UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
Commission file number: 1-11376
THE ALLIED DEFENSE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware | 04-2281015 | |
(State of incorporation) | (I.R.S. Employer Identification No.) |
120 E. Baltimore Street, Suite 2100
Baltimore, Maryland 21202
(Address of principal executive offices, including zip code)
(410) 385-8155
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO þ
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 þ NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
¨ |
Accelerated filer |
¨ | |||
Non-accelerated filer |
¨ (Do not check if a smaller reporting company) |
Smaller reporting company |
þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES þ NO ¨
The aggregate market value of the voting stock of the registrant held by non-affiliates as of June 30, 2011, the last day of the registrants most recently completed second fiscal quarter, was $29,471,514. For purposes of this determination, only our directors, including any indirect holdings of such directors as reported in Item 11 of this Form 10-K, and executive officers have been deemed affiliates.
The number of shares of registrants Common Stock outstanding as of February 29, 2012, was 8,235,195.
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ITEM 1. | BUSINESS |
The Allied Defense Group, Inc. (Allied or the Company) previously conducted a multinational defense business focused on the manufacture and sale of ammunition and ammunition related products for use by the U.S. and foreign governments. Allieds business was conducted by two wholly-owned subsidiaries: MECAR sprl, formerly MECAR S.A. (Mecar), and ADG Sub USA, Inc., formerly MECAR USA, Inc. (Mecar USA).
On June 24, 2010, the Company signed a definitive purchase and sale agreement (the Agreement) with Chemring Group PLC (Chemring) pursuant to which Chemring agreed to acquire substantially all of the assets of the Company for $59.56 million in cash and the assumption of certain liabilities. On September 1, 2010, the Company completed the asset sale to Chemring contemplated by the Agreement. Chemring acquired all of the capital stock of Mecar for $45.81 million in cash, and separately Chemring acquired substantially all of the assets of Mecar USA for $13.75 million in cash and the assumption by Chemring of certain specified liabilities of Mecar USA. A portion of the purchase price was paid through the repayment of certain intercompany indebtedness owed to the Company that would otherwise have been cancelled at closing. $15 million of the proceeds of the sale was deposited into escrow to secure the Companys indemnification obligations under the Agreement.
In conjunction with the Agreement, the Board of Directors of the Company unanimously approved the dissolution of the Company pursuant to a Plan of Complete Liquidation and Dissolution (Plan of Dissolution). The Companys stockholders approved the Plan of Dissolution on September 30, 2010. In response to concerns of certain of the Companys stockholders, the Company agreed to delay the filing of a certificate of dissolution with the Delaware Secretary of State. The Company filed a certificate of dissolution with the Delaware Secretary of State on August 31, 2011. In connection with this filing, our stock transfer agent has ceased recording transfers of our stock and our stock is no longer publicly traded.
In connection with the adoption of the Plan of Dissolution and the anticipated liquidation of the Company, we adopted the liquidation basis of accounting effective close of business on September 30, 2010, whereby assets are valued at their estimated net realizable cash values and liabilities are stated at their estimated settlement amounts. Uncertainties as to the ultimate amount of our liabilities make it impractical to predict the aggregate net value that may ultimately be distributable to stockholders. Under the liquidation basis of accounting, we accrue for the remaining costs to be incurred during liquidation, including compensation for remaining directors, consultants, insurance costs, costs to settle remaining leases, fees for professional service providers, income taxes, and miscellaneous other costs, partially offset by estimated future interest earnings. Such net costs were estimated to be $2.688 million as of December 31, 2011. Our estimates are based on assumptions regarding our ability to settle outstanding obligations to trade creditors, settle remaining leases and the ultimate timing of distributions to our stockholders, but do not include any settlement amounts, fines or penalties, if any, that we might incur as a result of the DOJ subpoena or any other legal proceedings.
The Company received a subpoena from the Department of Justice (DOJ) on January 19, 2010 requesting that the Company produce documents relating to its dealings with foreign governments. The DOJ initially limited its request of documents to those relating to an indicted former employee of Mecar USA. The DOJ has subsequently advised the Company that it is conducting an industry-wide review, and therefore the DOJs investigation of the Company will be expanded and ongoing. The Company has also received inquiries from the Securities and Exchange Commission (SEC) as to this matter. We cannot predict the settlement amounts, fines or penalties, if any, that we might incur as a result of the foregoing. As a result, it is unlikely that any distributions to our stockholders will be made until the matters relating to the DOJ subpoena have been resolved. The remaining period of time required to resolve these matters is uncertain but is expected to take in excess of one year. Furthermore, under the Agreement, the Company has agreed to indemnify Chemring and certain of its related parties from any losses, fines or penalties arising out of, among other things, the completed contracts of Mecar and Mecar USA. We have agreed to escrow $15 million of the cash consideration paid to the Company in the sale to secure our indemnification obligations under the Agreement. These escrowed funds will not be available to the Company for distribution to our stockholders, or otherwise, until released to the Company pursuant to the terms of the Agreement.
Based on advice from our Foreign Corrupt Practices Act (FCPA) outside counsel, we are now estimating that we may not be able to conclude the DOJ/SEC inquiries and make final distribution to stockholders until 2013. As a result, our estimate of net costs to be incurred during liquidation includes our estimate of costs through December 31, 2013.
3
Prior to September 2010, the Company operated within two operating segments: Mecar and Mecar USA. Allied, the parent company, provided oversight and corporate services to its subsidiaries and had no operating activities. With the completion of the September 2010 sale, Allied no longer has operating segments. The Company is being managed by its two directors who are also serving as the Companys Chief Executive Officer and Chief Financial Officer. The Company no longer has any full-time employees. Allied no longer conducts any active business operations and is winding-up its affairs as set forth above.
Available Information
Our principal Internet address is www.allieddefensegroup.com. We make available free of charge on www.allieddefensegroup.com our annual, quarterly and current reports, and amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, you may request a copy of these filings (excluding exhibits) at no cost by writing or telephoning us at the following address or telephone number:
The Allied Defense Group, Inc.
120 E. Baltimore Street, Suite 2100
Baltimore, Maryland 21202
(410) 385-8155
ITEM 1A. | RISK FACTORS |
Not required for a smaller reporting company.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 2. | PROPERTIES |
Allieds principal executive offices are located at 120 E. Baltimore Street, Suite 2100, Baltimore, Maryland 21202. Allied continues to lease its prior principal executive office, consisting of approximately 6,400 square feet in Vienna, Virginia, and the lease expires in February 2013. Allied has subleased this space to an unaffiliated third party through the term of the lease.
ITEM 3. | LEGAL PROCEEDINGS |
DOJ Subpoena
On January 19, 2010, the Company received a subpoena and communications from the U.S. Department of Justice (DOJ) requesting the Company produce documents relating to its dealings with foreign governments. The subpoena stated that it was issued in connection with an ongoing criminal investigation. On the same day, the Company also became aware through a press release issued by the DOJ that an employee of Mecar USA had been indicted by the DOJ for allegedly engaging in schemes to bribe foreign government officials to obtain and retain business. The unsealed indictment of this employee and the DOJs press release indicate that the alleged criminal conduct was on behalf of a Decatur, Georgia company which is unrelated to the Company or Mecar USA. Mecar USAs employment agreement with the employee provides that the employee shall not actively engage in any other employment, occupation or consulting activity that conflicts with the interests of the Company. In light of the employees apparent breach of his employment agreement, Mecar USA terminated his employment on January 20, 2010.
According to the DOJs press release, the former employee was arrested on January 19, 2010, along with twenty-one other individuals, after a large-scale undercover operation that targeted foreign bribery in the military and law enforcement products industry. The indictments of the twenty-two individuals allege that the defendants conspired to violate the Foreign Corrupt Practices Act (FCPA), conspired to engage in money laundering and engaged in substantive violations of the FCPA.
4
Subsequently, the Company received notice from the DOJ that indicated that it would request additional documents and expand its review beyond matters relating to the indicted former employee of Mecar USA. The Company understands that the DOJs expanded review is in connection with an industry-wide review. The Company has also received inquiries from the SEC as to this matter.
The Company is cooperating with the DOJ and the SEC and has been complying with the DOJs subpoena and the SECs requests for information. The Companys response to the DOJ and SEC inquiries is being overseen by the Companys Board of Directors. The Board of Directors is being assisted in these matters by outside counsel. The Company cannot predict the outcome of these matters or the impact, if any, that they may have on our plan to return the net proceeds of the Chemring sale to our stockholders.
Litigation Relating to Consulting Agreement (MECAR)
A former consultant to MECAR has initiated a lawsuit in Belgium against MECAR and the Company for unpaid consulting fees in excess of $0.75 million. This lawsuit was settled in the fourth quarter of 2011 without any payment by the Company.
Other Litigation
In 2010 and 2011, the Company settled lawsuits filed against the Company by a former service provider and by a former executive officer of the Company. The Company paid approximately $0.230 million to settle these lawsuits.
Indemnification provisions
The Company has sold its SeaSpace, Titan, the VSK Group, GMS and NSM subsidiaries in separate transactions starting with the first transaction closing in 2007. In each transaction, the Company agreed to indemnify the purchaser for periods subsequent to closing for losses arising from breaches of representations, warranties and covenants. Indemnification periods varied based on the particular representation, warranty or covenant covered, the vast majority of which have all expired. As of December 31, 2011, the only remaining indemnification obligations relate to representations and warranties concerning taxes, environmental matters, breaches of title, breaches of authorization and fraud. For SeaSpace, Titan, the VSK Group, GMS and NSM, these indemnification provisions have been capped at $1 million, $0.95 million, $6.5 million, $5.2 million and $0.863 million, respectively. At December 31, 2011, no amount has been accrued related to these indemnifications as a liability is not deemed probable.
On June 24, 2010, the Company signed a definitive purchase and sale agreement with Chemring Group PLC pursuant to which Chemring agreed to acquire substantially all of the assets of the Company for $59.56 million in cash and the assumption of certain liabilities. The purchase and sale agreement contains certain indemnification provisions pursuant to which the Company may be required to indemnify the buyer for a period subsequent to the completion of the sale for any and all losses directly or indirectly based upon, related to, arising out of or in connection with Mecars completed contracts, Mecar USA liabilities retained by the Company and any failure by the Company to satisfy all transaction related expenses. The Companys indemnification liability is limited to, and capped at, the escrowed amount of $15 million plus the accumulated interest. The Companys indemnification obligations expire upon the earlier of (i) June 30, 2015 and (ii) the Companys entry into either a court or administrative order or a Chemring-approved settlement agreement, in either case, finally resolving the matters relating to the DOJs subpoena. In the absence of such final resolution, in certain circumstances, up to 50% of the escrowed funds may be released as early as June 24, 2013. At December 31, 2011, no amount has been accrued related to this indemnification as a liability is not deemed probable.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information. Allieds Common Stock was listed for trading on the NYSE Alternext Exchange (formerly American Stock Exchange) until September 20, 2010. From that date through the end of August, 2011, the Companys stock traded in the over-the-counter market under the trading symbol ADGI. The Companys stock ceased trading after the Company filed a certificate of dissolution in Delaware on August 31, 2011. The table below shows the high and low sales prices of Allieds Common Stock during 2011 and 2010:
2011 | 2010 | |||||||||||||||
High | Low | High | Low | |||||||||||||
1st Quarter |
$ | 3.75 | $ | 3.25 | $ | 7.25 | $ | 4.51 | ||||||||
2nd Quarter |
$ | 3.58 | $ | 3.15 | $ | 7.25 | $ | 1.85 | ||||||||
3rd Quarter |
$ | 3.50 | $ | 2.97 | $ | 3.72 | $ | 2.22 | ||||||||
4th Quarter |
N/A | N/A | $ | 3.48 | $ | 2.30 |
Stockholders. The number of holders of record of the Common Stock at August 31, 2011 was 725. We closed our stock transfers on August 31, 2011.
Dividends. There have been no dividends declared or paid by Allied since November 1992.
ITEM 6. | SELECTED FINANCIAL DATA |
Not required for a smaller reporting company.
ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
The Allied Defense Group, Inc. (Allied or the Company) previously conducted a multinational defense business focused on the manufacture and sale of ammunition and ammunition related products for use by the U.S. and foreign governments. Allieds business was conducted by two wholly-owned subsidiaries: MECAR sprl, formerly MECAR S.A. (Mecar), and ADG Sub USA, Inc., formerly MECAR USA, Inc. (Mecar USA).
On June 24, 2010, the Company signed a definitive purchase and sale agreement (the Agreement) with Chemring Group PLC (Chemring) pursuant to which Chemring agreed to acquire substantially all of the assets of the Company for $59.6 million in cash and the assumption of certain liabilities. On September 1, 2010, the Company completed the asset sale to Chemring contemplated by the Agreement. Chemring acquired all of the capital stock of Mecar for $45.8 million in cash, and separately Chemring acquired substantially all of the assets of Mecar USA for $13.8 million in cash and the assumption by Chemring of certain specified liabilities of Mecar USA. A portion of the purchase price was paid through the repayment of certain intercompany indebtedness owed to the Company that would otherwise have been cancelled at closing. $15 million of the proceeds from the sale was deposited into escrow to secure the Companys indemnification obligations under the Agreement.
In conjunction with the Agreement, the Board of Directors of the Company unanimously approved the dissolution of the Company pursuant to a Plan of Complete Liquidation and Dissolution (Plan of Dissolution). The Companys stockholders approved the Plan of Dissolution on September 30, 2010. In response to concerns of certain of the Companys stockholders, the Company agreed to delay the filing of a Certificate of Dissolution with the Delaware Secretary of State. The Company filed a Certificate of Dissolution with the Delaware Secretary of State on August 31, 2011. In connection with this filing, our stock transfer agent has ceased recording transfers of our stock and our stock is no longer publicly traded.
In connection with the adoption of the Plan of Dissolution and the anticipated liquidation of the Company, we adopted the liquidation basis of accounting effective close of business on September 30, 2010, whereby assets are valued at their estimated net realizable cash values and liabilities are stated at their estimated settlement amounts. Uncertainties as to the ultimate amount of our liabilities make it impractical to predict the aggregate net value that may ultimately be distributable to stockholders. Under the liquidation basis of accounting, we accrue for the remaining costs to be incurred during liquidation, including compensation for remaining directors, consultants, insurance costs, costs to settle remaining leases, fees for professional service providers, income taxes, and miscellaneous other costs, partially offset by estimated future interest earnings and sublease payments. Such net costs were estimated to be $2.688 million as of December 31, 2011. Our estimates are based on assumptions regarding our ability to settle outstanding obligations and the ultimate timing of distributions to our stockholders, but do not include any settlement amounts, fines or penalties, if any, that we might incur as a result of the DOJ subpoena or any other legal proceedings.
6
The Company received a subpoena from the Department of Justice (DOJ) on January 19, 2010 requesting that the Company produce documents relating to its dealings with foreign governments. The DOJ initially limited its request of documents to those relating to an indicted former employee of Mecar USA. The DOJ has subsequently advised the Company that it is conducting an industry-wide review, and therefore the DOJs investigation of the Company will be expanded and ongoing. The Company has also received inquiries from the Securities and Exchange Commission (SEC) as to this matter. We cannot predict the settlement amounts, fines or penalties, if any, that we might incur as a result of the foregoing. The period of time required to resolve these matters is uncertain but is expected to take in excess of one year. Furthermore, under the Agreement, the Company has agreed to indemnify Chemring and certain of its related parties from any losses, fines or penalties arising out of, among other things, the completed contracts of Mecar and Mecar USA. We have escrowed $15 million of the cash consideration paid to the Company in the sale to secure our indemnification obligations under the Agreement. These escrowed funds will not be available to the Company for distribution to our stockholders, or otherwise, until released to the Company pursuant to the terms of the Agreement.
In late February, 2012, the DOJ dismissed charges against all individuals indicted in the FCPA sting operation, including the former employee of MECAR USA. The Company has subsequently requested that the DOJ consider the Companys status in its investigation so that the Company may move forward with distributions to Company stockholders. No distributions to stockholders are expected prior to resolution of the DOJ and SEC inquiries and completion of the Delaware dissolution process which includes notice to creditors and publication of the dissolution, followed by a petition to the Delaware courts.
Based on advice from our Foreign Corrupt Practices Act (FCPA) outside counsel, we are now estimating that we may not be able to conclude the DOJ/SEC inquiries, complete the Delaware dissolution process and make final distribution to stockholders until 2013. As a result, our estimate of net costs to be incurred during liquidation includes our estimate of costs through December 31, 2013.
Prior to September 2010, the Company operated within two operating segments: Mecar and Mecar USA. Allied, the parent company, provided oversight and corporate services to its subsidiaries and had no operating activities. With the completion of the September 2010 sale, Allied no longer has operating segments. The Company is being managed by its two directors who are also serving as the Companys Chief Executive Officer and Chief Financial Officer. The Company no longer has any full-time employees. Allied no longer conducts any active business operations and is winding-up its affairs as set forth above.
Net Assets in Liquidation
Net assets in liquidation at December 31, 2011 are $44.333 million compared to $45.629 million at December 31, 2010. The change in net assets in liquidation is due to: (i) adjustments of assets to fair value, (ii) income earned on investments, and (iii) adjustments to estimated costs to be incurred during liquidation. The net assets in liquidation per share as of December 31, 2011 has been adjusted to $5.38 as compared to $5.54 as of December 31, 2010 and March 31, 2011, $5.40 as of June 30, 2011 and $5.37 as of September 30, 2011.
We expect to use all of our net assets to complete our Plan of Dissolution, which includes settling existing claims against the Company, including current liabilities and accrued expenses, and making cash liquidating distributions to our shareholders. Net assets available for liquidating distributions to shareholders may vary if we incur greater than estimated operating expenses associated with executing the Plan of Dissolution, any actual settlement costs for existing claims against the Company (as we have not accrued any amounts for resolution of the DOJ/SEC matter or any other existing claim), or if there are existing, but unknown claims made against us in the future.
7
Changes in Net Assets in Liquidation During the Three Months Ended December 31, 2011
The table below summarizes the changes in net assets during the three months ended December 31, 2011:
Three Months | ||||
Ended | ||||
December 31, 2011 | ||||
(in thousands) | ||||
Net assets on liquidation basis at beginning of period |
$ | 44,240 | ||
Changes in fair value of net assets in liquidation |
||||
Adjust net assets to fair value |
(341 | ) | ||
Decrease in estimated net costs to be incurred during liquidation |
71 | |||
Adjust estimated income to be earned during liquidation |
363 | |||
|
|
|||
Net assets on liquidation basis at end of period |
$ | 44,333 | ||
|
|
The change in net assets in liquidation during the three months ended December 31, 2011 is the net effect of valuation changes to the net assets, income earned on assets, and changes in the estimated net costs to be incurred during liquidation. Adjusting net assets to fair market value decreased the net assets in liquidation by $0.341 million. The estimated net costs to be incurred during liquidation decreased by $0.071 million. Estimated income earned during liquidation increased by $0.363 million. The net effect was an increase of $0.093 million in net assets in liquidation for the three months ended December 31, 2011.
The adjustment of assets to fair value is the reduction of short term investments to fair market value. The unrealized loss associated with the short term investments is due to the Companys purchase of financial instruments with interest rates above market and therefore are purchased at a premium to their maturity value with an initial unrealized loss. The unrealized loss will be absorbed against the interest income received as the instruments mature.
The table below reconciles the changes during the quarter ended December 31, 2011, in the estimated net costs to be incurred during liquidation. Actual costs, net of interest income received, incurred during the three months ended December 31, 2011 reduce the remaining estimated net costs to be incurred during liquidation. An updated estimate of remaining estimated net costs to be incurred during liquidation is prepared and reflected in the changes in estimates column.
(in thousands) | ||||||||||||||||
September 30, | Changes in | (Costs Incurred) | December 31, | |||||||||||||
Estimated Net Costs to be Incurred During Liquidation |
2011 | Estimates | Income Received | 2011 | ||||||||||||
Estimated net costs to be incurred during liquidation |
||||||||||||||||
Compensation for remaining employees and directors |
$ | 387 | $ | (24 | ) | $ | (66 | ) | $ | 297 | ||||||
Compliance and other office costs |
814 | (187 | ) | (63 | ) | 564 | ||||||||||
Insurance Fees |
416 | 114 | (209 | ) | 321 | |||||||||||
Professional Fees |
1,743 | 26 | (213 | ) | 1,556 | |||||||||||
Income Taxes |
150 | | | 150 | ||||||||||||
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|
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Subtotal |
3,510 | (71 | ) | (551 | ) | 2,888 | ||||||||||
Less: interest income on cash and investment balances |
(200 | ) | (363 | ) | 363 | (200 | ) | |||||||||
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Total estimated net costs to be incurred during liquidation |
$ | 3,310 | $ | (434 | ) | $ | (188 | ) | $ | 2,688 | ||||||
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As of September 30, 2011, the estimated total net costs to be incurred during liquidation was $3.310 million, consisting of $3.510 million estimated costs offset by $0.200 million of investment income. During the quarter ended December 31, 2011, $0.551 million of costs were incurred. The estimate of costs to be incurred during liquidation was reduced by $0.071 million. This is the net effect of a $0.114 million increase in insurance costs, primarily for directors and officers liability insurance, and a $0.187 million decrease in compliance costs for accounting and legal services. As of December 31, 2011, the estimate of remaining costs to be incurred through 2013 is $2.888 million. Future investment income is estimated to be $0.200 million resulting in estimated total net costs to be incurred during liquidation of $2.688 million as of December 31, 2011.
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Changes in Net Assets in Liquidation During the Twelve Months Ended December 31, 2011
The table below summarizes the changes in net assets during the twelve months ended December 31, 2011:
Twelve Months | ||||
Ended | ||||
December 31, 2011 | ||||
(in thousands) | ||||
Net assets on liquidation basis at beginning of period |
$ | 45,629 | ||
Changes in fair value of net assets in liquidation |
||||
Adjust net assets to fair value |
(1,577 | ) | ||
Increase in estimated net costs to be incurred during liquidation |
(1,184 | ) | ||
Adjust estimated income to be earned during liquidation |
1,465 | |||
|
|
|||
Net assets on liquidation basis at end of period |
$ | 44,333 | ||
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|
The change in net assets in liquidation during the twelve months ended December 31, 2011 is the net effect of valuation changes to the net assets, income earned on investments and changes in the estimated net costs to be incurred during liquidation. Adjusting net assets to fair market value decreased the net assets in liquidation by $1.577 million. The estimated net costs to be incurred during liquidation increased by $1.184 million. Adjusting estimated income to be earned during liquidation increased the net assets in liquidation by $1.465 million. The net effect was a reduction of $1.296 million in net assets in liquidation for the twelve months ended December 31, 2011.
The adjustment of assets to fair value is the reduction of short term investments to fair market value. The unrealized loss associated with the short term investments is due to the Companys purchase of financial instruments with interest rates above market and therefore are purchased at a premium to their maturity value with an initial unrealized loss. The unrealized loss is absorbed against the interest income received as the instruments mature.
Our estimated costs to be incurred during liquidation consist of $1.711 million and $1.177 million in costs to be incurred in 2012 and 2013, respectively. The total costs are offset by anticipated income of $0.2 million related to short-term investments. To the extent that we are able to resolve the DOJ/SEC matter and make final distributions to stockholders prior to the end of 2013, we may be able to minimize certain of these costs and increase our distribution to the stockholders.
Our estimate of $2.688 million in net remaining costs to be incurred during liquidation consists of $0.297 million in compensation for remaining employees and directors; $0.564 million for compliance and other office costs, including resident filing fees and costs to settle remaining leases; $0.321 million for insurance; $1.556 million in fees for professional service providers including legal representation relating to the DOJ subpoena; and $0.150 million in income taxes related to the repatriation of foreign monies; offset by interest income of $0.2 million estimated to be received on our cash and short-term investment balances during liquidation. Our estimates are based on the assumption that liquidation will occur no later than December 31, 2013.
9
The table below reconciles the changes during the twelve months ended December 31, 2011, in the estimated net costs to be incurred during liquidation:
(in thousands) | ||||||||||||||||
December 31, | Changes in | (Costs Incurred) | December 31, | |||||||||||||
Estimated Net Costs to be Incurred During Liquidation |
2010 | Estimates | Income Received | 2011 | ||||||||||||
Estimated net costs to be incurred during liquidation |
||||||||||||||||
Compensation for remaining employees and directors |
$ | 398 | $ | 173 | $ | (274 | ) | $ | 297 | |||||||
Compliance and other office costs |
1,230 | (34 | ) | (632 | ) | 564 | ||||||||||
Insurance Fees |
351 | 454 | (484 | ) | 321 | |||||||||||
Professional Fees |
1,385 | 814 | (643 | ) | 1,556 | |||||||||||
Income Taxes |
350 | | (200 | ) | 150 | |||||||||||
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Subtotal |
3,714 | 1,407 | (2,233 | ) | 2,888 | |||||||||||
Accrued liabilities |
399 | (223 | ) | (176 | ) | | ||||||||||
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Subtotal |
4,113 | 1,184 | (2,409 | ) | 2,888 | |||||||||||
Less: interest income on cash and investment balances |
(150 | ) | (1,465 | ) | 1,415 | (200 | ) | |||||||||
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Total estimated net costs to be incurred during liquidation |
$ | 3,963 | $ | (281 | ) | $ | (994 | ) | $ | 2,688 | ||||||
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As of December 31, 2010, the estimate of net costs to be incurred during liquidation was $3.963 million, consisting of $4.113 million in estimated costs, offset by $0.150 million in estimated investment income. During the year ended December 31, 2011, $2.409 million in costs were incurred. The estimate of costs to be incurred increased by $1.184 million during the year, decreasing the net assets in liquidation per share by $0.15.
The primary causes for the increase were the extension of the liquidation period through 2013 based on advice of FCPA counsel ($0.800 million), the settlement of litigation with a former executive of the Company ($0.200 million), and additional accounting and legal fees costs to be incurred as a result of the direction by the Securities and Exchange Commission staff that the Company must continue to file quarterly and annual financial statements ($0.250 million) and an increase in the premium costs for directors and officers liability insurance ($0.150 million). These increases were offset by the estimate of sublease income from the Companys former executive offices ($0.200 million).
The estimate of investment income increased by $1.465 million during the year. This is an offset to the fair market value adjustment for investments and reduces the change in net costs in liquidation to $0.281 million.
Results of Operations (Going Concern Basis)
For all periods preceding the authorization of the Plan of Dissolution, the Companys financial statements are presented on the going concern basis of accounting. Such financial statements reflect the historical basis of assets and liabilities and the historical results of operations related to the Companys assets and liabilities for the period from January 1, 2010 to September 30, 2010. Accordingly, the following discussion of the results of operations includes the period for the nine months ended September 30 as reflected in the Consolidated Statements of Operations.
With the September 2010 sale of both Mecar and Mecar USA, we will no longer generate revenue from the sale of our products. The Companys continuing operations include only those costs incurred to support the Companys corporate headquarters and its non-operating European subsidiaries. The operating results, prior to the sale of the business, for Mecar, Mecar USA, and NS Microwave Systems (NSM) are reported as discontinued operations. The sale of NSM was completed in August 2009. The Mecar and Mecar USA transactions closed on September 1, 2010.
Allied had a net loss from continuing operations of $8.81 million for the nine months ended September 30, 2010. For the nine months ended September 30, 2010, the Company had net income of $33.66 million from discontinued operations. Net income was $24.86 million for the nine months ended September 30, 2010. Results for 2010 were favorably impacted by the gains recognized from the sale of both Mecar and Mecar USA.
10
The table below sets forth certain condensed consolidated statement of operations data for the nine months ended September 30, 2010:
Nine Months Ended | ||||
September 30, 2010 | ||||
(in thousands) | ||||
Revenues |
$ | | ||
|
|
|||
Cost and expenses |
||||
Selling and administrativecorporate expenses |
7,469 | |||
|
|
|||
Operating loss |
(7,469 | ) | ||
|
|
|||
Other income (expenses) |
||||
Interest income |
38 | |||
Net loss on fair value of senior notes and warrants |
(17 | ) | ||
Other-net |
(1,358 | ) | ||
|
|
|||
(1,337 | ) | |||
|
|
|||
Loss from continuing operations before income taxes |
(8,806 | ) | ||
Income tax expense |
1 | |||
|
|
|||
Loss from continuing operations |
(8,807 | ) | ||
|
|
|||
Income (loss) from discontinued operations, net of tax |
||||
Gain on sale of subsidiaries |
48,081 | |||
Loss from discontinued operations |
(14,418 | ) | ||
|
|
|||
Net income from discontinued operations |
33,663 | |||
|
|
|||
NET INCOME |
$ | 24,856 | ||
|
|
|||
Earnings (Loss) per sharebasic and diluted: |
||||
Net loss from continuing operations |
$ | (1.08 | ) | |
Net income from discontinued operations |
4.12 | |||
|
|
|||
Total income per sharebasic and diluted |
$ | 3.04 | ||
|
|
|||
Weighted average number of common shares: |
||||
Basic |
8,175,580 | |||
Diluted |
8,182,279 |
11
Critical Accounting Policies
The Companys discussion and analysis of its financial condition, results of operations and cash flows are based upon the Companys consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, sales, and expenses, and related disclosure of contingent assets and liabilities. The Company re-evaluates its estimates on an on-going basis. The Companys estimates and judgments are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates or judgments under different assumptions or conditions.
The Company believes the following are its critical accounting policies which affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:
| Estimates of the potential liability associated with litigation and government investigation |
| Estimates of expenses incurred and interest income received during liquidation. Under the liquidation basis of accounting, the Company accrues for the remaining costs to be incurred during liquidation, including compensation for remaining directors, consultants, insurance costs, costs to settle remaining leases, fees for professional service providers and miscellaneous other costs, partially offset by estimated future interest earnings. These estimates are undiscounted for present value and are based on the assumption that liquidation will occur no later than December 31, 2013. |
| Fair Value of financial instruments. The fair values for substantially all of our financial assets and financial liabilities are based on observable prices and inputs and are classified in level 1 of the hierarchy. |
Forward-Looking Statements
This Managements 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. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions 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.
Commitments and Contingencies
DOJ Subpoena
On January 19, 2010, the Company received a subpoena and communications from the U.S. Department of Justice (DOJ) requesting the Company produce documents relating to its dealings with foreign governments. The subpoena stated that it was issued in connection with an ongoing criminal investigation. See Note B (DOJ Legal Proceedings) for additional information regarding the DOJ matter.
Employee Severance Payments
The Company entered into employment agreements with certain management personnel at the Companys subsidiaries and with certain domestic management personnel. These agreements provided for severance payments in the event of termination under certain conditions. In September 2010, the Company paid $1.650 million in satisfaction of its severance obligations to the Companys management personnel. Employment agreements with employees at Mecar and Mecar USA were assigned as part of the sale transactions.
Leases
The Company leases domestic office space under an operating lease which expires in early 2013. The lease also includes escalation provisions for taxes and operating costs. In April, 2011, the Company subleased the office space for 2011 and 2012 to offset a portion of the rental obligation owed by the Company.
12
Indemnification provisions
The Company has sold its SeaSpace, Titan, the VSK Group, GMS and NSM subsidiaries in separate transactions starting with the first transaction closing in 2007. In each transaction, the Company agreed to indemnify the purchaser for periods subsequent to closing for losses arising from breaches of representations, warranties and covenants. Indemnification periods varied based on the particular representation, warranty or covenant covered, the vast majority of which have all expired. As of September 30, 2011, the only remaining indemnification obligations relate to representations and warranties concerning taxes, environmental matters, breaches of title, breaches of authorization and fraud. For SeaSpace, Titan, the VSK Group, GMS and NSM, these indemnification provisions have been capped at $1.0 million, $0.950 million, $6.474 million (5.0 million), $5.2 million and $0.863 million, respectively. At December 31, 2011, no amount has been accrued related to these indemnifications as a liability is not deemed probable.
On June 24, 2010, the Company signed a definitive purchase and sale agreement with Chemring Group PLC pursuant to which Chemring agreed to acquire substantially all of the assets of the Company for $59.560 million in cash and the assumption of certain liabilities. The purchase and sale agreement contains certain indemnification provisions pursuant to which the Company may be required to indemnify the buyer for a period subsequent to the completion of the sale for any and all losses directly or indirectly based upon, related to, arising out of or in connection with Mecars completed contracts, Mecar USA liabilities retained by the Company and any failure by the Company to satisfy all transaction related expenses. The Companys indemnification liability is limited to, and capped at, the escrowed amount of $15 million plus the accumulated interest. The Companys indemnification obligations expire upon the earlier of (i) June 30, 2015 and (ii) the Companys entry into either a court or administrative order or a Chemring-approved settlement agreement, in either case, finally resolving the matters relating to the DOJs subpoena. In the absence of such final resolution, in certain circumstances, up to 50% of the escrowed funds may be released as early as June 24, 2013. At December 31, 2011, no amount has been accrued related to this indemnification as a liability is not deemed probable.
Future Reporting
The Company filed a Certificate of Dissolution with the State of Delaware on August 31, 2011 and the Company has closed its stock transfer books and instructed its stock transfer agent that no further stock transfers be recognized. Accordingly, the Companys stock has ceased trading on the OTCQB Marketplace. The Company is required under Delaware law to maintain a quasi-corporate existence for a period of three years for the limited purpose of winding up its affairs and discharging or making provision for the discharge of its liabilities.
Promptly after the filing of the Certificate of Dissolution, the Company requested a no-action letter from the Securities and Exchange Commission to allow the Company to cease filing Forms 10-K and 10-Q. The Securities and Exchange Commission has rejected this request; accordingly, the Company will continue to file all required Forms 10-K and 10-Q.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not required for a smaller reporting company.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The financial statements and supplementary financial information and data required by this Item are set forth in the pages indicated in Item 15(a) (1) and (2). See Note M of the consolidated financial statements for supplementary quarterly financial data required by this item.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
There were no disagreements on any matter of accounting principles, financial statement disclosure or auditing scope or procedure to be reported under this item. BDO USA, LLP was the Companys independent registered public accounting firm for both 2011 and 2010.
13
ITEM 9A. | CONTROLS AND PROCEDURES |
Overview
As a result of the sale of Mecar and Mecar USA and the adoption by the stockholders of the Plan of Dissolution, the Company has terminated all employees. During the third quarter of 2010 the Company reduced its corporate staff to one (1) person who left the Company in mid-November, 2010. The Companys Officers/Board of Directors continue to oversee and review the Companys system of financial reporting.
Disclosure Controls and Procedures
Subject to the provisions set forth in the Overview section above, under the direction and with the participation of the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by the report. Based on this evaluation, the Companys Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective as of December 31, 2011.
Managements Report on Internal Control over Financial Reporting
The management of The Allied Defense Group, Inc. is responsible for establishing and maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. The Companys internal control system was designed to provide reasonable assurance to the Companys management and Board of Directors regarding the preparation and fair presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Companys management assessed the effectiveness of the Companys internal control over financial reporting as of December 31, 2011. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework. Based on our assessment, the Chief Executive Officer and Chief Financial Officer concluded that the Companys internal controls over financial reporting are effective as of December 31, 2011.
This annual report does not include an attestation report of the Companys registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Companys registered public accounting firm pursuant to SEC rules that permits the Company to provide only managements report in this annual report.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15-d-15(f) of the Exchange Act) during the fourth quarter of fiscal year 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. | OTHER INFORMATION |
There was no information required to be disclosed in a report on Form 8-K during the fourth quarter of 2011 which was not so disclosed.
14
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The following are the directors of Allied:
Name of Nominee |
Year in which first elected a director |
Age | Principal business occupation for past five years and other directorships | |||
John G. Meyer, Jr. |
2003 | 67 | Consultant; Chief Executive Officer of RedX Defense, Inc., a provider of explosive detection devices from July 2009 to September 2009; serves as a director of Heckler & Koch since 2005; Chief Executive Officer of Heckler & Koch, a defense contractor, from June 2005 August 2007; Chief Executive Officer of the Company from June 2003 June, 2005; President of the Company from January 2003 June 2005; Chief Operating Officer of the Company from January 2001 May 2003; Executive Vice President of the Company from January 2001 January 2003; retired from United States Army having served as its most senior Public Affairs Officer. Mr. Meyer has proven business acumen, having served as the chief executive officer of several defense industry companies including serving as the Chief Executive Officer of the Company from 2003 to 2005. His military background provides the Board with relevant industry experience. Mr. Meyer currently serves on the board of Cyalume Technologies, Inc. as well as three non-public companies. | |||
Charles S. Ream |
2006 | 68 | Retired as the Executive Vice President and Chief Financial Officer of Anteon International Corporation, having served in that capacity from 2003-2006; Senior Vice President and Chief Financial Officer of Newport News Shipbuilding Inc. from 2000-2001; Senior Vice President of Finance and Strategic Initiatives of Raytheon Systems Company from 1998-2000. Also currently a director of Aeroflex Holdings Corp., and previously a director of Vangent, Inc. (2007-2011), DynCorp International (2006-2010), and Stanley, Inc. (2006-2010). Mr. Reams experience brings to the Board a strong understanding of public company governance and operations. Mr. Ream has extensive financial experience as having served as a chief financial officer at several industry related companies. Mr. Ream is a certified public accountant (inactive). |
Executive Officers
Mr. Meyer serves as Chief Executive Officer of Allied and Mr. Ream serves as Chief Financial Officer of Allied. Neither is a full-time salaried employee.
Code of Ethics
Allied has adopted a code of business conduct and ethics for directors and officers (including Allieds principal executive officer and principal financial officer). Stockholders may request a free copy of the code of ethics from the Companys website at http://www.allieddefensegroup.com or at:
Allied Defense Group, Inc.
120 E. Baltimore Street
Suite 2100
Baltimore, Maryland 21202
(410) 385-8155
15
Procedure for Board Recommendations
There have been no material changes to the procedures by which the Companys stockholders may recommend nominees to the Companys Board of Directors.
Audit Committee
The Company does not have a separately-designated standing audit committee as Messrs. Meyer and Ream, constituting the entire board of directors of the Company, act as the Companys audit committee. The board of directors has determined that Mr. Ream qualifies as an audit committee financial expert as defined under Securities and Exchange Commission rules.
Section 16(a) Beneficial Ownership Regarding Compliance
Section 16(a) of the Securities Exchange Act of 1934 (Exchange Act) requires the Companys Directors and Executive Officers, and anyone who beneficially owns ten percent (10%) or more of the Companys common stock, to file with the Securities and Exchange Commission initial reports of beneficial ownership and reports of changes in beneficial ownership of common stock. Such persons are required by regulations of the Securities and Exchange Commission to furnish the Company with copies of all Section 16(a) forms they file.
Based solely upon a review of a copy of the Section 16(a) filing received by the Company during or with respect to 2011, the Company believes that each filing required to be made pursuant to Section 16(a) of the Exchange Act and with respect to 2011 was filed in a timely manner.
16
ITEM 11. | EXECUTIVE COMPENSATION |
SUMMARY COMPENSATION TABLE
As Of December 31, 2011
Name and Principal Position |
Year | Salary | Bonus | Stock Awards ($) |
Option Awards ($) |
Non-Equity Incentive Plan Compensation ($) |
Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) |
All Other Compensation on ($) |
Total ($) | |||||||||||||||
John G. Meyer, Jr., Chief Executive |
2011 | $ | 54,000 | (1) | $ | 54,000 | ||||||||||||||||||
Officer from and after September 1, 2010 |
2010 | $ | 54,000 | (1) | $ | 54,000 | ||||||||||||||||||
Charles S Ream, Chief Financial |
2011 | $ | 54,000 | (1) | $ | 54,000 | ||||||||||||||||||
Officer from and after September 1, 2010 |
2010 | $ | 54,000 | (1) | $ | 54,000 |
(1) | Salary paid as directors compensation |
17
COMPENSATION OF DIRECTORS
Each director is compensated for service at the annual rate of $54,000. The Company also reimburses directors for out-of-pocket expenses incurred in connection with their service.
DIRECTOR COMPENSATION FOR 2011
Name |
Fees Earned or Paid in Cash ($) |
Stock Awards |
Option Awards ($) |
Non-Equity Incentive Plan Compensation ($) |
Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) |
All Other Compensation ($) |
Total ($) | |||||||||||
John G. Meyer, Jr. |
$ | 54,000 | $ | 54,000 | ||||||||||||||
Charles S. Ream |
$ | 54,000 | $ | 54,000 |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth information with respect to the shares of the Companys common stock which is held by the only persons known to the Company to be the beneficial owners of more than 5% of such common stock based upon the most recent filings made by the undersigned with the Securities and Exchange Commission and other information obtained by the Company:
Name of Beneficial Owner |
Shares Beneficially Owned | Percent of Class(1) | ||||||
Southpaw Asset Management(2) |
838,569 | 10.2 | % | |||||
Water Island Capital, LLC(3) |
689,203 | 8.4 | % | |||||
AQR Capital Management, LLC(4) |
555,790 | 6.7 | % | |||||
Dimensional Fund Advisors LP(5) |
504,833 | 6.1 | % | |||||
Gabelli Funds, LLC (6) |
420,247 | 5.1 | % |
(1) | Based upon 8,235,195 shares of common stock outstanding as of December 31, 2011. |
(2) | Ownership information as of December 31, 2011, based on information in a Form 13G filed with the SEC on January 20, 2012, by Southpaw Credit Opportunity Master Fund LP, Southpaw Asset Management LP, Southpaw Holdings LLC, Kevin Wyman and Howard Golden, Two Greenwich Office Park, Greenwich, CT 06831. |
(3) | Ownership information based on information contained in a Schedule 13G filed with the SEC on December 10, 2010 by Water Island Capital, LLC (Water Island). Water Island possesses sole voting power of 689,203 shares or our common stock and sole investment power of 689,203 shares of our common stock. The principal business address of the reporting person is 41 Madison Ave., Suite 2802, New York, NY 10010. |
(4) | Ownership information as of December 31, 2011, based on information contained in a Schedule 13G/A filed with the SEC on February 14, 2012 by AQR Capital Management, LLC (AQR). AQR possesses shared voting power of 555,790 shares of our common stock and shared investment power of 555,790 shares of our common stock. The principal business address of AQR is Two Greenwich Plaza, 3rd Floor, Greenwich, CT 06830. |
(5) | Ownership information as of December 31, 2011, based on information contained in a Schedule 13G/A filed with the SEC on February 14, 2012 by Dimensional Fund Advisors LP (Dimensional). Dimensional possess sole voting power of 497,420 shares of our common stock and sole investment power of 504,833 shares of our common stock. Dimensional, an investment adviser registered under Section 203 of the Investment Advisors Act of 1940, as amended, furnishes investment advice to four investment companies registered under the Investment Company Act of 1940, as amended, and serves as investment manager to certain other commingled group trusts and separate accounts (such investment companies, trusts and accounts, collectively referred to as the Dimensional Funds). In certain cases, subsidiaries of Dimensional may act as an adviser or sub-adviser to certain Dimensional Funds. In its role as investment adviser, sub-adviser and/or manager, neither Dimensional nor its subsidiaries possesses voting and/or investment power over our securities that are owned by the Dimensional Funds, and may be deemed to be the beneficial owner of our shares of common stock held by the Dimensional Funds. However, all shares reported on Dimensionals Schedule 13G/A are owned by the Dimensional Funds. Dimensional disclaims beneficial ownership of such securities. The principal business address of Dimensional is Palisades West, Building One, 6300 Bee Cave Road, Austin, TX 78746. |
18
(6) | Ownership information, based on information contained in a Schedule 13D filed with the SEC on December 13, 2010 by Gabelli Funds, LLC (Gabelli). Gabelli possesses shared voting power of 420,247 shares of our common stock and shared investment power of 420,247 shares of our common stock. The principal business address of Gabelli is One Corporate Center, Rye, New York 10580-1435. |
The following information is furnished as of December 31, 2011, with respect to the beneficial ownership by management of the Companys common stock:
Name and Address of | Amount and Nature of | |||||||
Title of Class |
Beneficial Owner |
Beneficial Owner |
Percent of Class | |||||
Common |
John G. Meyer, Jr. | 102,800 Owned directly | 1.25% | |||||
Common |
Charles S. Ream | 36,214 Owned directly | * | |||||
Common |
All executive officers and directors as a group(2) | 139,014 Owned directly | 1.69% |
* | Less than 1.00% |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE. |
Procedures for Approval of Related Party Transactions
Our Board of Directors is charged with reviewing and approving all potential related party transactions. All such related party transactions must then be reported under applicable SEC rules. We have not adopted other procedures for review, or standards for approval, of such transactions, but instead review them on a case-by-case basis.
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICE. |
The following table sets forth the fees billed to the Company by BDO USA, LLP (BDO) for audit and other services provided for 2011 and 2010, including work in connection with quarterly reviews:
(In Thousands) | ||||||||
2011 | 2010 | |||||||
Audit fees |
$ | 85 | $ | 332 | ||||
Audit-related fees |
||||||||
|
|
|
|
|||||
Tax fees |
||||||||
|
|
|
|
|||||
All other fees |
||||||||
|
|
|
|
|||||
Total |
$ | 85 | $ | 332 | ||||
|
|
|
|
The Board of Directors considered whether the provision of services referenced above is compatible with maintaining independence and concluded the provision of services to be independent.
The Board of Directors policy is to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year. The Board of Directors may also pre-approve particular services on a case-by-case basis.
19
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
Exhibit No. |
Description of Exhibits | |
2.1 | Stock and Asset Purchase Agreement, dated as of June 24, 2010, between The Allied Defense Group, Inc., Mecar USA, Inc., ARC Europe, S.A. and Chemring Group PLC (Filed as Exhibit 2.1 to Form 8-K filed on June 24, 2010, and incorporated herein by reference). | |
3.1 | Certificate of Incorporation, as amended (Incorporated by reference from Form 10-Q filed in August 2002). | |
3.2 | Amended and Restated By-Laws (Incorporated by reference from Form 10-Q filed in August 2004). | |
3.3 | Plan of Complete Liquidation And Dissolution of The Allied Defense Group, Inc. (Incorporated by reference from Proxy Statement filed on July 28, 2010). | |
3.4 | Certificate of Dissolution dated August 31, 2011 (a) | |
4.1 | Rights Agreement between Allied and Mellon Investor Services, LLC (Incorporated by reference from Form 8-K filed in June 2001). | |
4.2 | First Amendment To Rights Agreement, dated as of June 15, 2006 (incorporated by reference from Form 8-A/A filed on June 21, 2006). | |
4.3 | Second Amendment To Rights Agreement, dated as of November 30, 2006 (incorporated by reference from Form 8-K filed on December 7, 2006). | |
4.4 | Third Amendment To Rights Agreement, dated as of January 18, 2010 (incorporated by reference from Form 8-K filed on January 19, 2010). | |
4.5 | Fourth Amendment To Rights Agreement, dated as of June 24, 2010 (Filed as Exhibit 4.5 to Form 8-K filed on June 24, 2010, and incorporated herein by reference). | |
10.1 | Employment Agreement between Allied and John J. Marcello (Incorporated by reference from Form 10-Q filed in August 2005). | |
10.2 | Employment Agreement between Allied and Deborah F. Ricci (Incorporated by reference from Form 10-Q filed in May 2007). | |
10.3 | Employment Agreement between Allied and Monte L. Pickens (Incorporated by reference from Form 8-K filed in April 2003). | |
10.4 | Employment Agreement letter amendment between Allied and Monte L. Pickens (Incorporated by reference from Form 10-Q filed in August 2004). | |
10.5 | Employment Agreement between Allied and Wayne F. C. Hosking, Jr. (Incorporated by reference from Form 8-K filed in April 2004). | |
10.6 | 2001 Equity Incentive Plan, as amended (Incorporated by reference from Proxy Statements filed in April 2001, April 2002 and May 2005). | |
10.7 | 8% Convertible Debenture, Series A and related documents (Incorporated by reference from Form 8-K filed in July 2002). | |
10.8 | Credit Agreement for MECAR S.A. (Incorporated by reference from Form 10-Q filed in August 2002). | |
10.9 | Employee Stock Purchase Plan, as amended (Incorporated by reference from Form 10-Q filed in November 2002). | |
10.10 | Lease Agreement, as amended (Incorporated by reference from Form 10-Q filed in November 2002). | |
10.11 | Amendment to Lease Agreement | |
10.12 | Form of Indemnity Agreement for Directors and Executive Officers (Incorporated by reference from Form 10-Q filed in November 2002). | |
10.13 | Amended and Restated International Distribution Agreement (Incorporated by reference from Form 10-Q filed in November 2008). | |
10.14 | Deferred Compensation Plan for Non-Employee Directors (Incorporated by reference from Form 10-Q filed in August 2004). | |
10.15 | Stock Option Agreement-Employee Form (Incorporated by reference from Form 10-Q filed in November 2004) | |
10.16 | Directors Stock Option Agreement-Director Form (Incorporated by reference from Form 10-Q filed in November 2004) | |
10.17 | Restricted Stock Agreement (Incorporated by reference from Form 10-Q filed in May 2005) | |
10.18 | 7.5% Senior Subordinated Convertible Notes and related documents (Incorporated by reference from 8-K filed in March 2006). | |
10.19 | Amended and Restated Securities Purchase Agreement, dated as of June 19, 2007, between The Allied Defense Group, Inc. and the Purchasers (Incorporated by reference from Form 8-K filed June 20, 2007). | |
10.20 | Form of Notes (Incorporated by reference from Form 8-K filed June 20, 2007). | |
10.21 | Form of Amended and Restated Registration Rights Agreement (June 20, 2007). | |
10.22 | MECAR Certificate dated July 11, 2007 (Incorporated by reference from Form 8-K filed July 12, 2007). | |
10.23 | Stock Purchase Agreement, dated as of September 6, 2007 between Ving Holdings (Belgium) BVBA in incorporation (in oprichting), as purchaser and ARC Europe SA, as seller (Incorporated by reference from Form 8-K filed September 10, 2007). | |
10.25 | Asset Purchase Agreement, dated as of August 19, 2008, among The Allied Defense Group, Inc., Global Microwave Systems, Inc., GMS Cobham, Inc. and DTC Communications, Inc. (Incorporated by reference from Form 8-K filed on August 20, 2008). | |
10.26 | Stock Purchase Agreement, dated as of August 7, 2009, between The Allied Defense Group, Inc., .and 3DRS International, Inc. to complete the sale of NS Microwave Systems, Inc., (Incorporated by reference from Form 8-K filed on August 10, 2009). | |
10.27 | Secured Promissory Note, between The Allied Defense Group, Inc. and Chemring Group PLC (Filed as Exhibit 10.27 to Form 8-K filed on June 24, 2010, and incorporated herein by reference). | |
10.28 | Secured Promissory Note, between ARC Europe, S.A. and Chemring Group PLC (Filed as Exhibit 10.28 to Form 8-K filed on June 24, 2010, and incorporated herein by reference). | |
21 | List of Subsidiaries (a) | |
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (a) | |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (a) | |
32 | Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(a). |
(a) | Filed herewith |
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Allied has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
The Allied Defense Group, Inc. | ||||||
By: |
/s/ John G. Meyer, Jr. | |||||
John G. Meyer, Jr., Chief Executive Officer and President | Date: March 23, 2012 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Allied and in the capacities and on the dates indicated.
/s/ Charles S. Ream |
Chief Financial Officer | Date: March 23, 2012 | ||
Charles S. Ream |
||||
/s/ Charles S. Ream |
Director | Date: March 23, 2012 | ||
Charles S. Ream |
||||
/s/ John G. Meyer, Jr. |
Director | Date: March 23, 2012 | ||
John G. Meyer, Jr. |
21
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011
FORMING A PART OF
ANNUAL REPORT PURSUANT TO
THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-K
OF
The Allied Defense Group, Inc.
F-1
The Allied Defense Group Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||
F - 3 | ||||
F - 4 | ||||
F - 5 | ||||
F - 6 | ||||
F - 7 | ||||
F - 8 | ||||
F - 9 |
F-2
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
The Allied Defense Group, Inc.
Vienna, Virginia
We have audited the accompanying consolidated statements of net assets (liquidation basis) of The Allied Defense Group, Inc. and subsidiaries (the Company), as of December 31, 2011 and 2010, and the related consolidated statements of changes in net assets (liquidation basis) for the year ended December 31, 2011 and for the period from October 1, 2010 to December 31, 2010. We have also audited the consolidated statements of operations (going concern basis), stockholders equity and comprehensive income (going concern basis), and cash flows (going concern basis) for the period from January 1, 2010 to September 30, 2010. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note C to the consolidated financial statements, the shareholders of The Allied Defense Group, Inc. approved a plan of liquidation on September 30, 2010. As a result, the Company changed its basis of accounting effective October 1, 2010, from the going-concern basis to a liquidation basis.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated net assets (liquidation basis) of The Allied Defense Group, Inc. and subsidiaries as of December 31, 2011 and 2010, the consolidated changes in net assets (liquidation basis) for the year ended December 31, 2011 and for period from October 1, 2010 to December 31, 2010, and the consolidated results of its operations and its cash flows for the period from January 1, 2010 to September 30, 2010, in conformity with accounting principles generally accepted in the United States of America applied on the bases described in the preceding paragraph.
/s/ BDO USA, LLP
Bethesda, Maryland
March 23, 2012
F-3
CONSOLIDATED STATEMENTS OF NET ASSETS
The Allied Defense Group, Inc.
CONSOLIDATED STATEMENTS OF NET ASSETS (Liquidation Basis)
(Thousands of Dollars, except per share and share data)
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
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Cash and cash equivalents |
$ | 640 | $ | 14,462 | ||||
Short-term investments |
30,872 | 18,801 | ||||||
Prepaid and other current assets |
647 | 606 | ||||||
Notes receivable |
| 875 | ||||||
Property and Equipment, net |
| 2 | ||||||
Funds held in escrow |
15,010 | 15,003 | ||||||
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TOTAL ASSETS |
47,169 | 49,749 | ||||||
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LIABILITIES |
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Estimated net costs to be incurred during liquidation |
2,688 | 3,564 | ||||||
Accounts payable |
57 | 68 | ||||||
Accrued liabilities |
| 399 | ||||||
Income taxes payable |
| 2 | ||||||
Other liabilities |
91 | 87 | ||||||
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TOTAL LIABILITIES |
2,836 | 4,120 | ||||||
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NET ASSETS IN LIQUIDATION |
$ | 44,333 | $ | 45,629 | ||||
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NUMBER OF SHARES OUTSTANDING |
8,235,195 | 8,235,195 | ||||||
NET ASSETS IN LIQUIDATION PER SHARE |
$ | 5.38 | $ | 5.54 | ||||
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See accompanying notes to consolidated financial statements.
F-4
The Allied Defense Group, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (Liquidation Basis)
(Thousands of Dollars, except per share and share data)
Twelve Months | Three Months | |||||||
Ended | Ended | |||||||
December 31, 2011 | December 31, 2010 | |||||||
Net assets on liquidation basis at beginning of period |
$ | 45,629 | $ | 45,654 | ||||
Changes in fair value of net assets in liquidation |
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Adjust net assets to fair value |
(1,577 | ) | 168 | |||||
Decrease/(increase) in estimated net costs to be incurred during liquidation |
(1,184 | ) | 138 | |||||
Adjust estimated income to be earned during liquidation |
1,465 | (331 | ) | |||||
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Net assets on liquidation basis at end of period |
$ | 44,333 | $ | 45,629 | ||||
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See accompanying notes to consolidated financial statements.
F-5
The Allied Defense Group, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
CONSOLIDATED STATEMENT OF OPERATIONS (Going Concern Basis)
(Thousands of Dollars, except per share and share data)
Nine Months Ended | ||||
September 30, 2010 | ||||
Revenues |
$ | | ||
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Cost and expenses |
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Selling and administrativecorporate expenses |
7,469 | |||
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Operating loss |
(7,469 | ) | ||
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Other income (expenses) |
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Interest income |
38 | |||
Net loss on fair value of warrants |
(17 | ) | ||
Other-net |
(1,358 | ) | ||
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(1,337 | ) | |||
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Loss from continuing operations before income taxes |
(8,806 | ) | ||
Income tax expense |
1 | |||
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Loss from continuing operations |
(8,807 | ) | ||
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Income (loss) from discontinued operations, net of tax |
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Gain on sale of subsidiaries |
48,081 | |||
Loss from discontinued operations |
(14,418 | ) | ||
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Net income from discontinued operations |
33,663 | |||
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NET INCOME |
$ | 24,856 | ||
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Earnings (Loss) per sharebasic and diluted: |
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Net loss from continuing operations |
$ | (1.08 | ) | |
Net income from discontinued operations |
4.12 | |||
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Total income per sharebasic and diluted |
$ | 3.04 | ||
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Weighted average number of common shares: |
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Basic |
8,175,580 | |||
Diluted |
8,182,279 |
See accompanying notes to consolidated financial statements.
F-6
The Allied Defense Group, Inc.
TED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
(Going Concern Basis)
(Thousands of Dollars, except per share and share data)
Accumulated | ||||||||||||||||||||||||||||
Preferred | Common Stock | Capital in | Other | Total | ||||||||||||||||||||||||
stock, no | $.10 Par | Excess of Par | Accumulated | Comprehensive | Stockholders | |||||||||||||||||||||||
Par Value | Shares | value | value | (Deficit) | Income | Equity | ||||||||||||||||||||||
Balance at December 31, 2009 |
$ | | 8,175,480 | $ | 818 | $ | 56,490 | $ | (46,658 | ) | $ | 16,361 | $ | 27,011 | ||||||||||||||
Common stock awards |
| | | 138 | | | 138 | |||||||||||||||||||||
Forfeited stocks |
| (1,000 | ) | | | | | | ||||||||||||||||||||
Retired stocks |
| (830 | ) | | | | | | ||||||||||||||||||||
Issue of stock options |
| | | 33 | | | 33 | |||||||||||||||||||||
Directors deferred stock compensation |
| 61,545 | 6 | 37 | | | 43 | |||||||||||||||||||||
Comprehensive income: |
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Net income for the period |
| | | | 24,856 | | 24,856 | |||||||||||||||||||||
Currency translation adjustment |
| | | | | (2,410 | ) | (2,410 | ) | |||||||||||||||||||
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Total comprehensive income |
22,446 | |||||||||||||||||||||||||||
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Balance at September 30, 2010 |
$ | | 8,235,195 | $ | 824 | $ | 56,698 | $ | (21,802 | ) | $ | 13,951 | $ | 49,671 | ||||||||||||||
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See accompanying notes to consolidated financial statements.
F-7
The Allied Defense Group, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
CONSOLIDATED STATEMENT OF CASH FLOWS (Going Concern Basis)
(Thousands of Dollars)
Nine Months Ended | ||||
September 30, 2010 | ||||
Cash flows from operating activities |
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Net income |
$ | 24,856 | ||
Less: Gain on sale of subsidiaries |
(48,081 | ) | ||
Plus: Loss on discontinued operations, net of tax |
14,418 | |||
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Loss from continuing operations |
(8,807 | ) | ||
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities, net of divestitures: |
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Depreciation and amortization |
13 | |||
Loss on sale of fixed assets |
1 | |||
Net gain related to fair value of warrants |
17 | |||
Common stock and stock option awards |
171 | |||
Deferred director stock awards |
43 | |||
(Increase) decrease in operating assets and increase (decrease) in liabilities, net of effects from discontinued businesses: |
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Restricted cash |
160 | |||
Prepaid and other current assets |
88 | |||
Accounts payable and accrued liabilities |
(62 | ) | ||
Deferred compensation |
(156 | ) | ||
Income taxes |
(363 | ) | ||
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Net cash used in operating activities |
(8,895 | ) | ||
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Cash flows from investing activities |
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Net proceeds from sale of subsidiaries |
54,446 | |||
Funds deposited in escrow |
(15,000 | ) | ||
Net cash used for short-term investment transactions |
(20,000 | ) | ||
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Net cash provided by investing activities |
19,446 | |||
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Cash flows from financing activities |
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Net principal payments on long-term debt and capital lease obligations |
(1 | ) | ||
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Net cash used in financing activities |
(1 | ) | ||
Net change in cash of discontinued operations |
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Effects of exchange rate on cash |
850 | |||
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
11,400 | |||
Cash and cash equivalents at beginning of period |
3,475 | |||
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Cash and cash equivalents at end of period |
$ | 14,875 | ||
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Supplemental Disclosures of Cash Flow information |
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Cash paid during the period for: |
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Taxes |
$ | 373 | ||
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See accompanying notes to consolidated financial statements.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A DESCRIPTION OF BUSINESS
Business Operations
The Allied Defense Group Inc. (Allied or the Company), a Delaware corporation, previously conducted a multinational defense business focused on the manufacture and sale of ammunition and ammunition related products for use by the U.S. and foreign governments. Allieds business was conducted by its two wholly owned subsidiaries: MECAR sprl, formerly Mecar S.A. (Mecar), and ADG Sub USA, Inc., formerly Mecar USA, Inc. (Mecar USA).
Plan of Dissolution and Liquidation
On June 24, 2010, the Company signed a definitive purchase and sale agreement (the Agreement) with Chemring Group PLC (Chemring) pursuant to which Chemring agreed to acquire substantially all of the assets of the Company for $59,560 in cash and the assumption of certain liabilities. On September 1, 2010, the Company completed the asset sale to Chemring contemplated by the Agreement. Pursuant to the Agreement, Chemring acquired all of the capital stock of Mecar for approximately $45,810 in cash, and separately Chemring acquired substantially all of the assets of Mecar USA for $13,750 in cash and the assumption by Chemring of certain specified liabilities of Mecar USA. A portion of the purchase price was paid through the repayment of certain intercompany indebtedness owed to the Company that would otherwise have been cancelled at closing. $15,000 of the proceeds of the sale was deposited into escrow to secure the Companys indemnification obligations under the Agreement.
In conjunction with the Agreement, the Board of Directors of the Company unanimously approved the dissolution of the Company pursuant to a Plan of Complete Liquidation and Dissolution (Plan of Dissolution). The Companys stockholders approved the Plan of Dissolution on September 30, 2010. In response to concerns of certain of the Companys stockholders, the Company agreed to delay the filing of a certificate of dissolution with the Delaware Secretary of State. The Company filed a certificate of dissolution with the Delaware Secretary of State on August 31, 2011. In connection with this filing, our stock transfer agent has ceased recording transfers of our stock and our stock is no longer publicly traded.
NOTE B DOJ LEGAL PROCEEDINGS
On January 19, 2010, the Company received a subpoena and communications from the U.S. Department of Justice (DOJ) requesting the Company produce documents relating to its dealings with foreign governments. The subpoena stated that it was issued in connection with an ongoing criminal investigation. On the same day, the Company also became aware through a press release issued by the DOJ that an employee of Mecar USA had been indicted by the DOJ for allegedly engaging in schemes to bribe foreign government officials to obtain and retain business. The unsealed indictment of this employee and the DOJs press release indicate that the alleged criminal conduct was on behalf of a Decatur, Georgia company which is unrelated to the Company or Mecar USA. Mecar USAs employment agreement with the employee provides that the employee shall not actively engage in any other employment, occupation or consulting activity that conflicts with the interests of the Company. In light of the employees breach of his employment agreement, Mecar USA terminated his employment on January 20, 2010.
According to the DOJs press release, the former employee was arrested on January 19, 2010, along with twenty-one other individuals, after an undercover operation that targeted foreign bribery in the military, and small arms and ammunition industries. The indictments of the twenty-two individuals allege that the defendants conspired to violate the Foreign Corrupt Practices Act (FCPA), conspired to engage in money laundering and engaged in substantive violations of the FCPA.
Subsequently, the Company received notice from the DOJ that indicated that it would request additional documents and expand its review beyond matters relating to the indicted former employee of Mecar USA. The Company understands that the DOJs expanded review was in connection with an industry-wide review. The Company has also received inquiries from the SEC on this matter.
The Company is cooperating with the DOJ and the SEC and has been complying with the DOJs subpoena and the SECs requests for information. The Companys response to the DOJ and SEC inquiries is being overseen by the Companys Board of Directors. The Board of Directors is being assisted in these matters by outside counsel. The Company cannot predict the outcome of these matters or the impact, if any, that they may have on the plan to return the net proceeds of the Chemring sale to its stockholders. The period of time required to resolve these matters is uncertain but is expected to take in excess of one year. Furthermore, under the Agreement, the Company has agreed to indemnify Chemring and certain of its related parties from any losses, fines or penalties arising out of, among other things, the completed contracts of Mecar and Mecar USA. We have agreed to escrow $15,000 of the cash consideration paid to the Company in the sale to secure our maximum indemnification obligations under the Agreement. These escrowed funds will not be available to the Company for distribution to our stockholders, or otherwise, until released to the Company pursuant to the terms of the Agreement.
F-9
In late February, 2012, the DOJ dismissed charges against all individuals indicted in the FCPA sting operation, including the former employee of MECAR USA. The Company has subsequently requested that the DOJ consider the Companys status in its investigation so that the Company may move forward with distributions to Company stockholders. No distributions to stockholders are expected prior to resolution of the DOJ and SEC inquiries and completion of the Delaware dissolution process which includes notices to creditors and publication of dissolution followed by a petition to the Delaware courts.
For additional disclosures surrounding other legal contingencies, refer to Note HContingencies and Commitments.
NOTE C SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Liquidation Basis of Accounting
With the authorization of the Plan of Dissolution, the Company adopted the liquidation basis of accounting effective as the close of business on September 30, 2010. The liquidation basis of accounting will continue to be used by the Company until such time that the plan is terminated. Under the liquidation basis of accounting, assets are stated at their estimated net realizable value and liabilities are stated at their estimated settlement amounts, which estimates will be periodically reviewed and adjusted as appropriate. Consolidated statements of net assets (liquidation basis) and consolidated statements of changes in net assets (liquidation basis) are the principal financial statements presented under the liquidation basis of accounting. The valuations of assets at their net realizable value and liabilities at their anticipated settlement amounts represent estimates, based on present facts and circumstances associated with carrying out the Plan of Dissolution based on the assumptions set forth below. The actual values and costs associated with carrying out the Plan of Dissolution are expected to differ from the amounts shown herein because of the inherent uncertainty and will be greater than or less than the amounts recorded. Such differences may be material. In particular, the estimates of the Companys costs will vary with the length of time it operates under the Plan of Dissolution. Accordingly, it is not possible to predict the aggregate amount or timing of future distributions to stockholders, as long as the plan is in effect, and no assurance can be given that the amount of liquidating distributions to be received will equal or exceed the estimate of net assets in liquidation presented in the accompanying consolidated statements of net assets (liquidation basis).
Under the liquidation basis of accounting, the carrying amounts of assets as of the close of business on September 30, 2010, the date of the authorization of the Plan of Dissolution by the Company, were adjusted to their estimated net realizable values and liabilities, including the estimated costs associated with implementing the Plan of Dissolution. Such value estimates were updated by the Company as of December 31, 2011. The majority of net assets in liquidation at December 31, 2011 were highly liquid and did not require adjustment as their estimated net realizable value approximates their current book value.
The Company is also required to estimate and accrue the costs associated with implementing and completing the Plan of Dissolution under the liquidation basis of accounting. These amounts can vary significantly due to, among other things, the costs of retaining personnel and others to oversee the liquidation, including compensation for remaining directors, consultants, insurance costs, costs to settle remaining leases, fees for legal and other professional service providers, income taxes, and miscellaneous other costs, partially offset by estimated future interest earnings on the Companys cash accounts. Such net costs were estimated to be $2,688 as of December 31, 2011. The $2,688 in net remaining costs to be incurred during liquidation consists of $297 in compensation for remaining employees and directors; $564 for compliance and other office costs, including resident filing fees and costs to settle remaining leases; $321 for insurance; and $1,556 in fees for professional service providers including legal representation relating to the DOJ subpoena; and income tax payments not to exceed $150 for the repatriation of cash balances held in foreign countries as of December 31, 2011; offset by $200 of estimated interest to be received on our cash and short-term investment balances during liquidation. Such estimates are based on assumptions regarding the Companys ability to settle outstanding obligations to creditors, resolve outstanding litigation, settle remaining leases and the ultimate timing of distributions to its stockholders, but does not include any settlement amounts, fines or penalties, if any, that the Company might incur as a result of the DOJ subpoena or any other legal proceedings. These estimates will be adjusted from time to time as projections and assumptions change.
F-10
Going Concern Basis of Accounting
For all periods preceding the authorization of the Plan of Dissolution, the Companys financial statements are presented on the going concern basis of accounting. Such financial statements reflect the historical basis of assets and liabilities and the historical results of operations related to the Companys assets and liabilities for the period from January 1, 2010 to September 30, 2010.
Principles of Consolidation
As of December 31, 2011, the consolidated financial statements of the Company include the accounts of Allied and its wholly-owned subsidiaries, which are as follows:
| ARC Europe, a Belgian company, |
| Allied Research BV (BV), a Dutch company, |
| Allied Research Cooperative (Coop) and, |
| ADG Sub USA, Inc. (USA) |
On September 1, 2010, as discussed in Note A, Chemring acquired the assets of Mecar USA and the stock of Mecar, a wholly owned subsidiary of ARC Europe. As a result of the acquisition, the Net Income (Loss) for Mecar and Mecar USA has been reclassified to Net income (loss) from discontinued operations on the Statement of Operations for the period from January 1, 2010 to September 30, 2010.
Significant intercompany transactions have been eliminated in the consolidation.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
The assets and liabilities of the Companys foreign subsidiaries are translated into U.S. dollars at period-end exchange rates. The resulting translation gains and losses are accumulated in a separate component of stockholders equity. Income and expense items are converted into U.S. dollars at average rates of exchange prevailing during the period. Foreign currency transaction gains and losses are credited or charged directly to operations.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Short-term investments
The Company has invested in high-quality, fixed income securities which have a maturity of less than 12 months and are accounted for at fair value. These investments are classified as trading and are presented as short-term investments on the Statement of Net Assets and as an adjustment to fair value in the Statement of Changes in Net Assets. Unrealized gains or losses are recorded in other income (expense) on the Statement of Operations.
F-11
Property and equipment
Under the liquidation method of accounting, property and equipment are stated at the estimated value the Company is expected to recover from the assets.
Income Taxes
Under the going concern method of accounting, income taxes were provided based on the liability method for financial reporting purposes. Under this method, deferred and prepaid taxes are provided for on temporary differences in the basis of assets and liabilities which are recognized in different periods for financial and tax reporting purposes. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Where it is not more likely than not that the Companys tax position will be sustained, the Company records its best estimate of the resulting tax liability and interest in the consolidated financial statements. It is the Companys policy to record interest and penalties, if any, related to unrecognized tax benefits as part of income tax expense for financial reporting purposes.
Earnings Per Common Share
Under the going concern method of accounting, basic earnings per share amounts have been computed based on the weighted average number of common shares outstanding. Diluted earnings per share reflects the increase in weighted average common shares outstanding that would result from the assumed exercise of outstanding options, warrants, and convertible debt calculated using the treasury stock method, unless they are anti-dilutive.
Stock-Based Compensation
Under the going concern method of accounting, the Company has adopted the provisions of ASC 718, Accounting for Stock Compensation, and the related SEC rules included in Staff Accounting Bulletin No. 107, on a modified prospective basis. ASC 718 requires all share-based payments to employees, including grants of stock options and the compensatory elements of employee stock purchase plans, to be recognized in the statement of operations based upon their fair values. Share-based employee compensation cost is recognized as a component of selling, general and administrative expense in the consolidated statements of operations.
Allieds principal Equity Incentive Plan (the Plan), which was approved by the Board of Directors and stockholders in 2001 authorized the Compensation Committee of the Board of Directors to grant up to 990,000 stock options, stock appreciation rights, restricted (non-vested) stock, performance shares and cash awards. Each type of grant places certain requirements and restrictions upon the Company and grantee. The options for common shares generally are exercisable over a one to five year period and expire up to five years from the date of grant and are valued at the closing market price on the date of grant. Restricted shares generally vest over periods of one to five years from the date of award and are also valued at the closing market price on the date of grant.
The Company used the modified prospective transition method to adopt the provisions of ASC 718 in 2006. Under this method, employee compensation cost recognized in 2010 included: (1) compensation cost for all share-based payments granted after the effective date that have met the requisite service requirement and (2) compensation cost for the portion of awards that have met the requisite service period on or after the effective date based on the grant-date fair value of those awards. In accordance with ASC 718, the fair value of options grants is estimated on the date of grant using the Black-Scholes option pricing model.
Concentrations of Credit Risk
Financial instruments and related items which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances.
F-12
Reportable segments
Prior to September 2010, the Company operated within two operating segments: Mecar and Mecar USA. In September 2010, the Company completed the divesture of Mecar and Mecar USA and in August 2009, the Company completed the divestiture of NSM. As a result, Allied no longer has operating segments. The Companys continuing operations include only those expenses incurred to support the Companys corporate headquarters and its non-operating European subsidiaries.
Recent Accounting Pronouncements
In May 2011, the FASB issued a new accounting standard update, which amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011.
Under the liquidation basis of accounting, the Company does not expect any recent accounting pronouncements to impact the Consolidated Statement of Net Assets.
NOTE D DISCONTINUED OPERATIONS
Mecar and Mecar USA
On June 24, 2010, the Company signed a definitive purchase and sale agreement with Chemring Group PLC pursuant to which Chemring agreed to acquire substantially all of the assets of the Company for $59,560 in cash and the assumption of certain liabilities. On September 1, 2010, the Company completed the asset sale to Chemring contemplated by the Agreement. Pursuant to the Agreement, Chemring acquired all of the capital stock of Mecar for approximately $45,810 in cash, and separately Chemring acquired substantially all of the assets of Mecar USA for $13,750 in cash and the assumption by Chemring of certain specified liabilities of Mecar USA. A portion of the purchase price was paid through the repayment of certain intercompany indebtedness owed to the Company that would otherwise have been cancelled at closing. $15,000 of the proceeds of the sale was deposited into escrow to secure the Companys indemnification obligations under the Agreement. Such amounts are included in Funds held in escrow on the Statement of Net Assets (Liquidation Basis). In conjunction with sale, the Company paid $1,637 in legal fees, $3,177 in investment banking fees and $300 in retention and incentive plans for the management of Mecar and Mecar USA. As a result, the sale generated net proceeds of $54,446, and the Company recorded a gain of $48,081. The Company did not record a significant tax expense from this transaction as the gain is expected to be offset by the Companys existing net operating loss carry forwards and foreign tax credits.
NS Microwave Systems, Inc.
On August 7, 2009, the Company entered into a Purchase Agreement to sell NSM for $400 in cash and a promissory note in the amount of $1,325 at closing. The note is due 24 months after closing and is subject to a reduction based on certain terms as defined in the Purchase Agreement. On December 31, 2009 and again on June 30, 2010, the Company wrote-off $250, for a total write-off of $500, against the receivable as it was unlikely that one of the Purchase Agreement conditions would be met. As of December 31, 2010, the outstanding amount of the note receivable was $825. The note bore interest at a rate of one-year London Interbank Offered Rate plus 5% subject to a maximum interest cap of 8%. On August 5, 2011, the note was fully repaid and, as a result, the Company received $825 representing the note principal amount. The following summarizes the results of discontinued operations for the nine months ended September 30, 2010 for NSM, Mecar and Mecar USA:
Nine Months Ended | ||||||||||||||||
September 30, 2010 | ||||||||||||||||
Mecar | Mecar USA | NSM | Total | |||||||||||||
Revenues |
$ | 38,477 | $ | 9,342 | $ | | $ | 47,819 | ||||||||
Loss before taxes |
(14,122 | ) | (287 | ) | | (14,409 | ) | |||||||||
Loss, net of tax |
(14,122 | ) | (296 | ) | | (14,418 | ) | |||||||||
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Discontinued operations, net of tax |
$ | (14,122 | ) | $ | (296 | ) | $ | | $ | (14,418 | ) | |||||
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F-13
NOTE E PROPERTY & EQUIPMENT
Under the liquidation basis of accounting, the Company has reduced the value of its property and equipment to $2 as of December 31, 2010, which is the amount that management believes is likely be recoverable via sale or in liquidation.
Depreciation expense was $13 for the nine months ended September 30, 2010.
Capital Leases. The Company leases equipment under various capital leases, with lease terms ending in 2011. The economic substance of the leases is that the Company is financing the acquisition of the assets through the leases, and accordingly, they are recorded in the Companys assets and liabilities.
NOTE F FAIR VALUE MEASUREMENTS
The Company values its assets and liabilities using the methods of fair-value as described in ASC 820, Fair Value Measurements and Disclosures. In accordance with ASC 820, the Company determines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company generally applies the income approach to determine fair value. This method uses valuation techniques to convert future amounts to a single present amount. The measurement is based on the value indicated by current market expectations about those future amounts.
ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to active markets for identical assets and liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). We classify fair value balances based on the observability of those inputs. The three levels of the fair value hierarchy are as follows:
Level 1 - Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level 2 Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and amounts derived from valuation models where all significant inputs are observable in active markets.
Level 3 Unobservable inputs that reflect managements assumptions.
For disclosure purposes, assets and liabilities are classified in their entirety in the fair value hierarchy level based on the lowest level of input that is significant to the overall fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement within the fair value hierarchy levels.
The following table sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, in the consolidated statement of net assets at December 31, 2011:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Mutual Funds |
2,977 | | | 2,977 | ||||||||||||
Municipal Bonds |
22,892 | | | 22,892 | ||||||||||||
Certificates of Deposit |
5,003 | | | 5,003 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets as fair value |
$ | 30,872 | $ | | $ | | $ | 30,872 | ||||||||
|
|
|
|
|
|
|
|
F-14
The following table sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, in the consolidated statement of net assets at December 31, 2010:
Level 1 | Level 2 | Level 3 |
Total | |||||||||||||
Mutual Funds |
15,574 | | | 15,574 | ||||||||||||
Municipal Bonds |
| | | | ||||||||||||
Certificates of Deposit |
3,227 | | | 3,227 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets as fair value |
$ | 18,801 | $ | | $ | | $ | 18,801 | ||||||||
|
|
|
|
|
|
|
|
NOTE G WARRANTS
On March 6, 2006, in conjunction with the issuance of convertible notes, the Company issued detachable warrants to the purchasers exercisable for an aggregate of 226,800 shares of Allied common stock. The warrants are exercisable for a term of five years at an exercise price of $27.68 per share, subject to anti-dilution provisions and expire on March 9, 2011. The original exercisable shares of 226,800 and exercise price of $27.68 was adjusted to 349,297 and $17.97, respectively, to account for the December 2006 Private Placement and the Amendment Agreement.
Under the going concern basis of accounting, the warrants did not meet the requirement for equity classification in accordance with ASC 815 Derivatives and Hedging, mainly because the warrants are required to settle in registered shares of the Companys common stock. The warrants were recorded as other current liabilities, presented as derivative instruments on the balance sheet, and were recorded and carried at the fair value of the instrument. At December 31, 2010 under the liquidation basis of accounting, the Company determined the fair value of the warrants was $0.
NOTE H CONTINGENCIES AND COMMITMENTS
DOJ Subpoena
On January 19, 2010, the Company received a subpoena and communications from the U.S. Department of Justice (DOJ) requesting the Company produce documents relating to its dealings with foreign governments. The subpoena stated that it was issued in connection with an ongoing criminal investigation. See Note B for additional information regarding the DOJ proceedings.
Employee Severance Payments
The Company entered into employment agreements with certain management personnel at the Companys subsidiaries and with certain domestic management personnel. These agreements provided for severance payments in the event of termination under certain conditions. In September 2010, the Company paid $1,650 in satisfaction of its severance obligations to the Companys management personnel. Employment agreements with employees at Mecar and Mecar USA were assigned as part of the sale transactions.
Leases
The Company leases domestic office space under an operating lease which expires in early 2013. The lease also includes escalation provisions for taxes and operating costs. The Company has subleased this office space to an unaffiliated party.
Indemnification provisions
The Company has sold its SeaSpace, Titan, the VSK Group, GMS and NSM subsidiaries in separate transactions starting with the first transaction closing in 2007. In each transaction, the Company agreed to indemnify the purchaser for periods subsequent to closing for losses arising from breaches of representations, warranties and covenants. Indemnification periods varied based on the particular representation, warranty or covenant covered, the vast majority of which have all expired. As of December 31, 2011, the only remaining indemnification obligations relate to representations and warranties concerning taxes, environmental matters, breaches of title, breaches of authorization and fraud. For SeaSpace, Titan, the VSK Group, GMS and NSM, these indemnification provisions have been capped at $1,000, $950, $6,474 (5,000), $5,200 and $863, respectively. At December 31, 2011, no amount has been accrued related to these indemnifications as a liability is not deemed probable.
F-15
On June 24, 2010, the Company signed a definitive purchase and sale agreement with Chemring Group PLC pursuant to which Chemring agreed to acquire substantially all of the assets of the Company for $59,560 in cash and the assumption of certain liabilities. The purchase and sale agreement contains certain indemnification provisions pursuant to which the Company may be required to indemnify the buyer for a period subsequent to the completion of the sale for any and all losses directly or indirectly based upon, related to, arising out of or in connection with Mecars completed contracts, Mecar USA liabilities retained by the Company and any failure by the Company to satisfy all transaction related expenses. The Companys indemnification liability is limited to, and capped at, the escrowed amount of $15,000 plus the accumulated interest. The Companys indemnification obligations expire upon the earlier of (i) June 30, 2015 and (ii) the Companys entry into either a court or administrative order or a Chemring-approved settlement agreement, in either case, finally resolving the matters relating to the DOJs subpoena. In the absence of such final resolution, in certain circumstances, up to 50% of the escrowed funds may be released as early as June 24, 2013. At December 31, 2011, no amount has been accrued related to this indemnification as a liability is not deemed probable.
NOTE I STOCKHOLDERS EQUITY
Rights Agreement
The Board of Directors adopted a Rights Agreement in 2001 and has subsequently amended the agreement. The Rights Agreement expired at the close of business on December 31, 2011. Each right under the Rights Agreement entitled a stockholder to acquire at a purchase price of $50, one-hundredth of a share of preferred stock which carried voting and dividend rights similar to one share of common stock. Alternatively, a right holder could elect to purchase for $50 an equivalent number of common shares (or in certain circumstances, cash, property or other securities of the Company) at a price per share equal to one-half of the average market price for a specified period. In lieu of the purchase price, a right holder could elect to acquire one-half of the common shares available under the second option. The purchase price and the preferred share fractional amount were subject to adjustment for certain events as described in the Agreement.
Rights also entitled the holder to receive a specified number of shares of an acquiring companys common stock in the event that the Company is not the surviving corporation in a Merger or if 50% or more of the Companys assets are sold or transferred.
At the discretion of a majority of the Board and within a specified time period, the Company could redeem all of the rights at a price of $.01 per right. The Board could also amend any provision of the Agreement prior to exercise of the rights.
Share based compensation
Under the going concern basis of accounting, total share-based compensation was $214 for the nine months ended September 30, 2010. The share-based compensation expense for the period includes costs associated with stock options, restricted stock grants, and the compensatory element of the Employee Stock Purchase Plan.
In conjunction with the Companys signing a definitive Merger Agreement on January 18, 2010, all equity compensation plans were suspended pending the Companys merger. As such, no new equity awards have been made. With the June 24, 2010 signing of the definitive Sale Agreement, the original Merger Agreement was terminated.
In conjunction with the Companys signing the Rights Agreement on June 24, 2010, all equity compensation plans were suspended pending the Companys Merger. As such, no equity awards were made during the years ended December 31, 2010 and December 31, 2011. Since the exercise price for all of the options exercisable at December 31, 2009 remained above the share price in 2010, no options were exercised and all of them expired.
F-16
NOTE J OTHER NET
Other expense included in the Companys consolidated statements of operations at for the nine months ended September 30, 2010 is comprised of the following:
Nine Months Ended September 30, 2010 |
||||
Net currency transaction gains |
$ | (1,368 | ) | |
Miscellaneous income (losses) - net |
10 | |||
|
|
|||
Other, net |
$ | (1,358 | ) | |
|
|
Miscellaneous net includes subsidies, penalties, non deductible value added taxes, sublease rent and sale of materials.
NOTE K INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the consolidated financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
Loss before income taxes from continuing operations are comprised as follows:
Nine Months Ended Septmber 30, 2010 |
||||
Domestic |
$ | (6,523 | ) | |
Foreign |
(2,283 | ) | ||
|
|
|||
Total |
$ | (8,806 | ) | |
|
|
The Companys provision for income taxes from continuing operations is comprised of:
September 30, 2010 | ||||
Current Provision |
$ | 1 | ||
Domestic |
| |||
|
|
|||
Foreign |
||||
Total Current Provision |
1 | |||
|
|
|||
Deferred Provision |
| |||
Domestic |
| |||
Foreign |
||||
|
|
|||
Total Deferred Provision |
| |||
|
|
|||
Total tax provision |
$ | 1 | ||
|
|
The Companys provision for income taxes differs from the anticipated United States federal statutory rate. Differences between the statutory rate and the Companys provision are as follows:
Septmber 30, 2010 | ||||
Taxes at statutory rate |
34.0 | % | ||
State taxes, net of federal benefit |
| |||
Impact of international operations |
(0.1 | ) | ||
Other permanent differences |
44.1 | |||
Valuation allowance |
(78.0 | ) | ||
|
|
|||
Income taxes |
| % | ||
|
|
F-17
As of December 31, 2010, the Company has provided for U.S. tax on foreign earnings of approximately $25,475 that is expected to be repatriated. In anticipation of the repatriation, the NOL carryforwards are no longer included in the deferred tax assets. Income taxes related to repatriation of cash held in foreign countries is not expected to exceed $350 as included in the estimated costs for liquidation. As of December 31, 2010, the fair value of net deferred tax assets is zero due to full valuation allowance.
As of December 31, 2011, foreign earnings of $13,757 has been successfully repatriated and income tax payments of $200 has been made. The Company has reviewed all available information and has determined that there does not appear to have been an ownership change within the meaning of Section 382 of the Internal Revenue Code. If the Company has a change prior to the repatriation of foreign earnings, the Companys ability to utilize its net operating loss and foreign tax credit carryovers to offset U.S. tax on the foreign earnings may be significantly limited.
As of December 31, 2010 and 2011, the Company had no unrecognized tax benefits. For the year ended December 31, 2011, there was no interest or penalties recorded.
In Belgium, the Company is still open to examination by the Belgian tax authorities from 2008 forward. In the United States, the Company is still open to examination from 2008 forward, although carryforward tax attributes that were generated prior to 2008 may still be adjusted upon examination by the U.S. tax authorities if they either have been or will be utilized.
NOTE L LOSS PER COMMON SHARE FROM CONTINUING OPERATIONS
Under the going concern basis of accounting, basic loss per share from continuing operations excludes potential common shares and is computed by dividing net loss by the weighted average number of common shares outstanding for the period. The computation of diluted loss per share from continuing operations excludes the effects of stock options, warrants, restricted stock (unvested stock awards) and convertible debentures, if such effect is anti-dilutive. The table below shows the calculation of basic and diluted loss per share from continuing operations for the nine months ended September 30, 2010:
Nine Months Ended, September 30, 2010 |
||||
Loss: |
||||
Net loss from continuing operations |
$ | (8,807 | ) | |
Effect of dilutive potential common shares |
| |||
|
|
|||
Diluted net loss from continuing operations |
$ | (8,807 | ) | |
|
|
|||
Number of shares: |
||||
Weighted-average shares outstanding |
8,175,580 | |||
|
|
|||
Basic and diluted net loss per share from continuing operations |
$ | (1.08 | ) | |
|
|
For the nine months ended September 30, 2010, the Company excluded stock options from the calculation of loss per share since their effect would be anti-dilutive.
NOTE M QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table is the Companys quarterly financial data under the going concern basis of accounting. The fourth quarter of 2011 was prepared under the liquidation basis of accounting and is not presented in the table below.
2010 |
First Quarter |
Second Quarter |
Third Quarter |
Total | ||||||||||||
Revenues |
$ | | $ | | $ | | $ | | ||||||||
Gross margin |
| | | | ||||||||||||
Income (loss) from continuing operations, net of tax |
(825 | ) | 303 | (8,285 | ) | (8,807 | ) | |||||||||
Income (loss) from discontinued operations, net of tax |
(4,330 | ) | (9,693 | ) | 47,686 | 33,663 | ||||||||||
Net income (loss) |
(5,155 | ) | (9,390 | ) | 39,401 | 24,856 | ||||||||||
Basic and diluted earning (loss) per share: |
||||||||||||||||
Net income (loss) from continuing operations |
$ | (0.10 | ) | $ | 0.04 | $ | (1.02 | ) | $ | (1.08 | ) | |||||
Net income (loss) from discontinued operations |
(0.53 | ) | (1.19 | ) | 5.84 | 4.12 | ||||||||||
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|
|
|
|
|
|
|
|||||||||
Total net earnings (loss) per share |
$ | (0.63 | ) | $ | (1.15 | ) | $ | 4.82 | $ | 3.04 | ||||||
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NOTE N SUBSEQUENT EVENTS
In accordance with Codification 855-50, Subsequent Events, the Company has reviewed subsequent events through the date of the filing and has determined there are no subsequent events that require disclosure.
F-18
EXHIBIT INDEX
Number |
Description of Exhibit |
Page | ||||||
3.4 | Certificate of Dissolution | E-2 | ||||||
21 | List of Subsidiaries | E-3 | ||||||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002, dated March 23, 2012 | E-4 | ||||||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002, dated March 23, 2012 | E-5 | ||||||
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002, dated March 23, 2012 | E-6 | ||||||
101 | The following financial information from our Annual Report on Form 10-K for 2011 filed with the SEC formatted in Extensible Business Reporting Language (XBRL):
(i) Consolidated Statements of Net Assets (liquidation basis) as of December 31, 2011 and December 31, 2010; (ii) Consolidated Statements of Changes in Net Assets (liquidation basis) for the three months ended December 31, 2010 and twelve months ended December 31, 2011; (iii) Consolidated Statement of Operations (going concern basis) for the nine months ended September 30, 2010; (iv) Consolidated Statement of Stockholders Equity and Comprehensive Income (Loss) (going concern basis) for the nine months ended September 30, 2010; and (v) Consolidated Statement of Cash Flows (going concern basis) for the nine months ended September 30, 2010. |
E-1
EXHIBIT 3.4
STATE OF DELAWARE
CERTIFICATE OF DISSOLUTION
OF THE ALLIED DEFENSE GROUP, INC.
The corporation organized and existing under the General Corporation Law of the State of Delaware hereby certifies as follows:
The dissolution of said The Allied Defense Group, Inc. has been duly authorized by the Board of Directors and Stockholders in accordance with subsections (a) and (b) of Section 275 of the General Corporation Law of the State of Delaware.
The date of filing of the Corporations original Certificate of Incorporation in Delaware was July 20, 1961.
The date the dissolution was authorized is September 30, 2010.
The following is a list of the names and addresses of the directors of the said corporation
NAME |
ADDRESS | |
John G. Meyer, Jr. |
120 E. Baltimore Street, Suite 2100, Baltimore, MD 21202 | |
Charles S. Ream |
120 E. Baltimore Street, Suite 2100, Baltimore, MD 21202 |
The following is a list of the names and addresses of the officers of the said corporation:
NAME |
OFFICE | ADDRESS | ||
John G. Meyer, Jr. |
President |
120 E. Baltimore Street, Suite 2100 Baltimore, MD 21202 | ||
Charles S. Ream |
Chief Financial Officer |
120 E. Baltimore Street, Suite 2100 Baltimore, MD 21202 |
By: | /s/ John G. Meyer, Jr. | |
John G. Meyer, Jr., President |
State of Delaware
Secretary of State
Division of Corporations
Delivered 08:15 AM 08/31/2011
FILED 08:15 AM 08/31/2011
SRV 110957396 0570311 FILE
E-2
EXHIBIT 21
The Allied Defense Group, Inc.
LIST OF SUBSIDIARIES
1. | ARC Europe, S.A., a Belgian Corporation |
2. | ADG Sub USA, Inc. (formerly Mecar USA, Inc.) |
3. | Allied Research BV, a Dutch company and, |
4. | Allied Research Cooperative U.A. (Coop), a Dutch cooperative |
E-3
Exhibit 31.1
CERTIFICATION
I, John G. Meyer, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of The Allied Defense Group, Inc.
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
/s/ John G. Meyer, Jr. |
John G. Meyer, Jr., Chief Executive Officer and President |
Date: March 23, 2012
E-4
Exhibit 31.2
CERTIFICATION
I, Charles S. Ream, certify that:
1. I have reviewed this annual report on Form 10-K of The Allied Defense Group, Inc.
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
/s/ Charles S. Ream |
Charles S. Ream, Chief Financial Officer and Treasurer |
Date: March 23, 2012
E-5
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
In connection with the Report of The Allied Defense Group Inc. (Allied) on Form 10-K of the year ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, the undersigned, John G. Meyer, Jr., as Chief Executive Officer and Charles S. Ream, as Chief Financial Officer of Allied, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and results of operations of Allied.
/s/ Charles S. Ream |
/s/ John G. Meyer, Jr. | |
Charles S. Ream, Chief Financial Officer and Treasurer |
John G. Meyer, Jr., Chief Executive Officer and President |
E-6
Summary of Significant Accounting Policies
|
12 Months Ended | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2011
|
|||||||||||||||||
Summary of Significant Accounting Policies [Abstract] | |||||||||||||||||
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
NOTE C – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Liquidation Basis of Accounting With the authorization of the Plan of Dissolution, the Company adopted the liquidation basis of accounting effective as the close of business on September 30, 2010. The liquidation basis of accounting will continue to be used by the Company until such time that the plan is terminated. Under the liquidation basis of accounting, assets are stated at their estimated net realizable value and liabilities are stated at their estimated settlement amounts, which estimates will be periodically reviewed and adjusted as appropriate. Consolidated statements of net assets (liquidation basis) and consolidated statements of changes in net assets (liquidation basis) are the principal financial statements presented under the liquidation basis of accounting. The valuations of assets at their net realizable value and liabilities at their anticipated settlement amounts represent estimates, based on present facts and circumstances associated with carrying out the Plan of Dissolution based on the assumptions set forth below. The actual values and costs associated with carrying out the Plan of Dissolution are expected to differ from the amounts shown herein because of the inherent uncertainty and will be greater than or less than the amounts recorded. Such differences may be material. In particular, the estimates of the Company’s costs will vary with the length of time it operates under the Plan of Dissolution. Accordingly, it is not possible to predict the aggregate amount or timing of future distributions to stockholders, as long as the plan is in effect, and no assurance can be given that the amount of liquidating distributions to be received will equal or exceed the estimate of net assets in liquidation presented in the accompanying consolidated statements of net assets (liquidation basis). Under the liquidation basis of accounting, the carrying amounts of assets as of the close of business on September 30, 2010, the date of the authorization of the Plan of Dissolution by the Company, were adjusted to their estimated net realizable values and liabilities, including the estimated costs associated with implementing the Plan of Dissolution. Such value estimates were updated by the Company as of December 31, 2011. The majority of net assets in liquidation at December 31, 2011 were highly liquid and did not require adjustment as their estimated net realizable value approximates their current book value. The Company is also required to estimate and accrue the costs associated with implementing and completing the Plan of Dissolution under the liquidation basis of accounting. These amounts can vary significantly due to, among other things, the costs of retaining personnel and others to oversee the liquidation, including compensation for remaining directors, consultants, insurance costs, costs to settle remaining leases, fees for legal and other professional service providers, income taxes, and miscellaneous other costs, partially offset by estimated future interest earnings on the Company’s cash accounts. Such net costs were estimated to be $2,688 as of December 31, 2011. The $2,688 in net remaining costs to be incurred during liquidation consists of $297 in compensation for remaining employees and directors; $564 for compliance and other office costs, including resident filing fees and costs to settle remaining leases; $321 for insurance; and $1,556 in fees for professional service providers including legal representation relating to the DOJ subpoena; and income tax payments not to exceed $150 for the repatriation of cash balances held in foreign countries as of December 31, 2011; offset by $200 of estimated interest to be received on our cash and short-term investment balances during liquidation. Such estimates are based on assumptions regarding the Company’s ability to settle outstanding obligations to creditors, resolve outstanding litigation, settle remaining leases and the ultimate timing of distributions to its stockholders, but does not include any settlement amounts, fines or penalties, if any, that the Company might incur as a result of the DOJ subpoena or any other legal proceedings. These estimates will be adjusted from time to time as projections and assumptions change.
Going Concern Basis of Accounting For all periods preceding the authorization of the Plan of Dissolution, the Company’s financial statements are presented on the going concern basis of accounting. Such financial statements reflect the historical basis of assets and liabilities and the historical results of operations related to the Company’s assets and liabilities for the period from January 1, 2010 to September 30, 2010. Principles of Consolidation As of December 31, 2011, the consolidated financial statements of the Company include the accounts of Allied and its wholly-owned subsidiaries, which are as follows:
On September 1, 2010, as discussed in Note A, Chemring acquired the assets of Mecar USA and the stock of Mecar, a wholly owned subsidiary of ARC Europe. As a result of the acquisition, the Net Income (Loss) for Mecar and Mecar USA has been reclassified to Net income (loss) from discontinued operations on the Statement of Operations for the period from January 1, 2010 to September 30, 2010. Significant intercompany transactions have been eliminated in the consolidation. Use of Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period. Actual results could differ from those estimates. Foreign Currency Translation The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at period-end exchange rates. The resulting translation gains and losses are accumulated in a separate component of stockholders’ equity. Income and expense items are converted into U.S. dollars at average rates of exchange prevailing during the period. Foreign currency transaction gains and losses are credited or charged directly to operations. Cash and cash equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Short-term investments The Company has invested in high-quality, fixed income securities which have a maturity of less than 12 months and are accounted for at fair value. These investments are classified as trading and are presented as short-term investments on the Statement of Net Assets and as an adjustment to fair value in the Statement of Changes in Net Assets. Unrealized gains or losses are recorded in other income (expense) on the Statement of Operations.
Property and equipment Under the liquidation method of accounting, property and equipment are stated at the estimated value the Company is expected to recover from the assets. Income Taxes Under the going concern method of accounting, income taxes were provided based on the liability method for financial reporting purposes. Under this method, deferred and prepaid taxes are provided for on temporary differences in the basis of assets and liabilities which are recognized in different periods for financial and tax reporting purposes. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Where it is not more likely than not that the Company’s tax position will be sustained, the Company records its best estimate of the resulting tax liability and interest in the consolidated financial statements. It is the Company’s policy to record interest and penalties, if any, related to unrecognized tax benefits as part of income tax expense for financial reporting purposes. Earnings Per Common Share Under the going concern method of accounting, basic earnings per share amounts have been computed based on the weighted average number of common shares outstanding. Diluted earnings per share reflects the increase in weighted average common shares outstanding that would result from the assumed exercise of outstanding options, warrants, and convertible debt calculated using the treasury stock method, unless they are anti-dilutive. Stock-Based Compensation Under the going concern method of accounting, the Company has adopted the provisions of ASC 718, Accounting for Stock Compensation, and the related SEC rules included in Staff Accounting Bulletin No. 107, on a modified prospective basis. ASC 718 requires all share-based payments to employees, including grants of stock options and the compensatory elements of employee stock purchase plans, to be recognized in the statement of operations based upon their fair values. Share-based employee compensation cost is recognized as a component of selling, general and administrative expense in the consolidated statements of operations. Allied’s principal Equity Incentive Plan (the Plan), which was approved by the Board of Directors and stockholders in 2001 authorized the Compensation Committee of the Board of Directors to grant up to 990,000 stock options, stock appreciation rights, restricted (non-vested) stock, performance shares and cash awards. Each type of grant places certain requirements and restrictions upon the Company and grantee. The options for common shares generally are exercisable over a one to five year period and expire up to five years from the date of grant and are valued at the closing market price on the date of grant. Restricted shares generally vest over periods of one to five years from the date of award and are also valued at the closing market price on the date of grant. The Company used the modified prospective transition method to adopt the provisions of ASC 718 in 2006. Under this method, employee compensation cost recognized in 2010 included: (1) compensation cost for all share-based payments granted after the effective date that have met the requisite service requirement and (2) compensation cost for the portion of awards that have met the requisite service period on or after the effective date based on the grant-date fair value of those awards. In accordance with ASC 718, the fair value of options grants is estimated on the date of grant using the Black-Scholes option pricing model. Concentrations of Credit Risk Financial instruments and related items which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances.
Reportable segments Prior to September 2010, the Company operated within two operating segments: Mecar and Mecar USA. In September 2010, the Company completed the divesture of Mecar and Mecar USA and in August 2009, the Company completed the divestiture of NSM. As a result, Allied no longer has operating segments. The Company’s continuing operations include only those expenses incurred to support the Company’s corporate headquarters and its non-operating European subsidiaries. Recent Accounting Pronouncements In May 2011, the FASB issued a new accounting standard update, which amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. Under the liquidation basis of accounting, the Company does not expect any recent accounting pronouncements to impact the Consolidated Statement of Net Assets. |