e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934. |
For the quarterly period ended July 3, 2011
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934. |
For the transition period from to
Commission file number 333-171547
Colt Defense LLC
Colt Finance Corp.
(Exact name of Registrant as specified in its charter)
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Delaware
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32-0031950 |
Delaware
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27-1237687 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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547 New Park Avenue, West Hartford, CT
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06110 |
(Address of principal executive offices)
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(Zip Code) |
(860) 232-4489
(Registrants telephone number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities and 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 þ No o
Indicate by check mark whether the Registrant had submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that
the Registrant was required to submit and post such files). Yes þ No o
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definition of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act (Check one):
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Large accelerated filer o | |
Accelerated filer o | |
Non-accelerated filer þ | |
Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act.) Yes o No þ
The number of shares outstanding of the Registrants common stock as of August 2, 2011 was
none.
PART I FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Colt Defense LLC and Subsidiaries
Consolidated Balance Sheets
(In thousands of dollars)
(Unaudited)
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July 3, 2011 |
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December 31, 2010 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
23,404 |
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$ |
61,444 |
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Restricted cash |
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1,403 |
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671 |
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Accounts receivable, net |
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27,517 |
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15,218 |
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Inventories |
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47,781 |
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31,641 |
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Other current assets |
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2,403 |
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2,709 |
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Total current assets |
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102,508 |
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111,683 |
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Property and equipment, net |
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21,712 |
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21,741 |
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Goodwill |
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15,289 |
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14,950 |
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Intangible assets with finite lives, net |
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7,280 |
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7,484 |
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Deferred financing costs |
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8,726 |
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9,452 |
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Other assets |
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2,184 |
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2,277 |
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Total assets |
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$ |
157,699 |
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$ |
167,587 |
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LIABILITIES AND DEFICIT |
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Current liabilities: |
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Capital lease obligations current portion |
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$ |
1,279 |
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$ |
1,229 |
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Accounts payable |
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11,913 |
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9,180 |
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Accrued expenses |
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8,262 |
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7,270 |
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Pension and retirement obligations current portion |
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893 |
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893 |
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Accrued interest |
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2,950 |
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2,862 |
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Customer advances and deferred income |
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11,831 |
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9,185 |
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Accrued distributions to members |
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15,606 |
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Total current liabilities |
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37,128 |
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46,225 |
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Long-term debt, less current portion |
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247,010 |
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246,838 |
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Capital lease obligations |
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496 |
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1,148 |
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Pension and retirement liabilities |
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12,699 |
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13,261 |
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Other long-term liabilities |
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1,723 |
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1,742 |
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Total long-term liabilities |
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261,928 |
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262,989 |
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Total liabilities |
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299,056 |
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309,214 |
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Commitments and Contingencies (Note 11) |
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Deficit: |
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Accumulated deficit |
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(136,116 |
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(135,187 |
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Accumulated other comprehensive loss |
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(5,241 |
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(6,440 |
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Total deficit |
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(141,357 |
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(141,627 |
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Total liabilities and deficit |
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$ |
157,699 |
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$ |
167,587 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
Colt Defense LLC and Subsidiaries
Consolidated Statements of Operations
(In thousands of dollars)
(Unaudited)
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For the Three Months Ended |
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For the Six Months Ended |
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July 3, 2011 |
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July 4, 2010 |
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July 3, 2011 |
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July 4, 2010 |
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Net sales |
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$ |
36,550 |
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$ |
44,492 |
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$ |
85,047 |
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$ |
100,831 |
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Cost of sales |
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25,535 |
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33,680 |
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60,960 |
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73,485 |
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Gross profit |
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11,015 |
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10,812 |
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24,087 |
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27,346 |
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Selling and commissions |
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2,393 |
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2,421 |
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5,689 |
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5,107 |
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Research and development |
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1,442 |
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1,423 |
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2,169 |
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2,392 |
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General and administrative |
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2,686 |
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2,924 |
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6,163 |
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5,510 |
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Amortization of purchased intangibles |
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138 |
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137 |
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274 |
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273 |
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Operating income |
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4,356 |
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3,907 |
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9,792 |
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14,064 |
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Interest expense |
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5,972 |
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6,222 |
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12,057 |
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12,635 |
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Other (income) expense, net |
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(386 |
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(116 |
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(415 |
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481 |
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Nonoperating expense |
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5,586 |
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6,106 |
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11,642 |
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13,116 |
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(Loss) income from continuing operations before
provision for foreign income taxes |
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(1,230 |
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(2,199 |
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(1,850 |
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948 |
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Provision for foreign income taxes |
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657 |
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421 |
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1,796 |
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874 |
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(Loss) income from continuing operations |
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(1,887 |
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(2,620 |
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(3,646 |
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74 |
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Discontinued operations: |
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Loss from discontinued operations |
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(302 |
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(589 |
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Net loss |
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(1,887 |
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(2,922 |
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(3,646 |
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(515 |
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Less: Net loss from discontinued operations
attributable to non-controlling interest |
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(23 |
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(46 |
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Net loss attributed to Colt Defense LLC members |
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$ |
(1,887 |
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$ |
(2,899 |
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$ |
(3,646 |
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$ |
(469 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
Colt Defense LLC and Subsidiaries
Consolidated Statements of Changes in Cash Flows
(In thousands of dollars)
(Unaudited)
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For the Six Months Ended |
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July 3, 2011 |
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July 4, 2010 |
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Operating Activities |
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Net loss |
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$ |
(3,646 |
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$ |
(515 |
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Adjustments to reconcile net loss to net cash
used in operating activities: |
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Loss from discontinued operations |
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589 |
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Depreciation and amortization |
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2,745 |
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2,190 |
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Amortization of financing fees |
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726 |
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998 |
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Deferred foreign income taxes |
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(162 |
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(115 |
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Gain on sale/disposals of fixed assets |
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(12 |
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(9 |
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Amortization of debt discount |
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172 |
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158 |
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Amortization of deferred income |
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(94 |
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(94 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(11,962 |
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2,738 |
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Inventories |
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(15,841 |
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71 |
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Prepaid expenses and other current assets |
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460 |
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591 |
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Accounts payable and accrued expenses |
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3,698 |
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(7,307 |
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Accrued pension and retirement liabilities |
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(369 |
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(706 |
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Other liabilities, net |
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2,466 |
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919 |
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Net cash used in operating activities from continuing operations |
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(21,819 |
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(492 |
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Net cash used in operating activities from discontinued operations |
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(35 |
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(558 |
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Net cash used in operating activities |
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(21,854 |
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(1,050 |
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Investing Activities |
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Purchases of property and equipment |
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(2,194 |
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(4,054 |
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Proceeds from sale of property |
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12 |
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9 |
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Change in restricted cash |
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(732 |
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266 |
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Net cash used in investing activities |
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(2,914 |
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(3,779 |
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Financing Activities |
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Capital lease obligation payments |
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(602 |
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(567 |
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Distributions paid to members |
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(12,889 |
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Tax distributions paid to members |
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(4,984 |
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Net cash used in financing activities from continuing operations |
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(13,491 |
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(5,551 |
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Net cash used in financing activities from discontinued operations |
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(10 |
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Net cash used in financing activities |
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(13,491 |
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(5,561 |
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Effect of exchange rates on cash |
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219 |
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(133 |
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Change in cash and cash equivalents |
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(38,040 |
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(10,523 |
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Cash and cash equivalents, beginning of period |
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61,444 |
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72,705 |
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Cash and cash equivalents, end of period |
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$ |
23,404 |
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$ |
62,182 |
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Supplemental Disclosure of Cash Flow Information |
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Cash paid during the period for: |
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Interest |
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$ |
11,058 |
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$ |
11,520 |
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Foreign income taxes |
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1,304 |
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2,140 |
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The accompanying notes are an integral part of these consolidated financial statements.
5
Notes to Consolidated Financial Statements (unaudited)
(in thousands of dollars)
Note 1 Basis of Presentation
The accompanying unaudited consolidated financial statements of Colt Defense LLC and Colt Finance
Corp. (the Company, Colt, we, or us) have been prepared in accordance with U.S. generally
accepted accounting principles (GAAP) for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all significant
adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of
the financial position, results of operations and cash flows for the three and six months ended
July 3, 2011 and July 4, 2010 have been included. The financial information included in this
quarterly report on Form 10-Q should be read in conjunction with the consolidated financial
statements and notes in the Companys Registration Statement on Form S-4, as amended, for the
fiscal year ended December 31, 2010, which was filed with the Securities and Exchange Commission on
April 15, 2011. The consolidated balance sheet dated December 31, 2010 included in this quarterly
report on Form 10-Q has been derived from the audited consolidated financial statements at that
time, but does not include all disclosures required by GAAP.
The accompanying consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated. We
have reclassified certain prior year amounts to conform with our current year presentation.
Operating results for the three and six months ended July 3, 2011 are not necessarily indicative of
the results to be expected for any subsequent interim period or for the year ending December 31,
2011.
Recent Accounting Pronouncements
Presentation of Comprehensive Income In June 2011, the Financial Accounting Standards Boards
(FASB) issued ASU 2011-05, which requires an entity to present the total of comprehensive income,
the components of net income, and the components of other comprehensive income either in a single
continuous statement of comprehensive income, or in two separate but consecutive statements. This
update eliminates the option to present components of other comprehensive income as part of the
statement of equity. The amendments in this update do not change the items that must be reported in
other comprehensive income or when an item of other comprehensive income must be reclassified to
net income. This update will be effective for us beginning on January 1, 2012. We do not expect the
adoption of ASU 2011-05 to have a material impact on our operating results or financial position.
Fair Value Measurement In May 2011, FASB issued an amendment to revise the wording used to
describe the requirements for measuring fair value and for disclosing information about fair value
measurements. For many of the requirements, the FASB does not intend for the amendments to result
in a change in the application of existing fair value measurement requirements, such as specifying
that the concepts of the highest and best use and valuation premise in a fair value measurement are
relevant only when measuring the fair value of nonfinancial assets. Other amendments change a
particular principle or requirement for measuring fair value or for disclosing information about
fair value measurements such as specifying that, in the absence of a Level 1 input, a reporting
entity should apply premiums or discounts when market participants would do so when pricing the
asset or liability. The amendment is effective for interim and annual periods beginning after
December 15, 2011. Early adoption is not permitted. We are currently evaluating the impact this
amendment will have, if any, on our financial statements.
Milestone Method of Revenue Recognition In April 2010, the FASB issued authoritative guidance
which allows entities to make a policy election to use the milestone method of revenue recognition
and provides guidance on defining a milestone and the criteria that should be met for applying the
milestone method. The scope of this guidance is limited to the transactions involving milestones
relating to research and development deliverables. The guidance includes enhanced disclosure
requirements about each arrangement, individual milestones and related contingent consideration,
substantive milestones and factors considered in that determination. The amendments are effective
prospectively to milestones achieved in fiscal years, and interim periods within those years,
beginning after June 15, 2010. Early application and retrospective application are permitted. The
adoption of this guidance had no impact on our consolidated financial statements.
Revenue Arrangements with Multiple DeliverablesIn September 2009, the accounting standard for the
allocation of revenue in arrangements involving multiple deliverables was amended. Current
accounting standards require companies to allocate revenue based on the fair value of each
deliverable, even though such deliverables may not be sold separately either by the company itself
or other vendors. The new accounting standard eliminates i) the residual method of revenue
allocation and ii) the requirement that all undelivered elements must have objective and reliable
evidence of fair value before a company can recognize the portion of the overall arrangement fee
that is attributable to items that already have been delivered. This revised accounting standard
was effective for us beginning January 1, 2011 via prospective transition. Early adoption and
retrospective transition are permitted. The adoption of this guidance had no impact on our
consolidated financial statements.
6
Goodwill
The net carrying amount of goodwill may change from period to period as a result of fluctuations in
exchange rates at our Canadian operation.
2010 Revisions
During the first quarter of 2011, we identified a $3.3 million understatement of goodwill related
to our acquisition of Colt Canada and corresponding understatement of deferred tax liabilities.
These understatements are attributable to the initial application of purchase accounting in 2005.
We corrected this immaterial error through revision of our historical financial statements. As a
result, our previously reported December 31, 2010 goodwill and deferred tax liabilities increased
from $11,622 to $14,950 and $248 to $1,644, respectively.
Additionally, our net loss for the three months ended July 4, 2010 decreased from $(2,962) to
$(2,922) and for the first six months of 2010 decreased from $(594) to $(515) due to a reduction on
our tax provision. Our accumulated deficit as of December 31, 2010 decreased from $(136,911) to
$(135,187) to include the historical net income impact of the revision. Based on an analysis of
qualitative and quantitative factors, this error was deemed immaterial to all periods previously
reported.
Note 2 Discontinued Operations
On December 1, 2010, we closed a non-core business located in Delhi, Louisiana, Colt Rapid Mat,
which was engaged in the manufacture and sale of runway repair systems. Accordingly, Colt Rapid
Mat is presented as a discontinued operation in the consolidated financial statements. There was
no buyer for this business and no significant proceeds from the disposition of its assets. In
addition, there were no significant costs nor on-going commitments associated with the closure.
The following table summarizes the components of the discontinued operations for Colt Rapid Mat:
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Three Months Ended |
|
Six Months Ended |
|
|
July 4, 2010 |
|
July 4, 2010 |
Net sales |
|
$ |
|
|
|
$ |
|
|
Loss from discontinued operations |
|
|
(302 |
) |
|
|
(589 |
) |
Additionally, included in the loss from discontinued operations in the Consolidated Statements of
Operations is a net loss attributed to non-controlling interest of $23 and $46 for the three and
six months ended July 4, 2010, respectively.
Note 3 Accounts Receivable
Accounts receivable are net of an allowance for doubtful accounts of $12 and $216 at July 3, 2011
and December 31, 2010, respectively.
Note 4 Inventories
Inventories consist of:
|
|
|
|
|
|
|
|
|
|
|
July 3, 2011 |
|
|
December 31, 2010 |
|
Materials |
|
$ |
25,015 |
|
|
$ |
19,338 |
|
Work in process |
|
|
12,611 |
|
|
|
10,257 |
|
Finished products |
|
|
10,155 |
|
|
|
2,046 |
|
|
|
|
|
|
|
|
|
|
$ |
47,781 |
|
|
$ |
31,641 |
|
|
|
|
|
|
|
|
7
Note 5 Notes Payable and Long-term Debt
On November 10, 2009, Colt Defense LLC (Parent), our parent company, and Colt Finance Corp, a
100%-owned finance subsidiary of Parent, jointly and severally co-issued $250,000 of unsecured
senior notes (the senior notes). Proceeds from the offering of the senior notes were used to
repay the outstanding balances of our then outstanding senior secured credit facility and senior
subordinated notes ($189,281), settle outstanding interest rate swap agreements ($5,395), pay a
prepayment premium on our senior subordinated notes ($581), pay bank legal costs associated with
the prepayment ($9) and pay financing costs ($12,848). The balance of the proceeds was available
for general corporate purposes.
Concurrently with the issuance of the senior notes, we entered into a senior secured credit
facility, consisting of a $50,000 revolving credit line (the revolver). On November 1, 2010, the
revolver was amended to provide for a $10,000 letter of credit facility only.
Senior Notes
The $250,000 senior notes bear interest at 8.75% and mature November 15, 2017. Interest is payable
semi-annually in arrears on May 15 and November 15, commencing on May 15, 2010. We issued the
senior notes at a discount of $3,522 from their principal value. This discount will be amortized as
additional interest expense over the life of the indebtedness. No principal repayments are required
until maturity. However, in the event of a change in control of our company, we are required to
offer to purchase the senior notes at a price equal to 101% of their principal amount, together
with accrued and unpaid interest.
The senior notes are not guaranteed by any of our subsidiaries and do not have any financial
condition covenants that require us to maintain compliance with any financial ratios or
measurements on a periodic basis. The senior notes do contain non-financial condition covenants
that, among other things, limit our ability to incur additional indebtedness, enter into certain
mergers or consolidations, incur certain liens and engage in certain transactions with our
affiliates. Under certain circumstances, we are required to make an offer to purchase our senior
notes offered hereby at a price equal to 100% of the principal amount thereof, plus accrued and
unpaid interest to the date of purchase with the proceeds of certain asset dispositions. In
addition, the indenture restricts our ability to pay dividends or make other Restricted Payments
(as defined in the indenture) to our members, subject to certain exceptions, unless certain
conditions are met, including that (1) no default under the indenture shall have occurred and be
continuing, (2) we shall be permitted by the indenture to incur additional indebtedness and (3) the
amount of distributions to our unit holders may not exceed a certain amount based on, among other
things, our consolidated net income. Such restrictions are not expected to affect our ability to
meet our cash obligations for the next 12 months. Additionally, the senior notes contain certain
cross default provisions with other indebtedness, if such indebtedness in default aggregates to
$20,000 or more.
The outstanding loan balances at July 3, 2011 and December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
July 3, 2011 |
|
|
December 31, 2010 |
|
Senior notes principal amount |
|
$ |
250,000 |
|
|
$ |
250,000 |
|
Unamortized discount |
|
|
(2,990 |
) |
|
|
(3,162 |
) |
|
|
|
|
|
|
|
|
|
|
247,010 |
|
|
|
246,838 |
|
Less: current portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
247,010 |
|
|
$ |
246,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
July 3, 2011 |
|
July 4, 2010 |
|
July 3, 2011 |
|
July 4, 2010 |
Effective interest rate |
|
|
9.0 |
% |
|
|
9.1 |
% |
|
|
9.0 |
% |
|
|
9.1 |
% |
Amortization of discount |
|
$ |
86 |
|
|
$ |
78 |
|
|
$ |
172 |
|
|
$ |
158 |
|
Amortization of deferred financing costs |
|
$ |
363 |
|
|
$ |
458 |
|
|
$ |
726 |
|
|
$ |
916 |
|
Revolver (Senior Secured Credit Facility)
From November 10, 2009 through October 31, 2010, the Company was party to a $50,000 revolver. On
November 1, 2010, the revolver was amended to provide for a $10,000 letter of credit facility only.
The letter of credit facility exists for the sole purpose of supporting our letter of credit
requirements. Loans under the letter of credit facility bear interest at our option at a rate equal
to LIBOR plus 3.75% or an alternate base rate plus 2.75% (with the base rate defined as the higher
of (a) the prime rate or (b) the Federal funds
8
rate plus 0.50% or (c) the one-month LIBOR rate plus 1.00%). The letter of credit facility matures
January 31, 2014. Obligations under this facility are secured by substantially all of our assets.
We are subject to a non-financial condition covenant limiting our maximum capital expenditures made
in the ordinary course of business in any year to $10,000, with provisions to carryover up to
$5,000 of the unused amounts to the succeeding year. We were in compliance with this non-financial
condition covenant as of and through July 3, 2011.
As of July 3, 2011, there were $632 standby letters of credit outstanding against the $10,000
letter of credit facility.
Note 6 Warranty Costs
We generally warrant our military products for a period of one year and record the estimated costs
of such product warranties at the time the sale is recorded. For direct foreign sales, posting a
warranty bond for periods ranging from one to five years is occasionally required. Our estimated
warranty costs are based upon actual past experience, our current production environment as well as
specific and identifiable warranty activity. The warranty reserve is included in current accrued
expenses in the Consolidated Balance Sheets.
A summary
of warranty reserve activity follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 3, 2011 |
|
|
July 4, 2010 |
|
|
July 3, 2011 |
|
|
July 4, 2010 |
|
Balance, at beginning of period |
|
$ |
129 |
|
|
$ |
104 |
|
|
$ |
116 |
|
|
$ |
93 |
|
Net provision charged to operations |
|
|
9 |
|
|
|
12 |
|
|
|
23 |
|
|
|
25 |
|
Payments |
|
|
|
|
|
|
(9 |
) |
|
|
(1 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, at end of period |
|
$ |
138 |
|
|
$ |
107 |
|
|
$ |
138 |
|
|
$ |
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7 Income Taxes
As a limited liability company, we are treated as a partnership for U.S. federal and state income
tax reporting purposes and therefore, are not subject to U.S. federal or state income taxes. Our
taxable income (loss) is reported to our members for inclusion in their individual tax returns.
Our Canadian operation files separate income tax returns in Canada. In any year in which U.S.
taxable income is allocated to the members, and to the extent the Board of Directors determines
that sufficient funds are available, distributions to members equal to 45% of the highest taxable
income allocated to any one unit shall be made.
The provision (benefit) for foreign income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 3, 2011 |
|
|
July 4, 2010 |
|
|
July 3, 2011 |
|
|
July 4, 2010 |
|
Current |
|
$ |
776 |
|
|
$ |
495 |
|
|
$ |
1,958 |
|
|
$ |
989 |
|
Deferred |
|
|
(119 |
) |
|
|
(74 |
) |
|
|
(162 |
) |
|
|
(115 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
657 |
|
|
$ |
421 |
|
|
$ |
1,796 |
|
|
$ |
874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8 Colt Defense LLC Deficit
Our authorized capitalization consists of 1,000,000 common units and 250,000 preferred units.
Common units issued and outstanding as of July 3, 2011 and December 31, 2010 were 132,174. No
preferred units have been issued.
In February 2010, our board declared a special distribution to members up to a maximum amount of
$15,606. During the first quarter of 2011, the final liability was determined to be $12,889. The
reduction in the liability was recognized in accumulated deficit. This distribution was made during
the second quarter of 2011.
Note 9 Pension, Savings and Postretirement Benefits
We have two noncontributory, domestic defined benefit pension plans (the Plans) that cover
substantially all eligible salaried and hourly U.S. employees.
9
We also provide certain postretirement health care coverage to retired U.S. employees who were
subject to our collective bargaining agreement when they were employees. The cost of these
postretirement benefits is determined actuarially and is recognized in our consolidated financial
statements during the employees active working career.
Effective January 1, 2009, we froze the pension benefits under the salaried defined benefit plan.
Accordingly, participants retain the pension benefits already accrued, but no additional benefits
will accrue after the effective date of the freeze.
The components of cost recognized in our Consolidated Statements of Operations for our pension
plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 3, 2011 |
|
|
July 4, 2010 |
|
|
July 3, 2011 |
|
|
July 4, 2010 |
|
Service cost |
|
$ |
72 |
|
|
$ |
87 |
|
|
$ |
144 |
|
|
$ |
206 |
|
Interest cost |
|
|
273 |
|
|
|
281 |
|
|
|
545 |
|
|
|
560 |
|
Expected return on assets |
|
|
(387 |
) |
|
|
(346 |
) |
|
|
(775 |
) |
|
|
(697 |
) |
Amortization of unrecognized
prior service costs |
|
|
43 |
|
|
|
43 |
|
|
|
85 |
|
|
|
85 |
|
Amortization of unrecognized loss |
|
|
124 |
|
|
|
79 |
|
|
|
247 |
|
|
|
167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic cost |
|
$ |
125 |
|
|
$ |
144 |
|
|
$ |
246 |
|
|
$ |
321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of cost recognized in our Consolidated Statements of Operations for our
post-retirement health plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 3, 2011 |
|
|
July 4, 2010 |
|
|
July 3, 2011 |
|
|
July 4, 2010 |
|
Service cost |
|
$ |
64 |
|
|
$ |
76 |
|
|
$ |
129 |
|
|
$ |
148 |
|
Interest cost |
|
|
167 |
|
|
|
170 |
|
|
|
334 |
|
|
|
338 |
|
Curtailment (gain) |
|
|
|
|
|
|
(407 |
) |
|
|
|
|
|
|
(407 |
) |
Amortization of unrecognized
prior service costs |
|
|
(71 |
) |
|
|
(78 |
) |
|
|
(142 |
) |
|
|
(169 |
) |
Amortization of unrecognized loss |
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic cost |
|
$ |
162 |
|
|
$ |
(236 |
) |
|
$ |
324 |
|
|
$ |
(87 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the renewal of our collective bargaining agreement in 2007, effective April
1, 2007, we capped our monthly contribution to the cost of providing retiree health care benefits
at approximately $250 (not in thousands) per employee. For the year ended December 31, 2010, the
cost per month was $212 (not in thousands) per employee. For the six months ended July 3, 2011, the
cost per month was $207 (not in thousands) per employee.
Note
10 Transactions with Related Parties
We have a financial advisory agreement with Sciens Management LLC, an affiliate of Sciens Capital
Management LLC. Under the terms of the agreement, we also reimburse expenses incurred in connection
with the financial advisory services provided. The cost for these advisory services and the
associated expenses are recorded within general and administrative expenses.
We have a license agreement (the License) with New Colt Holding Corp (NCHC), an affiliate, for
the use of certain Colt trademarks. Under the terms of the License, we received a 20-year paid-up
license for the use of the Colt trademarks, which expires December 31, 2023. Thereafter, the
License may be extended for successive five-year periods. Consideration for the License included
the transfer to NCHCs wholly owned subsidiary, Colts Manufacturing of the Colt Match
Target® rifle line of business, inventories of $18 and cash of $2,000. The total value
transferred of $2,018 is recorded in other assets and is being amortized over 20 years. This
intangible had an unamortized balance of $1,261 at July 3, 2011 and $1,311 at December 31, 2010.
Effective July 1, 2007, we entered into a service agreement with Colts Manufacturing, an affiliate
entity, which provides for remuneration for certain factory accounting, data processing and
management services provided by us to Colts Manufacturing. Since January 1, 2009, the annual fee
has been $430. In May 2011, we signed a memorandum of understanding with Colts Manufacturing to
jointly coordinate the marketing and sales of rifles in the commercial market.
10
We also lease our West Hartford facility from an affiliate and we sublease a portion of our
facility to Colts Manufacturing. In addition, Colt Security LLC (Security), a wholly owned
subsidiary of E-Plan Holding, provides security guard services to us.
Note 11 Commitments and Contingencies
A summary of standby letters of credit issued principally in connection with performance and
warranty bonds established for the benefit of certain international customers is as follows:
|
|
|
|
|
|
|
|
|
|
|
July 3, 2011 |
|
December 31, 2010 |
Standby letters of credit secured by restricted cash |
|
$ |
1,358 |
|
|
$ |
654 |
|
Standby letters of credit secured by Revolver |
|
|
632 |
|
|
|
632 |
|
Guarantees of standby letters of credit established
by a sales agent on behalf of Colt |
|
|
804 |
|
|
|
804 |
|
At July 3, 2011 and December 31, 2010, we had unconditional purchase obligations related to
capital expenditures for machinery and equipment of $924 and $950, respectively.
We also had certain Industrial Cooperation Agreements, which stipulate terms of cooperation for
commitment of offsetting business over five to six years for the foreign governments that are party
to the related sales contracts. We generally settle our offset purchase commitment under Industrial
Cooperation Agreements through on-going business and/or cooperating with other contractors on their
spending during the related period. Additionally, we identify future purchases and other
satisfaction plans for the remainder of the offset purchase commitment period and should there be a
projected net purchase commitment after such consideration, we accrue the estimated cost to settle
the offset purchase commitment.
Our remaining gross offset purchase commitment is the total amount of offset purchase commitments
reduced for claims submitted and approved by the governing agencies. At July 3, 2011 and December
31, 2010, our remaining gross offset purchase commitments totaled $44,976 and $25,807,
respectively. We have evaluated our settlement of our remaining gross offset purchase commitments
through probable planned spending and other probable satisfaction plans to determine our net offset
purchase commitment. We have accrued $685 and $412 as of July 3, 2011 and December 31, 2010,
respectively, based on our estimated cost of settling the remaining net offset purchase commitment.
We are involved in various legal claims and disputes in the ordinary course of our business. In
managements opinion, the ultimate disposition of these matters will not have a material adverse
effect on our financial condition, results of operations or cash flows.
Note 12 Segment Information
Our small arms weapons systems segment represents our core business, as substantially all of our
operations are conducted through this segment. Our small arms weapons systems segment consists of
two operating segments which have similar economic characteristics and have been aggregated into
the Companys only reportable segment. The small arms weapons systems segment designs, develops
and manufactures small arms weapons systems for military and law enforcement personnel both
domestically and internationally. In addition, we sell rifles and carbines to our affiliate, Colts
Manufacturing, which resells them into the commercial market.
Management uses Adjusted EBITDA from continuing operations to evaluate the financial performance of
and make operating decisions for the small arms weapons systems segment. See the footnotes that
follow the reconciliation tables below for additional information regarding the adjustments made to
arrive at Adjusted EBITDA from continuing operations of the small arms weapons systems segment.
The following table represents a reconciliation of Adjusted EBITDA from continuing operations to
net (loss) income from continuing operations:
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
Statement of Operations Data: |
|
July 3, 2011 |
|
|
July 4, 2010 |
|
|
July 3, 2011 |
|
|
July 4, 2010 |
|
Adjusted EBITDA from continuing operations |
|
$ |
5,833 |
|
|
$ |
5,149 |
|
|
$ |
12,772 |
|
|
$ |
16,470 |
|
Provision for foreign income taxes |
|
|
(657 |
) |
|
|
(421 |
) |
|
|
(1,796 |
) |
|
|
(874 |
) |
Depreciation and amortization (i) |
|
|
(1,375 |
) |
|
|
(1,134 |
) |
|
|
(2,745 |
) |
|
|
(2,190 |
) |
Interest expense |
|
|
(5,972 |
) |
|
|
(6,222 |
) |
|
|
(12,057 |
) |
|
|
(12,635 |
) |
Sciens fees and expenses (ii) |
|
|
(102 |
) |
|
|
(108 |
) |
|
|
(235 |
) |
|
|
(216 |
) |
Other income (expense), net (iii) |
|
|
386 |
|
|
|
116 |
|
|
|
415 |
|
|
|
(481 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations |
|
$ |
(1,887 |
) |
|
$ |
(2,620 |
) |
|
$ |
(3,646 |
) |
|
$ |
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) |
|
Includes depreciation and amortization of intangible assets. |
|
(ii) |
|
Includes fees and expenses pursuant to our financial advisory
agreement with Sciens Management LLC, an affiliate of Sciens Capital
Management. |
|
(iii) |
|
Includes expenses incurred in connection with prior refinancing
activities, transaction costs incurred in connection with our
contemplated merger and acquisition activities, foreign currency
exchange gains or losses, service income from an affiliate and other
less significant charges not related to on-going operations. |
Geographical Information
Geographic external revenues are attributed to the geographic regions based on the customers
location of origin. Our reported net sales in the United States include revenues that arise from
sales to the U.S. Government under its Foreign Military Sales program, which involve product that
is resold by the U.S. Government to foreign governments and that we generally ship directly to the
foreign government.
The table below presents net sales for specific geographic regions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 3, 2011 |
|
|
July 4, 2010 |
|
|
July 3, 2011 |
|
|
July 4, 2010 |
|
United States |
|
$ |
16,297 |
|
|
$ |
27,994 |
|
|
$ |
36,991 |
|
|
$ |
65,423 |
|
Canada |
|
|
3,909 |
|
|
|
3,192 |
|
|
|
10,232 |
|
|
|
9,855 |
|
Europe |
|
|
10,754 |
|
|
|
7,165 |
|
|
|
22,747 |
|
|
|
14,103 |
|
Latin America |
|
|
1,312 |
|
|
|
3,539 |
|
|
|
2,862 |
|
|
|
5,381 |
|
Asia/Pacific |
|
|
2,082 |
|
|
|
870 |
|
|
|
10,012 |
|
|
|
4,259 |
|
Middle East |
|
|
2,196 |
|
|
|
1,732 |
|
|
|
2,203 |
|
|
|
1,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
36,550 |
|
|
$ |
44,492 |
|
|
$ |
85,047 |
|
|
$ |
100,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets are net fixed assets attributed to specific geographic regions:
|
|
|
|
|
|
|
|
|
|
|
July 3, 2011 |
|
|
December 31, 2010 |
|
United States |
|
$ |
17,853 |
|
|
$ |
18,538 |
|
Canada |
|
|
3,859 |
|
|
|
3,203 |
|
|
|
|
|
|
|
|
|
|
$ |
21,712 |
|
|
$ |
21,741 |
|
|
|
|
|
|
|
|
Major Customer Information
During the three months ended July 3, 2011 and July 4, 2010, sales to the U.S. government accounted
for 27% and 55% of net sales, respectively. Sales to the U.S. government for the six months ended
July 3, 2011 and July 4, 2010 represented 32% and 58% of net sales, respectively.
For the three and six months ended July 3, 2011, one direct foreign customer accounted for 11% and
14% of net sales, respectively. No sales to any one direct foreign customer exceeded 10% of net
sales for either the three or six months ended July 4, 2010.
Note 13 Concentration of risk
Financial instruments, which potentially subject us to concentration of credit risk, consist
primarily of accounts receivable. Accounts receivable due from our most significant customers
were:
12
|
|
|
|
|
|
|
|
|
|
|
July 3, 2011 |
|
December 31, 2010 |
United States Government |
|
$ |
4,390 |
|
|
$ |
1,838 |
|
Government of Netherlands |
|
|
4,402 |
|
|
|
4,211 |
|
Government of Canada |
|
|
1,280 |
|
|
|
1,082 |
|
Government of Denmark |
|
|
112 |
|
|
|
4,745 |
|
Government of Thailand |
|
|
7,247 |
|
|
|
|
|
Government of Norway |
|
|
2,857 |
|
|
|
|
|
Note 14 Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and other current assets and liabilities approximate their fair value due to their short
maturities. The carrying value of our long-term debt of $247,010 and $246,838 at July 3, 2011 and
December 31, 2010, respectively, was recorded at amortized cost. The estimated fair value of
long-term debt of approximately $215,625 and $183,425 at July 3, 2011 and December 31, 2010,
respectively, was based on quoted market prices.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. The inputs used to
measure fair value fall into the following hierarchy:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Unadjusted quoted prices in active markets for similar assets or liabilities, or
unadjusted quoted prices for identical or similar assets or liabilities in markets that are not
active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3: Unobservable inputs for the asset or liability.
As of July 3, 2011 and December 31, 2010, we did not have any financial assets and liabilities
reported at fair value and measured on a recurring basis or any significant nonfinancial assets or
nonfinancial liabilities. Therefore, we did not have any transfers of assets and liabilities
between Level 1 and Level 2 of the fair value measurement hierarchy during the three or six months
ended July 3, 2011.
Note 15 Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized |
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
Prior Service |
|
|
Unrecognized |
|
|
Currency |
|
|
|
|
|
|
Cost |
|
|
Loss |
|
|
Translation |
|
|
Total |
|
Balance, December 31, 2009 |
|
$ |
322 |
|
|
$ |
(7,606 |
) |
|
$ |
1,246 |
|
|
$ |
(6,038 |
) |
Pension liability |
|
|
85 |
|
|
|
(733 |
) |
|
|
|
|
|
|
(648 |
) |
Change in post-retirement health liability |
|
|
(578 |
) |
|
|
(151 |
) |
|
|
|
|
|
|
(729 |
) |
Currency translation |
|
|
|
|
|
|
|
|
|
|
(414 |
) |
|
|
(414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 4, 2010 |
|
|
(171 |
) |
|
|
(8,490 |
) |
|
|
832 |
|
|
|
(7,829 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010 |
|
|
(201 |
) |
|
|
(8,898 |
) |
|
|
2,659 |
|
|
|
(6,440 |
) |
Pension liability |
|
|
85 |
|
|
|
247 |
|
|
|
|
|
|
|
332 |
|
Change in post-retirement health liability |
|
|
(142 |
) |
|
|
3 |
|
|
|
|
|
|
|
(139 |
) |
Currency translation |
|
|
|
|
|
|
|
|
|
|
1,006 |
|
|
|
1,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 3, 2011 |
|
$ |
(258 |
) |
|
$ |
(8,648 |
) |
|
$ |
3,665 |
|
|
$ |
(5,241 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss for the three months ended July 3, 2011 and July 4, 2010 was $1,840 and
$5,694, respectively.
Comprehensive loss for the six months ended July 3, 2011 and July 4, 2010 was $2,447 and $2,306,
respectively.
13
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q, including the documents that we incorporate by reference, contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
that are subject to the safe harbor created by those sections. Any statements about our
expectations, beliefs, plans, objectives, assumptions or future events or our future financial
performance and/or operating performance are not statements of historical fact and reflect only our
current expectations regarding these matters. These statements are often, but not always, made
through the use of words such as may, will, expect, anticipate,believe, intend,
predict, potential, estimate, plan or variations of these words or similar expressions.
These statements inherently involve a wide range of known and unknown uncertainties. Our actual
actions and results may differ materially from what is expressed or implied by these statements.
Factors that could cause such a difference include, but are not limited to, those set forth as
Risk Factors under Section 1A herein and in our Registration Statement on Form S-4 for the fiscal
year ended December 31, 2010, which was filed with the Securities and Exchange Commission on April
15, 2011. Given these factors, you should not rely on forward-looking statements, assume that past
financial performance will be a reliable indicator of future performance nor use historical trends
to anticipate results or trends in future periods. We expressly disclaim any obligation or
intention to provide updates to the forward-looking statements and estimates and assumptions
associated with them.
Certain monetary amounts, percentages and other figures included in this section have been subject
to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the
arithmetic aggregation of the figures that precede them and figures expressed as percentages in the
text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of
the percentages that precede them.
Overview of Our Business
We are one of the worlds leading designers, developers and manufacturers of small arms weapons
systems for individual soldiers and law enforcement personnel. We have supplied small arms weapons
systems to more than 80 countries by expanding our portfolio of products and services to meet
evolving military and law enforcement requirements around the world. Our products have proven
themselves under the most severe battle conditions, including the jungles of Vietnam, the deserts
of the Middle East, the urban centers of Iraq and the mountains of Afghanistan.
We are currently the U.S. militarys sole supplier of the M4 carbine, the U.S. Armys standard
issue rifle, the Canadian militarys exclusive supplier of the C8 carbine and C7 rifle, and a
supplier of small arms weapons systems to U.S., Canadian and international law enforcement
agencies. In addition, we sell rifles and carbines to our affiliate, Colts Manufacturing, which
resells them into the commercial market. Furthermore, our development and sales of M4 carbines and
the more than 45 years of sales of M16 rifles, have resulted in a global installed base of more
than 7.0 million of these small arms weapons systems. Our expertise in developing small arms
weapons systems enables us to integrate new technologies and features into the large installed
base, and diversify our revenue sources by adding related products and services, investing in new
technologies and seeking strategic acquisitions, co-production opportunities and other alliances.
Widely-recognized brand name loyalty and weapons already in stock play a significant role in the
selection process of our customers. We have been a leading supplier of small arms weapons systems
to the U.S. military since the Mexican-American War in 1847 and have supplied our products to
international customers for nearly as long.
Our facilities in West Hartford, Connecticut and Kitchener, Ontario, Canada manufacture and sell
military rifles, carbines and related products and services as well as law enforcement model
products in the United States and internationally.
Results of Operations
The following table sets forth our results of operations in dollars and as a percentage of total
net sales for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 3, 2011 |
|
|
% |
|
|
July 4, 2010 |
|
|
% |
|
|
July 3, 2011 |
|
|
% |
|
|
July 4, 2010 |
|
|
% |
|
Statement of Operations
Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
36,550 |
|
|
|
100.0 |
% |
|
$ |
44,492 |
|
|
|
100.0 |
% |
|
$ |
85,047 |
|
|
|
100.0 |
% |
|
$ |
100,831 |
|
|
|
100.0 |
% |
Cost of sales |
|
|
25,535 |
|
|
|
69.9 |
|
|
|
33,680 |
|
|
|
75.7 |
|
|
|
60,960 |
|
|
|
71.7 |
|
|
|
73,485 |
|
|
|
72.9 |
|
|
|
|
|
|
Gross profit |
|
|
11,015 |
|
|
|
30.1 |
|
|
|
10,812 |
|
|
|
24.3 |
|
|
|
24,087 |
|
|
|
28.3 |
|
|
|
27,346 |
|
|
|
27.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and commissions |
|
|
2,393 |
|
|
|
6.5 |
|
|
|
2,421 |
|
|
|
5.5 |
|
|
|
5,689 |
|
|
|
6.7 |
|
|
|
5,107 |
|
|
|
5.1 |
|
Research and development |
|
|
1,442 |
|
|
|
3.9 |
|
|
|
1,423 |
|
|
|
3.2 |
|
|
|
2,169 |
|
|
|
2.6 |
|
|
|
2,392 |
|
|
|
2.4 |
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 3, 2011 |
|
|
% |
|
|
July 4, 2010 |
|
|
% |
|
|
July 3, 2011 |
|
|
% |
|
|
July 4, 2010 |
|
|
% |
|
General and administrative |
|
|
2,686 |
|
|
|
7.3 |
|
|
|
2,924 |
|
|
|
6.6 |
|
|
|
6,163 |
|
|
|
7.2 |
|
|
|
5,510 |
|
|
|
5.5 |
|
Amortization of purchased
intangibles |
|
|
138 |
|
|
|
0.4 |
|
|
|
137 |
|
|
|
0.3 |
|
|
|
274 |
|
|
|
0.3 |
|
|
|
273 |
|
|
|
0.3 |
|
|
|
|
|
|
Operating income |
|
|
4,356 |
|
|
|
11.9 |
|
|
|
3,907 |
|
|
|
8.8 |
|
|
|
9,792 |
|
|
|
11.5 |
|
|
|
14,064 |
|
|
|
13.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
5,972 |
|
|
|
16.3 |
|
|
|
6,222 |
|
|
|
14.0 |
|
|
|
12,057 |
|
|
|
14.2 |
|
|
|
12,635 |
|
|
|
12.5 |
|
Other (income) expense, net |
|
|
(386 |
) |
|
|
(1.1 |
) |
|
|
(116 |
) |
|
|
(0.3 |
) |
|
|
(415 |
) |
|
|
(0.5 |
) |
|
|
481 |
|
|
|
0.5 |
|
|
|
|
|
|
Nonoperating expenses |
|
|
5,586 |
|
|
|
15.3 |
|
|
|
6,106 |
|
|
|
13.7 |
|
|
|
11,642 |
|
|
|
13.7 |
|
|
|
13,116 |
|
|
|
13.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from
continuing operations
before provision for
foreign income taxes |
|
|
(1,230 |
) |
|
|
(3.4 |
) |
|
|
(2,199 |
) |
|
|
(4.9 |
) |
|
|
(1,850 |
) |
|
|
(2.2 |
) |
|
|
948 |
|
|
|
0.9 |
|
Provision for foreign
income taxes |
|
|
657 |
|
|
|
1.8 |
|
|
|
421 |
|
|
|
0.9 |
|
|
|
1,796 |
|
|
|
2.1 |
|
|
|
874 |
|
|
|
0.9 |
|
|
|
|
|
|
(Loss) income from
continuing operations |
|
|
(1,887 |
) |
|
|
(5.2 |
) |
|
|
(2,620 |
) |
|
|
(5.9 |
) |
|
|
(3,646 |
) |
|
|
(4.3 |
) |
|
|
74 |
|
|
|
0.1 |
|
Loss from discontinued
operations |
|
|
|
|
|
|
0.0 |
|
|
|
(302 |
) |
|
|
(0.7 |
) |
|
|
|
|
|
|
0.0 |
|
|
|
(589 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
Net loss |
|
|
(1,887 |
) |
|
|
(5.2 |
) |
|
|
(2,922 |
) |
|
|
(6.6 |
) |
|
|
(3,646 |
) |
|
|
(4.3 |
) |
|
|
(515 |
) |
|
|
(0.5 |
) |
Less: net loss
attributable to
non-controlling interest |
|
|
|
|
|
|
0.0 |
|
|
|
(23 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
0.0 |
|
|
|
(46 |
) |
|
|
0.0 |
|
|
|
|
|
|
Net loss attributable to
Colt Defense LLC members |
|
$ |
(1,887 |
) |
|
|
(5.2 |
)% |
|
$ |
(2,899 |
) |
|
|
(6.5 |
)% |
|
$ |
(3,646 |
) |
|
|
(4.3 |
)% |
|
$ |
(469 |
) |
|
|
(0.5 |
)% |
|
|
|
|
|
Three and Six Months Ended July 3, 2011 Compared to the Three and Six Months Ended July 4, 2010
Net Sales
The following table shows net sales for the three and six months ended July 3, 2011 and July 4,
2010, respectively, by product category (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
% |
|
|
July 3, 2011 |
|
July 4, 2010 |
|
Change |
|
July 3, 2011 |
|
July 4, 2010 |
|
Change |
|
|
|
|
|
Weapons systems |
|
$ |
22,456 |
|
|
$ |
31,506 |
|
|
|
(28.7 |
)% |
|
$ |
52,951 |
|
|
$ |
72,648 |
|
|
|
(27.1 |
)% |
Spares / other |
|
|
14,094 |
|
|
|
12,986 |
|
|
|
8.5 |
% |
|
|
32,096 |
|
|
|
28,183 |
|
|
|
13.9 |
% |
|
|
|
|
|
Total |
|
$ |
36,550 |
|
|
$ |
44,492 |
|
|
|
(17.9 |
)% |
|
$ |
85,047 |
|
|
$ |
100,831 |
|
|
|
(15.7 |
)% |
|
|
|
|
|
Net sales for the three months ended July 3, 2011 were $36.6 million, a decrease of $7.9 million,
or 17.9%, from $44.5 million in the comparable prior year period. Net sales for the six months
ended July 3, 2011 were $85.0 million, a decrease of $15.8 million, or 15.7%, from $100.8 million
in the comparable prior year period.
Weapons systems sales declined by $9.1 million to $22.5 million in the second quarter of 2011 and
by $19.7 million to $53.0 million in the first six months of 2011 compared to the same periods in
2010. This was mainly due to a decrease in sales of carbines to the U.S. Government of $13.0
million in the second quarter of 2011 and $31.1 million in the first six months of 2011, from the
comparable periods in 2010, due to the expiration of our M4 IDIQ contract on December 31, 2010. This decline was
partially mitigated by increased weapons systems sales to international, law enforcement and
commercial markets as a direct result of our strategy to diversify our sales base.
Spares/other sales increased 8.5% to $14.1 million in the second quarter of 2011 and 13.9% to $32.1
million in the first six months of 2011 compared to the same periods in 2010. The increase in
spares/other sales is due to higher international sales to several countries.
Cost of Sales/Gross Profit
Gross margin for the three months ended July 3, 2011 increased to 30.1% from 24.3% for the three
months ended July 4, 2010. For the first six months of 2011, gross margin increased to 28.3% from
27.1% for the first six months of 2010. Several factors drove the year over year gross margin
improvement. For each of the 2011 periods presented, a favorable sales channel mix generated higher
15
margins versus last year. In addition, our West Hartford facility benefited from lower expenses
related to inventory reserves and higher production levels in the second quarter of
2011 compared to the same period of the prior year.
Selling and Commissions Expense
For the three months ended July 3, 2011, selling and commission expenses of $2.4 million, were in
line with the expenses for the three months ended July 4, 2010. For the first six months of 2011,
selling and commission expenses increased by $0.6 million to $5.7 million compared to the same
period in 2010. The increase was primarily due to higher commission expense as a result of stronger
direct foreign sales in 2011.
Research and Development
For the three months ended July 3, 2011, research and development expenses of $1.4 million, were in
line with the expenses for the three months ended July 4, 2010. For the first six months of 2011,
research and development expenses decreased by $0.2 million to $2.2 million compared to the same
period in 2010.
General and Administrative Expense
During the three months ended July 3, 2011, general and administrative costs were $2.7 million, a
decrease of $0.2 million versus the comparable three months in 2010. The decrease in the second
quarter of 2011 was mainly due to lower compensation and benefits and legal expenses. General and
administrative costs increased $0.7 million from $5.5 million for the six months ended July 4, 2010
to $6.2 million for the six months ended July 3, 2011. For the six month period, the year over
year increase was mainly driven by increased outside professional fees related to the filing of our
Registration Statement on Form S-4 and the project costs associated with our requirements to be
compliant with Section 404 of the Sarbanes-Oxley Act by the end of fiscal 2012.
Interest Expense
Our interest expense for the three months ended July 3, 2011 was $6.0 million, a decrease of $0.2
million from $6.2 million in the three months ended July 4, 2010. For the first six months of 2011,
interest expense was $12.1 million, a $0.5 million decrease from $12.6 million in the first six
months of 2010. In 2010, we had a $50 million revolving credit facility, but in 2011 we only had a
$10 million letter of credit facility. The interest expense and amortization of deferred financing
fees to interest expense is lower in 2011 as a result of the smaller credit facility.
Other (Income) Expense
For the three months ended July 3, 2011, we had other income of $0.4 million compared to other
income of $0.1 million for the three months ended July 4, 2010. For the six months ended July 3,
2011, we had other income of $0.4 million compared to other expense of $0.5 million for the six
months ended July 4, 2010. For both periods, the positive year over year change is primarily
attributable to favorable foreign currency gains and lower merger & acquisition expenses in 2011
compared to 2010.
Income Taxes
We are not subject to U.S. federal or state income taxes. For the second quarter of 2011, we had
foreign income tax expense of $0.7 million compared to $0.4 million for the second quarter of 2010.
Our effective tax rate for the second quarter of 2011 was 53.4% compared to an effective tax rate
of 19.9% for the second quarter of 2010. For the six months ended July 3, 2011, we had foreign
income tax expense of $1.8 million and an effective tax rate of 97.1% compared to foreign income
tax expense of $0.9 million and an effective tax rate of 92.2% for the six months ended July 4,
2010.
The income tax that we incurred results from Canadian federal and provisional income taxes as well
as withholding tax required on the royalty and interest income received from our Canadian
subsidiary. The difference between our consolidated effective tax rate and the U.S. Federal
statutory tax rate, results primarily from U.S. income (loss) being taxable to our members, the
difference between the U.S. and Canadian statutory rates, Canadian non-deductible expenses, and
withholding taxes on Canadian interest and royalty expenses.
Discontinued Operations
We dissolved Colt Rapid Mat as of December 31, 2010. For the three months and six months ended
July 4, 2010, we recognized a loss from this discontinued operation of $0.3 million and $0.6
million, respectively.
16
Liquidity and Capital Resources
Our primary liquidity requirements are for debt service, working capital and capital expenditures.
We have historically funded these requirements through internally generated operating cash flow.
Our cash requirements for working capital are principally to fund accounts receivable and
inventory. U.S. Government receivables, which have historically constituted the majority of our
accounts receivable, are generally collected within 20 days. Payment terms for international orders
are negotiated individually with each customer. As a result, international receivables, a growing
portion of our receivable base, tend to experience a longer collection cycle. To date, we have not
experienced any significant credit losses.
Historically, we have shipped our products as soon as manufacturing and testing was completed. As
a result, we have had low levels of finished products inventory. However, certain large
international orders tend to ship upon completion of large production runs, which can cause greater
fluctuations in our finished goods inventory levels. We experienced higher inventory levels at the
end of the second quarter of 2011 as a result of these orders. Our cash generated from operating
activities is generally a reflection of our operating results adjusted for non-cash charges or
credits such as depreciation and the timing of the collection of accounts receivable and our
investment in inventory. Historically, tax distributions to our members have been made in amounts
equal to 45% of our taxable income, as defined, for the applicable period. Our Governing Board may
also from time to time declare other distributions to our members. In addition, our cash
requirements and liquidity could be impacted by potential acquisitions.
The $250 million senior unsecured outstanding notes bear interest at 8.75% and mature November 15,
2017. Interest is payable semi-annually in arrears on May 15 and November 15, commencing on May
15, 2010. We issued the outstanding notes at a discount of $3.5 million from their principal
value. This discount will be amortized as additional interest expense over the life of the
indebtedness. No principal repayments are required until maturity.
The outstanding notes do not have any financial condition covenants which require us to maintain
compliance with any financial ratios or measurements, however, there are cross default provisions
with other indebtedness, if such indebtedness in default aggregates to $20.0 million or more. The
outstanding notes do contain covenants that, among other things, limit our ability to incur
additional indebtedness, enter into certain mergers or consolidations, incur certain liens and
engage in certain transactions with our affiliates. Under certain circumstances, we are required
to make an offer to purchase our notes offered hereby at a price equal to 100% of the principal
amount thereof, plus accrued and unpaid interest to the date of purchase with the proceeds of
certain asset dispositions. In addition, the indenture restricts our ability to pay dividends or
make other restricted payments (as defined in the indenture) to our members, subject to certain
exceptions, unless certain conditions are met, including that (1) no default under the indenture
shall have occurred and be continuing, (2) we shall be permitted by the indenture to incur
additional indebtedness and (3) the amount of the dividend or payment may not exceed a certain
amount based on, among other things, our consolidated net income. Such restrictions are not
expected to affect our ability to meet our cash obligations for the next 12 months.
From November 10, 2009 through October 31, 2010, the Company was party to a $50.0 million senior
secured revolving credit facility. On November 1, 2010, the senior secured credit facility was
amended to reduce it to a $10.0 million letter of credit facility. The letter of credit facility
exists for the sole purpose of supporting the Companys letter of credit requirements. Loans under
the letter of credit facility bear interest at our option at a rate equal to LIBOR plus 3.75% or an
alternate base rate plus 2.75% (with the base rate defined as the higher of (a) the prime rate or
(b) the Federal funds rate plus 0.50% or (c) the one-month LIBOR rate plus 1.00%). The letter of
credit facility matures January 31, 2014. Obligations under this facility are secured by
substantially all of our assets.
Under the letter of credit facility, we continue to be subject to a covenant limiting our maximum
capital expenditures made in the ordinary course of business in any year to $10.0 million, with
provisions to carryover up to $5.0 million of the unused amount to the succeeding year. As of July
3, 2011, we are in compliance with this covenant. The letter of credit facility matures on January
31, 2014. At July 3, 2011, we had $0.6 million of standby letters of credit outstanding against the
letter of credit facility.
At July 3, 2011, we had cash and cash equivalents totaling $23.4 million. We believe our existing
cash balances and forecasted operating cash flows are sufficient to meet our obligations for the
next twelve months. We are not aware of any significant events or conditions that are likely to
have a material impact on our liquidity.
Cash Flows
The following table sets forth our consolidated cash flows for the six months ended July 3, 2011
and July 4, 2010, respectively ($ in thousands):
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Six Months Ended |
|
|
July 3, 2011 |
|
July 4, 2010 |
Cash used in operating activities |
|
$ |
21,854 |
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|
$ |
1,050 |
|
Cash used in investing activities |
|
|
2,914 |
|
|
|
3,779 |
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Cash used in financing activities |
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|
13,491 |
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|
|
5,561 |
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17
Cash Flows Provided by Operating Activities
Net cash used by operating activities for the six months ended July 3, 2011 was $21.9 million,
compared to net cash used by operating activities of $1.1 million for the six months ended July 4,
2010. This unfavorable variance was partly due to a net loss of $3.6 million in 2011 compared to a
net loss of $0.5 million in 2010.
During the first six months of 2011, we also used $21.5 million of cash to fund changes in
operating assets and liabilities as compared to $3.7 million to fund changes in operating assets
and liabilities during the first six months of 2010. In the first six months of 2011, we used
$15.8 million to fund an increase in inventory primarily related to several large orders that we
expect to ship in the second half of this year.
Additionally in the first six months of 2011, accounts receivable increased by $12.0 million. The
increase in accounts receivable in 2011 was partially due to the timing of sales in the quarters.
In December of 2010, we had a plant shutdown at the end of the year. As a result, most of our
shipments occurred earlier in the month of December and many of our U.S. Government receivables
were paid before the end of the year. In contrast, we billed $4.2 million to the U.S. Government
in the last week of June 2011. In addition, our recent efforts to increase law enforcement and
commercial sales resulted in increased shipments in the second quarter of 2011, with $2.1 million
shipping in the last week of the second quarter of June 2011. The increase in accounts receivable in the second quarter of 2011 was
also related to increased international sales, some of which had longer collection cycles. At the
end of June 2011, we had $7.2 million outstanding on an international sale from the end of the
first quarter, which was subsequently collected in the first week of July 2011.
The increases in accounts receivable and inventory were partially offset by increases in accounts
payable and accrued expenses and other liabilities, net. The increase in accounts payable and
accrued expenses is mainly due to increased accounts payable, which is related to our higher
inventory levels. The increase in other liabilities, net is primarily due to increased customer
deposits.
In the first six months of 2010, we used $3.7 million to fund changes in operating assets and
liabilities. Accounts payable and accrued expenses decreased by $7.3 million, primarily due to a
significant decline in sales from the fourth quarter of 2009 to the second quarter of 2010. The
decline in accounts payable and accrued expenses was partially offset by a $2.7 million decrease in
accounts receivable, which was also related to lower sales and a $0.9 increase on other
liabilities, net, which was attributable to increased deferred revenue at Colt Canada.
Cash Flows Used in Investing Activities
Net cash used in investing activities for both periods presented were principally for capital
expenditures. These capital expenditures reflect our ongoing initiative to expand our
manufacturing capabilities, upgrade our machinery and equipment and improve our overall
manufacturing efficiency. We expect our full-year capital expenditures for 2011 to be approximately
$5.0 $7.0 million.
Capital expenditures for the six months ended July 3, 2011 were $2.2 million, which included $1.4
million for the purchase of equipment associated with contracts awarded for new products including
the M240 machine gun and M249 barrel. For the six months ended July 4, 2010, capital expenditures
were $4.1 million, primarily for manufacturing machinery and equipment to modernize our West
Hartford facility and to support new contracts.
In addition to our capital expenditures, we used $0.7 million of cash to fund an increase in
restricted cash to secure standby letters of credit during the first six months of 2011. This compares to a $0.3 million decrease in
restricted cash during the first six months of 2010.
Cash Flows Used in Financing Activities
Net cash used in financing activities was $13.5 million for the first six months of 2011 compared
to $5.6 million for the first six months of 2010. Payments on capital lease obligations were $0.6
million in both years. For the first six months of 2011, we paid a $12.9 million distribution to
our members compared to a $5.0 million tax distribution to our members in the first six months of
2010.
Backlog
Because a substantial portion of our business is of a build-to-order nature, we generally have a
significant backlog of orders to be shipped. Our backlog increased by 31.0% from $165.7 million at
December 31, 2010 to $217.0 million at July 3, 2011, primarily due to a large international order
that we received during the first quarter of 2011. We expect
approximately 67% of our backlog of
orders as of July 3, 2011 to be shipped over the next twelve months.
18
Recent Issued Accounting Standards
Presentation of Comprehensive Income In June 2011, the Financial Standards Boards (FASB)
issued ASU 2011-05, which requires an entity to present the total of comprehensive income, the
components of net income, and the components of other comprehensive income either in a single
continuous statement of comprehensive income, or in two separate but consecutive statements. This
update eliminates the option to present components of other comprehensive income as part of the
statement of equity. The amendments in this update do not change the items that must be reported in
other comprehensive income or when an item of other comprehensive income must be reclassified to
net income. This update will be effective for us beginning on January 1, 2012. We do not expect the
adoption of ASU 2011-05 to have a material impact on our operating results or financial position.
Fair Value Measurement In May 2011, FASB issued an amendment to revise the wording used to
describe the requirements for measuring fair value and for disclosing information about fair value
measurements. For many of the requirements, the FASB does not intend for the amendments to result
in a change in the application of existing fair value measurement requirements, such as specifying
that the concepts of the highest and best use and valuation premise in a fair value measurement are
relevant only when measuring the fair value of nonfinancial assets. Other amendments change a
particular principle or requirement for measuring fair value or for disclosing information about
fair value measurements such as specifying that, in the absence of a Level 1 input, a reporting
entity should apply premiums or discounts when market participants would do so when pricing the
asset or liability. The amendment is effective for interim and annual periods beginning after
December 15, 2011. Early adoption is not permitted. We are currently evaluating the impact this
amendment will have, if any, on our financial statements.
Milestone Method of Revenue Recognition - In April 2010, the FASB issued authoritative guidance
which allows entities to make a policy election to use the milestone method of revenue recognition
and provides guidance on defining a milestone and the criteria that should be met for applying the
milestone method. The scope of this guidance is limited to the transactions involving milestones
relating to research and development deliverables. The guidance includes enhanced disclosure
requirements about each arrangement, individual milestones and related contingent consideration,
substantive milestones and factors considered in that determination. The amendments are effective
prospectively to milestones achieved in fiscal years, and interim periods within those years,
beginning after June 15, 2010. Early application and retrospective application are permitted. The
adoption of this guidance had no impact on our consolidated financial statements.
Revenue Arrangements with Multiple DeliverablesIn September 2009, the accounting standard for the
allocation of revenue in arrangements involving multiple deliverables was amended. Current
accounting standards require companies to allocate revenue based on the fair value of each
deliverable, even though such deliverables may not be sold separately either by the company itself
or other vendors. The new accounting standard eliminates i) the residual method of revenue
allocation and ii) the requirement that all undelivered elements must have objective and reliable
evidence of fair value before a company can recognize the portion of the overall arrangement fee
that is attributable to items that already have been delivered. This revised accounting standard
was effective for us beginning January 1, 2011 via prospective transition. Early adoption and
retrospective transition are permitted. The adoption of this guidance had no impact on our
consolidated financial statements.
Critical Accounting Policies and Estimates
The preparations of our financial statements requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. The Companys reaffirms
the significant accounting policies as disclosed in Note 2 of the Notes to the Consolidated
Financial Statements in our Registration Statement on Form S-4 for the fiscal year ended December
31, 2010, which was filed with the Securities and Exchange Commission on April 15, 2011.
Contractual Obligations
As of July 3, 2011, there have been no material changes to our contractual obligations outside the
ordinary course of our business since December 31, 2010.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exposure
We are subject to foreign currency exchange risks relating to receipts from customers, payments to
suppliers and some intercompany transactions. As a matter of policy, we do not engage in currency
speculation and therefore, we have no derivative financial instruments to hedge this exposure. In
our Consolidated Statements of Operations, we have foreign currency gains of $0.3 million for the
six months ended July 3, 2011 and foreign currency losses of $0.3 million for the six months ended
July 4, 2010. The foreign currency amounts reported in the Consolidated Statement of Operations
may change materially should our international business continue to grow or if changes in the
Canadian dollar or Euro versus the U.S. dollar fluctuate materially.
19
Interest Rate Exposures
We had no variable rate debt outstanding at July 3, 2011.
ITEM 4. CONTROLS AND PROCEDURES
Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness
of our internal control over financial reporting. The Company is not currently required to comply
with Section 404 but will be required to do so prior to the filing of our annual report on Form
10-K for the year ended December 31, 2012. In preparation for compliance with Section 404 and the
rules promulgated thereunder, we may identify deficiencies with respect to our internal controls
over financial reporting, and any such deficiencies may be material.
Our principal executive officer and principal financial officer have evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)), as of July 3, 2011. Based on
such evaluation, they have concluded that as of such date, our disclosure controls and procedures
are effective and designed to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in applicable SEC rules and forms, and that such information is
accumulated and communicated to management, including our principal executive officer and principal
financial officer, to allow timely decisions regarding required disclosure.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to legal proceedings, claims and disputes arising from the ordinary course
of its business. In managements opinion, the ultimate disposition of these matters will not have a
material adverse effect on our financial condition, results of operations or cash flows.
Item 1A. Risk Factors
You should carefully consider the risks described below together with all of the other information
included in this report. These risks could have a material adverse effect on our business,
financial position or results of operations. The following risk factors may not include all of the
important factors that could affect our business or our industry or that could cause our future
financial results to differ materially from historic or expected results. If any of the following
risks occur, you could lose all or part of your investment in, and the expected return on, our
senior unsecured notes.
Risks related to our business
We make a significant portion of our sales to a limited number of customers, and a decrease in
sales to these customers could have a material adverse effect on our business.
A significant portion of our net sales is derived from a limited number of customers. For the six
months ended July 3, 2011, our top ten customers represented approximately 87% of our net sales.
Our two largest customers accounted for approximately 46% of our net sales for the six months ended
July 3, 2011. Although we expect sales to those two customers to continue to decrease as a
percentage of total net sales for the full year ending December 31, 2011, we expect to continue to
derive a significant portion of our business from sales to a relatively small number of customers.
If we were to lose one or more of our top customers, or if one or more of these customers
significantly decreased orders for our products, our business would be materially and adversely
affected.
We are subject to risks related to a lack of product revenue diversification.
We derive a substantial percentage of our net sales from a limited number of products, especially
our M4 carbine and related small arms weapons systems, and we expect these products to continue to
account for a large percentage of our net sales in the near term. Continued market acceptance of
these products is, therefore, critical to our future success. We cannot predict how long the M4
carbine and related products will continue to be the primary small arms weapons system of choice
for the U.S. Government and certain of our other customers. Our business, operating results,
financial condition, and cash flows could be adversely affected by:
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a decline in demand for the M4 carbine and related small arms weapons systems; |
20
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a failure to achieve continued market acceptance of our key products; |
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export restrictions or other regulatory, legislative or multinational actions which
could limit our ability to sell those products to key customers or market segments,
especially existing and potential international customers; |
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improved competitive alternatives to our products gaining acceptance in the markets
in which we participate; |
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increased pressure from competitors that offer broader product lines; |
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technological change that we are unable to address with our products; or |
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a failure to release new or enhanced versions of our products to our military or
other customers on a timely basis. |
Any of the above events could impact our ability to maintain or expand our business with certain
customers.
In addition, a contractual requirement that the U.S. Army purchase the M4 carbine and critical
spare parts exclusively from us expired on June 30, 2009 and our IDIQ contract with the U.S. Army
for the M4 carbine expired on December 31, 2010. The Army has recently awarded contracts for spare
parts to a competitor following a competitive solicitation. We can give no assurance that the U.S.
military will not select other small arms manufacturers to supply the M4 carbine, or spare parts,
for use by U.S. military personnel in the future or that such competing manufacturers will not be
able to leverage that position to compete with us in other markets. In addition, we can give no
assurance that the U.S. military will not purchase other small arms weapons systems, supplied by
other manufacturers, in lieu of the M4 carbine.
Our U.S. and Canadian Government contracts are generally multi-year contracts that are funded by
government appropriations annually. A reduction in the defense budget of our government
customers would have a material adverse effect on our business.
Our primary contracts with the U.S. Government are indefinite delivery, indefinite quantity
contracts under which the customer places orders at its discretion. Although these contracts
generally have a four- or five-year term, they are funded annually by government appropriations.
Furthermore, our primary contracts with the Canadian Government are funded annually by Canadian
Government appropriations. Agreements with other foreign governments may also have similar
conditions or may otherwise be dependent on initial or continued funding by such governments.
Accordingly, our net sales from year to year with respect to such customers are dependent on annual
appropriations and subject to uncertainty. The U.S. Governments ability to place orders under our
most recent IDIQ contract for the M4 carbine expired on December 31, 2010.
The U.S. or Canadian Government, or a foreign government, may decide to reduce government defense
spending in the programs in which we participate. Sovereign budget deficits are likely to put
long-term pressure on defense budgets in many of the European countries to which we sell our
products. There can be no assurances that the amount spent on defense by countries to which we sell
our products will be maintained or that individual defense agencies will allocate a percentage of
their budget for the purchase of small arms. The loss of, or significant reduction in, government
funding, for any program in which we participate, could have a material adverse effect on our sales
and earnings and thus negatively affect our business.
We may not receive the full amount of orders authorized under indefinite delivery, indefinite
quantity contracts.
Our contracts with the U.S. Government are ordinarily indefinite delivery, indefinite quantity
(IDIQ) contracts under which the U.S. Government may order up to a maximum quantity specified in
the contract but is only obligated to order a minimum quantity. We may incur capital or other
expenses in order to be prepared to manufacture the maximum quantity that may not be fully recouped
if the U.S. Government orders a smaller amount. The U.S. Government may order less than the
maximum quantity for any number of reasons, including a decision to purchase the same product from
others despite the existence of an IDIQ contract. Our failure to realize anticipated revenues from
IDIQ contracts could negatively affect the results of our operations.
Our dependence on government customers, including foreign governments, could result in
significant fluctuations in our period-to-period performance.
Our operating results and cash flow are materially dependent upon the timing of securing government
contracts and manufacturing and delivering products according to our customers timetables.
Similar uncertainty and volatility in the timing of orders is likely to continue to affect our net
sales. We do not recognize sales until delivery of the product or service has occurred and title
and risk of loss have passed to the customer, which may be in a non-U.S. location. This may extend
the period of time during which we carry inventory and may result in an uneven distribution of net
sales from these contracts between periods. As a result, our period-to-period
performance may fluctuate significantly, and you should not consider our performance during any
particular period as indicative of longer-term results.
21
In addition, we are subject to business risks specific to companies engaged in supplying
defense-related equipment and services to the U.S. Government and other governments. These risks
include the ability of the U.S. Government and other government counterparties to suspend or
permanently prevent us from receiving new contracts or from extending existing contracts based on
violations or suspected violations of procurement laws or regulations, terminate our existing
contracts or not purchase the full agreed-upon number of small arms weapons systems or other
products to be delivered by us.
Government contracts are subject to competitive bidding, and bidding for such contracts may
require us to incur additional costs.
We expect to obtain a greater portion of our U.S. Government and other government contracts in the
future through a competitive bidding process than has been the case in the recent past due to the
expiration on June 30, 2009 of the U.S. Armys contractual obligation to purchase the M4 carbine
exclusively from us. We may not win all of the contracts for which we compete and, even if we do,
these contracts may not result in a profit. We are also subject to risks associated with the
substantial expense, time and effort required to prepare bids and proposals for competitively
awarded contracts that may not be awarded to us. In addition, our customers may require terms and
conditions that require us to reduce our price or provide more favorable terms if we provide a
better price or terms under any other contract for the same product. Such most favored nation
clauses could restrict our ability to profitably compete for government and other contracts.
Our government contracts are subject to audit and our business could suffer as a result of a
negative audit by government agencies.
As a U.S. and Canadian Government contractor, we are subject to financial audits and other reviews
by the U.S. and Canadian Governments of our costs, performance, accounting and other business
practices relating to certain of our significant U.S. and Canadian Government contracts. We are
audited and reviewed on a continual basis. Based on the results of their audits, the U.S. and
Canadian Governments may challenge the prices we have negotiated for our products, our procurement
practices and other aspects of our business practices. Although adjustments arising from
government audits and reviews have not caused a material decline in our results of operations in
the past, future audits and reviews may have such effects. In addition, under U.S. and Canadian
Government purchasing regulations, some of our costs, including most financing costs, amortization
of intangible assets, portions of our research and development costs, and some marketing expenses
may not be reimbursable or allowed in our negotiation of fixed-price contracts. Further, as a U.S.
and Canadian Government contractor, we are subject to a higher risk of investigations, criminal
prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities than
purely private sector companies, the results of which could cause our results of operations to
suffer.
As a U.S. and Canadian Government contractor, we are subject to a number of procurement rules and
regulations.
We must comply with and are affected by laws and regulations relating to the award, administration,
and performance of our U.S. and Canadian Government contracts. Government contract laws and
regulations affect how we do business with our customers and vendors and, in some instances, impose
added costs on our business. In many instances, we are required to self-report to the responsible
agency if we become aware of a violation of applicable regulations. In addition, we have been, and
expect to continue to be, subjected to audits and investigations by government agencies regarding
our compliance with applicable regulations. A violation of specific laws and regulations could
result in the imposition of fines and penalties or the termination of our contracts or debarment
from bidding on future contracts. These fines and penalties could be imposed for failing to follow
procurement integrity and bidding rules, employing improper billing practices or otherwise failing
to follow cost accounting standards, receiving or paying kickbacks, filing false claims, or failing
to comply with other applicable procurement regulations. Additionally, the failure to comply with
the terms of our government contracts also could harm our business reputation. It also could
result in payments to us being withheld. If we violate specific laws and regulations, it could
result in the imposition of fines and penalties or the termination of our contracts or debarment
from bidding on contracts, which could have a material adverse effect on our net sales and results
of operations.
Our contracts with foreign governments often contain ethics and other requirements that subject us
to some of the same risks. Violation of those contractual terms could interfere with our ability
to collect payment under the contract. Also, we and our representatives are required to comply
with numerous laws and regulations, including the U.S. Foreign Corrupt Practices Act and similar
anti-bribery laws in other jurisdictions.
The defense industry is highly competitive, and this competitiveness may limit our ability to win
and retain government contracts.
We face significant domestic and international competition for government contracts. Some
competitors have greater financial, technical, marketing, manufacturing and distribution resources
than we do, or may have broader product lines. Our ability to compete
22
for government contracts depends on our ability to offer better product performance than our
competitors at a lower cost and on the readiness and capacity of our facilities, equipment and
personnel to produce quality products on a consistent and timely basis. In addition, some of our
competitors may operate in less regulated countries or environments and therefore have advantages
over us in certain situations.
Our government and other sales contracts contain termination provisions such that they can be
cancelled at any time at the governments sole discretion.
U.S. Government and other government counterparties may terminate contracts with us either for
their convenience or if we default by failing to perform. Termination for convenience provisions
generally would enable us to recover only our costs incurred or committed, and settlement expenses
and profit on the work completed, prior to termination. Termination for default provisions do not
permit these recoveries and make us liable for excess costs incurred by the U.S. Government or
other government counterparties in procuring undelivered items from another source. In addition, a
termination arising out of our default could expose us to liability and have a material adverse
effect on our ability to compete for future contracts and orders.
We may lose money on our fixed unit price contracts, and our contract prices may be adjusted to
reflect price reductions or discounts that are requested by our customers.
We provide our products and services primarily through fixed unit price contracts. In a fixed unit
price contract, we provide our products and services at a predetermined price, regardless of the
costs we incur. Accordingly, we must fully absorb any increases in our costs that occur during the
life of the contract, notwithstanding the difficulty of estimating all of the costs we will incur
in performing these contracts and in projecting the ultimate level of sales that we may achieve.
Our failure to estimate costs accurately, including as a result of price volatility relating to raw
materials, or to anticipate technical problems of a fixed unit price contract may reduce our
profitability or cause a loss. From time to time, we have also accommodated our customers
requests for price reductions or discounts in the past, and customers may continue to make such
requests in the future.
Our long-term growth plan includes the expansion of our global operations. Such global expansion
may not prove successful, and may divert significant capital, resources and management time and
attention and could adversely affect our ongoing operations.
Net direct sales to customers outside the United States accounted for approximately 56.8% of our
net sales for the six months ended July 3, 2011. We intend to continue expanding our international
presence, which we expect to grow at a faster rate than our U.S. sales. Expanding our
international presence will require our managements time and attention and may detract from our
efforts in the United States and our other existing markets and adversely affect our operating
results in these markets. Our products and overall marketing approach may not be accepted in other
markets to the extent needed to continue the profitability of our international operations. Any
further international expansion will likely intensify our risks associated with conducting
international operations, including:
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difficulty in predicting the timing of international orders and shipments; |
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increased liquidity requirements as a result of bonding or letters of credit
requirements; |
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unexpected changes in regulatory requirements; |
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changes in foreign legislation; |
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multinational agreements restricting international trade in small arms weapons
systems; |
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possible foreign currency controls, currency exchange rate fluctuations or
devaluations; |
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tariffs; |
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difficulties in staffing and managing foreign operations; |
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difficulties in obtaining and managing vendors and distributors; |
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potential negative tax consequences; |
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greater difficulties in protecting intellectual property rights; |
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greater potential for violation of U.S. and foreign anti-bribery and export-import
laws; and |
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difficulties collecting or managing accounts receivable. |
General economic and political conditions in these foreign markets may also impact our
international net sales, as such conditions may cause customers to delay placing orders or to
deploy capital to other governmental priorities. These and other factors may have a material
adverse effect on our future international net sales.
Some of our contracts with foreign governments are or will be subject to the fulfillment of
offset commitment or industrial cooperation agreement that could impose additional costs on us
and that we might not be able to timely satisfy, possibly resulting in the assessment of
penalties or even debarment from doing further business with that government.
Some countries that we are or are planning on doing business with impose offset purchase
commitments, or industrial cooperation commitments in return for purchasing our products and
services. These commitments vary from country to country and generally require us to commit to
make direct or indirect purchases, investments or other satisfaction methods of an investment in
the local economy The gross amount of the offset purchase commitment is typically a function of
the value of the related sales contract to date. Although certain approved purchases qualify for a
multiplier of satisfaction, failure to timely satisfy the purchase commitment also can lead to a
penalty of additional offset purchase requirements based on a multiplier. Each offset program is
measured against a schedule that requires performance within a specified period. Some countries we
do business with require a direct investment in the country, often by in-country manufacture of
part or all of the products sold, the transfer of manufacturing technology or both. Others allow
for offsets to be satisfied indirectly by our purchasing unrelated products manufactured
in-country. Sometimes, offset purchase commitments can be traded to other parties holding credits,
but doing so incurs a transaction cost that is typically 3% of the commitment. For certain
countries we may do business with in the future, the commitment cannot be traded and must be
fulfilled with direct or indirect purchases. Failure to satisfy offset purchase commitments can
result in penalties or blacklisting against awards of future contracts. We have paid penalties
that were assessed by foreign governments and incurred transaction costs to trade credits to
satisfy offset purchase commitments in the past. We may be subject to future penalties or
transaction costs or even disbarment from doing business with a government.
In order for us to sell our products overseas, we are required to obtain certain licenses or
authorizations, which we may not be able to receive or retain.
Export licenses are required for us to export our products from the United States and Canada and
issuance of an export license lies within the discretion of the issuing government. In the United
States, substantially all of our export licenses are processed and issued by the Directorate of
Defense Trade Controls (DDTC) within the U.S. Department of State. In the case of large
transactions, DDTC is required to notify Congress before it issues an export license. Congress may
take action to block the proposed sale. As a result, we may not be able to obtain export licenses
or to complete profitable contracts due to domestic political or other reasons that are outside of
our control. We cannot be sure, therefore, of our ability to obtain the governmental
authorizations required to export our products. Furthermore, our export licenses, once obtained,
may be terminated or suspended by the U.S. or Canadian Government at any time. Failure to receive
required licenses or authorizations or any termination or suspension of our export privileges could
have a material adverse effect on our financial condition, results of operations and cash flow.
We face risks associated with international currency exchange.
While we transact business primarily in U.S. dollars and bill and collect most of our sales in U.S.
dollars, a portion of our net sales results from goods that are purchased, in whole or in part,
from foreign customers, primarily in Canadian dollars and Euros, thereby exposing us to some
foreign exchange fluctuations. In the future, customers may make or require payments in non-U.S.
currencies, such as the Canadian dollar and the Euro or other currencies.
Fluctuations in foreign currency exchange rates could affect the sale of our products or the cost
of goods and operating margins and could result in exchange losses. In addition, currency
devaluation can result in a loss to us if we hold deposits of that currency. Hedging foreign
currencies can be difficult, especially if the currency is not freely traded. We do not enter into
any market risk sensitive instruments for trading purposes. We cannot predict the impact of future
exchange rate fluctuations on our operating results.
While part of our strategy is to pursue strategic acquisitions, we may not be able to identify
businesses that we can acquire on acceptable terms, we may not be able to obtain necessary
financing or may face risks due to additional indebtedness, and our acquisition strategy may
incur significant costs or expose us to substantial risks inherent in the acquired businesss
operations.
Our strategy of pursuing strategic acquisitions may be negatively impacted by several risks,
including the following:
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We may not successfully identify companies that have complementary product lines or
technological competencies or that can diversify our revenue or enhance our ability to
implement our business strategy. |
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We may not successfully acquire companies if we fail to obtain financing, or to
negotiate the acquisition on acceptable terms, or for other related reasons. |
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We may incur additional expenses due to acquisition due diligence, including legal,
accounting, consulting and other professional fees and disbursements. Such additional
expenses may be material, will likely not be reimbursed and would increase the aggregate
investment cost of any acquisition. |
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Any acquired business will expose us to the acquired companys liabilities and to
risks inherent to its industry. We may not be able to ascertain or assess all of the
significant risks. |
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We may require additional financing in connection with any future acquisition. Such
financing may adversely impact, or be restricted by, our capital structure and our
ability to pay amounts owed under the notes when due and payable. Increasing our
indebtedness could increase the risk of a default that would entitle the holder to
declare all of such indebtedness due and payable, as well as the risk of cross-defaults
under other debt facilities. |
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Achieving the anticipated potential benefits of a strategic acquisition will depend
in part on the successful integration of the operations, administrative infrastructures
and personnel of the acquired company or companies in a timely and efficient manner.
Some of the challenges involved in such an integration include: |
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demonstrating to the customers of the acquired company that the consolidation
will not result in adverse changes in quality, customer service standards or
business focus; |
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preserving important relationships of the acquired company; |
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coordinating sales and marketing efforts to effectively communicate the expanded
capabilities of the combined company; and |
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coordinating the supply chains. |
Any integration is expected to be complex, time-consuming and expensive and may harm the
newly-consolidated companys business, financial condition and results of operations.
We intend to incur additional costs to develop new products and variations that diversify our
product portfolio, and we may not be able to recover these additional costs.
The development, of additional products and product variations, is speculative and may require
additional and, in some cases, significant expenditures for marketing, research, development and
manufacturing equipment. The new products or product variations that we introduce may not be
successful, or they may not generate an amount of net sales that is sufficient to fully recover the
additional costs incurred for their development. In addition, we may not successfully develop
technical data packages (TDPs) for new products or product variations with proprietary
intellectual property rights that are superior to products offered by other companies.
Our intellectual property rights are valuable, and any inability to protect them could reduce the
value of our products, services and brand.
We license the Colt trademarks and service marks from New Colt Holding Corp. (New Colt), an
affiliate of one of our sponsors that we do not control. There are events that are outside of our
control that pose a risk to these intellectual property rights, including the bankruptcy of New
Colt, or the licensing of the trademarks and service marks to manufacturers that tarnish the
quality, reputation and goodwill of these marks, actions or omissions by New Colt that abandon or
forfeit some or all of its rights to these marks or that diminish the value of the marks, failure
by New Colt to take appropriate action to deter infringement of these marks, and certain breaches
by New Colt of the agreement governing our license to these marks. Any of the foregoing acts or
omissions could impair our use of the Colt trademarks or their value and harm our business.
Despite our efforts to protect our proprietary technology, unauthorized persons may be able to
copy, reverse engineer or otherwise use some of our proprietary technology. It also is possible
that others will develop and market similar or better technology to compete
with us. Furthermore, existing intellectual property laws may afford only limited protection, and
the laws of certain countries do not protect proprietary technology as well as United States law.
For these reasons, we may have difficulty protecting our proprietary technology against
unauthorized copying or use, and the efforts we have taken or may take to protect our proprietary
rights may not be sufficient or effective. Significant impairment of our intellectual property
rights could harm our business or our ability to compete. Protecting our intellectual property
rights is costly and time consuming and we may not prevail. In addition, prosecuting certain
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claims could depend, in part, on the participation of New Colt, and any delay or refusal to
cooperate in such dispute could adversely prejudice our rights. Our intellectual property rights
are valuable, and any inability to protect them could reduce the value of our products, services
and brand.
If we lose key management or are unable to attract and retain qualified individuals required for
our business, our operating results and growth may suffer.
Our ability to operate our business is dependent on our ability to hire and retain qualified senior
management. Our senior management is intimately familiar with our small arms weapons systems and
those offered by our competitors, as well as the situations in which small arms weapons systems are
utilized in combat and law enforcement activities. Our senior management also brings an array of
other important talents and experience to the Company, including managerial, financial,
governmental contracts, sales, legal and compliance. We believe their backgrounds, experience and
knowledge gives us expertise that is important to our success. Losing the services of these or
other members of our management team, particularly if they depart the Company to join a
competitors business, could harm our business and expansion efforts. The Companys success also
is dependent on its ability to hire and retain technically skilled workers. Competition for some
qualified employees, such as engineering professionals, is intense and may become even more
competitive in the future. If we are unable to attract and retain qualified employees, our
operating results, growth and ability to obtain future contracts could suffer.
Misconduct by employees or agents could harm us and is difficult to detect and deter.
Our employees or agents may engage in misconduct, fraud or other improper activities that could
have adverse consequences on our prospects and results of operations, including engaging in
violations of the U.S. Arms Export Control Act or Foreign Corrupt Practices Act or numerous other
state and federal laws and regulations, as well as the corresponding laws and regulations in the
foreign jurisdictions into which we sell products. Misconduct by employees or agents, including
foreign sales representatives, could include the export of defense articles or technical data
without an export license, the payment of bribes in order to obtain business, failures to comply
with applicable U.S. or Canadian Government or other foreign government procurement regulations,
violation of government requirements concerning the protection of classified information and
misappropriation of government or third-party property and information. The occurrence of any such
activity could result in our suspension or debarment from contracting with the government
procurement agency, as well as the imposition of fines and penalties, which would cause material
harm to our business. It is not always possible to deter misconduct by agents and employees and
the precautions we take to detect and prevent this activity may not be effective in all cases.
Failure to comply with applicable firearms laws and regulations in the U.S. and Canada could have
a material adverse effect on our business.
As a firearms manufacturer doing business in the U.S. and Canada, we are subject to the National
Firearms Act and the Gun Control Act in the U.S. and the Firearms Act in Canada, together with
other federal, state or provincial, and local laws and regulations that pertain to the manufacture,
sale and distribution of firearms in and from the U.S. and Canada. In the U.S., we are issued a
Federal Firearms License by, and pay Special Occupational Taxes, to the Bureau of Alcohol, Tobacco,
Firearms and Explosives of the U.S. Department of Justice to be able to manufacture firearms and
destructive devices in the U.S. Similarly, in Canada, we are issued a Business Firearms License by
the Chief Provincial Firearms Officer of Ontario, to enable us to manufacture firearms and
destructive devices in Canada. These federal agencies also require the serialization of receivers
or frames of our firearm products and recordkeeping of our production and sales. Our places of
business are subject to compliance inspections by these agencies. Compliance failures, which
constitute violations of law and regulation, could result in the assessment of fines and penalties
by these agencies, including license revocation. Any curtailment of our privileges to manufacture,
sell, or distribute our products could have a material adverse effect on our business.
Third parties may assert that we are infringing their intellectual property rights.
Although we do not believe our business activities infringe upon the rights of others, nor are we
aware of any pending or contemplated actions to such effect, it is possible that one or more of our
products infringe, or any of our products in development will infringe, upon the intellectual
property rights of others. We may also be subject to claims of alleged infringement of
intellectual property rights asserted by third parties whose products or services we use or combine
with our own intellectual property and for which we may have no right to intellectual property
indemnification. Our competitors may also assert that our products infringe intellectual property
rights held by them. Moreover, as the number of competitors in our markets grows, the possibility
of an intellectual property infringement claim against us may increase. In addition, because
patent applications are maintained under conditions of
confidentiality and can take many years to issue, our products may potentially infringe upon patent
applications that are currently pending of which we are unaware and which may later result in
issued patents. If that were to occur and we were not successful in obtaining a license or
redesigning our products, we could be subject to litigation.
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Regardless of the merits of any infringement claims, intellectual property litigation can be
time-consuming and costly. Determining whether a product infringes a patent involves complex legal
and factual issues that may require the determination of a court of law. An adverse finding by a
court of law may require us to pay substantial damages or prohibit us from using technologies
essential to our products covered by third-party intellectual property, or we may be required to
enter into royalty or licensing agreements that may not be available on terms acceptable to us, if
at all. Inability to use technologies or processes essential to our products could have a material
adverse effect on our financial condition, results of operations and cash flow.
Our manufacturing facilities may experience disruptions adversely affecting our financial
position and results of operations.
We currently manufacture our products primarily at our facilities in West Hartford, Connecticut and
Kitchener, Ontario, Canada. Any natural disaster or other serious disruption at these facilities
due to a fire, electrical outage or any other calamity could damage our capital equipment or
supporting infrastructure or disrupt our ability to ship our products from, or receive our supplies
at, either of these facilities. Any such event could materially impair our ability to manufacture
and deliver our products. Even a short disruption in our production output could delay shipments
and cause damage to relationships with customers, causing them to reduce or eliminate the amount of
products they purchase from us. Any such disruption could result in lost net sales, increased
costs and reduced profits.
We lease our West Hartford facility from an affiliate of one of our sponsors. The term of this
lease expires October 25, 2012. This lease does not provide for renewal of the term and after the
stated lease maturity we may not be able to continue to occupy that property on acceptable terms or
be able to find suitable replacement manufacturing facilities on satisfactory terms and conditions.
If we must find new facilities, we may be required to incur construction and similar costs,
including architect, legal and other costs, which may be significant, and to remediate
environmental conditions, which might require us to provide indemnifications and post bonds or
other collateral, among other measures. In addition, if we were to relocate a substantial distance
from our current facility, we might lose the services of administrative and factory personnel who
are familiar with our operations and could experience difficulty attracting qualified replacements
on a timely basis or at all. Any disruption in our business or manufacturing operations resulting
from the relocation of our West Hartford facility or otherwise could result in lost net sales,
increased costs (including increased rent payments) and reduced profits.
Labor disruptions by our employees could adversely affect our business.
The United Automobile, Aerospace & Agricultural Implement Workers of America (UAW) represents our
West Hartford work force pursuant to a collective bargaining agreement that expires on March 31,
2012. It is possible that a new agreement to replace the expiring agreement will not be reached
without a work stoppage or strike or will not be reached on terms satisfactory to us. Labor
organizing activities could result in additional employees becoming unionized. Any prolonged work
stoppage or strike at either of our manufacturing facilities or unexpected increases in labor costs
could materially harm our results of operations. Additionally, the workforce of Colts
Manufacturing, an affiliate of one of our sponsors that we do not control, shares space with us at
our West Hartford manufacturing facility, and is subject to the same UAW collective bargaining
agreement as our West Hartford employees. Labor stoppages may occur in the future. Union action
asserted against Colts Manufacturing could also adversely affect our operations.
We may incur higher employee medical costs in the future.
Our employee medical plans are self-insured. As of July 3, 2011, the average age of the production employees
working in our West Hartford, CT facility is 55 years. Approximately 25% of those employees are age
65 or over. While our medical costs in recent years have generally increased at the same level as
the national average, the age of our workforce could result in higher than anticipated future
medical claims, resulting in an increase in our costs beyond what we have experienced. We have stop
loss coverage in place for catastrophic events, but the aggregate impact may have an effect on our
profitability.
We may be unable to realize expected benefits from our cost reduction efforts and our
profitability may be hurt or our business otherwise might be adversely affected.
In order to operate more efficiently and control costs, we have historically and continue to
evaluate various cost reduction initiatives, including workforce reductions. These plans are
intended to generate operating expense savings through direct and indirect overhead expense
reductions as well as other savings. We may undertake further workforce reductions or cost saving
actions in the future. If we do not successfully manage these activities, the expected efficiencies
and benefits might be delayed or not realized, and our operations and business could be disrupted.
Risks associated with these actions and other workforce management issues include delays in
implementation of anticipated workforce reductions, additional unexpected costs, adverse effects on
employee morale and the failure to meet operational targets due to the loss of employees, any of
which may impair our ability to achieve anticipated cost reductions or
may otherwise harm our business, which could have a material adverse effect on our cash flows,
competitive position, financial condition or results of operations.
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Significant risks are inherent in the day-to-day operations in our business.
The day-to-day activities of our business involve the operation of machinery and other operating
hazards, including worker exposure to lead and other hazardous substances. As a result, our
operations can cause personal injury or loss of life, severe damage to and destruction of property
and equipment, and interruption of our business. In addition, our weapon systems are designed to
kill and therefore can cause accidental damage, injury or death or can potentially be used in
incidents of workplace violence.
We could be named as a defendant in a lawsuit asserting substantial claims upon the occurrence of
any of these events. Although we maintain insurance protection in amounts we consider to be
adequate, this insurance could be insufficient in coverage and may not be effective under all
circumstances or against all hazards to which we may be subject. If we are not fully insured
against a successful claim, there could be a material adverse effect on our financial condition and
result of operations.
Our West Hartford, Connecticut facility is inspected from time to time by the U.S. Occupational
Safety and Health Administration and similar agencies. We have been cited for violation of U.S.
occupational safety and health regulations in the past and could be cited again in the future. A
violation of these regulations can result in substantial fines and penalties. We are subject to
similar regulations at our Canadian manufacturing facility.
Environmental laws and regulations may subject us to significant costs and liabilities.
We are subject to various U.S. and Canadian environmental, health and safety laws and regulations,
including those related to the discharge of hazardous materials into the air, water or soil and the
generation, storage, treatment, handling, transportation, disposal, investigation and remediation
of hazardous materials. Certain of these laws and regulations require our facilities to obtain and
operate under permits or licenses that are subject to periodic renewal or modification. These
laws, regulations or permits can require the installation of pollution control equipment or
operational changes to limit actual or potential impacts to the environment. A violation of these
laws, regulations or permit conditions can result in substantial fines or penalties.
Certain environmental laws impose strict as well as joint and several liability for the
investigation and remediation of spills and releases of hazardous materials and damage to natural
resources, without regard to negligence or fault on the part of the person being held responsible.
In addition, certain laws require and we have incurred costs for, the investigation and remediation
of contamination upon the occurrence of certain property transfers or corporate transactions. We
are potentially liable under these and other environmental laws and regulations for the
investigation and remediation of contamination at properties we currently or have formerly owned,
operated or leased and at off-site locations where we may be alleged to have sent hazardous
materials for treatment, storage or disposal. We may also be subject to related claims by private
parties alleging property damage or personal injury as a result of exposure to hazardous materials
at or in the vicinity of these properties. Environmental litigation or remediation, new laws and
regulations, stricter or more vigorous enforcement of existing laws and regulations, the discovery
of unknown contamination or the imposition of new or more stringent clean-up requirements may
require us to incur substantial costs in the future. As such, we may incur material costs or
liabilities in the future.
Our sponsors control us and may have conflicts of interest with us or you now or in the future.
Through their respective affiliates Sciens Management LLC and funds managed by an affiliate of The
Blackstone Group, L.P., beneficially own a substantial portion of the Companys limited liability
company interests. Under the terms of the Companys limited liability company agreement, our
sponsors and our union have the right to appoint our Governing Board and our sponsors, subject to
maintaining certain equity ownership levels, have specified veto or approval rights which may be
exercised in their discretion. As such, our sponsors have the ability to prevent specified
transactions that might be in the best interests of the noteholders or to cause the Company to
engage in transactions in which the sponsors have interests that might conflict with the interests
of the noteholders. Members of the Companys Governing Board are not required to abide by the same
standard of care under the Delaware Limited Liability Company Act as the standard of care required
of directors of a Delaware corporation. Additionally, Sciens Management LLC and The Blackstone
Group are in the business of making investments in companies and may from time to time acquire and
hold interests in businesses that may directly or indirectly compete with or otherwise be adverse
to us. They may also pursue acquisition opportunities that may be complementary to our business
and, as a result, those acquisition opportunities may not be available to us.
We may have to utilize significant cash to meet our unfunded pension obligations, and
post-retirement health care liabilities and these obligations are subject to increase.
Our union employees at our West Hartford facility participate in our defined benefit pension plan.
We also have a salaried pension plan, the benefits of which were frozen on January 1, 2009. At
July 3, 2011, our aggregate unfunded pension liability totaled $1.2
million. Declines in interest rates or the market values of the securities held by the plans, or
other adverse changes, could materially increase the underfunded status of our plans and affect the
level and timing of required cash contributions. To the extent we use cash to reduce these
unfunded liabilities, the amount of cash available for our working capital needs would be reduced.
Under
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the Employee Retirement Income Security Act of 1974, as amended, or ERISA, the Pension
Benefit Guaranty Corporation, or PBGC, has the authority to terminate an underfunded tax-qualified
pension plan under limited circumstances. In the event our tax-qualified pension plans are
terminated by the PBGC, we could be liable to the PBGC for the underfunded amount and, under
certain circumstances, the liability could be senior to the notes.
We also have a post-retirement health plan for our union employees. The post-retirement health
plan is unfunded. We derive post-retirement benefit expense from an actuarial calculation based on
the provisions of the plan and a number of assumptions provided by us including information about
employee demographics, retirement age, future health care costs, turnover, mortality, discount
rate, amount and timing of claims, and a health care inflation trend rate. In connection with the
renewal of our collective bargaining agreement in 2004, we capped the monthly cost of providing
retiree health care benefits at approximately $206 (not in thousands) per employee per month. In
connection with the renegotiation of our union contract effective April 2007, the cap was raised to
approximately $250 (not in thousands) per employee per month. For the six months ended July 3,
2011, the cost per employee per month was $207 (not in thousands). The unfunded post-retirement
health care benefit obligation was $12.4 million at July 3, 2011.
Because we are not currently subject to the reporting requirements of the Securities Exchange Act
of 1934 or the Sarbanes-Oxley Act of 2002, we have not, either alone or with our auditors,
performed an evaluation or an audit of our internal controls over financial reporting.
Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness
of our internal control over financial reporting. The Company is not currently required to comply
with Section 404 but will be required to do so prior to the filing of our annual report on Form
10-K for the year ending December 31, 2012. In preparation for compliance with Section 404 and the
rules promulgated thereunder, we may identify deficiencies with respect to our internal controls
over financial reporting, and any such deficiencies may be material.
We have a substantial amount of indebtedness, which could have a material adverse effect on our
financial health and our ability to obtain financing in the future and to react to changes in our
business.
We now have, and will continue to have, a substantial amount of indebtedness, which requires
significant principal and interest payments. As of July 3, 2011, we had approximately $248.8
million of debt outstanding. Such amounts do not include $9.4 million of borrowings available
under our letter of credit as of July 3, 2011. As of July 3, 2011, we had a total deficit of
approximately $141.4 million.
Our significant amount of indebtedness could have important consequences to holders of the notes.
For example, it could:
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make it more difficult for us to pay our debts, including payment on the notes, as
they become due, especially during general negative economic and market industry
conditions because if our net sales decrease due to general economic or industry
conditions, we may not have sufficient cash flow from operations to make our scheduled
debt payments; |
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increase our vulnerability to adverse economic, regulatory and general industry
conditions; |
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require us to dedicate a substantial portion of our cash flow from operations to
payments on our debt, which would reduce the availability of our cash flow from
operations to fund working capital, capital expenditures, acquisitions or other general
corporate purposes; |
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limit our flexibility in planning for, or reacting to, changes in our business and
industry in which we operate and, consequently, place us at a competitive disadvantage
to our competitors with less debt; |
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limit our ability to obtain additional debt or equity financing, particularly in the
current economic environment; and |
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increase our cost of borrowing. |
Despite our current levels of debt, we may still incur substantially more debt. This could
further exacerbate the risks described above.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future.
The terms of the indenture and our letter of credit facility do not fully prohibit us or our
subsidiaries from doing so. If we incur any additional indebtedness that ranks
equally with the notes, the holders of that debt will be entitled to share ratably in any proceeds
distributed in connection with any insolvency, liquidation, reorganization, dissolution or other
winding-up of us. This may have the effect of reducing the amount of proceeds paid to holders of
our notes. For example, we have up to $9.4 million of availability under our letter of credit
facility. All of those borrowings are secured indebtedness.
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Although covenants under the indenture governing the notes and the letter of credit facility limit
our ability to incur certain additional indebtedness, these restrictions are subject to a number of
qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions
could be substantial. If we add new debt to our current debt levels, the related risks that we now
face could intensify, making it less likely that we will be able to fulfill our obligations to
holders of the notes. The subsidiaries that guarantee the notes are also guarantors under the
letter of credit facility.
We may not be able to generate enough cash to service our indebtedness and may be forced to take
other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on, or to refinance, our debt and to fund planned capital
expenditures and pursue our acquisition strategy will depend on our ability to generate cash. This
is subject, in part, to general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control. Accordingly, our business may not generate sufficient cash
flows from operations to enable us to pay our indebtedness, including the notes, or to fund our
other liquidity needs. In addition, we will be permitted to make certain distributions to our
members, including distributions in amounts based on their allocated taxable income and gains. Any
such payments may reduce our ability to make payments on our debt, including the notes.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we
may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional
capital or restructure or refinance our indebtedness, including the notes. We may not be able to
take any of these actions, these actions may not be successful enough to permit us to meet our
scheduled debt service obligations or these actions may not be permitted under the terms of our
existing or future debt agreements, including the letter of credit facility or the indenture that
will govern the notes. In the absence of such operating results and resources, we could face
substantial liquidity problems and might be required to dispose of material assets or operations to
meet our debt service and other obligations. The letter of credit facility and the indenture that
govern the notes restrict our ability to dispose of assets and use the proceeds from the
disposition. We may not be able to consummate those dispositions or to obtain the proceeds that we
could realize from them, and these proceeds may not be adequate to meet any debt service
obligations then due.
If we cannot make scheduled payments on our debt, we will be in default and, as a result:
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our debt holders could declare all outstanding principal and interest to be due and
payable; |
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the lenders under our letter of credit facility could terminate their commitments to
lend us money and foreclose against the assets securing their borrowings; and |
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we could be forced into bankruptcy or liquidation, which could result in holders of
our notes losing their investment in our notes. |
Our ability to bid for large contracts may depend on our ability to obtain performance guarantees
from financial institutions.
In the normal course of our business we may be asked to provide performance guarantees to our
customers in relation to our contracts. Some customers may require that our performance guarantees
be issued by a financial institution in the form of a letter of credit, surety bond or other
financial guarantee. A deterioration of our credit rating and financial position may prevent us
from obtaining such guarantees from financial institutions or make the process more difficult or
expensive. If we are not able to obtain performance guarantees or if such performance guarantees
were to become expensive, we could be prevented from bidding on or obtaining certain contracts or
our profit margins with respect to those contracts could be adversely affected, which could in turn
have a material adverse effect on our revenue, financial condition and results of operations.
We may not be able to finance a change of control offer required by the indenture.
If we were to experience specific kinds of change of control events, we are required to offer to
purchase all of the notes then outstanding at 101% of their principal amount, plus accrued and
unpaid interest to the date of repurchase. If a change of control were to occur, we may not have
sufficient funds to purchase the notes. In fact, we expect that we would require third-party debt
or equity financing to purchase all of such notes, but we may not be able to obtain that financing
on favorable terms or at all. Further, our ability to repurchase the notes may be limited by law.
Any of our future senior secured indebtedness, including our letter of credit facility, would
likely restrict our ability to repurchase the notes, even when we are required to do so by the
indenture in connection with a change of control. A change of control could
therefore result in a default under such senior secured indebtedness and could cause the
acceleration of our debt. The inability to repay such debt, if accelerated, and to purchase all of
the tendered notes, would constitute an event of default under the indenture.
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Any of our future senior secured indebtedness, including our letter of credit facility, would
likely restrict our ability to repurchase the notes, even when we are required to do so by the
indenture in connection with a change of control. A change of control could therefore result in a
default under such senior secured indebtedness and could cause the acceleration of our debt. The
inability to repay such debt, if accelerated, and to purchase all of the tendered notes, would
constitute an event of default under the indenture.
Holders of the notes may not be able to determine when a change of control giving rise to their
right to have the notes repurchased has occurred following a sale that potentially constitutes a
sale of substantially all of our assets.
The definition of change of control in the indenture governing the notes includes a phrase relating
to the sale of all or substantially all of our assets. There is no precise established
definition of the phrase substantially all under applicable law. Accordingly, the ability of a
holder of notes to require us to repurchase its notes as a result of a sale of less than all of our
assets to another person may be uncertain.
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Item 6. Exhibits
The following list of exhibits includes exhibits submitted with this Form 10-Q as filed with the
Securities and Exchange Commission and those incorporated by reference to other fillings.
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10.1
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Memorandum of Understanding Regarding Distribution of Colt Law Enforcement and Commercial
Rifles, dated as of May 1, 2011, between Colt Defense LLC and Colts Manufacturing Company LLC* |
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31.1
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Certification of Gerald R. Dinkel pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
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31.2
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Certification of Scott B. Flaherty pursuant to Section 302 of Sarbanes-Oxley Act of 2002.* |
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31.3
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Certification of Cynthia J. McNickle pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
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101.INS
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XBRL Instance Document*
(File name: coltdef-20110703.xml) |
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101.SCH
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XBRL Taxonomy Extension Schema Document*
(File name: coltdef-20110703.xsd) |
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document*
(Filename: coltdef-20110703_cal.xml) |
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase Document*
(File name: coltdef-20110703_def.xml) |
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101.LAB
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XBRL Taxonomy Extension Label Linkbase Document*
(File name: coltdef-20110703_lab.xml) |
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document*
(File name: coltdef-20110703_pre.xml) |
Notes to Exhibits List:
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* |
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Submitted electronically herewith. |
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business
Reporting Language): (i) Consolidated Balance Sheets at July 3, 2011 and December 31, 2010, (ii)
Consolidated Statements of Operations for the three and six months ended July 3, 2011 and July 4,
2010, (iii) Consolidated Statements of Cash Flows for the six months ended July 3, 2011 and July 4,
2010 and (iv) Notes to the Consolidated Financial Statements. In accordance with Rule 406T of
Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q
shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise
subject to the liability of that section, and shall not be part of any registration statement or
other document filed under the Securities Act or the Exchange Act, except as shall be expressly set
forth by specific reference in such filing.
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Signatures
Pursuant to the requirements of the Securities Act of 1934, the registrants have duly caused
this report to be signed on its behalf by the undersigned, hereunto duly authorized, in West
Hartford, Connecticut, on the 3rd day of August, 2011.
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COLT DEFENSE LLC |
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COLT FINANCE CORP. |
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By:
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/s/ Scott B. Flaherty |
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Scott B. Flaherty |
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Senior Vice President and Chief Financial Officer |
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