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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, 1996 0-2545
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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, 1996 0-2545
----------------- ------
ALLIED RESEARCH CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2281015
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(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 14, 1997:
Common Stock - Par Value $.10 $43,839,200
The number of shares of registrant's Common Stock outstanding as of March 14,
1997, was 4,521,838.
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 subsidiaries, MECAR S.A. ("MECAR"), Barnes & Reinecke, Inc. ("BRI"),
Allied Research Corporation Limited ("Limited") 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; 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. From time to time, MECAR provides system integration services pursuant
to which it purchases and resells weapon systems and/or ammunition.
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.
120mm Mortar Round. This round can be fired in both direct and
indirect modes. It has been developed for use in new mortar weapon
systems.
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
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 M551 Sheridan Light Tank.
4
BRI's technical publications department provides hard copy and
electronic format documents and manuals for the presentation and support of
products. This includes both commercial and government department of defense
customers.
Limited.
Limited, a systems integrator in the ammunition industry, was
established by Allied in 1989 to augment its overseas business development
efforts. In 1994, the London office of Limited was closed and the employment of
the relevant employees was terminated. Allied and MECAR continue to attempt to
obtain additional systems integration contracts. If any such contracts are
obtained in the name of Limited, such entity will be appropriately staffed and
supported to carry out the contracts.
VSK Group.
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.
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 1996, 1995 and
1994, two agencies of a foreign government and another foreign government
accounted for approximately 10%, 42% and 19% in 1996, 12%, 31% and 27% in 1995
and 5%, 60% and 14% in 1994, of Allied's revenues. During 1996 and 1995, Allied
derived approximately 11% and 17%, respectively, of its annual revenue from U.S.
Government agencies and contractors. The VSK Group accounted for approximately
17% and 28% of Allied's 1996 and 1995 revenues, respectively.
5
MECAR's products are sold directly or indirectly to the defense
departments of governments. MECAR is regulated by Belgian law regarding the
foreign governments with which it may do business.
The sales by MECAR in any given period and its backlog at any
particular time may be significantly influenced by one or a few large orders.
This is due to the nature of its business. An order for MECAR's products is
typically for a large quantity and/or a substantial aggregate price, primarily
because materials required for the manufacture of the products cannot be
economically purchased in small quantities and because of the favorable
economies of large volume production. In addition, the production period
required to fill most such orders may range from several months to a year.
Accordingly, MECAR's business is dependent upon its ability to obtain such large
orders. MECAR has no continuing contract with any customer to purchase MECAR's
products. MECAR does, of course, accept smaller orders when it is profitable to
do so or when MECAR management believes that accepting such an order is
otherwise in the best interests of MECAR. MECAR's products are designed for
general military use by a variety of government customers.
When MECAR obtains a contract for the sale of its products, it
generally receives down payment(s) and/or letter(s) of credit to be applied to
the purchase price upon shipment of the products.
BRI's engineering and technical services are sold directly or
indirectly to the United States Department of Defense, foreign governments and
certain civilian customers. BRI has a number of ongoing design and engineering
assignments with U.S. military agencies, however, BRI has no continuing contract
with any customer to provide products or services. The size of the orders vary
and completion time ranges from several months to a few days. U.S. Government
contracts are subject to termination at the convenience of the U.S. Government
or for default.
The VSK Group derives substantially all of its revenue from sales and
services to private industry such as banks, hospitals, commercial businesses,
office buildings, etc. The VSK Group also sells its systems to other independent
distributors and resellers. The customers of the VSK Group are located in
Belgium and in neighboring countries. While most of the orders received by the
VSK Group are for work which can be completed within one year, it has received
multi-year orders for its products and services. sells its products principally
in European markets.
6
Marketing.
Most of the marketing activities of MECAR are handled by MECAR's staff
of sales engineers and executive staff. In addition, MECAR advertises in trade
journals and participates in trade shows. MECAR is also represented by marketing
representatives in different markets. MECAR obtains orders from the agencies of
a foreign government which constitute its principal customers through an
independent marketing representative.
BRI's marketing activities are conducted by its executive and marketing
staff. In addition, BRI participates in various trade shows and advertises in
trade journals.
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 1996, 1995 and 1994, MECAR expended $857,434, $1,039,631
and $940,133, respectively, for research and development activities. MECAR
designed most of the products which it currently manufactures. MECAR designs and
develops most of its special tooling, fixtures and special explosive loading and
testing systems.
BRI conducts research and development under contract to both government
and commercial clients. Generally, full-size prototypes are supplied where the
research and development requirement calls for a working model or unit.
The business of the VSK Group requires continuous investment in
research and development to update and enhance the security systems. The VSK
Group employs a staff of design engineers specialized in the field of both
electronic hardware and software. During 1996 and 1995, the VSK Group expended
$888,885 and $954,363, respectively, on research and development. Prior to 1995
the VSK Group did not separately account for its research and development costs.
7
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 materials and parts, some of which are customer-directed sole
source procurement. BRI has found such supplies and materials 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, 1996 and December 31, 1995, Allied had backlog
orders believed to be firm, after giving effect to the percentage of completion
method of accounting, of approximately $79.6 million and $68.1 million,
respectively. The backlog of orders as of December 31, 1996 are expected to be
substantially filled in 1997 and the first half of 1998.
Competition.
The munitions business is highly competitive. MECAR has a number of
competitors throughout the world, including the United
8
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, capabilities of the product and price.
BRI is in a very competitive business and many of its competitors are
larger companies with greater capital resources. As defense spending continues
to decline and the defense industry consolidates, the level of competition will
likely increase. A large portion of BRI's business is obtained through the
competitive bidding process.
The nature of the competition encountered by the VSK Group depends upon
the segment of the security systems business. In the development and
manufacturing area, there are a number of larger competitors, many with greater
financial resources than the VSK Group. In the installation and services area,
the VSK Group competes with a number of smaller, local competitors.
Personnel.
As of March 14, 1997, Allied, MECAR, BRI and the VSK Group had 487
permanent employees as follows:
ALLIED
Salaried employees 5
Part-time employees 1
MECAR
Technical and salaried employees 52
Hourly workers 207
Technical consultants 2
BRI
Salaried employees 65
Hourly employees 36
VSK Group
Technical salaried employees 79
Hourly workers 40
The classification of employees noted above for MECAR and the VSK Group
is in accordance with Belgian law.
Patents.
9
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 in 1995
and 1996, although below the levels received in the 1991-1993 timeframe.
Item 2. Properties.
Allied's principal executive offices are located in Vienna, Virginia,
where it leases approximately 4,300 square feet of office space. The lease
expires in September, 2000.
MECAR's principal factory is located approximately 25 miles south of
Brussels near Nivelles, Belgium. The factory principally consists of a
manufacturing and administrative complex which was occupied by MECAR in 1989.
The manufacturing area consists of approximately 112,000 square feet and the
administration facilities consist of approximately 28,000 square feet. There are
a number of older buildings on the property that are still used in conjunction
with the new complex. A small test firing range is 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.
Throughout 1996, MECAR operated at an average of 85% of productive
capacity of its facility, assuming the operation of 3 shifts. MECAR is currently
operating at full productive capacity including use of some temporary personnel.
Capital expenditure programs for equipment planned in 1997 will require
funding of approximately $2.6 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
10
July 31, 1999. Assuming one full shift is maximum capacity, BRI is currently
operating at approximately 90% of the productive capacity of its Arlington
Heights facility.
BRI also operates from leased facilities located in Troy, Michigan and
East Moline, Illinois. The Troy operations are conducted from a leased facility
consisting of approximately 17,500 square feet of office and engineering space.
The Troy lease expires on January 31, 2000. The East Moline facility contains
1,200 square feet of office and engineering space and is leased on a month to
month basis. Both facilities are used as bases to service Department of Defense
customers in the vicinity. BRI is currently operating at approximately 90% of
the productive capacities of each of its Troy and East Moline facilities.
The VSK Group operates from owned facilities containing approximately
49,400 square feet. Such facilities are currently operating at approximately 80%
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 1996.
11
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 1996 and 1995 (as reported
by AMEX):
1996 High Low
---- ---- ---
1st Quarter $5-3/8 $3-1/2
2nd Quarter 7-1/2 3-1/2
3rd Quarter 6-1/4 4-1/2
4th Quarter 6-1/2 4-7/8
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
Stockholders.
There were approximately 1,644 holders of record of the Common Stock of
Allied as of March 14, 1997.
Dividends.
Allied paid a 5% stock dividend on November 6, 1992 to holders of
record of its Common Stock on October 15, 1992. Cash was paid in lieu of the
issuance of fractional shares. There have been no dividends declared or paid by
Allied in 1993-1996. The banking agreements of MECAR restrict the ability of
such subsidiary to transfer funds to Allied as described in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
12
Item 6. Selected Financial Data.
The following selected financial data relates to Allied's consolidated
financial position and results of operations for 1996, 1995, 1994, 1993 and
1992:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(000's omitted except per share amounts)
Revenues $103,660 $65,769 $69,847 $147,097 $217,334
Net earnings (loss) 4,805 (2,013) (10,941) 7,995 18,040
Per Share:
Net earnings (loss) 1.08 (.46) (2.49) 1.73 3.99
Total assets 91,948 94,253 107,386 163,591 116,236
Long-term debt
obligations and
redeemable preferred
stock 7,443 28,435 14,108 19,218 6,462
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.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Overview
Allied provides management services to its subsidiaries.
Allied's consolidated statements have eliminated intercompany transactions. The
following discussion refers to the financial condition, liquidity and results of
operations of Allied on a consolidated basis unless otherwise stated. All
dollars are in millions except per share amounts.
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Allied earned a net profit of $4.81 ($1.08 per share) for
1996 compared with a net loss of $2.01 ($.46 per share) for 1995 and a net
loss of $10.94 ($2.49 per share) for 1994. In 1996, each of Allied's
operating subsidiaries earned a profit.
Trends In Operations
Allied's results from operations continue to be uneven as a
result of the volatility of the overseas military business of MECAR. The
substantial orders received by MECAR in 1995 and throughout 1996 resulted in
profitable operations beginning in the second half of 1995 and continuing
throughout 1996. Consistent with historical patterns, these orders were
primarily from two agencies of a foreign government. In order to continue
profitable operations, MECAR must continue to obtain similar or larger orders on
a timely basis.
Management continues to broaden its revenue base in several
respects. In 1996, MECAR obtained approximately $17 in new orders from
non-traditional customers (as opposed to approximately $71 from its traditional
customer base). Management believes that MECAR's expanded marketing efforts
should continue to produce future orders from non-traditional customers. In
addition, in 1996, the VSK Group contributed approximately $17.9 in revenues and
$0.8 in profits. Accordingly, revenues from the commercial security services
business contributed approximately 17% of Allied revenues in 1996.
Notwithstanding these efforts, 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.
Allied commenced 1997 with a backlog of approximately $79.6
compared with a backlog at the beginning of 1996 of $68.1. MECAR began 1997 with
a backlog of approximately $49.4. In the first quarter of 1997, it also
received an $84 contract from its principal customer. VSK began 1997 with a
backlog of approximately $14.5 compared with a 1996 beginning backlog of
approximately $21.1. BRI's beginning backlog in 1997 was $15.6 compared with a
1996 beginning backlog of $12.4. Approximately $8.9 of BRI's 1997 backlog is
based on a contract to manufacture and deliver a dynamometer for a foreign
country which is scheduled for delivery in mid to late 1999. BRI is
negotiating for the additional financing required for this contract.
In recent years, the award of additional U.S. government
business to BRI has become less predictable in both amount and timing; in turn,
BRI has received a substantial portion of its revenues from relatively large
contracts for the benefit of foreign governments. It is anticipated that BRI's
future prospects will continue to be dependent on receipt of such contracts from
or for the benefit of international customers.
14
Trends In Liquidity And Capital Resources
The substantial losses incurred in 1994 caused a decline in
liquidity which decline continued in 1995. Allied's liquidity improved in 1996
as a result of the profitable operations experienced in the last of half of 1995
and throughout 1996. No liquidity problems are forecast for 1997 in view of
Allied's existing backlog, particularly the backlog accumulated at MECAR. In the
longer term, Allied's liquidity will continue to depend upon its ability to
obtain substantial orders from it's traditional customer base and the success of
the above-described efforts to broaden its revenue base.
Liquidity.
Allied's liquidity increased in 1996, principally as a result
of profitable operations at each operating unit. Working capital was
approximately $18.1 at December 31, 1996, which is an increase of $4.1 from the
December 31, 1995 level. Allied's current working capital is required for
operations and to support credit facility agreements.
Accounts receivable at December 31, 1996 decreased from
December 31, 1995 by $9.2 due to substantial collections of receivables in
December, 1996. Costs and accrued earnings on uncompleted contracts increased by
$8.4 from 1995 as a result of greater levels of work in process at 1996
year-end. Inventory increased by $0.8 over 1995, generally as a result of longer
production times. Prepaid expenses and deposits increased $2.8 due to an
increase in new orders. Current liabilities increased by $15.8 from 1995 levels
inasmuch as the Term Loan (as herein defined) matures in 1997.
During 1996, 1995 and 1994, Allied funded its operations
principally with internally generated cash and back-up credit facilities
required for foreign government contracts.
Allied and its subsidiaries continued their cost cutting
initiatives in 1996. Allied reduced its general and administrative expenditures
by approximately 1% on a significantly increased revenue base in 1996.
Except for a modest line of credit to support the operations
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 and VSK's operations.
15
MECAR typically obtains relatively large orders for its
ammunition and weapon systems which require a credit facility to provide import
letters of credit, advance payment 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"). The Term Loan
(which was $11.4 at December 31, 1996) was provided solely to support the
Walloon Region guarantee. Given MECAR's improved financial performance, the
Walloon Region did not extend its guarantee to the credit accommodations
required to support the $84 contract recently awarded to MECAR. It is currently
anticipated that the Term Loan will be repaid during 1997 and the Walloon Region
guarantee will be released. MECAR's obligations under the Bank Agreement are
also supported by a $3 guarantee provided by Allied.
The credit facility was recently amended to finance the
substantial order received by MECAR from its principal customers, discussed
above. The credit facility is now being provided by a five (5) member foreign
bank pool. As has been the case in recent years, the bank agreement must be
further amended to provide appropriate financing for new orders as they are
received by MECAR. While management believes that it will be able to finance
additional MECAR contracts using the bank pool structure, there can be no
assurance that such financing will be provided.
The Bank Agreement and other loan agreements continue to
impose certain restrictions on MECAR. MECAR's obligations were collateralized at
December 31, 1996 by base cash deposits of $20.1 and a pledge on MECAR's assets
of $31. As a result, $20.1 of the cash balance reflected on the December 31,
1996 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.
MECAR has a mortgage loan with a foreign bank which had an
outstanding balance of approximately $5.1 at December 31, 1996. Principal and
interest payments on the mortgage loan extend through January, 2004.
BRI operated throughout 1996 from cash generated from
operations supplemented by a credit facility. The credit facility consisted of
(i) a $.750 line of credit and (ii) two (2) term loans aggregating $.661 at
December 31, 1996 (repayable in monthly installments through October, 1998) to
finance capital expenditures and obligations. In January, 1997, the line of
credit was increased to $1.25. The line of credit expires in June, 1997 and is
renewable at the discretion of the bank on an annual basis thereafter. At
December 31, 1996, the line of credit had an outstanding balance of $.250.
Allied has guaran-
16
teed BRI's obligations under the above-described term loans and line of credit.
BRI is in the process of securing additional financing necessary to perform
under it's $8.9 dynamometer contract. While management believes that it will be
able to secure such financing, there can be no assurance that such financing
will be provided.
VSK operated throughout 1995 primarily from cash generated
from operations. VSK is obligated on several mortgages with December 31, 1996
balances aggregating $1.2.
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 $1.07 in 1996 on capital equipment as compared
with $2.92 in 1995 and $3.62 in 1994, respectively. The expenditures in 1996
were primarily for facility upgrades and computer equipment. Management
currently anticipates that it will spend approximately $2.6 on capital
expenditures in 1997, principally for additional upgrades to the MECAR
facilities.
Results of Operations.
Allied had revenues of $103.7 in 1996 as compared to $65.8 in
1995 and $69.8 in 1994, respectively. Allied earned a profit of $4.81 in
1996 compared to losses of $2.01 in 1995 and $10.94 in 1994, respectively.
The following table sets forth, for the years ended December
31, 1996, 1995 and 1994, certain items from Allied's consolidated statements of
operations expressed as a percentage of revenue:
1996 1995 1994
---- ---- ----
Revenue 100% 100.0 100.0%
Costs and Expenses
Cost of sales 75.9 75.9 91.6
Selling and administrative 15.1 24.0 22.4
Research and development 1.7 3.2 1.8
Restructuring charge ---- ---- .5
Operating income (loss) 7.3 (3.1) (16.3)
Other income (deductions)
Interest income 1.9 2.7 5.1
Interest expense (3.3) (4.6) (5.4)
Other - net (0.4) 3.0 1.9
17
1996 1995 1994
---- ---- ----
Earnings (loss) before
income taxes 5.5 (2.0) (14.7)
Income taxes 0.9 1.1 1.0
Net earnings (loss) 4.6 (3.1) (15.7)
Revenues
Revenues for 1996 increased $37.9 or 57.6% as compared to
1995. Revenues at MECAR increased by approximately 105% over the prior year due
to the increased amount of orders received in the latter portion of 1995 and
throughout 1996. In 1996, revenues at the VSK Group decreased approximately 2%
under 1995 levels primarily due to currency fluctuations. Revenues at BRI
increased 2.5% from 1995 levels. Revenues at Limited were generated largely from
interest earned on inter-company loans made to MECAR, which revenues were
eliminated in consolidation. In 1996, Limited's intercompany loans to MECAR were
eliminated by conversion thereof to MECAR capital. Accordingly, Limited should
have minimal revenues in 1997 and going forward.
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 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.
Cost of Sales
Cost of sales as a percentage of sales for 1996 and 1995 were
each approximately 76%.
Cost of sales as a percentage of sales for 1995 decreased
15.7% 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.
Selling and Administrative Expenses
Selling and general administrative expenses in 1996 were
slightly less than those incurred in 1995.
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
18
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.
Research and Development
Research and development costs decreased by $0.34, or 16%
under 1995 levels due to lower expenditures at MECAR.
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.
Interest Income
Interest income increased in 1996 by $0.15, or 8.6% over 1995
levels principally due to improved cash flow and corresponding levels of cash.
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 Expense
Interest expense increased in 1996 by $0.42, or 13.7% over the
amount incurred in 1995 as a result of an increase in the Term Loan and a
change in reporting of bank charges.
Interest expense decreased in 1995 from 1994 as a result of a
decrease in outstanding debt and credit facilities fees.
Other - Net
Allied had a loss of $0.38 in 1996, largely due to net
currency losses.
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.
Income Taxes
The 1996 effective tax rate was 15.6% primarily due to the
utilization of tax loss carryforwards.
The 1995 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.
19
Net Earnings (Loss)
The Company had a $4.81 profit in 1996 compared with a
$2.01 loss in 1995. All operating units earned a profit in 1996.
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 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.
PART III
Item 10. Directors and Executive Officers of Allied.
Directors.
The following are the directors of Allied:
J. R. Sculley, age 56, became a director of Allied in 1991. He has
served as president and chief operating officer of Allied since April, 1992, and
was named chairman of the board and chief executive officer in December, 1992.
He is also a director of MECAR, BRI and Limited. Between 1989 and April, 1992,
Mr. Sculley was Director of Advanced Studies and Technologies of Grumman
Corporation, a defense company, and, prior thereto, was Assistant Secretary of
the Army (Research, Development and Acquisition).
Clifford C. Christ, age 49, 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 58, 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 73, became a director of Allied in early 1996.
Throughout the last five years, Mr. Hebel has been a private investor.
Harry H. Warner, age 61, 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
20
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 56, was elected chairman of the board and chief
executive officer of Allied in December, 1992, and has served as Allied's
president and chief operating officer since April, 1992. He served as Director
of Advanced Studies and Technologies of Grumman Corporation, a defense company,
from 1989 to April, 1992, and previously was Assistant Secretary of the Army
(Research, Development and Acquisition). Mr. Sculley also serves as a director
of MECAR, BRI and Limited.
W. Glenn Yarborough, Jr., age 56, 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 Corpora- tion, a defense company. Mr. Yarborough also serves as a
direc- tor of BRI and the VSK Group.
21
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, 1996, 1995 and 1994, by the
chief executive officer of Allied and by other executive officers of Allied
whose total annual salary and bonus exceeds $100,000:
22
SUMMARY COMPENSATION TABLE
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------------------- ----------------------------------
Other All
Name Annual Restricted Securities Other
and Compen- Stock Underlying LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($)(1) ($)(2) ($) SARs (#) ($) ($)
- --------- ---- --------- ----------- -------- ---------- ---------- ------- -------
J. R. 1996 $245,000 $100,000 15,000
Sculley, 1995 $235,000
Chief 1994 $235,000 $103,125 $ 82,763 56,000
Executive
Officer
W. Glenn 1996 $168,000 $ 90,000 27,600
Yarborough, 1995 $144,500
Jr., Vice 1994 $130,000 $ 26,250 14,000
President
- ---------------
(1) Pursuant to Board of Directors' authorization in December, 1996, Messrs.
Sculley and Yarborough were awarded bonuses of $100,000 and $90,000 for
1996 performance payable in 1997 in stock and/or cash. In March, 1997, Mr.
Sculley was awarded 5,548 shares of stock and a cash bonus of $44,420 and
Mr. Yarborough was awarded 9,000 shares of Company stock. These shares had
a market value of $10.00 per share on the date of grant. In 1994, 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 and 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.
(2) In 1994, Mr. Sculley was paid $82,763 in payment of federal and state taxes
paid as a result of the 1994 stock award.
23
Option/SAR Grants in Last Fiscal Year
Individual Grants Grant Date Value
----------------- ----------------
Number of
Securities % of Total
Underlying Options/SARs
Options/ Granted to Exercise or Grant Date
SARs Employees in Base Price Expiration Present Value
Name Granted (#) Fiscal Year ($/Sh) Date ($)(2)
- ---- ----------- ----------- ------ ---- -------------
J. R. Sculley 15,000 24.75% $5.125 10/24/99 32,700
W. G. Yarborough, Jr. 12,600(1) 20.79% $3.75 3/19/06 20,664
W. G. Yarborough, Jr. 15,000 24.75% $5.125 10/24/99 32,700
- ------------------
(1) Options are exercisable 33 1/3% in March, 1997; 66 2/3% in March, 1998; and
100% in March, 1999.
(2) The Company used a modified Black-Scholes model of option valuation to
determine grant date present value. The Company does not advocate or
necessarily agree that the Black-Scholes model can properly determine the
value of an option.
24
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Value
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARS at Options/SARs at
FY-End (#) FY-End ($)(1)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- --------------- ------------ ------------- -------------
J.R. Sculley 0 0 26,200/44,800 $15,000/$0
W. Glenn Yarborough, Jr. 0 0 22,000/19,600 $15,000/$29,925
- ---------------------
(1) Based on the closing price of the Company's stock of $6.125 on December 31,
1996
25
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. 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 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.
26
Options for 15,000 shares each were granted under the Directors Option Plan in
1996 to Messrs. Scott, Christ, Smith, Hebel and Warner.
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 $245,000 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, 1997, 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
certain of its subsidiaries, Mr. Yarborough is entitled to receive an aggregate
sum of not less than $168,000 per year. The Yarborough Agreement further
provides that in the event Mr. Yarborough ceases to serve in any capacity as an
officer of the Company as a result of a voluntary or involuntary termination
within a period of twelve (12) months following a change in control, Mr.
Yarborough shall be entitled to a lump sum payment equal to the aggregate amount
of compensation payable to Mr. Yarborough throughout the remaining term of the
Yarborough Agreement.
In June, 1991, the Board of Directors of Allied adopted the Preferred
Share Purchase Rights Agreement (the "Agreement"). The Agreement provides each
stockholder of record on a dividend distribution of one "right" for each
outstanding share of Allied's common stock. Rights become exercisable at the
earlier of ten days following: (1) a public announcement that an acquiror has
purchased or has the right to acquire 10% or more of Allied's common stock, or
(2) the commencement of a tender offer which would result in an offeror
beneficially owning 30% or more of the outstanding common stock of Allied. All
rights held by an acquiror or offeror expire on the announced acquisition date,
and all rights expire at the close of business on June 20, 2001. Each right
entitles a stockholder to acquire at a stated purchase price, 1/100 of a share
of Allied's preferred stock which carries voting and dividend rights similar to
one share of its common stock. Alternatively, a right holder may elect to
purchase for
27
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, 1996 consisted of Messrs. Charles T. Scott, Robert W. Hebel and
Earl P. Smith. Upon the retirement from the Board of Directors of Mr. Scott, Mr.
Harry H. Warner was elected to the Compensation Committee. 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 14, 1997,
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:
28
Amount and
Title nature of
of Name and address of beneficial Percent of
class beneficial owner ownership class(1)
- ----- ------------------- ---------- ----------
Common Fidelity Low-Priced 442,610 9.3%
Stock Fund/Fidelity Owned directly
Management & Research
Company
82 Devonshire Street
Boston, MA 02109
Common Dimensional Fund 269,40 5.7%
Advisors, Inc. Owned directly(2)
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
- --------------------------
(1.) Based upon 4,521,838 shares of common stock outstanding plus 229,100
shares which may be acquired within 60 days pursuant to outstanding
stock options.
(2.) Dimensional Fund Advisors, Inc. ("Dimensional"), a regis- tered investment
advisor, is deemed to have beneficial ownership of 269,400 shares, all of
which shares are held in portfolios of DFA Investment Dimensions Group,
Inc., a registered open-end investment company, or in series of the DFA
Investment Trust Company, a Delaware business trust, or the DFA Group
Grust and DFA Participation Group Trust, investment vehicles for qualified
employee benefit plans, all of which Dimensional Fund Advisors, Inc.
serves as investment manager. Dimensional disclaims beneficial owner-
ship of all such shares.
29
The following information is furnished as of March 14, 1997,
with respect to the beneficial ownership by management of Allied's Common Stock:
Amount and
Title nature of
of Name of beneficial Percent of
class beneficial owner ownership(1) class(2)
- ----- ---------------- ------------ ----------
Common Harry H. Warner 17,000 *
Owned
directly
Common Earl P. Smith 17,110 *
Owned
directly
Common Clifford C. Christ 24,000 *
Owned
directly
Common Robert W. Hebel 16,000 *
Owned
directly
Common J. R. Sculley 111,504 2.3%
Owned
directly
Common W. Glenn Yarborough, Jr. 52,904 1.1%
Owned
directly
Common All executive officers 238,518 5.0%
and directors as a Owned
group (6) directly
*Less than 1%
- -------------------------
(1.) Includes 15,000 shares which may be acquired by each of Messrs. Smith,
Christ and Hebel, 18,200 shares which may be acquired by Mr. Yarborough
and 37,400 shares which may be acquired by Mr. Sculley within 60 days
pursuant to outstanding stock options.
(2.) Based upon 4,521,838 shares of common stock outstanding plus 229,100
shares which may be acquired within 60 days pursuant to outstanding
stock options.
30
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
1996 and 1995
Consolidated Statements of Operations for F-6
the three years ended December 31, 1996
31
Consolidated Statements of Stockholders' F-7
Equity for the three years ended
December 31, 1996
Consolidated Statements of Cash Flows F-8
for the three years ended December 31, 1996
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, 1996 and 1995 and for the
three years ended December 31, 1996:
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)
(a) Amendment to Amended and Restated
By-Laws adopted by the Board of
Directors in September, 1996
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-
32
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 1996.
33
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FINANCIAL STATEMENTS AND SCHEDULES
December 31, 1996
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, 1996 and 1995 F -4
Consolidated Statements of Operations for the three years ended December 31, 1996 F -6
Consolidated Statements of Stockholders' Equity for the three years
ended December 31, 1996 F -7
Consolidated Statements of Cash Flows for the three years ended December 31, 1996 F -8
Notes to Consolidated Financial Statements F -10
Schedules as of and for the three years ended December 31, 1996
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, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1996 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.
Grant Thornton LLP
Baltimore, Maryland
March 10, 1997
Allied Research Corporation
CONSOLIDATED BALANCE SHEETS
December 31,
- --------------------------------------------------------------------------------
ASSETS
1996 1995
----------- -----------
CURRENT ASSETS
Cash and equivalents, including restricted cash
(notes A, C and F) $32,859,478 $15,744,145
Accounts receivable (notes A, D and F) 11,889,785 21,090,945
Costs and accrued earnings on
uncompleted contracts (note A) 14,694,117 6,311,705
Inventories (notes A and F) 7,171,007 6,336,821
Prepaid expenses and deposits 3,879,723 1,112,711
---------- ----------
Total current assets 70,494,111 50,596,327
PROPERTY, PLANT AND EQUIPMENT - AT COST
(notes A and H)
Buildings and improvements 13,316,505 14,247,986
Machinery and equipment 33,030,014 35,189,034
---------- ----------
46,346,519 49,437,020
Less accumulated depreciation 33,106,026 33,330,357
---------- ----------
13,240,493 16,106,663
Land 1,411,659 1,544,737
---------- ----------
14,652,152 17,651,400
OTHER ASSETS
Deposits - restricted cash (notes C, F and H) - 18,492,000
Intangibles, less accumulated amortization of
$1,688,122 and $1,751,020 in 1996 and 1995,
respectively (notes A and B) 6,123,992 7,085,401
Other 677,906 428,145
---------- ----------
6,801,898 26,005,546
---------- ----------
$91,948,160 $94,253,273
========== ==========
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
1996 1995
----------- -------------
CURRENT LIABILITIES
Notes payable (note E) $ 3,317,438 $ 485,330
Current maturities of long-term debt 14,099,171 2,786,383
Accounts and trade notes payable 18,571,110 17,786,258
Accrued liabilities 4,311,407 4,857,776
Accrued losses on contracts (note G) 390,125 431,215
Customer deposits 10,934,488 9,900,120
Income taxes 805,970 370,878
---------- ----------
Total current liabilities 52,429,709 36,617,960
LONG-TERM DEBT, less current maturities (note H) 7,443,436 28,434,776
DEFERRED INCOME TAXES (notes A and P) 628,374 846,953
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, 4,443,092
in 1996 and 4,422,056 in 1995 444,309 442,206
Capital in excess of par value 10,846,303 10,745,295
Retained earnings 17,481,483 12,676,000
Accumulated foreign currency translation adjustment 2,674,546 4,490,083
---------- ----------
31,446,641 28,353,584
---------- ----------
$91,948,160 $94,253,273
========== ==========
The accompanying notes are an integral part of these statements.
F-5
Allied Research Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
------------ ----------- ------------
Revenue (note M) $103,660,137 $65,768,907 $ 69,846,845
Cost and expenses
Cost of sales 78,658,573 49,896,794 63,976,951
Selling and administrative 15,647,951 15,758,673 15,631,256
Research and development 1,746,319 2,087,278 1,262,333
Restructuring charge (note R) - - 326,831
------------ ----------- ------------
96,052,843 67,742,745 81,197,371
------------ ----------- ------------
Operating income (loss) 7,607,294 (1,973,838) (11,350,526)
Other income (deductions)
Interest income 1,921,864 1,770,278 3,539,888
Interest expenses (3,451,066) (3,034,537) (3,768,788)
Other - net (note O) (381,379) 1,968,478 1,306,083
------------ ----------- ------------
(1,910,581) 704,219 1,077,183
------------ ----------- ------------
Earnings (loss) before income taxes 5,696,713 (1,269,619) (10,273,343)
Income taxes (notes A and P) 891,230 743,652 667,763
------------ ----------- ------------
NET EARNINGS (LOSS) $ 4,805,483 $(2,013,271) $(10,941,106)
============ =========== ============
Earnings (loss) per common share (note S) $1.08 $(.46) $(2.49)
==== ==== =====
The accompanying notes are an integral part of these statements.
F-6
Allied Research Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
Capital
Preferred stock Common stock in excess
no par value $.10 par value of par value Retained earnings
--------------- -------------- ------------ -----------------
Balance at December 31, 1993 $ - $453,123 $10,800,510 $ 28,597,205
Common stock awards - 7,236 318,014 -
Employee stock purchase plan purchases - 1,486 64,186 -
Purchase and retirement of shares - (22,000) (524,536) (2,966,828)
Currency translation adjustment - - - -
Net loss for the year - - - (10,941,106)
---------- -------- ----------- ------------
Balance at December 31, 1994 - 439,845 10,658,174 14,689,271
Common stock awards - 300 10,950 -
Employee stock purchase plan purchases - 2,061 76,171 -
Currency translation adjustment - - - -
Net loss for the year - - - (2,013,271)
---------- -------- ----------- ------------
Balance at December 31, 1995 - 442,206 10,745,295 12,676,000
Common stock awards - 903 40,479 -
Employee stock purchase plan purchases - 1,200 60,529 -
Currency translation adjustment - - - -
Net earnings for the year - - - 4,805,483
---------- -------- ----------- ------------
Balance at December 31, 1996 - $444,309 $10,846,303 $ 17,481,483
========== ======== =========== ============
Accumulated Total
foreign currency stockholders'
translation adjustment equity
---------------------- -------------
Balance at December 31, 1993 $ 1,324,060 $ 41,174,898
Common stock awards - 325,250
Employee stock purchase plan purchases - 65,672
Purchase and retirement of shares - (3,513,364)
Currency translation adjustment 2,586,324 2,586,324
Net loss for the year - (10,941,106)
----------- ------------
Balance at December 31, 1994 3,910,384 29,697,674
Common stock awards - 11,250
Employee stock purchase plan purchases - 78,232
Currency translation adjustment 579,699 579,699
Net loss for the year - (2,013,271)
----------- ------------
Balance at December 31, 1995 4,490,083 28,353,584
Common stock awards - 41,382
Employee stock purchase plan purchases - 61,729
Currency translation adjustment (1,815,537) (1,815,537)
Net earnings for the year - 4,805,483
----------- ------------
Balance at December 31, 1996 $ 2,674,546 $ 31,446,641
=========== ============
The accompanying notes are an integral part of these statements.
F-7
Allied Research Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
- --------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 1996 1995 1994
------------ ------------- -------------
Cash flows from (used in) operating activities
Net earnings (loss) for the year $ 4,805,483 $ (2,013,271) $(10,941,106)
Adjustments to reconcile net earnings (loss) to
net cash from (used in) operating activities
Depreciation and amortization 3,093,534 2,751,867 2,411,029
(Gain) loss on sale of fixed assets (250) (8,381) (2,558)
Deferred income taxes (590,419) 376,550 390,233
Provision for estimated losses on contracts (4,036) (1,178,475) 721,937
Common stock awards 41,382 11,250 325,250
Changes in assets and liabilities
Accounts receivable 7,874,015 2,746,237 48,367,325
Cost and accrued earnings on
uncompleted contracts (9,142,340) 2,709,185 9,910,050
Inventories (1,413,524) (983,917) 1,570,129
Prepaid expenses and other assets (2,798,161) (1,451,796) 8,832,706
Accounts payable and accrued liabilities 2,015,448 (12,291,397) (34,244,206)
Customer deposits 1,917,475 7,959,923 (20,288,705)
Income taxes 441,852 (552,009) (4,410,959)
----------- ------------ ------------
1,434,976 89,037 13,582,231
----------- ------------ ------------
Net cash provided by (used in)
operating activities 6,240,459 (1,924,234) 2,641,125
Cash flows from (used in) investing activities
Capital expenditures (1,066,889) (2,920,728) (3,617,518)
Proceeds from sale of fixed assets 250 183,470 16,650
Payments for acquisitions, net of cash acquired - (1,083,571) (4,387,925)
----------- ------------ ------------
Net cash (used in) investing activities (1,066,639) (3,820,829) (7,988,793)
The accompanying notes are an integral part of these statements.
F-8
Allied Research Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
------------ ------------- -------------
Cash flows from (used in) financing activities
Net increase (decrease) in short-term borrowings 2,908,978 (114,514) (4,011,549)
Principal payments on long-term debt (19,009,160) (23,979,845) (9,296,733)
Proceeds from issuance of long-term debt 11,762,981 12,252,705 8,533,958
Net (increase) decrease in long- term deposits 18,492,000 (12,092,000) 7,467,000
Proceeds from employee stock purchases 61,729 78,232 65,672
Common shares purchased and retired - - (3,513,360)
----------- ------------ ------------
Net cash provided by (used in)
financing activities 14,216,528 (23,855,422) (755,012)
Effects of exchange rates on cash (2,275,015) 1,738,751 5,067,494
----------- ------------ ------------
Net increase (decrease) in cash
and equivalents 17,115,333 (27,861,734) (1,035,186)
Cash and equivalents at beginning of year 15,744,145 43,605,879 44,641,065
----------- ------------ ------------
Cash and equivalents at end of year $ 32,859,478 $ 15,744,145 $ 43,605,879
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for
Interest $ 3,088,529 $ 4,461,871 $ 4,428,708
Income taxes 1,245,678 1,638,984 4,784,980
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 Mecar's
wholly-owned subsidiaries (Mecar), Barnes & Reinecke, Inc. (BRI), a Delaware
corporation and Allied Research Corporation Limited (ARCL), a United Kingdom
company.
Mecar, S.A.'s wholly owned Belgian subsidiaries include, Sedachim, S.I., and
the VSK Group of companies, which include Tele Technique Generale, I.D.C.S.,
N.V. and VSK Electronics N.V. and its wholly-owned subsidiaries, Classics,
B.V.B.A., Detectia, N.V. and Belgian Automation Units, N.V.
The VSK Group and I.D.C.S., N.V were acquired during 1994 and 1995. Both were
accounted for as a purchases, and revenue and results of operations from their
dates of acquisition, June 1, 1994 and May 9, 1995, have been consolidated.
The 1995 and 1994 consolidated financial statements also included Allied's
wholly-owned subsidiary ARC Services, Inc. which ceased operations in
December, 1995; Mecar's wholly-owned subsidiaries Management Export Services,
N.V. which was liquidated in 1995; and Mecar Immobliere S.A., which merged
with Mecar effective January 1, 1996; VSK's minority interest in Building
Control Services, N.V., which was liquidated, and VSK France, which was also
effectively liquidated in December, 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 1996, seventy-two 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. Seventeen percent of
the business activity is developing, manufacturing, distributing and servicing
industrial security products in Belgium with industrial customers throughout
Europe. Eleven 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
has 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 was involved in 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
Reclassifications
Certain items in the 1995 and 1994 financial statements have been reclassified
to conform to the current presentation.
Newly Issued Accounting Standards
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, which became effective in 1996.
As permitted by SFAS No. 123, the Company has disclosed the impact of stock
based employee compensation on operations and 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 adoption of SFAS No. 123 did not have a material effect on the
Company's financial statements.
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, did not impact the Company's 1996 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. 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 alarms.
The acquisitions have been accounted for as purchases 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. VSK has also pledged certain term deposits to secure
outstanding bank guarantees. Cash and long-term deposits at December 31, 1996
and 1995 restricted or pledged as collateral for various bank agreements are
comprised as follows:
1996 1995
----------- -----------
Cash
Credit facility and related term loan arrangements $18,382,000 $ 7,755,000
Other bank guarantees and letters of credit 1,734,000 1,769,000
Notes payable and line-of-credit - 1,035,000
---------- ----------
20,116,000 10,559,000
Deposits restricted cash - long-term
Credit facility and related term loan arrangements - 18,492,000
---------- ----------
$20,116,000 $29,051,000
========== ==========
NOTE D - ACCOUNTS RECEIVABLE
Accounts receivable at December 31 are comprised as follows:
1996 1995
----------- -----------
Receivables under U.S. Government contracts and subcontracts
Amounts billed $ 1,150,123 $ 1,715,818
Unbilled amounts due upon completion of contracts,
recoverable costs and accrued profits 2,116,580 1,670,042
---------- ----------
3,266,703 3,385,860
Receivables from foreign governments 3,154,989 10,618,736
Commercial and other receivables, less allowance for doubtful
receivables of $364,674 in 1996 and $330,077 in 1995 5,468,093 7,086,349
---------- ----------
$11,889,785 $21,090,945
========== ==========
Unbilled receivables are comprised of progress billing holdbacks, terminated
contracts receivable and other unbilled costs and fees.
NOTE E - NOTES PAYABLE
At December 31, 1996 and 1995, short-term loans of $3,067,438 and $40,330,
respectively, were outstanding with certain banks. Notes payable at December
31, 1996 bear an average interest rate of approximately 9%.
F-14
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE E - NOTES PAYABLE - Continued
The Company is also obligated under a $1,000,000 revolving line-of-credit
agreement which had an outstanding balance of $250,000 as of December 31,
1996. Borrowings under a $750,000 revolving line-of-credit agreement at
December 31, 1995 were $445,000. The current line bears interest at prime,
plus .5% (8.75% at December 31, 1996) and expires in June, 1997. The amount of
the line-of-credit was increased to $1,250,000 in January, 1997. 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 $946,000 secured line of credit with a foreign bank, which
was unused at December 31, 1996.
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. The Agreement provides for certain bank charges and
fees as the line is used, plus a fee of approximately 2% of guarantees issued.
As of December 31, 1996, the credit facility had been fully utilized and
guarantees and performance bonds of $18.4 million remain outstanding.
Advances under the credit facility are secured by cash deposits of
$18,382,000. Amounts outstanding are also collateralized by the letters of
credit received under the contracts financed and a pledge of approximately $25
million 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 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 $2.8 million, at December 31, 1996,
and are collateralized by $1.7 million of time deposits.
NOTE G - ACCRUED LOSSES ON CONTRACTS
The Company has provided for accrued losses of $390,125 at December 31, 1996
($431,215 at December 31, 1995) in connection with the completion of certain
contracts in progress. These contracts are expected to be completed in 1997.
Net reductions in the provision for contract losses in 1996 and 1995 of
$124,980 and $1,178,475, respectively, were credited to operations, primarily
due to loss provisions no longer required on certain orders.
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:
1996 1995
----------- -----------
Term loan agreement $11,413,078 $18,492,000
Mortgage loan agreements 6,299,262 8,022,113
Notes payable bank 660,711 967,146
Note payable - I.D.C.S., N.V. 189,162 603,750
Other 2,980,394 3,136,150
----------- -----------
21,542,607 31,221,159
Less current maturities 14,099,171 2,786,383
---------- -----------
$ 7,443,436 $28,434,776
=========== ==========
Term Loan Agreement
The Company is obligated under a 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%, payable quarterly. The
loan matures on the earlier of 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 approximately $31 million 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.
Mortgage Loan Agreement
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 loan has a balance due of
$5,075,000 at December 31, 1996. The first principal installment was due in
January, 1996 and the loan matures in January, 2004. As amended, the loan is
payable in annual principal installments of $599,000 (except for the annual
principal installment in the year 2000 which is $882,800). The loan bears
interest at 8.75% annually and is collateralized by a mortgage on the
Company's real estate. The Company is also obligated on several mortgages on
the VSK Group's buildings which have a total balance due of $1,224,000 at
December 31, 1996. The mortgages mature at various dates through 2005 in
annual installments of approximately $254,000, plus interest at rates ranging
from 6.6% to 8.5% per year.
Notes Payable Bank
BRI is obligated on two notes payable of $500,000 each to its bank, which had
a total balance due of $660,711 at December 31, 1996. The notes bear interest
at the prime rate plus 2% (10.25% at December 31, 1996) and mature in
September and October, 1998. The two notes are payable in monthly installments
of $16,383 and $16,400, respectively, including principal and interest. The
notes are collateralized by the assets of the BRI and Allied's guarantee. The
agreement contains covenants requiring BRI to maintain certain financial
ratios, among other matters.
F-16
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE H - LONG-TERM DEBT - Continued
Note Payable - I.D.C.S., N.V.
The Company is obligated 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 through June, 1997.
Other
The Company is also obligated on various vehicle, equipment and other
operating loans. The notes are generally secured by the assets acquired, bear
interest at rates ranging from 4.4% to 10.75% and mature at various dates
through 2000.
Scheduled annual maturities of long-term obligations as of December 31, 1996
are as follows:
Year Amount
---- -----------
1997 $14,099,171
1998 1,796,114
1999 1,268,651
2000 1,246,295
2001 805,536
Thereafter 2,326,840
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, two former directors are 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, 1996.
The Company 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 Company's
management. In 1996, the Company began to match participants' contributions at
a rate of 25% for each participant dollar contributed up to a maximum of 1% of
salary. Matching contributions in 1996 were approximately $53,000. No
contributions were made for the years ended December 31, 1995 and 1994.
Under the terms of labor agreements at its Belgian subsidiaries, the Company
contributes to certain employee benefit and retirement programs.
F-17
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
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.
At December 31, 1996, Mecar has provided for estimated losses on contracts of
$390,115. 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, 1996.
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,
1996.
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 2001. Certain leases
also include escalation provisions for taxes and operating costs. The
following is a schedule by year of base rentals due on operating leases that
have initial or remaining lease terms in excess of one year as of December 31,
1996.
Year Amount
---- --------
1997 $422,900
1998 395,000
1999 329,400
2000 105,100
2001 12,700
Total rental expense charged to operations approximated $421,000, $444,000 and
$660,000, for the years ended December 31, 1996, 1995 and 1994.
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 workforce reduction as part of its
restructuring charge (see note R). After giving effect to the workforce
reductions, 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:
1996 1995
----------------------------- -----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------ ------------- -------------
Notes payable $ 3,317,438 $ 3,317,000 $ 485,330 $ 485,000
Long-term debt, including current maturities 21,542,607 21,543,000 31,221,159 31,221,000
Off-balance-sheet instruments
Guarantees and letters of credit - 20,283,000 - 20,294,000
Foreign exchange contracts - - - -
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 notes payable approximate their fair value
because of the short maturity of these obligations.
(bullet) The fair value of long-term debt is estimated based on
approximate market prices for the same or similar issues or the
current rates offered to the Corporation for debt of the same
remaining maturities. The Company believes the aggregate carrying
value approximates fair value.
(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.
NOTE L - CAPITAL STOCK
At December 31, 1996, options to acquire 313,100 shares of the Company
common stock were outstanding and 631,949 shares were reserved for future
issuance under the following plans:
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 1996, 1995 and 1994 - 12,001,
20,608 and 14,859 shares, respectively, subject to the plan were issued and
$9,225, $11,736 and $9,808 was charged to operations.
F-19
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE L - CAPITAL STOCK - Continued
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 1996, additional
options to purchase 60,600 shares were issued to four officers at prices of
$3.75 to $5.125 per share. These options are exercisable on March 20, 1997 for
one-third the number of shares; and an additional one-third in each of the
following two years.
During 1994, 30,100 shares were issued as stock awards to two officers and
one employee. The value of the awards charged to operations was $129,937
in 1994.
As of December 31, 1996, 94,000 shares of restricted common stock subject to
the plan have been awarded. These shares 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, 1996 there were 10,800 shares still reserved
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, 1996, 177,500 of 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
1996, 1995 and 1994, the Company granted 5,000, 3,000 and 5,000 shares of
common stock subject to the plan and charged $26,250, $11,250 and $22,500,
respectively, 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. During 1996, the Company granted additional
options to purchase a total of 75,000 shares at $5.125 per share. At December
31, 1996, none of the 1996 issued options had been exercised.
Other
Stock grants for 3,035, 37,260 and 5,950 shares of the Company's common stock
were made to various employees during 1996, 1995 and 1994. These shares were
issued outside of any existing plan and their value ($13,125, $172,812 and
$74,375, respectively) was charged to operations.
Preferred Share Purchase Rights Agreement
The Board of Directors has adopted an Agreement which provides each
stockholder of record a dividend distribution of one "right" for each
outstanding share of common stock. Rights become exercisable the earlier of
ten days following: (1) a public announcement that an acquiring person has
purchased or has the right to acquire 10% or more of the Company's common
stock, or (2) the commencement of a tender offer which would result in an
offeror beneficially owning 30% or more of the outstanding common stock. All
rights held by an acquiring person or offeror expire on the announced
acquisition date and all rights expire at the close of business on June 20,
2001.
Each right under the Preferred Share Purchase Rights Agreement entitles a
stockholder to acquire at a purchase price of $45, one-hundredth of a share of
preferred stock which carries voting and dividend rights similar to one share
of common stock. Alternatively, a right holder may elect to purchase for $45
an equivalent number of common shares (or in certain circumstances, cash,
property or other securities of the Company) at a price per share equal to
one-half of the average market price for a specified period. In lieu of the
purchase price, a right holder may elect to acquire one-half of the common
shares available under the second option. The purchase price and the preferred
share fractional amount are subject to adjustment for certain events as
described in the Agreement.
Rights also entitle the holder to receive a specified number of shares of an
acquiring company's common stock in the event that the Company is not the
surviving corporation in a merger or if 50% or more of the Company's assets
are sold or transferred.
At the discretion of a majority of the Board and within a specified time
period, the Company may redeem all of the rights at a price of $.01 per right.
The Board may also amend any provisions of the Agreement prior to their
exercise.
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.
F-21
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE L - CAPITAL STOCK - Continued
The fair value of each option grant is estimated on the date of grant, using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1996: risk free interest rates that range from
5.64% to 5.94%; expected volatility rates that range from 28.91% to 57.98%,
and expected lives of 1 to 5 years.
The following table summarizes option activity:
1996
---------------------------
Weighted Average 1995 1994
Shares Exercise Price Shares Shares
-------- ---------------- ------- --------
Options outstanding at beginning of year 227,500 $7.89 227,500 10,000
Options exercised - - - -
Options granted 135,600 $4.81 - 217,500
Options Expired (50,000) $7.63 - -
------- ------- -------
Options outstanding at end of year 313,100 $6.76 227,500 227,500
======= ======= =======
Option price range at end of year $3.75 $2.75 $2.75
to to to
$8.25 $8.25 $8.25
Option price range for exercised shares - - -
Options available for grant at end of year 112,800 238,400 238,400
Weighted-average fair value of options,
granted during the year $2.06
The following table summarizes options outstanding at December 31, 1996:
Weighted Average
Number Weighted Average Remaining
Outstanding Exercise Prices Exercise Prices Contractual Life
----------- --------------- ---------------- ----------------
313,100 $3.75 to $8.25 $6.76 5.91 years
F-22
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
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 1996,
1995 and 1994, the Company derived approximately 11%, 17% and 12%,
respectively, of its revenue from U.S. Government agencies and contractors.
Two agencies of a foreign government and another foreign government accounted
for approximately 10%, 42% and 19% of revenue in 1996, 12%, 31% and 27% of
revenue in 1995 and, 5%, 60% and 14% of revenue in 1994.
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 1996 and 1995 was not significant.
The majority of ammunition sales are to two agencies of a foreign government
and other foreign governments. Mecar's ammunition sales in any given period
and its backlog at any particular time may be significantly influenced by one
or a few large orders. In addition, the production period required to fill
most orders ranges from several months to a year. Accordingly, Mecar's
business is dependent upon its ability to obtain such large orders and the
required financing for these orders. As of December 31, 1996 and 1995, backlog
orders believed to be firm approximated $79.6 and $68.1 million.
Amounts in foreign banks at December 31, 1996 and 1995 were approximately
$31,815,000 and $15,182,000, 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.
NOTE O - OTHER - NET
Other income and expense included in the Company's consolidated statements of
operations is comprised as follows:
1996 1995 1994
-------- --------- ---------
Net currency transaction gains (losses) $(836,254) $1,284,446 $1,484,651
Miscellaneous - net 454,875 684,032 (178,578)
-------- --------- ---------
$(381,379) $1,968,478 $1,306,083
======== ========= =========
F-23
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE P - INCOME TAXES
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), which
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.
Earnings (loss) before income taxes is comprised as follows:
1996 1995 1994
----------- ------------ ------------
Domestic $ 124,549 $ 151,888 $ (1,005,790)
Foreign 5,572,164 (1,421,507) (9,267,553)
--------- ---------- -----------
$5,696,713 $(1,269,619) $(10,273,343)
========= ========== ===========
The Company's provision for income taxes is comprised as follows:
1996 1995 1994
----------- ------------ ------------
Currently payable
Domestic $ 197,299 $ 116,692 $ (65,405)
Foreign 1,323,619 498,696 342,935
---------- --------- ---------
1,520,918 615,388 277,530
Deferred - net (629,688) 128,264 390,233
---------- --------- ---------
$ 891,230 $ 743,652 $ 667,763
========== ========= =========
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:
1996 1995 1994
------- ------- -------
Taxes at statutory rate 34.0 % (34.0)% (34.0)%
Benefit of foreign tax credit carryforward (1.2) (7.4) (14.3)
Foreign tax rate differential and current
loss limitations (18.3) 94.3 53.9
State taxes, net of federal income tax effect - - .9
Other 1.1 5.7 -
----- ----- -----
Income taxes 15.6 % 58.6 % 6.5 %
===== ===== =====
In 1996, 1995 and 1994, the Company's Belgian subsidiaries utilized
approximately $4,242,318, $47,000 and $50,000, respectively, of foreign
operating loss carryforwards for tax reporting purposes. Unused net operating
losses of the Belgian subsidiaries at December 31, 1996 approximate
$5,300,000, which under Belgian tax law cannot be carried back, but may be
carried forward indefinitely subject to certain annual limitations.
F-24
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE P - INCOME TAXES - Continued
The Company utilized approximately $289,000, $94,000, and $1,664,000 of its
foreign tax credits in 1996, 1995 and 1994. At December 31, 1996, foreign tax
credit carryforwards of approximately $747,000 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
$18,800,000 at December 31, 1996. Determination of the amount of unrecognized
deferred tax liabilities is not practicable.
Deferred taxes at December 31, 1996 and 1995 are comprised as follows:
1996 1995
------------ -------------
Current
Unrealized exchange gain (losses) $ 52,158 $ (85,970)
Compensated absences 96,000 96,900
Deferred income (8,713) (4,185)
Other 18,000 14,200
Deferred compensation 45,224 55,628
---------- -----------
Current deferred tax asset/liability 202,669 76,573
Noncurrent
Foreign tax credit carryforwards 790,017 1,099,625
Foreign and domestic net operating loss carryforwards 5,345,510 7,708,768
Depreciation and amortization 189,656 295,881
Unrealized exchange gain (599,375) (1,069,231)
---------- -----------
Noncurrent deferred tax asset/liability 5,725,808 8,035,043
---------- -----------
Total deferred tax asset before valuation allowances 5,928,477 8,111,616
Valuation allowances (6,064,997) (8,877,811)
---------- -----------
Net deferred tax liability $ (136,520) $ (766,195)
========== ===========
Deferred tax components are included in the following balance sheet
accounts:
1996 1995
------------ -------------
Current (included in "prepaid expenses and deposits") $ 491,854 $ 80,758
Deferred income taxes (628,374) (846,953)
---------- -----------
$ (136,520) $ (766,195)
========== ===========
F-25
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
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 cost 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.
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 4,432,750 in 1996, 4,408,172 in 1995, and 4,392,517 in
1994. Stock options outstanding have not been included in the per share
computations since they would not have a material effect on per share amounts.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock options plans. Had compensation cost been determined based on the fair
value at the grant date for the 1996 awards consistent with the provisions of
SFAS No. 123, the Company's net earnings and earnings per share would have
been reduced to the pro forma amounts indicated below:
Net earnings - as reported $4,805,483
Net earnings - pro forma $4,645,786
Earnings per share - as reported $1.08
Earnings per share - pro forma $1.05
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 did not have operating
revenues in 1995 and 1994.
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 1996 1995 1994
-------------------- ------------ ----------- ------------
Net sales
Belgium (1) $ 89,191,742 $53,280,097 $ 61,189,115
United Kingdom (2) - - 332,266
France 2,832,154 1,054,560 -
United States 11,636,241 11,434,250 8,325,464
----------- ---------- -----------
$103,660,137 $65,768,907 $ 69,846,845
=========== ========== ===========
Operating income (loss)
Belgium $ 6,848,251 $ (926,099) $ (8,954,876)
United Kingdom (91,752) (626,630) (84,007)
France - (495,318) -
United States 940,247 598,497 (1,622,714)
Corporate (89,452) (524,288) (688,929)
----------- ---------- -----------
$ 7,607,294 $(1,973,838) $(11,350,526)
=========== ========== ===========
Assets
Belgium $ 84,842,298 $84,800,974 $100,320,904
United Kingdom 228,654 1,645,818 1,647,402
France - 1,213,227 -
United States 6,877,208 6,593,254 5,418,003
----------- ---------- -----------
$ 91,948,160 $94,253,273 $107,386,309
=========== ========== ===========
(1) Includes export sales principally to customers in Asia/Middle East and
Europe of $69,910,271 in 1996, $33,212,000 in 1995, $50,457,142 in 1994.
(2) Includes export sales principally to customers in Asia\Middle East of
$332,266 in 1994.
F-27
Allied Research Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE T - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - Continued
Industry Segment Data 1996 1995 1994
--------------------- ------------ ----------- ------------
Net sales
Product sales $ 74,109,952 $36,131,894 $ 54,335,591
Engineering and technical 11,636,242 11,354,440 8,325,464
Security systems and service 17,913,943 18,282,573 7,185,790
----------- ---------- -----------
$103,660,137 $65,768,907 $ 69,846,845
=========== ========== ===========
Operating income (loss)
Product sales $ 5,373,053 $(2,686,686) $ (9,657,051)
Engineering and technical 650,837 912,048 (872,206)
Security systems and service 1,672,856 325,088 (132,340)
Corporate (89,452) (524,288) (688,929)
----------- ---------- -----------
$ 7,607,294 $(1,973,838) $(11,350,526)
=========== ========== ===========
Assets
Product sales $ 81,334,200 $83,468,399 $ 94,174,064
Engineering and technical 5,505,577 5,855,840 4,096,033
Security systems and service 3,736,752 4,191,620 7,842,496
Corporate assets 1,371,631 737,414 1,273,716
----------- ---------- -----------
$ 91,948,160 $94,253,273 $107,386,309
=========== ========== ===========
Capital expenditures
Product sales $ 696,699 $ 2,179,864 $ 2,688,614
Engineering and technical 264,915 310,059 632,922
Security systems and service 105,275 430,805 295,982
----------- ---------- -----------
$ 1,066,889 $ 2,920,728 $ 3,617,518
=========== ========== ===========
Depreciation and amortization expense
Product sales $ 2,488,189 $ 2,310,195 $ 1,868,803
Engineering and technical 392,497 222,857 238,725
Security systems and service 212,848 218,815 303,501
----------- ---------- -----------
$ 3,093,534 $ 2,751,867 $ 2,411,029
=========== ========== ===========
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
1996 Quarter Quarter Quarter Quarter For Year
- ------------------- ------- ------- ------- ------- --------
Revenue $23,527 $23,004 $17,547 $39,582 $103,660
Gross profit 5,132 5,675 4,341 11,568 26,716
Net earnings 636 651 521 2,997 4,805
Per share data:
Net earnings .14 .15 .12 .67 1.08
1995
- -------------------
Revenue $ 9,153 $13,275 $16,530 $26,811 $ 65,769
Gross profit 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)
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
1996 1995
----------- -----------
Cash and equivalents $ 1,039,062 $ 454,470
Due from subsidiaries - 3,431,939
Investments in subsidiaries 34,903,082 31,192,155
Deferred tax asset 97,382 -
Deposits and other 235,187 313,287
---------- ----------
Total assets $36,274,713 $35,391,851
========== ==========
LIABILITIES
Accounts payable and accrued liabilities $ 475,208 $ 206,141
Due to subsidiaries 4,264,263 6,751,678
Income taxes 88,601 80,447
---------- ----------
Total liabilities 4,828,072 7,038,266
STOCKHOLDERS' EQUITY
Common stock 444,309 442,206
Capital in excess of par value 10,846,303 10,745,296
Retained earnings 17,481,483 12,676,000
Accumulated foreign currency
translation adjustment 2,674,546 4,490,083
---------- ----------
31,446,641 28,353,585
---------- ----------
$36,274,713 $35,391,851
========== ==========
F-31
Allied Research Corporation
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
(Parent Company)
STATEMENTS OF OPERATIONS
Year ended December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
---------- ----------- ------------
Income
Management fees - intercompany $2,652,889 $ 2,505,222 $ 3,864,152
Other - net (77,412) 266,361 202,275
--------- ---------- -----------
2,575,477 2,771,583 4,066,427
Costs and expenses
Administrative and other 2,878,746 3,115,475 3,775,141
--------- ---------- -----------
Earnings (loss) before equity in
operations of subsidiaries (303,269) (343,892) 291,286
Equity in operations of subsidiaries 4,959,035 (1,696,176) (10,965,420)
--------- ---------- -----------
Earnings (loss) before income taxes 4,655,766 (2,040,068) (10,674,134)
Income taxes (benefit) (149,717) (26,797) 266,972
--------- ----------- -----------
NET EARNINGS (LOSS) $4,805,483 $(2,013,271) $(10,941,106)
========= ========== ===========
Net earnings (loss) per common share $1.08 $(.46) $(2.49)
==== ==== =====
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 1996 1995 1994
------------ ------------ -------------
Cash flows from (used in) operating activities
Net (loss) earnings for the year $ 4,805,483 $(2,013,270) $(10,941,106)
Adjustments to reconcile net earnings to net cash from
(used in) operating activities
Equity in operations of subsidiaries (4,959,035) 1,696,176 10,965,420
(Gain) loss on disposal of property and equipment (250) - -
Deferred income taxes (127,724) 41,904 41,048
Common stock awards and grants 41,382 11,250 236,473
Changes in assets and liabilities
Due from subsidiaries 377,095 (329,697) 3,653,332
Other assets 85,350 133,830 (350,872)
Due to subsidiaries - 26,146 316,935
Accounts payable and accrued liabilities 269,066 (61,644) 164,350
Income taxes 38,496 (3,308) 120,000
----------- ---------- -----------
(4,275,620) 1,514,657 15,146,686
----------- ---------- -----------
Net cash provided by (used in) operating activities 529,863 (498,613) 4,205,580
Cash flows from investing activities
Capital expenditures (7,250) - (213,840)
Proceeds for sale of property and equipment 250 - -
----------- ---------- -----------
Net cash (used in) investing activities (7,000) - (213,846)
Cash flows from financing activities
Purchase of treasury shares - - (3,513,360)
Proceeds from employee stock purchase plan shares 61,729 78,232 65,672
----------- ---------- -----------
Net cash provided by (used in) financing activities 61,729 78,232 (3,447,688)
----------- ---------- -----------
Net increase (decrease) in cash and equivalents 584,592 (420,381) 544,052
Cash and equivalents at beginning of year 454,470 874,851 330,799
----------- ---------- -----------
Cash and equivalents at end of year $ 1,039,062 $ 454,470 $ 874,851
=========== ========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for
Income taxes $ 135,000 $ 120,000 $ -
Interest - - 3,667
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, 1996
Estimated losses on
contracts $ 431,215 $ 390,125 $ - $ 431,215 $ 390,125
========== ========== ======= ========== ==========
Allowance for doubtful
receivables $ 330,077 $ 55,186 $ - $ 20,589 $ 364,674
========== ========== ======= ========== ==========
Valuation allowances on
deferred tax assets $19,923,320 $ - $ - $13,858,323 $ 6,064,997
========== ========== ======= ========== ==========
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
F-34
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 26, 1997
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 26, 1997
* * * * * * *
/s/ J. R. Sculley
By (Signature and Title). . . . . . . . . . . . . . . . . . . . . . . . . . .
J. R. Sculley, Director
Date: March 26, 1997
* * * * * * *
/s/ Clifford C. Christ
By (Signature and Title). . . . . . . . . . . . . . . . . . . . . . . . . . .
Clifford C. Christ, Director
Date: March 26, 1997
* * * * * * *
/s/ Earl P. Smith
By (Signature and Title). . . . . . . . . . . . . . . . . . . . . . . . . . .
Earl P. Smith, Director
Date: March 26, 1997
34
* * * * * * *
/s/ Robert W. Hebel
By (Signature and Title). . . . . . . . . . . . . . . . . . . . . . . . . . .
Robert W. Hebel, Director
Date: March 26, 1997
* * * * * * *
/s/ Harry H. Warner
By (Signature and Title). . . . . . . . . . . . . . . . . . . . . . . . . . .
Harry H. Warner, Director
Date: March 26, 1997
* * * * * * *
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.
35
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
E-2