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The Allied Defense Group Inc. isn't just about bombs and bullets.Though the ammunition business of the Vienna, Va., company accounts for more than 60 percent of its revenue, ADG is using an acquisition strategy to diversify into other technology-rich markets.The company also has a new president and chief executive officer in retired Army Maj. Gen. John Marcello to lead these efforts. He was appointed to replace another retired officer, Maj. Gen. John Meyer, Jr., as head of the company in May."The future prospects for ADG are significant, and I am proud to lead this team," Marcello said.Marcello's goal is to build off ADG's base and create a portfolio of defense and security companies with revenue of at least $350 million by 2010, according to the company's 2004 annual report. In 2004, the company had $146.9 million in revenue.Marcello led ADG's Mecar SA unit in Belgium, which makes a range of conventional ammunition. Mecar is one of six ADG subsidiaries.Other ADG units design electronic microwave security systems, manufacture battlefield simulators and other military training devices and produce weather and navigational software, data and systems for military and commercial customers.The company's growth plans are multifaceted. First, Marcello wants to enhance profitability of ADG's U.S. subsidiaries by making small acquisitions in the $6 million to $10 million range to fill specific technology or business needs.ADG is looking at two firms in this range that fit into the company's surveillance equipment business, Marcello said. He declined to name the companies, but said they involve hardware and software for defense, law and order and commercial markets.ADG is looking to buy a company that either fits into one of its divisions or that will mesh with its defense and security companies portfolios.If ADG acquires a company that fits into a separate sector on its own, it will likely be a larger acquisition in the $25 million to $50 million range that will serve as an anchor company, he said.ADG's six subsidiaries fall into four business sectors:In 2004, ADG reported revenue of $146.9 million, a slight decrease from $154.2 million in 2003. Its 2004 net earnings also dropped to $2.5 million from 3.9 million in 2003.In the first quarter of 2005, ADG's revenue fell to $17.9 million, from $26.9 million in the same quarter in 2004. The company posted a net loss of $3.4 million.On Aug. 9, ADG announced it was delaying the release of its second quarter results and is restating results for 2002, 2003, 2004 and the first quarter of 2005 because of issues with how it accounted for currency exchange rates.The first two quarters are usually weak for ADG, with business picking up in the second part of the year, because Mecar is subject to the cyclical nature of the ammunition business, according to the company. Mecar receives more orders in the first half of the year, but most of its revenue is not earned until the second half, the company said.Michael Hoffman of the investment bank Friedman, Billings, Ramsey Group Inc. in Arlington, Va., called ADG "a diamond in the rough." He is the only Wall Street analyst following the company, and he lauded Marcello's appointment because of his understanding and knowledge of the company.Although ADG's growth strategy includes acquisitions, the company is prudent with its capital and won't overpay, Hoffman said. At the moment, ADG is "challenged, because valuations for possible acquisition targets are high," he said.BOOSTER SHOTSTo bolster internal growth, Marcello wants to boost business development assistance to all of the company's subsidiaries by helping them find contract opportunities and preparing proposals."What I can do here is locate a larger group of people in the center of all this information," Marcello said. "I can identify more here about government contracts and law enforcement contracts that are becoming available and get that information to them."To improve ADG's prospects for winning business opportunities, Marcello wants to team with other major U.S. defense and security contractors, including General Dynamics Corp. and Alliant Techsystems Inc. of Edina, Minn., a maker of conventional munitions and advanced weapons systems.Another part of ADG's strategy is to expand its worldwide customer base and to win more business from non-Army customers, Marcello said.The company also wants to gain market share in countries that don't yet have an established defense industrial complex, including some nations in the Middle East, Mexico, Latin America or Southeast Asia, Hoffman said. Saudi Arabia, which is ADG's largest client, generates about 50 percent to 60 percent of ADG's annual revenue.Marcello, 57, has worked for ADG since 2002 as chief operating officer and then managing director of Mecar, the largest of the company's six operating units. Mecar typically has generated about $90 million a year for ADG. Until a new managing director is found for Mecar in Belgium, Marcello continues to oversee the operations and travels there once a month.Also on Marcello's plate is finding a new chief financial officer for the company after former CFO Charles Hasper resigned in July.About 65 percent of ADG's business comes from the U.S. Defense Department, 24 percent from the commercial sector and about 11 percent from law enforcement, which includes state and local organizations. Most of the company's U.S. federal contract awards are in the $1 million to $12 million range, but its Mecar subsidiary has nabbed contracts valued up to $127 million, Marcello said."ADG has so much potential for the future," Marcello said. "Now is the time for us to seize the opportunities within our grasp."Staff Writer Roseanne Gerin can be reached at rgerin@postnewsweektech.com.XXXSPLITXXX-XXXSPLITXXX-