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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-K
(Mark One)
-----
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
-----
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 0-2545
ALLIED RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2281015
(State of incorporation) (I.R.S. Employer Identification No.)
8000 Towers Crescent Drive (703) 847-5268
Suite 260 (Registrants' telephone number,
Vienna, Virginia 22182 including area code)
(Address of principal executive
offices, including zip code)
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 March 1, 2002:
Common Stock - Par Value $.10 $90,090,413
The number of shares of registrant's Common Stock outstanding as of March 1,
2002, was 5,157,438.
INDEX
PART I
Item 1. Business....................................................................... 1
Item 2. Properties..................................................................... 7
Item 3. Legal Proceedings.............................................................. 7
Item 4 Submission of Matters to a Vote of Security Holders............................ 7
PART II
Item 5. Market for Stock and Related Security Holder Matters........................... 8
Item 6. Selected Financial Data........................................................ 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................... 19
Items 8. Financial Statements and Supplementary Data.................................... 20
Item 9. Changes and Disagreements With Accountants on Accounting and
Financial Disclosure....................................................... 20
PART III
Item 10. Directors and Executive Officers of Allied..................................... 21
Item 11. Executive Compensation......................................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and Management................. 26
Item 13. Certain Relationships and Related Transactions................................. 27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............... 28
SIGNATURES....................................................................................... 30
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 strategic
defense and security services businesses are primarily conducted through MECAR
S.A. ("MECAR") and a group of Belgian corporations acquired in 1994, 1995 and
1999 consisting of VSK Electronics, S.A., Tele Technique Generale, S.A., IDCS,
S.A. and VIGITEC, S.A. (collectively, the "VSK Group"). MECAR is located in
Petit-Roeulx-lez-Nivelles, Belgium; and the VSK Group operates from several
different locations in Belgium. On December 31, 2001, Allied acquired all of the
capital stock of News/Sports Microwave Rental, Inc. ("Microwave"). Microwave is
located in Spring Valley, California.
Description of Business
- -----------------------
Allied.
- ------
Allied provides management, marketing services and government relations
for its subsidiaries. In addition, Allied also provides export licensing,
procurement and logistic support 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 has successfully completed
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.
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 five 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
1
family includes the APFSDS, HESH and SMK versions with their corresponding
training rounds. This system is currently undergoing qualification by the U.S.
Army.
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 customers.
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, which are 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 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 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, armor 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.
VSK Group.
- ---------
The VSK Group engages in the business of developing, manufacturing,
selling, installing and servicing security systems for government and 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 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. In late 1999, the VSK Group acquired all of the
outstanding stock of VIGITEC, S.A., which markets closed circuit television
systems and provides other communications services.
2
Microwave
- ---------
Microwave engages in the development of sophisticated microwave
surveillance systems used in law enforcement, port security, border security,
airport security, high-end commercial security, and citywide surveillance
applications. The company's products and services are used for gathering,
transmitting, receiving and processing multiple signals from remote locations.
The company develops, assembles and sells electronic technology products and
systems for users to operate through the company's proprietary hardware,
software and communication links. Microwave's systems and products include
cameras, command/control systems, video concealments, microwave link solutions,
and other sensors. Microwave offers fixed observation/transmit surveillance
installations in addition to mobile command centers and airborne
camera/tracking/transmit packages.
Geographic Areas and Industry Segments
- --------------------------------------
See Note T 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 and prime contractors, primarily on fixed
price contracts. Two agencies of a foreign government and another foreign
government accounted for approximately 47%, 30% and 1% in 2001, 54%, 23% and 4%
in 2000, and 26%, 27%, and 6% in 1999, of Allied's revenues as detailed in Note
O to Allied's consolidated financial statements, the provisions of which are
incorporated herein. The addition of the VSK Group adds a non-military component
to company-wide operations. The VSK Group accounted for approximately 21%, 23%
and 35% of Allied's 2001, 2000 and 1999 revenues respectively.
MECAR's sales to its principal foreign government customers have
historically been made with the assistance of an independent marketing
representative. Commencing in early 2000, MECAR designated an affiliate of this
representative as its independent distributor/value added reseller (the
"Distributor"). The Distributor obtains a contract from the end user customer
and subcontracts a portion of the work to MECAR. The products that MECAR
produces are sold to the Distributor for resale to the foreign government
agencies end users.
MECAR's products are sold either 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. Most of the contracts received by MECAR require delivery in
approximately one year. Accordingly, MECAR's business is dependent upon its
ability to obtain such large orders. MECAR frequently accepts smaller orders in
an attempt to increase its customer base. 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. In such cases, MECAR is generally
required to provide advance payment guarantees and performance bonds issued by
its bank syndicate.
3
MECAR has from time-to-time received foreign military sale ("FMS")
contracts from the U.S. Government for the manufacture of ammunition for the
benefit of a foreign government. Such contracts may be terminated for
convenience by the government or upon default by the manufacturer. The contracts
received by MECAR through the FMS system do not provide for down payments,
letters of credit, advance payment guarantees or performance bonds.
The VSK Group derives substantially all of its revenue from sales and
services to private industry such as banks, hospitals, commercial businesses,
office buildings and to local governments. The VSK Group sells some of its
products/services directly to the end users; in other instances it sells its
systems to independent distributors and resellers for resale to the end users.
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. VSK Electronics and IDCS sell their products principally
in European markets. VIGITEC and Tele Technique Generale sell their products
principally in Belgium.
Microwave customers include U.S. Government agencies as well as state and
local law enforcement agencies. The U.S. Government agencies have historically
accounted for a majority of Microwave's revenues.
Marketing
- ---------
Most of the marketing activities of MECAR are handled by MECAR's staff of
sales engineers and executive personnel. In addition, MECAR advertises in trade
journals and participates in trade shows. MECAR is also represented by marketing
representatives in different markets and has designated the Distributor for
indirect sales to its principal end user customers.
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.
Microwave's marketing activities are handled by both its sales personnel
and executive management.
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 2001, 2000 and 1999, MECAR expended $500,904, $736,764
and $793,916, 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.
The business of the VSK Group requires continuous investment in research
and development to update and enhance its security systems. The VSK Group
employs a staff of design engineers specialized in the field of both electronic
hardware and software. During 2001, 2000 and 1999, the VSK Group expended
$1,003,358, $846,307 and $892,092, respectively, on research and development.
Management anticipates that the business of Microwave will require
continuous investment in research and development.
4
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 continuous 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, and has
generally found such materials and supplies to be readily available.
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.
Microwave contracts with a number of vendors for components used in its
systems. Historically, such components have been found to be readily available.
Backlog
- -------
As of December 31, 2001 and December 31, 2000, Allied had backlog
orders believed to be firm, after giving effect to the percentage of completion
method of accounting, of approximately $56.0 million and $63.5 million,
respectively. A substantial portion of the backlog of orders as of December 31,
2001 is expected to be filled in 2002.
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.
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.
Microwave competes with niche suppliers of specialized security
products as well as much larger companies with substantially greater financial
and other resources.
5
Personnel
- ---------
As of December 31, 2001, Allied, MECAR, VSK Group and Microwave had 501
full and part-time employees as follows:
ALLIED
------
Salaried employees 7
MECAR
-----
Technical and salaried employees 50
Hourly workers 265
Technical consultants 1
VSK GROUP
---------
Technical salaried employees 120
Hourly workers 23
Part-time employees 5
MICROWAVE
---------
Salaried employees 18
Hourly workers 12
The classification of employees noted above for MECAR and the VSK Group is
in accordance with Belgian law.
Patents
- -------
Microwave holds a patent on a mechanical mast that is a key component of
certain security systems it supplies to law enforcement agencies. The patent was
filed in 1997. Neither Allied nor any of its other subsidiaries holds any other
significant 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. See Note O to Allied's consolidated
financial statements. MECAR now receives contracts for the benefit of these
customers via the Distributor and via the FMS program.
6
ITEM 2. PROPERTIES
Allied's principal executive offices are located in Vienna, Virginia,
where it leases approximately 3,700 square feet of office space. The lease
expires in September, 2007.
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 is approximately 112,000 square feet and the
administration facility is 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 600 acres in the vicinity of the Village of Marche in the Ardennes
region of Belgium, which was previously used as a test range. MECAR ceased its
use of the Ardennes firing range in 2001. MECAR is now utilizing other test
ranges, including a test range owned by the Belgian Army, although it is also
exploring the prospects of securing the use of a new test range.
Throughout 2001, MECAR operated using one full and two partial shifts.
MECAR is currently operating near its productive capacity.
The VSK Group operates from owned facilities containing approximately
49,400 square feet. Such facilities are currently operating at approximately 75%
of productive capacity.
Microwave operates from a leased office, production and warehouse
facility consisting of approximately 8,400 square feet in Spring Valley,
California. The facility is leased on a month to month basis. Microwave operated
at 50% capacity of the facility in 2001. Microwave has adequate capacity at the
facility to operate at projected levels in 2002.
Capital expenditure programs for facilities and equipment planned in
2002 will require funding of approximately $3.0 million.
ITEM 3. LEGAL PROCEEDINGS
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 2001.
7
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 2001 and 2000 (as reported by AMEX):
2001 High Low
---- ---- ---
1st Quarter $ 8.94 $ 6.15
2nd Quarter $ 9.31 $ 7.30
3rd Quarter $16.59 $ 7.80
4th Quarter $19.70 $11.20
2000 High Low
---- ---- ---
1st Quarter $ 9.38 $ 7.00
2nd Quarter $ 8.56 $ 6.75
3rd Quarter $ 9.31 $ 7.13
4th Quarter $ 9.19 $ 7.75
Stockholders
- ------------
There were approximately 1,114 holders of record of the Common Stock of
Allied as of February 15, 2002.
Dividends
- ---------
Allied paid a 5% stock dividend in November, 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
1993-2001.
Stock Issuance
- --------------
On December 31, 2001, Allied acquired all of the outstanding capital stock
of Microwave in exchange for consideration which included 176,334 shares of
unregistered Common Stock. The company issued an additional 8,443 unregistered
shares of its Common Stock in satisfaction of an obligation of Microwave. All
shares issued in this transaction were exempt from registration pursuant to
Section 4(2) of the Securities Act.
8
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data relates to Allied's consolidated
financial position and results of operations for 2001, 2000, 1999, 1998 and
1997:
2001 2000 1999 1998 1997
------- -------- ------- -------- --------
(000's omitted except per share amounts)
Revenues $96,947 $107,743 $59,033 $133,078 $123,935
Earnings (loss) from
- - continuing operations 10,367 8,705 (3,282) 8,629 8,147
- - discontinued operation - 517 (746) 437 418
------- -------- ------- -------- --------
Net earnings (loss) 10,367 9,222 (4,028) 9,066 8,565
======= ======== ======= ======== ========
Earnings (loss) per share
Basic:
- - continuing operations 2.11 1.79 (0.68) 1.83 1.79
- - discontinued operation - 0.11 (0.16) 0.09 0.09
------- -------- ------- -------- --------
Net income (loss) 2.11 1.90 (0.84) 1.92 1.88
======= ======== ======= ======== ========
Diluted:
- - continuing operations 2.10 1.79 (0.68) 1.81 1.76
- - discontinued operation - 0.11 (0.16) 0.09 0.09
------- -------- ------- -------- --------
Net income (loss) 2.10 1.90 (0.84) 1.90 1.85
======= ======== ======= ======== ========
Total assets 86,784 87,636 60,131 101,635 89,310
Long-term debt obligations and redeemable
preferred stock 3,110 3,529 3,081 4,154 5,104
Cash dividends declared per common share - - - - -
9
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.
In 2001, Allied operated in two (2) principal segments: the development and
production of ammunitions and weapon systems ("product sales"); and the
manufacture, distribution and service of an integrated line of industrial
security products ("security systems and services"). Product sales were provided
solely by MECAR and a related company, Sedachim. Security systems and services
were provided by the VSK Group. Accordingly, all references in this Item 7 to
(i) MECAR shall refer to the product sales segment and (ii) the VSK Group shall
refer to the security systems and services segment. All references herein to
Allied or the Company shall refer to Allied Research Corporation as a whole.
An agreement to sell the stock of Barnes & Reinecke, Inc. ("BRI") was
executed in early December, 1999 and the stock of BRI was sold in March, 2000.
Accordingly, BRI's operations have been excluded from Allied's results from
continuing operations and the net results of such operations are reported
separately as results from discontinued operation.
On December 31, 2001, Allied acquired all of the capital stock of
Microwave. This acquisition is reflected on Allied's year-end balance sheet.
In 1999, Allied reorganized its European holdings. A Belgium holding
company, ARC Europe, S.A., now owns all of the capital stock of each of MECAR,
Sedachim and the VSK Group.
Allied earned net profits of $10.4 ($2.11 per share-basic and $2.10 per
share - diluted) from continuing operations in 2001 compared to net profits of
$8.7 ($1.79 per share-basic and diluted) in 2000 and a net loss of $3.3 ($0.68
per share - basic and diluted) for 1999.
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 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 to expand its business base; the mix of products/services;
domestic and foreign governmental fiscal affairs and public policy changes which
may affect the level of purchases made by
10
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. These 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;
increasing competition by foreign and domestic competitors, including new
entrants; and other Future Factors.
Critical Accounting Policies
- ----------------------------
Our significant accounting policies are described in Note A to the
consolidated financial statements included in Item 8 of this Form 10-K. We
believe our most critical accounting policies include revenue recognition and
cost estimation on fixed price contracts for which we use the percentage of
completion method of accounting. This method is used by MECAR for substantially
all of its sales contracts. Approximately 80%, 81% and 65% of consolidated
revenue was recognized under the percentage of completion method during 2001,
2000 and 1999, respectively. The value of contracts in process at December 31,
2001 and 2000 were $20.3 and $34.1 and the profits recognized on these contracts
through December 31, 2001 were approximately $11.1 and $10.4, respectively.
Under the percentage of completion method revenue is recognized on these
contracts as work progresses during the period, based on the amount of actual
cost incurred during the period compared to total estimated cost to be incurred
for the total contract. Management reviews these estimates on a regular basis
and the effect of any change in cost estimates are reflected in cost of sales in
the period in which the change is identified. If the contract is projected to
create a loss, the entire estimated loss is charged to operations in the period
such loss first becomes known. A number of internal and external factors affect
our cost of sales estimates, including labor rates and efficiency variances,
material usage variances, delivery schedules and testing requirements.
Additionally, as inventory items increase in age, obsolete and excess items are
charged to cost of sales when such determination is made. While we believe that
the systems and procedures used by MECAR, coupled with the experience of its
management team, provide a sound basis for our estimates, actual result will
differ from management's estimates. The complexity of the estimation process and
issues related to the assumptions, risks and uncertainties inherent with the
application of the percentage of completion method affect the amounts reported
in our financial statements.
Trends In Operations
- --------------------
Each of MECAR and the VSK Group contributed to a very successful 2001. We
also took the first step in our plan to extend the reach of our strategic
defense and security businesses by acquiring Microwave.
MECAR operated near capacity of its facilities throughout much of 2001. The
vast majority of MECAR's 2001 revenues resulted from orders from its traditional
customer base.
MECAR's 2001 revenues included contracts for the benefit of its traditional
customers via the Foreign Military Sales Program ("FMS") as well as from direct
and indirect contracts with and for the benefit of the end user customers.
MECAR has supplied both 90 mm ammunition and 120 mm mortar ammunition for
use in two (2) new weapon systems acquired by one of MECAR's traditional
customers via FMS contracts. The customer has indicated a need and desire for
additional rounds of each of the 90mm ammunition and 120 mm mortar ammunition.
In early March, 2002, Allied announced the award by such customer of a three (3)
year, $130.0 FMS contract for 90 mm ammunition.
11
MECAR's 2001 results were positively impacted by a supplemental
contract awarded as part of an FMS contract for a new series of ammunition
developed by MECAR. The contract requires MECAR to correct deficiencies in the
ammunition detected by tests performed by the U.S. Government. The revenue from
the contract was recognized in the third and fourth quarters of 2001 since the
most critical tests performed by the U.S. Government only identified minimal
deficiencies. A $2.0 provision was established by MECAR to cover corrections and
other costs that might be incurred. This contract provided approximately forty
percent (40%) of Allied's 2001 profits. The final tests and MECAR's corrections
should be completed by mid-2002.
The VSK Group recorded another excellent year in 2002. It contributed
approximately $19.9 in revenues and $2.1 in pre-tax profits.
The reported earnings of each of MECAR and the VSK Group were adversely
impacted by the fluctuations of the Euro during 2001.
Allied commenced 2002 with a consolidated backlog of approximately
$56.0 compared with a consolidated backlog at the beginning of 2001 of $63.5.
MECAR began 2002 with a backlog of approximately $47.0 compared with a 2001
beginning backlog of $54.3. VSK began 2002 with a backlog of approximately $7.6
compared with a 2001 beginning backlog of approximately $9.2. Microwave
commenced 2002 with a backlog of approximately $1.4.
In future periods, Allied's operations will continue to be impacted by
MECAR's ability to obtain large orders on a periodic basis, Allied's ability to
successfully continue its expansion of other business and Allied's ability to
successfully integrate new acquisitions, such as Microwave.
Trends In Liquidity And Capital Resources
- -----------------------------------------
The Company's liquidity did not materially improve in 2001 despite the
excellent operating results and an increase in working capital.
MECAR utilized a $9.0 line of credit and other short-term bank
facilities of up to $7.0 during 2001 to fund working capital requirements. While
the line of credit was repaid by December 31, 2001, MECAR required temporary
bank loans to cover overdrafts of approximately $2.5.
In addition, Allied made advances of $4.0 to MECAR throughout 2001 to
supplement MECAR's working capital needs. These advances were repaid prior to
the end of 2001.
In an effort to minimize the liquidity shortage at MECAR, in early 2001
the bank syndicate provided a partial waiver of the requirement to pledge cash
to collateralize performance bonds and advance payment guarantees. The waiver
expired in mid-2001 at which point MECAR was required to provide the full amount
of pledged cash, as collateral, as required by the bank syndicate agreement.
Throughout 2001, Allied management engaged in a review and analysis of
its company-wide financing requirements. As a result, MECAR's bank syndicate
agreement has been recently modified as described below under Liquidity. Allied
---------
anticipates that the modification will increase MECAR's credit facility, will
provide a maximum amount of pledged cash required for contracts and will
potentially provide Allied increased access to cash generated by MECAR.
No liquidity shortages have been forecasted for 2002. For the long
term, the generation of positive cash flow from core operations will depend upon
MECAR's ability to continue to receive orders from its traditional customer
base, the ability of MECAR to broaden its revenue base and the ability of Allied
to successfully expand its group of strategic security businesses.
12
Liquidity
- ---------
Working capital, which includes restricted cash, was approximately
$41.2 at December 31, 2001, which is an increase of $6.3 from the December 31,
2000 level. Allied's current working capital is required for operations and to
support credit facility agreements.
Cash and equivalents at December 31, 2001 increased over year-end 2000
levels largely as a result of profitable operations. Accounts receivable at
December 31, 2001 increased over December 31, 2000 levels by $1.0 principally
due to the acquisition of Microwave. Costs and accrued earnings on uncompleted
contracts decreased by $13.8 from year-end 2000 levels as a result of decreased
amounts of work-in-progress at the end of 2001. Inventories at year-end 2001
were 5% higher than at the end of 2000. Prepaid expenses were essentially
unchanged from 2000 levels. Intangibles increased from 2000 levels due to the
Microwave acquisition. Deferred taxes increased in 2001 by $0.7 as a result of
the recognition of the tax benefit related to the net operating loss
carryforward from U.S. operations.
Current liabilities decreased by $12.4 from December 31, 2000 levels
due to increased cash availability from operations which was used to reduce
payables.
During 2001, 2000 and 1999, Allied funded its operations principally
with internally generated cash and back-up credit facilities required for
foreign government contracts. In addition, MECAR utilized a $9.0 line of credit
and other short-term bank facilities of up to $7.0 throughout 2001.
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
syndicate. While the bank syndicate agreement provides that MECAR is responsible
to repay the syndicate for amounts paid by the banks pursuant to the
guarantees/bonds, the financial terms stipulate that all such obligations be
secured, in part, by a cash pledge. At December 31, 2001, MECAR's lenders had
issued $18.0 of guarantees/performance bonds and MECAR had pledged $6.2 of cash.
The bank syndicate agreement provides the banks the right to review and
approve each proposed MECAR contract before they agree to provide the necessary
guarantees/bonds. While management believes that it will be able to finance
additional MECAR contracts using the bank syndicate structure, there can be no
assurance that such financing will be provided.
The bank syndicate agreement was amended and restated in mid-March,
2002. The revised bank syndicate agreement provides $20.0 increased credit
support over the previous bank syndicate agreement, which includes an $8.9
increase in the guarantee/bond facility, which increase does not require any
cash pledges. The new agreement provides (i) lines of credit aggregating $11.2
for tax prepayments and working capital and (ii) a facility for guarantees/bonds
to support customer contracts of $32.6.
The revised bank syndicate agreement eliminates most restrictions on
payments by MECAR to Allied or other Allied group companies but substitutes
financial covenants requiring MECAR to maintain minimum net worth and working
capital levels.
MECAR's obligations under the revised bank syndicate agreement
continues to be collateralized by a pledge of MECAR's assets and adds a second
mortgage on MECAR's facility. The revised agreement provides for the release of
the guarantee of ARC Europe and the pledge of the stock of the VSK Group but
retains Allied's agreement to support MECAR so that it remains in compliance
with its bank syndicate agreement obligations.
13
MECAR has a mortgage loan with a foreign government agency which had an
outstanding balance of approximately $1.3 at December 31, 2001. Principal and
interest payments on the mortgage loan extend through January, 2004, and the
loan includes a prepayment penalty clause.
The VSK Group operated throughout 2001 primarily from cash generated
from operations. The VSK Group is obligated on several mortgages and other
long-term obligations with December 31, 2001 balances aggregating $0.3. It is
also obligated on letters of credit required by a contract with a customer.
On January 1, 1999, eleven 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. Between January
1, 2002, and July 1, 2002, the participating countries will introduce Euro notes
and coins and withdraw all legacy currencies so that they will no longer be
available.
Allied will continue to evaluate all issues involving the introduction
of the Euro as further accounting, tax and governmental legal and regulatory
guidance becomes available. Based on current information and Allied's current
assessment, Allied does not expect that the Euro conversion will have a material
adverse effect on its business or financial condition. However, its operations
in 2001 were adversely impacted by the fluctuations in the value of the Euro
versus the U.S. Dollar.
In September 1998, Allied's Board of Directors authorized the purchase
of up to 200,000 shares of Allied's common stock. During 2000 and 1999, Allied
repurchased 75,688 and 22,600 shares of its common stock in market transactions.
The Company did not repurchase shares in 2001 and does not anticipate
repurchasing shares of Company stock in calendar year 2002.
Allied's ability to cover its anticipated future operating and capital
requirements is dependent upon its ability to generate positive cash flow from
the operations of its subsidiaries, particularly the operations of MECAR.
Capital Resources
- -----------------
Allied spent $3.1 in 2001 on capital equipment as compared with $3.9 in
2000 and $2.3 in 1999, respectively. The expenditures in 2001 were primarily for
operating machinery and building upgrades. Management currently anticipates that
it will spend approximately $3.0, across all the operations, on capital
expenditures in 2002 for additional upgrades to its facilities and equipment.
Contractual Obligations and Commercial Commitments
- --------------------------------------------------
As described herein and in the notes to the consolidated financial
statements, Allied has contractual obligations and commercial commitments that
may affect its financial condition. However, based on management's assessment of
the underlying provisions and circumstances of the material contractual
obligations and commercial commitments of Allied, there is no known trend,
demand, commitment, event or uncertainty that is reasonably likely to occur
which would have a material adverse effect on Allied's financial condition or
results of operations.
14
The following tables identify material obligations and commitments as
of December 31, 2001:
Payments Due By Period
Contractual Obligations/1/ Total 1 Year 2-3 Years 4-5 Years
----------------------- ----- ------ --------- ---------
Debt and capital leases $6.8 $3.7 $2.9 $0.2
Operating leases 0.5 0.1 0.2 0.2
--- --- --- ---
Total contractual obligations $7.3 $3.8 $3.1 $0.4
=== === === ===
Total
Amount
Other Commercial Commitments Committed
---------------------------- ---------
Bank Guarantees $18.0
Standby letters of credit 0.4
-----
Total commercial commitments $18.4
=====
Results of Operations
- ---------------------
Allied had revenues from continuing operations of $96.9 in 2001
compared to $107.7 in 2000 and to $59.0 in 1999, respectively. Allied earned
profits from continuing operations of $10.4 in 2001 and $8.7 in 2000 compared to
a loss of $3.3 in 1999.
___________
/1/ Excluded are contracts made in the normal course of business for performance
of sales contracts or routine services, as well as commitments where contract
provisions allow for cancellation.
15
The following table sets forth, for the years ended December 31, 2001, 2000 and
1999, certain items from Allied`s consolidated statements of operations
expressed as a percentage of revenue:
2001 2000 1999
-------- -------- ------
Revenue 100.0% 100.0% 100.0%
Cost and expenses
Cost of sales 65.2 74.2 86.2
Selling and administrative 12.5 10.0 18.2
Research and development 1.6 1.5 2.8
-------- -------- -------
Operating income (loss) 20.7 14.3 (7.2)
Other income (deductions)
Interest income 0.7 0.6 1.4
Interest expense (1.7) (1.4) (1.9)
Other - net (0.3) 0.4 1.3
-------- -------- -------
Earnings (loss) before discontinued operation and
income taxes 19.3 13.9 (6.4)
Income tax expense (benefit) 8.6 5.8 (0.8)
-------- -------- -------
Earnings (loss) from continuing operations
10.7 8.1 (5.6)
Discontinued operation - 0.5 (1.3)
-------- -------- -------
Net earnings (loss) 10.7 8.6 (6.9)
======== ======== =======
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.
16
Revenues
- --------
Allied's consolidated revenues from continuing operations for 2001
decreased $10.8, or 10%, from 2000 revenues. Revenues from continuing operations
for 2000 increased $48.7, or 83%, over 1999 revenues.
Revenues By Segment
-------------------
($ Millions)
2001 1999 2000
-------------- --------------- ---------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
MECAR $ 77.0 80% $ 87.6 81% $ 38.5 65%
VSK 19.9 20% 20.1 19% 20.5 35%
The fluctuation in MECAR's 2001 revenues from the amount realized in 2000
results principally from a change in MECAR's revenue base. In 2000, MECAR began
to receive subcontracts from the Distributor (as opposed to direct contracts
from the end user customer). As a result, in 2001 the majority of non-FMS
revenue was via the Distributor subcontracts. These subcontracts generally have
lower revenue value than MECAR's traditional direct end user sales contracts;
however, this subcontract arrangement does not reduce the Company's gross
margins since MECAR's cost of sales are reduced as a result of its agreement
with the Distributor. MECAR's revenues for 2000 increased by 127% over its 1999
revenues. The increase in 2000 revenues over 1999 revenues is attributable to
increased order levels for its products, after a downturn in business in 1999.
Revenues at the VSK Group were essentially unchanged in 2001 as compared to
2000. In 2000, revenues at the VSK Group decreased approximately 2% from 1999
levels. If currency fluctuations are eliminated, 2001 and 2000 VSK Group
revenues were 2% and 16% greater than 2000 and 1999 revenues, respectively.
Cost of Sales
- -------------
Cost of sales as a percentage of sales for 2001 was approximately 65%
compared with 74% for 2000 and 86% for 1999. The improvement in cost of sales in
2001 and 2000 results primarily from cost reductions and the increase in
subcontracts via the Distributor as explained under Revenues. Certain fees,
selling expenses and other customer related expenses in connection with direct
sales to customers are not incurred on Distributor subcontracts. Costs in 1999
were higher than normal as a result of rework costs on orders for certain
customers.
Selling and Administrative Expenses
- -----------------------------------
Selling and general administrative expenses increased by 12% in 2001 over
expenses incurred in 2000 largely due to increased employment related charges at
the parent company and increased costs associated with the review of acquisition
opportunities.
Selling and general administrative expenses in 2000 increased less than 1%
over 1999.
17
Research and Development
- ------------------------
Research and development costs incurred in 2001 decreased by 5% from 2000
levels as a result of work load associated with contracts in process during the
year.
Research and development costs incurred in 2000 decreased by $0.1 (or 6%)
from 1999 levels. The reduction was also attributable to the work load
associated with contracts in process during the year.
Interest Income
- ---------------
Interest income was essentially unchanged in 2001 from 2000. Interest
income decreased in 2000 by $0.2 (or 22%) from 1999 levels, principally due to
decreased amounts of cash invested.
Interest Expense
- ----------------
Interest expenses incurred in 2001 increased by approximately 9% compared
to the amount incurred in 2000 largely due to increased borrowings at MECAR.
Interest expense increased in 2000 by $0.4 (or 38%) compared to the amount
incurred in 1999, principally as a result of an increase in borrowings at MECAR
via its line of credit.
Other - Net
- -----------
Other-net results were a $0.3 loss in 2001 and a $0.5 gain in 2000, largely
due to foreign currency transactions at MECAR and the VSK Group.
Pre-Tax Profit From Continuing Operations
- -----------------------------------------
Pre-Tax Profit (Loss) By Segment
--------------------------------
($ Millions)
2001 2000 1999
------ ------ ------
MECAR $ 17.4 $ 12.7 $ (7.7)
VSK 3.5 2.9 4.2
Corporate and Other (2.1) (0.6) (0.2)
MECAR's 2001 pre-tax profit was favorably impacted by profits earned on the
supplemental contract described under Trends in Operations. MECAR's 2000 pre-tax
--------------------
profit increase was largely attributable to the gross margins generated on
incremental revenue. MECAR's 1999 loss resulted primarily from unanticipated
costs to rework products for various customers.
The VSK Group's pre-tax profit increase in 2001 from its 2000 level was due
to increased operating margins as a result of production efficiencies and lower
administrative expenses. The decrease in 2000 pre-tax profit from 1999 was due
to a long-term high margin project which was completed in 1999.
Income Taxes
- ------------
The effective income tax expense attributable to continuing operations in
2001 and 2000 was 45% and 42%, respectively, primarily due to foreign rate
differentials and permanent tax differences.
18
The Company reported a $0.5 tax benefit relating to continuing operations
in 1999 principally as a result of the deferred tax benefits of tax loss
carryforwards attributable to MECAR's 1999 operating losses, less Belgium taxes
attributable to the VSK Group's 1999 operations and domestic tax expenses.
Net Earnings From Continuing Operations
- ---------------------------------------
The Company earned $10.4 profits in 2001 and $8.7 profits in 2000 from
continuing operations, compared with $3.3 loss in 1999.
Discontinued Operations
- -----------------------
All results from discontinued operations reported by Allied relate to the
operations of BRI and have been reported net of income tax expense or benefits.
The Company's 2000 profit of $0.5 from discontinued operations is
principally comprised of gain on the sale of BRI.
The Company's loss from discontinued operations of $0.7 in 1999 is from BRI
operations.
Impact of Year 2000
- -------------------
Through March 1, 2002, the Company has not experienced any significant
problems related to the Y2K issue.
Recent Accounting Pronouncements
- --------------------------------
See Note A to Allied's consolidated financial statements for a description
of recently issued accounting pronouncements. Except for the elimination of
periodic amortization of goodwill and the substitution therefore of periodic
goodwill impairment testing, Allied does not anticipate that any of such
pronouncements will have a material impact on its financial results.
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 2001, Allied had approximately $5.5 million of fixed-rate
indebtedness and approximately $1.3 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 2001 variable rate debt and cash available for
investment, a one percent change in interest rates would impact net interest
income by less than $0.2.
19
Exchange Rate Sensitivity
- -------------------------
Allied maintains operations in several foreign countries. Virtually all of
the Company's revenue from continuing operations 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.
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
net earnings by approximately $1.2.
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 and supplementary financial information and data
required by this Item are set forth in the pages indicated in Item 14(a)(1) and
(2).
See Note U to Allied's consolidated financial statements for supplementary
quarterly financial data required by this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
There were no disagreements on any matter of accounting principles,
financial statement disclosure or auditing scope or procedure to be reported
under this item.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ALLIED
Directors
- ---------
The following are the directors of Allied:
J. H. Binford Peay, III, age 61, became a director in April, 2000 and was
elected Chairman of the Board, President and Chief Executive Officer in January,
2001. Since 1997, General Peay has been a consultant. General Peay retired in
1997 as Commander in Chief, United States Central Command, with responsibility
for operations in some 20 countries throughout Africa, the Middle East, Persian
Gulf and South Asia. Previously, he was Vice Chief of Staff, U.S. Army. General
Peay is currently a director of United Defense Industries, Inc., and a Trustee
of the George C. Marshall Foundation, the Virginia Military Institute Foundation
and the National Defense University.
J. R. Sculley, age 61, became a director of Allied in 1991 and currently
serves as Chairman Emeritus. He served as Chairman of the Board and Chief
Executive Officer from December, 1992 until September, 1999; from April 1992
until December 1992 he served as President and Chief Operating Officer of
Allied. Between 1989 and April, 1992, Mr. Sculley was Director of Advanced
Studies and Technologies of Grumman Corporation, a defense company, and, prior
thereto, was Assistant Secretary of the Army (Research, Development and
Acquisition).
Clifford C. Christ, age 54, 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.
Harry H. Warner, age 66, 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 and Virginia Management Investment Corporation.
Ronald H. Griffith, age 63, became a director of Allied in April, 2000. Mr.
Griffith is Executive Vice President and Chief Operating Officer of MPRI, Inc.,
a professional services company, since 1998. Formerly, he served as Vice Chief
of Staff of the U.S. Army.
Executive Officers
- ------------------
The following are the executive officers of Allied:
J. H. Binford Peay, III was elected Chairman of the Board, President and
Chief Executive Officer of Allied in January, 2001.
John G. Meyer, Jr., age 57, was elected Executive Vice President and Chief
Operating Officer in January, 2001. Mr. Meyer recently retired from the U.S.
Army having served as its most senior Public Affairs Officer for the last four
(4) years.
Bruce W. Waddell, age 55, was elected Vice President for Strategic Planning
and Corporate Development in January, 2001. He served as a director of Allied
from April, 2000 through mid-January, 2001. Mr. Waddell was most recently
President of The Stonebridge Group, Inc., a management consulting firm
specializing in strategy and business development. He previously held management
positions with Avery Dennison and in General Electric's defense and lighting
businesses.
21
Charles A. Hasper, age 47, was elected Treasurer and Chief Financial
Officer in August, 2001. Previously, Mr. Hasper served as a partner in CK
Capital Partners, an investment banking firm.
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, 2001, 2000 and 1999, to the chief executive
officer of Allied and to other executive officers of Allied whose total annual
salary and bonus exceeds $100,000:
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
---------------------------------------- ------
Securities
Name and Other Underlying
Principal Annual Options/ All Other
Position Year Salary Bonus Compensation SARs (#) Compensation
- ------------------------------ ---- ------ ------ ------------ ---------- ------------
J. H. Binford Peay, III, 2001 $300,000 $150,000 $67,685/1/ 100,000 86,250/6/
Chairman of the Board, President and
Chief Executive Officer since mid-January,
2001
John G. Meyer, Jr., 2001 $160,000 $ 76,000/2/ 40,000 21,563/6/
Executive Vice President and Chief Operating
Officer
Bruce W. Waddell, 2001 $145,000 $ 69,000/2/ 40,000 21,563/6/
Vice President for Strategic Planning and
Corporate Development
Charles A. Hasper, Treasurer 2001 $ 66,667 $ 48,000/2/ 40,000 22,525/6/
and Chief Financial Officer since August,
2001
W. Glenn Yarborough, Jr., 2001 $200,000/3/ $275,000/5/
President and Chief 2000 $200,000 $ 50,000/4/
Executive Officer until mid-January, 2001 1999 $200,000
_________________
/1/ The Company reimbursed Mr Peay for the premium paid for a $1 million life
insurance policy, including the income tax payable thereon, as required by
the terms of his employment agreement.
/2/ Includes a stock grant of approximately $20,000.
/3/ Mr. Yarborough was paid $200,000 in severance payments in 2001.
/4/ Mr. Yarborough was awarded a bonus of $50,000 for 2000 performance.
/5/ Mr. Yarborough is entitled to annual consultation payments of $55,000 for
the 2002-2006 period.
/6/ Each of the executives who joined the Company in 2001 were granted stock
awards in connection with their employment agreements.
22
Options Grants in Last Fiscal Year
- ----------------------------------
The following table contains information concerning the stock option
grants made to each of the Named Executive Officers for the fiscal year ended
December 31, 2001.
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term /(1)/
- ---------------------------------------------------------------------------------------------- ---------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted Fiscal Year ($/Sh) Date 5% ($) 10% ($)
---- ------------ ----------- --------------- ------------- ------ -------
J. H. Binford Peay, III 100,000 45% $8.63 12/31/10 $ 542,736 $ 1,375,400
John G. Meyer, Jr. 40,000 18% $8.63 12/31/05 $ 95,372 $ 210,748
Bruce W. Waddell 40,000 18% $8.63 12/31/05 $ 95,372 $ 210,748
Charles A. Hasper 40,000 18% $9.01 07/31/06 $ 97,572 $ 220,028
(1) Potential gains are net of exercise price, but before taxes associated with
exercise. These amounts represent certain assumed rates of appreciation
only, in accordance with the SEC's rule. Actual gains, if any, on stock
option exercises are dependent on the future performance of the Common
Stock, overall market conditions and the option holders continued
employment through the vesting period. The amounts reflected in this table
may not necessarily be achieved.
Aggregated Options Exercised in Last Fiscal Year and Fiscal Year-End Values
- ---------------------------------------------------------------------------
The following tables sets forth information concerning option
exercises and option holdings by each of the Named Executive Officers for the
fiscal year ended December 31, 2001.
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options/SARsValue Options/SARs at FY-End ($) /(1)/
------------------------------- ---------------------------------
Shares
Acquired on Value
Name Exercise (#) Realized Exercisable (#) Unexercisable Exercisable Unexercisable
- ----------------------- ------------ -------- --------------- ------------- ----------- -------------
(#)
---
J. H. Binford Peay, III - $ - 20,000 80,000 $ 105,800 $ 423,200
John G. Meyer, Jr. - $ - 8,000 32,000 $ 42,320 $ 169,280
Bruce W. Waddell 6,500 $ 44,668 8,000 32,000 $ 42,320 $ 169,280
Charles A. Hasper - $ - - 40,000 $ - $ 196,400
(1) Represents the closing price per share of the underlying shares on the last
day of the fiscal year less the option exercise price multiplied by the
number of shares. The closing price per share was $13.92 on the last
trading day of the fiscal year as reported on the AMEX.
23
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
service as a director, including as a member of committees of the Board, at the
rate of $1,000 per month; an award of 1,000 shares of Common Stock on each July
1; an award as of each July 1 of an option to acquire 6,500 shares of common
stock (commencing in 2000); $1,000 for each Board meeting in excess of four (4)
personally attended during each calendar year; $500 for each committee meeting
attended which is not held in conjunction with a Board meeting; and $250 for
each teleconference Board meeting in excess of two (2) in which a director
participates during each calendar year. As Chairman Emeritus, Mr. Sculley is
entitled to an additional $500 per month.
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 from 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 to 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. The Board of Directors has determined that no further benefits will
accrue under the plan to current or future Outside Directors. During 2001,
payments of $82,597 were made to former directors of Allied in consideration of
their accrued benefits under the Directors Retirement Plan. The other
individuals with accrued benefits under the Directors Retirement Plan agreed to
accept the following consideration in lieu thereof:
Mr. Warner - 3,278 shares of Allied's stock upon his retirement from
the Board.
Mr. Christ - cash benefits as described above following his retirement
from the Board.
Mr. Sculley - $9,483 payable in cash commencing when Mr. Sculley
reaches age 70.
In 1991, the Board of Directors of Allied adopted the Allied Research
Corporation Outside Directors Stock Option Plan (the "Directors Option Plan").
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. Options for an aggregate of 26,000 and 39,000 shares were
granted under the Directors Option Plan in 2001 and 2000, respectively, to
Allied's Outside Directors. The Directors Option Plan expired in 2001.
In 2001, Mr. Sculley was paid approximately $100,000 in satisfaction of
his post-employment severance entitlement. Mr. Sculley is entitled to annual
payments of $80,000 through 2005.
Employment Contract and Change-In-Control Arrangements
- ------------------------------------------------------
In 2001, General Peay and Allied entered into an employment agreement
which provides for an annual salary of $300,000 and the potential to earn an
annual bonus up to 50% of the annual salary upon satisfaction of certain
performance standards. Upon certain terminations of Mr. Peay's employment, he
will be entitled to receive his annual salary, bonus and benefits for a period
of up to three (3) years
24
following the termination of employment. Further, if the termination of
employment occurs within twelve (12) months of a change of control, the payments
may be accelerated into a lump sum payment at the election of Mr. Peay.
In 2001, Mr. Meyer and Allied entered into an employment agreement
which provides for an annual salary of $160,000 and the potential to earn an
annual bonus up to 35% of the annual salary upon satisfaction of certain
performance standards. The annual salary was increased to $200,000 in early
2002. Upon certain terminations of Mr. Meyer's employment, he will be entitled
to receive his annual salary for one year following such termination. Further,
if the termination of employment occurs within twelve (12) months of a change of
control, the payments may be accelerated into a lump sum payment at the election
of Mr. Meyer.
In 2001, Mr. Waddell and Allied entered into an employment agreement
which provides for an annual salary of $145,000 and the potential to earn an
annual bonus up to 35% of the annual salary upon satisfaction of certain
performance standards. The annual salary was increased to $160,000 in early
2002. Upon certain terminations of Mr. Waddell's employment, he will be entitled
to receive his annual salary for one year following such termination. Further,
if the termination of employment occurs within twelve (12) months of a change of
control, the payments may be accelerated into a lump sum payment at the election
of Mr. Waddell.
In 2001, Mr. Hasper and Allied entered into an employment agreement
which provides for an annual salary of $160,000 and the potential to earn an
annual bonus up to 35% of the annual salary upon satisfaction of certain
performance standards. Upon certain terminations of Mr. Hasper's employment, he
will be entitled to receive his annual salary for one year following such
termination. Further, if the termination of employment occurs within twelve (12)
months of a change of control, the payments may be accelerated into a lump sum
payment at the election of Mr. Hasper.
Mr. Yarborough's employment with Allied terminated in January, 2001.
Mr. Yarborough is entitled to consulting fees of $55,000 per year through 2006.
Mr. Sculley's employment with Allied terminated in September, 1999. He
is entitled to post-employment payments of $80,000 per year through 2005. Such
amounts are subject to acceleration upon a change of control of Allied.
In June, 2001, the Board of Directors of Allied adopted a new
shareholder rights plan (the "Rights Plan"). The Rights Plan provides each
stockholder of record on a dividend distribution 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 acquirer has
purchased or has the right to acquire 15% or more of Allied's common stock, or
(2) the commencement of a tender offer which would result in an offeror
beneficially owning 15% or more of the outstanding common stock of Allied. All
rights held by an acquirer or offeror expire on the announced acquisition date,
and all rights expire at the close of business on May 31, 2011. 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 Rights Plan. 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 Rights Plan prior to exercise.
25
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
The Compensation Committee of Allied consists of Messrs. Harry H.
Warner, Ronald H. Griffith and J. R. Sculley. Mr. Griffith is Executive Vice
President of MPRI, Inc. and General Peay previously served on the Board of
Directors of MPRI, Inc. Mr. Sculley was formerly Chairman of the Board and
President of Allied.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information is furnished 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 and is based upon the most recent filings made by the
undersigned with the Securities and Exchange Commission:
Name and Address of Amount and Nature of
Title of Class Beneficial Owner Beneficial Ownership Percent of Class/1/
- -------------- -------------------- -------------------- -------------------
Common Bricoleur Capital 558,700 10.6%
Management, LLC/2/ Owned directly
12230 El Camino Rd, Ste. 100
San Diego, CA 92130
Common FMR Corp./3/ 445,000 8.4%
82 Devonshire Street Owned directly
Boston, MA 02109
Common Dimensional Fund 356,100 6.7%
Advisors, Inc./4/ Owned directly
1299 Ocean Ave., 11/th/ Floor
Santa Monica, CA 90401
Common Berno, Gambal & Barbee, Inc./5/ 267,200 5.0%
1100 North Glebe Road Owned directly
Suite 1040
Arlington, Virginia 22201
___________________
/1/ Based upon 5,157,438 shares of common stock outstanding plus 138,000 shares
which may be acquired within sixty (60) days pursuant to outstanding stock
options.
/2/ Bricoleur Capital Management, LLC ("Bricoleur") filed an amended Schedule
13G with the SEC on February 14, 2002. This Schedule 13G states that
Bricoleur beneficially owned 558,700 shares of Common Stock as of December
31, 2001.
/3/ FMR Corp, and its wholly-owned subsidiary, Fidelity Management & Research
Company ("Fidelity"), Edward C. Johnson, 3rd and Abigail P. Johnson,
jointly filed and amendment Schedule 13G with the SEC on February 13, 2002.
This Schedule 13G states that Fidelity Low-Price Stock Fund owned 445,000
shares of Common Stock as of December 31, 2001.
/4/ Dimensional Fund Advisors, Inc. ("Demensional"), a registered investment
advisor, filed an amended Schedule 13G with the SEC on February 12, 2002.
This Schedule 13G states that Demensional is deemed to have beneficial
ownership of 356,100 shares, all of which shares are owned by advisory
clients of Demensional. Demensional disclaims beneficial ownership of all
such shares.
/5/ Berno, Gambal and Barbee, Inc. ("BGB") filed a Schedule 13G with the SEC on
February 13, 2002. The Schedule 13G states that BGB beneficially owns
267,200 shares of Common Stock as of December 31 2001.
26
The following information is furnished as of March 1, 2002, with
respect to the beneficial ownership by management of Allied's Common Stock:
Name and Address of Amount and Nature of
Title of Class Beneficial Owner Beneficial Ownership Percent of Class/1/
- -------------- ----------------------- -------------------- -------------------
Common J. H. Binford Peay, III 69,326/2/ 1.3%
Owned directly
Common Harry H. Warner 31,000/3/ *
Owned directly
Common Clifford C. Christ 24,000 *
Owned directly
Common J. R. Sculley 57,400/3/ 1.1%
Owned directly
Common Ronald H. Griffith 15,000/3/ *
Owned directly
Common All executive officers and 241,954/4/ 4.6%
directors as a group (8) Owned directly
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.
Mr. Sculley's employment with the Company terminated in September,
1999. During 2001 and 2000, the Company paid Mr. Sculley approximately $100,000
and $194,000, respectively, in satisfaction of his post-employment severance
entitlement. He is entitled to post-employment payments of $80,000 per year
through 2005. Such amounts are subject to acceleration upon a change of control
of the Company.
_________________________
/1/ Based upon 5,157,438 shares of common stock outstanding plus 138,000 shares
which may be acquired within sixty (60) days pursuant to outstanding stock
options.
/2/ Includes stock options for 46,500 shares which may be exercised within
sixty (60) days.
/3/ Includes stock options for 13,000 shares which may be exercised within
sixty (60) days.
/4/ Includes stock options for 117,500 shares which may be exercised within
sixty (60) days.
/*/ Less than 1%
27
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 is 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 being 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
2001 and 2000
Consolidated Statements of Operations for F-6
each of the three years in the period ended
December 31, 2001
Consolidated Statements of Stockholders' F-7
Equity for each of the three years in the period
ended December 31, 2001
Consolidated Statements of Cash Flows F-8
for each of the three years in the period
ended December 31, 2001
Notes to Consolidated Financial Statements F-10
28
(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, 2001 and 2000 and for the three years
ended December 31, 2001:
Schedule I - Condensed
Financial Information of Allied F-34
Schedule II - Valuation
and Qualifying Accounts F-37
(a)(3) Exhibits:
--------
Exhibit 3 - Certificate of Incorporation, as amended (Incorporated by
reference from Form 10-K filed in March, 1992); Restated By-Laws
(Incorporated by reference from Form 10-Q filed in July, 1999).
Exhibit 10A - Employment agreement between Allied Research Corporation
and J. H. Binford Peay, III (Incorporated by reference from Form 8-K
filed in March, 2002 and Form 8-K filed in August, 2002.)
Exhibit 10B - Employment agreement between Allied Research Corporation
and John G. Meyer, Jr. (Incorporated by reference from Form 8-K filed
in March, 2002 and Form 8-K filed in August, 2002.)
Exhibit 10C - Employment agreement between Allied Research Corporation
and Bruce W. Waddell (Incorporated by reference from Form 8-K filed in
March, 2002 and Form 8-K filed in August, 2002.)
Exhibit 10D - Employment agreement between Allied Research Corporation
and Charles A. Hasper (Incorporated by reference from Form 8-K filed in
August, 2002.)
Exhibit 21 - List of Subsidiaries E-3
Exhibit 23 - Consent of Independent Certified Public Accountants E-4
(b) Reports on Form 8-K:
-------------------
No reports on Form 8-K were filed during the fourth quarter of 2001.
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.
29
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
By: /s/ J. H. Binford Peay, III
------------------------------------
J. H. Binford Peay, III,
Chairman of the Board, President
and Chief Executive Officer
Date: March 21, 2002
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: /s/ John G. Meyer, Jr.
-----------------------------------
John G. Meyer, Jr.,
Executive Vice President, Chief Operating
Officer
Date: March 21, 2002
By: /s/ Charles A. Hasper
-----------------------------------
Charles A. Hasper,
Treasurer and Chief Financial Officer
Date: March 21, 2002
**********
/s/ J. R. Sculley
------------------------------------
J. R. Sculley, Director
Date: March 21, 2002
/s/ Clifford C. Christ
------------------------------------
Clifford C. Christ, Director
30
Date: March 21, 2002
/s/ Harry H. Warner
--------------------------------------------
Harry H. Warner, Director
Date: March 21, 2002
/s/ Ronald H. Griffith
--------------------------------------------
Ronald H. Griffith, Director
Date: March 21, 2002
31
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FINANCIAL STATEMENTS AND SCHEDULES
December 31, 2001
FORMING A PART OF
ANNUAL REPORT PURSUANT TO
THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-K
OF
Allied Research Corporation
F-1
Allied Research Corporation
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
- --------------------------------------------------------------------------------
Page
Report of Independent Certified Public Accountants F - 3
Consolidated Balance Sheets at December 31, 2001 and 2000 F - 4
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 2001 F - 6
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 2001 F - 7
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 2001 F - 8
Notes to Consolidated Financial Statements F - 10
Schedules as of and for the three years ended December 31, 2001
Schedule I - Condensed Financial Information of Registrant F - 34
Schedule II - Valuation and Qualifying Accounts F - 37
F-2
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, 2001 and 2000 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
We have also audited Schedules I and II for each of the three years in the
period ended December 31, 2001. 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 8, 2002
F-3
Allied Research Corporation
CONSOLIDATED BALANCE SHEETS
December 31,
- --------------------------------------------------------------------------------
ASSETS
2001 2000
----------- -----------
CURRENT ASSETS
Cash and equivalents $10,921,624 $ 7,570,358
Restricted cash 6,211,977 3,010,253
Accounts and note receivable 19,655,881 18,661,105
Costs and accrued earnings on uncompleted contracts 20,338,227 34,136,421
Inventories 6,190,410 5,910,906
Prepaid and other current assets 2,902,891 2,996,142
----------- -----------
Total current assets 66,221,010 72,285,185
PROPERTY, PLANT AND EQUIPMENT - AT COST
Buildings and improvements 12,266,314 11,905,686
Machinery and equipment 28,745,743 28,460,783
----------- -----------
41,012,057 40,366,469
Less accumulated depreciation 29,773,427 29,803,505
----------- -----------
11,238,630 10,562,964
Land 1,060,074 1,112,356
----------- -----------
12,298,704 11,675,320
OTHER ASSETS
Intangibles, less accumulated amortization of
$2,768,998 in 2001 and $2,538,365 in 2000 7,144,427 3,251,404
Deferred taxes 935,035 285,313
Other assets 184,656 139,258
----------- -----------
8,264,118 3,675,975
----------- -----------
$86,783,832 $87,636,480
=========== ===========
The accompanying notes are an intergal part of these consolidated
financial statements.
F-4
Allied Research Corporation
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31,
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
2001 2000
------------- ------------
CURRENT LIABILITIES
Notes payable $2,478,199 $ 3,699,100
Current maturities of long-term debt 1,255,090 1,079,053
Accounts payable 10,306,055 22,008,658
Accrued liabilities 6,783,641 4,320,612
Customer deposits 2,052,973 5,777,112
Income taxes 2,149,795 502,332
------------- -------------
Total current liabilities 25,025,753 37,386,867
LONG-TERM DEBT, less current maturities 3,109,873 3,529,539
CONTINGENCIES AND COMMITMENTS - -
STOCKHOLDERS' EQUITY
Preferred stock, no par value; authorized, 1,000,000
shares; none issued - -
Common stock, par value, $.10 per share; authorized
10,000,000 shares; issued and outstanding, 5,129,179
in 2001 and 4,812,464 in 2000 512,918 481,246
Capital in excess of par value 17,273,168 13,689,053
Retained earnings 50,672,524 40,305,945
Accumulated other comprehensive loss (9,810,404) (7,756,170)
----------- -------------
58,648,206 46,720,074
----------- -------------
$86,783,832 $87,636,480
=========== =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
Allied Research Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
- --------------------------------------------------------------------------------
2001 2000 1999
----------- ------------ -----------
Revenue $96,947,263 $107,742,815 $59,032,607
Cost and expenses
Cost of sales 63,253,073 79,974,464 50,863,772
Selling and administrative 12,108,778 10,818,384 10,756,462
Research and development 1,504,262 1,583,071 1,686,008
----------- ------------ -----------
76,866,113 92,375,919 63,306,242
----------- ------------ -----------
Operating income (loss) 20,081,150 15,366,896 (4,273,635)
Other income (deductions)
Interest income 644,093 654,504 835,496
Interest expense (1,666,068) (1,524,098) (1,102,312)
Other - net (315,592) 489,392 782,781
----------- ------------ -----------
(1,337,567) (380,202) 515,965
----------- ------------ -----------
Earnings (loss) before discontinued
operation and income taxes 18,743,583 14,986,694 (3,757,670)
Income tax expense (benefit) 8,377,004 6,281,370 (475,803)
----------- ------------ -----------
Earnings (loss) from continuing operations 10,366,579 8,705,324 (3,281,867)
Discontinued operation - engineering and technical segment - 516,993 (746,414)
----------- ------------ -----------
NET EARNINGS (LOSS) $10,366,579 $ 9,222,317 $(4,028,281)
=========== ============= ===========
Earnings (loss) per share
Basic
Continuing operations $ 2.11 $ 1.79 $ (.68)
Discontinued operation - .11 (.16)
----------- ------------ -----------
Net income (loss) $ 2.11 $ 1.90 $ (.84)
=========== ============ ===========
Diluted
Continuing operations $ 2.10 $ 1.79 $ (.68)
Discontinued operation - .11 (.16)
----------- ------------ -----------
Net income (loss) $ 2.10 $ 1.90 $ (.84)
=========== ============ ===========
Weighted average number of common shares:
Basic 4,905,114 4,844,267 4,818,857
=========== ============ ===========
Diluted 4,947,260 4,846,399 4,818,857
=========== ============ ===========
The accompaning notes are an integral part of these consolidated financial
statements.
F-6
Allied Research Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
Preferred Common Stock Capital
----------------------------
Stock, no $.10 in excess Retained
par value Shares par value of par value earnings
--------- ------------ ------------ ------------ ------------
Balance at January 1, 1999 $ - 4,757,174 $ 475,717 $ 13,391,099 $ 35,111,909
Common stock awards - 66,048 6,605 440,597 -
Employee stock purchase plan purchases - 31,900 3,190 193,989 -
Exercise stock options - 4,200 420 15,330 -
Retirement of common stock - (22,600) (2,260) (134,276) -
Comprehensive loss
Net loss for the year - - - - (4,028,281)
Currency translation adjustment - - - - -
Total comprehensive loss - - - - -
--------- ------------ ------------ ------------ ------------
Balance at December 31, 1999 - 4,836,722 483,672 13,906,739 31,083,628
Common stock awards - 17,000 1,700 139,550 -
Employee stock purchase plan purchases - 16,930 1,693 126,821 -
Exercise stock options - 17,500 1,750 126,875 -
Retirement of common stock - (75,688) (7,569) (610,932) -
Comprehensive income
Net earnings for the year - - - - 9,222,317
Currency translation adjustment - - - - -
Total comprehensive income - - - - -
--------- ------------ ------------ ------------ ------------
Balance at December 31, 2000 - 4,812,464 481,246 13,689,053 40,305,945
Common stock awards - 71,400 7,140 575,170 -
Common stock issued - 184,777 18,478 2,428,522 -
Employee stock purchase plan purchases - 38,538 3,854 281,993 -
Exercise stock options - 22,000 2,200 298,430 -
Comprehensive income
Net earnings for the year - - - - 10,366,579
Currency translation adjustment - - - - -
Total comprehensive income - - - - -
--------- ------------ ------------ ------------ ------------
Balance at December 31, 2001 $ - 5,129,179 $ 512,918 $ 17,273,168 $ 50,672,524
========= ============ ============ ============ ============
Accumulated Total
other comprehensive stockholders'
income (loss) equity
------------- ------------
Balance at January 1, 1999 $ 985,125 $ 49,963,850
Common stock awards - 447,202
Employee stock purchase plan purchases - 197,179
Exercise stock options - 15,750
Retirement of common stock - (136,536)
Comprehensive loss
Net loss for the year - -
Currency translation adjustment (6,139,599) -
Total comprehensive loss - (10,167,880)
------------ ------------
Balance at December 31, 1999 (5,154,474) 40,319,565
Common stock awards - 141,250
Employee stock purchase plan purchases - 128,514
Exercise stock options - 128,625
Retirement of common stock - (618,501)
Comprehensive income
Net earnings for the year - -
Currency translation adjustment (2,601,696) -
Total comprehensive income - 6,620,621
------------ ------------
Balance at December 31, 2000 (7,756,170) 46,720,074
Common stock awards - 582,310
Common stock issued - 2,447,000
Employee stock purchase plan purchases - 285,847
Exercise stock options - 300,630
Comprehensive income
Net earnings for the year - -
Currency translation adjustment (2,054,234) -
Total comprehensive income - 8,312,345
------------ ------------
Balance at December 31, 2001 $ (9,810,404) $ 58,648,206
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
Allied Research Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
- --------------------------------------------------------------------------------
2001 2000 1999
------------ ------------ -------------
Cash flows from (used in) operating activities
Net earnings (loss) for the year $ 10,366,579 $ 9,222,317 $ (4,028,281)
Adjustments to reconcile net earnings (loss) to net
cash from continuing operating activities
Depreciation and amortization 2,224,844 2,194,654 2,136,214
Gain on sale of subsidiary - (462,893) -
(Income) loss from discontinued operation - (54,100) 746,414
Gain on sale of fixed assets - - (45,808)
Deferred income taxes (702,243) 2,390,672 (2,578,217)
Provision for estimated losses on contracts (329,691) 539,504 (159,795)
Common stock awards 582,310 141,250 447,202
Changes in assets and liabilities
Accounts receivable (494,411) (4,913,544) 9,190,965
Cost and accrued earnings on
uncompleted contracts 12,324,767 (20,925,251) 4,098,209
Inventories 1,002,068 (2,633,890) (609,352)
Prepaid expenses and other assets 992,182 (1,485,542) 7,830,017
Accounts payable and accrued liabilities (10,633,608) 10,640,553 (11,630,667)
Customer deposits (3,489,764) 5,283,474 (14,145,053)
Income taxes 1,688,021 (81,649) (634,944)
------------- ------------ -------------
3,164,475 (9,366,762) (5,354,815)
------------- ------------ -------------
Net cash provided by (used in) continuing
operating activities 13,531,054 (144,445) (9,383,096)
Cash flows from (used in) investing activities
Capital expenditures (3,108,281) (3,893,026) (2,256,305)
Proceeds from sale of discontinued operations - 2,822,495 -
Proceeds from sale of fixed assets 129,848 42,911 519,866
Acquisitions (556,181) - (924,680)
------------ ------------ -------------
Net cash used in investing activities (3,534,614) (1,027,620) (2,661,119)
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
Allied Research Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31,
- --------------------------------------------------------------------------------
2001 2000 1999
------------ ----------- ------------
Cash flows from (used in) financing activities
Net (decrease) increase in short-term borrowings (1,058,481) 2,864,172 1,286,882
Principal payments on long-term debt (3,883,738) (1,082,419) (982,207)
Proceeds from issuance of long-term debt 1,307,430 1,346,594 153,403
Retirement of common stock - (618,501) (136,536)
Proceeds from stock purchases 586,577 257,139 212,929
Restricted cash and restricted deposits (3,201,724) 1,497,829 9,505,823
------------ ----------- ------------
Net cash (used in) provided by
financing activities (6,249,936) 4,264,814 10,040,294
Cash flows provided by discontinued operation - - 493,258
Effects of exchange rates on cash (395,238) (1,490,245) (2,754,139)
------------ ----------- ------------
Net increase (decrease) in cash
and equivalents 3,351,266 1,602,504 (4,264,802)
Cash and equivalents at beginning of year 7,570,358 5,967,854 10,232,656
------------ ----------- ------------
Cash and equivalents at end of year $ 10,921,624 $ 7,570,358 $ 5,967,854
============ =========== ============
Supplemental Disclosures of Cash Flow Information:
- -------------------------------------------------
Cash paid during the year for
Interest $ 1,691,880 $ 1,425,688 $ 1,255,594
Income taxes 6,939,330 6,072,626 1,719,500
Supplemental of Non-Cash Investing and Financing
- ------------------------------------------------
Activities:
- ------------
Non-cash consideration in connection with business
acquisition $ 6,833,311 $ - $ -
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT 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, ARC Europe, S.A. (ARC Europe), a Belgian company,
Allied Research Corporation Limited (Limited), an inactive United Kingdom
company, and News/Sports Microwave Rental, Inc. (NS Microwave), a California
corporation, which was acquired in a purchase transaction on December 31,
2001. The operations of a former subsidiary, Barnes & Reinecke, Inc. (BRI), a
Delaware corporation, are classified as discontinued operations.
ARC Europe includes its wholly-owned subsidiaries Mecar S.A. (Mecar),
Sedachim, S.I. (Sedachim) and VSK Electronics N.V. (the VSK Group). The VSK
Group is comprised of VSK Electronics N.V. and its wholly-owned subsidiaries,
Tele Technique Generale, S.A., I.D.C.S., N.V., Belgian Automation Units, N.V.
and Vigitec S.A. (Vigitec), which was acquired in a purchase transaction on
December 14, 1999. Vigitec's results of operations for the period from
December 14, 1999 to December 31, 1999 were not significant and Vigitec's
operations were consolidated effective January 1, 2000.
Significant intercompany transactions have been eliminated in consolidation.
Continuing Business Operations and Segments
-------------------------------------------
During 2001, 80 percent of Allied's revenues was attributable to the
development and production of ammunitions and weapons systems in Belgium with
sales to customers in Asia, the Middle East, the United States and Europe, and
20 percent of the revenue is attributable to developing, manufacturing,
distributing and servicing industrial security products in Belgium with
industrial customers throughout Europe. Allied's operating subsidiaries are
located in Belgium. On December 31, 2001, Allied purchased a domestic company,
NS Microwave. NS Microwave is a manufacturer and distributor of specialty
surveillance and video broadcast equipment and products. NS Microwave's
operations will be consolidated effective January 1, 2002. A description of
the current business segments and operations of Allied 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. ARC
Europe has no direct operating assets or business activity and serves as a
Belgian holding company.
Product Sales
-------------
Mecar is primarily engaged in the development and production of ammunitions
and weapons systems. Mecar derives substantially all of its revenue,
primarily on fixed price contracts, from direct and indirect sales to
foreign governments, including via U.S. Government sponsored foreign
military sales contracts and subcontracts.
F-10
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - 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 ARC Europe, 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 at completion. Provision for estimated losses and penalties 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.
Costs and accrued profits on uncompleted direct and indirect fixed price
contracts with foreign governments and direct and indirect U.S. Government
foreign military sales contracts, 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. Revenues from service work rendered are
recorded when performed.
In the normal course of the Company's business, it does not bill shipping and
handling costs to customers. Shipping and handling costs are included in cost
of sales.
Use of Estimates
----------------
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and revenue and expenses during the reporting
period. Actual results could differ from those estimates.
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
NOTE A - SUMMARY OF SIGNIFICANT 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 goodwill and intangibles acquired in connection with
businesses acquired and have been 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
and forecasted profitability of the related business, cash flow and management
estimates. There have been no adjustments to the carrying values of intangible
assets resulting from these evaluations. Goodwill and intangibles acquired
subsequent to June 30, 2001 have not been amortized.
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.
The Company recognizes the fair value of hedge contracts to which it is a
party on its balance sheet. 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 as a
component of revenue or cost of sales in accordance with criteria established
by SFAS No. 133 and SFAS No. 138.
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
NOTE A - SUMMARY OF SIGNIFICANT 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 (loss) per share amounts have been computed based on the
weighted average number of common shares outstanding. Diluted earnings (loss)
per share reflects the increase in weighted average common shares outstanding
that would result from the assumed exercise of outstanding options, calculated
using the treasury stock method, unless they are anti-dilutive.
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 2000 and 1999 financial statements have been reclassified
to conform to the current presentation.
Newly Issued Accounting Standards
---------------------------------
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective for
fiscal years beginning after December 15, 2001; however, certain provisions of
this Statement apply to goodwill and other intangible assets acquired between
July 1, 2001 and the effective date of SFAS 142. Major provisions of these
Statements and their effective dates for the Company are:
. All business combinations initiated after June 30, 2001 are required to
use the purchase method of accounting. The pooling of interest method of
accounting is prohibited except for transactions initiated before July 1,
2001.
. Intangible assets acquired in a business combination are required to be
recorded separately from goodwill if they arise from contractual or other
legal rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as
part of a related contract, asset or liability.
. Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective January 1, 2002,
all previously recognized goodwill and intangible assets with indefinite
lives will no longer be subject to amortization.
. All acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting.
F-13
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Newly Issued Accounting Standards - continued
---------------------------------
. Effective January 1, 2002, goodwill and intangible assets with indefinite
lives will be tested for impairment annually and whenever there is an
impairment indicator.
In July, 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This Statement applies to all entities.
It applies to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and (or)
the normal operation of a long-lived asset, except for certain obligations of
lessees. This Statement is effective for financial statements issued for
fiscal years beginning after June 15, 2002.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. The provisions of the
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001.
The Company's management has not completed its assessment of the impact of
these statements, however, it does expect that a substantial portion of its
intangible assets will no longer be amortized.
NOTE B - ACQUISITION
On December 31, 2001, the Company acquired all of the common stock of
News/Sports Microwave Rental, Inc. (NS Microwave) in a transaction accounted
for as a purchase. This acquisition was undertaken to provide Allied with a
strong position in a high-growth segment of the North America electronic
security market.
The assets acquired are summarized below:
Current assets $2,919,000
Property and equipment 194,000
Intangibles 1,065,000
Goodwill 3,211,000
----------
Assets acquired $7,389,000
==========
The purchase price included cash and expenses of approximately $556,000,
shares of Allied Research Corporation common stock valued at $2,447,000, based
on the market price of the shares, a note for $70,000 and the assumption of
$4,316,000 of liabilities.
The allocation of the purchase price will be finalized upon receipt of the
final independent appraisal report. It is anticipated that approximately
$760,000 of the purchase price is allocable to intangible assets, including
patents, that will be amortized over a weighted average period of 7.7 years.
The residual values of intangibles subject to amortization are not expected to
be significant at this time. Intangibles not subject to amortization,
including goodwill, are approximately $3,516,000.
F-14
NOTE B - ACQUISITION - Continued
Goodwill arising from this transaction is related to security systems and
service segment and is not deductible for tax purposes. The purchase price is
subject to adjustment in the event adjustments are required or certain
contractual provisions are breached.
NS Microwave's 2001 revenues were approximately $6.2 million and it operated
at a small loss, accordingly, pro forma results of operations have not been
presented since they are not material to the Company's current operating
results.
NOTE C - DISCONTINUED OPERATION
On March 6, 2000, the Company sold the stock of BRI, the engineering and
technical segment of its business. Summarized data relating to the
discontinued operation of the engineering and technical segment for the years
ended December 31, 2000 and 1999 are as follows:
2000 1999
---------- -----------
Results of operations
Revenue $1,492,501 $11,237,247
Income (loss) before taxes 72,494 (1,155,744)
Income taxes (benefit) 18,394 (409,330)
Net income (loss) 54,100 (746,414)
Net gain (loss) from discontinued operations
Gain on sale, net of taxes $ 462,893 $ -
Net income (loss) 54,100 (746,414)
---------- -----------
$ 516,993 $ (746,414)
========== ===========
NOTE D - RESTRICTED CASH
Mecar is generally required under the terms of its contracts for direct and
indirect sales to 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. VSK has also pledged certain term
deposits to secure outstanding bank guarantees.
Restricted cash of $6,211,977 and $3,010,253 included in current assets at
December 31, 2001 and 2000, respectively, was restricted or pledged as
collateral for these agreements and other obligations.
F-15
NOTE E - ACCOUNTS AND NOTE RECEIVABLE
Accounts and note receivable at December 31 are comprised as follows:
2001 2000
-------- ---------
Direct and indirect receivables from foreign governments $10,198,834 $ 9,409,943
Commercial and other receivables, less allowance for doubtful
receivables of $106,601 in 2001 and $153,840 in 2000 9,457,047 9,251,162
----------- ----------
$19,655,881 $18,661,105
=========== ===========
Included in commercial and other receivables at December 31, 2000 was a
$900,000 note receivable bearing interest at 6.5% arising from the sale of
BRI. The note was paid in full at maturity in September 2001.
NOTE F - PREPAID EXPENSES
Advance payments on contracts in process in 2001 and 2000 of approximately
$1,000,440 and $1,061,185, respectively, were included in prepaid expenses.
NOTE G - CREDIT FACILITY
The Company is obligated under various credit agreements (the Agreements) with
its foreign banks and its foreign banking syndicate 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% base on letters of credit and
guarantees outstanding. These fees are charged to interest expense. As of
December 31, 2001, guarantees and performance bonds of approximately $18
million remain outstanding.
Advances under the Agreements are secured by restricted cash of approximately
$6.2 million at December 31, 2001. Amounts outstanding are also collateralized
by the letters of credit received under the contracts financed, and a pledge
of approximately $24 million on Mecar's assets. Certain Agreements provide for
restrictions on payments or transfers to Allied and Limited for management
fees, intercompany loans, loan payments, the maintenance of certain net worth
levels and other provisions.
Mecar also had a line-of-credit for working capital of approximately $9.2
million at December 31, 2000, that was paid in full at maturity in February
2001.
NOTE H - ACCRUED LOSSES ON CONTRACTS
The Company provided for accrued losses of $382,385 at December 31, 2001 in
connection with the completion of certain contracts in progress. These
contracts are scheduled to be completed in 2002. Accrued contract losses at
December 2000 were $712,076. These amounts are included in accrued expenses.
F-16
NOTE I - LONG-TERM DEBT
Long-term obligations as of December 31 consist of the following:
2001 2000
----------- -----------
Mortgage loan agreements $ 1,547,279 $ 2,098,458
Other 2,817,684 2,510,134
----------- -----------
4,364,963 4,608,592
Less current maturities 1,255,090 1,079,053
----------- -----------
$ 3,109,873 $ 3,529,539
=========== ===========
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, that had a balance due of $1,251,912 at
December 31, 2001. The loan matures in January, 2004. As amended, the loan is
payable in annual principal installments of $550,000. The loan bears interest
at rates ranging from 5.60% to 6.95% per year, is collateralized by a mortgage
on the Company's real estate and includes a prepayment penalty. The Company is
also obligated on several mortgages on the VSK Group's buildings which have a
total balance due of $295,367 at December 31, 2001. The mortgages mature at
various dates through 2005 in annual installments of approximately $39,000,
plus interest at rates ranging from 3.9% to 4.5% per year.
Other
-----
The Company is also obligated on various vehicle, equipment, capital lease
obligations and other loans. The notes and leases are generally secured by the
assets acquired, bear interest at rates ranging from 3.50% to 8.00% and mature
at various dates through 2006.
Scheduled annual maturities of long-term obligations as of December 31, 2001
are as follows:
Year Amount
---- ------
2002 $ 1,255,090
2003 2,344,170
2004 583,416
2005 41,437
2006 42,198
NOTE J - BENEFIT PLANS
The Company instituted a simplified employee pension plan in 2000 for its
domestic staff. Contributions to the plan in 2001 and 2000 were approximately
$104,000 and $78,000, respectively.
In June 1992, the Board of Directors adopted the Allied Research Corporate
Outside Directors Retirement Plan. Future benefits under this plan were
terminated during 2000. The net present value of benefits payable to currently
eligible directors has been previously accrued and reflected as a charge to
earnings.
Under the terms of labor agreements at its Belgian subsidiaries, the Company
contributes to certain governmental and labor organization employee benefit and
retirement programs.
F-17
NOTE K - CONTINGENCIES AND COMMITMENTS
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 recognizes 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.
U.S. Government sponsored foreign military sales contracts are subject to U.S.
Government review. It is not anticipated that adjustments, if any, with respect
to determination of costs under these direct contracts or subcontracts will
have a material effect on the Company's consolidated results of operations or
financial position.
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 $32
million were outstanding as of December 31, 2001 ($37.8 million at December 31,
2000).
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. Certain of these agreements provide for
severance payments in the events of termination under certain conditions.
In connection with the sale of BRI, the Company has agreed to indemnify the
purchaser of BRI's stock in the event the purchaser suffers losses as a result
of breaches of representations and warranties made by the Company in the sales
agreement. The agreement to indemnify is subject to various conditions and
limitations.
The Company leases domestic office space and equipment under operating leases
which expire at various dates through 2007. 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, 2001:
Year Amount
---------- ------
2002 $123,611
2003 120,000
2004 120,000
2005 120,000
2006 120,000
Thereafter 120,000
Total rental expense charged to operations approximated $136,000, $137,000 and
$122,000, for the years ended December 31, 2001, 2000 and 1999, 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 workforce reductions. After giving effect to
prior workforce reductions, current workloads, expected levels of future
operations, severance policies and future severance costs, post employment
benefits are not expected to be material to the Company's financial position.
F-18
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 2001 and 2000, the Company's financial instruments include
cash, cash equivalents, receivables, accounts payable, borrowings, forward
exchange contracts, guarantees and performance bonds. The face value of cash,
cash equivalents, receivables and payables approximate their carrying values
because of the short-term nature of the instruments. The estimated fair value
of the other financial instruments and off-balance-sheet credit obligations
are as follows:
2001 2000
--------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ------------ ---------- ------------
Notes payable and long-term debt, including
current maturities $6,843,162 $ 6,843,162 $8,307,692 $ 8,307,692
Foreign exchange contracts 945,786 945,786 - 37,800,000
Off-balance-sheet instruments
Guarantees and performance bonds - 18,000,000 - 23,711,000
Standby letters of credit - 380,000 - 242,000
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.
. The fair value of notes payable and long-term debt is estimated based on
approximate market prices for the same or similar issues or the current
rates offered to the Company for debt of the same remaining maturities.
The Company believes the aggregate carrying value approximates fair value.
. The fair value of foreign exchange contracts are based on quoted market
prices for the same or similar instruments in 2001; the national covenant
of the contracts in 2000 were used prior to the implementation of SFAS
133.
. Estimated fair values for off-balance-sheet instruments, which include
performance bonds and advance payment guarantees 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.
NOTE M - DERIVATIVE FINANCIAL INSTRUMENTS
In the first quarter of the current calendar year, the Company adopted
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. SFAS 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The accounting for the changes in the
fair value of the derivative depends on the intended use of the derivative and
the resulting designation.
The Company designates its derivatives based upon the criteria established by
SFAS 133. For a derivative designated as a fair value hedge, the gain or loss
is recognized in earnings in the period of change together with the offsetting
loss or gain on the risk being hedged. For a derivative designated as a cash
flow hedge, the effective portion of the derivative's gain or loss is
initially reported as a component of accumulated other comprehensive income
(loss) and is subsequently reclassified to earnings when the hedge exposure
effects earnings. The ineffective portion of the hedge is reported in earnings
immediately.
F-19
NOTE M - DERIVATIVE FINANCIAL INSTRUMENTS - Continued
The Company uses derivatives to manage exposures to foreign currency exchange
rate risks. The objective is to reduce the volatility of earnings and cash
flows associated with changes in foreign currency exchange rates.
The Company uses foreign currency future contracts to minimize the foreign
currency exposures that arise from sales contracts with certain foreign
customers and certain costs associated with these contracts. Under the terms
of these sales contracts, the selling price and certain costs are payable in
U.S. dollars rather than the Euro, which is Mecar's functional currency. These
futures contracts are designated as fair value hedges since they are designed
to lock in the net Euros that will be realized when the amounts due under the
sales agreement are received. As a matter of policy, the Company does not
enter into speculative hedge contracts or use other derivative financial
instruments.
As of December 31, 2001 futures contracts designated as fair value hedges with
a $32 million notional amount were outstanding and the fair value of these
contracts was $945,786. The Company estimates the fair value of outstanding
hedge contracts based on quotes obtained from the counterparties to the
derivative contracts. The Company recognizes the fair value of hedge contracts
that expire in less than one year as current assets or liabilities. Those that
expire in more than one year are recognized as long-term assets or
liabilities.
The adoption of SFAS 133 did not have a material impact on the Company's
operating results. Gains and losses from settlements of derivative contracts
are reported as a component of other income. Net changes in the fair value of
derivative contracts prior to settlement are also reported as a component of
other income. There were no net gains or losses realized during the year ended
December 31, 2001 from hedge ineffectiveness, from firm commitments that no
longer qualifies as fair value hedges, nor were any amounts excluded from the
assessment of hedge effectiveness.
The Company's foreign exchange forward and option contracts expose the Company
to credit risks to the extent that the counter parties may be unable to meet
the terms of the agreement. The company minimizes such risk by using major
financial institutions as its counterparties. Management does not expect any
material loss as result of default by counterparties.
NOTE N - CAPITAL STOCK
During 1998, the Board of Directors authorized the repurchase of up to 200,000
shares of the Company's common stock. During 2000 and 1999, 75,688 and 22,600
shares were reacquired and retired, respectively. No shares were reacquired in
2001.
The Company may grant stock options, appreciation rights, incentive options,
performance shares and other awards to key executives, management, directors
and employees under various plans at prices equal to or in excess of the
market price at the date of the grant. The options for common shares generally
are exercisable over a five to ten year period and expire ten years from the
date of grant. At December 31, 2001, options to acquire 286,000 shares of the
Company's common stock were outstanding and 478,492 shares were reserved for
future issuance under the following plans:
F-20
NOTE N - CAPITAL STOCK - Continued
2001 Equity Incentive Plan
--------------------------
During 2001, the Board of Directors and shareholders approved and reserved
240,000 shares of common stock for awards to key employees of the Company and
its subsidiaries. The plan authorized the Compensation Committee of the Board
of Directors to grant stock options, stock appreciation rights, restricted
stock, performance shares and cash awards. Each type of grant places certain
requirements and restrictions upon the Company and grantee. In 2001, options
to acquire 135,496 shares were granted and 1,800 shares were also awarded
under the plan. The plan expires in December 2010.
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. At December
31, 2001, a total of 223,600 options and shares had been issued under the
plan, including 98,104 and 10,000 shares in 2001 and 2000, respectively.
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 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 2001, 2000 and 1999 - 38,538, 16,930 and 31,548 shares, respectively
were issued under the Plan and $48,410, $21,822 and $29,570 was charged to
operations, respectively. A total of 160,012 shares have been issued under the
Plan.
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,
2001, all options granted have been exercised or expired.
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 permitted option grants through March
31, 1994. In March 1994, 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, 2001, options for 20,500 shares remain
outstanding.
F-21
NOTE N - 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
2001, 2000 and 1999, the Company granted 4,000, 7,000 and 4,000 shares of
common stock subject to the plan and charged $32,360, $52,500 and $24,500,
respectively, to operations. To date a total of 43,000 shares were issued
under the Plan.
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. Through 1996, the Company granted
options to purchase a total of 115,000 shares all of which have been
exercised. During 2001 and 2000, the Company granted options to purchase a
total of 26,000 shares and 39,000 shares, respectively, at $8.00 and $7.88 per
share. This plan expired in 2001, therefore no further grants can be made. At
December 31, 2001, options for 45,500 shares remained outstanding.
Other
-----
Stock grants for 52,000 and 48,746 shares of the Company's common stock were
made to various employees during 2001 and 1999, respectively. These shares
were issued outside of any existing plan and their value of $416,000 and
$487,460, respectively, was charged to operations.
Preferred Share Purchase Rights Agreement
-----------------------------------------
The Board of Directors has adopted a new Preferred Stock Purchase Rights
Agreement in 2001. The Agreement provides each stockholder of record a
dividend distribution of one "right" for each outstanding share of common
stock. Rights become exercisable the earlier of ten days following: (1) a
public announcement that an acquiring person has purchased or has the right to
acquire 15% or more of the Company's common stock, or (2) the commencement of
a tender offer which would result in an offeror beneficially owning 15% or
more of the outstanding common stock. All rights held by an acquiring person
or offeror expire on the announced acquisition date and all rights expire at
the close of business on May 31, 2011.
Each right under the Preferred Share Purchase Rights Agreement entitles a
stockholder to acquire at a purchase price of $50, one-hundredth of a share of
preferred stock which carries voting and dividend rights similar to one share
of common stock. Alternatively, a right holder may elect to purchase for $50
an equivalent number of common shares (or in certain circumstances, cash,
property or other securities of the Company) at a price per share equal to
one-half of the average market price for a specified period. In lieu of the
purchase price, a right holder may elect to acquire one-half of the common
shares available under the second option. The purchase price and the preferred
share fractional amount are subject to adjustment for certain events as
described in the Agreement.
Rights also entitle the holder to receive a specified number of shares of an
acquiring company's common stock in the event that the Company is not the
surviving corporation in a merger or if 50% or more of the Company's assets
are sold or transferred.
At the discretion of a majority of the Board and within a specified time
period, the Company may redeem all of the rights at a price of $.01 per right.
The Board may also amend any provision of the Agreement prior to exercise of
the rights.
F-22
NOTE N - CAPITAL STOCK - Continued
The following table summarizes option activity:
2001 2000 1999
---------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- ----------- -------- ----------- -------- ----------
Options outstanding at beginning of year 62,000 $ 7.83 50,750 $ 7.72 127,350 $ 7.49
Options granted 246,000 8.63 39,000 7.88 - -
Options exercised (22,000) 7.45 (17,500) 7.35 (4,200) 3.75
Options forfeited - - - - (56,000) 8.25
Options expired - - (10,250) 8.25 (16,400) 5.13
-------- ----------- -------- ----------- -------- ----------
Options outstanding at end of year 286,000 $ 8.54 62,000 $ 7.83 5 0,750 $ 7.72
======== =========== ======== =========== ======== ==========
Option price range at end of year $ 7.88 $ 3.75 $ 3.75
to to to
$ 9.01 $ 8.25 $ 8.25
Option price range for exercised shares $ 3.75 $ 3.75 $ 3.75
to to
$ 8.00 $ 8.25
Options exercisable at end of year 102,000 62,000 50,750
Weighted-average fair value of options,
granted during the year $ 3.03 $ 3.57 -
The following table summarizes options outstanding at December 31, 2001:
Weighted Average
Number Weighted Average Remaining
Outstanding Exercise Prices Exercise Prices Contractual Life
----------- --------------- --------------- ----------------
45,000 $7.88 to $8.00 $7.93 3.89
200,500 $8.25 to $8.63 $8.29 6.31
40,000 $9.01 $9.01 4.58
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options pricing model. The weighted average assumptions used
in the model were as follows.
2001 2000
------ ------
Risk free interest rate 4.54% 6.46%
Expected volatility rate 40.00% 60.00%
Expected lives - years 3 3
Divided yield - -
There were no options granted in 1999.
F-23
NOTE N - CAPITAL STOCK - Continued
The following table presents the pro forma decrease in income or increase in
loss 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:
2001 2000 1999
-------- -------- --------
Pro forma
Net earnings decrease $142,062 $85,459 $46,503
Earnings per share decrease
Basic .03 .02 .01
Diluted .03 .02 .01
The pro forma amounts may not be representative of future amounts since the
estimated fair value of stock options is amortized to expense over the vesting
period, and additional options may be granted in future periods.
NOTE O - MAJOR CUSTOMERS
The Company derives the majority of its revenues directly or indirectly from
foreign governments (some of which are through the U.S. government via the
Foreign Military Sales program), primarily on fixed price contracts. Direct
and indirect sales to two agencies of The Kingdom of Saudi Arabia and Belgium
accounted for approximately 47%, 30% and 1% of revenue in 2001, 54%, 23% and
4% of revenue in 2000 and 26%, 27% and 6% of revenue in 1999.
NOTE P - 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 2001 and 2000 was not
significant.
The majority of ammunition sales are to or for the benefit of two agencies of
The Kingdom of Saudi Arabia 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, 2001 and 2000, backlog orders, believed to be firm, from continuing
operations, approximated $56.0 and $63.5 million, respectively.
Amounts in foreign banks at December 31, 2001 and 2000 were approximately
$14.4 million and $9.1 million, respectively. Changes in the value of the U.S.
dollar and other currencies affect the Company's financial position and
results of operations since the Company has assets and operations in Belgium
and sells its products on a worldwide basis.
F-24
NOTE Q - OTHER - NET
Other income and (expense) included in the Company's consolidated statements
of operations is comprised as follows:
2001 2000 1999
---------- ---------- ----------
Net currency transaction (losses) gains $(436,612) $ (42,183) $ 664,042
Miscellaneous - net 121,020 531,575 118,739
--------- --------- ----------
$(315,592) $ 489,392 $ 782,781
========= ========= ==========
NOTE R - INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the 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) from continuing operations before income taxes is comprised as
follows:
2001 2000 1999
------------ ----------- ------------
Domestic $ (1,975,063) $ (572,025) $ (334,165)
Foreign 20,718,646 15,558,719 (3,423,505)
------------ ----------- -----------
$ 18,743,583 $14,986,694 $(3,757,670)
============ =========== ===========
The Company's provision for income taxes is comprised as follows:
2001 2000 1999
----------- ----------- -----------
Currently (refundable) payable
Domestic $ 158,644 $ (36,379) $ 448,206
Foreign 8,920,896 3,677,622 1,436,918
---------- ---------- -----------
9,079,540 3,641,243 1,885,124
Deferred - net (702,536) 2,640,127 (2,360,927)
---------- ---------- -----------
Total attributable to continuing operations 8,377,004 6,281,370 (475,803)
Taxes related to discontinued operation 18,394 (409,330)
---------- ---------- -----------
Total tax provision $8,377,004 $6,299,764 $ (885,133)
========== ========== ===========
F-25
NOTE R - INCOME TAXES - Continued
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:
2001 2000 1999
------ ------ ------
Taxes at statutory rate 34.0% 34.0% (34.0)%
Foreign tax rate differential 6.8 6.3 (5.8)
Permanent differences 2.8 - -
Amortization of intangibles .3 1.1 13.8
Deemed dividend - - 11.2
Other .8 (0.9) (3.2)
---- ---- -----
Income taxes 44.7% 40.5% (18.0)%
==== ==== =====
In 1999, the Company recognized the tax benefits of Mecar's net operating loss
in the fourth quarter, when it became likely that it would realize the
benefits of such losses in future periods, as a result of new contract awards
in the latter part of 1999. These benefits were partially offset by taxes
related to an intercompany dividend.
Foreign loss carryforwards of $6.6 million were utilized in 2000 for tax
reporting purposes.
Foreign tax credit carryforwards of approximately $374,000 were available at
December 31, 2001, which expire at various dates through 2004.
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 $46
million at December 31, 2001. Determination of the amount of unrecognized
deferred tax liabilities attributable to these unremitted earnings is not
practicable.
F-26
NOTE R - INCOME TAXES - Continued
Deferred taxes at December 31, 2001 and 2000 are comprised as follows:
2001 2000
----------- ----------
Current deferred tax asset
Deferred compensation $ 64,032 $ -
Net unrealized exchange loss (11,540) -
----------- ----------
52,492 -
Noncurrent deferred tax asset (liability)
Foreign tax credit carryforwards 270,661 288,399
Foreign and domestic net operating loss carryforwards 942,812 -
Depreciation and amortization 21,069 207,871
Deferred compensation - 199,588
Deferred income (199,988) (120,772)
Valuation adjustments 171,142 -
Other - (1,374)
----------- ----------
Noncurrent deferred tax asset 1,205,696 573,712
Valuation allowance (270,661) (288,399)
----------- ----------
Total deferred tax asset before valuation allowance 935,035 285,313
----------- ----------
Net deferred tax asset $ 987,527 $ 285,313
=========== ==========
Deferred tax components are included in the following balance sheet accounts:
2001 2000
----------- ----------
Prepaid expenses and other current assets $ 52,492 $ -
Noncurrent deferred tax asset 935,035 285,313
----------- ----------
$ 987,527 $ 285,313
=========== ==========
F-27
NOTE S - EARNINGS PER COMMON SHARE
The average outstanding shares and dilutive stock options used in the basic
and diluted earnings per share (EPS) computations are as follows:
2001 2000 1999
----------------------- ------------------------------------ -------------------------------------
Income from Loss from Income from
continuing continuing Discontinued continuing Discontinued
operations Net income operation operation Net loss operations operation Net income
----------- ---------- ---------- ------------ ---------- ----------- ------------ ----------
Basic EPS
Weighted average
number of common
shares outstanding 4,905,114 4,905,114 4,844,267 4,844,267 4,844,267 4,818,857 4,818,857 4,818,857
=========== ========== ========== ============ ========== =========== ============ ==========
Diluted EPS
Weighted average
number of common
shares outstanding 4,905,114 4,905,114 4,844,267 4,844,267 4,844,267 4,818,857 4,818,857 4,818,857
Effect of dilutive
securities - stock
options 42,147 42,147 2,132 2,132 2,132 - - -
----------- ---------- ---------- ------------ ---------- ----------- ------------ ----------
Adjusted weighted
average number of
common shares
outstanding 4,947,260 4,947,260 4,846,399 4,846,399 4,846,399 4,818,857 4,818,857 4,818,857
=========== ========== ========== ============ ========== =========== ============ ==========
The incremental shares from assumed conversions of options, totaling 20,500
and 44,750 in 2000 and 1999, respectively, are not included in computing the
diluted per share amounts, since inclusion of such shares would be
anti-dilutive.
NOTE T - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS
The Company currently operates in two principal segments: Product sales
(Mecar), and Security Systems and Services (The VSK Group). Product sales
includes the production of ammunitions, weapons systems and ordnance products
systems integration. Security Systems and Services includes sales and services
to industrial and institutional customers of protection, fire and access
control systems and services and the assets of NS Microwave acquired on
December 31, 2001. 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 costs and Limited's costs.
F-28
NOTE T - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - Continued
The Company's foreign operations are conducted by Mecar and the VSK Group.
2001 2000 1999
------------ ------------- -------------
Revenues from external customers, from
continuing operations
Product Sales $ 77,071,290 $ 87,610,826 $ 38,575,416
Security Systems and Service 19,875,973 20,131,989 20,457,191
------------ ------------- -------------
$ 96,947,263 $ 107,742,815 $ 59,032,607
============ ============= =============
Interest expense
Product Sales $ 1,574,002 $ 1,411,723 $ 795,630
Security Systems and Service 91,911 112,184 130,535
Corporate and Other 155 191 176,147
------------ ------------- -------------
$ 1,666,068 $ 1,524,098 $ 1,102,312
============ ============= =============
Interest income
Product Sales $ 321,853 $ 283,745 $ 471,925
Security Systems and Service 184,742 130,196 104,787
Corporate and Other 137,498 240,563 258,784
------------ ------------- -------------
$ 644,093 $ 654,504 $ 835,496
============ ============= =============
Income tax expense (benefit)
Product Sales $ 7,347,311 $ 5,180,113 $ (2,447,046)
Security Systems and Service 1,431,554 1,270,993 1,645,356
Corporate and Other (401,861) (169,736) 325,887
------------ ------------- -------------
$ 8,377,004 $ 6,281,370 $ (475,803)
============ ============= =============
Depreciation and amortization
Product Sales $ 1,297,356 $ 1,449,062 $ 1,520,183
Security Systems and Service 912,879 732,928 611,482
Corporate and Other 14,609 12,664 4,549
------------ ------------- -------------
$ 2,224,844 $ 2,194,654 $ 2,136,214
============ ============= =============
Segment profit (loss), from continuing
operations before taxes
Product Sales $ 17,378,954 $ 12,703,260 $ (7,743,149)
Security Systems and Service 3,497,515 2,855,459 4,172,136
Corporate and Other (2,132,886) (572,025) (186,657)
------------ ------------- -------------
$ 18,743,583 $ 14,986,694 $ (3,757,670)
============ ============= =============
F-29
NOTE T - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - Continued
2001 2000 1999
----------- ----------- -----------
Segment assets
Product Sales $59,264,836 $68,125,248 $40,499,173
Security Systems and Service 25,797,810 16,458,039 13,116,269
Corporate and Other/(1)/ 1,721,186 3,053,193 2,316,845
----------- ----------- -----------
Total reportable segments 86,783,832 87,636,480 55,932,287
Discontinued operations - - 4,198,644
----------- ----------- -----------
$86,783,832 $87,636,480 $60,130,931
=========== =========== ===========
Expenditure for segment assets
Product Sales $2,170,480 $ 2,840,971 $ 1,685,305
Security Systems and Service 937,801 1,013,477 571,000
Corporate and Other - 38,578 -
----------- ----------- -----------
$ 3,108,281 $ 3,893,026 $ 2,256,305
=========== =========== ===========
/(1)/ Net of intersegment receivables.
The following geographic area data includes trade revenues based on customer
location and assets based on physical location.
Geographic Segment Data
2001 2000 1999
----------- ------------ -----------
Revenues from external customers
Saudi Arabia $57,111,737 $ 45,688,844 $19,864,608
United States/(1)/ 1,548,402 25,726,688 13,632,279
Belgium 15,117,143 19,771,275 18,272,388
Canada/(1)/ 15,522,751 11,320,304 -
France 3,467,574 3,069,015 4,116,046
Other foreign countries 4,179,656 2,166,689 3,147,286
----------- ------------ -----------
$96,947,263 $107,742,815 $59,032,607
=========== ============ ===========
/(1)/ Foreign military sales for the benefit of Saudi Arabia.
F-30
NOTE T - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - Continued
Geographic Segment Data
2001 2000 1999
----------- ----------- -----------
Segment assets
Belgium $74,528,030 $84,583,288 $53,615,442
United Kingdom 3,411 185,326 256,652
United States /(1)/ 12,252,391 2,867,866 2,060,193
----------- ----------- -----------
Total reportable segments 86,783,832 87,636,480 55,932,287
Discontinued operation - - 4,198,644
----------- ----------- -----------
$86,783,832 $87,636,480 $60,130,931
=========== =========== ===========
/(1)/ Net of intersegment receivables and investments.
2001 2000 1999
----------- ----------- -----------
Property and equipment
Belgium $12,067,047 $11,623,114 $10,234,423
United States 231,657 52,206 27,293
----------- ----------- -----------
$12,298,704 $11,675,320 $10,261,716
=========== =========== ===========
NOTE U - QUARTERLY FINANCIAL DATA (UNAUDITED)
(Amounts in thousands, except per share data)
First Second Third Fourth Total
2001 Quarter Quarter Quarter Quarter For Year
- --------------------------------------------- ------- ------- ------- ------- --------
Revenue $17,010 $25,837 $26,847 $27,253 $96,947
Gross profit 4,988 7,410 10,043 11,253 33,694
Earnings from continuing operations 1,143 2,022 3,203 3,999 10,367
Net earnings 1,143 2,022 3,203 3,999 10,367
Per share data:
Basic
Continuing operations $ .23 $ .41 $ .65 $ .82 $ 2.11
======= ======= ======= ======= =======
Diluted
Continuing operations $ .23 $ .41 $ .65 $ .81 $ 2.10
======= ======= ======= ======= =======
F-31
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE U - QUARTERLY FINANCIAL DATA (UNAUDITED) - Continued
(Amounts in thousands, except per share data)
First Second Third Fourth Total
2000 Quarter Quarter Quarter Quarter For Year
- -------------------------------------- ------- ------- ------- ------- --------
Revenue $23,474 $28,548 $25,308 $30,413 $107,743
Gross profit 4,517 4,920 8,128 10,203 27,768
Earnings from continuing operations 967 1,448 3,120 3,170 8,705
Discontinued operation 485 32 - - 517
Net earnings 1,452 1,480 3,120 3,170 9,222
Per share data:
Basic
Continuing operations $ .20 $ .30 $ .64 $ .66 $ 1.79
Discontinued operation .10 .01 - - .11
------- ------- ------- ------- --------
Net income $ .30 $ .31 $ .64 $ .66 $ 1.90
======= ======= ======= ======= ========
Diluted
Continuing operations $ .20 $ .30 $ .64 $ .66 $ 1.79
Discontinued operation .10 .01 - - .11
------- ------- ------- ------- --------
Net income $ .30 $ .31 $ .64 $ .66 $ 1.90
======= ======= ======= ======= ========
F-32
SCHEDULES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Allied Research Corporation
(Parent Company)
BALANCE SHEETS
December 31,
- --------------------------------------------------------------------------------
2001 2000
------------ ------------
ASSETS
Cash and equivalents $ 2,723,143 $ 1,527,064
Investment in subsidiaries 53,922,437 41,118,859
Due from subsidiaries 2,310,523 3,868,732
Deferred tax asset 995,303 274,258
Deposits and other 326,517 1,185,811
------------ ------------
Total assets $ 60,277,923 $ 47,974,724
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued liabilities $ 1,509,717 $ 1,254,650
Income taxes payable 120,000 -
------------ ------------
Total liabilities 1,629,717 1,254,650
STOCKHOLDERS' EQUITY
Common stock 512,918 481,246
Capital in excess of par value 17,273,168 13,689,053
Retained earnings 50,672,524 40,305,945
Accumulated other comprehensive loss (9,810,404) (7,756,170)
------------ ------------
58,648,206 46,720,074
------------ ------------
$ 60,277,923 $ 47,974,724
============ ============
F-34
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
Allied Research Corporation
(Parent Company)
STATEMENTS OF OPERATIONS
Year ended December 31,
- --------------------------------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Income
Intercompany management fees $ 2,870,627 $ 2,867,912 $ 2,967,432
Dividend from subsidiary - - 10,456,160
Other - net 491,258 876,091 645,250
------------ ------------ ------------
3,361,885 3,744,003 14,068,842
Costs and expenses
Administrative and other 5,336,948 3,853,136 3,946,847
------------ ------------ ------------
(Loss) earnings before equity in operations of
subsidiaries (1,975,063) (109,133) 10,121,995
Equity in operations of subsidiaries, less dividends
received of $10,456,160 in 1999 11,779,241 9,161,714 (13,824,389)
------------ ------------ ------------
Earnings (loss) before income taxes 9,804,178 9,052,581 (3,702,394)
Income taxes (benefit) (562,401) (169,736) 325,887
------------ ------------ ------------
NET EARNINGS (LOSS) $ 10,366,579 $ 9,222,317 $ (4,028,281)
============ ============ ============
Earnings (loss) per common share
Basic $ 2.11 $ 1.90 $ (.84)
============ ============ ============
Diluted $ 2.10 $ 1.90 $ (.84)
============ ============ ============
F-35
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
Allied Research Corporation
(Parent Company)
STATEMENTS OF CASH FLOWS
Year ended December 31,
- --------------------------------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Cash flows from (used in) operating activities
Net earnings (loss) for the year $ 10,366,579 $ 9,222,317 $ (4,028,281)
Adjustments to reconcile net (loss) earnings to net cash
from (used in) operating activities
Equity in operations of subsidiaries (11,779,241) (9,161,714) 3,368,229
Dividend from subsidiary - - 10,456,160
Depreciation and amortization 14,609 13,663 4,549
Deferred income taxes (721,045) (133,357) (122,700)
Common stock awards and grants 582,310 141,250 447,202
Changes in assets and liabilities
Other assets 844,685 (912,363) 31,923
Due to subsidiaries 1,552,209 (2,595,188) (9,548,529)
Accounts payable and accrued liabilities 185,577 830,621 (515,170)
Income taxes 120,000 (81,649) (244,748)
------------ ------------ ------------
(9,200,896) (11,898,737) 3,876,916
------------ ------------ ------------
Net cash provided by (used in) operating activities 1,165,683 (2,676,420) (151,365)
Cash flows from investing activities
Capital expenditures - (38,578) -
Proceeds from sale of subsidiary - 2,822,495 -
Acquisition (556,181) - -
------------ ------------ ------------
Net cash (used in) provided by investing activities (556,181) 2,783,917 -
Cash flows from financing activities
Proceeds from employee stock purchase plan shares 586,577 257,139 212,929
Retirement of common stock - (618,501) (136,536)
------------ ------------ ------------
Net cash provided by (used in) financing activities 586,577 (361,362) 76,393
------------ ------------ ------------
Net increase (decrease) in cash and equivalents 1,196,079 (253,865) (74,972)
Cash and equivalents at beginning of year 1,527,064 1,780,929 1,855,901
------------ ------------ ------------
Cash and equivalents at end of year $ 2,723,143 $ 1,527,064 $ 1,780,929
============ ============ ============
Supplemental Disclosures of Cash Flow Information:
- -------------------------------------------------
Cash paid during the year for:
Income taxes $ 44,367 $ 70,123 $ 68,154
Interest 155 191 221,973
Supplemental of Non-Cash Investing and Financing Activities:
- -----------------------------------------------------------
Non-cash dividend from subsidiary $ - $ - $ 10,456,160
Non-cash consideration in connection with business acquisition
6,833,311 - -
F-36
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allied Research Corporation
Valuation and Qualifying Accounts
Years ended December 31, 2001, 2000 and 1999
--------------------------------------------
- ---------------------------------------------------------------------------------------------------
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, 2001
- ----------------------------
Estimated losses on
contracts $ 712,076 $ 382,385 $ - $ 712,076/(1)/ $ 382,385
=========== ========== ========= =========== ============
Allowance for doubtful
receivables $ 153,840 $ - $ - $ 47,239/(2)/ $ 106,601
=========== ========== ========= =========== ============
Valuation allowances on
deferred tax assets $ 288,399 $ - $ - $ 17,738 $ 270,661
=========== ========== ========= =========== ============
Year ended December 31, 2000
- ----------------------------
Estimated losses on
contracts $ 172,572 $ 712,076 $ - $ 172,572/(1)/ $ 712,076
=========== ========== ========= =========== ============
Allowance for doubtful
receivables $ 168,682 $ - $ - $ 14,842/(2)/ $ 153,840
=========== ========== ========= =========== ============
Valuation allowances on
deferred tax assets $ 1,379,239 $ - $ - $ 1,090,840/(3)/ $ 288,399
=========== ========== ========= =========== ============
Year ended December 31, 1999
- ----------------------------
Estimated losses on
contracts $ 175,470 $ 172,572 $ - $ 175,470/(1)/ $ 172,572
=========== ========== ========= =========== ============
Allowance for doubtful
receivables $ 213,362 $ - $ - $ 44,680/(2)/ $ 168,682
=========== ========== ========= =========== ============
Valuation allowances on
deferred tax assets $ 498,365 $ 880,874 $ - $ - $ 1,379,239
=========== ========== ========= ===-======= ============
/(1)/ Represents amount of reserve relieved through completion of contracts.
/(2)/ Represents write-off of receivables.
/(3)/ Reductions in deferred tax valuation allowance requirements in 2000.
F-37
EXHIBITS
EXHIBIT INDEX
- --------------------------------------------------------------------------------
Number Description of Exhibit Page
- ------ ---------------------- ----
21 List of Subsidiaries E-3
23 Consent of Independent Certified
Public Accountants E-4