1 THE O’MARA LAW FIRM, P.C. WILLIAM M. O’MARA, ESQ. Nevada Bar No. 00837 BRIAN O. O’MARA, ESQ. Nevada Bar No. 08214 DAVID C. O’MARA, ESQ. Nevada Bar No. 08599 311 East Liberty Street Reno, Nevada 89501 Telephone: 775/323-1321 775/323-4082 (fax) UNITED STATES DISTRICT COURT DISTRICT OF NEVADA CARY GREEN, Derivatively on Behalf of Nominal Defendant Smith & Wesson Holding Corp, Plaintiff, vs. BARRY M. MONHEIT, ROBERT L. SCOTT, MICHAEL F. GOLDEN, JEFFREY D. BUCHANAN, JOHN B. FURMAN, COLTON R. MELBY, MITCHELL A. SALTZ, DAVID M. STONE, JOHN A. KELLY and I. MARIE WADECKI, Defendants, and SMITH & WESSON HOLDING CORP., Nominal Defendant. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Case No. VERIFIED SHAREHOLDER DERIVATIVE COMPLAINT JURY TRIAL DEMANDED Case 2:08-cv-00238-BES-RJJ Document 1 Filed 02/25/2008 Page 1 of 37 www.courthousenews.com Courthouse News Service
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THE O’MARA LAW FIRM, P.C. WILLIAM M. O’MARA, ESQ. Nevada Bar No. 00837 BRIAN O. O’MARA, ESQ. Nevada Bar No. 08214 DAVID C. O’MARA, ESQ. Nevada Bar No. 08599 311 East Liberty Street Reno, Nevada 89501 Telephone: 775/323-1321 775/323-4082 (fax)
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
CARY GREEN, Derivatively on Behalf of Nominal Defendant Smith & Wesson Holding Corp,
Plaintiff,
vs.
BARRY M. MONHEIT, ROBERT L. SCOTT, MICHAEL F. GOLDEN, JEFFREY D. BUCHANAN, JOHN B. FURMAN, COLTON R. MELBY, MITCHELL A. SALTZ, DAVID M. STONE, JOHN A. KELLY and I. MARIE WADECKI,
Defendants,
and
SMITH & WESSON HOLDING CORP.,
Nominal Defendant.
) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )
Case No.
VERIFIED SHAREHOLDER DERIVATIVE COMPLAINT
JURY TRIAL DEMANDED
Case 2:08-cv-00238-BES-RJJ Document 1 Filed 02/25/2008 Page 1 of 37www.courthousenews.com
1. This is a shareholder derivative action brought by Plaintiff and shareholders of
Smith & Wesson Holding Corp. (“Smith & Wesson” or the “Company”) against certain current
or former officers and directors of Smith & Wesson seeking to remedy the Individual
Defendants’ violations of state law, including breaches of fiduciary duties, abuse of control, gross
mismanagement, waste of corporate assets, unjust enrichment and negligence that occurred from
June 15, 2007 through the present, (the “Relevant Period”) and that have caused substantial
losses to the Company. 1
2. Throughout the Relevant Period, Defendants misrepresented to investors that the
market from various lines of the Company’s gun products was saturated with inventory. As a
result of increased inventory customers were reducing orders and postponing purchases. Due to
the foregoing, the Company’s sales did not represent true growth for the Company’s product but
were instead inventory stocking transactions that could not continue indefinitely. Furthermore,
Defendants lacked a reasonable basis for their positive statements about the Company and its
future prospects. While the foregoing events were occurring, Defendants were disposing of their
stock at a rapid pace, resulting in a windfall of millions of dollars to certain Defendants.
3. Defendants’ representations concerning the Company’s internal operational
controls and financial procedures were either patently untrue, or were made with reckless
disregard of the true material adverse facts. The undisclosed, material adverse facts about Smith
& Wesson included the following:
1 Because Defendants have failed to take action to remedy the breaches of fiduciary duties that occurred between June 15, 2007 and December 6, 2007, the Relevant Period continues through this day instead of ceasing on December 6, 2007, the day the public became aware of the wrongdoings at the Company.
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22. The Individual Defendants, because of their positions of control and authority as
directors and/or officers of the Company, were able to and did, directly and/or indirectly,
exercise control over the wrongful acts complained of herein.
23. To discharge their duties, the Individual Defendants were required to exercise
reasonable and prudent supervision over the management, policies, practices and controls of the
Company. By virtue of such duties, the Individual Defendants were required to, among other
things:
a. exercise good faith to ensure that the affairs of the Company were conducted in an efficient, business-like manner so as to make it possible to provide the highest quality performance of their business;
b. exercise good faith to ensure that the Company was operated in a diligent, honest and prudent manner and complied with all applicable federal and state laws, rules, regulations and requirements, and all contractual obligations, including acting only within the scope of its legal authority; and
c. when placed on notice of improper or imprudent conduct by the Company and/or its employees, exercise good faith in taking action to correct the misconduct and prevent its recurrence.
24. Because of the Individual Defendants’ positions with the Company, they had
access to the adverse undisclosed information about its business, operations, products,
operational trends, financial statements, markets and present and future business prospects via
access to internal corporate documents (including the Company’s operating plans, budgets and
forecasts and reports of actual operations compared thereto), conversations and connections with
other corporate officers and employees, attendance at management and Board of Directors
meetings and committees thereof and via reports and other information provided to them in
connection therewith.
25. Each of the above officers of Smith & Wesson, by virtue of their high-level
positions with the Company, directly participated in the management of the Company, was
Case 2:08-cv-00238-BES-RJJ Document 1 Filed 02/25/2008 Page 7 of 37www.courthousenews.com
performance as particularized herein and knew (or deliberately disregarded) that these adverse
facts rendered the positive representations made by or about Smith & Wesson and its business
issued or adopted by the Company materially false and misleading.
28. The Individual Defendants, because of their positions of control and authority as
officers and/or directors of the Company, were able to and did control the content of the various
SEC filings, press releases and other public statements pertaining to the Company during the
Relevant Period. Each Individual Defendant was provided with copies of the documents alleged
herein to be misleading prior to or shortly after their issuance and/or had the ability and/or
opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of the
Individual Defendants is responsible for the accuracy of the public reports and releases detailed
herein and is therefore primarily liable for the representations contained therein.
SUBSTANTIVE ALLEGATIONS
DEFENDANTS’ MATERIALLY FALSE AND MISLEADING STATEMENTS
29. On June 14, 2007, after the market closed, the Company issued a press release
announcing its financial results for the fourth quarter and full year of fiscal 2007, including a
forecast for the third quarter of 2007, the period ended April 30, 2007. The Company reported
record quarterly revenues of $82.6 million and record annual revenues of $234.8 million. The
Company also reported net income of $13 million, and record earnings per share of $0.31.
Specifically, Defendant Monheit commented on the results as follows:
Our results for fiscal 2007 reflect the tremendous execution of our business strategy by Mike Golden and his team. They have now delivered ten consecutive quarters of year-over-year, double digit sales growth in our core handgun business, and the recent acquisition of Thompson/Center, combined with the introduction of our new Smith & Wesson shotguns and bolt-action rifles, demonstrates that our diversification is successfully underway. The board of directors is excited with the progress this team has made, and we look forward to opportunities to build upon these successes in fiscal 2008.
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Fiscal 2007 was a year of exceptional progress toward establishing Smith & Wesson as a global supplier in the business of safety, security, protection and sport. Tremendous growth in our core handgun business was driven by a number of new products and our continuing penetration of existing and new markets, while our launch of new shotgun and rifle products reflected our ability to diversity both organically and through successful acquisitions. Our 48.8% increase in net product sales was driven by a number of initiatives. It has now been a full year since the implementation of our sporting goods sales force comprised entirely of employees, rather than independent manufacturers’ representatives. It has also been a full year of equipping our sporting goods sales force, as well as our law enforcement sales force, with the specially designed, M&P Line of polymer pistols. The results have been impressive. Net product sales in the sporting goods channel grew 35.2% for fiscal 2007, apart from the Thompson/Center acquisition. Equally important, we continued to deliver growth each quarter beyond the anniversary date of the implementation of this sales force. Sporting goods sales increased 30% for the second half of fiscal 2007 compared with the comparable period of fiscal 2006 even though the all-employee sales force was in place during both periods.
The Company also provided its outlook for fiscal 2008:
We are raising our sales expectations for fiscal 2008 from $320 million to $330 million, which would represent a 40.5% increase over fiscal 2007 sales. This increased sales expectation includes growth in our existing sporting goods channel and our continued penetration of the law enforcement and international markets. It also reflects a full fiscal year of impact from our Thompson/Center acquisition. The increased sales expectation does not include any significant revenue from federal government orders, nor does it include the results of any potential future diversification initiatives. The M&P pistol and tactical rifle series, along with our new shotgun and bolt-action rifle lines, are expected to be drivers in the sales increase for fiscal 2008.
Net income for fiscal 2008 is anticipated to be $28.0 million, or $0.62 per diluted share, double the earnings per diluted share for fiscal 2007. Our increased expectation of $0.62 per diluted share in net income reflects an increase over our previously announced guidance of $0.60. This increase is expected to result from higher expected sales volume, improvement in gross margin percentage to between 35% and 36%, a decline in operating expenses as a percentage of sales and licensing, and a full fiscal year of impact from our Thompson/Center acquisition. Because of the acquisition, the seasonality of the hunting segment will now be reflected in our quarterly results. Therefore, our first quarter (May through July) of fiscal 2008 will be our weakest quarter, while results in our
Case 2:08-cv-00238-BES-RJJ Document 1 Filed 02/25/2008 Page 10 of 37www.courthousenews.com
second quarter (August through October), traditionally a strong quarter, for hunting sales will improve substantially over results for the second quarter of fiscal 2006. We began the year with a strong order backlog and as a result, we expect earnings for the first quarter of fiscal 2008 to now be $0.9 per diluted share compared with $.08 per diluted share for the first quarter of fiscal 2007 and expect that the subsequent quarters through fiscal 2008 will increase more significantly on a year-over-year basis. 30. On July 16, 2007, the Company filed with the SEC its Form 10-K for the fiscal
year 2007, which included the same financial results previously reported. The Form 10-K was
signed by Defendants, with the exception of Defendant Saltz.
31. On September 6, 2007, after the market closed, the Company issued a press
release announcing its financial results for the first quarter revenues of $74.4 million and net
income for the quarter of $4.7 million, or $0.11 per diluted share, compared with $3.4 million, or
$.08 per diluted share, for the comparable quarter the previous year. Defendant Golden
commented on the results stating in relevant part:
Our results for the first quarter of fiscal 2008 demonstrate progress across many initiatives and reflect growth in our core handgun business as well as our newly established long gun business. Our sales growth was particularly strong given that the comparable quarter of the prior year included $5.2 million in U.S. government orders for Afghanistan that were not duplicated in the current quarter. Handgun sales into the retail channel increased by 41.0% for the quarter, driven by our direct sales force and a number of ongoing retail initiatives. We continued to penetrate the law enforcement channel in the first quarter. Our Military & Police (M&P) polymer pistols have a cumulative win rate of over 80% in all test and evaluation processes in which they have competed. The number of law enforcement agencies that have purchased or approved for carry our M&P pistol has now grown to 231, including recent wins at sizeable agencies such as the Hartford, Connecticut Police and the New Hampshire State Police.
32. The Company also provided its outlook for fiscal year 2008, stating in relevant
part:
We continue to expect revenue to increase to approximately $330 million in fiscal 2008, which would represent a 40% increase over fiscal 2007 revenue. This revenue expectation does not include the results of any potential future, diversification initiatives, but does include growth in our existing consumer
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market, as well as continued penetration of the law enforcement, federal government, and international markets. Sales of our M&P pistols, M&P tactical rifles, our new shotguns and both of our new lines of hunting rifles are all expected to be key drivers of the revenue increase for fiscal 2008. We expect second quarter revenue to increase by approximately 60% over revenue in second quarter of fiscal 2007, driven by continued expansion in our existing markets and the addition of revenue from Thompson/Center.
We are increasing our expectations for fiscal 2008 net income to approximately $28.5 million, or $0.63 per diluted share, which is higher than our earlier expectation of $28.0 million, or $0.62 per share. These results would represent an increase of 119% over net income for fiscal 2007. While first quarter results were $0.02 per diluted share higher than our expectations, approximately one-half of this increase was due to timing on depreciation expense. Our capital expenditures for the first quarter were lower than anticipated, though we still expect to spend $17.7 million in fiscal 2008. We continue to expect gross margin improvement to the range of 35% to 36% for the full fiscal year, with second quarter gross margins of approximately 33%, reflecting the impact of the annual two week plant shutdown which occurs each August at our Springfield and Houlton facilities. The 33% gross margin reflects a 180 basis point increase over the second quarter of fiscal 2006. The seasonal nature of the hunting business will be reflected in higher marketing expenditures in the second quarter as a result of our increased advertising efforts during this peak buying period. We still expect operating expenses to be in the 20% to 21% range for the full fiscal year. We continue to expect positive cash flow in fiscal 2008 of approximately $41 million, with net cash flow of $23.0 million after capital expenditures of $17.7 million. We also continue to expect cash flow for the first half of fiscal 2008 to be negative, becoming positive in the third quarter and strengthening in the fourth quarter.
33. In response to the positive earnings announcement, the Company’s stock price
surged to $21.06 per share on over two million shares traded.
34. On September 10, 2007, the Company filed with the SEC its Form 10-Q for the
first quarter of 2008, which included the same financial results previously reported.
Defendants Kelly and Golden certified the 10-Q.
35. As a result of all the positive statements the Defendants caused the Company to
issue, the Company’s stock price continued to climb until it reached a high of $21.85 on October
18, 2007. The price of $21.85 per share represents a 47% increase in the price of the Company’s
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stock from June 14, 2007, the last day prior to the commencement of the Relevant Period in
which the Company’s stock price was a mere $14.91 per share.
36. These statements were false and misleading when made because they failed to
disclose and misrepresented the following material adverse facts, which were known to
Defendants or recklessly disregarded by them: (a) that the market for various lines of the
Company’s gun products was saturated with inventory; (b) that as a result of this increased
inventory customers were reducing orders and postponing purchases; (c) that as a result of the
foregoing, the Company’s sales did not represent true growth for the Company’s product but
were instead inventory stocking transactions that could not continue indefinitely; and (d) that
based on the foregoing, Defendants lacked a reasonable basis for their positive statements about
the Company and its future prospects.
37. On October 29, 2007, after the market closed, the Company issued a press
release announcing its preliminary financial results for the second quarter of fiscal 2008, the
period ending October 31, 2007. Among other things the Company reduced its revenue and
earnings guidance for fiscal 2008. Specifically, the Company reduced revenue guidance to $325
million, down from the previously forecasted $330, and reduced its earning guidance to $23.8
million ($0.53 per share), down from the previously forecasted $28.5 million ($0.63 per share).
Defendant Golden commented in pertinent part as follows:
While second quarter sales growth came in strong at 36% to 40%, our results were impacted by a combination of factors that emerged late in the quarter. Among these factors were softness in the market for hunting rifles and shotguns, driven by lower than expected consumer demand, a buildup of pre-season retail inventories, and unseasonably warm autumn weather, which decreased retail traffic and compressed the fall hunting season. Sales of our Thompson/Center Arms hunting rifles, which have a brand name that is already well-established in the consumer hunting market, appear to be far less impacted by these factors than are sales of new Smith & Wesson rifles and shotguns, which have only just begun to arrive in retail locations.
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38. On this announcement the Company’s stock plunged $7.97 (40%) from
$20.09 to $12.12 on nearly 15 million shares traded. Defendants, however, continued to conceal
the truth about the Company, its operations, and its prospects.
THE TRUTH IS DISCLOSED
39. Finally, on December 6, 2007, after the market closed, the Company issued
a press release announcing its financial results for the second quarter of fiscal 2008. This time
the Company revealed a more dismal outlook than previously reported. Revenue forecast
was slashed to $300 million (down from the previously forecasted $330 million) and net
income forecast was reduced to $17 million or $0.40 per share (down from the previously
forecasted $28.5 million, or $0.63 per share). Defendant Golden commented on the
reduced expectations as follows:
As we announced last month, our results for the second quarter of fiscal 2008 in the consumer channel was impacted by a combination of factors, including softness in the market for hunting rifles and shotguns driven by lower than expected consumer demand, an industry-wide buildup of pre-season retail inventories, and unseasonably warm autumn weather, which compressed the fall hunting season. Within the consumer channel, the reduced retail activity not only affected long guns but handguns as well, and was compounded by the fact that inventory in the channel was at an extremely high level, due in part to the anticipation of a strong hunting season. In fact, during the first six months of calendar 2007, federal excise tax data indicates that industry-wide long gun sales into the distribution channel increased 20% year-over-year and handgun sales increased 37% year-over-year. However, federal background check data, which is an indicator or retail purchases, resulting that retail purchases for the same period of time increased by only 5.2%. The resulting, industry-wide inventory buildup, accentuated by lower retail traffic, caused order activity to slow beginning in October. Several manufacturers responded with significant discounts on both long guns and handguns. This caused increased price competition in the channel and served to exacerbate already inflated inventory levels.
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Respectfully submitted, DATED: February 25, 2008 THE O’MARA LAW FIRM, P.C.
WILLIAM M. O’MARA, ESQ. BRIAN O. O’MARA, ESQ DAVID C. O’MARA, ESQ
/s/ David C. O’Mara DAVID C. O’MARA, ESQ.
311 EAST LIBERTY STREET RENO, NEVADA 89501 TELEPHONE: 775/323-1321 775/323-4082 (FAX) WILLIAM B. FEDERMAN FEDERMAN & SHERWOOD 10205 N. PENNSYLVANIA OKLAHOMA CITY, OKLAHOMA 73120 TELEPHONE: 405/235-1560 405/239-2112 (FAX) -AND- 2926 MAPLE AVE., STE. 200 DALLAS, TEXAS 75201
Attorneys for Plaintiff I:\Pending\SMITH & WESSONInc\Pleadings\Complaint.doc
Case 2:08-cv-00238-BES-RJJ Document 1 Filed 02/25/2008 Page 37 of 37www.courthousenews.com