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, 1998
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, 1998: 4,727,770.
ALLIED RESEARCH CORPORATION
INDEX
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PAGE
PART I. FINANCIAL INFORMATION - UNAUDITED NUMBER
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1997 and March 31, 1998...............2,3
Condensed Consolidated Statements of Earnings
Three months ended March 31, 1998 and 1997...........4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 1998 and 1997...........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, 1998 December 31, 1997
-------------- -----------------
CURRENT ASSETS
Cash and equivalents, including restricted cash $17,178,398 $16,420,943
Accounts receivable 17,317,406 40,649,726
Costs and accrued earnings on uncompleted contracts 17,261,407 7,804,344
Inventories 2,780,698 6,965,666
Prepaid expenses and deposits 5,762,397 4,094,190
----------- -----------
Total current assets 60,300,306 75,934,869
PROPERTY, PLANT AND EQUIPMENT - AT COST
Buildings and improvements 11,610,542 11,714,475
Machinery and equipment 28,780,347 28,778,285
Leasehold improvements 118,927 118,927
----------- -----------
40,509,816 40,611,687
Less accumulated depreciation 30,309,220 30,259,311
----------- -----------
10,200,596 10,352,376
Land 1,064,437 1,208,013
----------- -----------
11,265,033 11,560,389
OTHER ASSETS
Deposits 6,475,660 6,414,419
Intangibles, net of amortization 4,933,415 5,028,390
Other 327,954 562,572
----------- -----------
11,737,029 12,005,381
----------- -----------
$83,302,368 $99,500,639
=========== ===========
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, 1998 December 31, 1997
-------------- -----------------
CURRENT LIABILITIES
Notes payable $ 2,485,000 $ 1,720,000
Current maturities of long-term debt 556,877 1,280,736
Accounts and trade notes payable 10,955,906 34,656,335
Accrued liabilities 6,212,194 4,747,291
Accrued losses on contracts 144,498 572,279
Customer deposits 9,571,082 6,993,756
Income taxes 1,484,791 847,563
----------- -----------
Total current liabilities 31,410,348 50,817,960
LONG-TERM DEBT, less current maturities 5,139,843 5,311,564
ADVANCE PAYMENTS ON CONTRACTS 5,850,000 5,850,000
DEFERRED INCOME TAXES 577,780 626,660
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, 4,727,770
in 1998 and 4,608,221 in 1997 472,777 460,822
Capital in excess of par value 13,149,099 12,100,521
Retained earnings 28,302,908 26,046,271
Accumulated other comprehensive income (loss) (1,600,387) (1,713,159)
----------- -----------
40,324,397 36,894,455
----------- -----------
$83,302,368 $99,500,639
=========== ===========
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
-----------------------------
1998 1997
---------- ----------
Revenue $ 35,753 $ 29,765
Cost and expenses
Cost of sales 29,123 24,275
Selling and administrative 3,271 3,322
Research and development 457 367
---------- ----------
32,851 27,964
Operating income 2,902 1,801
Other income (deductions)
Interest expense (407) (508)
Interest income 236 253
Other - net (12) 639
---------- ----------
(183) 384
Earnings before income taxes 2,719 2,185
Income taxes 462 201
---------- ----------
NET EARNINGS $ 2,257 $ 1,984
========== ==========
Net income per common share
Basic $ .49 $ .44
========== ==========
Diluted $ .48 $ .44
========== ==========
Weighted average number of shares
Basic 4,646,008 4,472,340
Diluted 4,692,067 4,472,340
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 1998 1997
---------- ----------
Cash flows from operating activities
Net earnings $ 2,257 $ 1,983
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities
Depreciation and amortization 497 403
Changes in assets and liabilities
Accounts receivable 22,736 (9,176)
Costs and accrued earnings on uncompleted contracts (9,588) 6,316
Inventories 4,087 590
Prepaid expenses and other assets (1,485) 375
Accounts payable, accrued liabilities and
customer deposits (18,731) (7,943)
Income taxes 640 608
-------- --------
Net cash provided by (used in ) operating activities 413 (6,844)
Cash flows (used in) investing activities
Capital expenditures (413) (326)
-------- --------
Net cash (used in) investing activities (413) (326)
Cash flows from financing activities
Principal payments of long-term debt (17) --
Net increase (decrease) in short-term borrowings (742) (2,700)
Stock award/stock plan 715 494
Options exercised 346 176
Net increase (decrease) in long-term deposits 765 --
-------- --------
Net cash (used by) provided by financing activities 1,067 (2,030)
Effects of exchange rate changes on cash (289) (2,038)
-------- --------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 778 (11,238)
Cash and equivalents at beginning of year 16,421 32,859
-------- --------
Cash and equivalents at end of period $ 17,178 $ 21,621
======== ========
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for
Interest $ 476 $ 220
Taxes 399 150
The accompanying notes are an integral part of these statements.
5
Allied Research Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Thousands of Dollars)
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheets as of March 31, 1998 and December 31,
1997, the condensed consolidated statements of earnings and the condensed
consolidated statements of cash flows for the three months ended March 31, 1998
and 1997, 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, 1998 and 1997 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, 1997 Form
10-K filed with the Securities and Exchange Commission, Washington, D.C. 20549.
The results of operations for the period ended March 31, 1998 and 1997 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 of $14,217 and long-term deposits of $6,476 at March 31,
1998 ($20,116 at December 31, 1997) are restricted or pledged as collateral for
various 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, 1998
(Thousands of Dollars)
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - NOTES PAYABLE
Barnes and Reinecke has a $3,500 revolving line-of-credit agreement which had an
outstanding balance at March 31, 1998 of $2,485 and $1,720 at December 31, 1997.
The line-of-credit bears interest at the prime rate plus 1.5% and expires at the
earlier of the contract completion or November, 1999. 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 $800 line-of-credit agreement with a foreign bank was unused at
March 31, 1998 and at December 31, 1997. The line is secured by a cash deposit
pledge equal to the full amount of the line.
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, 1998, guarantees and performance bonds of $18.4
million ($28.6 million at December 31, 1997) remain outstanding.
Advances under the Agreements are secured by cash of $14,217 and long-term cash
deposits of $6,476. Amounts outstanding are also collateralized by the letters
of credit received under the contracts financed, and a pledge of approximately
$23 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 $4,800 mortgage on its manufacturing and
administration facilities. As amended, the balance of the loan is payable in
annual principal installments of approximately $600 and matures in 2004. The
Company is also obligated on several mortgages on The VSK Group's buildings
which has a balance of approximately $1,000 at March 31, 1998. The mortgages are
payable in annual installments of approximately $250 plus interest.
Barnes & Reinecke is obligated on two notes payable to its bank which have a
total balance due of $329 at March 31, 1998 and $346 at December 31, 1997.
Scheduled annual maturities of long-term obligations as of March 31, 1998 are
approximately as follows:
Year Amount
---- ------
1999 $1,204
2000 1,175
2001 760
2002 800
2003 800
Thereafter 400
7
Allied Research Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998
(Thousands of Dollars)
(Unaudited)
- --------------------------------------------------------------------------------
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 loss carryovers and earnings from foreign
subsidiaries.
The Company's Belgian subsidiaries have unused net operating losses of
approximately $3,200 at March 31, 1998, which under Belgian law cannot be
carried back but may be carried forward indefinitely.
As of March 31, 1998, the Company had unused foreign tax credit carryforwards of
approximately $455 which expire through 2009.
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 $28,600 at March 31, 1998 and
at December 31, 1997. 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, 1998
(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 1998 was $35,753, an increase of 20%
over the comparable period in 1997, principally due to increased revenue from
Mecar and the VSK Group. Mecar sales were $28,615, or up 23% compared to the
period ended March 31, 1997. The VSK Group's revenue for the quarter was $4,781,
up 12% over the first quarter of 1997. Barnes' revenue was $2,357, up 4%
compared to the same period in 1997.
Backlog
As of March 31, 1998, the Company's backlog was $121,000 compared with $92,800
at December 31, 1997 and $145,000 at March 31, 1997. During the first quarter of
1998, Mecar received orders for $69.5 million from or for the benefit of its
principal customers.
Operating Costs and Expenses
Cost of sales for the first three months of 1998 were approximately $29,123, or
81% of sales, as compared to $24,275, or 82%, for the first three months of
1997.
Selling and administrative expenses were approximately $3,271, or 9% of revenue,
for the three months ended March 31, 1998 as compared to $3,322, or 11%, for the
three months ended March 31, 1997. This decrease is a result of increased 1998
revenues.
Research and Development
Research and development expenses were 1% as a ratio of sales for each of the
three month periods ended March 31, 1998 and 1997.
Interest Expense
Interest expense for the first three months of 1998 decreased, compared to the
same period in 1997, as a result of decreased borrowing levels.
Interest Income
Interest income for the 1998 period was substantially the same as for the first
three months of 1997.
Other - Net
Other - Net represents primarily currency losses, net of currency gains,
resulting from foreign currency transactions for the three months ended March
31, 1998. The fluctuation in currency rates resulted in the decrease in the
current period.
9
Allied Research Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1998
(Thousands of Dollars)
(Unaudited)
- --------------------------------------------------------------------------------
Net Earnings
The Company earned a $2,257 profit ($0.49 per share basic and $0.48 per share
diluted) in the first three months of 1998 compared with a $1,984 profit ($0.44
per share basic and diluted) in the first three months of 1997. The increased
net earnings were primarily attributable to an increased volume of business at
Mecar and the VSK Group and increased profit margins at the VSK Group.
Liquidity and Capital Resources
During the first three months of 1998 and throughout 1997, 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. At March 31, 1998 and December 31, 1997, 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 $2,961 and
$6,476 compared with approximately $8,152 and $6,414 at December 31, 1997.
Accounts receivable at March 31, 1998 decrease from December 31, 1997 levels by
$23,332 due to substantial collections in the first quarter of 1998. Costs and
accrued earnings on uncompleted contracts increased by $9,457 from December 31,
1997 levels due to increased levels of work-in-progress. Inventories were
reduced from year-end levels by $4,815 due to increases in work-in-process and
shipments during the first quarter of 1998. Prepaid expenses and deposits
increased by $1,668 primarily due to increases in prepayments of expenses.
Current liabilities decreased by $19,408 from December 31, 1997 levels
principally as a result of reductions in accounts and notes payable.
In summary, working capital was approximately $28,890 at March 31, 1998, which
is an increase of $3,773 from working capital at December 31, 1997. The increase
is primarily attributable to the Company's continuing profitability, increased
work-in-progress and a substantial reduction in accounts and notes payable.
10
Allied Research Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1998
(Thousands of Dollars)
(Unaudited)
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
None.
11
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 28, 1998 J. R. Sculley
Chairman of the Board,
Chief Executive Officer and
Chief Financial Officer
12