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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended April 30, 2005 | ||
Commission File Number 1-31552
SMITH & WESSON HOLDING CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
|
Nevada
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87-0543688 | |
|
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
2100 Roosevelt Avenue
Springfield, Massachusetts 01104
(800) 331-0852
(Address including zip code, and telephone number,
including area code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the
Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class)
Securities registered pursuant to Section 12(g) of the
Exchange Act:
None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of Common Stock held by nonaffiliates
of the registrant (19,287,886 shares) based on the last
reported sale price of the registrant’s Common Stock on the
American Stock Exchange on October 31, 2004, which was the
last business day of the registrant’s most recently
completed second fiscal quarter, was $28,546,071. For purposes
of this computation, all officers, directors, and 10% beneficial
owners of the registrant are deemed to be affiliates. Such
determination should not be deemed to be an admission that such
officers, directors, or 10% beneficial owners are, in fact,
affiliates of the registrant.
As of July 31, 2005, there were outstanding
32,128,917 shares of the registrant’s Common Stock,
par value $.001 per share.
Documents Incorporated by Reference
Portions of the registrant’s definitive proxy statement for
the 2005 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Form 10-K.
SMITH & WESSON HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended April 30, 2005
TABLE OF CONTENTS
Statement Regarding Forward-Looking Information
The statements contained in this report on Form 10-K that
are not purely historical are forward-looking statements within
the meaning of applicable securities laws. Forward-looking
statements include statements regarding our
“expectations,” “anticipation,”
“intentions,” “beliefs,” or
“strategies” regarding the future. Forward-looking
statements also include statements regarding revenue, margins,
expenses, and earnings analysis for fiscal 2005 and thereafter;
future products or product development; our product development
strategies; beliefs regarding product performance; the success
of particular product or marketing programs; and liquidity and
anticipated cash needs and availability. All forward-looking
statements included in this report are based on information
available to us as of the filing date of this report, and we
assume no obligation to update any such forward-looking
statements. Our actual results could differ materially from the
forward-looking statements. Among the factors that could cause
actual results to differ materially are the factors discussed
under Item 1, “Business — Risk Factors.”
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PART I
| Item 1. | Business |
Introduction
We are the largest manufacturer of handguns in the United States
and the largest U.S. exporter of handguns. We manufacture
revolvers, pistols, and related products and accessories for
sale primarily to gun enthusiasts, collectors, hunters,
sportsmen, protection focused individuals, public safety
agencies and officers, and military agencies in the United
States and throughout the world. We have manufacturing
facilities in Springfield, Massachusetts and Houlton, Maine,
both of which are used primarily to manufacture our products. In
addition, we pursue opportunities to license our name and
trademarks to third parties for use in association with their
products and services. We plan to increase substantially our
product offerings and our licensing program to leverage the 150
plus year old “Smith & Wesson” name and
capitalize on the goodwill developed through our historic
American tradition by expanding consumer awareness of products
we produce or license in the safety, security, protection, and
sport markets.
Our objective is to become a leader in the safety, security,
protection, and sport businesses. Key elements of our strategy
to achieve this objective are as follows:
| • | enhancing existing and introducing new products, | |
| • | entering new markets, | |
| • | enhancing manufacturing productivity, | |
| • | capitalizing on our brand name, | |
| • | necessary focused sales support, | |
| • | emphasizing customer satisfaction and loyalty, and | |
| • | pursuing strategic relationships and acquisitions. |
Based upon 2004 reports by the U.S. Bureau of Alcohol,
Tobacco and Firearms, or ATF, we believe the domestic and export
non-military market is approximately $138 million for
revolvers and $467 million for pistols with our current
market share being approximately 38% and 10%, respectively; and
$670 million for rifles and $361 million for shotguns,
of which we currently have no market share.
Our wholly owned subsidiary, Smith & Wesson Corp., was
founded in 1852 by Horace Smith and Daniel B. Wesson.
Mr. Wesson purchased Mr. Smith’s interest in
1873. The Wesson family sold Smith & Wesson Corp. to
Bangor Punta Corp. in 1965. Lear Siegler Corporation purchased
Bangor Punta in 1984, thereby gaining ownership of
Smith & Wesson Corp. Forstmann Little & Co.
purchased Lear Siegler in 1986 and sold Smith & Wesson
Corp. shortly thereafter to Tomkins Corporation, an affiliate of
UK-based Tomkins PLC. We purchased Smith & Wesson Corp.
from Tomkins in May 2001 and changed our name to
Smith & Wesson Holding Corporation in February 2002.
We maintain our principal executive offices at 2100 Roosevelt
Avenue, Springfield, Massachusetts 01104. Our telephone
number is (800) 331-0852. Our website is located at
www.smith-wesson.com. Through our website, we make
available free of charge our annual reports on Form 10-K,
our proxy statements, our quarterly reports on Form 10-Q,
our current reports on Form 8-K, and amendments to any of
them filed or furnished pursuant to Section 13(a) or 15(d)
under the Securities Exchange Act. These documents are available
as soon as reasonably practicable after we electronically file
those documents with the Securities and Exchange Commission. We
also post on our website the charters of our Audit,
Compensation, and Nominations and Corporate Governance
Committees; our Corporate Governance Guidelines, our Code of
Conduct, our Code of Ethics for the CEO and Senior Financial
Officers, and any amendments or waivers thereto; and any other
corporate governance materials contemplated by the regulations
of the SEC and the American Stock Exchange. The documents are
also available in print by contacting our corporate secretary at
our executive offices.
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Business
| Products and Services |
| Handguns |
The sale of handguns accounted for approximately
$113.6 million in net product sales, or approximately 91.6%
of our net product sales, in the fiscal year ended
April 30, 2005 and for approximately $102.3 million in
net product sales, or approximately 86.8% of our net product
sales, in the fiscal year ended April 30, 2004. With the
exception of Walther pistols, all of our handguns are sold under
the “Smith & Wesson” name.
We manufacture high-quality, center-fire revolvers and pistols
with forged components. We have never manufactured or sold
inexpensive concealable firearms, sometimes known as
“Saturday Night Specials,” and we do not produce
“assault weapons” as defined in the Violent Crime
Control and Law Enforcement Act of 1994.
We offer a complete line of handguns to meet the needs of our
customers. We currently offer more handgun models, in more
calibers, for more applications than any other handgun
manufacturer. We currently offer 77 different standard models of
handguns with a wide variety of calibers, finishes, sizes,
compositions, ammunition capacities, barrel lengths, grips,
sights, actions, and other features. In order to enhance our
competitive position, we continually introduce new handgun
models. We introduced seven new revolver models and 11 new
pistol models in fiscal 2005 and five new revolver models and
four new pistol models in fiscal 2004.
Revolvers. A revolver is a handgun with a cylinder that
holds the ammunition in a series of chambers that are
successively aligned with the barrel of the gun during each
firing cycle. There are two general types of revolvers:
single-action and double-action. To fire a single-action
revolver, the hammer is pulled back to cock the gun and align
the cylinder before the trigger is pulled. To fire a
double-action revolver, a single trigger pull advances the
cylinder and cocks and releases the hammer.
We currently manufacture 45 different models of revolvers. The
suggested retail prices of our revolvers range between $450 and
$1,253. The following table sets forth information regarding
some of our most popular revolvers.
| Model | Description | |||
| 60 | .357 magnum, .38 caliber revolver, which is the first all stainless steel handgun. | |||
| 640 | .357 magnum, .38 caliber revolver, enclosed hammer for no snag, easy carry. | |||
| 637 | .38 caliber revolver, which is the original aluminum frame, lightweight revolver. | |||
| 340PD | .357 magnum, .38 caliber lightweight revolver combining a Scandium alloy frame and a Titanium cylinder. | |||
| 10 | .38 caliber revolver descended from the original .38 caliber S&W special military and police revolver introduced in 1899. | |||
| 500 | Extra large frame .50 caliber S&W magnum revolver, which is the world’s most powerful production revolver. | |||
| 65LS | .357 magnum, .38 caliber Lady Smith revolver designed specifically for women. | |||
Revolvers accounted for approximately $54.0 million in net
product sales, or approximately 43.6% of our net product sales
in the fiscal year ended April 30, 2005 and for
approximately $47.6 million in net product sales, or
approximately 40.4% of our net product sales, in the fiscal year
ended April 30, 2004. As of April 30, 2005, we had a
backlog of approximately $12.3 million, or
25,246 units.
Pistols. A pistol is a handgun in which the ammunition
chamber is an integral part of the barrel and which is fed
ammunition from a magazine contained in the grip. The firing
cycle ejects the spent casings and loads a new round into the
chamber.
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We currently manufacture 24 different models of pistols. The
suggested retail prices of our pistols range between $245 and
$1,213. The following sets forth information regarding some of
our most popular pistols.
| Model | Description | |||
| 22A | .22 caliber Rimfire target pistol. | |||
| 41 | .22 caliber Rimfire pistol for competitive target shooting. | |||
| 910 | 9mm all metal traditional double action pistol for law enforcement or personal protection. | |||
| CS9 | 9mm lightweight, compact personal defense pistol. | |||
| SW9VE | 9mm Sigma Series polymer frame, double action only pistol. | |||
| SW99 | 9mm pistol collaborately designed and built with Walther with a steel barrel and slide built on a polymer frame. | |||
| 3913TSW | 9mm premium pistol designed with input from law enforcement for law enforcement. | |||
| SW1911 | .45 ACP adjustable rear sight competition-ready pistol based on the 1911 pistol that was the standard issue for the U.S. military for decades. | |||
| 3913LS | 9mm compact pistol designed specifically for women. | |||
Our pistol sales accounted for approximately $29.0 million
in net product sales, or approximately 23.4% of our net product
sales, in the fiscal year ended April 30, 2005 and for
approximately $26.9 million in net product sales, or
approximately 22.9% of our net product sales, in the fiscal year
ended April 30, 2004. As of April 30, 2005, our
backlog for Smith & Wesson pistols was approximately
$6.1 million, or 24,299 units.
We are the exclusive U.S. importer of Walther firearms and
hold the production rights for the popular Walther PPK model in
the United States. Walther sales accounted for approximately
$17.3 million in net product sales, or approximately 14.0%
of our net product sales, in the fiscal year ended
April 30, 2005 and for approximately $17.2 million of
our net product sales, or approximately 14.6% of our net product
sales, in the fiscal year ended April 30, 2004. As of
April 30, 2005, we had a backlog of approximately
$2.0 million of orders for Walther pistols, or
approximately 7,700 units.
We plan to introduce the first model of our military and police,
or M&P, pistol service in the fall of 2005 with three
additional models scheduled to be introduced by the end of our
2006 fiscal year. The M&P pistol is specifically designed
for use by the military and police and other law enforcement
agencies. We believe the M&P pistol will be the most feature
rich, durable, and safe polymer service weapon available on the
market.
Premium and Limited Edition Handguns. Through our S&W
Performance Center® department, we design, manufacture, and
assemble premium and limited edition pistols and revolvers. The
19 employees in this department are all trained gunsmiths who
undergo periodic peer review and personally select new employees
when needed. Our premium and limited edition handguns include
high-quality features found only in handguns produced by custom
gunsmiths. Our premium and limited edition handguns generated
approximately $10.2 million in net product sales, or
approximately 8.2% of our net product sales, in the fiscal year
ended April 30, 2005 and for $7.7 million in net
product sales, or approximately 6.5% of our net product sales,
in the fiscal year ended April 30, 2004. We offer eight
catalog Performance Center model variations in order to expand
product availability. The addition of the Model 500 and the
SW1911 make platforms available to the Performance Center that
enable us to expand our product offerings into larger calibers
and competition level products.
Parts and Used Guns. Parts and used gun sales accounted
for approximately $3.1 million in net product sales, or
approximately 2.5% of our net product sales, in the fiscal year
ended April 30, 2005 and for approximately
$2.8 million in net product sales, or approximately 2.4% of
our net product sales, in the fiscal year ended April 30,
2004.
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| Handcuffs |
We are one of the largest manufacturers of handcuffs and
restraints in the United States. These products are fabricated
from the finest quality carbon or stainless steel and feature
heat-treated internal lock works. Double locks help prevent
tampering and smooth ratchets allow for swift cuffing and an
extra measure of safety. We can customize handcuffs to fit
customer specifications. Handcuffs accounted for
$4.3 million in net product sales, or approximately 3.4% of
our net product sales, in the fiscal year ended April 30,
2005 and for approximately $5.5 million in net product
sales, or approximately 4.7% of our net product sales, in the
fiscal year ended April 30, 2004.
| Apparel, Accessories, and Collectibles |
We offer an extensive line of licensed accessories, branded
products, and apparel through our website, our catalog, and our
toll free phone number. These items include polo shirts, tee
shirts, denim shirts, field shirts, jackets, hats, gloves,
safety glasses, knives, shooter bags, desk sets, presentation
cases, gun rugs, belt buckles, coffee mugs, key chains, and
watches. Sales of apparel, accessories, and collectibles
accounted for approximately $650,000 in net product sales, or
approximately 0.5% of our net product sales, in the fiscal year
ended April 30, 2005 and for approximately $700,000 in net
product sales, or approximately 0.6% of our net product sales,
in the fiscal year ended on April 30, 2004.
| Smith & Wesson Academy |
Established in 1969, the Smith & Wesson Academy is the
nation’s oldest private law enforcement training facility.
The Academy has trained law enforcement personnel from all
50 states and more than 50 foreign countries. Classes
are conducted at a modern facility in Springfield, Massachusetts
or on location around the world. Through the Smith &
Wesson Academy, we offer state-of-the art instruction designed
to meet the training needs of law enforcement worldwide.
| Specialty Services |
We utilize our substantial capabilities in metal processing and
finishing to provide services to third-party customers. Our
services include forging, heat treating, finishing, and plating.
Specialty services accounted for approximately $3.5 million
in net product sales, or approximately 2.8% of our net product
sales, in the fiscal year ended April 30, 2005 and for
approximately $5.0 million in net product sales, or 4.2% of
our net product sales, in the fiscal year ended April 30,
2004.
Forging. The fundamental strength of our handguns results
from the forgings used in our products. We strive to produce
near net shaped forgings, minimizing excess material. Our
skilled die makers review each customer’s special
requirements, specifying the most effective die layout and
determining the most efficient size and type of forging
equipment to be utilized. The die makers oversee the manufacture
of the forge, trim and coin die sets from design through first
piece acceptance. Once into production, the dies are maintained
on a routine basis. Our process capabilities run from small 1/4
pound to larger 20 pound parts. We can produce components with
lengths of up to 15 inches, utilizing drop hammers ranging
in size from 1,500 pounds to 5,000 pounds. We also have a
variety of mechanical presses for cold and hot trimming. Our
forging capabilities give us the ability to forge products from
carbon, stainless, and alloy steel as well as aluminum, brass,
and copper.
Heat Treating. Our handguns are well known for their
durability and dependability. We perform the controlled
processes required to improve and enhance the physical
properties of components in our “state-of-the art”
heat treating area. Each process is electronically controlled to
ensure that customers’ specific requirements are met. The
equipment allows a wide variety of processes to be performed
while minimizing distortion. We also offer a variety of
controlled quenching atmosphere processes, such as oil, vacuum,
water, nitrogen, and salt. Our in-process inspection area is
able to verify hardness requirements but more critical
parameters, such as superficial hardness testing and tensile
testing, are verified by our in-house metallurgical lab.
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Plating and Finishing. We are recognized for the deep,
rich blue of our handguns. In addition to our metal plating
capabilities, we offer a variety of metal finishing processing,
ranging from polishing, buffing, and sandblasting to isotropic
vibratory finishing of a variety of base metals. Our processes
are adaptable to batch, barrel, or tumbling and racking methods
of component handling. We can process parts up to 60 inches
in length. Our plating and finishing capabilities include black
oxide; passivate for stainless steel; anodized aluminum offering
clear, black, and various colors, electrolytic nickel for steel,
aluminum, brass, or copper; barrel nickel; electroless nickel;
chemical brightening; stripping; zinc phosphate; chromate
conversion coatings; ultrasonic cleaning; and vibratory
finishing processes specializing in elimination of manual
polishing requirements.
| Strategy |
Our objective is to become a leader in the safety, security,
protection, and sport businesses. Key elements of our strategy
to achieve this objective include the following:
| Enhance Existing and Introduce New Products |
We continually seek to enhance our existing products and to
introduce new products. During the last two fiscal years, we
have introduced 12 new revolver models and 15 new pistol models
and plan to launch approximately 20 new handgun models in fiscal
2006, including the launch of our M&P pistol designed for
the military and police and other law enforcement agencies. A
number of the new products we introduce will be intended for
markets and customers that we currently do not serve.
| Enter New Markets |
We plan to expand the markets we serve. Historically, the
largest portion of our business has resulted from the sale of
revolvers in the domestic sporting gun market. We are now
significantly expanding the breadth and quality of our pistol
offerings. We also are actively considering the introduction of
other firearm products, such as hunting rifles, tactical rifles,
and shotguns, as well as related products and services, such as
less lethal guns, ammunition, security systems, and homeland
defense products and services. In addition, we are expanding our
focus on the domestic law enforcement and military markets as
well as international markets. Other products and services being
considered will be intended for other aspects of the safety,
security, protection, and sports markets.
| Enhance Manufacturing Productivity |
We are continuing our efforts to enhance our manufacturing
productivity in terms of added capacity, increased daily
production quantities, lower manufacturing down time, extension
of machinery useful life, reduced overtime, and enhanced product
quality. The recent introduction of new production methods and
additional machinery has resulted in significant improvements in
our production. For example, we have been able to increase our
average daily revolver production from 538 in May 2004 to 675 in
May 2005, while improving product quality, reducing waste, and
reducing overtime. We plan to continue to seek gains in
manufacturing efficiency.
| Capitalize on Brand Name |
We plan to capitalize on our well-known Smith & Wesson
brand name. We believe our brand name will enable us to offer
new products and services that we do not currently offer, such
as rifles and shotguns, and to achieve license revenue from
third parties that believe our brand name will facilitate the
sale of their products or services.
| Increase Focused Sales Support |
We are moving from using independent sales representatives to a
sales team of dedicated company employees in the
U.S. sporting goods channel.
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| Emphasize Customer Satisfaction and Loyalty |
We plan to emphasize customer satisfaction and loyalty by
offering high-quality products on a timely and cost-effective
basis and by offering customer training and support.
| Pursue Strategic Relationships and Acquisitions |
We intend to develop and expand strategic relationships and
strategic acquisitions to enhance our ability to offer new
products and penetrate new markets.
| Discontinued Products and Services |
We are focusing our business on what we consider to be
significant opportunities in the safety, security, protection,
and sport markets. During the fiscal year ended April 30,
2004, we discontinued our Crossings catalog business,
discontinued our Smith & Wesson Advanced Technology, or
SWAT division, and moved our corporate headquarters from
Scottsdale, Arizona to Springfield, Massachusetts. For the year
ended April 30, 2004, we recorded pre-tax losses on our
discontinued Crossings catalog and Advanced Technology
businesses of approximately $900,000 and $1.0 million
pre-tax, respectively. In addition, we incurred approximately
$1.0 million pre-tax for severance and other costs relating
to the closing of the Scottsdale office. The closing of the
Scottsdale office and related staff reduction resulted in
pre-tax savings of approximately $2.0 million in fiscal
2004.
On June 3, 2004, we entered into a Purchase and License
Agreement with Copia Partners, LLC, an Arizona limited liability
company controlled by two former employees. Pursuant to the
Agreement, we sold to Copia all of our intellectual property
used in connection with Identi-Kit, a software-based facial
construction tool generally used in lieu of a police sketch
artist. This intellectual property includes, among other things,
the software, technical specifications and design documents, the
internet domain name, four U.S. trademark registrations on
the mark IDENTI-KIT, and 27 foreign registrations on the same
mark. The agreement also provides for a non-exclusive limited
license to use the SMITH & WESSON word mark and
monogram logo. The purchase price was $300,000, plus 6% of net
revenues from Identi-Kit products for 10 years.
| Marketing, Sales, and Distribution |
We market our products primarily through in-store promotions at
retail stores; vertical print advertising in magazines, such as
Guns and Ammo, Shooting Times, American Handgunner, Outdoor
Life, and Field & Stream; and sponsorship of various
shooting events carried on selective cable television channels;
and sponsorship of a car in the NASCAR Busch Series. We print
various catalogs displaying our products, which are distributed
to our dealers and mailed directly, on a limited basis, to end
consumers. We also attend various trade shows, such as the SHOT
Show, the NRA Show, the International Association of Chiefs of
Police Show, the IWA Show in Europe, and various buying group
shows. We also receive publicity through features in trade
magazines. In the fiscal year ended April 30, 2005,
advertising and promotion expenses amounted to approximately
$6.2 million.
We have both a direct and indirect commissioned sales force. We
currently employ 15 direct sales people and two independent
contract agencies that service distributors, dealers, and law
enforcement agencies. As of April 30, 2005, we had 25
commercial distributors and 39 law enforcement distributors.
Five distributors accounted for a total of 27.3% of our net
product and services sales in the fiscal year ended
April 30, 2005. Historically, commercial and law
enforcement distributors have been primarily responsible for the
distribution of our handguns and restraints. We are moving to a
direct sales force in the U.S. sporting goods channel and
plan to add approximately 20 sales personnel in this channel
during fiscal 2006.
We also sell a significant amount of firearms directly to law
enforcement agencies. Our overseas sales are primarily made
through distributors, which in turn sell to retail stores and
government agencies.
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| Website |
We utilize our website to market our products and services and
provide information regarding our company to customers,
consumers, dealers, distributors, and law enforcement agencies
worldwide. We recently upgraded our website and are exploring
ways to enhance our ability to utilize the website to provide
additional products and services to our customers.
| Retail Store |
We operate a retail store, including a commercial shooting
range, in Springfield, Massachusetts. Our store sells our
licensed accessories, branded products, apparel, handguns,
ammunition, and related shooting supplies.
| Service and Support |
We operate a toll free customer service number from
8:00 a.m. to 8:00 p.m. Eastern Time to answer
questions and resolve issues regarding our handgun products. In
addition, we offer a limited lifetime warranty program under
which we repair defects in material or workmanship in our
firearms products without charge for as long as the original
purchaser owns the handgun. We also maintain a number of
authorized warranty centers throughout the world and provide
both warranty and charge repair services at our Springfield,
Massachusetts facility.
| Licensing |
Several of our registered trademarks, including the
“S&W®” logo and script “Smith &
Wesson®”, are well known throughout the world and have
a reputation for quality, value, and trustworthiness. As a
result, licensing our trademarks to third parties for use in
products and services provides us with an opportunity that is
not available to many other companies.
We plan to enhance our licensing program through the expansion
of our licensing personnel and the identification of additional
licensees. Our future plans include the expansion of our
licensing program to build greater awareness of the 150 plus
year-old “Smith & Wesson” name and capitalize
on the goodwill developed through our historic American
tradition by expanding consumer awareness of licensed products.
We expect this further extension will provide added retail and
distribution channels, products, and markets for our licensed
goods and branded products. We believe that the use and
exploitation of our brand through an increased licensing program
can leverage our historic reputation and increase revenue with
minimal risk exposure.
We are actively pursuing opportunities within the safety,
security, protection, and sport markets:
| • | Dealer installed home security systems and monitoring, | |
| • | Industrial safety equipment, | |
| • | Ammunition, | |
| • | Automotive locks and security, and | |
| • | Truck and hunting accessories. |
Our licensees are located throughout the world. As of
April 30, 2005, we licensed our Smith & Wesson
trademarks to 19 different companies that market products
complimenting our products. In fiscal 2005, we signed agreements
with four new licensees and ended our relationship with four
licensees.
Licensing revenue in the fiscal years ended April 30, 2005,
April 30, 2004, and April 30, 2003 was approximately
$1.8 million, $1.6 million, and $1.5 million,
respectively.
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| Manufacturing |
We have two manufacturing facilities: a 530,323 square foot
facility located in Springfield, Massachusetts and a
38,115 square foot facility located in Houlton, Maine. We
conduct most of our firearms manufacturing and all of our
specialty services activities at our Springfield, Massachusetts
facility. We use our Houlton, Maine facility for the production
of .22 caliber pistols, the Walther PPK, handcuffs, and other
restraint devices. Both of our facilities are ISO 9001
certified. We perform all assembly, inspection, and testing of
handguns manufactured at our manufacturing facilities. Each
handgun is test fired before shipment. Our major handgun
components are cut by computer-assisted machines, and we deploy
sophisticated automated testing equipment to assist our skilled
employees to ensure the proper functioning of our handguns.
We currently are operating on a three-shift, 40-hour workweek
basis. In certain areas we are operating on a 7-day work
schedule. We have the capacity of producing approximately 1,500
handguns per day. We seek to minimize inventory costs through an
integrated planning and production system.
We believe we have a strong track record of manufacturing very
high-quality products with only a limited amount of recalls.
From time to time, we have experienced some manufacturing issues
with respect to some of our pistols and have had recalls of
pistols. Our most recent recalls occurred in August 2003 on the
SW1911 pistol and in June 2004 on the Model 329 Performance
Center revolver. In June 2004, we also recalled all of the P22
pistols sold in California in order to retrofit them to comply
with California law. The cost of these recalls was less than
$300,000, after tax.
| Supplies |
Although we manufacture all major components for our revolvers
and pistols, we obtain certain parts, primarily magazines and
smaller parts, from third parties. All of our major suppliers
are U.S. based and include Carpenter Steel for raw steel,
Pioneer Tool for cutting tools, Tri-Town Precision Plastics for
polymer components, and Advanced Forming Technology and
Parmatech for metal-injected-molded components. The costs of
these materials are at competitive rates and could be obtained
from other suppliers if necessary.
| Research and Development; New Product Introductions |
Through our advanced products engineering department, we enhance
existing and develop new handgun products. We have an agreement
with Remington Arms Co., Inc. that gives Remington the right to
use our technology in firearms and gives us the right to use
Remington’s technology in handguns. The agreement also
calls for a 50/50 sharing of royalties generated from
sublicensing authorized-user-only and electronic fire
intellectual property owned by the two companies. The agreement
was entered into as of December 28, 2000 and expires when
the last Smith & Wesson or Remington patent relating to
this technology expires. As the prototypes are still in the
testing phase, no royalties have been paid or received to date.
In fiscal 2005, our gross spending, before grant reimbursements,
on research activities relating to the development of new
products was approximately $386,000. In fiscal 2004, our gross
spending on such research activities amounted to approximately
$1.3 million. Of those annual amounts, approximately
$187,000 and $787,000 in fiscal 2005 and 2004, respectively,
were reimbursed by the National Institute of Justice based on
grants received by us for development of an authorized user-only
firearm. As of April 30, 2005, we had two employees engaged
in research and development as part of their responsibilities.
| Patents and Trademarks |
We own numerous patents related to our revolvers, pistols, and
related products. We apply for patents and trademarks whenever
we develop new products or processes deemed commercially viable.
Historically, we have focused on applying primarily for utility
patents, but we are now also focusing on applying for design
patents when we believe that a particular handgun design has
merit worth protecting. Most recently, we have sought patent
protection for our new electronic “smart-gun,” which
is still under research and joint development with Remington
Arms Co., Inc. We have filed for 21 patents related to this
technology. We also filed for 12 patents to protect our polymer
pistol, and we have filed for patents to protect production of
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revolvers manufactured from titanium and scandium. We do not
believe our patents are critical to our business.
Trademarks and copyrights also are important to our handgun
business and licensing activities. We have an active global
program of trademark registration and enforcement. We believe
that our SMITH & WESSON trademark and our S&W
Monogram, registered in 1913-1914, and the derivatives thereof
are known and recognized by the public worldwide and are very
valuable assets. With the return of our company to American
ownership, we have a renewed our emphasis on strengthening our
product branding and realize that the reputation developed by
the use of our name for over 150 years is helpful to
leverage our reputation and image among the general public. Many
of the products we sell derive higher margins as a result of our
brand name.
In addition to our name and derivations thereof, we have
numerous other trademarks, service marks, and logos registered
both in the United States and abroad. Many of our products are
introduced to the market with a particular brand name associated
with them. Sometimes, we collaborate with other companies, such
as to develop ammunition suitable for a newly introduced
revolver or pistol. Some of our better-known trademarks and
service marks include the following:
| • | “AIRLITE,” “HERITAGE SERIES,” “THE SIGMA SERIES,” “CHIEFS SPECIAL,” “SHORTY,” | |
| • | “LADY SMITH,” “BODYGUARD,” “MOUNTAIN GUN,” and “MOUNTAIN LITE” (each used to denote a particular gun design or series of designs); | |
| • | “MAGNUM” (used not only for revolvers but a whole line of brand products) and “LEX MDC” (used in connection with our advanced technology operations); | |
| • | “S&W PERFORMANCE CENTER” (our custom gunsmith service center and used in connection with products); and | |
| • | “SMITH & WESSON ACADEMY” (refers to our training center). |
We intend to vigorously pursue and challenge any violations of
our trademarks, copyrights, or service marks, as we believe the
goodwill associated with them is a cornerstone of our branding
and licensing strategy.
| Competition |
The firearms industry is dominated by a small number of
well-known companies. We encounter competition from both
domestic and foreign manufacturers. Some competitors manufacture
both revolvers and pistols while the majority manufacture only
pistols. Based upon the reports most recently available from the
Bureau of Alcohol, Tobacco and Firearms, or ATF, we are the
largest U.S. manufacturer of revolvers, the fourth largest
U.S. manufacturer of pistols, and the largest
U.S. exporter of handguns. Our primary competitors are
Ruger and Taurus in the revolver market and Ruger, Glock, Sig
Sauer, and Beretta in the pistol market. We compete primarily
based upon product quality, reliability, price, performance, and
service. Our customer service organization is pro-active in
offering timely responses to customer inquiries.
Peerless Handcuff Company is the only major handcuff
manufacturer with significant market share in the United States
that directly competes with us. As a result of competitive
foreign pricing, we sell approximately 90% of our handcuffs and
restraints in the United States.
| Customers |
We sell our products and services through a variety of
distribution channels. Depending upon the product or service,
our customers include distributors, state and municipal law
enforcement agencies and officers, retail accounts, and
consumers.
The ultimate users of our products include gun enthusiasts,
collectors, sportsmen, hunters, law enforcement personnel and
agencies, and other governmental organizations. Approximately
10% of our handguns are sold to law enforcement agencies;
approximately 10% are sold internationally; and the remaining
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approximately 80% are sold through the highly regulated
distribution channel to domestic consumers. Our domestic sales
are made to distributors, that sell to licensed dealers, that in
turn sell to the end user. In some cases, we sell directly to
large dealers.
| Governmental Regulations |
We are regulated by the Bureau of Alcohol, Tobacco and Firearms,
or ATF, which licenses the manufacture and sale of firearms. ATF
conducts periodic audits of our facilities. The U.S. State
Department oversees the export of firearms, and we must obtain
an export permit for all international shipments.
There are also various state and local regulations relating to
firearm design and distribution. In Massachusetts, for example,
there are regulations related to the strength of the trigger
pull, barrel length, and the makeup of the material of the gun.
California has similar regulations, but also requires that each
weapon be sampled by an independent lab before shipping. Warning
labels related to operation of the handgun are contained in all
boxes in which the weapons are shipped. With respect to state
and local regulations, the local gun dealer is required to
comply with those laws and we seek to manufacture weapons
complying with those specifications.
On March 17, 2000, we, the U.S. Department of the
Treasury, and the U.S. Department of Housing and Urban
Development, or HUD, signed an agreement that was subsequently
signed by two states and 11 cities and counties. The
agreement imposed various terms and conditions related to the
design, manufacture, marketing, and distribution of our
handguns. Although the agreement has not been formally
rescinded, we do not believe that the agreement is legally
binding for numerous reasons. We have received confirmation that
HUD will not seek to enforce the agreement. Additionally, among
other terms, the agreement provided that any city or county that
was a party to the agreement and had a lawsuit pending against
us would dismiss us with prejudice from the lawsuit subject to a
consent order. As of March 17, 2000, lawsuits had been
filed against us by nine of the 11 cities and counties that
signed the agreement. None of those nine cities and counties has
dismissed us with prejudice from its lawsuit subject to a
consent order under the agreement. No assurance can be given,
however, that our position that this agreement is not legally
binding would ultimately prevail in any subsequent litigation on
this issue. If ultimately required to comply with the agreement,
it could have a harmful impact on our handgun sales particularly
because none of our competitors are bound by similar agreements.
We are involved in an effort to rescind the HUD agreement.
| Environmental |
We are subject to numerous federal, state, and local laws that
regulate or otherwise relate to the protection of the
environment, including those governing pollutant discharges into
the air and water, managing and disposing of hazardous
substances, and cleaning up contaminated sites. Some of our
operations require permits and environmental controls to prevent
or reduce air and water pollution. These permits are subject to
modification, renewal, and revocation by the issuing authorities.
Environmental laws and regulations generally have become
stricter in recent years, and the cost to comply with new laws
may be greater than we estimate. Several of the more significant
federal laws applicable to our operations include the Clean Air
Act, the Clean Water Act, the Comprehensive Environmental
Response, Compensation and Liability Act, or CERCLA, and the
Solid Waste Disposal Act, as amended by the Resource
Conservation and Recovery Act, or RCRA. CERCLA, RCRA, and
related state laws can impose liability for the entire cost of
cleaning up contaminated sites upon any of the current and
former site owners or operators or parties that sent waste to
these sites, regardless of location, fault, or the lawfulness of
the original disposal activity.
In our efforts to satisfy our environmental responsibilities and
to comply with environmental laws and regulations, we have
established, and periodically update, policies relating to the
environmental standards of performance for our operations. We
maintain programs that monitor compliance with various
environmental regulations. However, in the normal course of our
manufacturing operations, we may be subject to governmental
proceedings and orders pertaining to waste disposal, air
emissions, and water discharges from our operations into the
environment. We regularly incur substantial capital and
operating costs to comply with
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environmental laws, including remediation of known environmental
conditions at our main plant in Springfield, Massachusetts. We
spent approximately $303,000 in the fiscal year ended
April 30, 2005 on environmental compliance, comprising
approximately $213,000 for disposal fees and containers, $50,000
for DEP analysis and fees, and $40,000 for equipment. Although
we have potential liability with respect to the future
remediation of certain pre-existing sites, we believe that we
are in substantial compliance with applicable material
environmental laws, regulations, and permits.
We may become involved in various proceedings relating to
environmental matters, and we are engaged in environmental
investigation and remediation at one site. Our manufacturing
facilities are located on properties with a long history of
industrial use, including the use of hazardous substances. We
have identified soil and groundwater contamination at our
Springfield plant, which we are investigating, monitoring, or
remediating.
We have provided reserves for potential environmental
obligations that we consider probable and for which reasonable
estimates of such obligations can be made. In the fiscal year
ended April 30, 2002, we recorded a charge of
$2.5 million to increase the provision for remediation of
contaminated sites at our Springfield, Massachusetts facility.
As of April 30, 2005, we had a reserve of $3.7 million
for environmental matters, which is recorded on an undiscounted
basis. Environmental liabilities are considered probable based
upon specific facts and circumstances, including currently
available environmental studies, existing technology, enacted
laws and regulations, experience in remediation efforts,
direction or approval from regulatory agencies, our status as a
potentially responsible party, or PRP, and the ability of other
PRPs, if any, or contractually liable parties to pay the
allocated portion of any environmental obligations. We believe
we have adequately provided for the reasonable estimable costs
of known environmental obligations. However, the reserves will
be periodically reviewed and increases or decreases to these may
occur due to the specific facts and circumstances previously
noted.
We do not expect that the liability with respect to such
investigation and remediation activities will have a material
adverse effect on our liquidity and financial condition.
However, we cannot be sure that we have identified all existing
environmental issues related to our properties or that our
operations will not cause environmental conditions in the
future. As a result, we could incur additional material costs to
address cleanup of the environmental conditions.
In February 2003, we sold approximately 85 acres of our
135-acre Springfield property for $1.75 million. The
85 acres have known environmental liabilities related to
past operating practices, and the sales price reflects those
issues. The buyer, the Springfield Redevelopment Authority, or
the SRA, is an agency of the city of Springfield. The SRA has
obtained governmental grants to help defray costs related to the
property. We intend to closely monitor the SRA’s
development and remediation of the sites. Despite the sale, we
have not decreased our reserves for remediation for this site.
Any such adjustment must await remediation by the SRA. We have
listed the property with the Massachusetts Department of
Environmental Protection, or DEP, under the voluntary
remediation program referred to as the Massachusetts Contingency
Plan, or MCP. Environmental investigations on the property began
in 1983, culminating with the completion of a
Phase I — Limited Site Investigation (August
1995), Phase II Comprehensive Site Assessment (January
1999), Phase III Remedial Action Plan (January 1999), and
Phase IV Remedy Investigation (February 2000).
| Employees |
As of July 1, 2005, we had 734 full-time employees. Of
our employees, 643 are engaged in manufacturing, 44 in sales and
marketing, 17 in finance and accounting, 10 in information
services, 2 in our retail and sports center, and 18 in various
executive or other administrative functions. None of our
employees are represented by a union in collective bargaining
with us. Approximately 62% of our employees have 10 or more
years of service with our company, and approximately 47% have
greater than 25 years of service. We believe that our
employee relations are good.
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| Backlog |
As of April 30, 2005, we had a backlog of orders of
approximately $22.8 million. The backlog of orders as of
April 30, 2004 was approximately $28.4 million. Our
backlog consists of orders for which purchase orders have been
received and which are scheduled for shipment within six months.
Our backlog as of a particular date may not be indicative of net
sales for any succeeding period.
Executive Officers
The following table sets forth certain information regarding our
executive officers:
| Name | Age | Position | ||||||
|
Michael F. Golden
|
51 | President and Chief Executive Officer | ||||||
|
John A. Kelly
|
46 | Chief Financial Officer and Treasurer | ||||||
|
Thomas L. Taylor
|
44 | Vice President — Marketing | ||||||
|
Kenneth W. Chandler
|
44 | Vice President — Operations | ||||||
|
Leland A. Nichols
|
43 | Vice President — Sales | ||||||
|
Ann B. Makkiya
|
35 | Secretary and Corporate Counsel | ||||||
Michael L. Golden has served as the President and Chief
Executive Officer and a director of our company since December
2004. Mr. Golden was employed in various executive
positions with the Kohler Company from February 2002 until
joining our company, with his most recent position being the
President of its Cabinetry Division. Mr. Golden was the
President of Sales for the Industrial/ Construction Group of the
Stanley Works Company from 1999 until 2002; Vice President of
Sales for Kohler’s North American Plumbing Group from 1996
until 1998; and Vice President — Sales and Marketing
for a division of Black and Decker where he was employed from
1981 until 1996.
John A. Kelly has served as Chief Financial Officer and
Treasurer of our company since February 2004. Mr. Kelly
served as Vice President-Finance and Chief Financial Officer of
our wholly owned subsidiary, Smith & Wesson Corp., from
August 1994 until February 2004. From October 1984 to July 1994,
Mr. Kelly served at Smith & Wesson Corp. in a
variety of finance and accounting positions, including
Accounting Manager and Director of Accounting.
Thomas L. Taylor has served as Vice President —
Marketing of our company since July 2004. Prior to joining our
company, Mr. Taylor served for more than 24 years in
various sales and marketing positions with Coca-Cola Enterprises
and Frito-Lay. Most recently, Mr. Taylor was Vice
President — Sales and Marketing for the New England
Division of Coca-Cola Enterprises.
Kenneth W. Chandler has served as Vice
President — Operations of our company since November
2004. Mr. Chandler was Vice President —
Operations — Automotive Division of Torrington Bearing
Company, formerly a subsidiary of Ingersoll Rand and now a
subsidiary of the Timkin Company, from 2001 until joining our
company.
Leland A. Nichols has served as Vice
President — Sales of our company since January 2005.
Mr. Nichols was Executive Vice President of the Cabinetry
Division of the Kohler Company from July 2002 until joining our
company. Mr. Nichols held various executive positions with
the Stanley Works from April 1998 until June 2002, including
President of its Hardware Division. Mr. Nichols spent the
previous 14 years with the Black & Decker
Corporation, including positions in sales, marketing, product
management, and general management in the United States and Asia.
Ann B. Makkiya has served as Secretary and Corporate
Counsel of our company since February 2004. Ms. Makkiya
served as Corporate Counsel of our wholly owned subsidiary,
Smith & Wesson Corp., from December 2001 until February
2004. Ms. Makkiya was associated with the law firm of
Bulkley, Richardson and Gelinas, LLP from 1998 to 2001.
On December 2, 2004, without admitting or denying the
charges against him, Thomas Taylor consented to an order of the
Securities and Exchange Commission (“SEC”)
Administrative Law Judge to cease and
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desist from committing or causing violations of the SEC’s
books and records provisions, Section 13 (a) of the
Securities Exchange Act of 1934 and Rules 13a-1, 12b-20 and
13b2-1 thereunder, and agreed to pay a civil penalty in the
amount of $25,000. Mr. Taylor’s settlement arose out
of the SEC’s investigation of whether or not the Kmart
Corporation issued materially false financial statements for the
fiscal year ended December 31, 2001, by improperly
accounting for allowances obtained from its vendors for various
promotional and marketing activities. Mr. Taylor was
Frito-Lay’s Director of Sales in charge of the Kmart snack
account during the relevant period. Frito-Lay is a subsidiary of
PepsiCo, Inc. In entering into that settlement, Mr. Taylor
neither admitted, nor denied, the allegations of the SEC.
Risk Factors
You should carefully consider the following risk factors, as
well as other information in this report, in evaluating our
company and our business.
| We are pursuing a new business strategy, which may not be successful. |
We have expanded our business objective to become a leader in
the business of safety, security, protection, and sport. This
objective is designed to enable us to increase our business
significantly and reduce our traditional dependence on handguns
in general, and revolvers in particular, in the sporting gun
market. Pursuing our strategy to achieve this objective will
require us to hire additional managerial, licensing,
manufacturing, marketing, and sales employees; to introduce new
products and services, which may include rifles, shotguns, and
other firearms products; to purchase additional machinery and
equipment; to expand our distribution channels; to expand our
customer base to include a leadership position in sales to law
enforcement agencies and the military; and to engage in
strategic alliances and acquisitions. There can be no assurance
that we will be able to attract and retain the additional
employees we require, to introduce new products that attain
significant market share, to increase our law enforcement and
military business, or to penetrate successfully other safety,
security, protection, and sport markets.
| We have a new management team. |
Three of our principal operating executive officers have been
with our company for less than a year. We also have recently
hired a number of executives to lead several of our business
initiatives, such as licensing, governmental sales, and long
guns. As a result, our management team has not shown that they
can operate as a cohesive unit and has yet to prove that they
can successively operate our company.
| We may be unable to continue to achieve gains in manufacturing productivity. |
A key element of our strategy is to enhance our manufacturing
productivity in terms of added capacity, increased daily
production quantities, lower machinery down time, extension of
machinery useful life, and enhanced product quality. From May
2004 until May 2005, we increased our daily production of
handguns from 922 to 1,417. There can be no assurance that we
will be able to continue the increases in our manufacturing
productivity.
| Our migration to direct sales force may not be successful. |
Historically, we sold our products in the U.S. sporting
goods channel primarily through independent sales
representatives that sold a number of products for other
companies. We are moving towards a direct sales force in the
U.S. sporting goods channel. There can be no assurance that
this direct sales force will result in additional revenue.
| We are currently involved in numerous lawsuits. |
We are currently defending numerous lawsuits brought by various
cities and counties against us and numerous other manufacturers
and distributors arising out of the design, manufacture,
marketing, and distribution of handguns. In these lawsuits, the
various governments seek to recover substantial damages, as well
as various types of injunctive relief that, if granted, could
affect the future design, manufacture,
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marketing, and distribution of handguns by the defendant
manufacturers and distributors. Although the defense of these
lawsuits has been successful to date, we cannot provide any
assurance regarding the outcome of these lawsuits.
| Government settlements have adversely affected our business. |
We are the only gun manufacturer to enter into settlement
agreements with the city of Boston, the Boston Public Health
Commission, and the U.S. Department of Housing and Urban
Development, or HUD, relating to the manner of selling handguns.
Adverse publicity regarding the settlement agreements resulted
in a boycott by certain of our dealers and customers. A number
of dealers stopped carrying our products altogether, and many
long-time customers began purchasing products from our
competitors. Our settlement agreement with the Boston
authorities was vacated on April 8, 2002, and the HUD
settlement is not being enforced. However, we are still seeking
to recover fully from the consumer boycott.
The settlement agreement dated March 17, 2000 between us,
the U.S. Department of the Treasury, and HUD has not been
formally rescinded. The HUD settlement placed substantial
restrictions and obligations on the operation of our business,
including restrictions on the design, manufacture, marketing,
and distribution of our firearm products. It was subsequently
signed by two states and 11 cities and counties.
As of the signing of the HUD settlement, lawsuits had been filed
against us by nine of the 11 cities and counties that
signed the HUD settlement. Among other terms, the HUD settlement
provided that any city or county that was a party to the HUD
settlement and had a lawsuit pending against us would dismiss us
with prejudice from its lawsuit subject to a consent order. As
of August 10, 2005 , none of the nine cities and counties
that signed the HUD settlement had dismissed us with prejudice
from its lawsuit subject to a consent order under the HUD
settlement.
We do not believe that the HUD settlement is legally binding for
numerous reasons, including that the lack of consideration
received by us for entering into the settlement. No assurance
can be given, however, that our position that the HUD settlement
is not legally binding would ultimately prevail in any
subsequent litigation. We have received confirmation that the
HUD settlement will not be enforced, but have no indication that
the HUD settlement will be formally rescinded. If enforced,
these restrictions contained in the HUD Settlement could
substantially impair our ability to compete, particularly since
none of our competitors are subject to such restrictions.
| Insurance is expensive and difficult to obtain. |
Insurance coverage for firearms companies, including our
company, is expensive and relatively difficult to obtain. Our
insurance costs were approximately $3.3 million in the
fiscal year ended April 30, 2005. Our inability to obtain
insurance, the cost of insurance we obtain, or losses in excess
of our insurance coverage would have a material adverse effect
on our business, financial condition, and operating results.
| The ongoing SEC investigation could result in additional costs, monetary penalties, and injunctive relief. |
The SEC is conducting an investigation to determine whether
there were violations of the federal securities laws in
connection with matters relating to the restatement of our
consolidated financial statements for fiscal 2002 and the first
three quarters of fiscal 2003. Although we have fully cooperated
with the SEC in this matter, the SEC may determine that we have
violated federal securities laws. We cannot predict when this
investigation will be completed or its outcome. If the SEC
determines that we violated federal securities laws, we may face
sanctions, including monetary penalties and injunctive relief.
In addition, we are incurring legal costs for our company as
well as a result of reimbursement obligations for several of our
current and former officers.
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| We face intense competition that could result in our losing or failing to gain market share and suffering reduced revenue. |
We operate in intensely competitive markets that are
characterized by competition from major domestic and
international companies. This intense competition could result
in pricing pressures, lower sales, reduced margins, and lower
market share. Any movement away from high-quality, domestic
handguns to lower priced or comparable foreign alternatives
would adversely affect our business. Some of our competitors
have greater financial, technical, marketing, distribution, and
other resources and, in certain cases, may have lower cost
structures than we possess and that afford them competitive
advantages. As a result, they may be able to devote greater
resources to the promotion and sale of products, to negotiate
lower prices on raw materials and components, to deliver
competitive products at lower prices, and to introduce new
products and respond to customer requirements more effectively
and quickly than we can.
Competition is based primarily on quality of products, product
innovation, price, and customer service and support. Product
image, quality, and innovation are the dominant competitive
factors in the firearms industry.
Our licensed products and non-gun products displayed in our
catalogs and sold by our licensees or us compete based on the
goodwill associated with our name. A decline in the perceived
quality of our handguns, a failure to design our products to
meet consumer preferences, or other circumstances adversely
affecting our goodwill could significantly damage our ability to
sell or license those products. Our licensed products compete
with numerous other licensed and non-licensed products outside
the firearms market. We depend to a great extent on the success
of our independent licensees in distributing non-gun products.
It is uncertain whether the licensees we select will ultimately
succeed in their respective highly competitive markets.
Our ability to compete successfully depends on a number of
factors, both within and outside our control. These factors
include the following:
| • | our success in designing and introducing new products; | |
| • | our ability to predict the evolving requirements and desires of our customers; | |
| • | the quality of our customer services; | |
| • | product introductions by our competitors; and | |
| • | foreign labor costs and currency fluctuations, which may cause a foreign competitor’s products to be priced significantly lower than our products. |
| Our Springfield, Massachusetts facility is critical to our success. |
Our Springfield, Massachusetts facility is critical to our
success. We currently produce the majority of our handguns at
this facility. The facility also houses our principal research,
development, engineering, design, shipping, sales, accounting,
finance, and management functions. Any event that causes a
disruption of the operation of the facility for even a
relatively short period of time would adversely affect our
ability to produce and ship our products and to provide service
to our customers. We are in the process of making certain
changes in our manufacturing operations and modernizing our
equipment as a result of the age of the facility and certain
inefficient manufacturing processes in order to produce in a
more efficient and cost-efficient manner our anticipated volume
of products. There can be no assurance that we will be
successful in attaining increased production efficiencies.
| Shortages of components and materials may delay or reduce our sales and increase our costs, thereby harming our operating results. |
The inability to obtain sufficient quantities of raw materials,
components, and other supplies from independent sources
necessary for the production of our products could result in
reduced or delayed sales or lost orders. Any delay in or loss of
sales could adversely impact our operating results. Many of the
materials used in the production of our products are available
only from a limited number of suppliers. In most cases, we
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do not have long-term supply contracts with these suppliers. As
a result, we could be subject to increased costs, supply
interruptions, and difficulties in obtaining materials. Our
suppliers also may encounter difficulties or increased costs in
obtaining the materials necessary to produce their products that
we use in our products. The time lost in seeking and acquiring
new sources could hurt our net sales and profitability.
| We must effectively manage our growth. |
To remain competitive, we must make significant investments in
systems, equipment, and facilities. In addition, we may commit
significant funds to enhance our sales, marketing, and licensing
efforts in order to expand our business. As a result of the
increase in fixed costs and operating expenses, our failure to
increase sufficiently our net sales to offset these increased
costs would adversely affect our operating results.
The failure to manage our growth effectively could adversely
affect our operations. We have substantially increased the
number of our manufacturing and design programs and plan to
expand further the number and diversity of our programs in the
future. Our ability to manage our planned growth effectively
will require us to
| • | enhance our operational, financial, and management systems; | |
| • | enhance our facilities and expand our equipment; and | |
| • | successfully hire, train, and motivate additional employees, including additional personnel for our sales, marketing, and licensing efforts. |
The expansion and diversification of our products and customer
base may result in increases in our overhead and selling
expenses. We also may be required to increase staffing and other
expenses as well as our expenditures on capital equipment and
leasehold improvements in order to meet the demand for our
products. Any increase in expenditures in anticipation of future
sales that do not materialize would adversely affect our
profitability.
From time to time, we may seek additional equity or debt
financing to provide funds for the expansion of our business. We
cannot predict the timing or amount of any such financing
requirements at this time. If such financing is not available on
satisfactory terms, we may be unable to expand our business or
to develop new business at the rate desired and our operating
results may suffer. Debt financing increases expenses and must
be repaid regardless of operating results. Equity financing
could result in additional dilution to existing stockholders.
| Our operating results may involve significant fluctuations. |
Various factors contribute to significant periodic and seasonal
fluctuations in our results of operations. These factors include
the following:
| • | the volume of customer orders relative to our capacity, | |
| • | the success of product introductions and market acceptance of new products by us and our competitors, | |
| • | timing of expenditures in anticipation of future customer orders, | |
| • | effectiveness in managing manufacturing processes and costs, | |
| • | changes in cost and availability of labor and components, | |
| • | ability to manage inventory and inventory obsolescence, | |
| • | pricing and other competitive pressures, and | |
| • | changes or anticipated changes in economic conditions. |
Accordingly, you should not rely on the results of any period as
an indication of our future performance. If our operating
results fall below expectations of securities analysts or
investors, our stock price may decline.
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| Potential strategic alliances may not achieve their objectives, and the failure to do so could impede our growth. |
We anticipate that we will continue to enter into strategic
alliances. Among other matters, we continually explore strategic
alliances designed to expand our product offerings, enter new
markets, and improve our distribution channels. Any strategic
alliances may not achieve their intended objectives, and parties
to our strategic alliances may not perform as contemplated. The
failure of these alliances may impede our ability to introduce
new products and enter new markets.
| Any acquisitions that we undertake could be difficult to integrate, disrupt our business, dilute stockholder value, and harm our operating results. |
We expect to review opportunities to acquire other businesses
that would complement or expand our current products, expand the
breadth of our markets, or otherwise offer growth opportunities.
While we have no current definitive agreements underway, we may
acquire businesses and products in the future. If we make any
future acquisitions, we could issue stock that would dilute
existing stockholders’ percentage ownership, incur
substantial debt, or assume contingent liabilities. Our
experience in acquiring other businesses is limited. Potential
acquisitions also involve numerous risks, including the
following:
| • | problems assimilating the purchased operations or products, | |
| • | unanticipated costs associated with the acquisition, | |
| • | diversion of management’s attention from our core businesses, | |
| • | adverse effects on existing business relationships with suppliers and customers, | |
| • | risks associated with entering markets in which we have little or no prior experience, and | |
| • | potential loss of key employees of purchased organizations. |
We cannot assure you that we would be successful in overcoming
problems encountered in connection with any acquisitions, and
our inability to do so could disrupt our operations and
adversely affect our business.
| Our inability to protect our intellectual property could impair our competitive advantage, reduce our revenue, and increase our costs. |
Our success and ability to compete depend in part on our ability
to protect our intellectual property. We rely on a combination
of patents, copyrights, trade secrets, trademarks,
confidentiality agreements, and other contractual provisions to
protect our intellectual property, but these measures may
provide only limited protection. Our failure to enforce and
protect our intellectual property rights or obtain the right to
use necessary intellectual property from third parties could
have a material adverse effect on our business, financial
condition, and operating results. In addition, the laws of some
foreign countries do not protect proprietary rights as fully as
do the laws of the United States.
Patents may not be issued for the patent applications that we
have filed or may file in the future. Our issued patents may be
challenged, invalidated, or circumvented, and claims of our
patents may not be of sufficient scope or strength, or issued in
the proper geographic regions, to provide meaningful protection
or any commercial advantage. We have registered certain of our
trademarks in the United States and other countries. There can
be no assurances that we will be able to enforce existing or
obtain new registrations of principle or other trademarks in key
markets. Failure to obtain or enforce such registrations could
compromise our ability to protect fully our trademarks and
brands and could increase the risk of challenge from third
parties to our use of our trademarks and brands.
In the past, we did not consistently require our employees and
consultants to enter into confidentiality agreements, employment
agreements, or proprietary information and invention agreements.
Therefore, our former employees and consultants may try to claim
some ownership interest in our intellectual property and may use
our intellectual property competitively and without appropriate
limitations.
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| We may incur substantial expenses and devote management resources in prosecuting others for their unauthorized use of our intellectual property rights. |
We may become involved in litigation regarding patents and other
intellectual property rights. Other companies, including our
competitors, may develop intellectual property that is similar
or superior to our intellectual property, duplicate our
intellectual property, or design around our patents and may have
or obtain patents or other proprietary rights that would
prevent, limit, or interfere with our ability to make, use, or
sell our products. Effective intellectual property protection
may be unavailable or limited in some foreign countries in which
we sell products or from which competing products may be sold.
Unauthorized parties may attempt to copy or otherwise use
aspects of our intellectual property and products that we regard
as proprietary. There can be no assurance that our means of
protecting our proprietary rights in the United States or abroad
will be adequate or that competitors will not independently
develop similar intellectual properties. If our intellectual
property protection is insufficient to protect our intellectual
property rights, we could face increased competition in the
market for our products.
Should any of our competitors file patent applications or obtain
patents that claim inventions also claimed by us, we may choose
to participate in an interference proceeding to determine the
right to a patent for these inventions because our business
would be harmed if we fail to enforce and protect our
intellectual property rights. Even if the outcome is favorable,
this proceeding could result in substantial cost to us and
disrupt our business.
In the future, we also may need to file lawsuits to enforce our
intellectual property rights, to protect our trade secrets, or
to determine the validity and scope of the proprietary rights of
others. This litigation, whether successful or unsuccessful,
could result in substantial costs and diversion of resources,
which could have a material adverse effect on our business,
financial condition, and operating results.
| We face risks associated with international trade and currency exchange. |
Political and economic conditions abroad may adversely affect
our foreign sales and our importation of firearms from Walther
or other foreign suppliers. Protectionist trade legislation in
either the United States or foreign countries, such as a change
in the current tariff structures, export or import compliance
laws, or other trade policies, could adversely affect our
ability to sell our products in foreign markets, the ability of
foreign customers to purchase our products, and our ability to
import firearms from Walther and other foreign suppliers.
While we transact business predominantly in U.S. Dollars
and bill and collect most of our sales in U.S. Dollars, a
portion of our revenue resulted from goods that were purchased,
in whole or in part, from a European supplier, in Euros, thereby
exposing us to some foreign exchange fluctuations. In the
future, customers or suppliers increasingly may make or require
payments in non-U.S. currencies, such as the Euro.
Fluctuations in foreign currency exchange rates could affect the
sale of our products or the cost of goods and operating margins
and could result in exchange losses. In addition, currency
devaluation can result in a loss to us if we hold deposits of
that currency. Hedging foreign currencies can be difficult,
especially if the currency is not freely traded. We cannot
predict the impact of future exchange rate fluctuations on our
operating results.
| We face risks associated with international activities. |
Our foreign sales of handguns and our importation of handguns
from Walther create a number of logistical and communications
challenges. These activities also expose us to various economic,
political, and other risks, including the following:
| • | compliance with local laws and regulatory requirements as well as changes in those laws and requirements; | |
| • | transportation delays or interruptions and other effects of less developed infrastructures; | |
| • | foreign exchange rate fluctuations; |
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| • | limitations on imports and exports; | |
| • | imposition of restrictions on currency conversion or the transfer of funds; | |
| • | the possibility of appropriation of our assets without just compensation; | |
| • | difficulties in staffing and managing foreign personnel and diverse cultures; | |
| • | overlap of tax issues; | |
| • | tariffs and duties; | |
| • | possible employee turnover or labor unrest; | |
| • | the burdens and costs of compliance with a variety of foreign laws; and | |
| • | political or economic instability in countries in which we conduct business, including possible terrorist acts. |
Changes in policies by the United States or foreign governments
resulting in, among other things, increased duties, higher
taxation, currency conversion limitations, restrictions on the
transfer or repatriation of funds, or limitations on imports or
exports also could have a material adverse effect on us. Any
actions by foreign countries to reverse policies that encourage
foreign trade also could adversely affect our operating results.
In addition, U.S. trade policies, such as “most
favored nation” status and trade preferences, could affect
the attractiveness of our services to our U.S. customers.
| We are subject to national events |
We are subject to sales cycles beyond our control, which can be
driven by national events. The entire firearm industry has
experienced a surge in demand in the United States since and as
a direct result of the terrorist acts that occurred on
September 11, 2001. Americans are now more focused on their
personal security. Prior to September 11, 2001, we
manufactured approximately 10,200 handguns per month. We now are
manufacturing approximately 28,000 handguns per month. The
renewed patriotism of the American consumer coupled with the
return of our company to American ownership, the change in
administrations in Washington, D.C. to one favorably
disposed to protecting the rights of the Second Amendment, and
the lessening of various dealer and consumer boycotts against
purchasing our products are also contributing factors to the
demand for our handguns. We cannot predict how long these and
similar factors will increase the demand for our products.
| We may incur higher employee medical costs in the future |
We are self-insured for our employee medical plan. The average
age of our workforce is 48 years. More than 10% of our
employees are over age 60. While our medical costs in
recent years have generally increased at the same level as the
regional average, the age of our workforce could result in
higher than anticipated medical claims, resulting in an increase
in our costs beyond what we have experienced. We do have stop
loss coverage in place for catastrophic events, but the
aggregate impact may have an effect on profitability.
| Seasonality |
Historically, our fiscal quarter ending July 31 has been
our weakest quarter. We believe that this downturn in sales
occurs primarily as a result of customers pursuing other
sporting activities outdoors with the arrival of more temperate
weather and the reduced disposable income of our customers after
using their tax refunds for purchases in March and April,
historically our strongest months. Generally, we do not
experience any significant increase in demand until immediately
prior to the opening of hunting season in the fall. This decline
in net sales may result in decreases in our stock price during
the summer months.
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| Regulation |
Our business, as well as the business of all producers and
marketers of firearms and firearms parts, is subject to numerous
federal, state, and local laws and governmental regulations and
protocols, including the National Firearms Act, the Federal
Firearms Act, and the Gun Control Act of 1968. These laws
generally prohibit the private ownership of fully automatic
weapons and place certain restrictions on the interstate sale of
firearms unless certain licenses are obtained. We do not
manufacture fully automatic weapons, other than for the law
enforcement market, and hold all necessary licenses under these
federal laws. From time to time, congressional committees
consider proposed bills and various states enact laws relating
to the regulation of firearms. These proposed bills and enacted
state laws generally seek either to restrict or ban the sale
and, in some cases, the ownership of various types of firearms.
We believe we are in compliance with all such laws applicable to
us and hold all necessary licenses. There can be no assurance
that the regulation of firearms will not become more restrictive
in the future or that any such restriction would not have a
material adverse effect on our business. In June 2004, we
recalled Walter P22 pistols sold in California in order to
retrofit them to comply with California law.
| Environmental Matters |
We are subject to numerous federal, state, and local laws that
regulate or otherwise relate to the protection of the
environment, including the Clean Air Act, the Clean Water Act,
the Comprehensive Environmental Response, Compensation and
Liability Act, or CERCLA, and the Solid Waste Disposal Act, as
amended by the Resource Conservation and Recovery Act, or RCRA.
CERCLA, RCRA, and related state laws subject us to the potential
obligation to remove or mitigate the environmental effects of
the disposal or release of certain pollutants at our
manufacturing facilities and at third-party or formerly owned
sites at which contaminants generated by us may be located. This
requires us to make expenditures of both a capital and expense
nature.
In our efforts to satisfy our environmental responsibilities and
to comply with environmental laws and regulations, we maintain
policies relating to the environmental standards of performance
for our operations, and conduct programs to monitor compliance
with various environmental regulations. However, in the normal
course of our manufacturing operations, we may become subject to
governmental proceedings and orders pertaining to waste
disposal, air emissions, and water discharges into the
environment. We believe that we are generally in compliance with
applicable environmental regulations.
We may become involved in various proceedings relating to
environmental matters and are engaged in environmental
investigation or remediation at certain sites. The Springfield
property, on which our principal manufacturing facility is
located, has known environmental liabilities related to past
operating practices. We have listed the property with the
Massachusetts Department of Environmental Protection, or DEP,
under the voluntary remediation program referred to as the
Massachusetts Contingency Plan, or MCP. Environmental
investigations on the property began in 1983, culminating with
the completion of a Phase I — Limited Site
Investigation (August 1995), Phase II Comprehensive Site
Assessment (January 1999), Phase III Remedial Action Plan
(January 1999), and Phase IV Remedy Investigation (February
2000). We may be entitled to contractual commitments or
indemnification with respect to certain expenditures incurred in
connection with such environmental matters and do not expect
that the liability with respect to such investigation and
remediation activities will have a material adverse effect on
our financial condition. We have provided reserves for remedial
investigation and cleanup activities that we have determined to
be both probable and reasonably estimable. As of April 30,
2005, we had reserves of $3.7 million for environmental
matters.
We cannot assure you that we have identified all existing
contamination on our properties or that our operations will not
cause contamination in the future. As a result, we could incur
additional material costs to clean up contamination. We will
periodically review the probable and reasonably estimable
environmental costs in order to update the environmental
reserves. In February 2003, we sold 85 acres of land to a
governmental redevelopment authority, which agreed to conduct
the remediation on the parcel. We still may incur liability if
that authority does not fully, or fails to, remediate the
property or if that authority fails to meet
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its obligations under the related note receivable. The agency
has begun remediation efforts, but those efforts were not
complete as of April 30, 2005.
Furthermore, it is not possible to predict with certainty the
impact on us 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. Additional or changing
environmental regulation may become burdensome in the future,
and any such development could have a material adverse effect on
us.
| The ownership of our common stock is concentrated. |
Colton R. Melby and Mitchell A. Saltz, each of whom is a
director and former executive officer of our company,
beneficially own approximately 22.1% and 22.5%, respectively, of
our common stock. As of April 30, 2005, Messrs. Saltz
and Robert L. Scott, a director and former officer of our
company held warrants to purchase 5,000,000 shares and
4,688,750 shares, respectively, of our common stock. These
stockholders, acting together, would be able to influence
significantly all matters requiring approval by our
stockholders, including the election of directors. These
individuals may take certain actions even if other stockholders
oppose them. This concentration of ownership might also have the
effect of delaying or preventing a change of control of our
company even if such a change were in the best interests of
other stockholders.
| Certain provisions of our articles of incorporation and bylaws and Nevada law make it more difficult for a third party to acquire us and make a takeover more difficult to complete, even if such a transaction were in the stockholders’ interest or might result in a premium over the market price for the shares held by our stockholders. |
Our articles of incorporation, bylaws, and the Nevada General
Corporation Law contain provisions that may have the effect of
making more difficult or delaying attempts by others to obtain
control of our company, even when these attempts may be in the
best interests of our stockholders.
We also are subject to the anti-takeover provisions of the
Nevada General Corporation Law, which prohibits us from engaging
in a “business combination” with an “interested
stockholder” unless the business combination is approved in
a prescribed manner and prohibits the voting of shares held by
persons acquiring certain members of shares without obtaining
requisite approval. The statutes have the effect of making it
more difficult to effect a change in control of a Nevada company.
| Our stockholders’ rights plan may adversely affect existing stockholders. |
Our Stockholders’ Rights Plan may have the effect of
deterring, delaying, or preventing a change in control that
might otherwise be in the best interests of our stockholders. In
general and subject to certain exceptions as to existing major
stockholders, stock purchase rights issued under the Plan become
exercisable when a person or group acquires 15% or more of our
common stock or a tender offer or exchange offer of 15% or more
of our common stock is announced or commenced. After any such
event, our other stockholders may purchase additional shares of
our common stock at 50% of the then-current market price. The
rights will cause substantial dilution to a person or group that
attempts to acquire us on terms not approved by our board of
directors. The rights should not interfere with any merger or
other business combination approved by our board of directors
since the rights may be redeemed by us at $0.01 per stock
purchase right at any time before any person or group acquires
15% or more of our outstanding common stock. The rights expire
in August 2015.
| The issuance of additional common stock in the future, including shares that we may issue pursuant to option grants, may result in dilution in the net tangible book value per share of our common stock. |
Our Board of Directors has the legal power and authority to
determine the terms of an offering of shares of our capital
stock, or securities convertible into or exchangeable for these
shares, to the extent of our shares of authorized and unissued
capital stock.
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| Sale of substantial number of shares that are eligible for sale could adversely affect the price of our common stock. |
As of April 30, 2005, there were outstanding
31,974,017 shares of our common stock. Substantially all of
these shares are freely tradable without restriction or further
registration under the securities laws, unless held by an
“’affiliate” of our company, as that term is
defined in Rule 144 under the securities laws. Shares held
by affiliates of our company, which generally include our
directors, officers, and certain principal stockholders, are
subject to the resale limitations of Rule 144 described
below.
In general, under Rule 144 as currently in effect, any
person, or persons whose shares are aggregated for purposes of
Rule 144, who beneficially owns restricted securities with
respect to which at least one year has elapsed since the later
of the date the shares were acquired from us, or from an
affiliate of ours, is entitled to sell within any three-month
period a number of shares that does not exceed the greater of 1%
of the then outstanding shares of our common stock and the
average weekly trading volume in common stock during the four
calendar weeks preceding such sale. Sales under Rule 144
also are subject to certain manner-of-sale provisions and notice
requirements and to the availability of current public
information about us. Rule 701, as currently in effect,
permits our employees, officers, directors, and consultants who
purchase shares pursuant to a written compensatory plan or
contract to resell these shares in reliance upon Rule 144,
but without compliance with specific restrictions. Rule 701
provides that affiliates may sell their
Rule 701 shares under Rule 144 without complying
with the holding period requirement and that non-affiliates may
sell their shares in reliance on Rule 144 without complying
with the holding period, public information, volume limitation,
or notice provisions of Rule 144. A person who is not an
affiliate, who has not been an affiliate within three months
prior to sale, and who beneficially owns restricted securities
with respect to which at least two years have elapsed since the
later of the date the shares were acquired from us, or from an
affiliate of ours, is entitled to sell such shares under
Rule 144(k) without regard to any of the volume limitations
or other requirements described above. Sales of substantial
amounts of common stock in the public market could adversely
affect prevailing market prices.
As of April 30, 2005, we had outstanding options to
purchase 2,467,125 shares of common stock under our
stock option plans and we issued 607,034 of the
10,000,000 shares of common stock reserved for issuance
under our employee stock purchase plan. As of April 30,
2005, we also had outstanding warrants to
purchase 9,688,750 shares of common stock. We have
registered for offer and sale the shares of common stock that
are reserved for issuance pursuant to our stock option plans and
available for issuance pursuant to the employee stock purchase
plan as well as the shares underlying the warrants. Shares
covered by such registration statements upon the exercise of
stock options or warrants or pursuant to the employee stock
purchase plan generally will be eligible for sale in the public
market, except that affiliates will continue to be subject to
volume limitations and other requirements of Rule 144. The
issuance or sale of such shares could depress the market price
of our common stock.
| We incur costs as a result of being a public company. |
As a public company, we incur significant legal, accounting, and
other expenses. In addition, the Sarbanes-Oxley Act of 2002, as
well as new rules subsequently implemented by the Securities and
Exchange Commission and the American Stock Exchange, have
required changes in corporate governance practices of public
companies. These new rules and regulations have increased our
legal and financial compliance costs and made some activities
more time-consuming and costly. In addition, we incur additional
costs associated with our public company reporting requirements.
We also expect these new rules and regulations to make it more
difficult and more expensive for us to obtain director and
officer liability insurance, and we may be required to accept
reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage. As a result, it
may be more difficult for us to attract and retain qualified
persons to serve on our Board of Directors or as executive
officers.
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| The market price of our common stock could be subject to wide fluctuations as a result of many factors. |
Many factors could affect the trading price of our common stock,
including the following:
| • | variations in our operating results; | |
| • | the relatively small public float of our common stock; | |
| • | introductions of new products by us or our competitors; | |
| • | the success of our distributors; | |
| • | changes in the estimates of our operating performance or changes in recommendations by any securities analysts that follow our stock; | |
| • | general economic, political, and market conditions; | |
| • | governmental policies and regulations; | |
| • | the performance of the firearms industry in general; and | |
| • | factors relating to suppliers and competitors. |
In addition, market demand for small-capitalization stocks, and
price and volume fluctuations in the stock market unrelated to
our performance, could result in significant fluctuations in
market price of our common stock. The performance of our common
stock could adversely affect our ability to raise equity in the
public markets and adversely affect the growth of our business.
| We do not pay cash dividends. |
We do not anticipate paying cash dividends in the foreseeable
future. Moreover, financial covenants under certain of our
credit facilities restrict our ability to pay dividends.
| Item 2. | Properties |
We own two manufacturing facilities, subject to no liens,
mortgages, or encumbrances. Our principal facility is an
approximately 530,323 square foot plant located in
Springfield, Massachusetts. The other facility is an
approximately 38,115 square foot plant in Houlton, Maine.
The Houlton facility is used primarily to manufacture handcuffs,
restraints, .22 caliber pistols, and the Walther PPK, while the
Springfield facility is used primarily to manufacture pistols
and revolvers. We believe that each facility is in good
condition and capable of producing products at historic rates of
production. In addition, we own a 56,869 square foot
facility in Springfield that we use for the Smith &
Wesson Academy, a state-accredited firearms training
institution, a public shooting facility, and a retail store.
We lease on a month-to-month basis 7,100 square feet of
office space in Scottsdale, Arizona, which previously housed our
corporate headquarters.
In February 2003, we sold approximately 85 acres of land to
the Springfield Redevelopment Authority. We had not developed
that property and it did not fit in our future plans. The parcel
is adjacent to the manufacturing facility in Springfield,
Massachusetts. The sales price was $1.75 million, which
included a down payment of $750,000 in cash at signing and a
20 year note for $1.0 million bearing an interest rate
of 6% due on March 1, 2022.
We believe that all our facilities are adequate for present
requirements and that our current equipment is in good condition
and is suitable for the operations involved.
| Item 3. | Legal Proceedings |
| New Cases |
No new cases of a material nature were filed against us during
the fiscal year ended April 30, 2005. The following
describes material updates to or resolution of cases previously
reported by us.
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| Cases Dismissed Or Resolved |
The following previously reported cases have been finally
adjudicated in our favor:
| The City of Chicago and County of Cook v. Beretta U.S.A. Corp., et al., in the Circuit Court of Cook County, Illinois. On November 18, 2004, the Illinois Supreme Court reversed the judgment of the appellate court and affirmed the judgment of the circuit court that properly granted the Defendants’ Motion to Dismiss. Plaintiffs’ deadline to file a Petition for Writ of Certiorari to the United States Supreme Court expired on May 5, 2005. Plaintiffs did not appeal. | |
| The People of the State of California, by and through attorneys for the cities of Los Angeles, Compton, Inglewood and West Hollywood, et al. v. Arcadia Machine & Tool, et al; People of the State of California ex. rel. the County of Los Angeles, et al. v. Arcadia Machine Tool, et al; and the Cities of San Francisco, Berkeley, Sacramento, Oakland and East Palo Alto and the Counties of San Mateo and Alameda, et al. v. Arcadia Machine & Tool, Inc., et al., have all been consolidated for purposes of appeal. On February 10, 2005, the Court of Appeals issued a decision affirming the trial court’s granting of summary judgment. Plaintiffs’ deadline to file a Petition for Review to the California Supreme Court expired on March 22, 2005. Plaintiffs did not appeal. |
| Cases on Appeal |
The ruling in the following case is still subject to certain
pending appeals.
District of Columbia, et al. v. Beretta U.S.A. Corp.,
et al., in the Superior Court for the District of Columbia.
The District of Columbia and nine individual plaintiffs seek an
unspecified amount of compensatory and exemplary damages and
certain injunctive relief. On December 16, 2002, the
Superior Court for the District of Columbia granted
defendants’ motion for judgment on the pleadings in its
entirety. On January 14, 2003, plaintiffs filed their
notice of appeal to the District of Columbia Court of Appeals.
The court of appeals issued its decision, which affirmed the
dismissal of plaintiffs’ common law negligence and public
nuisance claims, but reversed the dismissal of the statutory
strict liability count as to the individual plaintiffs. The
court also reversed the dismissal of the statutory strict
liability count as to the District of Columbia but only to the
extent that the District seeks subrogated damages for named
individuals for whom it has incurred medical expenses.
Plaintiffs and defendants each filed separate petitions for
rehearing on May 13, 2004. Oral argument was held before
the D.C. Court of Appeals on January 11, 2005. On
April 21, 2005, the D.C. Court of Appeals issued an opinion
affirming its earlier decision. On July 20, 2005,
defendants filed a Petition for Writ of Certiorari to the United
States Supreme Court.
| Pending Cases |
The following describes the status of pending cases previously
reported by us.
Mayor Michael R. White, and the City of Cleveland v. Hi-Point
Firearms, et al. in the United States District Court for
the Northern District of Ohio. The complaint alleges that
handgun manufacturers, distributors, and trade associations have
failed to provide adequate warnings with the firearms and have
failed to incorporate safety devices that would prevent
unauthorized users from firing the guns under the Ohio Products
Liability Act. The complaint also alleges unjust enrichment,
negligence, negligent design, nuisance abatement, and public
nuisance claims. An unspecified amount of actual and punitive
damages, future restitution, plus other costs against each
defendant are demanded, as is injunctive relief. The court has
denied the defendants’ motion to dismiss. On
September 20, 2001, the court granted the parties’
joint motion to stay the case pending a ruling by the Ohio
Supreme Court in the Cincinnati case. The case remains stayed.
City of Gary, Indiana, by its Mayor, Scott L. King v.
Smith & Wesson Corp., et al., in Lake Superior
Court, Indiana. Plaintiff’s complaint alleges public
nuisance, negligent distribution and marketing, and negligent
design and seeks an unspecified amount of compensatory and
punitive damages and certain injunctive relief. Defendants’
motion to dismiss plaintiff’s complaint was granted on all
counts on January 11, 2001. On September 20, 2002, the
Indiana Court of Appeals issued an opinion affirming the trial
court’s dismissal of plaintiff’s claims against the
manufacturer defendants. On December 23, 2003, the Indiana
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Supreme Court issued a decision on plaintiff’s Petition to
Transfer reversing the decision of the court of appeals and
remanding the case to the trial court. The court held that
plaintiff should be allowed to proceed with its public nuisance
and negligence claims against all defendants and its negligent
design claim against the manufacturer defendants. We filed our
answer to plaintiff’s amended complaint on January 30,
2004. Discovery is ongoing. Trial has been set for June 15,
2009.
City of New York, et al. v. Arms Technology, Inc.,
et al., in the United States District Court for the Eastern
District of New York. The complaint alleges that the Defendants
have created, contributed to, and maintained a public nuisance
in the City of New York because of their allegedly negligent
marketing and distribution practices. Plaintiff seeks injunctive
relief. Defendants’ Petition for a Writ of Mandamus
requiring the recusal of Judge Weinstein was denied by the
Second Circuit Court of Appeals on May 21, 2004. On
April 8, 2004, the trial court denied Plaintiff’s
Motion to Strike Defendants’ Jury Demands and granted
Defendants a Seventh Amendment jury. On April 12, 2004, the
trial court denied Defendants’ Motion to Dismiss. Our
Answer to the Second Amended Complaint was filed on May 17,
2004. On June 14, 2004, the court entered an order
releasing certain ATF trace data. On June 22, 2004,
Defendants filed a Motion to Certify the Court’s Order for
Interlocutory Appeal. On July 6, 2004, the court entered an
order denying an immediate separate appeal by Defendants. On
July 16, 2004, ATF filed a petition for Writ of Mandamus in
the Second Circuit Court of Appeals, seeking review of Judge
Weinstein’s June 14, 2004 order releasing certain
trace data. On August 24, 2004, the Second Circuit issued
an order denying ATF’s petition for Writ of Mandamus. On
September 20, 2004, the court entered a protective order
for confidential documents. Depositions of three of our former
employees were held in June of 2005. Discovery is ongoing. Trial
is scheduled for November 28, 2005.
Tenedora Tuma, S.A. v. Smith & Wesson Corp., in
the Civil and Commercial Court of the First District of the
Court of First Instance of the National District, Santo Domingo,
Dominican Republic. The plaintiff commenced this suit by
submitting a request for a preliminary reconciliation hearing.
After two preliminary reconciliation hearings, the
Reconciliation Committee issued a Certificate of Lack of
Agreement. Thereafter, a Summons and Notice of Claim was issued
to us on January 17, 2000. The plaintiff alleged we
terminated its distributor agreement without just cause and
sought damages of approximately $580,000 for alleged violations
of Dominican Republic Law 173 for the Protection of Importers of
Merchandise and Products. Briefing on the merits was completed
in the trial court in November 2002. On June 7, 2004, the
court granted our Motion to Dismiss in its entirety.
Notification of the judgment was filed on August 10, 2004.
On or about September 9, 2004, plaintiff purportedly
appealed the decision. On March 3, 2005, we were informed
that a hearing had been held in the Court of Appeals on
October 27, 2004, without notification to our counsel, or
us and that the merits of plaintiff’s appeal have been
taken under advisement by that court. On June 23, 2005, a
hearing was held wherein we attempted to re-open the appeal
based on the lack of service of the appeal papers on us. No
decision has issued to date. To date we have not been served
with the appeal papers.
Peter Edward Fudali v. Smith & Wesson Corp., et. al.,
in the Frederick County Court in Maryland. Plaintiff’s
complaint was filed on March 4, 1999 and stems from an
incident that occurred on March 8, 1996. The complaint
alleges that our revolver discharged unexpectedly while
plaintiff was preparing to shoot the revolver in his
neighbor’s backyard, causing fragments of metal and burning
gunpowder to strike him in the forehead and eye. The complaint
asserts claims for negligence and strict liability and seeks
compensatory damages of two million dollars plus other costs and
fees. The court has entered an order granting summary judgment
in our favor; however, we are waiting for the court’s
ruling on certification of the dismissal as a final order.
Oren Gorden v. Smith & Wesson Corp., et. al., in the
Territorial Court of the Virgin Islands, District of St. Croix.
The complaint was filed on January 19, 2001 and seeks
unspecified compensatory damages for personal injuries allegedly
sustained by Mr. Gorden. The complaint alleges that
Mr. Gorden’s Smith & Wesson handgun
malfunctioned and exploded when he tried to load it. We filed an
answer denying all allegations of liability. On
November 17, 2003, the firearm at issue in this case was
lost in transit by a commercial carrier while it was being
returned from us to plaintiff. On April 21, 2004, the court
denied our motion for summary judgment and extended the pretrial
deadlines. Mediation was conducted on April 13, 2005.
Expert discovery is ongoing. Trial has been rescheduled for
January 9, 2006.
25
Table of Contents
| Protection of Lawful Commerce in Arms Act |
On July 29, 2005, the U.S. Senate passed Senate Bill
397, the Protection of Lawful Commerce in Arms Act. The bill is
designed to prohibit civil liability actions from being brought
or continued against manufacturers, distributors, dealers, or
importers of firearms or ammunition for damages, injunctive, or
other relief resulting from the misuse of their products by
others. The U.S. House of Representatives has not yet voted
on passage of the bill, although it voted to pass similar
legislation in 2004. If the legislation passes the House and is
signed by the President of the United States, it should result
in the dismissal of the remaining municipal cases and preclude
similar cases in the future. There can be no assurance that
judges in existing proceedings will dismiss cases currently
pending before them.
| Item 4. | Submission of Matters to a Vote of Security Holders |
Not applicable.
PART II
| Item 5. | Market for the Registrant’s Common Equity and Related Stockholder Matters |
Our common stock is traded on the American Stock Exchange under
the symbol “SWB.” The following table sets forth the
high and low sale prices of our common stock for each quarter in
our fiscal years ended on April 30 indicated as reported on
the American Stock Exchange.
| High | Low | ||||||||
|
2003
|
|||||||||
|
First quarter
|
$ | 2.87 | $ | 1.50 | |||||
|
Second quarter
|
$ | 1.75 | $ | 1.00 | |||||
|
Third quarter
|
$ | 2.70 | $ | 1.50 | |||||
|
Fourth quarter
|
$ | 2.00 | $ | 1.30 | |||||
|
2004
|
|||||||||
|
First quarter
|
$ | 1.94 | $ | 1.35 | |||||
|
Second quarter
|
$ | 2.50 | $ | 1.65 | |||||
|
Third quarter
|
$ | 2.40 | $ | 1.39 | |||||
|
Fourth quarter
|
$ | 2.11 | $ | 1.50 | |||||
|
2005
|
|||||||||
|
First quarter
|
$ | 1.70 | $ | 1.40 | |||||
|
Second quarter
|
$ | 1.98 | $ | 1.15 | |||||
|
Third quarter
|
$ | 2.40 | $ | 1.38 | |||||
|
Fourth quarter
|
$ | 2.94 | $ | 1.92 | |||||
On July 29, 2005, the last reported sale price of our
common stock was $5.97 per share. On July 31, 2005,
there were approximately 413 record holders of our common stock.
26
Table of Contents
| Item 6. | Selected Financial Data |
The following selected data for 2004, 2003 and 2002 have been
restated to correct the accounting for certain stock awards
under APB 25 and all periods presented have been restated
to early adopt SFAS No. 123(R). This restatement is
further described in footnote 24 to our consolidated
financial statements. There was no impact on the selected data
of Saf-T-Hammer or of Smith & Wesson Corp. (the
predecessor corporation) for the periods prior to May 11,
2001 from this restatement. See footnote 23 with respect to
litigation.
| Smith & Wesson Holding Corporation(1) | Saf-T Hammer(2)(3) | ||||||||||||||||||||||||||||
| Four Months | |||||||||||||||||||||||||||||
| Fiscal Year Ended April 30, | Ended April 30, | Year Ended December 31, | |||||||||||||||||||||||||||
| Restated | Restated | Restated | Restated | Restated | Restated | ||||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2002 | 2001 | 2002 | 1999 | |||||||||||||||||||||||
|
For the year
|
|||||||||||||||||||||||||||||
|
Net product and services sales
|
$ | 123,963,973 | $ | 117,892,507 | $ | 98,468,766 | $ | 79,284,709 | $ | 23,368 | $ | 13,367 | $ | 0 | |||||||||||||||
|
Licensing revenue
|
1,824,077 | 1,622,128 | 1,502,448 | 1,270,319 | 0 | 0 | 0 | ||||||||||||||||||||||
|
Cost of product, services sold and licensing revenue
|
84,900,032 | 80,384,720 | 69,590,497 | 60,756,956 | 9,305 | 5,347 | 0 | ||||||||||||||||||||||
|
Gross profit
|
40,888,018 | 39,129,915 | 30,380,717 | 19,798,072 | 14,063 | 8,020 | 0 | ||||||||||||||||||||||
|
Operating expenses
|
29,707,027 | 34,319,226 | 27,658,160 | 30,371,363 | 0 | 0 | 1,240,040 | ||||||||||||||||||||||
|
Operating income (loss)
|
11,180,991 | 4,810,689 | 2,722,557 | (10,573,291 | ) | (1,896,297 | ) | (2,212,215 | ) | (1,240,040 | ) | ||||||||||||||||||
|
Interest expense
|
2,675,373 | 3,340,375 | 3,587,519 | 8,020,559 | 284,300 | 329,855 | 3,000 | ||||||||||||||||||||||
|
Income (loss) before income taxes
|
8,675,446 | 486,223 | 1,604,857 | (17,761,127 | ) | (2,180,597 | ) | (2,542,070 | ) | (1,243,040 | ) | ||||||||||||||||||
|
Income taxes (benefit)
|
3,426,490 | (346,062 | ) | (15,620,636 | ) | 70,598 | 0 | 0 | 0 | ||||||||||||||||||||
|
Net income (loss)
|
5,248,956 | 832,285 | 17,225,493 | (17,831,725 | ) | (2,180,597 | ) | (2,542,070 | ) | (1,243,040 | ) | ||||||||||||||||||
|
Net income per share
|
|||||||||||||||||||||||||||||
|
Basic
|
$ | 0.17 | $ | 0.03 | $ | 0.58 | $ | (0.85 | ) | $ | (0.13 | ) | $ | (0.23 | ) | $ | (0.15 | ) | |||||||||||
|
Diluted
|
$ | 0.14 | $ | 0.02 | $ | 0.49 | $ | (0.85 | ) | $ | (0.13 | ) | $ | (0.23 | ) | $ | (0.15 | ) | |||||||||||
|
Weighted average number of shares outstanding
|
|||||||||||||||||||||||||||||
|
Basic
|
31,361,009 | 30,719,114 | 29,860,228 | 20,878,937 | 16,443,054 | 11,021,937 | 8,426,412 | ||||||||||||||||||||||
|
Diluted
|
36,636,170 | 36,011,400 | 35,372,633 | 20,878,937 | 16,443,054 | 11,021,937 | 8,426,412 | ||||||||||||||||||||||
|
Depreciation and amortization
|
$ | 2,756,915 | $ | 1,705,514 | $ | 987,674 | $ | 435,572 | $ | 82,066 | $ | 44,538 | $ | 7,740 | |||||||||||||||
|
Capital expenditures
|
8,423,144 | 5,676,614 | 4,173,418 | 2,978,593 | 3,020 | 24,744 | 0 | ||||||||||||||||||||||
|
Year-end financial position
|
|||||||||||||||||||||||||||||
|
Working capital
|
$ | 23,049,031 | $ | 19,459,641 | $ | 29,737,842 | $ | 30,917,261 | $ | (599,190 | ) | $ | (22,809 | ) | $ | (33,041 | ) | ||||||||||||
|
Current ratio
|
1.8 | 1.7 | 2.1 | 2.3 | 0.1 | 0.8 | 0.0 | ||||||||||||||||||||||
|
Total assets
|
81,992,346 | $ | 105,289,971 | $ | 110,250,904 | $ | 96,946,752 | $ | 321,378 | $ | 542,595 | $ | 22,212 | ||||||||||||||||
|
Long-term debt and notes payable
|
$ | 16,028,424 | $ | 37,870,046 | $ | 42,907,722 | $ | 45,000,000 | $ | 386,000 | $ | 738,125 | $ | 340,000 | |||||||||||||||
27
Table of Contents
Smith & Wesson Corp (predecessor financial
data)(4)
| 13-Days Ended | Fiscal Year Ended | |||||||||||
| May 11, | April 28, | April 28, | ||||||||||
| 2001 | 2001 | 2000 | ||||||||||
|
For the period:
|
||||||||||||
|
Net product sales
|
$ | 1,965,385 | $ | 70,662,738 | $ | 111,966,272 | ||||||
|
Operating income (loss)
|
(440,168 | ) | (48,438,849 | ) | 3,428,879 | |||||||
|
Income (loss) before income taxes
|
(195,256 | ) | (50,765,006 | ) | 656,082 | |||||||
|
Income taxes (benefit)
|
— | 6,853,820 | 882,352 | |||||||||
|
Net income (loss)
|
(195,256 | ) | (57,618,826 | ) | (226,270 | ) | ||||||
|
Depreciation and amortization
|
$ | 245,361 | $ | 6,779,000 | $ | 7,609,000 | ||||||
|
Capital expenditures
|
12,573 | 1,035,167 | 2,403,910 | |||||||||
|
Year-end financial position
|
||||||||||||
|
Working capital
|
$ | 62,661,689 | $ | 62,624,157 | $ | 82,179,589 | ||||||
|
Current ratio
|
4.5 | 4.0 | 4.3 | |||||||||
|
Total assets
|
$ | 118,057,742 | $ | 121,423,844 | $ | 180,038,262 | ||||||
|
Long-term debt and notes payable
|
50,000,000 | 73,830,000 | 73,830,000 | |||||||||
| (1) | Financial data included Smith & Wesson Corp. from the date of acquisition May 11, 2001. |
| (2) | Saf-T-Hammer changed its year end to April 30 from December 31 therefore information is for the four month transition period. |
| (3) | Financial data is for Saf-T-Hammer Corporation which changed its name to Smith & Wesson Holding Corporation on February 15, 2002. |
| (4) | Predecessor financial data is presented on the predecessor’s historical basis of accounting and does not include adjustments from the application of purchase accounting by Smith &Wesson Holding Corporation. Therefore the predecessor financial data is not comparable, in all respects, to the financial data of Smith and Wesson Holding Corporation after May 11, 2001. |
| (5) | Earnings per common share are based on weighted average common shares outstanding during each year. |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following discussion and analysis in
conjunction with our financial statements and related notes
contained elsewhere in this report. This discussion contains
forward-looking statements that involve risks, uncertainties,
and assumptions. Our actual results may differ materially from
those anticipated in these forward-looking statements as a
result of a variety of factors, including those set forth under
“Risk Factors” and elsewhere in this report.
| Overview |
| 2005 Highlights |
Our fiscal 2005 net product sales of approximately
$124.0 million represented an increase of 5.2% over fiscal
2004. Firearms sales, our core business, increased by 11.0%.
Income from operations in fiscal 2005 increased by $6,370,302,
or 132.4%, over fiscal 2004. We also completed a refinancing of
our outstanding debt in January 2005. We repaid the Tomkins
note, which not only had a 9% interest rate, but also included
many restrictive covenants that would have prevented us from
growing the business until repaid. As a result of the
refinancing, we have significantly improved our balance sheet
with total debt at April 30, 2005 of $17.6 million as
compared with $41.9 million at April 30, 2004. We
anticipate that the annual interest savings from this
refinancing will be approximately $1.5 million.
28
Table of Contents
| Restatement/ SEC Inquiry |
In August 2003, we decided to amend various reports previously
filed with the SEC to modify certain accounting matters related
to our acquisition of Smith & Wesson Corp. We decided
to restate our Form 10-KSB Report for the fiscal year ended
April 30, 2002 as well as our Form 10-QSB Reports for
the quarters ended July 31, 2001 and 2002, October 31,
2001 and 2002, and January 31, 2002 and 2003. The
Form 10-KSB Report for the fiscal year ended April 30,
2003 was filed in December 2003 and included restated financial
statements for fiscal 2002. The amended Form 10-QSB Reports
for the July and October quarters were filed in January 2004,
and the amended Form 10-QSB Reports for the January
quarters were filed in March 2004. We are current in all of our
SEC filings. The SEC is conducting an informal inquiry regarding
the circumstances surrounding the restatement. We are
cooperating fully with the SEC in this inquiry. The inquiry is
still ongoing.
In June 2005, we determined that our previously reported
financial statements for 2002, 2003, 2004 and the first three
quarters of 2005 required restatement to increase compensation
expense for certain employee stock awards. We issued warrants,
to two former employees in May 2001, containing a cashless
exercise feature, and as a result compensation expense should
have been adjusted in subsequent periods through April 30,
2005 for increases or decreases in the quoted value of our
stock. In addition, in fiscal 2004 and 2005, we should have
recorded compensation expense resulting from the modification of
certain vested stock options for terminating employees. For the
year ended April 30, 2005, we decided to adopt Statement of
Financial Accounting Standards No. 123(R), Share-Based
Payment, (Revised 2004), (SFAS 123(R)), using the modified
retrospective application method. We filed Form 8-K on
July 1, 2005 describing the need to restate our previously
issued financial statements to correct compensation expense and
our decision to adopt FAS 123R. The financial statements
included in this Form 10-K have been restated to correct
compensation expense and to adopt SFAS 123(R). The effects
of these restatements are described in Notes 24 and 25 to
the Consolidated Financial Statements.
| Management Objectives |
In fiscal 2005, we added several new senior managers to our
company, including a new Chief Executive Officer in December
2004. The new management team has been assessing our business,
including extensive market research about the Smith &
Wesson brand, the firearms market, and our competitors. Our
research has determined that the Smith & Wesson brand
stands for safety, security, protection, and sport. Our
management team has decided to focus its strategy around those
four items. All future ventures and licensing opportunities will
fit under the umbrella of safety, security, protection, and
sport. It is our view that opportunities for the company extend
beyond handguns. This belief is supported by brand research that
has identified several areas where the Smith & Wesson
brand has a strong recognition among prospective buyers. While
we will continue to grow in the handgun market, with an
increased emphasis on the military and law enforcement markets,
we will also look beyond the handgun market using safety,
security, protection, and sport as the guide for determining
business expansion.
| Our Business |
We are one of the largest handgun manufacturers in the world. We
offer one of the broadest lines of handguns in the industry. Our
product line consists of both revolvers and pistols. We are also
one of the largest manufacturers of handcuffs and restraints in
the United States.
| Key Performance Indicators |
We evaluate the performance of our business based upon operating
profit, which includes net sales, cost of sales, selling and
administrative expenses, and certain components of other income
and expense. We also use EBITDA (earnings before interest,
taxes, depreciation, and amortization) to evaluate our
performance. We evaluate our various product lines by such
measurements as cost per unit produced, units produced per day,
and incoming orders per day.
29
Table of Contents
| Key Industry Data |
The handgun market in the United States has remained relatively
constant over the past 10 years. Handguns have been subject
to legislative actions in the past, and the market has reacted
to these actions. There was a substantial increase in sales in
the early 1990s during the period leading up and shortly after
the enactment of the Brady Bill. In the 1992 through 1994
period, the U.S. handgun market increased by over 50%, as
consumers purchased handguns in fear of prohibition of handgun
ownership.
Federal excise tax collections represents the best measurement
of U.S. market share. The U.S. Government issues this
information on a quarterly basis. By comparing our tax payment
to the reported collection, we can estimate our market share.
Based upon the most recent data, we believe that we have
approximately a 19% share of the U.S. consumer market for
handguns. This compares to 10% in the period just before we
acquired Smith & Wesson Corp. It also compares
favorably with market share figures of the 1990s when we had an
estimated 16% market share.
Results of Operations
| Net Product Sales |
The following table set forth certain information relative to
net product sales for the fiscal years ended April 30,
2005, 2004, and 2003:
| $ | % | |||||||||||||||||||
| 2005 | 2004 | Change | Change | 2003 | ||||||||||||||||
|
Revolvers
|
$ | 54,021,120 | $ | 47,642,409 | $ | 6,378,711 | 13.4 | % | $ | 38,230,676 | ||||||||||
|
Pistols
|
28,950,858 | 26,939,756 | 2,011,102 | 7.5 | % | 21,286,356 | ||||||||||||||
|
Walther
|
17,308,440 | 17,179,183 | 129,257 | 0.8 | % | 12,747,436 | ||||||||||||||
|
Performance Center
|
8,484,800 | 7,385,554 | 1,099,246 | 14.9 | % | 6,113,334 | ||||||||||||||
|
Engraving
|
1,705,068 | 285,177 | 1,419,891 | 497.9 | % | — | ||||||||||||||
|
Other
|
3,089,570 | 2,849,881 | 239,689 | 8.4 | % | 2,039,649 | ||||||||||||||
|
Total Firearms
|
113,559,856 | 102,281,960 | 11,277,896 | 11.0 | % | 80,417,451 | ||||||||||||||
|
Handcuffs
|
4,263,008 | 5,536,641 | (1,273,633 | ) | (23.0 | )% | 5,437,976 | |||||||||||||
|
Specialty Services
|
3,490,099 | 5,027,217 | (1,537,118 | ) | (30.6 | )% | 7,894,918 | |||||||||||||
|
Other
|
2,651,010 | 5,046,689 | (2,395,679 | ) | (47.5 | )% | 4,718,421 | |||||||||||||
|
Non-Firearms
|
10,404,117 | 15,610,547 | (5,206,430 | ) | (33.4 | )% | 18,051,315 | |||||||||||||
|
Total
|
$ | 123,963,973 | $ | 117,892,507 | $ | 6,071,466 | 5.2 | % | $ | 98,468,766 | ||||||||||
| Fiscal 2005 Compared with Fiscal 2004 |
We recorded net product sales of $123,963,973 for fiscal 2005,
an increase of $6,071,466, or 5.2%, over fiscal 2004. Firearms
sales increased by $11,277,896, or 11.0%. Total handgun unit
sales for fiscal 2005 were approximately 323,000 units, an
increase of 7.7% over fiscal 2004 sales of approximately
300,000 units. Non-firearm sales for fiscal 2005 declined
by $5,206,430, or 33.4%, compared with fiscal 2004 as a result
of lower demand for handcuffs and our decision to exit certain
non-core businesses.
Revolver sales increased by $6,378,711, or 13.4%, for fiscal
2005 to $54,021,120. The continued success of the Model 500
revolver fueled the increase in revolver sales. We sold over
27,700 Model 500 revolvers in fiscal 2005, generating
approximately $17.6 million in sales. The revolver order
backlog was $12,251,811 at April 30, 2005.
Pistol sales of $28,950,858 were $2,011,102, or 7.5% higher, for
fiscal 2005. The increase in pistol sales was attributable to
our aggressive pricing strategy on our Sigma VE pistol. Sales of
the SW1911 accounted for approximately $3.8 million of the
increase in pistol sales for fiscal 2004. The Sigma VE pistol
sales increased from approximately 30,000 units for fiscal
2004 to approximately 46,000 units in fiscal 2005, an
increase in
30
Table of Contents
sales of approximately $3.6 million. Partially offsetting
some of the gains in these two areas was a decline in our
traditional metal frame pistols and lower SW99 pistol sales. The
higher cost of our traditional pistols puts us at a competitive
disadvantage, particularly against foreign competitors whose
labor costs are lower. The pistol order backlog was at
$6,082,826 April 30, 2005.
We are the exclusive U.S. distributor of Walther firearms.
Walther sales totaled $17,308,440 in fiscal 2005, an increase of
$129,257, or 0.8%, over the previous fiscal year. The increase
in Walther sales was attributable to the introduction of the G22
rifle. The Walther order backlog was $1,977,404 at
April 30, 2005.
Performance Center sales increased by $1,099,246, or 14.9%, for
fiscal 2005 to $8,484,800. Custom variations of the Model 500
and SW1911 were responsible for the increase in sales. The
Performance Center had an order backlog of $2,120,714 at
April 30, 2005.
Engraving sales increased by $1,419,891 million over fiscal
2004. We have increased our emphasis on this very profitable
segment of high-end, high-margin engraved handguns.
Non-firearms sales declined by $5,206,430, or 33.4%, for fiscal
2005 as a result of lower handcuff sales and the discontinuation
of certain product lines as part of our decision to focus more
on the core business. The decline in handcuff sales was the
result of lower demand domestically and competitive pressure
from low-cost providers internationally. In fiscal 2004, we
closed our optics business and sold the remaining inventory.
Other sales in fiscal 2004 includes $1,777,958 in optics sales.
We also sold our Identi-Kit business early in fiscal 2005.
Fiscal 2004 other sales include $469,786 relative to the
Identi-Kit business.
| Fiscal 2004 Compared with Fiscal 2003 |
We recorded net product sales of $117,892,507 for fiscal 2004,
an increase of $19,423,741, or 19.7%, over fiscal 2003. Firearms
sales increased by $21,864,509, or 27.2%. Total handgun unit
sales for fiscal 2004 were approximately 300,000 units, an
increase of 25.5% over fiscal 2003 sales of approximately
239,000 units. Non-firearm sales for fiscal 2004 declined
by $2,440,768, or 13.5%, compared with fiscal 2003 as a result
of our decision to exit certain non-core businesses.
Revolver sales increased by $9,411,733, or 24.6%, for fiscal
2004 to $47,642,409. The introduction of new products, such as
our Model 500 revolver, helped to fuel the increase in net
product sales. We sold over 16,000 Model 500 revolvers in fiscal
2004, generating approximately $9.1 million in sales.
During fiscal 2004, we continued our aggressive pricing strategy
by reducing the price on our M642 revolver. Sales for the M642
increased from approximately 4,500 units in fiscal 2003 to
over 17,000 units in fiscal 2004, representing an increase
of approximately $3.0 million. The revolver order backlog
was $13,953,390 at April 30, 2004.
Pistol sales of $26,939,756 were $5,653,400, or 26.6% higher,
for fiscal 2004. The increase in pistol sales was attributable
to the full year impact of our SW1911 pistol and an aggressive
pricing strategy on our Sigma VE pistol. Sales of the
SW1911 accounted for approximately $3.8 million of the
increase in pistol sales in fiscal 2004. The Sigma VE pistol
sales increased from approximately 10,000 units in fiscal
2003 to approximately 30,000 units in fiscal 2004, an
increase in sales of $3.7 million, as a result of the new
pricing. Partially offsetting some of the gains in these two
areas were a decline in our traditional metal frame pistols and
lower international pistol sales, which declined by
approximately $2.2 million and $415,000, respectively. The
higher cost of our traditional pistols puts us at a competitive
disadvantage, particularly against foreign competitors whose
labor costs are lower. The pistol order backlog was $4,756,489
at April 30, 2004.
We are the exclusive U.S. distributor of Walther firearms.
This product line has grown considerably over the last two
years. Walther sales totaled $17,179,183 for fiscal 2004, an
increase of $4,431,747, or 34.8%, over the previous fiscal year.
The increase in Walther sales was attributable to the success of
the P22 pistol. The Walther order backlog was $4,293,273 at
April 30, 2004.
Performance Center sales increased by $1,272,220, or 20.8%, for
fiscal 2004 to $7,385,554. Custom variations of the Model 500
and SW1911 were responsible for the increase in sales. The
Performance Center has an order backlog of $4,383,867 at
April 30, 2004.
31
Table of Contents
Non-firearms sales declined by $2,440,768, or 13.5%, for fiscal
2004 as a result of the discontinuation in late fiscal 2003 of
certain product lines as part of our decision to focus more on
the core businesses. In fiscal 2003, we discontinued our
machining and cutter grinding businesses for third-party
customers, as well as our bicycle business. We also closed four
of our five retail locations in fiscal 2003. As a result of
these decisions, non-firearms sales declined by $4,468,919 for
fiscal 2004, partially offset by $1,777,958 in optics sales. We
discontinued the optics product line in fiscal 2004, and our
sales reflect the closeout of the inventory on hand.
| Licensing Revenue |
The following table sets forth certain information relative to
licensing revenue for the fiscal years ended April 30,
2005, 2004 and 2003:
| $ | % | |||||||||||||||||
| 2005 | 2004 | Change | Change | 2003 | ||||||||||||||
| $1,824,077 | $1,622,128 | $201,949 | 12.4% | $1,502,448 | ||||||||||||||
Licensing revenue for fiscal 2005 increased by $201,949, or
12.4%, over the previous fiscal year. The increase in licensing
revenue resulted from new licensees added during the year. We
have hired a Vice President-Licensing with an extensive
background in the field. We plan to focus on areas that have
synergy with our core products, our brand, and our customer
base. We also intend to add additional licensees and to develop
strategies with our existing licensees to assist them in
expanding their business and thereby increase our licensing
revenue.
| Cost of Goods and Services and Gross Profit |
The following table sets forth certain information regarding
cost of sales and services and gross profit for the fiscal years
ended April 30, 2005, 2004, and 2003:
| $ | % | ||||||||||||||||||||
| 2005 | 2004 | Change | Change | 2003 | |||||||||||||||||
|
Cost of product and services sales and license revenue
|
$ | 84,900,032 | $ | 80,384,720 | $ | 4,515,312 | 5.6 | % | $ | 69,590,497 | |||||||||||
|
% net product and services sales and license revenue
|
67.5 | % | 67.3 | % | 69.6 | % | |||||||||||||||
|
Gross profit
|
$ | 40,888,018 | $ | 39,129,915 | $ | 1,758,103 | 4.5 | % | $ | 30,380,717 | |||||||||||
|
% net product and services sales and license revenue
|
32.5 | % | 32.7 | % | 30.4 | % | |||||||||||||||
Gross profit for fiscal 2005 increased by $1,758,103, or 4.5%,
over fiscal 2004. Gross margin as a percentage of net products
and services sales and license revenue sales and licensing
declined from 32.7% in fiscal 2004 to 32.5% for fiscal 2005. The
decline in the gross margin percentage was attributable to a
number of factors. The substantial increase in capital
expenditures led to a significant increase in depreciation
expense. Depreciation expense included in cost of goods sold
increased by $876,997 from $1,060,106 in fiscal 2004 to
$1,937,103 in fiscal 2005. We also incurred an additional
$802,820 in manufacturing consulting fees relative to studies of
our manufacturing processes. In January 2005, we moved several
of our production departments to a seven-day workweek. This
required the hiring of approximately 25 additional production
workers. We incurred an additional $200,001 in costs in
preparation for the move to a seven-day workweek. In addition,
we incurred production inefficiencies and higher than normal
scrap as a result of the start-up of this new production
schedule. Gross profit in fiscal 2005 also included a $2,023,000
refund from one of our insurance carriers for legal expenses
relative to product liability and municipal litigation defense
costs.
Gross profit for fiscal 2004 increased by $8,749,198, or 28.8%,
over fiscal 2003. The increase in gross profit was attributable
to the increase in net product sales as well as improvements in
efficiency. Our increased handgun production, without a
corresponding increase in staffing and infrastructure, led to
improved efficiency
32
Table of Contents
as evidenced by the increase in gross profit as a percentage of
net product sales and licensing revenue. The dismissal of
several of the municipal litigation cases resulted in a
reduction of our reserves. This had a favorable impact on gross
profit of $738,243. Refunds from insurance carriers on defense
costs paid in fiscal 2004 reduced cost of sales by $445,067.
Gross profit, as a percentage of net product and services sales
and license revenue increased from 30.4% for fiscal 2003 to
32.7% for fiscal 2004.
| Operating Expenses |
The following table sets forth certain information regarding
operating expenses for the fiscal years ended April 30,
2005, 2004 and 2003:
| $ | % | ||||||||||||||||||||
| 2005 | 2004 | Change | Change | 2003 | |||||||||||||||||
|
Research and development, net
|
$ | 199,042 | $ | 557,884 | $ | (358,842 | ) | (64.3 | )% | $ | 905,542 | ||||||||||
|
Sales and marketing
|
13,581,939 | 12,723,916 | 858,023 | 6.7 | % | 11,339,709 | |||||||||||||||
|
General and administrative
|
15,926,046 | 20,036,495 | (4,110,449 | ) | (20.5 | )% | 15,412,909 | ||||||||||||||
|
Restructuring costs
|
— | 1,000,931 | (1,000,931 | ) | (100 | )% | — | ||||||||||||||
|
Operating expenses
|
$ | 29,707,027 | $ | 34,319,226 | $ | (4,612,199 | ) | (13.4 | )% | $ | 27,658,160 | ||||||||||
|
% net product and services sales and license revenue
|
23.6 | % | 28.7 | % | 27.7 | % | |||||||||||||||
Operating expenses for fiscal 2005 decreased by $4,612,199, or
13.4%, over fiscal 2004. Fiscal 2004 operating expenses included
$1,977,537 related to the discontinued Crossings catalog and
advanced technology divisions, $1,000,931 related to the
restructuring costs relative to the closing our corporate office
in Scottsdale, $2,494,729 related to legal and accounting fees
relative to the restatement of our financial statements for
fiscal 2002 and the first three quarters of fiscal 2003 and the
SEC inquiry, for a total of $5,473,197 of expenses in fiscal
2004 that did not recur in fiscal 2005. Fiscal 2005 operating
expenses included $1,137,143 in recruiting and relocation
expenses for the Chief Executive Officer and several senior
management additions. This was an increase of $752,880 over
fiscal 2004 spending on recruiting and relocation. Stock option
expense, as calculated under SFAS 123(R) totaled $626,150
for fiscal 2005 versus $819,507 for fiscal 2004. Profit sharing
expense of $2,403,019 in fiscal 2005 was $130,989 higher versus
fiscal 2004 spending as a result of increased profits.
Operating expenses for fiscal 2004 increased by $6,661,066, or
24.1%, over fiscal 2003. Of the increase in fiscal 2004
operating expenses, $5,473,197 is identified above. In addition,
we incurred $651,102 related to higher profit sharing expenses
due to increased profits, $930,755 related to increased
advertising expenses, and $538,372 related to higher management
bonuses. Stock option expense for fiscal 2004 decreased by
$834,795 from $1,654,302 in fiscal 2003 to $819,507.
| Income from Operations |
The following table sets forth certain information regarding
operating income for the fiscal years ended April 30, 2005,
2004, and 2003:
| $ | % | ||||||||||||||||||||
| 2005 | 2004 | Change | Change | 2003 | |||||||||||||||||
|
Income from operations
|
$ | 11,180,991 | $ | 4,810,689 | $ | 6,370,302 | 132.4 | % | $ | 2,722,557 | |||||||||||
|
% net product and services sales and license revenue
|
8.9 | % | 4.0 | % | 2.7 | % | |||||||||||||||
Income from operations was $11,180,991 for fiscal 2005, an
increase of $6,370,302, or 132.4%, compared with operating
income of $4,810,689 in fiscal 2004. The increase in income from
operations income was
33
Table of Contents
primarily due to the reduction in operating expenses. As noted
above, in fiscal 2004, there were a number of one-time expenses
totaling $5,473,197 that did not recur in fiscal 2005.
Income from operations was $4,810,689 for fiscal 2004, an
increase of 176.7% compared to income from operations of
$2,722,557 in fiscal 2003. The increase reflected the improved
results of our handgun operation and the reduction of the
municipal litigation reserve, partially offset by the losses
incurred by the discontinued divisions, restructuring costs, and
legal and accounting fees related to the restatement and the SEC
inquiry. These one-time items and discontinued products and
services, increased expenses by $5,473,197.
| Other Income/ Expense |
Other expense totaled $120,373 for fiscal 2005 compared with
expense of $1,302,959 for fiscal 2004. We realized a $435,815
gain from the sale of our Identi-Kit business. Partially
offsetting this gain was $682,927 in exchange losses related to
the purchase of inventory from Walther.
Other expense totaled $1,302,959 for fiscal 2004 compared with
income of $1,789,114 for fiscal 2003. Other expense included a
$1,132,923 exchange loss related to purchase of inventory from
Walther. While we purchased forward contracts to reduce our
exposure to exchange losses, the dollar declined so
significantly against the Euro that we were unable to protect
ourselves fully against the loss. Other income of $1,789,114 in
fiscal 2003 included a gain on the sale of land of $1,666,132.
Interest income of $290,201 for fiscal 2005 represented a
decline of $28,667 versus $318,868 in fiscal 2004 due to reduced
cash available for investment. Interest income of $318,868 for
fiscal 2004 represented a decline of $361,837 versus $680,705
for fiscal 2003 again due to reduced cash available for
investment as well as a decline in interest rates on invested
cash.
| Interest Expense |
The following table sets forth certain information regarding
interest expense for the fiscal years ended April 30, 2005,
2004, and 2003:
| $ | % | |||||||||||||||||
| 2005 | 2004 | Change | Change | 2003 | ||||||||||||||
| $2,675,373 | $3,340,375 | $(665,002) | (19.9)% | $3,587,519 | ||||||||||||||
Interest expense declined by $665,002 in fiscal 2005 due
primarily to the refinancing that was completed in January 2005.
Monthly interest expense declined by approximately
$128,000 per month as a result of the refinancing.
Interest expense declined in fiscal 2004 by $247,144 due to
repayments made in fiscal 2003 and 2004 on the Tomkins note. We
made early payments on the Tomkins note in fiscal 2003, totaling
$2,000,000. We repaid an additional $1,000,000 in fiscal 2004.
The interest rate on this note is 9%.
| Income Taxes |
Our income tax expense for fiscal 2005 was $3,426,490 compared
to an income tax benefit of $346,062 in fiscal 2004 and an
income tax benefit of $15,620,636 in fiscal 2003. The tax
provision for fiscal 2005 included a $155,512 adjustment
resulting from the write-off of an Internal Revenue Code
Section 382 limitation to our federal net operating loss
carryforward of $457,388 (discussed below) and $60,826 of tax
expense related to tax deficiencies on exercises of employee
stock options under SFAS123(R). The tax benefit for fiscal 2004
was primarily attributable to the federal net operating loss
adjustments (described below) and the reversal of $135,856 of
our state tax valuation allowance. The tax benefit in fiscal
2003 of $15,620,636 related primarily to the reversal of
approximately $15 million and $1 million of federal
and state valuation allowances.
The fiscal 2004 tax provision included a $416,193 benefit for
federal net operating loss adjustments. This benefit related to
the filing of amended fiscal 2003 and 2002 federal income tax
returns to recognize tax deductions for warrant and option
exercises. We were previously not entitled to these deductions
as we had not
34
Table of Contents
complied with federal statutory reporting requirements. We have
subsequently complied with these reporting requirements, and we
therefore are now entitled to realize these tax benefits related
to the warrant and option exercises.
Our income tax expense includes deferred income taxes arising
from temporary differences between the financial reporting and
tax bases of assets, liabilities, and net operating loss
carryforwards. These amounts are reflected in the balance of our
net deferred tax assets, which totaled approximately
$14.2 million, before valuation allowance, at
April 30, 2005. In assessing the realization of our
deferred income tax assets, we consider whether it is more
likely than not that the deferred income tax assets will be
realized. The ultimate realization of our deferred income tax
assets depends upon generating future taxable income during the
periods in which our temporary differences become deductible and
before our net operating loss carryforwards expire. We evaluate
the recoverability of our deferred income tax assets by
assessing the need for a valuation allowance on a quarterly
basis. If we determine that it is more likely than not that our
deferred income tax assets will not be recovered, a valuation
allowance will be established against some or all of our
deferred income tax assets. Recording a valuation allowance or
reversing a valuation allowance could have a significant effect
on our future results of operations and financial position.
No valuation allowance was provided on our deferred federal
income tax assets as of April 30, 2005, 2004 and 2003, as
we believe that it is more likely than not that all such assets
will be realized. We do, however, continue to maintain a
valuation allowance of approximately $300,000, $500,000 and
$600,000 provided against our state deferred tax assets as of
April 30, 2005, 2004 and 2003, respectively. This valuation
allowance specifically relates to state net operating loss
carryforwards. There is uncertainty related to the recognition
of the benefit attributable to these state net operating losses.
We reached these conclusions after considering both changes in
our business as well as the availability of taxable income in
prior carryback years, tax planning strategies, and the
likelihood of generating future taxable income exclusive of
reversing temporary differences and carryforwards. Differences
between forecasted and actual future operating results could
adversely impact our ability to realize our deferred tax assets.
During the fourth quarter of the fiscal year ended
April 30, 2003, we determined that a valuation allowance
against our deferred tax assets was no longer needed, with the
exception for certain state deferred tax assets. We reached this
conclusion despite the existence of cumulative losses in recent
years. Cumulative losses are weighted heavily in the overall
assessment of the need for a valuation allowance. In making this
assessment, we took into consideration the existence of
significant expenses in the fiscal year ended April 30,
2002 relating to the acquisition of Smith & Wesson
Corp. that are not recurring in this or future fiscal years. In
prior years, we had losses before income taxes for financial
reporting purposes. For fiscal years ended April 30, 2005,
2004 and 2003, we are reporting pre-tax income of approximately
$8.7 million, $0.5 million and $1.6 million,
respectively. Net operating loss carryforwards of
$5.0 million and $0.5 million were utilized in fiscal
2005 and 2004, respectively. We believe that existing levels of
income from changes in our operations that have taken place or
will take place are sufficient to generate the minimum amounts
of taxable income set forth below to utilize our deferred tax
assets and net operating losses before they expire. Such changes
included (i) maintaining a strong order backlog;
(ii) successful launch of new firearm products, which have
been well received by the marketplace; (iii) new licensing
strategies, which are projected to generate royalty income; and
(iv) other changes in an effort to increase the efficiency
of our business operations, including the closing of our
Scottsdale, Arizona office and discontinuing our Crossings
catalog and the advanced technology divisions. We believe this
positive evidence outweighs negative evidence of prior year
losses in fiscal 2002.
To utilize all of our federal net operating loss carryforwards
before expiration, we would need to generate minimum taxable
income of $10.9 million (the amount of net operating loss
carryforwards) before 2024. As of April 30, 2005, we have
total gross book as compared to tax temporary differences of
$29.0 million, which may result in future tax deductions.
Therefore, future income of $39.9 million would need to be
generated to realize all of our deferred tax assets. We believe
our current level of pre-tax earnings are sufficient to realize
all of these deferred tax assets.
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Table of Contents
The following chart reconciles our income (loss) before taxes
for financial statement purposes to our taxable income (loss)
for income tax purposes:
| Year Ended | Year Ended | Year Ended | |||||||||||
| April 30, 2005 | April 30, 2004 | April 30, 2003 | |||||||||||
| (Dollars in millions) | |||||||||||||
|
Income (loss) before income taxes
|
$ | 8.7 | $ | 0.5 | $ | 1.6 | |||||||
|
Adjustments to determine taxable income:
|
|||||||||||||
|
State taxes
|
(0.3 | ) | (0.1 | ) | (0.1 | ) | |||||||
|
Depreciation
|
(3.7 | ) | (2.8 | ) | (3.3 | ) | |||||||
|
Gain/loss on sale of land (installment sale)
|
— | — | (1.3 | ) | |||||||||
|
Product liability
|
(2.6 | ) | (2.0 | ) | (2.7 | ) | |||||||
|
Section 263A unicap adjust
|
0.8 | (0.4 | ) | (0.6 | ) | ||||||||
|
LIFO to FIFO accounting change adjustment
|
3.8 | 3.8 | 3.8 | ||||||||||
|
Warrants
|
(0.3 | ) | — | (0.5 | ) | ||||||||
|
Non-Qualified stock options
|
(0.5 | ) | (0.1 | ) | — | ||||||||
|
Workers compensation
|
0.3 | 0.3 | (0.5 | ) | |||||||||
|
Accrued severance
|
(0.9 | ) | 0.4 | (0.3 | ) | ||||||||
|
Environmental reserve
|
(0.2 | ) | (0.1 | ) | (0.1 | ) | |||||||
|
Section 481(a) adjustment
|
— | (0.2 | ) | — | |||||||||
|
Finders fees
|
— | — | (0.5 | ) | |||||||||
|
FAS 123(R) compensation
|
0.6 | 0.8 | 1.6 | ||||||||||
|
Various reserves & accruals
|
(0.3 | ) | (0.2 | ) | 1.1 | ||||||||
|
Other book vs. tax differences
|
(0.4 | ) | 0.6 | (0.1 | ) | ||||||||
|
Utilization of net operating loss carryforwards
|
(5.0 | ) | (0.5 | ) | — | ||||||||
|
Taxable Income
|
$ | — | $ | — | $ | (1.9 | ) | ||||||
At April 30, 2005, we had federal income tax loss
carryforwards of $10,880,216 available (subject to various
statutory restrictions) for use on future federal income tax
returns. These carryforwards will expire as follows:
|
$ 217,076
|
Expires 2019 | |||
|
$1,832,658
|
Expires 2020 | |||
|
$6,863,760
|
Expires 2022 | |||
|
$1,947,170
|
Expires 2023 | |||
|
$ 19,552
|
Expires 2024 |
Net operating loss carryforwards reflecting in deferred tax
assets have been reduced by $0.2 million pursuant to
footnote 82 of SFAS 123(R).
During fiscal year 2005, we completed our analysis pursuant to
Internal Revenue Code Section 382
(“Section 382”). This analysis determined that we
had an ownership change within the definition of
Section 382 during the calendar year ended
December 31, 2000. As a result of this ownership change,
net operating losses of $3.6 million incurred prior to the
ownership change are subject to a limitation of
$0.1 million annually, subject to increases for built-in
gains. This limitation results in $457,388 of net operating loss
carryforwards expiring unutilized. Therefore, the deferred tax
asset attributable to the expiring net operating losses of
$155,512 has been reversed. It is possible that future
substantial changes in our ownership could occur that could
result in additional ownership changes pursuant to Internal
Revenue Code Section 382. If such an ownership change
should occur, there would be an annual limitation on the
remaining net operating loss and tax credit carryforwards which
can be utilized.
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Table of Contents
Based on our projections of future taxable income, we expect to
utilize the largest portion of our net operating loss
carryforward over the next five to six years. Finally, since our
net operating loss carryforwards do not begin to expire until
2019, and based on our projections of future financial reporting
income, we expect to utilize all of our net deferred income tax
assets of $13.9 million (after $0.3 million state tax
valuation allowance) over the next six to seven years.
On October 22, 2004, the American Jobs Creation Act
(“the AJCA”) was signed into law. The AJCA provides a
deduction for income from qualified domestic production activity
(“QPA”), which will be phased in from 2005 through
2010. Pursuant to FASB Staff Position No. 109-1,
“Application of SFAS No. 109 (Accounting for
Income Taxes), to the Tax Deduction on Qualified Production
Activity provided by the AJCA” the effect of this deduction
is reported in the period in which it is claimed on our tax
return. The QPA deduction is expected to be available to us
starting in FY2006. No deduction will be available in a year we
have a tax loss or no taxable income due to operating loss
carryforwards. As we have net operating loss carryforwards,
further analysis is required in order to determine the timing
and impact of the QPA to our financial statements.
In return for the QPA, the AJCA provides for a two-year
transition from the existing Extraterritorial Income Exclusion
(“ETI”) tax benefit for foreign sales, which the World
Trade Organization (WTO) ruled, was an illegal export
subsidy. The ETI benefit will be fully phased out for us in
FY2007. The ETI benefit for us was approximately $40,000 and
$43,000 for fiscal years 2005 and 2004.
| Net Income |
The following table sets forth certain information regarding net
income and the related per share data for the fiscal years ended
April 30, 2005, 2004, and 2003:
| $ | % | ||||||||||||||||||||
| 2005 | 2004 | Change | Change | 2003 | |||||||||||||||||
|
Net income
|
$ | 5,248,956 | $ | 832,285 | $ | 4,416,671 | 530.7 | % | $ | 17,225,493 | |||||||||||
|
Net income per share
|
|||||||||||||||||||||
|
Basic
|
$ | 0.17 | $ | 0.03 | $ | 0.14 | 466.7 | % | $ | 0.58 | |||||||||||
|
Diluted
|
0.14 | 0.02 | 0.12 | 600.0 | % | 0.49 | |||||||||||||||
The increase in net income and net income per share for fiscal
2005 resulted primarily from a reduction in operating expenses.
Fiscal 2004 spending included $1,977,537 related to the
discontinued Crossings catalog and advanced technology
divisions, $1,000,931 related to the restructuring costs
relative to the closing our corporate office in Scottsdale,
$2,494,729 related to legal and accounting fees relative to the
restatement of our financial statements for fiscal 2002 and the
first three quarters of fiscal 2003, and the SEC inquiry. Fiscal
2005 results also reflected the benefit of an agreement reached
with one of our insurance carriers, which included a net cash
refund of approximately $2.0 million.
The decrease in net income and net income per share for fiscal
2004 resulted primarily from the comparative effect of an income
tax valuation allowance reversed for fiscal 2003 of
approximately $16.0 million that resulted in an income tax
benefit. The reversal of the allowance was triggered by our
improved profitability and the likelihood that we would be able
to utilize income tax loss carryforwards. In addition, the
losses associated with our Crossings catalog and advanced
technology divisions, the restructuring charges incurred in the
third quarter, and the costs related to the restatement and the
SEC inquiry eroded the profitability in fiscal 2004.
The adoption of SFAS 123(R) was to record additional stock
compensation expense of $626,000, 820,000 and 1,654,000 for year
end April 30, 2005, 2004, and 2003, respectively.
37
Table of Contents
Liquidity and Capital Resources
Our principal cash requirements are to finance the growth of our
firearms and licensing operations and to service our existing
debt. Capital expenditures for new products, capacity expansion,
and process improvements represent important cash needs.
The following table sets forth certain information relative to
cash flow for the fiscal years ended April 30, 2005, 2004,
and 2003:
| $ | % | |||||||||||||||||||
| 2005 | 2004 | Change | Change | 2003 | ||||||||||||||||
|
Operating activities
|
$ | 6,441,991 | $ | 906,702 | $ | 5,535,289 | 610.5 | % | $ | (1,517,872 | ) | |||||||||
|
Investing activities
|
16,097,297 | (6,840,766 | ) | 22,938,063 | 335.3 | % | (4,386,889 | ) | ||||||||||||
|
Financing activities
|
(23,968,476 | ) | (737,283 | ) | (23,231,193 | ) | (3150.9 | )% | (1,925,720 | ) | ||||||||||
|
Total
|
$ | (1,429,188 | ) | $ | (6,671,347 | ) | $ | 5,242,159 | 78.6 | % | $ | (7,830,481 | ) | |||||||
Operating activities represent the principal source of our cash
flow. Cash flow from operating activities increased by
$5,535,289 for fiscal 2005 compared with fiscal 2004. The
improvement in operating cash flow in fiscal 2004 was
attributable to improved profitability, which was further
enhanced by our use of tax loss carry forwards. Accounts
receivable improved substantially during the year as a result of
collecting the open receivable from the fiscal 2004 fourth
quarter sales promotion. Inventories increased by
$4.0 million as a result of the increased volume and
replenishing finished goods inventory that was depleted below
normal levels in the fourth quarter of fiscal 2004.
Cash flow from operating activities increased by $2,424,574 for
fiscal 2004 compared with fiscal 2003. The improvement in
operating cash flow in fiscal 2004 was attributable to improved
profitability. We launched an aggressive sales promotion
campaign in January 2004. The program included extended payment
terms to our distributors. As a result, accounts receivable
collections were lower than our historical levels. While this
program resulted in higher sales for the fourth quarter of
fiscal 2004, the cash impact was not felt until fiscal 2005.
Cash provided by investing activities totaled $16,097,297
compared with a cash use of $6,840,766 in fiscal 2004, an
increase of $22,938,063. Collateralized cash deposits decreased
by $22,673,059 as a result of the refinancing that was completed
in January 2005. Capital expenditures of $8,423,144 in fiscal
2005 were $2,746,530 higher than fiscal 2004’s capital
expenditures of $5,676,614. Capital expenditures in fiscal 2005
were three times the depreciation expense for the year. We
intend to spend approximately $12.0 million in capital
expenditures in fiscal 2006, all of which will be internally
financed.
Cash used for investing activities increased by $2,453,877 for
fiscal 2004, partially as a result of a $1,503,196 increase in
capital expenditures. Collateralized cash deposits increased by
$1,160,059 as a result of banking agreements relative to the
forward-exchange contracts we had purchased.
The $23,231,193 increase in cash used for financing activities
in fiscal 2005 resulted from our repayment of the $27,000,000
Tomkins note as well as the refinancing of our BankNorth debt in
January 2005. We incurred $654,843 in costs relative to the
refinancing effort.
The $1,188,437 decrease in cash used for financing activities
for fiscal 2004 resulted from our repayment of $2,357,425 in
debt in fiscal 2003 compared to $1,090,498 in fiscal 2004.
Repayment on the note to BankNorth, our primary bank, commenced
in April 2004, and principal payments on the Tomkins note
commenced in May 2004.
At April 30, 2005, we had open letters of credit
aggregating $5.1 million.
At April 30, 2005, we had $4,081,475 in cash and cash
equivalents on hand. We have a $17 million revolving line
of credit with BankNorth as well as access to a $5 million
line starting on May 1, 2005 for capital expenditures.
38
Table of Contents
Other Matters
| Inflation |
We do not believe that inflation had a material impact on us
during fiscal 2005, 2004, or 2003.
| Critical Accounting Policies |
| Use of Estimates in Preparation of Financial Statements |
Use of Estimates — The preparation of our
consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the financial statement
dates and the reported amounts of revenues and expenses during
the reporting periods. Our significant estimates include
accruals for warranty, product liability, workers compensation,
environmental liability, excess and obsolete inventory and
medical claims payable. Actual results could differ from those
estimates.
| Revenue Recognition |
We recognize revenue from product sales when the earnings
process is complete and the risks and rewards of ownership have
transferred to the customer, which is generally upon shipment.
The substantial portion of our revenues are from product sales.
We also provide tooling, forging, heat treating, finishing,
plating, and engineering support services to customers; such
revenues are recognized when accepted by the customer, when no
further contingencies or material performance obligations exist,
and when collectibility is reasonably assured, thereby earning
us the right to receive and retain payments for services
performed and billed.
We recognize trademark licensing revenues for all individual
licensees on a quarterly basis based on actual receipts from
licensees. This revenue consists of minimum royalties and/or a
percentage of a licensee’s sales on licensed products.
Under our current licensing agreements, these revenues are
payable on a calendar quarter basis. Fees received upon initial
signing of license agreements are recognized as revenues. As a
result of a combination of uncertain factors, regarding existing
licensees, including current and past payment performance,
market acceptance of the licensee’s product and
insufficient historical experience, we believe that reasonable
assurance of collectibility does not exist based on the results
and past payment performance of licensees in general. Therefore,
we do not initially recognize minimum royalty payments, but
instead record such revenue when the minimum royalty is paid. As
of April 30, 2005, minimum royalties to be collected in the
future amounted to approximately $6.1 million.
| Product Liability |
We provide reserves for potential product liability defense
costs based on estimates determined in consultation with
litigation counsel, exclusive of any insurance reimbursements.
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. At this time, the estimated
range of reasonably possible additional losses, as that term is
defined in SFAS No. 5, is zero.
| Environmental Liability |
We provide reserves for potential environmental obligations that
we consider probable and for which reasonable estimates of such
obligations can be made. As of April 30, 2005, we had a
reserve of $3.7 million for environmental matters, which is
recorded on an undiscounted basis.
39
Table of Contents
| Stock Options |
We account for stock-based employee compensation arrangements in
accordance with the provisions of Statement of Financial
Accounting Standards No. 123(R), Shared-Based Payments
(Revised). Under SFAS 123(R), compensation cost is
calculated on the date of the grant using the Black Scholes
method. The compensation expense is then amortized over the
vesting period.
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 151, “Inventory Costs, an amendment of ARB
No. 43, Chapter 4” (FAS 151). FAS 151
clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material.
Additionally, FAS 151 requires that allocation of fixed
production overhead to inventory be based on the normal capacity
of the production facilities. The provisions of FAS 151 are
applicable to inventory costs incurred during fiscal years
beginning after June 15, 2005. The adoption of this
statement is not expected to have a material effect on the
Company’s consolidated financial position, results of
operations or cash flows.
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123, “Share-Based
Payment” (revised 2004)(FAS 123(R)). We have adopted
SFAS 123(R) using the modified retrospective application
method which resulted in the restatement of prior years (see
Footnote 24).
In December 2004, FASB issued Statement of Financial Accounting
Standards No. 153, “Exchanges of Nonmonetary Assets,
an amendment to APB Opinion No. 29” (FAS 153).
The Statement eliminates the exception to measure exchanges at
fair value for exchanges of similar productive assets and
replaces it with a general exception for exchange transactions
that do not have commercial substance. FAS 153 is effective
for nonmonetary exchanges in fiscal periods beginning after
June 15, 2005. The adoption of this statement is not
expected to have a material effect on the Company’s
consolidated financial position, results of operations or cash
flows.
Contractual Obligations and Commercial Commitments
The following table sets forth a summary of our material
contractual obligations and commercial commitments as of
April 30, 2005:
| Less Than | More Than | |||||||||||||||||||
| Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | ||||||||||||||||
|
Long-term debt obligations
|
$ | 17,614,888 | $ | 1,586,464 | $ | 3,489,803 | $ | 3,965,287 | $ | 8,573,334 | ||||||||||
|
Operating lease obligations
|
538,062 | 111,627 | 208,216 | 173,177 | 45,042 | |||||||||||||||
|
Purchase obligations
|
13,393,812 | 13,393,812 | — | — | — | |||||||||||||||
|
Other long-term obligations reflected on the balance sheet under
GAAP
|
239,834 | 49,049 | 95,723 | 53,958 | 41,104 | |||||||||||||||
|
Total obligations
|
$ | 31,786,596 | $ | 15,140,952 | $ | 3,793,742 | $ | 4,192,422 | $ | 8,659,480 | ||||||||||
Off-Balance Sheet Arrangements
We do not have any transactions, arrangements, or other
relationships with unconsolidated entities that are reasonably
likely to affect our liquidity or capital resources. We have no
special purpose or limited purpose entities that provide
off-balance sheet financing, liquidity, or market or credit risk
support; or engage in leasing, hedging, research and development
services, or other relationships that expose us to liability
that is not reflected on the face of the financial statements.
40
Table of Contents
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
We do not enter into any market risk sensitive instruments for
trading purposes. Our principal market risk relates to changes
in the value of the Euro relative to the U.S. Dollar. A
portion of our gross revenues during the three and twelve months
ended April 30, 2005 ($5.0 million and
$17.0 million, respectively, representing approximately
13.5% and 13.4%, respectively, of aggregate gross revenues) came
from the sale of goods that were purchased, wholly or partially
from a European manufacturer, in Euros. Annually, we purchase
approximately $10 million of inventory from a European
supplier. This exposes us to risk from foreign exchange rate
fluctuations. A 10% drop in the value of the U.S. Dollar in
relation to the Euro would, to the extent not covered through
price adjustments, reduce the Company’s gross profit on
that $10 million of inventory by approximately
$1 million. In an effort to offset our risks from
unfavorable foreign exchange fluctuations, we entered into Euro
participating forward options under which we would purchase
Euros which in turn would be used to pay the European
manufacturer. As of April 30, 2005 our outstanding
contracts had a remaining balance of 4.5 million euros.
Contracts are for 750,000 euros per month with the last month
expiring in October 2005.
Participating forward options provide full protection for us
against the depreciation of the U.S. dollar against the
Euro and partial benefit from the appreciation of the
U.S. dollar against the Euro. If the Euro strengthens above
the average rate, we will not pay for the Euros at more than the
average rate. If the Euro weakens below the average rate, we
would pay 50% of the Euros at the average rate and the remaining
50% of the Euros are paid for at the spot rate. Each option,
unless used prior to the expiration date, will be converted at
the expiration date to a forward contract, due when needed
during the month at a slight up charge in rate. During the three
and twelve months ended April 30, 2005, we experienced a
net gain of $663 and $127,498, respectively, on such contracts
that we executed during the period in an effort to limit our
exposure to fluctuations in the Euro/ Dollar exchange rate. As
of April 30, 2005, we had participating forward options
totaling 4.5 million Euros remaining which were reported as
a liability of $63,659.
| Item 8. | Financial Statements and Supplementary Data |
Reference is made to the financial statements, the notes
thereto, and the report thereon, commencing on page F-1 of this
report, which financial statements, notes, and report are
incorporated herein by reference.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Not applicable.
| Item 9A. | Controls and Procedures |
Disclosure controls and procedures are those controls and
procedures that are designed to ensure that information required
to be disclosed in the reports we file or submit under the
Securities Exchange Act of 1934 (Exchange Act) is recorded,
processed, summarized, and reported within the time periods
specified in the Securities and Exchange Commission’s
(SEC) rules and forms. Disclosure controls and procedures
include, those processes, controls and procedures designed to
ensure that information required to be disclosed in the reports
that we file or submit under the Exchange Act is accumulated and
communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
During our year-end closing process, for the reporting period
ended April 30, 2005, we carried out an evaluation, under
the supervision of our management, including the Chief Executive
Officer and the Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rules 13a-15. Based
upon that evaluation, we determined that we had a material
weakness in internal control over financial reporting related to
stock awards. A material weakness is a control deficiency, or
combination of control deficiencies, that results in a more than
remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected.
Specifically, we determined that certain warrants issued in May
2001 to two employees, contained a cashless exercise feature
that required compensation expense to be recorded in our
financial statements. In addition, modifications in
41
Table of Contents
2004 and 2005 to the terms of certain stock option agreements
required additional compensation expense to be recorded in the
financial statements. These matters resulted in the restatement
of our 2002, 2003, 2004 and the first three quarters of our
fiscal 2005 consolidated financial statements. This restatement
is further described in Notes 24 and 25 of our 2005
consolidated financial statements. Our Chief Executive Officer
and Chief Financial Officer have each concluded that our
disclosure controls and procedures were not effective as of
April 30, 2005 due to the matters relating to stock option
accounting. As a result, we have implemented remedial action.
Specifically, we have enhanced our closing process and
procedures related to accounting for stock awards, including
designating an individual to oversee the accounting for stock
awards. We have also provided extensive training in
SFAS 123(R), which we adopted as part of our year-end
closing process in fiscal 2005.
| Changes In Internal Control over Financial Reporting |
Other than as described above, there were no changes in our
internal control over financial reporting during the quarter
ended April 30, 2005 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
PART III
| Item 10. | Directors and Executive Officers of the Registrant |
The information required by this Item relating to our directors
is incorporated herein by reference to the definitive Proxy
Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2005 Annual Meeting of Stockholders. The
information required by this Item relating to our executive
officers is included in Item 1, “Business —
Executive Officers” of this report.
| Item 11. | Executive Compensation |
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant
to Regulation 14A of the Exchange Act for our 2005 Annual
Meeting of Stockholders.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant
to Regulation 14A of the Exchange Act for our 2005 Annual
Meeting of Stockholders.
| Item 13. | Certain Relationships and Related Transactions |
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant
to Regulation 14A of the Exchange Act for our 2005 Annual
Meeting of Stockholders.
| Item 14. | Principal Accountant Fees and Services |
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant
to Regulation 14A of the Exchange Act for our 2005 Annual
Meeting of Stockholders.
42
Table of Contents
PART IV
| Item 15. | Exhibits, Financial Statement Schedules, and Reports On Form 8-K |
(a) Financial Statements and Financial Statement
Schedules
Financial Statements are listed in the Index to Financial
Statements on page F-1 of this report.
(b) Reports on Form 8-K
None.
(c) Exhibits
| Exhibit | ||||
| Number | Exhibit | |||
| 3 | .1 | Amended and Restated Articles of Incorporation.(1) | ||
| 3 | .2 | Amended and Restated Bylaws.(1) | ||
| 4 | .1 | Registration Rights Agreement between Saf-T-Hammer Corporation and Colton Melby dated May 6, 2001.(2) | ||
| 4 | .2 | Form of Option to 2001 Stock Option.(3) | ||
| 4 | .3 | Employee Stock Purchase Agreement dated as of April 1, 2002.(3) | ||
| 4 | .4 | Form of Subscription Agreement to Employee Stock Purchase Agreement.(3) | ||
| 4 | .5 | 2005 Incentive Compensation Plan.(1) | ||
| 4 | .6 | Warrant issued to Mitchell L. Saltz.(4) | ||
| 4 | .7 | Warrant issued to Robert Scott.(4) | ||
| 10 | .1 | Trademark Agency Agreement with UMAREX dated March 11, 2000.(5) | ||
| 10 | .2 | Agreement with Walther/ UMAREX, dated August 1, 1999.(5) | ||
| 10 | .3 | Trademark License Agreement with UMAREX/ Gutman Cutlery dated July 1, 2000.(5) | ||
| 10 | .4 | Agreement with Western Mass Electric dated July 6, 1998.(5) | ||
| 10 | .5 | Agreement with Western Mass Electric dated December 18, 2000.(5) | ||
| 10 | .6 | Settlement Agreement with Dept. of Treasury and HUD dated March 17, 2000.(5) | ||
| 10 | .7 | Letter Agreement with Dept. of Treasury and HUD dated May 2, 2000.(5) | ||
| 10 | .8 | Trademark License Agreement with Canadian Security Agency dated May 31, 1996.(5) | ||
| 10 | .9 | Master Supply Agreement with Remington Arms dated August 1, 2001.(6) | ||
| 10 | .10 | Loan and Security Agreement, dated January 11, 2005, by and between the Registrant, Smith & Wesson Corp., and Banknorth, N.A.(7) | ||
| 10 | .11 | Revolving Line of Credit Note, dated January 11, 2005.(7) | ||
| 10 | .12 | Commercial Term Promissory Note, dated January 11, 2005.(7) | ||
| 10 | .13 | Commercial Real Estate Term Promissory Note, dated January 11, 2005.(7) | ||
| 10 | .14 | Equipment Line of Credit Note, dated January 11, 2005(7) | ||
| 10 | .15 | Mortgage and Security Agreement, dated January 11, 2005, by and between the Registrant and Banknorth, N.A.(7) | ||
| 10 | .16 | Mortgage and Security Agreement, dated January 11, 2005, by the Registrant in favor of Banknorth, N.A.(7) | ||
| 10 | .17 | Guaranty, dated January 11, 2005, by the Registrant in favor of Banknorth, N.A.(7) | ||
| 10 | .18 | Purchase and Sale Agreement with Springfield Redevelopment Authority.(8) | ||
| 10 | .19 | Environmental Agreement with Springfield Redevelopment Authority.(8) | ||
| 10 | .20 | Promissory Note from Springfield Redevelopment Authority.(8) | ||
| 10 | .21 | Agreement with Carl Walther GmbH.(9) | ||
| 10 | .22 | Employment Agreement with Michael L. Golden.(10) | ||
| 21 | .1 | Subsidiaries of the Company.(4) | ||
| 23 | .1 | Consent of PricewaterhouseCoopers LLP.(4) | ||
| 24 | .1 | Power of Attorney (see signature page of this Annual Report on Form 10-KSB).(4) | ||
| 31 | .1 | Rule 13a-14(a)/ 15d-14(a) Certification of Principal Executive Officer.(4) | ||
43
Table of Contents
| Exhibit | ||||
| Number | Exhibit | |||
| 31 | .2 | Rule 13a-14(a)/ 15d-14(a) Certification of Principal Financial Officer.(4) | ||
| 32 | .1 | Section 1350 Certification of Principal Executive Officer.(4) | ||
| 32 | .2 | Section 1350 Certification of Principal Financial Officer.(4) | ||
| (1) | Incorporated by reference to the Proxy Statement on Schedule 14A filed with the SEC on August 11, 2004. | |
| (2) | Incorporated by reference from the Company’s Form 8-K, filed with the SEC on April 4, 2000. | |
| (3) | Incorporated by reference to the Proxy Statement on Schedule 14A filed with the SEC on December 28, 2001. | |
| (4) | Filed herewith | |
| (5) | Incorporated by reference from the Company’s Form 10-QSB filed with the SEC on August 13, 2001. | |
| (6) | Incorporated by reference from the Company’s Form 10-QSB filed with the SEC on September 14, 2001. | |
| (7) | Incorporated by reference from the Company’s Form 8-K filed with the SEC on January 18, 2005. | |
| (8) | Incorporated by reference from the Company’s Form 10-KSB filed with the SEC on December 16, 2002. | |
| (9) | Incorporated by reference from the Company’s Form 10-K Report filed with the SEC on July 13, 2004. |
| (10) | Incorporated by reference from the Company’s Form 8-K Report filed with the SEC on December 6, 2004. |
44
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
| SMITH & WESSON HOLDING CORPORATION | |
| /s/ MICHAEL F. GOLDEN | |
|
|
|
| Michael F. Golden | |
| President and Chief Executive Officer |
Date: August 15, 2005
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
date indicated.
| Signature | Capacity | Date | ||||
|
/s/ MICHAEL F. GOLDEN |
President, Chief Executive Officer, and Director (Principal Executive Officer) |
August 15, 2005 | ||||
|
/s/ JOHN A. KELLY |
Chief Financial Officer and Treasurer (Principal Accounting
and Financial Officer) |
August 15, 2005 | ||||
|
/s/ BARRY M. MONHEIT |
Chairman of the Board | August 15, 2005 | ||||
|
/s/ JEFFREY D. BUCHANAN |
Director | August 15, 2005 | ||||
|
/s/ JOHN B. FURMAN |
Director | August 15, 2005 | ||||
|
/s/ COLTON R. MELBY |
Director | August 15, 2005 | ||||
|
/s/ JAMES J. MINDER |
Director | August 15, 2005 | ||||
|
/s/ MITCHELL A. SALTZ |
Director | August 15, 2005 | ||||
|
/s/ ROBERT L. SCOTT |
Director | August 15, 2005 | ||||
|
/s/ I. MARIE WADECKI |
Director | August 15, 2005 | ||||
45
Table of Contents
| Item 15 | Exhibits, Financial Statements and Schedules |
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
| Page | ||||
|
Item 15(a) 1 Financial Statements:
|
||||
| F-2 | ||||
| F-3 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| F-7 | ||||
|
Item 15(a) 2 Financial Statement Schedule:
|
||||
| F-36 | ||||
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Smith & Wesson Holding Corporation:
In our opinion, the financial statements listed in the index
appearing under Item 15(a) 1, present fairly, in all
material respects, the consolidated financial position of
Smith & Wesson Holding Corporation and subsidiaries at
April 30, 2005 and 2004, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended April 30, 2005, in conformity
with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial
statement schedule appearing under Item 15(a) 2 presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial
statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 24 to the consolidated financial
statements, the Company has restated its financial statements to
correct errors in accounting for certain stock awards and to
adopt Statement of Financial Accounting Standards
No. 123(R), “Share-Based Payment (Revised 2004)”.
PricewaterhouseCoopers LLP
Hartford, Connecticut
August 15, 2005
F-2
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
CONSOLIDATED BALANCE SHEETS
As of:
| Restated (Note 24) | ||||||||||
| April 30, 2005 | April 30, 2004 | |||||||||
| ASSETS | ||||||||||
|
Current assets:
|
||||||||||
|
Cash and cash equivalents
|
$ | 4,081,475 | $ | 5,510,663 | ||||||
|
Marketable securities
|
— | 1,538,738 | ||||||||
|
Accounts receivable, net of allowance for doubtful accounts of
$75,000 on April 30, 2005 and $100,000 on April 30,
2004
|
18,373,713 | 20,249,858 | ||||||||
|
Inventories
|
19,892,581 | 15,986,705 | ||||||||
|
Other current assets
|
2,388,286 | 1,984,343 | ||||||||
|
Deferred income taxes
|
6,119,561 | 3,900,480 | ||||||||
|
Income tax receivable
|
3,701 | 160,596 | ||||||||
|
Total current assets
|
50,859,317 | 49,331,383 | ||||||||
|
Property, plant, and equipment, net
|
16,726,361 | 11,021,174 | ||||||||
|
Intangibles, net
|
364,908 | 351,908 | ||||||||
|
Collateralized cash deposits
|
— | 22,673,059 | ||||||||
|
Notes receivable
|
1,029,812 | 1,072,359 | ||||||||
|
Deferred income taxes
|
7,806,702 | 13,045,388 | ||||||||
|
Other assets
|
5,205,246 | 7,794,700 | ||||||||
| $ | 81,992,346 | $ | 105,289,971 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
|
Current liabilities:
|
||||||||||
|
Accounts payable
|
$ | 12,034,692 | $ | 9,608,975 | ||||||
|
Accrued expenses
|
4,898,517 | 6,210,422 | ||||||||
|
Accrued payroll
|
3,220,730 | 3,920,426 | ||||||||
|
Accrued taxes other than income
|
589,449 | 1,055,506 | ||||||||
|
Accrued profit sharing
|
2,403,019 | 2,272,030 | ||||||||
|
Accrued workers’ compensation
|
536,773 | 225,000 | ||||||||
|
Accrued product liability
|
2,524,996 | 2,097,636 | ||||||||
|
Deferred revenue
|
15,646 | 442,291 | ||||||||
|
Current portion of notes payable
|
1,586,464 | 4,039,456 | ||||||||
|
Total current liabilities
|
27,810,286 | 29,871,742 | ||||||||
|
Notes payable
|
16,028,424 | 37,870,046 | ||||||||
|
Other non-current liabilities
|
11,062,459 | 17,292,848 | ||||||||
|
Commitments and contingencies (Note 23)
|
||||||||||
|
Stockholders’ equity:
|
||||||||||
|
Preferred stock, $.001 par value, 20,000,000 shares
authorized, 0 shares on April 30, 2005 and 2004 issued
and outstanding
|
— | — | ||||||||
|
Common stock, $.001 par value, 100,000,000 shares
authorized, 31,974,017 shares on April 30, 2005 and
30,935,799 shares on April 30, 2004 issued and
outstanding
|
31,974 | 30,936 | ||||||||
|
Additional paid-in capital
|
27,744,819 | 26,138,726 | ||||||||
|
Accumulated deficit
|
(685,616 | ) | (5,934,572 | ) | ||||||
|
Accumulated other comprehensive income
|
— | 20,245 | ||||||||
|
Total stockholders’ equity
|
27,091,177 | 20,255,335 | ||||||||
| $ | 81,992,346 | $ | 105,289,971 | |||||||
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE
INCOME
| Restated (Note 24) | Restated (Note 24) | |||||||||||||
| April 30, 2005 | April 30, 2004 | April 30, 2003 | ||||||||||||
|
Net product and services sales
|
$ | 123,963,973 | $ | 117,892,507 | $ | 98,468,766 | ||||||||
|
License revenue
|
1,824,077 | 1,622,128 | 1,502,448 | |||||||||||
|
Cost of products and services sold
|
84,861,811 | 80,080,391 | 69,294,008 | |||||||||||
|
Cost of license revenue
|
38,221 | 304,329 | 296,489 | |||||||||||
|
Gross profit
|
40,888,018 | 39,129,915 | 30,380,717 | |||||||||||
|
Operating expenses:
|
||||||||||||||
|
Research and development, net
|
199,042 | 557,884 | 905,542 | |||||||||||
|
Selling and marketing
|
13,581,939 | 12,723,916 | 11,339,709 | |||||||||||
|
General and administrative
|
15,926,046 | 20,036,495 | 15,412,909 | |||||||||||
|
Restructuring costs
|
— | 1,000,931 | — | |||||||||||
|
Total operating expenses
|
29,707,027 | 34,319,226 | 27,658,160 | |||||||||||
|
Income from operations
|
11,180,991 | 4,810,689 | 2,722,557 | |||||||||||
|
Other income/(expense):
|
||||||||||||||
|
Other income/(expense)
|
(120,373 | ) | (1,302,959 | ) | 1,789,114 | |||||||||
|
Interest income
|
290,201 | 318,868 | 680,705 | |||||||||||
|
Interest expense
|
(2,675,373 | ) | (3,340,375 | ) | (3,587,519 | ) | ||||||||
| (2,505,545 | ) | (4,324,466 | ) | (1,117,700 | ) | |||||||||
|
Income before income taxes
|
8,675,446 | 486,223 | 1,604,857 | |||||||||||
|
Income tax (benefit) expense
|
3,426,490 | (346,062 | ) | (15,620,636 | ) | |||||||||
|
Net income
|
$ | 5,248,956 | $ | 832,285 | $ | 17,225,493 | ||||||||
|
Other comprehensive income:
|
||||||||||||||
|
Unrealized (loss) gain on marketable securities, net of $0,
($4,217), and $11,935 tax effect, respectively
|
$ | — | $ | (7,231 | ) | $ | 24,608 | |||||||
|
Reclassification of realized gains to net income
|
(20,245 | ) | — | — | ||||||||||
|
Comprehensive income
|
$ | 5,228,711 | $ | 825,054 | $ | 17,250,101 | ||||||||
|
Weighted average number of common equivalent shares outstanding,
basic
|
31,361,009 | 30,719,114 | 29,860,228 | |||||||||||
|
Net income per share, basic
|
$ | 0.17 | $ | 0.03 | $ | 0.58 | ||||||||
|
Weighted average number of common equivalent shares outstanding,
diluted
|
36,636,170 | 36,011,400 | 35,372,633 | |||||||||||
|
Net income per share, diluted
|
$ | 0.14 | $ | 0.02 | $ | 0.49 | ||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
| Accumulated | |||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional | Other | Total | |||||||||||||||||||||||||||||
| Paid-In | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Income | Equity | ||||||||||||||||||||||||||
|
Balance at April 30, 2002
|
|||||||||||||||||||||||||||||||||
|
As previously reported
|
— | $ | — | 29,683,613 | $ | 29,683 | $ | 15,751,515 | $ | (16,938,840 | ) | $ | 2,868 | $ | (1,154,774 | ) | |||||||||||||||||
|
Restatement for stock awards under APB 25 and adoption of
SFAS 123R (Note 24)
|
— | 7,053,510 | (7,053,510 | ) | — | ||||||||||||||||||||||||||||
|
As restated at April 30, 2002
|
29,683,613 | 29,683 | 22,805,025 | (23,992,350 | ) | 2,868 | (1,154,774 | ) | |||||||||||||||||||||||||
|
Exercise of warrants
|
614,713 | 615 | 149,385 | 150,000 | |||||||||||||||||||||||||||||
|
Exercise of stock options
|
76,666 | 77 | 65,723 | 65,800 | |||||||||||||||||||||||||||||
|
Shares issued under ESPP October 1, 2002
|
67,117 | 67 | 75,945 | 76,012 | |||||||||||||||||||||||||||||
|
April 1, 2003
|
122,819 | 123 | 139,770 | 139,893 | |||||||||||||||||||||||||||||
|
Stock option expense
|
— | — | 1,654,302 | 1,654,302 | |||||||||||||||||||||||||||||
|
Common stock issued to settle liabilities
|
54,700 | 55 | 64,770 | 64,825 | |||||||||||||||||||||||||||||
|
Net income for the year ended April 30, 2003
|
17,225,493 | 17,225,493 | |||||||||||||||||||||||||||||||
|
Other comprehensive income
|
24,608 | 24,608 | |||||||||||||||||||||||||||||||
|
As restated at April 30, 2003
|
— | $ | — | 30,619,628 | $ | 30,620 | $ | 24,954,920 | $ | (6,766,857 | ) | $ | 27,476 | $ | 18,246,159 | ||||||||||||||||||
|
Exercise of stock options
|
90,075 | 90 | 106,796 | 106,886 | |||||||||||||||||||||||||||||
|
Shares issued under ESPP October 1, 2003
|
116,752 | 117 | 133,476 | 133,593 | |||||||||||||||||||||||||||||
|
April 1, 2004
|
109,344 | 109 | 124,027 | 124,136 | |||||||||||||||||||||||||||||
|
Stock option expense
|
— | — | 819,507 | 819,507 | |||||||||||||||||||||||||||||
|
Net income for the year ended April 30, 2004
|
832,285 | 832,285 | |||||||||||||||||||||||||||||||
|
Other comprehensive income
|
(7,231 | ) | (7,231 | ) | |||||||||||||||||||||||||||||
|
As restated at April 30, 2004
|
— | $ | — | 30,935,799 | $ | 30,936 | $ | 26,138,726 | $ | (5,934,572 | ) | $ | 20,245 | $ | 20,255,335 | ||||||||||||||||||
|
Cashless exercise of warrants
|
200,000 | 200 | (200 | ) | — | ||||||||||||||||||||||||||||
|
Exercise of stock options
|
647,216 | 647 | 735,759 | 736,406 | |||||||||||||||||||||||||||||
|
Shares issued under ESPP October 1, 2004
|
106,811 | 107 | 123,200 | 123,307 | |||||||||||||||||||||||||||||
|
April 1, 2005
|
84,191 | 84 | 121,184 | 121,268 | |||||||||||||||||||||||||||||
|
Stock option expense
|
— | — | 626,150 | 626,150 | |||||||||||||||||||||||||||||
|
Net income for the year ended April 30, 2005
|
5,248,956 | 5,248,956 | |||||||||||||||||||||||||||||||
|
Reclassification of realized gains to net income
|
(20,245 | ) | (20,245 | ) | |||||||||||||||||||||||||||||
|
Balance at April 30, 2005
|
— | $ | — | 31,974,017 | $ | 31,974 | $ | 27,744,819 | $ | (685,616 | ) | $ | — | $ | 27,091,177 | ||||||||||||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended April 30, | |||||||||||||||
| Restated (Note 24) | Restated (Note 24) | ||||||||||||||
| 2005 | 2004 | 2003 | |||||||||||||
|
Cash flows provided by (used for) operating activities
|
|||||||||||||||
|
Net income
|
$ | 5,248,956 | $ | 832,285 | $ | 17,225,493 | |||||||||
|
Adjustments to reconcile net income to cash provided by (used
for) operating activities:
|
|||||||||||||||
|
Amortization and depreciation
|
2,756,915 | 1,705,514 | 987,674 | ||||||||||||
|
Gain on disposal of IdentiKit
|
(435,815 | ) | — | — | |||||||||||
|
(Gain) loss on sale of assets
|
(93,949 | ) | 81,988 | 179,605 | |||||||||||
|
Realized gain on sale of marketable securities
|
(18,780 | ) | — | — | |||||||||||
|
Write-off of patents
|
50,534 | — | — | ||||||||||||
|
Gain on sale of land
|
— | — | (1,666,132 | ) | |||||||||||
|
Deferred taxes
|
3,019,605 | (488,578 | ) | (15,669,987 | ) | ||||||||||
|
Provision for losses on accounts receivable
|
52,875 | (4,829 | ) | 10,000 | |||||||||||
|
Provision for excess and obsolete inventory
|
97,942 | 283,063 | 628,248 | ||||||||||||
|
Provision for loss on purchase commitments
|
— | — | 1,114,666 | ||||||||||||
|
Stock option expense
|
626,150 | 819,507 | 1,654,302 | ||||||||||||
|
Stock compensation for services
|
— | 11,400 | 64,825 | ||||||||||||
|
Changes in operating assets and liabilities
|
|||||||||||||||
|
(Increase) decrease in assets:
|
|||||||||||||||
|
Accounts receivable
|
1,823,270 | (5,336,190 | ) | (2,819,403 | ) | ||||||||||
|
Inventories
|
(4,003,818 | ) | (670,463 | ) | 2,776,363 | ||||||||||
|
Other current assets
|
(403,943 | ) | 6,113,519 | (6,650,719 | ) | ||||||||||
|
Income tax receivable
|
156,895 | 14,735 | 36,472 | ||||||||||||
|
Note receivable
|
42,547 | (72,359 | ) | — | |||||||||||
|
Other assets
|
3,210,945 | 3,496,721 | 5,113,878 | ||||||||||||
|
Increase (decrease) in liabilities:
|
|||||||||||||||
|
Accounts payable
|
2,425,717 | 1,599,462 | 1,054,377 | ||||||||||||
|
Accrued payroll
|
(699,696 | ) | 923,536 | (138,227 | ) | ||||||||||
|
Accrued profit sharing
|
130,989 | 651,102 | 801,090 | ||||||||||||
|
Accrued taxes other than income
|
(466,057 | ) | (561,101 | ) | (139,252 | ) | |||||||||
|
Accrued expenses
|
(1,311,905 | ) | (3,878,601 | ) | 4,479,072 | ||||||||||
|
Other non-current liabilities
|
(6,230,389 | ) | (5,066,149 | ) | (7,530,977 | ) | |||||||||
|
Deferred revenue
|
(276,130 | ) | 229,504 | (1,384,887 | ) | ||||||||||
|
Accrued workers compensation
|
311,773 | 45,000 | (35,000 | ) | |||||||||||
|
Accrued product liability
|
427,360 | 177,636 | (1,080,000 | ) | |||||||||||
|
Due to Walther USA, LLC, net
|
— | — | (529,353 | ) | |||||||||||
|
Net cash provided by (used for) operating activities
|
6,441,991 | 906,702 | (1,517,872 | ) | |||||||||||
|
Cash flows provided by (used for) investing activities:
|
|||||||||||||||
|
Payments to acquire marketable securities
|
— | — | (552,673 | ) | |||||||||||
|
Proceeds from sale of marketable securities
|
1,537,273 | 34,471 | — | ||||||||||||
|
Decrease (increase) to collateralized cash deposits
|
22,673,059 | (1,160,059 | ) | (285,975 | ) | ||||||||||
|
Payments to acquire patents
|
(84,266 | ) | (64,980 | ) | (129,123 | ) | |||||||||
|
Proceeds from sale of property and equipment
|
109,075 | 26,416 | 754,300 | ||||||||||||
|
Proceeds from sale of IdentiKit
|
285,300 | — | — | ||||||||||||
|
Payments to acquire property and equipment
|
(8,423,144 | ) | (5,676,614 | ) | (4,173,418 | ) | |||||||||
|
Net cash provided by (used for) investing activities
|
16,097,297 | (6,840,766 | ) | (4,386,889 | ) | ||||||||||
|
Cash flows financing activities:
|
|||||||||||||||
|
Payment on notes payable, Tomkins
|
(27,000,000 | ) | (1,000,000 | ) | (2,000,000 | ) | |||||||||
|
Proceeds from loans and notes payable
|
18,000,000 | — | — | ||||||||||||
|
Debt Issuance Costs
|
(654,843 | ) | — | — | |||||||||||
|
Payments on loans and notes payable, related parties
|
— | — | (357,425 | ) | |||||||||||
|
Proceeds from sale of common stock under ESPP
|
244,575 | 257,729 | 281,705 | ||||||||||||
|
Proceeds from exercise of options to acquire common stock
|
736,406 | 95,486 | 150,000 | ||||||||||||
|
Payments on loans and notes payable
|
(15,294,614 | ) | (90,498 | ) | — | ||||||||||
|
Net cash used for financing activities
|
(23,968,476 | ) | (737,283 | ) | (1,925,720 | ) | |||||||||
|
Net decrease in cash and cash equivalents
|
(1,429,188 | ) | (6,671,347 | ) | (7,830,481 | ) | |||||||||
|
Cash and cash equivalents, beginning of year
|
5,510,663 | 12,182,010 | 20,012,491 | ||||||||||||
|
Cash and cash equivalents, end of year
|
$ | 4,081,475 | $ | 5,510,663 | $ | 12,182,010 | |||||||||
|
Supplemental disclosure of cash flow information
|
|||||||||||||||
|
Cash paid for:
|
|||||||||||||||
|
Interest, related parties
|
$ | 1,570,563 | $ | 2,670,250 | $ | 2,700,000 | |||||||||
|
Interest, other
|
$ | 904,835 | $ | 682,125 | $ | 877,500 | |||||||||
|
Income taxes
|
$ | 228,992 | $ | 123,742 | $ | 20,061 | |||||||||
|
Non-cash transactions:
|
|||||||||||||||
|
Note receivable from sale of land
|
$ | — | $ | — | $ | 1,000,000 | |||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Organization |
Organization — We were incorporated on
June 17, 1991 in the state of Nevada. We were a development
stage company for a number of years.
Effective October 20, 1998, we acquired the assets of
Saf-T-Hammer, Inc. and changed our name to Saf-T-Hammer
Corporation. The acquisition was accounted for under the
purchase method. We issued 1,331,250 shares of common stock
in the Saf-T-Hammer acquisition, which resulted in a total of
1,864,038 shares of common stock being issued and
outstanding.
Smith & Wesson Corp. was incorporated under the laws of
the state of Delaware on January 13, 1987. Smith &
Wesson Corp. and its predecessors have been in business since
1852. Since its formation, it has undergone several ownership
changes. On June 9, 1987, Tomkins Corporation
(“Tomkins”), a company organized under the laws of the
state of Delaware and a subsidiary of U.K.-based Tomkins PLC,
acquired Smith & Wesson Corp. from Lear Siegler.
On May 11, 2001, we purchased all of the outstanding stock
of Smith & Wesson Corp. from Tomkins for $15,000,000.
(See Note 2 — “Acquisition of
Smith & Wesson Corp.”). At a special meeting of
stockholders held on February 14, 2002, our stockholders
approved a change of our company’s name to
“Smith & Wesson Holding Corporation.”
| 2. | Acquisition of Smith & Wesson Corp. |
The Acquisition — The purchase price paid by us
for Smith & Wesson Corp was as follows:
| $5 million, which was paid at the closing in cash (See the “Melby Loan”); | |
| $10 million due on or before May 11, 2002 pursuant to the terms of an uncollateralized promissory note issued by us to Tomkins (the “Acquisition Note”) providing for interest at a rate of 9% per year, and; | |
| A receivable of $464,500 due from Tomkins to us. | |
| The purchase price resulted from negotiations between Tomkins and us. This acquisition was accounted for under the purchase method pursuant to APB 16, “Business Combinations.” A summary of the net assets acquired is as follows: |
|
Acquisition cost:
|
||||||
|
Cash paid on May 11, 2001
|
$ | 5,000,000 | ||||
|
Note payable, Tomkins, repaid by April 30, 2002
|
10,000,000 | |||||
|
Total consideration
|
15,000,000 | |||||
|
As of May 11, 2001:
|
||||||
|
Cash and cash equivalents acquired
|
$ | 48,598,168 | ||||
|
Accounts receivable
|
7,733,517 | |||||
|
Inventory
|
24,258,858 | |||||
|
Collateralized cash deposits
|
5,150,000 | |||||
|
Other current assets
|
1,976,862 | |||||
|
Due from Tomkins Corporation
|
7,699,500 | |||||
|
Property, plant, and equipment
|
1,582,773 | |||||
|
Intangibles
|
828,964 | |||||
|
Other long-term assets
|
13,991,700 | |||||
| $ | 111,820,342 | |||||
F-7
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
Liabilities assumed:
|
||||
|
Accounts payable and accrued expenses
|
$ | 21,252,449 | ||
|
Deferred revenue
|
1,612,707 | |||
|
Other non-current liabilities
|
23,955,186 | |||
|
Note payable, Tomkins
|
50,000,000 | |||
| 96,820,342 | ||||
|
Net assets acquired
|
$ | 15,000,000 | ||
Acquisition Note — Pursuant to the acquisition
agreement with Tomkins, we issued a promissory note in the
amount of $10 million as partial consideration for the
acquisition of Smith & Wesson Corp. During March 2002,
we obtained a bank loan (See Note 5) and paid off the
entire loan balance.
Tomkins Note — The acquisition agreement
required us to guarantee the obligations of Smith &
Wesson Corp. to Tomkins under a promissory note issued on
April 30, 1997 by Smith & Wesson Corp. to Tomkins
(the “Tomkins Note”). The Tomkins Note originally was
in the amount of $73,830,000, was due on April 30, 2004,
and bore interest at the rate of 9% per annum. Prior to the
acquisition, Tomkins contributed $23,830,000 of the Tomkins Note
to the capital of Smith & Wesson Corp., leaving a
balance of $50,000,000. Immediately subsequent to the
acquisition, we paid $20,000,000 of the Tomkins Note. We repaid
an additional $2,000,000 of the outstanding principal balance in
April 2003, another $1,000,000 in July 2003, and repaid the
remaining balance in January 2005.
The Melby Loan — We obtained financing in the
amount of $5 million from an individual pursuant to a
Promissory Note and Loan Agreement dated May 6, 2001
between us and this individual (the “Melby Note”).
Interest accrued on the Melby Note at a rate of 12% per
annum until maturity on May 15, 2002. Under the terms of
the Melby Note, we prepaid the annual interest of $600,000 at a
rate of 12% on May 14, 2001. Related to this loan, we also
granted warrants described below to purchase an aggregate of
approximately 8,700,000 shares of common stock at exercise
prices ranging from $0.40 per share to $2.00 per share.
In consideration for the Melby loan, we issued to Colton Melby,
formerly the President and Chief Operating Officer and currently
a director of our company, a common stock purchase warrant dated
May 6, 2001 (the “Melby Warrant”). The Melby
Warrant provided for 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,
at anytime from the date of issuance until six years from the
date of issuance. Also in consideration for the Melby loan, we
issued common stock purchase warrants; each dated May 11,
2001, to three affiliates of Mr. Melby (the “Affiliate
Warrants”). The Affiliate Warrants provided for each holder
to purchase at any time from the date of issuance until one year
from the date of issuance 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. As a portion of a
finder’s fee for arranging the Melby loan, we issued common
stock purchase warrants; each dated May 11, 2001, to two
unrelated parties (the “Finders Warrants”). The
Finders Warrants provided for each holder to purchase up to
354,725 shares of common stock at an exercise price of
$1.00 per share at any time between the date of issuance
and two years from the date of issuance. We relied upon
Section 4(2) of the Securities Act with respect to the
issuance of all of these warrants and the underlying shares. All
of the warrants were exercised in full, including by way of the
repayment of the Melby Note.
| 3. | Significant Accounting Policies |
Use of Estimates — The preparation of our
consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America
requires us to make estimates and
F-8
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and
liabilities at the financial statement dates and the reported
amounts of revenues and expenses during the reporting periods.
Our significant estimates include accruals for warranty, product
liability, workers compensation, environmental liability, excess
and obsolete inventory and medical claims payable. Actual
results could differ from those estimates.
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. (United States),
Smith & Wesson, Inc. (United States), and Lost Coast
Ventures, Inc. (inactive). All significant intercompany accounts
and transactions have been eliminated in consolidation.
Fair Value of Financial Instruments — Unless
otherwise indicated, the fair values of all reported assets and
liabilities, which represent financial instruments, not held for
trading purposes, approximate the carrying values of such
amounts.
Cash and Cash Equivalents — Cash and cash
equivalents include highly liquid debt instruments with
maturities of three months or less, at the date of purchase,
which are not collateralizing any corporate obligations. We
maintain our cash in bank deposit accounts, which, at times, may
exceed federally insured limits. We have not experienced any
losses in such accounts.
Marketable Securities — Marketable securities
in fiscal 2004 consisted of mutual funds. In accordance with
Statement of Financial Accounting Standards No. 115,
“Accounting for Certain Investments in Debt and Equity
Securities,” we determine the appropriate classification of
debt and equity securities presented as marketable securities at
the time of purchase and re-evaluate such designation as of each
balance sheet date. All marketable securities are classified as
available-for-sale. Securities classified as available-for-sale
are required to be reported at fair value with unrealized gains
and losses, net of taxes, excluded from earnings and shown
separately as a component of accumulated other comprehensive
income within stockholders’ equity. Realized gains and
losses on the sale of securities available-for-sale are
determined using the specific identification method.
Trade Receivables — We extend credit to our
domestic customers and some foreign distributors based on their
financial condition. Discounts are offered for early payment.
When extension of credit is not advisable, we rely on either a
prepayment or a letter of credit. Past due balances are placed
for collection with an outside agency after 90 days.
Balances deemed uncollectible by us are written off against our
allowance for doubtful accounts.
Concentrations of Credit Risk — Financial
instruments that potentially subject us to concentration of
credit risk consist principally of cash, cash equivalents,
short-term investments, and trade receivables. We place our
cash, cash equivalents, and short-term investments in
high-quality financial institutions and instruments.
Concentrations of credit risk with respect to trade receivables
are limited by the large number of customers comprising our
customer base and their geographic and business dispersion. We
perform ongoing credit evaluations of our customers’
financial condition and generally do not require collateral.
Inventories — Inventories, consisting primarily
of finished firearms components, finished firearms, and related
products and accessories, are valued at the lower of cost, using
the first-in, first-out (FIFO) method, or market. An
allowance for potential non-saleable inventory due to excess
stock or obsolescence is provided based upon a detailed review
of inventory components, past history, and expected future usage.
Deferred Revenues — Deferred revenues represent
deposits and prepayments from customers for products and
services for which the revenue is not yet recognizable, because
the risks and rewards of ownership have not yet transferred to
the customer. We expect to have earned such revenues fully
within a 12-month period, and they will be recognized into
revenues at that time.
F-9
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In fiscal 2004, we offered a promotion to our distributors that
provided them a free gun with the purchase of six others. A
portion of revenue was deferred and not recognized until the
free gun was shipped.
Other Comprehensive Income — Statement of
Financial Accounting Standards No. 130, “Reporting
Comprehensive Income”, requires companies to report all
components of comprehensive income in their financial
statements, including all non-owner transactions and events that
impact their equity, even if those items do not directly affect
net income (loss). Comprehensive income (loss) consists of net
income (loss) and unrealized gains (losses) on available for
sale securities, net of tax, and accordingly, consolidated
statements of operations and other comprehensive income (loss)
are presented.
Property, Plant, and Equipment — Property,
plant, and equipment, consisting of land, building,
improvements, machinery, equipment, computers, furniture, and
fixtures, are recorded at cost and are depreciated using the
straight-line method over their estimated useful lives.
Expenditures for maintenance and repairs are charged to earnings
as incurred; additions, renewals, and betterments are
capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts, and any
gain or loss is included in operations. A summary of the
estimated useful lives is as follows:
| Description | Useful Life | |||
|
Building and improvements
|
10 to 40 years | |||
|
Machinery and equipment
|
2 to 10 years | |||
|
Furniture and fixtures
|
2 to 10 years | |||
|
Computers and software
|
3 to 5 years | |||
We capitalize tooling, dies, and fixtures as part of machinery
and equipment, and depreciate them over a period not exceeding
five years.
Intangible Assets — Intangible assets are
amortized over their estimated useful lives, which range from
three to 30 years. See Note 12 for additional
information regarding intangible assets.
Valuation of Long-lived Assets — We evaluate
the recoverability of long-lived assets, or asset groups,
whenever events or changes in circumstances indicate that
carrying amounts may not be recoverable. Should such evaluations
indicate that the related future undiscounted cash flows are not
sufficient to recover the carrying values of the assets, such
carrying values would be reduced to fair value and this adjusted
carrying value would become the asset’s new cost basis.
Fair value is determined primarily using future anticipated cash
flows that are directly associated with and that are expected to
arise as a direct result of the use and eventual disposition of
the asset, or asset group, discounted using an interest rate
commensurate with the risk involved. We have determined that
there were no impairments to long-lived assets in fiscal 2005,
2004 and 2003.
Revenue Recognition — We recognize revenue from
product sales when the earnings process is complete and the
risks and rewards of ownership have transferred to the customer,
which is generally upon shipment.
The substantial portion of our revenues are from product sales.
We also provide tooling, forging, heat treating, finishing,
plating, and engineering support services to customers; we
recognize such revenues when accepted by the customer, when no
further contingencies or material performance obligations exist,
and when collectibility is reasonably assured, thereby earning
us the right to receive and retain payments for services
performed and billed.
We recognize trademark licensing revenues for all individual
licensees on a quarterly basis based on actual receipts from
licensees. This revenue consists of minimum royalties and/or a
percentage of a licensee’s sales on licensed products.
Under our current licensing agreements, these revenues are
payable on a calendar quarter basis. Fees received upon initial
signing of license agreements are recognized as revenues. As a
result
F-10
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
of a combination of uncertain factors, regarding existing
licensees, including current and past payment performance,
market acceptance of the licensee’s product and
insufficient historical experience, we believe that reasonable
assurance of collectibility does not exist based on the results
and past payment performance of licensees in general. Therefore,
we do not initially recognize minimum royalty payments, but
instead record such revenue when the minimum royalty is paid. As
of April 30, 2005, minimum royalties to be collected in the
future amounted to approximately $6.1 million is as follows:
| Minimum | ||||
| For the Years Ended April 30, | Royalty | |||
|
2006
|
$ | 1,120,600 | ||
|
2007
|
$ | 1,294,800 | ||
|
2008
|
$ | 1,179,500 | ||
|
2009
|
$ | 693,500 | ||
|
2010
|
$ | 624,900 | ||
|
Thereafter
|
$ | 1,165,100 | ||
| $ | 6,078,400 | |||
Segment Information — Statement of Financial
Accounting Standards No. 131, “Disclosures about
Segments of an Enterprise and Related Information” requires
public companies to report financial and descriptive information
about their reportable operating segments. We identify our
operating segments based on how we internally evaluate separate
financial information, business activities, and management
responsibility. At the present time, we believe we operate in a
single business segment. Through April 30, 2005, 2004, and
2003, there have been no material foreign operations.
| For the Years Ended April 30, | ||||||||||||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||||||||||||
| Net Sales | % of Total | Net Sales | % of Total | Net Sales | % of Total | |||||||||||||||||||
| (Millions) | (Millions) | (Millions) | ||||||||||||||||||||||
|
Firearms
|
$ | 113.6 | 91.6 | % | $ | 102.3 | 86.8 | % | $ | 80.4 | 81.6 | % | ||||||||||||
|
Specialty services
|
3.5 | 2.8 | 5.0 | 4.2 | 7.9 | 8.0 | ||||||||||||||||||
|
Handcuffs
|
4.3 | 3.5 | 5.5 | 4.7 | 5.4 | 5.5 | ||||||||||||||||||
|
Other products and services
|
2.6 | 2.1 | 5.1 | 4.3 | 4.8 | 4.9 | ||||||||||||||||||
|
Total net product sales
|
$ | 124.0 | 100.0 | % | $ | 117.9 | 100.0 | % | $ | 98.5 | 100.0 | % | ||||||||||||
Research and Development — We engage in both
internal and external research and development (R&D) in
order to remain competitive and to exploit possible untapped
market opportunities. Prospective R&D projects are approved
by executive management after analysis of the cost and benefits
associated with the potential product. Costs in R&D expense
include, among other items, salaries, materials, utilities, and
administrative costs.
In fiscal 2005, we spent approximately $386,000 on research
activities relating to the development of new products. In
fiscal 2004, we spent approximately $1.3 million on
research activities, of which $441,000 related to our now
discontinued Advanced Technology product line. In fiscal 2003,
we spent $1.8 million, of which $528,000 related to
Advanced Technology. Of those annual amounts, we were reimbursed
$187,000, $787,000, and $918,000, in fiscal 2005, 2004, and
2003, respectively, by the National Institute of Justice based
on grants received by us for development of an authorized user
firearm. Both grants expired during fiscal 2005. Research and
development expense is recorded net of such reimbursement in the
financial statements.
F-11
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Earnings per Share — Basic and diluted earnings
per common share are calculated in accordance with the
provisions of Statement of Financial Accounting Standards
No. 128, “Earnings 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 warrants, if such effect is dilutive.
The following table provides a reconciliation of the restated
income (loss) amounts (see Note 24) and shares used to
determine basic and diluted earnings (loss) per share.
| For the Years Ended April 30, | ||||||||||||||||||||||||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||||||||||||||||||||||||
| Per Share | Net | Per Share | Per Share | |||||||||||||||||||||||||||||||||
| Net Income | Shares | Amount | Income | Shares | Amount | Net Income | Shares | Amount | ||||||||||||||||||||||||||||
|
Basic income (loss) earnings per share
|
$ | 5,248,956 | 31,361,009 | $ | 0.17 | $ | 832,285 | 30,719,114 | $ | 0.03 | $ | 17,225,493 | 29,860,228 | $ | 0.58 | |||||||||||||||||||||
|
Effect of dilutive stock options and warrants
|
— | 5,275,161 | (0.03 | ) | — | 5,292,286 | (0.01 | ) | — | 5,512,405 | (0.09 | ) | ||||||||||||||||||||||||
|
Diluted income (loss) earnings per share
|
$ | 5,248,956 | 36,636,170 | $ | 0.14 | $ | 832,285 | 36,011,400 | $ | 0.02 | $ | 17,225,493 | 35,372,633 | $ | 0.49 | |||||||||||||||||||||
Options to purchase 313,685 shares of our common stock
were excluded from the fiscal 2005 computation of diluted
earnings per share because the effect would be antidilutive.
Options to purchase 116,666 shares of the our common
stock were excluded from the fiscal 2004 computation of diluted
earnings per share because the effect would be antidilutive.
Options to purchase 50,000 shares of our common stock
were excluded from the fiscal 2003 computation of diluted
earnings per share because the effect would be antidilutive.
Income Taxes — The provision for income taxes
is based upon income reported in the accompanying financial
statements. Deferred income taxes reflect the impact of
temporary differences between the amounts of assets and
liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes. These deferred taxes are
measured by applying currently enacted tax laws.
Derivative Instruments — We account for
derivative instruments under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended (SFAS 133).
SFAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities and requires us to
recognize these instruments as either assets or liabilities on
the balance sheet and measure them at fair value.
Stock Options and Warrants — As described in
Notes 18 and 19, we have issued stock warrants and
have stock option plans under which employees and directors
receive options to purchase our common stock. During the fourth
quarter of fiscal 2005, we early adopted Statement of Financial
Accounting Standards No. 123(R), “Share-Based Payment
(Revised 2004)” (SFAS 123(R)), utilizing the modified
retrospective application method for all periods presented.
Prior to the early adoption of SFAS 123(R), we applied the
provisions of APB Opinion No. 25, “Accounting for
Stock Issued to Employees” and related interpretations
(APB 25). The impact of the early adoption of
SFAS 123(R) for our stock options and warrants is disclosed
in further detail in Note 24.
Product Liability — We provide reserves for
potential product liability defense costs based on estimates
determined in consultation with litigation counsel, exclusive of
any insurance reimbursements. Adjustments to the provision for
product liability are evaluated on an on-going basis and are
charged or credited to cost of sales. This evaluation is based
upon information regarding potential and existing product
F-12
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
liability cases. Any future costs as a result of this evaluation
are recorded when considered both probable and reasonably
estimable. Certain product liability costs are subject to
reimbursement by insurance carriers.
Environmental Liability — We have provided
reserves, on an undiscounted basis, for potential environmental
obligations that we consider probable and for which reasonable
estimates of such obligations can be made. Environmental
liabilities are considered probable based upon specific facts
and circumstances, including currently available environmental
studies, existing technology, currently enacted laws and
regulations, the timing of future expenditures, experience in
remediation efforts, direction or approval from regulatory
agencies, our 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. We believe that we have 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.
| Environmental Liability Reserve | ||||||||
| Site | April 30, 2005 | April 30, 2004 | ||||||
|
Southfield
|
$ | 1,545,000 | $ | 1,545,000 | ||||
|
Westfield
|
305,000 | 305,000 | ||||||
|
Fire Pond
|
1,238,000 | 1,238,000 | ||||||
|
Wildcat
|
25,000 | 116,000 | ||||||
|
Chlorinated Release
|
26,000 | 100,000 | ||||||
|
Academy
|
578,000 | 578,000 | ||||||
|
Total
|
$ | 3,717,000 | $ | 3,882,000 | ||||
Environmental expense (income) for the fiscal years ended
April 30, 2005, 2004, and 2003 amounted to approximately
($44,500), ($11,045), and $0, respectively.
Warranty — We generally provide a lifetime
warranty to the “original” purchaser of our new
firearms products. Estimated warranty obligations are provided
for in the period in which the related revenue is recognized. We
quantify and record an estimate for warranty related costs based
on our actual historical claims experience and the current
repair costs. Adjustments are made to accruals as warranty claim
data and historical experience warrant. Should we experience
actual claims and repair costs that are higher than the
estimated claims and repair costs used to calculate the
provision, our operating results for the period or periods in
which such returns or additional costs materialize would be
adversely impacted. Warranty expense for the fiscal years ended
April 30, 2005, 2004, and 2003 amounted to $1,539,400,
$1,591,741, and $1,194,328, respectively.
The change in accrued warranties in the fiscal years ended
April 30, 2005 and 2004 was as follows:
| For the Years Ended April 30, | ||||||||
| 2005 | 2004 | |||||||
|
Beginning balance
|
$ | 1,742,917 | $ | 1,364,220 | ||||
|
Warranties issued and adjustments to provision
|
1,539,400 | 1,591,741 | ||||||
|
Warranty claims
|
(1,642,772 | ) | (1,213,044 | ) | ||||
|
Ending balance
|
$ | 1,639,545 | $ | 1,742,917 | ||||
Sales and Promotional Related Expenses — Net
product sales are presented in the financial statements net of
customer promotional program costs that depend on the volume of
sales, which amounted to approximately $437,000, $234,000, and
$410,000 for the fiscal years ended April 30, 2005, 2004,
and 2003, respectively. We have other customer promotional
programs, the costs of which do not depend on the volume of
sales. These costs amounted to approximately $182,000, $197,000,
and $845,000 for the fiscal years ended April 30, 2005,
2004, and 2003, respectively, and are included in selling and
marketing expenses.
F-13
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Co-Op Advertising — We have a co-op advertising
program at the retail level. Costs amounting to approximately
$670,000, $797,000, and $482,000 in fiscal 2005, 2004, and 2003,
respectively, were expensed as selling and marketing expenses.
Shipping and Handling — In the accompanying
financial statements, amounts billed to customers for shipping
and handling are included in net product sales. Our costs
relating to shipping and handling charges are included in cost
of goods sold.
Insurance Reserves — We are self-insured
through retentions or deductibles for the majority of our
workers’ compensation, automobile, general liability,
product liability, and group health insurance programs.
Self-insurance amounts vary up to $2,000,000 per
occurrence. Our liability for estimated premiums and incurred
losses are actuarially determined and recorded in the
accompanying consolidated financial statements on an
undiscounted basis.
Recently issued accounting standards — In
November 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 151, “Inventory Costs, an amendment of ARB
No. 43, Chapter 4” (FAS 151). FAS 151
clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material.
Additionally, FAS 151 requires that allocation of fixed
production overhead to inventory be based on the normal capacity
of the production facilities. The provisions of FAS 151 are
applicable to inventory costs incurred during fiscal years
beginning after June 15, 2005. The adoption of this
statement is not expected to have a material effect on the
Company’s consolidated financial position, results of
operations or cash flows.
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 153, “Exchanges of
Nonmonetary Assets, an amendment to APB Opinion
No. 29” (FAS 153). The Statement eliminates the
exception to measure exchanges at fair value for exchanges of
similar productive assets and replaces it with a general
exception for exchange transactions that do not have commercial
substance. FAS 153 is effective for nonmonetary exchanges
in fiscal periods beginning after June 15, 2005. The
adoption of this statement is not expected to have a material
effect on the Company’s consolidated financial position,
results of operations or cash flows.
Reclassification of financial information —
Certain prior year components of the consolidated financial
statements have been reclassified to be consistent with the
current year presentation.
| 4. | Financial Instruments |
Marketable Securities — consist entirely of
mutual funds and are “available for sale.” The change
in unrealized gain (loss) on marketable securities (mutual
funds) was $0, ($11,489), and $36,543 for the fiscal years ended
April 30, 2005, 2004 and 2003.
| April 30, | ||||||||||||||||
| 2005 | 2004 | |||||||||||||||
| Cost | Fair Value | Cost | Fair Value | |||||||||||||
|
Mutual funds
|
$ | — | $ | — | $ | 1,550,227 | $ | 1,538,738 | ||||||||
Collateralized Cash Deposits — consist entirely
of money market funds. A summary of money market funds as of
April 30, 2005 and 2004 is as follows:
| April 30, 2005 | April 30, 2004 | |||||||
|
Money market funds
|
$ | — | $ | 23,010,644 | ||||
|
Amount classified as cash equivalents
|
— | 337,585 | ||||||
|
Amount classified as collateralized cash deposits
|
$ | — | $ | 22,673,059 | ||||
F-14
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Collaterized cash deposits were required as of April 30,
2005 and 2004 for the follows:
| April 30, 2005 | April 30, 2004 | |||||||
|
BankNorth note
|
— | 14,909,503 | ||||||
|
Letters of credit
|
— | 5,093,556 | ||||||
|
Foreign exchange exposure
|
— | 2,250,000 | ||||||
|
ACH exposure
|
— | 420,000 | ||||||
|
Total collaterized cash deposits
|
$ | — | $ | 22,673,059 | ||||
Our prior bank loan agreement (See Note 5) obligated us to
maintain a collateral balance equal to the face amount of the
bank loan, plus any open letters of credit, plus foreign
exchange exposure, plus any automated clearing house
“ACH” exposure. Accordingly, we presented
collateralized cash deposits of $22,673,059 as of April 30,
2004 as a non-current asset on the accompanying consolidated
balance sheet. As part of the refinancing completed in January
2005, the collateralized cash deposits were utilized to reduce
the outstanding debt (See Note 5).
| 5. | Long-term Debt and Financing Arrangements |
| Debt Refinancing — |
In January 2005, we completed the refinancing of our existing
debt utilizing our receivables, inventory, and equipment as
collateral. The financing was obtained through BankNorth, with
which we had previous loans. As a result of our refinancing, we
were able to repay the Tomkins Note, which had an interest rate
of 9% per year and restrictive covenants, along with the
previously existing loans with BankNorth. We used the cash that
was collateralizing our existing line of credit with BankNorth
toward the repayment of the Tomkins Note.
The new bank credit facility consists of the following:
| (1) A revolving line of credit of up to a maximum amount of the lesser of (a) $17 million; or (b) (i) 85% of the net amount of Borrower’s Eligible Receivables; (ii) plus the lesser of $6 million or 70% of Eligible Raw Materials Inventory; plus (iii) 60% of Eligible Finished Goods Inventory; and (iv) 40% of Eligible Finished Parts Inventory, which will be available until September 30, 2007 for working capital needs. The revolving line of credit bears interest at a variable rate equal to prime or LIBOR plus 250 basis points (the 250 basis point LIBOR spread may be reduced if we meet certain targets with respect to our maximum leverage). There were no amounts outstanding as of April 30, 2005. | |
| (2) A seven-year, $12.1 million term loan which bears interest at a rate of 6.23% per annum. The monthly payment is $178,671, with the final payment due January 11, 2012. | |
| (3) A ten-year, $5.9 million term loan bearing interest at a rate of 6.85% per annum. The monthly payment is $45,525, through December 11, 2014 with a balloon payment due on January 11, 2015 of $3,975,611. | |
| (4) A $5 million credit arrangement for capital expenditures commencing May 1, 2005, which will bear interest at a variable rate until April 30, 2006 equal to either prime or LIBOR plus 250 basis points (the 250 basis point LIBOR spread may be reduced if we meet certain targets with respect to our maximum leverage), and then either a variable rate equal to LIBOR plus 250 basis points (the 250 basis point LIBOR spread may be reduced if we meet certain targets with respect to their maximum leverage), or a fixed rate equal to the Federal Home Loan Bank of Boston Rate as of April 30, 2006 plus 200 basis points, in each case with the applicable rate selected by us. The aggregate availability of the Equipment Line of Credit Loan will cease on April 30, 2006, at which time any unpaid outstanding principal balance |
F-15
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| and interest will become due and payable in monthly installments over a period of seven years. There were no amounts outstanding as of April 30, 2005. |
Debt issuance costs related to the aforementioned refinancing
amounted to $654,843, of which $33,352 was amortized to expense
during the fiscal year ended April 30, 2005. Future
amortization of expense is as follows: fiscal year 2006 is
$114,002, 2007 is $110,717, 2008 is $97,466, 2009 is $82,865,
2010 is $67,602 and thereafter $148,839.
| Bank Loan (repaid January 2005) — |
In March 2002, we entered into a specific purpose loan agreement
with our bank. Under the terms of this agreement, we borrowed
$15.0 million to pay the Acquisition Note and the Melby
Note related to the acquisition of Smith & Wesson Corp
(see Note 2.) The outstanding balance of $14.9 million
at April 30, 2004 accrued interest at a rate of
5.85% per annum and was collateralized by liquid assets up
to the face aggregate amount of the obligation. This note was
repaid in January 2005 as part of the debt refinancing.
| Tomkins Note (repaid January 2005) — |
The acquisition agreement related to our acquisition of
Smith & Wesson Corp. required us to guaranty
obligations of Smith & Wesson Corp. to Tomkins under a
promissory note issued on April 30, 1997 by
Smith & Wesson Corp. to Tomkins (the “Tomkins
Note”). The Tomkins Note originally was in the amount of
$73,830,000, was due on April 30, 2004, and bore interest
at the rate of 9% per annum. Prior to the acquisition,
Tomkins contributed $23,830,000 of the Tomkins Note to the
capital of Smith & Wesson Corp., leaving a balance of
$50,000,000. Immediately subsequent to the acquisition, we paid
$20,000,000 of the Tomkins Note. In April 2003, we made an early
repayment of $2.0 million to Tomkins to bring the principal
balance down from $30.0 million to $28.0 million. In
July 2003, we made another early repayment of $1 million to
Tomkins to bring the principal balance down to
$27.0 million. This note was repaid in January 2005 as part
of the debt refinancing.
Total long-term debt maturing in fiscal 2006, 2007, 2008, 2009,
2010, and thereafter is $1.6 million, $1.7 million,
$1.8 million, $1.9 million, $2.0 million, and
$8.6 million, respectively.
The carrying amounts of notes payable as of April 30, 2005
and 2004 were as follows:
| April 30, 2005 | April 30, 2004 | |||||||||
|
Current portion of long term debt:
|
||||||||||
|
Tomkins note
|
— | 2,900,573 | ||||||||
|
Bank note — Repaid
|
— | 1,138,883 | ||||||||
|
Bank note — Due in 2012
|
1,442,687 | — | ||||||||
|
Bank note — Due in 2015
|
143,777 | — | ||||||||
|
Total current portion
|
$ | 1,586,464 | $ | 4,039,456 | ||||||
|
Non-current portion of long term debt:
|
||||||||||
|
Tomkins note
|
— | 24,099,428 | ||||||||
|
Bank note — Repaid
|
— | 13,770,618 | ||||||||
|
Bank note — Due in 2012
|
10,312,012 | — | ||||||||
|
Bank note — Due in 2015
|
5,716,412 | — | ||||||||
|
Total non-current portion
|
$ | 16,028,424 | $ | 37,870,046 | ||||||
F-16
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The new credit facility with BankNorth contains financial
covenants relating to maintaining minimum EBITDA, maximum
leverage, minimum debt service coverage and maximum capital
expenditures. We are in compliance with the debt covenants in
2005.
| Bank Letters of credit facility — |
As of April 30, 2005 we had open letters of credit
aggregating $5.1 million compared to $5.1 million as
of April 30, 2004.
| 6. | Accounts Receivable and Major Customers |
One customer accounted for approximately 10%, 13% and 11% of our
net product sales in the fiscal years ended April 30, 2005,
2004, and 2003, respectively. This customer owed us
approximately $1,848,000, or 10% of total accounts receivable,
as of April 30, 2005 and $1,797,000, or 9% of total
accounts receivable, as of April 30, 2004.
| 7. | International Sales |
We sell our products worldwide. A breakdown of international and
export sales, which accounted for approximately 9%, 10%, and 15%
of net product sales for the fiscal years ended April 30,
2005, 2004, and 2003, respectively, is as follows:
| For the Years Ended April 30, | ||||||||||||
| Region | 2005 | 2004 | 2003 | |||||||||
|
Europe
|
$ | 5,377,000 | $ | 3,121,000 | $ | 3,893,000 | ||||||
|
Asia
|
3,581,000 | 5,434,000 | 6,741,000 | |||||||||
|
Latin America
|
951,000 | 2,029,000 | 2,982,000 | |||||||||
|
All others
|
998,000 | 1,567,000 | 694,000 | |||||||||
|
Total Net Sales
|
$ | 10,907,000 | $ | 12,151,000 | $ | 14,310,000 | ||||||
| 8. | Other Income (Expense) |
The details of other income (expense) in the fiscal years
ended April 30, 2005, 2004, and 2003, are as follows:
| For the Years Ended April 30, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
|
Currency transaction loss on euro denominated purchases,
including derivative contracts
|
(659,723 | ) | (1,132,923 | ) | (9,439 | ) | ||||||
|
Gain on sale of discontinued Identi-Kit
|
435,815 | — | — | |||||||||
|
Adjustment to fair value on derivative contracts
|
(23,203 | ) | (227,930 | ) | 187,474 | |||||||
|
Gain on sale of land
|
— | — | 1,666,132 | |||||||||
|
Other
|
126,738 | 57,894 | (55,053 | ) | ||||||||
| $ | (120,373 | ) | $ | (1,302,959 | ) | $ | 1,789,114 | |||||
| 9. | Advertising Costs |
Advertising costs, consisting primarily of magazine
advertisements and printed materials, are expensed as incurred.
In the fiscal years ended April 30, 2005, 2004, and 2003,
advertising expenses amounted to approximately $6,154,000,
$5,175,000, and $4,171,000, respectively.
F-17
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 10. | Property, Plant, and Equipment |
A summary of property, plant, and equipment as of April 30,
2005 and 2004 is as follows:
| April 30, 2005 | April 30, 2004 | |||||||
|
Machinery and equipment
|
$ | 19,761,662 | $ | 9,894,897 | ||||
|
Building and improvements
|
1,442,468 | 842,995 | ||||||
|
Land and improvements
|
258,087 | 258,087 | ||||||
| 21,462,217 | 10,995,979 | |||||||
|
Less accumulated depreciation
|
(5,490,866 | ) | (2,913,950 | ) | ||||
| 15,971,351 | 8,082,029 | |||||||
|
Construction in Progress
|
755,010 | 2,939,145 | ||||||
| $ | 16,726,361 | $ | 11,021,174 | |||||
Depreciation expense amounted to $2,702,831, $1,682,109, and
$969,779 in the fiscal years ended April 30, 2005, 2004,
and 2003, respectively.
| 11. | Inventories |
A summary of inventories, stated at lower of cost or market, as
of April 30, 2005 and 2004 is as follows:
| April 30, 2005 | April 30, 2004 | |||||||
|
Finished goods
|
$ | 7,456,857 | $ | 5,318,632 | ||||
|
Finished parts
|
8,973,434 | 8,060,833 | ||||||
|
Work in process
|
1,917,912 | 1,897,614 | ||||||
|
Raw material
|
1,544,378 | 709,626 | ||||||
| $ | 19,892,581 | $ | 15,986,705 | |||||
The changes in the reserve for excess and obsolete inventory in
the fiscal years ended April 30, 2005 and 2004 are as
follows:
| 2005 | 2004 | 2003 | ||||||||||
|
Beginning balance
|
$ | 1,960,896 | $ | 1,760,778 | 1,326,081 | |||||||
|
Additions/adjustments
|
97,942 | 283,063 | 628,248 | |||||||||
|
Write-offs
|
(13,811 | ) | (82,945 | ) | (193,551 | ) | ||||||
|
Ending Balance
|
$ | 2,045,027 | $ | 1,960,896 | 1,760,778 | |||||||
| 12. | Intangible Assets |
Intangible assets are recorded at cost and arose principally
from our acquisition of Smith & Wesson Corp. and its
patents. The patents are being amortized using the straight-line
method over their estimated useful lives ranging from three to
20 years.
F-18
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of intangible assets is as follows:
| April 30, 2005 | April 30, 2004 | |||||||
|
Patents
|
$ | 426,940 | $ | 393,208 | ||||
|
Less accumulated amortization
|
(62,032 | ) | (41,300 | ) | ||||
| $ | 364,908 | $ | 351,908 | |||||
Amortization expense amounted to $20,732, $23,405, and $17,895
in the fiscal years ended April 30, 2005, 2004, and 2003,
respectively. Amortization expense on the patents will
approximate $25,400 annually over each of the next five fiscal
years.
| 13. | Other Assets |
Other assets consist of the following as of April 30, 2005
and 2004:
| April 30, 2005 | April 30, 2004 | |||||||
|
Receivable from insurers
|
$ | 4,168,154 | $ | 7,379,099 | ||||
|
Escrow deposit-product liability
|
100,000 | 100,000 | ||||||
|
Escrow deposit-workers compensation
|
253,901 | 253,901 | ||||||
|
Escrow deposit-dental
|
61,700 | 61,700 | ||||||
|
Debt issue costs
|
621,491 | — | ||||||
| $ | 5,205,246 | $ | 7,794,700 | |||||
| 14. | Other Non-current Liabilities |
Other non-current liabilities consist of the following as of
April 30, 2005 and 2004:
| April 30, 2005 | April 30, 2004 | |||||||
|
Product liability
|
5,501,713 | 11,458,117 | ||||||
|
Environmental
|
3,616,651 | 3,781,755 | ||||||
|
Workers compensation
|
1,221,934 | 1,025,006 | ||||||
|
Severance
|
92,374 | 333,004 | ||||||
|
Post retirement medical
|
178,418 | 280,786 | ||||||
|
Sales tax
|
227,916 | 208,033 | ||||||
|
Warranty
|
223,453 | 206,147 | ||||||
|
Other non-current liabilities
|
$ | 11,062,459 | $ | 17,292,848 | ||||
Severance payments will continue through January 2009.
| 15. | Derivative Financial Instruments and Hedging Activities |
We purchase certain finished goods and component parts from a
European supplier and pay for them in euros. We have purchased
foreign exchange contracts to minimize the impact of
fluctuations in foreign exchange rates. We have not elected to
designate our derivative instruments as qualifying for hedge
accounting treatment under SFAS 133, and accordingly gains
and losses from these derivative contracts are expensed
currently as an element of other income (expense). The fair
values of the derivative financial instruments are estimated
based on the exchange rates of the underlying currency.
The fair value of all outstanding derivatives was a liability of
approximately $64,000 as of April 30, 2005 and $40,000 as
of April 30, 2004. Current derivative instruments expire in
October 2005.
F-19
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 16. | Self-Insurance Reserves |
As of April 30, 2005 and 2004, we had reserves for
workers’ compensation, product liability, and
medical/dental costs totaling $10,658,339 and $15,584,507,
respectively, of which, $6,723,647 and $12,483,123,
respectively, have been classified as non-current and included
in other non-current liabilities and the remaining amounts of
$3,934,692 and $3,101,384, respectively, are included in accrued
expenses on the accompanying consolidated balance sheet. While
we believe these reserves to be adequate, it is possible that
the ultimate liabilities will exceed such estimates. Amounts
charged to expense were $4,993,438 and $5,454,233 in the fiscal
years ended April 30, 2005 and 2004, respectively.
Following is a summary of the activity in the workers’
compensation, product liability and medical/dental reserves in
the fiscal years ended April 30, 2005 and 2004:
| For the Years Ended April 30, | ||||||||
| 2005 | 2004 | |||||||
|
Beginning balance
|
$ | 15,584,507 | $ | 24,181,712 | ||||
|
Provision, net of reserve adjustments
|
3,255,956 | 5,454,233 | ||||||
|
Payments
|
(5,596,597 | ) | (7,028,773 | ) | ||||
|
Reduction in liability (offset by a reduction to receivable from
insurance carrier)
|
(2,585,527 | ) | (7,022,665 | ) | ||||
|
Ending balance
|
$ | 10,658,339 | $ | 15,584,507 | ||||
It is our policy to provide an estimate for loss as a result of
expected adverse findings or legal settlements when such losses
are probable and are reasonably estimable. It is also our policy
to accrue for reasonably estimable legal costs associated with
defending such litigation. While such estimates involve a range
of possible costs, we determine, in consultation with litigation
counsel, the most likely cost within such range on a
case-by-case basis. As of April 30, 2005 and 2004, we had
accrued reserves for product liability of approximately
$8.0 million and $13.6 million, respectively (of which
approximately $5.5 million and $11.5 million
respectively, are non-current), consisting entirely of expected
legal defense costs.
| 17. | Restructuring and Dispositions |
In January 2004, we decided to close our Scottsdale corporate
office and transfer the executive office functions, along with
our licensing operations, to our Springfield, Massachusetts
facility. We also decided to discontinue our Crossings catalog,
as well as to discontinue our Advanced Technology product line.
As a result, we incurred a one-time charge of approximately
$1.0 million in fiscal 2004. Severance costs relative to
the closing of the Scottsdale corporate headquarters were
approximately $804,000. The remaining $196,000 were costs to
discontinue our Crossings catalog and advanced technology
product lines.
A summary of the activity in the accrued restructuring liability
for the fiscal year ended April 30, 2005 is as follows:
|
Beginning Balance
|
365,728 | ||||
|
Costs — Accrued
|
— | ||||
|
Costs — Paid or Settled
|
(402,979 | ) | |||
|
Adjustment to Original Estimate
|
37,251 | ||||
|
Ending Balance
|
$ | — | |||
On June 3, 2004, we completed the sale of certain net
assets associated with our Identi-Kit product line to Copia
Partners, LLC d/b/a Identi-Kit Solutions, a limited liability
company, whose principals are former employees of ours, for
$300,000 in cash and a 6% license fee on future net revenue, as
defined, of the product
F-20
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
line. The effective date of the sale was May 1, 2004. Under
terms of the agreement, we retain ownership of the tradename
Identi-Kit and granted the buyer a 10-year renewable license.
The gain on the sale of this product line amounted to
approximately $436,000.
| 18. | Capital Stock |
| Common stock issued — |
During the fiscal year ended April 30, 2005, we issued
647,216 shares of common stock having a market value of
$1,238,072 to current and former employees upon the exercise of
options granted to them while employees of our company. The
proceeds from the exercise of these shares was $736,406.
During the fiscal year ended April 30, 2005, we issued
191,002 shares of common stock having a market value of
$373,798 under our employee stock purchase plan. The proceeds
from the exercise of these shares was $244,575.
During the fiscal year ended April 30, 2005, we issued
200,000 shares of common stock having a market value of
$498,000 to a former employee and current director upon the
cashless exercise of warrants granted to him while an employee
of our company.
During the fiscal year ended April 30, 2004, we issued
65,075 shares of common stock having a market value of
$116,738 to current and former employees upon the exercise of
options granted to them while employees of our company. The
proceeds from the exercise of these shares was $58,187.
During the fiscal year ended April 30, 2004, we issued
226,096 shares of common stock having a market value of
$404,342 under our employee stock purchase plan. The proceeds
from the exercise of these shares was $257,729.
During the fiscal year ended April 30, 2004, we issued
25,000 shares of common stock having a market value of
$48,700 to an unrelated third party upon the exercise of
options. The proceeds from the exercise of these shares were
$37,300. The difference was recorded as consulting expense.
In October 2002, we issued 67,117 shares of common stock
having a market value of $89,266 under our employee stock
purchase plan. The proceeds from exercise of these shares was
$76,012.
In November 2002, we issued 4,700 shares of common stock
having a market value of $8,037 to an employee to settle $5,875
in compensation due him. These shares were valued at
$1.25 per share.
In November 2002, we issued 50,000 shares of common stock
to an unrelated third party as part of a litigation settlement.
In February 2003, we issued 165,032 shares of common stock
to an individual upon the exercise of a warrant, which had an
exercise price of $1.00 per share.
In March 2003, we issued an aggregate of 300,000 shares of
common stock to two unrelated parties upon the exercise of
warrants. The warrants had an exercise price of $.50 per
share.
In March 2003, we issued 149,681 shares of common stock to
a former executive officer of our company upon the exercise of a
warrant, which had an exercise price of $1.00 per share.
In March 2003, we issued 24,000 shares of common stock
having a market value of $40,800 to a former employee upon the
exercise of options granted to him while an employee of our
company. The proceeds from exercise of these shares was $19,440.
In March 2003, we issued 10,000 shares of common stock
having a market value of $15,700 to a current director of our
company upon the exercise of options granted to him. The
proceeds from exercise of these shares was $11,800.
F-21
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In April 2003, we issued 42,666 shares of common stock
having a market value of $65,279 to a former employee upon the
exercise of options granted to him while an employee of our
company. The proceeds from exercising of these shares was
$34,560.
In April 2003, we issued 122,819 shares of common stock
having a market value of $192,826 under our employee stock
purchase plan. The proceeds from exercising these shares was
$139,893.
| Stock Warrants Issued — |
In fiscal 2002, we 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.
In consideration for past services to our company, including
services rendered in connection with the acquisition of
Smith & Wesson Corp., we issued a common stock purchase
warrant, dated May 11, 2001 (approved by the Board of
Directors on April 30, 2001), to Mitchell Saltz, formerly
Chief Executive Officer and currently a director of our company
(the “Saltz Warrant”). The Saltz Warrant, which
contained a cashless exercise provision, 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, at any time from the date of issuance until
five years from the date of issuance. We relied upon
Section 4(2) of the Securities Act with respect to the
issuance of the Saltz Warrant and the underlying shares.
In consideration for past services to our company, including
services rendered in connection with the acquisition of
Smith & Wesson Corp., we issued a common stock purchase
warrant, dated May 11, 2001 (approved by the Board of
Directors on April 30, 2001), to Robert L. Scott, a former
officer and current director of our company (the “Scott
Warrant”). The Scott Warrant, which contained a cashless
exercise provision, entitles Mr. Scott 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, at any time from the date of issuance until five years
from the date of issuance. We relied upon Section 4(2) of
the Securities Act with respect to the issuance of the Scott
Warrant and the underlying shares.
The following outlines the activity related to the warrants for
the periods indicated:
| 2005 | 2004 | 2003 | ||||||||||||||||||||||
| Weighted- | Weighted- | Weighted- | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Exercise | Exercise | Exercise | ||||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
|
Warrants outstanding, beginning of year
|
10,000,000 | $ | 0.89 | 10,000,000 | $ | 0.89 | 11,159,450 | $ | 0.89 | |||||||||||||||
|
Granted during the year
|
— | — | — | — | — | — | ||||||||||||||||||
|
Exercised during the year
|
(311,250 | ) | $ | 0.89 | — | — | (1,009,450 | ) | $ | 0.85 | ||||||||||||||
|
Canceled/forfeited during the the year
|
— | — | — | — | (150,000 | ) | $ | 5.00 | ||||||||||||||||
|
Warrants outstanding, end of year
|
9,688,750 | $ | 0.89 | 10,000,000 | $ | 0.89 | 10,000,000 | $ | 0.89 | |||||||||||||||
|
Shares exercisable, end of year
|
9,688,750 | $ | 0.89 | 10,000,000 | $ | 0.89 | 10,000,000 | $ | 0.89 | |||||||||||||||
|
Weighted average remaining life (years)
|
1.1 | 2.1 | 3.1 | |||||||||||||||||||||
F-22
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 19. | Stock Option and Employee Stock Purchase Plans |
We have two Employee Stock Option Plans (“the SOPs”):
the 2001 Stock Option Plan and the 2004 Incentive Compensation
Plan. New grants under the 2001 Stock Option Plan were not made
following the approval of the 2004 Incentive Compensation Plan
at our September 13, 2004 annual meeting of shareholders.
All new grants covering all participants will be issued under
the 2004 Incentive Compensation Plan. The 2004 Incentive
Compensation Plan authorizes the issuance of the lesser of
(1) 15% of the shares of our common stock outstanding from
time to time or (2) 10,000,000 shares of our common
stock, and is available for issuance pursuant to options granted
to acquire common stock, the direct granting of restricted
common stock and deferred stock, the granting of stock
appreciation rights, and the granting of dividend equivalents.
The Board of Directors or a committee established by the board
administers the SOPs, selects recipients to whom options are
granted, and determines the number of grants to be awarded.
Options granted under the SOPs are exercisable at a price
determined by the board or 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 SOPs
are nontransferable and subject to forfeiture. Unless terminated
earlier by the Board of Directors, the 2004 Incentive
Compensation Plan will terminate at such time as no shares of
common stock remain available for issuance under the plan and
our company has no further rights or obligations with respect to
outstanding awards under the plan. Unless otherwise specified by
the Board of Directors or board committee in the resolution
authorizing such option, the date of grant of an option is
deemed to be the date upon which the Board of Directors or board
committee authorizes the granting of such option. Generally,
options vest over a period of three years. Once vested, the
options are exercisable for a period of 10 years. We issue
shares of our common stock upon exercise of options. During the
years ended April 30, 2005, 2004, and 2003, we granted
1,015,000 options (145,000 under the 2001 Stock Option Plan,
370,000 options under the 2004 Incentive Compensation Plan and
500,000 options as a separate grant), 340,000 options (under the
2001 Stock Option Plan) and 1,202,500 options (under the 2001
Stock Option Plan), respectively.
The number and weighted average exercise prices of options
granted under the SOPs and separate grant for the fiscal years
ended April 30, 2005, 2004, and 2003 are as follows:
| For the Years Ended April 30, | ||||||||||||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||||||||||||
| Weighted- | Weighted- | Weighted- | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Exercise | Exercise | Exercise | ||||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
|
Options outstanding, beginning of year
|
2,389,092 | $ | 1.17 | 2,542,500 | $ | 1.10 | 1,550,000 | $ | 0.81 | |||||||||||||||
|
Granted during the year
|
1,015,000 | $ | 1.57 | 340,000 | $ | 1.81 | 1,202,500 | $ | 1.43 | |||||||||||||||
|
Exercised during the year
|
(647,216 | ) | $ | 1.14 | (90,075 | ) | $ | 1.06 | (76,666 | ) | $ | 0.86 | ||||||||||||
|
Canceled/forfeited during the year
|
(289,751 | ) | $ | 1.53 | (403,333 | ) | $ | 1.28 | (133,334 | ) | $ | 0.81 | ||||||||||||
|
Options outstanding, end of year
|
2,467,125 | $ | 1.30 | 2,389,092 | $ | 1.17 | 2,542,500 | $ | 1.10 | |||||||||||||||
|
Shares exercisable, end of year
|
1,397,539 | $ | 1.08 | 1,689,102 | $ | 1.15 | 1,112,507 | $ | 1.20 | |||||||||||||||
F-23
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of stock options outstanding, vested, and exercisable
as of April 30, 2005 is as follows:
| Outstanding | Vested and Exercisable | ||||||||||||||||||||
| Number | Weighted Average | Weighted | Number | Weighted | |||||||||||||||||
| Outstanding | Remaining | Average | Exercisable at | Average | |||||||||||||||||
| at April 30 | Contractual Life | Exercise Price | April 30 | Exercise Price | |||||||||||||||||
|
Range of Exercise Prices
|
|||||||||||||||||||||
|
$0.81 - $0.81
|
871,925 | 6.50 years | $ | 0.81 | 871,925 | $ | 0.81 | ||||||||||||||
|
$1.18 - $1.47
|
905,200 | 7.97 years | $ | 1.41 | 218,534 | $ | 1.30 | ||||||||||||||
|
$1.48 - $2.61
|
690,000 | 9.18 years | $ | 1.78 | 307,080 | $ | 1.71 | ||||||||||||||
|
$0.81 - $2.61
|
2,467,125 | 7.79 years | $ | 1.30 | 1,397,539 | $ | 1.08 | ||||||||||||||
The aggregate intrinsic value for outstanding options and vested
and exercisable options as of April 30, 2005 was $3,799,010
and $2,459,669, respectively.
We have an Employee Stock Purchase Plan (“the ESPP”),
which authorizes the sale of up to 10,000,000 shares of our
common stock to employees. The ESPP commenced on June 24,
2002 and continues in effect for a term of 10 years unless
sooner terminated. The ESPP was implemented by a series of
offering periods of two years duration, with four six-month
purchase periods in the offering period. The plan was amended in
September 2004 such that future offering periods, commencing
with the October 1, 2004 offering period, will be six
months consistent with the six month purchase period. The
purchase price will be 85% of the fair market value of our
common stock on the offering date or on the purchase date,
whichever is lower. A participant may elect to have payroll
deductions made on each payday during the offering period in an
amount not less than 1% and not more than 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 last day of each
offering period will be the purchase date for such offering
period. An offering period commencing on April 1 ends on
the next September 30. An offering period commencing on
October 1 ends on the next March 31. The Board of
Directors has 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 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 is 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 will be assumed or an equivalent
option will be substituted by the successor corporation or a
parent or subsidiary of such successor corporation. During
fiscal 2005, 2004, and 2003, 191,002, 226,096 and
189,936 shares, respectively, were purchased under the ESPP
out of a total authorized of 10,000,000 shares.
F-24
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Under SFAS 123(R), a fair value for our stock options and
warrants is calculated using the Black Scholes method at the
time the options are granted. That amount is then amortized over
the vesting period of the option and warrant. With ESPP, a fair
value is determined at the beginning of the purchase period and
amortized over the term of the offering period. The following
assumptions were used in valuing our options, warrants and ESPP:
| For the Years Ended April 30, | |||||||||||||
| 2005 | 2004 | 2003 | |||||||||||
|
Stock opton grants:
|
|||||||||||||
|
Risk-free interest rate
|
4.24 | % | 3.95 | % | 3.95 | % | |||||||
|
Expected term
|
9.39 years | 8.09 years | 6.76 years | ||||||||||
|
Expected volatility
|
78.0 | % | 82.0 | % | 90.4 | % | |||||||
|
Dividend yield
|
0 | % | 0 | % | 0 | % | |||||||
|
Employee Stock Purchase Plan
|
|||||||||||||
|
Risk-free interest rate
|
2.08 | % | 1.56 | % | 1.61 | % | |||||||
|
Expected term
|
14 months | 18 months | 14 months | ||||||||||
|
Expected volatility
|
71.7 | % | 89.7 | % | 89.4 | % | |||||||
|
Dividend yield
|
0 | % | 0 | % | 0 | % | |||||||
We estimate expected volatility using historical stock values
for the equivalent term. The fair value of each stock option 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 fiscal 2005, 2004, and
2003 was $1.27, $1.46 and $1.10, respectively. The
weighted-average fair value of ESPP shares granted in fiscal
2005, 2004, and 2003 was $0.73, $0.76, and $0.70.
We recorded compensation cost for stock option and employee
stock purchase plans of approximately $626,000, $820,000, and
$1,654,000 for fiscal 2005, 2004, and 2003, respectively. The
related income tax benefit for fiscal 2005, 2004, and 2003 was
$230,000, $300,000, and $605,000.
The intrinsic value of options and warrants exercised during
fiscal 2005, 2004, and 2003 was approximately $951,000,
$205,000, and $690,000, respectively.
The total fair value of shares vested in fiscal 2005, 2004, and
2003 was approximately $4.0 million, $2.7 million, and
$1.5 million, respectively.
During fiscal 2005 and 2004, modifications to certain options
for 12 terminating employees were made to extend the exercise
period of their vested options, which resulted in additional
compensation expense being recorded of approximately $49,000 and
$51,000, respectively.
At April 30, 2005, total unrecognized compensation cost for
all option and ESPP awards was approximately $1.2 million,
which will be recognized over 4.7 years and $40,000, which
will be recognized over .4 years, respectively.
| 20. | Employer Sponsored Benefit Plans |
Contributory Defined Investment Plan — We offer
a contributory defined investment plan covering substantially
all employees who have completed at least six months of service,
as defined. Employees may contribute from 1% to 30% of their
annual pay, with us matching 50% of the first 6% of combined
pre-and post-tax compensation. We contributed approximately
$618,000 for the fiscal year ended April 30, 2005, $580,000
for the fiscal year ended April 30, 2004, and $557,000 for
the fiscal year ended April 30, 2003.
F-25
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Non-contributory Profit Sharing Plan — We also
have a non-contributory profit sharing plan. Employees are
eligible on May 1 following their completion of a full
fiscal year of continuous service. We contribute 15% of our net
operating profit before interest and taxes, as defined, to the
plan each year. For fiscal 2005, we plan to contribute
approximately $2,403,000. We contributed approximately
$2,272,000 for the fiscal year ended April 30, 2004 and
approximately $1,621,000 for the fiscal year ended
April 30, 2003. Contributions are funded after fiscal
year-end.
| 21. | Post-employment, Post-retirement, and Deferred Compensation |
Post-Retirement Medical Program — We have
certain obligations under a now terminated program that provides
health care to retirees until age 65. Employees who had a
designated combined age and years of service have been
grandfathered under the program. The grandfathered provision
provides varying degrees of coverage based upon years of
service. There are currently four retirees covered by the
program and 12 active employees who are grandfathered under the
program. The post-retirement medical liability is based upon
reports as provided by an independent actuary. The
post-retirement medical liability was approximately $227,000 as
of April 30, 2005 and approximately $313,000 as of
April 30, 2004.
The following tables sets forth the Post-retirement Medical and
Life Plan’s status and amounts recognized in our Retirement
Incentive Program:
| For the Years Ended April 30, | |||||||||
| 2005 | 2004 | ||||||||
|
Change in benefit obligation:
|
|||||||||
|
Net benefit obligation at beginning of year
|
$ | 205,356 | $ | 228,601 | |||||
|
Service cost
|
3,841 | 3,841 | |||||||
|
Interest cost
|
10,581 | 10,091 | |||||||
|
Actuarial loss/(gain)
|
50,107 | (11,220 | ) | ||||||
|
Benefits paid
|
(52,542 | ) | (25,957 | ) | |||||
|
Net benefit obligation at end of year
|
$ | 217,343 | $ | 205,356 | |||||
|
Reconciliation of funded status:
|
|||||||||
|
Funded status at end of year
|
$ | (217,343 | ) | $ | (205,356 | ) | |||
|
Unrecognized actuarial gain
|
(10,124 | ) | (108,057 | ) | |||||
|
Net amount recognized at end of year
|
$ | (227,467 | ) | $ | (313,413 | ) | |||
Net periodic post-retirement benefit (income) includes the
following components:
| 2005 | 2004 | 2003 | ||||||||||
|
Service cost
|
$ | 3,841 | $ | 3,841 | $ | 3,273 | ||||||
|
Interest cost
|
10,581 | 10,091 | 14,175 | |||||||||
|
Recognized actuarial gain
|
(47,826 | ) | (40,425 | ) | (48,950 | ) | ||||||
|
Net periodic benefit income
|
$ | (33,404 | ) | $ | (26,493 | ) | $ | (31,502 | ) | |||
The weighted average discount rate used in determining the
actuarial present value of the projected benefit obligation was
5.20% and 5.50% at April 30, 2005 and 2004, respectively.
For measurement purposes, an 11% annual rate of increase in the
per capita cost of covered health care benefits was assumed for
fiscal 2005, with the rate grading down to an ultimate rate of
5% in fiscal 2013. In
F-26
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
fiscal 2004, a 9% annual rate of increase in the per capita cost
of covered health care benefits was assumed for fiscal 2004,
with the rate grading down to an ultimate rate of 5% in fiscal
2008.
For the fiscal years ended April 30, 2005 and 2004, a 1%
increase or decrease in the assumed health care cost trend rate
would have an immaterial affect on the aggregate of the service
and interest cost components of the net periodic post-retirement
health care benefit costs and the accumulated post-retirement
benefit obligation for health care benefits. Estimated future
benefit payments are as follows: 2006 — $49,000,
2007 — $56,000, 2008 — $39,000,
2009 — $34,000, 2010 — $20,000, and 2011
through 2015 — $41,000.
The impact of The Medicare Prescription Drug, Improvement and
Modernization Act of 2003 was not reflected as of April 30,
2005, as the plan has an immaterial amount of post-65 drug
benefits, and likely would not qualify for the federal subsidy
period.
| 22. | Income Taxes |
We use an asset and liability approach for financial accounting
and reporting of income taxes. Deferred tax assets and
liabilities are determined based on temporary differences
between financial reporting and tax basis of assets and
liabilities and are measured by applying enacted tax rates and
laws to the taxable years in which differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
A reconciliation of the provision for income taxes at statutory
rates to the provision in the consolidated financial statements
is as follows:
| For the Years Ended April 30, | |||||||||||||
| 2005 | 2004 | 2003 | |||||||||||
|
Federal income taxes expected at 34% statutory rate
|
$ | 2,949,652 | $ | 161,424 | $ | 558,076 | |||||||
|
State income taxes (benefit), less federal income tax benefit
|
260,190 | 24,845 | (792,026 | ) | |||||||||
|
Employee Stock Purchase Plan
|
24,168 | 44,104 | 67,624 | ||||||||||
|
Other
|
10,790 | (28,014 | ) | (15,236 | ) | ||||||||
|
Business meals and entertainment
|
43,511 | 43,271 | 38,123 | ||||||||||
|
Export sales benefit
|
(40,111 | ) | (42,850 | ) | (48,046 | ) | |||||||
|
Depreciation-permanent
|
(48,302 | ) | (137,442 | ) | — | ||||||||
|
SFAS123(R) Deficiencies
|
60,826 | 576 | — | ||||||||||
|
Deferred tax liability reduction
|
— | — | (267,684 | ) | |||||||||
|
Installment Sale Adjustment
|
— | — | (94,802 | ) | |||||||||
|
Federal net operating loss adjustment
|
10,254 | (416,193 | ) | — | |||||||||
|
Change in federal valuation allowance
|
— | — | (15,054,730 | ) | |||||||||
|
Section 382 NOL Limitation
|
155,512 | — | — | ||||||||||
|
Total provision
|
$ | 3,426,490 | $ | (350,279 | ) | $ | (15,608,701 | ) | |||||
Federal and state income tax expense(benefit) of $0 in fiscal
2005, $(4,217) in fiscal 2004, and $11,935 in fiscal 2003 have
been allocated to other comprehensive income.
The fiscal 2004 tax provision includes a $416,193 benefit for
federal net operating loss adjustments. This benefit relates to
the filing of amended fiscal 2003 and 2002 federal income tax
returns to recognize tax deductions for warrant and option
exercises. We were previously not entitled to these deductions,
as we had not complied with federal statutory reporting
requirements. We have subsequently complied with these
F-27
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
reporting requirements and are now entitled to realize these tax
benefits relating to warrant and option exercises.
During the fourth quarter of fiscal 2003, we reversed federal
and state valuation allowances in the amounts of
$15.0 million and $1.0 million, respectively. A
portion of the tax benefit resulting from the reversal of the
valuation allowance was recorded against intangible assets in
accordance with Statement of Financial Accounting Standards
No. 109, paragraph 30. Although realization of these
deferred tax assets is not assured, we assessed positive
evidence, including forecasts of future taxable income, to
support realization of the net deferred tax assets and negative
evidence, including our tax losses in recent years, and
concluded that it was more likely than not, with the exception
of state net operating loss carryforwards, that all deferred tax
assets will be realized.
Realization depends on generating sufficient future taxable
income during the periods in which temporary differences become
deductible and prior to the expiration of net operating loss
carryforwards. The amount of deferred tax asset considered
realizable could be reduced in the near term if estimates of
future taxable income during the carryforward period are
reduced. Differences between forecasted and actual future
operating results could adversely impact our ability to realize
the deferred tax assets.
The income tax provision (benefit) consists of the following:
| For the Years Ended April 30, | |||||||||||||
| 2005 | 2004 | 2003 | |||||||||||
|
Current:
|
|||||||||||||
|
Federal
|
$ | 77,930 | $ | — | $ | — | |||||||
|
State
|
328,955 | 138,299 | 61,286 | ||||||||||
|
Total current
|
406,885 | 138,299 | 61,286 | ||||||||||
|
Deferred:
|
|||||||||||||
|
Deferred federal and state
|
3,182,444 | (352,722 | ) | 360,981 | |||||||||
|
Valuation allowance
|
(162,839 | ) | (135,856 | ) | (16,030,968 | ) | |||||||
|
Total deferred
|
3,019,605 | (488,578 | ) | (15,669,987 | ) | ||||||||
|
Total provision
|
$ | 3,426,490 | $ | (350,279 | ) | $ | (15,608,701 | ) | |||||
Deferred tax assets relating to tax benefits of employee stock
option grants have been reduced to reflect exercises in fiscal
2005 and 2004. Some exercises resulted in tax deductions in
excess of previously recorded benefits based on the option value
at the time of grant (“windfalls”). Although these
additional tax benefits or “windfalls” are reflected
in net operating tax loss carryforwards, pursuant to
SFAS 123(R), the additional tax benefit associated with the
windfall is not recognized until the deduction reduces taxes
payable. Accordingly, since the tax benefit does not reduce our
current taxes payable in fiscal 2005 and 2004 due to net
operating loss carryforwards, these “windfall” tax
benefits are not reflected in our net operating losses in
deferred tax assets for fiscal 2005 and 2004. Windfalls included
in net operating loss carryforwards but not reflected in
deferred tax assets for fiscal 2005 and 2004 are
$0.2 million and $0, respectively.
F-28
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Future tax benefits (deferred tax liabilities) related to
temporary differences on the following:
| For the Years Ended April 30, | |||||||||
| 2005 | 2004 | ||||||||
|
Current tax assets (liabilities):
|
|||||||||
|
Net operating loss carryforward
|
$ | 2,780,738 | $ | — | |||||
|
Environmental reserves
|
36,994 | 36,709 | |||||||
|
Inventory reserves
|
1,735,236 | 1,486,856 | |||||||
|
Product liability
|
(1,196,089 | ) | 395,354 | ||||||
|
Accrued expenses, including compensation
|
2,058,508 | 2,408,360 | |||||||
|
Warranty reserve
|
523,876 | 511,937 | |||||||
|
Other
|
471,118 | 586,740 | |||||||
|
Section 481 LIFO to FIFO adjustment
|
— | (1,402,739 | ) | ||||||
|
Property taxes
|
(123,889 | ) | (122,737 | ) | |||||
|
Less valuation allowance
|
(166,931 | ) | — | ||||||
|
Net deferred tax asset — current
|
$ | 6,119,561 | $ | 3,900,480 | |||||
|
Non-current tax assets:
|
|||||||||
|
Net operating loss carryforwards and tax credits
|
$ | 726,630 | $ | 5,529,484 | |||||
|
Environmental reserves
|
1,337,960 | 1,388,236 | |||||||
|
Product liability
|
2,142,613 | 1,504,933 | |||||||
|
Accrued expenses, including compensation
|
542,613 | 476,360 | |||||||
|
Warranty reserve
|
82,665 | 127,867 | |||||||
|
SFAS 123(R) compensation
|
3,331,082 | 3,379,346 | |||||||
|
Property, plant, and equipment
|
(33,262 | ) | 1,291,055 | ||||||
|
Other
|
(192,351 | ) | (190,875 | ) | |||||
|
Less valuation allowance
|
(131,248 | ) | (461,018 | ) | |||||
|
Net deferred tax asset — non-current
|
7,806,702 | 13,045,388 | |||||||
|
Net tax asset — total
|
$ | 13,926,263 | $ | 16,945,868 | |||||
We had federal net operating loss carrforwards amounting to
$10.9 million, $16.3 million, and $16.8 million
as of April 30, 2005, 2004, and 2003, respectively. An
analysis was performed pursuant to Internal Revenue Code
Section 382 during fiscal 2005. It has been determined that
an ownership change occurred, pursuant to Section 382,
during the calendar year ended December 31, 2000. As a
result of this ownership change, use of net operating losses of
$3.6 million incurred prior to the ownership change are
limited to $100,000 annually subject to increases for built-in
gains. As a result, it was determined that $457,388 of net
operating loss carryforwards will expire unutilized. Therefore,
the related deferred tax asset of $155,512 has been reversed to
tax expense. It is possible that future substantial changes in
our ownership could occur that could result in additional
ownership changes pursuant to Internal Revenue Code
Section 382. If such an ownership change were to occur,
there would be an annual limitation on the remaining tax loss
carryforwards which can be utilized. Federal net operating
losses account for $3.3 million of the total net deferred
tax asset of $13.9 million and $5.1 million of the
$16.9 million of deferred tax assets as of April 30,
2005 and 2004, respectively.
F-29
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The net operating loss carryforwards are scheduled to expire in
the following years:
| $ | 217,076 | Expires 2019 | ||||||
| $ | 1,832,658 | Expires 2020 | ||||||
| $ | 6,863,760 | Expires 2022 | ||||||
| $ | 1,947,170 | Expires 2023 | ||||||
| $ | 19,552 | Expires 2024 |
State net operating loss carryforwards amounted to
$6.5 million, $12.1 million, and $15.1 million as
of April 30, 2005, 2004, and 2003, respectively, most of
which expire from fiscal 2005 to fiscal 2006. Certain state
provisions may limit our ability to utilize state net operating
losses in any given year when certain events occur, including
cumulative changes in ownership interests over a three-year
period. In our opinion, due to the uncertainty of the
realization of the benefit from state net operating losses, a
valuation allowance will be maintained against most of these
deferred tax assets.
SFAS 109 requires that if a valuation allowance is
recognized for the deferred tax asset for an acquired
entity’s deductible temporary differences or operating loss
or tax credit carryforwards at the acquisition date, the tax
benefits for those items that are first recognized in the
financial statements shall be applied to first reduce goodwill,
if any, related to the acquisition, second to reduce other
non-current intangible assets related to the acquisition, and
third to reduce income tax expense. Non-current intangible
assets were reduced by approximately $800,000 in the fiscal year
ended April 30, 2003 in accordance with this standard. The
remaining $15.2 million April 30, 2003 change to
valuation allowance was recorded as a reduction to income tax
expense.
| 23. | Commitments and Contingencies |
| Litigation |
We, together with other firearms manufacturers and certain
related organizations, are a co-defendant in various legal
proceedings involving product liability claims and are aware of
other product liability claims, including allegations of
defective product design, manufacturing, negligent marketing,
and/or distribution of firearms leading to personal injury,
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 currently exceed product liability accruals and, if
applicable, insurance coverage. We believe that, in every case,
the allegations of defective product design are unfounded, and
that the accident and any results therefrom were due to
negligence or misuse of the firearm by the claimant or a third
party and that there should be no recovery against us.
In addition, we are also a 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.
F-30
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We monitor 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, we believe, after consultation with
litigation counsel, that it is uncertain whether the outcome of
these claims will have a material adverse effect on our
consolidated financial position, results of operations, or cash
flows. We believe that we have provided adequate reserves for
defense costs. We do not anticipate a material adverse judgment
and intend to vigorously defend ourselves.
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
loss 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
$434 million as of April 30, 2005 and
$454 million as of April 30, 2004, are set forth as an
indication of possible maximum liability that we 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 fiscal years ended April 30, 2005, 2004 and 2003, we
paid $4,535, $1.6 million, and $1.9 million,
respectively, in defense and administrative costs relative to
product liability and municipal litigation. In addition, we
spent an aggregate of $0, $16,039, and $207,500, respectively,
in those fiscal years in settlement fees relative to product
liability cases.
In fiscal 2005, 2004 and 2003, we recorded a reduction to cost
of goods sold of $2,938,982, $40,388, and $1,421,857,
respectively, to recognize changes in our product and municipal
litigation liability. The income was due to a reduction in
reserves due to favorable outcomes in product and municipal
cases, as well as to reflect the initiation of insurance
coverage in fiscal 2005 and 2003.
We have recorded our liability for defense costs before
consideration for reimbursement from insurance carriers. We have
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 2002 and the first
three quarters of fiscal 2003. We continue to be in discussions
with the SEC and intend to continue to cooperate fully with the
SEC.
| Environmental Remediation |
We are subject to numerous federal, state, and local laws that
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, us to make significant
expenditures of both a capital and expense nature. Several of
the more significant federal laws applicable to our 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”).
We have in place programs and personnel to monitor compliance
with various federal, state, and local environmental
regulations. In the normal course of our manufacturing
operations, we are subject to governmental proceedings and
orders pertaining to waste disposal, air emissions, and water
discharges into the environment. We fund our environmental costs
through cash flows from operations. We believe that we are in
compliance with applicable environmental regulations in all
material respects.
F-31
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We are required to remediate hazardous waste at our facilities.
Currently, we own designated sites in Springfield, Massachusetts
and are 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.
We may be required to remove hazardous waste or remediate the
alleged effects of hazardous substances on the environment
associated with past disposal practices at sites not owned by
us. We have received notice that we are a potentially
responsible party from the Environmental Protection Agency
(“EPA”) and/or individual states under CERCLA or a
state equivalent at one site.
We had reserves of $3.7 million as of April 30, 2005
($3.6 million as non-current) for remediation of the sites
referred to above and believe 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. Our estimate of these costs is based upon currently
enacted laws and regulations, currently available facts,
experience in remediation efforts, existing technology, and the
ability of other potentially responsible parties or
contractually liable parties to pay the allocated portions of
any environmental obligations. When the available information is
sufficient to estimate the amount of liability, that estimate
has been used; when 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. We do not have insurance coverage for our
environmental remediation costs. We have 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.
On February 25, 2003, we sold approximately 85 acres
of company-owned property in the city of Springfield,
Massachusetts to the Springfield Redevelopment Authority
(“SRA”) for $1.75 million, resulting in a net
gain of $1.7 million. The terms of the sale included a cash
payment of $750,000 at the closing and a promissory note for the
remaining $1.0 million. The note is collateralized by a
mortgage on the sold property. This note is due in 2022 and
accrues interest at a fixed rate of 6.0% per annum.
SRA is a public body politic and corporate created pursuant to
Massachusetts General Laws. This property is excess land
adjacent to our manufacturing and office facility. The
85 acres includes three of our five previously disclosed
release areas that have identified soil and groundwater
contamination under the MCP. This property was acquired by SRA
as a defined “Brownfield” under the Comprehensive
Environmental Response, Compensation and Liability Act
(“CERCLA”). We believe that the SRA plans to create a
light industrial and other commercial use development park on
the property. SRA, with the support of the city of Springfield,
has received governmental “Brownfield” grants or loans
to facilitate the remediation and development of the property.
Although we have entered into certain environmental agreements
and other contractual assurances with the SRA associated with
the sale, we have not revised our environmental reserve to
determine if a revision is necessary. We will monitor the
progress of the SRA in the remediation and development of the
property. The SRA’s progress and success in the Brownfield
redevelopment of the property, specifically approval of
remediation by governing authorities, will allow us to review
our environmental reserve to determine if a revision is
necessary. Based upon the previously identified specific facts
and circumstances, we may revise the environmental reserve in
the future. This revision could have a significant impact on our
earnings for the period in which such revision is made.
Based on information known to us, we do not expect current
environmental regulations or environmental proceedings and
claims to have a material adverse effect on our consolidated
financial position, results of operations, or cash flows.
However, it is not possible to predict with certainty the impact
on us 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 environ-
F-32
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
mental regulation will not become more burdensome in the future
and that any such development would not have a material adverse
effect on our company.
| Contracts |
Employment Agreements — We have entered into
employment agreements with certain officers and managers to
retain their service in the ordinary course of business. We have
also entered into severance agreements with certain officers and
managers affected by restructuring and the discontinuance of
certain businesses. See footnote 17.
Other Agreements — We have distribution
agreements with various third parties in the ordinary course of
business.
| Rental Leases |
We lease office space in Scottsdale under an operating
(non-renewing) lease, which expires in May 2005. We also lease
photocopiers at our Springfield location with various expiration
dates. As of April 30, 2005, the lease commitments are
approximately as follows:
| For the Years Ended April 30, | Amount | |||
|
2006
|
$ | 112,000 | ||
|
2007
|
103,000 | |||
|
2008
|
105,000 | |||
|
2009
|
95,000 | |||
|
2010
|
78,000 | |||
|
Thereafter
|
45,000 | |||
| $ | 538,000 | |||
Lease expense in the fiscal years ended April 30, 2005,
2004, and 2003 was approximately $181,000, $151,000, and
$147,000, respectively.
We will be relocating into a new Scottsdale location on
August 1, 2005, and have recently entered into a 65-month
lease agreement on said property. The lease expense for fiscal
year 2006 is approximately $46,000, 2007 is $69,000, 2008 is
$71,000, 2009 is $73,000, 2010 is $75,000 and thereafter is
$45,000.
| 24. | Restatement to Correct Accounting for Certain Stock Awards under APB 25 and to Adopt Statement of Financial Standards No. 123(R), Share-Based Payment (Revised 2004) |
During our year-end closing process, we determined that
compensation cost for certain warrants issued to two former
employees in May 2001, which included a cashless exercise
feature, was not adjusted in subsequent periods through 2005 for
increases or decreases in the quoted market value of the our
stock. In addition, in fiscal 2004 and 2005, we did not record
compensation cost resulting from the modification of certain
vested stock options for terminating employees. The pre-tax
impact on the statement of operations for these transactions
under APB 25 was to increase (decrease) previously reported
general and administrative expense for fiscal 2004 and 2003 by
$2,995,251 and ($9,251,497), respectively. The impact of the
restatement under ABP 25 is disclosed below.
During our year-end closing process, we also elected to early
adopt Statement of Financial Accounting Standards
No. 123(R), “Share-Based Payment (Revised 2004)”
(SFAS 123(R)), utilizing the modified retrospective
application method for all periods for which Statement 123
was effective. The impact of the adoption of SFAS 123(R) as
of April 30, 2002 was to increase additional paid-in
capital and reduce
F-33
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
retained earnings by $7,053,510. There was no adjustment to
deferred tax assets since we had recorded a full valuation
allowance against net deferred tax assets. The effect of the
early adoption of SFAS 123(R) on income before income
taxes, income tax (benefit) expense, net income, cash flow from
operations, cash flow from financing activities, and basic and
fully diluted earnings per share is disclosed below.
| Year Ended April 30, 2004 | Year Ended April 30, 2003 | |||||||||||||||||||||||
| Restated for | Restated for | |||||||||||||||||||||||
| APB 25 | APB 25 | |||||||||||||||||||||||
| Accounting | Accounting | |||||||||||||||||||||||
| As Previously | for Stock | Adoption of | As Previously | for Stock | Adoption of | |||||||||||||||||||
| Reported | Awards | SFAS 123(R) | Reported | Awards | SFAS 123(R) | |||||||||||||||||||
|
Statement of Operations
|
||||||||||||||||||||||||
|
General and administrative expense
|
$ | 19,216,988 | $ | 22,212,239 | $ | 20,036,495 | $ | 13,758,607 | $ | 4,507,110 | $ | 15,412,909 | ||||||||||||
|
Total operating expenses
|
33,499,719 | 36,494,970 | 34,319,226 | 26,003,858 | 16,752,361 | 27,658,160 | ||||||||||||||||||
|
Income from operations
|
5,630,196 | 2,634,945 | 4,810,689 | 4,376,859 | 13,628,356 | 2,722,557 | ||||||||||||||||||
|
Income (loss) before income taxes
|
1,305,730 | (1,689,521 | ) | 486,223 | 3,259,159 | 12,510,656 | 1,604,857 | |||||||||||||||||
|
Income tax (benefit) expense
|
(83,750 | ) | (1,183,307 | ) | (346,062 | ) | (12,404,320 | ) | (13,968,728 | ) | (15,620,636 | ) | ||||||||||||
|
Net income (loss)
|
1,389,480 | (506,214 | ) | 832,285 | 15,663,479 | 26,479,384 | 17,225,493 | |||||||||||||||||
|
Basic earnings (loss) per share
|
$ | 0.05 | $ | (0.02 | ) | $ | 0.03 | $ | 0.52 | $ | 0.89 | $ | 0.58 | |||||||||||
|
Dilute earnings (loss) per share
|
$ | 0.04 | $ | (0.02 | ) | $ | 0.02 | $ | 0.44 | $ | 0.74 | $ | 0.49 | |||||||||||
|
Balance Sheet
|
||||||||||||||||||||||||
|
Long term deferred income taxes
|
9,607,287 | 12,271,252 | 13,045,388 | 9,308,893 | 10,873,301 | 12,525,209 | ||||||||||||||||||
|
Additional paid-in capital
|
16,651,934 | 24,131,693 | 26,138,726 | 16,247,108 | 20,731,616 | 24,954,920 | ||||||||||||||||||
|
Retained earnings (deficit)
|
114,119 | (4,701,675 | ) | (5,934,572 | ) | (1,275,361 | ) | (4,195,461 | ) | (6,766,857 | ) | |||||||||||||
|
Statement of Cash Flows
|
||||||||||||||||||||||||
|
Net income (loss)
|
1,389,480 | (506,214 | ) | 832,285 | 15,663,479 | 26,479,384 | 17,225,493 | |||||||||||||||||
|
Deferred taxes
|
(226,266 | ) | (1,325,823 | ) | (488,578 | ) | (12,453,671 | ) | (14,018,079 | ) | (15,669,987 | ) | ||||||||||||
|
Stock option expense
|
0 | 2,995,251 | 819,507 | 0 | (9,251,497 | ) | 1,654,302 | |||||||||||||||||
The quarterly impacts of correcting the accounting for stock
awards under APB 25 and the adoption of SFAS 123(R)
are disclosed in Note 25.
F-34
Table of Contents
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 25. | Quarterly Financial Information (Unaudited) |
The following quarterly financial information has been restated
to correct errors in accounting for certain stock awards under
APB 25 and to early adopt SFAS 123(R) as further
described in Note 24. In our opinion, all adjustments
necessary to present fairly the information for such quarters
have been reflected.
| Quarter | Full Year | ||||||||||||||||||||||||||||||||||||||||||||
| Ended | Ended | ||||||||||||||||||||||||||||||||||||||||||||
| April 30, | April 30, | ||||||||||||||||||||||||||||||||||||||||||||
| Quarter Ended July 31, 2004 | Quarter Ended October 31, 2004 | Quarter Ended January 31, 2005 | 2005 | 2005 | |||||||||||||||||||||||||||||||||||||||||
| Restated for | Restated for | Restated for | |||||||||||||||||||||||||||||||||||||||||||
| ABP 25 | ABP 25 | ABP 25 | |||||||||||||||||||||||||||||||||||||||||||
| As | Accounting | As | Accounting | As | Accounting | ||||||||||||||||||||||||||||||||||||||||
| Previously | for Stock | Adoption of | Previously | for Stock | Adoption of | Previously | for Stock | Adoption of | As | ||||||||||||||||||||||||||||||||||||
| Reported | Awards | SFAS 123(R) | Reported | Awards | SFAS 123(R) | Reported | Awards | SFAS 123(R) | As Reported | Reported | |||||||||||||||||||||||||||||||||||
|
Net product sales
|
27,768,875 | 27,768,875 | 27,768,875 | 29,078,039 | 29,078,039 | 29,078,039 | 31,145,521 | 31,145,521 | 31,145,521 | 35,971,538 | 123,963,973 | ||||||||||||||||||||||||||||||||||
|
Licensing revenue
|
396,750 | 396,750 | 396,750 | 526,018 | 526,018 | 526,018 | 417,100 | 417,100 | 417,100 | 484,209 | 1,824,077 | ||||||||||||||||||||||||||||||||||
|
Gross profit
|
9,364,400 | 9,364,400 | 9,364,400 | 12,388,832 | 12,388,832 | 12,388,832 | 7,748,174 | 7,748,174 | 7,748,174 | 11,386,612 | 40,888,018 | ||||||||||||||||||||||||||||||||||
|
Income (loss) from operations
|
2,865,470 | 4,265,470 | 2,788,357 | 4,390,745 | 4,290,745 | 4,289,100 | 819,268 | (3,914,932 | ) | 644,038 | 3,459,496 | 11,180,991 | |||||||||||||||||||||||||||||||||
|
Net income (loss)
|
1,492,646 | 2,379,826 | 1,466,999 | 2,243,207 | 2,179,797 | 2,106,410 | (32,658 | ) | (3,022,779 | ) | (153,112 | ) | 1,828,659 | 5,248,956 | |||||||||||||||||||||||||||||||
|
Per common share
|
|||||||||||||||||||||||||||||||||||||||||||||
|
Basic(1)
|
$ | 0.05 | $ | 0.08 | $ | 0.05 | $ | 0.07 | $ | 0.07 | $ | 0.07 | $ | (0.00 | ) | $ | (0.10 | ) | $ | (0.00 | ) | $ | 0.06 | $ | 0.17 | ||||||||||||||||||||
|
Diluted(1)
|
$ | 0.04 | $ | 0.07 | $ | 0.04 | $ | 0.07 | $ | 0.06 | $ | 0.06 | $ | (0.00 | ) | $ | (0.10 | ) | $ | (0.00 | ) | $ | 0.05 | $ | 0.14 | ||||||||||||||||||||
|
Market price (high- low)
|
$ | 1.70-1.40 | $ | 1.70-1.40 | $ | 1.70-1.40 | $ | 1.98-1.15 | $ | 1.98-1.15 | $ | 1.98-1.15 | $ | 2.40-1.38 | $ | 2.40-1.38 | $ | 2.40-1.38 | $ | 2.94-1.92 | $ | 2.94-1.15 | |||||||||||||||||||||||
| Quarter Ended July 31, 2003 | Quarter Ended October 31, 2003 | Quarter Ended January 31, 2004 | Quarter Ended April 30, 2004 | Full Year Ended April 30, 2005 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restated for | Restated for | Restated for | Restated for | Restated for | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ABP 25 | ABP 25 | ABP 25 | ABP 25 | ABP 25 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| As | Accounting | As | Accounting | As | Accounting | As | Accounting | Accounting | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Previously | for Stock | Adoption of | Previously | for Stock | Adoption of | Previously | for Stock | Adoption of | Previously | for Stock | Adoption of | As Previously | for Stock | Adoption of | |||||||||||||||||||||||||||||||||||||||||||||||
| Reported | Awards | SFAS 123(R) | Reported | Awards | SFAS 123(R) | Reported | Awards | SFAS 123(R) | Reported | Awards | SFAS 123(R) | Reported | Awards | SFAS 123(R) | |||||||||||||||||||||||||||||||||||||||||||||||
|
Net product sales
|
28,792,856 | 28,792,856 | 28,792,856 | 28,874,158 | 28,874,158 | 28,874,158 | 27,454,067 | 27,454,067 | 27,454,067 | 32,771,426 | 32,771,426 | 32,771,426 | 117,892,507 | 117,892,507 | 117,892,507 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Licensing revenue
|
423,303 | 423,303 | 423,303 | 362,701 | 362,701 | 362,701 | 464,521 | 464,521 | 464,521 | 371,603 | 371,603 | 371,603 | 1,622,128 | 1,622,128 | 1,622,128 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Gross profit
|
8,954,439 | 8,954,439 | 8,954,439 | 10,138,343 | 10,138,343 | 10,138,343 | 8,180,852 | 8,180,852 | 8,180,852 | 11,856,281 | 11,856,281 | 11,856,281 | 39,129,915 | 39,129,915 | 39,129,915 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Income (loss) from operations
|
2,349,212 | (1,750,788 | ) | 2,146,234 | 2,069,754 | (3,034,947 | ) | 1,910,362 | (2,169,896 | ) | 4,278,954 | (2,298,393 | ) | 3,381,126 | 3,141,726 | 3,052,486 | 5,630,196 | 2,634,945 | 4,810,689 | ||||||||||||||||||||||||||||||||||||||||||
|
Net income (loss)
|
585,248 | (2,009,642 | ) | 449,826 | 670,665 | (2,560,100 | ) | 555,613 | (1,706,609 | ) | 2,374,868 | (1,797,862 | ) | 1,840,176 | 1,688,660 | 1,624,708 | 1,389,480 | (506,214 | ) | 832,285 | |||||||||||||||||||||||||||||||||||||||||
|
Per common share
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Basic(1)
|
$ | 0.02 | $ | (0.07 | ) | $ | 0.01 | $ | 0.02 | $ | (0.08 | ) | $ | 0.02 | $ | (0.06 | ) | $ | 0.08 | $ | (0.06 | ) | $ | 0.06 | $ | 0.05 | $ | 0.05 | $ | 0.05 | $ | (0.02 | ) | $ | 0.03 | ||||||||||||||||||||||||||
|
Diluted(1)
|
$ | 0.02 | $ | (0.07 | ) | $ | 0.01 | $ | 0.02 | $ | (0.08 | ) | $ | 0.02 | $ | (0.06 | ) | $ | 0.07 | $ | (0.06 | ) | $ | 0.05 | $ | 0.05 | $ | 0.04 | $ | 0.04 | $ | (0.02 | ) | $ | 0.02 | ||||||||||||||||||||||||||
|
Market price (high-low)
|
$ | 1.94-1.35 | $ | 1.94-1.35 | $ | 1.94-1.35 | $ | 2.50-1.65 | $ | 2.50-1.65 | $ | 2.50-1.65 | $ | 2.40-1.39 | $ | 2.40-1.39 | $ | 2.40-1.39 | $ | 2.11-1.50 | $ | 2.11-1.50 | $ | 2.11-1.50 | $ | 2.50-1.35 | $ | 2.50-1.35 | $ | 2.50-1.35 | |||||||||||||||||||||||||||||||
(1) — Quarterly per share data may add to full year
due to rounding.
F-35
Table of Contents
SCHEDULE II
SMITH & WESSON HOLDING CORPORATION and
Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended April 30, 2005, 2004 and 2003
| Additions | ||||||||||||||||||||
| Charged to | Charged to | |||||||||||||||||||
| Balance at | Costs and | Other | Balance at | |||||||||||||||||
| May 1, | Expenses | Accounts | Deductions | April 30, | ||||||||||||||||
|
2005
|
||||||||||||||||||||
|
Allowance for doubtful receivables
|
$ | 100,000 | $ | 52,875 | $ | (77,875 | ) | $ | 75,000 | |||||||||||
|
Inventory reserve
|
1,960,896 | 97,942 | (13,811 | ) | 2,045,027 | |||||||||||||||
|
Deferred tax valuation allowance
|
461,018 | (162,839 | ) | 298,179 | ||||||||||||||||
|
Warranty reserve
|
1,742,917 | 1,539,400 | (1,642,772 | ) | 1,639,545 | |||||||||||||||
|
Product liability
|
13,555,752 | (2,938,982 | ) | (2,585,528 | )(1) | (4,535 | ) | 8,026,708 | ||||||||||||
|
Workers compensation
|
1,250,004 | 833,455 | 186,774 | (2) | (511,528 | ) | 1,758,705 | |||||||||||||
|
Environmental
|
3,881,755 | (44,500 | ) | (120,604 | ) | 3,716,651 | ||||||||||||||
|
2004
|
||||||||||||||||||||
|
Allowance for doubtful receivables
|
107,552 | (4,829 | ) | (2,723 | ) | 100,000 | ||||||||||||||
|
Inventory reserve
|
1,760,778 | 283,063 | (82,945 | ) | 1,960,896 | |||||||||||||||
|
Deferred tax valuation allowance
|
596,874 | (135,856 | ) | 0 | 461,018 | |||||||||||||||
|
Warranty reserve
|
1,364,220 | 1,591,741 | (1,213,044 | ) | 1,742,917 | |||||||||||||||
|
Product liability
|
22,473,982 | (259,429 | ) | (7,022,666 | )(1) | (1,636,135 | ) | 13,555,752 | ||||||||||||
|
Workers compensation
|
981,220 | 864,199 | (595,415 | ) | 1,250,004 | |||||||||||||||
|
Environmental
|
3,968,228 | (11,045 | ) | (75,428 | ) | 3,881,755 | ||||||||||||||
|
2003
|
||||||||||||||||||||
|
Allowance for doubtful receivables
|
100,566 | 10,000 | (3,014 | ) | 107,552 | |||||||||||||||
|
Inventory reserve
|
1,326,081 | 628,248 | (193,551 | ) | 1,760,778 | |||||||||||||||
|
Deferred tax valuation allowance
|
16,627,842 | (16,030,968 | ) | 0 | 596,874 | |||||||||||||||
|
Warranty reserve
|
1,354,224 | 1,194,328 | (1,184,332 | ) | 1,364,220 | |||||||||||||||
|
Product liability
|
25,839,866 | (138,465 | ) | (636,481 | )(1) | (2,590,940 | ) | 22,473,982 | ||||||||||||
|
Workers compensation
|
1,493,860 | 80,561 | (593,203 | ) | 981,220 | |||||||||||||||
|
Environmental
|
4,084,218 | 0 | (115,990 | ) | 3,968,228 | |||||||||||||||
| (1) | Represents reduction in accrued product liability with corresponding reduction in insurance carrier reimbursement receivable. |
| (2) | Represents reimbursement from insurance carrier for claims in excess of retention. |
F-36
Table of Contents
Index to Exhibits
| Exhibit | ||||
| Number | Exhibit | |||
| 3 | .1 | Amended and Restated Articles of Incorporation.(1) | ||
| 3 | .2 | Amended and Restated Bylaws.(1) | ||
| 4 | .1 | Registration Rights Agreement between Saf-T-Hammer Corporation and Colton Melby dated May 6, 2001.(2) | ||
| 4 | .2 | Form of Option to 2001 Stock Option.(3) | ||
| 4 | .3 | Employee Stock Purchase Agreement dated as of April 1, 2002.(3) | ||
| 4 | .4 | Form of Subscription Agreement to Employee Stock Purchase Agreement.(3) | ||
| 4 | .5 | 2005 Incentive Compensation Plan.(1) | ||
| 4 | .6 | Warrant issued to Mitchell L. Saltz.(4) | ||
| 4 | .7 | Warrant issued to Robert Scott.(4) | ||
| 10 | .1 | Trademark Agency Agreement with UMAREX dated March 11, 2000.(5) | ||
| 10 | .2 | Agreement with Walther/ UMAREX, dated August 1, 1999.(5) | ||
| 10 | .3 | Trademark License Agreement with UMAREX/ Gutman Cutlery dated July 1, 2000.(5) | ||
| 10 | .4 | Agreement with Western Mass Electric dated July 6, 1998.(5) | ||
| 10 | .5 | Agreement with Western Mass Electric dated December 18, 2000.(5) | ||
| 10 | .6 | Settlement Agreement with Dept. of Treasury and HUD dated March 17, 2000.(5) | ||
| 10 | .7 | Letter Agreement with Dept. of Treasury and HUD dated May 2, 2000.(5) | ||
| 10 | .8 | Trademark License Agreement with Canadian Security Agency dated May 31, 1996.(5) | ||
| 10 | .9 | Master Supply Agreement with Remington Arms dated August 1, 2001.(6) | ||
| 10 | .10 | Loan and Security Agreement, dated January 11, 2005, by and between the Registrant, Smith & Wesson Corp., and Banknorth, N.A.(7) | ||
| 10 | .11 | Revolving Line of Credit Note, dated January 11, 2005.(7) | ||
| 10 | .12 | Commercial Term Promissory Note, dated January 11, 2005.(7) | ||
| 10 | .13 | Commercial Real Estate Term Promissory Note, dated January 11, 2005.(7) | ||
| 10 | .14 | Equipment Line of Credit Note, dated January 11, 2005(7) | ||
| 10 | .15 | Mortgage and Security Agreement, dated January 11, 2005, by and between the Registrant and Banknorth, N.A.(7) | ||
| 10 | .16 | Mortgage and Security Agreement, dated January 11, 2005, by the Registrant in favor of Banknorth, N.A.(7) | ||
| 10 | .17 | Guaranty, dated January 11, 2005, by the Registrant in favor of Banknorth, N.A.(7) | ||
| 10 | .18 | Purchase and Sale Agreement with Springfield Redevelopment Authority.(8) | ||
| 10 | .19 | Environmental Agreement with Springfield Redevelopment Authority.(8) | ||
| 10 | .20 | Promissory Note from Springfield Redevelopment Authority.(8) | ||
| 10 | .21 | Agreement with Carl Walther GmbH.(9) | ||
| 10 | .22 | Employment Agreement with Michael L. Golden.(10) | ||
| 21 | .1 | Subsidiaries of the Company.(10) | ||
| 23 | .1 | Consent of PricewaterhouseCoopers LLP.(4) | ||
| 24 | .1 | Power of Attorney (see signature page of this Annual Report on Form 10-KSB).(4) | ||
| 31 | .1 | Rule 13a-14(a)/ 15d-14(a) Certification of Principal Executive Officer.(4) | ||
| 31 | .2 | Rule 13a-14(a)/ 15d-14(a) Certification of Principal Financial Officer.(4) | ||
| 32 | .1 | Section 1350 Certification of Principal Executive Officer.(4) | ||
| 32 | .2 | Section 1350 Certification of Principal Financial Officer.(4) | ||
| (1) | Incorporated by reference to the Proxy Statement on Schedule 14A filed with the SEC on August 11, 2004. |
Table of Contents
| (2) | Incorporated by reference from the Company’s Form 8-K, filed with the SEC on April 4, 2000. | |
| (3) | Incorporated by reference to the Proxy Statement on Schedule 14A filed with the SEC on December 28, 2001. | |
| (4) | Filed herewith | |
| (5) | Incorporated by reference from the Company’s Form 10-QSB filed with the SEC on August 13, 2001. | |
| (6) | Incorporated by reference from the Company’s Form 10-QSB filed with the SEC on September 14, 2001. | |
| (7) | Incorporated by reference from the Company’s Form 8-K filed with the SEC on January 18, 2005. | |
| (8) | Incorporated by reference from the Company’s Form 10-KSB filed with the SEC on December 16, 2002. | |
| (9) | Incorporated by reference from the Company’s Form 10-K Report filed with the SEC on July 13, 2004. |
| (10) | Incorporated by reference from the Company’s Form 8-K Report filed with the SEC on December 6, 2004. |
Exhibit 4.6
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND MAY NOT BE SOLD, OFFERED
FOR SALE, ASSIGNED, TRANSFERRED, OR OTHERWISE DISPOSED OF, UNLESS REGISTERED PURSUANT TO THE
PROVISIONS OF THE SECURITIES ACT OR AN OPINION OF COUNSEL IS OBTAINED STATING THAT SUCH DISPOSITION
IS IN COMPLIANCE WITH AN AVAILABLE EXEMPTION FROM SUCH REGISTRATION.
May 11, 2001 (Original Issue Date)
Smith & Wesson Holding Corporation
Warrant for the Purchase of Shares of Common Stock
No. MAS-1A
For value received, this Warrant is hereby issued by Smith & Wesson Holding Corporation, a
Nevada corporation (the “Company”), to Mitchell Saltz (the “Holder”). Subject to the provisions of
this Warrant, the Company hereby grants to Holder the right to purchase from the Company 5,000,000
fully paid and non-assessable shares of Common Stock (sometimes called “Warrant Stock”), at a price
of $0.89 per share (the “Exercise Price”).
The Holder agrees with the Company that this Warrant is issued, and all the rights hereunder
shall be held, subject to all of the conditions, limitations and provisions set forth herein.
1. Exercise of Warrant. Subject to the terms and conditions set forth herein, this Warrant
may be exercised in whole or in part, pursuant to the procedures provided below, at any time on or
before 5:00 p.m., Eastern time, on May 11, 2006, (the “Expiration Date”) or, if such day is a day
on which banking institutions in New York are authorized by law to close, then on the next
succeeding day that shall not be such a day. To exercise this Warrant, the Holder shall present
and surrender this Warrant to the Company at its principal office, with the Warrant Exercise Form
attached hereto duly executed by the Holder and accompanied by payment (either (a) in cash or by
check, payable to the order of the Company, (b) by cancellation by the Holder of indebtedness or
other obligations of the Company to the Holder, (c) by such other means as may be authorized by the
Board of Directors of the Company from time to time, or (d) by a combination of (a), (b), or (c)),
of the aggregate Exercise Price for the total aggregate number of shares for which this Warrant is
exercised. Upon receipt by the Company of this Warrant, together with the executed Warrant
Exercise Form and payment of the Exercise Price for the shares to be acquired, in proper form for
exercise, and subject to the Holder’s compliance with all requirements of this Warrant for the
exercise hereof, the Holder shall be deemed to be the holder of record of the shares of Common
Stock (or Other Securities) issuable upon such exercise, notwithstanding that the stock transfer
books of the Company shall then be closed or that certificates representing such shares of Common
Stock shall not then be actually delivered to the Holder; provided, however, that
no exercise of this Warrant shall be effective, and the Company shall have no obligation to issue
any Common Stock or Other Securities to the Holder upon any attempted exercise of this Warrant,
unless the Common Stock has been registered under the Securities Act or the Holder shall have first
delivered to the Company, in form and substance reasonably satisfactory to the Company, appropriate
representations so as to provide the Company reasonable assurances that the securities issuable
upon exercise may be issued without violation of the registration requirements of the Securities
Act and applicable state securities laws, including without limitation representations that the
exercising Holder is an “accredited investor” as defined in Regulation D under the Securities Act
and that the Holder is familiar with the Company and its business and financial condition and has
had an opportunity to ask questions and receive documents relating thereto to his reasonable
satisfaction.
2. Reservation of Shares. The Company will at all times reserve for issuance and delivery upon
exercise of this Warrant all shares of Common Stock or other shares of capital stock of the Company
(and Other Securities) from time to time receivable upon exercise of this Warrant. All such shares
(and Other Securities) shall be duly authorized and, when issued upon such exercise, shall be
validly issued, fully paid and non-assessable, and free of all preemptive rights.
3. Fractional Shares. No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant, but the Company shall pay the Holder an amount equal to
the Fair Market Value (as defined below) of such fractional share of Common Stock in lieu of each
fraction of a share otherwise called for upon any exercise of this Warrant.
4. Fair Market Value. For purposes of this Warrant, the Fair Market Value of a share of
Common Stock (or Other Security) shall be determined as of any date (the “Value Date”) by the
Company’s Board of Directors in good faith; provided, however, that where there exists a public
market for the Company’s Common Stock on the Value Date, the fair market value per share shall be
either of the following:
(a) If the Common Stock is listed on a national securities exchange or admitted to
unlisted trading privileges on such exchange or listed for trading on the NASDAQ system, the
Fair Market Value shall be the last reported sale price of the security on such exchange or
system on the last business day prior to the Value Date or if no such sale is made on such
day, the average of the closing bid and asked prices for such day on such exchange or
system; or
(b) If the Common Stock is not so listed or so admitted to unlisted trading privileges,
the Fair Market Value shall be the mean of the last reported bid and asked prices reported
by the National Quotation Bureau, Inc. on the last business day prior to the Value Date.
5. Assignment or Loss of Warrant. Subject to the transfer restrictions herein (including
Section 8), upon surrender of this Warrant to the Company or at the office of its stock transfer
agent, if any, with the Assignment Form annexed hereto duly executed and funds sufficient to pay
any transfer tax, the Company shall, without charge, execute and deliver a new Warrant in the name
of the assignee named in such instrument of assignment and this Warrant shall promptly be canceled.
Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction, or mutilation of this Warrant, and of reasonably satisfactory indemnification by the
Holder, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall
execute and deliver a replacement Warrant of like tenor and date.
6. Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of
a stockholder in the Company, either at law or in equity, and the rights of the Holder are limited
to those expressed in this Warrant.
7. Adjustments.
7.1 Adjustment for Recapitalization. If the Company shall at any time subdivide its
outstanding shares of Common Stock (or Other Securities at the time receivable upon the exercise of
the Warrant) by recapitalization, reclassification, or split-up thereof, or if the Company shall
declare a stock dividend or distribute shares of Common Stock to its stockholders, the number of
shares of Common Stock (or Other Securities) subject to this Warrant immediately prior to such
subdivision shall be proportionately increased, and if the Company shall at any time combine the
outstanding shares of Common Stock by recapitalization, reclassification, or combination thereof,
the number of shares of Common Stock subject to this Warrant immediately prior to such combination
shall be proportionately decreased. Any such adjustment and adjustment to the Exercise Price
pursuant to this Section 7.1 shall be effective at the close of business on the effective date of
such subdivision or combination or if any adjustment is the result of a stock dividend or
distribution then the effective date for such adjustment based thereon shall be the record date
therefor.
Whenever the number of shares of Common Stock purchasable upon the exercise of this Warrant is
adjusted, as provided in this Section 7.1, the Exercise Price shall be adjusted to the nearest cent
by multiplying such Exercise Price immediately prior to such adjustment by a fraction (x) the
numerator of which shall be the number of shares of
2
Common Stock purchasable upon the exercise
immediately prior to such adjustment, and (y) the denominator of which shall be the number of
shares of Common Stock so purchasable immediately thereafter.
7.2 Adjustment for Reorganization, Consolidation, Merger, Etc. In case of any reorganization
of the Company (or any other corporation, the securities of which are at the time receivable on the
exercise of this Warrant) after the date hereof or in case after such date the Company (or any such
other corporation) shall consolidate with or merge into another corporation or convey all or
substantially all of its assets to another corporation, then, and in each such case, the Holder of
this Warrant upon the exercise thereof as provided in Section 1 at any time after the consummation
of such reorganization, consolidation, merger, or conveyance, shall be entitled to receive, in lieu
of the securities and property receivable upon the exercise of this Warrant prior to such
consummation, the securities or property to which such Holder would have been entitled upon such
consummation if such Holder had exercised this Warrant immediately prior thereto; in each such
case, the terms of this Warrant shall be applicable to the securities or property receivable upon
the exercise of this Warrant after such consummation.
7.3 Certificate as to Adjustments. The adjustments provided in this Section 7 shall be
interpreted and applied by the Company in such a fashion so as to reasonably preserve the
applicability and benefits of this Warrant (but not to increase or diminish the benefits
hereunder). In each case of an adjustment in the number of shares of Common Stock receivable on
the exercise of this Warrant, the Company at its expense will promptly compute such adjustment in
accordance with the terms of this Warrant and prepare a certificate executed by two executive
officers of the Company setting forth such adjustment and showing in detail the facts upon which
such adjustment is based. The Company will forthwith mail a copy of each such certificate to each
Holder.
7.4 Notices of Record Date, Etc. In the event that:
(a) the Company shall declare any dividend or other distribution to the holders of Common
Stock, or authorizes the granting to Common Stock holders of any right to subscribe for, purchase,
or otherwise acquire any shares of stock of any class or any other securities; or
(b) the Company authorizes any capital reorganization of the Company, any reclassification of
the capital stock of the Company, any consolidation or merger of the Company with or into another
corporation, or any conveyance of all or substantially all of the assets of the Company to another
corporation or entity; or
(c) the Company authorizes any voluntary or involuntary dissolution, liquidation, or winding
up of the Company,
then, and in each such case, the Company shall mail or cause to be mailed to the holder of this
Warrant at the time outstanding a notice specifying, as the case may be, (i) the date on which a
record is to be taken for the purpose of such dividend, distribution or right, and stating the
amount and character of such dividend, distribution, or right, or (ii) the date on which such
reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation, or
winding up is to take place, and the time, if any is to be fixed, as to which the holders of record
of Common Stock (or such other securities at the time receivable upon the exercise of the Warrant)
shall be entitled to exchange their shares of Common Stock (or such Other Securities) for
securities or other property deliverable upon such reorganization, reclassification, consolidation,
merger, conveyance, dissolution, liquidation, or winding up. Such notice shall be mailed at least
20 days prior to the date therein specified.
7.5 No Impairment. The Company will not, by any voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed hereunder by the Company,
but will at all times in good faith assist in the carrying out of all the provisions of this
Section 8 and in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the Holder of this Warrant against impairment.
8. Transfer to Comply with the Securities Act. This Warrant and any Warrant Stock or Other
Securities may not be sold, transferred, pledged, hypothecated, or otherwise disposed of except as
follows: (a) to a person who, in the opinion of counsel to the Company, is a person to whom this
Warrant or the Warrant Stock or Other Securities may legally be transferred without registration
and without the delivery of a current prospectus
3
under the Securities Act with respect thereto and
then only against receipt of an agreement of such person to comply with the provisions of this
Section 8 with respect to any resale or other disposition of such securities; or (b) to any person
upon delivery of a prospectus then meeting the requirements of the Securities Act relating to such
securities and the offering thereof for such sale or disposition, and thereafter to all successive
assignees.
9. Legend. Unless the shares of Warrant Stock or Other Securities have been registered under
the Securities Act, upon exercise of this Warrant and the issuance of any of the shares of Warrant
Stock, all certificates representing shares shall bear on the face thereof substantially the
following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not
be sold, offered for sale, assigned, transferred or otherwise
disposed of, unless registered pursuant to the provisions of that
Act or unless an opinion of counsel to the Corporation is obtained
stating that such disposition is in compliance with an available
exemption from such registration.
10. Notices. All notices required hereunder shall be in writing and shall be deemed given when
telegraphed, delivered personally or within two days after mailing when mailed by certified or
registered mail, return receipt requested, to the Company or the Holder, as the case may be, for
whom such notice is intended, if to the Holder, at the address of such party shown on the books of
the Company, or if to the Company, its principal executive office, Attn: President, or at such
other address of which the Company or the Holder has been advised by notice hereunder.
11. Applicable Law. The Warrant is issued under and shall for all purposes be governed by and
construed in accordance with the laws of the state of Nevada, without regard to the conflict of
laws provisions of such state.
4
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed on its behalf, in its
corporate name, by its duly authorized officer, all as of the day and year first above written.
| SMITH & WESSON HOLDING CORPORATION |
||||
| By: | ||||
5
WARRANT EXERCISE FORM
The undersigned hereby irrevocably elects to (i) exercise the within Warrant to purchase
_____ shares of the Common Stock of Smith & Wesson Holding Corporation, a Nevada corporation,
pursuant to the provisions of Section 1 of the attached Warrant, and hereby makes payment of
$_____ in payment therefor, or (ii) exercise this
Warrant for the purchase of _____ shares
of Common Stock, pursuant to the provisions of Section 2 of the attached Warrant. The
undersigned’s execution of this form constitutes the undersigned’s agreement to all the terms of
the Warrant and to comply therewith.
| Signature | ||||
| Print Name: | ||||
| Signature, if jointly held | ||||
| Print Name: | ||||
| Date |
6
ASSIGNMENT FORM
FOR VALUE RECEIVED_____(“Assignor”) hereby sells, assigns and transfers
unto _______(“Assignee”) all of Assignor’s right, title and interest in,
to and under Warrant No. W-_____issued by _______, dated _______.
DATED: _________________
| ASSIGNOR: | ||||
| Signature | ||||
| Print Name: | ||||
| Signature, if jointly held | ||||
| Print Name: | ||||
| ASSIGNEE: |
The undersigned agrees to all of the terms of the Warrant and to comply therewith.
| Signature | ||||
| Print Name: | ||||
| Signature, if jointly held | ||||
| Print Name: |
7
Exhibit 4.7
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND MAY NOT BE SOLD, OFFERED
FOR SALE, ASSIGNED, TRANSFERRED, OR OTHERWISE DISPOSED OF, UNLESS REGISTERED PURSUANT TO THE
PROVISIONS OF THE SECURITIES ACT OR AN OPINION OF COUNSEL IS OBTAINED STATING THAT SUCH DISPOSITION
IS IN COMPLIANCE WITH AN AVAILABLE EXEMPTION FROM SUCH REGISTRATION.
May 11, 2001 (Original Issue Date)
Smith & Wesson Holding Corporation
Warrant for the Purchase of Shares of Common Stock
No. RLS-1A
For value received, this Warrant is hereby issued by Smith & Wesson Holding Corporation, a
Nevada corporation (the “Company”), to Robert L. Scott (the “Holder”). Subject to the provisions
of this Warrant, the Company hereby grants to Holder the right to purchase from the Company
5,000,000 fully paid and non-assessable shares of Common Stock (sometimes called “Warrant Stock”),
at a price of $0.89 per share (the “Exercise Price”).
The Holder agrees with the Company that this Warrant is issued, and all the rights hereunder
shall be held, subject to all of the conditions, limitations and provisions set forth herein.
1. Exercise of Warrant. Subject to the terms and conditions set forth herein, this Warrant
may be exercised in whole or in part, pursuant to the procedures provided below, at any time on or
before 5:00 p.m., Eastern time, on May 11, 2006, (the “Expiration Date”) or, if such day is a day
on which banking institutions in New York are authorized by law to close, then on the next
succeeding day that shall not be such a day. To exercise this Warrant, the Holder shall present
and surrender this Warrant to the Company at its principal office, with the Warrant Exercise Form
attached hereto duly executed by the Holder and accompanied by payment (either (a) in cash or by
check, payable to the order of the Company, (b) by cancellation by the Holder of indebtedness or
other obligations of the Company to the Holder, (c) by such other means as may be authorized by the
Board of Directors of the Company from time to time, or (d) by a combination of (a), (b), or (c)),
of the aggregate Exercise Price for the total aggregate number of shares for which this Warrant is
exercised. Upon receipt by the Company of this Warrant, together with the executed Warrant
Exercise Form and payment of the Exercise Price for the shares to be acquired, in proper form for
exercise, and subject to the Holder’s compliance with all requirements of this Warrant for the
exercise hereof, the Holder shall be deemed to be the holder of record of the shares of Common
Stock (or Other Securities) issuable upon such exercise, notwithstanding that the stock transfer
books of the Company shall then be closed or that certificates representing such shares of Common
Stock shall not then be actually delivered to the Holder; provided, however, that
no exercise of this Warrant shall be effective, and the Company shall have no obligation to issue
any Common Stock or Other Securities to the Holder upon any attempted exercise of this Warrant,
unless the Common Stock has been registered under the Securities Act or the Holder shall have first
delivered to the Company, in form and substance reasonably satisfactory to the Company, appropriate
representations so as to provide the Company reasonable assurances that the securities issuable
upon exercise may be issued without violation of the registration requirements of the Securities
Act and applicable state securities laws, including without limitation representations that the
exercising Holder is an “accredited investor” as defined in Regulation D under the Securities Act
and that the Holder is familiar with the Company and its business and financial condition and has
had an opportunity to ask questions and receive documents relating thereto to his reasonable
satisfaction.
8
2. Reservation of Shares. The Company will at all times reserve for issuance and delivery upon
exercise of this Warrant all shares of Common Stock or other shares of capital stock of the Company
(and Other Securities) from time to time receivable upon exercise of this Warrant. All such shares
(and Other Securities) shall be duly authorized and, when issued upon such exercise, shall be
validly issued, fully paid and non-assessable, and free of all preemptive rights.
3. Fractional Shares. No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant, but the Company shall pay the Holder an amount equal to
the Fair Market Value (as defined below) of such fractional share of Common Stock in lieu of each
fraction of a share otherwise called for upon any exercise of this Warrant.
4. Fair Market Value. For purposes of this Warrant, the Fair Market Value of a share of
Common Stock (or Other Security) shall be determined as of any date (the “Value Date”) by the
Company’s Board of Directors in good faith; provided, however, that where there exists a public
market for the Company’s Common Stock on the Value Date, the fair market value per share shall be
either of the following:
(a) If the Common Stock is listed on a national securities exchange or admitted to
unlisted trading privileges on such exchange or listed for trading on the NASDAQ system, the
Fair Market Value shall be the last reported sale price of the security on such exchange or
system on the last business day prior to the Value Date or if no such sale is made on such
day, the average of the closing bid and asked prices for such day on such exchange or
system; or
(b) If the Common Stock is not so listed or so admitted to unlisted trading privileges,
the Fair Market Value shall be the mean of the last reported bid and asked prices reported
by the National Quotation Bureau, Inc. on the last business day prior to the Value Date.
5. Assignment or Loss of Warrant. Subject to the transfer restrictions herein (including
Section 8), upon surrender of this Warrant to the Company or at the office of its stock transfer
agent, if any, with the Assignment Form annexed hereto duly executed and funds sufficient to pay
any transfer tax, the Company shall, without charge, execute and deliver a new Warrant in the name
of the assignee named in such instrument of assignment and this Warrant shall promptly be canceled.
Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction, or mutilation of this Warrant, and of reasonably satisfactory indemnification by the
Holder, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall
execute and deliver a replacement Warrant of like tenor and date.
6. Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of
a stockholder in the Company, either at law or in equity, and the rights of the Holder are limited
to those expressed in this Warrant.
7. Adjustments.
7.1 Adjustment for Recapitalization. If the Company shall at any time subdivide its
outstanding shares of Common Stock (or Other Securities at the time receivable upon the exercise of
the Warrant) by recapitalization, reclassification, or split-up thereof, or if the Company shall
declare a stock dividend or distribute shares of Common Stock to its stockholders, the number of
shares of Common Stock (or Other Securities) subject to this Warrant immediately prior to such
subdivision shall be proportionately increased, and if the Company shall at any time combine the
outstanding shares of Common Stock by recapitalization, reclassification, or combination thereof,
the number of shares of Common Stock subject to this Warrant immediately prior to such combination
shall be proportionately decreased. Any such adjustment and adjustment to the Exercise Price
pursuant to this Section 7.1 shall be effective at the close of business on the effective date of
such subdivision or combination or if any adjustment is the result of a stock dividend or
distribution then the effective date for such adjustment based thereon shall be the record date
therefor.
Whenever the number of shares of Common Stock purchasable upon the exercise of this Warrant is
adjusted, as provided in this Section 7.1, the Exercise Price shall be adjusted to the nearest cent
by multiplying such Exercise Price immediately prior to such adjustment by a fraction (x) the
numerator of which shall be the number of shares of
9
Common Stock purchasable upon the exercise
immediately prior to such adjustment, and (y) the denominator of which shall be the number of
shares of Common Stock so purchasable immediately thereafter.
7.2 Adjustment for Reorganization, Consolidation, Merger, Etc. In case of any reorganization
of the Company (or any other corporation, the securities of which are at the time receivable on the
exercise of this Warrant) after the date hereof or in case after such date the Company (or any such
other corporation) shall consolidate with or merge into another corporation or convey all or
substantially all of its assets to another corporation, then, and in each such case, the Holder of
this Warrant upon the exercise thereof as provided in Section 1 at any time after the consummation
of such reorganization, consolidation, merger, or conveyance, shall be entitled to receive, in lieu
of the securities and property receivable upon the exercise of this Warrant prior to such
consummation, the securities or property to which such Holder would have been entitled upon such
consummation if such Holder had exercised this Warrant immediately prior thereto; in each such
case, the terms of this Warrant shall be applicable to the securities or property receivable upon
the exercise of this Warrant after such consummation.
7.3 Certificate as to Adjustments. The adjustments provided in this Section 7 shall be
interpreted and applied by the Company in such a fashion so as to reasonably preserve the
applicability and benefits of this Warrant (but not to increase or diminish the benefits
hereunder). In each case of an adjustment in the number of shares of Common Stock receivable on
the exercise of this Warrant, the Company at its expense will promptly compute such adjustment in
accordance with the terms of this Warrant and prepare a certificate executed by two executive
officers of the Company setting forth such adjustment and showing in detail the facts upon which
such adjustment is based. The Company will forthwith mail a copy of each such certificate to each
Holder.
7.4 Notices of Record Date, Etc. In the event that:
(a) the Company shall declare any dividend or other distribution to the holders of Common
Stock, or authorizes the granting to Common Stock holders of any right to subscribe for, purchase,
or otherwise acquire any shares of stock of any class or any other securities; or
(b) the Company authorizes any capital reorganization of the Company, any reclassification of
the capital stock of the Company, any consolidation or merger of the Company with or into another
corporation, or any conveyance of all or substantially all of the assets of the Company to another
corporation or entity; or
(c) the Company authorizes any voluntary or involuntary dissolution, liquidation, or winding
up of the Company,
then, and in each such case, the Company shall mail or cause to be mailed to the holder of this
Warrant at the time outstanding a notice specifying, as the case may be, (i) the date on which a
record is to be taken for the purpose of such dividend, distribution or right, and stating the
amount and character of such dividend, distribution, or right, or (ii) the date on which such
reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation, or
winding up is to take place, and the time, if any is to be fixed, as to which the holders of record
of Common Stock (or such other securities at the time receivable upon the exercise of the Warrant)
shall be entitled to exchange their shares of Common Stock (or such Other Securities) for
securities or other property deliverable upon such reorganization, reclassification, consolidation,
merger, conveyance, dissolution, liquidation, or winding up. Such notice shall be mailed at least
20 days prior to the date therein specified.
7.5 No Impairment. The Company will not, by any voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed hereunder by the Company,
but will at all times in good faith assist in the carrying out of all the provisions of this
Section 8 and in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the Holder of this Warrant against impairment.
8. Transfer to Comply with the Securities Act. This Warrant and any Warrant Stock or Other
Securities may not be sold, transferred, pledged, hypothecated, or otherwise disposed of except as
follows: (a) to a person who, in the opinion of counsel to the Company, is a person to whom this
Warrant or the Warrant Stock or Other Securities may legally be transferred without registration
and without the delivery of a current prospectus
10
under the Securities Act with respect thereto and
then only against receipt of an agreement of such person to comply with the provisions of this
Section 8 with respect to any resale or other disposition of such securities; or (b) to any person
upon delivery of a prospectus then meeting the requirements of the Securities Act relating to such
securities and the offering thereof for such sale or disposition, and thereafter to all successive
assignees.
9. Legend. Unless the shares of Warrant Stock or Other Securities have been registered under
the Securities Act, upon exercise of this Warrant and the issuance of any of the shares of Warrant
Stock, all certificates representing shares shall bear on the face thereof substantially the
following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not
be sold, offered for sale, assigned, transferred or otherwise
disposed of, unless registered pursuant to the provisions of that
Act or unless an opinion of counsel to the Corporation is obtained
stating that such disposition is in compliance with an available
exemption from such registration.
10. Notices. All notices required hereunder shall be in writing and shall be deemed given when
telegraphed, delivered personally or within two days after mailing when mailed by certified or
registered mail, return receipt requested, to the Company or the Holder, as the case may be, for
whom such notice is intended, if to the Holder, at the address of such party shown on the books of
the Company, or if to the Company, its principal executive office, Attn: President, or at such
other address of which the Company or the Holder has been advised by notice hereunder.
11. Applicable Law. The Warrant is issued under and shall for all purposes be governed by and
construed in accordance with the laws of the state of Nevada, without regard to the conflict of
laws provisions of such state.
11
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed on its behalf, in its
corporate name, by its duly authorized officer, all as of the day and year first above written.
| SMITH & WESSON HOLDING CORPORATION |
||||
| By: | ||||
12
WARRANT EXERCISE FORM
The undersigned hereby irrevocably elects to (i) exercise the within Warrant to purchase
_______shares of the Common Stock of Smith & Wesson Holding Corporation, a Nevada corporation,
pursuant to the provisions of Section 1 of the attached Warrant, and hereby makes payment of
$_______in payment therefor, or (ii) exercise this Warrant for the purchase of _______shares
of Common Stock, pursuant to the provisions of Section 2 of the attached Warrant. The
undersigned’s execution of this form constitutes the undersigned’s agreement to all the terms of
the Warrant and to comply therewith.
| Signature | ||||
| Print Name: | ||||
| Signature, if jointly held | ||||
| Print Name: | ||||
| Date |
13
ASSIGNMENT FORM
FOR VALUE RECEIVED_______(“Assignor”) hereby sells, assigns and transfers
unto _______(“Assignee”) all of Assignor’s right, title and interest in,
to and under Warrant No. W-_______issued by _______, dated _______.
DATED: _________________
| ASSIGNOR: | ||||
| Signature | ||||
| Print Name: | ||||
| Signature, if jointly held | ||||
| Print Name: | ||||
| ASSIGNEE: |
The undersigned agrees to all of the terms of the Warrant and to comply therewith.
| Signature | ||||
| Print Name: | ||||
| Signature, if jointly held | ||||
| Print Name: |
14
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 of
(Nos. 333-87748 and 333-87750) of Smith & Wesson Holding Corporation and its subsidiaries of our
report dated August 15, 2005 relating to the financial statements and financial statement schedule
of Smith & Wesson Holding Corporation, which appear in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP |
||||
Hartford, Connecticut |
||||
August 15, 2005 |
15
EXHIBIT 31.1
CERTIFICATION
I, Michael F. Golden, certify that:
1. I have reviewed this annual report on Form 10-K of Smith & Wesson Holding Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this annual report is
being prepared;
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures as of the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize, and report financial information;
and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
| /s/ michael f. golden | ||||
| Michael F. Golden | ||||
| President and Chief Executive Officer | ||||
Date: August 15, 2005
EXHIBIT 31.2
CERTIFICATION
I, John A. Kelly, certify that:
1. I have reviewed this annual report on Form 10-K of Smith & Wesson Holding Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this annual report is
being prepared;
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures as of the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize, and report financial information;
and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
| /s/ john a. kelly | ||||
| John A. Kelly | ||||
| Chief Financial Officer and Treasurer | ||||
Date: August 15, 2005
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Smith & Wesson Holding Corporation (the
“Company”) for the year ended April 30, 2005, as filed with the Securities and Exchange Commission
on the date hereof (the “Report”), I, Michael F. Golden, President and Chief Executive Officer of
the Company, certify, to my best knowledge and belief, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and | ||
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /s/ michael f. golden | ||||
| Michael F. Golden | ||||
| President and Chief Executive Officer | ||||
August 15, 2005
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Smith & Wesson Holding Corporation (the
“Company”) for the year ended April 30, 2005, as filed with the Securities and Exchange Commission
on the date hereof (the “Report”), I, John A. Kelly, Chief Financial Officer and Treasurer of the
Company, certify, to my best knowledge and belief, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and | ||
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /s/ john a. kelly | ||||
| John A. Kelly | ||||
| Chief Financial Officer and Treasurer | ||||
August 15, 2005