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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-Q





Mark one


|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------




For the period endedJune 30, 2002





OR





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------




For the transition period from
 to





Commission File Number 0-2545





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ALLIED RESEARCH CORPORATION


(Exact name of Registrant as specified in its charter)





Delaware (State or other
jurisdiction of incorporation or organization)

04-2281015 (I.R.S. Employer
Number)





8000 Towers Crescent Drive, Suite 260 Vienna, Virginia (Address of principal executive offices)

22182 (Zip
Code)





(703) 847-5268


Registrants telephone number, including area code:





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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  x  No  ̈





Indicate the number of shares outstanding of each of the issuers classes of common stock, as of June 30, 2002: 5,255,913.





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ALLIED RESEARCH CORPORATION





INDEX





Page NumberPART I.

FINANCIAL INFORMATIONUNAUDITEDItem 1.

Financial StatementsCondensed Consolidated Balance Sheets June 30, 2002 and December 31, 2001

2Condensed Consolidated Statements of Earnings Three months and six months ended June 30, 2002 and 2001

3Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2002 and 2001

4Notes to Condensed Consolidated Financial Statements

5Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

11Item 3.

Quantitative and Qualitative Market Risk Disclosure

16PART II.

OTHER INFORMATION

17









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ALLIED RESEARCH CORPORATION





CONDENSED CONSOLIDATED BALANCE SHEETS


(Thousands of Dollars)





ASSETS


(Unaudited)





June 30, 2002


December 31, 2001ASSETSCURRENT ASSETSCash and equivalents

$
20,505


$
10,922Restricted cash


7,609



6,212Accounts and note receivable


17,316



19,656Costs and accrued earnings on uncompleted contracts


29,523



20,338Inventories


8,956



6,190Prepaid and other current assets


4,300



2,903Total current assets


88,209



66,221PROPERTY, PLANT AND EQUIPMENTnet of accumulated depreciation


13,966



12,299OTHER ASSETSIntangibles, net of accumulated amortization


9,058



7,144Deferred taxes


908



935Other assets


298



18510,264



8,264$
112,439


$
86,784LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESNotes payable

$
1,786


$
2,478Current maturities of long-term debt


1,367



1,255Convertible subordinated debenture, current


750



Accounts payable


10,324



10,306Accrued liabilities


5,484



6,784Customer deposits


8,231



2,052Income taxes


2,957



2,149Total current liabilities


30,899



25,026LONG-TERM OBLIGATIONSConvertible Subordinated Debenture, less current maturities and unamortized discount


6,610



Long-Term Debt, less current maturities


3,080



3,1109,690



3,110STOCKHOLDERS 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, 5,255,913 in 2002 and
5,129,179 in 2001


526



513Additional paid-in capital


20,088



17,273Retained earnings


53,996



50,672Accumulated other comprehensive loss


(2,760
)


(9,810
)71,850



58,648$
112,439


$
86,784





The accompanying notes are an integral part of these consolidated financial
statements.




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ALLIED RESEARCH CORPORATION





CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS


(Thousands of Dollars)


(Unaudited)





Three months ended June
30,


Six months ended June
30,2002


2001


2002


2001Revenue

$
27,396


$
25,837


$
44,324


$
42,847Cost and expensesCost of sales


19,018



18,427



30,716



30,449Selling and administrative


4,406



2,899



6,961



5,601Research and development


415



380



947



83323,839



21,706



38,624



36,883Operating income


3,557



4,131



5,700



5,964Other income (deductions)Interest income


256



139



336



274Interest expense


(411
)


(405
)


(622
)


(800
)Other


282



(211
)


360



230127



(477
)


74



(296
)Earnings before income taxes


3,684



3,654



5,774



5,668Income tax expense


1,533



1,632



2,450



2,503Net Earnings

$
2,151


$
2,022


$
3,324


$
3,165Earnings per shareBasic

$
.41


$
.41


$
.64


$
.65Diluted

$
.41


$
.41


$
.63


$
.65Weighted average number of common shares:Basic


5,192,615



4,906,717



5,170,288



4,888,716Diluted


5,262,086



4,911,796



5,283,238



4,890,843





The accompanying notes are an integral part of these consolidated financial
statements.




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ALLIED RESEARCH CORPORATION





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Thousands of Dollars)


(Unaudited)





Six months ended June 302002


2001Cash flows from continuing operating activitiesNet earnings

$
3,324


$
3,165Adjustments to reconcile net earnings to net cash provided by (used in) continuing operating activitiesDepreciation and amortization


794



729Common stock award


515



533Changes in assets and liabilitiesAccounts receivable


5,012



7,354Costs and accrued earnings on uncompleted contracts


(6,110
)


(403
)Inventories


(2,066
)


(214
)Prepaid expenses and other assets


(1,385
)


687Accounts payable, accrued liabilities and customer deposits


3,739



747Income taxes


386



(77
)Net cash provided by (used in) continuing operating activities


4,209



12,521Cash flows (used in) investing activitiesCapital expenditures


(939
)


(1,368
)Payment for acquisition, net of cash acquired


(125
)


Proceeds from sale of fixed assets






159Net cash (used in) provided by investing activities


(1,064
)


(1,209
)Cash flows from financing activitiesProceeds from convertible subordinated debenture


7,500



359Principal payments on long-term debt


(573
)


(714
)Net decrease in short-term borrowings


(896
)


(506
)Proceeds from employee stock purchases


90



209Options exercised


62



Restricted cash and restricted deposits


(1,397
)


(7,988
)Net cash (used in) provided by financing activities


4,786



(8,640
)Net increase in cash


7,931



2,672Effects of exchange rate changes on cash


1,652



(944
)Net Increase In Cash And Cash Equivalents


9,583



1,728Cash and equivalents at beginning of year


10,922



7,570Cash and equivalents at end of period

$
20,505


$
9,298Supplemental Disclosures of Cash Flow InformationCash paid during the period forInterest

$
47


$
459Taxes


1,745



762Supplemental Disclosures of Non-Cash Investing and Financing ActivitiesNon-cash (stock) consideration in connection with business acquisition

$
1,883



Warrants issued in conjunction with convertible subordinated debenture


140



Convertible subordinated debenture beneficial conversion feature


138









The accompanying notes are an integral part of these consolidated financial
statements.




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ALLIED RESEARCH CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


June 30, 2002


(Thousands of Dollars)


Unaudited










NOTE 1CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





The condensed consolidated balance sheets as of June 30, 2002 and December 31, 2001, the condensed consolidated statements of earnings for
the three and six month periods ended June 30, 2002 and 2001 and the condensed consolidated statements of cash flows for the six months ended June 30, 2002 and 2001, have been prepared by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flow as of and for the periods ended June 30, 2002 and 2001 have been made.





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. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in
the Companys December 31, 2001 Form 10-K filed with the Securities and Exchange Commission, Washington, D.C. 20549. The results of operations for the period ended June 30, 2002 and 2001 are not necessarily indicative of the operating results
for the full year.





NOTE 2PRINCIPLES OF CONSOLIDATION





The condensed consolidated financial statements include the accounts of Allied Research Corporation (Allied Research or the Company), a Delaware
corporation, and its wholly-owned subsidiaries, ARC Europe, S.A. (ARC Europe), a Belgian company, News/Sports Microwave Rental, Inc. (Microwave), a California corporation, Titan Dynamics Systems, Inc. (Titan Dynamics
Systems), a Texas corporation and Allied Research Corporation Limited (Limited), a United Kingdom company (which is inactive).





ARC Europe includes its wholly-owned subsidiaries Mecar S.A. (MECAR), Sedachim, S.I. and the VSK Group. The VSK Group is comprised of VSK Electronics N.V. and its wholly-owned subsidiaries,
Tele Technique Generale, S.A., I.D.C.S., N.V., Belgian Automation Units, N.V. and Vigitec S.A.





The Company
operates in three (3) principal segments. MECAR engages principally in the development and production of medium caliber tank ammunition and mortars (Ordnance & Manufacturing Segment, formerly the Product Sales Segment). The VSK Group and
Microwave engage in the design, manufacture, distribution and service of industrial and law enforcement security products and systems (Electronic Security Segment, formerly the Security Systems & Services Segment). Titan Dynamic Systems engages
in the design, manufacture and sale of battlefield effects simulators (Software, Training & Simulation Segment).





Significant intercompany transactions have been eliminated in consolidation.





NOTE 3DERIVATIVE FINANCIAL
INSTRUMENTS





In the second quarter of 2001, the Company adopted 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 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.




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ALLIED RESEARCH CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


June 30, 2002


(Thousands of Dollars)


Unaudited










NOTE 3DERIVATIVE FINANCIAL INSTRUMENTSContinued





The Company designates its derivatives based upon the criteria established by SFAS 133. 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.





The Company uses derivatives to manage exposures to foreign currency exchange rate risks. The objective is to
reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates.





The
Company uses foreign currency future contracts to minimize the foreign currency exposures that arise from sales contracts with certain foreign customers and certain costs associated with these contracts. 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. These futures contracts are designated as fair value hedges since they are designed to lock in the net Euros that will be
realized when the amounts due under the sales agreement are received. As a matter of policy, the Company does not enter into speculative hedge contracts or use other derivative financial instruments.





As of June 30, 2002, futures contracts designated as fair value hedges with a $101 million notional amount were outstanding and the fair
value of these contracts was $13,652.





The Company estimates the fair value of outstanding hedge contracts based
on quotes obtained from the counterparties to the derivative contracts. The Company recognizes the fair value of hedge contracts that expire in less than one year as current assets or liabilities. Those that expire in more than one year are
recognized as long-term assets or liabilities.





The adoption of SFAS 133 did not have a material impact on the
Companys operating results. Gains and losses from settlements of derivative contracts are reported as a component of other income. Net changes in the fair value of derivative contracts before settlement are also reported as a component of
other income. There were no net gains or losses realized during the six months ended June 30, 2002 from hedge ineffectiveness, from firm commitments that no longer qualify as fair value hedges, nor were any amounts excluded from the assessment of
hedge effectiveness.





The Companys foreign exchange forward and option contracts expose the Company to
credit risks to the extent that the counterparties may be unable to meet the terms of the agreement. The company minimizes such risk by using major financial institutions as its counterparties. Management does not expect any material loss as result
of default by counterparties.




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ALLIED RESEARCH CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


June 30, 2002


(Thousands of Dollars)


Unaudited










NOTE 4ACQUISITIONS





On June 6, 2002, the Company acquired all the common stock of Titan Dynamics Systems in a transaction accounted for as a purchase. This acquisition was undertaken to
provide Allied Research with a strong position in a high-growth segment of the North America Simulation(s) and Training market.





The assets acquired in the acquisition of Titan Dynamics Systems are summarized below:





Current assets

$
92Property and equipment


64Intangibles


894Goodwill


1,074Assets acquired

$
2,124





The purchase price included cash and costs of approximately $386,
assumption of $218 of liabilities, and shares of Allied Research Corporation common stock valued at $1,520, based on the market price of the shares. The results of Titans operations have been consolidated since its acquisition on June 6, 2002.





Goodwill arising from this transaction is related to the Software, Training & Simulation Segment and is not
deductible for tax purposes. The purchase price is subject to adjustment in the event certain contractual provisions are breached.





NOTE 5RESTRICTED CASH





MECAR is generally required under the terms of its contracts
with foreign governments to provide performance bonds, advance payment guarantees and letters of credit. The credit facility agreements used to provide these financial guarantees place restrictions on cash deposits and other liens on MECARs
assets. VSK has also pledged certain term deposits to secure outstanding bank guarantees.





Restricted cash of
$7,609 and $6,212 included in current assets at June 30, 2002 and December 31, 2001, respectively, was restricted or pledged as collateral for these agreements and other obligations.





NOTE 6CREDIT FACILITY





MECAR is obligated under a new
agreement (the Agreement), executed March 2002, with its foreign banking syndicate that provides credit facilities primarily for letters of credit, bank guarantees, performance bonds 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 letters of
credit and guarantees outstanding. These fees are charged to interest expense. As of June 30, 2002 and December 31, 2001, guarantees and performance bonds of approximately $17,227 and $18,000, respectively, were outstanding.




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ALLIED RESEARCH CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


June 30, 2002


(Thousands of Dollars)


Unaudited










NOTE 6CREDIT FACILITYContinued





Advances under the Agreement are secured by restricted cash at June 30, 2002 and December 31, 2001 of $7,609 and $6,212, respectively.
Amounts outstanding are also collateralized by the letters of credit received under the contracts financed, and a pledge of approximately $34 million of MECARs net assets. The Agreement requires that MECAR maintain net worth and working
capital covenants.





NOTE 7CONVERTIBLE 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.





The debenture bears interest at the rate of 8% per year, payable semi-annually commencing January 1, 2003. The Company may elect to pay the interest in cash or in registered shares of its common stock.
The debenture matures in ten (10) equal monthly principal installments of $750 commencing June 28, 2003. 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.





Warrants issued are exercisable for a total of 15,000 shares of the
Companys common stock at an exercise price of $28.75 payable in cash.





The Company agreed to file a
registration statement no later than March 1, 2003 covering the resale of shares of common stock issuable upon conversion of the debenture and exercise of the warrants.





NOTE 8LONG-TERM FINANCING





MECAR is obligated on a
mortgage with a balance of approximately $1,001 on its manufacturing and administration facilities. The loan is payable in annual principal installments of approximately $500 and matures in 2004. The VSK Group is also obligated on several mortgages
on its buildings, which have a balance of approximately $311 at June 30, 2002. These mortgages are payable in annual installments of approximately $43 plus interest.





The Company and its subsidiaries are also obligated on various vehicle, equipment, capital lease obligation and other loans. The notes and leases are generally secured by
the assets acquired, bear interest at rate ranging from 3.5% to 8.0% and mature at various dates through 2007.




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ALLIED RESEARCH CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


June 30, 2002


(Thousands of Dollars)


Unaudited










Scheduled annual maturities of long-term obligations as of June 30,
2002 are approximately as follows:





Year

Amount2003

1,3672004

2,1272005

4832006

3562007

114





NOTE 9INCOME TAXES





As of December 31, 2001, the Company had unused foreign tax credit carryforwards of approximately $374 which expire through 2004 and domestic net operating loss
carryforwards of approximately $2,400 which expire in 2020.





Deferred tax liabilities have not been recognized for
basis differences related to investments in the Companys Belgian and United Kingdom subsidiaries. These differences, which consist primarily of unremitted earnings intended to be indefinitely reinvested in the subsidiaries, aggregated
approximately $52,561 at June 30, 2002. Determination of the amount of unrecognized deferred tax liabilities is not practical.





NOTE
10EARNINGS PER SHARE





The computation of diluted earnings per share includes the effects of stock
options, warrants and convertible debenture, if such effect is dilutive.





NOTE 11RECENT ACCOUNTING PRONOUNCEMENTS





On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after
December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. The provisions of SFAS 141 and 142 have been implemented by the Company.
Accordingly, effective January 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives are no longer being amortized. These assets will be tested for impairment annually and whenever there is an impairment indicator.
Intangibles with definite lives are being amortized to operations over their estimated useful lives. The impact was not material to the Companys operations.





In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This Statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. There
are no known retirement obligations related to financial assets or operations at this time.




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ALLIED RESEARCH CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


June 30, 2002


(Thousands of Dollars)


Unaudited










NOTE 11RECENT ACCOUNTING PRONOUNCEMENTSContinued





In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement
addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
provisions of the statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. There are no known impairment issues related to financial assets or operations at this time.





In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement 13, and Technical
Corrections. SFAS 145 is effective May 15, 2002, except the rescission of SFAS 4 which is effective in fiscal years beginning after May 15, 2002. SFAS 145 rescinds SFAS 4, Reporting Gains and Losses from Extinguishment of Debt, and SFAS
64, Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements. Accordingly, a gain or loss from a debt extinguishment should not be classified as an extraordinary item unless it meets the criteria for extraordinary item classification
in APB Opinion 30, Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions. SFAS 145 also rescinds SFAS 44,
Accounting for Intangible Assets of Motor Carriers, because transition to the Motor Carrier Act of 1980 is complete and intrastate operating rights have been deregulated. SFAS 145 amends SFAS 13, Accounting for Leases, to require a
capital lease that is modified so that the new agreement is classified as an operating lease be accounted for under the sale-leaseback provisions of SFAS 98, Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate; Sales-Type
Leases of Real Estate; Definition of the Lease Term; Initial Direct Costs of Direct Financing Leases, if the lease involves real estate. If the lease does not involve real estate, SFAS 28, Accounting for Sales with Leasebacks, is
applicable. The technical corrections amend SFAS 13, Accounting for Leases, SFAS 95, Statement of Cash Flows, and SFAS 102, Statement of Cash FlowsExemption of Certain Enterprises and Classification of Cash Flows from Certain
Securities Acquired for Resale, SFAS 141, Business Combinations, SFAS 142, Goodwill and Other Intangible Assets, among others. The adoption of the SFAS 145 did not impact the Company.





NOTE 12SUBSEQUENT EVENT





On July 31, 2002, the Company acquired SeaSpace Corporation (SeaSpace), of Poway, California, in a cash and stock transaction. SeaSpace is a leading supplier of environmental satellite ground reception systems.




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ALLIED RESEARCH COMPANY





MANAGEMENTS, DISCUSSION AND ANALYSIS OF


FINANCIAL CONDITION AND RESULTS OF OPERATIONS





June 30, 2002







The following is intended to update the information contained in the Companys Annual Report on Form
10-K for the year ended December 31, 2001 and its Quarterly Report on Form 10-Q for the period ended March 31, 2002 and presumes that readers have access to, and will have read, Managements Discussion and Analysis of Financial Condition
and Results of Operations contained in such Forms 10-K and 10-Q.





The Company conducts its business through
its wholly-owned subsidiaries: Mecar S.A. (MECAR), a Belgian corporation; a group of Belgian corporations led by VSK Electronics, N.V., Tele Technique General, S.A., Vigitec S.A. and IDCS, S.A. (collectively, the VSK Group);
and News/Sports Microwave Rental, Inc. (Microwave), a California corporation. The Company operates in three (3) principal segmentsMECARs development and production of ammunition and weapon systems (Ordnance & Manufacturing); the
manufacture, distribution and service of industrial security products conducted by the VSK Group and Microwave (Electronic Security), and Titan Dynamic Systems development and sale of Battlefield Effects Simulators (Software, Training &
Simulation). This discussion refers to the financial condition and results of operations of the Company on a consolidated basis. All dollars are in thousands except per share amounts.





Forward-Looking Statements





This Managements
Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that are based on current expectations, estimates and projections about the Company 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.





Future Factors include substantial reliance on MECARs principal customers to continue to acquire MECARs 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 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; 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. These are representative of the Future Factors that could affect the
outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates; general domestic and international economic conditions, including interest rate and currency
exchange rate fluctuations; increasing competition by foreign and domestic competitors, including new entrants; and other Future Factors.




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ALLIED RESEARCH COMPANY





MANAGEMENTS, DISCUSSION AND ANALYSIS OF


FINANCIAL CONDITION AND RESULTS OF OPERATIONS





June 30, 2002







Critical Accounting Policies





Our significant accounting policies are described in Note A to the consolidated financial statements included in Item 8 of the Form 10-K for the year ended December 31, 2001. We believe our most
critical accounting policies include revenue recognition and cost estimation on fixed price contracts for which we use the percentage of completion method of accounting. This method is used by MECAR for substantially all of its sales contracts.
Approximately 80%, 81% and 65% of consolidated revenue was recognized under the percentage of completion method during the years ended December 31, 2001, 2000 and 1999, respectively. The value of contracts in process at June 30, 2002 and 2001 were
$16,994 and $11,615 and the profits recognized on these contracts through June 30, 2002 and 2001 were approximately $4,986 and $2,684, respectively.





Under the percentage of completion method revenue is recognized on these contracts as work progresses during the period, based on the amount of actual cost incurred during the period compared to total
estimated cost to be incurred for the total contract. Management reviews these estimates on a regular basis and the effect of any change in cost estimates are reflected in cost of sales in the period in which the change is identified. If the
contract is projected to create a loss, the entire estimated loss is charged to operations in the period such loss first becomes known. A number of internal and external factors affect our cost of sales estimates, including labor rates and
efficiency variances, material usage variances, delivery schedules and testing requirements. Additionally, as inventory items increase in age, obsolete and excess items are charged to cost of sales when such determination is made. While we believe
that the systems and procedures used by MECAR, coupled with the experience of its management team, provide a sound basis for our estimates, actual results will differ from managements estimates. The complexity of the estimation process and
issues related to the assumptions, risks and uncertainties inherent with the application of the percentage of completion method affect the amounts reported in our financial statements.





Revenue





Allied Research had revenue of $44,324 in the
first six months of 2002, which was 3% higher than its revenue in the first six months of 2001 of $42,847.





Revenue by Segment1st Six Months 2002


1st Six Months 2001Amount

Percentage of total


Amount

Percentage of totalOrdnance & Manufacturing

$
30,229

68
%

$
32,885

77
%Electronic Security


14,094

32
%


9,962

23
%Software, Training & Simulation


1







Allied Research had revenue of $27,396 in the second three months
of 2002, which was 6% higher than its revenue in the second three months of 2001 of $25,837.


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Revenue by Segment2nd Three Months 2002


2nd Three Months 2001Amount

Percentage of total


Amount

Percentage of totalOrdnance & Manufacturing

$
19,396

71
%

$
21,084

82
%Electronic Security


7,999

29
%


4,753

18
%Software, Training & Simulation


1

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##### Table of Contents



ALLIED RESEARCH COMPANY





MANAGEMENTS, DISCUSSION AND ANALYSIS OF


FINANCIAL CONDITION AND RESULTS OF OPERATIONS





June 30, 2002










RevenueContinued





Ordnance & Manufacturing Segment revenue in the first six months of 2002 decreased from the amount recognized in the comparable period of 2001 due to lower production
during the period. Results for the first six months of 2002 would have been higher but for an unusual raw material defect that delayed some production of one item. Production and revenue recognition of the affected order is anticipated to shift to
the third and fourth quarters of this year.





Electronic Security Segment revenue in the first six months of 2002
increased from the amount recognized in the comparable period of 2001 due primarily to higher export sales, the addition of Microwave, and the Euro currencys improved parity with the US dollar.





Software, Training & Simulation Segment revenue were nominal and reflect the operations of Titan since June 6, 2002.





Revenue for the second three months of 2002 increased by 6% over the revenue for the comparable 2001 period. This increase was
primarily attributable to the addition of Microwave and the Euro currencys improved parity with the US dollar.





Backlog





As of June 30, 2002, the Companys backlog was $210,540 compared to $56,000 at December 31, 2001 and
$53,400 at June 30, 2001. The June 30, 2002 backlog consists of approximately $199,900, $10,180, and $460 for Ordnance & Manufacturing, Electronic Security, and Software Training & Simulation Segments, respectively.





Operating Costs





Cost of sales as a percentage of sales for the first six months and second three months of 2002 was approximately 69% compared with 71% for the same periods in 2001. The 2001 cost of sales related to higher costs incurred by MECAR on
various contracts.





Selling and Administrative Expenses





Selling and administrative expenses as a percentage of sales for the first six months of 2002 was approximately 16% compared with 13% for the same period in 2001.





Selling and administrative expenses as a percentage of sales for the second three months of 2002 was
approximately 16% compared with 11% for the same period in 2001.





The 2002 increase in selling and administrative
expenses resulted principally from costs incurred in connection with the Companys acquisition and financing activities.





Research and Development





Research and development costs increased in the first six months
of 2002 by approximately 14% over 2001 levels. Research and development costs incurred in the second three months of 2002 increased slightly over comparable 2001 levels. The increase is primarily attributed to increased business activity at MECAR
and the VSK Group.




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ALLIED RESEARCH COMPANY





MANAGEMENTS, DISCUSSION AND ANALYSIS OF


FINANCIAL CONDITION AND RESULTS OF OPERATIONS





June 30, 2002










Interest Income





Interest income increased in each of the first six months of 2002 and in the second three months of 2002 from 2001 levels principally due to increased amounts of cash
invested.





Interest Expense





Interest expense decreased in the first six months of 2002 from 2001 levels, principally as a result of decreased borrowings at MECAR in 2002 and greater bank charges in 2001.





Interest expense in the second three months of 2002 was comparable to the amount incurred in the second quarter of 2001.





OtherNet





Other-net primarily represents currency gains/currency losses, resulting from foreign currency transactions at MECAR and the VSK Group for the periods ending June 30, 2002 and 2001.





Pre-Tax Profit





Pre-Tax Profit by Segment1st Six Months


2nd Three Months2002


2001


2002


2001Ordnance & Manufacturing

4,390


$
4,600


$
2,932


$
3,250Electronic Security

1,592



1,600



1,000



769Software, Training & Simulation

(17
)






(17
)


Corporate and other

(191
)


(532
)


(231
)


(365
)





Ordnance & Manufacturing Segment pre-tax profit for the first
six months and second three months of 2002 decreased from the comparable 2001 periods principally due to product mix at MECAR and to a delay in production due to an unusual raw material defect.





Electronic Security Segment pre-tax profit for the first six months of 2002 was comparable with the same 2001 period. Microwave contributed $131 of the 2002 pre-tax
profit and the balance was contributed by VSK Group. Pre-tax profit for the second three months of 2002 increased from the amount recognized in the comparable period of 2001 due to higher export sales.





Income Taxes





The
effective income tax expense in the first six months of 2002 was 42% compared to 44% in the same period of 2001. The decrease is related to the amount of permanent tax differences.





Net Earnings





The Company earned a $3,324 net profit in the
first six months of 2002 compared with $3,165 net profit in the first half of 2001. During the second three months of 2002, the Company earned a $2,151 net profit compared to 2001s second three months net profit of $2,022.




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ALLIED RESEARCH COMPANY





MANAGEMENTS, DISCUSSION AND ANALYSIS OF


FINANCIAL CONDITION AND RESULTS OF OPERATIONS





June 30, 2002










Liquidity





Working capital, which includes restricted cash, was approximately $57,310 at June 30, 2002, which is $16,115 greater than the December 31, 2001 level. The increase in
working capital is primarily attributable to the sale of the $7,500 convertible subordinated debenture and the Companys profitable operations in the first six months of 2002. The Companys current working capital is required for
operations, to support credit facility agreements, to fulfill contractual obligations related to orders, and to continue to implement the Companys growth plans. On July 31, 2002, the Company acquired SeaSpace.





During the first six months of 2002, the Company funded its operations principally with internally generated cash and a bank syndicate
facility provided to MECAR. The bank syndicate agreement was amended in March 2002 and now provides MECAR (i) lines of credit aggregating $12,500 for tax prepayments and working capital and (ii) a $36,500 facility for bank guarantees/bonds needed to
support certain customer contracts.





On June 28, 2002, the Company sold to an accredited investor $7,500 of an 8%
subordinated debenture convertible into shares of the Companys common stock at $25.00 per share. The investor also acquired warrants to purchase 15,000 shares of the Companys common stock at an exercise price of $28.75 per share.





As of June 30, 2002, the Company had unrestricted cash (i.e., cash not required by the terms of the bank
syndicate agreement to collateralize contracts) of approximately $20,505 compared with approximately $10,992 at December 31, 2001. Restricted cash increased by $1,397 during the first six months of 2002.





Stockholders equity as of June 30, 2002 was positively affected by the improvement of the value of the Euro verses the U.S. dollar
during the first six months of 2002, resulting in a $7,050 adjustment to Accumulated other comprehensive loss.





Final testing of the ammunition supplied by MECAR pursuant to the supplemental FMS contract described in the Companys Form 10-Q for the period ending March 31, 2002 has been delayed. It is now scheduled to be completed by the
end of the third quarter of 2002. The Company continues to believe that its cost provision maintained by MECAR is sufficient to cover future costs for this contract.





Customer deposits increased by $6,179 in the first six months of 2002 in connection with new orders at MECAR.





The Company continues to explore alternate methods of securing the necessary financial capacity to implement its growth plans. Allied Researchs plans for future
growth continues to be in and related to Ordnance & Manufacturing, Electronic Security, and Software, Training & Simulation.





The Companys ability to cover its anticipated future operating and capital requirements is dependent upon its 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 Microwave, Titan, SeaSpace and any future acquisitions.




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ALLIED RESEARCH CORPORATION





QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE


June 30, 2002





There have been no material changes in the Companys interest rate sensitivity and exchange rate sensitivity as reported in the Companys Form 10-K for the period
ended December 31, 2001.





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##### Table of Contents



ALLIED RESEARCH COMPANY





June 30, 2002










PART II.    OTHER INFORMATION





Changes in Securities and Use of Proceeds





At the end of June 2002, the Company sold a convertible subordinated debenture and a common stock warrant to
Riverview Group, LLC, an accredited institutional investor, for $7.5 million in a private placement exempt from the registration provisions of the Securities Act of 1933 pursuant to the provisions of Section 4(2) thereof and the rules and
regulations thereunder. After payment of financial advisor/finder fees and other expense of the transaction, the net proceeds of the offering are expected to be $7.3 million. In connection with sale, the Company has agreed to register the shares
issuable pursuant to conversion of the debenture and exercise of the warrant.





The debenture bears interest at the
rate of 8% per year, payable semi-annually commencing January 1, 2003. The Company can elect to pay interest in cash or in registered shares of common stock. The debenture matures in ten (10) equal monthly principal installments of $750,000
commencing June 28, 2003.





The holder of the debenture can choose to convert all or a portion of the principal
amount outstanding into shares of common stock at any time before maturity. The debenture is convertible into common stock at a fixed conversion price of $25 per share.





In the event that the Company sells any shares of common stock (or certain securities convertible into or exercisable for shares of common stock) at a price less than $25
per share, the fixed conversion price of the debenture generally shall be reduced based on a weighted average adjustment (subject to certain exceptions). The debenture also contains customary antidilution provisions for stock dividends, stock splits
or combinations and reclassifications.





A debenture holder may not convert its debenture or exercise the warrant
to the extent that, at the time of the conversion or exercise, the sum of (i) the number of shares of common stock beneficially owned by the holder plus (ii) the number of shares to be issued upon conversion or exercise would exceed 9.999% of the
number of shares of common stock then issued and outstanding.





If an event of default occurs under the debenture,
the holder has the right to require the Company to pay a mandatory redemption amount equal to 110% of the outstanding principal on the debenture, plus accrued interest.





The warrant is exercisable for a total of 15,000 shares of common stock at an exercise price of $28.75 payable in cash. The warrant is exercisable until June 28, 2006. The
number of shares issuable upon exercise and the exercise price are subject to adjustment in the event of stock dividends, stock splits, combinations or reclassifications, as well as sales of Company shares at less than $25 per share (subject to
exceptions).





Further information regarding the debenture, the warrant and this transaction is contained in our
Report on Form 8-K filed with the Securities and Exchange Commission on July 8, 2002.




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##### Table of Contents



ALLIED RESEARCH COMPANY





June 30, 2002










Submission of Matters to a Vote of Security Holders





On June 6, 2002, the Company held its annual meeting of shareholders.





The Companys shareholders re-elected J. H. Binford Peay, III, J.R. Sculley, Clifford C. Christ, Harry H. Warner and Ronald H. Griffith as members of the Board of
Directors of the Company.





The following votes were cast in connection with the election of directors:





Nominee

In Favor

WithheldJ. H. Binford Peay, III

3,626,099

817,303Clifford C. Christ

3,628,099

818,303Ronald H. Griffith

3,627,673

818,729J. R. Sculley

3,627,549

818,853Harry H. Warner

3,626,573

819,829





The Companys shareholders approved an amendment to the 2001
Equity Incentive Plan of the Company. The following votes were cast in connection with such approval:





For

Against

Abstain3,377,706

1,051,786

16,910





The Companys shareholders approved an amendment to the
Companys Certificate of Incorporation, as amended. The following votes were cast in connection with such approval:





For

Against

Abstain3,170,349

1,261,452

14,601





The Companys shareholders ratified the appointment of Grant
Thornton LLP as the Companys independent auditors for 2002. The following votes were cast in connection with such ratification:





For

Against

Abstain4,418,498

15,764

12,140





Immediately following the June 6, 2002 annual meeting of
shareholders, the Board of Directors voted to increase the number of directors to six (6) and elected Gilbert F. Decker as a member of the Board of Directors to fill the resulting vacancy.





Reports of Form 8-K





On June 12, 2002, the
Company filed a Form 8-K reporting its acquisition of Titan Dynamics Systems, Inc.





On June 12, 2002, the Company
filed a Form 8-K reporting the results of its annual stockholders meeting and Gilbert F. Deckers election to the Companys Board of Directors.




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##### Table of Contents



ALLIED RESEARCH COMPANY





June 30,2002










Exhibit No.

Description of Exhibits3.1.

Certificate of Incorporation, as amended3.2.

By-Laws10.1.

Employment Agreement between Allied Research Corporation and J. H. Binford Peay, III (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 Research Corporation and John G. Meyer, Jr. (Incorporated by reference from Form 8-K filed in March, 2001 and Form 8-K
filed in August, 2001.)10.3.

Employment Agreement between Allied Research Corporation and Bruce W. Waddell (Incorporated by reference from Form 8-K filed in March, 2001 and Form 8-K
filed in August, 2001.)10.4.

Employment Agreement between Allied Research Corporation and Charles A. Hasper (Incorporated by reference from Form 8-K filed in August, 2001.)10.5.

2001 Equity Incentive Plan, as amended (Incorporated by reference from Proxy Statements filed in April 2001 and April 2002.)10.6.

8% Convertible Debenture, Series A and related documents (Incorporated by reference from Form 8-K filed in July, 2002.)10.7.

Credit Agreement for MECAR S.A.10.8.

Award/Contract dated as of March 1, 2002, by and between MECAR S.A. and U.S. Government. (Portions have been omitted pursuant to a request for confidential
treatment)99.1

Certificate Pursuant to 18 U.S.C. Section 1350


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##### Table of Contents




ALLIED RESEARCH CORPORATION





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.








ALLIED RESEARCH CORPORATION/S/ CHARLES A.
HASPERCharles A. Hasper, Chief Financial Officer and Treasurer





Date: August 14, 2002




20