-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ev5t+Klx9HkCCgFlnf/eSE6kqTvUJRXXATxCPAwhaMFSruPgoiOhDOWgcw08WRWE e6qLEbbdjiZxyYxV15QRsw== 0000950123-00-002623.txt : 20000324 0000950123-00-002623.hdr.sgml : 20000324 ACCESSION NUMBER: 0000950123-00-002623 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STURM RUGER & CO INC CENTRAL INDEX KEY: 0000095029 STANDARD INDUSTRIAL CLASSIFICATION: ORDNANCE & ACCESSORIES, (NO VEHICLES/GUIDED MISSILES) [3480] IRS NUMBER: 060633559 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10435 FILM NUMBER: 576934 BUSINESS ADDRESS: STREET 1: 1 LACEY PLACE CITY: SOUTHPORT STATE: CT ZIP: 06490 BUSINESS PHONE: 2032597843 MAIL ADDRESS: STREET 2: 1 LACEY PLACE CITY: SOUTHPORT STATE: CT ZIP: 06490 10-K405 1 STURM, RUGER * COMPANY, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) /x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM ____________ TO ___________ COMMISSION FILE NUMBER 0-4776 STURM, RUGER & COMPANY, INC. (Exact name of registrant as specified in its charter) DELAWARE 06-0633559 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) LACEY PLACE, SOUTHPORT, CONNECTICUT 06490 (Address of principal executive offices) (Zip Code) (203) 259-7843 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES /x/ NO / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [x]. The aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 1, 2000: Common Stock, $1 par value - $182,985,090 The number of shares outstanding of the issuer's common stock as of March 14, 2000: Common Stock, $1 par value - 26,910,720 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the fiscal year ended December 31, 1999 are incorporated by reference into Parts I, II and IV of this Report. Portions of the Proxy Statement relating to the Annual Meeting of Stockholders to be held May 11, 2000 are incorporated by reference into Part III of this Report. Page 1 of 54 2 PART I ITEM 1 -- BUSINESS The Company is principally engaged in the design, manufacture, and sale of firearms and precision metal investment castings. The Company is the only U.S. firearms manufacturer which offers products in all four industry categories (rifles, shotguns, pistols, and revolvers) and believes that it is the largest U.S. firearms manufacturer, based on data reported in the Bureau of Alcohol, Tobacco and Firearms' 1998 Annual Firearms Manufacturing and Exportation Report ("BATF Data"). The Company, which has been profitable every year since 1950, believes it has a preeminent reputation among sportsmen, hunters, and gun collectors for technical innovation and quality construction, based on reports in industry and business publications. The Company has been in business since 1949 and was incorporated in its present form under the laws of Delaware in 1969. The Company's firearms, which are sold under the "Ruger" name and trademark, consist of single-shot, autoloading, bolt-action, lever action, and muzzleloading rifles in a broad range of hunting calibers; shotguns in three gauges; .22 caliber rimfire autoloading pistols and centerfire autoloading pistols in various calibers; and single-action, double-action, and muzzleloading revolvers in various calibers. The Company manufactures a wide range of high quality products and does not manufacture inexpensive concealable firearms, sometimes known as "Saturday Night Specials," "Junk Guns," or any firearm included on the list of "assault weapons" which was part of anti-crime legislation enacted by Congress in 1994. Many of the firearms introduced by the Company over the years have become "classics" which have retained their popularity for decades and are sought by collectors. These firearms include the single-action Single-Six, Blackhawk, and Bearcat revolvers, the double-action Redhawk revolvers, the 10/22 and Mini-14 autoloading, M-77 bolt-action, and Number One Single-Shot rifles, and the Red Label over-and-under shotguns. The Company has supplemented these "classics" with the introduction of new models and variations of existing models, including a line of centerfire autoloading pistols introduced in 1987, three lines of double action revolvers, the SP101, GP100, and Super Redhawk models as well as a line of muzzleloading rifles introduced in 1997. The Company also introduced a line of lever action rifles in 1997. The Company's ongoing commitment to the development and introduction of new models of firearms in appropriate product categories continues to generate new offerings. In 1999, new product introductions included the Ruger 10/22 Magnum rifle, the Ruger Super Redhawk revolver chambered in .454 Casull, the 50th Anniversary Mark II pistol, several new "All-Weather" models in our existing rifle and shotgun lines, and a new P97 centerfire pistol chambered for .45 ACP caliber. New for 2000, the Ruger Trap Model single-barrel shotgun features a fully adjustable rib for pattern position and a cut-checkered walnut stock, which is adjustable for length of pull. The target trigger is adjustable for weight of pull and the barrel is manufactured with "controlled pattern" straight grooves running the full length of the barrel to minimize shot dispersion. The Ruger No. 1 Stainless Steel Single-Shot Rifle with black laminated hardwood stock is available in a wide range of calibers from .22-250 through the .300 Winchester Magnum. An engraved series of Ruger Red Label over-and-under shotguns is available with scroll engraving and finished with a Ruger 24-karat gold eagle, precision engraved on the bottom of the receiver. The Company is also engaged in the manufacture of titanium, ferrous, and aluminum investment castings for a wide variety of markets including sporting goods, commercial, and military. In 1999, 1998, and 1997, the Company's foremost investment castings product was titanium golf club heads for Callaway Golf Company, Inc. ("Callaway Golf"). Historically, the Company had obtained purchase orders from Callaway Golf that covered periods in excess of one year. However, a long-term contract with Callaway Golf was substantially completed during the fourth quarter of 1999 with no additional long-term supply 2 3 ITEM 1 -- BUSINESS (CONTINUED) contract anticipated. As a result, the level of future golf club head shipments is expected to continue to decline. In 1998, the Company began production of titanium golf club heads for Karsten Manufacturing Corporation ("Ping") and other golf club manufacturers, as well as beginning production of a line of titanium hand tools for a number of customers. For 2000 and beyond, the Company will continue to pursue other titanium and steel castings markets, as well as other golf club casting business. For the years ended December 31, 1999, 1998, and 1997, net sales attributable to the Company's firearms operations were approximately 78%, 68%, and 68%, respectively, of total net sales. The balance of the Company's net sales for the aforementioned periods was attributable to its investment castings operations. Further information regarding industry segment data is incorporated by reference to page 20 of the Company's 1999 Annual Report to Stockholders. PRODUCTS -- FIREARMS The Company presently manufactures 29 different types of firearm products in four industry categories: rifles, shotguns, pistols, and revolvers. Most are available in several models based upon caliber, finish, barrel length, and other features. RIFLES -- A rifle is a long gun with spiral grooves cut into the interior of the barrel to give the bullet a stabilizing spin after it leaves the barrel. The Company presently manufactures eleven different types of rifles: the M77 Mark II, the M77 Mark II Magnum, the 77/22, the 77/44, the 10/22, the Model 96, the Mini-14, the Mini Thirty, the Ruger Carbine, the No. 1 Single-Shot, and the 77/50 Muzzle Loader. Sales of rifles by the Company accounted for approximately $89.8 million, $71.6 million, and $67.7 million, of revenues for the years 1999, 1998, and 1997, respectively. SHOTGUNS -- A shotgun is a long gun with a smooth barrel interior which fires lead or steel pellets. The Company presently manufactures three different types of over-and-under shotguns: the Red Label available in 12, 20, and 28 gauge, the Woodside available in 12 gauge, and the Trap Model available in 12 gauge. Most of the Red Label models are available in special Sporting Clays and English Field versions. Sales of shotguns by the Company accounted for approximately $13.4 million, $10.4 million, and $9.3 million of revenues for the years 1999, 1998, and 1997, respectively. PISTOLS -- A pistol is a handgun in which the ammunition chamber is an integral part of the barrel and which is fed ammunition from a magazine contained in the grip. The Company presently manufactures three different types of pistols, the Ruger Mark II .22 caliber in Standard, Competition, and Target models, the Ruger 22/45, and the P-Series centerfire autoloading pistols in various calibers, configurations, and finishes. Sales of pistols by the Company accounted for approximately $47.3 million, $33.5 million, and $33.6 million of revenues for the years 1999, 1998, and 1997, respectively. REVOLVERS -- A revolver is a handgun which has a cylinder that holds the ammunition in a series of chambers which are successively aligned with the barrel of the gun during each firing cycle. There are two general types of revolvers, single-action and double-action. To fire a single-action revolver, the hammer is pulled back to cock the gun and align the cylinder before the trigger is pulled. To fire a double-action revolver, a single trigger pull advances the cylinder and cocks and releases the hammer. The Company presently manufactures eight different types of single-action revolvers: the New Model Super Single-Six, the New Model .32 Magnum Super Single-Six, the New Model Blackhawk, the New Model Super Blackhawk, the Vaquero, the Ruger Bisley, the Old Army Cap & Ball, and the New Bearcat. The Company presently manufactures four different types of double-action revolvers: the SP101, the GP100, the Redhawk, and the Super Redhawk. Sales of revolvers by the Company accounted for approximately $33.7 million, $26.0 million, and $28.5 million, of revenues for the years 1999, 1998, and 1997, respectively. 3 4 ITEM 1 -- BUSINESS (CONTINUED) The Company also manufactures and sells accessories and replacement parts for its firearms. These sales accounted for approximately $4.4 million, $3.4 million, and $2.8 million of revenues for the years 1999, 1998, and 1997, respectively. PRODUCTS -- INVESTMENT CASTINGS The investment castings products currently manufactured by the Company consist of titanium, ferrous (both chrome-moly and stainless), and aluminum. Sales of golf club heads to Callaway Golf approximated 58%, 63%, and 76% of casting revenues for the years 1999, 1998, and 1997, respectively. The remaining revenue represents parts sold to unrelated third parties for a wide variety of industries including sporting goods, commercial, and military. Ruger Investment Casting ("RIC"), which includes the Antelope Hills foundry, is located in Prescott, Arizona and engineers and produces titanium and ferrous castings. This facility's manufacturing activity during 1999, 1998, and 1997 for outside customers consisted primarily of producing titanium golf club heads for Callaway Golf. Sales of golf club heads to Callaway Golf accounted for approximately $31.0 million, $41.9 million, and $51.6 million of revenues during 1999, 1998, and 1997, respectively. The Pine Tree Castings Division of the Company, located in Newport, New Hampshire, engineers and produces ferrous castings for a wide range of commercial customers. The Company's Uni-Cast Division, located in Manchester, New Hampshire, engineers and produces primarily large complex aluminum castings for a number of prime defense contractors. Sales from the Company's investment casting operations (excluding intercompany transactions) accounted for approximately $53.1 million, $66.7 million, and $67.5 million, or 22%, 32%, and 32% of the Company's total net sales for 1999, 1998, and 1997, respectively. MANUFACTURING FIREARMS -- The Company produces most rifles, and all shotguns and revolvers at the Newport, New Hampshire facility. Some rifles and all pistols are produced at the Prescott, Arizona facility. Many of the basic metal component parts of the firearms manufactured by the Company are produced by the Company's castings facilities through a process known as precision investment casting. See "Manufacturing-Investment Castings" for a description of the investment casting process. The Company initiated the use of this process in the production of component parts for firearms in 1953 and believes that its widespread use of investment castings in the firearms manufacturing process is unique among firearms manufacturers. The investment casting process provides greater design flexibility and results in component parts which are generally close to their ultimate shape and, therefore, require less machining. Through the use of investment castings, the Company is able to produce durable and less costly component parts for its firearms. Third parties supply the Company with various raw materials for its firearms, such as fabricated steel components, walnut, birch, beech, maple and laminated lumber for rifle and shotgun stocks, various synthetic products and other component parts. These raw materials and component parts are readily available from multiple sources at competitive prices. All assembly, inspection, and testing of firearms manufactured by the Company is performed at the Company's manufacturing facilities. Every firearm, including every chamber of every revolver, manufactured by the Company is test-fired prior to shipment. 4 5 ITEM 1 -- BUSINESS (CONTINUED) INVESTMENT CASTINGS -- The Company manufactures all of its precision investment castings products at one of its three investment casting facilities. To produce a product by the investment casting method, a wax model of the part is created and coated ("invested") with several layers of ceramic material. The shell is then heated to melt the interior wax which is poured off, leaving a hollow mold. To cast the desired part, molten metal is poured into the mold and allowed to cool and solidify. The mold is then broken off to reveal a near net shape cast metal part. Titanium investment castings products are manufactured by the Company's RIC Division. This facility, one of the largest investment castings facilities in the Southwest, also has the capabilities of producing ferrous and aluminum investment castings. The Company's Pine Tree Castings Division manufactures most of the ferrous investment castings produced by the Company. Aluminum investment castings products are primarily manufactured by the Company's Uni-Cast Division. Raw materials including wax, ceramic material, and metal alloys necessary for the production of investment cast products are supplied to the Company through third parties. The Company believes that all these raw materials are readily available from multiple sources at competitive prices. MARKETING AND DISTRIBUTION FIREARMS -- The Company's firearms are primarily marketed through a network of selected independent wholesale distributors who purchase the products directly from the Company for resale to gun dealers and legally authorized end-users. These end-users include sportsmen, hunters, law enforcement and other governmental organizations, and gun collectors. Each of these distributors carries the entire line of firearms manufactured by the Company for the commercial market. Currently, 21 distributors service the domestic commercial market, with an additional 16 servicing the domestic law enforcement market and two servicing the Canadian market. Three of these distributors service both the domestic commercial market and the domestic law enforcement market. In 1999, 1998, and 1997, one distributor, Jerry's Sport Center, accounted for approximately 14%, 15%, and 16% of the Company's net sales of firearms and 11%, 10%, and 11%, of consolidated net sales, respectively. In 1999, another distributor, Davidson's Supply Company, accounted for approximately 13% of net firearms sales and 10% of consolidated net sales. The Company employs six employees and two independent contractors who service these distributors and call on dealers and law enforcement agencies. Because the ultimate demand for the Company's firearms comes from end-users, rather than from the Company's distributors, the Company believes that the loss of any distributor would not have a material adverse effect on the Company. The Company considers its relationships with its distributors to be satisfactory. In addition, the Company markets its firearms directly to foreign customers, consisting primarily of law enforcement agencies and foreign governments. Foreign sales were less than 10% of the Company's consolidated net sales for each of the past three years. No material portion of the Company's business is subject to renegotiation of profits or termination of contracts at the election of a government purchaser. In the fourth quarter of 1999, the Company received annual orders from its distributors for the 2000 marketing year. These orders may be adjusted in the second quarter by the distributors to allow for market fluctuations. As of March 1, 2000, unfilled firearms orders were approximately $135 million as compared to approximately $128 million at March 1, 1999. Most of the firearms manufactured by the Company are sold on terms requiring payment in full within 30 days. However, certain products which are generally used during the fall hunting season are sold pursuant to a "dating plan" which, in general, allows the purchasing distributor to buy the products 5 6 ITEM 1 -- BUSINESS (CONTINUED) commencing in December, the normal start of the Company's dating plan year, and pay for them on extended terms. Discounts are offered for early payment. Management believes that this dating plan serves to level out the demand for these seasonal products throughout the entire year and facilitates an efficient manufacturing schedule. The Company does not consider its overall firearms business to be significantly seasonal; however sales of certain models of firearms are usually lower in the third quarter of the year. INVESTMENT CASTINGS -- The investment casting segment's principal markets are sporting goods, commercial, and military. Sales are made directly to customers or through manufacturers' representatives. In 1999, 1998, and 1997, one castings segment customer, Callaway Golf, accounted for approximately 13%, 20%, and 25% of consolidated net sales and 58%, 63%, and 76% of casting segment sales, respectively. Historically, the Company had obtained purchase orders from Callaway Golf that covered periods in excess of one year. However, a long-term contract with Callaway Golf was substantially completed during the fourth quarter of 1999 with no additional long-term supply contract anticipated. As a result, the level of future golf club head shipments is expected to continue to decline. In 1998, the Company began production of titanium golf club heads for Karsten Manufacturing Corporation ("Ping") and other golf club manufacturers, as well as beginning production of a line of titanium hand tools for a number of customers. For 2000 and beyond, the Company will continue to pursue other titanium and steel castings markets, as well as other golf club casting business. COMPETITION FIREARMS -- Competition in the firearms industry is intense and comes from both foreign and domestic manufacturers. While some of these competitors concentrate on a single industry product category, such as rifles or pistols, several foreign competitors manufacture products in all four industry categories (rifles, shotguns, pistols, and revolvers). Some of these competitors are subsidiaries of large corporations with substantially greater financial resources than the Company. The Company is the only domestic manufacturer which produces firearms in all four industry product categories and believes that it is the largest U.S. firearms manufacturer, according to BATF Data. The principal methods of competition in the industry are product quality and price. The Company believes that it can compete effectively with all of its present competitors based upon the high quality, reliability and performance of its products, and the competitiveness of its pricing. INVESTMENT CASTINGS -- There are a large number of investment castings manufacturers, both domestic and foreign, with which the Company competes. Competition varies based on the type of investment castings products (titanium, ferrous, or aluminum) and the end use of the product (sporting goods, commercial, or military). Many of these competitors are larger than the Company and may have greater resources. The principal methods of competition in the industry are quality, production lead time, and price. The Company believes that it can compete effectively with all of its present competitors and has expended significant amounts of resources on both expanding and modernizing its investment casting facilities during the last several years. EMPLOYEES As of March 1, 2000, the Company employed 1,952 full-time employees of which approximately 33% had at least ten years of service with the Company. None of the Company's employees are subject to a collective bargaining agreement. The Company has never experienced a strike during its entire 50-year history and believes its employee relations are satisfactory. 6 7 ITEM 1 -- BUSINESS (CONTINUED) RESEARCH AND DEVELOPMENT In 1999, 1998, and 1997, the Company spent approximately $1.2 million, $1.1 million, and $1.3 million, respectively, on research activities relating to the development of new products and the improvement of existing products. As of February 28, 2000, the Company had approximately 49 employees engaged in research and development activities as part of their responsibilities. PATENTS AND TRADEMARKS The Company owns various United States and foreign patents and trademarks which have been secured over a period of years and which expire at various times. It is the policy of the Company to apply for patents and trademarks whenever new products or processes deemed commercially valuable are developed or marketed by the Company. However, none of these patents and trademarks are considered to be basic to any important product or manufacturing process of the Company and, although the Company deems its patents and trademarks to be of value, it does not consider its business materially dependent on patent or trademark protection. ENVIRONMENTAL MATTERS The Company has programs in place that monitor compliance with various environmental regulations. However, in the normal course of its manufacturing operations the Company is subject to occasional governmental proceedings and orders pertaining to waste disposal, air emissions, and water discharges into the environment. The Company believes that it is generally in compliance with applicable environmental regulations and the outcome of such proceedings and orders will not have a material effect on its business. EXECUTIVE OFFICERS OF THE COMPANY Set forth below are the names, ages, and positions of the executive officers of the Company. Officers serve at the pleasure of the Board of Directors of the Company.
Name Age Position With Company ---- --- --------------------- William B. Ruger 83 Chairman of the Board, Chief Executive Officer, Treasurer, and Director William B. Ruger, Jr. 60 Vice Chairman, Senior Executive Officer, President, Chief Operating Officer, and Director Stephen L. Sanetti 50 Vice President, General Counsel, and Director Erle G. Blanchard 53 Vice President, Controller Leslie M. Gasper 46 Corporate Secretary
William B. Ruger has been the Chairman of the Board, Chief Executive Officer, and Treasurer of the Company since 1949. He is the father of William B. Ruger, Jr. William B. Ruger, Jr. became President and Chief Operating Officer effective March 1, 1998. Mr. Ruger has been Vice Chairman and Senior Executive Officer of the Company since 1995 and a Director of the Company since 1970. Previously, he served as President of the Company from 1991 to 1995 and as Senior Vice President of the Company from 1970 to 1990. 7 8 ITEM 1 -- BUSINESS (CONTINUED) Erle G. Blanchard returned to the Company as Vice President, Controller in March 1996. From March 1995 to March 1996, he was not employed by the Company. Prior to this, he served as Plant Manager of the Newport Firearms Manufacturing facility since 1986 and became Vice President, Controller - Newport in 1993. Stephen L. Sanetti became a Director effective March 1, 1998. He has been Vice President, General Counsel of the Company since 1993 and has served as General Counsel since 1980. Leslie M. Gasper has been Secretary of the Company since 1994. Prior to this, she was the Administrator of the Company's pension plans, a position she held for more than five years prior thereto. ITEM 2 -- PROPERTIES The Company's manufacturing operations are carried out at four facilities. The following table sets forth certain information regarding each of these facilities:
Approximate Aggregate Usable Square Feet Status ----------- ------ Newport, New Hampshire 350,000 Owned Prescott, Arizona 230,000 Leased Prescott, Arizona 110,000 Owned Manchester, New Hampshire 50,000 Owned
The Newport and one of the Prescott facilities each contain enclosed ranges for testing firearms and also contain modern tool room facilities. The lease of the Prescott facility provides for rental payments which approximate real property taxes. The Company's headquarters and related operations are in Southport, Connecticut. There are no mortgages on any of the real estate owned by the Company. ITEM 3 -- LEGAL PROCEEDINGS As of December 31, 1999 the Company is a defendant in approximately 40 lawsuits involving its products and is aware of certain other such claims. These lawsuits and claims fall within two categories: (i) those that claim damages from the Company related to allegedly defective product design which stem from a specific incident. These lawsuits and claims are based principally on the theory of "strict liability" but also may be based on negligence, breach of warranty, and other legal theories, and (ii) those brought by cities, municipalities, counties, and individuals (including certain putative class actions) against numerous firearms manufacturers, distributors and dealers seeking to recover damages allegedly arising out of the misuse of firearms by third parties in the commission of homicides, suicides and other shootings involving juveniles and adults. The complaints by municipalities seek damages, among other things, for the costs of medical 8 9 ITEM 3 -- LEGAL PROCEEDINGS (CONTINUED) care, police and emergency services, public health services, and the maintenance of courts, prisons, and other services. In certain instances, the plaintiffs seek to recover for decreases in property values and loss of business within the city due to criminal violence. In addition, nuisance abatement and/or injunctive relief is sought to change the design, manufacturing, marketing and distribution practices of the various defendants. These suits allege, among other claims, strict liability or negligence in the design of products, public nuisance, negligent entrustment, assault, negligent distribution, deceptive or fraudulent advertising, violation of consumer protection statutes and conspiracy or concert of action theories. None of these cases allege a specific injury to a specific individual as a result of the misuse or use of any of the Company's products. In the opinion of management, after consultation with special and corporate counsel, it is not probable and is unlikely that litigation, including punitive damage claims, will have a material adverse effect on the financial position of the Company, but may have a material impact on the Company's financial results for a particular period. Claims for punitive damages are significant. As of March 18, 1982, compensatory and punitive damage insurance coverage is provided, in States where permitted, for losses exceeding $1.0 million of loss per occurrence or an aggregate maximum loss of $4.0 million. For claims which the Company has been notified in writing between July 10, 1988, through July 10, 1989, coverage is provided for losses exceeding $2.5 million per claim or an aggregate maximum loss of $9.0 million. For claims made between July 10, 1989, and July 10, 1991, the aggregate maximum loss is $7.5 million. For claims made after July 10, 1992, coverage is provided for losses exceeding $2.25 million per claim, or an aggregate maximum loss of $6.5 million. For claims made after July 10, 1994, coverage is provided for losses exceeding $2.0 million per claim, or an aggregate maximum loss of $6.0 million. For claims made after July 10, 1997, coverage is provided for annual losses exceeding $2.0 million per claim, or an aggregate maximum loss of $5.5 million annually. The Company has reported all cases instituted against it through September 30, 1999, and the results of those cases, where terminated, to the S.E.C. on its previous Form 10-K and 10-Q reports, to which reference is hereby made. For a description of all pending lawsuits against the Company through September 30, 1999, reference is made to the discussion under the caption "Item 3. LEGAL PROCEEDINGS" of the Company's Annual Reports on Form 10-K for the years ended December 31, 1995 and 1998, and to the discussion under caption "Item 1. LEGAL PROCEEDINGS" of the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1987, September 30, 1990, March 31, 1995, March 31 and June 30, 1996, September 30, 1997, September 30, 1998 and March 31, June 30, and September 30, 1999. The following cases were instituted against the Company during the three months ended December 31, 1999, which involved significant demands for compensatory and/or punitive damages: Mayor James H. Sills, Jr., et. al. v. Smith & Wesson Corp., et. al. in the Superior Court of the State of Delaware in and for New Castle County (DE). The complaint, which was served on the Company on October 5, 1999, alleges that defendants have allegedly caused harm to the plaintiffs and the city of Wilmington due to the manufacture, marketing, promotion, negligent distribution and sale of firearms. Complaint also alleges dangerous design, lack of safety features, and inadequate warnings which allegedly make handguns dangerous because they can be fired by unauthorized users. Compensatory and punitive damages, plus other fees and costs to be determined by the Court are demanded. 9 10 ITEM 3 -- LEGAL PROCEEDINGS (CONTINUED) National Association for the Advancement of Colored People, et. al. v. AcuSport Corporation, et. al. in the District Court for the Eastern District of New York. The complaint was served on the Company on October 13, 1999. The complaint alleges that defendants have allegedly failed to regulate, supervise, and control marketing, distribution, and sales practices of handguns, which has allegedly resulted in a disproportionate number of injuries and deaths of members of the NAACP. The complaint also alleges that defendants allegedly fail to incorporate safety devices to prevent or reduce improper use. Injunctive relief only is sought; no monetary damages are claimed. Amber Lee Dibble v. Company in the Superior Court of the State of Alaska. The complaint was served on the Company on November 2, 1999. The complaint alleges that plaintiff was handling a Ruger revolver and it discharged, resulting in injuries to her leg. General and special damages in excess of $100,000.00 are demanded. During the three months ending December 31, 1999, no previously-reported cases were settled. The previously-reported case of City of Cincinnati (OH) v. Company was dismissed on October 7, 1999. The plaintiffs have appealed this dismissal. The previously-reported case of Mayor Joseph P. Ganim and the City of Bridgeport (CT) v. Company was dismissed on December 10, 1999. The plaintiffs have appealed this dismissal. The previously-reported case of Alexander Penelas, Mayor of Miami-Dade County (FL), et. al. v. Company was dismissed on December 13, 1999. The plaintiffs have appealed this dismissal. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5 -- MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The information required for this Item is incorporated by reference from pages 4 and 23 of the Company's 1999 Annual Report to Stockholders. ITEM 6 -- SELECTED FINANCIAL DATA The information required for this Item is incorporated by reference from page 4 of the Company's 1999 Annual Report to Stockholders. ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required for this Item is incorporated by reference from pages 6 through 9 of the Company's 1999 Annual Report to Stockholders. 10 11 ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to changes in prevailing market interest rates affecting the return on its investments but does not consider this interest rate market risk exposure to be material to its financial condition or results of operations. The Company invests primarily in United States Treasury Bills with short-term (less than one year) maturities. The carrying amount of these investments approximates fair value due to the short-term maturities. Under its current policies, the Company does not use derivative financial instruments, derivative commodity instruments or other financial instruments to manage its exposure to changes in interest rates or commodity prices. ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (A) FINANCIAL STATEMENTS The consolidated balance sheets of Sturm, Ruger & Company, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999 and the report dated February 11, 2000 of Ernst & Young LLP, independent auditors, are incorporated by reference from pages 12 through 22 of the Company's 1999 Annual Report to Stockholders. (B) SUPPLEMENTARY DATA Quarterly results of operations for 1999 and 1998 are incorporated by reference from page 21 of the Company's 1999 Annual Report to Stockholders. ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information as to the directors of the Company under the caption "ELECTION OF DIRECTORS" on pages 2 and 3 of the Company's Proxy Statement relating to the Annual Meeting of Stockholders to be held May 11, 2000 is incorporated by reference into this Report. The information set forth under the caption "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" on page 18 of the Proxy Statement relating to the Annual Meeting of Stockholders to be held May 11, 2000 is incorporated by reference into this Report. The information as to executive officers of the Company is included in Part I hereof under the caption "Executive Officers of the Company" in reliance upon General Instruction G to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K. ITEM 11 -- EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference from those sections of the Company's Proxy Statement relating to the Annual Meeting of Stockholders to be held May 11, 2000 under the captions "DIRECTOR COMPENSATION AND INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES," "EXECUTIVE COMPENSATION," "BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION," 11 12 ITEM 11 -- EXECUTIVE COMPENSATION (CONTINUED) "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION," "1998 STOCK INCENTIVE PLAN," "1999 OPTION GRANTS," "AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES," "COMPANY STOCK PRICE PERFORMANCE," "PENSION PLAN TABLE," and "SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN TABLE" on pages 4 through 15. ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference from those sections of the Company's Proxy Statement relating to the Annual Meeting of Stockholders to be held May 11, 2000 under the captions "ELECTION OF DIRECTORS," "PRINCIPAL STOCKHOLDERS," and "SECURITY OWNERSHIP OF MANAGEMENT" on pages 2, 3, 16, and 17. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference from those sections of the Company's Proxy Statement relating to the Annual Meeting of Stockholders to be held May 11, 2000 under the captions "DIRECTOR COMPENSATION AND INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES," "EXECUTIVE COMPENSATION," "1998 STOCK INCENTIVE PLAN," "1999 OPTION GRANTS," AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES," and "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" on pages 4, 5, 7 through 11, and 18. PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this Form 10-K. (1) Financial Statements: Consolidated Balance Sheets -- December 31, 1999 and 1998 Consolidated Statements of Income -- Years ended December 31, 1999, 1998, and 1997 Consolidated Statements of Stockholders' Equity -- Years ended December 31, 1999, 1998, and 1997 Consolidated Statements of Cash Flows -- Years ended December 31, 1999, 1998, and 1997 Notes to Consolidated Financial Statements Report of Independent Auditors 12 13 ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) This information is incorporated by reference from the Company's 1999 Annual Report to Stockholders as noted in Item 8. (2) Financial Statement Schedules: Schedule II-Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, or are inapplicable, or the required information is disclosed elsewhere, and therefore, have been omitted. (3) Listing of Exhibits:
Exhibit 3.1 Certificate of Incorporation of the Company, as amended (Incorporated by reference to Exhibits 4.1 and 4.2 to the Form S-3 Registration Statement previously filed by the Company File No. 33-62702). Exhibit 3.2 Bylaws of the Company, as amended (Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, SEC File No. 0-4776). Exhibit 3.3 Amendment to Article 2, Sections 4 and 5 of the Bylaws of the Company (Incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996, SEC File No. 0-4776). Exhibit 10.1 Sturm, Ruger & Company, Inc. 1986 Stock Bonus Plan (Incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, as amended by Form 8 filed March 27, 1990, SEC File No. 0-4776). Exhibit 10.2 Amendment to Sturm, Ruger & Company, Inc. 1986 Stock Bonus Plan (Incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, SEC File No. 0-4776). Exhibit 10.3 Sturm, Ruger & Company, Inc. Supplemental Executive Profit Sharing Retirement Plan (Incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, SEC File No. 0-4776). Exhibit 10.4 Agreement and Assignment of Lease dated September 30, 1987 by and between Emerson Electric Co. and Sturm, Ruger & Company, Inc. (Incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, SEC File No. 0-4776).
13 14 ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED)
Exhibit 10.5 Sturm, Ruger & Company, Inc. Supplemental Executive Retirement Plan (Incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, SEC File No. 0-4776). Exhibit 10.6 Operating Agreement of Antelope Hills, LLC, a Delaware Limited Liability Company, dated as of October 5, 1995 (Incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, SEC File No. 0-4776). Exhibit 10.7 Sturm, Ruger & Company, Inc. 1998 Stock Incentive Plan. (Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, SEC File No. 1-10435). Exhibit 13.1 Annual Report to Stockholders of the Company for the year ended December 31, 1999. Except for those portions of such Annual Report to Stockholders expressly incorporated by reference into the Report, such Annual Report to Stockholders is furnished solely for the information of the Securities and Exchange Commission and shall not be deemed a "filed" document. Exhibit 23.1 Consent of Independent Auditors. Exhibit 27.1 Financial Data Schedule. Exhibit 99.1 Item 1 LEGAL PROCEEDINGS from the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 1987, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS. Exhibit 99.2 Item 1 LEGAL PROCEEDINGS from the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 1990, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS. Exhibit 99.3 Item 1 LEGAL PROCEEDINGS from the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 1995, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS. Exhibit 99.4 Item 3 LEGAL PROCEEDINGS from the Annual Report on Form 10-K of the Company for the year ended December 31, 1995, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS. Exhibit 99.5 Item 1 LEGAL PROCEEDINGS from the Quarterly Reports on Form 10-Q of the Company for the quarters ended March 31, June 30, 1996, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS
14 15 ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED)
Exhibit 99.6 Item 1 LEGAL PROCEEDINGS from the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 1997, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS. Exhibit 99.7 Item 1 LEGAL PROCEEDINGS from the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 1998, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS. Exhibit 99.8 Item 3 LEGAL PROCEEDINGS from the Annual Report on Form 10-K of the Company for the year ended December 31, 1998, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS. Exhibit 99.9 Item 1 LEGAL PROCEEDINGS from the Quarterly Reports on Form 10-Q of the Company for the quarters ended March 31, June 30, and September 30, 1999 SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS
(b) Report on Form 8-K filed in the fourth quarter of 1999: None 15 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STURM, RUGER & COMPANY, INC. ----------------------------------- (Registrant) /S/LESLIE M. GASPER ----------------------------------- Leslie M. Gasper Corporate Secretary March 15, 2000 ----------------------------------- Date Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/S/WILLIAM B. RUGER 3/15/00 /S/WILLIAM B. RUGER, JR. 3/15/00 - -------------------------------------------------------------- ---------------------------------------------------- William B. Ruger William B. Ruger, Jr. Chairman of the Board, Chief Executive Officer, Vice Chairman, Senior Executive Officer, Treasurer, Director President, Chief Operating Officer, (Principal Executive Officer) Director /S/JOHN M. KINGSLEY, JR. 3/15/00 /S/STANLEY B. TERHUNE 3/15/00 - -------------------------------------------------------------- ---------------------------------------------------- John M. Kingsley, Jr. Stanley B. Terhune Director Director /S/RICHARD T. CUNNIFF 3/15/00 /S/TOWNSEND HORNOR 3/15/00 - -------------------------------------------------------------- ---------------------------------------------------- Richard T. Cunniff Townsend Hornor Director Director /S/PAUL X. KELLEY 3/15/00 /S/JAMES E. SERVICE 3/15/00 - -------------------------------------------------------------- ---------------------------------------------------- Paul X. Kelley James E. Service Director Director /S/STEPHEN L. SANETTI 3/15/00 /S/ERLE G. BLANCHARD 3/15/00 - -------------------------------------------------------------- ---------------------------------------------------- Stephen L. Sanetti Erle G. Blanchard Vice President, General Counsel, Director Vice President, Controller (Principal Financial Officer)
16 17 EXHIBIT INDEX
Page No. -------- Exhibit 3.1 Certificate of Incorporation of the Company, as amended (Incorporated by reference to Exhibits 4.1 and 4.2 to the Form S-3 Registration Statement previously filed by the Company File No. 33-62702). Exhibit 3.2 Bylaws of the Company, as amended (Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, SEC File No. 0-4776). Exhibit 3.3 Amendment to Article 2, Sections 4 and 5 of the Bylaws of the Company (Incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996, SEC File No. 0-4776). Exhibit 10.1 Sturm, Ruger & Company, Inc. 1986 Stock Bonus Plan (Incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, as amended by Form 8 filed March 27, 1990, SEC File No. 0-4776). Exhibit 10.2 Amendment to Sturm, Ruger & Company, Inc. 1986 Stock Bonus Plan (Incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, SEC File No. 0-4776). Exhibit 10.3 Sturm, Ruger & Company, Inc. Supplemental Executive Profit Sharing Retirement Plan (Incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, SEC File No. 0-4776). Exhibit 10.4 Agreement and Assignment of Lease dated September 30, 1987 by and between Emerson Electric Co. and Sturm, Ruger & Company, Inc. (Incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, SEC File No. 0-4776). Exhibit 10.5 Sturm, Ruger & Company, Inc. Supplemental Executive Retirement Plan (Incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, SEC File No. 0-4776). Exhibit 10.6 Operating Agreement of Antelope Hills, LLC, a Delaware Limited Liability Company, dated as of October 5, 1995 (Incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, SEC File No. 0-4776). Exhibit 10.7 Sturm, Ruger & Company, Inc. 1998 Stock Incentive Plan. (Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, SEC File No. 1-10435).
17 18 EXHIBIT INDEX (continued)
Page No. -------- Exhibit 13.1 Annual Report to Stockholders of the Company for the year ended December 31, 1999. Except for those portions of such Annual Report to Stockholders expressly incorporated by reference into the Report, such Annual Report to Stockholders is furnished solely for the information of the Securities and Exchange Commission and shall not be deemed a "filed" document. 22 Exhibit 23.1 Consent of Independent Auditors. 51 Exhibit 27.1 Financial Data Schedule. 52 Exhibit 99.1 Item 1 LEGAL PROCEEDINGS from the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 1987, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS. Exhibit 99.2 Item 1 LEGAL PROCEEDINGS from the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 1990, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS. Exhibit 99.3 Item 1 LEGAL PROCEEDINGS from the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 1995, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS. Exhibit 99.4 Item 3 LEGAL PROCEEDINGS from the Annual Report on Form 10-K of the Company for the year ended December 31, 1995, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS. Exhibit 99.5 Item 1 LEGAL PROCEEDINGS from the Quarterly Reports on Form 10-Q of the Company for the quarters ended March 31, June 30, 1996, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS Exhibit 99.6 Item 1 LEGAL PROCEEDINGS from the Quarterly Report on Form 10-Q of the Company for the quarter September 30, 1997, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS. Exhibit 99.7 Item 1 LEGAL PROCEEDINGS from the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 1998, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS. Exhibit 99.8 Item 3 LEGAL PROCEEDINGS from the Annual Report on Form 10-K of the Company for the year ended December 31, 1998, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS.
18 19 EXHIBIT INDEX (continued)
Exhibit 99.9 Item 1 LEGAL PROCEEDINGS from the Quarterly Reports on Form 10-Q of the Company for the quarters ended March 31, June 30, and September 30, 1999, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS
19 20 ANNUAL REPORT ON FORM 10-K YEAR ENDED DECEMBER 31, 1999 STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES SOUTHPORT, CONNECTICUT ITEMS 14(a)(2) AND 14(d) FINANCIAL STATEMENT SCHEDULE CERTAIN EXHIBITS 20 21 Sturm, Ruger & Company, Inc. and Subsidiaries Item 14(a)(2) and Item 14(d)--Financial Statement Schedule Schedule II -- Valuation and Qualifying Accounts (In Thousands)
COL. A COL. B COL. C COL. D COL. E ----------- --------- -------- ---------- --------- ADDITIONS ------------------------ (1) (2) Charged to Balance at Charged to Other Balance Beginning Costs and Accounts at End Description of Period Expenses - Describe Deductions of Period ----------- --------- -------- ---------- ---------- --------- Deductions from asset accounts: Allowance for doubtful accounts: Year ended December 31, 1999 $1,299 $ 125 $ 32(a) $1,392 ------ ------ ----------- ------ Year ended December 31, 1998 $1,001 $ 350 $ 52(a) $1,299 ------ ------ ----------- ------ Year ended December 31, 1997 $ 834 $ 251 $ 300 (d) $ 384(a) $1,001 ------ ------ --------- ----------- ------ Allowance for discounts: Year ended December 31, 1999 $1,888 $5,634 $ 5,773(b) $1,749 ------ ------ ---------- ------ Year ended December 31, 1998 $2,842 $9,948 $10,902(b) $1,888 ------ ------ ---------- ------ Year ended December 31, 1997 $1,095 $5,861 $ 690 (e) $ 4,804(b) $2,842 ------ ------ --------- ---------- ------ Product safety modifications accrual: Year ended December 31, 1999 $ 752 $ 154(c) $ 598 ------ ---------- ------ Year ended December 31, 1998 $ 870 $ 118(c) $ 752 ------ ----------- ------ Year ended December 31, 1997 $1,302 $(300)(d) $ 132(c) $ 870 ------ --------- ---------- ------
(a) Accounts written off (b) Discounts taken (c) Costs incurred (d) Amount reclassified from product safety modifications accrual to allowance for doubtful accounts (e) Amount reclassified from accrued expenses to allowance for discounts 21 EX-13.1 2 PORTIONS OF ANNUAL REPORT TO STOCKHOLDERS 1 [LOGO] [GRAPHIC] Sturm, Ruger & Company, Inc. 1999 Annual Report 2 [LOGO] ARMS MAKERS FOR Front Cover: The illustration depicted on the cover is the Currier & Ives print "Camping Out, 'Some of the Right Sort' "by Louis Mauer, ca. 1856. Currier & Ives print courtesy of The Adirondack Museum 3 [GRAPHIC] Ruger Advanced Materials Group is a major producer of high quality titanium, ferrous (both chrome-molybdenum and stainless steel), and aluminum precision investment castings. With over 700 employees spread across four facilities, the Advanced Materials Group provides a wide variety of castings for both Ruger firearms plants and numerous commercial and industrial customers. In addition, these facilities also house the continuing research efforts endeavoring to produce technologically superior products for use in a number of recreational, industrial, and commercial applications. 4 A Father's Advice If a sportsman true you'd be Listen carefully to me... Never, never let your gun Pointed be at anyone. That it may unloaded be Matters not the least to me. When a hedge or fence you cross Though of time it cause a loss From your gun the cartridge take For the greater safety's sake. If twixt you and neighboring gun Bird shall fly or beast may run Let this maxim ere be thine "Follow not across the line." Stops and beaters oft unseen Lurk behind some leafy screen. Calm and steady always be "Never shoot where you can't see." You may kill or you may miss But at all times think of this: "All the pheasants ever bred Won't repay for one man dead." Written by Mark Beaufoy of Coombe House, Shaftsbury, Dorset, England, in 1902, on presenting his eldest, Henry Mark, with his first gun. Reproduction here by permission of the author's granddaughter, Mrs. P.M. Guild. [LOGO] 8 Arms Makers for Responsible Citizens Sturm, Ruger & Company, Inc., Lacey Place, Southport, CT 06490. www.ruger-firearms.com Instruction manuals for all Ruger firearms are available free upon request. Please specify model. 5 [GRAPHIC] RESPONSIBLE CITIZENS 2-3 - To Our Stockholders o 4 - Selected Financial Data o 5 - New Ruger Firearms for 2000 o 6-9 - Management's Discussion and Analysis of Financial Condition and Results of Operations o 10-11 - Timeline for 1999 o 12-13 - Consolidated Balance Sheets o 14 - Consolidated Statements of Income and Stockholders' Equity o 15 - Consolidated Statements of Cash Flows o 16-21 - Notes to Consolidated Financial Statements o 22 - Report of Independent Auditors o 23 - Stockholder Information o 24 - Directors and Officers o Inside Back Cover - Ruger Advanced Materials Group 6 TO OUR STOCKHOLDERS On January 11, 1999, the Company officially completed 50 years of business in the manufacture and sale of high quality sporting firearms for responsible citizens. In addition to this significant milestone, it is important to note that we have also completed nearly 40 years in the investment casting business. In that context, we are pleased to report that 1999 brought record sales in dollars, which in turn resulted in near record earnings for the period. As you read through this report, you will see not only improvements in sales and income, but significant improvements in our overall financial health as a result of this record year. These accomplishments have been the result of carefully planned steps providing long-term growth and improved stockholder value. You may recall about five years ago we increased capital expenditures to expand our manufacturing facilities in an effort to generate internal growth opportunities for the future. Those investments are now paying off, and during 1999 we again approached full capacity at our firearms manufacturing facilities. We must point out that while sales volume from our investment casting segment decreased for the year, our efforts at margin improvements actually resulted in increased earnings over those levels achieved during 1998. More specifically, results for 1999 include sales of $241.7 million, net income of $33.7 million, earnings per share of $1.25, and dividends of $0.80. Comparable results for 1998 were sales of $211.6 million, net income of $23.4 million, earnings per share of $0.87 and dividends of $0.80. A basic tenet of our planning process includes an on going commitment to research and development activity, which continues to lead to the introduction of new products in the Ruger firearms line. 1999 was no exception, and we are pleased to have introduced several new items at both the National Association of Sporting Goods Wholesalers Show in November and at the Shooting, Hunting and Outdoor Trade ("SHOT") Show in Las Vegas, Nevada in January 2000. These new product introductions include our single-barrel Trap Model clay target shotgun, the Ruger No.1 Single-Shot Rifle in stainless steel, and an engraved series of Red Label Over-and-Under Shotguns. As in previous years, our new product ideas were enthusiastically received, and we expect they will result in significant future business. These products are more fully described below and are featured in other sections of this report and our product catalog. o The Ruger Trap Model single-barrel shotgun features a fully adjustable rib for pattern position and a cut-checkered walnut stock, which is adjustable for length of pull, drop at the comb and cast. The target trigger is adjustable for weight of pull and the barrel is manufactured with "controlled pattern" straight grooves running the full length of the barrel to minimize shot dispersion when shooting long-range clay targets that are typical in the sport of trap shooting. The chrome molybdenum monoblock is mated to a stainless steel receiver, and a 34 inch stainless steel barrel is standard. o The new Ruger No. 1 Stainless Steel Single-Shot Rifle with black laminated hardwood stock is resistant to both corrosion and wet-weather warpage, which may cause shifting points of impact and can otherwise degrade accuracy. The action was designed with the extra strength needed to handle the most powerful factory cartridges, and this new stainless steel version is available in a wide range of calibers from .22-250 through the .300 Winchester Magnum. o During Ruger's 50th Anniversary year, limited quantities of engraved Ruger Over-and-Under Shotgun Anniversary Models were produced. These Anniversary Models proved to be such a success that this year we are offering an Engraved Series of Ruger Red Label over-and-under shotguns bearing different engraving than that used on the unique 50th Anniversary Models. These classic arms are now available with special new scroll engraving and finished with a Ruger 24-karat gold eagle, precision engraved on the bottom of the receiver. o Also for our Over-and-Under Shotgun line, .410 Gauge tube inserts are now available so that owners of larger-bore Ruger shotguns can utilize smaller, lighter recoiling .410 gauge ammunition for practice and competitive skeet shooting. Ruger shotguns are now available in 12, 20, 28 and .410 gauge (utilizing these new tubes). While our steel investment casting facilities are working at near capacity, there appear to be new opportunities for some of the available capacity in our titanium foundry. Our goal to expand our titanium investment casting sales may come both in new applications not previously seen as appropriate for this specialty metal, and in new ideas for increasing the market share of existing titanium products. We 2 7 expect to increase the applications for titanium usage and to make our expertise in the casting process widely known and available for a variety of potential customers in 2000. We cannot fail to mention a very significant and disturbing phenomenon which occurred during 1999. We write of the completely misguided and misdirected lawsuits against the legitimate firearms industry filed by certain mayors, threatened by politically ambitious state attorneys general, and even proposed by this Administration's Department of Housing and Urban Development. Everyone with knowledge of this Company knows that we have always taken our responsibility as a manufacturer of high-quality sporting and law enforcement firearms most seriously. We scrupulously conform our conduct and business practices to all aspects of the many Federal, State and local laws and regulations that govern our conduct. Both violent crime and firearms accidents have been steadily and dramatically dropping to record lows during the last half of the 1990's, even as our firearms sales have increased. We have been an industry leader with regard to safety precautions taken for the benefit of our customers and the law-abiding citizens of this nation. Yet we have been forced to expend an inordinate amount of resources fighting legally and factually baseless municipal lawsuits. They are legally baseless in that courts across the nation have consistently rejected the legal underpinnings of such spurious claims of wrongdoing on our part. They are factually baseless even to the extent that in the only case of its kind to go to trial, a Brooklyn jury in the 1999 case of Hamilton, et. al. v. Accu-Tek, et. al. found the Company's sales and marketing practices to be appropriate and non-negligent. In fact, none of our products manufactured during the last 25 years has ever been found by any court or jury to be "defective," "unreasonably dangerous," or to lack any required safety device or warnings. All our products come with appropriate locking devices, a practice which we ourselves pioneered in 1987. However, for political ends, certain politicians wrongly seek to portray us as an enemy. Capitalizing on the government's power to coerce and prodded by agenda-driven special interest groups, they waste taxpayer money on trial lawyers in vain attempts to bludgeon a small industry into conformance with their own social agenda. One attorney general has referred to the power of governments to force this industry to unilaterally accede to his gun-control demands without legislative or regulatory authority to do so as "a meat axe." Is this the depth to which the political processes practiced by these governmental usurpers has sunk? They willfully ignore the law, the Constitution, due process, and separation of powers to regulate by litigation, even when elected legislatures reject such lawsuits. It is interesting to note that the public also overwhelmingly rejects misusing the court system to sue law-abiding firearms manufacturers for criminal misuse of non-defective firearms, often exceeding 80% rejection of this notion in public opinion surveys. We must, and will, fight such intrusive governmental violation of our democratic legislative process, while continually supporting efforts to prosecute illegal gun sellers and misusers, and promulgating truly effective safety efforts to decrease the accidental misuse of our products even further. Such claims remain at historic low levels. Already in January 2000, the design of our M-77 rifle was unanimously found to be non-defective and non-negligent in the case of Smith v. Sturm, Ruger by a jury which deliberated for only 15 minutes to reach this correct conclusion. We would like to take this opportunity to again express our appreciation to our 2,000 loyal employees whose talents and efforts helped to make this a record year. They, as always, take advantage of each opportunity to help the Company meet and exceed our goals, and for this we are profoundly grateful. As requested by several stockholders, we are again holding our annual meeting in New London, New Hampshire, and hope you will join us there on May 11, 2000. /s/ William B. Ruger William B. Ruger Chairman, Chief Executive Officer, and Treasurer /s/ William B. Ruger, Jr. William B. Ruger, Jr. Vice Chairman, Senior Executive Officer, President, and Chief Operating Officer February 11, 2000 3 8 SELECTED FINANCIAL DATA (Dollars in thousands, except per share data)
Year Ended December 31, - ----------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Net firearms sales ................................. $188,564 $144,898 $141,863 $148,829 $155,622 Net castings sales ................................. 53,100 66,682 67,520 74,466 36,847 - ----------------------------------------------------------------------------------------------------------------------------------- Total net sales .................................... $241,664 $211,580 $209,383 $223,295 $192,469 =================================================================================================================================== Cost of products sold .............................. $170,650 $157,048 $146,143 $150,200 $134,930 Gross profit ....................................... 71,014 54,532 63,240 73,095 57,539 Income before income taxes ......................... 55,483 39,372 46,639 56,835 43,846 Income taxes ....................................... 21,749 15,946 18,889 22,450 17,670 Net income ......................................... 33,734 23,426 27,750 34,385 26,176 Basic and diluted earnings per share ............... 1.25 0.87 1.03 1.28 0.97 Cash dividends per share ........................... 0.80 0.80 0.80 0.80 0.70 December 31, - ----------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Working capital .................................... $118,593 $102,395 $ 97,551 $ 95,217 $ 91,942 Total assets ....................................... 211,585 196,734 199,794 189,890 178,552 Total stockholders' equity ......................... 166,826 154,564 152,920 146,727 133,735 Book value per share ............................... 6.20 5.74 5.68 5.45 4.97 Return on stockholders' equity ..................... 21.0% 15.2% 18.5% 24.5% 20.1% Current ratio ...................................... 5.2 to 1 5.1 to 1 4.5 to 1 5.0 to 1 4.6 to 1 Common shares outstanding .......................... 26,910,700 26,910,700 26,922,800 26,916,800 26,910,800 Number of stockholders of record ................... 2,046 1,974 1,971 1,899 1,678 Number of employees ................................ 1,952 2,130 1,978 2,094 1,937
Selected Financial Data should be read in conjunction with the Consolidated Financial Statements and accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations. Return on Stockholder's Earnings Net Sales Net Income Equity Per Share Millions of dollars Millions of dollars Percent Dollars [LINE CHART] [LINE CHART] [LINE CHART] [LINE CHART] 4 9 NEW RUGER FIREARMS FOR 2000 ================================================================================ Ruger Trap Model Shotgun [GRAPHIC] The new Ruger Trap Model shotgun redefines the field. It joins our popular Sporting Clays models on the clay target fields. Demanding trap shooters will appreciate its adjustable rib, butt plate, and stock comb; and its revolutionary "controlled pattern" grooved barrel helps ensure target-breaking pattern density at longer ranges. Ruger No. 1 Stainless Steel Single-Shot Rifle [GRAPHIC] Since the "Golden Age" of American Rifle shooting at Creedmoor more than 120 years ago, the single-shot rifle has fit the philosophy of those sportsmen demanding the best. The new stable laminated wood stocks on this model help ensure shot-to-shot accuracy, combined with a tasteful brushed-finish stainless steel barrel and receiver. Engraved Red Label Stainless All Weather Shotgun [GRAPHIC] The Ruger Red Label shotgun has been a favorite in upland game fields since 1979. Now, waterfowlers and others hunting in adverse environmental conditions can use their prized shotgun without fear of corrosion or stock warpage, due to this new model's all-stainless construction and synthetic stock, which will endure the elements. A tastefully engraved receiver inspires true pride of ownership. 5 10 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS Introduction The Company's sales are comprised of the sales of fire- arms and investment castings. The Company is the only U.S. firearms manufacturer which offers products in all four industry product categories - rifles, shotguns, pistols, and revolvers. Investment castings are manufactured using titanium, ferrous, and aluminum alloys. Results of Operations Year ended December 31, 1999, as compared to year ended December 31, 1998: Consolidated net sales of $241.7 million were achieved by the Company in 1999 representing an increase of $30.1 million or 14.2% from net sales of $211.6 million in 1998. Firearms segment net sales increased by $43.7 million or 30.2% to $188.6 million in 1999 from $144.9 million in the prior year. Firearms unit shipments for 1999 increased 23.9% from 1998. The unit increase reflects continued strong overall market demand. In 1999, shipments of all major industry product categories, pistols, revolvers, shotguns, and rifles, increased from 1998. A heightened level of demand for most existing products and the introduction of the Company's Fiftieth Anniversary commemorative models, which were available exclusively in 1999, contributed to the overall increase in firearms unit sales. The Fiftieth Anniversary models had the greatest impact on pistols which achieved a unit growth of 46.6%. In order to maintain the overall level of shipments in 2000, the quantity of Fiftieth Anniversary models shipped in 1999, which will not be available for sale in 2000, must be replaced by other models. In 1999, the Company instituted a new sales incentive program for its distributors that allowed them to earn rebates of up to 15% if certain annual overall sales targets were achieved. This program replaced four programs offered in 1998. Firearms segment sales were favorably impacted by pricing increases on selected models which went into effect on December 1, 1998, July 1, 1999, and December 1, 1999. Casting segment net sales decreased $13.6 million or 20.4% to $53.1 million in 1999 from $66.7 million in 1998 as a result of lower unit volume. This was primarily attributable to a decrease in the shipment of titanium golf club heads. A long-term contract with Callaway Golf Company, Inc. ("Callaway Golf") was substantially completed during the fourth quarter of 1999 with no additional long-term supply contract anticipated from Callaway Golf. As a result, the level of future titanium golf club head shipments is expected to continue to decline somewhat, but this may be offset to some extent by anticipated increasing golf club head business from Karsten Manufacturing Corporation. The Company continues to actively pursue other titanium and steel markets as well as other golf club casting business, and has had some success in this regard, most notably as sole supplier of stainless steel propellers for Outboard Marine Corporation. Consolidated cost of products sold for 1999 was $170.7 million compared to $157.0 million in 1998, representing an increase of 8.7%. This increase of $13.7 million was primarily attributable to significantly increased sales by the firearms segment and increased product liability expenses, partially offset by a reduction in investment casting segment sales. Gross profit as a percentage of net sales increased to 29.4% in 1999 from 25.8% in 1998. The improvement is due to the increased volume of firearms sales in 1999, the aforementioned pricing increases for selected models, and the absence in 1999 of significant additional start-up costs associated with potential customers in the investment casting segment, as had been the case in 1998. These improvements were partially offset by increased product liability costs in 1999. Selling, general and administrative expenses remained constant at $19.3 million and $19.2 million in 1999 and 1998, respectively. Other income-net decreased slightly from $4.0 million in 1998 to $3.8 million in 1999, reflecting a gain on the sale of non-manufacturing real estate in the second quarter of 1998, though this decrease was partially offset by increased interest income earned on short-term investments in 1999. The effective income tax rate decreased from 40.5% in 1998 to 39.2% in 1999, reflecting lower effective state tax rates. As a result of the foregoing factors, consolidated net income in 1999 increased to $33.7 million from $23.4 million 6 11 in 1998, representing an increase of $10.3 million or 44.0%. Year ended December 31, 1998, as compared to year ended December 31, 1997: Consolidated net sales of $211.6 million were achieved by the Company in 1998, representing an increase of $2.2 million or 1.0% from net sales of $209.4 million in 1997. Firearms segment net sales increased by $3.0 million or 2.1% to $144.9 million in 1998 from $141.9 million in the prior year. Firearms unit shipments for 1998 increased modestly (1.7%) from 1997 due to growth in rifles partially offset by a reduced demand for revolvers. Rifle growth reflects an increase of 18.6% in shipments of M-77 models, and 11.2% for 10/22 models, over 1997. Firearms segment sales were favorably impacted by a price increase on selected models which went into effect on July 1, 1998. Casting segment net sales experienced a slight decrease of 1.2% to $66.7 million in 1998 from $67.5 million in 1997 as a result of slightly lower volume. Strong golf club head shipments, primarily to Callaway Golf Company, Inc. ("Callaway Golf") in the first half of 1998, waned during the latter half of the year. Consolidated cost of products sold for 1998 was $157.0 million compared to $146.1 million in 1997, representing an increase of 7.5%. This increase was primarily attributable to significant additional start-up costs associated with new investment casting segment customers and products and increased sales by the firearms segment, partially offset by a reduction in product liability expense as a result of favorable litigation experience. Gross profit as a percentage of net sales decreased to 25.8% in 1998 from 30.2% in 1997. The decrease is due to significant additional start-up costs associated with new customers and products in the investment castings segment and the increased level of participation in the firearms sales incentive programs in 1998, partially offset by the firearms price increases effective July 1, 1998. Selling, general and administrative expenses increased by 7.3% or $1.3 million to $19.2 million from $17.9 million in 1997. This increase resulted from a national marketing campaign employed by the Company in 1998 which featured numerous advertisement placements in various outdoor and sporting media. Other income-net increased from $1.3 million in 1997 to $4.0 million in 1998, reflecting start-up expenses incurred in 1997 at Antelope Hills, LLC, a former joint venture between the Company and Callaway Golf, and a gain on the sale of non-manufacturing real estate in the second quarter of 1998. The effective income tax rate was 40.5% in 1998 and 1997. As a result of the foregoing factors, consolidated net income in 1998 decreased to $23.4 million from $27.8 million in 1997, representing a decrease of $4.4 million or 15.6%. Financial Condition At December 31, 1999, the Company had cash, cash equivalents and short-term investments of $78.8 million, working capital of $118.6 million and a current ratio of 5.2 to 1. Cash provided by operating activities was $56.7 million, $24.6 million, and $49.1 million in 1999, 1998, and 1997, respectively. The increase in cash provided in 1999 is principally the result of higher net income and the $9.6 million reduction in inventories in 1999 compared to an increase in inventories of $2.0 million in 1998. The Company follows an industry-wide practice of offering a "dating plan" to its firearms customers on selected products, which allows the purchasing distributor to buy the products commencing in December, the start of the Company's marketing year, and pay for them on extended terms. Discounts are offered for early payment. The dating plan provides a revolving payment plan under which payments for all shipments made during the period December through February have to be made by April 30. Shipments made in subsequent months have to be paid for within approximately 90 days. Dating plan receivable balances were $16.3 million and $15.7 million at December 31, 1999 and 1998, respectively. The Company has reserved the right to discontinue the dating plan at any time and has been able to finance this plan from internally generated funds provided by operating activities. The Company purchases its various raw materials from a number of suppliers. There is, however, a limited supply of these materials in the marketplace at any given time which 7 12 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (Continued) can cause the purchase prices to vary based upon numerous market factors. The Company believes that it has adequate quantities of raw materials in inventory to provide ample time to locate and obtain additional items at a reasonable cost without interruption of its manufacturing operations. However, if market conditions result in a significant prolonged inflation of certain prices, the Company's results could be adversely affected. Capital expenditures during the past three years averaged $5.0 million per year. In 2000, the Company expects to spend approximately $8 million on capital expenditures to continue to upgrade and modernize equipment at each of its manufacturing facilities. The Company finances, and intends to continue to finance, all of these activities with funds provided by operations. In 1999 the Company paid dividends of $21.5 million. This amount reflects the regular quarterly dividend of $0.20 per share paid in March, June, September, and December 1999. On January 17, 2000, the Company declared a regular quarterly dividend of $0.20 per share payable on March 15, 2000. Future dividends depend on many factors, including internal estimates of future performance and the Company's need for funds. Historically, the Company has not required external financing. Based on its cash flow and unencumbered assets, the Company believes it has the ability to raise substantial amounts of short-term or long-term debt. The Company does not anticipate any need for external financing in 2000. The purchase of firearms is subject to many federal, state and local governmental regulations. The basic federal laws are the National Firearms Act, the Federal Firearms Act, and the Gun Control Act of 1968. These laws generally prohibit the private ownership of fully automatic weapons and place certain restrictions on the interstate sale of firearms unless certain licenses are obtained. The Company does not manufacture fully automatic weapons, other than for the law enforcement market, and holds all necessary licenses under these Federal laws. From time to time, congressional committees review proposed bills relating to the regulation of firearms. These proposed bills generally seek either to restrict or ban the sale and, in some cases, the ownership of various types of firearms. Several states currently have laws in effect similar to the aforementioned legislation. Until November 30, 1998, the "Brady Law" mandated a nationwide five-day waiting period and background check prior to the purchase of a handgun. As of November 30, 1998, the National Instant Check System, which applies to both handguns and long guns, replaced the five-day waiting period. The Company believes that the "Brady Law" has not had a significant effect on the Company's sales of firearms, nor does it anticipate any impact on sales in the future. The "Crime Bill" took effect on September 13, 1994, but none of the Company's products were banned as so-called "assault weapons." To the contrary, all the Company's then-manufactured long guns were exempted by name as "legitimate sporting firearms." The Company remains strongly opposed to laws which would unduly restrict the rights of law-abiding citizens to acquire firearms for legitimate purposes. The Company believes that the private ownership of firearms is guaranteed by the Second Amendment to the United States Constitution and that the widespread private ownership of firearms in the United States will continue. However, there can be no assurance that the regulation of firearms will not become more restrictive in the future and that any such restriction would not have a material adverse effect on the business of the Company. The Company is a defendant in numerous lawsuits involving its products and is aware of certain other such claims. The Company has expended significant amounts of financial resources and management time in connection with product liability litigation. Management believes that, in every case, the allegations are unfounded, and that the shootings and any results therefrom were due to negligence or misuse of the firearm by third parties or the claimant, and that there should be no recovery against the Company. Defenses further exist to the suits brought by cities, municipalities and counties based, among other reasons, on established state law precluding the recovery by municipalities for the essential government services, the remoteness of the claims, the types of damages sought to be recovered, and limitations on the extraterritorial authority which may be exerted by a city, municipality or county under state 8 13 and Federal law, including State and Federal Constitutions. On October 7, 1999, a lawsuit brought against the Company and numerous firearms manufacturers and distributors by the mayor of Cincinnati, Ohio, City of Cincinnati v. Beretta U.S.A. Corp., et. al., was dismissed. In December 1999, similar lawsuits brought by the cities of Bridgeport, Connecticut, and Miami, Florida, were also dismissed. Motions to dismiss other such lawsuits are pending or will be filed when timely. The Company's management monitors the status of known claims and the product liability accrual, which includes amounts for asserted and unasserted claims. While it is not possible to forecast the outcome of litigation or the timing of costs, in the opinion of management, after consultation with special and corporate counsel, it is not probable and is unlikely that litigation, including punitive damage claims, will have a material adverse effect on the financial position of the Company, but may have a material impact on the Company's financial results for a particular period. In the normal course of its manufacturing operations, the Company is subject to occasional governmental proceedings and orders pertaining to waste disposal, air emissions and water discharges into the environment. The Company believes that it is generally in compliance with applicable environmental regulations and the outcome of such proceedings and orders will not have a material adverse effect on its business. The Company expects to realize its deferred tax assets through tax deductions against future taxable income or carry back against taxes previously paid. Inflation's effect on the Company's operations is most immediately felt in cost of products sold because the Company values inventory on the LIFO basis. Generally, under this method, the cost of products sold reported in the financial statements approximates current costs, and thus, reduces distortion in reported income. The use of historical cost depreciation has a beneficial effect on cost of products sold. The Company has been affected by inflation in line with the general economy. Some of the Company's computer programs were originally written using two digits rather than four to define the applicable year. As a result, those computer programs may have had time-sensitive software that recognized a date using "00" as the year 1900 rather than the year 2000. This could have caused a system failure or miscalculation causing disruptions of operations, including a temporary inability to process transactions, send invoices, or engage in similar normal business activities. This was commonly referred to as the "Year 2000" issue. In 1999, the Company completed an assessment of the Year 2000 issue as it related to information technology systems, non-information technology applications, and third parties. Currently, the Company has not experienced any material Year 2000 problems with its internal systems, and is not aware of any such problems experienced by its customers, vendors and other third parties. However, if latent Year 2000 problems exist in internal systems or Year 2000 problems exist with third parties and remain unknown, the Company may experience an adverse material impact related to Year 2000. Forward-Looking Statements and Projections The Company may, from time to time, make forward-looking statements and projections concerning future expectations. Such statements are based on current expectations and are subject to certain qualifying risks and uncertainties, such as market demand, sales levels of firearms, anticipated castings sales and earnings (including those from titanium golf club components), the need for external financing for operations or capital expenditures, the impact of Year 2000 issues, the results of pending litigation against the Company (including lawsuits filed by mayors or other governmental entities and membership organizations), and the impact of future firearms control and environmental legislation, any one or more of which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made, and the Company undertakes no obligation to publish revised forward-looking statements to reflect events or circumstances after the date such forward-looking statements are made or to reflect the occurrence of unanticipated events. 9 14 TIMELINE FOR 1999 JANUARY [GRAPHIC] The Ruger MK4-50 "50th Year" commemorative pistol, evocative of the first Ruger .22 pistol introduced in 1949, is introduced at the SHOT Show in Atlanta, Georgia. FEBRUARY [GRAPHIC] The Company is fully exonerated by a jury in Brooklyn, New York of any charges of marketing negligence in the closely-watched case of Hamilton, et. al. v. Accutek, et. al. On February 14, "60 Minutes" airs an interview of Ruger Vice President & General Counsel Stephen L. Sanetti by Mike Wallace, CBS News, in which Mr. Sanetti effectively asserts the Company's position that the lawsuits filed by several cities are baseless, misdirected, and an abuse of the legal system. MARCH [GRAPHIC] Charlton Heston, legendary film star and current President of the NRA, meets with William B. Ruger in beautiful Prescott, Arizona. APRIL [GRAPHIC] Ruger 10/22 target rifles again take the spotlight as the rifle of choice in the 11th NSSF/Chevy Truck Sportsman's Team Challenge in Ft. Lauderdale, Florida, and broadcast on ESPN. MAY [GRAPHIC] Company President William B. Ruger, Jr. presides over the Company's annual shareholders' meeting in New London, New Hampshire. JUNE JULY [GRAPHIC] An editorial entitled "Our Daily Dose of Death" by Chairman William B. Ruger appears in The Washington Post. It is highly critical of gratuitous media violence and its desensitizing impact upon children, and exhorts the media to begin acting responsibly in their portrayals of firearms use. 10 15 AUGUST [GRAPHIC] A celebration honoring Walter P. Sych, the Company's sixth employee, and marking his 50th year of service to the Company, is held at Southport, Connecticut Headquarters. SEPTEMBER [GRAPHIC] The William B. Ruger Firearms Gallery of the National Firearms Museum in Alexandria, Virginia continues its special exhibition of "Guns of the Gold Rush of 1849." Special "50th Year" engraved commemorative Ruger #1 rifles and "Red Label" Over-and-Under shotguns are announced by the Company. OCTOBER [GRAPHIC] "Firing Blanks" and "Ohio Judge Throws Out Cincinnati's Lawsuit Against Gun Industry" read the headlines as the first city lawsuit against the Company is dismissed. NOVEMBER [GRAPHIC] In conjunction with the New Hampshire Firearms Safety Coalition and Injury Prevention Center at Dartmouth Medical School, a firearms safety videotape for young people entitled "Staying Safe Around Guns. What You Don't Know Can Hurt You" is released. Major funding is provided by the Company. [GRAPHIC] The Ruger Trap Model clay target shotgun is first publicly shown at the National Association of Sporting Goods Wholesalers Show in Phoenix, Arizona to enthusiastic reviews. DECEMBER [GRAPHIC] "Court Rejects Gun Litigation" Bridgeport, CT Besides the December dismissals of the Bridgeport and Miami lawsuits, the year ends with predictions of a banner sales year confirmed. At the same time, the Bureau of Justice Statistics and the National Safety Council report that both firearms crime and gun accidents have dropped dramatically to 25 year-lows. The Ruger 10/22 Magnum rifle is awarded the "Shooting Industry Academy of Excellence Award" as Rifle of the Year. 11 16 CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)
December 31, 1999 1998 Assets Current Assets Cash and cash equivalents .............................. $ 8,164 $ 4,680 Short-term investments ................................. 70,611 43,247 Trade receivables, less allowances for doubtful accounts ($1,392 and $1,299) and discounts ($1,749 and $1,888) 20,270 23,046 Inventories: Finished products .................................... 9,467 13,402 Materials and products in process .................... 28,518 34,150 - --------------------------------------------------------------------------------------------------- 37,985 47,552 Deferred income taxes .................................. 8,700 7,999 Prepaid expenses and other assets ...................... 1,123 1,091 - --------------------------------------------------------------------------------------------------- Total Current Assets ................................... 146,853 127,615 Property, Plant, and Equipment Land and improvements ................................ 3,567 3,495 Buildings and improvements ........................... 30,831 30,370 Machinery and equipment .............................. 91,213 88,067 Dies and tools ....................................... 23,822 22,986 - --------------------------------------------------------------------------------------------------- 149,433 144,918 Allowances for depreciation .......................... (102,567) (93,833) - --------------------------------------------------------------------------------------------------- 46,866 51,085 Deferred income taxes .................................. 2,979 3,400 Other assets ........................................... 14,887 14,634 - --------------------------------------------------------------------------------------------------- Total Assets ........................................... $ 211,585 $ 196,734 ===================================================================================================
See accompanying notes. 12 17
December 31, 1999 1998 Liabilities and Stockholders' Equity Current Liabilities Trade accounts payable and accrued expenses $ 5,623 $ 3,936 Product safety modifications ............... 598 752 Product liability .......................... 3,000 3,000 Employee compensation and benefits ......... 11,158 11,181 Workers' compensation ...................... 4,975 4,173 Income taxes ............................... 2,906 2,178 - --------------------------------------------------------------------------------------- Total Current Liabilities .................. 28,260 25,220 Product Liability Accrual .................. 16,499 16,950 Contingent Liabilities (Note 6) ............ -- -- Stockholders' Equity Common Stock, non-voting, par value $1: Authorized shares - 50,000; none issued .. -- -- Common Stock, par value $1: Authorized shares - 40,000,000 Issued and outstanding shares - 26,910,700 26,911 26,911 Additional paid-in capital ................. 2,434 2,434 Retained earnings .......................... 137,614 125,409 Accumulated other comprehensive income ..... (133) (190) - --------------------------------------------------------------------------------------- Total Stockholders' Equity ................. 166,826 154,564 - --------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity . $ 211,585 $ 196,734 =======================================================================================
13 18 CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
Year ended December 31, 1999 1998 1997 Net firearms sales ................. $188,564 $144,898 $141,863 Net castings sales ................. 53,100 66,682 67,520 - ------------------------------------------------------------------------------------------------ Total net sales .................... 241,664 211,580 209,383 Cost of products sold .............. 170,650 157,048 146,143 - ------------------------------------------------------------------------------------------------ Gross profit ....................... 71,014 54,532 63,240 Expenses: Selling .......................... 13,367 13,515 12,412 General and administrative ....... 5,930 5,655 5,453 - ------------------------------------------------------------------------------------------------ 19,297 19,170 17,865 - ------------------------------------------------------------------------------------------------ 51,717 35,362 45,375 Other income-net ................... 3,766 4,010 1,264 - ------------------------------------------------------------------------------------------------ Income before income taxes ......... 55,483 39,372 46,639 Income taxes ....................... 21,749 15,946 18,889 - ------------------------------------------------------------------------------------------------ Net Income ......................... $ 33,734 $ 23,426 $ 27,750 ================================================================================================ Basic and Diluted Earnings Per Share $ 1.25 $ 0.87 $ 1.03 ================================================================================================ Cash Dividends Per Share ........... $ 0.80 $ 0.80 $ 0.80 ================================================================================================
See accompanying notes. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
Accumulated Additional Other Common Paid-In Retained Comprehensive Stock Capital Earnings Income Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 ............................. $26,917 $2,514 $117,296 -- $146,727 Net income ............................................. 27,750 27,750 Additional minimum pension liability ................... $(145) (145) -------- Comprehensive income ................................... 27,605 -------- Issuance of 6,000 shares of Common Stock ............... 6 118 124 Cash dividends ......................................... (21,536) (21,536) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 ............................. 26,923 2,632 123,510 (145) 152,920 Net income ............................................. 23,426 23,426 Additional minimum pension liability ................... (45) (45) -------- Comprehensive income ................................... 23,381 -------- Repurchase of 12,100 shares of Common Stock ............ (12) (198) (210) Cash dividends ......................................... (21,527) (21,527) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 ............................. 26,911 2,434 125,409 (190) 154,564 Net income ............................................. 33,734 33,734 Additional minimum pension liability ................... 57 57 -------- Comprehensive income ................................... 33,791 -------- Cash dividends ......................................... (21,529) (21,529) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 ............................. $26,911 $2,434 $137,614 $(133) $166,826 ===================================================================================================================================
See accompanying notes. 14 19 CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year ended December 31, 1999 1998 1997 Operating Activities Net income ................................................ $ 33,734 $ 23,426 $ 27,750 Adjustments to reconcile net income to cash provided by operating activities: Depreciation .......................................... 8,734 10,295 9,208 Gain on sale of land .................................. (169) (825) -- Issuance of Common Stock .............................. -- -- 124 Net provision for product safety modifications ........ (154) (118) (432) Deferred income taxes ................................. (280) 526 696 Changes in operating assets and liabilities: Trade receivables ................................... 2,776 (1,928) (44) Inventories ......................................... 9,567 (2,003) 9,534 Trade accounts payable and accrued expenses ......... 1,687 (692) (3) Prepaid expenses, other assets, and other liabilities 551 (215) (910) Product liability ................................... (451) (2,268) -- Income taxes ........................................ 728 (1,614) 3,197 - ------------------------------------------------------------------------------------------------------------------------------ Cash provided by operating activities ................. 56,723 24,584 49,120 Investing Activities Property, plant, and equipment additions .................. (4,515) (5,969) (4,511) Purchases of short-term investments ....................... (184,807) (131,521) (160,757) Proceeds from sales or maturities of short-term investments .................................. 157,443 133,758 145,925 Net proceeds from sale of land ............................ 169 1,077 -- Investment in joint venture ............................... -- -- 518 Purchase of Callaway Golf's interest in joint venture ..... -- -- (7,000) - ------------------------------------------------------------------------------------------------------------------------------ Cash used by investing activities ..................... (31,710) (2,655) (25,825) Financing Activities Dividends paid ............................................ (21,529) (21,527) (21,536) Repurchase of Common Stock ................................ -- (210) -- - ------------------------------------------------------------------------------------------------------------------------------ Cash used by financing activities ..................... (21,529) (21,737) (21,536) - ------------------------------------------------------------------------------------------------------------------------------ Increase in cash and cash equivalents ....................... 3,484 192 1,759 Cash and cash equivalents at beginning of year .............. 4,680 4,488 2,729 - ------------------------------------------------------------------------------------------------------------------------------ Cash and Cash Equivalents at End of Year .................... $ 8,164 $ 4,680 $ 4,488 ==============================================================================================================================
See accompanying notes. 15 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Significant Accounting Policies Organization Sturm, Ruger & Company, Inc. (the "Company") is principally engaged in the design, manufacture, and sale of firearms and precision investment castings. The Company's design and manufacturing operations are located in the United States. Substantially all sales are domestic. The Company's firearms are sold through a select number of independent wholesale distributors to the sporting and law enforcement markets. Investment castings are sold either directly to or through manufacturers' representatives to companies in a wide variety of industries. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Revenue Recognition Revenue is recognized upon the shipment of products. Cash Equivalents The Company considers interest-bearing deposits with financial institutions with remaining maturities of three months or less at the time of acquisition to be cash equivalents. Short-term Investments Short-term investments are recorded at cost plus accrued interest, which approximates market, and are principally United States Treasury Bills, all maturing within one year. The income from short-term investments is included in other income - net. The Company intends to hold these investments until maturity. Inventories Inventories are stated at the lower of cost, principally determined by the last-in, first-out (LIFO) method, or market. If inventories had been valued using the first-in, first-out method, inventory values would have been higher by approximately $40.1 million and $38.7 million at December 31, 1999 and 1998, respectively. During 1999, inventory quantities were reduced. This reduction resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the current cost of purchases, the effect of which decreased cost of products sold by approximately $0.5 million. Property, Plant, and Equipment Property, plant, and equipment are stated on the basis of cost. Depreciation is computed by the straight-line and declining balance methods. Income Taxes Income taxes are accounted for using the liability method in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109. Under the liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of the Company's assets and liabilities. Product Liability The Company provides for product liability claims. The provision for product liability claims is charged to cost of products sold. Advertising Costs The Company expenses advertising costs as incurred. Advertising expenses for the years ended December 31, 1999, 1998, and 1997 were $1.7 million, $3.1 million, and $2.3 million, respectively. Stock Options The Company records stock option compensation on an intrinsic value basis in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." The Company also provides pro forma disclosures of stock option compensation recorded on a fair value basis in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation." 16 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Earnings Per Share Basic earnings per share is based upon the weighted-average number of shares of Common Stock outstanding during the year, which was 26,910,700 in 1999, 26,911,700 in 1998, and 26,918,800 in 1997. Diluted earnings per share for 1999 and 1998 reflect the impact of options outstanding using the treasury stock method. This results in diluted weighted-average shares outstanding of 26,910,700 in 1999 and 26,912,900 in 1998. 2. Income Taxes The Federal and state income tax provision (benefit) consisted of the following (in thousands):
- --------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- Current Deferred Current Deferred Current Deferred - --------------------------------------------------------------------------------------------------------------------------------- Federal ........................ $ 18,421 $ (234) $ 13,593 $ 464 $ 15,865 $ 607 State .......................... 3,608 (46) 1,827 62 2,328 89 - --------------------------------------------------------------------------------------------------------------------------------- $ 22,029 $ (280) $ 15,420 $ 526 $ 18,193 $ 696 =================================================================================================================================
Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
December 31, 1999 1998 - -------------------------------------------------------------------------------------- Deferred tax assets: Product liability ............................ $ 7,644 $ 8,080 Employee compensation and benefits ........... 3,828 2,167 Product safety modifications ................. 234 305 Allowances for doubtful accounts and discounts 1,794 1,652 Inventories .................................. 1,694 948 Other ........................................ 513 2,682 - -------------------------------------------------------------------------------------- Total deferred tax assets ...................... 15,707 15,834 - -------------------------------------------------------------------------------------- Deferred tax liabilities: Prepaid insurance ............................ 295 313 Depreciation ................................. 1,631 2,287 Pension plans ................................ 2,102 1,835 - -------------------------------------------------------------------------------------- Total deferred tax liabilities ................. 4,028 4,435 - -------------------------------------------------------------------------------------- Net deferred tax assets ........................ $11,679 $11,399 ======================================================================================
The effective income tax rate varied from the statutory Federal income tax rate as follows:
Year ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------ Statutory Federal income tax rate ............ 35.0% 35.0% 35.0% State income taxes, net of Federal tax benefit 4.1 4.7 5.0 Other items .................................. .1 .8 .5 - ------------------------------------------------------------------------------------------------ Effective income tax rate .................... 39.2% 40.5% 40.5% ================================================================================================
The Company made income tax payments of approximately $22.0 million, $17.0 million, and $15.0 million, during 1999, 1998, and 1997, respectively. 3. Joint Venture In 1995, the Company entered into a joint venture agreement with Callaway Golf Company, Inc. ("Callaway Golf") to construct and operate a foundry for the production of golf club heads investment cast in titanium. The joint venture, named Antelope Hills, LLC ("Antelope Hills"), was owned 50% by the Company and 50% by Callaway Golf. On June 25, 1997, the Company purchased Callaway Golf's interest in Antelope Hills for $7 million. As a result, Antelope Hills is now a wholly owned subsidiary of the Company and is consolidated in the accompanying financial statements. 17 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. Pension Plans The Company and its subsidiaries sponsor two defined benefit pension plans which cover substantially all employees. A third defined benefit pension plan is non-qualified and covers certain executive officers of the Company. The cost of these defined benefit plans and the balances of plan assets and obligations are shown below (in thousands). Change in Benefit Obligation 1999 1998 - ------------------------------------------------------------------------------- Benefit obligation at January 1 ......................... $ 34,250 $ 30,738 Service cost ........................... 1,405 1,252 Interest cost .......................... 2,290 2,114 Actuarial loss (gain) .................. (3,492) 1,386 Benefits paid .......................... (1,401) (1,240) - ------------------------------------------------------------------------------- Benefit obligation at December 31 ....................... 33,052 34,250 - ------------------------------------------------------------------------------- Change in Plan Assets - ------------------------------------------------------------------------------- Fair value of plan assets at January 1 ......................... 29,325 26,016 Actual return on plan assets ........... 453 2,783 Employer contributions ................. 1,743 1,766 Benefits paid .......................... (1,401) (1,240) - ------------------------------------------------------------------------------- Fair value of plan assets at December 31 ....................... 30,120 29,325 - ------------------------------------------------------------------------------- Funded status .......................... (2,932) (4,925) Unrecognized net actuarial loss ........ 4,760 6,272 Unrecognized prior service cost ......................... 2,103 2,555 Unrecognized transition obligation ........................... (331) (452) - ------------------------------------------------------------------------------- Net amount recognized .................. $ 3,600 $ 3,450 =============================================================================== Amounts Recognized on the Balance Sheet 1999 1998 - ------------------------------------------------------------------------------ Prepaid benefit cost ....................... $ 6,061 $ 5,369 Accrued benefit liability .................. (3,929) (3,767) Intangible asset ........................... 1,246 1,528 Accumulated other comprehensive income ..................... 133 190 Deferred tax asset ......................... 89 130 - ------------------------------------------------------------------------------ $ 3,600 $ 3,450 - ------------------------------------------------------------------------------ Weighted-Average Assumptions as of December 31, - ------------------------------------------------------------------------------ Discount rate .............................. 7.50% 6.75% Expected return on plan assets ............. 9.00% 9.00% Rate of compensation increases ............. 5.00% 5.00% Components of Net Periodic Pension Cost - ------------------------------------------------------------------------------ Service cost ............................... $ 1,405 $ 1,252 Interest cost .............................. 2,290 2,114 Expected return on assets ................................ (2,663) (2,336) Amortization of unrecognized transition asset ......................... (121) (122) Recognized gains ........................... 229 171 Prior service cost recognized .............. 452 452 - ------------------------------------------------------------------------------ Net periodic pension cost .................. $ 1,592 $ 1,531 ============================================================================== The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with projected benefit obligations in excess of plan assets were $10.1 million, $8.1 million, and $5.2 million, respectively, as of December 31, 1999 and $10.3 million, $8.1 million, and $5.1 million, respectively, as of December 31, 1998. The Company also sponsors a defined contribution plan which covers substantially all of its salaried employees and a non-qualified defined contribution plan which covers certain of its salaried employees. Expenses related to the defined contribution plans were $1.2 million, $1.1 million, and $1.1 million, in 1999, 1998, and 1997, respectively. In 1999 and 1998, the Company changed the weighted-average discount rates which decreased the projected benefit obligation by approximately $3.6 million in 1999 and increased the projected benefit obligation by approximately $1.2 million in 1998. In accordance with SFAS No. 87, "Employers' Accounting for Pension Costs", the Company recorded an additional minimum pension liability which reduced comprehensive income by $45,000 and $145,000 in 1998 and 1997, respectively. In 1999, the additional minimum pension liability was adjusted and comprehensive income increased by $57,000. 5. Stock Incentive and Bonus Plans In 1998, the Company adopted, and in May 1999 the shareholders approved, the "1998 Stock Incentive Plan" (the "1998 Plan") under which employees may be granted options to purchase shares of the Company's authorized but unissued stock and stock appreciation rights. The Company has reserved 2,000,000 shares for issuance under the 1998 Plan. On December 31, 1998, 1,470,000 stock options were granted under the 1998 Plan. These options have an exercise price equal to the fair market value of the shares of the Company at the date of grant, become vested ratably over five years, and expire ten years from the date of grant. To date, no stock appreciation rights have been granted. 18 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table summarizes the activity of the 1998 Plan: Shares Exercise Price - -------------------------------------------------------------------------------- Outstanding at January 1, 1998 ...... -- -- Granted ........................... 1,470,000 $11.94 Exercised ......................... -- -- Canceled .......................... -- -- - -------------------------------------------------------------------------------- Outstanding at December 31, 1998 .... 1,470,000 11.94 Granted ........................... -- -- Exercised ......................... -- -- Canceled .......................... (50,000) 11.94 - -------------------------------------------------------------------------------- Outstanding at December 31, 1999 .... 1,420,000 $11.94 - -------------------------------------------------------------------------------- There were 284,000 exercisable options at December 31, 1999. At December 31, 1999, an aggregate of 580,000 shares remain available for grant under the 1998 Plan. The Company accounts for employee stock options under APB Opinion No. 25, "Accounting for Stock-Based Compensation." The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation expense has been recognized for the stock option plans. Had compensation expense for the plans been determined in accordance with SFAS No. 123, the Company's 1999 and 1998 net income and earnings per share would have been reduced to the following pro forma amounts (in thousands, except per share data):
1999 1998 - ----------------------------------------------------------------------------------- Net Income: As reported ......................... $ 33,734 $ 23,426 Pro forma ........................... $ 33,394 $ 23,426 Earnings per Share (Basic and Diluted): As reported ......................... $ 1.25 $ 0.87 Pro forma ........................... $ 1.24 $ 0.87 - -----------------------------------------------------------------------------------
The weighted-average fair value of options granted under the 1998 Plan was estimated at $1.99 on the date of grant using the Black- Scholes option-pricing model with the following weighted-average assumptions: 6.7% dividend yield, expected volatility of 30.3%, risk free rate of return of 5.5% and expected lives of 5 years. The estimated fair value of options granted is subject to the assumptions made and if the assumptions changed, the estimated fair value amounts could be significantly different. The Company's Stock Bonus Plan, as amended, covers its key employees excluding members of the Ruger family. Pursuant to the Plan, awards are made of Common Stock and a cash bonus approximating the estimated income tax on the awards. At December 31, 1999, 502,000 shares of Common Stock were reserved for future awards. 6. Contingent Liabilities The Company is a defendant in approximately 40 lawsuits involving its products and is aware of certain other such claims. These lawsuits and claims fall within two categories: (i) those that claim damages from the Company related to allegedly defective product design which stem from a specific incident. These lawsuits and claims are based principally on the theory of "strict liability" but also may be based on negligence, breach of warranty, and other legal theories, and (ii) those brought by cities, municipalities, counties, and individuals (including certain putative class actions) against numerous firearms manufacturers, distributors and dealers seeking to recover damages allegedly arising out of the misuse of firearms by third parties in the commission of homicides, suicides and other shootings involving juveniles and adults. The complaints by municipalities seek damages, among other things, for the costs of medical care, police and emergency services, public health services, and the maintenance of courts, prisons, and other services. In certain instances, the plaintiffs seek to recover for decreases in property values and loss of business within the city due to criminal violence. In addition, nuisance abatement and/or injunctive relief is sought to change the design, manufacturing, marketing and distribution practices of the various defendants. These suits allege, among other claims, strict liability or negligence in the design of products, public nuisance, negligent entrustment, assault, negligent distribu- 19 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) tion, deceptive or fraudulent advertising, violation of consumer protection statutes and conspiracy or concert of action theories. None of these cases allege a specific injury to a specific individual as a result of the misuse or use of any of the Company's products. In many of these cases punitive damages, as well as compensatory damages, are demanded. Aggregate claimed amounts presently exceed product liability accruals and if applicable, insurance coverage. Management believes that, in every case, the allegations are unfounded, and that the shootings and any results therefrom were due to negligence or misuse of the firearm by third-parties or the claimant, and that there should be no recovery against the Company. Defenses further exist to the suits brought by cities, municipalities and counties based, among other reasons, on established state law precluding recovery by municipalities for the essential government services, the remoteness of the claims, the types of damages sought to be recovered, and limitations on the extraterritorial authority which may be exerted by a city, municipality or county under state and Federal law, including State and Federal Constitutions. While it is not possible to forecast the outcome of litigation or the timing of costs, in the opinion of management, after consultation with special and corporate counsel, it is not probable and is unlikely that litigation, including punitive damage claims, will have a material adverse effect on the financial position of the Company, but may have a material impact on the Company's financial results for a particular period. 7. Operating Segment Information The Company has two reportable segments: firearms and investment castings. The firearms segment manufactures and sells rifles, pistols, revolvers, and shotguns principally to a select number of distributors primarily located in the United States. The investment casting segment consists of three operating divisions which manufacture and sell titanium, ferrous, and aluminum investment castings. The Company evaluates performance and allocates resources, in part, based on profit or loss before taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies (see Note 1). Intersegment sales are recorded at the Company's cost plus a fixed profit percentage. The Company's assets are located entirely in the United States and export sales are insignificant. In 1999, revenues from two customers in the firearms segment totaled $27.1 million and $25.1 million, respectively. Revenues from one customer in the firearms segment totaled $22.2 million and $23.8 million in 1998 and 1997, respectively. Revenues from one customer in the casting segment totaled $31.0 million, $41.9 million, and $51.6 million in 1999, 1998, and 1997, respectively.
Year ended December 31, (in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------- Net Sales Firearms ........................... $ 188,564 $ 144,898 $ 141,863 Castings Unaffiliated ..................... 53,100 66,682 67,520 Intersegment ..................... 24,604 25,322 20,698 - ------------------------------------------------------------------------------------------------------- 77,704 92,004 88,218 Eliminations ....................... (24,604) (25,322) (20,698) - ------------------------------------------------------------------------------------------------------- $ 241,664 $ 211,580 $ 209,383 ======================================================================================================= Income Before Income Taxes Firearms ........................... $ 48,404 $ 33,166 $ 31,811 Castings ........................... 4,741 4,320 13,663 Corporate .......................... 2,338 1,886 1,165 - ------------------------------------------------------------------------------------------------------- $ 55,483 $ 39,372 $ 46,639 - ------------------------------------------------------------------------------------------------------- Identifiable Assets Firearms ........................... $ 71,756 $ 79,633 $ 75,024 Castings ........................... 35,753 43,760 50,097 Corporate .......................... 104,076 73,341 74,673 - ------------------------------------------------------------------------------------------------------- $ 211,585 $ 196,734 $ 199,794 ======================================================================================================= Depreciation Firearms ........................... $ 3,733 $ 4,774 $ 4,413 Castings ........................... 5,001 5,521 4,795 - ------------------------------------------------------------------------------------------------------- $ 8,734 $ 10,295 $ 9,208 ======================================================================================================= Capital Expenditures Firearms ........................... $ 3,165 $ 3,011 $ 1,350 Castings ........................... 1,350 2,958 3,161 - ------------------------------------------------------------------------------------------------------- $ 4,515 $ 5,969 $ 4,511 =======================================================================================================
20 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. Quarterly Results of Operations (Unaudited) The following is a tabulation of the unaudited quarterly results of operations for the two years ended December 31, 1999 (in thousands, except per share data):
Three Months Ended - ------------------------------------------------------------------------------------------------------------------------------------ 3/31/99 6/30/99 9/30/99 12/31/99 - ------------------------------------------------------------------------------------------------------------------------------------ Net sales ................................................................ $ 62,891 $ 63,018 $ 55,444 $ 60,311 Gross profit ............................................................. 18,274 16,437 15,618 20,685 Net income ............................................................... 8,383 7,537 6,981 10,833 Basic and diluted earnings per share ..................................... 0.31 0.28 0.26 0.40 Three Months Ended - ------------------------------------------------------------------------------------------------------------------------------------ 3/31/98 6/30/98 9/30/98 12/31/98 - ------------------------------------------------------------------------------------------------------------------------------------ Net sales ................................................................ $ 58,521 $ 59,997 $ 43,373 $ 49,689 Gross profit ............................................................. 16,324 17,318 7,933 12,957 Net income ............................................................... 7,162 8,407 2,454 5,403 Basic and diluted earnings per share ..................................... 0.27 0.31 0.09 0.20
During the fourth quarter of 1999, the effective tax rate for the year was reduced to 39.2% due to a favorable change in effective state tax rates. As a result, the effective tax rate for the fourth quarter of 1999 was reduced to 36.3%. The Company made certain adjustments in the fourth quarter of 1998 resulting from changes in estimates that were material to the operating results of the quarter. These adjustments related primarily to LIFO inventory valuation and increased net income in the fourth quarter of 1998 by approximately $3.1 million or $.07 per share. 21 26 [LETTERHEAD OF ERNST & YOUNG LLP] REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors Sturm, Ruger & Company, Inc. We have audited the accompanying consolidated balance sheets of Sturm, Ruger & Company, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sturm, Ruger & Company, Inc. and Subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP February 11, 2000 22 27 STOCKHOLDER INFORMATION Common Stock Data The Company's Common Stock is traded on the New York Stock Exchange under the symbol "RGR." At February 15, 2000 the Company had 2,042 stockholders of record. The following table sets forth, for the periods indicated, the high and low sales prices for the Common Stock as reported on the New York Stock Exchange and dividends paid on Common Stock.
Dividends High Low Per Share - ------------------------------------------------------------------------------------------------------------------------------------ 1999: First Quarter .................................................................. $12.94 $ 8.50 $ .20 Second Quarter ................................................................. 11.94 9.56 .20 Third Quarter .................................................................. 10.94 8.44 .20 Fourth Quarter ................................................................. 9.94 8.25 .20 1998: First Quarter .................................................................. $20.94 $ 17.13 $ .20 Second Quarter ................................................................. 21.19 16.56 .20 Third Quarter .................................................................. 17.38 13.44 .20 Fourth Quarter ................................................................. 15.94 10.56 .20
Items of Interest to Stockholders Annual Meeting The Annual Meeting of Stockholders will be held on May 11, 2000 at the Lake Sunapee Country Club, New London, New Hampshire, at 10:30 a.m. Principal Banks Fleet Bank, Southport, Connecticut Lake Sunapee Savings Bank, Newport, New Hampshire Bank One, Arizona, NA, Prescott, Arizona Independent Auditors Ernst & Young LLP, Stamford, Connecticut Transfer Agent Harris Trust & Savings Bank 311 W. Monroe Street, 11th Floor Chicago, Illinois 60606 312-360-5190 Form 10-K Report Available A copy of the Sturm, Ruger & Company, Inc. Annual Report on Form 10-K filed with the Securities and Exchange Commission for 1999 can be obtained free of charge by writing to: Corporate Secretary Sturm, Ruger & Company, Inc. One Lacey Place Southport, Connecticut 06490 Telephone: 203-259-7843 Fax: 203-254-2195 Facilities Southport, Connecticut Corporate Headquarters Newport, New Hampshire Firearms Division Pine Tree Castings Division Prescott, Arizona Firearms Division Ruger Investment Casting Division Antelope Hills, LLC Manchester, New Hampshire Uni-Cast Division 23 28 DIRECTORS AND OFFICERS [PHOTOS] Directors William B. Ruger Chairman, Chief Executive Officer, and Treasurer William B. Ruger, Jr. Vice Chairman, Senior Executive Officer, President, and Chief Operating Officer Stephen L. Sanetti Vice President, General Counsel *Richard T. Cunniff **Vice Chairman, Ruane, Cunniff & Co., Inc. *Townsend Hornor Corporate Director *Paul X. Kelley **Partner, J.F. Lehman & Company John M. Kingsley, Jr. Corporate Director **James E. Service Consultant, PGGR/Russell, Inc. Stanley B. Terhune Consultant Officers William B. Ruger Chairman, Chief Executive Officer, and Treasurer William B. Ruger, Jr. Vice Chairman, Senior Executive Officer, President, and Chief Operating Officer Stephen L. Sanetti Vice President, General Counsel Erle G. Blanchard Vice President, Controller Leslie M. Gasper Corporate Secretary *Audit Committee Member **Compensation Committee Member 24 EX-23.1 3 CONSENT OF INDEPENDENT AUDITORS 1 Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of Sturm, Ruger & Company, Inc. of our report dated February 11, 2000, included in the 1999 Annual Report to Stockholders of Sturm, Ruger & Company, Inc. Our audits also included the financial statement schedule of Sturm, Ruger & Company, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333- 84677) pertaining to the Sturm, Ruger & Company, Inc. 1998 Stock Incentive Plan of our report dated February 11, 2000, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Sturm, Ruger & Company, Inc. ERNST & YOUNG LLP Stamford, Connecticut March 17, 2000 51 2 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Sturm, Ruger & Company, Inc. ---------------------------------------- (Registrant) ---------------------------------------- Leslie M. Gasper Corporate Secretary ---------------------------------------- Date Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
- ----------------------------------------------- ---------------------------------------- William B. Ruger William B. Ruger, Jr. Chairman of the Board, Chief Executive Officer, Vice Chairman, Senior Executive Officer, Treasurer, Director President, Chief Operating Officer, (Principal Executive Officer) Director - ----------------------------------------------- ---------------------------------------- John M. Kingsley, Jr. Stanley B. Terhune Director Director - ----------------------------------------------- ---------------------------------------- Richard T. Cunniff Townsend Hornor Director Director - ----------------------------------------------- ---------------------------------------- Paul X. Kelley James E. Service Director Director - ----------------------------------------------- ---------------------------------------- Stephen L. Sanetti Erle G. Blanchard Vice President, General Counsel, Director Vice President, Controller (Principal Financial Officer)
EX-27.1 4 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1,000 8,164 70,611 23,411 3,141 37,985 146,853 149,433 102,567 211,585 28,260 0 0 0 26,911 139,915 211,585 241,664 241,664 170,650 170,650 19,297 0 0 55,483 21,749 33,734 0 0 0 33,734 1.25 1.25
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