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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission file number
December 31, 1998 0-2545
ALLIED RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission file number
December 31, 1998 O-2545
----------------- ------
ALLIED RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
- --------
04-2281015
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8000 Towers Crescent Drive
Suite 750
Vienna, Virginia 22182
- ---------------- -----
(Address of principal executive offices) (Zip Code)
Allied's telephone number, including area code: (703) 847-5268
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange
-------------- ----------------
Common Stock, American Stock Exchange
$0.10 Par Value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part II
of this Form 10-K or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant as of February 2, 1999:
Common Stock - Par Value $.10 $31,927,427
The number of shares of registrant's Common Stock outstanding as of
February 2, 1999, was 4,754,210.
Item 1. Business.
General.
Allied Research Corporation ("Allied" or the "Company") was incorporated
in 1962 under the name Allied Research Associates, Inc. Allied changed its
corporate name to Allied Research Corporation in 1988. Allied's business is
primarily conducted through its subsidiaries, MECAR S.A. ("MECAR"), Barnes &
Reinecke, Inc. ("BRI"), Allied Research Corporation Limited ("Limited") as well
as a group of Belgian corporations acquired in 1994 and 1995 lead by VSK
Electronics, S.A., Teletechnique Generale, S.A. and IDCS, S.A. (collectively,
the "VSK Group"). MECAR is located in Petit-Roeulx-lez-Nivelles, Belgium; BRI is
headquartered in Arlington Heights, Illinois and has operations in East Moline,
Illinois and Troy, Michigan; Limited is located in the United Kingdom; and the
VSK Group operates from several different locations in Belgium.
Description of Business.
Allied.
Allied provides management and marketing services to its subsidiaries.
Allied also provides export licensing and freight forwarding services for its
subsidiaries.
MECAR.
MECAR develops, designs, manufactures and sells ammunition and light
weapons for infantry use. Substantially all of MECAR's revenues are derived from
the sale of ammunition which is used with weapons that are generally considered
defensive weapons. From time to time, MECAR provides system integration services
pursuant to which it purchases and resells weapon systems and/or ammunition.
MECAR designs, develops and manufactures a wide variety of ammunition
and grenades in the medium caliber, artillery, anti-tank and anti-personnel
categories. The following are the principal products produced and sold by MECAR:
Mortar Ammunition. The 81mm family of mortar ammunition has
recently been modernized to compete with the latest generation of this product
line. Production quantities of this latest version have already been
manufactured and delivered to MECAR customers. The 120mm family is a state of
the art ammunition for standard field mortars and for the increased performance
turreted AMS mortar. The current version of this ammunition is presently
undergoing qualification with the US Army, together with the 120mm AMS LAV-M(S)
system. This system is capable of direct as well as indirect fire. The MECAR
ammunition is the only one so far developed that has been designed to perform in
the AMS weapon high pressure and acceleration environment.
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90mm Weapon Systems for Light Armored Vehicles. MECAR has
developed and produces complete families of ammunition that include APFSDS, HE,
SMK and HESH rounds for the COCKERILL Mk II and III and ENGESA EC-90, and DEFA
F1 guns. Over 2000 of these guns are standard equipment on light APCs in the Far
East and South America alone. In the last three years, these families of
ammunition have been improved to meet the highest standards of safety and
performance.
The 90mm KENERGA Weapon System has been jointly developed by
COCKERILL MECHANICAL SYSTEMS ("CMI") and MECAR to provide the modern APC with
anti-tank punch similar to that of tanks equipped with 105mm guns, without
sacrifice to the range, mobility and maintainability of the light APC. In this
partnership CMI is responsible for the weapon and MECAR for the ammunition. The
ammunition family includes the APFSDS, HESH and SMK versions with their
corresponding training rounds.
Tank Ammunition. MECAR produces the entire range of 105mm rounds
of its own design and which perform to NATO requirements, for use in the US M68,
UK L7 and French CN105F1 guns. These include the APFSDS, HEAT, HESH and SMK,
with their corresponding training rounds. Additionally, it has produced under
license the US Army M393A2 HEP-T and M724A1 TPDS-T rounds for the Belgian Army.
MECAR has produced 100mm APFSDS rounds for friendly pro western clients in the
Far East.
Artillery Ammunition. MECAR has produced 155mm HE, SMK(WP) and
ILLUMINATING rounds for various clients. It is currently producing 155mm M107 HE
projectiles for a European client.
Medium Caliber Round. The 25mm APFSDS-T ammunition round is MECAR's
entry into the medium caliber arena.
76mm L23 Ammunition. MECAR manufactures HE, HESH and HESH-PRAC
ammunition for the L23 guns, in service with armored vehicles in several
countries in Europe, South America, Africa and the Far East. Even though this is
an established weapon, requirements for this ammunition are expected to continue
for the next several years.
Universal Bullet Trap Rifle Grenades. The universal bullet trap rifle
grenade is designed to be light, effective, accurate and simple to use. It is
fitted over the muzzle of any standard military rifle with a muzzle outer
diameter of 22mm and fired from the shoulder in the normal manner. This method
of firing a grenade is made possible by MECAR's development of the universal
bullet trap ("BTU"). The BTU is a patented device which can be used with all
existing makes of steel core or soft core bullets in calibers 7.62mm and 5.56mm,
including the latest round (SS109) used in the M-16 rifle. The BTU is fitted
within the tail of the grenade. When the bullet is fired, it lodges in the
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BTU and the expanding gases released by the discharged round propel the grenade
to its target. MECAR manufactures several different bullet trap grenades
including high explosive fragmentation, anti-personnel, armour piercing, smoke
generating, white phosphorus, and parachute flare (night illuminating).
84mm SAKR Recoilless Rifle. MECAR developed and manufactures this
recoilless rifle and its associated family of ammunition. The SAKR fills the gap
between rifle grenades and the 90mm family of guns and ammunition. The SAKR
ammunition (HEAT, HE-T and HE-TP-T) is also interoperable with existing 84mm
systems.
Hand Grenades. MECAR manufactures the M72 controlled fragmentation hand
grenade.
BRI.
BRI is an engineering and technical firm that specializes in design,
prototype fabrication, production, test and inspection documentation for
government and industry. The major portion of BRI's business is in military
vehicle technology and technical support of combat and support vehicles. BRI's
capability includes the design of heavy wheeled and tracked vehicles. Military
and commercial technical manuals are prepared, technical data packages are
maintained, and logistic support analysis conducted. BRI is the U.S. Army's
technical support contractor on the M109 self-propelled 155mm Howitzer family of
vehicles, M88 Recovery Vehicle and M551 Sheridan Light Tank.
BRI's technical publications department provides hard copy and
electronic format documents and manuals for the presentation and support of
products. This includes both commercial and government department of defense
customers.
Limited.
Limited, a systems integrator in the ammunition industry, was
established by Allied in 1989 to augment its overseas business development
efforts. In 1994, the London office of Limited was closed and the employment of
the relevant employees was terminated. Allied and MECAR continue to attempt to
obtain additional systems integration contracts. If any such contracts are
obtained in the name of Limited, such entity will be appropriately staffed and
supported to carry out the contracts.
VSK Group.
The VSK Group engages in the business of developing, manufacturing,
selling, installing and servicing security systems for private industry. The
systems marketed by the VSK Group include intrusion detection, access control
and fire detection systems. The principal products manufactured by the VSK Group
are central control panels; the other
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components are purchased from other vendors. In May, 1995, the VSK Group
acquired all of the outstanding stock of IDCS, S.A., which markets an upscale
line of security services products principally in European markets.
Geographic Areas and Industry Segments.
See Note S to Allied's consolidated financial statements for information
concerning the geographic areas and industry segments of Allied which
information is incorporated herein by reference.
Market and Customers.
Allied derives the principal portion of its revenues from direct and
indirect sales to foreign governments, U.S. Government agencies and prime
contractors, primarily on fixed price contracts. The addition of the VSK Group
adds a non-military component to company-wide operations. Two agencies of a
foreign government and another foreign government accounted for approximately
41%, 20% and 10% in 1998, 64%, 6% and 10% in 1997 and 48%, 10% and 19% in 1996
of Allied's revenues. During 1998, 1997 and 1996, Allied derived approximately
3%, 5% and 11%, respectively, of its annual revenue from U.S. Government
agencies and contractors. The VSK Group accounted for approximately 15%, 12% and
17% of Allied's 1998, 1997 and 1996 revenues, respectively.
MECAR's products are sold directly or indirectly to the defense
departments of governments. MECAR is regulated by Belgian law regarding the
foreign governments with which it may do business.
The sales by MECAR in any given period and its backlog at any particular
time may be significantly influenced by one or a few large orders. This is due
to the nature of its business. An order for MECAR's products is typically for a
large quantity and/or a substantial aggregate price, primarily because materials
required for the manufacture of the products cannot be economically purchased in
small quantities and because of the favorable economies of large volume
production. In addition, the production period required to fill most such orders
may range from several months to a year. Accordingly, MECAR's business is
dependent upon its ability to obtain such large orders. MECAR has no continuing
contract with any customer to purchase MECAR's products. MECAR does, of course,
accept smaller orders when it is profitable to do so or when MECAR management
believes that accepting such an order is otherwise in the best interests of
MECAR. MECAR's products are designed for general military use by a variety of
government customers.
When MECAR obtains a contract for the sale of its products, it generally
receives down payment(s) and/or letter(s) of credit to be applied to the
purchase price upon shipment of the products.
6
MECAR has received from time-to-time foreign military sale contracts
from the U.S. Government for the manufacture of ammunition for the benefit of a
foreign government. Such contracts are subject to termination for convenience or
upon default.
BRI's engineering and technical services are sold directly or indirectly
to the United States Department of Defense, foreign governments and certain
civilian customers. BRI has a number of ongoing design and engineering
assignments with U.S. military agencies, however, BRI has no continuing contract
with any customer to provide products or services. The size of the orders vary
and completion time ranges from several months to a few days. U.S. Government
contracts are subject to termination at the convenience of the U.S.
Government or for default.
The VSK Group derives substantially all of its revenue from sales and
services to private industry such as banks, hospitals, commercial businesses,
office buildings, etc. The VSK Group also sells its systems to other independent
distributors and resellers. The customers of the VSK Group are located in
Belgium and in neighboring countries. While most of the orders received by the
VSK Group are for work which can be completed within one year, it has received
multi-year orders for its products and services. IDCS sells its products
principally in European markets.
Marketing.
Most of the marketing activities of MECAR are handled by MECAR's staff
of sales engineers and executive staff. In addition, MECAR advertises in trade
journals and participates in trade shows. MECAR is also represented by marketing
representatives in different markets. MECAR obtains orders from the agencies of
a foreign government which constitute its principal customers through an
independent marketing representative.
BRI's marketing activities are conducted by its executive and marketing
staff. In addition, BRI participates in various trade shows and advertises in
trade journals. In 1997, BRI entered into various teaming agreements pursuant to
which BRI will be relying upon the marketing efforts of its teaming partners.
The marketing activities of the VSK Group are handled principally by its
staff of sales personnel. Marketing activities outside of Belgium are conducted
by independent distributors. In addition, the VSK Group advertises in trade
journals and participates in trade shows.
7
Research and Development.
The development of ammunition and weapon systems requires knowledge and
experience in aerodynamics, mechanical engineering, chemistry, combustion,
materials behavior and ballistics. MECAR maintains an active research and
development staff, including a staff of design engineers, in order to determine
how materials can be used or combined in new ways to improve performance or to
solve new problems. In 1998, 1997 and 1996, MECAR expended $811,240, $794,370
and $857,434, respectively, for research and development activities. MECAR
designed most of the products which it currently manufactures. MECAR designs and
develops most of its special tooling, fixtures and special explosive loading and
testing systems.
BRI conducts research and development under contract to both government
and commercial clients. Generally, full-size prototypes are supplied where the
research and development requirement calls for a working model or unit.
The business of the VSK Group requires continuous investment in research
and development to update and enhance the security systems. The VSK Group
employs a staff of design engineers specialized in the field of both electronic
hardware and software. During 1998, 1997 and 1996 the VSK Group expended
$802,810, $694,026 and $888,885, respectively, on research and development.
Suppliers and Materials.
Production of ammunition requires an ample supply of chemicals,
pyrotechnical materials and metal component parts and casings. MECAR generally
attempts to ensure that several vendors will be available in the open market to
compete for all supply contracts. However, once the development phase is
complete and the design has been stabilized for certain products, the continued
availability of supplies can become critical to its ability to perform a
particular contract. MECAR seeks to protect itself against shortages and similar
risks by planning alternative means of production, by producing internally, and
by monitoring the availability and sources of supplies.
Production of weapons requires a continued supply of a variety of
components and materials. MECAR depends upon major suppliers to provide such
components and materials where in-house capability does not exist. It has
generally found such materials and supplies to be readily available.
For its manufacturing and assembly operations, BRI is dependent on
suppliers of materials and parts, some of which are customer-directed sole
source procurement. BRI has found such supplies and materials to be generally
available.
8
The VSK Group relies upon a number of selected subcontractors to supply
the requisite electronic hardware for its security systems. To date, the VSK
Group has found such subcontract materials to be readily available. Assembly of
the central control panels (including all computer software) is performed
internally by employees of the VSK Group.
Backlog.
As of December 31, 1998 and December 31, 1997, Allied had backlog orders
believed to be firm, after giving effect to the percentage of completion method
of accounting, of approximately $48.0 million and $92.8 million, respectively.
The backlog of orders as of December 31, 1998 are expected to be filled in 1999.
Competition.
The munitions business is highly competitive. MECAR has a number of
competitors throughout the world, including the United States. Many of its
competitors are substantially larger companies with greater capital resources
and experience. Many of its competitors have existing relationships with
governments and countries in which MECAR markets its products. For example, many
countries will only acquire ammunition and other military items from vendors
located in said countries. In many other countries, it is important to have an
independent marketing representative. Competition is mainly based upon
accessibility of potential markets, technical expertise, quality, capabilities
of the product and price.
BRI is in a very competitive business and many of its competitors are
larger companies with greater capital resources. As defense spending continues
to decline and the defense industry consolidates, the level of competition will
likely increase. A large portion of BRI's business is obtained through the
competitive bidding process.
The nature of the competition encountered by the VSK Group depends upon
the segment of the security systems business. In the development and
manufacturing area, there are a number of larger competitors, many with greater
financial resources than the VSK Group. In the installation and services area,
the VSK Group competes with a number of smaller, local competitors.
9
Personnel.
As of December 31, 1998, Allied, MECAR, BRI and the VSK Group had 440
full and part-time employees as follows:
ALLIED
------
Salaried employees 5
Part-time employees 1
MECAR
-----
Technical and salaried employees 46
Hourly workers 185
Technical consultants 3
BRI
---
Salaried employees 59
Hourly employees 26
Part-time employees 9
VSK Group
---------
Technical salaried employees 65
Hourly workers 41
The classification of employees noted above for MECAR and the VSK Group
is in accordance with Belgian law.
Patents.
MECAR holds a number of patents in many countries and with varying
expiration dates covering certain of its products. Allied does not believe there
is a threat of a material loss of revenue with the expiration of any of these
patents.
Environmental Regulations.
Allied 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.
Principal Customers.
MECAR has historically received a large percentage of its revenue from
two (2) agencies of a foreign government. BRI receives a substantial portion of
its business from and/or through the U.S. Government.
10
Item 2. Properties.
Allied's principal executive offices are located in Vienna, Virginia,
where it leases approximately 4,300 square feet of office space. The lease
expires in September, 2000.
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 was occupied by MECAR in 1989.
The manufacturing area consists of approximately 112,000 square feet and the
administration facilities consist of approximately 28,000 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 owns a 500 acre test range in the vicinity of the Village of Marche
in the Ardennes region of Belgium, which was acquired in 1985.
Throughout 1998, MECAR operated at an average of 85% of productive
capacity of its facility, assuming the operation of 3 shifts. MECAR is currently
operating at 85% of productive capacity.
BRI operates from an office and manufacturing building in Arlington
Heights, Illinois. BRI has leased approximately 57,500 square feet of office,
engineering and manufacturing space through July 31, 1999 and has recently
extended the term of this lease through July 31, 2004. Assuming one full shift
is maximum capacity, BRI is currently operating at approximately 85% of the
productive capacity of its Arlington Heights facility.
BRI also operates from leased facilities located in Troy, Michigan and
East Moline, Illinois. The Troy operations are conducted from a leased facility
consisting of approximately 17,500 square feet of office and engineering space.
The Troy lease expires on January 31, 2000. The East Moline facility contains
1,200 square feet of office and engineering space and is leased on a month to
month basis. Both facilities are used as bases to service Department of Defense
customers in the vicinity. BRI is currently operating at approximately 90% of
the productive capacities of each of its Troy and East Moline facilities.
The VSK Group operates from owned facilities containing approximately
49,400 square feet. Such facilities are currently operating at approximately 85%
of productive capacity.
Capital expenditure programs for equipment planned in 1999 will require
funding of approximately $2.5 million.
Item 3. Legal Proceedings.
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There are no material pending legal proceedings, other than ordinary
routine litigation incidental to Allied's business, to which Allied or any of
its subsidiaries is a party or to which any of their property is subject.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders of Allied
during the fourth quarter of 1998.
PART II
Item 5. Market for Stock and Related Security Holder Matters.
Market Information.
Allied's Common Stock has been listed for trading on the American Stock
Exchange ("AMEX") since September 15, 1992. Its AMEX trading symbol is ALR. Its
media listing is under the symbol Allied Research. The table below shows the
high and low sales prices of Allied's Common Stock during 1998 and 1997 (as
reported by AMEX):
1998 High Low
---- ---- ---
1st Quarter $13-3/16 $ 10
2nd Quarter 13-1/16 11-1/4
3rd Quarter 12-1/4 6-3/8
4th Quarter 8-5/8 6
1997 High Low
---- ---- ---
1st Quarter $10-1/2 $ 5-7/8
2nd Quarter 9-9/16 7-1/4
3rd Quarter 13-5/8 8-3/8
4th Quarter 15-13/16 10-5/8
Stockholders.
There were approximately 1,525 holders of record of the Common Stock of
Allied as of February 18, 1999.
Dividends.
Allied paid a 5% stock dividend on November 6, 1992 to holders of record
of its Common Stock on October 15, 1992. Cash was paid in lieu of the issuance
of fractional shares. There have been no dividends declared or paid by Allied in
1993-1998. The banking agreements of MECAR restrict the ability of such
subsidiary to transfer funds to
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Allied as described in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Item 6. Selected Financial Data.
The following selected financial data relates to Allied's consolidated
financial position and results of operations for 1998, 1997, 1996, 1995 and
1994:
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(000's omitted except per share amounts)
Revenues $143,535 $134,484 $103,660 $65,769 $ 69,847
Net earnings (loss) 9,066 8,565 4,805 (2,013) (10,941)
Earnings (loss) per share:
Basic 1.92 1.88 1.08 (.46) (2.49)
Diluted 1.90 1.85 1.08 (.46) (2.49)
Total assets 113,076 99,501 91,948 94,253 107,386
Long-term debt
obligations and
redeemable preferred
stock 10,281 11,162 7,443 28,435 14,108
Cash dividends
declared per
common share - - - - -
NOTE: All per share amounts have been restated consistent with the provision of
FASB 128, which became effective in 1997.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
Allied provides management services to its subsidiaries. Allied's
consolidated statements have eliminated all significant intercompany
transactions. The following discussion refers to the financial condition,
liquidity and results of operations of Allied on a consolidated basis unless
otherwise stated. All dollars are in millions except per share amounts.
Allied operates in three (3) principal segments: the development and
production of ammunitions and weapon systems ("product sales"); the manufacture,
distribution and service of an integrated line of industrial security products
("security systems and services"); and engineering and technical support
services ("engineering and
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technical"). Product sales, security systems and services and engineering and
technical are provided solely by MECAR, VSK Group and BRI, respectively.
Accordingly, all references in this Item 7 to (i) MECAR shall refer to the
product sales segment, (ii) VSK Group shall refer to the security systems and
services segment and (iii) BRI shall refer to the engineering and technical
segment. All references herein to Allied or the Company shall refer to Allied
Research Corporation as a whole.
Allied earned a net profit of $9.07 ($1.92 per share - basic) for
1998 compared to a net profit of $8.56 ($1.88 per share - basic) for 1997 and a
net profit of $4.81 ($1.08 per share - basic) for 1996. Diluted earnings per
share were $1.90, $1.85 and $1.08 in 1998, 1997 and 1996, respectively. In each
of 1998, 1997 and 1996, each of Allied's operating subsidiaries earned a profit.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that are based on
current expectations, estimates and projections about the Company and the
industries in which it operates. In addition, other written or oral statements
which constitute forward-looking statements may be made by or on behalf of the
Company. Words such as "expects", "anticipates", "intends", "plans", "believes",
"seeks", "estimates", or variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions ("Future Factors") which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecast in
such forward-looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
Future Factors include increasing competition by foreign and
domestic competitors, including new entrants; substantial reliance on MECAR's
principal customers to continue to acquire MECAR's products on a regular basis;
the cyclical nature of the Company's military business; rapid technological
developments and changes and the Company's ability to continue to introduce
competitive new products and services on a timely, cost effective basis; the
ability of the Company to successfully continue its transition from a pure
defense firm to a firm with a substantial commercial component; the mix of
products/services; the achievement of lower costs and expenses; domestic and
foreign governmental fiscal affairs and public policy changes which may affect
the level of purchases made by customers; changes in environmental and other
domestic and foreign governmental regulations; continued availability of
financing, financial instruments and financial resources in the amounts, at the
times and on the terms required to support the Company's future business. The
principal current Future Factor affecting MECAR's business is the continuing
impact of depressed oil prices on its principal customers. These
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are representative of the Future Factors that could affect the outcome of the
forward-looking statements. In addition, such statements could be affected by
general industry and market conditions and growth rates, general domestic and
international economic conditions including interest rate and currency exchange
rate fluctuations and other Future Factors.
Trends In Operations
Allied had one of its most profitable years in 1998.
MECAR turned in another solid performance in 1998. It contributed
approximately 78% of Allied's 1998 revenues. While the vast majority of such
revenues resulted from products supplied to MECAR's principal customers, MECAR
received a modest contract award ($4.0) from a new customer in 1998 which could
lead to substantial follow-on awards. MECAR has also negotiated the terms of a
contract with another new customer, however this contract has not yet been
awarded.
MECAR's performance slowed in the fourth quarter of 1998 as a result of
the lack of current orders from MECAR's principal customers. The last
substantial contract received by MECAR from its principal customers was received
in March, 1998. Allied believes that depressed oil prices, which adversely
impact the purchasing power of such customers, is the principal reason for the
delay in receipt of orders from such customers. Notwithstanding the continued
depressed state of oil prices, MECAR has been in active negotiations with the
principal customers for a new contract. MECAR anticipates an award of this
contract in the second quarter of 1999, however there can be no assurance as to
the receipt of such an award.
Allied is optimistic that continued orders will be placed by such
principal customers. In addition to follow-on orders for ammunition for various
weapons systems currently owned by such customers, these customers are in the
process of acquiring two new weapons systems via the Foreign Military Sales
program ("FMS"). MECAR has received and completed an initial contract for
ammunition for one of these systems. This ammunition is in the process of being
tested by the U.S. Government and MECAR is in negotiations with the U.S.
Government for a follow-on contract for additional rounds of such ammunition.
MECAR has engaged in preliminary discussions with respect to an initial order
for ammunition for the second new weapons system. It is currently anticipated
that MECAR will receive a contract for such an initial order during 1999 and
anticipates receipt of substantial ammunition orders over a several year period
following successful completion of testing of the ammunition supplied for these
new weapons systems.
Given the several-month delay in the recognition of revenue from the
time of receipt of a contract (due to the ramp-up time and the delay in
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receipt of raw materials following the placement of orders therefor), the
Company anticipates a substantial slow-down in MECAR's revenue beginning at the
end of the first quarter of 1999. If substantial contracts are received in the
near future, the reduced contribution by MECAR may be limited to the next few
quarters. Further, MECAR utilized all of its tax-loss carry forwards in 1998 and
therefore will be subject to Belgian tax on any 1999 earnings.
The VSK Group had a record year in 1998. It contributed approximately
$21.27 in revenues and $2.54 in profits. Thus, the VSK Group contributed
approximately 28% of Allied's profits on only 14.8% of Allied's revenues. While
all lines of business increased in 1998, the VSK Group's 1998 results were
enhanced by a $4.2 project for an integrated security system installed in a
large hotel complex outside of the VSK Group's traditional service territory.
This project is scheduled for completion in the first quarter of 1999.
Allied expects the VSK Group to provide another excellent year in 1999,
although it may not reach 1998 levels. In addition to the one-time hotel
project, the VSK Group expects a temporary downturn in its bank business in
1998. One of its principal bank customers is in the process of merging with
another bank and has advised the VSK Group that it will discontinue the
installation of further security systems until the merged entity determines
which bank branches it will continue to operate and which will be closed.
Notwithstanding these matters, the VSK Group has a substantial backlog of orders
and good prospects for additional work.
In 1998, the VSK Group established dealer relationships in the United
Kingdom and in Germany, two of the fastest growing European markets for security
services and products. The VSK Group expects to continue to expand into these
markets.
In addition, Allied and the VSK Group are actively seeking to grow the
VSK Group by acquisition. An active acquisition search is in process.
The internal expansion of the VSK Group's business and its growth by
acquisition are being pursued to further increase Allied's non-defense business
with the twin goals of having (i) a larger commercial business base to reduce
the volatility of Allied's defense business and (ii) a sufficient commercial
component of revenues and profits to cause the investment community to cease
valuing Allied stock solely as a defense company.
BRI's profitability was based in large part on revenues from a large
contract for the benefit of a foreign government. This contract is scheduled for
completion in mid-1999. In 1997, BRI entered into several teaming arrangements
with U.S.-based firms to pursue both domestic and international business. In
1998, BRI began to receive certain
16
contract awards from such arrangements. It is anticipated that BRI's future
prospects will depend in large part on the success of such teaming arrangements
and its ability to secure other large contracts.
Allied commenced 1999 with a consolidated backlog of approximately
$48.0 compared with a consolidated backlog at the beginning of 1998 of $92.8.
MECAR began 1999 with a backlog of approximately $22.0 compared with a 1998
beginning backlog of $65.8. VSK began 1999 with a backlog of approximately $15.0
compared with a 1998 beginning backlog of approximately $12.7. BRI's beginning
backlog in 1999 was $11.0 compared with a 1998 beginning backlog of $14.4.
The future prospects for Allied depend largely on MECAR's ability to
continue to obtain large orders on a periodic basis and Allied's ability to
successfully continue its expansion of its commercial business.
Trends In Liquidity And Capital Resources
Allied's liquidity has improved in the last few years as a result of
its profitable operations. No liquidity problems are forecast for 1999. In the
longer term, Allied's liquidity will continue to depend upon its ability to
obtain substantial orders from its traditional customer base and the success of
its efforts to broaden its revenue base.
Year 2000 Issues
Allied is addressing a broad range of issues associated with the
programming code in existing computer systems as the Year 2000 approaches. The
Year 2000 problem is complex, as many computer systems will be affected in some
way by the rollover of the two-digit year value to 00. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Year 2000 issue creates risks for Allied from unforeseen
problems in its products or its own computer and embedded systems and from third
parties with whom Allied deals on financial and other transactions worldwide.
Failure of Allied's and/or third parties' computer systems could have a material
impact on Allied's ability to conduct its business.
Allied has commenced a phased program to inventory, assess, remediate,
test, implement and develop contingency plans for all mission-critical
applications and products potentially affected by the Year 2000 issue (the "Y2K
Program"). To accelerate overall completion, activities in each phase are often
concurrent rather than serial, but all phases, except developing contingency
plans, are expected to be completed by mid-1999.
Allied's current estimate of the aggregate costs to be incurred for the
Y2K Program is less than $.25, which is expected to be funded from operating
cash flows. If Allied encounters significant unforeseen Year 2000 problems,
either in its products or
17
internal business systems or in relation to third party vendors, manufacturers
or suppliers, actual costs could materially exceed this estimate.
Allied has substantially completed its inventory of Year 2000 impacted
software and is assessing its centralized computer and embedded systems to
identify any potential Year 2000 issues. Allied has a number of projects
underway to replace or upgrade hardware and software that are known to be Year
2000 non-compliant. Allied currently expects to substantially complete
remediation, validation, and implementation of its internal systems by mid-1999.
However, if implementation of replacement or upgraded systems or software is
delayed, or if significant new non-compliance issues are identified, Allied's
results of operations or financial condition could be materially adversely
affected.
Allied is also in the process of contacting its critical suppliers,
manufacturers, distributors and other vendors to determine that the operations,
products and services that they provide to Allied are Year 2000 compliant. Where
practicable, Allied will attempt to mitigate its risks with respect to the
failure of third parties to be Year 2000 ready, including developing contingency
plans. However, such failures, including failures of any contingency plan,
remain a possibility and could have a materially adverse impact on Allied's
results of operations or financial condition.
Allied is in the process of developing contingency plans to address
situations that may result if Allied is unable to achieve Year 2000 readiness of
its critical operations, including operations under the control of third
parties. Additionally, the most reasonably likely "worst case" scenario has not
yet been clearly identified. Completion of such contingency plans is in progress
and is expected to be completed by September 1999. There can be no assurance
that the Company will be able to develop contingency plans that will adequately
address all Year 2000 issues that may arise.
Liquidity.
Allied's liquidity increased in 1998, principally as a result of
profitable operations at each operating segment. Working capital, which includes
restricted cash, was approximately $35.27 at December 31, 1998, which is an
increase of $10.15 from the December 31, 1997 level. Allied's current working
capital is required for operations and to support credit facility agreements.
Cash and equivalents at December 31, 1998 increased over year-end 1997
levels largely due to the profitable operations of the operating segments.
Restricted cash increased over year-end 1997 amounts due to an increased level
of work-in-process at MECAR. Accounts receivable at December 31, 1998 decreased
from December 31, 1997 by $11.2 due to unusually large shipments of products at
the end of 1997. Costs and accrued earnings on uncompleted contracts increased
by $13.08 over 1997 as a result of larger amounts of work in progress at the end
of 1998 which is anticipated to be completed
18
and shipped in the first quarter of 1999. Inventories decreased by $3.54 from
1997 levels due to the increase in contracts in progress and the reduced
backlog. Prepaid expenses increased by $6.0 over 1997 levels corresponding to
the increase in contracts in progress which are scheduled to be shipped in the
first quarter of 1999. Current liabilities increased slightly from 1997 levels.
During 1998, 1997 and 1996, Allied funded its operations principally
with internally generated cash and back-up credit facilities required for
foreign government contracts.
Except for modest lines of credit to support certain of its operations,
Allied's ability to cover its anticipated future operating and capital
requirements is dependent upon its ability to generate positive cash flow from
operations. Given the relative size of the operations of its subsidiaries,
Allied's continued ability to generate sufficient cash flow remains dependent
principally upon the operations of MECAR and the VSK Group.
MECAR typically obtains relatively large orders for its ammunition and
weapon systems which require credit facilities to provide import letters of
credit, advance payment guarantees and performance bonds. These needs have been
met in the last few years via agreements with a multi-member foreign bank pool.
The current credit facility was revised in 1998. As has been the case
in recent years, the bank pool must agree to extend such facility to new orders
as they are received by MECAR. While management believes that it will be able to
finance additional MECAR contracts using the bank pool structure, there can be
no assurance that such financing will be provided.
The credit facility and other loan agreements continue to impose
certain restrictions on MECAR. MECAR's obligations were collateralized at
December 31, 1998 by base cash deposits of $13.2 and a pledge on MECAR's assets
of $32. The bank agreement further precludes MECAR from making payments to any
company in the Allied group in excess of $2.4 per year until MECAR has
unrestricted cash of not less than $7.2. MECAR's obligations under the bank
agreement are also supported by a guarantee provided by Allied.
MECAR has a mortgage loan with a foreign bank which had an outstanding
balance of approximately $3.56 at December 31, 1998. Principal and interest
payments on the mortgage loan extend through January, 2004.
The VSK Group operated throughout 1998 primarily from cash generated
from operations. The VSK Group is obligated on several mortgages and other
long-term obligations with December 31, 1998 balances aggregating $1.2. It is
also obligated on letters of credit required by a contract with a customer.
19
On January 1, 1999, eleven of the fifteen member countries of the
European Union adopted the euro as their common legal currency and established
fixed conversion rates between their existing sovereign currencies and the euro.
The euro trades on currency exchanges and is available for non-cash
transactions. Based on a preliminary assessment, Allied does not believe the
conversion will have a material impact on the competitiveness of its products or
increase the likelihood of contract cancellations. Further, Allied expects that
modifications to comply with euro requirements have been and will continue to be
made in its business operations and systems on a timely basis and does not
believe that the cost of such modifications will have a material adverse impact
on Allied's results of operations or financial condition. There can be no
assurance, however, that Allied will be able to continue to complete such
modifications on a timely basis; any failure to do so could have a material
adverse effect on Allied's results of operations or financial condition. In
addition, Allied faces risks to the extent that suppliers, manufacturers,
distributors and other vendors upon whom Allied relies and their suppliers are
unable to make appropriate modifications to support euro transactions. The
inability of such third parties to support euro transactions could have a
material adverse effect on Allied's results of operations or financial
condition.
BRI operated throughout 1998 from cash generated from operations
supplemented by a credit facility. The credit facility consisted of a $3.5 line
of credit, which was increased to $4.75 in the latter portion of 1998 as well as
a cash collateralized letter of credit facility. At December 31, 1998, the line
of credit had an outstanding balance of $3.42. Allied has guaranteed BRI's
obligations under the above-described credit facility. Principally in order to
finance BRI's principal contract for the benefit of a foreign government, Allied
advanced approximately $1.4 million to BRI in the third and fourth quarters of
1998 (the "Inter-Company Loan").
In early 1999, BRI obtained a new credit facility consisting of a $6.0
line of credit (which permits advances based upon BRI eligible accounts
receivable and unbilled work-in-process). BRI has used a portion of its line of
credit to repay a substantial portion of the Inter-Company Loan.
In September 1998, Allied's Board of Directors authorized the purchase
of up to 200,000 shares of Allied's common stock. To date, the Company has
made very modest repurchases under the share repurchase program. The timing and
size of any future stock repurchases are subject to market conditions, stock
prices Allied's cash position and other cash requirements going forward.
Capital Resources.
Allied spent $2.4 in 1998 on capital equipment as compared with $1.3 in
1997 and $1.1 in 1996, respectively. The expenditures in 1998 were primarily for
facility
20
upgrades and computer equipment. Management currently anticipates that it will
spend approximately $2.5 on capital expenditures in 1999, principally for
additional upgrades to the MECAR and VSK facilities and equipment.
Results of Operations.
Allied had revenues of $143.54 in 1998 as compared to $134.48 in 1997
and $103.66 in 1996, respectively. Allied earned a profit of $9.07 in 1998
compared to profits of $8.56 in 1997 and $4.81 in 1996.
The following table sets forth, for the years ended December 31, 1998,
1997 and 1996, certain items from Allied's consolidated statements of operations
expressed as a percentage of revenue:
1998 1997 1996
---- ---- ----
Revenue 100.0% 100.0% 100.0%
Costs and Expenses
Cost of sales 81.3 80.9 75.9
Selling and administrative 8.8 10.7 15.1
Research and development 1.1 1.1 1.7
Restructuring charge --- .7 ---
---- ----- ----
Operating income 8.8 6.6 7.3
Other income (deductions)
Interest income 1.0 .8 1.9
Interest expense (1.2) (1.4) (3.3)
Other - net .6 1.1 (0.4)
---- ----- ----
Earnings before
income taxes 8.1 7.1 5.5
Income taxes 1.7 .7 0.9
Net earnings 6.3 6.4 4.6
---- ----- ----
The following discussion of the components of the results of operations
applies to Allied as a whole unless reference is made to a particular segment.
Revenues
Allied revenues for 1998 increased $9.05, or 6.73%, as compared to 1997.
Revenues for 1997 increased $30.8, or 29.7%, as compared to 1996.
21
Revenues By Segment
($ Millions)
1998 1997 1996
---- ---- ----
% of % of % of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
MECAR $111.8 77.9% $107.5 80.0% $74.1 71.5%
VSK 21.3 14.8% 16.4 12.2% 17.9 17.3%
BRI 10.5 7.2% 10.5 7.8% 11.6 11.2%
Revenues at MECAR for 1998 increased by approximately 4.0% from the
prior year and such revenues increased in 1997 by approximately 45% (net of
currency fluctuations) over the prior year due to increased business from
MECAR's traditional customer base.
In 1998, revenues at the VSK Group increased approximately 29.9% over
1997 levels primarily due to several large projects including the
previously-described hotel complex project. In 1997, revenues at the VSK Group
decreased approximately 8.4% under 1996 levels primarily due to currency
fluctuations (if currency fluctuations are eliminated, 1997 VSK Group revenues
increased 6% over 1996 levels).
Revenues at BRI for 1998 decreased by less than 1% from 1997. Revenues
in 1997 decreased 9.3% from 1996 levels.
Cost of Sales
Cost of sales as a percentage of sales for 1998 was approximately 81%
compared with 81% and 76% for each of 1997 and 1996, respectively.
Selling and Administrative Expenses
Selling and general administrative expenses in 1998 were $1.8 (or
12.5%) less than those incurred in 1997 as a result of continued cost cutting
efforts.
Selling and general administrative expenses in 1997 were $1.2 (or 7.8%)
less than those incurred in 1996.
22
Research and Development
Research and development costs incurred in 1998 increased by $0.13 (or
8.4%) over 1997 levels.
Research and development costs incurred in 1997 decreased by $0.26 (or
14.8%) under 1996 levels due to lower expenditures at MECAR.
Restructuring Costs
Restructuring costs incurred by MECAR, principally comprised of
workforce reductions, of approximately $.98 were incurred in 1997. Such charges
were incurred to reduce employment levels at MECAR.
Interest Income
Interest income increased in 1998 by $0.47, or 45.4%, over 1997 levels
principally due to increased amounts of cash invested.
Interest income decreased in 1997 by $.89, or 46% below 1996 levels
principally due to reduced cash levels principally resulting from repayment of a
term loan.
Interest Expense
Interest expense decreased in 1998 by $0.07, or 4%, under the amount
incurred in 1997 as a result of lesser borrowings during the year.
Interest expense decreased in 1997 by $1.6, or 46.5%, from the amount
incurred in 1996 as a result of a decrease in bank debt and credit facility
fees.
Other - Net
Other-net results were a $0.81 loss in 1998 and a gain of $1.52 in
1997, largely due to net currency losses and gains, respectively, at MECAR.
23
Pre-Tax Profit
Pre-Tax Profit By Segment
($ Million)
1998 1997 1996
---- ---- ----
% of % of % of
Amount Total Amount Total Amount Total
MECAR $6.9 57% $8.6 76% $3.7 66%
VSK 4.5 37% 2.0 18% 1.4 25%
BRI 0.7 6% 0.7 6% 0.5 9%
MECAR's 1998 pre-tax profit decreased by 20% from 1997 levels
notwithstanding that 1997 pre-tax profits were adversely affected by
approximately $.98 in workforce reduction restructuring costs. MECAR'S results
for 1997 were enhanced by a substantial systems intergration contract. Such
contracts typically provide higher profit margins than traditional contracts.
MECAR'S 1997 pre-tax profit increased by 132% over 1996 pre-tax profits due to a
substantial increase of revenue in 1997 from MECAR's traditional customer base,
including the systems integration contract.
The VSK Group's 1998 pre-tax profit increased by 125% from its 1997
pre-tax profit principally due to a substantial increase in VSK Group revenue in
1998. The 1997 pre-tax profit of the VSK Group increased by 43% over the 1996
pre-tax profit as a result of higher profit margins and the implementation of
cost containment measures at the VSK Group in 1997.
BRI's pre-tax profit remained substantially unchanged throughout the
1996-1998 period.
Income Taxes
The 1998 effective tax rate was 21.7%, primarily due to the utilization
of tax loss carryforwards at MECAR and the reduction of $0.9 in deferred and
accrued tax obligations in the United Kingdom that were favorably resolved in
1998. The foreign operating loss carryforwards at MECAR were fully utilized in
1998 and some 1998 MECAR earnings became subject to Belgian tax at the 40.7%
statutory rate.
The 1997 effective tax rate was 10.1% primarily due to the utilization
of tax loss carryforwards at MECAR.
24
Net Earnings
The Company had a $9.07 profit in 1998 compared with a $8.56 profit in
1997. All segments earned a profit in 1998.
The Company had a $8.56 profit in 1997 compared with a $4.81 profit in
1996. All segments earned a profit in 1997.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Sensitivity.
Allied manages its debt and its available cash considering available
investment opportunities and risks, tax consequences and overall financing
strategies.
At year-end 1998, Allied had approximately $3.6 million of fixed-rate
indebtedness and approximately $5.6 million of variable-rate indebtedness.
Allied has not entered into any interest rate swaps or other derivatives with
respect to its indebtedness.
Cash available for investment is typically invested in short term funds,
which generally mature in 30 days or money-market funds. In general, such funds
are not subject to market risk because the interest paid on such funds
fluctuates with the prevailing interest rate. The carrying amounts approximate
market value. It is the Company's practice to hold these investments to
maturity.
Assuming year-end 1998 variable rate debt and cash available for
investment, a one percent change in interest rates would impact net interest
income by less than $280,000.
Exchange Rate Sensitivity.
Allied conducts business in several foreign countries and approximately
93%, 92% and 89%, of the Company's revenue for the years ended December 31,
1998, 1997 and 1996, respectively, was derived from Allied's operations outside
the United States. Accordingly, exposure exists to potentially adverse movement
in foreign currency rates. Allied uses foreign exchange forward contracts to
hedge the risk of change in foreign currency exchange rates associated with
some, but not all, of its contracts in which the expenses for providing services
are incurred in currency other than the functional currency of Allied's foreign
subsidiaries or payments on contracts are made by the customer in another
currency. The objective of these contracts is to hedge fixed obligations to
reduce the effect of foreign currency exchange rate fluctuations on Allied's
foreign subsidiaries' operating results.
25
Additionally, Allied's consolidated financial statements are
denominated in U.S. dollars and, accordingly, changes in the exchange rates
between the Allied subsidiaries' local currency and the U.S. dollar will affect
the translation of such subsidiaries' financial results into U.S. dollars for
purposes of reporting the consolidated financial results. Allied does not hedge
these matters because cash-flows from international operations are generally
re-invested locally. It is estimated that a 10% change in foreign exchange rates
would impact reported operating profit by less than $1.2 million.
Allied does not use derivative financial instruments for speculative
trading purposes, nor does Allied hedge its foreign currency exposure in a
manner that entirely offsets the effects of changes in foreign exchange rates.
Allied regularly reviews its hedging program and may as part of this
review determine at any time to change its hedging program.
Item 8. Financial Statements and Supplementary Data.
The financial statements required by this item are set forth following
the signature pages hereof.
See Note T to Allied's consolidated financial statements for
supplementary financial data required by this item.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
There were no disagreements on any matter of accounting principles,
financial statement disclosure or auditing scope or procedure to be reported
under this item.
PART III
Item 10. Directors and Executive Officers of Allied.
Directors.
The following are the directors of Allied:
J. R. Sculley, age 58, became a director of Allied in 1991. He has
served as president and chief operating officer of Allied since April, 1992, and
was named chairman of the board and chief executive officer in December, 1992.
He is also a director of MECAR, BRI and Limited. Between 1989 and April, 1992,
Mr. Sculley was Director of Advanced Studies and Technologies of Grumman
Corporation, a defense company, and,
26
prior thereto, was Assistant Secretary of the Army (Research, Development and
Acquisition).
Clifford C. Christ, age 51, became a director of Allied in 1993. He has
been the president and chief executive officer of NavCom Defense Electronics,
Inc., a defense electronics company, since 1988.
Earl P. Smith, age 60, became a director of Allied in 1993. Mr. Smith
has been a principal of Earl Smith & Associates, a defense consulting firm,
since 1990. During 1990 he was vice president-commercial operations of
Management Services Corporation, a subsidiary of Lear Siegler Corp., and from
1986 to 1990 he was vice president - marketing and contracts of Management
Services Corporation.
Robert W. Hebel, age 75, became a director of Allied in early 1996.
Throughout the last five years, Mr. Hebel has been a private investor.
Harry H. Warner, age 63, became a director of Allied in early 1996.
Throughout the last five years, Mr. Warner has been a self-employed financial
consultant, investor and real estate developer. He is also a director of
Chesapeake Corporation, Pulaski Furniture Corporation and Virginia Management
Investment Corporation.
Executive Officers.
The following are the executive officers of Allied:
J. R. Sculley, age 58, was elected chairman of the board and chief
executive officer of Allied in December, 1992, and has served as Allied's
president and chief operating officer since April, 1992. He served as Director
of Advanced Studies and Technologies of Grumman Corporation, a defense company,
from 1989 to April, 1992, and previously was Assistant Secretary of the Army
(Research, Development and Acquisition). Mr. Sculley also serves as a director
of MECAR, BRI and Limited.
W. Glenn Yarborough, Jr., age 58, was elected president and chief
operating officer in July 1998, and has served as vice president of Allied since
January, 1995 and as Vice President of Services since February, 1993.
Previously, he served as director of business development of Grumman
Corporation, a defense company. Mr. Yarborough also serves as a director of BRI,
Limited and the VSK Group.
27
Item 11. Executive Compensation
Compensation of Directors and Executive Officers
The following table sets forth information concerning all compensation
paid for services rendered in all capacities to Allied and its subsidiaries
during the years ended December 31, 1998, 1997 and 1996, by the chief executive
officer of Allied and by other executive officers of Allied whose total annual
salary and bonus exceeds $100,000:
28
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
Awards Payouts
------ -------
Other All
Name Annual Restricted Securities Other
and Compen- Stock Underlying LTIP Compen
Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($)1 ($) ($) SARs (#) ($) ($)
- -------- ---- --------- --------- --- --- -------- --- ---
J.R. 1998 $275,000 $ 68,125
Sculley, 1997 $245,000 $120,000
Chief 1996 $245,000 $100,000 15,000
Executive
Officer
W. Glenn 1998 $197,000 $ 61,312
Yarborough, 1997 $183,000 $108,000
Jr., President and 1996 $168,000 $ 90,000 27,600
Chief Operating
Officer
- --------------------
(1) Messrs. Sculley and Yarborough were awarded bonuses of (i) $68,125 and
$61,312.50 respectively, for 1998 performance, payable in 1999 in stock and/or
cash, (ii) $120,000 and $108,000, respectively, for 1997 performance, payable in
1998 in stock and/or cash and (iii) $100,000 and $90,000, respectively, for 1996
performance payable in 1997 in stock and/or cash. In each of February 1999, and
March 1998 and 1997, Mr. Sculley was awarded 5,548 shares of stock and cash
bonuses of $30,329, $53,424 and $44,420, respectively. Mr. Yarborough was
awarded 9,000 shares of Company stock in each of February 1999, and March 1998
and 1997. The shares issued in February 1999 had a market value of $6.8125 per
share on the date of grant; the shares issued in 1998 had a market value of
$12.00 per share on the date of grant; and the shares issued in 1997 had a
market value of $10.00 per share on the date of grant.
29
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Value
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARS at Options/SARS at
FY-End (#)1 FY-End ($)1
----------- -----------
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- --------------- ------------ ------------- -------------
J.R. Sculley 1,220 $ 8,159 42,500/22,400 27,813/0
W. Glenn Yarborough 4,200 $37,980 18,200/0 18,900/0
- -------------------
(1) Based on the Closing price of the Company's stock of $8.25 on December 31,
1998.
30
Director Compensation
Directors who are employees of Allied receive no additional compensation
for serving as a director. Each non-employee director (an "Outside Director") is
compensated for services as a director, including as a member of committees of
the Board, in accordance with the Allied Research Corporation Outside Directors
compensation Plan (The "Directors Compensation Plan") by which Allied pays each
of its Outside Directors $1,000 per month during such Outside Director's tenure
and awards 1,000 shares of Allied's Common Stock to each individual who serves
as an Outside Director on each July 1. In addition, Outside Directors are
compensated (a) $1,000 for each Board meeting in excess of four (4) personally
attended during each calendar year, (b) $500 for each committee meeting attended
which is not held in conjunction with a Board meeting, and (c) $250 for each
teleconference Board meeting in excess of two (2) in which a director
participates during each calendar year.
In 1992, the Board of Directors of Allied adopted the Allied Research
Corporation Outside Directors Retirement Plan (the "Directors Retirement Plan")
to provide retirement benefits for long-standing Outside Directors. Under the
Directors Retirement Plan, Outside Directors are eligible for a retirement
benefit if they retire form the Board and have served as a member of the Board
for a minimum of five (5) years. An eligible Outside Director who retires from
the Board is entitled to receive, commencing on the last day of the first month
following the month in which the director attains age seventy (70), monthly
payments equal to the monthly cash compensation received from Allied at the time
the director terminated service in such capacity. Such payments will cease upon
the earlier of the expiration of a period of time equivalent to the period of
time the director served as a member of the Board or the death of the director.
In the event that a director has breached any fiduciary or legal duty Allied,
the director will forfeit any right to payment of benefits under the Directors
Retirement Plan. The Directors Retirement Plan is administered by the Board of
Directors.
In 1991, the Board of Directors of Allied adopted the Allied Research
Corporation Outside Directors Stock Option Plan (the "Directors Option Plan") by
which Allied may grant options for up to 208,000 shares of Allied's Common Stock
to its Outside Directors (which amount includes the 5% stock dividend paid on
November 6, 1992). None of the options granted pursuant to the Directors Option
Plan are intended to qualify as incentive stock options under Sections 422
through 424 of the Internal Revenue Code. The purpose of the Directors Option
Plan is to advance the interest of Allied by providing its Outside Directors
with financial incentives in the form of non-statutory stock options in order to
attract, retain and motivate such Outside Directors. Options for an aggregate of
75,000 shares were granted under the Directors Option Plan in 1996 to Allied's
Outside Directors; no such options were awarded in 1997 or 1998.
31
Employment Contract and Change-In-Control Arrangements
J.R. Sculley and Allied entered into an Employment Agreement (the
"Sculley Agreement") which expired and is currently being renegotiated by
Allied's Compensation Committee. In consideration for his services as an officer
of Allied and as a director of Allied and each of its subsidiaries, Mr. Sculley
is entitled to receive an aggregate sum of not less than $290,000 per calendar
year.
W. Glenn Yarborough, Jr. and Allied have entered into an Employment
Agreement (the "Yarborough Agreement") which extends through July, 1999, and is
automatically renewable from year to year thereafter unless either Allied or Mr.
Yarborough gives the other timely notice of its or his intent not to renew. Mr
Yarborough is entitled to receive base compensation or $200,000 per calendar
year. The Yarborough Agreement further provides that in the event Mr. Yarborough
ceases to serve in any capacity as an officer of the Company as a result of a
voluntary or involuntary termination within a period of twelve (12) months
following a change in control, Mr. Yarborough shall be entitled to a lump sum
payment equal to the aggregate amount of compensation payable to Mr. Yarborough
throughout the remaining term of the Yarborough Agreement.
In June, 1991, the Board of Directors of Allied adopted the Preferred
Share Purchase Rights Agreement (the "Agreement"). The Agreement provides each
stockholder of record on a dividend distribution of one "right" for each
outstanding share of Allied's common stock. Rights become exercisable at the
earlier of ten days following: (1) a public announcement that an acquiror has
purchased or has the right or acquire 10% or more of Allied's common stock, or
(2) the commencement of a tender offer which would result in an offeror
beneficially owning 30% or more of the outstanding common stock of Allied. All
rights held by an acquiror or offeror expire on the announced acquisition date,
and all rights expire at the close of business on June 20, 2001. Each right
entitles a stockholder to acquire at a stated purchase price, 1/100 of a share
of Allied's preferred stock which carries voting and dividend rights similar to
one share of its common stock. Alternatively, a right holder may elect to
purchase for the stated price an equivalent number of shares of Allied's common
stock (or in certain circumstances, cash, property or other securities of
Allied) 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 stock available under the second option. The
purchase price of the preferred stock fractional amount is subject to adjustment
for certain events as described in the Agreement. At the discretion of a
majority of the Board and within a specified time period, Allied may redeem all
of the rights at a price of $.01 per right. The Board may also amend any
provisions of the Agreement prior to exercise.
32
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of Allied during the fiscal year ended
December 31, 1998 consisted of Messrs. Earl P. Smith, Robert W. Hebel and Harry
H. Warner. None of such individuals has served as an officer or employee of
Allied nor is there any other relationship between any member of the
Compensation Committee and Allied which is required to be disclosed under
applicable regulations.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following information is furnished as of February 2, 1999, with
respect to any person who is known to Allied to be the beneficial owner of more
than five percent (5%) of its Common Stock:
Amount and
Title nature of
of Name and address of beneficial Percent of
class beneficial owner ownership class(1)
- ----- ---------------- --------- ------
Common Fidelity Low-Priced 473,000 9.7%
Stock Fund/Fidelity Owned directly
Management &
Research Company
82 Devonshire Street
Boston, MA 02109
Common Lionheart Group, Inc. 319,388 6.6%
230 Park Avenue Owned directly
Suite 516
New York, New York 10169
Common Dimensional Fund 278,000 5.7%
Advisor, Inc.2 Owned directly
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
- -----------------
(1) Based upon 4,754,210 shares of common stock outstanding plus 116,150 shares
which may be acquired within 60 days pursuant to outstanding stock options.
(2) Dimensional Fund Advisors, Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 278,000 shares, all of which
shares are owned by advisory clients of Dimensional. Dimensional disclaims
beneficial ownership of all such shares.
33
The following information is furnished as of February 2, 1999, with
respect to the beneficial ownership by management of Allied's Common Stock:
Amount and
Title nature of
of Name of beneficial Percent of
class beneficial owner ownership(1) class(2)
- ----- ---------------- ------------ --------
Common Harry H. Warner 11,000 *
Owned
directly
Common Earl P. Smith 6,110 *
Owned
directly
Common Clifford C. Christ 26,000 *
Owned
directly
Common Robert W. Hebel 8,625 *
Owned
directly
Common J. R. Sculley 139,552 2.9%
Owned
directly
Common W. Glenn Yarborough 73,762 1.5%
Owned
directly
Common All executive officers 265,049 5.4%
and directors as a Owned
group (6) directly
- ------------------
(1) Includes 18,200 shares which may be acquired by Mr. Yarborough and 53,700
shares which may be acquired by Mr. Sculley within 60 days pursuant to
outstanding stock options.
(2) Based upon 4,754,210 shares of common stock outstanding plus 116,150 shares
which may be acquired within 60 days pursuant to outstanding stock options.
34
Allied is aware of no arrangement the operation of which may at a
subsequent date result in a change in control of Allied.
Item 13. Certain Relationships and Related Transactions.
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
For the purposes of complying with the amendments to the rules governing
Form S-8 under the Securities Act of 1933, the undersigned registrant hereby
undertakes as follows, which undertaking shall be incorporated by reference into
Allied's Registration Statements on Form S-8:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Allied of
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities bing registered, Allied will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(a)(1) Financial Statements:
Report of Independent Certified Public F-3
Accountants
Consolidated Balance Sheets at December 31, F-4
1998 and 1997
Consolidated Statements of Earnings for F-6
the three years ended December 31, 1998
Consolidated Statements of Stockholders' F-7
Equity for the three years ended
December 31, 1998
Consolidated Statements of Cash Flows F-8
for the three years ended December 31, 1998
Notes to Consolidated Financial Statements F-10
35
(a)(2) Financial Statement Schedules:
The following financial statement schedules are included in Part IV of
this report:
(a)(2)(a) As of December 31, 1998 and 1997 and for the three
years ended December 31, 1998.
Schedule I - Condensed F-31
Financial Information of
Allied
Schedule II - Valuation F-34
and Qualifying Accounts
(a)(3) Exhibits:
Exhibit 3 - Certificate of Incorporation, as amended
(Incorporated by reference from Form 10-K filed
in March, 1992); Amended and Restated By-Laws
(Incorporated by reference from Form 8-K filed
in November, 1992); and Amendment to Amended and
Restated By-Laws adopted by the Board of
Directors in September, 1996 (Incorporated by
reference from Form 10-K filed in March, 1998);
and Amendment to Amended and Restated By-Laws
adopted by the Board of Directors in February,
1999 (Incorporated by reference from Form 8-K
filed in February, 1999).
Exhibit 10 -
(a) Executive Employment Agreement between
Allied Research Corporation and W. Glenn
Yarborough, Jr. (Incorporated by reference
from Form 10-K filed in March, 1995.)
Exhibit 21 - List of Subsidiaries E-3
Exhibit 23 - Consent of Independent Certified E-4
Public Accountants
36
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the Fourth quarter of 1998.
Supplemental Information to be Furnished with Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.
No annual report or proxy material has as yet been sent to Allied's
stockholders, although it is expected that an annual report and proxy material
will be furnished to Allied's stockholders subsequent to the filing of this Form
10-K.
37
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.
Allied Research Corporation
(Allied).........................................................
By (Signature and Title) /s/ J.R. Sculley
-------------------------------------
J. R. Sculley, Chief Executive Officer
Date: March 12, 1999
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.
By (Signature and Title) /s/ J.R. Sculley
-------------------------------------
J. R. Sculley,
Chief Financial Officer
Date: March 12, 1999
* * * * * * *
By (Signature and Title) /s/ J.R. Sculley
-------------------------------------
J. R. Sculley, Director
Date: March 12, 1999
* * * * * * *
38
By (Signature and Title) /s/ Clifford C. Christ
-------------------------------------
Clifford C. Christ, Director
Date: March 12, 1999
* * * * * * *
By (Signature and Title) /s/ Earl P. Smith
-------------------------------------
Earl P. Smith, Director
Date: March 12, 1999
* * * * * * *
By (Signature and Title) /s/ Robert W. Hebel
-------------------------------------
Robert W. Hebel, Director
Date: March 12, 1999
* * * * * * *
By (Signature and Title) /s/ Harry H. Warner
-------------------------------------
Harry H. Warner, Director
Date: March 12, 1999
* * * * * * *
39
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FINANCIAL STATEMENTS AND SCHEDULES
DECEMBER 31, 1998
FORMING A PART OF
ANNUAL REPORT PURSUANT TO
THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-K
OF
ALLIED RESEARCH CORPORATION
ALLIED RESEARCH CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
- --------------------------------------------------------------------------------
Page
Report of Independent Certified Public Accountants F-3
Consolidated Balance Sheets at December 31, 1998 and 1997 F-4
Consolidated Statements of Earnings for the three years ended December 31, 1998 F-6
Consolidated Statements of Stockholders' Equity for the three years
ended December 31, 1998 F-7
Consolidated Statements of Cash Flows for the three years ended December 31, 1998 F-8
Notes to Consolidated Financial Statements F-10
Schedules as of and for the three years ended December 31, 1998
Schedule I - Condensed Financial Information of Registrant F-31
Schedule II -Valuation and Qualifying Accounts F-34
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Allied Research Corporation
We have audited the accompanying consolidated balance sheets of Allied Research
Corporation and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Allied Research
Corporation and subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
We have also audited Schedules I and II for each of the three years in the
period ended December 31, 1998. In our opinion, these schedules present fairly,
in all material respects, the information required to be set forth therein.
/s/ Grant Thornton LLP
- ------------------------
BALTIMORE, MARYLAND
FEBRUARY 16, 1999
ALLIED RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
- --------------------------------------------------------------------------------
ASSETS
1998 1997
------------ -----------
CURRENT ASSETS
Cash and equivalents (note A) $10,234,653 $7,693,757
Restricted cash (notes C and F) 14,013,905 8,727,186
Accounts receivable (notes A, C and E) 29,445,873 40,649,726
Costs and accrued earnings on
uncompleted contracts (note A) 20,886,607 7,804,344
Inventories (note D) 3,422,303 6,965,666
Prepaid expenses 10,093,885 4,094,190
---------- ---------
Total current assets 88,097,226 75,934,869
PROPERTY, PLANT AND EQUIPMENT - AT COST
(notes A and H)
Buildings and improvements 12,439,745 11,714,475
Machinery and equipment 31,775,830 28,778,285
Leasehold improvements 118,927 118,927
------- -------
44,334,502 40,611,687
Less accumulated depreciation 33,102,833 30,259,311
---------- ----------
11,231,669 10,352,376
Land 1,298,091 1,208,013
--------- ---------
12,529,760 11,560,389
OTHER ASSETS
Restricted cash deposits (notes B and F) 6,670,289 6,414,419
Intangibles, less accumulated amortization of
$3,136,339 and $2,783,724 in 1998 and 1997,
respectively (note A) 4,960,537 5,028,390
Other 818,318 562,572
------- -------
12,449,144 12,005,381
---------- ----------
$113,076,130 $99,500,639
=========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
ALLIED RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS - CONTINUED
DECEMBER 31,
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
------------- -----------
CURRENT LIABILITIES
Notes payable (note E) $ 3,415,000 $1,720,000
Current maturities of long-term debt 1,324,221 1,280,736
Accounts payable 25,377,241 34,656,335
Accrued liabilities 5,043,742 4,747,291
Accrued losses on contracts (note G) 786,986 572,279
Customer deposits 16,135,013 6,993,756
Income taxes 748,795 847,563
------- -------
Total current liabilities 52,830,998 50,817,960
LONG-TERM DEBT, less current maturities (note G) 4,431,282 5,311,564
ADVANCE PAYMENTS ON CONTRACTS (note F) 5,850,000 5,850,000
DEFERRED INCOME TAXES (notes A and P) - 626,660
CONTINGENCIES AND COMMITMENTS (notes I, J, L and N) - -
STOCKHOLDERS' EQUITY (note L)
Preferred stock, no par value; authorized, 10,000
shares; none issued - -
Common stock, par value, $.10 per share; authorized
10,000,000 shares; issued and outstanding, 4,757,174
in 1998 and 4,608,221 in 1997 475,717 460,822
Capital in excess of par value 13,391,099 12,100,521
Retained earnings 35,111,909 26,046,271
Accumulated other comprehensive income (loss) 985,125 (1,713,159)
------- ----------
49,963,850 36,894,455
---------- ----------
$113,076,130 $99,500,639
============ ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
ALLIED RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1998 1997 1996
------------ ------------- ------------
REVENUE (note M) $143,535,202 $134,483,750 $103,660,137
COST AND EXPENSES
Cost of sales 116,642,893 108,775,629 78,658,573
Selling and administrative 12,621,055 14,422,923 15,647,951
Research and development 1,614,050 1,488,396 1,746,319
Restructuring costs (note Q) - 977,267 -
----------- ----------- -----------
130,877,998 125,664,215 96,052,843
----------- ----------- ----------
Operating income 12,657,204 8,819,535 7,607,294
OTHER INCOME (DEDUCTIONS)
Interest income 1,503,138 1,033,599 1,921,864
Interest expense (1,772,284) (1,846,697) (3,451,066)
Other - net (note O) (812,252) 1,519,505 (381,379)
----------- ----------- -----------
(1,081,398) 706,407 (1,910,581)
----------- ----------- -----------
Earnings before income taxes 11,575,806 9,525,942 5,696,713
INCOME TAXES (NOTES A AND P) 2,510,168 961,154 891,230
----------- ----------- -----------
NET EARNINGS $ 9,065,638 $ 8,564,788 $ 4,805,483
============ =========== ===========
EARNINGS PER SHARE (NOTE R):
BASIC $1.92 $1.88 $1.08
==== ==== ====
DILUTED $1.90 $1.85 $1.08
==== ==== ====
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
BASIC 4,722,303 4,543,874 4,432,750
========= ========= =========
DILUTED 4,765,207 4,626,602 4,438,489
========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
ALLIED RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
Common Accumulated
Stock other comprehensive
Preferred --------------------- Capital income (loss)
stock no $.10 in excess Retained foreign currency
par value Shares par value of par value earnings translation adjustment
--------- ------ --------- ------------ -------- ----------------------
BALANCE AT DECEMBER 31, 1995 $ - 4,422,056 $442,206 $10,745,295 $12,676,000 $ 4,490,083
Common stock awards - 9,035 903 40,479 - -
Employee stock purchase plan purchases - 12,001 1,200 60,529 - -
Comprehensive income (loss)
Net earnings for the year - - - - 4,805,483 -
Currency translation adjustment - - - - - (1,815,537)
Total comprehensive income - - - - - -
----- --------- ------- ---------- ---------- ---------
BALANCE AT DECEMBER 31, 1996 - 4,443,092 444,309 10,846,303 17,481,483 2,674,546
Common stock awards - 52,746 5,275 516,185 - -
Employee stock purchase plan purchases - 112,383 11,238 738,033 - -
Comprehensive income (loss)
Net earnings for the year - - - - 8,564,788 -
Currency translation adjustment - - - - - (4,387,705)
Total comprehensive income - - - - - -
----- --------- ------- ---------- ---------- ---------
BALANCE AT DECEMBER 31, 1997 - 4,608,221 460,822 12,100,521 26,046,271 (1,713,159)
Common stock awards - 57,448 5,745 683,631 - -
Employee stock purchase plan
purchases - 94,505 9,450 628,172 - -
Retirement of common stock - (3,000) (300) (21,225) - -
Comprehensive income
Net earnings for the year - - - - 9,065,638 -
Currency translation adjustment - - 2,698,284
Total comprehensive income - - - - - -
----- --------- ------- ---------- ---------- ---------
BALANCE AT DECEMBER 31, 1998 $ - 4,757,174 $475,717 $13,391,099 $35,111,909 $ 985,125
======= ========= ======== =========== =========== ============
Total
stockholders'
-------------
BALANCE AT DECEMBER 31, 1995 $28,353,584
Common stock awards 41,382
Employee stock purchase plan purchases 61,729
Comprehensive income (loss)
Net earnings for the year -
Currency translation adjustment -
Total comprehensive income 2,989,946
----------
BALANCE AT DECEMBER 31, 1996 31,446,641
Common stock awards 521,460
Employee stock purchase plan purchases 749,271
Comprehensive income (loss)
Net earnings for the year -
Currency translation adjustment -
Total comprehensive income 4,177,083
----------
BALANCE AT DECEMBER 31, 1997 36,894,455
Common stock awards 689,376
Employee stock purchase plan
purchases 637,622
Retirement of common stock (21,525)
Comprehensive income
Net earnings for the year -
Currency translation adjustment -
Total comprehensive income 11,763,922
----------
BALANCE AT DECEMBER 31, 1998 $49,963,850
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-7
ALLIED RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 1998 1997 1996
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings for the year $ 9,065,638 $ 8,564,788 $ 4,805,483
Adjustments to reconcile net earnings to net cash
from operating activities
Depreciation and amortization 2,531,777 2,645,995 3,093,534
Loss (gain) on sale of fixed assets - 2,874 (250)
Deferred income taxes (1,513,793) 1,148,753 (590,419)
Provision for estimated losses on contracts 200,938 (80,012) (4,036)
Gain on sale of securities - (11,684) -
Common stock awards 689,376 521,460 41,382
Changes in assets and liabilities
Accounts receivable 12,859,926 (30,952,448) 7,874,015
Cost and accrued earnings on
uncompleted contracts (11,922,369) 4,937,582 (9,142,340)
Inventories 3,800,770 (803,742) (1,413,524)
Prepaid expenses and other assets (5,728,946) (840,140) (2,798,161)
Accounts payable and accrued liabilities (10,143,759) 18,611,804 2,015,448
Customer deposits 8,229,857 (2,458,936) 1,917,475
Income taxes (402,161) 110,020 441,852
---------- --------- -----------
(1,398,384) (7,168,474) 1,434,976
---------- --------- -----------
Net cash provided by operating activities 7,667,254 1,396,314 6,240,459
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (2,381,943) (1,342,320) (1,066,889)
Restricted cash and restricted cash deposits (5,542,589) 4,986,079 (9,557,000)
Proceeds from sale of fixed assets - - 250
---------- --------- -----------
Net cash (used in) provided by investing
activities (7,924,532) 3,643,759 (10,623,639)
========== ========= ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-8
ALLIED RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings 74,050 (2,717,150) 2,908,978
Principal payments on long-term debt (1,183,821) (12,663,855) (19,009,160)
Proceeds from issuance of long-term debt 1,653,127 1,908,449 11,762,981
Net decrease in long-term deposits - 5,850,000 18,492,000
Retirement of common stock (21,525) - -
Proceeds from employee stock purchases 637,622 749,271 61,729
------------ ------------- ------------
Net cash provided by (used in)
financing activities 1,159,453 (6,873,285) 14,216,528
Effects of exchange rates on cash 1,638,721 (3,216,509) (2,275,015)
------------ ------------- ------------
Net increase (decrease) in cash
and equivalents 2,540,896 (5,049,721) 7,558,333
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 7,693,757 12,743,478 5,185,145
------------ ------------- ------------
CASH AND EQUIVALENTS AT END OF YEAR $ 10,234,653 $ 7,693,757 $ 12,743,478
=========== ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- --------------------------------------------------
Cash paid during the year for
Interest $ 1,352,548 $2,681,569 $ 3,088,529
Income taxes 4,429,842 2,140,896 1,245,678
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-9
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts of
Allied Research Corporation (Allied), a Delaware corporation, and its
wholly-owned subsidiaries, Mecar S.A., (Mecar) a Belgian company, Barnes &
Reinecke, Inc. (BRI), a Delaware corporation and Allied Research Corporation
Limited (Limited), a United Kingdom company.
Mecar includes its wholly owned Belgian subsidiaries, Sedachim, S.I., and the
VSK Group of companies, comprised of Tele Technique Generale, I.D.C.S., N.V.
and VSK Electronics N.V. and its wholly-owned subsidiary, Belgian Automation
Units, N.V.
In 1996 and 1997, Classics B.V.B.A. and Detectia, N.V. merged into the VSK
Group.
Significant intercompany transactions have been eliminated in consolidation.
BUSINESS OPERATIONS AND SEGMENTS
The Companies operate primarily in the United States and Belgium. During 1998,
seventy-eight percent of Allied's business activity was in the development and
production of ammunitions and weapons systems in Belgium with sales to
customers in Asia, the Middle East and Europe. Fifteen percent of the business
activity is developing, manufacturing, distributing and servicing industrial
security products in Belgium with industrial customers throughout Europe.
Seven percent of the business activity is providing engineering and technical
support services in the United States with the majority of its sales directly
or indirectly to United States Military Agencies, other defense contractors,
foreign governments and industry. A description of the business segments and
operations of each company follows.
CORPORATE
Allied provides management services to its wholly-owned subsidiaries. Allied
has no direct domestic operating assets or business activity. Limited, which
was formerly engaged in the marketing of military hardware, is inactive.
PRODUCT SALES
Mecar is primarily engaged in the development and production of ammunitions
and weapons systems. Mecar derives substantially all of its revenue from
direct and indirect sales to foreign governments, primarily on fixed price
contracts.
ENGINEERING AND TECHNICAL
BRI provides engineering and technical support services and sells directly
and indirectly primarily to United States Military Agencies, other defense
contractors, foreign governments and industry.
F-10
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
BUSINESS OPERATIONS AND SEGMENTS - CONTINUED
SECURITY SYSTEMS AND SERVICES
The VSK Group develops, manufactures, distributes and services an
integrated line of industrial security products, including devices such as
building access control, intrusion detection, fire detection and alarm
systems.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of Mecar, the VSK Group and Limited are translated
into U.S. dollars at year-end exchange rates. 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.
REVENUE AND COST RECOGNITION
Revenues under fixed price contracts are recognized on the
percentage-of-completion method measured by costs incurred to total estimated
costs. Provision for estimated losses on contracts are recorded when
identified. Revenues under cost-plus-fixed-fee and time and material 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.
Recoverable costs plus accrued profits not billed and amounts withheld and due
upon completion of U.S. Government contracts and subcontracts are carried as
unbilled receivables. These amounts will be billed on the basis of contract
terms and are expected to be collected within one year.
Costs and accrued profits on uncompleted fixed price contracts with foreign
governments, which are billable upon completion, are carried as costs and
accrued earnings on uncompleted contracts.
Revenues from the sale of fire and security systems are recognized when the
installation is completed, less a provision for anticipated service costs.
Security system maintenance contract revenues are recognized over the term of
the contract on a straight-line basis.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, 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.
INVENTORIES
Inventories which consist primarily of raw materials, are stated principally
at the lower of cost or market. Cost is determined principally by the
first-in, first-out method.
F-11
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
PROPERTY, PLANT AND EQUIPMENT
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives, primarily
on a straight-line basis. Accelerated depreciation methods are used for tax
purposes on certain assets. The estimated service lives used in determining
depreciation are as follows:
Buildings 20 - 30 years
Machinery and equipment 3 - 10 years
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.
INTANGIBLES
Intangibles represent costs in excess of net assets acquired in connection
with businesses acquired and are being amortized to operations on a
straight-line basis over twenty years. The recoverability of carrying values
of intangible assets is evaluated on a recurring basis. The primary indicators
are current or forecasted profitability of the related business. There have
been no adjustments to the carrying values of intangible assets resulting from
these evaluations.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are utilized by the Company to hedge certain
sales and purchase contracts. The Company does not hold or issue derivative
financial instruments for trading or speculative purposes.
Currency gains and losses on contracts designated as hedges of foreign
currency commitments are deferred and recognized when the measurement of the
related foreign currency transactions are recognized.
STOCK-BASED COMPENSATION
Compensation costs for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the
amount an employee must pay to acquire the stock. Compensation cost for stock
awards is recorded based on the quoted market value of the Company's stock at
the time of grant.
RESEARCH AND DEVELOPMENT
Costs incurred in research and development activities are charged to
operations as incurred.
WARRANTIES
The Company grants warranties on certain ammunition products for periods
varying from one to five years. Provision is made for estimated losses arising
from warranty claims as incurred. Provision is made for estimated warranty
costs on the sale of security systems at the time of the sale.
F-12
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
INCOME TAXES
Income taxes are provided based on the liability method for financial
reporting purposes. 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.
EARNINGS PER COMMON SHARE
Basic earnings per share amounts have been computed based on the average
number of common shares outstanding. Diluted earnings per share reflects the
increase in average common shares outstanding that would result from the
assumed exercise of outstanding options, calculated using the treasury stock
method. All prior period per share amounts have been restated to reflect the
above policy.
STATEMENT OF CASH FLOWS
For purposes of the Statement of Cash Flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to
be cash equivalents.
RECLASSIFICATIONS
Certain items in the 1997 and 1996 financial statements have been reclassified
to conform to the current presentation.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION (SFAS 131), which is effective for fiscal
years beginning after December 15, 1997. The statement establishes revised
standards under which an entity must report business segment information in
its financial statements to the basis that is used internally for evaluating
segment performance. The Company adopted SFAS 131 in the fiscal year beginning
January 1, 1998 and has restated its prior year segment data to conform to
this presentation.
In December 1997, SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSION AND OTHER
POSTRETIREMENT BENEFITS, was issued and is effective for the Company's 1998
fiscal year. The statement revises current disclosure requirements for
employers' pensions and other retiree benefits. Implementation of this
disclosure standard did not affect the Company's financial position or results
of operations.
In June 1998, SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, was issued and is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The statement establishes accounting and
reporting standards for derivative instruments, and for hedging activities.
Implementation of this standard is not anticipated to have a material effect
on the Company.
F-13
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE B - RESTRICTED CASH
Mecar is generally required under the terms of its contracts with foreign
governments to provide performance bonds, advance payment guarantees and
letters of credit. The credit facility agreements used to provide these
financial guarantees place restrictions on certain cash deposits and other
liens on Mecar's assets. BRI is also required under the terms of a contract
with a foreign government to provide a performance bond and letters of credit.
The credit facility agreement used to provide these financial guarantees also
places restrictions on cash deposits. VSK has also pledged certain term
deposits to secure outstanding bank guarantees.
Restricted cash of $14,013,905 included in current assets and long-term
restricted cash deposits of $6,670,289 included in other assets at December
31, 1998 are restricted or pledged as collateral for these agreements and
other obligations. The corresponding amounts at December 31, 1997 were
$8,727,186 and $6,414,419, respectively.
NOTE C - ACCOUNTS RECEIVABLE
Accounts receivable at December 31 are comprised as follows:
1998 1997
----------- ----------
Receivables under U.S. Government contracts and subcontracts
Amounts billed $ 729,746 $ 836,769
Unbilled amounts due upon completion of contracts,
recoverable costs and accrued profits 526,288 3,457,570
----------- ----------
1,256,034 4,294,339
Receivables from foreign governments 21,077,888 31,322,856
Commercial and other receivables, less allowance for doubtful
receivables of $234,361 in 1998 and $205,350 in 1997 7,111,951 5,032,531
----------- ----------
$29,455,873 $40,649,726
=========== ===========
Unbilled receivables are comprised of progress billing holdbacks, terminated
contracts receivable and other unbilled costs and fees.
NOTE D - PREPAID EXPENSES
Advance payments on contracts in process of approximately $8,271,481 in 1998
and $2,554,145 in 1997 are included in prepaid expenses.
NOTE E - NOTES PAYABLE
In November 1998, the Company modified its financing agreement with a domestic
bank to provide financing for one of its significant contracts. The agreement
provides for a $4,750,000 line-of-credit, of which $3,415,000 was outstanding
at December 31, 1998. Borrowings under a similar line-of-credit were
$1,720,000 at December 31, 1997. The current line-of-credit bears interest at
the prime rate (7.75% at December 31, 1998) plus 1.5% and expires at the
earlier of the contract completion or November, 1999. Borrowings under the
line-of-credit are limited to BRI's eligible accounts receivable, as defined
in the agreement.
F-14
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE E - NOTES PAYABLE - CONTINUED
Borrowings are secured by BRI's eligible accounts receivable, Allied's
guarantee and are subject to covenants requiring the maintenance of certain
financial ratios and other provisions.
NOTE F - CREDIT FACILITY
The Company is obligated under various credit agreements (the Agreements) with
its foreign banking pool and its domestic bank that provide credit facilities
primarily for letters of credit, bank guarantees, performance bonds and
similar instruments required for specific sales contracts. The Agreements
provide for certain bank charges and fees as the line is used, plus fees of 2%
of guarantees issued and annual fees of 1.25% - 1.35% of letters of credit and
guarantees outstanding. As of December 31, 1998, guarantees and performance
bonds of $34.1 million remain outstanding.
Advances under the Agreements are secured by restricted cash of $14,013,905
and long-term restricted cash deposits of $6,670,289. Long-term restricted
cash dposits include $5,850,000 received as an advance payment on contracts.
Amounts outstanding are also collateralized by the letters of credit received
under the contracts financed, and a pledge of approximately $32 million on
Mecar's assets. Certain Agreements provide for restrictions on payments or
transfers to Allied and ARCL for management fees, intercompany loans, loan
payments, the maintenance of certain net worth levels and other provisions.
NOTE G - ACCRUED LOSSES ON CONTRACTS
The Company has provided for accrued losses of $786,986 at December 31, 1998
($572,279 at December 31, 1997) in connection with the completion of certain
contracts in progress. These contracts are expected to be completed in 1999.
NOTE H - LONG-TERM DEBT
Long-term obligations as of December 31 consist of the following:
1998 1997
----------- -----------
Mortgage loan agreements $4,710,535 $4,678,268
Notes payable bank 346,449 415,449
Other 698,519 1,498,583
------- ---------
5,755,503 6,592,300
Less current maturities 1,324,221 1,280,736
--------- ---------
$4,431,282 $5,311,564
========== ==========
F-15
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE H - LONG-TERM DEBT - CONTINUED
MORTGAGE LOAN AGREEMENTS
The Company entered into a mortgage loan agreement in 1986, which was amended
in 1994, to partially finance the construction of Mecar's manufacturing and
administration facilities in Belgium, which had a balance due of $3,557,998 at
December 31, 1998. The first principal installment was due in January, 1996
and the loan matures in January, 2004. As amended, the loan is payable in
annual principal installments of $550,000 (except for the annual principal
installment in the year 2000 which is $810,000). The loan bears interest at
8.75% annually and is collateralized by a mortgage on the Company's real
estate. The Company is also obligated on several mortgages on the VSK Group's
buildings which have a total balance due of $1,152,537 at December 31, 1998.
The mortgages mature at various dates through 2005 in annual installments of
approximately $254,000, plus interest at rates ranging from 6.6% to 8.5% per
year.
NOTES PAYABLE BANK
BRI is obligated on a note payable with a balance of $346,449 at December 31,
1998 which bears interest at the prime rate (7.75% at December 31, 1998) plus
1.5% and matures in May 2002. The note is payable in monthly installments of
principal of $5,750 plus accrued interest. The note is secured by the assets
of BRI and is guaranteed by Allied. The agreement contains covenants requiring
the maintenance of certain financial ratios, among other matters.
OTHER
The Company is also obligated on various vehicle, equipment and other
operating loans. The notes are generally secured by the assets acquired, bear
interest at rates ranging from 4.4% to 10.75% and mature at various dates
through 2000.
Scheduled annual maturities of long-term obligations as of December 31, 1998
are as follows:
Year Amount
---- ------
1999 $1,324,221
2000 1,079,359
2001 1,077,596
2002 878,529
2003 594,446
Thereafter 801,352
NOTE I - BENEFIT PLANS
In June, 1992, the Board of Directors adopted the Allied Research Corporation
Outside Directors Retirement Plan. The plan provides retirement benefits at
age 70 to any board member who retires as a director after a minimum of five
years of service. A retired director is entitled to receive an amount equal to
the monthly cash compensation received prior to retirement for a period
equivalent to the time served as a board member. The Board may cease
retirement payments for cause and modify or terminate the plan at any time.
Currently, one former director is receiving retirement benefits under the
plan. The net present value of benefits anticipated to be payable to former
directors have been previously accrued and reflected as a charge to earnings.
F-16
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE - I BENEFIT PLANS - CONTINUED
In June, 1992, the Board of Directors approved the Officers Nonqualified
Deferred Compensation Plan and the Officers Deferred Compensation Grantor
Trust. Certain officers of the Company are eligible to participate in the
plan, which permits a deferral of a percentage of future base compensation.
Amounts deferred will be invested by the Trustee of the Grantor Trust. The
Company may terminate the plan at any time. No eligible officers had elected
to participate in the plan as of December 31, 1998.
The Company instituted a retirement savings plan in 1989 which received a
favorable determination letter from the Internal Revenue Service.
Contributions to the Plan are at the discretion of Company's management. In
1996, the Company began to match participants' contributions at a rate of 25%
for each participant dollar contributed up to a maximum of 1% of salary.
Matching contributions in 1998, 1997 and 1996 were approximately $41,000,
$47,000 and $43,000, respectively. The Company contributed additional amounts
of $41,000 and $35,000 to the Plan's profit sharing fund, during 1998 and
1997, respectively.
Under the terms of labor agreements at its Belgian subsidiaries, the Company
contributes to certain governmental and labor organization employee benefit
and retirement programs.
NOTE J - CONTINGENCIES AND COMMITMENTS
Cost-plus contracts, subcontracts, and certain other costs are subject to U.S.
Government audit and review. It is not anticipated that adjustments, if any,
with respect to determination of reimbursability of costs under cost-plus
contracts or subcontracts will have a material effect on the Company's
consolidated results of operations or financial position.
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.
Mecar and BRI recognize revenues under fixed price contracts using the
percentage of completion method. Estimates of total costs at completion are
used to determine the amount of revenue earned. The actual costs on these
contracts may differ from the Company's estimate at completion and losses
could exceed the provision of $786,986 established at December 31, 1998.
The Company enters into foreign exchange contracts in the normal course of
business primarily to hedge certain sales and purchase contracts. These
contracts typically mature within twelve months, and forward exchange gains
and losses are recognized upon final maturity or at the time the related
foreign currency transaction is recognized. Contracts with a notional amount
of $22,900,000 were outstanding as of December 31, 1998 ($20,000,000 at
December 31, 1997).
In connection with its commitment to provide management services to its
subsidiaries, the Company has entered into consulting and employment
agreements with certain management personnel for these subsidiaries. The
Company has also entered into employment agreements and consulting agreements
with certain domestic management personnel.
F-17
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE J - CONTINGENCIES AND COMMITMENTS - CONTINUED
The Company leases office space, other facilities and equipment under
operating leases which expire at various dates through 2001. Certain leases
also include escalation provisions for taxes and operating costs. The
following is a schedule by year of base rentals due on operating leases that
have initial or remaining lease terms in excess of one year as of December 31,
1998.
Year Amount
---- ------
1999 $309,198
2000 111,567
2001 21,548
2002 4,705
Total rental expense charged to operations approximated $398,000, $400,000 and
$421,000, for the years ended December 31, 1998, 1997 and 1996, 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. The Company has provided for
known severance costs related to its 1997 workforce reduction as part of its
restructuring charge (see note Q). After giving effect to the workforce
reductions, current work loads, 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 at this time.
NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments and off
balance sheet credit obligations are as follows:
1998 1997
-------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Notes payable $3,415,000 $3,415,000 $1,720,000 $1,720,000
Long-term debt, including current maturities 5,755,503 5,755,503 6,592,300 6,592,300
Off-balance-sheet instruments
Guarantees and letters of credit - 34,138,502 - 28,586,000
Foreign exchange contracts - 22,900,000 - 20,000,000
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value.
o The carrying amounts of notes payable approximate their fair value because
of the short maturity of these obligations.
o The fair value of long-term debt is estimated based on approximate market
prices for the same or similar issues or the current rates offered to the
Corporation for debt of the same remaining maturities. The Company believes
the aggregate carrying value approximates fair value.
F-18
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
o Estimated fair values for off-balance-sheet instruments (performance bonds,
advance payment guarantees and letters-of-credit) are reflected at the face
value of these obligations, since management does not expect to have any
claims against these obligations based on its past experience. The fair
value of foreign exchange contracts are based on their notional values,
since they have short-term maturities at December 31, 1998.
NOTE L - CAPITAL STOCK
During 1998, the Board of Directors authorized the repurchase of up to 200,000
shares of the Company's common stock. During 1998, 3,000 shares were
reacquired and retired.
At December 31, 1998, options to acquire 127,350 shares of the Company's
common stock were outstanding and 848,949 shares were reserved for future
issuance under the following plans:
1997 INCENTIVE STOCK PLAN
During 1997, the Board of Directors and shareholders 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, and
employees of the Company and its subsidiaries who are deemed to be key
employees by the Committee are eligible for awards under the Plan.
In 1998, 53,448 shares were awarded under the Plan.
1992 ALLIED RESEARCH CORPORATION EMPLOYEE STOCK PURCHASE PLAN
During 1993, the Board of Directors and shareholders approved and reserved
525,000 shares for the plan. The plan is voluntary and substantially all
full-time employees with greater than six months of service 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. During 1998, 1997 and 1996 - 7,085,
16,553 and 12,001 shares, respectively were issued under the plan and $9,314,
$31,978 and $9,225 was charged to operations.
1988 INCENTIVE COMPENSATION PLAN
The Company reserved 410,900 shares of common stock for key employees of the
Company and its subsidiaries. The plan permitted grants through 1998,
authorized the Board to grant incentive stock options, non-statutory stock
options, stock appreciation rights, stock awards, restricted stock,
performance stock rights and cash awards. Each type of grant places certain
requirements and restrictions upon the Company and grantee. As of December 31,
1998, options for 19,100 shares at prices of $3.75 to $5.125 per share remain
outstanding.
1984 INCENTIVE STOCK OPTION PLAN
The Company reserved 315,000 shares of common stock for key employees of the
Company and its subsidiaries. The plan, which permitted grants through March
31, 1994. In March 1996, the Company granted options to two officers and
sixteen employees to purchase 217,500 shares at $8.25 per share. These options
expire in 2004. At December 31, 1998, 100,750 of these options remained
outstanding.
F-19
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE L - CAPITAL STOCK - CONTINUED
1993 ALLIED RESEARCH CORPORATION OUTSIDE DIRECTORS COMPENSATION PLAN
During 1993, the Board of Directors and shareholders approved a plan whereby
each director is entitled to receive a cash payment of $1,000 per month and an
annual grant of 1,000 shares of the Company's common stock while serving as a
board member. The Company has reserved 52,400 shares of common stock for the
plan which is subject to certain restrictions. The plan will terminate upon
the earlier of issuance of all reserved common shares or December 31, 2003. In
1998, 1997 and 1996, the Company granted 4,000, 4,000 and 5,000 shares of
common stock subject to the plan and charged $48,000, $34,000 and $26,250,
respectively, to operations.
1991 OUTSIDE DIRECTORS STOCK OPTION PLAN
During 1991, the Board of Directors and shareholders approved and reserved
208,000 shares of common stock for the plan. Prior to 1996, the Company
granted options to purchase a total of 40,000 shares at $2.50 to $4.125 per
share. All such issued options have been exercised. During 1996, the Company
granted additional options to purchase a total of 75,000 shares at $5.125 per
share. At December 31, 1998, 67,500 of the options had been exercised.
OTHER
Stock grants for 48,746 and 3,035 shares of the Company's common stock were
made to various employees during 1997 and 1996, respectively. These shares
were issued outside of any existing plan and their value ($487,460 and
$12,125, respectively) was charged to operations.
PREFERRED SHARE PURCHASE RIGHTS AGREEMENT
The Board of Directors has adopted an Agreement which 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 10% or more of the Company's common
stock, or (2) the commencement of a tender offer which would result in an
offeror beneficially owning 30% 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 June 20,
2001.
Each right under the Preferred Share Purchase Rights Agreement entitles a
stockholder to acquire at a purchase price of $45, 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 $45
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 provisions of the Agreement prior to their
exercise.
F-20
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE L - CAPITAL STOCK - CONTINUED
THE FOLLOWING TABLE SUMMARIZES OPTION ACTIVITY:
1998
-----------------------------
Weighted Average 1997 1996
Shares Exercise Price Shares Shares
------ -------------- ------ ------
Options outstanding at beginning of year 214,770 $7.08 313,100 227,500
Options exercised (87,420) 6.48 (95,830) -
Options granted - - - 135,600
Options expired - - (2,500) (50,000)
------- ----- ------- -------
Options outstanding at end of year 127,350 $7.49 214,770 313,100
======= ===== ======= =======
Option price range at end of year $3.75 $3.75 $3.75
to to to
$8.25 $8.25 $8.25
Option price range for exercised shares $3.75 $3.75 -
to to
$8.25 $8.25
Options exercisable at end of year 94,750 115,300 112,800
Weighted-average fair value of options,
granted during the year - - $2.06
THE FOLLOWING TABLE SUMMARIZES OPTIONS OUTSTANDING AT DECEMBER 31, 1998:
Weighted Average
Number Weighted Average Remaining
Outstanding Exercise Prices Exercise Prices Contractual Life
----------- --------------- --------------- ----------------
127,350 $3.75 to $8.25 $7.49 4.78
The fair value of each option grant is estimated on the date of grant, using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1996: risk free interest rates that range from
5.64% to 5.94%; expected volatility rates that range from 28.91% to 57.98%,
and expected lives of 1 to 5 years.
The following table presents the pro forma decrease in income that would have
been recorded had the fair values of options granted been recognized as
compensation expense on a straight-line basis over the vesting period of the
grant.
1998 1997 1996
---------- ---------- -------
Pro forma
Net earnings decrease $59,568 $80,067 $159,697
Earnings per share decrease
Basic .01 .01 .03
Diluted .01 .02 .03
F-21
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE M - MAJOR CUSTOMERS
The Company derives the majority of its revenues from foreign governments,
direct and indirect sales to U.S. Government agencies and government prime
contractors, primarily on fixed price contracts. During 1998, 1997 and 1996,
the Company derived approximately 3%, 5% and 11%, respectively, of its revenue
from U.S. Government agencies and contractors. Two agencies of a foreign
government and another foreign government accounted for approximately 48% ,
20% and 10% of revenue in 1998, 64%, 6% and 10% of revenue in 1997 and, 42%,
10%, and 19% of revenue in 1996.
NOTE N - 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 places its temporary cash investments with high credit
quality financial institutions. 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. The
Company's provision for doubtful accounts for 1998 and 1997 was not
significant.
The majority of ammunition sales are to two agencies of a foreign government
and other 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, 1998 and 1997, backlog
orders believed to be firm approximated $47.8 and $92.8 million.
Amounts in foreign banks at December 31, 1998 and 1997 were approximately
$22.4 million and $14.1 million, respectively. Changes in the value of the
U.S. dollar and other currencies affect the Company's financial position and
result of operations since the Company has assets and operations in Belgium
and sells its products on a worldwide basis.
NOTE O - OTHER - NET
Other income and expense included in the Company's consolidated statements of
earnings is comprised as follows:
1998 1997 1996
------------ ---------- ----------
Net currency transaction gains (losses) $(1,093,160) $1,328,195 $(836,254)
Miscellaneous - net 280,908 191,310 454,875
------------- ---------- ----------
$ (812,252) $1,519,505 $(381,379)
=========== ========= ========
F-22
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE P - INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the 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.
Earnings (loss) before income taxes is comprised as follows:
1998 1997 1996
------------ ------------ ----------
Domestic $ 213,282 $ (809,173) $ 124,549
Foreign 11,362,524 10,335,115 5,572,164
---------- ---------- ---------
$11,575,806 $ 9,525,942 $5,696,713
========== =========== =========
The Company's provision for income taxes is comprised as follows:
1998 1997 1996
------------ ----------- ------------
Currently payable
Domestic $ 669,102 $ 46,614 $ 197,299
Foreign 2,945,711 921,336 1,323,619
----------- -------- ----------
3,614,813 967,950 1,520,918
Deferred - net (1,104,645) (6,796) (629,688)
----------- -------- ----------
$ 2,510,168 $961,154 $ 891,230
========== ======= ==========
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:
1998 1997 1996
-------- ------- -------
Taxes at statutory rate 34.0 % 34.0 % 34.0 %
Benefit of foreign tax credit carryforward (1.2) - (1.2)
Foreign tax rate differential (13.4) (27.5) (18.3)
Foreign loss limitations 1.3 - -
Other 1.0 3.6 1.1
-------- ------- -------
Income taxes 21.7% 10.1 % 15.6 %
======== ======= =======
In 1998, 1997 and 1996, the Company's Belgian subsidiaries utilized
approximately $3,846,000, $8,529,000 and $4,232,000, respectively, of foreign
operating loss carryforwards for tax reporting purposes. The Company's Belgian
subsidiary has used all of its remaining net operating losses at December 31,
1998. Income tax expense in 1998 was also reduced by approximately $939,000 as
a result of the favorable resolution of deferred and accrued tax obligations
in the United Kingdom.
F-23
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE P - INCOME TAXES - CONTINUED
The Company utilized approximately $143,600 and $67,000 of its foreign tax
credits in 1998 and 1996, respectively. No foreign tax credits were utilized
in 1997. At December 31, 1998, foreign tax credit carryforwards of
approximately $764,000 were available which expire through 2001.
Deferred tax liabilities have not been recognized for basis differences
related to investments in the Company's Belgian and United Kingdom
subsidiaries. These differences, which consist primarily of unremitted
earnings intended to be indefinitely reinvested, aggregated approximately $33
million at December 31, 1998. Determination of the amount of unrecognized
deferred tax liabilities is not practicable.
Deferred taxes at December 31, 1998 and 1997 are comprised as follows:
1998 1997
---------------- -----------------
Current
Unrealized exchange (losses) gain $ 1,594 $ (48,880)
Compensated absences 132,100 111,000
Deferred income - (52,455)
Contract cost provision 249,000 -
Other 15,000 73,000
----------- ------------
Current deferred tax asset 397,694 82,665
Noncurrent
Foreign tax credit carryforwards 498,365 676,005
Foreign and domestic net operating loss carryforwards - 1,776,435
Depreciation and amortization 577,168 124,455
Deferred compensation 16,607 25,103
Deferred income (5,915) -
Other 26,159 -
Unrealized exchange gain - (577,780)
----------- -----------
Noncurrent deferred tax asset 1,112,384 2,024,218
--------- ----------
Total deferred tax asset before valuation allowances 1,510,078 2,106,883
Valuation allowances (498,365) (2,236,594)
--------- ----------
Net deferred tax asset (liability) $1,011,713 $ (129,711)
========= ===========
Deferred tax components are included in the following balance sheet accounts:
1998 1997
------------- ------------
Current (included in "prepaid expenses and deposits") $ 397,694 $ 496,949
Noncurrent (included in "other" noncurrent assets) 614,019 -
Deferred income taxes - (626,660)
------------- ------------
$1,011,713 $(129,711)
============= ============
F-24
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE Q - RESTRUCTURING COSTS
The Company began implementing a streamlining of its manufacturing,
administrative processes and personnel during 1993 at its Belgian subsidiary,
Mecar. The Company has continued to implement additional cost reductions and
efficiency improvements beyond those initiated in 1993. As a result of changes
effected in late 1997, the Company recorded a restructuring charge of $977,267
in the fourth quarter of 1997, principally comprised of workforce reductions,
termination costs and benefits. The reductions are expected to produce further
efficiencies and reduce the overall level of core employment.
Provisions in 1997 $977,267
Payments in 1997 478,817
--------
Payments in 1998 $498,450
=======
NOTE R - EARNINGS PER COMMON SHARE
The following table reconciles the numerators and denominators of the basic
and diluted earnings per share (EPS) computations.
1998 1997 1996
---------- ---------- ----------
Basic EPS
Income available to common stockholders $9,065,638 $8,564,788 $4,805,483
========= ========= =========
Weighted average number of common shares outstanding 4,722,303 4,543,874 4,432,750
========= ========= =========
Basic EPS $1.92 $1.88 $1.08
==== ==== ====
Diluted EPS
Income available to common stockholders $9,065,638 $8,564,788 $4,805,483
Income impact of assumed conversions
- - -
Income available to common stockholders on a
diluted basis $9,065,638 $8,564,788 $4,805,483
========= ========= =========
Weighted average number of common shares outstanding 4,722,303 4,543,874 4,432,750
Effect of dilutive securities - stock options 42,904 82,728 5,739
--------- --------- ---------
Adjusted weighted average number of common
shares outstanding 4,765,207 4,626,602 4,438,489
========= ========= =========
Diluted EPS $1.90 $1.85 $1.08
==== ==== ====
F-25
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE R - EARNINGS PER COMMON SHARE - CONTINUED
During 1996, options to purchase 71,950 shares at $8.75 a share were
outstanding, which were not included in the computation of diluted EPS because
the options' exercise price was greater than the average market price of the
common shares.
NOTE S - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS
The Company currently operates in three principal segments: Product sales
(Mecar), Engineering and Technical (BRI) and Security Systems and Services
(The VSK Group). Product sales includes the production of ammunitions, weapons
systems and ordnance products systems integration. Engineering and Technical
provides support services primarily to United States Military Agencies and
government contractors. Security Systems and Services includes sales and
services to industrial and institutional customers of protection, fire and
access control systems and services. Corporate costs are allocated to each
segment's operations monthly and are included in the measure of each segments
profit or loss. Corporate and other includes unallocated corporate cost and
the former activities of Limited.
The Company's foreign operations are conducted by Mecar and the VSK Group.
1998 1997 1996
------------ ------------ ------------
REVENUES FROM EXTERNAL CUSTOMERS
Product Sales $111,804,077 $107,533,415 $74,109,952
Engineering and Technical 10,457,075 10,549,224 11,636,242
Security Systems and Service 21,274,050 16,401,111 17,913,943
Corporate and Other - - -
------------ ------------ ------------
$143,535,202 $134,483,750 $103,660,137
=========== =========== ============
INTEREST EXPENSE
Product Sales $ 1,203,361 $ 1,513,363 $ 2,971,325
Engineering and Technical 419,422 155,206 111,879
Security Systems and Service 159,284 218,868 361,308
Corporate and Other (9,783) (40,740) 6,554
------------ ------------ ------------
$ 1,772,284 $ 1,846,697 $ 3,451,066
============ ============ ============
INTEREST INCOME
Product Sales $ 853,581 $ 777,502 $ 1,324,658
Engineering and Technical 344,127 131,049 5,738
Security Systems and Service 83,444 51,526 111,405
Corporate and Other 221,986 73,522 480,063
------------ ------------ ------------
$ 1,503,138 $ 1,033,599 $ 1,921,864
============ ============ ============
F-26
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE S - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - CONTINUED
1998 1997 1996
-------------- ------------ ------------
INCOME TAX EXPENSE (BENEFIT)
Product Sales $ 1,162,865 $ 7,038 $ 51,569
Engineering and Technical 308,130 288,200 212,392
Security Systems and Service 1,909,945 890,943 686,903
Corporate and Other (870,772) (225,027) (59,634)
-------------- ------------ ------------
$ 2,510,168 $ 961,154 $ 891,230
============== ============ ============
DEPRECIATION AND AMORTIZATION
Product Sales $ 1,474,159 $2,049,204 $2,488,189
Engineering and Technical 427,407 446,602 392,497
Security Systems and Service 623,074 150,189 212,848
Corporate and Other 7,137 - -
-------------- ------------ ------------
$ 2,531,777 $ 2,645,995 $ 3,093,534
============== ============ ============
SEGMENT PROFIT (LOSS) BEFORE TAXES
Product Sales (1) $ 6,854,793 $8,609,293 $3,715,666
Engineering and Technical 744,738 706,558 497,824
Security Systems and Service 4,452,232 2,003,295 1,442,368
Corporate and Other (475,957) (1,793,204) 40,855
-------------- ------------ ------------
$ 11,575,806 $ 9,525,942 $ 5,696,713
============== ============ ============
SEGMENT ASSETS
Product Sales $80,262,860 $73,593,091 $70,775,112
Engineering and Technical 16,879,699 13,016,075 5,505,577
Security Systems and Service 13,567,284 9,664,265 14,067,186
Corporate and Other (2) 2,366,287 3,227,208 1,600,285
-------------- ------------ ------------
$113,076,130 $99,500,639 $91,948,160
============== ============ ============
EXPENDITURE FOR SEGMENT ASSETS
Product Sales $ 1,634,411 $1,043,058 $ 696,699
Engineering and Technical 170,924 163,963 264,915
Security Systems and Service 576,608 135,299 105,275
Corporate and Other - - -
-------------- ------------ ------------
$ 2,381,943 $ 1,342,320 $ 1,066,889
============== ============ ============
(1) UNUSUAL ITEMS - SEGMENT PROFIT ATTRIBUTABLE TO PRODUCT SALES IN 1997
INCLUDES RESTRUCTURING COSTS OF $977,267, DIRECT CORPORATE COST ALLOCATIONS
TO OPERATING SEGMENTS INCREASED BY APPROXIMATELY $166,000 IN 1998,
CORPORATE AND OTHER IN 1997 INCLUDES $742,000 OF NON-RECURRING COSTS,
WHICH AFFECT YEAR-TO-YEAR COMPARABILITY.
(2) NET OF INTERSEGMENT RECEIVABLES.
F-27
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE S - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - CONTINUED
The following geographic area data include trade revenues based on product
shipment destination and property, plant, and equipment based on physical
location.
Geographic Segment Data
-----------------------------------------------
1998 1997 1996
------------ ------------- -------------
REVENUES FROM EXTERNAL CUSTOMERS
United States $ 7,066,567 $ 7,505,918 $11,634,067
Belgium 14,481,788 13,399,143 19,218,820
Middle East 105,439,877 94,441,684 68,054,857
Far East 3,940,000 3,061,000 -
France 4,096,218 2,934,664 2,832,154
Other foreign countries 8,510,752 13,141,341 1,860,239
------------ ------------- -------------
$143,535,202 $134,483,750 $103,600,137
============ ============= =============
SEGMENT ASSETS
Belgium $93,830,144 $83,257,626 $84,842,298
United Kingdom 260,149 480,608 228,654
United States (1) 18,985,837 15,762,405 6,877,208
------------ ------------- -------------
$113,076,130 $ 99,500,639 $ 91,948,160
============ ============= =============
(1) NET OF INTERSEGMENT RECEIVABLES.
NOTE T - QUARTERLY FINANCIAL DATA (UNAUDITED)
(Amounts in thousands, except per share data)
---------------------------------------------
First Second Third Fourth Total
1998 Quarter Quarter Quarter Quarter For Year
---- ------- ------- ------- ------- --------
Revenue $35,753 $32,154 $31,001 $44,627 $143,535
Gross profit 6,630 7,380 5,228 7,654 26,892
Net earnings 2,257 2,546 1,780 2,483 9,066
Per share data:
Basic .49 .53 .38 .52 1.92
Diluted .48 .53 .37 .52 1.90
F-28
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE T - QUARTERLY FINANCIAL DATA (UNAUDITED) - CONTINUED
(Amounts in thousands, except per share data)
---------------------------------------------
First Second Third Fourth Total
1997 Quarter Quarter Quarter Quarter For Year
---- ------- ------- ------- ------- --------
Revenue $29,765 $24,630 $27,774 $52,315 $134,484
Gross profit 5,490 6,618 5,484 7,452 25,044
Net earnings 1,984 2,307 1,896 2,378 8,565
Per share data:
Basic .44 .51 .42 .52 1.88
Diluted .44 .50 .41 .51 1.85
F-29
SCHEDULES
F-30
ALLIED RESEARCH CORPORATION
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
BALANCE SHEETS
DECEMBER 31,
- --------------------------------------------------------------------------------
The condensed balance sheets, statements of operations and cash flows of the
registrant follow.
ASSETS
1998 1997
---------------------------
Cash and equivalents $ 1,855,901 $ 2,342,037
Investments in subsidiaries 57,273,612 41,722,046
Deferred tax asset 18,201 25,103
Deposits and other 232,036 379,158
------------ ------------
Total assets $59,379,750 $44,468,344
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued liabilities $1,212,627 $ 1,176,115
Due to subsidiaries 8,203,273 6,348,894
Deferred tax liability - 48,880
----------- ----------
Total liabilities 9,415,900 7,573,889
STOCKHOLDERS' EQUITY
Common stock 475,717 460,822
Capital in excess of par value 13,391,099 12,100,521
Retained earnings 35,111,909 26,046,271
Accumulated other comprehensive
income (loss) 985,125 (1,713,159)
----------- ----------
49,963,850 36,894,455
----------- ----------
$59,379,750 $44,468,344
=========== ===========
F-31
ALLIED RESEARCH CORPORATION
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
(PARENT COMPANY)
STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1998 1997 1996
----------- ----------- ----------
Income
Intercompany management fees $2,850,448 $ 2,684,859 $2,652,889
Other - net 463,881 311,587 (77,412)
---------- ----------- ----------
3,314,329 2,996,446 2,575,477
Costs and expenses
Administrative and other 3,845,785 4,512,176 2,878,746
--------- ---------- ---------
(Loss) before equity in
operations of subsidiaries (531,456) (1,515,730) (303,269)
Equity in operations of subsidiaries 9,665,490 9,855,491 4,959,035
--------- ---------- ---------
Earnings before income taxes 9,134,034 8,339,761 4,655,766
Income taxes (benefit) 68,396 (225,027) (149,717)
----------- ---------- -----------
NET EARNINGS $9,065,638 $ 8,564,788 $4,805,483
========= ========== =========
Earnings per common share
Basic $1.92 $1.88 $1.08
==== ==== ====
Diluted $1.90 $1.85 $1.08
==== ==== ====
F-32
ALLIED RESEARCH CORPORATION
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
(PARENT COMPANY)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 1998 1997 1996
------------------------------------------------
Cash flows from (used in) operating activities
Net earnings for the year $ 9,065,638 $ 8,564,789 $ 4,805,483
Adjustments to reconcile net earnings to net cash from
(used in) operating activities
Equity in operations of subsidiaries (9,665,490) (9,855,489) (4,959,035)
Depreciation and amortization 5,307 6,191 -
Gain on disposal of property and equipment - - (250)
Deferred income taxes (41,978) 146,262 (127,724)
Common stock awards and grants 689,376 521,460 41,382
Changes in assets and liabilities
Other assets 141,823 (158,022) 85,350
Due to subsidiaries (1,333,421) 733,448 377,095
Accounts payable and accrued liabilities 36,512 700,909 269,066
Income taxes - (88,601) 38,496
----------- ---------- ----------
(10,167,871) (7,993,842) (4,275,620)
----------- ---------- ----------
Net cash (used in) provided by operating activities (1,102,233) 570,947 529,863
Cash flows from investing activities
Capital expenditures - (17,243) (7,250)
Proceeds for sale of property and equipment - - 250
----------- ---------- ----------
Net cash (used in) investing activities - (17,243) (7,000)
Cash flows from financing activities
Proceeds from employee stock purchase plan shares 637,622 749,271 61,729
Retirement of common stock (21,525) - -
----------- ---------- ----------
Net cash provided by financing activities 616,097 749,271 61,729
----------- ---------- ----------
Net (decrease) increase in cash and equivalents (486,136) 1,302,975 584,592
Cash and equivalents at beginning of year 2,342,037 1,039,062 454,470
----------- ---------- ----------
Cash and equivalents at end of year $ 1,855,901 $ 2,342,037 $ 1,039,062
============= =========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Income taxes $ 178,000 $ 116,692 $ 135,000
Interest - - -
F-33
ALLIED RESEARCH CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
Additions
--------------------------
Balance at Charged to Charged Balance
beginning costs and to other at end of
Description of period expenses accounts Deductions period
- ----------- --------- -------- -------- ---------- ------
Year ended December 31, 1998
- ----------------------------
Estimated losses on
contracts $ 572,279 $ 786,986 $ - $ 572,279 (1) $ 786,986
============ ========= ======== ============ ===========
Allowance for doubtful
receivables $ 205,350 $ 29,011 $ - $ - $ 234,361
============ ========= ======== ============ ===========
Valuation allowances on
deferred tax assets $ 2,236,594 $ - $ - $ 1,738,229 (1) $ 498,365
============ ========= ======== ============ ===========
Year ended December 31, 1997
- ----------------------------
Estimated losses on
contracts $ 390,125 $ 572,279 $ - $ 390,125 (1) $ 572,279
============ ========= ======== ============ ===========
Allowance for doubtful
receivables $ 364,674 $ 192,837 $ - $ 33,513 (2) $ 205,350
============ ========= ======== ============ ===========
Valuation allowances on
deferred tax assets $ 6,064,997 $ - $ - $ 3,828,403 (3) $ 2,236,594
============ ========= ======== ============ ===========
Year ended December 31, 1996
- ----------------------------
Estimated losses on
contracts $ 431,215 $ 390,125 $ - $ 431,215 (1) $ 390,125
============ ========= ======== ============ ===========
Allowance for doubtful
receivables $ 330,077 $ 55,186 $ - $ 20,589 (2) $ 364,674
============ ========= ======== ============ ===========
Valuation allowances on
deferred tax assets $ 19,923,320 $ - $ - $ 13,858,323 (3) $ 6,064,997
============ ========= ======== ============ ===========
(1) REPRESENTS AMOUNT OF RESERVE RELIEVED THROUGH COMPLETION OF CONTRACTS.
(2) REPRESENTS WRITE-OFF OF RECEIVABLES.
(3) REDUCTION IN VALUATION ALLOWANCE DUE TO UTILIZATION OF NET OPERATING LOSS
AND IN 1998 REDUCTION IN DEFERRED TAX OBLIGATIONS.
F-34
EXHIBITS
EXHIBIT INDEX
- --------------------------------------------------------------------------------
Number Description of Exhibit Page
- ------ ---------------------- ----
21 List of Subsidiaries E-3
23 Consent of Independent Certified
Public Accountants E-4
E-2