ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
Allied’s principal executive offices are located in Vienna, Virginia, where it leases approximately 6,400 square feet of office space. The lease expires in February 2013. The following table shows the principal properties of Allied’s subsidiaries as of December 31, 2009:
(1)
Mecar’s principal factory is located approximately 25 miles south of Brussels near Nivelles, Belgium. The factory principally consists of a manufacturing and administrative complex which has been occupied by Mecar since 1989. The manufacturing and the administration facility area is approximately 339,000 square feet. There are a number of older buildings on the property that are still used in conjunction with the new complex. A small test firing range is maintained on this property. Mecar also utilizes other test firing ranges, including test ranges located in the United Kingdom, Spain and Portugal. During most of 2009, Mecar operated at approximately 70-80% of its productive capacity, based on the product mix of its backlog in 2009.
(2)
Mecar USA operates from an office and manufacturing facility in Marshall, Texas, constructed in 2005 with assistance from the local development authority. Buildings are located on land which has been leased under a long-term lease agreement with an option to purchase at the end of the lease. See Note V. In addition to the manufacturing facility, Mecar USA has leased 36,000 square feet since 2007. The facilities at Mecar USA have been sized in anticipation of future period revenue growth. Mecar USA is currently operating at 50% of productive capacity.
The above facilities are considered to be in good operating condition, adequate for present use, and have sufficient plant capacity to meet current and anticipated operating requirements.
DOJ Subpoena
On January 19, 2010, the Company received a subpoena and communications from the U.S. Department of Justice (“DOJ”) requesting the Company produce documents relating to its dealings with foreign governments. The subpoena stated that it was issued in connection with an ongoing criminal investigation. On the same day, the Company also became aware through a press release issued by the DOJ that an employee of Mecar USA had been indicted by the DOJ for allegedly engaging in schemes to bribe foreign government officials to obtain and retain business. The unsealed indictment of this employee and the DOJ’s press release indicate that the alleged criminal conduct was on behalf of a Decatur, Georgia company which is unrelated to the Company or Mecar USA. Mecar USA’s employment agreement with the employee provides that the employee shall not actively engage in any other employment, occupation or consulting activity that conflicts with the interests of the Company. In light of the employee’s apparent breach of his employment agreement, Mecar USA terminated his employment on January 20, 2010.
According to the DOJ’s press release, the former employee was arrested on January 19, 2010, along with twenty-one other individuals, after a large-scale undercover operation that targeted foreign bribery in the military and law enforcement products industry. The indictments of the twenty-two individuals allege that the defendants conspired to violate the Foreign Corrupt Practices Act (“FCPA”), conspired to engage in money laundering and engaged in substantive violations of the FCPA.
The Company is cooperating with the DOJ and complying with the DOJ’s subpoena in addition to conducting an internal review of the activities of Mecar USA’s former employee. The internal review is being conducted by the Company’s Audit Committee with the assistance of independent outside counsel.
The Company’s internal review and the Company’s response to the DOJ’s subpoena are still in an early stage, and the Company cannot predict the outcome of these matters or the impact, if any, that the internal review or the response to the subpoena may have on the Merger with Chemring (the “Merger”) or on our business, results of operations, liquidity or capital resources.
Litigation Relating to the Merger
Two putative stockholder class action lawsuits related to the Merger were filed since the announcement of the execution of the Merger agreement. On February 19, 2010, the Delaware Court of Chancery entered an order consolidating the two actions. On March 3, 2010, following the filing of the Company’s preliminary proxy statement with the SEC, the plaintiffs filed a consolidated amended class-action compliant, which names as defendants, each of the Company’s directors and a Chemring subsidiary. The consolidated action was dismissed without prejudice effective April 1, 2010.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information. Allied’s Common Stock has been listed for trading on the NYSE Alternext Exchange (formerly American Stock Exchange) since September 15, 1992. Its trading symbol is ADG. Its media listing is under the symbol Allied Defense. The table below shows the high and low sales prices of Allied’s Common Stock during 2009 and 2008:
Stockholders. The number of holders of record of the Common Stock at March 10, 2010 was 780.
Dividends. There have been no dividends declared or paid by Allied since November 1992. The payment of dividends is within the discretion of Allied’s Board of Directors and any decision to pay dividends in the future will depend upon an evaluation of a number of factors, including earnings, capital requirements, operating and financial condition, and any contractual limitation then in effect. Under the terms of the Merger agreement, Allied is not permitted to pay any dividends pending the closing of the Merger. Mecar is not allowed to remit a dividend to Allied based on the terms of its borrowing arrangements with its bank group and a Belgian regional agency.
Equity Compensation Plan Information. The following table provides information as of December 31, 2009 about Allied’s Common Stock that may be issued upon the exercise of options and rights under all of Allied’s existing equity compensation plans as of December 31, 2009, including the 2001 Equity Incentive Plan, the 1997 Incentive Stock Plan and the 1992 Employee Stock Purchase Plan (all of which have been approved by Allied’s stockholders), as well as rights to acquire shares of Allied’s Common Stock granted to unaffiliated institutional investors.
In conjunction with the Company’s signing a definitive Merger agreement on January 18, 2010, all equity compensation plans have been suspended pending the Company’s Merger. As such, new future equity awards will not be made unless the Merger transaction fails to close.
Not required for a smaller reporting company.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (amounts in thousands of dollars, other than share data)
Overview
Allied is a multinational defense business focused on the manufacture and sale of ammunition and ammunition related products for use by the U.S. and foreign governments. Allied’s business is conducted by its two wholly owned subsidiaries: Mecar S.A. (“Mecar”) and Mecar USA, Inc. (“Mecar USA”). Mecar is located in Nivelles, Belgium and Mecar USA is located in Marshall, Texas. Corporate is located in Vienna, Virginia. Expenses related to Corporate and foreign holding companies are reported separately in the segment reporting schedules.
On January 18, 2010, the Company signed a definitive Merger agreement with Chemring Group PLC (“Chemring”). Chemring has agreed to acquire the Company in an all-cash transaction valued at $7.25 per share. The closing of the Merger is subject to obtaining the approval of our stockholders and the satisfaction of the other closing conditions contained in the Merger agreement and may be impacted by the matters described in Item 3
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for a smaller reporting company.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information and data required by this Item are set forth in the pages indicated in Item 15(a) (1) and (2). See Note U of the consolidated financial statements for supplementary quarterly financial data required by this item.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
There were no disagreements on any matter of accounting principles, financial statement disclosure or auditing scope or procedure to be reported under this item. BDO Seidman, LLP was the Company’s independent registered public accounting firm for both 2009 and 2008.
ITEM 9A
ITEM 9A (T).
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the direction and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by the report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective as of December 31, 2009.
Management’s Report on Internal Control over Financial Reporting
The management of The Allied Defense Group, Inc. is responsible for establishing and maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on our assessment, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s internal controls over financial reporting are effective as of December 31, 2009.
Changes in Internal Control Over Financial Reporting
In our Annual Report on Form 10-K for the year ended December 31, 2008, management identified the following material weakness in the Company’s internal control over financial reporting: As of December 31, 2008, the Company’s Belgian subsidiary, Mecar, failed to maintain an accurate perpetual inventory record. The Company believes this failure resulted from the increased level of activity and inventory movements in the later half of 2008. Specifically, there was: (i) no formal review of certain changes to the perpetual inventory records, (ii) perpetual inventory records were not properly reconciled to the general ledger on a timely basis, (iii) results of the physical inventory count were not timely matched to the perpetual inventory records, and (iv) inventory balances were not sufficiently analytically reviewed.
In response to the material weakness in internal control over financial reporting described above, management, has taken the following steps to remediate the above listed material weakness: (i) implementing accounting procedures to reconcile and monitor inventory balances each month, and report exceptions and trends in account balances; (ii) enhancing physical inventory count procedures to ensure more accurate physical counts; and (iii) extending internal audit procedures performed by a third party consultant to include the inventory cycle. The material weakness will be fully remediated when, in the opinion of management, the revised control processes have been operating for a sufficient period of time to provide reasonable assurance as to its effectiveness. The remediation and ultimate resolution of our material weakness has been reviewed with the Audit Committee of our Board of Directors. We have concluded that our remediation efforts have effectively addressed our previously disclosed material weakness relating to inventory accounting at our Belgian subsidiary.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the SEC that permits the company to provide only management’s report in this annual report.
The Annual Meeting of Shareholders of the Company, for which proxies were solicited pursuant to Registration 14A under the Securities Exchange Act of 1934, as amended, was held on November 13, 2009.
At the Annual Meeting, each of the following nominees was elected to the Board of Directors according to the following votes:
At the Annual Meeting, the shareholders ratified the appointment of BDO Seidman LLP as the Company’s independent registered public accounting firm for 2009 according to the following votes:
PART III
ITEM 10.
ITEM 10.
DIRECTORS EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following are the directors of Allied:
Year in which first
Name of Nominee
elected a director
Age
Principal business occupation for past five years and other directorships
Tassos D. Recachinas
Managing Member of Sophis Investments LLC, a diversified investment management firm specializing in research-driven value investing, since April 2008; Senior Investment Analyst with Pirate Capital LLC from 2007 - 2008; Equity Research Associate at Raymond James & Associates from 2005 - 007, where he provided equity research coverage on several Defense and Technology companies; Summa Cum Laude, The George Washington University, where he graduated from the Honors Program and first in his class studying mechanical/aerospace engineering; also a Pembroke Scholar, having studied engineering and economics at Oxford University in England. Mr. Recachinas is the only Board member with a background in investment banking which has added a valuable perspective in Board discussions. Mr. Recachinas also served, at one time, as a representative of one of the Company’s largest shareholders.
The Audit Committee is currently comprised solely of independent members of the Board of Directors, consisting of Messrs. Decker, Ream and Wasserman. Among its functions, the Audit Committee (i) recommends the selection of the Company’s independent registered public accountants, (ii) reviews the scope and conduct of the independent public accountants’ audit activity and other services, (iii) reviews the financial statements and associated press releases and required filings with the Securities and Exchange Commission, and (iv) reviews the adequacy of the Company’s basic accounting and internal control systems. Each of the Audit Committee members satisfy the independence requirements and other established criteria of NYSE AMEX and the Securities and Exchange Commission. The Board of Directors has determined that each of Gilbert F. Decker, Charles S. Ream and Frederick G. Wasserman qualify as an “audit committee financial expert” as defined under applicable Securities and Exchange Commission rules and is financially sophisticated as defined by NYSE AMEX rules.
The Compensation Committee is currently comprised solely of independent members of the Board of Directors, consisting of Messrs. Ream, Griffith and Recachinas. The Compensation Committee establishes the Company’s executive compensation program. It also periodically reviews the compensation of executives and other key officers and employees of the Company and its subsidiaries.
The Nominating Committee is currently comprised solely of independent members of the Board of Directors, consisting of Messrs. Griffith and Decker. The Nominating Committee is responsible for soliciting and recommending candidates for the Board of Directors. The Nominating Committee does not have any formal minimum qualifications for director candidates. The Board of Directors first evaluates the current members of the Board willing to continue in service. The Committee evaluates performance in office to determine suitability for continued service, taking into consideration the value of continuity and familiarity with the Company’s business. If any member of the Board does not wish to continue in service or if the Board decides not to re-nominate a member for re-election, the Nominating Committee then identifies the desired skills and experience of a new candidate. Among other factors, the Nominating Committee considers a candidate’s business experience and skills, personal integrity and judgment, and possible conflicts of interest. To date, the Nominating Committee has not utilized the services of any search firm to assist it in identifying director candidates. The Nominating Committee’s policy is to consider director candidate recommendations from its shareholders, including confirmation of the candidate’s consent to serve as a director. Upon receipt of such a recommendation, the Nominating Committee will solicit appropriate information about the candidate in order to evaluate the candidate, including information that would need to be described in the Company’s proxy statement if the candidate was nominated. Candidates recommended by shareholders will be evaluated on the same basis as other candidates.
The Ethics and Governance Committee is currently comprised of Messrs. Meyer, Marcello and Wasserman. The Ethics and Governance Committee is responsible for evaluating the Company’s adherence to accepted standards of ethics and governance.
The Strategic Review Committee is comprised of Messrs. Peay, Griffith, Marcello and Recachinas. The Strategic Review Committee is responsibly for identifying, considering, and recommending to the Board of Directors, actions and strategic alternatives to increase shareholder value.
Charters for the committees noted above are available on the Company’s website at http://www.allieddefensegroup.com.
All directors were elected/re-elected to the Board based on the shareholders votes received on November 13, 2009.
Executive Officers
All of our executive officers are appointed annually. None of our executive officers was selected pursuant to any arrangement or understanding between the officer and any other person. The name, age, offices and positions of our executives held for at least the last five years, were as follows:
Mr. Marcello is the President and Chief Executive Officer of Allied.
Monte L. Pickens, age 64, was appointed Executive Vice President and Chief Operating Officer in May 2003. Previously, Mr. Pickens was the Vice President of T. Marzetti Company. Mr. Pickens retired from the U.S. Army as a Colonel.
Deborah F. Ricci, age 45, was appointed Treasurer and Chief Financial Officer in April 2007. Ms. Ricci was promoted from her position as Controller and Corporate Secretary, which she held from early 2006. Previously, Ms. Ricci served as Chief Financial Officer of Hemagen Diagnostics, Inc.
Wayne F. Hosking, Jr., age 43, was appointed Vice President for Corporate Strategic Development in April 2004.
Allied has adopted a code of business conduct and ethics for directors, officers (including Allied’s principal executive officer, principal operating officer, principal financial officer and controller) and employees. The code of ethics is available on the Company’s website at http://www.allieddefensegroup.com. Stockholders may request a free copy of the code of ethics from:
Allied Defense Group, Inc.
8000 Towers Crescent Drive, Suite 260
Vienna, Virginia 22182
(703) 847-5268
Attn: Investor Relations
There have been no material changes to the procedures by which the Company’s shareholders may recommend nominees to the Company’s Board of Directors.
SUMMARY COMPENSATION TABLE
As Of December 31, 2009
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
AS OF DECEMBER 31, 2009
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL
The Company has an employment agreement with each of our named executive officers which provides for severance compensation to be paid if employment is terminated following certain triggering events.
In the event of any termination within twelve (12) months following a change of control, the named executive officers will be entitled to the following severance payments:
Both John J. Marcello and Monte L. Pickens would receive a lump sum payment equal to the sum of two (2) times base salary at time of termination plus two (2) times average annual bonus earned during the three (3) most recent years. Deborah F. Ricci would receive a lump sum payment equal to the sum of two (2) times base salary at the time of termination plus two (2) times the greater of the average annual bonus earned during the three (3) most recent years or the “target” bonus as defined as 50% of the base salary. Wayne F. Hosking would receive a lump sum payment equal to the sum of two (2) times base salary at the time of termination plus two (2) times the greater of the average annual bonus earned during the three (3) most recent years or the “target” bonus as defined as 40% of the base salary. At December 31, 2009, this would have resulted in severance payments of $640,700, $524,400, $618,000 and $547,960 to Messrs. Marcello, Pickens, Ms. Ricci and Mr. Hosking, respectively. In addition, each named executive officer would be entitled to continue to receive medical, dental, vision, life, short and long-term disability insurance coverage, business travel accident insurance, flexible spending account and employee assistance program participation and the 401(k) benefit for two (2) years. Mr. Pickens is also entitled to receive two (2) years of long-term care insurance.
In the event of any termination initiated by the Company without cause or initiated by the named executive officer following a material adverse alteration or diminution in the nature of his status or authority, a reduction in his title or a reduction in his base salary, the named executive officers would be entitled to the following severance payments:
Both John J. Marcello and Monte L. Pickens would receive a lump sum payment equal to the sum of one (1) times base salary at the time of termination plus one (1) times average annual bonus earned during the three (3) most recent years. Deborah F. Ricci would receive a lump sum payment equal to the sum of one (1) times base salary at the time of termination plus one (1) times the greater of the average annual bonus earned during the three (3) most recent years or the “target” bonus as defined as 50% of the base salary. Wayne F. Hosking would receive a lump sum payment equal to the sum of one (1) times base salary at the time of termination plus one (1) times the greater of the average annual bonus earned during the three (3) most recent years or the “target” bonus as defined as 40% of the base salary. At December 31, 2009, this would have resulted in severance payments of $320,350, $262,200, $309,000 and $273,980, respectively. In addition, each named executive officer would be entitled to continue to receive medical, dental, vision, life, short and long-term disability insurance coverage, business travel accident insurance, flexible spending account and employee assistance program participation and the 401(k) benefit for one (1) year. Mr. Pickens is also entitled to receive one (1) year of long-term care insurance.
We also have restricted stock and stock option agreements with our named executive officers which provide for accelerated vesting in the event of a termination of employment within twelve (12) months following a change of control, in the event of a termination of employment initiated by the Company “without cause”, or in the event of a termination of employment initiated by the executive as described above. As of December 31, 2009, these provisions would have resulted in the following acceleration of vesting:
John J. Marcello - Options for 30,000 shares of stock
Monte L. Pickens - Options for 25,000 shares of stock
Deborah F. Ricci - 3,000 shares of restricted stock and Options for 31,000 shares of stock
Wayne F. Hosking - Options for 30,000 shares of stock
COMPENSATION OF DIRECTORS
Prior to March 2009, each director is compensated for service at the annual rate of $60,000 of which $36,000 must be paid in Allied stock although directors may elect to receive the entire $60,000 of compensation in Allied stock. In March 2009, the Board of Directors further amended the compensation plan to decrease the annual compensation payable to its non-employee directors to $54,000. This amendment was effective on July 1, 2009. The directors are allowed to defer receipt of the cash and/or the Allied stock until they retire from the Allied board. As Chairman of the Board, General Peay received the same cash and stock-based compensation as paid to non-employee members of the Board of Directors plus a reimbursement of annual premiums paid on a $1 million life insurance policy, together with all applicable income taxes. The Company has been paying the annual premiums since General Peay joined the Company in 2001, as Chairman and Chief Executive Officer. The Company also reimburses directors for out-of-pocket expenses incurred in connection with their service.
DIRECTOR COMPENSATION
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information with respect to the shares of the Company’s common stock which is held by the only persons known to the Company to be the beneficial owners of more than 5% of such common stock based upon the most recent filings made by the undersigned with the Securities and Exchange Commission:
The following information is furnished as of December 31, 2009, with respect to the beneficial ownership by management of the Company’s common stock:
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The following members of the Board of Directors of the Company have been determined to qualify as independent members of the Board of Directors pursuant to the standards set forth by the NYSE Amex (formerly American Stock Exchange): John G. Meyer, Jr., Gilbert F. Decker, Ronald H. Griffith, Charles S. Ream, Frederick G. Wasserman, and Tassos D. Recachinas. The Company’s Audit, Compensation and Nominating Committees consist solely of independent directors.
Procedures for Approval of Related Party Transactions
Our Board of Directors is charged with reviewing and approving all potential related party transactions. All such related party transactions must then be reported under applicable SEC rules. We have not adopted other procedures for review, or standards for approval, of such transactions, but instead review them on a case-by-case basis.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICE
The following table sets forth the fees paid by the Company to BDO Seidman LLP (BDO) for audit and other services provided for 2009 and 2008:
Audit fees include work in connection with quarterly reviews.
Statutory audit fees of approximately $146 and $147 were included in the table above for Audit fees paid by the Company in 2009 and 2008 respectively, to the principal auditor.
The Audit Committee considered whether the provision of services referenced above is compatible with maintaining independence and concluded the provision of services to be independent.
The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year. The Audit Committee may also pre-approve particular services on a case-by-case basis.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Allied has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Allied and in the capacities and on the dates indicated.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
December 31, 2009
FORMING A PART OF
ANNUAL REPORT PURSUANT TO
THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-K
OF
The Allied Defense Group, Inc.
F - 1
The Allied Defense Group Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
F - 2
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
The Allied Defense Group, Inc.
Vienna, Virginia
We have audited the accompanying consolidated balance sheets of The Allied Defense Group, Inc. and subsidiaries (the “Company”) as of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows for the years then ended. In connection with our audits of the financial statements, we have also audited the financial statement schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Allied Defense Group, Inc. and subsidiaries at December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B to the consolidated financial statements, the Company has suffered recurring losses from operations. Also, the Company has been unable to obtain long-term and short-term financing necessary to support its operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note B. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ BDO Seidman LLP
Bethesda, Maryland
April 7, 2010
F - 3
The Allied Defense Group, Inc.
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars, except per share and share data)
See accompanying notes to consolidated financial statements.
F - 4
The Allied Defense Group, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of Dollars, except per share and share data)
See accompanying notes to consolidated financial statements.
F - 5
The Allied Defense Group, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
(Thousands of Dollars, except per share and share data)
See accompanying notes to consolidated financial statements.
F - 6
The Allied Defense Group, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
F - 7
The Allied Defense Group, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
See accompanying notes to consolidated financial statements.
F - 8
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements of the Company include the accounts of Allied 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.
As discussed in Note W, the results of operations, financial position and cash flows of Titan Dynamics Systems Inc. (Titan),Global Microwave Systems, Inc. (GMS) and News/Sports Microwave Rental, Inc. (NSM), have been reported as discontinued operations for all periods presented. In March 2008, October 2008 and August 2009, the Company sold Titan, GMS and NSM, respectively. Unless otherwise indicated, all disclosures in the notes to the consolidated financial statements relate to the Company’s continuing operations.
Significant intercompany transactions have been eliminated in the consolidation.
Nature of Operations. The Allied Defense Group Inc. (Allied), a Delaware corporation, is a defense business, with presence in worldwide markets, offering manufacturing and marketing of ammunition and ammunition related products to the U.S. and foreign governments.
Foreign Currency Translation. The assets and liabilities of ARC Europe, its subsidiary Mecar, and BV are translated into U.S. dollars at year-end exchange rates. In years with greater currency fluctuation, the impact on the apparent change for the same balance sheet category from one year to the next could appear more significant than in if all assets or liabilities were held in the same functional currency (e.g. U.S. Dollars). The resulting translation gains and losses are accumulated in a separate component of stockholders’ equity. Income and expense items are converted into U.S. dollars at average rates of exchange prevailing during the year. Foreign currency transaction gains and losses are credited or charged directly to operations.
Reclassifications. Certain items in the financial statements have been reclassified to conform to the current presentation.
Use of Estimates. In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents. The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Accounts Receivable. Accounts receivable from foreign government agencies are supported by letters of credit or other guarantees. They are stated at the amount the Company expects to collect from balances outstanding at year end. Based on management’s assessment of the supported letters of credit and other guarantees, it has concluded that no allowance for doubtful accounts is required. The Company maintains an allowance for uncollectible accounts receivable for commercial receivables, or occasionally for government receivables, which is determined based on historical experience and management’s expectations of future losses. Losses have historically been within management’s expectations. The Company charges the accounts receivable to the established provision when collection efforts have been exhausted and the receivables are deemed uncollectible.
F - 9
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
Costs and Accrued Earnings on Uncompleted Contracts. Costs and accrued earnings on uncompleted contracts represent recoverable costs incurred and, where applicable, accrued profit related to long-term contracts for which the customer has not yet been billed (unbilled receivables).
Inventories. Inventories consist of raw materials, work in process, and finished goods, and are stated at the lower of cost or market. Cost is determined principally by the weighted average cost method. The Company reviews its recorded 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.
Property, Plant and Equipment. Property, Plant and Equipment are stated at cost and depreciated using the straight-line method over their estimated service lives, as follows:
Leasehold improvements are amortized over the shorter of the lease term or their estimated useful lives. Accelerated depreciation methods are used for tax purposes on certain assets. Maintenance and repairs are charged to expense as incurred; additions and betterments are capitalized. Upon retirement or sale, the cost and related accumulated depreciation of the disposed assets are removed and any resulting gain or loss is credited or charged to operations.
Assets under capital lease obligations are recorded at the lesser of the present value of the minimum lease payments or the fair market value of the leased asset, at the inception of the lease. Amortization of assets acquired under capital lease obligations is recorded in depreciation expense.
The Company allocates the portion of deprecation and amortization expense that is directly attributable to contract performance to cost of sales.
Impairment of Long-Lived Assets. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable in accordance with ASC 360 Accounting for the Impairment or Disposal of Long-Lived Assets. Impairment losses, where identified, are determined as the excess of the carrying value over the estimated fair value of the long-lived asset. The Company assesses the recoverability of the carrying value of assets held for use based on a review of projected discounted cash flows. As the Company has reduced its head count as a result of selling a number of its subsidiaries, the Company determined that the carrying value of the ERP system that is used mainly by the Company’s U.S. subsidiaries exceeds its fair value. Accordingly, the Company recorded $181 and $462 in impairment charges for long-lived assets related to the Company’s ERP computer system in 2009 and 2008, respectively.
Derivative Financial Instruments. The Company designates its derivatives based upon the criteria established under ASC 815, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. ASC 815 requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for the changes in the fair value of the derivative depends on the intended use of the derivative and the resulting designation. The Company no longer utilizes derivatives that are designated as fair value or cash flow hedges. Therefore, changes in fair value of the Company’s derivatives are recognized currently in net income. It is the Company’s policy to classify all of its derivative instruments for cash flow purposes as operating activities.
F - 10
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
Revenue and Cost Recognition.
•
Percentage of Completion Method - Revenues under fixed price contracts are recognized on the percentage-of-completion method measured by direct labor incurred to total estimated direct labor at completion. The actual costs on these contracts may differ from the Company’s estimate at completion. Provision for estimated losses and penalties on contracts are recorded when identified. Revenues under cost-plus-fixed-fee contracts are recognized on the basis of costs incurred during the period plus the fee earned. As contracts extend over one or more years, revisions in costs and earnings estimated during the course of the work are reflected in the accounting period in which the facts which require the revision become known. For contract modifications supported by a change in contract price, profit on such contract modifications are only recognized upon receipt of a signed contract amendment and only in the proportion of such contract’s progress towards completion. For modifications not supported by a change in contract price, those additional costs are treated as contract costs and charged to expense in the proportion of such contract’s progress towards completion. Costs and accrued profits on uncompleted direct and indirect fixed price contracts with foreign governments and direct and indirect U.S. government foreign military sales (FMS) contracts, which are billable upon completion, are carried as costs and accrued earnings on uncompleted contracts.
•
Other Method -Revenues from service work rendered are recorded when performed. Revenues from pass through contracts are evaluated based on the guidelines of ASC 605 Revenue Recognition. Accordingly, the Company bases its decision on whether to report revenue from such pass through contracts on a gross basis or net basis based on the relative strength of each of the following factors: whether the Company (1) is the primary obligor in the arrangement, (2) has general inventory risk, (3) has latitude in establishing price, (4) changes the product or performed part of the service, (5) has discretion in supplier selection and (6) is involved in the determination of product or service specifications. There are no provisions related to performance, cancellation, termination or refunds.
In the normal course of the Company’s business, it does not bill shipping and handling costs to customers. Shipping and handling costs are included in cost of sales. Costs of sales also include inbound freight charges, purchasing and receiving costs, inspection costs and warehousing costs. No production costs are included in selling and administrative expense.
The Company records deposits received from customers as current liabilities.
Advertising. Advertising costs are expensed as incurred. These costs are not material to the Company’s operations.
Research and Development. Research and development costs are expensed as incurred. Such costs include salaries and benefits, rents, supplies, and other costs related to various products under development.
Capitalization of Software. The Company capitalizes purchased software systems in accordance with ASC 350 Intangibles - Goodwill and Other, which requires that computer software meeting the characteristics of internal-use software be capitalized once the preliminary project stage has been completed. Once the capitalization criteria has been met, external direct costs of materials and services consumed in developing or obtaining internal-use computer software, payroll and payroll related costs for employees who are directly associated with and who devote time to the internal-use computer software project and interest costs incurred when developing computer software for internal use should be capitalized. No costs were capitalized in 2009 and 2008.
Warranties. The Company grants warranties on certain products for periods varying from one to five years. Provision is made for estimated losses arising from warranty claims on ammunition products as incurred, based on a minimal level of claims historically for that segment. The reserves for warranty expense were not significant.
Environmental Regulations. The Company does not anticipate that compliance with any laws or regulations relating to environmental protection will have a material effect on its capital expenditures, earnings or competitive position, although new environmental regulations continue to go into effect in Belgium. Mecar has spent approximately $143 and $400 in 2009 and 2008, respectively, in order to be compliant with the current Belgian regulations.
Income Taxes. Income taxes are provided based on the liability method for financial reporting purposes. Under this method, deferred and prepaid taxes are provided for on temporary differences in the basis of assets and liabilities which are recognized in different periods for financial and tax reporting purposes. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Where it is not more likely than not that the Company’s tax position will be sustained, the Company records its best estimate of the resulting tax liability and interest in the consolidated financial statements. It is the Company’s policy to record interest and penalties, if any, related to unrecognized tax benefits as part of income tax expense for financial reporting purposes.
F - 11
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
Earnings Per Common Share. Basic earnings per share amounts have been computed based on the weighted average number of common shares outstanding. Diluted earnings per share reflects the increase in weighted average common shares outstanding that would result from the assumed exercise of outstanding options, warrants, and convertible debt calculated using the treasury stock method, unless they are anti-dilutive.
Stock-Based Compensation - The Company has adopted the provisions of ASC 718 Accounting for Stock Compensation, and the related SEC rules included in Staff Accounting Bulletin No. 107, on a modified prospective basis. ASC 718 supersedes APB 25 and amends ASC 230 Statement of Cash Flows. ASC 718 requires all share-based payments to employees, including grants of stock options and the compensatory elements of employee stock purchase plans, to be recognized in the statement of operations based upon their fair values. Share-based employee compensation cost is recognized as a component of selling, general and administrative expense in the consolidated statements of operations.
Allied’s principal Equity Incentive Plan (the Plan), which was approved by the Board of Directors and shareholders in 2001 authorizes the Compensation Committee of the Board of Directors to grant up to 990,000 stock options, stock appreciation rights, restricted (non-vested) stock, performance shares and cash awards. Each type of grant places certain requirements and restrictions upon the Company and grantee. The options for common shares generally are exercisable over a one to five year period and expire up to five years from the date of grant and are valued at the closing market price on the date of grant. Restricted shares generally vest over periods of one to five years from the date of award and are also valued at the closing market price on the date of grant.
Total share-based compensation was $520 (including outside directors compensation of $394) for the year ended December 31, 2009 and $590 (including outside directors compensation of $327) for the year ended December 31, 2008. 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.
The Company used the modified prospective transition method to adopt the provisions of ASC 718 in 2006. Under this method, employee compensation cost recognized in 2009 and 2008 include: (1) compensation cost for all share-based payments granted after the effective date that have met the requisite service requirement and (2) compensation cost for the portion of awards that have met the requisite service period on or after the effective date based on the grant-date fair value of those awards. In accordance with ASC 718, the fair value of options grants are estimated on the date of grant using the Black-Scholes option pricing model.
As of December 31, 2009, the total compensation cost related to unvested stock-based awards that had not been recognized was approximately $107. This cost will be amortized on a straight-line basis over a period of approximately 27 months.
The Company granted 100,000 and 20,000 stock options during the year ended December 31, 2009 and 2008, respectively. The fair value of each option granted was estimated on the date of grant using the Black-Scholes options pricing model. The weighted-average fair values of each option at the dates of grant during the year ended December 31, 2009 and 2008 was $1.20 and $2.67, respectively. The weighted average assumptions used in the model for the years ended December 31, 2009 and 2008, respectively, were as follows:
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 Company’s weekly closing stock price starting with the period end date and going back four years. The expected lives in years is the vesting period for most of the stock option grants in the period with vesting periods based on the assumption and on general Company experience that the options will be exercised upon vesting.
F - 12
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
Major Customers. The Company derives the majority of its revenues directly or indirectly from foreign governments (some of which are through the U.S. government via the Foreign Military Sales program), primarily on fixed price type contracts. Direct and indirect sales to the Company’s largest customers (foreign governments in the Middle East) accounted for approximately 45% and 60% of revenue in both 2009 and 2008, respectively.
Concentrations of Credit Risk. Financial instruments and related items which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments, trade receivables and costs and accrued earnings on uncompleted contracts. The Company is required to maintain most of its cash balances with the lenders that provide credit to the Company. Credit risk with respect to trade receivables and costs and accrued earnings on uncompleted contracts are concentrated due to the nature of the Company’s customer base. The Company generally receives guarantees and letters of credit from its foreign customers and performs ongoing credit evaluations of its other customers’ financial condition. In addition, in Belgium, Mecar is required to purchase credit insurance on its foreign sales contracts from a local government agency. The Company’s allowance for doubtful accounts as of December 31, 2009 and 2008 totaled $987 and $1,038, respectively.
The majority of ammunition sales are to or for the benefit of agencies of foreign governments. Mecar’s ammunition sales in any given period and its backlog at any particular time may be significantly influenced by one or a few large orders. In addition, the production period required to fill most orders ranges from several months to a year. Accordingly, Mecar’s business is dependent upon its ability to obtain such large orders and the required financing for these orders. As of December 31, 2009 and 2008, Mecar’s firm committed backlog was $68,933 and $136,396, respectively. In addition to the firm committed backlog, the Company had unfunded amounts, which are subject to an appropriation or authorization of governmental funds, of $29,272 and $1,049 as of December 31, 2009 and 2008, respectively.
Mecar USA’s current customers are mainly the U.S. government, U.S.-based prime contractors and foreign governments. Mecar USA’s products are sold either directly or indirectly to the defense departments of governments and are regulated by U.S. government law regarding the foreign governments with which it may do business.
U.S. Government contracts and subcontracts are by their terms subject to termination by the Government or the prime contractor either for convenience or for default. U.S. Government sponsored foreign military sales contracts are subject to U.S. Government review. It is not anticipated that adjustments, if any, with respect to determination of costs under these direct contracts or subcontracts will have a material effect on the Company’s consolidated results of operations or financial position.
Restricted and unrestricted cash balances in foreign banks at December 31, 2009 and 2008 were $11,003 and $12,613, respectively. Changes in the value of the U.S. dollar and other currencies affect the Company’s financial position and results of operations since the Company has assets and operations in Belgium and sells its products on a worldwide basis.
Recent Accounting Pronouncements.
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 Company does not expect that the provisions of the new guidance will have a material effect on its 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 Company’s consolidated financial statements.
F - 13
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
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 entity’s financial position, results of operations and cash flows. The implementation of this standard did not have a material impact on the Company’s 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 Company’s consolidated financial statements.
In June 2009, the Financial Accounting Standards Board (“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 Company’s references to GAAP accounting standards but did not impact the Company’s results of operations, financial position or liquidity.
NOTE B - LIQUIDITY AND CAPITAL RESOURCES
During the last few years, the Company has faced and continues to face liquidity challenges resulting mainly from the reduction of revenues in 2006 and 2007 and continuing significant operating losses at MECAR. In 2008, the Company’s liquidity was adversely affected by financing and restructuring costs. During that time, the Company implemented a plan to reduce the fixed operating cost base at its subsidiaries. The corporate headquarters also engaged in cost-cutting measures and committed to a plan to divest non-core subsidiaries and repay its convertible notes and MECAR’s revolving cash line. In December 2008, the Company repaid MECAR’s revolving cash line. The Company fully repaid its convertible notes, with the last payment made in January 2009.
At present, the Company and its subsidiaries are operating without the benefit of any line of credit. Each of Mecar and Mecar USA have been operating under substantial cash restrictions and have managed their respective operations with the assistance of receivables factoring, bank overdrafts and stretching payments to vendors and suppliers. Mecar’s cash shortages have precluded it from paying management fees to Allied. Allied has overcome this shortfall by obtaining early, discounted payments from escrows established in connection with the sales of The VSK Group and GMS, which escrows have now been exhausted.
In addition, MECAR’s bank group has agreed to extend its current credit facility for the issuance of performance bonds and advance payment guarantees until April 30, 2010. The current facility provides for a maximum of $39,416 (27,500) of performance bonds and advance payment guarantees outstanding at one time. Any requirements in excess of this amount are required to be fully cash collateralized by the Company. The banks currently have issued irrevocable performance bonds and advance payment guarantees, expiring after April 30, 2010, with a value of $21,412 (14,939). Such outstanding performance bonds and advance payment guarantees will remain in place until their individual expiration, which at the minimum, is for the term of the respective contract. Unless the Company is able to extend or replace this financing, it will not be able to sign any new customer contracts that require performance bonds or advance payment guarantees without full cash collaterization. The Company’s possible inability to sign new customer contracts will significantly impact future revenues thereby potentially limiting Mecar’s ability to meet its existing and known or reasonably likely future cash requirements. However, the Company will continue to recognize revenue from contracts in progress with existing performance bond and advance payment guarantees until completion of the contracts. Sales contracts typically extend for a period of 12 to 18 months from signing. In addition, in order to better manage short-term cash flow, members of the bank group have discounted letters of credit and extended the bank overdraft facility during 2009 from time to time.
F - 14
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
The Company has been unable to obtain a longer term banking solution in Europe. In 2009, MECAR was approved for additional issuances of performance bonds and advance payment guarantees by a new bank that is not in the bank group. Upon the termination of MECAR’s credit facility on April 30, 2010, future issuances, if any, will have to be provided on a case by case basis. The Mecar bank group has advised that if the Merger does not close by April 30, 2010, the Company should not expect continued short-term financing and short-term extensions of the credit facility by Mecar’s bank group.
The Company has also sought additional working capital financing for its US operations to support MECAR USA; no such financing has yet been obtained. In the interim, MECAR USA has made arrangements to fund its working capital requirements with accounts receivable factoring arrangements and continued stretching of trade creditors. MECAR USA has adequate trade financing in place to execute its current backlog, but future growth will be limited unless long-term working capital financing can be secured.
At December 31, 2009, the Company had $9,021 in cash on hand. For the year ended December 31, 2009, the Company used $3,399 of cash from its continuing operating activities. This usage stems mainly from a $10,551 net loss from continuing operations, offset by $4,961 of non-cash adjustments and $2,191 from a decrease in net operating assets.
Outlook for 2010
On January 18, 2010, the Company signed a definitive Merger agreement with Chemring Group PLC (“Chemring”). Due to the cash flow challenges noted in the Liquidity and Capital Resources section above, if the Merger does not timely close, the Company will need to secure additional financing to support its operations.
As reported under Item 3 Legal Proceedings, the Company is currently complying with a subpoena and communications received from the DOJ. In addition, the Audit Committee of the Board is conducting an internal review of the activities of a former Mecar USA employee. The Company is incurring significant legal expense associated in complying with this subpoena and the internal review and it is uncertain of the outcome of these matters or the impact they may have on the Merger, our business, results of operations, liquidity or capital resources.
Since 2007, Mecar USA revenues have grown significantly as a result of the expansion of its ammunition service business. The Mecar USA executive whose employment was recently terminated was responsible for substantially all of the MECAR USA’s ammunition services contracts. During 2009, MECAR USA recruited an assistant for this former employee and management believes it has the personnel and resources necessary to timely perform on its backlog. Mecar USA continues to pursue new ammunition services contracts, although the loss of its former employee will likely have an adverse impact on Mecar USA’s ability to continue to grow its ammunition service business, for at least the short term.
The continuing loss from operations, the lack of financing, the DOJ subpoena and the loss of a key Mecar USA executive raise doubt about the Company’s ability to continue as a going concern in the event that the Merger does not close. If the Merger does not close, the Company will need to do a substantial refinance which, given the current credit markets, will likely be an equity transaction that will result in significant dilution to the shareholders.
The Company has less than $730 of firm commitments for capital expenditures outstanding as of December 31, 2009.
NOTE C - RESTRICTED CASH
Restricted cash at December 31 is comprised as follows:
F - 15
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
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 used to provide these financial guarantees place restrictions on certain cash deposits and other liens on Mecar’s assets. In addition, as certain customers make advance deposits, Mecar’s banking group restricts up to forty percent of the advance deposit as collateral for the issuance of an advance payment guarantee. The majority of the restricted cash balance relates to requirements under our sales contracts to provide performance bonds and advance payment guarantees. These instruments typically expire within one year or operating cycle and the restriction on the cash is released. As such, the restricted cash is classified as current for the periods presented. Cash of $5,364 and $9,506 at December 31, 2009 and 2008, respectively, was restricted or pledged as collateral for these agreements.
NOTE D - ACCOUNTS RECEIVABLE AND COSTS & ACCRUED EARNINGS ON UNCOMPLETED CONTRACTS
Accounts receivable at December 31 are comprised as follows:
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 management’s expectations of future losses. Losses have historically been within management’s expectations.
Costs and accrued earnings on uncompleted contracts totaled $14,402 and $21,999 at December 31, 2009 and 2008, respectively.
NOTE E - INVENTORIES
Inventories at December 31 are comprised as follows:
Inventories are stated at the lower of cost or net realizable value. Cost is determined principally by the weighted average cost method. Raw material 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 to the customer. 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.
F - 16
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
NOTE F - 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 contract 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 December 31, 2009 and 2008, the Company had recoverable costs of $179 and $1,469, respectively.
NOTE G - PROPERTY, PLANT & EQUIPMENT
Property, Plant & Equipment at December 31 are comprised as follows:
Depreciation expense was $4,324 and $5,147 for the years ended December 31, 2009 and 2008, respectively.
Capital Leases. The Company leases equipment under various capital leases, with lease terms through 2014. The economic substance of the leases is that the Company is financing the acquisition of the assets through the leases, and accordingly, they are recorded in the Company’s assets and liabilities.
The following is an analysis of the leased property under capital leases included in property, plant and equipment:
F - 17
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of December 31, 2009:
NOTE H - IMPAIRMENT OF LONG-LIVED ASSETS
The Company recorded $181 and $462 in impairment charges for long-lived assets related to the Company’s Enterprise Reporting Package (ERP) computer system in 2009 and 2008, respectively. As the Company decided to no longer utilize its current ERP system in 2009, the Company determined that the carrying value of the ERP system exceeds its fair value. The fair value of the ERP system was determined based on replacement cost.
NOTE I - 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 $39,416) 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. Mecar’s bank group has informally agreed to extend its credit facility for the issuance of performance bonds and advance payment guarantees until April 30, 2010. The bank group has issued irrevocable performance bonds and advance payment guarantees that expire after April 30, 2010, with a value of 14,939 (approximately $21,412). Such outstanding performance bonds and advance payment guarantees will remain in place until their individual expiration, which at the minimum, is for the term of the respective contract. Unless the Company is able to extend or replace this financing, it will not be able to sign any new customer contracts that require performance bonds or advance payment guarantees without full cash collaterization. The Company’s possible inability to sign new customer contracts will significantly impact future revenues thereby potentially limiting Mecar’s ability to meet its existing and known or reasonably likely future cash requirements. However, the Company will continue to recognize revenue from contracts in progress with existing performance bond and advance payment guarantees until completion of the 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 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 Mecar’s credit requirements relative to certain performance bonds and advance payment guarantees, to reduce the exposure of the existing bank group. In April 2008, Mecar’s 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 $4,300) at the end of August 2009 and 4,500 (approximately $6,450) from September through December 31, 2009. In conjunction with Mecar’s 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. This amount has been accrued at December 31, 2009.
F - 18
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
As of December 31, 2009 and December 31, 2008, total guarantees and performance bonds of approximately $32,877 and $63,923, respectively, were outstanding. Advances for working capital amounted to $2,763 and $670 at December 31 2009 and 2008, respectively. The balance outstanding at December 31, 2009 includes $2,635 of overdraft and $128 of issued loans to the credit facility for varying purposes. The notes are more fully described in Note M - Long Term Debt. Although the cash line of the credit facility expired on December 31, 2008, Mecar has borrowed from the bank group in 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 $5,364 and $9,416, at December 31, 2009 and 2008, 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 Mecar’s assets. Amounts outstanding are also collateralized by the letters of credit received under the contracts financed, and a pledge of all of Mecar’s assets, with the exception of assets pledged for the SOGEPA loan described in Note M - Long Term Debt.
NOTE J - 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 Mecar’s 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 December 31, 2009, the Company had liabilities totaling $814 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 year ended December 31, 2009, the Company recognized net gains of $669, in connection with its foreign currency futures contracts.
The following table presents the Company’s derivative liabilities at December 31, 2009:
The following table presents the location and amount of gains from derivatives reported in the consolidated statements of operations for the year ended December 31, 2009:
For more information on the fair value of these derivative instruments, see Note K.
F - 19
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
NOTE K - 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 management’s 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.
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 December 31, 2009 and 2008:
The fair values of the Company’s 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 Company’s stock as well as U.S. Treasury Bill rates are observable in active markets. The fair values of the Company’s 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.
F - 20
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
NOTE L - ACCRUED LOSSES ON CONTRACTS AND DEFERRED COMPENSATION
Accrued losses on contracts. At December 31, 2009 and 2008, the Company provided for accrued losses of $2,447 and $1,774, respectively, in connection with the completion of certain contracts. These amounts are included in accrued liabilities.
Deferred compensation. The December 31, 2009 and 2008 deferred compensation balances of $1,665 and $682, respectively, represent the retirement benefits for employees who applied for early retirement at MECAR and cash compensation deferred by the non-employee directors. These amounts are included in other long-term liabilities.
NOTE M - LONG-TERM DEBT
Long-term obligations as of December 31 consist of the following:
Senior secured convertible notes. On June 19, 2007, the Company and four purchasers entered into an Amended and Restated Securities Purchase Agreement (the “Amendment Agreement”) to refinance the terms of the original transaction and to provide for the issuance of additional convertible notes totaling up to $15,376. The Company entered into the Amendment Agreement with each purchaser whereby the Company exchanged the Initial Notes in the principal amount of $30,000 and $1,204 of unpaid and accrued interest and penalties for Senior Secured Convertible Notes (the “Amended Notes”) in the principal amount of $27,204 and 1,288,000 shares of the Company’s common stock (“Exchange Transaction”). In addition, the Amendment Agreement provided for the issuance of an additional $15,376 of Senior Secured Convertible Notes (the “New Notes”).
The Company elected to carry both the Initial Notes and the Amended Notes (collectively, the “Notes”) at fair value. The Company determined that the Notes are hybrid instruments that could be carried at fair value, with any changes in fair value reported as gains or losses in subsequent periods. The Company determined the fair value and the face value of the Notes at December 31, 2008 was $933 and $928, respectively. For the year ended December 31, 2009, the Company recorded a net gain of $5, related to the change in calculated fair values of the Notes through the redemption date of January 19, 2009. For the year ended December 31, 2008, the Company recorded a net loss of $969, respectively, related to the calculated fair values of the Notes at December 31, 2008. The Company redeemed $8,039 of the Notes on December 26, 2008 and the remaining $928 of the Notes on January 20, 2009.
Warrants. On March 6, 2006, in conjunction with the issuance of the Initial 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 EITF 00-19, Accounting for Derivative Instruments Index to, and Potentially Settled in, a Company’s Own Stock, mainly because the warrants are required to settle in registered shares of the Company’s 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 December 31, 2009 and 2008, the Company determined the fair value of the warrants was $24 and $318, respectively. For the year ended December 31, 2009, the Company recorded a gain of $294, related to the calculated fair value adjustment of the warrants at December 31, 2009. For the year ended December 31, 2008, the Company recorded a loss of $135, related to the calculated fair value adjustment of the warrants at December 31, 2008.
F - 21
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
SOGEPA Loan. On December 20, 2007, Mecar entered into a 6,000 (approximately $8,600) 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 covering property owned by Mecar. 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 $82 and $108 at December 31, 2009 and 2008, respectively. As a cash conservation measure, it was verbally agreed to defer the 2009 required repayments of principal in the amount of $1,994 (1,391) to the end of first 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 EITF 96-19 Debtor’s 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 $8,600 (6,000) and $8,458 (6,000) at December 31, 2009 and 2008, respectively.
Bank notes payable. In December 2008, Mecar borrowed $289 (205) from one of the banks in its banking facility to fund future retirement obligations. The loan accrues interest at 4.56% per year. The loan was fully repaid in 2009. At December 31, 2009, no outstanding balance is due on this loan. In addition, in February 2009, Mecar entered into a $170 (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 $128 at December 31, 2009.
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.
The annual maturities of long-term obligations as of December 31, 2009 are as follows:
None of the Company’s debt classified as long-term contains cross-default provisions.
NOTE N - BENEFIT PLANS
In 2003, the Company adopted a 401(k) plan. Employer contributions to the plans in 2009 and 2008 were approximately $172 and $167, respectively. Employee contributions to the plan in 2009 and 2008 were $166 and $129, respectively. Under the terms of labor agreements at Mecar, the Company contributes to certain governmental and labor organization employee benefit and retirement programs. In 2009 and 2008, the Company had an accrual of $1,426 and $448, respectively, for employees who applied for early retirement at Mecar. This retirement benefit amount was included in other long-term liabilities.
F - 22
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
NOTE O - CONTINGENCIES AND COMMITMENTS
There are no material pending legal proceedings, other than ordinary routine litigation to Allied’s 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 Company’s 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 following is a schedule by year of base expense due on operating leases that have initial or remaining lease terms in excess of one year as of December 31, 2009:
Total rental expense charged to operations approximated $448 and $462, for the years ended December 31, 2009 and 2008, respectively.
The Company’s 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 Company’s financial position.
In January 2009, the Company amended its agreement with Houlihan Lokey Howard & Zukin Capital, Inc. (“Houlihan Lokey”), the Company’s 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.
DOJ Subpoena
On January 19, 2010, the Company received a subpoena and communications from the U.S. Department of Justice (“DOJ”) requesting the Company produce documents relating to its dealings with foreign governments. The subpoena stated that it was issued in connection with an ongoing criminal investigation. On the same day, the Company also became aware through a press release issued by the DOJ that an employee of Mecar USA had been indicted by the DOJ for allegedly engaging in schemes to bribe foreign government officials to obtain and retain business. The unsealed indictment of this employee and the DOJ’s press release indicate that the alleged criminal conduct was on behalf of a Decatur, Georgia company which is unrelated to the Company or Mecar USA. Mecar USA’s employment agreement with the employee provides that the employee shall not actively engage in any other employment, occupation or consulting activity that conflicts with the interests of the Company. In light of the employee’s apparent breach of his employment agreement, Mecar USA terminated his employment on January 20, 2010.
F - 23
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
According to the DOJ’s press release, the former employee was arrested on January 19, 2010, along with twenty-one other individuals, after a large-scale undercover operation that targeted foreign bribery in the military and law enforcement products industry. The indictments of the twenty-two individuals allege that the defendants conspired to violate the Foreign Corrupt Practices Act (“FCPA”), conspired to engage in money laundering and engaged in substantive violations of the FCPA.
The Company is cooperating with the DOJ and complying with the DOJ’s subpoena in addition to conducting an internal review of the activities of Mecar USA’s former employee. The internal review is being conducted by the Company’s Audit Committee with the assistance of independent outside counsel.
The Company’s internal review and the Company’s response to the DOJ’s subpoena are still in an early stage, and the Company cannot predict the outcome of these matters or the impact, if any, that the internal review or the response to the subpoena may have on the Merger with Chemring (the “Merger”) or on our business, results of operations, liquidity or capital resources.
Litigation Relating to the Merger
Two putative stockholder class action lawsuits related to the Merger were filed since the announcement of the execution of the Merger agreement. On February 19, 2010, the Delaware Court of Chancery entered an order consolidating the two actions. On March 3, 2010, following the filing of the Company’s preliminary proxy statement with the SEC, the plaintiffs filed a consolidated amended class-action compliant, which names as defendants, each of the Company’s directors and a Chemring subsidiary. The consolidated action was dismissed without prejudice effective April 1, 2010.
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 December 31, 2009, 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.
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 December 31, 2009, no amount has been accrued related to this indemnification as a liability is not deemed probable.
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 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 will expire on March 31, 2010. At December 31, 2009, no amount has been accrued related to this indemnification as a liability is not deemed probable. 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.
F - 24
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
In conjunction with the sale of GMS, and pursuant to the terms of employment agreements with GMS’s 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 December 31, 2009, no amount has been accrued related to this indemnification as a liability is not deemed probable. At December 31, 2009, the outstanding principal and interest balance on the note receivable from the buyer was $1,096, net of uncollectible allowance 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 $3,278 and $3,302 at December 31, 2009 and 2008, 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.
Social Security Litigation
As of December 31, 2009, Mecar repaid its entire past due Belgian social security amounts, including accrued interest and penalties. As of December 31, 2008, the Company had an accrual of $3,522 which included past due amounts of $878. Accordingly, the December 31, 2009 accrued social security balance of $3,803 represents amounts currently due.
NOTE P - STOCKHOLDERS’ EQUITY
The Company has various equity compensation plans for employees as well as non-employee members of the board of directors. The Company may grant stock options, stock appreciation rights, incentive and non-statutory options, performance shares and other awards to key executives, management, directors and employees under various plans at prices equal to or in excess of the market price at the date of the grant. The options for common shares generally are exercisable over a five to ten year period and expire up to ten years from the date of grant. The equity compensation plans consist of the following:
2001 Equity Incentive Plan. During 2001, the Board of Directors and stockholders approved and reserved 240,000 shares of common stock for awards to key employees of the Company and its subsidiaries. In each of 2002, 2003 and 2005, the Board of Directors and the stockholders authorized the plan to be increased by 250,000 shares. The plan authorizes the Compensation Committee of the Board of Directors to grant stock options, stock appreciation rights, restricted stock, performance shares and cash awards. Each type of grant places certain requirements and restrictions upon the Company and grantee. For the year ended December 31, 2009, the Company granted 100,000 options to certain key employees and issued 78,490 shares to six directors as part of the annual directors’ compensation for 2009. For the year ended December 31, 2008, the Company granted 20,000 options to certain key employees and issued 52,395 shares to five directors as part of the annual directors’ compensation for 2008. During 2009 and 2008, 1,502 and 4,402 fully vested shares were retired at the option of the employee as reimbursement to Allied for payroll taxes associated with the vesting of their restricted shares, respectively. As of December 31, 2009, total restricted shares of 6,000 shares were reserved for certain employees. These restricted shares will vest immediately upon the closing of the definitive Merger agreement with Chemring Group PLC.
F - 25
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
1997 Incentive Stock Plan. During 1997, the Board of Directors and stockholders approved and reserved 225,000 shares of common stock for awards to key employees of the Company and its subsidiaries in the form of stock options and stock awards. The Plan is administered by the Compensation Committee of the Board of Directors. Employees of the Company and its subsidiaries who are deemed to be key employees by the Committee are eligible for awards under the Plan. This plan terminated with the establishment of the 2001 Equity Incentive Plan.
1992 Employee Stock Purchase Plan. During 1992, the Board of Directors and stockholders approved and reserved 525,000 shares for the plan. The plan is voluntary and substantially all full-time employees are eligible to participate through payroll deductions. The purchase price of each share is equal to 85% of the closing price of the common stock at the end of each calendar quarter. The Plan is subject to certain restrictions and the Board may amend or terminate it at any time. With the adoption of ASC 718, Share Based Payment, at January 1, 2006, the Company began recognizing the compensation cost related to the plan.
Rights Agreement. The Board of Directors adopted a Rights Agreement in 2001 and amended the agreement in June and November 2006. In January 2010 in conjunction with the execution of a definitive Merger agreement with Chemring Group PLC., the Board of Directors amended the agreement for the third time. The third amendment provides that the Merger agreement with Chemring Group PLC is inapplicable to the Rights Agreement. The Agreement provides each stockholder of record a dividend distribution of one “right” for each outstanding share of common stock. Rights become exercisable the earlier of ten days following: (1) a public announcement that an acquiring person has purchased or has the right to acquire 25% or more of the Company’s common stock, or (2) the commencement of a tender offer which would result in an offeror beneficially owning 25% or more of the outstanding common stock. All rights held by an acquiring person or offeror expire on the announced acquisition date and all rights expire at the close of business on May 31, 2011.
Each right under the Rights Agreement entitles a stockholder to acquire at a purchase price of $50, one-hundredth of a share of preferred stock which carries voting and dividend rights similar to one share of common stock. Alternatively, a right holder may elect to purchase for $50 an equivalent number of common shares (or in certain circumstances, cash, property or other securities of the Company) at a price per share equal to one-half of the average market price for a specified period. In lieu of the purchase price, a right holder may elect to acquire one-half of the common shares available under the second option. The purchase price and the preferred share fractional amount are subject to adjustment for certain events as described in the Agreement.
Rights also entitle the holder to receive a specified number of shares of an acquiring company’s common stock in the event that the Company is not the surviving corporation in a Merger or if 50% or more of the Company’s assets are sold or transferred.
At the discretion of a majority of the Board and within a specified time period, the Company may redeem all of the rights at a price of $.01 per right. The Board may also amend any provision of the Agreement prior to exercise of the rights.
In conjunction with the Company’s signing a definitive Merger agreement on January 18, 2010, all equity compensation plans have been suspended pending the Company’s Merger. As such, new future equity awards will not be made unless the Merger transaction fails to close.
The following table summarizes option activity:
F - 26
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
The following table summarizes options outstanding at December 31, 2009:
Since the exercise price for of all the options exercisable is greater than the closing share price on December 31, 2009, no intrinsic value is available for any exercisable options. For outstanding options, the closing share price on December 31, 2009 exceeded the exercise price for only the 100,000 options issued on March 23, 2009. The intrinsic value for these options is $47,000. The market value of our stock was $4.77 and $6.20 at December 31, 2009 and 2008, respectively.
The following table summarizes restricted stock (nonvested) shares outstanding as of December 31,
As of December 31, 2009 and 2008, there were approximately $9 and $51, respectively, of total unrecognized compensation cost related to restricted share based compensation arrangements granted under the Plan. As of December 31, 2009 and 2008, the cost is expected to be recognized over a weighted average period of 0.46 years and 0.81 years, respectively.
As of December 31, 2009 and 2008, there were approximately $98 and $49, respectively, of total unrecognized compensation cost related to stock options based compensation arrangements granted under the Plan. As of December 31, 2009 and 2008, the cost is expected to be recognized over a weighted average period of 1.77 years and 2.33 years, respectively.
NOTE Q - OTHER - NET
Other income (expense) included in the Company’s consolidated statements of operations at December 31 is comprised of the following:
Miscellaneous - net includes income received from various sources such as subsidies, penalties, non deductible value added taxes, sublease rent and sale of materials.
F - 27
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
NOTE R - INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the consolidated financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
Loss before income taxes from continuing operations are comprised as follows:
The Company’s provision for income taxes from continuing operations is comprised of:
The Company’s provision for income taxes differs from the anticipated United States federal statutory rate. Differences between the statutory rate and the Company’s provision are as follows:
F - 28
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
The components of the deferred taxes at December 31, 2009 and 2008 are comprised as follows:
At December 31, 2009 and 2008, the Company had US net operating loss carryforwards of $16,322 and $15,682, respectively, which will begin to expire in 2026 and foreign NOLs of approximately $89,416 and $77,215, respectively, which may be carried forward indefinitely. The Company had foreign tax credits of approximately $14,776 and $13,770 at December 31, 2009 and 2008, respectively. In addition, the Company had alternative minimum tax credits of approximately $458 at both December 31, 2009 and 2008. The foreign tax credits will begin to expire in 2012 and the alternative minimum tax credits do not expire.
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 office locations. Because the Company experienced losses in previous years and continued losses in the current year, management recorded a valuation allowance of approximately $56,227 and $50,254 against the Company’s net deferred tax asset as of December 31, 2009 and 2008, respectively. The change in the valuation allowance from December 31, 2008 to December 31, 2009 was an increase of $10,210 related to the valuation allowance recorded against the U.S. and foreign net deferred tax assets during 2008 and a decrease of $4,237 related to the sale of a U.S. subsidiary.
As of December 31, 2009 and 2008, 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 the years ended December 31, 2009 and 2008, there was no interest or penalties recorded or included in tax expense.
In Belgium, the Company is still open to examination by the Belgian tax authorities from 2006 forward. In the United States, the Company is still open to examination 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.
As of December 31, 2009, the Company does not have any foreign earnings that have not already been taxed in the U.S.
See Note O - Contingencies and Commitments for disclosure on Belgian tax contingency.
F - 29
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
NOTE S - LOSS PER COMMON SHARE FROM CONTINUING OPERATIONS
Basic loss per share from continuing operations excludes potential common shares and is computed by dividing net loss 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, restricted stock (unvested stock awards) and convertible debentures, if such effect is anti-dilutive. The table below shows the calculation of basic and diluted loss per share from continuing operations for the years ended December 31, 2009 and 2008, respectively:
For the year ended December 31, 2009, the Company has excluded warrants, unvested stock awards and stock options of 411,593, 6,000 and 10,921 shares, respectively, from the calculation of loss per share from continuing operations since their effect would be anti-dilutive. For the year ended December 31, 2008, the Company had excluded convertible notes, warrants and unvested stock awards of 99,286, 411,593 and 16,668, respectively, from the calculation of loss per share since their effect would be anti-dilutive.
NOTE T - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS
Based on senior management’s evaluation of the business and in accordance with ASC 280 Segment Reporting (formerly SFAS No. 131), Allied’s management believes Mecar and Mecar USA are two distinctive segments because they have their own management teams, different capital requirements, and different marketing approaches.
Mecar mainly develops and manufactures its proprietary ammunition and has some smaller portion of its revenue based on service type activities such as selling ammunition manufactured by other parties, consulting on the development of manufacturing facilities, and providing sales representation to weapon systems manufacturers. Mecar USA, on the other hand, has a revenue base that is largely made up of more service type activities with a much smaller portion of its revenue based on manufacturing.
Allied, the parent Company, provides management and other services to its subsidiaries and has no operating activities. Significant intercompany transactions have been eliminated in consolidation. The segment profit (loss) before provision for income taxes includes all revenue and expenses at the subsidiary level excluding any corporate fees charged to the subsidiary in the form of management fees. Corporate includes all expenses of the Corporate office and foreign holding companies before a charge of management fees to the subsidiaries.
The Company’s foreign operations are conducted by Mecar.
F - 29
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
F - 30
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
Amounts Net of intersegment receivables.
The following geographic area data includes trade revenues based on customer location and assets based on physical location.
(A)
Revenues are attributed to countries based on location of customers
(1)
Net of inter-segment receivables and investments.
F - 31
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
NOTE U - QUARTERLY FINANCIAL DATA (UNAUDITED)
NOTE V - OFF-BALANCE SHEET TRANSACTION
In 2005, the Company and the Marshall Economic Development Corporation (MEDCO) entered into an agreement under which MEDCO agreed to provide funds for the build out of the initial Mecar USA facilities. MEDCO is chartered to assist in the creation of manufacturing jobs in the Marshall, Texas area by facilitating the construction of roads and buildings for companies willing to locate manufacturing facilities in the local area. As part of the incentive package, MEDCO contributed $500 to Mecar USA toward the construction of facilities (used predominately for the installation of roads and utilities) and $1,650 worth of land to house these facilities (100 acres). The agreement between the Company and MEDCO calls for a ten year lease, commencing October 1, 2004 at a total lease cost of $1 (one dollar) per year with a buyout option for the building and land at the end of the lease provided certain hiring targets are achieved. If, at the end of the lease term, the Company has created at least 175 full time jobs at the Marshall facility, MEDCO will convey title to the land and the facilities for which they provided funding, to the Company without any additional payment by the Company. If at the end of the lease term the Company has continuously occupied and used the facilities but has not fully met the 175 job goal, the Company will have the option to purchase the land and facilities at a price to be computed based on the actual number of full time jobs created. This agreement was amended on June 24, 2005 to add an additional 10 acres to this tract for the construction of facilities for Titan Dynamics Systems. The agreement was further amended on April 11, 2006 to add a further 10 acres to this tract for the construction of pyrotechnic facilities for Mecar USA. Although the lease of both 10 acre tracts passed to Chemring Group PLC, when they acquired Titan in March 2008, by a supplemental agreement with Medco on March 18 2008 this agreement has now been annulled as Chemring Group PLC has relinquished the facility. Mecar now has the right to acquire the 120 acre site under the original terms. As noted above, at October 1, 2014, the purchase price will be equal to 175 minus the actual number of full time jobs created as of December 2014 times $9,750.
F - 32
The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
NOTE W - DISCONTINUED OPERATIONS
The Consolidated Financial Statements and related note disclosures reflect Titan Dynamic Systems, Inc., Global Microwave Systems, Inc., and NS Microwave as “Long-Lived Assets to be Disposed of by Sale” for all periods presented. Accordingly, our results of operations for all periods presented have been reclassified to reflect Titan Dynamic Systems, Inc., Global Microwave Systems, Inc. and NS Microwave as discontinued operations in the consolidated statement of operations and the assets and liabilities of such entities have been reclassified as held for sale in the consolidated balance sheets for all periods presented.
Titan Dynamics Systems, Inc.
On October 22, 2007, the Company committed to a formal plan to sell Titan, which had been previously reported in the
Ammunitions & Weapons Effects segment, as part of management’s continuing plan to dispose of certain non-strategic assets of the Company. At September 30, 2007, the Company recorded a loss of $1,395 to write down Titan’s assets to fair value less costs to sell based on a nonbinding offer received from a potential buyer during the fourth quarter of 2007. On January 24, 2008, the Company entered into a Purchase Agreement to sell Titan for $4,750 in cash. An additional loss of $1,300 was recorded to reflect additional costs to sell including a separation agreement with a founder and former Titan employee as well as additional funding provided up to the date of sale. The loss accrual reflects the write-off of Titan’s intangible assets including goodwill. The transaction closed on March 17, 2008 and generated proceeds of $2,433, net of costs to sell of $2,317. The Company did not record a significant tax expense or benefit from this transaction.
Global Microwave Systems, Inc.
On August 14, 2008, the Company committed to a formal plan to sell GMS, which had been previously reported in the Electronic Security segment. On August 19, 2008, the Company entered into an Asset Purchase Agreement to sell substantially all of the assets of GMS for $26,000 subject to a final working capital adjustment determined following the closing. The transaction closed on October 1, 2008 and generated net proceeds of $20,579. The sales price was adjusted for disposal costs which included a working capital adjustment of $600, funds held in escrow of $2,500, investment banking and legal fees of $943 and management retention and incentive plans of $1,379. The Asset Purchase Agreement required a total of $2,500 be held in escrow to provide for certain indemnifications as stated for in the Asset Purchase Agreement. 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 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. Accordingly, such amount was not included in the determination of the original gain on sale. On October 1, 2008, the Company recorded a gain of approximately $2,638, net of tax of $294 as a result of this transaction. In March 2009, the Company recorded an additional $100 in income taxes associated with the sale. In July and December 2009, the Company recovered the escrow amount in full. As such, the Company recorded an additional gain of $2,350, net of $150 in fees associated with the early release in 2009.
NS Microwave Systems, Inc.
In the fourth quarter of 2008, the Company committed to a formal plan to sell NSM, which had been previously reported in the Electronic Security segment. Based on negotiations and nonbinding offers received during the third quarter of 2008, the Company recorded a goodwill impairment of $3,495 in the third quarter of 2008 to write down NSM’s assets to estimated fair value less costs to sell. During June 2009, the Company recorded an additional loss of $900 to write down NSM’s long-lived assets, including intangible assets, to fair value less costs to sell based on a nonbinding offer received and negotiated with a potential buyer. 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.
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The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
At December 31, 2008, only the assets and liabilities of NSM were classified as held for sale as the sale of Titan and GMS transactions had been completed in 2008. The following is a summary of assets and liabilities classified as held for sale at December 31, 2008:
At December 31, 2009, there were no assets and liabilities held for sale for NSM as the transactions had been completed in 2009.
The following discloses the results of discontinued operations for the years ended December 31, 2009 and 2008 for Titan, GMS and NSM, respectively:
Income from discontinued operations for the year ended December 31, 2009 includes an adjustment of $332 for 2007 income tax expense related to the sale of a foreign subsidiary. Management believes the impact of this adjustment is immaterial to 2007.
NOTE X - SUBSEQUENT EVENTS
Merger Agreement
On January 18, 2010, the Company signed a definitive Merger agreement, subject to shareholder approval, with Chemring Group PLC (“Chemring”). The terms of the agreement provide that Chemring will acquire all of the stock of the Company in an all-cash transaction valued at $7.25 per share. The closing of the transaction is subject to regulatory filings and the Company’s shareholder approval and may be impacted by the matters described in Item 3 including but not limited to a delay in the closing of the Merger. The Company has postponed the date of its special meeting of stockholders to approve its pending merger with Chemring from April 8, 2010 to April 22, 2010. The special meeting has been postponed in order to provide ADG stockholders with additional time to review the Form 10-K, and in order to provide ADG with additional time to address the matters described in Item 3. ADG has been providing regular updates to Chemring on its progress in addressing such matters and expects to continue to cooperate with Chemring with respect to these matters.
Also, on January 18, 2010, the Company entered into a Third Amendment to Rights Agreement to the Company’s Rights Agreement dated as of June 6, 2001 to provide that neither the approval of the Merger agreement nor the consummation of the Merger or the other transactions contemplated by the Merger agreement will cause (a) the Rights to become exercisable, (b) a Distribution Date to occur, (c) a Stock Acquisition Date to occur, or (d) a Trigger Event to occur. The Third Rights Agreement Amendment also revised the definition of “Acquiring Person” and “Beneficial Owner.” Pursuant to the Third Rights Agreement Amendment, the Rights Agreement will terminate immediately prior to the effective time of the Merger.
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The Allied Defense Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
DOJ Subpoena
On January 19, 2010, the Company received a subpoena and communications from the U.S. Department of Justice (“DOJ”) requesting the Company produce documents relating to its dealings with foreign governments. The subpoena stated that it was issued in connection with an ongoing criminal investigation. On the same day, the Company also became aware through a press release issued by the DOJ that an employee of Mecar USA had been indicted by the DOJ for allegedly engaging in schemes to bribe foreign government officials to obtain and retain business. The unsealed indictment of this employee and the DOJ’s press release indicate that the alleged criminal conduct was on behalf of a Decatur, Georgia company which is unrelated to the Company or Mecar USA. Mecar USA’s employment agreement with the employee provides that the employee shall not actively engage in any other employment, occupation or consulting activity that conflicts with the interests of the Company. In light of the employee’s apparent breach of his employment agreement, Mecar USA terminated his employment on January 20, 2010.
According to the DOJ’s press release, the former employee was arrested on January 19, 2010, along with twenty-one other individuals, after a large-scale undercover operation that targeted foreign bribery in the military and law enforcement products industry. The indictments of the twenty-two individuals allege that the defendants conspired to violate the Foreign Corrupt Practices Act (“FCPA”), conspired to engage in money laundering and engaged in substantive violations of the FCPA.
The Company is cooperating with the DOJ and complying with the DOJ’s subpoena in addition to conducting an internal review of the activities of Mecar USA’s former employee. The internal review is being conducted by the Company’s Audit Committee with the assistance of independent outside counsel.
The Company’s internal review and the Company’s response to the DOJ’s subpoena are still in an early stage, and the Company cannot predict the outcome of these matters or the impact, if any, that the internal review or the response to the subpoena may have on the Merger with Chemring (the “Merger”) or on our business, results of operations, liquidity or capital resources.
Litigation Relating to the Merger
Two putative stockholder class action lawsuits related to the Merger were filed since the announcement of the execution of the Merger agreement. On February 19, 2010, the Delaware Court of Chancery entered an order consolidating the two actions. On March 3, 2010, following the filing of the Company’s preliminary proxy statement with the SEC, the plaintiffs filed a consolidated amended class-action compliant, which names as defendants, each of the Company’s directors and a Chemring subsidiary. The consolidated action was dismissed without prejudice effective April 1, 2010.
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SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
The Allied Defense Group, Inc.
(Parent Company)
BALANCE SHEETS
(Thousands of Dollars)
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SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
The Allied Defense Group, Inc.
(Parent Company)
STATEMENTS OF OPERATIONS
(Thousands of Dollars)
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SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
The Allied Defense Group, Inc.
(Parent Company)
STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
The Allied Defense Group, Inc.
Years ended December 31, 2009 and 2008
(Thousands of Dollars)
(1)
Represents amount of reserve relieved through completion of contracts.
(2)
Represents write-off of receivables.
(3)
Represents write-off of inventory.
(4)
Represents amounts of valuation allowance relieved through use of deferred tax assets.
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EXHIBIT INDEX
E - 1