##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2009
 Commission file number: 1-11376
 THE ALLIED DEFENSE GROUP, INC.
 (Exact name of registrant as specified in its charter)
 Delaware(State of incorporation)
    
    04-2281015(I.R.S. Employer
Identification No.)
 8000 Towers Crescent Drive, Suite 260
Vienna, Virginia 22182  (Address of principal executive offices, including zip code)   (703) 847-5268  (Registrants telephone number, including area code)
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Class
    
    Name of ExchangeCommon Stock, $0.10 Par Value
    
    NYSE Amex(formerly American Stock Exchange)
 Securities registered pursuant to Section 12(g) of the Act:
None
 YES o NO þ
 o þ
 þ o
 o o
 þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




---



##### 



INDEX
 PART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    8Item 1B. Unresolved Staff Comments
    
    
    8Item 2. Properties
    
    
    8Item 3. Legal Proceedings
    
    
    9Item 4. (Reserved)
    
    
    9PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
    
    
    10Item 6. Selected Financial Data
    
    
    10Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 8. Financial Statements and Supplementary Data
    
    
    23Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    23Item 9A (T). Controls and Procedures
    
    
    23Item 9B. Other Information
    
    
    24PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    25Item 11. Executive Compensation
    
    
    29Item 12. Security Ownership of Certain Beneficial Owners, Management & Related Stockholder Matters
    
    
    33Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    35Item 14. Principal Accountant Fees and Services
    
    
    35PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    36SIGNATURES
    
    
    37Exhibit 21Exhibit 23Exhibit 31.1Exhibit 31.2Exhibit 32




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##### Table of Contents



PART I
 
 ITEM 1.
    
    BUSINESS
      Acquisition Date
    
    Company Involved
    
    Disposition DateMay 31, 1994
    
    VSK Electronics N.V. and Télé Technique Générale S.A.
    
    September 18, 2007May 9, 1995
    
    Intelligent Data Capturing Systems N.V.
    
    September 18, 2007December 11, 1999
    
    VIGITEC S.A.
    
    September 18, 2007December 31, 2001
    
    News/Sports Microwave Rental Inc.
    
    August 7, 2009June 6, 2002
    
    Titan Dynamic Systems, Inc.
    
    March 17, 2008July 31, 2002
    
    SeaSpace Corporation
    
    July 23, 2007August 1, 2004
    
    CMS Security Systems
    
    January 1, 2008November 1, 2005
    
    Global Microwave Systems, Inc.
    
    October 1, 2008
  Accounting for the Impairment or Disposal of Long-Lived Assets.
 Description of Business
 Allied
  Segment Reporting.
  3




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##### Table of Contents



Mecar
  Direct Fire Ammunition
 90mm Ammunition
 105mm Ammunition
 Indirect Fire Ammunition
 Mortar Ammunition
 Other Ammunition
  Grenades
   4




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##### Table of Contents



Mecar USA
  Geographic Areas and Industry Segments
  Market and Customers
         5




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##### Table of Contents



Principal Customers
  Raw Materials and Suppliers
  Marketing
  Research and Development
   6




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##### Table of Contents



Backlog
  Backlog by Segment2009
    
    
    2008Amount
    
    
    %
    
    
    Amount
    
    
    %Mecar
    
    $
    68,933
    
    
    
    84
    %
    
    $
    136,396
    
    
    
    73
    %Mecar USA
    
    
    13,492
    
    
    
    16
    
    
    
    49,525
    
    
    
    27Total
    
    $
    82,425
    
    
    
    100
    %
    
    $
    185,921
    
    
    
    100
    %
  Competition
    Seasonal Nature of Business
   7




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##### Table of Contents



Personnel
  Technical &
    
    
    Hourly
    
    
    Part-Time
    
    
    TechnicalSalaried Employees
    
    
    Workers
    
    
    Employees
    
    
    Consultants
    
    
    TotalAllied
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Mecar
    
    
    53
    
    
    
    264
    
    
    
    1
    
    
    
    4
    
    
    
    322Mecar USA
    
    
    10
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    18Total
    
    
    71
    
    
    
    272
    
    
    
    1
    
    
    
    4
    
    
    
    348
  Patents and Trademarks
  Environmental Regulations
  Available Information
 www.allieddefensegroup.com www.allieddefensegroup.com
 
 
 ITEM 1A.
    
    RISK FACTORS
  
 ITEM 1B.
    
    UNRESOLVED STAFF COMMENTS
  
 ITEM 2.
    
    PROPERTIES
  Square FootageEntity
    
    Location
    
    Property
    
    Owned
    
    
    LeasedMecar (1)
    
    Nivelles, Belgium
    
    Office/Mfg
    
    
    399,068
    
    
    
    2,046Mecar USA (2)
    
    Marshall, TX
    
    Office/Mfg
    
    
    17,538
    
    
    
    36,000
  8




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##### Table of Contents



(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 has
been occupied by Mecar since 1989. The manufacturing
and the administration facility area is approximately
339,000 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
utilizes other test firing ranges, including test
ranges located in the United Kingdom, Spain and
Portugal. During most of 2009, Mecar operated at
approximately 70-80% of its productive capacity, based
on the product mix of its backlog in 2009.(2)
    
    Mecar USA operates from an office and
manufacturing facility in Marshall, Texas, constructed
in 2005 with assistance from the local development
authority. Buildings are located on land which has
been leased under a long-term lease agreement with an
option to purchase at the end of the lease. See Note
V. In addition to the manufacturing facility, Mecar
USA has leased 36,000 square feet since 2007. The
facilities at Mecar USA have been sized in
anticipation of future period revenue growth. Mecar
USA is currently operating at 50% of productive
capacity.  
 ITEM 3.
    
    LEGAL PROCEEDINGS
 DOJ Subpoena
     Litigation Relating to the Merger
  
 ITEM 4.
    
    (RESERVED)
   9




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PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 Market Information.
 2009
    
    
    2008High
    
    
    Low
    
    
    High
    
    
    Low1st Quarter
    
    $
    7.15
    
    
    $
    3.78
    
    
    $
    8.45
    
    
    $
    5.622nd Quarter
    
    
    4.84
    
    
    
    3.28
    
    
    
    7.41
    
    
    
    5.013rd Quarter
    
    
    5.26
    
    
    
    3.37
    
    
    
    7.16
    
    
    
    4.824th Quarter
    
    
    7.14
    
    
    
    4.72
    
    
    
    8.35
    
    
    
    4.96
 Stockholders.
 Dividends.
 Equity Compensation Plan Information.
  Number of SecuritiesAvailable for FutureNumber of Securities to be
    
    
    Weighted Average
    
    
    Issuance Under EquityIssued Upon Exercise of
    
    
    Exercise Price of
    
    
    Compensation PlansOutstanding Options,
    
    
    Outstanding Options,
    
    
    (Excluding SecuritiesWarrants and Rights
    
    
    Warrants and Rights
    
    
    Reflected in Column (a))(a)
    
    
    (b)
    
    
    (c)Equity compensation plans approved by security holders
    
    
    390,000
    
    
    $
    11.52
    
    
    
    253,258Equity compensation plans not approved by security
holders(1)
    
    
    411,593
    
    
    $
    17.89
    
    
    
    Total
    
    
    801,593
    
    
    $
    14.79
    
    
    
    253,258
 
 (1)
    
    Consists of 349,297 warrants issued to purchasers
of convertible notes as part of prior financings and
62,296 warrants issued to the financial advisor for
such financings. 
 ITEM 6.
    
    SELECTED FINANCIAL DATA
   10




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##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (amounts in thousands of
dollars, other than share data)
 Overview
     
    
    Mecar.Mecar designs, develops, manufactures and sells
ammunition and ammunition related products for military
use. Substantially all of Mecars revenues are derived
from the sale of ammunition which is used with weapons
that are generally considered defensive weapons. From time
to time, Mecar provides system integration services
pursuant to which it purchases and resells weapon systems,
ammunition manufactured by others or consulting services
to governments looking to develop their own manufacturing
capabilities often in types of ammunition not manufactured
by Mecar. Mecars manufactured products consist of a wide
variety of ammunition and grenades in the medium caliber,
artillery, anti-tank and anti-material categories.
    
    Mecar USA.Mecar USA purchases and resells ammunition
and ammunition related products manufactured by others for
the benefit of the U.S. government and foreign governments.
Mecar USA substantially expanded this procurement
business in 2008. Mecar USA also pursues manufacturing
contracts from the U.S. Government and others for
ammunition and pyrotechnics devices. Mecar USA became
operational in late-2005 following the construction of a
new facility in Marshall, Texas.
   Liquidity and Capital Resources
   11




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Outlook for 2010
  Item 3 Legal Proceedings,
     12




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Results of Operations
     Results of Operations for the Year Ended 2009 compared to 2008
 Years Ended December 31,2009
    
    
    2008Revenues
    
    $
    142,423
    
    
    $
    144,424Cost and expensesCost of sales
    
    
    127,933
    
    
    
    123,969Selling and administrative
    
    
    18,745
    
    
    
    19,452Research and development
    
    
    2,017
    
    
    
    2,277Impairment of long-lived assets
    
    
    181
    
    
    
    462Operating loss
    
    
    (6,453
    )
    
    
    (1,736
    )Other income (expenses)Interest income
    
    
    107
    
    
    
    734Interest expense
    
    
    (4,007
    )
    
    
    (6,403
    )Net gain (loss) on fair value of senior convertible notes and warrants
    
    
    299
    
    
    
    (1,104
    )Gain (loss) from foreign exchange contracts
    
    
    669
    
    
    
    (1,542
    )Other-net
    
    
    (1,368
    )
    
    
    (711
    )(4,300
    )
    
    
    (9,026
    )Loss from continuing operations before income taxes
    
    
    (10,753
    )
    
    
    (10,762
    )Income tax (benefit) expense
    
    
    (202
    )
    
    
    214Loss from continuing operations
    
    
    (10,551
    )
    
    
    (10,976
    )Income (loss) from discontinued operations, net of taxGain on sale of subsidiaries
    
    
    3,923
    
    
    
    2,750Loss from discontinued operations
    
    
    (1,679
    )
    
    
    (2,216
    )2,244
    
    
    
    534NET LOSS
    
    $
    (8,307
    )
    
    $
    (10,442
    )Earnings (Loss) per share  basic and diluted:Net loss from continuing operations
    
    $
    (1.30
    )
    
    $
    (1.36
    )Net earnings from discontinued operations
    
    
    0.28
    
    
    
    0.07Total loss per share  basic and diluted
    
    $
    (1.02
    )
    
    $
    (1.29
    )Weighted average number of common shares:Basic and Diluted
    
    
    8,120,428
    
    
    
    8,045,239
  13




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Revenue .
 Revenue by Segment2009
    
    
    2008% of
    
    
    
    
    
    
    % ofAmount
    
    
    total
    
    
    Amount
    
    
    totalMecar
    
    $
    86,393
    
    
    
    61
    %
    
    $
    112,192
    
    
    
    78
    %Mecar USA
    
    
    56,030
    
    
    
    39
    
    
    
    32,232
    
    
    
    22Total
    
    $
    142,423
    
    
    
    100
    %
    
    $
    144,424
    
    
    
    100
    %
   Cost of Sales .
 Cost of Sales as a Percentage of Revenue by Segment2009
    
    
    2008% of
    
    
    
    
    
    
    % ofsegment
    
    
    
    
    
    
    segmentAmount
    
    
    revenue
    
    
    Amount
    
    
    revenueMecar
    
    $
    78,030
    
    
    
    90
    %
    
    $
    93,716
    
    
    
    84
    %Mecar USA
    
    
    49,903
    
    
    
    89
    
    
    
    30,253
    
    
    
    94Total
    
    $
    127,933
    
    
    
    90
    %
    
    $
    123,969
    
    
    
    86
    %
   
  14




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Selling and Administrative Expenses .
 Selling and Administrative Expenses by Segment2009
    
    
    2008Amount
    
    
    % of total
    
    
    Amount
    
    
    % of totalMecar
    
    $
    10,121
    
    
    
    54
    %
    
    $
    10,250
    
    
    
    53
    %Mecar USA
    
    
    1,787
    
    
    
    10
    
    
    
    1,082
    
    
    
    6Corporate
    
    
    6,837
    
    
    
    36
    
    
    
    8,120
    
    
    
    41Total
    
    $
    18,745
    
    
    
    100
    %
    
    $
    19,452
    
    
    
    100
    %
   Research and Development.
 Impairment of Long-Lived Assets
 Interest Income .
 Interest expense .
 Net Gain (Loss) on fair value of senior convertible notes and warrants.
 Gain (Loss) from Foreign Exchange Contracts.
  15




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Other  Net.
 Pre-Tax Loss.
 Pre-Tax Income (Loss) by Segment2009
    
    
    2008% of
    
    
    
    
    
    
    % oftotal
    
    
    
    
    
    
    totalAmount
    
    
    revenue
    
    
    Amount
    
    
    revenueMecar
    
    $
    (7,800
    )
    
    
    (5
    )%
    
    $
    (811
    )
    
    
    (1
    )%Mecar USA
    
    
    3,723
    
    
    
    3
    
    
    
    946
    
    
    
    1Corporate
    
    
    (6,676
    )
    
    
    (5
    )
    
    
    (10,897
    )
    
    
    (7
    )Total
    
    $
    (10,753
    )
    
    
    (7
    )%
    
    $
    (10,762
    )
    
    
    (7
    )%
  Income Taxes- (Benefit) Expense.
 Income (loss) from discontinued operations, net of tax . (
 For The Year EndedDecember 31,2009
    
    
    2008NSM
    
    $
    (1,679
    )
    
    $
    (4,290
    )GMS
    
    
    
    
    
    
    2,214Titan
    
    
    
    
    
    
    (140
    )Income (loss) from discontinued operations
    
    
    (1,679
    )
    
    
    (2,216
    )Gain on sale of subsidiaries, net of tax
    
    
    3,923
    
    
    
    2,750Net income from discontinued operations
    
    $
    2,244
    
    
    $
    534
   16




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##### Table of Contents



Net Loss.
 Backlog.
 Backlog by Segment2009
    
    
    2008Amount
    
    
    %
    
    
    Amount
    
    
    %Mecar
    
    $
    68,933
    
    
    
    84
    %
    
    $
    136,396
    
    
    
    73
    %Mecar USA
    
    
    13,492
    
    
    
    16
    
    
    
    49,525
    
    
    
    27Total
    
    $
    82,425
    
    
    
    100
    %
    
    $
    185,921
    
    
    
    100
    %
     
  17




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##### Table of Contents



Balance Sheet.
  December 31,2009
    
    
    2008ASSETSCash, unrestricted
    
    $
    9,021
    
    
    $
    8,816Cash, restricted
    
    
    5,599
    
    
    
    9,666Accounts receivable, net
    
    
    28,911
    
    
    
    12,646Costs and accrued earnings on uncompleted contracts
    
    
    14,402
    
    
    
    21,999Inventories, net
    
    
    19,581
    
    
    
    21,508Contracts in progress
    
    
    179
    
    
    
    1,469Other current assets
    
    
    4,679
    
    
    
    7,611Property, plant & equipment
    
    
    16,545
    
    
    
    19,525Other assets
    
    
    1,712
    
    
    
    459TOTAL ASSETS
    
    $
    100,629
    
    
    $
    103,699LIABILITIESAccounts payable and accrued liabilities
    
    $
    39,886
    
    
    $
    34,157Customer deposits
    
    
    15,974
    
    
    
    16,731Other current liabilities
    
    
    6,408
    
    
    
    5,610Senior convertible notes
    
    
    
    
    
    
    933Other long-term liabilities and debt
    
    
    11,350
    
    
    
    11,817TOTAL LIABILITIES
    
    
    73,618
    
    
    
    69,248STOCKHOLDERS EQUITY
    
    
    27,011
    
    
    
    34,451TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    100,629
    
    
    $
    103,699
       18




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##### Table of Contents



Cash Flows.
  2009
    
    
    2008Net cash (used in) operating activities
    
    $
    (3,399
    )
    
    $
    (5,041
    )Net cash provided by investing activities
    
    
    2,813
    
    
    
    22,459Net cash provided by (used in) financing activities
    
    
    673
    
    
    
    (29,800
    )Effects of exchange rate on cash
    
    
    118
    
    
    
    (166
    )
  19




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##### Table of Contents



Operating Activities.
  Investing Activities .
 Financing Activities .
 Effects of Exchange Rate .
 Allied.
 Mecar.
 Mecar USA.
  20




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##### Table of Contents



Stock Repurchases.
 Future Liquidity
 Off-Balance Sheet Arrangements
   Recent Accounting Pronouncements
 Critical Accounting Policies
   
    
    Revenue recognition
    
    Inventory reserves and allowance for doubtful accounts
    
    Foreign currency translations
    
    Derivative Instruments
    
    Valuation of deferred income taxes and income tax reserves.
 Revenue Recognition.
   21




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##### Table of Contents



Reporting Revenue
Gross as a Principal versus Net as an Agent
 Inventory reserves and allowance for doubtful accounts
 Foreign Currency Translation.
  22




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##### Table of Contents



Derivative Instruments. ,
 Valuation of deferred income taxes.
 Forward-Looking Statements
  
 ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
  
 ITEM 9A (T).
    
    CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   23




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##### Table of Contents



Managements Report on Internal Control over Financial Reporting
    Changes in Internal Control Over Financial Reporting
    
 ITEM 9B.
    
    OTHER INFORMATION
   24




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##### Table of Contents



Director Name
    
    FOR
    
    
    WITHHELD
    
    
    Broker Non-VotesJ. H. Binford Peay, III
    
    
    5,636,911
    
    
    
    1,163,496
    
    
    
    979,963John G. Meyer, Jr.
    
    
    5,617,044
    
    
    
    1,183,363
    
    
    
    999,830Ronald H. Griffith
    
    
    6,492,255
    
    
    
    308,152
    
    
    
    124,619Gilbert F. Decker
    
    
    5,018,733
    
    
    
    1,781,674
    
    
    
    1,598,141Charles S. Ream
    
    
    5,089,659
    
    
    
    1,710,748
    
    
    
    1,527,215John J. Marcello
    
    
    6,416,282
    
    
    
    323,125
    
    
    
    139,592Frederick G. Wasserman
    
    
    4,995,192
    
    
    
    1,805,215
    
    
    
    1,621,682Tassos D. Recachinas
    
    
    6,583,618
    
    
    
    216,789
    
    
    
    33,256
  FOR
    
    
    AGAINST
    
    
    ABSTAIN
    
    
    Broker Non-VotesRatification of BDO
Seidman as
Independent
Registered Public
Accounting Firm
    
    
    6,767,564
    
    
    
    12,101
    
    
    
    20,742
    
    
    
    1,429,138
 
 PART III
 
 ITEM 10.
    
    DIRECTORS EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  Year in which firstName of Nominee
    
    elected a director
    
    Age
    
    Principal business occupation for past five years and other directorshipsJ. H. Binford Peay, III
    
    
    2000
    
    
    
    69
    
    
    Superintendent of the Virginia Military Institute since June 2003;
Chairman of the Board of the Company since January 2001; Chief Executive
Officer of the Company from January 2001  June 2003; formerly,
Commander in Chief, United States Central Command, Vice Chief of Staff
of the United States Army and a consultant. Also a director of BAE
Systems, Inc., a subsidiary of BAE Systems, plc, an international
defense and aerospace company and a president of FT Campbell Historical
Foundation. As having served as the Chairman of the Board for the
Company since 2001 and its Chief Executive Officer from 2001 to 2003,
Mr. Peay has extensive knowledge of the Companys business and history.
His military background provides the Board with relevant industry
experience. Mr. Peay currently serves on the board of one other
non-public Company.John G. Meyer, Jr.
    
    
    2003
    
    
    
    65
    
    
    Consultant; Chief Executive Officer of RedX Defense, Inc., a provider of
explosive detection devices from July 2009 to September 2009; serves as
a director of Heckler & Koch since 2005; Chief Executive Officer of
Heckler & Koch, a defense contractor, from June 2005  August 2007;
Chief Executive Officer of the Company from June 2003  June, 2005;
President of the Company from January 2003  June 2005; Chief Operating
Officer of the Company from January 2001  May 2003; Executive Vice
President of the Company from January 2001  January 2003; retired from
United States Army having served as its most senior Public Affairs
Officer. Mr. Meyer has proven business acumen, having served as the
chief executive officer of several defense industry companies including
serving as the Chief Executive Officer of the Company from 2003 to 2005.
His military background provides the Board with relevant industry
experience. Mr. Meyer currently serves on the board of one other
non-public Company.
  25




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##### Table of Contents



Year in which firstName of Nominee
    
    elected a director
    
    Age
    
    Principal business occupation for past five years and other directorshipsRonald H. Griffith
    
    
    2000
    
    
    
    70
    
    
    Executive Vice President and Chief Operating Officer of MPRI, Inc., a
professional services company, since 1998; formerly, Vice Chief of
Staff of the United States Army. Mr. Griffith has served on the
Companys Board since 2000. As one the longest serving Board members,
Mr. Griffith provides great insight on the Companys business and
history. Also, his military background provides the Board with relevant
industry experience.Gilbert F. Decker
    
    
    2002
    
    
    
    72
    
    
    Consultant to defense and aerospace companies since 2001; Executive Vice
President of Engineering and Production of Walt Disney Imagineering from
1999 to 2001. Also a director of CoVant Technologies, Ltd. and a
retired director of Alliant Techsystems, Inc. (1997  2007), Digital
Fusion Inc. (2002  2008), and Anteon Corporation (1997  2006). Served
as Assistant Secretary of the Army from 1994  1997. Mr. Deckers work
in the defense and aerospace industry provides the Board with relevant
industry experience as does his military service. Mr. Decker currently
serves on the boards of one other non-public company.Charles S. Ream
    
    
    2006
    
    
    
    65
    
    
    Retired as the Executive Vice President and Chief Financial Officer of
Anteon International Corporation, having served in that capacity from
2003-2006; Senior Vice President and Chief Financial Officer of Newport
News Shipbuilding Inc. from 2000-2001; Senior Vice President of Finance
and Strategic Initiatives of Raytheon Systems Company from 1998-2000.
Also a director of DynCorp International Inc., Stanley, Inc. and
Vangent, Inc. Mr. Ream is a retired director of Stewart and Stevenson
from 2004 to 2006. Mr. Reams experience brings to the Board a strong
understanding of public company governance and operations. Mr. Ream has
extensive financial experience as having served as a chief financial
officer at several industry related companies.John J. Marcello
    
    
    2006
    
    
    
    62
    
    
    President and Chief Executive Officer of the Company since June, 2005;
Managing Director/Chief Operating Officer of MECAR S.A., a munitions
manufacturer and subsidiary of the Company from November, 2002  June,
2005; retired from United States Army having served as a Major General.
Also a director of Optelecom-NKF. As the only management representative
on the Board, Mr. Marcello provides an insiders perspective in Board
discussions about the business and strategic direction of the Company
and has experience in the Companys international business having served
as Managing Director of the Companys Belgian subsidiary.Frederick G. Wasserman
    
    
    2006
    
    
    
    55
    
    
    President of FGW Partners LLC, which provides financial and management
consulting services, since May 2008; Self-employed financial and
management consultant, from January 2007  April 2008; Chief
Operating/Financial Officer of Mitchell & Ness Nostalgia Company, a
manufacturer of licensed sportswear, during 2005; President of Goebel of
North America, a manufacturer of select giftware and home décor items,
from 2002 -2005; Chief Financial Officer of Goebel of North America from
2001  2005. Also a director of Acme Communications, Inc., AfterSoft
Group, Inc., Crown Crafts, Inc., Breeze Eastern Corporation, and Gilman
+ Ciocia, Inc. Recently elected to be Chairman of the Board of
TeamStaff, Inc. An experienced board member, Mr. Wasserman serves on six
boards of companies, representing a diverse range of industries. Mr.
Wasserman has extensive financial experience as having served as a chief
financial officer at several companies. Mr. Wasserman was elected as a
representative of one of the Companys largest shareholders.
  26




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##### Table of Contents



Year in which firstName of Nominee
    
    elected a director
    
    Age
    
    Principal business occupation for past five years and other directorshipsTassos D. Recachinas
    
    
    2008
    
    
    
    26
    
    
    Managing Member of Sophis Investments LLC, a diversified investment
management firm specializing in research-driven value investing, since
April 2008; Senior Investment Analyst with Pirate Capital LLC from 2007
 2008; Equity Research Associate at Raymond James & Associates from
2005  007, where he provided equity research coverage on several
Defense and Technology companies; Summa Cum Laude, The George Washington
University, where he graduated from the Honors Program and first in his
class studying mechanical/aerospace engineering; also a Pembroke
Scholar, having studied engineering and economics at Oxford University
in England. Mr. Recachinas is the only Board member with a background in
investment banking which has added a valuable perspective in Board
discussions. Mr. Recachinas also served, at one time, as a
representative of one of the Companys largest shareholders.
      http://www.allieddefensegroup.com
   27




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##### Table of Contents



Executive Officers
       
   28




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##### Table of Contents



ITEM 11.
    
    EXECUTIVE COMPENSATION
 SUMMARY COMPENSATION TABLE
As Of December 31, 2009
 Change inPension ValueandNonqualifiedNon-Equity
    
    
    DeferredStock
    
    
    Option
    
    
    Incentive Plan
    
    
    Compensation
    
    
    All OtherAwards
    
    
    Awards
    
    
    Compensation
    
    
    Earnings
    
    
    Compensation
    
    
    TotalName and Principal Position
    
    Year
    
    
    Salary
    
    
    Bonus
    
    
    ($)
    
    
    ($)(1)
    
    
    ($)
    
    
    ($)
    
    
    ($)(2)
    
    
    ($)John J. Marcello,
    
    
    2009
    
    
    $
    303,850
    
    
    $
    
    
    
    $
    
    
    
    $
    36,030
    
    
    $
    
    
    
    $
    
    
    
    $
    28,500
    
    
    $
    368,380Chief Executive Officer
    
    
    2008
    
    
    
    303,850
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,758
    
    
    
    359,608Monte L. Pickens,
    
    
    2009
    
    
    $
    247,200
    
    
    $
    
    
    
    $
    
    
    
    $
    30,025
    
    
    $
    
    
    
    $
    
    
    
    $
    28,500
    
    
    $
    305,725Executive Vice President
    
    
    2008
    
    
    
    247,200
    
    
    
    
    
    
    
    
    
    
    
    26,743
    
    
    
    
    
    
    
    
    
    
    
    27,000
    
    
    
    300,943Deborah F. Ricci
    
    
    2009
    
    
    $
    206,000
    
    
    $
    
    
    
    $
    
    
    
    $
    30,025
    
    
    $
    
    
    
    $
    
    
    
    $
    20,600
    
    
    $
    256,625Chief Financial Officer
    
    
    2008
    
    
    
    206,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,462
    
    
    
    226,462
 
 (1)
    
    The amounts in this column reflect the aggregate
grant date fair value, in accordance with FASB ASC
718, of option grants made under the 2001 Equity
Incentive Plan in 2009 and 2008, respectively.
Assumptions used in the calculation of these amounts
are included in Footnote A to the Companys audited
financial statements included in this Form 10-K.(2)
    
    This column includes the contribution to a
participants 401(K) plan account equal to 10% of an
employees base salary. In 2008, this column includes
tax payments of $28,758, to Belgium for Mr. Marcello
based on income earned by Mr. Marcello in Belgium.
For Mr. Marcello and Mr. Pickens this column also
includes a payment of $4,000 each for premiums for
life insurance policies.  29




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##### Table of Contents



OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
 AS OF DECEMBER 31, 2009
 Option Awards
    
    
    Stock AwardsEquityIncentive
    
    
    EquityPlan
    
    
    Incentive PlanAwards:
    
    
    Awards:Equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number of
    
    
    Market orIncentive Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unearned
    
    
    Payout ValueNumber of
    
    
    Number of
    
    
    Awards:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3) Market
    
    
    Shares,
    
    
    of UnearnedSecurities
    
    
    Securities
    
    
    Number of
    
    
    
    
    
    
    
    
    
    
    Number of
    
    
    Value of
    
    
    Units, or
    
    
    Shares, UnitsUnderlying
    
    
    Underlying
    
    
    Securities
    
    
    
    
    
    
    
    
    
    
    Shares or Units
    
    
    Shares or
    
    
    Other
    
    
    or OtherUnexercised
    
    
    Unexercised
    
    
    Underlying
    
    
    Option
    
    
    Option
    
    
    of Stock that
    
    
    Units of Stock
    
    
    Rights That
    
    
    Rights ThatOptions (#)
    
    
    Options (#)
    
    
    Unearned
    
    
    Exercise
    
    
    Expiration
    
    
    Have Not Vested
    
    
    That Have Not
    
    
    Have Not
    
    
    Have NotPosition
    
    Exercisable
    
    
    Unexercisable
    
    
    Options (#)
    
    
    Price
    
    
    Date
    
    
    (#)
    
    
    Vested ($)
    
    
    Vested ($)
    
    
    Vested ($)John J. Marcello,
    
    
    
    
    
    
    30,000
    (2)
    
    
    
    
    
    $
    4.30
    
    
    
    3/23/2012
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    Chief Executive OfficerMonte L. Pickens,
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    $
    23.95
    
    
    
    3/6/2010
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    Executive Vice President
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    $
    7.44
    
    
    
    3/4/2010
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    25,000
    (2)
    
    
    
    
    
    $
    4.30
    
    
    
    3/23/2012
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    Deborah F. Ricci
    
    
    24,000
    
    
    
    6,000
    (1)
    
    
    
    
    
    $
    15.05
    
    
    
    5/31/2011
    
    
    
    3,000
    
    
    $
    14,310
    
    
    
    
    
    
    
    Chief Financial Officer
    
    
    
    
    
    
    25,000
    (2)
    
    
    
    
    
    $
    4.30
    
    
    
    3/23/2012
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Options vest on May 1, 2010.(2)
    
    Options vest on March 23, 2010.(3)
    
    Based on closing price of common stock at December 31, 2009 of $4.77 per share.  30




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##### Table of Contents



POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL
            31




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##### Table of Contents



COMPENSATION OF DIRECTORS
  DIRECTOR COMPENSATION
 Change inPension ValueNon-Equity
    
    
    andFees Earned
    
    
    
    
    
    
    
    
    
    
    Incentive
    
    
    Nonqualifiedor Paid in
    
    
    Stock Awards
    
    
    
    
    
    
    Plan
    
    
    Deferred
    
    
    All OtherCash
    
    
    (2) (3) (4)
    
    
    Option Awards
    
    
    Compensation
    
    
    Compensation
    
    
    Compensation
    
    
    TotalName(1)
    
    ($) (3) (6)
    
    
    ($) (6)
    
    
    ($)
    
    
    ($)
    
    
    Earnings
    
    
    ($)(5)
    
    
    ($)J. H. Binford Peay, III
    
    $
    0
    
    
    $
    54,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    60,100
    
    
    $
    114,100John G. Meyer, Jr.
    
    $
    0
    
    
    $
    54,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    54,000Ronald H. Griffith
    
    $
    0
    
    
    $
    54,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    54,000Gilbert F. Decker
    
    $
    21,600
    
    
    $
    32,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    54,000Charles S. Ream
    
    $
    0
    
    
    $
    54,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    54,000Frederick G. Wasserman
    
    $
    0
    
    
    $
    54,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    54,000Tassos D. Recachinas
    
    $
    0
    
    
    $
    54,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    54,000
 
 (1)
    
    Mr. Marcello, Chief Executive Officer, does not receive additional compensation as a director. All of his
compensation is reported in the Summary Compensation Table.(2)
    
    Mr. Meyer has elected to defer his annual compensation received as director until he ceases to serve on the Board.(3)
    
    Mr. Decker has elected to defer his 60% of the annual compensation received as director until he ceases to serve
on the Board and elected to receive 40% of the annual compensation in cash.(4)
    
    Cumulative stock compensation for each of the above as a non-employee member of the Companys Board of Directors
are as follows: Mr. Peay, 38,523 shares; Mr. Meyer, 33,690 shares with 32,129 deferred; Mr. Griffith,
39,693 shares; Mr. Decker, 31,414 shares with 29,414 deferred; Mr. Ream, 32,129 shares; Mr. Wasserman, 30,492
shares; and Mr. Recachinas, 25,811 shares as of July 1, 2009.(5)
    
    This is the annual payment for a $1 million life insurance policy including the gross-up for taxes. The
Company has been paying these premiums since Mr. Peay joined the Company in 2001, as Chairman and Chief Executive
Officer.(6)
    
    Compensation earned and received from July 1, 2009 to June 30, 2010.  32




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##### Table of Contents



ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  Amount and Nature of
    
    Percent ofTitle of Class
    
    Name and Address of Beneficial Owner
    
    Beneficial Ownership
    
    Class(1)Common
    
    Aegis Financial Corporation (2)
    
    1,082,301
    
    
    13.24
    %1100 North Glebe Rd
    
    Owned directlySuite 1040Arlington, Virginia 22201Common
    
    Wynnefield Capital Management, LLC (3)
    
    587,235
    
    
    7.18
    %450 Seventh Avenue
    
    Owned directlySuite 509New York, New York 10123Common
    
    Dimensional Fund Advisors LP(4)
    
    586,903
    
    
    7.18
    %Palisades West, Building One
    
    Owned directly6300 Bee Cave Road,Austin, Texas 78746Common
    
    RBC Global Asset Management (U.S.) Inc.(5)
    
    461,256
    
    
    5.64
    %100 South Fifth Street, Suite 2300
    
    Owned directlyMinneapolis, MN 55402
 
 (1)
    
    Based upon 8,175,480 shares of common stock outstanding as of December 31, 2009.(2)
    
    Aegis Financial Corporation, The Aegis Value Fund and Scott L. Barbee jointly
filed its Schedule 13G with the SEC on February 12, 2010.(3)
    
    Wynnefield Capital Management, LLC, Wynnefield Capital, Inc., Joshua H. Landes,
Wynnefield Partners Small Cap Value, L.P., Wynnefield Partners Small Cap
Value, L.P. I., and Wynnefield Small Cap Value Offshore Fund,Ltd., filed a
Schedule 13D/A with the SEC on June 29, 2007.(4)
    
    Dimensional Fund Advisors, Inc. (Dimensional), a registered investment
adviser, filed an amended Schedule 13G/A with the SEC on February 8, 2010.(5)
    
    RBC Global Asset Management (U.S.) Inc., a registered investment adviser, filed
its Schedule 13G with the SEC on February 10, 2010.  33




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##### Table of Contents



Name and Address of
    
    Amount and Nature of
    
    
    Percent ofTitle of Class
    
    Beneficial Ownership
    
    Beneficial Owner
    
    
    Class(1)Common
    
    J. H. Binford Peay, III
    
    
    310,028
    (2)
    
    
    3.70
    %Owned directlyCommon
    
    John G. Meyer, Jr.
    
    
    102,800
    (3)
    
    
    1.25
    %Owned directlyCommon
    
    Monte L. Pickens
    
    
    77,255
    (4)
    
    
    *Owned directlyCommon
    
    John J. Marcello
    
    
    72131
    (8)
    
    
    *Owned directlyCommon
    
    Deborah F. Ricci
    
    
    67,880
    (6)
    
    
    *Owned directlyCommon
    
    Ronald H. Griffith
    
    
    49,267
    
    
    
    *Owned directlyCommon
    
    Gilbert F. Decker
    
    
    39,784
    (5)
    
    
    *Owned directlyCommon
    
    Charles S. Ream
    
    
    36,214
    
    
    
    *Owned directlyCommon
    
    Wayne F. Hosking
    
    
    31,969
    (7)
    
    
    *Owned directlyCommon
    
    Frederick G. Wasserman
    
    
    30,492
    
    
    
    *Owned directlyCommon
    
    Tassos D. Recachinas
    
    
    25,811
    
    
    
    *Owned directlyCommon
    
    All executive officers and
    
    
    843,631
    (9)
    
    
    9.78
    %directors as a group
    
    Owned directly
 
 (1)
    
    Based upon 8,175,480 shares of common stock outstanding plus any outstanding options by director and officer and
shares issuable upon retirement from the Board.(2)
    
    Includes stock options for 200,000 shares which may be exercised within sixty (60) days.(3)
    
    Includes 32,129 shares issuable upon retirement from the Board pursuant to the Directors Deferred Compensation Plan.(4)
    
    Includes stock options for 75,000 shares which may be exercised within sixty (60) days.(5)
    
    Includes 29,414 shares issuable upon retirement from the Board pursuant to the Directors Deferred Compensation Plan.(6)
    
    Includes stock options for 55,000 shares which may be exercised within sixty (60) days.(7)
    
    Includes stock options for 30,000 shares which may be exercised within sixty (60) days.(8)
    
    Includes stock options for 30,000 shares which may be exercised within sixty (60) days.(9)
    
    This total includes stock options for 390,000 shares which may be exercised within sixty (60) days and
(9) 61,543 shares issuable upon retirement from the Board.*
    
    Less than 1.00%  34




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##### Table of Contents



ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE
  Procedures for Approval of Related Party Transactions
  
 ITEM 14.
    
    PRINCIPAL ACCOUNTING FEES AND SERVICE
  (In Thousands)2009
    
    
    2008Audit fees
    
    $
    633
    
    
    $
    700Audit-related fees
    
    
    
    
    
    
    Tax fees
    
    
    
    
    
    
    All other fees
    
    
    
    
    
    
    Total
    
    $
    633
    
    
    $
    700
      35




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##### Table of Contents



PART IV
 
 ITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 Exhibit No.
    
    Description of Exhibits2.1
    
    
    Merger Agreement, dated as of January 18, 2010, between The Allied Defense Group,
Inc., and Chemring Group PLC (Incorporated by reference from Form 8-K filed on January 19,
2010).3.1
    
    
    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).4.1
    
    
    Rights Agreement between Allied and Mellon Investor Services, LLC (Incorporated by
reference from Form 8-K filed in June 2001).4.2
    
    
    First Amendment To Rights Agreement, dated as of June 15, 2006 (incorporated by reference
from Form 8-A/A filed on June 21, 2006).4.3
    
    
    Second Amendment To Rights Agreement, dated as of November 30, 2006 (incorporated by
reference from Form 8-K filed on December 7, 2006).4.4
    
    
    Third Amendment To Rights Agreement, dated as of January 18, 2010 (incorporated by
reference from Form 8-K filed on January 19, 2010).10.1
    
    
    Employment Agreement between Allied and John J. Marcello (Incorporated by reference from Form 10-Q filed in August 2005).10.2
    
    
    Employment Agreement between Allied and Deborah F. Ricci (Incorporated by reference from Form 10-Q filed in May 2007).10.3
    
    
    Employment Agreement between Allied and Monte L. Pickens (Incorporated by reference from Form 8-K filed in April 2003).10.4
    
    
    Employment Agreement letter amendment between Allied and Monte L. Pickens (Incorporated by
reference from Form 10-Q filed in August 2004).10.5
    
    
    Employment Agreement between Allied and Wayne F. C. Hosking, Jr. (Incorporated by
reference from Form 8-K filed in April 2004).10.6
    
    
    2001 Equity Incentive Plan, as amended (Incorporated by reference from Proxy Statements
filed in April 2001, April 2002 and May 2005).10.7
    
    
    8% Convertible Debenture, Series A and related documents (Incorporated by reference from Form 8-K filed in July 2002).10.8
    
    
    Credit Agreement for MECAR S.A. (Incorporated by reference from Form 10-Q filed in August 2002).10.9
    
    
    Employee Stock Purchase Plan, as amended (Incorporated by reference from Form 10-Q filed in November 2002).10.10
    
    
    Lease Agreement, as amended (Incorporated by reference from Form 10-Q filed in November 2002).10.11
    
    
    Amendment to Lease Agreement.10.12
    
    
    Form of Indemnity Agreement for Directors and Executive Officers (Incorporated by
reference from Form 10-Q filed in November 2002).10.13
    
    
    Amended and Restated International Distribution Agreement (Incorporated by reference from
Form 10-Q filed in November 2008).10.14
    
    
    Deferred Compensation Plan for Non-Employee Directors (Incorporated by reference from Form 10-Q filed in August 2004).10.15
    
    
    Stock Option Agreement-Employee Form (Incorporated by reference from Form 10-Q filed in November 2004).10.16
    
    
    Directors Stock Option Agreement-Director Form (Incorporated by reference from Form 10-Q filed in November 2004).10.17
    
    
    Restricted Stock Agreement (Incorporated by reference from Form 10-Q filed in May 2005).10.18
    
    
    7.5% Senior Subordinated Convertible Notes and related documents (Incorporated by reference from 8-K filed in March 2006).10.19
    
    
    Amended and Restated Securities Purchase Agreement, dated as of June 19, 2007, between
The Allied Defense Group, Inc. and the Purchasers (Incorporated by reference from Form 8-K
filed June 20, 2007).10.20
    
    
    Form of Notes (Incorporated by reference from Form 8-K filed June 20, 2007).10.21
    
    
    Form of Amended and Restated Registration Rights Agreement (June 20, 2007).10.22
    
    
    MECAR Certificate dated July 11, 2007 (Incorporated by reference from Form 8-K filed July 12, 2007).10.23
    
    
    Stock Purchase Agreement, dated as of September 6, 2007 between Ving Holdings (Belgium)
BVBA in incorporation (in oprichting), as purchaser and ARC Europe SA, as seller
(Incorporated by reference from Form 8-K filed September 10, 2007).10.25
    
    
    Asset Purchase Agreement, dated as of August 19, 2008, among The Allied Defense Group,
Inc., Global Microwave Systems, Inc., GMS Cobham, Inc. and DTC Communications, Inc.
(Incorporated by reference from Form 8-K filed on August 20, 2008).10.26
    
    
    Stock Purchase Agreement, dated as of August 7, 2009, between The Allied Defense Group,
Inc., .and 3DRS International, Inc. to complete the sale of NS Microwave Systems, Inc.,
(Incorporated by reference from Form 8-K filed on August 10, 2009).21
    
    
    List of Subsidiaries (a).23
    
    
    Consent of Independent Registered Public Accounting Firm (a).31.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (a).31.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (a).32
    
    
    Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(a).
 
 (a)
    
    Filed herewith  36




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##### Table of Contents



SIGNATURES
  The Allied Defense Group, Inc.By:
    /s/ John J. MarcelloJohn J. MarcelloDate: April 7, 2010
    
    Chief Executive Officer and President  By:
    /s/ Deborah F. Ricci

Deborah F. Ricci.,
    
    Chief Financial
Officer and
Treasurer
    
    Date: April 7, 2010**********/s/ Gilbert F. Decker

Gilbert F. Decker,
    
    Director
    
    Date: April 7, 2010/s/ Ronald H. Griffith

Ronald H. Griffith,
    
    Director
    
    Date: April 7, 2010/s/ John J. Marcello.

John J. Marcello,
    
    Director
    
    Date: April 7, 2010/s/ John G. Meyer, Jr.

John G. Meyer,
    
    Director
    
    Date: April 7, 2010/s/ J. H. Binford Peay, III

J. H. Binford Peay, III,
    
    Director
    
    Date: April 7, 2010/s/ Charles S. Ream

Charles S. Ream,
    
    Director
    
    Date: April 7, 2010/s/ Tassos D. Recachinas

Tassos D. Recachinas,
    
    Director
    
    Date: April 7, 2010/s/ Frederick G. Wasserman

Frederick G. Wasserman,
    
    Director
    
    Date: April 7, 2010
  37




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##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
 December 31, 2009
 FORMING A PART OF
ANNUAL REPORT PURSUANT TO
THE SECURITIES EXCHANGE ACT OF 1934
 FORM 10-K
 OF
 The Allied Defense Group, Inc.
  F - 1




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##### Table of Contents



The Allied Defense Group Inc.
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-3Consolidated Balance Sheets at December 31, 2009 and 2008
    
    
    F-4Consolidated Statements of Operations for the years ended December 31, 2009 and 2008
    
    
    F-5Consolidated Statements of Stockholders Equity and Comprehensive Loss for the
years ended December 31, 2009 and 2008
    
    
    F-6Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-9Schedules as of and for the years ended December 31, 2009 and 2008Schedule I  Condensed Financial Information of Registrant
    
    
    F-36Schedule II  Valuation and Qualifying Accounts
    
    
    F-39
  F - 2




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
   ,
   /s/ BDO Seidman LLP
    F - 3




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##### Table of Contents



The Allied Defense Group, Inc.
 
 CONSOLIDATED BALANCE SHEETS
 (Thousands of Dollars, except per share and share data)
 December 31,2009
    
    
    2008ASSETSCurrent AssetsCash and cash equivalents
    
    $
    9,021
    
    
    $
    8,816Restricted cash
    
    
    5,599
    
    
    
    9,666Accounts receivable, net
    
    
    28,911
    
    
    
    12,646Costs and accrued earnings on uncompleted contracts
    
    
    14,402
    
    
    
    21,999Inventories, net
    
    
    19,581
    
    
    
    21,508Contracts in progress
    
    
    179
    
    
    
    1,469Prepaid and other current assets
    
    
    4,679
    
    
    
    3,137Assets held for sale
    
    
    
    
    
    
    4,474Total current assets
    
    
    82,372
    
    
    
    83,715Property, Plant and Equipment, net
    
    
    16,545
    
    
    
    19,525Other Assets
    
    
    1,712
    
    
    
    459TOTAL ASSETS
    
    $
    100,629
    
    
    $
    103,699CURRENT LIABILITIESCurrent maturities of senior secured convertible notes
    
    $
    
    
    
    $
    933Bank overdraft facility
    
    
    2,635
    
    
    
    381Current maturities of foreign exchange contract
    
    
    315
    
    
    
    405Current maturities of long-term debt
    
    
    4,240
    
    
    
    2,659Accounts payable
    
    
    17,429
    
    
    
    14,536Accrued liabilities
    
    
    18,654
    
    
    
    16,099Customer deposits
    
    
    15,974
    
    
    
    16,731Belgium social security
    
    
    3,803
    
    
    
    3,522Income taxes
    
    
    3,773
    
    
    
    3,913Liabilities held for sale
    
    
    
    
    
    
    1,316Total current liabilities
    
    
    66,823
    
    
    
    60,495LONG TERM OBLIGATIONSLong-term debt, less current maturities and unamortized discount
    
    
    4,607
    
    
    
    6,681Long-term foreign exchange contract, less current maturities
    
    
    499
    
    
    
    1,072Derivative instrument
    
    
    24
    
    
    
    318Other long-term liabilities
    
    
    1,665
    
    
    
    682Total long-term obligations
    
    
    6,795
    
    
    
    8,753TOTAL LIABILITIES
    
    
    73,618
    
    
    
    69,248CONTINGENCIES AND COMMITMENTSSTOCKHOLDERS EQUITYPreferred stock, no par value; authorized 1,000,000 shares; none issued
    
    
    
    
    
    
    Common stock, par value, $.10 per share; authorized 30,000,000 shares; issued
and outstanding, 8,175,480 in 2009 and 8,079,509 in 2008
    
    
    818
    
    
    
    808Capital in excess of par value
    
    
    56,490
    
    
    
    55,912Accumulated deficit
    
    
    (46,658
    )
    
    
    (38,351
    )Accumulated other comprehensive income
    
    
    16,361
    
    
    
    16,082Total stockholders equity
    
    
    27,011
    
    
    
    34,451TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    100,629
    
    
    $
    103,699
   F - 4




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##### Table of Contents



The Allied Defense Group, Inc.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Thousands of Dollars, except per share and share data)
 Years Ended December 31,2009
    
    
    2008Revenues
    
    $
    142,423
    
    
    $
    144,424Cost and expensesCost of sales
    
    
    127,933
    
    
    
    123,969Selling and administrative
    
    
    18,745
    
    
    
    19,452Research and development
    
    
    2,017
    
    
    
    2,277Impairment of long-lived assets
    
    
    181
    
    
    
    462Operating loss
    
    
    (6,453
    )
    
    
    (1,736
    )Other income (expenses)Interest income
    
    
    107
    
    
    
    734Interest expense
    
    
    (4,007
    )
    
    
    (6,403
    )Net gain (loss) on fair value of senior convertible notes and warrants
    
    
    299
    
    
    
    (1,104
    )Gain (loss) from foreign exchange contracts
    
    
    669
    
    
    
    (1,542
    )Other-net
    
    
    (1,368
    )
    
    
    (711
    )(4,300
    )
    
    
    (9,026
    )Loss from continuing operations before income taxes
    
    
    (10,753
    )
    
    
    (10,762
    )Income tax (benefit) expense
    
    
    (202
    )
    
    
    214Loss from continuing operations
    
    
    (10,551
    )
    
    
    (10,976
    )Income (loss) from discontinued operations, net of taxGain on sale of subsidiaries
    
    
    3,923
    
    
    
    2,750Loss from discontinued operations
    
    
    (1,679
    )
    
    
    (2,216
    )2,244
    
    
    
    534NET LOSS
    
    $
    (8,307
    )
    
    $
    (10,442
    )Earnings (Loss) per share  basic and diluted:Net loss from continuing operations
    
    $
    (1.30
    )
    
    $
    (1.36
    )Net earnings from discontinued operations
    
    
    0.28
    
    
    
    0.07Total loss per share  basic and diluted
    
    $
    (1.02
    )
    
    $
    (1.29
    )Weighted average number of common shares:Basic and Diluted
    
    
    8,120,428
    
    
    
    8,045,239
   F - 5




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##### Table of Contents



The Allied Defense Group, Inc.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS(Thousands of Dollars, except per share and share data)
 AccumulatedPreferred
    
    
    Common Stock
    
    
    Capital in
    
    
    
    
    
    
    Other
    
    
    Totalstock, no
    
    
    
    
    
    
    $.10 Par
    
    
    Excess of
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersPar Value
    
    
    Shares
    
    
    value
    
    
    Par value
    
    
    (Deficit)
    
    
    Income
    
    
    EquityBalance at January 1, 2008
    
    $
    
    
    
    
    8,013,161
    
    
    $
    801
    
    
    $
    55,355
    
    
    $
    (27,909
    )
    
    $
    17,408
    
    
    $
    45,655Common stock awards
    
    
    
    
    
    
    52,395
    
    
    
    5
    
    
    
    322
    
    
    
    
    
    
    
    
    
    
    
    327Retired stocks
    
    
    
    
    
    
    (4,402
    )
    
    
    
    
    
    
    (29
    )
    
    
    
    
    
    
    
    
    
    
    (29
    )Employee stock purchase plan purchases
    
    
    
    
    
    
    18,355
    
    
    
    2
    
    
    
    107
    
    
    
    
    
    
    
    
    
    
    
    109Issue of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    65Directors deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    
    
    
    
    
    
    
    
    92Comprehensive loss:Net loss for the year ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,442
    )
    
    
    
    
    
    
    (10,442
    )Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,326
    )
    
    
    (1,326
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,768
    )Balance at December 31, 2008
    
    $
    
    
    
    
    8,079,509
    
    
    $
    808
    
    
    $
    55,912
    
    
    $
    (38,351
    )
    
    $
    16,082
    
    
    $
    34,451Common stock awards
    
    
    
    
    
    
    78,490
    
    
    
    8
    
    
    
    326
    
    
    
    
    
    
    
    
    
    
    
    334Retired stocks
    
    
    
    
    
    
    (1,502
    )
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    (6
    )Employee stock purchase plan purchases
    
    
    
    
    
    
    18,983
    
    
    
    2
    
    
    
    84
    
    
    
    
    
    
    
    
    
    
    
    86Issue of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    71Directors deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103
    
    
    
    
    
    
    
    
    
    
    
    103Comprehensive loss:Net loss for the year ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,307
    )
    
    
    
    
    
    
    (8,307
    )Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    279
    
    
    
    279Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,028
    )Balance at December 31, 2009
    
    $
    
    
    
    
    8,175,480
    
    
    $
    818
    
    
    $
    56,490
    
    
    $
    (46,658
    )
    
    $
    16,361
    
    
    $
    27,011
   F - 6




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##### Table of Contents



The Allied Defense Group, Inc.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Thousands of Dollars)
 Years ended December 31,2009
    
    
    2008Cash flows from operating activitiesNet loss
    
    $
    (8,307
    )
    
    $
    (10,442
    )Less: Gain on sale of subsidiaries
    
    
    (3,923
    )
    
    
    (2,750
    )Discontinued operations, net of tax
    
    
    1,679
    
    
    
    2,216Loss from continuing operations
    
    
    (10,551
    )
    
    
    (10,976
    )Adjustments to reconcile net loss from continuing operations to net cash used in operating activities, net of divestitures:Depreciation and amortization
    
    
    4,324
    
    
    
    5,147Impairment of long-lived assets
    
    
    181
    
    
    
    462Unrealized (gain) loss on forward contracts
    
    
    (669
    )
    
    
    1,542Loss (gain) on sale of fixed assets
    
    
    98
    
    
    
    (7
    )Net (gain) loss related to fair value of notes and warrants
    
    
    (299
    )
    
    
    1,104Provision (reduction) for estimated losses on contracts
    
    
    765
    
    
    
    (196
    )Provision for warranty reserves, uncollectible accounts and inventory obsolescence
    
    
    41
    
    
    
    1,591Common stock and stock option awards
    
    
    417
    
    
    
    408Deferred director stock awards
    
    
    103
    
    
    
    92(Increase) decrease in operating assets and increase (decrease) in liabilities, net
of effects from discontinued businessesRestricted cash
    
    
    4,111
    
    
    
    2,962Accounts receivable
    
    
    (15,937
    )
    
    
    (7,542
    )Costs and accrued earnings on uncompleted contracts
    
    
    7,751
    
    
    
    14,762Contracts in progress
    
    
    1,290
    
    
    
    (1,469
    )Inventories
    
    
    2,099
    
    
    
    (2,664
    )Prepaid and other current assets
    
    
    (1,893
    )
    
    
    414Accounts payable and accrued liabilities
    
    
    5,118
    
    
    
    (4,433
    )Customer deposits
    
    
    (1,007
    )
    
    
    (9,143
    )Deferred compensation
    
    
    949
    
    
    
    43Income taxes
    
    
    (290
    )
    
    
    113Net cash used in operating activities  continuing operations
    
    
    (3,399
    )
    
    
    (7,790
    )Net cash provided by operating activities  discontinued operations
    
    
    
    
    
    
    2,749Net cash used in operating activities
    
    
    (3,399
    )
    
    
    (5,041
    )Cash flows from investing activitiesCapital expenditures
    
    
    (1,540
    )
    
    
    (1,803
    )Proceeds from sale of subsidiaries
    
    
    4,213
    
    
    
    24,286Proceeds from sale of fixed assets
    
    
    140
    
    
    
    7Net cash provided by investing activities  continuing operations
    
    
    2,813
    
    
    
    22,490Net cash used in investing activities  discontinued operations
    
    
    
    
    
    
    (31
    )Net cash provided by investing activities
    
    
    2,813
    
    
    
    22,459
  F - 7




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##### Table of Contents



The Allied Defense Group, Inc.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Thousands of Dollars)
 Years ended December 31,2009
    
    
    2008Cash flows from financing activitiesBank overdrafts (payments)
    
    
    2,187
    
    
    
    (6,834
    )Principal payments on senior convertible notes
    
    
    (928
    )
    
    
    (19,428
    )Principal payments on long term debt
    
    
    (330
    )
    
    
    Repayment on capital lease obligations
    
    
    (413
    )
    
    
    (848
    )Proceeds from issuance of long-term debt
    
    
    376
    
    
    
    Net cash transferred from discontinued operations
    
    
    
    
    
    
    2,726Net (decrease) increase in short-term borrowings
    
    
    (286
    )
    
    
    302Proceeds from employee stock purchases
    
    
    73
    
    
    
    92Retirement of stock
    
    
    (6
    )
    
    
    (29
    )Net cash provided by (used in) financing activities  continuing operations
    
    
    673
    
    
    
    (24,019
    )Net cash used in financing activities  discontinued operations
    
    
    
    
    
    
    (5,781
    )Net cash provided by (used in) financing activities
    
    
    673
    
    
    
    (29,800
    )Net change in cash of discontinued operations
    
    
    
    
    
    
    (287
    )Effects of exchange rate on cash
    
    
    118
    
    
    
    (166
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    205
    
    
    
    (12,835
    )Cash and cash equivalents at beginning of year
    
    
    8,816
    
    
    
    21,651Cash and cash equivalents at end of year
    
    $
    9,021
    
    
    $
    8,816
 2009
    
    
    2008Supplemental Disclosures of Cash Flow informationCash paid during the period forInterest
    
    $
    4,504
    
    
    $
    6,921Taxes
    
    $
    61
    
    
    $
    345Supplemental Disclosures of Non-Cash Investing and Financing ActivitiesCapital leases
    
    $
    22
    
    
    $
    53
   F - 8




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##### Table of Contents



The Allied Defense Group, Inc.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
 NOTE A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation.
 
    
    ARC Europe, S.A. (ARC Europe), a Belgian company, including its
wholly-owned subsidiary Mecar S.A. (Mecar).
    
    Allied Research BV (BV), a Dutch company,
    
    Allied Research Cooperative (Coop) and,
    
    Mecar USA, Inc. (Mecar USA), a Delaware corporation.
   Nature of Operations.
 Foreign Currency Translation.
 Reclassifications.
 Use of Estimates.
 Cash and cash equivalents.
 Accounts Receivable.
  F - 9




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
 Costs and Accrued Earnings on Uncompleted Contracts.
 Inventories.
 Property, Plant and Equipment.
 Buildings and improvements
    
    20 - 30 yearsMachinery and equipment
    
    3 - 10 yearsDemonstration inventory
    
    3 - 7 years
    Impairment of Long-Lived Assets. Accounting for the Impairment or Disposal of Long-Lived
Assets.
 Derivative Financial Instruments.
  F - 10




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
 Revenue and Cost Recognition.
 
    
    Percentage of Completion Method Revenues under fixed price contracts are recognized on
the percentage-of-completion method measured by direct labor incurred to total estimated
direct labor 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 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. For contract modifications supported by a change in contract price, profit on such contract modifications are only recognized upon receipt of a
signed contract amendment and only in the proportion of such contracts progress towards
completion. For modifications not supported by a change in contract price, those additional
costs are treated as contract costs and charged to expense in the proportion of such
contracts progress towards completion. Costs and accrued profits on uncompleted direct and
indirect fixed price contracts with foreign governments and direct and indirect
U.S. government foreign military sales (FMS) contracts, which are billable upon completion,
are carried as costs and accrued earnings on uncompleted contracts.
 
    
    Other MethodRevenues from service work rendered are recorded when performed. Revenues
from pass through contracts are evaluated based on the guidelines of ASC 605 Revenue
Recognition. Accordingly, the Company bases its decision on whether to report revenue from
such pass through contracts on a gross basis or net basis based on the relative strength of
each of the following factors: whether the Company (1) is the primary obligor in the
arrangement, (2) has general inventory risk, (3) has latitude in establishing price, (4)
changes the product or performed part of the service, (5) has discretion in supplier
selection and (6) is involved in the determination of product or service
specifications. There are no provisions related to performance, cancellation,
termination or refunds.
   Advertising.
 Research and Development.
 Capitalization of Software. Intangibles  Goodwill and Other
 Warranties.
 Environmental Regulations.
 Income Taxes.
  F - 11




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
 Earnings Per Common Share.
 Stock-Based Compensation Accounting for
Stock Compensation Statement of Cash Flows.
      December 31,2009
    
    
    2008Risk free interest rate
    
    
    0.80
    %
    
    
    1.53
    %Expected volatility rate
    
    
    70.71
    %
    
    
    92.11
    %Expected lives  years
    
    
    1
    
    
    
    1Divided yield
    
    
    
    
    
    
    
   F - 12




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
 Major Customers.
 Concentrations of Credit Risk.
     Recent Accounting Pronouncements.
  Fair Value Measurements and Disclosures
  F - 13




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
 Derivatives and Hedging
  Generally
Accepted Accounting Principles
 NOTE B  LIQUIDITY AND CAPITAL RESOURCES
     F - 14




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
    Outlook for 2010
  Item 3 Legal Proceedings,
    NOTE C  RESTRICTED CASH
  2009
    
    
    2008Collateralized performance bonds and advance payment guarantees
    
    $
    5,388
    
    
    $
    9,506Other
    
    
    211
    
    
    
    160$
    5,599
    
    
    $
    9,666
  F - 15




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
  NOTE D  ACCOUNTS RECEIVABLE AND COSTS & ACCRUED EARNINGS ON
UNCOMPLETED CONTRACTS
  2009
    
    
    2008Direct and indirect receivables from governments
    
    $
    19,570
    
    
    $
    10,173Commercial and other receivables
    
    
    10,328
    
    
    
    3,51129,898
    
    
    
    13,684Less: Allowance for doubtful receivables
    
    
    (987
    )
    
    
    (1,038
    )$
    28,911
    
    
    $
    12,646
   NOTE E  INVENTORIES
  2009
    
    
    2008Raw materials
    
    $
    10,633
    
    
    $
    10,714Work in process
    
    
    9,037
    
    
    
    10,670Finished goods
    
    
    2,859
    
    
    
    2,91922,529
    
    
    
    24,303Less: Reserve for obsolescence
    
    
    (2,948
    )
    
    
    (2,795
    )$
    19,581
    
    
    $
    21,508
   F - 16




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
 NOTE F  CONTRACTS IN PROGRESS
  NOTE G  PROPERTY, PLANT & EQUIPMENT
  2009
    
    
    2008Land
    
    $
    370
    
    
    $
    364Buildings and improvements
    
    
    19,849
    
    
    
    19,600Machinery and equipment
    
    
    61,963
    
    
    
    60,074Demonstration Equipment
    
    
    4,577
    
    
    
    4,19486,759
    
    
    
    84,232Less: Accumulated depreciation
    
    
    (70,214
    )
    
    
    (64,707
    )$
    16,545
    
    
    $
    19,525
  Capital Leases.
  2009
    
    
    2008Leased equipment
    
    $
    642
    
    
    $
    2,962Less: Accumulated amortization
    
    
    (299
    )
    
    
    (1,534
    )$
    343
    
    
    $
    1,428
  F - 17




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
  Year Ending December 31,2010
    
    $
    1032011
    
    
    162012
    
    
    52013
    
    
    52014
    
    
    2Total minimum lease payments
    
    
    131Less: Amount representing interest
    
    
    (6
    )Present value of net minimum lease payments
    
    $
    125
 NOTE H  IMPAIRMENT OF LONG-LIVED ASSETS
  NOTE I  BANK CREDIT FACILITY
    F - 18




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
  NOTE J  DERIVATIVE FINANCIAL INSTRUMENTS
    Liability DerivativesBalance Sheet Location
    
    
    Fair ValueDerivatives not designated as
hedging instruments under ASC 815Foreign currency futures contracts
    
    Current maturities of foreign exchange
contracts
    
    
    $
    315Foreign currency futures contracts
    
    Long-term foreign exchange contracts, less
current maturities
    
    
    
    499Total derivatives not designated
as hedging instruments under ASC
815
    
    
    
    
    
    $
    814
  For the Year EndedStatements of Operations Location
    
    
    December 31, 2009Derivatives not designated as
hedging instruments under ASC 815Foreign currency futures contracts
    
    Gains (loss) from foreign exchange contracts
    
    
    $
    669
   F - 19




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
 NOTE K  FAIR VALUE MEASUREMENTS
   
 
 
   Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets or
    
    
    Observable Inputs
    
    
    UnobservableDecember 31, 2009
    
    Liabilities (Level 1)
    
    
    (Level 2)
    
    
    Inputs (Level 3)
    
    
    TotalLiabilitiesDerivative instrument  warrants
    
    $
    
    
    
    $
    24
    
    
    $
    
    
    
    $
    24Foreign exchange contract
    
    
    
    
    
    
    814
    
    
    
    
    
    
    
    814$
    
    
    
    $
    838
    
    
    $
    
    
    
    $
    838
 Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets or
    
    
    Observable Inputs
    
    
    UnobservableDecember 31, 2008
    
    Liabilities (Level 1)
    
    
    (Level 2)
    
    
    Inputs (Level 3)
    
    
    TotalLiabilitiesSenior secured convertible notes
    
    $
    
    
    
    $
    933
    
    
    $
    
    
    
    $
    933Derivative instrument  warrants
    
    
    
    
    
    
    318
    
    
    
    
    
    
    
    318Foreign exchange contract
    
    
    
    
    
    
    1,477
    
    
    
    
    
    
    
    1,477$
    
    
    
    $
    2,728
    
    
    $
    
    
    
    $
    2,728
   F - 20




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
 NOTE L  ACCRUED LOSSES ON CONTRACTS AND DEFERRED COMPENSATION
 Accrued losses on contracts.
 Deferred compensation.
 NOTE M  LONG-TERM DEBT
  2009
    
    
    2008Fair value of senior secured convertible notes
    
    $
    
    
    
    $
    933SOGEPA loan
    
    
    8,600
    
    
    
    8,458Bank notes payable
    
    
    128
    
    
    
    289Capital leases and other
    
    
    119
    
    
    
    593Total long-term debt
    
    
    8,847
    
    
    
    10,273Less: Current maturities
    
    
    (4,240
    )
    
    
    (3,592
    )Long-term debt, less current maturities
    
    $
    4,607
    
    
    $
    6,681
 Senior secured convertible notes.
  Warrants. Accounting for Derivative Instruments Index to, and
Potentially Settled in, a Companys Own Stock
  F - 21




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
 SOGEPA Loan. Société Wallonne de Gestion et de Participations EITF 96-19
Debtors Accounting for a Modification or Exchange of Debt Instruments
 Bank notes payable.
 Capital lease and other.
  Year
    
    Amount2010
    
    $
    4,2402011
    
    
    2,2752012
    
    
    2,3262013
    
    
    52014
    
    
    1Total
    
    $
    8,847
  NOTE N  BENEFIT PLANS
   F - 22




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
 NOTE O  CONTINGENCIES AND COMMITMENTS
    Year
    
    Amount2010
    
    $
    4412011
    
    
    4332012
    
    
    4292013
    
    
    1512014
    
    
    202015 and after
    
    
    60Total
    
    $
    1,534
    DOJ Subpoena
   F - 23




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
    Litigation
Relating to the Merger
  Indemnification provisions
      F - 24




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
   Tax Litigation
  Social Security Litigation
  NOTE P  STOCKHOLDERS EQUITY
  2001 Equity Incentive Plan.
  F - 25




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
 1997 Incentive Stock Plan.
 1992 Employee Stock Purchase Plan.
 Rights Agreement.
     The following table summarizes option activity:
 2009
    
    
    2008Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageShares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise PriceOptions outstanding at beginning of the year
    
    
    330,000
    
    
    $
    14.78
    
    
    
    369,500
    
    
    $
    15.39Options granted
    
    
    100,000
    
    
    
    4.30
    
    
    
    20,000
    
    
    
    7.44Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options expired
    
    
    (40,000
    )
    
    
    20.43
    
    
    
    (59,500
    )
    
    
    16.08Options outstanding at end of year
    
    
    390,000
    
    
    $
    11.52
    
    
    
    330,000
    
    
    $
    14.78Options exercisable at end of year
    
    
    284,000
    
    
    
    13.98
    
    
    
    290,000Weighted-average fair value of options,
granted during the year
    
    $
    1.20
    
    
    
    
    
    
    $
    2.67
  F - 26




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
 The following table summarizes options outstanding at December 31, 2009:
 ExercisableWeighted
    
    
    Weighted Average
    
    
    
    
    
    
    WeightedNumber
    
    Range of Exercise
    
    
    Average Exercise
    
    
    Remaining
    
    
    Number of
    
    
    Average ExerciseOutstanding
    
    Prices
    
    
    Prices
    
    
    Contractual Term
    
    
    Options
    
    
    Prices100,000
    
    $4.30
    
    
    $
    4.30
    
    
    2.23 Years
    
    
    
    
    
    $
    20,000
    

    7.44
    
    
    
    7.44
    
    
    0.17 Years
    
    
    20,000
    
    
    
    7.44100,000
    

    8.63
    
    
    
    8.63
    
    
    1.00 Years
    
    
    100,000
    
    
    
    8.63170,000
    
    $15.05 to $23.95
    
    
    
    17.94
    
    
    2.13 Years
    
    
    164,000
    
    
    
    18.04390,000
    
    $4.30 to $23.95
    
    
    $
    11.52
    
    
    
    
    
    
    
    284,000
    
    
    $
    13.98
  The following table summarizes restricted stock (nonvested) shares outstanding as of
December 31,
 2009
    
    
    2008Weighted -
    
    
    
    
    
    
    Weighted -Average Grant
    
    
    
    
    
    
    Average GrantDate Fair
    
    
    
    
    
    
    Date FairRestricted Stock
    
    Shares
    
    
    Value
    
    
    Shares
    
    
    ValueRestricted at January 1,
    
    
    16,668
    
    
    $
    15.43
    
    
    
    43,418
    
    
    $
    17.46Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vested
    
    
    (10,668
    )
    
    
    17.20
    
    
    
    (26,750
    )
    
    
    18.72Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted shares at December 31,
    
    
    6,000
    
    
    $
    12.29
    
    
    
    16,668
    
    
    $
    15.43
   NOTE Q  OTHER  NET
  2009
    
    
    2008Net currency transaction losses
    
    $
    (1,632
    )
    
    $
    (824
    )Miscellaneous  net
    
    
    264
    
    
    
    113$
    (1,368
    )
    
    $
    (711
    )
   F - 27




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
 NOTE R  INCOME TAXES
   2009
    
    
    2008Domestic
    
    $
    (717
    )
    
    $
    (8,417
    )Foreign
    
    
    (10,036
    )
    
    
    (2,345
    )$
    (10,753
    )
    
    $
    (10,762
    )
  2009
    
    
    2008Current (Benefit) ProvisionDomestic
    
    $
    
    
    
    $
    Foreign
    
    
    (202
    )
    
    
    214Total Current (Benefit) Provision
    
    
    (202
    )
    
    
    214Deferred ProvisionDomestic
    
    
    
    
    
    
    Foreign
    
    
    
    
    
    
    Total Deferred Provision
    
    
    
    
    
    
    Total tax (benefit) provision
    
    $
    (202
    )
    
    $
    214
  2009
    
    
    2008Taxes at statutory rate
    
    
    34.0
    %
    
    
    34.0
    %State taxes, net of federal benefit
    
    
    (0.1
    )
    
    
    (0.6
    )Impact of international operations
    
    
    2.9
    
    
    
    0.4Other permanent differences
    
    
    16.8
    
    
    
    (2.8
    )Valuation allowance
    
    
    (51.8
    )
    
    
    (33.0
    )Income taxes
    
    
    1.8
    %
    
    
    (2.0
    )%
  F - 28




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands of Dollars)
  2009
    
    
    2008Deferred tax assetsInventory
    
    $
    
    
    
    $
    159Compensation accruals
    
    
    135
    
    
    
    153Valuation adjustments
    
    
    398
    
    
    
    311Accrued expenses
    
    
    244
    
    
    
    443Business tax credits
    
    
    458
    
    
    
    458Deferred compensation
    
    
    341
    
    
    
    502Depreciation and amortization
    
    
    34
    
    
    
    386Fair value adjustment of financial instruments
    
    
    333
    
    
    
    554Capitalized software
    
    
    
    
    
    
    295Foreign tax credit carryforwards
    
    
    14,776
    
    
    
    13,770Net operating loss carryforwards
    
    
    39,508
    
    
    
    33,223Gross deferred tax asset
    
    
    56,227
    
    
    
    50,254Valuation allowance
    
    
    (56,227
    )
    
    
    (50,254
    )Total deferred tax assets
    
    $
    
    
    
    $
    Deferred tax liabilitiesDepreciation and amortization
    
    $
    
    
    
    $
    Fair value adjustment of financial instrument
    
    
    
    
    
    
    Accrued foreign dividends
    
    
    
    
    
    
    Total deferred liabilities
    
    $
    
    
    
    $
    Net Deferred Tax Assets (Liabilities)
    
    $
    
    
    
    $
    
        F - 29




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
 NOTE S  LOSS PER COMMON SHARE FROM CONTINUING OPERATIONS
  Year EndedDecember 31,2009
    
    
    2008Loss:Net loss from continuing operations
    
    $
    (10,551
    )
    
    $
    (10,976
    )Effect of dilutive potential common shares
    
    
    
    
    
    
    Diluted net loss from continuing operations
    
    $
    (10,551
    )
    
    $
    (10,976
    )Number of shares:Weighted-average shares outstanding
    
    
    8,120,428
    
    
    
    8,045,239Basic and diluted net loss per share from continuing operations
    
    $
    (1.30
    )
    
    $
    (1.36
    )
  NOTE T  GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS
 Segment Reporting (formerly ,
     F - 29




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
 2009
    
    
    2008Revenues from external customersMecar SA
    
    $
    86,393
    
    
    $
    112,192Mecar USA
    
    
    56,030
    
    
    
    32,232$
    142,423
    
    
    $
    144,424Interest expenseMecar SA
    
    $
    3,704
    
    
    $
    4,834Mecar USA
    
    
    285
    
    
    
    1Corporate
    
    
    18
    
    
    
    1,568$
    4,007
    
    
    $
    6,403Interest incomeMecar SA
    
    $
    57
    
    
    $
    380Mecar USA
    
    
    1
    
    
    
    2Corporate
    
    
    49
    
    
    
    352$
    107
    
    
    $
    734Income tax (benefit) expenseMecar SA
    
    $
    
    
    
    $
    Mecar USA
    
    
    2
    
    
    
    Corporate
    
    
    (204
    )
    
    
    214$
    (202
    )
    
    $
    214Depreciation and amortizationMecar SA
    
    $
    4,011
    
    
    $
    4,698Mecar USA
    
    
    166
    
    
    
    146Corporate
    
    
    147
    
    
    
    303$
    4,324
    
    
    $
    5,147Segment earnings (loss) from continuing operations before taxesMecar SA
    
    $
    (7,800
    )
    
    $
    (811
    )Mecar USA
    
    
    3,723
    
    
    
    946Corporate
    
    
    (6,676
    )
    
    
    (10,897
    )$
    (10,753
    )
    
    $
    (10,762
    )Segment assetsMecar SA
    
    $
    84,575
    
    
    $
    86,161Mecar USA
    
    
    12,175
    
    
    
    9,324Corporate
    
    
    3,879
    
    
    
    8,214$
    100,629
    
    
    $
    103,699Capital expenditure for segment assetsMecar SA
    
    $
    1,354
    
    
    $
    1,657Mecar USA
    
    
    186
    
    
    
    135Corporate
    
    
    
    
    
    
    11$
    1,540
    
    
    $
    1,803
  F - 30




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
 Amounts Net of intersegment receivables.
  Geographic Segment Data2009
    
    
    2008Revenues from external customers by country (A)United States
    
    $
    54,563
    
    
    $
    16,982Saudi Arabia
    
    
    42,087
    
    
    
    75,905Bahrain
    
    
    16,203
    
    
    
    2,505Kuwait
    
    
    5,723
    
    
    
    8,535Morocco
    
    
    4,794
    
    
    
    16,522Slovenia
    
    
    3,979
    
    
    
    Qatar
    
    
    2,320
    
    
    
    227Belgium
    
    
    2,228
    
    
    
    1,896Indonesia
    
    
    1,888
    
    
    
    2,618Cyprus
    
    
    1,332
    
    
    
    Canada
    
    
    1,314
    
    
    
    Egypt
    
    
    1,269
    
    
    
    France
    
    
    1,245
    
    
    
    Italy
    
    
    955
    
    
    
    Ireland
    
    
    766
    
    
    
    2,655Oman
    
    
    604
    
    
    
    Other Foreign Countries
    
    
    1,153
    
    
    
    903Georgia
    
    
    
    
    
    
    15,676$
    142,423
    
    
    $
    144,424
 (A)
    
    Revenues are attributed to countries based on location of customers Geographic Segment Data2009
    
    
    2008Segment assetsBelgium
    
    $
    85,052
    
    
    $
    86,944United States (1)
    
    
    15,577
    
    
    
    16,755$
    100,629
    
    
    $
    103,699
 (1)
    
    Net of inter-segment receivables and investments. 2009
    
    
    2008Property and equipment, netBelgium
    
    $
    14,124
    
    
    $
    16,811United States
    
    
    2,421
    
    
    
    2,714$
    16,545
    
    
    $
    19,525
  F - 31




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
 NOTE U  QUARTERLY FINANCIAL DATA (UNAUDITED)
 First
    
    
    Second
    
    
    Third
    
    
    Fourth2009
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    TotalRevenues
    
    $
    31,548
    
    
    $
    47,380
    
    
    $
    36,185
    
    
    $
    27,310
    
    
    $
    142,423Gross margin
    
    
    4,830
    
    
    
    7,222
    
    
    
    3,447
    
    
    
    (1,009
    )
    
    
    14,490Income (loss) from continuing operations, net of tax
    
    
    (1,373
    )
    
    
    1,969
    
    
    
    (3,205
    )
    
    
    (7,942
    )
    
    
    (10,551
    )Income (loss) from discontinued operations, net of tax
    
    
    1,056
    
    
    
    (810
    )
    
    
    (69
    )
    
    
    2,067
    
    
    
    2,244Net income (loss)
    
    
    (317
    )
    
    
    1,159
    
    
    
    (3,274
    )
    
    
    (5,875
    )
    
    
    (8,307
    )Basic and diluted earnings (loss) per share:Net income (loss) from continuing operations
    
    $
    (0.17
    )
    
    $
    0.24
    
    
    $
    (0.39
    )
    
    $
    (0.98
    )
    
    $
    (1.30
    )Net earnings (loss) from discontinued operations
    
    
    0.13
    
    
    
    (0.10
    )
    
    
    (0.01
    )
    
    
    0.26
    
    
    
    0.28Total net earnings (loss) per share
    
    $
    (0.04
    )
    
    $
    0.14
    
    
    $
    (0.40
    )
    
    $
    (0.72
    )
    
    $
    (1.02
    )
 First
    
    
    Second
    
    
    Third
    
    
    Fourth2008
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    TotalRevenues
    
    $
    26,795
    
    
    $
    40,322
    
    
    $
    49,247
    
    
    $
    28,060
    
    
    $
    144,424Gross margin (loss)
    
    
    5,807
    
    
    
    6,838
    
    
    
    6,396
    
    
    
    1,414
    
    
    
    20,455Loss from continuing operations, net of tax
    
    
    (2,678
    )
    
    
    (673
    )
    
    
    (3,308
    )
    
    
    (4,317
    )
    
    
    (10,976
    )Income (loss) from discontinued operations, net of tax
    
    
    (617
    )
    
    
    1,579
    
    
    
    (2,912
    )
    
    
    2,484
    
    
    
    534Net earnings (loss)
    
    
    (3,295
    )
    
    
    906
    
    
    
    (6,220
    )
    
    
    (1,833
    )
    
    
    (10,442
    )Basic and diluted earnings (loss) per share:Net loss from continuing operations
    
    $
    (0.34
    )
    
    $
    (0.08
    )
    
    $
    (0.41
    )
    
    $
    (0.53
    )
    
    $
    (1.36
    )Net earnings (loss) from discontinued operations
    
    
    (0.08
    )
    
    
    0.20
    
    
    
    (0.36
    )
    
    
    0.31
    
    
    
    0.07Total net earnings (loss) per share
    
    $
    (0.41
    )
    
    $
    0.12
    
    
    $
    (0.77
    )
    
    $
    (0.22
    )
    
    $
    (1.29
    )
 NOTE V  OFF-BALANCE SHEET TRANSACTION
   F - 32




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
 NOTE W  DISCONTINUED OPERATIONS
  Titan Dynamics Systems, Inc.
  Global Microwave Systems, Inc.
  NS Microwave Systems, Inc.
   F - 33




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
  December 31,2008Cash
    
    $
    386Accounts receivable, net
    
    
    1,312Costs and accrued earnings on uncompleted contracts
    
    
    689Inventories, net
    
    
    1,107Other assets
    
    
    980Assets held for sale
    
    $
    4,474Accounts payable
    
    $
    408Accrued liabilities
    
    
    500Customer deposits
    
    
    382Other liabilities
    
    
    26Liabilities held for sale
    
    $
    1,316
   Year Ended
    
    
    Year EndedDecember 31, 2009
    
    
    December 31, 2008NSM
    
    
    Titan
    
    
    GMS
    
    
    NSM
    
    
    TotalRevenue
    
    $
    2,894
    
    
    $
    668
    
    
    $
    10,083
    
    
    $
    6,979
    
    
    $
    17,730Income (loss) before taxes
    
    
    (1,675
    )
    
    
    (140
    )
    
    
    2,215
    
    
    
    (4,289
    )
    
    
    (2,214
    )Income (loss), net of tax
    
    
    (1,679
    )
    
    
    (140
    )
    
    
    2,214
    
    
    
    (4,290
    )
    
    
    (2,216
    )Discontinued operations, net of tax
    
    $
    (1,679
    )
    
    $
    (140
    )
    
    $
    2,214
    
    
    $
    (4,290
    )
    
    $
    (2,216
    )
  NOTE X  SUBSEQUENT EVENTS
 Merger Agreement
    F - 34




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
 DOJ Subpoena
     Litigation
Relating to the Merger
   F - 35




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##### Table of Contents



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 The Allied Defense Group, Inc.
(Parent Company)
 BALANCE SHEETS
 (Thousands of Dollars)
 December 31,2009
    
    
    2008ASSETSCash and cash equivalents
    
    $
    2,119
    
    
    $
    1,835Restricted cash
    
    
    160
    
    
    
    160Investment in subsidiaries
    
    
    13,047
    
    
    
    49,891Assets Held for Sale, net of liabilities
    
    
    
    
    
    
    3,158Due from subsidiaries
    
    
    14,701
    
    
    
    Other
    
    
    1,256
    
    
    
    961Total assets
    
    $
    31,283
    
    
    $
    56,005LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESAccounts payable and accrued liabilities
    
    $
    3,506
    
    
    $
    3,485Due to subsidiaries
    
    
    
    
    
    
    16,174Income tax
    
    
    496
    
    
    
    397Deferred compensation
    
    
    239
    
    
    
    234Long term debt, less unamortized discount
    
    
    7
    
    
    
    13Derivative instrument
    
    
    24
    
    
    
    318Senior convertible notes
    
    
    
    
    
    
    933Total liabilities
    
    
    4,272
    
    
    
    21,554STOCKHOLDERS EQUITYCommon stock
    
    
    818
    
    
    
    808Capital in excess of par value
    
    
    56,490
    
    
    
    55,912Accumulated (deficit)
    
    
    (46,658
    )
    
    
    (38,351
    )Accumulated other comprehensive income
    
    
    16,361
    
    
    
    16,082Total stockholders equity
    
    
    27,011
    
    
    
    34,451Total liabilities and stockholders equity
    
    $
    31,283
    
    
    $
    56,005
  F - 36




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##### Table of Contents



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 The Allied Defense Group, Inc.
(Parent Company)
 STATEMENTS OF OPERATIONS
 (Thousands of Dollars)
 Years ended December 31,2009
    
    
    2008IncomeIntercompany management fees
    
    $
    4,200
    
    
    $
    2,705Other  net
    
    
    48
    
    
    
    1254,248
    
    
    
    2,830Costs and expensesAdministrative and other
    
    
    7,067
    
    
    
    9,247Net Interest due to subsidiaries
    
    
    961
    
    
    
    1,672(Gain) loss on fair value of Senior Notes and warrants
    
    
    (299
    )
    
    
    1,104Loss before equity in operations of subsidiaries
    
    
    (3,481
    )
    
    
    (9,193
    )Loss in continuing operations of subsidiaries, net of tax
    
    
    (7,070
    )
    
    
    (1,783
    )Loss from continuing operations before income taxes
    
    
    (10,551
    )
    
    
    (10,976
    )Income taxes
    
    
    
    
    
    
    Equity from discontinued operations
    
    
    2,244
    
    
    
    534Net loss
    
    $
    (8,307
    )
    
    $
    (10,442
    )Earnings (loss) per common shareBasic and dilutedNet loss from continuing operations
    
    $
    (1.30
    )
    
    $
    (1.36
    )Net earnings from discontinued operations
    
    
    0.28
    
    
    
    0.07Total loss per share  basic and diluted
    
    $
    (1.02
    )
    
    $
    (1.29
    )Weighted average number of common shares:Basic and Diluted
    
    
    8,120,428
    
    
    
    8,045,239
  F - 37




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##### Table of Contents



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 The Allied Defense Group, Inc.
(Parent Company)
STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
 2009
    
    
    2008Cash flows from operating activitiesNet loss for the year
    
    $
    (8,307
    )
    
    $
    (10,442
    )Gain on sale of subsidiaries
    
    
    (3,923
    )
    
    
    (2,750
    )Discontinued Operations, net of tax
    
    
    1,679
    
    
    
    2,216Loss from continuing operations
    
    
    (10,551
    )
    
    
    (10,976
    )Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activitiesEquity in operations of subsidiaries
    
    
    7,070
    
    
    
    1,783Impairment of long-lived assets
    
    
    181
    
    
    
    462Depreciation and amortization
    
    
    147
    
    
    
    303Net (gain) loss related to fair value of notes and warrants
    
    
    (299
    )
    
    
    1,104Common stock and stock option awards
    
    
    417
    
    
    
    408Deferred director stock awards
    
    
    103
    
    
    
    92Changes in assets and liabilitiesOther assets
    
    
    144
    
    
    
    319Due to subsidiaries, net
    
    
    1,190
    
    
    
    (346
    )Accounts payable and accrued liabilities
    
    
    721
    
    
    
    (1,848
    )Deferred compensation
    
    
    5
    
    
    
    33Net cash used in operating activities
    
    
    (872
    )
    
    
    (8,666
    )Cash flows from investing activitiesCapital expenditures
    
    
    
    
    
    
    (11
    )Proceeds from sale of subsidiaries
    
    
    2,023
    
    
    
    24,286Net cash provided by investing activities
    
    
    2,023
    
    
    
    24,275Cash flows from financing activitiesPrincipal payments on long-term obligations
    
    
    (928
    )
    
    
    (19,428
    )Repayment on capital lease obligations
    
    
    (6
    )
    
    
    (13
    )Proceeds from employee stock purchase plan
    
    
    73
    
    
    
    92Net cash transferred from discontinued operations
    
    
    
    
    
    
    104Retirement of stock
    
    
    (6
    )
    
    
    (29
    )Restricted cash
    
    
    
    
    
    
    (28
    )Net cash used in financing activities
    
    
    (867
    )
    
    
    (19,302
    )Net increase (decrease) in cash and equivalents
    
    
    284
    
    
    
    (3,693
    )Cash and equivalents at beginning of year
    
    
    1,835
    
    
    
    5,528Cash and equivalents at end of year
    
    $
    2,119
    
    
    $
    1,835Supplemental Disclosures of Cash Flow Information:Cash paid during the year for:Interest
    
    $
    18
    
    
    $
    2,259Supplemental of Non-Cash Investing and Financing Activities:Capital leases
    
    $
    
    
    
    $
    15
  F - 38




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##### Table of Contents



SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
 The Allied Defense Group, Inc.
 Years ended December 31, 2009 and 2008
(Thousands of Dollars)
 AdditionsBalance at
    
    
    Charged to
    
    
    Charged
    
    
    
    
    
    
    Balance atBeginning of
    
    
    Costs and
    
    
    to Other
    
    
    
    
    
    
    End ofDescription
    
    Period
    
    
    Expenses
    
    
    Accounts
    
    
    Deductions
    
    
    PeriodYear ended December 31, 2009Estimated losses on contracts
    
    $
    1,774
    
    
    $
    765
    
    
    $
    51
    
    
    $
    (143
    )(1)
    
    $
    2,447Allowance for doubtful receivables
    
    $
    1,038
    
    
    $
    360
    
    
    $
    16
    
    
    $
    (427
    )(2)
    
    $
    987Valuation allowance on inventory
    
    $
    2,795
    
    
    $
    178
    
    
    $
    45
    
    
    $
    (70
    )(3)
    
    $
    2,948Valuation allowances on deferred tax assets
    
    $
    50,254
    
    
    $
    10,210
    
    
    $
    
    
    
    $
    (4,237
    )(4)
    
    $
    56,227Year ended December 31, 2008Estimated losses on contracts
    
    $
    1,902
    
    
    $
    
    
    
    $
    
    
    
    $
    (128
    )(1)
    
    $
    1,774Allowance for doubtful receivables
    
    $
    634
    
    
    $
    447
    
    
    $
    
    
    
    $
    (43
    )(2)
    
    $
    1,038Valuation allowance on inventory
    
    $
    1,775
    
    
    $
    1,144
    
    
    $
    
    
    
    $
    (124
    )(3)
    
    $
    2,795Valuation allowances on deferred tax assets
    
    $
    43,486
    
    
    $
    6,768
    
    
    $
    
    
    
    $
    
    (4)
    
    $
    50,254
 
 (1)
    
    Represents amount of reserve relieved through completion of contracts.(2)
    
    Represents write-off of receivables.(3)
    
    Represents write-off of inventory.(4)
    
    Represents amounts of valuation allowance relieved through use of deferred tax assets.  F - 39




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##### Table of Contents



EXHIBIT INDEX
 Number
    
    Description of Exhibit
    
    Page21
    
    
    List of Subsidiaries
    
    E-223
    
    
    Consent of Independent Registered Public Accounting Firm
    
    E-331.1
    
    
    Certification of Chief Executive Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002, dated
April 7, 2010
    
    E-431.2
    
    
    Certification of Chief Financial Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002, dated
April 7, 2010
    
    E-532
    
    
    Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002, dated April 7, 2010
    
    E-6
  E - 1