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, 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 September 30, 1998:
4,745,908
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 September 30, 1998................3,4
Condensed Consolidated Statements of Earnings
Three months and nine months ended September 30, 1998
and 1997..................................................5
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997.............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
Allied Research Corporation
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
ASSETS
(Unaudited)
- -------------------------------------------------------------------------------
September 30, 1998 December 31, 1997
------------------ -----------------
CURRENT ASSETS
Cash and equivalents, including restricted cash $31,280 $16,421
Accounts receivable 23,137 40,650
Costs and accrued earnings on uncompleted contracts 20,823 7,804
Inventories 3,098 6,966
Prepaid expenses and deposits 17,561 4,094
------- -------
Total current assets 95,899 75,935
PROPERTY, PLANT AND EQUIPMENT - AT COST
Buildings and improvements 12,255 11,714
Machinery and equipment 31,973 28,897
-------- -------
44,228 40,611
Less accumulated depreciation 33,805 30,259
-------- -------
10,423 10,352
Land 1,675 1,208
-------- -------
12,098 11,560
OTHER ASSETS
Deposits 6,642 6,414
Intangibles, net of amortization 5,200 5,028
Other 531 563
-------- -------
12,373 12,005
-------- -------
$120,370 $99,500
======== =======
The accompanying notes are an integral part of these statements.
3
Allied Research Corporation
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(Thousands of Dollars)
LIABILITIES
(Unaudited)
- --------------------------------------------------------------------------------
September 30, 1998 December 31, 1997
------------------ -----------------
CURRENT LIABILITIES
Notes payable $ 5,038 $ 1,720
Current maturities of long-term debt 220 1,281
Accounts and trade notes payable 20,382 34,656
Accrued liabilities 6,853 4,747
Accrued loss on contracts 297 572
Customer deposits 25,622 6,994
Income taxes 2,509 848
-------- -------
Total current liabilities 60,921 50,818
LONG-TERM OBLIGATIONS
Long-term debt, less current maturities 5,553 5,311
Customer deposits 5,850 5,850
-------- -------
11,403 11,161
DEFERRED INCOME TAXES 577 627
STOCKHOLDERS' EQUITY
Common stock, par value, $.10 per share; authorized
10,000,000 shares; issued and outstanding, 4,745,908
in 1998 and 4,608,221 in 1997 475 460
Capital in excess of par value 13,296 12,101
Retained earnings 32,629 26,046
Accumulated foreign currency translation adjustment 1,069 (1,713)
-------- -------
47,469 36,894
-------- -------
$120,370 $99,500
======== =======
The accompanying notes are an integral part of these statements.
4
Allied Research Corporation
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Thousands of Dollars)
(Unaudited)
- -------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- ------- -------
Revenue $31,001 $27,774 $98,908 $82,169
Costs and expenses
Cost of sales 25,773 22,290 79,670 64,577
Selling and administrative 1,650 3,286 8,435 9,715
Research and development 721 321 1,451 1,004
------- ------- ------- -------
28,144 25,897 89,556 75,296
------- ------- ------- -------
Operating income 2,857 1,877 9,352 6,873
Other income (deductions)
Interest expense (581) (438) (1,458) (1,558)
Interest income 542 327 1,096 771
Other - net (39) 323 (423) 830
------- ------- ------- -------
(78) 212 (785) 43
------- ------- ------- -------
Earnings before income taxes 2,779 2,089 8,567 6,916
Income taxes 999 193 1,984 729
------- ------- ------- --------
NET EARNINGS $ 1,780 $ 1,896 $ 6,583 $ 6,187
======= ======= ======= ========
Net income per common share
Basic $ .38 $ .42 $ 1.40 $ 1.37
======= ======= ======== ========
Diluted $ .37 $ .41 $ 1.38 $ 1.35
======= ======= ======== ========
Weighted average number of shares
Basic 4,743,777 4,566,509 4,706,453 4,524,085
Diluted 4,764,151 4,647,934 4,764,086 4,591,194
The accompanying notes are an integral part of these statements.
5
Allied Research Corporation
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
- -------------------------------------------------------------------------------
Nine months ended
September 30
--------------------
Increase (decrease) in cash and equivalents 1998 1997
-------- --------
Cash flows from operating activities
Net earnings $ 6,583 $ 6,187
Adjustments to reconcile net earnings to net cash (used in)
operating activities
Depreciation and amortization 909 1,474
Changes in assets and liabilities
Accounts receivable 19,159 (5,784)
Costs and accrued earnings on uncompleted contracts (10,264) 4,709
Inventories 2,625 2,040
Prepaid expenses and other assets (12,153) 458
Accounts payable, accrued liabilities and customer deposits 3,292 (10,382)
Income taxes 1,240 609
-------- --------
Net cash provided by (used in) operating activities 11,391 (689)
Cash flows (used in) investing activities
Capital expenditures (559) (505)
Cash flows from financing activities
Principal payments of long-term debt (52) (8,549)
Net increase in long-term borrowings - 4,050
Net increase (decrease) in short-term borrowings 1,225 (299)
Stock option/stock plan 1,210 962
Deposits - restricted cash (227) (4,050)
-------- --------
Net cash provided by (used in) financing activities 2,156 (7,886)
Effects of exchange rate changes on cash 1,871 (3,915)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 14,859 (12,995)
Cash and equivalents at beginning of year 16,421 32,859
-------- --------
Cash and equivalents at end of period $ 31,280 $ 19,864
======== ========
Supplemental Disclosures of Cash Flow Information
- -------------------------------------------------
Cash paid during the period for
Interest $ 720 $ 700
Taxes 2,500 500
The accompanying notes are an integral part of these statements.
6
Allied Research Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Thousands of Dollars)
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheets as of September 30, 1998 and
December 31, 1997, the condensed consolidated statements of earnings and the
condensed consolidated statements of cash flows for the nine months ended
September 30, 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 September 30,
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
September 30, 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, VSK Electronics N.V. and 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 bond and advance payment guarantees. The
credit facility agreements used to provide these financial guarantees
generally place restrictions on cash deposits and other liens on Mecar's
assets, until the customer accepts delivery. In addition, under the term of
Barnes & Reinecke's letter of credit facility with its bank, deposits of
$6,642 are also restricted. Cash deposits totaling approximately $18,450 and
long-term deposits of $6,642 as of September 30, 1998 and $8,727 and $6,414
at December 31, 1997, are restricted or pledged as collateral for various
bank agreements. Mecar's cash is also limited by its bank pool agreement in
the amounts it may transfer to Allied or other affiliates if its
unrestricted cash is less than $7,200.
NOTE 4 - INVENTORIES
Inventories are composed of raw materials and supplies.
7
Allied Research Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Thousands of Dollars)
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 5 - NOTES PAYABLE
Barnes & Reinecke has a $4,000 revolving line-of-credit agreement which has
an outstanding balance of $3,880 at September 30, 1998 and an agreement with
Allied to provide up to $750 additional funding for working capital, if
required. In addition, Barnes & Reinecke has a $500 loan which matures in
August 1999 with Allied and a commitment from the bank to increase the
revolving line of credit to $4,750. The outstanding borrowings under the
line at December 31, 1997 was $1,720. Borrowings are secured by assets, as
defined in the agreement, and are guaranteed by Allied. The agreement
contains covenants requiring the maintenance of certain financial ratios and
other matters.
Mecar has a line-of-credit agreement with a foreign bank which has a balance
of $1,158 at September 30, 1998, and no amount outstanding at December 31,
1997. The line is secured by a cash deposit pledge equal to the amount of
the line.
NOTE 6 - CREDIT FACILITIES
The Company is obligated under several agreements with its current and
former banking pools comprised of foreign banks 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 a fee of approximately 2% of guarantees issued and annual fees of 1.25%
to 1.35% of letters of credit and guarantees outstanding. As of September
30, 1998, guarantees of $37,836 remain outstanding under the current and
former agreements, respectively.
The Company is also obligated under a $6,300 letter of credit facility
agreement established by Barnes & Reinecke with its bank, against which it
has drawn $5,850 at September 30, 1998, that is collateralized by the
proceeds from customer deposits and other deposits.
Guarantees and other instruments issued on Mecar's behalf by other banks
which approximate $1,184 at September 30, 1998.
Advances under these agreements are secured by cash of $18,450 and long-term
cash deposits of $6,642. 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.
8
Allied Research Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Thousands of Dollars)
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 7 - LONG-TERM FINANCING
Mecar is obligated on a $3,300 mortgage on its manufacturing and
administration facilities. As amended, the balance of the loan is payable in
annual principal installments of approximately $500 and matures in 2004. The
Company is also obligated on several mortgages on The VSK Group's buildings
which have balances of approximately $800 at September 30, 1998. The
mortgages are payable in annual installments of approximately $250 plus
interest. The VSK Group is also obligated on various equipment and other
operating loans of approximately $1,000.
Scheduled annual maturities of long-term obligations as of September 30,
1998 are approximately as follows:
Year Amount
---- ------
2000 $1,176
2001 764
2002 825
2003 825
2004 800
Thereafter 1,163
NOTE 8 - INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS No. 109").
The Company's provision for income taxes differs from the anticipated
combined federal and state statutory rates due to foreign net operating loss
carryovers and earnings from foreign subsidiaries.
At September 30, 1998, Mecar had completely utilized its net operating loss
carryovers of approximately $4,300.
As of September 30, 1998, the Company had unused foreign tax credit
carryforwards of approximately $455 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
$32,000 at September 30, 1998. Determination of the amount of unrecognized
deferred tax liabilities is not practicable.
NOTE 9 - EARNINGS PER SHARE
Stock options outstanding have been included in the diluted per share
computation based on their assumed exercise using the treasury stock method.
9
Allied Research Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 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" 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 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 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 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
and other Future Factors.
Revenue
-------
Revenue for the first nine months of 1998 was $98,908, an increase of 20%
over the comparable period in 1997, principally due to increased revenue
from Mecar and the VSK Group. Mecar's sales were $76,038, up 20% compared to
the same period ended September 30, 1997. The VSK Group's revenue for the
first nine months of 1998 was $14,978, up 23% over the first three quarters
of 1997. Barnes' revenue was $7,643, up 11% compared to the same period in
1997. Other revenues were $249.
10
Allied Research Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
September 30, 1998
(Thousands of Dollars)
(Unaudited)
- -------------------------------------------------------------------------------
Revenue - Continued
-------
Revenue for the quarter ended September 30, 1998 was $31,001, an 11%
increase over the quarter ended September 30, 1997. Mecar recognized revenue
of $22,688 for the quarter ended September 30, 1998, a 13% decrease over the
quarter ended September 30, 1997; Barnes' revenue of $2,751 for the quarter
ended September 30, 1998 constitutes a 35% increase over the quarter ended
September 30, 1997; the revenue of the VSK Group of $5,313 for the quarter
ended September 30, 1998 constitutes an increase of 45% over the comparable
period in 1997. Other revenues were $249.
Backlog
-------
As of September 30, 1998, the Company's backlog was $88,500 compared with
$92,800 at December 31, 1997 and $105,100 at June 30, 1998.
At September 30, 1998 and 1997, respectively, the backlog of each of the
Company's operating units was as follows:
1998 1997
------- --------
Mecar $59,000 $104,000
Barnes 12,400 17,000
VSK Group 17,100 15,000
Almost all of the new awards received by the Company during the third
quarter of 1998 were received by the VSK Group.
The Company believes that reduced oil prices is the principal cause of the
lack of current orders from Mecar's principal customers. Depressed oil
prices adversely impact the purchasing power of such customers. The Company
believes that these customers are in the process of prioritizing their
defense needs and that orders have been delayed pending such prioritization.
In addition, Mecar continues to pursue ammunition orders for new weapon
systems being developed for its traditional customers. Such orders are
expected to be placed via the U.S. Government through the foreign military
sales program. The Company believes that the funding for such orders has
been reserved and will not be directly affected by oil prices.
Mecar has already received and completed an order for testing ammunition for
one of the new weapon systems and the related ammunition is undergoing
detailed testing and analysis by the U.S. Government. A follow-on contract
for additional ammunition is expected following successful completion of the
testing.
The Company has been advised that the U.S. Government will soon be taking
the initial steps for award of contracts for the other new weapon system,
including testing ammunition.
11
Allied Research Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
September 30, 1998
(Thousands of Dollars)
(Unaudited)
- -------------------------------------------------------------------------------
Backlog - Continued
-------
The Company currently believes that it will receive contract awards for
ammunition for both systems in 1999, with the prospect for follow-on
contracts thereafter.
Operating Costs and Expenses
----------------------------
Cost of sales for the first nine months of 1998 was approximately $79,670,
or 81% of sales, compared to $64,577, or 79% of sales for the first nine
months of 1997. Cost of sales for the third quarter of 1998 were
approximately $25,773, or 83% of sales, as compared to $22,290, or 80% of
sales for the third quarter of 1997. The increases are due to the nature of
the product mix during the period.
Selling and administrative expenses were approximately $8,435 or 9% of sales
for the nine months ended September 30, 1998, as compared to $9,715, or 12%
of sales, for the nine months ended September 30, 1997. Selling and
administrative expenses were approximately $1,650, or 5% of revenue, for the
three months ended September 30, 1998 as compared to $3,286, or 12% of
revenue, for the three months ended September 30, 1997. The reduction is
attributable to continued cost reductions.
Research and Development
------------------------
Research and development expenses were 1% as a ratio of sales for the nine
months ended 1998 and 1997, and three months periods ended 1997 and 2% for
the three month period ended September 30, 1998.
Interest Expense
----------------
Interest expense for the nine months ended September 30, 1998 was $1,458,
compared to $1,558 for the comparable period in 1997. Interest expense
increased during the third quarter of 1998 compared to the third quarter of
1997 by approximately $143 as a result of an increase in borrowing needs
during the quarter.
Interest Income
---------------
Interest income for each of the nine months and three months periods of 1998
increased over the comparable periods of 1997, principally as a result of
increased amounts of cash invested.
Other - Net
-----------
Other - Net represents primarily currency losses, net of currency gains,
resulting from foreign currency transactions for the nine months and three
months ended September 30, 1998. The fluctuation of currency rates resulted
in the decrease other - net in the current period.
12
Allied Research Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
September 30, 1998
(Thousands of Dollars)
(Unaudited)
- -------------------------------------------------------------------------------
Net Earnings
------------
The Company had a $6,583 net profit ($1.40 per share basic and $1.38 per
share diluted) for the first nine months of 1998 compared with a $6,187 net
profit ($1.37 per share basic and $1.35 per share diluted) for the
comparable period in 1997. The Company earned a $1,780 profit ($0.38 per
share basic and $0.37 per share diluted) in the third quarter of 1998
compared with a $1,896 profit ($0.42 per share basic and $0.41 per share
diluted) in third quarter of 1997.
The VSK Group continued to experience increased profit margins during the
third quarter of 1998.
The Company anticipates that earnings during the next few quarters may be
less than in the comparable quarters of the immediately preceding year
because of delays in the receipt of orders by Mecar and tax costs, as Mecar
has exhausted its tax loss carryforwards.
Liquidity and Capital Resources
-------------------------------
During the first nine 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.
At September 30, 1998, the Company had unrestricted cash (i.e., cash not
required by the terms of the bank pool agreement to collateralize contracts)
of approximately $12,830 compared with approximately $2,290 and $7,694 at
September 30, 1997 and at December 31, 1997, respectively. Mecar is limited
by its bank pool agreement in the amounts it may transfer to Allied or other
affiliates, if its unrestricted cash is less than $7,200.
Barnes has obtained a commitment to increase its bank line-of-credit in
order to obtain additional funds necessary principally to continue work on a
project for a foreign-based customer which is not expected to be delivered
until mid-1999. Such commitment is conditioned on Allied first advancing up
to $1,250 to BRI. Allied has provided such commitment and has commenced
advancing sums to BRI.
The VSK Group continues to reduce its bank and other long-term indebtedness.
Accounts receivable at September 30, 1998 decreased from December 31, 1997
levels by $17,513 due to substantial collections in the first nine months of
1998. Costs and accrued earnings on uncompleted contracts increased by
$13,019 from December 31, 1997 levels due to increased levels of
work-in-progress. Inventories were reduced from year-end levels by $3,868
due to increased work-in-progress and shipments during 1998. Prepaid
expenses and deposits increased by $13,467 primarily due to prepaid taxes
and operating expenses. Current liabilities increased by $9,878 from
December 31, 1997 levels principally as a result of increases in customer
deposits.
In summary, working capital was approximately $35,203 at September 30, 1998,
which is an increase of $5,770 and $10,086 from working capital at June 30,
1998 and December 31, 1997 respectively. The increase is primarily
attributable to the Company's continuing profitability and reduction in
accounts and notes payable.
13
Allied Research Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
September 30, 1998
(Thousands of Dollars)
(Unaudited)
- -------------------------------------------------------------------------------
Year 2000
---------
In late 1997, the Company began its preparation of a formal project to
analyze the financial and information systems applications, manufacturing
applications and third-party relationships which would be impacted as a
result of computer processor's using a two-digit format or the Year 2000
issue (Y2K). During the initial phase of this project all internal systems
were identified and the potential exposures to Y2K issues were determined.
Action plans were then established to modify or upgrade existing systems
that required conversion. In certain situations, systems were already Y2K
compliant, in others planned upgrades were already scheduled for
implementation in 1998 and early 1999. In the area of third-party systems,
these sources were contacted and most state that they intend to be Y2K
compliant by late 1999.
At this stage, the Company's financial and information systems and
manufacturing applications have either, already been upgraded or will be
upgraded within the next 6 months to a new version which will be Y2K
compliant. Testing for compliance after the upgrade is also part of the
planned procedures. Most of the costs of this project are part of the normal
maintenance activity and budget of the Company's IT departments. The impact
of this issue to date has not been significant, given the nature and size of
the systems in place at this time. Additional costs that are expected to be
incurred to complete this project are also not considered to be material
financially, since the Company has completed a significant part of this
project. The cost and impact of third-party relationships has yet to be
determined.
14
Allied Research Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
September 30, 1998
(Thousands of Dollars)
(Unaudited)
- -------------------------------------------------------------------------------
PART II. OTHER INFORMATION
None.
15
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: ____________, 1998 J. R. Sculley
Chairman of the Board,
Chief Executive Officer and
Chief Financial Officer
16