<PAGE> 1
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 September 30, 1998
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 or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
870 Remington Drive
P.O. Box 700
Madison, North Carolina 27025-0700
(Address of principal executive offices)
(Zip Code)
(336) 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 November 2, 1998
760,000 shares
Class B Common Stock, par value $.01 per share, outstanding at November 2, 1998
0 shares
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RACI Holding, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in Millions, Except Per Share Data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 2.9 $ 0.6
Accounts Receivable Trade - net 99.3 56.3
Inventories 75.2 90.0
Supplies 11.7 12.7
Prepaid Expenses and Other Current Assets 8.6 9.3
Deferred Income Taxes 14.7 16.2
-------- --------
Total Current Assets 212.4 185.1
Property, Plant and Equipment - net 85.5 92.0
Intangibles and Debt Issuance Costs - net 90.0 93.1
Deferred Income Taxes 2.0 6.2
Other Noncurrent Assets 2.6 4.3
-------- --------
Total Assets $ 392.5 $ 380.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 29.0 $ 22.7
Short-Term Debt 0.2 1.0
Current Portion of Long-Term Debt 24.0 21.5
Product and Environmental Liabilities 3.2 3.2
Other Accrued Liabilities 29.7 28.5
-------- --------
Total Current Liabilities 86.1 76.9
Long-Term Debt 161.3 173.5
Retiree Benefits 35.1 34.8
Product and Environmental Liabilities 9.0 9.2
-------- --------
Total Liabilities 291.5 294.4
-------- --------
Commitments and Contingencies
Shareholders' Equity
Class A Common Stock, par value $.01; 1,250,000 shares
authorized, 760,000 issued and outstanding -- --
Class B Common Stock, par value $.01; 1,250,000 shares
authorized, none issued and outstanding -- --
Paid in Capital 76.0 76.0
Retained Earnings 25.0 10.3
-------- --------
Total Shareholders' Equity 101.0 86.3
-------- --------
Total Liabilities and Shareholders' Equity $ 392.5 $ 380.7
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 3
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 Year-to-Date
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales (1) $ 114.9 $ 125.4 $ 294.8 $ 299.8
Cost of Goods Sold 80.3 88.8 200.0 213.5
--------- --------- --------- ---------
Gross Profit 34.6 36.6 94.8 86.3
Selling, General and Administrative
Expenses 16.0 17.3 47.3 52.1
Research & Development Expense 2.0 1.6 5.9 5.7
Other Expense, net 0.4 0.4 1.6 1.8
Restructuring and Nonrecurring Items (0.2) -- (0.4) --
--------- --------- --------- ---------
Operating Profit 16.4 17.3 40.4 26.7
Interest Expense 4.9 6.0 15.3 18.7
--------- --------- --------- ---------
Profit Before Income Taxes 11.5 11.3 25.1 8.0
Provision for Income Taxes 5.1 4.5 10.4 3.5
--------- --------- --------- ---------
Net Income $ 6.4 $ 6.8 $ 14.7 $ 4.5
========= ========= ========= =========
Per Share Data:
Basic Net Income Per Share $ 8.42 $ 9.07 $ 19.34 $ 6.00
========= ========= ========= =========
Diluted Net Income Per Share $ 8.42 $ 9.07 $ 19.34 $ 6.00
========= ========= ========= =========
Weighted average common stock outstanding
and assumed conversions (000s) 760 750 760 750
========= ========= ========= =========
</TABLE>
(1) Sales are presented net of Federal Excise Taxes of $10.4 and $11.0
for the quarters ended and $24.4 and $24.4 for the year-to-date
periods ended September 30, 1998 and 1997, respectively.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
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
September 30,
-------------------
1998 1997
------- -------
<S> <C> <C>
Operating Activities
Net Cash provided by Operating Activities $ 16.5 $ 24.9
Investing Activities
Capital Expenditures (3.7) (3.8)
------- -------
Net Cash used in Investing Activities (3.7) (3.8)
Financing Activities
Net borrowings (payments) under Revolving Credit Facility 6.5 (5.0)
Principal payments on Long-Term Debt (16.2) (15.7)
Principal payments on Short-Term Debt (0.8) (1.1)
Debt Issuance Costs -- (0.8)
------- -------
Net Cash used in Financing Activities (10.5) (22.6)
------- -------
Increase (Decrease) in Cash and Cash Equivalents 2.3 (1.5)
Cash and Cash Equivalents at beginning of period 0.6 9.6
------- -------
Cash and Cash Equivalents at end of period $ 2.9 $ 8.1
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
RACI Holding, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 1998 (Unaudited)
(Dollars in Millions, Except Per Share Data)
Note 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 interim condensed consolidated
financial statements of Holding have been prepared by the Company in accordance
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and
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 three and nine month periods ended September
30, 1998 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998.
On December 1, 1993, the Company acquired certain assets and
assumed certain liabilities (the "Acquisition") of the Sporting Goods Business
(the "Business") formerly operated by E.I. du Pont de Nemours and Company
("DuPont") and one of DuPont's subsidiaries (together with DuPont, the
"Sellers") pursuant to an asset purchase agreement (the "Asset Purchase
Agreement").
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, 1997.
Certain reclassifications were made to the prior period's
financial information to conform to the current presentation format.
Note 2 - Inventories
Inventories consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Raw Materials $ 12.0 $ 13.9
Semi-Finished Products 18.3 20.0
Finished Product 44.9 56.1
------ ------
Total $ 75.2 $ 90.0
====== ======
</TABLE>
5
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Note 3 - Long-Term Debt
Long-term debt consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -----------
(Unaudited)
<S> <C> <C>
9.5% Senior Subordinated Notes due 2003 $ 99.7 $ 99.6
Credit Agreement:
Term Loans 54.5 68.2
Revolving Credit Facility 26.4 19.9
Capital Lease Obligations 3.9 5.3
Other 0.8 2.0
------- -------
Subtotal $ 185.3 $ 195.0
Less: Current Portion 24.0 21.5
------- -------
Total $ 161.3 $ 173.5
======= =======
</TABLE>
The Credit Agreement was amended in September 1998 to permit the
Company to expend up to $25.0 toward the repurchase of Remington's 9.5% Senior
Subordinated Notes due 2003, Series B (the "New Notes").
Note 4 - Restructuring
The Company recorded charges for restructuring in 1996 of $4.9.
The reserve balance of $0.2 at September 30, 1998 is included in other accrued
liabilities in the accompanying balance sheet. During the nine months ended
September 30, 1998, the Company paid out $0.1 and reduced the reserve by $0.8 to
reflect changes between the amount originally estimated and the actual amount
incurred.
Note 5 - 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 New Notes. Further, the New Notes are fully and
unconditionally guaranteed by Holding.
6
<PAGE> 7
RACI HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS
September 30, 1998
(Dollars in Millions)
<TABLE>
<CAPTION>
RACI Holding
Inc. and
Holding Remington Eliminations Subsidiaries
-------- --------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets $ -- $ 212.4 $ -- $ 212.4
Receivable from Remington 1.0 -- 1.0 --
Noncurrent Assets 100.0 180.1 100.0 180.1
-------- -------- -------- --------
Total Assets $ 101.0 $ 392.5 $ 101.0 $ 392.5
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities $ -- $ 86.1 $ -- $ 86.1
Payable to RACI Holding, Inc. -- 1.0 1.0 --
Noncurrent Liabilities -- 205.4 -- 205.4
Shareholders' Equity 101.0 100.0 100.0 101.0
-------- -------- -------- --------
Total Liabilities and
Shareholders' Equity $ 101.0 $ 392.5 $ 101.0 $ 392.5
======== ======== ======== ========
</TABLE>
RACI HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS
December 31, 1997
(Dollars in Millions)
<TABLE>
<CAPTION>
RACI Holding
Inc. and
Holding Remington Eliminations Subsidiaries
-------- --------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets $ -- $ 185.1 $ -- $ 185.1
Receivable from Remington 1.0 -- 1.0 --
Noncurrent Assets 85.3 195.6 85.3 195.6
------- -------- ------- --------
Total Assets $ 86.3 $ 380.7 $ 86.3 $ 380.7
======= ======== ======= ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities $ -- $ 76.9 $ -- $ 76.9
Payable to RACI Holding, Inc. -- 1.0 1.0 --
Noncurrent Liabilities -- 217.5 -- 217.5
Shareholders' Equity 86.3 85.3 85.3 86.3
------- -------- ------- --------
Total Liabilities and
Shareholders' Equity $ 86.3 $ 380.7 $ 86.3 $ 380.7
======= ======== ======= ========
</TABLE>
7
<PAGE> 8
RACI HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Millions)
<TABLE>
<CAPTION>
RACI
Holding,
Inc. and
Holding Remington Eliminations Subsidiaries
------- --------- ------------ ------------
<S> <C> <C> <C> <C>
QUARTER ENDED
SEPTEMBER 30, 1998
Sales $ -- $ 114.9 $ -- $ 114.9
Gross Profit -- 34.6 -- 34.6
Equity in Earnings of Subsidiary 6.4 -- 6.4 --
Net Income $ 6.4 $ 6.4 $ 6.4 $ 6.4
QUARTER ENDED
SEPTEMBER 30, 1997
Sales $ -- $ 125.4 $ -- $ 125.4
Gross Profit -- 36.6 -- 36.6
Equity in Earnings of Subsidiary 6.8 -- 6.8 --
Net Income $ 6.8 $ 6.8 $ 6.8 $ 6.8
</TABLE>
RACI HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Millions)
<TABLE>
<CAPTION>
RACI
Holding,
Inc. and
Holding Remington Eliminations Subsidiaries
------- --------- ------------ ------------
<S> <C> <C> <C> <C>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
Sales $ -- $ 294.8 $ -- $ 294.8
Gross Profit -- 94.8 -- 94.8
Equity in Earnings of Subsidiary 14.7 -- 14.7 --
Net Income $ 14.7 $ 14.7 $ 14.7 $ 14.7
NINE MONTHS ENDED
SEPTEMBER 30, 1997
Sales $ -- $ 299.8 $ -- $ 299.8
Gross Profit -- 86.3 -- 86.3
Equity in Earnings of Subsidiary 4.5 -- 4.5 --
Net Income $ 4.5 $ 4.5 $ 4.5 $ 4.5
</TABLE>
8
<PAGE> 9
Note 6 - 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 generally bears financial responsibility for all product liability
cases and claims relating to occurrences after the closing of the Acquisition,
except for certain cases and claims relating to shotguns as described below and
except for all cases and claims relating to discontinued products. It is
difficult to forecast the outcome of litigation. However, 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 a portion of certain post-Acquisition shotgun-related costs),
the Company does not believe that the outcome of pending product liability cases
and claims involving post-Acquisition occurrences, which arose prior to
September 30, 1998, 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 the Sellers retained liability for future product liability
cases and claims involving pre-Acquisition occurrences and agreed to indemnify
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. Because of the nature of its
products, the Company anticipates that it will continue to be involved in
product liability litigation in the future.
Note 7 - Recent Accounting Developments
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131 requires
public business enterprises to adopt its provisions for calendar year-ends
starting in 1998, 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. This statement
does not require application to interim financial statements in the initial
year. The Company is evaluating the provisions of SFAS No. 131, but has not yet
determined if additional disclosures will be required.
SFAS No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits," will be adopted by the Company for the year ended
December 31, 1998. This statement standardizes the disclosure requirements for
pensions and postretirement benefits and will require changes in disclosures of
benefit obligations and fair values of plan assets. Comparative disclosures,
which include prior period information, will be restated to conform to the
provisions of this statement.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires all
entities to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal quarters for the fiscal years
beginning after June 15, 1999. The Company is evaluating the provisions of SFAS
No. 133, but the impact, if any, of its adoption has not yet been determined.
9
<PAGE> 10
Note 8 - Subsequent Event
Subsequent to September 30, 1998, the Company has repurchased
approximately $6.6 of the New Notes on the open market with borrowings under its
revolving credit facility. The effect of this repurchase was not material to the
Company's statement of operations.
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, 1997, on file with the Securities and
Exchange Commission. The results of operations for the three and nine month
periods ended September 30, 1998 are not necessarily indicative of results that
may be expected for the year ended December 31, 1998, in part due to the
seasonality of the Company's business.
Business Trends and Initiatives
The Company believes that during 1996 and 1997 several of its
key customers instituted tighter inventory control practices to reduce inventory
that resulted in a modest softness in the demand for the Company's products
during those years. Although tighter inventory control practices have caused,
and may continue to cause, the Company to experience increased liquidity and
working capital requirements to meet customers' shorter lead time order
requirements, management believes that demand is stabilizing as customers'
inventories reach their targeted levels.
The markets in which the Company competes are highly competitive.
Product image, quality and innovation are the dominant competitive factors in
the firearms industry and price is the dominant factor in the ammunition
industry. While the Company intends to respond to competitive pressures, such
responses may affect quarterly results. In addition, the Company believes that
the market for firearms and ammunition is a mature market, which the Company
expects will remain flat, at least in the near term.
In light of market constraints on sales growth opportunities and
the Company's increased liquidity and working capital needs, the Company
continues to focus on increasing profitability by increasing brand name
awareness, introducing new products and containing costs. The Company continues
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 Three and Nine Month Periods Ended September 30,
1998 as Compared to the Three and Nine Month Periods Ended September 30, 1997
Sales. Sales for the third quarter of 1998 were $114.9 million, a
decrease of $10.5 million, or 8.4%, from 1997 third quarter sales of $125.4
million. Sales for the first nine months of 1998 were $294.8 million, a decrease
of $5.0 million, or 1.7%, from 1997 year-to-date sales of $299.8 million. The
decrease
10
<PAGE> 11
in sales for the quarter and year-to-date periods was primarily due to lower
sales in ammunition and firearms as a result of the factors described below.
Firearms sales decreased $0.7 million, or 1.7%, to $41.5 million
for the third quarter of 1998 from $42.2 million in the third quarter of 1997.
Year-to-date sales in 1998 were $129.5 million, $3.0 million, or 2.3%, lower
than the prior year-to-date period. The decreases in the quarter and
year-to-date periods were primarily the result of softness in demand for certain
higher-priced rifles, but were somewhat offset by product introductions and
higher pricing on firearms overall.
Ammunition sales for the third quarter of 1998 were $60.9
million, a decrease of $8.7 million, or 12.5%, from the comparable 1997 sales of
$69.6 million. The decrease in ammunition sales in the quarter was primarily due
to a second quarter centerfire rifle ammunition promotion that shifted some
demand into the second quarter. Year-to-date sales in 1998 were $123.8 million,
a decrease of $4.8 million, or 3.7%, from the prior year-to-date period,
primarily due to lower sales volumes in all ammunition categories, as a result
of changes in customer order practices.
Sales for the third quarter of 1998 in fishing and accessory
products declined $1.1 million, or 12.0%, from the third quarter of 1997,
impacted by the 1998 weather-related shorter fishing season and lower gun safe
sales. Year-to-date sales in fishing and accessory products increased
$2.3 million, or 8.0%, over the comparable prior year period primarily due to
new product introductions.
Cost of Goods Sold. Cost of goods sold for the third quarter of
1998 was $80.3 million, a decrease of $8.5 million, or 9.6%, versus $88.8
million for the third quarter of 1997. For the first nine months of 1998, cost
of goods sold decreased $13.5 million, or 6.3%, to $200.0 million from $213.5
million for the same period in 1997. The decrease in both the quarter and
year-to-date periods principally was due to a favorable mix of lower-cost
firearm products, favorable commodity prices and reductions in other
manufacturing costs (including reductions in pension expense, due to prior plan
amendments and portfolio performance, and the absence in the 1998 period of some
nonrecurring and startup costs incurred in 1997). As a percentage of sales, cost
of goods sold for the third quarter of 1998 decreased to 69.9% from 70.8% and
for the first nine months of 1998 decreased to 67.8% from 71.2% for the same
periods in 1997. These decreases, as a percentage of sales, are due mainly to a
favorable mix of higher-margin ammunition products, the reductions in commodity
prices and other manufacturing costs noted above and, to a lesser extent, price
increases on firearms.
Operating Expenses. Operating expenses consist of selling,
general and administrative expense, research and development expense,
restructuring and nonrecurring items and other income and expense. Operating
expenses for the third quarter of 1998 were $18.2 million, a decrease of $1.1
million, or 5.7%, from $19.3 million for the third quarter of 1997. Year-to-date
operating expenses for 1998 were $54.4 million, a decrease of $5.2 million, or
8.7%, from $59.6 million for the same period of 1997 as a result of the factors
described below.
Selling, general and administrative expenses for the third
quarter of 1998 were $16.0 million, a decrease of $1.3 million, or 7.5%, from
$17.3 million for the third quarter of 1997. Year-to-date selling, general and
administrative expenses were $47.3 million, a $4.8 million, or 9.2%, decrease
from $52.1 million in the prior year-to-date period. The decrease for the
quarter was primarily due to an adjustment resulting from the periodic review of
estimated marketing communication expenses, and lower distribution and
information technology expenses. The decrease between the year-to-date periods
was primarily attributable to the above-stated factors coupled with lower bad
debt expense.
11
<PAGE> 12
Research and development expenses were $2.0 million for the third
quarter of 1998, an increase of $0.4 million, or 25.0%, from $1.6 million for
the third quarter of 1997. For the nine months ended September 30, 1998,
research and development expenses were $5.9 million, a $0.2 million, or 3.5%,
increase from the same period in the prior year.
Restructuring and nonrecurring items include reserve reductions
of $0.4 million for the quarter and $0.8 million year-to-date to reflect actual
versus estimated expenses.
Interest Expense. Interest expense for the quarter ended
September 30, 1998 was $4.9 million, a decrease of $1.1 million, or 18.3%, from
$6.0 million during the third quarter 1997. Year-to-date interest expense was
$15.3 million versus $18.7 million in the prior year-to-date period. The
decrease in interest expense between the third quarter periods was primarily a
result of a reduction in average outstanding debt, coupled with reductions in
the interest rate charged under the credit agreement, dated as of November 30,
1993, as amended, among Remington and certain lending institutions (the "Credit
Agreement"), related to improved financial performance. See "-Liquidity and
Capital Resources - Liquidity." The decrease in interest expense between the
year-to-date periods was primarily a result of a reduction in average
outstanding debt, coupled with a reduction in the interest rate on the New Notes
as a result of the completion of the Exchange Offer (as defined below), and to a
lesser extent, the reduced interest rate charged under the Credit Agreement as
noted above.
Provision for Income Taxes. The provision for income taxes for
the quarter ended September 30, 1998 was $5.1 million, compared to $4.5 million
for the quarter ended September 30, 1997. The Company's effective tax rate was
41.4% and 43.8% for year-to-date 1998 and 1997, respectively. The effective
rates for 1998 and 1997 exceed the federal statutory rate of 35% due primarily
to the impact of state income taxes and nondeductible expenses.
Net Income. Net income for the third quarter of 1998 was $6.4
million, a decrease of $0.4 million from the third quarter 1997. Net income for
the nine months ended September 30, 1998 was $14.7 million, an increase of $10.2
million from the comparable 1997 period net income of $4.5 million, due
primarily to the factors discussed above.
Liquidity and Capital Resources
Cash Flows. Net cash provided by operating activities for the
nine month period ended September 30, 1998 was $16.5 million, resulting
primarily from net income adjusted for non-cash items of $34.0 million, a
reduction in inventories and supplies of $15.9 million and an increase in
accounts payable and other accrued liabilities of $7.5 million, offset by an
increase in accounts receivable of $43.0 million. Accounts receivable increased
to $99.3 million at September 30, 1998 principally due to $52.2 million of sales
on extended payment terms. These terms provide cash discount incentives, and
require payment in October 1998. The terms are granted to customers consistent
with industry-wide programs and with prior years' experience. The Company has
applied the proceeds from these receivables to the existing balance on its
revolving credit facility. Net cash used in investing activities in the first
nine months of 1998 was $3.7 million consisting of capital expenditures for
replacement equipment and improvement projects concentrated on enhancing the
efficiency of existing facilities. Net cash used in financing activities during
the first nine months of 1998 was $10.5 million, primarily resulting from $16.2
million of principal payments on outstanding indebtedness, partly offset by
borrowing under the revolving credit facility of $6.5 million.
12
<PAGE> 13
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 September 30, 1998, the Company was in
compliance in all material respects with the financial covenants under the
Credit Agreement, and during the third quarter the Company qualified for a
reduction in interest rates based on recent financial performance. 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.
Working Capital. Working capital increased to $126.3 million at
September 30, 1998 from $108.2 million at December 31, 1997, primarily as a
result of a $43.0 million increase in accounts receivable, partly offset by a
$15.9 million decrease in inventories and supplies and a $7.5 million increase
in accounts payable and other accrued liabilities. The September 30, 1998
accounts receivable balance was higher than the December 31, 1997 balance partly
as a result of sales on extended terms consistent with industry standards and
prior practices. See "-Cash Flows." Additionally, the seasonality of the
Company's business causes accounts receivable and inventories to be higher in
the first three quarters of the year. See "-Seasonality." The Company continues
to focus on working capital management, including the collection of accounts
receivable, maintaining inventory levels in line with sales projections and
management of accounts payable. Primarily as a result of these efforts,
inventories were $13.0 million lower and accounts receivable were $1.1 million
lower at September 30, 1998 than at September 30, 1997.
Capital Expenditures. Capital expenditures for the nine months
ended September 30, 1998 were $3.7 million, principally for replacement
equipment and improvement projects concentrated on enhancing the efficiency at
existing facilities. On July 2, 1998, the board of directors of the Company
approved purchase commitments for $5.1 million of machinery and equipment to
improve efficiency at the Ilion facility, $1.0 million of which was expended
during the third quarter of 1998, and approximately $0.9 million of which is
expected to be expended during the fourth quarter of 1998.
Liquidity. The Company incurred substantial indebtedness in
connection with the Acquisition. As of September 30, 1998, the Company had
outstanding $185.3 million of indebtedness, consisting of approximately $99.7
million ($100.0 million face amount) in 9.5% Senior Subordinated Notes due 2003,
Series B (the "New Notes"); $54.5 million in term loan borrowings and $26.4
million in revolving credit borrowings under the Credit Agreement, $3.9 million
in capital lease obligations and $0.8 million of other long-term debt. As of
September 30, 1998 the Company also had aggregate letters of credit outstanding
of $3.8 million. The Company's revolving credit facility had $120.9 million
available for borrowing as of September 30, 1998.
On June 23, 1997 the Company completed its offer to exchange (the
"Exchange Offer") up to $100.0 million aggregate principal amount of Remington's
registered New Notes for a like principal amount of Remington's issued and
outstanding 9.5% 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
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<PAGE> 14
Exchange Offer, and is currently 9.5% per annum. The reduction in interest
payments amounts to approximately $0.5 million per year.
The Credit Agreement was amended on September 23, 1998 to permit
the Company to expend up to $25.0 million toward the repurchase of the New
Notes. Subsequent to September 30, 1998, the Company repurchased approximately
$6.6 million of the New Notes on the open market with borrowings under the
Credit Agreement. From time to time, the Company may continue to repurchase
additional amounts of the New Notes on the open market.
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 that 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
historically has had the effect of shifting some firearms sales from the second
and third quarters to the first quarter. The Company's sales for the first three
quarters of 1998 were less seasonal than in prior years, primarily due to the
effect of the centerfire rifle ammunition promotion in the second quarter.
Recent Accounting Developments
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131 requires
public business enterprises to adopt its provisions for calendar year-ends
starting in 1998, 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. This statement
does not require application to interim financial statements in the initial
year. The Company is evaluating the provisions of SFAS No. 131, but has not yet
determined if additional disclosures will be required.
SFAS No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits," will be adopted by the Company for the year ended
December 31, 1998. This statement standardizes the disclosure requirements for
pensions and postretirement benefits and will require changes in disclosures of
benefit obligations and fair values of plan assets. Comparative disclosures,
which include prior period information, will be restated to conform to the
provisions of this statement.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires all
entities to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal quarters for the fiscal years
beginning after June 15, 1999. The Company is evaluating the provisions of SFAS
No. 133, but the impact, if any, of its adoption has not yet been determined.
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<PAGE> 15
Year 2000 Compliance
The year 2000 issue is the result of programming code that was
written to use only two digits to define calendar year dates. As a result,
computers, software and other equipment that include such programming code could
fail to operate or produce correct results.
In connection with the Acquisition, DuPont agreed to continue to
provide data processing support and services for the Company during a transition
period. In 1995, the Company completed the first phase of replacing its computer
systems, including those provided by DuPont, with an enterprise-wide,
fully-integrated system from SAP America, Inc. that will handle accounts
payable, accounts receivable, general ledger, fixed assets, sales and
distribution, plant maintenance and certain manufacturing systems. This system
will eliminate most stand-alone legacy systems and result in all facilities
operating within the same application software package. Systems that will not be
replaced with the SAP software include human resources and payroll, which are
already year 2000 compliant. The new system accommodates the dating changes
necessary to permit correct recording of dates for the year 2000 and later
years.
The Company has also commenced a year 2000 project to address the
Company's remaining systems, including both information technology and
non-information technology systems. The work plan developed by the Company has
four phases: site analysis, site assessment, testing and implementation. In the
site analysis phase, which has been completed, the Company identified primary
areas of concern such as software, networks, products, production equipment,
trucking, telecommunications, customers, vendors, and other third parties such
as banks and government agencies to be evaluated. Appropriate people at the
Company's various facilities were asked to rank these areas at their facility as
critical, which might include a single source supplier, somewhat critical, such
as a preferred supplier, or not critical, where many alternatives are available.
The site assessment phase, which consisted of on-site visits to
determine which of the previously-identified areas of concern needed to be
addressed at each facility, is approximately 80% complete for all facilities,
for both information technology and non-information technology systems. The main
component remaining is the surveying of significant third parties, including
major customers, and suppliers of raw materials, parts and services. Surveys are
scheduled to be mailed throughout November with responses requested by
mid-December. The Company has identified 40 customers, representing 75% of its
1997 sales, from whom it plans to request information on their year 2000
compliant status. The Company also plans to contact 450 vendors, which supply
approximately 90% of the raw materials and finished goods used by the Company,
as well as banks, health care and service providers. Based on unfavorable
responses or lack of response, the Company will evaluate whether the possible
inability of customers, vendors or other third parties to continue to do
business without interruption could have a material adverse effect on the
Company's business, financial condition or results of operations. The Company
expects to complete this assessment by the end of January 1999 and to have
formulated a plan for seeking alternative business partners, if necessary, by
the end of March 1999.
The Company is currently testing systems at all of its
facilities. Key non-information technology systems, including microcontrollers
used in plant operations, are in the process of being tested with post-1999
dates. The testing of existing equipment is on schedule and is expected to be
completed by December 1998 for both information technology systems and
non-information technology systems. Once information has been received from
customers with whom the Company does business electronically, the Company will
begin transaction testing utilizing electronic data interchange. The Company
expects to complete transaction testing of third parties in mid-1999.
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<PAGE> 16
In the implementation phase, the Company will replace
non-compliant systems with tested compliant systems. The Company has begun
implementing year 2000 compliant information technology and non-information
technology systems at all of its facilities and expects to have the
implementation phase completed, with conversion of the final manufacturing
facility to the SAP software at the end of July 1999. The Company estimates that
with respect to its information technology systems that were not replaced by the
installation of the SAP software, it has completed approximately 50% of the
reprogramming or replacement necessary to upgrade these systems to be year 2000
compliant. With respect to non-information technology systems, the Company
estimates that it has completed approximately 70% of the upgrades necessary to
render such systems year 2000 compliant. The Company expects to have completed
implementation of all remaining systems by the end of July 1999. The Company's
telecommunications systems are being upgraded and are expected to be year 2000
compliant by early 1999.
Due to the implementation of the computer system necessitated by
the Acquisition, costs related specifically to year 2000 compliance, including
allocation of internal salaries and related costs, are estimated to be less than
$1.0 million. The Company estimates that it has spent less than $0.2 million on
the year 2000 project. Costs of this project have come from the Company's cash
flows and have been expensed as incurred except for hardware, which has been
capitalized. Accordingly, the Company does not expect that the cost of year 2000
compliance will be material to its financial condition or results of operations.
While the Company currently believes its year 2000 project
addresses its material areas of concern, the failure to correct a material year
2000 problem could result in an interruption in, or a failure of, certain normal
business activities or operations. Such failures could materially and adversely
affect the Company's results of operations, liquidity and financial condition.
Due to the general uncertainty inherent in the year 2000 problem, resulting in
part from the uncertainty of the year 2000 readiness of third-party suppliers
and customers, the Company is unable to determine at this time whether the
consequences of year 2000 failures could have a material impact on the Company's
results of operations, liquidity or financial condition. The year 2000 project
is expected to significantly reduce the Company's level of uncertainty about the
year 2000 problem and, in particular, about the year 2000 compliance and
readiness of its significant business partners. The Company believes that, with
the implementation of new business systems and completion of the project as
scheduled, the possibility of significant interruptions of normal operations
should be reduced. The Company is currently developing a contingency plan in the
event the Company is not able to complete its year 2000 project in a timely
manner. It expects to have the contingency plan completed by December 1998. In
the event the Company does not complete all phases of its year 2000 project by
December 31, 1999, the most likely worst case scenario would be that suppliers
would not be able to supply materials and that manufacturing accounting at the
Ilion facility would have to be processed outside of the SAP software until the
SAP software was functional at that site. The Company will address these issues
in the contingency plan presently being developed.
The discussion of the Company's efforts and expectations relating
to year 2000 compliance are forward -looking statements and should be read in
conjunction with the Company's disclosures under the heading: "Information
Concerning Forward-Looking Statements." The Company's ability to achieve year
2000 compliance and the costs associated therewith could be adversely impacted
by, among other things, the availability of resources, the ability of customers,
vendors or third parties to achieve year 2000 compliance and unanticipated
problems in the testing and implementation phases of its year 2000 project.
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<PAGE> 17
Regulatory Developments
The Brady Handgun Violence Prevention Act of 1993 (the "Brady
Bill") is expected to be extended to shotguns and rifles on November 30, 1998.
The extension of the Brady Bill will mandate a new national system of instant
background checks for all firearm buyers, to be operated by the Federal Bureau
of Investigations and state governments, that will replace the system of checks
on handgun buyers that has been in place at the state and local level since
February 1994. The Company believes that the expected extension of the Brady
Bill to shotguns and rifles could impact fourth quarter sales and future results
of operations, although the effect of the Brady Bill extension, if any, on the
financial condition or results of operations of the Company cannot be determined
at this time. In addition, there can be no assurance that federal, state, local
or foreign regulation of firearms and ammunition will not become more
restrictive in the future and that any such development would not have a
material adverse effect on the financial condition or results of operations of
the Company.
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 belief that
tighter inventory control practices will continue and are likely to cause the
Company to experience increased liquidity and working capital requirements; (b)
management's belief that demand is stabilizing as customers' inventories reach
their targeted levels; (c) the Company's intention to respond to competitive
pressure, which may affect quarterly results; and (d) the Company's belief that
the market for firearms and ammunition will remain flat, at least in the near
term; (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 statement in
"-Liquidity and Capital Resources - Capital Expenditures" concerning the
Company's expectation that it will expend $0.9 million of its existing purchase
commitments at its Ilion facility during the fourth quarter 1998; (iv) the
statement in "Liquidity and Capital Resources - Liquidity" concerning the
Company's expectation that it may continue to repurchase the New Notes on the
open market from time to time; (v) the statements in "-Year 2000 Compliance"
concerning (a) the functions that will be handled by the SAP software and such
software's expected replacement of most stand-alone legacy systems, (b) the
Company's completion dates for the Company's evaluation of third party responses
and formulation of a plan for seeking alternative business partners, (c) the
Company's expectation as to when testing and implementation of information
technology and non-information technology systems will be completed, (d) the
Company's expectation that the cost of year 2000 compliance will not be material
to its financial condition or results of operations, (e) the Company's belief
that its year 2000 project addresses its material areas of concern, (f) the
Company's expectation that the year 2000 project will significantly reduce the
Company's level of uncertainty about the year 2000 problem, (g) the Company's
belief that the implementation of new business systems and the completion of the
year 2000 project will reduce the possibility of significant interruptions of
normal operations, (h) the Company's expectation that it will have the
contingency plan completed by December 1998 and (i) the Company's identification
of the most likely worst case scenario; (vi) 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"; (vii)
the statements in "-Regulatory Developments" concerning the Company's belief
that the expected
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<PAGE> 18
extension of the Brady Bill to shotguns and rifles on November 30, 1998 may
impact fourth quarter sales and future results of operations; (viii) the
statements in "Legal Proceedings" concerning (a) the substitution of Sporting
Goods Properties, Inc. for Remington as the appropriate defendant in the Wright
case, (b) the Company's belief that appellate courts' decision in Luna should
govern class action claims against Remington and the Sellers, and (c) 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 condition or results of operations of the
Company; and (ix) 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 important factors described in this report (including, without
limitation, those discussed in "-Business Trends and Initiatives", "-Results of
Operations for the Three and Nine Month Periods Ended September 30, 1998 as
Compared to the Three and Nine Month Periods Ended September 30, 1997",
"-Liquidity and Capital Resources", "-Year 2000 Compliance", "-Regulatory
Developments" and "Legal Proceedings"), in the Company's Annual Report on Form
10-K for the period ended December 31, 1997, or in other Securities and Exchange
Commission filings (which factors are incorporated herein by reference), 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.
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 of the Acquisition
("extant products") and relating to occurrences that took place, but were not
disclosed to the Company, prior to the Acquisition. The Company assumed
financial responsibility, up to a maximum aggregate 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
Acquisition, and (2) any environmental liabilities relating to the ownership or
operation of the Business prior to the Acquisition. 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. In 1997, the remaining Cap was exhausted and
the Sellers are now required to indemnify the Company for all costs relating to
pre-closing cases and claims. 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
Acquisition. 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 September 30, 1998, 28 such cases were pending,
primarily alleging defective product design or manufacture, or failure to
provide adequate warnings, all of which are individual actions alleging personal
injury, and many seek punitive as well as compensatory damages. Of these pending
individual cases, approximately eight involve either discontinued products or
pre-Acquisition occurrences, for which the Sellers retained liability and are
required to indemnify the Company. The remaining approximately 20 of the pending
cases involve post-Acquisition occurrences for which the Company bears
responsibility under the Asset Purchase Agreement; the Sellers have some
responsibility for the costs of six of these cases involving certain shotguns,
as described below. The Company has previously disposed of a number of other
cases involving post-Acquisition occurrences by settlement.
Among the new product liability cases filed during the third
quarter of 1998 is Wright, et al. vs. Golden, et al., a wrongful death case
involving the March 24, 1998 schoolyard shooting in Jonesboro, Arkansas by two
young boys. One of the guns allegedly used in the tragedy was a Remington Model
742 rifle. The case, filed in Craighead County, Arkansas state court, was
brought on behalf of the estates of the teacher and two of the four schoolgirls
killed in the incident. In addition to Remington, the other defendants include
the two shooters, their parents, the grandfather of the shooter from whom the
guns used in the shooting were stolen, and the apparently defunct distributor of
a carbine that was also used. As to Remington, the plaintiffs allege that the
Model 742 was defective because it did not come with a trigger lock and because
of an alleged failure to warn the owner of the gun of the danger of its theft.
Remington has answered the complaint, stating various grounds why the action
should be dismissed as a matter of law. Because the Model 742 is a discontinued
product, the Sellers are responsible for the costs associated with the defense
of this action, and Sporting Goods Properties, Inc. (as manufacturer of the
Model 742) will be
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<PAGE> 20
substituted for Remington as the appropriate defendant. On October 30, 1998, a
second complaint was filed in the same court by the families of the three other
schoolgirls killed in the Jonesboro shooting. This action, Herring, et al. v.
Sporting Goods Properties, Inc., et al., was brought by the same plaintiffs'
counsel as in Wright and is based on the same legal theories set forth in the
Wright complaint. Herring alleges that one of these three victims was shot with
the Model 742.
One case is not included in the figures listed above. Joe Luna,
et al. v. Remington Arms Company, Inc. and E. I. du Pont de Nemours and Company
et al. ("Luna"), which was pending at the time of the Acquisition, and for which
the Company assumed financial responsibility up to the amount of the Cap, was
asserted as a class action involving bolt-action rifles. 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.
Luna was filed in 1989 against the Sellers in Texas district
court in Jim Wells County, and amended in December 1993 and again in July 1996.
The plaintiffs sought 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." The Sellers appealed this ruling to the intermediate level
state appellate court, which on February 11, 1998, reversed the class
certification decision. The plaintiffs' request for rehearing was denied by the
Court of Appeals, as was their petition for review by the Texas Supreme Court.
Remington was not named as a defendant until July 1996, after the class
certification was appealed, and was not a party to the appeal. Although a motion
to certify a class against Remington was briefed and argued in June 1997, it has
not yet been decided. (Holding has not been named as a defendant in this case.)
Nevertheless, the appellate courts' decisions should govern class action claims
against it as well as the claims against the Sellers. The Sellers' obligations
with respect to Luna include a requirement that they indemnify the Company
against claims for economic loss involving Model 700 rifles shipped up to 42
calendar months after the Acquisition (prior to the end of May 1997). Claims of
economic loss involving Model 700 rifles shipped thereafter would 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. (A second economic loss class action, Leonel Garza,
et al., v. Sporting Goods Properties, Inc., et al. ("Garza"), involving certain
Remington model shotguns, was settled in 1996 and final disposition of
settlement funds was resolved in April 1998.)
The representations and warranties in the Asset Purchase
Agreement expired 18 months after the Acquisition, 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) would be 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 Acquisition are not likely to have a material adverse effect upon
the financial condition or results of operations of the Company. It is difficult
to forecast the outcome of litigation. However, 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
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<PAGE> 21
arising after the Acquisition, the Company's accruals for the uninsured costs of
such cases and claims and the Sellers' agreement to be responsible for a portion
of certain post-Acquisition shotgun-related product liability costs, as
described above), the Company does not believe that the outcome of all pending
post-Acquisition 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4 Fifth Amendment, dated as of September 23, 1998, to the Credit
Agreement (previously filed May 3, 1996 as Exhibit 4.4 to Registration
Statement No. 333-4520, 333-4520-01 under the Securities Act of 1933,
as amended).
27 Financial Data Schedule.
99 Reconciliation of Income from Operations to EBITDA.
(b) Reports on Form 8-K
During the quarter ended September 30, 1998, the Company filed no reports
on Form 8-K.
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SIGNATURE
Pursuant to the requirements of the Securities 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)
November 12, 1998
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<PAGE> 23
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
4 Fifth Amendment, dated as of September 23, 1998, to the Credit
Agreement (previously filed May 3, 1996 as Exhibit 4.4 to
Registration Statement No. 333-4520, 333-4520-01 under the
Securities Act of 1933, as amended).
27 Financial Data Schedule.
99 Reconciliation of Income from Operations to EBITDA.
23
<PAGE> 1
EXHIBIT 4
FIFTH AMENDMENT, dated as of September 23, 1998 (this "Amendment"),
to the CREDIT AGREEMENT, dated as of November 30, 1993 (as the same may be
amended, supplemented or otherwise modified from time to time, the "Credit
Agreement"), among Remington Arms Company, Inc. (f/k/a RACI Acquisition
Corporation), a Delaware corporation (the "Borrower"), the several banks and
other financial institutions from time to time parties thereto (the "Lenders"),
The Chase Manhattan Bank ("Chase"), and UBS AG, New York Branch, as co-agents,
and Chase, as administrative agent for the Lenders thereunder (in such capacity,
the "Administrative Agent").
WITNESSETH:
WHEREAS, the Borrower has requested the Lenders to amend the Credit
Agreement in certain respects;
WHEREAS, the Lenders have agreed to amend the Credit Agreement to the
extent and upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein, the parties hereto agree as follows:
SECTION 1. DEFINITIONS
1.1 Defined Terms. Unless otherwise defined herein, terms defined in
the Credit Agreement shall be used herein as defined therein.
SECTION 2. AMENDMENT OF CREDIT AGREEMENT
2.1 Amendment of Section 8.8(a) of the Credit Agreement. Section 8.8(a)
of the Credit Agreement is hereby amended by deleting such Section and
substituting therefor the following:
"Limitation on Optional Payments and Modifications of Debt
Instruments, etc. (a) Make any optional payment or prepayment on or
redemption, repurchase or defeasance of any Subordinated Notes, except
that so long as no Default or Event of Default has occurred and is
continuing or would result therefrom, the Borrower may optionally pay,
prepay, redeem or repurchase Subordinated Notes for consideration not
exceeding in the aggregate $25,000,000;"
2.2 Amendment of Section 8.10 of the Credit Agreement. (a) Section 8.10
of the Credit Agreement is hereby amended by deleting the "and" at the end of
Section 8.10(k), replacing the period at the end of section 8.10(l) with
"; and" and adding the following Section 8.10(m):
"(m) Investments in Subordinated Notes permitted by Section 8.8(a)."
<PAGE> 2
2
SECTION 3. MISCELLANEOUS
3.1 Limited Effect. Except as expressly amended hereby, the Credit
Agreement is, and shall remain, in full force and effect in accordance with its
terms.
3.2 Effectiveness. This Amendment shall become effective as of the date
hereof upon receipt by the Administrative Agent of a counterpart hereof duly
executed by the Borrower and the Required Lenders.
3.3 Counterparts. This Amendment may be executed by one or more of the
parties hereto on any number of separate counterparts, and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
3.4 GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
REMINGTON ARMS COMPANY, INC. (f/k/a
RACI Acquisition Corporation)
By: /s/ Fritz Baumgartner
----------------------------------
Title: Treasurer
The Administrative Agent and a Lender:
THE CHASE MANHATTAN BANK
By: /s/ William J. Caggiano
----------------------------------
Title: Managing Director
<PAGE> 3
The Lenders
THE BANK OF NEW YORK
By: /s/ Ann Marie Hughes
----------------------------------
Title: Vice President
BANK OF SCOTLAND
By:
----------------------------------
Title:
BANK OF NEW AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ F. A. Zagar
----------------------------------
Title: Vice President
BANKERS TRUST COMPANY
By:
----------------------------------
Title:
BANK OF BOSTON
By: /s/ Hope Kelley
----------------------------------
Title: Vice President
THE CHASE MANHATTAN BANK
By:
----------------------------------
Title:
<PAGE> 4
THE CIT GROUP/BUSINESS CREDIT, INC.
By: /s/ Robert Smith
----------------------------------
Title: Senior Vice President
COMERICA BANK-DETROIT
By: /s/ Dan Roman
----------------------------------
Title: Vice President
FIRST UNION NATIONAL BANK
By: /s/ F.W. Price
----------------------------------
Title: Senior Vice President
ERSTE BANK
By: /s/ Anca Trifan
----------------------------------
Title: Vice President
By: /s/ John S. Runnion
----------------------------------
Title: First Vice President
MARINE MIDLAND BANK, N.A.
By: /s/ Christopher F. French
----------------------------------
Title: Authorized Signatory
NATEXIS BANQUE BFCE
By:
----------------------------------
Title:
<PAGE> 5
NATIONAL CITY BANK
By: /s/ Robert C. Rowe
----------------------------------
Title: Vice President
NATIONSBANK, N.A.
By:
----------------------------------
Title:
PNC BANK, N.A.
By: /s/ Rose M. Crump
----------------------------------
Title: Vice President
SOCIETE GENERALE
By: /s/ John J. Wagner
----------------------------------
Title: Vice President
UNION BANK OF SWITZERLAND (UBS)
By: /s/ Renata Jacobson
----------------------------------
Title: Director
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,900
<SECURITIES> 0
<RECEIVABLES> 103,200
<ALLOWANCES> 3,900
<INVENTORY> 75,200
<CURRENT-ASSETS> 212,400
<PP&E> 136,100
<DEPRECIATION> 50,600
<TOTAL-ASSETS> 392,500
<CURRENT-LIABILITIES> 86,100
<BONDS> 161,300
0
0
<COMMON> 0
<OTHER-SE> 101,000
<TOTAL-LIABILITY-AND-EQUITY> 392,500
<SALES> 294,800
<TOTAL-REVENUES> 294,800
<CGS> 200,000
<TOTAL-COSTS> 200,000
<OTHER-EXPENSES> 54,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,300
<INCOME-PRETAX> 25,100
<INCOME-TAX> 10,400
<INCOME-CONTINUING> 14,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,700
<EPS-PRIMARY> 19.34
<EPS-DILUTED> 19.34
</TABLE>
<PAGE> 1
EXHIBIT 99
RACI Holding, Inc. and Subsidiaries
Reconciliation of Income from Operations to EBITDA (A)
(Dollars in Millions)
<TABLE>
<CAPTION>
------------------------------------------------
Unaudited
------------------------------------------------
Quarter Ended Year-to-Date
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income from Operations (A) $ 6.4 $ 6.8 $ 14.7 $ 4.5
Interest Expense (B) 4.9 6.0 15.3 18.7
Provision for Income Taxes 5.1 4.5 10.4 3.5
Depreciation and Amortization (B) 4.0 3.9 11.8 11.3
Other Non-cash Charges (C) 0.1 -- 0.5 --
Nonrecurring and Restructuring Expense (D) (0.2) -- (0.4) 0.8
------- ------- ------- -------
Total 13.9 14.4 37.6 34.3
------- ------- ------- -------
EBITDA $ 20.3 $ 21.2 $ 52.3 $ 38.8
======= ======= ======= =======
</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) Interest expense includes, and depreciation and amortization excludes
amortization of deferred financing costs of $0.4 and $1.3 for the quarter
and year-to-date periods, respectively, ended both September 30, 1998 and
1997.
(C) Non-cash charges consist of a $0.3 pension accrual and $0.2 for loss on
disposal of assets for the nine months ended September 30, 1998.
(D) YTD Nonrecurring and restructuring expenses excluded in calculating EBITDA
consist of $0.8 write-down of restructuring accrual and $0.4 accrual for
nonrecurring legal expense in 1998 and $0.8 of unusual and nonrecurring
charges for 1997.
