<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 March 31, 1999
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
incorporation or organization) Identification No.)
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 May 7, 1999
761,800 shares
Class B Common Stock, par value $.01 per share, outstanding at May 7, 1999
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>
March 31, December 31,
1999 1998
---------------- ---------------
<S> <C> <C>
(Unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents $ 1.0 $ 4.9
Accounts Receivable Trade - net 118.9 63.0
Inventories 75.7 71.7
Supplies 10.7 10.6
Prepaid Expenses and Other Current Assets 10.0 9.6
Deferred Income Taxes 14.7 15.3
---------------- ---------------
Total Current Assets 231.0 175.1
Property, Plant and Equipment - net 83.9 86.3
Intangibles and Debt Issuance Costs - net 87.6 88.7
Deferred Income Taxes 2.0 2.0
Other Noncurrent Assets 1.8 2.4
---------------- ---------------
Total Assets $ 406.3 $ 354.5
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 30.6 $ 28.2
Short-Term Debt 1.0 0.9
Current Portion of Long-Term Debt 26.1 24.9
Product and Environmental Liabilities 3.3 3.1
Income Taxes 1.7 -
Other Accrued Liabilities 31.5 26.9
---------------- ---------------
Total Current Liabilities 94.2 84.0
Long-Term Debt 158.4 122.0
Retiree Benefits 36.1 35.6
Product and Environmental Liabilities 9.6 9.4
---------------- ---------------
Total Liabilities 298.3 251.0
---------------- ---------------
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 32.0 27.5
---------------- ---------------
Total Shareholders' Equity 108.0 103.5
---------------- ---------------
Total Liabilities and Shareholders' Equity $ 406.3 $ 354.5
================ ===============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 3
RACI Holding, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Dollars in Millions, Except Per Share Data)
<TABLE>
<CAPTION>
---------------------------------
Unaudited
---------------------------------
Year-to-Date March 31,
---------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Sales (1) $ 90.5 $ 89.0
Cost of Goods Sold 60.2 60.3
--------------- ---------------
Gross Profit 30.3 28.7
Selling, General and Administrative
Expenses 16.7 15.4
Research and Development Expense 1.9 1.9
Other Expense 0.4 0.5
Restructuring and Nonrecurring Items (0.2) (0.4)
--------------- ---------------
Operating Profit 11.5 11.3
Interest Expense 4.0 5.1
--------------- ---------------
Profit Before Income Taxes 7.5 6.2
Provision for Income Taxes 3.0 2.5
--------------- ---------------
Net Income $ 4.5 $ 3.7
=============== ===============
Per Share Data:
Basic Income Per Share $ 5.92 $ 4.87
=============== ===============
Diluted Income Per Share $ 5.78 $ 4.79
=============== ===============
</TABLE>
(1) Sales are presented net of Federal Excise Taxes of $7.5 and $6.8 for
the year-to-date periods ended March 31, 1999 and 1998, respectively.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
RACI Holding, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars in Millions)
<TABLE>
<CAPTION>
-----------------------------------
Unaudited
-----------------------------------
Year-To-Date March 31,
-----------------------------------
1999 1998
-------------- ------------
<S> <C> <C>
Operating Activities
Net Cash used in Operating Activities $(40.6) $(42.5)
-------------- ------------
Investing Activities
Capital Expenditures (1.0) (0.7)
-------------- ------------
Net Cash used in Investing Activities (1.0) (0.7)
-------------- ------------
Financing Activities
Net Borrowings under Revolving Credit Facility 47.5 49.3
Repurchase of Senior Subordinated Notes (3.8) -
Principal Payments on Long-Term Debt (6.2) (5.4)
Net Borrowings (Payments) on Short-Term Debt 0.2 (0.3)
-------------- ------------
Net Cash provided by Financing Activities 37.7 43.6
-------------- ------------
Increase (Decrease) in Cash and Cash Equivalents (3.9) 0.4
Cash and Cash Equivalents at Beginning of Period 4.9 0.6
============== ============
Cash and Cash Equivalents at End of Period $ 1.0 $ 1.0
============== ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999.
Pursuant to an asset purchase agreement (the "Asset Purchase
Agreement"), on December 1, 1993, the Company acquired certain assets and
assumed certain liabilities (the "Acquisition") of the Sporting Goods Business
formerly operated by E. I. du Pont de Nemours and Company ("DuPont") and one of
DuPont's subsidiaries (together with DuPont, the "Sellers").
These condensed consolidated 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, 1998.
Certain reclassifications were made to the prior period's financial
information to conform with the current presentation format.
Note 2 - Inventories
Inventories consisted of the following at:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
(Unaudited)
<S> <C> <C>
Raw Materials $ 11.1 $ 10.7
Semi-Finished Products 18.1 17.4
Finished Product 46.5 43.6
------ ------
Total $ 75.7 $ 71.7
====== ======
</TABLE>
Note 3 - Long-Term Debt
Long-term debt consisted of the following at:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- --------
(Unaudited)
<S> <C> <C>
Credit Agreement:
Term Loans $ 44.3 $ 50.0
Revolving Credit Facility 47.5 -
9.5% Senior Subordinated Notes due 2003 89.2 92.9
Capital Lease Obligations 3.1 3.5
Other 0.4 0.5
--------- --------
Subtotal $ 184.5 $ 146.9
Less: Current Portion 26.1 24.9
--------- --------
Total $ 158.4 $ 122.0
========= ========
</TABLE>
5
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Data)
Note 4 - Restructuring
The Company recorded charges for restructuring in 1996 of $4.9. The
reserve balance of $0.2 included in other accrued liabilities in the
accompanying balance sheet at December 31, 1998 was eliminated during the three
months ended March 31, 1999, 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 condensed consolidating 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 9.5%
Senior Subordinated Notes due 2003, Series B (the "Notes"). Further, the Notes
are fully and unconditionally guaranteed by Holding.
RACI HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
March 31, 1999
<TABLE>
<CAPTION>
RACI Holding
Inc. and
Holding Remington Eliminations Subsidiaries
-------- --------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets $ - $ 231.0 $ - $ 231.0
Receivable from Remington 0.9 - 0.9 -
Noncurrent Assets 107.1 175.3 107.1 175.3
-------- -------- -------- --------
Total Assets $ 108.0 $ 406.3 $ 108.0 $ 406.3
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities $ - $ 94.2 $ - $ 94.2
Payable to RACI Holding, Inc. - 0.9 0.9 -
Noncurrent Liabilities - 204.1 - 204.1
Shareholders' Equity 108.0 107.1 107.1 108.0
-------- -------- -------- --------
Total Liabilities and
Shareholders' Equity $ 108.0 $ 406.3 $ 108.0 $ 406.3
======== ======== ======== ========
</TABLE>
6
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Data)
RACI HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
December 31, 1998
<TABLE>
<CAPTION>
RACI
Holding,
Inc. and
Holding Remington Eliminations Subsidiaries
------- --------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets $ - $ 175.1 $ - $ 175.1
Receivable from Remington 0.9 - 0.9 -
Noncurrent Assets 102.6 179.4 102.6 179.4
-------- ------- -------- --------
Total Assets $ 103.5 $ 354.5 $ 103.5 $ 354.5
======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities $ - $ 84.0 $ - $ 84.0
Payable to RACI Holding, Inc. - 0.9 0.9 -
Noncurrent Liabilities - 167.0 - 167.0
Shareholders' Equity 103.5 102.6 102.6 103.5
-------- ------- -------- --------
Total Liabilities and
Shareholders' Equity $ 103.5 $ 354.5 $ 103.5 $ 354.5
======== ======= ======== ========
</TABLE>
RACI HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
RACI
Holding,
Inc. and
Holding Remington Eliminations Subsidiaries
------- --------- ------------ ------------
<S> <C> <C> <C> <C>
QUARTER ENDED
MARCH 31, 1999
Sales $ - $ 90.5 $ - $ 90.5
Gross Profit - 30.3 - 30.3
Equity in Earnings of Subsidiary 4.5 - 4.5 -
Net Income 4.5 4.5 4.5 4.5
QUARTER ENDED
MARCH 31, 1998
Sales $ - $ 89.0 $ - $ 89.0
Gross Profit - 28.7 - 28.7
Equity in Earnings of Subsidiary 3.7 - 3.7 -
Net Income 3.7 3.7 3.7 3.7
</TABLE>
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Data)
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 certain shotguns, all cases and claims
relating to discontinued products and for limited other costs. Although 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 Acquisition, its accruals for the
uninsured costs of such cases and claims and the Sellers' retention of liability
or agreement to be responsible for certain product liability costs), 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. Nonetheless, 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.
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 - Segment Information
Information on Segments:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
---------- ----------
(Unaudited)
<S> <C> <C>
Net Sales:
Hunting/Shooting Sports $ 77.7 $ 76.1
All Other 12.8 12.9
---------- ----------
Consolidated Net Sales $ 90.5 $ 89.0
========== ==========
EBITDA:
Hunting/Shooting Sports $ 12.8 $ 13.1
All Other 2.8 2.5
---------- ----------
Consolidated EBITDA $ 15.6 $ 15.6
========== ==========
March 31, December 31,
1999 1998
---------- ----------
(Unaudited)
Assets:
Hunting/Shooting Sports $ 250.5 $ 195.4
All Other 155.8 159.1
---------- ----------
Consolidated Assets $ 406.3 $ 354.5
========== ==========
</TABLE>
8
<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Data)
Reconciliation of Reportable Segments:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
-------- ----------
(Unaudited)
<S> <C> <C>
Consolidated EBITDA $ 15.6 $ 15.6
Less: Interest Expense 4.0 5.1
Depreciation and Amortization (1) 3.8 3.9
Other Noncash Charges 0.5 0.8
Nonrecurring and Restructuring Items (0.2) (0.4)
-------- ---------
8.1 9.4
-------- ---------
Consolidated Income from Continuing
Operations Before Taxes $ 7.5 $ 6.2
======== =========
</TABLE>
(1) Excludes amortization of deferred financing costs of $0.5 and $0.4, in 1999
and 1998, respectively, which was included in interest expense.
Note 8 - Income Per Share
The basic and diluted income per share was determined as follows for the
three months ended March 31:
<TABLE>
<CAPTION>
1999 1998
----- ----
(Unaudited)
<S> <C> <C>
Basic Income Per Share:
Net Income Available to Common Shareholders $ 4.5 $ 3.7
Weighted Average Common Shares 760,000 760,000
Basic Income Per Share $ 5.92 $ 4.87
Diluted Income Per Share:
Net Income Available to Common Shareholders $ 4.5 $ 3.7
Weighted Average Common Shares 760,000 760,000
Effect of Outstanding Options 18,983 12,655
Weighted Average Common Shares and Dilutive Potential
Common Stock 778,983 772,655
Diluted Income Per Share $5.78 $4.79
Options Outstanding at March 31, 37,965 37,965
</TABLE>
Note 9 - Subsequent Event
Subsequent to March 31, 1999, 1,800 shares of Class A Common Stock were
issued to certain directors under the 1994 Directors' Stock Plan.
Note 10 - Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("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
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, 1998, on file with the Securities and Exchange
Commission. The results of operations for the three month period ended March 31,
1999 are not necessarily indicative of results that may be expected for the year
ended December 31, 1999, in part due to the seasonality of the Company's
business.
Business Trends and Initiatives
The markets in which the Company competes are highly competitive.
Product image, quality and innovation are the dominant competitive factors in
firearms products and price is the dominant factor in ammunition products. While
the Company intends to respond to competitive pressures, such responses may
affect quarterly results. 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.
Although the Company believes that consumer concerns about regulation
have not had a significant influence on the market for its firearms and
ammunition products for the periods presented herein, there can be no assurance
that the regulation of firearms and ammunition will not become more restrictive
in the future and that any such development would not adversely affect these
markets or the Company. See "-Regulatory Developments" and "Legal Proceedings."
In light of market constraints on sales growth opportunities and its
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
its operations with a view towards managing costs in response to competitive
pressures.
Results of Operations for the Three Month Period Ended March 31, 1999 as
Compared to the Three Month Period Ended March 31, 1998
Sales. Sales for the first quarter of 1999 were $90.5 million, an
increase of $1.5 million, or 1.7%, from 1998 first quarter sales.
Hunting/Shooting Sports sales were $77.7 million for the first quarter of 1999,
an increase of $1.6 million, or 2.1%, from 1998 first quarter sales.
Firearms sales increased $1.3 million, or 2.7%, to $49.2 million for
the first quarter of 1999 from the first quarter of 1998, primarily resulting
from higher sales volumes, mainly in shotguns, partly offset by softness in
demand for certain higher-priced specialty rifles. Ammunition sales for the
first quarter of 1999 were $28.5 million, an increase of $0.3 million, or 1.1%,
from comparable 1998 sales, primarily due to higher rimfire sales volumes,
mostly offset by price concessions, mainly in centerfire ammunition, in response
to the increasingly competitive environment.
Sales of all other products, including fishline, accessories, targets
and powder metal products, for the first quarter of 1999 declined $0.1 million,
or 0.8%, from the first quarter of 1998.
Cost of Goods Sold. Cost of goods sold for the first quarter of 1999
was $60.2 million, a decrease of $0.1 million, or 0.2%, versus the first quarter
of 1998. The decrease in the quarter was due to a favorable mix of lower-cost
firearm products, favorable commodity prices and reductions in other
manufacturing costs. As a percentage of sales, cost of goods sold for the first
quarter of 1999 decreased to 66.5% from 67.8%. This decrease, as a percentage of
sales, is due mainly to the factors discussed above.
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
first quarter of 1999 were $18.8 million, an increase of $1.4 million, or 8.0%,
from $17.4 million for the first quarter of 1998.
10
<PAGE> 11
Selling, general and administrative expenses for the first quarter of
1999 were $16.7 million, an increase of $1.3 million, or 8.4%, from the first
quarter of 1998. The increase for the quarter was primarily due to planned
increases in marketing communications spending and information system
maintenance fees that were waived in the prior year period.
Restructuring and nonrecurring items include reserve reductions of $0.2
million during the current year quarter to eliminate estimated accruals not
realized.
Interest Expense. Interest expense for the quarter ended March 31, 1999
was $4.0 million, a decrease of $1.1 million, or 21.6%, from the first quarter
of 1998. The decrease in interest expense between the first quarter periods was
primarily a result of a reduction in average outstanding debt, and to a lesser
extent, 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."
Provision for Income Taxes. The Company's effective tax rate was 40%
for both year-to-date 1999 and 1998. The effective rates for 1999 and 1998
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 first quarter of 1999 was $4.5 million,
an increase of $0.8 million from the first quarter 1998, due primarily to the
factors discussed above.
Liquidity and Capital Resources
Cash Flows. Net cash used in operating activities for the three month
period ended March 31, 1999 was $40.6 million, resulting primarily from
increases in accounts receivable of $55.9 million and in inventories of $4.0
million, partly offset by net income adjusted for $5.5 million of noncash items
and an increase in accounts payable and other accrued liabilities of $9.3
million. Accounts receivable increased to $118.9 million at March 31, 1999
principally due to approximately $50.7 million of firearms sales on extended
payment terms. These terms provide cash discount incentives and require payment
by September 1999. The terms are granted to customers consistent with
industry-wide programs and with the Company's prior years' experience. The
Company intends to apply the proceeds from these receivables to the outstanding
balance on its revolving credit facility. Net cash used in investing activities
in the first three months of 1999 was $1.0 million, consisting of capital
expenditures. Net cash provided by financing activities during the first three
months of 1999 was $37.7 million, primarily resulting from borrowing under the
revolving credit facility of $47.5 million, partly offset by $6.2 million of
principal payments on outstanding indebtedness and the repurchase of
approximately $3.8 million of the Notes, at an average price of 99.8% of the
face value on the open market.
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 March 31, 1999, 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.
Working Capital. Working capital increased to $136.8 million at March
31, 1999 from $91.1 million at December 31, 1998, primarily as a result of the
increases in accounts receivable and inventories, partly offset by the increase
in accounts payable and other accrued liabilities. See "-Cash Flows." The
seasonality of the Company's business causes accounts receivable and inventories
generally to be higher in the first three quarters of the year. See
11
<PAGE> 12
"-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.
Capital Expenditures. Capital expenditures for the three months ended
March 31, 1999 were $1.0 million, principally for replacement equipment and
improvement projects concentrated on enhancing the efficiency at existing
facilities.
Liquidity. The Company incurred substantial indebtedness in connection
with the Acquisition. As of March 31, 1999, the Company had outstanding $184.5
million of indebtedness, consisting of approximately $89.2 million ($89.4
million face amount) of the Notes, $44.3 million in term loan borrowings and
$47.5 million in revolving credit borrowings under the Credit Agreement, $3.1
million in capital lease obligations and $0.4 million of other long-term debt.
As of March 31, 1999, the Company also had aggregate letters of credit
outstanding of $4.0 million. The Company's revolving credit facility had $99.6
million available for borrowing as of March 31, 1999.
Subsequent to March 31, 1999, the Company repurchased approximately
$0.8 million of the Notes on the open market. From time to time, the Company may
continue to repurchase additional amounts of the 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 firearms 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 partially offset the seasonality of the Company's business by shifting
some firearms sales to the first quarter.
Recent Accounting Developments
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.
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 to produce correct results.
In 1995, the Company completed the first phase of replacing its
computer systems with an enterprise-wide, fully-integrated system from SAP
America, Inc., that, upon implementation, 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. The new system accommodates the dating
changes necessary to permit correct recording of dates for the year 2000 and
later years. Systems that will not be replaced with the SAP software include
human resources and payroll, which are already year 2000 compliant.
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
12
<PAGE> 13
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 several 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, was completed for both information technology and
non-information technology systems at all facilities. The Company identified 70
customers, representing approximately 80% of its 1998 sales, from whom it
requested information on their year 2000 compliant status. The Company also
contacted approximately 380 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. The initial surveying of these significant third parties
was completed in November 1998. Because certain of these parties responded
unfavorably or did not respond, the Company is evaluating additional information
requested from those parties to determine whether the possible inability of
those 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, results of operations or cash flows. If deemed
necessary, based on the results of these evaluations, the Company expects to
begin seeking alternative business partners or utilizing other alternatives by
the end of the second quarter of 1999.
The Company continues to test systems at all of its facilities. Key
non-information technology systems, including microcontrollers used in plant
operations, are being tested with year 2000 compliant dates. The testing of
existing equipment was 90% complete by March 1999 for both information
technology systems and non-information technology systems. Based on responses
received from customers with whom the Company does business electronically, the
Company is conducting transaction tests utilizing electronic data interchange,
and expects to complete such testing in mid-1999.
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 by
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 75% 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 85% of the upgrades necessary to render such systems
year 2000 compliant. The Company's telecommunications systems have been upgraded
and are year 2000 compliant.
Due to the implementation of the new computer system in 1995, 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 been satisfied 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, results of operations or
cash flows.
While the Company currently believes its year 2000 project addresses
its material areas of concern, the failure to correct material year 2000
problems 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 has not yet adopted any formal contingency plan
in the event the Company is not able to complete its year 2000 project in a
timely manner. However, if significant risks are identified, the Company intends
to develop a contingency plan as deemed necessary at that time. 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 certain suppliers would
not be able to supply materials and that certain manufacturing accounting
functions at the Ilion, New York facility would have to be processed outside of
the SAP software until the SAP software was functional at that site.
13
<PAGE> 14
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.
Regulatory Developments
The Brady Handgun Violence Prevention Act of 1993 (the "Brady Bill")
was extended to shotguns and rifles in November 1998. The extension of the Brady
Bill mandates a new national system of instant background checks for all firearm
buyers, to be operated by the Federal Bureau of Investigation and state
governments, that replaces 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 recent federal, state and local legislation
relating to the regulation of firearms and ammunition has not had a material
adverse effect on its sale of these products or its financial condition,
results of operations or cash flows during the periods presented. However, 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 business 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 the
market for firearms and ammunition will remain flat, at least in the near term
and (b) the Company's intention to respond to competitive pressure, which may
affect quarterly results; (ii) the statements in "-Liquidity and Capital
Resources - Cash Flows" concerning (a) the Company's intention to apply the
proceeds from receivables from sales on extended payment terms to the
outstanding balance on its revolving credit facility, (b) 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 (c) 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 - Liquidity"
concerning the Company's expectation that it may continue to repurchase the
Notes on the open market from time to time; (iv) 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 expectation that it will begin seeking alternative
business partners or utilizing other alternatives, if necessary, by the end of
the second quarter, (c) the Company's expectation that transaction testing will
be complete by mid-1999 and implementation of year 2000 compliant information
technology and non-information technology systems will be complete by the end of
July 1999, (d) the Company's expectation that the cost of year 2000 compliance
will not be material to its financial condition, results of operations or cash
flows, (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 and (h) the
Company's identification of the most likely worst case scenario; (v) 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"; (vi) the statements in "Legal Proceedings"
concerning (a) the Company's belief that 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 (b) the
Company's anticipation that because of the nature of its products, it will
continue to be involved in product liability cases and claims in the future; and
(vii) other statements as to management's or the Company's expectations and
beliefs presented in "Legal Proceedings."
14
<PAGE> 15
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 Month Period Ended March 31, 1999 as Compared to the Three Month Period
Ended March 31, 1998", "-Liquidity and Capital Resources", "-Year 2000
Compliance" and "Legal Proceedings"), in the Company's Annual Report on Form
10-K for the period ended December 31, 1998, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Certain of the Company's financial instruments are subject to market
risks, including interest rate risk. The Company was not a party to any interest
rate cap or other protection arrangements with respect to its $91.8 million of
variable rate indebtedness as of March 31, 1999. The Company uses commodity
futures contracts to hedge against the risk of increased prices for lead and
copper to be used in the manufacture of the Company's products. At March 31,
1999, the market value of the Company's outstanding contracts relating to firm
commitments and anticipated purchases up to one year from the respective balance
sheet date was $0.3 million. The Company believes that a near-term change in
commodity prices will not materially impact the consolidated financial position,
results of operations, future earnings, fair value or cash flows of the Company.
Additionally, the Company believes it does not have a material exposure to
fluctuations in foreign currencies. The Company does not hold or issue financial
instruments for speculative or trading purposes.
15
<PAGE> 16
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 Acquisition (the "Closing")
and which relate to occurrences that took place prior to the Closing. Except for
all cases and claims relating to discontinued products and for limited costs in
cases relating to certain shotguns, the Company generally bears financial
responsibility for product liability cases and claims relating to occurrences
after the Closing.
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 March 31, 1999, approximately 32 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. Many of these cases seek punitive as well as compensatory damages. Of
these pending individual cases, approximately nine involve either discontinued
products or pre-Closing occurrences, for which the Sellers retained liability
and are required to indemnify the Company. The remaining approximately 23 of the
pending cases involve post-Closing occurrences for which the Company bears
responsibility under the Asset Purchase Agreement; the Sellers have some
responsibility for the costs of five of these cases involving certain shotguns.
The Company has previously disposed of a number of other cases involving
post-Acquisition occurrences by settlement.
The pending cases include Wright, et al. v. Golden, et al., and
Herring, et al. v. Sporting Goods Properties, Inc., et al., which involve the
March 24, 1998 schoolyard shooting in Jonesboro, Arkansas filed in Arkansas
state court. One of the guns allegedly used was a Remington Model 742(TM) rifle,
which plaintiffs allege was defective because it did not come with a trigger
lock or other mechanism to prevent unauthorized use and because of an alleged
failure to warn the owner of the gun of the danger of its theft. 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) has been substituted for Remington as the
appropriate defendant.
As of May 1, 1999, ten municipalities and counties had filed actions
against various firearms manufacturers, distributors and sellers, seeking to
recover health care, public safety and other costs incurred in connection with
the accidental or illegal use of firearms. Most of these lawsuits, which allege
strict liability, negligent distribution and nuisance theories, have focused on
handgun manufacturers. There can be no assurance that the Company, as a
manufacturer of rifles, shotguns and ammunition, will not be materially
adversely affected by such litigation in the future.
Although 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 Acquisition,
its accruals for the uninsured costs of such cases and claims and the Sellers'
retention of liability or agreement to be responsible for certain product
liability costs), 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. Nonetheless, 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. Because of the nature of its products, the
Company anticipates that it will continue to be involved in product liability
litigation in the future.
Item 5. Other Information
At the annual meeting of the Boards of Directors of Holding and
Remington held on April 27, 1999, Thomas L. Millner was elected to serve as
Chief Executive Officer of both Holding and Remington.
16
<PAGE> 17
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
99.1 Reconciliation of Income from Operations to EBITDA.
(b) Reports on Form 8-K
During the quarter ended March 31, 1999, the Company filed no reports on
Form 8-K.
17
<PAGE> 18
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)
May 13, 1999
18
<PAGE> 19
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule.
99.1 Reconciliation of Income from Operations to EBITDA.
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RACI HOLDING, INC. FOR THE QUARTER ENDED MARCH 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 123,200
<ALLOWANCES> 4,300
<INVENTORY> 75,700
<CURRENT-ASSETS> 231,000
<PP&E> 141,000
<DEPRECIATION> 57,100
<TOTAL-ASSETS> 406,300
<CURRENT-LIABILITIES> 94,200
<BONDS> 158,400
0
0
<COMMON> 0
<OTHER-SE> 108,000
<TOTAL-LIABILITY-AND-EQUITY> 406,300
<SALES> 90,500
<TOTAL-REVENUES> 90,500
<CGS> 60,200
<TOTAL-COSTS> 60,200
<OTHER-EXPENSES> 18,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,000
<INCOME-PRETAX> 7,500
<INCOME-TAX> 3,000
<INCOME-CONTINUING> 4,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,500
<EPS-PRIMARY> 5.92
<EPS-DILUTED> 5.78
</TABLE>
<PAGE> 1
EXHIBIT 99.1
RACI Holding, Inc. and Subsidiaries
Reconciliation of Income from Operations to EBITDA (A)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Net Income from Operations (A) $ 4.5 $ 3.7
Interest Expense 4.0 5.1
Provision for Income Taxes 3.0 2.5
Depreciation and Amortization (B) 3.8 3.9
Other Noncash Charges (C) 0.5 0.8
Nonrecurring and Restructuring Expense (D) (0.2) (0.4)
----------- -----------
Total 11.1 11.9
----------- -----------
EBITDA $15.6 $15.6
=========== ===========
</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, adjusted to exclude cash interest expense, income tax expense,
depreciation, amortization, noncash 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 noncash 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 year-to-date periods ended March 31, 1999 and 1998, respectively,
which is included in interest expense.
(C) Noncash charges consist of a $0.4 pension accrual and $0.1 for loss on
disposal of assets for the three months ended March 31, 1999 and a $0.7
pension accrual and $0.1 for loss on disposal of assets in 1998.
(D) Nonrecurring and restructuring expenses excluded in calculating EBITDA
consist of $0.2 and $0.4 write-down of accrual for restructuring
expense for the year-to-date periods ended March 31, 1999 and 1998,
respectively.
