<PAGE>
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 March 31, 2000
--------------
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 260
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 March 31, 2000: 4,862,984.
<PAGE>
ALLIED RESEARCH CORPORATION
INDEX
- --------------------------------------------------------------------------------
PAGE
PART I. FINANCIAL INFORMATION - UNAUDITED NUMBER
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999......................... 2
Condensed Consolidated Statements of Earnings
Three months ended March 31, 2000 and 1999................... 3
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2000 and 1999................... 4
Notes to Condensed Consolidated Financial Statements.............. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 8
PART II. OTHER INFORMATION................................................ 12
<PAGE>
Allied Research Corporation
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
ASSETS
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 6,711 $ 5,968
Restricted cash 7,613 4,508
Accounts receivable 8,285 9,278
Costs and accrued earnings on uncompleted contracts 33,135 14,109
Inventories 4,455 3,519
Prepaid expenses 823 972
Net assets of discontinued operation - 4,199
------- -------
Total current assets 61,022 42,553
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation 10,915 10,262
OTHER ASSETS
Intangibles, net of accumulated amortization 4,068 4,255
Deferred taxes 2,424 2,924
Other 1,064 137
------- -------
7,556 7,316
------- -------
$79,493 $60,131
======= =======
CURRENT LIABILITIES
Notes payable $ 5,798 $ 609
Current maturities of long-term debt 1,617 1,225
Accounts payable 18,862 10,757
Accrued liabilities 5,633 2,983
Customer deposits 2,885 492
Income taxes 1,098 664
------- -------
Total current liabilities 35,893 16,730
LONG-TERM DEBT, less current maturities 2,827 3,080
CONTINGENCIES AND COMMITMENTS - -
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, 4,862,984 in 2000 and 4,836,722 in 1999 486 484
Capital in excess of par value 14,119 13,907
Retained earnings 32,635 31,084
Accumulated other comprehensive loss (6,468) (5,154)
------- -------
40,773 40,321
------- -------
$79,493 $60,131
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
Allied Research Corporation
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Thousands of Dollars)
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended March 31
---------------------------
2000 1999
---------- ----------
<S> <C> <C>
Revenue $ 23,474 $ 23,800
Cost and expenses
Cost of sales 18,957 19,624
Selling and administrative 2,337 2,115
Research and development 396 397
---------- ----------
Operating income 1,784 1,664
Other income (deductions)
Interest income 114 219
Interest expense (154) (202)
Other (133) 376
---------- ----------
(173) 393
---------- ----------
Earnings before discontinued operation and income taxes 1,611 2,057
Income tax expense 644 794
---------- ----------
Earnings from continuing operations 967 1,263
Discontinued operation -
Engineering and technical segment
Income from operations, net of income taxes 54 3
Gain on sale, net of income taxes 431 -
---------- ----------
485 3
---------- ----------
NET EARNINGS $ 1,452 $ 1,266
========== ==========
Earnings per share
Basic
Continuing operations $ .20 $ .27
Discontinued operation .10 -
---------- ----------
Net income $ .30 $ .27
========== ==========
Diluted
Continuing operations $ .20 $ .27
Discontinued operation .10 -
---------- ----------
Net income $ .30 $ .27
========== ==========
Weighted average number of common shares:
Basic 4,840,337 4,779,223
Diluted 4,842,059 4,785,937
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
Allied Research Corporation
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended March 31
-----------------------------
Increase (decrease) in cash and equivalents 2000 1999
-------- --------
<S> <C> <C>
Cash flows from continuing operating activities
Net earnings $ 1,452 $ 1,266
Adjustments to reconcile net earnings to net cash provided by (used in) continuing
operating activities
Depreciation and amortization 387 470
Gain on sale of discontinued operation (415) -
Income from discontinued operation (70) (3)
Changes in assets and liabilities
Accounts receivable 851 (15,873)
Costs and accrued earnings on uncompleted contracts (20,685) 15,077
Inventories (1,143) (1,034)
Prepaid expenses and other assets (105) 7,307
Accounts payable, accrued liabilities and customer deposits 13,006 (8,935)
Income taxes 857 1,062
-------- --------
Net cash (used in) provided by continuing operating activities (5,865) (663)
Cash flows (used in) investing activities
Capital expenditures (1,294) (560)
Proceeds from sale of stock of subsidiary 2,791 -
Restricted cash and restricted deposits (3,105) 2,743
-------- --------
Net cash (used in) provided by investing activities (1,608) 2,183
Cash flows from financing activities
Proceeds from long-term debt 826 -
Principal payments on long-term debt (84) -
Net increase (decrease) in short-term borrowings 6,599 (800)
Stock award/stock plan 89 503
Options exercised 121 16
Net (decrease) increase in long-term deposits - (67)
Retirement of common stock (70) (28)
-------- --------
Net cash provided by (used in) financing activities 7,481 (376)
-------- --------
Net increase in cash from continuing operations 8 1,144
Net cash provided by discontinued operations - 894
Effects of exchange rate changes on cash 735 (501)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 743 1,537
Cash and equivalents at beginning of year 5,968 10,233
-------- --------
Cash and equivalents at end of period $ 6,711 $ 11,770
======== ========
Supplemental Disclosures of Cash Flow Information
- -------------------------------------------------
Cash paid during the period for
Interest $ 205 $ 316
Taxes 309 214
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
Allied Research Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Thousands of Dollars)
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheets as of March 31, 2000 and December
31, 1999, the condensed consolidated statements of earnings and the condensed
consolidated statements of cash flows for the three months ended March 31,
2000 and 1999, 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 March 31, 2000 and 1999 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,
1999 Form 10-K filed with the Securities and Exchange Commission, Washington,
D.C. 20549. The results of operations for the period ended March 31, 2000 and
1999 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 its wholly-owned
subsidiaries, ARC Europe, S.A. (ARC Europe), a Belgian company, Barnes &
Reinecke, Inc. (BRI), a Delaware Corporation (which discontinued operations)
and Allied Research Corporation Limited (Limited), a United Kingdom company.
ARC Europe includes its wholly-owned subsidiaries Mecar S.A. (Mecar) and the
VSK Group of companies. Mecar includes a related Belgian subsidiary,
Sedachim, S.I. The VSK Group is comprised of Tele Technique Generale,
I.D.C.S., N.V. and VSK Electronics N.V. and its wholly-owned subsidiaries,
Belgian Automation Units, N.V. and Vigitec S.A. (Vigitec), which was acquired
in a purchase transaction on December 14, 1999.
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 place restrictions on cash deposits and other liens on
Mecar's assets. VSK has also pledged certain term deposits to secure
outstanding bank guarantees.
Restricted cash of $7,613 and $4,508 included in current assets at March 31,
2000 and December 31, 1999, respectively, was restricted or pledged as
collateral for these agreements and other obligations.
NOTE 4 - DISCONTINUED OPERATION
On December 10, 1999, the Company contracted to sell the engineering and
technical segment of its business. Settlement of the sale occurred on March
10, 2000 and resulted in a gain of $431, net of taxes, on the sale.
5
<PAGE>
Allied Research Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 2000
(Thousands of Dollars)
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - INVENTORIES
Inventories are composed of raw materials and supplies.
NOTE 6 - NOTES PAYABLE
Mecar has a line-of-credit of up to $10,000 for working capital.
Approximately $5,798 of the line was used at March 31, 2000. There was no
amount outstanding at December 31, 1999.
NOTE 7 - 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. These fees are charged to interest expense. As of
March 31, 2000 and December 31, 1999, guarantees and performance bonds of
$10,065 and $6,913, respectively, remain outstanding.
Advances under the Agreements are secured by restricted cash at March 31, 2000
and December 31, 1999 of $7,613 and $4,508, respectively. Amounts outstanding
are also collateralized by the letters of credit received under the contracts
financed, and a pledge of approximately $26 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 8 - LONG-TERM FINANCING
Mecar is obligated on a mortgage of approximately $2,000 on its manufacturing
and administration facilities. As amended, the balance of the loan is payable
in annual principal installments of approximately $550 and matures in 2004.
The Company is also obligated on several mortgages on The VSK Group's
buildings which has a balance of approximately $800 at March 31, 2000. These
mortgages are payable in annual installments of approximately $250 plus
interest.
Scheduled annual maturities of long-term obligations as of March 31, 2000 are
approximately as follows:
Year Amount
---- -------
2001 $1,617
2002 1,049
2003 966
2004 794
2005 18
6
<PAGE>
Allied Research Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 2000
(Thousands of Dollars)
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES
As of December 31, 1999, the Company had unused foreign tax credit
carryforwards of approximately $1,400 which expire through 2004.
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
$12,400 at December 31, 1999. Determination of the amount of unrecognized
deferred tax liabilities is not practicable.
NOTE 10 - EARNINGS (LOSS) PER SHARE
Incremental shares from the assumed conversion of stock options outstanding
have been included in the diluted per share computation.
7
<PAGE>
Allied Research Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2000
(Thousands of Dollars)
(Unaudited)
- --------------------------------------------------------------------------------
The following is intended to update the information contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999 and presumes
that readers have access to, and will have read, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in such
Form 10-K.
The Company conducts its business through its wholly-owned subsidiaries:
Mecar, S.A. ("Mecar"), a Belgian corporation; and a group of Belgian
corporations acquired in 1994 and 1995 led by VSK Electronics, N.V.,
Teletechnique General, S.A., Vigitec S.A. and IDCS, S.A. (collectively, the
"VSK Group"). This discussion refers to the financial condition and results
of operations of the Company on a consolidated basis. All dollars are in
thousands except per share amounts.
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 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 to increase the commercial component of its
business; the mix of products/services; 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. 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; increasing competition by foreign and domestic
competitors, including new entrants; and other Future Factors.
8
<PAGE>
Allied Research Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2000
(Thousands of Dollars)
(Unaudited)
- --------------------------------------------------------------------------------
Revenue
-------
Revenue for the first (3) three months of 2000 was $23,474, a decrease of
1.4% from the comparable period in 1999, due to exchange rate fluctuations.
<TABLE>
<CAPTION>
Revenues by Segment
-----------------------------------------------------------
1st Quarter 2000 1st Quarter 1999
---------------------- ---------------------
Percentage Percentage
Amount of total Amount of total
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Mecar $18,615 79% $18,988 80%
VSK $ 4,859 21% $ 4,812 20%
</TABLE>
Backlog
-------
As of March 31, 2000, the Company's backlog was $117,000 compared with
$105,000 at December 31, 1999 and $26,000 at March 31, 1999, respectively.
The March 31, 2000 backlog consisted of backlog of approximately $103,000 and
$14,000 at Mecar and VSK Group, respectively.
Operating Costs and Expenses
----------------------------
Cost of sales for the first three months of 2000 were approximately $18,957,
or 81% of revenue, as compared to $19,624, or 82% of revenue, for the first
three months of 1999.
Selling and administrative expenses were approximately $2,337, or 10% of
revenue, for the three months ended March 31, 2000, as compared to $2,115, or
9% of revenue, for the three months ended March 31, 1999. This increase
results from anticipated cost increases.
Research and Development
------------------------
Research and development expenses were less than 2% of revenue for the three
month periods ended March 31, 2000 and 1999.
Interest Income
---------------
Interest income for the first three months of 2000 decreased, compared to the
same period in 1999, due to lesser amounts of cash invested.
Interest Expense
----------------
Interest expense for the first three months of 2000 decreased by 24% compared
to the same period in 1999 as a result of decreases in bank guarantee fees.
Other - Net
-----------
Other - Net represents primarily currency losses, net of currency gains,
resulting from foreign currency transactions for the three months ended March
31, 2000.
9
<PAGE>
Allied Research Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2000
(Thousands of Dollars)
(Unaudited)
- --------------------------------------------------------------------------------
Pre-Tax Profit
--------------
<TABLE>
<CAPTION>
Pre-Tax Profit by Segment
----------------------------------------------------------
1st Quarter 2000 1st Quarter 1999
--------------------- ---------------------
Percentage Percentage
Amount of total Amount of total
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Mecar $975 61% $ 737 36%
VSK $636 39% $1,320 64%
</TABLE>
Mecar's first quarter 2000 pre-tax profits increased by 32% over its profits
in the first quarter of 1999 primarily due to the product mix of the orders in
process. VSK Group's pre-tax profits through March 31, 2000 were less than
50% of its pre-tax profits in the first quarter of 1999 principally due to the
inclusion of a very profitable foreign hotel project in the first quarter of
1999.
Income Taxes
------------
The effective tax rate in the first quarter of 2000 was 40% as compared to 39%
in the first quarter of 1999.
Net Earnings
------------
The Company earned a $967 profit from continuing operations ($0.20 per share
basic and diluted) in the first three months of 2000 compared with a $1,263
profit from continuing operations ($0.27 per share basic and diluted) in the
first three months of 1999.
In addition, in the first quarter of 2000, the Company reported (i) a $431
gain, net of income taxes, on the sale of Barnes & Reinecke, Inc. ("BRI") and
(ii) a $54 profit from discontinued operation (i.e., the operations of BRI
prior to completion of the sale) compared to $3 for the period ended March 31,
1999.
Liquidity and Capital Resources
-------------------------------
During the first three months of 2000 and throughout 1999, Allied funded its
operations principally with internally generated cash and back-up credit
facilities required for foreign government contracts. In addition, Mecar has
obtained a $10,000 line-of-credit from one of the bank pool participants.
Mecar is limited by its bank pool agreement in the amounts it may transfer to
Allied or other affiliates. At March 31, 2000, the Company had unrestricted
cash (i.e., cash not required by the terms of the bank pool agreement to
collateralize contracts) of approximately $6,711 compared with approximately
$5,968 at December 31, 1999.
10
<PAGE>
Allied Research Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2000
(Thousands of Dollars)
(Unaudited)
- --------------------------------------------------------------------------------
Accounts receivable at March 31, 2000 decreased from December 31, 1999 levels
by $993 due to greater shipments at the end of 1999. Costs and accrued
earnings on uncompleted contracts increased by $19,026 from December 31, 1999
levels due to increased levels of work-in-progress. Inventories were
increased from year-end levels by $936 due to increases in purchases for work-
in-progress. The increase in other assets results primarily from the $900
note receivable due in connection with the sale of BRI.
Current liabilities outstanding at the end of the first quarter of 2000
increased by $19,163 over such liabilities outstanding at the end of 1999
primarily due to loans outstanding at Mecar under its line-of-credit and
increased accounts payable and accrued liabilities arising from the increased
work -in-progress at Mecar.
In summary, working capital was approximately $25,129 at March 31, 2000, which
is a decrease of $694 from working capital at December 31, 1999. The decrease
is primarily attributable to the Company's investment in work-in-process.
Year 2000 Issue
---------------
To date, the Company has not encountered any significant effects of the year
2000 issue either internally or with third parties. The Company cannot
guarantee that problems will not occur in the future or have not yet been
detected.
Quantitative and Qualitative Market Risk Disclosure
---------------------------------------------------
No material changes have occurred in the quantitative and qualitative market
risk disclosures of the Company as presented in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
11
<PAGE>
Allied Research Corporation
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
On March 23, 2000, the Company filed a Form 8-K reporting the sale of
Barnes & Reinecke, Inc.
12
<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: April 27, 2000 W. Glenn Yarborough, Jr.
President,
Chief Executive Officer and
Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-2000
<CASH> 14,324,000
<SECURITIES> 0
<RECEIVABLES> 8,285,000
<ALLOWANCES> 0
<INVENTORY> 4,455,000
<CURRENT-ASSETS> 61,022,000
<PP&E> 40,415,000
<DEPRECIATION> 29,550,000
<TOTAL-ASSETS> 79,443,000
<CURRENT-LIABILITIES> 35,893,000
<BONDS> 0
0
0
<COMMON> 486,000
<OTHER-SE> 40,287,000
<TOTAL-LIABILITY-AND-EQUITY> 79,443,000
<SALES> 23,474,000
<TOTAL-REVENUES> 23,474,000
<CGS> 18,957,000
<TOTAL-COSTS> 21,690,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 154,000
<INCOME-PRETAX> 1,611,000
<INCOME-TAX> 644,000
<INCOME-CONTINUING> 967,000
<DISCONTINUED> 485,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,452,000
<EPS-BASIC> .30
<EPS-DILUTED> .30
</TABLE>
