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, 1996 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, 1996: 4,430,233. ALLIED RESEARCH CORPORATION INDEX - -------------------------------------------------------------------------------- PAGE PART I. FINANCIAL INFORMATION - UNAUDITED NUMBER Item 1. Financial Statements Condensed Consolidated Balance Sheets December 31, 1995 and March 31, 1996...............2,3 Condensed Consolidated Statements of Earnings Three months ended March 31, 1996 and 1995...........4 Condensed Consolidated Statements of Cash Flows Three months ended March 31, 1996 and 1995.........5,6 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...........................................13 Allied Research Corporation CONDENSED CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) ASSETS (Unaudited) - -------------------------------------------------------------------------------- March 31, 1996 December 31, 1995 -------------- ----------------- CURRENT ASSETS Cash and equivalents, including restricted cash $14,362 $15,744 Accounts receivable 19,173 21,091 Costs and accrued earnings on uncompleted contracts 8,407 6,312 Inventories 6,311 6,337 Prepaid expenses 1,391 1,112 ------- ------- Total current assets 49,644 50,596 PROPERTY, PLANT AND EQUIPMENT - AT COST Buildings 13,692 14,248 Machinery and equipment 34,304 35,189 ------- ------- 47,996 49,437 Less accumulated depreciation 32,796 33,330 ------- ------- 15,200 16,107 Land 1,476 1,545 ------- ------- Total property, plant and equipment 16,676 17,652 OTHER ASSETS Deposit - restricted cash 16,152 18,492 Intangibles 6,616 7,085 Other 38 428 ------- ------- Total other assets 22,806 26,005 ------- ------- $89,126 $94,253 ======= ======= 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, 1996 December 31, 1995 -------------- ----------------- CURRENT LIABILITIES Notes payable $ 449 $ 485 Current maturities of long-term debt 1,709 2,787 Accounts and trade notes payable 19,643 17,786 Accrued liabilities 4,747 5,289 Customer deposits 6,379 9,900 Income taxes 729 371 ------- ------- Total current liabilities 33,656 36,618 LONG-TERM DEBT, less current maturities 26,358 28,435 DEFERRED INCOME TAXES 847 847 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 4,430,233 443 442 in 1996 and 4,422,056 in 1995 Capital in excess of par value 10,777 10,745 Retained earnings 13,312 12,676 Accumulated foreign currency translation adjustment 3,733 4,490 ------- ------- Total stockholders' equity 28,265 28,353 ------- ------- $89,126 $94,253 ======= ======= 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 1996 1995 Revenue $ 23,527 $ 9,153 Cost and expenses Cost of sales 18,395 9,050 Selling and administrative 3,464 2,269 Research and development 411 195 ---------- ---------- 22,270 11,514 Operating income (loss) 1,257 (2,361) Other income (deductions) Interest expense (678) (794) Interest income 397 820 Other - net (116) (259) ---------- ---------- (397) (233) Earnings (loss) before income taxes 860 (2,594) Income taxes 224 130 ---------- ---------- NET EARNINGS (LOSS) $ 636 $ (2,724) ========== ========== Net income (loss) per common share $ .14 $ (.62) ========== ========== Weighted average number of shares 4,422,634 4,398,512 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 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss) $ 636 $(2,724) Adjustments to reconcile net earnings to net cash provided by (used in) operating activities Depreciation and amortization 352 472 Changes in assets and liabilities (Increase) decrease in Accounts receivable 1,879 4,302 Costs and accrued earnings on uncompleted contracts (2,174) (1,325) Inventories (234) (43) Prepaid expenses and other assets (340) (433) Increase (decrease) in Accounts payable, accrued liabilities and customer deposits (1,212) (9,201) Income taxes 361 500 ------- ------- Net cash (used in) provided by operating activities (732) (8,452) CASH FLOWS (USED IN) INVESTING ACTIVITIES Capital expenditures (114) (322) ------- ------- Net cash (used in) investing activities (114) (322) The accompanying notes are an integral part of these statements. 5 Allied Research Corporation CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Thousands of Dollars) (Unaudited) - -------------------------------------------------------------------------------- Three months ended March 31 1996 1995 CASH FLOWS FROM FINANCING ACTIVITIES Principal payments of long-term debt (1,291) - Net increase in long-term borrowings - 435 Net increase (decrease) in short-term borrowings (924) 1,285 Stock award/stock plan 32 20 Common shares purchased and retired - - Deposits - restricted cash 2,340 (760) ------- ------- Net cash provided by financing activities 157 980 Effects of exchange rate changes on cash (694) 2,827 ------- ------- NET (DECREASE) IN CASH AND CASH EQUIVALENTS (1,383) (4,967) CASH AND EQUIVALENTS AT BEGINNING OF YEAR 15,744 43,606 ------- ------- CASH AND EQUIVALENTS AT END OF PERIOD $14,362 $38,639 ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for Interest $ 516 $ 1,841 Taxes 60 410 The accompanying notes are an integral part of these statements. 6 Allied Research Corporation NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 1996 (Thousands of Dollars) (Unaudited) - -------------------------------------------------------------------------------- NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The condensed consolidated balance sheets as of March 31, 1996 and December 31, 1995, the condensed consolidated statements of earnings and the condensed consolidated statements of cash flows for the three months ended March 31, 1996 and 1995, 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, 1996 and 1995 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, 1995 Form 10-K filed with the Securities and Exchange Commission, Washington, D.C. 20549. The results of operations for the period ended March 31, 1996 and 1995 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), Barnes & Reinecke, Inc. (a Delaware Corporation), and ARC Services, Inc. (a Delaware Corporation). Mecar, S.A.'s wholly-owned Belgian subsidiaries include, Mecar Immobliere S.A., Sedachim, S.I., Tele Technique Generale and VSK Electronics N.V. and its wholly-owned subsidiaries, Classics, B.V.B.A. Dectectia, N.V., IDCS, N.V. and Belgian Automation Units, N.V. (collectively "The VSK Group"). IDCS, N.V. was acquired on May 9, 1995, and was accounted for as a purchase, and revenue and results of operations from that date forward have been consolidated. During 1995, Mecar's wholly-owned subsidiaries Management Export Services, N.V. and its minority interest in Building Control Services, N.V. were liquidated. In addition, the Company effectively ceased operations of its wholly-owned subsidiary ARC Services, Inc. in December, 1995. VSK France is also being liquidated effective December 31, 1995. Significant intercompany transactions have been eliminated in consolidated. NOTE 3 - ACQUISITION On May 9, 1995, the VSK Group acquired IDCS, N.V. a Belgian company, for approximately $2,972. This company manufactures, distributes and services an integrated line of industrial security products, including devices such as buildings access control, parking control, intrusion and fire detection and intrusion and fire alarms. 7 Allied Research Corporation NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 1996 (Thousands of Dollars) (Unaudited) - -------------------------------------------------------------------------------- NOTE 3 - ACQUISITION - Continued The acquisition has been accounted for as a purchase and the purchase price in excess of the net assets acquired has been reflected in intangibles. The financial statements include the results of operations since the date of acquisition. Pro forma financial data for these acquisitions prior to the date of acquisition would not have a material affect on reported results. Fair value of tangible assets acquired $2,587 Liabilities assumed 855 ------ Net assets acquired 1,732 Purchase price 2,972 ------ Excess of cost over assets acquired $1,240 ====== NOTE 4 - 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 and long-term deposits totaling approximately $25,897 ($16,152 of which is classified as a long-term deposit) at March 31, 1996 ($29,051 at December 31, 1995) are restricted or pledged as collateral for various bank agreements and are comprised as follows: 1996 1995 Cash Credit facility and related term loan agreements $ 6,362 $ 7,755 Other bank guarantees and letters of credit 2,348 1,769 Notes payable 1,035 1,035 ------- ------- 9,745 10,559 Deposit - restricted cash - long-term Credit facility and related term loan agreements 16,152 18,492 ------- ------- $25,897 $29,051 ======= ======= NOTE 5 - INVENTORIES Inventories consist of the following: March 31, 1996 December 31, 1995 Raw materials and supplies $6,311 $6,337 ====== ====== 8 Allied Research Corporation NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 1996 (Thousands of Dollars) (Unaudited) - -------------------------------------------------------------------------------- NOTE 6 - NOTES PAYABLE At March 31, 1996 and December 31, 1995, secured short-term loans of $72 and of 337 were outstanding with certain banks. Barnes and Reinecke has a $750 revolving line-of-credit agreement which had no outstanding balance at March 31, 1996. The outstanding borrowings under the similar line were $445 at December 31, 1995. The line-of-credit bears interest at the prime rate plus 1.5% and expires in July, 1996. 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. Mecar has a $1,035 line-of-credit agreement with a foreign bank which was unused at March 31, 1996 and at December 31, 1995. The line is secured by a cash deposit pledge equal to the full amount of the line. NOTE 7 - CREDIT FACILITY The Company is obligated under a credit agreement (the Agreement) with a banking pool comprised of four foreign banks that provided credit facilities primarily for letters of credit, bank guarantees, performance bonds and similar instruments required for specific sales contracts. The Agreement provides for certain bank charges and fees as the line is used, plus an annual fee of approximately 2% of guarantees issued. As of March 31, 1996, the credit facility had been fully utilized and guarantees of $17,964 remain outstanding. At March 31, 1996, advances under the credit facility were secured by deposits of $6,362, plus term deposits of $16,152. There is $16,152 classified as long-term deposit at March 31, 1996 and $18,492 at December 31, 1995. Amounts outstanding are also collateralized by pledges of approximately $27,600 on Mecar's assets, letters of credit and certain funds received under the contracts financed. The Agreement provides 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 the payment of bank fees and charges as defined in the Agreement. The Agreement also requires Allied to increase Mecar's capital by approximately $8,600 during 1996 by agreeing to cancel certain intercompany indebtedness. The Company is also liable for guarantees and other instruments issued on its behalf by other banks which approximate $1,670 at March 31, 1996, which are collateralized by $1,048 of time deposits. Mecar is obligated on an approximately $5,400 mortgage on its manufacturing and administration facilities. As amended, the balance of the loan is payable in annual principal installments of approximately $600 commencing in January 1996 (except for the annual principal installment in the year 2000 which is approximately $800) and the entire balance matures in 2004. The Company is also obligated on several mortgages on The VSK Group's buildings which has a balance of approximately $1,800 at March 31, 1996. The mortgages are payable in annual installments of approximately $250 plus interest. 9 Allied Research Corporation NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 1996 (Thousands of Dollars) (Unaudited) - -------------------------------------------------------------------------------- NOTE 7 - LONG-TERM FINANCING - Continued Scheduled annual maturities of long-term obligations as of March 31, 1996 are approximately as follows: Year Amount 1996 $ 2,086 1997 21,020 1998 1,629 1999 1,162 2000 995 Thereafter 1,175 ------- $28,067 ======= NOTE 8 - INCOME TAXES The Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). The provision for income taxes differs from the anticipated combined federal and state statutory rates due to operating losses and earnings from foreign subsidiaries. The Company's Belgian subsidiaries have unused net operating losses of approximately $17,000 at March 31, 1996, which under Belgian law cannot be carried back but may be carried forward indefinitely, and are subject to annual limitations. As of March 31, 1996, the Company had unused foreign tax credit carryforwards of approximately $1,100 which expire through 2009. 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 $16,500 at March 31, 1996 and December 31, 1995. Determination of the amount of unrecognized deferred tax liabilities is not practicable. NOTE 9 - EARNINGS (LOSS) PER SHARE Stock options outstanding have not been included in the per share computation because there would not be a material effect on earnings (loss) per share. 10 Allied Research Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS March 31, 1996 (Thousands of Dollars) (Unaudited) - -------------------------------------------------------------------------------- The Company conducts its business through its wholly-owned subsidiaries: Mecar, S.A., ("Mecar"), a Belgian corporation, and its subsidiaries, Mecar Immobliere, S.A., Sedachim, S.I., Tele Technique Generale, as well as VSK Electronics, N.V., Classics, B.V.B.A., Detectia, N.V. IDCS, N.V. and Belgian Automation Units, N.V. (collectively "The VSK Group"): Barnes & Reinecke, Inc., ("Barnes") a Delaware corporation, headquarterd in Illinois; Allied Research Corporation Limited, ("Limited") a U.K. Company; and ARC Services, Inc., ("Services") a Delaware corporation, headquartered in Vienna, Virginia. This discussion refers to the financial condition and results of operations of the Company on a consolidated basis. During 1995, Mecar's wholly-owned subsidiaries Management Export Services, N.V. and its minority interest in Building Control Services, N.V. were liquidated. In addition, the Company effectively ceased operations of its wholly-owned subsidiary ARC Services, Inc. in December, 1995. VSK France is also being liquidated effective December 31, 1995. SALES Revenue for the first three months of 1996 was $23,527, an increase of 157% over the comparable period in 1995, due to increases in revenues by all operating subsidiary groups. Mecar sales were $15,825, or up 404% compared to the period ended March 31, 1995. Barnes revenues were $3,415, up 67% compared to the same period in 1995. The VSK Group's revenues for the quarter were $4,284 compared to $3,944 for 1995, however, the prior year did not include IDCS, N.V. which was acquired in May, 1995. Limited and Services did not have revenues this period or in last year's comparable period. BACKLOG As of March 31, 1996, the Company's backlog was $60,333 compared with $68,100 at December 31, 1995. Mecar's backlog at March 31, 1996 was approximately $30,771. As of March 31, 1995, the Company's backlog was $40,730, $13,100 of which was Mecar's backlog. During the quarter, Mecar received orders for $12 million, although no direct orders were received from Mecar's principal customer. OPERATING COSTS AND EXPENSES Cost of sales for the first three months of 1996 were approximately $18,395 or 78% of sales as compared to $9,050 or 99% for the first three months of 1995. The decrease is primarily due to the product mix. Selling and administrative expenses were approximately $3,464 or 15% of revenues for the three months ended March 31, 1996 as compared to $2,269 or 25% for the three months ended March 31, 1995. This decrease is a result of increased volumes of revenue. RESEARCH AND DEVELOPMENT Research and development expenses were 2% as a ratio of sales for the three month period ended March 31, 1996 and 1995. 11 Allied Research Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS - CONTINUED March 31, 1996 (Thousands of Dollars) (Unaudited) - -------------------------------------------------------------------------------- OPERATING INCOME There was operating income of $1,257 for the first three months or 5% of revenues for the quarter ended March 31, 1996. This compares with an operating loss of $2,361 for the three months ended March 31, 1995. This increase is primarily because of increased revenues from all subsidiaries. INTEREST EXPENSE Interest expense for the first three months of 1996 decreased, compared to the same period in 1995, as a result of decreased borrowing levels. INTEREST INCOME Interest income decreased as a result of a decrease in funds available for investment. OTHER - NET For the three months ended March 31, 1996, Other - Net represents primarily currency losses, net of currency gains, resulting from foreign currency transactions. LIQUIDITY AND CAPITAL RESOURCES During the first three months of 1996 and throughout 1995, Allied funded its operations principally with internally generated cash and back-up credit facilities required for foreign government contracts. At March 31, 1996, the Company had unrestricted cash (i.e., cash not required by the terms of the bank agreement to collateralize contracts) of approximately $4,617. Mecar is limited by its bank pool agreement in the amounts it may transfer to Allied or other affiliates. Accounts receivable at March 31, 1996 decreased over December 31, 1995 by $1,918 and costs and accrued earnings on uncompleted contracts increased by $2,095 from 1995. Inventories remained level. Prepaid expenses and deposits increased $279 primarily due to the increase in prepaid expenses. Current liabilities decreased by $2,962 from December 31, 1995 levels as a result of decreases in accounts payable, notes payables, current maturities on long-term debt, accrued liabilities and customer deposits. In summary, working capital was approximately $15,988 at March 31, 1996, which is an increase of $2,200 from December 31, 1995. The increase is primarily attributable to cash generated from operating activities. 12 Allied Research Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS - CONTINUED March 31, 1996 (Thousands of Dollars) (Unaudited) - -------------------------------------------------------------------------------- PART II. OTHER INFORMATION None. 13 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 --------------------------------- Date: May 15, 1996 J. R. Sculley Chairman of the Board, Chief Executive Officer and Chief Financial Officer 14