<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30,1997..................................
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from............................. to..................
Commission file number ......333-4520.........................................
.................................RACI HOLDING,INC.............................
(Exact name of registrant as specified in its charter)
........Delaware ............ ..........51-0350929..................
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
870 Remington Drive
P.O. Box 700
....................Madison, North Carolina 27025-0700..............
(Address of principal executive offices)
(Zip Code)
.............................(910) 548-8700.........................
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes...X ... No......
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class A Common Stock, par value $.01 per share, outstanding at
July 31, 1997 750,000 shares
Class B Common Stock, par value $.01 per share, outstanding at
July 31, 1997 0 shares
1
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PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
RACI Holding, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in Millions except per share and share data)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------------- ---------------
(Unaudited)
ASSETS
------
Current Assets
--------------
<S> <C> <C>
Cash and Cash Equivalents $ 3.8 $ 9.6
Accounts Receivable Trade - net 90.9 71.1
Inventories 109.9 101.9
Supplies 13.4 13.9
Prepaid Expenses and Other Current Assets 8.9 10.7
Deferred Income Taxes 12.6 13.4
------------------- ---------------
Total Current Assets 239.5 220.6
Property, Plant and Equipment - net 94.5 98.4
Intangibles and Debt Issuance Costs - net 94.8 96.4
Deferred Income Taxes 15.4 14.0
Other Noncurrent Assets 4.7 5.6
------------------- ---------------
Total Assets $ 448.9 $ 435.0
=================== ===============
- ------------------------------------------------------------------------------------------
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Current Liabilities
-------------------
Accounts Payable $ 30.2 $ 32.9
Short-Term Debt 0.5 1.2
Current Portion of Long-Term Debt 20.8 20.9
Product and Environmental Liabilities 5.6 7.2
Other Accrued Liabilities 26.9 22.3
------------------- ---------------
Total Current Liabilities 84.0 84.5
Long-term Debt 245.7 232.2
Retiree Benefits 33.5 31.9
Product and Environmental Liabilities 8.2 6.6
------------------- ---------------
Total Liabilities 371.4 355.2
Commitments and Contingencies
Shareholder's Equity
--------------------
Class A Common Stock, par value
$.01; 1,250,000 shares
authorized, 750,000 issued
and outstanding - -
Class B Common Stock, par value
$.01; 1,250,000 shares
authorized, none issued and outstanding - -
Paid in Capital 75.0 75.0
Retained Earnings 2.5 4.8
------------------- ---------------
Total Shareholder's Equity 77.5 79.8
Total Liabilities and Shareholder's Equity $ 448.9 $ 435.0
=================== ===============
- ------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
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Item 1. Financial Statements (continued)
RACI Holding, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Dollars in Millions except per share data)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Unaudited
----------------------------------------------------------------------------
Quarter Ended June 30, Year-to-Date June 30,
--------------------------------- --------------------------------------
1997 1996 (1) 1997 1996 (1)
------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Sales (2) $ 85.9 $ 80.8 $ 174.4 $ 177.1
Cost of Goods Sold 60.7 58.7 124.7 123.3
------------- ------------- ------------- ----------------
Gross Profit 25.2 22.1 49.7 53.8
Selling, General and Administrative
Expenses 18.4 19.6 36.1 41.8
Research & Development Expense 2.0 2.5 4.1 5.0
Other (Income) Expense, net (0.3) 0.5 0.1 0.7
Restructuring and Nonrecurring Items - 1.2 - 1.2
------------- ------------- ------------- ----------------
Operating Profit/(Loss) 5.1 (1.7) 9.4 5.1
Interest Expense (6.6) (6.6) (12.7) (12.3)
------------- ------------- ------------- ----------------
Loss Before Income Taxes (1.5) (8.3) (3.3) (7.2)
Credit for Income Taxes (0.5) (3.7) (1.0) (3.2)
------------- ------------- ------------- ----------------
Net Loss $ (1.0) $ (4.6) $ (2.3) $ (4.0)
============= ============= ============= ================
Per Share Data:
Net Loss $ (1.34) $ (6.13) $ (3.07) $ (5.33)
============= ============= ============= ================
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Certain reclassifications were made to the prior period's financial
information to conform with the current presentation format.
(2) Sales are presented net of Federal Excise Taxes of $6.9 and $6.2 for the
quarter, and $13.4 and $14.2 for the year-to-date period ended June 30,
1997 and 1996, respectively.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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Item 1. Financial Statements (continued)
RACI Holding, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars in Millions)
<TABLE>
<CAPTION>
------------------------------
Unaudited
------------------------------
Year-to-Date June 30,
------------------------------
1997 1996
---------- ----------
Operating Activities
<S> <C> <C>
Net cash used in operating activities $ (15.4) $ (61.2)
Investing Activities
Capital Expenditures (2.6) (8.8)
---------- ----------
Net cash used in investing activities (2.6) (8.8)
Financing Activities
Net borrowings under Revolving Credit Facility 24.0 92.6
Principal payments on Long-Term Debt (10.6) (7.4)
Principal payments on Short-Term Debt (0.7) (2.4)
Debt Issuance Costs (0.5) -
---------- ----------
Net cash provided by financing activities 12.2 82.8
---------- ----------
(Decrease)/Increase in cash and cash equivalents (5.8) 12.8
Cash and cash equivalents at beginning of period 9.6 1.4
---------- ----------
Cash and cash equivalents at end of period $ 3.8 $ 14.2
========= =========
- --------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</TABLE>
4
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RACI Holding, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 (Unaudited)
(Dollars in Millions, except per share and share data)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of RACI Holding, Inc.
("Holding") include the accounts of its subsidiary, Remington Arms Company, Inc.
("Remington") and Remington's wholly owned subsidiary, Remington International,
Ltd. (together with Remington and Holding, the "Company"). Holding has no
material assets other than its investment in Remington. All intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements of
Holding have been prepared by the Company in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of items of a normal recurring nature)
considered necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 1997 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1997.
Pursuant to an asset purchase agreement (the "Asset Purchase Agreement"),
on December 1, 1993, the Company acquired certain assets and assumed certain
liabilities of the Sporting Goods Business (the "Business" or the "Predecessor")
formerly operated by E.I. du Pont de Nemours and Company, Inc. ("DuPont") and
one of DuPont's subsidiaries ("Sporting Goods", and together with DuPont, the
"Sellers"), for a cash purchase price of $299.8 as adjusted subsequent to the
closing of such acquisition (the "Acquisition").
Certain reclassifications were made to the prior period's financial
information to conform with the current presentation format.
These financial statements should be read in conjunction with the audited
consolidated financial statements of RACI Holding, Inc. and Subsidiaries as of
and for the year ended December 31, 1996.
5
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RACI Holding, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 (Unaudited)
(Dollars in Millions, except per share and share data)
<TABLE>
<CAPTION>
2. INVENTORIES
June 30, December 31,
1997 1996
---- ----
<S> <S> <C> <C>
Raw Materials $ 17.1 $ 16.0
Semi-Finished Product 19.4 22.9
Finished Product 73.4 63.0
------ ------
Total $109.9 $101.9
====== ======
3. DEBT
June 30, December 31,
1997 1996
---- ----
Credit Agreement:
Term Loans $ 77.3 $ 86.4
Revolving Credit Facility 83.0 59.0
9.5% Senior Subordinated 99.6 99.6
Notes due 2003
Capital Lease Obligations 4.8 5.7
Other 1.8 2.4
------ ------
Subtotal $ 266.5 $ 253.1
Less: Current Portion 20.8 20.9
------ ------
Long-term Debt $ 245.7 $ 232.2
====== ======
</TABLE>
4. STATEMENT OF ACCOUNTING STANDARDS NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, effective
for fiscal periods ending after December 15, 1997. The new standard simplifies
the computation of earnings (loss) per share by replacing primary earnings
(loss) per share with basic earnings (loss) per share. Basic earnings (loss) per
share will not include the effect of any potentially dilutive securities, as
under the current accounting standard, and will be computed by dividing reported
income available to common shareholders by the weighted average number of common
shares outstanding during the period. Fully diluted earnings (loss) per share
will now be called diluted earnings (loss) per share and will reflect the
dilution of all potentially dilutive securities. Companies will be required to
restate all prior period earnings (loss) per share data. The adoption of this
standard by the Company will have no impact on the historical reported earnings
(loss) per share amounts since the effect of potentially dilutive securities
have been immaterial and therefore have been excluded from the historical
earnings (loss) per share computations.
6
<PAGE>
RACI Holding, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 (Unaudited)
(Dollars in Millions, except per share and share data)
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 requires public business enterprises to adopt its provisions for periods
beginning after December 15, 1997, and to report certain information about
operating segments in complete sets of financial statements of the enterprise
and in condensed financial statements of interim periods issued to shareholders.
The Company is evaluating the provisions of SFAS No. 131, but has not yet
determined if additional disclosures will be required.
5. RESTRUCTURING
The Company recorded charges for restructuring in 1996 of $4.9. The
restructuring was necessary to reduce production levels, plant overhead
expenses, corporate administrative expense and other costs to correspond with
current sales volumes and to reorganize the Company's international marketing
efforts. The company-wide plan resulted in reductions of approximately 325
salaried and hourly (including bargaining unit) employees during 1996. The
charges incurred include estimated costs for employee severance and other
benefits of $3.2, lease costs of $0.7 and other expenses of $1.0. The majority
of the spending is expected to be completed by the end of 1997.
Components of the restructuring provision recorded in 1996 and utilized
through June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Severance and
Termination Lease Other
Benefits Costs Expenses Total
------------ ----- -------- -----
<S> <C> <C> <C> <C>
Original Provision $3.2 $0.7 $1.0 $4.9
Payments in 1996 1.3 0.1 0.1 1.5
---- ---- ---- ----
Balance, December 31, 1996 $1.9 $0.6 $0.9 $3.4
Payments in 1997 1.4 0.1 0.4 1.9
---- ---- ---- ----
Balance, June 30, 1997 $0.5 $0.5 $0.5 $1.5
==== ==== ==== ====
</TABLE>
The reserve balance at June 30, 1997 is included in other accrued
liabilities in the accompanying balance sheet.
7
<PAGE>
RACI Holding, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 (Unaudited)
(Dollars in Millions, except per share and share data)
6. FINANCIAL POSITION AND RESULTS OF OPERATIONS OF HOLDING AND REMINGTON
The following consolidating condensed financial data provides information
regarding the financial position and results of operations of Holding and its
wholly owned subsidiary, Remington including Remington's wholly owned subsidiary
Remington International, Ltd. Separate financial statements of Holding are not
presented because management has determined that they would not be material to
holders of the Company's public securities, Remington's 9 1/2% Senior
Subordinated Notes due 2003. Further, the Notes are fully and unconditionally
guaranteed by Holding.
RACI HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS
June 30, 1997
(Dollars in Millions)
<TABLE>
<CAPTION>
RACI
HOLDING,
INC. AND
HOLDING REMINGTON ELIMINATIONS SUBSIDIARIES
------- --------- ------------ -----------
ASSETS
------
<S> <C> <C> <C> <C>
Current Assets $ - $ 239.5 $ - $ 239.5
Noncurrent Assets 77.5 209.4 77.5 209.4
----- ------ ----- ------
Total Assets $ 77.5 $ 448.9 $77.5 $ 448.9
===== ====== ===== ======
LIABILITIES AND
---------------
SHAREHOLDER'S EQUITY
--------------------
Current Liabilities $ - $ 84.0 $ - $ 84.0
Noncurrent Liabilities - 287.4 - 287.4
Shareholder's Equity 77.5 77.5 77.5 77.5
----- ------ ----- ------
Total Liabilities and
Shareholder's Equity $ 77.5 $ 448.9 $ 77.5 $ 448.9
===== ====== ===== ======
</TABLE>
8
<PAGE>
RACI Holding, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 (Unaudited)
(Dollars in Millions, except per share and share data)
RACI HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS
December 31, 1996
(Dollars in Millions)
<TABLE>
<CAPTION>
RACI
HOLDING,
INC. AND
HOLDING REMINGTON ELIMINATIONS SUBSIDIARIES
------- --------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
- ------
Current Assets $ - $ 220.6 $ - $ 220.6
Noncurrent Assets 79.8 214.4 79.8 214.4
----- ------ ----- ------
Total Assets $79.8 $ 435.0 $79.8 $ 435.0
===== ====== ===== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
Current Liabilities $ - $ 84.5 $ - $ 84.5
Noncurrent Liabilities - 270.7 - 270.7
Shareholder's Equity 79.8 79.8 79.8 79.8
----- ------ ----- ------
Total Liabilities and
Shareholder's Equity $ 79.8 $ 435.0 $ 79.8 $ 435.0
===== ====== ===== ======
</TABLE>
RACI HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Millions)
<TABLE>
<CAPTION>
RACI
HOLDING,
INC.AND
HOLDING REMINGTON ELIMINATIONS SUBSIDIARIES
------- --------- ------------ ------------
QUARTER ENDED JUNE 30, 1997
- ---------------------------
<S> <C> <C> <C> <C>
Sales $ - $ 85.9 $ - $ 85.9
Gross Profit - 25.2 - 25.2
Equity in Loss of Subsidiary (1.0) - (1.0) -
Net Loss $ (1.0) $ (1.0) $(1.0) $ (1.0)
QUARTER ENDED JUNE 30, 1996
- ---------------------------
Sales $ - $ 80.8 $ - $ 80.8
Gross Profit - 22.1 - 22.1
Equity in Loss of Subsidiary (4.6) - (4.6) -
Net Loss $ (4.6) $ (4.6) $ (4.6) $ (4.6)
</TABLE>
9
<PAGE>
RACI Holding, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 (Unaudited)
(Dollars in Millions, except per share and share data)
RACI HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Millions)
<TABLE>
<CAPTION>
RACI
HOLDING,
INC. AND
HOLDING REMINGTON ELIMINATIONS SUBSIDIARIES
------- --------- ------------ ------------
YEAR-TO-DATE JUNE 30, 1997
- --------------------------
<S> <C> <C> <C> <C>
Sales $ - $ 174.4 $ - $ 174.4
Gross Profit - 49.7 - 49.7
Equity in Loss of Subsidiary (2.3) - (2.3) -
Net Loss $ (2.3) $ (2.3) $ (2.3) $ (2.3)
YEAR-TO-DATE JUNE 30, 1996
- --------------------------
Sales $ - $ 177.1 $ - $ 177.1
Gross Profit - 53.8 - 53.8
Equity in Loss of Subsidiary (4.0) - (4.0) -
Net Loss $ (4.0) $ (4.0) $ (4.0) $ (4.0)
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company is subject to various lawsuits and claims with respect to
product liabilities, governmental regulations, and other matters arising in the
normal course of business. Under the Asset Purchase Agreement, the Company
assumed financial responsibility for certain product liability claims involving
pre-Acquisition occurrences and certain pre-Acquisition environmental
liabilities up to a maximum aggregate amount (the "Cap"), the product liability
portion of which was increased pursuant to an agreement between the Company and
the Sellers in December 1996. Based upon the incurrence of additional product
liability costs chargeable to the Cap in the second quarter of 1997 the
remaining product liability basket has been exceeded. The Company expects to pay
the balance of the costs incurred in the third quarter to the Sellers. As of
June 30, 1997 the Company had charged to the Cap payments of $0.4 million
relating to environmental costs, leaving $0.1 million to be paid. The Company
anticipates making a payment in the third quarter of 1997 to close out the
remaining environmental Cap. Except for certain cases and claims relating to
shotguns as described below and for all cases and claims relating to
discontinued products, the Company generally bears financial responsibility for
all cases and claims relating to occurrences after the Closing. Because the
Company's assumption of financial responsibility for certain product liability
cases and claims involving pre-Acquisition occurrences is limited to the amount
of the Cap, with the Sellers retaining liability in excess of the Cap and
indemnifying the Company in respect thereof, and because of the Company's
accruals with respect to such cases and claims, the Company believes that
product liability cases and claims involving occurrences arising prior to the
closing of the Acquisition are not likely to have a material adverse effect upon
the financial condition or results of operations of the Company.
10
<PAGE>
RACI Holding, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 (Unaudited)
(Dollars in Millions, except per share and share data)
While it is difficult to forecast the outcome of litigation, the Company does
not believe, in light of relevant circumstances (including the current
availability of insurance for personal injury and property damage with respect
to cases and claims involving occurrences arising after the closing of the
Acquisition, the Company's accruals for the uninsured costs of such cases and
claims and the Sellers' agreement to be responsible for certain post-Acquisition
shotgun-related costs) that the outcome of all product liability cases and
claims involving post-Acquisition occurrences, which occurrences have arisen
prior to June 30, 1997, individually or in the aggregate, will be likely to have
a material adverse effect upon the financial condition or results of operations
of the Company. Because of the nature of its products, the Company anticipates
that it will continue to be involved in product liability litigation in the
future.
8. SUBSEQUENT EVENTS
On July 22, 1997 the Board of Directors approved the RACI Holding, Inc.
Director Stock Purchase Plan and reserved an additional 12,500 shares of Class A
Common Stock, par value $.01 per share, of Holding ("Common Stock") for issuance
in accordance therewith. To date, no Common Stock has been issued under this
plan.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the accompanying Condensed Consolidated Financial Statements and related notes
of RACI Holding, Inc. ("Holding") and its subsidiary, Remington Arms Company,
Inc. ("Remington") and Remington's wholly owned subsidiary, Remington
International, Ltd. (together with Remington and Holding, the "Company"), and
with the Company's audited consolidated financial statements as of and for the
year ended December 31, 1996 and the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in the Company's
Registration Statement on Form S-4 (File No. 333-4520) on file with the
Securities and Exchange Commission. The results of operations for the three and
six months ended June 30, 1997 are not necessarily indicative of results that
may be expected for the year ended December 31, 1997, in part due to the
seasonality of the Company's business.
BUSINESS TRENDS AND INITIATIVES
The Company believes that several of its key customers, including Wal-Mart,
instituted tighter inventory control practices to reduce inventory levels during
1996. The Company also believes that additional key customers are beginning to
institute tighter inventory control practices, such as delaying purchases until
product is needed to fill orders particularly in product categories where
customers' existing inventories are sufficient in relation to current demand
such as certain higher priced rifles. As a result of this shift in customer
buying patterns, sales of the Company's products are becoming increasingly
seasonal. See "- Seasonality." While more of the Company's customers could
adopt similar policies leading to further constraints on future sales, the
Company does not believe that any such development is likely to have a material
adverse impact on full year sales volumes, although no assurance can be given in
this regard. However, these practices have caused, and are likely to continue
to cause, the Company to experience increased liquidity and working capital
requirements in producing and carrying inventory for later sale to meet
customers' shorter lead time order requirements.
In addition, gross margin as a percentage of sales was adversely affected
in the first quarter of 1997 compared to the prior year period by customers
purchasing lower priced, lower margin products such as economically priced
shotguns and promotionally priced ammunition. This impact on gross margins was
partially offset in the second quarter of 1997 by higher pricing on the
Company's firearms products and an improved mix of ammunition product sales.
Although changes in customer buying patterns have adversely influenced the
Company's gross profit margin for the first six months of 1997 compared to the
prior year period, the Company does not anticipate that the gross profit margin
will be significantly impacted for the full year.
The Company began its 1997 sales plan year on December 1, 1996 rather than
on January 1, 1997. This change in the sales plan year extended the qualifying
period for the early order or "dating" plan by one month to include December
orders which, the Company believes, had the effect of reducing orders for
firearms products in the first quarter.
The Company believes that consumer concerns about regulation, which were a
factor in market growth in 1994 and early 1995, will not be a significant market
influence in the near term. In part as a result of this change, the Company
believes that the markets for its firearms and ammunition products generally
will experience low levels of growth, at least in the near future.
In light of these market constraints on sales growth opportunities and the
Company's increased liquidity and working capital needs, the Company is focusing
on increasing profitability by increasing brand name awareness, introducing new
products and containing costs. In 1996, the Company undertook
12
<PAGE>
a number of cost containment initiatives and will continue to review all aspects
of the Company's operations with a view towards managing costs in response to
competitive pressures.
RESULTS OF OPERATIONS FOR THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1997
AS COMPARED TO THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
Sales. Sales for the second quarter of 1997 were $85.9 million, an
increase of $5.1 million, or 6.3%, from 1996 second quarter sales of $80.8
million. This increase was primarily due to increased firearms sales volume and
higher firearms pricing. Sales for the first six months of 1997 ("year-to-
date") were $174.4 million, a decrease of $2.7 million, or 1.5%, from 1996 year-
to-date sales of $177.1 million. The decline in sales for the year-to-date
period was primarily due to lower demand for certain of the Company's higher
priced rifles (primarily during the first quarter as compared to the prior year
period), partially offset by higher firearms pricing and increased sales of
ammunition, accessories and fishline products. The Company believes the decline
in demand for certain firearms in the first six months of 1997 versus the same
period of 1996 was primarily due to a shift in customer buying patterns,
although other factors contributed to the decline. See "-- Business Trends and
Initiatives."
Firearms sales increased $6.1 million, or 15.9%, to $44.5 million for the
second quarter of 1997 from $38.4 million in the second quarter of 1996. The
increase in firearms sales for the quarter was primarily due to increased sales
volumes relating to the fall hunting season which were realized later in 1997
due to a shift in customer buying patterns along with higher pricing on the
Company's firearms products. See "- Seasonality." Year-to-date sales in 1997
were $90.3 million, $3.6 million, or 3.8%, lower than the prior year-to-date
period. The decrease was most pronounced in the rifle category. The Company
believes this decrease was primarily the result of customers' tighter inventory
management practices such as delaying purchases until product is needed to fill
orders, and the change in the Company's 1997 sales plan year, which adversely
impacted first quarter sales as discussed above.
Ammunition sales for the second quarter of 1997 were $29.8 million, an
increase of $0.2 million over 1996 sales of $29.6 million. Year-to-date sales in
1997 were $59.0 million, $1.2 million, or 2.1%, higher than the prior year-to-
date period. The increase in ammunition sales for the year-to-date period was
primarily due to increased sales volumes.
Sales of fishing products for the second quarter were approximately equal
to the prior year period and increased slightly from the six months ended June
30, 1996 primarily due to higher sales of fishing related products. Sales of
accessory products decreased during the second quarter of 1997 from the second
quarter of 1996 primarily due to lower volumes, but higher first quarter volumes
resulted in increased sales for the year-to-date period as compared to the same
period for 1996.
Cost of Goods Sold. Cost of goods sold for the second quarter of 1997 was
$60.7 million, an increase of $2.0 million, or 3.4%, versus $58.7 million for
the second quarter of 1996. This increase resulted principally from the
increase in sales discussed above. Cost of goods sold as a percentage of sales
decreased between the two quarterly periods from 72.6% in 1996 to 70.7% in 1997.
This was primarily a result of higher pricing on firearms products and a
favorable mix of ammunition product sales, partially offset by costs associated
with the start-up of the Company's new manufacturing facility in Mayfield,
Kentucky. Cost of goods sold for the first six months of 1997 increased only
$1.4 million or 1.1% over the same period in 1996. As a percentage of sales,
however, cost of goods sold increased from 69.6% for the first six months in
1996 to 71.5% for the same period in 1997. This increase as a percentage of
sales for the year-to-date period was primarily due to start-up costs at the
Mayfield facility and an unfavorable sales mix of the Company's firearms
products, which included a higher percentage of lower priced lower margin
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products than the prior year period (primarily during the first quarter),
partially offset by higher pricing on the Company's firearms products.
Gross Profit. Gross profit was $25.2 million for the second quarter of
1997, an increase of $3.1 million, or 14.0% from the second quarter 1996 gross
profit of $22.1 million. This increase in gross profit was primarily due to
higher pricing and increased sales volume of the Company's firearms products and
a favorable mix of ammunition product sales, partially offset by costs
associated with the start-up of the Mayfield facility discussed above. Year-to-
date gross profit was $49.7 million in the current year versus $53.8 million in
the same period of the prior year. This decrease in gross profit between the
year-to-date periods was primarily due to lower sales volume in the Company's
firearms business and, to a lesser extent, start-up costs at the Mayfield
facility and an unfavorable mix of firearms product sales, partially offset by
higher pricing on the Company's firearms products.
Operating Expenses. Operating expenses consist of selling, general and
administrative expense; research and development expense; and other income and
expense. Operating expenses for the second quarter of 1997 were $20.1 million, a
decrease of $2.5 million, or 11.1%, from $22.6 million for the second quarter of
1996. Year-to-date operating expenses for 1997 were $40.3 million, a decrease of
$7.2 million, or 15.2%, from $47.5 million for the same period of 1996 for the
reasons set forth below.
Selling, general and administrative expenses for the second quarter of 1997
were $18.4 million, a decrease of $1.2 million, or 6.1%, from $19.6 million for
the second quarter of 1996. Year-to-date selling, general and administrative
expenses were $36.1 million, a $5.7 million decrease from $41.8 million in the
prior year-to-date period. The decrease in both the quarterly and year-to-date
periods was primarily attributable to the hiring of permanent employees to
replace outside consultants who comprised much of the Company's information
systems staffing during the first quarter and early part of the second quarter
of 1996, lower expenditures for salary and discretionary items due to the
workforce reductions and cost containment activities undertaken in 1996, and
reduced product liability expense. Selling, general and administrative expenses
decreased from 24.3% of sales in the second quarter of 1996 to 21.4% of sales in
the second quarter of 1997 and from 23.6% of sales for the six months ended June
30, 1996 to 20.7% for the six months ended June 30, 1997 primarily as a result
of the reduction in costs discussed above.
Research and development expenses were $2.0 million for the second quarter
of 1997, a decrease of $0.5 million, or 20.0%, from $2.5 million in the second
quarter of 1996. For the six months ended June 30, 1997, research and
development expenses were $4.1 million, a $0.9 million, or 18.0% decrease from
the same period of the prior year. The decrease in research and development
expenses for both the quarterly and year-to-date periods was primarily a result
of the Company consolidating research and development activities into the new
research and development facility in Elizabethtown, Kentucky.
Operating Profit. Operating profit increased to $5.1 million for the
second quarter of 1997, an increase of $6.8 million from 1996's second quarter
operating loss of $1.7 million. Operating profit increased to $9.4 million for
the year-to-date period, a $4.3 million or 84.3% increase from 1996's year-to-
date operating profit of $5.1 million. Operating profit for the second quarter
of 1996, however, included a $1.2 million restructuring charge recognized when
the Company reduced production levels, plant overhead expenses and other costs
to correspond with current sales volumes, and reorganized the international
marketing efforts. Excluding the restructuring related charges from both the
quarterly and year-to-date periods of 1996, operating profit increased $5.6
million for the 1997 quarterly period primarily as a result of higher gross
profits and lower operating expenses as discussed above, and increased $3.1
million for the 1997 year-to-date period primarily as a result of decreases in
operating expenses, partially offset by the lower gross profit as discussed
above.
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Interest Expense. Interest expense for the quarter ended June 30, 1997 was
$6.6 million, unchanged from the second quarter of 1996. Year-to-date interest
expense was $12.7 million versus $12.3 million in the prior year-to-date period.
The increase in interest expense for the year-to-date period was primarily due
to higher average borrowings on the Company's revolving credit facility (the
"Revolving Credit Facility") under its senior bank credit agreement (as amended,
the "Credit Agreement"), partially offset by lower interest on the Company's
term loan borrowings due primarily to lower term debt levels resulting from
scheduled debt repayments.
Net Income / Loss. Net loss for the second quarter of 1997 was $1.0
million, a decrease of $3.6 million from the second quarter 1996 net loss of
$4.6 million, due primarily to the factors discussed above. Net loss for the six
months ended June 30, 1997 was $2.3 million, a decrease of $1.7 million from
1996 net loss of $4.0 million due primarily to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Net cash used in operating activities for the six month period ended June
30, 1997 was $15.4 million, resulting primarily from an increase in accounts
receivable. Accounts receivable increased $19.8 million principally due to
$45.8 million of sales on extended payment terms granted to customers consistent
with industry-wide programs and with prior year experience, partially offset by
additional collections. The extended sales terms provide cash discount
incentives and, in the majority of cases, require payment by October 10, 1997.
The Company intends to use the proceeds from these receivables to pay down the
existing balance on its Revolving Credit Facility. Net cash used in investing
activities in the first six months of 1997 was $2.6 million consisting of
capital expenditures for maintenance of operations and improvement projects
concentrated on enhancing the efficiency of existing facilities as well as
investment in the Company's new manufacturing facility in Mayfield, Kentucky.
Net cash provided by financing activities in the first six months of 1997 was
$12.2 million, primarily resulting from increased borrowings under the Revolving
Credit Facility of approximately $24.0 million, offset in part by $10.6 million
in principal payments on outstanding indebtedness (including capital leases).
At present, the principal sources of liquidity for the Company's business
and operating needs are internally generated funds from its operations and
revolving credit borrowings under the Credit Agreement. The Credit Agreement
contains various default provisions and affirmative and negative covenants,
including a negative pledge with respect to the Company's unencumbered assets,
and certain financial covenants that require the Company to meet certain
financial ratios and tests. As of June 30, 1997, the Company was in compliance
in all material respects with the financial covenants under the Credit
Agreement. The Company believes that it will be able to meet its debt service
obligations and fund its operating requirements with cash flow from operations
and revolving credit borrowings prior to the maturity of the Revolving Credit
Facility, although no assurance can be given in this regard. In addition, the
Company has implemented certain programs and initiatives in order to improve
cash flow from operations. The Company expects that it will have to replace the
Revolving Credit Facility and refinance any outstanding amounts thereunder upon
its maturity on December 31, 2000. No assurance can be given that the Company
will be able to obtain such a replacement working capital facility or refinance
such amounts on terms acceptable to the Company.
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Working Capital
Working capital increased from $136.1 million at December 31, 1996 to
$155.5 million at June 30, 1997 primarily as a result of an increase in accounts
receivable and inventories (funded principally with borrowings from the
Company's Revolving Credit Facility), partially offset by a decrease in cash and
cash equivalents. During the fourth quarter of 1996, the Company implemented an
ongoing working capital management program to help maximize cash from
operations. This program includes improved collection of accounts receivable,
maintaining inventory levels in line with sales projections and increased focus
on management of accounts payable.
Capital Expenditures
Capital expenditures for the six months ended June 30, 1997 were $2.6
million, of which approximately 28% was related to the new firearms
manufacturing facility in Mayfield, Kentucky. The remainder of the capital
expenditures in the first six months of 1997 were principally for maintenance of
operations and improvement projects concentrated on enhancing the efficiency of
existing facilities.
Liquidity
The Company incurred substantial indebtedness in connection with the
Acquisition. As of June 30, 1997 the Company had outstanding approximately
$266.5 million of indebtedness, consisting of approximately $99.6 million
($100.0 million face amount) in 9 1/2% Senior Subordinated Notes due 2003,
Series A, $77.3 million in term loan borrowings and $83.0 million in revolving
credit borrowings under the Credit Agreement, $4.8 million in capital lease
obligations, and $1.8 million of other long-term debt. As of June 30, 1997 the
Company also had aggregate letters of credit outstanding of $7.0 million. $62.2
million of the Company's Revolving Credit Facility was available for borrowing
as of June 30, 1997.
The Company recently completed its offer to exchange (the "Exchange Offer")
up to $100 million aggregate principal amount of Remington's registered 9 1/2%
Senior Subordinated Notes due 2003, Series B (the "New Notes") for a like
principal amount of Remington's issued and outstanding 9 1/2% Senior
Subordinated Notes due 2003, Series A (the "Existing Notes" and, together with
the New Notes, the "Notes"). All of the Existing Notes were exchanged for New
Notes. The interest rate on the Notes was 10% per annum from April 30, 1994
until June 22, 1997, the day before the date of consummation of the Exchange
Offer, and is currently 9 1/2% per annum. The reduction in interest payments
will amount to $0.5 million per year.
SEASONALITY
The Company produces and markets a broad range of firearms and ammunition
products used in various shooting sports. Several models of the Company's
shotguns and several types of ammunition are intended for target shooting which
generally occurs in the "off season." The majority of the Company's firearm and
ammunition products, however, are manufactured for hunting use. As a result,
sales of the Company's products are seasonal and concentrated toward the fall
hunting season. The Company follows the industry practice of selling firearms
pursuant to a "dating" plan allowing the customer to buy the products commencing
at the beginning of the Company's dating plan year and pay for them on extended
terms. The Company believes that this dating plan has historically had the
effect of shifting some firearms sales from the second and third quarters to the
first quarter. Recently, however, more of the Company's customers appear to be
instituting tighter inventory management practices such as delaying purchases
until product is needed to fill orders closer to the fall hunting season and
relying more on manufacturers to stock inventory and supply products within a
narrower order period. The Company believes that both firearms
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and ammunition sales have become increasingly seasonal as a result of these
changes in customers' buying patterns.
STATEMENT OF ACCOUNTING STANDARDS NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, effective
for fiscal periods ending after December 15, 1997. The new standard simplifies
the computation of earnings (loss) per share by replacing primary earnings
(loss) per share with basic earnings (loss) per share. Basic earnings (loss) per
share will not include the effect of any potentially dilutive securities, as
under the current accounting standard, and will be computed by dividing reported
income available to common shareholders by the weighted average number of common
shares outstanding during the period. Fully diluted earnings (loss) per share
will now be called diluted earnings (loss) per share and will reflect the
dilution of all potentially dilutive securities. Companies will be required to
restate all prior period earnings (loss) per share data. The adoption of this
standard by the Company will have no impact on the historical reported earnings
(loss) per share amounts since the effect of potentially dilutive securities
have been immaterial and therefore have been excluded from the historical
earnings (loss) per share computations.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 requires public business enterprises to adopt its provisions for periods
beginning after December 15, 1997, and to report certain information about
operating segments in complete sets of financial statements of the enterprise
and in condensed financial statements of interim periods issued to shareholders.
The Company is evaluating the provisions of SFAS No. 131, but has not yet
determined if additional disclosures will be required.
YEAR 2000 COMPLIANCE
While the Company's new computer system, which was installed at the
Company's headquarters in 1996, is able to accommodate the "year 2000" dating
changes necessary to permit correct recording of year dates for 2000 and later
years, the Company is currently in the process of converting its manufacturing
systems at its other facilities to year 2000 compliant software. The Company
does not expect that the cost of converting such systems will be material to its
financial condition or results of operations. The Company believes it will be
able to achieve year 2000 compliance at its other facilities by the end of 1999,
and does not currently anticipate any material disruption in its operations as
the result of any failure by the Company to be in compliance. The Company does
not currently have any information concerning the year 2000 compliance status of
its suppliers and customers. In the event that any of the Company's significant
suppliers or customers do not successfully and timely achieve year 2000
compliance, the Company's business or operations could be adversely affected.
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INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report (other than the
financial statements and other statements of historical fact) are forward-
looking statements, including, without limitation, (i) the statements in "-
Business Trends and Initiatives" concerning (a) the Company's expectation that
the institution of tighter inventory control practices by additional customers
will not have a material adverse impact on full year sales volumes, and the
Company's belief that these practices will continue and are likely to cause the
Company to experience increased liquidity and working capital requirements, (b)
the Company's anticipation that gross profit margin will not be significantly
impacted for 1997 by the changes in customers' buying patterns, (c) the
Company's belief that consumer concerns about regulation will not be a
significant market influence in the near term; and (d) the Company's belief that
the markets for its firearms and ammunition products generally will experience
low levels of growth, at least in the near future; (ii) the statements in "-
Liquidity and Capital Resources - Cash Flows" concerning (a) the Company's
belief that it will be able to meet its debt service obligations and fund its
operating requirements with cash flow from operations and revolving credit
borrowings prior to the maturity of the Revolving Credit Facility and (b) the
Company's expectation that it will have to replace the Revolving Credit Facility
and refinance any outstanding amounts thereunder upon its maturity on December
31, 2000; (iii) the statements in "-Year 2000 Compliance" concerning the
Company's expectation that the cost of converting manufacturing systems at its
facilities will not be material to its financial condition or results of
operations and that it will be able to achieve year 2000 compliance at its
facilities by the end of 1999 without material disruption in its operations;
(iv) other statements as to management's or the Company's expectations and
beliefs presented in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations"; (v) the statements in "Legal Proceedings"
concerning (a) the Company's belief that any additional claims for personal
injury resulting from the disposition of Garza will be unlikely to have a
material adverse effect upon its financial condition or results of operations
and (b) the Company's belief that although it anticipates that it will continue
to be involved in product liability cases and claims in the future, the outcome
of all pending product liability cases and claims will not be likely to have a
material adverse effect upon the financial conditions or results of operations
of the Company; and (vi) other statements as to management's or the Company's
expectations and beliefs presented in "Legal Proceedings."
Forward-looking statements are made based upon management's current
expectations and beliefs concerning future developments and their potential
effects upon the Company. There can be no assurance that future developments
will be in accordance with management's expectations or that the effect of
future developments on the Company will be those anticipated by management. The
following important factors, and those important factors described elsewhere in
this report (including, without limitation, those discussed in "-Business Trends
and Initiatives", "-Liquidity and Capital Resources", "-Year 2000 Compliance"
and "Legal Proceedings"), or in other Securities and Exchange Commission
filings, could affect (and in some cases have affected) the Company's actual
results and could cause such results to differ materially from estimates or
expectations reflected in such forward-looking statements.
. The Company's ability to make scheduled payments of principal or interest on,
or to refinance its obligations with respect to its indebtedness and to
comply with the covenants and restrictions contained in the instruments
governing such indebtedness will depend on its future operating performance
and cash flow, which are subject to prevailing economic conditions,
prevailing interest rate levels, and financial, competitive, business and
other factors beyond its control including the responses of competitors,
changes in customer inventory management practices, changes in customer
buying patterns, regulatory developments and increased operating costs.
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. The degree to which the Company is leveraged could have important
consequences to the holders of the notes relating to the Company's
indebtedness, including the following: (i) the Company's ability to obtain
additional financing for working capital or other purposes in the future may
be limited; (ii) a substantial portion of the Company's cash flow from
operations will be dedicated to the payment of principal and interest on its
indebtedness, thereby reducing funds available for operations; (iii) certain
of the Company's borrowings will be at variable rates of interest, which
could cause the Company to be vulnerable to increases in interest rates; and
(iv) the Company may be more vulnerable to economic downturns and be limited
in its ability to withstand competitive pressures.
. The Company's ability to meet its debt service and other obligations will
depend in significant part on customers purchasing the Company's products
during the fall hunting season. Notwithstanding the Company's cost
containment initiatives and continuing management of costs, a decrease in
demand during the fall hunting season for the Company's higher priced, higher
margin products would require the Company to further reduce costs or increase
its reliance on borrowings under the Company's Revolving Credit Facility to
fund operations. No assurance can be given that the Company would be able to
reduce costs or increase its borrowings sufficiently to adjust to such a
reduction in demand.
. Because of the nature of its products, the Company anticipates that it will
continue to be involved in product liability litigation in the future. The
Company's ability to meet its product liability obligations will depend
(among other things) upon the availability of insurance, the adequacy of
Company accruals, the Sellers' ability to satisfy their obligations to
indemnify the Company against certain product liability cases and claims and
Sellers' agreement to be responsible for certain post-Acquisition shotgun
related costs.
. The Company's sales revenues have been adversely affected by changes in
inventory management practices at several of its key customers. In addition,
changes in customer buying patterns at certain key customers have increased
the seasonality of the Company's sales of certain higher priced, higher
margin products. The Company cannot control the inventory management
practices or timing of its customers' purchases, and the adoption of similar
policies by more of the Company's customers could lead to further constraints
on sales and increased liquidity and working capital requirements.
. The Company faces significant competition. The Company's competitors vary
according to product line. Certain of these competitors are subsidiaries of
large corporations with substantially greater financial resources than the
Company. There can be no assurance that the Company will continue to compete
effectively with all of its present competition, and the Company's ability to
so compete could be adversely affected by its leveraged condition.
. Sales made to Wal-Mart Stores, Inc. ("Wal-Mart") accounted for approximately
18% of the Company's total net revenues in 1996. The Company's sales to Wal-
Mart are not governed by a written contract between the parties. In the event
that Wal-Mart were to significantly reduce or terminate its purchases of
firearms and/or ammunition from the Company, the Company's financial
condition or results of operations could be aversely affected.
. The Company utilizes numerous raw materials, including steel, lead, brass,
plastics and wood, as well as manufactured parts, that are purchased from one
or a few suppliers. In addition, the Company purchases most of the fishline
it requires for its product lines from DuPont under a supply agreement that
was renewed in January 1997. Any disruption in the Company's relationship
with these suppliers could increase the cost of operations.
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. The purchase of firearms is subject to federal, state and local governmental
regulation. Regulatory proposals, even if never enacted, may affect firearms
or ammunition sales as a result of consumer perceptions. The Company believes
that its ammunition sales levels in 1994 and 1995 were affected by proposed
legislation increasing the taxes on ammunition and by consumer uncertainty
over the impact of the Brady Bill. While the Company does not believe that
existing federal and state legislation relating to the regulation of firearms
and ammunition has had a material adverse effect on its sales from 1994
through 1996, no assurance can be given that more restrictive regulations, if
proposed or enacted, will not have a material adverse effect on the Company
in the future.
While the Company periodically reassesses material trends and
uncertainties affecting the operations and financial condition in connection
with its preparation of management's discussion and analysis of results of
operations and financial condition contained in its quarterly and annual
reports, the Company does not intend to review or revise any particular forward-
looking statement referenced in this report in light of future events.
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PART II - OTHER INFORMATION
----------------------------
ITEM 1. LEGAL PROCEEDINGS
Pursuant to the Asset Purchase Agreement, the Sellers retained liability
for, and are required to indemnify the Company against, (1) all product
liability cases and claims (whenever they may arise) involving discontinued
products and (2) all product liability cases and claims involving products that
had not been discontinued as of the Closing ("extant products") and relating to
occurrences that took place, but were not disclosed to the Company, prior to the
Closing. The Company assumed financial responsibility, up to a stated amount
(the "Cap"), for (1) product liability cases and claims involving extant
products and relating to occurrences that took place, and were disclosed to the
Company, prior to the Closing, and (2) any environmental liabilities relating to
the ownership or operation of the Business prior to the Closing. Product
liability costs chargeable to the Cap exceeded the Cap in April 1997. The
Sellers retained liability for, and are required to indemnify the Company
against, all such disclosed product liability occurrences and such environmental
liabilities in excess of the Cap. This indemnification obligation of the
Sellers is not subject to any survival period limitation. Except for certain
cases and claims relating to shotguns as described below and for all cases and
claims relating to discontinued products, the Company generally bears financial
responsibility for product liability cases and claims relating to occurrences
after the Closing. Because of the nature of firearm and ammunition products, the
Company anticipates that it, as well as other manufacturers of firearm or
ammunition products, will continue to be involved in product liability cases and
claims in the future.
The Company and the Sellers are engaged in the joint defense of product
liability litigation involving Remington brand firearms and Company ammunition
products. As of June 30, 1997, approximately 34 such cases were pending,
primarily alleging defective product design or manufacture, or failure to
provide adequate warnings. All but two of these cases are individual actions
alleging personal injury, and many seek punitive as well as compensatory
damages. Of these pending cases, approximately 6 involve discontinued products
and approximately 8 involve undisclosed pre-Closing occurrences. Accordingly,
these are cases for which the Sellers retained liability and are required to
indemnify the Company for the full amount. In addition, approximately 5 of the
pending cases are subject to the Cap and are cases for which the Sellers
retained liability and are required to indemnify the Company for amounts in
excess of the Cap. The remaining approximately 15 of the pending cases involve
post-Closing occurrences for which the Company bears responsibility under the
Asset Purchase Agreement. The Company has previously disposed of a number of
other cases involving post-Closing occurrences by settlement.
Two cases, Leonel Garza et al. v. Sporting Goods Properties, Inc., et al.
("Garza") and Joe Luna, et al. v. Remington Arms Company, Inc. and E. I. du
Pont de Nemours and Company et al. ("Luna"), involving Company products which
were pending at the time of the Closing, and for which the Company assumed
financial responsibility up to the amount of the Cap, were asserted as class
actions, one involving shotguns and the other bolt-action rifles. In each case
certification was sought of a class of owners of Remington brand firearms,
generally claiming economic loss based on alleged product defect, and seeking
compensatory, punitive and treble damages, plus other costs.
On February 6, 1996, the Court in San Antonio, Texas gave final approval to
a settlement of the Garza class action relating to Remington brand shotguns, and
that decision has become final and non-appealable. The Garza case involved
certain Remington brand 12-gauge shotguns, including Model 1100, 11-87 and 870
shotguns, manufactured from 1960 to 1995. Pursuant to the settlement, funds of
approximately $19.0 million were distributed to eligible shotgun owners in the
second quarter of 1997. Approximately 500,000 class members filed valid claims
covering approximately 800,000 guns. Defense
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costs associated with Garza are subject to the Cap. However, pursuant to a
separate agreement between the Company and the Sellers, the Sellers will pay for
the settlement fund of approximately $19.0 million which was distributed to
class members, related expenses of approximately $12.0 million for plaintiffs'
counsel fees and costs, and more than $1.0 million for costs of administering
the fund, without regard to the Cap. Approximately 350 class members (including
two institutions) opted out and chose not to participate in the settlement,
although approximately 15 of them (including such institutions) have filed
claims, apparently in an effort to rejoin the settlement class. Except for these
few class members who have opted out, the settlement resolves all claims that
might be brought by owners of the shotguns at issue in connection with the
barrel steel formerly used in such firearms, other than claims for personal
injury. Publicity regarding the Garza agreement led, and may continue to lead,
to some additional claims of personal injury allegedly involving use of the
shotguns included in the class action lawsuit. Most of the additional claims
received were settled in 1996 without lawsuits being filed. The Company does not
believe that the disposition of Garza (including any individual personal injury
actions which might be filed as a result of the settlement) is likely to have a
material adverse effect upon its financial condition or results of operations.
The other purported class action, Luna, filed in 1989 against the Sellers
in Texas district court in Jim Wells County, and amended in December 1993, seeks
certification of a class consisting of all Texas owners, allegedly 400,000 in
number, of Model 700 bolt-action rifles. In June 1996, the district court issued
a ruling that certified for class treatment the limited issues of whether the
Model 700 fire control system is "defective" and, if so, the "cost of repair."
Pursuant to Texas law, the Sellers filed a timely appeal of this ruling to the
intermediate level state appellate court, and oral argument was held on June 19,
1997. Remington had not been named as a defendant at the time of the decision
or the filing of the appeal, and is not a party to the appeal. On July 16,
1996, plaintiffs further amended the complaint to include Remington, which filed
an answer in September 1996. A hearing in the district court on the class
certification motion against Remington took place on June 9, 1997. Holding has
not been named as a defendant in this case. The Sellers' obligations with
respect to Luna include a requirement that they indemnify the Company against
all claims in that case for economic loss involving firearms similar to those
involved in that case and shipped up to 42 calendar months after the Closing
(prior to the end of May 1997). Any such claims of economic loss involving such
firearms shipped thereafter will be the Company's responsibility and, to the
extent that such claims do not involve personal injury or property damage, they
would not be covered by the Company's product liability insurance.
The representations and warranties in the Asset Purchase Agreement expired
18 months after the Closing, with certain exceptions, and claims for
indemnification with respect thereto were to be made within 30 days of such
expiration. The Company made claims for such indemnification involving product
liability issues within that time period. In connection with the consummation
of the Garza settlement, the Company and the Sellers agreed that the Sellers
shall assume financial responsibility for a portion of the costs relating to
product liability claims and cases involving certain shotguns manufactured prior
to mid-1995 and based on occurrences arising prior to November 30, 1999, and
that any claims the Company and the Sellers may have against each other under
the Asset Purchase Agreement relating to shotguns (excluding various
indemnification rights and the allocation of certain costs under the Cap) are
released. Any claims between the Company and the Sellers relating to other
product liability issues remain open.
Because the Company's assumption of financial responsibility for certain
product liability cases and claims involving pre-Acquisition occurrences was
limited to the amount of the Cap, with the Sellers retaining liability in excess
of the Cap and indemnifying the Company in respect thereof, and because of the
Company's accruals with respect to such cases and claims, the Company believes
that product liability cases and claims involving occurrences arising prior to
the Closing are not likely to have a material adverse effect upon the financial
condition or results of operations of the Company. While it is difficult to
forecast the outcome of litigation, the Company does not believe, in light of
relevant circumstances (including the
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current availability of insurance for personal injury and property damage with
respect to cases and claims involving occurrences arising after the Closing, the
Company's accruals for the uninsured costs of such cases and claims and the
Sellers' agreement to be responsible for certain post-Closing firearm-related
costs, as described above), that the outcome of all pending product liability
cases and claims will be likely to have a material adverse effect upon the
financial condition or results of operations of the Company. However, in part
because of the uncertainty as to the nature and extent of manufacturer liability
for personal injury due to alleged product defects, there can be no assurance
that the Company's resources will be adequate to cover future product liability
occurrences, cases or claims, in the aggregate, or that such a material adverse
effect will not result therefrom.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 22, 1997 the sole stockholder of Holding, at its annual
meeting, unanimously re-elected in its entirety the board of directors of
Holding. On the same day, the sole stockholder of Remington, at its annual
meeting, unanimously re-elected in its entirety the board of directors of
Remington.
ITEM 5. OTHER INFORMATION
On May 3, 1996 the Company filed a registration statement on Form S-4
with the Securities and Exchange Commission relating to the proposed exchange
offer of Remington's 9 1/2% Senior Subordinated Notes, which became effective on
May 12, 1997.
The Company recently completed the Exchange Offer of up to $100
million aggregate principal amount of Remington's New Notes for a like principal
amount of Remington's issued and outstanding Existing Notes. All of the
Existing Notes were exchanged for New Notes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
The exhibits listed on the accompanying Index to Exhibits are filed as part
of this quarterly report on Form 10-Q.
(b) Reports on Form 8-K
-------------------
During the quarter ended June 30, 1997, the Company filed no reports on Form
8-K.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RACI HOLDING, INC.
/s/ Mark A. Little
------------------
Mark A. Little
Vice President, Chief Financial Officer
and Controller (Principal Financial
Officer)
August 14, 1997
24
<PAGE>
INDEX TO EXHIBITS
The File Number of the Registrant, RACI Holding, Inc. is 333-4520.
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
99 Reconciliation of Loss from Operations to EBITDA
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,800
<SECURITIES> 0
<RECEIVABLES> 97,300
<ALLOWANCES> 6,400
<INVENTORY> 109,900
<CURRENT-ASSETS> 239,500
<PP&E> 129,700
<DEPRECIATION> 35,200
<TOTAL-ASSETS> 448,900
<CURRENT-LIABILITIES> 84,000
<BONDS> 245,700
0
0
<COMMON> 0
<OTHER-SE> 75,000
<TOTAL-LIABILITY-AND-EQUITY> 448,900
<SALES> 174,400
<TOTAL-REVENUES> 174,400
<CGS> 124,700
<TOTAL-COSTS> 124,700
<OTHER-EXPENSES> 39,300
<LOSS-PROVISION> 1,000
<INTEREST-EXPENSE> 12,700
<INCOME-PRETAX> (3,300)
<INCOME-TAX> (1,000)
<INCOME-CONTINUING> (2,300)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,300)
<EPS-PRIMARY> (3.07)
<EPS-DILUTED> (3.07)
</TABLE>
<PAGE>
EXHIBIT 99
RACI Holding, Inc. and Subsidiaries
Reconciliation of Loss from Operations to EBITDA
(Dollars in Millions)
<TABLE>
<CAPTION>
--------------------------------------------------
Unaudited
--------------------------------------------------
Quarter Ended June 30, Year-to-Date June 30,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Loss from Operations (A) $ (1.0) $ (4.6) $ (2.3) $ (4.0)
Interest Expense 6.6 6.6 12.7 12.3
Credit for Income Taxes (0.5) (3.7) (1.0) (3.2)
Depreciation and Amortization (B) 3.7 3.4 7.4 6.7
Other (C) 0.7 1.1 0.8 1.3
-------- -------- -------- --------
Total 10.5 7.4 19.9 17.1
-------- -------- -------- --------
EBITDA at June 30 $ 9.5 $ 2.8 $ 17.6 $ 13.1
======= ======= ======= =======
</TABLE>
Notes:
-----
(A) EBITDA as presented may not be comparable to similar measures reported
by other companies. Generally, EBITDA is defined to consist of net
income (loss), adjusted to exclude cash interest expense, income tax
expense, depreciation, amortization, non-cash expenses and charges, gain
or loss on sale or write-off of assets, and extraordinary, unusual or
nonrecurring gains, losses, charges or credits. EBITDA is presented to
facilitate a more complete analysis of the Company's financial
performance, by adding back non-cash and nonrecurring items to operating
income, as an indicator of the Company's ability to generate cash to
service debt and other fixed obligations. Investors should not rely on
EBITDA as an alternative to operating income or cash flows, as
determined in accordance with generally accepted accounting principles,
as an indicator of the Company's operating performance, liquidity or
ability to meet cash needs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for further discussion of
the Company's operating income and cash flows.
(B) Excludes amortization of deferred financing costs of $0.5 and $0.4 for
the quarter, and $0.9 and $0.8 for the year-to-date period ended June
30, 1997 and 1996, respectively, which is included in interest expense.
(C) Other includes unusual and nonrecurring charges.
