##### 



UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q/A QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended March 31, 2004 Commission File Number: 001-11376   The Allied Defense Group, Inc. (Exact name of Registrant as specified in its charter)
 Delaware
    
    04-2281015(State or other jurisdiction of
    
    (I.R.S. Employer Number)incorporation or organization)
 8000 Towers Crescent Drive, Suite 260
Vienna, Virginia 22182(Address of principal executive offices, including zip code) (703) 847-5268(Registrants telephone number, including area code)   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 is an accelerated filer (as defined in Rule 12b-2 of
the Act).  Yes þ       No Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
March 31, 2004: 5,553,729.




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##### 



EXPLANATORY NOTE This Form 10-Q/A is being filed to amend The Allied Defense Group, Inc. (the Company) Quarterly
Report on Form 10-Q for the period ended March 31, 2004 in order to reflect the restatement of the
Companys Consolidated Financial Statements and amendments to related disclosures as of March 31,
2004 and for the three months ended March 31, 2004 and 2003. The restatement arose from
managements determination that the Companys accounting for foreign currency contracts did not
qualify for the use of hedge accounting under SFAS No. 133 Accounting for Derivative Instruments
and Hedging Activities. See the more complete discussion set forth in the Annual Report on Form
10-K for the period ended December 31, 2004. Generally, no attempt has been made in this Form 10-Q/A to modify or update other disclosures
presented in the original report on Form 10-Q except as required to reflect the effects of the
restatement. This Form 10-Q/A does not reflect events occurring after the filing of the original
Form 10-Q or modify or update those disclosures. Information not affected by the restatement is
unchanged and reflects the disclosure made at the time of the original filing of the Form 10-Q with
the Securities and Exchange Commission on May 10, 2004. The following items have been amended as a
result of the restatement:  
    Part I  Item 1  Financial Statements
    Part I  Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    Part I  Item 3  Quantitative and Qualitative Market Risk Disclosure
    Part I  Item 4  Disclosure Controls and Procedures; and
    Part II  Item 6  Exhibits and Reports on Form 8-K




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##### 



THE ALLIED DEFENSE GROUP, INC.
INDEX   PAGENUMBERPART I.
FINANCIAL INFORMATION - UNAUDITEDItem 1. Financial StatementsCondensed Consolidated Balance Sheets March 31, 2004 and December 31, 2003
    
    
    2Condensed Consolidated Statements of Earnings Three months ended March 31, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Cash Flows Three months ended March 31, 2004 and 2003
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Market Risk Disclosure
    
    
    21Item 4. Disclosure Controls and Procedures
    
    
    21PART II. OTHER INFORMATIONItem 6. Exhibits and Reports on Form 8-K
    
    
    22Signatures
    
    
    24




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The Allied Defense Group, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (Thousands of Dollars, except per share data)   March 31, 2004Restated andUnaudited
    
    
    December 31, 2003ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    26,437
    
    
    $
    43,377Restricted cash
    
    
    4,890
    
    
    
    15,937Accounts receivable
    
    
    32,863
    
    
    
    33,404Costs and accrued earnings on uncompleted contracts
    
    
    69,390
    
    
    
    60,516Inventories
    
    
    13,149
    
    
    
    12,068Deferred tax asset
    
    

    846
    
    
    
    1,016Fair value of foreign exchange contracts
    
    
    147
    
    
    
    6,900Prepaid and other current assets
    
    
    5,695
    
    
    
    4,880Total current assets
    
    
    153,417
    
    
    
    178,098PROPERTY, PLANT AND EQUIPMENT net of accumulated depreciation
    
    
    23,759
    
    
    
    24,615OTHER ASSETSIntangibles, net of accumulated amortization
    
    
    4,043
    
    
    
    4,135Goodwill
    
    
    13,590
    
    
    
    13,718Other assets
    
    
    489
    
    
    
    37818,122
    
    
    
    18,231$
    195,298
    
    
    $
    220,944LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESNotes payable
    
    $
    82
    
    
    $
    14,200Current maturities of long-term debt
    
    
    1,975
    
    
    
    2,709Convertible subordinated debenture, current, less unamortized discount
    
    
    7,424
    
    
    
    5,250Accounts payable
    
    
    36,909
    
    
    
    53,284Accrued liabilities
    
    
    20,997
    
    
    
    7,594Customer deposits
    
    
    3,916
    
    
    
    4,938Income taxes
    
    
    1,730
    
    
    
    906Total current liabilities
    
    
    73,033
    
    
    
    88,881LONG-TERM OBLIGATIONSLong-term debt, less current maturities
    
    
    4,305
    
    
    
    4,902Convertible subordinated debenture, less current maturities and
unamortized discount
    
    
    
    
    
    
    2,156Deferred compensation
    
    
    1,745
    
    
    
    1,334Deferred taxes
    
    
    3,064
    
    
    
    5,5339,114
    
    
    
    13,925STOCKHOLDERS 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, 5,553,729 in 2004 and 5,551,373 in 2003
    
    
    555
    
    
    
    555Additional paid-in capital
    
    
    25,930
    
    
    
    25,891Retained earnings
    
    
    72,630
    
    
    
    75,495Accumulated other comprehensive income
    
    
    14,036
    
    
    
    16,197113,151
    
    
    
    118,138$
    195,298
    
    
    $
    220,944
 The accompanying notes are an integral part of these consolidated financial statements. 2




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The Allied Defense Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Thousands of Dollars, except per share data) (Unaudited)   Three months endedMarch 31,2004
    
    
    2003Restated
    
    
    RestatedRevenue
    
    $
    26,864
    
    
    $
    35,853Cost and expensesCost of sales
    
    
    22,175
    
    
    
    25,621Selling and administrative
    
    
    6,646
    
    
    
    5,774Research and development
    
    
    1,561
    
    
    
    851Operating income (loss)
    
    
    (3,518
    )
    
    
    3,607Other income (expense)Interest income
    
    
    101
    
    
    
    97Interest expense
    
    
    (479
    )
    
    
    (436
    )Other  net
    
    
    (349
    )
    
    
    28(727
    )
    
    
    (311
    )Earnings (loss) before income taxes
    
    
    (4,245
    )
    
    
    3,296Income tax expense (benefit)
    
    
    (1,380
    )
    
    
    1,679NET EARNINGS (LOSS)
    
    $
    (2,865
    )
    
    $
    1,617Earnings (loss) per shareBasic
    
    $
    (0.52
    )
    
    $
    0.30Diluted
    
    $
    (0.52
    )
    
    $
    0.29Weighted average number of common shares:Basic
    
    
    5,551,399
    
    
    
    5,479,125Diluted
    
    
    5,744,163
    
    
    
    5,919,028
 The accompanying notes are an integral part of these consolidated financial statements. 3




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The Allied Defense Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands of Dollars) (Unaudited)   Three months ended March 312004
    
    
    2003Restated
    
    
    RestatedCash flows from operating activitiesNet earnings (loss)
    
    $
    (2,865
    )
    
    $
    1,617Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operating activitiesDepreciation and amortization
    
    
    1,160
    
    
    
    1,008Unrealized losses (gains) on forward contracts
    
    
    1,264
    
    
    
    (2,477
    )Provision for estimated losses on contracts
    
    
    45
    
    
    
    111Deferred taxes
    
    
    1,892
    
    
    
    4,855Deferred compensation
    
    
    451
    
    
    
    114Changes in assets and liabilitiesAccounts receivable
    
    
    3,029
    
    
    
    5,430Costs and accrued earnings on uncompleted contracts
    
    
    (5,321
    )
    
    
    4,417Inventories
    
    
    (1,351
    )
    
    
    (1,563
    )Prepaid and other current assets
    
    
    (954
    )
    
    
    58Accounts payable, accrued liabilities and customer deposits
    
    
    (9,655
    )
    
    
    606Income taxes
    
    
    882
    
    
    
    2,701Net cash provided by (used in) operating activities
    
    
    (11,423
    )
    
    
    16,877Cash flows from investing activitiesCapital expenditures
    
    
    (888
    )
    
    
    (1,157
    )Net cash used in investing activities
    
    
    (888
    )
    
    
    (1,157
    )Cash flows from financing activitiesPrincipal payments on long-term borrowing
    
    
    (1,100
    )
    
    
    (828
    )Proceeds from issuance of long-term debt
    
    
    
    
    
    
    298Net decrease in short-term borrowings
    
    
    (14,046
    )
    
    
    (2,514
    )Proceeds from employee stock purchases
    
    
    39
    
    
    
    110Option exercises
    
    
    
    
    
    
    43Restricted cash
    
    
    10,843
    
    
    
    110Net cash used in financing activities
    
    
    (4,264
    )
    
    
    (2,781
    )Net increase (decrease) in cash and cash equivalents
    
    
    (16,575
    )
    
    
    12,923Effects of exchange rate changes on cash and cash equivalents
    
    
    (365
    )
    
    
    297NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (16,940
    )
    
    
    12,939Cash and cash equivalents at beginning of year
    
    
    43,377
    
    
    
    14,876Cash and cash equivalents at end of period
    
    $
    26,437
    
    
    $
    28,112Supplemental Disclosures of Cash Flow InformationCash paid during the period forInterest
    
    $
    148
    
    
    $
    173Taxes
    
    
    1
    
    
    
    55
 The accompanying notes are an integral part of these consolidated financial statements. 4




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The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Thousands of Dollars)
(Unaudited)   NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying condensed consolidated financial statements have been prepared by the Company
without audit. In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all necessary adjustments and reclassifications (all of which are of a
normal, recurring nature) that are necessary for fair presentation for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have been
condensed or omitted. The results of operations for the periods ended March 31, 2004 and 2003 are
not necessarily indicative of the operating results for the full year. Certain reclassifications have been made to the prior periods financial statements to conform to
the current presentation. Restatement.As described in greater detail in the Annual Report on Form 10-K for the period ended
December 31, 2004, the Company has restated its financial statements for certain periods, including
the periods covered by this Form 10-Q/A, since it did not qualify for the use of hedge accounting
under SFAS 133. The Condensed Consolidated Balance Sheets as of March 31, 2004 included in this Form 10-Q/A has
been restated as follows: March 31, 2004As
    
    
    As PreviouslyRestated
    
    
    ReportedAccounts receivable
    
    $
    32,863
    
    
    $
    25,899Cost and accrued earnings on uncompleted contracts
    
    
    69,390
    
    
    
    71,543Fair value of foreign exchange contracts
    
    
    147
    
    
    
    2,734Total current assets
    
    
    153,417
    
    
    
    151,193Total assets
    
    
    195,298
    
    
    
    193,074Accrued liabilities
    
    
    20,997
    
    
    
    22,672Foreign exchange contracts
    
    
    
    
    
    
    2,734Total current liabilities
    
    
    73,033
    
    
    
    77,442Deferred tax liability  non-current
    
    
    3,064
    
    
    
    809Total liabilities
    
    
    82,147
    
    
    
    84,301Accumulated other comprehensive income
    
    
    14,036
    
    
    
    11,378Total liabilities and stockholders equity
    
    
    195,298
    
    
    
    193,074
 The Condensed Consolidated Statements of Earnings for the three months ended March 31, 2004 and
2003 included in this Form 10-Q/A have been restated as follows: Three months ended, March 31, 2004
    
    
    March 31, 2003As
    
    
    As Previously
    
    
    As
    
    
    As PreviouslyRestated
    
    
    Reported
    
    
    Restated
    
    
    ReportedRevenues
    
    $
    26,864
    
    
    $
    34,468
    
    
    $
    35,853
    
    
    $
    42,657Cost of Sales
    
    
    22,175
    
    
    
    24,310
    
    
    
    25,621
    
    
    
    28,914Operating income (loss)
    
    
    (3,518
    )
    
    
    1,951
    
    
    
    3,607
    
    
    
    7,118Earnings (loss) before income taxes
    
    
    (4,245
    )
    
    
    1,224
    
    
    
    3,296
    
    
    
    6,807Income tax expense (benefit)
    
    
    (1,380
    )
    
    
    480
    
    
    
    1,679
    
    
    
    2,873Net Earnings (Loss)
    
    $
    (2,865
    )
    
    $
    744
    
    
    $
    1,617
    
    
    $
    3,934
 5




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The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Thousands of Dollars)
(Unaudited)   NOTE 2 - PRINCIPLES OF CONSOLIDATION The condensed consolidated financial statements include the accounts of The Allied Defense Group,
Inc. (Allied or the Company), a Delaware corporation, and its wholly-owned subsidiaries as
follows:  
    ARC Europe, S.A. (ARC Europe), a Belgian company,
    Allied Research Corporation Limited (Limited), an inactive United Kingdom company,
    News/Sports Microwave Rental, Inc. (NS Microwave), a California corporation,
    Titan Dynamics Systems, Inc. (Titan Dynamics), a Texas corporation,
    SeaSpace Corporation (SeaSpace), a California corporation, and
    MECAR USA, Inc. (MECAR USA), a Delaware corporation ARC Europe includes its wholly-owned subsidiaries MECAR S.A. (MECAR), Sedachim S.I. S.A.,
Hendrickx S.A., and the VSK Group. The VSK Group is comprised of VSK Electronics N.V. and its
wholly-owned subsidiaries, Télé Technique Générale S.A., Intelligent Data Capturing Systems (IDCS)
N.V., and VIGITEC S.A. The Company operates in four (4) segments, which are outlined below:  
    Ordnance & Manufacturingsegment
consists of MECAR and MECAR USA. MECAR
develops and produces medium caliber
tank, mortar and other ammunition.
MECAR USA will initially pursue
contracts from the U.S. government and
others for ammunition and pyrotechnics
devices. MECAR USA is expected to be
operational in the latter portion of
2004.
    Electronic Securitysegment consists of
The VSK Group and NS Microwave. VSK
Electronics N.V. manufactures access
control, intrusion protection, fire
detection and video systems; Télé
Technique Générale S.A. installs
security systems; Intelligent Data
Capturing Systems N.V. manufacturers
integrated video systems; and VIGITEC
S.A. installs networked video
surveillance systems. NS Microwave
designs, manufactures, distributes and
services industrial and law enforcement
security products and systems.
    Environmental Safety & Securitysegment
consists of SeaSpace, which designs,
manufactures, distributes and services
weather and environmental satellite
ground reception systems.
    Software, Training & Simulationsegment
consists of Titan Dynamics, which
designs, manufactures and sells
battlefield effects simulators. Allied, the parent company, provides management services to its subsidiaries and has no operating
activities. Significant intercompany transactions have been eliminated in consolidation. NOTE 3 - DERIVATIVE FINANCIAL INSTRUMENTS The Company uses foreign currency futures contracts to minimize the foreign currency exposures that
arise from sales contracts with certain foreign customers. Under the terms of these sales
contracts, the selling price and certain costs are payable in U.S. dollars rather than the Euro,
which is MECARs functional currency. As discussed in Note 1, the Companys accounting for foreign
currency exchange contracts at MECAR did not comply with the guidelines of FAS 133. As such,
gains/losses from settlements of the derivative contracts are reported as a component of revenues
and amounted to a loss of $745 and a gain of $3,655 for the three months ended March 31, 2004 and
2003, respectively. NOTE 4 - RESTRICTED CASH MECAR is generally required under the terms of its contracts with foreign governments and its
distributor to provide performance bonds and advance payment guarantees. The credit facility
agreements used to provide these financial guarantees place restrictions on cash deposits and other
liens on MECARs assets. The VSK Group has also pledged certain term deposits to secure
outstanding bank guarantees. $4,765 and $15,812 at March 31, 2004 and December 31, 2003,
respectively, was restricted or pledged as collateral for these agreements. 6




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The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Thousands of Dollars)
(Unaudited)   Restricted cash also included $125 at March 31, 2004 and December 31, 2003, as a result of a
deposit which was a requirement of the SeaSpace acquisition agreement. In 2002, the Company issued
a $250 promissory note payable in equal installments on July 31, 2003 and 2004. Payment is subject
to certain conditions being met as defined in the acquisition agreement. NOTE 5  ACCOUNTS RECEIVABLE Accounts receivable at March 31, 2004 and December 31, 2003 are comprised as follows: 2004
    
    
    2003RestatedDirect and indirect receivables from foreign governments
    
    $
    21,931
    
    
    $
    19,696Commercial and other receivables, less allowance for doubtful
receivables of $119 in 2004 and $115 in 2003
    
    
    10,932
    
    
    
    13,708$
    32,863
    
    
    $
    33,404
 Receivables from foreign government and government agencies are generally due within 30 days of
shipment, less a 10% hold back provision which is generally due within 90 days. Since these
receivables are supported by letters of credit or other guarantees, no provision for doubtful
accounts is deemed necessary. The Company evaluates its allowance for doubtful accounts on
commercial receivables on an ongoing basis and provides for losses as deemed necessary. NOTE 6 - COSTS AND ACCRUED EARNINGS ON UNCOMPLETED CONTRACTS Costs and accrued earnings on uncompleted contracts are recognized by MECAR, NS Microwave and
SeaSpace for their fixed priced sales contracts in accordance with the percentage of completion
method of accounting. Under this method, revenue is recognized as work progresses, based on the
relationship between actual costs incurred during the period and total estimated cost to be
incurred for the total contract. Management reviews these estimates as work progresses and the
effect of any change in cost estimates is reflected in cost of sales in the period in which the
change is identified. The revenue recognized on the contracts in progress for the three months
ended March 31, 2004 and 2003 were $19,091 and $28,871, respectively. NOTE 7  INVENTORIES Inventories at March 31, 2004 and December 31, 2003 are comprised as follows: 2004
    
    
    2003Raw materials
    
    $
    10,869
    
    
    $
    9,852Work in process
    
    
    1,056
    
    
    
    1,017Finished goods, less reserve for obsolescence of
$212 in 2004 and $214 in 2003
    
    
    1,224
    
    
    
    1,199$
    13,149
    
    
    $
    12,068
 7




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The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Thousands of Dollars)
(Unaudited)   NOTE 8  INTANGIBLE ASSETS AND GOODWILL March 31, 2004
    
    
    December 31, 2003Gross
    
    
    Accumulated
    
    
    
    
    
    
    Gross
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    NetIntangible assets subject
to amortization:Capitalized Software
    
    $
    1,199
    
    
    $
    325
    
    
    $
    874
    
    
    $
    1,179
    
    
    $
    282
    
    
    $
    897Customer Lists
    
    
    2,246
    
    
    
    402
    
    
    
    1,844
    
    
    
    2,247
    
    
    
    356
    
    
    
    1,891Patents
    
    
    1,494
    
    
    
    169
    
    
    
    1,325
    
    
    
    1,494
    
    
    
    147
    
    
    
    1,347Total
    
    $
    4,939
    
    
    $
    896
    
    
    $
    4,043
    
    
    $
    4,920
    
    
    $
    785
    
    
    $
    4,135Goodwill
    
    
    
    
    
    
    
    
    
    $
    13,590
    
    
    
    
    
    
    
    
    
    
    $
    13,718
 Consolidated amortization expense related to intangible assets, excluding goodwill, for the three
months ended March 31, 2004 and 2003 was $111. The $13,590 of goodwill at March 31, 2004 is comprised of $7,612 related to the Electronic Security
Segment, $4,322 related to the Environmental Safety & Security Segment and $1,656 related to the
Software, Training & Simulation Segment. Estimated future aggregate annual amortization for intangible assets is as follows: Period
    
    AmountNine months ended December 31, 2004
    
    $
    576Year ended December 31, 2005
    
    
    540Year ended December 31, 2006
    
    
    379Year ended December 31, 2007
    
    
    297Year ended December 31, 2008
    
    
    225
 NOTE 9  NOTES PAYABLE AND CREDIT FACILITY Notes Payable At March 31, 2004, NS Microwave had a note of $82 for machinery and vehicles. At
December 31, 2003 MECAR borrowed $4,322 under its lines of credit with its lenders. In addition,
MECAR borrowed $9,878 under a short-term loan which was secured by a receivable of $9,878. The
line of credit and short-term loan were paid off during the first quarter of 2004. The weighted
average interest rates for Notes Payable as of March 31, 2004 and December 31, 2003 were 8% and 3%,
respectively. Credit Facility MECAR is obligated under an agreement (the Agreement), executed March 2002, with
its foreign banking syndicate that provides credit facilities primarily for bank guarantees
including performance bonds, letters of credit and similar instruments required for specific sales
contracts as well as a line-of-credit for tax prepayments and working capital. The Agreement
provides for certain bank charges and fees as the facility is used, plus fees of 2% of guarantees
issued and quarterly fees at an annual rate of 1.25% of guarantees outstanding. These fees are
charged to interest expense. As of March 31, 2004 and December 31, 2003, guarantees and
performance bonds of approximately $20,631 and $17,233 respectively, were outstanding. Advances under the Agreement are secured by restricted cash at March 31, 2004 and December 31, 2003
of approximately $4,765 and $15,813, respectively. Amounts outstanding are also collateralized by
a pledge of approximately $41,945 of MECARs net assets. The Agreement requires that MECAR
maintain net worth and working capital covenants. 8




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The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Thousands of Dollars)
(Unaudited)   NOTE 10 - LONG-TERM DEBT The VSK Group is obligated on a mortgage on its building, which has a balance of approximately $294
at March 31, 2004. These mortgages are payable in annual installments of approximately $59 plus
interest. The Company and its subsidiaries are also obligated on various vehicle, equipment, capital lease
obligations and other loans. The notes and leases are generally secured by the assets acquired,
bear interest at rates ranging from 3.5% to 8.0% and mature at various dates through 2007. Scheduled annual maturities of long-term obligations as of March 31, 2004 are approximately as
follows: Year
    
    Amount2005
    
    $
    1,9752006
    
    
    1,7302007
    
    
    1,3632008
    
    
    8712009
    
    
    341
 NOTE 11 - CONVERTIBLE SUBORDINATED DEBENTURE On June 28, 2002 the Company sold to an accredited investor for $7,500 (i) an 8% subordinated
debenture that is convertible into shares of the Companys common stock at $25.00 per share and
(ii) warrants to purchase 15,000 shares of the Companys common stock at an exercise price of
$28.75 per share in cash. The debenture bears interest at the rate of 8% per year, payable
semi-annually. The Company may elect to pay the principal and/or the interest in cash or in
registered shares of its common stock at a 10% discount to the then current market price. The
warrants to purchase 15,000 shares of the Companys common stock were valued at $140. Monthly principal payments, in the amount of $750, are to begin on June 28, 2004 and continue for a
period of ten (10) months or until March 28, 2005. The holder of the debenture may choose to
convert all or a portion of the principal amount outstanding into shares of the Companys common
stock at any time before maturity. The right of the Company to sell and the holders right to
purchase additional debentures expired in August 2003. The Company has registered the shares of
common stock that could be issued in the event the holder elects to convert the debenture and
exercise the warrants. NOTE 12 - EARNINGS (LOSS) PER SHARE Basic earnings per share exclude dilution and are computed by dividing net earnings by the weighted
average number of common shares outstanding for the period. The computation of diluted earnings
per share includes the effects of stock options, warrants and convertible debenture, if such effect
is dilutive. The table below shows the calculation of basic and diluted earnings (loss) per share
for the three months ended March 31, 2004 and March 31, 2003, respectively: 9




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##### 



The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Thousands of Dollars)
(Unaudited)   Three months endedMarch 31,2004
    
    
    2003Restated
    
    
    RestatedNet earnings (loss)
    
    $
    (2,865
    )
    
    $
    1,617Interest on convertible debenture, net of taxes
    
    
    
    
    
    
    89Net earnings before interest on convertible
debenture
    
    $
    (2,865
    )
    
    $
    1,706Weighted average number of basic shares
    
    
    5,551,399
    
    
    
    5,479,125Common stock equivalents
    
    
    
    
    
    
    439,903Weighted average number of diluted shares
    
    
    5,551,399
    
    
    
    5,919,028Basic earnings (loss) per share
    
    $
    (0.52
    )
    
    $
    0.30Diluted earnings (loss) per share
    
    $
    (0.52
    )
    
    $
    0.29
 For the three months ended March 31, 2004, the Company has
excluded common stock equivalents of 192,764 since their effect would be anti-dilutive. NOTE 13 - COMPREHENSIVE INCOME (LOSS) A summary of the components of Comprehensive Income (Loss) for the three months ended March 31,
2004 and 2003, were as follows: Three months endedMarch 31,2004
    
    
    2003Restated
    
    
    RestatedNet earnings (loss)
    
    $
    (2,865
    )
    
    $
    1,617Currency translation adjustment
    
    
    (2,161
    )
    
    
    2,896Comprehensive income (loss)
    
    $
    (5,026
    )
    
    $
    4,513
 The currency translation adjustment for the three months ended March 31, 2004 resulted from the
depreciation of the Euro during the period. In contrast, the currency translation adjustment for
the comparable period in 2003 resulted from the appreciation of the Euro during that period. NOTE 14 - STOCK BASED COMPENSATION The Company currently accounts for stock options using the intrinsic value method and is applying
APB Opinion No. 25, Accounting for Stock Issued to Employees.Accordingly, compensation costs
for stock options is measured and recorded as the excess, if any, of the quoted market price of the
Companys stock at the date of grant over the amount an employee must pay to acquire the stock.
Compensation cost for stock awards is recorded based on the quoted market value of the Companys
stock at the time of grant. No compensation cost has been recognized for the granting of stock
options to employees in the three months ended March 31, 2004 and 2003. The following table presents the pro forma decrease in income for the three months ended March 31,
2004 and 2003, that would have been recorded had the fair values of options granted been recognized
as compensation expense on a straight-line basis over the vesting period of the grant: 10




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##### 



The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Thousands of Dollars)
(Unaudited)   Three Months EndedMarch 31,(Dollars in thousands, except per share amounts)
    
    2004
    
    
    2003Restated
    
    
    RestatedReported net earnings (loss)
    
    $
    (2,865
    )
    
    $
    1,617Stock-based compensation costs that would have
been included in the determination of reported
net earnings, if the fair value method was
applied to all awards, net of tax
    
    
    (154
    )
    
    
    (118
    )Pro forma net earnings (loss)
    
    $
    (2,711
    )
    
    $
    1,499Basic earnings (loss) per share:Reported earnings (loss) per share
    
    $
    (0.52
    )
    
    $
    0.29Compensation costs, net of tax
    
    
    (0.03
    )
    
    
    (0.02
    )Pro forma basic earnings (loss) per share
    
    $
    (0.55
    )
    
    $
    0.27Diluted earnings (loss) per share:Reported earnings (loss) per share
    
    $
    (0.52
    
    
    $
    0.28Compensation costs, net of tax
    
    
    (0.03
    )
    
    
    (0.02
    )Pro forma diluted earnings (loss) per share
    
    $
    (0.55
    )
    
    $
    0.26
 No options were granted during the three months ended March 31, 2004, and 2003. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes options pricing model.
The weighted average assumptions used in the model and the weighted-average fair values of each
option at the date of grant were as follows: Three Months Ended March 312004
    
    
    2003Risk free interest rate
    
    
    2.86
    %
    
    
    2.86
    %Expected volatility rate
    
    
    47.00
    %
    
    
    47.00
    %Expected
lives - years
    
    
    3
    
    
    
    3Divided yield
    
    
    
    
    
    
    
 The pro forma amounts may not be representative of future amounts since the estimated fair value of
stock options is amortized to expense over the vesting period, and additional options may be
granted in future periods. NOTE 15 - INDUSTRY SEGMENTS Three months endedMarch 31,2004
    
    
    2003Restated
    
    
    RestatedRevenues from external customersOrdnance & Manufacturing
    
    $
    15,474
    
    
    $
    25,863Electronic Security
    
    
    9,330
    
    
    
    6,731Environmental Safety & Security
    
    
    2,024
    
    
    
    2,306Software, Training & Simulation
    
    
    36
    
    
    
    953$
    26,864
    
    
    $
    35,853
 11




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##### 



The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Thousands of Dollars)
(Unaudited)   Three months endedMarch 31,2004
    
    
    2003Restated
    
    
    RestatedSegment profit (loss) before taxesOrdnance & Manufacturing
    
    $
    (4,190
    )
    
    $
    3,307Electronic Security
    
    
    820
    
    
    
    58Environmental Safety & Security
    
    
    (136
    )
    
    
    8Software, Training & Simulation
    
    
    (179
    )
    
    
    167Corporate and Other
    
    
    (560
    )
    
    
    (244
    )$
    (4,245
    )
    
    $
    3,296
 NOTE 16 - RECENT ACCOUNTING PRONOUNCEMENTS There were no new accounting pronouncements during the three months ended March 31, 2004 that would
impact the Companys financial reporting. 12




---



##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2004
(Thousands of Dollars)
(Unaudited)   Overview Allied is a strategic portfolio of defense and security businesses, with presence in worldwide
markets, offering both government and commercial customers leading edge products and services.
Allied operates in four (4) segments:  
    Ordnance & Manufacturingsegment consists of MECAR, located in
Belgium, and MECAR USA, located in Marshall, TX. MECAR develops
and produces medium caliber tank, mortar and other ammunition.
MECAR USA will initially pursue contracts from U.S. and foreign
governments for ammunition and pyrotechnics devices. MECAR USA is
expected to be operational in the fourth quarter of 2004.
    Electronic Securitysegment consists of The VSK Group, located in
Belgium, and NS Microwave, located in San Diego, CA. The VSK
Group consists of VSK Electronics N.V. which manufactures access
control, intrusion protection, fire detection and video systems;
Télé Technique Générale S.A. which installs security systems;
Intelligent Data Capturing Systems N.V. which manufacturers
integrated video systems; and VIGITEC S.A. which installs
networked video surveillance systems. NS Microwave designs,
manufactures, distributes and services industrial and law
enforcement surveillance products and systems.
    Environmental Safety & Securitysegment consists of SeaSpace,
located in San Diego, CA, which designs, manufactures, distributes
and services weather and environmental satellite ground reception
systems.
    Software, Training & Simulationsegment consists of Titan
Dynamics, located in Marshall, TX, which designs, manufactures and
sells battlefield effects simulators, minor pyrotechnics and other
training devices. Allied, the parent company, provides management services to its subsidiaries and has no operating
activities. Allied earned a net loss of $2,865 in the first quarter of 2004 compared to a net
profit of $1,617 for the first quarter of 2003. The reduction is principally attributed to reduced
profits at MECAR as well as the change in accounting for the derivatives. European results were
benefited by a 16% increase in the value of the Euro versus the U.S. Dollar between the two
periods. Allied entered 2004 with substantial cash reserves and anticipates no liquidity concerns
in 2004. The Company continues to pursue a domestic lending facility in order to continue its
acquisition program. Restatement.As described in greater detail in the Annual Report on Form 10-K for the period ended
December 31, 2004, the Company has restated its financial statements for certain periods, including
the periods covered by this Form 10-Q/A, since it did not qualify for the use of hedge accounting
under SFAS 133. The balance of this Managements Discussion and Analysis of Financial Condition
and Results of Operations gives effect to and is based upon the restated financial statements,
computed using derivative accounting. Results of Operations The table below shows, for the three months ended March 31, 2004 and 2003, certain items from
Allieds condensed consolidated statements of earnings expressed as a percentage of revenue: Three months ended
    
    
    Three months endedMarch 31, 2004
    
    
    March 31, 2003Revenue
    
    $
    26,864
    
    
    
    100.0
    %
    
    $
    35,853
    
    
    
    100.0
    %Cost and expensesCost of sales
    
    
    22,175
    
    
    
    82.6
    
    
    
    25,621
    
    
    
    71.5Selling and administrative
    
    
    6,646
    
    
    
    24.7
    
    
    
    5,774
    
    
    
    16.1Research and development
    
    
    1,561
    
    
    
    5.8
    
    
    
    851
    
    
    
    2.4Operating income (loss)
    
    
    (3,518
    )
    
    
    (13.1
    )
    
    
    3,607
    
    
    
    10.0Other income (expense)Interest income
    
    
    101
    
    
    
    0.4
    
    
    
    97
    
    
    
    0.3Interest expense
    
    
    (479
    )
    
    
    (1.8
    )
    
    
    (436
    )
    
    
    (1.2
    )Other  net
    
    
    (349
    )
    
    
    (1.3
    )
    
    
    28
    
    
    
    0.1Earnings (loss) before
income taxes
    
    
    (4,245
    )
    
    
    (15.8
    )
    
    
    3,296
    
    
    
    9.2Income tax expense (benefit)
    
    
    (1,380
    )
    
    
    (5.1
    )
    
    
    1,679
    
    
    
    4.7Net earnings (loss)
    
    $
    (2,865
    )
    
    
    (10.7
    )
    
    $
    1,617
    
    
    
    4.5
 13




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##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2004
(Thousands of Dollars)
(Unaudited)   Revenue.Allied had revenue of $26,864 in the first three months of 2004, which was 25% lower than
its revenue in the first three months of 2003 of $35,853. This decrease was principally
attributable to reduced production activities at MECAR. Revenue by SegmentThree Months Ended
    
    
    Three Months EndedMarch 31, 2004
    
    
    March 31, 2003Percentage
    
    
    
    
    
    
    PercentageAmount
    
    
    of total
    
    
    Amount
    
    
    of totalOrdnance & Manufacturing
    
    $
    15,474
    
    
    
    58
    %
    
    $
    25,863
    
    
    
    72
    %Electronic Security
    
    
    9,330
    
    
    
    35
    %
    
    
    6,731
    
    
    
    19
    %Environmental Safety & Security
    
    
    2,024
    
    
    
    7
    %
    
    
    2,306
    
    
    
    6
    %Software, Training & Simulation
    
    
    36
    
    
    
    
    %
    
    
    953
    
    
    
    3
    %$
    26,864
    
    
    
    100
    %
    
    $
    35,853
    
    
    
    100
    %
 Ordnance & Manufacturing Segment revenue in the first three months of 2004 decreased by 40% from
the comparable period in 2003. The entire decrease occurred at MECAR. MECAR USA did not have any
sales activity and is not expected to be operational until the latter portion of 2004. The sales
decrease at MECAR resulted from the change in accounting for the derivatives as well as lower
production on the approximately $130,000 Foreign Military Sales (FMS) multi-year contract received
in February 2002. The FMS contract provided approximately 50% of MECARs 2004 year-to-date
revenues. During the first three months of 2004, MECAR encountered production delays on the FMS
contract as a result of design and vendor technical issues. Those issues are expected to be
resolved in the second quarter of 2004. MECAR has undertaken a customer diversification effort in
the past few years, which continues to be prolific in 2004. In addition to meeting the ammunition
needs of its traditional customers, MECAR has gained new customers, which will contribute to a
majority of its new orders for 2004. Electronic Security Segment revenue increased by $2,599 from the comparable period in 2003.
Revenue increased at the VSK Group by $1,709 and at NS Microwave by $890. The increase at the VSK
Group stemmed from the continued expansion of its distribution network in Europe, as well as its
strong marketing and business development efforts. In addition, the stronger Euro represented
$1,093 of the increase at the VSK Group. The increase in sales activity at NS Microwave resulted
from work on its strong 2003 year-end backlog. In 2003 NS Microwaves sales activity was adversely
affected by delays in homeland security appropriations. Environmental Safety & Security Segment revenues decreased by $282 from the comparable period in
2003 as a result of increased competition by domestic and foreign competitors. SeaSpaces X band
sales made up the majority of 2004 revenues. SeaSpace has undertaken a product and customer
diversification effort to mitigate the increased competition. Software, Training & Simulation Segment revenues decreased by $917 from the comparable period in
2003 as a result of reduced orders. In the first quarter of 2004, the sales of cartridges
represented the majority of Titan Dynamics sales. Titan Dynamics major product line of Battle
Effects Simulators (BES) is presently undergoing a U.S. Navy/Marine Corp sponsored safety
certification program scheduled for completion in the fourth quarter 2004. This testing will be
accepted by the US Army, thus allowing Titan Dynamics to better compete in the US BES market.
Certification should also accelerate penetration in foreign markets. 14




---



##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2004
(Thousands of Dollars)
(Unaudited)   Cost of Sales.Cost of sales as a percentage of sales for the three months ended March 31, 2004,
was 83% compared with 71% for the same period in 2003. The increase during the three month period
was driven by higher costs within the Ordnance & Manufacturing Segment. Cost of Sales as Percentage of Sales by Segment Three months endedMarch 312004
    
    
    2003Ordnance & Manufacturing
    
    
    100
    %
    
    
    77
    %Electronic Security
    
    
    58
    %
    
    
    54
    %Environmental Safety & Security
    
    
    57
    %
    
    
    62
    %Software, Training & Simulation
    
    
    66
    %
    
    
    63
    %Total
    
    
    83
    %
    
    
    71
    %
 Ordnance & Manufacturing Segment cost of sales as a percentage of sales for the three months ended
March 2004 increased over the same period of 2003 because of the derivative adjustment described
above, lower production activity in 2004 as well as product mix. In addition, MECAR encountered
production delays on the FMS contract as a result of technical issues, resulting in higher than
expected labor and overhead costs. Those issues are expected to be resolved in the second quarter
of 2004. Electronic Security Segment cost of sales as a percentage of sales for the three months ended March
2004 increased over the same period of 2003 due to the fact that NS Microwave incurred higher
material costs associated with using new product components to fulfill customer requirements as
well as replacing components which were discontinued by vendors. In contrast, the VSK Group had
consistent cost of sales as a percentage of sales between 2003 and 2004 as it continues to
experience production efficiencies while expanding its distribution channel throughout Europe. Environmental Safety & Security Segment cost of sales as a percentage of sales decreased from 2003
as a result of the change in product mix and streamlined labor costs. SeaSpace has taken efforts
to right-size its organization and reduce its cost of goods sold in light of the competitive
environment. Software, Training & Simulation Segment cost of sales as a percentage of sales for the three months
ended March 2004 increased over 2003 as a result of the change in product mix and higher labor
costs. Direct labor as a percentage of sales was higher in 2004 because the cartridges are more
labor intensive than BES systems and other products. Titan Dynamics BES systems are presently
undergoing a U.S. Navy/Marine Corp sponsored safety certification program scheduled for completion
in the fourth quarter of 2004. Until the safety certification is obtained, the Company expects the
cartridge sales to represent the majority of total sales. Selling and Administrative Expenses.Selling and administrative expenses as a percentage of sales
for the first three months of 2004 was approximately 25% compared with 16% for the same period in
2003. This resulted from lower production activity in 2004 at MECAR. For the other business
units, costs were higher in the first three months of 2004 across each business unit due primarily
to increased compensation expenses for administrative personnel. The Company expects selling and
administrative expense to continue to increase in proportion to the increase in sales for the
remainder of the year. Research and Development.Research and development costs increased in the first three months of
2004 by 170% over 2003 levels. The total dollar increase was primarily attributed to increased
research being conducted at all the business units, except NS Microwave. Expenditures decreased at
NS Microwave as the staff utilized for R & D efforts were assigned to production efforts during the
quarter. This trend of increased research and development is expected to continue for the
remainder of the year. 15




---



##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2004
(Thousands of Dollars)
(Unaudited)   Interest Income.Interest income increased in the first three months of 2004 by 4% over 2003
levels. The total dollar increase was nominal and was primarily attributed to earnings on interest
bearing cash accounts. Interest Expense.Interest expense increased in the first three months of 2004 by 10% over 2003
levels due principally to increased charges at MECAR. Other-Net.Other-net primarily represents currency gains/losses, resulting from foreign currency
transactions at MECAR and the VSK Group, as well as bank charges related to MECARs performance
bonds and advance payment guarantees, which are generally required under the terms of MECARs
contracts with foreign governments and its distributor. Other-net expense was $349 at March 2004,
compared to Other-net income of $28 at March 2003. This resulted primarily from currency losses in
2004 on MECARs US bank accounts. Pre-Tax Profit (Loss) Pre-Tax Profit (Loss) by SegmentThree months endedMarch 312004
    
    
    2003Ordnance & Manufacturing
    
    $
    (4,190
    )
    
    $
    3,307Electronic Security
    
    
    820
    
    
    
    58Environmental Safety & Security
    
    
    (136
    )
    
    
    8Software, Training & Simulation
    
    
    (179
    )
    
    
    167Corporate and other
    
    
    (560
    )
    
    
    (244
    )$
    (4,245
    )
    
    $
    3,296
 Ordnance & Manufacturing Segment incurred a pre-tax loss for the first three months of 2004
compared to a pre-tax profit for the comparable period in 2003 principally due to the change in
accounting for the derivatives, decreased production activity at MECAR on the FMS contract during
the quarter and work on lower-margin contracts. MECARs profitability for 2004 is expected to be
at lower levels than in prior years due to a lack of high-margin contracts which benefited
2001-2003 results. Electronic Security Segment pre-tax profit for the first three months of 2004 increased from the
comparable period in 2003. Activity at the VSK Group was favorably impacted by increased sales to
non-Belgian customers via the VSK Groups distribution network. NS Microwaves incurred a lower
pre-tax loss as a result of strong orders in the fourth quarter of 2003. Environmental Safety & Security Segment pre-tax loss resulted from increased competitive pressures,
both at home and abroad, as well as increased development costs. SeaSpace has taken efforts to
right-size its organization and reduce its cost of goods sold in light of the competitive
environment. Software, Training & Simulation Segment pre-tax loss in 2004 results from Titan Dynamics principal
product lacking U.S. Government safety certification. Titan Dynamics anticipates receipt of Marine
Corp certification in the fourth quarter of 2004. Corporate and other Segment pre-tax loss for the first three months of 2004 increased over 2003 due
to reduced intercompany management fee adjustments and reduced currency gains. Income Taxes.The effective income tax rate in the first three months of 2004 was a benefit of 5%
compared to an expense of 5% in the same period of 2003. This occurred from the change in
accounting for the derivatives. 16




---



##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2004
(Thousands of Dollars)
(Unaudited)   Net Earnings (Loss).The Company earned a $2,865 net loss in the first three months of 2004
compared with $1,617 net profit in the same period of 2003. The decrease in 2004 resulted
principally from the activities at MECAR, in particular the change in accounting for the
derivatives. The Companys 2004 results were negatively impacted by losses at Microwave, SeaSpace
and Titan Dynamics. Backlog.As of March 31, 2004, the Companys backlog was $106,775 compared to $107,795 at December
31, 2003, and $119,291 at March 31, 2003. The March 31, 2004 and December 31, 2003 amounts
included unfunded portion of approximately $12,000 from an indefinite delivery, indefinite quantity
(IDIQ) federal contract. Backlog by SegmentMarch 31, 2004
    
    
    March 31, 2003Percentage
    
    
    
    
    
    
    PercentageAmount
    
    
    of total
    
    
    Amount
    
    
    Of totalOrdnance & Manufacturing
    
    $
    80,641
    
    
    
    76
    %
    
    $
    108,073
    
    
    
    91
    %Electronic Security
    
    
    23,971
    
    
    
    22
    %
    
    
    9,977
    
    
    
    8
    %Environmental Safety & Security
    
    
    1,644
    
    
    
    2
    %
    
    
    1,008
    
    
    
    1
    %Software, Training & Simulation
    
    
    519
    
    
    
    
    
    
    
    233
    
    
    
    $
    106,775
    
    
    
    100
    %
    
    $
    119,291
    
    
    
    100
    %
 The decrease in backlog is primarily the result of MECARs work on the approximately $130,000 FMS
multi-year contract awarded in February 2002. The backlog associated with this particular contract
will continue to decrease in accordance with the delivery terms of the award. MECAR has undertaken
a customer diversification effort in the past few years, which continues to be prolific in 2004.
In addition to meeting the ammunition needs of its traditional customers, MECAR has gained new
customers which will contribute to a majority of its new orders for 2004. Electronic Security
backlog increased from new contracts received at the VSK Group and NS Microwave. Electronic
Security backlog includes an unfunded portion of approximately $12,000 from an IDIQ federal
contract. Liquidity and Capital Resources Balance Sheet All items on the Companys March 31, 2004 condensed consolidated balance sheet were affected by the
value of the Euro in 2004. All European values were converted at the March 31, 2004 and December
31, 2003 conversion ratios of 1.2178 and 1.2557, respectively. Historically, the Companys positive cash flow from operations and available credit facilities have
provided adequate liquidity and working capital to fully fund the Companys operational needs.
Working capital, which includes restricted cash, was $80,384 at March 31, 2004, which is a decrease
of $8,833 from the December 31, 2003, level. Working capital remains strong due to profitable
operations. Cash at March 31, 2004 decreased by $16,940 from December 31, 2003 as substantial cash was expended
in the first quarter of 2004 to repay current liabilities including MECARs short-term borrowings.
Restricted cash decreased by $11,047 in the first quarter of 2004 due to completion of certain
contracts at MECAR. Accounts receivable at March 31, 2004, decreased $541 from December 31, 2003, due to lower sales in
the first quarter 2004 versus the fourth quarter 2003 and the change in accounting for the
derivatives. Costs and accrued earnings on uncompleted contracts increased from year-end 2003
primarily as a result of continued work on the FMS contract at MECAR and the change in accounting
for the derivatives. Inventories increased $1,081 primarily from higher raw material purchases.
The inventory buildup will give the subsidiaries the ability to deliver products with the shortest
possible lead times. Fair value of foreign exchange contracts was $147 at March 31, 2004, compared
to $6,900 at December 31, 2003. MECAR uses foreign currency derivative contracts to minimize the
foreign currency exposures that arise from sales contracts with certain foreign customers. 17




---



##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2004
(Thousands of Dollars)
(Unaudited)   Prepaid and other current assets increased $937 primarily from capitalized costs on MECARs hedge
contract agreements as well as capitalized funding costs for a proposed senior debt facility at
Corporate. Property, Plant & Equipment, net of accumulated depreciation, decreased primarily from the lower
Euro at March 2004, which affected the balances of MECAR and the VSK Group. All subsidiaries,
except Corporate, purchased equipment during the first three months of 2004. Goodwill decreased
solely from the lower Euro. Notes Payable decreased $14,118 from December 31, 2003 as a result of MECAR paying off its line of
credit and other indebtedness. During 2004, MECAR used its cash from operations for working
capital needs. The outstanding Notes Payable balance is from NS Microwave. Accounts payable
decreased $16,375 as a result of lower production costs, primarily at MECAR, for the three months
ended March 2004 compared to the three months ended December 2003. In contrast, accrued
liabilities increased $13,403 due primarily to the change in accounting for the derivatives.
Customer deposits decreased $1,022 primarily at MECAR as a result of shipments during the period
and other new contracts in 2004 not requiring deposits. Income taxes increased $824 due to the tax
provisions at MECAR and the VSK Group, offset by the tax benefits at NS Microwave, SeaSpace, Titan
Dynamics and Corporate. Convertible-subordinated debenture, current and long-term, was materially unchanged between March
31, 2004, and December 31, 2003. Stockholders equity as of March 31, 2004, was negatively affected by the reduction in the value of
the Euro versus the U.S. dollar during the first three months of 2004, resulting in a decrease in
accumulated other comprehensive income by $2,161. The Euro depreciated by approximately 3% since
the beginning of the year. Cash Flows The table below provides the cash flow statement data for the periods presented. Three months ended March 312004
    
    
    2003Net cash provided by (used in) operating activities
    
    $
    (11,423
    )
    
    $
    16,877Net cash used in investing activities
    
    
    (888
    )
    
    
    (1,157
    )Net cash used in financing activities
    
    
    (4,264
    )
    
    
    (2,781
    )
 Operating Activities.The Company used $11,423 of cash in its operating activities during the
three months ended March 31, 2004 whereas it generated $16,877 of cash during the same period of
2003. This is attributed primarily to reduction in earnings for the three months ended March 2004
and payments of costs and accrued earnings on uncompleted contracts as well as current liabilities,
which are mainly from MECARs and the VSK Groups customer base. Cash paid for interest was $148
and $173, for the three months ended March 31, 2004 and 2003, respectively. Cash paid for income
taxes was $1 and $55 for the three months ended March 31, 2004 and 2003, respectively, and includes
federal, international and state taxes. Investing Activities.Net cash used in investing activities decreased by $269 between the two
periods. This stemmed from lower capital expenditures for production equipment and leasehold
improvements at the Belgian business units. The Company anticipates that cash generated from
operations will be sufficient to support any further capital expenditures over the remainder of the
year. Future expenditures for the remainder of the year will be primarily incurred for machinery
and equipment. Financing Activities.Net cash used in financing activities decreased by $1,483 between the two
periods. This stemmed from payment of short-term borrowings offset by increased restricted cash,
which primarily pertained to MECAR operations. 18




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The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2004
(Thousands of Dollars)
(Unaudited)   Allied.The parent company continues to operate based on fees and dividends received from its
subsidiaries. In the first quarter of 2004, Allied has made cash infusions to NS Microwave, Titan
Dynamics and SeaSpace to support working capital requirements. MECAR.MECAR continues to operate from internally generated cash and funds provided by its bank
syndicate and financing from capital leases. The bank syndicate agreement provides (i) lines of
credit for tax prepayments and working capital and (ii) a facility for guarantees/bonds to support
customer contracts. The financial lending terms and fees are denominated in Euros and the dollar
equivalents will fluctuate according to global economic conditions. The bank agreement imposes two
financial covenants requiring MECAR to maintain minimum net worth and working capital levels. As
of March 31, 2004, MECAR was in compliance with both of these bank covenants. MECARs obligations
under the bank syndicate agreement continue to be collateralized by a pledge of MECARs assets.
The agreement includes Allieds pledge to support MECAR so that it remains in compliance with its
total borrowing obligations. VSK Group.The VSK Group operated solely from cash generated from business operations. The VSK
Group is obligated on several mortgages and other long-term obligations. Other Subsidiaries.NS Microwave, Titan Dynamics and SeaSpace operated from cash generated from
operations and cash infusions by Allied. Stock Repurchases.The Company did not repurchase any shares of its common stock during the three
months ended March 31, 2004 and does not anticipate repurchasing shares of Company stock during the
remainder of 2004. Future Liquidity.The Company continues to explore alternate methods of securing the necessary
financial capacity to implement its growth plans. At times, the Company has utilized the services
of an Investment Banker in an attempt to secure a senior credit facility for its U.S. based
operations. Funds for the build out of the initial MECAR USA infrastructure are being provided by the Marshall
Economic Development Corporation of Marshall, Texas. This is a state funded organization with the
initial proceeds directed at creating roads and a manufacturing plant on the grounds. The Companys ability to cover its anticipated future operating and capital requirements is
dependent upon its continued ability to generate positive cash flow from the operations of its
subsidiaries, particularly the operations of MECAR and the VSK Group, and its ability to
successfully integrate its acquisitions. The Company expects its acquisitions to be accretive to
operations over a period of not longer than 24 months, although this cannot be assured. This will
depend upon many factors including the successful release of new product offerings, successful
research and development efforts, and increased market share. Off-Balance Sheet Arrangements.As part of our ongoing business, we do not participate in
transactions that generate relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose entities (SPEs),
which would have been established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes. As of March 31, 2004, we are not involved in any
material unconsolidated SPE transactions. MECAR is required to provide performance bonds and
advance payment guarantees for certain contracts, which are provided by MECARs bank syndicate.
MECAR is obligated to repay the bank syndicate any amounts it pays as a result of any demands on
the bonds or guarantees. To date, there have never been any such demands. 19




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The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2004
(Thousands of Dollars)
(Unaudited)   Critical Accounting Policies Our significant accounting policies are described in Note A to the consolidated financial
statements included in Item 7 of the Form 10-K for the year ended December 31, 2003, and are
outlined below:  
    Revenue recognition via the percentage of completion method.The
percentage of completion method is used by MECAR, NS Microwave and
SeaSpace for their fixed price sales contracts. Approximately 71%
and 81% of condensed consolidated revenue was recognized under the
percentage of completion method during the three months ended
March 31, 2004 and 2003, respectively.
    Goodwill and intangible asset valuation.The Company completed a
goodwill impairment analysis in the fourth quarter of 2003 and did
not determine that an impairment charge to earnings was required.
As required by the accounting rules, the Company will perform a
similar review each year or earlier if indicators of potential
impairment exist. As of March 31, 2004, there were no indicators
of impairment.
    Inventory reserves and allowance for doubtful accounts.The
Company reviews its recorded inventory and estimates a write-down
for obsolete or slow-moving items to their net realizable value.
Allowances for doubtful accounts are evaluated based upon detailed
analysis and assessment of receivables that may not be collected
in the normal course of operations. The inventory reserves and
allowance for doubtful accounts are deemed reasonable.
    Derivative Instruments.The Company designates its derivatives
based upon the criteria established by Statement of Financial
Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133), which establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS 133, as amended by
SFAS 138 and SFAS 149, requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
The accounting for the changes in the fair value of the derivative
depends on the intended use of the derivative and the resulting
designation. For a derivative designated as a fair value hedge,
the gain or loss is recognized in earnings in the period of change
together with the offsetting loss or gain on the risk being
hedged. For a derivative designated as a cash flow hedge, the
effective portion of the derivatives gain or loss is initially
reported as a component of accumulated other comprehensive income
(loss) and is subsequently reclassified to earnings when the hedge
exposure effects earnings. The ineffective portion of the hedge
is reported in earnings immediately. For a derivative that does
not qualify as a fair value hedge or cash flow hedge, the change
in fair value is recognized currently in net income.
    Valuation of deferred income taxes and income tax reserves.The
Company is subject to taxation by federal, state and international
jurisdictions. The Company reviews the balances on a quarterly
basis and believes the balances are adequate. Forward-Looking Statements This Managements Discussion and Analysis contains forward-looking statements that are based on
current expectations, estimates and projections about the Company and the industries in which it
operates. In addition, other written or oral statements which constitute forward-looking
statements may be made by or on behalf of the Company. Words such as expects, anticipates,
intends, plans, believes, seeks, estimates, or variations of such words and similar
expressions are intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and assumptions (Future
Factors) which are difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecast in such forward-looking statements. The Company
undertakes no obligation to update publicly any forward-looking statements, whether as a result of
new information, future events or otherwise. 20




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The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2004
(Thousands of Dollars)
(Unaudited)   Future Factors include the following:  
    substantial reliance on MECARs principal customers to continue to acquire products on a regular basis;
    the cyclical nature of the Companys military business;
    rapid technological developments and changes and the Companys ability to continue to introduce competitive
new products and services on a timely, cost effective basis;
    the ability of the Company to successfully continue to expand its business base;
    the ability of the Companys acquired businesses to mature and meet performance expectations;
    the mix of products/services;
    domestic and foreign governmental fiscal affairs and public policy changes which may affect the level of
purchases made by customers;
    changes in environmental and other domestic and foreign governmental regulations;
    general risks associated with doing business outside the United States, including, without limitation,
import duties, tariffs, quotas and political and economic instability;
    the effects of terrorist actions on business activities, customer orders and cancellations, and the United
States and international governments responses to these terrorist actions;
    changes in government regulations;
    liability and other claims asserted against us;
    the ability to attract and retain qualified personnel; and
    continued availability of financing, financial instruments and financial resources in the amounts, at the
times, and on the terms required to support the Companys future business. We operate in a very competitive and rapidly changing environment. New risk factors can arise and
it is not possible for management to predict all such risk factors, nor can it assess the impact of
all such risk factors on our business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results. 21




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The Allied Defense Group, Inc. March 31, 2004   QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE At March 31, 2004, Allied had $31 million of cash (including restricted cash). Assuming all the
cash was available for investment, a 1% change in interest rates would impact interest income for
the three months ended March 31, 2004 and 2003 by less than $0.1 million. Approximately 86% and 89% of the Companys revenue for the three months ended March 31, 2004 and
2003, respectively, was derived from operations outside the U.S. Accordingly, exposure exists to
potentially adverse movement in foreign currency rates. It is estimated that a 10% change in the
value of the Euro would impact reported net earnings (loss) for the three months ended March 31,
2004 and 2003 by approximately $0.2 million, respectively. DISCLOSURE CONTROLS AND PROCEDURES The following has been amended to reflect the restatement of the Companys consolidated financial
statements as discussed further in the Explanatory Note and in Note 1 of the Notes to Consolidated
Financial Statements.  1.
    Evaluation of disclosure controls and proceduresThe Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports filed or submitted under the Securities
Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and
reported within the time periods specified in the Commissions rules and forms. Disclosure
controls and procedures are designed to ensure that information required to be disclosed by the
Company in its Exchange Act reports is accumulated and communicated to the Companys management
including its principal executive and financial officers, as appropriate to allow timely
decisions regarding required disclosure. Under the direction and with the participation of the
Companys management, including the Companys 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. In connection with the annual audit for calendar year 2004,
management concluded that its internal control over financial reporting was ineffective due to
its method of accounting for foreign currency contracts. As a result, the Chief Executive
Officer and the Chief Financial Officer have concluded that the disclosure controls and
procedures were not effective.2.
    Changes in internal controlsExcept as set forth above, there have been no significant changes in our internal controls over
financial reporting or, to our knowledge, in other factors that occurred during the last quarter
that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting. 22




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The Allied Defense Group, Inc.
PART II - OTHER INFORMATION
March 31, 2004   Item 6 Exhibits and Reports on Form 8-K  (a)
    Reports on Form 8-KOn February 26, 2004, the Company filed a Form 8-K reporting its 2004 outlook from the Chief
Executive Officer in a letter to shareholders.On March 2, 2004, the Company filed a Form 8-K providing its financial results for the year
ended December 31, 2003. (b)
    
    Exhibit No.
    
    Description of Exhibits3.1
    
    
    Certificate of Incorporation, as amended (Incorporated by reference from Form 10-Q filed in August 2002).3.2
    
    
    By-Laws (Incorporated by reference from Form 10-Q filed in August 2002).3.3
    
    
    Rights Agreement between Allied and Mellon Investor Services, LLC (Incorporated by reference from Form 8-K filed in June 2001).10.1
    
    
    Employment Agreement between Allied and John G. Meyer, Jr. (Incorporated by reference from Form 8-K filed in March 2001 and Form 8-K filed in August 2001).10.2
    
    
    Employment Agreement between Allied and Charles A. Hasper (Incorporated by reference from Form 8-K filed in August 2001).10.3
    
    
    Employment Agreement between Allied and Monte L. Pickens (Incorporated by reference
from Form 8-K filed in April 2003).10.4
    
    
    2001 Equity Incentive Plan, as amended (Incorporated by reference from Proxy Statements
filed in April 2001 and April 2002).10.5
    
    
    8% Convertible Debenture, Series A and related documents (Incorporated by reference
from Form 8-K filed in July 2002).10.6
    
    
    Credit Agreement for MECAR S.A. (Incorporated by reference from Form 10-Q filed in
August 2002).10.7
    
    
    Award/Contract dated as of March 1, 2002, by and between MECAR S.A. and U.S. Government
(Incorporated by reference from Form 10-Q filed in August 2002).10.8
    
    
    Employee Stock Purchase Plan, as amended (Incorporated by reference from Form 10-Q
filed in November 2002).10.9
    
    
    Lease Agreement, as amended (Incorporated by reference from Form 10-Q filed in November
2002).10.10
    
    
    Form of Indemnity Agreement for Directors and Executive Officers (Incorporated by
reference from Form 10-Q filed in November 2002).10.11
    
    
    International Distribution Agreement (Incorporated by reference from Form 10-Q filed
in November 2002).21
    
    
    List of Subsidiaries23
    
    
    Consent of Independent Certified Public Accountants31.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 200232
    
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
 23




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The Allied Defense Group, Inc. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned
thereunto duly authorized. THE ALLIED DEFENSE GROUP, INC./s/ Charles A. HasperDate: April 25, 2005
    Charles A. Hasper,Chief Financial Officer and
Treasurer 24