-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GL48SxrBO8lChHPLNaRoNnctzZj4Tzl1T0VCWoEwvx91rOrA+w/gIeQc+mZs7R2D RDleDDgFSlUKnyNhwbJZ6w== 0000950168-99-000727.txt : 19990317 0000950168-99-000727.hdr.sgml : 19990317 ACCESSION NUMBER: 0000950168-99-000727 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIED RESEARCH CORP CENTRAL INDEX KEY: 0000003952 STANDARD INDUSTRIAL CLASSIFICATION: ORDNANCE & ACCESSORIES, (NO VEHICLES/GUIDED MISSILES) [3480] IRS NUMBER: 042281015 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11376 FILM NUMBER: 99566213 BUSINESS ADDRESS: STREET 1: 8000 TOWERS CRESCENT DR STREET 2: STE 750 CITY: VIENNA STATE: VA ZIP: 22182 BUSINESS PHONE: 7038475268 MAIL ADDRESS: STREET 1: 8000 TOWERS CRESCENT DRIVE STREET 2: STE 750 CITY: VIENNA STATE: VA ZIP: 22182 FORMER COMPANY: FORMER CONFORMED NAME: ALLIED RESEARCH ASSOCIATES INC DATE OF NAME CHANGE: 19880601 10-K 1 ALLIED RESEARCH CORPORATION 10-K 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, 1998 0-2545 ALLIED RESEARCH CORPORATION (Exact name of registrant as specified in its charter) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended Commission file number December 31, 1998 O-2545 ----------------- ------ ALLIED RESEARCH CORPORATION (Exact name of registrant as specified in its charter) Delaware - -------- 04-2281015 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8000 Towers Crescent Drive Suite 750 Vienna, Virginia 22182 - ---------------- ----- (Address of principal executive offices) (Zip Code) Allied's telephone number, including area code: (703) 847-5268 Securities registered pursuant to Section 12(b) of the Act: Title of Class Name of Exchange -------------- ---------------- Common Stock, American Stock Exchange $0.10 Par Value Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part II of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non-affiliates of the registrant as of February 2, 1999: Common Stock - Par Value $.10 $31,927,427 The number of shares of registrant's Common Stock outstanding as of February 2, 1999, was 4,754,210. Item 1. Business. General. Allied Research Corporation ("Allied" or the "Company") was incorporated in 1962 under the name Allied Research Associates, Inc. Allied changed its corporate name to Allied Research Corporation in 1988. Allied's 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 ammunition. MECAR designs, develops and manufactures a wide variety of ammunition and grenades in the medium caliber, artillery, anti-tank and anti-personnel categories. The following are the principal products produced and sold by MECAR: Mortar Ammunition. The 81mm family of mortar ammunition has recently been modernized to compete with the latest generation of this product line. Production quantities of this latest version have already been manufactured and delivered to MECAR customers. The 120mm family is a state of the art ammunition for standard field mortars and for the increased performance turreted AMS mortar. The current version of this ammunition 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. 3 90mm Weapon Systems for Light Armored Vehicles. MECAR has developed and produces complete families of ammunition that include APFSDS, HE, SMK and HESH rounds for the COCKERILL Mk II and III and ENGESA EC-90, and DEFA F1 guns. Over 2000 of these guns are standard equipment on light APCs in the Far East and South America alone. In the last 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. Tank Ammunition. MECAR produces the entire range of 105mm rounds of its own design and which perform to NATO requirements, for use in the US M68, UK L7 and French CN105F1 guns. These include the APFSDS, HEAT, HESH and SMK, with their corresponding training rounds. Additionally, it has produced under license the US Army M393A2 HEP-T and M724A1 TPDS-T rounds for the Belgian Army. MECAR has produced 100mm APFSDS rounds for friendly pro western clients in the Far East. Artillery Ammunition. MECAR has produced 155mm HE, SMK(WP) and ILLUMINATING rounds for various 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. 76mm L23 Ammunition. MECAR manufactures HE, HESH and HESH-PRAC ammunition for the L23 guns, in service with armored vehicles in several countries in Europe, South America, Africa and the Far East. Even though this is an established weapon, requirements for this ammunition are expected to continue for the next several years. Universal Bullet Trap Rifle Grenades. The universal bullet trap rifle grenade is designed to be light, effective, accurate and simple to use. It is fitted over the muzzle of any standard military rifle with a muzzle outer diameter of 22mm and fired from the shoulder in the normal manner. This method of firing a grenade is made possible by MECAR's development of the universal bullet trap ("BTU"). The BTU is a 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 4 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. BRI. BRI is an engineering and technical 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 5 components are purchased from other vendors. In May, 1995, the VSK Group acquired all of the outstanding stock of IDCS, S.A., which markets an upscale line of security services products principally in European markets. Geographic Areas and Industry Segments. See Note S 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 41%, 20% and 10% in 1998, 64%, 6% and 10% in 1997 and 48%, 10% and 19% in 1996 of Allied's revenues. During 1998, 1997 and 1996, Allied derived approximately 3%, 5% and 11%, respectively, of its annual revenue from U.S. Government agencies and contractors. The VSK Group accounted for approximately 15%, 12% and 17% of Allied's 1998, 1997 and 1996 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. 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. 6 MECAR has received from time-to-time foreign military sale contracts from the U.S. Government for the manufacture of ammunition for the benefit of a foreign government. 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. 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. 7 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 1998, 1997 and 1996, MECAR expended $811,240, $794,370 and $857,434, respectively, for research and development activities. MECAR designed most of the products which it currently manufactures. MECAR designs and develops most of its special tooling, fixtures and special explosive loading and testing systems. BRI conducts research and development under contract to both government and commercial clients. Generally, full-size prototypes are supplied where the research and development requirement calls for a working model or unit. The business of the VSK Group requires continuous investment in research and development to update and enhance the security systems. The VSK Group employs a staff of design engineers specialized in the field of both electronic hardware and software. During 1998, 1997 and 1996 the VSK Group expended $802,810, $694,026 and $888,885, 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. 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. 8 The VSK Group relies upon a number of selected subcontractors to supply the requisite electronic hardware for its security systems. To date, the VSK Group has found such subcontract materials to be readily available. Assembly of the central control panels (including all computer software) is performed internally by employees of the VSK Group. Backlog. As of December 31, 1998 and December 31, 1997, Allied had backlog orders believed to be firm, after giving effect to the percentage of completion method of accounting, of approximately $48.0 million and $92.8 million, respectively. The backlog of orders as of December 31, 1998 are expected to be filled in 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. 9 Personnel. As of December 31, 1998, Allied, MECAR, BRI and the VSK Group had 440 full and part-time employees as follows: ALLIED ------ Salaried employees 5 Part-time employees 1 MECAR ----- Technical and salaried employees 46 Hourly workers 185 Technical consultants 3 BRI --- Salaried employees 59 Hourly employees 26 Part-time employees 9 VSK Group --------- Technical salaried employees 65 Hourly workers 41 The classification of employees noted above for MECAR and the VSK Group is in accordance with Belgian law. Patents. MECAR holds a number of patents in many countries and with varying expiration dates covering certain of its products. Allied does not believe there is a threat of a material loss of revenue with the expiration of any of these patents. Environmental Regulations. Allied does not anticipate that compliance with any laws or regulations relating to environmental protection will have a material effect on its capital expenditures, earnings or competitive position. Principal Customers. MECAR has historically received a large percentage of its revenue from two (2) agencies of a foreign government. BRI receives a substantial portion of its business from and/or through the U.S. Government. 10 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 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 1998, MECAR operated at an average of 85% of productive capacity of its facility, assuming the operation of 3 shifts. MECAR is currently operating at 85% of productive capacity. 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 and has recently extended the term of this lease through July 31, 2004. Assuming one full shift is maximum capacity, BRI is currently operating at approximately 85% of the productive capacity of its Arlington Heights facility. BRI also operates from leased facilities located in Troy, Michigan and East Moline, Illinois. The Troy operations are conducted from a leased facility consisting of approximately 17,500 square feet of office and engineering space. The Troy lease expires on January 31, 2000. The East Moline facility contains 1,200 square feet of office and engineering space and is leased on a month to month basis. Both facilities are used as bases to service Department of Defense customers in the vicinity. BRI is currently operating at approximately 90% of the productive capacities of each of its Troy and East Moline facilities. The VSK Group operates from owned facilities containing approximately 49,400 square feet. Such facilities are currently operating at approximately 85% of productive capacity. Capital expenditure programs for equipment planned in 1999 will require funding of approximately $2.5 million. Item 3. Legal Proceedings. 11 There are no material pending legal proceedings, other than ordinary routine litigation incidental to Allied's business, to which Allied or any of its subsidiaries is a party or to which any of their property is subject. Item 4. Submission of Matters to a Vote of Security Holders. There were no matters submitted to a vote of security holders of Allied during the fourth quarter of 1998. PART II Item 5. Market for Stock and Related Security Holder Matters. Market Information. Allied's Common Stock has been listed for trading on the American Stock Exchange ("AMEX") since September 15, 1992. Its AMEX trading symbol is ALR. Its media listing is under the symbol Allied Research. The table below shows the high and low sales prices of Allied's Common Stock during 1998 and 1997 (as reported by AMEX): 1998 High Low ---- ---- --- 1st Quarter $13-3/16 $ 10 2nd Quarter 13-1/16 11-1/4 3rd Quarter 12-1/4 6-3/8 4th Quarter 8-5/8 6 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 Stockholders. There were approximately 1,525 holders of record of the Common Stock of Allied as of February 18, 1999. Dividends. Allied paid a 5% stock dividend on November 6, 1992 to holders of record of its Common Stock on October 15, 1992. Cash was paid in lieu of the issuance of fractional shares. There have been no dividends declared or paid by Allied in 1993-1998. The banking agreements of MECAR restrict the ability of such subsidiary to transfer funds to 12 Allied as described in Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 6. Selected Financial Data. The following selected financial data relates to Allied's consolidated financial position and results of operations for 1998, 1997, 1996, 1995 and 1994:
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (000's omitted except per share amounts) Revenues $143,535 $134,484 $103,660 $65,769 $ 69,847 Net earnings (loss) 9,066 8,565 4,805 (2,013) (10,941) Earnings (loss) per share: Basic 1.92 1.88 1.08 (.46) (2.49) Diluted 1.90 1.85 1.08 (.46) (2.49) Total assets 113,076 99,501 91,948 94,253 107,386 Long-term debt obligations and redeemable preferred stock 10,281 11,162 7,443 28,435 14,108 Cash dividends declared per common share - - - - -
NOTE: All per share amounts have been restated consistent with the provision of FASB 128, which became effective in 1997. 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 operates in three (3) principal segments: the development and production of ammunitions and weapon systems ("product sales"); the manufacture, distribution and service of an integrated line of industrial security products ("security systems and services"); and engineering and technical support services ("engineering and 13 technical"). Product sales, security systems and services and engineering and technical are provided solely by MECAR, VSK Group and BRI, respectively. Accordingly, all references in this Item 7 to (i) MECAR shall refer to the product sales segment, (ii) VSK Group shall refer to the security systems and services segment and (iii) BRI shall refer to the engineering and technical segment. All references herein to Allied or the Company shall refer to Allied Research Corporation as a whole. Allied earned a net profit of $9.07 ($1.92 per share - basic) for 1998 compared to a net profit of $8.56 ($1.88 per share - basic) for 1997 and a net profit of $4.81 ($1.08 per share - basic) for 1996. Diluted earnings per share were $1.90, $1.85 and $1.08 in 1998, 1997 and 1996, respectively. In each of 1998, 1997 and 1996, each of Allied's operating subsidiaries earned a profit. Forward-Looking Statements This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that are based on current expectations, estimates and projections about the Company and the industries in which it operates. In addition, other written or oral statements which constitute forward-looking statements may be made by or on behalf of the Company. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Future Factors include increasing competition by foreign and domestic competitors, including new entrants; substantial reliance on MECAR's principal customers to continue to acquire MECAR's products on a regular basis; the cyclical nature of the Company's military business; rapid technological developments and changes and the Company's ability to continue to introduce competitive new products and services on a timely, cost effective basis; the ability of the Company to successfully continue its transition from a pure defense firm to a firm with a substantial commercial component; the mix of products/services; the achievement of lower costs and expenses; domestic and foreign governmental fiscal affairs and public policy changes which may affect the level of purchases made by customers; changes in environmental and other domestic and foreign governmental regulations; continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support the Company's future business. The principal current Future Factor affecting MECAR's business is the continuing impact of depressed oil prices on its principal customers. These 14 are representative of the Future Factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general domestic and international economic conditions including interest rate and currency exchange rate fluctuations and other Future Factors. Trends In Operations Allied had one of its most profitable years in 1998. MECAR turned in another solid performance in 1998. It contributed approximately 78% of Allied's 1998 revenues. While the vast majority of such revenues resulted from products supplied to MECAR's principal customers, MECAR received a modest contract award ($4.0) from a new customer in 1998 which could lead to substantial follow-on awards. MECAR has also negotiated the terms of a contract with another new customer, however this contract has not yet been awarded. MECAR's performance slowed in the fourth quarter of 1998 as a result of the lack of current orders from MECAR's principal customers. The last substantial contract received by MECAR from its principal customers was received in March, 1998. Allied believes that depressed oil prices, which adversely impact the purchasing power of such customers, is the principal reason for the delay in receipt of orders from such customers. Notwithstanding the continued depressed state of oil prices, MECAR has been in active negotiations with the principal customers for a new contract. MECAR anticipates an award of this contract in the second quarter of 1999, however there can be no assurance as to the receipt of such an award. Allied is optimistic that continued orders will be placed by such principal customers. In addition to follow-on orders for ammunition for various weapons systems currently owned by such customers, these customers are in the process of acquiring two new weapons systems via the Foreign Military Sales program ("FMS"). MECAR has received and completed an initial contract for ammunition for one of these systems. This ammunition is in the process of being tested by the U.S. Government and MECAR is in negotiations with the U.S. Government for a follow-on contract for additional rounds of such ammunition. MECAR has engaged in preliminary discussions with respect to an initial order for ammunition for the second new weapons system. It is currently anticipated that MECAR will receive a contract for such an initial order during 1999 and anticipates receipt of substantial ammunition orders over a several year period following successful completion of testing of the ammunition supplied for these new weapons systems. Given the several-month delay in the recognition of revenue from the time of receipt of a contract (due to the ramp-up time and the delay in 15 receipt of raw materials following the placement of orders therefor), the Company anticipates a substantial slow-down in MECAR's revenue beginning at the end of the first quarter of 1999. If substantial contracts are received in the near future, the reduced contribution by MECAR may be limited to the next few quarters. Further, MECAR utilized all of its tax-loss carry forwards in 1998 and therefore will be subject to Belgian tax on any 1999 earnings. The VSK Group had a record year in 1998. It contributed approximately $21.27 in revenues and $2.54 in profits. Thus, the VSK Group contributed approximately 28% of Allied's profits on only 14.8% of Allied's revenues. While all lines of business increased in 1998, the VSK Group's 1998 results were enhanced by a $4.2 project for an integrated security system installed in a large hotel complex outside of the VSK Group's traditional service territory. This project is scheduled for completion in the first quarter of 1999. Allied expects the VSK Group to provide another excellent year in 1999, although it may not reach 1998 levels. In addition to the one-time hotel project, the VSK Group expects a temporary downturn in its bank business in 1998. One of its principal bank customers is in the process of merging with another bank and has advised the VSK Group that it will discontinue the installation of further security systems until the merged entity determines which bank branches it will continue to operate and which will be closed. Notwithstanding these matters, the VSK Group has a substantial backlog of orders and good prospects for additional work. In 1998, the VSK Group established dealer relationships in the United Kingdom and in Germany, two of the fastest growing European markets for security services and products. The VSK Group expects to continue to expand into these markets. In addition, Allied and the VSK Group are actively seeking to grow the VSK Group by acquisition. An active acquisition search is in process. The internal expansion of the VSK Group's business and its growth by acquisition are being pursued to further increase Allied's non-defense business with the twin goals of having (i) a larger commercial business base to reduce the volatility of Allied's defense business and (ii) a sufficient commercial component of revenues and profits to cause the investment community to cease valuing Allied stock solely as a defense company. BRI's profitability was based in large part on revenues from a large contract for the benefit of a foreign government. This contract is scheduled for completion in mid-1999. In 1997, BRI entered into several teaming arrangements with U.S.-based firms to pursue both domestic and international business. In 1998, BRI began to receive certain 16 contract awards from such arrangements. 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 1999 with a consolidated backlog of approximately $48.0 compared with a consolidated backlog at the beginning of 1998 of $92.8. MECAR began 1999 with a backlog of approximately $22.0 compared with a 1998 beginning backlog of $65.8. VSK began 1999 with a backlog of approximately $15.0 compared with a 1998 beginning backlog of approximately $12.7. BRI's beginning backlog in 1999 was $11.0 compared with a 1998 beginning backlog of $14.4. 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 of its commercial business. Trends In Liquidity And Capital Resources Allied's liquidity has improved in the last few years as a result of its profitable operations. No liquidity problems are forecast for 1999. 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. Year 2000 Issues Allied is addressing a broad range of issues associated with the programming code in existing computer systems as the Year 2000 approaches. The Year 2000 problem is complex, as many computer systems will be affected in some way by the rollover of the two-digit year value to 00. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Year 2000 issue creates risks for Allied from unforeseen problems in its products or its own computer and embedded systems and from third parties with whom Allied deals on financial and other transactions worldwide. Failure of Allied's and/or third parties' computer systems could have a material impact on Allied's ability to conduct its business. Allied has commenced a phased program to inventory, assess, remediate, test, implement and develop contingency plans for all mission-critical applications and products potentially affected by the Year 2000 issue (the "Y2K Program"). To accelerate overall completion, activities in each phase are often concurrent rather than serial, but all phases, except developing contingency plans, are expected to be completed by mid-1999. Allied's current estimate of the aggregate costs to be incurred for the Y2K Program is less than $.25, which is expected to be funded from operating cash flows. If Allied encounters significant unforeseen Year 2000 problems, either in its products or 17 internal business systems or in relation to third party vendors, manufacturers or suppliers, actual costs could materially exceed this estimate. Allied has substantially completed its inventory of Year 2000 impacted software and is assessing its centralized computer and embedded systems to identify any potential Year 2000 issues. Allied has a number of projects underway to replace or upgrade hardware and software that are known to be Year 2000 non-compliant. Allied currently expects to substantially complete remediation, validation, and implementation of its internal systems by mid-1999. However, if implementation of replacement or upgraded systems or software is delayed, or if significant new non-compliance issues are identified, Allied's results of operations or financial condition could be materially adversely affected. Allied is also in the process of contacting its critical suppliers, manufacturers, distributors and other vendors to determine that the operations, products and services that they provide to Allied are Year 2000 compliant. Where practicable, Allied will attempt to mitigate its risks with respect to the failure of third parties to be Year 2000 ready, including developing contingency plans. However, such failures, including failures of any contingency plan, remain a possibility and could have a materially adverse impact on Allied's results of operations or financial condition. Allied is in the process of developing contingency plans to address situations that may result if Allied is unable to achieve Year 2000 readiness of its critical operations, including operations under the control of third parties. Additionally, the most reasonably likely "worst case" scenario has not yet been clearly identified. Completion of such contingency plans is in progress and is expected to be completed by September 1999. There can be no assurance that the Company will be able to develop contingency plans that will adequately address all Year 2000 issues that may arise. Liquidity. Allied's liquidity increased in 1998, principally as a result of profitable operations at each operating segment. Working capital, which includes restricted cash, was approximately $35.27 at December 31, 1998, which is an increase of $10.15 from the December 31, 1997 level. Allied's current working capital is required for operations and to support credit facility agreements. Cash and equivalents at December 31, 1998 increased over year-end 1997 levels largely due to the profitable operations of the operating segments. Restricted cash increased over year-end 1997 amounts due to an increased level of work-in-process at MECAR. Accounts receivable at December 31, 1998 decreased from December 31, 1997 by $11.2 due to unusually large shipments of products at the end of 1997. Costs and accrued earnings on uncompleted contracts increased by $13.08 over 1997 as a result of larger amounts of work in progress at the end of 1998 which is anticipated to be completed 18 and shipped in the first quarter of 1999. Inventories decreased by $3.54 from 1997 levels due to the increase in contracts in progress and the reduced backlog. Prepaid expenses increased by $6.0 over 1997 levels corresponding to the increase in contracts in progress which are scheduled to be shipped in the first quarter of 1999. Current liabilities increased slightly from 1997 levels. During 1998, 1997 and 1996, 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. The current credit facility was revised in 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, 1998 by base cash deposits of $13.2 and a pledge on MECAR's assets of $32. 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 $7.2. MECAR's obligations under the bank agreement are also supported by a guarantee provided by Allied. MECAR has a mortgage loan with a foreign bank which had an outstanding balance of approximately $3.56 at December 31, 1998. Principal and interest payments on the mortgage loan extend through January, 2004. The VSK Group operated throughout 1998 primarily from cash generated from operations. The VSK Group is obligated on several mortgages and other long-term obligations with December 31, 1998 balances aggregating $1.2. It is also obligated on letters of credit required by a contract with a customer. 19 On January 1, 1999, eleven of the fifteen member countries of the European Union adopted the euro as their common legal currency and established fixed conversion rates between their existing sovereign currencies and the euro. The euro trades on currency exchanges and is available for non-cash transactions. Based on a preliminary assessment, Allied does not believe the conversion will have a material impact on the competitiveness of its products or increase the likelihood of contract cancellations. Further, Allied expects that modifications to comply with euro requirements have been and will continue to be made in its business operations and systems on a timely basis and does not believe that the cost of such modifications will have a material adverse impact on Allied's results of operations or financial condition. There can be no assurance, however, that Allied will be able to continue to complete such modifications on a timely basis; any failure to do so could have a material adverse effect on Allied's results of operations or financial condition. In addition, Allied faces risks to the extent that suppliers, manufacturers, distributors and other vendors upon whom Allied relies and their suppliers are unable to make appropriate modifications to support euro transactions. The inability of such third parties to support euro transactions could have a material adverse effect on Allied's results of operations or financial condition. BRI operated throughout 1998 from cash generated from operations supplemented by a credit facility. The credit facility consisted of a $3.5 line of credit, which was increased to $4.75 in the latter portion of 1998 as well as a cash collateralized letter of credit facility. At December 31, 1998, the line of credit had an outstanding balance of $3.42. Allied has guaranteed BRI's obligations under the above-described credit facility. Principally in order to finance BRI's principal contract for the benefit of a foreign government, Allied advanced approximately $1.4 million to BRI in the third and fourth quarters of 1998 (the "Inter-Company Loan"). In early 1999, BRI obtained a new credit facility consisting of a $6.0 line of credit (which permits advances based upon BRI eligible accounts receivable and unbilled work-in-process). BRI has used a portion of its line of credit to repay a substantial portion of the Inter-Company Loan. In September 1998, Allied's Board of Directors authorized the purchase of up to 200,000 shares of Allied's common stock. To date, the Company has made very modest repurchases under the share repurchase program. The timing and size of any future stock repurchases are subject to market conditions, stock prices Allied's cash position and other cash requirements going forward. Capital Resources. Allied spent $2.4 in 1998 on capital equipment as compared with $1.3 in 1997 and $1.1 in 1996, respectively. The expenditures in 1998 were primarily for facility 20 upgrades and computer equipment. Management currently anticipates that it will spend approximately $2.5 on capital expenditures in 1999, principally for additional upgrades to the MECAR and VSK facilities and equipment. Results of Operations. Allied had revenues of $143.54 in 1998 as compared to $134.48 in 1997 and $103.66 in 1996, respectively. Allied earned a profit of $9.07 in 1998 compared to profits of $8.56 in 1997 and $4.81 in 1996. The following table sets forth, for the years ended December 31, 1998, 1997 and 1996, certain items from Allied's consolidated statements of operations expressed as a percentage of revenue: 1998 1997 1996 ---- ---- ---- Revenue 100.0% 100.0% 100.0% Costs and Expenses Cost of sales 81.3 80.9 75.9 Selling and administrative 8.8 10.7 15.1 Research and development 1.1 1.1 1.7 Restructuring charge --- .7 --- ---- ----- ---- Operating income 8.8 6.6 7.3 Other income (deductions) Interest income 1.0 .8 1.9 Interest expense (1.2) (1.4) (3.3) Other - net .6 1.1 (0.4) ---- ----- ---- Earnings before income taxes 8.1 7.1 5.5 Income taxes 1.7 .7 0.9 Net earnings 6.3 6.4 4.6 ---- ----- ---- The following discussion of the components of the results of operations applies to Allied as a whole unless reference is made to a particular segment. Revenues Allied revenues for 1998 increased $9.05, or 6.73%, as compared to 1997. Revenues for 1997 increased $30.8, or 29.7%, as compared to 1996. 21 Revenues By Segment ($ Millions)
1998 1997 1996 ---- ---- ---- % of % of % of Amount Total Amount Total Amount Total ------ ----- ------ ----- ------ ----- MECAR $111.8 77.9% $107.5 80.0% $74.1 71.5% VSK 21.3 14.8% 16.4 12.2% 17.9 17.3% BRI 10.5 7.2% 10.5 7.8% 11.6 11.2%
Revenues at MECAR for 1998 increased by approximately 4.0% from the prior year and such revenues increased in 1997 by approximately 45% (net of currency fluctuations) over the prior year due to increased business from MECAR's traditional customer base. In 1998, revenues at the VSK Group increased approximately 29.9% over 1997 levels primarily due to several large projects including the previously-described hotel complex project. 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 for 1998 decreased by less than 1% from 1997. Revenues in 1997 decreased 9.3% from 1996 levels. Cost of Sales Cost of sales as a percentage of sales for 1998 was approximately 81% compared with 81% and 76% for each of 1997 and 1996, respectively. Selling and Administrative Expenses Selling and general administrative expenses in 1998 were $1.8 (or 12.5%) less than those incurred in 1997 as a result of continued cost cutting efforts. Selling and general administrative expenses in 1997 were $1.2 (or 7.8%) less than those incurred in 1996. 22 Research and Development Research and development costs incurred in 1998 increased by $0.13 (or 8.4%) over 1997 levels. Research and development costs incurred in 1997 decreased by $0.26 (or 14.8%) under 1996 levels due to lower expenditures at MECAR. Restructuring Costs Restructuring costs incurred by MECAR, principally comprised of workforce reductions, of approximately $.98 were incurred in 1997. Such charges were incurred to reduce employment levels at MECAR. Interest Income Interest income increased in 1998 by $0.47, or 45.4%, over 1997 levels principally due to increased amounts of cash invested. Interest income decreased in 1997 by $.89, or 46% below 1996 levels principally due to reduced cash levels principally resulting from repayment of a term loan. Interest Expense Interest expense decreased in 1998 by $0.07, or 4%, under the amount incurred in 1997 as a result of lesser borrowings during the year. 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. Other - Net Other-net results were a $0.81 loss in 1998 and a gain of $1.52 in 1997, largely due to net currency losses and gains, respectively, at MECAR. 23 Pre-Tax Profit Pre-Tax Profit By Segment ($ Million) 1998 1997 1996 ---- ---- ---- % of % of % of Amount Total Amount Total Amount Total MECAR $6.9 57% $8.6 76% $3.7 66% VSK 4.5 37% 2.0 18% 1.4 25% BRI 0.7 6% 0.7 6% 0.5 9% MECAR's 1998 pre-tax profit decreased by 20% from 1997 levels notwithstanding that 1997 pre-tax profits were adversely affected by approximately $.98 in workforce reduction restructuring costs. MECAR'S results for 1997 were enhanced by a substantial systems intergration contract. Such contracts typically provide higher profit margins than traditional contracts. MECAR'S 1997 pre-tax profit increased by 132% over 1996 pre-tax profits due to a substantial increase of revenue in 1997 from MECAR's traditional customer base, including the systems integration contract. The VSK Group's 1998 pre-tax profit increased by 125% from its 1997 pre-tax profit principally due to a substantial increase in VSK Group revenue in 1998. The 1997 pre-tax profit of the VSK Group increased by 43% over the 1996 pre-tax profit as a result of higher profit margins and the implementation of cost containment measures at the VSK Group in 1997. BRI's pre-tax profit remained substantially unchanged throughout the 1996-1998 period. Income Taxes The 1998 effective tax rate was 21.7%, primarily due to the utilization of tax loss carryforwards at MECAR and the reduction of $0.9 in deferred and accrued tax obligations in the United Kingdom that were favorably resolved in 1998. The foreign operating loss carryforwards at MECAR were fully utilized in 1998 and some 1998 MECAR earnings became subject to Belgian tax at the 40.7% statutory rate. The 1997 effective tax rate was 10.1% primarily due to the utilization of tax loss carryforwards at MECAR. 24 Net Earnings The Company had a $9.07 profit in 1998 compared with a $8.56 profit in 1997. All segments earned a profit in 1998. The Company had a $8.56 profit in 1997 compared with a $4.81 profit in 1996. All segments earned a profit in 1997. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Interest Rate Sensitivity. Allied manages its debt and its available cash considering available investment opportunities and risks, tax consequences and overall financing strategies. At year-end 1998, Allied had approximately $3.6 million of fixed-rate indebtedness and approximately $5.6 million of variable-rate indebtedness. Allied has not entered into any interest rate swaps or other derivatives with respect to its indebtedness. Cash available for investment is typically invested in short term funds, which generally mature in 30 days or money-market funds. In general, such funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate. The carrying amounts approximate market value. It is the Company's practice to hold these investments to maturity. Assuming year-end 1998 variable rate debt and cash available for investment, a one percent change in interest rates would impact net interest income by less than $280,000. Exchange Rate Sensitivity. Allied conducts business in several foreign countries and approximately 93%, 92% and 89%, of the Company's revenue for the years ended December 31, 1998, 1997 and 1996, respectively, was derived from Allied's operations outside the United States. Accordingly, exposure exists to potentially adverse movement in foreign currency rates. Allied uses foreign exchange forward contracts to hedge the risk of change in foreign currency exchange rates associated with some, but not all, of its contracts in which the expenses for providing services are incurred in currency other than the functional currency of Allied's foreign subsidiaries or payments on contracts are made by the customer in another currency. The objective of these contracts is to hedge fixed obligations to reduce the effect of foreign currency exchange rate fluctuations on Allied's foreign subsidiaries' operating results. 25 Additionally, Allied's consolidated financial statements are denominated in U.S. dollars and, accordingly, changes in the exchange rates between the Allied subsidiaries' local currency and the U.S. dollar will affect the translation of such subsidiaries' financial results into U.S. dollars for purposes of reporting the consolidated financial results. Allied does not hedge these matters because cash-flows from international operations are generally re-invested locally. It is estimated that a 10% change in foreign exchange rates would impact reported operating profit by less than $1.2 million. Allied does not use derivative financial instruments for speculative trading purposes, nor does Allied hedge its foreign currency exposure in a manner that entirely offsets the effects of changes in foreign exchange rates. Allied regularly reviews its hedging program and may as part of this review determine at any time to change its hedging program. Item 8. Financial Statements and Supplementary Data. The financial statements required by this item are set forth following the signature pages hereof. See Note T to Allied's consolidated financial statements for supplementary financial data required by this item. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. There were no disagreements on any matter of accounting principles, financial statement disclosure or auditing scope or procedure to be reported under this item. PART III Item 10. Directors and Executive Officers of Allied. Directors. The following are the directors of Allied: J. R. Sculley, age 58, 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, 26 prior thereto, was Assistant Secretary of the Army (Research, Development and Acquisition). Clifford C. Christ, age 51, 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 60, 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 75, became a director of Allied in early 1996. Throughout the last five years, Mr. Hebel has been a private investor. Harry H. Warner, age 63, 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, Pulaski Furniture Corporation and Virginia Management Investment Corporation. Executive Officers. The following are the executive officers of Allied: J. R. Sculley, age 58, 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 58, was elected president and chief operating officer in July 1998, and has served as vice president of Allied since January, 1995 and as Vice President of Services since February, 1993. Previously, he served as director of business development of Grumman Corporation, a defense company. Mr. Yarborough also serves as a director of BRI, Limited and the VSK Group. 27 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, 1998, 1997 and 1996, by the chief executive officer of Allied and by other executive officers of Allied whose total annual salary and bonus exceeds $100,000: 28 SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION ------------------- ---------------------- Awards Payouts ------ ------- Other All Name Annual Restricted Securities Other and Compen- Stock Underlying LTIP Compen Principal sation Award(s) Options/ Payouts sation Position Year Salary($) Bonus($)1 ($) ($) SARs (#) ($) ($) - -------- ---- --------- --------- --- --- -------- --- --- J.R. 1998 $275,000 $ 68,125 Sculley, 1997 $245,000 $120,000 Chief 1996 $245,000 $100,000 15,000 Executive Officer W. Glenn 1998 $197,000 $ 61,312 Yarborough, 1997 $183,000 $108,000 Jr., President and 1996 $168,000 $ 90,000 27,600 Chief Operating Officer
- -------------------- (1) Messrs. Sculley and Yarborough were awarded bonuses of (i) $68,125 and $61,312.50 respectively, for 1998 performance, payable in 1999 in stock and/or cash, (ii) $120,000 and $108,000, respectively, for 1997 performance, payable in 1998 in stock and/or cash and (iii) $100,000 and $90,000, respectively, for 1996 performance payable in 1997 in stock and/or cash. In each of February 1999, and March 1998 and 1997, Mr. Sculley was awarded 5,548 shares of stock and cash bonuses of $30,329, $53,424 and $44,420, respectively. Mr. Yarborough was awarded 9,000 shares of Company stock in each of February 1999, and March 1998 and 1997. The shares issued in February 1999 had a market value of $6.8125 per share on the date of grant; the shares issued in 1998 had a market value of $12.00 per share on the date of grant; and the shares issued in 1997 had a market value of $10.00 per share on the date of grant. 29 Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Value
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARS at Options/SARS at FY-End (#)1 FY-End ($)1 ----------- ----------- Shares Acquired Value Exercisable/ Exercisable/ Name on Exercise (#) Realized ($) Unexercisable Unexercisable - ---- --------------- ------------ ------------- ------------- J.R. Sculley 1,220 $ 8,159 42,500/22,400 27,813/0 W. Glenn Yarborough 4,200 $37,980 18,200/0 18,900/0
- ------------------- (1) Based on the Closing price of the Company's stock of $8.25 on December 31, 1998. 30 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 form 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 Allied, the director will forfeit any right to payment of benefits under the Directors Retirement Plan. The Directors Retirement Plan is administered by the Board of Directors. In 1991, the Board of Directors of Allied adopted the Allied Research Corporation Outside Directors Stock Option Plan (the "Directors Option Plan") by which Allied may grant options for up to 208,000 shares of Allied's Common Stock to its Outside Directors (which amount includes the 5% stock dividend paid on November 6, 1992). None of the options granted pursuant to the Directors Option Plan are intended to qualify as incentive stock options under Sections 422 through 424 of the Internal Revenue Code. The purpose of the Directors Option Plan is to advance the interest 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 an aggregate of 75,000 shares were granted under the Directors Option Plan in 1996 to Allied's Outside Directors; no such options were awarded in 1997 or 1998. 31 Employment Contract and Change-In-Control Arrangements J.R. Sculley and Allied entered into an Employment Agreement (the "Sculley Agreement") which expired and is currently being renegotiated by Allied's Compensation Committee. 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 $290,000 per calendar year. W. Glenn Yarborough, Jr. and Allied have entered into an Employment Agreement (the "Yarborough Agreement") which extends through July, 1999, 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 or $200,000 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 or acquire 10% or more of Allied's common stock, or (2) the commencement of a tender offer which would result in an offeror beneficially owning 30% or more of the outstanding common stock of Allied. All rights held by an acquiror or offeror expire on the announced acquisition date, and all rights expire at the close of business on June 20, 2001. Each right entitles a stockholder to acquire at a stated purchase price, 1/100 of a share of Allied's preferred stock which carries voting and dividend rights similar to one share of its common stock. Alternatively, a right holder may elect to purchase for 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. 32 Compensation Committee Interlocks and Insider Participation The Compensation Committee of Allied during the fiscal year ended December 31, 1998 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 February 2, 1999, 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: Amount and Title nature of of Name and address of beneficial Percent of class beneficial owner ownership class(1) - ----- ---------------- --------- ------ Common Fidelity Low-Priced 473,000 9.7% Stock Fund/Fidelity Owned directly Management & Research Company 82 Devonshire Street Boston, MA 02109 Common Lionheart Group, Inc. 319,388 6.6% 230 Park Avenue Owned directly Suite 516 New York, New York 10169 Common Dimensional Fund 278,000 5.7% Advisor, Inc.2 Owned directly 1299 Ocean Avenue 11th Floor Santa Monica, CA 90401 - ----------------- (1) Based upon 4,754,210 shares of common stock outstanding plus 116,150 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 278,000 shares, all of which shares are owned by advisory clients of Dimensional. Dimensional disclaims beneficial ownership of all such shares. 33 The following information is furnished as of February 2, 1999, 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 11,000 * Owned directly Common Earl P. Smith 6,110 * Owned directly Common Clifford C. Christ 26,000 * Owned directly Common Robert W. Hebel 8,625 * Owned directly Common J. R. Sculley 139,552 2.9% Owned directly Common W. Glenn Yarborough 73,762 1.5% Owned directly Common All executive officers 265,049 5.4% and directors as a Owned group (6) directly - ------------------ (1) Includes 18,200 shares which may be acquired by Mr. Yarborough and 53,700 shares which may be acquired by Mr. Sculley within 60 days pursuant to outstanding stock options. (2) Based upon 4,754,210 shares of common stock outstanding plus 116,150 shares which may be acquired within 60 days pursuant to outstanding stock options. 34 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 unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Allied of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities bing 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 1998 and 1997 Consolidated Statements of Earnings for F-6 the three years ended December 31, 1998 Consolidated Statements of Stockholders' F-7 Equity for the three years ended December 31, 1998 Consolidated Statements of Cash Flows F-8 for the three years ended December 31, 1998 Notes to Consolidated Financial Statements F-10 35 (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, 1998 and 1997 and for the three years ended December 31, 1998. Schedule I - Condensed F-31 Financial Information of Allied Schedule II - Valuation F-34 and Qualifying Accounts (a)(3) Exhibits: Exhibit 3 - Certificate of Incorporation, as amended (Incorporated by reference from Form 10-K filed in March, 1992); Amended and Restated By-Laws (Incorporated by reference from Form 8-K filed in November, 1992); and Amendment to Amended and Restated By-Laws adopted by the Board of Directors in September, 1996 (Incorporated by reference from Form 10-K filed in March, 1998); and Amendment to Amended and Restated By-Laws adopted by the Board of Directors in February, 1999 (Incorporated by reference from Form 8-K filed in February, 1999). Exhibit 10 - (a) 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 Exhibit 23 - Consent of Independent Certified E-4 Public Accountants 36 (b) Reports on Form 8-K: No reports on Form 8-K were filed during the Fourth quarter of 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. 37 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)......................................................... By (Signature and Title) /s/ J.R. Sculley ------------------------------------- J. R. Sculley, Chief Executive Officer Date: March 12, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Allied and in the capacities and on the dates indicated. By (Signature and Title) /s/ J.R. Sculley ------------------------------------- J. R. Sculley, Chief Financial Officer Date: March 12, 1999 * * * * * * * By (Signature and Title) /s/ J.R. Sculley ------------------------------------- J. R. Sculley, Director Date: March 12, 1999 * * * * * * * 38 By (Signature and Title) /s/ Clifford C. Christ ------------------------------------- Clifford C. Christ, Director Date: March 12, 1999 * * * * * * * By (Signature and Title) /s/ Earl P. Smith ------------------------------------- Earl P. Smith, Director Date: March 12, 1999 * * * * * * * By (Signature and Title) /s/ Robert W. Hebel ------------------------------------- Robert W. Hebel, Director Date: March 12, 1999 * * * * * * * By (Signature and Title) /s/ Harry H. Warner ------------------------------------- Harry H. Warner, Director Date: March 12, 1999 * * * * * * * 39 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FINANCIAL STATEMENTS AND SCHEDULES DECEMBER 31, 1998 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, 1998 and 1997 F-4 Consolidated Statements of Earnings for the three years ended December 31, 1998 F-6 Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1998 F-7 Consolidated Statements of Cash Flows for the three years ended December 31, 1998 F-8 Notes to Consolidated Financial Statements F-10 Schedules as of and for the three years ended December 31, 1998 Schedule I - Condensed Financial Information of Registrant F-31 Schedule II -Valuation and Qualifying Accounts F-34
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Allied Research Corporation We have audited the accompanying consolidated balance sheets of Allied Research Corporation and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. We have also audited Schedules I and II for each of the three years in the period ended December 31, 1998. In our opinion, these schedules present fairly, in all material respects, the information required to be set forth therein. /s/ Grant Thornton LLP - ------------------------ BALTIMORE, MARYLAND FEBRUARY 16, 1999 ALLIED RESEARCH CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, - -------------------------------------------------------------------------------- ASSETS 1998 1997 ------------ ----------- CURRENT ASSETS Cash and equivalents (note A) $10,234,653 $7,693,757 Restricted cash (notes C and F) 14,013,905 8,727,186 Accounts receivable (notes A, C and E) 29,445,873 40,649,726 Costs and accrued earnings on uncompleted contracts (note A) 20,886,607 7,804,344 Inventories (note D) 3,422,303 6,965,666 Prepaid expenses 10,093,885 4,094,190 ---------- --------- Total current assets 88,097,226 75,934,869 PROPERTY, PLANT AND EQUIPMENT - AT COST (notes A and H) Buildings and improvements 12,439,745 11,714,475 Machinery and equipment 31,775,830 28,778,285 Leasehold improvements 118,927 118,927 ------- ------- 44,334,502 40,611,687 Less accumulated depreciation 33,102,833 30,259,311 ---------- ---------- 11,231,669 10,352,376 Land 1,298,091 1,208,013 --------- --------- 12,529,760 11,560,389 OTHER ASSETS Restricted cash deposits (notes B and F) 6,670,289 6,414,419 Intangibles, less accumulated amortization of $3,136,339 and $2,783,724 in 1998 and 1997, respectively (note A) 4,960,537 5,028,390 Other 818,318 562,572 ------- ------- 12,449,144 12,005,381 ---------- ---------- $113,076,130 $99,500,639 =========== ========== 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
1998 1997 ------------- ----------- CURRENT LIABILITIES Notes payable (note E) $ 3,415,000 $1,720,000 Current maturities of long-term debt 1,324,221 1,280,736 Accounts payable 25,377,241 34,656,335 Accrued liabilities 5,043,742 4,747,291 Accrued losses on contracts (note G) 786,986 572,279 Customer deposits 16,135,013 6,993,756 Income taxes 748,795 847,563 ------- ------- Total current liabilities 52,830,998 50,817,960 LONG-TERM DEBT, less current maturities (note G) 4,431,282 5,311,564 ADVANCE PAYMENTS ON CONTRACTS (note F) 5,850,000 5,850,000 DEFERRED INCOME TAXES (notes A and P) - 626,660 CONTINGENCIES AND COMMITMENTS (notes I, J, L 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, 4,757,174 in 1998 and 4,608,221 in 1997 475,717 460,822 Capital in excess of par value 13,391,099 12,100,521 Retained earnings 35,111,909 26,046,271 Accumulated other comprehensive income (loss) 985,125 (1,713,159) ------- ---------- 49,963,850 36,894,455 ---------- ---------- $113,076,130 $99,500,639 ============ ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-5 ALLIED RESEARCH CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, - --------------------------------------------------------------------------------
1998 1997 1996 ------------ ------------- ------------ REVENUE (note M) $143,535,202 $134,483,750 $103,660,137 COST AND EXPENSES Cost of sales 116,642,893 108,775,629 78,658,573 Selling and administrative 12,621,055 14,422,923 15,647,951 Research and development 1,614,050 1,488,396 1,746,319 Restructuring costs (note Q) - 977,267 - ----------- ----------- ----------- 130,877,998 125,664,215 96,052,843 ----------- ----------- ---------- Operating income 12,657,204 8,819,535 7,607,294 OTHER INCOME (DEDUCTIONS) Interest income 1,503,138 1,033,599 1,921,864 Interest expense (1,772,284) (1,846,697) (3,451,066) Other - net (note O) (812,252) 1,519,505 (381,379) ----------- ----------- ----------- (1,081,398) 706,407 (1,910,581) ----------- ----------- ----------- Earnings before income taxes 11,575,806 9,525,942 5,696,713 INCOME TAXES (NOTES A AND P) 2,510,168 961,154 891,230 ----------- ----------- ----------- NET EARNINGS $ 9,065,638 $ 8,564,788 $ 4,805,483 ============ =========== =========== EARNINGS PER SHARE (NOTE R): BASIC $1.92 $1.88 $1.08 ==== ==== ==== DILUTED $1.90 $1.85 $1.08 ==== ==== ==== WEIGHTED AVERAGE NUMBER OF COMMON SHARES: BASIC 4,722,303 4,543,874 4,432,750 ========= ========= ========= DILUTED 4,765,207 4,626,602 4,438,489 ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-6 ALLIED RESEARCH CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 - --------------------------------------------------------------------------------
Common Accumulated Stock other comprehensive Preferred --------------------- Capital income (loss) stock no $.10 in excess Retained foreign currency par value Shares par value of par value earnings translation adjustment --------- ------ --------- ------------ -------- ---------------------- BALANCE AT DECEMBER 31, 1995 $ - 4,422,056 $442,206 $10,745,295 $12,676,000 $ 4,490,083 Common stock awards - 9,035 903 40,479 - - Employee stock purchase plan purchases - 12,001 1,200 60,529 - - Comprehensive income (loss) Net earnings for the year - - - - 4,805,483 - Currency translation adjustment - - - - - (1,815,537) Total comprehensive income - - - - - - ----- --------- ------- ---------- ---------- --------- BALANCE AT DECEMBER 31, 1996 - 4,443,092 444,309 10,846,303 17,481,483 2,674,546 Common stock awards - 52,746 5,275 516,185 - - Employee stock purchase plan purchases - 112,383 11,238 738,033 - - Comprehensive income (loss) Net earnings for the year - - - - 8,564,788 - Currency translation adjustment - - - - - (4,387,705) Total comprehensive income - - - - - - ----- --------- ------- ---------- ---------- --------- BALANCE AT DECEMBER 31, 1997 - 4,608,221 460,822 12,100,521 26,046,271 (1,713,159) Common stock awards - 57,448 5,745 683,631 - - Employee stock purchase plan purchases - 94,505 9,450 628,172 - - Retirement of common stock - (3,000) (300) (21,225) - - Comprehensive income Net earnings for the year - - - - 9,065,638 - Currency translation adjustment - - 2,698,284 Total comprehensive income - - - - - - ----- --------- ------- ---------- ---------- --------- BALANCE AT DECEMBER 31, 1998 $ - 4,757,174 $475,717 $13,391,099 $35,111,909 $ 985,125 ======= ========= ======== =========== =========== ============
Total stockholders' ------------- BALANCE AT DECEMBER 31, 1995 $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 - Total comprehensive income 2,989,946 ---------- BALANCE AT DECEMBER 31, 1996 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 - Total comprehensive income 4,177,083 ---------- BALANCE AT DECEMBER 31, 1997 36,894,455 Common stock awards 689,376 Employee stock purchase plan purchases 637,622 Retirement of common stock (21,525) Comprehensive income Net earnings for the year - Currency translation adjustment - Total comprehensive income 11,763,922 ---------- BALANCE AT DECEMBER 31, 1998 $49,963,850 ===========
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 1998 1997 1996 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings for the year $ 9,065,638 $ 8,564,788 $ 4,805,483 Adjustments to reconcile net earnings to net cash from operating activities Depreciation and amortization 2,531,777 2,645,995 3,093,534 Loss (gain) on sale of fixed assets - 2,874 (250) Deferred income taxes (1,513,793) 1,148,753 (590,419) Provision for estimated losses on contracts 200,938 (80,012) (4,036) Gain on sale of securities - (11,684) - Common stock awards 689,376 521,460 41,382 Changes in assets and liabilities Accounts receivable 12,859,926 (30,952,448) 7,874,015 Cost and accrued earnings on uncompleted contracts (11,922,369) 4,937,582 (9,142,340) Inventories 3,800,770 (803,742) (1,413,524) Prepaid expenses and other assets (5,728,946) (840,140) (2,798,161) Accounts payable and accrued liabilities (10,143,759) 18,611,804 2,015,448 Customer deposits 8,229,857 (2,458,936) 1,917,475 Income taxes (402,161) 110,020 441,852 ---------- --------- ----------- (1,398,384) (7,168,474) 1,434,976 ---------- --------- ----------- Net cash provided by operating activities 7,667,254 1,396,314 6,240,459 CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Capital expenditures (2,381,943) (1,342,320) (1,066,889) Restricted cash and restricted cash deposits (5,542,589) 4,986,079 (9,557,000) Proceeds from sale of fixed assets - - 250 ---------- --------- ----------- Net cash (used in) provided by investing activities (7,924,532) 3,643,759 (10,623,639) ========== ========= ===========
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, - --------------------------------------------------------------------------------
1998 1997 1996 ------------- ------------- ------------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings 74,050 (2,717,150) 2,908,978 Principal payments on long-term debt (1,183,821) (12,663,855) (19,009,160) Proceeds from issuance of long-term debt 1,653,127 1,908,449 11,762,981 Net decrease in long-term deposits - 5,850,000 18,492,000 Retirement of common stock (21,525) - - Proceeds from employee stock purchases 637,622 749,271 61,729 ------------ ------------- ------------ Net cash provided by (used in) financing activities 1,159,453 (6,873,285) 14,216,528 Effects of exchange rates on cash 1,638,721 (3,216,509) (2,275,015) ------------ ------------- ------------ Net increase (decrease) in cash and equivalents 2,540,896 (5,049,721) 7,558,333 CASH AND EQUIVALENTS AT BEGINNING OF YEAR 7,693,757 12,743,478 5,185,145 ------------ ------------- ------------ CASH AND EQUIVALENTS AT END OF YEAR $ 10,234,653 $ 7,693,757 $ 12,743,478 =========== ============ =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: - -------------------------------------------------- Cash paid during the year for Interest $ 1,352,548 $2,681,569 $ 3,088,529 Income taxes 4,429,842 2,140,896 1,245,678
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., (Mecar) a Belgian company, Barnes & Reinecke, Inc. (BRI), a Delaware corporation and Allied Research Corporation Limited (Limited), a United Kingdom company. Mecar includes its wholly owned Belgian subsidiaries, Sedachim, S.I., and the VSK Group of companies, comprised of Tele Technique Generale, I.D.C.S., N.V. and VSK Electronics N.V. and its wholly-owned subsidiary, Belgian Automation Units, N.V. 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 AND SEGMENTS The Companies operate primarily in the United States and Belgium. During 1998, seventy-eight percent of Allied's business activity was in the development and production of ammunitions and weapons systems in Belgium with sales to customers in Asia, the Middle East and Europe. Fifteen percent of the business activity is developing, manufacturing, distributing and servicing industrial security products in Belgium with industrial customers throughout Europe. Seven 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 segments and operations of each company follows. CORPORATE Allied provides management services to its wholly-owned subsidiaries. Allied has no direct domestic operating assets or business activity. Limited, which was formerly engaged in the marketing of military hardware, is inactive. PRODUCT SALES 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. ENGINEERING AND TECHNICAL 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 AND SEGMENTS - CONTINUED SECURITY SYSTEMS AND SERVICES The VSK Group develops, manufactures, distributes and services an integrated line of industrial security products, including devices such as building access control, intrusion detection, fire detection and alarm systems. FOREIGN CURRENCY TRANSLATION The assets and liabilities of Mecar, the VSK Group and Limited are translated into U.S. dollars at year-end exchange rates. Resulting translation gains and losses are accumulated in a separate component of stockholders' equity. Income and expense items are converted into U.S. dollars at average rates of exchange prevailing during the year. Foreign currency transaction gains and losses are credited or charged directly to operations. REVENUE AND COST RECOGNITION Revenues under fixed price contracts are recognized on the percentage-of-completion method measured by costs incurred to total estimated costs. 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. INVENTORIES Inventories which consist primarily of raw materials, are stated principally at the lower of cost or market. Cost is determined principally by the first-in, first-out method. F-11 ALLIED RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED PROPERTY, PLANT AND EQUIPMENT Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, primarily on a straight-line basis. Accelerated depreciation methods are used for tax purposes on certain assets. The estimated service lives used in determining depreciation are as follows: Buildings 20 - 30 years Machinery and equipment 3 - 10 years Maintenance and repairs are charged to expense as incurred; additions and betterments are capitalized. Upon retirement or sale, the cost and related accumulated depreciation of the disposed assets are removed and any resulting gain or loss is credited or charged to operations. INTANGIBLES Intangibles represent 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 measurement of the related foreign currency transactions are 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 at the time of grant. RESEARCH AND DEVELOPMENT Costs incurred in research and development activities are charged to operations as incurred. WARRANTIES The Company grants warranties on certain ammunition products for periods varying from one to five years. Provision is made for estimated losses arising from warranty claims as incurred. Provision is made for estimated warranty costs on the sale of security systems at the time of the sale. F-12 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 1997 and 1996 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 to the basis that is used internally for evaluating segment performance. The Company adopted SFAS 131 in the fiscal year beginning January 1, 1998 and has restated its prior year segment data to conform to this presentation. In December 1997, SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSION AND OTHER POSTRETIREMENT BENEFITS, was issued and is effective for the Company's 1998 fiscal year. The statement revises current disclosure requirements for employers' pensions and other retiree benefits. Implementation of this disclosure standard did not affect the Company's financial position or results of operations. In June 1998, SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued and is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The statement establishes accounting and reporting standards for derivative instruments, and for hedging activities. Implementation of this standard is not anticipated to have a material effect on the Company. F-13 ALLIED RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- NOTE B - 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 these financial guarantees also places restrictions on cash deposits. VSK has also pledged certain term deposits to secure outstanding bank guarantees. Restricted cash of $14,013,905 included in current assets and long-term restricted cash deposits of $6,670,289 included in other assets at December 31, 1998 are restricted or pledged as collateral for these agreements and other obligations. The corresponding amounts at December 31, 1997 were $8,727,186 and $6,414,419, respectively. NOTE C - ACCOUNTS RECEIVABLE Accounts receivable at December 31 are comprised as follows:
1998 1997 ----------- ---------- Receivables under U.S. Government contracts and subcontracts Amounts billed $ 729,746 $ 836,769 Unbilled amounts due upon completion of contracts, recoverable costs and accrued profits 526,288 3,457,570 ----------- ---------- 1,256,034 4,294,339 Receivables from foreign governments 21,077,888 31,322,856 Commercial and other receivables, less allowance for doubtful receivables of $234,361 in 1998 and $205,350 in 1997 7,111,951 5,032,531 ----------- ---------- $29,455,873 $40,649,726 =========== ===========
Unbilled receivables are comprised of progress billing holdbacks, terminated contracts receivable and other unbilled costs and fees. NOTE D - PREPAID EXPENSES Advance payments on contracts in process of approximately $8,271,481 in 1998 and $2,554,145 in 1997 are included in prepaid expenses. NOTE E - NOTES PAYABLE In November 1998, the Company modified its financing agreement with a domestic bank to provide financing for one of its significant contracts. The agreement provides for a $4,750,000 line-of-credit, of which $3,415,000 was outstanding at December 31, 1998. Borrowings under a similar line-of-credit were $1,720,000 at December 31, 1997. The current line-of-credit bears interest at the prime rate (7.75% at December 31, 1998) 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. F-14 ALLIED RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- NOTE E - NOTES PAYABLE - CONTINUED 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. NOTE F - CREDIT FACILITY The Company is obligated under various credit agreements (the Agreements) with its foreign banking pool and its domestic bank that provide credit facilities primarily for letters of credit, bank guarantees, performance bonds and similar instruments required for specific sales contracts. The Agreements provide for certain bank charges and fees as the line is used, plus fees of 2% of guarantees issued and annual fees of 1.25% - 1.35% of letters of credit and guarantees outstanding. As of December 31, 1998, guarantees and performance bonds of $34.1 million remain outstanding. Advances under the Agreements are secured by restricted cash of $14,013,905 and long-term restricted cash deposits of $6,670,289. Long-term restricted cash dposits include $5,850,000 received as an advance payment on contracts. Amounts outstanding are also collateralized by the letters of credit received under the contracts financed, and a pledge of approximately $32 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 $786,986 at December 31, 1998 ($572,279 at December 31, 1997) in connection with the completion of certain contracts in progress. These contracts are expected to be completed in 1999. NOTE H - LONG-TERM DEBT Long-term obligations as of December 31 consist of the following: 1998 1997 ----------- ----------- Mortgage loan agreements $4,710,535 $4,678,268 Notes payable bank 346,449 415,449 Other 698,519 1,498,583 ------- --------- 5,755,503 6,592,300 Less current maturities 1,324,221 1,280,736 --------- --------- $4,431,282 $5,311,564 ========== ========== F-15 ALLIED RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- NOTE H - LONG-TERM DEBT - CONTINUED MORTGAGE LOAN AGREEMENTS The Company entered into a mortgage loan agreement in 1986, which was amended in 1994, to partially finance the construction of Mecar's manufacturing and administration facilities in Belgium, which had a balance due of $3,557,998 at December 31, 1998. 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 $550,000 (except for the annual principal installment in the year 2000 which is $810,000). 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 $1,152,537 at December 31, 1998. 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 $346,449 at December 31, 1998 which bears interest at the prime rate (7.75% at December 31, 1998) 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. OTHER The Company is also obligated on various vehicle, equipment and other operating loans. The notes are generally secured by the assets acquired, bear interest at rates ranging from 4.4% to 10.75% and mature at various dates through 2000. Scheduled annual maturities of long-term obligations as of December 31, 1998 are as follows: Year Amount ---- ------ 1999 $1,324,221 2000 1,079,359 2001 1,077,596 2002 878,529 2003 594,446 Thereafter 801,352 NOTE I - BENEFIT PLANS In June, 1992, the Board of Directors adopted the Allied Research Corporation Outside Directors Retirement Plan. The plan provides retirement benefits at age 70 to any board member who retires as a director after a minimum of five years of service. A retired director is entitled to receive an amount equal to the monthly cash compensation received prior to retirement for a period equivalent to the time served as a board member. The Board may cease retirement payments for cause and modify or terminate the plan at any time. Currently, one former director is receiving retirement benefits under the plan. The net present value of benefits anticipated to be payable to former directors have been previously accrued and reflected as a charge to earnings. F-16 ALLIED RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- NOTE - I BENEFIT PLANS - CONTINUED 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, 1998. 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 1998, 1997 and 1996 were approximately $41,000, $47,000 and $43,000, respectively. The Company contributed additional amounts of $41,000 and $35,000 to the Plan's profit sharing fund, during 1998 and 1997, respectively. Under the terms of labor agreements at its Belgian subsidiaries, the Company contributes to certain governmental and labor organization employee benefit and retirement programs. 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. 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. The actual costs on these contracts may differ from the Company's estimate at completion and losses could exceed the provision of $786,986 established at December 31, 1998. The Company enters into foreign exchange contracts in the normal course of business primarily to hedge certain sales and purchase contracts. These contracts typically mature within twelve months, and forward exchange gains and losses are recognized upon final maturity or at the time the related foreign currency transaction is recognized. Contracts with a notional amount of $22,900,000 were outstanding as of December 31, 1998 ($20,000,000 at December 31, 1997). 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. F-17 ALLIED RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- NOTE J - CONTINGENCIES AND COMMITMENTS - CONTINUED 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, 1998. Year Amount ---- ------ 1999 $309,198 2000 111,567 2001 21,548 2002 4,705 Total rental expense charged to operations approximated $398,000, $400,000 and $421,000, for the years ended December 31, 1998, 1997 and 1996, 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 1997 workforce reduction as part of its restructuring charge (see note Q). After giving effect to the workforce reductions, current work loads, expected levels of future operations, severance policies and future severance costs, post employment benefits are not expected to be material to the Company's financial position at this time. 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:
1998 1997 -------------------------- ------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- Notes payable $3,415,000 $3,415,000 $1,720,000 $1,720,000 Long-term debt, including current maturities 5,755,503 5,755,503 6,592,300 6,592,300 Off-balance-sheet instruments Guarantees and letters of credit - 34,138,502 - 28,586,000 Foreign exchange contracts - 22,900,000 - 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. F-18 ALLIED RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED 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, 1998. NOTE L - CAPITAL STOCK During 1998, the Board of Directors authorized the repurchase of up to 200,000 shares of the Company's common stock. During 1998, 3,000 shares were reacquired and retired. At December 31, 1998, options to acquire 127,350 shares of the Company's 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 and shareholders approved and reserved 225,000 shares of common stock for awards to key employees of the Company and its subsidiaries in the form of stock options and stock awards. The Plan is administered by the Compensation Committee of the Board of Directors, and employees of the Company and its subsidiaries who are deemed to be key employees by the Committee are eligible for awards under the Plan. In 1998, 53,448 shares were awarded under the Plan. 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 1998, 1997 and 1996 - 7,085, 16,553 and 12,001 shares, respectively were issued under the plan and $9,314, $31,978 and $9,225 was charged to operations. 1988 INCENTIVE COMPENSATION PLAN The Company reserved 410,900 shares of common stock for key employees of the Company and its subsidiaries. The plan permitted grants through 1998, authorized the Board to grant incentive stock options, non-statutory stock options, stock appreciation rights, stock awards, restricted stock, performance stock rights and cash awards. Each type of grant places certain requirements and restrictions upon the Company and grantee. As of December 31, 1998, options for 19,100 shares at prices of $3.75 to $5.125 per share remain outstanding. 1984 INCENTIVE STOCK OPTION PLAN The Company reserved 315,000 shares of common stock for key employees of the Company and its subsidiaries. The plan, which permitted grants through March 31, 1994. In March 1996, the Company granted options to two officers and sixteen employees to purchase 217,500 shares at $8.25 per share. These options expire in 2004. At December 31, 1998, 100,750 of these options remained outstanding. F-19 ALLIED RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- NOTE L - CAPITAL STOCK - CONTINUED 1993 ALLIED RESEARCH CORPORATION OUTSIDE DIRECTORS COMPENSATION PLAN During 1993, the Board of Directors and shareholders approved a plan whereby each director is entitled to receive a cash payment of $1,000 per month and an annual grant of 1,000 shares of the Company's common stock while serving as a board member. The Company has reserved 52,400 shares of common stock for the plan which is subject to certain restrictions. The plan will terminate upon the earlier of issuance of all reserved common shares or December 31, 2003. In 1998, 1997 and 1996, the Company granted 4,000, 4,000 and 5,000 shares of common stock subject to the plan and charged $48,000, $34,000 and $26,250, respectively, to operations. 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. Prior to 1996, the Company granted options to purchase a total of 40,000 shares at $2.50 to $4.125 per share. All such 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, 1998, 67,500 of the options had been exercised. OTHER Stock grants for 48,746 and 3,035 shares of the Company's common stock were made to various employees during 1997 and 1996, respectively. These shares were issued outside of any existing plan and their value ($487,460 and $12,125, 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-20 ALLIED RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- NOTE L - CAPITAL STOCK - CONTINUED THE FOLLOWING TABLE SUMMARIZES OPTION ACTIVITY:
1998 ----------------------------- Weighted Average 1997 1996 Shares Exercise Price Shares Shares ------ -------------- ------ ------ Options outstanding at beginning of year 214,770 $7.08 313,100 227,500 Options exercised (87,420) 6.48 (95,830) - Options granted - - - 135,600 Options expired - - (2,500) (50,000) ------- ----- ------- ------- Options outstanding at end of year 127,350 $7.49 214,770 313,100 ======= ===== ======= ======= Option price range at end of year $3.75 $3.75 $3.75 to to to $8.25 $8.25 $8.25 Option price range for exercised shares $3.75 $3.75 - to to $8.25 $8.25 Options exercisable at end of year 94,750 115,300 112,800 Weighted-average fair value of options, granted during the year - - $2.06
THE FOLLOWING TABLE SUMMARIZES OPTIONS OUTSTANDING AT DECEMBER 31, 1998: Weighted Average Number Weighted Average Remaining Outstanding Exercise Prices Exercise Prices Contractual Life ----------- --------------- --------------- ---------------- 127,350 $3.75 to $8.25 $7.49 4.78 The fair value of each option grant is estimated on the date of grant, using the Black-Scholes options-pricing model with the following weighted-average assumptions used for grants in 1996: risk free interest rates that range from 5.64% to 5.94%; expected volatility rates that range from 28.91% to 57.98%, and expected lives of 1 to 5 years. The following table presents the pro forma decrease in income that would have been recorded had the fair values of options granted been recognized as compensation expense on a straight-line basis over the vesting period of the grant. 1998 1997 1996 ---------- ---------- ------- Pro forma Net earnings decrease $59,568 $80,067 $159,697 Earnings per share decrease Basic .01 .01 .03 Diluted .01 .02 .03 F-21 ALLIED RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- 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 1998, 1997 and 1996, the Company derived approximately 3%, 5% and 11%, respectively, of its revenue from U.S. Government agencies and contractors. Two agencies of a foreign government and another foreign government accounted for approximately 48% , 20% and 10% of revenue in 1998, 64%, 6% and 10% of revenue in 1997 and, 42%, 10%, and 19% of revenue in 1996. 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 generally receives guarantees and letters of credit from its foreign customers and performs ongoing credit evaluations of its other customers' financial condition. The Company's provision for doubtful accounts for 1998 and 1997 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, 1998 and 1997, backlog orders believed to be firm approximated $47.8 and $92.8 million. Amounts in foreign banks at December 31, 1998 and 1997 were approximately $22.4 million and $14.1 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 assets and operations in Belgium and sells its products on a worldwide basis. NOTE O - OTHER - NET Other income and expense included in the Company's consolidated statements of earnings is comprised as follows:
1998 1997 1996 ------------ ---------- ---------- Net currency transaction gains (losses) $(1,093,160) $1,328,195 $(836,254) Miscellaneous - net 280,908 191,310 454,875 ------------- ---------- ---------- $ (812,252) $1,519,505 $(381,379) =========== ========= ========
F-22 ALLIED RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- NOTE P - INCOME TAXES The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Earnings (loss) before income taxes is comprised as follows: 1998 1997 1996 ------------ ------------ ---------- Domestic $ 213,282 $ (809,173) $ 124,549 Foreign 11,362,524 10,335,115 5,572,164 ---------- ---------- --------- $11,575,806 $ 9,525,942 $5,696,713 ========== =========== ========= The Company's provision for income taxes is comprised as follows: 1998 1997 1996 ------------ ----------- ------------ Currently payable Domestic $ 669,102 $ 46,614 $ 197,299 Foreign 2,945,711 921,336 1,323,619 ----------- -------- ---------- 3,614,813 967,950 1,520,918 Deferred - net (1,104,645) (6,796) (629,688) ----------- -------- ---------- $ 2,510,168 $961,154 $ 891,230 ========== ======= ========== The Company's provision for income taxes differs from the anticipated United States federal statutory rate. Differences between the statutory rate and the Company's provision are as follows: 1998 1997 1996 -------- ------- ------- Taxes at statutory rate 34.0 % 34.0 % 34.0 % Benefit of foreign tax credit carryforward (1.2) - (1.2) Foreign tax rate differential (13.4) (27.5) (18.3) Foreign loss limitations 1.3 - - Other 1.0 3.6 1.1 -------- ------- ------- Income taxes 21.7% 10.1 % 15.6 % ======== ======= ======= In 1998, 1997 and 1996, the Company's Belgian subsidiaries utilized approximately $3,846,000, $8,529,000 and $4,232,000, respectively, of foreign operating loss carryforwards for tax reporting purposes. The Company's Belgian subsidiary has used all of its remaining net operating losses at December 31, 1998. Income tax expense in 1998 was also reduced by approximately $939,000 as a result of the favorable resolution of deferred and accrued tax obligations in the United Kingdom. F-23 ALLIED RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- NOTE P - INCOME TAXES - CONTINUED The Company utilized approximately $143,600 and $67,000 of its foreign tax credits in 1998 and 1996, respectively. No foreign tax credits were utilized in 1997. At December 31, 1998, foreign tax credit carryforwards of approximately $764,000 were available which expire through 2001. 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 $33 million at December 31, 1998. Determination of the amount of unrecognized deferred tax liabilities is not practicable. Deferred taxes at December 31, 1998 and 1997 are comprised as follows:
1998 1997 ---------------- ----------------- Current Unrealized exchange (losses) gain $ 1,594 $ (48,880) Compensated absences 132,100 111,000 Deferred income - (52,455) Contract cost provision 249,000 - Other 15,000 73,000 ----------- ------------ Current deferred tax asset 397,694 82,665 Noncurrent Foreign tax credit carryforwards 498,365 676,005 Foreign and domestic net operating loss carryforwards - 1,776,435 Depreciation and amortization 577,168 124,455 Deferred compensation 16,607 25,103 Deferred income (5,915) - Other 26,159 - Unrealized exchange gain - (577,780) ----------- ----------- Noncurrent deferred tax asset 1,112,384 2,024,218 --------- ---------- Total deferred tax asset before valuation allowances 1,510,078 2,106,883 Valuation allowances (498,365) (2,236,594) --------- ---------- Net deferred tax asset (liability) $1,011,713 $ (129,711) ========= =========== Deferred tax components are included in the following balance sheet accounts: 1998 1997 ------------- ------------ Current (included in "prepaid expenses and deposits") $ 397,694 $ 496,949 Noncurrent (included in "other" noncurrent assets) 614,019 - Deferred income taxes - (626,660) ------------- ------------ $1,011,713 $(129,711) ============= ============
F-24 ALLIED RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- NOTE Q - 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 cost 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 Payments in 1997 478,817 -------- Payments in 1998 $498,450 ======= NOTE R - EARNINGS PER COMMON SHARE The following table reconciles the numerators and denominators of the basic and diluted earnings per share (EPS) computations.
1998 1997 1996 ---------- ---------- ---------- Basic EPS Income available to common stockholders $9,065,638 $8,564,788 $4,805,483 ========= ========= ========= Weighted average number of common shares outstanding 4,722,303 4,543,874 4,432,750 ========= ========= ========= Basic EPS $1.92 $1.88 $1.08 ==== ==== ==== Diluted EPS Income available to common stockholders $9,065,638 $8,564,788 $4,805,483 Income impact of assumed conversions - - - Income available to common stockholders on a diluted basis $9,065,638 $8,564,788 $4,805,483 ========= ========= ========= Weighted average number of common shares outstanding 4,722,303 4,543,874 4,432,750 Effect of dilutive securities - stock options 42,904 82,728 5,739 --------- --------- --------- Adjusted weighted average number of common shares outstanding 4,765,207 4,626,602 4,438,489 ========= ========= ========= Diluted EPS $1.90 $1.85 $1.08 ==== ==== ====
F-25 ALLIED RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- NOTE R - 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. NOTE S - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS The Company currently operates in three principal segments: 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. Corporate costs are allocated to each segment's operations monthly and are included in the measure of each segments profit or loss. Corporate and other includes unallocated corporate cost and the former activities of Limited. The Company's foreign operations are conducted by Mecar and the VSK Group.
1998 1997 1996 ------------ ------------ ------------ REVENUES FROM EXTERNAL CUSTOMERS Product Sales $111,804,077 $107,533,415 $74,109,952 Engineering and Technical 10,457,075 10,549,224 11,636,242 Security Systems and Service 21,274,050 16,401,111 17,913,943 Corporate and Other - - - ------------ ------------ ------------ $143,535,202 $134,483,750 $103,660,137 =========== =========== ============ INTEREST EXPENSE Product Sales $ 1,203,361 $ 1,513,363 $ 2,971,325 Engineering and Technical 419,422 155,206 111,879 Security Systems and Service 159,284 218,868 361,308 Corporate and Other (9,783) (40,740) 6,554 ------------ ------------ ------------ $ 1,772,284 $ 1,846,697 $ 3,451,066 ============ ============ ============ INTEREST INCOME Product Sales $ 853,581 $ 777,502 $ 1,324,658 Engineering and Technical 344,127 131,049 5,738 Security Systems and Service 83,444 51,526 111,405 Corporate and Other 221,986 73,522 480,063 ------------ ------------ ------------ $ 1,503,138 $ 1,033,599 $ 1,921,864 ============ ============ ============
F-26 ALLIED RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- NOTE S - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - CONTINUED
1998 1997 1996 -------------- ------------ ------------ INCOME TAX EXPENSE (BENEFIT) Product Sales $ 1,162,865 $ 7,038 $ 51,569 Engineering and Technical 308,130 288,200 212,392 Security Systems and Service 1,909,945 890,943 686,903 Corporate and Other (870,772) (225,027) (59,634) -------------- ------------ ------------ $ 2,510,168 $ 961,154 $ 891,230 ============== ============ ============ DEPRECIATION AND AMORTIZATION Product Sales $ 1,474,159 $2,049,204 $2,488,189 Engineering and Technical 427,407 446,602 392,497 Security Systems and Service 623,074 150,189 212,848 Corporate and Other 7,137 - - -------------- ------------ ------------ $ 2,531,777 $ 2,645,995 $ 3,093,534 ============== ============ ============ SEGMENT PROFIT (LOSS) BEFORE TAXES Product Sales (1) $ 6,854,793 $8,609,293 $3,715,666 Engineering and Technical 744,738 706,558 497,824 Security Systems and Service 4,452,232 2,003,295 1,442,368 Corporate and Other (475,957) (1,793,204) 40,855 -------------- ------------ ------------ $ 11,575,806 $ 9,525,942 $ 5,696,713 ============== ============ ============ SEGMENT ASSETS Product Sales $80,262,860 $73,593,091 $70,775,112 Engineering and Technical 16,879,699 13,016,075 5,505,577 Security Systems and Service 13,567,284 9,664,265 14,067,186 Corporate and Other (2) 2,366,287 3,227,208 1,600,285 -------------- ------------ ------------ $113,076,130 $99,500,639 $91,948,160 ============== ============ ============ EXPENDITURE FOR SEGMENT ASSETS Product Sales $ 1,634,411 $1,043,058 $ 696,699 Engineering and Technical 170,924 163,963 264,915 Security Systems and Service 576,608 135,299 105,275 Corporate and Other - - - -------------- ------------ ------------ $ 2,381,943 $ 1,342,320 $ 1,066,889 ============== ============ ============
(1) UNUSUAL ITEMS - SEGMENT PROFIT ATTRIBUTABLE TO PRODUCT SALES IN 1997 INCLUDES RESTRUCTURING COSTS OF $977,267, DIRECT CORPORATE COST ALLOCATIONS TO OPERATING SEGMENTS INCREASED BY APPROXIMATELY $166,000 IN 1998, CORPORATE AND OTHER IN 1997 INCLUDES $742,000 OF NON-RECURRING COSTS, WHICH AFFECT YEAR-TO-YEAR COMPARABILITY. (2) NET OF INTERSEGMENT RECEIVABLES. F-27 ALLIED RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- NOTE S - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - CONTINUED The following geographic area data include trade revenues based on product shipment destination and property, plant, and equipment based on physical location.
Geographic Segment Data ----------------------------------------------- 1998 1997 1996 ------------ ------------- ------------- REVENUES FROM EXTERNAL CUSTOMERS United States $ 7,066,567 $ 7,505,918 $11,634,067 Belgium 14,481,788 13,399,143 19,218,820 Middle East 105,439,877 94,441,684 68,054,857 Far East 3,940,000 3,061,000 - France 4,096,218 2,934,664 2,832,154 Other foreign countries 8,510,752 13,141,341 1,860,239 ------------ ------------- ------------- $143,535,202 $134,483,750 $103,600,137 ============ ============= ============= SEGMENT ASSETS Belgium $93,830,144 $83,257,626 $84,842,298 United Kingdom 260,149 480,608 228,654 United States (1) 18,985,837 15,762,405 6,877,208 ------------ ------------- ------------- $113,076,130 $ 99,500,639 $ 91,948,160 ============ ============= =============
(1) NET OF INTERSEGMENT RECEIVABLES. NOTE T - QUARTERLY FINANCIAL DATA (UNAUDITED) (Amounts in thousands, except per share data) --------------------------------------------- First Second Third Fourth Total 1998 Quarter Quarter Quarter Quarter For Year ---- ------- ------- ------- ------- -------- Revenue $35,753 $32,154 $31,001 $44,627 $143,535 Gross profit 6,630 7,380 5,228 7,654 26,892 Net earnings 2,257 2,546 1,780 2,483 9,066 Per share data: Basic .49 .53 .38 .52 1.92 Diluted .48 .53 .37 .52 1.90 F-28 ALLIED RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- NOTE T - QUARTERLY FINANCIAL DATA (UNAUDITED) - CONTINUED (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 F-29 SCHEDULES F-30 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 1998 1997 --------------------------- Cash and equivalents $ 1,855,901 $ 2,342,037 Investments in subsidiaries 57,273,612 41,722,046 Deferred tax asset 18,201 25,103 Deposits and other 232,036 379,158 ------------ ------------ Total assets $59,379,750 $44,468,344 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accounts payable and accrued liabilities $1,212,627 $ 1,176,115 Due to subsidiaries 8,203,273 6,348,894 Deferred tax liability - 48,880 ----------- ---------- Total liabilities 9,415,900 7,573,889 STOCKHOLDERS' EQUITY Common stock 475,717 460,822 Capital in excess of par value 13,391,099 12,100,521 Retained earnings 35,111,909 26,046,271 Accumulated other comprehensive income (loss) 985,125 (1,713,159) ----------- ---------- 49,963,850 36,894,455 ----------- ---------- $59,379,750 $44,468,344 =========== =========== F-31 ALLIED RESEARCH CORPORATION SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED (PARENT COMPANY) STATEMENTS OF EARNINGS YEAR ENDED DECEMBER 31, - -------------------------------------------------------------------------------- 1998 1997 1996 ----------- ----------- ---------- Income Intercompany management fees $2,850,448 $ 2,684,859 $2,652,889 Other - net 463,881 311,587 (77,412) ---------- ----------- ---------- 3,314,329 2,996,446 2,575,477 Costs and expenses Administrative and other 3,845,785 4,512,176 2,878,746 --------- ---------- --------- (Loss) before equity in operations of subsidiaries (531,456) (1,515,730) (303,269) Equity in operations of subsidiaries 9,665,490 9,855,491 4,959,035 --------- ---------- --------- Earnings before income taxes 9,134,034 8,339,761 4,655,766 Income taxes (benefit) 68,396 (225,027) (149,717) ----------- ---------- ----------- NET EARNINGS $9,065,638 $ 8,564,788 $4,805,483 ========= ========== ========= Earnings per common share Basic $1.92 $1.88 $1.08 ==== ==== ==== Diluted $1.90 $1.85 $1.08 ==== ==== ==== F-32 ALLIED RESEARCH CORPORATION SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED (PARENT COMPANY) STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 1998 1997 1996 ------------------------------------------------ Cash flows from (used in) operating activities Net earnings for the year $ 9,065,638 $ 8,564,789 $ 4,805,483 Adjustments to reconcile net earnings to net cash from (used in) operating activities Equity in operations of subsidiaries (9,665,490) (9,855,489) (4,959,035) Depreciation and amortization 5,307 6,191 - Gain on disposal of property and equipment - - (250) Deferred income taxes (41,978) 146,262 (127,724) Common stock awards and grants 689,376 521,460 41,382 Changes in assets and liabilities Other assets 141,823 (158,022) 85,350 Due to subsidiaries (1,333,421) 733,448 377,095 Accounts payable and accrued liabilities 36,512 700,909 269,066 Income taxes - (88,601) 38,496 ----------- ---------- ---------- (10,167,871) (7,993,842) (4,275,620) ----------- ---------- ---------- Net cash (used in) provided by operating activities (1,102,233) 570,947 529,863 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 637,622 749,271 61,729 Retirement of common stock (21,525) - - ----------- ---------- ---------- Net cash provided by financing activities 616,097 749,271 61,729 ----------- ---------- ---------- Net (decrease) increase in cash and equivalents (486,136) 1,302,975 584,592 Cash and equivalents at beginning of year 2,342,037 1,039,062 454,470 ----------- ---------- ---------- Cash and equivalents at end of year $ 1,855,901 $ 2,342,037 $ 1,039,062 ============= =========== =========== Supplemental Disclosures of Cash Flow Information Cash paid during the year for: Income taxes $ 178,000 $ 116,692 $ 135,000 Interest - - -
F-33 ALLIED RESEARCH CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS - --------------------------------------------------------------------------------
Additions -------------------------- Balance at Charged to Charged Balance beginning costs and to other at end of Description of period expenses accounts Deductions period - ----------- --------- -------- -------- ---------- ------ Year ended December 31, 1998 - ---------------------------- Estimated losses on contracts $ 572,279 $ 786,986 $ - $ 572,279 (1) $ 786,986 ============ ========= ======== ============ =========== Allowance for doubtful receivables $ 205,350 $ 29,011 $ - $ - $ 234,361 ============ ========= ======== ============ =========== Valuation allowances on deferred tax assets $ 2,236,594 $ - $ - $ 1,738,229 (1) $ 498,365 ============ ========= ======== ============ =========== Year ended December 31, 1997 - ---------------------------- Estimated losses on contracts $ 390,125 $ 572,279 $ - $ 390,125 (1) $ 572,279 ============ ========= ======== ============ =========== Allowance for doubtful receivables $ 364,674 $ 192,837 $ - $ 33,513 (2) $ 205,350 ============ ========= ======== ============ =========== Valuation allowances on deferred tax assets $ 6,064,997 $ - $ - $ 3,828,403 (3) $ 2,236,594 ============ ========= ======== ============ =========== Year ended December 31, 1996 - ---------------------------- Estimated losses on contracts $ 431,215 $ 390,125 $ - $ 431,215 (1) $ 390,125 ============ ========= ======== ============ =========== Allowance for doubtful receivables $ 330,077 $ 55,186 $ - $ 20,589 (2) $ 364,674 ============ ========= ======== ============ =========== Valuation allowances on deferred tax assets $ 19,923,320 $ - $ - $ 13,858,323 (3) $ 6,064,997 ============ ========= ======== ============ ===========
(1) REPRESENTS AMOUNT OF RESERVE RELIEVED THROUGH COMPLETION OF CONTRACTS. (2) REPRESENTS WRITE-OFF OF RECEIVABLES. (3) REDUCTION IN VALUATION ALLOWANCE DUE TO UTILIZATION OF NET OPERATING LOSS AND IN 1998 REDUCTION IN DEFERRED TAX OBLIGATIONS. F-34 EXHIBITS EXHIBIT INDEX - -------------------------------------------------------------------------------- Number Description of Exhibit Page - ------ ---------------------- ---- 21 List of Subsidiaries E-3 23 Consent of Independent Certified Public Accountants E-4 E-2 EX-21 2 EXHIBIT 21 ALLIED RESEARCH CORPORATION EXHIBIT 21 LIST OF SUBSIDIARIES - -------------------------------------------------------------------------------- 1. Mecar S.A., a Belgian Corporation Wholly-owned and majority owed Belgian subsidiaries of Mecar S.A. A. Mecar Immobliere S.A. B. Sedachim, S.I. C. Tele Technique Generale D. VSK Electronics N.V. Belgian Automation Units, N.V. (100% owned) I.D.C.S., N.V. VSK Electronics, S.A. (a French Company) 2. Barnes & Reinecke, Inc., a Delaware Corporation 3. Allied Research Corporation Limited, a U.K. Corporation 4. ARC Services, Inc., a Delaware Corporation 5. Allied Environmental, Inc. 6. Energa Corporation E-3 EX-23 3 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated February 16, 1999 accompanying the consolidated financial statements and schedules Report of Allied Research Corporation on Form 10-K for the year ended December 31, 1998. We hereby consent to the incorporation by reference of said report in the Registration Statements of Allied Research Corporation on Forms S-8 (File No. 2-96771, effective April 22, 1985, File No. 33-25677 effective December 14, 1988, File No. 33-41422 effective June 27, 1992, File No. 33-45303 effective January 24, 1993, File No. 33-57170 effective January 19, 1994, and File No. 33-57172 effective January 19, 1994 and Form S-8 filed March 20, 1998). /s/ GRANT THORNTON LLP - ---------------------- BALTIMORE, MARYLAND MARCH 12, 1999 EX-27 4 FDS -- FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 10,234,653 0 29,445,873 0 3,422,303 88,097,226 45,632,593 33,102,833 113,076,130 52,830,998 0 0 0 475,717 49,488,133 113,076,130 143,535,202 143,535,202 116,642,893 130,877,998 0 0 1,722,284 11,575,806 2,510,168 0 0 0 0 9,065,638 1.92 1.90
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