##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K/A
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004
 Commission file number: 1-11376
 
 THE ALLIED DEFENSE GROUP, INC.
  Delaware
(State of incorporation)
    
    04-2281015
(I.R.S. Employer Identification No.)
 8000 Towers Crescent Drive, Suite 260
Vienna, Virginia 22182
 (703) 847-5268
 
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Class
    
    Name of ExchangeCommon Stock, $0.10 Par
Value
    
    American Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act: None
 þ o
  þ o
 o þ
   Documents Incorporated by Reference




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##### 



INDEX
 PART IExplanatory Note
    
    
    1Item 1.
    
    Business
    
    
    1Item 2.
    
    Properties
    
    
    13Item 3.
    
    Legal Proceedings
    
    
    14Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    14PART IIItem 5.
    
    Market for Stock and Related Stockholder Matters And Issuer Purchases of Equity Securities
    
    
    14Item 6.
    
    Selected Financial Data
    
    
    15Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 8.
    
    Financial Statements and Supplementary Data
    
    
    29Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    29Item 9A.
    
    Controls and Procedures
    
    
    29Item 9B.
    
    Other Information
    
    
    29PART IIIItem 10.
    
    Directors and Executive Officers
    
    
    30Item 11.
    
    Executive Compensation
    
    
    30Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    30Item 13.
    
    Certain Relationships and Related Transactions
    
    
    30Item 14.
    
    Principal Accounting Fees and Service
    
    
    30PART IVItem 15.
    
    Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    31SIGNATURES
    
    
    
    
    32




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##### 



PART I
 EXPLANATORY NOTE
     ITEM 1. BUSINESS
   Date
    
    Company Involved
    
    EventMay 31, 1994
    
    VSK Electronics N.V and Télé Technique Générale S.A.
    
    AcquiredMay 9, 1995
    
    Intelligent Data Capturing Systems N.V.
    
    AcquiredDecember 11, 1999
    
    VIGITEC S.A.
    
    AcquiredDecember 31, 2001
    
    News/Sports Microwave Rental Inc.
    
    AcquiredJune 6, 2002
    
    Titan Dynamics Systems, Inc.
    
    AcquiredJuly 31, 2002
    
    SeaSpace Corporation
    
    AcquiredAugust 1, 2004
    
    Control Monitor Systems, Inc.
    
    Acquired
  
    
    Strategic acquisitions that complement existing operating divisions
    
    Organic growth by expanding product offerings, increasing market share in existing markets, and penetrating new markets
    
    Enhance marketing and business development efforts between each subsidiary to increase sales and backlog
    
    Successfully integrate new subsidiaries to ensure profitability and accretion
   1




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##### 



Description of Business
 Allied.
 MECAR.
 Mortar Ammunition
 90mm Ammunition
 Tank Ammunition nd
 Other Ammunition
 Grenades
 2




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##### 



VSK Group.
 NS Microwave.
 Titan Dynamics.
 SeaSpace. ®
 MECAR USA.
 Geographic Areas and Industry Segments
  3




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##### 



Market and Customers
        Principal Customers
  4




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##### 



Raw Materials and Suppliers
      Marketing
     Research and Development
   5




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##### 



Backlog
 
 December 31, 2004
    
    December 31, 2003Ordnance and Manufacturing
    
    $
    50.5
    million
    
    $
    81.2
    millionElectronic Security
    
    
    24.6
    million
    
    $
    24.3
    millionEnvironmental Safety & Security
    
    
    1.5
    million
    
    $
    1.7
    millionSoftware, Training & Simulation
    
    
    0.7
    million
    
    $
    0.5
    million
  Competition
     6




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##### 



Seasonal Nature of Business
   Personnel
 
 Technical & salaried
    
    Hourly
    
    Part-time
    
    Technicalemployees
    
    workers
    
    employees
    
    consultants
    
    TotalAllied
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8MECAR
    
    
    56
    
    
    
    321
    
    
    
    
    
    
    
    3
    
    
    
    380VSK Group
    
    
    132
    
    
    
    17
    
    
    
    5
    
    
    
    
    
    
    
    154NS Microwave
    
    
    45
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    69SeaSpace
    
    
    38
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    43Titan Dynamics
    
    
    2
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    10
  Patents and Trademarks
  Environmental Regulations
  Available Information
 www.allieddefensegroup.com. www.allieddefensegroup.com
 
 7




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##### 



Executive Officers of Allied
  John J. Marcello.
 Monte L. Pickens
 Robert P. Dowski
 Wayne F. Hosking, Jr.
  Risk Factors
             8




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##### 




    
    the timing and amount of, or cancellation or rescheduling of, orders for our products;
    
    our ability to develop, introduce, ship and support new products and product
enhancements and manage product transitions, announcements and new product introductions;
    
    our ability to achieve cost reductions;
    
    our ability to achieve and maintain production volumes and quality levels for our products;
    
    the volume of products sold and the mix of distribution channels through which they are sold;
    
    the loss of any one of our major customers or a significant reduction in orders from those customers; and
    
    increased competition, particularly from larger, better capitalized competitors.
    9




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##### 



10




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##### 




    
    make it more difficult for us to satisfy our obligations,
    
    require us to dedicate a substantial portion of our cash flow from operations to
payments on our debt, thereby reducing the amount of cash flow available for working
capital, capital expenditures, acquisitions and other general corporate purposes,
    
    limit our flexibility in planning for, or reacting to, changes in our lines of business,
    
    place us at a competitive disadvantage compared to competitors that have lower debt
service obligations and significantly greater operating and financing flexibility,
    
    limit, along with the financial and other restrictive covenants applicable to our
indebtedness, among other things, our ability to borrow additional funds,
    
    increase our vulnerability to general adverse economic and industry conditions, and
    
    result in an event of default upon a failure to comply with financial covenants
contained in our senior credit facilities which, if not cured or waived, could have a
material adverse effect on our business, financial condition, or results of operations.
          11




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##### 



12




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##### 



ITEM 2. PROPERTIES
  Square FootageLocation
    
    Property
    
    Owned
    
    Leased
    
    Industry SegmentNivelles, Belgium
    
    Office/Mfg
    
    
    140,000
    
    
    
    
    
    
    Ordnance & Manufacturing (1)Harelbeke, Belgium
    
    Office/Mfg
    
    
    25,600
    
    
    
    
    
    
    Electronic Security (2)Heppignies, Belgium
    
    Office/Mfg
    
    
    9,600
    
    
    
    
    
    
    Electronic Security (2)Brussels, Belgium
    
    Office/Mfg
    
    
    8,700
    
    
    
    
    
    
    Electronic Security (2)Hasselt, Belgium
    
    Office/Mfg
    
    
    7,500
    
    
    
    
    
    
    Electronic Security (2)Huntington Beach, CA
    
    Office/Mfg
    
    
    
    
    
    
    3,100
    
    
    Electronic Security (2)Spring Valley, CA
    
    Office/Mfg
    
    
    
    
    
    
    18,400
    
    
    Electronic Security (3)Poway, CA
    
    Office/Mfg
    
    
    
    
    
    
    27,400
    
    
    Environmental Safety & Security (4)Marshall, TX
    
    Office/Mfg
    
    
    
    
    
    
    3,800
    
    
    Software, Training & Simulation (5)Marshall, TX
    
    Office/Mfg
    
    In process
    
    
    
    
    
    Ordnance & Manufacturing (6)
 
 (1)
    
    MECARs principal factory is located approximately 25 miles south of Brussels near Nivelles,
Belgium. The factory principally consists of a manufacturing and administrative complex which
was occupied by MECAR in 1989. The manufacturing area is approximately 112,000 square feet
and the administration facility is approximately 28,000 square feet. There are a number of
older buildings on the property that are still used in conjunction with the new complex. A
small test firing range is maintained on this property. MECAR also owns 600 acres in the
vicinity of the Village of Marche in the Ardennes region of Belgium, which was previously used
as a test range. MECAR ceased its use of the Ardennes firing range in 2001. MECAR is now
utilizing other test ranges, including a test range owned by the Belgian Army, although it is
also exploring the prospects of securing the use of a new test range. Throughout 2004, MECAR
operated using one full and two partial shifts. MECAR is currently operating near its
productive capacity.(2)
    
    The VSK Group operates from owned facilities throughout Belgium, as well as a leased facility
in California. Such facilities are currently operating at approximately 85% of productive
capacity.(3)
    
    NS Microwave operates from leased office, production and warehouse facilities in Spring
Valley, California. In 2004, NS Microwave expanded to a second warehouse facility in close
proximity to its original facility providing an additional 10,000 square feet. The facilities
are leased on a month to month basis and are currently operating at approximately 80% of
productive capacity.(4)
    
    SeaSpace operates from leased office, production and warehouse facilities in Poway, CA. The
office lease expires in June, 2009 and the facility is currently operating at approximately
70% of productive capacity. In 2004, SeaSpace expanded to two production and warehouse
facilities in close proximity to its original facility providing an additional 13,400 square
feet.(5)
    
    Titan Dynamics operates from a leased office and manufacturing facility in Marshall, TX. The
facility is currently operating at approximately 80% of productive capacity. 13




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##### 



(6)
    
    MECAR USA will operate from an office and manufacturing facility in Marshall, Texas, which is
being constructed by the local development authority. Construction is expected to be
completed during the latter portion of 2005. It is anticipated that Titan Dynamics will
relocate its operations to share this facility with MECAR USA.  ITEM 3. LEGAL PROCEEDINGS
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  PART II
 ITEM 5. MARKET FOR STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 Market Information.
 2004
    
    2003High
    
    Low
    
    High
    
    Low1st Quarter
    
    $
    23.97
    
    
    $
    18.25
    
    
    $
    19.00
    
    
    $
    14.862nd Quarter
    
    
    21.50
    
    
    
    16.50
    
    
    
    19.00
    
    
    
    14.753rd Quarter
    
    
    19.66
    
    
    
    17.81
    
    
    
    22.00
    
    
    
    18.254th Quarter
    
    
    22.31
    
    
    
    18.56
    
    
    
    24.04
    
    
    
    20.00
 Stockholders.
 Dividends.
 Equity Compensation Plan Information.
 14




---



##### 



Number of securities to be
    
    Weighted average exercise
    
    Number of securities availableissued upon exercise of
    
    price of outstanding options,
    
    for future issuance under equityoutstanding options,
    
    warrants and rights
    
    compensation plans (excludingwarrants and rights
    
    
    
    securities reflected in column (a))(a)
    
    (b)
    
    (c)Equity compensation plans
approved by security holders
    
    
    632,266
    
    
    $
    14.69
    
    
    
    125,287Equity compensation plans
not approved by security
holders
    
    
    105,000
    
    
    $
    25.18
    
    
    
    Total
    
    
    737,266
    
    
    $
    16.18
    
    
    
    125,287
 ITEM 6. SELECTED FINANCIAL DATA
  2004(1)
    
    2003 (1)
    
    2002(1)
    
    2001(1)
    
    2000(000s omitted except per share amounts)Operations data:Revenues
    
    $
    150,131
    
    
    $
    153,937
    
    
    $
    141,622
    
    
    $
    96,641
    
    
    $
    107,743Earnings from- continuing operations
    
    
    3,934
    
    
    
    3,762
    
    
    
    19,236
    
    
    
    10,165
    
    
    
    8,705- discontinued operation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    517Net earnings
    
    
    3,934
    
    
    
    3,762
    
    
    
    19,236
    
    
    
    10,165
    
    
    
    9,222Earnings per shareBasic:- continuing operations
    
    
    0.71
    
    
    
    0.68
    
    
    
    3.63
    
    
    
    2.07
    
    
    
    1.79- discontinued operation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.11Net earnings
    
    
    0.71
    
    
    
    0.68
    
    
    
    3.63
    
    
    
    2.07
    
    
    
    1.90Diluted:- continuing operations
    
    
    0.70
    
    
    
    0.63
    
    
    
    3.43
    
    
    
    2.05
    
    
    
    1.79- discontinued operation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.11Net earnings
    
    
    0.70
    
    
    
    0.63
    
    
    
    3.43
    
    
    
    2.05
    
    
    
    1.90Balance sheet data:Working capital
    
    
    83,896
    
    
    
    85,604
    
    
    
    74,563
    
    
    
    40,996
    
    
    
    34,898Total assets
    
    
    196,318
    
    
    
    217,331
    
    
    
    168,954
    
    
    
    86,584
    
    
    
    87,636Long-term obligations
    
    
    6,817
    
    
    
    12,697
    
    
    
    12,312
    
    
    
    3,110
    
    
    
    3,529Stockholders equity
    
    
    129,045
    
    
    
    115,753
    
    
    
    96,005
    
    
    
    58,449
    
    
    
    46,720Cash dividends declared per common share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  (1)
 
 15




---



##### 



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(amounts in thousands of dollars)
 Overview
  
    
    Ordnance & Manufacturingsegment consists of MECAR, located in
Belgium, and MECAR USA, located in Marshall, TX. MECAR
develops and produces medium caliber tank, mortar and other
ammunition. MECAR USA will initially pursue contracts from
U.S. and foreign governments for ammunition and pyrotechnics
devices. MECAR USA is expected to be operational in mid-2005.
    
    Electronic Securitysegment consists of the VSK Group, located
in Belgium and California, and NS Microwave, located in San
Diego, CA. The VSK Group consists of VSK Electronics N.V.
which manufactures access control, intrusion protection, fire
detection and video systems; Télé Technique Générale S.A.
which installs security systems; Intelligent Data Capturing
Systems N.V. which manufacturers integrated video systems;
VIGITEC S.A. which installs networked video surveillance
systems; and Control Monitor Systems which manufactures access
control systems. NS Microwave designs, manufactures,
distributes and services industrial and law enforcement
surveillance products and systems.
    
    Environmental Safety & Securitysegment consists of SeaSpace,
located in San Diego, CA, which designs, manufactures,
distributes and services weather and environmental satellite
ground reception systems, and which has begun to manufacture
and market antenna products.
    
    Software, Training & Simulationsegment consists of Titan
Dynamics, located in Marshall, TX, which designs, manufactures
and sells battlefield effects simulators, minor pyrotechnics
and other training devices.
    Restatements
    16




---



##### 



Condensed Consolidated Statements of Earnings
 Years Ended December 31,
    
    2004
    
    
    2003
    
    
    2002As Previously
    
    
    Pro-Forma
    
    
    As Previously
    
    
    As Initially
    
    
    As Previously
    
    
    As InitiallyReported
    
    
    (Unaudited)
    
    

Reported
    
    
    Reported
    
    

Reported
    
    
    ReportedRevenues
    
    $
    146,900
    
    
    $
    160,737
    
    
    $
    154,235
    
    
    $
    171,407
    
    
    $
    145,274
    
    
    $
    130,866Cost of Sales
    
    
    104,850
    
    
    
    110,671
    
    
    
    114,800
    
    
    
    124,558
    
    
    
    90,430
    
    
    
    91,509Operating income
    
    
    6,182
    
    
    
    14,198
    
    
    
    10,905
    
    
    
    18,319
    
    
    
    35,718
    
    
    
    20,231Earnings before
income taxes
    
    
    3,478
    
    
    
    11,494
    
    
    
    9,129
    
    
    
    16,543
    
    
    
    35,437
    
    
    
    19,950Income taxes
    
    
    960
    
    
    
    3,685
    
    
    
    5,201
    
    
    
    7,722
    
    
    
    14,543
    
    
    
    9,278Net Earnings
    
    $
    2,518
    
    
    $
    7,809
    
    
    $
    3,928
    
    
    $
    8,821
    
    
    $
    20,894
    
    
    $
    10,672Earnings per share:Basic
    
    $
    0.45
    
    
    $
    1.40
    
    
    $
    0.71
    
    
    $
    1.60
    
    
    $
    3.94
    
    
    $
    2.01Diluted
    
    $
    0.42
    
    
    $
    1.34
    
    
    $
    0.66
    
    
    $
    1.54
    
    
    $
    3.73
    
    
    $
    1.92


Condensed Consolidated Statements of Earnings


Years Ended December 31,
    
    2004
    
    
    2003
    
    
    2002As
    
    
    As Previously
    
    
    As
    
    
    As Previously
    
    
    As
    
    
    As PreviouslyRestated
    
    

Reported(1)
    
    
    Restated
    
    

Reported(1)
    
    
    Restated
    
    

Reported(1)Revenues
    
    $
    150,131
    
    
    $
    146,900
    
    
    $
    153,937
    
    
    $
    154,235
    
    
    $
    141,622
    
    
    $
    145,274Cost of Sales
    
    
    105,936
    
    
    
    104,850
    
    
    
    114,753
    
    
    
    114,800
    
    
    
    89,290
    
    
    
    90,430Operating income
    
    
    8,327
    
    
    
    6,182
    
    
    
    10,654
    
    
    
    10,905
    
    
    
    33,206
    
    
    
    35,718Earnings before
income taxes
    
    
    5,623
    
    
    
    3,478
    
    
    
    8,878
    
    
    
    9,129
    
    
    
    32,925
    
    
    
    35,437Income taxes
    
    
    1,689
    
    
    
    960
    
    
    
    5,116
    
    
    
    5,201
    
    
    
    13,689
    
    
    
    14,543Net Earnings
    
    $
    3,934
    
    
    $
    2,518
    
    
    $
    3,762
    
    
    $
    3,928
    
    
    $
    19,236
    
    
    $
    20,894Earnings per share:Basic
    
    $
    0.71
    
    
    $
    0.45
    
    
    $
    0.68
    
    
    $
    0.71
    
    
    $
    3.63
    
    
    $
    3.94Diluted
    
    $
    0.70
    
    
    $
    0.42
    
    
    $
    0.63
    
    
    $
    0.66
    
    
    $
    3.43
    
    
    $
    3.73





|    |  |                                                                                                                            
|--- |  | ---------------------------------------------------------------------------------------------------------------------------
|(1) |  | The amounts previously restated reflect the balances reported by the Company in its 2004 Form
10-K filed on March 31, 2005.



17



---



##### 



Condensed Consolidated Statements of Earnings
 Years Ended December 31,
    
    2004
    
    2003
    
    2002As
    
    Pro-Forma
    
    As
    
    As Initially
    
    As
    
    As InitiallyRestated
    
    (Unaudited)
    
    Restated
    
    Reported
    
    Restated
    
    ReportedRevenues
    


    $
    150,131
    
    
    $
    160,737
    
    
    $
    153,937
    
    
    $
    171,407
    
    
    $
    141,622
    
    
    $
    130,866Cost of Sales
    
    
    105,936
    
    
    
    110,671
    
    
    
    114,753
    
    
    
    124,558
    
    
    
    89,290
    
    
    
    91,509Operating income
    
    
    8,327
    
    
    
    14,198
    
    
    
    10,654
    
    
    
    18,319
    
    
    
    33,206
    
    
    
    20,231Earnings before income taxes
    
    
    5,623
    
    
    
    11,494
    
    
    
    8,878
    
    
    
    16,543
    
    
    
    32,925
    
    
    
    19,950Income taxes
    
    
    1,689
    
    
    
    3,685
    
    
    
    5,116
    
    
    
    7,722
    
    
    
    13,689
    
    
    
    9,278Net Earnings
    
    $
    3,934
    
    
    $
    7,809
    
    
    $
    3,762
    
    
    $
    8,821
    
    
    $
    19,236
    
    
    $
    10,672Earnings per share:Basic
    
    $
    0.71
    
    
    $
    1.40
    
    
    $
    0.68
    
    
    $
    1.60
    
    
    $
    3.63
    
    
    $
    2.01Diluted
    
    $
    0.70
    
    
    $
    1.34
    
    
    $
    0.63
    
    
    $
    1.54
    
    
    $
    3.43
    
    
    $
    1.92
 18




---



##### 



Reconciliation
between unaudited Pro-Forma and Initially Reported data and Restated
Results
  Impact FromYear Ended December 31,2004
    
    
    
    Impact From
    
    Euro FluctuationsAs
Restated
    

Derivative
Gains
    

and
Using Incorrect Rate
    

(Unaudited)(1)
    
    (2)Revenues
    
    $
    150,131
    
    
    $
    (3,698
    )
    
    $
    14,304
    
    
    $
    160,737Cost of Sales
    
    
    105,936
    
    
    
    
    
    
    
    4,735
    
    
    
    110,671Operating income
    
    
    8,327
    
    
    
    (3,698
    )
    
    
    9,569
    
    
    
    14,198Earnings before income taxes
    
    
    5,623
    
    
    
    (3,698
    )
    
    
    9,569
    
    
    
    11,494Income taxes
    
    
    1,689
    
    
    
    (1,257
    )
    
    
    3,253
    
    
    
    3,685Net Earnings
    
    $
    3,934
    
    
    $
    (2,441
    )
    
    $
    6,316
    
    
    $
    7,809
 Impact FromYear Ended December 31,2003
    
    
    
    Impact From
    
    Euro FluctuationsAs
Restated
    

Derivative
Gains
    

and
Using Incorrect Rate
    

(Unaudited)(1)
    
    (2)Revenues
    
    $
    153,937
    
    
    $
    (13,625
    )
    
    $
    31,095
    
    
    $
    171,407Cost of Sales
    
    
    114,753
    
    
    
    
    
    
    
    9,805
    
    
    
    124,558Operating income
    
    
    10,654
    
    
    
    (13,625
    )
    
    
    21,290
    
    
    
    18,319Earnings before income taxes
    
    
    8,878
    
    
    
    (13,625
    )
    
    
    21,290
    
    
    
    16,543Income taxes
    
    
    5,116
    
    
    
    (4,632
    )
    
    
    7,238
    
    
    
    7,722Net Earnings
    
    $
    3,762
    
    
    $
    (8,993
    )
    
    $
    14,052
    
    
    $
    8,821
 Impact FromYear Ended December 31,2002
    
    
    
    Impact From
    
    Euro FluctuationsAs
Restated
    

Derivative
Gains
    

and
Using Incorrect Rate
    

(Unaudited)(1)
    
    (2)Revenues
    
    $
    141,622
    
    
    $
    (16,977
    )
    
    $
    6,221
    
    
    $
    130,866Cost of Sales
    
    
    89,290
    
    
    
    
    
    
    
    2,219
    
    
    
    91,509Operating income
    
    
    33,206
    
    
    
    (16,977
    )
    
    
    4,002
    
    
    
    20,231Earnings before income taxes
    
    
    32,925
    
    
    
    (16,977
    )
    
    
    4,002
    
    
    
    19,950Income taxes
    
    
    13,689
    
    
    
    (5,772
    )
    
    
    1,361
    
    
    
    9,278Net Earnings
    
    $
    19,236
    
    
    $
    (11,205
    )
    
    $
    2,641
    
    
    $
    10,672Cumulative Net Earnings
(2002 -2004)
    
    $
    26,932
    
    
    $
    (22,639
    )
    
    $
    23,009
    
    
    $
    27,302
 
 (1)
    
    Unrealized gains on FX contracts and related tax effects.(2)
    
    Impact of revising the revenues at the average currency rates
and related tax effects, as
well as adjusting the U.S. Dollar denominated receivables at the
period end spot rate and not the hedged rate.  Results of Operations
  19




---



##### 



For the years ended December 31,
    
    2004
    
    2003
    
    2002Restated
    
    
    
    
    
    
    
    Restated
    
    
    
    
    
    
    
    RestatedRevenue
    
    $
    150,131
    
    
    
    100.0
    %
    
    $
    153,937
    
    
    
    100.0
    %
    
    $
    141,622
    
    
    
    100.0
    %Cost and expensesCost of sales
    
    
    105,936
    
    
    
    70.6
    
    
    
    114,753
    
    
    
    74.5
    
    
    
    89,290
    
    
    
    63,0Selling and administrative
    
    
    29,173
    
    
    
    19.4
    
    
    
    23,998
    
    
    
    15.6
    
    
    
    17,497
    
    
    
    12,4Research and development
    
    
    6,695
    
    
    
    4.5
    
    
    
    4,532
    
    
    
    2.9
    
    
    
    1,629
    
    
    
    1,1Operating income
    
    
    8,327
    
    
    
    5.5
    
    
    
    10,654
    
    
    
    7.0
    
    
    
    33,206
    
    
    
    23,5Other income (expense)Interest income
    
    
    549
    
    
    
    0.4
    
    
    
    459
    
    
    
    0.3
    
    
    
    506
    
    
    
    0.4Interest expense
    
    
    (2,441
    )
    
    
    (1.6
    )
    
    
    (2,490
    )
    
    
    (1.6
    )
    
    
    (2,087
    )
    
    
    (1.5
    )Other  net
    
    
    (812
    )
    
    
    (0.6
    )
    
    
    255
    
    
    
    0.1
    
    
    
    1,300
    
    
    
    0.9Earnings before income taxes
    
    
    5,623
    
    
    
    3.7
    
    
    
    8,878
    
    
    
    5.8
    
    
    
    32,925
    
    
    
    23.3Income tax expense
    
    
    1,689
    
    
    
    1.1
    
    
    
    5,116
    
    
    
    3.3
    
    
    
    13,689
    
    
    
    9.7Net earnings
    
    $
    3,934
    
    
    
    2.6
    
    
    $
    3,762
    
    
    
    2.5
    
    
    $
    19,236
    
    
    
    13.6
 2004 compared to 2003 compared to 2002
 Revenues.
 Revenue by Segment2004
    
    2003
    
    2002Amount
    
    %
    
    Amount
    
    %
    
    Amount
    
    %Ordnance
& Manufacturing (restated)
    
    $
    96,810
    
    
    
    64.5
    %
    
    $
    112,240
    
    
    
    72,9
    %
    
    $
    106,035
    
    
    
    74.9
    %Electronic Security
    
    
    45,973
    
    
    
    30.6
    %
    
    
    33,303
    
    
    
    21.6
    %
    
    
    31,302
    
    
    
    22.1
    %Environmental Safety & Security
    
    
    6,435
    
    
    
    4.3
    %
    
    
    7,065
    
    
    
    4,6
    %
    
    
    4,032
    
    
    
    2.8
    %Software, Training & Simulation
    
    
    913
    
    
    
    0.6
    %
    
    
    1,329
    
    
    
    0.9
    %
    
    
    253
    
    
    
    0.2
    %$
    150,131
    
    
    
    100.0
    %
    
    $
    153,937
    
    
    
    100.0
    %
    
    $
    141,622
    
    
    
    100.0
    %
     20




---



##### 



Cost of Sales.
 Selling and Administrative Expenses.
  Research and Development.
 Interest Income.
 Interest expense.
 Other  Net.
 Pre-Tax Profit.
 Pre-Tax Profit (Loss) by Segment2004
    
    2003
    
    2002Ordnance
& Manufacturing (restated)
    


    $
    5,620
    
    
    $
    8,822
    
    
    $
    29,414Electronic Security
    
    
    6,987
    
    
    
    2,618
    
    
    
    3,903Environmental Safety & Security
    
    
    (3,283
    )
    
    
    (528
    )
    
    
    550Software, Training & Simulation
    
    
    (438
    )
    
    
    (207
    )
    
    
    (181
    )Corporate and Other
    
    
    (3,263
    )
    
    
    (1,827
    )
    
    
    (761
    )$
    5,623
    
    
    $
    8,878
    
    
    $
    32,925
 21




---



##### 



Income Taxes.
 Net Earnings.
 Backlog.
 Backlog by SegmentDecember 31, 2004
    
    December 31, 2003
    
    December 31, 2002Percentage
    
    
    
    
    
    Percentage
    
    
    
    
    
    PercentageAmount
    
    of total
    
    Amount
    
    of total
    
    Amount
    
    of totalOrdnance & Manufacturing
    
    $
    50,491
    
    
    
    65
    %
    
    $
    81,204
    
    
    
    75
    %
    
    $
    135,480
    
    
    
    91
    %Electronic Security
    
    
    24,601
    
    
    
    32
    
    
    
    24,349
    
    
    
    23
    
    
    
    10,559
    
    
    
    7Environmental Safety & Security
    
    
    1,523
    
    
    
    2
    
    
    
    1,744
    
    
    
    2
    
    
    
    1,998
    
    
    
    1Software, Training & Simulation
    
    
    658
    
    
    
    1
    
    
    
    498
    
    
    
    
    
    
    
    1,170
    
    
    
    1$
    77,273
    
    
    
    100
    %
    
    $
    107,795
    
    
    
    100
    %
    
    $
    149,207
    
    
    
    100
    %
  Liquidity and Capital Resources
 American Jobs Creation Act of 2004.
  22




---



##### 



Balance Sheet.
        23




---



##### 



Cash Flows.
  For the years ended December 312004
    
    2003
    
    2002Restated
    
    Restated
    
    RestatedNet cash provided by operating activities
    
    $
    10,367
    
    
    $
    24,350
    
    
    $
    575Net cash used in investing activities
    
    
    (5,517
    )
    
    
    (4,353
    )
    
    
    (7,304
    )Net cash provided by (used in) financing activities
    
    
    (22,243
    )
    
    
    4,354
    
    
    
    9,332
 Operating Activities.
 Investing Activities.
 Financing
Activities.
 Allied.
 MECAR.
  24




---



##### 



VSK Group.
 Other Subsidiaries.
 Contractual Obligations and Commercial Commitments.
  Payments due by period (amount in 000s)Less than 1
    
    2  3
    
    4  5
    
    More thanContractual Obligations
    
    Total
    
    year
    
    years
    
    years
    
    5 yearsLong-Term Debt Obligations (1)
    
    $
    1,971
    
    
    $
    204
    
    
    $
    358
    
    
    $
    89
    
    
    $
    1,320Capital Lease Obligations
    
    
    7,202
    
    
    
    2,529
    
    
    
    3,842
    
    
    
    831
    
    
    
    Convertible Debenture (2)
    
    
    2,231
    
    
    
    2,231
    
    
    
    
    
    
    
    
    
    
    
    Operating Leases
    
    
    1,954
    
    
    
    394
    
    
    
    824
    
    
    
    736
    
    
    
    Foreign Exchange Contracts (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Contractual Obligations
    
    $
    13,358
    
    
    $
    5,358
    
    
    $
    5,024
    
    
    $
    1,656
    
    
    $
    1,320Commercial Commitments
    
    TotalBank guarantees
    
    $
    26,781
    
    
    $
    26,781
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Interest payments on long-term debt (which are excluded above) are estimated to be $233,
$467, $465 and $230 for the above periods, assuming interest rates of 11.5% and 5.5%.(2)
    
    Interest payments on the convertible debenture are estimated to be $30 for the above period.(3)
    
    The Companys cash position is neutral over the term of the foreign exchange contracts and,
as such, has been excluded from this table. Future Liquidity.
   25




---



##### 



Off-Balance Sheet Arrangements.
 Recent Accounting Pronouncements.
 Critical Accounting Policies
   
    
    Revenue recognition via the percentage of completion method
    
    Goodwill and intangible asset valuation
    
    Inventory reserves and allowance for doubtful accounts
    
    Derivative instruments
    
    Valuation of deferred income taxes and income tax reserves.
 Revenue Recognition via the Percentage of Completion Method.
   Goodwill and intangible asset valuation.
 26




---



##### 



Inventory reserves and allowance for doubtful accounts.
 Derivative Instruments. Accounting for Derivative
Instruments and Hedging Activities
 Valuation of deferred income taxes and income tax reserves.
  Forward-Looking Statements
  27




---



##### 




    
    substantial reliance on MECARs principal customers to continue to acquire products on a regular basis;
    
    the cyclical nature of the Companys military business;
    
    rapid technological developments and changes and the Companys ability to continue to introduce
competitive new products and services on a timely, cost effective basis;
    
    the ability of the Company to successfully continue to expand its business base;
    
    the ability of the Companys acquired businesses to mature and meet performance expectations;
    
    the mix of products/services;
    
    domestic and foreign governmental fiscal affairs and public policy changes which may affect the level
of purchases made by customers;
    
    changes in environmental and other domestic and foreign governmental regulations;
    
    general risks associated with doing business outside the United States, including, without limitation,
import duties, tariffs, quotas and political and economic instability;
    
    the effects of terrorist actions on business activities, customer orders and cancellations, and the
United States and international governments responses to these terrorist actions;
    
    changes in government regulations;
    
    liability and other claims asserted against us;
    
    the ability to attract and retain qualified personnel; and
    
    continued availability of financing, financial instruments and financial resources in the amounts, at
the times, and on the terms required to support the Companys future business.
  ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 market risk credit risk
  Interest Rate Sensitivity.
 Exchange Rate Sensitivity.
 28




---



##### 



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
  ITEM 9A. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
   ITEM 9B. OTHER INFORMATION
  29




---



##### 



PART III
  ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ALLIED
  http://www.allieddefensegroup.com.
 
  ITEM 11. EXECUTIVE COMPENSATION
  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICE.
  30




---



##### 



PART IV
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 Exhibit No.
    
    Description of Exhibits3.1
    
    Certificate of Incorporation, as amended (Incorporated by reference from Form 10-Q filed in
August 2002).3.2
    
    Amended and Restated By-Laws (Incorporated by reference from Form 10-Q filed in August 2004).3.3
    
    Rights Agreement between Allied and Mellon Investor Services, LLC (Incorporated by reference
from Form 8-K filed in June 2001).10.1
    
    Employment Agreement between Allied and John G. Meyer, Jr. (Incorporated by reference from
Form 8-K filed in March 2001 and Form 8-K filed in August 2001).10.2
    
    Employment Agreement letter amendments between Allied and John G. Meyer, Jr. (Incorporated by
reference from Form 10-Q filed in August 2004).10.3
    
    Employment Agreement between Allied and Charles A. Hasper (Incorporated by reference from
Form 8-K filed in August 2001).10.4
    
    Employment Agreement letter amendment between Allied and Charles A. Hasper (Incorporated by
reference from Form 10-Q filed in August 2004).10.5
    
    Employment Agreement between Allied and Monte L. Pickens (Incorporated by reference from Form
8-K filed in April 2003).10.6
    
    Employment Agreement letter amendment between Allied and Monte L. Pickens (Incorporated by
reference from Form 10-Q filed in August 2004).10.7
    
    Employment Agreement between Allied and Wayne F. C. Hosking, Jr. (Incorporated by reference
from Form 8-K filed in April 2004).10.8
    
    Employment Agreement between Allied and John J. Marcello (Incorporated by reference from Form
10-Q filed in August 2005).10.9
    
    2001 Equity Incentive Plan, as amended (Incorporated by reference from Proxy Statements filed
in April 2001, April 2002 and May 2005).10.10
    
    8% Convertible Debenture, Series A and related documents (Incorporated by reference from
Form 8-K filed in July 2002).10.11
    
    Credit Agreement for MECAR S.A. (Incorporated by reference from Form 10-Q filed in August
2002).10.12
    
    Award/Contract dated as of March 1, 2002, by and between MECAR S.A. and U.S. Government
(Incorporated by reference from Form 10-Q filed in August 2002).10.13
    
    Employee Stock Purchase Plan, as amended (Incorporated by reference from Form 10-Q filed in
November 2002).10.14
    
    Lease Agreement, as amended (Incorporated by reference from Form 10-Q filed in November
2002).10.15
    
    Form of Indemnity Agreement for Directors and Executive Officers (Incorporated by reference
from Form 10-Q filed in November 2002).10.16
    
    International Distribution Agreement (Incorporated by reference from Form 10-Q filed in
November 2002).10.17
    
    Deferred Compensation Plan for Non-Employee Directors (Incorporated by reference from Form
10-Q filed in August 2004).10.18
    
    Loan and Security Agreement among Wilton Funding, LLC and Allied and certain of its
subsidiaries (Incorporated by reference from Form 8-K filed in June 2004)10.19
    
    Amendments to Loan and Security Agreement among Wilton Funding, LLC and Allied and certain
of its subsidiaries10.20
    
    Stock Option Agreement-Employee Form (Incorporated by reference from Form 10-Q filed in
November 2004)10.21
    
    Directors Stock Option Agreement-Director Form (Incorporated by reference from Form 10-Q
filed in November 2004)10.22
    
    Summary of Annual Compensation of Board Members21
    
    List of Subsidiaries23
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 31




---



##### 



Reports on Form 8-K
  SIGNATURES
  The Allied Defense Group, Inc.By:
    
    /s/ John J. Marcello.John J. Marcello,Chief Executive Officer and President
   By:
    
    /s/ Robert P. DowskiRobert P. Dowski,Chief Financial Officer and TreasurerDate: October 5, 2005By:
    
    /s/ Gresford B. GrayGresford B. Gray,Controller and Corporate SecretaryDate: October 5, 2005**********/s/ J. R. SculleyJ. R. Sculley, DirectorDate: October 5, 2005/s/ Clifford C. ChristClifford C. Christ, DirectorDate: October 5, 2005/s/ Harry H. WarnerHarry H. Warner, DirectorDate: October 5, 2005/s/ Ronald H. GriffithRonald H. Griffith, DirectorDate: October 5, 2005/s/ Gilbert F. DeckerGilbert F. Decker, DirectorDate: October 5, 2005/s/ John G. Meyer, Jr.John G. Meyer, Jr., DirectorDate: October 5, 2005/s/ J.H. Binford Peay, IIIJ.H Binford Peay, III, DirectorDate: October 5, 2005
 32




---



##### 



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FINANCIAL STATEMENTS AND SCHEDULES
 December 31, 2004
 FORMING A PART OF
ANNUAL REPORT PURSUANT TO
THE SECURITIES EXCHANGE ACT OF 1934
 FORM 10-K/A
OF
The Allied Defense Group Inc.
 F-1




---



##### 



The Allied Defense Group Inc.
 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
 PageManagements Report on Internal Controls over Financial Reporting
    
    
    F - 3Report of Independent Registered Public Accounting Firm
    
    
    F - 4Consolidated Balance Sheets at December 31, 2004 and 2003
    
    
    F - 7Consolidated Statements of Earnings for each of the three years in
the period ended December 31, 2004
    
    
    F - 8Consolidated Statements of Stockholders Equity for each of the three
years in the period ended December 31, 2004
    
    
    F - 9Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 2004
    
    
    F - 10Notes to Consolidated Financial Statements
    
    
    F - 12Schedules as of and for the three years ended December 31, 2004Schedule I  Condensed Financial Information of Registrant
    
    
    F - 37Schedule II  Valuation and Qualifying Accounts
    
    
    F - 40
 F-2




---



##### 



MANAGEMENTS REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
         /s/ Robert P. Dowski
    
    /s/ John J. MarcelloRobert P. Dowski
    
    John J. MarcelloChief Financial Officer
    
    Chief Executive OfficerOctober 5, 2005
    
    October 5, 2005
 F-3




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
        F-4




---



##### 



/s/ Grant Thornton LLP
 Baltimore, Maryland  , 2005
 F-5




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
        /s/ Grant Thornton LLP
 Baltimore, Maryland  2005
 F-6




---



##### 



The Allied Defense Group, Inc.
 CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
December 31,
 2004
    
    2003Restated
    
    RestatedASSETSCurrent AssetsCash
    
    $
    27,940
    
    
    $
    43,377Restricted cash
    
    
    9,757
    
    
    
    15,937Accounts receivable, net
    
    
    28,241
    
    
    
    29,870Costs and accrued earnings on uncompleted contracts
    
    
    54,877
    
    
    
    60,437Inventories, net
    
    
    17,161
    
    
    
    12,068Deferred tax asset
    
    
    1,058
    
    
    
    1,016Fair value of foreign exchange contracts
    
    
    1,195
    
    
    
    6,900Prepaid and other current assets
    
    
    4,123
    
    
    
    4,880Total current assets
    
    
    144,352
    
    
    
    174,485Property, Plant and Equipment, net
    
    
    30,294
    
    
    
    24,615Other AssetsRestricted cash
    
    
    2,000
    
    
    
    Intangible assets, net
    
    
    3,723
    
    
    
    4,135Goodwill
    
    
    14,401
    
    
    
    13,718Deferred tax asset, non-current
    
    
    1,020
    
    
    
    Other assets
    
    
    528
    
    
    
    37821,672
    
    
    
    18,231$
    196,318
    
    
    $
    217,331CURRENT LIABILITIESNotes payable
    
    $
    54
    
    
    $
    14,200Current maturities of long-term debt
    
    
    2,733
    
    
    
    2,709Convertible subordinated debenture, current
    
    
    2,231
    
    
    
    5,250Accounts payable
    
    
    34,933
    
    
    
    53,284Accrued liabilities
    
    
    9,374
    
    
    
    7,594Customer deposits
    
    
    8,708
    
    
    
    4,938Deferred compensation
    
    
    1,612
    
    
    
    Income taxes
    
    
    811
    
    
    
    906Total current liabilities
    
    
    60,456
    
    
    
    88,881LONG-TERM OBLIGATIONSLong-term debt, less current maturities and unamortized discount
    
    
    6,440
    
    
    
    4,902Convertible subordinated debenture, less current maturities and
unamortized discount
    
    
    
    
    
    
    2,156Deferred compensation
    
    
    377
    
    
    
    1,334Deferred taxes
    
    
    
    
    
    
    4,3056,817
    
    
    
    12,697CONTINGENCIES AND COMMITMENTS
    
    
    
    
    
    
    STOCKHOLDERS 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,
5,601,101 in 2004 and 5,551,373 in 2003
    
    
    560
    
    
    
    555Capital in excess of par value
    
    
    26,669
    
    
    
    25,891Retained earnings
    
    
    77,605
    
    
    
    73,671Accumulated other comprehensive income
    
    
    24,211
    
    
    
    15,636129,045
    
    
    
    115,753$
    196,318
    
    
    $
    217,331
 The accompanying notes are an integral part of these consolidated financial statements.
 F-7




---



##### 



The Allied Defense Group, Inc.
 CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of dollars, except per share data)
 Years ended December 31,
 2004
    
    2003
    
    2002Restated
    
    Restated
    
    RestatedRevenue
    
    $
    150,131
    
    
    $
    153,937
    
    
    $
    141,622Cost and expensesCost of sales
    
    
    105,936
    
    
    
    114,753
    
    
    
    89,290Selling and administrative
    
    
    29,173
    
    
    
    23,998
    
    
    
    17,497Research and development
    
    
    6,695
    
    
    
    4,532
    
    
    
    1,629141,804
    
    
    
    143,283
    
    
    
    108,416Operating income
    
    
    8,327
    
    
    
    10,654
    
    
    
    33,206Other income (expense)Interest income
    
    
    549
    
    
    
    459
    
    
    
    506Interest expense
    
    
    (2,441
    )
    
    
    (2,490
    )
    
    
    (2,087
    )Other  net
    
    
    (812
    )
    
    
    255
    
    
    
    1,300(2,704
    )
    
    
    (1,776
    )
    
    
    (281
    )Earnings before income taxes
    
    
    5,623
    
    
    
    8,878
    
    
    
    32,925Income tax expense
    
    
    1,689
    
    
    
    5,116
    
    
    
    13,689NET EARNINGS
    
    $
    3,934
    
    
    $
    3,762
    
    
    $
    19,236Earnings per shareBasic
    
    $
    0.71
    
    
    $
    0.68
    
    
    $
    3.63Diluted
    
    $
    0.70
    
    
    $
    0.63
    
    
    $
    3.43Weighted average number of common shares:Basic
    
    
    5,568,183
    
    
    
    5,496,786
    
    
    
    5,304,998Diluted
    
    
    5,991,101
    
    
    
    5,970,119
    
    
    
    5,658,274
 The accompanying notes are an integral part of these consolidated financial statements.
 F-8




---



##### 



The Allied Defense Group, Inc.
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands of dollars, except per share data)
 Years ended December 31, 2004, 2003 and 2002
 Preferred
    
    Common Stock
    
    Capital
    
    
    
    
    
    Accumulated
    
    TotalStock, no
    
    
    
    
    
    $.10
    
    in excess
    
    Retained
    
    other comprehensive
    
    Stockholderspar value
    
    Shares
    
    par value
    
    of par value
    
    earnings
    
    (loss) income
    
    EquityBalance at January 1, 2002, as previously reported
    
    $
    
    
    
    
    5,129,179
    
    
    $
    513
    
    
    
    17,273
    
    
    $
    50,673
    
    
    $
    (9,810
    )
    
    $
    58,649Derivative adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (202
    )
    
    
    (202
    )Balance at January 1, 2002, as restated
    
    $
    
    
    
    
    5,129,179
    
    
    $
    513
    
    
    
    17,273
    
    
    $
    50,673
    
    
    $
    (10,012
    )
    
    $
    58,447Common stock awards
    
    
    
    
    
    
    35,964
    
    
    
    3
    
    
    
    785
    
    
    
    
    
    
    
    
    
    
    
    788Common stock issued
    
    
    
    
    
    
    293,070
    
    
    
    29
    
    
    
    6,444
    
    
    
    
    
    
    
    
    
    
    
    6,473Employee stock purchase plan purchases
    
    
    
    
    
    
    9,100
    
    
    
    1
    
    
    
    168
    
    
    
    
    
    
    
    
    
    
    
    169Exercise stock options
    
    
    
    
    
    
    7,500
    
    
    
    1
    
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    62Warrants issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140
    
    
    
    
    
    
    
    
    
    
    
    140Comprehensive incomeNet earnings for the year, restated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,236
    
    
    
    
    
    
    
    Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,690
    
    
    
    Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,926Balance at December 31, 2002, as restated
    
    $
    
    
    
    
    5,474,813
    
    
    $
    547
    
    
    $
    24,871
    
    
    $
    69,909
    
    
    $
    678
    
    
    $
    96,005Common stock awards
    
    
    
    
    
    
    6,000
    
    
    
    1
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    111Employee stock purchase plan purchases
    
    
    
    
    
    
    10,560
    
    
    
    1
    
    
    
    151
    
    
    
    
    
    
    
    
    
    
    
    152Exercise stock options
    
    
    
    
    
    
    60,000
    
    
    
    6
    
    
    
    759
    
    
    
    
    
    
    
    
    
    
    
    765Comprehensive incomeNet earnings for the year, restated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,762
    
    
    
    
    
    
    
    Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,958
    
    
    
    Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,720Balance at December 31, 2003, as restated
    
    $
    
    
    
    
    5,551,373
    
    
    $
    555
    
    
    $
    25,891
    
    
    $
    73,671
    
    
    $
    15,636
    
    
    $
    115,753Common stock awards
    
    
    
    
    
    
    5,753
    
    
    
    1
    
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    106Employee stock purchase plan purchases
    
    
    
    
    
    
    16,241
    
    
    
    1
    
    
    
    259
    
    
    
    
    
    
    
    
    
    
    
    260Exercise stock options
    
    
    
    
    
    
    27,734
    
    
    
    3
    
    
    
    346
    
    
    
    
    
    
    
    
    
    
    
    349Warrants issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    68Comprehensive incomeNet earnings for the year, restated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,934
    
    
    
    
    
    
    
    Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,575
    
    
    
    Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,509Balance
at December 31, 2004, as restated
    
    $
    
    
    
    
    5,601,101
    
    
    $
    560
    
    
    $
    26,669
    
    
    $
    77,605
    
    
    $
    24,211
    
    
    $
    129,045
 The accompanying notes are an integral part of these consolidated financial statements.
 F-9




---



##### 



The Allied Defense Group, Inc.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
 Years ended December 31,
 2004
    
    2003
    
    2002Restated
    
    Restated
    
    RestatedCash flows from operating activitiesNet earnings for the year
    
    $
    3,934
    
    
    $
    3,762
    
    
    $
    19,236Adjustments to reconcile net earnings to net
cash provided by operating activitiesDepreciation and amortization
    
    
    4,551
    
    
    
    4,037
    
    
    
    3,322Unrealized losses (gains) on forward contracts
    
    
    4,758
    
    
    
    (4,312
    )
    
    
    (16,977
    )Gain on sale of fixed assets
    
    
    (44
    )
    
    
    (18
    )
    
    
    Deferred income taxes
    
    
    (856
    )
    
    
    1,864
    
    
    
    5,205Provision for estimated losses on contracts
    
    
    661
    
    
    
    255
    
    
    
    282Amortization of debt issue costs and conversion feature
    
    
    179
    
    
    
    243
    
    
    
    Common stock awards
    
    
    106
    
    
    
    111
    
    
    
    651Changes in assets and liabilitiesRestricted cash and cash deposits
    
    
    6,893
    
    
    
    (5,807
    )
    
    
    (775
    )Accounts receivable
    
    
    2,573
    
    
    
    1,810
    
    
    
    (2,041
    )Cost and accrued earnings on uncompleted contracts
    
    
    9,618
    
    
    
    6,362
    
    
    
    (26,100
    )Inventories
    
    
    (4,090
    )
    
    
    (1,392
    )
    
    
    (3,309
    )Prepaid expenses and other assets
    
    
    1,275
    
    
    
    (1,609
    )
    
    
    532Accounts payable and accrued liabilities
    
    
    (22,442
    )
    
    
    21,488
    
    
    
    18,801Customer deposits
    
    
    3,100
    
    
    
    (928
    )
    
    
    993Deferred compensation
    
    
    521
    
    
    
    672
    
    
    
    300Income taxes
    
    
    (370
    )
    
    
    (2,188
    )
    
    
    4556,433
    
    
    
    20,588
    
    
    
    (18,661
    )Net cash provided by operating activities
    
    
    10,367
    
    
    
    24,350
    
    
    
    575Cash flows used in investing activitiesCapital expenditures
    
    
    (5,036
    )
    
    
    (4,373
    )
    
    
    (3,494
    )Acquisitions, net of cash acquired
    
    
    (525
    )
    
    
    
    
    
    
    (3,810
    )Proceeds from sale of fixed assets
    
    
    44
    
    
    
    20
    
    
    
    Net cash used in investing activities
    
    
    (5,517
    )
    
    
    (4,353
    )
    
    
    (7,304
    )Cash flows from (used in) financing activitiesNet (decrease) increase in short-term borrowings
    
    
    (14,013
    )
    
    
    5,780
    
    
    
    3,245Repayment on capital lease obligations
    
    
    (2,357
    )
    
    
    (1,711
    )
    
    
    (876
    )Proceeds from convertible subordinated debenture
    
    
    
    
    
    
    
    
    
    
    7,500Principal payments on long-term debt and debenture
    
    
    (5,922
    )
    
    
    (632
    )
    
    
    (610
    )Proceeds from issuance of long-term debt
    
    
    2,300
    
    
    
    
    
    
    
    Debt issue costs
    
    
    (860
    )
    
    
    
    
    
    
    (158
    )Proceeds from stock purchases
    
    
    261
    
    
    
    152
    
    
    
    169Option exercises
    
    
    348
    
    
    
    765
    
    
    
    62Restricted cash and restricted deposits
    
    
    (2,000
    )
    
    
    
    
    
    
    Net cash (used in) provided by financing
activities
    
    
    (22,243
    )
    
    
    4,354
    
    
    
    9,332Effects of exchange rates on cash
    
    
    1,956
    
    
    
    4,150
    
    
    
    1,351Net (decrease) increase in cash
    
    
    (15,437
    )
    
    
    28,501
    
    
    
    3,954Cash at beginning of year
    
    
    43,377
    
    
    
    14,876
    
    
    
    10,922Cash at end of year
    
    $
    27,940
    
    
    $
    43,377
    
    
    $
    14,876
 The accompanying notes are an integral part of these consolidated financial statements.
 F-10




---



##### 



The Allied Defense Group, Inc.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
 Years ended December 31,
 2004
    
    2003
    
    2002Restated
    
    Restated
    
    RestatedSupplemental Disclosures of Cash Flow Information:Cash paid during the year forInterest
    
    $
    1,516
    
    
    $
    1,492
    
    
    $
    535Income taxes
    
    
    7,782
    
    
    
    9,455
    
    
    
    9,510Supplemental Non-Cash Investing and Financing Activities:Capital Leases
    
    
    2,481
    
    
    
    1,989
    
    
    
    2,796Non-cash consideration in connection with business
acquisition
    
    
    
    
    
    
    
    
    
    $
    6,473Warrants issued in conjunction with long term debt and
convertible subordinated debenture
    
    
    68
    
    
    
    
    
    
    
    140Convertible debenture beneficial conversion feature
    
    
    
    
    
    
    
    
    
    
    138
 The accompanying notes are an integral part of these consolidated financial statements.
 F-11




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
 NOTE A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nature of Operations.
 Restatements.
   Selected Consolidated Statements of Earnings Data:
 Impact From
    
    
    Impact fromYear Ended December
    
    As Previously
    
    
    Derivative Gains
    
    
    Euro Fluctuations
    
    
    As Initially31, 2003
    
    Reported
    
    
    (1)
    
    
    (2)
    
    
    ReportedRevenues
    
    $
    154,235
    
    
    $
    (13,625
    )
    
    $
    30,797
    
    
    $
    171,407Cost of Sales
    
    
    114,800
    
    
    
    
    
    
    
    9,758
    
    
    
    124,558Operating income
    
    
    10,905
    
    
    
    (13,625
    )
    
    
    21,039
    
    
    
    18,319Earnings before income
    
    
    9,129
    
    
    
    (13,625
    )
    
    
    21,039
    
    
    
    16,543Income taxes
    
    
    5,201
    
    
    
    (4,632
    )
    
    
    7,153
    
    
    
    7,722Net Earnings
    
    $
    3,928
    
    
    $
    (8,993
    )
    
    $
    13,886
    
    
    $
    8,821Earnings per shareBasic
    
    $
    0.71
    
    
    $
    (1.64
    )
    
    $
    2.53
    
    
    $
    1.60Diluted
    
    $
    0.66
    
    
    $
    (1.51
    )
    
    $
    2.39
    
    
    $
    1.54
 Impact From
    
    
    Impact fromYear Ended December
    
    As Previously
    
    
    Derivative Gains
    
    
    Euro Fluctuations
    
    
    As Initially31, 2002
    
    Reported
    
    
    (1)
    
    
    (2)
    
    
    ReportedRevenues
    
    $
    145,274
    
    
    $
    (16,977
    )
    
    $
    2,569
    
    
    $
    130,866Cost of Sales
    
    
    90,430
    
    
    
    
    
    
    
    1,079
    
    
    
    91,509Operating income
    
    
    35,718
    
    
    
    (16,977
    )
    
    
    1,490
    
    
    
    20,231Earnings before income
    
    
    35,437
    
    
    
    (16,977
    )
    
    
    1,490
    
    
    
    19,950Income taxes
    
    
    14,543
    
    
    
    (5,772
    )
    
    
    507
    
    
    
    9,278Net Earnings
    
    $
    20,894
    
    
    $
    (11,205
    )
    
    $
    983
    
    
    $
    10,672Earnings per shareBasic
    
    $
    3.94
    
    
    $
    (2.11
    )
    
    $
    0.18
    
    
    $
    2.01Diluted
    
    $
    3.73
    
    
    $
    (1.98
    )
    
    $
    0.17
    
    
    $
    1.92
  (1)
    
    Unrealized gains on FX contracts and related tax effects.(2)
    
    Impact of revising the revenues at the average currency rates and related tax effects.
 Selected Consolidated Balance Sheets Data:
 December 31, 2003
    
    
    December 31, 2002As Previously
    
    
    As Initially
    
    
    As Previously
    
    
    As InitiallyReported
    
    
    Reported
    
    
    Reported
    
    
    ReportedAccounts receivable
    
    $
    33,404
    
    
    $
    29,321
    
    
    $
    28,027
    
    
    $
    28,551Costs and accrued earnings on uncompleted
contracts
    
    
    60,516
    
    
    
    68,414
    
    
    
    55,601
    
    
    
    56,728Fair value of foreign exchange contracts
    
    
    6,900
    
    
    
    9,378
    
    
    
    18,815
    
    
    
    13,595Total current assets
    
    
    178,098
    
    
    
    184,391
    
    
    
    137,983
    
    
    
    134,414Total assets
    
    
    220,944
    
    
    
    227,237
    
    
    
    171,737
    
    
    
    168,168Accrued liabilities
    
    
    7,594
    
    
    
    16,846
    
    
    
    8,219
    
    
    
    8,219Foreign exchange contracts
    
    
    
    
    
    
    9,378
    
    
    
    
    
    
    
    13,595Total current liabilities
    
    
    88,881
    
    
    
    107,511
    
    
    
    60,637
    
    
    
    74,232Deferred tax liability  non-current
    
    
    5,533
    
    
    
    1,339
    
    
    
    5,946
    
    
    
    111Total liabilities
    
    
    102,806
    
    
    
    117,242
    
    
    
    73,894
    
    
    
    81,654Accumulated other comprehensive income loss)
    
    
    16,197
    
    
    
    13,383
    
    
    
    858
    
    
    
    (249
    )Total liabilities and stockholders equity
    
    
    220,944
    
    
    
    227,237
    
    
    
    171,737
    
    
    
    168,168
    F-12




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
  Selected Consolidated Statements of Earnings Data:
 Impact fromUsing Incorrect
    
    
    As PreviouslyYear
Ended December 31, 2004
    
    As Restated
    
    

Rate (1)
    
    
    ReportedRevenues
    
    $
    150,131
    
    $
    (3,231
    )
    
    $
    146,900Cost of Sales
    
    
    105,936
    
    
    (1,086
    )
    
    
    104,850Operating income
    
    
    8,327
    
    
    (2,145
    )
    
    
    6,182Earnings before income
    
    
    5,623
    
    
    (2,145
    )
    
    
    3,478Income taxes
    
    
    1,689
    
    
    (729
    )
    
    
    960Net Earnings
    
    $
    3,934
    
    $
    (1,416
    )
    
    $
    2,518Earnings per shareBasic
    
    $
    0.71
    
    $
    (0.26
    )
    
    $
    0.45Diluted
    
    $
    0.70
    
    $
    (0.28
    )
    
    $
    0.42
 Impact fromUsing Incorrect
    
    
    As PreviouslyYear Ended December 31, 2003
    
    As Restated
    
    

Rate (1)
    
    
    ReportedRevenues
    
    $
    153,937
    
    $
    298
    
    
    $
    154,235Cost of Sales
    
    
    114,753
    
    
    47
    
    
    
    114,800Operating income
    
    
    10,654
    
    
    251
    
    
    
    10,905Earnings before income
    
    
    8,878
    
    
    251
    
    
    
    9,129Income taxes
    
    
    5,116
    
    
    85
    
    
    
    5,201Net Earnings
    
    $
    3,762
    
    $
    166
    
    
    $
    3,928Earnings per shareBasic
    
    $
    0.68
    
    $
    0.03
    
    
    $
    0.71Diluted
    
    $
    0.63
    
    $
    0.03
    
    
    $
    0.66
 Impact fromUsing Incorrect
    
    
    As PreviouslyYear
Ended December 31, 2002
    
    As Restated
    
    

Rate (1)
    
    
    ReportedRevenues
    
    $
    141,622
    
    $
    3,652
    
    
    $
    145,274Cost of Sales
    
    
    89,290
    
    
    1,140
    
    
    
    90,430Operating income
    
    
    33,206
    
    
    2,512
    
    
    
    35,718Earnings before income
    
    
    32,925
    
    
    2,512
    
    
    
    35,437Income taxes
    
    
    13,689
    
    
    854
    
    
    
    14,543Net Earnings
    
    $
    19,236
    
    $
    1,658
    
    
    $
    20,894Earnings per shareBasic
    
    $
    3.63
    
    $
    0.31
    
    
    $
    3.94Diluted
    
    $
    3.43
    
    $
    0.30
    
    
    $
    3.73
   (1)
    
    Impact
of adjusting the Companys U.S. Dollar denominated receivables
at MECAR valued at the period end spot rate and not the hedged rate. F-13




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
 Selected Consolidated Balance Sheets Data:
 December 31, 2004
    
    
    December 31, 2003As
    
    
    
    
    
    
    AsAs
    
    
    Previously
    
    
    As
    
    
    PreviouslyRestated
    
    
    Reported
    
    
    Restated
    
    
    ReportedAccounts receivable
    
    $
    28,241
    
    
    $
    31,946
    
    
    $
    29,870
    
    
    $
    33,404Costs and accrued earnings on
uncompleted contracts
    
    
    54,877
    
    
    
    52,745
    
    
    
    60,437
    
    
    
    60,516Fair value of foreign exchange
contracts
    
    
    1,195
    
    
    
    1,195
    
    
    
    6,900
    
    
    
    6,900Total current assets
    
    
    143,254
    
    
    
    147,925
    
    
    
    174,485
    
    
    
    178,098Total assets
    
    
    196,318
    
    
    
    197,356
    
    
    
    217,331
    
    
    
    220,944Accrued liabilities
    
    
    9,374
    
    
    
    9,374
    
    
    
    7,594
    
    
    
    7,594Foreign exchange contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total current liabilities
    
    
    60,456
    
    
    
    60,456
    
    
    
    88,881
    
    
    
    88,881Deferred tax liability  long term
    
    
    
    
    
    
    
    
    
    
    4,305
    
    
    
    5,533Total liabilities
    
    
    67,273
    
    
    
    67,273
    
    
    
    101,578
    
    
    
    102,806Accumulated other comprehensive
income (loss)
    
    
    24,211
    
    
    
    24,841
    
    
    
    15,636
    
    
    
    16,197Total liabilities and
stockholders equity
    
    
    196,318
    
    
    
    197,356
    
    
    
    217,331
    
    
    
    220,944
   F-14




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
 TABLE
#1: Selected Consolidated Statements of Cash Flows Data (Reclassification of Restricted
Cash):
 As previouslyYear Ended December 31, 2004
    
    As restated
    
    Adjustment
    
    reportedCash flows from operating activitiesRestricted cash and restricted deposits
    
    
    6,893
    
    
    
    6,893
    
    
    
    Cash flows used in financing activitiesRestricted cash and restricted deposits
    
    
    (2,000
    )
    
    
    (6,893
    )
    
    
    4,893Net Impact on Cash
    
    
    4,893
    
    
    
    
    
    
    
    4,893
 As previouslyYear Ended December 31, 2003
    
    As restated
    
    Adjustment
    
    reportedCash flows from operating activitiesRestricted cash and restricted deposits
    
    
    (5,807
    )
    
    
    (5,807
    )
    
    
    Cash flows from financing activitiesRestricted cash and restricted deposits
    
    
    
    
    
    
    5,807
    
    
    
    (5,807
    )Net Impact on Cash
    
    
    (5,807
    )
    
    
    
    
    
    
    (5,807
    )
 As previouslyYear Ended December 31, 2002
    
    As restated
    
    Adjustment
    
    reportedCash flows from operating activitiesRestricted cash and restricted deposits
    
    
    (775
    )
    
    
    (775
    )
    
    
    Cash flows from financing activitiesRestricted cash and restricted deposits
    
    
    
    
    
    
    775
    
    
    
    (775
    )Net Impact on Cash
    
    
    (775
    )
    
    
    
    
    
    
    (775
    )
 TABLE
#2: Selected Consolidated Statements of Cash Flows Data (Reclassification of Capital
Leases):
 As previouslyYear Ended December 31, 2004
    
    As restated
    
    Adjustment
    
    reportedCash flows from investing activitiesCapital expenditures
    
    
    (5,036
    )
    
    
    2,481
    
    
    
    (7,517
    )Cash flows used in financing activitiesRepayment on capital lease obligations
    
    
    (2,357
    )
    
    
    (2,357
    )
    
    
    Principal payments on long term debt and debenture
    
    
    (5,922
    )
    
    
    2,357
    
    
    
    (8,279
    )Proceeds from issuance of long term debt
    
    
    2,300
    
    
    
    (2,481
    )
    
    
    4,781Net Impact on Cash
    
    
    (11,015
    )
    
    
    
    
    
    
    (11,015
    )
 As previouslyYear Ended December 31, 2003
    
    As restated
    
    Adjustment
    
    reportedCash flows from investing activitiesCapital expenditures
    
    
    (4,373
    )
    
    
    1,989
    
    
    
    (6,362
    )Cash flows from financing activitiesRepayment on capital lease obligations
    
    
    (1,711
    )
    
    
    (1,711
    )
    
    
    Principal payments on long term debt and debenture
    
    
    (632
    )
    
    
    1,711
    
    
    
    (2,343
    )Proceeds from issuance of long term debt
    
    
    
    
    
    
    (1,989
    )
    
    
    1,989Net Impact on Cash
    
    
    (6,716
    )
    
    
    
    
    
    
    (6,716
    )
 As previouslyYear Ended December 31, 2002
    
    As restated
    
    Adjustment
    
    reportedCash flows from investing activitiesCapital expenditures
    
    
    (3,494
    )
    
    
    2,796
    
    
    
    (6,290
    )Cash flows from financing activitiesRepayment on capital lease obligations
    
    
    (876
    )
    
    
    (876
    )
    
    
    Principal payments on long term debt and debenture
    
    
    (610
    )
    
    
    876
    
    
    
    (1,486
    )Proceeds from issuance of long term debt
    
    
    
    
    
    
    (2,796
    )
    
    
    2,796Net Impact on Cash
    
    
    (4,980
    )
    
    
    
    
    
    
    (4,980
    )
 F-15




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
 Basis of Presentation.
 
    
    ARC Europe, S. A. (ARC Europe), a Belgian company,
    
    Allied Research Corporation Limited (Limited), an inactive United Kingdom company,
    
    News/Sports Microwave Rental, Inc. (NS Microwave), a California corporation,
    
    Titan Dynamics Systems, Inc., (Titan Dynamics), a Texas corporation,
    
    SeaSpace Corporation (SeaSpace), a California corporation, and
    
    Mecar USA, a Delaware corporation.
   Foreign Currency Translation.
 Reclassifications.
 Use of Estimates.
 Cash.
 Accounts Receivable.
 Inventories.
 F-16




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
  Property, Plant and Equipment.
 Buildings
    
    20-30 yearsMachinery and equipment
    
    3-10 years
   Intangibles and Goodwill.
 Derivative Financial Instruments. Accounting for Derivative
Instruments and Hedging Activities
 Revenue and Cost Recognition.
 
    
    Percentage of Completion Method Revenues under fixed price contracts are recognized on
the percentage-of-completion method measured by costs incurred to total estimated costs at
completion. The actual costs on these contracts may differ from the Companys estimate at
completion. Provision for estimated losses and penalties on contracts are recorded when
identified. Revenues under cost-plus-fixed-fee and time and material contracts are
recognized on the basis of costs incurred during the period plus the fee earned. As contracts
extend over one or more years, revisions in costs and earnings estimated during the course of
the work are reflected in the accounting period in which the facts which require the revision
become known. The revenue recognized on the contracts in progress for 2004, 2003 and 2002
were $119,392, $125,374 and $120,313, respectively.
 F-17




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
 Costs and accrued profits on uncompleted direct and indirect fixed price contracts with foreign
governments, direct and indirect U.S. government foreign military sales (FMS) contracts, and
custom designed domestic security and weather systems, which are billable upon completion, are
carried as costs and accrued earnings on uncompleted contracts.
    
    Completed contract method Revenues from the sale of traditional fire & security systems,
as well as battlefield effects simulators, are recognized when the installation is completed.
Security system maintenance contract revenues are recognized over the term of the contract
on a straight-line basis. Revenues from service work rendered are recorded when performed.
The elements of fire and security systems are separable into units of accounting in
accordance with EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.
The maintenance contracts are sold separately from the product and installation contracts and
are priced at market value. There are no provisions related to performance, cancellation,
termination or refunds.
   Advertising.
 Research and Development. Accounting for the Costs of Computer Software Developed or Obtained for Internal Use
 Warranties.
 Income Taxes.
 Earnings Per Common Share.
 Detachable Stock Purchase Warrants 
 Application of Issue No. 98-5 to Certain Convertible Instruments
 F-18




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
 Stock-Based
Compensation  Accounting for Stock Issued to Employees.
  (in thousands, except per share data)
    
    2004
    
    2003
    
    2002Restated
    
    Restated
    
    RestatedReported net earnings
    
    $
    3,934
    
    
    $
    3,762
    
    
    $
    19,236Stock-based compensation costs that
would have been included in the
determination of reported net
earnings, if the fair value method
was applied to all awards, net of
tax
    
    
    (585
    )
    
    
    (471
    )
    
    
    (347
    )Pro forma net earnings
    
    $
    3,349
    
    
    $
    3,291
    
    
    $
    18,889Basic earnings per shareReported earnings per share
    
    
    0.71
    
    
    
    0.68
    
    
    
    3.63Compensation costs, net of tax
    
    
    (0.11
    )
    
    
    (0.09
    )
    
    
    (0.07
    )Pro forma basic earnings per share
    
    $
    0.60
    
    
    $
    0.59
    
    
    $
    3.56Diluted earnings per shareReported earnings per share
    
    
    0.70
    
    
    
    0.63
    
    
    
    3.43Compensation costs, net of tax
    
    
    (0.10
    )
    
    
    (0.08
    )
    
    
    (0.06
    )Pro forma basic earnings per share
    
    $
    0.60
    
    
    $
    0.55
    
    
    $
    3.37
  2004
    
    2003
    
    2002Risk free interest rate
    
    
    3.63
    %
    
    
    2.86
    %
    
    
    1.82
    %Expected volatility rate
    
    
    33.90
    %
    
    
    47.00
    %
    
    
    44.00
    %Expected lives  years
    
    
    3
    
    
    
    3
    
    
    
    3Divided yield
    
    
    
    
    
    
    
    
    
    
    
  Major Customers.
 Concentrations of Credit Risk
 F-19




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
    Newly Issued Accounting Standards
 Share-Based Payment
 Inventory Costs  An Amendment of ARB No. 43, Chapter
4.
 Exchanges of Non-monetary AssetsAn Amendment
of APB Opinion No. 29
 Accounting for Conditional Asset
Retirement Obligations  an interpretation of FASB Statement No. 143 Accounting for Asset Retirement
Obligations,
 F-20




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
 NOTE B  ACQUISITION
 Control Monitor Systems
   Current assets
    
    $
    69Property and equipment
    
    
    23Goodwill
    
    
    449Intangibles
    
    
    50Total assets acquired
    
    
    591Current liabilities
    
    
    (172
    )Deferred tax liability
    
    
    (19
    )Net assets acquired
    
    $
    400
 Titan Dynamics Systems
   Current assets
    
    $
    92Property and equipment
    
    
    64Goodwill
    
    
    1,656Intangibles
    
    
    894Total assets acquired
    
    
    2,706Deferred tax liability
    
    
    (311
    )Other liabilities
    
    
    (368
    )Net assets acquired
    
    $
    2,027
 SeaSpace Corporation
   F-21




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
  Current assets
    
    $
    4,245Property and equipment
    
    
    725Goodwill
    
    
    4,322Intangibles
    
    
    2,495Other assets
    
    
    153Total assets acquired
    
    
    11,940Deferred tax liability
    
    
    (874
    )Other liabilities
    
    
    (1,800
    )Net assets acquired
    
    $
    9,266
  Estimated
    
    Weighted AverageFair Value
    
    Amortization PeriodCapitalized Software
    
    $
    523
    
    
    6 yearsCustomer lists
    
    
    2,022
    
    
    15 yearsPatents
    
    
    894
    
    
    13 yearsTotal
    
    $
    3,439
    
    
    13 years
  NOTE C  RESTRICTED CASH
  2004
    
    2003Collateralized performance bonds and
advance payment guarantees
    
    $
    9,745
    
    
    $
    15,812Senior secured facility deposit
    
    
    2,000
    
    
    
    Other
    
    
    12
    
    
    
    12511,757
    
    
    
    15,937Less non-current portion
    
    
    2,000
    
    
    
    $
    9,757
    
    
    $
    15,937
  NOTE D  ACCOUNTS RECEIVABLE
  2004
    
    2003Restated
    
    RestatedDirect and indirect receivables from governments
    
    $
    15,585
    
    
    $
    16,162Commercial and other receivables, less allowance for doubtful
receivables of $143 in 2004 and $115 in 2003
    
    
    12,656
    
    
    
    13,708$
    28,241
    
    
    $
    29,870
 F-22




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
  NOTE E
 INVENTORIES
  2004
    
    2003Raw materials
    
    $
    15,701
    
    
    $
    9,852Work in process
    
    
    686
    
    
    
    1,017Finished goods, less reserve for obsolescence of
$668 in 2004 and $214 in 2003
    
    
    774
    
    
    
    1,199$
    17,161
    
    
    $
    12,068
 NOTE F
 PROPERTY, PLANT & EQUIPMENT
  2004
    
    2003Land
    
    $
    1,632
    
    
    $
    1,502Buildings and improvements
    
    
    23,621
    
    
    
    20,021Machinery and equipment
    
    
    59,372
    
    
    
    50,309$
    84,625
    
    
    $
    71,832Less accumulated depreciation
    
    
    54,331
    
    
    
    47,217$
    30,294
    
    
    $
    24,615
  Capital Leases.
  2004
    
    2003Leased equipment
    
    $
    13,721
    
    
    $
    10,769Less: accumulated depreciation
    
    
    4,170
    
    
    
    3,063$
    9,551
    
    
    $
    7,706
  Year ending December 31,2005
    
    $
    2,6782006
    
    
    2,3852007
    
    
    1,6812008
    
    
    6502009
    
    
    230Total minimum lease payments
    
    
    7,624Less: Amount representing interest
    
    
    (431
    )Present value of net minimum lease payments
    
    $
    7,193
 F-23




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
 NOTE G
 INTANGIBLE ASSETS
  December 31, 2004
    
    December 31, 2003Gross
    
    Accumulated
    
    
    
    
    
    Gross
    
    AccumulatedIntangible
assets subject to amortization:
    
    Amount
    
    Amortization
    
    Net
    
    Amount
    
    Amortization
    
    NetCapitalized
Software
    
    $
    1,184
    
    
    $
    477
    
    
    $
    707
    
    
    $
    1,179
    
    
    $
    282
    
    
    $
    897Customer Lists
    
    
    2,297
    
    
    
    540
    
    
    
    1,757
    
    
    
    2,247
    
    
    
    356
    
    
    
    1,891Patents
    
    
    1,494
    
    
    
    235
    
    
    
    1,259
    
    
    
    1,494
    
    
    
    147
    
    
    
    1,347Total
    
    $
    4,975
    
    
    $
    1,252
    
    
    $
    3,723
    
    
    $
    4,920
    
    
    $
    785
    
    
    $
    4,135
  Year
    
    Amount2005
    
    $
    5402006
    
    
    3792007
    
    
    2972008
    
    
    2252009
    
    
    225
 NOTE H  GOODWILL
 Environmental
    
    Software, TrainingElectronic Security
    
    Safety & Security
    
    & Simulation
    
    TotalBalance as of January 1, 2003
    
    $
    5,936
    
    
    $
    3,323
    
    
    $
    1,345
    
    
    $
    10,604Goodwill acquired during the
year
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    125Deferred tax asset adjustment
    
    
    426
    
    
    
    874
    
    
    
    311
    
    
    
    1,611Foreign exchange fluctuation
    
    
    1,378
    
    
    
    
    
    
    
    
    
    
    
    1,378Balance as of December 31, 2003
    
    $
    7,740
    
    
    $
    4,322
    
    
    $
    1,656
    
    
    $
    13,718Goodwill acquired during the
year
    
    
    449
    
    
    
    125
    
    
    
    
    
    
    
    574Deferred tax asset adjustment
    
    
    
    
    
    
    
    
    
    
    (261
    )
    
    
    (261
    )Foreign exchange fluctuation
    
    
    370
    
    
    
    
    
    
    
    
    
    
    
    370Balance as of December 31, 2004
    
    $
    8,559
    
    
    $
    4,447
    
    
    $
    1,395
    
    
    $
    14,401
  NOTE I
 NOTES PAYABLE AND CREDIT FACILITY
   F-24




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
   NOTE J  ACCRUED LOSSES ON CONTRACTS AND DEFERRED COMPENSATION
 Accrued losses on contracts.
 Deferred compensation.
 NOTE K  LONG-TERM DEBT
  2004
    
    2003Notes payable, less unamortized discount and debt issue costs
    
    $
    1,176
    
    
    $
    Mortgage loan agreements
    
    
    284
    
    
    
    908Loan for Control Monitor Systems acquisition
    
    
    300
    
    
    
    Capital leases and other
    
    
    7,413
    
    
    
    6,703Total Long-Term Debt
    
    $
    9,173
    
    
    $
    7,611Less current maturities
    
    
    2,733
    
    
    
    2,709Long-Term Debt, less current maturities and unamortized discount
    
    $
    6,440
    
    
    $
    4,902
 Notes payable.
 Mortgage Loan Agreements.
 Loan for Control Monitor Systems acquisition.
 F-25




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
 Other.
  Year
    
    Amount2005
    
    $
    2,7332006
    
    
    2,4312007
    
    
    1,7702008
    
    
    6842009
    
    
    235Thereafter
    
    
    1,320
 NOTE L  CONVERTIBLE SUBORDINATED DEBENTURE
  NOTE M  BENEFIT PLANS
  NOTE N  CONTINGENCIES AND COMMITMENTS
     Year
    
    Amount2005
    
    $
    3942006
    
    
    4062007
    
    
    4182008
    
    
    4312009
    
    
    304
  F-26




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
  NOTE O  FAIR VALUE OF FINANCIAL INSTRUMENTS
  2004
    
    2003Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueNotes payable and long-term
obligations, including current
maturities
    
    $
    13,447
    
    
    $
    13,447
    
    
    $
    30,550
    
    
    $
    30,550Foreign exchange contracts
    
    
    1,223
    
    
    
    1,223
    
    
    
    6,900
    
    
    
    6,900Off-balance-sheet instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Guarantees and performance bonds
    
    
    
    
    
    
    26,781
    
    
    
    
    
    
    
    18,097Standby letters of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  
    
    The fair value of notes payable and long-term obligations is estimated based on
approximate market prices for the same or similar issues or the current rates offered to the
Company for debt of the same remaining maturities. The Company believes the aggregate
carrying value approximates fair value.
    
    The fair value of foreign exchange contracts is based on the mark to market calculations
performed at the end of each period. The balance sheet at December 31, 2004 and 2003
includes the fair value of MECARs forward contracts of $1,195 and $6,900, respectively. The
fair value of the VSK Groups forward contracts was $28 at December 31, 2004.
    
    Estimated fair values for off-balance-sheet instruments, which include performance bonds
and advance payment guarantees are reflected at the face value of these obligations, since
management does not expect to have any claims against these obligations based on its past
experience.
 NOTE P  DERIVATIVE FINANCIAL INSTRUMENTS
 Derivatives and hedging
  F-27




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
 Fair value hedges
  Cash flow hedges
  Derivatives not designated as hedges
  Counterparty credit risk
  NOTE Q
 STOCKHOLDERS EQUITY
  2001 Equity Incentive Plan.
 1997 Incentive Stock Plan.
 1992 Employee Stock Purchase Plan.
 Preferred Share Purchase Rights Agreement.
 F-28




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
     The following table summarizes option activity:
 2004
    
    2003
    
    2002Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOptions outstanding at beginning of year
    
    
    620,000
    
    
    $
    14.08
    
    
    
    531,000
    
    
    $
    12.81
    
    
    
    286,000
    
    
    $
    8.54Options granted
    
    
    40,000
    
    
    
    20.43
    
    
    
    149,000
    
    
    
    16.92
    
    
    
    252,500
    
    
    
    17.51Options exercised
    
    
    (27,734
    )
    
    
    9.21
    
    
    
    (60,000
    )
    
    
    9.87
    
    
    
    (7,500
    )
    
    
    8.25Options forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options outstanding at end of year
    
    
    632,266
    
    
    $
    14.69
    
    
    
    620,000
    
    
    $
    14.08
    
    
    
    531,000
    
    
    $
    12.81Options exercisable at end of year
    
    
    416,930
    
    
    
    
    
    
    
    305,333
    
    
    
    
    
    
    
    179,000Weighted-average fair value of options,
granted during the year
    
    $
    7.59
    
    
    
    
    
    
    $
    7.73
    
    
    
    
    
    
    $
    7.10
 The following table summarizes options outstanding at December 31, 2004:
 Weighted Average
    
    ExercisableNumber
    
    Range of
    
    Weighted Average
    
    Remaining
    
    Number of
    
    Weighted averageOutstanding
    
    Exercise Prices
    
    Exercise Prices
    
    Contractual Life
    
    Options
    
    Exercise Prices193,500
    
    $
    7.88 to $8.63
    
    
    $
    8.47
    
    
    3.56 Years
    
    
    157,500
    
    
    $
    8.4348,000
    
    $
    9.01 to $14.90
    
    
    $
    13.92
    
    
    3.04 Years
    
    
    16,000
    
    
    $
    14.90390,766
    
    $
    16.40 to $25.00
    
    
    $
    17.88
    
    
    4.16 Years
    
    
    243,430
    
    
    $
    18.11
 F-29




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
 NOTE R  OTHER  NET
  2004
    
    2003
    
    2002Net currency transaction gains (losses)
    
    $
    (1,832
    )
    
    $
    (545
    )
    
    $
    872Miscellaneous  net
    
    
    1,020
    
    
    
    800
    
    
    
    428$
    (812
    )
    
    $
    255
    
    
    $
    1,300
  NOTE S  INCOME TAXES
   2004
    
    2003
    
    2002Restated
    
    Restated
    
    RestatedDomestic
    
    $
    (5,751
    )
    
    $
    (5,295
    )
    
    $
    (93
    )Foreign
    
    
    11,374
    
    
    
    14,173
    
    
    
    33,018$
    5,623
    
    
    $
    8,878
    
    
    $
    32,925
  2004
    
    2003
    
    2002Restated
    
    Restated
    
    RestatedCurrent ProvisionDomestic
    
    $
    417
    
    
    $
    309
    
    
    $
    1,781Foreign
    
    
    6,364
    
    
    
    8,301
    
    
    
    8,290Total Current Provision
    
    
    6,781
    
    
    
    8,610
    
    
    
    10,071Deferred (Benefit) ProvisionDomestic
    
    
    (2,995
    )
    
    
    (848
    )
    
    
    (899
    )Foreign
    
    
    (2,097
    )
    
    
    (2,646
    )
    
    
    4,517Total Deferred Provision
    
    
    (5,092
    )
    
    
    (3,494
    )
    
    
    3,618Total tax provision
    
    $
    1,689
    
    
    $
    5,116
    
    
    $
    13,689
  2004
    
    2003
    
    2002Restated
    
    Restated
    
    RestatedTaxes at statutory rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %Foreign tax rate differential
    
    
    (1.5
    )
    
    
    (2.3
    )
    
    
    State taxes, net of federal benefit
    
    
    
    
    
    
    18.6
    
    
    
    4.2Permanent differences
    
    
    7.5
    
    
    
    8.0
    
    
    
    Amortization of intangibles
    
    
    (3.6
    )
    
    
    (0.7
    )
    
    
    2.7Valuation allowance
    
    
    (6.4
    )
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    0.7Income taxes
    
    
    30.0
    %
    
    
    57.6
    %
    
    
    41.6
    %
 F-30




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
  2004
    
    2003Restated
    
    RestatedDeferred tax assetsInventory
    
    $
    769
    
    
    $
    249Compensation accruals
    
    
    113
    
    
    
    114Valuation adjustments
    
    
    198
    
    
    
    152Accrued expenses
    
    
    225
    
    
    
    162Business tax credits
    
    
    394
    
    
    
    204Deferred compensation
    
    
    128
    
    
    
    185Capitalized software
    
    
    1,309
    
    
    
    Foreign tax credit carryforwards
    
    
    1,295
    
    
    
    3,857Net operating loss carryforwards
    
    
    1,469
    
    
    
    395Gross deferred tax asset
    
    
    5,900
    
    
    
    5,318Valuation allowance
    
    
    (1,466
    )
    
    
    (4,117
    )Total deferred tax assets
    
    
    4,434
    
    
    
    1,201Deferred tax liabilitiesDepreciation and amortization
    
    
    (1,251
    )
    
    
    (1,356
    )Derivatives
    
    
    (1,032
    )
    
    
    (2,966
    )Deferred income
    
    
    (73
    )
    
    
    (168
    )Total deferred tax liabilities
    
    $
    (2,356
    )
    
    $
    (4,490
    )Net Deferred Tax Assets (Liabilities)
    
    $
    2,078
    
    
    $
    (3,289
    )
      F-31




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
  NOTE T  EARNINGS PER COMMON SHARE
  2004
    
    2003
    
    2002Restated
    
    Restated
    
    RestatedNet earnings
    
    $
    3,934
    
    
    $
    3,762
    
    
    $
    19,236Interest on convertible debenture, net of taxes
    
    
    239
    
    
    
    
    
    
    
    185Net earnings after interest on convertible debenture
    
    $
    4,173
    
    
    $
    3,762
    
    
    $
    19,421Weighted average number of basic shares
    
    
    5,568,183
    
    
    
    5,496,786
    
    
    
    5,304,998Common stock equivalents
    
    
    422,918
    
    
    
    473,333
    
    
    
    353,276Weighted average number of diluted shares
    
    
    5,991,101
    
    
    
    5,970,119
    
    
    
    5,658,274Basic earnings per share
    
    $
    0.71
    
    
    $
    0.68
    
    
    $
    3.63Diluted earnings per share
    
    $
    0.70
    
    
    $
    0.63
    
    
    $
    3.43
 NOTE U  GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS
  F-32




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
  2004
    
    
    2003
    
    
    2002Restated
    
    
    Restated
    
    
    RestatedRevenues from external customersOrdnance & Manufacturing
    
    $
    96,810
    
    
    $
    112,240
    
    
    $
    106,035Electronic Security
    
    
    45,973
    
    
    
    33,303
    
    
    
    31,302Environmental Safety & Security
    
    
    6,435
    
    
    
    7,065
    
    
    
    4,032Software Training & Simulation
    
    
    913
    
    
    
    1,329
    
    
    
    253$
    150,131
    
    
    $
    153,937
    
    
    $
    141,622Interest expenseOrdnance & Manufacturing
    
    $
    1,483
    
    
    $
    1,603
    
    
    $
    1,350Electronic Security
    
    
    48
    
    
    
    49
    
    
    
    52Environmental Safety & Security
    
    
    1
    
    
    
    1
    
    
    
    1Software Training & Simulation
    
    
    
    
    
    
    
    
    
    
    Corporate and Other
    
    
    909
    
    
    
    837
    
    
    
    684$
    2,441
    
    
    $
    2,490
    
    
    $
    2,087Interest incomeOrdnance & Manufacturing
    
    $
    202
    
    
    $
    221
    
    
    $
    232Electronic Security
    
    
    274
    
    
    
    167
    
    
    
    193Environmental Safety & Security
    
    
    22
    
    
    
    35
    
    
    
    11Software Training & Simulation
    
    
    1
    
    
    
    
    
    
    
    Corporate and Other
    
    
    50
    
    
    
    36
    
    
    
    70$
    549
    
    
    $
    459
    
    
    $
    506
 Restated
    
    
    Restated
    
    
    RestatedIncome tax expense (benefit)Ordnance & Manufacturing
    
    $
    2,017
    
    
    $
    3,648
    
    
    $
    11,059Electronic Security
    
    
    2,694
    
    
    
    654
    
    
    
    1,638Environmental Safety & Security
    
    
    (1,411
    )
    
    
    (199
    )
    
    
    212Software Training & Simulation
    
    
    (169
    )
    
    
    (68
    )
    
    
    (48
    )Corporate and Other
    
    
    (1,442
    )
    
    
    1,081
    
    
    
    828$
    1,689
    
    
    $
    5,116
    
    
    $
    13,689Depreciation and amortizationOrdnance & Manufacturing
    
    $
    2,687
    
    
    $
    2,336
    
    
    $
    1,767Electronic Security
    
    
    1,216
    
    
    
    1,093
    
    
    
    1,010Environmental Safety & Security
    
    
    524
    
    
    
    488
    
    
    
    206Software Training & Simulation
    
    
    77
    
    
    
    74
    
    
    
    43Corporate and Other
    
    
    47
    
    
    
    46
    
    
    
    296$
    4,551
    
    
    $
    4,037
    
    
    $
    3,322
 F-33




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
 2004
    
    
    2003
    
    
    2002Restated
    
    
    Restated
    
    
    RestatedSegment profit (loss) before taxesOrdnance & Manufacturing
    
    $
    5,620
    
    
    $
    8,822
    
    
    $
    29,414Electronic Security
    
    
    6,987
    
    
    
    2,618
    
    
    
    3,903Environmental Safety & Security
    
    
    (3,283
    )
    
    
    (528
    )
    
    
    550Software Training & Simulation
    
    
    (438
    )
    
    
    (207
    )
    
    
    (181
    )Corporate and Other
    
    
    (3,263
    )
    
    
    (1,827
    )
    
    
    (761
    )$
    5,623
    
    
    $
    8,878
    
    
    $
    32,925
 Restated
    
    
    RestatedSegment assetsOrdnance & Manufacturing
    
    $
    128,953
    
    
    $
    149,541Electronic Security
    
    
    45,231
    
    
    
    35,048Environmental Safety & Security
    
    
    12,808
    
    
    
    12,207Software Training & Simulation
    
    
    3,421
    
    
    
    3,077Corporate and Other (1)
    
    
    5,905
    
    
    
    17,458$
    196,318
    
    
    $
    217,331Restated
    
    
    Restated
    
    
    RestatedCapital Expenditure for Segment assetsOrdnance & Manufacturing
    
    $
    2,227
    
    
    $
    2,929
    
    
    $
    1,454Electronic Security
    
    
    1,525
    
    
    
    747
    
    
    
    1,504Environmental Safety & Security
    
    
    1,230
    
    
    
    682
    
    
    
    159Software Training & Simulation
    
    
    44
    
    
    
    12
    
    
    
    49Corporate and Other
    
    
    10
    
    
    
    3
    
    
    
    328$
    5,036
    
    
    $
    4,313
    
    
    $
    3,494
 
 (1)
    
    Net of intersegment receivables.  Geographic Segment Data2004
    
    
    2003
    
    
    2002Restated
    
    
    Restated
    
    
    RestatedRevenues from external customersUnited States (1)
    
    $
    58,485
    
    
    $
    78,551
    
    
    $
    66,211Belgium
    
    
    25,694
    
    
    
    24,320
    
    
    
    16,373Venezuela
    
    
    9,910
    
    
    
    18,042
    
    
    
    4,138Saudi Arabia
    
    
    35,007
    
    
    
    13,051
    
    
    
    44,730France
    
    
    6,676
    
    
    
    6,385
    
    
    
    3,987Kuwait
    
    
    
    
    
    
    3,545
    
    
    
    Germany
    
    
    1,345
    
    
    
    1,233
    
    
    
    618Canada (1)
    
    
    10
    
    
    
    1
    
    
    
    365Japan
    
    
    353
    
    
    
    899
    
    
    
    Taiwan
    
    
    267
    
    
    
    338
    
    
    
    Qatar
    
    
    2,844
    
    
    
    
    
    
    
    Other foreign countries
    
    
    9,540
    
    
    
    7,572
    
    
    
    5,200$
    150,131
    
    
    $
    153,937
    
    
    $
    141,622
 
 (1)
    
    Includes foreign military sales for the benefit of Saudi Arabia. F-34




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
 Geographic Segment Data2004
    
    
    2003Restated
    
    
    RestatedSegment assetsBelgium
    
    $
    160,203
    
    
    $
    174,491United Kingdom
    
    
    199
    
    
    
    179United States (1)
    
    
    35,916
    
    
    
    42,661$
    196,318
    
    
    $
    217,331
 
 (1)
    
    Net of intersegment receivables and investments. 2004
    
    
    2003Property and equipmentBelgium
    
    $
    27,956
    
    
    $
    23,308United States
    
    
    2,338
    
    
    
    1,307$
    30,294
    
    
    $
    24,615
 NOTE V  QUARTERLY FINANCIAL DATA (UNAUDITED)
  2004 (restated)
    
    First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    Total(Amounts in thousands, except per share data)
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    For YearRevenue
    
    $
    33,090
    
    
    $
    39,069
    
    
    $
    34,927
    
    
    $
    43,045
    
    
    $
    150,131Gross profit
    
    
    9,023
    
    
    
    10,723
    
    
    
    7,945
    
    
    
    16,504
    
    
    
    44,195Net earnings
    
    
    (6
    )
    
    
    1,608
    
    
    
    (567
    )
    
    
    2,899
    
    
    
    3,934Per share data:Basic
    
    $
    (0.01
    )
    
    $
    0.29
    
    
    ($
    0.10
    )
    
    $
    0.52
    
    
    $
    0.71Diluted
    
    $
    (0.01
    )
    
    $
    0.27
    
    
    ($
    0.10
    )
    
    $
    0.49
    
    
    $
    0.70
 2004 (as previously reported)
    
    First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    Total(Amounts in thousands, except per share data)
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    For YearRevenue
    
    $
    26,864
    
    
    $
    39,231
    
    
    $
    36,138
    
    
    $
    44,667
    
    
    $
    146,900Gross profit
    
    
    4,688
    
    
    
    10,776
    
    
    
    8,837
    
    
    
    17,749
    
    
    
    42,050Net earnings
    
    
    (2,865
    )
    
    
    1,641
    
    
    
    22
    
    
    
    3,720
    
    
    
    2,518Per share data:Basic
    
    $
    (0.52
    )
    
    $
    0.30
    
    
    $
    
    
    
    $
    0,66
    
    
    $
    0.45Diluted
    
    $
    (0.52
    )
    
    $
    0.28
    
    
    $
    
    
    
    $
    0.63
    
    
    $
    0.42
 2003 (restated)
    
    First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    Total(Amounts in thousands, except per share data)
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    For YearRevenue
    
    $
    39,447
    
    
    $
    39,447
    
    
    $
    30,917
    
    
    $
    44,126
    
    
    $
    153,937Gross profit
    
    
    12,626
    
    
    
    11,107
    
    
    
    5,735
    
    
    
    9,716
    
    
    
    39,184Net earnings
    
    
    3,197
    
    
    
    1,692
    
    
    
    (566
    )
    
    
    (561
    )
    
    
    3,762Per share data:Basic
    
    $
    0.58
    
    
    $
    0.31
    
    
    ($
    0.10
    )
    
    ($
    0.10
    )
    
    $
    0.68Diluted
    
    $
    0.56
    
    
    $
    0.30
    
    
    ($
    0.10
    )
    
    ($
    0.10
    )
    
    $
    0.63
 F-35




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
 First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    Total2003 (as previously reported)
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    For Year(Amounts in thousands, except per share data)Revenue
    
    $
    35,853
    
    
    $
    41,205
    
    
    $
    31,421
    
    
    $
    45,756
    
    
    $
    154,235Gross profit
    
    
    10,231
    
    
    
    12,430
    
    
    
    6,022
    
    
    
    10,752
    
    
    
    39,435Net earnings
    
    
    1,617
    
    
    
    2,565
    
    
    
    (376
    )
    
    
    122
    
    
    
    3,928Per share data:Basic
    
    $
    0.30
    
    
    $
    0.47
    
    
    $
    (0.07
    )
    
    $
    0.02
    
    
    $
    0.71Diluted
    
    $
    0.29
    
    
    $
    0.45
    
    
    $
    (0.07
    )
    
    $
    0.02
    
    
    $
    0.66
 F-36




---



##### 



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 The
Allied Defense Group, Inc. (Parent Company)
 BALANCE SHEETS
(Thousands of Dollars)
December 31,
 2004
    
    
    2003Restated
    
    
    RestatedASSETSCash and equivalents
    
    $
    1,017
    
    
    $
    15,039Restricted cash
    
    
    2,012
    
    
    
    125Investment in subsidiaries
    
    
    129,223
    
    
    
    108,831Due from subsidiaries
    
    
    1,202
    
    
    
    Income tax recoverable
    
    
    
    
    
    
    350Deferred taxes
    
    
    1,076
    
    
    
    417Other
    
    
    342
    
    
    
    336Total assets
    
    $
    134,872
    
    
    $
    125,098LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESAccounts payable and accrued liabilities
    
    $
    1,994
    
    
    $
    725Due to subsidiaries
    
    
    
    
    
    
    402Income tax
    
    
    4
    
    
    
    Deferred Compensation
    
    
    376
    
    
    
    404Long term debt, less unamortized discount
    
    
    1,176
    
    
    
    Convertible Debenture, less unamortized discount
    
    
    2,231
    
    
    
    7,405Total liabilities
    
    
    5,781
    
    
    
    8,936STOCKHOLDERS EQUITYCommon stock
    
    
    560
    
    
    
    555Capital in excess of par value
    
    
    26,669
    
    
    
    25,891Retained earnings
    
    
    77,605
    
    
    
    73,671Accumulated other comprehensive loss
    
    
    24,257
    
    
    
    16,045129,091
    
    
    
    116,162$
    134,872
    
    
    $
    125,098
 F-37




---



##### 



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT  CONTINUED
 The
Allied Defense Group, Inc.
 (Parent Company)
 STATEMENTS OF EARNINGS
(Thousands of Dollars)
Year ended December 31,
 2004
    
    
    2003
    
    
    2002Restated
    
    
    Restated
    
    
    RestatedIncomeIntercompany management fees
    
    $
    4,249
    
    
    $
    4,146
    
    
    $
    3,859Dividend from subsidiaries
    
    
    
    
    
    
    14,186
    
    
    
    4,883Other  net
    
    
    45
    
    
    
    99
    
    
    
    604,294
    
    
    
    18,431
    
    
    
    8,802Costs and expensesAdministrative and other
    
    
    7,512
    
    
    
    5,905
    
    
    
    4,688Earnings (loss) before equity in
operations of subsidiaries
    
    
    (3,218
    )
    
    
    12,526
    
    
    
    4,114Equity in operations of subsidiaries, less
dividends received
    
    
    5,688
    
    
    
    (7,933
    )
    
    
    15,914Earnings (loss) before income taxes
    
    
    2,470
    
    
    
    4,593
    
    
    
    20,028Income taxes (benefit)
    
    
    (1,464
    )
    
    
    831
    
    
    
    792NET EARNINGS
    
    $
    3,934
    
    
    $
    3,762
    
    
    $
    19,236Earnings per common shareBasic
    
    $
    0.71
    
    
    $
    0.68
    
    
    $
    3.63Diluted
    
    $
    0.70
    
    
    $
    0.63
    
    
    $
    3.43
 F-38




---



##### 



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT  CONTINUED
 The Allied Defense Group, Inc.
 (Parent
Company)
 STATEMENTS OF CASH FLOWS
Year ended December 31,
 2004
    
    
    2003
    
    
    2002Restated
    
    
    Restated
    
    
    RestatedCash flows from operating activitiesNet earnings for the year
    
    $
    3,934
    
    
    $
    3,762
    
    
    $
    19,236Adjustments to reconcile net earnings to net cash
from (used in) operating activitiesEquity in operations of subsidiaries
    
    
    (5,688
    )
    
    
    (6,253
    )
    
    
    (20,797
    )Dividend from subsidiary
    
    
    
    
    
    
    14,186
    
    
    
    4,883Depreciation and amortization
    
    
    47
    
    
    
    46
    
    
    
    297Deferred taxes
    
    
    (658
    )
    
    
    (375
    )
    
    
    953Amortization of debenture issue costs and conversion
feature
    
    
    179
    
    
    
    243
    
    
    
    Common stock awards and grants
    
    
    106
    
    
    
    111
    
    
    
    651Changes in assets and liabilitiesOther assets
    
    
    306
    
    
    
    (546
    )
    
    
    342Due to subsidiaries
    
    
    (1,605
    )
    
    
    (3,492
    )
    
    
    (2,504
    )Accounts payable and accrued liabilities
    
    
    1,270
    
    
    
    (30
    )
    
    
    (1,489
    )Deferred compensation
    
    
    (27
    )
    
    
    191
    
    
    
    Income taxes
    
    
    4
    
    
    
    
    
    
    
    (238
    )(6,066
    )
    
    
    4,081
    
    
    
    (17,902
    )Net cash provided by operating activities
    
    
    (2,132
    )
    
    
    7,843
    
    
    
    1,334Cash flows used in investing activitiesCapital expenditures
    
    
    (10
    )
    
    
    (3
    )
    
    
    (328
    )Equity infusions in subsidiaries
    
    
    (6,367
    )
    
    
    
    
    
    
    Acquisitions
    
    
    (125
    )
    
    
    
    
    
    
    (4,895
    )Net cash used in investing activities
    
    
    (6,502
    )
    
    
    (3
    )
    
    
    (5,223
    )Cash flows from financing activitiesProceeds from issuance of long-term debt
    
    
    2,000
    
    
    
    
    
    
    
    Proceeds from convertible subordinated debenture
    
    
    
    
    
    
    
    
    
    
    7,500Debt issue costs
    
    
    (860
    )
    
    
    
    
    
    
    (158
    )Principal payments on debenture
    
    
    (5,250
    )
    
    
    
    
    
    
    Proceeds from employee stock purchase plan shares
    
    
    261
    
    
    
    152
    
    
    
    169Option exercises
    
    
    348
    
    
    
    765
    
    
    
    62Restricted cash
    
    
    (1,887
    )
    
    
    125
    
    
    
    (250
    )Net cash provided by financing activities
    
    
    (5,388
    )
    
    
    1,042
    
    
    
    7,323Net increase in cash and equivalents
    
    
    (14,022
    )
    
    
    8,882
    
    
    
    3,434Cash and equivalents at beginning of year
    
    
    15,039
    
    
    
    6,157
    
    
    
    2,723Cash and equivalents at end of year
    
    $
    1,017
    
    
    $
    15,039
    
    
    $
    6,157Supplemental Disclosures of Cash Flow Information:Cash paid during the year for:Income taxes
    
    $
    45
    
    
    $
    
    
    
    $
    360Interest
    
    
    641
    
    
    
    590
    
    
    
    36Supplemental of Non-Cash Investing and Financing Activities:Non-cash consideration in connection with business
acquisition
    
    
    
    
    
    
    
    
    
    $
    6,473Warrants issued in conjunction with convertible debenture
    
    
    68
    
    
    
    
    
    
    
    140Convertible debenture beneficial conversion feature
    
    
    
    
    
    
    
    
    
    
    138
 F-39




---



##### 



SCHEDULE
II  VALUATION AND QUALIFYING ACCOUNTS
 The
Allied Defense Group, Inc.
 Valuation and Qualifying Accounts
(in thousands)
Years ended December 31, 2004, 2003 and 2002
 
 AdditionsBalance at
    
    Charged to
    
    Charged
    
    
    
    
    
    Balancebeginning
    
    costs and
    
    to other
    
    
    
    
    
    at end ofDescription
    
    of period
    
    expenses
    
    accounts
    
    Deductions
    
    periodYear ended December 31, 2004Estimated losses on
contracts
    
    $
    283
    
    
    $
    726
    
    
    $
    
    
    
    $
    283
    (1)
    
    $
    726Allowance for doubtful
receivables
    
    $
    115
    
    
    $
    143
    
    
    $
    
    
    
    $
    115
    (2)
    
    $
    143Valuation allowance on
inventory
    
    $
    214
    
    
    $
    454
    
    
    $
    
    
    
    $
    
    
    
    $
    668Valuation allowances on
deferred tax assets
    
    $
    4,117
    
    
    $
    1,466
    
    
    $
    
    
    
    $
    4,117
    (3)
    
    $
    1,466Warranty Reserve
    
    $
    182
    
    
    $
    130
    
    
    $
    
    
    
    $
    182
    (1)
    
    $
    130Year ended December 31, 2003Estimated losses on
contracts
    
    $
    313
    
    
    $
    283
    
    
    $
    
    
    
    $
    313
    (1)
    
    $
    283Allowance for doubtful
receivables
    
    $
    233
    
    
    $
    115
    
    
    $
    
    
    
    $
    233
    (2)
    
    $
    115Valuation allowance on
inventory
    
    $
    200
    
    
    $
    14
    
    
    $
    
    
    
    $
    
    
    
    $
    214Valuation allowances on
deferred tax assets
    
    $
    1,244
    
    
    $
    2,873
    
    
    $
    
    
    
    $
    
    
    
    $
    4,117Warranty Reserve
    
    $
    219
    
    
    $
    182
    
    
    $
    
    
    
    $
    219
    (1)
    
    $
    182Year ended December 31, 2002Estimated losses on
contracts
    
    $
    382
    
    
    $
    313
    
    
    $
    
    
    
    $
    382
    (1)
    
    $
    313Allowance for doubtful
receivables
    
    $
    107
    
    
    $
    126
    
    
    $
    
    
    
    $
    
    
    
    $
    233Valuation allowance on
inventory
    
    $
    150
    
    
    $
    50
    
    
    $
    
    
    
    $
    
    
    
    $
    200Valuation allowances on
deferred tax assets
    
    $
    271
    
    
    $
    973
    
    
    $
    
    
    
    $
    
    
    
    $
    1,244Warranty Reserve
    
    $
    21
    
    
    $
    219
    
    
    $
    
    
    
    $
    21
    (1)
    
    $
    219
 
 (1)
    
    Represents amount of reserve relieved through completion of
contracts.(2)
    
    Represents write-off of receivables.(3)
    
    Represents amount of valuation allowance relieved through use of
deferred tax assets. F-40




---



##### 



EXHIBIT INDEX
 
 Number
    
    Description of Exhibit
    
    Page21
    
    
    List of Subsidiaries23
    
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    

Certification of
Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002, dated October 5, 200531.2
    
    

Certification of
Chief Financial Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002, dated October 5, 200532
    
    

Certification of
Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 2002, dated October 5, 2005