No longer under the gun
Sunday, May 12, 2002
By WILLIAM FREEBAIRN
Robert L. Scott, president and chief executive officer of Smith & Wesson, is shown last month on the stairs at the company's Springfield headquarters near a portrait of Daniel B. Wesson, one of the company's founders
What a difference a year makes.
One year ago, Smith & Wesson was a company in deep trouble, its sales slumping and customers feeling betrayed by its gun safety and distribution deal with the government.
Dealers were ready to defect if the deal was implemented, but the company was bound by a court order to enforce the restrictions or face huge fines.
Enter a small Arizona gun lock company named Saf-T-Hammer Corp., which made an improbable bid to buy Smith & Wesson from its British owner Tomkins plc as the Springfield company lay suffering from largely self-inflicted wounds.
On May 11, 2001, Saf-T-Hammer, a company with five employees, had bought the nation's second-largest handgun manufacturer.
One year later, Smith & Wesson is once again popular with its customers, has seen sales boom and is no longer governed by the court deal signed by previous management.
"It's been a remarkable year for them," said Russ Thurman, editor of Shooting Industry magazine in San Diego. "Very few companies have weathered the battering Smith & Wesson has taken and survived, let alone turned around."
At the center of the story is Robert L. Scott, a former vice president at Smith & Wesson during the 1990s who returned with the new buyers to head the company. As he marked his one-year anniversary as the company president and chief executive officer yesterday, Scott could look back on a year of major changes for the firm.
The company has reversed a slide in sales that has been estimated at between 40 and 50 percent.
Smith & Wesson has been welcomed back into the gun industry fold, and Scott himself recently earned one of the industry's highest awards.
The company has been released from the unpopular strictures of a Boston court decree imposing limits on its dealers.
The firm has reported two consecutive quarters of profitability, following the first losses in decades in late 2000 and early 2001.
Although the company let go almost 100 people in the past 18 months, it has recently rehired some workers and is working overtime shifts this month to keep up with demand.
The crisis at Smith & Wesson was the result of events dating back almost a decade. The gun business was booming in the early 1990s, but a series of events was soon to shake the business.
With gun-related violence on the rise, gun control proponents launched a new strategy to try to attack the problem. Victims of crimes sued gun manufacturers, ultimately without much success.
Then, in 1998, the city of New Orleans filed a lawsuit against gun manufacturers seeking to recover some of the social costs of gun violence. The city, assisted by the Washington-based Center to Prevent Handgun Violence, said gun-makers were not being responsible in their design and distribution of guns.
More and more cities joined in filing lawsuits, until by decade's end 32 local governments had sued.
Scott, who had joined the company in 1989 as vice president of sales and marketing, saw the raft of lawsuits against his employer escalate. Around 1997, he was selected to head an initiative to increase the company's contract manufacturing, where Smith & Wesson made metal components for automobile and motorcycle manufacturers, among others.
Scott left Smith & Wesson in 1999 for an Arizona company that planned to capitalize on safety concerns by making and selling gun trigger locks and other firearm safety equipment. He was offered the presidency of Saf-T-Hammer Corp., a small publicly held company.
"It was an opportunity to try something from concept to reality," Scott said.
As the costs of defending the lawsuits soared, Smith & Wesson's president at the time , L.E. "Ed" Shultz, struck a secret deal in early 2000 with representatives of the Clinton administration who were working with the cities suing the industry. In exchange for agreeing to a strict code of conduct for itself and its dealers, Smith & Wesson would be released from most of the lawsuits.
The deal, announced by the White House on St. Patrick's Day, was immediately denounced by gun enthusiasts who considered Smith & Wesson to be giving up constitutional rights to bear arms.A consumer backlash began that affected Smith & Wesson sales immediately.
Scott, in Arizona, watched in surprise the announcement of the deal between Smith & Wesson and the Clinton administration. While he said he supported efforts to negotiate an end to the lawsuits, which were bleeding gun companies dry, he was surprised by the extent of the deal. "It was very severe," Scott said.
He understood that customers, most of whom had strong views on the Second Amendment, would turn on Smith & Wesson. And the requirements the agreement imposed on dealers were even more troublesome to the company.
Many dealers said they could not agree to the new rules, which would have required them to store Smith & Wesson guns differently, to stop selling Smith & Wesson handguns at gun shows that did not require background checks before a sale and meet other requirements.
In addition, the deal required Smith & Wesson to continue to make safety improvements in its weapons and pursue technology that would allow only an authorized user to fire a handgun.
Sales dropped by at least 40 percent by late 2000, and some industry observers including Thurman believe the decline may have been closer to 50 percent. It went from being the nation's largest handgun maker to No. 2 for calendar year 2000.
"I was watching from afar, and it was a painful thing to see," Scott said.
By mid-year, Tomkins made it clear that it wanted to sell the gun company, which no longer fit in with the firm's focus on non-consumer products.
Scott and Saf-T-Hammer Chairman Mitchell Saltz met in October 2000 with representatives of Tomkins, and by January, Tomkins had decided to negotiate seriously with Saf-T-Hammer.
Scott said Tomkins had an interest in selling to a publicly held company that would have the best chance of keeping Smith & Wesson going. One of Tomkins' concerns was that it be as insulated as possible from liability in the pending gun lawsuits.
"If there was a huge judgment, there was some fear that it would become a judgment against Tomkins," Scott said.
So Tomkins included restrictions on how Saf-T-Hammer could use the cash in Smith & Wesson's bank accounts, limiting its use to operational expenses.
Saf-T-Hammer paid $15 million for Smith & Wesson. In the end, when traditional financing fell through, the Arizona company arranged to borrow the entire purchase price.
The $5 million downpayment was borrowed from a Washington state businessman with a background in precision machining. Colton Melby loaned the money for one year in exchange for the right to buy a large number of shares at 40 cents each.
The company stock (OTC: SMWS) closed the day the sale was announced last year at $1.16 and has risen to over $2.50 in recent sessions.
Melby recently converted the loaned money into a 30 percent stake in Smith & Wesson Holding Co., the new name for Saf-T-Hammer.
The remaining $10 million for the purchase was borrowed from Tomkins itself. That one-year loan was repaid recently with the proceeds of a long-term loan from Banknorth Group.
The deal to buy Smith & Wesson closed on May 11, 2001, a Friday, and the following Monday Scott and others from Saf-T-Hammer were at the Springfield plant. One of the first actions was to let go 45 people, most of them salaried employees.
"We simply couldn't afford them any longer," Scott said.
It was a smaller company than he had left, but Scott was glad to be back at Smith & Wesson, this time in the driver's seat.
Over the coming months, the company was welcomed by industry figures, dealers and customers at several trade shows. For the National Rifle Association show last spring, the firm had buttons made saying "American-made, American-owned" that proved popular with gun owners.
Gun people were willing to give Scott a chance, even though he was not publicly able to repudiate the deal with the Clinton administration and a subsequent consent decree reached with the city of Boston to settle the lawsuit there.
Scott and other company executives showed patience with the unpopular deals the company had signed, Thurman said.
"He wasn't shoved and pushed into making extraordinary statements that people wanted him to make, and say 'We're not going to abide by this,'" Thurman said.
Scott began negotiating to get Smith & Wesson out from under the Boston consent decree, which carried the weight of law and could be enforced if Boston went to court.
"We inherited those agreements, we couldn't just ignore them," he said. "There were penalties in the Boston agreement . . . I could have been in jail, the company could have been fined hundreds of thousands of dollars."
Company lawyers met with their counterparts in Boston and explained that the consent decree could put the company out of business. They shared sales figures with the Boston lawyers, Scott said, and negotiations began to change the deal.
"If the consent decree had not been modified significantly or eliminated . . . the company as we know it could not survive," Scott said.
Even with the decree in place, sales were rising at Smith & Wesson.
Last fall, sales of guns nationwide took off, which many people said was a reaction to the tragedy of the Sept. 11 attacks.
"We already saw the trend before that," Scott said. "It probably sped the trend up for us."
The company reported strong sales through October, a traditionally good month, and November. In March, it said it turned a profit for the quarter ended Jan. 31.
At the same time, the company and Boston lawyers were close to a deal to change the consent decree. In April, just before a scheduled trial in the case against all the gun manufacturers except for Smith & Wesson, Boston suddenly announced it would drop the lawsuit.
The city said it believed gun companies were making better efforts to produce safe guns, and gun control supporters pointed to Massachusetts' toughest-in-the-nation gun laws.
But Scott said he believes the back-and-forth with Boston lawyers contributed to the decision of the city to drop its lawsuit and, days later, withdraw the Smith & Wesson consent decree entirely.
"In a non-adversarial way, they were able to better understand how the industry worked."
News of the end to the consent decree was gratifying to dealers and customers alike.
Gun dealers were relieved they would not have to agree to many of the restrictions included in the Boston court agreement. The consent decree would have required all Smith & Wesson dealers to lock handguns made by the company in safes at night and provide additional safety training to their workers.
In many respects, Smith & Wesson was back where it had been before the March 2000 agreement.
Scott said he is satisfied with the turn-around at the company, but believes it is a feeling best shared with the team at the gun company. "Yes, I get satisfaction, but hopefully everyone working at Smith & Wesson gets that satisfaction from what has occurred."
The company still faces obstacles. It owes $30 million to Tomkins, part of an intra-company debt from Smith & Wesson to its former parent firm.
While the stock price has risen, it still does not meet the requirements for being listed on a major stock exchange like the Nasdaq. The shares trade on the over-the-counter bulletin boards, which limit the interest by institutional investors and the ability to buy and sell large quantities of the stock.
And dozens of lawsuits against Smith & Wesson remain alive. In fact, a new suit was filed in March by Jersey City, N.J.
Scott said he believes most of the court rulings and appeals are going the industry's way, and more states have approved laws preventing such suits by cities. "I'm optimistic," he said of the future.
Smith & Wesson hopes to use its size and its access to capital to make some new partnerships, such as a deal earlier this year to be the exclusive distributor for a line of video observation equipment for police made by a Vermont firm. "There are two or three other similar projects," Scott said.
The company also hopes to capitalize better on its brand name, which is famous worldwide. "We can look at the Harley-Davidson model to see what can be done as far as extension and support," Scott said.
The company already sells a line of bicycles aimed at law enforcement as well as branded clothing and even food products bearing their famous logo.
The company could also buy up small firms that would never have interested giant Tomkins.
The industry will survive the lawsuits and increasing regulation that it faces, Scott said. "We're very bullish. This industry tends to survive thick and thin, and ups and downs."
© 2002 UNION-NEWS. Used with permission.
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