David Luxton, president and CEO of Allen-Vanguard. (Darren Brown, OBJ)

Allen-Vanguard Corp. (TSX:VRS) has rejected an outside investor's proposal to take up a significant investment position in the company, citing material differences between the final terms of the agreement and the original proposal.

The Ottawa-based defence products company, whose stock price has lost more than 90 per cent of its value in the past year, said its investment bankers are looking at several of the other unsolicited expressions of interest it has received, as well as courting other potential investors and exploring alternative recapitalization scenarios, after deciding that proposal was not in the best interest of the company or its shareholders.

Allen-Vanguard said it had by Aug. 14 accepted a proposed non-binding term sheet with terms based on advanced due diligence already completed by the investor, and the deal had been set to close before Sept. 30.

"However, the final terms proposed by the investor subsequent to Aug. 14 differed materially from the initial proposal," the company's statement read.

Versant Partners analyst Neil Linsdell wrote that the differing terms had likely been due to Allen-Vanguard's dramatic drop in share price, as the company's stock has dropped by more than $1 since Aug. 14 alone.

Allen-Vanguard is now in danger of breaching its debt covenants since the lack of a deal means it might not be able to make the next $10-million quarterly payment, due at the end of the month, on its $200-million credit line with Royal Bank of Canada. The company has drawn approximately $185 million on the loan facility.

CEO David Luxton said the company has been suffering from delays in expected orders for electronic counter-measures ever since its $640-million purchase of local competitor Med-Eng a year ago, and blamed its "disappointing" fiscal 2008 year on difficulties in combining the two companies' sales teams.

Allen-Vanguard's third quarter, which Mr. Luxton said was a "low-water mark" for the company, saw net loss deepening to $36.6 million from $1.8 million, although sales did improve to $31.2 million from $12.4 million.

"We do not believe that performance in fiscal 2008 is reflective of the future prospects and sustainable earnings capability of Allen-Vanguard," said Mr. Luxton in a statement. "We have changed and transformed the organization and management ranks over the past months and have a much stronger execution team going forward."

The company noted that its backlog has more than doubled to $100 million, although it said it remains cautious and is trying to keep costs low "while it rebuilds revenue."

Allen-Vanguard added it is now working with RBC and investors to secure accommodation for its loan repayments or additional capital.

Mr. Luxton told the OBJ that talks were "well in progress" for some kind of deal within the next few weeks, and noted that the company's main interest was in financial investors who know the company well.

As well, he said that the company might be able to draw on its $50-million revolving credit facility to satisfy working capital requirements, although there are several restrictions on the credit line.

The company's stock price lost another 37 per cent on Tuesday after the news, dropping to a low of 37 cents before recovering in the afternoon, to 47 cents at 1:09 p.m.