UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Mark one
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) of the Securities Exchange
Act of 1934
For the period ended September 30, 1999
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _____________________ to _______________________
Commission File Number
0-2545
----------------------
ALLIED RESEARCH CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 04-2281015
- ------------------------------ ---------------------------
(State or other jurisdiction of (I.R.S. Employer Number)
incorporation or organization)
8000 Towers Crescent Drive, Suite 750
Vienna, Virginia 22182
- ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 847-5268
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of September 30, 1999: 4,845,758
<PAGE>
ALLIED RESEARCH CORPORATION
INDEX
<TABLE>
<CAPTION>
<S> <C>
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PAGE
PART I. FINANCIAL INFORMATION - UNAUDITED NUMBER
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1998 and September 30, 1999.........................................3,4
Condensed Consolidated Statements of Earnings
Three months and nine months ended September 30, 1999 and 1998.....................5
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998......................................6
Notes to Condensed Consolidated Financial Statements........................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................11
PART II. OTHER INFORMATION..........................................................................15
</TABLE>
<PAGE>
ALLIED RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
September 30, 1999 December 31, 1998
------------------ -----------------
CURRENT ASSETS
Cash and equivalents $14,396 $10,235
Restricted cash (notes 3 and 6) 11,303 14,014
Accounts receivable 17,920 29,446
Costs and accrued earnings on uncompleted contracts 7,277 20,887
Inventories 4,201 3,422
Prepaid expenses and deposits 1,601 10,094
------- -------
Total current assets 56,698 88,098
PROPERTY, PLANT AND EQUIPMENT - AT COST
Buildings and improvements 11,811 12,440
Machinery and equipment 29,796 31,776
Leasehold improvements 123 118
------- -------
41,730 44,334
Less accumulated depreciation 32,096 33,103
------- -------
9,634 11,231
Land 1,190 1,298
------- -------
10,824 12,529
OTHER ASSETS
Restricted deposits (notes 3 and 6) - 6,670
Intangibles, net of amortization 4,623 4,961
Other 600 818
------- -------
5,223 12,449
------- -------
$72,745 $113,076
====== =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
<PAGE>
ALLIED RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(THOUSANDS OF DOLLARS)
LIABILITIES
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
September 30, 1999 December 31, 1998
------------------ -----------------
CURRENT LIABILITIES
Notes payable $ 5,619 $ 3,415
Current maturities of long-term debt 1,025 1,324
Accounts and trade notes payable 8,059 25,379
Accrued liabilities 6,631 5,043
Accrued losses on contracts 340 786
Customer deposits 6,551 16,137
Income taxes 1,211 748
------- -------
Total current liabilities 29,436 52,832
LONG-TERM DEBT, less current maturities 3,122 4,431
ADVANCE PAYMENTS ON CONTRACTS - 5,850
STOCKHOLDERS' EQUITY
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, 4,845,758
in 1999 and 4,757,174 in 1998 485 475
Capital in excess of par value 13,953 13,391
Retained earnings 28,073 35,111
Accumulated other comprehensive (loss) income (2,324) 986
------- -------
40,187 49,963
------- -------
$72,745 $113,076
====== =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
<PAGE>
ALLIED RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE $10,176 $31,001 $47,755 $98,908
COSTS AND EXPENSES
Cost of sales 9,386 24,847 41,603 79,670
Selling and administrative 3,915 2,576 10,944 8,435
Research and development 414 721 1,254 1,451
------- ------- ------- -------
13,715 28,144 53,801 89,556
------- ------- ------- -------
Operating (loss) income (3,539) 2,857 (6,046) 9,352
OTHER INCOME (DEDUCTIONS)
Interest expense (490) (581) (1,213) (1,458)
Interest income 276 542 850 1,096
Other - net 119 (39) 564 (423)
------- ------- ------- -------
(95) (78) 201 (785)
------- ------- ------- -------
(Loss) earnings before income taxes (3,634) 2,779 (5,845) 8,567
INCOME TAXES 245 999 1,193 1,984
------- ------- ------- -------
NET (LOSS) EARNINGS $ (3,879) $ 1,780 $ (7,038) $ 6,583
======= ====== ======= ======
NET (LOSS) INCOME PER COMMON SHARE
Basic $ (.80) $ .38 $ (1.46) $ 1.40
======= ====== ======= ======
Diluted $ (.80) $ .37 $ (1.46) $ 1.38
======= ====== ======= ======
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 4,835,821 4,743,777 4,815,464 4,706,453
Diluted 4,838,078 4,764,151 4,820,025 4,764,086
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
5
<PAGE>
ALLIED RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended
September 30
-----------------
Increase (decrease) in cash and equivalents 1999 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net (loss) earnings $(7,038) $ 6,583
Adjustments to reconcile net earnings to net cash (used in)
operating activities
Depreciation and amortization 1,928 909
Changes in assets and liabilities
Accounts receivable 8,826 19,159
Costs and accrued earnings on uncompleted contracts 10,900 (10,264)
Inventories (1,232) 2,625
Prepaid expenses and other assets (5,975) (12,153)
Accounts payable, accrued liabilities and customer deposits (11,970) 3,292
Income taxes 843 1,240
------- -------
Net cash (used in) provided by operating activities (3,718) 11,391
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures (2,055) (559)
Restricted cash and deposits 6,473 (9,722)
------- -------
Net cash provided by (used in) investing activities 4,418 (10,281)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of long-term debt (1,378) (52)
Net increase in long-term borrowings 350 -
Net increase in short-term borrowings 3,038 1,225
Stock grant/stock plan 628 1,210
Options exercised 16 (227)
Retirement - common stock (73) -
------- -------
Net cash provided by financing activities 2,581 2,156
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 880 1,871
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,161 5,137
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 10,235 7,693
------- -------
CASH AND EQUIVALENTS AT END OF PERIOD $ 14,396 $ 12,830
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- -------------------------------------------------
Cash paid during the period for
Interest $ 702 $ 720
Taxes 1,147 2,500
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
6
<PAGE>
ALLIED RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(THOUSANDS OF DOLLARS)
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheets as of September 30, 1999 and
December 31, 1998, the condensed consolidated statements of earnings and the
condensed consolidated statements of cash flows for the nine months ended
September 30, 1999 and 1998, have been prepared by the Company without
audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and changes in cash flow at September 30,
1999 and 1998 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's December
31, 1998 Form 10-K filed with the Securities and Exchange Commission,
Washington, D.C. 20549. The results of operations for the period ended
September 30, 1999 and 1998 are not necessarily indicative of the operating
results for the full year.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of
Allied Research Corporation (a Delaware Corporation) and the Company's
wholly-owned subsidiaries, ARC Europe, S.A. (a Belgian Company), Allied
Research Corporation Limited (a United Kingdom Company) and Barnes &
Reinecke, Inc. (a Delaware Corporation).
ARC Europe, S.A. was formed as a management company in July 1999. ARC
Europe, S.A.'s wholly-owned Belgian subsidiaries include, Mecar, S.A.,
Sedachim, S.I., Tele Technique Generale, and VSK Electronics, N.V., its
wholly-owned subsidiaries Belgian Automation Units, N.V. and I.D.C.S., N.V.,
(collectively "The VSK Group").
Significant intercompany transactions have been eliminated in consolidation.
NOTE 3 - RESTRICTED CASH
Mecar is generally required under the terms of its contracts with foreign
governments to provide performance bonds, advance payment guarantees and
letters of credit. The credit facility agreements used to provide these
financial guarantees generally place restrictions on cash deposits and other
liens on Mecar's assets. Cash deposits received from a customer of BRI are
also restricted by its credit facility agreement. VSK also has pledged
certain term deposits to secure outstanding bank guarantees. Cash of $11,303
at September 30, 1999 ($14,014 and long-term deposits of $6,670 at December
31, 1998) are restricted or pledged as collateral for these bank agreements.
NOTE 4 - INVENTORIES
Inventories are composed of raw materials and supplies.
7
<PAGE>
ALLIED RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(THOUSANDS OF DOLLARS)
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - NOTES PAYABLE
BRI has a $6,000 revolving line-of-credit agreement which had an outstanding
balance at September 30, 1999 of $5,619 and $3,415 at December 31, 1998. The
current line-of-credit bears interest at the prime rate and expires February
2000. Borrowings under the line-of-credit are secured by eligible accounts
receivable, as defined in the agreement, and are guaranteed by the Company.
The agreement contains covenants requiring the maintenance of certain
financial ratios and other matters.
NOTE 6 - 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 facility is
used, plus fees of 2% of guarantees issued and annual fees of 1.25% - 1.35%
of letters of credit and guarantees outstanding. These fees are treated as
interest. As of September 30, 1999, guarantees and performance bonds of
$11.2 million ($34.1 million at December 31, 1998) remain outstanding.
Advances under the Agreements are secured by cash of $11,303. Amounts
outstanding are also collateralized by the letters of credit received under
the contracts financed, and a pledge of approximately $30 million on Mecar's
assets. Certain Agreements provide for restrictions on payments or transfers
to Allied and its affiliates for management fees, intercompany loans, loan
payments, the maintenance of certain net worth levels and other provisions.
NOTE 7 - LONG-TERM FINANCING
Mecar is obligated on an approximately $2,758 mortgage on its manufacturing
and administration facilities. As amended, the balance of the loan is
payable in annual principal installments of approximately $550 (except for
the annual principal installment in the year 2000 of $810) and matures in
2004. The Company is also obligated on several mortgages on The VSK Group's
buildings which have balances of approximately $1,094 at September 30, 1999.
The mortgages are payable in annual installments of approximately $250 plus
interest.
Barnes & Reinecke is obligated on a notes payable to its bank which has an
outstanding balance due of $295 at September 30, 1999 and $346 at December
31, 1998.
8
<PAGE>
ALLIED RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(THOUSANDS OF DOLLARS)
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 7 - LONG-TERM FINANCING - CONTINUED
Scheduled annual maturities of long-term obligations as of September 30,
1999 are approximately as follows:
Year Amount
---- ------
2000 $1,025
2001 706
2002 736
2003 697
2004 400
Thereafter 583
NOTE 8 - INCOME TAXES
The Company's provision for income taxes differs from the anticipated
combined federal and state statutory rates due to operating losses in
certain jurisdictions and earnings from certain foreign subsidiaries.
As of December 31, 1998, the Company had unused foreign tax credit
carryforwards of approximately $734 which expire through 2001.
Deferred tax liabilities have not been recognized for bases differences
related to investments in the Company's Belgian and United Kingdom
subsidiaries. These differences, which consist primarily of unremitted
earnings intended to be indefinitely reinvested, aggregated approximately
$33,000 at December 31, 1998. Determination of the amount of unrecognized
deferred tax liabilities is not practicable.
NOTE 9 - EARNINGS (LOSS) PER SHARE
Stock options outstanding have been included in the diluted per share
computation on a weighted average basis.
NOTE 10 - RECLASSIFICATION
Certain items in September 30, 1999 and 1998 financial statements have been
reclassified to conform to the current presentation.
9
<PAGE>
ALLIED RESEARCH CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
SEPTEMBER 30, 1999
(THOUSANDS OF DOLLARS)
(UNAUDITED)
- --------------------------------------------------------------------------------
The Company conducts its business through its subsidiaries: Mecar, S.A.,
("Mecar"), a Belgian corporation and Barnes & Reinecke, Inc. ("Barnes" or
"BRI"), a Delaware corporation, headquartered in Illinois; as well as a group of
Belgian corporations acquired in 1994 and 1995 led by VSK Electronics, N.V.,
Teletechnique General, S.A. and I.D.C.S., S.A. (collectively, the "VSK Group").
This discussion refers to the financial condition and results of operations of
the Company on a consolidated basis.
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 or 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 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. These 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.
REVENUE
Revenue for the first nine (9) months of 1999 was $47,755, or 48% of the
comparable period in 1998, principally due to decreased revenue from Mecar.
10
<PAGE>
ALLIED RESEARCH CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
SEPTEMBER 30, 1999
(THOUSANDS OF DOLLARS)
(UNAUDITED)
- --------------------------------------------------------------------------------
REVENUE - CONTINUED
Revenues by Segment - Nine Months Ended
-----------------------------------------------
September 30, 1999 September 30, 1998
------------------- -------------------
Percentage Percentage
Amount of total Amount of total
------ ---------- ------ ----------
Mecar $23,780 50% $76,287 77%
VSK 14,673 31% 14,978 15%
BRI 9,302 19% 7,643 8%
Mecar recognized revenue of $23,780 for the third quarter of 1999, or 31% of the
revenue earned in the third quarter of 1998; the revenue of VSK Group of $14,673
for the quarter ended September 30, 1999 constitutes a decrease of 2% from the
comparable period in 1998; and, Barnes' revenue of $9,302 for the third quarter
ended September 30, 1999 constitutes a 21% increase over the quarter ended
September 30, 1998. Revenue for the quarter ended September 30, 1999 was
$10,176, or 33% of the quarter ended September 30, 1998.
Mecar's decrease in revenues resulted from reductions in customer orders
received in 1998 and through the first five months of 1999. Since June 1, 1999,
Mecar has received orders for approximately $73,500. These orders will begin to
have a positive impact on Mecar's operations in the fourth quarter of 1999, as
raw materials are received and production commences.
BACKLOG
As of September 30, 1999, the Company's backlog was $83,800 compared with
$48,000 at December 31, 1998 and $72,000 at June 30, 1999.
At September 30, 1999 and 1998, respectively, the backlog of each of the
Company's operating units was as follows:
September 30,
-------------
1999 1998
---- ----
Mecar $64,300 $59,000
Barnes 6,800 12,400
VSK Group 12,700 17,100
OPERATING COSTS AND EXPENSES
Cost of sales for the first nine (9) months of 1999 was approximately $41,426,
or 87% of sales as compared to $79,670, or 81% for the first nine (9) months of
1998.
Cost of sales for the third three months of 1999 was approximately $9,386 or 92%
of sales as compared to $24,847, or 80% of sales for the third quarter of 1998.
11
<PAGE>
ALLIED RESEARCH CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
SEPTEMBER 30, 1999
(THOUSANDS OF DOLLARS)
(UNAUDITED)
- --------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES - CONTINUED
Selling and administrative expenses were approximately $10,944 of revenues or
23% of sales for the nine (9) months ended September 30, 1999, as compared to
$8,435 or 9% of sales for the nine months ended September 30, 1998.
Selling and administrative expenses were approximately $3,915 or 38% of revenue
for the three months ended September 30, 1999 as compared to $2,576, or 8% for
the three months ended September 30, 1998.
This increase is primarily due to legal fees and other costs associated with the
1999 proxy contest, nonrecurring severance cost associated with a former officer
of the Company and investment advisor fees.
RESEARCH AND DEVELOPMENT
Research and development expenses were 3% and 4%, respectively, as a ratio of
sales for each of the nine (9) months and three (3) months periods ended
September 30, 1999 and 1998.
INTEREST EXPENSE
Interest expense for the nine (9) months ending September 30, 1999 was $1,213,
compared to $1,458 for the comparable period in 1998, and $490 compared to $581
for the comparable three month period. All such decreases are principally due to
reduced levels of borrowing and reduced bank fees and charges.
INTEREST INCOME
Interest income for each of the nine (9) months and three (3) months periods of
1999 decreased from the comparable periods of 1998, principally as a result of
decreased amounts of cash invested.
OTHER - NET
Other - Net represents primarily net currency gains, net of currency losses
resulting from foreign currency transactions for the nine (9) months and three
months ended September 30, 1999. The fluctuation of currency rates resulted in
the increase in the current period.
PRE-TAX (LOSS) PROFIT
Pre-Tax (Loss) Profit by Segment - Nine months Ended
----------------------------------------------------
September 30, 1999 September 30, 1998
------------------ ------------------
Mecar $(7,820) $2,930
VSK 2,673 3,207
BRI (698) 446
The decline in Mecar's performance results from a combination of decreased
revenue and unexpected costs incurred in reworking various products for
customers.
VSK continues to achieve excellent profits, although not at the record level
achieved in 1998.
BRI's decline in 1999 results primarily from unanticipated costs incurred in
finishing its large dynomometer contract and delays in receipt of other expected
orders.
INCOME TAXES
The effective tax rate in the first nine (9) months of 1999 differs from the
anticipated rate as a result of foreign taxes and net operating losses in
certain jurisdictions.
12
<PAGE>
ALLIED RESEARCH CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
SEPTEMBER 30, 1999
(THOUSANDS OF DOLLARS)
(UNAUDITED)
- --------------------------------------------------------------------------------
NET EARNINGS
The Company had a $7,038 net loss ($1.46 per share basic and diluted) for the
first nine (9) months of 1999 compared with a $6,583 net profit ($1.40 per share
basic and $1.38 per share diluted) for the comparable period in 1998. The
Company had a $3,879 loss ($0.80 per share basic and diluted) in the third
quarter of 1999 compared with a $1,780 profit ($0.38 per share basic and $0.37
per share diluted) in the third three months of 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine (9) months of 1999 and throughout 1998, Allied funded its
operations principally with internally generated cash and back-up credit
facilities required for foreign government contracts.
Mecar continues to provide bonds and guarantees for contracts via credit
facilities supplied by a foreign bank pool. Mecar is limited by its bank pool
agreement in the amounts it may transfer to Allied or other affiliates.
The VSK Group continues to reduce its bank and other long-term indebtedness.
BRI continues to operate on borrowings under its bank line of credit. Due to
the losses year to date, BRI is in violation of one or more financial covenants
in its line of credit agreement. The company expects to fully retire the line
of credit from proceeds received from the sale of the dynomometer.
At September 30, 1999, the Company had unrestricted cash (i.e., cash not
required by the terms of the bank pool agreement to collateralize contracts) of
approximately $14,396 compared with approximately $12,830 and $10,235 at
September 30, 1998 and at December 31, 1998, respectively.
Accounts receivable at September 30, 1999 decreased from the December 31, 1998
levels by $11,526 due to substantial collections in the first half of 1999.
Costs and accrued earnings on uncompleted contracts decreased by $13,610 from
December 31, 1998 levels due to decreased levels of work-in-process. Inventories
increased from year-end levels by $779 due to anticipated production levels in
the fourth quarter of 1999. Prepaid expenses and deposits decreased by $8,493
primarily due to lower levels of prepayments. Current liabilities decreased by
$23,396 from December 31, 1998 levels principally as a result of reductions in
accounts and notes payable.
In summary, working capital was approximately $27,262 at September 30, 1999,
which is a decrease of $8,004 from working capital at December 31, 1998,
primarily as a result of current year operating losses.
YEAR 2000 ISSUES
During 1999, the Company has continued its program to prepare its systems for
Year 2000 compliance. The Year 2000 issues relates to computer systems that use
two digits rather than four to define the applicable year and whether such
systems will properly process information when the year changes to 2000.
The Company has completed an assessment of the impact of the Year 2000 on its
purchased and internally development systems. The current purchased and
internally developed software is Year 2000 compliant. The Company is continuing
its program of formal communications with significant suppliers and customers to
determine the extent to which the Company's activities would be impacted by
those third parties' failure to remediate their own Year 2000 issues.
13
<PAGE>
ALLIED RESEARCH CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
SEPTEMBER 30, 1999
(THOUSANDS OF DOLLARS)
(UNAUDITED)
- --------------------------------------------------------------------------------
YEAR 2000 ISSUES - CONTINUED
The estimated costs related to testing and modifying existing systems for Year
2000 compliance are approximately $250, substantially all of which has been
spent or committed to date.
Year 2000 compliance is expected to be achieved no later than the end of
November 1999. The Company believes that with the planned modifications, Year
2000 issues will not have a material impact on operations. However, if these
modifications are not made, or are not completed on a timely basis, Year 2000
issues could result in the temporary inability to process orders, send invoices,
or engage in similar business activities, which would have a material impact on
the Company's operations. Failure by significant suppliers and customers to be
Year 2000 compliant could also have a material impact on the Company. The
amounts of potential liability and lost revenue from the failure to be Year 2000
compliant cannot be reasonably estimated at this time.
The Company's contingency plans are being prepared and refined and are expected
to be completed by early November 1999. These plans include the manual processes
required to perform critical business functions that could be affected by Year
2000 issues.
14
<PAGE>
ALLIED RESEARCH CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
SEPTEMBER 30, 1999
(THOUSANDS OF DOLLARS)
(UNAUDITED)
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
None.
15
<PAGE>
ALLIED RESEARCH CORPORATION
- --------------------------------------------------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLIED RESEARCH CORPORATION
/s/ W. Glenn Yarborough, Jr.
Date: November 5, 1999 -------------------------------
W. Glenn Yarborough, Jr.
President,
Chief Executive Officer and
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
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0
0
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</TABLE>
