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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 March 31, 2009
 Commission File Number: 1-11376
 The Allied Defense Group, Inc.
 (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 22182
 (Address of principal executive offices, including zip code)   (703) 847-5268
 (Registrants telephone number, including area code)
  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)
  o þ




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##### 



THE ALLIED DEFENSE GROUP, INC.
INDEX
 PAGENUMBERPART I. FINANCIAL INFORMATION  UNAUDITEDItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at March 31, 2009 and December 31, 2008
    
    
    2Condensed Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008
    
    
    3Condensed Consolidated Statements of Stockholders Equity and Comprehensive Loss for the three months ended March 31, 2009 and the year ended December 31, 2008
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4T. Controls and Procedures
    
    
    32PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    33Item 1A. Risk Factors
    
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    33Signatures
    
    
    34Exhibit 31.1Exhibit 31.2Exhibit 32




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The Allied Defense Group, Inc.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 (Thousands of Dollars, except per share and share data)
 March 31,
    
    
    December 31,2009
    
    
    2008 (a)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    1,888
    
    
    $
    8,816Restricted cash
    
    
    17,540
    
    
    
    9,666Accounts receivable, net
    
    
    23,261
    
    
    
    12,646Costs and accrued earnings on uncompleted contracts
    
    
    29,046
    
    
    
    21,999Inventories, net
    
    
    22,956
    
    
    
    21,508Contracts in progress
    
    
    5,167
    
    
    
    1,469Prepaid and other current assets
    
    
    3,915
    
    
    
    3,137Assets held for sale
    
    
    4,555
    
    
    
    4,474Total current assets
    
    
    108,328
    
    
    
    83,715Property, Plant and Equipment, net
    
    
    17,714
    
    
    
    19,525Other Assets
    
    
    424
    
    
    
    459TOTAL ASSETS
    
    $
    126,466
    
    
    $
    103,699CURRENT LIABILITIESCurrent maturities of senior secured convertible notes
    
    $
    
    
    
    $
    933Bank overdraft facility
    
    
    5,089
    
    
    
    381Current maturities of long-term debt
    
    
    2,871
    
    
    
    2,659Current maturities of foreign exchange contract
    
    
    654
    
    
    
    405Accounts payable
    
    
    16,440
    
    
    
    14,536Accrued liabilities
    
    
    21,904
    
    
    
    16,099Customer deposits
    
    
    32,021
    
    
    
    16,731Belgium social security
    
    
    2,041
    
    
    
    3,522Income taxes
    
    
    3,792
    
    
    
    3,913Liabilities held for sale
    
    
    1,260
    
    
    
    1,316Total current liabilities
    
    
    86,072
    
    
    
    60,495LONG TERM OBLIGATIONSLong-term debt, less current maturities
    
    
    5,826
    
    
    
    6,681Long-term foreign exchange contract, less current maturities
    
    
    1,399
    
    
    
    1,072Derivative instrument
    
    
    84
    
    
    
    318Other long-term liabilities
    
    
    655
    
    
    
    682Total long-term obligations
    
    
    7,964
    
    
    
    8,753TOTAL LIABILITIES
    
    
    94,036
    
    
    
    69,248CONTINGENCIES 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, 8,084,748 at March 31, 2009 and 8,079,509 at December 31, 2008
    
    
    809
    
    
    
    808Capital in excess of par value
    
    
    56,070
    
    
    
    55,912Accumulated deficit
    
    
    (38,668
    )
    
    
    (38,351
    )Accumulated other comprehensive income
    
    
    14,219
    
    
    
    16,082Total stockholders equity
    
    
    32,430
    
    
    
    34,451TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    126,466
    
    
    $
    103,699
 (a)
    
    Condensed consolidated balance sheet as of December 31, 2008, has been derived from audited
consolidated financial statements. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
  2




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The Allied Defense Group, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (Thousands of Dollars, except per share and share data)
 Three Months Ended March 31,2009
    
    
    2008Revenue
    
    $
    31,548
    
    
    $
    26,795Cost and expensesCost of sales
    
    
    26,718
    
    
    
    20,988Selling and administrative
    
    
    4,212
    
    
    
    4,973Research and development
    
    
    492
    
    
    
    552Operating income
    
    
    126
    
    
    
    282Other income (expenses)Interest income
    
    
    35
    
    
    
    158Interest expense
    
    
    (864
    )
    
    
    (1,690
    )Net gain (loss) on fair value of senior convertible notes and warrants
    
    
    239
    
    
    
    (1,233
    )Loss from foreign exchange contracts
    
    
    (662
    )
    
    
    Other-net
    
    
    (247
    )
    
    
    (67
    )(1,499
    )
    
    
    (2,832
    )Loss from continuing operations
before income taxes
    
    
    (1,373
    )
    
    
    (2,550
    )Income tax expense
    
    
    
    
    
    
    128Loss from continuing operations
    
    
    (1,373
    )
    
    
    (2,678
    )Income (loss) from discontinued operations, net of taxGain on sale of subsidiaries
    
    
    946
    
    
    
    113Income (loss) from discontinued
operations
    
    
    110
    
    
    
    (730
    )Net income (loss) from
discontinued operations
    
    
    1,056
    
    
    
    (617
    )NET LOSS
    
    $
    (317
    )
    
    $
    (3,295
    )Earnings (Loss) per share  basic and diluted:Net loss from continuing operations
    
    $
    (0.17
    )
    
    $
    (0.33
    )Net income (loss) from discontinued operations, net of tax
    
    
    0.13
    
    
    
    (0.08
    )Total loss per share  basic and
diluted
    
    $
    (0.04
    )
    
    $
    (0.41
    )Weighted average number of common shares:Basic and Diluted
    
    
    8,079,972
    
    
    
    8,013,156
 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 STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
 (Unaudited)
 (Thousands of Dollars, except per share and share data)
 AccumulatedPreferred
    
    
    Common Stock
    
    
    Capital in
    
    
    
    
    
    
    Other
    
    
    Totalstock, no
    
    
    
    
    
    
    $.10 Par
    
    
    Excess of
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersPar Value
    
    
    Shares
    
    
    value
    
    
    Par value
    
    
    (Deficit)
    
    
    Income
    
    
    EquityBalance at January 1, 2008
    
    $
    
    
    
    
    8,013,161
    
    
    $
    801
    
    
    $
    55,355
    
    
    $
    (27,909
    )
    
    $
    17,408
    
    
    $
    45,655Common stock awards
    
    
    
    
    
    
    52,395
    
    
    
    5
    
    
    
    322
    
    
    
    
    
    
    
    
    
    
    
    327Retired stocks
    
    
    
    
    
    
    (4,402
    )
    
    
    
    
    
    
    (29
    )
    
    
    
    
    
    
    
    
    
    
    (29
    )Employee stock purchase plan purchases
    
    
    
    
    
    
    18,355
    
    
    
    2
    
    
    
    107
    
    
    
    
    
    
    
    
    
    
    
    109Issue of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    65Directors deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    
    
    
    
    
    
    
    
    92Comprehensive loss:Net loss for the year ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,442
    )
    
    
    
    
    
    
    (10,442
    )Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,326
    )
    
    
    (1,326
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,768
    )Balance at December 31, 2008
    
    $
    
    
    
    
    8,079,509
    
    
    $
    808
    
    
    $
    55,912
    
    
    $
    (38,351
    )
    
    $
    16,082
    
    
    $
    34,451Common stock awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    
    
    
    
    96Employee stock purchase plan purchases
    
    
    
    
    
    
    5,239
    
    
    
    1
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    21Issue of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    12Directors deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    30Comprehensive loss:Net loss for the three months ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (317
    )
    
    
    
    
    
    
    (317
    )Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,863
    )
    
    
    (1,863
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,180
    )Balance at March 31, 2009
    
    $
    
    
    
    
    8,084,748
    
    
    $
    809
    
    
    $
    56,070
    
    
    $
    (38,668
    )
    
    $
    14,219
    
    
    $
    32,430
 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 CASH FLOWS
(Unaudited)
(Thousands of Dollars)
 Three Months Ended March 31,2009
    
    
    2008Cash flows from operating activitiesNet loss
    
    $
    (317
    )
    
    $
    (3,295
    )Less: Gain on sale of subsidiaries
    
    
    (946
    )
    
    
    (113
    )Discontinued operations, net of tax
    
    
    (110
    )
    
    
    730Loss from continuing operations
    
    
    (1,373
    )
    
    
    (2,678
    )Adjustments to reconcile net loss from continuing operations to net cash used in operating activities, net of divestitures:Depreciation and amortization
    
    
    1,016
    
    
    
    1,341Unrealized loss on forward contracts
    
    
    662
    
    
    
    Loss on sale of fixed assets
    
    
    
    
    
    
    231Net (gain) loss related to fair value of notes and warrants
    
    
    (239
    )
    
    
    1,233Provision for estimated losses on contracts
    
    
    250
    
    
    
    (97
    )Provision for warranty reserves, uncollectible accounts and inventory obsolescence
    
    
    344
    
    
    
    141Common stock and stock option awards
    
    
    111
    
    
    
    119Deferred director stock awards
    
    
    30
    
    
    
    18(Increase) decrease in operating assets and increase (decrease) in liabilities, net
of effects from discontinued businessesRestricted cash
    
    
    (8,386
    )
    
    
    19Accounts receivable
    
    
    (11,616
    )
    
    
    1,026Costs and accrued earnings on uncompleted contracts
    
    
    (8,353
    )
    
    
    (13,122
    )Inventories
    
    
    (2,925
    )
    
    
    (2,823
    )Contracts in progress
    
    
    (3,698
    )
    
    
    (1,469
    )Prepaid and other current assets
    
    
    113
    
    
    
    845Accounts payable and accrued liabilities
    
    
    8,414
    
    
    
    3,212Customer deposits
    
    
    16,167
    
    
    
    (3,255
    )Deferred compensation
    
    
    1
    
    
    
    13Income taxes
    
    
    
    
    
    
    128Net cash used in operating activities  continuing operations
    
    
    (9,482
    )
    
    
    (15,118
    )Net cash (used in) provided by operating activities  discontinued operations
    
    
    (250
    )
    
    
    609Net cash used in operating activities
    
    
    (9,732
    )
    
    
    (14,509
    )Cash flows from investing activitiesCapital expenditures
    
    
    (272
    )
    
    
    (640
    )Net proceeds from sale of subsidiaries
    
    
    (646
    )
    
    
    2,433Net cash (used in) provided by investing activities  continuing operations
    
    
    (918
    )
    
    
    1,793Net cash provided by investing activities  discontinued operations
    
    
    
    
    
    
    3Net cash (used in) provided by investing activities
    
    
    (918
    )
    
    
    1,796
  5




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The Allied Defense Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
 Three Months Ended March 31,2009
    
    
    2008Cash flows from financing activitiesNet bank overdraft borrowings
    
    
    4,418
    
    
    
    8,770Principal payments on long-term debt
    
    
    (70
    )
    
    
    Principal payments on senior convertible notes
    
    
    (928
    )
    
    
    Net of long-term debt and capital lease obligations
    
    
    283
    
    
    
    (277
    )Net cash transferred to discontinued operations
    
    
    (27
    )
    
    
    (394
    )Proceeds from employee stock purchases
    
    
    18
    
    
    
    49Retirement of stock
    
    
    
    
    
    
    (9
    )Net cash provided by financing activities  continuing operations
    
    
    3,694
    
    
    
    8,139Net cash provided by financing activities  discontinued operations
    
    
    24
    
    
    
    375Net cash provided by financing activities
    
    
    3,718
    
    
    
    8,514Net change in cash of discontinued operations
    
    
    223
    
    
    
    (83
    )Effects of exchange rate on cash
    
    
    (219
    )
    
    
    802NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (6,928
    )
    
    
    (3,480
    )Cash and cash equivalents at beginning of period
    
    
    8,816
    
    
    
    21,651Cash and cash equivalents at end of period
    
    $
    1,888
    
    
    $
    18,171
 2009
    
    
    2008Supplemental Disclosures of Cash Flow informationCash paid during the period forInterest
    
    $
    872
    
    
    $
    1,275Taxes
    
    $
    4
    
    
    $
    37
 The accompanying notes are an integral part of these unaudited condensed consolidated statements.
  6




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The Allied Defense Group, Inc.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
 (Thousands of Dollars)
 NOTE 1  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      Liquidity and Capital Resources
    
   7




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Thousands of Dollars)
     Reclassifications
  NOTE 2  PRINCIPLES OF CONSOLIDATION
  
    
    ARC Europe, S.A. (ARC Europe), a Belgian company,
    
    Allied Research Corporation Limited (Limited), an inactive United Kingdom company,
    
    News/Sports Microwave Rental, Inc. (NSM), a California corporation (Discontinued Operation),
    
    Mecar USA, Inc. (Mecar USA), a Delaware corporation,
    8




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Thousands of Dollars)
  
    
    Mecar.Mecar designs, develops, manufactures and sells ammunition
and ammunition related products for military use. Substantially all
of Mecars revenues are derived from the sale of ammunition which is
used with weapons that are generally considered defensive weapons.
From time to time, Mecar provides system integration services
pursuant to which it purchases and resells weapon systems, ammunition
manufactured by others or consulting services to governments looking
to develop their own manufacturing capabilities in types of
ammunition not manufactured by Mecar. Mecars manufactured products
consist of a wide variety of ammunition and grenades in the medium
caliber, artillery, anti-tank and anti-material categories.
    
    Mecar USA.Mecar USA purchases and resells ammunition and
ammunition related products manufactured by others for the benefit of
the U.S. government and foreign governments. Mecar USA substantially
expanded this procurement business in 2008. Mecar USA also pursues
manufacturing contracts from the U.S. Government and others for
ammunition and pyrotechnics devices. Mecar USA became operational in
late-2005 following the construction of a new facility in Marshall,
Texas.
  NOTE 3  ACCOUNTS RECEIVABLE AND COSTS AND ACCRUED EARNINGS ON UNCOMPLETED CONTRACTS
  March 31,
    
    
    December 31,2009
    
    
    2008Direct and indirect receivables from governments
    
    $
    20,495
    
    
    $
    10,173Commercial and other receivables
    
    
    3,951
    
    
    
    3,51124,446
    
    
    
    13,684Less: Allowance for doubtful receivables
    
    
    (1,185
    )
    
    
    (1,038
    )$
    23,261
    
    
    $
    12,646
   NOTE 4  INVENTORIES
  March 31,
    
    
    December 31,2009
    
    
    2008Raw materials
    
    $
    9,058
    
    
    $
    10,714Work in process
    
    
    12,762
    
    
    
    10,670Finished goods
    
    
    3,894
    
    
    
    2,91925,714
    
    
    
    24,303Less: Reserve for obsolescence
    
    
    (2,758
    )
    
    
    (2,795
    )$
    22,956
    
    
    $
    21,508
  9




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The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Thousands of Dollars)
  NOTE 5  CONTRACTS IN PROGRESS
  NOTE 6  BANK CREDIT FACILITY
    
 
   10




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The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Thousands of Dollars)
 NOTE 7  LONG-TERM OBLIGATIONS
  March 31,
    
    
    December 31,2009
    
    
    2008Fair value of senior secured convertible notes
    
    $
    
    
    
    $
    933SOGEPA loan
    
    
    7,925
    
    
    
    8,458Bank notes payable
    
    
    360
    
    
    
    289Capital leases and other
    
    
    412
    
    
    
    593Total long-term debt
    
    
    8,697
    
    
    
    10,273Less: Current maturities
    
    
    (2,871
    )
    
    
    (3,592
    )Long-term debt, less current maturities
    
    $
    5,826
    
    
    $
    6,681
 Senior secured convertible notes.
 Accounting for Certain Hybrid Instruments
  Warrants
 Accounting for Derivative Instruments Index to, and
Potentially Settled in, a Companys Own Stock
  11




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The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Thousands of Dollars)
 SOGEPA Loan.  Société Wallonne de Gestion et de Participations Debtors Accounting for a Modification or Exchange of
Debt Instruments  
 Bank notes payable. 
 Capital lease and other.
  NOTE 8  DERIVATIVE FINANCIAL INSTRUMENTS
     12




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The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Thousands of Dollars)
  Liability DerivativesBalance Sheet Location
    
    Fair ValueDerivatives not designated as hedging instruments under SFAS
No. 133Foreign currency futures contracts
    
    Current maturities of foreign exchange contracts
    
    $
    654Foreign currency futures contracts
    
    Long-term foreign exchange contracts, less current maturities
    
    
    1,399Total derivatives not designated as hedging
instruments under SFAS No. 133
    
    
    
    $
    2,053
  Amount of LossStatements of Operations Location
    
    RecognizedDerivatives not designated as hedging instruments under SFAS No. 133Foreign currency futures contracts
    
    Loss from foreign exchange contracts
    
    $
    662
  NOTE 9  FAIR VALUE MEASUREMENTS
 Fair Value Measurements
   
 
 
   13




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Thousands of Dollars)
  Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets or Liabilities
    
    
    Observable Inputs
    
    
    Unobservable InputsMarch 31, 2009
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalLiabilitiesDerivative instrument
    
    $
    
    
    
    $
    84
    
    
    
    
    
    
    $
    84Foreign exchange contract
    
    
    
    
    
    
    2,053
    
    
    
    
    
    
    
    2,053$
    
    
    
    $
    2,137
    
    
    $
    
    
    
    $
    2,137
 Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets or Liabilities
    
    
    Observable Inputs
    
    
    Unobservable InputsDecember 31, 2008
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalLiabilitiesSenior secured convertible notes
    
    $
    
    
    
    $
    933
    
    
    $
    
    
    
    $
    933Derivative instrument
    
    
    
    
    
    
    318
    
    
    
    
    
    
    
    318Foreign exchange contract
    
    
    
    
    
    
    1,477
    
    
    
    
    
    
    
    1,477$
    
    
    
    $
    2,728
    
    
    $
    
    
    
    $
    2,728
  NOTE 10  EARNINGS (LOSS) PER SHARE
  Three Months Ended March 31,2009
    
    
    2008Net loss from continuing operations
    
    $
    (1,373
    )
    
    $
    (2,678
    )Net earnings (loss) from discontinued operations
    
    
    1,056
    
    
    
    (617
    )Net loss
    
    $
    (317
    )
    
    $
    (3,295
    )Weighted average number of basic and diluted shares
    
    
    8,079,972
    
    
    
    8,013,156Basic and diluted net loss per share from continuing operations
    
    $
    (0.17
    )
    
    $
    (0.33
    )Basic and diluted net earnings (loss) per share from discontinued operations
    
    
    0.13
    
    
    
    (0.08
    )Total
    
    $
    (0.04
    )
    
    $
    (0.41
    )
   14




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Thousands of Dollars)
 NOTE 11  COMPREHENSIVE LOSS
  Three Months Ended March 31,2009
    
    
    2008Net loss
    
    $
    (317
    )
    
    $
    (3,295
    )Currency Translation Adjustment
    
    
    (1,863
    )
    
    
    2,474Comprehensive loss
    
    $
    (2,180
    )
    
    $
    (821
    )
  NOTE 12  OTHER  NET
  Three Months Ended March 31,2009
    
    
    2008Net currency transaction losses
    
    $
    (301
    )
    
    $
    (69
    )Miscellaneous  net
    
    
    54
    
    
    
    2$
    (247
    )
    
    $
    (67
    )
  NOTE 13  SHARE- BASED COMPENSATION
   15




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Thousands of Dollars)
  March 31,2009
    
    
    2008Risk free interest rate
    
    
    0.80
    %
    
    
    1.53
    %Expected volatility rate
    
    
    70.71
    %
    
    
    92.11
    %Expected lives  years
    
    
    1
    
    
    
    1Divided yield
    
    
    
    
    
    
    
  NOTE 14  INDUSTRY SEGMENTS
 Three Months Ended March 31,2009
    
    
    2008Revenues from external customersMecar SA
    
    $
    26,742
    
    
    $
    25,687Mecar USA
    
    
    4,806
    
    
    
    1,108$
    31,548
    
    
    $
    26,795Segment earnings (loss) from continuing operations before taxesMecar SA
    
    $
    (172
    )
    
    $
    1,347Mecar USA
    
    
    6
    
    
    
    (70
    )Corporate
    
    
    (1,207
    )
    
    
    (3,827
    )$
    (1,373
    )
    
    $
    (2,550
    )
  March 31,
    
    
    December 31,2009
    
    
    2008Segment assetsMecar SA
    
    $
    106,453
    
    
    $
    86,161Mecar USA
    
    
    12,398
    
    
    
    9,324Corporate
    
    
    7,615
    
    
    
    8,214$
    126,466
    
    
    $
    103,699
   16




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Thousands of Dollars)
 NOTE 15  PROVISION FOR TAXES
 Interim Financial
Reporting
    Accounting for Income
  NOTE 16  COMMITMENTS AND CONTINGENCIES
       17




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Thousands of Dollars)
  Indemnification provisions
       
    Tax Litigation
   18




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Thousands of Dollars)
 Social Security Litigation
  NOTE 17  DISCONTINUED OPERATIONS
 Accounting for the
Impairment or Disposal of Long-Lived Assets
 Titan Dynamics Systems, Inc.
  Global Microwave Systems, Inc.
    19




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Thousands of Dollars)
 NS Microwave Systems, Inc.
    March 31,
    
    
    December 31,2009
    
    
    2008Cash
    
    $
    163
    
    
    $
    386Accounts receivable, net
    
    
    1,550
    
    
    
    1,312Costs and accrued earnings on uncompleted contracts
    
    
    776
    
    
    
    689Inventories, net
    
    
    1,113
    
    
    
    1,107Other assets
    
    
    953
    
    
    
    980Assets held for sale
    
    $
    4,555
    
    
    $
    4,474Accounts payable
    
    $
    392
    
    
    $
    408Accrued liabilities
    
    
    518
    
    
    
    500Customer deposits
    
    
    324
    
    
    
    382Other liabilities
    
    
    26
    
    
    
    26Liabilities held for sale
    
    $
    1,260
    
    
    $
    1,316
  Three Months Ended
    
    
    Three Months EndedMarch 31, 2009
    
    
    March 31, 2008NSM
    
    
    Titan
    
    
    GMS
    
    
    NSM
    
    
    TotalRevenue
    
    $
    1,741
    
    
    $
    668
    
    
    $
    1,972
    
    
    $
    1,334
    
    
    $
    3,974Income (loss) before taxes
    
    
    110
    
    
    
    (142
    )
    
    
    (172
    )
    
    
    (414
    )
    
    
    (728
    )Income (loss), net of tax
    
    
    110
    
    
    
    (142
    )
    
    
    (173
    )
    
    
    (415
    )
    
    
    (730
    )Discontinued operations, net of tax
    
    $
    110
    
    
    $
    (142
    )
    
    $
    (173
    )
    
    $
    (415
    )
    
    $
    (730
    )
  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
 March 31, 2009
 (Thousands of Dollars)
 (Unaudited)
 Overview
    
    
    Mecar.Mecar designs, develops, manufactures and sells
ammunition and ammunition related products for military use.
Substantially all of Mecars revenues are derived from the
sale of ammunition which is used with weapons that are
generally considered defensive weapons. From time to time,
Mecar provides system integration services pursuant to which
it purchases and resells weapon systems, ammunition
manufactured by others or consulting services to governments
looking to develop their own manufacturing capabilities in
types of ammunition not manufactured by Mecar. Mecars
manufactured products consist of a wide variety of ammunition
and grenades in the medium caliber, artillery, anti-tank and
anti-material categories.
 
    
    Mecar USA.Mecar USA purchases and resells ammunition and
ammunition related products manufactured by others for the
benefit of the U.S. government and foreign governments. Mecar
USA substantially expanded this procurement business in 2008.
Mecar USA also pursues manufacturing contracts from the U.S.
Government and others for ammunition and pyrotechnics
devices. Mecar USA became operational in late-2005 following
the construction of a new facility in Marshall, Texas.
    Liquidity and Capital Resources
   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
March 31, 2009
(Thousands of Dollars)
(Unaudited)
   
      Results of Operations
     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
March 31, 2009
(Thousands of Dollars)
(Unaudited)
 Revenue.
 Revenue by SegmentThree Months Ended March 31,2009
    
    
    2008% of
    
    
    
    
    
    
    % ofAmount
    
    
    total
    
    
    Amount
    
    
    totalMecar
    
    $
    26,742
    
    
    
    85
    %
    
    $
    25,687
    
    
    
    96
    %Mecar USA
    
    
    4,806
    
    
    
    15
    
    
    
    1,108
    
    
    
    4Total
    
    $
    31,548
    
    
    
    100
    %
    
    $
    26,795
    
    
    
    100
    %
   Cost of Sales.
 Cost of Sales as a Percentage of Revenue by SegmentThree Months Ended March 31,2009
    
    
    2008% of
    
    
    
    
    
    
    % ofsegment
    
    
    
    
    
    
    segmentAmount
    
    
    revenue
    
    
    Amount
    
    
    revenueMecar
    
    $
    22,233
    
    
    
    83
    %
    
    $
    19,989
    
    
    
    78
    %Mecar USA
    
    
    4,485
    
    
    
    93
    
    
    
    999
    
    
    
    90Total
    
    $
    26,718
    
    
    
    85
    %
    
    $
    20,988
    
    
    
    78
    %
     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
March 31, 2009
(Thousands of Dollars)
(Unaudited)
 Selling and Administrative Expenses.
 Selling and Administrative Expenses by SegmentThree Months Ended March 31,2009
    
    
    2008% of
    
    
    
    
    
    
    % ofAmount
    
    
    total
    
    
    Amount
    
    
    totalMecar
    
    $
    2,434
    
    
    
    58
    %
    
    $
    2,616
    
    
    
    53
    %Mecar USA
    
    
    332
    
    
    
    8
    
    
    
    178
    
    
    
    3Corporate
    
    
    1,446
    
    
    
    34
    
    
    
    2,179
    
    
    
    44Total
    
    $
    4,212
    
    
    
    100
    %
    
    $
    4,973
    
    
    
    100
    %
  Research and Development.
 Interest Income.
 Interest Expense.
 Net Gain (Loss) on fair value of the senior convertible notes and warrants.
 Loss from Foreign Exchange Contracts.
  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
March 31, 2009
(Thousands of Dollars)
(Unaudited)
 Other  Net.
 Pre-Tax Income (Loss)
  Pre-Tax Income (Loss) by SegmentThree Months Ended March 31,2009
    
    
    2008% of
    
    
    
    
    
    
    % oftotal
    
    
    
    
    
    
    totalAmount
    
    
    revenue
    
    
    Amount
    
    
    revenueMecar
    
    $
    (172
    )
    
    
    
    %
    
    $
    1,347
    
    
    
    6
    %Mecar USA
    
    
    6
    
    
    
    
    
    
    
    (70
    )
    
    
    (1
    )Corporate
    
    
    (1,207
    )
    
    
    (4
    )
    
    
    (3,827
    )
    
    
    (15
    )Total
    
    $
    (1,373
    )
    
    
    (4
    )%
    
    $
    (2,550
    )
    
    
    (10
    )%
  Income Taxes. Accounting for Income Taxes in
Interim periods
  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
March 31, 2009
(Thousands of Dollars)
(Unaudited)
 Net Income (Loss) from discontinued operations. ( 
 Three Months Ended March 31,2009
    
    
    2008NSM
    
    $
    110
    
    
    $
    (415
    )GMS
    
    
    
    
    
    
    (173
    )Titan
    
    
    
    
    
    
    (142
    )Income (loss) from discontinued operations
    
    
    110
    
    
    
    (730
    )Gain on sale of subsidiaries, net of tax
    
    
    946
    
    
    
    113Net income (loss) from discontinued operations
    
    $
    1,056
    
    
    $
    (617
    )
  Net Income (Loss).
 Backlog.
 Backlog by Segment2009
    
    
    2008Amount
    
    
    %
    
    
    Amount
    
    
    %Mecar
    
    $
    109,482
    
    
    
    69
    %
    
    $
    142,808
    
    
    
    92
    %Mecar USA
    
    
    49,005
    
    
    
    31
    
    
    
    12,843
    
    
    
    8Total
    
    $
    158,487
    
    
    
    100
    %
    
    $
    155,651
    
    
    
    100
    %
     26




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2009
(Thousands of Dollars)
(Unaudited)
 Balance Sheet
  March 31,
    
    
    December 31,2009
    
    
    2008ASSETSCash, restricted and unrestricted
    
    $
    19,428
    
    
    $
    18,482Accounts receivable, net
    
    
    23,261
    
    
    
    12,646Costs and accrued earnings on uncompleted contracts
    
    
    29,046
    
    
    
    21,999Inventories, net
    
    
    22,956
    
    
    
    21,508Contracts in progress
    
    
    5,167
    
    
    
    1,469Other current assets
    
    
    8,470
    
    
    
    7,611Property, plant & equipment and other assets
    
    
    18,138
    
    
    
    19,984TOTAL ASSETS
    
    $
    126,466
    
    
    $
    103,699LIABILITIESBank overdraft facility
    
    $
    5,089
    
    
    $
    381Accounts payable and accrued liabilities
    
    
    40,385
    
    
    
    34,157Customer deposits
    
    
    32,021
    
    
    
    16,731Other current liabilities
    
    
    5,052
    
    
    
    5,229Senior convertible notes
    
    
    
    
    
    
    933Other long-term liabilities and debt
    
    
    11,489
    
    
    
    11,817TOTAL LIABILITIES
    
    
    94,036
    
    
    
    69,248STOCKHOLDERS EQUITY
    
    
    32,430
    
    
    
    34,451TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    126,466
    
    
    $
    103,699
        27




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2009
(Thousands of Dollars)
(Unaudited)
  
    Cash Flows
  2008
    
    
    2007Net cash used in operating activities
    
    $
    (9,732
    )
    
    $
    (14,509
    )Net cash (used in) provided by investing activities
    
    
    (918
    )
    
    
    1,796Net cash provided by financing activities
    
    
    3,718
    
    
    
    8,514Effects of exchange rate on cash
    
    
    (219
    )
    
    
    802
 Operating Activities.
   28




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2009
(Thousands of Dollars)
(Unaudited)
 Investing Activities.
 Financing Activities.
 Effects of Exchange Rate.
 Allied.
 Mecar.
 Mecar USA.
 Stock Repurchases.
 Off-Balance Sheet Arrangements.
    29




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2009
(Thousands of Dollars)
(Unaudited)
 Critical Accounting Policies
   
    
    Revenue recognition
 
    
    Inventory reserves and allowance for doubtful accounts
 
    
    Foreign currency translations
 
    
    Derivative Instruments
 
    
    Valuation of deferred income taxes and income tax reserves.
  Recent Accounting Pronouncements
 Disclosures about Derivative Instruments and
Hedging Activities  an amendment of FASB Statement No. 133
 Fair Value Measurements Effective Date
of FASB Statement No. 157
  30




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2009
(Thousands of Dollars)
(Unaudited)
 Forward-Looking Statements
    31




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE
  
 ITEM 4T. DISCLOSURE CONTROLS AND PROCEDURES
 Evaluation of disclosure controls and procedures
      Changes in internal controls
   32




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 Exhibit No.
    
    Description of Exhibits31.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
    
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
  33




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##### Table of Contents



SIGNATURE
  THE ALLIED DEFENSE GROUP, INC.Date: May 15, 2009
    /s/ Deborah  F. RicciDeborah  F. RicciChief Financial Officer and Treasurer  34




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description of Exhibits31.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
    
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
  35