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| ADG > SEC Filings for ADG > Form 10-K on 31-Mar-2009 | All Recent SEC Filings |
31-Mar-2009
Annual Report
Overview
Allied is 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. Allied's strategic business is conducted by its two wholly owned subsidiaries: MECAR S.A. ("Mecar") and MECAR USA, Inc. ("Mecar USA"). Mecar is located in Nivelles, Belgium and Mecar USA is located in Marshall, Texas. Corporate is located in Vienna, Virginia. Expenses related to Corporate and foreign holding companies are reported separately in the segment reporting schedules.
Prior to the fourth quarter of 2008, Allied had operated within two primary business segments, the Ammunition & Weapons Effects segment ("AWE") and the Electronic Security ("ES") segment. In order to focus on its core competency in ammunition and reduce its debt, the Company began divesting certain of its business units in 2007. Since 2007, Allied sold one business that had been in the AWE segment, Titan Dynamic Systems, Inc. ("Titan"); one business that had been in the Company's Other segment, SeaSpace Corporation ("SeaSpace") and divested The VSK Group ("VSK") and Global Microwave Systems Inc. ("GMS"), which constitute all but one of its ES business units. In the fourth quarter of 2008, the Company committed to a formal plan to divest the last remaining business in the ES segment, News/Sports Microwave Rental, Inc. ("NSM").
As a result, Allied has realigned its operating segments into Mecar and Mecar USA, as follows:
• Mecar. Mecar designs, develops, manufactures and sells ammunition and ammunition related products for military use. Substantially all of Mecar's revenues are derived from the sale of ammunition which is used with weapons that are generally considered defensive weapons. From time to time, Mecar provides system integration services pursuant to which it purchases and resells weapon systems, ammunition manufactured by others or consulting services to governments looking to develop their own manufacturing capabilities in types of ammunition not manufactured by Mecar. Mecar's manufactured products consist of a wide variety of ammunition and grenades in the medium caliber, artillery, anti-tank and anti-material categories.
• Mecar USA. Mecar USA purchases and resells ammunition and ammunition related products manufactured by others for the benefit of the U.S government and foreign governments. Mecar USA substantially expanded this procurement business in 2008. Mecar USA also pursues manufacturing contracts from the U.S. Government and others for ammunition and pyrotechnics devices. Mecar USA became operational in late-2005 following the construction of a new facility in Marshall, Texas.
Allied, the parent company, provides oversight and corporate services to its subsidiaries and has no operating activities.
Segment data set forth herein for prior periods has been revised to conform to the current Mecar and Mecar USA operating segments.
The Company continues to evaluate its strategic options. The Company has committed to a plan to sell NSM. In addition, the Board of Directors of the Company continues to evaluate a possible disposition of all operating units of the Company and the return of the net remaining proceeds to the shareholders. The Board will continue to evaluate alternatives to maximizing shareholder value through either the divestiture process or a more focused, cohesive business strategy centered on the Mecar and Mecar USA.
Liquidity and Capital Resources
During the last few years, the Company faced liquidity challenges resulting mainly from the reduction of revenues and significant operating losses at MECAR. In addition, the Company's liquidity was adversely affected by financing and restructuring costs. During that time, the Company implemented a plan to reduce the fixed operating cost base at Mecar and NSM. The corporate headquarters also engaged in cost-cutting measures and
committed to a plan to divest non-core subsidiaries and repay its convertible notes and Mecar's revolving cash line. Since 2007, the Company has divested several of its non-core subsidiaries and improved its operating results. The divestitures have permitted the Company to repay its debt and eliminate smaller non-profitable subsidiaries. The Company fully repaid its convertible notes, with the last payment made in January 2009.
In April 2008, MECAR reached an agreement with its existing bank group regarding its credit facility. The agreement provided for an expansion of the total credit facility from approximately $60,406 (€42,850) to $64,318 (€45,625). The credit facility was restructured and the portion designated for tax prepayments was terminated. The agreement provided for a cash line of $14,379 (€10,200) and performance bond and advance payment guarantee line of $49,939 (€35,425). The agreement required a partial repayment of MECAR's cash line of $7,190 (€5,100) in July 2008 and the remainder to be repaid by November 30, 2008. The performance bond and advance payment guarantee line expired on December 31, 2008. Based on the timing of MECAR's shipments in July 2008, the Company was unable to repay half of the cash line by July 31, 2008, but subsequently made the required repayments to the banking facility in the third quarter of 2008 and the remaining $7,190 (€5,100) by November 30, 2008 with cash generated from operations. Mecar is in continuing discussions with its bank group regarding an additional extension of the performance bond and advance payment guarantee line in 2009. The extension would provide an initial line of $64,036 (€45,425) and then by August 31, 2009, the line would be reduced to $49,939 (€35,425). The extension would expire on March 31, 2010 and one of the members of the bank group that represents approximately 20% of the credit would potentially cease to issue new bonds or guarantees after October 1, 2009. In line with Mecar's projected facility requirements, the facility will gradually be lowered after October 1, 2009 to compensate for the exit of one member to approximately $38,767 (€27,500). The refinancing of the credit facility, particularly the performance bond and advance payment guarantee facility, is critical to the Company's ability to sign new contracts and continue on a long term basis. All Mecar's current funded backlog is covered by required performance bonds and credit guarantees. Mecar was able to open performance bonds and credit guarantees for new contracts through February 2009 under a temporary extension of the facility. Since the current funded backlog is covered by the performance bonds and credit guarantees, executions of the current funded backlog is not dependent on a refinancing of the credit facility. If this extension is not secured, the Company will continue to look for new financial institutions that are interested in this type of line. This search may inhibit the Company's ability to open new performance bonds and advance payment guarantees and thereby begin new contracts until a new line is secured.
In December 2008, the Company announced that Mecar USA was awarded, as a subcontractor to a prime contractor in a U.S. Government contract, a contract for more than $37,000 that would be executed during 2009. In February 2009, this contract was expanded to approximately $42,000. This new contract, in addition to an already higher contracted backlog at Mecar, provided backlog of $185,921 at December 31, 2008, an increase of 71% from the balance at December 31, 2007. This increased backlog will require the Company to expand its working capital in the first eight months of 2009. In addition to the normal working capital build that is required to deliver on the existing backlog, Mecar is prohibited from shipping to its largest customer, due to said customer's terms, in the summer months of late May through mid-September.
At December 31, 2008, the Company had $8,816 in cash on hand. For the year ended December 31, 2008, the continuing operations of the Company used $7,790 of cash from operating activities. This usage stems mainly from the $10,442 net loss, increases in working capital, particularly accounts receivable, and the reduction of customer deposits, accounts payable and accrued liabilities at Mecar as the sales contracts that were manufactured in 2008 were shipped in the fourth quarter of 2008.
Outlook for 2009
The Company's cash projections for 2009 require additional working capital funding through the summer months with the Company generating cash in the third and fourth quarters of 2009. Current projections have a shortfall of available cash in August, however the Company has a list of actions to remediate that shortfall. Upon execution of these actions, management is confident that the Company will be able to work through this shortfall. The Company is also evaluating additional working capital financing.
In March 2009, Mecar USA signed a commitment with a U.S. bank for a $10,000 working capital revolving credit and contract guidance facility. This new facility will provide $1,000 of revolving credit based upon an agreed upon borrowing base calculation and $9,000 of financing based on working capital requirements of specific sales contracts that the lender agrees to finance. Mecar USA's credit facility will expire on June 30, 2010 and will pay interest at the rate of the 30-day London Interbank Offered Rate (LIBOR) plus an applicable margin. Today, that interest rate is 4.52% with the applicable margin equal to 4.0% per annum. This working capital financing should enable Mecar USA to perform on its $49,525 of backlog that was outstanding at December 31, 2008. The Company is working to close this facility in April 2009.
Mecar is in the process of negotiating an final agreement with its bank group to continue to finance the performance bond and advance payment guarantee portion of the credit facility until March 2010. The cash portion of the line will not be renewed. The Company is managing the cash requirements at all of its business units with its existing cash balances. Mecar is currently taking certain actions to reduce the seasonality and its shipping constraints and may look for additional financing or an additional restructuring of the its credit facility in order to provide additional working capital.
The Company has less than $600 of firm commitments for capital expenditures outstanding as of December 31, 2008.
Results of Operations
Allied had a net loss of $10,442 for the year ended December 31, 2008 as compared to a net loss of $21,278 for the comparable period in 2007. Results for 2007 were benefited by $21,876 of income from discontinued operations as compared to $534 of income from discontinued operations in 2008.
The net loss from continuing operations before income taxes was $10,762 for the
year ended December 31, 2008 as compared to $43,154 for the comparable period in
2007. The 2008 results were favorably impacted by a substantial increase in
sales volume, reduced restructuring and refinancing activities; and reduced
interest expense associated with the Company's convertible notes. The 2008 net
loss from continuing operations includes three significant non-cash items:
losses relating to changes in fair value of its participating forward European
currency contracts of $1,542; a loss relating to a change in the fair value of
convertible notes and warrants of $1,104; and a charge for impairment of
long-lived assets of $462.
The Company's results were significantly affected by the foreign exchange impact on the operations of the Company's Euro-based business unit. All Euro-based results of operations were converted at the average 2008 exchange rate of 1.4713 and 2007 exchange rate of 1.3707, U.S. Dollar to 1 Euro.
The following table sets forth, for the years ended December 31, 2008 and 2007, certain items from Allied's consolidated statements of operations.
2008 2007
For the Years Ended December 31, Amount % Amount %
Revenues $ 144,424 100.0 % $ 38,603 100.0 %
Cost and expenses
Cost of sales 123,969 85.8 41,245 106.8
Selling and administrative 19,452 13.5 21,495 55.7
Research and development 2,277 1.6 1,617 4.2
Impairment of long-lived assets 462 0.3 - -
Operating loss (1,736 ) (1.2 ) (25,754 ) (66.7 )
Other income (expense)
Interest income 734 0.5 703 1.8
Interest expense (6,403 ) (4.4 ) (10,878 ) (28.2 )
Net loss on fair value of senior convertible
notes and warrants (1,104 ) (0.8 ) (6,663 ) (17.3 )
Other - net (2,253 ) (1.5 ) (562 ) (1.4 )
Loss from continuing operations before income
taxes (10,762 ) (7.4 ) (43,154 ) (111.8 )
Income tax expense 214 0.2 - -
Loss from continuing operations (10,976 ) (7.6 ) (43,154 ) (111.8 )
Income (loss) from discontinued operations,
net of tax
Gain on sale of subsidiaries 2,750 1.9 29,314 75.9
Loss from discontinued operations (2,216 ) (1.5 ) (7,438 ) (19.2 )
534 0.4 21,876 56.7
Net loss $ (10,442 ) (7.2 )% $ (21,278 ) (55.1 )%
Earnings (Loss) per share - basic and diluted:
Net loss from continuing operations $ (1.36 ) $ (5.96 )
Net earnings from discontinued operations 0.07 3.02
Total loss per share - basic and diluted $ (1.29 ) $ (2.94 )
Weighted average number of common shares:
Basic and Diluted 8,045,239 7,244,983
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2008 compared to 2007
Revenue. Allied had revenue of $144,424 for 2008, which was 274% higher than prior year's revenue. The table below shows revenue by segment for the two year period.
Revenue by Segment
2008 2007
% of % of
Amount total Amount total
Mecar $ 112,192 78 % $ 37,822 98 %
Mecar USA 32,232 22 781 2
Total $ 144,424 100 % $ 38,603 100 %
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Mecar's revenue for the year ended December 31, 2008 increased $74,370 (197%) from the prior year due to a higher volume of Mecar contracts in process. In July 2007, Mecar obtained new sales contracts with various customers with a total expected value exceeding $170,000 over a three year period. Mecar began to perform on these contracts in 2008. In addition, in February 2008, Mecar received an additional multi-year award for $43,500 which it began to perform in 2008.
The 2008 revenue for Mecar USA has increased by $31,451 from the prior year's level of $781 based on a receipt of several new procurement contracts in the current year. In 2008, Mecar USA grew its ammunition service related business by contracting to resell ammunition to the U.S and foreign governments. Accordingly, 99% of Mecar USA's 2008 revenue was from procurement contracts as opposed to manufacturing operations.
Cost of Sales. Cost of sales (COS) as a percentage of revenue was 86% and 107% in 2008 and 2007, respectively. Gross margins, as a percentage of revenues, were 14% and (7)% in 2008 and 2007, respectively.
Cost of Sales as a Percentage of Revenue by Segment
2008 2007
% of % of
Segment Segment
Amount Revenue Amount Revenue
Mecar $ 93,716 84 % $ 40,385 107 %
Mecar USA 30,253 94 860 110
Total $ 123,969 86 % $ 41,245 107 %
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The improvement in the gross margin for the year ended December 31, 2008 was due to higher revenue levels. In 2007, Mecar's costs of sales exceeded revenues as a result of a low level of revenues on Mecar's high fixed cost structure. Current year production levels more than compensated for the fixed cost structure at Mecar. The current year results were negatively impacted by several factors as Mecar substantially ramped up its business from the very low 2007 level. For example, 2008 cost of goods sold was negatively affected by overtime pay and shift premiums required due to late deliveries of supplies. The overtime was required to meet customer delivery schedules and to avoid contractual penalties for late deliveries. In addition, in December 2008, Mecar encountered technical difficulties in connection with a new product which failed to meet customer specifications, which has been resolved subsequently in 2009. This failure resulted in an adjustment of contract profitability and revenue recognition, thereby negatively impacting gross profit by $2,979. Gross profit for Mecar was $18,476 (16% of segment revenue) in 2008 as compared to a gross loss of $2,563 (7% of segment revenue) in 2007.
For the year ended December 31, 2008, gross profit for Mecar USA was $1,979 (6% of segment revenue) compared to a gross loss of $79 (10% of segment revenue) in the prior year. Gross margins for Mecar USA's procurement contracts are inherently less than for Mecar's manufacturing business. Moreover, in 2008, Mecar USA operated on lower than usual gross margins in order to obtain its initial procurement contracts. This past performance has enabled Mecar USA to compete in more contract bids and grow its revenue base. Mecar USA anticipates its gross margin will improve further in 2009.
Selling and Administrative Expenses. Selling and Administrative (SA) expenses as a percentage of revenue were 14% and 56% for 2008 and 2007, respectively. The table below shows SA expenses by segment for the two year period.
Selling and Administrative Expenses by Segment
2008 2007
% of % of
Amount Total Amount Total
Mecar $ 10,250 53 % $ 8,937 42 %
Mecar USA 1,082 6 517 2
Corporate 8,120 41 12,041 56
Total $ 19,452 100 % $ 21,495 100 %
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The increase of $1,313 at Mecar was mainly due to a higher level of spending in professional services for the restructuring activities and increased payroll costs resulting from the increased level of operating activity in the current period. As a result of its increased level of operating activities in 2008, Mecar USA's expenses increased by $565 from the prior year levels as selling expenses increased. The decrease of $3,921 in the Corporate segment resulted from reduced spending in staffing, legal and professional costs. The Company is focused on reducing administrative costs across all business segments. It is focused on continued significant reductions in corporate expenses as restructuring consultants have been eliminated in 2008 and the complexity of the Company has been reduced with the divestitures of four of its operating subsidiaries.
Research and Development. Research and development (R&D) costs increased $660 or 41% for the year ended December 31, 2008 from 2007 levels. All R&D expenses were at Mecar. The increased expenses in R&D expenses stemmed from the relocation of larger caliber testing to testing facilities outside of Belgium. During the year ended December 31, 2008, Mecar had more technical resources focused on Research and Development (R&D) projects than during the prior year when many of the projects were idle.
Impairment of Long-Lived Assets. In September 2008, Corporate recorded $462 in impairment charges for long-lived assets related to the Corporate's ERP computer system. As the Company has reduced its head count and operating units as a result of selling a number of its subsidiaries, the Company determined that the carrying value of the ERP system exceeded its fair value.
Interest Income. Interest income for the years ended December 31, 2008 was $734 as compared to $703 in 2007. In 2008, the interest income only increased by $31 from the 2007 level of $703. The increase in interest income was a result of having higher average cash levels with lower interest rates in 2008 compared to 2007.
Interest expense. Interest expense for the year ended December 31, 2008 was $6,403 as compared to $10,878 in 2007. This decrease was mainly due to a reduction in Corporate interest expense of $6,490 as a result of the redemptions of a majority of the outstanding debt in 2008. In addition, Corporate interest expense in 2007 was negatively impacted by the write off of debt issue costs of $3,456. In 2008, with the proceeds from the sales of Titan and GMS, the Company repaid $19,428 of the convertible notes that were issued in June and July 2007. The results in 2008 were negatively impacted by $2,014 of increased interest expense at Mecar associated with higher borrowing and increased financing charges associated with Mecar's short term restructuring of its credit facility.
Net (Loss) Gain on fair value of senior convertible notes and warrants. The net loss recognized for the year ended December 31, 2008 from the fair value of the convertible notes and warrants was $1,104 as compared to the net loss of $6,663 for the comparable period in 2007. Changes in the fair value of the notes and warrants are due primarily to the change in the Company's closing stock price, the volatility of the Company's stock price during the period, the redemption features of the notes relative to the Company's announced subsidiary asset sales and the outstanding principal balance at any point in time. On December 31, 2008, the Company's stock closed at $6.20 per common share as compared to $5.77 per common share on December 31, 2007. See Note L for a description of these instruments.
Other - Net. Other - net for the year ended December 31, 2008 increased to a loss of $2,253 from a loss of $562 in the prior year. This unfavorable result was associated with Mecar's foreign currency transactions. Approximately $1,542 of this loss is attributed to unrealized losses from the changes in fair value of its participating forward European currency contracts. Mecar had participating forward European currency contracts in place mainly for a significant U.S. Dollar denominated sales contract that spans over the next three years. At the signing of the sales contract Mecar entered into the forward currency contract to protect Mecar's anticipated profitability on this contract. Subsequent to entering into the forward currency contract, the U.S. Dollar has gotten stronger, thereby yielding unrealized losses on an interim basis relative to the life of the forward contract. As the Company does not designate these contracts as fair value or cash flow hedges, changes in fair value must be as reported in the statement of operations. Other currency losses reported in the current year of $809 represents the impact of other foreign currency transactions at Mecar.
Pre-Tax Loss.
Pre-Tax Income (Loss) by Segment
2008 2007
% of % of
Total Total
Amount Revenue Amount Revenue
Mecar $ (811 ) (1 )% $ (16,178 ) (42 )%
Mecar USA 946 1 (571 ) (2 )
Corporate (10,897 ) (7 ) (26,405 ) (68 )
Total $ (10,762 ) (7 )% $ (43,154 ) (112 )%
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Mecar incurred a pre-tax loss of $811 for the year ended December 31, 2008 as compared to a pre-tax loss of $16,178 for the comparable period in 2007. The improvement was associated with the higher level of sales volume at Mecar. For the year ended December 31, 2008, Mecar USA recognized an increase in pre-tax income of $1,517 from the prior period pre-tax loss of $571, due to several significant procurement contracts. The Corporate segment had pre-tax loss of $10,897 in 2008 as compared to a pre-tax loss of $26,405 in 2007. This improvement in the pre-tax loss was attributable to a reduced loss incurred from the change in fair value of the notes and warrants for the year ended December 31, 2008 of $5,559 and reduced administrative expenses associated with reduced restructuring and payroll expense of $3,921 and reduced interest expense in the current period of $6,490, offset by the impairment charge of $462 to long-lived assets in the current period.
Income Taxes-Expense (Benefit). The effective income tax rates in 2008 and 2007 were 2% and zero, respectively. The increased tax rate in 2008 was associated with increased taxable income at a foreign holding company, ARC Europe, that could not be offset by Mecar's or the U.S. based entities' net operating loss carryforward.
Income (loss) from discontinued operations, net of tax. Income (loss) from discontinued operations consisted of gain on sale of subsidiaries and loss from discontinued operations. The Company had income, net of tax of $294, of $534 for the year ended December 31, 2008 compared to income of $21,876 in the same prior comparable year. This decline was due to a one-time significant net gain of $29,314 recognized from the sale of The VSK Group in 2007 as compared to a lower net gain of $2,750 recognized from the sale of GMS and Titan in 2008. For the year ended December 31, 2008, the operating loss from discontinued operations was $2,216 which resulted from a loss at NSM of $4,290 and a loss at Titan of $140 offset by income at GMS of $2,214. The net loss at NSM included a goodwill impairment of $3,495. The operating loss from discontinued operations for 2007 was $7,438 and included $2,483 loss from NSM, $3,665 loss from Titan, $4,313 . . .
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