ALLIED DEFENSE GROUP INC - FORM 10-Q

ALLIED DEFENSE GROUP INC - FORM 10-Q - November 14, 2012

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ALLIED DEFENSE GROUP INC Reports

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ALLIED DEFENSE GROUP INC Reports

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EX-32 - EX-32 - ALLIED DEFENSE GROUP INC	d397903dex32.htm
EX-31.2 - EX-31.2 - ALLIED DEFENSE GROUP INC	d397903dex312.htm
EX-31.1 - EX-31.1 - ALLIED DEFENSE GROUP INC	d397903dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

Commission File Number: 1-11376

The Allied Defense Group, Inc.

(Exact name of Registrant as specified in its charter)

Delaware

04-2281015

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Number)

120 E. Baltimore Street, Suite 2100

Baltimore, MD 21202

(Address of principal executive offices, including zip code)

(410) 385-8155

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes x No ¨

The number of shares of registrant’s Common Stock outstanding as of September 30, 2012 was 8,235,195.

THE ALLIED DEFENSE GROUP, INC.

INDEX


	PAGE NUMBER
PART I. FINANCIAL INFORMATION — UNAUDITED

Item 1. Financial Statements (Unaudited)

Consolidated Statements of Net Assets as of September 30, 2012 and December 31, 2011 (liquidation basis)		2

Consolidated Statement of Changes in Net Assets for the three and nine months ended September 30, 2012 (liquidation basis)		3

Notes to Unaudited Consolidated Financial Statements		4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		9

Item 3. Quantitative and Qualitative Disclosures About Market Risk		14

Item 4. Controls and Procedures		14

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		15

Item 1A. Risk Factors		16

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		16

Item 3. Defaults Upon Senior Securities		16

Item 4. Mine Safety Disclosures		16

Item 5. Other Information		16

Item 6. Exhibits		16

Signatures		17

The Allied Defense Group, Inc.

CONSOLIDATED STATEMENTS OF NET ASSETS (Liquidation Basis)

(Thousands of Dollars, except per share and share data)


	September 30, 2012		December 31, 2011
ASSETS
Cash and cash equivalents	$	10,775	$	3,617
Short-term investments		19,460		27,895
Prepaid expenses		—		219
Accrued interest receivable		265		428
Funds held in escrow		15,015		15,010

TOTAL ASSETS		45,515		47,169

LIABILITIES
Estimated net costs to be incurred during liquidation		1,870		2,688
Accounts payable		222		57
Other liabilities		95		91

TOTAL LIABILITIES		2,187		2,836

NET ASSETS IN LIQUIDATION	$	43,328	$	44,333

NUMBER OF SHARES OUTSTANDING		8,235,195		8,235,195
NET ASSETS IN LIQUIDATION PER SHARE	$	5.26	$	5.38

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

The Allied Defense Group, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (Liquidation Basis)

(Unaudited)

(Thousands of Dollars)


	Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012
Net assets on liquidation basis at beginning of period	$	43,818		$	44,333

Changes in fair value of net assets in liquidation
Adjust net assets to fair value		214			212
Increase in estimated net costs to be incurred during liquidation		(489	)		(980	)
Adjust estimated income to be earned during liquidation		(215	)		(237	)

Net assets on liquidation basis at end of period	$	43,328		$	43,328

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

The Allied Defense Group, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Thousands of Dollars)

NOTE 1 — DESCRIPTION OF BUSINESS

Business Operations

The Allied Defense Group Inc. (“Allied” or the “Company”), a Delaware corporation, previously conducted a multinational defense business focused on the manufacture and sale of ammunition and ammunition related products for use by the U.S. and foreign governments. Allied’s business was conducted by its two wholly owned subsidiaries: MECAR sprl, formerly Mecar S.A. (“Mecar”), and ADG Sub USA, Inc., formerly Mecar USA, Inc. (“Mecar USA”).

Plan of Dissolution and Liquidation

On June 24, 2010, the Company signed a definitive purchase and sale agreement (the “Agreement”) with Chemring Group PLC (“Chemring”) pursuant to which Chemring agreed to acquire substantially all of the assets of the Company for $59,560 in cash and the assumption of certain liabilities. On September 1, 2010, the Company completed the asset sale to Chemring contemplated by the Agreement. Pursuant to the Agreement, Chemring acquired all of the capital stock of Mecar for approximately $45,810 in cash, and separately Chemring acquired substantially all of the assets of Mecar USA for $13,750 in cash and the assumption by Chemring of certain specified liabilities of Mecar USA. A portion of the purchase price was paid through the repayment of certain intercompany indebtedness owed to the Company that would otherwise have been cancelled at closing. $15,000 of the proceeds of the sale was deposited into escrow to secure the Company’s indemnification obligations under the Agreement.

In conjunction with the Agreement, the Board of Directors of the Company unanimously approved the dissolution of the Company pursuant to a Plan of Complete Liquidation and Dissolution (“Plan of Dissolution”). The Company’s stockholders approved the Plan of Dissolution on September 30, 2010. In response to concerns of certain of the Company’s stockholders, the Company agreed to delay the filing of a certificate of dissolution with the Delaware Secretary of State. The Company filed a certificate of dissolution with the Delaware Secretary of State on August 31, 2011. In connection with this filing, our stock transfer agent has ceased recording transfers of our stock and our stock is no longer publicly traded.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Liquidation Basis of Accounting

With the authorization of the Plan of Dissolution, the Company adopted the liquidation basis of accounting effective as of the close of business on September 30, 2010. The liquidation basis of accounting will continue to be used by the Company until such time that the plan is terminated and all net assets have been distributed to shareholders.

Under the liquidation basis of accounting, the carrying amounts of assets as of the close of business on September 30, 2010, the date of the authorization of the Plan of Dissolution by the Company, were adjusted to their estimated net realizable values and liabilities, including the estimated costs associated with implementing the Plan of Dissolution, were stated at their estimated settlement amounts. Such value estimates were updated by the Company as of December 31, 2011 and September 30, 2012. The majority of net assets in liquidation at December 31, 2011 and September 30, 2012 were highly liquid and did not require adjustment as their estimated net realizable value approximates their current book value. The exception is the short-term investments which are subject to changes in market value.

Consolidated Statements of Net Assets in Liquidation and Changes in Net Assets in Liquidation are the financial statements presented under the liquidation basis of accounting. The valuations of assets at their net realizable values and liabilities at their anticipated settlement amounts represent estimates, based on present facts and circumstances associated with carrying out the Plan of Dissolution based on the assumptions set forth below. The actual values and costs associated with carrying out the Plan of Dissolution are expected to differ from the amounts shown herein because of the inherent uncertainty of the estimates. Such differences may be material. In particular, the estimates of the Company’s liquidation costs will vary with the length of time it operates under the Plan of Dissolution. Accordingly, it is not possible to predict the aggregate amount or timing of future distributions to stockholders, as long as the Plan of Dissolution is in effect and no assurance can be given that the amount of liquidating distributions to be received will equal or exceed the estimate of net assets in liquidation presented in the accompanying Statement of Net Assets in Liquidation.

The Allied Defense Group, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Thousands of Dollars)

The estimated net costs to be incurred during liquidation as of September 30, 2012 are as follows:


Estimated net costs to be incurred during liquidation
Compensation for remaining employees and directors	$	250
Compliance and other office costs		354
Insurance Fees		211
Professional Fees		1,018
Income Taxes		150

Subtotal		1,983
Less: interest income on cash and investment balances		(113	)

Total net costs to be incurred during liquidation	$	1,870

These estimates are based on assumptions regarding the Company’s ability to settle outstanding obligations to creditors, resolve outstanding litigation, settle remaining leases and the ultimate timing of distributions to its stockholders, but does not include any settlement amounts, fines or penalties, if any, that the Company might incur as a result of the DOJ subpoena or any other legal proceedings. These estimates will be reviewed quarterly and adjusted as projections and assumptions change.

Principles of Consolidation

As of September 30, 2012, the consolidated financial statements of the Company include the accounts of Allied and its wholly-owned subsidiaries, which are as follows:

•

ARC Europe, a Belgian company,

•

Allied Research BV (“BV”), a Dutch company,

•

Allied Research Cooperative (“Coop”) and,

•

ADG Sub USA, Inc. (“Mecar USA”)

Fair Value of Financial Instruments

The Company values its assets and liabilities using the methods of fair-value as described in ASC 820, Fair Value Measurements and Disclosures. In accordance with ASC 820, the Company determines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company generally applies the income approach to determine fair value. This method uses valuation techniques to convert future amounts to a single present amount. The measurement is based on the value indicated by current market expectations about those future amounts.

ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to active markets for identical assets and liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). We classify fair value balances based on the observability of those inputs. The three levels of the fair value hierarchy are as follows:

•

Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities.

•

Level 2 – Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and amounts derived from valuation models where all significant inputs are observable in active markets.

•

Level 3 – Unobservable inputs that reflect management’s assumptions.

The Allied Defense Group, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Thousands of Dollars)

Reclassification

Reclassifications have been made to the prior year financial statements in order to conform to the current year presentation.

NOTE 3 — SHORT-TERM INVESTMENTS

Cash in excess of funds required for immediate use by the Company has been invested with the primary goal to preserve capital. As such, the funds are invested in short-term, high-quality, fixed-income securities and are accounted for at fair value. As of September 30, 2012 and December 31, 2011, the fair value of these investments was $19,460 and $27,895, respectively, and was included in short-term investments on the consolidated statements of net assets.

In addition to short-term investments, the Company invests in money market funds which are classified as cash equivalents. Amounts are transferred between short-term investments and money market funds based on investment availability and yield.

NOTE 4 — FAIR VALUE MEASUREMENTS

For disclosure purposes, assets and liabilities are classified in their entirety in the fair value hierarchy level based on the lowest level of input that is significant to the overall fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement within the fair value hierarchy levels.

The following table sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, in the consolidated statement of net assets at September 30, 2012:


	Level 1		Level 2		Level 3		Total
Municipal Bonds	$	13,820	$	—	$	—	$	13,820
Certificates of Deposit		5,640		—		—		5,640

Total assets at fair value	$	19,460	$	—	$	—	$	19,460

The following table sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, in the consolidated statement of net assets at December 31, 2011:


	Level 1		Level 2		Level 3		Total
Municipal Bonds	$	22,892		—		—	$	22,892
Certificates of Deposit		5,003		—		—		5,003

Total assets at fair value	$	27,895	$	—	$	—	$	27,895

The Company believes the fair value of its financial instruments consisting of cash, cash equivalents, and short-term investments, adjusted to recognize unrealized gains and losses, approximate their carrying values due to the relatively short maturity of these instruments.

NOTE 5 — INDUSTRY SEGMENTS

Prior to September 2010, the Company operated within two operating segments: Mecar and Mecar USA. In September 2010, the Company completed the divesture of Mecar and Mecar USA. As a result, Allied no longer has operating segments.

NOTE 6 — PROVISION FOR TAXES

The Company regularly reviews the recoverability of its deferred tax assets and establishes a valuation allowance as deemed appropriate. Realization of deferred tax assets is dependent upon generation of sufficient income by the Company in

The Allied Defense Group, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Thousands of Dollars)

the jurisdictions in which it has operations and, in some cases, by specific location. Because the Company experienced losses in previous years and continued losses in the current year, management recorded a full valuation allowance against the Company’s net deferred tax asset as of September 30, 2012.

As of September 30, 2012 and December 31, 2011, the Company had no unrecognized tax liabilities. Income taxes are provided based on the liability method for financial reporting purposes. For the three months ended September 30, 2012, there were no interest or penalties recorded.

In Belgium, the Company is still open to examination by the Belgian tax authorities from 2008 forward. Currently, tax years 2009 and 2010 are under examination. The Company does not expect additional taxes to be due as a result of the examination. In the United States, the Company is still open to examination from 2008 forward, although carryforward tax attributes that were generated prior to 2008 may still be adjusted upon examination by the U.S. tax authorities if they either have been or will be utilized.

As of December 31, 2010, the Company provided for U.S. tax on foreign earnings of approximately $25,475 that is expected to be repatriated. As of September 30, 2012, $13,757 had been successfully repatriated. Income taxes related to repatriation of cash held in foreign countries is not expected to exceed $350. As of September 30, 2012, $200 of income taxes related to the repatriation has been paid and the remainder is expected to be paid in 2013. As of September 30, 2012, the fair value of net deferred tax assets is zero due to full valuation allowance.

The Company may undergo, or may already have undergone, an “ownership change” within the meaning of Section 382 of the Internal Revenue Code, which could affect the Company’s ability to offset gains realized in the asset sale against net operating losses and foreign tax credit carryovers.

NOTE 7 — COMMITMENTS AND CONTINGENCIES

Legal Proceedings

DOJ Subpoena

Leases

The Company leases domestic office space under an operating lease which expires in early 2013. The lease also includes escalation provisions for taxes and operating costs. In April, 2011, the Company subleased the office space for 2011 and 2012 to offset a portion of the rental obligation owed by the Company.

Indemnification provisions

The Company sold its SeaSpace, Titan, the VSK Group, GMS and NSM subsidiaries in separate transactions starting with the first transaction closing in 2007. In each transaction, the Company agreed to indemnify the purchaser for periods subsequent to closing for losses arising from breaches of representations, warranties and covenants. Indemnification periods varied based on the particular representation, warranty or covenant covered, the vast majority of which have all expired. As of September 30, 2012, the only remaining indemnification obligations relate to representations and warranties concerning taxes, environmental matters, breaches of title, breaches of authorization and fraud. For SeaSpace, Titan, the VSK Group, GMS and NSM, these indemnification provisions have been capped at $1,000, $950, $6,428 (€5,000), $5,200 and $863, respectively. At September 30, 2012, no amount has been accrued related to these indemnifications as a liability is not deemed probable.

The Allied Defense Group, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Thousands of Dollars)

may be required to indemnify the buyer for a period subsequent to the completion of the sale for any and all losses directly or indirectly based upon, related to, arising out of or in connection with Mecar’s completed contracts, Mecar USA liabilities retained by the Company and any failure by the Company to satisfy all transaction related expenses. The Company’s indemnification liability is limited to, and capped at, the escrowed amount of $15,000 plus the accumulated interest. The Company’s indemnification obligations expire upon the earlier of (i) June 30, 2015 and (ii) the Company’s entry into either a court or administrative order or a Chemring-approved settlement agreement, in either case, finally resolving the matters relating to the DOJ’s subpoena. In the absence of such final resolution, in certain circumstances, up to 50% of the escrowed funds may be released as early as June 24, 2013. At September 30, 2012, no amount has been accrued related to this indemnification as a liability is not deemed probable.

ITEM 2.

MANGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The Allied Defense Group, Inc. (“Allied” or the “Company”) previously conducted a multinational defense business focused on the manufacture and sale of ammunition and ammunition related products for use by the U.S. and foreign governments. Allied’s business was conducted by two wholly-owned subsidiaries: MECAR sprl, formerly MECAR S.A. (“Mecar”), and ADG Sub USA, Inc., formerly MECAR USA, Inc. (“Mecar USA”).

On June 24, 2010, the Company signed a definitive purchase and sale agreement (the “Agreement”) with Chemring Group PLC (“Chemring”) pursuant to which Chemring agreed to acquire substantially all of the assets of the Company for $59.6 million in cash and the assumption of certain liabilities. On September 1, 2010, the Company completed the asset sale to Chemring contemplated by the Agreement. Chemring acquired all of the capital stock of Mecar for $45.8 million in cash, and separately Chemring acquired substantially all of the assets of Mecar USA for $13.8 million in cash and the assumption by Chemring of certain specified liabilities of Mecar USA. A portion of the purchase price was paid through the repayment of certain intercompany indebtedness owed to the Company that would otherwise have been cancelled at closing. $15 million of the proceeds from the sale was deposited into escrow to secure the Company’s indemnification obligations under the Agreement.

In conjunction with the Agreement, the Board of Directors of the Company unanimously approved the dissolution of the Company pursuant to a Plan of Complete Liquidation and Dissolution (“Plan of Dissolution”). The Company’s stockholders approved the Plan of Dissolution on September 30, 2010. In response to concerns of certain of the Company’s stockholders, the Company agreed to delay the filing of a Certificate of Dissolution. The Company filed a Certificate of Dissolution with the Delaware Secretary of State on August 31, 2011. In connection with this filing, our stock transfer agent has ceased recording transfers of our stock and our stock is no longer publicly traded.

In connection with the adoption of the Plan of Dissolution and the anticipated liquidation of the Company, we adopted the liquidation basis of accounting effective the close of business on September 30, 2010, whereby assets are valued at their estimated net realizable cash values and liabilities are stated at their estimated settlement amounts. Uncertainties as to the ultimate amount of our liabilities make it impractical to predict the aggregate net value that may ultimately be distributable to stockholders. Under the liquidation basis of accounting, we accrue for the remaining costs to be incurred during liquidation, including compensation for remaining directors, consultants, insurance costs, costs to settle remaining leases, fees for professional service providers, income taxes, and miscellaneous other costs, partially offset by estimated future interest earnings and sublease payments. Such net costs were estimated to be $1.870 million as of September 30, 2012. Our estimates are based on assumptions regarding our ability to settle outstanding obligations and the ultimate timing of distributions to our stockholders, but do not include any settlement amounts, fines or penalties, if any, that we might incur as a result of the DOJ subpoena or any other legal proceedings.

The Company received a subpoena from the Department of Justice (“DOJ”) on January 19, 2010 requesting that the Company produce documents relating to its dealings with foreign governments. The DOJ initially limited its request of documents to those relating to an indicted former employee of Mecar USA. The DOJ subsequently advised the Company that it is conducting an industry-wide review, and therefore the DOJ’s investigation of the Company will be expanded and ongoing. The Company also received inquiries from the Securities and Exchange Commission (“SEC”) as to this matter. We cannot predict the settlement amounts, fines or penalties, if any, that we might incur as a result of the foregoing. The period of time required to resolve these matters is uncertain but is expected to take in excess of one year. Furthermore, under the Agreement, the Company has agreed to indemnify Chemring and certain of its related parties from any losses, fines or penalties arising out of, among other things, the completed contracts of Mecar and Mecar USA. We have escrowed $15 million of the cash consideration paid to the Company in the sale to secure our indemnification obligations under the Agreement. These escrowed funds will not be available to the Company for distribution to our stockholders, or otherwise, until released to the Company pursuant to the terms of the Agreement.

Based on advice from our Foreign Corrupt Practices Act (“FCPA”) outside counsel, we are now estimating that we may not be able to conclude the DOJ/SEC inquiries, complete the Delaware dissolution process and make final distribution to stockholders until 2013. As a result, our estimate of net costs to be incurred during liquidation includes our estimate of costs through December 31, 2013.

In February and March, 2012, the DOJ dismissed charges against all individuals indicted in the FCPA “sting” operation, including the former employee of MECAR USA. Since this time, the Company’s FCPA counsel has had several discussions with the DOJ and SEC regarding the agencies’ respective inquiries. The SEC has recently advised that it will not pursue an

enforcement action against the Company. The discussions with the DOJ are continuing and based upon these discussions, it appears likely that resolution of the DOJ inquiry will involve a payment by the Company in connection with at least one transaction involving the former employee of Mecar USA. At this point, the amount of this payment is undeterminable.

No distributions to stockholders are expected prior to resolution of the DOJ inquiry and completion of the Delaware dissolution process which includes notice to creditors and publication of the dissolution, followed by a petition to the Delaware courts.

With the completion of the September 2010 sale, Allied no longer has operating segments. The Company is being managed by its two directors who are also serving as the Company’s Chief Executive Officer and Chief Financial Officer. The Company no longer has any full-time employees. Allied no longer conducts any active business operations and is winding-up its affairs as set forth above.

Forward-Looking Statements

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that are based on current expectations, estimates and projections about the Company. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Net Assets in Liquidation

Net assets in liquidation at September 30, 2012 are $43.328 million compared to $44.333 million at December 31, 2011. The change in net assets in liquidation is due to: (i) adjustments of assets to fair value, (ii) adjustment to estimated income to be earned on investments, and (iii) adjustments to estimated costs to be incurred during liquidation. The net assets in liquidation per share as of September 30, 2012 has been adjusted to $5.26 as compared to $5.32 as of June 30, 2012, $5.35 as of March 31, 2012, $5.38 as of December 31, 2011, $5.37 as of September 30, 2011, $5.40 as of June 30, 2011 and $5.54 as of March 31, 2011 and December 31, 2010.

We expect to use all of our net assets to complete our Plan of Dissolution, which includes settling existing claims against the Company, including current liabilities and accrued expenses, and making cash liquidating distributions to our shareholders. Net assets available for liquidating distributions to shareholders may vary if we incur greater than estimated operating expenses associated with executing the Plan of Dissolution, any actual settlement costs for existing claims against the Company (as we have not accrued any amounts for resolution of the DOJ/SEC matter or any other existing claim), or if there are existing, but unknown claims made against us in the future.

As of September 30, 2012, cash and cash equivalents increased from December 31, 2011 by approximately $7.2 million due to funds transferred from short-term investments. We expect to reinvest a substantial portion of these funds in the fourth quarter of 2012.

Changes in Net Assets in Liquidation During the Three Months Ended September 30, 2012

The table below summarizes the changes in net assets during the three months ended September 30, 2012:


	Three Months
	Ended
	September 30, 2012
Net assets on liquidation basis at beginning of period	$	43,818

Changes in fair value of net assets in liquidation
Adjust net assets to fair value		214
Increase in estimated net costs to be incurred during liquidation		(489	)
Adjust estimated income to be earned during liquidation		(215	)

Net assets on liquidation basis at end of period	$	43,328

The change in net assets in liquidation during the three months ended September 30, 2012 is the net effect of valuation changes to the net assets, adjustment to income to be earned on investments, and changes in the estimated net costs to be incurred during liquidation. Adjusting net assets to fair market value increased the net assets in liquidation by $0.214 million. The estimated net costs to be incurred during liquidation increased by $0.489 million. Estimated income to be earned during liquidation decreased by $0.215 million. The net effect was a decrease of $0.490 million in net assets in liquidation for the three months ended September 30, 2012.

The adjustment of assets to fair value is the reduction of short-term investments to fair market value. The unrealized loss associated with the short-term investments is due to the Company’s purchase of financial instruments with interest rates above market and therefore are purchased at a premium to their maturity value with an initial unrealized loss. The unrealized loss will be absorbed against the interest income received as the instruments mature.

The table below reconciles the changes during the quarter ended September 30, 2012, in the estimated net costs to be incurred during liquidation. Actual costs, net of interest income received, incurred during the three months ended September 30, 2012 reduce the remaining estimated net costs to be incurred during liquidation. An update to the estimate of remaining net costs to be incurred during liquidation is reflected in the changes in estimates column.


	(in thousands)
	June 30,			Changes in			(Costs Incurred)			September 30,
Estimated Net Costs to be Incurred During Liquidation	2012			Estimates			Income Received			2012
Estimated net costs to be incurred during liquidation
Compensation for remaining employees and directors	$	292		$	(9	)	$	(33	)	$	250
Compliance and other office costs		427			44			(117	)		354
Insurance Fees		421			10			(220	)		211
Professional Fees		1,090			444			(516	)		1,018
Income Taxes		150			—			—			150

Subtotal		2,380			489			(886	)		1,983
Less: interest income on cash and investment balances		(135	)		215			(193	)		(113	)

Total net costs to be incurred during liquidation	$	2,245		$	704		$	(1,079	)	$	1,870

During the three months ended September 30, 2012, $0.886 million of costs were incurred. The estimate of costs to be incurred during liquidation was increased by $0.489 million. This is the net effect of a $0.009 million decrease in compensation for remaining employees and directors; $0.044 million increase in compliance and other office costs; $0.010 million increase in insurance fees, and $0.444 million increase in professional fees primarily due to increased legal fees associated with the DOJ matter. The Company also incurred substantial legal fees in the third quarter in its efforts to resolve the DOJ/SEC inquiry, as well as in resolving a threatened lawsuit by a former employee of MECAR USA. As of September 30, 2012, the estimate of remaining costs to be incurred through 2013 is $1.983 million. Future investment income is estimated to be $0.113 million resulting in estimated total net costs to be incurred during liquidation of $1.870 million as of September 30, 2012.

The Company recorded a net loss of $0.193 million on short-term investments (comprised of interest income of $0.176 million and a realized loss of $0.369 million) during the three-month period ended September 30, 2012. The realized loss is attributable to the early redemption of approximately $8.100 million of municipal bonds during the quarter as compared to a cumulative net redemption of approximately $3.500 million for the six-month period ended June 30, 2012. The recorded loss of $0.193 million in investment income is offset by an unrealized gain of $0.214 million, resulting in a net gain of $0.021 on investments during the quarter.

Changes in Net Assets in Liquidation During the Nine Months Ended September 30, 2012

The table below summarizes the changes in net assets during the nine months ended September 30, 2012:


	Nine Months
	Ended
	September 30, 2012
Net assets on liquidation basis at beginning of period	$	44,333

Changes in fair value of net assets in liquidation
Adjust net assets to fair value		212
Increase in estimated net costs to be incurred during liquidation		(980	)
Adjust estimated income to be earned during liquidation		(237	)

Net assets on liquidation basis at end of period	$	43,328

The change in net assets in liquidation during the nine months ended September 30, 2012 is the net effect of valuation changes to the net assets, adjustment to estimated income to be earned on investments, and changes in the estimated net costs to be incurred during liquidation. Adjusting net assets to fair market value increased the net assets in liquidation by $0.212 million. The estimated net costs to be incurred during liquidation increased by $0.980 million. Estimated income to be earned during liquidation decreased by $0.237 million. The net effect was a decrease of $1.005 million in net assets in liquidation for the nine months ended September 30, 2012.

The table below reconciles the changes during the nine months ended September 30, 2012, in the estimated net costs to be incurred during liquidation. Actual costs, net of interest income received, incurred during the nine months ended September 30, 2012 reduce the remaining estimated net costs to be incurred during liquidation. An update to the estimate of remaining net costs to be incurred during liquidation is reflected in the changes in estimates column.


	(in thousands)
	December 31,			Changes in		(Costs Incurred)			September 30,
Estimated Net Costs to be Incurred During Liquidation	2011			Estimates		Income Received			2012
Estimated net costs to be incurred during liquidation
Compensation for remaining employees and directors	$	297		$	92	$	(139	)	$	250
Compliance and other office costs		564			50		(260	)		354
Insurance Fees		321			354		(464	)		211
Professional Fees		1,556			484		(1,022	)		1,018
Income Taxes		150			—		—			150

Subtotal		2,888			980		(1,885	)		1,983
Less: interest income on cash and investment balances		(200	)		237		(150	)		(113	)

Total net costs to be incurred during liquidation	$	2,688		$	1,217	$	(2,035	)	$	1,870

As of December 31, 2011, the estimated total net costs to be incurred during liquidation was $2.688 million, consisting of $2.888 million estimated costs offset by $0.200 million of investment income. During the nine months ended September 30,

2012, $1.885 million of costs were incurred. The estimate of costs to be incurred during liquidation was increased by $0.980 million. This is the net effect of a $0.092 million increase in compensation for remaining employees and directors principally due to a final 401 (k) plan contribution and a potential final pay-out to Mecar employees; $0.050 million increase in compliance and other office costs; $0.354 million increase in insurance fees, primarily due to the amortization of prepaid insurance and write-off of the prepaid balance and an increase in the estimate for D&O insurance; and $0.484 million increase in professional fees primarily due to increased legal fees associated with the DOJ matter and resolution of a threatened lawsuit by a former employee of MECAR USA. As of September 30, 2012, the estimate of remaining costs to be incurred through 2013 is $1.983 million. Future investment income is estimated to be $0.113 million resulting in estimated total net costs to be incurred during liquidation of $1.870 million as of September 30, 2012.

The Company recorded a net loss of $0.150 million on short-term investments (comprised of interest income of $0.642 million and a realized loss of $0.792 million) during the nine-month period ended September 30, 2012. The realized loss is attributable to the early redemption of approximately $11.600 million of municipal bonds. The recorded loss of $0.150 million in investment income is offset by an unrealized gain of $0.212 million, resulting in a net gain on investments of $0.062 million during the nine-month period ending on September 30, 2012.

Critical Accounting Policies

The Company’s discussion and analysis of its financial condition, results of operations and cash flows are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, sales, and expenses, and related disclosure of contingent assets and liabilities. The Company re-evaluates its estimates on an on-going basis. The Company’s estimates and judgments are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates or judgments under different assumptions or conditions.

The Company believes the following are its critical accounting policies which affect its more significant judgments and estimates used in the preparation of its unaudited condensed consolidated financial statements:

•

Estimates of the potential liability associated with litigation and government investigations

•

Estimates of expenses incurred and interest income received during liquidation. Under the liquidation basis of accounting, the Company accrues for the remaining costs to be incurred during liquidation, including compensation for remaining directors, consultants, insurance costs, costs to settle remaining leases, fees for professional service providers and miscellaneous other costs, partially offset by estimated future interest earnings. These estimates are undiscounted for present value and are based on the assumption that liquidation will occur no later than December 31, 2013.

•

Fair Value of financial instruments. The fair values for substantially all of our financial assets and financial liabilities are based on observable prices and inputs and are classified in level 1 of the hierarchy.

A complete discussion of these policies is contained in our Form 10-K filed on March 23, 2012 with the Securities and Exchange Commission for the year ended December 31, 2011. There were no significant changes to the critical accounting policies discussed in the Company’s Form 10-K filed for December 31, 2011.

Commitments and Contingencies

DOJ Subpoena

Leases

Indemnification provisions

The Company sold its SeaSpace, Titan, the VSK Group, GMS and NSM subsidiaries in separate transactions starting with the first transaction closing in 2007. In each transaction, the Company agreed to indemnify the purchaser for periods subsequent to closing for losses arising from breaches of representations, warranties and covenants. Indemnification periods varied based on the particular representation, warranty or covenant covered, the vast majority of which have all expired. As of September 30, 2011, the only remaining indemnification obligations relate to representations and warranties concerning taxes, environmental matters, breaches of title, breaches of authorization and fraud. For SeaSpace, Titan, the VSK Group, GMS and NSM, these indemnification provisions have been capped at $1.0 million, $0.950 million, $6.428 million (€5.0 million), $5.2 million and $0.863 million, respectively. At September 30, 2012, no amount has been accrued related to these indemnifications as a liability is not deemed probable.

On June 24, 2010, the Company signed a definitive purchase and sale agreement with Chemring Group PLC pursuant to which Chemring agreed to acquire substantially all of the assets of the Company for $59.560 million in cash and the assumption of certain liabilities. The purchase and sale agreement contains certain indemnification provisions pursuant to which the Company may be required to indemnify the buyer for a period subsequent to the completion of the sale for any and all losses directly or indirectly based upon, related to, arising out of or in connection with Mecar’s completed contracts, Mecar USA liabilities retained by the Company and any failure by the Company to satisfy all transaction related expenses. The Company’s indemnification liability is limited to, and capped at, the escrowed amount of $15 million plus the accumulated interest. The Company’s indemnification obligations expire upon the earlier of (i) June 30, 2015 and (ii) the Company’s entry into either a court or administrative order or a Chemring-approved settlement agreement, in either case, finally resolving the matters relating to the DOJ’s subpoena. In the absence of such final resolution, in certain circumstances, up to 50% of the escrowed funds may be released as early as June 24, 2013. At September 30, 2012, no amount has been accrued related to this indemnification as a liability is not deemed probable.

Future Reporting

The Company filed a Certificate of Dissolution with the State of Delaware on August 31, 2011 and the Company has closed its stock transfer books and instructed its stock transfer agent that no further stock transfers be recognized. Accordingly, the Company’s stock has ceased trading on the OTCQB Marketplace. The Company is required under Delaware law to maintain a quasi-corporate existence for a period of three years for the limited purpose of winding up its affairs and discharging or making provision for the discharge of its liabilities.

Promptly after the filing of the Certificate of Dissolution, the Company requested a no-action letter from the Securities and Exchange Commission to allow the Company to cease filing Forms 10-K and 10-Q. The Securities and Exchange Commission has rejected this request; accordingly, the Company will continue to file all required Forms 10-K and 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for a smaller reporting company.

ITEM 4. CONTROLS AND PROCEDURES

Overview

As a result of the sale of Mecar and Mecar USA and the adoption by the stockholders of the Plan of Dissolution, the Company terminated all employees. The Company’s Officers/Board of Directors continue to oversee and review the Company’s system of financial reporting.

Disclosure Controls and Procedures

Subject to the provisions set forth in the Overview section above, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by the report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective as of September 30, 2012.

Changes in Internal Control Over Financial Reporting

Subject to the provisions set forth in the Overview section above, there were no changes in the Company’s internal control over financial reporting during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

DOJ Subpoena

On January 19, 2010, the Company received a subpoena and communications from the U.S. Department of Justice (“DOJ”) requesting the Company produce documents relating to its dealings with foreign governments. The subpoena stated that it was issued in connection with an ongoing criminal investigation. On the same day, the Company also became aware through a press release issued by the DOJ that an employee of Mecar USA had been indicted by the DOJ for allegedly engaging in schemes to bribe foreign government officials to obtain and retain business. The unsealed indictment of this employee and the DOJ’s press release indicate that the alleged criminal conduct was on behalf of a Decatur, Georgia company which is unrelated to the Company or Mecar USA. Mecar USA’s employment agreement with the employee provided that the employee not actively engage in any other employment, occupation or consulting activity that conflicts with the interests of the Company. In light of the employee’s breach of his employment agreement, Mecar USA terminated his employment on January 20, 2010.

According to the DOJ’s press release, the former employee was arrested on January 19, 2010, along with twenty-one other individuals, after an undercover operation that targeted foreign bribery in the military, and small arms and ammunition industries. The indictments of the twenty-two individuals allege that the defendants conspired to violate the Foreign Corrupt Practices Act (“FCPA”), conspired to engage in money laundering and engaged in substantive violations of the FCPA.

Subsequently, the Company received notice from the DOJ that indicated that it would request additional documents and expand its review beyond matters relating to the indicted former employee of Mecar USA. The Company understood that the DOJ’s expanded review was in connection with an industry-wide review. The Company also received inquiries from the SEC regarding this matter. The SEC recently advised the Company that it will not pursue an enforcement action against the Company.

The Company is cooperating with the DOJ and complying with the DOJ’s subpoena. The Company’s ongoing compliance with these matters is being overseen by the Company’s Board of Directors. The Board of Directors is being assisted in these matters by independent outside counsel. The Company cannot predict the outcome of these matters or the impact, if any, that they may have on our plan to return the net proceeds of the Chemring sale to our stockholders.

Based on advice from our FCPA outside counsel, we have estimated that we may not be able to conclude the DOJ/SEC inquiries, complete the Delaware dissolution process and make final distribution to stockholders until 2013. As a result, our estimate of net costs to be incurred during liquidation includes our estimate of costs through December 31, 2013.

In February and March, 2012, the DOJ dismissed charges against all individuals indicted in the FCPA sting operation, including the former employee of MECAR USA. Since this time, the Company’s FCPA counsel has had several discussions with the DOJ and SEC regarding the agencies’ respective inquiries. Based upon these discussions, it appears likely that resolution of these inquiries will involve a payment by the Company to at least one of these government agencies in connection with at least one transaction involving the former employee of Mecar USA. At this point, the amount of this payment is undeterminable.

No distributions to stockholders are expected prior to resolution of the DOJ and SEC inquiries and completion of the Delaware dissolution process which includes notice to creditors and publication of the dissolution, followed by a petition to the Delaware courts.

Item 1A. Risk Factors

Not required for a smaller reporting company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

Item 6. Exhibits


Exhibit No.		Description of Exhibits

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following financial information from our Quarterly Report on Form 10-Q for the second quarter of 2012 filed with the SEC formatted in Extensible Business Reporting Language (XBRL):

(i)		Consolidated Statements of Net Assets as of September 30, 2012 and December 31, 2011 (liquidation basis)

(ii)		Consolidated Statement of Changes in Net Assets for the three and nine months ended September 30, 2012 (liquidation basis)

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company