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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

For the quarterly period ended March 31, 2012

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)

120 E. Baltimore Street, Suite 2100

Baltimore, MD 21202

(Address of principal executive offices, including zip code)

(410) 385-8155

(Registrant’s telephone number, including area code)

 

 

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

Indicate 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  x    No  ¨

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   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  x    No  ¨

The number of shares of registrant’s Common Stock outstanding as of April 30, 2012 was 8,235,195.

 

 

 


Table of Contents

THE ALLIED DEFENSE GROUP, INC.

INDEX

 

     PAGE
NUMBER
 

PART I. FINANCIAL INFORMATION — UNAUDITED

  

Item 1. Financial Statements (Unaudited)

  

Consolidated Statements of Net Assets as of March 31, 2012 and December  31, 2011 (liquidation basis)

     2   

Consolidated Statement of Changes in Net Assets for the three months ended March  31, 2012 and three months ended March 31, 2011 (liquidation basis)

     3   

Notes to Unaudited Condensed Consolidated Financial Statements

     4   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     8   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     13   

Item 4. Controls and Procedures

     13   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     13   

Item 1A. Risk Factors

     14   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     14   

Item 3. Defaults Upon Senior Securities

     14   

Item 4. Mine Safety Disclosures

     14   

Item 5. Other Information

     14   

Item 6. Exhibits

     14   

Signatures

     15   


Table of Contents

The Allied Defense Group, Inc.

CONSOLIDATED STATEMENTS OF NET ASSETS (Liquidation Basis)

(Thousands of Dollars, except per share and share data)

 

     March 31,
2012
     December 31,
2011
 

ASSETS

     

Cash and cash equivalents

   $ 12,605       $ 640   

Short-term investments

     18,837         30,872   

Prepaid expenses

     —           219   

Accrued interest receivable

     251         428   

Funds held in escrow

     15,012         15,010   
  

 

 

    

 

 

 

TOTAL ASSETS

     46,705         47,169   
  

 

 

    

 

 

 

LIABILITIES

     

Estimated net costs to be incurred during liquidation

     2,446         2,688   

Accounts payable

     134         57   

Other liabilities

     93         91   
  

 

 

    

 

 

 

TOTAL LIABILITIES

     2,673         2,836   
  

 

 

    

 

 

 

NET ASSETS IN LIQUIDATION

   $ 44,032       $ 44,333   
  

 

 

    

 

 

 

NUMBER OF SHARES OUTSTANDING

     8,235,195         8,235,195   

NET ASSETS IN LIQUIDATION PER SHARE

   $ 5.35       $ 5.38   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

2


Table of Contents

The Allied Defense Group, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (Liquidation Basis)

(Unaudited)

(Thousands of Dollars)

 

     Three Months
Ended
March 31, 2012
    Three Months
Ended
March 31, 2011
 

Net assets on liquidation basis at beginning of period

   $ 44,333      $ 45,629   

Changes in fair value of net assets in liquidation

    

Adjust net assets to fair value

     (15     (213

(Increase)/decrease in estimated net costs to be incurred during liquidation

     (288     190   

Adjust estimated income to be earned during liquidation

     2        —     
  

 

 

   

 

 

 

Net assets on liquidation basis at end of period

   $ 44,032      $ 45,606   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

The Allied Defense Group, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(Thousands of Dollars)

NOTE 1 — DESCRIPTION OF BUSINESS

Business Operations

The Allied Defense Group Inc. (“Allied” or the “Company”), a Delaware corporation, previously conducted a multinational defense business focused on the manufacture and sale of ammunition and ammunition related products for use by the U.S. and foreign governments. Allied’s business was conducted by its two wholly owned subsidiaries: MECAR sprl, formerly Mecar S.A. (“Mecar”), and ADG Sub USA, Inc., formerly Mecar USA, Inc. (“Mecar USA”).

Plan of Dissolution and Liquidation

On June 24, 2010, the Company signed a definitive purchase and sale agreement (the “Agreement”) with Chemring Group PLC (“Chemring”) pursuant to which Chemring agreed to acquire substantially all of the assets of the Company for $59,560 in cash and the assumption of certain liabilities. On September 1, 2010, the Company completed the asset sale to Chemring contemplated by the Agreement. Pursuant to the Agreement, Chemring acquired all of the capital stock of Mecar for approximately $45,810 in cash, and separately Chemring acquired substantially all of the assets of Mecar USA for $13,750 in cash and the assumption by Chemring of certain specified liabilities of Mecar USA. A portion of the purchase price was paid through the repayment of certain intercompany indebtedness owed to the Company that would otherwise have been cancelled at closing. $15,000 of the proceeds of the sale was deposited into escrow to secure the Company’s indemnification obligations under the Agreement.

In conjunction with the Agreement, the Board of Directors of the Company unanimously approved the dissolution of the Company pursuant to a Plan of Complete Liquidation and Dissolution (“Plan of Dissolution”). The Company’s stockholders approved the Plan of Dissolution on September 30, 2010. In response to concerns of certain of the Company’s stockholders, the Company agreed to delay the filing of a certificate of dissolution with the Delaware Secretary of State. The Company filed a certificate of dissolution with the Delaware Secretary of State on August 31, 2011. In connection with this filing, our stock transfer agent has ceased recording transfers of our stock and our stock is no longer publicly traded.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Liquidation Basis of Accounting

With the authorization of the Plan of Dissolution, the Company adopted the liquidation basis of accounting effective as of the close of business on September 30, 2010. The liquidation basis of accounting will continue to be used by the Company until such time that the plan is terminated and all net assets have been distributed to shareholders.

Under the liquidation basis of accounting, the carrying amounts of assets as of the close of business on September 30, 2010, the date of the authorization of the Plan of Dissolution by the Company, were adjusted to their estimated net realizable values and liabilities, including the estimated costs associated with implementing the Plan of Dissolution, were stated at their estimated settlement amounts. Such value estimates were updated by the Company as of December 31, 2011 and March 31, 2012. The majority of net assets in liquidation at December 31, 2011 and March 31, 2012 were highly liquid and did not require adjustment as their estimated net realizable value approximates their current book value. The exception is the short term investments which are subject to changes in market value.

Consolidated Statements of Net Assets in Liquidation and Changes in Net Assets in Liquidation are the financial statements presented under the liquidation basis of accounting. The valuations of assets at their net realizable values and liabilities at their anticipated settlement amounts represent estimates, based on present facts and circumstances associated with carrying out the Plan of Dissolution based on the assumptions set forth below. The actual values and costs associated with carrying out the Plan of Dissolution are expected to differ from the amounts shown herein because of the inherent uncertainty of the estimates. Such differences may be material. In particular, the estimates of the Company’s liquidation costs will vary with the length of time it operates under the Plan of Dissolution. Accordingly, it is not possible to predict the aggregate amount or timing of future distributions to stockholders, as long as the Plan of Dissolution is in effect and no assurance can be given that the amount of liquidating distributions to be received will equal or exceed the estimate of net assets in liquidation presented in the accompanying Statement of Net Assets in Liquidation.

 

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The Allied Defense Group, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(Thousands of Dollars)

 

The estimated net costs to be incurred during liquidation were $2,446 as of March 31, 2012. The $2,446 in net remaining costs consists of $254 in compensation for former employees and remaining directors; $503 for compliance and other office costs, including resident filing fees and costs to settle remaining leases; $302 for insurance; $1,395 in fees for professional service providers including legal representation relating to the DOJ subpoena; and income tax payments not to exceed $150 for the repatriation of cash balances held in foreign countries; offset by $158 estimated to be received on our cash and short-term investment balances during liquidation. Such estimates are based on assumptions regarding the Company’s ability to settle outstanding obligations to creditors, resolve outstanding litigation, settle remaining leases and the ultimate timing of distributions to its stockholders, but does not include any settlement amounts, fines or penalties, if any, that the Company might incur as a result of the DOJ subpoena or any other legal proceedings. These estimates will be adjusted from time to time as projections and assumptions change.

Principles of Consolidation

As of March 31, 2012, the consolidated financial statements of the Company include the accounts of Allied and its wholly-owned subsidiaries, which are as follows:

 

   

ARC Europe, a Belgian company,

 

   

Allied Research BV (“BV”), a Dutch company,

 

   

Allied Research Cooperative (“Coop”) and,

 

   

ADG Sub USA, Inc. (“Mecar USA”)

Fair Value of Financial Instruments

The Company values its assets and liabilities using the methods of fair-value as described in ASC 820, Fair Value Measurements and Disclosures. 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 management’s assumptions.

NOTE 3 — SHORT-TERM INVESTMENTS

Cash in excess of funds required for immediate use by the Company has been invested with the primary goal to preserve capital. As such, the funds are invested in short-term, high-quality, fixed-income securities and are accounted for at fair value. As of March 31, 2012 and December 31, 2011, the fair value of these investments was $18,837 and $30,872, respectively, and was included in short-term investments on the consolidated statements of net assets.

 

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Table of Contents

The Allied Defense Group, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(Thousands of Dollars)

 

NOTE 4 — FAIR VALUE MEASUREMENTS

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.

The following table sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, in the consolidated statement of net assets at March 31, 2012:

 

     Level 1      Level 2      Level 3      Total  

Mutual Funds

   $ —         $ —         $ —         $ —     

Municipal Bonds

     14,770         —           —           14,770   

Certificates of Deposit

     4,067         —           —           4,067   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 18,837       $ —         $ —         $ 18,837   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, in the consolidated statement of net assets at December 31, 2011:

 

     Level 1      Level 2      Level 3      Total  

Mutual Funds

   $ 2,977       $ —         $ —         $ 2,977   

Municipal Bonds

     22,892         —           —           22,892   

Certificates of Deposit

     5,003         —           —           5,003   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 30,872       $ —         $ —         $ 30,872   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company believes the fair value of its financial instruments consisting of cash, cash equivalents, and short-term investments, adjusted to recognize unrealized gains and losses, approximate their carrying values due to the relatively short maturity of these instruments.

NOTE 5 — INDUSTRY SEGMENTS

Prior to September 2010, the Company operated within two operating segments: Mecar and Mecar USA. In September 2010, the Company completed the divesture of Mecar and Mecar USA. As a result, Allied no longer has operating segments. The Company’s continuing operations include only those expenses incurred to support the Company’s corporate headquarters and its non-operating European subsidiaries.

NOTE 6 — PROVISION FOR TAXES

The Company regularly reviews the recoverability of its deferred tax assets and establishes a valuation allowance as deemed appropriate. Realization of deferred tax assets is dependent upon generation of sufficient income by the Company in the jurisdictions in which it has operations and, in some cases, by specific location. Because the Company experienced losses in previous years and continued losses in the current year, management recorded a full valuation allowance against the Company’s net deferred tax asset as of March 31, 2012.

As of March 31, 2012 and December 31, 2011, the Company had no unrecognized tax liabilities or 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 the three months ended March 31, 2012, there were no interest or penalties recorded.

In Belgium, the Company is still open to examination by the Belgian tax authorities from 2008 forward. In the United States, the Company is still open to examination from 2008 forward, although carryforward tax attributes that were generated prior to 2008 may still be adjusted upon examination by the U.S. tax authorities if they either have been or will be utilized.

 

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The Allied Defense Group, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(Thousands of Dollars)

 

Currently, the Company has significant net deferred tax assets that have a full valuation allowance in accordance with ASC 740, Accounting for Income Taxes. As of December 31, 2010, the Company provided for U.S. tax on foreign earnings of approximately $25,475 that is expected to be repatriated. As of March 31, 2012, $13,757 had been successfully repatriated. Income taxes related to repatriation of cash held in foreign countries is not expected to exceed $350. As of March 31, 2012, $200 of income taxes related to the repatriation has been paid and the remainder is expected to be paid in 2012. As of March 31, 2012, the fair value of net deferred tax assets is zero due to full valuation allowance.

The Company may undergo, or may already have undergone, an “ownership change” within the meaning of Section 382 of the Internal Revenue Code, which could affect the Company’s ability to offset gains realized in the asset sale against net operating losses and foreign tax credit carryovers. If it is determined that an ownership change has occurred, this could significantly increase the tax expense incurred from the sale transactions.

NOTE 7 — COMMITMENTS AND CONTINGENCIES

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. See Part II – Item 1 for additional information regarding the DOJ proceedings.

Leases

The Company leases domestic office space under an operating lease which expires in early 2013. The lease also includes escalation provisions for taxes and operating costs. In April, 2011, the Company subleased the office space for 2011 and 2012 to offset a portion of the rental obligation owed by the Company.

Indemnification provisions

The Company has sold its SeaSpace, Titan, the VSK Group, GMS and NSM subsidiaries in separate transactions starting with the first transaction closing in 2007. In each transaction, the Company agreed to indemnify the purchaser for periods subsequent to closing for losses arising from breaches of representations, warranties and covenants. Indemnification periods varied based on the particular representation, warranty or covenant covered, the vast majority of which have all expired. As of March 31, 2012, the only remaining indemnification obligations relate to representations and warranties concerning taxes, environmental matters, breaches of title, breaches of authorization and fraud. For SeaSpace, Titan, the VSK Group, GMS and NSM, these indemnification provisions have been capped at $1,000, $950, $6,669 (€5,000), $5,200 and $863, respectively. At March 31, 2012, no amount has been accrued related to these indemnifications as a liability is not deemed probable.

On June 24, 2010, the Company signed a definitive purchase and sale agreement with Chemring Group PLC pursuant to which Chemring agreed to acquire substantially all of the assets of the Company for $59,560 in cash and the assumption of certain liabilities. The purchase and sale 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 losses directly or indirectly based upon, related to, arising out of or in connection with Mecar’s completed contracts, Mecar USA liabilities retained by the Company and any failure by the Company to satisfy all transaction related expenses. The Company’s indemnification liability is limited to, and capped at, the escrowed amount of $15,000 plus the accumulated interest. The Company’s indemnification obligations expire upon the earlier of (i) June 30, 2015 and (ii) the Company’s entry into either a court or administrative order or a Chemring-approved settlement agreement, in either case, finally resolving the matters relating to the DOJ’s subpoena. In the absence of such final resolution, in certain circumstances, up to 50% of the escrowed funds may be released as early as June 24, 2013. At March 31, 2012, no amount has been accrued related to this indemnification as a liability is not deemed probable.

 

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ITEM 2. MANGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The Allied Defense Group, Inc. (“Allied” or the “Company”) previously conducted a multinational defense business focused on the manufacture and sale of ammunition and ammunition related products for use by the U.S. and foreign governments. Allied’s business was conducted by two wholly-owned subsidiaries: MECAR sprl, formerly MECAR S.A. (“Mecar”), and ADG Sub USA, Inc., formerly MECAR USA, Inc. (“Mecar USA”).

On June 24, 2010, the Company signed a definitive purchase and sale agreement (the “Agreement”) with Chemring Group PLC (“Chemring”) pursuant to which Chemring agreed to acquire substantially all of the assets of the Company for $59.6 million in cash and the assumption of certain liabilities. On September 1, 2010, the Company completed the asset sale to Chemring contemplated by the Agreement. Chemring acquired all of the capital stock of Mecar for $45.8 million in cash, and separately Chemring acquired substantially all of the assets of Mecar USA for $13.8 million in cash and the assumption by Chemring of certain specified liabilities of Mecar USA. A portion of the purchase price was paid through the repayment of certain intercompany indebtedness owed to the Company that would otherwise have been cancelled at closing. $15 million of the proceeds from the sale was deposited into escrow to secure the Company’s indemnification obligations under the Agreement.

In conjunction with the Agreement, the Board of Directors of the Company unanimously approved the dissolution of the Company pursuant to a Plan of Complete Liquidation and Dissolution (“Plan of Dissolution”). The Company’s stockholders approved the Plan of Dissolution on September 30, 2010. In response to concerns of certain of the Company’s stockholders, the Company agreed to delay the filing of a Certificate of Dissolution. The Company filed a Certificate of Dissolution with the Delaware Secretary of State on August 31, 2011. In connection with this filing, our stock transfer agent has ceased recording transfers of our stock and our stock is no longer publicly traded.

In connection with the adoption of the Plan of Dissolution and the anticipated liquidation of the Company, we adopted the liquidation basis of accounting effective the close of business on September 30, 2010, whereby assets are valued at their estimated net realizable cash values and liabilities are stated at their estimated settlement amounts. Uncertainties as to the ultimate amount of our liabilities make it impractical to predict the aggregate net value that may ultimately be distributable to stockholders. Under the liquidation basis of accounting, we accrue for the remaining costs to be incurred during liquidation, including compensation for remaining directors, consultants, insurance costs, costs to settle remaining leases, fees for professional service providers, income taxes, and miscellaneous other costs, partially offset by estimated future interest earnings and sublease payments. Such net costs were estimated to be $2.446 million as of March 31, 2012. Our estimates are based on assumptions regarding our ability to settle outstanding obligations and the ultimate timing of distributions to our stockholders, but do not include any settlement amounts, fines or penalties, if any, that we might incur as a result of the DOJ subpoena or any other legal proceedings.

The Company received a subpoena from the Department of Justice (“DOJ”) on January 19, 2010 requesting that the Company produce documents relating to its dealings with foreign governments. The DOJ initially limited its request of documents to those relating to an indicted former employee of Mecar USA. The DOJ subsequently advised the Company that it is conducting an industry-wide review, and therefore the DOJ’s investigation of the Company will be expanded and ongoing. The Company has also received inquiries from the Securities and Exchange Commission (“SEC”) as to this matter. We cannot predict the settlement amounts, fines or penalties, if any, that we might incur as a result of the foregoing. The period of time required to resolve these matters is uncertain but is expected to take in excess of one year. Furthermore, under the Agreement, the Company has agreed to indemnify Chemring and certain of its related parties from any losses, fines or penalties arising out of, among other things, the completed contracts of Mecar and Mecar USA. We have escrowed $15 million of the cash consideration paid to the Company in the sale to secure our indemnification obligations under the Agreement. These escrowed funds will not be available to the Company for distribution to our stockholders, or otherwise, until released to the Company pursuant to the terms of the Agreement.

Based on advice from our Foreign Corrupt Practices Act (“FCPA”) outside counsel, we have estimated that we may not be able to conclude the DOJ/SEC inquiries, complete the Delaware dissolution process and make final distribution to stockholders until 2013. As a result, our estimate of net costs to be incurred during liquidation includes our estimate of costs through December 31, 2013.

 

 

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In late February, 2012, the DOJ dismissed charges against all individuals indicted in the FCPA sting operation, including the former employee of MECAR USA. The Company’s FCPA counsel has recently met with the DOJ and requested that the DOJ consider the Company’s status in its investigation so that the Company may move forward with distributions to Company stockholders. No distributions to stockholders are expected prior to resolution of the DOJ and SEC inquiries and completion of the Delaware dissolution process which includes notice to creditors and publication of the dissolution, followed by a petition to the Delaware courts.

With the completion of the September 2010 sale, Allied no longer has operating segments. The Company is being managed by its two directors who are also serving as the Company’s Chief Executive Officer and Chief Financial Officer. The Company no longer has any full-time employees. Allied no longer conducts any active business operations and is winding-up its affairs as set forth above.

Net Assets in Liquidation

Net assets in liquidation at March 31, 2012 are $44.032 million compared to $44.333 million at December 31, 2011. The change in net assets in liquidation is due to: (i) adjustments of assets to fair value, (ii) income earned on investments, and (iii) adjustments to estimated costs to be incurred during liquidation. The net assets in liquidation per share as of March 31, 2012 has been adjusted to $5.35 as compared to $5.38 as of December 31, 2011, $5.37 as of September 31, 2011, $5.40 as of June 30, 2011 and $5.54 as of March 31, 2011 and December 31, 2010.

We expect to use all of our net assets to complete our Plan of Dissolution, which includes settling existing claims against the Company, including current liabilities and accrued expenses, and making cash liquidating distributions to our shareholders. Net assets available for liquidating distributions to shareholders may vary if we incur greater than estimated operating expenses associated with executing the Plan of Dissolution, any actual settlement costs for existing claims against the Company (as we have not accrued any amounts for resolution of the DOJ/SEC matter or any other existing claim), or if there are existing, but unknown claims made against us in the future.

As of March 31, 2012, cash and cash equivalents increased by approximately $12 million and short-term investments decreased by the same amount from December 31, 2011. The shift between these asset categories is the result of temporarily investing in institutional money market funds (classified as cash equivalents) which at that time provided a higher yield than municipal bonds and certificates of deposit.

Changes in Net Assets in Liquidation During the Three Months Ended March 31, 2012

The table below summarizes the changes in net assets during the three months ended March 31, 2012:

 

     Three Months
Ended
March 31, 2012
 

Net assets on liquidation basis at beginning of period

   $ 44,333   

Changes in fair value of net assets in liquidation

  

Adjust net assets to fair value

     (15

Increase in estimated net costs to be incurred during liquidation

     (288

Adjust estimated income to be earned during liquidation

     2   
  

 

 

 

Net assets on liquidation basis at end of period

   $ 44,032   
  

 

 

 

The change in net assets in liquidation during the three months ended March 31, 2012 is the net effect of valuation changes to the net assets, income earned on assets, and changes in the estimated net costs to be incurred during liquidation. Adjusting net assets to fair market value decreased the net assets in liquidation by $0.015 million. The estimated net costs to be incurred during liquidation increased by $0.288 million. Estimated income earned during liquidation increased by $0.002 million. The net effect was a decrease of $0.301 million in net assets in liquidation for the three months ended March 31, 2012.

The adjustment of assets to fair value is the reduction of short term investments to fair market value. The unrealized loss associated with the short term investments is due to the Company’s purchase of financial instruments with interest rates above market and therefore are purchased at a premium to their maturity value with an initial unrealized loss. The unrealized loss will be absorbed against the interest income received as the instruments mature.

 

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The table below reconciles the changes during the quarter ended March 31, 2012, in the estimated net costs to be incurred during liquidation. Actual costs, net of interest income received, incurred during the three months ended March 31, 2012 reduce the remaining estimated net costs to be incurred during liquidation. An updated estimate of remaining estimated net costs to be incurred during liquidation is prepared and reflected in the changes in estimates column.

 

     (in thousands)  
     December 31,     Changes in     (Costs Incurred)     March 31,  

Estimated Net Costs to be Incurred During Liquidation

   2011     Estimates     Income Received     2012  

Estimated net costs to be incurred during liquidation

        

Compensation for remaining employees and directors

   $ 297      $ 27      $ (70   $ 254   

Compliance and other office costs

     564        15        (76     503   

Insurance Fees

     321        224        (243     302   

Professional Fees

     1,556        22        (183     1,395   

Income Taxes

     150        —          —          150   
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     2,888        288        (572     2,604   

Less: interest income on cash and investment balances

     (200     (2     44        (158
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net costs to be incurred during liquidation

   $ 2,688      $ 286      $ (528   $ 2,446   
  

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2011, the estimated total net costs to be incurred during liquidation were $2.688 million, consisting of $2.888 million estimated costs offset by $0.200 million of investment income. During the quarter ended March 31, 2012, $0.572 million of costs were incurred. The estimate of costs to be incurred during liquidation was increased by $0.288 million. This is the net effect of a $0.027 million increase in compensation for remaining employees and directors principally due to a final 401k plan contribution; $0.015 million increase in compliance and other office costs due to additional accruals related to audit and review services; $0.224 million increase in insurance fees, primarily due to the amortization of prepaid insurance and write-off of the prepaid balance; and $0.022 million increase in professional fees due to amounts accrued not previously included in the estimated net costs to liquidate. As of March 31, 2012, the estimate of remaining costs to be incurred through 2013 is $2.604 million. Future investment income is estimated to be $0.158 million resulting in estimated total net costs to be incurred during liquidation of $2.446 million as of March 31, 2012.

Critical Accounting Policies

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

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

 

   

Estimates of the potential liability associated with litigation and government investigations

 

   

Estimates of expenses incurred and interest income received during liquidation. Under the liquidation basis of accounting, the Company accrues for the remaining costs to be incurred during liquidation, including compensation for remaining directors, consultants, insurance costs, costs to settle remaining leases, fees for professional service providers and miscellaneous other costs, partially offset by estimated future interest earnings. These estimates are undiscounted for present value and are based on the assumption that liquidation will occur no later than December 31, 2013.

 

   

Fair Value of financial instruments. The fair values for substantially all of our financial assets and financial liabilities are based on observable prices and inputs and are classified in level 1 of the hierarchy.

A complete discussion of these policies is contained in our Form 10-K filed on March 23, 2012 with the Securities and Exchange Commission for the year ended December 31, 2011. There were no significant changes to the critical accounting policies discussed in the Company’s Form 10-K filed for December 31, 2011.

 

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Forward-Looking Statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that are based on current expectations, estimates and projections about the Company. 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.

Commitments and Contingencies

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. See Part II – Item 1 for additional information regarding the DOJ matter.

Leases

The Company leases domestic office space under an operating lease which expires in early 2013. The lease also includes escalation provisions for taxes and operating costs. In April, 2011, the Company subleased the office space for 2011 and 2012 to offset a portion of the rental obligation owed by the Company.

Indemnification provisions

The Company has sold its SeaSpace, Titan, the VSK Group, GMS and NSM subsidiaries in separate transactions starting with the first transaction closing in 2007. In each transaction, the Company agreed to indemnify the purchaser for periods subsequent to closing for losses arising from breaches of representations, warranties and covenants. Indemnification periods varied based on the particular representation, warranty or covenant covered, the vast majority of which have all expired. As of September 30, 2011, the only remaining indemnification obligations relate to representations and warranties concerning taxes, environmental matters, breaches of title, breaches of authorization and fraud. For SeaSpace, Titan, the VSK Group, GMS and NSM, these indemnification provisions have been capped at $1.0 million, $0.950 million, $6.669 million (€5.0 million), $5.2 million and $0.863 million, respectively. At March 31, 2012, no amount has been accrued related to these indemnifications as a liability is not deemed probable.

On June 24, 2010, the Company signed a definitive purchase and sale agreement with Chemring Group PLC pursuant to which Chemring agreed to acquire substantially all of the assets of the Company for $59.560 million in cash and the assumption of certain liabilities. The purchase and sale 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 losses directly or indirectly based upon, related to, arising out of or in connection with Mecar’s completed contracts, Mecar USA liabilities retained by the Company and any failure by the Company to satisfy all transaction related expenses. The Company’s indemnification liability is limited to, and capped at, the escrowed amount of $15 million plus the accumulated interest. The Company’s indemnification obligations expire upon the earlier of (i) June 30, 2015 and (ii) the Company’s entry into either a court or administrative order or a Chemring-approved settlement agreement, in either case, finally resolving the matters relating to the DOJ’s subpoena. In the absence of such final resolution, in certain circumstances, up to 50% of the escrowed funds may be released as early as June 24, 2013. At March 31, 2012, no amount has been accrued related to this indemnification as a liability is not deemed probable.

 

 

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Future Reporting

The Company filed a Certificate of Dissolution with the State of Delaware on August 31, 2011 and the Company has closed its stock transfer books and instructed its stock transfer agent that no further stock transfers be recognized. Accordingly, the Company’s stock has ceased trading on the OTCQB Marketplace. The Company is required under Delaware law to maintain a quasi-corporate existence for a period of three years for the limited purpose of winding up its affairs and discharging or making provision for the discharge of its liabilities.

Promptly after the filing of the Certificate of Dissolution, the Company requested a no-action letter from the Securities and Exchange Commission to allow the Company to cease filing Forms 10-K and 10-Q. The Securities and Exchange Commission has rejected this request; accordingly, the Company will continue to file all required Forms 10-K and 10-Q.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for a smaller reporting company.

 

ITEM 4. CONTROLS AND PROCEDURES

Overview

As a result of the sale of Mecar and Mecar USA and the adoption by the stockholders of the Plan of Dissolution, the Company terminated all employees. The Company’s Officers/Board of Directors continue to oversee and review the Company’s system of financial reporting.

Disclosure Controls and Procedures

Subject to the provisions set forth in the Overview section above, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by the report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective as of March 31, 2012.

Changes in Internal Control Over Financial Reporting

Subject to the provisions set forth in the Overview section above, there were no changes in the Company’s 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 Company’s 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 DOJ’s press release indicate that the alleged criminal conduct was on behalf of a Decatur, Georgia company which is unrelated to the Company or Mecar USA. Mecar USA’s employment agreement with the employee provided that the employee not actively engage in any other employment, occupation or consulting activity that conflicts with the interests of the Company. In light of the employee’s breach of his employment agreement, Mecar USA terminated his employment on January 20, 2010.

According to the DOJ’s press release, the former employee was arrested on January 19, 2010, along with twenty-one other individuals, after an undercover operation that targeted foreign bribery in the military, and small arms and ammunition industries. 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.

Subsequently, the Company received notice from the DOJ that indicated that it would request additional documents and expand its review beyond matters relating to the indicted former employee of Mecar USA. The Company understood that the DOJ’s expanded review was in connection with an industry-wide review. The Company has also received inquiries from the SEC regarding this matter.

The Company is cooperating with the DOJ and SEC and complying with the DOJ’s subpoena and SEC’s request for information. The Company’s ongoing compliance with these matters is being overseen by the Company’s Board of Directors. The Board of Directors is being assisted in these matters by independent outside counsel. The Company cannot predict the outcome of these matters or the impact, if any, that they may have on our plan to return the net proceeds of the Chemring sale to our stockholders.

 

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Based on advice from our FCPA outside counsel, we have estimated that we may not be able to conclude the DOJ/SEC inquiries, complete the Delaware dissolution process and make final distribution to stockholders until 2013. As a result, our estimate of net costs to be incurred during liquidation includes our estimate of costs through December 31, 2013.

In late February, 2012, the DOJ dismissed charges against all individuals indicted in the FCPA sting operation, including the former employee of MECAR USA. The Company’s FCPA counsel has recently met with the DOJ and requested that the DOJ consider the Company’s status in its investigation so that the Company may move forward with distributions to Company stockholders. No distributions to stockholders are expected prior to resolution of the DOJ and SEC inquiries and completion of the Delaware dissolution process which includes notice to creditors and publication of the dissolution, followed by a petition to the Delaware courts.

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. Mine Safety Disclosures

Not Applicable

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.
101    The following financial information from our Quarterly Report on Form 10-Q for the first quarter of 2012 filed with the SEC formatted in Extensible Business Reporting Language (XBRL):

 

(i) Consolidated Statements of Net Assets as of March 31, 2012 and December 31, 2011 (liquidation basis)
(ii) Consolidated Statement of Changes in Net Assets for the three months ended March 31, 2012 and three months ended March 31, 2011 (liquidation basis).

 

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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/ Charles S. Ream
     

 

Date: May 11, 2012

      Charles S. Ream
      Director and Chief Financial Officer

 

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