-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UKgMosAqKigN26WD6xqU/S5UNI918+647lxOtNI5V7+g/xLH0kBe7O5sYuKH1EgC 6RQYPU+FJDaIVq1f4h+GKw== 0001021408-01-504240.txt : 20010801 0001021408-01-504240.hdr.sgml : 20010801 ACCESSION NUMBER: 0001021408-01-504240 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010731 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIED RESEARCH CORP CENTRAL INDEX KEY: 0000003952 STANDARD INDUSTRIAL CLASSIFICATION: ORDNANCE & ACCESSORIES, (NO VEHICLES/GUIDED MISSILES) [3480] IRS NUMBER: 042281015 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11376 FILM NUMBER: 1693562 BUSINESS ADDRESS: STREET 1: 8000 TOWERS CRESCENT DR STREET 2: SUITE 260 CITY: VIENNA STATE: VA ZIP: 22182 BUSINESS PHONE: 7038475268 MAIL ADDRESS: STREET 1: 8000 TOWERS CRESCENT DRIVE STREET 2: STE 750 CITY: VIENNA STATE: VA ZIP: 22182 FORMER COMPANY: FORMER CONFORMED NAME: ALLIED RESEARCH ASSOCIATES INC DATE OF NAME CHANGE: 19880601 10-Q 1 d10q.txt ALLIED RESEARCH CORP. FORM 10-Q 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 June 30, 2001 ------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________________ to _______________________ Commission File Number 0-2545 ---------------------- Allied Research Corporation ---------------------------- (Exact name of Registrant as specified in its charter) Delaware 04-2281015 - ------------------------------------- ------------------------------- (State or other jurisdiction of (I.R.S. Employer Number) incorporation or organization) 8000 Towers Crescent Drive, Suite 260 Vienna, Virginia 22182 - ------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (703) 847-5268 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of June 30, 2001: 4,910,228. ALLIED RESEARCH CORPORATION INDEX ================================================================================ PART I. FINANCIAL INFORMATION - UNAUDITED PAGE NUMBER Item 1. Financial Statements Condensed Consolidated Balance Sheets June 30, 2001 and December 31, 2000................ 2 Condensed Consolidated Statements of Earnings Three months and six months ended June 30, 2001 and 2000........................................... 3 Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2001 and 2000............ 4 Notes to Condensed Consolidated Financial Statements...... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 9 PART II. OTHER INFORMATION......................................... 13 Allied Research Corporation CONDENSED CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) ASSETS (Unaudited) ================================================================================
ASSETS June 30, 2001 December 31, 2000 ------------- ----------------- CURRENT ASSETS Cash and equivalents $ 9,298 $ 7,570 Restricted cash 10,998 3,010 Accounts and note receivable 10,188 18,662 Costs and accrued earnings on uncompleted contracts 31,574 34,136 Inventories 5,602 5,911 Fair value of forward exchange contracts 4,949 - Prepaid expenses 3,419 2,996 -------- ------- Total current assets 76,028 72,285 PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation 11,140 11,675 OTHER ASSETS Intangibles, net of accumulated amortization 2,836 3,252 Deferred taxes 225 406 Other 125 139 -------- ------- 3,186 3,797 -------- ------- $ 90,354 $87,757 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 3,442 $ 3,699 Current maturities of long-term debt 844 1,079 Accounts payable 12,886 22,009 Accrued liabilities 8,974 4,823 Customer deposits 9,177 5,777 Forward exchange contract commitments 4,949 - -------- ------- Total current liabilities 40,272 37,387 LONG-TERM DEBT, less current maturities 3,058 3,529 DEFERRED INCOME TAXES - 121 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, 4,910,228 in 2001 and 4,812,464 in 2000 491 481 Capital in excess of par value 14,422 13,689 Retained earnings 43,471 40,306 Accumulated other comprehensive loss (11,360) (7,756) -------- ------- 47,024 46,720 -------- ------- $ 90,354 $87,757 ======== =======
The accompanying notes are an integral part of these consolidated financial statements. 2 Allied Research Corporation CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Thousands of Dollars) (Unaudited) ================================================================================
Three months ended Six months ended June 30, June 30, ----------------------- ----------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Revenue $ 25,837 $ 28,548 $ 42,847 $ 52,022 Cost and expenses Cost of sales 18,427 23,628 30,449 42,585 Selling and administrative 2,899 2,266 5,601 4,603 Research and development 380 353 833 749 ---------- ---------- ---------- ---------- 21,706 26,247 36,883 47,937 ---------- ---------- ---------- ---------- Operating income 4,131 2,301 5,964 4,085 Other (income) deductions Interest income (139) (201) (274) (315) Interest expense 405 370 800 524 Other 211 (286) (230) (153) ---------- ---------- ---------- ---------- 477 (117) 296 56 ---------- ---------- ---------- ---------- Earnings before discontinued operation and income taxes 3,654 2,418 5,668 4,029 Income tax expense 1,632 969 2,503 1,613 ---------- ---------- ---------- ---------- Earnings from continuing operations 2,022 1,449 3,165 2,416 Discontinued operation - Engineering and technical segment Income from operations, net of income taxes - - - 54 Gain on sale, net of income taxes - 31 - 462 ---------- ---------- ---------- ---------- - 31 - 516 ---------- ---------- ---------- ---------- NET EARNINGS $ 2,022 $ 1,480 $ 3,165 $ 2,932 ========== ========== ========== ========== Earnings per share Basic Continuing operations $ .41 $ .30 $ .65 $ .50 Discontinued operation - .01 - .11 ---------- ---------- ---------- ---------- Net income (loss) $ .41 $ .31 $ .65 $ .61 ========== ========== ========== ========== Diluted Continuing operations $ .41 $ .30 $ .65 $ .50 Discontinued operation - .01 - .11 ---------- ---------- ---------- ---------- Net income (loss) $ .41 $ .31 $ .65 $ .61 ========== ========== ========== ========== Weighted average number of common shares: Basic 4,906,717 4,753,513 4,888,716 4,849,812 Diluted 4,911,796 4,754,619 4,890,843 4,815,577
The accompanying notes are an integral part of these consolidated financial statements. 3 Allied Research Corporation CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands of Dollars) (Unaudited)
======================================================================================================================== Six months ended June 30 -------------------------- Increase (decrease) in cash and equivalents 2001 2000 ----------- --------- Cash flows from continuing operating activities Net earnings $ 3,165 $ 2,932 Adjustments to reconcile net earnings to net cash provided by (used in) continuing operating activities Depreciation and amortization 729 754 Gain on sale of discontinued operation - (462) Loss from discontinued operation - (54) Common stock award 533 - Changes in assets and liabilities Accounts receivable 7,354 (1,204) Costs and accrued earnings on uncompleted contracts (403) (21,876) Inventories (214) (576) Prepaid expenses and other assets 687 (1,188) Accounts payable, accrued liabilities and customer deposits 747 16,011 Income taxes (77) 1,861 ----------- -------- Net cash provided by (used in) continuing operating activities 12,521 (3,802) Cash flows (used in) investing activities Capital expenditures (1,368) (2,084) Proceeds from sale of stock of subsidiary - 2,822 Payment for acquisition, net of cash acquired - (826) Proceeds from sale of fixed assets 159 - ----------- -------- Net cash (used in) provided by investing activities (1,209) (3,228) Cash flows from financing activities Proceeds from long-term debt 359 429 Principal payments on long-term debt (714) (123) Net (decrease) increase in short-term borrowings (506) 7,712 Proceeds from employee stock purchases 209 172 Options exercised - 116 Retirement of common stock - (123) Restricted cash and restricted deposits (7,988) (3,140) ----------- -------- Net cash (used in) provided by financing activities (8,640) 8,183 ----------- -------- Net increase in cash from continuing operations 2,672 1,153 Effects of exchange rate changes on cash (944) 1,537 ----------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 1,728 2,690 Cash and equivalents at beginning of year 7,570 5,968 ----------- -------- Cash and equivalents at end of period $ 9,298 $ 8,658 =========== ======== Supplemental Disclosures of Cash Flow Information - ------------------------------------------------- Cash paid during the period for Interest $ 459 $ 513 Taxes 762 618
The accompanying notes are an integral part of these consolidated financial statements. 4 ALLIED RESEARCH CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 (Thousands of Dollars) (Unaudited) ================================================================================ NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The condensed consolidated balance sheets as of June 30, 2001 and December 31, 2000, the condensed consolidated statements of earnings for the three and six month periods ended June 30, 2001 and 2000 and the condensed consolidated statements of cash flows for the six months ended June 30, 2001 and 2000, 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 flows at June 30, 2001 and 2000 have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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, 2000 Form 10-K filed with the Securities and Exchange Commission, Washington, D.C. 20549. The results of operations for the three and six month periods ended June 30, 2001 and 2000 are not necessarily indicative of the operating results for the full year. NOTE 2 - PRINCIPLES OF CONSOLIDATION The condensed consolidated financial statements include the accounts of Allied Research Corporation (a Delaware Corporation) and its subsidiaries, ARC Europe, S.A. (ARC Europe), a Belgian company, Barnes & Reinecke, Inc. (BRI), a Delaware Corporation (which discontinued operations effective March 2000) and Allied Research Corporation Limited (Limited), a United Kingdom company and ARC International Sales Corporation, a Barbados corporation (both of which are inactive). ARC Europe includes its wholly-owned subsidiaries Mecar S.A. (Mecar) and the VSK Group of companies. Mecar includes a related Belgian subsidiary, Sedachim, S.I. The VSK Group is comprised of Tele Technique Generale, S.A., I.D.C.S., N.V. and VSK Electronics N.V. and its wholly-owned subsidiaries, Belgian Automation Units, N.V. and Vigitec S.A. (Vigitec). NOTE 3 - DERIVATIVE FINANCIAL INSTRUMENTS In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. It specifies necessary conditions to be met to designate a derivative as a hedge. As amended by SFAS No.'s 137 and 138, SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. As a result, the Company implemented SFAS No. 133 effective January 1, 2001. Prior to adoption of SFAS No. 133, gains and losses arising from the use of derivative instruments were deferred until realized. 5 Allied Research Corporation NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED June 30, 2001 (Thousands of Dollars) (Unaudited) ================================================================================ NOTE 3 - DERIVATIVE FINANCIAL INSTRUMENTS - Continued The Company estimates fair value based on quotes obtained from the counterparties to the derivative contracts. The Company recognizes the fair value of derivative contracts that expire in less than one year as current assets or liabilities. Those that expire in more than one year are recognized as long-term assets or liabilities. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in fair value are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Gains and losses from settlements of derivative contracts are reported as a component of other income. Changes in the fair value of derivative contracts prior to settlement are also reported as a component of other income. NOTE 4 - RESTRICTED CASH Mecar is generally required under the terms of its contracts to provide performance bonds, advance payment guarantees and letters of credit. The credit facility agreements used to provide these financial guarantees place restrictions on cash deposits and other liens on Mecar's assets. The VSK Group has also pledged certain term deposits to secure outstanding bank guarantees. Restricted cash of $10,998 and $3,010 included in current assets at June 30, 2001 and December 31, 2000, respectively, was restricted or pledged as collateral for these agreements and other obligations. NOTE 5 - DISCONTINUED OPERATION On December 10, 1999, the Company contracted to sell the engineering and technical segment of its business. Settlement of the sale occurred on March 10, 2000 and resulted in a gain of $462, net of taxes. NOTE 6 - INVENTORIES Inventories are composed of raw materials and supplies. NOTE 7 - NOTES PAYABLE Mecar has a line-of-credit of up to $7,221 for working capital. Approximately $3,442 of the line was used at June 30, 2001 and $2,800 was outstanding at December 31, 2000. 6 Allied Research Corporation NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED June 30, 2001 (Thousands of Dollars) (Unaudited) ================================================================================ NOTE 8 - CREDIT FACILITY The Company is obligated under various credit agreements (the "Agreements") with its foreign banking pool that provide credit facilities primarily for letters of credit, bank guarantees, performance bonds and similar instruments required for specific sales contracts. The Agreements provide for certain bank charges and fees as the line is used, plus fees of 2% of guarantees issued and annual fees of 1.25% - 1.35% of letters of credit and guarantees outstanding. These fees are charged to interest expense. As of June 30, 2001 and December 31, 2000, guarantees and performance bonds of $20,558 and $22,687, respectively, remain outstanding. Advances under the Agreements are secured by restricted cash at June 30, 2001 and December 31, 2000 of $10,998 and $3,010, respectively. Amounts outstanding are also collateralized by the letters of credit received under the contracts financed, and a pledge of approximately $26 million on Mecar's assets. Certain Agreements provide for restrictions on payments or transfers to Allied and its affiliates for management fees, intercompany loans, loan payments, the maintenance of certain net worth levels and other provisions. NOTE 9 - LONG-TERM FINANCING Mecar is obligated on a mortgage with a balance of approximately $1,200 on its manufacturing and administration facilities. The loan is payable in annual principal installments of approximately $422 and matures in 2004. The Company is also obligated on several mortgages on the VSK Group's buildings which have a balance of approximately $282 at June 30, 2001. These mortgages are payable in annual installments of approximately $49 plus interest. Scheduled annual maturities of long-term obligations as of June 30, 2001 are approximately as follows: Year Amount ----- ------ 2002 $844 2003 974 2004 945 2005 944 2006 195 NOTE 10 - INCOME TAXES As of December 31, 2000, the Company had unused foreign tax credit carryforwards of approximately $288 which expire through 2004. Deferred tax liabilities have not been recognized for basis differences related to investments in the Company's Belgian and United Kingdom subsidiaries. These differences, which consist primarily of unremitted earnings intended to be indefinitely reinvested, aggregated approximately $10,700 at June 30, 2001. Determination of the amount of unrecognized deferred tax liabilities is not practicable. 7 Allied Research Corporation NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED June 30, 2001 (Thousands of Dollars) (Unaudited) ================================================================================ NOTE 11 - EARNINGS (LOSS) PER SHARE Incremental shares from the assumed conversion of 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 June 30, 2001 (Thousands of Dollars) (Unaudited) - -------------------------------------------------------------------------------- The following is intended to update the information contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and the Quarterly Report on Form 10-Q for the period ended March 31, 2001 and presumes that readers have access to, and will have read, "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in such Forms 10-K and 10-Q. The Company conducts its business through its wholly-owned subsidiaries: Mecar, S.A. ("Mecar"), a Belgian corporation; and a group of Belgian corporations led by VSK Electronics, N.V., Tele Technique General, S.A., Vigitec S.A. and IDCS, N.V. (collectively, the "VSK Group"). This discussion refers to the financial condition and results of operations of the Company on a consolidated basis. All dollars are in thousands except per share amounts. Forward-Looking Statements -------------------------- This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that are based on current expectations, estimates and projections about the Company and the industries in which it operates. In addition, other written or oral statements which constitute forward-looking statements may be made by or on behalf of the Company. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Future Factors include substantial reliance on Mecar's principal customers to continue to acquire Mecar's products on a regular basis; the cyclical nature of the Company's military business; rapid technological developments and changes and the Company's ability to continue to introduce competitive new products and services on a timely, cost effective basis; the ability of the Company to successfully continue to increase the commercial component of its business; the mix of products/services; domestic and foreign governmental fiscal affairs and public policy changes which may affect the level of purchases made by customers; changes in environmental and other domestic and foreign governmental regulations; continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support the Company's future business. These are representative of the Future Factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates; general domestic and international economic conditions including interest rate and currency exchange rate fluctuations; increasing competition by foreign and domestic competitors, including new entrants; and other Future Factors. 9 Allied Research Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED June 30, 2001 (Thousands of Dollars) (Unaudited) - -------------------------------------------------------------------------------- Revenue ------- Allied had revenue of $42,847 in the first six months of 2001, which was 82% of its revenue in the first six months of 2000. Revenues by Segment 1/st/ Six Months 2001 1/st/ Six Months 2000 --------------------- --------------------- Percentage Percentage Amount of total Amount of total ------ ------------ ------ ------------ Mecar $32,885 77% $41,850 80% VSK Group $ 9,962 23% $10,172 20% Revenue for the quarter ended June 30, 2001 was $25,837, a $2,711 decrease from revenue earned in the second quarter of 2000. Mecar's second quarter 2001 revenue was $21,000, a 9% decrease from revenue earned in the second quarter of 2000. The reduction in sales from 2000 levels is attributable to an increase in revenue from the Company's independent distributor/value added reseller. These contracts generally have lower sales values than Mecar's traditional direct sales, however, they do not adversely impact the Company's gross margins or profitability. The VSK Group's revenue in the second three months of 2001 decreased by $500, or 9% from its revenue in the second three months of 2000. In each instance, the 2001 results were adversely affected by currency fluctuations. Backlog ------- As of June 30, 2001, the Company's backlog was $53,400 compared to $63,500 at December 31, 2000. The June 30, 2001 backlog consists of backlog of approximately $44,600 and $8,800 at Mecar and the VSK Group, respectively. Operating Costs and Expenses ---------------------------- Cost of sales for the first six months of 2001 was approximately $30,449, or 71% of revenue, as compared to $42,585, or 82% of revenue, for the first six months of 2000. Cost of sales as a percentage of sales for the second quarter of 2001 was approximately 71% compared with 83% for the same period in 2000. As previously discussed under Revenue, the reduction in cost of sales in 2001 result primarily from cost reductions effected by increases in product sales to the Company's independent distributor. Selling and administrative expenses were approximately $5,601, or 13% of revenue, for the six months ended June 30, 2001, as compared to $4,603, or 9% or revenue, for the six months ended June 30, 2000. Selling and administrative expenses in the second quarter of 2001 were $633 greater than those incurred in 2000. 10 Allied Research Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED June 30, 2001 (Thousands of Dollars) (Unaudited) - -------------------------------------------------------------------------------- Selling and administrative expenses in the first half of 2001 were greater than in the same 2000 period in part due to increased acquisition search and analysis activities and costs incurred with respect to the new management team of the Company. Research and Development ------------------------ Research and development costs incurred in the first six months of 2001 increased by $84 over costs incurred in the same period of 2000. Research and development costs incurred in the second three months of 2001 increased slightly over comparable 2000 levels. Interest Income --------------- Interest income decreased in each of the first six months of 2001 and in the second quarter of 2001 from 2000 levels principally due to decreased interest rates and lower amounts of cash invested. Interest Expense ---------------- Interest expense increased by 53% in the first six months of 2001 compared to the same period in 2000 and in the second quarter of 2001 increased by 9% compared to the amount incurred in 2000. Such increases were experienced principally as a result of an increase in borrowings at Mecar under its line-of-credit. Other - Net ----------- Other-net represents primarily currency gains/currency losses, resulting from foreign currency transactions for the periods ending June 30, 2001 and 2000. Pre-Tax Profit From Continuing Operations ----------------------------------------- Pre- Tax Profit by Segment -------------------------- 1/st/ Six Months -------------------------- 2001 2000 ------ ------ Mecar $4,600 $2,300 VSK Group $1,600 $1,500 Corporate and other $ (500) $ 200 11 Allied Research Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED June 30, 2001 (Thousands of Dollars) (Unaudited) - -------------------------------------------------------------------------------- Mecar's pre-tax profit for the first six months of 2001 increased by $2,300, or 100% over its pre-tax profit for the comparable 2000 period. Slightly more than half of Mecar's 2001 revenue was from indirect sales to its independent distributor/value added reseller. Such contracts produce less revenue than direct sales but do not adversely affect profitability, since there is corresponding cost reduction. The VSK Group's 2001 pre-tax profit increased by $100, or 7%, over its 2000 performance, notwithstanding substantial currency fluctuations, principally due to increased efficiency in operations. Income Taxes ------------ The effective income tax expense in the first six months of 2001 was 44% compared to 40 % in the first half of 2000. Net Earnings ------------ The Company earned a $3,165 net profit from continuing operations ($.65 per share basic and diluted) in the first six months of 2001 compared with $2,416 in the first half of 2000 ($.50 per share basic and diluted). In the second quarter of 2001, the Company earned $2,022 from continuing operations (or $.41 per share basic and diluted) compared with $1,449 (or $.30 per share basic and diluted) in the second quarter of 2000. In addition, in the first quarter of 2000, the Company reported (i) a $462 gain, net of income taxes, on the sale of its former subsidiary Barnes & Reinecke, Inc. ("BRI") and (ii) a $54 profit from discontinued operations (i.e., the operations of BRI prior to sale). Liquidity --------- Working capital, which includes restricted cash, was approximately $35,756 at June 30, 2001, which is an increase of $858 from the December 31, 2000 level. Allied's current working capital is required for operations and to support credit facility agreements. During the first six months of 2001, Allied funded its operations principally with internally generated cash and back-up credit facilities required for foreign government contracts. In addition, Mecar utilized a $7,221 line-of- credit, which is scheduled to be repaid on or before October 31, 2001. As of June 30, 2001, the Company had unrestricted cash (i.e., cash not required by the terms of the bank pool agreement to collateralize contracts) of approximately $9,298 compared with approximately $7,570 at December 31, 2000. Restricted cash increased to almost $11,000 as of June 30, 2001 due in part to the expiration of the bank pool's partial waiver of the restricted cash requirement. Accounts receivable at June 30, 2001 decreased from December 31, 2000 levels by $8,474 due to collections in shipments made at year-end. Costs and accrued earnings on uncompleted contracts decreased by $2,562 from December 31, 2000 levels due to decreased levels of work-in-progress. Inventories decreased from year-end levels by $309 due to decreased purchases during the first half of 2001. Current liabilities increased by $2,885 from December 31, 2000 levels principally as a result of increases in customer deposits and accrued expenses to meet increased production levels and FASB 133 reporting requirements. 12 Allied Research Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED June 30, 2001 (Thousands of Dollars) (Unaudited) - -------------------------------------------------------------------------------- Allied's stockholders' equity as of June 30, 2001 was adversely affected by the deterioration of the value of the Euro verses the U.S. dollar during the first half of 2001, resulting in a $3,604 increase in "Accumulated other comprehensive loss". Allied is continuing to explore alternate methods of obtaining financing necessary to implement its growth plans. Allied's ability to cover its anticipated future operating and capital requirements is dependent upon its ability to generate positive cash flow from the operations of its subsidiaries, particularly the operations of Mecar. Quantitative and Qualitative Market Risk Disclosure --------------------------------------------------- No material changes have occurred in the quantitative and qualitative market risk disclosures of the Company as presented in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 13 Allied Research Corporation June 30, 2001 - -------------------------------------------------------------------------------- PART II. OTHER INFORMATION Submission of Matters to a Vote of Security Holders --------------------------------------------------- On June 6, 2001, the Company held its annual meeting of shareholders. The Company's shareholders re-elected J. H. Binford Peay, III, J. R. Sculley, Clifford C. Christ, Harry H. Warner, and Ronald H. Griffith as members of the Board of Directors of the Company. The following votes were cast in connection with the election of directors: Nominees In Favor Withheld -------- -------- -------- J. H. Binford Peay, III 3,872,495 111,138 Clifford C. Christ 3,889,273 94,360 Ronald H. Griffith 3,887,631 96,002 J. R. Sculley 3,868,985 114,648 Harry H. Warner 3,889,526 84,107 The Company's shareholders approved the 2001 Equity Incentive Plan of the Company. The following votes were cast in connection with such approval: For Against Abstain --- ------- ------- 3,294,233 682,198 7,202 The Company's shareholders ratified the appointment of Grant Thornton LLP as the Company's independent auditors for 2001. The following votes were cast in connection with such ratification: For Against Abstain --- ------- ------- 3,967,220 10,251 6,162 Reports on Form 8-K ------------------- On June 25, 2001, the Company filed a Form 8-K reporting the adoption of a new shareholders rights plan. 14 Allied Research Corporation June 30, 2001 - -------------------------------------------------------------------------------- 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/ John G. Meyer, Jr. -------------------------------- Date: July 31, 2001 John G. Meyer, Jr. Executive Vice President, Chief Operating Officer and Acting Chief Financial Officer 15 -----END PRIVACY-ENHANCED MESSAGE-----