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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 September 30, 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
    
    (I.R.S. Employer Number)incorporation or organization)
 120 E. Baltimore Street, Suite 2100
Baltimore, MD 21202
 (Address of principal executive offices, including zip code)  (703) 847-5268
 (Registrants telephone number, including area code)
 None
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 þ o




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##### 



THE ALLIED DEFENSE GROUP, INC.
INDEX
 PAGENUMBERPART I. FINANCIAL INFORMATION  UNAUDITEDItem 1. Financial Statements (Unaudited)Consolidated Statement of Net Assets as of September 30, 2010 (liquidation basis)
    
    
    2Consolidated Statement of Changes in Net Assets September 30, 2010 (liquidation basis)
    
    
    3Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009
    
    
    4Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2010 and 2009
    
    
    5Condensed Consolidated Statements of Stockholders Equity and Comprehensive Loss for
the nine months ended September 30, 2010 and the year ended December 31, 2009
    
    
    6Condensed Consolidated Statements of Cash Flows for the nine months ended September
30, 2010 and 2009
    
    
    7Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    27Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3. Defaults Upon Senior Securities
    
    
    28Item 4. (Reserved)
    
    
    28Item 5. Other Information
    
    
    28Item 6. Exhibits
    
    
    28Signatures
    
    
    29Exhibit 31.1Exhibit 31.2Exhibit 32




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The Allied Defense Group, Inc.
 
 CONSOLIDATED STATEMENT OF NET ASSETS (Liquidation Basis)
(Unaudited)
(Thousands of Dollars, except per share and share data)
 September 30,2010ASSETSCash and cash equivalents
    
    $
    14,875Short-term investments
    
    
    20,000Prepaid and other current assets
    
    
    1,117Funds held in escrow
    
    
    15,000TOTAL ASSETS
    
    $
    50,992LIABILITIESEstimated net costs to be incurred during liquidation
    
    $
    4,000Accounts payable
    
    
    364Accrued liabilities
    
    
    446Income taxes
    
    
    132Other liabilities
    
    
    396TOTAL LIABILITIES
    
    $
    5,338NET ASSETS IN LIQUIDATION
    
    $
    45,654NUMBER OF SHARES OUTSTANDING
    
    
    8,235,193NET ASSETS IN LIQUIDATION PER SHARE
    
    $
    5.54
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
  2




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The Allied Defense Group, Inc.
 
 CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS (Liquidation Basis)
(Unaudited)
(Thousands of Dollars, except per share and share data)
 September 30, 2010Shareholders equity at September 30, 2010
    
    $
    49,671Liquidation basis adjustmentsAdjust assets to fair value
    
    
    (17
    )Accrue estimated costs to be incurred during liquidation
    
    
    (4,500
    )Estimated interest income earned during liquidation
    
    
    500NET ASSETS IN LIQUIDATION AT SEPTEMBER 30, 2010
    
    $
    45,654
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
  3




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The Allied Defense Group, Inc.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS

(Going Concern Basis)
(Unaudited)
(Thousands of Dollars, except per share and share data)
 September 30,
    
    
    December 31,2010
    
    
    2009 (a)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    14,875
    
    
    $
    3,475Restricted cash
    
    
    
    
    
    
    234Short-term investments
    
    
    20,000
    
    
    
    Prepaid and other current assets
    
    
    1,117
    
    
    
    400Assets held for sale
    
    
    
    
    
    
    95,689Total current assets
    
    
    35,992
    
    
    
    99,798Property, Plant and Equipment, net
    
    
    17
    
    
    
    31Other AssetsFunds held in escrow
    
    
    15,000
    
    
    
    Note receivable
    
    
    
    
    
    
    1,075Total other assets
    
    
    15,000
    
    
    
    1,075TOTAL ASSETS
    
    $
    51,009
    
    
    $
    100,904CURRENT LIABILITIESCurrent maturities of long-term debt
    
    $
    4
    
    
    $
    5Accounts payable
    
    
    364
    
    
    
    696Accrued liabilities
    
    
    442
    
    
    
    2,936Income taxes
    
    
    132
    
    
    
    495Other current liabilities
    
    
    311
    
    
    
    Liabilities held for sale
    
    
    
    
    
    
    69,220Total current liabilities
    
    
    1,253
    
    
    
    73,352LONG TERM OBLIGATIONSLong-term debt, less current maturities and unrealized discounts
    
    
    
    
    
    
    2Other long-term liabilities
    
    
    85
    
    
    
    263Total long-term obligations
    
    
    85
    
    
    
    265TOTAL LIABILITIES
    
    
    1,338
    
    
    
    73,617CONTINGENCIES 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, 8,235,193 at September 30, 2010 and 8,175,480 at December
31, 2009
    
    
    824
    
    
    
    818Capital in excess of par value
    
    
    56,698
    
    
    
    56,490Accumulated deficit
    
    
    (21,802
    )
    
    
    (46,382
    )Accumulated other comprehensive income
    
    
    13,951
    
    
    
    16,361Total stockholders equity
    
    
    49,671
    
    
    
    27,287TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    51,009
    
    
    $
    100,904
 (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.
  4




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The Allied Defense Group, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 
(Going Concern Basis)
(Unaudited)
(Thousands of Dollars, except per share and share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2010
    
    
    September 30, 2009
    
    
    September 30, 2010
    
    
    September 30, 2009Revenue
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Cost and expensesSelling and administrative
    
    
    3,001
    
    
    
    1,638
    
    
    
    7,469
    
    
    
    4,729Operating loss
    
    
    (3,001
    )
    
    
    (1,638
    )
    
    
    (7,469
    )
    
    
    (4,729
    )Other income (expenses)Net interest income (expense)
    
    
    26
    
    
    
    9
    
    
    
    38
    
    
    
    11Net gain (loss) on fair value of warrants
    
    
    
    
    
    
    10
    
    
    
    (17
    )
    
    
    257Other-net
    
    
    (1,372
    )
    
    
    2
    
    
    
    (1,358
    )
    
    
    3(1,346
    )
    
    
    21
    
    
    
    (1,337
    )
    
    
    271Loss from continuing operations before income taxes
    
    
    (4,347
    )
    
    
    (1,617
    )
    
    
    (8,806
    )
    
    
    (4,458
    )Income tax expense (benefit)
    
    
    
    
    
    
    (4
    )
    
    
    1
    
    
    
    (199
    )Loss from continuing operations
    
    
    (4,347
    )
    
    
    (1,613
    )
    
    
    (8,807
    )
    
    
    (4,259
    )Income (loss) from discontinued operations, net of taxGain on sale of subsidiaries
    
    
    48,055
    
    
    
    44
    
    
    
    47,805
    
    
    
    1,856Loss from discontinued operations
    
    
    (4,307
    )
    
    
    (1,695
    )
    
    
    (14,418
    )
    
    
    (18
    )Net income (loss) from discontinued operations
    
    
    43,748
    
    
    
    (1,651
    )
    
    
    33,387
    
    
    
    1,838NET INCOME (LOSS)
    
    $
    39,401
    
    
    $
    (3,264
    )
    
    $
    24,580
    
    
    $
    (2,421
    )Earnings (Loss) per share  basic and diluted:Net earnings (loss) from continuing operations
    
    $
    (0.53
    )
    
    $
    (0.20
    )
    
    $
    (1.08
    )
    
    $
    (0.53
    )Net earnings (loss) from discontinued operations, net of tax
    
    
    5.35
    
    
    
    (0.20
    )
    
    
    4.08
    
    
    
    0.23Total earnings (loss) per share  basic and diluted
    
    $
    4.82
    
    
    $
    (0.40
    )
    
    $
    3.00
    
    
    $
    (0.30
    )Weighted average number of common shares:Basic
    
    
    8,177,559
    
    
    
    8,143,661
    
    
    
    8,175,580
    
    
    
    8,102,913Diluted
    
    
    8,177,559
    
    
    
    8,143,661
    
    
    
    8,182,279
    
    
    
    8,102,913
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
  5




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The Allied Defense Group, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS 
(Going Concern Basis)
(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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,031
    )
    
    
    
    
    
    
    (8,031
    )Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    279
    
    
    
    279Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,752
    )Balance at December 31, 2009
    
    $
    
    
    
    
    8,175,480
    
    
    $
    818
    
    
    $
    56,490
    
    
    $
    (46,382
    )
    
    $
    16,361
    
    
    $
    27,287Common stock awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138
    
    
    
    
    
    
    
    
    
    
    
    138Forfeited stocks
    
    
    
    
    
    
    (1,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Retired stocks
    
    
    
    
    
    
    (830
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issue of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    33Directors deferred stock compensation
    
    
    
    
    
    
    61,543
    
    
    
    6
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    43Comprehensive income:Net income for the nine months ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,580
    
    
    
    
    
    
    
    24,580Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,410
    )
    
    
    (2,410
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,170Balance at September 30, 2010
    
    $
    
    
    
    
    8,235,193
    
    
    $
    824
    
    
    $
    56,698
    
    
    $
    (21,802
    )
    
    $
    13,951
    
    
    $
    49,671
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
  6




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The Allied Defense Group, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
(Going Concern Basis)
(Unaudited)
(Thousands of Dollars)
 Nine Months EndedSeptember 30, 2010
    
    
    September 30, 2009Cash flows from operating activitiesNet income (loss)
    
    $
    24,580
    
    
    $
    (2,421
    )Less: Gain on sale of subsidiaries
    
    
    (47,805
    )
    
    
    (1,856
    )Discontinued operations, net of tax
    
    
    14,418
    
    
    
    18Loss from continuing operations
    
    
    (8,807
    )
    
    
    (4,259
    )Adjustments to reconcile net loss from continuing operations to net cash used in operating activities, net of divestitures:Depreciation and amortization
    
    
    13
    
    
    
    124Loss on sale of fixed assets
    
    
    1
    
    
    
    Net loss (gain) related to fair value of warrants
    
    
    17
    
    
    
    (257
    )Common stock and stock option awards
    
    
    171
    
    
    
    322Deferred director stock awards
    
    
    43
    
    
    
    82(Increase) decrease in operating assets and increase (decrease) in liabilities, net
of effects from discontinued businessesRestricted cash
    
    
    160
    
    
    
    Prepaid and other current assets
    
    
    88
    
    
    
    584Accounts payable, accrued liabilities and other current liabilities
    
    
    (62
    )
    
    
    1,086Customer deposits
    
    
    
    
    
    
    7Deferred compensation
    
    
    (156
    )
    
    
    4Income taxes
    
    
    (363
    )
    
    
    (284
    )Net cash used in operating activities  continuing operations
    
    
    (8,895
    )
    
    
    (2,591
    )Net cash used in operating activities  discontinued operations
    
    
    
    
    
    
    (7,030
    )Net cash used in operating activities
    
    
    (8,895
    )
    
    
    (9,621
    )Cash flows from investing activitiesNet proceeds from sale of subsidiaries
    
    
    54,446
    
    
    
    2,023Funds deposited in escrow
    
    
    (15,000
    )
    
    
    Net cash used for short-term investment transactions
    
    
    (20,000
    )
    
    
    Net cash provided by investing activities  continuing operations
    
    
    19,446
    
    
    
    2,023Net cash used in investing activities  discontinued operations
    
    
    
    
    
    
    (1,082
    )Net cash provided by investing activities
    
    
    19,446
    
    
    
    941Cash flows from financing activitiesPrincipal payments on senior convertible notes
    
    
    
    
    
    
    (928
    )Net principal payments on long-term debt and capital lease obligations
    
    
    (1
    )
    
    
    (5
    )Proceeds from employee stock purchases
    
    
    
    
    
    
    54Net cash used in financing activities  continuing operations
    
    
    (1
    )
    
    
    (879
    )Net cash provided by financing activities  discontinued operations
    
    
    
    
    
    
    5,441Net cash (used in) provided by financing activities
    
    
    (1
    )
    
    
    4,562Effects of exchange rate on cash
    
    
    850
    
    
    
    51NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    11,400
    
    
    
    (4,067
    )Cash and cash equivalents at beginning of period
    
    
    3,475
    
    
    
    5,663Cash and cash equivalents at end of period
    
    $
    14,875
    
    
    $
    1,596Supplemental Disclosures of Cash Flow information
    
    September 30, 2010
    
    September 30, 2009Cash paid during the period forInterest
    
    $
    13
    
    
    $
    13Taxes
    
    $
    373
    
    
    $
    24
 The accompanying notes are an integral part of these unaudited condensed consolidated statements.
  7




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The Allied Defense Group, Inc.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Thousands of Dollars)
 NOTE 1  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
       8




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The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Thousands of Dollars)
     NOTE 2  PRINCIPLES OF CONSOLIDATION
  
    
    ARC Europe, S.A. (ARC Europe), a Belgian company,
    
    Allied Research BV (BV), a Dutch company, and
    
    Allied Research Cooperative (Coop), a Dutch
company.
   NOTE 3  DISCONTINUED OPERATIONS
   9




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The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Thousands of Dollars)
 Mecar and Mecar USA
  NS Microwave Systems, Inc.
   December 31, 2009Mecar
    
    
    Mecar USA
    
    
    TotalCash
    
    $
    5,546
    
    
    $
    
    
    
    $
    5,546Restricted cash
    
    
    5,364
    
    
    
    
    
    
    
    5,364Accounts receivable, net
    
    
    21,786
    
    
    
    7,124
    
    
    
    28,910Costs and accrued earnings on
uncompleted contracts
    
    
    14,402
    
    
    
    
    
    
    
    14,402Contract in progress
    
    
    
    
    
    
    179
    
    
    
    179Inventories, net
    
    
    18,908
    
    
    
    949
    
    
    
    19,857Prepaid and other current assets
    
    
    3,942
    
    
    
    337
    
    
    
    4,279Property, Plant and Equipment, net
    
    
    14,124
    
    
    
    2,391
    
    
    
    16,515Other assets
    
    
    636
    
    
    
    1
    
    
    
    637Assets held for sale
    
    $
    84,708
    
    
    $
    10,981
    
    
    $
    95,689Bank overdraft facility
    
    $
    2,635
    
    
    $
    
    
    
    $
    2,635Accounts payable
    
    
    13,084
    
    
    
    3,649
    
    
    
    16,733Accrued liabilities
    
    
    18,889
    
    
    
    632
    
    
    
    19,521Customer deposits
    
    
    15,589
    
    
    
    385
    
    
    
    15,974Other liabilities
    
    
    5,517
    
    
    
    
    
    
    
    5,517Long-term debt
    
    
    8,804
    
    
    
    36
    
    
    
    8,840Liabilities held for sale
    
    $
    64,518
    
    
    $
    4,702
    
    
    $
    69,220
   10




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The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Thousands of Dollars)
  Three Months Ended
    
    
    Three Months EndedSeptember 30, 2010
    
    
    September 30, 2009Mecar
    
    
    Mecar USA
    
    
    NSM
    
    
    Total
    
    
    Mecar
    
    
    Mecar USA
    
    
    NSM
    
    
    TotalRevenue
    
    $
    6,979
    
    
    $
    1,670
    
    
    $
    
    
    
    $
    8,649
    
    
    $
    19,054
    
    
    $
    16,415
    
    
    $
    315
    
    
    $
    35,784Loss before taxes
    
    
    (4,035
    )
    
    
    (272
    )
    
    
    
    
    
    
    (4,307
    )
    
    
    (2,776
    )
    
    
    1,195
    
    
    
    (114
    )
    
    
    (1,695
    )Loss, net of tax
    
    
    (4,035
    )
    
    
    (272
    )
    
    
    
    
    
    
    (4,307
    )
    
    
    (2,776
    )
    
    
    1,195
    
    
    
    (114
    )
    
    
    (1,695
    )Discontinued operations, net of tax
    
    $
    (4,035
    )
    
    $
    (272
    )
    
    $
    
    
    
    $
    (4,307
    )
    
    $
    (2,776
    )
    
    $
    1,195
    
    
    $
    (114
    )
    
    $
    (1,695
    )
 Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2010
    
    
    September 30, 2009Mecar
    
    
    Mecar USA
    
    
    NSM
    
    
    Total
    
    
    Mecar
    
    
    Mecar USA
    
    
    NSM
    
    
    TotalRevenue
    
    $
    38,477
    
    
    $
    9,342
    
    
    $
    
    
    
    $
    47,819
    
    
    $
    68,767
    
    
    $
    46,398
    
    
    $
    2,894
    
    
    $
    118,059Income (loss) before taxes
    
    
    (14,122
    )
    
    
    (287
    )
    
    
    
    
    
    
    (14,409
    )
    
    
    (1,554
    )
    
    
    3,215
    
    
    
    (1,675
    )
    
    
    (14
    )Income (loss), net of tax
    
    
    (14,122
    )
    
    
    (296
    )
    
    
    
    
    
    
    (14,418
    )
    
    
    (1,554
    )
    
    
    3,215
    
    
    
    (1,679
    )
    
    
    (18
    )Discontinued operations, net of tax
    
    $
    (14,122
    )
    
    $
    (296
    )
    
    $
    
    
    
    $
    (14,418
    )
    
    $
    (1,554
    )
    
    $
    3,215
    
    
    $
    (1,679
    )
    
    $
    (18
    )
 NOTE 4  SHORT-TERM INVESTMENTS
  NOTE 5  LONG-TERM OBLIGATIONS
  NOTE 6  WARRANTS
 Derivatives and Hedging
  11




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Thousands of Dollars)
 NOTE 7  FAIR VALUE MEASUREMENTS
   
 
 
   Quoted Prices in ActiveMarkets for Identical
    
    
    Significant Other
    
    
    SignificantAssets or Liabilities
    
    
    Observable Inputs
    
    
    Unobservable InputsSeptember 30, 2010
    
    (level 1)
    
    
    (level 2)
    
    
    (Level 3)
    
    
    TotalAssetsShort-term investments
    
    $
    20,000,000
    
    
    $
    
    
    
    $
    
    
    
    $
    20,000,000LiabilitiesDerivative instruments
    
    $
    
    
    
    $
    (42
    )
    
    $
    
    
    
    $
    (42
    )Net assets
    
    $
    20,000,000
    
    
    $
    (42
    )
    
    $
    
    
    
    $
    19,999,958Quoted Prices in ActiveMarkets for Identical
    
    
    Significant Other
    
    
    SignificantAssets or Liabilities
    
    
    Observable Inputs
    
    
    Unobservable InputsDecember 31, 2009
    
    (level 1)
    
    
    (level 2)
    
    
    (Level 3)
    
    
    TotalLiabilitiesDerivative instruments
    
    $
    
    
    
    $
    (24
    )
    
    $
    
    
    
    $
    (24
    )$
    
    
    
    $
    (24
    )
    
    $
    
    
    
    $
    (24
    )
   12




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Thousands of Dollars)
 NOTE 8  EARNINGS (LOSS) PER SHARE
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2010
    
    
    September 30, 2009
    
    
    September 30, 2010
    
    
    September 30, 2009Net loss from continuing operations
    
    $
    (4,347
    )
    
    $
    (1,613
    )
    
    $
    (8,807
    )
    
    $
    (4,259
    )Net earnings from discontinued operations, net of tax
    
    
    43,748
    
    
    
    (1,651
    )
    
    
    33,387
    
    
    
    1,838Total earnings (loss)
    
    
    39,401
    
    
    
    (3,264
    )
    
    
    24,580
    
    
    
    (2,421
    )Number of shares:Weighted average shares outstanding
    
    
    8,177,559
    
    
    
    8,143,661
    
    
    
    8,175,580
    
    
    
    8,102,913Effect of dilutive potential common sharesStock Options
    
    
    
    
    
    
    
    
    
    
    6,699
    
    
    
    Weighted average number of diluted shares
    
    
    8,177,559
    
    
    
    8,143,661
    
    
    
    8,182,279
    
    
    
    8,102,913Basic and diluted net earnings (loss) per share from continuing operations
    
    $
    (0.53
    )
    
    $
    (0.20
    )
    
    $
    (1.08
    )
    
    $
    (0.53
    )Basic and diluted net earnings (loss) per share from discontinued operations
    
    
    5.35
    
    
    
    (0.20
    )
    
    
    4.08
    
    
    
    0.23Basic and diluted net earnings (loss) per share from continuing operations
    
    $
    4.82
    
    
    $
    (0.40
    )
    
    $
    3.00
    
    
    $
    (0.30
    )
  For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30, 2010
    
    
    September 30, 2009
    
    
    September 30, 2010
    
    
    September 30, 2009Warrants
    
    
    411,593
    
    
    
    411,593
    
    
    
    411,593
    
    
    
    411,593Unvested stock awards
    
    
    
    
    
    
    6,000
    
    
    
    
    
    
    
    6,000Stock options
    
    
    6,699
    
    
    
    398
    
    
    
    
    
    
    
    7,631Total
    
    
    418,292
    
    
    
    417,991
    
    
    
    411,593
    
    
    
    425,224
 NOTE 9  COMPREHENSIVE LOSS
  Three Months Ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income (loss)
    
    $
    39,401
    
    
    $
    (3,264
    )
    
    $
    24,580
    
    
    $
    (2,421
    )Currency Translation Adjustment
    
    
    54
    
    
    
    961
    
    
    
    (2,410
    )
    
    
    928Comprehensive income (loss)
    
    $
    39,455
    
    
    $
    (2,303
    )
    
    $
    22,170
    
    
    $
    (1,493
    )
   13




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Thousands of Dollars)
 NOTE 10  OTHER - NET
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net currency transaction gains (losses)
    
    $
    (1,374
    )
    
    $
    
    
    
    $
    (1,368
    )
    
    $
    (1
    )Miscellaneous  net
    
    
    2
    
    
    
    2
    
    
    
    10
    
    
    
    4$
    (1,372
    )
    
    $
    2
    
    
    $
    (1,358
    )
    
    $
    3
 NOTE 11  SHARE- BASED COMPENSATION
    September 30, 2009Risk free interest rate
    
    
    0.80
    %Expected volatility rate
    
    
    70.71
    %Expected lives  years
    
    
    1Dividend yield
    
    
    
  NOTE 12  INDUSTRY SEGMENTS
    14




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Thousands of Dollars)
 NOTE 13  PROVISION FOR TAXES
 Interim Financial Reporting
    Accounting for Income Taxes.
  NOTE 14  COMMITMENTS AND CONTINGENCIES
     15




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Thousands of Dollars)
 Legal Proceedings
 DOJ Subpoena
     Litigation Relating to Consulting Agreement
  Pending Claim of a Former Employee
  Indemnification provisions
 
  16




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Thousands of Dollars)
   17




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2010
(Thousands of Dollars)
(Unaudited)
 
 ITEM 2. MANGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
      18




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The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2010
(Thousands of Dollars)
(Unaudited)
   Net Assets in Liquidation and Changes in Net Assets in Liquidation
  Results of Operations
  Results of Operations for the Three Month Ended September 30, 2010 and September 30, 2009
   19




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2010
(Thousands of Dollars)
(Unaudited)
  Three Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009Cost and expensesSelling and administrative
    
    $
    (3,001
    )
    
    $
    (1,638
    )Other income (expenses)Net interest income (expense)
    
    
    26
    
    
    
    9Net gain (loss) on fair value of warrants
    
    
    
    
    
    
    10Other-net
    
    
    (1,372
    )
    
    
    2Loss from continuing operations before income taxes
    
    
    (4,347
    )
    
    
    (1,617
    )Income tax expense (benefit)
    
    
    
    
    
    
    (4
    )Loss from continuing operations
    
    
    (4,347
    )
    
    
    (1,613
    )Income (loss) from discontinued operations, net of tax
    
    
    43,748
    
    
    
    (1,651
    )NET INCOME (LOSS)
    
    $
    39,401
    
    
    $
    (3,264
    )
 Selling and Administrative.
 Net Interest Income (Expense).
 Net Gain (Loss) on Fair Value of the Warrants.
 Other  Net.
 Income Taxes. Accounting for Income Taxes in Interim periods
  20




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2010
(Thousands of Dollars)
(Unaudited)
 Net Income (Loss) from Discontinued Operations.
 Three months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009Income (loss) from discontinued operationsMecar
    
    $
    (4,035
    )
    
    $
    (2,775
    )Mecar USA
    
    
    (272
    )
    
    
    1,194NSM
    
    
    
    
    
    
    (114
    )$
    (4,307
    )
    
    $
    (1,695
    )Gain on the sale of subsidiaries, net of tax
    
    $
    48,055
    
    
    $
    44Net gain (loss) from discontinued operations
    
    $
    43,748
    
    
    $
    (1,651
    )
  Results of Operations for the Nine Months Ended September 30, 2010 and September 30, 2009
  Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009Cost and expensesSelling and administrative
    
    $
    (7,469
    )
    
    $
    (4,729
    )Other income (expenses)Net interest income (expense)
    
    
    38
    
    
    
    11Net gain (loss) on fair value of warrants
    
    
    (17
    )
    
    
    257Other-net
    
    
    (1,358
    )
    
    
    3Loss from continuing operations before income taxes
    
    
    (8,806
    )
    
    
    (4,458
    )Income tax expense (benefit)
    
    
    1
    
    
    
    (199
    )Loss from continuing operations
    
    
    (8,807
    )
    
    
    (4,259
    )Income from discontinued operations, net of tax
    
    
    33,387
    
    
    
    1,838NET INCOME (LOSS)
    
    $
    24,580
    
    
    $
    (2,421
    )
  21




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2010
(Thousands of Dollars)
(Unaudited)
 Selling and Administrative.
 Net Interest Income (Expense).
 Net Gain (Loss) on Fair Value of the Warrants.
 Other  Net.
 Income Taxes. Accounting
for Income Taxes in Interim periods
 Net income (loss) from Discontinued Operations.
 Nine months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009Income (loss) from discontinued operationsMecar
    
    $
    (14,122
    )
    
    $
    (1,553
    )Mecar USA
    
    
    (296
    )
    
    
    3,214NSM
    
    
    
    
    
    
    (1,679
    )$
    (14,418
    )
    
    $
    (18
    )Gain on the sale of subsidiaries, net of tax
    
    $
    47,805
    
    
    $
    1,856Net gain (loss) from discontinued operations
    
    $
    33,387
    
    
    $
    1,838
 
  22




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2010
(Thousands of Dollars)
(Unaudited)
 Balance Sheet
  September 30,
    
    
    December 31,2010
    
    
    2009ASSETSCash and cash equivalents
    
    $
    14,875
    
    
    $
    3,709Short-term investments
    
    
    20,000
    
    
    
    Prepaid assets
    
    
    1,117
    
    
    
    400Assets held for sale
    
    
    
    
    
    
    95,689Property, plant & equipment
    
    
    17
    
    
    
    31Other assets
    
    
    15,000
    
    
    
    1,075TOTAL ASSETS
    
    $
    51,009
    
    
    $
    100,904LIABILITIESAccounts payable and accrued
liabilities
    
    $
    806
    
    
    $
    3,632Other current liabilities
    
    
    443
    
    
    
    495Liabilities held for sale
    
    
    
    
    
    
    69,220Other long-term liabilities and debt
    
    
    89
    
    
    
    270TOTAL LIABILITIES
    
    
    1,338
    
    
    
    73,617STOCKHOLDERS EQUITY
    
    
    49,671
    
    
    
    27,287TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    51,009
    
    
    $
    100,904
      23




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2010
(Thousands of Dollars)
(Unaudited)
    Cash Flows
  For Nine Months Ended September 30,2010
    
    
    2009Net cash used in operating activities
    
    $
    (8,895
    )
    
    $
    (9,621
    )Net cash provided by investing activities
    
    
    19,446
    
    
    
    941Net cash (used in) provided by financing activities
    
    
    (1
    )
    
    
    4,562Effects of exchange rate on cash
    
    
    850
    
    
    
    51
 Operating Activities.
  Investing Activities.
 Financing Activities.
 Effects of Exchange Rate.
 Stock Repurchases.
 Future Liquidity
  24




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2010
(Thousands of Dollars)
(Unaudited)
 Off-Balance Sheet Arrangements.
  Critical Accounting Policies
   
    
    Foreign currency translations
    
    Valuation of deferred income taxes and income tax reserves.
    
    Estimation of expenses incurred and interest income received during liquidation.
  Recent Accounting Pronouncements
 Subsequent Events (Topic 855)  Amendments to
Certain Recognition and Disclosure Requirements. Subsequent Events
 Improving Disclosures about Fair Value
Measurements
  25




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2010
(Thousands of Dollars)
(Unaudited)
 Forward-Looking Statements
   26




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  Overview
  Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 DOJ Subpoena
      27




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##### Table of Contents



Litigation Relating to Consulting Agreement
  Pending Claim of a Former Employee
  
 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 Exhibits2
    
    
    Stock and Asset Purchase Agreement, dated as of June 24, 2010, between The Allied Defense Group, Inc., Mecar USA,
Inc., ARC Europe, S.A. and Chemring Group PLC (Filed as Exhibit 2.1 to Form 8-K filed on June 24, 2010, and
incorporated herein by reference).4
    
    
    Fourth Amendment To Rights Agreement, dated as of June 24, 2010 (Filed as Exhibit 4.5 to Form 8-K filed on June 24,
2010, and incorporated herein by reference).10
    
    
    Secured Promissory Note, between The Allied Defense Group, Inc. and Chemring Group PLC (Filed as Exhibit 10.27 to
Form 8-K filed on June 24, 2010, and incorporated herein by reference).10.2
    
    
    Secured Promissory Note, between ARC Europe, S.A. and Chemring Group PLC (Filed as Exhibit 10.28 to Form 8-K filed on
June 24, 2010, and incorporated herein by reference).10.3
    
    
    Escrow Agreement, between U.S. Bank National Associate, Chemring Group PLC, The Allied Defense Group, Inc., Mecar
USA, Inc. and ARC Europe, SA(Filed as Exhibit 10.1 to Form 8-K filed on September 2, 2010, and incorporated herein by
reference).*31.1
    
    
    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.
 
 *
    
    Filed herewith.  28




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##### Table of Contents



SIGNATURE
  THE ALLIED DEFENSE GROUP, INC./s/ Charles S. ReamDate: November 12, 2010
    Charles S. ReamDirector and Chief Financial Officer  29