e10vq
United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-16391
TASER INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE
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86-0741227 |
(State or other jurisdiction
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(I.R.S. Employer |
of incorporation or organization)
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Identification Number) |
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17800 N.
85th St., SCOTTSDALE, ARIZONA
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85255 |
(Address of principal executive offices)
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(Zip Code) |
(480) 991-0797
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
There were 61,415,419 shares of the issuers common stock, par value $0.00001 per share,
outstanding as of December 20, 2005.
TASER INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TASER INTERNATIONAL, INC.
BALANCE SHEETS
September 30, 2005 and December 31, 2004
(UNAUDITED)
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September 30, 2005 |
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December 31, 2004 |
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Assets |
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|
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|
|
|
|
|
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Current Assets |
|
|
|
|
|
|
|
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Cash and cash equivalents |
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$ |
17,133,705 |
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|
$ |
14,757,159 |
|
Short-term investments |
|
|
|
|
|
|
17,201,477 |
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Accounts receivable, net |
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|
7,305,378 |
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|
8,460,112 |
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Inventory |
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|
9,215,133 |
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|
|
6,840,051 |
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Prepaids and other assets |
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|
1,461,576 |
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|
|
1,639,734 |
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Income tax receivable |
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|
42,376 |
|
|
|
52,973 |
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Current deferred income tax asset |
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|
5,532,997 |
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|
11,083,422 |
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
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Total Current Assets |
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40,691,165 |
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|
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60,034,928 |
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Long-term Investments |
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25,555,785 |
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18,071,815 |
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Property and Equipment, net |
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21,000,653 |
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|
14,756,512 |
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Deferred Income Tax Asset |
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|
21,144,068 |
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|
|
15,310,207 |
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Intangible Assets, net |
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|
1,315,925 |
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|
1,279,116 |
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|
|
|
|
|
|
|
|
|
|
|
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|
|
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Total Assets |
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$ |
109,707,596 |
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$ |
109,452,578 |
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Liabilities and Stockholders Equity |
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Current Liabilities
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Current portion of capital lease obligations |
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$ |
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$ |
4,642 |
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Accounts payable and accrued liabilities |
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5,658,155 |
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|
8,427,711 |
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Current deferred revenue |
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482,710 |
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|
399,421 |
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Customer deposits |
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218,518 |
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|
102,165 |
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|
|
|
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|
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Total Current Liabilities |
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6,359,383 |
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|
8,933,939 |
|
Deferred Revenue |
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|
730,773 |
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|
607,856 |
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|
|
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|
|
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|
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|
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|
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|
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Total Liabilities |
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7,090,156 |
|
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|
9,541,795 |
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Commitments and Contingencies |
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Stockholders Equity |
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Preferred Stock, $0.00001 par value per share; 25 million
shares authorized; 0 shares issued and outstanding at September 30,
2005 and December 31, 2004 |
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Common Stock, $0.00001 par value per share; 200 million shares
authorized; 61,415,419 and 60,992,156 shares issued and
outstanding at September 30, 2005 and December 31, 2004 |
|
|
614 |
|
|
|
609 |
|
Additional Paid-in Capital |
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77,603,379 |
|
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75,850,810 |
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Retained Earnings |
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25,013,447 |
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24,059,364 |
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|
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|
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|
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|
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Total Stockholders Equity |
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102,617,440 |
|
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|
99,910,783 |
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|
|
|
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|
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|
|
|
|
|
|
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Total Liabilities and Stockholders Equity |
|
$ |
109,707,596 |
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|
$ |
109,452,578 |
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|
The accompanying notes are an integral part of these financial statements.
3
TASER
INTERNATIONAL, INC.
STATEMENTS OF INCOME
For the three and nine months ended September 30, 2005 and 2004
(UNAUDITED)
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For the Three Months Ended |
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For the Nine Months Ended |
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September 30, 2005 |
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September 30, 2004 |
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September 30, 2005 |
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|
September 30, 2004 |
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Net Sales |
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$ |
11,675,611 |
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$ |
18,947,548 |
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$ |
35,086,431 |
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$ |
48,406,109 |
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Cost of Products Sold: |
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Direct manufacturing expense |
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|
2,932,791 |
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|
4,472,606 |
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|
9,568,667 |
|
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|
11,750,800 |
|
Indirect manufacturing expense |
|
|
894,450 |
|
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|
1,295,706 |
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3,531,611 |
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|
3,969,103 |
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Total Cost of Products Sold |
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3,827,241 |
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|
5,768,312 |
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13,100,278 |
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15,719,903 |
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Gross Margin |
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7,848,370 |
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13,179,236 |
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21,986,153 |
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32,686,206 |
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|
|
|
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Sales, general and
administrative expenses |
|
|
6,909,018 |
|
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|
3,062,422 |
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|
19,740,112 |
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|
8,993,022 |
|
Research and development
expenses |
|
|
360,689 |
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|
105,239 |
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|
1,103,593 |
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623,472 |
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Income from Operations |
|
|
578,663 |
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|
|
10,011,575 |
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|
1,142,448 |
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|
23,069,712 |
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Interest income |
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|
306,761 |
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|
88,463 |
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|
853,473 |
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|
184,307 |
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Interest expense |
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|
(103 |
) |
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Other income (expense), net |
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|
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|
1,000 |
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|
(59,735 |
) |
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|
4,480 |
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|
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|
|
|
|
|
|
|
|
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Income before income taxes |
|
|
885,424 |
|
|
|
10,101,038 |
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|
|
1,936,083 |
|
|
|
23,258,499 |
|
Provision for income tax |
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|
555,000 |
|
|
|
3,975,000 |
|
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|
982,000 |
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|
|
9,091,000 |
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Net Income |
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$ |
330,424 |
|
|
$ |
6,126,038 |
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$ |
954,083 |
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$ |
14,167,499 |
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|
Income per common and common
equivalent shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic |
|
$ |
0.01 |
|
|
$ |
0.11 |
|
|
$ |
0.02 |
|
|
$ |
0.25 |
|
Diluted |
|
$ |
0.01 |
|
|
$ |
0.09 |
|
|
$ |
0.01 |
|
|
$ |
0.23 |
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|
|
|
|
|
|
|
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|
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|
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|
Weighted average number of
common and common equivalent
shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
61,385,863 |
|
|
|
57,954,454 |
|
|
|
61,266,387 |
|
|
|
56,309,278 |
|
Diluted |
|
|
63,694,740 |
|
|
|
64,541,234 |
|
|
|
63,951,621 |
|
|
|
62,912,386 |
|
The accompanying notes are an integral part of these financial statements.
4
TASER
INTERNATIONAL INC.
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2005 and 2004
(UNAUDITED)
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For the Nine Months Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
954,083 |
|
|
$ |
14,167,499 |
|
Adjustments to reconcile net income to net cash (used) provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,185,374 |
|
|
|
335,626 |
|
Loss on disposal of assets |
|
|
56,872 |
|
|
|
|
|
Provision for doubtful accounts |
|
|
|
|
|
|
90,000 |
|
Provision for warranty |
|
|
150,415 |
|
|
|
361,058 |
|
Compensatory stock options |
|
|
|
|
|
|
625,704 |
|
Deferred income taxes |
|
|
(32,030 |
) |
|
|
597,029 |
|
Stock option tax benefit |
|
|
1,026,539 |
|
|
|
8,493,255 |
|
Change in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
1,154,734 |
|
|
|
(2,049,923 |
) |
Inventory |
|
|
(2,375,082 |
) |
|
|
(2,870,411 |
) |
Prepaids and other assets |
|
|
178,158 |
|
|
|
135,182 |
|
Income tax receivable |
|
|
10,597 |
|
|
|
259,026 |
|
Accounts payable and accrued liabilities |
|
|
(2,873,258 |
) |
|
|
1,907,199 |
|
Current deferred revenue |
|
|
83,289 |
|
|
|
255,237 |
|
Customer deposits |
|
|
116,353 |
|
|
|
(32,334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by operating activities |
|
|
(363,956 |
) |
|
|
22,274,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Purchases of investments |
|
|
(26,985,127 |
) |
|
|
(12,725,082 |
) |
Proceeds from investments |
|
|
36,702,634 |
|
|
|
|
|
Purchases of property and equipment |
|
|
(7,380,839 |
) |
|
|
(6,048,365 |
) |
Purchases of intangible assets |
|
|
(66,153 |
) |
|
|
(129,961 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities |
|
|
2,270,515 |
|
|
|
(18,903,408 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Payments under capital leases |
|
|
(4,642 |
) |
|
|
(11,529 |
) |
Payments on notes payable |
|
|
|
|
|
|
(250,000 |
) |
Proceeds from warrants exercised |
|
|
|
|
|
|
2,470,058 |
|
Proceeds from options exercised |
|
|
474,629 |
|
|
|
7,274,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
469,987 |
|
|
|
9,483,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents |
|
|
2,376,546 |
|
|
|
12,853,741 |
|
Cash and Cash Equivalents, beginning of period |
|
|
14,757,159 |
|
|
|
15,878,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, end of period |
|
$ |
17,133,705 |
|
|
$ |
28,732,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
103 |
|
|
$ |
1,135 |
|
Cash (refunded) paid for income taxes net |
|
$ |
|
|
|
$ |
(264,026 |
) |
Non Cash Transactions- |
|
|
|
|
|
|
|
|
Increase to deferred tax asset related to tax benefits realized from the exercise of
stock options (with a related increase to additional paid in capital of $1,277,945 and
$12,532,226) |
|
$ |
251,406 |
|
|
$ |
4,038,971 |
|
Increase to property and equipment with a corresponding increase in accounts payable |
|
$ |
76,204 |
|
|
$ |
|
|
The accompanying notes are an integral part of these financial statements.
5
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited)
NOTE 1 GENERAL
The accompanying unaudited financial statements of TASER International, Inc. (the Company)
include all adjustments (consisting only of normal recurring accruals) which management considers
necessary for the fair presentation of the Companys operating results, financial position and cash
flows as of September 30, 2005 and September 30, 2004. Certain information and note disclosures
normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) have been omitted from these unaudited
financial statements in accordance with applicable rules.
The results of operations for the three and nine month periods are not necessarily indicative of
the results to be expected for the full year (or any other period) and should be read in
conjunction with the financial statements and notes thereto included in the Companys Annual Report
on Form 10-KSB/A as filed on May 23, 2005.
The Company develops and manufactures non-lethal self-defense devices. Our products are often used
in aggressive confrontations that may result in serious, permanent bodily injury or death to those
involved. A person injured in a confrontation or otherwise in connection with the use of our
products may bring legal action against us to recover damages on the basis of theories including
personal injury, wrongful death, negligent design, dangerous product or inadequate warning. We are
currently subject to a number of such lawsuits. We may also be subject to lawsuits involving
allegations of misuse of our products. We have seen and expect to continue to see an increased
number of complaints filed against the Company alleging injuries resulting from the use of a TASER
device. If successful, personal injury, misuse and other claims could have a material adverse
effect on our operating results and financial condition. Although we carry product liability
insurance, significant litigation could also result in a diversion of managements attention and
resources, negative publicity and an award of monetary damages in excess of our insurance coverage.
The outcome of any litigation is inherently uncertain and there can be no assurance that our
existing or any future litigation will not have a material adverse effect on our revenues, our
financial condition or financial results.
Further, since late 2004, as a result of on-going negative press coverage and increased litigation
concerning the Companys products and their use, the Company has experienced a decline in sales and
profits for the nine months ended September 30, 2005 compared to the nine months ended September
30, 2004. In particular, these events have resulted in longer sales cycles and delays in orders
from prospective customers. The Company has also experienced significant increases in selling,
general and administrative expenses for the nine months ended September 30, 2005 compared to the
nine months ended September 30, 2004 as additional resources have been devoted to legal, public
relations and consulting activities. The Companys deferred tax asset includes $26.0 million in net
operating loss carryforwards. The amount of the deferred tax asset realizeable could be reduced if
future taxable income is not sufficient to utilize the loss carryforwards before their expiration,
as discussed in Note 7 below.
NOTE 2 NET SALES
The components of net sales for the three and nine months ended September 30, 2005 and 2004 were as
follows (amounts in thousands):
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For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
Sales by Product Line |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TASER X26 |
|
$ |
7,788 |
|
|
|
67 |
% |
|
$ |
13,440 |
|
|
|
71 |
% |
|
$ |
22,193 |
|
|
|
63 |
% |
|
$ |
33,037 |
|
|
|
68 |
% |
ADVANCED TASER |
|
|
674 |
|
|
|
6 |
% |
|
|
1,095 |
|
|
|
6 |
% |
|
|
2,027 |
|
|
|
6 |
% |
|
|
4,129 |
|
|
|
9 |
% |
AIR TASER |
|
|
15 |
|
|
|
0 |
% |
|
|
65 |
|
|
|
0 |
% |
|
|
65 |
|
|
|
0 |
% |
|
|
186 |
|
|
|
0 |
% |
Single Cartridges |
|
|
2,813 |
|
|
|
24 |
% |
|
|
4,323 |
|
|
|
23 |
% |
|
|
9,655 |
|
|
|
28 |
% |
|
|
10,918 |
|
|
|
23 |
% |
Research Funding |
|
|
105 |
|
|
|
1 |
% |
|
|
|
|
|
|
0 |
% |
|
|
245 |
|
|
|
1 |
% |
|
|
12 |
|
|
|
0 |
% |
Other |
|
|
281 |
|
|
|
2 |
% |
|
|
25 |
|
|
|
0 |
% |
|
|
901 |
|
|
|
3 |
% |
|
|
124 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,676 |
|
|
|
100 |
% |
|
$ |
18,948 |
|
|
|
100 |
% |
|
$ |
35,086 |
|
|
|
100 |
% |
|
$ |
48,406 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International sales for the third quarter and year to date 2005 were $1.6 million, or 14% of
total net sales, and $4.4 million, or 12% of total net sales, respectively, compared to
international sales for the third quarter and year to date 2004 of $0.3 million, or 2% of total net
sales, and $1.1 million, or 2% of total net sales, respectively.
6
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
NOTE 3 INTANGIBLE ASSETS
The Company values purchased intangible assets at cost less accumulated amortization. Amortization
is calculated using the useful life of the asset acquired. The components of net intangible assets
as of September 30, 2005 and December 31, 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life |
|
September 30, 2005 |
|
|
December 31, 2004 |
|
|
TASER.com Domain Name |
|
5 Years |
|
$ |
60,000 |
|
|
$ |
60,000 |
|
U.S. Patents |
|
6 to 7 Years |
|
|
128,360 |
|
|
|
128,360 |
|
Patents Pending |
|
17 Years |
|
|
298,301 |
|
|
|
232,147 |
|
Non-Compete Agreement |
|
7 Years |
|
|
50,000 |
|
|
|
50,000 |
|
TASER Trademark |
|
Indefinite |
|
|
900,000 |
|
|
|
900,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost |
|
|
|
|
1,436,661 |
|
|
|
1,370,507 |
|
Less: Accumulated Amortization |
|
|
|
|
120,736 |
|
|
|
91,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Intangible Assets |
|
|
|
$ |
1,315,925 |
|
|
$ |
1,279,116 |
|
|
|
|
|
|
|
|
|
|
Estimated amortization expense of intangible assets with finite lives for the next five years
is as follow:
|
|
|
|
|
2005 |
|
$ |
9,781 |
|
2006 |
|
|
31,125 |
|
2007 |
|
|
27,126 |
|
2008 |
|
|
27,126 |
|
2009 |
|
|
15,267 |
|
NOTE 4 INVESTMENT SECURITIES
Investment securities are accounted for in accordance with Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities.
Short-term and long-term investments are invested in governmental debt securities, and are
classified as held to maturity. These investments are recorded at amortized cost, which
approximates fair value. The Company intends to hold these securities until maturity. The
short-term investments have maturities of less than one year. At September 30, 2005, the Company
had $25.6 million of long-term investments. All of the long-term investments have maturities
between one and three years. The Companys cash and investment accounts earned interest at an
approximate rate of 2.8% and 0.9% during the three months ended September 30, 2005 and 2004,
respectively. The Companys cash and investment accounts earned interest at an approximate rate of
2.5% and 0.8% during the nine months ended September 30, 2005 and 2004, respectively.
At September 30, 2005, the Company had unrealized losses attributable to its investments which
aggregated approximately $271,000. These unrealized losses have not been recorded as the
investments are held to maturity. None of the investments have been in an unrealized loss position
for more than twelve months.
NOTE 5 INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using the most recent
acquisition cost which approximates the first-in, first-out (FIFO) method. Inventories as of
September 30, 2005 and December 31, 2004 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
December 31, 2004 |
|
|
Raw materials and
work-in-process |
|
$ |
7,191,373 |
|
|
$ |
5,198,716 |
|
Finished goods |
|
|
2,023,760 |
|
|
|
1,641,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Inventory |
|
$ |
9,215,133 |
|
|
$ |
6,840,051 |
|
|
|
|
|
|
|
|
7
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
NOTE 6 EARNINGS PER SHARE
The following table reconciles average common shares outstanding basic, to average common shares
outstanding diluted, that are used in the calculation of earnings per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share |
|
|
Earnings Per Share |
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
Numerator
for basic and diluted earnings per share Net Income |
|
$ |
330,424 |
|
|
$ |
6,126,038 |
|
|
$ |
954,083 |
|
|
$ |
14,167,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share -
weighted average shares outstanding |
|
|
61,385,863 |
|
|
|
57,954,454 |
|
|
|
61,266,387 |
|
|
|
56,309,278 |
|
Dilutive effect of shares issuable under stock
options outstanding |
|
|
2,308,877 |
|
|
|
6,586,780 |
|
|
|
2,685,234 |
|
|
|
6,603,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share -
adjusted weighted average shares |
|
|
63,694,740 |
|
|
|
64,541,234 |
|
|
|
63,951,621 |
|
|
|
62,912,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.01 |
|
|
$ |
0.11 |
|
|
$ |
0.02 |
|
|
$ |
0.25 |
|
Diluted |
|
$ |
0.01 |
|
|
$ |
0.09 |
|
|
$ |
0.01 |
|
|
$ |
0.23 |
|
For the three and nine months ended September 30, 2005, the effects of 558,406 and 370,906
stock options were excluded from the calculation of diluted net income per share, as their effect
would have been anti-dilutive and increased the net income per share.
NOTE 7 INCOME TAXES
The deferred income tax asset at September 30, 2005 is comprised primarily of a net operating loss
carryforward, which resulted from the compensation expense the Company recorded, for income tax
purposes, when employees exercised stock options. For the nine months ended September 30, 2005, the
Company recognized additional tax benefits related to stock option transactions totaling $1,277,945
of which $982,000 was used to offset income taxes otherwise payable
and $295,945 was recorded as
an increase in the deferred tax asset. For the nine months ended September 30, 2004, the Company
recognized tax benefits related to these stock transactions totaling $12,532,226 of which
$8,493,255 was used to offset federal income taxes otherwise payable, and $4,038,971 was recorded
as a deferred tax asset. The total tax benefit of $1,277,945 was credited to additional paid-in
capital in 2005 and the total tax benefit of $12,532,226 was credited to additional paid-in capital
in 2004. Additionally, warranty and inventory reserves, accrued vacation and other items have
contributed to the deferred income tax asset.
The Companys total current and long term deferred tax asset at September 30, 2005 is $26.7
million. SFAS No. 109 requires the reduction of deferred tax assets by a valuation allowance if,
based on the weight of all available evidence, it is more likely than not that some or all of the
deferred tax asset may not be realized. The Company has determined that no such valuation allowance
is necessary. The deferred tax asset reflects primarily the benefit of $26.0 million in loss
carryforwards. Federal loss carryforwards expire in 2024 and state loss carryforwards expire in
2009. Realization of these loss carryforwards is dependent on the Companys ability to generate
sufficient taxable income to utilize the loss carryforwards. Although realization is not assured,
management believes that the deferred tax asset will be utilized. However, the amount of the
deferred tax asset realizable could be reduced if future taxable income is not sufficient to
utilize the loss carryforwards before their expiration.
8
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
NOTE 8 STOCK OPTIONS
At September 30, 2005, the Company had three stock-based employee compensation plans, which are
described more fully in Note 9 to the financial statements included in the Companys Annual Report
on Form 10-KSB/A as filed on May 23, 2005. The Company accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee compensation cost is reflected in
net income, as all options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. However, we have computed compensation
costs for proforma disclosure purposes, based on the fair value of all options awarded at the date
of grant, using the Black-Scholes pricing model. For purposes of this calculation, the Company used
a volatility of 103% for the three months and 106% for the nine months ended September 30, 2005 and
103% for the three and nine months ended September 30, 2004, and a risk free interest rate of 3.5%
for the three and nine months ended September 30, 2005 and a risk free interest rate of 3.0% for
the three and nine months ended September 30, 2004. The Company used an expected life for options
of either one and one-half or three years, depending on the vesting period. The following table
illustrates the effect on net income and earnings per share if the Company had applied the fair
value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation. The Company will adopt SFAS No. 123R on January 1, 2006, which
will require stock-based compensation expense to be recognized for the portion of outstanding
unvested awards, based on the grant date fair value of those awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
|
|
(In thousands) |
|
|
(In thousands) |
|
Net Income, as reported |
|
$ |
330 |
|
|
$ |
6,126 |
|
|
$ |
954 |
|
|
$ |
14,167 |
|
Add: Total stock-based
compensation included in net
income as reported |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct: Total stock-based employee
compensation determined under fair
value based method for all awards,
net of related tax effects |
|
|
(1,755 |
) |
|
|
(2,130 |
) |
|
|
(4,037 |
) |
|
|
(4,886 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Net (Loss) Income |
|
$ |
(1,425 |
) |
|
$ |
3,996 |
|
|
$ |
(3,083 |
) |
|
$ |
9,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic, as reported |
|
$ |
0.01 |
|
|
$ |
0.11 |
|
|
$ |
0.02 |
|
|
$ |
0.25 |
|
Basic, pro forma |
|
$ |
(0.02 |
) |
|
$ |
0.07 |
|
|
$ |
(0.05 |
) |
|
$ |
0.16 |
|
Diluted, as reported |
|
$ |
0.01 |
|
|
$ |
0.09 |
|
|
$ |
0.01 |
|
|
$ |
0.23 |
|
Diluted, pro forma |
|
$ |
(0.02 |
) |
|
$ |
0.06 |
|
|
$ |
(0.05 |
) |
|
$ |
0.15 |
|
NOTE 9 WARRANTY
The Company warrants its products from manufacturing defects for a period of one year after
purchase, and thereafter will replace any defective TASER unit for a fee. After the one year
warranty expires, if the device fails to operate properly for any reason, the Company will replace
the ADVANCED TASER device for a fee of $75, and the TASER X26 on a time and materials basis. The
Company tracks historical data related to returns and related warranty costs on a quarterly basis,
and estimates future warranty claims by applying the estimated average return rate to the product
sales for the period. Historically the reserve amount is increased if the Company becomes aware of
a component failure that could result in larger than anticipated returns from its customers. A
summary of changes in the warranty accrual for the nine months ended September 30, 2005 and 2004 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
Balance at Beginning of Period |
|
$ |
457,914 |
|
|
$ |
312,934 |
|
Utilization of Accrual |
|
|
(599,193 |
) |
|
|
(216,078 |
) |
Warranty Expense |
|
|
749,607 |
|
|
|
361,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at End of the Period |
|
$ |
608,328 |
|
|
$ |
457,914 |
|
|
|
|
|
|
|
|
9
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
NOTE 10 LINE OF CREDIT
The Company has a line of credit agreement with a bank which provides for a total availability of
$10 million. The line is secured primarily by the Companys accounts receivable and inventory and
bears interest at varying rates of interest, ranging from LIBOR plus 1.5% to prime. The
availability under this line is computed on a monthly borrowing base, which is based on the
Companys eligible accounts receivable and inventory. The line of credit matures on July 13, 2006
and requires monthly payments of interest only. At September 30, 2005, there were no borrowings
under the line of credit and the availablity was $5.9 million. There have been no borrowings under
the line of credit to date.
The Companys agreement with the bank requires the Company to comply with certain financial and
other covenants including maintenance of minimum tangible net worth and fixed charge coverage
ratios. For the nine months ended September 30, 2005, the Company was in compliance with all
covenants.
NOTE 11 LEGAL PROCEEDINGS
Securities Class Action Litigation
On January 10, 2005, a securities class action lawsuit was filed in the United States District
Court for the District of Arizona against the Company and certain of its officers and directors,
captioned Malasky v. TASER International, Inc., et al., Case No. 2:05 CV 115. Since then, numerous
other securities class action lawsuits were filed against the Company and certain of its officers
and directors. The majority of these lawsuits were filed in the District of Arizona. Four actions
were filed in the United States District Court for the Southern District of New York and one in the
Eastern District of Michigan. The New York and Michigan actions were transferred to the District of
Arizona. The cases were consolidated, and the court appointed a lead plaintiff and lead counsel.
The lead plaintiff filed a consolidated amended complaint. Defendants filed a motion to dismiss the
consolidated amended complaint for failure to state a claim.
The consolidated amended complaint asserts claims on behalf of the purchasers of the Companys
stock from May 29, 2003 to January 11, 2005. The consolidated amended complaint alleges, among
other things, violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended, and Rule 10b-5, promulgated thereunder, and seek unspecified monetary damages and other
relief against all defendants. The consolidated amended complaint allege generally that the Company
and the individual defendants made false or misleading public statements regarding, among other
things, the safety of the Companys products and the Companys ability to meet its sales goals,
including the validity of a $1.5 million sales order with one of the Companys distributors in the
fourth quarter of 2004. The consolidated complaint also alleges that product defects were leading
to excessive product returns by customers. We intend to defend these lawsuits vigorously; however,
the outcome of any litigation is inherently uncertain and there can be no assurance that any
liability and damages that may ultimately result from the resolution of these matters will be
covered by our insurance or will not be in excess of amounts provided by insurance coverage and
will not have a material adverse effect on our business, operating results or financial condition.
Shareholder Derivative Litigation
On January 11, 2005, a shareholder derivative lawsuit was filed in the United States District Court
for the District of Arizona purportedly on behalf of the Company and against certain of its
officers and directors, captioned Goldfine v. Culver, et al., Case No. 2:05 CV 123. Since then,
five other shareholder derivative lawsuits were filed in the District of Arizona, two shareholder
derivative lawsuits were filed in the Arizona Superior Court, Maricopa County, and one shareholder
derivative lawsuit was filed in the Delaware Chancery Court. On February 9, 2005, the shareholder
derivative actions pending in federal court were consolidated into a single action in the United
States District Court for the District of Arizona under the caption, In re TASER International
Shareholder Derivative Litigation, Case No. 2:05 CV 123. On May 13, 2005, plaintiffs in the
consolidated federal derivative action filed a consolidated amended complaint. Defendants filed
motions to dismiss the consolidated amended complaint on August 19, 2005. The derivative actions in
Arizona state court were consolidated and plaintiffs filed a consolidated complaint. Plaintiffs in
the Arizona state court action and the Delaware action agreed to stay those actions pending
resolution of the consolidated federal derivative action.
10
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
The complaints in the shareholder derivative lawsuits generally allege that the defendants breached
the fiduciary duties owed to the Company and its shareholders by reason of their positions as
officers and/or directors of the Company. The complaints claim that such duties were breached by
defendants disclosure of allegedly false or misleading statements about the safety and
effectiveness of Company products and the Companys financial prospects. The complaints also claim
that fiduciary duties were breached by defendants alleged use of non-public information regarding
the safety of Company products and the Companys financial condition and future business prospects
for personal gain through the sale of the Companys stock. The Company is named solely as a nominal
defendant against which no recovery is sought.
On May 4, 2005, a lawsuit was filed in the Delaware Chancery Court against the Company, captioned
Lucian B. Dinkens v. TASER International, Inc., Case No. 5749754, to compel the Company to give the
plaintiff the right to inspect and copy certain books and records of the Company pursuant to
Section 220 of Delaware General Corporation Law. The Company filed an answer to the complaint on
June 7, 2005.
Securities and Exchange Commission Investigation
In December 2004, the Company was informed that the staff of the Securities and Exchange
Commission had commenced an informal inquiry concerning the Company's public statements regarding the safety
and performance of the Companys products, certain disclosure issues and the accounting for certain transactions.
The Company voluntarily provided documents and information to the SEC staff. In August 2005, the Company was informed that the staff of the SEC had
initiated a formal investigation regarding the Companys disclosures concerning the medical safety of its
products; the accounting and disclosure of certain transactions; and the unauthorized acquisition of
confidential information from the Company by persons outside the Company for the possible purpose of
manipulating the Companys stock. The Company provided additional information at the request of the SEC
staff. In December 2005, the SEC staff advised the Company that it had completed its investigation into the
Companys disclosures concerning the medical safety of the
Companys products; and into the accounting and disclosure issues. The SEC staff further advised the
Company that it had determined that at the present time it will not recommend that the Commission institute
any enforcement proceedings as to any of these matters. The Staff also advised the Company that it is continuing to investigate issues relating to trading in the
Companys stock.
Contract Litigation
In
March 2000, Thomas N. Hennigan, a sales representative for the
Companys products from late 1997 through early 2000,
sued the Company and certain of its shareholders in the United States
District Court, Southern District of New York. The Company previously sued
him in February 2000 in the United States District Court for the
District of Arizona, but had not served him. After the New York case was dismissed in February 2001
for lack of personal jurisdiction, Mr. Hennigan brought a counterclaim in the United States
District Court for the District of Arizona. Mr. Hennigan claims
the exclusive right to sell the Companys
products to many of the largest law enforcement, corrections, and military agencies in the United
States. He sought monetary damages that may amount to as much as $400 million against us allegedly
arising in connection with his alleged service to the Company as a distributor. His claims rest on theories of our
failure to pay commissions, breach of contract, promissory estoppel, breach of fiduciary duty, and
on related theories. No written contract was ever signed with
Mr. Hennigan. The Company believes that he
has no reasonable basis for claims based on informal or implied contractual rights and will be
unable to prove his damages with reasonable certainty. Mr. Hennigan died in April 2001 and the case
is now being prosecuted by his estate. On May 24, 2002, H.A. Russell was permitted to proceed as an
additional defendant-counterclaimant. The Company filed various motions in November 2002 for
partial summary judgment including a motion to dismiss his claims. On September 30, 2003, the Court
issued an order granting the Companys motion for partial summary judgment to dismiss Mr. Russells
claims and struck Hennigans jury demand. On April 14, 2004, the Court issued an opinion partially
granting the Companys motion for partial summary judgment on certain joint venture,
post-termination, post-death and exclusivity claims. A pretrial conference was held on July 28,
2005 and the trial started on August 31, 2005. At the conclusion of Hennigans
case in chief, the Company made a motion to dismiss Hennigans case. The court issued a briefing schedule on
the Companys motion and the trial was suspended pending the courts decision
on the Companys motion.
In September 2004, the Company was served with a summons and complaint in the matter of Roy Tailors
Uniform Co., Inc. v. TASER International in which the plaintiff alleges that it is entitled to
commissions for disputed sales that were made to customers that are claimed to be plaintiffs
customers for which plaintiff is seeking monetary damages. Plaintiff failed to sign a distributor
agreement with the Company and did not have distribution rights with the Company. This case is in
the discovery phase and a trial date has not been set.
11
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
Other Class Action Litigation
In August 2005, the Company was served with a summons and complaint in the matter of Village of
Dolton v. TASER International in which the Plaintiff alleges that defendant misled the plaintiff
about the safety of the TASER device when they purchased the TASER device and are seeking damages.
The plaintiff is seeking to certify the lawsuit as a class action. The Company has filed an answer
to the complaint and a motion to dismiss. In October 2005, the Company filed a declaration of the
former chief of police for the Village of Dolton which refutes many of the allegations made in the
complaint and the Company filed a motion for sanctions. In October 2005, the Court issued an order
partially granting the Companys Motion to Dismiss, and denied the balance of the motions. The case
is now moving forward with discovery.
Product Liability Litigation
The
Company is currently named as a defendant in 44 lawsuits in which the plaintiffs alleged either
wrongful death or personal injury in situations in which the TASER device was used (or present) by
law enforcement officers or during training exercises. One of these cases has been dismissed by
summary judgment order, but is on appeal. In addition, six other cases have been dismissed and
are not included in this number. With respect to each of these
pending 44 cases, the table below
lists the name of plaintiff, the date the Company was served with process, the jurisdiction in
which the case is pending, the type of claim and the status of the matter. This table also lists
those cases which were dismissed during the most recent fiscal quarter. In each of the pending
lawsuits, the plaintiff is seeking monetary damages from the Company. In one case the plaintiff is
seeking injunctive relief in addition to monetary damages. The
defense of each of these lawsuits has been submitted to our insurance carriers that
maintained insurance coverage during these
applicable periods and we continue to maintain product liability insurance coverage with varying
limits and deductibles. The Companys product liability insurance coverage during these periods
ranged from $5,000,000 to $10,000,000 in coverage limits and from $10,000 to $250,000 in per
incident deductibles. The Company is defending each of these lawsuits vigorously. Although the
Company does not expect the outcome in any individual case to be material, the outcome of any
litigation is inherently uncertain and there can be no assurance that any liability and damages
that may ultimately result from the resolution of these matters will be covered by our insurance or
will not be in excess of amounts provided by insurance coverage and will not have a material
adverse effect on our business, operating results or financial condition.
12
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
|
|
|
|
|
|
|
|
|
|
|
Month |
|
|
|
|
|
|
Plaintiff |
|
Served |
|
Jurisdiction |
|
Claim Type |
|
Status |
Alvarado
|
|
4/2003
|
|
CA Superior Court
|
|
Wrongful Death
|
|
Discovery Phase |
City of Madera
|
|
6/2003
|
|
CA Superior Court
|
|
Wrongful Death
|
|
Dismissed by Summary Judgment Appeal Pending |
Borden
|
|
9/2004
|
|
US District Court, SD IN
|
|
Wrongful Death
|
|
Dismissed with Prejudice |
Thompson
|
|
9/2004
|
|
MI Circuit Court
|
|
Wrongful Death
|
|
Discovery Phase |
Pierson
|
|
11/2004
|
|
US District Court, CD CA
|
|
Wrongful Death
|
|
Discovery Phase |
Glowczenski
|
|
10/2004
|
|
US District Court, ED NY
|
|
Wrongful Death
|
|
Case Stayed |
LeBlanc
|
|
12/2004
|
|
US District Court, CD CA
|
|
Wrongful Death
|
|
Discovery Phase |
M.
Elsholtz
|
|
12/2004
|
|
TX District Court
|
|
Wrongful Death
|
|
Discovery Phase |
Madrigal
|
|
5/2005
|
|
AZ Superior Court
|
|
Wrongful Death
|
|
Dismissed with Prejudice |
Washington
|
|
5/2005
|
|
US District Court, ED CA
|
|
Wrongful Death
|
|
Discovery Phase |
Clark
|
|
5/2005
|
|
US District Court, ND TX
|
|
Wrongful Death
|
|
Dismissed with Prejudice |
Sanders
|
|
5/2005
|
|
US District Court ED CA
|
|
Wrongful Death
|
|
Discovery Phase |
Fleming
|
|
5/2005
|
|
US District Court ED LA
|
|
Wrongful Death
|
|
Discovery Phase |
Woolfolk
|
|
6/2005
|
|
US District Court MD FL
|
|
Wrongful Death
|
|
Discovery Phase |
Nowell
|
|
8/2005
|
|
US District Court ND TX
|
|
Wrongful Death
|
|
Motion to Dismiss Filed |
Graff
|
|
9/2005
|
|
AZ Superior Court
|
|
Wrongful Death
|
|
Discovery Phase |
Holcomb
|
|
9/2005
|
|
US District Court, ND OH
|
|
Wrongful Death
|
|
Discovery Phase |
Tucker
|
|
10/2005
|
|
US District Court, NV
|
|
Wrongful Death
|
|
Complaint Served |
Hammock
|
|
10/2005
|
|
District Court, Tarrant County, TX
|
|
Wrongful Death
|
|
Discovery Phase |
Heston
|
|
11/2005
|
|
US District Court, ND CA
|
|
Wrongful Death
|
|
Complaint Served |
A.
Elsholtz
|
|
10/2005
|
|
TX District Court
|
|
Wrongful Death
|
|
Complaint Served |
Rosa
|
|
11/2005
|
|
US District Court, ND CA
|
|
Wrongful Death
|
|
Complaint Served |
Gosserand
|
|
11/2005
|
|
US District Court ED LA
|
|
Wrongful Death
|
|
Complaint Served |
O
Donnell/Hasse
|
|
11/2005
|
|
Circuit Court, Cook County, IL
|
|
Wrongful Death
|
|
Complaint Served |
Yeagley
|
|
11/2005
|
|
Hillsborough County Circuit
Court, FL
|
|
Wrongful Death
|
|
Complaint Served |
Neal-Lomax
|
|
12/2005
|
|
US District Court, NV
|
|
Wrongful Death
|
|
Complaint Served |
Williams
|
|
12/2005
|
|
Gwinnett County State Court, GA
|
|
Wrongful Death
|
|
Complaint Served |
Kerchoff
|
|
6/2004
|
|
US District Court, ED MI
|
|
Training Injury
|
|
Dismissed, Refiled |
Powers
|
|
11/2003
|
|
AZ Superior Court
|
|
Training Injury
|
|
At Trial |
Cook
|
|
8/2004
|
|
NV District Court
|
|
Training Injury
|
|
Discovery Phase |
Stevens
|
|
10/2004
|
|
OH Court Common Pleas
|
|
Training Injury
|
|
Discovery Phase |
Eckenroth
|
|
11/2004
|
|
AZ Superior Court
|
|
Training Injury
|
|
Dismissed with Prejudice |
Lipa
|
|
2/2005
|
|
MI Circuit Court
|
|
Training Injury
|
|
Discovery Phase |
Dimiceli
|
|
3/2005
|
|
FL Circuit Court
|
|
Training Injury
|
|
Discovery Phase |
Collins
|
|
5/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Dismissed |
Allen
|
|
5/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Discovery Phase |
J.J.
|
|
7/2005
|
|
FL Circuit Court
|
|
Training Injury
|
|
Complaint Served |
J.B.
|
|
7/2005
|
|
FL Circuit Court
|
|
Training Injury
|
|
Complaint Served |
Howard
|
|
8/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Complaint Served |
Wagner
|
|
8/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Complaint Served |
Gerdon
|
|
8/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Complaint Served |
Gallant
|
|
8/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Complaint Served |
Herring
|
|
8/2005
|
|
Circuit Court of City
of St. Louis, MO
|
|
Training Injury
|
|
Complaint Served |
Stewart
|
|
10/2005
|
|
Circuit Court for
Broward County, FL
|
|
Training Injury
|
|
Complaint Served |
Cosby
|
|
8/2004
|
|
US District Court, SD NY
|
|
Injury During Arrest
|
|
Summary Judgement Motion Being Filed |
Blair
|
|
3/2005
|
|
US District Court, MD NC
|
|
Injury During Detention
|
|
Summary Judgement Motion Filed Awaiting Ruling |
Lewis
|
|
7/2005
|
|
US District Court Tal FL
|
|
Injury During Arrest
|
|
Complaint Served |
Lash
|
|
8/2005
|
|
US District Court ED MO
|
|
Injury During Arrest
|
|
Complaint Served, motion to dismiss
filed |
Games
|
|
8/2005
|
|
Circuit Court,
Multnomah County, OR
|
|
Injury During Arrest
|
|
Complaint Served |
Bynum
|
|
10/2005
|
|
US District Court SD NY
|
|
Injury During Arrest
|
|
Complaint Served |
Other Litigation
In January 2005, the Company filed litigation in U.S. District Court for the Western District of
North Carolina against Stinger Systems, Inc. and Robert Gruder alleging false advertising and a
violation of the Lanham Act. The defendants have filed a counterclaim against the Company alleging
defamation. This case is in the discovery phase and no trial date has been set.
13
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
In February 2005, the Company filed litigation in Superior Court for Maricopa County, Arizona
against its former patent attorney, Thomas G. Watkins III, alleging breach of fiduciary duty and
estoppel arising out of ownership and inventorship claims
Mr. Watkins has made against two patents he
filed for the Company for certain technology utilized in the TASER X26 product. This case is in the
discovery phase and no trial date has been set.
In July 2005, the Company filed a lawsuit in Superior Court for Maricopa County against Gannett
Co., Inc., parent company of the USA Today Newspaper and the Arizona Republic, for libel, false
light invasion of privacy, injurious falsehood and tortuous interference with business relations.
The complaint alleges that the defendants published an article in the USA Today Newspaper on June
3, 2005 which was grossly incorrect and completely misrepresented the facts by overstating the
electrical output of the TASER X26 by a factor of 1 million. The complaint also asserts that
the defendants engaged in the ongoing publication of misleading articles related to the safety of
TASER products, resulting in substantial economic damages to TASER International, its customers and
its shareholders. The court recently dismissed the count of false light invasion of privacy. The
case is in the discovery phase and no trial date has been set.
In
November 2005, the company filed a lawsuit in Marion County Circuit
Court, Indiana against James Ruggieri for defamation, product
disparagement, intentional interference with a business relationship,
Lanham Act violations, and tortiously affecting the fairness and
integrity as adverse third-party witness. This case is entering the
discovery phase and no trial date has been set.
We intend to pursue and defend the foregoing lawsuits vigorously; however, the outcome of any
litigation is inherently uncertain and there can be no assurance that any liability and damages
that may ultimately result from the resolution of these matters will be covered by our insurance or
will not be in excess of amounts provided by insurance coverage and will not have a material
adverse effect on our business, operating results or financial condition.
NOTE 12 RELATED PARTY TRANSACTIONS
The Company charters an aircraft for business travel from Four Futures Corporation, which is
wholly-owned by Thomas P. Smith, President of the Company, and his family. For the three and nine
months ended September 30, 2005, the Company incurred charter expenses of approximately $141,000
and $340,000, respectively, to Four Futures Corporation and Thomas P.
Smith. Any personal use of the aircraft by Mr.
Smith is billed to Four Futures Corporation for reimbursement. For the three and nine months ended
September 30, 2005, the Company billed approximately $2,000 and $5,000, respectively, to Four
Futures Corporation for personal use of the aircraft. For the three and nine months ended September
30, 2004, the Company incurred expenses of approximately $62,000 and $143,000, respectively, to
Four Futures Corporation, and no expenses were billed to Four Futures Corporation for personal use
of the aircraft. At September 30, 2005, the Company had an outstanding payable of approximately
$69,000 to Four Futures Corporation and Thomas P. Smith, and no amounts due from Four Futures Corporation. The Company
believes that the rates charged by Four Futures Corporation are equal to or below commercial rates
the Company would pay to charter similar aircraft from independent charter companies.
The Company also charters an aircraft for business travel from Thundervolt, LLC, which is wholly
owned by Patrick W. Smith, Chief Executive Officer of the Company, and Phillips W. Smith, Chairman
of the Companys Board. For the three and nine months ended September 30, 2005, the Company
incurred charter expenses of approximately $98,000 and $335,000, respectively, to Thundervolt, LLC.
Any personal use of the aircraft by Patrick, Phillip or Thomas Smith is billed to Thundervolt, LLC,
or directly to the individual, for reimbursement. For the three and nine months ended September 30,
2005, the Company billed approximately $118,000 and $293,000, respectively, to Thundervolt, LLC,
Patrick W. Smith, Phillips W. Smith and Thomas P. Smith for personal use of the aircraft. For the
three and nine months ended September 30, 2004, the Company incurred expenses of approximately
$63,000 to Thundervolt, LLC, and no expenses were billed to Thundervolt, LLC for personal use of
the aircraft. At September 30, 2005, the Company had an outstanding payable of approximately
$76,000 to Thundervolt, LLC and $36,000 outstanding receivable from Patrick W. Smith and Thomas P. Smith. The
Company believes that the rates charged by Thundervolt, LLC are equal to or below commercial rates
the Company would pay to charter similar aircraft from independent charter companies.
In November 2004, the Company established the TASER Foundation. The TASER Foundation is a 501(c)3
non-profit corporation and has made application to the IRS for tax exempt status. The TASER
Foundations mission is to honor the service and sacrifice of local and federal law enforcement
officers in the United States and Canada lost in the line of duty by providing financial support to
their families. Patrick W. Smith, Thomas P. Smith and Daniel M. Behrendt, all officers of the
Company, also serve on the Board of Directors of the TASER Foundation. Over half of the initial $1
million endowment was contributed directly by TASER International, Inc. employees. The Company bears all administrative costs of the TASER
Foundation in order to ensure 100% of all donations are distributed to the families of fallen
officers. For the three and nine months ended September 30, 2005, the Company has incurred
approximately $32,000 and $92,000, respectively, in such administrative costs. In addition, for the
three and nine months ended September 30, 2005, the Company has contributed $100,000 and $225,000,
respectively, to the TASER Foundation.
14
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
NOTE 13
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43, Inventory Pricing, for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) requiring
that those items be recognized as current-period expenses regardless of whether they meet the
criterion as so abnormal. This statement also requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the production facilities.
The statement is effective for inventory costs incurred after September 15, 2005. Management does
not expect this statement to have a material impact on the Companys financial position or results
of operations.
In December 2004, the FASB issued SFAS No. 123R, Share- based Payment. This standard is a
revision of SFAS No. 123, Accounting for Stock- Based Compensation, and supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS No. 123R requires the measurement of the cost of employees services
received in exchange for an award of the entitys equity instruments based on the grant-date fair
value of the award. The cost will be recognized over the period during which an employee is
required to provide service in exchange for the award. No compensation cost is recognized for
equity instruments for which employees do not render service. SFAS No. 123R also requires the
benefits of tax deductions in excess of recognized compensation cost be reported as a financing
cash flow rather than as an operating cash flow as required under current literature. This
requirement will reduce net cash flows from operating activities in periods after the adoption. The
Company will adopt SFAS No. 123R on January 1, 2006, which will require stock-based compensation
expense to be recognized for the portion of outstanding unvested awards, based on the grant date
fair value of those awards. The Company is currently evaluating the transition provisions of this
standard; and to what extent the Companys equity instruments will be used in the future for
employees services. Therefore, the impact on the Companys financial statements of the adoption of
SFAS No. 123R cannot be predicted with certainty at this time.
NOTE 14
RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
On November 14, 2005, we concluded that our financial
statements at March 31, 2005 and June
30, 2005 and for the periods then ended, included in our Form 10-Qs for the periods ended
March 31, 2005 and June 30, 2005, respectively, should no longer be relied upon due to an error
in those financial statements which resulted from the incorrect
accrual of legal and professional
fees and other expenses for those periods. Beginning in the first quarter of 2005, we experienced a
significant increase in outside legal and other professional expenses. We determined that
our internal controls surrounding the recording of legal and professional fees in the appropriate
accounting period were not operating effectively. Certain of the invoices relating to the work
performed were not received by our accounting department until after we had closed our books
and reported our financial results for such periods due to delays on the part of third parties in
delivering or communicating such invoices to us. As a result, certain invoices were recorded in
the incorrect period. Correction of these errors will result in shifting of expenses among the first
three quarters of 2005 with expenses increasing in the first quarter of 2005 and decreasing in the
second quarter of 2005 from the figures included in the previously filed Form 10-Qs. There is a
corresponding decrease/increase in net income for the first and second quarters resulting from the
change in expenses. The restatement will have no impact on revenues for the periods. Amended
Forms 10-Q for the quarters ended March 31, 2005 and June 30, 2005 will be filed to reflect the
restatement.
The following changes will be made to the previously reported financial statements as of and for
the quarters ended March 31, 2005 and June 30, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Income: |
|
For the Three Months Ended |
|
|
|
March
31, 2005 |
|
|
|
As Previously |
|
|
|
|
|
|
Reported |
|
|
As Restated |
|
Sales, general and administrative expenses |
|
$ |
5,252,164 |
|
|
$ |
5,590,100 |
|
Income (loss) from operations |
|
|
76,609 |
|
|
|
(261,327 |
) |
Income (loss) before income taxes |
|
|
275,021 |
|
|
|
(62,915 |
) |
Provision
(credit) for income tax |
|
|
107,000 |
|
|
|
(24,000 |
) |
Net
income (loss) |
|
|
168,021 |
|
|
|
(38,915 |
) |
|
Statement
of Income |
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June
30, 2005 |
|
|
June 30, 2005 |
|
|
|
As Previously |
|
|
|
|
|
|
As Previously |
|
|
|
|
|
|
Reported |
|
|
As
Restated |
|
|
Reported |
|
|
As
Restated |
|
Indirect manufacturing expense |
|
$ |
1,290,429 |
|
|
$ |
1,219,342 |
|
|
$ |
2,708,248 |
|
|
$ |
2,637,161 |
|
Total cost of products sold |
|
|
4,816,099 |
|
|
|
4,745,012 |
|
|
|
9,344,124 |
|
|
|
9,273,037 |
|
Gross margin |
|
|
8,390,560 |
|
|
|
8,461,647 |
|
|
|
14,066,696 |
|
|
|
14,137,783 |
|
Sales, general and administrative expenses |
|
|
7,458,533 |
|
|
|
7,240,994 |
|
|
|
12,710,697 |
|
|
|
12,831,094 |
|
Research and development expenses |
|
|
351,441 |
|
|
|
395,541 |
|
|
|
698,804 |
|
|
|
742,904 |
|
Income from operations |
|
|
580,586 |
|
|
|
825,112 |
|
|
|
657,195 |
|
|
|
563,785 |
|
Income before income taxes |
|
|
869,048 |
|
|
|
1,113,574 |
|
|
|
1,144,069 |
|
|
|
1,050,659 |
|
Provision for income tax |
|
|
360,000 |
|
|
|
451,000 |
|
|
|
467,000 |
|
|
|
427,000 |
|
Net income |
|
|
509,048 |
|
|
|
662,574 |
|
|
|
677,069 |
|
|
|
623,659 |
|
15
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following is a discussion of the Companys financial condition and results of operations for
the three and nine months ended September 30, 2005 and September 30, 2004. The following discussion
may be understood more fully by reference to the financial statements, notes to the financial
statements, and the Managements Discussion and Analysis of Financial Condition or Plan of
Operation section contained in the Companys Annual Report on Form 10-KSB/A filed on May 23, 2005.
Certain statements contained in this report may be deemed to be forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995, and the Company intends that such
forward-looking statements be subject to the safe-harbor created thereby. Such forward-looking
statements may relate to, among other things: expected revenue and earnings growth; estimates
regarding the size of our target markets; successful penetration of the law enforcement market;
expansion of product sales to the private security, military and consumer self-defense markets;
growth expectations for new and existing accounts; expansion of production capability; new product
introductions; and our business model. We caution that these statements are qualified by important
factors that could cause actual results to differ materially from those reflected by the
forward-looking statements herein. Such factors include, but are not limited to: market acceptance
of our products; establishment and expansion of our direct and indirect distribution channels;
attracting and retaining the endorsement of key opinion-leaders in the law enforcement community;
the level of product technology and price competition for our products; the degree and rate of
growth of the markets in which we compete and the accompanying demand for our products; potential
delays in international and domestic orders; implementation risks of manufacturing automation;
risks associated with rapid technological change; execution and implementation risks of new
technology; new product introduction risks; ramping manufacturing production to meet demand;
litigation resulting from alleged product- related injuries; risks related to government inquiries
and pending class action and derivative litigation; media publicity concerning allegations of
deaths occurring after use of the TASER device and the negative impact this publicity could have on
sales; product quality risks; potential fluctuations in quarterly operating results; competition;
financial and budgetary constraints of prospects and customers; dependence upon sole and limited
source suppliers; fluctuations in component pricing; risks of governmental regulations; dependence
on a single product; dependence upon key employees; employee retention risks; and other factors
detailed in the Companys filings with the Securities and Exchange Commission.
Overview
We began operations in Arizona in 1993 for the purpose of developing and manufacturing non-lethal
self-defense devices. In December 1999, we introduced our ADVANCED TASER device for sale in the law
enforcement market. Although we had limited financial resources, in 2001, we focused on building
the distribution channel for marketing our product line and developing a nationwide training
program to introduce our product line to law enforcement agencies, primarily in North America. We
also completed our initial public offering in 2001. In April 2002, we received a grant from the
Office of Naval Research to aid the U.S. Government with the development of non-lethal weapons for
the military. This grant provided us with added funding for our research and development efforts,
and also validated our position as a leader in non-lethal technologies. In 2003, we remained
focused on expanding our manufacturing and sales infrastructure to support the growing demand for
our products, continued developing new product capabilities, and added resources to expand our
technology base. In May 2003, we introduced our TASER X26 device which incorporated the strengths
of its predecessor, the ADVANCED TASER device, but also introduced a new shaped pulse technology,
and a smaller form factor. The TASER X26 began shipping in
September 2003. In June 2003, we
purchased patent applications and patents from a former competitor in the manufacture and sale of
Taser conducted energy weapons to law enforcement. In 2003, we shipped our products to key United
States Military command posts, and worked with several key international police and military forces
to conduct safety and reliability testing for future deployment.
Our business grew substantially in 2004 and we achieved 177% growth in net sales compared to 2003,
earned $18.9 million in net income, and generated more than $30.3 million of cash through operating
activities. During 2004, our TASER X26 met with significant customer approval contributing more
than $46.1 million of net sales for the year. However, since late 2004, as a result of on going
negative press coverage and increased litigation concerning the Companys products and their use,
the Company has experienced a decline in sales for the nine months ended September 30, 2005
compared to the nine months ended September 30, 2004. In particular, these events have resulted in
longer sales cycles and delays in orders from prospective customers. The Company has also
experienced significant increases in selling, general and administrative expenses for the nine
months ended September 30, 2005 compared to the nine months ended September 30, 2004 as additional
resources have been devoted to legal, public relations and consulting activities.
Our TASER brand product line consists of several models. Our most often purchased device in 2005
has been the TASER X26, with our new shaped pulse technology, and a new smaller form factor that
was introduced to our target markets in May 2003. It is sold along with optional accessory packages
of lithium batteries, various cartridges that shoot two small, electrified probes up to 35 feet,
data download package, extended warranty packages, and a number of holsters. The ADVANCED TASER
device which we introduced in December 1999 is still widely used across our target markets. There
are three versions of the ADVANCE TASER device: the M26, the M18 and the M18-L, various cartridges that
shoot two small, electrified probes up to 35 feet, rechargeable batteries, a battery recharging
system, data download package, extended warranty packages, and a number of holstering accessories.
In addition to the
16
law enforcement line of ADVANCED TASER products, we also developed a slightly less powerful private
citizen version of the ADVANCED TASER device for the private citizen self defense market. This line
includes the ADVANCED TASER M18L, with integrated laser sight, the ADVANCED TASER M18 without an
integrated laser sight, a cartridge that shoots two small, electrified probes up to 15 feet, and a
number of holstering accessories. We also introduced a citizen
version of the TASER X26 with our
shaped pulse technology in the fourth quarter of 2004 and have devoted a limited amount of
marketing efforts to bring the X26C to selected cities within the U.S. in the nine months ended
September 30, 2005.
Law enforcement, military and corrections agencies represent our primary target markets. In each of
these markets, the decision to purchase TASER devices is normally made by a group of people
including the agency head, his or her training staff, and weapons experts. Depending on the size
and cost of the device deployment, the decision may involve political decision-makers such as city
council members and the federal government. The decision-making process can take as little as a few
weeks or as long as several years. In the first nine months of 2005, we shipped a total of 13,859
orders at an average sale price of $2,570. In 2004, we shipped a total of 16,612 orders at an
average sale price of $4,072 per shipment. This compares to 9,580 orders shipped in 2003, at an
average sales price of $2,553 per order. With the exception of several accounts to which we sell
directly, the vast majority of our law enforcement agency sales in the United States occur through
our network of 28 law enforcement distributors. Sales in the private citizen market are made
through sales from the Companys webstore and through 25 commercial distributors.
Our international sales are made through a network of over 80 international distributors that work
in a specific territory generally under short term exclusive agreements. Prior to 2004, we
concentrated our resources on the United States law enforcement and corrections market and our
international sales efforts were limited. We shipped products to approximately 43 countries during
fiscal 2004. Our sales outside the U.S. accounted for approximately 12% of our sales in the nine
months ended September 30, 2005, 4% of our sales in 2004 and 12% of our sales in 2003. During 2005,
we have been bolstering our international presence by expanding our focus to a larger number of
countries. We have formalized our international distribution programs and have placed a greater
emphasis on managing individual international distributor performance. We are working to develop an
international Master Instructor training group modeled after our domestic training programs to
further educate police agencies internationally about our products.
We conduct manufacturing and final assembly operations at our headquarters in Scottsdale, Arizona
and we own all of the equipment required to manufacture and assemble our finished products. With
our current work force we are able to produce approximately 80,000 cartridges per month, and more
than 7,500 TASER devices. We believe we can expand our production capabilities by adding additional
personnel with negligible new investment in tooling and equipment.
Our devices are not considered to be a firearm by the U.S. Bureau of Alcohol, Tobacco, Firearms
and Explosives. Therefore, no firearms-related regulations apply to the sale and distribution of
our devices within the United States. However, many states have regulations restricting the sale
and use of stun guns, inexpensive hand-held shock devices, which we
believe apply to our devices. Our products are often used in aggressive confrontations that may result in serious, permanent
bodily injury or death to those involved. Our products may cause or be associated with these
injuries. A person injured in a confrontation or otherwise in connection with the use of our
products may bring legal action against us to recover damages on the basis of theories including
personal injury, wrongful death, negligent design, dangerous product or inadequate warning. We are
currently subject to a number of such lawsuits. We may also be subject to lawsuits involving
allegations of misuse of our products. If successful, personal injury, misuse and other claims
could have a material adverse effect on our operating results and financial condition. Although we
carry product liability insurance, significant litigation could also result in a diversion of
managements attention and resources, negative publicity and an award of monetary damages in excess
of our insurance coverage. The outcome of any litigation is inherently uncertain and there can be
no assurance that our existing or any future litigation will not have a material adverse effect on
our revenues, our financial condition or financial results.
Our future challenges include risk management, increasing sales and profits, and managing the cost
structure of our business. As our weapon systems are deployed around the world, we have seen and
expect to continue to see an increased number of complaints filed against the Company alleging
injuries resulting from the use of a TASER device. We carry product liability insurance to help
defray the costs associated with these claims, but have experienced increased legal costs and
higher insurance premiums in recent periods which are expected to continue in the future. Further,
the Company has $67.6 million in net operating loss carryforwards. The amount realizeable could
be reduced if future taxable income is not sufficient to utilize the loss carryforwards before
their expiration. In addition, the implications of Financial Accounting Standards Board (FASB)
123R, which requires the expensing of fair value of employee stock options, may result in
significant additional compensation expense recorded by the Company in the future.
Critical Accounting Policies
We have identified the following policies as critical to our business operations and the
understanding of our results of operations. The preparation of this Quarterly Report on Form 10-Q
requires us to make estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our financial
statements, and the reported amounts of revenue and expenses during the reporting period. There can
be no assurance that actual results will not differ from those estimates. The effect of these
policies on our business operations is discussed below.
17
Revenue Recognition. Our revenue recognition policy is significant because our revenue is a key
component of our results of operations. We recognize revenues when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, title has transferred,
the price is fixed and collectability is reasonably assured. All of the Companys sales are final
and our customers do not have a right to return the product. We charge certain of our customers
shipping fees, which are recorded as a component of net sales. We record training revenue as the
service is provided. In 2003, we began offering our customers the right to purchase extended
warranties on our ADVANCED TASER product and TASER X26 product. Revenue for warranty purchases is
deferred at the time of sale, and recognized over the warranty period. At September 30, 2005,
$1,045,000 was deferred under this program and at December 31, 2004, $839,000 was deferred under
this program. The Company also defers revenue associated with the one-on-one private citizen
training and background checks that are included with the purchase of an X26 C
private citizen device. The revenue associated with these items is deferred until the service is
provided. At September 30, 2005, the Company had deferred approximately $145,000 relating to these
items, and another $23,000 relating to the training of federal firearms licensed dealers who will
sell the X26 C device. At December 31, 2004, the Company had deferred
approximately $135,000 relating to the private citizen training and background checks, and another
$33,000 relating to the training of federal firearms licensed dealers who will sell the
X26 C device.
Standard Warranty Costs. We warrant our products from manufacturing defects for a period of one
year after purchase and will replace any defective unit with a new one for a fee. After the one
year warranty expires, if the device fails to operate properly for any reason, the Company will
replace the ADVANCED TASER device for a fee of $75, and the TASER X26 on a time and materials
basis. We track historical data related to returns and related warranty costs on a quarterly basis,
and estimate future warranty claims by applying our four quarter average warranty return rate to
our product sales for the period. We have also historically increased our reserve amount if we
become aware of a component failure that could result in larger than anticipated returns from our
customers. As of September 30, 2005, our reserve for warranty returns was $608,000 compared to a
$458,000 reserved at December 31, 2004.
Inventory. Our inventory balance includes the application of overhead expenditures. This
calculation is based upon the standard manufacturing costs for each sub assembly and finished
product in inventory at the period end, and includes allocations for indirect manufacturing,
manufacturing overhead expenditures and engineering expenses incurred during the period. On
September 30, 2005, the reserve for obsolete inventory was $197,000, compared to $144,000 at
December 31, 2004. In the nine months ended September 30, 2005, the Company increased its inventory
balances by $2.4 million to $9.2 million, from $6.8 million at December 31, 2004, as the Companys
purchasing and production was in excess of demand.
Accounts Receivable. Sales are typically made on credit and we generally do not require collateral.
We perform ongoing credit evaluations of our customers financial condition and maintain an
allowance for estimated potential losses. Uncollectible accounts are written off when deemed
uncollectible, and accounts receivable are presented net of an allowance for doubtful accounts.
Results of Operations
Three and Nine Months Ended September 30, 2005 Compared to the Three and Nine Months Ended
September 30, 2004
Net Sales. Net sales decreased $7.3 million, or 38%, to $11.7 million for the third quarter of 2005
compared to $18.9 million for the third quarter of 2004. Net sales decreased $13.3 million, or 28%,
to $35.1 million for the year to date 2005 compared to $48.4 million for the year to date 2004. We
believe the principal reasons for the decreases in net sales relate to the adverse effect on
customers and potential customers of the negative publicity surrounding our products or use of our
products, and potential competition which may cause our customers to postpone or delay orders to
allow them to evaluate other competing products. Specifically, TASER X26 device sales decreased
$5.6 million to $7.8 million for the third quarter of 2005 compared to $13.4 million for the third
quarter of 2004. TASER X26 device sales decreased $10.8 million to $22.2 million for the year to
date 2005 compared to $33.0 million for the year to date 2004. ADVANCED TASER device sales
decreased $421,000 for the third quarter of 2005 to $674,000 compared to $1.1 million for the third
quarter of 2004. ADVANCED TASER device sales decreased $2.1 million for the year to date 2005 to
$2.0 million compared to $4.1 million for the year to date 2004. These declines are associated with
reduced sales of the ADVANCED TASER product line as many customers transitioned to the smaller and
lighter TASER X26 models. Single cartridge sales decreased $1.5 million for the third quarter of
2005 to $2.8 million compared to $4.3 million for the third quarter of 2004. Single cartridge sales
decreased $1.2 million for the year to date 2005 to $9.7 million compared to $10.9 million for the
year to date 2004.
International sales for the third quarter and year to date 2005 were $1.6 million, or 14% of total
net sales, and $4.4 million, or 12% of total net sales, respectively, compared to international
sales for the third quarter and year to date 2004 of $0.3 million, or 2% of total net sales, and
$1.1 million, or 2% of total net sales, respectively.
18
For the three and nine months ended September 30, 2005 and 2004, sales by product line were as
follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
Sales by Product Line |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TASER X26 |
|
$ |
7,788 |
|
|
|
67 |
% |
|
$ |
13,440 |
|
|
|
71 |
% |
|
$ |
22,193 |
|
|
|
63 |
% |
|
$ |
33,037 |
|
|
|
68 |
% |
ADVANCED TASER |
|
|
674 |
|
|
|
6 |
% |
|
|
1,095 |
|
|
|
6 |
% |
|
|
2,027 |
|
|
|
6 |
% |
|
|
4,129 |
|
|
|
9 |
% |
AIR TASER |
|
|
15 |
|
|
|
0 |
% |
|
|
65 |
|
|
|
0 |
% |
|
|
65 |
|
|
|
0 |
% |
|
|
186 |
|
|
|
0 |
% |
Single Cartridges |
|
|
2,813 |
|
|
|
24 |
% |
|
|
4,323 |
|
|
|
23 |
% |
|
|
9,655 |
|
|
|
28 |
% |
|
|
10,918 |
|
|
|
23 |
% |
Research Funding |
|
|
105 |
|
|
|
1 |
% |
|
|
|
|
|
|
0 |
% |
|
|
245 |
|
|
|
1 |
% |
|
|
12 |
|
|
|
0 |
% |
Other |
|
|
281 |
|
|
|
2 |
% |
|
|
25 |
|
|
|
0 |
% |
|
|
901 |
|
|
|
3 |
% |
|
|
124 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,676 |
|
|
|
100 |
% |
|
$ |
18,948 |
|
|
|
100 |
% |
|
$ |
35,086 |
|
|
|
100 |
% |
|
$ |
48,406 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the third quarter of 2005, the number of TASER X26 devices sold decreased by 7,301 units, or
41%, to 10,492 devices sold in the third quarter of 2005 compared to 17,793 devices sold in the
third quarter of 2004. For the year to date 2005, the number of TASER X26 devices sold decreased by
14,892 units, or 34%, to 29,417 devices sold for the year to date 2005 compared to 44,309 devices
sold for the year to date 2004. In the third quarter of 2005, the number of ADVANCED TASER devices
sold decreased by 509 units, or 21%, to 1,931 devices sold in the third quarter of 2005 compared to
2,440 devices sold in the third quarter of 2004. For the year to date 2005, the number of ADVANCED
TASER devices sold decreased by 6,353 units, or 71%, to 2,588 devices sold for the year to date
2005 compared to 8,941 devices sold for the year to date 2004. Single cartridge sales decreased by
80,079 units, or 32%, to 172,965 sold in the third quarter of 2005 compared to 253,044 sold in the
third quarter of 2004. Single cartridge sales decreased by 78,484 units, or 12% to 592,441 sold for
the year to date 2005 compared to 670,925 sold for the year to date 2004.
Cost of Products Sold. Cost of products sold declined $2.0 million for the third quarter of 2005
compared to the third quarter of 2004. However, as a percentage of net sales, cost of products sold
increased to 33% of net sales for the third quarter of 2005 compared to 30% of net sales for the
third quarter of 2004. Cost of products sold declined $2.6 million for the year to date 2005
compared to the year to date 2004. However, as a percentage of net sales, cost of products sold
increased to 37% of net sales for the year to date 2005 compared to 32% of net sales for the year
to date 2004. These percentage increases are directly attributable to the decline in device sales
which resulted in fewer units over which to apply indirect manufacturing expenses, resulting in
higher per unit costs. Indirect expenses primarily include indirect salaries for manufacturing
support personnel, scrapped materials, freight, supplies and depreciation. Direct manufacturing
costs also increased as a percentage of net sales to 25% of net sales for the third quarter of
2005, and 27% of net sales for the year to date 2005 compared to 24% of net sales for both the
third quarter and year to date 2004. These increases in direct manufacturing expenses as a
percentage of sales were primarily due to lower production yields in 2005 and to a lesser extent a
change in the sales mix to a higher concentration of cartridges.
Gross
Margin. Gross margins declined $5.4 million to $7.8 million for the third quarter of 2005
compared to $13.2 million for the third quarter of 2004. As a percentage of net sales, gross
margins declined to 67% for the third quarter of 2005 compared to 70% for the third quarter of
2004. Gross margins declined $10.7 million to $22.0 million for the year to date 2005 compared to
$32.7 million for the year to date 2004. As a percentage of net sales, gross margins declined to
63% for the year to date 2005 compared to 68% for the year to date 2004. These decreases were due
to the higher cost of sales per unit and higher indirect manufacturing expenses as a percent of
sales for the reasons discussed above.
Sales, General and Administrative Expenses. Sales, general and administrative expenses increased
$3.8 million, or 126%, to $6.9 million for the third quarter of 2005 compared to $3.1 million for
the third quarter of 2004. Sales, general and administrative expenses
increased $10.7 million, or 120%, to $19.7 million for the year to date 2005 compared to $9.0 million for the year to date
2004. Included in these increases were significant increases in the Companys legal and
professional fees, travel expenses, salaries and benefits, liability insurance, and public
relations expenses. Increases in legal fees and some professional fees relate to the Companys
defense costs in the securities litigation, product liability, and contract litigation matters
discussed further in Part II, Item 1 below. Also included in professional fees for the third
quarter and year to date 2005, are $0.2 million and $0.5 million, respectively, in fees associated
with the implementation of the internal control requirements of Sarbanes-Oxley Section 404. The
increase in public relations and travel activities are associated with the Companys continuing
efforts to educate the public in regard to the safety and efficacy of its products. Increases in
salaries and benefits relate to the Company building its infrastructure to support its business.
Research
and Development Expenses. Research and development expenses
increased $256,000, or 243%,
to $361,000 for the third quarter of 2005 compared to $105,000 for the third quarter of 2004.
Research and development expenses increased $480,000, or 77%, to $1.1 million for the year to date
2005 compared to $623,000 for the year to date 2004. These increases are due to higher headcounts,
medical research and supplies to support the Companys continuing efforts to develop new products
such as a projectile weapon platform and the TASER Anti Personnel Munition (TAPM).
19
Interest Income. Interest income increased $219,000 to $307,000 for the third quarter of 2005
compared to $88,000 for the third quarter of 2004. Interest income increased $669,000 to $853,000
for the year to date 2005 compared to $184,000 for the year to date 2004. These increases in
interest income resulted from higher cash reserves invested in higher yielding investments. The
Company had cash, cash equivalents and investment balances of $42.7 million at September 30, 2005
compared to $41.5 million at September 30, 2004. In addition, the Companys cash and investment
accounts earned interest at an approximate rate of 2.8% and 2.5% during the third quarter and year
to date 2005 compared to 0.9% and 0.8% during the third quarter and year to date 2004.
Income
Taxes. The provision for income tax decreased $3.4 million
to $555,000 for the third quarter
of 2005 compared to $4.0 million for the third quarter of 2004. The provision for income tax
decreased $8.1 million to $1.0 million for the year to date 2005 compared to $9.1 million for the year
to date 2004. These decreases were the result of lower income before taxes for both the third
quarter and year to date 2005. The effective income tax rate for the third quarter and year to date
2005 was 62.7% and 50.7%, respectively, compared to 39.4% and 39.1%, respectively, for the third
quarter and year to date 2004. The increases in the effective tax rates for 2005 are the result of
increases in expenses that are not deductible for tax purposes along with the decline in taxable
income.
For the year to date 2005, we received approximately $1.3 million of tax benefits from the exercise
of stock options and subsequent sale of the underlying stock compared to $12.5 million for the year
to date 2004. The net deferred tax asset as of September 30, 2005 totaled $26.7 million compared to
$26.4 million at December 31, 2004.
Net
Income. Net income decreased $5.8 million to $0.3 million for the third quarter of 2005
compared to $6.1 million for the third quarter of 2004. Net
income decreased $13.2 million to $1.0
million for the year to date 2005 compared to $14.2 million for the year to date 2004. The
decreases in net income resulted primarily from the decline in sales volume for the quarter and
year to date, and increased spending for selling, general and administrative expenses. Income per
basic share declined to $0.01 for the third quarter of 2005 and $0.02 for the year to date 2005
compared to $0.11 for the third quarter of 2004 and $0.25 for the year to date 2004. Income per
diluted share also declined to $0.01 per share for the third quarter
and year to date 2005 compared to $0.09 for the third quarter of 2004 and $0.23 for the year to date 2004.
Income per basic share calculations were based on weighted average shares outstanding of 61,385,863
for the third quarter of 2005 and 57,954,454 for the third quarter of 2004. Income per basic share
calculations were based on weighted average shares outstanding of 61,266,387 for the year to date
2005 and 56,309,278 for the year to date 2004. Income per diluted share calculations were based on
weighted average shares outstanding of 63,694,740 for the third quarter of 2005 and 64,541,234 for
the third quarter of 2004. Income per diluted share calculations were based on weighted average
shares outstanding of 63,951,621 for the year to date 2005 and 62,912,386 for the year to date
2004. All share and per share amounts have been retroactively restated for the two stock splits
executed in the second and fourth quarters of 2004.
Liquidity and Capital Resources
Liquidity.
As of September 30, 2005, the Company had working capital of $34.3 million compared to
working capital of $51.1 million at December 31, 2004. The decrease in working capital was
primarily due to a shift in our investments from short-term to long-term which was made to take
advantage of the higher yields on the longer- term investments, a reduction in the current portion
of the deferred tax asset to reflect the expected use of net operating loss carry forwards in the
next twelve months, and the decrease in accounts receivable resulting from lower sales levels for
the third quarter of 2005 compared to the fourth quarter of 2004. A portion of the short-term
investments were also converted to cash and cash equivalents to give the Company more cash on hand
to meet cash flow needs. The decreases in short-term investments, current deferred tax asset and
accounts receivable were partially offset by an increase in inventory and a decline in accounts
payable. The increase in inventory is a result of purchasing and production levels in excess of
demand. The decline in accounts payable is a reflection of the timing of payments.
During the
nine months ended September 30, 2005, we used $0.4 million of cash in operations
compared to the $22.3 million generated from operations for the same period in 2004. The decrease
in cash provided by operations was primarily due to the decrease in net income from $14.2 million
for the nine months ended September 30, 2004 to $1.0 million for the same period in 2005. Further,
the Company realized reduced tax payments attributable to the exercise of stock options of $8.5
million for the nine months ended September 30, 2004 compared to $1.0 million for the same period
in 2005, due to the lower income before taxes for the year to date 2005.
We
generated $2.3 million of cash from investing activities during the nine months ended September
30, 2005, compared to $18.9 million of cash used in investing activities for the same period in
2004. The proceeds from investments which matured in the nine months ended September 30, 2005 of
$36.7 million were partially offset by the purchase of other investments of $27.0 million and $7.4
million of investments in property and equipment. Of the funds invested in property and equipment
for the year to date 2005, $5.3 million was used for the construction of our new 100,000 square
foot manufacturing and corporate headquarters facility in Scottsdale, Arizona, $0.9 million was
used for improvements in production equipment, and $1.1 million was used to purchase and install
new computer equipment and software, including investments associated with a new ERP system.
20
During the nine months ended September 30, 2005, we generated $0.5 million of cash from financing
activities, compared to $9.5 million generated from financing activities for the same period in
2004. The $0.5 million of cash generated from financing activities for the year to date 2005 was
driven by proceeds from stock options exercised, compared to $7.3 million of proceeds of stock
options exercised in the same period of 2004. Cash generated from the exercise of warrants was $2.5
million for the year to date 2004. All unexercised public warrants expired in 2004, so there was
not any cash generated from the exercise of warrants for the year to date 2005. The Company paid
off its notes payable of $250,000 in 2004.
CapitalResources. On September 30, 2005, the Company had cash and investments of $42.7 million and
no debt outstanding. At September 30, 2005, the Company had no remaining purchase commitments to
complete the construction of its new manufacturing and headquarters
facility in Scottsdale, Arizona.
We negotiated a revolving line of credit on July 13, 2004, through a domestic bank. The total
availability on the line is $10 million. The line is secured by substantially all of our assets,
other than intellectual property, and bears interest at varying rates, ranging from LIBOR plus 1.5%
to prime. The line of credit matures on July 13, 2006 and requires monthly payments of interest
only. At September 30, 2005, there was a calculated availability of $5.9 million based on the
defined borrowing base, which is based on the Companys eligible accounts receivable and inventory.
However, there was no outstanding balance under the line of credit at September 30, 2005, and no
borrowings under the line as of the date of the filing of this Form 10-Q.
Commitments and Contingencies. The following table outlines our future contractual financial
obligations, in thousands, as of September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
After |
|
|
Total |
|
1 year |
|
1-3 years |
|
4-5 years |
|
5 years |
Operating Leases |
|
$ |
209 |
|
|
$ |
96 |
|
|
$ |
106 |
|
|
$ |
8 |
|
|
$ |
|
|
Capital Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
209 |
|
|
$ |
96 |
|
|
$ |
106 |
|
|
$ |
8 |
|
|
$ |
|
|
|
|
|
We believe our existing cash balances and short-term and long-term investments, together with
cash expected to be generated from operating activities, will be sufficient to meet our anticipated
cash needs for at least the next 12 months. Our future capital requirements will depend on many
factors, including our level of revenues, the timing and extent of spending to support product
development efforts, the expansion of our sales and marketing activities, the timing of
introductions of new products, competitive factors, the outcome of pending or future litigation and
the level of acceptance of our products in domestic and international markets. We could be
required, or could elect, to seek additional funding through public or private equity or debt
financing and additional funds may not be available on terms acceptable to us or at all.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer evaluated
the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that because the material weaknesses in internal
control over financial reporting described below have
not yet been remediated, our disclosure controls and procedures were ineffective as of September 30,
2005 to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of
1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission
rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer
and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and
procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our
management. Our disclosure controls and procedures include components
of our internal control over financial reporting. Managements assessment
of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance because a
control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance
that the control systems objectives will be met.
Restatement of Previously Issued Financial Statements
On November 14, 2005, we concluded that our financial statements at March 31, 2005 and June 30, 2005 and for the periods then ended, included in our Form 10-Qs for the periods ended March 31, 2005 and June 30, 2005, respectively, should no longer be relied upon due to an error in those financial statements which resulted from the incorrect
accrual of legal and other professional fees for those periods. Beginning in the first quarter of 2005, we experienced a significant
increase in outside legal and other professional expenses. We determined that our internal controls surrounding the recording
of legal and professional fees in the appropriate accounting period were not operating effectively. Certain of the invoices relating
to the work performed were not received by our accounting department until after we had closed our books and reported our financial
results for such periods due to delays on the part of third parties in delivering or communicating such invoices to us. As a result,
certain invoices were recorded in the incorrect period. Correction of these errors will result in shifting of expenses among the first
three quarters of 2005 with expenses increasing in the
first quarter of 2005 and decreasing in the second quarter of 2005 from
the figures included in the previously filed Form 10-Qs. There is a corresponding decrease/increase in net income for the first and
second quarters resulting from the change in expenses. The restatement will have no impact on revenues for the periods.
Amended Forms 10-Q for the quarters ended March 31, 2005 and June 30, 2005 will be filed
to reflect the restatement.
The restatement also had the effect of decreasing our legal
and professional fees for the third quarter of 2005. Total sales, general and administration expenses for the third quarter
of 2005 decreased from the $7.0 million previously reported by us on
October 26, 2005 to $6.9 million. The year to date 2005 sales,
general and administration expenses decreased from the $19.8 million previously reported on October 26,
2005 to $19.7 million. Our net income for the third quarter of 2005
increased by $59,000 from the number
previously reported on October 26, 2005 to $0.3 million. Net income for year to date 2005 increased
from the $0.9 million previously reported on October 26, 2005 to $1.0 million.
21
With respect to the restatement described above, we have determined that the errors resulted from an inadequate control over the accounting for our legal and other professional fees and under standards established by the Public Company Accounting Oversight Board constituted a material weakness in our internal control over financial reporting. We have consulted with and advised our Audit Committee of our Board of Directors of our determination.
In response to the deficiencies which resulted in the
material weakness described above, our management took actions to enhance the operation and effectiveness of
our internal controls and procedures to ensure that we properly account for our legal and other professional fees in the
appropriate financial reporting period. These actions included reviewing each of the invoices submitted by firms that
provided legal and other professional services to us and contacting outside legal and professional firms to obtain copies
of any invoice which had not been already paid to ensure that such amounts were recorded in the proper financial reporting
period. In addition, we are currently implementing additional accounting controls such as setting up a special email account
for legal bills, preparing detailed analysis of legal and professional spending which will be reviewed monthly, and
sending out quarterly confirmations to outside legal firms to confirm balances owed for billed and unbilled services to help ensure that any such legal and other professional fees incurred in the future are properly recorded in the appropriate fiscal period. As of the date of the filing of this Form 10-Q, certain of our remediation efforts were still being implemented.
We also
identified another material weakness in our internal
control over financial reporting in that we do not have adequate
resources in accounting and financial statement preparation
particularly with respect to financial statement footnote
preparation. In
response to this deficiency, we plan to engage additional resources
to assist with such activities. We do not believe that this
deficiency resulted in any material errors in the reporting of our
results of operations but we concluded that there was more than a
remote likelihood that a material misstatement of our annual or
interim financial statements would not be prevented or detected in
the future. We have consulted with and advised our Audit Committee of
our Board of Directors of our determination of this material
weakness. As of the date of this filing of this Form 10-Q, our
remediation efforts were still being implemented.
Changes in internal control over financial reporting. There has not been any change in our internal control over financial reporting during our quarter ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except as described above.
22
PART IIOTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Securities Class Action Litigation
On January 10, 2005, a securities class action lawsuit was filed in the United States District
Court for the District of Arizona against the Company and certain of its officers and directors,
captioned Malasky v. TASER International, Inc., et al., Case No. 2:05 CV 115. Since then, numerous
other securities class action lawsuits were filed against the Company and certain of its officers
and directors. The majority of these lawsuits were filed in the District of Arizona. Four actions
were filed in the United States District Court for the Southern District of New York and one in the
Eastern District of Michigan. The New York and Michigan actions were transferred to the District of
Arizona. The cases were consolidated, and the court appointed a lead plaintiff and lead counsel.
The lead plaintiff filed a consolidated amended complaint. Defendants filed a motion to dismiss the
consolidated amended complaint for failure to state a claim.
The consolidated amended complaint asserts claims on behalf of the purchasers of the Companys
stock from May 29, 2003 to January 11, 2005. The consolidated amended complaint alleges, among
other things, violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended, and Rule 10b-5, promulgated thereunder, and seek unspecified monetary damages and other
relief against all defendants. The consolidated amended complaint allege generally that the Company
and the individual defendants made false or misleading public statements regarding, among other
things, the safety of the Companys products and the Companys ability to meet its sales goals,
including the validity of a $1.5 million sales order with one of the Companys distributors in the
fourth quarter of 2004. The consolidated complaint also alleges that product defects were leading
to excessive product returns by customers. We intend to defend these lawsuits vigorously; however,
the outcome of any litigation is inherently uncertain and there can be no assurance that any
liability and damages that may ultimately result from the resolution of these matters will be
covered by our insurance or will not be in excess of amounts provided by insurance coverage and
will not have a material adverse effect on our business, operating results or financial condition.
Shareholder Derivative Litigation
On January 11, 2005, a shareholder derivative lawsuit was filed in the United States District Court
for the District of Arizona purportedly on behalf of the Company and against certain of its
officers and directors, captioned Goldfine v. Culver, et al., Case No. 2:05 CV 123. Since then,
five other shareholder derivative lawsuits were filed in the District of Arizona, two shareholder
derivative lawsuits were filed in the Arizona Superior Court, Maricopa County, and one shareholder
derivative lawsuit was filed in the Delaware Chancery Court. On February 9, 2005, the shareholder
derivative actions pending in federal court were consolidated into a single action in the United
States District Court for the District of Arizona under the caption, In re TASER International
Shareholder Derivative Litigation, Case No. 2:05 CV 123. On May 13, 2005, plaintiffs in the
consolidated federal derivative action filed a consolidated amended complaint. Defendants filed
motions to dismiss the consolidated amended complaint on August 19, 2005. The derivative actions in
Arizona state court were consolidated and plaintiffs filed a consolidated complaint. Plaintiffs in
the Arizona state court action and the Delaware action agreed to stay those actions pending
resolution of the consolidated federal derivative action.
The complaints in the shareholder derivative lawsuits generally allege that the defendants breached
the fiduciary duties owed to the Company and its shareholders by reason of their positions as
officers and/or directors of the Company. The complaints claim that such duties were breached by
defendants disclosure of allegedly false or misleading statements about the safety and
effectiveness of Company products and the Companys financial prospects. The complaints also claim
that fiduciary duties were breached by defendants alleged use of non-public information regarding
the safety of Company products and the Companys financial condition and future business prospects
for personal gain through the sale of the Companys stock. The Company is named solely as a nominal
defendant against which no recovery is sought.
On May 4, 2005, a lawsuit was filed in the Delaware Chancery Court against the Company, captioned
Lucian B. Dinkens v. TASER International, Inc., Case No. 5749754, to compel the Company to give the
plaintiff the right to inspect and copy certain books and records of the Company pursuant to
Section 220 of Delaware General Corporation Law. The Company filed an answer to the complaint on
June 7, 2005.
23
Securities and Exchange Commission Investigation
In
December 2004, the Company was informed that the staff of the
Securities and Exchange Commission had commenced an informal inquiry
concerning the Companys public statements regarding the safety
and performance of the Companys products, certain disclosure
issues and the accounting for certain transactions. The Company
voluntarily provided documents and information to the SEC staff. In
August 2005, the Company was informed that the staff of the SEC had
initiated a formal investigation regarding the Companys
disclosures concerning the medical safety of its products; the
accounting and disclosure of certain transactions; and the
unauthorized acquisition of confidential information from the Company
by persons outside the Company for the possible purpose of
manipulating the Companys stock. The Company provided
additional information at the request of the SEC staff. In December
2005, the SEC staff advised the Company that it had completed its
investigation into the Companys disclosures concerning the
medical safety of the Companys products; and into the
accounting and disclosure issues. The SEC staff further advised the
Company that it had determined that at the present time it will not
recommend that the Commission institute any enforcement proceedings
as to any of these matters. The Staff also advised the Company that
it is continuing to investigate issues relating to trading in the
Companys stock.
Contract Litigation
In
March 2000, Thomas N. Hennigan, a sales representative for the
Companys products from late 1997 through early 2000,
sued the Company and certain of its shareholders in the United States
District Court, Southern District of New York. The Company previously sued
him in February 2000 in the United States District Court for the
District of Arizona, but had not served him. After the New York case was dismissed in February 2001
for lack of personal jurisdiction, Mr. Hennigan brought a counterclaim in the United States
District Court for the District of Arizona. Mr. Hennigan claims
the exclusive right to sell the Companys
products to many of the largest law enforcement, corrections, and military agencies in the United
States. He sought monetary damages that may amount to as much as $400 million against us allegedly
arising in connection with his alleged service to the Company as a distributor. His claims rest on theories of our
failure to pay commissions, breach of contract, promissory estoppel, breach of fiduciary duty, and
on related theories. No written contract was ever signed with
Mr. Hennigan. The Company believes that he
has no reasonable basis for claims based on informal or implied contractual rights and will be
unable to prove his damages with reasonable certainty. Mr. Hennigan died in April 2001 and the case
is now being prosecuted by his estate. On May 24, 2002, H.A. Russell was permitted to proceed as an
additional defendant-counterclaimant. The Company filed various motions in November 2002 for
partial summary judgment including a motion to dismiss his claims. On September 30, 2003, the Court
issued an order granting the Companys motion for partial summary judgment to dismiss Mr. Russells
claims and struck Hennigans jury demand. On April 14, 2004, the Court issued an opinion partially
granting the Companys motion for partial summary judgment on certain joint venture,
post-termination, post-death and exclusivity claims. A pretrial conference was held on July 28,
2005 and the trial started on August 31, 2005. At the conclusion of Hennigans
case in chief, the Company made a motion to dismiss Hennigans case. The court issued a briefing schedule on
the Companys motion and the trial was suspended pending the courts decision
on the Companys motion.
In September 2004, the Company was served with a summons and complaint in the matter of Roy Tailors
Uniform Co., Inc. v. TASER International in which the plaintiff alleges that it is entitled to
commissions for disputed sales that were made to customers that are claimed to be plaintiffs
customers for which plaintiff is seeking monetary damages. Plaintiff failed to sign a distributor
agreement with the Company and did not have distribution rights with the Company. This case is in
the discovery phase and a trial date has not been set.
Other Class Action Litigation
In August 2005, the Company was served with a summons and complaint in the matter of Village of
Dolton v. TASER International in which the Plaintiff alleges that defendant misled the plaintiff
about the safety of the TASER device when they purchased the TASER device and are seeking damages.
The plaintiff is seeking to certify the lawsuit as a class action. The Company has filed an answer
to the complaint and a motion to dismiss. In October 2005, the Company filed a declaration of the
former chief of police for the Village of Dolton which refutes many of the allegations made in the
complaint and the Company filed a motion for sanctions. In October 2005, the Court issued an order
partially granting the Companys Motion to Dismiss, and denied the balance of the motions. The case
is now moving forward with discovery.
Product Liability Litigation
The
Company is currently named as a defendant in 44 lawsuits in which the plaintiffs alleged either
wrongful death or personal injury in situations in which the TASER device was used (or present) by
law enforcement officers or during training exercises. One of these cases has been dismissed by
summary judgment order, but is on appeal. In addition, six other cases have been dismissed and
are not included in this number. With respect to each of these
pending 44 cases, the table below
lists the name of plaintiff, the date the Company was served with process, the jurisdiction in
which the case is pending, the type of claim and the status of the matter. This table also lists
those cases which were dismissed during the most recent fiscal quarter. In each of the pending
lawsuits, the plaintiff is seeking monetary damages from the Company. In one case the plaintiff is
seeking injunctive relief in addition to monetary damages. The
defense of each of these lawsuits has been submitted to our insurance carriers that
maintained insurance coverage during these
applicable periods and we continue to maintain product liability insurance coverage with varying
limits and deductibles. The Companys product liability insurance coverage during these periods
ranged from $5,000,000 to $10,000,000 in coverage limits and from $10,000 to $250,000 in per
incident deductibles. The Company is defending each of these lawsuits vigorously. Although the
Company does not expect the outcome in any individual case to be material, the outcome of any
litigation is inherently uncertain and there can be no assurance that any liability and damages
that may ultimately result from the resolution of these matters will be covered by our insurance or
will not be in excess of amounts provided by insurance coverage and will not have a material
adverse effect on our business, operating results or financial condition.
24
|
|
|
|
|
|
|
|
|
|
|
Month |
|
|
|
|
|
|
Plaintiff |
|
Served |
|
Jurisdiction |
|
Claim Type |
|
Status |
Alvarado
|
|
4/2003
|
|
CA Superior Court
|
|
Wrongful Death
|
|
Discovery Phase |
City of Madera
|
|
6/2003
|
|
CA Superior Court
|
|
Wrongful Death
|
|
Dismissed by Summary Judgment Appeal Pending |
Borden
|
|
9/2004
|
|
US District Court, SD IN
|
|
Wrongful Death
|
|
Dismissed with Prejudice |
Thompson
|
|
9/2004
|
|
MI Circuit Court
|
|
Wrongful Death
|
|
Discovery Phase |
Pierson
|
|
11/2004
|
|
US District Court, CD CA
|
|
Wrongful Death
|
|
Discovery Phase |
Glowczenski
|
|
10/2004
|
|
US District Court, ED NY
|
|
Wrongful Death
|
|
Case Stayed |
LeBlanc
|
|
12/2004
|
|
US District Court, CD CA
|
|
Wrongful Death
|
|
Discovery Phase |
M.
Elsholtz
|
|
12/2004
|
|
TX District Court
|
|
Wrongful Death
|
|
Discovery Phase |
Madrigal
|
|
5/2005
|
|
AZ Superior Court
|
|
Wrongful Death
|
|
Dismissed with Prejudice |
Washington
|
|
5/2005
|
|
US District Court, ED CA
|
|
Wrongful Death
|
|
Discovery Phase |
Clark
|
|
5/2005
|
|
US District Court, ND TX
|
|
Wrongful Death
|
|
Dismissed with Prejudice |
Sanders
|
|
5/2005
|
|
US District Court ED CA
|
|
Wrongful Death
|
|
Discovery Phase |
Fleming
|
|
5/2005
|
|
US District Court ED LA
|
|
Wrongful Death
|
|
Discovery Phase |
Woolfolk
|
|
6/2005
|
|
US District Court MD FL
|
|
Wrongful Death
|
|
Discovery Phase |
Nowell
|
|
8/2005
|
|
US District Court ND TX
|
|
Wrongful Death
|
|
Motion to Dismiss Filed |
Graff
|
|
9/2005
|
|
AZ Superior Court
|
|
Wrongful Death
|
|
Discovery Phase |
Holcomb
|
|
9/2005
|
|
US District Court, ND OH
|
|
Wrongful Death
|
|
Discovery Phase |
Tucker
|
|
10/2005
|
|
US District Court, NV
|
|
Wrongful Death
|
|
Complaint Served |
Hammock
|
|
10/2005
|
|
District Court, Tarrant County, TX |
|
Wrongful Death
|
|
Discovery Phase |
Heston
|
|
11/2005
|
|
US District Court, ND CA
|
|
Wrongful Death
|
|
Complaint Served |
A.
Elsholtz
|
|
10/2005
|
|
TX District Court
|
|
Wrongful Death
|
|
Complaint Served |
Rosa
|
|
11/2005
|
|
US District Court, ND CA
|
|
Wrongful Death
|
|
Complaint Served |
Gosserand
|
|
11/2005
|
|
US District Court ED LA
|
|
Wrongful Death
|
|
Complaint Served |
O
Donnell/Hasse
|
|
11/2005
|
|
Circuit Court, Cook County, IL
|
|
Wrongful Death
|
|
Complaint Served |
Yeagley
|
|
11/2005
|
|
Hillsborough County Circuit
Court, FL
|
|
Wrongful Death
|
|
Complaint Served |
Neal-Lomax
|
|
12/2005
|
|
US District Court, NV
|
|
Wrongful Death
|
|
Complaint Served |
Williams
|
|
12/2005
|
|
Gwinnett County State Court, GA
|
|
Wrongful Death
|
|
Complaint Served |
Kerchoff
|
|
6/2004
|
|
US District Court, ED MI
|
|
Training Injury
|
|
Dismissed, Refiled |
Powers
|
|
11/2003
|
|
AZ Superior Court
|
|
Training Injury
|
|
At Trial |
Cook
|
|
8/2004
|
|
NV District Court
|
|
Training Injury
|
|
Discovery Phase |
Stevens
|
|
10/2004
|
|
OH Court Common Pleas
|
|
Training Injury
|
|
Discovery Phase |
Eckenroth
|
|
11/2004
|
|
AZ Superior Court
|
|
Training Injury
|
|
Dismissed with Prejudice |
Lipa
|
|
2/2005
|
|
MI Circuit Court
|
|
Training Injury
|
|
Discovery Phase |
Dimiceli
|
|
3/2005
|
|
FL Circuit Court
|
|
Training Injury
|
|
Discovery Phase |
Collins
|
|
5/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Dismissed |
Allen
|
|
5/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Discovery Phase |
J.J.
|
|
7/2005
|
|
FL Circuit Court
|
|
Training Injury
|
|
Complaint Served |
J.B.
|
|
7/2005
|
|
FL Circuit Court
|
|
Training Injury
|
|
Complaint Served |
Howard
|
|
8/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Complaint Served |
Wagner
|
|
8/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Complaint Served |
Gerdon
|
|
8/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Complaint Served |
Gallant
|
|
8/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Complaint Served |
Herring
|
|
8/2005
|
|
Circuit Court of City
of St. Louis, MO
|
|
Training Injury
|
|
Complaint Served |
Stewart
|
|
10/2005
|
|
Circuit Court for
Broward County, FL
|
|
Training Injury
|
|
Complaint Served |
Cosby
|
|
8/2004
|
|
US District Court, SD NY
|
|
Injury During Arrest
|
|
Summary Judgement Motion Being Filed |
Blair
|
|
3/2005
|
|
US District Court, MD NC
|
|
Injury During Detention
|
|
Summary Judgement Motion Filed Awaiting Ruling |
Lewis
|
|
7/2005
|
|
US District Court Tal FL
|
|
Injury During Arrest
|
|
Complaint Served |
Lash
|
|
8/2005
|
|
US District Court ED MO
|
|
Injury During Arrest
|
|
Complaint Served, motion to dismiss
filed |
Games
|
|
8/2005
|
|
Circuit Court,
Multnomah County, OR
|
|
Injury During Arrest
|
|
Complaint Served |
Bynum
|
|
10/2005
|
|
US District Court SD NY
|
|
Injury During Arrest
|
|
Complaint Served |
Other Litigation
In January 2005, the Company filed litigation in U.S. District Court for the Western District of
North Carolina against Stinger Systems, Inc. and Robert Gruder alleging false advertising and a
violation of the Lanham Act. The defendants have filed a counterclaim against the Company alleging
defamation. This case is in the discovery phase and no trial date has been set.
In February 2005, the Company filed litigation in Superior Court for Maricopa County, Arizona
against its former patent attorney, Thomas G. Watkins III, alleging breach of fiduciary duty and
estoppel arising out of ownership and inventorship claims
Mr. Watkins has made against two patents he
filed for the Company for certain technology utilized in the TASER X26 product. This case is in the
discovery phase and no trial date has been set.
25
In July 2005, the Company filed a lawsuit in Superior Court for Maricopa County against Gannett
Co., Inc., parent company of the USA Today Newspaper and the Arizona Republic, for libel, false
light invasion of privacy, injurious falsehood and tortuous interference with business relations.
The complaint alleges that the defendants published an article in the USA Today Newspaper on June
3, 2005 which was grossly incorrect and completely misrepresented the facts by overstating the
electrical output of the TASER X26 by a factor of 1 million. The complaint also asserts that
the defendants engaged in the ongoing publication of misleading articles related to the safety of
TASER products, resulting in substantial economic damages to TASER International, its customers and
its shareholders. The court recently dismissed the count of false light invasion of privacy. The
case is in the discovery phase and no trial date has been set.
In
November 2005, the company filed a lawsuit in Marion County Circuit
Court, Indiana against James Ruggieri for defamation, product
disparagement, intentional interference with a business relationship,
Lanham Act violations and tortuous, affecting the fairness and
integrity as adverse third-party witness. This case is entering the
discovery phase and no trial date has been set.
We intend to pursue and defend the foregoing lawsuits vigorously; however, the outcome of any
litigation is inherently uncertain and there can be no assurance that any liability and damages
that may ultimately result from the resolution of these matters will be covered by our insurance or
will not be in excess of amounts provided by insurance coverage and will not have a material
adverse effect on our business, operating results or financial condition.
26
ITEM 6. EXHIBITS
31.1 |
|
Chief Executive Officer Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
|
31.2 |
|
Chief Financial Officer Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
|
|
32.1 |
|
Chief Executive Officer Certification pursuant to U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
32.2 |
|
Chief Financial Officer Certification pursuant to U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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99.1 |
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Certain Factors to Consider in Connection with Forward-Looking Statements |
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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TASER INTERNATIONAL, INC. |
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(Registrant) |
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Date:
December 20, 2005
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/s/ Patrick W. Smith
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Patrick W. Smith, |
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Chief Executive Officer |
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(Principal Executive Officer) |
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Date:
December 20, 2005
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/s/ Daniel M. Behrendt
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Daniel M. Behrendt |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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28
Index to Exhibits
Exhibits:
31.1 |
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Chief Executive Officer Certification pursuant to Rule 13a-14(a) under the Securities exchange Act of 1934. |
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31.2 |
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Chief Financial Officer Certification pursuant to Rule 13a-14(a) under the Securities exchange Act of 1934.
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32.1 |
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Chief Executive Officer Certification pursuant to U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2 |
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Chief Financial Officer Certification pursuant to U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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99.1 |
|
Certain Factors to Consider in Connection with Forward-Looking Statements |
29