##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2010
 Commission File Number: 1-11376
 The Allied Defense Group, Inc.
 (Exact name of Registrant as specified in its charter)
 Delaware
    
    04-2281015(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Number)
 8000 Towers Crescent Drive, Suite 260
Vienna, Virginia 22182  (Address of principal executive offices, including zip code)
 (703) 847-5268  (Registrants telephone number, including area code)
 None
 þ o
 Yes o No o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




---



##### 



THE ALLIED DEFENSE GROUP, INC.
INDEX
 PAGENUMBERPART I. FINANCIAL INFORMATION  UNAUDITEDItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at March 31, 2010 and December 31, 2009
    
    
    2Condensed Consolidated Statements of Operations for the three months ended March 31,
2010 and 2009
    
    
    3Condensed Consolidated Statements of Stockholders Equity and Comprehensive Loss
for the three months ended March 31, 2010 and the year ended December 31, 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended March 31,
2010 and 2009
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4T. Controls and Procedures
    
    
    32PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. (Reserved)
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    33Signatures
    
    
    34Exhibit 31.1Exhibit 31.2Exhibit 32




---



##### Table of Contents



The Allied Defense Group, Inc.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars, except per share and share data)
 March 31,
    
    
    December 31,2010
    
    
    2009 (a)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    1,398
    
    
    $
    9,021Restricted cash
    
    
    19,996
    
    
    
    5,599Accounts receivable, net
    
    
    23,471
    
    
    
    28,911Costs and accrued earnings on uncompleted contracts
    
    
    11,446
    
    
    
    14,402Inventories, net
    
    
    23,978
    
    
    
    19,581Contracts in progress
    
    
    1,862
    
    
    
    179Prepaid and other current assets
    
    
    4,706
    
    
    
    4,679Total current assets
    
    
    86,857
    
    
    
    82,372Property, Plant and Equipment, net
    
    
    15,067
    
    
    
    16,545Other Assets
    
    
    1,562
    
    
    
    1,712TOTAL ASSETS
    
    $
    103,486
    
    
    $
    100,629CURRENT LIABILITIESBank overdraft facility
    
    $
    679
    
    
    $
    2,635Current maturities of long-term debt
    
    
    8,188
    
    
    
    4,240Accounts payable
    
    
    17,443
    
    
    
    17,429Accrued liabilities
    
    
    16,737
    
    
    
    18,654Customer deposits
    
    
    27,284
    
    
    
    15,974Belgium social security
    
    
    4,149
    
    
    
    3,803Income taxes
    
    
    3,461
    
    
    
    3,773Other current liabilities
    
    
    2,006
    
    
    
    315Total current liabilities
    
    
    79,947
    
    
    
    66,823LONG TERM OBLIGATIONSLong-term debt, less current maturities
    
    
    73
    
    
    
    4,607Long-term foreign exchange contract, less current maturities
    
    
    907
    
    
    
    499Derivative instrument
    
    
    273
    
    
    
    24Other long-term liabilities
    
    
    1,579
    
    
    
    1,665Total long-term obligations
    
    
    2,832
    
    
    
    6,795TOTAL LIABILITIES
    
    
    82,779
    
    
    
    73,618CONTINGENCIES AND COMMITMENTSSTOCKHOLDERS EQUITYPreferred stock, no par value; authorized 1,000,000 shares; none issued
    
    
    
    
    
    
    Common stock, par value, $.10 per share; authorized 30,000,000 shares; issued
and outstanding, 8,174,480 at March 31, 2010 and 8,175,480 at December 31, 2009
    
    
    818
    
    
    
    818Capital in excess of par value
    
    
    56,597
    
    
    
    56,490Accumulated deficit
    
    
    (51,813
    )
    
    
    (46,658
    )Accumulated other comprehensive income
    
    
    15,105
    
    
    
    16,361Total stockholders equity
    
    
    20,707
    
    
    
    27,011TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    103,486
    
    
    $
    100,629
 (a)
    
    Condensed consolidated balance sheet as of December 31, 2009, has been derived from audited
consolidated financial statements. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
  2




---



##### Table of Contents



The Allied Defense Group, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars, except per share and share data)
 Three Months Ended March 31,2010
    
    
    2009Revenue
    
    $
    20,169
    
    
    $
    31,548Cost and expensesCost of sales
    
    
    18,274
    
    
    
    26,718Selling and administrative
    
    
    4,523
    
    
    
    4,212Research and development
    
    
    504
    
    
    
    492Operating (loss) income
    
    
    (3,132
    )
    
    
    126Other income (expenses)Interest income
    
    
    19
    
    
    
    35Interest expense
    
    
    (1,159
    )
    
    
    (864
    )Net (loss) gain on fair value of senior convertible notes and warrants
    
    
    (249
    )
    
    
    239Loss from foreign exchange contracts
    
    
    (668
    )
    
    
    (662
    )Other-net
    
    
    44
    
    
    
    (247
    )(2,013
    )
    
    
    (1,499
    )Loss from continuing operations before income taxes
    
    
    (5,145
    )
    
    
    (1,373
    )Income tax expense
    
    
    10
    
    
    
    Loss from continuing operations
    
    
    (5,155
    )
    
    
    (1,373
    )Income from discontinued operations, net of taxGain on sale of subsidiaries
    
    
    
    
    
    
    946Income from discontinued operations
    
    
    
    
    
    
    110Net income from discontinued operations
    
    
    
    
    
    
    1,056NET LOSS
    
    $
    (5,155
    )
    
    $
    (317
    )Earnings (Loss) per share  basic and diluted:Net loss from continuing operations
    
    $
    (0.63
    )
    
    $
    (0.17
    )Net income from discontinued operations, net of tax
    
    
    
    
    
    
    0.13Total loss per share  basic and diluted
    
    $
    (0.63
    )
    
    $
    (0.04
    )Weighted average number of common shares:Basic and Diluted
    
    
    8,175,364
    
    
    
    8,079,972
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
  3




---



##### Table of Contents



The Allied Defense Group, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
(Unaudited)
(Thousands of Dollars, except per share and share data)
 AccumulatedPreferred
    
    
    Common Stock
    
    
    Capital in
    
    
    
    
    
    
    Other
    
    
    Totalstock, no
    
    
    
    
    
    
    $.10 Par
    
    
    Excess of
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersPar Value
    
    
    Shares
    
    
    value
    
    
    Par value
    
    
    (Deficit)
    
    
    Income
    
    
    EquityBalance at January 1, 2009
    
    $
    
    
    
    
    8,079,509
    
    
    $
    808
    
    
    $
    55,912
    
    
    $
    (38,351
    )
    
    $
    16,082
    
    
    $
    34,451Common stock awards
    
    
    
    
    
    
    78,490
    
    
    
    8
    
    
    
    326
    
    
    
    
    
    
    
    
    
    
    
    334Retired stocks
    
    
    
    
    
    
    (1,502
    )
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    (6
    )Employee stock purchase plan purchases
    
    
    
    
    
    
    18,983
    
    
    
    2
    
    
    
    84
    
    
    
    
    
    
    
    
    
    
    
    86Issue of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    71Directors deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103
    
    
    
    
    
    
    
    
    
    
    
    103Comprehensive loss:Net loss for the year ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,307
    )
    
    
    
    
    
    
    (8,307
    )Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    279
    
    
    
    279Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,028
    )Balance at December 31, 2009
    
    $
    
    
    
    
    8,175,480
    
    
    $
    818
    
    
    $
    56,490
    
    
    $
    (46,658
    )
    
    $
    16,361
    
    
    $
    27,011Common stock awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    68Forfeited stocks
    
    
    
    
    
    
    (1,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issue of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    17Directors deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    22Comprehensive loss:Net loss for the three months ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,155
    )
    
    
    
    
    
    
    (5,155
    )Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,256
    )
    
    
    (1,256
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,411
    )Balance at March 31, 2010
    
    $
    
    
    
    
    8,174,480
    
    
    $
    818
    
    
    $
    56,597
    
    
    $
    (51,813
    )
    
    $
    15,105
    
    
    $
    20,707
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
  4




---



##### Table of Contents



The Allied Defense Group, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
 Three Months Ended March 31,2010
    
    
    2009Cash flows from operating activitiesNet loss
    
    $
    (5,155
    )
    
    $
    (317
    )Less: Gain on sale of subsidiaries
    
    
    
    
    
    
    (946
    )Discontinued operations, net of tax
    
    
    
    
    
    
    (110
    )Loss from continuing operations
    
    
    (5,155
    )
    
    
    (1,373
    )Adjustments to reconcile net loss from continuing operations to net cash used in operating activities, net of divestitures:Depreciation and amortization
    
    
    930
    
    
    
    1,016Unrealized loss on foreign exchange contracts
    
    
    668
    
    
    
    662Net loss (gain) related to fair value of notes and warrants
    
    
    249
    
    
    
    (239
    )(Reduction) provision for estimated losses on contracts
    
    
    (82
    )
    
    
    250(Reduction) provision for warranty reserves, uncollectible accounts and inventory obsolescence
    
    
    (223
    )
    
    
    344Common stock and stock option awards
    
    
    85
    
    
    
    111Deferred director stock awards
    
    
    22
    
    
    
    30(Increase) decrease in operating assets and increase (decrease) in liabilities, net
of effects from discontinued businessesRestricted cash
    
    
    (15,164
    )
    
    
    (8,386
    )Accounts receivable
    
    
    4,126
    
    
    
    (11,616
    )Costs and accrued earnings on uncompleted contracts
    
    
    2,119
    
    
    
    (8,353
    )Inventories
    
    
    (5,485
    )
    
    
    (2,925
    )Contracts in progress
    
    
    (1,683
    )
    
    
    (3,698
    )Prepaid and other current assets
    
    
    (251
    )
    
    
    113Accounts payable and accrued liabilities
    
    
    609
    
    
    
    8,414Customer deposits
    
    
    12,635
    
    
    
    16,167Deferred compensation
    
    
    1
    
    
    
    1Income taxes
    
    
    (112
    )
    
    
    Net cash used in operating activities  continuing operations
    
    
    (6,711
    )
    
    
    (9,482
    )Net cash used in operating activities  discontinued operations
    
    
    
    
    
    
    (250
    )Net cash used in operating activities
    
    
    (6,711
    )
    
    
    (9,732
    )Cash flows from investing activitiesCapital expenditures
    
    
    (299
    )
    
    
    (272
    )Net proceeds from sale of subsidiaries
    
    
    
    
    
    
    (646
    )Net cash used in investing activities  continuing operations
    
    
    (299
    )
    
    
    (918
    )Net cash provided by investing activities  discontinued operations
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (299
    )
    
    
    (918
    )Cash flows from financing activitiesBank overdraft (payments) borrowings
    
    
    (1,847
    )
    
    
    4,418Principal payments on long-term debt
    
    
    
    
    
    
    (70
    )Principal payments on senior convertible notes
    
    
    
    
    
    
    (928
    )Financing of receivables
    
    
    1,500
    
    
    
    Net of proceeds received from long-term debt and repayment on capital lease obligations
    
    
    (48
    )
    
    
    283Net cash transferred to discontinued operations
    
    
    
    
    
    
    (27
    )Proceeds from employee stock purchases
    
    
    
    
    
    
    18Net cash (used in) provided by financing activities  continuing operations
    
    
    (395
    )
    
    
    3,694Net cash provided by financing activities  discontinued operations
    
    
    
    
    
    
    24Net cash (used in) provided by financing activities
    
    
    (395
    )
    
    
    3,718Net change in cash of discontinued operations
    
    
    
    
    
    
    223Effects of exchange rate on cash
    
    
    (218
    )
    
    
    (219
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (7,623
    )
    
    
    (6,928
    )Cash and cash equivalents at beginning of period
    
    
    9,021
    
    
    
    8,816Cash and cash equivalents at end of period
    
    $
    1,398
    
    
    $
    1,8882010
    
    
    
    2009Supplemental Disclosures of Cash Flow informationCash paid during the period forInterest
    
    $
    1,292
    
    
    $
    872Taxes
    
    $
    121
    
    
    $
    4
 The accompanying notes are an integral part of these unaudited condensed consolidated statements.
  5




---



##### Table of Contents



The Allied Defense Group, Inc.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
 NOTE 1  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      - Commitments and Contingencies,
 Liquidity and Capital Resources
    6




---



##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
  
 
   Outlook for 2010
  - Commitments and Contingencies,
     7




---



##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
 NOTE 2  PRINCIPLES OF CONSOLIDATION
  
    
    ARC Europe, S.A. (ARC Europe), a Belgian company, including its
wholly-owned subsidiary Mecar S.A. (Mecar).
 
    
    Allied Research BV (BV), a Dutch company,
 
    
    Allied Research Cooperative (Coop) and,
 
    
    Mecar USA, Inc. (Mecar USA), a Delaware corporation.
   
    
    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 often 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.
  NOTE 3  ACCOUNTS RECEIVABLE AND COSTS AND ACCRUED EARNINGS ON UNCOMPLETED CONTRACTS
  March 31,
    
    
    December 31,2010
    
    
    2009Direct and indirect receivables from governments
    
    $
    17,876
    
    
    $
    19,570Commercial and other receivables
    
    
    6,527
    
    
    
    10,32824,403
    
    
    
    29,898Less: Allowance for doubtful receivables
    
    
    (932
    )
    
    
    (987
    )$
    23,471
    
    
    $
    28,911
  8




---



##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
  Transfers and Servicing.
  NOTE 4  INVENTORIES
  March 31,
    
    
    December 31,2010
    
    
    2009Raw materials
    
    $
    13,107
    
    
    $
    10,633Work in process
    
    
    11,138
    
    
    
    9,037Finished goods
    
    
    2,284
    
    
    
    2,85926,529
    
    
    
    22,529Less: Reserve for obsolescence
    
    
    (2,551
    )
    
    
    (2,948
    )$
    23,978
    
    
    $
    19,581
  NOTE 5  CONTRACTS IN PROGRESS
   9




---



##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
 NOTE 6  BANK CREDIT FACILITY
  
   
  NOTE 7  LONG-TERM OBLIGATIONS
  March 31,
    
    
    December 31,2010
    
    
    2009SOGEPA loan
    
    $
    8,073
    
    
    $
    8,600Bank notes payable
    
    
    107
    
    
    
    128Capital leases and other
    
    
    81
    
    
    
    119Total long-term debt
    
    
    8,261
    
    
    
    8,847Less: Current maturities
    
    
    (8,188
    )
    
    
    (4,240
    )Long-term debt, less current maturities
    
    $
    73
    
    
    $
    4,607
  10




---



##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
 SOGEPA Loan.  Société Wallonne de Gestion et de Participations   Debtors Accounting for a
Modification or Exchange of Debt Instruments  
 Bank notes payable. 
 Capital lease and other.
  NOTE 8  WARRANTS
 Derivatives and Hedging
 NOTE 9  DERIVATIVE FINANCIAL INSTRUMENTS
    11




---



##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
  Fair Value atLiability Derivatives Balance Sheet Location
    
    March 31, 2010
    
    
    December 31, 2009Derivatives
not designated as hedging instruments under ASC 815Foreign Currency future contracts
    
    Other current liabilities
    
    $
    506
    
    
    $
    315Foreign Currency future contracts
    
    Long-term foreign exchange contracts, less current maturities
    
    
    907
    
    
    
    499Total derivatives not designated
as hedging instruments under ASC 815
    
    
    
    $
    1,413
    
    
    $
    814
  For the Three Months EndedStatement of Operations Location
    
    March 31, 2010
    
    
    March 31, 2009Derivatives
not designated as hedging instruments under ASC 815Foreign Currency future contracts
    
    Loss from foreign exchange contracts
    
    $
    (668
    )
    
    $
    (662
    )
  NOTE 10  FAIR VALUE MEASUREMENTS
   
 
 
   12




---



##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
  Quoted Prices in Active
    
    
    Significant Other
    
    
    SignificantMarkets for Identical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsMarch 31, 2010
    
    or Liabilities (level 1)
    
    
    (level 2)
    
    
    (Level 3)
    
    
    TotalLiabilitiesDerivatives instruments  warrants
    
    $
    
    
    
    $
    273
    
    
    $
    
    
    
    $
    273Foreign exchange contracts
    
    
    
    
    
    
    1,413
    
    
    
    
    
    
    
    1,413$
    
    
    
    $
    1,686
    
    
    $
    
    
    
    $
    1,686
 Quoted Prices in Active
    
    
    Significant Other
    
    
    SignificantMarkets for Identical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsDecember 31, 2009
    
    or Liabilities (level 1)
    
    
    (level 2)
    
    
    (Level 3)
    
    
    TotalLiabilitiesDerivatives instruments  warrants
    
    $
    
    
    
    $
    24
    
    
    $
    
    
    
    $
    24Foreign exchange contracts
    
    
    
    
    
    
    814
    
    
    
    
    
    
    
    814$
    
    
    
    $
    838
    
    
    $
    
    
    
    $
    838
  NOTE 11  LOSS PER SHARE FROM CONTINUING OPERATIONS
  Three Months Ended March 31,2010
    
    
    2009Net loss from continuing operations
    
    $
    (5,155
    )
    
    $
    (1,373
    )Weighted average number of basic and diluted shares
    
    
    8,175,364
    
    
    
    8,079,972Basic and diluted net loss per share from continuing operations
    
    $
    (0.63
    )
    
    $
    (0.17
    )
   13




---



##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
 NOTE 12  COMPREHENSIVE LOSS
  Three Months Ended March 31,2010
    
    
    2009Net loss
    
    $
    (5,155
    )
    
    $
    (317
    )Currency Translation Adjustment
    
    
    (1,256
    )
    
    
    (1,863
    )Comprehensive loss
    
    $
    (6,411
    )
    
    $
    (2,180
    )
  NOTE 13  OTHER  NET
  Three Months Ended March 31,2010
    
    
    2009Net currency transaction gains (losses)
    
    $
    339
    
    
    $
    (301
    )Miscellaneous  net
    
    
    (295
    )
    
    
    54$
    44
    
    
    $
    (247
    )
  NOTE 14  SHARE-BASED COMPENSATION
    March 31, 2009Risk free interest rate
    
    
    0.80
    %Expected volatility rate
    
    
    70.71
    %Expected lives  years
    
    
    1Dividend yield
    
    
    
   14




---



##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
 NOTE 15  INDUSTRY SEGMENTS
 Three Months Ended March 31,2010
    
    
    2009Revenues from external customersMecar SA
    
    $
    14,435
    
    
    $
    26,742Mecar USA
    
    
    5,734
    
    
    
    4,806$
    20,169
    
    
    $
    31,548Segment earnings (loss) from
continuing operations before taxesMecar SA
    
    $
    (3,731
    )
    
    $
    (172
    )Mecar USA
    
    
    519
    
    
    
    6Corporate
    
    
    (1,933
    )
    
    
    (1,207
    )$
    (5,145
    )
    
    $
    (1,373
    )
  March 31,
    
    
    December 31,2010
    
    
    2009Segment assetsMecar SA
    
    $
    92,217
    
    
    $
    84,575Mecar USA
    
    
    7,936
    
    
    
    12,175Corporate
    
    
    3,333
    
    
    
    3,879$
    103,486
    
    
    $
    100,629
  NOTE 16  PROVISION FOR TAXES
 Interim Financial Reporting
    15




---



##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
  Accounting for Income Taxes.
  NOTE 17  COMMITMENTS AND CONTINGENCIES
      DOJ Subpoena
     16




---



##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
  Litigation Relating to the Merger
  Litigation Relating to Consulting Agreement
  Indemnification provisions
      
   17




---



##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
    Tax Litigation
  NOTE 18  DISCONTINUED OPERATIONS
  NS Microwave Systems, Inc.
    18




---



##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Thousands of Dollars)
  Three Months EndedMarch 31, 2009NSMRevenue
    
    $
    1,741Income (loss) before taxes
    
    
    110Income (loss), net of tax
    
    
    110Discontinued operations, net of tax
    
    $
    110
  NOTE 19  SUBSEQUENT EVENTS
     19




---



##### Table of Contents



The Allied Defense Group, Inc.
 
 MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
 Overview
  Part II Item 1- Legal Proceedings,
  
    
    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 often
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.
   Liquidity and Capital Resources
    20




---



##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
  
 
   Outlook for 2010
  Part II, Item 1- Legal Proceedings,
   21




---



##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
   Results of Operations
     Revenue.
 Revenue by SegmentThree months Ended March 31,2010
    
    
    2009% of
    
    
    
    
    
    
    % ofAmount
    
    
    total
    
    
    Amount
    
    
    totalMecar
    
    $
    14,435
    
    
    
    72
    %
    
    $
    26,742
    
    
    
    85
    %Mecar USA
    
    
    5,734
    
    
    
    28
    
    
    
    4,806
    
    
    
    15Total
    
    $
    20,169
    
    
    
    100
    %
    
    $
    31,548
    
    
    
    100
    %
    22




---



##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
 Cost of Sales.
 Cost of Sales as a Percentage of Revenue by SegmentThree months Ended March 31,2010
    
    
    2009% of
    
    
    
    
    
    
    % ofsegment
    
    
    
    
    
    
    segmentAmount
    
    
    revenue
    
    
    Amount
    
    
    revenueMecar
    
    $
    13,467
    
    
    
    93
    %
    
    $
    22,233
    
    
    
    83
    %Mecar USA
    
    
    4,807
    
    
    
    84
    
    
    
    4,485
    
    
    
    93Total
    
    $
    18,274
    
    
    
    91
    %
    
    $
    26,718
    
    
    
    85
    %
   Selling and Administrative Expenses.
 Selling and Administrative Expenses by SegmentThree months Ended March 31,2010
    
    
    2009% of
    
    
    
    
    
    
    % ofAmount
    
    
    total
    
    
    Amount
    
    
    totalMecar
    
    $
    2,499
    
    
    
    55
    %
    
    $
    2,434
    
    
    
    58
    %Mecar USA
    
    
    333
    
    
    
    8
    
    
    
    332
    
    
    
    8Corporate
    
    
    1,691
    
    
    
    37
    
    
    
    1,446
    
    
    
    34Total
    
    $
    4,523
    
    
    
    100
    %
    
    $
    4,212
    
    
    
    100
    %
  Research and Development.
  23




---



##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
 Interest Income.
 Interest Expense.
 Net Gain (Loss) on fair value of the senior convertible notes and warrants.
 Loss from Foreign Exchange Contracts.
 Other  Net.
 Pre-Tax Income (Loss)
  Pre-Tax Income (Loss) by SegmentThree months Ended March 31,2010
    
    
    2009% of
    
    
    
    
    
    
    % oftotal
    
    
    
    
    
    
    totalAmount
    
    
    revenue
    
    
    Amount
    
    
    revenueMecar
    
    $
    (3,731
    )
    
    
    (19
    )%
    
    $
    (172
    )
    
    
    
    %Mecar USA
    
    
    519
    
    
    
    3
    
    
    
    6
    
    
    
    Corporate
    
    
    (1,933
    )
    
    
    (10
    )
    
    
    (1,207
    )
    
    
    (4
    )Total
    
    $
    (5,145
    )
    
    
    (26
    )%
    
    $
    (1,373
    )
    
    
    (4
    )%
  24




---



##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
  Income Taxes. Accounting for Income Taxes in Interim periods
 Net Income from discontinued operations.
 Three Months Ended March 31,2010
    
    
    2009Income from discontinued operations
    
    $
    
    
    
    $
    110Gain on the sale of subsidiaries, net of tax
    
    
    
    
    
    
    946Net income from discontinued operations
    
    $
    
    
    
    $
    1,056
 
 Net Loss.
 Backlog.
 Backlog by Segment2010
    
    
    2009Amount
    
    
    %
    
    
    Amount
    
    
    %Mecar
    
    $
    79,313
    
    
    
    90
    %
    
    $
    109,482
    
    
    
    69
    %Mecar USA
    
    
    8,413
    
    
    
    10
    
    
    
    49,005
    
    
    
    31Total
    
    $
    87,726
    
    
    
    100
    %
    
    $
    158,487
    
    
    
    100
    %
  25




---



##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
    Balance Sheet
  March 31,
    
    
    December 31,2010
    
    
    2009ASSETSCash, unrestricted
    
    $
    1,398
    
    
    $
    9,021Cash, restricted
    
    
    19,996
    
    
    
    5,599Accounts receivable, net
    
    
    23,471
    
    
    
    28,911Costs and accrued earnings on uncompleted contracts
    
    
    11,446
    
    
    
    14,402Inventories, net
    
    
    23,978
    
    
    
    19,581Contracts in progress
    
    
    1,862
    
    
    
    179Other current assets
    
    
    4,706
    
    
    
    4,679Property, plant & equipment and other assets
    
    
    16,629
    
    
    
    18,257TOTAL ASSETS
    
    $
    103,486
    
    
    $
    100,629LIABILITIESBank overdraft facility
    
    $
    679
    
    
    $
    2,635Accounts payable and accrued liabilities
    
    
    38,329
    
    
    
    39,886Customer deposits
    
    
    27,284
    
    
    
    15,974Other current liabilities
    
    
    4,961
    
    
    
    3,773Other long-term liabilities and debt
    
    
    11,526
    
    
    
    11,350TOTAL LIABILITIES
    
    
    82,779
    
    
    
    73,618STOCKHOLDERS EQUITY
    
    
    20,707
    
    
    
    27,011TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    103,486
    
    
    $
    100,629
    26




---



##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
            27




---



##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
 Cash Flows
  For three Months Ended March 31,2010
    
    
    2009Net cash used in operating activities
    
    $
    (6,711
    )
    
    $
    (9,732
    )Net cash used in investing activities
    
    
    (299
    )
    
    
    (918
    )Net cash (used in) provided by financing activities
    
    
    (395
    )
    
    
    3,718Effects of exchange rate on cash
    
    
    (218
    )
    
    
    (219
    )
 Operating Activities.
  Investing Activities.
 Financing Activities.
 Effects of Exchange Rate.
 Allied .
  28




---



##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
 Mecar. 
 Mecar USA.
 Stock Repurchases.
 Future Liquidity
 Off-Balance Sheet Arrangements.
   Critical Accounting Policies
   
    
    Revenue recognition
    
    Inventory reserves and allowance for doubtful accounts
    
    Foreign currency translations
    
    Derivative Instruments
    
    Valuation of deferred income taxes and income tax reserves.
  29




---



##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
  Recent Accounting Pronouncements
 Improving Disclosures about Fair Value Measurements
  Fair
Value Measurements and Disclosures
 Derivatives and Hedging
   30




---



##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2010
(Thousands of Dollars)
(Unaudited)
 Generally Accepted Accounting Principles
 Forward-Looking Statements
  
  31




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE
  
 ITEM 4T. DISCLOSURE CONTROLS AND PROCEDURES
 Evaluation of disclosure controls and procedures
   Changes in Internal Control Over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 DOJ Subpoena
     Litigation Relating to the Merger
   32




---



##### Table of Contents



Litigation Relating to Consulting Agreement
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. (Reserved)
 
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibit No.
    
    Description of Exhibits31.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
    
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
  33




---



##### Table of Contents



SIGNATURE
  THE ALLIED DEFENSE GROUP, INC./s/ Deborah  F. RicciDate: May 17, 2010
    Deborah  F. RicciChief Financial Officer and Treasurer  34