UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-QSB/A

Amendment No. 1

Quarterly Report of Small Business Issuers under Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the quarterly period ended January 31, 2003

Commission File No. 001-31552

Smith & Wesson Holding Corporation

Issuer’s telephone number, including area code:
(800) 331-0852

Number of shares outstanding of each of the issuer’s classes of common equity:

The issuer is not using the Transitional Small Business Disclosure format.

EXPLANATORY NOTE

     This amendment on Form 10-QSB/A (i) summarizes the impact and effect of the restatement of our previously filed fiscal year 2002 financial statements and the effects of that restatement for the quarters ended January 31, 2003 and 2002, (ii) identifies certain recent events and (iii) amends Items 1 and 2 of Part I, and Item 6 of Part II of the Quarterly Report of Smith & Wesson Holding Corporation (the “Company”) on Form 10-QSB previously filed for the quarter ended January 31, 2003. The restatement of our previously filed fiscal year 2002 financial statements is set forth in our Form 10-KSB for the fiscal year ended April 30, 2003, filed with the Securities and Exchange Commission on December 18, 2003.

     This amendment on Form 10-QSB/A for the fiscal quarters ended January 31, 2003 and 2002 amends and restates only those items of the previously filed Form 10-QSB which have been affected by the restatement. In order to preserve the nature and character of the disclosures set forth in such items as originally filed, no attempt has been made in this amendment (i) to modify or update such disclosures except as required to reflect the effects of the restatement or (ii) to make revisions to the Notes to the Consolidated Financial Statements except for those which are required by or result from the effects of the restatement. For additional information regarding the restatement, see Note 9 to the Consolidated Financial Statements for Smith & Wesson Holding Corporation and Subsidiaries included in Part I — Item 1. No other information contained in the Company’s Form 10-QSB for the quarter ended January 31, 2003 has been updated or amended.

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SMITH & WESSON HOLDING CORPORATION

TABLE OF CONTENTS

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PART I: FINANCIAL INFORMATION

The Restatement

Overview

     On March 17, 2003, the Company engaged PricewaterhouseCoopers LLP (PwC), as our independent public accountants to audit our financial statements for fiscal year 2003. On August 12, 2003, the Company engaged PwC to conduct a re-audit of our previously issued fiscal year 2002 financial statements. On December 18, 2003, we filed our Form 10-KSB for the fiscal year ended April 30, 2003, which included restated financial statements for the fiscal year ended April 30, 2002. These restatement changes affect the financial statements for each quarter in fiscal years 2003 and 2002. In this Form 10-QSB/A, we are restating our previously filed financial statements for each of the three month periods and nine month periods ended January 31, 2003 and January 31, 2002 to reflect adjustments required with respect to the acquisition balance sheet of Smith & Wesson Corp. (S&W) and other adjustments. These adjustments include, among other items:

Discussion

     The restatement adjustments for fiscal year 2002 and the effects of those adjustments on the three and nine months ended January 31, 2003 and 2002 are described within each subsection below:

Net Sales and Cost of Sales

     We have restated our fiscal year 2002 financial statements to increase net product sales by $2.8 million and increase cost of sales by $3.8 million. Included in the $2.8 million net product sales increase was $1.2 million to reverse a sales return recorded in error. The sales return related to a pre-acquisition sale by Smith & Wesson Corp., for which no reserve for returns had been established. Accordingly, upon return of the product, we now believe the returned goods should have been recorded as an increase in inventory of $1.2 million and as a reduction to acquired receivables of $1.2 million. As such, we restated our 2002 financial statements to increase net product sales by $1.2 million and increase cost of sales by $1.2 million. We also restated our fiscal year 2002 financial statements to increase net product sales by $1.6 million, increase marketing and selling expense by $0.7 million for cooperative advertising and distributor incentives, increase cost of goods sold by $0.8 million for the cost of freight and $0.1 million used to fund industry programs. These three costs had incorrectly been reported as reductions of sales. We also restated to increase cost of sales by $0.4 million for inventory and equipment write-offs, decrease cost of goods sold by $0.3 million for depreciation expense which was overstated as a result of errors in the S&W purchase accounting and to increase cost of goods sold by $1.6 million for adjustments to product liability reserves.

     The effect of these adjustments on our quarterly financial statements for the three months ended January 31, 2002 is to increase net product sales by $.4 million and increase cost of sales by $0.3 million for the cost of freight and $.5 million for additional product liability expense. We are also restating our financial statements for the three months ended January 31, 2003, to increase net product sales by $0.6 million, increase selling and marketing expense by $0.1 million for cooperative advertising and distributor incentives, and increase cost of goods sold by $0.3 million for the cost of freight.

     The effect of these adjustments on the nine months ended January 31, 2002 is to increase net product sales by $2.3 million, which includes a $1.2 million sales return recorded in error in the second quarter, as well as $1.1 million in freight, promotional and industry dues that had originally been reported as a reduction of sales and should have been charged to cost of sales and operating expenses. Cost of sales has been increased by $3.2 million which includes $1.0 million related to the sales return, $1.2 million relative to the product liability adjustment, $0.6 million in freight costs previously reported as a reduction to sales, and $0.4 million in for inventory and equipment write-offs. For the nine months ended January 31, 2003 the effects of the restatement on net product sales was an increase of $1.9 million which, was the freight, promotional and industry dues that had originally been reported as a reduction of sales and should have been charged to cost of sales and operating expenses.

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Product Liability and Environmental Expenses

     We have restated our fiscal year 2002 financial statements to record additional provisions of $2.5 million for environmental remediation and $1.6 million for product liability and accounted for such amounts as adjustments to the May 11, 2001 acquisition balance sheet of Smith & Wesson Corp. We now believe that under generally accepted accounting principles (GAAP) these amounts, aggregating $4.1 million, should have been expensed in 2002 rather than capitalized as increases to purchased assets under FAS 38, Accounting for Preacquisition Contingencies of Purchased Enterprises, which provides that adjustments of preacquisition contingencies after the end of the allocation period must be included in net income in the period the adjustment is determined. Accordingly, our fiscal year 2002 financial statements were restated to increase cost of goods sold by $1.6 million, to increase environmental expense by $2.5 million and to correspondingly reduce the amount of purchase price allocable to reduce purchased fixed assets and intangibles by $4.1 million.

     The effect of these adjustments for the three months ended January 31, 2002, is to increase cost of goods sold by $0.5 million to adjust the product liability reserve. The effect of these adjustments on the nine months ended January 31, 2002 was to increase cost of goods sold by $1.2 million for product liability and to increase environmental expense by $2.5 million.

Melby Financing; Interest Expense and Compensation Expense Adjustments

     We determined that there were errors in the accounting for a $5 million debt financing, known as the Melby financing, provided to us by Colton R. Melby to finance part of the acquisition of Smith & Wesson Corp. As a result of this loan and the related stock warrants issued, we originally recorded approximately $5,008,500 in expense consisting of $5,000,000 in interest expense, $6,000 in depreciation expense and $2,500 in office supplies expense in fiscal year 2002. We have now determined that under GAAP we should have recorded aggregate expense of $4,541,500 consisting of $2,567,166 in interest expense for amortization of debt discount related to the warrants; $827,414 in interest expense for amortization of debt issue costs arising from the consideration paid to the parties who assisted in arranging the financing (the finders); a loss on early extinguishment of the note payable of $294,420 charged to interest expense; interest expense of $185,000 resulting from settlement of the finders’ liability and compensation expense of $667,500 to a finder related to his employment by us. The net result of these transactions is that the previously reported pre-tax loss for the fiscal year ended April 30, 2002 was overstated by $467,000. Our fiscal year 2002 financial statements were restated accordingly, to decrease interest expense by $1,126,000, decrease depreciation expense by $6,000, decrease supplies expense by $2,500 and increase general and administrative expense by $667,500 for compensation expense.

     The following discussion provides additional background on the Melby financing. On May 6, 2001, we sold to Mr. Melby a $5 million nonconvertible note due May 12, 2002 and warrants, known as the Melby warrants, to acquire shares of our common stock. At the time of this financing transaction, Mr. Melby had no relationship with us. He became a director of the Company in May 2001, served as our Executive Vice President from May 2002 to September 2002 and served as our President and Chief Operating Officer from September 2002 to December 2003. Under the terms of the Melby financing, we also issued additional warrants, known as the Melby affiliate warrants, to Mr. Melby’s two brothers and one of his associates. Shortly after the issue date, Mr. Melby’s brothers exercised their Melby affiliate warrants. The Melby affiliate warrants issued to Mr. Melby’s associate expired unexercised.

     We initially valued the Melby warrants and the Melby affiliate warrants and recorded a debt discount of $5,000,000 completely offsetting the Melby Note of the same amount. We now believe that under GAAP the $5.0 million financing proceeds should have been allocated among the debt and the Melby warrants and Melby affiliate warrants on a relative fair value basis. Based on their relative values, we have determined that, of the $5.0 million financing proceeds, $2,245,000 should have been allocated to the debt and $2,755,000 should have been allocated to equity for the warrants. As a result of the warrant discount, interest expense for the fiscal year ended April 30, 2002 should have been $2,755,000, comprising $2,567,166 amortized to interest expense over the period from the May 2001 debt issue date through the debt extinguishment date and an early extinguishment loss of $187,834 on the debt extinguishment date. The $5.0 million of debt was redeemed in an early extinguishment on March 28, 2002 for $5 million of consideration consisting of $2,837,000 in cash and $2,162,200 in common stock valued at the March 28, 2002 extinguishment date. Mr. Melby used the $2,837,800 of cash from the extinguishment to exercise his warrants. On the debt extinguishment date, an extinguishment loss of $294,420, including the remaining unamortized debt issue costs of $106,586 and the unamortized debt discount of $187,834, should have been recognized.

     For the three and nine months ended January 31, 2002, we should have recorded interest expense of $564,606 and $2,333,415 respectively, relating to the Melby Note, the Melby Warrants, and the Melby Affiliate Warrants compared to interest expense previously recorded of $.9 million and $4.5 million, respectively.

     In connection with the Melby financing, on May 11, 2001 we also issued warrants, known as the finders’ warrants, to the two finders retained to locate the Melby financing. These warrants had a fair value of $434,000. In addition to the finders’ warrants, each finder was also entitled to receive a $250,000 cash fee. On May 6, 2001, we advised the finders that they would be paid this fee in approximately 90 days. We now believe that, under GAAP, we should have recorded debt issue costs of $934,000 together with a corresponding liability of $500,000 and $434,000 of paid in capital for the finders’ warrants. In addition, we should have recorded

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amortization expense of $827,414 in fiscal year 2002 related to the debt issue costs and we should have written off the remaining unamortized debt issue costs of $106,586 on the debt extinguishment date.

     For the three and nine months ended January 31, 2002, we should have recorded interest expense of $229,912 and $710,849 respectively, relating to the finders’ warrants.

     On September 24, 2001, we issued 500,000 shares of common stock to one of the finders to settle the $250,000 liability to him. In addition, on August 9, 2001, we paid $62,500 cash to the other finder, Mr. Corey Lambrecht, which reduced our liability to him from $250,000 to $187,500. On April 1, 2002, Mr. Lambrecht became our Vice President of Licensing. On April 30, 2002, we issued 375,000 shares to him. He has served as our Executive Vice President since September 2002. We had previously recorded the issuance of 875,000 shares of common stock as of May 6, 2001 as a credit to paid in capital for $437,500 or $0.50 per share, although these shares were unissued as of May 6, 2001. We now believe that under GAAP we should have recorded an extinguishment loss of $185,000 in September 2001 based upon the 500,000 shares issued to the first finder on September 24, 2001 (500,000 shares valued at $0.87 as of the date of issuance less the $250,000 restated liability as of May 6, 2001). Based upon the 375,000 shares issued to Mr. Lambrecht on April 30, 2002, our restatement includes a compensation expense of $667,500 in April 2002 (375,000 shares valued at $2.28 on the date of issuance less the $187,500 remaining restated liability as of April 2002).

     Because the finders’ fees were determined to be settled in a fixed number of shares of stock, we now believe that we should have recorded the excess of the market value of the stock to be issued over the original amount of the obligation as additional expense for the three months ended January 31, 2002. The difference between the market value and the initial value of the 500,000 shares due to Mr. Lambrecht for the three months ended January 31, 2002 results in recognizing an increase in compensation expense of $11,250.

     For the nine months ended January 31, 2002, the Company has recorded $185,000 in interest expense as an extinguishment of debt relative to the difference between the market value and the initial value of the 500,000 shares issued to one of the finders. The Company has also recorded $123,750 as compensation expense for the nine months ended January 31, 2002 for the difference between the market value and the initial value of the 375,000 shares due to Mr. Lambrecht.

Adjustments for Income Tax Accounting Error Corrections

     Our acquisition of Smith & Wesson Corp. was a stock transaction for which no election was made under Internal Revenue Code Section 338 to treat the transaction as an asset purchase for income tax purposes. Therefore, while a new basis of accounting was established for financial reporting purposes, all historical tax bases carried over, resulting in substantial deferred tax temporary differences at the time of the acquisition.

     On the opening balance sheet at the May 11, 2001 acquisition date of Smith & Wesson Corp., we reported a $10.5 million deferred tax liability. In the fourth quarter of fiscal year 2002, we subsequently determined that this $10.5 million deferred tax liability was an error on the opening balance sheet requiring correction under GAAP. The net deferred tax balance on the opening balance sheet as of May 11, 2001 should have reflected deferred tax liabilities and assets as set forth in the following table.

Deferred Tax Liabilities and Assets Reflected in the Net Deferred Tax Balance
on the Restated Opening Balance Sheet as of May 11, 2001

     In our previously filed annual report on Form 10-KSB for the fiscal year ended April 30, 2002, we recorded adjustments in the fourth quarter of fiscal year 2002 to correct these errors in the opening balance sheet for deferred tax balances by decreasing net deferred tax liabilities by $10.5 million and decreasing fixed assets and intangible assets by $10.5 million. Although these fourth quarter corrections had no impact on our previously reported tax provision for fiscal year 2002, depreciation and amortization expense for 2002 are overstated as a result of recording the correction in the fourth quarter rather than as of May 11, 2001. We now believe we should have had a net deferred tax asset of $10.2 million with a corresponding valuation allowance of $10.2 million at May 11, 2001 to total to a net zero balance for deferred taxes on the opening balance sheet. This finding has a direct impact on each of the first three quarters of fiscal year 2002 as deferred tax benefits were recorded in each of these quarters.

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     The impact for the quarter ended January 31, 2002 was to increase income tax expense by $145,983 to eliminate the previously reported benefit from income tax of $128,333 and record income tax expense of $17,650.

     For the nine months ended January 31, 2002, the impact was to increase income tax expense by $2,018,507 to eliminate the previously reported benefit from income tax of $1,965,559 and record income tax expense of $52,948.

Other Items

     We also restated our fiscal year 2002 financial statements to record the following adjustments that resulted in the changes set forth in the table above:

     We are also filing an amended income tax return with the Internal Revenue Service for the fiscal year ended April 30, 2002. The amended return increases our net operating loss carryforward. As a result, our deferred tax asset relating to net operating losses was also understated in the April 30, 2002 tax provision. Since there is a full valuation allowance against this asset, there is no net balance sheet effect at April 30, 2002 or income statement impact on the financial statements for fiscal year 2002 other than a change to the footnote disclosures.

Adjustments to General and Administrative Expenses

     We also restated our fiscal year 2002 financial statements to record $1,232,634 of additional costs and expenses related to reserves for self-insured medical costs, unemployment insurance, workers’ compensation reserves, and legal services that were previously accounted for as purchase adjustments to the May 11, 2001 acquisition balance sheet of Smith & Wesson Corp. and which we now believe under GAAP should have been expensed in fiscal year 2002. These adjustments increased our previously reported pre-tax loss for fiscal year 2002. A summary of the items comprising the $1,232,634 is presented below:

Adjustments to Expense in Fiscal Year 2002 for Items Previously Capitalized

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     In addition to the expenses noted in the table above, for the three months ended January 31, 2002, general and administrative expenses increased by $83,802 due to the restatement.

     For the nine months ended January 31, 2002, we should have recorded $450,000 of additional expense consisting of accounting and legal costs of $275,000 and the workers compensation/Directors and Officers insurance expense of $175,000.

Other Income/Expense

     We restated our fiscal year 2002 financial statements to increase other expense by $47,200 which includes a loss on extinguishment of debt $187,834.

     For the three months ended January 31, 2002, we should have recorded other income of $112,675.

     For the nine months ended January 31, 2002, we should have recorded other income of $91,586.

Summary of Restatement Adjustments

     The aggregate impact to our fiscal year statement of operations of the adjustments described above is to increase our previously reported 2002 pre-tax net loss by $5.3 million. The following table summarizes the statement of operations impact of these adjustments on our net loss for the period indicated.

Restatement and Adjustment Impact on Net Income (Loss)

     The aggregate impact of the fiscal year 2002 restatement on our financial statements for the three months ended January 31, 2002, is to decrease our previously reported net income by $555,826 to $720,070. Additionally, the restatement had minor effects on our financial statements for the three months ended January 31, 2003 resulting in an increase of our net income for that period from $231,717 to $718,545. The following table summarizes the statement of operations impact of these adjustments on our net loss for each of the periods indicated.

Restatement and Adjustment Impact on Net Income (Loss)

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(*) Do not add due to rounding

Change from LIFO to FIFO Method

     Our annual report on Form 10-KSB for the fiscal year ended April 30, 2002 incorrectly disclosed that we adopted the first in, first out (FIFO) method of inventory valuation for Smith & Wesson Corp. following our acquisition of Smith & Wesson Corp. on May 11, 2001. We did not adopt the FIFO method of inventory valuation for S&W until the fourth quarter of fiscal year 2002. Our disclosure in our quarterly reports filed on Form 10-QSB for the quarters ended October 31, 2001 and January 31, 2002 correctly disclosed that for these quarters, inventory was valued using the last in, first out (LIFO) method. However, following the acquisition of S&W on May 11, 2001, we failed to record adjustments during each of the first three quarters of fiscal year 2002 to reflect S&W’s inventory in accordance with the LIFO method of inventory accounting. The result was that the cost of sales amounts reported in our previously filed 2002 quarterly financial statements were equivalent to a FIFO basis. S&W changed to the FIFO method of accounting during the fourth quarter of fiscal year 2002.

     Under GAAP, a change to the FIFO method would ordinarily require that the financial statements of all prior periods presented be restated to reflect results under the newly adopted FIFO accounting method. However, since our quarterly results initially reported for the three months ended January 31, 2001 reflect the FIFO basis of accounting for inventory (even though we disclosed that our inventory was accounted for on a LIFO basis) we do not believe we need to amend our previously reported results for this matter.

Amendments to Prior Filings

     On December 18, 2003, we filed our annual report for the year ended April 30, 2003 on Form 10-KSB. This annual report includes our restated consolidated financial statements for the year ended April 30, 2002.

     This quarterly report on Form 10-QSB/A includes our restated consolidated financial statements for the quarters ended January 31, 2003 and 2002. We have not amended our previously-filed report on Form 10-QSB for the quarter ended January 31, 2002.

Recent Developments

American Stock Exchange Listing Status

     On September 11, 2003, we received notice from the American Stock Exchange staff indicating that we are not in compliance with the American Stock Exchange’s continued listing standards due to our inability to file with the SEC in a timely manner our Form 10-KSB for the fiscal year ended April 30, 2003, as required under the rules of the American Stock Exchange. On September 25, 2003,

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we submitted a plan of compliance to the American Stock Exchange. The staff of the American Stock Exchange accepted our plan on October 17, 2003, and it granted us an extension of time to regain compliance with the continued listing standards.

     Because we were not able to file our Form 10-KSB by October 24, 2003, the date specified in our original plan to the Exchange, we requested the opportunity to submit a revised plan to the staff of the American Stock Exchange. Under this revised plan submitted to and accepted by the Exchange on November 25, 2003 and as further amended on December 12, 2003 and on December 31, 2003, we have filed our quarterly reports for the first and second quarters of fiscal year 2004 and amended our quarterly reports for the first and second quarters of fiscal year 2003 as of January 9, 2004. We will continue to be subject to periodic review by the staff of the American Stock Exchange. If we fail to make progress consistent with the revised plan or fail to regain compliance with the continued listing standards, we may be delisted from the American Stock Exchange.

SEC Investigation

     The SEC is conducting an investigation to determine whether there have been violations of the federal securities laws in connection with matters relating to the restatement of our consolidated financial statements for fiscal year 2002. We continue to be in discussions with the SEC and intend to continue to fully cooperate with the SEC.

Restructuring

     On January 16, 2004, the Board of Directors voted to close the Scottsdale corporate office and relocate the executive office function to the Company’s Springfield, Massachusetts location. The board also voted to transfer the Licensing division to Springfield as well. In addition, it was also decided to discontinue the Crossings catalog operation as well as the Company’s Advanced Technology division. The company intends to incur a one-time charge in the quarter ended January 31, 2004, relative to this restructuring.

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Item 1: Financial Statements

SMITH & WESSON HOLDING CORPORATION and Subsidiaries

CONSOLIDATED BALANCE SHEETS

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

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SMITH & WESSON HOLDING CORPORATION and Subsidiaries

CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)

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

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SMITH & WESSON HOLDING CORPORATION and Subsidiaries

CONSOLIDATED UNAUDITED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY (DEFICIT)
For the Nine Months Ended January 31, 2003 and 2002 (restated Note 9)

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

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SMITH & WESSON HOLDING CORPORATION and Subsidiaries

CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
For the Nine Months Ended:

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

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SMITH & WESSON HOLDING CORPORATION and Subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended January 31, 2003 and 2002

Notes to Consolidated Financial Statements

(1) Basis of Presentation:

     The restated consolidated balances sheets as of January 31, 2003 and 2002, the restated consolidated statements of operations and changes in stockholders’ equity (deficit) for the three and nine months ended January 31, 2003 and 2002 and the cash flow statements for the nine months ended January 31, 2003 and 2002, have been prepared by the Company, without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to fairly present the financial position, results of operations changes in stockholder’s equity (deficit) and cash flows at January 31, 2003 and 2002 and for the periods presented, have been included. All significant intercompany transactions have been eliminated.

     Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s April 30, 2003 Annual Report to Shareholders on Form 10-KSB.

(2) Organization:

Organization

     Smith & Wesson Holding Corporation, (the “Company”) was incorporated on June 17, 1991 in the State of Nevada as De Oro Mines, Inc. The Company’s original Articles of Incorporation provided for 1,000,000 shares of common stock with a par value of $0.01 per share. From its inception, De Oro Mines, Inc. was a development stage company primarily engaged in the business of developing mining properties. During 1992, De Oro transferred its remaining assets, settled its liabilities and remained dormant until 1996.

     On August 15, 1996, the shareholders of the Company authorized the recapitalization of the Company and the amendment of its Articles of Incorporation to allow the corporation to issue up to 100,000,000 shares of a single class of common stock with a par value of $0.001 per share. The amended Articles were duly adopted as stated and were filed on October 16, 1996 with the State of Nevada.

     Effective October 20, 1998, the Company acquired the assets of Saf-T-Hammer, Inc. and changed its name from De Oro Mines, Inc. to Saf-T-Hammer Corporation. The acquisition was accounted for under the purchase method. Prior to this agreement becoming effective, the Company had a total of 532,788 shares of common stock issued and outstanding. Pursuant to the Asset Acquisition Agreement, the Company issued 1,331,250 shares of common stock to Saf-T-Hammer, Inc., which then resulted in a total of 1,864,038 shares of common stock being issued and outstanding.

     On May 11, 2001, the Company purchased all of the outstanding stock of Smith & Wesson Corp. for $15,000,000 from Tomkins Corporation and accordingly the operations of Smith Wesson Corp. are included in these financial statements from the date of acquisition (See Note 3 “Acquisition of Smith & Wesson Corp.”). Smith & Wesson Corp. was incorporated under the laws of the State of Delaware on January 13, 1987. Smith & Wesson Corp. has been in business since 1852, during which period ownership has changed on a few occasions. Prior to incorporation on January 13, 1987, Smith & Wesson Corp. operated as a division of Lear Siegler. On June 9, 1987, Tomkins Corporation (“Tomkins”), a company organized under the laws of the State of Delaware, acquired all the outstanding stock of the Company.

Name Change

     At a special meeting held February 14, 2002, and at the recommendation of the Board of Directors, the Company’s shareholders approved a change of the Company’s name to “Smith & Wesson Holding Corporation.”

(3) Acquisition of Smith & Wesson Corp.:

The Acquisition

     Pursuant to a Stock Purchase Agreement (the “Acquisition Agreement”) dated as of May 11, 2001 between Tomkins and Smith & Wesson Holding Corporation, the Company acquired (the “Acquisition”) all of the issued and outstanding shares of the Smith & Wesson Corp. (“Smith & Wesson”). As a result of the Acquisition, Smith & Wesson became a wholly owned subsidiary of the

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Company. The Company paid $15,000,000 (the “Purchase Price”) in exchange for all of the issued and outstanding shares of Smith & Wesson as follows:

     The Purchase Price was the result of negotiations between the Company and Tomkins. This acquisition has been accounted for under the purchase method pursuant to APB 16, “Business Combinations.” A summary of the net assets acquired is as follows:

Acquisition Note

     Pursuant to the Acquisition Agreement, the Company issued a promissory note in the amount of $10 million as partial consideration for the acquisition of Smith & Wesson. This note was due on May 11, 2002, was uncollateralized and bore interest at 9% per annum. During March 2002, the Company obtained a bank loan and paid off the entire balance.

Tomkins Note

     The Acquisition Agreement requires the Company to guaranty Smith & Wesson’s existing obligations to Tomkins under a promissory note issued on April 30, 1997 by Smith & Wesson to Tomkins (the “Tomkins Note”). The original Tomkins Note was in the amount of $73,830,000, due April 30, 2004 and bore interest at the rate of 9% per annum. Prior to the Acquisition, Tomkins contributed to the capital of Smith & Wesson, $23,830,000 of the Tomkins Note, thereafter leaving a balance of $50,000,000. Immediately subsequent to the Acquisition, Smith & Wesson paid $20,000,000 of the Tomkins Note. The Company executed a guaranty in favor of Tomkins dated May 11, 2001 and amended the Tomkins Note as follows:

     (a) Commencing on May 11, 2001, the due date was extended by ten years to May 11, 2011;

     (b) The unpaid principal balance shall be paid in 84 equal monthly payments commencing on May 11, 2004;

     (c) Until May 11, 2006, dividends declared and paid to the Company shall not exceed $600,000 for the twelve month period ended May 11, 2002, and may not exceed $1,800,000 for annual periods thereafter;

     (d) Until the payment of $10 million under the Acquisition Note owed by the parent to Tomkins, the Company shall not, either directly or indirectly, incur, assume, guaranty, or otherwise become liable to any indebtedness, except in the ordinary course of business or to re-finance the unpaid balance of the Tomkins Note.

     (e) Smith & Wesson shall not liquidate, wind-up or dissolve any business assets, including tangible and intangible assets; and

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     (f) In the event of default by Smith & Wesson on the Tomkins Note, the Tomkins Note shall be accelerated and become due and payable in full immediately. In addition, any change in control of the Company or Smith & Wesson, will accelerate the Tomkins Note and will become due and payable in full immediately.

The Melby Loan

     The Company obtained financing in the amount of $5 million from an individual, pursuant to a Promissory Note & Loan Agreement dated May 6, 2001 between the Company and this individual (the “Melby Note”). Interest accrued on the Melby Note at a rate of 12% per annum and until maturity on May 15, 2002. During March 2002, the Company obtained a bank loan (See below) and paid off the entire balance. Pursuant to the terms of the Melby Note, the Company prepaid the annual interest of $600,000 at a rate of 12% on May 14, 2001. Related to this loan, the Company also granted warrants, to purchase in aggregate, approximately 8.7 million shares of common stock at exercise prices ranging from $0.40 per share to $2.00 per share.

     As mentioned above, in consideration for making this loan to the Company, the Company issued to Colton Melby, formerly the President and Chief Operating Officer and currently a Director of the Company, a Common Stock Purchase Warrant dated May 6, 2001 (the “Melby Warrant”). The Melby Warrant allowed Mr. Melby to purchase up to 7,094,500 shares of common stock at an exercise price of $.40 per share, subject to adjustment as set forth therein. The Melby warrant was exercisable immediately and would have expired six years from the date of issuance. Also in consideration for the Note, the Company issued Common Stock Purchase Warrants each dated May 11, 2001, to three affiliates of Mr. Melby (the “Affiliate Warrants”). The Affiliate Warrants allowed each holder to purchase up to 300,000 shares of common stock at an exercise price of (a) $.80 per share if exercised on or before May 21, 2001, (b) $2.00 per share if exercised from May 22, 2001 through June 30, 2001, and (c) $5.00 per share if exercised after June 30, 2001. The Affiliate Warrants were exercisable immediately and would have expired one year from the date of issuance. As a portion of a finder’s fee for arranging the Melby Note, the Company issued Common Stock Purchase Warrants, each dated May 11, 2001, to two unrelated parties (the “Finders Warrants”). The Finders Warrants would have expired two years from the date of issuance and allowed each holder to purchase up to 354,725 shares of common stock at an exercise price of $1.00 per share. The Company relied upon Section 4(2) of the Securities Act with respect to the issuance of these Warrants.

Bank Loan

     During March 2002, the Company entered into a specific purpose loan agreement with its bank. Pursuant to the terms of this agreement, the Company borrowed $15.0 million to pay the Acquisition Note and the Melby Note related to the acquisition of Smith & Wesson Corp. The outstanding balance of $15.0 million accrues interest at a rate of 5.85% per annum and is collateralized by liquid assets of S&W up to the face aggregate amount of the obligation. Interest is payable monthly and the principal is payable in monthly installments starting April 28, 2004 and is due in full by March 28, 2014. Beginning in April 2004, monthly combined principal and interest payments will be $165,403.

(4) Summary of Significant Accounting Policies:

Principles of Consolidation

     The accompanying consolidated financial statements include the accounts of Smith & Wesson Holding Corporation and its wholly owned subsidiaries — Smith & Wesson Corp., Smith & Wesson Firearms Training Centre GmbH (Germany), Smith & Wesson Distributing, Inc., Smith & Wesson, Inc. and Lost Coast Ventures, Inc. (Inactive). All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates in Preparation of Financial Statements

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting periods. Operating results in the future could vary from the amounts derived from management’s estimates and assumptions. In addition, future facts and circumstances could alter management’s estimates with respect to the adequacy of reserves. The more significant estimates and assumptions used by management in the preparation of the financial statements relate to the reserves established for uncollectible accounts receivable, excess and obsolete inventory and certain accrued liabilities, including, but not limited to, product, environmental and warranty liabilities and workers compensation.

Fair Value of Financial Instruments

     Unless otherwise indicated, the fair values of all reported assets and liabilities, which represent financial instruments, none of which are held for trading purposes, approximate the carrying values of such amounts.

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Revenue Recognition

     The Company recognizes revenue when the earnings process is complete and the risks and rewards of ownership have transferred to the customer, which is generally upon shipment.

     The Company recognizes tooling, forging, heat treating, finishing, plating, and engineering support revenues after acceptance by the customer and only when no further contingencies or material performance obligations exist, when collectibility is reasonably assured and thereby the Company has earned the right to receive and retain payments for services performed and billed.

     The Company recognizes licensing revenue from the use of its Identi-Kit software over the subscription period.

     The Company recognizes trademark licensing revenue on a quarterly basis based on actual receipts due from licensees through the date of our financial statements. These revenues are comprised of minimum royalties and/or a percentage of a licensee’s sales on licensed products. Fees received upon initial signing of license agreements are recognized as revenues to the extent of costs incurred. Any amounts in excess of costs are deferred and amortized over the life of the agreement. Due to a combination of uncertain factors regarding existing licensees and past payment performance of licensees in general, the Company believes that reasonable assurance of collectibility does not currently exist. Therefore, the Company does not initially recognize minimum royalty payments, but instead, records such revenue over the period the minimum royalty becomes due and payable. The Company also believes, due to the factors noted above, that an allowance for “uncollectible minimum royalties” cannot reasonably be estimated.

Segment Information

     The Company adopted the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” SFAS 131 requires public companies to report financial and descriptive information about their reportable operating segments. The Company identifies its operating segments based on how management internally evaluates separate financial information, business activities and management responsibility. At the present time, the Company believes it operates in a single business segment and adoption of this standard did not have a material impact on the Company’s financial statements. For each of the three and nine month periods ended January 31, 2003 and 2002, there have been no material foreign operations.

Net Earnings (Loss) Per Share

     Basic earnings per common share are equal to net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are equal to net income divided by the weighted average number of common shares outstanding during the period, including the effect of stock options and stock awards, if such effect is dilutive.

Stock Options

     As described in Note 8, the Company has stock option plans under which employees and directors have options to purchase Common Stock. The Company applies APB Opinion 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its stock option plans. Accordingly, compensation cost is not recognized in the financial statements except in the event where options are granted to consultants at below market exercise prices.

     The following table illustrates the effect on net income and earnings per share had compensation cost been recognized on the fair value of the options at the grant dates for awards under those plans consistent with Statement of Financial Accounting Standards, No. 123, “Accounting for Stock-Based Compensation” using the Black-Scholes fair value method for option pricing.

Product Liability

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     The Company provides reserves for potential product liability defense costs based on estimates determined in consultation with counsel. Adjustments to the provision for product liability are evaluated on an ongoing basis and are charged or credited to cost of sales. This evaluation is based upon information regarding potential or existing product liability cases. Any future costs as a result of this evaluation are recorded when considered both probable and reasonably estimable.

Environmental Liability

     The Company has provided reserves, on an undiscounted basis for potential environmental obligations that management considers probable and for which reasonable estimates of such obligations can be made. Environmental liabilities are considered probable based upon specific facts and circumstances including, but not limited to, currently available environmental studies, existing technology, presently enacted laws and regulations, the timing of future expenditures, experience in remediation efforts, direction or approval from regulatory agencies, the Company’s status as a potentially responsible party (PRP) and the ability of other PRPs or contractually liable parties, if any, to pay the allocated portion of any environmental obligations. Management believes that the Company has adequately reserved for the reasonable estimable costs of known environmental obligations. Currently, reserves are reviewed and additional reserves or deletions to the reserves may occur due to the specific facts and circumstances previously noted.

(5) Advertising Costs:

     Advertising costs, consisting primarily of magazine advertisements and printed materials, are expensed as incurred. For the nine months ended January 31, 2003 and 2002, advertising expenses amounted to approximately $2,760,000 and $1,844,000, respectively.

(6) Self-Insurance Reserves:

     As of January 31, 2003 and 2002, the Company’s subsidiary, Smith & Wesson, had reserves for workers compensation and product liability totaling $8,763,915 and $12,325,993, respectively, of which, $5,973,915 and $10,075,993, respectively, have been classified as non-current and included in other non-current liabilities and the remaining amounts of $2,790,000 and $2,250,000, respectively, are included in accrued expenses on the accompanying consolidated balance sheet. While management believes these reserves to be adequate, there exists a possibility that the ultimate liabilities will exceed such estimates. Amounts credited or charged to expense were $(75,995) and $2,421,903 for the nine months ended January 31, 2003 and 2002, respectively.

     Following is a summary of the activity in the workers’ compensation and product liability reserves for the nine months ended January 31, 2003 and January 31, 2002:

     It is the Company’s policy to provide an estimate for loss as a result of expected adverse findings or legal settlements where such losses are probable and are reasonably estimable. It is also the Company’s policy to accrue for reasonable estimable legal costs associated with defending such litigation. While such estimates involve a range of possible costs, the Company determines, in consultation with legal counsel, the most likely cost within such range on a case-by-case basis. At January 31, 2003 and January 31, 2002, the Company has product liability reserves of approximately $8.1 million and $11.0 million, respectively comprised entirely of expected legal defense costs.

(7) Commitments and Contingencies:

Litigation

     The Company, together with other firearms manufacturers and certain related organizations, is a co-defendant in various legal proceedings involving product liability claims and is aware of other product liability claims including allegations of defective product

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design, manufacturing, negligent marketing and/or distribution of firearms leading to personal injury(s) including wrongful death. The lawsuits and claims are based principally on the theory of “strict liability” but also may be based on negligence, breach of warranty and other legal theories. In many of the lawsuits, punitive damages, as well as compensatory damages, are demanded. Aggregate claimed amounts presently exceed product liability accruals and, if applicable, insurance coverage. Management believes that, in every case, the allegations of defective product design are unfounded, and that the accident and any results there from were due to negligence or misuse of the firearm by the claimant or a third party and that there should be no recovery against the Company.

     In addition, the Company is also co-defendant in various legal proceedings brought by certain cities, municipalities and counties, against numerous firearms manufacturers, distributors and dealers seeking to recover damages allegedly arising out of the misuse of firearms by third parties in shootings. The complaints by municipalities seek damages, among other things, for the costs of medical care, police and emergency services, public health services, and the maintenance of courts, prisons, and other services. In certain instances, the plaintiffs seek to recover for decreases in property values and loss of business within the city due to increased criminal violence. In addition, nuisance abatement and/or injunctive relief is sought to change the design, manufacture, marketing and distribution practices of the various defendants. These suits allege, among other claims, strict liability or negligence in the design of products, public nuisance, negligent entrustment, negligent distribution, deceptive or fraudulent advertising, violation of consumer protection statutes and conspiracy or concert of action theories.

     The Company’s management monitors the status of known claims and the product liability accrual, which includes amounts for defense costs for asserted and unasserted claims. While it is difficult to forecast the outcome of these claims, in the opinion of management, after consultation with litigation counsel, it is uncertain whether the outcome of these claims will have a material adverse effect on the results of operations or financial condition of the Company. Management believes that it has provided adequate reserves for defense costs. The Company does not anticipate a material adverse judgment and intends to vigorously defend itself.

     At this time, the estimated range of reasonably possible additional losses, as that term is defined in SFAS No. 5, is zero. A range of reasonably possible losses relating to unfavorable outcomes cannot be made. However, in the product liability cases in which a dollar amount of damages is claimed, the amount of damages claimed, which totaled approximately $904 million are set forth as an indication of possible maximum liability that the Company might be required to incur in these cases (regardless of the likelihood or reasonable probability of any or all of this amount being awarded to claimants) as a result of adverse judgments that are sustained on appeal.

     In the nine months ended January 31, 2003, the Company paid approximately $1.8 million in defense and administrative costs relative to product liability and municipal litigation. In addition, the Company spent $207,500 in aggregate in settlement fees relative to product liability cases.

     The Company has recorded the liability for defense costs at a level before reimbursement from insurance carriers. The Company has also recorded the amount due as reimbursement under existing policies from the insurance carriers as a receivable shown in other current assets and other assets.

SEC Investigation

     The SEC is conducting an investigation to determine whether there have been violations of the federal securities laws in connection with matters relating to the restatement of our consolidated financial statements for fiscal year 2002. We continue to be in discussions with the SEC and intend to continue to fully cooperate with the SEC.

Environmental Remediation

     The Company is subject to numerous federal, state and local laws, which regulate the discharge of materials into, or otherwise relate to the protection of, the environment. These laws have required, and are expected to continue to require, the Company to make significant expenditures of both a capital and expense nature. Several of the more significant federal laws applicable to the Company’s operations include the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act (“RCRA”).

     The Company has in place programs and personnel that monitor compliance with various federal, state and local environmental regulations. In the normal course of its manufacturing operations, the Company is subject to occasional governmental proceedings and orders pertaining to waste disposal, air emissions and water discharges into the environment. The Company will fund its environmental costs through cash flows from operating revenue and expects to do so in the future. S&W believes that it is in compliance with applicable environmental regulations in all material respects.

     The Company is required to remediate hazardous waste at Company owned facilities. Currently, it owns designated sites in Springfield, Massachusetts and is subject to five release areas which are the focus of remediation projects as part of the Massachusetts Contingency Plan (MCP). The MCP provides a structured environment for the voluntary remediation of regulated releases. The Company may be required to remove hazardous waste or remediate the alleged effects of hazardous substances on the environment

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associated with past disposal practices at sites not owned by the Company. The Company has received notice that it is a potentially responsible party from the Environmental Protection Agency (EPA) and/or individual states under CERCLA or a state equivalent at one site.

     The Company has reserves of approximately $4.0 million ($3.9 million as non-current) for remediation of the sites referred to above and believes that the time frame for remediation is currently indeterminable. Therefore, the time frame for payment of such remediation is likewise currently indeterminable thus making any net present value calculation irrelevant. The Company’s estimates of these costs are based upon presently enacted laws and regulations, currently available facts, experience in remediation efforts utilizing existing technology, and the ability of other potentially responsible parties or contractually liable parties to pay the allocated portions of any environmental obligations. Where the available information is sufficient to estimate the amount of liability, that estimate has been used; where the information is only sufficient to establish a range of probable liability and no point within the range is more likely than any other, the lower end of the range has been used. The Company does not have insurance coverage for its environmental remediation costs. The Company has not recognized any gains from probable recoveries or other gain contingencies. The environmental reserve was calculated using undiscounted amounts based on independent environmental remediation reports obtained from consultants.

     Based on information known to the Company, management does not expect current environmental regulations or environmental proceedings and claims to have a material adverse effect on the results of operations or financial conditions of the Company. However, it is not possible to predict with certainty the impact on the Company of future environmental compliance requirements or of the cost of resolution of future environmental proceedings and claims, in part because the scope of the remedies that may be required is not certain, liability under federal environmental laws is joint and several in nature, and environmental laws and regulations are subject to modification and changes in interpretation. There can be no assurance that additional or changing environmental regulation will not become more burdensome in the future and that any such development would not have a material adverse effect on the Company.

Contracts

     Employment Agreements — The Company has entered into employment agreements with certain officers and managers to retain their expertise in the ordinary course of business.

     Other Agreements — The Company has various distribution agreements with various third parties in the ordinary course of business.

(8) Stockholders’ Equity:

Common Stock

     During the nine months ended January 31, 2003 and 2002, options or warrants were exercised as follows:

     (a) During November 2002, the Company issued 4,700 shares of the Company’s common shares having a market value of $8,037 to an employee to settle $5,875 in compensation due him. These shares were valued at $1.71 per share.

     (b) During November 2002, the Company issued 50,000 shares of the Company’s common shares to an unrelated third party as part of a litigation settlement involving the Company’s subsidiary.

     (c) During May 2001, 750,000 warrants were exercised by affiliates of a related party at $0.80 per share for net proceeds of $600,000. These warrants were granted in relation to the financing of the Melby Note (see Note 3).

     (d) During August 2001, the Company issued 6,667 shares of the Company’s common shares to a consultant as part of an employment agreement and hence recorded compensation expense of $9,334.

     (e) During September 2001, the Company issued 26,667 shares of the Company’s common shares to a consultant for services rendered and hence recorded compensation expense of $37,334.

     (f) During September 2001, the Company issued 500,000 shares of the Company’s common shares to one of the finders in relation to the financing of the Melby Note (see Note 2). These shares were issued to settle the finders fee payable at the time the financing was arranged. A total of $185,000 was charged to interest expense as part of the extinguishment of this debt.

     (g) During October 2001, the Company issued 87,000 shares of the Company’s common shares to a consultant for services rendered and hence recorded compensation expense of $121,840.

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     The following table provides a reconciliation of the income (loss) amounts and shares used to determine basic and diluted earnings (loss) per share.

     Options and warrants to purchase 50,000 and 20,703,950 shares, respectively, of the Company’s Common Stock were excluded from the January 31, 2003 and 2002 computation of diluted earnings per share because the effect would be antidilutive.

Stock Warrants

     The Company issued warrants related to the financing of debt used for the acquisition of Smith & Wesson Corp., as incentive bonuses to employees and directors, and as compensation to outside consultants during fiscal year 2002.

     In consideration for past services to the Company, including services rendered in connection with the acquisition of Smith & Wesson, the Company issued a Common Stock Purchase Warrant, dated May 11, 2001 (formally approved by the Board of Directors on April 24, 2001), to Mitchell Saltz, former Chief Executive Officer and a director of the Company and a director of Smith & Wesson (the “Saltz Warrant”). The Saltz Warrant entitles Mr. Saltz to purchase up to 5,000,000 shares of common stock at an exercise price of $0.89 per share, subject to adjustment as set forth therein. The Saltz Warrant is exercisable immediately and expires five years from the date of issuance. The Company relied upon Section 4(2) of the Securities Act with respect to the issuance of the Saltz Warrant.

     In consideration for past services to the Company, including services rendered in connection with the acquisition of Smith and Wesson, the Company issued a Common Stock Purchase Warrant, dated May 11, 2001 (formally approved by the Board of Directors on April 24, 2001), to Robert L. Scott, former President and a director of both the Company and Smith & Wesson (the “Scott Warrant”). The Scott Warrant entitles Mr. Scott to purchase up to 5,000,000 shares of common stock at an exercise price of $.89 per share, subject to adjustment as set forth therein. The Scott Warrant is exercisable immediately and expires five years from the date of issuance. The Company relied upon Section 4(2) of the Securities Act with respect to the issuance of the Scott Warrant.

Employee Stock Option and Employee Stock Purchase Plans

     The Company adopted the Employee Stock Option Plan (“the SOP”). The SOP authorizes the issuance of up to 10,000,000 shares of the Company’s common stock pursuant to the exercise of the options granted thereunder. The Board of Directors through its Compensation Committee administers the SOP, selects recipients to whom options are granted and determines the number of shares to be awarded. Options granted under the SOP are exercisable at a price determined by the Committee at the time of grant, but in no event less than fair market value. Grants of options may be made to employees and directors without regard to any performance measures. All options issued pursuant to the SOP are nontransferable and subject to forfeiture. The term of the SOP, unless earlier terminated by the Board, is ten years or May 14, 2011. Any options granted under the SOP shall become exercisable over a period of no longer than ten (10) years. Unless otherwise specified by the Board or the Committee in the resolution authorizing such option, the date of grant of an option shall be deemed to be the date upon which the Board or the Committee authorizes the granting of such option. Generally, options vest over a period of three years. In some instances, however, that time period has been reduced. During the nine months ended January 31, 2003 and 2002, the Company granted 645,000 and 1,350,000 options,respectively, under the SOP.

     The number and weighted average exercise prices of options granted under the SOP, for the nine months ended January 31, 2003 and 2002 are as follows:

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     A summary of stock options outstanding and exercisable at January 31, 2003 follows:

     The Company adopted an Employee Stock Purchase Plan (“the ESPP”), which authorizes the sale of up to 10,000,000 shares of the Company’s common stock to employees and directors. The ESPP commenced operating on June 24, 2002 and shall continue in effect for a term of ten (10) years unless sooner terminated. The ESPP shall be implemented by a series of offering periods of twenty-four (24) months duration, with new offering periods commencing on or about April 1 and October 1 of each year (or at such other time or times as may be determined by the Board of Directors). The purchase price shall be equal to 85% of the fair market value of a share of common stock on the offering date or on the purchase date, whichever is lower. A participant shall elect to have payroll deductions made on each payday during the offering period in an amount not less than one percent (1%) and not more than twenty percent 20% (or such greater percentage as the Board may establish from time to time before an offering date) of such participant’s compensation on each payday during the offering period. The first offering period began on June 24, 2002 and will continue until March 31, 2004. Each offering period shall consist of four (4) consecutive purchase periods of six (6) months’ duration. The last day of each purchase period shall be the purchase date for such purchase period. A purchase period commencing on April 1 shall end on the next September 30. A purchase period commencing on October 1 shall end on the next March 31. The Board of Directors of the Company shall have the power to change the duration and/or the frequency of offering and purchase periods with respect to future offerings and purchases without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first offering period to be affected. The maximum number of shares an employee may purchase during each purchase period shall be 12,500 shares. All options and rights to participate in the ESPP are nontransferable and subject to forfeiture in accordance with the ESPP guidelines. In the event of certain corporate transactions, each option outstanding under the ESPP shall be assumed or an equivalent option shall be substituted by the successor corporation or a parent or Subsidiary of such successor corporation. During the nine months ended January 31, 2003 and 2002, 67,117 and 0 shares, respectively, were purchased under the ESPP out of a total authorized of 10,000,000 shares.

     The Company applies APB 25 in accounting for its stock compensation plans, under which no compensation cost has been recognized except in the event where options are granted to consultants at below market exercise prices. The effect on net income and earnings per share had compensation cost been recognized based on the fair value of the options at the grant dates for awards under those plans consistent with Statement of Financial Accounting Standards, No. 123, “Accounting for Stock Based Compensation” using the Black-Scholes fair value method for option pricing is detailed in Note 3 under “Stock Options”.

     For the purpose of computing the pro forma effects of stock compensation under the fair value accounting method, the fair value of each stock option grant or ESPP purchase was estimated on the date of the grant using the Black-Scholes option pricing model. The weighted-average fair value of stock options granted during the nine months ended January 31, 2003 and 2002 was $1.16 and $0.72, respectively. The weighted-average fair value of ESPP shares granted during the nine months ended January 31, 2002 was $0.59. The following weighted-average assumptions were used for stock option grants and ESPP purchases during the following periods:

(9) The Restatement:

Overview

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     On March 17, 2003, the Company engaged PricewaterhouseCoopers LLP (PwC), as our independent public accountants to audit our financial statements for fiscal year 2003. On August 12, 2003, the Company engaged PwC to conduct a re-audit of our previously issued fiscal year 2002 financial statements. On December 18, 2003, we filed our Form 10-KSB for the fiscal year ended April 30, 2003, which included restated financial statements for the fiscal year ended April 30, 2002. These restatement changes affect the financial statements for each quarter in fiscal years 2003 and 2002. In this Form 10-QSB/A, we are restating our previously filed financial statements for each of the three month periods and nine month periods ended January 31, 2003 and January 31, 2002 to reflect adjustments required with respect to the acquisition balance sheet of Smith & Wesson Corp. (S&W) and other adjustments. These adjustments include, among other items:

• adjustments to net sales for product returns and freight invoiced to customers;

• adjustments to S&W’s product liability and environmental expenses;

• our accounting for non-cash interest and fees related to a note payable that we issued to finance a part of the acquisition of Smith & Wesson Corp.;

• adjustments to S&W’s income tax accounts; and

• adjustments to other accounts.

Discussion

     The restatement adjustments for fiscal year 2002 and the effects of those adjustments on the three and nine months ended January 31, 2003 and 2002 are described within each subsection below:

Net Sales and Cost of Sales

     We have restated our fiscal year 2002 financial statements to increase net product sales by $2.8 million and increase cost of sales by $3.8 million. Included in the $2.8 million net product sales increase was $1.2 million to reverse a sales return recorded in error. The sales return related to a pre-acquisition sale by Smith & Wesson Corp., for which no reserve for returns had been established. Accordingly, upon return of the product, we now believe the returned goods should have been recorded as an increase in inventory of $1.2 million and as a reduction to acquired receivables of $1.2 million. As such, we restated our 2002 financial statements to increase net product sales by $1.2 million and increase cost of sales by $1.2 million. We also restated our fiscal year 2002 financial statements to increase net product sales by $1.6 million, increase marketing and selling expense by $0.7 million for cooperative advertising and distributor incentives, increase cost of goods sold by $0.8 million for the cost of freight and $0.1 million used to fund industry programs. These three costs had incorrectly been reported as reductions of sales. We also restated to increase cost of sales by $0.4 million for inventory and equipment write-offs, decrease cost of goods sold by $0.3 million for depreciation expense which was overstated as a result of errors in the S&W purchase accounting and to increase cost of goods sold by $1.6 million for adjustments to product liability reserves.

     The effect of these adjustments on our quarterly financial statements for the three months ended January 31, 2002 is to increase net product sales by $.4 million and increase cost of sales by $0.3 million for the cost of freight and $.5 million for additional product liability expense. We are also restating our financial statements for the three months ended January 31, 2003, to increase net product sales by $0.6 million, increase selling and marketing expense by $0.1 million for cooperative advertising and distributor incentives, and increase cost of goods sold by $0.3 million for the cost of freight.

     The effect of these adjustments on the nine months ended January 31, 2002 is to increase net product sales by $2.3 million, which includes a $1.2 million sales return recorded in error in the second quarter, as well as $1.1 million in freight, promotional and industry dues that had originally been reported as a reduction of sales and should have been charged to cost of sales and operating expenses. Cost of sales has been increased by $3.2 million which includes $1.0 million related to the sales return, $1.2 million relative to the product liability adjustment, $0.6 million in freight costs previously reported as a reduction to sales, and $0.4 million in for inventory and equipment write-offs. For the nine months ended January 31, 2003 the effects of the restatement on net product sales was an increase of $1.9 million which, was the freight, promotional and industry dues that had originally been reported as a reduction of sales and should have been charged to cost of sales and operating expenses.

Product Liability and Environmental Expenses

     We have restated our fiscal year 2002 financial statements to record additional provisions of $2.5 million for environmental remediation and $1.6 million for product liability and accounted for such amounts as adjustments to the May 11, 2001 acquisition balance sheet of Smith & Wesson Corp. We now believe that under generally accepted accounting principles (GAAP) these amounts, aggregating $4.1 million, should have been expensed in 2002 rather than capitalized as increases to purchased assets under FAS 38,

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Accounting for Preacquisition Contingencies of Purchased Enterprises, which provides that adjustments of preacquisition contingencies after the end of the allocation period must be included in net income in the period the adjustment is determined. Accordingly, our fiscal year 2002 financial statements were restated to increase cost of goods sold by $1.6 million, to increase environmental expense by $2.5 million and to correspondingly reduce the amount of purchase price allocable to reduce purchased fixed assets and intangibles by $4.1 million.

     The effect of these adjustments for the three months ended January 31, 2002, is to increase cost of goods sold by $0.5 million to adjust the product liability reserve. The effect of these adjustments on the nine months ended January 31, 2002 was to increase cost of goods sold by $1.2 million for product liability and to increase environmental expense by $2.5 million.

Melby Financing; Interest Expense and Compensation Expense Adjustments

     We determined that there were errors in the accounting for a $5 million debt financing, known as the Melby financing, provided to us by Colton R. Melby to finance part of the acquisition of Smith & Wesson Corp. As a result of this loan and the related stock warrants issued, we originally recorded approximately $5,008,500 in expense consisting of $5,000,000 in interest expense, $6,000 in depreciation expense and $2,500 in office supplies expense in fiscal year 2002. We have now determined that under GAAP we should have recorded aggregate expense of $4,541,500 consisting of $2,567,166 in interest expense for amortization of debt discount related to the warrants; $827,414 in interest expense for amortization of debt issue costs arising from the consideration paid to the parties who assisted in arranging the financing (the finders); a loss on early extinguishment of the note payable of $294,420 charged to interest expense; interest expense of $185,000 resulting from settlement of the finders’ liability and compensation expense of $667,500 to a finder related to his employment by us. The net result of these transactions is that the previously reported pre-tax loss for the fiscal year ended April 30, 2002 was overstated by $467,000. Our fiscal year 2002 financial statements were restated accordingly, to decrease interest expense by $1,126,000, decrease depreciation expense by $6,000, decrease supplies expense by $2,500 and increase general and administrative expense by $667,500 for compensation expense.

     The following discussion provides additional background on the Melby financing. On May 6, 2001, we sold to Mr. Melby a $5 million nonconvertible note due May 12, 2002 and warrants, known as the Melby warrants, to acquire shares of our common stock. At the time of this financing transaction, Mr. Melby had no relationship with us. He became a director of the Company in May 2001, served as our Executive Vice President from May 2002 to September 2002 and served as our President and Chief Operating Officer from September 2002 to December 2003. Under the terms of the Melby financing, we also issued additional warrants, known as the Melby affiliate warrants, to Mr. Melby’s two brothers and one of his associates. Shortly after the issue date, Mr. Melby’s brothers exercised their Melby affiliate warrants. The Melby affiliate warrants issued to Mr. Melby’s associate expired unexercised.

     We initially valued the Melby warrants and the Melby affiliate warrants and recorded a debt discount of $5,000,000 completely offsetting the Melby Note of the same amount. We now believe that under GAAP the $5.0 million financing proceeds should have been allocated among the debt and the Melby warrants and Melby affiliate warrants on a relative fair value basis. Based on their relative values, we have determined that, of the $5.0 million financing proceeds, $2,245,000 should have been allocated to the debt and $2,755,000 should have been allocated to equity for the warrants. As a result of the warrant discount, interest expense for the fiscal year ended April 30, 2002 should have been $2,755,000, comprising $2,567,166 amortized to interest expense over the period from the May 2001 debt issue date through the debt extinguishment date and an early extinguishment loss of $187,834 on the debt extinguishment date. The $5.0 million of debt was redeemed in an early extinguishment on March 28, 2002 for $5 million of consideration consisting of $2,837,000 in cash and $2,162,200 in common stock valued at the March 28, 2002 extinguishment date. Mr. Melby used the $2,837,800 of cash from the extinguishment to exercise his warrants. On the debt extinguishment date, an extinguishment loss of $294,420, including the remaining unamortized debt issue costs of $106,586 and the unamortized debt discount of $187,834, should have been recognized.

     For the three and nine months ended January 31, 2002, we should have recorded interest expense of $564,606 and $2,333,415 respectively, relating to the Melby Note, the Melby Warrants, and the Melby Affiliate Warrants compared to interest expense previously recorded of $.9 million and $4.5 million, respectively.

     In connection with the Melby financing, on May 11, 2001 we also issued warrants, known as the finders’ warrants, to the two finders retained to locate the Melby financing. These warrants had a fair value of $434,000. In addition to the finders’ warrants, each finder was also entitled to receive a $250,000 cash fee. On May 6, 2001, we advised the finders that they would be paid this fee in approximately 90 days. We now believe that, under GAAP, we should have recorded debt issue costs of $934,000 together with a corresponding liability of $500,000 and $434,000 of paid in capital for the finders’ warrants. In addition, we should have recorded amortization expense of $827,414 in fiscal year 2002 related to the debt issue costs and we should have written off the remaining unamortized debt issue costs of $106,586 on the debt extinguishment date.

     For the three and nine months ended January 31, 2002, we should have recorded interest expense of $229,912 and $710,849 respectively, relating to the finders’ warrants.

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     On September 24, 2001, we issued 500,000 shares of common stock to one of the finders to settle the $250,000 liability to him. In addition, on August 9, 2001, we paid $62,500 cash to the other finder, Mr. Corey Lambrecht, which reduced our liability to him from $250,000 to $187,500. On April 1, 2002, Mr. Lambrecht became our Vice President of Licensing. On April 30, 2002, we issued 375,000 shares to him. He has served as our Executive Vice President since September 2002. We had previously recorded the issuance of 875,000 shares of common stock as of May 6, 2001 as a credit to paid in capital for $437,500 or $0.50 per share, although these shares were unissued as of May 6, 2001. We now believe that under GAAP we should have recorded an extinguishment loss of $185,000 in September 2001 based upon the 500,000 shares issued to the first finder on September 24, 2001 (500,000 shares valued at $0.87 as of the date of issuance less the $250,000 restated liability as of May 6, 2001). Based upon the 375,000 shares issued to Mr. Lambrecht on April 30, 2002, our restatement includes a compensation expense of $667,500 in April 2002 (375,000 shares valued at $2.28 on the date of issuance less the $187,500 remaining restated liability as of April 2002).

     Because the finders’ fees were determined to be settled in a fixed number of shares of stock, we now believe that we should have recorded the excess of the market value of the stock to be issued over the original amount of the obligation as additional expense for the three months ended January 31, 2002. The difference between the market value and the initial value of the 500,000 shares due to Mr. Lambrecht for the three months ended January 31, 2002 results in recognizing an increase in compensation expense of $11,250.

     For the nine months ended January 31, 2002, the Company has recorded $185,000 in interest expense as an extinguishment of debt relative to the difference between the market value and the initial value of the 500,000 shares issued to one of the finders. The Company has also recorded $123,750 as compensation expense for the nine months ended January 31, 2002 for the difference between the market value and the initial value of the 375,000 shares due to Mr. Lambrecht.

Adjustments for Income Tax Accounting Error Corrections

     Our acquisition of Smith & Wesson Corp. was a stock transaction for which no election was made under Internal Revenue Code Section 338 to treat the transaction as an asset purchase for income tax purposes. Therefore, while a new basis of accounting was established for financial reporting purposes, all historical tax bases carried over, resulting in substantial deferred tax temporary differences at the time of the acquisition.

     On the opening balance sheet at the May 11, 2001 acquisition date of Smith & Wesson Corp., we reported a $10.5 million deferred tax liability. In the fourth quarter of fiscal year 2002, we subsequently determined that this $10.5 million deferred tax liability was an error on the opening balance sheet requiring correction under GAAP. The net deferred tax balance on the opening balance sheet as of May 11, 2001 should have reflected deferred tax liabilities and assets as set forth in the following table.

Deferred Tax Liabilities and Assets Reflected in the Net Deferred Tax Balance
on the Restated Opening Balance Sheet as of May 11, 2001

     In our previously filed annual report on Form 10-KSB for the fiscal year ended April 30, 2002, we recorded adjustments in the fourth quarter of fiscal year 2002 to correct these errors in the opening balance sheet for deferred tax balances by decreasing net deferred tax liabilities by $10.5 million and decreasing fixed assets and intangible assets by $10.5 million. Although these fourth quarter corrections had no impact on our previously reported tax provision for fiscal year 2002, depreciation and amortization expense for 2002 are overstated as a result of recording the correction in the fourth quarter rather than as of May 11, 2001. We now believe we should have had a net deferred tax asset of $10.2 million with a corresponding valuation allowance of $10.2 million at May 11, 2001 to total to a net zero balance for deferred taxes on the opening balance sheet. This finding has a direct impact on each of the first three quarters of fiscal year 2002 as deferred tax benefits were recorded in each of these quarters.

     The impact for the quarter ended January 31, 2002 was to increase income tax expense by $145,983 to eliminate the previously reported benefit from income tax of $128,333 and record income tax expense of $17,650.

     For the nine months ended January 31, 2002, the impact was to increase income tax expense by $2,018,507 to eliminate the previously reported benefit from income tax of $1,965,559 and record income tax expense of $52,948.

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Other Items

     We also restated our fiscal year 2002 financial statements to record the following adjustments that resulted in the changes set forth in the table above:

• Property, Plant and Equipment. — We acquired Smith & Wesson Corp. in a bargain purchase that resulted in writing down long-lived assets below fair value, resulting in decreasing fixed assets to a financial statement basis that is less than the net tax basis, which creates a deferred tax asset. This temporary difference should have resulted in a deferred tax asset of approximately $4.8 million. However, we incorrectly recorded a $2.0 million deferred tax liability related to fixed assets which was included in the $10.5 million deferred tax liability. This error was discovered and corrected in the fourth quarter of fiscal year 2002 but should have been corrected effective May 11, 2001. The adjustment in the fourth quarter of fiscal year 2002 reduced deferred tax liabilities by $2.0 million, increased deferred tax assets by $4.8 million and reduced fixed assets and intangible assets by $6.8 million.

• Trademark. — The trademark is being amortized over a 20-year period for financial statement purposes, and the historical tax basis of the trademark is zero, which results in a deferred tax liability. A deferred tax liability of $2,640,000 relating to the trademark was previously recorded at the opening balance sheet as part of the $10.5 million deferred tax liability. However, Smith & Wesson Corp. had sufficient deferred tax assets to offset this liability, which reverses over a foreseeable time frame (20 years). A full valuation allowance of $8.0 million against deferred tax assets was previously recorded in the opening balance sheet, thus resulting in recognition of only deferred tax liabilities on the balance sheet. In the fourth quarter of fiscal year 2002, we determined that this deferred tax liability must, under GAAP, be considered as a source of future taxable income available to offset deferred tax assets at May 11, 2001. Therefore, at May 11, 2001, no valuation allowance should have been recognized to the extent deferred tax assets will be utilized by this reversing deferred tax liability, meaning that the valuation allowance at opening balance sheet was overstated. This overstatement was corrected in the fourth quarter of 2002.

• LIFO Reserve. — The last in, first out (LIFO) reserve book versus tax difference was created primarily as the result of purchase accounting adjustments made to inventory. Smith & Wesson Corp. had historically valued its financial statement and tax inventory under the LIFO accounting method. The inventory acquired in the May 11, 2001 acquisition was recorded at fair value. Therefore, for book purposes the LIFO reserve was zero at May 11, 2001. However, the inventory basis and related LIFO reserve was unchanged for tax purposes. Therefore, there was a LIFO reserve for tax purposes only of approximately $14.7 million, creating a temporary difference. We now believe that the use of tax planning strategies available with respect to the LIFO reserve were not appropriately considered for purposes of determining the valuation allowance for the opening balance sheet. This error at opening balance sheet was discovered and corrected in the fourth quarter of the fiscal year 2002 based on tax planning strategies which would allow us to recognize the LIFO temporary difference as a source of future taxable income for purposes of determining the deferred tax asset valuation allowance.

• Deferred Taxes. — Our Form 10-KSB for the fiscal year ended April 30, 2002 as originally filed also reflects adjustments made in the fourth quarter of fiscal year 2002 to adjust deferred taxes to reverse approximately $2 million of tax benefits recorded over the prior three fiscal quarters.

     We are also filing an amended income tax return with the Internal Revenue Service for the fiscal year ended April 30, 2002. The amended return increases our net operating loss carryforward. As a result, our deferred tax asset relating to net operating losses was also understated in the April 30, 2002 tax provision. Since there is a full valuation allowance against this asset, there is no net balance sheet effect at April 30, 2002 or income statement impact on the financial statements for fiscal year 2002 other than a change to the footnote disclosures.

Adjustments to General and Administrative Expenses

     We also restated our fiscal year 2002 financial statements to record $1,232,634 of additional costs and expenses related to reserves for self-insured medical costs, unemployment insurance, workers’ compensation reserves, and legal services that were previously accounted for as purchase adjustments to the May 11, 2001 acquisition balance sheet of Smith & Wesson Corp. and which we now believe under GAAP should have been expensed in fiscal year 2002. These adjustments increased our previously reported pre-tax loss for fiscal year 2002. A summary of the items comprising the $1,232,634 is presented below:

Adjustments to Expense in Fiscal Year 2002 for Items Previously Capitalized

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     In addition to the expenses noted in the table above, for the three months ended January 31, 2002, general and administrative expenses increased by $83,802 due to the restatement.

     For the nine months ended January 31, 2002, we should have recorded $450,000 of additional expense consisting of accounting and legal costs of $275,000 and the workers compensation/Directors and Officers insurance expense of $175,000.

Other Income/Expense

     We restated our fiscal year 2002 financial statements to increase other expense by $47,200 which includes a loss on extinguishment of debt $187,834.

     For the three months ended January 31, 2002, we should have recorded other income of $112,675.

     For the nine months ended January 31, 2002, we should have recorded other income of $91,586.

Summary of Restatement Adjustments

     The aggregate impact to our fiscal year statement of operations of the adjustments described above is to increase our previously reported 2002 pre-tax net loss by $5.3 million. The following table summarizes the statement of operations impact of these adjustments on our net loss for the period indicated.

Restatement and Adjustment Impact on Net Income (Loss)

     The aggregate impact of the fiscal year 2002 restatement on our financial statements for the three months ended January 31, 2002, is to decrease our previously reported net income by $555,826 to $720,070. Additionally, the restatement had minor effects on our financial statements for the three months ended January 31, 2003 resulting in an increase of our net income for that period from $231,717 to $718,545. The following table summarizes the statement of operations impact of these adjustments on our net loss for each of the periods indicated.

Restatement and Adjustment Impact on Net Income (Loss)

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