1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 0-4776 STURM, RUGER & COMPANY, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 06-0633559 ---------------------------------- ------------------------- (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) Lacey Place, Southport, Connecticut 06490 - --------------------------------------------- ------------------------- (Address of principal executive offices) (Zip code) (203) 259-7843 (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 October 31, 1999: Common Stock, $1 par value - 26,910,720. Page 1 of 22
2 INDEX STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES <TABLE> <CAPTION> PART I. FINANCIAL INFORMATION - ------- --------------------- <S> <C> Item 1. Financial Statements (Unaudited) Condensed consolidated balance sheets--September 30, 1999 and December 31, 1998 3 Condensed consolidated statements of income--Three months ended September 30, 1999 and 1998; Nine months ended September 30, 1999 and 1998 5 Condensed consolidated statements of cash flows--Nine months ended September 30, 1999 and 1998 6 Notes to condensed consolidated financial statements--September 30, 1999 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 PART II. OTHER INFORMATION - -------------------------- Item 1. Legal Proceedings 15 Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19 - ---------- </TABLE> 2
3 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> September 30, December 31, 1999 1998 ------------------ ------------------ (unaudited) (Note) <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents $6,364 $ 4,680 Short-term investments 70,499 43,247 Trade receivables, less allowances for doubtful accounts ($1,367 and $1,299) and discounts ($353 and $1,888) 24,221 23,046 Inventories: Finished products 10,660 13,402 Materials and products in process 27,410 34,150 ------------------ ------------------ 38,070 47,552 Deferred income taxes 10,807 7,999 Prepaid expenses and other assets 1,465 1,091 ------------------ ------------------ TOTAL CURRENT ASSETS 151,426 127,615 Property, plant and equipment 147,958 144,918 Less allowances for depreciation (100,486) (93,833) ------------------ ------------------ 47,472 51,085 Deferred income taxes 3,521 3,400 Other assets 14,579 14,634 ------------------ ------------------ $216,998 $196,734 ================== ================== </TABLE> 3
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> September 30, December 31, 1999 1998 ------------------- ----------------- (unaudited) (Note) <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable and accrued expenses $ 12,744 $ 3,936 Product safety modifications 662 752 Product liability 3,000 3,000 Employee compensation 12,188 11,181 Workers' compensation 4,611 4,173 Income taxes 4,964 2,178 ------------------- ----------------- TOTAL CURRENT LIABILITIES 38,169 25,220 Product liability accrual 17,512 16,950 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 132,162 125,409 Accumulated other comprehensive income (190) (190) ------------------- ----------------- 161,317 154,564 ------------------- ----------------- $216,998 $196,734 =================== ================= </TABLE> Note: - ----- The balance sheet at December 31, 1998 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
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 Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ------------------------------------ ----------------------------------- <S> <C> <C> <C> <C> Firearms sales $42,651 $28,812 $139,518 $107,598 Castings sales 12,793 14,561 41,835 54,293 ----------------- ----------------- ---------------- ---------------- Net sales 55,444 43,373 181,353 161,891 Cost of products sold 39,826 35,440 131,024 120,316 ----------------- ----------------- ---------------- ---------------- 15,618 7,933 50,329 41,575 Expenses: Selling 3,344 3,223 9,823 9,997 General and administrative 1,534 1,386 4,627 4,543 ----------------- ----------------- ---------------- ---------------- 4,878 4,609 14,450 14,540 ----------------- ----------------- ---------------- ---------------- 10,740 3,324 35,879 27,035 Other income-net 993 802 2,610 3,257 ----------------- ----------------- ---------------- ---------------- Income before income taxes 11,733 4,126 38,489 30,292 Income taxes 4,752 1,672 15,588 12,269 ----------------- ----------------- ---------------- ---------------- Net income $ 6,981 $ 2,454 $ 22,901 $ 18,023 ================= ================= ================ ================ Basic and diluted earnings per share $0.26 $0.09 $0.85 $0.67 ===== ===== ===== ===== Cash dividends per share $0.20 $0.20 $0.60 $0.60 ===== ===== ===== ===== </TABLE> See notes to condensed consolidated financial statements. 5
6 STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands) <TABLE> <CAPTION> Nine Months Ended September 30, 1999 1998 --------------------------------------- <S> <C> <C> CASH PROVIDED BY OPERATING ACTIVITIES $ 47,955 $ 21,002 INVESTING ACTIVITIES Property, plant and equipment additions (3,040) (4,608) Purchases of short-term investments (133,603) (95,275) Proceeds from sales or maturities of short-term investments 106,351 94,685 Net proceeds from sale of land 169 1,077 ------------------ ------------------ Cash used in investing activities (30,123) (4,121) ------------------ ------------------ FINANCING ACTIVITIES Dividends paid (16,148) (16,146) Repurchase of common stock - (210) ------------------ ------------------ Cash used in financing activities (16,148) (16,356) ------------------ ------------------ Increase in cash and cash equivalents 1,684 525 Cash and cash equivalents at beginning of period 4,680 4,488 ------------------ ------------------ Cash and cash equivalents at end of period $ 6,364 $ 5,013 ================== ================== </TABLE> See notes to condensed consolidated financial statements. 6
7 STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) September 30, 1999 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 nine months ended September 30, 1999 are not necessarily indicative of the results to be expected for the full year ending December 31, 1999. 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, 1998. 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 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. During 1999, inventory quantities have been reduced. This reduction may result in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the current cost of purchases. Although a reduction in inventory levels is expected to remain through year-end, the effect of a liquidation cannot be quantified at the present time. If a liquidation does occur in 1999, management believes that the impact would not be material to the financial statements. 7
8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED 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 nine months ended September 30, 1999 and 1998 were $15.7 million and $15.1 million, respectively. 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. On May 13, 1999, shareholders approved the 1998 Stock Incentive Plan under which employees may be granted options to purchase shares of the Company's authorized but unissued stock. 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 nine months of 1999 and 1998, total comprehensive income equals net income for the three and nine months ended September 30, 1999 and 1998, or $7.0 million and $2.5 million, and $22.9 million and $18.0 million, respectively. NOTE 7--CONTINGENT LIABILITIES The Company is a defendant in approximately 36 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, manufacturing, 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, assault, 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. 8
9 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED 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 million of loss per occurrence or an aggregate maximum loss of $4 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 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 $2,250,000 per claim, or an aggregate maximum loss $6,500,000. For claims made after July 10, 1994, coverage is provided for losses exceeding $2,000,000 per claim, or an aggregate maximum loss of $6,000,000. For claims made after July 10, 1997, coverage is provided for losses exceeding $2,000,000 per claim, or an aggregate maximum loss of $5,500,000. 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 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 go to 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 May 26, 1999 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. Motions to dismiss other such lawsuits are pending. 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 results of operations or financial condition of the Company. The Company has reported all lawsuits instituted against it through September 30, 1999 and the results of those lawsuits, where terminated, to the S.E.C. in this Form 10-Q and prior Form 10-K and Form 10-Q reports to which reference is hereby made. 9
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 three operating divisions which manufacture and sell titanium, ferrous, and aluminum investment castings. Selected operating segment financial information follows (in thousands): <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------ ----------------- September 30, September 30, ------------- ------------- 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net Sales Firearms $42,651 $28,812 $139,518 $ 107,598 Castings Unaffiliated 12,793 14,561 41,835 54,293 Intersegment 5,116 6,324 19,156 19,939 - ---------------------------------------------------------------------------------------------------------------------------- 17,909 20,885 60,991 74,232 Eliminations (5,116) (6,324) (19,156) (19,939) - ---------------------------------------------------------------------------------------------------------------------------- $55,444 $43,373 $181,353 $161,891 - ---------------------------------------------------------------------------------------------------------------------------- Income (Loss) Before Income Taxes Firearms $10,163 $6,142 $34,337 $23,668 Castings 1,011 (2,342) 2,814 4,901 Corporate 559 326 1,338 1,723 - ---------------------------------------------------------------------------------------------------------------------------- $11,733 $4,126 $38,489 $30,292 - ---------------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> September 30, December 31, 1999 1998 ------------------------------------------- <S> <C> <C> Identifiable Assets Firearms $74,969 $79,633 Castings 37,584 43,760 Corporate 104,445 73,341 ------------------------------------------ $216,998 $196,734 ------------------------------------------ </TABLE> 10
11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- Consolidated net sales of $55.4 million and $181.4 million were achieved by the Company for the three and nine months ended September 30, 1999, respectively. This represents increases of 27.8% and 12.0% from the respective 1998 consolidated net sales of $43.4 million and $161.9 million. Firearms segment net sales increased by $13.9 million or 48.0% in the third quarter of 1999 to $42.7 million from $28.8 million in the third quarter of the prior year. For the nine months ended September 30, 1999, firearms segment net sales increased by $31.9 million or 29.7% to $139.5 million, compared to the corresponding 1998 period. Firearms unit shipments increased 29.4% for the three-month period and 23.7% for the nine-month period ended September 30, 1999 from the comparable 1998 periods. The unit increase reflects continued strong overall market demand. For the nine months ended September 30, 1999, shipments of all major industry product categories increased from the comparable 1998 period. A heightened level of demand for most existing products and the introduction of the Company's Fiftieth Anniversary commemorative models have contributed to the overall increase in firearms unit sales. Demand for pistols and revolvers, which achieved unit growth of 48.5% and 23.3%, respectively, over 1998 levels was especially strong. In 1999, the Company instituted a new sales incentive program for its distributors that allows them to earn rebates of up to 15% if certain annual overall sales targets are achieved. This program replaces programs offered in previous years which rewarded distributors for meeting overall annual sales targets as well as sales targets within specific product lines. Casting segment net sales decreased by 12.1% to $12.8 million in the three months ended September 30, 1999 from $14.6 million in the third quarter of 1998. For the nine months ended September 30, 1999, casting segment net sales decreased $12.5 million or 22.9% to $41.8 million. The reduction in casting segment sales for the three and nine months ended September 30, 1999 from the comparable 1998 periods was attributable to a decrease in golf club heads shipped to Callaway Golf Company, Inc. ("Callaway Golf"). The Company's current long-term contract with Callaway Golf will be completed during the fourth quarter of 1999. No additional long-term supply contract with Callaway Golf is anticipated. The Company anticipates that fourth quarter investment casting sales may be below the level achieved in 1998, and 2000 investment casting sales may be below the level achieved in 1999. Consolidated cost of products sold for the third quarter of 1999 and the nine months ended September 30, 1999 was $39.8 million and $131.0 million compared to $35.4 million and $120.3 million in the corresponding 1998 periods, respectively, representing an increase of 12.4% and 8.9%, respectively. This was primarily attributable to increased sales activities by the firearms segment partially offset by reduced casting segment sales during the third quarter and the nine months ended September 30, 1999. Gross profit as a percentage of net sales increased to 28.2% and 27.8% in the three and nine month periods ended September 30, 1999, respectively, from 18.3% and 25.7% in the corresponding periods of 1998. This improvement is due to increased sales volumes in the firearms segment and pricing increases for selected models effective December 1, 1998 and July 1, 1999. In addition, the level of gross profit achieved in 1998 was adversely affected by a special promotion in September 1998 that allowed for an 11% discount on certain of the Company's rifles as well as significant costs associated with new customers and products in the investment casting segment. 11
12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED Selling, general & administrative expenses increased slightly to $4.9 million in the third quarter of 1999 from $4.6 million in the third quarter of 1998 and remained constant at $14.5 million in the nine month periods ended September 30, 1999 and 1998. Other income-net increased by $0.2 million in the three months ended September 30, 1999 compared to the third quarter of 1998 and decreased $0.6 million in the nine months ended September 30, 1999 compared to the corresponding 1998 period. The increase in the quarter ended September 30, 1999 reflects increased earnings on Treasury bill investments resulting from increased principal. For the nine months ended September 30, 1999, the decrease reflects a gain on the sale of non-manufacturing real estate in the second quarter of 1998. . The effective income tax rate of 40.5% in the third quarter and nine months ended September 30, 1999 is unchanged from corresponding 1998 periods. As a result of the foregoing factors, consolidated net income for the three and nine months ended September 30, 1999 increased to $7.0 million and $22.9 million, respectively, from $2.5 million and $18.0 million for the three and nine months ended September 30, 1998, respectively, representing increases of $4.5 million or 184.5% and $4.9 million or 27.1%, respectively. Financial Condition - ------------------- At September 30, 1999, the Company had cash, cash equivalents and short-term investments of $76.9 million, working capital of $113.3 million and a current ratio of 4.0 to 1. Cash provided by operating activities was $48.0 million and $21.0 million for the nine months ended September 30, 1999 and 1998, respectively. This change in cash flows is principally a result of increased net income, reductions in inventories, and increases in trade accounts payable and accrued expenses in 1999. 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. Shipments made in subsequent months have to be paid for within approximately 90 days. 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 nine months ended September 30, 1999 totaled $3.0 million. For the past two years capital expenditures averaged approximately $1.3 million per quarter. For the fourth quarter of 1999, the Company expects to spend approximately $2 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 nine months ended September 30, 1999 dividends paid totaled $16.1 million. This amount reflects the regular quarterly dividend of $.20 per share paid in March, June and September 1999. On October 26, 1999, 12
13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED the Company declared a regular quarterly dividend of $.20 per share payable on December 15, 1999. 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 1999. The purchase of firearms is subject to 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 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 numerous 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 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 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 results of operations or financial condition of the Company. 13
14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED 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. Some of the Company's computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognizes a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculation causing disruptions of operations, including a temporary inability to process transactions, send invoices, or engage in similar normal business activities. This is commonly referred to as the "Year 2000" issue. The Company has completed its assessment of the Year 2000 issue as it relates to both information technology systems and non-information technology applications. With respect to information technology systems, numerous programs and files on the Company's mainframe computer system have been identified as candidates for conversion. The conversion of these programs and files has been substantially completed. After conversion, these files have been placed in active service and are in use. Additional testing, most of which relates to the financial and accounting functions of the Company, is scheduled for the fourth quarter of 1999. If program failures result or any other unforeseen problems or issues arise with the identified programs or if it is determined that additional programs require remediation, additional personnel from outside the Company may be needed to complete the Year 2000 remediation in a timely manner. The availability of such personnel is unknown. Currently, the Company has not established a formal contingency plan in the event it does not complete all phases of the Year 2000 program. Although the structure of a contingency plan would be dependent on many factors, under most scenarios, the plan would, to a large extent, be comprised of manual work-arounds. The Company has not completed its assessment of Year 2000 issues related to third parties, as approximately one third of third party responses have not yet been received. Thus far, the Company is unaware of any significant issues related to third parties with which it has a material relationship. As the Company is relying on the truthfulness and completeness of third party information and certification, there can be no assurance that the systems of other companies will be converted on time or that any such failure to convert by another company would not have an adverse effect on the Company. 14
15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED Results of the efforts underway and the Company's current assessments continue to indicate that the impact of the Year 2000 remediation relating to information technology, non-information technology and third parties will be immaterial to the Company's future operating results and cash flows. However, the Company will continue to closely monitor and disclose the impact of Year 2000 issues. 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 (including those from titanium golf club components), the need for external financing for operations or capital expenditures, the impact of Year 2000 issues, the results of pending litigation against the Company, 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 and the Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date such forward-looking statements are made or to reflect the occurrence of unanticipated events. 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 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-"CONTINGENT LIABILITIES" to this Form 10-Q report, which is incorporated herein by reference. The Company has reported all cases instituted against it through June 30, 1999, 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 September 30, 1999, which involved significant demands for compensatory and/or punitive damages: 15
16 LEGAL PROCEEDINGS -- CONTINUED Bobby S. Williams, et. al. v. Sturm, Ruger & Company, Inc. et. al. in the District Court of the Parish of Ascension, Louisiana. The complaint, which was served on September 22, 1999, alleges that on or about August 3, 1998, the defendant was injured when he allegedly dropped a revolver manufactured by the Company. Damages and other costs to be determined by the Court are demanded. Camden County Board of Freeholders v. Beretta U.S.A. Corp., et. al. in the District Court of Camden County, New Jersey. The complaint, which was served on September 2, 1999, alleges that handgun manufacturers have created a public nuisance because of allegedly negligent marketing and distribution practices regarding their products. The complaint also alleges design defects in firearms because adolescents and children can obtain and misuse guns. Compensatory, punitive, and treble damages, as well as injunctive relief, are demanded. Christopher T. Martin v. Philip A. Toren, individually, et. al. in the Circuit Court in Palm Beach County, Florida. The complaint, which was served on September 14, 1999, alleges that on or about September 14, 1999, the plaintiff was injured while he was handling a loaded pistol handed to him by the owner of the pistol, resulting in injuries to the plaintiff. Damages in excess of $15,000.00 are demanded. City of Atlanta v. Smith & Wesson, et. al. in the State Court of Fulton County, Georgia. The complaint was made known to the Company on February 5, 1999, but was not served until August 11, 1999. The complaint alleges that all defendants' guns are unreasonably dangerous because they can be fired by unauthorized users, including children, criminals, and mentally unstable persons. Compensatory and punitive damages in an amount to be determined by the Court are demanded. City of Camden v. Beretta U.S.A.Corp., et. al. in the Superior Court in Camden County, New Jersey. The complaint was made known to the Company on June 1, 1999, but was not served as a lawsuit until September 1, 1999. The complaint alleges that the defendants have created a public nuisance because of negligent marketing and distribution practices which allegedly allow guns to be purchased and used by criminals, juveniles, and other prohibited persons in the commissions of crimes. Complaint also alleges a design defect because unauthorized users, including children and adolescents can obtain and misuse guns. Compensatory, punitive, and special damages to be determined by the Court, as well as injunctive relief, are demanded. City of Gary, Indiana, by its Mayor, Scott L. King v. Smith & Wesson Corp., et. al. in Superior Court in Lake, Indiana. The complaint, which was served on September 7, 1999, alleges that the defendants have created a public nuisance due to their negligent marketing and distribution practices, which allegedly enables guns to be purchased by juveniles, criminals, and other prohibited persons. The complaint also alleges design defects in firearms due to allegedly inadequate warnings and lack of safety devices. Compensatory, punitive, general and special damages, as well as preliminary and permanent injunctive relief, are demanded. City of San Francisco, et. al. v. Arcadia Machine & Tool,, Inc. et. al. in the Superior Court of San Francisco, California. The complaint was made known to the Company on May 25, 1999, but was not served until July 28, 1999. The complaint alleges that firearms manufacturers, distributors, and trade associations have created a public nuisance and have contributed to minors, criminals, and other unauthorized users obtaining handguns. The complaint also alleges a violation of the California Business and Professions Code in that the defendants have allegedly failed to incorporate reasonable safety features which would allegedly prevent minors, criminals, or other unauthorized users from using the guns. Injunctive and declaratory relief is demanded. 16
17 LEGAL PROCEEDINGS -- CONTINUED Mayor Sharpe James, and the City of Newark, New Jersey v. Arcadia Machine & Tools, et. al. in the Superior Court of New Jersey in Essex County, New Jersey. The complaint was made known to the Company on June 10, 1999, but was not served until July 23, 1999. The complaint alleges that firearms manufacturers and their agents have allegedly failed to implement safety features which would allegedly prevent unauthorized or unintended users from using the guns. The complaint also alleges that gun manufacturers and their agents have allegedly created a public nuisance by making it easy for juveniles, felons, and other unauthorized users to obtain guns through illegal markets. Punitive and exemplary damages to be determined by the Court are demanded. Melissa M. Halliday, et. al. v. Sturm, Ruger & Company, Inc., et. al. in the Circuit Court in Baltimore, Maryland. The complaint, which was served on July 22, 1999, alleges that the plaintiff's decedent was playing with a loaded pistol which accidentally fired, resulting in fatal injuries to plaintiff's decedent. Compensatory damages in amount of $4,000,000.00 are demanded against defendants. $10,000,000.00 in punitive damages are demanded against the Company. People of the State of California ex. rel. the County of Los Angeles, et. al. v. Arcadia Machine Tool, et. al. in the Superior Court in Los Angeles, California. The complaint, which was served on July 29, 1999, alleges a violation of the California Business and Professions Code in that handgun manufacturers, distributors, retailers and trade associations have created a public nuisance and have contributed to the juveniles, criminals, and unauthorized users obtaining handguns. The complaint also alleges that handgun manufacturers have failed to incorporate reasonable safety features which allegedly would prevent felons, minors or other unauthorized users from using handguns. Preliminary damages to be determined by the Court are demanded, as well as permanent injunctive relief. People of the State of California, by and through attorneys for the cities of Los Angeles, Campton, Inglewood, and West Hollywood, et. al. v. Arcadia Machine & Tool, et. al. in the Superior Court of the State of California. The complaint was made known to the Company on May 25, 1999, but was not served until July 28, 1999. The complaint alleges that handgun manufacturers, distributors, retailers and trade association have allegedly created a public nuisance by allegedly contributing to juveniles and criminals obtaining handguns. The complaint also alleges a violation to the California Business and Professions Code in that handgun manufacturers, distributors, retailers, and trade associations have allegedly failed to implement safety features which would allegedly prevent unauthorized users from using guns. Injunctive and declaratory relief are demanded. During the three months ending September 30, 1999, no previously reported cases were settled. Summary judgment in favor of the Company on all counts was granted in the previously-reported case of Allen v. Company (NY). It is uncertain whether plaintiffs will appeal this dismissal. Litigation of the previously-reported cases of Gerena (NY) and Prosper (NY) has been stayed by Judge Weinstein pending the appeal by the three remaining defendants on the previously-reported Hamilton case (NY), in which the Company was adjudged not to be liable. 17
18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - Exhibit 27 - Financial Data Schedule (b) The Company did not file any reports on Form 8-K during the three months ended September 30, 1999. 18
19 STURM, RUGER & COMPANY, INC. FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 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: November 5, 1999 S/ERLE G. BLANCHARD ---------------- --------------------------------- Erle G. Blanchard Principal Financial and Accounting Officer, Vice President, Controller 19