-Caveat Lector-
Colt's Restructuring Cuts
Role of Consumer Handguns
By PAUL M. BARRETT
Staff Reporter of THE WALL STREET JOURNAL
Colt's Manufacturing Co., the storied gun maker, is restructuring
in a way that will shrink significantly its role in producing
handguns for the consumer market.
The restructuring stems from several causes, but in one sense it
is the most drastic response so far by a major gun maker to the
wave of municipal litigation pending against the firearm
industry. Lawsuits filed by 27 cities and counties across the
country specifically target the sort of handguns that Colt's is
planning to move away from.
Internal company documents show Colt's, West Hartford, Conn., is
in the process of spinning off into a separate company its
controversial project aimed at producing a high-tech "smart gun"
that can only be fired by an authorized user.
The documents also indicate the remaining core business will be
focused more narrowly on production of military small arms, an
area that Colt's has emphasized heavily over the past two years.
New York financiers Donald Zilkha and John Rigas, who control the
manufacturer, have used Colt's as a vehicle to acquire other
makers of small military arms, and the restructuring appears to
be another step in that direction. In fact, there are rumors in
the gun business that Colt's is close to a new acquisition of a
rival, but those rumors couldn't be confirmed.
While immediate plans for the company's well-known lines of
consumer handguns aren't clear from the documents that were
reviewed, the documents do show that litigation against the gun
industry has been a major concern to Colt's owners. Messrs.
Zilkha and Rigas have indicated in the past that they would
consider getting out of consumer handgun manufacturing as a way
of trying to minimize their exposure to the municipal lawsuits.
Messrs. Zilkha and Rigas didn't return telephone messages.
Steven Sliwa, chief executive of Colt's, said he is going to head
the new high-tech spinoff, which is known as iColt. Retired Gen.
William Keys, a Colt's board member, will take over the remaining
core Colt's business, focusing on military small arms.
"Gen. Keys and I are looking forward to working together on the
two ventures and taking Colt's into the 21st century," Mr. Sliwa
said.
Among major gun makers, Colt's has been among the most determined
to send signals that it wants to resolve the municipal litigation
without a protracted and expensive court fight. But a quick
settlement of the suits doesn't appear to be part of the
restructuring plan, and lawyers representing Colt's are
continuing to try to get those suits dismissed.
The commercial handgun segment of Colt's business produces about
30% of revenue but a larger share of profit, because margins are
greater in that segment than in military sales, the company
documents show. Nevertheless, Messrs. Zilkha and Rigas are said
to see the commercial handgun market as too risky to remain a
major part of the overall business.
The company has struggled financially for more than 15 years,
seeing itself surpassed by more nimble competitors in markets
ranging from law enforcement to military rifles. A Zilkha-led
group bought the company while it was in bankruptcy-court
proceedings in 1994 and since then, Colt's has won back some
important U.S. military contracts for its M-16 family of rifles,
among other weapons. In December 1998, Colt's also completed its
acquisition of Saco Defense Corp., a smaller maker of military
arms, and remains in the hunt for another acquisition in the
area.
In 1998, Colt's and Saco had combined revenue of about $136
million and operating profit of $13.4 million, said a person
familiar with both companies' results.
One risk the restructuring creates is a negative reaction from
activist gun owners, who could perceive a withdrawal from the
consumer handgun market as another indication of Colt's bending
to gun-control proponents. Gun owners in New Jersey, California
and other states mounted a boycott of Colt's products last year,
partly in response to the company's development of the smart gun,
which also was seen as a manifestation of weakness in response to
gun foes.
On the other hand, by spinning off iColt, Colt's may be able to
distance itself from the smart-gun controversy.
The smart gun is an effort to use microprocessor technology to
prevent the misuse of guns by children, thieves or other
unauthorized users. Colt's has developed a prototype handgun that
can fire only when the trigger is pulled by someone wearing a
wristband that emits a coded radio signal that is received by a
computer microchip in the gun's handle. Still unreliable as
recently as this spring, when it was demonstrated for The Wall
Street Journal, the smart gun is ultimately seen as a product
that would appeal to middle-class consumers who wouldn't
otherwise buy a gun because of safety concerns.
Several other major gun companies, including Smith & Wesson
Corp., a unit of Britain's Tomkins PLC, are scrambling to perfect
smart-gun models, but it remains to be seen whether the idea will
succeed commercially and whether pro-gun activists will punish
companies that identify themselves with the smart gun.
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