The Connecticut River region has supplied the U.S. with firearms since before it was a nation, and some of the best-known names in the industry remain in what’s known as Gun Valley. Smith & Wesson (SWHC) operates from a fortress-like building in Springfield, Mass. Sturm Ruger (RGR) has its headquarters in Southport, Conn. Colt, the most famous of all the New England small-arms manufacturers, still makes handguns and rifles at a 22-acre facility in West Hartford. A giant blue sign with the company’s familiar “rampant Colt” rearing horse insignia marks the entrance.
Decorating the lobby of the Colt administrative building is a series of framed documents testifying to the gunmaker’s influence. Here’s a record of William F. “Buffalo Bill” Cody’s purchase of a Colt Peacemaker on Aug. 17, 1883. George S. Patton Jr., just beginning his rise up U.S. Army ranks, bought a .38 revolver on May 18, 1912. Generations of American officers carried versions of the Colt .45 pistol into battle in World War I, World War II, Korea, and Vietnam—an extraordinary span of service for a weapon introduced during the American occupation of the Philippines. Later, Colt made the M16 rifles GIs took into the dense jungles of Vietnam and the compact, swift-firing M4s that have accompanied U.S. soldiers to the deserts of Iraq and Afghanistan. John Wayne, Clint Eastwood, and Bruce Willis have all brandished Colts on the big screen, as did Captain John Miller (Tom Hanks) in Saving Private Ryan. No manufacturer has put more firearms in more American hands over a longer period of time.
In the Colt factory, a short walk from the reception area, rows of hulking machines, some computer-controlled, others surprisingly antiquated, hum with activity. The chemical scent of lubricants hangs in the air. Mike Magouirk, the company’s chief operating officer, points out a pair of women in safety glasses assembling pocket-size .380 Mustang pistols. “Reintroducing Colt commercial handguns is a big priority,” he says. “These models haven’t been as available as we wish they had been during the past few years when demand was so high.” Another assembly line produces the latest offspring of John Browning’s 1911 design—a .45 “close quarter battle pistol” for the U.S. Marine Corps. “This is a point of pride, because it’s our franchise from way back,” says Magouirk, an ex-marine. Sales of the AR15, a civilian semiautomatic version of the Colt military rifle, have been soft in recent months, he says, even though it has won over former critics of the company. Magouirk’s excited to talk about the latest iteration of the M4. He points out some crates marked “UAE” that fill the loading dock: rifles headed for the United Arab Emirates. “The M4 is the envy of the world,” he says.
He’s not exaggerating. In addition to forces in the U.S. and U.A.E., militaries in Canada, Malaysia, and scores of other countries use versions of the rifle. And yet despite high regard for the M4 and a growing consensus that the company has put some of its quality-control problems behind it, Colt, owner of one of the best-known brands in firearms—or any industry—finds itself again on the edge of financial disaster. It showed a net loss on declining sales for the first quarter of 2014, and its long-term bonds merit junk ratings from Standard & Poor’s (MHFI) and Moody’s (MCO). “Colt’s very weak credit measures, if they persist, could make refinancing difficult for the company when its bonds mature in 2017,” S&P said in an April 1 analysis.
For historians, collectors, and even some investors, it’s a sorry kind of déjà vu, as Colt has been haunted by commercial crisis for many of its 178 years. In particular, the past decade has been dominated by some dubious financial engineering and accumulation of a daunting debt load. Adding insult to injury, lawsuits filed by two former senior Colt executives, scheduled for trial in September, threaten to air allegations of a front office tainted by racism and homophobia.
“The pattern at Colt has been consistent for decades, dysfunction and more dysfunction,” says Cameron Hopkins, an industry consultant and former editor-in-chief of Firearm Marketing Group, publisher of the magazines American Handgunner and GUNS. Colt “always seems to be on the brink,” agrees Richard Feldman, president of the Independent Firearm Owners Association, an advocacy group. “It’s like some kind of weird curse.”
Handgun pioneer Samuel Colt got off to an unpromising start. Born in Hartford in 1814, the mechanically inclined young man returned from a stint as a seaman’s apprentice inspired by the captain’s wheel, or so the story goes, to devise an improved sidearm. The user of Colt’s repeating revolver did not have to manually rotate the ammunition cylinder around the barrel. Pulling back the hammer also turned the cylinder.
For all their ingenuity, Colt’s early guns didn’t always work. The company he started in 1836 went bust six years later. He kept tinkering, though, and received encouragement from Captain Samuel Walker of the Texas Rangers. When war with Mexico broke out in 1846, the U.S. government ordered 1,000 “Walker Colts.” Having by now mastered the use of interchangeable parts, Colt built a state-of-the-art factory in his hometown. In 1860 he introduced a new Army Model revolver—just in time for the Civil War.
Financially, however, Colt displayed a reckless streak. He pursued government contracts regardless of profit margins and ran up enormous bills entertaining politicians with liquor, cigars, and other amusements. When he died at age 47 in 1862 of rheumatic fever, he didn’t leave the sort of solid corporate foundation his inheritors might have wished. Crucial patents expired; imitators encroached. Fortunately for the company, if unfortunately for American Indian populations, these challenges were eclipsed by the westward push of European-descended settlers. Introduced in 1873, the Colt Peacemaker became “the gun that won the West.”
An early master of illustrated brochures and celebrity endorsements, Colt bequeathed far more than influential gun designs, according to biographer William Hosely. “What Colt invented,” Hosely wrote, “was a system of myths, symbols, stagecraft, and distribution that has been mimicked by generations of industrial mass marketers and has rarely been improved upon.”
After its innovative initial phase, the Colt company focused on producing large volumes of weapons designed by others—notably Browning’s .45 semiautomatic pistol, which replaced the revolver’s rotating cylinder with a spring-loaded ammunition magazine. Colt churned out similarly huge numbers of the Vietnam-era M16 rifle, also based on an outsider’s design.
In the 1970s, Colt and other American gunmakers, following the bad example of Detroit’s Big Three automakers, grew smug and lazy. Like Japanese and German car companies, more nimble foreign gunmakers grabbed market share. By the 1980s, Smith & Wesson had lost the U.S. police to Austria’s Glock, while Colt saw Italy’s Beretta snatch its main U.S. Army sidearm contract. In 1985, Colt plant employees who belonged to the United Auto Workers launched a protracted strike for higher pay. Replacement employees weren’t up to the task, and “quality suffered badly,” says Feldman, then an organizer for the National Rifle Association. In 1988 the Pentagon gave Colt’s M16 contract to FN Herstal of Belgium. Four years later, Colt filed for bankruptcy court protection from its creditors. “With the end of the Cold War,” says Hopkins, the firearms marketer, “it seemed like the company might never recover.”
Colt’s unlikely rescuer materialized in the person of Donald Zilkha, scion of a wealthy Manhattan family of Iraqi immigrant bankers. Zilkha’s parents, Ezra and Cecile, hosted galas for the Metropolitan Opera. Ezra confessed in his 1999 memoir, From Baghdad to Boardrooms, that until Donald was 13, he was dressed each morning by a governess nicknamed “Nursie.” The Zilkhas were not “gun people.”
By the 1990s, Donald, then in his 40s and working at the family investment firm Zilkha & Co., yearned to emerge from his father’s shadow. He did just that by buying Colt’s Manufacturing in 1994 for the fire sale price of $27 million, plus assumption of liabilities. The media suddenly cared what the younger Zilkha had to say. Colt, he told the Hartford Courant, “has been neglected for so long.” He would save it by means of austerity. Assuming the post of chairman, he consolidated from its original, onion dome-topped facility to the more efficient, if more prosaic, plant in West Hartford. At a company that employed 15,000 at its peak in World War II, Zilkha slashed the workforce by a third, to 600. He brought in as chief executive officer a former auto industry executive.
Zilkha may not have known anything about guns, but he had ambitious plans to use Colt as a vehicle for rolling up other small-arms manufacturers. “This is an industry in dire need of consolidation,” he told the Wall Street Journal in 1997. He set his sights on FN Herstal, the company that nine years earlier had taken away Colt’s M16 contract with the Pentagon. Acquiring the Belgian company, he told the Journal, “would create a dominant firearms manufacturer worldwide.”
His reach exceeded his grasp. Belgium announced in November 1997 that rather than permit an American takeover, it would nationalize FN Herstal. Zilkha’s rollup stalled, and the would-be industrialist was stuck with the down-on-its-luck gun company he had purchased in the first place. Via e-mail, he declined to comment on this episode.
No gunmaker has put more firearms in more American hands over a longer period of time
Complicating matters, Colt then blundered into the vortex of American gun-control politics. In a December 1997 editorial in American Firearms Industry magazine, Zilkha’s handpicked CEO, Ron Stewart, made a pair of proposals that set off alarms in Second Amendment circles. He urged “the creation of a research and development program to further firearm technology toward more advanced methods that promote safety (such as personalized firearms).” And he recommended that Congress require gun owners to obtain a federal permit. “All hell broke loose,” says Feldman.
In the eyes of gun rights activists, mandating a federal permit constituted a step down the slippery slope toward gun bans and confiscation. Personalized firearms, also known as smart guns, are viewed with equal suspicion because of fear that the government could remotely deactivate digital weapons. Colt at the time was developing a pistol called the Z40, which had a microchip that allowed it to fire only after receiving a signal from a corresponding chip in a wristband worn by an authorized user.
“We saw it as a threat,” says Alan Rice, an NRA-certified instructor active with the New Hampshire Firearms Coalition. “The smart gun was a way for gun controllers to move toward mandating firearms the government could monitor.” At an NRA convention in Philadelphia in June 1998, Rice and others circulated fliers urging a boycott of Colt. “They created a lot of ill will,” he says, “and we helped them see their mistake.”
Zilkha relieved Stewart of his CEO duties in late 1998; by the following year the Colt smart gun was dead. In 1999, Zilkha named a new CEO, William Keys, a retired three-star Marine Corps general. The company announced it would end production of all but a handful of civilian handguns and focus on military production. As a reporter at the Wall Street Journal during this period, I interviewed a memorably glum Zilkha. He complained that on top of his other problems, he felt unfairly targeted by gun rights activists who criticized his past contributions to Democratic New York Senator Charles Schumer, a vocal proponent of stricter gun control. When I suggested to Zilkha that he seemed to regret ever having entered the gun business, he didn’t argue.
Colt got a new lease on life after Sept. 11. By the time of the 2001 terrorist attacks, the closely held company had atrophied to fewer than 500 employees generating only $50 million in annual sales. After subtracting its costs, Colt lost money in 2001. Keys, a gruff, highly decorated veteran of Vietnam and the first Gulf War, set out to persuade his ex-colleagues at the Pentagon to keep Colt alive. “The General,” as he was known, kept his pit bull, Jenks, chained to a chair in his office. He showed little interest in civilian sales and disdain for the abortive smart gun championed by Zilkha. When the owner wasn’t around, the General referred to Zilkha as “little Donald,” according to former Colt executives.
Disrespected at his own company and distracted by a 2002 divorce that received lurid Page Six treatment in the New York Post, Zilkha began retreating from the gun business. Into the vacuum stepped Ioannis Rigas, a more junior banker at Zilkha & Co. who handled much of the oversight of Colt. A globe-trotting Greek native also known as John, Rigas formed his own Manhattan-based firm, Sciens Capital Management, which had investment interests in Athens and London. Rigas viewed the gun company as a financial play he could exploit. He didn’t respond to interview requests made with Colt and Sciens.
In late 2002, Rigas arranged for the spinoff of the military business into a separate company called Colt Defense. After the dust settled, Sciens Capital and its affiliates controlled the defense company, although Zilkha retained an ownership interest. The withered commercial handgun business—by now reduced almost exclusively to producing copies of classic handguns—was left behind under the name Colt’s Manufacturing. The two companies shared the West Hartford factory. To the consternation of workers, a metal fence was erected to denote the corporate split.
With American forces streaming toward the Middle East, Colt Defense’s sales began to grow, hitting $75 million in 2004. Rigas hoped the improved wartime performance would allow him to cash out by means of an initial public offering, according to a 2005 company filing with the Securities and Exchange Commission. Potential investors, however, weren’t impressed. Colt Defense depended heavily on the whims of margin-sensitive Pentagon budget officials. Even as overall war spending rose, the company notched only a $10 million profit in 2004—not exactly Wall Street catnip. Rigas never pulled the trigger on the IPO.
“They created a lot of ill will, and we helped them see their mistake”
Over the next several years, Colt Defense went through the private equity leverage wringer. Sciens Capital and its affiliates loaded the company with debt while taking out cash in the form of “distributions” and “advisory fees.” The 2005 SEC filing shows payouts totaling $40 million over the two prior years—a significant amount for a company in such fragile financial health. In 2006, another SEC filing shows, the company redeemed “members’ equity” worth $41 million. In 2007, Colt Defense agreed to borrow $150 million in a “leveraged recapitalization” that featured distributions to “members” of $131 million. In 2009 it borrowed an additional $250 million, while multimillion-dollar payouts continued. For 2010, Colt Defense had sales of $176 million—more than double what they were in 2004—but registered an $11 million loss. “You didn’t have to work at Colt Defense to know it had put itself in a dire situation,” says Merrick Alpert, a Connecticut businessman who began advising the shriveled remains of Colt’s Manufacturing in late 2010 and later became its senior vice president.
Among other failings, the severed halves of Colt somehow missed the post-2008 “Obama surge” as much as other U.S. gun manufacturers. Whipped up by NRA warnings that the Democratic president intended to toughen gun control, consumers cleared gun store shelves of ammunition and weapons. Better-prepared manufacturers such as Glock saw sales rise sharply. Under the terms of the Colt split, however, Colt Defense could reach the booming civilian market only by first selling its rifles to Colt’s Manufacturing, a debilitated company with sclerotic lines of distribution. Colt’s Manufacturing, for its part, offered only a limited selection of the handguns so much in demand.
Turmoil reigned in the Colt administrative building. Zilkha retained an equity stake in the civilian arms company, but in practical terms he “had no control or influence over” it, according to a lawsuit Alpert brought against Colt’s Manufacturing after his firing in 2012. Rigas and Sciens Capital controlled both Colt Defense and Colt’s Manufacturing, according to the suit. The Colt’s Manufacturing board rarely met “and was not a functioning entity.” When Alpert mentioned Zilkha’s name to Rigas, “Rigas simply laughed dismissively.”
As bitter as their relationship had become, Rigas and Zilkha collaborated in 2012 on a mutually remunerative recombination of the Colt companies. The transaction reversed the separation of a decade earlier. After borrowing an additional $50 million, Colt Defense paid $60.5 million to acquire Colt’s Manufacturing. In effect, the feuding Zilkha-Rigas team paid itself, along with other investors, to put the civilian arms company back together with the defense branch. In the process the merged company’s debt rose to more than $300 million, and its balance sheet showed a deficit of $137 million. Workers took down the fence running through the plant in West Hartford.
Asked to explain these convolutions, Jeffrey Grody, senior vice president and general counsel of the combined company, says: “The board saw an opportunity to create value for shareholders” by splitting in 2002, and then, in 2012, Colt Defense “saw benefits to reuniting.” The merger received a tepid response from outside financial experts. S&P analyst Christopher Denicolo told Bloomberg News last July that the company lacked sufficient revenue to pay off its long-term bonds on time. He warned that investors such as Pacific Investment Management and Chicago Title Insurance could see their holdings default.
In the face of what looks like an acute crisis, the mood in the Colt corporate suite seems oddly blasé. Grody shrugs off questions about the debt load. “The company has a lot of debt on its balance sheet,” he acknowledges. “At the appropriate point, it will be taken out and replaced” in a refinancing. In 2013, he notes, the recombined company reported a 30 percent increase in sales, to $278 million.
Others are less sanguine. S&P projects that company revenue will fall by 5 percent to 15 percent in 2014. It cites “declining commercial rifle sales as demand returns to more normalized levels following a surge in recent years” and a sharp reduction in Pentagon demand for new M4 rifles following the end of the wars in Iraq and Afghanistan. “The government’s plan to shrink the size of the Army also poses a threat to long-term demand for the rifle,” S&P notes. On May 14, Colt reported that revenue for its first quarter of 2014 slumped 22 percent, to $50 million. The company suffered a loss of $7.8 million for the period. During an investor conference call, CEO Dennis Veilleux said, “I’m not pleased with these results.”
He’s not likely to be any more pleased with a trial scheduled to unfold in state court in Hartford late this summer. Alpert and Carlton Chen, a former general counsel at Colt’s Manufacturing, are pressing twin lawsuits against the combined company. The plaintiffs seek millions of dollars in “change-of-control” benefits they claim they’re owed after they were fired in the midst of the merger. On April 9, Judge Carl Schuman issued interim rulings offering Alpert and Chen reason for optimism. Schuman called the plaintiffs’ pretrial testimony credible and ordered Colt to set aside $3.8 million as a “prejudgment remedy,” in case the company loses at trial.
The money might turn out to be the least of Colt’s worries in the suit. Chen, who is of Chinese descent, alleges the company was rife with ethnic hostility and homophobia, a potentially dangerous accusation for a manufacturer that relies heavily on federal contracts and could find itself the object of congressional scrutiny.
In a related complaint filed with the Connecticut Commission on Human Rights, Chen says he learned that General Keys referred to him in July 2012 as “that old Chinese f-----.” Another executive referred to Chen as “the Yellow Peril,” the complaint alleges. Keys derided others as homosexuals, according to Chen. In February 2012, during talks about the merger, the General allegedly said, “Mark my words, before this thing is over, those f------ queers Rigas and Zilkha will be walking down the aisle holding hands together.”
Keys, who lives in Virginia, stepped down as CEO of Colt’s Manufacturing in 2013 and had been replaced as chief executive of Colt Defense three years earlier, according to legal filings. His lawyer, John Droney, said via e-mail: “General Keys has no comment at this time except to say we look forward to a jury trial where the truth will come out.”
In court papers, Colt and Keys denied all of Alpert’s and Chen’s accusations. The company and Keys accuse the former executives of “improper and illegal self-dealing”—allegations the plaintiffs deny. Grody, the current general counsel, declined to comment on the litigation. Contacted via e-mail, Zilkha later said: “I resigned from the board of Colt Defense in 2006 and hold a minor interest in the business. I have had no role in operating or advising the company for quite a long time. I have no role in Colt’s Manufacturing, in which I no longer hold any ownership stake.”
Other gun industry veterans look at Colt and shake their heads. “I don’t know what it is about them—they just can’t get their act together, and this is not anything new,” says Paul Jannuzzo, an independent consultant based in Savannah, Ga. He headed Glock’s U.S. subsidiary from the early 1990s through 2003. During that period, the Austrian handgun maker didn’t bother to keep up closely with what Colt was doing, because the Connecticut company wasn’t a competitive threat, he says.
Despite that, Jannuzzo continues, Colt retains a place in the hearts of many American gun owners. “For logo recognition, historical fame, and brand status, I would take Colt over any other name,” he says. “Perhaps Colt should just leave the Connecticut Valley and change their karma.”