000.  For the years ended December31, 2004 and 2003, the Company paid cash dividends of $0.40 per share, or aggregate dividendpayments of $5,093,000 and $5,315,000, respectively, andfor the year endedDecember 31, 2002, $0.30 per share or an aggregate of $3,912,000.  The payment of any future dividends will beat the discretion of the Board of Directors and will depend upon, among otherthings, the Company’s corporate strategy, future earnings, operations, capitalrequirements, and the Company’s financial condition and general businessconditions.  Shouldthe Company distribute a cash dividend in any quarterly period in excess of$0.10 per share, the conversion rate provided for in the Indenture governingthe 3.75% Convertible Senior Notes would be adjusted.  In addition, the Company’s future lenders mayimpose restrictions on the payment of dividends.

 

As discussed more fully under “*ManagementOverview*” above, during the remainder of 2005 the Company’smanagement will continue to implement its restructuring plans to reduce costsand streamline operations in the Defense segment’sfluid test systems product area and at Detroit Stoker.  The Company expects that it will continue toincur and pay costs during the remainder of 2005 as these plans are fullyimplemented, which will primarily be charged to earnings as the relatedobligations are incurred.  For thereorganization activities in the Defense segment’s fluidtest systems product line, the Company estimates that it will incur total cash chargesof approximately $3,000,000, of which approximately $600,000 was expensed and$200,000 was paid in 2004.  In the firstquarter of 2005, an additional $330,000 was expensed and $637,000 waspaid.  The remaining cash charges ofapproximately $2,200,000 are expected to be charged to the Defense segment’soperations and paid during the remainder of 2005 as the obligations areincurred.  The Company estimates that itwill expense and pay a total of approximately $700,000 of costs in 2005 for therestructuring activities at Detroit Stoker, of which $81,000 was expensed and$81,000 was paid in the first quarter of 2005.

 

The cash requiredto completely exit the discontinued transportation operation subsequent toMarch 31, 2005, is expected to be approximately $3,500,000 through 2006, ofwhich $2,500,000 is expected to be paid during the remainder of 2005.  These amounts exclude legal fees expected tobe incurred related to claims made by AAI in pursuit of payment under a suretybond (see Note L to the Consolidated Condensed Financial Statements included inthis Quarterly Report on Form 10-Q for a discussion of AAI’s claims).

 

For additional information regarding the Company’s contingencies,please see the discussion under the heading “*ContingentMatters*” below.

 

The Company does not anticipate having tocontribute cash to the UIC Retirement Pension Plan, but does expect tocontribute $244,000 to the union pension plan in the Energy segment during 2005of which $37,000 was funded in the first quarter of 2005.  Further, the Company expects to pay otherpostretirement benefits of approximately $3,093,000 in 2005 of which $838,000was funded in the first quarter of 2005.

 

**Cash Management**

 

Based on cash on hand and future cash expected to be generated fromoperations, the Company expects to have sufficient cash to meet itsrequirements during the next twelve months.

 

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**Contingent Matters**

 

**Off-Balance Sheet Arrangements**

 

In connection with certain contracts, UnitedIndustrial’s operating subsidiaries have committed to certain performanceguarantees. The ability to perform under these guarantees may, in part, bedependent on the performance of other parties, including partners andsubcontractors. If United Industrial’s operating subsidiaries are unable tomeet these performance obligations, the performance guarantees could have amaterial adverse effect on product margins and the Company’s results of operations,liquidity or financial position. United Industrial’s operating subsidiariesmonitor the progress of their partners and subcontractors, and UnitedIndustrial does not believe that the performance of these partners andsubcontractors will adversely affect these contracts as of March 31, 2005. Noassurances can be given, however, as to the liability of United Industrial’soperating subsidiaries if partners or subcontractors are unable to performtheir obligations.

 

**Other ContingentMatters**

 

The Company is involved in various lawsuits and claims, includingasbestos-related litigation and environmental matters.  Except as set forth in Note K to theConsolidated Condensed Financial Statements included in this Quarterly Reporton Form 10-Q, there have been no material changes in litigation since theCompany filed its Annual Report on Form 10-K for the year ended December 31,2004.  For further information, refer tothe Consolidated Financial Statements and Notes thereto included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2004 andto Note K to the Consolidated Condensed Financial Statements included in thisQuarterly Report on Form 10-Q.

 

**Critical AccountingPolicies**

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions.  These estimates and assumptions affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements, as well as reportedamounts of revenues and expenses during the reporting period.  Judgments and assessments of uncertaintiesare required in applying the Company’s accounting policies in many areas.  Actual results could differ from theseestimates.

 

There have been no revisions to the CriticalAccounting Policies as filed in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2004.

 

**NewAccounting Pronouncements**

 

There have been no revisions to the NewAccounting Pronouncements as filed in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2004.

 

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**Item 3. - Quantitative and QualitativeDisclosures about Market Risk**

 

**Interest Rate**

 

On September 15, 2004, the Company issuedand sold $120,000,000 of 3.75% Convertible Senior Notes.  Several features contained in the indenturegoverning the 3.75% Convertible Senior Notes are considered embedded derivativeinstruments and are being accounted for as derivative instruments separate fromthe host contract (the 3.75% Convertible Senior Notes). The Company will recordgains or losses in its Consolidated Condensed Statements of Operations forchanges in the fair value of these embedded derivatives.  The aggregate fair value assigned to theseembedded derivatives at December 31, 2004 was approximately $742,000, and wasapproximately $304,000 at March 31, 2005. Accordingly, the Company recognized a gain of $438,000 for the threemonths ended March 31, 2005 as the result of the change in fair value of theembedded derivatives.

 

Each of the embeddedderivatives may result in certain payments to the holders of the 3.75%Convertible Senior Notes.

 

Therehas been no material change in the interest rate risk or contingent paymentfeatures from December 31, 2004 (see Item 7A in the Company’s Annual Report onForm 10-K for the year ended December 31, 2004).

 

**Foreign Currency**

 

A portion of the Company’s operationsconsists of manufacturing and sales activities in foreign jurisdictions, andsome of these transactions are denominated in foreign currencies.  As a result, the Company’s financial resultscould be affected by changes in foreign exchange rates.  To mitigate the effect of changes in these rates,the Company, from time to time, enters into foreign exchange contracts.  There has been no material change in thefirmly committed sales exposures and related derivative contracts from December31, 2004 (see Item 7A in the Company’s Annual Report on Form 10-K for the yearended December 31, 2004).

 

**Item 4. - Controls and Procedures**

 

(a)                TheCompany’s management evaluated, with the participation of the Company’sprincipal executive and principal financial officers, the effectiveness of theCompany’s disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)), as of March 31, 2005.  Based ontheir evaluation, the Company’s principal executive and principal financialofficers concluded that the Company’s disclosure controls and procedures wereeffective as of March 31, 2005.

 

(b)               There has been no change in the Company’sinternal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) that occurred during the Company’s fiscalquarter ended March 31, 2005, that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

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**PARTII - OTHER INFORMATION**

 

##### **Item 1. - Legal Proceedings**

 

Reference is made to the information containedin the section entitled “*Contingent Matters*”under Item 2. “*Management’s Discussion andAnalysis of Financial Condition and Results of Operations*” set forthabove and to Note K to the Consolidated Condensed Financial Statements includedherein, which information is incorporated herein by reference.

 

**Item6. - Exhibits**

 
| 31.1   |   | Rule  13a-14(a)/15d-14(a) Certification by the Chief Executive Officer of the  Company. |
|--------|--------|-----------------------------------------------------------------------------------------|
|   |   |                                                                                    |
| 31.2   |   | Rule  13a-14(a)/15d-14(a) Certification by the Chief Financial Officer of the  Company. |
|   |   |                                                                                    |
| 32.1   |   | Section 1350  Certification by the Chief Executive Officer of the Company.              |
|   |   |                                                                                    |
| 32.2   |   | Section 1350  Certification by the Chief Financial Officer of the Company.              |

 

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SIGNATURE

 

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

 
|   | UNITED  INDUSTRIAL CORPORATION                                                                             |
|--------|------------------------------------------------------------------------------------------------------------|
|   |                                                                                                       |
|   |                                                                                                       |
| Date:  | May 9, 2005                                                                                                |   | By: |  /s/  James H. Perry |   |
|   | James H.  Perry                                                                                            |   |
|   | Vice  President,  Chief Financial Officer  (as duly authorized officer  and principal accounting  officer) |   |
|        |                                                                                                            |  |  |  |  |  |  |  |  |

 

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INDEX OF EXHIBITS FILED HEREWITH

 

**Exhibit No.**

 
| 31.1   |   | Rule  13a-14(a)/15d-14(a) Certification by the Chief Executive Officer of the  Company. |
|--------|--------|-----------------------------------------------------------------------------------------|
|   |   |                                                                                    |
| 31.2   |   | Rule  13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of the  Company. |
|   |   |                                                                                    |
| 32.1   |   | Section 1350  Certification of the Chief Executive Officer of the Company.              |
|   |   |                                                                                    |
| 32.2   |   | Section 1350  Certification of the Chief Financial Officer of the Company.              |

 

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