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, 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 March 31, 1999: 4,830,716. ALLIED RESEARCH CORPORATION INDEX - -------------------------------------------------------------------------------- PAGE PART I. FINANCIAL INFORMATION - UNAUDITED NUMBER Item 1.Financial Statements Condensed Consolidated Balance Sheets December 31, 1998 and March 31, 1999.............................2,3 Condensed Consolidated Statements of Earnings Three months ended March 31, 1999 and 1998.........................4 Condensed Consolidated Statements of Cash Flows Three months ended March 31, 1999 and 1998.........................5 Notes to Condensed Consolidated Financial Statements......................6 Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................9 PART II. OTHER INFORMATION........................................................11 ALLIED RESEARCH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS) ASSETS (UNAUDITED) - -------------------------------------------------------------------------------- March 31, 1999 December 31, 1998 -------------- ----------------- CURRENT ASSETS Cash and equivalents $11,542 $10,235 Restricted cash (notes 3 and 6) 11,336 14,014 Accounts receivable 45,298 29,446 Costs and accrued earnings on uncompleted contracts 4,802 20,887 Inventories 4,151 3,422 Prepaid expenses and deposits 1,509 10,094 ------- ------- Total current assets 78,638 88,098 PROPERTY, PLANT AND EQUIPMENT - AT COST Buildings and improvements 11,600 12,440 Machinery and equipment 29,685 31,776 Leasehold improvements 119 118 ------- ------- 41,404 44,334 Less accumulated depreciation 31,247 33,103 ------- ------- 10,157 11,231 Land 1,198 1,298 ------- ------- 11,355 12,529 OTHER ASSETS Restricted deposits (notes 3 and 6) 6,737 6,670 Intangibles, net of amortization 4,830 4,961 Other 776 818 ------- ------- 12,343 12,449 ------- ------- $102,336 $113,076 ======== ======== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 2 ALLIED RESEARCH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED (THOUSANDS OF DOLLARS) LIABILITIES (UNAUDITED) - -------------------------------------------------------------------------------- March 31, 1999 December 31, 1998 -------------- ----------------- CURRENT LIABILITIES Notes payable $ 5,330 $ 3,415 Current maturities of long-term debt 556 1,324 Accounts and trade notes payable 26,826 25,379 Accrued liabilities 4,308 5,043 Accrued losses on contracts 1,030 786 Customer deposits 1,464 16,137 Income taxes 1,478 748 ------- ------- Total current liabilities 40,992 52,832 LONG-TERM DEBT, less current maturities 4,008 4,431 ADVANCE PAYMENTS ON CONTRACTS 5,850 5,850 DEFERRED INCOME TAXES - - 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, 4,830,716 in 1999 and 4,757,174 in 1998 483 475 Capital in excess of par value 13,874 13,391 Retained earnings 36,378 35,111 Accumulated other comprehensive income 751 985 ------- ------- 51,486 49,963 ------- ------- $102,336 $113,076 ======== ======== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 3 ALLIED RESEARCH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (THOUSANDS OF DOLLARS) (UNAUDITED) - -------------------------------------------------------------------------------- Three months ended March 31 --------------------------- 1999 1998 -------- -------- REVENUE $ 27,482 $ 35,753 COST AND EXPENSES Cost of sales 22,693 29,123 Selling and administrative 2,664 3,271 Research and development 397 457 -------- -------- 25,754 32,851 -------- -------- Operating income 1,728 2,902 OTHER INCOME (DEDUCTIONS) Interest expense (335) (407) Interest income 293 236 Other - net 376 (12) -------- -------- 334 (183) -------- -------- Earnings before income taxes 2,062 2,719 INCOME TAXES 796 462 -------- -------- NET EARNINGS $ 1,266 $ 2,257 ============ ============ NET INCOME PER COMMON SHARE Basic $ .27 $ .49 ============ ============ Diluted $ .27 $ .48 ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES Basic 4,779,223 4,646,008 Diluted 4,785,937 4,692,067 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 4 ALLIED RESEARCH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS OF DOLLARS) (UNAUDITED) - -------------------------------------------------------------------------------- Three months ended March 31 --------------------------- Increase (decrease) in cash and equivalents 1999 1998 ------- ------ CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 1,266 $2,257 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities Depreciation and amortization 568 497 Changes in assets and liabilities Accounts receivable (17,969) 22,736 Costs and accrued earnings on uncompleted 14,948 (9,588) contracts Inventories (1,034) 4,087 Prepaid expenses and other assets 7,294 (1,485) Accounts payable, accrued liabilities and customer deposits (7,980) (18,731) Income taxes 1,062 640 ------- ------ Net cash (used in ) provided by operating (1,845) 413 activities CASH FLOWS (USED IN) INVESTING ACTIVITIES Capital expenditures (560) (413) Restricted cash and restricted deposits 2,678 - ------- ------ Net cash provided by (used in ) investing 2,118 (413) activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt 350 - Principal payments of long-term debt (354) (17) Net increase (decrease) in short-term borrowings 1,115 (742) Stock award/stock plan 503 715 Options exercised 16 346 Net (increase) in long-term deposits (67) (4,746) Retirement of common stock (28) - ------- ------ Net cash provided by (used in) financing activities 1,535 (4,444) Effects of exchange rate changes on cash (501) (289) ------- ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,307 (4,733) CASH AND EQUIVALENTS AT BEGINNING OF YEAR 10,235 7,694 ------- ------ CASH AND EQUIVALENTS AT END OF PERIOD $ 11,542 2,961 ======== ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for Interest $ 316 $ 476 Taxes 214 399 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 5 ALLIED RESEARCH CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 (THOUSANDS OF DOLLARS) (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The condensed consolidated balance sheets as of March 31, 1999 and December 31, 1998, the condensed consolidated statements of earnings and the condensed consolidated statements of cash flows for the three months ended March 31, 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 March 31, 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 March 31, 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, Mecar, S.A. (a Belgian Company), Allied Research Corporation Limited (a United Kingdom Company), and Barnes & Reinecke, Inc. (a Delaware Corporation). Mecar, S.A.'s wholly-owned Belgian subsidiaries include, Sedachim, S.I., Tele Technique Generale and VSK Electronics N.V. and its wholly-owned subsidiaries, IDCS, N.V. and Belgian Automation Units, 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 $11,336 and long-term deposits of $6,737 at March 31, 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. 6 ALLIED RESEARCH CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 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 March 31, 1999 of $5,330 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. The Company is also obligated on various vehicles, equipment and other operating loans. NOTE 6 - CREDIT FACILITY The Company is obligated under various credit agreements (the Agreements) with its foreign banking pool and its domestic bank that provided credit facilities primarily for letters of credit, bank guarantees, performance bonds and similar instruments required for specific sales contracts. The Agreements provide for certain bank charges and fees as the line is used, plus fees of 2% of guarantees issued and annual fees of 1.25% - 1.35% of letters of credit and guarantees outstanding. As of March 31, 1999, guarantees and performance bonds of $20.9 million ($34.1 million at December 31, 1998) remain outstanding. Advances under the Agreements are secured by cash of $11,336 and long-term cash deposits of $6,737. 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 7 - LONG-TERM FINANCING Mecar is obligated on an approximately $3,000 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 has a balance of approximately $800 at March 31, 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 $247 at March 31, 1999 and $346 at December 31, 1998. Scheduled annual maturities of long-term obligations as of March 31, 1999 are approximately as follows: Year Amount ---- ------ 2000 $ 556 2001 1,300 2002 1,100 2003 900 2004 500 Thereafter 208 7 ALLIED RESEARCH CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1999 (THOUSANDS OF DOLLARS) (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 8 - INCOME TAXES The provision for income taxes differs from the anticipated combined federal and state statutory rates due to operating loss carryovers and earnings from foreign subsidiaries. As of March 31, 1999, the Company had unused foreign tax credit carryforwards of approximately $764 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 $30,000 at March 31, 1999 and 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. 8 ALLIED RESEARCH CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MARCH 31, 1999 (THOUSANDS OF DOLLARS) (UNAUDITED) - -------------------------------------------------------------------------------- The Company conducts its business through its wholly-owned subsidiaries: Mecar, S.A., ("Mecar"), a Belgian corporation and Barnes & Reinecke, Inc. ("Barnes"), 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 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. REVENUE Revenue for the first (3) three months of 1999 was $27,482, a decrease of 23% from the comparable period in 1998, principally due to decreased revenue from Mecar . Revenues by Segment ---------------------------------------------- 1st Quarter 1999 1st Quarter 1998 ------------------ ------------------- Percentage Percentage Amount of total Amount of total ------ --------- ------ --------- Mecar $18,821 69% $28,615 80% VSK $4,979 18% $4,781 13% BRI $3,682 13% $2,357 7% Mecar's performance continues to suffer as a result of lack of orders from its principal customers. BACKLOG As of March 31, 1999, the Company's backlog was $26,000 compared with $48,000 at December 31, 1998 and $121,000 at March 31, 1998. The March 31, 1999 backlog consisted of backlog of approximately $6,000, $13,000 and $7,000 at Mecar, VSK Group and BRI, respectively. OPERATING COSTS AND EXPENSES Cost of sales for the first three months of 1999 were approximately $22,693, or 83% of sales, as compared to $29,123, or 81%, for the first three months of 1998. The change is due to the product mix Selling and administrative expenses were approximately $2,664, or 10% of revenue, for the three months ended March 31, 1999 as compared to $3,271, or 9%, for the three months ended March 31, 1998. RESEARCH AND DEVELOPMENT Research and development expenses were 1% of sales for each of the three month periods ended March 31, 1999 and 1998. INTEREST EXPENSE Interest expense for the first three months of 1999 decreased, compared to the same period in 1998, as a result of decreased borrowing levels. 9 ALLIED RESEARCH CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MARCH 31, 1999 (THOUSANDS OF DOLLARS) (UNAUDITED) - -------------------------------------------------------------------------------- INTEREST INCOME Interest income for the 1999 period increased over the same three month period of 1998 due to increased levels of cash. OTHER - NET Other - Net represents primarily currency gains, net of currency losses, resulting from foreign currency transactions for the three months ended March 31, 1999. The difference over the same period ended March 31, 1998 results from the fluctuation of currency rates. PRE-TAX PROFIT Pre-Tax Profit by Segment -------------------------------------------- 1st Quarter 1999 1st Quarter 1998 ----------------- ----------------- Percentage Percentage Amount of total Amount of total ------ -------- ------ -------- Mecar $ 737 36% $1,636 60% VSK $1,320 64% $ 960 35% BRI $ 5 - % $ 123 5% INCOME TAXES The effective tax rate in the first quarter of 1999 was 39% as compared to 17% in the first quarter of 1998. The increase is the result of the utilization during 1998 of Mecar's tax loss carryforwards. NET EARNINGS The Company earned a $1,266 profit ($0.27 per share basic and diluted) in the first three months of 1999 compared with a $2,257 profit ($0.49 per share basic and $0.48 diluted) in the first three months of 1998. The decreased net earnings were primarily attributable to a decreased volume of business at Mecar. LIQUIDITY AND CAPITAL RESOURCES During the first three 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 finance its activities 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. Since the end of 1998, Allied has made intercompany loans to BRI to support BRI's cash flow, pending completion of BRI's contract to supply a dynamometor to a foreign customer. At March 31, 1999, the Company had unrestricted cash (i.e., cash not required by the terms of the bank pool agreement to collateralize contracts) and deposits of approximately $11,542 compared with approximately $10,235 at the year ended December 31, 1998. 10 ALLIED RESEARCH CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MARCH 31, 1999 (THOUSANDS OF DOLLARS) (UNAUDITED) - -------------------------------------------------------------------------------- Accounts receivable at March 31, 1999 increased from December 31, 1998 levels by $15,850 due to substantial shipments at the end of the first quarter of 1999. Costs and accrued earnings on uncompleted contracts decreased by $16,085 from December 31, 1998 levels due to decreased levels of work-in-progress. Inventories increased from year-end levels by $729 due to purchases on anticipated contracts. Prepaid expenses and deposits decreased by $8,584 primarily due to expenses related to shipments during the quarter. Current liabilities decreased by $11,838 from December 31, 1998 levels principally as a result of reductions in customer deposits. In summary, working capital was approximately $37,646 at March 31, 1999, which is an increase of $2,378 from working capital at December 31, 1998. The increase is primarily attributable to the Company's continuing profitability and a reduction in current liabilities. 11 ALLIED RESEARCH CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MARCH 31, 1999 (THOUSANDS OF DOLLARS) (UNAUDITED) - -------------------------------------------------------------------------------- PART II. OTHER INFORMATION None. 12 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/ J. R. Sculley --------------------------- Date: April 27, 1999 J. R. Sculley Chairman of the Board, Chief Executive Officer and Chief Financial Officer 13