INDUSTRY NEWS: JULY 2004

by Robert M. Hausman

Brady Campaign Files Suit Against ATF

Two weeks after the U.S. Senate debated and ultimately rejected unacceptable amendment-laden legislation that would have prevented frivolous lawsuits against the industry, the Brady Campaign to Prevent Gun Violence and its “Million” Mom March subsidiary, filed another such federal lawsuit against the Bureau of Alcohol, Tobacco, Firearms & Explosives, Edgar Demenech, acting director of ATF, the U.S. Justice Department and Attorney General John Ashcroft.

The suit, being a prime hypocritical example of why federal legislation is needed to protect the industry against such abuses of the legal system, was filed March 18th in the U.S. District Court for the District of Columbia. The suit alleges that the named officials, the Justice Dept. and ATF, violated federal law by allowing firearms manufacturers to make thousands of new “illegal assault weapons.”

The Brady Campaign says its suit is based in part on documents obtained from ATF through the Freedom of Information Act – before Congress moved to prohibit the agency to disallow most FOIA requests.

The suit alleges Ashcroft and ATF allowed gunmakers to violate the 1994 Clinton Administration promulgated ban on the manufacture, sale and possession of certain specific semiautomatic firearms and others defined by a set of cosmetic features as “assault weapons.”

The ban is due to expire on Sept. 13th, unless Congress renews it. One of the amendments tacked on to the Protection of Lawful Commerce in Firearms Act (which helped cause the bill’s defeat in early March) would have made the ban permanent. The Brady Campaign has been intensely lobbying for an extension of the ban and this latest suit seems to be part of a calculated strategy.

The lawsuit claims that among the documents obtained through the FOIA was private correspondence between ATF and Bushmaster Firearms of Windham, Maine, in which ATF repeatedly gave Bushmaster permission to manufacture new AR-15 type “receivers” to replace damaged or defective receivers that were possessed before the ban went into effect in 1994, which were protected under the law’s “grandfather” clause. The Brady Campaign argues that since the “receivers” are legally considered to be firearms under U.S. law, by allowing the manufacture of new receivers, ATF has been allowing manufacture of new “assault weapons” in contravention of the statute.

The suit says ATF authorized Bushmaster to make at least 96 new “assault weapons” since 1997 and that ATF likely allowed thousands of “illegal assault weapons” to be manufactured since the onset of the ban by other manufacturers.

The Brady Campaign further argues that when Congress grandfathered “assault weapons” legally possessed when the ban was passed, it envisioned that over time the number of such arms in circulation would decline due to wear and tear. Thus, the suit alleges, the Justice Dept.’s policy ensures, instead, that the grandfathered “assault weapons” will remain functional into the foreseeable future in contravention of the will of Congress.

The suit seeks a court order prohibiting the government from continuing to allow the manufacture of new receivers for semi-automatic “assault weapons.”

Taurus Adds 40,000 to NRA’s Member Rolls

At the opening of the 2004 SHOT Show, Taurus International Manufacturing presented a “check” representing over 40,000 new National Rifle Association members gained during the past year (through the Taurus NRA Member Recruitment Program) to Wayne LaPierre, NRA Executive Vice President.

Morrison also presented LaPierre with the Taurus Defender of Freedom Award in recognition of LaPierre’s leadership in the areas of the preservation of freedom and the U.S. Constitution, as well as his stewardship of the NRA.

Taurus announced no fewer than 12 new products at the show, including their version of the Model 500, a .50 caliber revolver to become available this fall.

Gerber Acquires CMG Equipment

Gerber Legendary Blades® best known for knives, tools and outdoor recreational gear, has acquired CMG Equipment LLC, a manufacturer and marketer of light emitting diode (LED) -based portable outdoor lighting products.

LED technology, with virtually indestructible bulbs that burn for over 100,000 hours and consume a fraction of the energy of their incandescent peers, is reshaping the portable lighting industry, according to Gerber.

CMG’s light are planned to form the foundation of a complete Gerber LED lighting line, with additional products to be released later this year. CMG’s operations will be relocated from Chicago to Gerber’s headquarters in Portland, Oregon.

“The LED lighting market is positioned for explosive growth, commented Gerber president, Chad Vincent, “and the products, expertise and technology CMG brings to Gerber will help us capitalize on that opportunity.”

Lozito Heads ADCO’s New Gun Division ADCO Sales appoints Charlie Lozito as national sales manager. Lozito is well known as a key player/builder of the Stoeger line of guns and books during the past 20 years. ADCO will also soon announce the establishment of ADCO Arms Co., Inc., which will focus on the firearms side of the business, while optics and other accessories are handled through a complete sales unit.

The goal is to have a seamless program for all of ADCO’s goods. Lozito will oversee key distributors, which will maintain the bulk of the Original CZ Strakonice SRO gun line and Diamond brand shotguns. He will be based in New Jersey while maintaining direct lines of communication with ADCO in Woburn, Massachusetts.

S&W Reports Increased Sales But Net Loss in Third Fiscal Quarter

Net product sales of $27.5 million for the quarter ended Jan. 31, 2004, a 7.6% increase over the corresponding quarter in 2003, are reported by Smith & Wesson Holding Corp., (AMEX:SWB), parent of Smith & Wesson Corp. (S&W).

Sales for the nine months ended Jan. 31, 2004 were $85.1 million, an increase of 20.1% over the comparable period in the previous fiscal year. The sales increase was attributed to strong demand for the firm’s new products, particularly the Model 500 .50 caliber revolver and the Walther line. Firearms unit sales increased by 14.7% and 24.1% for the three and nine months ended Jan. 31, 2004 compared to the comparable periods in 2003.

The handgun maker also reported a net loss for the quarter ended Jan. 31, 2004 of $1.7 million, or 6 cents per share, compared to a profit of $718,545, or two cents per share, for the quarter ended Jan. 31, 2003. The quarterly loss resulted in a year-to-date loss of $450,696, or one cent per share. The year-to-date loss compares to a profit of $743,505, three cents per share, for the nine months ended Jan. 31, 2003.

Costs Leading to Loss

The $1.7 million loss resulted entirely from one-time restructuring and severance costs as well as legal and professional fees. The company incurred restructuring costs of $1 million (about $629,000 after-tax, or two cents per share) relative to the closing of the Scottsdale corporate office, the discontinuance of the Crossings catalog and the discontinuation of the S&W Advanced Technology {SWAT} division). Another $1.1 million (approximately $662,000 after-tax, or two cents per share) was spent in professional fees for the quarter relative to the restatement of the fiscal year 2002 financial statements as well as legal fees associated with the ongoing SEC investigation.

In addition, the company also incurred a one-time charge for severance payments to four officers who resigned in December. The total severance costs involved was about $760,000 (approximately $474,000 after-tax, or two cents per share). The total impact of these one-time charges and professional fees was about $2.8 million (approximately $1.8 million after-tax, or 6 cents per share).

Apart from these one-time charges and professional fees associated with the restatement and the SEC investigation, the company would have reported a profit of $58,086 for the quarter and $1,314,304, or 4 cents per share, for the nine months.

S&W expects to save about $1.6 million (approximately $900,000 after-tax, or three cents per share) annually in salaries and office expenses from the closing of the Scottsdale corporate headquarters. The Crossings catalog generated a loss of about $920,000 (approximately $530,000 after-tax, or two cents per share) for the nine months ended Jan. 31, 2004. The Advanced Technology division had a loss of about $940,000 (approximately $547,000 on an after-tax basis, or two cents per share) for the nine months ended Jan. 31, 2004.

Cash and cash equivalents declined by $7.4 million in the nine months ended Jan. 31, 2004. The decrease was attributed to year-to-date losses for the Crossings catalog and the Advanced Technology division, which totaled about $2.1 million on a pre-tax basis. Also incurred were over $1.8 million in professional fees with respect to the restatement of the fiscal year 2002 financial statements and the ongoing SEC investigation in the nine months ended Jan. 31, 2004. The company also made a $1 million payment on its long-term debt in July 2003. In addition, capital spending has exceeded depreciation by about $1.9 million, which was attributed to the company’s plan to continue to invest in its core business.

Order Backlog Increasing

“The company has a high order backlog,” noted Roy Cuny, president and CEO of S&W Holding Corp., “and the previous three shifts of production has been expanded to six days per week to address the high demand.” The firm reported the order backlog at the end of January stood at $18.6 million, 34.8% higher than the $13.8 million backlog at the end of January 2003.

“The company’s restructuring actions in the third quarter are focused on driving toward higher levels of operating efficiency through the process of consolidating physical operations and the discontinuance of non-core business activities,” Cuny added. “The core handgun business presents significant opportunity to profitably grow the company.”

John Kelly, chief financial officer, disclosed the company plans to invest about $3 million of capital through the course of the next few months to further automate processes and drive toward higher levels of productivity. “Our focus is to allocate investment dollars in ways that best position the company for quickly accretive operational enhancements. Capital expenditure decisions are based on very strict parameters,” Kelly said.

Court Rules Foreign Convictions Not Included in Gun Ownership Ban

The Second U.S. Circuit Court of Appeals recently ruled foreign convictions should not be counted towards previous offenses when considering harsher penalties for arms possession under the federal Gun Control Act.

The court determined the U.S. Congress didn’t intend to include foreign convictions in the felon-in-possession section of the law, which bans a person from possessing a firearm if “convicted in any court” of a crime punishable by more than a year in prison.

The ruling was made in a case involving one Rohan Ingram, arrested in Plattsburgh, NY, after guns were found in his hotel room. Officials suspected he entered the U.S. illegally from Canada.

Ingram was charged with conspiracy to export defense articles and conspiracy to travel with intent to engage in the illegal acquisition of guns. He was also charged as a felon in possession of a firearm as a result of a prior gun conviction in Canada.

As a result of the court ruling, the felon-in-possession charge against Ingram for his 1996 felony conviction in Canada was held to be invalid.

The ruling is not likely to have effect in other jurisdictions however. The most famous related case in recent memory involved firearms retailer Thomas Lamar Bean who traveled to Mexico while not knowing his employees had left some shotgun shells in his vehicle. Bean was arrested at the border, convicted of illegally importing ammunition into Mexico and served time in a Mexican prison. ATF then revoked his federal firearms license relying on the language in the 1968 Gun Control Act which prohibits a person from possessing a firearm if “convicted in any court” of a crime punishable by more than a year in prison.

Sturm, Ruger 2003 Financials Improved

Sturm, Ruger & Co., Inc. reports improved financial results for both the year and fourth quarter 2003.

For the year, the company recorded sales of $147.9 million, net income of $12.4 million, and earnings-per-share of 46 cents. Included in these results is the pretax gain of $5.9 million or 13 cents per share after-tax from the sale of non-manufacturing real estate in Arizona, known as the Single-Six Ranch.

The respective figures for 2002 were sales of $161.6 million, net income of $8.5 million, and earnings-per-share of 31 cents. Included is a $3.3 million pre-tax earnings charge recognizing an impairment loss on certain investment castings segment assets.

For the fourth quarter of 2003, the gunmaker had sales of $38.2 million, net income of $3 million, and earnings-per-share of 11 cents. Comparable amounts for 2002 were sales of $35.3 million, a net loss of $0.3 million, and a loss-per-share of 2 cents due to the aforementioned impairment loss.

Chairman William B. Ruger, Jr. commented on the fourth quarter, “Firearms shipments improved by 26% during the quarter. The popularity of many new product offerings was instrumental to this sales growth.

“Despite our strong finish, 2003 was a flat year for firearms sales,” Ruger admitted. “The success of our new products in 2003 was offset by an overall softness in the marketplace, particularly during the first half of the year. We are encouraged by our recent sales upturn, favorable economic indicators and with our new product introductions. We believe 2004 can be a solid year for the company.”

Turning his attention to the castings results, Ruger remarked, “Our castings business declined in 2003 as sales dropped 20% from the prior year, due largely to foreign competition. But despite this marked decline, we were able to improve our net results from the prior year, even before the $3.3 million pre-tax charge to earnings that was incurred in 2002. The precision castings process affords us great flexibility and efficiency in our firearms manufacturing, and for that reason it will always be a critical success factor for the company. We will continue to evaluate the viability and profitability of the commercial castings market.”

Ruger also noted the strength of the balance sheet in stating, “We are financially solid. At December 31, 2003, we remained debt-free, with $54 million of cash and short-term investments.” In pointing to the company’s continued commitment to firearms development, Ruger said, “In 2003, we added four design engineers to our firearms development team.”

In reviewing the company’s financial statements, firearms sales during 2003’s fourth quarter came to $34,682,000 or 90.9% of sales versus $31,396,000 or 88.9% of sales in the fourth quarter of 2002. Castings sales amounted to $3,482,000 or 9.1% of sales during the three months ended December 31, 2003 versus $3,927,000 or 11.1% of total sales in the corresponding period of 2002.

For the twelve months ended Dec. 31, 2003, firearms sales were $130,558,000 or 88.3% of total sales compared to $139,752,000 or 86.5% of sales for the year of 2002. Castings sales were $17,359,000 or 11.7% of total sales for the year 2003, versus a total of $21,825,000 or 13.5% of sales for the year of 2002.

Ruger recently opened a custom shop and is now offering enhancements, including custom engraving.

SIG Supports Spec Ops Charity

SIGARMS has released a limited number of specially serialized P226 pistols identical to those carried by U.S. Navy SEALs.

Since 1986 the SIG SAUER P226 in 9mm has been the official sidearm of this elite warrior unit. To support the families of fallen heroes, SIGARMS will donate up to $100,000 to the Special Operations Warrior Foundation.

“It is a great source of pride knowing that when it counts these elite warriors count on the to-hell-and-back reliability of the SIG SAUER P226. That is why we have committed to help their families and are asking our customers to consider purchasing this very special pistol,” said Jim Pledger, SIGARMS’ vp/law enforcement & military sales.

26th SHOT Show Most Successful Ever

The 2004 SHOT Show in Las Vegas closed setting new records for the number of attendees pre-registered, an historic high of over 529,000 square-feet of exhibitor space, and 1,610 exhibitors.

More than 30,000 people came to the show, with almost 18,000 of them wearing retailer badges.

Over 10,000 attendees signed up to add their names to the 28,000 who had already contacted their legislators in support of S.659, the Protection of Lawful Commerce in Arms Act. The valiant effort failed as anti-gun amendments were added to the bill, which was defeated by Senate vote.

When the opening bell rang on Thursday morning, exhibitors were caught somewhat by surprise by the hordes of enthusiastic visitors entering the exhibition halls. Some major firms felt initially overwhelmed by the throngs of people entering their booths while elbowing one another in an effort to glimpse the products on display and opportunity to ask questions.

“The industry needed this,” quipped one executive in making reference to the generally flat year the firearms industry experienced during 2003.

One foreign producer, Korth of Germany, picked up 13 new authorized retailers during the first 3 days of the show for their line of high-grade handguns.

The author publishes two of the small arms industry’s most widely read trade newsletters. The International Firearms Trade covers the world firearms scene, and The New Firearms Business covers the domestic market. Visit www.FirearmsGroup.com. He may be reached at: FirearmsB@aol.com.