UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

Commission file number: 1-11376

THE ALLIED DEFENSE GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware (State of incorporation)		04-2281015 (I.R.S. Employer Identification No.)

8000 Towers Crescent Drive, Suite 260
Vienna, Virginia 22182
(Address of principal executive offices, including zip code)

(703) 847-5268
(Registrant’s telephone number, including area code)

Title of Class		Name of Exchange
Common Stock, $0.10 Par Value		NYSE Amex
		(formerly American Stock Exchange)

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO þ

The aggregate market value of the voting stock of the registrant held by non-affiliates as of June 30, 2009, the last day of the registrant’s most recently completed second fiscal quarter, was $29,320,746. For purposes of this determination, only our directors, including any indirect holdings of such directors as reported in Item 11 of this Form 10-K, and executive officers have been deemed affiliates.

The number of shares of registrant’s Common Stock outstanding as of March 10, 2010, was 8,174,480.

 

 

INDEX

PART I
Item 1. Business			3
Item 1A. Risk Factors			8
Item 1B. Unresolved Staff Comments			8
Item 2. Properties			8
Item 3. Legal Proceedings			9
Item 4. (Reserved)			9
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			10
Item 6. Selected Financial Data			10
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			23
Item 8. Financial Statements and Supplementary Data			23
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			23
Item 9A (T). Controls and Procedures			23
Item 9B. Other Information			24
PART III
Item 10. Directors, Executive Officers and Corporate Governance			25
Item 11. Executive Compensation			29
Item 12. Security Ownership of Certain Beneficial Owners, Management & Related Stockholder Matters			33
Item 13. Certain Relationships and Related Transactions, and Director Independence			35
Item 14. Principal Accountant Fees and Services			35
PART IV
Item 15. Exhibits and Financial Statement Schedules			36
SIGNATURES			37
Exhibit 21
Exhibit 23
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I

ITEM 1.		BUSINESS

The Allied Defense Group, Inc. (“Allied” or the “Company”) is a multinational defense business focused on the manufacture and sale of ammunition and ammunition related products for use by the U.S. and foreign governments. Allied’s strategic business is conducted by its two wholly owned subsidiaries: MECAR S.A. (“Mecar”) and MECAR USA, Inc. (“Mecar USA”). Mecar is located in Nivelles, Belgium and Mecar USA is located in Marshall, Texas.

On January 18, 2010, the Company signed a definitive Merger agreement with Chemring Group PLC (“Chemring”). Chemring has agreed to acquire the Company in an all-cash transaction valued at $7.25 per share. The closing of the Merger is subject to obtaining the approval of our stockholders and the satisfaction of the other closing conditions contained in the Merger agreement and may be impacted by the matters described in Item 3 including but not limited to a delay in the closing of the Merger. The Company has postponed the date of its special meeting of stockholders to approve its pending merger with Chemring from April 8, 2010 to April 22, 2010. The special meeting has been postponed in order to provide ADG stockholders with additional time to review the Form 10-K, and in order to provide ADG with additional time to address the matters described in Item 3. ADG has been providing regular updates to Chemring on its progress in addressing such matters and expects to continue to cooperate with Chemring with respect to these matters.

Prior to the fourth quarter of 2008, the Company had operated within two primary business segments, the Ammunition & Weapons Effects segment (“AWE”) and the Electronic Security (“ES”) segment. In order to focus on its core competency in ammunition and reduce its debt, the Company began divesting certain of its business units in 2007. Since 2007, the Company sold one business that had been in the AWE segment, Titan Dynamic Systems, Inc. (“Titan”); one business that had been in the Company’s Other segment, SeaSpace Corporation and the three businesses that made up the Company’s ES segment, The VSK Group, Global Microwave Systems Inc. (“GMS”) and News/Sports Microwave Rental, Inc. (“NSM”).

Allied was incorporated as a Delaware corporation in 1961 under the name Allied Research Associates, Inc. Allied changed its corporate name to Allied Research Corporation in 1988 and subsequently changed its name to The Allied Defense Group, Inc. effective January 2, 2003.

The following table summarizes the Company’s significant acquisitions and dispositions:

Acquisition Date		Company Involved		Disposition Date
May 31, 1994		VSK Electronics N.V. and Télé Technique Générale S.A.		September 18, 2007
May 9, 1995		Intelligent Data Capturing Systems N.V.		September 18, 2007
December 11, 1999		VIGITEC S.A.		September 18, 2007
December 31, 2001		News/Sports Microwave Rental Inc.		August 7, 2009
June 6, 2002		Titan Dynamic Systems, Inc.		March 17, 2008
July 31, 2002		SeaSpace Corporation		July 23, 2007
August 1, 2004		CMS Security Systems		January 1, 2008
November 1, 2005		Global Microwave Systems, Inc.		October 1, 2008

All amounts are reported in thousands of dollars, except for share data and Item 11 - Executive Compensation.

The results of operations, financial position and cash flows of Titan, GMS and NSM, have been reported as discontinued operations for all periods presented, in accordance with ASC 360 Accounting for the Impairment or Disposal of Long-Lived Assets.

Description of Business

Allied

Allied, as the parent holding company, provides oversight and corporate services for its subsidiaries. Allied’s corporate expenses are reported separately on the segment reporting schedules.

As a result of the Company’s recent divestitures of business units, the Company has realigned its operating segments based on senior management’s evaluation of the business and in accordance with ASC 280 Segment Reporting. The new segments are Mecar and Mecar USA. The Company’s management believes these two business units are two distinctive segments because they have their own management teams, different capital requirements, different markets and different products.

Mecar mainly develops and manufactures its proprietary ammunition and has some smaller portion of its revenue based on service type activities such as selling ammunition manufactured by other parties, consulting on the development of manufacturing facilities, and providing sales representation to weapon systems manufacturers. Mecar USA, on the other hand, has a revenue base that is largely made up of service type activities with a much smaller portion of its revenue based on manufacturing. Mecar has higher capital requirements as compared to a lower capital base at Mecar USA. The gross margins at Mecar, in general, are higher than those of Mecar USA.

Mecar

Mecar designs, develops, manufactures and sells ammunition and ammunition related products for military use. Substantially all of Mecar’s revenues are derived from the sale of ammunition which is used with weapons that are generally considered defensive weapons. From time to time, Mecar provides system integration services pursuant to which it purchases and resells weapon systems, ammunition manufactured by others or consulting services to governments looking to develop their own manufacturing capabilities in types of ammunition not manufactured by Mecar. Mecar’s manufactured products consist of a wide variety of ammunition and grenades in the medium caliber, artillery, anti-tank and anti-material categories. The following are the principal products produced and sold by Mecar:

Direct Fire Ammunition

90mm Ammunition Mecar develops and produces a complete family of 90mm ammunition that includes Armor Piercing Fin Stabilized Discarding Sabot (APFSDS), High Explosive (HE), High Explosive Anti-Tank (HEAT), Smoke (SMK) and High Explosive Squash Head (HESH) rounds. This tank ammunition is for the COCKERILL Mk II and III, ENGESA EC-90, the DEFA F1 and the CN 90 F3 & F4 guns. The 90mm MKVIII KENERGA Weapon System has been jointly developed by Cockerill Mechanical Systems (“CMI”) and Mecar to provide the modern LAV with anti-tank punch similar to that of tanks equipped with 105mm guns, without sacrifice to the range, mobility and maintainability of the light LAV. The ammunition products include the APFSDS, HESH and SMK versions with their corresponding training rounds and these rounds have been safety certified by the US Army.

105mm Ammunition Mecar produces an entire range of 105mm tank ammunition. This range includes the APFSDS, HEAT, HESH and SMK, with their corresponding training rounds. In 2003, Mecar, in conjunction with L-3 Communications, won the contract to deliver the 105mm High Explosive Plastic — Tracer (HEP-T) and Training Practice — Tracer (TP-T) rounds to the U.S. Army for the Stryker BCT systems. The rounds have been type classified as the M393A3 and M467A1 respectively.

Indirect Fire Ammunition

Mortar Ammunition The 120mm family is state of the art ammunition for standard field mortars and for the turreted mortar systems such as the Patria NEMO and the BAE Land Systems AMS. The current version of this ammunition has successfully completed qualification with the U.S. Army, together with the 120mm AMS Light Armored Vehicle (LAV) system. This system is capable of direct as well as indirect fire. Mecar has developed and qualified a direct fire fuse for the AMS. The 60mm and 81mm family of mortar ammunition has been modernized to compete with the latest generation of this product line.

Other Ammunition

The 25mm APFSDS-T ammunition round is Mecar’s entry into the medium caliber arena. This round and other 25mm rounds have been key components of the larger sales contracts Mecar has signed since 2007. In addition, Mecar has produced 155mm HE, SMK (WP) and Illuminating rounds for various customers. Mecar manufactures HE, CAN, HESH and HESH-PRAC ammunition for the 76mm L23 guns, which are in service with armored vehicles in several countries in Europe, South America, Africa and the Far East. Mecar has developed and manufactured ammunition for the 106mm Recoilless Rifle. Mecar has also developed and manufactured the 84mm SAKR Recoilless Rifle and its associated family of ammunition. The SAKR ammunition (HEAT, HE, SMK, ILL and HEAT-TP-T) is also interoperable with existing 84mm systems.

Grenades

Mecar manufactures two types of grenades: the M72 controlled fragmentation hand grenade and the universal bullet trap rifle grenade. The universal bullet trap rifle grenade is designed to be light, effective, accurate and simple to use. It is fitted over the muzzle of any standard military rifle with a muzzle outer diameter of 22mm and fired from the shoulder in the normal manner. Mecar manufactures several different bullet trap grenades including high explosive fragmentation, anti-personnel, armor piercing, smoke generating, white phosphorus, and parachute flare (night illuminating). A new dual-purpose rifle grenade with an electronic dual safety fuse has been developed for a European client. It is in its final stages of production.

Mecar USA

Mecar USA purchases and resells ammunition and ammunition related products manufactured by others for the benefit of the U.S. government and foreign governments. Mecar USA substantially expanded this procurement business in 2008. Under the normal terms of these procurement contracts, Mecar USA negotiates pricing, assumes ownership of inventory, inspects quality of ammunition and arranges all logistics required by the customer. Mecar USA also has manufacturing contracts from the U.S. Government and others for ammunition and pyrotechnics devices. Mecar USA became operational in late-2005 following the construction of a new facility in Marshall, Texas.

Geographic Areas and Industry Segments

See Note T of Allied’s consolidated financial statements for information concerning the geographic areas and industry segments of Allied. The Company has two operating segments, Mecar and Mecar USA, both of which are in the defense industry.

Market and Customers

Allied derives the principal portion of its revenue from direct and indirect sales to foreign governments and prime contractors, primarily on fixed price contracts. Certain foreign governments accounted for approximately 45% and 60% of the Company’s total revenue in both 2009 and 2008, respectively, either directly or indirectly, as detailed in Note A to the consolidated financial statements.

Commencing in early 2000, Mecar designated a former marketing representative as its independent distributor/value added reseller (“Distributor”) to its largest foreign government customer. The Distributor obtains a contract from the end user customer and subcontracts a portion of the work to Mecar. The products that Mecar produces are sold to the Distributor for resale to the foreign government customer end users. The use of a Distributor for these purposes is not in conflict with European Community or Department of Defense regulations or protocol.

Mecar’s products are sold either directly or indirectly to the defense departments of governments and are regulated by Belgian law regarding the foreign governments with which it may do business and which products may be sold to the end users. As a practice, Allied does not permit Mecar to accept sales contracts if they are in conflict with U.S. government policy.

The sales by Mecar in any given period and its backlog at any particular time may be significantly influenced by one or a few large orders. An order for Mecar’s products is often for a large quantity and/or a substantial aggregate price, primarily because the materials required for the manufacture of the products cannot be economically purchased in small quantities and because of the favorable economies of scale gained with large volume production. Most of the contracts received by Mecar require delivery in approximately one year. Mecar’s business and its profitability is dependent upon its ability to obtain such large orders. In addition to these large orders, Mecar frequently accepts smaller orders to increase its customer base and efficiently use its manufacturing capacity.

When Mecar obtains a contract for the sale of its products, it generally receives down payment(s) and/or letter(s) of credit to be applied to the purchase price upon shipment of the products. In such cases, Mecar is generally required to provide advance payment guarantees and performance bonds issued by its banking credit facility. Mecar has from time-to-time received foreign military sale (“FMS”) contracts from the U.S. Government for the manufacture of ammunition for the benefit of a foreign government customer. Such contracts may be terminated for convenience by the government or upon default by the manufacturer. The contracts received by Mecar through the FMS system do not require down payments, letters of credit, advance payment guarantees or performance bonds.

Mecar USA’s current customers are the U.S. government, U.S.-based prime contractors and foreign governments. Mecar USA’s products are sold either directly or indirectly to the defense departments of governments and are regulated by U.S. government law regarding the foreign governments with which it may do business.

The sales by Mecar USA in any given period and its backlog at any particular time may be significantly influenced by one or a few large orders. Mecar USA’s business and its profitability is dependent upon its ability to obtain such large orders.

Principal Customers

Mecar has historically received a large percentage of its revenue from agencies of The Kingdom of Saudi Arabia. See Note A to Allied’s consolidated financial statements. Mecar receives contracts for the benefit of The Kingdom of Saudi Arabia via the Distributor and has also received contracts for the benefit of this customer via the FMS program. Mecar has been focusing on expanding and diversifying its customer base. In the years 2004, 2005, 2006 and 2007, this foreign government represented 88%, 75%, 54% and 52%, of Allied’s revenue, respectively. In 2008 and 2009, this customer represented 52% and 30% of Allied’s revenue, thus reducing the concentration of this customer. Other significant customers include the Kingdom of Bahrain which represented 11% of 2009 revenues. Mecar USA sells directly or indirectly to the U.S. and foreign governments. Most of the larger contracts are indirect with the end user and Mecar USA obtains its purchase orders from teaming or subcontracting agreements. In 2009, Mecar USA served as a sub-contractor to large defense contractors on a U.S. Government contract which represented 27% of Allied’s revenue.

Raw Materials and Suppliers

The production of ammunition requires an ample supply of chemicals, pyrotechnic materials, metal component parts and casings. Mecar generally attempts to ensure that several vendors will be available in the open market to compete for all supply contracts. However, once the development phase is complete and the design has been stabilized for certain products, the continued availability of supplies can become critical to its ability to perform on a particular contract. Mecar and Mecar USA seek to protect themselves against shortages and similar risks by planning alternative means of production, by producing internally, and by monitoring the availability and sources of supplies. Mecar and Mecar USA depend upon major suppliers to provide a continuous flow of such components and materials where in-house capability does not exist, and has generally found such materials and supplies to be readily available.

Marketing

The day to day marketing activities are handled by Mecar and Mecar USA’s staff of sales professionals, engineers, and executive personnel. For Mecar and Mecar USA, an even greater effort has been made to expand its customer base into new foreign governments in order to mitigate the potential downfalls of relying on a few large customers. Mecar USA currently focuses more of its marketing efforts on procuring finished goods for resale in pass through contracts, based on its limited manufacturing capabilities. In addition, Mecar advertises in trade journals and participates in trade shows. Mecar is also represented by marketing representatives in different markets and has designated a Distributor for indirect sales to its largest end user customer.

Research and Development

The development of ammunition and weapon systems requires knowledge and experience in aerodynamics, mechanical engineering, chemistry, combustion, materials behavior and ballistics. Mecar maintains an active research and development staff, including a staff of design engineers, in order to determine how materials can be used or combined in new ways to improve performance or to solve new problems. In 2009 and 2008, Mecar expended $2,017 and $2,277, respectively, for research and development activities. Mecar designed most of the products which it currently manufactures. In addition to its ammunition, Mecar designs and develops most of its special tooling, fixtures, special explosive loading, testing systems and demilitarization equipment.

Backlog

As of December 31, 2009 and 2008, Allied had backlog orders, believed to be firm, after giving effect to the percentage of completion method of accounting for its contracts of $82,425 and $185,921, respectively. This backlog is calculated by taking all committed contracts and orders and deducting shipments or revenue recognized pursuant to the percentage of completion method of accounting as applicable. The December 31, 2009 and 2008 backlog was as follows:

		Backlog by Segment
		2009								2008
		Amount				%				Amount				%
Mecar		$	68,933				84	%		$	136,396				73	%
Mecar USA			13,492				16				49,525				27
Total		$	82,425				100	%		$	185,921				100	%

The December 31, 2009 and 2008 amounts do not include unfunded portions of contracts, which are subject to the appropriation or authorization of government funds, of approximately $29,272 and $13,439, respectively, from Mecar and Mecar USA. These are contracts or portions of contracts that do not have all of the appropriate approval to be performed on. In most cases, these contracts require a formal budget approval before they can be added to the funded, firm backlog.

Competition

The munitions business is highly competitive. Mecar and Mecar USA have a number of competitors throughout the world, including competitors in the United States. Many of these competitors are substantially larger companies with greater capital resources and broader product lines. Many of the competitors have existing relationships with governments and countries in which Mecar and Mecar USA market their products. For example, many countries will only acquire ammunition and other military items from manufacturers located in said countries. In many other countries, it is important to have an independent marketing representative.

Competition is mainly based upon accessibility to potential markets, technical expertise, quality, capabilities of the product, price and ability to meet delivery schedules. In the United States, the market place is dominated by several large domestic manufacturers that make it difficult for Mecar and Mecar USA to directly compete. In some instances, Mecar and Mecar USA have signed strategic alliances with larger competitors in order to work with them to develop new niche products. The downsizing of the munitions industrial base has resulted in a reduction in the number of competitors through consolidations and departures from the industry. This has reduced the number of competitors in some programs, but has strengthened the capabilities of some of the remaining competitors. In addition, it is possible that there will be increasing competition from the remaining competitors in business areas in which they do not currently compete.

Recently, Mecar USA has experienced significant growth with procurement contracts. These are contracts where Mecar USA commits to deliver ammunition and/or related products manufactured by others to U.S. or foreign governments. Mecar USA assumes inventory risk, including quality risk, for the procurement products and often provides the logistic support to transport this inventory. These contracts are very competitive with many businesses competing for these generally lower margin contracts.

Seasonal Nature of Business

The Company’s business in general is not seasonal, although the summer and winter holiday seasons affect Company revenue because of the impact of holidays and vacations on the Company’s international operations. Our ability to ship product to certain customers in the Middle East is restricted in the summer months, which can increase our working capital requirements during those periods. Variations in the Company’s business may also occur at the expiration of major contracts until such contracts are renewed or new business obtained.

Personnel

As of December 31, 2009, the Company collectively had 348 employees as follows:

		Technical &				Hourly				Part-Time				Technical
		Salaried Employees				Workers				Employees				Consultants				Total
Allied			8				—				—				—				8
Mecar			53				264				1				4				322
Mecar USA			10				8				—				—				18
Total			71				272				1				4				348

The classification of employees noted above for Mecar is in accordance with Belgian law. Mecar’s employees, except management, are represented by a labor union. The Company’s relations with the labor union have been good.

Patents and Trademarks

None of the Allied subsidiaries hold significant patents or trademarks.

Environmental Regulations

The Company does not anticipate that compliance with any laws or regulations relating to environmental protection will have a material effect on its capital expenditures, earnings or competitive position, although new environmental regulations continue to go into effect in Belgium. Mecar has spent approximately $143 and $400 in 2009 and 2008, respectively, in order to be compliant with current Belgian regulations.

Available Information

Our principal Internet address is www.allieddefensegroup.com. We make available free of charge on www.allieddefensegroup.com our annual, quarterly and current reports, and amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, you may request a copy of these filings (excluding exhibits) at no cost by writing or telephoning us at the following address or telephone number:

The Allied Defense Group, Inc.
8000 Towers Crescent Drive, Suite 260
Vienna, Virginia 22182
(703) 847-5268

ITEM 1A.		RISK FACTORS

Not required for a smaller reporting company.

ITEM 1B.		UNRESOLVED STAFF COMMENTS

None.

ITEM 2.		PROPERTIES

Allied’s principal executive offices are located in Vienna, Virginia, where it leases approximately 6,400 square feet of office space. The lease expires in February 2013. The following table shows the principal properties of Allied’s subsidiaries as of December 31, 2009:

Square Footage

Entity

Location

Property

Owned

Leased

Mecar (1)

Nivelles, Belgium

Office/Mfg

399,068

2,046

Mecar USA (2)

Marshall, TX

Office/Mfg

17,538

36,000

The above facilities are considered to be in good operating condition, adequate for present use, and have sufficient plant capacity to meet current and anticipated operating requirements.

ITEM 3.		LEGAL PROCEEDINGS

DOJ Subpoena

On January 19, 2010, the Company received a subpoena and communications from the U.S. Department of Justice (“DOJ”) requesting the Company produce documents relating to its dealings with foreign governments. The subpoena stated that it was issued in connection with an ongoing criminal investigation. On the same day, the Company also became aware through a press release issued by the DOJ that an employee of Mecar USA had been indicted by the DOJ for allegedly engaging in schemes to bribe foreign government officials to obtain and retain business. The unsealed indictment of this employee and the DOJ’s press release indicate that the alleged criminal conduct was on behalf of a Decatur, Georgia company which is unrelated to the Company or Mecar USA. Mecar USA’s employment agreement with the employee provides that the employee shall not actively engage in any other employment, occupation or consulting activity that conflicts with the interests of the Company. In light of the employee’s apparent breach of his employment agreement, Mecar USA terminated his employment on January 20, 2010.

According to the DOJ’s press release, the former employee was arrested on January 19, 2010, along with twenty-one other individuals, after a large-scale undercover operation that targeted foreign bribery in the military and law enforcement products industry. The indictments of the twenty-two individuals allege that the defendants conspired to violate the Foreign Corrupt Practices Act (“FCPA”), conspired to engage in money laundering and engaged in substantive violations of the FCPA.

The Company is cooperating with the DOJ and complying with the DOJ’s subpoena in addition to conducting an internal review of the activities of Mecar USA’s former employee. The internal review is being conducted by the Company’s Audit Committee with the assistance of independent outside counsel.

The Company’s internal review and the Company’s response to the DOJ’s subpoena are still in an early stage, and the Company cannot predict the outcome of these matters or the impact, if any, that the internal review or the response to the subpoena may have on the Merger with Chemring (the “Merger”) or on our business, results of operations, liquidity or capital resources.

Litigation Relating to the Merger

Two putative stockholder class action lawsuits related to the Merger were filed since the announcement of the execution of the Merger agreement. On February 19, 2010, the Delaware Court of Chancery entered an order consolidating the two actions. On March 3, 2010, following the filing of the Company’s preliminary proxy statement with the SEC, the plaintiffs filed a consolidated amended class-action compliant, which names as defendants, each of the Company’s directors and a Chemring subsidiary. The consolidated action was dismissed without prejudice effective April 1, 2010.

ITEM 4.		(RESERVED)

 

PART II

ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information. Allied’s Common Stock has been listed for trading on the NYSE Alternext Exchange (formerly American Stock Exchange) since September 15, 1992. Its trading symbol is ADG. Its media listing is under the symbol Allied Defense. The table below shows the high and low sales prices of Allied’s Common Stock during 2009 and 2008:

		2009								2008
		High				Low				High				Low
1st Quarter		$	7.15			$	3.78			$	8.45			$	5.62
2nd Quarter			4.84				3.28				7.41				5.01
3rd Quarter			5.26				3.37				7.16				4.82
4th Quarter			7.14				4.72				8.35				4.96

Stockholders. The number of holders of record of the Common Stock at March 10, 2010 was 780.

Dividends. There have been no dividends declared or paid by Allied since November 1992. The payment of dividends is within the discretion of Allied’s Board of Directors and any decision to pay dividends in the future will depend upon an evaluation of a number of factors, including earnings, capital requirements, operating and financial condition, and any contractual limitation then in effect. Under the terms of the Merger agreement, Allied is not permitted to pay any dividends pending the closing of the Merger. Mecar is not allowed to remit a dividend to Allied based on the terms of its borrowing arrangements with its bank group and a Belgian regional agency.

Equity Compensation Plan Information. The following table provides information as of December 31, 2009 about Allied’s Common Stock that may be issued upon the exercise of options and rights under all of Allied’s existing equity compensation plans as of December 31, 2009, including the 2001 Equity Incentive Plan, the 1997 Incentive Stock Plan and the 1992 Employee Stock Purchase Plan (all of which have been approved by Allied’s stockholders), as well as rights to acquire shares of Allied’s Common Stock granted to unaffiliated institutional investors.

In conjunction with the Company’s signing a definitive Merger agreement on January 18, 2010, all equity compensation plans have been suspended pending the Company’s Merger. As such, new future equity awards will not be made unless the Merger transaction fails to close.

Number of Securities

Available for Future

Number of Securities to be

Weighted Average

Issuance Under Equity

Issued Upon Exercise of

Exercise Price of

Compensation Plans

Outstanding Options,

Outstanding Options,

(Excluding Securities

Warrants and Rights

Warrants and Rights

Reflected in Column (a))

(a)

(b)

(c)

Equity compensation plans approved by security holders

390,000

$

11.52

253,258

Equity compensation plans not approved by security holders(1)

411,593

$

17.89

—

Total

801,593

$

14.79

253,258

ITEM 6.		SELECTED FINANCIAL DATA

Not required for a smaller reporting company.

ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (amounts in thousands of dollars, other than share data)

Overview

Allied is a multinational defense business focused on the manufacture and sale of ammunition and ammunition related products for use by the U.S. and foreign governments. Allied’s business is conducted by its two wholly owned subsidiaries: Mecar S.A. (“Mecar”) and Mecar USA, Inc. (“Mecar USA”). Mecar is located in Nivelles, Belgium and Mecar USA is located in Marshall, Texas. Corporate is located in Vienna, Virginia. Expenses related to Corporate and foreign holding companies are reported separately in the segment reporting schedules.

On January 18, 2010, the Company signed a definitive Merger agreement with Chemring Group PLC (“Chemring”). Chemring has agreed to acquire the Company in an all-cash transaction valued at $7.25 per share. The closing of the Merger is subject to obtaining the approval of our stockholders and the satisfaction of the other closing conditions contained in the Merger agreement and may be impacted by the matters described in Item 3 including but not limited to a delay in the closing of the Merger. The Company has postponed the date of its special meeting of stockholders to approve its pending merger with Chemring from April 8, 2010 to April 22, 2010. The special meeting has been postponed in order to provide ADG stockholders with additional time to review the Form 10-K, and in order to provide ADG with additional time to address the matters described in Item 3. ADG has been providing regular updates to Chemring on its progress in addressing such matters and expects to continue to cooperate with Chemring with respect to these matters.

Prior to the fourth quarter of 2008, Allied operated within two primary business segments, the Ammunition & Weapons Effects segment (“AWE”) and the Electronic Security (“ES”) segment. In order to focus on its core competency in ammunition and reduce its debt, the Company began divesting certain of its business units. During 2008, Allied sold one business that had been in the AWE segment, Titan Dynamic Systems, Inc. (“Titan”) and divested Global Microwave Systems Inc. (“GMS”), which had been in the ES business units. On August 7, 2009, the Company completed the sale of the last remaining business in the ES segment, News/Sports Microwave Rental, Inc. (“NSM”).

As a result, Allied has realigned its operating segments into Mecar and Mecar USA, as follows:

	•		Mecar. Mecar designs, develops, manufactures and sells ammunition and ammunition related products for military use. Substantially all of Mecar’s revenues are derived from the sale of ammunition which is used with weapons that are generally considered defensive weapons. From time to time, Mecar provides system integration services pursuant to which it purchases and resells weapon systems, ammunition manufactured by others or consulting services to governments looking to develop their own manufacturing capabilities often in types of ammunition not manufactured by Mecar. Mecar’s manufactured products consist of a wide variety of ammunition and grenades in the medium caliber, artillery, anti-tank and anti-material categories.
	•		Mecar USA. Mecar USA purchases and resells ammunition and ammunition related products manufactured by others for the benefit of the U.S. government and foreign governments. Mecar USA substantially expanded this procurement business in 2008. Mecar USA also pursues manufacturing contracts from the U.S. Government and others for ammunition and pyrotechnics devices. Mecar USA became operational in late-2005 following the construction of a new facility in Marshall, Texas.

Allied, the parent company, provides oversight and corporate services to its subsidiaries and has no operating activities.

Segment data set forth herein for prior periods has been revised to conform to the current Mecar and Mecar USA operating segments.

Liquidity and Capital Resources

During the last few years, the Company has faced and continues to face liquidity challenges resulting mainly from the reduction of revenues in 2006 and 2007 and continuing significant operating losses at MECAR. In 2008, the Company’s liquidity was adversely affected by financing and restructuring costs. During that time, the Company implemented a plan to reduce the fixed operating cost base at its subsidiaries. The corporate headquarters also engaged in cost-cutting measures and committed to a plan to divest non-core subsidiaries and repay its convertible notes and MECAR’s revolving cash line. In December 2008, the Company repaid MECAR’s revolving cash line. The Company fully repaid its convertible notes, with the last payment made in January 2009.

At present, the Company and its subsidiaries are operating without the benefit of any line of credit. Each of Mecar and Mecar USA have been operating under substantial cash restrictions and have managed their respective operations with the assistance of receivables factoring, bank overdrafts and stretching payments to vendors and suppliers. Mecar’s cash shortages have precluded it from paying management fees to Allied. Allied has overcome this shortfall by obtaining early, discounted payments from escrows established in connection with the sales of The VSK Group and GMS, which escrows have now been exhausted.

In addition, MECAR’s bank group has agreed to extend its current credit facility for the issuance of performance bonds and advance payment guarantees until April 30, 2010. The current facility provides for a maximum of $39,416 (€27,500) of performance bonds and advance payment guarantees outstanding at one time. Any requirements in excess of this amount are required to be fully cash collateralized by the Company. The banks currently have issued irrevocable performance bonds and advance payment guarantees, expiring after April 30, 2010, with a value of $21,412 (€14,939). Such outstanding performance bonds and advance payment guarantees will remain in place until their individual expiration, which at the minimum, is for the term of the respective contract. Unless the Company is able to extend or replace this financing, it will not be able to sign any new customer contracts that require performance bonds or advance payment guarantees without full cash collaterization. The Company’s possible inability to sign new customer contracts will significantly impact future revenues thereby potentially limiting Mecar’s ability to meet its existing and known or reasonably likely future cash requirements. However, the Company will continue to recognize revenue from contracts in progress with existing performance bond and advance payment guarantees until completion of the contracts. Sales contracts typically extend for a period of 12 to 18 months from signing. In addition, in order to better manage short-term cash flow, members of the bank group have discounted letters of credit and extended the bank overdraft facility during 2009 from time to time.

The Company has been unable to obtain a longer term banking solution in Europe. In 2009, MECAR was approved for additional issuances of performance bonds and advance payment guarantees by a new bank that is not in the bank group. Upon the termination of MECAR’s credit facility on April 30, 2010, future issuances, if any, will have to be provided on a case by case basis. The Mecar bank group has advised that if the Merger does not close by April 30, 2010, the Company should not expect continued short-term financing and short-term extensions of the credit facility by Mecar’s bank group.

The Company has also sought additional working capital financing for its US operations to support MECAR USA; no such financing has yet been obtained. In the interim, MECAR USA has made arrangements to fund its working capital requirements with accounts receivable factoring arrangements and continued stretching of trade creditors. MECAR USA has adequate trade financing in place to execute its current backlog, but future growth will be limited unless long-term working capital financing can be secured.

At December 31, 2009, the Company had $9,021 in cash on hand. For the year ended December 31, 2009, the Company used $3,399 of cash from its continuing operating activities. This usage stems mainly from a $10,551 net loss from continuing operations, offset by $4,961 of non-cash adjustments and $2,191 from a decrease in net operating assets.

Outlook for 2010

On January 18, 2010, the Company signed a definitive Merger agreement with Chemring Group PLC (“Chemring”). Due to the cash flow challenges noted in the Liquidity and Capital Resources section above, if the Merger does not timely close, the Company will need to secure additional financing to support its operations.

As reported under Item 3 Legal Proceedings, the Company is currently complying with a subpoena and communications received from the DOJ. In addition, the Audit Committee of the Board is conducting an internal review of the activities of a former Mecar USA employee. The Company is incurring significant legal expense associated in complying with this subpoena and the internal review and it is uncertain of the outcome of these matters or the impact they may have on the Merger, our business, results of operations, liquidity or capital resources.

Since 2007, Mecar USA revenues have grown significantly as a result of the expansion of its ammunition service business. The Mecar USA executive whose employment was recently terminated was responsible for substantially all of the MECAR USA’s ammunition services contracts. During 2009, MECAR USA recruited an assistant for this former employee and management believes it has the personnel and resources necessary to timely perform on its backlog. Mecar USA continues to pursue new ammunition services contracts, although the loss of its former employee will likely have an adverse impact on Mecar USA’s ability to continue to grow its ammunition service business, for at least the short term.

The continuing loss from operations, the lack of financing, the DOJ subpoena and the loss of a key Mecar USA executive raise doubt about the Company’s ability to continue as a going concern in the event that the Merger does not close. If the Merger does not close, the Company will need to do a substantial refinance which, given the current credit markets, will likely be an equity transaction that will result in significant dilution to the shareholders.

The Company has less than $730 of firm commitments for capital expenditures outstanding as of December 31, 2009.

Results of Operations

Allied had a net loss from continuing operations of $10,551 for the year ended December 31, 2009 as compared to a net loss from continuing operations of $10,976 for the comparable period in 2008. The results were favorably impacted by reduced selling and administration expenses, gains from foreign exchange contracts and changes in the fair value of senior convertible notes and warrants and reduced interest expense associated with the Company’s convertible notes and Mecar’s credit facility, offset by a reduction in revenues of $2,001 and an increased cost of sales of $3,964.

For the year ended December 31, 2009, the Company had net income of $2,244 from discontinued operations as compared to net income of $534 for the comparable period in 2008. The 2009 results were favorably impacted by gains recognized on recoveries of outstanding escrow balances from the VSK and GMS sale transactions.

Net loss was $8,307 for the year ended December 31, 2009 as compared to a net loss of $10,442 for the comparable period in 2008. Results for 2009 benefited from the increase in net income from discontinued operations.

The Company’s results were negatively impacted by the foreign exchange impact on the operations of the Company’s Euro-based business unit. All Euro-based results of operations were converted at the average 2009 exchange rate of 1.3946 and 2008 exchange rate of 1.4713, U.S. Dollar to 1 Euro.

Results of Operations for the Year Ended 2009 compared to 2008

		Years Ended December 31,
		2009				2008
Revenues		$	142,423			$	144,424
Cost and expenses
Cost of sales			127,933				123,969
Selling and administrative			18,745				19,452
Research and development			2,017				2,277
Impairment of long-lived assets			181				462
Operating loss			(6,453	)			(1,736	)
Other income (expenses)
Interest income			107				734
Interest expense			(4,007	)			(6,403	)
Net gain (loss) on fair value of senior convertible notes and warrants			299				(1,104	)
Gain (loss) from foreign exchange contracts			669				(1,542	)
Other-net			(1,368	)			(711	)
			(4,300	)			(9,026	)
Loss from continuing operations before income taxes			(10,753	)			(10,762	)
Income tax (benefit) expense			(202	)			214
Loss from continuing operations			(10,551	)			(10,976	)
Income (loss) from discontinued operations, net of tax
Gain on sale of subsidiaries			3,923				2,750
Loss from discontinued operations			(1,679	)			(2,216	)
			2,244				534
NET LOSS		$	(8,307	)		$	(10,442	)
Earnings (Loss) per share — basic and diluted:
Net loss from continuing operations		$	(1.30	)		$	(1.36	)
Net earnings from discontinued operations			0.28				0.07
Total loss per share — basic and diluted		$	(1.02	)		$	(1.29	)
Weighted average number of common shares:
Basic and Diluted			8,120,428				8,045,239

Revenue. Allied had revenue of $142,423 for 2009, which was 1% lower than prior year’s revenue. The table below shows revenue by segment for the two year period.

		Revenue by Segment
		2009								2008
						% of								% of
		Amount				total				Amount				total
Mecar		$	86,393				61	%		$	112,192				78	%
Mecar USA			56,030				39				32,232				22
Total		$	142,423				100	%		$	144,424				100	%

Mecar’s revenue for the year ended December 31, 2009 decreased by $25,799 (23%) from the prior period. The decrease in revenue was due to lower manufacturing activity which mainly consisted of smaller, lower price contracts as compared to those executed in the prior year and reduced average exchange rates in the current year. The change in exchange rates accounted for $4,764 of the reduction from the prior period.

For the year ended December 31, 2009, Mecar USA’s revenue increased by $23,798 (74%) over the prior year. The growth in revenue is associated with the expansion of Mecar USA’s ammunition service business. Since February 2008, Mecar USA experienced substantial growth in its ammunition service related business by contracting to resell ammunition manufactured by others, to U.S. and foreign governments. Revenue in the current year mainly resulted from contracts to provide non-standard ammunition to the U.S. government for the benefit of Afghanistan. On these contracts, Mecar USA serves as a sub-contractor to large defense contractors.

Cost of Sales. Cost of sales (COS) as a percentage of revenue was 90% and 86% in 2009 and 2008, respectively. Gross margins, as a percentage of revenues, were 10% and 14% in 2009 and 2008, respectively. The decline of gross margin between the periods was due to lower margin contracts and a reduction in the number of hours worked in 2009 at Mecar. The table below shows cost of sales by segment for the year ended December 31, 2009 and 2008, respectively.

		Cost of Sales as a Percentage of Revenue by Segment
		2009								2008
						% of								% of
						segment								segment
		Amount				revenue				Amount				revenue
Mecar		$	78,030				90	%		$	93,716				84	%
Mecar USA			49,903				89				30,253				94
Total		$	127,933				90	%		$	123,969				86	%

Mecar’s gross profit for the year ended December 31, 2009 was $8,363 (10% of segment revenue) as compared to gross profit of $18,476 (16% of segment revenue) for the year ended December 31, 2008. This decrease was due to having a larger volume of smaller contracts and a mix of contracts with higher direct costs in the current year, which resulted in overall lower gross margins. On certain contracts with foreign governments, these direct costs include commissions to in-country agents. Mecar considers such costs to be directly attributable to its performance on the contract, as such, these costs are included in cost of goods sold. In the year ended December 31, 2009, commission expense was 8% of revenues as compared to 5% of revenues in the prior same year.

For the year ended December 31, 2009, gross profit for Mecar USA was $6,127 (11% of segment revenue) compared to gross profit of $1,979 (6% of segment revenue) in the prior comparable year. The improvement in gross margin resulted from better pricing and larger contracts being executed in the current year. The larger contracts provide better volume pricing from vendors and reduced per unit shipping costs.

Selling and Administrative Expenses. Selling and Administrative (SA) expenses as a percentage of revenue were 13% and 14% for 2009 and 2008, respectively. The table below shows SA expenses by segment for the two year period.

		Selling and Administrative Expenses by Segment
		2009								2008
		Amount				% of total				Amount				% of total
Mecar		$	10,121				54	%		$	10,250				53	%
Mecar USA			1,787				10				1,082				6
Corporate			6,837				36				8,120				41
Total		$	18,745				100	%		$	19,452				100	%

The decrease of $129 at Mecar was comprised of $751 of lower spending mainly related to professional services offset by a provision for an early retirement program of $622 (€446) booked in the current period. The early retirement program will be paid by Mecar over the next three to five years. The program provides for the immediate elimination of four full time positions.

In mid 2008 and early 2009, Mecar USA expanded its headcount and marketing efforts to handle its increased operating activities. This expansion led to the $705 increase from the prior year. The increased spending stemmed from higher payroll, legal and travel expenses. The decrease of $1,283 in Corporate segment resulted from reduced spending in staffing and professional expenses.

Research and Development. Research and development (R&D) costs decreased $260 for the year ended December 31, 2009 from 2008 levels. All R&D expenses are incurred at Mecar where there is a permanent staff of engineers available for projects. The reduction in R&D expense stemmed from a reduced focus on R&D projects during 2009.

Impairment of Long-Lived Assets. During 2009 and 2008, Corporate recorded $181 and $462, respectively, in impairment charges for long-lived assets related to the Corporate’s ERP computer system. As the Company has reduced its head count and operating units as a result of selling a number of its subsidiaries, the Company determined that the carrying value of the ERP system exceeded its fair value.

Interest Income. Interest income for the years ended December 31, 2009 was $107 as compared to $734 in 2008. The decrease of $627 in interest income was a result of lower interest rates applied to lower average cash levels in 2009 compared to 2008.

Interest expense. Interest expense for the year ended December 31, 2009 was $4,007 as compared to prior year interest expense of $6,403. This decrease was mainly due to the full repayment of the Company’s outstanding convertible notes in January 2009. In addition, Mecar no longer has to accrue interest on past due liabilities related to its social security obligations. Current year interest expense at Mecar includes costs for performance bonds and advance payment guarantees, short-term financing associated with bank overdrafts and interest penalties associated with a delayed sales contract. In addition, in 2009, Mecar agreed to pay its bank group approximately $558 (€400) as a financing fee associated with the cash pledge waiver provided by the bank group. See Note I — Bank Credit Facility for a description of this fee.

Net Gain (Loss) on fair value of senior convertible notes and warrants. For the year ended December 31, 2009, the Company recognized a net gain of $299 related to the fair value of the notes and warrants as compared to a net loss of $1,104 for the comparable period in 2008. Changes in the fair value of the notes and warrants are due primarily to the change in the Company’s closing stock price, the volatility of the Company’s stock price during the period, the redemption features of the notes relative to the Company’s announced subsidiary asset sales and the outstanding principal balance at any point in time. On December 31, 2009, the Company’s stock closed at $4.77 per common share as compared to $6.20 per common share at December 31, 2008. See Note M for a description of these instruments.

Gain (Loss) from Foreign Exchange Contracts. For the year ended December 31, 2009, the Company recognized a gain of $669 associated with Mecar’s foreign exchange contracts as opposed to a loss of $1,542 in the prior year. This gain (loss) is attributed to unrealized gains (losses) from the change in fair value of its participating forward European currency contracts. Mecar has participating forward European currency contracts in place mainly for a significant U.S. Dollar denominated sales contract that spans over the next two years. At the signing of the sales contract Mecar entered into the forward currency contract to protect Mecar’s anticipated profitability on this contract. Subsequent to entering into the forward currency contract, the U.S. Dollar has fluctuated, thereby yielding unrealized gains (losses) on an interim basis relative to the life of the forward contract.

Other — Net. Other — net expenses for the year ended December 31, 2009 increased to $1,368 from $711 in the prior year. This change was due to foreign currency losses incurred from certain vendor payments at Mecar and Mecar USA, as a result of the lower U.S. Dollar position during the year ended December 31 2009 as compared to the prior comparable year. A summary of the contents of this expense is provided in the Note Q — Other — Net of the financial statements.

Pre-Tax Loss.

		Pre-Tax Income (Loss) by Segment
		2009								2008
						% of								% of
						total								total
		Amount				revenue				Amount				revenue
Mecar		$	(7,800	)			(5	)%		$	(811	)			(1	)%
Mecar USA			3,723				3				946				1
Corporate			(6,676	)			(5	)			(10,897	)			(7	)
Total		$	(10,753	)			(7	)%		$	(10,762	)			(7	)%

For the year ended December 31, 2009, Mecar had a pre-tax loss of $7,800 as compared to a pre-tax loss of $811 in the prior year. This increase in pre-tax loss was due to lower revenues on lower gross margin contracts executed in the current year. For the year ended December 31, 2009, Mecar USA’s pre-tax income increased by $2,777 from the prior year levels due to higher revenue and improved gross margin in the current year. Corporate’s reduction in pre-tax loss was attributable to reduced administrative expenses associated with restructuring and professional expense of $1,283, reduced net interest expense of $1,246 and a $299 gain recognized from the change in fair value of the notes and warrants in 2009 as compared to a loss of $1,104 from fair value in 2008. In addition, a higher impairment charge for long-lived assets of $462 in 2008 as opposed to $181 impairment charge in 2009 related to the Company’s ERP computer system contributed to the improved results in the current period.

Income Taxes- (Benefit) Expense. The effective income tax rate for the year ended December 31, 2009 and 2008 was (2)% and 2%, respectively. The favorable change in the effective tax rate was due to a 2009 Belgian tax court ruling which reduced 2008 taxable income as well as decreased income tax expense for Mecar. This reduction in income tax expense was recorded as a benefit in the quarter ended June 30, 2009, which coincided with when the Belgian tax court ruling become effective. The Company’s accounting for income taxes is in accordance with ASC 740.

Income (loss) from discontinued operations, net of tax. Net income (loss) from discontinued operations consisted of gains on the sales of subsidiaries and income (loss) from the operations of these discontinued businesses. The table below shows the net income (loss) from discontinued operations for the year ended December 31, 2009 and 2008, respectively.

		For The Year Ended
		December 31,
		2009				2008
NSM		$	(1,679	)		$	(4,290	)
GMS			—				2,214
Titan			—				(140	)
Income (loss) from discontinued operations			(1,679	)			(2,216	)
Gain on sale of subsidiaries, net of tax			3,923				2,750
Net income from discontinued operations		$	2,244			$	534

The Company had net income from discontinued operations of $2,244 for the year ended December 31, 2009 compared to net income from discontinued operations of $534 in the same comparable period of 2008. Current year income includes a loss from the operations of discontinued subsidiaries of $1,679 offset by a gain on the sale of discontinued subsidiaries of $3,923. In the prior period, the Company had loss from the operations of discontinued subsidiaries of $2,216 offset by gains on sale of subsidiaries of $2,750. The increase in the gain on the sale of subsidiaries in the current year stems from the recovery of escrow balances from prior years divestitures. Current year income tax expense on discontinued operations includes an adjustment from 2007 divestiture of The VSK Group. Management believes the impact of the 2007 income tax adjustment is immaterial to the year ended December 31, 2007.

The decline in loss from discontinued operations was mainly due to reduced operating losses at NSM in the current year and a lower write-down of $2,595 of NSM’s assets in current year as compared to the write-down in the prior period, all of which were offset by income generated from GMS during the year ended December 31, 2008.

Net Loss. The Company had net loss of $8,307 for the year ended December 31, 2009 compared to a net loss of $10,442 in the same comparable period of 2008. This change was mainly associated with an improved net income from discontinued operations of $2,244 in the current year as opposed to a lower amount of $534 in the prior comparable period. The improvement in net income from discontinued operations was mainly associated with recoveries of outstanding escrow balances from the sales of The VSK Group and GMS received in the current year.

Backlog. As of December 31, 2009, the Company’s firm committed backlog was $82,425, compared to $185,921 at December 31, 2008. This backlog is calculated by taking all committed contracts and orders and deducting shipments or revenue recognized pursuant to the percentage of completion method of accounting, as applicable. The table below shows the backlog by each entity for the two year period.

		Backlog by Segment
		2009								2008
		Amount				%				Amount				%
Mecar		$	68,933				84	%		$	136,396				73	%
Mecar USA			13,492				16				49,525				27
Total		$	82,425				100	%		$	185,921				100	%

The reduction in Mecar’s backlog resulted from significant progress made on the funded contracts in 2009. Mecar continues to work on a receipt of new contracts or replacement contracts for the existing in progress contracts in the backlog.

The reduction in Mecar USA’s backlog was associated with the significant shipments made under funded contracts in 2009, particularly shipments to Afghanistan for the U.S. government. As publicly announced in October 2009, Mecar USA received funded orders from the U.S. government for approximately $10,700, most of which was as a sub-contractor to a large defense contractor. In addition, Mecar USA received subsequent funded orders from the U.S. government for approximately $6,864 in December 2009.

In addition, the Company had unfunded backlog, which is subject to an appropriation of governmental funds, of approximately $29,272 and $13,439 at December 31, 2009 and 2008, respectively. These are contracts or portions of contracts that do not have all of the appropriate approvals for performance. In most cases, these contracts require a formal budget approval before they can be added to the funded, firm backlog.

The increase in unfunded backlog at December 31, 2009 as compared to the prior comparable year resulted from an unusually low unfunded backlog at Mecar in the prior period. Based on the nature of Mecar’s business, from time to time, Mecar receives large contracts that are executed over the long-term, which can sometimes cause backlog, both funded and unfunded, to have unusual peaks and downs.

Balance Sheet.

The table below provides the summary consolidated balance sheets as of December 31, 2009 and 2008:

		December 31,
		2009				2008
ASSETS
Cash, unrestricted		$	9,021			$	8,816
Cash, restricted			5,599				9,666
Accounts receivable, net			28,911				12,646
Costs and accrued earnings on uncompleted contracts			14,402				21,999
Inventories, net			19,581				21,508
Contracts in progress			179				1,469
Other current assets			4,679				7,611
Property, plant & equipment			16,545				19,525
Other assets			1,712				459
TOTAL ASSETS		$	100,629			$	103,699
LIABILITIES
Accounts payable and accrued liabilities		$	39,886			$	34,157
Customer deposits			15,974				16,731
Other current liabilities			6,408				5,610
Senior convertible notes			—				933
Other long-term liabilities and debt			11,350				11,817
TOTAL LIABILITIES			73,618				69,248
STOCKHOLDERS’ EQUITY			27,011				34,451
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	100,629			$	103,699

All items on the Company’s December 31, 2009 consolidated balance sheet were affected by a higher value of the Euro in 2009. All Euro-based activity was converted at the December 31, 2009 and 2008 closing exchange rates of $1.4333 and $1.4097 U.S. Dollar to 1 Euro, respectively.

Current assets were $82,372 at December 31, 2009 as compared to $83,715 at December 31, 2008. Current liabilities were $66,823 at December 31, 2009 as compared to $60,495 at December 31, 2008. Working capital, which includes restricted cash, was $15,549 at December 31, 2009 as compared to $23,220 at December 31, 2008. This decrease in working capital of $7,671 was primarily due to an increase in liabilities and the result of the completion of the NSM sale transaction in 2009. NSM’s assets and liabilities were classified as other current assets and other current liabilities, respectively at December 31, 2008. NSM’s net assets held for sale were $3,158 at December 31, 2008.

Unrestricted cash balances increased by $205 to $9,021 at December 31, 2009 due to a net impact between increased usage in operating activities associated with contracts in progress at both Mecar and Mecar USA and cash received from the recoveries of outstanding escrow balances setup for the sale of The VSK Group and GMS in 2009.

Restricted cash balances were $5,599 and $9,666 at December 31, 2009 and 2008, respectively. Restricted cash balance consist mainly of Mecar’s customer deposits of which a portion has been restricted to secure bank issued advance payment guarantees and performance bonds. The decrease of restricted cash balance from December 31, 2008 was associated with a release of expired advance payment guarantees for completed contracts in the current period. In addition, the guarantees from a local Belgium regional agency temporarily reduced restricted cash balances required by Mecar’s bank group. These guarantees reduced Mecar’s restricted cash requirement by $6,450 (€4,500) at December 31, 2009 up from $4,300 (€3,000) at December 31, 2008.

Accounts receivable at December 31, 2009 increased by $16,265 from December 31, 2008 primarily due to the timing of shipments at both Mecar and Mecar USA in the last quarter of 2009. Mecar’s increase in receivables was attributed to client products that were accepted by the customer in December 2009. The increase in Mecar USA’s accounts receivable was associated with shipments made to Afghanistan in the last quarter of 2009 associated with a contract for the U.S. government in which Mecar USA is a sub-contractor.

At Mecar, the costs and accrued earnings on uncompleted contracts declined from $21,999 at December 31, 2008 to $14,402 at December 31, 2009. Likewise Mecar USA’s contracts in progress decreased to $179 at December 31, 2009 from $1,469 at December 31, 2008. The decline of costs and accrued earnings on uncompleted contracts is primarily due to completion and shipments on sales contracts in backlog, thereby reducing the amount of unbilled contracts at the end of the year. The decrease of contracts in progress is associated with completion of shipments under a large contract in 2009 in which prepayments and advance payments are no longer required to be made to Mecar USA’s suppliers at the end of the year.

Inventories decreased by $1,927 from December 31, 2008 to $19,581 at December 31, 2009. This decrease was due to the completion of contracts and reduction of work in process inventory at Mecar, offset by Mecar USA’s increase in inventory and expansion of its business. Mecar USA’s inventory was $806 at December 31, 2009 as compared to $27 at December 31, 2008. This increased balance mainly represents inventory that is to be shipped or awaiting transfer of title on open sales contracts. On the other hand, Mecar’s inventories decreased by $2,706 at December 31, 2009 from an improvement in inventory supply management.

Other current assets decreased to $4,679 at December 31, 2009 from $7,611 at December 31, 2008. This change was mainly due to a reduction in assets held for sale of $4,474 resulting from the sale of NSM on August 7, 2009, offset by an increase in advance payments made to suppliers for contracts in progress at Mecar.

Property, plant & equipment decreased from $19,525 at December 31, 2008 to $16,545 at December 31, 2009. This decline was primarily attributable to depreciation expense of $4,324, offset by an additional capital expenditure of $1,540 in the current period.

Other assets increased from $459 at December 31, 2008 to $1,712 at December 31, 2009. This increase was primarily associated with a note receivable of $1,075 due from the sale of NSM in August 2009.

At December 31, 2009, accounts payable and accrued liabilities, including the accrual for Belgium social security, increased by $5,729 from December 31, 2008. This increase was related to a higher accrual for sales commissions at Mecar and an increase in trade payables at Mecar USA. Although Mecar repaid its entire past due Belgium social security amounts in 2009, this reduction was not enough to offset higher sales commissions in the current year. In addition, as a result of an inventory build up and delivery of significant shipments in December 2009, Mecar USA experienced a high volume of trade payables at year end. Customer deposits decreased by $757 as Mecar and Mecar USA completed the orders for which deposits were collected from customers in 2009. Other current liabilities grew by $798 at December 31, 2009 as a result of higher bank overdraft, offset by a reduction in liabilities held for sale from the sale of NSM in the current period.

With the $928 repayment of principal in January 2009, the Company completely repaid its convertible notes. See Note M of the financial statements for a full description of the transactions.

Other long-term liabilities and debt decreased by $467 at December 31, 2009 from the December 31, 2008 level of $11,817. This decrease was primarily attributable to scheduled principal payments in 2009 and reduced fair value of the warrants and foreign exchange contracts in the current year, offset by a higher accrual setup for early retirement of certain employees at Mecar in the current year.

The decline of Stockholders’ equity of $7,440 at December 31, 2009 from the December 31, 2008 balance of $34,451 was due to the net loss for the current year, offset by an increase in the value of the Euro versus the U.S. dollar. The Euro appreciated by approximately 2% from December 31, 2008. As a result, accumulated other comprehensive income increased from $16,082 at December 31, 2008 to $16,361 at December 31, 2009.

Cash Flows.

The table below provides the summary cash flow data for the periods presented:

		2009				2008
Net cash (used in) operating activities		$	(3,399	)		$	(5,041	)
Net cash provided by investing activities			2,813				22,459
Net cash provided by (used in) financing activities			673				(29,800	)
Effects of exchange rate on cash			118				(166	)

Operating Activities. The Company used $3,399 of cash in its operating activities during 2009 as compared to $5,041 of cash used during 2008. The cash used in continuing operations was $3,399 in 2009 as compared to $7,790 in the prior comparable period. Discontinued operations generated $2,749 of cash in the year ended December 31, 2008.

The decline of cash used from continuing operations resulted mainly from a decrease in net changes in operating assets and liabilities. The change in operating assets and liabilities generated $2,191 of cash in 2009 as compared to a use of $6,957 in the prior comparable period. The most significant change in operating assets and liabilities in 2009 was from an increase in accounts payable and accrued liabilities. The growth in accounts payable and accrued liabilities generated cash of $5,118 in the current year due to delay in scheduled payments as a cash conservation measure. An increase in accounts receivable resulted in higher cash use of $15,937 instead of $7,542 in the prior comparable period due to having higher billings in the fourth quarter of 2009. In addition, a lower increase in costs and accrued earnings on uncompleted contracts generated cash of $7,751 in 2009 as compared to $14,762 in the prior year. The fluctuation in cost and accrued earnings on contracts was due to fewer contracts in process in 2009 compared to the prior year’s level. The Company generated cash of $2,099 from a decline of inventories in 2009 as compared to $2,664 cash used in 2008 as the current year’s inventory levels were maintained more efficiently than at the prior year. As significant amounts of prepayments and deposits to suppliers for contracts in progress expired in 2009, the Company utilized less cash in the current year for these purposes. Furthermore, the change in customer deposits used $1,007 of cash in 2009 as compared to $9,143 of cash used in the prior comparable period. Cash paid for interest was $4,504 and $6,921 for the year ended December 31, 2009 and 2008, respectively. Cash paid for income taxes was $61 and $345 for the year ended December 31, 2009 and 2008, respectively, which included federal, international and state taxes.

Investing Activities. Net cash provided by investing activities decreased by $19,646 from $22,459 of cash generated in 2008 to $2,813 of cash generated in 2009. This fluctuation stemmed from lower net proceeds received from the disposition of NSM and the recoveries of outstanding escrows from The VSK Group and GMS of $4,213 in 2009 as compared to the proceeds received from the dispositions of GMS and Titan of $24,286 in 2008.

Financing Activities. The Company generated $673 of cash from its financing activities during the year ended December 31, 2009 compared to $29,800 of cash used during the same period in 2008. This improvement in cash use was related to the repayment of a majority of outstanding principal due on the convertible notes of $19,428 and the repayment of the bank overdraft facility of $6,834 with no additional borrowings incurred in 2008. In 2009, the Company made repayments of $1,341 for principal due on the convertible notes and for capital lease obligations, offset by $2,187 of cash generated from increased short-term borrowings on the bank overdraft facility.

Effects of Exchange Rate. Due to the fluctuation in the exchange rate between the USD and the Euro between December 31, 2009 and 2008, the Company generated cash of $118 in the current period as compared to used cash of $166 in the same comparable period of 2008, related to the effects of currency on cash balances.

Allied. Corporate continues to fund its operations from management fees and proceeds of divestitures. In 2009, Corporate cash requirements were largely met by obtaining early release of escrow funds from subsidiary divestitures. These escrow funds have all been fully depleted in 2009. Corporate plans to fund operations in 2010 from repayments of intercompany loans and management fees. In addition, Allied is expecting to collect funds from a note related to the sale of NSM. Mecar and Mecar USA are projected to operate without financing from Allied.

Mecar. Mecar continues to operate from internally generated cash and advances received from customers. In addition, a loan of approximately $8,600 was provided by a local Belgian regional agency to extend Mecar’s working capital in December 2007. This loan will be repaid over the remaining three years beginning in 2010. The bank facility agreement provides a facility for guarantees/bonds to support customer contracts. The financial lending terms and fees are denominated in Euros and the dollar equivalents will fluctuate according to global economic conditions. The existing credit facility is scheduled to expire on April 30, 2010. The Company is currently negotiating with Mecar’s bank group to extend the performance bond and advance payment guarantee line. In 2009, Mecar began a relationship with a new bank to provide performance bond and advance payment guarantees on a case by case basis. During the first quarter of 2010, the new bank provided an approximately $6,163 of performance bonds and advance payment guarantees. To date, all required bonds and guarantees have been issued.

Mecar USA. Mecar USA operated in 2009 from cash generated from operations. From time to time in 2010, Mecar USA has been factoring certain receivables to address its short-term cash shortfalls.

Stock Repurchases. The Company did not repurchase any shares of its common stock in 2009 and does not expect to repurchase any shares in 2010.

Future Liquidity. On January 18, 2010, the Company signed a definitive Merger agreement with Chemring Group PLC (“Chemring”). If the Merger does not timely close, the Company will need to secure additional financing to support its operations. If Mecar is unable to secure a new bank facility, Mecar may not be able to accept new sales contracts from its customers that require performance bonds or advance payment guarantees.

Off-Balance Sheet Arrangements. As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2009, we are not involved in any unconsolidated SPE transactions.

Mecar is required to provide performance bonds and advance payment guarantees for certain contracts, which are provided by Mecar’s banking group. Mecar is obligated to repay the bank group any amounts it pays as a result of any demands on the bonds or guarantees.

The Company’s cash balances are held in several locations throughout the world, including substantial amounts held outside the U.S. Most of the amounts held outside the U.S. could be repatriated to the U.S., but, under current law, would be subject to federal income taxes, less applicable foreign tax credits. Repatriation of some foreign balances is restricted by local laws. Allied has provided for the U.S. federal tax liability on these amounts for financial statement purposes, except for foreign earnings that are considered indefinitely reinvested outside the U.S.

Recent Accounting Pronouncements. See Note A to the consolidated financial statements for a description of recently issued accounting pronouncements. Allied does not anticipate that any of such pronouncements will have a material impact on its financial results.

Critical Accounting Policies

The Company’s discussion and analysis of its financial condition, results of operations and cash flows are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, sales, and expenses, and related disclosure of contingent assets and liabilities. The Company re-evaluates its estimates on an on-going basis. The Company’s estimates and judgments are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates or judgments under different assumptions or conditions.

The Company believes the following are its critical accounting policies which affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:

	•		Revenue recognition
	•		Inventory reserves and allowance for doubtful accounts
	•		Foreign currency translations
	•		Derivative Instruments
	•		Valuation of deferred income taxes and income tax reserves.

Revenue Recognition. We believe our most critical accounting policies include revenue recognition and cost estimation on fixed price contracts for which we use the percentage of completion method of accounting. The percentage of completion method is used by Mecar for substantially all of its fixed price sales contracts. Approximately 61% and 78% of consolidated revenue was recognized under the percentage of completion method during 2009 and 2008, respectively.

Under the percentage of completion method, revenue is recognized on these contracts as work progresses during the period, using the percentage of direct labor incurred to total estimated direct labor. Management reviews these estimates as work progresses and the effect of any change in cost estimates is reflected in the calculation of the expected margin and the percent complete. If the contract is projected to create a loss, the entire estimated loss is charged to operations in the period such loss first becomes known.

Accounting for the profit on a contract requires (1) the total contract value, (2) the estimated total direct labor cost to complete which is equal to the sum of the actual incurred labor costs to date on the contract and the estimated labor costs to complete the contract’s scope of work, and (3) the measurement of progress towards completion. The estimated profit or loss on a contract is equal to the difference between the contract value and the estimated total cost at completion. Adjustments to original estimates are often required as work progresses under a contract, as experience is gained and as more information is obtained, even though the scope of work required under the contract may not change, or if contract modifications occur. For contract modifications supported by a change in contract price, profit on such contract modifications are only recognized upon receipt of a signed contract amendment and only in the proportion of such contract’s progress towards completion. For modifications not supported by a change in contract price, those additional costs are treated as contract costs and charged to expense in the proportion of such contract’s progress towards completion. A number of internal and external factors affect our cost of sales estimates, including labor rates and efficiency variances and testing requirements. While we believe that the systems and procedures, coupled with the experience of the management teams, provide a sound basis for our estimates, actual results will differ from management’s estimates. The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent with the application of the percentage of completion method affect the amounts reported in our financial statements.

On contracts that do not qualify for the percentage of completion method, revenue is recognized using the completed contract method under which revenue is recognized when the contract is completed or substantially completed. Using the completed contract method, we recognize revenue on a shipment basis, usually FOB shipping point. Revenues from pass through contracts are evaluated based on the guidelines of ASC 605-45 Reporting Revenue Gross as a Principal versus Net as an Agent. Accordingly, the Company bases its decision on whether to report revenue from such pass through contracts on a gross basis or net basis based on the relative strength of each of the following factors: whether the Company (1) is the primary obligor in the arrangement, (2) has general inventory risk, (3) has latitude in establishing price, (4) changes the product or performed part of the service, (5) has discretion in supplier selection and (6) is involved in the determination of product or service specifications. There are no provisions related to performance, cancellation, termination or refunds.

Inventory reserves and allowance for doubtful accounts. Inventories are stated at the lower of cost or market. Cost is determined based on the weighted average cost method. The Company’s inventory reserves include raw materials, work-in process and finished goods of $2,948 as of December 31, 2009. The Company reviews its recorded inventory and estimates a write-down for obsolete or slow-moving items to their net realizable value. The write-down is based on current and forecasted demand and the age of the item, and therefore, if actual demand and market conditions are less favorable than those projected by management, additional write-downs may be required. Some of our customers share the same weapons platforms. For these customers, MECAR, at times, produces inventory in anticipation of receiving signed contracts for their manufacture. This inventory, while designated for a particular contract, can be used to fulfill other contracts as long as the customer uses the same weapons platform. At times the Company may have inventory in excess of the amount designated in a signed contract. The Company feels that this inventory is still realizable as it is able to sell it to other customers that share the same platforms. Allowances for doubtful accounts are evaluated based upon detailed analysis and assessment of receivables that may not be collected in the normal course of operations.

Foreign Currency Translation. The assets and liabilities of ARC Europe, its subsidiary Mecar, and ARC BV, are translated into U.S. dollars at year-end exchange rates. The resulting translation gains and losses are accumulated in a separate component of stockholders’ equity. In years with greater currency fluctuation, the impact on the apparent change for the same line item (e.g. Property, Plant & Equipment) would appear more significant than if all assets or liabilities were held in the same functional currency (e.g. US Dollars). As of December 31, 2009, 85% of all Company assets are located in Belgium, making the Company sensitive to year-to-year fluctuations in currency, particularly the Euro. Income and expense items are converted into U.S. dollars at average rates of exchange prevailing during the year. Foreign currency transaction gains and losses are credited or charged directly to operations. For 2009 and 2008, revenue from Belgium represented 61% and 78% of the total revenue for the Company, respectively. The Company recognizes the significance of foreign subsidiary operations on reported financial results thus making this a critical accounting policy.

Derivative Instruments. The Company designates its derivatives based upon the criteria established by ASC 815, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. ASC 815 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for the changes in the fair value of the derivative depends on the intended use of the derivative and the resulting designation. The Company no longer utilizes derivatives that are designated as fair value or cash flow hedges. Therefore, changes in fair value of the Company’s derivatives are recognized currently in net income. The Company believes that derivative accounting is critical to its estimates and financial reporting.

Valuation of deferred income taxes. The Company is subject to taxation by federal, state and international jurisdictions. The Company’s annual provision for income taxes and the determination of the resulting deferred tax assets and liabilities involve a significant amount of management judgment and are based on the best information available at the time. The Company believes that it has recorded adequate liabilities and reviews those balances on a quarterly basis. Judgment is also applied in determining whether deferred tax assets will be realized in full or in part. When it is more likely than not that all or some portion of specific deferred tax assets such as foreign tax credit carryovers will not be realized, a valuation allowance is established for the amount of the deferred tax assets that are determined not to be realizable. Currently, the Company has full valuation allowances recorded for all deferred tax assets based mainly on the substantial losses incurred over the past five years. The Company will continue to evaluate the adequacy of these valuation allowances on a quarterly basis as Mecar performs on its backlog.

Forward-Looking Statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that are based on current expectations, estimates and projections about the Company and the industries in which it operates. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for a smaller reporting company.

ITEM 8.		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary financial information and data required by this Item are set forth in the pages indicated in Item 15(a) (1) and (2). See Note U of the consolidated financial statements for supplementary quarterly financial data required by this item.

ITEM 9.		CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

There were no disagreements on any matter of accounting principles, financial statement disclosure or auditing scope or procedure to be reported under this item. BDO Seidman, LLP was the Company’s independent registered public accounting firm for both 2009 and 2008.

ITEM 9A (T).		CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the direction and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by the report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective as of December 31, 2009.

Management’s Report on Internal Control over Financial Reporting

The management of The Allied Defense Group, Inc. is responsible for establishing and maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s internal controls over financial reporting are effective as of December 31, 2009.

Changes in Internal Control Over Financial Reporting

In our Annual Report on Form 10-K for the year ended December 31, 2008, management identified the following material weakness in the Company’s internal control over financial reporting: As of December 31, 2008, the Company’s Belgian subsidiary, Mecar, failed to maintain an accurate perpetual inventory record. The Company believes this failure resulted from the increased level of activity and inventory movements in the later half of 2008. Specifically, there was: (i) no formal review of certain changes to the perpetual inventory records, (ii) perpetual inventory records were not properly reconciled to the general ledger on a timely basis, (iii) results of the physical inventory count were not timely matched to the perpetual inventory records, and (iv) inventory balances were not sufficiently analytically reviewed.

In response to the material weakness in internal control over financial reporting described above, management, has taken the following steps to remediate the above listed material weakness: (i) implementing accounting procedures to reconcile and monitor inventory balances each month, and report exceptions and trends in account balances; (ii) enhancing physical inventory count procedures to ensure more accurate physical counts; and (iii) extending internal audit procedures performed by a third party consultant to include the inventory cycle. The material weakness will be fully remediated when, in the opinion of management, the revised control processes have been operating for a sufficient period of time to provide reasonable assurance as to its effectiveness. The remediation and ultimate resolution of our material weakness has been reviewed with the Audit Committee of our Board of Directors. We have concluded that our remediation efforts have effectively addressed our previously disclosed material weakness relating to inventory accounting at our Belgian subsidiary.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the SEC that permits the company to provide only management’s report in this annual report.

ITEM 9B.		OTHER INFORMATION

The Annual Meeting of Shareholders of the Company, for which proxies were solicited pursuant to Registration 14A under the Securities Exchange Act of 1934, as amended, was held on November 13, 2009.

At the Annual Meeting, each of the following nominees was elected to the Board of Directors according to the following votes:

Director Name		FOR				WITHHELD				Broker Non-Votes
J. H. Binford Peay, III			5,636,911				1,163,496				979,963
John G. Meyer, Jr.			5,617,044				1,183,363				999,830
Ronald H. Griffith			6,492,255				308,152				124,619
Gilbert F. Decker			5,018,733				1,781,674				1,598,141
Charles S. Ream			5,089,659				1,710,748				1,527,215
John J. Marcello			6,416,282				323,125				139,592
Frederick G. Wasserman			4,995,192				1,805,215				1,621,682
Tassos D. Recachinas			6,583,618				216,789				33,256

At the Annual Meeting, the shareholders ratified the appointment of BDO Seidman LLP as the Company’s independent registered public accounting firm for 2009 according to the following votes:

		FOR				AGAINST				ABSTAIN				Broker Non-Votes
Ratification of BDO Seidman as Independent Registered Public Accounting Firm			6,767,564				12,101				20,742				1,429,138

PART III

ITEM 10.		DIRECTORS EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following are the directors of Allied:

		Year in which first
Name of Nominee		elected a director				Age				Principal business occupation for past five years and other directorships
J. H. Binford Peay, III			2000				69			Superintendent of the Virginia Military Institute since June 2003; Chairman of the Board of the Company since January 2001; Chief Executive Officer of the Company from January 2001 — June 2003; formerly, Commander in Chief, United States Central Command, Vice Chief of Staff of the United States Army and a consultant. Also a director of BAE Systems, Inc., a subsidiary of BAE Systems, plc, an international defense and aerospace company and a president of FT Campbell Historical Foundation. As having served as the Chairman of the Board for the Company since 2001 and its Chief Executive Officer from 2001 to 2003, Mr. Peay has extensive knowledge of the Company’s business and history. His military background provides the Board with relevant industry experience. Mr. Peay currently serves on the board of one other non-public Company.
John G. Meyer, Jr.			2003				65			Consultant; Chief Executive Officer of RedX Defense, Inc., a provider of explosive detection devices from July 2009 to September 2009; serves as a director of Heckler & Koch since 2005; Chief Executive Officer of Heckler & Koch, a defense contractor, from June 2005 — August 2007; Chief Executive Officer of the Company from June 2003 — June, 2005; President of the Company from January 2003 — June 2005; Chief Operating Officer of the Company from January 2001 — May 2003; Executive Vice President of the Company from January 2001 — January 2003; retired from United States Army having served as its most senior Public Affairs Officer. Mr. Meyer has proven business acumen, having served as the chief executive officer of several defense industry companies including serving as the Chief Executive Officer of the Company from 2003 to 2005. His military background provides the Board with relevant industry experience. Mr. Meyer currently serves on the board of one other non-public Company.

		Year in which first
Name of Nominee		elected a director				Age				Principal business occupation for past five years and other directorships
Ronald H. Griffith			2000				70			Executive Vice President and Chief Operating Officer of MPRI, Inc., a professional services company, since 1998; formerly, Vice Chief of Staff of the United States Army. Mr. Griffith has served on the Company’s Board since 2000. As one the longest serving Board members, Mr. Griffith provides great insight on the Company’s business and history. Also, his military background provides the Board with relevant industry experience.
Gilbert F. Decker			2002				72			Consultant to defense and aerospace companies since 2001; Executive Vice President of Engineering and Production of Walt Disney Imagineering from 1999 to 2001. Also a director of CoVant Technologies, Ltd. and a retired director of Alliant Techsystems, Inc. (1997 — 2007), Digital Fusion Inc. (2002 — 2008), and Anteon Corporation (1997 — 2006). Served as Assistant Secretary of the Army from 1994 — 1997. Mr. Decker’s work in the defense and aerospace industry provides the Board with relevant industry experience as does his military service. Mr. Decker currently serves on the boards of one other non-public company.
Charles S. Ream			2006				65			Retired as the Executive Vice President and Chief Financial Officer of Anteon International Corporation, having served in that capacity from 2003-2006; Senior Vice President and Chief Financial Officer of Newport News Shipbuilding Inc. from 2000-2001; Senior Vice President of Finance and Strategic Initiatives of Raytheon Systems Company from 1998-2000. Also a director of DynCorp International Inc., Stanley, Inc. and Vangent, Inc. Mr. Ream is a retired director of Stewart and Stevenson from 2004 to 2006. Mr. Ream’s experience brings to the Board a strong understanding of public company governance and operations. Mr. Ream has extensive financial experience as having served as a chief financial officer at several industry related companies.
John J. Marcello			2006				62			President and Chief Executive Officer of the Company since June, 2005; Managing Director/Chief Operating Officer of MECAR S.A., a munitions manufacturer and subsidiary of the Company from November, 2002 — June, 2005; retired from United States Army having served as a Major General. Also a director of Optelecom-NKF. As the only management representative on the Board, Mr. Marcello provides an insider’s perspective in Board discussions about the business and strategic direction of the Company and has experience in the Company’s international business having served as Managing Director of the Company’s Belgian subsidiary.
Frederick G. Wasserman			2006				55			President of FGW Partners LLC, which provides financial and management consulting services, since May 2008; Self-employed financial and management consultant, from January 2007 — April 2008; Chief Operating/Financial Officer of Mitchell & Ness Nostalgia Company, a manufacturer of licensed sportswear, during 2005; President of Goebel of North America, a manufacturer of select giftware and home décor items, from 2002 -2005; Chief Financial Officer of Goebel of North America from 2001 — 2005. Also a director of Acme Communications, Inc., AfterSoft Group, Inc., Crown Crafts, Inc., Breeze Eastern Corporation, and Gilman + Ciocia, Inc. Recently elected to be Chairman of the Board of TeamStaff, Inc. An experienced board member, Mr. Wasserman serves on six boards of companies, representing a diverse range of industries. Mr. Wasserman has extensive financial experience as having served as a chief financial officer at several companies. Mr. Wasserman was elected as a representative of one of the Company’s largest shareholders.

		Year in which first
Name of Nominee		elected a director				Age				Principal business occupation for past five years and other directorships
Tassos D. Recachinas			2008				26			Managing Member of Sophis Investments LLC, a diversified investment management firm specializing in research-driven value investing, since April 2008; Senior Investment Analyst with Pirate Capital LLC from 2007 — 2008; Equity Research Associate at Raymond James & Associates from 2005 — 007, where he provided equity research coverage on several Defense and Technology companies; Summa Cum Laude, The George Washington University, where he graduated from the Honors Program and first in his class studying mechanical/aerospace engineering; also a Pembroke Scholar, having studied engineering and economics at Oxford University in England. Mr. Recachinas is the only Board member with a background in investment banking which has added a valuable perspective in Board discussions. Mr. Recachinas also served, at one time, as a representative of one of the Company’s largest shareholders.

The Audit Committee is currently comprised solely of independent members of the Board of Directors, consisting of Messrs. Decker, Ream and Wasserman. Among its functions, the Audit Committee (i) recommends the selection of the Company’s independent registered public accountants, (ii) reviews the scope and conduct of the independent public accountants’ audit activity and other services, (iii) reviews the financial statements and associated press releases and required filings with the Securities and Exchange Commission, and (iv) reviews the adequacy of the Company’s basic accounting and internal control systems. Each of the Audit Committee members satisfy the independence requirements and other established criteria of NYSE AMEX and the Securities and Exchange Commission. The Board of Directors has determined that each of Gilbert F. Decker, Charles S. Ream and Frederick G. Wasserman qualify as an “audit committee financial expert” as defined under applicable Securities and Exchange Commission rules and is financially sophisticated as defined by NYSE AMEX rules.

The Compensation Committee is currently comprised solely of independent members of the Board of Directors, consisting of Messrs. Ream, Griffith and Recachinas. The Compensation Committee establishes the Company’s executive compensation program. It also periodically reviews the compensation of executives and other key officers and employees of the Company and its subsidiaries.

The Nominating Committee is currently comprised solely of independent members of the Board of Directors, consisting of Messrs. Griffith and Decker. The Nominating Committee is responsible for soliciting and recommending candidates for the Board of Directors. The Nominating Committee does not have any formal minimum qualifications for director candidates. The Board of Directors first evaluates the current members of the Board willing to continue in service. The Committee evaluates performance in office to determine suitability for continued service, taking into consideration the value of continuity and familiarity with the Company’s business. If any member of the Board does not wish to continue in service or if the Board decides not to re-nominate a member for re-election, the Nominating Committee then identifies the desired skills and experience of a new candidate. Among other factors, the Nominating Committee considers a candidate’s business experience and skills, personal integrity and judgment, and possible conflicts of interest. To date, the Nominating Committee has not utilized the services of any search firm to assist it in identifying director candidates. The Nominating Committee’s policy is to consider director candidate recommendations from its shareholders, including confirmation of the candidate’s consent to serve as a director. Upon receipt of such a recommendation, the Nominating Committee will solicit appropriate information about the candidate in order to evaluate the candidate, including information that would need to be described in the Company’s proxy statement if the candidate was nominated. Candidates recommended by shareholders will be evaluated on the same basis as other candidates.

The Ethics and Governance Committee is currently comprised of Messrs. Meyer, Marcello and Wasserman. The Ethics and Governance Committee is responsible for evaluating the Company’s adherence to accepted standards of ethics and governance.

The Strategic Review Committee is comprised of Messrs. Peay, Griffith, Marcello and Recachinas. The Strategic Review Committee is responsibly for identifying, considering, and recommending to the Board of Directors, actions and strategic alternatives to increase shareholder value.

Charters for the committees noted above are available on the Company’s website at http://www.allieddefensegroup.com.

All directors were elected/re-elected to the Board based on the shareholders votes received on November 13, 2009.

Executive Officers

All of our executive officers are appointed annually. None of our executive officers was selected pursuant to any arrangement or understanding between the officer and any other person. The name, age, offices and positions of our executives held for at least the last five years, were as follows:

Mr. Marcello is the President and Chief Executive Officer of Allied.

Monte L. Pickens, age 64, was appointed Executive Vice President and Chief Operating Officer in May 2003. Previously, Mr. Pickens was the Vice President of T. Marzetti Company. Mr. Pickens retired from the U.S. Army as a Colonel.

Deborah F. Ricci, age 45, was appointed Treasurer and Chief Financial Officer in April 2007. Ms. Ricci was promoted from her position as Controller and Corporate Secretary, which she held from early 2006. Previously, Ms. Ricci served as Chief Financial Officer of Hemagen Diagnostics, Inc.

Wayne F. Hosking, Jr., age 43, was appointed Vice President for Corporate Strategic Development in April 2004.

Allied has adopted a code of business conduct and ethics for directors, officers (including Allied’s principal executive officer, principal operating officer, principal financial officer and controller) and employees. The code of ethics is available on the Company’s website at http://www.allieddefensegroup.com. Stockholders may request a free copy of the code of ethics from:

Allied Defense Group, Inc.
8000 Towers Crescent Drive, Suite 260
Vienna, Virginia 22182
(703) 847-5268
Attn: Investor Relations

There have been no material changes to the procedures by which the Company’s shareholders may recommend nominees to the Company’s Board of Directors.

ITEM 11.		EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE
As Of December 31, 2009

																										Change in
																										Pension Value
																										and
																										Nonqualified
																						Non-Equity				Deferred
														Stock				Option				Incentive Plan				Compensation				All Other
														Awards				Awards				Compensation				Earnings				Compensation				Total
Name and Principal Position		Year				Salary				Bonus				($)				($)(1)				($)				($)				($)(2)				($)
John J. Marcello,			2009			$	303,850			$	—			$	—			$	36,030			$	—			$	—			$	28,500			$	368,380
Chief Executive Officer			2008				303,850				—				—				—				—				—				55,758				359,608
Monte L. Pickens,			2009			$	247,200			$	—			$	—			$	30,025			$	—			$	—			$	28,500			$	305,725
Executive Vice President			2008				247,200				—				—				26,743				—				—				27,000				300,943
Deborah F. Ricci			2009			$	206,000			$	—			$	—			$	30,025			$	—			$	—			$	20,600			$	256,625
Chief Financial Officer			2008				206,000				—				—				—				—				—				20,462				226,462

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

AS OF DECEMBER 31, 2009

		Option Awards																				Stock Awards
																														Equity
																														Incentive				Equity
																														Plan				Incentive Plan
																														Awards:				Awards:
										Equity																				Number of				Market or
										Incentive Plan																				Unearned				Payout Value
		Number of				Number of				Awards:																(3) Market				Shares,				of Unearned
		Securities				Securities				Number of												Number of				Value of				Units, or				Shares, Units
		Underlying				Underlying				Securities												Shares or Units				Shares or				Other				or Other
		Unexercised				Unexercised				Underlying				Option				Option				of Stock that				Units of Stock				Rights That				Rights That
		Options (#)				Options (#)				Unearned				Exercise				Expiration				Have Not Vested				That Have Not				Have Not				Have Not
Position		Exercisable				Unexercisable				Options (#)				Price				Date				(#)				Vested ($)				Vested ($)				Vested ($)
John J. Marcello,			—				30,000	(2)			—			$	4.30				3/23/2012				—			$	—				—				—
Chief Executive Officer
Monte L. Pickens,			40,000				—				—			$	23.95				3/6/2010				—			$	—				—				—
Executive Vice President			10,000				—				—			$	7.44				3/4/2010				—			$	—				—				—
			—				25,000	(2)			—			$	4.30				3/23/2012				—			$	—				—				—
Deborah F. Ricci			24,000				6,000	(1)			—			$	15.05				5/31/2011				3,000			$	14,310				—				—
Chief Financial Officer			—				25,000	(2)			—			$	4.30				3/23/2012				—			$	—				—				—

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL

The Company has an employment agreement with each of our named executive officers which provides for severance compensation to be paid if employment is terminated following certain triggering events.

In the event of any termination within twelve (12) months following a change of control, the named executive officers will be entitled to the following severance payments:

Both John J. Marcello and Monte L. Pickens would receive a lump sum payment equal to the sum of two (2) times base salary at time of termination plus two (2) times average annual bonus earned during the three (3) most recent years. Deborah F. Ricci would receive a lump sum payment equal to the sum of two (2) times base salary at the time of termination plus two (2) times the greater of the average annual bonus earned during the three (3) most recent years or the “target” bonus as defined as 50% of the base salary. Wayne F. Hosking would receive a lump sum payment equal to the sum of two (2) times base salary at the time of termination plus two (2) times the greater of the average annual bonus earned during the three (3) most recent years or the “target” bonus as defined as 40% of the base salary. At December 31, 2009, this would have resulted in severance payments of $640,700, $524,400, $618,000 and $547,960 to Messrs. Marcello, Pickens, Ms. Ricci and Mr. Hosking, respectively. In addition, each named executive officer would be entitled to continue to receive medical, dental, vision, life, short and long-term disability insurance coverage, business travel accident insurance, flexible spending account and employee assistance program participation and the 401(k) benefit for two (2) years. Mr. Pickens is also entitled to receive two (2) years of long-term care insurance.

In the event of any termination initiated by the Company without cause or initiated by the named executive officer following a material adverse alteration or diminution in the nature of his status or authority, a reduction in his title or a reduction in his base salary, the named executive officers would be entitled to the following severance payments:

Both John J. Marcello and Monte L. Pickens would receive a lump sum payment equal to the sum of one (1) times base salary at the time of termination plus one (1) times average annual bonus earned during the three (3) most recent years. Deborah F. Ricci would receive a lump sum payment equal to the sum of one (1) times base salary at the time of termination plus one (1) times the greater of the average annual bonus earned during the three (3) most recent years or the “target” bonus as defined as 50% of the base salary. Wayne F. Hosking would receive a lump sum payment equal to the sum of one (1) times base salary at the time of termination plus one (1) times the greater of the average annual bonus earned during the three (3) most recent years or the “target” bonus as defined as 40% of the base salary. At December 31, 2009, this would have resulted in severance payments of $320,350, $262,200, $309,000 and $273,980, respectively. In addition, each named executive officer would be entitled to continue to receive medical, dental, vision, life, short and long-term disability insurance coverage, business travel accident insurance, flexible spending account and employee assistance program participation and the 401(k) benefit for one (1) year. Mr. Pickens is also entitled to receive one (1) year of long-term care insurance.

We also have restricted stock and stock option agreements with our named executive officers which provide for accelerated vesting in the event of a termination of employment within twelve (12) months following a change of control, in the event of a termination of employment initiated by the Company “without cause”, or in the event of a termination of employment initiated by the executive as described above. As of December 31, 2009, these provisions would have resulted in the following acceleration of vesting:

John J. Marcello — Options for 30,000 shares of stock

Monte L. Pickens — Options for 25,000 shares of stock

Deborah F. Ricci — 3,000 shares of restricted stock and Options for 31,000 shares of stock

Wayne F. Hosking — Options for 30,000 shares of stock

COMPENSATION OF DIRECTORS

Prior to March 2009, each director is compensated for service at the annual rate of $60,000 of which $36,000 must be paid in Allied stock although directors may elect to receive the entire $60,000 of compensation in Allied stock. In March 2009, the Board of Directors further amended the compensation plan to decrease the annual compensation payable to its non-employee directors to $54,000. This amendment was effective on July 1, 2009. The directors are allowed to defer receipt of the cash and/or the Allied stock until they retire from the Allied board. As Chairman of the Board, General Peay received the same cash and stock-based compensation as paid to non-employee members of the Board of Directors plus a reimbursement of annual premiums paid on a $1 million life insurance policy, together with all applicable income taxes. The Company has been paying the annual premiums since General Peay joined the Company in 2001, as Chairman and Chief Executive Officer. The Company also reimburses directors for out-of-pocket expenses incurred in connection with their service.

DIRECTOR COMPENSATION

																		Change in
																		Pension Value
														Non-Equity				and
		Fees Earned												Incentive				Nonqualified
		or Paid in				Stock Awards								Plan				Deferred				All Other
		Cash				(2) (3) (4)				Option Awards				Compensation				Compensation				Compensation				Total
Name(1)		($) (3) (6)				($) (6)				($)				($)				Earnings				($)(5)				($)
J. H. Binford Peay, III		$	0			$	54,000				—				—				—			$	60,100			$	114,100
John G. Meyer, Jr.		$	0			$	54,000				—				—				—				—			$	54,000
Ronald H. Griffith		$	0			$	54,000				—				—				—				—			$	54,000
Gilbert F. Decker		$	21,600			$	32,400				—				—				—				—			$	54,000
Charles S. Ream		$	0			$	54,000				—				—				—				—			$	54,000
Frederick G. Wasserman		$	0			$	54,000				—				—				—				—			$	54,000
Tassos D. Recachinas		$	0			$	54,000				—				—				—				—			$	54,000

ITEM 12.		SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth information with respect to the shares of the Company’s common stock which is held by the only persons known to the Company to be the beneficial owners of more than 5% of such common stock based upon the most recent filings made by the undersigned with the Securities and Exchange Commission:

				Amount and Nature of		Percent of
Title of Class		Name and Address of Beneficial Owner		Beneficial Ownership		Class(1)
Common		Aegis Financial Corporation (2)		1,082,301			13.24	%
		1100 North Glebe Rd		Owned directly
		Suite 1040
		Arlington, Virginia 22201
Common		Wynnefield Capital Management, LLC (3)		587,235			7.18	%
		450 Seventh Avenue		Owned directly
		Suite 509
		New York, New York 10123
Common		Dimensional Fund Advisors LP(4)		586,903			7.18	%
		Palisades West, Building One		Owned directly
		6300 Bee Cave Road,
		Austin, Texas 78746
Common		RBC Global Asset Management (U.S.) Inc.(5)		461,256			5.64	%
		100 South Fifth Street, Suite 2300		Owned directly
		Minneapolis, MN 55402

The following information is furnished as of December 31, 2009, with respect to the beneficial ownership by management of the Company’s common stock:

		Name and Address of		Amount and Nature of				Percent of
Title of Class		Beneficial Ownership		Beneficial Owner				Class(1)
Common		J. H. Binford Peay, III			310,028	(2)			3.70	%
				Owned directly
Common		John G. Meyer, Jr.			102,800	(3)			1.25	%
				Owned directly
Common		Monte L. Pickens			77,255	(4)			*
				Owned directly
Common		John J. Marcello			72131	(8)			*
				Owned directly
Common		Deborah F. Ricci			67,880	(6)			*
				Owned directly
Common		Ronald H. Griffith			49,267				*
				Owned directly
Common		Gilbert F. Decker			39,784	(5)			*
				Owned directly
Common		Charles S. Ream			36,214				*
				Owned directly
Common		Wayne F. Hosking			31,969	(7)			*
				Owned directly
Common		Frederick G. Wasserman			30,492				*
				Owned directly
Common		Tassos D. Recachinas			25,811				*
				Owned directly
Common		All executive officers and			843,631	(9)			9.78	%
		directors as a group		Owned directly

ITEM 13.		CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The following members of the Board of Directors of the Company have been determined to qualify as independent members of the Board of Directors pursuant to the standards set forth by the NYSE Amex (formerly American Stock Exchange): John G. Meyer, Jr., Gilbert F. Decker, Ronald H. Griffith, Charles S. Ream, Frederick G. Wasserman, and Tassos D. Recachinas. The Company’s Audit, Compensation and Nominating Committees consist solely of independent directors.

Procedures for Approval of Related Party Transactions

Our Board of Directors is charged with reviewing and approving all potential related party transactions. All such related party transactions must then be reported under applicable SEC rules. We have not adopted other procedures for review, or standards for approval, of such transactions, but instead review them on a case-by-case basis.

ITEM 14.		PRINCIPAL ACCOUNTING FEES AND SERVICE

The following table sets forth the fees paid by the Company to BDO Seidman LLP (BDO) for audit and other services provided for 2009 and 2008:

		(In Thousands)
		2009				2008
Audit fees		$	633			$	700
Audit-related fees			—				—
Tax fees			—				—
All other fees			—				—
Total		$	633			$	700