Back to GetFilings.com
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, 1997 0-2545
----------------- ------
ALLIED RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2281015
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8000 Towers Crescent Drive
Suite 750
Vienna, Virginia 22182
- ------------------ -----
(Address of principal executive offices) (Zip Code)
Allied's telephone number, including area code: (703) 847-5268
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - Par Value $.10
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
1
Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part II
of this Form 10-K or any amendment to this Form 10-K. X
---
State the aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 11, 1998:
Common Stock - Par Value $.10 $57,468,361
The number of shares of registrant's Common Stock outstanding as of March 11,
1998, was 4,703,169.
2
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 in 1994 and 1995 lead by VSK Electronics, S.A.,
Teletechnique Generale, S.A. and IDCS, S.A. (collectively, the "VSK Group").
MECAR is located in Petit-Roeulx-lez-Nivelles, Belgium; BRI is headquartered in
Arlington Heights, Illinois and has operations in East Moline, Illinois and
Troy, Michigan; Limited is located in the United Kingdom; and the VSK Group
operates from several different locations in Belgium.
Description of Business.
- ------------------------
Allied.
- -------
Allied provides management and marketing services to its subsidiaries.
Allied also provides export licensing and freight forwarding services for its
subsidiaries.
MECAR.
- ------
MECAR develops, designs, manufactures and sells ammunition and light
weapons for infantry use. Substantially all of MECAR's revenues are derived from
the sale of ammunition which is used with weapons that are generally considered
defensive weapons. From time to time, MECAR provides system integration services
pursuant to which it purchases and resells weapon systems and/or
3
ammunition.
MECAR designs, develops and manufactures a wide variety of ammunition,
grenades and rockets in the medium caliber, artillery, anti-tank and
anti-personnel categories. The following are the principal products produced and
sold by MECAR:
Mortar Ammunition. The 81mm family of mortar ammunition has
recently been modernized to compete with the latest generation of this product
line. Production quantities of this latest version have already been
manufactured and delivered to MECAR customers. The 120mm family is a state of
the art ammunition for standard field mortars and for the increased performance
turreted AMS mortar. The entire family of this ammunition is presently
undergoing qualification with the US Army, together with the 120mm AMS LAV-M(S)
system. This system is capable of direct as well as indirect fire. The MECAR
ammunition is the only one so far developed that has been designed to perform in
the AMS weapon high pressure and acceleration environment.
90mm Weapon Systems for Light Armored Vehicles. MECAR has
developed and produces complete families of ammunition that include APFSDS, HE,
SMK and HESH rounds for COCKERILL Mk II and III and ENGESA EC-90, and DEFA F1
guns. Over 2000 of these guns are standard equipment of light APCs in the Far
East and Sout America alone. In the last three years, these families of
ammunition have been improved to meet the highest standards of safety and
performance.
The 90mm KENERGA Weapon System has been jointly developed by
COCKERILL MECHANICAL SYSTEMS ("CMI") and MECAR to provide the modern APC with
anti-tank punch similar to that of tanks equipped with 105mm guns, without
sacrifice to the range, mobility and maintainability of the light APC. In this
partnership CMI is responsible for the weapon and MECAR for the ammunition. The
ammunition family includes the APFSDS, HESH and SMK versions with their
corresponding training rounds. Qualification of this system by the US Army is
anticipated to start in 1998. The system is already under production for other
customers.
Tank Ammunition. MECAR produces the entire range of 105mm
rounds of its own design and which perform to NATO requirements, for use in the
4
US M68, UK L7 and French CN105F1 guns. These include the APFSDS, HEAT, HESH and
SMK, with their corresponding training rounds. Additionally, it has produced
under license the US Army M393A2 HEP-T and M724A1 TPDS-T rounds for the Belgian
Army. MECAR also produces 100mm APFSDS rounds for friendly pro western clients
in the Far East.
Artillery Ammunition. MECAR has produced 155mm HE, SMK(WP) and
ILLUMINATING rounds for various clients. It is currently producing 155mm M107 HE
projectiles for a European client.
Medium Caliber Round. The 25mm APFSDS-T ammunition round is
MECAR's entry into the medium caliber arena.
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 released by the discharged round propel the
grenade to its target. MECAR manufactures several different bullet trap
grenades including high explosive fragmentation, anti-personnel, armour
piercing, smoke generating, white phosphorus, and parachute flare
(night illuminating).
84mm SAKR Recoilless Rifle. MECAR developed and manufactures
this recoilless rifle and its associated family of ammunition. The SAKR
fills the gap between rifle grenades and the 90mm family of guns and
ammunition. The SAKR ammunition (HEAT, HE-T and HE-TP-T) is also
interoperable with existing 84mm systems.
Hand Grenades. MECAR manufactures the M72 controlled
fragmentation hand grenade.
5
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.
BRI's technical publications department provides hard copy and
electronic format documents and manuals for the presentation and support of
products. This includes both commercial and government department of defense
customers.
Limited.
- --------
Limited, a systems integrator in the ammunition industry, was
established by Allied in 1989 to augment its overseas business development
efforts. In 1994, the London office of Limited was closed and the employment of
the relevant employees was terminated. Allied and MECAR continue to attempt to
obtain additional systems integration contracts. If any such contracts are
obtained in the name of Limited, such entity will be appropriately staffed and
supported to carry out the contracts.
VSK Group.
- ----------
The VSK Group engages in the business of developing, manufacturing,
selling, installing and servicing security systems for private industry. The
systems marketed by the VSK Group include intrusion detection, access control
and fire detection systems. The principal products manufactured by the VSK Group
are central control panels; the other 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.
6
Geographic Areas and Industry Segments.
- ---------------------------------------
See Note U to Allied's consolidated financial statements for
information concerning the geographic areas and industry segments of Allied
which information is incorporated herein by reference.
Market and Customers.
- ---------------------
Allied derives the principal portion of its revenues from direct and
indirect sales to foreign governments, U.S. Government agencies and prime
contractors, primarily on fixed price contracts. The addition of the VSK Group
adds a non-military component to company-wide operations. Two agencies of a
foreign government and another foreign government accounted for approximately
64%, 6% and 10% in 1997, 42%, 10% and 19% in 1996, and 31%, 12% and 27% in 1995,
of Allied's revenues. During 1997, 1996 and 1995, Allied derived approximately
5%, 11% and 17%, respectively, of its annual revenue from U.S. Government
agencies and contractors. The VSK Group accounted for approximately 12%, 17% and
28% of Allied's 1997, 1996 and 1995 revenues, respectively.
MECAR's products are sold directly or indirectly to the defense
departments of governments. MECAR is regulated by Belgian law regarding the
foreign governments with which it may do business.
The sales by MECAR in any given period and its backlog at any
particular time may be significantly influenced by one or a few large orders.
This is due to the nature of its business. An order for MECAR's products is
typically for a large quantity and/or a substantial aggregate price, primarily
because materials required for the manufacture of the products cannot be
economically purchased in small quantities and because of the favorable
economies of large volume production. In addition, the production period
required to fill most such orders may range from several months to a year.
Accordingly, MECAR's business is dependent upon its ability to obtain such large
orders. MECAR has no continuing contract with any customer to purchase MECAR's
products. MECAR does, of course, accept smaller orders when it is profitable to
do so or when MECAR management believes that accepting such an order is
otherwise in the best interests of MECAR. MECAR's products are designed for
general military use by a variety of government customers.
7
When MECAR obtains a contract for the sale of its products, it
generally receives down payment(s) and/or letter(s) of credit to be applied to
the purchase price upon shipment of the products.
In 1997, MECAR received a foreign military sale contract from the U.S.
Government for the manufacture of ammunition for the benefit of a foreign
government. It is anticipated that MECAR may receive additional foreign military
sales contracts. Such contracts are subject to termination for convenience or
upon default.
BRI's engineering and technical services are sold directly or
indirectly to the United States Department of Defense, foreign governments and
certain civilian customers. BRI has a number of ongoing design and engineering
assignments with U.S. military agencies, however, BRI has no continuing contract
with any customer to provide products or services. The size of the orders vary
and completion time ranges from several months to a few days. U.S. Government
contracts are subject to termination at the convenience of the U.S. Government
or for default.
The VSK Group derives substantially all of its revenue from sales and
services to private industry such as banks, hospitals, commercial businesses,
office buildings, etc. The VSK Group also sells its systems to other independent
distributors and resellers. The customers of the VSK Group are located in
Belgium and in neighboring countries. While most of the orders received by the
VSK Group are for work which can be completed within one year, it has received
multi-year orders for its products and services. IDCS sells its products
principally in European markets.
Marketing.
- ----------
Most of the marketing activities of MECAR are handled by MECAR's staff
of sales engineers and executive staff. In addition, MECAR advertises in trade
journals and participates in trade shows. MECAR is also represented by marketing
representatives in different markets. MECAR obtains orders from the agencies of
a foreign government which constitute its principal customers through an
independent marketing representative.
BRI's marketing activities are conducted by its executive and marketing
staff.
8
In addition, BRI participates in various trade shows and advertises in trade
journals. In 1997, BRI entered into various teaming agreements pursuant to which
BRI will be relying upon the marketing efforts of its teaming partners.
The marketing activities of the VSK Group are handled principally by
its staff of sales personnel. Marketing activities outside of Belgium are
conducted by independent distributors. In addition, the VSK Group advertises in
trade journals and participates in trade shows.
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 1997, 1996 and 1995, MECAR expended $794,370, $857,434
and $1,039,631, 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.
9
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 1997, 1996 and 1995 the VSK Group
expended $694,026, $888,885 and $954,363, respectively, on research and
development.
Suppliers and Materials.
- ------------------------
Production of ammunition requires an ample supply of chemicals,
pyrotechnical materials and metal component parts and casings. 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
10
employees of the VSK Group.
Backlog.
- --------
As of December 31, 1997 and December 31, 1996, Allied had backlog
orders believed to be firm, after giving effect to the percentage of completion
method of accounting, of approximately $92.8 million and $79.6 million,
respectively. The backlog of orders as of December 31, 1997 are expected to be
substantially filled in 1998 and the first half of 1999.
Competition.
- ------------
The munitions business is highly competitive. MECAR has a number of
competitors throughout the world, including the United States. Many of its
competitors are substantially larger companies with greater capital resources
and experience. Many of its competitors have existing relationships with
governments and countries in which MECAR markets its products. For example, many
countries will only acquire ammunition and other military items from vendors
located in said countries. In many other countries, it is important to have an
independent marketing representative. Competition is mainly based upon
accessibility of potential markets, technical expertise, quality, capabilities
of the product and price.
BRI is in a very competitive business and many of its competitors are
larger companies with greater capital resources. As defense spending continues
to decline and the defense industry consolidates, the level of competition will
likely increase. A large portion of BRI's business is obtained through the
competitive bidding process.
The nature of the competition encountered by the VSK Group depends upon
the segment of the security systems business. In the development and
manufacturing area, there are a number of larger competitors, many with greater
financial resources than the VSK Group. In the installation and services area,
the VSK Group competes with a number of smaller, local competitors.
Personnel.
- ----------
As of January 31, 1998, Allied, MECAR, BRI and the VSK Group had 448
11
permanent employees as follows:
ALLIED
------
Salaried employees 5
Part-time employees 1
MECAR
-----
Technical and salaried employees 47
Hourly workers 201
Technical consultants 3
BRI
---
Salaried employees 64
Hourly employees 25
VSK Group
---------
Technical salaried employees 63
Hourly workers 39
The classification of employees noted above for MECAR and the VSK Group
is in accordance with Belgian law.
Patents.
- --------
MECAR holds a number of patents in many countries and with varying
expiration dates covering certain of its products. Allied does not believe there
is a threat of a material loss of revenue with the expiration of any of these
patents.
Environmental Regulations.
- --------------------------
Allied does not anticipate that compliance with any laws or regulations
relating to environmental protection will have a material effect on its capital
expenditures, earnings or competitive position.
12
Principal Customers.
- --------------------
MECAR has historically received a large percentage of its revenue from
two (2) agencies of a foreign government. Contract awards from these agencies
have generally increased since 1994, although below the levels received in the
1991-1993 timeframe. BRI receives a substantial portion of its business from
and/or through the U.S. Government.
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 1997, 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.
BRI operates from an office and manufacturing building in Arlington
Heights, Illinois. BRI has leased approximately 57,500 square feet of office,
engineering and manufacturing space through July 31, 1999. Assuming one full
shift is maximum capacity, BRI is currently operating at approximately 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
13
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.
Capital expenditure programs for equipment planned in 1998 will require
funding of approximately $1.5 million.
Item 3. Legal Proceedings.
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to Allied's business, to which Allied or any of
its subsidiaries is a party or to which any of their property is subject.
14
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 1997.
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 1997 and 1996 (as reported
by AMEX):
1997 High Low
---- ---
1st Quarter $ 10-1/2 $ 5-7/8
2nd Quarter 9-9/16 7-1/4
3rd Quarter 13-5/8 8-3/8
4th Quarter 15-13/16 10-5/8
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
Stockholders.
- -------------
There were approximately 1,613 holders of record of the Common Stock of
Allied as of March 11, 1998.
Dividends.
- ----------
15
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 1993-1997. 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.
16
Item 6. Selected Financial Data.
The following selected financial data relates to Allied's consolidated
financial position and results of operations for 1997, 1996, 1995, 1994 and
1993:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(000's omitted except per share amounts)
Revenues $134,484 $103,660 $ 65,769 $ 69,847 $147,097
Net earnings (loss) 8,565 4,805 (2,013) (10,941) 7,995
Earnings (loss)
per share:
Basic 1.88 1.08 (.46) (2.49) 1.73
Diluted 1.85 1.08 (.46) (2.49) 1.73
Total assets 99,501 91,948 94,253 107,386 163,591
Long-term debt
obligations and
redeemable preferred
stock 11,162 7,443 28,435 14,108 19,218
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. All per share amounts have been restated
consistent with the provision of FASB 128, which became effective in
1997.
17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
- --------
Allied provides management services to its subsidiaries. Allied's
consolidated statements have eliminated all significant intercompany
transactions. The following discussion refers to the financial condition,
liquidity and results of operations of Allied on a consolidated basis unless
otherwise stated. All dollars are in millions except per share amounts.
Allied earned a net profit of $8.56 ($1.88 per share - basic) for 1997
compared to a net profit of $4.81 ($1.08 per share - basic) for 1996 and
compared with a net loss of $2.01 ($.46 per share - basic) for 1995. Diluted
earnings per share were $1.85, $1.08 and ($0.46) in 1997, 1996 and 1995,
respectively. In 1997 and 1996, each of Allied's operating subsidiaries earned a
profit.
Trends In Operations
- --------------------
Allied had one of its most profitable years in 1997, largely fueled by
the continued resurgence of MECAR's overseas military business. Approximately
80% of Allied's 1997 revenues was contributed by MECAR, principally from its
traditional customer base.
Management's continued attempts to broaden its revenue base was
overshadowed in 1997 by MECAR's extraordinary performance. MECAR experienced a
surge in revenues from its traditional customer base as a result of substantial
orders received in 1996 and 1997, including an $84 order received in early 1997.
Almost all of the new orders received by MECAR in 1997 were for the benefit of
its principal customers. This trend has continued in early 1998 as nearly all of
the $69.5 new orders received to date in 1998 have been for the benefit of such
principal customers.
The VSK Group continues to supply a steady stream of commercial sector
revenues and earnings. In 1997, the VSK Group contributed approximately $1.1 in
profits and $16.4 in revenues. The 6.8% profit margin achieved by the VSK
18
Group in 1997 exceeded the 4.5 % profit margin earned in 1996.
BRI's profitability was based in large part on revenues from a large
contract for the benefit of a foreign government. In 1997, BRI entered into
several teaming arrangements with U.S.-based firms to pursue both domestic and
international business. It is anticipated that BRI's future prospects will
depend in large part on the success of such teaming arrangements and its ability
to secure other large contracts.
Allied commenced 1998 with a consolidated backlog of approximately
$92.8 compared with a consolidated backlog at the beginning of 1997 of $79.6.
MECAR began 1998 with a backlog of approximately $65.8 compared with a 1997
beginning backlog of $49.4. VSK began 1998 with a backlog of approximately $12.7
compared with a 1997 beginning backlog of approximately $14.5. BRI's beginning
backlog in 1998 was $14.3 compared with a 1997 beginning backlog of $15.6.
The future prospects for Allied depend largely on MECAR's ability to
continue to obtain large orders on a periodic basis and Allied's ability to
successfully continue its expansion into commercial business segments.
MECAR's core business has been excellent in the past few years. Much of
this business has been for ammunition for MECAR's traditional customers.
Further, such customers have tentatively agreed to purchase two (2) new weapon
systems. MECAR has received and processed an order for training rounds of
ammunition for one of such systems and anticipates receipt of a similar order
for training rounds for the other system. If such systems are fully developed
and acquired by these customers, MECAR should be in a position to receive
substantial orders for ammunition for these systems. However, MECAR has
historically experienced substantial periods during which it has received few or
no orders from these customers. Most of these negative cycles were caused by
customers' budget constraints. Such customers depend heavily on oil sales for
their revenue. The recent drop in oil prices may have the effect of delaying
future MECAR orders or potentially leading to a future negative cycle.
During the last year, management successfully focused on increasing the
profit margins of the VSK Group's security services business. Management is in
19
the process of examining alternative methods to increase the revenue base of the
VSK Group's business. Such alternatives include but are not limited to expanding
the VSK Group's distributor network and/or growing the VSK Group by acquisition.
Management desires to increase its non-defense business with the twin goals of
having (i) a larger commercial business base to reduce future volatility of the
defense business and (ii) a sufficient commercial component of revenues and
profits to cause the investment community to cease valuing Allied's stock solely
as a defense company.
Trends In Liquidity And Capital Resources
- -----------------------------------------
Allied's liquidity improved in 1996 as a result of the profitable
operations experienced in the last of half of 1995 and throughout 1996, and such
liquidity continued to improve throughout 1997. No liquidity problems are
forecast for 1998 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 its traditional
customer base and the success of its efforts to broaden its revenue base.
The Company has investigated the ability of the parent company and its
subsidiaries to address potential Year 2000 issues. The Company has determined
that its major internal and external systems are or are in the process of being
upgraded to be Year 2000 compliant. The impact of these issues will not have a
material adverse effect on the Company's liquidity or operations.
Liquidity.
- ----------
Allied's liquidity increased in 1997, principally as a result of
profitable operations at each operating unit. Working capital was approximately
$25.1 at December 31, 1997, which is an increase of $7.1 from the December 31,
1996 level. Allied's current working capital is required for operations and to
support credit facility agreements.
Accounts receivable at December 31, 1997 increased from December 31,
1996 by $28.8 due to substantial shipments of products at the end of 1997. Costs
and accrued earnings on uncompleted contracts decreased by $6.9 from 1996 as a
result of shipments at 1997 year-end. Inventory levels and prepaid expenses
20
were essentially the same at the end of calendar years 1997 and 1996. Current
liabilities decreased slightly from 1996 levels. Accounts payables increased in
1997 over 1996 by $16.1 primarily due to orders completed and shipped at the end
of 1997. Current liabilities decreased slightly from 1996 levels.
During 1997, 1996 and 1995, Allied funded its operations principally
with internally generated cash and back-up credit facilities required for
foreign government contracts.
Except for modest lines of credit to support certain of its operations,
Allied's ability to cover its anticipated future operating and capital
requirements is dependent upon its ability to generate positive cash flow from
operations. Given the relative size of the operations of its subsidiaries,
Allied's continued ability to generate sufficient cash flow remains dependent
principally upon the operations of MECAR and the VSK Group.
MECAR typically obtains relatively large orders for its ammunition and
weapon systems which require credit facilities to provide import letters of
credit, advance payment guarantees and performance bonds. These needs have been
met in the last few years via agreements with a multi-member foreign bank pool,
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 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 contracts awarded to MECAR in 1997 and the Term Loan was paid off.
The current credit facility was revised in 1997 and again in early
1998. As has been the case in recent years, the bank pool must agree to extend
such facility to new orders as they are received by MECAR. While management
believes that it will be able to finance additional MECAR contracts using the
bank pool structure, there can be no assurance that such financing will be
provided.
The credit facility and other loan agreements continue to impose
certain restrictions on MECAR. MECAR's obligations were collateralized at
December 31, 1997 by base cash deposits of $8.7 and a pledge on MECAR's assets
21
of $23. The bank agreement further precludes MECAR from making payments to any
company in the Allied group in excess of $2.4 per year until MECAR has
unrestricted cash of not less than $6.7. MECAR's obligations under the bank
agreement are also supported by a guarantee provided by Allied.
MECAR also has a secured line of credit facility with a maximum
availability of $0.8. Such line of credit was unused at December 31, 1997.
MECAR has a mortgage loan with a foreign bank which had an outstanding
balance of approximately $3.8 at December 31, 1997. Principal and interest
payments on the mortgage loan extend through January, 2004.
BRI operated throughout 1997 from cash generated from operations
supplemented by a credit facility. The credit facility consists of a $3.5 line
of credit (which permits advances based upon BRI eligible accounts receivable)
as well as a cash collateralized letter of credit facility. At December 31,
1997, the line of credit had an outstanding balance of $1.7. Allied has
guaranteed BRI's obligations under the above-described credit facility.
The VSK Group operated throughout 1997 primarily from cash generated
from operations. The VSK Group is obligated on several mortgages and other long
term obligations with December 31, 1997 balances aggregating $2.2.
Capital Resources.
- ------------------
Allied spent $1.4 in 1997 on capital equipment as compared with $1.07
in 1996 and $2.92 in 1995, respectively. The expenditures in 1997 were primarily
for facility upgrades and computer equipment. Management currently anticipates
that it will spend approximately $1.5 on capital expenditures in 1998,
principally for additional upgrades to the MECAR facilities and equipment.
Results of Operations.
- ----------------------
Allied had revenues of $134.5 in 1997 as compared to $103.7 in 1996 and
$65.8 in 1995, respectively. Allied earned a profit of $8.56 in 1997 compared
with a profit of $4.81 in 1996 and a compared to loss of $2.01 in 1995.
22
The following table sets forth, for the years ended December 31, 1997,
1996 and 1995, certain items from Allied's consolidated statements of operations
expressed as a percentage of revenue:
1997 1996 1995
---- ---- ----
Revenue 100.0% 100.0% 100.0%
Costs and Expenses
Cost of sales 80.9 75.9 75.9
Selling and administrative 10.7 15.1 24.0
Research and development 1.1 1.7 3.2
Restructuring charge .7 -- --
Operating income (loss) 6.6 7.3 (3.1)
Other income (deductions)
Interest income .8 1.9 2.7
Interest expense (1.4) (3.3) (4.6)
Other - net 1.1 (0.4) 3.0
Earnings (loss) before
income taxes 7.1 5.5 (2.0)
Income taxes .7 0.9 1.1
Net earnings (loss) 6.4 4.6 (3.1)
Revenues
- --------
Revenues for 1997 increased $30.8 or 29.7% as compared to 1996.
Revenues at MECAR increased by approximately 50% over the prior year due to
increased business from MECAR's traditional customer base. The $84 order
received by MECAR in early 1997 included a $44 systems integration component. In
1997, revenues at the VSK Group decreased approximately 8.4% under 1996 levels
primarily due to currency fluctuations (if currency fluctuations are eliminated,
1997 VSK Group revenues increased 6% over 1996 levels). Revenues at BRI
decreased 9.3% from 1996 levels.
23
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.
Cost of Sales
- -------------
Cost of sales as a percentage of sales for 1997 was approximately 81%
compared with 76% for each of 1996 and 1995.
Selling and Administrative Expenses
- -----------------------------------
Selling and general administrative expenses in 1997 were $1.2
(or 7.8%) less than those incurred in 1996.
Selling and general administrative expenses in 1996 were slightly less
than those incurred in 1995.
Research and Development
- ------------------------
Research and development costs incurred in 1997 decreased by $0.26, or
approximately 14.8% under 1996 levels due to lower expenditures at MECAR.
Research and development costs incurred in 1996 decreased by $0.34, or
16.3% under 1995 levels due to lower expenditures at MECAR.
Restructuring Costs
- -------------------
Restructuring charges to MECAR, principally comprised of workforce
reductions, of approximately $.98 were incurred in 1997. Such charges were
incurred to reduce employment levels at MECAR.
24
Interest Income
- ---------------
Interest income decreased in 1997 by $.89, or 46% below 1996 levels
principally due to reduced cash levels principally resulting from repayment of
the Term Loan.
Interest income increased in 1996 by $0.15, or 8.9% over 1995 levels
principally due to improved cash flow and corresponding levels of cash.
Interest Expense
- ----------------
Interest expense decreased in 1997 by $1.6, or 46.5% from the amount
incurred in 1996 as a result of a decrease in bank debt and credit facility
fees.
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.
Other - Net
- -----------
Allied experienced a $1.5 gain in 1997, largely due to net currency
gains.
Allied had a loss of $0.38 in 1996, largely due to net currency losses.
Income Taxes
- ------------
The 1997 effective tax rate was 10.1% primarily due to the utilization
of tax loss carryforwards. The balance of the foreign operating loss
carryforwards at MECAR are expected to be utilized in 1998 and it is anticipated
that some 1998 MECAR earnings will become subject to Belgian tax at the 40.7%
statutory rate.
The 1996 effective tax rate was 15.6% primarily due to the utilization
of tax loss carryforwards.
Net Earnings (Loss)
- -------------------
The Company had a $8.56 profit in 1997 compared with a $4.81 profit in
1996. All operating units earned a profit in 1997.
25
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.
PART III
Item 10. Directors and Executive Officers of Allied.
Directors.
- ----------
The following are the directors of Allied:
J. R. Sculley, age 57, 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 50, 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 59, 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 74, became a director of Allied in early 1996.
Throughout the last five years, Mr. Hebel has been a private investor.
Harry H. Warner, age 62, became a director of Allied in early 1996.
Throughout the last five years, Mr. Warner has been a self-employed financial
consultant, investor and real estate developer. He is also a director of
Chesapeake Corporation and Pulaski Furniture Corporation.
Executive Officers.
- -------------------
26
The following are the executive officers of Allied:
J. R. Sculley, age 57, 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 57, was elected vice president of Allied
in January, 1995. Since February, 1993, Mr. Yarborough has served as vice
president of Services. Previously, he served as director of business development
of Grumman Corporation, a defense company. Mr. Yarborough also serves as a
director of BRI and the VSK Group.
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, 1997, 1996 and 1995, by the chief executive
officer of Allied and by other executive officers of Allied whose total annual
salary and bonus exceeds $100,000:
27
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION Awards Payouts
--------------------------------- -------------------------
Other All
Name Annual Restricted Securities Other
and Compen- Stock Underlying LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($)(1) ($) ($) SARs (#) ($) ($)
- --------- ---- --------- -------- ------- ---------- -------- ------- ------
J.R. 1997 $245,000 $120,000
Sculley, 1996 $245,000 $100,000 15,000
Chief 1995 $235,000
Executive
Officer
W. Glenn 1997 $180,500 $108,000
Yarborough, 1996 $168,000 $ 90,000 27,600
Jr., Vice 1995 $144,500
President
29
- ---------------
(1) Messrs. Sculley and Yarborough were awarded bonuses of $120,000 and
$108,000, respectively, for 1997 performance, payable in 1998 in stock
and/or cash and $100,000 and $90,000, respectively, for 1996
performance payable in 1997 in stock and/or cash. In each of March,
1998 and 1997, Mr. Sculley was awarded 5,548 shares of stock and cash
bonuses of $53,424 and $44,420. Mr. Yarborough was awarded 9,000 shares
of Company stock in each of March, 1998 and 1997. The shares issued in
March, 1998 had a market value of $12.00 per share on the date of
grant; the shares issued in March, 1997 had a market value of $10.00
per share on the date of grant.
30
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Value
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARS at Options/SARs at
FY-End (#) FY-End ($)(1)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- --------------- ------------ ------------- -------------
J.R. Sculley 4,880 $25,010 22,520/43,600 $94,689/$213,847
W. Glenn Yarborough, Jr. 19,200 $92,625 14,000/8,400 $58,632/$72,979
- ---------------------
(1) Based on the closing price of the Company's stock of $12.4375 on
December 31, 1997.
31
Director Compensation
- ---------------------
Directors who are employees of Allied receive no additional
compensation for serving as a director. Each non-employee director (an "Outside
Director") is compensated for services as a director, including as a member of
committees of the Board, in accordance with the Allied Research Corporation
Outside Directors Compensation Plan (the "Directors Compensation Plan") by which
Allied pays each of its Outside Directors $1,000 per month during such Outside
Director's tenure and awards 1,000 shares of Allied's Common Stock to each
individual who serves as an Outside Director on each July 1. In addition,
Outside Directors are compensated (a) $1,000 for each Board meeting in excess of
four (4) personally attended during each calendar year, (b) $500 for each
committee meeting attended which is not held in conjunction with a Board
meeting, and (c) $250 for each teleconference Board meeting in excess of two (2)
in which a director participates during each calendar year.
In 1992, the Board of Directors of Allied adopted the Allied Research
Corporation Outside Directors Retirement Plan (the "Directors Retirement Plan")
to provide retirement benefits for long-standing Outside Directors. Under the
Directors Retirement Plan, Outside Directors are eligible for a retirement
benefit if they retire 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
32
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. Options for 15,000 shares
each were granted under the Directors Option Plan in 1996 to Messrs. Scott,
Christ, Smith, Hebel and Warner; no such options were awarded in 1997.
Employment Contracts and Change-In-Control Arrangements
- -------------------------------------------------------
J. R. Sculley and Allied have entered into an Employment Agreement (the
"Sculley Agreement") which extends through July 31, 1998. 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, 1998, and is
automatically renewable from year to year thereafter unless either Allied or Mr.
Yarborough gives the other timely notice of its or his intent not to renew. Mr.
Yarborough is entitled to receive base compensation of $183,000 per calendar
year. The Yarborough Agreement further provides that in the event Mr. Yarborough
ceases to serve in any capacity as an officer of the Company as a result of a
voluntary or involuntary termination within a period of twelve (12) months
following a change in control, Mr. Yarborough shall be entitled to a lump sum
payment equal to the aggregate amount of compensation payable to Mr. Yarborough
throughout the remaining term of the Yarborough Agreement.
In June, 1991, the Board of Directors of Allied adopted the Preferred
Share Purchase Rights Agreement (the "Agreement"). The Agreement provides each
stockholder of record on a dividend distribution of one "right" for each
outstanding share of Allied's common stock. Rights become exercisable at the
earlier of ten days following: (1) a public announcement that an acquiror has
purchased or has the right 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
33
owning 30% or more of the outstanding common stock of Allied. All rights held by
an acquiror or offeror expire on the announced acquisition date, and all rights
expire at the close of business on June 20, 2001. Each right entitles a
stockholder to acquire at a stated purchase price, 1/100 of a share of Allied's
preferred stock which carries voting and dividend rights similar to one share of
its common stock. Alternatively, a right holder may elect to purchase for the
stated price an equivalent number of shares of Allied's common stock (or in
certain circumstances, cash, property or other securities of Allied) at a price
per share equal to one-half of the average market price for a specified period.
In lieu of the purchase price, a right holder may elect to acquire one-half of
the common stock available under the second option. The purchase price of the
preferred stock fractional amount is subject to adjustment for certain events as
described in the Agreement. At the discretion of a majority of the Board and
within a specified time period, Allied may redeem all of the rights at a price
of $.01 per right. The Board may also amend any provisions of the Agreement
prior to exercise.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
The Compensation Committee of Allied during the fiscal year ended
December 31, 1997 consisted of Messrs. Earl P. Smith, Robert W. Hebel and Harry
H. Warner. None of such individuals has served as an officer or employee of
Allied nor is there any other relationship between any member of the
Compensation Committee and Allied which is required to be disclosed under
applicable regulations.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following information is furnished as of March 1, 1998, 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:
34
Amount and
Title nature of
of Name and address of beneficial Percent of
class beneficial owner ownership class(1)
- -------- ---------------- ---------- ----------
Common Fidelity Low-Priced 454,000 9.5%
Stock Fund/Fidelity Owned directly
Management &
Research Company
82 Devonshire Street
Boston, MA 02109
Common Dimensional Fund 270,200 5.7%
Advisors, Inc.(2) Owned directly(2)
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
- --------------------------
(1) Based upon 4,649,721 shares of common stock outstanding plus 140,670
shares which may be acquired within 60 days pursuant to outstanding
stock options.
(2) Dimensional Fund Advisors, Inc. ("Dimensional"), a registered
investment advisor, is deemed to have beneficial ownership of 270,200
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 Trust 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 ownership of all such shares.
35
The following information is furnished as of March 1, 1998, 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 10,000 *
Owned
directly
Common Earl P. Smith 16,110 *
Owned
directly
Common Clifford C. Christ 25,000 *
Owned
directly
Common Robert W. Hebel 17,000 *
Owned
directly
Common J. R. Sculley 122,804 2.6%
Owned
directly
Common W. Glenn Yarborough, Jr. 58,649 1.3%
Owned
directly
Common All executive officers 249,563 5.2%
and directors as a Owned
group (6) directly
36
*Less than 1%
- -------------------------
(1) Includes 14,000 shares which may be acquired by Mr. Smith, 18,200
shares which may be acquired by Mr. Yarborough and 43,720 shares which
may be acquired by Mr. Sculley within 60 days pursuant to outstanding
stock options.
(2) Based upon 4,649,721 shares of common stock outstanding plus 140,270
shares which may be acquired within 60 days pursuant to outstanding
stock options.
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
37
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
1997 and 1996
Consolidated Statements of Operations for F-6
the three years ended December 31, 1997
Consolidated Statements of Stockholders' F-7
Equity for the three years ended
December 31, 1997
Consolidated Statements of Cash Flows F-8
for the three years ended December 31, 1997
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, 1997 and 1996
and for the three years ended
December 31, 1997:
38
Schedule I - Condensed F-33
Financial Information of
Allied
Schedule II - Valuation F-36
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. (Incorporated by
reference from Form 10-K filed in March,
1995.)
Exhibit 21 - List of Subsidiaries E-3
39
Exhibit 23 - Consent of Independent Certified E-4
Public Accountants
(b) Reports on Form 8-K:
--------------------
No reports on Form 8-K were filed during the fourth quarter of
1997.
40
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 24, 1998
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 24, 1998
* * * * * * * *
/s/ J. R. Sculley
By (Signature and Title). . . . . . . . . . . . . . . . . . .
J. R. Sculley, Director
Date: March 24, 1998
41
* * * * * * * *
/s/ Clifford C. Christ
By (Signature and Title). . . . . . . . . . . . . . . . . . .
Clifford C. Christ, Director
Date: March 24, 1998
* * * * * * * *
/s/ Earl P. Smith
By (Signature and Title). . . . . . . . . . . . . . . . . . .
Earl P. Smith, Director
Date: March 24, 1998
* * * * * * * *
/s/ Robert W. Hebel
By (Signature and Title). . . . . . . . . . . . . . . . . . .
Robert W. Hebel, Director
Date: March 24, 1998
* * * * * * * *
/s/ Harry H. Warner
By (Signature and Title). . . . . . . . . . . . . . . . . . .
Harry H. Warner, Director
Date: March 24, 1998
* * * * * * * *
Supplemental Information to be Furnished with Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.
No annual report or proxy material has as yet been sent to Allied's
stockholders, although it is expected that an annual report and proxy material
will be furnished to Allied's stockholders subsequent to the filing of this Form
10-K.
42
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FINANCIAL STATEMENTS AND SCHEDULES
DECEMBER 31, 1997
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, 1997 and 1996 F-4
Consolidated Statements of Operations for the three years ended December 31, 1997 F-6
Consolidated Statements of Stockholders' Equity for the three years
ended December 31, 1997 F-7
Consolidated Statements of Cash Flows for the three years ended December 31, 1997 F-8
Notes to Consolidated Financial Statements F-10
Schedules as of and for the three years ended December 31, 1997
Schedule I - Condensed Financial Information of Registrant F-33
Schedule II -Valuation and Qualifying Accounts F-36
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, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
We have also audited the consolidated financial statement schedules listed on
the accompanying index at Item 14(a)(2). In our opinion, these schedules present
fairly, in all material respects, the information required to be set forth
therein.
/s/ GRANT THORNTON LLP
______________________
BALTIMORE, MARYLAND
MARCH 6, 1998
ALLIED RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
- -------------------------------------------------------------------------------
ASSETS
1997 1996
---------- ----------
CURRENT ASSETS
Cash and equivalents, including restricted cash
(notes A, C and F) $16,420,943 $32,859,478
Accounts receivable (notes A, D and F) 40,649,726 11,889,785
Costs and accrued earnings on
uncompleted contracts (note A) 7,804,344 14,694,117
Inventories (notes A and F) 6,965,666 7,171,007
Prepaid expenses and deposits 4,094,190 3,879,723
---------- ----------
Total current assets 75,934,869 70,494,111
PROPERTY, PLANT AND EQUIPMENT - AT COST
(notes A and H)
Buildings and improvements 11,714,475 13,231,477
Machinery and equipment 28,778,285 33,030,014
Leasehold improvements 118,927 85,028
---------- ----------
40,611,687 46,346,519
Less accumulated depreciation 30,259,311 33,106,026
---------- ----------
10,352,376 13,240,493
Land 1,208,013 1,411,659
---------- ----------
11,560,389 14,652,152
OTHER ASSETS
Deposits (notes C, F and H) 6,414,419 -
Intangibles, less accumulated amortization of
$2,783,724 and $1,688,122 in 1997 and 1996,
respectively (notes A and B) 5,028,390 6,123,992
Other 562,572 677,906
---------- ----------
12,005,381 6,801,898
---------- ----------
$99,500,639 $91,948,160
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
ALLIED RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS - CONTINUED
DECEMBER 31,
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
---------- ----------
CURRENT LIABILITIES
Notes payable (note E) $ 1,720,000 $ 3,317,438
Current maturities of long-term debt 1,280,736 14,099,171
Accounts payable 34,656,335 18,571,110
Accrued liabilities 4,747,291 4,311,407
Accrued losses on contracts (note G) 572,279 390,125
Customer deposits 6,993,756 10,934,488
Income taxes 847,563 805,970
---------- ----------
Total current liabilities 50,817,960 52,429,709
LONG-TERM DEBT, less current maturities (note H) 5,311,564 7,443,436
ADVANCE PAYMENTS ON CONTRACTS (note C) 5,850,000 -
DEFERRED INCOME TAXES (notes A and P) 626,660 628,374
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, 4,608,221
in 1997 and 4,443,092 in 1996 460,822 444,309
Capital in excess of par value 12,100,521 10,846,303
Retained earnings 26,046,271 17,481,483
Accumulated other comprehensive income (loss) (1,713,159) 2,674,546
---------- ----------
36,894,455 31,446,641
---------- ----------
$99,500,639 $91,948,160
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
ALLIED RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------
1997 1996 1995
------------- --------------- -----------
REVENUE (note M) $134,483,750 $103,660,137 $65,768,907
COST AND EXPENSES
Cost of sales 108,775,629 78,658,573 49,896,794
Selling and administrative 14,422,923 15,647,951 15,758,673
Research and development 1,488,396 1,746,319 2,087,278
Restructuring costs (note R) 977,267 - -
------------- --------------- -----------
-
125,664,215 96,052,843 67,742,745
------------- --------------- -----------
Operating income (loss) 8,819,535 7,607,294 (1,973,838)
OTHER INCOME (DEDUCTIONS)
Interest income 1,033,599 1,921,864 1,770,278
Interest expense (1,846,697) (3,451,066) (3,034,537)
Other - net (note O) 1,519,505 (381,379) 1,968,478
------------- --------------- -----------
706,407 (1,910,581) 704,219
------------- --------------- -----------
Earnings (loss) before income taxes 9,525,942 5,696,713 (1,269,619)
INCOME TAXES (NOTES A AND P) 961,154 891,230 743,652
------------- --------------- -----------
NET EARNINGS (LOSS) $ 8,564,788 $ 4,805,483 $(2,013,271)
============= ============== ==========
EARNINGS (LOSS) PER SHARE (NOTE S)
BASIC $1.88 $1.08 $(.46)
==== ==== ====
DILUTED $1.85 $1.08 $(.46)
==== ==== ====
The accompanying notes are an integral part of these statements.
F-6
ALLIED RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
Capital
Preferred stock Common stock in excess
no par value $.10 par value of par value Retained earnings
----------------- ------------------ ------------ -----------------
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 -
Comprehensive income (loss)
Net loss for the year - - - (2,013,271)
Currency translation adjustment - - - -
Total comprehensive income (loss) - - - -
------------ -------- ----------- -----------
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 -
Comprehensive income (loss)
Net earnings for the year - - - 4,805,483
Currency translation adjustment - - - -
Total comprehensive income (loss) - - - -
------------ -------- ----------- -----------
BALANCE AT DECEMBER 31, 1996 - 444,309 10,846,303 17,481,483
Common stock awards - 5,275 516,185 -
Employee stock purchase plan purchases - 11,238 738,033 -
Comprehensive income (loss)
Net earnings for the year - - - 8,564,788
Currency translation adjustment - - - -
Total comprehensive income (loss) - - - -
------------ -------- ----------- -----------
BALANCE AT DECEMBER 31, 1997 - $460,822 $12,100,521 $26,046,271
============ ======= ========== ==========
Accumulated
other comprehensive
income (loss)
---------------------- Total
foreign currency stockholders'
translation adjustment equity
---------------------- --------------
BALANCE AT DECEMBER 31, 1994 $ 3,910,384 $29,697,674
Common stock awards - 11,250
Employee stock purchase plan purchases - 78,232
Comprehensive income (loss)
Net loss for the year - -
Currency translation adjustment 579,699 -
Total comprehensive income (loss) - (1,433,572)
----------- -----------
BALANCE AT DECEMBER 31, 1995 4,490,083 28,353,584
Common stock awards - 41,382
Employee stock purchase plan purchases - 61,729
Comprehensive income (loss)
Net earnings for the year - -
Currency translation adjustment (1,815,537) -
Total comprehensive income (loss) - 2,989,946
----------- -----------
BALANCE AT DECEMBER 31, 1996 2,674,546 31,446,641
Common stock awards - 521,460
Employee stock purchase plan purchases - 749,271
Comprehensive income (loss)
Net earnings for the year - -
Currency translation adjustment (4,387,705) -
Total comprehensive income (loss) - 4,177,083
----------- -----------
BALANCE AT DECEMBER 31, 1997 $(1,713,159) $36,894,455
========== ==========
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 1997 1996 1995
------------- ------------- -------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net earnings (loss) for the year $ 8,564,788 $ 4,805,483 $ (2,013,271)
Adjustments to reconcile net earnings (loss) to
net cash from (used in) operating activities
Depreciation and amortization 2,645,995 3,093,534 2,751,867
Loss (gain) on sale of fixed assets 2,874 (250) (8,381)
Deferred income taxes 1,148,753 (590,419) 376,550
Provision for estimated losses on contracts (80,012) (4,036) (1,178,475)
Gain on sale of securities (11,684) - -
Common stock awards 521,460 41,382 11,250
Changes in assets and liabilities
Accounts receivable (30,952,448) 7,874,015 2,746,237
Cost and accrued earnings on
uncompleted contracts 4,937,582 (9,142,340) 2,709,185
Inventories (803,742) (1,413,524) (983,917)
Prepaid expenses and other assets (840,140) (2,798,161) (1,451,796)
Accounts payable and accrued liabilities 18,611,804 2,015,448 (12,291,397)
Customer deposits (2,458,936) 1,917,475 7,959,923
Income taxes 110,020 441,852 (552,009)
------------ ------------ ------------
(7,168,474) 1,434,976 89,037
------------ ------------ ------------
Net cash provided by (used in)
operating activities 1,396,314 6,240,459 (1,924,234)
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (1,342,320) (1,066,889) (2,920,728)
Proceeds from sale of fixed assets - 250 183,470
Purchase of restricted investments (8,216,235) - -
Proceeds from sale of restricted investments 1,813,500 - -
Payments for acquisitions, net of cash acquired - - (1,083,571)
------------ ------------ ------------
Net cash (used in) investing activities (7,745,055) (1,066,639) (3,820,829)
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,
- --------------------------------------------------------------------------------
1997 1996 1995
------------- ------------- -------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings (2,717,150) 2,908,978 (114,514)
Principal payments on long-term debt (12,663,855) (19,009,160) (23,979,845)
Proceeds from issuance of long-term debt 1,908,449 11,762,981 12,252,705
Net (increase) decrease in long-term deposits 5,850,000 18,492,000 (12,092,000)
Proceeds from employee stock purchases 749,271 61,729 78,232
------------ ------------ ------------
Net cash (used in) provided by
financing activities (6,873,285) 14,216,528 (23,855,422)
Effects of exchange rates on cash (3,216,509) (2,275,015) 1,738,751
------------ ------------ ------------
Net (decrease) increase in cash
and equivalents (16,438,535) 17,115,333 (27,861,734)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 32,859,478 15,744,145 43,605,879
------------ ------------ ------------
CASH AND EQUIVALENTS AT END OF YEAR $ 16,420,943 $ 32,859,478 $ 15,744,145
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 2,681,569 $ 3,088,529 $ 4,461,871
Income taxes 2,140,896 1,245,678 1,638,984
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 subsidiary, Belgian
Automation Units, N.V.
I.D.C.S., N.V. was acquired on May 9, 1995, was accounted for as a purchase,
and revenue and results of operations from the date of acquisition have been
consolidated.
The 1995 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. In 1996 and 1997, Classics B.V.B.A.
and Detectia, N.V. merged into the VSK Group.
Significant intercompany transactions have been eliminated in consolidation.
BUSINESS OPERATIONS
The Companies operate primarily in the United States, Belgium and the United
Kingdom. During 1997, seventy-two percent of Allied's 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 the
majority of its sales directly or indirectly to United States Military
Agencies, other defense contractors foreign governments and industry. A
description of the business operations of each company follows.
Allied provides management services to its wholly-owned subsidiaries. Allied
has no direct domestic operating assets or business activity. Allied is
currently in the formative steps of establishing a U.S. base for the VSK
Group's industrial security products.
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, other defense
contractors, foreign governments and industry.
F-10
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
BUSINESS OPERATIONS - CONTINUED
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.
ARCL, which was formerly engaged in the marketing of military hardware on
behalf of Allied, Mecar and BRI, is currently inactive.
ARC Services, Inc. was formed in 1993, and continued until December 31, 1995,
to market and provide demilitarization and environmental clean-up services.
ARC Services was involved in certain research and development projects and had
no other significant operations since its formation.
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.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are utilized by the Company to hedge certain
sales and purchase contracts. The Company does not hold or issue derivative
financial instruments for trading or speculative purposes.
Currency gains and losses on contracts designated as hedges of foreign
currency commitments are deferred and recognized when the related measurement
of the related foreign currency transactions is recognized.
STOCK-BASED COMPENSATION
Compensation costs for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the
amount an employee must pay to acquire the stock. Compensation cost for stock
awards is recorded based on the quoted market value of the Company's stock and
the time of grant.
RESEARCH AND DEVELOPMENT
Costs incurred in research and development activities are charged to
operations as incurred.
WARRANTIES
The Company grants warranties on certain ammunition products for periods
varying from one to five years. Provision is made for estimated losses arising
from product warranty claims as incurred. Provision is made for estimated
warranty costs on the sale of security systems at the time of the sale.
F-12
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
INCOME TAXES
Income taxes are provided based on the liability method for financial
reporting purposes. Deferred and prepaid taxes are provided for on temporary
differences in the basis of assets and liabilities which are recognized in
different periods for financial and tax reporting purposes.
EARNINGS PER COMMON SHARE
Basic earnings per share amounts have been computed based on the average
number of common shares outstanding. Diluted earnings per share reflects the
increase in average common shares outstanding that would result from the
assumed exercise of outstanding options, calculated using the treasury stock
method. All prior period per share amounts have been restated to reflect the
above policy.
STATEMENT OF CASH FLOWS
For purposes of the Statement of Cash Flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to
be cash equivalents.
RECLASSIFICATIONS
Certain items in the 1996 and 1995 financial statements have been reclassified
to conform to the current presentation.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION (SFAS 131), which is effective for fiscal
years beginning after December 15, 1997. The statement establishes revised
standards under which an entity must report business segment information in
its financial statements. The Company plans to adopt SFAS 131 in the fiscal
year beginning January 1, 1998 and does not believe its current segment data
will change significantly under the newly adopted standards, which requires
reporting on the basis that is used internally for evaluating segment
performance.
NOTE B - ACQUISITION
On May 9, 1995 the VSK Group acquired I.D.C.S., N.V., a Belgian company for
approximately $2,972,000. I.D.C.S. manufactures, distributes and services
an integrated line of industrial security products.
F-13
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE B - ACQUISITION - CONTINUED
The acquisition has been accounted for as a purchase and the purchase price in
excess of the net assets acquired has been reflected in intangibles. The
financial statements include the result of operations since the date of
acquisition. Pro forma financial data for the acquisition prior to the date of
acquisition would not have a material affect on reported results.
I.D.C.S., N.V.
May 9, 1995
--------------
Fair value of tangible assets acquired $2,587,000
Liabilities assumed 855,000
----------
Net assets acquired 1,732,000
Purchase price 2,972,000
----------
Excess of cost over assets acquired $1,240,000
==========
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 place restrictions on certain cash deposits and other
liens on Mecar's assets. BRI is also required under the terms of a contract
with a foreign government to provide a performance bond and letters of credit.
The credit facility agreement used to provide the financial guarantees also
places restrictions on cash deposits. VSK has also pledged certain term
deposits to secure outstanding bank guarantees.
Cash of $8,727,186 and long-term cash deposits of $6,414,419 at December 31,
1997 ($20,116,000 of cash at December 31, 1996) are restricted or pledged as
collateral for these agreements and other obligations.
NOTE D - ACCOUNTS RECEIVABLE
Accounts receivable at December 31 are comprised as follows:
1997 1996
----------- -----------
Receivables under U.S. Government contracts and subcontracts
Amounts billed $ 836,769 $ 1,150,123
Unbilled amounts due upon completion of contracts,
recoverable costs and accrued profits 3,457,570 2,116,580
----------- -----------
4,294,339 3,266,703
Receivables from foreign governments 31,322,856 3,154,989
Commercial and other receivables, less allowance for doubtful
receivables of $205,350 in 1997 and $364,674 in 1996 5,032,531 5,468,093
----------- -----------
$40,649,726 $11,889,785
=========== ===========
F-14
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE D - ACCOUNTS RECEIVABLE - CONTINUED
Unbilled receivables are comprised of progress billing holdbacks, terminated
contracts receivable and other unbilled costs and fees.
NOTE E - NOTES PAYABLE
In June of 1997, the Company entered into a financing agreement with a
domestic bank to provide financing for a contract with a foreign government.
The agreement provides for a $3,500,000 line-of-credit, of which $1,720,000
was outstanding at December 31, 1997. Borrowings under a similar
line-of-credit were $250,000 at December 31, 1996. The current line-of-credit
bears interest at the prime rate (8.5% at December 31, 1997) plus 1.5% and
expires at the earlier of the contract completion or November, 1999.
Borrowings under the line-of-credit are limited to BRI's eligible accounts
receivable, as defined in the agreement.
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.
At December 31, 1996, short-term loans of $3,067,438, were outstanding with
certain banks.
The Company has a secured line-of-credit of approximately $800,000 with a
foreign bank, which was unused at December 31, 1997.
NOTE F - CREDIT FACILITY
The Company is obligated under various credit agreements (the Agreements) with
its foreign banking pool and its domestic bank that provided credit facilities
primarily for letters of credit, bank guarantees, performance bonds and
similar instruments required for specific sales contracts. The Agreements
provide for certain bank charges and fees as the line is used, plus fees of 2%
of guarantees and bonds issued and annual fees of 1.25% - 1.35% of letters of
credit, bonds and guarantees outstanding. As of December 31, 1997, guarantees
and performance bonds of $28.6 million remain outstanding.
Advances under the Agreements are secured by cash of $8,727,186 and long-term
cash deposits of $6,414,419. Amounts outstanding are also collateralized by
the letters of credit received under the contracts financed, and a pledge of
approximately $23 million on Mecar's assets. Certain Agreements provide for
restrictions on payments or transfers to Allied and ARCL for management fees,
intercompany loans, loan payments, the maintenance of certain net worth levels
and other provisions.
NOTE G - ACCRUED LOSSES ON CONTRACTS
The Company has provided for accrued losses of $572,279 at December 31, 1997
($390,125 at December 31, 1996) in connection with the completion of certain
contracts in progress. These contracts are expected to be completed in 1998.
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:
1997 1996
----------- -----------
Term loan agreement $ - $11,413,078
Mortgage loan agreements 4,678,268 6,299,262
Notes payable bank 415,449 660,711
Note payable - I.D.C.S., N.V. - 189,162
Other 1,498,583 2,980,394
--------- -----------
6,592,300 21,542,607
Less current maturities 1,280,736 14,099,171
--------- ----------
$5,311,564 $ 7,443,436
========== ===========
TERM LOAN AGREEMENT
The Company was obligated under a secured term loan agreement with two of the
institutions in its foreign banking pool that matured and was paid prior to
December 31, 1997.
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
$3,831,108 at December 31, 1997. 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 $512,000 (except for the annual
principal installment in the year 2000 which is $1,025,000). The loan bears
interest at 8.75% annually and is collateralized by a mortgage on the
Company's real estate. The Company is also obligated on several mortgages on
the VSK Group's buildings which have a total balance due of $847,160 at
December 31, 1997. The mortgages mature at various dates through 2005 in
annual installments of approximately $254,000, plus interest at rates ranging
from 6.6% to 8.5% per year.
NOTES PAYABLE BANK
BRI is obligated on a note payable with a balance of $415,449 at December 31,
1997 which bears interest at the prime rate (8.5% at December 31, 1997) plus
1.5% and matures in May 2002. The note is payable in monthly installments of
principal of $5,750 plus accrued interest. The note is secured by the assets
of BRI and is guaranteed by Allied. The agreement contains covenants requiring
the maintenance of certain financial ratios, among other matters.
BRI was obligated on two notes payable of $500,000 each to its bank at
December 31, 1996, which were repaid on August 14, 1997.
NOTE PAYABLE - I.D.C.S., N.V.
As of December 31, 1996, the Company was obligated to the former owner of
I.D.C.S. in connection with the acquisition of I.D.C.S. in the amount of
$189,162, which was paid at maturity in June, 1997.
F-16
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE H - LONG-TERM DEBT - CONTINUED
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 2002.
Scheduled annual maturities of long-term obligations as of December 31, 1997
are as follows:
Year Amount
---- ----------
1998 $1,280,736
1999 1,233,386
2000 1,180,671
2001 766,779
2002 828,779
Thereafter 1,201,841
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 former directors have
been previously accrued and 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, 1997.
The Company instituted a retirement savings plan in 1989 which received a
favorable determination letter from the Internal Revenue Service.
Contributions to the Plan are at the discretion of Company's management. In
1996, the Company began to match participants' contributions at a rate of 25%
for each participant dollar contributed up to a maximum of 1% of salary.
Matching contributions in 1997 and 1996 were approximately $47,000 and
$53,000, respectively. No contributions were made for the year ended December
31, 1995.
In 1997, the Company also contributed an additional amount of $35,000 to the
Plan's profit sharing fund. Additional contributions of 25%, up to a maximum
of 1% of salary will be made in 1998.
Under the terms of labor agreements at its Belgian subsidiaries, the Company
contributes to certain governmental and labor organization employee benefit
and retirement programs.
F-17
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE J - CONTINGENCIES AND COMMITMENTS
Cost-plus contracts, subcontracts, and certain other costs are subject to U.S.
Government audit and review. It is not anticipated that adjustments, if any,
with respect to determination of reimbursability of costs under cost-plus
contracts or subcontracts will have a material effect on the Company's
consolidated results of operations or financial position.
U.S. Government contracts and subcontracts are by their terms subject to
termination by the Government or the prime contractor either for convenience
or for default.
At December 31, 1997, Mecar has provided for estimated losses on contracts of
$572,279. 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, 1997.
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. Contracts with a notional amount of $20,000,000
were outstanding as of December 31, 1997. There were no contracts outstanding
at December 31, 1996.
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,
1997.
Year Amount
---- --------
1998 $427,215
1999 363,516
2000 212,458
2001 17,373
Total rental expense charged to operations approximated $400,000, $421,000 and
$444,000, for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company's domestic operations do not provide post employment benefits to
its employees. Under Belgian labor provisions, the Company may be obligated
for future severance costs for its employees. The Company has provided for
known severance costs related to its workforce 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,
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:
1997 1996
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ------------ ------------ ------------
Notes payable $ 1,720,000 $ 1,720,000 $ 3,317,438 $ 3,317,000
Long-term debt, including current maturities 6,592,300 6,592,300 21,542,607 21,543,000
Off-balance-sheet instruments
Guarantees and letters of credit - 28,586,000 - 20,283,000
Foreign exchange contracts - 20,000,000 - -
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value.
o The carrying amounts of notes payable approximate their fair value because
of the short maturity of these obligations.
o The fair value of long-term debt is estimated based on approximate market
prices for the same or similar issues or the current rates offered to the
Corporation for debt of the same remaining maturities. The Company
believes the aggregate carrying value approximates fair value.
o Estimated fair values for off-balance-sheet instruments (performance bonds,
advance payment guarantees and letters-of-credit) are reflected at the face
value of these obligations, since management does not expect to have any
claims against these obligations based on its past experience. The fair
value of foreign exchange contracts are based on their notional values,
since they have short-term maturities at December 31, 1997.
NOTE L - CAPITAL STOCK
At December 31, 1997, options to acquire 214,770 shares of the Company
common stock were outstanding and 848,949 shares were reserved for future
issuance under the following plans:
1997 INCENTIVE STOCK PLAN
During 1997, the Board of Directors approved and reserved 225,000 shares of
common stock for awards to key employees of the Company and its subsidiaries
in the form of stock options and stock awards. The Plan is administered by the
Compensation Committee of the Board of Directors, and employees of the Company
and its subsidiaries who are deemed to be key employees by the Committee are
eligible for awards under the Plan. As of December 31, 1997, no awards had
been made under the Plan.
F-19
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE L - CAPITAL STOCK - CONTINUED
1992 ALLIED RESEARCH CORPORATION EMPLOYEE STOCK PURCHASE PLAN
During 1993, the Board of Directors and shareholders approved and reserved
525,000 shares for the plan. The plan is voluntary and substantially all
full-time employees with greater than six months of service are eligible to
participate through payroll deductions. The purchase price of each share is
equal to 85% of the closing price of the common stock at the end of each
calendar quarter. The plan is subject to certain restrictions and the Board
may amend or terminate it at any time. During 1997, 1996 and 1995 - 16,553,
12,001 and 20,608 shares, respectively, subject to the plan were issued and
$31,978, $9,225 and $11,736 was charged to operations.
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, 1997, options had been granted for
276,000 shares, which have all been exercised except for 33,020 at prices of
$3.75 to $5.125 per share.
As of December 31, 1997, 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.
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
1995, 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, 1997, 144,250 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
1997, 1996 and 1995, the Company granted 4,000, 5,000 and 3,000 shares of
common stock subject to the plan and charged $34,000, $26,250 and $11,250,
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, 1997, 37,500 of the options had been exercised.
OTHER
Stock grants for 48,746, 3,035 and 37,260 shares of the Company's common stock
were made to various employees during 1997, 1996 and 1995. These shares were
issued outside of any existing plan and their value ($487,460, $12,125 and
$172,812, respectively) was charged to operations.
PREFERRED SHARE PURCHASE RIGHTS AGREEMENT
The Board of Directors has adopted an Agreement which provides each
stockholder of record a dividend distribution of one "right" for each
outstanding share of common stock. Rights become exercisable the earlier of
ten days following: (1) a public announcement that an acquiring person has
purchased or has the right to acquire 10% or more of the Company's common
stock, or (2) the commencement of a tender offer which would result in an
offeror beneficially owning 30% or more of the outstanding common stock. All
rights held by an acquiring person or offeror expire on the announced
acquisition date and all rights expire at the close of business on June 20,
2001.
Each right under the Preferred Share Purchase Rights Agreement entitles a
stockholder to acquire at a purchase price of $45, one-hundredth of a share of
preferred stock which carries voting and dividend rights similar to one share
of common stock. Alternatively, a right holder may elect to purchase for $45
an equivalent number of common shares (or in certain circumstances, cash,
property or other securities of the Company) at a price per share equal to
one-half of the average market price for a specified period. In lieu of the
purchase price, a right holder may elect to acquire one-half of the common
shares available under the second option. The purchase price and the preferred
share fractional amount are subject to adjustment for certain events as
described in the Agreement.
Rights also entitle the holder to receive a specified number of shares of an
acquiring company's common stock in the event that the Company is not the
surviving corporation in a merger or if 50% or more of the Company's assets
are sold or transferred.
At the discretion of a majority of the Board and within a specified time
period, the Company may redeem all of the rights at a price of $.01 per
right. The Board may also amend any provisions of the Agreement prior to their
exercise.
F-21
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE L - CAPITAL STOCK - CONTINUED
THE FOLLOWING TABLE SUMMARIZES OPTION ACTIVITY:
1997
-----------------------------
Weighted Average 1996 1995
Shares Exercise Price Shares Shares
------- ---------------- ------- -------
Options outstanding at beginning of year 313,100 $6.76 227,500 227,500
Options exercised (95,830) 6.02 - -
Options granted - - 135,600 -
Options expired (2,500) 8.25 (50,000) -
------- ---- ------- -------
Options outstanding at end of year 214,770 $7.08 313,100 227,500
======= ==== ======= =======
Option price range at end of year $3.75 $3.75 $2.75
to to to
$8.25 $8.25 $8.25
Option price range for exercised shares $3.75 - -
to
$8.25
Options available for grant at end of year 115,300 112,800 238,400
Weighted-average fair value of options,
granted during the year - $2.06 -
THE FOLLOWING TABLE SUMMARIZES OPTIONS OUTSTANDING AT DECEMBER 31, 1997:
Weighted Average
Number Weighted Average Remaining
Outstanding Exercise Prices Exercise Prices Contractual Life
----------- --------------- ---------------- ----------------
214,770 $3.75 to $8.25 $7.08 5.42
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.
F-22
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE L - CAPITAL STOCK - CONTINUED
The following table presents the pro forma decrease in income that would have
been recorded had the fair values of options granted in each year after 1994
been recognized as compensation expense on a straight-line basis over the
vesting period of the grant.
1997 1996 1995
-------- -------- --------
Pro forma
Net earnings $80,067 $159,697 $ -
Earnings per share
Basic .01 .03 -
Diluted .02 .03 -
There were no options granted in 1995
NOTE M - MAJOR CUSTOMERS
The Company derives the majority of its revenues from foreign governments,
direct and indirect sales to U.S. Government agencies and government prime
contractors, primarily on fixed price contracts. During 1997, 1996 and 1995,
the Company derived approximately 5%, 11% and 17%, respectively, of its
revenue from U.S. Government agencies and contractors. Two agencies of a
foreign government and another foreign government accounted for approximately
64% , 6% and 10% of revenue in 1997, 42% , 10% , and 19% of revenue in 1996
and, 31%, 12% and 27% of revenue in 1995.
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 1997 and 1996 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, 1997 and 1996, backlog
orders believed to be firm approximated $92.8 and $79.6 million.
Amounts in foreign banks at December 31, 1997 and 1996 were approximately
$14.1 million and $31.8 million, respectively. Changes in the value of the
U.S. dollar and other currencies affect the Company's financial position and
result of operations since the Company has operations in Belgium and the
United Kingdom and sells its products on a worldwide basis.
F-23
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE O - OTHER - NET
Other income and expense included in the Company's consolidated statements of
operations is comprised as follows:
1997 1996 1995
---------- --------- ----------
Net currency transaction gains (losses) $1,328,195 $(836,254) $1,284,446
Miscellaneous - net 191,310 454,875 684,032
--------- --------- ---------
$1,519,505 $(381,379) $1,968,478
========= ======== =========
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:
1997 1996 1995
------------ ----------- -----------
Domestic $ (809,173) $ 124,549 $ 151,888
Foreign 10,335,115 5,572,164 (1,421,507)
----------- --------- ----------
$ 9,525,942 $5,696,713 $(1,269,619)
=========== ========= ==========
The Company's provision for income taxes is comprised as follows:
1997 1996 1995
------------ ----------- -----------
Currently payable
Domestic $ 46,614 $ 197,299 $ 116,692
Foreign 921,336 1,323,619 498,696
-------- --------- --------
967,950 1,520,918 615,388
Deferred - net (6,796) (629,688) 128,264
-------- --------- --------
$ 961,154 $ 891,230 $ 743,652
======== ========= ========
F-24
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE P - INCOME TAXES - CONTINUED
The Company's provision for income taxes differs from the anticipated United
States statutory rate. Differences between the statutory rate and the
Company's provision are as follows:
1997 1996 1995
-------- -------- --------
Taxes at statutory rate 34.0% 34.0% (34.0)%
Benefit of foreign tax credit carryforward - (1.2) (7.4)
Foreign tax rate differential, loss limitations,
and net operating loss benefits (27.5) (18.3) 94.3
Other 3.6 1.1 5.7
---- ----- ----
Income taxes 10.1% 15.6% 58.6%
==== ===== ====
In 1997, 1996 and 1995, the Company's Belgian subsidiaries utilized
approximately $8,529,000, $4,232,000 and $47,000, respectively, of foreign
operating loss carryforwards for tax reporting purposes. Unused net operating
losses of the Belgian subsidiaries at December 31, 1997 approximate
$4,220,000, which under Belgian tax law cannot be carried back, but may be
carried forward indefinitely.
The Company utilized approximately $67,000, and $94,000 of its foreign tax
credits in 1996 and 1995, respectively. No foreign tax credits were utilized
in 1997. At December 31, 1997, foreign tax credit carryforwards of
approximately $455,000 were available which expire through 2000.
Deferred tax liabilities have not been recognized for basis differences
related to investments in the Company's Belgian and United Kingdom
subsidiaries. These differences, which consist primarily of unremitted
earnings intended to be indefinitely reinvested, aggregated approximately
$28.6 million at December 31, 1997. Determination of the amount of
unrecognized deferred tax liabilities is not practicable.
F-25
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE P - INCOME TAXES - CONTINUED
Deferred taxes at December 31, 1997 and 1996 are comprised as follows:
1997 1996
----------- ------------
Current
Unrealized exchange (losses) gain $ (48,880) $ 52,158
Compensated absences 111,000 96,000
Deferred income (52,455) (8,713)
Other 73,000 18,000
----------- ------------
Current deferred tax asset/liability 82,665 202,669
Noncurrent
Foreign tax credit carryforwards 676,005 790,017
Foreign and domestic net operating loss carryforwards 1,776,435 5,345,510
Depreciation and amortization 124,455 189,656
Deferred compensation 25,103 45,224
Unrealized exchange gain (577,780) (599,375)
----------- ------------
Noncurrent deferred tax asset/liability 2,024,218 5,725,808
----------- ------------
Total deferred tax asset before valuation allowances 2,106,883 5,928,477
Valuation allowances (2,236,594) (6,064,997)
----------- ------------
Net deferred tax liability $ (129,711) $ (136,520)
========== ===========
Deferred tax components are included in the following balance sheet accounts:
1997 1996
----------- -------------
Current (included in "prepaid expenses and deposits") $ 496,949 $ 491,854
Deferred income taxes (626,660) (628,374)
---------- -----------
$ (129,711) $ (136,520)
========== ===========
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.
F-26
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE R - RESTRUCTURING COSTS
The Company began implementing a streamlining of its manufacturing,
administrative processes and personnel during 1993 at its Belgian subsidiary,
Mecar. The Company has continued to implement additional costs reductions and
efficiency improvements beyond those initiated in 1993. As a result of changes
effected in late 1997, the Company recorded a restructuring charge of $977,267
in the fourth quarter of 1997, principally comprised of workforce reductions,
termination costs and benefits. The reductions are expected to produce further
efficiencies and reduce the overall level of core employment.
Provisions in 1997 $977,267
Cash payments in 1997 478,817
--------
Restructuring provision at December 31, 1997 $498,450
=======
NOTE S - EARNINGS PER COMMON SHARE
The following table reconciles the numerators and denominators of the basic
and diluted earnings per share (EPS) computations.
1997 1996 1995
---------- ---------- -----------
Basic EPS
Income (loss) available to common stockholder $8,564,788 $4,805,483 $(2,013,271)
========= ========= ==========
Weighted average number of common shares outstanding 4,543,874 4,432,750 4,408,172
Basic EPS $1.88 $1.08 $(0.46)
==== ==== =====
Diluted EPS
Income (loss) available to common stockholders $8,564,788 $4,805,483 $(2,013,271)
Income impact of assumed conversions
- - -
---------- ---------- -----------
Income available to common stockholders on a
diluted basis $8,564,788 $4,805,483 $(2,013,271)
========= ========= ==========
Weighted average number of common shares outstanding 4,543,874 4,432,750 4,408,172
Effect of dilutive securities - stock options 82,728 5,739 -
---------- ---------- -----------
Adjusted weighted average number of common
shares outstanding 4,626,602 4,438,489 4,408,172
Diluted EPS $1.85 $1.08 $(0.46)
==== ==== =====
F-27
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE S - EARNINGS PER COMMON SHARE - CONTINUED
During 1996, options to purchase 71,950 shares at $8.75 a share were
outstanding , which were not included in the computation of diluted EPS
because the options' exercise price was greater than the average market price
of the common shares. During 1995, options to purchase 227,500 shares at
prices ranging from $2.75 to $8.25 a share were outstanding, which were not
included in the computation of diluted EPS since inclusion of such shares
would be antidilutive.
NOTE T - YEAR 2000 COMPUTER SYSTEMS COMPLIANCE
The Company has made and will continue to make certain expenditures to ensure
that its software systems and applications continue to function properly in
and after 2000. These expenditures have not been and are not anticipated to be
material to the Company's financial position or results of operations.
NOTE U - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS
The Company currently operates in three principal areas: Product sales
(Mecar), Engineering and Technical (BRI) and Security Systems and Services
(The VSK Group). Product sales includes the production of ammunitions, weapons
systems and ordnance products systems integration. Engineering and Technical
provides support services primarily to United States Military Agencies and
government contractors. Security Systems and Services includes sales and
services to industrial and institutional customers of protection, fire and
access control systems and services.
The Company's foreign operations are presently conducted by Mecar and the VSK
Group.
F-28
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE U - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - CONTINUED
Information by geographic area and industry segment is as follows:
Geographic Area Data 1997 1996 1995
-------------------- ------------- ----------- -----------
Net sales to unaffiliated customers
Belgium (1) $123,916,607 $ 92,023,896 $53,280,097
France - - 1,054,560
United States 10,567,143 11,636,241 11,434,250
------------ ------------ ----------
$134,483,750 $103,660,137 $65,768,907
=========== =========== ==========
Operating income (loss)
Belgium $ 8,855,302 $ 6,848,251 $ (926,099)
United Kingdom (212,433) (91,752) (626,630)
France - - (495,318)
United States 620,453 940,247 598,497
Corporate (443,787) (89,452) (524,288)
-------------- -------------- -----------
$ 8,819,535 $ 7,607,294 $(1,973,838)
============= ============= ==========
Assets
Belgium $ 83,257,626 $ 84,842,298 $84,800,974
United Kingdom 480,608 228,654 1,645,818
France - - 1,213,227
United States 15,762,405 6,877,208 6,593,254
------------ ------------- -----------
$ 99,500,639 $ 91,948,160 $94,253,273
============ ============ ==========
F-29
(1) INCLUDES EXPORT SALES PRINCIPALLY TO CUSTOMERS IN ASIA/MIDDLE EAST AND
EUROPE OF $113,578,000 IN 1997, $72,742,500 IN 1996, $33,212,000 IN 1995.
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE U - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - CONTINUED
Industry Segment Data 1997 1996 1995
--------------------- ------------ ------------ -----------
Net sales to unaffiliated customers
Product sales $107,533,415 $ 74,109,952 $36,131,894
Engineering and technical 10,549,224 11,636,242 11,354,440
Security systems and service 16,401,111 17,913,943 18,282,573
------------- ----------- ----------
$134,483,750 $103,660,137 $65,768,907
=========== =========== ==========
Operating income (loss)
Product sales $ 7,277,898 $ 5,373,053 $ (2,686,686)
Engineering and technical 620,453 650,837 912,048
Security systems and service 1,364,971 1,672,856 325,088
Corporate (443,787) (89,452) (524,288)
------------- ------------ ------------
$ 8,819,535 $ 7,607,294 $(1,973,838)
============ =========== ===========
Assets
Product sales $ 18,317,504 $ 81,334,200 $83,468,399
Engineering and technical 13,016,075 5,505,577 5,855,840
Security systems and service 2,527,051 3,736,752 4,191,620
Corporate assets 2,640,009 1,371,631 737,414
------------ ----------- ------------
$ 99,500,639 $ 91,948,160 $94,253,273
============ ============ ==========
Capital expenditures
Product sales $ 1,043,058 $ 696,699 $ 2,179,864
Engineering and technical 163,963 264,915 310,059
Security systems and service 135,299 105,275 430,805
----------- ----------- ------------
$ 1,342,320 $ 1,066,889 $ 2,920,728
=========== ============ ===========
Depreciation and amortization expense
Product sales $ 2,049,204 $ 2,488,189 $ 2,310,195
Engineering and technical 446,602 392,497 222,857
Security systems and service 150,189 212,848 218,815
------------ ------------- ------------
$ 2,645,995 $ 3,093,534 $ 2,751,867
=========== ============= ===========
F-30
ALLIED RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE V - QUARTERLY FINANCIAL DATA (UNAUDITED)
(Amounts in thousands, except per share data)
----------------------------------------------------------------
First Second Third Fourth Total
1997 Quarter Quarter Quarter Quarter For Year
- ------------------------------- --------- --------- --------- --------- ----------
Revenue $29,765 $24,630 $27,774 $52,315 $134,484
Gross profit 5,490 6,618 5,484 7,452 25,044
Net earnings 1,984 2,307 1,896 2,378 8,565
Per share data:
Basic .44 .51 .42 .52 1.88
Diluted .44 .50 .41 .51 1.85
1996
- ----------------
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:
Basic .14 .15 .12 .67 1.08
Diluted .14 .15 .12 .67 1.08
F-31
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
1997 1996
----------- -----------
Cash and equivalents $ 2,342,037 $ 1,039,062
Investments in subsidiaries 41,722,046 34,903,082
Deferred tax asset 25,103 97,382
Deposits and other 379,158 235,187
----------- ----------
Total assets $44,468,344 $36,274,713
========== ==========
LIABILITIES
Accounts payable and accrued liabilities $ 1,176,115 $ 475,208
Due to subsidiaries 6,348,894 4,264,263
Deferred tax liability 48,880 -
Income taxes - 88,601
----------- ----------
Total liabilities 7,573,889 4,828,072
STOCKHOLDERS' EQUITY
Common stock 460,822 444,309
Capital in excess of par value 12,100,521 10,846,303
Retained earnings 26,046,271 17,481,483
Accumulated other comprehensive
(loss) income (1,713,159) 2,674,546
----------- ----------
36,894,455 31,446,641
----------- ----------
$44,468,344 $36,274,713
========== ==========
F-33
ALLIED RESEARCH CORPORATION
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
(PARENT COMPANY)
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------ ----------- -----------
Income
Intercompany management fees $ 2,684,859 $2,652,889 $ 2,505,222
Other - net 311,587 (77,412) 266,361
---------- --------- ----------
2,996,446 2,575,477 2,771,583
Costs and expenses
Administrative and other 4,512,176 2,878,746 3,115,475
---------- --------- ----------
(Loss) before equity in
operations of subsidiaries (1,515,730) (303,269) (343,892)
Equity in operations of subsidiaries 9,855,491 4,959,035 (1,696,176)
---------- --------- ----------
Earnings (loss) before income taxes 8,339,761 4,655,766 (2,040,068)
Income taxes (benefit) (225,027) (149,717) (26,797)
---------- --------- ----------
NET EARNINGS (LOSS) $ 8,564,788 $4,805,483 $(2,013,271)
========= ========= ==========
Earnings (loss) per common share
Basic $1.88 $1.08 $(.46)
==== ==== ====
Diluted $1.85 $1.08 $(.46)
==== ==== ====
F-34
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 1997 1996 1995
----------- ----------- -----------
Cash flows from (used in) operating activities
Net (loss) earnings for the year $ 8,564,789 $ 4,805,483 $(2,013,270)
Adjustments to reconcile net earnings to net cash from
(used in) operating activities
Equity in operations of subsidiaries (9,855,489) (4,959,035) 1,696,176
Depreciation and amortization 6,191 - -
Gain on disposal of property and equipment - (250) -
Deferred income taxes 146,262 (127,724) 41,904
Common stock awards and grants 521,460 41,382 11,250
Changes in assets and liabilities
Due from subsidiaries - 377,095 (329,697)
Inventories (96,059) - -
Accounts receivable (25,665) - -
Other assets (36,298) 85,350 133,830
Due to subsidiaries 733,448 - 26,146
Accounts payable and accrued liabilities 700,909 269,066 (61,644)
Income taxes (88,601) 38,496 (3,308)
---------- ----------- -----------
(7,993,842) (4,275,620) 1,514,657
---------- ----------- -----------
Net cash provided by (used in) operating activities 570,947 529,863 (498,613)
Cash flows from investing activities
Capital expenditures (17,243) (7,250) -
Proceeds for sale of property and equipment - 250 -
---------- ----------- -----------
Net cash (used in) investing activities (17,243) (7,000) -
Cash flows from financing activities
Proceeds from employee stock purchase plan shares 749,271 61,729 78,232
---------- ----------- -----------
Net increase (decrease) in cash and equivalents 1,302,975 584,592 (420,381)
Cash and equivalents at beginning of year 1,039,062 454,470 874,851
---------- ----------- -----------
Cash and equivalents at end of year $ 2,342,037 $ 1,039,062 $ 454,470
========== =========== ===========
Supplemental Disclosures of Cash Flow Information
- -------------------------------------------------
Cash paid during the year for
Income taxes $ 116,692 $ 135,000 $ 120,000
Interest - - -
F-35
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, 1997
- ----------------------------
Estimated losses on
contracts $ 390,125 $ 572,279 $ - $ 390,125 $ 572,279
========== ========== ============= =========== ==========
Allowance for doubtful
receivables $ 364,674 $ 192,837 $ - $ 33,513 $ 205,350
========== ========== ============= =========== ==========
Valuation allowances on
deferred tax assets $ 6,064,997 $ - $ - $ 3,909,700 $ 2,155,297
========== ========== ============= =========== ==========
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
========== ========== ============= ========== ==========
F-36
EXHIBITS
EXHIBIT INDEX
- -----------------------------------------------------------------------------------------------------------------
Number Description of Exhibit Page
- ------ ---------------------- ----
21 List of Subsidiaries
23 Consent of Independent Certified
Public Accountants
E-2