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 U.S. 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.
The settlement agreement dated March 17, 2000 between us, the U.S. 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has not been formally rescinded.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.
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 HUDsettlement. Among other terms, the HUDsettlement 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 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will be formally rescinded.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.