Attached files
file | filename |
---|---|
EX-32 - EXHIBIT 32 - ALLIED DEFENSE GROUP INC | c01241exv32.htm |
EX-31.2 - EXHIBIT 31.2 - ALLIED DEFENSE GROUP INC | c01241exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - ALLIED DEFENSE GROUP INC | c01241exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
Commission File Number: 1-11376
The Allied Defense Group, Inc.
(Exact name of Registrant as specified in its charter)
Delaware | 04-2281015 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Number) |
8000 Towers Crescent Drive, Suite 260
Vienna, Virginia 22182
(Address of principal executive offices, including zip code)
Vienna, Virginia 22182
(Address of principal executive offices, including zip code)
(703) 847-5268
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
None
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 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 number of shares of registrants Common Stock outstanding as of May 15, 2010, was
8,174,480.
THE ALLIED DEFENSE GROUP, INC.
INDEX
INDEX
PAGE | ||||||||
NUMBER | ||||||||
PART I. FINANCIAL INFORMATION UNAUDITED |
||||||||
Item 1. Financial Statements (Unaudited) |
||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
20 | ||||||||
32 | ||||||||
32 | ||||||||
32 | ||||||||
33 | ||||||||
33 | ||||||||
33 | ||||||||
33 | ||||||||
33 | ||||||||
33 | ||||||||
34 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
Table of Contents
The Allied Defense Group, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars, except per share and share data)
(Unaudited)
(Thousands of Dollars, except per share and share data)
March 31, | December 31, | |||||||
2010 | 2009 (a) | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 1,398 | $ | 9,021 | ||||
Restricted cash |
19,996 | 5,599 | ||||||
Accounts receivable, net |
23,471 | 28,911 | ||||||
Costs and accrued earnings on uncompleted contracts |
11,446 | 14,402 | ||||||
Inventories, net |
23,978 | 19,581 | ||||||
Contracts in progress |
1,862 | 179 | ||||||
Prepaid and other current assets |
4,706 | 4,679 | ||||||
Total current assets |
86,857 | 82,372 | ||||||
Property, Plant and Equipment, net |
15,067 | 16,545 | ||||||
Other Assets |
1,562 | 1,712 | ||||||
TOTAL ASSETS |
$ | 103,486 | $ | 100,629 | ||||
CURRENT LIABILITIES |
||||||||
Bank overdraft facility |
$ | 679 | $ | 2,635 | ||||
Current maturities of long-term debt |
8,188 | 4,240 | ||||||
Accounts payable |
17,443 | 17,429 | ||||||
Accrued liabilities |
16,737 | 18,654 | ||||||
Customer deposits |
27,284 | 15,974 | ||||||
Belgium social security |
4,149 | 3,803 | ||||||
Income taxes |
3,461 | 3,773 | ||||||
Other current liabilities |
2,006 | 315 | ||||||
Total current liabilities |
79,947 | 66,823 | ||||||
LONG TERM OBLIGATIONS |
||||||||
Long-term debt, less current maturities |
73 | 4,607 | ||||||
Long-term foreign exchange contract, less current maturities |
907 | 499 | ||||||
Derivative instrument |
273 | 24 | ||||||
Other long-term liabilities |
1,579 | 1,665 | ||||||
Total long-term obligations |
2,832 | 6,795 | ||||||
TOTAL LIABILITIES |
82,779 | 73,618 | ||||||
CONTINGENCIES AND COMMITMENTS |
||||||||
STOCKHOLDERS EQUITY |
||||||||
Preferred stock, no par value; authorized 1,000,000 shares; none issued |
| | ||||||
Common stock, par value, $.10 per share; authorized 30,000,000 shares; issued
and outstanding, 8,174,480 at March 31, 2010 and 8,175,480 at December 31, 2009 |
818 | 818 | ||||||
Capital in excess of par value |
56,597 | 56,490 | ||||||
Accumulated deficit |
(51,813 | ) | (46,658 | ) | ||||
Accumulated other comprehensive income |
15,105 | 16,361 | ||||||
Total stockholders equity |
20,707 | 27,011 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 103,486 | $ | 100,629 | ||||
(a) | Condensed consolidated balance sheet as of December 31, 2009, has been derived from audited
consolidated financial statements. |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Table of Contents
The Allied Defense Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars, except per share and share data)
(Unaudited)
(Thousands of Dollars, except per share and share data)
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Revenue |
$ | 20,169 | $ | 31,548 | ||||
Cost and expenses |
||||||||
Cost of sales |
18,274 | 26,718 | ||||||
Selling and administrative |
4,523 | 4,212 | ||||||
Research and development |
504 | 492 | ||||||
Operating (loss) income |
(3,132 | ) | 126 | |||||
Other income (expenses) |
||||||||
Interest income |
19 | 35 | ||||||
Interest expense |
(1,159 | ) | (864 | ) | ||||
Net (loss) gain on fair value of senior convertible notes and warrants |
(249 | ) | 239 | |||||
Loss from foreign exchange contracts |
(668 | ) | (662 | ) | ||||
Other-net |
44 | (247 | ) | |||||
(2,013 | ) | (1,499 | ) | |||||
Loss from continuing operations before income taxes |
(5,145 | ) | (1,373 | ) | ||||
Income tax expense |
10 | | ||||||
Loss from continuing operations |
(5,155 | ) | (1,373 | ) | ||||
Income from discontinued operations, net of tax |
||||||||
Gain on sale of subsidiaries |
| 946 | ||||||
Income from discontinued operations |
| 110 | ||||||
Net income from discontinued operations |
| 1,056 | ||||||
NET LOSS |
$ | (5,155 | ) | $ | (317 | ) | ||
Earnings (Loss) per share basic and diluted: |
||||||||
Net loss from continuing operations |
$ | (0.63 | ) | $ | (0.17 | ) | ||
Net income from discontinued operations, net of tax |
| 0.13 | ||||||
Total loss per share basic and diluted |
$ | (0.63 | ) | $ | (0.04 | ) | ||
Weighted average number of common shares: |
||||||||
Basic and Diluted |
8,175,364 | 8,079,972 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Table of Contents
The Allied Defense Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
(Unaudited)
(Thousands of Dollars, except per share and share data)
(Unaudited)
(Thousands of Dollars, except per share and share data)
Accumulated | ||||||||||||||||||||||||||||
Preferred | Common Stock | Capital in | Other | Total | ||||||||||||||||||||||||
stock, no | $.10 Par | Excess of | Accumulated | Comprehensive | Stockholders | |||||||||||||||||||||||
Par Value | Shares | value | Par value | (Deficit) | Income | Equity | ||||||||||||||||||||||
Balance at January 1, 2009 |
$ | | 8,079,509 | $ | 808 | $ | 55,912 | $ | (38,351 | ) | $ | 16,082 | $ | 34,451 | ||||||||||||||
Common stock awards |
| 78,490 | 8 | 326 | | | 334 | |||||||||||||||||||||
Retired stocks |
| (1,502 | ) | | (6 | ) | | | (6 | ) | ||||||||||||||||||
Employee stock purchase plan purchases |
| 18,983 | 2 | 84 | | | 86 | |||||||||||||||||||||
Issue of stock options |
| | | 71 | | | 71 | |||||||||||||||||||||
Directors deferred stock compensation |
| | | 103 | | | 103 | |||||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||
Net loss for the year ended |
| | | | (8,307 | ) | | (8,307 | ) | |||||||||||||||||||
Currency translation adjustment |
| | | | | 279 | 279 | |||||||||||||||||||||
Total comprehensive loss |
(8,028 | ) | ||||||||||||||||||||||||||
Balance at December 31, 2009 |
$ | | 8,175,480 | $ | 818 | $ | 56,490 | $ | (46,658 | ) | $ | 16,361 | $ | 27,011 | ||||||||||||||
Common stock awards |
| | | 68 | | | 68 | |||||||||||||||||||||
Forfeited stocks |
| (1,000 | ) | | | | | | ||||||||||||||||||||
Issue of stock options |
| | | 17 | | | 17 | |||||||||||||||||||||
Directors deferred stock compensation |
| | | 22 | | | 22 | |||||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||
Net loss for the three months ended |
| | | | (5,155 | ) | | (5,155 | ) | |||||||||||||||||||
Currency translation adjustment |
| | | | | (1,256 | ) | (1,256 | ) | |||||||||||||||||||
Total comprehensive loss |
(6,411 | ) | ||||||||||||||||||||||||||
Balance at March 31, 2010 |
$ | | 8,174,480 | $ | 818 | $ | 56,597 | $ | (51,813 | ) | $ | 15,105 | $ | 20,707 | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Table of Contents
The Allied Defense Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
(Unaudited)
(Thousands of Dollars)
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | (5,155 | ) | $ | (317 | ) | ||
Less: Gain on sale of subsidiaries |
| (946 | ) | |||||
Discontinued operations, net of tax |
| (110 | ) | |||||
Loss from continuing operations |
(5,155 | ) | (1,373 | ) | ||||
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities, net of divestitures: |
||||||||
Depreciation and amortization |
930 | 1,016 | ||||||
Unrealized loss on foreign exchange contracts |
668 | 662 | ||||||
Net loss (gain) related to fair value of notes and warrants |
249 | (239 | ) | |||||
(Reduction) provision for estimated losses on contracts |
(82 | ) | 250 | |||||
(Reduction) provision for warranty reserves, uncollectible accounts and inventory obsolescence |
(223 | ) | 344 | |||||
Common stock and stock option awards |
85 | 111 | ||||||
Deferred director stock awards |
22 | 30 | ||||||
(Increase) decrease in operating assets and increase (decrease) in liabilities, net
of effects from discontinued businesses |
||||||||
Restricted cash |
(15,164 | ) | (8,386 | ) | ||||
Accounts receivable |
4,126 | (11,616 | ) | |||||
Costs and accrued earnings on uncompleted contracts |
2,119 | (8,353 | ) | |||||
Inventories |
(5,485 | ) | (2,925 | ) | ||||
Contracts in progress |
(1,683 | ) | (3,698 | ) | ||||
Prepaid and other current assets |
(251 | ) | 113 | |||||
Accounts payable and accrued liabilities |
609 | 8,414 | ||||||
Customer deposits |
12,635 | 16,167 | ||||||
Deferred compensation |
1 | 1 | ||||||
Income taxes |
(112 | ) | | |||||
Net cash used in operating activities continuing operations |
(6,711 | ) | (9,482 | ) | ||||
Net cash used in operating activities discontinued operations |
| (250 | ) | |||||
Net cash used in operating activities |
(6,711 | ) | (9,732 | ) | ||||
Cash flows from investing activities |
||||||||
Capital expenditures |
(299 | ) | (272 | ) | ||||
Net proceeds from sale of subsidiaries |
| (646 | ) | |||||
Net cash used in investing activities continuing operations |
(299 | ) | (918 | ) | ||||
Net cash provided by investing activities discontinued operations |
| | ||||||
Net cash used in investing activities |
(299 | ) | (918 | ) | ||||
Cash flows from financing activities |
||||||||
Bank overdraft (payments) borrowings |
(1,847 | ) | 4,418 | |||||
Principal payments on long-term debt |
| (70 | ) | |||||
Principal payments on senior convertible notes |
| (928 | ) | |||||
Financing of receivables |
1,500 | | ||||||
Net of proceeds received from long-term debt and repayment on capital lease obligations |
(48 | ) | 283 | |||||
Net cash transferred to discontinued operations |
| (27 | ) | |||||
Proceeds from employee stock purchases |
| 18 | ||||||
Net cash (used in) provided by financing activities continuing operations |
(395 | ) | 3,694 | |||||
Net cash provided by financing activities discontinued operations |
| 24 | ||||||
Net cash (used in) provided by financing activities |
(395 | ) | 3,718 | |||||
Net change in cash of discontinued operations |
| 223 | ||||||
Effects of exchange rate on cash |
(218 | ) | (219 | ) | ||||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
(7,623 | ) | (6,928 | ) | ||||
Cash and cash equivalents at beginning of period |
9,021 | 8,816 | ||||||
Cash and cash equivalents at end of period |
$ | 1,398 | $ | 1,888 | ||||
2010 | 2009 | |||||||
Supplemental Disclosures of Cash Flow information |
||||||||
Cash paid during the period for |
||||||||
Interest |
$ | 1,292 | $ | 872 | ||||
Taxes |
$ | 121 | $ | 4 |
The accompanying notes are an integral part of these unaudited condensed consolidated statements.
5
Table of Contents
The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
March 31, 2010
(Thousands of Dollars)
NOTE 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Allied Defense Group Inc. (Allied or the Company), a Delaware corporation, 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.
The accompanying unaudited condensed consolidated financial statements have been prepared by
the Company. We have continued to follow the accounting policies disclosed in the consolidated
financial statements included in our 2009 Form 10-K filed with the Securities and Exchange
Commission. In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all necessary adjustments and reclassifications (all of which are of a
normal, recurring nature) that are necessary for fair presentation for the periods presented.
Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted. The results of operations for the three months ended March
31, 2010 and 2009 are not necessarily indicative of the operating results for the full year.
It is suggested that these unaudited condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes thereto included in the
Companys latest shareholders annual report (Form 10-K) for the period ended December 31, 2009.
As discussed in Note 18, the results of operations, financial position and cash flows of
News/Sports Microwave Rental, Inc. (NSM) have been reported as discontinued operations for all
periods presented. NSM was sold in August 2009. Unless otherwise indicated, all disclosures in the
notes to the unaudited interim consolidated financial statements relate to the Companys continuing
operations.
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 Note 17- Commitments and Contingencies, 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 and then further postponed it to May 6, 2010. On May 6, 2010, the shareholders voted to
adjourn the special meeting to a later date, June 1, 2010, after Chemring indicated that it needed
more time to continue its ongoing review of the Company. The Company has been providing regular
updates to Chemring on its progress in addressing such matters, has been responding to additional
requests for information from Chemring and expects to continue to cooperate with Chemring with
respect to these matters.
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 revenue and continuing significant operating losses at Mecar
over the past several years. Since 2008, the Company has cut the operating costs of its
headquarters, divested all of its non-core subsidiaries, and implemented a plan to reduce the
fixed-cost base of Mecar. The Company repaid Mecars cash line in late 2008 and made the last
repayment of its senior convertible notes in early 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. Mecars cash shortages have precluded
it from paying management fees to Allied since 2005. 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.
6
Table of Contents
The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
Mecars bank group has agreed to extend its current credit facility for the issuance of
performance bonds and advance payment guarantees until June 2, 2010. The current facility provides
for a maximum of $37,001 (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 June 2, 2010, with a value of
$35,223 (26,178). 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 Companys possible inability to sign new customer contracts
will significantly impact future revenues thereby potentially limiting Mecars 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, from time to time, discounted letters of credit and extended the
bank overdraft facility since 2009.
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. This bank has issued irrevocable performance bonds and
advanced payment guarantees with a value of $5,786 (4,300). Upon the termination of Mecars credit
facility on June 2, 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, the Company should not
expect continued short-term financing and short-term extensions of the credit facility by Mecars
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. Currently, based on the terms of the
Merger Agreement, the Company is precluded from entering into new
financing agreements outside of the ordinary course of business
without Chemrings consent. In the
interim, Mecar USA has made arrangements to fund its working capital requirements with existing
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 March 31, 2010, the Company had $1,398 in cash on hand. For the three months ended March
31, 2010, the Company used $6,711 of cash from its continuing operating activities. This usage
stems mainly from a $5,155 net loss from continuing operations and $3,205 from a decrease in net
operating assets, offset by $1,649 of non-cash adjustments.
Outlook for 2010
On January 18, 2010, the Company signed a definitive Merger agreement with 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. If the Company is unable to secure additional financing,
it may need to cease operations.
As reported under Note 17- Commitments and Contingencies, the Company received a subpoena and
communications from the Department of Justice (DOJ). The Audit Committee of the Board has been
overseeing compliance with the subpoena and has also conducted an internal review of the activities
of a former Mecar USA executive. The Company has been providing regular updates to Chemring and the
Company has been responding to additional requests for information from Chemring. The Company is
incurring significant legal expense associated with these matters 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 USAs ammunition services contracts. During 2009,
Mecar USA recruited an assistant for this former employee and outsourced certain activities that
historically were performed by this executive. 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 executive will likely have an adverse impact on
Mecar USAs 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 Companys 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 finance transaction which, given the current credit markets, if available at all, would
likely be an equity transaction that will result in significant dilution to the shareholders.
There are no assurances that this financing will be available to the
Company and if such financing is not available, the Company may need to cease operations.
The Company has less than $500 of firm commitments for capital expenditures outstanding as of
March 31, 2010.
7
Table of Contents
The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
NOTE 2 PRINCIPLES OF CONSOLIDATION
The unaudited condensed consolidated financial statements include the accounts of The Allied
Defense Group, Inc. (Allied or the Company), a Delaware corporation, and its wholly-owned
subsidiaries as follows:
| ARC Europe, S.A. (ARC Europe), a Belgian company, including its
wholly-owned subsidiary Mecar S.A. (Mecar). |
| Allied Research BV (BV), a Dutch company, |
| Allied Research Cooperative (Coop) and, |
| Mecar USA, Inc. (Mecar USA), a Delaware corporation. |
In August 2009, the Company completed the divestiture of 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 Mecars 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. Mecars 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.
NOTE 3 ACCOUNTS RECEIVABLE AND COSTS AND ACCRUED EARNINGS ON UNCOMPLETED CONTRACTS
Accounts receivable at March 31, 2010 and December 31, 2009 are comprised as follows:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Direct and indirect receivables from governments |
$ | 17,876 | $ | 19,570 | ||||
Commercial and other receivables |
6,527 | 10,328 | ||||||
24,403 | 29,898 | |||||||
Less: Allowance for doubtful receivables |
(932 | ) | (987 | ) | ||||
$ | 23,471 | $ | 28,911 | |||||
8
Table of Contents
The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
Receivables from governments and government agencies are generally due within 30 days of
shipment, less a 10% hold back provision which is generally due within 90 days. Since these
receivables are typically supported by letters of credit or other guarantees, no provision for
doubtful accounts is deemed necessary. The Company maintains an allowance for doubtful
accounts on commercial receivables or receivables from governments that are deemed
uncollectible, which is determined based on historical experience and managements expectations of
future losses. Losses have historically been within managements expectations.
At times during the quarter ended March 31, 2010, the Company transferred certain receivables
to a third party. The Company accounts for such transfers in accordance with the provisions of ASC
860 Transfers and Servicing. Since these receivables were transferred with recourse with the
Company maintaining credit risk, these transactions have been accounted for as a secured borrowing
based on the criteria set forth in ASC 860. As a result, the receivables remain on the Companys
balance sheets and are characterized as financing receivables. As of March 31, 2010, financing
receivables totaled $2,277 and the amount due to the third party related to these receivables was
$1,500 which is included in other current liabilities.
Costs and accrued earnings on uncompleted contracts totaled $11,446 and $14,402 at March 31,
2010 and December 31, 2009, respectively.
NOTE 4 INVENTORIES
Inventories at March 31, 2010 and December 31, 2009 are comprised as follows:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Raw materials |
$ | 13,107 | $ | 10,633 | ||||
Work in process |
11,138 | 9,037 | ||||||
Finished goods |
2,284 | 2,859 | ||||||
26,529 | 22,529 | |||||||
Less: Reserve for obsolescence |
(2,551 | ) | (2,948 | ) | ||||
$ | 23,978 | $ | 19,581 | |||||
Inventories are stated at the lower of cost or net realizable value. Cost is determined
principally by the weighted average cost method. Raw materials inventory represents materials and
semi-finished components purchased but not yet allocated to specific contracts. Work in progress
inventory represents inventory allocated to specific contracts less amounts expensed in conjunction
with revenue recognized under the percentage of completion method. Finished goods inventory
represents completed items which have not yet shipped and/or title for which has not transferred.
The Company reviews its inventory periodically and estimates an allowance for obsolete, excess or
slow-moving items. The inventory allowance 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 allowances may be required.
NOTE 5 CONTRACTS IN PROGRESS
For contracts in progress, the Company capitalizes recoverable costs that have been incurred
during performance of contracts at Mecar USA. These costs have been capitalized and recorded as a
current asset which will be relieved and expensed along with the associated revenue recognized
based on the terms of the specific contracts which is normally upon shipment. In the case of a
partial shipment, a prorata percentage of contract costs are relieved in proportion to the revenue
recognized. Contract costs consist primarily of prepayments made to suppliers, but also include
other contract specific advances such as travel related expenditures and shipping costs. As of
March 31, 2010 and December 31, 2009, the Company had recoverable costs of $1,862 and $179,
respectively.
9
Table of Contents
The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
NOTE 6 BANK CREDIT FACILITY
Mecar is obligated under an agreement (the Agreement) with its foreign banking syndicate that
provides credit facilities of up to 27,500 (approximately $37,001) primarily for bank guarantees
including performance bonds, letters of credit and similar instruments. The Agreement provides for
certain bank charges and fees as the facility is used, plus fees of 2% of guarantees issued and
quarterly fees at an annual rate of 1.25% of guarantees outstanding. These fees are charged to
interest expense. Mecars bank group has informally agreed to extend its credit facility for the issuance of
performance bonds and advance payment guarantees until June 2, 2010. The bank group has issued
irrevocable performance bonds and advance payment guarantees that expire after June 2, 2010, with a
value of 26,178 (approximately $35,223). 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 Companys possible inability to sign new
customer contracts will significantly impact future revenues thereby potentially limiting Mecars
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 contract. Sales contracts typically
extend for a period of 12 to 18 months upon signing. The Company has started a new relationship
with a new bank in 2009 which will open guarantees and bonds on a case by case basis. The
guarantees issued by this new bank will not be included in the existing facility opened with the
bank group. The Company continues to look for a longer term banking solution in Europe.
Effective July 1, 2007, a local Belgian regional agency began providing guarantees up to 50%
of Mecars credit requirements relative to certain performance bonds and advance payment
guarantees, to reduce the exposure of the existing bank group. In April 2008, Mecars bank group
received additional temporary local support from the agency to provide additional guarantees on the
performance bonds and advance payment guarantees from May to November 2008. These additional
guarantees were extended until mid December 2009 and allowed Mecar to reduce its restricted cash
requirements by 3,000 (approximately $4,037) at the end of August 2009 and 4,500 (approximately
$6,055) from September through December 31, 2009. In conjunction with Mecars bank group agreeing
to the reduction in restricted cash, Mecar agreed to pay the bank group a one-time fee of 400
(approximately $558) in January 2010.
As of March 31, 2010 and December 31, 2009, total guarantees and performance bonds of
approximately $41,134 and $32,877, respectively, were outstanding. Advances for working capital
amounted to $786 and $2,763 at March 31, 2010 and December 31 2009, respectively. The balance
outstanding at March 31, 2010 includes $679 of overdraft and $107 of issued loans from the credit
facility for varying purposes. The balance outstanding at December 31, 2009 includes $2,635 of
overdraft and $128 of issued loans from the credit facility for varying purposes. The notes are
more fully described in Note 7 Long Term Obligations. Although the cash line of the credit
facility expired on December 31, 2008, Mecar has borrowed from the bank group since 2009 by
discounting customer letters of credit and other short-term extension of credits. Performance bonds
and advance payment guarantees under the Agreement are secured by restricted cash of approximately
$19,764 and $5,364, at March 31, 2010 and December 31, 2009, respectively. Mecar is generally
required under the terms of its contracts with foreign governments and its distributor to provide
performance bonds and advance payment guarantees. The credit facility agreement is used to provide
these financial guarantees and places restrictions on certain cash deposits and other liens on
Mecars assets. Amounts outstanding are also collateralized by the letters of credit received under
the contracts financed, and a pledge of all of Mecars assets, with the exception of assets pledged
for the SOGEPA loan described in Note 7 Long Term Obligations.
NOTE 7 LONG-TERM OBLIGATIONS
Long-term obligations as of March 31, 2010 and December 31, 2009 consist of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
SOGEPA loan |
$ | 8,073 | $ | 8,600 | ||||
Bank notes payable |
107 | 128 | ||||||
Capital leases and other |
81 | 119 | ||||||
Total long-term debt |
8,261 | 8,847 | ||||||
Less: Current maturities |
(8,188 | ) | (4,240 | ) | ||||
Long-term debt, less current maturities |
$ | 73 | $ | 4,607 | ||||
10
Table of Contents
The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
SOGEPA Loan. On December 20, 2007, Mecar entered into a 6,000 (approximately $8,073) loan
agreement with the Société Wallonne de Gestion et de Participations (SOGEPA), a local Belgian
regional agency to provide Mecar with additional working capital financing. The loan matures on
December 20, 2012 and accrues interest at 4.95% per year. Quarterly interest payments are due
during the first year of the loan, with quarterly principal and interest payments due
thereafter. The loan is secured by a mortgage on Mecars office building and manufacturing
facilities. As part of the loan, Mecar is required to maintain certain capital requirements as
defined in the loan agreement. Mecar paid debt issue costs of $141 in connection with the loan
which is being amortized over the term of the loan. The unamortized debt issue cost was $71 and
$82 at March 31, 2010 and December 31, 2009, respectively. As a cash conservation measure, it was
verbally agreed to defer the required repayments of 2009 and the first quarter of 2010 principal in
the amount of $1,927 (1,391) and $507 (366), respectively, to the end of the second quarter of
2010. The Company evaluated the amendment and concluded that it did not meet the definition of a
substantially different debt modification subject to the terms of ASC 470 Debtors Accounting for a
Modification or Exchange of Debt Instruments. Therefore, no gain or loss was recorded as a result
of the modification. The outstanding balance due on the loan was $8,073 (6,000) and $8,600
(6,000) at
March 31, 2010 and December 31, 2009, respectively. The
Company reclassified the entire
outstanding balance as a short-term obligation as the Company will be unlikely to repay the
required 2009 and first quarter 2010 principal balances due on June 30, 2010.
Bank notes payable. In February 2009, Mecar entered into a $163 (121) loan agreement with one of
the banks in its banking facility to purchase a telephone system. The loan matures on February 25,
2012 and accrues interest at 4.88% per year. The loan is secured by the assets acquired. The
outstanding balance due on the loan was $107 and $128 at March 31, 2010 and December 31, 2009,
respectively.
Capital lease and other. The Company is also obligated on various vehicle, equipment, capital lease
obligations and other loans. The notes and leases are generally secured by the assets acquired,
bear interest at rates ranging from 1.80% to 15.85% and mature at various dates through 2014.
Other than as disclosed above with regard to the Notes, no other debt classified as long-term
contain cross-default provisions.
NOTE 8 WARRANTS
On March 6, 2006, in conjunction with the issuance of the convertible notes, the Company
issued detachable warrants to the purchasers exercisable for an aggregate of 226,800 shares of
Allied common stock. The warrants are exercisable for a term of five years at an exercise price of
$27.68 per share, subject to anti-dilution provisions similar to the provisions set forth in the
Notes and expire on March 9, 2011. The original exercisable shares of 226,800 and exercise price of
$27.68 was adjusted to 349,297 and $17.97, respectively, to account for the December 2006 Private
Placement and the Amendment Agreement. The warrants did not meet the requirement for equity
classification in accordance with ASC 815 Derivatives and Hedging, mainly because the warrants are
required to settle in registered shares of the Companys common stock. The warrants were recorded
as liabilities, presented as derivative instruments on the balance sheet, and are being recorded
and carried at the fair value of the instrument. At March 31, 2010 and December 31, 2009, the
Company determined the fair value of the warrants was $273 and $24, respectively. For the three
months ended March 31, 2010 and 2009, the Company recorded a loss of $249 and a gain of $234,
related to the calculated fair value adjustment of the warrants, respectively.
NOTE 9 DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses foreign currency futures contracts to minimize the foreign currency exposures
that arise from sales contracts with certain foreign customers and certain purchase commitments at
Mecar. Under the terms of these sales contracts, the selling price and certain costs are payable in
U.S. dollars rather than the Euro, which is Mecars functional currency. Foreign currency futures
contracts represent agreements to exchange the currency of one country for the currency of another
country at an agreed-upon price on an agreed-upon settlement date.
The Company has not designated the foreign currency futures contracts as hedging instruments
under ASC 815. As such, realized and unrealized gains (losses) from derivative contracts are
reported in the income statement. As of March 31, 2010 and December 31, 2009, the Company had
liabilities totaling $1,413 and $814, respectively, representing the fair values of these foreign
currency futures contracts. The Company classifies its foreign currency futures contracts as
current or non-current based on the expiration date of such contracts. During the three months
ended March 31, 2010 and 2009, the Company recognized net losses of $668 and $662, respectively, in
connection with its foreign currency futures contracts.
11
Table of Contents
The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
The following table presents the Companys derivative liabilities at March 31, 2010 and
December 31, 2009, respectively:
Fair Value at | ||||||||||
Liability Derivatives Balance Sheet Location | March 31, 2010 | December 31, 2009 | ||||||||
Derivatives
not designated as hedging instruments under ASC 815 |
||||||||||
Foreign Currency future contracts |
Other current liabilities | $ | 506 | $ | 315 | |||||
Foreign Currency future contracts |
Long-term foreign exchange contracts, less current maturities | 907 | 499 | |||||||
Total derivatives not designated
as hedging instruments under ASC 815 |
$ | 1,413 | $ | 814 | ||||||
The following table presents the location and amount of gains from derivatives reported in the
consolidated statements of operations for the three months ended March 31, 2010 and 2009,
respectively:
For the Three Months Ended | ||||||||||
Statement of Operations Location | March 31, 2010 | March 31, 2009 | ||||||||
Derivatives
not designated as hedging instruments under ASC 815 |
||||||||||
Foreign Currency future contracts |
Loss from foreign exchange contracts | $ | (668 | ) | $ | (662 | ) | |||
For more information on the fair value of these derivative instruments, see Note 10.
NOTE 10 FAIR VALUE MEASUREMENTS
The Company values its assets and liabilities using the methods of fair-value as described in
ASC 820 (formerly SFAS 157). In accordance with ASC 820, the Company determines fair value as the
price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The Company generally applies the
income approach to determine fair value. This method uses valuation techniques to convert future
amounts to a single present amount. The measurement is based on the value indicated by current
market expectations about those future amounts.
ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair
value. The hierarchy gives the highest priority to active markets for identical assets and
liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3
measurement). We classify fair value balances based on the observability of those inputs. The
three levels of the fair value hierarchy are as follows:
Level 1 Observable inputs such as quoted prices in active markets for identical assets
or liabilities.
Level 2 Inputs other than quoted prices that are observable for the asset or liability,
either directly or indirectly. These include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or similar assets or liabilities
in markets that are not active and amounts derived from valuation models where all
significant inputs are observable in active markets.
Level 3 Unobservable inputs that reflect managements assumptions.
For disclosure purposes, assets and liabilities are classified in their entirety in the fair
value hierarchy level based on the lowest level of input that is significant to the overall fair
value measurement. Our assessment of the significance of a particular input to the fair value
measurement requires judgment and may affect the placement within the fair value hierarchy levels.
12
Table of Contents
The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
The following table sets forth the assets and liabilities measured at fair value on a
recurring basis, by input level, in the consolidated balance sheet at March 31, 2010 and December
31, 2009:
Quoted Prices in Active | Significant Other | Significant | ||||||||||||||
Markets for Identical Assets | Observable Inputs | Unobservable Inputs | ||||||||||||||
March 31, 2010 | or Liabilities (level 1) | (level 2) | (Level 3) | Total | ||||||||||||
Liabilities |
||||||||||||||||
Derivatives instruments warrants |
$ | | $ | 273 | $ | | $ | 273 | ||||||||
Foreign exchange contracts |
| 1,413 | | 1,413 | ||||||||||||
$ | | $ | 1,686 | $ | | $ | 1,686 | |||||||||
Quoted Prices in Active | Significant Other | Significant | ||||||||||||||
Markets for Identical Assets | Observable Inputs | Unobservable Inputs | ||||||||||||||
December 31, 2009 | or Liabilities (level 1) | (level 2) | (Level 3) | Total | ||||||||||||
Liabilities |
||||||||||||||||
Derivatives instruments warrants |
$ | | $ | 24 | $ | | $ | 24 | ||||||||
Foreign exchange contracts |
| 814 | | 814 | ||||||||||||
$ | | $ | 838 | $ | | $ | 838 | |||||||||
The fair values of the Companys senior secured convertible notes and warrants disclosed above
are primarily derived from valuation models where significant inputs such as historical price and
volatility of the Companys stock as well as U.S. Treasury Bill rates are observable in active
markets. The fair values of the Companys foreign exchange contracts are valued using a discounted
cash flow model that takes into account the present value of future cash flows under the terms of
the contracts using current market information as of the reporting date such as prevailing foreign
currency spot and forward rates.
NOTE 11 LOSS PER SHARE FROM CONTINUING OPERATIONS
Basic loss per share from continuing operations excludes potential common shares and is
computed by dividing net loss from continuing operations by the weighted average number of common
shares outstanding for the period. The computation of diluted loss per share from continuing
operations excludes the effects of stock options, warrants and restricted stock (unvested stock
awards), if such effect is anti-dilutive. The table below shows the calculation of basic and
diluted loss per share from continuing operations for the three months ended March 31, 2010 and
2009, respectively:
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Net loss from continuing operations |
$ | (5,155 | ) | $ | (1,373 | ) | ||
Weighted average number of basic and diluted shares |
8,175,364 | 8,079,972 | ||||||
Basic and diluted net loss per share from continuing operations |
$ | (0.63 | ) | $ | (0.17 | ) |
For the three months ended March 31, 2010, the Company has excluded warrants, unvested stock
awards and stock options of 411,593, 5,000, and 36,597 shares, respectively, from the calculation
of loss per share from continuing operations since their effect would be anti-dilutive. For the
three months ended March 31, 2009, the Company has excluded warrants, unvested stock awards and
stock options of 411,593, 16,334 and 2,786 shares, respectively, from the calculation of loss per
share from continuing operations since their effect would be anti-dilutive.
13
Table of Contents
The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
NOTE 12 COMPREHENSIVE LOSS
A summary of the components of Comprehensive Loss for the three months ended March 31, 2010
and 2009 were as follows:
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Net loss |
$ | (5,155 | ) | $ | (317 | ) | ||
Currency Translation Adjustment |
(1,256 | ) | (1,863 | ) | ||||
Comprehensive loss |
$ | (6,411 | ) | $ | (2,180 | ) | ||
The currency translation adjustment for the three months ended March 31, 2010 and 2009
resulted from the change in the value of the Euro during the respective periods.
NOTE 13 OTHER NET
Other income (expense) included in the Companys consolidated statements of operations at
March 31 is comprised of the following:
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Net currency transaction gains (losses) |
$ | 339 | $ | (301 | ) | |||
Miscellaneous net |
(295 | ) | 54 | |||||
$ | 44 | $ | (247 | ) | ||||
Miscellaneous net includes income received from various sources such as subsidies, penalties, non
deductible value added taxes, sublease rent and sale of materials.
NOTE 14 SHARE-BASED COMPENSATION
Total share-based compensation was $107 (including outside directors compensation of $89) and
$141 (including outside directors compensation of $108) for the three months ended March 31, 2010
and 2009, respectively. The share-based compensation expense for the period includes costs
associated with stock options, restricted stock grants, and the compensatory element of the
Employee Stock Purchase Plan.
In conjunction with the Companys signing a definitive Merger agreement on January 18, 2010,
all equity compensation plans have been suspended pending the Companys Merger. As such, new future
equity awards will not be made unless the Merger fails to close.
During the three months ended March 31, 2009, the Company granted options to purchase 100,000
shares of its common stock. The fair value of each option grant was estimated on the date of
grant using the Black-Scholes options pricing model. The weighted-average fair values of each
option at the date of grant were $1.21 at March 31, 2009. The weighted average assumptions used in
the model for the three months ended March 31, 2009 were as follows:
March 31, 2009 | ||||
Risk free interest rate |
0.80 | % | ||
Expected volatility rate |
70.71 | % | ||
Expected lives years |
1 | |||
Dividend yield |
|
The risk free interest rate is equal to the U.S. Treasury Bill rate for the auction closest to
period end. The expected volatility is calculated from the Companys daily closing stock price
starting with the options grant date and going back one year. The expected life in years is the
vesting period of the stock options based on general Company experience that the options will be
exercised upon vesting.
14
Table of Contents
The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
NOTE 15 INDUSTRY SEGMENTS
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Revenues from external customers |
||||||||
Mecar SA |
$ | 14,435 | $ | 26,742 | ||||
Mecar USA |
5,734 | 4,806 | ||||||
$ | 20,169 | $ | 31,548 | |||||
Segment earnings (loss) from
continuing operations before taxes |
||||||||
Mecar SA |
$ | (3,731 | ) | $ | (172 | ) | ||
Mecar USA |
519 | 6 | ||||||
Corporate |
(1,933 | ) | (1,207 | ) | ||||
$ | (5,145 | ) | $ | (1,373 | ) | |||
The segment profit (loss) before provision for income taxes includes all revenue and expenses
at the subsidiary level excluding any corporate fees passed to the subsidiary in the form of
management fees. Corporate includes all expenses of the Corporate office and foreign holding
companies before an allocation of management fees to the subsidiaries.
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Segment assets |
||||||||
Mecar SA |
$ | 92,217 | $ | 84,575 | ||||
Mecar USA |
7,936 | 12,175 | ||||||
Corporate |
3,333 | 3,879 | ||||||
$ | 103,486 | $ | 100,629 | |||||
The segment assets exclude any intersegment receivables and payables.
NOTE 16 PROVISION FOR TAXES
As required under ASC 270 Interim Financial Reporting, the Company has estimated its annual
effective tax rate for the full fiscal year 2010 and applied that rate to its income before income
taxes in determining its provision for income taxes for the three months ended March 31, 2010 and
2009. For each of the three months ended March 31, 2010 and 2009, the Companys consolidated
annualized effective tax rate was 0%.
As of March 31, 2010 and December 31, 2009, the Company had no unrecognized tax benefits, nor
did it have any that would have an effect on the effective tax rate. Income taxes are provided
based on the liability method for financial reporting purposes. For each of the three months ended
March 31, 2010 and 2009, there was no interest or penalties recorded or included in tax expense.
In the United States, the Company is still open to examination from 2006 forward. In Belgium,
the Company is still open to examination by the Belgian tax authorities from 2006 forward, although
carryforward tax attributes that were generated prior to 2006 may still be adjusted upon
examination by the Belgian tax authorities if they either have been or will be utilized.
15
Table of Contents
The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
The determination of our consolidated provision for income taxes, deferred tax assets and
liabilities, and the related valuation allowance requires management to make certain judgments and
estimates. As a company with subsidiaries in foreign jurisdictions, the Company is required to
calculate and provide for estimated income tax liabilities for each of the tax jurisdictions in
which we operate. This process involves estimating current tax obligations and exposures in each
jurisdiction as well as making judgments regarding the future recoverability of deferred tax
assets. Changes in the estimated level of annual pre-tax income, changes in tax laws, and changes
resulting from tax audits can all affect the overall effective income tax rate which, in turn,
impacts the overall level of income tax expense and net income. Judgments and estimates related to
the Companys projections and assumptions are inherently uncertain; therefore, actual results
could differ materially from projections.
Currently, the Company has significant net deferred tax assets that have a full valuation
allowance in accordance with ASC 740 Accounting for Income Taxes. The Company will continue to
periodically review the adequacy of the tax valuation allowance and may, at some point in the
future based on continued profit, reverse the tax valuation allowance. At December 31, 2009, the
Company had US net operating loss carryforwards of $16,322, which will begin to expire in 2026 and
foreign NOLs of approximately $89,416, which may be carried forward indefinitely. The Company had
foreign tax credits and alternative minimum tax credits of approximately $14,776 and $458,
respectively, at December 31, 2009. The foreign tax credits will begin to expire in 2012 and the
alternative minimum tax credit does not expire.
See Note 17 Commitments and Contingencies for disclosure on Belgian tax contingency.
NOTE 17 COMMITMENTS AND CONTINGENCIES
There are no material pending legal proceedings, other than ordinary routine litigation to
Allieds business, to which Allied or any of its subsidiaries is a party or to which any of their
properties is subject.
The Company has entered employment agreements with certain management personnel at the
Companys subsidiaries and with certain domestic management personnel. Certain of these agreements
provide for severance payments in the event of termination under certain conditions.
The Company leases domestic office space and equipment under operating leases which expire at
various dates through 2014. Certain leases also include escalation provisions for taxes and
operating costs.
The Companys domestic operations do not provide post employment benefits to its employees.
Under Belgian labor provisions, the Company may be obligated for future severance costs for its
employees. After giving effect to prior workforce reductions, current workloads, expected levels of
future operations, severance policies and future severance costs, post employment benefits are not
expected to be material to the Companys financial position.
In January 2009, the Company amended its agreement with Houlihan Lokey Howard & Zukin Capital,
Inc. (Houlihan Lokey), the Companys investment banking advisor. Among other changes, the
amended agreement outlines terms for payment of a success fee for investment banking services
provided since April 2007. This fee will be based on the aggregate sales proceeds received from
sales of all Company subsidiaries and assets as well as the fair value any such assets which are
not sold. No amounts have been accrued as of March 31, 2010 and December 31, 2009.
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 DOJs 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
USAs 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 employees breach of his employment agreement, Mecar USA terminated his
employment on January 20, 2010.
According to the DOJs 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 DOJs
subpoena. The Companys ongoing compliance with the DOJ subpoena
is being overseen
by the Audit Committee which is also conducting an internal review of the activities of Mecar USAs
former employee. The Audit Committee is being assisted in these matters by independent outside
counsel.
16
Table of Contents
The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
The Company has been providing regular updates to Chemring on the progress of the internal
review and has been responding to additional requests for information from Chemring. The Company
cannot predict the outcome of these matters or the impact, if any, that they 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 Companys preliminary proxy statement with the SEC, the plaintiffs filed a consolidated amended
class-action compliant, which names as defendants, each of the Companys directors and a Chemring
subsidiary. The consolidated amended class-action was dismissed without prejudice effective April
1, 2010.
Litigation Relating to Consulting Agreement
On April 19, 2010, a lawsuit was filed against the Company alleging breach of contract related
to an agreement the Company entered into with a loan brokerage firm in its attempt to seek a new
bank line of credit. The lawsuit seeks damages in the amount of $640. The Company believes this
lawsuit is without merit and intends to defend it vigorously.
Indemnification provisions
On July 6, 2007, the Company signed a Stock Purchase Agreement to sell SeaSpace for $1,541 in
net proceeds. The Stock Purchase Agreement contains certain indemnification provisions pursuant to
which the Company may be required to indemnify the buyer for a period subsequent to the completion
of the sale for liabilities, losses, costs or expenses arising out of breaches of covenants,
certain breaches of representations and warranties and any actions or suits relating to the
condition of the business prior to and at the time of sale. Theses indemnification provisions have
been capped at $1,000, a majority of which expired on July 6, 2008. At March 31, 2010, no amount
has been accrued related to this indemnification as a liability is not deemed probable.
On September 6, 2007, ARC Europe, a wholly-owned subsidiary of the Company, entered into a
Stock Purchase Agreement to sell The VSK Group for approximately $48,737 in cash subject to a
purchase price adjustment to be determined following closing. On September 18, 2007, the Company
completed the sale. The Stock Purchase Agreement contains certain indemnification provisions
pursuant to which the Company may be required to indemnify the buyer for a period subsequent to the
completion of the sale for any and all actions, liabilities, encumbrances, losses, damages, fines,
penalties, taxes, fees, costs or expenses or amounts paid in settlement suffered or incurred
arising out of any breach of or inaccuracy in any representation or warranties made by the seller
or any breach or violation of any covenants or agreements of the Company. Total indemnification
provisions have been capped at $7,365 (5,000). An escrow amount of approximately $2,790 (2,000)
was established to satisfy any such claims. In March 2009, the Company received $1,116 (800) in
accordance with the terms of the escrow agreement. In December 2009, the Company received the
remaining escrow balance of $1,074 (770), net of $600 (430) in fees associated with an early
release. At March 31, 2010, no amount has been accrued related to this indemnification as a
liability is not deemed probable.
On January 24, 2008, the Company entered into a Purchase Agreement to sell Titan for $4,750 in
cash. The Purchase Agreement contains certain indemnification provisions pursuant to which the
Company may be required to indemnify the buyer for a period subsequent to the completion of the
sale for losses, liabilities, damages or expenses arising for any breach of covenants,
representation or warranties; income tax liabilities existing prior to closing; and violations of
environmental laws. The indemnification amount can be as much as the purchase price for certain
covenants but generally is capped at $950. A majority of these indemnification provisions expired
on April 25, 2009. At March 31, 2010, no amount has been accrued related to this indemnification as
a liability is not deemed probable.
17
Table of Contents
The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
On August 14, 2008, the Company entered into an Asset Purchase Agreement to sell GMS for
$26,000. The Asset Purchase Agreement requires a total of $2,500 be held in escrow to provide for
certain indemnifications as stated for in the Asset Purchase Agreement. The terms of the escrow
agreement provide that the remaining escrow balance will be released on April 1, 2010. The Asset
Purchase Agreement contains certain indemnification provisions pursuant to which the Company may be
required to indemnify the buyer for a period subsequent to the completion of the sale of any and
all liabilities, losses, claims, damages, diminution of value or other costs and expenses paid by
the buyer arising out of any breach or inaccuracy of
any representations or warranties made by the seller or any breach or violation of any covenants or
agreements of the Company. Total indemnification provisions have been capped at $5,200, a majority
of which expired on March 31, 2010. As a result of an early release of an escrow amount in full in
2009, a gain of $2,350, net of $150 in fees associated with an early release, was recorded in 2009.
At March 31, 2010, no amount has been accrued related to this indemnification as a liability is not
deemed probable.
In conjunction with the sale of GMS, and pursuant to the terms of employment agreements with
GMSs management team, the Company committed to pay $1,379 as a retention bonus. Of this total
retention amount, approximately $835 was paid in 2008 and 2009, in accordance with the terms of the
respective employment agreements, and the remainder was paid on January 1, 2010, though it was due
in October 2009.
On August 7, 2009, the Company signed a Stock Purchase Agreement to sell NS Microwave for $400
in cash and a promissory note in the amount of $1,325. The Stock Purchase Agreement contains
certain indemnification provisions pursuant to which the Company may be required to indemnify the
buyer for a period subsequent to the completion of the sale for liabilities, losses, costs or
expenses arising out of breaches of covenants, certain breaches of representations and warranties
and any actions or suits relating to the condition of the business prior to and at the time of
sale. These indemnification provisions have been capped at $863, a majority of which will expire
on August 6, 2010. At March 31, 2010, no amount has been accrued related to this indemnification as
a liability is not deemed probable. At March 31, 2010, the outstanding principal and interest
balance on the note receivable from the buyer was $1,092, net of accounts deemed uncollectible of
$250, in accordance with the terms of the agreement.
Tax Litigation
As part of its 2004 tax audit with the Belgian tax authorities, the Company recorded a
liability of $3,077 and $3,278 at March 31, 2010 and December 31, 2009, respectively, related to
tax due on unrealized/realized foreign currency gains as well as associated interest and penalties.
This issue is currently being litigated in the Belgian tax courts. At this time, the Company
believes no further accruals are necessary.
NOTE 18 DISCONTINUED OPERATIONS
The Consolidated Financial Statements and related note disclosures reflect NS Microwave as
Long-Lived Assets to be Disposed of by Sale for all periods presented in accordance with ASC 360.
Accordingly, our results of operations for all periods presented have been reclassified to reflect
NS Microwave as discontinued operations in the consolidated statement of operations for all periods
presented.
NS Microwave Systems, Inc.
On August 7, 2009, the Company entered into a Purchase Agreement to sell NSM for $400 in cash
and a promissory note in the amount of $1,325 at closing. The note is due 24 months after closing
and is subject to a reduction based on certain terms as defined in the purchase agreement. On
December 31, 2009, the Company recorded an allowance of $250 against the receivable as it was
unlikely that one of the purchase agreement conditions would be met. The note bears interest at a
rate of one-year London Interbank Offered Rate plus 5% subject to a maximum interest cap of 8%.
Accordingly, the Company recorded a gain of $46 as a result of this transaction. The Company did
not record a significant tax expense or benefit from this transaction.
At both March 31, 2010 and December 31, 2009, there were no assets and liabilities held for
sale for NSM as the transactions had been completed in 2009.
18
Table of Contents
The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
The following discloses the results of discontinued operations for the three months ended
March 31, 2009 for NSM:
Three Months Ended | ||||
March 31, 2009 | ||||
NSM | ||||
Revenue |
$ | 1,741 | ||
Income (loss) before taxes |
110 | |||
Income (loss), net of tax |
110 | |||
Discontinued operations, net of tax |
$ | 110 | ||
For the three months ended March 31, 2009, the Company recorded an additional $100 in income
taxes associated with the sale of GMS completed in 2008.
NOTE 19 SUBSEQUENT EVENTS
On April 7, the Company announced that it has postponed the date of its special meeting of
stockholders to approve its pending merger with Chemring Group PLC from the scheduled date April 8,
2010 to April 22, 2010. On April 21, the Company announced that it further postponed the date of
its special meeting of stockholders to May 6, 2010. On May 6, 2010, the shareholders voted to
adjourn the special meeting to a later date, June 1, 2010.
The special meeting was postponed after Chemring indicated that it needed more time to continue its
ongoing review of the Company. The Company has been providing regular updates to Chemring on the
progress of its internal review and has been responding to additional requests for information from
Chemring. The Company intends to continue to cooperate with Chemring with respect to these matters.
On April 19, 2010, a lawsuit was filed against the Company alleging breach of contract related
to an agreement the Company entered into with a loan brokerage firm in its attempt to seek a new
bank line of credit. The lawsuit seeks damages in the amount of $640. The Company believes this
lawsuit is without merit and intends to defend it vigorously.
19
Table of Contents
The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
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. Allieds 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 Part II, Item 1- Legal Proceedings, 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
and then further postponed it to May 6, 2010. On May 6, 2010, the shareholders voted to adjourn
the special meeting to a later date, June 1, 2010, after Chemring indicated that it needed more
time to continue its ongoing review of the Company. The Company has been providing regular updates
to Chemring on its progress in addressing such matters, has been responding to additional requests
for information from Chemring and expects to continue to cooperate with Chemring with respect to
these matters.
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 Mecars 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. Mecars
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 revenue and continuing significant operating losses at Mecar
over the past several years. Since 2008, the Company has cut the operating costs of its
headquarters, divested all of its non-core subsidiaries, and implemented a plan to reduce the
fixed-cost base of Mecar. The Company repaid Mecars cash line in late 2008 and made the last
repayment of its senior convertible notes in early 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. Mecars cash shortages have precluded
it from paying management fees to Allied since 2005. 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.
20
Table of Contents
The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
Mecars bank group has agreed to extend its current credit facility for the issuance of
performance bonds and advance payment guarantees until June 2, 2010. The current facility provides
for a maximum of $37,001 (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 June 2, 2010, with a value of $35,223 (26,178). 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
Companys possible inability to sign new customer contracts will significantly impact future
revenues thereby potentially limiting Mecars 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, from time to time, discounted letters of credit and extended the bank overdraft facility
since 2009.
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. This bank has issued irrevocable performance bonds and
advanced payment guarantees with a value of $5,786 (4,300). Upon the termination of Mecars credit
facility on June 2, 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, the Company should not
expect continued short-term financing and short-term extensions of the credit facility by Mecars
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. Currently, based on the terms of the
Merger Agreement, the Company is precluded from entering into new
financing agreements outside of the ordinary course of business
without Chemrings consent. In the
interim, Mecar USA has made arrangements to fund its working capital requirements with existing
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 March 31, 2010, the Company had $1,398 in cash on hand. For the three months ended March
31, 2010, the Company used $6,711 of cash from its continuing operating activities. This usage
stems mainly from a $5,155 net loss from continuing operations and $3,205 from a decrease in net
operating assets, offset by $1,649 of non-cash adjustments.
Outlook for 2010
On January 18, 2010, the Company signed a definitive Merger agreement with 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. If the Company is unable to secure additional financing,
it may need to cease operations.
As reported under Part II, Item 1- Legal Proceedings, the Company received a subpoena and
communications from the Department of Justice (DOJ). The Audit Committee of the Board has been
overseeing compliance with the subpoena and has also conducted an internal review of the activities
of a former Mecar USA executive. The Company has been providing regular updates to Chemring and
the Company has been responding to additional requests for information from Chemring. The Company
is incurring significant legal expense associated with these matters 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 USAs ammunition services contracts. During 2009,
Mecar USA recruited an assistant for this former employee and outsourced certain activities that
historically were performed by this executive. 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 executive will likely have an adverse impact on Mecar USAs ability
to continue to grow its ammunition service business, for at least the short term.
21
Table of Contents
The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
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 Companys 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 finance transaction which, given the current credit markets, if available at all, would
likely be an equity transaction that will result in significant dilution to the shareholders. There
are no assurances that this financing will be available to the
Company and if such financing is not available, the Company may need to cease operations.
The Company has less than $500 of firm commitments for capital expenditures outstanding as of
March 31, 2010.
Results of Operations
Allied had a net loss from continuing operations of $5,155 for the three months ended March
31, 2010 as compared to a net loss from continuing operations of $1,373 for the comparable period
in 2009. The unfavorable results of 2010 were due to a reduction in revenues and increased
percentage of cost of sales relative to the revenue at Mecar.
For the three months ended March 31, 2010, the Company had no net income from discontinuing
operations as compared to net income of $1,056 for the comparable period in 2009. This was due to
completion of the sale of NSM in August 2009 and the recoveries of outstanding escrow balances from
the VSK sale transaction in 2009.
Net loss was $5,155 for the three months ended March 31, 2010 as compared to a net loss of
$317 for the comparable period in 2009. Results for 2010 were unfavorably impacted by the reduced
revenue and increased percentage of cost of sales relative to the revenue.
The Companys results were significantly affected by the foreign exchange impact on the
operations of the Companys Euro-based business units. All Euro-based results of operations were
converted at the average 2010 and 2009 exchange rates of 1.3856 and 1.3080, U.S. Dollar to 1 Euro,
respectively.
Revenue. The table below shows revenue by segment for the three months ended March 31, 2010 and
2009, respectively. Allied had revenue of $20,169 during the current period, which was 36% lower
than its revenue in the same period of 2009.
Revenue by Segment | ||||||||||||||||
Three months Ended March 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
% of | % of | |||||||||||||||
Amount | total | Amount | total | |||||||||||||
Mecar |
$ | 14,435 | 72 | % | $ | 26,742 | 85 | % | ||||||||
Mecar USA |
5,734 | 28 | 4,806 | 15 | ||||||||||||
Total |
$ | 20,169 | 100 | % | $ | 31,548 | 100 | % | ||||||||
Mecars revenue for the three months ended March 31, 2010 decreased by $12,307 (46%) from the
prior period. The decrease in revenue was due to lower manufacturing activity in the current
period. Mecars ability to execute on its backlog continues to be negatively affected by the
Companys liquidity issues.
For the three months ended March 31, 2010, Mecar USAs revenue has increased by $928 from
$4,806 in the prior period to $5,734 in the current period. Revenue in the current period resulted
mainly from increased shipments of 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.
22
Table of Contents
The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
Cost of Sales. Cost of sales, as a percentage of revenue, for the three months ended March 31,
2010, was 91% compared to 85% for the same period in 2009. Gross profit, as a percentage of
revenues, was 9% and 15% for the three months ended March 31,
2010 and 2009, respectively. The table below shows cost of sales by segment for the three months
ended March 31, 2010 and 2009, respectively.
Cost of Sales as a Percentage of Revenue by Segment | ||||||||||||||||
Three months Ended March 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
% of | % of | |||||||||||||||
segment | segment | |||||||||||||||
Amount | revenue | Amount | revenue | |||||||||||||
Mecar |
$ | 13,467 | 93 | % | $ | 22,233 | 83 | % | ||||||||
Mecar USA |
4,807 | 84 | 4,485 | 93 | ||||||||||||
Total |
$ | 18,274 | 91 | % | $ | 26,718 | 85 | % | ||||||||
Mecars gross profit for the three months ended March 31, 2010 was $968 (7% of segment
revenue) as compared to gross profit of $4,509 (17% of segment revenue) in the prior comparable
period. This decrease was due to having a larger volume of smaller contracts and a mix of
contracts with higher direct costs in the current period in addition to a significantly lower level
of revenue, which resulted in overall lower gross margin. On certain contracts to 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.
For the three months ended March 31, 2010, gross profit for Mecar USA was $927 (16% of segment
revenue) compared to gross profit of $321 (7% of segment revenue) in the prior comparable period.
The improvement in gross margin resulted from better pricing of contracts, lower shipping costs and
lower commissions in the current period.
Selling and Administrative Expenses. Selling and Administrative (SA) expenses as a percentage of
revenue were 22% and 13% for the three months ended March 31, 2010 and 2009, respectively. The
table below shows SA by segment for the three months ended March 31, 2010 and 2009, respectively.
Selling and Administrative Expenses by Segment | ||||||||||||||||
Three months Ended March 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
% of | % of | |||||||||||||||
Amount | total | Amount | total | |||||||||||||
Mecar |
$ | 2,499 | 55 | % | $ | 2,434 | 58 | % | ||||||||
Mecar USA |
333 | 8 | 332 | 8 | ||||||||||||
Corporate |
1,691 | 37 | 1,446 | 34 | ||||||||||||
Total |
$ | 4,523 | 100 | % | $ | 4,212 | 100 | % | ||||||||
The increase of $65 in Mecar was due to higher average exchange rates in the current period,
offset by a lower level of spending in the current period. Mecar USAs SA expenses remained
consistent at 8% of the total SA expenses for both three months ended March 31, 2010 and 2009. The
increase of $245 in Corporate segment during the three months ended March 31, 2010 resulted from
higher spending in legal and professional costs associated with the pending Merger with Chemring as
well as compliance with the DOJ subpoena and the accompanying Audit Committee internal review,
offset by reduced accounting and travel expenses.
Research and Development. Research and development (R&D) costs increased by $12 for the three
months ended March 31, 2010 from 2009 levels of $492 to $504 in the current period. This increase
was attributable to a higher average exchange rate for the current period.
23
Table of Contents
The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
Interest Income. Interest income for the three months ended March 31, 2010 decreased by $16 from
2009 levels of $35 to $19 in the current period. The decline in interest income was a result of
having lower average cash levels in 2010 and due to the decrease in overall interest rate between
the two periods.
Interest Expense. Interest expense for the three months ended March 31, 2010 was $1,159 as compared
to prior period interest expense of $864. This increase was mainly due to higher costs at Mecar
associated with accruals for late penalties and fees incurred for performance bonds and advance
payment guarantees in the current period.
Net Gain (Loss) on fair value of the senior convertible notes and warrants. For the three months
ended March 31, 2010, the Company recognized a net loss of $249 related to the fair value of the
warrants as compared to a net gain of $239 related to the fair value of the notes and warrants for
the comparable period in 2009. Changes in the fair value of the notes and warrants are due
primarily to the change in the Companys closing stock price, the volatility of the Companys stock
price during the periods, the redemption features of the notes and warrants relative to the
Companys pending Merger with Chemring and the outstanding principal balance at any point in time.
On March 31, 2010, the Companys stock closed at $7.21 per common share as compared to $3.95 per
common share on March 31, 2009. The Notes related to the Companys senior secured convertible
notes were repaid in full in January 2009. See Note 8 for a description of Warrants.
Loss from Foreign Exchange Contracts. For the three months ended March 31, 2010 and 2009, the
Company realized a loss of $668 and $662, respectively, associated with Mecars foreign currency
transactions. This loss is attributed to unrealized 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 Mecars anticipated profitability on this contract by
protecting itself against the net currency exposure. As a result of a fluctuation in the U.S.
Dollar, Mecar has experienced unrealized gains (losses) on an interim basis relative to the life of
the forward contracts.
Other Net. Other net for the three months ended March 31, 2010 increased to an income of $44
from a loss of $247 in the prior period. This change was due to a favorable impact of foreign
currency transactions at Mecar, as a result of a higher U.S. Dollar exchange rate during the three
month period ended March 31, 2010. A summary of the contents of this income (expense) is provided
in the Note 13 Other Net of the financial statements.
Pre-Tax Income (Loss)
The table below shows the pre-tax income (loss) by segment for the three months ended March
31, 2010 as compared to the same period in the prior year.
Pre-Tax Income (Loss) by Segment | ||||||||||||||||
Three months Ended March 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
% of | % of | |||||||||||||||
total | total | |||||||||||||||
Amount | revenue | Amount | revenue | |||||||||||||
Mecar |
$ | (3,731 | ) | (19 | )% | $ | (172 | ) | | % | ||||||
Mecar USA |
519 | 3 | 6 | | ||||||||||||
Corporate |
(1,933 | ) | (10 | ) | (1,207 | ) | (4 | ) | ||||||||
Total |
$ | (5,145 | ) | (26 | )% | $ | (1,373 | ) | (4 | )% | ||||||
24
Table of Contents
The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
Mecar incurred a pre-tax loss of $3,731 for the three months ended March 31, 2010 as compared
to a pre-tax loss of $172 for the comparable period in 2009. This increase in pre-tax loss was
associated with lower revenues on lower gross margin contracts executed in the current period. For
the three months ended March 31, 2010, Mecar USA had a pre-tax income of $519 as compared to
pre-tax income of $6 for the comparable period in 2009. This improvement in pre-tax income was due
to increased revenue from higher gross margin contracts executed in the current period. Corporate
had pre-tax loss of $1,933 for the three months ended March 31, 2010 as compared to a pre-tax loss
of $1,207 for the comparable period in 2009. This increase in pre-tax loss was attributable to
higher legal and professional costs incurred in the pending Merger with Chemring as well as
compliance with the DOJ subpoena and the accompanying Audit Committee internal review. In addition,
a loss incurred from the change in fair value of the warrants for the three month period in 2010 of
$249 as opposed to a gain of $239 in the prior comparable period.
Income Taxes. The effective income tax rate for each of the three months ended March 31, 2010 and
2009 was 0%. The Companys interim accounting for income taxes is in accordance with ASC 740,
Accounting for Income Taxes in Interim periods.
Net Income from discontinued operations. Net income from discontinued operations consisted of gain
on the sale of subsidiaries and the income from the operations of these discontinued businesses.
The table below shows the net income from discontinued operations for the three months ended March
31, 2010 and 2009, respectively.
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Income from discontinued operations |
$ | | $ | 110 | ||||
Gain on the sale of subsidiaries, net of tax |
| 946 | ||||||
Net income from discontinued operations |
$ | | $ | 1,056 | ||||
The Company had no net income from discontinued operations for the three months ended March
31, 2010 as compared to net income from discontinued operations of $1,056 in the same comparable
period of 2009. Prior year income included an income from NSM of $110 and a gain on the sale of
subsidiaries of $946. This decline was due to the completion of a divestiture of NSM in August
2009. In addition, the Company partially recovered an escrow balance in the amount of $1,046
(800) in March 2009 from the sale of The VSK Group, offset by a loss recognized from additional
income taxes of $100 recorded in March 2009 for the sale of GMS.
Net Loss. The Company had a net loss of $5,155 for the three months ended March 31, 2010 compared
to a net loss of $317 in the same comparable period of 2009. This increase in net loss was
associated with an increased loss from continuing operations of $5,155 in the current period as
compared to a loss from continuing operations of $1,373 in the prior period. This increased loss
from continuing operations was due to lower revenues and higher cost of sales at Mecar in the
current period. In addition, an increase in interest expense of $295 and a loss incurred from the
change in the fair value of the warrants at March 31, 2010 of $249, as compared to a fair value
gain of $239 in the prior period, negatively impacted the current period results. Finally, a
one-time recovery of escrow balances resulted in a gain of $946 from the sale of discontinued
business in the prior period.
Backlog. As of March 31, 2010, the Companys firm committed backlog was $87,726 compared to
$158,487 at March 31, 2009. 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 segment at March 31, 2010 and
2009, respectively.
Backlog by Segment | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Mecar |
$ | 79,313 | 90 | % | $ | 109,482 | 69 | % | ||||||||
Mecar USA |
8,413 | 10 | 49,005 | 31 | ||||||||||||
Total |
$ | 87,726 | 100 | % | $ | 158,487 | 100 | % | ||||||||
25
Table of Contents
The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
The decrease of funded backlog in March 31, 2010 for Mecar was associated with significant
progress made on funded contracts received in 2009. Mecar continues to work on receipt of new
contracts or replacement contracts for the existing in progress contracts. Based on the nature of
Mecars 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.
The reduction of Mecar USAs backlog was associated with significant shipments made under
funded contracts received in 2009, particularly shipments of non-standard ammunition to Afghanistan
for the U.S. government. The $37,000 contract award received in December 2008 was fully executed
in 2009. While the contract received in December 2008 was a firm, fixed contract, Mecar USAs
current U.S. government contract to provide non-standard ammunition to Afghanistan is an IDIQ,
indefinite delivery and quantity, contract with specific task orders. The majority of Mecar USAs
current backlog reflects open task orders on that contract. Since 2009, Mecar USA has provided
non-standard ammunition to the U.S. government as a sub-contractor to large defense contractors.
In addition to above funded backlog, the Company had unfunded backlog, which is subjected to
an appropriation of governmental funds, of approximately $27,479 and $13,473 at March 31, 2010 and
2009, respectively. These are contracts or portions of contracts that do not have all of the
appropriate approvals to be performed on. In most cases, these contracts require a formal budget
approval before they can be added to the funded, firm backlog.
Balance Sheet
The table below provides the summary consolidated balance sheets as of March 31, 2010 and
December 31, 2009:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Cash, unrestricted |
$ | 1,398 | $ | 9,021 | ||||
Cash, restricted |
19,996 | 5,599 | ||||||
Accounts receivable, net |
23,471 | 28,911 | ||||||
Costs and accrued earnings on uncompleted contracts |
11,446 | 14,402 | ||||||
Inventories, net |
23,978 | 19,581 | ||||||
Contracts in progress |
1,862 | 179 | ||||||
Other current assets |
4,706 | 4,679 | ||||||
Property, plant & equipment and other assets |
16,629 | 18,257 | ||||||
TOTAL ASSETS |
$ | 103,486 | $ | 100,629 | ||||
LIABILITIES |
||||||||
Bank overdraft facility |
$ | 679 | $ | 2,635 | ||||
Accounts payable and accrued liabilities |
38,329 | 39,886 | ||||||
Customer deposits |
27,284 | 15,974 | ||||||
Other current liabilities |
4,961 | 3,773 | ||||||
Other long-term liabilities and debt |
11,526 | 11,350 | ||||||
TOTAL LIABILITIES |
82,779 | 73,618 | ||||||
STOCKHOLDERS EQUITY |
20,707 | 27,011 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 103,486 | $ | 100,629 | ||||
The Companys March 31, 2010 unaudited condensed consolidated balance sheet was affected by
the value of the Euro. All Euro values were converted at March 31, 2010 and December 31, 2009
conversion ratios of $1.3455 and $1.4333, respectively.
Current assets were $86,857 at March 31, 2010 as compared to $82,372 at December 31, 2009.
Current liabilities were $79,947 at March 31, 2010 as compared to $66,823 at December 31, 2009.
Working capital, which includes restricted cash, was $6,910 at March 31, 2010 as compared to
$15,549 at December 31, 2009. The decrease in net working capital of $8,639 was primarily due to
an increase in current liabilities associated with a reclassification of the entire outstanding
balance of SOGEPA loan as a short-term obligation in the current period.
26
Table of Contents
The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
Unrestricted cash balances decreased by $7,623 to $1,398 at March 31, 2010 as compared $9,021
at December 31, 2009. This was due to increased usage in operating activities in performance of
sales contracts in progress at both Mecar and Mecar USA.
Restricted cash balances were $19,996 and $5,599 at March 31, 2010 and December 31, 2009,
respectively. The restricted cash balance consists mainly of Mecars customer deposits of which a
portion has been restricted to secure bank issued advance payment guarantees and performance bonds.
The increase of restricted cash balance from December 31, 2009 was associated with new advance
payment guarantees that were opened in the current period for certain contracts.
Accounts receivable at March 31, 2010 decreased by $5,440 as compared to the December 31, 2009
balance of $28,911, primarily due to the collection of outstanding receivables and lower volume of
billings in the current period at both Mecar and Mecar USA.
At Mecar, the costs and accrued earnings on uncompleted contracts declined from $14,402 at
December 31, 2009 to $11,446, while Mecar USAs contracts in progress have increased by $1,683 from
December 31, 2009s level of $179. The decline of costs and accrued earnings on uncompleted
contracts was primarily due to completion of existing sales contracts, thereby reducing the amount
of unbilled contracts in the current period. At Mecar, the Companys liquidity challenges continue
to impact Mecars ability to execute on its backlog. The increase of contracts in progress was
associated with advance prepayments that Mecar USA was required to make to its suppliers at the end
of the current period for upcoming shipments under a large contract currently in backlog.
Inventories increased by $4,397 from December 31, 2009 to $23,978 at March 31, 2010. This
increase was due to Mecars buildup of pass-through orders and contracts for the resale of certain
ammunition which are scheduled to be shipped in the second quarter of 2010.
Other current assets increased to $4,706 at March 31, 2010 from $4,679 at December 31, 2009.
This growth was mainly due to an increase in vendor deposits made to suppliers for inventory at
Mecar.
Property, plant & equipment and other assets decreased from $18,257 at December 31, 2009 to
$16,629 at March 31, 2010. This decline was attributable to depreciation expense of $930 and the
impact of a decline in the value of the Euro versus the U.S. dollar in the current period.
The bank overdraft facility at March 31, 2010 decreased by $1,956 from December 31, 2009 as a
result of a repayment of a majority of the outstanding balance in the current period. At March 31,
2010, accounts payable and accrued liabilities, including accrual for Belgium social security,
decreased by $1,557 from December 31, 2009. This decline was due to repayment of trade payables.
Customer deposits increased by $11,310, primarily at Mecar, as a result of the new deposits
collected from customers in the current period. Mecar received a significant customer deposit in
the current period for a contract that is scheduled to ship in 2011. Other current liabilities
increased by $1,188 at March 31, 2010 and was associated with $1,500 due to a third party related
to a transfer of certain receivables, offset by a partial payment of outstanding income taxes and a
decline in the value of the Euro versus the U.S. dollar in the current period.
Long-term debt and long-term liabilities increased by $176 at March 31, 2010 from the December
31, 2009 level of $11,350. This increase was primarily attributable to an increase in fair value
of the warrants and foreign exchange contracts in the current period, offset by scheduled principal
repayments in 2010.
The decline of Stockholders equity of $6,304 at March 31, 2010 from the December 31, 2009
balance of $27,011 was primarily due to the net loss for the three month period in 2010 and a
decrease in the value of the Euro versus the U.S. dollar, which lowered accumulated other
comprehensive income. The Euro depreciated by approximately 6% from December 31, 2009. Accumulated
other comprehensive income dropped from $16,361 at December 31, 2009 to $15,105 at March 31, 2010.
27
Table of Contents
The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
Cash Flows
The table below provides the summary cash flow data for the periods presented.
For three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Net cash used in operating activities |
$ | (6,711 | ) | $ | (9,732 | ) | ||
Net cash used in investing activities |
(299 | ) | (918 | ) | ||||
Net cash (used in) provided by financing activities |
(395 | ) | 3,718 | |||||
Effects of exchange rate on cash |
(218 | ) | (219 | ) |
Operating Activities. The Company used $6,711 of cash in its operating activities during the three
months ended March 31, 2010 as compared to $9,732 of cash used during the same period of 2009. Cash
used in continuing operations was $6,711 in 2010 as compared to $9,482 in the prior comparable
period.
The decline of cash used from continuing operations resulted mainly from lower net changes in
operating assets and liabilities in the current period. The change in operating assets and
liabilities resulted in $3,205 of cash use during the three month period of 2010 as compared to
cash use of $10,283 in the prior comparable period. The most significant change in operating assets
and liabilities in 2010 was from a timely collection of accounts receivables and a reduction in
costs and accrued earnings on uncompleted contracts in the current period. The decline of accounts
receivable generated $4,126 of cash in the current period as opposed to cash use of $11,616 in the
prior period. A lower increase in costs and accrued earnings on uncompleted contracts generated
cash of $2,119 as compared to $8,353 of cash use in the prior period. The fluctuation in cost and
accrued earnings on contracts was due to fewer contracts in process in the current period. The
Company used $5,485 of cash from an increased level of inventories in the current period as
compared to $2,925 of cash use in the prior period. Due to the current periods cash requirements,
the change in accounts payable and accrued liabilities generated $609 of cash in the current period
as opposed to a higher generated cash of $8,414 in the prior period. Furthermore, the change in
customer deposits generated $12,635 of cash in the current period as compared to $16,167 in the
prior comparable period. Cash paid for interest was $1,292 and $872 for the three months ended
March 31, 2010 and 2009, respectively. Cash paid for income taxes was $121 and $4 for the three
months ended March 31, 2010 and 2009, respectively, which included federal, international and state
taxes.
Investing Activities. Net cash used in investing activities decreased by $619 from $918 in the
three months ended March 31, 2009 to $299 in the current period. This fluctuation stemmed from one
time settlement of net proceeds from the sale of subsidiaries of $646 in the prior period.
Financing Activities. The Company used $395 of cash from its financing activities during the three
months ended March 31, 2010 compared to a generated cash of $3,718 from its financing activities
during the same comparable period in 2009. This negative impact in the current period was
primarily related to a repayment of bank overdraft facility of $1,847 with a borrowing of $1,500
from a transfer of certain receivables to a third party in the current period. During the three
months ended March 31, 2009, the Company borrowed $4,418 from its bank overdraft facility, offset
by the repayment of the remaining convertible notes of $928 in January 2009.
Effects of Exchange Rate. Due to a consistent fluctuation in the exchange rate between U.S. dollar
and Euro between March 31, 2010 and 2009, the Company used $218 and $219 of cash, respectively,
related to the effects of currency on balances.
Allied. Corporate continues to fund its operations with the remaining recovered escrow balances
from the sale of subsidiaries and management fees. If the Merger does not close, Allied will need
to seek additional financing to support its operations and meet its obligations. Mecar and Mecar
USA are projected to operate without financing from Allied.
28
Table of Contents
The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
Mecar. Mecar continues to operate from internally generated cash and advances received from
customers. In addition, a loan of approximately $8,073 was provided by a local Belgian regional
agency to extend Mecars 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 June 2, 2010. The Company is
currently negotiating with Mecars 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 approximately $5,786 (4,300) in performance bonds and advance payment guarantees. To
date, all required bonds and guarantees have been issued.
Mecar USA. Mecar USA operated in 2010 from cash generated from operations. From time to time,
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 during the three
months ended March 31, 2010 and does not anticipate repurchasing shares of its common stock during
the remainder of 2010.
Future Liquidity. On January 18, 2010, the
Company signed a definitive Merger agreement with Chemring. If the Merger does not close, the Company will need to do
a substantial finance transaction which, given the current credit markets, if available at all, would likely be
an equity transaction that will result in significant dilution to the shareholders. There are no assurances that
this financing will be available to the Company and if such financing is not available, the Company may need to
cease operations.
Off-Balance Sheet Arrangements. As part of our ongoing business, the Company does 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 March 31, 2010, the Company is not involved
in any material unconsolidated SPE transactions.
Mecar is required to provide performance bonds and advance payment guarantees for certain
contracts, which are provided by Mecars 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 Companys 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.
Critical Accounting Policies
The Companys discussion and analysis of its financial condition, results of operations and cash
flows are based upon the Companys unaudited condensed 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 Companys 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 unaudited condensed 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. |
29
Table of Contents
The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
A complete discussion of these policies is contained in our Form 10-K filed on April 7, 2010 with
the Securities and Exchange Commission for the year ended December 31, 2009. There were no
significant changes to the critical accounting policies discussed in the Companys 10-K filed for
December 31, 2009.
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) ASB issued Accounting
Standards Update (ASU) 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06
requires new disclosures concerning transfers into and out of Level 1 and Level 2 of the fair value
measurement hierarchy and a roll forward of the activity of assets and liabilities measured in
Level 3 of the hierarchy. In addition, ASU 2010-06 clarifies existing disclosure requirements to
require fair value measurement disclosures for each class of assets and liabilities and disclosure
regarding the valuation techniques and inputs used to measure Level 2 or Level 3 fair value
measurements on a recurring and nonrecurring basis. ASU 2010-06 is effective for interim and annual
reporting periods beginning after December 15, 2009 except for the roll forward of activity for
Level 3 fair value measurements, which is effective for fiscal years beginning after December 15,
2010. The adoption of ASU 2010-06 did not have a material impact on the Companys consolidated
financial statements.
In August 2009, the FASB issued new guidance relating to the accounting for the fair value
measurement of liabilities. The new guidance, which is now part of ASC 820, provides clarification
that in certain circumstances in which a quoted price in an active market for the identical
liability is not available, a company is required to measure fair value using one or more of the
following valuation techniques: the quoted price of the identical liability when traded as an
asset, the quoted prices for similar liabilities or similar liabilities when traded as assets, or
another valuation technique that is consistent with the principles of fair value measurements. The
new guidance clarifies that a company is not required to include an adjustment for restrictions
that prevent the transfer of the liability and if an adjustment is applied to the quoted price used
in a valuation technique, the result is a Level 2 or 3 fair value measurement. The new guidance is
effective for interim and annual periods beginning after August 27, 2009. The implementation of
this standard did not have a material impact on the Companys consolidated financial statements.
In April 2009, the FASB issued guidance which is included in the Codification in ASC 820, Fair
Value Measurements and Disclosures. ASC 820 requires disclosures about fair value of financial
instruments in interim as well as in annual financial statements. This guidance is effective for
periods ending after June 15, 2009. In the second quarter of 2009, the Company implemented this
guidance which did not have a material impact on the Companys consolidated financial statements.
In March 2008, the FASB issued guidance which is included in the Codification in ASC 815,
Derivatives and Hedging. This guidance is effective for calendar-year companies beginning
January 1, 2009. The guidance requires additional disclosures for derivative instruments and
hedging activities that include how and why an entity uses derivatives, how these instruments and
the related hedged items are accounted for and how derivative instruments and related hedged items
affect the entitys financial position, results of operations and cash flows. The implementation of
this standard did not have a material impact on the Companys consolidated financial statements.
Effective January 1, 2009, the Company adopted a new accounting standard included in ASC 820,
which delayed the effective date for disclosing all non-financial assets and non-financial liabilities, except
for items that are recognized or disclosed at fair value on a recurring basis (at least annually).
This standard did not have a material impact on the Companys consolidated financial statements.
30
Table of Contents
The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
In June 2009, the FASB issued ASC 105 Generally Accepted Accounting Principles and establishes
only two levels of U.S. generally accepted accounting principles (GAAP), authoritative and
nonauthoritative. The FASB Accounting Standards Codification (ASC) will become the source of
authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which
are sources of authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC
accounting literature not included in the Codification will become nonauthoritative. This standard
is effective for financial statements for interim or annual reporting periods ending after
September 15, 2009. The adoption of the Codification changed the Companys references to GAAP
accounting standards but did not impact the Companys results of operations, financial position or
liquidity.
Forward-Looking Statements
This Managements 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.
We operate in a very competitive and rapidly changing environment. New risk factors can arise and
it is not possible for management to predict all such risk factors, nor can it assess the impact of
all such risk factors on our business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results.
31
Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE
Not required for a smaller reporting company.
ITEM 4T. DISCLOSURE CONTROLS AND PROCEDURES
1. Evaluation of disclosure controls and procedures
Disclosure Controls and Procedures
Under the direction and with the participation of the Companys management, including the
Companys 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 Companys Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective as of March 31, 2010.
Changes in Internal Control Over Financial Reporting
There were no changes in the Companys internal control over financial reporting during the
period covered by this quarterly report that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. 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 DOJs 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
USAs 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 employees breach of his employment agreement, Mecar USA terminated his
employment on January 20, 2010.
According to the DOJs 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 DOJs
subpoena. The Companys ongoing compliance with the DOJ subpoena
is being overseen
by the Audit Committee which is also conducting an internal review of the activities of Mecar USAs
former employee. The Audit Committee is being assisted in these matters by independent outside
counsel.
The Company has been providing regular updates to Chemring on the progress of the internal
review and has been responding to additional requests for information from Chemring. The Company
cannot predict the outcome of these matters or the impact, if any, that they 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 Companys preliminary proxy statement with the SEC, the plaintiffs filed a consolidated amended
class-action compliant, which names as defendants, each of the Companys directors and a Chemring
subsidiary. The consolidated amended class-action was dismissed without prejudice effective April
1, 2010.
32
Table of Contents
Litigation Relating to Consulting Agreement
On April 19, 2010, a lawsuit was filed against the Company alleging breach of contract related
to an agreement the Company entered into with a loan brokerage firm in its attempt to seek a new
bank line of credit. The lawsuit seeks damages in the amount of $640. The Company believes this
lawsuit is without merit and intends to defend it vigorously.
Item 1A. Risk Factors
Not required for a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Reserved)
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit No. | Description of Exhibits | |||
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
32 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
33
Table of Contents
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE ALLIED DEFENSE GROUP, INC. |
||||
/s/ Deborah F. Ricci | ||||
Date: May 17, 2010 | Deborah F. Ricci | |||
Chief Financial Officer and Treasurer |
34