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Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark one)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934.

 

For the quarterly period ended September 28, 2014

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934.

 

For the transition period from            to

 

Commission file number 333-171547

 


 

Colt Defense LLC

Colt Finance Corp.

(Exact name of Registrant as specified in its charter)

 

Delaware

 

32-0031950

Delaware

 

27-1237687

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

547 New Park Avenue, West Hartford, CT

 

06110

(Address of principal executive offices)

 

(Zip Code)

 

(860) 232-4489

(Registrant’s telephone number, including area code)

 

Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No o

 

Indicate by check mark whether the Registrant had submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the Registrant was required to submit and post such files).  Yes  x   No  o

 

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer x

 

Smaller reporting company o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes  o No x

 

The number of shares outstanding of the Registrant’s common stock as of November 25, 2014 was none.

 

 

 



Table of Contents

 

COLT DEFENSE LLC AND SUBSIDIARIES

INDEX

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements (unaudited)

 

 

 

Consolidated Balance Sheets — As of September 28, 2014 and December 31, 2013 (As Restated)

3

 

 

Consolidated Statements of Operations — Three and Nine Months Ended September 28, 2014 and September 29, 2013 (As Revised)

4

 

 

Consolidated Statements of Comprehensive Income (Loss) — Three and Nine Months Ended September 28, 2014 and September 29, 2013(As Revised)

5

 

 

Consolidated Statements of Changes in Cash Flows — Nine Months Ended September 28, 2014 and September 29, 2013 (As Revised)

6

 

 

Notes to Consolidated Financial Statements (Unaudited)

7

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

36

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

49

 

 

Item 4. Controls and Procedures

49

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

51

 

 

Item 1A. Risk Factors

51

 

 

Item 6. Exhibits

52

 

 

Signatures

53

 

 

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

Colt Defense LLC and Subsidiaries

Consolidated Balance Sheets

(In thousands of dollars)

(Unaudited)

 

 

 

September 28, 2014

 

December 31, 2013

 

 

 

 

 

(As Restated)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

3,963

 

$

12,594

 

Restricted cash

 

771

 

771

 

Accounts receivable, net

 

14,670

 

22,482

 

Inventories

 

76,553

 

66,674

 

Deferred tax assets

 

166

 

954

 

Other current assets

 

3,013

 

5,962

 

Total current assets

 

99,136

 

109,437

 

 

 

 

 

 

 

Property and equipment, net

 

27,754

 

30,733

 

Goodwill

 

50,749

 

51,225

 

Trademarks

 

50,100

 

50,100

 

Intangible assets with finite lives, net

 

10,798

 

13,415

 

Deferred financing costs

 

5,954

 

7,742

 

Long-term restricted cash

 

572

 

572

 

Other assets

 

1,464

 

1,510

 

Total assets

 

$

246,527

 

$

264,734

 

LIABILITIES AND DEFICIT

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Line of credit

 

$

13,000

 

$

7,083

 

Accounts payable

 

18,018

 

14,038

 

Accrued expenses (Note 11)

 

26,078

 

22,158

 

Pension and retirement liabilities - current portion

 

1,085

 

1,085

 

Customer advances and deferred income

 

13,968

 

19,467

 

Long-term debt - current portion (Note 1 and 10)

 

294,458

 

5,000

 

Accrued distributions to members

 

 

670

 

Total current liabilities

 

366,607

 

69,501

 

Long-term debt

 

 

289,817

 

Pension and retirement liabilities

 

22,881

 

21,670

 

Long-term deferred tax liability

 

19,105

 

18,715

 

Long-term distribution payable to members

 

2,277

 

2,277

 

Other long-term liabilities

 

5,949

 

2,230

 

Total long-term liabilities

 

50,212

 

334,709

 

Total liabilities

 

416,819

 

404,210

 

Commitments and Contingencies (Note 17)

 

 

 

 

 

Deficit:

 

 

 

 

 

Accumulated deficit

 

(158,412

)

(130,136

)

Accumulated other comprehensive loss

 

(11,880

)

(9,340

)

Total deficit

 

(170,292

)

(139,476

)

Total liabilities and deficit

 

$

246,527

 

$

264,734

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

Colt Defense LLC and Subsidiaries

Consolidated Statements of Operations

(In thousands of dollars)

(Unaudited)

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

September 28, 2014

 

September 29, 2013

 

September 28, 2014

 

September 29, 2013

 

 

 

 

 

(As Revised)

 

 

 

(As Revised)

 

Net sales

 

$

51,114

 

$

73,030

 

$

150,827

 

$

201,165

 

Cost of sales

 

40,517

 

58,487

 

125,543

 

149,642

 

Gross profit

 

10,597

 

14,543

 

25,284

 

51,523

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling and commissions

 

3,746

 

4,064

 

12,827

 

10,398

 

Research and development

 

1,250

 

1,714

 

3,885

 

4,015

 

General and administrative

 

4,088

 

3,896

 

11,798

 

10,641

 

 

 

9,084

 

9,674

 

28,510

 

25,054

 

Business development

 

 

463

 

509

 

707

 

Certain transaction cost (benefit)

 

(12

)

461

 

(12

)

877

 

Gain on effective settlement of contract (Note 3)

 

 

(15,264

)

 

(15,264

)

Restructuring cost (benefit) (Note 4)

 

 

631

 

(76

)

631

 

Total operating expenses

 

9,072

 

(4,035

)

28,931

 

12,005

 

Operating income

 

1,525

 

18,578

 

(3,647

)

39,518

 

 

 

 

 

 

 

 

 

 

 

Other expense (income):

 

 

 

 

 

 

 

 

 

Interest expense

 

7,904

 

7,623

 

23,447

 

19,686

 

Other (income)/expense, net

 

(55

)

306

 

(168

)

(1,092

)

Total other expense, net

 

7,849

 

7,929

 

23,279

 

18,594

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before provision for income taxes

 

(6,324

)

10,649

 

(26,926

)

20,924

 

Income tax expense (benefit)

 

1,510

 

(208

)

1,443

 

551

 

Net (loss) income

 

$

(7,834

)

$

10,857

 

$

(28,369

)

$

20,373

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

Colt Defense LLC and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands of dollars)

(Unaudited)

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

September 28, 2014

 

September 29, 2013

 

September 28, 2014

 

September 29, 2013

 

 

 

 

 

(As Revised)

 

 

 

(As Revised)

 

Net (loss) income

 

$

(7,834

)

$

10,857

 

$

(28,369

)

$

20,373

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment:

 

 

 

 

 

 

 

 

 

Foreign currency translation losses

 

(975

)

457

 

(1,115

)

(1,140

)

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefit liabilities:

 

 

 

 

 

 

 

 

 

Other comprehensive income arising during the period

 

(1

)

 

(1,551

)

 

Reclassification adjustment for unrecognized prior service costs and unrecognized loss included in net income (loss)

 

43

 

126

 

126

 

376

 

 

 

42

 

126

 

(1,425

)

376

 

Comprehensive (loss) income

 

$

(8,767

)

$

11,440

 

$

(30,909

)

$

19,609

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



Table of Contents

 

Colt Defense LLC and Subsidiaries

Consolidated Statements of Changes in Cash Flows

(In thousands of dollars)

(Unaudited)

 

 

 

For the Nine Months Ended

 

 

 

September 28, 2014

 

September 29, 2013

 

 

 

 

 

(As Revised)

 

Operating Activities

 

 

 

 

 

Net income (loss)

 

$

(28,369

)

$

20,373

 

Adjustments to reconcile net income (loss) to net cash (used in)/provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

7,086

 

4,294

 

Amortization of financing fees

 

1,788

 

1,403

 

Amortization of debt discount

 

947

 

486

 

Postretirement health plan curtailment

 

(98

)

 

Deferred income taxes

 

1,239

 

(196

)

Gain on sale/disposals of fixed assets

 

 

(15,264

)

Other non-cash items

 

 

110

 

Changes in operating assets and liabilities, net of acquisition:

 

 

 

 

 

Accounts receivable

 

7,464

 

2,954

 

Inventories

 

(10,034

)

(17,514

)

Prepaid expenses and other current assets

 

2,904

 

(243

)

Accounts payable and accrued expenses

 

7,812

 

16,014

 

Accrued pension and retirement liabilities

 

(214

)

(877

)

Customer advances and deferred income

 

(3,732

)

(726

)

Other

 

2,462

 

531

 

Net cash (used in)/provided by operating activities

 

10,745

 

11,345

 

Investing Activities

 

 

 

 

 

Purchases of property and equipment

 

(1,710

)

(6,615

)

Business acquisition, net of cash acquired and reinvested Merger consideration

 

 

(59,488

)

Change in restricted cash

 

 

(355

)

Net cash used in investing activities

 

(1,710

)

(66,458

)

Financing Activities

 

 

 

 

 

Debt issuance costs

 

(56

)

(1,961

)

Repayments of long-term debt

 

(1,250

)

 

Term Loan Borrowings

 

 

47,742

 

Line of credit advances

 

13,500

 

(6

)

Line of credit repayments

 

(7,583

)

 

Capital lease obligation repayment

 

 

(393

)

Proceeds from issuance of common units, net of reinvested consideration proceeds

 

 

5,000

 

Purchase of common units

 

 

(14,000

)

Distributions paid to members

 

(683

)

(2,557

)

Net cash provided by financing activities

 

3,928

 

33,825

 

Effect of exchange rates on cash and cash equivalents

 

(104

)

(478

)

Change in cash and cash equivalents

 

(8,631

)

(21,766

)

Cash and cash equivalents, beginning of period

 

12,594

 

42,373

 

Cash and cash equivalents, end of period

 

$

3,963

 

$

20,607

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

Cash paid for interest

 

$

14,031

 

$

11,503

 

Cash paid for income taxes

 

726

 

1,354

 

Non-cash consideration for sale of equipment

 

 

7

 

Accrued purchases of fixed assets

 

156

 

9

 

Accrued distribution to members

 

 

4,948

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6



Table of Contents

 

Notes to Consolidated Financial Statements (unaudited)

(in thousands of dollars)

 

Note 1   Nature of Business

 

Colt Defense LLC (“Colt Defense” or the “Company”) is one of the world’s oldest and most renowned designers, developers and manufacturers of firearms for military, personal defense and recreational purposes.  The Company’s founder, Samuel Colt, patented the first commercially successful revolving cylinder firearm in 1836 and, in 1847, began supplying U.S. and international military customers with firearms that have set the standards of their era.  Today, the Company’s end customers encompass every segment of the worldwide firearms market, including U.S., Canadian and foreign military forces, global law enforcement and security agencies, consumers seeking personal protection, the hunting and sporting community and collectors.

 

Going Concern

 

During the third quarter of 2014, the Company faced increasing liquidity challenges as a result of several recent business trends impacting the Company’s current and forecasted revenues and cash flows.  These trends included the continued decline in market demand for the Company’s commercial modern sporting rifle (“MSR”), recent declines in demand for the Company’s commercial handguns and delays in anticipated timing of U.S. Government and certain international sales.  As a result, the Company expects to report lower revenues and Adjusted EBITDA (see Note 18 “Segment Information”) for the year-ended December 31, 2014 than it had previously forecasted.  These trends are expected to continue to put pressure on the Company’s liquidity for the foreseeable future.

 

Management’s plan to mitigate the business risk associated with the Company’s increased liquidity challenges include: (i) seeking revenue growth across all sales channels, (ii) executing initiatives designed to optimize the Company’s performance and reduce costs, (iii) managing inventory levels for positive cash flow by focusing the production schedule on the Company’s backlog of firm commitments, (iv) working closely with U.S. Government regulators to obtain timely approval of international sales and (v) seeking ways to restructure the Company’s unsecured debt to reduce overall debt service costs. 

 

As announced in the Company’s Form 12b-25 filed on November 12, 2014, there was uncertainty about whether the Company would have the cash necessary to pay its November 17, 2014 senior notes interest payment under the Company’s senior notes issued on November 10, 2009 by Colt Defense LLC and Colt Finance Corp. (“Senior Notes”). On November 17, 2014, the Company entered into a $70,000 senior secured term loan facility with Wilmington Savings Fund Society, FSB, as agent and Morgan Stanley Senior Funding Inc., as lender, (the “MS Term Loan”) (see Note 22 “Subsequent Events”) which replaced the Company’s existing Term Loan agreement (see Note 10 “Notes Payable and Long-Term Debt – Term Loan”) and provided the Company a net amount of $4,101 of additional liquidity.  The MS Term Loan also enabled the Company to make its November 17, 2014 Senior Notes interest payment of $10,938.  In addition, the lenders, under the Company’s existing Credit Agreement (see Note 10 “Notes Payable and Long-Term Debt – Credit Agreement”), also agreed to amendments to the Credit Agreement which allowed the Company to enter into the MS Term Loan and provided for additional liquidity through a modification of excess availability thresholds.

 

After giving effect to the aforementioned market and business challenges as well as the sales opportunities that the Company believes exist, the Company has forecasted revenue and Adjusted EBITDA growth in 2015.   There can be no assurance that the actual demand for the Company’s commercial MSRs or commercial handguns will meet the Company’s internal forecast.  In addition, there can be no assurance that U.S. Government or international sales will occur as the Company has forecasted primarily due to a U.S. Government regulatory approval process which is difficult to predict.  As a result of these factors, and notwithstanding the additional cash the Company obtained from the MS Term Loan, risk exists with respect to the Company achieving its internally forecasted results and projected cash flows for the remainder of 2014 and 2015.  Absent the Company achieving its internal forecast for the remainder of 2014 and 2015 and the successful execution of Management’s strategy, including addressing other long-term debt such as the Senior Notes, it is probable that the Company may not have sufficient cash and cash equivalents on-hand along with availability under its Credit Agreement, as amended, to be able to meet its obligations as they come due over the next 12 months, including the Company’s May 15, 2015 Senior Notes interest payment of $10,938.  

 

As it is probable that the Company may not have sufficient liquidity to be able to make its May 15, 2015 Senior Notes interest payment without meeting the Company’s internal projections (including addressing the Company’s Senior Notes), the Company’s long-term debt has been classified as current on the consolidated balance sheet.  Currently the Company does not have sufficient funds to repay the Senior Notes upon an actual acceleration of maturity.  In the event of an accelerated maturity, the Company’s lenders may take actions to secure their position as creditors and mitigate their potential risks.  These events would adversely impact the Company’s liquidity (see Note 9 “Liquidity”).  These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

As of January 1, 2014, Colt Defense effected a legal entity restructuring whereby Colt Defense and New Colt Holding Corp. (“New Colt”) (See Note 3, “Acquisition” and Note 12, “Income Taxes”) contributed their assets and operations to Colt’s Manufacturing Company LLC (“Colt’s Manufacturing”), a limited liability corporation.  The contribution created a combined operating entity for the Company’s U.S. based operations.

 

7



Table of Contents

 

As of December 31, 2013, Colt Defense owned 100% of Colt Finance Corp. (“Colt Finance”), New Colt and Colt Defense Technical Services LLC (“CDTS”), New Colt owned 100% of Colt’s Manufacturing and Colt Defense and CDTS collectively owned 100% of Colt International which owned 100% of Colt Canada Corporation (“Colt Canada”).  Effective January 1, 2014, Colt Defense, a limited liability corporation, owned 100% of Colt Finance, New Colt, a C corporation, and CDTS, a limited liability corporation.  Colt Defense and New Colt collectively own 100% of Colt’s Manufacturing as a result of the legal entity restructuring and Colt Defense and CDTS collectively own 100% of Colt International Coöperatief U.A. (“Colt International”), a Dutch coöperatief, which owns 100% of Colt Canada a Canadian C corporation.

 

The company operates on a monthly 4-4-5 week calendar with the end of each month on a Sunday, except for the month of December which ends on the 31st. The first two months of each quarter, with the exception of January, have four weeks and the third month of each quarter, with the exception of December, has five weeks.  The 4-4-5 calendar ensures that the end date of the period is always the same day of the week, which is utilized by the Company for shift and manufacturing planning, and it also ensures that every period is the same length.

 

On March 31, 2014, Colt Defense through its domestic operating subsidiary Colt’s Manufacturing reached an agreement with UAW Local 376 for a new five year contract covering approximately 529 employees.  The new contract will be in effect from April 1, 2014 through March 31, 2019.

 

The following items, which  are discussed in further detail in the notes to the consolidated financial statements for the third quarter of 2014 had an impact on the Company’s results as included in the Form 10-Q:

 

The Company restated its Annual Report on Form 10-K/A for the year ended December 31, 2013 and revised the unaudited interim financial statements for the first three quarters in the fiscal year ended December 31, 2013  (see Note 2, “Summary of Significant Accounting Policies — Restatement of Previously Issued Consolidated Financial Statements”).

 

On August 6, 2014, the Company entered into Amendment No. 1 to the Term Loan (the “Term Loan Amendment”).  Absent an amendment to the Term Loan, the Company would have been in violation of certain of its financial covenants as of June 29, 2014 and September 28, 2014.  The Term Loan Amendment eliminated and modified certain covenants and provided for an extension of the time period for delivery of certain financial information to its lenders.   Also, on August 6, 2014, the Company obtained an amendment to its credit agreement (“Credit Agreement”) that provided an extension of the time period for delivery of certain financial information to its lenders, (See Note 10, “Notes Payable and Long-Term Debt”).

 

In response to, among other factors, the decrease in demand for commercial rifles, the Company initiated actions which resulted in a workforce reduction of 33 salaried and 64 hourly employees in the second and third quarters of 2014 (see Note 17, “Commitments and Contingencies”).  In conjunction with the workforce reduction, the Company recognized a curtailment of its postretirement health plan during the second quarter of 2014 (see Note 13, “Pension and Postretirement Benefits”).

 

During the third quarter of 2014, based upon new, additional information, the Company reassessed the M240 machine gun program (the “M240 Program”) accruals and determined an incremental contract obligation expense of $1,722 was required.  The incremental contract obligation expense related to additional inventory reserves for defective parts.  In addition, during the third quarter of 2014 the Company recorded a $200 increase in sales and a corresponding increase in cost of sales related to a contract modification signed in the fourth quarter of this year with the U.S. Government.  The Company continues to evaluate its M240 Program and believes sales of M240 machine guns will commence in the first quarter of 2015.  (See Note 17, “Commitments and Contingencies”)

 

Note 2   Summary of Significant Accounting Policies

 

Restatement of Previously Issued Consolidated Financial Statements

 

In the Company’s 2013 Annual Report on Form 10-K/A, it restated its previously issued consolidated financial statements and the related disclosures for the year ended December 31, 2013 (the “Restated Period”).  The Company also revised the unaudited interim financial statements for the first three quarters in the fiscal year ended December 31, 2013 and the fourth quarter in the fiscal year ended December 31, 2012 (the “Revised Periods”).

 

8



Table of Contents

 

The restatement is the result of the Company’s correction of a financial statement error attributable to the lack of recognition of the impact of a contract modification related to the M240 Program for the U.S. Government in the Company’s fourth quarter 2013 results.  There was no impact to the Company’s net sales or cost of sales in the three and nine month periods ended September 29, 2013 related to the M240 Program error.  In conjunction with the correction of the M240 Program error, other previously recorded, immaterial out-of-period adjustments were also adjusted to be reflected in the proper period, along with the reclassification of business development expenses from other expense (income) to operating income.  Correction of these previously recorded, immaterial out-of-period adjustments had the combined effect on the consolidated statements of operations for the three and nine month periods ended September 29, 2013 of decreasing net income by $288 and $0, respectively.

 

The impacts of correcting the previously recorded, immaterial out-of-period adjustments and the reclassification of business development expenses for the three and nine month periods ended September 29, 2013 were as follows:

 

 

 

Adjustments to

 

 

 

Previously Reported Income

 

 

 

Statement - Income / (Expense)

 

 

 

Three Months Ended

 

Nine Months Ended

 

For the years ended

 

September 29, 2013

 

September 29, 2013

 

Net sales

 

$

(208

)

(231

)

Cost of sales

 

(168

)

(89

)

Gross profit

 

(40

)

(142

)

Selling and commissions (A)

 

221

 

12

 

Research and development

 

4

 

6

 

General and administrative (B)

 

10

 

(207

)

Business development (C)

 

463

 

707

 

Operating income

 

(738

)

(660

)

Other (income) / expense (C)

 

(440

)

(707

)

Income tax expense

 

(10

)

47

 

Net income (loss) (B)

 

(288

)

 

 


(A)       Primarily relates to the reclassification of $214 of armorers training expenses from selling and commissions to cost of sales.

(B)       Primarily relates to the timing of recognition of certain professional fees.

(C)       Primarily relates to the reclassification of transaction costs incurred in connection with contemplated merger and acquisition activities from other expense/(income) to business development.

 

This Quarterly Report on Form 10-Q for the quarter ended September 28, 2014 includes the impact of adjustments to the Restated Period and Revised Periods on the applicable unaudited quarterly financial information for the quarter ended September 29, 2013.  In addition, the Company’s future Quarterly Reports on Form 10-Q for subsequent quarterly periods during 2014 will also include the impact of adjustments to the Restated Period and Revised Periods on applicable 2013 comparable prior quarter and year to date periods.  The effect of the revision on previously issued quarterly information as of and for the three and nine months ended September 29, 2013, is set forth in this footnote.

 

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Table of Contents

 

Comparison of revised financial statements to financial statements as previously reported

 

The following tables compare the Company’s previously reported Consolidated Statements of Operations, Comprehensive Income (Loss) and Changes in Cash Flows for the quarter ended September 29, 2013 to the corresponding financial statements for the quarterly period as revised.

 

Colt Defense LLC and Subsidiaries

Consolidated Statement of Operations

(In thousands of dollars)

(Unaudited)

 

 

 

Three months ended September 29, 2013

 

Nine months ended September 29, 2013

 

 

 

 

 

 

 

As Revised

 

 

 

 

 

As Revised

 

 

 

As

 

 

 

in this Quarterly

 

As

 

 

 

in this Quarterly

 

 

 

Previously

 

 

 

Report on

 

Previously

 

 

 

Report on

 

 

 

Reported

 

Adjustments

 

Form 10-Q

 

Reported

 

Adjustments

 

Form 10-Q

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

73,238

 

$

(208

)

$

73,030

 

$

201,396

 

$

(231

)

$

201,165

 

Cost of sales

 

58,655

 

(168

)

58,487

 

149,731

 

(89

)

149,642

 

Gross Profit

 

14,583

 

(40

)

14,543

 

51,665

 

(142

)

51,523

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and commissions

 

3,843

 

221

 

4,064

 

10,386

 

12

 

10,398

 

Research and development

 

1,710

 

4

 

1,714

 

4,009

 

6

 

4,015

 

General and administrative

 

3,886

 

10

 

3,896

 

10,848

 

(207

)

10,641

 

 

 

9,439

 

235

 

9,674

 

25,243

 

(189

)

25,054

 

Business development

 

 

463

 

463

 

 

707

 

707

 

Certain transaction costs

 

461

 

 

461

 

877

 

 

877

 

Gain on effective settlement of contract (Note 3)

 

(15,264

)

 

(15,264

)

(15,264

)

 

(15,264

)

Restructuring costs (Note 4)

 

631

 

 

631

 

631

 

 

631

 

Total operating expenses

 

(4,733

)

698

 

(4,035

)

11,487

 

518

 

12,005

 

Operating income

 

19,316

 

(738

)

18,578

 

40,178

 

(660

)

39,518

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense/(income):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

7,623

 

 

7,623

 

19,686

 

 

19,686

 

Other (income)/expense, net

 

746

 

(440

)

306

 

(385

)

(707

)

(1,092

)

Total other expenses, net

 

8,369

 

(440

)

7,929

 

19,301

 

(707

)

18,594

 

Income (loss) before provision for income taxes

 

10,947

 

(298

)

10,649

 

20,877

 

47

 

20,924

 

Income tax expense

 

(198

)

(10

)

(208

)

504

 

47

 

551

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

11,145

 

$

(288

)

$

10,857

 

$

20,373

 

$

 

$

20,373

 

 

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Table of Contents

 

Colt Defense LLC and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands of dollars)

(Unaudited)

 

 

 

For the Three Months Ended September 29, 2013

 

 

 

 

 

 

 

As Revised

 

 

 

As

 

 

 

in this Quarterly

 

 

 

Previously

 

 

 

Report on

 

 

 

Reported

 

Adjustments

 

Form 10-Q

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

11,145

 

$

(288

)

$

10,857

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Foreign currency translation adjustment:

 

 

 

 

 

 

 

Foreign currency translation gains (losses)

 

465

 

(8

)

457

 

Pension and postretirement benefit liabilities:

 

 

 

 

 

 

 

Other comprehensive income (loss) arising during the period

 

 

 

 

Reclassification adjustment for unrecognized prior service costs and unrecognized loss included in net income (loss)

 

126

 

 

126

 

 

 

126

 

 

126

 

Comprehensive income (loss)

 

$

11,736

 

$

(296

)

$

11,440

 

 

Consolidated Statements of Comprehensive Income (Loss)

(In thousands of dollars)

(Unaudited)

 

 

 

For the Nine Months Ended September 29, 2013

 

 

 

 

 

 

 

As Revised

 

 

 

As

 

 

 

in this Quarterly

 

 

 

Previously

 

 

 

Report on

 

 

 

Reported

 

Adjustments

 

Form 10-Q

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

20,373

 

$

 

$

20,373

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Foreign currency translation adjustment:

 

 

 

 

 

 

 

Foreign currency translation gains (losses)

 

(1,132

)

(8

)

(1,140

)

Pension and postretirement benefit liabilities:

 

 

 

 

 

 

 

Other comprehensive income (loss) arising during the period

 

 

 

 

Reclassification adjustment for unrecognized prior service costs and unrecognized loss included in net income (loss)

 

376

 

 

376

 

 

 

376

 

 

376

 

Comprehensive income (loss)

 

$

19,617

 

$

(8

)

$

19,609

 

 

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Colt Defense LLC and Subsidiaries

Consolidated Statement of Changes in Cash Flows

(In thousands of dollars)

(Unaudited)

 

 

 

For the Nine Months Ended September 29, 2013

 

 

 

 

 

 

 

As Revised

 

 

 

As

 

 

 

in this Quarterly

 

 

 

Previously

 

 

 

Report on

 

 

 

Reported

 

Adjustments

 

Form 10-Q

 

Operating Activities

 

 

 

 

 

 

 

Net income

 

$

20,373

 

$

 

$

20,373

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

4,294

 

 

4,294

 

Amortization of financing fees

 

1,403

 

 

1,403

 

Amortization of debt discount

 

486

 

 

486

 

Deferred income taxes

 

(195

)

(1

)

(196

)

Gain on sale/disposals of fixed assets

 

(15,264

)

 

(15,264

)

Other non-cash items

 

110

 

 

110

 

Changes in operating assets and liabilites, net of acquisition:

 

 

 

 

 

 

 

Accounts receivable

 

2,713

 

241

 

2,954

 

Inventories

 

(17,644

)

130

 

(17,514

)

Prepaid expense and other current assets

 

46

 

(289

)

(243

)

Accounts payable and accrued expense

 

16,299

 

(285

)

16,014

 

Accrued pension and retirement liabilities

 

(1,089

)

212

 

(877

)

Customer advances and deferred income

 

(726

)

 

(726

)

Other

 

531

 

 

531

 

Net cash provided by operating activities

 

11,337

 

8

 

11,345

 

Investing Activities

 

 

 

 

 

 

 

Purchase of property and equipment

 

(6,615

)

 

(6,615

)

Business acquisition, net of cash acquired and reinvested Merger consideration

 

(63,488

)

4,000

 

(59,488

)

Change in restricted cash

 

(355

)

 

(355

)

Net cash used in investing activities

 

(70,458

)

4,000

 

(66,458

)

Financing Activities

 

 

 

 

 

 

 

Debt issuance costs

 

(1,961

)

 

(1,961

)

Term Loan Borrowings

 

47,742

 

 

47,742

 

Line of credit advances

 

(6

)

 

(6

)

Capital lease obligation repayment

 

(393

)

 

(393

)

Proceeds from issuance of common units, net of reinvested consideration proceeds

 

9,000

 

(4,000

)

5,000

 

Purchase of common units

 

(14,000

)

 

(14,000

)

Distributions paid to members

 

(2,557

)

 

(2,557

)

Net cash provided by financing activities

 

37,825

 

(4,000

)

33,825

 

Effect of exchange rates on cash and cash equivalents

 

(470

)

(8

)

(478

)

Change in cash and cash equivalents

 

(21,766

)

 

(21,766

)

Cash and cash equivalents, beginning of period

 

42,373

 

 

42,373

 

Cash and cash equivalents, end of period

 

$

20,607

 

$

 

$

20,607

 

 

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Table of Contents

 

Basis of Accounting and Consolidation

 

The accompanying unaudited consolidated financial statements of Colt Defense and Colt Finance (collectively, the “Company”, or “Colt”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  In the opinion of management, all significant adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of the financial position, results of operations and cash flows for the three and nine months ended September 28, 2014 and September 29, 2013, as revised, have been included.  The financial information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes in the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2013, as restated. The consolidated balance sheet dated December 31, 2013, as restated, included in this quarterly report on Form 10-Q has been derived from the audited consolidated financial statements at that time, but does not include all disclosures required by GAAP. Operating results for the three and nine months ended September 28, 2014 are not necessarily indicative of the results to be expected for any subsequent interim period or for the year ending December 31, 2014.

 

During the third quarter of 2014, the Company faced increasing liquidity challenges as a result of several recent business trends impacting the Company’s current and forecasted revenues and cash flows.  These trends included the continued decline in market demand for the Company’s commercial MSR, recent declines in demand for the Company’s commercial handguns, and delays in anticipated timing of U.S. Government and certain international sales.  As a result, the Company expects to report significantly lower revenues and Adjusted EBITDA (see Note 18 “Segment Information”) for the year-ended December 31, 2014 than it had previously forecasted.  These trends are expected to continue to put significant pressure on the Company’s liquidity for the foreseeable future.

 

Absent the Company achieving its internal forecast for the remainder of 2014 and 2015 and the successful execution of Management’s plans, including restructuring of the unsecured debt, it is probable that the Company may not have sufficient cash and cash equivalents on-hand along with availability under its Credit Agreement, as amended, to be able to meet its obligations as they come due over the next 12 months, including the Company’s May 15, 2015 Senior Notes interest payment of $10,938.  As it is probable that the Company may not have sufficient liquidity to be able to make its May 15, 2015 Senior Notes interest payment, the Company’s long-term debt has been classified as current in the consolidated balance sheet.  Currently the Company does not have sufficient funds to repay the debt upon an actual acceleration of maturity.  In the event of an accelerated maturity, the Company’s lenders may take actions to secure their position as creditors and mitigate their potential risks.  These events would adversely impact the Company’s liquidity (see Note 9 “Liquidity”).  These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company’s financial statements have been prepared on the going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of operations.  The consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded asset amounts or classification of liabilities should the Company be unable to continue as a going concern.

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.

 

On July 12, 2013 (the “Merger Date”), the Company acquired 100% ownership (the “Merger”) of New Colt.  The results of New Colt have been included in the unaudited consolidated financial statements from the Merger Date.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s significant estimates include estimates used to determine the fair value of assets acquired and liabilities assumed related to the acquisition of New Colt (see Note 3, “Acquisition”) and accruals for the Company’s M240 Program (see Note 17, “Commitments and Contingencies”), excess and obsolete inventory, income tax expense, deferred tax asset valuation, medical claims payable, and worker’s compensation expense. Actual results could differ materially from those estimates.

 

Self-Funded Medical Plan

 

As of September 28, 2014, the Company maintained two employee group medical plans, one of which covers the Company’s Canadian subsidiary and one of which cover the Company’s domestic operations and is self-funded. The Company’s domestic medical plan liabilities are limited by individual and aggregate stop loss insurance coverage.  Included in accrued expense in the accompanying consolidated balance sheets is a liability for reported claims outstanding, as well as an estimate of incurred but unreported claims, based on the Company’s best estimate of the ultimate cost not covered by stop loss insurance.  The individual stop loss limit for the Company’s domestic self-funded medical plan is $175 as of September 28, 2014.  The aggregate stop loss limit for the Company’s self-funded medical plan is $14,547 as of September 28, 2014.  The actual amount of the claims could differ from the total consolidated estimated liability recorded of $416 and $823 at September 28, 2014 and December 31, 2013, respectively.

 

Self-Funded Worker’s Compensation

 

As of December 31, 2013, the Company insured its domestic worker’s compensation with a $250 per event deductible program, that incorporates individual, accident and aggregate stop loss limits of $2,000. The Company’s liability for estimated premiums and incurred losses under the Company’s deductible policies that have been actuarially determined and accrued for as of September 28, 2014 and December 31, 2013 were $958 and $214, respectively.  The Company revised its disclosure with respect to the Company’s liability for estimated premiums and incurred losses under the Company’s deductible policies as of December 31, 2013. The Company does not consider the revision of this disclosure material.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consists of cash and short-term, highly liquid investments with original maturities of three months or less at the date of purchase.

 

Restricted Cash

 

Restricted cash at September 28, 2014 and December 31, 2013, consists of funds deposited to secure standby letters of credit primarily for performance guarantees related to the Company’s international business.

 

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Table of Contents

 

Revenue

 

The Company recognizes revenue when evidence of an arrangement exists, delivery of the product or service has occurred and title and risk of loss have passed to the customer, the sales price is fixed or determinable, and collectability of the resulting receivable is reasonably assured.

 

The Company accounts for revenues and earnings under two long-term government contracts/programs with interrelated multiple elements (procurement of parts, manufacturing and refurbishment services) using concepts of proportionate performance. These contracts effect reported results for all periods presented. The Company estimates the total profit on each contract as the difference between the total estimated revenue and total estimated cost of the contract and recognizes that profit over the remaining life of the contract using an output measure (the ratio of units completed to the total number of units to be refurbished under the contract). The Company computes an earnings rate for each contract, including general and administrative expense, to determine operating earnings. The Company reviews the earnings rate quarterly to assess revisions in contract values and estimated costs at completion. Any changes in earnings rates and recognized contract to date earnings resulting from these assessments are made in the period the revisions are identified. Contract costs include production costs, related overhead and allocated general and administrative costs. Amounts billed and collected on these contracts in excess of revenue recorded are reflected as customer advances and deferred revenue in the Company’s consolidated balance sheets.

 

Anticipated contract losses are charged to operations as soon as they are identified. Anticipated losses cover all costs allocable to the contracts, including certain general and administrative expenses. If a contract is cancelled by the government for its convenience, the Company can make a claim against the customer for fair compensation for worked performed plus costs of settling and paying claims by terminated subcontractors, other settlement expenses and a reasonable profit on costs incurred. When the Company has a customer claim, revenue arising from the claims process is either recognized as revenue or as an offset against a potential loss only when the amount of the claim can be estimated reliably and its realization is probable. The Company had no claims recorded at any period-end presented.

 

Prior to the Merger, Colt Defense generated an immaterial amount of royalty income, which it included in other income in its consolidated statements of operations. As a result of the Merger, the Company now generates a higher amount of royalty income on a quarterly basis and has therefore determined that royalty income should now be recorded as net sales in the Consolidated Statements of Operations.

 

The Company recognizes trademark licensing revenue for individual licensees based on historical experience and expected cash receipts from licensees. Licensing revenue consists of minimum royalties and/or a percentage of a licensee’s sales on licensed products. Under most of the Company’s current licensing agreements, royalties are payable in arrears on a calendar quarter basis.

 

Income Taxes

 

The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse. The Company provides a valuation allowance when it is more likely than not that deferred tax assets will not be realized. The Company recognizes the benefit of an uncertain tax position that has been taken or it expects to take on income tax returns if such tax position is more likely than not to be sustained.

 

The Company follows the authoritative guidance regarding accounting for uncertainty in income taxes, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These unrecognized tax benefits relate primarily to issues common among multinational corporations in its industry. The Company applies a variety of methodologies in making these estimates, which include studies performed by independent economists, advice from industry and subject experts, evaluation of public actions taken by the Internal Revenue Service and other taxing authorities, as well as its own industry experience. The Company provides estimates for unrecognized tax benefits which may be subject to material adjustments until matters are resolved with taxing authorities or statutes expire. If its estimates are not representative of actual outcomes, its results of operations could be materially impacted.

 

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Table of Contents

 

The Company continues to maintain a valuation allowance against certain deferred tax assets where realization is not certain. The Company periodically evaluates the likelihood of the realization of deferred tax assets and reduces the carrying amount of these deferred tax assets by a valuation allowance to the extent it believes a portion will not be realized. The Company considers many factors when assessing the likelihood of future realization of deferred tax assets, including its recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, carryforward periods available to it for tax reporting purposes, various income tax strategies and other relevant factors. Significant judgment is required in making this assessment and, to the extent future expectations change; the Company would assess the recoverability of its deferred tax assets at that time. If the Company determines that the deferred tax assets are not realizable in a future period, the Company would record material adjustments to income tax expense in that period.

 

Recent Accounting Pronouncements

 

Revenue from Contracts with Customers - In May 2014, the FASB issued ASU No. 2014-09, that requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists - In July 2013, the FASB issued ASU 2013-11 to provide guidance on the presentation of unrecognized tax benefits. ASU 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective for interim and annual periods beginning after December 15, 2013 with earlier adoption permitted. ASU 2013-11 should be applied prospectively with retroactive application permitted. The Company has adopted ASU 2013-11 in the first quarter of 2014.

 

Note 3   Acquisition

 

On the Merger Date, the Company consummated the Merger with New Colt, a privately-held company, which is a world leader in the design, development and manufacture of pistols and revolvers. As a result of the Merger, the two manufacturers of Colt-branded firearms were consolidated into a single enterprise providing Colt Defense direct access to the commercial market for Colt Defense’s rifles and carbines, ownership of the Colt brand name and other related trademarks, and the technology and production facilities for the full line of Colt handguns.

 

Prior to determining the purchase price allocation of the Merger consideration, Colt Defense recorded the effective settlement of a pre-existing relationship with New Colt related to Colt Defense’s license agreement (the “License”) with New Colt for the use of certain Colt trademarks. As a result of the effective settlement of the pre-existing relationship, Colt Defense recorded a gain in the third quarter of 2013 of $15,264 (“Settlement Gain”), which equals the calculated gain of $16,320 reduced by the write-off of Colt Defense’s prepaid license balance of $1,056. A third-party valuation firm assisted management’s calculation of the gain by comparing the value of the royalty rate in the License to the current market rate for such a license.

 

The Company acquired New Colt for an aggregate purchase price of $82,543, which included the Settlement Gain of $15,264. The cash portion of the purchase price was funded by the proceeds from a new $50,000 senior secured term loan (“Term Loan”), cash on hand and $9,000 of consideration from the issuance and sale of the Company’s common units, of which $5,000 was paid in cash and $4,000 was related to Merger consideration reinvested by certain New Colt investors into Colt Defense.

 

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Table of Contents

 

The following table summarizes the fair values of the assets acquired and the liabilities assumed at the Merger Date:

 

Cash and cash equivalents

 

$

3,791

 

Accounts receivable

 

3,318

 

Inventories

 

7,585

 

Property and equipment

 

5,182

 

Other assets

 

3,090

 

Intangible assets with finite lives

 

9,340

 

Trademarks

 

50,100

 

Goodwill

 

36,974

 

Total assets acquired

 

119,380

 

 

 

 

 

Accounts payable and accrued expenses

 

8,808

 

Customer advances and deferred revenue

 

1,832

 

Capital lease obligations

 

393

 

Pension and retirement liabilities

 

9,357

 

Deferred tax liabilities

 

16,447

 

Total liabilities assumed

 

36,837

 

Net assets acquired

 

$

82,543

 

 

The Company, with the assistance of a third party valuation firm, valued the Colt brand and related trademarks by comparing the value of the royalty rate inherent in the prepaid license fee to the current market rate for such a license based upon both the value of the Colt brand and related trademarks in both the defense and commercial marketplace utilizing a relief from royalty methodology.

 

The Company, with the assistance of a third party valuation firm, determined the fair value of the finite-lived intangible assets which includes $5,240 of existing license agreements, valued based on a discounted cash flow approach, which represents the estimated fair value of New Colt license agreements for licensing the Colt trade marks to various third parties, $2,970 of developed technology, valued based on a relief from royalty method, which represents the estimated fair value of designs, trade secrets, materials, specifications and other proprietary intellectual property included in the technical data packages and related manufacturing processes and know-how and $1,130 of backlog, valued based on an excess earnings method, which represents the estimated fair value of unfilled contractual orders from customers.  The weighted average useful lives of the acquired existing license agreements, developed technology and backlog were 6 years, 20 years, and 3 years respectively.  In addition, the Company, with the assistance of a third party valuation firm, valued the Colt brand and related trade marks by comparing the value of the royalty rate inherent in the license (see Note 8,“Goodwill, Trademarks and Other Intangible Assets”) to the current market rate for such a license based upon both the value of the Colt brand and related trade marks in both the defense and the commercial marketplace utilizing a relief from royalty methodology.

 

Deferred income taxes arise from temporary differences between tax and financial statement recognition of revenue and expense.  In evaluating the Company’s ability to recover the deferred tax assets acquired through the acquisition of New Colt, the Company considered all available positive and negative evidence, including scheduled reversals of deferred tax assets and liabilities, projected future taxable income, tax-planning strategies and results of recent operations.  In projecting future taxable income for New Colt, the Company began with historical results adjusted to include the $50,000 Term Loan (see Note 10, “Notes Payable and Long-Term Debt”) and related interest expense, incorporated assumptions including the amount of future state and federal pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax-planning strategies.  These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company is using to manage the underlying business.  Based on the analysis performed, the Company believes, as of the acquisition date, that it is more likely than not that the benefit from New Colt’s deferred tax assets will not be realized.  In recognition of this risk, the Company provided a valuation allowance against New Colt’s deferred tax assets as part of the Company’s purchase accounting adjustments.

 

Goodwill is the excess of the purchase price of an acquired business over the fair value of net assets acquired. Goodwill will not be amortized but instead will be tested for impairment at least annually or more frequently if indicators of impairment arise. The $36,974 of goodwill is not deductible for federal income tax purposes.

 

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The following table reflects the unaudited pro forma operating results of the Company for three and nine months ended September 29, 2013, which gives effect to the Merger with New Colt as if it had occurred on January 1, 2012. The pro forma results are based on assumptions that the Company believes are reasonable under the circumstances. The pro forma results are not necessarily indicative of the operating results that would have occurred had the Merger been effective January 1, 2012, nor are they intended to be indicative of results that may occur in the future. The underlying pro forma information includes historical financial results of the Company and New Colt adjusted for certain items including depreciation and amortization expense associated with the assets acquired, the Company’s expense related to financing arrangements and the elimination of intercompany transactions. The pro forma information does not include the effects of any synergies or cost reduction initiatives related to the Merger.

 

 

 

Unaudited Pro Forma

 

Unaudited Pro Forma

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 29, 2013

 

September 29, 2013

 

 

 

(As Revised)

 

(As Revised)

 

Net sales

 

$

73,246

 

$

240,171

 

Net income (loss)

 

8,647

 

19,189

 

 

Pro forma net income for the three and nine months ended September 29, 2013 were adjusted to include $194 and $3,402 respectively, of additional interest expense related to the Company’s $50,000 Term Loan and to include $80 and $1,408, respectively, of additional expense related to the amortization of finite-lived intangible assets.

 

Note 4   Restructuring Costs

 

During the third and fourth quarters of the year ended December 31, 2013, as restated, the Company recorded restructuring costs of $1,118 for restructuring actions that were initiated as a result of the Merger with New Colt.  Of these costs, $336 is being reimbursed from an escrow established at the time of the Merger and $782 was recorded as operating expenses.  The costs consist of severance, continuation of benefits and other compensation-related expenses.  These actions, which have been completed, resulted in a workforce reduction of 10 salaried employees. Restructuring accruals are included in accounts payable, accrued expenses and other long-term liabilities on the Consolidated Balance Sheets.

 

The following table summarizes the Company’s restructuring activity for the nine months ended September 28, 2014:

 

Restructuring accruals at December 31, 2013

 

$

706

 

Accrual reversal

 

(76

)

Utilization

 

(491

)

Balance at September 28, 2014

 

$

139

 

 

During the third quarter of 2014, the Company received the remaining $268 for the reimbursement of restructuring costs from an escrow established at the time of the Merger.

 

Note 5   Accounts Receivable

 

Accounts receivable are net of an allowance for doubtful accounts of $68 and $78 at September 28, 2014 and December 31, 2013, respectively.

 

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Note 6            Inventories

 

The following table sets forth a summary of inventories, net of reserves at the lower of cost or market:

 

 

 

September 28, 2014

 

December 31, 2013

 

Raw materials

 

$

43,251

 

$

43,469

 

Work in process

 

20,627

 

9,476

 

Finished products

 

12,675

 

13,729

 

 

 

$

76,553

 

$

66,674

 

 

Note 7            Property and Equipment

 

Property and equipment are recorded at cost. Depreciation of building and equipment (including assets recorded under capital leases) and amortization of leasehold improvements are computed using the straight-line method over the estimated useful life of the assets, or for leasehold improvements, over the remaining life of the lease term if shorter.

 

Expenditures that improve or extend the lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.

 

The fair value of the property and equipment acquired as a result of the Merger are allocated to machinery and equipment, furniture, fixtures and leasehold improvements and construction in process was $4,420, $30 and $732, respectively.

 

Property and equipment consist of the following as of:

 

 

 

 

 

 

 

Estimated

 

 

 

September 28, 2014

 

December 31, 2013

 

Useful Life

 

Land

 

$

322

 

$

338

 

-

 

Building

 

2,528

 

2,653

 

33

 

Machinery and equipment

 

51,812

 

47,476

 

7-10

 

Furniture, fixtures and leasehold improvements

 

7,545

 

7,081

 

3-5

 

 

 

62,207

 

57,548

 

 

 

Less accumulated depreciation and amortization

 

(36,387

)

(32,152

)

 

 

 

 

25,820

 

25,396

 

 

 

Construction in process

 

1,934

 

5,337

 

 

 

Property and equipment, net

 

$

27,754

 

$

30,733

 

 

 

 

Note 8            Goodwill, Trademarks and Other Intangible Assets

 

Goodwill

 

Goodwill is tested for impairment annually as of the beginning of the Company’s fourth fiscal quarter, or when events or circumstances indicate that its value may have declined. Impairment exists when the carrying amount of goodwill exceeds its fair market value. Management estimates the fair value of each reporting unit primarily using the income approach. Specifically the discounted cash flow (“DCF”) model was utilized for the valuation of each reporting unit. Management develops cash flow forecasts based on existing firm orders, expected future orders, contracts with suppliers, labor agreements and general market conditions. The Company discounts the cash flow forecasts using the weighted average cost of capital method at the date of evaluation. The Company also calculates the fair value of its reporting units using the market approach in order to corroborate its DCF model results. These methodologies used in the current year are consistent with those used in the prior year.

 

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The following table sets forth the changes in the carrying amount of goodwill for the Company as of and for the nine months ended September 28, 2014:

 

 

 

Total

 

Balance at December 31, 2013

 

$

51,225

 

Effect of foreign currency translation

 

(476

)

Balance at September 28, 2014

 

$

50,749

 

 

As of September 28, 2014, the Company had $41.1 million and $9.6 million of goodwill assigned to its West Hartford and Colt Canada reporting units, respectively.

 

Trademarks

 

In connection with the Merger, the Company recorded an indefinite-lived intangible asset of $50,100 for the Colt brand and related trademarks.  The Company, with the assistance of a third party valuation firm, valued the Colt brand and related trademarks by comparing the value of the royalty rate inherent in the prepaid license fee to the current market rate for such a license based upon both the value of the Colt brand and related trademarks in both the defense and the commercial marketplace utilizing a relief from royalty methodology.

 

Impairment Evaluation

 

During the first half of 2014, the Company has experienced a continued decrease in the demand for commercial rifles.  The Company concluded that a triggering event had occurred and an interim impairment test for indefinite lived intangible assets, Goodwill and Trademarks, was required as of June 29, 2014.  Management developed cash flow forecasts based on existing firm orders, expected future orders, contracts with suppliers, labor agreements and general market conditions.  The Company, with the assistance of a third party valuation firm, discounted the cash flow forecasts using the weighted average cost of capital method as of June 29, 2014.  The Company also calculated the fair value of its reporting units using the market approach in order to corroborate its DCF model results.  Based on completion of Step 1 of the impairment analysis for indefinite lived intangible assets the fair value of the Company’s indefinite lived intangible assets, both goodwill and trademarks, exceeds the book value and therefore the Company concluded no impairment existed as of June 29, 2014.

 

Subsequent to the filing of the Company’s quarterly results for the three and six months ended June 29, 2014, the Company has seen a continued decrease in demand for MSR’s, a decline in demand for the Company’s commercial handguns, and delays in the anticipated timing of U.S. Government and certain international sales.  The Company considered these adverse changes in the Company’s business climate to be a triggering event as of September 28, 2014.  Therefore, in addition to the impairment analysis performed as of June 29, 2014 the Company performed an impairment analysis as of September 28, 2014 to determine the impact that a material decrease in the Company’s sales, resulting from the aforementioned factors would have on the Company’s valuation.  The Company, with assistance of a third party valuation firm, discounted the cash flow forecasts using the weighted average cost of capital method as of September 28, 2014.  The Company also calculated the fair value of its reporting units using the market approach to corroborate its discounted cash flows model results.  Based on completion of step one of the impairment analysis for indefinite lived intangible assets, the Company determined that the fair value of the Company’s indefinite lived intangible assets, including goodwill and trademarks, exceeds the book value, and therefore, the Company has concluded no impairment existed as of September 28, 2014.  The Company has two reporting units as of September 28, 2014, West Hartford, including all of the Company’s domestic operations and Colt Canada.  The estimated fair value as a percentage of the carrying value of the Company’s West Hartford and Colt Canada reporting units approximated 110% and 133%, respectively, and as such the fair value of the Company’s West Hartford reporting unit didn’t significantly exceed its carrying value.

 

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Net sales and operating income growth assumptions and the risk-adjusted discount rate, which represents the weighted average cost of capital, have the most significant influence on the estimation of the fair value of the Company’s reportable segment.  Under the income approach, specifically the discounted cash flow method, net sales and operating income growth rate assumptions were used to estimate cash flows in future periods.  Growth rates were based on current levels of backlog, the retention of existing customers and the Company’s ability to introduce new products.  If gross margin assumptions for the Company’s West Hartford reporting unit were to decline by approximately 1% per annum, the West Hartford reporting unit may not pass step one and step two could result in a non-cash goodwill impairment charge.  The factors that affect the level of estimated cash flows within the West Hartford reporting unit include, but are not limited to: (1) declines in consumer demand for commercial rifles and handguns, (2) delays in anticipated timing of U.S. Government orders, (3) delays in the timing of international sales which require certain regulatory approvals and (4) the Company’s ability to successfully launch new products.  Management utilized a discount rate of 18% to estimate the present value of future cash flows.  The discount rate was based upon a build-up of market data from similar companies and reflected uncertainty related to the Company’s ability to achieve its forecasted results.  Holding all other assumptions constant, an increase in the rate used to discount the expected future cash flows of approximately 175 basis points would reduce the fair value of the West Hartford reporting unit such that the reporting unit would not pass step one and step two cold result in a non-cash impairment charge.

 

Management’s judgment and assumptions are required in performing the impairment tests for all reporting units with goodwill.  While management expects future operating improvements to result from improving commercial rifle and handgun demand, the resumption of fulfilling certain U.S. Government orders and the introduction of new products there can be no assurance that such expectations will be met or that the fair value of the reporting units will continue to exceed their carrying value.  If the fair value of either of the reporting units were to fall below its carrying value, a non-cash impairment charge to income from operations could result.

 

Intangible Assets

 

The Company reviews long-lived assets, including intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Impairment losses, where identified, are determined as the excess of the carrying value over the estimated fair value of the long-lived asset. The Company assesses the recoverability of the carrying value of assets held for use based on a review of projected, undiscounted cash flows. When long-lived assets are reclassified to “held for sale”, the Company compares the asset’s carrying amount to its estimated fair value less cost to sell to evaluate impairment. No long-lived assets have been reclassified to held for sale for any period presented.

 

In connection with the Merger, the Company recorded finite-lived intangible assets of $9,340 which includes $5,240 of existing license agreements which represents the estimated fair value of New Colt license agreements for licensing the Colt trademarks to various third parties, $2,970 of developed technology which represents the estimated fair value of designs, trade secrets, materials, specifications and other proprietary intellectual property included in the technical data packages and related manufacturing processes and know-how and $1,130 of backlog which represents the estimated fair value of unfilled contractual orders from customers.  The weighted average useful lives of the acquired existing license agreements, developed technology and backlog were 6 years, 20 years and 3 years, respectively.

 

The net carrying value of the Company’s intangible assets with finite lives follows:

 

 

 

As of September 28, 2014

 

 

 

 

 

Gross

 

 

 

 

 

Estimated

 

 

 

Carrying

 

Accumulated

 

 

 

Useful

 

 

 

Amount

 

Amortization

 

Net

 

Life

 

Customer relationship Canadian Government

 

$

2,257

 

$

(702

)

$

1,555

 

30

 

Customer relationships other

 

5,869

 

(4,124

)

1,745

 

20

 

License agreements

 

5,240

 

(2,019

)

3,221

 

6

 

Backlog

 

1,694

 

(1,047

)

647

 

3

 

Technology-based intangibles

 

6,580

 

(2,950

)

3,630

 

15-20

 

 

 

$

21,640

 

$

(10,842

)

$

10,798

 

 

 

 

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As of December 31, 2013

 

 

 

 

 

Gross

 

 

 

 

 

Estimated

 

 

 

Carrying

 

Accumulated

 

 

 

Useful

 

 

 

Amount

 

Amortization

 

Net

 

Life

 

Customer relationship Canadian Government

 

$

2,369

 

$

(678

)

$

1,691

 

30

 

Customer relationships other

 

6,160

 

(4,077

)

2,083

 

20

 

License agreements

 

5,240

 

(805

)

4,435

 

6

 

Backlog

 

1,722

 

(604

)

1,118

 

3

 

Technology-based intangibles

 

6,580

 

(2,492

)

4,088

 

15 - 20

 

 

 

$

22,071

 

$

(8,656

)

$

13,415

 

 

 

 

The Company expects to record annual amortization expense of $3,251, $2,766, $1,910, $1,171, and $859 for 2014, 2015, 2016, 2017 and 2018, respectively.

 

Note 9   Liquidity

 

During the third quarter of 2014, the Company faced increasing liquidity challenges as a result of several recent business trends impacting the Company’s current and forecasted revenues and cash flows.  These trends included the continued decline in market demand for the Company’s commercial MSR, recent declines in demand for the Company’s commercial handguns, and delays in anticipated timing of U.S. Government and certain international sales.  As a result, the Company expects to report lower revenues and Adjusted EBITDA for the year-ended December 31, 2014 than it had previously forecasted.  These trends are expected to continue to put pressure on the Company’s liquidity for the foreseeable future.

 

Management’s plan to mitigate the business risk associated with the Company’s increased liquidity challenges include: (i) seeking revenue growth across all sales channels, (ii) executing initiatives designed to optimize the Company’s performance and reduce costs, (iii) managing inventory levels for positive cash flow by focusing the production schedule on the Company’s backlog of firm commitments, (iv) working closely with U.S. Government regulators to obtain timely approval of international sales, and (v) seeking ways to restructure the Company’s unsecured debt to reduce overall debt service costs.

 

As announced in the Company’s Form 12b-25 filed on November 12, 2014, there was uncertainty about whether the Company would have the cash necessary to pay its November 17, 2014 Senior Notes interest payment. On November 17, 2014 the Company entered into the MS Term Loan, a $70,000 senior secured term loan facility with Wilmington Savings Fund Society, FSB, as agent and Morgan Stanley Senior Funding Inc., as lender, which replaced the Company’s existing Term Loan agreement and provided the Company $4,101 of additional liquidity.  The MS Term Loan also enabled the Company to make its November 17, 2014 Senior Notes interest payment of $10,938.  In addition, the lenders, under the Company’s existing Credit Agreement (see Note 10 “Notes Payable and Long-Term Debt — Credit Agreement”), also agreed to amendments to the Credit Agreement which allowed the Company to enter into the MS Term Loan and provided for additional liquidity through a modification of excess availability thresholds.

 

After giving effect to the aforementioned market and business challenges as well as the sales opportunities that the Company believes exist, the Company has forecasted revenue and Adjusted EBITDA growth in 2015.  There can be no assurance that the actual demand for the Company’s commercial MSRs or commercial handguns will meet the Company’s internal forecast.  In addition, there can be no assurance that U.S. Government or international sales will take place as the Company has forecasted primarily due to a U.S. Government regulatory approval process which is difficult to predict.  As a result of these factors, and notwithstanding the additional cash the Company obtained from the MS Term Loan, risk exists with respect to the Company achieving its internally forecasted results and projected cash flows for the remainder of 2014 and 2015.  Absent the Company achieving its internal forecast for the remainder of 2014 and 2015 and the successful execution of Management’s strategy, addressing other long-term debt such as the Senior Notes, it is probable that the Company may not have sufficient cash and cash equivalents on-hand along with availability under its Credit Agreement, as amended, to be able to meet its obligations as they come due over the next 12 months, including the Company’s May 15, 2015 Senior Notes interest payment of $10,938.

 

As it is probable that the Company may not have sufficient liquidity to be able to make its May 15, 2015 Senior Notes interest payment without meeting the Company’s internal projections (including addressing the Company’s Senior Notes), the Company’s long-term debt has been classified as current in the consolidated balance sheet.  Currently the Company does not have sufficient funds to repay the debt upon an actual acceleration of maturity.  In the event of an accelerated maturity, the Company’s lenders may take actions to secure their position as creditors and mitigate their potential risks.  These events would adversely impact the Company’s liquidity.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The MS Term Loan and Credit Agreement contain a covenant requiring the Company to deliver audited financial statements within 90 days following each fiscal year, together with an audit opinion that does not contain a “going concern” explanatory paragraph.  The Company will be re-filing under current date its 2013 Form 10-K/A sometime before December 31, 2014 in response to United States Security and Exchange Commission (“SEC”) comments on the 2013 10-K.  The SEC comments primarily relate to the inclusion of certain certifications under Section 906 of Sarbanes-Oxley and do not require any changes to the financial statements for the year-ended December 31, 2013, as restated.  In connection with the Company’s response to these comments and the re-filing of the 2013 Form 10-K/A, management expects its independent registered public accounting firm will issue an audit report that contains a “going concern” explanatory paragraph.  The Company is in discussions with, and expects to receive a waiver from, each of our lenders in connection with the re-filing of the 2013 Form 10-K/A.

 

As of September 28, 2014, the Company had $3,963 of cash and cash equivalents and $2,113 of availability under its Credit Agreement.  As of November 20, 2014, the Company has $8,233 of cash and cash equivalents and $2,473 of availability under its Credit Agreement (see Note 10 “Notes Payable and Long-Term Debt”).

 

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The Company’s foreign and domestic cash and cash equivalents as of September 28, 2014 and December 31, 2013, respectively, are as follows:

 

 

 

September 28, 2014

 

December 31, 2013

 

United States (1)

 

$

2,029

 

$

8,363

 

Canada (2)

 

1,911

 

4,213

 

Netherlands (3)

 

23

 

18

 

Total cash and cash equivalents

 

$

3,963

 

$

12,594

 

 


(1)         United States includes the following legal entities:  Colt Defense LLC, New Colt Holding Corp., Colt’s Manufacturing Company LLC and Colt Defense Technical Services LLC

(2)         Canada includes the following legal entity:  Colt Canada Corporation

(3)         Netherlands includes the following legal entity: Colt International Coöperatief U.A.

 

Due to the Company’s current liquidity situation, during the three months ended September 28, 2014 Colt International recorded a deferred tax liability of $1,369 on the undistributed earnings from Colt Canada because the Company no longer considers Colt Canada’s earnings permanently reinvested (see Note 12 “Income Taxes”).

 

If the Company repatriated cash and cash equivalents, based on the Company’s current legal entity structure as described in Note 1 Nature of Business, the Company would not be required to accrue and pay U.S. income taxes to repatriate these funds.  The Company’s cost of repatriation would be in the form of a 5% withholding tax which Colt Canada is required to withhold on dividends when declared and paid to Colt International under the terms of the treaty between Canada and the Netherlands.  There is no further income or withholding tax on dividends when declared and paid to Colt Defense.

 

Note 10     Notes Payable and Long-Term Debt

 

Term Loan

 

On July 12, 2013, in connection with the Merger, the Company entered into the Term Loan agreement, which matures on November 15, 2016. The Term Loan bears interest at a variable rate of 9.75% plus the greater of the three month LIBOR rate or 1%. Interest is payable quarterly in arrears on the first day of the subsequent calendar quarter. Under the Term Loan, the Company’s obligations are secured by a first priority security interest in the Company’s intellectual property and a second priority security interest in substantially all other assets. The Term Loan was issued at a discount of $2,293, which represents the lenders fees and legal expenses. The Company also incurred $2,120 in financing fees. The discount and the financing fees are being amortized as additional interest expense over the life of the indebtedness.

 

On August 6, 2014, the Company entered into Amendment No. 1 to the Term Loan (the “Term Loan Amendment”).  Absent an amendment to the Term Loan, the Company would have been in violation of certain of its financial covenants as of September 28, 2014.  The Term Loan Amendment is discussed in more detail in the following paragraph.

 

The Term Loan Amendment provided that (i) the financial covenants were eliminated for the rolling four quarter periods ended June 29, 2014 and September 28, 2014 and modified for the rolling four quarter period ended December 31, 2014, (ii) the Company was granted the option to not pay principal installment payments of $1,875 due on September 30, 2014, December 31, 2014 and March 31, 2015, (iii) the applicable prepayment premium was increased from 2% to 6% of the outstanding principal balance of the Term Loan, (iv) the date of the applicable prepayment determination was extended to July 31, 2016 and (v) the Company was been granted a 30 day extension to deliver financial information to the Term Loan lenders to allow for completion of the restatement of the Company’s 2013 10-K (see Note 2, Summary of Significant Accounting Policies).  Additionally, the Company agreed to pay an amendment fee of $475 that will be capitalized and paid-in-kind by being added to the outstanding principal balance of the Term Loan.

 

The Term Loan Amendment fee of $475, along with Term Loan lenders legal fees to be paid by the Company in conjunction with the Term Loan Amendment, were recorded as additional debt discount in the third quarter of 2014 and amortized as interest expense over the remaining term of the Term Loan.  The Company expensed costs incurred by the Company in conjunction with the Term Loan Amendment in the third quarter of 2014.  The Company exercised its option not to pay the principal installment payment due on September 30, 2014.

 

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As of September 28, 2014 and December 31, 2013, the Company was subject to four financial covenants as defined in the Term Loan agreement: (i) minimum EBITDA (“Minimum EBITDA”), (ii) fixed charge coverage ratio (“FCCR”), (iii) secured coverage ratio (“Secured Coverage Ratio”) and (iv) maximum allowed capital expenditures (“Capital Expenditures”).  Prior to Amendment No. 1, the required Minimum EBITDA for the four quarters ended September 28, 2014 and December 31, 2013 was $40,000.  Actual Minimum EBITDA for the four quarters ended September 28, 2014 and December 31, 2013 was $31,833 and $63,293, respectively.  Amendment No. 1 eliminated the Minimum EBITDA covenant for the four quarters ended September 28, 2014.  Prior to Amendment No. 1, the required FCCR for the four quarters ended September 28, 2014 and December 31, 2013 was a minimum of 0.90:1.00.  The actual FCCR for the four quarters ended September 28, 2014 and December 31, 2013 was 0.75:1.00 and 1.21:1.00, respectively.  Amendment No. 1 eliminated the FCCR covenant for the four quarters ended September 28, 2014.  Prior to Amendment No. 1, the required Secured Coverage Ratio for the four quarters ended September 28, 2014 and December 31, 2013 was a ratio not greater than 1.20:1.00.  The actual Secured Coverage Ratio for the four quarters ended September 28, 2014 and December 31, 2013 was 2.02:1.00 and 0.89:1.00, respectively. Amendment No. 1 eliminated the Secured Leverage Ratio covenant for the four quarters ended September 28, 2014.  The maximum allowed Capital Expenditures for the four quarters ended September 28, 2014 and December 31, 2013 is $12,000.  The actual Capital Expenditures for the four quarters ended September 28, 2014 and December 31, 2013 were $3,693 and $8,598, respectively.  Amendment No. 1 did not modify the Capital Expenditure covenant.

 

The Term Loan agreement also contained non-financial covenants and other restrictions which limit the Company’s ability to incur additional indebtedness, make investments or certain payments, pay dividends (other than member distributions to support the Company’s member related taxes) enter into a merger and acquire or sell assets.

 

The Company was in compliance with its Term Loan covenants, as amended, as of September 28, 2014 (pursuant to the Term Loan Amendment the Company was not required to satisfy any particular financial covenant levels for the quarter ending September 28, 2014 other than with respect to the maximum allowed capital expenditures) and December 31, 2013.

 

On September 30, 2014, the Company made a Term Loan interest payment of $1,318.

 

On November 12, 2014, the Company entered into Amendment No. 2 to the Term Loan, whereby, the Term Loan lenders consented to extending the delivery date to November 21, 2014, for the Company to deliver financial statements for the month and fiscal quarter ended September 28, 2014.

 

On November 17, 2014, the Company entered into a $70,000 senior secured term loan facility with Wilmington Savings Fund Society, FSB, as agent and Morgan Stanley Senior Funding Inc., as lender (see Note 22, “Subsequent Events”) which replaced the Company’s Term Loan.  The existing Term Loan agreement did not permit pre-payment at such time and thus, the Company agreed with the existing Term Loan lenders to pay a premium of $4,318 in addition to the outstanding principal and accrued interest balance.  As a result of the Company entering into the MS Term Loan which replaced the Company’s existing Term Loan, the Term Loan has been reflected as a current liability as of September 28, 2014 in the consolidated balance sheet.  The MS Term Loan (i) does not contain financial covenants or amortization provisions similar to those provisions in the Company’s existing Term Loan agreement; (ii) provides for the accrual of interest on an 8% cash and 2% payment-in-kind basis; and (iii) will mature no later than August 15, 2018 subject to the satisfaction of certain conditions.

 

Credit Agreement

 

On September 29, 2011, the Company entered into a Credit Agreement with Wells Fargo Capital Finance, LLC (“WFCF”).  Under the terms of the Credit Agreement, senior secured revolving loans are available up to $50,000, inclusive of $20,000 available for letters of credit.  Revolving loans are subject to, among other things, the borrowing base, which is calculated monthly based on specified percentages of eligible accounts receivable and inventory and specified values of fixed assets.  Under the Credit Agreement, the Company’s obligations are secured by a first-priority security interest in substantially all of its assets (other than intellectual property), including accounts receivable, inventory and certain other collateral, and a second-priority security interest in its intellectual property. The Credit Agreement matures on September 28, 2016.

 

Borrowings under the Credit Agreement bear interest at a variable rate based on the London Inter-Bank Offered Rate (“LIBOR”), the Canadian Banker’s Acceptance Rate or the lender’s prime rate, as defined in the Credit Agreement, plus a spread. The interest rate spread on borrowing varies based on both the rate option selected and Colt’s quarterly average excess availability under the Credit Agreement. There is an unused line fee of .50% per annum, payable quarterly on the unused portion under the facility and a $40 annual servicing fee.

 

The Credit Agreement limits the Company’s ability to incur additional indebtedness, make investments or certain payments, pay dividends (other than for member distributions to support member LLC-related taxes) and merge, acquire or sell assets. In addition, certain covenants would be triggered if excess availability were to fall below a specified level. Excess availability is determined as the lesser of the Company’s borrowing base or $50,000, reduced by outstanding obligations under the Credit Agreement and trade payables that are more than 60 days past due. The Credit Agreement has an excess availability threshold of $11,000. If excess availability is below $11,000, the Company would be required to be in compliance with a fixed charge coverage ratio, as defined in the Credit Agreement (“WFCF FCCR”).  If the Company is not in compliance with the WFCF FCCR and below $11,000 in excess

 

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availability, the Company would not be able to borrow additional amounts under the Credit Agreement and would be in default of the Credit Agreement. In addition, if excess availability falls below $11,000 or an event of default occurs, the Company would be required to provide WFCF with more frequent compliance reporting and WFCF may also assume certain other contractual privileges.  The Company’s available borrowing capacity as of September 28, 2014 was $2,113 which is the amount above the excess availability requirement.  The Credit Agreement also contains customary events of default including, but not limited to, no material litigation or defaults under material contracts and no material adverse change. In connection with any borrowing requests, management must certify, among other things, to no default or event of default.

 

As of September 28, 2014, there were advances of $13,000 and $3,847 of letters of credit outstanding under the Credit Agreement. As of December 31, 2013, there was a $7,083 line advance and $3,486 of letters of credit outstanding under the Credit Agreement.  As of November 20, 2014, there were advances of $16,000 and $3,815 of letters of credit outstanding under the Credit Agreement.

 

As of September 28, 2014 and December 31, 2013, the Company was in compliance with all of the Credit Agreement covenants and restrictions, as amended, and the Company monitors its future compliance based on current and anticipated financial results. The WFCF FCCR for four consecutive quarters may not be less than 1.00:1.00.  As of September 28, 2014 and December 31, 2013 the Company’s availability was in excess of $11,000 and therefore the WFCF FCCR was not in effect.  If it had been in effect, the calculated WFCF FCCR for the four quarters ended September 28, 2014 and December 31, 2013 would have been 0.77:1.00 and 1.54:1.00, respectively.

 

On March 22, 2013, the Company entered into Amendment No. 2 to the Credit Agreement, whereby, among other things, WFCF consented to the transaction pursuant to the Unit Repurchase Agreement. For additional information about this transaction, see Note 13, “Accumulated Deficit” in this Form 10-Q.

 

On June 19, 2013, the Company entered into Amendment No. 3 to the Credit Agreement, whereby WFCF consented to the contribution of all the issued and outstanding equity interests issued by Colt Canada to Colt International so that Colt Canada would become a wholly-owned subsidiary of Colt International, and providing for Colt International to become a guarantor under the Credit Agreement.

 

On July 12, 2013, the Company entered into Amendment No. 4 to the Credit Agreement, which provided for New Colt to become a guarantor and Colt’s Manufacturing Company LLC (“Colt’s Manufacturing”) to become a borrower under the Credit Agreement in connection with the Merger.

 

On August 6, 2014, the Company entered into Amendment No. 5 to the Credit Agreement, whereby WFCF consented to, among other things, extending the delivery date to September 15, 2014 for the Company to deliver financial statements for the month and fiscal quarter ended June 29, 2014.

 

On November 12, 2014 the Company entered into Amendment No. 6 to the Credit Agreement, whereby WFCF consented to extending the delivery date to November 21, 2014, for the Company to deliver financial statements for the month and fiscal quarter ended September 28, 2014.

 

On November 17, 2014, the Company entered into amendment No. 7 to the Credit Agreement, whereby WFCF consented to amendments to the Credit Agreement necessary for the Company to enter into the MS Term Loan.  These amendments include, among other things, (i) reducing the Senior Secured revolving loan availability from $50,000 to $33,000 and (ii) incorporating a minimum $7,500 excess availability threshold for borrowings.

 

On November 21, 2014, the Company entered into Amendment No. 8 to the Credit Agreement, whereby WFCF consented to extending the delivery date to November 26, 2014, for the Company to deliver financial statements for the month and fiscal quarter ended September 28, 2014.

 

Senior Notes

 

On November 10, 2009, Colt Defense LLC and Colt Finance Corp., the Company’s 100%-owned subsidiary, jointly and severally co-issued $250,000 of unsecured Senior Notes under an indenture (“Indenture”). The Senior Notes bear interest at 8.75% and mature on November 15, 2017. Interest is payable semi-annually in arrears on May 15 and November 15. The Company issued the Senior Notes at a discount of $3,522 from par value. This discount is being amortized as additional interest expense over the life of the indebtedness. No principal repayments are required until maturity.

 

The Senior Notes do not contain financial covenants that require the Company to maintain compliance with any financial ratios or measurements on a periodic basis. The Senior Notes do contain non-financial covenants that, among other things, limit the Company’s ability to incur additional indebtedness, enter into certain mergers or consolidations, incur certain liens and engage in certain transactions with its affiliates. In addition, the Indenture restricts the Company’s ability to pay dividends or make other Restricted Payments (as defined in the Indenture) to its members, subject to certain exceptions. Such restrictions are not expected to affect the Company’s ability to meet its cash obligations for the next twelve months.  Additionally, the Senior Notes contain certain cross-default provisions with other indebtedness if such indebtedness in default aggregates to $20,000 or more.

 

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On June 19, 2013, the Company entered into a supplement to the Indenture by which Colt International, Colt Canada and CDTS became new subsidiary guarantors to the Senior Notes. As such, each agreed to jointly and severally guarantee the obligations under the Indenture.

 

On July 12, 2013, the Company entered into a supplement to the Indenture, by which New Colt and Colt’s Manufacturing became parties to the Indenture and each agreed to jointly and severally guarantee the obligations under the Indenture.

 

Each of the debt agreements certain cross-default provisions, whereby a default under one agreement represents a default under the others.

 

The outstanding loan balances at September 28, 2014 and December 31, 2013 were as follows:

 

 

 

September 28, 2014

 

December 31, 2013

 

Senior Notes

 

$

248,319

 

$

247,984

 

Term Loan

 

46,139

 

46,833

 

Credit Agreement

 

13,000

 

7,083

 

Total debt

 

307,458

 

301,900

 

Less: current portion

 

(307,458

)

(12,083

)

Long-term debt

 

$

 

$

289,817

 

 

As a result of the liquidity concerns (see, Note 1, “Nature of Business — Going Concern” and Note 9, “Liquidity”), the Company’s outstanding debt has been reflected as a current liability as of September 28, 2014 in the consolidated balance sheet.

 

The Company’s debt was recorded net of unamortized original issue and debt discounts of $3,517 at September 28, 2014 and $3,932 at December 31, 2013.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 28, 2014

 

September 29, 2013

 

September 28, 2014

 

September 29, 2013

 

Amortization of discount

 

$

334

 

$

280

 

$

947

 

$

486

 

Amortization of deferred financing costs

 

577

 

575

 

1,788

 

1,403

 

 

In accordance with Rule 3-10(f) of SEC Regulation S-X, the Company and Colt Finance Corp., co-issuers of the Senior Notes, are not presenting condensed consolidating guarantor financial statements as Colt Defense LLC and Colt Finance Corp. have no independent assets or operations. All of the Company’s subsidiaries are 100% owned and have guaranteed the Company’s Senior Notes; and all of the guarantees are full, unconditional, joint and several.

 

Note 11   Accrued Expenses

 

Accrued expenses consisted of:

 

 

 

September 28, 2014

 

December 31, 2013

 

 

 

 

 

(As Restated)

 

Accrued compensation and benefits

 

$

4,243

 

7,154

 

Accrued contract obligation expense

 

2,365

 

1,194

 

Accrued federal, excise and other taxes

 

2,643

 

4,902

 

Accrued interest

 

9,508

 

2,879

 

Accrued commissions

 

1,932

 

929

 

Other accrued expenses

 

5,387

 

5,100

 

 

 

$

26,078

 

$

22,158

 

 

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Note 12   Income Taxes

 

Colt Defense is a limited liability company organized under the laws of Delaware. Colt Defense is treated as a partnership for federal and state income tax purposes and is not subject to U.S. federal or state income taxes. Consequently, all taxable income (loss) of Colt Defense is reported to its members for inclusion in their respective income tax returns. The limited liability company agreement of Colt Defense requires distributions to the members in any year in which there is U.S. taxable income. The member’s distribution is equal to the product of the highest combined marginal federal, state, or local income tax rate applicable to any member and the highest taxable income allocated to any one unit, to the extent that the Governing Board determines that sufficient funds are available.

 

As a result of the Merger with New Colt effective July 12, 2013, Colt Defense owns 100% of New Colt, a C corporation organized under the laws of Delaware. New Colt is taxed as a corporation for U.S. federal and state income tax purposes. Through December 31, 2013, New Colt owned 100% of Colt’s Manufacturing, New Colt’s operating entity.

 

Effective January 1, 2014 (see Note 1, “Nature of Business”), Colt Defense and New Colt each contributed their assets and operations to Colt’s Manufacturing.  As a result, Colt Defense and New Colt collectively own 100% of Colt’s Manufacturing, the combined domestic operating entity of the Company. The Company estimated the fair value of the Colt Defense and New Colt contributions to determine the respective ownership percentages of Colt Defense and New Colt. The allocation of the fair value of the contributions to the individual assets and liabilities contributed is preliminary and subject to change.

 

The combined operations of Colt’s Manufacturing are treated as a partnership for federal income tax purposes. Consequently, taxable income is computed at the partnership level to determine New Colt’s income tax expense and Colt Defense’s member distribution payable.  In conjunction with the transaction, New Colt acquired a preferred investment in Colt’s Manufacturing and a common equity interest in exchange for its contribution. Colt Defense acquired the remaining common equity interest in exchange for its contribution. Since each member contributed assets, the Company is allocating the built in gain (the difference between fair market value and tax basis) back to the contributing member in accordance with a permitted method under Section 704(c) of the Internal Revenue Code.

 

Colt Defense and CDTS, a wholly owned subsidiary, collectively own 100% of Colt International, a Dutch coöperatief. Colt International owns 100% of Colt Canada, a Canadian C corporation. The income (loss) of Colt Canada is subject to entity level Canadian federal and provincial taxes. On April 16, 2014, Colt Canada declared and paid a $2,000 dividend to Colt International. Under the terms of the treaty between Canada and The Netherlands, Colt Canada is required to withhold taxes on the dividends at a rate of 5%.

 

During the three months ended September 28, 2014 Colt International recorded a deferred tax liability of $1,369 on the undistributed earnings of Colt Canada due to the fact that the Company no longer considers Colt Canada’s earnings permanently reinvested due to the Company’s liquidity position (see Note 9 “Liquidity”).

 

The provision (benefit) for foreign income taxes is as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 28, 2014

 

September 29, 2013

 

September 28, 2014

 

September 29, 2013

 

 

 

 

 

(As Revised)

 

 

 

(As Revised)

 

Current

 

$

152

 

$

12

 

$

204

 

$

747

 

Deferred

 

1,358

 

(220

)

1,239

 

(196

)

Total

 

$

1,510

 

$

(208

)

$

1,443

 

$

551

 

 

New Colt has a partnership interest in Colt’s Manufacturing in which the book basis of New Colt’s assets and liabilities contributed exceeds the tax basis of those assets and liabilities. Therefore, New Colt recorded a deferred tax liability with respect to their partnership interest at January 1, 2014.  The requirement that the partnership use carryover basis with respect to the contributed assets resulted in the partnership’s basis in the assets being equal to New Colt’s investment in the partnership.

 

A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized.  A significant portion of the value of New Colt’s asset contribution was attributed to indefinite lived intangible assets. Consequently, the exclusion of the portion of the contribution related the indefinite lived intangible asset from the deferred tax liability associated with the partnership interest would put New Colt in a net deferred tax asset position. The Company has established that it is more likely than not that the full amount of New Colt’s deferred tax assets will not be recognized in future years. Consequently, New Colt continues to maintain a valuation allowance on its net deferred tax assets.

 

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Note 13   Pension and Postretirement Benefits

 

As a result of the Merger in 2013, the Company had four noncontributory, domestic defined benefit pension plans (“Plans”) that covered substantially all eligible salaried and hourly U.S. employees. The bargaining unit Plans were combined on January 1, 2014 and the salaried Plans were combined on January 1, 2014.

 

Effective December 31, 2012, the pension benefits under the two hourly defined benefit plans were frozen. The benefits under the two salaried defined benefit plans have been frozen since December 31, 2008. Accordingly, participants retain the pension benefits that have already accrued. However, no additional benefits have accrued since the effective date of the freeze.

 

Pension expense for the New Colt plans is included in the amounts below from the Merger Date.

 

The components of income recognized in the Company’s Consolidated Statements of Operations for pension plans are as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 28, 2014

 

September 29, 2013

 

September 28, 2014

 

September 29, 2013

 

 

 

 

 

(As Revised)

 

 

 

(As Revised)

 

Interest cost

 

$

396

 

$

368

 

$

1,187

 

$

918

 

Expected return on assets

 

(478

)

(419

)

(1,433

)

(986

)

Amortization of unrecognized loss

 

47

 

107

 

140

 

321

 

Net periodic cost (income)

 

$

(35

)

$

56

 

$

(106

)

$

253

 

 

The Company also provides certain postretirement health care coverage to retired U.S. employees who were subject to a collective bargaining agreement when they were employees. The cost of these postretirement benefits is determined actuarially and is recognized in the Company’s consolidated financial statements during the employees’ active working career. In connection with the Company’s collective bargaining agreement, it has capped certain retirees to approximately $250 (not in thousands) per employee per month.

 

As a result of the Merger in 2013, the Company had two postretirement health care plans that applied to employees covered by the collective bargaining agreement.  The postretirement health care plans were combined on April 1, 2014.  Expense for the New Colt plan is included in the amounts below from the Merger Date.

 

As a result of the workforce reduction in the second quarter of 2014 the Company recognized a $98 curtailment gain with respect to the Company’s postretirement health care plans.

 

The components of cost recognized in the Company’s Consolidated Statements of Operations for postretirement health care coverage are as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 28, 2014

 

September 29, 2013

 

September 28, 2014

 

September 29, 2013

 

Service cost

 

$

173

 

$

159

 

$

519

 

$

384

 

Interest cost

 

233

 

201

 

700

 

446

 

Curtailment of postretirement health plan

 

 

 

(98

)

 

Amortization of unrecognized prior service costs

 

(38

)

(43

)

(113

)

(129

)

Amortization of unrecognized loss

 

33

 

61

 

99

 

184

 

Net periodic cost

 

$

401

 

$

378

 

$

1,107

 

$

885

 

 

Note 14   Accumulated Deficit

 

Colt Defense’s authorized capitalization consists of 1,000,000 common units, which include 18,878 nonvoting Class B common units, and 250,000 preferred units. Common units issued and outstanding as of both September 28, 2014 and December 31, 2013 were 132,174.  No Class B common units or preferred units have been issued.

 

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Table of Contents

 

On March 22, 2013, Colt Defense purchased 31,165.589 common units (“Unit Repurchase”) from Blackstone Mezzanine Partners II-A L.P. and Blackstone Mezzanine Holdings II USS L.P. (collectively, “Blackstone Funds”) (representing 100% of the Colt Defense common membership units held by the Blackstone Funds) for an aggregate purchase price of $14,000 pursuant to an equity purchase agreement, dated as of March 22, 2013 (“Unit Repurchase Agreement”), by and among Colt Defense and the Blackstone Funds.  In accordance with the Unit Repurchase Agreement, upon consummation of the Unit Repurchase, the Blackstone Funds delivered the certificates representing the common units held by the Blackstone Funds to Colt Defense for cancellation, and the rights of the Blackstone Funds under the Amended and Restated LLC Agreement, including appointment rights with respect to Colt Defense’s Governing Board, were terminated. The Unit Repurchase Agreement provided customary releases and indemnities for Colt Defense and the Blackstone Funds.

 

On July 12, 2013, the Company issued and sold 31,165.589 of Colt Defense common units to certain new and existing holders for $9,000 of consideration, of which $5,000 was paid in cash and $4,000 was related to Merger consideration reinvested by certain New Colt investors into Colt Defense.  The Company used the $9,000 of consideration, together with the proceeds from the Term Loan and cash on hand, to fund the Merger and pay related fees and expenses.

 

In the first quarter of 2014 and 2013, respectively, there were no tax distribution payments to members. During the second quarter of 2014, the Company made tax distribution payments to members of $683 along with State of Connecticut members’ withholding payments of $530, both of which were accrued for in 2013 based on the Company’s 2013 taxable income.  During the second quarter of 2013, the Company made tax distributions to members of $1,357 and no distributions to the State of Connecticut.  During the third quarter of 2014 and 2013 the Company made tax distributions to members of $0 and $1,200, respectively.

 

Due to limitations on distributions to the Company’s members associated with the Company’s Term Loan, there was a $2,277 long term liability payable to members at September 28, 2014 and December 31, 2013, respectively.

 

Note 15   Common Unit Compensation

 

On March 1, 2012, the Governing Board approved the Colt Defense Long Term Incentive Plan (the “Plan”). The purpose of the Plan is to advance the interests of Colt Defense and its equity holders by providing a means to attract, retain and motivate key employees, advisors and members of the Governing Board. Awards under the Plan may consist of options, restricted units, restricted phantom units, performance units or other unit-based awards. A total of 18,878 nonvoting Class B common units have been reserved for issuance in connection with awards under the Plan.

 

Under the Plan, the exercise price of option awards is set at the grant date and may not be less than the fair market value per unit on that date. The term of each option is ten years from the grant date. The vesting periods, which vary by grant, may be time based, performance based or a combination thereof. Compensation expense equal to the grant date fair value of the option is generally recognized over the period during which the employee is required to provide service in exchange for the award or as the performance obligation is met. Fair value of the option was estimated on the date of grant using the Black-Scholes valuation method.

 

In 2013, options were granted for 5,300 common units at a weighted average exercise price of $288.78 (not in thousands).  In the third quarter of 2014, options were granted for 3,000 common units at a weighted average exercise price of $288.78 (not in thousands).  The Company’s common unit compensation expense, which is included in general and administrative expense in the consolidated statements of operations, was $13 and $0 for the three months ended September 28, 2014 and September 29, 2013, respectively.  Common unit compensation expense was $95 and $0 for the nine month periods ended September 28, 2014 and September 29, 2013, respectively.

 

Note 16   Transactions with Related Parties

 

In July 2007, Colt Defense entered into a financial advisory agreement with Sciens Management LLC (“Sciens Management”), which through its affiliates, may be deemed to beneficially own a substantial portion of Colt Defense’s limited liability interests and whose managing member is also a member of Colt Defense’s Governing Board.  Under the terms of the agreement, the Company paid Sciens Management an aggregate annual retainer of $350. In July 2013, Colt Defense entered into a consulting services agreement (“Consulting Agreement”) with Sciens Institutional Services LLC (“Sciens Institutional”), an affiliate of Sciens Management.  Affiliates of Sciens Institutional beneficially own a substantial portion of Colt Defense’s limited liability interests and Sciens Institutional’s managing member is a member of Colt Defense’s Governing Board. Under the terms of the Consulting Agreement, Sciens Institutional provides consulting services to Colt Defense for an aggregate annual fee of $650, payable quarterly in advance.

 

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The costs for the services provided and the related expenses under the agreements with Sciens Institutional and Sciens Management were recorded within general and administrative expenses in the consolidated statements of operations and were $250 and $220 for the three months ended September 28, 2014 and September 29, 2013, respectively.  The Company’s cost for these services were $750 and $436 for the nine months ended September 28, 2014 and September 29, 2013, respectively.

 

In July 2013, the Company entered into a services agreement (“Archives Agreement”) with Colt Archive Properties LLC (“Archives Properties”), one of the owners of which is a member of Colt Defense’s Governing Board and affiliates of which beneficially own a substantial portion of Colt Defense’s limited liability interests. Under the Archives Agreement, Colt agrees to provide designated employees to perform services for Archive Properties for an initial annual fee of $241, payable quarterly in arrears. The Company records revenue related to archive services as net sales and costs associated with providing archive services in cost of sales.

 

The Company leases its West Hartford facility from NPA Hartford LLC, which is beneficially owned by Sciens Management, for its corporate headquarters and primary manufacturing facility. The lease expires on October 25, 2015.  For the three months ended September 28, 2014, and September 29, 2013, the rent expense under this lease was $210 and $210, respectively. Rent expense for the nine months ended September 28, 2014 and September 29, 2013 was $631 and $631 respectively.

 

In addition, Colt Defense LLC Profit Sharing Plan, a Colt Defense LLC unit holder, owns 100% of Colt Defense Employee Plan Holding Corp. which has a wholly owned subsidiary Colt Security LLC, which provides security guards for the Company.

 

Prior to the Merger, transactions with New Colt were as follows:

 

 

 

 

 

Nine Months

 

 

 

Three Months Ended

 

Ended

 

 

 

September 29, 2013

 

September 29, 2013

 

Net sales to New Colt

 

$

23,321

 

$

67,156

 

Purchases from New Colt

 

8

 

1,894

 

Administration and services fees charged to New Colt

 

442

 

1,325

 

 

Note 17   Commitments and Contingencies

 

Standby Letters of Credit

 

A summary of standby letters of credit issued principally in connection with performance and warranty bonds established for the benefit of certain international customers is as follows:

 

 

 

September 28, 2014

 

December 31, 2013

 

 

 

 

 

 

 

Standby letters of credit secured by restricted cash

 

$

1,172

 

$

1,185

 

Standby letters of credit under Credit Agreement

 

3,854

 

3,486

 

Guarantees of standby letters of credit established by a sales agent on behalf of Colt

 

74

 

74

 

 

Industrial Cooperation Agreements

 

The Company also had certain industrial cooperation agreements, which stipulate its commitments to provide offsetting business to certain countries that have purchased Colt’s products. Colt generally settles its offset purchase commitments under industrial cooperation agreements through offsetting business and/or cooperating with other contractors on their spending during the related period. Additionally, the Company identifies future purchases and other satisfaction plans for the remainder of the offset purchase commitment period.  Should there be a projected net purchase commitment after such consideration; Colt accrues the estimated cost to settle the offset purchase commitment.

 

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Table of Contents

 

The Company’s remaining gross offset purchase commitment is the total amount of offset purchase commitments reduced for claims submitted and approved by the governing agencies. At September 28, 2014 and December 31, 2013, remaining gross offset purchase commitments totaled $65,325 and $64,131, respectively.  The Company has evaluated the settlement of its remaining gross offset purchase commitments through planned spending and other satisfaction plans to determine the net offset purchase commitment.  The Company has accrued $1,998 and $1,639 as of September 28, 2014 and December 31, 2013, respectively, based on the estimated cost of settling the remaining net offset purchase commitment.

 

U.S. Government M240 and M249Programs

 

During the year ended December 31, 2013, as restated, the Company recorded a contract obligation expense of $3,381 and a M240 Program contract modification, reduction of net sales of $6,820, respectively, for an aggregate reduction in gross profit of $10,201 related to the Company’s M240 Program with the U.S. Government.  The M240 Program contract obligation expense and the M240 Program contract modification, relate to estimated costs (contract obligation expense) to retrofit products previously sold to the U.S. Government as well as the incorporation of changes into the Company’s M240 Program product design and production processes and the reduced funding of (contract modification) the M240 Program.

 

During 2014, the Company, based on additional available information, continually assessed the M240 Program accruals and determined that an incremental $311, $4,779 and $1,722 of M240 Program contract obligation expense was required for the three months ended March 30, 2014, June 29, 2014 and September 28, 2014, respectively.  The incremental M240 Program contract obligation expense related to the following:

 

 

 

 

 

 

 

 

 

For the Nine Months

 

 

 

For the Three Months Ended

 

Ended

 

 

 

March 30, 2014

 

June 29, 2014

 

September 28, 2014

 

September 28, 2014

 

Inventory Reserves

 

$

311

 

$

1,997

 

$

810

 

$

3,118

 

Contract Obligation