<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000
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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 0-4776
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STURM, RUGER & COMPANY, INC.
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(Exact name of registrant as specified in its charter)
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<CAPTION>
<S> <C>
Delaware 06-0633559
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
Lacey Place, Southport, Connecticut 06490
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(Address of principal executive offices) (Zip code)
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(203) 259-7843
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(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
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the issuer's common stock as of July
31, 2000: Common Stock, $1 par value - 26,910,720.
Page 1 of 21
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INDEX
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
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PART I. FINANCIAL INFORMATION
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<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--June 30, 2000 and December 31, 1999 3
Condensed consolidated statements of income--Three months ended June
30, 2000 and 1999, Six months ended June 30, 2000 and 1999 5
Condensed consolidated statements of cash flows--Six months ended June
30, 2000 and 1999 6
Notes to condensed consolidated financial statements--June 30, 2000 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
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PART II. OTHER INFORMATION
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<S> <C>
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 8,494 $ 8,164
Short-term investments 76,138 70,611
Trade receivables, less
allowances for doubtful
accounts ($1,267 and $1,392)
and discounts ($257 and $1,749) 15,862 20,270
Inventories:
Finished products 12,464 9,467
Materials and products in
process 32,049 28,518
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44,513 37,985
Deferred income taxes 9,797 8,700
Prepaid expenses and other assets 1,059 1,123
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Total current assets 155,863 146,853
Property, plant and equipment 147,152 149,433
Less allowances for depreciation (104,177) (102,567)
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42,975 46,866
Deferred income taxes 2,770 2,979
Other assets 16,463 14,887
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$218,071 $211,585
============ ============
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3
<PAGE> 4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(unaudited) (Note)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable and accrued
expenses $ 9,803 $ 5,623
Product safety modifications 547 598
Product liability 3,000 3,000
Employee compensation 12,318 11,158
Workers' compensation 4,702 4,975
Income taxes 355 2,906
------------ ------------
Total current liabilities 30,725 28,260
Product liability accrual 16,333 16,499
Contingent liabilities -- Note 7 -- --
Stockholders' Equity
Common Stock, non-voting, par value $1:
Authorized shares 50,000; none
issued -- --
Common Stock, par value $1: Authorized
shares - 40,000,000 issued and
outstanding 26,910,720 26,911 26,911
Additional paid-in capital 2,434 2,434
Retained earnings 141,801 137,614
Accumulated other comprehensive
income (133) (133)
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171,013 166,826
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$218,071 $211,585
============ ============
</TABLE>
Note:
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to condensed consolidated financial statements.
4
<PAGE> 5
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Firearms sales $37,594 $ 49,429 $ 88,689 $ 96,867
Castings sales 11,341 13,589 20,135 29,042
------------- ------------ ----------- ------------
Net sales 48,935 63,018 108,824 125,909
Cost of products sold 36,376 46,581 77,813 91,198
------------- ------------ ----------- ------------
12,559 16,437 31,011 34,711
Expenses:
Selling 3,274 3,259 6,922 6,479
General and administrative 1,531 1,444 2,949 3,093
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4,805 4,703 9,871 9,572
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7,754 11,734 21,140 25,139
Other income-net 1,992 933 3,451 1,617
------------- ------------ ----------- ------------
Income before income taxes 9,746 12,667 24,591 26,756
Income taxes 3,821 5,130 9,640 10,836
------------- ------------ ----------- ------------
Net income $ 5,925 $ 7,537 $ 14,951 $15,920
============= ============ =========== ============
Basic and diluted earnings per share $0.22 $0.28 $0.56 $0.59
===== ===== ===== =====
Cash dividends per share $0.20 $0.20 $0.40 $0.40
===== ===== ===== =====
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See notes to condensed consolidated financial statements.
5
<PAGE> 6
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
----------------------------
<S> <C> <C>
Cash Provided by Operating Activities $ 16,628 $ 39,911
Investing Activities
Property, plant and equipment additions (2,367) (1,739)
Purchases of short-term investments (79,082) (95,758)
Proceeds from maturities of short-term
investments 73,555 69,004
Net proceeds from sale of
non-manufacturing real estate 1,978 169
Net proceeds from sale of Uni-Cast assets 382 --
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Cash used by investing activities (5,534) (28,324)
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Financing Activities
Dividends paid (10,764) (10,764)
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Cash used by financing activities (10,764) (10,764)
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Increase in cash and cash equivalents 330 823
Cash and cash equivalents at
beginning of period 8,164 4,680
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Cash and cash equivalents at end of
period $ 8,494 $ 5,503
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
6
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STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2000
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and Article
10 of Regulation S-X. 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, the accompanying unaudited condensed
consolidated financial statements include all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation of the results
of the interim periods. Operating results for the six months ended June 30, 2000
are not necessarily indicative of the results to be expected for the full year
ending December 31, 2000. For further information refer to the consolidated
financial statements and footnotes thereto included in the Sturm, Ruger &
Company, Inc. Annual Report on Form 10-K for the year ended December 31, 1999.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
Organization: Sturm, Ruger & Company, Inc. ("Company") is principally
engaged in the design, manufacture, and sale of firearms and investment
castings. The Company's design and manufacturing operations are located in the
United States. Substantially all sales are domestic. The Company's firearms are
sold through a select number of distributors to the sporting and law enforcement
markets. Investment castings are sold either directly to or through
manufacturers' representatives to companies in a wide variety of industries.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
NOTE 3--INVENTORIES
Inventories are valued using the last-in, first-out (LIFO) method. An
actual valuation of inventory under the LIFO method can be made only at the end
of each year based on the inventory levels and costs existing at that time.
Accordingly, interim LIFO calculations must necessarily be based on management's
estimates of expected year-end inventory levels and costs. Because these are
subject to many forces beyond management's control, interim results are subject
to the final year-end LIFO inventory valuation.
NOTE 4--INCOME TAXES
The Company's effective tax rate differs from the statutory tax rate
principally as a result of state income taxes. Total income tax payments during
the six months ended June 30, 2000 and 1999 were $13.1 million and $8.7 million,
respectively.
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
NOTE 5--BASIC AND DILUTED EARNINGS PER SHARE
Basic and diluted earnings per share is based upon the weighted average
number of common shares outstanding during the period. Diluted earnings per
share reflects the impact of options outstanding using the treasury stock
method, when applicable.
NOTE 6--COMPREHENSIVE INCOME
As there were no non-owner changes in equity during the first half of
2000 and 1999, total comprehensive income equals net income for the three and
six months ended June 30, 2000 and 1999, or $5.9 million and $7.5 million, and
$15.0 million and $15.9 million, respectively.
NOTE 7 - CONTINGENT LIABILITIES
As of June 30, 2000 the Company is a defendant in approximately 41
lawsuits involving its products and is aware of certain other such claims. These
lawsuits and claims fall within two categories:
(i) those that claim damages from the Company related to allegedly
defective product design which stem from a specific incident.
These lawsuits and claims are based principally on the theory of
"strict liability" but also may be based on negligence, breach of
warranty, and other legal theories, and
(ii) those brought by cities, municipalities, counties, and individuals
(including certain putative class actions) against numerous
firearms manufacturers, distributors and dealers seeking to
recover damages allegedly arising out of the misuse of firearms by
third parties in the commission of homicides, suicides and other
shootings involving juveniles and adults. The complaints by
municipalities seek damages, among other things, for the costs of
medical care, police and emergency services, public health
services, and the maintenance of courts, prisons, and other
services. In certain instances, the plaintiffs seek to recover for
decreases in property values and loss of business within the city
due to criminal violence. In addition, nuisance abatement and/or
injunctive relief is sought to change the design, manufacture,
marketing and distribution practices of the various defendants.
These suits allege, among other claims, strict liability or
negligence in the design of products, public nuisance, negligent
entrustment, negligent distribution, deceptive or fraudulent
advertising, violation of consumer protection statutes and
conspiracy or concert of action theories. None of these cases
allege a specific injury to a specific individual as a result of
the misuse or use of any of the Company's products.
Management believes that, in every case, the allegations are unfounded,
and that the shootings and any results therefrom were due to negligence or
misuse of the firearms by third-parties or the claimant, and that there should
be no recovery against the Company. Defenses further exist to the suits brought
by cities, municipalities and counties based, among other reasons, on
established state law precluding recovery by municipalities for essential
government services, the remoteness of the claims, the types of damages sought
to be recovered, and limitations on the extraterritorial authority which may be
exerted by a city, municipality or county under state and federal law, including
State and Federal Constitutions.
8
<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
The only case against the Company alleging liability for criminal
shootings by third-parties to ever be permitted to go before a jury, Hamilton,
et. al. v. Accu-tek, et. al., resulted in a defense verdict in favor of the
Company on February 11, 1999. In that case, numerous firearms manufacturers and
distributors had been sued, alleging damages as a result of alleged negligent
sales practices and "industry-wide" liability. The Company and its marketing and
distribution practices were exonerated from any claims of negligence in each of
the seven cases decided by the jury. The Court upheld the verdict of the jury
and dismissed each case as to the Company in its later opinion. The three
defendants found liable have filed a notice of appeal from the Court's decision.
On October 7, 1999 a lawsuit brought against the Company and numerous
firearms manufacturers and distributors by the mayor of Cincinnati, City of
Cincinnati v. Beretta U.S.A. Corp., et. al., was dismissed. This was the first
dismissal of one of the lawsuits which have been filed by certain cities,
municipalities and counties. Since that time, such lawsuits filed by the cities
of Bridgeport, Connecticut and Miami, Florida have been completely dismissed and
those filed by the cities of Chicago and Atlanta have been partially dismissed.
The Cleveland suit has withstood an initial motion to dismiss in the trial
court, and in New Orleans the Court declared legislation passed to prohibit such
suits unconstitutional. The Detroit/Wayne County case was also partially
dismissed, and the Michigan legislature has passed legislation precluding such
suits. The only municipal lawsuit in which substantially all claims have
withstood dismissal by the trial court is the Boston case. Appeals of all trial
court decisions are pending or will be filed when appropriate. Motions to
dismiss other such lawsuits are pending or will be filed when timely.
The Company management monitors the status of known claims and the
product liability accrual, which includes amounts for asserted and unasserted
claims. While it is not possible to forecast the outcome of litigation or the
timing of costs, in the opinion of management, after consultation with special
and corporate counsel, it is not probable and is unlikely that litigation,
including punitive damage claims, will have a material adverse effect on the
financial position of the Company, but may have a material impact on the
Company's financial results for a particular period.
Punitive damages, as well as compensatory damages, are demanded in many
of the lawsuits and claims. Aggregate claimed amounts presently exceed product
liability accruals and applicable insurance coverage. As of March 18, 1982,
compensatory and punitive damage insurance coverage is provided, in States where
permitted, for losses exceeding $1.0 million of loss per occurrence or an
aggregate maximum loss of $4.0 million. For claims which the Company has been
notified in writing between July 10, 1988, through July 10, 1989, coverage is
provided for losses exceeding $2.5 million per claim or an aggregate maximum
loss of $9.0 million. For claims made between July 10, 1989, and July 10, 1991,
the aggregate maximum loss is $7.5 million. For claims made after July 10, 1992,
coverage is provided for losses exceeding $2.25 million per claim, or an
aggregate maximum loss of $6.5 million. For claims made after July 10, 1994,
coverage is provided for losses exceeding $2.0 million per claim, or an
aggregate maximum loss of $6.0 million. For claims made after July 10, 1997,
coverage is provided for annual losses exceeding $2.0 million per claim, or an
aggregate maximum loss of $5.5 million annually.
On March 17, 2000, Smith & Wesson announced that it had reached a
settlement to conclude some of the municipal lawsuits with various governmental
entities. On March 30, 2000, the Office of the Connecticut Attorney General
began an investigation of certain alleged "anticompetitive practices in the
firearms industry." On April 17, 2000, the State of Maryland's Attorney General
also made similar inquiries as to the Company. The Company has not engaged in
any improper conduct and has cooperated with these investigations.
The Company has reported all cases instituted against it through March
31, 2000 and the results of those cases, where terminated, to the S.E.C. on its
previous Form 10-K and 10-Q reports, to which reference is hereby made.
9
<PAGE> 10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
NOTE 8--OPERATING SEGMENT INFORMATION
The Company has two reportable segments: firearms and investment
castings. The firearms segment manufactures and sells rifles, pistols,
revolvers, and shotguns principally to a select number of independent wholesale
distributors primarily located in the United States. The investment castings
segment consists of two operating divisions which manufacture and sell titanium,
and steel investment castings. Selected operating segment financial information
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net Sales
Firearms $37,594 $49,429 $88,689 $ 96,867
Castings
Unaffiliated 11,341 13,589 20,135 29,042
Intersegment 7,240 7,044 15,069 14,040
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18,581 20,633 35,204 43,082
Eliminations (7,240) (7,044) (15,069) (14,040)
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$48,935 $63,018 $108,824 $125,909
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Income Before Income Taxes
Firearms $7,538 $11,689 $20,721 $24,174
Castings 508 421 1,078 1,803
Corporate 1,700 557 2,792 779
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$9,746 $12,667 $24,591 $26,756
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June 30, December 31,
2000 1999
-----------------------------
Identifiable Assets
Firearms $70,008 $71,756
Castings 35,697 35,753
Corporate 112,366 104,076
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$218,071 $211,585
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</TABLE>
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Consolidated net sales of $48.9 million and $108.8 million were achieved
by the Company for the three and six months ended June 30, 2000. This represents
a decrease of 22.3% and 13.6% from the respective 1999 prior period consolidated
net sales of $63.0 million and $125.9 million, respectively.
Firearms segment net sales decreased by $11.8 million, or 23.9%, in the
second quarter of 2000 to $37.6 million from $49.4 million in the second quarter
of the prior year. For the six months ended June 30, 2000, firearms segment net
sales decreased by $8.2 million, or 8.4% to $88.7 million, compared to the
corresponding 1999 period. Firearms unit shipments decreased 30.5% for the
three-month period and 15.0% for the six-month period ended June 30, 2000 from
the comparable 1999 periods. The unit decrease reflects a decline in overall
market demand. The Company's Fiftieth Anniversary commemorative models which
were available exclusively in 1999 may have increased firearms unit sales in the
second quarter of 1999. Shipments in the quarter ended June 30, 1999 may also
have been favorably impacted by a pricing increase in selected models effective
July 1, 1999, that was announced in May 1999. The Company anticipates that total
firearms sales in 2000 may be below the level achieved in 1999. In 2000, the
Company instituted a sales incentive program for its distributors which allows
them to earn rebates of up to 15% if certain annual overall sales targets are
achieved. This program replaces a similar program offered in 1999.
Casting segment net sales decreased by 16.5% and 30.7% to $11.3 million
and $20.1 million, respectively, in the three and six months ended June 30, 2000
from $13.6 million and $29.0 million in the comparable 1999 periods. This was
principally due to reduced shipments of titanium golf club heads to Callaway
Golf Company, Inc. Shipments to other golf companies (primarily Karsten
Manufacturing Corporation) for the first six months of 2000, increased 125% from
the comparable 1999 period, and partially offset this decrease. Increased
shipments of non-golf products, including marine propellers, also partially
compensated for the decrease in club head shipments. The Company anticipates
that total casting segment sales in 2000 may be below the level achieved in
1999. The Company continues to actively pursue other titanium and steel casting
business opportunities.
Consolidated cost of products sold for the second quarter and the six
months ended June 30, 2000 were $36.4 million and $77.8 million compared to
$46.6 million and $91.2 million in the corresponding 1999 periods, representing
a decrease of 21.9% and 14.7%, respectively. This was primarily attributable to
decreased firearms and casting segments sales during the second quarter and the
six months ended June 30, 2000.
Gross profit as a percentage of net sales was 28.5% for the six month
period ended June 30, 2000, as compared to 27.6% in the comparable 1999 period.
For the second quarter of 2000, gross profit as a percent of sales decreased
slightly to 25.7% from 26.1% in the second quarter of 1999. Margin erosion in
the quarter was caused by lower sales partially offset by lower product
liability expenses than were experienced in 1999.
Selling, general and administrative expenses of $4.8 million and $4.7
million remained consistent for the quarters ended June 30, 2000 and 1999,
respectively. For the six months ended June 30, 2000, selling, general and
administrative expenses increased slightly to $9.9 million from $9.6 million in
1999 as a result of increased national advertising initiatives incurred in the
first quarter of 2000 compared to the first quarter of 1999.
Other income-net increased by $1.1 million and $1.8 million in the three
and six months ended June 30, 2000 compared to the corresponding 1999 periods,
respectively. These increases are primarily due to a gain on the sale of
non-manufacturing real estate in the second quarter of 2000 and increased
earnings on Treasury Bill and Treasury Bond investments as a result of increased
principal and improved interest rates.
11
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
The effective income tax rate of 39.2% in the second quarter and six
months ended June 30, 2000, compared to 40.5% in the corresponding 1999 periods,
reflects lower effective state tax rates.
As a result of the foregoing factors, consolidated net income decreased
$1.6 million or 21.4% from $7.5 million to $5.9 million for the three months
ended June 30, 2000 as compared to the second quarter of 1999 and decreased $0.9
million or 6.1% from $15.9 million to $15.0 million for the six months ended
June 30, 2000 as compared to the first half of 1999.
Financial Condition
At June 30, 2000, the Company had cash, cash equivalents and short-term
investments of $84.6 million, working capital of $125.1 million and a current
ratio of 5.1 to 1.
Cash provided by operating activities was $16.6 million and $39.9 million
for the six months ended June 30, 2000 and 1999, respectively. The decrease in
cash provided is principally a result of the increase in inventories in the
first six months of 2000 compared to a reduction in inventories in the
comparable 1999 period.
The Company follows an industry-wide practice of offering a "dating plan"
to its firearms customers on selected products, which allows the purchasing
distributor to buy the products commencing in December, the start of the
Company's dating plan year, and pay for them on extended terms. Discounts are
offered for early payment. The dating plan provides a revolving payment plan
under which payments for all shipments made during the period December through
February have to be made by April 30. Generally, shipments made in subsequent
months have to be paid within approximately 90 days. Dating plan receivable
balances were $5.3 million at June 30, 2000 compared to $8.0 million at June 30,
1999. The Company has reserved the right to discontinue the dating plan at any
time and has been able to finance this dating plan from internally generated
funds provided by operating activities.
Capital expenditures during the six months ended June 30, 2000 totaled
$2.4 million. For the past two years capital expenditures averaged approximately
$1.3 million per quarter. In 2000, the Company expects to spend approximately
$6.5 million on capital expenditures to upgrade and modernize manufacturing
equipment primarily at the Newport Firearms, Ruger Investment Casting, and Pine
Tree Castings Divisions. The Company finances, and intends to continue to
finance, all of these activities with funds provided by operations.
For the six months ended June 30, 2000 dividends paid totaled $10.8
million. This amount reflects the regular quarterly dividend of $.20 per share
paid in March and June 2000. On July 27, 2000, the Company declared a regular
quarterly dividend of $.20 per share payable on September 15, 2000. Future
dividends depend on many factors, including internal estimates of future
performance and the Company's need for funds.
Historically, the Company has not required external financing. Based on
its cash flow and unencumbered assets, the Company believes it has the ability
to raise substantial amounts of short-term or long-term debt. The Company does
not anticipate any need for external financing through 2000.
The purchase of firearms is subject to many federal, state and local
governmental regulations. The basic federal laws are the National Firearms Act,
the Federal Firearms Act, and the Gun Control Act of 1968. These laws generally
prohibit the private ownership of fully automatic weapons and place certain
restrictions on the interstate sale of firearms unless certain licenses are
obtained. The Company does not manufacture fully automatic weapons, other than
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
for the law enforcement market, and holds all necessary licenses under these
Federal laws. From time to time, congressional committees review proposed bills
relating to the regulation of firearms. These proposed bills generally seek
either to restrict or ban the sale and, in some cases, the ownership of various
types of firearms. Several states currently have laws in effect similar to the
aforementioned legislation.
Until November 30, 1998, the "Brady Law" mandated a nationwide five-day
waiting period and background check prior to the purchase of a handgun. As of
November 30, 1998, the National Instant Check System, which applies to both
handguns and long guns, replaced the five-day waiting period. The Company
believes that the "Brady Law" has not had a significant effect on the Company's
sales of firearms, nor does it anticipate any impact on sales in the future. The
"Crime Bill" took effect on September 13, 1994, but none of the Company's
products were banned as so-called "assault weapons." To the contrary, all the
Company's then-manufactured long guns were exempted by name as "legitimate
sporting firearms." The Company remains strongly opposed to laws which would
unduly restrict the rights of law-abiding citizens to acquire firearms for
legitimate purposes. The Company believes that the private ownership of firearms
is guaranteed by the Second Amendment to the United States Constitution and that
the widespread private ownership of firearms in the United States will continue.
However, there can be no assurance that the regulation of firearms will not
become more restrictive in the future and that any such restriction would not
have a material adverse effect on the business of the Company.
The Company is a defendant in certain lawsuits involving its products and
is aware of certain other such claims. The Company has expended significant
amounts of financial resources and management time in connection with product
liability litigation. Management believes that, in every case, the allegations
are unfounded, and that the shootings and any results therefrom were due to
negligence or misuse of the firearm by third parties or the claimant, and that
there should be no recovery against the Company. Defenses further exist to the
suits brought by cities, municipalities and counties based, among other reasons,
on established state law precluding the recovery by municipalities for the
essential government services, the remoteness of the claims, the types of
damages sought to be recovered, and limitations on the extraterritorial
authority which may be exerted by a city, municipality or county under state and
Federal law, including State and Federal Constitutions.
The only case against the Company alleging liability for criminal
shootings by third-parties to ever be permitted to be tried before a jury,
Hamilton, et. al. v. Accu-tek, et. al., resulted in a defense verdict in favor
of the Company on February 11, 1999. In that case, numerous firearms
manufacturers and distributors had been sued, alleging damages as a result of
alleged negligent sales practices and "industry-wide" liability. The Company and
its marketing and distribution practices were exonerated from any claims of
negligence in each of the seven cases decided by the jury. The Court upheld the
verdict of the jury and dismissed each case as to the Company in its later
opinion. The three defendants found liable have filed a notice of appeal from
the Court's decision.
On October 7, 1999 a lawsuit brought against the Company and numerous
firearms manufacturers and distributors by the mayor of Cincinnati, City of
Cincinnati v. Beretta U.S.A. Corp., et. al., was dismissed. This was the first
dismissal of one of the lawsuits which have been filed by certain cities,
municipalities and counties. Since that time, such lawsuits filed by the cities
of Bridgeport, Connecticut and Miami, Florida have been completely dismissed and
those filed by the cities of Chicago and Atlanta have been partially dismissed.
The Cleveland suit has withstood an initial motion to dismiss in the trial
court, and in New Orleans the Court declared legislation passed to prohibit such
suits unconstitutional. The only municipal lawsuit in which substantially all
claims have withstood dismissal by the trial court is the Boston case. Appeals
of all trial court decisions are pending or will be filed when appropriate.
Motions to dismiss other such lawsuits are pending or will be filed when timely.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
The Company's management monitors the status of known claims and the
product liability accrual, which includes amounts for asserted and unasserted
claims. While it is not possible to forecast the outcome of litigation or the
timing of costs, in the opinion of management, after consultation with special
and corporate counsel, it is not probable and is unlikely that litigation,
including punitive damage claims, will have a material adverse effect on the
financial position of the Company, but may have a material impact on the
Company's financial results for a particular period.
In the normal course of its manufacturing operations, the Company is
subject to occasional governmental proceedings and orders pertaining to waste
disposal, air emissions and water discharges into the environment. The Company
believes that it is generally in compliance with applicable environmental
regulations and the outcome of such proceedings and orders will not have a
material adverse effect on its business.
The Company expects to realize its deferred tax assets through tax
deductions against future taxable income or carry back against taxes previously
paid.
Inflation's effect on the Company's operations is most immediately felt
in cost of products sold because the Company values inventory on the LIFO basis.
Generally under this method, the cost of products sold reported in the financial
statements approximates current costs, and thus, reduces distortion in reported
income which would result from the slower recognition of increased costs when
other methods are used. The use of historical cost depreciation has a beneficial
effect on cost of products sold. The Company has been affected by inflation in
line with the general economy.
In 1999, the Company completed an assessment of the Year 2000 issue as it
related to information technology systems, non-information technology
applications, and third parties. Currently, the Company has not experienced any
material Year 2000 problems with its internal systems, and is not aware of any
such problems experienced by its customers, vendors and other third parties.
However, if latent Year 2000 problems exist in internal systems or Year 2000
problems exist with third parties and remain unknown, the Company may experience
an adverse material impact related to Year 2000.
Forward-Looking Statements and Projections
The Company may, from time to time, make forward-looking statements and
projections concerning future expectations. Such statements are based on current
expectations and are subject to certain qualifying risks and uncertainties, such
as market demand, sales levels of firearms, anticipated castings sales and
earnings, the need for external financing for operations or capital
expenditures, the results of pending litigation against the Company including
lawsuits filed by mayors, attorneys general and other governmental entities and
membership organizations, and the impact of future firearms control and
environmental legislation, any one or more of which could cause actual results
to differ materially from those projected. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date made. The Company undertakes no obligation to publish revised
forward-looking statements to reflect events or circumstances after the date
such forward-looking statements are made or to reflect the occurrence of
subsequent unanticipated events.
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<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in prevailing market interest rates
affecting the return on its investments but does not consider this interest rate
market risk exposure to be material to its financial condition or results of
operations. The Company invests primarily in United States Treasury Bills and
United States Treasury Bonds with short-term (less than one year) maturities.
The carrying amount of these investments approximates fair value due to the
short-term maturities. Under its current policies, the Company does not use
derivative financial instruments, derivative commodity instruments or other
financial instruments to manage its exposure to changes in interest rates or
commodity prices.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The nature of the legal proceedings against the Company is discussed in
Note 7 to the condensed consolidated financial statements included in this Form
10-Q report, which is incorporated herein by reference.
The Company has reported all cases instituted against it through March
31, 2000, and the results of those cases, where terminated, to the S.E.C. on its
previous Form 10-K and 10-Q reports, to which reference is hereby made.
The following cases were instituted against the Company during the three
months ended June 30, 2000, which involved significant demands for compensatory
and/or punitive damages:
City of Philadelphia, et. al. v. Beretta U.S.A. Corp., et. al. (PA) in
the Court of Common Pleas of Philadelphia County, Trial Division. The complaint,
which was filed on April 26, 2000, alleges that defendants have created,
contributed to, and maintained a public nuisance by their marketing and
distribution of handguns. The complaint also alleges defendants have
over-supplied the handgun market, allegedly making it possible for illegal
purchasers to obtain handguns. Plaintiffs seek injunctive relief and unstated
compensatory and punitive damages to be determined by the Court.
During the three months ending June 30, 2000, one previously-reported
case was settled:
<TABLE>
<S> <C>
Case Name Jurisdiction
--------- ------------
Williams Louisiana
</TABLE>
The settlement amount was within the Company's limits of its
self-insurance coverage.
15
<PAGE> 16
LEGAL PROCEEDINGS--CONTINUED
The plaintiff's motion for a new trial in the case of B. Smith v. Company
(TX) was denied by the trial court on April 10, 2000. Plaintiff did not further
appeal the defense verdict in favor of the Company after a jury trial which
occurred on January 6, 2000.
The case of Allen v. Company (NY) in which summary judgment had been
granted in the Company's favor on October 5, 1999, was closed when plaintiff
failed to perfect his appeal by May 30, 2000.
On April 26, 2000, the Company, seven other law enforcement firearms
manufacturers, and the National Shooting Sports Foundation filed an action for
injunctive relief in U.S. District Court at Atlanta, GA, against the U.S.
Department of Housing and Urban Development, HUD Secretary Andrew Cuomo,
Attorneys General Elliot Spitzer and Richard Blumenthal, and various mayors of
cities who have illegally conspired to purchase law enforcement firearms only
from companies which first agree to their unilaterally-mandated requirements
which they have no authority to impose. The complaint alleges four counts of
violations of the U.S. Constitution's Commerce Clause and conspiracy to violate
42 U.S.C. Section 1983. (National Shooting Sports Foundation, et. al. v. Andrew
M. Cuomo, et. al.)
16
<PAGE> 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2000 Annual Meeting of the Stockholders of the Company was held on
May 11, 2000. The table below sets forth the results of the votes taken
at the 2000 Annual Meeting:
<TABLE>
<CAPTION>
1. Election of Directors Votes
--------------------- Votes For Withheld
--------- --------
<S> <C> <C>
William B. Ruger 23,545,608 1,317,662
William B. Ruger, Jr. 23,554,954 1,308,316
Stephen L. Sanetti 23,556,939 1,306,331
Richard T. Cunniff 24,664,117 199,153
Townsend Hornor 24,658,695 204,575
Paul X. Kelley 24,660,706 202,564
John M. Kingsley, Jr. 24,667,342 195,928
James E. Service 24,660,874 202,396
Stanley B. Terhune 24,465,835 397,435
2. Ratification of Ernst & Young LLP as Auditors for 2000
------------------------------------------------------
Votes For Votes Against Votes Withheld
--------- ------------- --------------
24,763,532 53,250 46,488
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K -
The Company filed a report on Form 8-K on June 19, 2000 announcing the
sale of the operating assets of its Uni-Cast Division.
17
<PAGE> 18
STURM, RUGER & COMPANY, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 2000
SIGNATURES
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.
STURM, RUGER & COMPANY, INC.
----------------------------------
Date: August 7, 2000 /s/ERLE G. BLANCHARD V.P.
----------------------------------
Erle G. Blanchard
Principal Financial and
Accounting Officer,
Vice President, Controller
18
