Wall Street Journal article

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Smith & Wesson Retools
Image as Lawsuits Falter
Momentum Shifts in Gun-Control Battle,
With White House Backing the Industry

By VANESSA O’CONNELL and PAUL M. BARRETT
Staff Reporters of THE WALL STREET JOURNAL

SPRINGFIELD, Mass. — For a brief time, one of the most fabled names in the
gun business looked set to play the role of peacemaker.

In March 2000, Smith
& Wesson, a unit of British conglomerate Tomkins
PLC,
agreed to settle a raft of government lawsuits by promising to restrict the
marketing of its handguns. For gun-control advocates, it was a stunning
victory. President

Clinton hailed the pact as historic, asserting it would sharply reduce the
flow of handguns to criminals.

But the detente didn’t last long. Under withering fire from pro-gun forces
and facing a catastrophic drop in sales, Smith & Wesson started retrenching.
Ed Shultz, the Smith & Wesson CEO who made the deal, resigned, and Tomkins
last year sold the unit at a bargain price. The new owners — who include a
former S&W sales chief and the founder of a tiny Scottsdale, Ariz., gun-lock
company — have returned the company to good standing with the gun lobby. And
sales have rebounded smartly.

Smith & Wesson’s about-face is part of a wholesale shift in the dynamics of
gun control. In Washington, the Bush administration has offered gun interests
staunch support, whereas the Clinton White House actively encouraged the
late-1990s legal assault against the industry. Meanwhile, in courtrooms
around the country, judges have dismissed 10 of the 21 lawsuits filed by
local governments seeking to hold firearm companies accountable for death and
injury caused by shootings. The legal assault remains a threat. But so far,
the plaintiffs’ side hasn’t turned up the sort of smoking-gun evidence that
in earlier litigation by the states brought the tobacco industry to the
bargaining table.

The industry faces a sensitive new challenge as the unsolved sniper shootings
in the Washington, D.C., area prompt calls for new regulations. Some
lawmakers have renewed a push for a national database of ballistic
information about all guns made in or imported to the U.S. This could
potentially help investigators trace the etchings on shell casings or slugs
found at a crime scene to a particular weapon.

Have the Washington-area sniper attacks changed your views on gun controls?

But right now, with war clouds gathering in the Middle East and Congress
about to go into recess just a few weeks before midterm congressional
elections, prospects for such legislation appear slim. The National Rifle
Association has firmly opposed the measure as a back-door form of gun
registration. Gun manufacturers question the efficacy of the technology and
would like to postpone any decision until there has been much more testing.
Overall, the U.S. gun industry is presenting a united — and formidable —
front again. Having made an example of Smith & Wesson, the gun lobby has been
emboldened, and nobody in the business is likely to step out of line again
any time soon.

Smith & Wesson has long been an icon of the American gun world. Founded 150
years ago by firearm pioneers Horace Smith and Daniel B. Wesson, it
established itself during the gun-making boom of the Civil War. In 1987, the
company was bought by Tomkins, which makes construction products and
industrial parts. It is the second-largest U.S. gun company, specializing in
medium- and high-priced handguns generally retailing for $300 to $600 each.

Beginning in 1998, the gun industry was deluged by suits filed by cities and
counties emulating the states’ earlier legal assault on cigarette makers.
Most of the suits demanded reimbursement from the industry for the vast
police and public-medical costs related to gun violence. Gun companies
countered that they weren’t any more responsible for criminal shootings than
car makers are for drunk-driving deaths.
Litigation expenses were siphoning hundreds of thousands of dollars a year
away from S&W’s modest bottom line. Tomkins wanted to shed the company, but
the shadow of the lawsuits was discouraging potential buyers. Then, in early
2000, the situation suddenly shifted.

Secret Emissaries

The Clinton administration, eager to take charge of the antigun litigation,
secretly sent emissaries to Mr. Shultz after he hinted in interviews that he
would consider conciliation. A onetime furniture-manufacturing executive
hired to run S&W in 1992, Mr. Shultz, now 60 years old, didn’t view guns with
the emotionalism common on both sides of the firearm debate. Weeks of covert
negotiations led to an unprecedented agreement on March 17, 2000.

LEGAL GUN FIGHT

Beginning in 1998, cities and counties filed 21 lawsuits against gun makers
and distributors. These actions emulate the legal attack on cigarette
companies.

• Plaintiffs argue: Gun companies have been negligent in their design and
distribution of firearms. And the profusion of guns generally is akin to
industrial pollution, which the companies must remedy.

• Defendants counter: Manufacturers and distributors shouldn’t be held
liable
for the acts of criminals or others who misuse guns.

SCORECARD

• Suits dismissed: 10 (Some on appeal)

• Suits that have survived early skirmishing: 6 (Others pending)

• Cases to watch: A joint suit by 12 California municipalities could go to
trial in state court in San Diego next year. Separately, the NAACP is
pressing a case in federal court in Brooklyn, N.Y.

• Industry’s biggest win: In dropping its suit in March, Boston formally
acknowledged that gun companies are devoted to safety and that litigation is
ill-advised.

In a first for a major U.S. gun maker, S&W vowed to go far beyond existing
legal requirements to police how its products were sold at retail. In return,
the White House agreed not to file a threatened federal class-action suit
against the industry and to persuade the municipalities to call off their
legal actions against S&W.
Cries of treachery came swiftly from pro-gun forces. “Smith & Wesson, a
British-owned company, recently became the first to run up the white flag of
surrender and run behind the Clinton-Gore lines, leaving its competitors in
the U.S. firearm industry to carry on the fight for the Second Amendment,”
the NRA declared in one of a barrage of Internet alerts and mass faxes. Other
gun manufacturers, who sell their wares to the NRA’s constituency, took note.
Glock GmbH had negotiated secretly with the Clintonites in early 2000, but
the Austrian pistol maker cut off all talks after March 17, in large part
because it didn’t want to get caught up in the firestorm.
Egged on by the NRA, which provided S&W’s phone and fax numbers, as well as
Mr. Shultz’s e-mail address, gun owners bombarded the company with hostile
messages. Web sites such as thefiringline.com (www.thefiringline.com) and
glocktalk.com bristled with calls for an S&W boycott. L. Neil Smith, a
science-fiction author and mini-celebrity in certain gun-owner circles, wrote
a widely distributed e-mail chain letter that repeated 13 times the refrain,
“Smith & Wesson must die.” Mr. Smith says he was urging only economic harm.

“People felt that they were betrayed by the company,” says Sanford M. Abrams,
a retail gun dealer in Baltimore and a member of the NRA’s national board. He
pulled down S&W banners, removed the company’s revolvers from his shelves and
ceased ordering new ones.

The settlement provisions that most offended dealers required that S&W sell
its guns only through authorized retailers. The dealers would have to agree
to new curbs on selling a customer multiple guns, operating at lightly
regulated gun shows, and other transactions. Doug Kiesler, who cleared his
Jeffersonville, Ind., store of S&W merchandise, says he told customers that
“to settle a couple of lawsuits, Smith & Wesson sold its soul to the Clinton
administration.”

S&W sales began to drop almost immediately. “It’s not about money, it’s about
freedom,” gun enthusiast Bob Curtis of Overland Park, Kan., recalls thinking
in the spring of 2000, when he was in the market for a new revolver. He
spurned S&W and bought one made by a Brazilian manufacturer.
> By the fall of 2000, industry officials estimate that S&W retail sales had
declined by 40% to 60%, compared with 1999.

Making matters worse for the company, only one city, Boston, in S&W’s home
state, actually went ahead and signed a binding court document to drop the
company from its gun-industry suit. In response to the backlash, S&W had
begun to debate the fine print of the federal settlement with gun-control
lawyers, who successfully urged the municipalities to hold off on signing.
The company thus was being economically punished for a legal truce from which
it barely benefited.

In October, Mr. Shultz resigned. Tomkins had sold a separate U.S.
outdoor-equipment unit, which he also ran, and he says he decided to leave
the gun world and focus exclusively on that business. With a caretaker
president installed at S&W, Tomkins tried to sell the company but found that
rival gun makers weren’t interested, industry executives say.

One person watching S&W’s travails was Robert Scott, a popular gun-industry
veteran who had worked for S&W in sales for most of the 1990s. Many thought
Mr. Scott, now 56, would head the company one day, but he got only as far as
vice president for business development. In 1999, he left S&W to become
president of Saf-T-Hammer Corp., a fledgling Scottsdale gun-lock manufacturer.

Mr. Scott perceived early on that S&W’s fortunes could change dramatically.
After George W. Bush was finally declared the winner of the messy 2000
presidential election, the new White House team signaled that the pro-gun
former governor of Texas wasn’t going to hold the industry to the Clinton
settlement. If new owners were willing to take a risk on a legally besieged
industry — and could restore S&W’s image as a storied American business —
perhaps the company could be righted. Mr. Scott called Tomkins to begin
discussions.

S&W would cost far less than the estimated $112 million Tomkins had paid for
it in 1987. But Mr. Scott says he didn’t have the money or finance experience
to make a bid himself. So, he turned to his boss, Mitchell Saltz, founder of
Saf-T-Hammer.

Gun Hammer

In 1997, Mr. Saltz, a small-business consultant without any gun-trade
experience, had been inspired to design a safety device after watching a
television-news report about a professional football coach getting caught in
an airport with a loaded handgun in his duffel bag. He decided to market a
gun hammer — a critical part of the firing mechanism — that can be removed
to disable the gun.

Mr. Saltz, now 50, hired Mr. Scott to help him hawk the Saf-T-Hammer. As the
pair visited trade shows, Mr. Saltz says he only grew more fascinated by the
gun world. Alerted by Mr. Scott, Tomkins approached Mr. Saltz as a potential
buyer, providing him with a Smith & Wesson balance sheet and a terse
statement that the hobbled handgun firm would come with its legal liabilities.

Tantalized, Mr. Saltz offered in early 2001 to buy S&W for $15 million: $5
million up front, the rest later. Tomkins accepted, on the condition that the
new owners eventually would also pay $30 million in dividends S&W owed its
parent.

Complicating his offer, Mr. Saltz says, was the reality that he was
personally tapped out, having invested $600,000 of family savings in
Saf-T-Hammer. So he looked around for a wealthy investor. The wife of a
Saf-T-Hammer employee suggested Colton Melby.

Mr. Melby had made a modest fortune in his family’s Washington state
airplane-parts business and then retired early to sunny Scottsdale to play
golf and invest his money. “I grew up around guns, but that’s about the sum
of my gun experience,” says Mr. Melby, now 44. But he says he was intrigued
by the idea of expanding S&W’s efforts to sell rights to use its famous name
for police gear, bicycles, apparel, even salad dressing. He put the $5
million down payment on the table and now owns 26% of the company.

When Mr. Scott, the new president, returned to the S&W compound in
Springfield in May 2001, the company was in dire shape. The sales drought had
led to a $14 million loss for the fiscal year that ended April 30, 2001. Mr.
Scott first laid off 7% of the 638-person work force. Next, he set out to
restore its reputation in the gun world.

His first stop was the NRA annual convention in Kansas City, Mo., a major
venue for manufacturers to pitch their wares to dealers and to the
organization that helps shape consumer tastes. A year earlier in Charlotte,
N.C., the NRA gathering had been a disaster for S&W, with many attendees
ostentatiously avoiding the company’s large booth or defacing it with yellow
“Boycott S&W” stickers.

Mr. Scott and other executives arrived in Kansas City wearing
red-white-and-blue lapel buttons declaring S&W to be “American Made, American
Owned.” They made a big splash. In numerous conversations with retailers and
others, Mr. Scott says he emphasized his commitment to gun owners’ freedoms.
Translation: The federal settlement was dead.

Mr. Abrams, the Baltimore gun retailer, says it took “a while to build
confidence up” again in S&W, but he and other dealers agree that the NRA show
was a turning point. At an industry gathering in Las Vegas in February 2002,
Mr. Scott sought out James J. Baker, then the NRA’s top lobbyist, and
arranged for the two to be photographed together, smiling — an image S&W
sent to gun dealers from coast to coast. In April, Mr. Scott received a
prestigious industry award “for engineering the return of Smith & Wesson to
American ownership.”

Retailers picked up on these signals. In Jeffersonville, Ind., the S&W
revolvers went back on the shelves at Kiesler’s. “Bob Scott is a visionary,”
says Mr. Kiesler. “Once he took over, we started to work with the company
again.” Mr. Curtis, the Overland Park, Kan., gun owner, says he noticed that
by late 2001, dealers at firearm shows in his area were displaying Smith &
Wessons, too.

In another move that elicited plaudits within the industry, S&W told Boston
that, with the Clinton legal settlement now irrelevant, the company wanted to
drop its related pact with the city. Boston, to the dismay of gun-control
activists, went a step further:

In March, it abandoned entirely its suit against the industry as a whole.
City officials cite mounting legal expenses. Other cities have had their own
trouble in court.
Challenges remain for S&W. The market for new handguns is shrinking, as fewer
people take up shooting sports, and the company’s stock, which traded Tuesday
at $1.18 a share, is down nearly 60% since March.

But Smith & Wesson’s finances have been improving. For the first quarter of
fiscal 2003, which ended July 31, it reported operating profit of $131,994 on
revenue of $20.6 million. And gun owners are embracing the company again. The
latest issue of the NRA’s American Rifleman magazine includes a prominent
feature on the Springfield plant, the magazine’s first major coverage of
Smith & Wesson since it made the federal pact. “Welcome back,” the editor’s
notes proclaim. “We missed you.”