| SMITH & WESSON HOLDING CORP Item 1A 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 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 |
| We may not 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 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 |
| There can be no assurance that we will be able to continue the increases in our manufacturing productivity |
| We are currently involved in numerous lawsuits |
| We are currently defending several 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, marketing, and distribution of handguns by the defendant manufacturers and distributors |
| Government settlements have adversely affected our business |
| We believe we are the only gun manufacturer to enter into settlement agreements with the city of Boston, the Boston Public Health Commission, and the US 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 US 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 |
| 13 _________________________________________________________________ [69]Table of Contents 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 |
| 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 is 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 dlra3dtta7 million in the fiscal year ended April 30, 2006 |
| 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 |
| 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 primarily based 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 and brand |
| 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 reputation 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 |
| 14 _________________________________________________________________ [70]Table of Contents 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 |
| 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 our anticipated volume of products in a more efficient and cost-efficient manner |
| We may not 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 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 |
| 15 _________________________________________________________________ [71]Table of Contents 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 |
| 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 |
| 16 _________________________________________________________________ [72]Table of Contents We may not be successful in overcoming problems encountered in connection with any acquisitions, and our inability to do so could disrupt our operations and reduce our profitability |
| Our inability to protect our intellectual property or obtain the right to use intellectual property from third parties 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 reduce our sales and increase our costs |
| 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 |
| We may be unable 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, however such agreements are now required |
| 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 |
| 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 |
| Our means of protecting our proprietary rights in the United States or abroad may prove to be inadequate and competitors may be able to 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 result in a reduction of our foreign sales, as a result of the sale of our products in 50 countries and our importation of firearms from Walther, which is based in Germany, and carbon and stainless steel from suppliers in Great Britain and Italy, including Osborn Steel Extrusion Limited in Great Britain, and Calvi Special Steel Profiles SPA and Stainless Bars SA in Italy |
| Protectionist trade legislation in 17 _________________________________________________________________ [73]Table of Contents 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 reduce our ability to sell our products in foreign markets, the ability of foreign customers to purchase our products, and our ability to import firearms and parts from Walther and other foreign suppliers |
| While we transact business predominantly in US dollars and bill and collect most of our sales in US 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 |
| 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 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 US dollar |
| Annually, we purchase approximately dlra10 million of inventory from a European supplier |
| This exposes us to risk from foreign exchange rate fluctuations |
| A 10prca drop in the value of the US dollar in relation to the euro would, to the extent not covered through price adjustments, reduce our gross profit on that dlra10 million of inventory by approximately dlra1 million |
| In an effort to offset our risks from unfavorable foreign exchange fluctuations, we entered into euro participating forward options under which we purchase euros to be used to pay the European manufacturer |
| 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; • 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, US trade policies, such as “most favored nation” status and trade preferences, could affect the attractiveness of our services to our US customers |
| 18 _________________________________________________________________ [74]Table of Contents 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 47 years |
| 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 |
| Our business is seasonal with our July fiscal quarters being our weakest quarter |
| 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 |
| 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 |
| The regulation of firearms could become more restrictive in the future and any such restriction would harm our business |
| In June 2004, we recalled Walter P22 pistols sold in California in order to retrofit them to comply with California law |
| Environmental laws and regulations may impact our business |
| 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 |
| On February 25, 2003, we sold approximately 85 acres of company-owned property in the city of Springfield, Massachusetts to the Springfield Redevelopment Authority, or SRA 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 Massachusetts Department of Environmental Protection’s voluntary remediation program, referred to as the Massachusetts Contingency Plan or MCP, specifically the South Field, West Field, and Fire Pond |
| This property was acquired by the SRA as a defined “Brownfield” under CERCLA We believe that the SRA plans to create a light industrial and other commercial use development park on the property |
| The SRA, with the support of the city of Springfield, has received governmental “Brownfield” grants 19 _________________________________________________________________ [75]Table of Contents or loans to facilitate the remediation and development of the property |
| The remediation of the property was completed during the quarter ended July 31, 2005 |
| We may not have identified all existing contamination on our properties and we cannot predict whether 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 |
| 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 12dtta7prca and 9dtta8prca, 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 15prca or more of our common stock or a tender offer or exchange offer of 15prca 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 50prca 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 dlra0dtta01 per stock purchase right at any time before any person or group acquires 15prca or more of our outstanding common stock |
| 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 |
| 20 _________________________________________________________________ [76]Table of Contents Sale of a substantial number of shares that are eligible for sale could adversely affect the price of our common stock |
| As of April 30, 2006, there were outstanding 39cmam310cmam543 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 1prca 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 |
| As of April 30, 2006, we had outstanding options to purchase 2cmam908cmam167 shares of common stock under our stock option plans and we had issued 744cmam902 of the 10cmam000cmam000 shares of common stock reserved for issuance under our employee stock purchase plan |
| As of April 30, 2006, we also had outstanding warrants to purchase 1cmam320cmam000 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 |
| 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 |
| 21 _________________________________________________________________ [77]Table of Contents 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 |