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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission file number
December 31, 1995 0-2545
ALLIED RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission file number
December 31, 1995 O-2545
ALLIED RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2281015
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8000 Towers Crescent Drive
Suite 750
Vienna, Virginia 22182
(Address of principal executive offices) (Zip Code)
Allied's telephone number, including area code: (703) 847-5268
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - Par Value $.10
(Title of Class)
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 III
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 4, 1996:
Common Stock - Par Value $.10 $16,805,665
The number of shares of registrant's Common Stock outstanding as of March 4,
1996, was 4,422,056.
Item 1. Business.
General.
Allied Research Corporation ("Allied") was incorporated in 1962 under
the name Allied Research Associates, Inc. Allied changed its corporate name to
Allied Research Corporation in 1988. Allied's business is primarily conducted
through its four (4) wholly-owned subsidiaries, MECAR S.A. ("MECAR"), Barnes &
Reinecke, Inc. ("BRI"), Allied Research Corporation Limited ("Limited") and ARC
Services, Inc. ("Services") as well as a group of Belgian corporations acquired
by MECAR in 1994 and 1995 lead by VSK Electronics, S.A., Teletechnique Generale,
S.A. and IDCS, S.A. (collectively, "The VSK Group"). MECAR is located in
Petit-Roeulx-lez-Nivelles, Belgium; BRI is headquartered in Arlington Heights,
Illinois and has operations in East Moline, Illinois and Troy, Michigan; Limited
is located in the United Kingdom; Services, which effectively terminated its
operations at the end of 1995, operated out of Allied's headquarters office in
Vienna, Virginia; and The VSK Group operates from several different locations in
Belgium.
Description of Business.
Allied.
Allied provides management and marketing services to its subsidiaries.
Allied also provides export licensing and freight forwarding services for its
subsidiaries.
MECAR.
MECAR develops, designs, manufactures and sells ammunition and weapon
systems. Substantially all of MECAR's revenues are derived from the sale of
ammunition which is used with weapons that are generally considered defensive
weapons.
MECAR designs and manufactures a wide variety of shells, grenades and
rockets in the artillery, anti-tank and anti-personnel categories. It also
produces two classes of weapons for light infantry use. The following are the
principal products produced and sold by MECAR:
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105mm Tank - APFSDS-T M1060 (Armour Piercing Discarding Sabot
Fin Stabilized Tracer) Round. For use with 105mm tank guns - US M68, UK
L7 and French CN105F1 - this projectile is used to defeat armored
targets by means of the kinetic energy (KE) of its monobloc tungsten
alloy long rod penetrator. This model of KE round is a product
improvement of the current in-service MECAR 105mm TK APFSDS-T M1050.
Projectiles consist of a sub-projectile and sabot. The sub-projectile
comprises an armour piercing fin stabilized tungsten alloy long rod
penetrator, and aluminum windshield and a tracer assembled in the fin
assembly. This is contained within a 3 piece aluminum discarding sabot,
held in place with a plastic band at the forward end and a plastic
obturating band toward the sabot base. The projectile is crimped to the
lined cartridge case which is loaded with cool burning,
multi-perforated, loose propellant, and is fitted with an electric
primer. This round is comparable to the US model M833 APFSDS-T round.
90mm Anti-tank APFSDS-T M562 Round. This shell developed by
MECAR consists of a tungsten penetrator weighing 1.7 kilograms, a
discardable sabot of light alloy and a fin with tracer. This kinetic
energy shell, weighing 2.8 kilograms with the sabot, is fired at a
muzzle velocity of 1460 meters per second with an effective combat
range of 1800 meters. The penetration capability of this shell against
a 120mm thick armour plate slanted at 60 degrees is achieved at ranges
in excess of 2,000 meters. MECAR has developed and designed several
versions of the 90 mm round which can be used by various guns in usage
around the world.
25mm APFSDS-T M935 Round. This ammunition round is produced
for use against light armor and support vehicles and was first
delivered to customers starting in 1993. This round was Mecar's first
entry into the medium caliber ammunition market, and further expanded
the customer base to include infantry fighting and reconnaissance
vehicles.
Universal Bullet Trap Rifle Grenades. The universal bullet
trap rifle grenade is designed to be light, effective, accurate and
simple to use. It is fitted over the muzzle of any standard military
rifle with a muzzle outer diameter of 22mm and fired from the shoulder
in the normal manner. This method of firing a grenade is made possible
by MECAR's development of the universal bullet trap ("BTU"). The BTU is
a patented device which can be used with all existing makes of steel
core or soft core bullets in calibers 7.62mm and 5.56mm, including the
latest round (SS109) used in the M-16 rifle. The BTU is fitted within
the tail of the grenade. When the bullet is fired, it lodges in the BTU
and the expanding gases
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released by the discharged round propel the grenade to its target.
MECAR manufactures several different bullet trap grenades including
high explosive fragmentation, anti-personnel, armour piercing, smoke
generating, white phosphorus, and parachute flare (night
illuminating).
Rifle Grenades. A full range of rifle grenades utilizing the
ballistite cartridge for launching can also be manufactured by MECAR.
These include anti-personnel, armour and concrete piercing, smoke,
illumination, delay and other types. This type of grenade is no longer
widely used due to the development of the bullet trap grenade.
60 to 202mm Ammunition. Other ammunition manufactured by MECAR
for use in various gun systems includes the kinetic energy penetrator
round, high explosive anti-personnel fragmentation round, anti-tank
tracer projectile, smoke tracer projectile, anti-personnel canister,
and training devices.
84mm SAKR Recoilless Rifle. MECAR has recently expanded its
line of anti-armor munitions with the addition of their 84mm SAKR
recoilless rifle and its associated family of ammunition. The SAKR
fills the gap between rifle grenades and the 90mm family of guns and
ammunition. Several large orders have already been received. The SAKR
ammunition (HEAT, HE-T and HE-TP-T) is also interoperable with existing
84mm systems which has been sold extensively around the world. MECAR is
now in a position to provide ammunition to support the existing
inventory of weapons as well as further expanding the use of this type
of infantry weapon with countries that have already purchased MECAR
rifle grenades.
BRI.
On May 26, 1987, Allied purchased all of the outstanding capital stock
of BRI, a Delaware corporation.
BRI is an engineering and manufacturing firm that specializes in
design, prototype fabrication, production, test and inspection documentation for
government and industry. The major portion of BRI's business is in military
vehicle technology and technical support of combat and support vehicles. BRI's
capability includes the design of heavy wheeled and tracked vehicles. Military
and commercial technical manuals are prepared, technical data packages are
maintained, and logistic support analysis conducted. BRI is the U.S. Army's
technical support contractor on the M109 self-propelled 155mm Howitzer family of
vehicles, M88 Recovery Vehicle and M55 Sheridan Light Tank.
4
BRI's technical publications department provides documents and manuals
for the presentation and support of products. This includes both commercial and
government department of defense customers.
Limited.
Limited, a systems integrator in the ammunition industry, was
established by Allied in 1989 to augment its overseas business development
efforts. In 1991 and 1992, Limited procured and supplied end item munitions such
as artillery projectiles and tank ammunition including cartridge cases, primers
and propellants pursuant to two (2) contracts obtained from one of MECAR's
principal customers. Limited has completed these contracts, which comprised
Limited's entire backlog. In 1994, the London office of Limited was closed and
the employment of the relevant employees was terminated. Allied and MECAR
continue to attempt to obtain additional systems integration contracts. If any
such contracts are obtained in the name of Limited, such entity will be
appropriately staffed and supported to carry out the contracts. At present, the
only substantial assets of Limited are a promissory note evidencing advances
made by Limited to MECAR and an intercompany receivable in the aggregate amount
of $21,774,000 which have been eliminated in consolidation.
Services.
Services was organized to provide demilitarization and environmental
services to governments and private corporations. No significant revenue has
been earned by Services. Its operations were effectively terminated at the end
of 1995. No significant activity is expected in this area for the foreseeable
future.
The VSK Group.
On June 1, 1994, MECAR acquired all of the outstanding stock of The VSK
Group. The VSK Group engages in the business of developing, manufacturing,
selling, installing and servicing security systems for private industry. The
systems marketed by The VSK Group include intrusion detection, access control
and fire detection systems. The principal products manufactured by The VSK Group
are central control panels; the other 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.
5
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, U.S. Government agencies and prime
contractors, primarily on fixed price contracts. The addition of The VSK Group
adds a non-military component to company-wide operations. During 1995, two
agencies of a foreign government and another foreign government accounted for
approximately 12%, 31% and 27% of Allied's revenues. During 1994, 5%, 60%, 14%
and 7%, of Allied's revenues were derived from two agencies of a foreign
government and two other foreign governments, respectively. During 1995 and
1994, Allied derived approximately 17% and 12%, respectively, of its annual
revenue from U.S. Government agencies and contractors. The VSK Group accounted
for approximately 28% and 10% of Allied's 1995 and 1994 revenues, respectively.
MECAR's products are sold directly or indirectly to the defense
departments of governments. MECAR is regulated by Belgian law regarding the
foreign governments with which it may do business.
The sales by MECAR in any given period and its backlog at any
particular time may be significantly influenced by one or a few large orders.
This is due to the nature of its business. An order for MECAR's products is
typically for a large quantity and/or a substantial aggregate price, primarily
because materials required for the manufacture of the products cannot be
economically purchased in small quantities and because of the favorable
economies of large volume production. In addition, the production period
required to fill most such orders may range from several months to a year.
Accordingly, MECAR's business is dependent upon its ability to obtain such large
orders. MECAR has no continuing contract with any customer to purchase MECAR's
products. MECAR does, of course, accept smaller orders when it is profitable to
do
6
so or when MECAR management believes that accepting such an order is otherwise
in the best interests of MECAR. MECAR's products are designed for general
military use by a variety of government customers.
When MECAR obtains a contract for the sale of its products, it
generally receives down payment(s) and/or letter(s) of credit to be applied to
the purchase price upon shipment of the products.
BRI's engineering and technical services are sold directly or
indirectly to the United States Department of Defense and to certain civilian
customers. BRI has a number of ongoing design and engineering assignments with
U.S. military agencies, however, BRI has no continuing contract with any
customer to provide products or services. The size of the orders vary and
completion time ranges from several months to a few days. U.S. Government
contracts are subject to termination at the convenience of the U.S. Government
or for default. BRI has also begun to market its services to foreign governments
and in 1995 received its first foreign military sales contract from the U.S.
government to provide upgrade parts for a foreign government's military
hardware.
Limited's system integration services have been marketed directly and
indirectly to the defense departments of governments. In 1994, Allied closed
Limited's London office and terminated the employment of the individuals
operating from such office. Allied and MECAR continue to market systems
integration business.
The VSK Group derives substantially all of its revenue from sales and
services to private industry such as banks, private businesses, quasi-public
office buildings, etc. 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 two (2)
multi-year orders for its products and services. IDCS sells its products
principally in European markets.
Marketing.
Most of the marketing activities of MECAR and Limited are handled by
MECAR's staff of sales engineers and executive staff. In addition, MECAR
advertises in trade journals and participates in trade shows. MECAR is also
represented by marketing representatives in different markets. MECAR obtains
orders from the agencies of a foreign government which constitute its principal
customers through an independent marketing representative.
7
BRI's marketing activities are conducted by its executive and
management staff. In addition, BRI participates in various trade shows and
advertises in trade journals.
Some of Limited's marketing is also handled by Allied's executive
staff. The two (2) systems integration contracts previously obtained by Limited
were obtained through Allied's efforts via MECAR's principal marketing
representative.
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.
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 1995, 1994 and 1993, MECAR expended $1,039,631, $940,133
and $671,685, 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 and fixtures and special explosive loading
and testing systems.
BRI conducts research and development under contract to both government
and commercial clients. Generally, full-size prototypes are supplied where the
research and development requirement calls for a working model or unit.
Approximately $93,000, $322,200 and $170,000 was expended in 1995, 1994
and 1993, respectively, for research and development activities on behalf of
Services. No significant amounts are expected to be expended for such activities
in 1996.
The business of The VSK Group requires continuous investment in
research and development to update and enhance the security systems. The VSK
Group employs a staff of design engineers specialized in the field of both
electronic hardware and software. During 1995, The VSK Group expended $954,363
on research and development. Prior to 1995, The VSK Group did not
separately account for its research and development costs.
8
Suppliers and Materials.
Production of ammunition requires an ample supply of chemicals,
pyrotechnical materials and metal component parts and casings. During the
development phase the selection of specific propellants and case materials
includes consideration of the availability of raw materials and reliability of
suppliers. MECAR generally attempts to ensure that several vendors will be
available in the open market to compete for all supply contracts. However, once
the development phase is complete and the design has been stabilized for certain
products, the continued availability of supplies can become critical to its
ability to perform a particular contract. MECAR seeks to protect itself against
shortages and similar risks by planning alternative means of production, by
producing internally, and by monitoring the availability and sources of
supplies.
Production of weapons requires a continued supply of a variety of
components and materials. MECAR depends upon major suppliers to provide such
components and materials where in-house capability does not exist. It has
generally found such materials and supplies to be readily available.
For its manufacturing and assembly operations, BRI is dependent on
suppliers of raw materials and parts, some of which are customer-directed sole
source procurement. BRI has found such supplies and materials to be generally
available.
By the nature of its systems integration business, Limited is required
to rely extensively upon vendors to supply end-use items required under
Limited's contracts with its customer. To date, Limited has found all necessary
items to be generally 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.
Backlog.
As of December 31, 1995 and December 31, 1994, Allied had backlog
orders believed to be firm, after giving effect to the percentage of completion
method of accounting, of approximately $68.1 (of which $21.1 relate to The VSK
Group) and $23.1 million, respectively. The backlog of orders as of December 31,
1995 are expected to be substantially filled in 1996.
9
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 representatives. Competition is mainly based upon
accessibility of potential markets, technical expertise, quality and
capabilities of the product and price.
BRI is in a very competitive business and many of its competitors are
larger companies with greater capital resources. A large portion of BRI's
business is obtained through the competitive bidding process.
Limited has a number of competitors in its attempts to obtain systems
integration business, many of which are larger companies with greater financial
resources.
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.
10
Personnel.
As of March 4, 1996, Allied had 5 employees. As of March 4, 1996,
MECAR, BRI and The VSK Group had 519 full-time, permanent employees classified
as follows:
MECAR
Technical and salaried employees 50
Hourly workers 214
Technical consultants 2
BRI
Salaried employees 70
Hourly employees 42
The VSK Group
Technical salaried employees 117
Hourly workers 24
The classification of employees noted above for MECAR and The VSK Group
is in accordance with Belgian law.
Patents.
MECAR holds a number of patents in many countries and with varying
expiration dates covering certain of its products. Allied does not believe there
is a threat of a material loss of revenue with the expiration of any of these
patents.
Environmental Regulations.
Allied does not anticipate that compliance with any laws or regulations
relating to environmental protection will have a material effect on its capital
expenditures, earnings or competitive position.
Principal Customers.
MECAR has historically received a large percentage of its revenue from
two (2) agencies of a foreign government. In 1991, 1992 and 1993, MECAR and in
1991 and 1992, Limited had contract revenue from these agencies in amounts in
excess of those historically received. Contract awards from these agencies from
1992 through 1994 were substantially reduced. Contract awards rebounded somewhat
in 1995, although well below the levels received in the 1991-1993 timeframe.
11
Item 2. Properties.
Allied's principal executive offices are located in Vienna, Virginia,
where it leases approximately 4,300 square feet of office space. The lease
expires in September, 2000.
MECAR's principal factory is located approximately 25 miles south of
Brussels near Nivelles, Belgium. The factory principally consists of a
manufacturing and administrative complex which was occupied by MECAR in 1989.
The manufacturing area consists of approximately 112,000 square feet and the
administration facilities consist of approximately 28,000 square feet. There
are a number of older buildings on the property that are still used in
conjunction with the new complex. A development range is also maintained on
this property. MECAR also owns a 500 acre test range in the vicinity of the
Village of Marche in the Ardennes region of Belgium, which was acquired in
1985. This property, which for several years had been leased by MECAR, was
acquired by S.A. MECAR Immobiliere, a wholly-owned subsidiary of MECAR.
Throughout 1995, MECAR operated at an average of 50% of productive
capacity of its facility, assuming the operation of 3 manufacturing shifts.
MECAR is currently operating at approximately 45% of such productive capacity.
MECAR is currently operating one full shift plus a partial manufacturing second
shift.
Capital expenditure programs for equipment planned in 1996 will require
funding of approximately $2.5 million.
BRI operates from an office and manufacturing building in Arlington
Heights, Illinois. BRI has leased approximately 57,500 square feet of office,
engineering and manufacturing space through July 31, 1999. Assuming one full
shift is maximum capacity, BRI is currently operating at approximately 100% of
the productive capacity of its Arlington Heights facility.
BRI also operates from leased facilities located in Troy, Michigan and
East Moline, Illinois. The Troy operations are conducted from a leased facility
consisting of approximately 17,500 square feet of office and engineering space.
The Troy lease expires on January 31, 2000. The East Moline facility contains
1,200 square feet of office and engineering space and is leased on a month to
month basis. Both facilities are used as bases to service Department of Defense
customers in the vicinity. BRI is currently operating at approximately 100% of
the productive capacities of each of its Troy and East Moline facilities.
12
The VSK Group operates from owned facilities containing approximately
43,000 square feet. Such facilities are currently operating at approximately
100% of productive capacity.
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 1995.
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 Rsrch. The table below shows the high
and low sales prices of Allied's Common Stock during 1995 and 1994 (as reported
by AMEX):
1995 High Low
1st Quarter $5 $3-1/4
2nd Quarter 4-1/4 2-9/16
3rd Quarter 4-5/8 3-5/8
4th Quarter 4-3/8 3-1/8
1994 High Low
1st Quarter $9-1/4 $6-3/8
2nd Quarter 7 4
3rd Quarter 5 2-7/8
4th Quarter 6-3/8 3-1/4
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Stockholders.
There were approximately 1,708 holders of record of the Common Stock of
Allied as of March 6, 1996.
Dividends.
Allied paid a 5% stock dividend on November 6, 1992 to holders of
record of its Common Stock on October 15, 1992. Cash was paid in lieu of the
issuance of fractional shares. There have been no cash dividends declared or
paid by Allied in 1993, 1994 or 1995. The banking agreements of MECAR and
Limited restrict the ability of such subsidiaries to transfer funds to Allied as
described in Management's Discussion and Analysis of Financial Condition and
Results of Operations.
14
Item 6. Selected Financial Data.
The following selected financial data relates to Allied's consolidated
financial position and results of operations for 1995, 1994, 1993, 1992 and
1991:
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(000's omitted except per share amounts)
Revenues $65,769 $ 69,847 $147,097 $217,334 $174,677
Net earnings (loss) (2,013) (10,941) 7,995 18,040 14,229
Per Share:
Net earnings (loss) (.46) (2.49) 1.73 3.99 3.21
Total assets 94,253 107,386 163,591 116,236 128,330
Long-term debt
obligations and
redeemable preferred
stock 28,435 14,108 19,218 6,462 7,437
Cash dividends
declared per
common share - - - - -
NOTE: During 1993, Allied changed its method of accounting for income taxes as a
result of the adoption of FASB 109. This change did not have a significant
effect on the comparability of the above selected financial data. See Notes A
and P to the accompanying financial statements for Allied. Per share amounts
have been retroactively restated to reflect the 1992 stock dividend.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
Allied provides management services to its wholly-owned
subsidiaries. Its principal assets are the stock of its wholly-owned
subsidiaries: MECAR, BRI, Limited and Services. Allied's consolidated statements
have eliminated intercompany trans-
15
actions. The following discussion refers to the financial condition,
liquidity and results of operations of Allied on a consolidated basis unless
otherwise stated. All dollars are in millions except per share amounts.
Allied incurred a net loss of $2.01 ($.46 per share) for 1995
compared with a net loss of $10.94 ($2.49 per share) for 1994 and a net profit
of $8 ($1.73 per share) for 1993 (after a provision for restructuring costs of
$2.1 net of taxes or $0.44 per share).
Allied's 1995 loss resulted principally from a loss incurred
at MECAR. The loss at MECAR was primarily attributable to insufficient revenue
from MECAR's traditional customer base. MECAR historically relies upon contracts
from two agencies of a foreign government for the major portion of its revenue.
In 1994, MECAR received orders from such customers for only $22. While the level
of such orders increased to $48 in 1995, such orders were not received until the
second half of 1995 and did not provide sufficient revenue in the last half of
1995 to offset the losses incurred during the first half of 1995.
Trends In Operations
Allied's results from operations are uneven as a result of the
volatility of the overseas military business of MECAR. While management is
encouraged by the increase in orders received by MECAR in 1995, MECAR must
continue to obtain similar or larger orders on a timely basis. The losses of
1994-1995 have eroded the profits earned in the 1991-1993 period.
Management continues to attempt to broaden its revenue base in
several respects. First, MECAR continues to attempt to open new markets for its
products. These efforts resulted in revenue from first-time customers of
approximately $2.6 in 1995. Second, the acquisition of The VSK Group (in 1994)
and IDCS (in 1995) constitute an attempt to mitigate the impact of the
volatility of the overseas military operations on Allied's results.
Notwithstanding these efforts, at present, Allied's results continue to be
principally driven by the results of MECAR and more specifically by the business
generated from MECAR's traditional customer base.
MECAR began 1996 with a backlog of approximately $34.7. It has
also received $15.4 of new orders in early 1996. While it anticipates the
receipt of additional orders in 1996 from other sources, the most substantial
orders anticipated by MECAR are from its traditional customer base. Such
contracts come at irregular intervals and have proven impossible to predict.
Given the lead time between receipt of such contracts and recognition of
significant amounts of revenue therefrom, the timing of receipt of any such
contracts is critical for Allied's 1996 results and liquidity.
16
Trends In Liquidity And Capital Resources
Allied experienced liquidity problems during 1990 and the
first portion of 1991 due to substantial operating losses experienced during
1988 and 1989 as well as the pledge of cash needed to accommodate the then
increasing backlog of orders. The liquidity improved significantly in 1991-1993.
The substantial losses incurred in 1994 caused a decline in liquidity which
decline continued throughout 1995 due to the more modest losses incurred in
1995. A further decline in liquidity is forecast for 1996 unless MECAR obtains
and finances substantial contracts from its principal customer base or other
customers. If such contracts are not timely obtained, the continued decline in
liquidity will cause Allied to continue its reduction of operating costs, seek
additional capital and/or take other currently unidentified actions to remedy
the liquidity deficiency.
Liquidity.
Allied's liquidity continued to decline in 1995, principally
as a result of non-profitable operations at MECAR. Working capital was
approximately $13.98 at December 31, 1995, which is a decrease of $2.47 from the
December 31, 1994 level. The working capital is required for operations and to
support credit facility agreements.
Accounts receivable at December 31, 1995 decreased from
December 31, 1994 by $.7 due to larger collections at the end of 1995. Costs and
accrued earnings on uncompleted contracts decreased by $2.08 from 1994 as a
result of lower levels of work in process at 1995 year-end. Inventory increased
by $2.01 over 1994, generally as a result of longer production times. Prepaid
expenses and deposits decreased $.11 due to a decline in new orders. Current
liabilities decreased by $26.07 from 1994 levels as a result of the completion
and final delivery of various contracts and an increase in long-term debt.
During 1995, 1994 and 1993, Allied funded its operations
principally with internally generated cash and back-up credit facilities
required for foreign government contracts.
Allied and its subsidiaries implemented substantial cost
cutting initiatives in 1995. Allied reduced its general and administrative
expenditures by 17%; similarly, MECAR reduced its expenditures by 2%. The London
office of Services was closed in late 1994 which resulted in substantial cost
savings in 1995. Services projects were wound down throughout 1995 which
resulted in a reduction in costs of 45%. Selling and administrative expenses for
Allied increased by $.13 in 1995 over 1994 since the 1995 expenses included a
full year of such expenses at VSK (as opposed to seven (7) months in 1994) as
well as almost eight (8) months of such expenses at IDCS.
17
Except for a modest line of credit to support the operations
of each of MECAR and BRI, neither Allied nor any of its subsidiaries has a line
of credit or other bank facility to provide liquidity. Accordingly, Allied's
ability to cover its anticipated future operating and capital requirements is
dependent upon its ability to generate positive cash flow from operations. Given
the relative size of the operations of its subsidiaries, Allied's continued
ability to generate sufficient cash flow is currently dependent principally upon
MECAR's operations.
MECAR typically obtains relatively large orders for its
ammunition and weapon systems which require a credit facility to provide import
letters of credit, advance bank guarantees and performance bonds. These needs
have been met in the last few years via an agreement with a four (4) member
foreign bank pool (the "Bank Agreement"), supplemented by a term loan supplied
by some of the bank pool participants (the "Term Loan") and a partial guarantee
by the regional government in Belgium (the "Walloon Region"). MECAR's
obligations under the Bank Agreement are also supported by a $3.0 guarantee
provided by Allied. The credit facility was last amended in 1995 to finance the
orders received by MECAR from its principal customers. The bank agreement must
be further amended to provide appropriate financing for new orders as they are
received by MECAR. To date, MECAR has not had to refuse a contract due to
inability to obtain appropriate financing. While management believes that it
will be able to finance additional MECAR contracts using the bank pool
structure, there can be no assurance that such financing will be provided.
The Bank Agreement and other loan agreements continues to
impose certain restrictions on MECAR. MECAR's obligations were collateralized at
December 31, 1995 by base cash deposits of $10.56 (plus the Term Loan deposit
proceeds of $18.49) and a pledge on MECAR's assets of $27.6. As a result, $10.56
of the $15.74 cash balance reflected on the December 31, 1995 balance sheet is
not available for general corporate use. The Bank Agreement further precludes
MECAR from making payments to any company in the Allied group in excess of $2
per year. At December 31, 1995, MECAR had unrestricted cash of $5.18. The Bank
Agreement also requires Allied to increase MECAR's capital by approximately $8.6
in early 1996 by agreeing to contribute certain intercompany indebtedness.
MECAR has a mortgage loan with a foreign bank which had an
outstanding balance of approximately $6.2 at December 31, 1995. The loan was
payable during 1995 on an interest-only basis; commencing January, 1996,
principal and interest payments commenced which extend through January, 2004.
BRI operated throughout 1995 from cash generated from
operations supplemented by a credit facility. The credit facility initially
consisted of a $1.0 line of credit which was converted during 1995 to: (i) a
$750,000 line of credit; (ii) a $500,000 term loan (repayable over a three year
period) to reimburse BRI for capital expenditures in 1994; and (iii) an
18
additional $500,000 term loan (repayable over a three year period) to finance
additional capital expenditures. The line of credit expires in July, 1996 and is
renewable at the discretion of the bank on an annual basis thereafter. At
December 31, 1995, the line of credit had an outstanding balance of $0.45.
VSK operated throughout 1994 primarily from cash
generated from operations. IDCS, which was acquired by VSK in the second
quarter of 1995, similarly operated from cash generated from operations.
Limited's minimal activities in 1995 were funded solely from
cash generated from the 1991-1993 period and from funds supplied by MECAR.
The operations of Services were funded by cash supplied from
Allied. Services effectively ceased operations at the end of 1995.
In May, 1995, The VSK Group acquired all of the outstanding
stock of IDCS, S.A. for a purchase price of $2.97. The purchase price was funded
by a combination of bank and seller financings and thus did not adversely affect
Allied's cash flow.
Capital Resources.
Allied spent $2.92 in 1995 on capital equipment expenditures
as compared with $3.62 and $3.65 in 1994 and 1993, respectively. The
expenditures in 1995 were primarily for repairing facilities damaged by the
spring, 1995 explosion and for new equipment and upgrading facilities at MECAR.
Management currently anticipates that it will spend approximately $2.5 on
capital expenditures in 1996, principally for additional upgrades to the MECAR
facility and for the benefit of BRI and The VSK Group.
Results of Operations
Allied had revenues of $65.8 in 1995 as compared to revenues
of $69.8 and $147.1 in 1994 and 1993, respectively. Allied incurred a loss of
$2.01 in 1995 compared to a loss of $10.94 in 1994 and a profit of $8.0 in 1993.
19
The following table sets forth, for the years ended December
31, 1995, 1994 and 1993, certain items from Allied's consolidated statements of
operations expressed as a percentage of net sales:
1995 1994 1993
---- ---- ----
Revenue 100.0% 100.0% 100.0%
Costs and Expenses
Cost of sales 75.9 91.6 80.8
Selling and administrative 24.0 22.4 7.9
Research and development 3.1 1.8 .6
Restructuring charge ---- .5 2.0
Operating income (loss) (3.0) (16.3) 8.7
Other income (deductions)
Interest income 2.7 5.1 2.9
Interest expense (4.6) (5.4) (2.8)
Other - net 3.0 1.9 (.6)
Earnings before
income taxes (loss) (1.9) (14.7) 8.2
Income taxes 1.1 1.0 2.8
Net earnings (loss) (3.0) (15.7) 5.4
Revenues
Revenues for 1995 decreased $4.1, or 5.8% as compared to 1994.
Revenues at MECAR decreased by approximately 41% from the prior year due to the
completion of several contracts and the delay in receipt of substantial new
orders. Further, MECAR's 1995 revenues included a $1.3 net recovery from
insurance arising from an explosion at one of the storage bunkers. Such revenues
partially offset overhead and operating costs of MECAR during the shutdown
period. Revenues at Limited continue to be generated largely by interest earned
on inter-company loans made to MECAR, which revenue was eliminated in
consolidation. Revenues at BRI increased 60% from 1994 levels principally due to
the receipt by BRI of a foreign military sales contract with an international
customer. Revenues at The VSK Group increased approximately $11.1, or 156%, over
the seven (7) month period reported for 1994. The 1995 revenue for The VSK Group
included $1.6 revenue reported by IDCS for the eight (8) month period following
its acquisition in early May, 1995.
Revenues for 1994 decreased $77.3, or 52.6% as compared to
1993. Revenues at MECAR decreased by approximately 60.5% from the prior year due
to the completion of several large contracts and the lack of substantial new
orders. In addition, MECAR did
20
not complete as originally forecast: (1) a contract from one of its
principal customers due to a delay in the provision by such customer of a
letter of credit to secure the purchase price and (ii) another contract as
a result of difficulty encountered in receipt of a necessary component.
Revenues at Limited decreased from 1993 levels since Limited has no remaining
customer contracts; its revenue was generated largely from interest earned on
inter-company loans made to MECAR, which revenue was eliminated in
consolidation. Revenues at BRI decreased 12.6% from 1993 levels principally due
to the delay in receipt of substantial orders. Such orders, originally
anticipated for receipt in early to mid 1994, were delayed and received in the
last quarter of 1994. Accordingly, only minimal revenue from these orders was
recognized in 1994. Revenues at The VSK Group were $7.2 for the last seven (7)
months of 1994.
Cost of Sales
Cost of sales as a percentage of sales for 1995 decreased
15.9% over 1994 due to the product mix manufactured, the high costs incurred in
1994 due to delays and loss provisions no longer required on a terminated
contract.
Cost of sales as a percentage of sales for 1994 increased
10.8% in 1994 over 1993 due to the product mix manufactured. MECAR's cost of
sales as a percentage of sales for 1994 increased 12.5% in 1994 compared to 1993
principally due to the product mix produced and some problems experienced in
obtaining certain components of its products.
Selling and Administrative Expenses
Selling and general administrative expenses in 1995 increased
from 1994 levels due to a full year of operations at The VSK Group, and eight
(8) months of operations at IDCS which were offset by cost containment measures
implemented company-wide. Further, The VSK Group incurred approximately $0.8
expenses in 1995 due to a failed attempt to establish an operation in France.
Selling and general administrative expenses in 1994 increased
over 1993 due to the acquisition of The VSK Group, increased marketing efforts
targeted to expand the Company's customer base as well as due diligence efforts
in connection with several proposed acquisitions.
Research and Development
Research and development costs increased in 1995 over 1994
levels due to additional efforts by MECAR in broadening its product lines and
VSK's accounting for research and development costs beginning in 1995.
21
Research and development costs increased in 1994 over 1993
levels due to additional efforts by MECAR in broadening its product lines. In
addition, Services continued to expend funds in its efforts to bring its
demilitarization and water purification efforts to market.
Interest Income
Interest income decreased in 1995 from 1994 due to the
utilization of cash for unprofitable operations and reduced cash deposits
associated with the Term Loan agreement.
Interest income decreased in 1994 from 1993 due to the
utilization of cash for unprofitable operations and the acquisition of The VSK
Group.
Interest Expense
Interest expense decreased in 1995 from 1994 as a result of a
decrease in outstanding debt and credit facilities fees.
Interest expense decreased in 1994 from 1993 as a result of a
decrease in outstanding debt and credit facilities fees.
Other - Net
Allied had a gain in 1995 of $2.0 from other sources,
principally consisting of net currency gains occasioned by the weakened U.S.
dollar.
Allied had a gain in 1994 of $1.3 from other sources,
principally consisting of net currency gains occasioned by the weakened U.S.
dollar. In 1993, Allied had a net loss of $1.0 including a net currency loss of
$1.2.
Income Taxes
The 1996 effective tax rate was 58.6% primarily due to the
losses incurred at MECAR (which can only be carried forward) and foreign tax
rate differentials in the U.S.
The 1994 effective tax rate was 6.5% due to the losses
incurred at MECAR (which can only be carried forward) and in the U.S.
Net Earnings (Loss)
The Company incurred a $2.01 loss in 1995 compared with a loss
of $10.94 in 1994. BRI and The VSK Group operated at a profit in 1995; MECAR and
Services operated at a loss. The loss
22
incurred by MECAR was minimized due to approximately $1.3 attributable to the
excess of insurance proceeds received by MECAR over direct costs and expenses
incurred as a result of the spring, 1995 explosion.
The Company incurred a $10.94 loss in 1994 compared with a
profit of $8 in 1993. All subsidiaries (except The VSK Group) operated at a
loss in 1994.
PART III
Item 10. Directors and Executive Officers of Allied.
Directors.
The following are the directors of Allied:
J. R. Sculley, age 55, became a director of Allied in 1991. He has
served as president and chief operating officer of Allied since April, 1992, and
was named chairman of the board and chief executive officer in December, 1992.
He is also a director of MECAR, BRI, Limited and Services. 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).
Charles T. Scott, age 74, became a director of Allied in 1991. He is a
retired business executive. From 1978 to 1990, Mr. Scott was president of
Management Services Corporation, a subsidiary of Lear Siegler Corp., a defense
company.
Clifford C. Christ, age 48, became a director of Allied in 1993. He has
been the president and chief executive officer of NavCom Defense Electronics,
Inc., a defense electronics company, since 1988.
Earl P. Smith, age 57, became a director of Allied in 1993. Mr. Smith
has been a principal of Earl Smith & Associates, a defense consulting firm,
since 1990. During 1990 he was vice president-commercial operations of
Management Services Corporation, a subsidiary of Lear Siegler Corp., and from
1986 to 1990 he was vice president marketing and contracts of Management
Services Corporation.
Robert W. Hebel, age 72, became a director of Allied in early 1996.
Throughout the last five years, Mr. Hebel has been a private investor.
Harry H. Warner, age 60, 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
23
developer. He is also a director of Chesapeake Corporation, Pulaski
Furniture Corporation and American Filtrona Corporation.
Executive Officers.
The following are the executive officers of Allied:
J. R. Sculley, age 55, was elected chairman of the board and chief
executive officer of Allied in December, 1992, and has served as Allied's
president and chief operating officer since April, 1992. He served as Director
of Advanced Studies and Technologies of Grumman Corporation, a defense company,
from 1989 to April, 1992, and previously was Assistant Secretary of the Army
(Research, Development and Acquisition). Mr. Sculley also serves as a director
of MECAR, BRI, Limited and Services.
W. Glenn Yarborough, Jr., age 55, was elected vice president of Allied
in January, 1995. Since February, 1993, Mr. Yarborough has served as vice
president of Services. Previously, he served as director of business
development of Grumman Corporation, a defense company. Mr. Yarborough also
serves as a director of The VSK Group.
24
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, 1995, 1994 and 1993, by the chief executive
officer of Allied and by other executive officers of Allied whose total annual
salary and bonus exceeds $100,000:
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name Annual Restricted Securities Other
and Compen- Stock Underlying LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($) ($) SARs (#) ($) ($)
- --------- ---- --------- -------- ------- ---------- -------- ------- ------
J. R. 1995 $235,000
Sculley, 1994 $235,000 1\$103,125 2\$ 82,762.85 3\56,000
Chief 1993 $225,000 4\ 44,654
Executive
Officer
W. Glenn 1995 $144,500
Yarborough, 1994 $130,000 6\$ 26,250 7\14,000
Jr., Vice
President\5
Michael W. 1995 $132,000
Owen, Vice
President\8
- ---------------
25
1. Mr. Sculley was granted 25,000 shares of Company stock which had a market
value of $4.125 per share on the date of grant.
2. Mr. Sculley was paid $82,762.85 in payment of federal and state taxes paid
as a result of the 1994 stock award.
3. Mr. Sculley was granted incentive stock options to acquire up to 56,000
shares of Company stock in March, 1994. The options first become
exercisable in March, 1996 at which point they become exercisable at
the rate of 20% of the underlying shares per year.
4. Mr. Sculley was paid $44,654 in partial payment of federal and state taxes
paid as a result of the 1992 stock award.
5. Mr. Yarborough first became an executive officer of the Company in April,
1992.
6. Mr. Yarborough was granted 6,000 shares of Company stock which had a market
value of $4.375 per share on the date of grant.
7. Mr. Yarborough was granted incentive stock options to acquire up to 13,000
shares of Company stock in March, 1994. The options first become
exercisable in March, 1996 at which point they become exercisable at the
rate of 20% of the underlying shares per year.
8. Mr. Owen resigned all positions with the Company in early 1996.
26
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Value
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARS at Options/SARs at
FY-End (#) FY-End ($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- --------------- ------------ ------------- -------------
J.R. Sculley 0 0 0/56,000 0\1
W. Glenn Yarborough, Jr. 0 0 0/14,000 0\1
- ----------------
1. At December 31, 1995, the Company common stock traded at $3.125 per share;
the exercise price was $8.25 per share.
27
Director Compensation
Each director of Allied is currently compensated for services as a
director, including as a member of committees of the Board, as follows: (i)
each director who is also an employee of Allied is compensated in the amount
of $1,000 per month; and (ii) each director who is not also an employee of
Allied ("Outside Director") is compensated in accordance with the Allied
Research Corporation Outside Directors Compensation Plan (the "Directors
Compensation Plan") by which Allied pays each of its Outside Directors $1,000
per month during such Outside Director's tenure and awards 1,000 shares of
Allied's Common Stock to each individual who serves as an Outside Director on
each July 1. As initially adopted by the Board of Directors, the Directors
Compensation Plan authorized the issuance of up to 50,000 shares of Common Stock
of Allied; as a result of the 5% stock dividend paid on November 6, 1992, the
48,000 shares remaining to be issued automatically increased to 50,400 shares.
In addition, Outside Directors are compensated (a) $1,000 for each Board meeting
in excess of four (4) personally attended during each calendar year, (b) $500
for each committee meeting attended which is not held in conjunction with a
Board meeting, and (c) $250 for each teleconference Board meeting in excess of
two (2) in which a director participates during each calendar year.
In 1992, the Board of Directors of Allied adopted the Allied Research
Corporation Outside Directors Retirement Plan (the "Directors Retirement Plan")
to provide retirement benefits for long-standing Outside Directors. Under the
Directors Retirement Plan, Outside Directors are eligible for a retirement
benefit if they retire 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.
In 1991, the Board of Directors of Allied adopted the Allied Research
Corporation Outside Directors Stock Option Plan (the "Directors Option Plan") by
which Allied may grant options for up to 208,000 shares of Allied's Common Stock
to its Outside Directors (which amount includes the 5% stock dividend paid on
November 6, 1992). None of the options granted pursuant to the Directors Option
Plan are intended to qualify as incentive stock
28
options under Sections 422 through 424 of the Internal Revenue Code. The
purpose of the Directors Option Plan is to advance the interests of Allied by
providing its Outside Directors with financial incentives in the form of
non-statutory stock options in order to attract, retain and motivate such
Outside Directors. No options were granted under the Directors Option Plan in
1994 and 1995 and no options are outstanding under the Directors Option Plan.
Employment Contracts and Change-In-Control Arrangements
J. R. Sculley and Allied have entered into an Employment Agreement (the
"Sculley Agreement") which extends through March 31, 1998, and is automatically
renewable from year to year thereafter unless either Allied or Mr. Sculley gives
the other timely notice of its or his intent not to renew. In consideration for
his services as an officer of Allied and as a director of Allied and each of its
subsidiaries, Mr. Sculley is entitled to receive an aggregate sum of not less
than $235,000 per calendar year. The Sculley Agreement further provides that
upon the death or disability of Mr. Sculley, the Company will make installment
payments to or for the benefit of Mr. Sculley in an amount not to exceed
$250,000.
W. Glenn Yarborough, Jr. and Allied have entered into an Employment
Agreement (the "Yarborough Agreement") which extends through July, 1996, and is
automatically renewable from year to year thereafter unless either Allied or Mr.
Yarborough gives the other timely notice of its or his intent not to renew. In
consideration for his services as an officer of Allied and as a director of the
entities comprising The VSK Group, Mr. Yarborough is entitled to receive an
aggregate sum of not less than $144,500. The Yarborough Agreement further
provides that in the event Mr. Yarborough ceases to serve in any capacity as an
officer of the Company as a result of a voluntary or involuntary termination
within a period of twelve (12) months following a change in control, Mr.
Yarborough shall be entitled to a lump sum payment equal to the aggregate amount
of compensation payable to Mr. Yarborough throughout the remaining term of the
Yarborough Agreement.
In June, 1991, the Board of Directors of Allied adopted the Preferred
Share Purchase Rights Agreement (the "Agreement"). The Board amended the
Agreement in April, 1993, to reduce the acquisition threshold described below
from 25% to 10%. The Agreement provides each stockholder of record on June 20,
1991, a dividend distribution of one "right" for each outstanding share of
Allied's common stock. Rights become exercisable at the earlier of ten days
following: (1) a public announcement that an acquiror has purchased or has the
right to acquire 10% or more of Allied's common stock, or (2) the commencement
of a tender offer
29
which would result in an offeror beneficially owning 30% or more of the
outstanding common stock of Allied. All rights held by an acquiror or offeror
expire on the announced acquisition date, and all rights expire at the close
of business on June 20, 2001. Each right entitles a stockholder to acquire
at a stated purchase price, 1/100 of a share of Allied's preferred stock which
carries voting and dividend rights similar to one share of its common stock.
Alternatively, a right holder may elect to purchase for the stated price an
equivalent number of shares of Allied's common stock (or in certain
circumstances, cash, property or other securities of Allied) at a price per
share equal to one-half of the average market price for a specified period. In
lieu of the purchase price, a right holder may elect to acquire one-half of the
common stock available under the second option. The purchase price of the
preferred stock fractional amount is subject to adjustment for certain events as
described in the Agreement. At the discretion of a majority of the Board and
within a specified time period, Allied may redeem all of the rights at a price
of $.01 per right. The Board may also amend any provisions of the Agreement
prior to exercise.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of Allied during the fiscal year ended
December 31, 1995 consisted of Messrs. Charles T. Scott, Clifford C. Christ and
Earl P. Smith. None of such individuals has served as an officer or employee of
Allied nor is there any other relationship between any member of the
Compensation Committee and Allied which is required to be disclosed under
applicable regulations.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following information is furnished as of March 4, 1996,
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:
30
Amount and
Title nature of
of Name and address of beneficial Percent of
class beneficial owner ownership class\1
- ------ -------------------- ------------- -------
Common Lindner Growth Fund/ 424,620 9.45%
Ryback Management Owned directly
Corporation
7711 Carondelet Avenue
P.O. Box 16900
St. Louis, MO 63105
Common Fidelity Low-Priced 248,110 5.52%
Stock Fund/Fidelity Owned directly
Management & Research
Company
82 Devonshire Street
Boston, MA 02109
- --------------------------
1. Based upon 4,422,056 shares of common stock outstanding plus 72,500 shares
which may be acquired within 60 days pursuant to outstanding stock options.
31
The following information is furnished as of March 4, 1996,
with respect to the beneficial ownership by management of Allied's Common Stock:
Amount and
Title nature of
of Name of beneficial Percent of
class beneficial owner ownership class \1
Common Charles T. Scott 2,000 *
Owned
directly
Common Harry H. Warner 1,000 *
Owned
directly
Common Earl P. Smith 1,110 *
Owned
directly
Common Clifford C. Christ 8,000 *
Owned
directly
Common J. R. Sculley 76,336\2 1.7%
Owned
directly
Common W. Glenn Yarborough, Jr. 15,664\3 *
Owned
directly
Common All executive officers 104,110 2.3%
and directors as a Owned
group (7) directly
*Less than 1%
- -------------------------
1. Based upon 4,422,056 shares of common stock outstanding plus 72,750
shares which may be acquired within 60 days pursuant to outstanding
stock options.
2. Includes 12,000 shares which may be acquired with 60 days pursuant to
outstanding stock options.
3. Includes 7,000 shares which may be acquired within 60 days pursuant to
outstanding stock options.
32
Allied is aware of no arrangement the operation of which may at a
subsequent date result in a change in control of Allied.
Item 13. Certain Relationships and Related Transactions.
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
For the purposes of complying with the amendments to the rules
governing Form S-8 under the Securities Act of 1933, the undersigned registrant
hereby undertakes as follows, which undertaking shall be incorporated by
reference into Allied's Registration Statements on Form S-8:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, 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
1995 and 1994
33
Consolidated Statements of Operations for F-6
the three years ended December 31, 1995
Consolidated Statements of Stockholders' F-7
Equity for the three years ended
December 31, 1995
Consolidated Statements of Cash Flows F-8
for the three years ended December 31, 1995
Notes to Consolidated Financial Statements F-10
(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, 1995 and 1994 and for the
three years ended December 31, 1995:
Schedule I - Condensed F-31
Financial Information of
Allied
Schedule II - Valuation F-34
and Qualifying Accounts
(a)(3) Exhibits:
Exhibit 3 - Certificate of Incorporation, as
amended (Incorporated by reference
from Form 10-K filed in March, 1992)
and Amended and Restated By-Laws
(Incorporated by reference from Form
8-K filed in November, 1992)
Exhibit 10 -
(a) Executive Employment Agreement between Allied
Research Corporation and J. R. Sculley
(Incorporated by reference from Form 8-K filed in
April, 1992)
(b) Executive Employment Agreement between Allied
Research Corporation and W. Glenn Yarborough, Jr.
(In-
34
corporated by reference from Form 10-K filed in
March, 1995.)
Exhibit 11 - Computation of
Earnings Per
Common and Common
Equivalent Shares
Exhibit 21 - List of Subsidiaries
Exhibit 23 - Consent of Independent Certified
Public Accountants
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of
1995.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Allied has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Allied Research Corporation
(Allied) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
/s/ J. R. Sculley
By (Signature and Title) . . . . . . . . . . . . . . . . . . . .
J. R. Sculley, President
Date: March 29, 1996
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.
/s/ J. R. Sculley
By (Signature and Title) . . . . . . . . . . . . . . . . . . . .
J. R. Sculley,
Chief Financial Officer
Date: March 29, 1996
* * * * * * *
/s/ J. R. Sculley
By (Signature and Title). . . . . . . . . . . . . . . . . . .
J. R. Sculley, Director
Date: March 29, 1996
* * * * * * *
/s/ Charles T. Scott
By (Signature and Title). . . . . . . . . . . . . . . . . . .
Charles T. Scott, Director
Date: March 29, 1996
* * * * * * *
36
/s/ Clifford C. Christ
By (Signature and Title). . . . . . . . . . . . . . . . . . .
Clifford C. Christ, Director
Date: March 29, 1996
* * * * * * *
/s/ Earl P. Smith
By (Signature and Title). . . . . . . . . . . . . . . . . . .
Earl P. Smith, Director
Date: March 29, 1996
* * * * * * *
Supplemental Information to be Furnished with Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.
No annual report or proxy material has as yet been sent to
Allied's stockholders, although it is expected that an annual report and proxy
material will be furnished to Allied's stockholders subsequent to the filing of
this Form 10-K.
37
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FINANCIAL STATEMENTS AND SCHEDULES
December 31, 1995
FORMING A PART OF
ANNUAL REPORT PURSUANT TO
THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-K
OF
ALLIED RESEARCH CORPORATION
Allied Research Corporation
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
- -----------------------------------------------------------------------------
Page
Report of Independent Certified Public Accountants F-3
Consolidated Balance Sheets at December 31, 1995 and 1994 F-4
Consolidated Statements of Operations for the three years
ended December 31, 1995 F-6
Consolidated Statements of Stockholders' Equity for the three years
ended December 31, 1995 F-7
Consolidated Statements of Cash Flows for the three years ended
December 31, 1995 F-8
Notes to Consolidated Financial Statements F-10
Schedules as of and for the three years ended December 31, 1995
Schedule I - Condensed Financial Information of Registrant F-31
Schedule II - Valuation and Qualifying Accounts F-34
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Allied Research Corporation
We have audited the accompanying consolidated balance sheets of Allied Research
Corporation and subsidiaries as of December 31, 1995 and 1994 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Allied Research
Corporation and subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
We have also audited the consolidated financial statement schedules listed on
the accompanying index at Item 14(a)(2). 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
March 15, 1996
Allied Research Corporation
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
1995 1994
---------------------------
CURRENT ASSETS
Cash and equivalents, including restricted cash
(notes A, C and F) $15,744,145 $ 43,605,879
Accounts receivable (notes A, D and F) 21,090,945 21,804,818
Costs and accrued earnings
on uncompleted contracts (note A) 6,311,705 8,390,976
Inventories (notes A and F) 6,336,821 4,333,416
Prepaid expenses and deposits 1,112,711 1,003,480
----------- -------------
Total current assets 50,596,327 79,138,569
PROPERTY, PLANT AND EQUIPMENT - AT COST
(notes A and H)
Buildings and improvements 14,247,986 11,410,826
Machinery and equipment 35,189,034 31,118,331
---------- ----------
49,437,020 42,529,157
Less accumulated depreciation 33,330,357 28,154,693
---------- ----------
16,106,663 14,374,464
Land 1,544,737 1,323,456
---------- ----------
17,651,400 15,697,920
OTHER ASSETS
Deposits - restricted cash (notes C, F and H) 18,492,000 6,400,000
Intangibles, less accumulated amortization of
$1,751,020 and $1,341,984 in 1995 and 1994,
respectively (notes A and B) 7,085,401 5,918,858
Other 428,145 230,962
----------- ------------
26,005,546 12,549,820
$94,253,273 $107,386,309
=========== ============
The accompanying notes are an integral part of these statements.
F-4
Allied Research Corporation
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY
1995 1994
------------- ------------
CURRENT LIABILITIES
Notes payable (note E) $ 485,330 $ 593,536
Current maturities of long-term debt 2,786,383 25,802,048
Accounts and trade notes payable 17,786,258 21,451,907
Accrued liabilities 4,857,776 10,553,803
Accrued losses on contracts (note G) 431,215 1,873,008
Customer deposits 9,900,120 1,534,149
Income taxes 370,878 883,883
------------ ----------
Total current liabilities 36,617,960 62,692,334
LONG-TERM DEBT, less current maturities (note H) 28,434,776 14,107,904
DEFERRED INCOME TAXES (notes A and P) 846,953 765,293
MINORITY INTEREST - 123,104
CONTINGENCIES AND COMMITMENTS (notes I, J, M and N) - -
STOCKHOLDERS' EQUITY (note L)
Preferred stock, no par value; authorized,
10,000 shares; none issued - -
Common stock, par value, $.10 per share; authorized,
10,000,000 shares; issued and outstanding, 4,422,056
in 1995 and 4,398,448 in 1994 442,206 439,845
Capital in excess of par value 10,745,295 10,658,174
Retained earnings 12,676,000 14,689,271
Accumulated foreign currency translation
adjustment (note A) 4,490,083 3,910,384
----------- ----------
28,353,584 29,697,674
---------- ----------
$94,253,273 $107,386,309
========== ===========
The accompanying notes are an integral part of these statements.
F-5
Allied Research Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1995 1994 1993
----------- ------------- ------------
Revenue (note M) $65,768,907 $ 69,846,845 $147,097,482
Costs and expenses
Cost of sales 49,896,794 63,976,951 118,897,942
Selling and administrative 15,758,673 15,631,256 11,655,229
Research and development 2,087,278 1,262,333 841,685
Restructuring charge (note R) - 326,831 2,883,289
---------- ------------ -----------
67,742,745 81,197,371 134,278,145
---------- ------------ -----------
Operating income (loss) (1,973,838) (11,350,526) 12,819,337
Other income (deductions)
Interest income 1,770,278 3,539,888 4,327,313
Interest expense (3,034,537) (3,768,788) (4,108,053)
Other - net (note O) 1,968,478 1,306,083 (1,003,059)
------------ ------------- -------------
704,219 1,077,183 (783,799)
------------ ------------- -------------
Earnings (loss) before
income taxes (1,269,619) (10,273,343) 12,035,538
Income taxes (notes A and P) 743,652 667,763 4,040,416
------------ -------------- -------------
NET LOSS (EARNINGS) $ (2,013,271) $ (10,941,106) $ 7,995,122
=========== ============ =============
Earnings (loss) per common share (note S) $( .46) $(2.49) $1.73
===== ===== ====
The accompanying notes are an integral part of these statements.
F-6
Allied Research Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1995, 1994 and 1993
Accumulated
foreign
Preferred Common Capital in Retained currency Total
stock no stock $.10 excess of earnings translation stockholders'
par value par value par value (deficit) adjustment equity
Balance at December 31, 1992 $ - $458,953 $10,712,729 $22,438,580 $3,417,531 37,027,793
Common stock awards - 976 147,774 - - 148,750
Common stock options exercised - 6,040 227,667 - - 233,707
Employee stock purchase plan purchases - 154 22,204 - - 22,358
Purchase and retirement of shares - (13,000) (309,864) (1,836,497) - (2,159,361)
Currency translation adjustment - - - - (2,093,471) (2,093,471)
Net earnings for the year - - - 7,995,122 - 7,995,122
---------- -------- ----------- ----------- ---------- ----------
Balance at December 31, 1993 - 453,123 10,800,510 28,597,205 1,324,060 41,174,898
Common stock awards - 7,236 318,014 - - 325,250
Employee stock purchase plan purchases - 1,486 64,186 - - 65,672
Purchase and retirement of shares - (22,000) (524,536) (2,966,828) - (3,513,364)
Currency translation adjustment - - - - 2,586,324 2,586,324
Net loss for the year - - - (10,941,106) - (10,941,106)
---------- -------- ----------- ----------- ---------- ----------
Balance at December 31, 1994 - 439,845 10,658,174 14,689,271 3,910,384 29,697,674
Common stock awards - 300 10,950 - - 11,250
Employee stock purchase plan purchases - 2,061 76,171 - - 78,232
Currency translation adjustment - - - - 579,699 579,699
Net loss for the year - - - (2,013,271) - (2,013,271)
---------- -------- ----------- ----------- ---------- ----------
Balance at December 31, 1995 $ - $442,206 $10,745,295 $12,676,000 $4,490,083 $28,353,584
========== ======== =========== ============ =========== ==========
The accompanying notes are an integral part of these statements.
F-7
Allied Research Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
Increase (decrease) in cash and equivalents 1995 1994 1993
Cash flows from (used in) operating activities
Net earnings (loss) for the year $ (2,013,271) $(10,941,106) $ 7,995,122
Adjustments to reconcile net earnings (loss) to
net cash from (used in) operating activities
Depreciation and amortization 2,751,867 2,411,029 2,727,662
(Gain) loss on sale of fixed assets (8,381) (2,558) -
Deferred income taxes 376,550 390,233 (290,915)
Provision for estimated losses on contracts (1,178,475) 721,937 3,127,574
Common stock awards 11,250 325,250 148,750
Changes in assets and liabilities
Accounts receivable 2,746,237 48,367,325 (49,655,997)
Costs and accrued earnings on
uncompleted contracts 2,709,185 9,910,050 13,388,974
Inventories (983,917) 1,570,129 (1,525,982)
Prepaid expenses and other assets (1,451,796) 8,832,706 (5,747,608)
Accounts payable and accrued liabilities (12,291,397) (34,244,206) 15,621,110
Customer deposits 7,959,923 (20,288,705) 2,106,147
Income taxes (552,009) (4,410,959) (3,825,904)
------------- ----------- ------------
89,037 13,582,231 (23,926,189)
------------- ----------- ------------
Net cash (used in) provided by
operating activities (1,924,234) 2,641,125 (15,931,067)
Cash flows (used in) investing activities
Capital expenditures (2,920,728) (3,617,518) (3,645,786)
Proceeds from sale of fixed assets 183,470 16,650 -
Payment for acquisitions, net of cash acquired (1,083,571) (4,387,925) -
------------- ----------- ------------
Net cash (used in) investing
activities (3,820,829) (7,988,793) (3,645,786)
The accompanying notes are an integral part of these statements.
F-8
Allied Research Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
1995 1994 1993
--------------- ------------- -------------
Cash flows from financing activities
Net increase (decrease) in short-term borrowings (114,514) (4,011,549) 5,393,106
Principal payments on long-term debt (23,979,845) (9,296,733) (559,671)
Proceeds from issuance of long-term debt 12,252,705 8,533,958 28,339,261
Deposits - restricted cash (12,092,000) 7,467,000 (13,867,000)
Proceeds from exercise of stock options - - 233,707
Proceeds from employee stock purchases 78,232 65,672 22,358
Common shares purchased and retired - (3,513,360) (2,159,361)
--------------- ------------- -------------
Net cash provided by (used in)
financing activities (23,855,422) (755,012) 17,402,400
Effects of exchange rates on cash 1,738,751 5,067,494 (2,666,356)
--------------- ------------- -------------
Net increase (decrease) in cash
and equivalents (27,861,734) (1,035,186) (4,840,809)
Cash and equivalents at beginning of year 43,605,879 44,641,065 49,481,874
--------------- ------------- -------------
Cash and equivalents at end of year $ 15,744,145 $ 43,605,879 $ 44,641,065
=============== ============= =============
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for
Interest $ 4,461,871 $ 4,428,708 $ 3,035,446
Income taxes 1,638,984 4,784,980 7,977,993
The accompanying notes are an integral part of these statements.
F-9
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
Basis of Presentation
The consolidated financial statements of the Company include the accounts of
Allied Research Corporation (Allied), a Delaware corporation, and its
wholly-owned subsidiaries, Mecar S.A., a Belgian company, and its wholly-owned
subsidiaries (Mecar), Barnes & Reinecke, Inc. (BRI), a Delaware corporation,
Allied Research Corporation Limited (ARCL), a United Kingdom company and ARC
Services, Inc. (Services), a Delaware corporation.
Mecar, S.A.'s wholly owned Belgian subsidiaries include, Mecar Immobliere
S.A., Sedachim, S.I., Tele Technique Generale, Management Export Services,
N.V., I.D.C.S., N.V., VSK France (a French Company which was formed in 1995)
and VSK Electronics N.V. and its wholly-owned subsidiaries, Classics,
B.V.B.A., Detectia, N.V. and Belgian Automation Units, N.V.
(collectively the "VSK Group"). A minority interest owned by VSK Electronics
in Building Control Services, N.V. is accounted for under the equity method.
The VSK Group was acquired during 1994 and was accounted for as a purchase,
and revenue and results of operations from June 1, 1994 (date of acquisition),
have been consolidated. I.D.C.S., N.V. was accounted for as a purchase, and
revenue and results of operations from May 9, 1995 (date of acquisition), have
been consolidated.
During 1995, Mecar's wholly-owned subsidiaries Management Export Services,
N.V. and its minority interest in Building Control Services, N.V. were
liquidated. In addition, the Company ceased operations of its wholly-owned
subsidiary ARC Services, Inc. in December, 1995. VSK France is also being
liquidated effective December 31, 1995.
Significant intercompany transactions have been eliminated in consolidation.
Business Operations
The Companies operate primarily in the United States, Belgium and the United
Kingdom. During 1995, fifty-five percent of the business activity is in the
development and production of ammunitions and weapons systems in Belgium with
sales to customers in Asia, the Middle East and Europe. Twenty-eight percent
of the business activity is developing, manufacturing, distributing and
servicing industrial security products in Belgium with industrial customers
throughout Europe. Seventeen percent of the business activity is providing
engineering and technical support services in the United States with sales
directly or indirectly with the United States Military Agencies and government
prime contractors. A description of the business operations of each company
follows.
Allied provides management services to its wholly-owned subsidiaries. Allied
had no direct domestic operating assets or business activity.
Mecar is primarily engaged in the development and production of ammunitions
and weapons systems. Mecar derives substantially all of its revenue from
direct and indirect sales to foreign governments, primarily on fixed price
contracts.
BRI provides engineering and technical support services and sells directly and
indirectly primarily to United States Military Agencies and government prime
contractors.
F-10
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
Business Operations - continued
ARCL is engaged in the marketing of military hardware on behalf of Allied,
Mecar and BRI.
ARC Services, Inc. was formed in 1993, and continued until December 31, 1995,
to market and provide demilitarization and environmental clean-up services.
Services has undertaken certain research and development projects and had no
other significant operations since its formation.
The VSK Group develops, manufacturers, distributes and services an integrated
line of industrial security products, including devices such as building
access control, intrusion detection, fire detection and alarm systems.
Foreign Currency Translation
The assets and liabilities of Mecar and ARCL are translated into U.S. dollars
at year-end exchange rates. Resulting translation gains and losses are
accumulated in a separate component of stockholders' equity. Income and
expense items are converted into U.S. dollars at average rates of exchange
prevailing during the year. Foreign currency transaction gains and losses are
credited or charged directly to operations.
Revenue and Cost Recognition
Revenues under fixed price contracts are recognized on the
percentage-of-completion method measured by costs incurred to total estimated
costs. Provision for estimated losses on contracts are recorded when
identified. Revenues under cost-plus-fixed-fee and time and material contracts
are recognized on the basis of costs incurred during the period plus the fee
earned. As contracts extend over one or more years, revisions in costs and
earnings estimated during the course of the work are reflected in the
accounting period in which the facts which require the revision become known.
Recoverable costs plus accrued profits not billed and amounts withheld and due
upon completion of U.S. Government contracts and subcontracts are carried as
unbilled receivables. These amounts will be billed on the basis of contract
terms and are expected to be collected within one year.
Costs and accrued profits on uncompleted fixed price contracts with foreign
governments, which are billable upon completion, are carried as costs and
accrued earnings on uncompleted contracts.
Revenues from the sale of fire and security systems are recognized when the
installation is completed, less a provision for anticipated service costs.
Security system maintenance contract revenues are recognized over the term of
the contract on a straight-line basis.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenue and expenses during the reporting period. Actual
results could differ from those estimates.
F-11
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
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.
Property, Plant and Equipment
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives primarily
on a straight-line basis. Accelerated depreciation methods are used for tax
purposes on certain assets. The estimated service lives used in determining
depreciation are as follows:
Buildings 20 - 30 years
Machinery and equipment 3 - 10 years
Maintenance and repairs are charged to expense as incurred; additions and
betterments are capitalized. Upon retirement or sale, the cost and related
accumulated depreciation of the disposed assets are removed and any resulting
gain or loss is credited or charged to operations.
Intangibles
Intangibles represent costs in excess of net assets acquired in connection
with businesses acquired and are being amortized to operations on a
straight-line basis over twenty years. The recoverability of carrying values
of intangible assets is evaluated on a recurring basis. The primary indicators
are current or forecasted profitability of the related business. There have
been no adjustments to the carrying values of intangible assets resulting from
these evaluations.
Research and Development
Costs incurred in research and development activities are charged to
operations as incurred.
Warranties
The Company grants warranties on certain products for periods varying from one
to five years. Provision is made for estimated losses arising from warranty
claims as incurred. Provision is made for estimated warranty costs on the sale
of security systems at the time of the sale.
Income Taxes
Income taxes are provided based on the liability method for financial
reporting purposes, in accordance with the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
Deferred and prepaid taxes are provided for on items which are recognized in
different periods for financial and tax reporting purposes.
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.
F-12
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
Restatement
Certain items in the 1994 and 1993 financial statements have been restated to
conform to the current presentation.
Newly Issued Accounting Standards
In October 1995, Statement of Financial Accounting Standards (SFAS No. 123,
Accounting for Stock-Based Compensation, was issued. As permitted by SFAS
No. 123, the Company will continue to follow the accounting provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, for applicable transactions with employees. The
Company will adopt the accounting provisions of SFAS No. 123 for transactions
entered into after December 15, 1995 with individuals or organizations
other than employees. The Company plans to adopt the disclosure
requirements of SFAS No. 123 in 1996. Management believes that adoption of
SFAS No. 123 will not have a material effect on the Company's financial
statements.
Management does not anticipate that the provisions of Statement of Financial
Accounting Standard No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, which is effective for
years beginning after December 15, 1995, will have a material effect on the
Company's financial statements.
NOTE B - ACQUISITION
On May 31, 1994, the Company's wholly-owned subsidiary, Mecar S.A., acquired
the VSK Group, a group of Belgian companies, as well as, a minority interest
in a Belgian company, for approximately $6,071,900 and on May 9, 1995 the VSK
Group acquired I.D.C.S., N.V., a Belgian company for approximately $2,972,000.
These companies manufacture, distribute and service an integrated line of
industrial security products, including devices such as buildings access
control, parking control, intrusion and fire detection and intrusion and fire
alarms.
The acquisitions have been accounted for as a purchase and the purchase price
in excess of the net assets acquired has been reflected in intangibles. The
financial statements include the result of operations since the date of
acquisition. Pro forma financial data for these acquisitions prior to the date
of acquisition would not have a material affect on reported results.
I.D.C.S., N.V. VSK Group
May 9, 1995 May 31, 1994
-------------- ------------
Fair value of tangible assets acquired $2,587,000 $7,720,900
Liabilities assumed 855,000 6,285,200
---------- ---------
Net assets acquired 1,732,000 1,435,700
Purchase price 2,972,000 6,071,900
--------- ---------
Excess of cost over assets acquired $1,240,000 $4,636,200
========= =========
F-13
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - RESTRICTED CASH
Mecar is generally required under the terms of its contracts with foreign
governments to provide performance bonds, advance payment guarantees and
letters of credit. The credit facility agreements used to provide these
financial guarantees generally place restrictions on cash deposits and other
liens on Mecar's assets. Cash and long-term deposits at December 31, 1995 and
1994 are restricted or pledged as collateral for various bank agreements and
are comprised as follows:
1995 1994
------------ -----------
Cash
Credit facility and related term loan arrangements $ 7,755,000 $28,142,000
Other bank guarantees and letters of credit 1,769,000 1,222,000
Notes payable and line-of-credit 1,035,000 84,000
--------- -----------
10,559,000 29,448,000
Deposit restricted cash - long-term
Credit facility and related term loan arrangements 18,492,000 6,400,000
---------- -----------
$29,051,000 $35,848,000
========== ==========
NOTE D - ACCOUNTS RECEIVABLE
Accounts receivable at December 31 are comprised as follows:
1995 1994
----------- ------------
Receivables under U.S. Government contracts and subcontracts
Amounts billed $ 1,715,818 $ 1,110,337
Unbilled amounts due upon completion of contracts,
recoverable costs and accrued profits 1,670,042 765,304
----------- ------------
3,385,860 1,875,641
Receivables from foreign governments 10,618,736 13,819,927
Commercial and other receivables, less allowance for
doubtful receivables of $330,077 in 1995 and $141,000 in 1994 7,086,349 6,109,250
----------- ------------
$21,090,945 $21,804,818
=========== ===========
Unbilled receivables are comprised of progress billing holdbacks, terminated
contracts receivable and other unbilled costs and fees.
NOTE E - NOTES PAYABLE
At December 31, 1995 and 1994, secured short-term loans of $40,330 and $93,536
were outstanding with certain banks. Notes payable at December 31, 1995 bear
an average interest rate of 9.75%.
F-14
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - NOTES PAYABLE - Continued
The Company is also obligated under a $750,000 revolving line-of-credit
agreement which had an outstanding balance of $445,000 as of December 31,
1995. Borrowings under a similar line-of-credit agreement at December 31, 1994
were $500,000. The current line bears interest at prime, plus 1.5% (10% at
December 31, 1995) and expires in July, 1996. Borrowings are secured by BRI's
eligible accounts receivable, Allied's guarantee and are subject to covenants
requiring the maintenance of certain financial ratios and other provisions.
The Company has a $1,035,000 line-of-credit agreement with a foreign bank,
which was unused at December 31, 1995. The line is secured by a cash deposit
pledge equal to the full amount of the line.
NOTE F - CREDIT FACILITY
The Company is obligated under a credit agreement (the Agreement) with a
banking pool that provided credit facilities primarily for letters of credit,
bank guarantees, performance bonds and similar instruments required for
specific sales contracts, which was amended in July, 1995. The Agreement
provides for certain bank charges and fees as the line is used, plus an annual
fee of approximately 2% of guarantees issued. As of December 31, 1995, the
credit facility had been fully utilized and guarantees of $17,413,000 remain
outstanding.
Advances under the credit facility are secured by cash deposits of $7,755,000,
plus long-term deposits of $18,492,000. Amounts outstanding are also
collateralized by the letters of credit received under the contracts financed
and a pledge of approximately $27,600,000 on Mecar's assets. The Agreement
provides for restrictions on payments or transfers to Allied and ARCL for
management fees, intercompany loans, loan payments, the maintenance of certain
net worth levels and other provisions. The Agreement also requires Allied to
increase Mecar's capital by approximately $8.6 million during 1996, by
agreeing to cancel certain intercompany indebtedness.
The term deposits used to secure the agreement were borrowed under a term loan
agreement with two of the institutions in the banking pool (see note H).
The Company is also liable for guarantees and other instruments issued on its
behalf by other banks which approximate $2,881,000 at December 31, 1995, which
are collateralized by $1,769,000 of time deposits.
NOTE G - ACCRUED LOSSES ON CONTRACTS
The Company has provided for accrued losses of $431,215 at December 31, 1995
($1,873,008 at December 31, 1994) in connection with the completion of certain
contracts in progress at December 31, 1995. These contracts are expected to be
completed in 1996. The provision for contract losses charged to operations was
$721,937 in 1994 and a credit of $1,178,475 in 1995, primarily due to a loss
provision no longer required on a rescinded order.
F-15
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - LONG-TERM DEBT
Long-term obligations as of December 31 consist of the following:
1995 1994
----------- -----------
Term loan agreement $18,492,000 $31,360,000
Mortgage loan agreements 8,022,113 6,041,600
Notes payable bank 967,146 -
Note payable - I.D.C.S., N.V. 603,750 -
Other 3,136,150 2,508,352
----------- -----------
31,221,159 39,909,952
Less current maturities 2,786,383 25,802,048
----------- -----------
$28,434,776 $14,107,904
=========== ===========
The Company is obligated under a $18,492,000 ($31,360,000 at December 31,
1994) term loan agreement with two of the institutions in its foreign banking
pool. The proceeds were placed in deposit accounts as collateral for credit
facility advances made by the Company's foreign banking pool. The note bears
interest at 7.5% (9.2% at December 31, 1994), payable quarterly. The loan
matures on December 31, 1997 or upon the expiration of the guarantees issued
under the Credit Facility Agreement with the Company's banking pool. The
agreement provides for the maintenance of certain net worth levels and the
payment of certain commissions.
The term loan is collateralized by a pledge of $33,810,000 on Mecar's assets
and the deposit accounts, subject to the priority position of the banking
pool. The regional government where Mecar is located (the Walloon region) has
guaranteed 50% of the term credit subject to certain priority pledges.
The Company entered into a mortgage loan agreement in 1986, which was amended
in 1994, to partially finance the construction of Mecar's manufacturing and
administration facilities in Belgium which has a balance due of $6,210,000 at
December 31, 1995. The first principal installment is due in January, 1996 and
the loan matures in January, 2004. As amended, the loan is payable in annual
principal installments of $655,500 (except for the annual principal
installment in the year 2000 which is $966,000). The loan bears interest at
10.4% annually and is collateralized by a mortgage on the Company's real
estate. The Company is also obligated on several mortgages on the VSK Group's
buildings which have a total balance due of $1,812,113 at December 31, 1995.
The mortgages mature at various dates through 2005 in annual installments of
approximately $254,000, plus interest at rates ranging from 6.6% to 8.5% per
year.
BRI is obligated on two notes payable of $500,000 each to its bank, of which
$477,569 and $489,577 were outstanding at December 31, 1995. The notes bear
interest at the prime rate plus 2% (10.5% at December 30, 1995) and mature in
September and October, 1998. The notes are payable in monthly installments of
principal and interest of $16,383 and $16,400, respectively. The notes are
secured by the assets of the Company and Allied's guarantee. The agreement
contains covenants requiring BRI to maintain certain financial ratios, among
other matters.
The Company is obligated in the amount of $603,750 at December 31, 1995 to the
former owner of I.D.C.S. in connection with the acquisition of I.D.C.S. The
note bears interest at 7.5% and is payable in monthly installments of $34,500
through June, 1997.
F-16
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - LONG-TERM DEBT - Continued
The Company is also obligated on various vehicle, equipment and other
operating loans which have an aggregate balance of $3,136,150 outstanding at
December 31, 1995 ($2,508,352 at December 31, 1994). The notes are generally
secured by the assets acquired, bear interest at rates ranging from 4.4% to
10.75% and mature at various dates through 2000.
Scheduled annual maturities of long-term obligations as of December 31, 1995
are as follows:
Year Amount
1996 $ 2,786,383
1997 21,020,195
1998 1,629,058
1999 1,162,305
2000 995,325
Thereafter 3,627,893
NOTE I - BENEFIT PLANS
In June, 1992, the Board of Directors adopted the Allied Research Corporation
Outside Directors Retirement Plan. The plan provides retirement benefits at
age 70 to any board member who retires as a director after a minimum of five
years of service. A retired director is entitled to receive an amount equal to
the monthly cash compensation received prior to retirement for a period
equivalent to the time served as a board member. The Board may cease
retirement payments for cause and modify or terminate the plan at any time.
Currently, one former director is receiving retirement benefits. The net
present value of benefits anticipated to be payable to current and former
directors have been reflected as a charge to earnings.
In June, 1992, the Board of Directors approved the Officers Nonqualified
Deferred Compensation Plan and the Officers Deferred Compensation Grantor
Trust. Certain officers of the Company are eligible to participate in the
plan, which permits a deferral of a percentage of future base compensation.
Amounts deferred will be invested by the trustee of the Grantor Trust. The
Company may terminate the plan at any time. No eligible officers had elected
to participate in the plan as of December 31, 1995.
BRI instituted a retirement savings plan in 1989 which received a favorable
determination letter from the Internal Revenue Service dated January 12, 1992.
Contributions to the Plan are at the discretion of BRI. No contributions were
made by the Company for the years ended December 31, 1995, 1994 and 1993.
Under the terms of labor agreements at its Belgian subsidiaries, the Company
contributes to certain employee benefit and retirement programs.
NOTE J - CONTINGENCIES AND COMMITMENTS
Cost-plus contracts and subcontracts are subject to government audit and
review. It is not anticipated that adjustments, if any, with respect to
determination of reimbursability of costs under cost-plus contracts or
subcontracts will have a material effect on the Company's consolidated results
of operations or financial position.
F-17
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - CONTINGENCIES AND COMMITMENTS - Continued
At December 31, 1995, Mecar has provided for estimated losses on contracts of
$431,215. In addition, Mecar and BRI recognize revenues under fixed price
contracts using the percentage of completion method. Estimates of total costs
at completion are used to determine the amount of revenue earned. It is likely
that actual costs on these contracts will differ from the Company's estimate
at completion and losses could exceed the provision established at December
31, 1995.
The Company enters into foreign exchange contracts in the normal course of
business primarily to hedge sales and purchase contracts. These contracts
typically mature within twelve months, and forward exchange gains and losses
are recognized upon maturity. No contracts were outstanding as of December 31,
1995.
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.
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.
The Company leases office space, other facilities and equipment under
operating leases which expire at various dates through 2000. BRI's office
lease provides that the Company is responsible for real estate taxes which
approximated $38,600, $133,700, and $151,500, respectively, for the years
ended December 31, 1995, 1994 and 1993. Allied's lease also includes certain
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, 1995.
Year Amount
1996 $416,100
1997 399,100
1998 368,900
1999 273,000
2000 79,300
Total rental expense charged to operations approximated $444,000, $660,000 and
$611,000, for the years ended December 31, 1995, 1994 and 1993.
Services entered into a three year $675,000 agreement in 1993 to fund the
development of certain reverse osmosis products in exchange for an exclusive
marketing license. Product development costs charged to operations were
$100,000, $185,000 and $93,000 for 1993, 1994 and 1995, respectively. Services
terminated this agreement in July, 1995.
The Company's domestic operations do not provide post employment benefits to
their 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 1993 workforce reduction as part of its
restructuring charge (see note R). After giving effect to the 1993 workforce
reduction, current work loads, expected levels of future operations, planned
redeployment of workers and severance policies, future severance costs and
post employment benefits are not expected to be material to the Company's
financial position at this time.
F-18
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments and off
balance sheet credit obligations are as follows:
1995 1994
---------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Financial assets
Cash and equivalents $ 15,744,145 $ 15,744,145 $ 43,605,879 $ 43,605,879
Deposits - restricted cash 18,492,000 18,492,000 6,400,000 6,400,000
Long-term debt, including current (31,221,159) (31,221,159) (39,909,952) (39,909,952)
maturities
Notes payable 485,330 485,330 593,536 593,536
Off-balance-sheet instruments
Guarantees and letters of credit - (20,294,000) - (13,163,000)
Foreign exchange contracts - - - (3,000,000)
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value.
(bullet) The carrying amounts of cash and equivalents and notes payable
approximates fair value because of the short maturity of these.
(bullet) The carrying amounts of deposit - restricted cash approximates fair
value because of the underlying nature of this deposit which secures
a term loan of equal value.
(bullet) Thefair value of long-term debt is estimated based on approximate
market prices for the same or similar issues or the current rates
offered to the Corporation for debt of the same remaining maturities.
The Company believes the aggregate carrying value approximates fair
value.
(bullet) Estimated fair values for off-balance-sheet instruments (performance
bonds, advance payment guarantees and letters-of-credit) are
reflected at the face value of these obligations, since management
does not expect to have any claims against these obligations based on
its past experience.
(bullet) Estimated fair value for forward and future hedge contracts are based
on the total contract position outstanding.
NOTE L - CAPITAL STOCK
At December 31, 1995, options to acquire 227,000 shares of the Company common
stock were outstanding and 766,795 shares were reserved under the following
plans:
F-19
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - CAPITAL STOCK - Continued
1992 Allied Research Corporation Employee Stock Purchase Plan
During 1993, the Board of Directors and shareholders approved and reserved
525,000 shares for the plan. The plan is voluntary and substantially all
full-time employees with greater than six months of service are eligible to
participate through payroll deductions. The purchase price of each share is
equal to 85% of the closing price of the common stock at the end of each
calendar quarter. The plan is subject to certain restrictions and the Board
may amend or terminate it at any time. During 1995, 1994 and 1993 - 20,608,
14,859 and 1,538 shares, respectively, subject to the plan were issued and
$11,736, $9,808 and $3,341 was charged to operations during 1995, 1994 and
1993.
1988 Incentive Compensation Plan
The Company has reserved 410,900 shares of common stock for key employees of
the Company and its subsidiaries. The plan authorizes 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, 1995, options had been granted for
215,400 shares at prices of $2.125 to $14.875 per share, which have all been
exercised except for 10,000 which expire at the earlier of 30 days after the
termination of employment of the optionholder or 2003. During 1994, 30,100
shares were issued as stock awards to two officers and one employee. The value
of the award that was charged to operations is $129,937. As of December 31,
1995, 94,000 shares of restricted common stock subject to the plan have been
awarded. These sales were awarded prior to 1993 and the value of the
incentives were charged to operations in the year they were awarded.
Restricted stock may be issued to a grantee for an amount less than fair
market value and may require the grantee to remain in the continuous employ of
the Company for a specified period before such shares can be sold or
transferred. At December 31, 1995 there were 71,400 shares still reserved and
unsecured under the plan.
1984 Incentive Stock Option Plan
The Company has reserved 315,000 shares of common stock for key employees of
the Company and its subsidiaries. The plan, which permitted grants through
March 31, 1994, provided that the purchase price shall be no less than the
fair market value of a share of common stock of the Company on the date the
option is granted, except for those options granted to employees who hold in
excess of 10% of the Company's stock, in which case the option price shall be
110% of the fair market value on the date of grant. Options granted can be
exercised two years or later from the date of grant and expire at the earlier
of thirty days after termination of employment or ten years from the date of
grant (five years in the case of an Over-Ten-Percent Stockholder). 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 have restrictions
concerning employment for a two-year period and expire in 2004. At December
31, 1995, all these options remained outstanding.
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
1995, 1994 and 1993, the Company granted 3,000, 5,000 and 5,000 shares of
common stock subject to the plan and charged $11,250, $22,500 and $74,375,
respectively, of compensation to operations.
F-20
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - CAPITAL STOCK - Continued
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. The Company granted options to
purchase a total of 40,000 shares at $2.50 to $4.125 per share. All issued
options have been exercised and there was no activity in this plan during
1995.
Other
Stock grants for 37,260 and 5,950 shares of the Company's common stock were
made to various employees during 1994 and 1993. These shares were issued
outside of any existing plan and their value ($172,812 and $74,375,
respectively) was charged to operations in 1994 and 1993.
During 1989, 1990 and 1991, the Company granted non-statutory options to
purchase a total of 100,500 shares of common stock at exercise prices ranging
from $1.79 to $3.93 per share. In 1991, options for 40,000 of these shares
were transferred to the 1991 Outside Directors Stock Option Plan. As of
December 31, 1995, options for 50,000 of the remaining 60,500 shares granted
had been exercised and the balance of 10,500 shares expired.
Preferred Share Purchase Rights Agreement
In June, 1992, the Board of Directors adopted the Agreement which provides
each stockholder of record on June 20, 1993, a dividend distribution of one
"right" for each outstanding share of common stock. Rights become exercisable
the earlier of ten days following: (1) a public announcement that an acquiring
person has purchased or has the right to acquire 10% or more of the Company's
common stock (effective April 5, 1994, the agreement was amended to reduce the
threshold from 25% to 10%), or (2) the commencement of a tender offer which
would result in an offeror beneficially owning 30% or more of the outstanding
common stock. All rights held by an acquiring person or offeror expire on the
announced acquisition date and all rights expire at the close of business on
June 20, 2001.
Each right under the Preferred Share Purchase Rights Agreement entitles a
stockholder to acquire at a purchase price of $45, one-hundredth of a share of
preferred stock which carries voting and dividend rights similar to one share
of common stock. Alternatively, a right holder may elect to purchase for $45
an equivalent number of common shares (or in certain circumstances, cash,
property or other securities of the Company) at a price per share equal to
one-half of the average market price for a specified period. In lieu of the
purchase price, a right holder may elect to acquire one-half of the common
shares available under the second option. The purchase price and the preferred
share fractional amount are subject to adjustment for certain events as
described in the Agreement.
Rights also entitle the holder to receive a specified number of shares of an
acquiring company's common stock in the event that the Company is not the
surviving corporation in a merger or, if 50% or more of the Company's assets
are sold or transferred.
At the discretion of a majority of the Board and within a specified time
period, the Company may redeem all of the rights at a price of $.01 per right.
The Board may also amend any provisions of the Agreement prior to their
exercise.
F-21
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - CAPITAL STOCK - Continued
Stock Purchase Agreement
In April, 1993, the Company agreed to purchase 350,000 shares of the Company's
common stock at a base price of $15 per share from a shareholder, plus
additional consideration as defined in the agreement. During 1993, the Company
purchased and retired 130,000 shares for $2,159,361, including $209,361 of
additional consideration. During 1994, the remaining 220,000 shares were
purchased for $3,513,364 and additional consideration of $213,364 in full
satisfaction of the agreement.
NOTE M - MAJOR CUSTOMERS
The Company derives substantially all of its revenues from foreign
governments, direct and indirect sales to U.S. Government agencies and
government prime contractors, primarily on fixed price contracts. During 1995,
1994 and 1993, the Company derived approximately 17%, 12% and 6%,
respectively, of its revenue from U.S. Government agencies and contractors.
Two agencies of a foreign government and another foreign government accounted
for approximately 12%, 31% and 27% of the Company's revenue in 1995. Two
agencies of a foreign government and two other foreign governments accounted
for approximately 5%, 60%, 14% and 7% of the Company's revenue in 1994. During
1993, 40%, 28% and 24% of the Company's revenues were derived from two
agencies of a foreign government and another foreign government.
NOTE N - CONCENTRATIONS OF CREDIT RISK
Financial instruments and related items which potentially subject the Company
to concentrations of credit risk consist principally of temporary cash
investments, trade receivables and costs and accrued earnings on uncompleted
contracts. The Company places its temporary cash investments with high credit
quality financial institutions. Credit risk with respect to trade receivables
and costs and accrued earnings on uncompleted contracts are concentrated due
to the nature of the Company's customer base. The Company 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 1995 and 1994 was not significant.
The majority of ammunition sales are to two agencies of a foreign government
and other foreign governments. Mecar's ammunition sales in any given period
and its backlog at any particular time may be significantly influenced by one
or a few large orders. In addition, the production period required to fill
most orders range 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, 1995 and 1994, backlog orders
believed to be firm approximated $68.1 and $23.1 million.
Amounts in foreign banks at December 31, 1995 and 1994 were approximately
$15,182,000 and $49,090,000, respectively. Changes in the value of the U.S.
dollar and other currencies affect the Company's financial position and result
of operations since the Company has operations in Belgium and the United
Kingdom and sells its products on a worldwide basis.
F-22
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O - OTHER - NET
Other income and expense included in the Company's consolidated statements of
operations is comprised as follows:
1995 1994 1993
---------- ---------- -----------
Net currency transaction gains (losses) $1,284,446 $1,484,651 $(1,243,190)
Miscellaneous - net 684,032 (178,578) 240,131
--------- --------- ----------
$1,968,478 $1,306,083 $(1,003,059)
========= ========= ==========
NOTE P - INCOME TAXES
Effective January 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"). SFAS No. 109 requires recognition of 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. The Company adopted SFAS No. 109 on a prospective basis resulting
in a noncash tax benefit of approximately $168,000, representing the
cumulative effect on prior years of adopting the accounting change in 1993.
Earnings (loss) before income taxes is comprised as follows:
1995 1994 1993
---------- ------------ -----------
Domestic $ 151,888 $ (1,005,790) $ 2,400,734
Foreign (1,421,507) (9,267,553) 9,634,804
---------- ----------- -----------
$(1,269,619) $(10,273,343) $12,035,538
========== =========== ==========
The Company's provision for income taxes is comprised as follows:
1995 1994 1993
----------- ----------- -----------
Currently payable
Domestic $ 116,692 $ (65,405) $ 1,471,589
Foreign 498,696 342,935 2,859,742
----------- ------------ -----------
615,388 277,530 4,331,331
Deferred - net 128,264 390,233 (290,915)
----------- ------------ -----------
743,652 $ 667,763 $ 4,040,416
=========== ============ ===========
F-23
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE P - INCOME TAXES - Continued
The Company's provision for income taxes differs from the anticipated United
States statutory rate. Differences between the statutory rate and the
Company's provision are as follows:
1995 1994 1993
------- ------- -------
Taxes at statutory rate (34.0)% (34.0)% 34.0 %
Benefit of foreign tax credit carryforward (7.4) (14.3) (5.1)
Foreign tax rate differential and current
loss limitations 94.3 53.9 4.8
State taxes, net of federal income tax effect - .9 1.2
Other 5.7 - -
Cumulative effect of adopting SFAS 109 - - (1.3)
------- ------- -------
Income taxes 58.6 % 6.5 % 33.6 %
======= ======== =======
In 1995, 1994 and 1993, the Company's Belgian subsidiaries utilized
approximately $47,000, $50,000 and $5,901,000, respectively, of foreign
operating loss carryforwards for tax reporting purposes. Unused net operating
losses of the Belgian subsidiaries at December 31, 1995 approximate
$18,672,000, which under Belgian tax law cannot be carried back, but may be
carried forward indefinitely subject to certain annual limitations.
The Company utilized approximately $94,000, $1,664,000, and $615,000 of its
foreign tax credits in 1995, 1994 and 1993. At December 31, 1995, foreign tax
credit carryforwards of approximately $1,100,000 were available which expire
through 2009.
Deferred tax liabilities have not been recognized for bases 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
$16,500,000 at December 31, 1995. Determination of the amount of unrecognized
deferred tax liabilities is not practicable.
F-24
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE P - INCOME TAXES - Continued
Deferred taxes at December 31, 1995 and 1994 are comprised as follows:
1995 1994
-------------------------------
Current
Unrealized exchange losses $ (85,970) $ (52,161)
Compensated absences 96,900 95,600
Deferred income (4,185) (19,268)
Other 14,200 20,200
Deferred compensation 55,628 63,723
------------ ------------
Current deferred tax asset/liability 76,573 108,094
Noncurrent
Foreign tax credit carryforwards 1,099,625 1,002,974
Foreign and domestic net operating loss carryforwards 18,754,277 16,653,156
Depreciation and amortization 295,881 230,866
Unrealized exchange gain (1,069,231) (755,793)
------------ ------------
Noncurrent deferred tax asset/liability 19,080,552 17,131,203
------------ ------------
Total deferred tax asset/liability before valuation allowances 19,157,125 17,239,297
Valuation allowances (19,923,320) (17,877,228)
------------ ------------
Net deferred tax liability $ (766,195) $ (637,931)
============ ============
Deferred tax components are included in the following balance sheet
accounts:
1995 1994
--------------------------------
Current (included in "prepaid expenses and deposits") $ 80,758 $ 127,362
Deferred income taxes (846,953) (765,293)
------------- -------------
$ (766,195) $ (637,931)
============= ==============
NOTE Q - EXPLOSION
In April, 1995, an explosion damaged Mecar's storage and loading facilities,
and caused production to cease for several months. The Company was insured for
property damage and business interruption. The direct costs of repairing the
facility approximating $2.3 million was recovered in addition to $1.3 million
for business interruption. The business interruption portion of the proceeds
have been classified as revenue in 1995, which partially offset overhead and
operating costs for the shut down period. The $2.3 million recovery was a
direct offset against the related costs.
F-25
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE R - RESTRUCTURING CHARGE
In the fourth quarter of 1993, the Company recorded an accrual for
restructuring costs totaling $2,883,289 ($.44 per share after taxes) related
to its Belgian manufacturing operations. The charge provided for estimated
employee severance, retraining, early retirements and related costs
attributable to a planned workforce reduction initiated in late 1993. The
Company anticipated that it would eliminate over the next two years
approximately 32 permanent and 120 temporary factory and administrative
positions. The reductions were the result of efficiencies implemented over the
past several years, current backlog levels and anticipated future workforce
requirements for Mecar's core defense operations, as well as those expected to
be redeployed as part of prospective diversification ventures. During 1994,
the Company increased the provision by $326,831 to cover additional
terminations. The restructuring was completed in early 1995.
NOTE S - EARNINGS PER COMMON SHARE
Net earnings per common share is based upon the weighted average number of
shares outstanding of 4,408,172 in 1995, 4,392,517 in 1994, and 4,619,965 in
1993. Stock options outstanding have not been included in the per share
computations since they would not have a material effect on per share amounts.
NOTE T - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS
The Company currently operates in three principal areas: Product sales (Mecar
and ARCL), Engineering and Technical (BRI) and Security Systems and Services
(The VSK Group). Product sales includes the production of ammunitions, weapons
systems and ordnance products systems integration. Engineering and Technical
provides support services primarily to United States Military Agencies and
government contractors. Security Systems and Services includes sales and
services to industrial and institutional customers of protection, fire and
access control systems and services. ARC Services had no significant revenues
since inception in 1993.
F-26
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE T - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - Continued
The Company's foreign operations are conducted by Mecar, the VSK Group and
ARCL. All material identifiable assets associated with foreign operations are
located in Belgium and the United Kingdom.
Information by geographic area and industry segment is as follows:
Geographic Area Data 1995 1994 1993
-------------------- ----------- ------------ ------------
Net sales
Belgium (1) $53,280,097 $ 61,189,115 $137,203,725
United Kingdom (2) - 332,266 369,503
France 1,054,560 - -
United States 11,434,250 8,325,464 9,524,254
---------- ----------- ------------
$65,768,907 $ 69,846,845 $147,097,482
========== =========== ===========
Operating income (loss)
Belgium $ (926,099) $ (8,954,876) $ 15,248,932
United Kingdom (626,630) (84,007) (632,210)
France (495,318) - -
United States 598,497 (1,622,714) (733,423)
Corporate (524,288) (688,929) (1,063,962)
---------- ----------- -----------
$(1,973,838) $(11,350,526) $ 12,819,337
========== =========== ============
Assets
Belgium $84,800,974 $100,320,904 $148,882,022
United Kingdom 1,645,818 1,647,402 10,396,231
France 1,213,227 - -
United States 6,593,254 5,418,003 4,313,226
---------- ----------- -----------
$94,253,273 $107,386,309 $163,591,479
========== =========== ===========
(1) Includes export sales principally to customers in Asia\Middle East and
Europe of $33,212,000 in 1995, $50,457,142 in 1994, $101,947,46 in 1993.
(2) Includes export sales principally to customers in Asia\Middle East of
$332,266 in 1994, and $369,503 in 1993.
F-27
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE T - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - Continued
Industry Segment Data 1995 1994 1993
--------------------- ----------- ----------- ------------
Net sales
Product sales $36,131,894 $ 54,335,591 $137,573,228
Engineering and technical 11,354,440 8,325,464 9,524,254
Security systems and service 18,282,573 7,185,790 -
----------- ----------- ------------
$65,768,907 $ 69,846,845 $147,097,482
=========== ============ ============
Operating income (loss)
Product sales $(2,426,616) $ (9,657,051) $ 14,071,618
Engineering and technical 912,048 (872,206) (188,319)
Security systems and service 65,018 (132,340) -
Corporate (524,288) (688,929) (1,063,962)
----------- ----------- ------------
$(1,973,838) $(11,350,526) $ 12,819,337
=========== ============ ============
Assets
Product sales $83,468,399 $ 94,174,064 $159,278,253
Engineering and technical 5,855,840 4,096,033 3,922,028
Security systems and service 4,191,620 7,842,496 -
Corporate assets 737,414 1,273,716 391,198
----------- ------------ ------------
$94,253,273 $107,386,309 $163,591,479
=========== ============ ============
Capital expenditures
Product sales $ 2,179,864 $ 2,688,614 $ 3,335,594
Engineering and technical 310,059 632,922 310,192
Security systems and service 430,805 295,982 -
----------- ------------ ------------
2,920,728 $ 3,617,518 $ 3,645,786
=========== ============ ============
Depreciation and
amortization expense
Product sales 2,310,195 $ 1,868,803 $ 2,529,547
Engineering and technical 222,857 238,725 198,115
Security systems and service 218,815 303,501 -
----------- ------------ ------------
$ 2,751,867 $ 2,411,029 $ 2,727,662
=========== ============ ============
F-28
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE U - QUARTERLY FINANCIAL DATA (UNAUDITED)
(Amounts in thousands, except per share data)
First Second Third Fourth Total
1995 Quarter Quarter Quarter Quarter For Year
- --------------------- ------- ------- ------- ------- --------
Revenue $ 9,153 $13,275 $16,530 $26,811 $65,769
Gross profit (loss) 103 2,531 2,583 10,655 15,872
Net earnings (loss) (2,724) (1,758) 215 2,254 (2,013)
Per share data:
Net earnings (loss) (.62) (.40) .05 .51 (.46)
1994
- ---------------------
Revenue $25,910 $18,481 $ 8,694 $16,762 $69,847
Gross profit (loss) 3,729 2,028 (434) 547 5,870
Net earnings (loss) 378 (2,409) (2,633) (6,277) (10,941)
Per share data:
Net earnings (loss) .09 (.55) (.60) (1.43) (2.49)
F-29
SCHEDULES
Allied Research Corporation
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Parent Company)
BALANCE SHEETS
December 31,
The condensed balance sheets, statements of operations and cash flows of the
registrant follow.
ASSETS
1995 1994
----------- -----------
Cash and equivalents $ 454,470 $ 874,851
Due from subsidiaries 3,431,939 3,102,242
Investments in subsidiaries 31,192,155 32,316,730
Deferred tax asset - 11,562
Deposits and other 313,287 439,021
----------- -----------
Total assets $35,391,851 $36,744,406
=========== ===========
LIABILITIES
Accounts payable and accrued liabilities $ 206,141 $ 267,787
Due to subsidiaries 6,751,678 6,725,532
Income taxes 80,447 53,413
----------- -----------
Total liabilities 7,038,266 7,046,732
STOCKHOLDERS' EQUITY
Common stock 442,206 439,844
Capital in excess of par value 10,745,296 10,658,175
Retained earnings 12,676,000 14,689,271
Accumulated foreign currency
translation adjustment 4,490,083 3,910,384
----------- -----------
28,353,585 29,697,674
----------- -----------
$35,391,851 $36,744,406
=========== ===========
F-31
Allied Research Corporation
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
(Parent Company)
STATEMENTS OF OPERATIONS
Year ended December 31,
1995 1994 1993
----------- ------------ ----------
Income
Management fees - intercompany $ 2,505,222 $ 3,864,152 $6,611,746
Other - net 266,361 202,275 (79,968)
----------- ------------ ---------
2,771,583 4,066,427 6,531,778
Costs and expenses
Administrative and other 3,115,474 3,775,141 3,487,492
---------- ------------ ---------
Earnings (loss) before equity in
operations of subsidiaries (343,891) 291,286 3,044,286
Equity in operations of subsidiaries (1,696,176) (10,965,420) 6,296,315
---------- ----------- ---------
Earnings (loss) before income taxes (2,040,067) (10,674,134) 9,340,601
Income taxes (26,797) 266,972 1,345,479
------------ ----------- ---------
NET EARNINGS (LOSS) $(2,013,270) $(10,941,106) $7,995,122
========== =========== =========
Net earnings (loss) per common share $( .46) $(2.49) $1.73
===== ===== ====
F-32
Allied Research Corporation
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
(Parent Company)
STATEMENTS OF CASH FLOWS
Year ended December 31,
Increase (decrease) in cash and equivalents 1995 1994 1993
----------- ------------ -----------
Cash flows from (used in) operating activities
Net (loss) earnings for the year $(2,013,270) $(10,941,106) $ 7,995,122
Adjustments to reconcile net earnings to net cash from
(used in) operating activities
Equity in operations of subsidiaries 1,696,176 10,965,420 (6,296,315)
Deferred income taxes 41,904 41,048 (152,610)
Common stock awards and grants 11,250 236,473 148,750
Changes in assets and liabilities
Income taxes recoverable - - (66,587)
Due from subsidiaries (329,697) 3,653,332 (346,977)
Other assets 133,830 (350,872) (15,609)
Due to subsidiaries 26,146 316,935 (418,783)
Accounts payable and accrued liabilities (61,644) 164,350 32,828
Income taxes (3,308) 120,000 (49,784)
----------- ------------ -----------
1,514,657 15,146,686 (7,165,087)
----------- ------------ -----------
Net cash provided by (used in) operating activities (498,613) 4,205,580 830,035
Cash flows from investing activities
Capital expenditures - (213,840) -
Cash flows from financing activities
Proceeds from exercise of stock options - - 233,707
Purchase of treasury shares - (3,513,360) (2,159,361)
Proceeds from employee stock purchase plan shares 78,232 65,672 22,358
----------- ------------ -----------
Net cash (used in) provided by financing activities 78,232 (3,447,688) (1,903,296)
----------- ------------ -----------
Net (decrease) increase in cash and equivalents (420,381) 544,052 (1,073,261)
Cash and equivalents at beginning of year 874,851 330,799 1,404,060
----------- ------------ -----------
Cash and equivalents at end of year $ 454,470 $ 874,851 $ 330,799
=========== ============= ============
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for
Interest $ - $ 3,667 $ -
Income taxes 120,000 - 1,451,725
F-33
Allied Research Corporation
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
----------------------------
Balance at Charged to Charged Balance
beginning costs and to other at end of
Description of period expenses accounts Deductions period
- ----------- ----------- ------------- ----------- ------------ ------------
Year ended December 31, 1995
Estimated losses on
contracts $ 1,873,008 $(1,178,475) $ - $ 263,318 $ 431,215
========== ========== ========== ========= ===========
Allowance for doubtful
receivables $ 141,000 $ 189,077 $ - $ - $ 330,077
========== ========== ========== ========= ===========
Valuation allowances on
deferred tax assets $17,877,228 $ 2,046,092 $ - $ - $19,923,320
========== ========== ========== ========= ===========
Year ended December 31, 1994
Estimated losses on
contracts $ 3,127,574 $ 721,937 $ - $1,976,503 $ 1,873,008
========== ========== ========== ========= ==========
Allowance for doubtful
receivables $ 21,000 $ - (a)$ 120,000 $ - $ 141,000
========== ========== ========== ========= ==========
Valuation allowances on
deferred tax assets $ 3,384,229 $14,492,999 $ - $ - $17,877,228
========== ========== ========== ========= ==========
(a) VSK Group acquisition
Year ended December 31, 1993
Estimated losses on
contracts $ 1,087,461 $ 3,127,574 $ - $1,087,461 $ 3,127,574
========== ========== ========== ========= ==========
Allowance for doubtful
receivables $ 21,000 $ - $ - $ - $ 21,000
========== ========== ========== ========= ==========
Valuation allowances on
deferred tax assets $ - $ - $3,384,229 $ - $ 3,384,229
========== ========== ========= ========= ==========
F-34
EXHIBITS
EXHIBIT INDEX
Number Description of Exhibit Page
- ------ ---------------------- ----
11 Computation of Earnings
per Common and Common
Equivalent Shares E - 3
21 List of Subsidiaries E - 4
23 Consent of Independent Certified
Public Accountants E - 5