e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2005
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from
to
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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
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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17800 N. 85th St.
Scottsdale, AZ
(Address of principal
executive offices)
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85255
(Zip
Code)
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(480) 991-0797
(Registrants
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $0.00001 par value per share
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
Filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the Common Stock held by
non-affiliates of the issuer, based on the last sales price of
the issuers common stock on June 30, 2005 as reported by
NASDAQ, was $568,766,442. The number of shares of the
registrants common stock outstanding as of March 15,
2006 were 61,949,254.
DOCUMENTS
INCORPORATED BY REFERENCE
Parts of registrants proxy statement to be prepared in
connection with the annual meeting of stockholders to be held
May 24, 2006 are incorporated by reference into
Part III of this report.
TASER
INTERNATIONAL, INC.
ANNUAL REPORT ON
FORM 10-K
Year Ended December 31, 2005
TABLE OF CONTENTS
1
PART I
The statements contained in this report that are not historical
are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the
Securities Act), and Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange
Act), including statements, without limitation, regarding
our expectations, beliefs, intentions or strategies regarding
the future. We intend that such forward-looking statements be
subject to the safe-harbor provided by the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements
relate to, among other things: (1) expected revenue and
earnings growth; (2) estimates regarding the size of our
target markets; (3) our ability to successfully penetrate
the law enforcement market; (4) growth expectations for
existing accounts; (5) our ability to expand product sales
to the private security, military, airline, and private citizen
self-defense markets; (6) expansion of product capability; (7)
new product introductions; (8) product safety; and (9) our
target business model. These statements are qualified by
important factors that could cause our actual results to differ
materially from those reflected by the forward-looking
statements. Such factors include but are not limited to:
(1) market acceptance of our products; (2) our ability
to establish and expand direct and indirect distribution
channels; (3) our ability to attract and retain the
endorsement of key opinion-leaders in the law enforcement
community; (4) the level of product technology and price
competition for our products; (5) the degree and rate of
growth of the markets in which we compete and the accompanying
demand for our products; (6) risks associated with rapid
technological change and new product introductions;
(7) competition; (8) litigation resulting from alleged
product related injuries and death; (9) media publicity
concerning allegations of deaths occurring after use of the
TASER device and the negative effect this publicity could have
on our sales; (10) TASER device tests and reports;
(11) product quality; (12) implementation of
manufacturing automation; (13) potential fluctuations in
our quarterly operating results; (14) financial and
budgetary constraints of prospects and customers;
(15) order delays; (16) dependence upon sole and
limited source suppliers; (17) negative reports concerning
TASER device uses; (18) fluctuations in component pricing;
(19) government regulations and inquiries;
(20) dependence upon key employees and our ability to
retain employees; (21) execution and implementation risks of new
technology; (22) ramping manufacturing production to meet
demand; and (23) other factors detailed in our filings with
the Securities and Exchange Commission, including, without
limitation, those factors detailed in ITEM 1.A of this
report entitled Risk Factors.
We own the following trademarks:
TASER®
and AIR
TASERtm,
TASER-Wavetm,
T-Wavetm,
AUTO
TASERtm,
ADVANCED
TASER®,
Shaped Pulse
Technologytm,
X-Railtm,
TASER
M18tm,
TASER
M26tm,
TASER
X26tm,
TASER
Camtm,
TASER
XREPtm
and
AFIDtm.
Each other trademark, trade name or service mark appearing in
this report belongs to its respective holder.
Overview
TASER International, Inc. (the Company or
we or us) began operations in Arizona in
1993 for the purpose of developing and manufacturing non-lethal
self-defense devices. From inception until the introduction in
1994 of our first product, the AIR TASER device, we were in the
developmental stage and focused our efforts on product
development, raising capital, hiring key employees and
developing marketing materials to promote our product line.
In 1995 and 1996, we concentrated our efforts on promoting
retail sales and establishing distribution channels for the AIR
TASER product line which was sold to private citizens for self
defense. At this time, our marketing efforts were limited by a
non-compete agreement that prohibited the marketing or sale of
our products to the U.S. law enforcement and military
markets. In 1998, the non-compete agreement that had precluded
sales to the law enforcement and military markets expired. In
anticipation of its expiration, we focused our research and
development efforts on the ADVANCED TASER product line. Our
change in focus from the private citizen market to the law
enforcement market resulted from a market analysis that
suggested it was critical to first prove the effectiveness of
our technology in the professional law enforcement community. In
December 1999, we introduced the ADVANCED TASER device for sale
in the law enforcement market.
2
The first full year of ADVANCED TASER product line sales was
2000. Although we had limited financial resources, we spent the
year building our distribution channel for marketing the product
line and developing a nationwide training program to introduce
the product line to law enforcement agencies, primarily in North
America.
In 2001, we made significant changes to support the growing
demand for the ADVANCED TASER product line. We developed a
manufacturing infrastructure inclusive of direct assembly and
material management to support product demand. We also completed
in 2001 an initial public offering of 800,000 units, at
$13.00 per unit, each unit consisting of one and one-half
shares of common stock and one and one-half warrants to purchase
one share of common stock with net proceeds to us of
approximately $8.4 million. Proceeds from the offering were
used to retire debt, increase inventory and working capital and
fund future sales and marketing programs. During 2001, we
relocated our corporate headquarters to a larger, more modern
facility, expanded our sales and marketing efforts, and sold or
provided ADVANCED TASER devices to more than 1,000 police
agencies worldwide.
In 2002, our management worked with officials from United
Airlines and a Washington lobbying firm to assist with safety
studies and to initiate legislative changes which would allow
the ADVANCED TASER device to be deployed on board commercial
aircraft. On November 25, 2002, Congress approved The
Homeland Security Act of 2002 allowing individual carriers to
apply to the Undersecretary of Transportation for Security, on a
case by case basis, to deploy our weapon system. As of January
2003, United Airlines and Mesa Airlines had submitted these
applications to the Transportation Security Administration (TSA)
for approval. In November 2004, the TSA granted approval for the
first commercial airline to deploy TASER devices on flights.
In April 2002, we were notified that we had 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 September
2002, our grant funding was augmented with an additional
$349,000 to pursue the concepts developed in Phase I of the
award, bringing the total award under this grant to $479,000. We
received a grant for an additional $515,000 from the Office of
Naval Research at the end of 2004.
At the close of 2002, three years following our initial
introduction of the ADVANCED TASER device, we had more than 2000
law enforcement agencies worldwide testing and deploying our M26
weapon system. This number of agencies includes 134 departments
who had either purchased, or were in the process of purchasing,
one unit for each patrol or line level officer. This list of 134
departments included two major departments, the City of Phoenix,
a top-ten law enforcement agency in the U.S., and the Ohio State
Troopers, a leader in the highway patrol community.
In 2003, we remained focused on expanding our manufacturing and
sales infrastructure to support the growing demand for our
product. We continued developing new product capabilities, and
we added new resources to expand our technology base. In May
2003, we introduced the TASER X26 device at our annual tactical
conference. This product incorporated the strengths of its
predecessor, the ADVANCED TASER device, but also introduced to
the market a new shaped pulse technology, and a new
smaller form factor. The product design was completed,
comprehensive medical safety testing was conducted, and the
first weapons began shipping in September 2003.
On June 26, 2003, we purchased the assets of Electronic
Medical Laboratory Inc., doing business as Taser Technologies
Inc., formerly Tasertron, a competitor in the manufacture and
sale of Taser conducted energy weapons to law enforcement at the
time. This purchase provided us with clear title to the
TASER Trademark and a number of patents, eliminated
litigation and market confusion, and enabled us to enter into a
teaming relationship with General Dynamics.
The protection of our intellectual property was also a priority
for our engineering and legal team during 2003. After acquiring
the assets of Tasertron, the next step in our strategy to build
barriers to entry for new competitors was by strengthening our
patent protection on both existing technologies and those in
varying stages of development. On October 21, 2003, we were
granted a fundamental patent on our ADVANCED TASER waveform.
This patent protects us against competing product development
using electrical impulses ranging from half the energy of the
M26 to five times the energy of the M26, or the range of
electrical output capable of immobilizing a human without
affecting critical organs. In addition, we purchased eight
additional patents allowing us to expand our current product
capabilities into new areas of weapon systems, including area
denial systems, or TASER landmine type devices known
as TASER Anti-Personnel Munition (TAPM).
3
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. These test programs included the United
Kingdom, Australia and Canada. We also received Congressional
approval for $1.0 million of appropriations to be used to
purchase TASER brand weapons for the United States Military.
And, we had our first major sale to a foreign military agency in
alliance with the U.S. in the war against terror.
In 2004, we continued to expand, growing our revenue by 177%
compared to 2003. In 2004, we also announced our new TASER
X26C
Citizen Defense System, targeted to the private citizen
self-defense market, and began shipments of this product late in
the third quarter. We booked the largest order in our history
when we sold $3.7 million of TASER products to the city of
Houston, TX. We also booked significant sales to the United
States Military and the National Guard. In addition, we
completed the development of the X-rail system to attach a TASER
X26 to the stock of an M-16 assault rifle using the Picatinny
rail system as well as the launch of an extended range cartridge
that improved the maximum range of TASER devices to 25 feet.
We also achieved several important legislative and safety
approvals for our products. In July 2004, the State of
Massachusetts passed legislation allowing TASER devices to be
used by police (prior legislation precluding the use of TASER
devices was overturned). The TSA approved the use of TASER
devices on commercial aircraft in November 2004. The United
States Department of Defense Human Effects Center of Excellence
(HECOE) concluded an extensive review of TASER devices
concluding that, while additional studies would be helpful,
TASER devices are generally safe and effective, and that data
indicated TASER devices reduce injuries to police officers and
suspects when compared to alternatives along the force
continuum. Several international governments also approved the
use of TASER devices, including the United Kingdom, Finland,
Sweden, and South Korea. Finally, we established the TASER
Foundation for the families of fallen law enforcement officers
in the fourth quarter of 2004. The TASER Foundation was funded
with initial commitments for over $700,000 from TASER
International, Inc. employees. The TASER Foundation is a
structured means for TASER International to give back to the
community in a very targeted fashion to support the law
enforcement community which has helped us to build our company.
In 2005, we increased our investment in Research and Development
by 91%. The return on this investment is intended to be realized
over the long term, however, several new systems and
technologies have already been developed during 2005 that will
have an impact on our business. These include, the TASER CAM, an
audio-video capture device which is compatible with our existing
X26 product and provides accountability for use of X26 devices
in the field by law enforcement. The TASER CAM is currently in
the final transition from development into production and is
expected to begin shipping in the second quarter of 2006. We
also developed the XP35 cartridge which has a range of
35 feet and has also been produced for shipment in 2006. In
2005, work also progressed to develop the eXtended Range
Electro-muscular Projectile (XREP), which is a 12-gauge
non-lethal round that combines blunt impact with proven TASER
bio-effect. As a culmination of the work performed in 2005, the
technology was successfully demonstrated to military customers
in January, 2006. The XREP, although a development prototype, is
expected to transition to production by 2007.
Products
We make electronic control devices for two main types of
customer groups; the law enforcement, military, and corrections
market, and the consumer market.
For the law enforcement, military and corrections market we
manufacture two product lines. The first is the ADVANCED TASER
M26. We launched the ADVANCED TASER M26 in November 1999. The
ADVANCED TASER M26 line consists of the ADVANCED TASER M26,
various cartridges (described below), rechargeable batteries, a
battery charging system, data download software and equipment,
extended warranties, and a number of holstering options and
accessories.
The second product manufactured for the law enforcement,
military and corrections market is the TASER X26 with Shaped
Pulse Technology. We introduced the TASER X26 in 2003. Shaped
Pulse technology is a refined energy pulse that concentrates a
small portion of energy to first penetrate any barriers, while
the majority of the energy flows into the target freely after
the barrier has been penetrated. The TASER X26 product line
consists of the
4
TASER X26, various cartridges, a proprietary battery system, a
digital power magazine, download software and equipment,
extended warranties, and a number of holstering options and
accessories.
For the consumer market we manufacture the ADVANCED TASER M18,
ADVANCED TASER M18L, and TASER X26c devices. The AIR TASER was
developed in 1994 and did not look like a gun so that we could
focus it for the consumer electronics market. In 2003, we
discontinued the manufacture of this model after building all
available units from raw material inventory. We are holding
remaining units to satisfy any warranty claims and are
continuing to sell off available accessories into the private
citizen market. The ADVANCED TASER M18, and ADVANCED TASER M18L
are designed after the law enforcement ADVANCED TASER M26
version; however, the electrical pulse rate is lower. The
ADVANCED TASER M18 and ADVANCED TASER M18L are identical except
that the ADVANCED TASER M18L has an integrated laser-aiming
device. The X26c was developed in conjunction with the law
enforcement TASER X26 version; however, its effect can
last longer allowing the owner to escape danger. These three
product lines consist of the units themselves, air cartridges,
batteries and digital power magazines, and a number of
holstering options and accessories.
All of our TASER devices are capable of firing various
cartridges from our cartridge product line. The cartridge is
connected to the TASER device before firing. It contains two
small probes that are propelled by compressed nitrogen when the
trigger of the TASER device is pulled. After a cartridge is
fired, the probes discharged from our cartridges remain
connected to the device by insulated wires that transmit
electrical pulses into the target. These electrical pulses are
transmitted through the bodys nerves in a manner similar
to the transmission of signals used by the nervous system to
communicate within the body. The pulses electrical signals
temporarily stimulate the bodys nerve fibers causing
muscles to contract and release with each pulse, impairing the
subjects ability to control their bodies or perform
coordinated actions. The TASER devices electrical output
can penetrate up to two inches of clothing. The initial effect
lasts 5 seconds for the law enforcement, military and
corrections models and up to ten seconds for the consumer market
models. This effect can be extended, if necessary, by the
operator.
We manufacture 5 cartridge types; a 15 cartridge, a
21 cartridge, a 25 XP cartridge, a 35
cartridge, and a 21 training cartridge.
The 15 cartridge is capable of firing a distance of
15 and is sold primarily to the law enforcement market for
training and the consumer market for use in the ADVANCED TASER
M18, ADVANCED TASER M18L, and TASER X26c devices. The 21,
25 XP, 35, and 21 training cartridge are sold
only to the law enforcement, military, and corrections market.
The 25 XP cartridge is different from the 21
cartridge in that it has a longer range and its probes are
longer and heavier which allows it to penetrate a thicker
clothing barrier. The training cartridge contains non-conductive
wiring, which allows law enforcement, military, and corrections
trainers to use the cartridge during training role-playing
scenarios.
All of our cartridges, with the exception of the training
cartridge, contain numerous colored, confetti-like tags bearing
the cartridges serial number. These tags, referred to as
Anti-Felon Identification tags, or AFIDs, are scattered when one
of our cartridges is fired. We require sellers of our products
to participate in the AFID program by registering buyers of our
cartridges. In many cases, we can use AFIDs to identify the
registered owner of cartridges fired.
In 2004 we introduced an accessory to the X26 that allows the
X26 electronic control device to be attached to military and law
enforcement rifles via a Picatinny rail giving the user lethal
and non-lethal options on the same weapon. Also in 2004, we had
successful field demonstrations of our TASER Anti-Personnel
Munition (TAPM) area denial device that is being developed with
General Dynamics. This product is still in the development stage.
Our products are sold primarily through our worldwide network of
distributors at a wide range of prices. Our distributors market
directly to our two main markets listed above. We also sell our
products directly to law enforcement agencies, military forces,
corrections facilities, and private citizens across the United
States.
Our most inexpensive private citizen product is the
entry-level ADVANCED TASER M18 product with a retail price
of $399.95. Our high-end private citizen model, the TASER
X26C
retails for $995.95. The kit includes the
X26C
device, six cartridges, a holster and a coupon which can be
redeemed for a one hour
one-on-one
training session with a certified instructor in the
citizens home.
5
The ADVANCED TASER device was our best selling item in 2003. In
2004, the TASER X26 became our best selling product and remained
as such during 2005. Law enforcement distributors sell the
ADVANCED TASER M26 to police and corrections agencies for $399.
The TASER X26 is sold to police, military, and corrections
agencies for $799. Retail cartridge prices range from
$16 per unit for law enforcement to $30 per unit for
private citizen purchases.
We offer a lifetime warranty on the AIR TASER. Under this
warranty, we will replace any AIR TASER that fails to operate
properly for a $25 fee. The AIR TASER and the X26c are designed
to disable an attacker for up to 30 seconds. We encourage
private citizens to leave the units and flee after firing them.
As a result, we also provide free replacement units to private
citizens who follow this suggested procedure. To qualify for the
replacement unit, users must file a police report that describes
the incident and confirms the use of the AIR TASER or the X26c.
Warranty costs under the AIR TASER replacement policy have been
minimal to date. Historically, approximately 2% of the AIR
TASERs sold by us were returned by end users in connection with
a warranty claim.
We offer a one year limited warranty on all of the ADVANCED
TASER devices and TASER X26 devices. After the warranty expires,
if the device fails to operate properly for any reason, we will
replace the ADVANCED TASER device for a fee of $75, and the
TASER X26 at a discounted price depending on when the product
was placed in service. These fees are intended to cover the
handling and repair costs and include a profit. This policy is
attractive to our law enforcement, military, and corrections
agency customers. In particular, it avoids disputes regarding
the source or cause of any defect.
It is our policy to maintain a warranty reserve equivalent to
estimated future warranty claims for products sold. 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. Warranty costs under the ADVANCED
TASER device and TASER X26 device replacement policy totaled
$1,294,000 and $361,000 in 2005 and 2004, respectively. As of
December 31, 2005 and 2004, our reserve for warranty
returns was $852,000 and $458,000, respectively.
Markets
Law
Enforcement and Corrections
Federal, state and local law enforcement agencies in the United
States currently represent the primary target market for our
ADVANCED TASER device and TASER X26 products. In the law
enforcement market, over 8,700 law enforcement agencies
have made initial purchases of our TASER brand devices for
testing or deployment. These agencies include the Unites States
Secret Service, Los Angeles Police Department, Los Angeles
County Sheriffs Department, New York Police Department,
Chicago Police Department, Las Vegas Metropolitan Police
Department, Seattle Police Department, the Royal Canadian
Mounted Police, Miami Police Department, Denver Police
Department, Houston (TX) Police Department, Fort Worth (TX)
Police Department, Orange County (FL) Sheriffs Department,
Chandler (AZ) Police Department, Philadelphia Police Department,
and Minneapolis Police Department. In addition, 2,158 police
departments, including Phoenix (AZ) Police Department, Ohio
State Troopers, Cincinnati, San Diego, Reno, Houston (TX),
Sacramento, Albuquerque, Citrus County (FL) Sheriffs
Office and Clay County (FL) Sheriffs Office have purchased
or are in the process of purchasing one TASER device to issue to
each of their on duty patrol officers.
We believe our TASER products could prove equally suitable for
use in correctional facilities and we have begun to see TASER
devices deployed in correctional facilities such as those
operated by the Los Angeles Custody Division and the State of
Wisconsin.
Military
Forces, both United States and Foreign Allies
Military police forces in the United States and overseas
continue to represent another key market opportunity for TASER
devices. During 2005, we saw our non-lethal weapon systems
continue to be deployed in key strategic locations around the
world. In several cases, they were used to reduce civilian and
prisoner casualties resulting from combat operations in
populated regions, and for prison control. In addition, new
TASER prototype devices were tested by strategic military
personnel for performance and field suitability. In total, we
have shipped military users approximately 5,400 TASER devices to
date. These shipments include one large order to a foreign
military of 3,348
6
ADVANCED TASER M26s. In 2004, we had our single largest
order from the United States Military for $1.8 million
which included TASER devices and cartridges. In addition, we had
a $440,000 order for our X26 conducted energy devices and
cartridges which shipped to the United States National Guard
during 2004. We also introduced our X-Rail system in 2004, which
allows the X26 conducted energy device to be attached to assault
rifles via a Picatinny rail giving the user lethal and
non-lethal options on the same device. In 2005, our products
were successfully used in both Afghanistan and Iraq for many
peacekeeping missions.
On September 30, 2003, President Bush signed into law the
2004 Fiscal Year Defense Appropriations Bill providing
$1.0 million toward the purchase of TASER non-lethal
conducted energy devices by the Department of Defense. As of
December 31, 2004, all funds under this budget line item
were spent.
In April 2002, we were awarded the first phase of a four-phase
cost-plus-profit grant from the Office of Naval Research. The
grant was to fund the development of non-lethal weapon systems
for the United States Military, and provided approximately
$130,000 of capital for our research and development efforts. In
September 2002, our funding was increased by an additional grant
of $349,000, which provided total funding of $479,000. As of
December 31, 2003, we completed and recognized revenue
equal to 95% of this project, or $456,000. Due to our success in
the first and second phase of this research, we were awarded a
$515,000 grant for phases three and four of the project in late
2004. In 2005, work progressed to develop the eXtended Range
Electro-muscular Projectile (XREP), which is a 12-guage
non-lethal round that combines blunt impact with proven TASER
bio-effect. As a culmination of the work performed in 2005, the
technology was successfully demonstrated in January, 2006.
In addition to our work with the Office of Naval Research, we
continue to work with General Dynamics on the development of the
TASER Anit-personnel Munition (TAPM) which is an area denial
system, and also with the U.S. Army ARDEC on advanced
electro-muscular projectile development. Both of these concepts
utilize TASER core technologies.
Commercial
Airlines
The commercial airlines became a new market for us in 2001.
Following the events of September 11, 2001, the commercial
airline industry implemented added security measures to protect
its passengers and crew. These measures, some voluntary and some
mandated by the federal government, included reinforcement of
cockpit doors, increased airport security, and the testing of
effective devices for storage and use on airlines.
Initially, our management believed approval of non-lethal
devices for airline use would occur in 2002. However, because of
an overwhelming array of security issues and programs demanding
TSA approval, this item was delayed. Two commercial carriers,
United Airlines and Mesa Airlines supported the use of our TASER
device for on-board security. And both, in accordance with the
Homeland Security Act of 2002, applied to the TSA for formal
approval to deploy the ADVANCED TASER M26 device platform. TSA
completed in May 2003 a Congressional mandated study on
non-lethal weapons. The study affirmed that the ADVANCED TASER
M26 would be an appropriate weapon for on board aircraft use and
the TSA formally approved a major airlines application to
carry the device on its flights in November 2004, however the
FAA has yet to approve one domestic airline.
In addition, the Vision 100 Century of Aviation
Reauthorization Act which was signed into law on
December 12, 2003 (Public Law 108-176), contained a sense
of Congress that members of flight deck crew of cargo
aircraft should be armed with a firearm or TASER device to
defend the cargo aircraft against an attack by terrorists that
could result in the use of the aircraft as a weapon of mass
destruction or other terrorist purposes. As of December
2004, management was not aware of any cargo carriers that are
pursuing the deployment of either the ADVANCED TASER M26 or
TASER X26 device aboard cargo aircraft.
Private
Security Firms and Guard Services
We are still in the early stage of pursuing additional
opportunities for sales of the TASER devices in private security
markets, and have made only limited sales to date. However, a
report of the Security Industry Association for
1999-2000
estimated that there were over 1.7 million privately
employed security guards or personnel in the United States. They
represent a broad range of individuals, including bodyguards,
commercial and government
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building security guards, commercial money carrier employees and
many others, and represent a large potential market.
Private
Citizen/Personal Protection
Prior to the introduction of the ADVANCED TASER device in late
1999, the majority of our annual revenue was derived from
private citizen sales. However, since the introduction of the
ADVANCED TASER device in 2000, our annual revenue from private
citizen sales has dropped to a range of $1.0 to
$1.7 million per year. We introduced a private citizen
version of our X26 device
(X26C)
during the third quarter of 2004 and agreed to a distribution
agreement with one of our distributors to distribute the
X26C
to federal firearms licensed dealers (FFL) for public sale in
December 2004. We believe private citizen sales could become a
more meaningful portion of our revenues going forward depending
on the success of the
X26C
product and legislation relating to the purchase of our products
by private citizens in each state.
Sales and
Marketing
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, their 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 or the federal government. The
decision-making process can take as little as a few weeks or as
long as several years. Although we have focused on three primary
markets, we have been able to expand our customer base to
thousands of end users within these markets. We currently sell
our products to over 8,700 law enforcement agencies.
Since the introduction of the ADVANCED TASER device in 1999, we
have used several types of media to communicate the costs and
benefits of deploying our device systems. These campaigns have
included the development of personalized CD/DVD packages geared
toward law enforcement leaders in the community, advertisements
in law enforcement publications, and the use of more than 1,000
training classes conducted around the world. We also target key
regional and national law enforcement trade shows where we can
demonstrate the TASER devices to leading departments. In 2005 we
attended and exhibited at 77 regional and national law
enforcement trade shows. In 2005 we held our sixth annual
U.S. Tactical Conference for the trained master
instructors, and law enforcement training officers. We also
conducted our fourth and largest European Tactical Conference to
reach customers in more than 30 countries, including the United
Kingdom, Germany, France, Spain, Austria, Switzerland, Czech
Republic, and Finland, who have either expressed an interest in,
or who are already in the process of testing or deploying TASER
devices. The focus of these conferences in 2005 was to introduce
and train the officers in the use of the TASER X26.
We plan to continue investment in the area of law enforcement
trade shows and conferences in 2006, as it has provided the
ability to market our products to a target audience. We believe
these types of activities accelerate penetration of our TASER
product lines in each market, which should lead to increased
visibility in both the private security and private citizen
markets and reinforce the value of non-lethal devices for
self-defense.
United
States Distribution
With the exception of several accounts to which we sell
directly, the vast majority of our law enforcement agency sales
in the Unites States transact through our network of 28 law
enforcement distributors. In addition, we added one military and
government contracting distributor in 2003. These distributors
were selected based upon their reputation within their
respective industries, their contacts, and their distribution
network. Our regional managers work closely with the
distributors in their territory to inform and educate the law
enforcement communities. We continue to maintain tight controls
over our law enforcement distributors to help ensure that our
service standards are achieved. We also reserve the right to
take any large agency order directly to secure our credit
interest.
Sales in the private citizen market are made through web sales
and through 25 commercial distributors. In December 2004, we
entered into a distribution agreement with one of our existing
law enforcement distributors to
8
distribute the
X26C
to federal firearms licensed (FFL) dealers for public sale. As
of December 31, 2005, the distributor had signed dealer
agreements with 400 FFL dealers who are purchasing and reselling
the X26c to citizens in the United States. In 2005, we tested
various citizen advertisements in 20 national monthly magazines
targeting citizens from various demographics as well as
attending citizen tradeshows. We held four press conferences and
media events in targeted large cities to further educate the
public of the availability for citizens to purchase X26c
products for private use. We also contracted an outside company
call center to assist with a large volume of citizen calls
generated from these advertisements, trade shows and press/media
conferences
Due to the confidential nature of our relationships established
with the major U.S. airlines, we intend to transact
directly all future sales of our products to the commercial
airline industry. These direct sales will enable us to assist
the airlines in the development of training and tactical
applications, and to provide
on-site
equipment maintenance services as they are required.
International
Distribution
We market and distribute our products to foreign markets through
a network of distributors. For geographical and cultural
reasons, our distributors usually have a territory defined by
their countrys borders. These distributors market both our
law enforcement, military, and corrections products, and our
consumer products where allowed by law.
Our distributors work with their local police, military, and
corrections agencies in the same manner as the domestic market.
They perform demonstrations, attend industry tradeshows,
maintain country specific web sites, engage in print
advertising, and arrange training classes.
In 2005, we concentrated our international marketing on the
countries that were furthest along in the testing and purchasing
process. These countries included the United Kingdom, France,
Singapore, and South Korea. The United Kingdom completed a three
year study of TASER brand conducted energy devices during 2004.
Their study ended in September 2004 with the Home Office
Secretary, David Blunkett, approving their use by all firearms
officers. During 2005 an addendum to the initial study was
released which led to the approval of the TASER X26.
In 2006, we are planning to continue our focus on territories
that are moving in the direction of non-lethal weaponry. We also
plan to bolster our international presence by expanding our
focus to a larger number of countries.
We shipped products to approximately 30 countries during fiscal
2005. As a percentage of total sales, sales outside the
U.S. increased to 13% in 2005 from 4% in 2004. Sales
outside the U.S were 12% of total net sales in 2003.
Training
Programs
Most law enforcement, military and corrections agencies will not
purchase new weapons until a training program is in place to
certify all officers in their proper use. We offer a
sixteen-hour
class that certifies law enforcement, military, and corrections
agency trainers as instructors in the use of the TASER devices.
As of December 31, 2005, approximately 21,500 law
enforcement officers around the world have been trained and
certified as instructors in the proper use of TASER brand
devices. This includes approximately 20,129 officers in the
United States and 1,391 in other countries.
Currently, 401 of our certified instructors have undergone
further training and became certified as master instructors. We
authorize these individuals to train other law enforcement and
corrections agency trainers, not just end-users within these
organizations. Military personnel are trained by our Chief
Master Instructor. Approximately 150 of our master instructors
have agreed to conduct TASER device training classes on a
regular basis. These instructors can independently organize and
promote their own training sessions or teach at training classes
arranged by us. We provide logistical support for the training
classes in both instances. The master instructors are
independent professional trainers, serve as local area TASER
experts, and assist in conducting TASER demonstrations at other
police departments within regions. On January 1, 2001, we
implemented a $195 charge for each training attendee, which was
raised to $225 effective January 1, 2005. We pay master
instructors a per-session training fee for each session they
conduct. We conducted over 313 training courses in 2005 and, as
of December 31, 2005, we have conducted a cumulative 1,319
training courses during which we have trained more than 21,500
9
individuals in the use of TASER products. We have also designed
a training course for private citizen customers. Customers who
purchase an
X26C
device receive a certificate good for a one hour,
one-on-one
training session with an
X26C
certified instructor. We have over 400 instructors certified to
give the
X26C
training.
During 2002, we created a Training Advisory Board to coordinate
the growing demands of our training program. This board annually
reviews the qualifications of the master instructors, and
provides retraining or certification as required. In addition,
the Training Board oversees the trainers and curriculum to
ensure new tactics and policies are properly communicated and
implemented, and gives input into new product development. We
created the new position of Director of Training during 2004,
which was upgraded to Vice President of Training in 2006 and
this person also serves on the Training Board. In order to gain
new perspectives on the training, we added five new members to
our training board in late 2004. The new members replaced four
training board members who rotated off the training board.
Manufacturing
We conduct manufacturing and final assembly operations at our
headquarters in Scottsdale, Arizona and we own substantially all
of the equipment required to manufacture and assemble our
finished products, as well as all molds, schematics, and
prototypes utilized by our vendors in the production of required
raw materials and sub-assemblies. With our current work force,
working only one shift, we are able to produce approximately
80,000 cartridges per month, and more than 7,500 TASER devices
per month. We can expand our production capabilities by adding
additional personnel and incorporating additional shifts with
negligible new investment in tooling and equipment.
In 2004, we implemented our first automated production line to
increase the throughput of the cartridge assemblies. We
augmented this by adding our first semi-robotic line in late
2005 for our X26 High Voltage subassembly process. We intend to
continue automating labor intensive functions in our production
process as well as look to automation equipment for new product
lines being introduced in the future.
We currently purchase finished circuit boards and
injection-molded plastic components from suppliers located in
the United States. Although we currently obtain plastic
components from a single supplier, we own the injection molded
component tooling used in their production. As a result, we
believe we could obtain alternative suppliers without incurring
significant production delays. We also purchase small, machined
parts from a vendor overseas, custom cartridge assemblies from a
proprietary vendor in the United States, and electronic
components from a variety of foreign and domestic distributors.
We believe there are readily available alternative suppliers in
most cases who can consistently meet our needs for these
components. We acquire most of our components on a purchase
order basis and do not have long-term contracts with suppliers.
We believe that our relations with our suppliers are good.
Competition
Law
Enforcement and Corrections Market
The primary competitive factors in the law enforcement and
corrections market include a weapons accuracy,
effectiveness, safety, cost and ease of use. During 2004, two
new competitors announced that they planned to introduce
products that directly compete with the products manufactured
and sold by us. The two companies were expected to launch their
products during 2005. At the time this report on
Form 10-K
was filed, we are not aware of any commercial sales of these
products made by either competitor. We believe that our strong
relationship with customers, our large installed base of
products, and the significant amount of medical and safety
testing already performed on our products will provide us with a
competitive advantage over these new competitors.
We also believe the ADVANCED TASER device and TASER X26 device
also compete indirectly with a variety of other non-lethal
alternatives. These alternatives include, but are not limited to
pepper spray and impact weapons sold by companies such as Armor
Holdings, Inc., and Pepperball. We believe our TASER brand
devices advanced technology; versatility, effectiveness,
and low injury rate enable it to compete effectively against
other non-lethal alternatives.
10
On June 26, 2003, we purchased the assets of Electronic
Medical Research Laboratories, Inc., doing business as Taser
Technologies, Inc., formerly Tasertron. Prior to our purchase,
Taser Technologies was the sole remaining manufacturer of the
original Taser device introduced in the 1970s. It is our
opinion that as of the date of acquisition, fewer than 200
police departments deployed Taser Technologies weapons, with
fewer than 5,000 total weapons in the field. As of
December 31, 2005, approximately 8,700 departments had
purchased in the aggregate more than 180,000 of our TASER brand
devices. Some of these agencies previously deployed Taser
Technologies weapons.
Military
Market
In the military markets, both in the United States and abroad, a
wide variety of weapon systems are utilized to accomplish the
mission at hand. Conducted energy devices have gained increased
acceptance during the last two years as a result of the
increased policing roll of military personnel in the conflicts
in both Iraq and Afghanistan. There has also been an increased
awareness of the use of non-lethal weapons to preserve human
intelligence. TASER devices give our armed forces one means to
capture or immobilize targets without using lethal force. We are
the only supplier providing electronic control devices to these
agencies. There is indirect competition from pepper spray and
impact weapons sold by companies such as Armor Holdings, Inc.,
and Pepperball.
Private
Citizen Market
Electronic control devices have gained limited acceptance in the
private citizen market for non-lethal weapons. These weapons
compete with other non-lethal weapons such as stun guns, batons
and clubs, and chemical sprays. The primary competitive factors
in the private citizen market include a weapons cost,
effectiveness, and ease of use. The widespread adoption of our
TASER devices by prominent law enforcement agencies may help us
overcome the historical perception of a lack of private citizen
confidence in electronic control devices.
In the private citizen market, the AIR TASER formerly competed
with an electronic control device introduced by Bestex, Inc. in
1996, called the Dual Defense, and indirectly competed with
other non-lethal alternatives. In July 2002, we purchased a
patent which covers the propulsion system of our air cartridge.
Prior to our purchase, the previous owner of the patent had
granted licenses to both Bestex and TASER International.
However, at the time we purchased the patent, Bestex had not
renewed its license, and subsequently lost its right to continue
utilizing the patented technology. Therefore, we believe our
products will only compete with remaining inventories of the
Bestex Dual Defense product produced prior to July 2002, as the
continued manufacture by Bestex of the existing Dual Defense
product beyond such date would be an infringement of our patent
rights.
Regulation
United
States Regulation
The AIR TASER device, ADVANCED TASER device, and TASER X26
device, as well as the cartridges used by these devices, are
subject to identical regulations. None of our devices are
considered to be a firearm by the U.S. Bureau
of Alcohol, Tobacco, Firearms and Explosives. Therefore, no
Federal firearms-related regulations apply to the sale and
distribution of our devices within the United States. In the
1980s however, many states introduced regulations
restricting the sale and use of stun guns, inexpensive hand-held
shock devices. We believe existing stun gun regulations also
apply to our device systems.
In 2002 through 2004, we worked with several law enforcement
agencies, government agencies and distributors to overturn prior
legislation preventing the sale of TASER devices to law
enforcement agencies in certain regions of the U.S. In
August 2004, the Commonwealth of Massachusetts changed its laws
to allow law enforcement agencies to deploy TASER devices. These
combined efforts were successful in changing the legislation in
the states of Hawaii, Massachusetts and Michigan. We consider
this to be a dramatic change in regulations as, for example,
prior to the amendment to the Michigan Penal Code, the
possession of a TASER or electronic weapon of any kind in
Michigan could result in a felony conviction. Currently, New
Jersey is the only remaining state in which TASER technology is
prohibited for law enforcement use.
11
In many cases, the law enforcement and corrections market is
subject to different regulations than the private citizen
market. Where different regulations exist, we assume the
regulations affecting the private citizen market also apply to
the private security markets except as the applicable
regulations otherwise specifically provide.
Based on a review of current regulations, we have determined the
following states regulate the sale and use of our device
systems:
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Law Enforcement
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State
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Use
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Private citizen Use
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Connecticut
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Legal
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Legal, subject to restrictions
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District of Columbia
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Legal
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Legal, subject to restrictions
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Florida
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Legal
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Legal, subject to restrictions
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Hawaii
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Legal
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Prohibited
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Illinois
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Legal
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Legal, subject to restrictions
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Indiana
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Legal
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Legal, subject to restrictions
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Massachusetts
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Legal
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Prohibited
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Michigan
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Legal
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Prohibited
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New Jersey
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Prohibited
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Prohibited
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New York
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Legal
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Prohibited
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North Carolina
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Legal
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Legal, subject to restrictions
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North Dakota
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Legal
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Legal, subject to restrictions
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Rhode Island
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Legal
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Prohibited
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Washington
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Legal
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Legal, subject to restrictions
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Wisconsin
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Legal
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Prohibited
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United
States Export Regulation
Our device systems are considered a crime control product by the
United States Department of Commerce. Accordingly, the export of
our device systems is regulated under export administration
regulations. As a result, we must obtain export licenses from
the Department of Commerce for all shipments to foreign
countries other than Canada. Most of our requests for export
licenses have been granted, and the need to obtain these
licenses has not caused a material delay in our shipments. The
need to obtain licenses, however, has limited or impeded our
ability to ship to certain foreign markets. Export regulations
also prohibit the further shipment of our products from foreign
markets in which we hold a valid export license to foreign
markets in which we do not hold an export license for the
products.
In addition, in the fall of 2000, the Department of Commerce
adopted new regulations restricting the export of technology
used in our device systems. These regulations apply to both the
technology incorporated in our device systems and in the
processes used to produce them. The technology export
regulations do not apply to production that takes place within
the United States, but is applicable to all sub-assemblies and
controlled items manufactured outside the United States.
Foreign
Regulation
Foreign regulations which may affect our weapon systems are
numerous and often unclear. We prefer to work with a distributor
who is familiar with the applicable import regulations in each
of our foreign markets. Experience with foreign distributors in
the past indicates that restrictions may prohibit certain sales
of our products in a number of countries. The countries in which
we are aware of restrictions for both citizens and law
enforcement include: Belgium, Denmark, Hong Kong, Italy, Japan,
Malaysia, New Zealand, the Netherlands, Norway, Serbia, and
Pakistan.
Additionally, Australia, Canada, Greece, India, Latvia,
Lithuania, South Korea, Sweden, and Switzerland permit our
products to be sold only to law enforcement and corrections
agencies. During 2003, Switzerland completed a review of TASER
brand devices, and has approved their use for law enforcement.
Although there have
12
been no significant orders from this country, this approval is a
milestone in reversing legislation in the international
community that previously prohibited the use of TASER brand
devices.
Previously, the United Kingdom was among the countries where
TASER technologies were prohibited. However, in January 2003,
the British Police announced that the national government would
be backing a TASER pilot program for five police forces within
the UK. The agencies participating in the trial program of the
ADVANCED TASER M26 include: the Northamptonshire Police,
Lincolnshire Police, Thames Valley Police, North Wales Police
and Metropolitan Police. This decision came after the completion
of two years of testing by the Police Scientific Development
Branch of the Home Office in England, during which the product
was reviewed for operational effectiveness and medical safety.
Following a detailed evaluation of a
12-month
operational trial of the ADVANCED TASER device, which was
carried out by the five police forces, the Home Secretary David
Blunkett agreed that firearms officers in forces nationwide can
now use the hand-held electrical device as of September 2004. To
date, there have been several successful outcomes involving the
use of TASER devices reported by the police forces deploying the
weapons system.
TASER device sales to civilians are permitted in Austria,
Bahamas, Bulgaria, Costa Rica, Croatia, Czech Republic, Ecuador,
France, Germany (device must look like a gun and not have a
laser sight), Mexico, Poland, Romania, Slovenia, and South
Africa.
Intellectual
Property
We protect our intellectual property with U.S. and foreign
patents and trademarks. We have numerous patents and trademarks
issued and pending in the United States and in foreign
countries. Our patents and pending patent applications relate to
technology used by us in connection with our products. We also
rely on international treaties and organizations and foreign
laws to protect our intellectual property. We continuously
assess whether and where to seek formal protection for
particular innovations and technologies based on such factors
as: the commercial significance of our operations and our
competitors operations in particular countries and
regions; our strategic technology or product directions in
different countries; and the degree to which intellectual
property laws exist and are meaningfully enforced in different
jurisdictions.
In addition, we use confidentiality agreements with employees,
consultants and key suppliers to help ensure the confidentiality
of our trade secrets. We also have sole source agreements with
many of our suppliers.
We own the internet domain name Taser.com.
Research
and Development
Our research and development initiatives are conducted in two
separate categories. The first is internally funded research and
development, and the second is research funded by the Office of
Naval Research. Both categories focus on next generation
technology, yet are differentiated by their time to completion
and accounting treatment. Internally funded research has been
primarily focused on improvements to existing TASER products, or
the development of new applications for TASER technology. The
work being done for the Office of Naval Research has been
focused on developing weapon systems to be used in military
combat or policing activities. These projects are more long-term
in nature, and involve several outside resources. Both avenues
of research are led by our internal personnel and make use of
specialized consultants when necessary. These initiatives
include bio-medical research and electrical and mechanical
engineering. We expect that future development projects will
focus on reducing the size, extending the range, and improving
the functionality of our products.
Our investment in internally funded research totaled
approximately $1.6 million, $824,000 and $498,000 in 2005,
2004 and 2003, respectively. This allowed the R&D department
to expand to 15 engineers and technicians. With the move into
the new facility, the R&D department outfitted a 16 station
electronics lab, a 13 station mechanical lab, and an indoor test
area with a 40 meter extended range capability. State of the art
modeling, simulation, and prototyping tools and equipment are
utilized by the department to facilitate product development.
The investment in the research and development staff and
equipment represents a significant increase from previous years
and reflects our commitment to maintaining and extending our
current technology advantages. The return on that investment is
intended to be realized over the long term but several new
systems and technologies have already
13
been developed that will have an impact on our business. These
include the XP35 cartridge which has a range of 35 feet and
has already been produced for shipment in 2006, the TASER CAM
which is in final transition to production and will be ready for
launch in second quarter of 2006, as well as the eXtended Range
Electro-muscular Projectile (XREP) prototypes that were
demonstrated to military customers on January 19, 2006. The
XREP, although a development prototype, is expected to
transition to production by 2007. Additionally, many product
improvement projects were completed, increasing the reliability
and quality of our current products.
The development of these capabilities also enables us to expand
our contracted technology development. In this last year, we
successfully executed funded programs to General Dynamics for
TAPM development and the Office of Naval Research (ONR).
Additionally, a firm fixed price contract was awarded by the
U.S. Army ARDEC for the amount of $65,000. This effort is
expected to be completed in the first quarter of 2006.
For the work contracted by the ONR, periodically as work is
completed, an invoice summarizing the reimbursable expenses is
submitted for payment. For contracts that are billed at
completion we record revenue on a percentage of completion
basis. The payment request details the costs expensed in the
period and adds a nominal profit. Because this project generates
profit for us, the reimbursement is recognized as a component of
revenue, and the associated expenditures are expensed as
research and development.
As we progress with projects underway, we expect that our
research and development expenditures will increase. This is due
to the addition of personnel in our research and development
department and the costs associated with conducting and
preparing biomedical studies.
Employees
As of December 31, 2005, we had 224 full-time
employees and 19 temporary manufacturing employees. The
breakdown by department is as follows: 113 direct manufacturing
employees and 111 administrative and manufacturing support
employees. Of the 111 administrative and manufacturing support
employees; 32 were involved in sales, marketing, communication
and training; 22 were employed in research, development and
engineering; 21 were employed in administrative functions
inclusive of executive management, legal, finance, accounting,
investor relations, aviation and the TASER Foundation; 7 were
employed in information systems technologies; 10 were employed
in quality control and 19 were employed in manufacturing support
functions.
Our employees are not covered by any collective bargaining
agreement, and we have never experienced a work stoppage. We
believe that our relations with our employees are good.
Corporate
Information
We were incorporated in Arizona in September 1993 as ICER
Corporation. We changed our name to AIR TASER, Inc. in
December 1993 and to TASER International, Incorporated in April
1998. In January 2001, we reincorporated in Delaware as TASER
International, Inc. Our website is located at www.taser.com. Our
annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
section 13(a) or 15(d) of the Securities Exchange Act of
1934 are available on our website as soon as reasonably
practicable after we electronically file such material with, or
furnish such material to, the SEC. Other information that is not
part of this Annual Report on Form 10-K can be accessed through
our website at www.TASER.com.
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We are
materially dependent on acceptance of our products by the law
enforcement and corrections market, and if law enforcement and
corrections agencies do not purchase our products, our revenues
will be adversely affected and we may not be able to expand into
other markets.
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A substantial number of law enforcement and corrections agencies
may not purchase our conducted energy, non-lethal devices. In
addition, if our products are not widely accepted by the law
enforcement and corrections market, we may not be able to expand
sales of our products into other markets. Law enforcement and
corrections agencies may be influenced by claims or perceptions
that conducted energy weapons are unsafe or may be used in
14
an abusive manner. In addition, earlier generation conducted
energy devices may have been perceived as ineffective. Sales of
our products to these agencies may also be delayed or limited by
these claims or perceptions.
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We
substantially depend on sales of the TASER X26 products, and if
these products are not widely accepted, our growth prospects
will be diminished.
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In the years ended December 31, 2005 and 2004, we derived
our revenues predominantly from sales of the TASER X26 brand
devices and related cartridges, and expect to depend on sales of
these products for the foreseeable future. A decrease in the
prices of or demand for these products, or their failure to
achieve broad market acceptance, would significantly harm our
growth prospects, operating results and financial condition.
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If we
are unable to manage any growth in our business, our prospects
may be limited and our future profitability may be adversely
affected.
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We intend to expand our sales and marketing programs and our
manufacturing capacity as needed to meet future demand. Any
significant expansion may strain our managerial, financial and
other resources. If we are unable to manage our growth, our
business, our operating results and financial condition could be
adversely affected. We will need to continually improve our
operations, financial and other internal systems to manage our
growth effectively, and any failure to do so may lead to
inefficiencies and redundancies, and result in reduced growth
prospects and profitability.
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We may
face personal injury, wrongful death and other liability claims
that harm our reputation and adversely affect our sales and
financial condition.
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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. Please see our product warnings on our website at
www.TASER.com. 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, we do
incur large legal expenses within our self insured retention in
defending these lawsuits and significant litigation could also
result in a diversion of managements attention and
resources, negative publicity and a potential 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.
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Pending
litigation may subject us to significant litigation costs,
judgments in excess of insurance coverage, and divert management
attention from our business.
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We are involved in litigation matters relating to our products
or the use of such products, litigation against persons who we
believe have defamed our products, litigation against our former
patent attorney as well as shareholder class action lawsuits and
a formal investigation by the Securities and Exchange
Commission. Such matters have resulted and are expected to
continue to result in substantial costs to us and a likely
diversion of our managements attention, which could
adversely affect our business, financial condition or operating
results.
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Our
future success is dependent on our ability to expand sales
through distributors and our inability to recruit new
distributors would negatively affect our sales.
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Our distribution strategy is to pursue sales through multiple
channels with an emphasis on independent distributors. Our
inability to recruit and retain police equipment distributors
who can successfully sell our products would adversely affect
our sales. In addition, our arrangements with our distributors
are generally short-term. If we do not competitively price our
products, meet the requirements of our distributors or
end-users, provide adequate marketing support, or comply with
the terms of our distribution arrangements, our distributors may
fail to
15
aggressively market our products or may terminate their
relationships with us. These developments would likely have a
material adverse effect on our sales. Our reliance on the sales
of our products by others also makes it more difficult to
predict our revenues, cash flow and operating results.
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If we
are unable to design, introduce and sell new products
successfully, our business and financial results could be
adversely affected.
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Our future success will depend on our ability to develop new
products that achieve market acceptance in a timely and
cost-effective manner. The development of new products is
complex, and we may experience delays in completing the
development and introduction of new products. We cannot provide
any assurance that products that we may develop in the future
will achieve market acceptance. If we fail to develop new
products on a timely basis that achieve market acceptance, our
business, financial results and competitive position could be
adversely affected.
We
expend significant resources in anticipation of a sale due to
our lengthy sales cycle and may receive no revenue in
return.
Generally, law enforcement and corrections agencies consider a
wide range of issues before committing to purchase our products,
including product benefits, training costs, the cost to use our
products in addition to or in place of other non-lethal
products, budget constraints and product reliability, safety and
efficacy. The length of our sales cycle may range from a few
weeks to as long as several years. Adverse publicity surrounding
our products or the safety of such products has in the past and
could in the future lengthen our sales cycle with customers. In
particular, we believe our revenue has decreased for the year
ended December 31, 2005 compared to the year ended
December 31, 2004 due to the adverse effect on customers
and potential customers of the negative publicity surrounding
our products or use of our products. We may incur substantial
selling costs and expend significant effort in connection with
the evaluation of our products by potential customers before
they place an order. If these potential customers do not
purchase our products, we will have expended significant
resources and received no revenue in return.
Most
of our end-users are subject to budgetary and political
constraints that may delay or prevent sales.
Most of our end-user customers are government agencies. These
agencies often do not set their own budgets and therefore have
little control over the amount of money they can spend. In
addition, these agencies experience political pressure that may
dictate the manner in which they spend money. As a result, even
if an agency wants to acquire our products, it may be unable to
purchase them due to budgetary or political constraints. Some
government agency orders may also be canceled or substantially
delayed due to budgetary, political or other scheduling delays
which frequently occur in connection with the acquisition of
products by such agencies.
Government
regulation of our products may adversely affect
sales.
Federal regulation of sales in the United
States: Our devices are not firearms regulated by
the Bureau of Alcohol, Tobacco, Firearms and Explosives, but are
consumer products regulated by the United States Consumer
Product Safety Commission. Although there are currently no
federal laws restricting sales of our devices in the United
States, future federal regulation could adversely affect sales
of our products.
Federal regulation of international sales: Our
devices are controlled as a crime control product by
the United States Department of Commerce, or DOC, for export
directly from the United States. Consequently, we must obtain an
export license from the DOC for the export of our devices from
the United States other than to Canada. Our inability to obtain
DOC export licenses on a timely basis for sales of our devices
to our international customers could significantly and adversely
affect our international sales.
State and local regulation: Our devices are
controlled, restricted or their use prohibited by several state
and local governments. Our devices are banned from private
citizen sale or use in seven states: New York, New Jersey, Rhode
Island, Michigan, Wisconsin, Massachusetts and Hawaii. Law
enforcement use of our products is also prohibited in New
Jersey. Some municipalities, including Omaha, Nebraska and
Washington, D.C., also prohibit private citizen use of our
products. Other jurisdictions may ban or restrict the sale of
our products and our product sales may be significantly affected
by additional state, county and city governmental regulation.
16
Foreign regulation: Certain foreign
jurisdictions, including Japan, Australia, Italy and Hong Kong,
prohibit the sale of conducted energy devices, limiting our
international sales opportunities.
If we
are unable to protect our intellectual property, we may lose a
competitive advantage or incur substantial litigation costs to
protect our rights.
Our future success depends in part upon our proprietary
technology. Our protective measures, including patents,
trademarks and trade secret laws, may prove inadequate to
protect our proprietary rights. Our United States patent on the
construction of the gas cylinder used to store the compress
nitrogen in our cartridges expires in 2015. Our patent on the
process by which compressed gases launch the probes in our
cartridges expires in 2009. The scope of any patent to which we
have or may obtain rights may not prevent others from developing
and selling competing products. The validity and breadth of
claims covered in technology patents involve complex legal and
factual questions, and the resolution of such claims may be
highly uncertain, lengthy and expensive. In addition, our
patents may be held invalid upon challenge, or others may claim
rights in or ownership of our patents.
On February 14, 2006, U.S. Patent No. US
6,999,295 entitled Dual Operating Mode Electronic
Disabling Device For Generating A Time-Sequenced, Shaped Voltage
Output Waveform was issued to named inventors Thomas G.
Watkins, III and Magne Nerheim. Mr. Nerheim assigned
his interest in this patent to us. This patent covers a portion
of the technology utilized in the TASER X26 device. This patent
was applied for by Mr. Watkins, who was our former patent
attorney, without our knowledge or consent. Mr. Watkins
originally filed patent applications on our behalf as our patent
attorney for the same inventions in February and May 2003 with
the U.S. Patent and Trademark Office. In each application
he filed a declaration stating that Mr. Nerheim was the
sole inventor. These patent applications are pending. In
December 2004 he informed us that he now felt that he was the
inventor of a portion of this invention. We vigorously dispute
his claim and we have filed litigation against Mr. Watkins
for declaratory judgment, breach of fiduciary duty, constructive
fraud, and breach of contract. We believe that we are the sole
owner of this invention. Since we are a joint owner of this
patent, this patent will not restrict us from manufacturing and
selling the TASER X26 device. We have other patent applications
pending that cover inventions contained in this patent. On
March 13th
2006, the court issued a temporary restraining order preventing
Mr. Watkins from selling, assigning, transferring, or licensing
this patent to a third party. A hearing has been scheduled for
March 24th
2006 to determine whether a preliminary injunction should be
issued.
We may
be subject to intellectual property infringement claims, which
will cause us to incur litigation costs and divert management
attention from our business.
Any intellectual property infringement claims against us, with
or without merit, could be costly and time-consuming to defend
and divert our managements attention from our business. If
our products were found to infringe a third partys
proprietary rights, we could be required to enter into royalty
or licensing agreements in order to be able to sell our
products. Royalty and licensing agreements, if required, may not
be available on terms acceptable to us or at all.
Competition
in the law enforcement and corrections market could reduce our
sales and prevent us from achieving profitability.
The law enforcement and corrections market is highly
competitive. We face competition from numerous larger, better
capitalized and more widely known companies that make other
non-lethal devices and products. Increased competition may
result in greater pricing pressure, lower gross margins and
reduced sales. In this regard, two different competitors
announced plans to introduce new products in 2005. We are unable
to predict when or if such products will actually be released or
the impact such products will have on our sales or our sales
cycle, but existing or potential customers may choose to
evaluate such products which could lengthen our sales cycle and
potentially reduce our future sales.
17
Defects
in our products could reduce demand for our products and result
in a loss of sales, delay in market acceptance and injury to our
reputation.
Complex components and assemblies used in our products may
contain undetected defects that are subsequently discovered at
any point in the life of the product. In 2002, we recalled a
series of ADVANCED TASER devices due to a defective component.
In connection with the recall, we incurred expenses of
approximately $25,000. Defects in our products may result in a
loss of sales, delay in market acceptance and injury to our
reputation and increased warranty costs.
Component
shortages could result in our inability to produce volume to
adequately meet customer demand. This could result in a loss of
sales, delay in deliveries and injury to our
reputation.
Single source components used in the manufacture of our products
may become unavailable or discontinued. Delays caused by
industry allocations, or obsolescence may take weeks or months
to resolve. In some cases, part obsolescence may require a
product re-design to ensure quality replacement circuits. These
delays could cause significant delays in manufacturing and loss
of sales, leading to adverse effects significantly impacting our
financial condition or results of operations.
Our
dependence on third party suppliers for key components of our
devices could delay shipment of our products and reduce our
sales.
We depend on certain domestic and foreign suppliers for the
delivery of components used in the assembly of our products. Our
reliance on third-party suppliers creates risks related to our
potential inability to obtain an adequate supply of components
or subassemblies and reduced control over pricing and timing of
delivery of components and sub-assemblies. Specifically, we
depend on suppliers of sub-assemblies, machined parts, injection
molded plastic parts, printed circuit boards, custom wire
fabrications and other miscellaneous customer parts for our
products. We also do not have long-term agreements with any of
our suppliers. We believe that there are readily available
alternative suppliers in most cases, however there is no
guarantee that supply will not be interrupted. Any interruption
of supply for any material components of our products could
significantly delay the shipment of our products and have a
material adverse effect on our revenues, profitability and
financial condition.
Our
dependence on foreign suppliers for key components of our
products could delay shipment of our finished products and
reduce our sales.
We depend on foreign suppliers for the delivery of certain
components used in the assembly of our products. Due to changes
imposed for imports of foreign products into the United States,
as well as potential port closures and delays created by
terrorist threats, public health issues or national disasters,
we are exposed to risk of delays caused by freight carriers or
customs clearance issues for our imported parts. Delays caused
by our inability to obtain components for assembly could have a
material adverse effect on our revenues, profitability and
financial condition.
Our
revenues and operating results may fluctuate unexpectedly from
quarter to quarter, which may cause our stock price to
decline.
Our revenues and operating results have varied significantly in
the past and may vary significantly in the future due to various
factors, including, but not limited to: market acceptance of our
products and services, the outcome of any existing or future
litigation, adverse publicity surrounding our products, the
safety of our products, or the use of our products, increased
raw material expenses, changes in our operating expenses,
regulatory changes that may affect the marketability of our
products, and budgetary cycles of municipal, state and federal
law enforcement and corrections agencies. As a result of these
and other factors, we believe that period- to-period comparisons
of our operating results may not be meaningful in the short
term, and our performance in a particular period may not be
indicative of our performance in any future period.
18
The
Sarbanes-Oxley Act and other recent changes in securities laws
and regulations have increased our costs.
The Sarbanes-Oxley Act of 2002 that became law in July 2002, as
well as rules subsequently implemented by the Securities and
Exchange Commission and the NASDAQ Stock Market, have required,
and will require, changes to some of our accounting and
corporate governance practices, including a report on our
internal controls as required by Section 404 of the
Sarbanes-Oxley Act of 2002. These rules and regulations have
increased our accounting, legal and other costs, and made some
activities more difficult, time consuming
and/or
costly. In particular, complying with the internal control
requirements of Sarbanes-Oxley Section 404 has resulted and
will continue to result in increased internal efforts,
significantly higher fees from our independent registered public
accounting firm and significantly higher fees from third party
contractors. We also expect these rules and regulations to make
it more difficult and more expensive for us to obtain director
and officer liability insurance, and we may be required to
accept reduced coverage or incur substantially higher costs to
obtain coverage. These rules and regulations could also make it
more difficult for us to attract and retain qualified executive
officers and qualified members of our board of directors,
particularly to serve on our audit committee.
We
have experienced difficulties and increased expenses in
complying with
Sarbanes-Oxley
Section 404.
We are required to evaluate our internal controls under
Section 404 of the Sarbanes-Oxley Act of 2002. Beginning
with this Annual Report on
Form 10-K
for the fiscal year ending December 31, 2005, we are
required to furnish a report by our management on our internal
control over financial reporting. Such report contains among
other matters, an assessment of the effectiveness of our
internal control over financial reporting as of the end of our
fiscal year, including a statement as to whether or not our
internal control over financial reporting is effective. Such
report also contains a statement that our independent registered
public accounting firm has issued an attestation report on
managements assessment of such internal controls.
Because the previously reported material weaknesses related to
not having controls in place to record appropriate accruals
related to professional fees in the appropriate accounting
period and inadequate resources related to accounting and
financial statement preparation particularly with respect to
financial statement footnote preparation were not fully
remediated and tested at December 31, 2005. Our management
assessment and the report of our Independent Registered Public
Accounting Firm concluded that our internal controls were not
effective at December 31, 2005. Compliance continues to be
both costly and challenging.
In connection with our ongoing Section 404 compliance
efforts, we are also continuing to make improvements to our
systems, procedures and controls. Upon completion of our 2005
audit, our Independent Registered Public Accounting Firm made
certain recommendations to us related to our internal control
and other accounting, administrative and operating matters and
we are also addressing these recommendations. Due to our
conclusion that our internal control over financial reporting
was not effective at December 31, 2005, we could lose
investor confidence in the accuracy and completeness of our
financial reports, which would have an adverse effect on our
stock price.
Recent
regulations related to equity compensation will likely result in
significantly higher expenses and could adversely affect our
ability to attract and retain key personnel.
Stock options are a fundamental component of our employee
compensation packages. We believe that stock options directly
motivate our employees to maximize long-term stockholder value
and, through the use of vesting, encourage employees to remain
with us. In December 2004, the Financial Accounting Standards
Board (FASB) issued Statement 123R, Share-Based Payment,
which requires all companies to measure compensation cost for
all share-based payments (including employee stock options) at
fair value. This requirement will be effective for us beginning
in the first quarter of 2006. Statement 123R will
negatively impact our earnings. Recording a charge for employee
stock options under SFAS No. 123 (which reflects a
similar but different charge than Statement 123R) would
have decreased our net income by $5.9 million,
$8.8 million and $1.3 million in the years ended
December 31, 2005, 2004 and 2003, respectively. In
addition, regulations implemented by The NASDAQ Stock Market
requiring shareholder approval for all stock option plans as
well as regulations implemented by the NYSE prohibiting NYSE
member organizations from giving a proxy to vote on
equity-compensation plans unless the
19
beneficial owner of the shares has given voting instructions
could make it more difficult for us to grant options to
employees in the future. To the extent that new regulations make
it more difficult or expensive to grant options to employees, we
may incur compensation costs, change our equity compensation
strategy or find it difficult to attract, retain and motivate
employees, each of which could materially and adversely affect
our business.
Foreign
currency fluctuations may affect our competitiveness and sales
in foreign markets.
The relative change in currency values creates fluctuations in
product pricing for potential international customers. These
changes in foreign end-user costs may result in lost orders and
reduce the competitiveness of our products in certain foreign
markets. These changes may also negatively affect the financial
condition of some existing or potential foreign customers and
reduce or eliminate their future orders of our products.
Use of
estimates may cause our financial results to differ from
expectations.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could
differ from those estimates.
We
face risks associated with rapid technological change and new
competing products.
The technology associated with non-lethal devices is receiving
significant attention and is rapidly evolving. While we have
patent protection in key areas of electro-muscular disruption
technology, it is possible that new non-lethal technology may
result in competing products that operate outside our patents
and could present significant competition for our products.
To the
extent demand for our products increases, our future success
will be dependent upon our ability to ramp manufacturing
production capacity which will be accomplished by the
implementation of customized manufacturing automation
equipment.
Although our revenue decreased in 2005 compared to 2004, we
experienced significant revenue growth in 2003 and 2004. To the
extent demand for our products increases significantly in future
periods, one of our key challenges will be to ramp our
production capacity to meet sales demand, while maintaining
product quality. Our primary strategies to accomplish this
include increasing the physical size of our assembly facilities,
the hiring of additional production staff, and the
implementation of customized automation equipment. We have
limited previous experience in implementing automation
equipment, and the investments made on this equipment may not
yield the anticipated labor and material efficiencies. Our
inability to meet any future increase in sales demand or
effectively manage our expansion could have a material adverse
affect on our revenues, financial results and financial
condition.
We
depend on our ability to attract and retain our key management
and technical personnel.
Our success depends upon the continued service of our key
management personnel. Our success also depends on our ability to
continue to attract, retain and motivate qualified technical
personnel. Although we have employment agreements with certain
of our officers, the employment of such persons is
at-will and either we or the employee can terminate
the employment relationship at any time, subject to the
applicable terms of the employment agreements. The competition
for our key employees is intense. The loss of the service of one
or more of our key personnel could harm our business.
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Item 1B.
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Unresolved
Staff Comments
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None
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Item 2.
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Description
of Property
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Principal
Location, Corporate Headquarters and Manufacturing
Facilities
In April 2005, we relocated our corporate and manufacturing
operations to a newly constructed 100,000 square foot
facility in Scottsdale, Arizona. We acquired the land and fully
paid for the construction of the facility using existing funds.
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Item 3.
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Legal
Proceedings
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Securities
Class Action Litigation
Beginning on or about January 10, 2005, numerous securities
class action lawsuits were filed against the Company and certain
of its officers and directors. These actions were filed on
behalf of the purchasers of the Companys stock in various
class periods, beginning as early as May 29, 2003 and
ending as late as January 14, 2005. The majority of these
lawsuits were filed in the United States District Court for the
District of Arizona. Four actions were filed in New York and one
Michigan. The New York and Michigan actions were
transferred to the District of Arizona. The class actions were
consolidated by Judge Susan Bolton and Lead Plaintiff and Lead
Counsel were selected. The Lead Plaintiff filed a consolidated
complaint (which became the operative complaint for all of the
class actions) on August 29, 2005. The operative class
period is May 29, 2003 to January 11, 2005. The
defendants filed a motion to dismiss the consolidated complaint,
which has been fully briefed for the Court but has not yet been
decided.
The consolidated complaint alleges, among other things,
violations of the Securities Exchange Act of 1934, as amended,
and
Rule 10b-5,
promulgated thereunder, and seeks unspecified monetary damages
and other relief against all defendants. The consolidated
amended complaint generally alleges 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
the Companys distributor, Davidsons, in the fourth
quarter of 2004. The consolidated complaint also alleges that
product defects were leading to excessive product returns by
customers.
Shareholder
Derivative Litigation
Beginning on or about January 11, 2005, numerous
shareholder derivative actions were also filed against the
Companys officers and directors. Such actions have been
filed in the United States District Court for the District of
Arizona, the Arizona Superior Court in Maricopa County, and the
Delaware Chancery Court in New Castle County. The derivative
actions pending in the Arizona Superior Court and the Delaware
Chancery Court have been stayed pending resolution of the
consolidated Arizona District Court action. The plaintiffs in
the Arizona District Court action filed a consolidated complaint
on May 13, 2005. The Company and the individual defendants
filed motions to dismiss the consolidated complaint on
August 19, 2005. The motions to dismiss are fully briefed
for the Court but have not yet been decided.
The derivative complaints are based on similar facts and events
as those alleged in the securities class action complaints. The
complaints generally allege that the individual defendants
breached the fiduciary duties that they owe 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 results. 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 to commit insider
trading of the Companys stock. The derivative plaintiffs
seek damages and restitutionary, equitable, injunctive and other
relief.
Shareholder
Demand for Inspection of Documents
On May 4, 2005, a Company shareholder filed an action in
the Delaware Chancery Court against the Company under
Section 220 of Delaware General Corporation Law, demanding
the inspection of certain corporate
21
documents. The Company filed an answer to the complaint on
June 7, 2005. The plaintiff served discovery requests on
February 14, 2006.
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 as of June 20, 2005, 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 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
our products from late 1997 through early 2000, sued the Company
and certain of our 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 our
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 $500,000 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. We
believe 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. We 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 our 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 our 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, we made a motion to dismiss Hennigans case.
The court issued a briefing schedule on our motion and the trial
was suspended pending the courts decision on our 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
22
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 49 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, eleven other
cases have been dismissed and are not included in this number.
With respect to each of these pending 49 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. Cases that were dismissed in prior fiscal
quarters are not included in this table. 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. Our 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. We are defending each of these
lawsuits vigorously. Although we do 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.
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Month
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Plaintiff
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Served
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Jurisdiction
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Claim Type
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Status
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Alvarado
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4/2003
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CA Superior Court
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Wrongful Death
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Trial scheduled for April 2006
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City of Madera
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6/2003
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CA Superior Court
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Wrongful Death
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Dismissed by Summary Judgment
Appeal Pending
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Borden
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9/2004
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US District Court, SD IN
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Wrongful Death
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Dismissed with Prejudice
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Thompson
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9/2004
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MI Circuit Court
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Wrongful Death
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Discovery Phase
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Pierson
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11/2004
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US District Court, CD CA
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Wrongful Death
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Discovery Phase
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Glowczenski
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10/2004
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US District Court, ED NY
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Wrongful Death
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Case Stayed
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LeBlanc
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12/2004
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US District Court, CD CA
|
|
Wrongful Death
|
|
Discovery Phase
|
M. Elsholtz
|
|
|
12/2004
|
|
|
TX District Court
|
|
Wrongful Death
|
|
Discovery Phase
|
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
|
|
Dismissed with Prejudice
|
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
|
|
Discovery Phase
|
Hammock
|
|
|
10/2005
|
|
|
District Court, Tarrant County, TX
|
|
Wrongful Death
|
|
Trial scheduled for October 2006
|
Heston
|
|
|
11/2005
|
|
|
US District Court, ND CA
|
|
Wrongful Death
|
|
Discovery Phase
|
A. Elsholtz
|
|
|
10/2005
|
|
|
TX District Court
|
|
Wrongful Death
|
|
Dismissed with Prejudice
|
Rosa
|
|
|
11/2005
|
|
|
US District Court, ND CA
|
|
Wrongful Death
|
|
Complaint Served
|
Gosserand
|
|
|
10/2005
|
|
|
US District Court ED LA
|
|
Wrongful Death
|
|
Discovery Phase
|
O Donnell/Hasse
|
|
|
11/2005
|
|
|
Circuit Court, Cook County, IL
|
|
Wrongful Death
|
|
Discovery Phase
|
Yeagley
|
|
|
11/2005
|
|
|
Hillsborough County Circuit Court,
FL
|
|
Wrongful Death
|
|
Discovery Phase
|
Neal-Lomax
|
|
|
12/2005
|
|
|
US District Court, NV
|
|
Wrongful Death
|
|
Discovery Phase
|
Yanga Williams
|
|
|
12/2005
|
|
|
Gwinnett County State Court, GA
|
|
Wrongful Death
|
|
Discovery Phase
|
Mann
|
|
|
12/2005
|
|
|
US District Court, ND GA, Rome Div
|
|
Wrongful Death
|
|
Discovery Phase
|
King
|
|
|
12/2005
|
|
|
US District Court, MD FL,
Jacksonville
|
|
Wrongful Death
|
|
Discovery Phase
|
Robert Williams
|
|
|
1/2006
|
|
|
US District Court, TX
|
|
Wrongful Death
|
|
Discovery Phase
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
Month
|
|
|
|
|
|
|
|
Plaintiff
|
|
Served
|
|
|
Jurisdiction
|
|
Claim Type
|
|
Status
|
|
Lee
|
|
|
1/2006
|
|
|
Davidson County, TN Circuit Court
|
|
Wrongful Death
|
|
Discovery Phase
|
Zaragoza
|
|
|
2/2006
|
|
|
CA Superior Court, Sacramento County
|
|
Wrongful Death
|
|
Complaint Served
|
Kerchoff
|
|
|
6/2004
|
|
|
US District Court, ED MI
|
|
Training Injury
|
|
Dismissed with Prejudice
|
Powers
|
|
|
11/2003
|
|
|
AZ Superior Court
|
|
Training Injury
|
|
Defense verdict for TASER
|
Cook
|
|
|
8/2004
|
|
|
NV District Court
|
|
Training Injury
|
|
Discovery Phase
|
Stevens
|
|
|
10/2004
|
|
|
OH Court Common Pleas
|
|
Training Injury
|
|
Discovery Phase
|
Lipa
|
|
|
2/2005
|
|
|
MI Circuit Court
|
|
Training Injury
|
|
Dismissed with Prejudice
|
Dimiceli
|
|
|
3/2005
|
|
|
FL Circuit Court
|
|
Training Injury
|
|
Discovery Phase
|
Allen
|
|
|
5/2005
|
|
|
AZ Superior Court
|
|
Training Injury
|
|
Discovery Phase
|
J.J
|
|
|
7/2005
|
|
|
FL Circuit Court
|
|
Training Injury
|
|
Discovery Phase
|
J.B
|
|
|
7/2005
|
|
|
FL Circuit Court
|
|
Training Injury
|
|
Discovery Phase
|
Howard
|
|
|
8/2005
|
|
|
AZ Superior Court
|
|
Training Injury
|
|
Discovery Phase
|
Wagner
|
|
|
8/2005
|
|
|
AZ Superior Court
|
|
Training Injury
|
|
Discovery Phase
|
Gerdon
|
|
|
8/2005
|
|
|
AZ Superior Court
|
|
Training Injury
|
|
Discovery Phase
|
Gallant
|
|
|
8/2005
|
|
|
AZ Superior Court
|
|
Training Injury
|
|
Discovery Phase
|
Herring
|
|
|
8/2005
|
|
|
Circuit Court of City of
St. Louis, MO
|
|
Training Injury
|
|
Discovery Phase
|
Stewart
|
|
|
10/2005
|
|
|
Circuit Court for Broward County, FL
|
|
Training Injury
|
|
Discovery Phase
|
Lewandowski
|
|
|
1/2006
|
|
|
US District Court, NV
|
|
Training Injury
|
|
Discovery Phase
|
Peterson
|
|
|
1/2006
|
|
|
US District Court, NV
|
|
Training Injury
|
|
Discovery Phase
|
Cosby
|
|
|
8/2004
|
|
|
US District Court, SD NY
|
|
Injury During Arrest
|
|
Discovery Phase
|
Blair
|
|
|
3/2005
|
|
|
US District Court, MD NC
|
|
Injury During
|
|
Summary Judgment Motion
|
|
|
|
|
|
|
|
|
Detention
|
|
Filed Awaiting Ruling
|
Lewis
|
|
|
7/2005
|
|
|
US District Court Tal FL
|
|
Injury During Arrest
|
|
Trial scheduled for September 2006
|
Lash
|
|
|
8/2005
|
|
|
US District Court ED MO
|
|
Injury During Arrest
|
|
Motion to dismiss filed
|
Games
|
|
|
8/2005
|
|
|
Circuit Court, Multnomah County, OR
|
|
Injury During Arrest
|
|
Discovery Phase
|
Bynum
|
|
|
10/2005
|
|
|
US District Court SD NY
|
|
Injury During Arrest
|
|
Discovery Phase
|
Lopez
|
|
|
11/2005
|
|
|
US District Court, ND IL Eastern Div
|
|
Injury During Police Call
|
|
Discovery Phase
|
Bellemore
|
|
|
2/2006
|
|
|
AZ Superior Court
|
|
Injury During Arrest
|
|
Complaint Served
|
From time to time, we are notified that we may be a party to a
lawsuit. It is our policy to not disclose the specifics of any
claim or threatened lawsuit until it is actually served on us.
Other
Litigation
In January 2005, we 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, we filed litigation in Superior Court for
Maricopa County against Thomas G. Watkins III, our former
patent attorney, for declaratory judgment, breach of fiduciary
duty, constructive fraud, and breach of contract.
Mr. Watkins originally filed patent applications on our
behalf as our patent attorney for inventions utilized in the
TASER X26 device in February and May 2003. In each patent
application he filed a declaration stating that Magne Nerheim,
our employee, was the sole inventor. These patent applications
are pending. Mr. Nerheim assigned his interest in these
patent applications to us. In December 2004 Mr. Watkins
informed us that he now felt that he was the inventor of a
portion of this invention. We vigorously dispute his claim and
we believe that we are the sole owner of this invention. We have
filed a motion for summary judgment in this litigation in
February 2006 which motion is pending before the court. On
February 14, 2006, U.S. Patent No. US 6,999,295
entitled Dual Operating Mode Electronic Disabling Device
For Generating A Time-Sequenced, Shaped Voltage Output
Waveform was issued to named inventors Thomas G.
Watkins, III and Mr. Nerheim. Mr. Nerheim
assigned his interest in this patent to us. This patent covers a
portion of the technology utilized in the TASER X26 device. This
patent was applied for by Mr. Watkins without our knowledge
or consent. Since we are a joint owner of this patent, this
patent will not restrict us from manufacturing and selling the
TASER X26 device. We have other patent applications pending that
cover inventions contained in this patent. On
March 13th
2006, the court issued a temporary restraining order
24
presenting Mr. Watkins from selling, assigning, transferring, or
licensing this patent to a third party. A hearing has been
scheduled for
March 24th
2006 to determine whether a preliminary injunction should be
issued.
In July 2005, we 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 us, our customers
and our shareholders. The court dismissed the count of false
light invasion of privacy. In January 2006 the court entered an
order dismissing this lawsuit. In February 2006 the parties
entered into a stipulation for dismissal with the understanding
that the USA Today and the Arizona Republic would review
articles regarding the TASER device with us prior to publication.
In November 2005, we 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.
In December 2005, we filed a lawsuit in Vigo County, Indiana,
Superior Court against Roland M. Kohr for defamation, product
disparagement, Lanham Act violations, tortiously affecting the
fairness and integrity of litigation as adverse third-party
witness, and intentional interference with a business
relationship. Dr. Kohr was the Medical Examiner and expert
witness in the James Borden wrongful death litigation which
litigation was dismissed with prejudice. This case is in 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 expenses,
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.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
The following matters were submitted to a vote of our security
holders at our annual shareholders meeting held on
November 30, 2005:
|
|
|
|
|
Election of Patrick W. Smith, Mark W. Kroll and Judy Martz to
serve a three year term on the Board of Directors
|
|
|
|
Ratification of appointment of Grant Thornton LLP as our
independent auditors for the year ended December 31, 2005.
|
Election
of Directors
The allocation of votes for the election of Patrick W. Smith,
Mark W. Kroll and Judy Martz to the Board of Directors was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YES
|
|
|
%
|
|
|
NO
|
|
|
%
|
|
|
ABSTAIN
|
|
|
%
|
|
|
NON-VOTES
|
|
|
%
|
|
|
1
|
|
PATRICK W. SMITH
|
|
|
52,328,494
|
|
|
|
85.64
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
756,549
|
|
|
|
1.24
|
|
|
|
0
|
|
|
|
0.00
|
|
2
|
|
MARK W. KROLL
|
|
|
52,333,899
|
|
|
|
85.64
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
75,144
|
|
|
|
1.23
|
|
|
|
0
|
|
|
|
0.00
|
|
3
|
|
JUDY MARTZ
|
|
|
52,308,393
|
|
|
|
85.60
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
77,650
|
|
|
|
1.27
|
|
|
|
0
|
|
|
|
0.00
|
|
The following sets forth certain information about each nominee
for election to the Board of Directors and each continuing
director of the Company.
25
Directors
Patrick W. Smith, Chief Executive Officer and Director.
Mr. Smith has served as Chief Executive Officer and as a
director of the Company since 1993. He is a co-founder of the
Company. Mr. Smith holds a B.S. degree in Biology and
Neurobiology from Harvard University, an M.B.A. degree from the
University of Chicago, and a Masters Degree in International
Finance from the University of Leuven in Leuven, Belgium.
Mark W. Kroll Ph.D., Director. Dr. Kroll has served
as a director of the Company since January 2003. He recently
retired (July 2005) from St. Jude Medical Inc., where he held
various executive level positions since 1995, most recently as
Senior Vice President and Chief Technology Officer, Cardiac
Rhythm Management Division. Dr. Kroll holds a B.S. degree
in Mathematics and a M.S. degree and a Ph.D. degree in
Electrical Engineering from the University of Minnesota and a
M.B.A. degree from the University of St. Thomas. Dr. Kroll
is a director of Haemonetics (NYSE: HAE) and several private
companies.
Judy Martz, Director. Ms. Martz has served as a
director of the Company since April 2005. From January 2001
through January 2004, Ms. Martz was Governor of the State
of Montana and was Lieutenant Governor of the State of Montana
from January 1996 through January 2000. From 1989 through 1995
Ms. Martz served as state representative for
U.S. Senator Conrad Burns and campaigned with Governor Marc
Racicot during part of 1995 and 1996.
Phillips W. Smith Ph.D., Chairman of the Board of
Directors. Dr. Smith has served as a director of the
Company since 1993. From 1999 to December 2004, Dr. Smith
has served as Director of Investor Relations with the Company.
Dr. Smith was Chairman of the Board of Pentawave from
January 1999 through October 2000 and its Chief Executive
Officer from January through March 1999. From June 1990 to
September 1997, Dr. Smith served as the President and Chief
Executive Officer of Zycad Corporation, a developer of
engineering and manufacturing applications software.
Dr. Smith holds a B.S.E. degree from West Point, a M.B.A.
degree from Michigan State University, and a Ph.D. degree in
Business Administration from St. Louis University.
Bruce R. Culver, Director. Mr. Culver has served as
a director of the Company since January 1994. Currently he is
the CEO and Chairman of IdealHire, Inc. a recruitment software
company he founded in 2001. In 1990, Mr. Culver co-founded
and was Chairman of Professional Staff, p.l.c. (PSTF), in
England, a human resource staffing company, and served on its
Board of Directors until 2001. In March 1993, Mr. Culver
acquired California Distribution, a company providing warehouse,
transportation and distribution services. In 1985
Mr. Culver founded Lab Support, Inc., now called On
Assignment, Inc. (ASGN) and served as its Chairman and a
director until 1990. Mr. Culver also serves on the Board of
Digital Map Products, Inc. From 1997 until 2001 Mr. Culver
served on the Board of Pentawave, Inc., becoming its Chairman in
October 2000. Mr. Culver holds B. Sc. and M.S. degrees in
Chemistry from University of South Dakota and Montana State
University.
Thomas P. Smith, President and Director. Mr. Smith
has served as President of the Company since April 1994 and as a
director since 1993. He is a co-founder of the Company.
Mr. Smith holds a B.S. degree in Ecology and Evolutionary
Biology from the University of Arizona and a M.B.A. degree from
Northern Arizona University.
Matthew R. McBrady Ph.D., Director. Dr. McBrady has
served as a director of the Company since January 2001. From
August 1998 though July 1999, Dr. McBrady served as a
member of the staff of President Clintons Council of
Economic Advisers. In December 1997, Dr. McBrady began
working as a financial and analytical consultant for Avenue A,
Inc., an internet marketing company, and served as its vice
president of analytics from June 1999 through October 1999.
Dr. McBrady taught corporate finance and economic courses
at the University of Southern California during the summer terms
of 1997 and 1998, at Harvard University from September 1996
through May 1997, at Harvard Business School during the spring
term of 1998, and taught advanced corporate finance at the
Wharton School of Business at the University of Pennsylvania
from September 2002 through May 2003. Dr. McBrady currently
teaches business administration at the Darden Graduate School of
Business Administration at the University of Virginia and has
held that position since 2003. Dr. McBrady holds a B.A.
degree in Economics from Harvard University, a M.S. degree in
International Economics from Oxford University (UK), and a Ph.D.
degree in Business Economics from Harvard University.
26
Ratification
of Auditors
The allocation of votes for the ratification of Grant Thornton
LLP as our independent auditors for the year ended
December 31, 2005 was as follows:
RATIFY
APPOINTMENT OF GRANT THORNTON LLP AS AUDITORS (% OF
RESPONDED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YES
|
|
%
|
|
|
NO
|
|
|
%
|
|
|
ABSTAIN
|
|
|
%
|
|
|
NON-VOTES
|
|
%
|
|
|
52,560,878
|
|
|
99.01
|
|
|
|
392,554
|
|
|
|
0.74
|
|
|
|
131,611
|
|
|
|
0.25
|
|
|
0
|
|
|
0.00
|
|
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters and
Issuer Repurchases of Equity
|
Market
Information
Our Common Stock is quoted under the symbol TASR on
The NASDAQ National Market.
The following table sets forth the high and low closing sales
prices per share for our Common Stock as reported by NASDAQ for
each quarter of the last two fiscal years as adjusted for our
February 11, 2004
three-for-one
stock split in the form of a stock dividend, our April 29,
2004
two-for-one
stock split in the form of a stock dividend, and our
November 29, 2004
two-for-one
stock split in the form of a stock dividend:
Common
Stock TASR
|
|
|
|
|
|
|
|
|
Fiscal Quarters
|
|
High
|
|
|
Low
|
|
|
March 31, 2004
|
|
$
|
21.89
|
|
|
$
|
3.77
|
|
June 30, 2004
|
|
$
|
32.08
|
|
|
$
|
8.07
|
|
September 30, 2004
|
|
$
|
23.00
|
|
|
$
|
12.53
|
|
December 31, 2004
|
|
$
|
33.45
|
|
|
$
|
13.08
|
|
March 31, 2005
|
|
$
|
12.55
|
|
|
$
|
11.89
|
|
June 30, 2005
|
|
$
|
10.28
|
|
|
$
|
10.01
|
|
September 30, 2005
|
|
$
|
6.26
|
|
|
$
|
6.04
|
|
December 31, 2005
|
|
$
|
7.00
|
|
|
$
|
6.75
|
|
Holders
As of December 31, 2005, there were approximately 353
holders of record of our Common Stock.
Dividends
To date, we have not declared or paid cash dividends on our
Common Stock. Our revolving line of credit with our principal
bank prohibits the payment of cash dividends.
Recent
Sales of Unregistered Securities
No unregistered securities were sold in 2005.
27
|
|
Item 6.
|
Selected
Financial Data
|
The following selected financial data should be read in
conjunction with our financial statements and the notes thereto,
and with Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations.
The statement of income data for the years ended
December 31, 2005, 2004 and 2003 and the balance sheet data
as of December 31, 2005 and 2004 have been derived from and
should be read in conjunction with our audited financial
statements and the notes thereto included herein. The statement
of income data for the years ended December 31, 2002 and
2001 is derived from audited financial statements and the notes
thereto which are not included in this Annual Report on
Form 10-K.
The balance sheet data as of December 31, 2003, 2002 and
2001 is derived from audited financial statements and the notes
thereto which are not included in this Annual Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
Statement of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
47,694,181
|
|
|
$
|
67,639,879
|
|
|
$
|
24,455,506
|
|
|
$
|
9,842,777
|
|
|
$
|
6,853,272
|
|
Gross margin
|
|
|
30,182,944
|
|
|
|
45,184,383
|
|
|
|
15,052,890
|
|
|
|
5,536,226
|
|
|
|
3,938,842
|
|
Sales, general and administrative
expenses
|
|
|
27,058,242
|
|
|
|
13,880,322
|
|
|
|
6,973,721
|
|
|
|
5,038,132
|
|
|
|
3,123,224
|
|
Research and development expenses
|
|
|
1,574,048
|
|
|
|
823,593
|
|
|
|
498,470
|
|
|
|
136,503
|
|
|
|
43,362
|
|
Income from operations
|
|
|
1,550,654
|
|
|
|
30,480,468
|
|
|
|
7,580,699
|
|
|
|
361,591
|
|
|
|
772,256
|
|
Net Income
|
|
|
1,062,857
|
|
|
|
18,881,742
|
|
|
|
4,453,690
|
|
|
|
208,903
|
|
|
|
515,029
|
|
Income per common and common
equivalent shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(1)
|
|
$
|
0.02
|
|
|
$
|
0.33
|
|
|
$
|
0.12
|
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
Diluted(1)
|
|
$
|
0.02
|
|
|
$
|
0.30
|
|
|
$
|
0.10
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Weighted average number of common
and common equivalent shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(1)
|
|
|
61,303,939
|
|
|
|
57,232,329
|
|
|
|
37,889,640
|
|
|
|
33,561,204
|
|
|
|
27,640,632
|
|
Diluted(1)
|
|
|
63,556,246
|
|
|
|
62,319,590
|
|
|
|
46,598,312
|
|
|
|
34,915,404
|
|
|
|
36,351,960
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
34,871,535
|
|
|
$
|
51,100,989
|
|
|
$
|
22,479,594
|
|
|
$
|
5,336,963
|
|
|
$
|
4,966,184
|
|
Total assets
|
|
|
112,338,194
|
|
|
|
109,452,578
|
|
|
|
31,444,690
|
|
|
|
7,904,213
|
|
|
|
8,054,679
|
|
Total current liabilities
|
|
|
7,556,321
|
|
|
|
8,933,939
|
|
|
|
3,895,371
|
|
|
|
1,804,305
|
|
|
|
2,455,656
|
|
Total stockholders equity
|
|
$
|
103,865,702
|
|
|
$
|
99,910,783
|
|
|
$
|
27,427,450
|
|
|
$
|
6,014,601
|
|
|
$
|
5,528,733
|
|
|
|
|
(1) |
|
Earnings per share and shares outstanding data are re-stated on
a post-split basis for the years ended December 31, 2003,
2002 and 2001. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
We begin Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) with an executive
overview of our business which includes a discussion of our key
business strategies, an overview of 2005 and an outlook for 2006
to give the reader an overview of the goals of our business and
the direction in which our business and products are moving.
This is followed by a discussion of the Critical Accounting
Policies that we believe are important to understanding the
assumptions and judgments incorporated in our reported financial
results. We then analyze our Results of Operations for 2005
compared to 2004, and for 2004 compared to
28
2003, which is followed by an analysis of changes in our balance
sheet and cash flows, and discuss our financial commitments in
the sections entitled contractual obligations.
This MD&A should be read in conjunction with the other
sections of this annual report on
Form 10-K,
including Part I, Item 1: Business;
Part II, Item 6: Selected Financial Data;
and Part II, Item 8: Financial Statements and
Supplementary Data. The various sections of this MD&A
contain a number of forward-looking statements, all of which are
based on our current expectations and could be affected by the
uncertainties and risk factors described throughout this filing.
Executive
Overview
We are a global leader in the development and manufacture of
non-lethal, self defense devices designed for use in law
enforcement, corrections, private security and personal defense.
We have focused our efforts on the continuous development of our
technology for both new and existing products as well as
industry leading training services while building distribution
channels for marketing our products and services to law
enforcement agencies, primarily in North America with increasing
efforts on expanding these programs with a view toward
international markets.
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.
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, which we believe apply to our devices
as well. 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.
Key
Strategies
Our key strategies include:
|
|
|
|
|
Increase market penetration in both the United States and
international law enforcement and corrections markets. We
currently have a penetration rate of approximately 16% of the
United States police and corrections market and about 1% of the
worldwide police and corrections market. We believe that the
large portion of these markets that do not currently use our
products presents an opportunity for our future growth,
particularly with respect to international law enforcement
agencies.
|
|
|
|
Continual development of new innovative products which both
complement and add to our existing products. These development
efforts include the introduction of our TASER CAM product, an
audio-video capture device which is compatible with our existing
X26 product. The TASER CAM provides accountability for use of
the product in the field which we believe will be a significant
factor in the decision making process of law enforcement
agencies. This device is currently in the final transition from
production and is expected to begin shipping in the second
quarter of 2006.
|
29
|
|
|
|
|
Continued application for patents and intellectual property
rights to protect key technology in our products and create
further barriers to entry for competing products.
|
|
|
|
Continued aggressive litigation defense to protect our brand
equity. We have an assembled team of world class medical experts
at our disposal and hired additional internal legal resources
during 2005 to provide an efficient means of defending us
against numerous product liability claims. We have had a total
of 12 cases dismissed or defense judgments in our favour. We
view a continued record of successful litigation defense as a
key factor for our long term growth.
|
2005
Overview
2005 presented many significant challenges for us as a Company.
|
|
|
|
|
In January 2005 we announced an informal inquiry by the
Securities Exchange Commission (SEC) into our
statements regarding product safety and the accounting for
certain transactions. This inquiry became a formal investigation
in August 2005 and was broadened to include the possible
unauthorized acquisition of material non-public information by
individuals outside of the Company in an effort to manipulate
our stock price. After we had submitted a large volume of
supporting documentation, in December 2005 the SEC notified us
that it had concluded its investigation on the statements on
product safety and on certain accounting issues with a
recommendation of no enforcement action. The investigation
remains open with respect to the possible unauthorized
acquisition of material non-public information by individuals
outside the Company.
|
|
|
|
As a result of the SEC investigation, ongoing negative press
coverage and increased amounts of litigation concerning our
products and their use, we experienced a decline in sales for
2005 compared to 2004. In particular these events have resulted
in longer sales cycles and delays in orders from prospective
customers. With the conclusion of key portions of the SEC
investigation, we believe prospective new customers,
particularly law enforcement agencies who postponed
implementation decisions, are again moving forward with their
evaluations and implementation of TASER programs. While we
dont expect this progress to manifest in immediate sales
we believe that the ongoing continued acceptance of our products
provides a platform from which to move forward. We feel that the
public at large understands the place for our products in modern
law enforcement which is constantly reflected in public opinion
polls that demonstrate clear support for law enforcements
use of the product.
|
|
|
|
Partially as a result of the negative publicity that we and our
products received, we witnessed a sharp increase in the amount
of legislation introduced at the state and local level relating
to the sale and use of our products. In fact, legislation was
introduced or regulatory inquiries into our products and
technologies were initiated in 22 states in 2005. We hired
lobbyists in many of these states to insure that our position on
the pending legislation and inquiries was clearly understood.
Most lawmakers appreciated the benefits of our products when
presented with the facts and the legislation which actually
became law during 2005 was not adverse to our business. In fact,
many of the studies yielded results that were quite positive for
us. For example, a study by the Wisconsin Department of Justice
concluded with a recommendation that all new police trainees
undergoing standardized state-wide training should undergo
mandatory training in electronic control devices and found that
TASER devices should be placed on the force continuum comparable
to pepper spray.
|
|
|
|
As a result of the various litigation, inquiries and proposed
legislation mentioned above, we had to incur significant general
and administrative expenditures in 2005; an investment in
protecting our brand equity and educating various public
interests in our technology. In particular we incurred
substantial incremental legal, lobbying, public relations and
related traveling costs which ultimately had an adverse impact
on our overall profitability in 2005. However, we believe these
investments were well worth the cost. In many cases, what began
as adverse circumstances for us yielded opportunities to educate
high level public leaders in the value of our products. As in
Wisconsin, many of these persons or agencies are now advocating
the life saving capabilities of our technology.
|
30
2006
Outlook
In 2006, we will move forward from many of the challenges
identified above with a continued commitment to quality and our
unrelenting focus on innovation. We will seek to pursue
profitable increased market penetration in our primary target
markets with continued focus on increasing our international
presence. Many of our prospective customers from our core
business markets are beginning to again move forward with
evaluation and implementation of TASER programs. We believe that
this, when combined with the introduction of the TASER CAM
product, will result in positive new business growth in 2006.
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 Annual Report on
Form 10-K
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.
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 our 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 extended warranty purchases is
deferred at the time of sale, and recognized over the warranty
period. At December 31, 2005 and 2004, $1,233,000 and
$839,000 was deferred under this program, respectively. We also
defer revenue associated with the
one-on-one
private citizen training and background checks that are included
with the purchase of an
X26C
private citizen device. The revenue associated with these items
is deferred until the service is provided. At December 31,
2005 and 2004, we had deferred approximately $150,000 and
$135,000 relating to these items, respectively and another
$18,000 and $33,000 relating to the training of federal firearms
licensed dealers who will sell the
X26C
device. Changes in judgments on these assumptions and estimates
could impact the timing or amount of revenue recognition.
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. 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 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 December 31,
2005, our reserve for warranty returns was $852,000 compared to
a $458,000 reserve at December 31, 2004. In the event that
product returns under warranty differ from these estimates,
changes to warranty reserves might become necessary.
Inventory
Inventories are stated at the lower of cost or market, with cost
determined using the weighted average cost, which approximates
the
first-in,
first-out (FIFO) method. Provisions are made to reduce
potentially excess, obsolete or slow-moving inventories to their
net realizable value. These provisions are based on our best
estimates after considering historical demand, projected future
demand, inventory purchase commitments, industry and market
trends and conditions and other factors. In the event that
actual excess, obsolete or slow-moving inventories differ from
these estimates, changes to inventory reserves might become
necessary.
31
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. These
allowances represent our best estimates and are based on our
judgment after considering a number of factors including
third-party credit reports, actual payment history,
customer-specific financial information and broader market and
economic trends and conditions. In the event that actual
uncollectible amounts differ from these estimates, changes in
allowances for doubtful accounts might become necessary.
Valuation
of Long-lived Assets
We review long-lived assets, such as property and equipment and
intangible assets subject to amortization, whenever events or
changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. We utilize a two-step
approach to testing long-lived assets for impairment. The first
step tests for possible impairment indicators. If an impairment
indicator is present, the second step measures whether the asset
is recoverable based on a comparison of the carrying amount of
the asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment
charge is recognized by the amount by which the carrying amount
of the asset exceeds the fair value of the asset. Our review
requires the use of judgment and estimates. No such impairment
charges have occurred to date. However, future events or
circumstances may result in a charge to earnings if we determine
that the carrying value of a long-lived asset is not recoverable.
Income
Taxes
Statement of Financial Accounting Standards No. 109, or
SFAS No. 109, Accounting for Income Taxes,
establishes financial accounting and reporting standards for the
effect of income taxes. In accordance with
SFAS No. 109, we recognize federal, state and foreign
current tax liabilities or assets based on our estimate of taxes
payable or refundable in the current fiscal year by tax
jurisdiction. We also recognize federal, state and foreign
deferred tax assets or liabilities, as appropriate, for our
estimate of future tax effects attributable to temporary
differences and carryforwards.
Our calculation of current and deferred tax assets and
liabilities is based on certain estimates and judgments and
involves dealing with uncertainties in the application of
complex tax laws. Our estimates of current and deferred tax
assets and liabilities may change based, in part, on added
certainty or finality to an anticipated outcome, changes in
accounting or tax laws in the United States, or changes in other
facts or circumstances. In addition, we recognize liabilities
for potential United States tax contingencies based on our
estimate of whether, and the extent to which, additional taxes
may be due. If we determine that payment of these amounts is
unnecessary or if the recorded tax liability is less than our
current assessment, we may be required to recognize an income
tax benefit or additional income tax expense in our financial
statements.
In preparing our financial statements, we assess the likelihood
that our deferred tax assets will be realized from future
taxable income. In evaluating our ability to recover our
deferred income tax assets we consider all available positive
and negative evidence, including our operating results, ongoing
tax planning and forecasts of future taxable income. We
establish a valuation allowance if we determine that it is more
likely than not that some portion or all of the net deferred tax
assets will not be realized. We exercise significant judgment in
determining our provisions for income taxes, our deferred tax
assets and liabilities and our future taxable income for
purposes of assessing our ability to utilize any future tax
benefit from our deferred tax assets. Although we believe that
our tax estimates are reasonable, the ultimate tax determination
involves significant judgments that could become subject to
audit by tax authorities in the ordinary course of business. As
of December 31, 2005, based on our evaluation, no valuation
allowance was deemed necessary as it is more likely than not
that our net deferred tax assets will be realized. However, the
deferred tax asset could be reduced in the near term if
estimates of taxable income during the carryforward period are
reduced.
32
Contingencies
We are subject to the possibility of various loss contingencies
arising in the ordinary course of business. We consider the
likelihood of loss or impairment of an asset or the incurrence
of a liability, as well as our ability to reasonably estimate
the amount of loss in determining loss contingencies. An
estimated loss contingency is accrued when it is probable that
an asset has been impaired or a liability has been incurred and
the amount of loss can be reasonably estimated. We regularly
evaluate current information available to us to determine
whether such accruals should be adjusted and whether new
accruals are required.
Results
of Operations
The following table sets forth, for the periods indicated, our
statements of income expressed as a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net sales
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of products sold
|
|
|
37
|
%
|
|
|
33
|
%
|
|
|
38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
63
|
%
|
|
|
67
|
%
|
|
|
62
|
%
|
Sales, general and administrative
expenses
|
|
|
57
|
%
|
|
|
21
|
%
|
|
|
29
|
%
|
Research and development expenses
|
|
|
3
|
%
|
|
|
1
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
operations
|
|
|
3
|
%
|
|
|
45
|
%
|
|
|
31
|
%
|
Interest income
|
|
|
3
|
%
|
|
|
1
|
%
|
|
|
0
|
%
|
Interest expense
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Other income and expense
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for
income taxes
|
|
|
6
|
%
|
|
|
46
|
%
|
|
|
30
|
%
|
Provision for income taxes
|
|
|
4
|
%
|
|
|
18
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
2
|
%
|
|
|
28
|
%
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
For the years ended December 31, 2005, 2004 and 2003, sales
by product line and by geography were as follows (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
2004
|
|
|
|
|
|
2003
|
|
|
|
|
|
Sales by Product Line
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TASER X26
|
|
$
|
31,313
|
|
|
|
66
|
%
|
|
$
|
46,083
|
|
|
|
68
|
%
|
|
$
|
8,066
|
|
|
|
33
|
%
|
ADVANCED TASER
|
|
|
2,635
|
|
|
|
5
|
%
|
|
|
3,929
|
|
|
|
6
|
%
|
|
|
15,412
|
|
|
|
63
|
%
|
AIR TASER
|
|
|
78
|
|
|
|
0
|
%
|
|
|
107
|
|
|
|
0
|
%
|
|
|
411
|
|
|
|
2
|
%
|
Single Cartridges(a)
|
|
|
12,468
|
|
|
|
26
|
%
|
|
|
14,655
|
|
|
|
22
|
%
|
|
|
|
|
|
|
0
|
%
|
Research Funding
|
|
|
435
|
|
|
|
1
|
%
|
|
|
12
|
|
|
|
0
|
%
|
|
|
277
|
|
|
|
1
|
%
|
Other
|
|
|
765
|
|
|
|
2
|
%
|
|
|
2,854
|
|
|
|
4
|
%
|
|
|
290
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,694
|
|
|
|
100
|
%
|
|
$
|
67,640
|
|
|
|
100
|
%
|
|
$
|
24,456
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In 2003 single cartridge sales were classified with the related
product sold. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Sales by Geographic
Area
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
87
|
%
|
|
|
96
|
%
|
|
|
88
|
%
|
Other Countries
|
|
|
13
|
%
|
|
|
4
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Net sales for the year ended December 31, 2005 were
$47.7 million, a decrease of $19.9 million, or 29%,
compared to $67.6 million in 2004. We believe the decline
is attributable to ongoing negative press coverage and increased
litigation concerning our products and their use. In particular,
these events have resulted in longer sales cycles and delays in
orders from prospective customers. The TASER X26 product line
continued to be our predominant product in 2005. Sales to
countries outside of the U.S increased to 12% in 2005 from 4% in
2004 reflecting the continued focus of our marketing efforts in
international markets.
Net Sales increased $43.2 million, or 177%, to
$67.6 million for 2004 compared to $24.5 million for
2003. This increase was due to the increased unit sales of the
higher priced TASER X26 device, and increased single cartridge
sales associated with the wider-spread and continued use of
TASER devices by law enforcement. Specifically, TASER X26 device
sales increased $38.0 million to $46.1 million for
2004 compared to $8.1 million for 2003. ADVANCED TASER
device sales decreased $11.5 million in 2004 to
$3.9 million compared to $15.4 million in 2003. This
decrease was the result of reduced sales of the ADVANCED TASER
product line as many customers transitioned to the smaller and
lighter TASER X26 models.
Grant funding from the Office of Naval Research (ONR) was
$435,000, $12,000 and $277,000 for the years ended
December 31, 2005, 2004 and 2003, respectively. We were
awarded a grant for $515,000 in late 2004 to
fund Phases 3 and 4 of the extended range projectile
project, for which the related work was performed and revenue
recognized in 2005 based upon the completion of specified
milestones. Other sales represent shipping, training and
warranty revenues net of cash discounts.
Cost
of Products Sold
Cost of products sold decreased $4.9 million, or 22%, to
$17.5 million for 2005 compared to $22.5 million for
2004. As a percentage of net sales, cost of products sold
increased by 4% to 37% of net sales in 2005 compared to 33% of
net sales in 2004. The increase in cost of products sold as a
percentage of net sales is mainly attributable to lower sales
levels and increased one time and recurring costs associated
with relocation to the new facility.
Cost of products sold increased $13.1 million, or 139%, to
$22.5 million for 2004 compared to $9.4 million for
2003. However, as a percent of net sales, cost of products sold
decreased to 33% of net sales in 2004 compared to 38% of net
sales for 2003. This decrease is attributable to four factors: a
significant increase in unit sales volume, a change in product
sales mix to our higher margin TASER X26 product, an increase in
the number of direct sales to law enforcement agencies, and
improved manufacturing efficiencies. These increases in unit
sales, and the favorable change in product mix, resulted in a 4%
reduction in direct expenses as a percent of sales for 2004, to
25% in 2004 from 29% for 2003. Indirect expenses, which include
primarily depreciation, rent, supplies, freight, indirect
salaries for manufacturing support personnel, and scrapped
materials, as a percent of sales declined to 8% for 2004 from
10% for 2003.
Gross
Margin
Gross margins for the year ended December 31, 2005
decreased $15.0 million, or 33%, as compared to 2004. As a
percentage of net sales, gross margin declined to 63% in 2005
from 67% in 2004. The decline in margin percentage is
attributable to some production yield and labor utilization
issues in the first half of 2005 and reduced sales levels
allowing for less leverage of fixed manufacturing expenses.
Gross margins improved $30.1 million, or 200%, to
$45.2 million for 2004 compared to $15.1 million for
2003. As a percent of sales, gross margins improved to 67% for
2004 compared to 62% for 2003. This increase is the result of
efficiencies obtained from higher production levels and
increased sales of the higher margin TASER X26.
Sales,
General and Administrative Expenses
Sales, general and administrative expenses increased
$13.1 million, or 95%, to $27.0 million for the year
ended December 31, 2005 compared to $13.9 million in
the prior year. As a percentage of net sales, sales, general and
administrative expenses increased to 57% for 2005 from 21% for
2004. The increases are substantially attributable to the
incremental costs incurred by us in order to defend against
numerous litigation matters. Specifically, legal fees increased
by $3.7 million, lobbying and public relations costs
increased by $3.3 million and related travel costs went up
by $1.2 million. In addition to these incremental costs,
salaries and related benefits increased by $872,000,
depreciation and amortization went up by $978,000 associated
with our new premises and related equipment and approximately
$870,000 in costs were incurred related to the implementation
and testing of Section 404 Sarbanes-
34
Oxley compliance. The remainder of the total increase in sales,
general and administrative expenses in 2005 compared to 2004 was
due to growth in various other expense items such as higher
insurance premiums and increased charitable contributions,
primarily to the TASER Foundation.
Sales, general and administrative expenses increased
$6.9 million, or 99%, to $13.9 million for 2004 from
$7.0 million for 2003. However, as a percent of sales,
sales, general and administrative expenses decreased to 21% for
2004 compared to 29% for 2003. Administrative expenses were
reduced to 10% of sales for 2004, compared to 13% of sales for
2003. This reduction in administrative expenses as a percent of
sales was achieved net of significant increases in our liability
insurance, salaries, and travel expenses. Sales and marketing
expenses were also reduced to 11% of sales for 2004 compared to
16% for 2003 due to better leverage of the fixed expenses. In
total, we spent $7.2 million in promoting new sales and
servicing existing customers in 2004, compared to
$3.8 million for 2003. The most significant increases were
in the areas of public relations activities, law enforcement
training programs, and travel and salaries expenses. The
increase in public relations activities is associated with our
continuing efforts to educate the public in regard to the safety
and efficacy of our products. In addition, the training programs
presented cost us $1.1 million for 2004 compared to
$482,000 for 2003.
Research
and Development Expenses
Research and development expenses for the year ended
December 31, 2005 were $1,574,000, an increase of $750,000,
or 91% compared to the prior year. The increase is predominantly
related to salary related costs and production materials in the
development of new products such as the TASERCam and the TASER
XREPtm
(eXtended Range Electro-Muscular Projectile).
Research and development expenses increased $326,000, or 65%, to
$824,000 for 2004 compared to $498,000 for 2003. This increase
was due to higher spending on software development, the design
and prototype expenses associated with the X-Rail, and work on a
prototype of a projectile weapon platform.
Interest
Income
Interest income for the year ended December 31, 2005 was
$1,229,000, an increase of $790,000, or 180%, compared to 2004.
The increase is the result of maintaining higher investment
balances for the entire year as compared to only part of the
year in 2004, combined with a slight increase in interest rates.
The average outstanding cash, cash equivalent and investment
balance was $45.4 million in 2005 compared to
$33.4 million in 2004.
Interest income increased $389,000 to $439,000 for 2004 compared
to $50,000 for 2003. This increase in interest income resulted
from higher cash reserves invested. We had cash, cash
equivalents and investment balances of $50.0 million at
December 31, 2004 compared to $15.9 million at
December 31, 2003.
Other
Income and Expense
For the year ended December 31, 2005, we had other expense
of $60,000 compared to other income of $2,000 in the prior year.
The increased expense primarily relates to a loss on disposition
of property and equipment from our previous leased facility
following the move into our new corporate headquarters and
manufacturing facility in April 2005.
During 2004, we recorded $2,000 of other income compared to
other expense of $254,000 for 2003. This decrease was primarily
the result of a discount offered to the holders of TASRW, our
publicly traded warrants, for early exercise in 2003. Prior to
the expiration of the discount offer, 781,703 warrants were
exercised, resulting in a charge of approximately $248,000 in
2003.
Income
Taxes
The provision for income taxes for the year ended
December 31, 2005 was $1.7 million, a decrease of
$10.3 million compared to $12 million in the prior
year. While the reduction in provision is the result of lower
income before taxes, the effective tax rate increased to 60.9%
for 2005 compared to 38.9% for 2004. The increase in the
effective tax rate is primarily due to an increase in non tax
deductible expenses such as lobbying costs which results in
having a higher pretax income for tax purposes than book,
driving up the provision for income taxes. It is anticipated
that the impact of such non tax deductible items on the
effective tax rate will diminish as our results improve in the
future.
35
The provision for income tax increased $9.1 million to
$12.0 million for 2004 compared to $2.9 million for
2003. This increase was the result of higher income before taxes
for 2004. The effective income tax rate for 2004 was 38.9%
compared to 39.5% for 2003. The decrease in the effective tax
rate was due a decrease in non-deductible lobbying expenses, as
a percentage of net income, from the prior year.
During 2005, we received approximately $2.1 million of tax
benefits from the exercise of stock options and subsequent sale
of the underlying stock compared to $37.3 million and
$4.0 million for 2004 and 2003, respectively. At
December 31, 2005, we had an income tax receivable in the
amount of $44,000 compared to $53,000 at December 31, 2004.
The net deferred tax asset as of December 31, 2005 was
$26.9 million compared to $26.4 million at
December 31, 2004.
Net
Income
Net income for the year ended December 31, 2005 was
$1.1 million, a decrease of $17.8 million or 94%
compared to the same period a year ago. The decrease is
primarily attributable to reduced sales levels and increased
legal and professional fees as previously discussed. Income per
basic share decreased $0.31 to $0.02 per share in 2005
compared to $0.33 per share in 2004. Income per diluted
share also decreased $0.28 to $0.02 per share in 2005
compared to $0.30 per share in 2004.
Net income increased $14.4 million to $18.9 million
for 2004 compared to $4.5 million for 2003. The increase in
net income resulted primarily from the increased sales volume
for the year and better leverage of our fixed costs. Income per
basic share increased $0.21 to $0.33 in 2004 compared to $0.12
for 2003. Income per diluted share also increased $0.20 to
$0.30 per share in 2004 compared to $0.10 for 2003.
Liquidity
and Capital Resources
Liquidity
Working capital was $34.9 million, $51.1 million and
$22.5 million at December 31, 2005, 2004 and 2003,
respectively.
Operating activities generated cash of $1.1 million,
$30.3 million and $4.4 million during 2005, 2004 and
2003, respectively. The decrease in cash flow from operating
activities in 2005 when compared to 2004 was primarily related
to the $17.8 million decrease in net income, a
$9.2 million decrease in the cash benefit attributable to
stock option exercises and changes in other operating assets and
liabilities. Net cash provided by operating activities in 2005
of $1.1 million was mainly comprised of net income of
$1.1 million, a reduction in accounts receivable of
$3.0 million due to lower sales levels in the fourth
quarter of 2005 compared to 2004, depreciation and amortization
expense of $1.7 million and stock option tax benefits of
$2.1 million. These were partially offset by an increased
investment in inventory of $3.4 million created by reduced
sales levels in 2005 and vendor buyouts of TASER-specific parts,
a reduction in accounts payable and accrued liabilities of
$2.1 million primarily due to differences in the timing of
payments and increased prepaids and other assets of
$1.2 million mainly created by higher prepaid insurance
premiums.
During 2004, we generated $30.3 million in cash from
operations compared to the $4.4 million generated from
operations in 2003. The increase in cash provided by operations
was primarily due to three key factors: the $18.9 million
of net income generated, $11.3 million of net tax benefits
derived from the exercise of stock options, and an increase to
accounts payable and other short term liabilities of
$5.6 million. These increases were partially off-set by the
use of cash from an increase in accounts receivable of
$3.1 million during the year, and an increase in the amount
of our investment in inventory of $3.7 million.
Investing activities used cash of $0.2 million,
$46.8 million and $4.2 million of cash in investing
during 2005, 2004 and 2003, respectively. Net cash used by
investing activities during 2005 was mainly the result of
$7.8 million invested in property and equipment
substantially all of which is attributable to the final stages
of constructing a new 100,000 square foot manufacturing and
administrative facility in Scottsdale, Arizona and on the
related production and computer equipment and furniture and
fixtures for the new building. This was substantially offset by
net proceeds received of $7.7 million from the purchase and
sale of short and long term investments. Of the funds invested
in 2004, $8.7 million was used for the construction of the
aforementioned new facility and $1.7 million was used to
purchase and install new computer equipment and software
including a new ERP system. We also invested $35.3 million
in short and long term investments during 2004.
36
Cash provided by financing activities was $0.7 million,
$15.4 million and $12.2 million for 2005, 2004 and
2003, respectively. During 2005, $0.7 million was generated
from the exercise of stock options. Of the $15.4 million
generated from financing activities in 2004, $13.1 million
resulted from the exercise of stock options and
$2.5 million resulted from the exercise of both public and
underwriter warrants. We used $250,000 of the funds generated to
pay off our notes payable.
Capital
Resources
On December 31, 2005, we had cash and investments of
$43.9 million and no long term debt outstanding.
Additionally, we generated net income of $1.1 million in
2005 despite facing significant business challenges,
$18.9 million in 2004, and $4.5 million in 2003. We
believe that our existing cash balances and anticipated cash
flows from operations will be sufficient to meet our operating,
acquisition and capital requirements for at least the next
12 months.
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 June 30, 2008 and requires
monthly payments of interest only. At December 31, 2005,
there was a calculated availability of $4.2 million based
on the borrowing base defined with the lender which is based on
our eligible accounts receivable and inventory. However, there
was no outstanding balance under the line of credit at
December 31, 2005, and no borrowings under the line as of
the date of this filing.
We believe that our balance of cash and investments of
$43.9 million as of December 31, 2005, together with
cash expected to be generated from operations, will be adequate
to fund our operations for at least the next 12 months.
However, we may require additional resources to expedite
manufacturing of new and existing technologies in order to meet
possible demand for our products. Although we believe financing
will be available at terms favorable to us, both through our
existing credit lines and possible additional equity financing,
there is no assurance that such funding will be available, or on
terms acceptable to us.
Contractual
Obligations
The following table outlines our future contractual financial
obligations, in thousands, as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
5 years
|
|
|
Operating Leases
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Capital Leases
|
|
|
137
|
|
|
|
50
|
|
|
|
81
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
141
|
|
|
$
|
54
|
|
|
$
|
81
|
|
|
$
|
6
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off
Balance Sheet Arrangements
We had no off balance sheet arrangements as of December 31,
2005.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
Rate Risk
We invest in a limited number of financial instruments,
consisting principally of investments in high credit quality
debt securities, denominated in United States dollars.
We account for our investment instruments in accordance with
Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, (SFAS No. 115). All of
the cash equivalents and marketable securities are treated as
held-to-maturity
under SFAS No. 115. Investments in fixed rate interest
earning instruments carry a degree of interest rate risk as
their market value may be adversely impacted due to a rise in
interest rates. As a result we may suffer losses in principal if
forced to sell securities that decline in market value due to
changes in interest rates. However, because we classify our debt
securities as
37
held-to-maturity,
no gains or losses are recognized due to changes in interest
rates. These securities are reported at amortized cost, which
approximates fair value.
As of December 31, 2005, we performed a sensitivity
analysis on our fixed rate financial investments. According to
our analysis, an increase in interest rates of 50 basis
points would result in a decrease in the fair market values for
these investments of approximately $116,000 and an decrease in
interest rates of 50 basis points would result in an
approximately $116,000 increase in fair market value.
Exchange
Rate Risk
We consider our direct exposure to foreign exchange rate
fluctuations to be minimal. Currently, sales to customers
provide for pricing and payment in United States dollars, and
therefore are not subject to exchange rate fluctuations. To
date, we have not engaged in any currency hedging activities,
although we may do so in the future. Fluctuations in currency
exchange rates could harm our business in the future.
|
|
Item 8.
|
Financial
Statements and Supplemental Data
|
The information required by this Item is included herein by
reference to the financial statements beginning on
page F-1.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Attached as exhibits to this Form 10-K are certifications
of the Companys Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), which are required in accordance with
Rule 13a-14 of the Securities Exchange Act of 1934, as
amended (the Exchange Act). This Controls and
Procedures section includes information concerning the
controls and controls evaluation referred to in the
certifications. The report of Grant Thornton LLP, our
independent registered public accounting firm, regarding its
audit of the Companys internal control over financial
reporting and of managements assessment of internal
control over financial reporting is included herein. This
section should be read in conjunction with the certifications
and the Grant Thornton report for a more complete understanding
of the topics presented.
Status of
Remediation Efforts with Respect to Previously Disclosed
Material Weaknesses
In our filing on
Form 10-Q
for the period ended September 30, 2005, we reported the
two material weaknesses described below. We have also described
below our remediation efforts with respect to such weaknesses.
|
|
|
Restatement
of previously issued financial statements due to an error in
those financial statements which resulted from the incorrect
accrual of legal and other professional fees.
|
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. As a result, certain invoices were recorded in the
incorrect period. Correction of these errors resulted 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 was a corresponding decrease/increase in net income for
the first and second quarters resulting from the change in
expenses. The restatement had no impact on revenues for the
periods. Amended
Forms 10-Q
for the quarters ended March 31, 2005 and June 30,
2005 were filed to reflect the restatement.
With respect to the restatement described above, we 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
38
Company Accounting Oversight Board constituted a material
weakness in our internal control over financial reporting.
We consulted with and advised our Audit Committee of our Board
of Directors of our determination.
In response to this deficiency 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 implemented 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 an
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.
Inadequate
resources in accounting and financial statement
preparation
We identified another material weakness in our
internal control over financial reporting in that we do not have
adequate resources with respect to accounting and financial
statement preparation particularly related to financial
statement footnote preparation. 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 detected or
prevented in the future. We consulted with and advised our Audit
Committee of our Board of Directors of our determination.
Remediation
efforts
In response to this deficiency which resulted in the
material weakness described above, management
engaged additional resources to assist with such activities by
hiring a manager of external reporting.
Even though management believes it has implemented remediation
efforts in regards to the two material weaknesses described
above, there is insufficient time to test operation
effectiveness to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting
principles.
Evaluation
of disclosure controls and procedures
As of the end of the period covered by this Annual Report on
Form 10-K,
as required by paragraph (b) of
Rule 13a-15
or
Rule 15d-15
under the Securities Exchange Act of 1934, as amended, we
evaluated under the supervision of our Chief Executive Officer
and our Chief Financial Officer, the effectiveness of our
disclosure controls and procedures (as defined in
Rules 13a-15(e)
or 15d-15(e)
of the Securities Exchange Act of 1934, as amended). Based on
this evaluation, and the fact that the material weaknesses
described above are still being remediated, our Chief Executive
Officer and our Chief Financial Officer have concluded that our
disclosure controls and procedures are not effective to ensure
that the 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.
39
Management
report on internal control over financial reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting to provide
reasonable assurance regarding the reliability of our financial
reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally accepted
accounting principles. Internal control over financial reporting
includes those policies and procedures that (i) pertain to
the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S.
generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or
disposition of the companys assets that could have a
material effect on the financial statements.
Management assessed our internal control over financial
reporting as of December 31, 2005, the end of our fiscal
year. Management based its assessment on criteria established in
Internal Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission. Managements assessment included evaluation of
such elements as the design and operating effectiveness of key
financial reporting controls, process documentation, accounting
policies and our overall control environment. This assessment is
supported by testing and monitoring performed by both our
Internal Audit organization and our Finance and Enterprise
Services organization.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weaknesses have been identified and included
in managements assessment.
|
|
|
|
|
Management did not maintain controls to record appropriate
accruals related to the professional fees in the appropriate
accounting period which resulted in the restatement of their
financial statements for the quarters ending March 31, 2005 and
June 30, 2005.
|
|
|
|
Management did not have adequate resources in accounting and
financial statement preparation particularly with respect to
financial statement footnote preparation.
|
Conclusion
Based on the material weaknesses described above, management has
concluded that our internal control over financial reporting
were not effective as of the end of the fiscal year. We reviewed
the results of managements assessment with the Audit
Committee of our Board of Directors.
Our independent registered public accounting firm, Grant
Thornton LLP, who also audited our consolidated financial
statements, audited managements assessment and
independently assessed the effectiveness of our internal control
over financial reporting. Grant Thornton LLP has issued their
attestation report, which is included in Part II,
Item 8 of this
Form 10-K.
Changes
in internal control over financial reporting
During the three months ended December 31, 2005, there was
no change in our internal control over financial reporting
identified in connection with the evaluation required by
paragraph (d) of
Rule 13a-15
or
Rule 15d-15
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting, except as noted above.
40
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Shareholders of TASER International, Inc.
We have audited managements assessment, included in the
accompanying managements report, that TASER International,
Inc. (the Company) (a Delaware Corporation) did not
maintain effective internal control over financial reporting as
of December 31, 2005, because of the effect of the material
weakness identified in managements assessment, based on
criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of the companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weaknesses have been identified and included
in managements assessment.
|
|
|
|
|
Management did not maintain controls to record appropriate
accruals related to the professional fees in the appropriate
accounting period which resulted in the restatement of their
financial statements for the quarters ending March 31, 2005
and June 30, 2005.
|
|
|
|
Management did not have adequate resources in accounting and
financial statement preparation particularly with respect to
financial statement footnote preparation.
|
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
the balance sheet of TASER International, Inc. as of
December 31, 2005, and the related statements of earnings,
stockholders equity, and cash flows for the year then
ended. The aforementioned material weaknesses were considered in
determining the nature, timing, and extent of audit tests
applied in our audit of the 2005 financial statements, and this
report does not affect our report dated March 16, 2006,
which expressed an unqualified opinion on those financial
statements.
In our opinion, managements assessment that the Company
did not maintain effective internal control over financial
reporting as of December 31, 2005, is fairly stated, in all
material respects, based on based on criteria established in
Internal Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Also in our opinion, because of the effect of
the material weaknesses described above on the achievement of
the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting
as of December 31, 2005, based on criteria established in
Internal Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
/s/ GRANT THORNTON LLP
Phoenix, Arizona
March 16, 2006
41
Changes
in internal control over financial reporting
During the three months ended December 31, 2005, there was
no change in our internal control over financial reporting
identified in connection with the evaluation required by
paragraph (d) of
Rule 13a-15
or
Rule 15d-15
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting, except as noted above.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
The information concerning the identification and business
experience of directors and identification of our audit
committee financial expert is incorporated herein by reference
to the information to be set forth in our definitive proxy
statement for the 2006 Annual Meeting of Stockholders under the
heading Election of Directors, which proxy statement
we expect to file with the Securities and Exchange Commission
within 120 days after the end of our fiscal year ended
December 31, 2005.
The information concerning the identification and business
experience of our executive officers is incorporated herein by
reference to the information to be set forth in our definitive
proxy statement for the 2006 Annual Meeting of Stockholders
under the heading Executive Officers, which proxy
statement we expect to file with the Securities and Exchange
Commission within 120 days after the end of our fiscal year
ended December 31, 2005.
The information concerning compliance with Section 16(a) of
the Exchange Act is incorporated herein by reference to the
information to be set forth in our definitive proxy statement
for the 2006 Annual Meeting of Stockholders under the heading
Security Ownership of Certain Beneficial Owners and
Management Section 16(a) Beneficial
Ownership Reporting Compliance, which proxy statement we
expect to file with the Securities and Exchange Commission
within 120 days after the end of our fiscal year ended
December 31, 2005.
The information concerning significant employees and family
relationships is incorporated herein by reference to the
information to be set forth in our definitive proxy statement
for the 2006 Annual Meeting of Stockholders under the heading
Significant Employees and Family Relationships,
which proxy statement we expect to file with the Securities and
Exchange Commission within 120 days after the end of our
fiscal year ended December 31, 2005.
The information concerning the Companys code of ethics is
incorporated herein by reference to the information to be set
forth in our definitive proxy statement for the 2006 Annual
Meeting of Stockholders under the heading Code of
Ethics, which proxy statement we expect to file with the
Securities and Exchange Commission within 120 days after
the end of our fiscal year ended December 31, 2005.
|
|
Item 11.
|
Executive
Compensation
|
The information concerning executive compensation is
incorporated herein by reference to the information to be set
forth in our definitive proxy statement for the 2006 Annual
Meeting of Stockholders under the heading Executive
Compensation, which proxy statement we expect to file with
the Securities and Exchange Commission within 120 days
after the end of our fiscal year ended December 31, 2005.
The information concerning compensation of directors is
incorporated herein by reference to the information to be set
forth in our definitive proxy statement for the 2006 Annual
Meeting of Stockholders under the heading Compensation of
Directors, which proxy statement we expect to file with
the Securities and Exchange Commission within 120 days
after the end of our fiscal year ended December 31, 2005.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information concerning security ownership of certain
beneficial owners and management is incorporated herein by
reference to the information to be set forth in our definitive
proxy statement for the 2006 Annual Meeting of Stockholders
under the heading Security Ownership of Certain Beneficial
Owners and Management, which
42
proxy statement we expect to file with the Securities and
Exchange Commission within 120 days after the end of our
fiscal year ended December 31, 2005.
Equity
Compensation Plan Information
The following table provides details of our equity compensation
plans at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Number of Securities
|
|
|
|
|
|
Number of
|
|
|
|
Authorized for
|
|
|
to be Issued Upon
|
|
|
|
|
|
Securities
|
|
|
|
Issuance
|
|
|
Exercise of
|
|
|
Weighted Average
|
|
|
Remaining
|
|
|
|
Under the
|
|
|
Outstanding Options,
|
|
|
Exercise Price of
|
|
|
Available for
|
|
Plan Category
|
|
Plan
|
|
|
Warrants or Rights
|
|
|
Outstanding Options
|
|
|
Future Issuance
|
|
|
Equity compensation plans approved
by security holders
|
|
|
23,352,500
|
|
|
|
6,148,791
|
|
|
$
|
4.92
|
|
|
|
5,381,980
|
|
Equity compensation plans not
approved by security holders
|
|
|
0
|
|
|
|
0
|
|
|
$
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
23,352,500
|
|
|
|
6,148,791
|
|
|
$
|
4.92
|
|
|
|
5,381,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information concerning certain relationships and related
transactions is incorporated herein by reference to the
information to be set forth in our definitive proxy statement
for the 2006 Annual Meeting of Stockholders under the heading
Certain Relationships and Related Transactions,
which proxy statement we expect to file with the Securities and
Exchange Commission within 120 days after the end of our
fiscal year ended December 31, 2005.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information covering principal accountant fees and services
required by this item is incorporated by reference to our Proxy
Statement under the heading Independent Public
Accountants.
The information concerning pre-approval policies for audit and
non-audit services required by this item is incorporated by
reference to our Proxy Statement, under the heading Audit
Committee Pre-Approval and Permissible Non-Audit Services of
Independent Public Accountants.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Companys Certificate of
Incorporation, as amended (incorporated by reference to
Exhibit 3.1 to Registration Statement on
Form SB-2,
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
|
3
|
.2
|
|
Companys Bylaws, as amended
(incorporated by reference to Exhibit 3.2 to Registration
Statement on
Form SB-2,
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
|
3
|
.3
|
|
Certificate of Amendment to
Certificate of Incorporation dated September 1, 2004
(incorporated by reference to Exhibit 3.3 to the Annual
Report on
Form 10-KSB,
filed March 31, 2005)
|
|
4
|
.1
|
|
Reference is made to
pages 1 4 of Exhibit 3.1 and
pages 1 5 and 12 14 of
Exhibit 3.2
|
|
4
|
.2
|
|
Form of Common Stock Certificate
(incorporated by reference to Exhibit 4.2 to Registration
Statement on
Form SB-2,
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
|
10
|
.1*
|
|
Employment Agreement with Patrick
W. Smith, dated July 1, 1998 (incorporated by reference to
Exhibit 10.1 to Registration Statement on
Form SB-2
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
|
10
|
.2*
|
|
Employment Agreement with Thomas
P. Smith, dated November 15, 2000 (incorporated by
reference to Exhibit 10.2 to Registration Statement on
Form SB-2
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
|
10
|
.3*
|
|
Employment Agreement with Kathleen
C. Hanrahan, dated November 15, 2000 (incorporated by
reference to Exhibit 10.3 to Registration Statement on
Form SB-2
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
43
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.4*
|
|
Form of Indemnification Agreement
between the Company and its directors (incorporated by reference
to Exhibit 10.4 to Registration Statement on
Form SB-2
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
|
10
|
.5*
|
|
Form of Indemnification Agreement
between the Company and its officers (incorporated by reference
to Exhibit 10.5 to Registration Statement on
Form SB-2
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
|
10
|
.6*
|
|
1999 Employee Stock Option Plan
(incorporated by reference to Exhibit 10.6 to Registration
Statement on
Form SB-2,
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
|
10
|
.7*
|
|
2001 Stock Option Plan
(incorporated by reference to Exhibit 10.7 to Registration
Statement on
Form SB-2,
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
|
10
|
.8*
|
|
Form of Warrant issued to Bruce
Culver and Phil Smith (incorporated by reference to
Exhibit 10.8 to Registration Statement on
Form SB-2
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
|
10
|
.9
|
|
Lease between the Company and
Norton P. Remes and Joan A. Remes Revocable Trust, dated
November 17, 2000 (incorporated by reference to
Exhibit 10.14 to Registration Statement on
Form SB-2
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
|
10
|
.10
|
|
Form of Sales Representative
Agreement with respect to services by and between the Company
and Sales Representatives (incorporated by reference to
Exhibit 10.15 to the Annual Report on
Form 10-KSB,
filed March 15, 2002)
|
|
10
|
.11
|
|
Lease Agreement, dated
April 17, 2001, payable to GE Capital Corporation in the
amount of $37,945 (incorporated by referenced to
Exhibit 10.13 to the Annual Report on
Form 10-KSB,
filed March 15, 2002)
|
|
10
|
.12*
|
|
Employment Agreement with Douglas
E. Klint, dated December 15, 2002 (incorporated by
referenced to Exhibit 10.14 to the Annual Report on
Form 10-KSB,
filed March 15, 2002)
|
|
10
|
.13
|
|
Credit Agreement dated
July 13, 2004, between the Company and Bank One
(incorporated by reference to Exhibit 10.13 to the Annual
Report on
Form 10-KSB,
filed March 31, 2005)
|
|
10
|
.14*
|
|
Employment Agreement with Daniel
Behrendt, dated April 28, 2004 (incorporated by reference
to Exhibit 10.14 to the Annual Report on
Form 10-KSB,
filed March 31, 2005)
|
|
10
|
.15*
|
|
2004 Stock Option Plan
(incorporated by reference to Exhibit 10.15 to the Annual
Report on
Form 10-KSB,
filed March 31, 2005)
|
|
10
|
.16*
|
|
TASER 2004 Outside Directors Stock
Option Plan (incorporated by reference to Exhibit 10.16 to
the Annual Report on
Form 10-KSB,
filed March 31, 2005)
|
|
14
|
.1
|
|
Code of Ethics, as adopted by the
Companys Board of Directors (incorporated by reference to
Exhibit 14.1 to the Annual Report on
Form 10-KSB,
filed March 31, 2005)
|
|
23
|
.1
|
|
Consent of Grant Thornton, LLP,
independent registered public accounting firm
|
|
23
|
.2
|
|
Consent of Deloitte and Touche,
LLP, independent registered public accounting firm
|
|
31
|
.1
|
|
Chief Executive Officer
Certification pursuant to
Rule 13a-14(a)
or
Rule 15d-14(a)
|
|
31
|
.2
|
|
Chief Financial Officer
Certification pursuant to
Rule 13a-14(a)
or
Rule 15d-14(a)
|
|
32
|
.1
|
|
Chief Executive Officer
Certification pursuant to 18 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 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
* |
|
Management contract or compensatory plan or arrangement |
44
Financial
Statements:
The Financial Statements listed below are located after the
signature page and begin on
page F-1.
|
|
|
|
|
|
|
|
F-1
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
Schedule
II Valuation and Qualifying Accounts
|
|
|
F-31
|
|
45
SIGNATURES
In accordance with the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report on
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized.
TASER INTERNATIONAL, INC.
Date: March 16, 2006
Patrick W. Smith
Chief Executive Officer
Date: March 16, 2006
|
|
|
|
By:
|
/s/ DANIEL
M. BEHRENDT
|
Daniel M. Behrendt
Chief Financial Officer
(Principal Financial and Accounting Officer)
In accordance with the Exchange Act, this report has been signed
by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
/s/ PATRICK
W. SMITH
Patrick
W. Smith
|
|
Director
|
|
March 16, 2006
|
|
|
|
|
|
/s/ THOMAS
P. SMITH*
Thomas
P. Smith
|
|
Director
|
|
March 16, 2006
|
|
|
|
|
|
/s/ PHILLIPS
W. SMITH*
Phillips
W. Smith
|
|
Director
|
|
March 16, 2006
|
|
|
|
|
|
/s/ MATTHEW
R. MCBRADY*
Matthew
R. McBrady
|
|
Director
|
|
March 16, 2006
|
|
|
|
|
|
/s/ BRUCE
R. CULVER*
Bruce
R. Culver
|
|
Director
|
|
March 16, 2006
|
|
|
|
|
|
/s/ JUDY
MARTZ*
Judy
Martz
|
|
Director
|
|
March 16, 2006
|
|
|
|
|
|
/s/ MARK
W. KROLL*
Mark
W. Kroll
|
|
Director
|
|
March 16, 2006
|
|
|
|
|
|
*By:/s/ PATRICK
W. SMITH
Patrick
W. Smith, Attorney in Fact
|
|
|
|
|
46
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
TASER International, Inc.
We have audited the accompanying balance sheet of TASER
International, Inc. (the Company) as of
December 31, 2005 and the related statements of income,
stockholders equity, and cash flows for the year ended
December 31, 2005. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes, assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements, referred to above,
present fairly, in all material respects, the financial position
of TASER International, Inc. as of December 31, 2005, and
the results of its operations and its cash flows for the year
ended December 31, 2005 in conformity with accounting
principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the
Public Company Oversight Board (United States), the
effectiveness of TASER International Inc.s internal
control over financial reporting as of December 31, 2005,
based on criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our reported dated March 16, 2006 expressed an
unqualified opinion on managements assessment of the
effectiveness of the Companys internal control over
financial reporting and an adverse opinion on the effectiveness
of the Companys internal control over financial reporting
because of material weaknesses.
Grant Thornton LLP
Phoenix, Arizona
March 16, 2006
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
TASER International, Inc.
Scottsdale, Arizona
We have audited the accompanying balance sheet of TASER
International, Inc. (the Company) as of
December 31, 2004, and the related statements of income,
stockholders equity, and cash flows for the years ended
December 31, 2004 and 2003. Our audits also included the
financial statement schedule listed in Item 15. These
financial statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. An audit includes
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of TASER
International, Inc. as of December 31, 2004 and the results
of its operations and its cash flows for the years ended
December 31, 2004 and 2003 in conformity with accounting
principles generally accepted in the United States of America.
Also in our opinion, such financial statement schedule, when
considered in relation to the financial statements taken as a
whole, presents fairly in all material respects the information
set forth therein.
As discussed in Note 14, the accompanying 2004 financial
statements have been restated.
/s/ DELOITTE &
TOUCHE LLP
Deloitte & Touche LLP
Phoenix, Arizona
March 31, 2005
(May 23, 2005 as to the effects of the restatement
discussed in Note 14)
F-2
TASER
INTERNATIONAL, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,351,909
|
|
|
$
|
14,757,159
|
|
Short-term investments
|
|
|
|
|
|
|
17,201,477
|
|
Accounts receivable, net of
allowance of $110,882 and $120,000 in 2005 and 2004, respectively
|
|
|
5,422,027
|
|
|
|
8,460,112
|
|
Inventory
|
|
|
10,283,390
|
|
|
|
6,840,051
|
|
Prepaids and other assets
|
|
|
2,795,576
|
|
|
|
1,639,734
|
|
Insurance settlement proceeds
receivable
|
|
|
575,000
|
|
|
|
|
|
Income tax receivable
|
|
|
44,454
|
|
|
|
52,973
|
|
Deferred income tax asset
|
|
|
6,955,500
|
|
|
|
11,083,422
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
42,427,856
|
|
|
|
60,034,928
|
|
Long-term investments
|
|
|
27,548,120
|
|
|
|
18,071,815
|
|
Property and equipment, net
|
|
|
21,061,754
|
|
|
|
14,756,512
|
|
Deferred income tax asset
|
|
|
19,959,681
|
|
|
|
15,310,207
|
|
Intangible assets, net
|
|
|
1,340,783
|
|
|
|
1,279,116
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
112,338,194
|
|
|
$
|
109,452,578
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Current portion of capital lease
obligations
|
|
$
|
43,111
|
|
|
$
|
4,642
|
|
Accounts payable and accrued
liabilities
|
|
|
6,285,274
|
|
|
|
8,427,711
|
|
Current portion of deferred revenue
|
|
|
561,165
|
|
|
|
399,421
|
|
Deferred insurance settlement
proceeds
|
|
|
476,515
|
|
|
|
|
|
Customer deposits
|
|
|
190,256
|
|
|
|
102,165
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
7,556,321
|
|
|
|
8,933,939
|
|
Capital lease obligations, net of
current portion
|
|
|
76,188
|
|
|
|
|
|
Deferred revenue, net of current
portion
|
|
|
839,983
|
|
|
|
607,856
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,472,492
|
|
|
|
9,541,795
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.00001 par
value per share; 25 million shares authorized;
0 shares issued and outstanding at December 31, 2005
and 2004
|
|
|
|
|
|
|
|
|
Common stock, $0.00001 par
value per share; 200 million shares authorized; 61,938,654
and 60,992,156 shares issued and outstanding at
December 31, 2005 and 2004, respectively
|
|
|
619
|
|
|
|
609
|
|
Additional paid-in capital
|
|
|
78,742,862
|
|
|
|
75,850,810
|
|
Retained earnings
|
|
|
25,122,221
|
|
|
|
24,059,364
|
|
|
|
|
|
|
|
|
|
|
Total stockholders
equity
|
|
|
103,865,702
|
|
|
|
99,910,783
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
112,338,194
|
|
|
$
|
109,452,578
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-3
TASER
INTERNATIONAL, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net Sales
|
|
$
|
47,694,181
|
|
|
$
|
67,639,879
|
|
|
$
|
24,455,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Products Sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct manufacturing expense
|
|
|
12,843,816
|
|
|
|
16,898,559
|
|
|
|
6,973,757
|
|
Indirect manufacturing expense
|
|
|
4,667,421
|
|
|
|
5,556,937
|
|
|
|
2,428,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Products Sold
|
|
|
17,511,237
|
|
|
|
22,455,496
|
|
|
|
9,402,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
30,182,944
|
|
|
|
45,184,383
|
|
|
|
15,052,890
|
|
Sales, general and administrative
expenses
|
|
|
27,058,242
|
|
|
|
13,880,322
|
|
|
|
6,973,721
|
|
Research and development expenses
|
|
|
1,574,048
|
|
|
|
823,593
|
|
|
|
498,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
1,550,654
|
|
|
|
30,480,468
|
|
|
|
7,580,699
|
|
Interest income
|
|
|
1,229,044
|
|
|
|
439,450
|
|
|
|
50,375
|
|
Interest expense
|
|
|
(4,208
|
)
|
|
|
(1,485
|
)
|
|
|
(9,307
|
)
|
Other income (expense), net
|
|
|
(59,772
|
)
|
|
|
2,309
|
|
|
|
(254,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income
taxes
|
|
|
2,715,718
|
|
|
|
30,920,742
|
|
|
|
7,367,291
|
|
Provision for income taxes
|
|
|
1,652,861
|
|
|
|
12,039,000
|
|
|
|
2,913,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,062,857
|
|
|
$
|
18,881,742
|
|
|
$
|
4,453,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common and common
equivalent shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
0.33
|
|
|
$
|
0.12
|
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
0.30
|
|
|
$
|
0.10
|
|
Weighted average number of common
and common equivalent shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
61,303,939
|
|
|
|
57,232,329
|
|
|
|
37,889,640
|
|
Diluted
|
|
|
63,556,246
|
|
|
|
62,319,590
|
|
|
|
46,598,312
|
|
The accompanying notes are an integral part of these financial
statements.
F-4
TASER
INTERNATIONAL, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
|
Balance, December 31, 2002
|
|
|
33,712,716
|
|
|
$
|
337
|
|
|
$
|
5,290,332
|
|
|
$
|
723,932
|
|
|
$
|
6,014,601
|
|
Exercise of stock options
|
|
|
2,941,692
|
|
|
|
29
|
|
|
|
1,819,541
|
|
|
|
|
|
|
|
1,819,570
|
|
Exercise of warrants
|
|
|
99,996
|
|
|
|
1
|
|
|
|
1,832
|
|
|
|
|
|
|
|
1,833
|
|
Exercise of underwriter warrants
|
|
|
1,290,504
|
|
|
|
13
|
|
|
|
947,005
|
|
|
|
|
|
|
|
947,018
|
|
Exercise of public warrants
|
|
|
12,653,916
|
|
|
|
127
|
|
|
|
10,051,541
|
|
|
|
|
|
|
|
10,051,668
|
|
Stock options granted for payment
of consulting fees
|
|
|
|
|
|
|
|
|
|
|
177,142
|
|
|
|
|
|
|
|
177,142
|
|
Income tax effect of stock options
exercised
|
|
|
|
|
|
|
|
|
|
|
3,961,928
|
|
|
|
|
|
|
|
3,961,928
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,453,690
|
|
|
|
4,453,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
50,698,824
|
|
|
|
507
|
|
|
|
22,249,321
|
|
|
|
5,177,622
|
|
|
|
27,427,450
|
|
Exercise of stock options
|
|
|
6,912,892
|
|
|
|
68
|
|
|
|
13,084,744
|
|
|
|
|
|
|
|
13,084,812
|
|
Exercise of private warrants
|
|
|
270,208
|
|
|
|
3
|
|
|
|
74,997
|
|
|
|
|
|
|
|
75,000
|
|
Exercise of public warrants
|
|
|
3,110,232
|
|
|
|
31
|
|
|
|
2,470,034
|
|
|
|
|
|
|
|
2,470,065
|
|
Stock options granted for payment
of consulting fees
|
|
|
|
|
|
|
|
|
|
|
625,714
|
|
|
|
|
|
|
|
625,714
|
|
Income tax effect of stock options
exercised
|
|
|
|
|
|
|
|
|
|
|
37,346,000
|
|
|
|
|
|
|
|
37,346,000
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,881,742
|
|
|
|
18,881,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
60,992,156
|
|
|
|
609
|
|
|
|
75,850,810
|
|
|
|
24,059,364
|
|
|
|
99,910,783
|
|
Exercise of stock options
|
|
|
946,498
|
|
|
|
10
|
|
|
|
749,493
|
|
|
|
|
|
|
|
749,503
|
|
Income tax effect of stock options
exercised
|
|
|
|
|
|
|
|
|
|
|
2,142,559
|
|
|
|
|
|
|
|
2,142,559
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,062,857
|
|
|
|
1,062,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
61,938,654
|
|
|
$
|
619
|
|
|
$
|
78,742,862
|
|
|
$
|
25,122,221
|
|
|
$
|
103,865,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-5
TASER
INTERNATIONAL, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,062,857
|
|
|
$
|
18,881,742
|
|
|
$
|
4,453,690
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of assets
|
|
|
56,872
|
|
|
|
|
|
|
|
15,873
|
|
Depreciation and amortization
|
|
|
1,712,738
|
|
|
|
551,793
|
|
|
|
393,568
|
|
Provision for doubtful accounts
|
|
|
26,620
|
|
|
|
90,000
|
|
|
|
12,908
|
|
Provision for excess and obsolete
inventory
|
|
|
117,000
|
|
|
|
36,027
|
|
|
|
55,934
|
|
Provision for warranty
|
|
|
394,007
|
|
|
|
361,058
|
|
|
|
302,165
|
|
Compensatory stock options and
warrants
|
|
|
|
|
|
|
625,714
|
|
|
|
177,142
|
|
Deferred insurance settlement
proceeds
|
|
|
(98,485
|
)
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
(521,552
|
)
|
|
|
727,892
|
|
|
|
(369,627
|
)
|
Stock option tax benefit
|
|
|
2,142,559
|
|
|
|
11,321,554
|
|
|
|
3,317,338
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
3,011,465
|
|
|
|
(3,145,779
|
)
|
|
|
(4,529,099
|
)
|
Inventory
|
|
|
(3,560,339
|
)
|
|
|
(3,750,104
|
)
|
|
|
(847,099
|
)
|
Prepaids and other assets
|
|
|
(1,155,842
|
)
|
|
|
(1,102,919
|
)
|
|
|
(423,066
|
)
|
Income tax receivable
|
|
|
8,519
|
|
|
|
239,348
|
|
|
|
(217,369
|
)
|
Accounts payable and accrued
liabilities
|
|
|
(2,610,676
|
)
|
|
|
4,654,004
|
|
|
|
1,743,324
|
|
Deferred revenue
|
|
|
393,871
|
|
|
|
897,487
|
|
|
|
109,790
|
|
Customer deposits
|
|
|
88,090
|
|
|
|
(83,637
|
)
|
|
|
171,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
1,067,704
|
|
|
|
30,304,180
|
|
|
|
4,366,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
(87,829,476
|
)
|
|
|
(35,273,292
|
)
|
|
|
|
|
Proceeds from investments
|
|
|
95,554,648
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(7,812,220
|
)
|
|
|
(11,322,299
|
)
|
|
|
(3,651,110
|
)
|
Purchases of intangible assets
|
|
|
(104,066
|
)
|
|
|
(195,397
|
)
|
|
|
(565,110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(191,114
|
)
|
|
|
(46,790,988
|
)
|
|
|
(4,216,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments under capital leases
|
|
|
(31,343
|
)
|
|
|
(14,236
|
)
|
|
|
(34,026
|
)
|
Payments on notes payable
|
|
|
|
|
|
|
(250,000
|
)
|
|
|
(250,000
|
)
|
Payments on revolving line of credit
|
|
|
|
|
|
|
|
|
|
|
(385,000
|
)
|
Proceeds from warrants exercised
|
|
|
|
|
|
|
2,545,065
|
|
|
|
11,000,519
|
|
Proceeds from options exercised
|
|
|
749,503
|
|
|
|
13,084,812
|
|
|
|
1,819,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
718,160
|
|
|
|
15,365,641
|
|
|
|
12,151,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and
Cash Equivalents
|
|
|
1,594,750
|
|
|
|
(1,121,167
|
)
|
|
|
12,301,389
|
|
Cash and Cash Equivalents,
beginning of period
|
|
|
14,757,159
|
|
|
|
15,878,326
|
|
|
|
3,576,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, end of
period
|
|
$
|
16,351,909
|
|
|
$
|
14,757,159
|
|
|
$
|
15,878,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
103
|
|
|
$
|
1,364
|
|
|
$
|
9,922
|
|
Cash (refunded) paid for income
taxes, net
|
|
$
|
(19,627
|
)
|
|
$
|
(264,026
|
)
|
|
$
|
202,410
|
|
Non Cash
Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance settlement proceeds
receivable
|
|
$
|
575,000
|
|
|
$
|
|
|
|
$
|
|
|
Property and equipment acquired
under capital lease
|
|
$
|
146,000
|
|
|
$
|
|
|
|
$
|
|
|
Property and equipment purchases in
accounts payable
|
|
$
|
74,233
|
|
|
$
|
|
|
|
$
|
|
|
Increase to deferred tax asset
related to shares of stock obtained from the exercise of stock
options (with a related increase to additional paid in capital
of $2,142,559, $37,346,000 and $3,961,928 in 2005, 2004 and
2003, respectively)
|
|
$
|
|
|
|
$
|
26,024,446
|
|
|
$
|
646,589
|
|
Note Payable issued for
purchase of intangible assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
500,000
|
|
The accompanying notes are an integral part of these financial
statements.
F-6
TASER
INTERNATIONAL, INC.
|
|
1.
|
History
and Nature of Organization
|
TASER International, Inc. (TASER or the Company) is a global
leader in the development and manufacture of non-lethal,
self-defense devices designed for use in law enforcement,
corrections, private security and personal defense. The Company
was incorporated and began operations in Arizona in 1993 and
reincorporated in the State of Delaware in January 2001. On
May 11, 2001, the Company completed its initial public
offering (IPO) of 800,000 units at a price of $13 per
unit, consisting of one and one-half shares of common stock and
one and one-half warrants, each whole warrant to purchase one
share of common stock. The net proceeds received, after the
underwriting discount and financing costs, totaled approximately
$8.4 million.
The Company develops and manufactures non-lethal self-defense
devices. The Companys 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 the
Companys 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. The Company is currently subject to a number
of such lawsuits. The Company may also be subject to lawsuits
involving allegations of misuse of its products. The
Company has seen and expects 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 the Companys operating results and
financial condition. Although the Company carries 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
its insurance coverage. The outcome of any litigation is
inherently uncertain and there can be no assurance that the
Companys existing or any future litigation will not have a
material adverse effect on the Companys revenues,
financial condition or financial results.
Further, since late 2004, management believes that, due to
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
year ended December 31, 2005 compared to the year ended
December 31, 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 year ended December 31, 2005 compared to
the year ended December 31, 2004 as additional resources
have been devoted to legal, public relations and consulting
activities. The Companys deferred tax asset includes
$66.3 million in net operating loss carryforwards. The
amount of the deferred tax asset is considered realizable,
however, it could be reduced in the near term if estimates of
future taxable income during the carryforward period are reduced.
|
|
2.
|
Summary
of Significant Accounting Policies
|
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America.
a. Cash
and Cash Equivalents and Investments
Cash and cash equivalents include funds on hand and short-term
investments with original maturities of three months or less.
Short-term investments include securities generally having
original maturities of 90 days to one year. Long-term
investments include securities having original maturities of
more than one year. The Companys long-term investments are
invested in federal agency mortgage-backed securities, and are
classified as held to maturity. These investments are recorded
at amortized cost. See note 3. The Company intends to hold
these securities until maturity. The short-term investments,
other than the auction rate securities mentioned below, have
maturities of less than one year.
The Company includes its investments in auction rate securities
in short term investments, and classifies them as
available-for-sale.
At December 31, 2005 and 2004, the Company had zero and
$10.0 million, respectively of these auction rate
securities that were recorded at fair value. The cost of these
investments approximates fair value due to their variable
interest rates, which typically reset every 7 to 28 days
despite the long-term nature of their stated contractual
maturities. The Companys cash and investment accounts
earned interest at an approximate rate
F-7
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
of 2.7% during 2005 and 1.3% in 2004. The Companys cash
with its bank of $6.4 million is in excess of the FDIC
insurance coverage limit of $100,000.
b. Inventory
Inventories are stated at the lower of cost or market; cost is
determined using the weighted average cost which approximates
the
first-in,
first-out (FIFO) method. Provisions are made to reduce
potentially excess, obsolete or slow-moving inventories to their
net realizable value.
c. Property
and Equipment
Property and equipment are stated at cost net of accumulated
depreciation. Additions and improvements are capitalized while
ordinary maintenance and repair expenditures are charged to
expense as incurred. Depreciation is calculated using the
straight-line method over the estimated useful lives of the
assets.
d. Impairment
of Long-Lived Assets
The Company continually evaluates whether events and
circumstances have occurred that indicate the remaining
estimated useful life of long-lived assets and identifiable
intangible assets may warrant revision or that the remaining
balance of these assets may not be recoverable. In performing
the review for recoverability, the Company estimates the future
undiscounted cash flows expected to result from the use of the
assets and its eventual disposition. The amount of the
impairment loss, if impairment exists, would be calculated based
on the excess of the carrying amounts of the assets over their
estimated fair value. No impairment losses were recorded in 2005
or 2004.
e. Customer
Deposits
The Company requires certain deposits in advance of shipment for
foreign customer sales orders.
f. Revenue
Recognition and Accounts Receivable
The Company recognizes 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. Certain of the Companys customers are charged
shipping fees, which are recorded as a component of net sales.
Training revenue is recorded as the service is provided.
Also included as a component of revenue is development funding
provided by the Office of Naval Research (ONR), under a
cost-plus fixed fee contract. Periodically, an invoice
summarizing the reimbursable expenses is submitted to the ONR
for payment. For contracts that are billed at completion we
record revenue on a percentage of completion basis. The payment
request details the costs expensed in the period and adds a
nominal profit. The total amount recognized for this work in the
years ended December 31, 2005, 2004 and 2003 was $435,000,
$12,000 and $277,000, respectively. The Company recognizes grant
revenue when the performance milestones have been completed.
In 2003 the Company began offering customers the right to
purchase extended warranties on the ADVANCED TASER products and
TASER X26 products. Revenue for warranty purchases is deferred
at the time of sale, and recognized over the warranty period.
The extended warranties range from one to four years. At
December 31, 2005 and 2004, $1,233,000 and $839,000 was
deferred under this program, respectively. In 2004 the Company
began selling a private citizen version of its TASER X26
product. This product comes with a certificate for a free
training session. The Company is deferring the revenue
associated with the cost of these trainings until such time as
the training has occurred. The Company has valued these
one-on-one
training sessions at their estimated fair value, which is the
amount that the Company will pay the independent third party
conducting the training. The Company also defers the recognition
of revenue associated with background checks (at the cost of
doing the background checks) that are done as part of the
private citizen sales process until the background check is done
and the private citizen purchases the product. The Company has
also deferred recognizing revenue associated with the training
for Federal Firearms Licensed dealers which will be trained as
part of the distribution agreement signed in 2004. The
F-8
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Company will recognize this revenue as the training is provided.
At December 31, 2005 and 2004, $168,000 was deferred under
the
X26C
program.
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. These
allowances represent our best estimates and are based on our
judgment after considering a number of factors including
third-party credit reports, actual payment history,
customer-specific financial information and broader market and
economic trends and conditions.
g. Cost
of Products Sold
At December 31, 2005, 2004 and 2003, cost of products sold
included manufacturing costs, including materials, labor and
overhead related to finished goods and components. Shipping
costs incurred related to product delivery are also included in
cost of products sold.
h. Use
of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant estimates
in these financial statements include revenue recognition,
allowances for doubtful accounts receivable, inventory valuation
reserves, product warranty reserves and valuation of deferred
income taxes. Actual results could differ from those estimates.
i. Advertising
Costs
In accordance with Statement of Position 93-7 Reporting on
Advertising Costs, the Company expenses the production
cost of advertising as incurred. The Company incurred
advertising costs of $888,000, $606,000 and $217,000 in 2005,
2004 and 2003, respectively. Advertising costs are included in
sales, general and administrative expenses in the accompanying
statements of income.
j. Warranty
Costs
The Company warrants its products from manufacturing defects on
a limited basis for a period of one year after purchase, and
thereafter will replace any defective TASER unit for a fee. We
also sell extended warranties for periods of up to four years
after the expiration of the limited one year warranty. 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. 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 for a prorated discounted price depending on when the
product was placed into service. These fees are intended to
cover the handling and repair costs and include a profit. A
summary of changes in the warranty accrual for the years ended
December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Balance at Beginning of Period
|
|
$
|
457,914
|
|
|
$
|
312,934
|
|
Utilization of Accrual
|
|
|
(899,651
|
)
|
|
|
(216,078
|
)
|
Warranty Expense
|
|
|
1,293,657
|
|
|
|
361,058
|
|
|
|
|
|
|
|
|
|
|
Balance at End of the Period
|
|
$
|
851,920
|
|
|
$
|
457,914
|
|
|
|
|
|
|
|
|
|
|
F-9
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
k. Research
and Development Expenses
The Company expenses research and development costs as incurred.
The Company incurred product development expense of $1,574,000,
$824,000 and $498,000 in 2005, 2004 and 2003, respectively.
l. Income
Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in future years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rate
is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced through the
establishment of a valuation allowance at the time, based upon
available evidence, if it is more likely than not that the
deferred tax assets will not be realized.
m. Concentration
of Credit Risk and Major Customers
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of accounts receivable.
Sales are typically made on credit and the Company generally
does not require collateral. The Company performs ongoing credit
evaluations of its customers financial condition and
maintains 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. The allowance for bad debts
totaled $111,000, $120,000 and $30,000 as of December 31,
2005, 2004 and 2003, respectively.
The Company sells primarily through a network of unaffiliated
distributors. The Company also reserves the right to sell
directly to the end user to secure its credit interests. There
were no customers that exceeded 10% of total product sales in
2005. In 2004, the Company had three distributors that met or
exceeded 10% of total sales; one of which represented 14% of
sales, and two of which individually represented 10% of sales.
No other customer exceeded 10% of product sales in 2004. Sales
to one U.S. customer represented 15% of total product sales
for 2003. No other customer exceeded 10% of total product sales
in 2003.
At December 31, 2005, the Company had receivables from one
customer comprising 12% of the aggregate accounts receivable
balance. This customer is an unaffiliated distributor of the
Companys products. At December 31, 2004, the Company
had a receivable from two customers comprising 21% and 16% of
the aggregate accounts receivable balance. These customers are
unaffiliated distributors of the Companys products.
The Company currently purchases finished circuit boards and
injection-molded plastic components from suppliers located in
the United States. Although the Company currently obtains these
components from single source suppliers, the Company owns the
injection molded component tooling used in their production. As
a result, the Company believes it could obtain alternative
suppliers in most cases without incurring significant production
delays. The Company also purchases small, machined parts from a
vendor in Taiwan, custom cartridge assemblies from a proprietary
vendor in the United States, and electronic components from a
variety of foreign and domestic distributors. The Company
believes that there are readily available alternative suppliers
in most cases who can consistently meet its needs for these
components. The Company acquires most of its components on a
purchase order basis and does not have long-term contracts with
suppliers.
n. Financial
Instruments
The Companys financial instruments include cash, accounts
receivable and accounts payable. Due to the short-term nature of
these instruments, the fair value of these instruments
approximates their recorded value.
F-10
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
o. Segment
Information
Management has determined that its operations are comprised of
one reportable segment. For the years ended December 31,
2005, 2004 and 2003, sales by geographic area were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Sales by Geographic
Area
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
87
|
%
|
|
|
96
|
%
|
|
|
88
|
%
|
Other Countries
|
|
|
13
|
%
|
|
|
4
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to customers outside of the United States are denominated
in U.S. dollars. All assets of the Company are located in
the United States.
p. Stock-Based
Compensation
At December 31, 2005, the Company had three stock-based
employee compensation plans, which are described more fully in
Note 11. The Company accounts for those plans under the
recognition and measurement principles of Accounting Principles
Board 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. The Company granted stock options to consultants in prior
years which were subject to variable accounting. The Company
accelerated the vesting of these options, and recognized
approximately $626,000 of consulting expense in 2004 relating to
the fair value of all such options. The following table
illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of
Financial Accounting Standards Board (FASB)
Statement No. 123, Accounting for Stock-Based Compensation
(SFAS 123), to stock-based employee compensation. Beginning
January 1, 2006, the Company will account for its
stock-based employee compensation plans in accordance with
SFAS 123R, see Note 2r.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Net income, as reported
|
|
$
|
1,063
|
|
|
$
|
18,882
|
|
|
$
|
4,454
|
|
Add: Total stock-based
compensation included in net income as reported
|
|
|
|
|
|
|
626
|
|
|
|
177
|
|
Deduct: Total stock-based employee
compensation determined under fair value based method for all
awards, net of related tax effects
|
|
|
(5,880
|
)
|
|
|
(8,773
|
)
|
|
|
(1,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Net Income (loss)
|
|
$
|
(4,817
|
)
|
|
$
|
10,735
|
|
|
$
|
3,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic, as reported
|
|
$
|
0.02
|
|
|
$
|
0.33
|
|
|
$
|
0.12
|
|
Basic, pro forma
|
|
$
|
(0.08
|
)
|
|
$
|
0.19
|
|
|
$
|
0.09
|
|
Diluted, as reported
|
|
$
|
0.02
|
|
|
$
|
0.30
|
|
|
$
|
0.10
|
|
Diluted, pro forma
|
|
$
|
(0.08
|
)
|
|
$
|
0.17
|
|
|
$
|
0.07
|
|
F-11
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
The fair value of option grants in 2005, 2004 and 2003 were
estimated on the grant date using the Black-Scholes option
pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Range of volatility
|
|
|
102-106
|
%
|
|
|
101-105
|
%
|
|
|
91-103
|
%
|
Risk-free interest rate
|
|
|
3.5
|
%
|
|
|
3.0
|
%
|
|
|
3.0
|
%
|
Dividend rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected life of options
|
|
|
1.5 to 3 years
|
|
|
|
1.5 to 3 years
|
|
|
|
3 years
|
|
Basic
|
|
|
61,303,939
|
|
|
|
57,232,329
|
|
|
|
37,889,640
|
|
Diluted
|
|
|
63,556,246
|
|
|
|
62,319,590
|
|
|
|
46,598,312
|
|
|
|
q.
|
Income
Per Common Share
|
The Company accounts for earnings per share in accordance with
SFAS No. 128, Earnings per Share. Basic
income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the
periods presented. Diluted income per share reflects the
potential dilution that could occur if outstanding stock options
were exercised. The calculation of the weighted average number
of shares outstanding and earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Numerator for basic and diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,062,857
|
|
|
$
|
18,881,742
|
|
|
$
|
4,453,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per
share weighted average shares outstanding
|
|
|
61,303,939
|
|
|
|
57,232,329
|
|
|
|
37,889,640
|
|
Dilutive effect of shares issuable
under stock options outstanding
|
|
|
2,252,307
|
|
|
|
5,087,261
|
|
|
|
8,708,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings
per share adjusted weighted average shares
outstanding
|
|
|
63,556,246
|
|
|
|
62,319,590
|
|
|
|
46,598,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
0.33
|
|
|
$
|
0.12
|
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
0.30
|
|
|
$
|
0.10
|
|
Basic net income per share is based upon the weighted average
number of common shares outstanding during the period. For the
years ended December 31, 2005, 2004 and 2003, the effects
of 536,486, 187,820 and 63,975 stock options, respectively, were
excluded from the calculation of diluted loss per share as their
effect would have been antidilutive and decreased the loss per
share.
r. Recent
Accounting Pronouncements
In December 2004, the FASB issued SFAS 123 (revised 2004),
Share-Based Payment, an amendment of FASB Statements Nos. 123
and 95 (SFAS 123(R)), which addresses the
accounting for share-based payment transactions in which a
company receives employee services in exchange for either equity
instruments of that company or liabilities that are based on the
fair value of that companys equity instruments, or that
may be settled by the issuance of such equity instruments. The
standard eliminates companies ability to account for
share-based compensation transactions using the intrinsic value
method as prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees and
requires that such transactions be accounted for using a fair
value-based method and recognized as expense in the Statement of
Income. Under SFAS 123(R), the Company is required to
determine an appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation
cost and the transition method to be used at date of adoption.
SFAS 123(R) also requires
F-12
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
the benefits of tax deductions in excess of recognized
compensation cost to be reported as cash flows from financing
activities, rather than as cash flows from operating activities.
In March 2005, the SEC released Staff Accounting
Bulletin No. (SAB) 107, Share-Based Payment,
which provides interpretive guidance relating to the application
of SFAS 123(R). The guidance contained in SAB 107 is
intended to assist issuers in the initial implementation of
SFAS 123(R) and to enhance the information received by
investors and other users of financial statements. SAB 107
allows a flexible approach to the implementation of
SFAS 123(R) and provides issuers with latitude in measuring
the value of employee stock options under the new standard. As
amended by the SEC in April 2005, SFAS 123(R) is now
effective for the first quarter of the Companys fiscal
year 2006. The Company is currently reviewing the impact of
implementing SFAS 123(R) and SAB 107 on its financial
statements, however, the Company expects this impact to be
material to its results of operations and operating cash flows.
Had the Company adopted SFAS 123(R) in prior periods, the
magnitude of the impact of that standard would have approximated
the impact of SFAS 123, assuming the application of the
Black-Schdes model as described in the disclosure of pro forma
net income (loss) and pro forma net income (loss) per share in
Note 2p. Stock-Based Compensation.
In November 2004, the FASB issued SFAS 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4. The
amendments made by SFAS 151 clarify that abnormal amounts
of idle facility expense, freight, handling costs and wasted
materials (spoilage) should be recognized as current-period
charges and require the allocation of fixed production overheads
to inventory based on the normal capacity of the production
facilities. The guidance is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005.
The Company does not expect the adoption of SFAS 151 to
have an impact on its financial condition or results of
operations.
In May 2005, the FASB issued SFAS 154, Accounting Changes
and Error Corrections, a replacement of APB Opinion No. 20
and FASB Statement No. 3. SFAS 154 provides guidance
on the accounting for and reporting of accounting changes and
error corrections. SFAS 154 requires retrospective
application to prior period financial statements for changes in
accounting principle, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of
the change. SFAS 154 also requires that retrospective
application of a change in accounting principle be limited to
the direct effects of the change. Indirect effects of a change
in accounting principle should be recognized in the period of
the accounting change. SFAS 154 further requires a change
in depreciation, amortization, or depletion method for
long-lived, non-financial assets to be accounted for as a change
in accounting estimate effected by a change in accounting
principle. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005. The Company does not expect the adoption
of SFAS 154 to have an impact on its financial condition or
results of operations.
s. Reclassifications
Certain reclassifications were made to the 2004 amounts to
conform to the 2005 presentation.
|
|
3.
|
Cash,
cash equivalents and investments
|
The following is a summary of cash, cash equivalents and
held-to-maturity
securities as distributed by type at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Cash
|
|
$
|
6,387,796
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,387,796
|
|
|
$
|
14,538,256
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14,538,256
|
|
Government sponsored entity
securities
|
|
|
37,512,233
|
|
|
|
22,887
|
|
|
|
(388,252
|
)
|
|
|
37,146,868
|
|
|
|
35,492,195
|
|
|
|
1,575
|
|
|
|
(221,531
|
)
|
|
|
35,272,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
43,900,029
|
|
|
$
|
22,887
|
|
|
$
|
(388,252
|
)
|
|
$
|
43,534,664
|
|
|
$
|
50,030,451
|
|
|
$
|
1,575
|
|
|
$
|
(221,531
|
)
|
|
$
|
49,810,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Government sponsored entity
securities reported as:
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
9,964,113
|
|
|
$
|
218,903
|
|
Short term investments
|
|
|
|
|
|
|
17,201,477
|
|
Long term investments
|
|
|
27,548,120
|
|
|
|
18,071,815
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,512,233
|
|
|
$
|
35,492,195
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the contractual maturities of
government sponsored entity securities at December 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Less than 1 year
|
|
$
|
14,980,493
|
|
|
$
|
19,920,067
|
|
1-3 years
|
|
|
22,531,740
|
|
|
|
15,572,128
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,512,233
|
|
|
$
|
35,492,195
|
|
|
|
|
|
|
|
|
|
|
The following table provides information about
held-to-maturity
investments with gross unrealized losses and the length of time
individual investments have been in a continuous unrealized loss
position at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
Description of
Securities
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Government sponsored entity
securities
|
|
$
|
11,871,083
|
|
|
$
|
(136,530
|
)
|
|
$
|
15,288,785
|
|
|
$
|
(251,722
|
)
|
|
$
|
27,159,868
|
|
|
$
|
(388,252
|
)
|
The following table provides information about
held-to-maturity
investments with gross unrealized losses and the length of time
individual investments have been in a continuous unrealized loss
position at December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
Description of
Securities
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Government sponsored entity
securities
|
|
$
|
25,053,160
|
|
|
$
|
(221,531
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
25,053,160
|
|
|
$
|
(221,531
|
)
|
The unrealized losses on the Companys investment in
government sponsored entity securities were caused by interest
rate increases. The contractual cash flows of these investments
are guaranteed by agencies of the U.S. Government and,
accordingly it is expected that the securities would not be
settled for a price less than the amortized cost of the
investment. Since the decline in fair value was attributable to
interest rates and not credit quality, and because the Company
has the ability and intent to hold these investments to
maturity, the Company does not consider these investments to be
other than temporarily impaired at December 31, 2005.
Inventories consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Raw materials and
work-in-process
|
|
$
|
8,148,459
|
|
|
$
|
5,308,259
|
|
Finished goods
|
|
|
2,395,681
|
|
|
|
1,675,920
|
|
Reserve for excess and obsolete
inventory
|
|
|
(260,750
|
)
|
|
|
(144,128
|
)
|
|
|
|
|
|
|
|
|
|
Total Inventory
|
|
$
|
10,283,390
|
|
|
$
|
6,840,051
|
|
|
|
|
|
|
|
|
|
|
F-14
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
5.
|
Property
and Equipment
|
Property and equipment consist of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
2005
|
|
|
2004
|
|
|
Land
|
|
|
|
|
|
$
|
2,899,962
|
|
|
$
|
2,899,962
|
|
Building
|
|
|
39 Years
|
|
|
|
13,170,716
|
|
|
|
|
|
Building Construction in Progress
|
|
|
|
|
|
|
|
|
|
|
8,689,046
|
|
Leasehold Improvements
|
|
|
Lease Term
|
|
|
|
|
|
|
|
90,658
|
|
Production Equipment
|
|
|
3-7 Years
|
|
|
|
2,147,271
|
|
|
|
1,555,988
|
|
Telephone Equipment
|
|
|
5 Years
|
|
|
|
297,618
|
|
|
|
35,555
|
|
Computer Equipment
|
|
|
3-5 Years
|
|
|
|
3,226,816
|
|
|
|
2,501,928
|
|
Furniture and Office Equipment
|
|
|
5-7 Years
|
|
|
|
1,500,368
|
|
|
|
834,728
|
|
Vehicles
|
|
|
5 Years
|
|
|
|
168,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost
|
|
|
|
|
|
|
23,411,596
|
|
|
|
16,607,865
|
|
Less: Accumulated Depreciation
|
|
|
|
|
|
|
2,349,842
|
|
|
|
1,851,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Property and Equipment
|
|
|
|
|
|
$
|
21,061,754
|
|
|
$
|
14,756,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2005,
2004 and 2003 was $1,670,339, $512,668 and $363,899,
respectively. Assets recorded under capital leases included in
property and equipment were $146,000 and $37,945 as of
December 31, 2005 and 2004, respectively. Related
accumulated amortization was $17,733 and $27,826 as of
December 31, 2005 and 2004, respectively. Amortization
expense for the years ended December 31, 2005, 2004 and
2003 related to capital leases was $20,263, $7,589 and $7,589,
respectively.
Intangible assets consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Useful Life
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TASER.com domain name
|
|
5 Years
|
|
$
|
60,000
|
|
|
$
|
56,000
|
|
|
$
|
4,000
|
|
|
$
|
60,000
|
|
|
$
|
44,000
|
|
|
$
|
16,000
|
|
Issued patents
|
|
4 to 15 Years
|
|
|
168,280
|
|
|
|
59,238
|
|
|
|
109,042
|
|
|
|
128,360
|
|
|
|
36,677
|
|
|
|
91,683
|
|
Issued trademarks
|
|
9 to 11 Years
|
|
|
14,198
|
|
|
|
695
|
|
|
|
13,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non compete agreement
|
|
7 Years
|
|
|
50,000
|
|
|
|
17,857
|
|
|
|
32,143
|
|
|
|
50,000
|
|
|
|
10,714
|
|
|
|
39,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
292,478
|
|
|
|
133,790
|
|
|
|
158,688
|
|
|
|
238,360
|
|
|
|
91,391
|
|
|
|
146,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets TASER
Trademark
|
|
|
|
|
900,000
|
|
|
|
|
|
|
|
900,000
|
|
|
|
900,000
|
|
|
|
|
|
|
|
900,000
|
|
Patents and trademarks pending
|
|
|
|
|
282,095
|
|
|
|
|
|
|
|
282,095
|
|
|
|
232,147
|
|
|
|
|
|
|
|
232,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,182,095
|
|
|
|
|
|
|
|
1,182,095
|
|
|
|
1,132,147
|
|
|
|
|
|
|
|
1,132,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
$
|
1,474,573
|
|
|
$
|
133,790
|
|
|
$
|
1,340,783
|
|
|
$
|
1,370,507
|
|
|
$
|
91,391
|
|
|
$
|
1,279,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the years ended December 31, 2005,
2004 and 2003 was $42,399, $39,125 and $29,669, respectively.
F-15
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Estimated amortization for intangible assets with finite lives
for the next five years and thereafter is as follows:
|
|
|
|
|
2006
|
|
$
|
35,839
|
|
2007
|
|
|
31,839
|
|
2008
|
|
|
31,839
|
|
2009
|
|
|
19,917
|
|
2010
|
|
|
11,763
|
|
Thereafter
|
|
|
27,491
|
|
|
|
|
|
|
|
|
$
|
158,688
|
|
|
|
|
|
|
|
|
7.
|
Accounts
Payable and Accrued Liabilities
|
Accounts payable and accrued liabilities were comprised as
follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Accounts payable
|
|
$
|
4,027,335
|
|
|
$
|
6,414,932
|
|
Accrued salaries and benefits
|
|
|
481,491
|
|
|
|
790,844
|
|
Accrued expenses
|
|
|
924,528
|
|
|
|
764,021
|
|
Accrued Warranty
|
|
|
851,920
|
|
|
|
457,914
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,285,274
|
|
|
$
|
8,427,711
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Commitments
and Contingencies
|
a. Lease
Obligations
The Company has entered into operating leases for various office
space and equipment. Prior to moving to a new corporate and
manufacturing facility in April 2005, the Company previously
leased premises under an operating lease agreement which expired
on December 31, 2005. The Company sub-leased a portion of
these facilities for the time from which it vacated this
facility through the expiration of the lease agreement and
recorded $50,250 in related sublease income for the year ended
December 31, 2005. The remaining operating lease for office
equipment expires in 2006. Rent expense, net of sublease income
under these operating leases for the years ended
December 31, 2005, 2004 and 2003, was $264,794, $339,524
and $162,743, respectively.
The Company entered into capital leases for various office
equipment which are collateralized by the underlying equipment
and bear interest at rates varying between 3.2% and 20.6%.
F-16
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Future minimum lease payments under lease obligations, are as
follows for the years ending December 31:
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Capital
|
|
|
2006
|
|
$
|
4,132
|
|
|
$
|
50,391
|
|
2007
|
|
|
|
|
|
|
50,391
|
|
2008
|
|
|
|
|
|
|
22,372
|
|
2009
|
|
|
|
|
|
|
8,362
|
|
2010
|
|
|
|
|
|
|
5,575
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,132
|
|
|
$
|
137,091
|
|
|
|
|
|
|
|
|
|
|
Less amount representing interest
|
|
|
|
|
|
|
(17,792
|
)
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease
payments
|
|
|
|
|
|
|
119,299
|
|
Current portion of capital lease
obligations
|
|
|
|
|
|
|
(43,111
|
)
|
|
|
|
|
|
|
|
|
|
Capital lease obligations, net of
current portion
|
|
|
|
|
|
$
|
76,188
|
|
|
|
|
|
|
|
|
|
|
b. Purchase
Commitments
The Company has no significant purchase commitments outstanding
at December 31, 2005
c. Litigation
Securities
Class Action Litigation
Securities
Litigation
Beginning on or about January 10, 2005, numerous securities
class action lawsuits were filed against the Company and certain
of its officers and directors. These actions were filed on
behalf of the purchasers of the Companys stock in various
class periods, beginning as early as May 29, 2003 and
ending as late as January 14, 2005. 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 class actions were consolidated by
Judge Susan Bolton and Lead Plaintiff and Lead Counsel were
selected. The Lead Plaintiff filed a consolidated complaint
(which became the operative complaint for all of the class
actions) on August 29, 2005. The operative class period is
May 29, 2003 to January 11, 2005. The defendants filed
a motion to dismiss the consolidated complaint, which has been
fully briefed for the Court but has not yet been decided.
The consolidated complaint alleges, among other things,
violations of the Securities Exchange Act of 1934, as amended,
and
Rule 10b-5,
promulgated thereunder, and seeks unspecified monetary damages
and other relief against all defendants. The consolidated
amended complaint generally alleges 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
the Companys distributor, Davidsons, in the fourth
quarter of 2004. The consolidated complaint also alleges that
product defects were leading to excessive product returns by
customers.
Shareholder
Derivative Litigation
Beginning on or about January 11, 2005, numerous
shareholder derivative actions were also filed against the
Companys officers and directors. Such actions have been
filed in the United States District Court for the District of
Arizona, the Arizona Superior Court in Maricopa County, and the
Delaware Chancery Court in New Castle County. The derivative
actions pending in the Arizona Superior Court and the Delaware
Chancery Court have been stayed pending resolution of the
consolidated Arizona District Court action. .The plaintiffs in
the Arizona District Court action filed a consolidated complaint
on May 13, 2005. The Company and the individual defendants
filed motions to
F-17
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
dismiss the consolidated complaint on August 19, 2005. The
motions to dismiss are fully briefed for the Court but have not
yet been decided.
The derivative complaints are based on similar facts and events
as those alleged in the securities class action complaints. The
complaints generally allege that the individual defendants
breached the fiduciary duties that they owe 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 results. 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 to commit insider
trading of the Companys stock. The derivative plaintiffs
seek damages and restitutionary, equitable, injunctive and other
relief.
On May 4, 2005, a Company shareholder filed an action under
in the Delaware Chancery Court against the Company under
Section 220 of Delaware General Corporation Law, demanding
the inspection of certain corporate documents. The Company filed
an answer to the complaint on June 7, 2005. The plaintiff
served discovery requests on February 14, 2006.
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 as of June 20, 2005, 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 these matters. The
Staff also advised the Company that it is continuing to
investigate issues relating to trading in the Companys
stock.
Contract
Litigation
Contract
Litigation
In March 2000, Thomas N. Hennigan, a sales representative for
our products from late 1997 through early 2000, sued the Company
and certain of our 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 our
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 $500,000 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. We
believe 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. We filed
various motions in November 2002 for partial summary judgment
including a motion to dismiss his claims. On September 30,
2003,
F-18
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
the Court issued an order granting our 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 our 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, we made a motion to dismiss Hennigans case.
The court issued a briefing schedule on our motion and the trial
was suspended pending the courts decision on our 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.
We have filed an answer to the complaint and a motion to
dismiss. In October 2005, we 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 we filed a motion for
sanctions. In October 2005, the Court issued an order partially
granting our 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 49 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, eleven other
cases have been dismissed and are not included in this number.
With respect to each of these pending 49 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. Cases that were dismissed in prior fiscal
quarters are not included in this table. 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. Our 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. We are defending each of these
lawsuits vigorously. Although we do 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.
|
|
|
|
|
|
|
|
|
|
|
Month
|
|
|
|
|
|
|
Plaintiff
|
|
Served
|
|
Jurisdiction
|
|
Claim Type
|
|
Status
|
|
Alvarado
|
|
4/2003
|
|
CA Superior Court
|
|
Wrongful Death
|
|
Trial scheduled for April 2006
|
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
|
F-19
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Month
|
|
|
|
|
|
|
Plaintiff
|
|
Served
|
|
Jurisdiction
|
|
Claim Type
|
|
Status
|
|
|
|
|
|
|
|
|
|
|
LeBlanc
|
|
12/2004
|
|
US District Court, CD CA
|
|
Wrongful Death
|
|
Discovery Phase
|
M. Elsholtz
|
|
12/2004
|
|
TX District Court
|
|
Wrongful Death
|
|
Discovery Phase
|
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
|
|
Dismissed with Prejudice
|
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
|
|
Discovery Phase
|
Hammock
|
|
10/2005
|
|
District Court, Tarrant County, TX
|
|
Wrongful Death
|
|
Trial scheduled for October 2006
|
Heston
|
|
11/2005
|
|
US District Court, ND CA
|
|
Wrongful Death
|
|
Discovery Phase
|
A. Elsholtz
|
|
10/2005
|
|
TX District Court
|
|
Wrongful Death
|
|
Dismissed with Prejudice
|
Rosa
|
|
11/2005
|
|
US District Court, ND CA
|
|
Wrongful Death
|
|
Complaint Served
|
Gosserand
|
|
10/2005
|
|
US District Court ED LA
|
|
Wrongful Death
|
|
Discovery Phase
|
O Donnell/Hasse
|
|
11/2005
|
|
Circuit Court, Cook County, IL
|
|
Wrongful Death
|
|
Discovery Phase
|
Yeagley
|
|
11/2005
|
|
Hillsborough County Circuit Court,
FL
|
|
Wrongful Death
|
|
Discovery Phase
|
Neal-Lomax
|
|
12/2005
|
|
US District Court, NV
|
|
Wrongful Death
|
|
Discovery Phase
|
Yanga Williams
|
|
12/2005
|
|
Gwinnett County State Court, GA
|
|
Wrongful Death
|
|
Discovery Phase
|
Mann
|
|
12/2005
|
|
US District Court, ND GA, Rome Div
|
|
Wrongful Death
|
|
Discovery Phase
|
King
|
|
12/2005
|
|
US District Court, MD FL,
Jacksonville
|
|
Wrongful Death
|
|
Discovery Phase
|
Robert Williams
|
|
1/2006
|
|
US District Court, TX
|
|
Wrongful Death
|
|
Discovery Phase
|
Lee
|
|
1/2006
|
|
Davidson County, TN Circuit Court
|
|
Wrongful Death
|
|
Discovery Phase
|
Zaragoza
|
|
2/2006
|
|
CA Superior Court, Sacramento County
|
|
Wrongful Death
|
|
Complaint Served
|
Kerchoff
|
|
6/2004
|
|
US District Court, ED MI
|
|
Training Injury
|
|
Dismissed with Prejudice
|
Powers
|
|
11/2003
|
|
AZ Superior Court
|
|
Training Injury
|
|
Defense verdict for TASER
|
Cook
|
|
8/2004
|
|
NV District Court
|
|
Training Injury
|
|
Discovery Phase
|
Stevens
|
|
10/2004
|
|
OH Court Common Pleas
|
|
Training Injury
|
|
Discovery Phase
|
Lipa
|
|
2/2005
|
|
MI Circuit Court
|
|
Training Injury
|
|
Dismissed with Prejudice
|
Dimiceli
|
|
3/2005
|
|
FL Circuit Court
|
|
Training Injury
|
|
Discovery Phase
|
Allen
|
|
5/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Discovery Phase
|
J.J.
|
|
7/2005
|
|
FL Circuit Court
|
|
Training Injury
|
|
Discovery Phase
|
J.B.
|
|
7/2005
|
|
FL Circuit Court
|
|
Training Injury
|
|
Discovery Phase
|
Howard
|
|
8/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Discovery Phase
|
Wagner
|
|
8/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Discovery Phase
|
Gerdon
|
|
8/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Discovery Phase
|
Gallant
|
|
8/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Discovery Phase
|
F-20
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Month
|
|
|
|
|
|
|
Plaintiff
|
|
Served
|
|
Jurisdiction
|
|
Claim Type
|
|
Status
|
|
|
|
|
|
|
|
|
|
|
Herring
|
|
8/2005
|
|
Circuit Court of City of
St. Louis, MO
|
|
Training Injury
|
|
Discovery Phase
|
Stewart
|
|
10/2005
|
|
Circuit Court for
Broward County, FL
|
|
Training Injury
|
|
Discovery Phase
|
Lewandowski
|
|
1/2006
|
|
US District Court, NV
|
|
Training Injury
|
|
Discovery Phase
|
Peterson
|
|
1/2006
|
|
US District Court, NV
|
|
Training Injury
|
|
Discovery Phase
|
Cosby
|
|
8/2004
|
|
US District Court, SD NY
|
|
Injury During Arrest
|
|
Discovery Phase
|
Blair
|
|
3/2005
|
|
US District Court, MD NC
|
|
Injury During Detention
|
|
Summary Judgment Motion
Filed Awaiting Ruling
|
Lewis
|
|
7/2005
|
|
US District Court Tal FL
|
|
Injury During Arrest
|
|
Trial scheduled for September 2006
|
Lash
|
|
8/2005
|
|
US District Court ED MO
|
|
Injury During Arrest
|
|
Motion to dismiss filed
|
Games
|
|
8/2005
|
|
Circuit Court,
Multnomah County, OR
|
|
Injury During Arrest
|
|
Discovery Phase
|
Bynum
|
|
10/2005
|
|
US District Court SD NY
|
|
Injury During Arrest
|
|
Discovery Phase
|
Lopez
|
|
11/2005
|
|
US District Court, ND IL Eastern Div
|
|
Injury During Police Call
|
|
Discovery Phase
|
Bellemore
|
|
2/2006
|
|
AZ Superior Court
|
|
Injury During Arrest
|
|
Complaint Served
|
From time to time, the Company is notified that it may be a
party to a lawsuit. It is the Companys policy to not
disclose the specifics of any claim or threatened lawsuit until
it is actually served on the Company.
As noted in the above table, the Company received a defense
verdict in the Samuel Powers v. TASER International
personal injury case. As part of its legal strategy to
aggressively defend these cases, the Company entered into a
settlement agreement with its own insurance provider in order to
prevent its insurance provider from settling the case with the
plaintiff. Under the terms of the settlement, the Company
received $575,000 from its liability insurance provider
associated with a settlement and release agreement, under the
terms of the agreement the Company assumed all future potential
liability and costs from and after the date the settlement and
release agreement was signed. After offsetting approximately
$100,000 in legal expenses to defend and win the trial, the
Company has recorded the remaining balance of approximately
$475,000 as deferred income on its balance sheet. This deferred
income will be used to cover any costs through all appeals and
the remaining balance if any will be recorded as other
income when final resolution is completed.
Other
Litigation
In January 2005, we 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, we filed litigation in Superior Court for
Maricopa County against Thomas G. Watkins III, our former
patent attorney, for declaratory judgment, breach of fiduciary
duty, constructive fraud, and breach of contract.
Mr. Watkins originally filed patent applications on our
behalf as our patent attorney for inventions utilized in the
TASER X26 device in February and May 2003. In each patent
application he filed a declaration stating that Magne Nerheim,
our employee, was the sole inventor. These patent applications
are pending. Mr. Nerheim assigned his interest in these
patent applications to us. In December 2004 Mr. Watkins
informed us that he now felt that he was the inventor of a
portion of this invention. We vigorously dispute his claim and
we believe that we are the sole owner of this invention. We have
filed a motion for summary judgment in this litigation in
February 2006 which motion is pending before the court. On
February 14, 2006, U.S. Patent No. US 6,999,295
entitled Dual Operating Mode Electronic Disabling Device
For Generating A Time-Sequenced, Shaped Voltage Output
Waveform was issued to named inventors Thomas G.
Watkins, III and Mr. Nerheim. Mr. Nerheim
assigned his interest in this patent
F-21
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
to us. This patent covers a portion of the technology utilized
in the TASER X26 device. This patent was applied for by
Mr. Watkins without our knowledge or consent. Since we are
a joint owner of this patent, this patent will not restrict us
from manufacturing and selling the TASER X26 device. We have
other patent applications pending that cover inventions
contained in this patent. On March 13th 2006, the court
issued a temporary restraining order preventing Mr. Watkins
from selling, assigning, transfering or licensing this patent to
a third party. A hearing has been scheduled for March 24th
2006 to determine whether a preliminary injunction should be
issued.
In July 2005, we 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 the Company, our
customers and our shareholders. The court dismissed the count of
false light invasion of privacy. In January 2006 the court
entered an order dismissing this lawsuit. In February 2006 the
parties entered into a stipulation for dismissal with the
understanding that the USA Today and the Arizona Republic would
review articles regarding the TASER device with us prior to
publication.
In November 2005, we 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 tortuously affecting the
fairness and integrity of litigation as adverse third-party
witness. This case is entering the discovery phase and no trial
date has been set.
In December 2005, we filed a lawsuit in Vigo County, Indiana,
Superior Court against Roland M. Kohr for defamation, product
disparagement, Lanham Act violations, tortuously affecting the
fairness and integrity of litigation as adverse third-party
witness, and intentional interference with a business
relationship. Dr. Kohr was the Medical Examiner and expert
witness in the James Borden wrongful death litigation which
litigation was dismissed with prejudice. This case is in 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 expenses,
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.
d. Employment
Agreements
The Company has employment agreements with its President, Chief
Executive Officer, Chief Operating Officer, Chief Financial
Officer, Vice President of Research and Development and Vice
President and General Counsel. The Company may terminate the
agreements with or without cause. Should the Company terminate
the agreements without cause, upon a change of control of the
Company or death of the employee, the employees are entitled to
additional compensation. Under these circumstances, these
officers and employees may receive the amounts remaining under
their contracts upon termination, which would total $1,097,000
in the aggregate at December 31, 2005.
F-22
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Significant components of the Companys deferred tax assets
and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Deferred income tax
assets
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
25,398,436
|
|
|
$
|
26,024,446
|
|
Reserves and accruals
|
|
|
1,042,452
|
|
|
|
405,684
|
|
Non-employee stock option expense
|
|
|
310,637
|
|
|
|
183,276
|
|
Capitalized R&D
|
|
|
543,849
|
|
|
|
|
|
Charitable contributions
|
|
|
204,580
|
|
|
|
|
|
Alternative minimum tax carry
forward
|
|
|
40,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
27,540,309
|
|
|
|
26,613,406
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax
liabilities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(583,512
|
)
|
|
|
(185,309
|
)
|
Amortization
|
|
|
(41,616
|
)
|
|
|
(34,468
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax
liabilities
|
|
|
(625,128
|
)
|
|
|
(219,777
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax
assets
|
|
$
|
26,915,181
|
|
|
$
|
26,393,629
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
Current deferred tax assets
|
|
$
|
6,955,500
|
|
|
$
|
11,083,422
|
|
Long-term deferred tax assets
|
|
|
19,959,681
|
|
|
|
15,310,207
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,915,181
|
|
|
$
|
26,393,629
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, the Company has net operating loss
carry forwards (NOL) for federal income tax purposes
of approximately $66,300,000, respectively. The Companys
federal NOL carryforward expires in 2024. The Company files in
various state jurisdictions and has state net operating loss
carryforwards of approximately $49,200,000. The Companys
state NOL carryforward expires at varies dates depending on the
state from 2008 to 2024.
In preparing our financial statements, we assess the likelihood
that our deferred tax assets will be realized from future
taxable income. In evaluating our ability to recover our
deferred income tax assets we consider all available positive
and negative evidence, including our operating results, ongoing
tax planning and forecasts of future taxable income on a
jurisdiction by jurisdiction basis. We establish a valuation
allowance if we determine that it is more likely than not that
some portion or all of the net deferred tax assets will not be
realized. We exercise significant judgment in determining our
provisions for income taxes, our deferred tax assets and
liabilities and our future taxable income for purposes of
assessing our ability to utilize any future tax benefit from our
deferred tax assets. Although we believe that our tax estimates
are reasonable, the ultimate tax determination involves
significant judgments that could become subject to audit by tax
authorities in the ordinary course of business. The Company
believes that the decrease in sales during 2005 were driven by
outside events including the SEC inquiry announced in January
2005, adverse publicity regarding the Company and its products
and a significant increase in litigation. The Company believes
that many of these external events which depressed sales levels
during 2005 are now more favorable and as of December 31,
2005, based on our evaluation and projections of future sales
and profitability, no valuation allowance was deemed necessary
as it is more likely than not that our net deferred tax assets
will be realized. However, the deferred tax asset could be
reduced in the near-term if estimates of future taxable income
during the carryforward period are reduced.
F-23
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Significant components of the federal and state income tax
expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,985,212
|
|
|
$
|
9,773,679
|
|
|
$
|
2,899,474
|
|
State
|
|
|
189,201
|
|
|
|
1,537,429
|
|
|
|
383,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
2,174,413
|
|
|
|
11,311,108
|
|
|
|
3,283,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(519,490
|
)
|
|
|
627,985
|
|
|
|
(339,350
|
)
|
State
|
|
|
(2,062
|
)
|
|
|
99,907
|
|
|
|
(30,277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(521,552
|
)
|
|
|
727,892
|
|
|
|
(369,627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income
taxes
|
|
$
|
1,652,861
|
|
|
$
|
12,039,000
|
|
|
$
|
2,913,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the Companys effective income tax rate
to the federal statutory rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
34.5
|
%
|
State tax, net of federal benefit
|
|
|
3.4
|
%
|
|
|
3.4
|
%
|
|
|
4.0
|
%
|
Nondeductible lobbying expenses
and other permanent differences
|
|
|
19.5
|
%
|
|
|
0.5
|
%
|
|
|
1.0
|
%
|
Change in state tax law
|
|
|
3.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
60.9
|
%
|
|
|
38.9
|
%
|
|
|
39.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On July 13, 2004, the Company entered into a line of credit
agreement to replace its existing line. The agreement has 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 June 30, 2008 and
requires monthly payments of interest only. At December 31,
2005, the available borrowing under the existing line of credit
was $4.2 million, and there was no amount outstanding under
the line of credit. There were no borrowings under the line
during the year ended December 31, 2005.
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. For the year ended December 31, 2005, the Company
was in violation of a debt provision by having entered into two
capital lease agreements in 2005. The Company obtained a waiver
from its credit provider to permanently waive this provision
with respect to these capital leases.
a. Common
Stock
Concurrent with its re-incorporation in Delaware in February
2001, the Company adopted a certificate of incorporation and
authorized the issuance of two classes of stock to be designated
common stock and preferred stock,
provided that both common and preferred stock shall have a par
value of $0.00001 per share and authorized the Company to
issue 50 million shares of common stock and 25 million
shares of preferred stock.
F-24
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
On August 26, 2004, the Company held a special meeting of
stockholders to amend its Certificate of Incorporation to
increase the authorized shares of common stock to
200 million shares. The increase in authorized shares was
approved to enable the Board of Directors to effect a future
stock split in the form of a stock dividend. Under the previous
Certificate of Incorporation, the Board of Directors could not
authorize future stock splits or declare additional stock
dividends without first soliciting and obtaining stockholder
approval if following such action the total number of shares of
common stock outstanding and reserved for issuance would exceed
50,000,000 shares. Under the Certificate of Incorporation,
as amended, the Board of Directors has the ability to authorize
future stock splits in the form of a stock dividend up to the
maximum amount permitted under the Certificate of Incorporation.
On January 14, 2004, the Company announced a
three-for-one
stock split in the form of a stock dividend. Under the terms of
the stock split, the Companys shareholders of record as of
January 26, 2004 would receive two shares of common stock
for every one share of common stock held on that date. The stock
split was effected on February 11, 2004 from authorized but
unissued shares of common stock of the Company.
On April 6, 2004, the Company announced a
two-for-one
stock split in the form of a stock dividend. Under the terms of
the stock split, the Companys shareholders of record as of
April 15, 2004 would receive one share of common stock for
every one share of common stock held on that date. The stock
split was effected on April 29, 2004 from authorized but
unissued shares of common stock of the Company.
On November 4, 2004, the Company announced a
two-for-one
stock split in the form of a stock dividend. Under the terms of
the stock split, the Companys shareholders of record as of
November 15, 2004 would receive one share of common stock
for every one share of common stock held on that date. The stock
split was effected on November 29, 2004 from authorized but
unissued shares of common stock of the Company.
Under the Companys Certificate of Incorporation, the
Companys stockholders do not have preemptive rights with
respect to common stock. Thus, should the Board of Directors
elect to issue additional shares of common stock, existing
stockholders would not have any preferential rights to purchase
such shares. In addition, if the Board of Directors elects to
issue additional shares of common stock, such issuance could
have a dilutive effect on earnings per share, voting power, and
share holdings of current stockholders.
The number of shares, per share amounts, conversion amounts and
stock option and warrant data of the Companys common stock
have been retroactively restated for all periods presented for
the stock dividends and stock splits discussed above.
b. Preferred
Stock
The Company is authorized to issue up to 25 million shares
of preferred stock, $0.00001 par value. The Board of
Directors may authorize the issuance of shares of preferred
stock of any class or any series of any class and establish
designations, voting powers, preferences, and relative
participating, optional or other rights, if any, or the
qualifications, limitations, or restrictions applicable to such
shares.
c. Warrants
At December 31, 2003, the Company had warrants outstanding
to purchase 855,972 shares of common stock at prices
ranging from $1.10 to $7.00 per share with an average
exercise price of $3.06 per share and a weighted average
remaining life of 2.2 years.
On February 2, 2004, the Company announced that it had
achieved the basic net income per share requirements to redeem
the remaining public warrants, and gave formal written notice to
all remaining public warrant holders that it would call the
warrants at the redemption price of $0.25 per warrant if
not redeemed prior to March 31, 2004.
On March 30, 2004, the Company announced that it would
extend the redemption period of its publicly traded warrants to
April 28, 2004. During that period, each warrant continued
to be exercisable for three shares of common stock (one share of
common stock plus two additional shares as a stock dividend) at
$9.53 per warrant. The warrant exercise price of $9.53 is
the pre-split price; although the price of the warrants was not
affected by the stock splits,
F-25
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
the underlying number of shares was affected. The result was
that each warrant became convertible into one share of common
stock and an additional five shares as a stock dividend. After
that time, the warrants were no longer exercisable, and holders
had the right to receive only the redemption price of
$0.25 per TASER warrant. All but four of the public
warrants were exercised. On December 31, 2005 and 2004, no
warrants were outstanding.
d. Stock
Option Plan
The Company has historically issued stock options to various
equity owners and key employees as a means of attracting and
retaining quality personnel. The option holders have the right
to purchase a stated number of shares at the market value on the
grant date. The options issued under the Companys 1999
Stock Option Plan (the 1999 Plan) generally vest
over a three-year period. The options issued under the
Companys 2001 Stock Option Plan (the 2001
Plan) generally vest over a three-year period. The options
issued under the Companys 2004 Stock Option Plan (the
2004 Plan) generally vest over a one-year period.
The shares issuable under each of the plans were registered on
Form S-8
with the United States Securities and Exchange Commission. The
total number of shares registered under these plans were
9,952,500 under the Companys 1999 Plan, and 6,600,000
under the 2001 Plan, and 6,800,000 under the 2004 Plan. These
plans provide for officers, key employees and consultants to
receive nontransferable stock options to purchase an aggregate
of 23,352,500 shares of the Companys common stock. As
of December 31, 2005, 18,247,905 options had been
granted at prices equal to or greater than the fair market value
of the stock, 11,821,730 of the options granted had been
exercised, and 5,381,980 options are remaining for future
grants. During 2003 and 2004, the Company granted options to
consultants at an exercise price equal to or greater than the
value of the common stock on the date of grant. The options vest
over a three-year period. The total compensation cost associated
with the options granted to consultants was $177,142 in 2003 and
approximately $625,714 in 2004.
A summary of the Companys stock options, adjusted for
stock splits in the form of stock dividends, at
December 31, 2005, 2004 and 2003 and for the years then
ended is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options outstanding, beginning of
year
|
|
|
5,644,518
|
|
|
$
|
3.11
|
|
|
|
10,283,808
|
|
|
$
|
0.91
|
|
|
|
9,467,100
|
|
|
$
|
0.77
|
|
Granted
|
|
|
1,550,297
|
|
|
$
|
9.00
|
|
|
|
2,451,260
|
|
|
$
|
8.94
|
|
|
|
3,758,400
|
|
|
$
|
0.85
|
|
Exercised
|
|
|
(946,498
|
)
|
|
$
|
0.99
|
|
|
|
(6,912,892
|
)
|
|
$
|
1.85
|
|
|
|
(2,941,692
|
)
|
|
$
|
0.62
|
|
Expired/terminated
|
|
|
(99,526
|
)
|
|
$
|
6.78
|
|
|
|
(177,658
|
)
|
|
$
|
2.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, end of year
|
|
|
6,148,791
|
|
|
$
|
4.92
|
|
|
|
5,644,518
|
|
|
$
|
3.19
|
|
|
|
10,283,808
|
|
|
$
|
0.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
5,538,047
|
|
|
$
|
4.87
|
|
|
|
2,898,472
|
|
|
$
|
4.25
|
|
|
|
4,027,392
|
|
|
$
|
0.97
|
|
Options available for grant at end
of year
|
|
|
5,381,980
|
|
|
|
|
|
|
|
6,832,750
|
|
|
|
|
|
|
|
2,306,352
|
|
|
|
|
|
Weighted average fair value of
options granted during the year
|
|
|
|
|
|
$
|
4.71
|
|
|
|
|
|
|
$
|
4.42
|
|
|
|
|
|
|
$
|
0.53
|
|
F-26
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
The following table summarizes information about stock options
outstanding and exercisable as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Number
|
|
|
Exercise
|
|
Range of Exercise
Price
|
|
Outstanding
|
|
|
Price
|
|
|
Life
|
|
|
Exercisable
|
|
|
Price
|
|
|
$ 0.28-$ 0.99
|
|
|
1,378,028
|
|
|
$
|
0.36
|
|
|
|
6.8
|
|
|
|
1,149,461
|
|
|
$
|
0.36
|
|
$ 1.03-$ 2.41
|
|
|
1,943,539
|
|
|
$
|
1.63
|
|
|
|
4.4
|
|
|
|
1,789,039
|
|
|
$
|
1.57
|
|
$ 5.89-$ 9.65
|
|
|
2,333,138
|
|
|
$
|
8.05
|
|
|
|
7.9
|
|
|
|
2,257,460
|
|
|
$
|
8.09
|
|
$10.10-$19.76
|
|
|
423,586
|
|
|
$
|
14.50
|
|
|
|
8.6
|
|
|
|
295,333
|
|
|
$
|
14.96
|
|
$20.12-$29.98
|
|
|
70,500
|
|
|
$
|
23.75
|
|
|
|
8.1
|
|
|
|
46,754
|
|
|
$
|
23.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.28-$29.98
|
|
|
6,148,791
|
|
|
$
|
4.92
|
|
|
|
7.7
|
|
|
|
5,538,047
|
|
|
$
|
4.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Related
Party Transactions
|
Aircraft
charter
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 years ended
December 31, 2005 and 2004, the Company incurred charter
expenses of approximately $434,000 and $154,000, respectively,
to Four Futures Corporation and Thomas P. Smith. No expenses
were incurred in the year ended December 31, 2003. Any
personal use of the aircraft by Mr. Smith is billed to Four
Futures Corporation for reimbursement. For the year ended
December 31, 2005, the Company billed approximately $5,000
to Four Futures Corporation for personal use of the aircraft. At
December 31, 2005, the Company had an outstanding payable
of approximately $67,000 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 years ended
December 31, 2005 and 2004, the Company incurred charter
expenses of approximately $419,000 and $191,000, respectively,
to Thundervolt, LLC. No expenses were incurred in the year ended
December 31, 2003. 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 year ended December 31, 2005, the
Company billed approximately $470,000, to Thundervolt, LLC,
Patrick W. Smith, Phillips W. Smith and Thomas P. Smith for
personal use of the aircraft. At December 31, 2005, the
Company had an outstanding payable of approximately $56,000 to
Thundervolt, LLC and $152,000 outstanding receivable from
Thundervolt, LLC, Patrick W. Smith , Thomas P. Smith and Mark
Kroll, a Board member of the Company. 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.
The Company has performed a review of the above relationships in
accordance with the provisions of Financial Accounting Standards
Board Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB
No. 51 (FIN 46R). Neither of the relationships
were determined to meet the definition of a variable interest
entity (VIE) as defined by FIN 46R as both Four Futures
Corporation and Thundervolt, LLC are adequately capitalized,
their owners possess all of the essential characteristics of a
controlling financial interest, and the Company does not have
any voting rights in either entity. Therefore, the entities are
not required to be consolidated into the Companys results.
F-27
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
TASER
Foundation
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 years ended December 31, 2005
and 2004, the Company incurred approximately $119,000 and
$32,000, respectively in such administrative costs. In addition,
for the year ended December 31, 2005, the Company
contributed $325,000 to the TASER Foundation. No contributions
were made in 2004.
Consulting
services
Beginning in August 2005, the Company agreed to pay Mark Kroll,
a member of the Board of Directors, a retainer of
$8,000 per month to provide consultancy services. The
cumulative expense for the period ended December 31, 2005
was approximately $42,000. At December 31, 2005, the
Company had accounts payable of approximately $42,000 related to
these services.
|
|
13.
|
Selected
Quarterly Financial Data (unaudited)
|
Selected quarterly financial data for years ended
December 31, 2005 and 2004 follows (in thousands except for
per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
Mar. 31, 2005
|
|
|
Jun. 30, 2005
|
|
|
Sep. 30, 2005
|
|
|
Dec. 31, 2005
|
|
|
Net sales
|
|
$
|
10,204,161
|
|
|
$
|
13,206,659
|
|
|
$
|
11,675,611
|
|
|
$
|
12,607,750
|
|
Gross margin
|
|
$
|
5,676,136
|
|
|
$
|
8,461,647
|
|
|
$
|
7,848,370
|
|
|
$
|
8,196,791
|
|
Net income (loss)
|
|
$
|
(38,915
|
)
|
|
$
|
662,574
|
|
|
$
|
330,424
|
|
|
$
|
108,774
|
|
Basic net income (loss) per share
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
Diluted net income (loss) per share
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
Mar. 31, 2004
|
|
|
Jun. 30, 2004
|
|
|
Sep. 30, 2004
|
|
|
Dec. 31, 2004
|
|
|
Net sales
|
|
$
|
13,136,554
|
|
|
$
|
16,322,007
|
|
|
$
|
18,947,548
|
|
|
$
|
19,233,770
|
|
Gross margin
|
|
$
|
8,682,094
|
|
|
$
|
10,862,223
|
|
|
$
|
13,179,236
|
|
|
$
|
12,460,830
|
|
Net income
|
|
$
|
3,551,030
|
|
|
$
|
4,490,432
|
|
|
$
|
6,126,038
|
|
|
$
|
4,714,242
|
|
Basic net income per share
|
|
$
|
0.07
|
|
|
$
|
0.08
|
|
|
$
|
0.11
|
|
|
$
|
0.08
|
|
Diluted net income per share
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
|
$
|
0.09
|
|
|
$
|
0.07
|
|
|
|
14.
|
Restatement
of 2004 Results
|
In April 2005, subsequent to the issuance of our financial
statements for the year ended December 31, 2004, the
Company discovered an error in that certain stock option grants
were treated as incentive stock options when the grants should
have been classified as non-statutory stock options because of
the annual limitation on incentive stock options under
applicable tax regulations. For employees who exercised stock
option grants and held the underlying stock, to the extent such
option grants should have been classified as non-statutory stock
options (as opposed to incentive stock options), the
employees taxable compensation was understated and the
Company was entitled to a deduction from its taxable income
equal to the amount of additional compensation attributable to
the exercise of non-statutory stock options. This resulted in an
increase in previously reported deferred tax assets at
December 31,
F-28
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
2004 by approximately $3.0 million, with a corresponding
increase to additional paid in capital. In addition, while
incentive stock options are not subject to payroll tax
withholding, non-statutory stock options that result in ordinary
income when exercised are subject to paroll tax withholding for
the employee and an equal amount to be paid by the employer. The
impact to the Company in the year ended December 31, 2004
of the additional payroll tax withholding was approximately
$395,000, which was recorded as an increase to selling, general
and administrative expenses over amounts previously reported. As
a result, the provision for income taxes decreased by
approximately $152,000, which resulted in a corresponding
increase in deferred tax assets. This adjustment impacted
previously reported net income for the year ended
December 31, 2004 by approximately $243,000 which reduced
diluted earnings per share for such period by $0.01 to $0.30.
The change in net income was not significant enough to affect
basic earnings per share for the year ended December 31,
2004. The Company also improperly tax affected the pro forma
expense associated with incentive stock options for the year
ended December 31, 2004. The pro forma expense is used in
the calculation of pro forma basic and diluted net income per
share. As a result of these errors, pro forma net income
decreased from $12,005,000 to $10,735,000, and pro forma basic
and diluted net income per share decresed from $0.21 and $0.19
to $0.19 and $0.17, respectively. The 2004 pro forma net income,
pro forma basic and diluted earnings per share were restated in
Form 10-KSB/A
filed May 23, 2005.
The following changes were made to the previously reported
financial statements as of and for the year ended
December 31, 2004 in connection with the restatement.
Balance
Sheet:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
As Previously
|
|
|
|
|
|
|
Reported
|
|
|
As Restated
|
|
|
Deferred income tax asset
|
|
$
|
12,126,765
|
|
|
$
|
15,310,207
|
|
Total assets
|
|
|
106,269,136
|
|
|
|
109,452,578
|
|
Accounts payable and accrued
liabilities
|
|
|
8,432,066
|
|
|
|
8,827,132
|
|
Total current liabilities
|
|
|
8,538,873
|
|
|
|
8,933,939
|
|
Total liabilities
|
|
|
9,146,729
|
|
|
|
9,541,795
|
|
Additional paid-in capital
|
|
|
72,819,368
|
|
|
|
75,850,810
|
|
Retained earnings
|
|
|
24,302,430
|
|
|
|
24,059,364
|
|
Total stockholders equity
|
|
|
97,122,407
|
|
|
|
99,910,783
|
|
Total liabilities and
stockholders equity
|
|
|
106,269,136
|
|
|
|
109,452,578
|
|
Statement
of Income:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2004
|
|
|
|
As Previously
|
|
|
|
|
|
|
Reported
|
|
|
As Restated
|
|
|
Sales, general and administrative
expenses
|
|
$
|
13,485,256
|
|
|
$
|
13,880,322
|
|
Income from operations
|
|
|
30,875,534
|
|
|
|
30,480,468
|
|
Income before income taxes
|
|
|
31,315,808
|
|
|
|
30,920,742
|
|
Provision for income tax
|
|
|
12,191,000
|
|
|
|
12,039,000
|
|
Net income
|
|
|
19,124,808
|
|
|
|
18,881,742
|
|
Income per common and common
equivalent share diluted
|
|
$
|
0.31
|
|
|
$
|
0.30
|
|
F-29
TASER
INTERNATIONAL, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Statement
of Cash Flow:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2004
|
|
|
|
As Previously
|
|
|
|
|
|
|
Reported
|
|
|
As Restated
|
|
|
Net income
|
|
$
|
19,124,808
|
|
|
$
|
18,881,742
|
|
Stock option tax benefit
|
|
|
11,473,554
|
|
|
|
11,321,554
|
|
Accounts payable and accrued
liabilities
|
|
|
5,156,425
|
|
|
|
5,551,491
|
|
Non-cash
transactions Increase to deferred tax asset
related to tax benefits realized from the exercise of stock
options
|
|
|
22,841,004
|
|
|
|
26,024,446
|
|
The following table summarizes changes in the previously
reported information in Note 2q:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2004
|
|
|
|
As Previously
|
|
|
|
|
|
|
Reported
|
|
|
As Restated
|
|
|
Net Income as reported
|
|
$
|
19,125
|
|
|
$
|
18,882
|
(1)
|
Add; Total stock-based
compensation included in net incomes as reported
|
|
|
626
|
|
|
|
626
|
|
Deduct: Total stock-based employee
compensation determined under fair value based method for all
awards, net of related tax effects
|
|
|
(7,746
|
)
|
|
|
(8,773
|
)
|
|
|
|
|
|
|
|
|
|
Pro Forma Net Income
|
|
$
|
12,005
|
|
|
$
|
10,735
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic, as reported
|
|
$
|
0.33
|
|
|
$
|
0.33
|
|
Basic, pro forma
|
|
$
|
0.21
|
|
|
$
|
0.19
|
|
Diluted, as reported
|
|
$
|
0.31
|
|
|
$
|
0.30
|
|
Diluted, pro forma
|
|
$
|
0.19
|
|
|
$
|
0.17
|
|
|
|
|
(1) |
|
As restated for effect of employer payroll taxes as described
above. |
F-30
TASER
INTERNATIONAL, INC.
SCHEDULE II VALUATION
AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
Other
|
|
|
|
|
|
End of
|
|
Description
|
|
Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions
|
|
|
Period
|
|
|
Allowance for doubtful
accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
$
|
120,000
|
|
|
$
|
26,620
|
|
|
$
|
|
|
|
$
|
(35,738
|
)
|
|
$
|
110,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004
|
|
$
|
30,000
|
|
|
$
|
90,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2003
|
|
$
|
20,000
|
|
|
$
|
12,908
|
|
|
$
|
|
|
|
$
|
(2,908
|
)
|
|
$
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
EXHIBIT INDEX
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
3.1
|
|
Companys Certificate of
Incorporation, as amended (incorporated by reference to
Exhibit 3.1 to Registration Statement on
Form SB-2,
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
3.2
|
|
Companys Bylaws, as amended
(incorporated by reference to Exhibit 3.2 to Registration
Statement on
Form SB-2,
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
3.3
|
|
Certificate of Amendment to
Certificate of Incorporation dated September 1, 2004
(incorporated by reference to Exhibit 3.3 to the Annual
Report on
Form 10-KSB,
filed March 31, 2005)
|
4.1
|
|
Reference is made to
pages 1 4 of Exhibit 3.1 and
pages 1 5 and 12 14 of
Exhibit 3.2
|
4.2
|
|
Form of Common Stock Certificate
(incorporated by reference to Exhibit 4.2 to Registration
Statement on
Form SB-2,
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
10.1*
|
|
Employment Agreement with Patrick
W. Smith, dated July 1, 1998 (incorporated by reference to
Exhibit 10.1 to Registration Statement on
Form SB-2,
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
10.2*
|
|
Employment Agreement with Thomas
P. Smith, dated November 15, 2000 (incorporated by
reference to Exhibit 10.2 to Registration Statement on
Form SB-2
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
10.3*
|
|
Employment Agreement with Kathleen
C. Hanrahan, dated November 15, 2000 (incorporated by
reference to Exhibit 10.3 to Registration Statement on
Form SB-2
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
10.4*
|
|
Form of Indemnification Agreement
between the Company and its directors (incorporated by reference
to Exhibit 10.4 to Registration Statement on
Form SB-2
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
10.5*
|
|
Form of Indemnification Agreement
between the Company and its officers (incorporated by reference
to Exhibit 10.5 to Registration Statement on
Form SB-2,
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
10.6*
|
|
1999 Employee Stock Option Plan
(incorporated by reference to Exhibit 10.6 to Registration
Statement on
Form SB-2,
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
10.7*
|
|
2001 Stock Option Plan
(incorporated by reference to Exhibit 10.7 to Registration
Statement on
Form SB-2,
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
10.8*
|
|
Form of Warrant issued to Bruce
Culver and Phil Smith (incorporated by reference to
Exhibit 10.8 to Registration Statement on
Form SB-2
effective May 11, 2001 (Registration
No. 333-55658),
as amended)
|
10.9
|
|
Lease between the Company and
Norton P. Remes and Joan A. Remes Revocable Trust, dated
November 17, 2000 (incorporated by reference to
Exhibit 10.14 to Registration Statement on
Form SB-2
effective May 11, 2001 (Registration
No. 333-55658),
as amended
|
10.10
|
|
Form of Sales Representative
Agreement with respect to services by and between the Company
and Sales Representatives (incorporated by reference to
Exhibit 10.15 to the Annual Report on
Form 10-KSB,
filed March 15, 2002), as amended
|
10.11
|
|
Lease Agreement, dated
April 17, 2001, payable to GE Capital Corporation in the
amount of $37,945 (incorporated by referenced to
Exhibit 10.13 to the Annual Report on
Form 10-KSB,
filed March 15, 2002), as amended
|
10.12*
|
|
Employment Agreement with Douglas
E. Klint, dated December 15, 2002 (incorporated by
referenced to Exhibit 10.14 to the Annual Report on
Form 10-KSB,
filed March 15, 2002), as amended
|
10.13
|
|
Credit Agreement dated
July 13, 2004, between the Company and Bank One
(incorporated by reference to Exhibit 10.13 to the Annual
Report on
Form 10-KSB,
filed March 31, 2005)
|
10.14*
|
|
Employment Agreement with Daniel
Behrendt, dated April 28, 2004 (incorporated by reference
to Exhibit 10.14 to the Annual Report on
Form 10-KSB,
filed March 31, 2005)
|
10.15*
|
|
2004 Stock Option Plan
(incorporated by reference to Exhibit 10.15 to the Annual
Report on
Form 10-KSB,
filed March 31, 2005)
|
10.16*
|
|
TASER 2004 Outside Directors Stock
Option Plan (incorporated by reference to Exhibit 10.16 to
the Annual Report on
Form 10-KSB,
filed March 31, 2005)
|
14.1
|
|
Code of Ethics, as adopted by the
Board of Directors (incorporated by reference to
Exhibit 14.1 to the Annual Report on
Form 10-KSB,
filed March 31, 2005)
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
23.1
|
|
Consent of Grant Thornton, LLP,
independent registered public accounting firm
|
23.2
|
|
Consent of Deloitte &
Touche, LLP, independent registered public accounting firm
|
31.1
|
|
Chief Executive Officer
Certification pursuant to
Rule 13a-14(a)
or
Rule 15d-14(a)
|
31.2
|
|
Chief Financial Officer
Certification pursuant to
Rule 13a-14(a)
or
Rule 15d-14(a)
|
32.1
|
|
Chief Executive Officer
Certification pursuant to 18 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 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
* |
|
Management contract or compensatory plan or arrangement |