AXON ENTERPRISE, INC. - Annual Report: 2006 (Form 10-K)
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-16391
TASER International, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 86-0741227 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
|
17800 N. 85th St. | ||
Scottsdale, AZ | 85255 | |
(Address of principal executive offices) | (Zip Code) |
(480) 991-0797
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.00001 par value per share (Nasdaq Global Market)
Securities registered pursuant to Section 12(g) of the Act: None
Common Stock, $0.00001 par value per share (Nasdaq Global Market)
Securities registered pursuant to Section 12(g) of the Act: None
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, 2006, which is the last
business day of the registrants most recently completed second fiscal quarter, as reported by
NASDAQ, was $449,048,952. The number of shares of the registrants common stock outstanding as of
March 9, 2007 was 62,054,907.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of registrants definitive proxy statement to be prepared and filed with the
Securities and Exchange Commission not later than 120 days after December 31, 2006 are incorporated
by reference into Part III of this Form 10-K.
TASER INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K
Year Ended December 31, 2006
Year Ended December 31, 2006
TABLE OF CONTENTS
Table of Contents
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 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, corrections, airline, and private citizen self-defense markets; | ||
(6) | expansion of product capability; | ||
(7) | new product introductions; | ||
(8) | product safety; | ||
(9) | our target business model; | ||
(10) | the automation of our production process; | ||
(11) | our insulation from competition; | ||
(12) | our focus on future development initiatives; | ||
(13) | our expectation that research and development costs will continue to increase; and | ||
(14) | our litigation strategy and the importance of recent favorable verdicts. |
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 including lawsuits resulting from
alleged product related injuries and death; (9) negative media publicity concerning our products;
(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 current and prospective 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) aligning manufacturing production with sales demand; (23) medical and safety
studies; (24) the timing and outcome of the final court approval
of our shareholder litigation
settlement; (25) the outcome of any current or future tax audit of
us, and (26) other factors detailed in our filings with the Securities and Exchange
Commission, including, without limitation, those factors detailed in ITEM 1A. of this annual report
entitled Risk Factors. The risks included in the
foregoing list are not exhaustive. Other sections of this report
may include additional factors that could adversely affect our business and financial performance.
New risk factors emerge from time to time, and it is not possible for management to predict all
such factors, nor can it assess the impact of all such risk factors or the extent to which any
factor, or combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements. We undertake no
obligations to update or revise forward looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to projections over time.
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,
TASER
C2tm,
TASER X26ctm and
AFIDtm.
Each other trademark, trade name or service mark appearing in this report belongs to its respective holder.
Item 1. | Business |
Overview
TASER International, Inc. (the Company or TASER or we or us) is a global leader in the
development and manufacture of advanced electronic control devices designed for use in law
enforcement, corrections, private security and personal defense. Since our founding in 1993, we
have remained committed to providing solutions to violent confrontation by developing products that
enable people to protect themselves. To that end, 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. We have done this 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 in international markets.
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Products
Electronic Control Devices
We make electronic control devices for two main types of target markets; 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 product 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 TASER X26, various
cartridges, TASER Cam, a proprietary battery system, a digital power magazine, download software and
equipment, extended warranties, and a number of holstering options and accessories.
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 and 2006. Our 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.
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
more time 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.
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
X26 C retails for $995.95. The kit includes the X26 C 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.
Cartridges 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 five 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.
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In
2006, we launched an accessory to the X26 called the TASER Cam. The
TASER Cam is a video
recording device that captures both video and audio of potential and actual TASER use incidents.
The device captures video and audio before, during and after a TASER deployment, which provides law
enforcement with a greater level of accountability to support their use of TASER devices against a
resistant subject. The TASER Cam is capable of recording in zero light conditions through the use of
an infrared illuminator. A non audio version of the device is also available for agencies operating
in states where legislation prohibits the use of audio recordings.
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.
Product Warranties
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.
We offer a one year limited warranty on all of the ADVANCED TASER devices and TASER
X26 c 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.
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 9,800 law enforcement agencies have made initial purchases of our
TASER brand devices for testing or deployment. In addition, approximately 3,300 police departments
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; Maricopa County, Arizona Sheriff and the State of Wisconsin.
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Military Forces, both United States and Foreign Allies
During 2006, TASER devices continued to be deployed in support of key strategic operations in
locations around the world. In total, we have shipped military users approximately 8,000 TASER
devices through the end of 2006. Additionally, in 2006 we began a focus initiative on supporting
our military customers. We hired the former head of the Military Joint Non Lethal Weapons
Directorate as our Vice President of Government and Military Programs. Additionally, we formed a
Senior Executive Advisory Group (SEAG) comprised of a team of professionals with extensive
military, homeland defense and law enforcement experience with the purpose of advising on business
models in support of military users. With this new focus, a new business group has been formed
(Government and Military Programs) with the focus on supporting military use of for our existing
hardware as well as developing increased technology development through contracted support.
In January 2006, we completed phase four of an Office of Naval Research (ONR) grant
to develop the wireless eXtended Range Electromuscular Projectile (XREP). The intention of the
grant was to develop the technologies required to demonstrate a 12-guage wireless Human
Electro-Muscular Incapacitation (HEMI) projectile at a Technology Readiness Level (TRL) of 6. The
grant was concluded with the delivery and subsequent discharge of 25 projectiles. All contracted
activities including the final report were completed in the first quarter of 2006. We are
currently in discussions with our military customers on the scope of the next contracted
activities. Additionally, we believe the maturity of the XREP has reached a level that transition
to a product having broad market appeal is close enough to justify continued internal development.
For this reason, we are continuing the development of the XREP from the demonstrated TRL 6 level in
2006 by focusing on design for manufacturability. We anticipate that a production projectile will
be available for sale in 2007.
Our work on the firm fixed price contract awarded to us by the U.S. Army ARDEC, as well as the
final report, was completed in the first quarter of 2006 for the amount of $65,000. This effort
was well received by our Army customer and discussions are in process for the scope and direction
of follow-on activities.
Late in 2006, we announced a new area denial technology based on improved sensing,
awareness, and networking capabilities called the TASER Remote Area Denial (T-RAD). A
sophisticated networking and user interface capability to integrate and control T-RAD devices was
also introduced as the TASERNET. We presented these concepts to military and law enforcement
customers for comment and we received positive feedback. For this reason, we plan to continue
development of the T-RAD/TASERNET capabilities in 2007.
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. Private security
guards represent a broad range of individuals, including bodyguards, commercial and government
building security guards, commercial money carrier employees and many others.
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 represented a
small percentage of our total business. We introduced a private citizen version of our X26 device
(X26C) in 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 our newly developed TASERC2
personal protector product (see Research and Development section below), the
X26 C product, and legislation relating to the purchase and use 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, the agency heads training staff, and weapons experts.
Depending on the size and cost of the device deployment and local procurement rules and customs,
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 9,800
law enforcement agencies.
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Since the introduction of the ADVANCED TASER device in 1999, we have used several types of media to
communicate the benefits of acquiring and deploying our products. 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 1,600 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 2006, we attended and
exhibited at 79 regional and national law enforcement trade shows. In 2006, we held our seventh
annual U.S. Tactical Conference for the trained master instructors, and law enforcement training
officers. We also conducted our fifth and largest European Tactical Conference to reach customers
in more than 20 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
2006 was to 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 2007, as it provides us the ability to market our products to our 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 have one military and government contracting distributor.
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 monitor our law enforcement distributors closely to help ensure that our service standards are
achieved. We also reserve the right to take any large agency order directly to secure the agencys
account balance with us.
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 distribute the X26C to federal
firearms licensed (FFL) dealers for public sale. As of December 31, 2006, this 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. In
2006, we continued to sell through web sales and our established commercial distributors.
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 our domestic market distributors. They perform demonstrations, attend
industry tradeshows, maintain country specific web sites, engage in print advertising, and arrange
training classes.
In 2006, 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 2007, 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.
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We shipped products to approximately 35 countries during fiscal 2006. As a
percentage of total sales, sales outside the U.S. increased slightly to approximately 14% in 2006
from 13% in 2005. Sales outside the U.S were 4% of total net sales in 2004. Our international sales
in 2006 included the shipment of two large orders to France consisting of approximately 2,000
units. Reference is made to Note 2(o) in the accompanying financial statements in Part II, Item 8
of this Form 10-K for further information concerning our sales and long lived assets by
geographic region.
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, corrections and security agency trainers as
instructors in the use of the TASER devices. As of December 31, 2006, approximately 26,000 law
enforcement officers around the world have been trained and certified as instructors in the proper
use of TASER brand devices. This includes approximately 23,550 officers in the United States and
2,450 in other countries.
Currently, 650 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 their own organization.
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. We provide
logistical support for the training classes. 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 325 training courses in
2006 and, as of December 31, 2006, we have conducted a cumulative 1,644 training courses during
which we have trained more than 26,000 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 our 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. In 2004, we also created the position of Senior Master
Instructor. Eight experienced Master Instructors were promoted to this position based on their
exemplary performance as Master Instructors. Their primary duties are to perform quality control
checks on Master Instructors during an instructor course and to help instruct at the Master
Instructor School.
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.
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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. During 2006, we learned that one of those companies introduced a new two-shot device
to compete with the TASER X26. To date, we do not know of any significant sales of any competing
products. 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.
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 three 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, safety 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. The remaining inventory
of Bestex is believed to consist of 11 units.
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 devices.
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. These combined efforts were successful in
changing the legislation in the states of Hawaii, Massachusetts and Michigan. We consider this to
be an important change in regulations. 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.
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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:
Law Enforcement | |||||
State | Use | Private citizen Use | |||
Connecticut
|
Legal | Legal, subject to restrictions | |||
District of Columbia
|
Legal | Legal, subject to restrictions | |||
Florida
|
Legal | Legal, subject to restrictions | |||
Hawaii
|
Legal | Prohibited | |||
Illinois
|
Legal | Legal, subject to restrictions | |||
Indiana
|
Legal | Legal, subject to restrictions | |||
Massachusetts
|
Legal | Prohibited | |||
Michigan
|
Legal | Prohibited | |||
New Jersey
|
Prohibited | Prohibited | |||
New York
|
Legal | Prohibited | |||
North Carolina
|
Legal | Legal, subject to restrictions | |||
North Dakota
|
Legal | Legal, subject to restrictions | |||
Rhode Island
|
Legal | Prohibited | |||
Washington
|
Legal | Legal, subject to restrictions | |||
Wisconsin
|
Legal | Prohibited |
United States Export Regulation
Our
devices are considered a crime control product by the United States
Department of Commerce. Accordingly, the export of our devices 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 devices. 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 devices, 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, the Netherlands, Norway, Serbia, and Pakistan.
Additionally, Australia, Canada, Greece, India, Latvia, Lithuania, South Korea,
Sweden, Switzerland and New Zealand 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 been no significant orders from this
country, we believe 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. Currently, all 43 police forces in England, Wales and
Scotland deploy TASER technology within their firearms teams. To date, there have been several
successful outcomes involving the use of TASER devices reported by
the police forces deploying them.
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TASER device sales to civilians are permitted in Austria, Bahamas, Bulgaria, Costa Rica,
Croatia, Czech Republic, Ecuador, France, Germany, Mexico, Poland, Romania, Slovenia, and South
Africa.
Intellectual Property
We protect our intellectual property with U.S. and foreign patents and trademarks.
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. As of February 28, 2007, we hold 18 United States patents and 7
international patents and also have numerous patents and trademarks pending. Our patents expire at
varying dates ranging between 2010 and 2024.Our earliest expiring United States patent generally
covers projectile propellant devices having a container of compressed gas in place of gunpowder as
a propellant. We use this technology in our cartridges. This patent expires in 2010. 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.
Confidentiality agreements are used with employees, consultants and key suppliers
to help ensure the confidentiality of our trade secrets.
TASER has the exclusive rights to the internet domain names taser.com and
taser.eu.
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 externally funded by
customers having requirements for expanded capabilities. Both categories focus on next generation
technology, yet are differentiated by the anticipated breadth of market opportunity, the time to
project 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 that we believe generally will have broad market appeal. The work completed in 2006 for
the Office of Naval Research and the U.S. Army ARDEC has been focused on developing capabilities to
support military combat or policing activities. These projects generally represent product
development which are long-term in nature and outside resources team member companies or expert
consulting.
Research and Development 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 $2.7 million,
$1.6 million and $824,000 in 2006, 2005 and 2004, respectively. This allowed the R&D department to
expand to 27 engineers and technicians at the end of 2006. Our investment in research and
development staff and equipment continues to represent a significant increase from previous years
and reflects our commitment to maintaining and extending our current technology. The return on that
investment is intended to be realized over the long term but new systems and technologies continue
to have an impact on our business. In 2006, the TASER Cam product has been launched and has entered
production. Additionally, a new commercial product was developed in 2006 and was announced at the
beginning of 2007 called the C2 personal protector. This new device is a compact system that
provides the same NMI effectiveness as our market leading X26 but in a form factor that will be
more attractive to private citizens. Additionally, we believe the maturity of the XREP has reached
a level that transition to a product having broad market appeal is close enough to justify
continued internal development. For this reason, we are continuing the development of the XREP
from the demonstrated TRL 6 level achieved in 2006 by focusing on design for manufacturability. We
anticipate that a production projectile will be available for sale in 2007. In addition to the
development of new products many product improvement projects were completed, increasing the
reliability and quality of our current products.
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, 2006, we had 240 full-time employees and 67 temporary employees of which 59
are employed in direct manufacturing. The breakdown of our full time employees by department is as
follows: 110 direct manufacturing employees and 130 administrative and manufacturing support
employees. Of the 130 administrative and manufacturing support employees; 39 were involved in
sales, marketing, communication and training; 27 were employed in research, development and
engineering; 21 were employed in administrative functions inclusive of executive management, legal,
finance, accounting and investor relations; 8 were employed in information systems technologies; 12
were employed in quality control and 23 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.
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Available Information
We
were incorporated in Arizona in September 1993 as an 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.
Item 1A. | Risk Factors |
Because of the following factors, as well as other variables affecting our operating results, past
financial performance may not be a reliable indicator of future performance and historical trends
should not be used to anticipate results or trends in future periods.
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.
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 such as the military market. Law enforcement and corrections agencies may be
influenced by claims or perceptions that conducted energy weapons are unsafe or may be used in 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.
We substantially depend on sales of our TASER X26 products, and if these products are not
widely accepted, our growth prospects will be diminished.
In the years ended December 31, 2006, 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.
If we are unable to manage any growth in our business, our prospects may be limited and our
future profitability may be adversely affected.
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, 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.
We may face personal injury, wrongful death and other liability claims that harm our
reputation and adversely affect our sales and financial condition.
Our products are often used in aggressive confrontations that may result in serious, permanent
bodily injury or death to those involved. Our products may 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, defective 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, fines and penalties in
excess of insurance coverage, and divert management attention from our business.
We are involved in numerous litigation matters relating to our products or the use of such
products, litigation against persons who we believe have defamed our
products, litigation against medical examiners who made errors in their autopsy
reports, litigation against a competitor, litigation against
our former patent attorney as well as shareholder class action and shareholder derivative lawsuits.
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. In particular, we recently reached an agreement to settle
our shareholder class action lawsuits and derivative lawsuits for approximately $21.75 million, of
which approximately $4.1 million is covered by insurance.
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.
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 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.
If we are unable to design, introduce and sell new products or new product features
successfully, our business and financial results could be adversely affected.
Our future success will depend on our ability to develop new products or new
product features that achieve market acceptance in a timely and cost-effective manner. The
development of new products and new product features 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 or new product features 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 decrease for the year ended December 31, 2005 compared to the
year ended December 31, 2004 was impacted in part by 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.
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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
a number of 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.
Foreign regulation: Certain foreign jurisdictions, including Japan, Australia, Italy and Hong
Kong, prohibit the sale of conducted energy devices such as our products, limiting our
international sales opportunities.
Environmental laws and regulations subject us to a number of risks and could result in significant
liabilities and costs.
We may be subject to various state, federal and international laws and regulations governing
the environment, including restricting the presence of certain substances in electronic products
and making producers of those products financially responsible for the collection, treatment,
recycling and disposal of those products. Recent environmental legislation within the European
Union (EU) may increase our cost of doing business internationally and impact our revenues from EU
countries as we comply with and implement these new requirements.
The EU has published Directives on the restriction of certain hazardous substances in
electronic and electrical equipment (the RoHS Directive) which became effective in July 2006, and
on electronic and electrical waste management (the WEEE Directive). The RoHS Directive restricts
the use of a number of substances, including lead. The Waste Electrical and Electronic Equipment
Directive, or WEEE directs members of the European Union to enact laws, regulations, and
administrative provisions to ensure that producers of electric and electronic equipment are
financially responsible for the collection, recycling, treatment and environmentally responsible
disposal of certain products sold into the market after August 15, 2005 and from products in use
prior to that date that are being replaced. In addition, similar environmental legislation has been
or may be enacted in other jurisdictions, including the U.S. (under federal and state laws) and
other countries, the cumulative impact of which could be significant.
We continue to evaluate the impact of specific registration and compliance activities required
by the RoHS and WEEE Directives. We endeavor to comply with these environmental laws, yet
compliance with such laws could increase our operations and product costs; increase the
complexities of product design, procurement, and manufacturing; limit our ability to manage excess
and obsolete non-compliant inventory; limit our sales activities; and impact our future financial
results. Any violation of these laws can subject us to significant liability, including fines,
penalties, and prohibiting sales of our products into one or more states or countries, and result
in a material adverse effect on our financial condition.
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 upon our proprietary technology. Our protective measures, including
patents, trademarks and trade secret protection, may prove inadequate to protect our proprietary rights.
Our earliest expiring United States patent generally covers projectile propellant devices having a
container of compressed gas in place of gunpowder as a propellant. We use this technology in our
cartridges. This patent expires in 2010. 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 now issued as granted patents. 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. In March 2006, the court issued a temporary restraining
order and a preliminary injunction preventing Mr. Watkins from selling, assigning, transferring, or
licensing this patent to a third party during the duration of this litigation.
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We may be subject to intellectual property infringement claims, which could 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.
If we face competition in foreign countries, we can enforce patent rights only in the jurisdictions
in which our patent applications have been granted.
Our US patents only protect us from imported infringing products coming into the US from
abroad. Applications for patents in a few foreign countries have been made; however, these may be
inadequate to protect markets for our products in other foreign countries. Each foreign patent is
examined and granted according to the law of the country where it was filed independent of whether
a US patent on similar technology was granted.
Government regulations applied to our products may affect our markets for these products.
We rely on the opinions of The Bureau of Alcohol Tobacco and Firearms, including that a device
that has projectiles propelled by the release of compressed gas, in place of the expanding gases
from ignited gunpowder, are not classified as firearms. Changes in statutes, regulations, and
interpretation outside of our control may result in our products being classified or reclassified
as firearms. Our market to civilians could be substantially reduced if consumers are required to
obtain registration to own a firearm prior to purchasing our products.
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. During 2006, one of those companies introduced a new device to compete with
the TASER X26. We are unable to predict 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.
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. Defects in our products may result
in a loss of sales, delay in market acceptance and injury to our reputation and increased warranty
costs.
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.
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.
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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.
We may experience a decline in gross margins due to rising raw material and transportation costs
associated with an increase in petroleum prices.
A significant number of our raw materials are comprised of petroleum based products, or incur
some form of landed cost associated with transporting the raw materials or components to our
facility. Any significant rise in oil prices such as that which occurred in 2006 could adversely
impact our ability to sustain current gross margins, by reducing our ability to control component
pricing.
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, budgetary cycles of municipal, state and federal law
enforcement and corrections agencies and the outcome of any current or future tax audits. 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.
While we believe that we currently have adequate internal control over financial reporting, we are
exposed to risks from legislation requiring companies to evaluate those internal controls.
Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our
independent registered public accounting firm to attest to, the effectiveness of our internal
control structure and procedures for financial reporting. We have an ongoing program to perform the
system and process evaluation and testing necessary to comply with these requirements. However,
this legislation is relatively new and subject to changing
interpretations, and companies and
accounting firms have limited experience in complying with its requirements. As a result, we have
incurred, and expect to continue to incur increased expense and to devote additional management
resources to Section 404 compliance. In the event that our chief executive officer, chief financial
officer or our independent registered public accounting firm determine that our internal control
over financial reporting is not effective as defined under Section 404, investor perceptions of us
may be adversely affected and could cause a decline in the market price of our stock.
We may experience difficulties in the future 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 our annual report on Form 10-K for the fiscal year
ending December 31, 2005, we have been 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. In our
Form 10-K for our 2005 fiscal year, 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.
Because of these material weaknesses, there is heightened risk that a material misstatement of
our annual or quarterly financial statements will not be prevented or detected. While we have
completed our remediation efforts to address these material weaknesses and while we did not
identify any materials weaknesses at December 31, 2006, we cannot assure you that material
weaknesses will not occur in future periods. If we fail to maintain proper and effective internal
controls in future periods, it could adversely affect our operating results, financial condition
and our ability to run our business effectively and could cause investors to lose confidence in our
financial reporting.
16
Table of Contents
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 2006 compared to 2005 and in 2004 and 2003. 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.
Item 1B. | Unresolved Staff Comments |
None
Item 2. | Properties |
Principal Location, Corporate Headquarters and Manufacturing Facilities
Our corporate headquarters and manufacturing facilities are based in a 100,000 square
foot facility in Scottsdale, Arizona which we own.
Item 3. | Legal Proceedings |
See discussion of Legal Proceedings in Note 8c to the financial statements included in
Part II, Item 8 of this annual report.
Item 4. | Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of security holders during the fourth quarter of 2006.
17
Table of Contents
PART II
Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
Our common stock is quoted under the symbol TASR on The NASDAQ Global Select
Market. The closing price of our common stock on March 9, 2007
was $7.78.
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.
Common Stock TASR
Fiscal Quarters | High | Low | ||||||
March 31, 2005
|
$ | 29.98 | $ | 11.99 | ||||
June 30, 2005
|
$ | 11.68 | $ | 7.64 | ||||
September 30, 2005
|
$ | 10.24 | $ | 5.88 | ||||
December 31, 2005
|
$ | 7.98 | $ | 5.42 | ||||
March 31, 2006
|
$ | 10.91 | $ | 7.06 | ||||
June 30, 2006
|
$ | 11.04 | $ | 7.47 | ||||
September 30, 2006
|
$ | 8.57 | $ | 6.89 | ||||
December 31, 2006
|
$ | 9.69 | $ | 7.43 |
Holders
As
of March 9, 2007, there were approximately 342 holders of record of our Common
Stock.
Dividends
To date, we have not declared or paid cash dividends on our common stock. We do not
intend to pay cash dividends in the foreseeable future. Our revolving line of credit with our
principal bank prohibits the payment of cash dividends.
Issuer Purchases of Equity Securities
We
did not repurchase any shares of our common stock in the fourth
quarter of 2006.
Recent Sales of Unregistered Securities
No unregistered securities were sold by us in 2006.
Stock Performance Graph
The following stock performance graph compares the performance of our common stock to the
NASDAQ Stock Market (U.S.) and the Russell 3000 Index. The Graph covers the period from December
31, 2001 to December 31, 2006. The graph assumes that the value of the investment in our stock and
in each index was $100 at December 31, 2001 and that all
dividends were reinvested. We do not pay dividends on our common
stock.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among TASER International, Inc., The NASDAQ Composite Index
And The Russell 3000 Index
Among TASER International, Inc., The NASDAQ Composite Index
And The Russell 3000 Index
![(PERFORMANCE GRAPH)](https://www.sec.gov/Archives/edgar/data/0001069183/000095015307000571/p73555p7355501.gif)
12/01 | 12/02 | 12/03 | 12/04 | 12/05 | 12/06 | |||||||
TASER International, Inc. | 100.00 | 29.38 | 599.05 | 2762.18 | 607.43 | 664.15 | ||||||
NASDAQ Composite | 100.00 | 69.66 | 99.71 | 113.79 | 114.47 | 124.20 | ||||||
Russell 3000 | 100.00 | 78.46 | 102.83 | 115.11 | 122.16 | 141.35 |
18
Table of Contents
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
operations data for the years ended
December 31, 2006, 2005 and 2004 and the balance sheet data as of December 31, 2006 and 2005 have
been derived from and should be read in conjunction with our audited financial statements and the
notes thereto included herein. The statement of operations data for the years ended December 31, 2003
and 2002 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, 2004, 2003 and 2002
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, | ||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
(As restated)(b) | ||||||||||||||||||||
Statement of
Operations Data |
||||||||||||||||||||
Net sales |
$ | 67,717,851 | $ | 47,694,181 | $ | 67,639,879 | $ | 24,455,506 | $ | 9,842,777 | ||||||||||
Gross margin |
43,179,061 | 29,597,895 | 45,184,383 | 15,052,890 | 5,536,226 | |||||||||||||||
Sales, general and administrative expenses |
29,680,764 | 26,483,485 | 13,880,322 | 6,973,721 | 5,038,712 | |||||||||||||||
Research and development expenses |
2,704,521 | 1,574,048 | 823,593 | 498,470 | 136,503 | |||||||||||||||
Shareholder litigation settlement expense (a) |
17,650,000 | | | | | |||||||||||||||
Income (loss) from operations |
(6,856,224 | ) | 1,540,362 | 30,480,468 | 7,580,699 | 361,591 | ||||||||||||||
Net income (loss) |
(4,087,679 | ) | 1,056,516 | 18,881,742 | 4,453,690 | 208,903 | ||||||||||||||
Income (loss) per common and common
equivalent shares |
||||||||||||||||||||
Basic (1) |
$ | (0.07 | ) | $ | 0.02 | $ | 0.33 | $ | 0.12 | $ | 0.01 | |||||||||
Diluted (1) |
$ | (0.07 | ) | $ | 0.02 | $ | 0.30 | $ | 0.10 | $ | 0.01 | |||||||||
Weighted average number of common and common
equivalent shares outstanding |
||||||||||||||||||||
Basic (1) |
61,984,240 | 61,303,939 | 57,232,329 | 37,889,640 | 33,561,204 | |||||||||||||||
Diluted (1) |
61,984,240 | 63,556,246 | 62,319,590 | 46,598,312 | 34,915,404 |
As of December 31, | |||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||
(As restated)(b) | |||||||||||||||||||||
Balance Sheet Data |
|||||||||||||||||||||
Working capital |
$ | 37,813,576 | $ | 34,663,101 | $ | 51,100,989 | $ | 22,479,594 | $ | 5,336,963 | |||||||||||
Total assets |
119,837,689 | 112,241,247 | 109,452,578 | 31,444,690 | 7,904,213 | ||||||||||||||||
Total current liabilities |
18,302,688 | 7,586,701 | 8,933,939 | 3,895,371 | 1,804,305 | ||||||||||||||||
Total long
term obligations |
30,974 | 76,188 | | 3,655 | 15,486 | ||||||||||||||||
Total stockholders equity |
$ | 99,328,539 | $ | 103,738,375 | $ | 99,910,783 | $ | 27,427,450 | $ | 6,014,601 |
a) | As discussed in Note 8c to the financial statements included in Part II, Item 8 of this annual report, in 2006 we reached an agreement to settle our securities class action and shareholder derivative lawsuits. The total litigation settlement expenses reflected in the income statement for the year ended December 31, 2006 were $17.65 million. | |
b) | See Note 14 to the financial statements in Item 8 of this Form 10-K. |
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) is designed to provide a reader of our financial statements with a narrative from
the perspective of our management on our financial condition, results of operations, liquidity and
certain other factors that may affect our future results. Our MD&A is presented in nine sections:
| Executive Overview | |
| Key Strategic Initiatives | |
| 2006 Overview | |
| 2007 Outlook | |
| Results of Operations | |
| Liquidity and Capital Resources | |
| Off-Balance-Sheet Arrangements | |
| Contractual Obligations | |
| Critical Accounting Estimates |
Our MD&A should be read in
conjunction with the other sections of this annual report on Form
10-K, including Part I, Item 1A: Risk Factors 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. The following information has
been adjusted to reflect
the restatement of the Companys 2005 financial results, which
is more fully described in Note 14 to the financial
statements. The net of tax impact of the adjustments on our 2005 results of operation was $(6,341). The impact of these
adjustments was not significant to our operating results, trends, or liquidity in 2005.
19
Table of Contents
Executive Overview
We are a global leader in the development and manufacture of advanced electronic
control 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 Electronic Control Devices (ECDs)
is normally made by a group of people including the agency head, the agency heads 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 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, defective 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 Strategic Initiatives
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 22% 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. | ||
| Grow our presence in the private citizen market. Having consistently demonstrated the effectiveness of our technology in the professional law enforcement community we aim to leverage this experience to increase our presence in the private citizen market. At the forefront of this initiative will be the introduction of the TASER C2 personal protector, a newly developed product which successfully debuted at the Consumer Electronics Show in January 2007. This new device is a compact system that provides the same proven Neuro-Muscular Incapacitation (NMI) effectiveness as our market leading X26 but in a form factor and at a price point that will be more attractive to private citizens. The TASER C2 also promotes responsible ownership and aims to prevent misuse with the introduction of a background check system whereby the device remains inactive until the owner has successfully completed a background check either online or via a toll-free telephone number. In addition the TASER C2 cartridges each have a unique serial number and are equipped with Anti-Felon Identification tags, which are dispersed upon deployment and which would allow the police to track a potential misuse. We expect to begin shipments of the TASER C2 in the second quarter of 2007. | ||
| Further develop our presence in government and military markets. In 2006, we introduced a focus initiative to support our military customers. We hired the former head of the Military Joint Non Lethal Weapons Directorate as our Vice President of Government and Military Programs and we formed a Senior Executive Advisory Group (SEAG) comprised of a team of professionals with extensive military, homeland defense and law enforcement experience with the purpose of advising on business actions in support of military users. With this new focus, a new business group has been formed by us (Government and Military Programs) with the sole emphasis on supporting military use of for our existing hardware as well as increasing technology development through contracted support. |
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| Continual development of new innovative products, which both complement and add to our existing products. These development efforts include the TASER C2 personal protector mentioned above and the wireless eXtended Range Electromuscular Projectile (XREP), which, following a successful test of the device for the ONR in January 2006 was further developed throughout 2006 with focus on design for manufacturability. A production projectile is expected to be available for sale in 2007. Additionally, late in 2006 we announced a new area denial technology based on improved sensing, awareness, and networking capabilities called the TASER Remote Area Denial (T-RAD). A sophisticated networking and user interface capability to integrate and control T-RAD devices was also introduced as the TASERNET. These concepts have been presented to military and law enforcement customers for comment with positive feedback. For this reason, we plan to continue development of the T-RAD/TASERNET capabilities in 2007. | ||
| Continued application for patents and intellectual property rights to protect key technology in our products and further protect our competitive position. | ||
| 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. Through March 9, 2007, we have had a total of 37 cases dismissed or defense judgments in our favor. We view a continued record of successful litigation defense as a key factor for our long term growth. |
2006 Overview
Management believes that its ability to achieve a balance between growing our core business
and building the foundations for future growth is the key to increasing long-term shareholder
value. Our 2006 performance and the initiatives we have put in place reflect our continuing
commitment to achieving this balance.
Some 2006 highlights include:
| During 2006, our focus on rebuilding our momentum in the law enforcement community delivered a return to the level of sales achieved in 2004. This manifested in a 42% sales increase in 2006, growing to a record $67.7 million compared to $47.7 million in 2005 and surpassing the $67.6 million we achieved in 2004. This growth in 2006 was achieved with the introduction of new TASER device deployments in approximately 1,800 law enforcement agencies, the expansion to full deployment of our devices by approximately 1,300 agencies and the repeat business that this generates. The supplemental orders we fulfilled during 2006 demonstrates the continuing trend of law enforcement agencies expanding the use of TASER ECDs to their first responders. We believe that the ongoing proven effectiveness of our products and their continued acceptance provides a platform from which to generate further growth. | ||
| In 2006, we advanced our international presence with the shipment of TASERX26s, TASER Cam systems, cartridges and accessories to France, following a lengthy trial and evaluation process. This represents the first shipments under a tender award to the Companys distributor which was authorized by the French government to purchase up to 5,000 TASER systems. | ||
| We began shipping our first TASER Cam units, enhancing our market position as the leader in accountability for non-lethal technology. | ||
| Our strategy of vigorously defending against product liability lawsuits continues to be successful. The dismissals during 2006 included the Alvarado litigation, which was the first in-custody death trial for TASER International and was an important win with a central Los Angeles jury for both TASER International as well as the City of Los Angeles Police Department. Statistics from our customers show that TASER ECDs significantly reduce use of force claims and litigation. As such, we believe the jury verdict in this case is an important indication that juries are seeing the life-saving benefits of law enforcement using TASER technology in the dangerous situations they face every day. |
2007 Outlook
In 2007, we aim to build on the momentum generated in 2006 with a continued commitment to
quality and our unrelenting focus on innovation. We intend 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 continuing to move
forward with evaluation and implementation of TASER programs. We believe that this, when combined
with the planned new product introductions and other key initiatives
identified above, should result
in positive new business growth in 2007.
21
Table of Contents
Results of Operations
The following table presents our statements of operations as well as the percentage relationship to
total net revenues of items included in our statements of operations
(dollars in thousands):
Year ended December 31, | ||||||||||||||||||||||||
2006 | 2005 | 2004 | ||||||||||||||||||||||
(As restated) | ||||||||||||||||||||||||
Net sales |
$ | 67,718 | 100 | % | $ | 47,694 | 100 | % | $ | 67,640 | 100 | % | ||||||||||||
Cost of products sold |
24,539 | 36 | % | 18,096 | 38 | % | 22,455 | 33 | % | |||||||||||||||
Gross margin |
43,179 | 64 | % | 29,598 | 62 | % | 45,185 | 67 | % | |||||||||||||||
Sales, general and administrative expenses |
29,681 | 44 | % | 26,483 | 56 | % | 13,880 | 21 | % | |||||||||||||||
Research and development expenses |
2,705 | 4 | % | 1,574 | 3 | % | 824 | 1 | % | |||||||||||||||
Shareholder litigation settlement expense |
17,650 | 26 | % | | # | | # | |||||||||||||||||
Income (loss) from operations |
(6,857 | ) | -10 | % | 1,541 | 3 | % | 30,481 | 45 | % | ||||||||||||||
Interest income |
1,880 | 3 | % | 1,229 | 3 | % | 439 | 1 | % | |||||||||||||||
Interest expense |
(7 | ) | # | (4 | ) | # | (1 | ) | # | |||||||||||||||
Other income and expense |
| # | (60 | ) | # | 2 | # | |||||||||||||||||
Income (loss) before income taxes |
(4,984 | ) | -7 | % | 2,706 | 6 | % | 30,921 | 46 | % | ||||||||||||||
Provision (benefit) for income taxes |
(896 | ) | -1 | % | 1,649 | 3 | % | 12,039 | 18 | % | ||||||||||||||
Net income (loss) |
$ | (4,088 | ) | -6 | % | $ | 1,057 | 2 | % | $ | 18,882 | 28 | % | |||||||||||
# Less than 1%
Net Sales
For the years ended December 31, 2006, 2005 and 2004, sales by product line and by
geography were as follows (dollars in thousands):
2006 | 2005 | 2004 | ||||||||||||||||||||||
Sales by Product Line |
||||||||||||||||||||||||
TASER X26 |
$ | 45,241 | 67 | % | $ | 31,313 | 66 | % | $ | 46,083 | 68 | % | ||||||||||||
TASER Cam |
2,289 | 3 | % | | # | | # | |||||||||||||||||
ADVANCED TASER |
2,578 | 4 | % | 2,635 | 6 | % | 3,929 | 6 | % | |||||||||||||||
AIR TASER |
116 | # | 78 | # | 107 | # | ||||||||||||||||||
Single Cartridges |
15,269 | 23 | % | 12,468 | 26 | % | 14,655 | 22 | % | |||||||||||||||
Other |
2,225 | 3 | % | 1,200 | 3 | % | 2,866 | 4 | % | |||||||||||||||
Total |
$ | 67,718 | 100 | % | $ | 47,694 | 100 | % | $ | 67,640 | 100 | % | ||||||||||||
# Less than 1%
Sales by Geographic Area | 2006 | 2005 | 2004 | |||||||||||||||||||||
United States |
86 | % | 87 | % | 96 | % | ||||||||||||||||||
Other Countries |
14 | % | 13 | % | 4 | % | ||||||||||||||||||
Total |
100 | % | 100 | % | 100 | % | ||||||||||||||||||
Net sales for the year ended December 31, 2006 were $67.7 million, an increase of
$20.0 million, or 42%, compared to $47.7 million in 2005. We believe the principal reasons for the
increase in net sales are related to us overcoming the various types of
negative publicity we experienced during the course of 2005. Specifically, as a result of a formal
investigation by the Securities Exchange Commission (SEC), ongoing negative press coverage and
increased amounts of litigation concerning our products and their use, many prospective customers,
particularly law enforcement agencies, frequently postponed implementation decisions. With the
resolution of key portions of the SEC investigation in December 2005, we noted that many of the
agencies that were postponing decisions began moving forward with their evaluation and implementation programs
and decisions to purchase our products, which had a positive impact on our sales during 2006.
Specifically, sales of our predominant TASER X26 product line and the related increase in single
cartridge sales demonstrate the increased market penetration and continued use of TASER devices by
law enforcement.
TASER X26 product line sales increased $13.9 million, or 44%, to $45.2 million for 2006
compared to $31.3 million for 2005 and represented 67% and 66% of our total net sales in 2006 and
2005, respectively. Single cartridge sales increased $2.8 million, or 22%, to $15.3 million in 2006
compared to $12.5 million in 2005. In addition, the introduction
of the TASER Cam device in 2006
contributed $2.3 million to 2006 net sales. Other sales include warranty, research funding,
training and shipping revenues net of cash and distributor discounts. International sales in 2006
represented approximately 14% or $9.5 million of total net sales compared to approximately 13% or
$6.2 million in 2005 reflecting our continued commitment to marketing efforts in countries outside
the United States.
22
Table of Contents
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. As noted above, we believe the principal cause
of the decline in 2005 was attributable to the SEC investigation, ongoing negative press coverage
and increased litigation concerning our products and their use. In particular, these events
resulted in longer sales cycles and order delays from prospective customers. The TASER X26 product
line continued to be our leading product in 2005 representing 66% of our total net sales compared
to 68% in 2004. Sales to countries outside of the U.S increased to 13% in 2005 from 4% in 2004.
Cost of Products Sold
For the year ended December 31, 2006, cost of products sold were $24.5 million, an increase of
$6.4 million, or 36%, over the same period in 2005. However, as a percentage of net sales, cost of
products sold decreased to 36% for 2006 compared to 38% for the same period in the prior year. The
decrease in cost of products sold as a percentage of sales for 2006 is primarily attributable to
the increased volume of device and ancillary product sales in 2006 providing a larger number of
units over which to apply relatively fixed indirect manufacturing expenses, resulting in lower per
unit costs. In addition, improved production throughput and lower scrap expense were partially
offset by increases in the cost of petroleum-based raw materials. Indirect expenses primarily
include indirect salaries for manufacturing support personnel including manufacturing engineering,
quality and materials management, scrapped materials, freight, supplies and depreciation.
Cost of products sold decreased $4.4 million, or 19%, to $18.1 million for 2005 compared to
$22.5 million for 2004. As a percentage of net sales, cost of products sold increased to 38% 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 the relocation to our new headquarters and manufacturing facility.
Gross Margin
Gross margin increased $13.6 million, or 46%, to $43.2 million for the year ended
December 31, 2006 compared to $29.6 million for the year ended December 31, 2005. As a percentage
of net sales, gross margin increased to 64% for the year ended December 31, 2006 compared to 62%
for the year ended December 31, 2005. The increase in gross margin was due to the lower cost of
sales per unit from the improved leverage of indirect manufacturing expenses and improved
production yields as discussed above.
Gross margins for the year ended December 31, 2005 decreased $15.6 million, or 34%, compared
to 2004. As a percentage of net sales, gross margin declined to 62% 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.
Sales, General and Administrative Expenses
For the years ended December 31, 2006, 2005 and 2004, sales, general and administrative
expenses were comprised as follows (dollars in thousands):
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||
$ | % | $ | % | |||||||||||||||||||||||||||||
2006 | 2005 | Change | Change | 2005 | 2004 | Change | Change | |||||||||||||||||||||||||
(As restated) | (As restated) | |||||||||||||||||||||||||||||||
Salaries and benefits |
$ | 5,791 | $ | 4,771 | $ | 1,020 | 21.4 | % | $ | 4,771 | $ | 3,929 | $ | 842 | 21.4 | % | ||||||||||||||||
Legal expenses |
4,282 | 4,004 | 278 | 6.9 | % | 4,004 | 361 | 3,643 | 1009.1 | % | ||||||||||||||||||||||
Professional, consulting and lobbying fees |
5,020 | 4,936 | 84 | 1.7 | % | 4,936 | 1,522 | 3,414 | 224.3 | % | ||||||||||||||||||||||
Travel and meals |
3,293 | 2,960 | 333 | 11.3 | % | 2,960 | 1,916 | 1,044 | 54.5 | % | ||||||||||||||||||||||
D&O and liability insurance |
2,121 | 1,827 | 294 | 16.1 | % | 1,827 | 1,111 | 716 | 64.4 | % | ||||||||||||||||||||||
Depreciation and amortization |
1,563 | 1,297 | 266 | 20.5 | % | 1,297 | 320 | 977 | 305.3 | % | ||||||||||||||||||||||
Stock-based compensation |
808 | | 808 | 100.0 | % | | | | | |||||||||||||||||||||||
Other |
6,803 | 6,688 | 115 | 1.7 | % | 6,688 | 4,721 | 1,967 | 41.7 | % | ||||||||||||||||||||||
Total |
$ | 29,681 | $ | 26,483 | $ | 3,198 | 12.1 | % | $ | 26,483 | $ | 13,880 | $ | 12,603 | 90.8 | % | ||||||||||||||||
Sales,
general and administrative expenses as a percentage of net sales |
44 | % | 56 | % | 56 | % | 21 | % |
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Sales, general and administrative expenses were $29.7 million and $26.5 million for the years
ended December 31, 2006 and 2005, respectively, representing an increase of $3.2 million, or 12% in
2006 compared to 2005. As a percentage of total net sales, sales, general and administrative
expenses decreased to 44% for the year ended December 31, 2006 compared to 56% for same period in
2005, representing the improved leverage of the relatively fixed costs to the increase in net
sales. The dollar increase for the year ended December 31, 2006 compared to the year ended December
31, 2005 is primarily due to a $1.0 million, or 21%, increase in salaries and benefits related to
an increased headcount and employee bonuses and a $362,000 increase in legal, professional,
consulting and lobbying fees associated with the continuing costs of defending against numerous
litigation matters and our ongoing public relations and lobbying efforts to educate the public in
regard to the safety and benefits of our products. In addition, we incurred $808,000 of stock-based
compensation costs associated with our adoption of SFAS
No. 123(R), effective January 1, 2006, D&O
and liability insurance costs increased by $294,000 as a result of higher premiums due to increased
coverage and depreciation and amortization expense increased $266,000 relating to our new facility and related
equipment which were not placed into service until April 2005.
Sales, general and administrative expenses increased $12.6 million, or 91%, to $26.5 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 56% for 2005 from 21% for
2004. The increases in 2005 are substantially attributable to the incremental costs incurred by us
in order to defend against numerous litigation matters. Specifically, legal fees increased by $3.6
million, professional, consulting and lobbying costs increased by $3.4 million and related travel
costs went up by $1.0 million. Approximately $870,000 of the increase in professional fees was due
to costs incurred related to the implementation and testing of Section 404 Sarbanes-Oxley
compliance. In addition to these incremental costs, depreciation and amortization went up by
$977,000 associated with our new facility and related equipment and salaries and related benefits
increased by $842,000 due to increased headcount. 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.
Research and Development Expenses
Research and development expenses increased $1.1million, or 72%, to $2.7 million, for the year
ended December 31, 2006 compared to $1.6 million for the year ended December 31, 2005. The increase
is predominantly related to growth in salary, supplies and consulting costs to support our
continuing efforts to develop new products such as the TASER C2
personal protector, the TASER Cam
and the XREP (Extended Range Electro-Muscular Projectile). Additionally, we recorded $199,000 in
research and development expenses related to stock-based compensation costs associated with our
adoption of SFAS No. 123(R) in 2006.
Research and development expenses for the year ended December 31, 2005 were $1.6 million, 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 XREP.
Litigation Settlement Expenses.
Litigation settlement expenses for the year ended December 31, 2006 represent $17.65 million
recorded in the second quarter of 2006 as a result of an agreement in principle for the proposed
settlement of our shareholder class action litigation and derivative lawsuits.
Interest Income
Interest income increased $651,000, or 53%, to $1.9 million for the year ended
December 31, 2006 compared to $1.2 million for the same period in 2005. The year over year increase
is a function of the growth in our cash and investment balances and higher average yields on our
investments. Our cash and investment accounts earned interest at an approximate average rate of
3.94% during the year ended December 31, 2006 compared to 2.71% during the year ended December 31,
2005, reflecting a more favorable interest rate environment. Our average outstanding cash, cash
equivalent and investment balance was approximately $47.3 million in 2006 compared to $45.5 million
in 2005.
Interest income for the year ended December 31, 2005 was $1.2 million, an increase of
$790,000, or 180%, compared to 2004. The increase is the result of maintaining higher investment
balances for the entire year compared to only part of the year in 2004, combined with a slight
increase in interest rates. Our average outstanding cash, cash equivalent and investment balance
was $45.5 million in 2005 compared to $33.4 million in 2004.
Other Income and Expense
We had no other income or expense items in the year ended December 31, 2006.
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 in 2005 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.
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Income Taxes
The provision for income taxes decreased by $2.5 million from a $1.6 million expense
for year ended December 31, 2005 to a benefit of $0.9 million for the year ended December 31, 2006.
This change can be attributed to the loss before provision for income taxes of $5.0 million for the
year ended December 31, 2006, which was generated by the shareholder litigation expense of $17.65
million recorded in the second quarter of 2006, compared to a pre tax income of $2.7 million in
2005. Our effective income tax rate for the year ended December 31, 2006 was (18.0)% compared to
60.9% for the year ended December 31, 2005. The change in the effective tax rate is
because, as a result of the net loss before income taxes in 2006, we
receive an income tax benefit compared to the provision for income
taxes in 2005. Additionally, the non tax deductible items such
as lobbying expenses reduced our effective tax benefit rate by 13.9%
in 2006 whereas in 2005 they had the inverse effect, increasing our
effective tax rate by 19.5%.
The provision for income taxes for the year ended December 31, 2005 was $1.7 million, a
decrease of $10.3 million compared to $12.0 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.
During 2006, we did not tax effect the stock based compensation expense for tax
purposes related to the exercise of stock options as a result of the adoption of SFAS No. 123(R).
The benefit will be recorded when we are in a position to realize it with an offset to our taxes
payable in future periods. The total unrecognized tax benefit related
to the non-qualified disposition of stock options in 2006 was
approximately $617,000. We received tax benefits of $2.1 million and $37.3 million from the
exercise of stock options and subsequent sale of the underlying stock in 2005 and 2004,
respectively. The net deferred tax asset as of December 31, 2006 was $28.2 million compared to
$26.9 million at December 31, 2005.
Net Income (Loss)
For the year ended December 31, 2006 we reported a net loss of $4.1 million compared to net
income of $1.1 million for the year ended December 31, 2005, a negative change of $5.2 million. The
decrease is a function of the increased gross margins derived from the growth in sales in 2006
offset by $17.65 million of shareholder litigation settlement expenses and the increases in sales,
general and administrative and research and development expenses previously discussed. As a result,
income per basic and diluted share decreased from $0.02 for the year ended December 31, 2005 to a
loss of $0.07 for the year ended December 31, 2006.
Net income for the year ended December 31, 2005 was $1.1 million, a decrease of $17.8 million
or 94% compared to 2004. 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.
Liquidity and Capital Resources
The following table presents selected financial information for each of the last three fiscal years
(dollars in thousands):
2006 | 2005 | 2004 | ||||||||||
(As restated) | ||||||||||||
Cash, cash equivalents and short term investments |
$ | 22,331 | $ | 16,352 | $ | 31,959 | ||||||
Accounts receivable, net |
10,068 | 5,422 | 8,460 | |||||||||
Inventory |
9,258 | 10,105 | 6,840 | |||||||||
Working capital |
37,814 | 34,663 | 51,101 | |||||||||
Net cash provided by operating activities |
7,482 | 1,068 | 30,304 | |||||||||
Net cash used in investing activities |
(3,556 | ) | (191 | ) | (46,791 | ) | ||||||
Net cash provided by (used in) financing activities |
$ | (1,504 | ) | $ | 718 | $ | 15,366 |
Liquidity
As of December 31, 2006, we had $22.3 million in cash, cash equivalents and short
term investments, an increase of $6.0 million from the end of fiscal 2005. As of December 31, 2005,
we had $16.4 million in cash, cash equivalents and short term investments, a decrease of $15.6
million from the end of fiscal 2004.
25
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As discussed in note 8 to the financial statements, in 2006 we reached an agreement to settle
our shareholder class action and derivative lawsuits. The terms of the agreement call for us to pay
approximately $12 million of cash, $4.1 million of which will be provided by insurance. In
addition, we will make a final payment of $8 million of stock or cash at our discretion for the
shareholder lawsuit and a payment of $1.75 million in stock for the derivative lawsuits. We made
the initial payment of $12 million using existing cash balances of $7.9 million and insurance
proceeds received of $4.1 million in December 2006 and expect to make the final payment during the
first quarter of 2007 using existing cash balances and/or cash generated from operations. In
addition, our Board has approved, in connection with the settlement, a stock repurchase of up to
$10 million subject to stock market conditions and corporate considerations. During 2006, we
repurchased 300,000 shares of our common stock for $2.2 million.
Operating activities generated net cash of $7.5 million, $1.1 million and $30.3
million during 2006, 2005 and 2004, respectively.
Net
cash provided by operating activities in 2006 of $7.5 million was mainly attributable to
our net loss of $4.1 million adjusted for the add back of certain non cash expense
items including $9.75 million for the remaining unpaid net shareholder litigation settlement (total
net settlement expenses of $17.65 million less the $7.9 million of our cash we paid for the first
installment of the settlement in December 2006), depreciation and amortization expense of $2.1
million and stock based compensation expense of $1.1 million. Additionally, our deferred revenue
balance increased by $1.6 million created by growth in sales of extended warranties, our inventory
decreased by $0.8 million attributable to increased sales of finished goods and our ongoing efforts
to reduce our investment in inventory on hand and our insurance proceeds receivable decreased by
$0.6 million related to the receipt of insurance proceeds from early settlement with our insurance
provider related to the Powers litigation. These increases to our net cash provided by operating
activities were partially offset by an increase in accounts receivable of $4.6 million attributable
to the increased sales levels in the fourth quarter of 2006 compared to 2005 and a net increase in
deferred income taxes of $1.2 million substantially due to the additional net operating loss
carryforwards generated in 2006.
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 $3.3 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 prepaid and other
assets of $1.2 million mainly created by higher prepaid insurance premiums.
We used $3.6 million of cash in investing activities during the year ended December 31, 2006,
compared to $0.2 million and $46.8 million for the same periods in 2005 and 2004, respectively. Net
cash used in investing activities for the year ended December 31, 2006 was comprised of net
increases in our investments of $1.5 million combined with $1.8 million in acquisitions of property
and equipment, which mainly related to building improvements and production and office equipment.
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 was attributable to the final stages of
constructing our 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 offset by net proceeds received of $7.7 million from the purchase and maturity
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.
During the year ended December 31, 2006, we used $1.5 million of cash in financing activities,
compared to $0.7 million and $15.4 million provided by financing activities for the same periods in
2005 and 2004, respectively. The $1.5 million of cash used by financing activities in 2006 was
mainly comprised of the repurchase of 300,000 shares of or common stock for $2.2 million partially
offset by proceeds from stock options exercised of $0.7 million. 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 warrants.
Capital Resources
On December 31, 2006, we had total cash, cash equivalents and short term
investments of $22.3 million and $0.1million of capital lease obligations outstanding.
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, 2006, there was a calculated availability of $7.6 million based on
the defined borrowing base, which is based on our eligible accounts receivable and inventory.
However, there was no outstanding balance under the line of credit at December 31, 2006, and no
borrowings under the line as of the date of this filing.
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We believe that our balance of total cash and short term investments of $22.3 million as of
December 31, 2006, together with cash expected to be generated from operations, will be adequate to
fund our operations for at least the next 12 months including the final payment related to the
shareholder litigation settlement. We expect our investment in
accounts receivable, inventory and accounts payable to increase in 2007 in line with the anticipated
growth in sales levels arising from both organic growth as well as the introduction of new products.
Additionally, we expect to invest approximately $1.0 million in
manufacturing equipment in 2007 related to the production of the
TASER C2.
As such, 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, 2006:
Less than | After | |||||||||||||||||||
Total | 1 year | 13 years | 45 years | 5 years | ||||||||||||||||
Capital Leases |
$ | 87 | $ | 50 | $ | 36 | $ | | $ | | ||||||||||
Shareholder litigation settlement |
8,000 | 8,000 | | | | |||||||||||||||
Total contractual cash obligations |
$ | 8,087 | $ | 8,050 | $ | 36 | $ | | $ | | ||||||||||
As discussed in Note 8 to our financial statements, in 2006 we reached an agreement
to settle our shareholder class action and derivative lawsuits. The terms of the agreement called
for us to make an initial payment of approximately $12 million of cash and a final payment of $8
million of stock or cash at our discretion. We made the initial payment of $12 million using $7.9
million of existing cash balances and $4.1 million of insurance proceeds in December 2006 and
expect to make the final payment of $8 million in the first quarter of 2007 using existing cash
balances and/or cash generated from operations.
Off Balance Sheet Arrangements
We had no off balance sheet arrangements as of December 31, 2006.
Critical Accounting Estimates
We have identified the following accounting estimates 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.
Standard Warranty Costs
We warrant
our 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 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, 2006, our
reserve for warranty returns was $713,000 compared to an $852,000 reserve at December 31, 2005. Our
reserve for warranty returns has decreased despite the growth in 2006 sales mainly as the result of
continued improvements in our product manufacturing processes which, in turn, have decreased our
product return rate. In the event that product returns under warranty differ from our 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. Our reserve for excess and obsolete inventory was
$223,000 at December 31, 2006 compared to $261,000 at December 31,
2005. The decrease in 2006 was primarily due to the write off of
previously reserved inventories. In the event that actual excess, obsolete or slow-moving inventories differ from
these estimates, changes to inventory reserves might become necessary.
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.
27
Table of Contents
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. Management believes that no such impairments 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. We are currently under audit by the United States Internal Revenue
Service for our 2004 fiscal year. The audit process has only recently begun and we are unable to
determine the outcome of the process at this time. There can be no assurance that the final outcome
of this audit will not have an adverse effect on our future operating results.
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 a result of the shareholder litigation settlement expense recorded
in the second quarter of 2006, we have recorded a valuation allowance of $250,000 against our
deferred tax assets for Arizona NOLs as of December 31, 2006. We believe that, other than as
previously described, as of December 31, 2006, based on our evaluation, no additional 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.
Stock Based Compensation
We account for stock-based compensation in accordance with the fair value
recognition provisions of SFAS No. 123R. We use the Black-Scholes-Merton option pricing model which
requires the input of highly subjective assumptions. These assumptions include estimating the
length of time employees will retain their stock options before exercising them (expected term),
the estimated volatility of our common stock price over the expected term and the number of options
that will ultimately not complete their vesting requirements (forfeitures). We
contracted with a third-party consultant who
utilized our historical data to validate our assumptions for the 2006 option grants.
Changes in the subjective assumptions can materially affect the
estimate of fair value of stock-based compensation
and consequently, the related amount recognized on our statements of operations. Refer to Note 2p
to our financial statements for further discussion of how we determined our valuation assumptions.
Contingencies
We are subject to the possibility of various loss contingencies including product
related litigation, 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.
28
Table of Contents
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 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, 2006, 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 $35,000 and a decrease in
interest rates of 50 basis points would result in an approximately $42,000 increase in fair market
value.
Additionally, we have access to a line of credit borrowing facility which bears interest at
varying rates, ranging from LIBOR plus 1.5% to prime. At December 31, 2006 the available borrowing
under the line of credit was $7.6 million, and there was no amount outstanding under the line of
credit. We have not borrowed any funds under the line of credit since its inception, however,
should we need to do so in the future, such borrowings would be subject to adverse or favorable
changes in the underlying interest rate.
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.
29
Table of Contents
Item 8. Financial Statements and Supplementary Data
TASER INTERNATIONAL, INC.
BALANCE SHEETS
December 31, | ||||||||
2006 | 2005 | |||||||
(As restated) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 18,773,685 | $ | 16,351,909 | ||||
Short-term investments |
3,557,289 | | ||||||
Accounts receivable, net of allowance of $110,000 and $111,000 in 2006 and 2005, respectively |
10,068,049 | 5,422,027 | ||||||
Inventory |
9,257,746 | 10,105,336 | ||||||
Prepaids and other assets |
2,164,002 | 2,840,030 | ||||||
Insurance settlement proceeds receivable |
| 575,000 | ||||||
Deferred income tax asset |
12,295,493 | 6,955,500 | ||||||
Total current assets |
56,116,264 | 42,249,802 | ||||||
Long-term investments |
25,477,574 | 27,548,120 | ||||||
Property and equipment, net |
20,842,632 | 21,061,754 | ||||||
Deferred income tax asset |
15,868,719 | 20,040,788 | ||||||
Intangible assets |
1,532,500 | 1,340,783 | ||||||
Total assets |
$ | 119,837,689 | $ | 112,241,247 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities |
||||||||
Current portion of capital lease obligations |
$ | 45,214 | $ | 43,111 | ||||
Accounts payable and accrued liabilities |
6,789,474 | 6,315,654 | ||||||
Current portion of deferred revenue |
1,037,441 | 561,165 | ||||||
Deferred insurance settlement proceeds |
509,067 | 476,515 | ||||||
Litigation Settlement Liabilities |
9,750,000 | | ||||||
Customer deposits |
171,492 | 190,256 | ||||||
Total current liabilities |
18,302,688 | 7,586,701 | ||||||
Capital lease obligations, net of current portion |
30,974 | 76,188 | ||||||
Deferred revenue, net of current portion |
1,975,489 | 839,983 | ||||||
Other liabilities |
199,999 | | ||||||
Total liabilities |
20,509,150 | 8,502,872 | ||||||
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, 2006 and 2005 |
| | ||||||
Common stock, $0.00001 par value per share; 200 million shares authorized; 61,939,974 and
61,938,654 shares issued and outstanding at December 31, 2006 and 2005, respectively |
622 | 619 | ||||||
Additional paid-in capital |
80,629,659 | 78,742,862 | ||||||
Treasury stock, 300,000 shares at December 31, 2006 |
(2,208,957 | ) | | |||||
Retained earnings |
20,907,215 | 24,994,894 | ||||||
Total stockholders equity |
99,328,539 | 103,738,375 | ||||||
Total liabilities and stockholders equity |
$ | 119,837,689 | $ | 112,241,247 | ||||
The accompanying notes are an integral part of these financial statements.
30
Table of Contents
TASER INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
(As restated) | ||||||||||||
Net sales |
$ | 67,717,851 | $ | 47,694,181 | $ | 67,639,879 | ||||||
Cost of products sold: |
||||||||||||
Direct manufacturing expense |
18,296,039 | 12,843,816 | 16,898,559 | |||||||||
Indirect manufacturing expense (1) |
6,242,751 | 5,252,470 | 5,556,937 | |||||||||
Total cost of products sold |
24,538,790 | 18,096,286 | 22,455,496 | |||||||||
Gross margin |
43,179,061 | 29,597,895 | 45,184,383 | |||||||||
Sales, general and administrative expenses (1) |
29,680,764 | 26,483,485 | 13,880,322 | |||||||||
Research and development expenses (1) |
2,704,521 | 1,574,048 | 823,593 | |||||||||
Shareholder litigation settlement expense |
17,650,000 | | | |||||||||
Income (loss) from operations |
(6,856,224 | ) | 1,540,362 | 30,480,468 | ||||||||
Interest income |
1,880,407 | 1,229,044 | 439,450 | |||||||||
Interest expense |
(7,281 | ) | (4,208 | ) | (1,485 | ) | ||||||
Other income (expense), net |
(481 | ) | (59,772 | ) | 2,309 | |||||||
Income (loss) before provision for income taxes |
(4,983,579 | ) | 2,705,426 | 30,920,742 | ||||||||
Provision (benefit) for income taxes |
(895,900 | ) | 1,648,910 | 12,039,000 | ||||||||
Net income (loss) |
$ | (4,087,679 | ) | $ | 1,056,516 | $ | 18,881,742 | |||||
Income (loss) per common and common equivalent shares |
||||||||||||
Basic |
$ | (0.07 | ) | $ | 0.02 | $ | 0.33 | |||||
Diluted |
$ | (0.07 | ) | $ | 0.02 | $ | 0.30 | |||||
Weighted average number of common and common
equivalent shares outstanding |
||||||||||||
Basic |
61,984,240 | 61,303,939 | 57,232,329 | |||||||||
Diluted |
61,984,240 | 63,556,246 | 62,319,590 | |||||||||
(1) | Stock-based compensation was allocated as follows: |
Indirect manufacturing expense |
$ | 131,086 | $ | | $ | | ||||||
Sales, general and administrative |
808,341 | | | |||||||||
Research and development expenses |
199,418 | | | |||||||||
$ | 1,138,845 | $ | | $ | | |||||||
The accompanying notes are an integral part of these financial statements.
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Table of Contents
TASER INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS EQUITY
For the Years Ended December 31, 2006, 2005 and 2004
STATEMENTS OF STOCKHOLDERS EQUITY
For the Years Ended December 31, 2006, 2005 and 2004
Additional | Total | |||||||||||||||||||||||||||
Common Stock | Paid-in | Treasury Stock | Retained | Stockholders | ||||||||||||||||||||||||
Shares | Amount | Capital | Shares | Amount | Earnings | Equity | ||||||||||||||||||||||
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 | |||||||||||||||||||||
Opening adjustment to retained earnings (a) |
| | | | | (120,986 | ) | (120,986 | ) | |||||||||||||||||||
Balance, December 31, 2004, as adjusted |
60,992,156 | 609 | 75,850,810 | | | 23,938,378 | 99,789,797 | |||||||||||||||||||||
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 |
| | | | | 1,056,516 | 1,056,516 | |||||||||||||||||||||
Balance,
December 31, 2005 (As restated) |
61,938,654 | 619 | 78,742,862 | | | 24,994,894 | 103,738,375 | |||||||||||||||||||||
Exercise of stock options |
301,320 | 3 | 747,952 | | | | 747,955 | |||||||||||||||||||||
Stock-based compensation expense |
| | 1,138,845 | | | | 1,138,845 | |||||||||||||||||||||
Purchase of treasury stock |
(300,000 | ) | | | 300,000 | (2,208,957 | ) | | (2,208,957 | ) | ||||||||||||||||||
Net loss |
| | | | | (4,087,679 | ) | (4,087,679 | ) | |||||||||||||||||||
Balance, December 31, 2006 |
61,939,974 | $ | 622 | $ | 80,629,659 | 300,000 | $ | (2,208,957 | ) | $ | 20,907,215 | $ | 99,328,539 | |||||||||||||||
(a) | Opening adjustment to the December 31, 2004 retained earnings balance represents the correction of historical methodology for the calculation of indirect manufacturing overhead costs and previously unrecorded adjustments related to cut-off errors primarily for legal and professional fees and the related income tax effects. (see Note 14). No restatement of the Companys financial statements for the year ended December 31, 2004 was deemed necessary for these as the Company determined the amounts were immaterial to this period. |
The accompanying notes are an integral part of these financial statements.
32
Table of Contents
TASER INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
For the Year Ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
(As restated) | ||||||||||||
Cash Flows from Operating Activities: |
||||||||||||
Net income (loss) |
$ | (4,087,679 | ) | $ | 1,056,516 | $ | 18,881,742 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Loss on disposal of assets |
| 56,872 | | |||||||||
Depreciation and amortization |
2,096,595 | 1,712,738 | 551,793 | |||||||||
Provision for doubtful accounts |
(830 | ) | 26,620 | 90,000 | ||||||||
Provision for excess and obsolete inventory |
85,329 | 117,000 | 36,027 | |||||||||
Provision for warranty |
442,195 | 1,293,657 | 361,058 | |||||||||
Stock compensation expense |
1,138,845 | | 625,714 | |||||||||
Deferred insurance settlement proceeds |
(192,448 | ) | (98,485 | ) | ||||||||
Deferred income taxes |
(1,167,924 | ) | (525,503 | ) | 727,892 | |||||||
Stock option tax benefit |
| 2,142,559 | 11,321,554 | |||||||||
Change in assets and liabilities: |
||||||||||||
Accounts receivable |
(4,645,192 | ) | 3,011,465 | (3,145,779 | ) | |||||||
Inventory |
762,261 | (3,459,333 | ) | (3,750,104 | ) | |||||||
Prepaids and other assets |
676,028 | (1,147,323 | ) | (863,571 | ) | |||||||
Insurance settlement proceeds receivable |
575,000 | | | |||||||||
Accounts payable and accrued liabilities |
256,625 | (3,601,040 | ) | 4,654,004 | ||||||||
Deferred revenue |
1,611,782 | 393,871 | 897,487 | |||||||||
Accrued litigation settlement |
9,750,000 | | | |||||||||
Other liabilities |
199,999 | | | |||||||||
Customer deposits |
(18,764 | ) | 88,090 | (83,637 | ) | |||||||
Net cash provided by operating activities |
7,481,822 | 1,067,704 | 30,304,180 | |||||||||
Cash Flows from Investing Activities: |
||||||||||||
Purchases of investments |
(82,610,518 | ) | (87,829,476 | ) | (35,273,292 | ) | ||||||
Proceeds from investments |
81,123,775 | 95,554,648 | | |||||||||
Purchases of property and equipment |
(1,839,815 | ) | (7,812,220 | ) | (11,322,299 | ) | ||||||
Purchases of intangible assets |
(229,375 | ) | (104,066 | ) | (195,397 | ) | ||||||
Net cash used in investing activities |
(3,555,933 | ) | (191,114 | ) | (46,790,988 | ) | ||||||
Cash Flows from Financing Activities: |
||||||||||||
Payments under capital leases |
(43,111 | ) | (31,343 | ) | (14,236 | ) | ||||||
Payments on notes payable |
| | (250,000 | ) | ||||||||
Repurchase of common stock |
(2,208,957 | ) | | | ||||||||
Proceeds from warrants exercised |
| | 2,545,065 | |||||||||
Proceeds from options exercised |
747,955 | 749,503 | 13,084,812 | |||||||||
Net cash (used in) provided by financing activities |
(1,504,113 | ) | 718,160 | 15,365,641 | ||||||||
Net (Decrease) Increase in Cash and Cash Equivalents |
2,421,776 | 1,594,750 | (1,121,167 | ) | ||||||||
Cash and Cash Equivalents, beginning of period |
16,351,909 | 14,757,159 | 15,878,326 | |||||||||
Cash and Cash Equivalents, end of period |
$ | 18,773,685 | $ | 16,351,909 | $ | 14,757,159 | ||||||
Supplemental Disclosure: |
||||||||||||
Cash paid for interest |
$ | 7,281 | $ | 103 | $ | 1,364 | ||||||
Cash (refunded) paid for income taxes net |
$ | 229,424 | $ | (19,627 | ) | $ | (264,026 | ) | ||||
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 $0, $2,142,559 and $37,346,000 in 2006, 2005 and 2004, respectively) |
$ | | $ | | $ | 26,024,446 |
The accompanying notes are an integral part of these financial statements.
33
Table of Contents
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. | History and Nature of Organization |
TASER International, Inc. (TASER or the Company) is a global leader in the development
and manufacture of advanced electronic control 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,
with each whole warrant entitling the holder 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 advanced electronic control 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 the Company to recover
damages on the basis of theories including personal injury, wrongful death, negligent design,
defective 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 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.
The Companys deferred tax asset includes approximately $56.5 million in net operating loss
carryforwards. Management believes the deferred tax asset is realizable; however, a valuation
allowance may be recorded 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, 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 Companys cash and investment accounts earned interest at an approximate rate of 3.9% during
2006 and 2.7% in 2005. Included in the Companys cash balances are deposits with its bank of $14.1
million which is in excess of the FDIC insurance coverage limit of $100,000. Management believes
the risk of financial loss on the uninsured deposits is limited due to the quality of the financial
institution.
34
Table of Contents
NOTES TO FINANCIAL STATEMENTS (Continued)
b. Inventory
Inventories are
stated at the lower of cost or market; cost is determined using the
weighted average cost of raw materials which approximates the first-in, first-out (FIFO) method and
manufacturing labor and overhead. Provisions are made
to reduce potentially excess, obsolete or slow-moving inventories to their net realizable value.
These provisions are based on managements best estimate after considering historical demand,
projected future demand, inventory purchase commitments, industry and market trends and conditions
and other factors.
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, management 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 2006
or 2005.
e. Customer Deposits
The Company requires certain deposits in advance of shipment for certain customer
sales orders. Customer deposits are recorded as a current liability on the accompanying balance
sheet.
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 its 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. Sales taxes collected on sales is netted against
government remittances and thus recorded on a net basis. 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
submitted by the Company to the ONR details the costs expensed in the period and adds a nominal
contracted for profit. The total amount recognized for this work in the years ended December 31,
2006, 2005 and 2004 was $146,000, $435,000 and $12,000, respectively. The Company recognizes grant
revenue when the performance milestones have been completed.
The Company offers 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, 2006 and 2005, $2,933,000 and $1,233,000 was deferred under this
program, respectively. In 2004 the Company began selling a private citizen version of its TASER X26
device, the X26c. This product comes with a certificate for a free training session. The
Company is deferring the revenue associated with these trainings until such time as either the
training has occurred or the certificate expires, which is 90 days after purchase by the end user.
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 Company will
recognize this revenue as the training is provided. At December 31, 2006 and 2005, $80,000 and
$168,000 was deferred under the X26 C program, respectively.
Sales are typically made on credit and the Company generally does 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, cash discounts, customer-specific financial
information and broader market and economic trends and conditions.
35
Table of Contents
NOTES TO FINANCIAL STATEMENTS (Continued)
g. Cost of Products Sold
Cost of products sold represents manufacturing costs, consisting of 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
The Company expenses advertising costs in the period in which they are incurred.
The Company incurred advertising costs of approximately $437,000, $888,000 and $606,000 in 2006,
2005 and 2004, respectively. Advertising costs are included in sales, general and administrative
expenses in the accompanying statements of operations.
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, which is included in accrued liabilities in the
accompanying balance sheets, for the years ended December 31 is as follows:
2006 | 2005 | |||||||
Balance at Beginning of Period |
$ | 851,920 | $ | 457,914 | ||||
Utilization of Accrual |
(580,980 | ) | (899,651 | ) | ||||
Warranty Expense |
442,195 | 1,293,657 | ||||||
Balance at End of the Period |
$ | 713,135 | $ | 851,920 | ||||
k. Research and Development Expenses
The Company expenses research and development costs as incurred. The Company
incurred product development expense of approximately $2,705,000, $1,574,000 and $824,000 in 2006,
2005 and 2004, respectively.
36
Table of Contents
NOTES TO FINANCIAL STATEMENTS (Continued)
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 amounts of 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. Income tax-related interest and penalties are recorded as a component
of the provision for income taxes.
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 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 $110,000, $111,000 and
$120,000 as of December 31, 2006, 2005 and 2004, respectively. Historically, we have experienced a
very low level of write offs related to doubtful accounts.
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 the customers account
balance. In 2006, one distributor represented 12% of total sales. No other customers exceeded 10%
in 2006. 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.
At December 31, 2006, the Company had receivables from three customers comprising
17%, 11% and 10% of the aggregate accounts receivable balance. These customers are unaffiliated
distributors of the Companys products. 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.
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, management 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. Management 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, accounts
payable and capital leases. Due to the short-term nature of these instruments, the fair value of these instruments
approximates their recorded value. Information about the fair value of the Companys investments is
included in Note 3.
o. Segment Information
Management has determined that its operations are comprised of one reportable
segment the sale of advanced electronic control devices. For the years ended December 31, 2006,
2005 and 2004, sales by geographic area were as follows:
2006 | 2005 | 2004 | ||||||||||
Sales by Geographic Area |
||||||||||||
United States |
86 | % | 87 | % | 96 | % | ||||||
Other Countries |
14 | % | 13 | % | 4 | % | ||||||
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.
37
Table of Contents
NOTES TO FINANCIAL STATEMENTS (Continued)
p. Stock-Based Compensation
Prior to January 1, 2006, the Company accounted for its stock-based compensation
plans under the recognition and measurement provisions of Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB Opinion No. 25) and related interpretations,
as permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123). No stock-based compensation expense was recognized in the income
statement for the years ended December 31, 2005 and 2004, as all options granted under the
Companys stock-based employee compensation plans had an exercise price equal to the market value
of the underlying common stock on the date of grant. As permitted by SFAS No. 123, stock-based
compensation was included as a pro forma disclosure in the notes to the Companys financial
statements for the years ended December 31, 2005 and 2004.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123(R), Share Based Payment (SFAS No. 123(R))
using the modified prospective transition method. Under this transition method, compensation cost
recognized in the year ended December 31, 2006 includes: (a) compensation cost for all stock-based
payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair
value calculated in accordance with the original provisions of SFAS No. 123, and (b) compensation
cost for all stock-based payments granted subsequent to January 1, 2006, based on the grant date
fair value calculated in accordance with the provisions of SFAS No. 123(R). Results for prior
periods have not been restated, as provided for under the modified-prospective method.
Total stock-based compensation expense recognized in the income statement for the year ended
December 31, 2006 was $1,139,000 before income taxes, $874,000 of which was related to Incentive
Stock Options (ISOs) for which no tax benefit is
recognized. The total deferred
tax benefit related to non-qualified stock options was approximately
$99,000. As a result of the adoption of SFAS No. 123(R) the
Company did not tax effect the stock based compensation
expense for tax purposes related to the non-qualified disposition of
ISOs exercised and sold. The benefit will be recorded when the
Company is in a position to realize it with an offset to taxes
payable in future periods. The total unrecognized tax benefit
related to the non-qualified disposition of ISOs exercised and sold
was approximately $617,000.
Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits of deductions
resulting from the exercise of stock options as operating cash flows in the consolidated statements
of cash flows. SFAS No. 123(R) requires the tax benefits resulting from tax deductions in excess of
the compensation cost recognized for those options (excess tax benefits) to be classified and
reported as both an operating cash outflow and a financing cash inflow on a prospective basis upon
adoption.
The following table shows the effect on net income and basic and diluted earnings per share
for the years ended December 31, 2005 and 2004 had compensation cost been recognized based upon the
estimated fair value on the grant date of stock options in accordance with SFAS No. 123, as amended
by SFAS No. 148 Accounting for Stock-Based Compensation Transition and Disclosure.
For the Year Ended December 31, | ||||||||
2005 | 2004 | |||||||
(As restated) | ||||||||
(In thousands) | ||||||||
Net income, as reported |
$ | 1,057 | $ | 18,882 | ||||
Add: Total stock-based compensation included in net income as reported |
| 626 | ||||||
Deduct: Total stock-based employee compensation determined under
fair value based method for all awards, net of related tax effects |
(5,880 | ) | (8,773 | ) | ||||
Pro forma net income (loss) |
$ | (4,823 | ) | $ | 10,735 | |||
Net income (loss) per common share: |
||||||||
Basic, as reported |
$ | 0.02 | $ | 0.33 | ||||
Basic, pro forma |
$ | (0.08 | ) | $ | 0.19 | |||
Diluted, as reported |
$ | 0.02 | $ | 0.30 | ||||
Diluted, pro forma |
$ | (0.08 | ) | $ | 0.17 | |||
Basic |
61,303,939 | 57,232,329 | ||||||
Diluted |
63,556,246 | 62,319,590 |
Disclosure for the year ended December 31, 2006 is not presented because all stock based
compensation expense is recognized in the financial statements in connection with the adoption of
SFASNo.123(R).
38
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NOTES TO FINANCIAL STATEMENTS (Continued)
SFAS No. 123(R) requires the use of a valuation model to calculate the fair value of
stock-based awards. The Company has elected to use the Black-Scholes-Merton (BSM) option
valuation model, which incorporates various assumptions including
volatility, expected life forfeiture rate and risk-free
interest rates. The assumptions used for the years ended December 31, 2006, 2005 and 2004 and the
resulting estimates of weighted-average fair value per share of options granted during those
periods are as follows:
2006 | 2005 | 2004 | ||||||||||
Weighted average / range of volatility |
68 | % | 102106 | % | 101105 | % | ||||||
Risk-free interest rate |
4.8 | % | 3.5 | % | 3.0 | % | ||||||
Dividend rate |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
Expected life of options |
3.5 years | 1.5 to 3 years | 1.5 to 3 years |
The expected life of the options represents the estimated period of time until exercise and is
based on historical experience of similar awards, giving consideration to the contractual terms,
vesting schedules and expectations of future employee behavior. For 2006, expected stock price
volatility is based on a combination of historical volatility of the Companys stock and the
one-year implied volatility of its traded option for the related vesting periods. Prior to the
adoption of SFAS No. 123(R), expected stock price volatility was estimated using only historical
volatility of the Companys stock. The risk-free interest rate is based on the implied yield
available on U.S. Treasury zero-coupon issues with an equivalent remaining term. The Company has
not paid dividends in the past and does not plan to pay any dividends
in the near future. As stock-based compensation expense recognized is
based on awards ultimately expected to vest, it should be reduced for
estimated forfeitures. SFAS No. 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates.
The Company forfeiture rate for 2006 was calculated based on its
historical experience of awards which ultimately vested.
In November 2005, the FASB issued FASB Staff Position No. 123(R)-3, Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards (FSP 123R-3). The Company
has elected to adopt the long form method for calculating the tax effects of share-based
compensation pursuant to SFAS No. 123(R). The long form method establishes the beginning balance of
the additional paid-in capital pool related to the effects of employee share-based compensation,
which is available to absorb tax deficiencies recognized subsequent to the adoption of SFAS No.
123(R).
q. Income(Loss) Per Common Share
The Company accounts for income (loss) per share in accordance with SFAS No. 128,
Earnings per Share. Basic income per share is computed by dividing net income (loss) 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 utilizing the treasury stock method. 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, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
(As restated) | ||||||||||||
Numerator for basic and diluted earnings per share
Net income (loss) |
$ | (4,087,679 | ) | $ | 1,056,516 | $ | 18,881,742 | |||||
Denominator for basic earnings per share weighted average
shares outstanding |
61,984,240 | 61,303,939 | 57,232,329 | |||||||||
Dilutive effect of shares issuable under stock options outstanding |
| 2,252,307 | 5,087,261 | |||||||||
Denominator for diluted earnings per share adjusted weighted
average shares outstanding |
61,984,240 | 63,556,246 | 62,319,590 | |||||||||
Net income (loss) per common share |
||||||||||||
Basic |
$ | (0.07 | ) | $ | 0.02 | $ | 0.33 | |||||
Diluted |
$ | (0.07 | ) | $ | 0.02 | $ | 0.30 |
Basic income (loss) per share is based upon the weighted average number of common
shares outstanding during the period. As a result of the net loss for the year ended December 31,
2006, 3,512,248 shares of potential dilutive securities were considered anti-dilutive and excluded
from the calculation as their effect would have been to reduce the net loss per share. For the
years ended December 31, 2005 and 2004, the effects of 536,486 and 187,820 stock options were excluded from the
calculation of diluted income per share as their effect would have been anti-dilutive and increased
the net income per share.
39
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NOTES TO FINANCIAL STATEMENTS (Continued)
r. Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (the FASB) issued Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No.
109, which seeks to reduce the diversity in practice associated with the accounting and reporting
for uncertainty in income tax positions. FIN 48 prescribes a comprehensive model for the financial
statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or
expected to be taken in income tax returns. FIN 48 is effective for fiscal years beginning after
December 15, 2006 and the Company will adopt the new requirements effective January 1, 2007.
Management does not believe the adoption of FIN 48 will result in a material cumulative-effect
adjustment.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements (SFAS 157),
which defines fair value, establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
Early adoption is permitted. The Company has not yet determined the effect on its financial
statements, if any, of the adoption of SFAS 157, or if it will adopt the requirements prior to the
first quarter of 2008.
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements (SAB 108). The intent of SAB 108 is to reduce diversity in practice for the
method companies use to quantify financial statement misstatements, including the effect of prior
year uncorrected errors. SAB 108 establishes an approach that requires quantification of financial
statement errors using both an income statement and a cumulative balance sheet approach. SAB 108 is
effective for interim periods of the first fiscal year ending after November 15, 2006. The adoption
of SAB 108 did not have an impact on the Companys financial statements.
s. Reclassifications
Certain reclassifications were made to the 2005 amounts to conform to the 2006 presentation.
40
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NOTES TO FINANCIAL STATEMENTS (Continued)
3. Cash, 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. The Company intends to hold these securities until
maturity. The Company intends to reinvest the proceeds from maturing short and long term
investments into securities with similar original maturities.
The following is a summary of cash, cash equivalents and held-to-maturity securities
as distributed by type at December 31:
2006 | 2005 | |||||||||||||||||||||||||||||||
Gross | Gross | |||||||||||||||||||||||||||||||
Gross Unrealized | Gross Unrealized | Unrealized | Unrealized | |||||||||||||||||||||||||||||
Cost | Gains | Losses | Fair Value | Cost | Gains | Losses | Fair Value | |||||||||||||||||||||||||
Cash |
$ | 14,130,112 | $ | | $ | | $ | 14,130,112 | $ | 6,387,796 | $ | | $ | | $ | 6,387,796 | ||||||||||||||||
Government sponsored entity securities |
33,678,436 | 3,756 | (221,849 | ) | 33,460,343 | 37,512,233 | 22,887 | (388,252 | ) | 37,146,868 | ||||||||||||||||||||||
$ | 47,808,548 | $ | 3,756 | $ | (221,849 | ) | $ | 47,590,455 | $ | 43,900,029 | $ | 22,887 | $ | (388,252 | ) | $ | 43,534,664 | |||||||||||||||
December 31, | ||||||||
2006 | 2005 | |||||||
Government sponsored entity securities reported as: |
||||||||
Cash equivalents |
$ | 4,643,573 | $ | 9,964,113 | ||||
Short term investments |
3,557,289 | | ||||||
Long term investments |
25,477,574 | 27,548,120 | ||||||
$ | 33,678,436 | $ | 37,512,233 | |||||
The following table summarizes the contractual maturities of government sponsored entity
securities at December 31:
2006 | 2005 | |||||||
Less than 1 year |
$ | 22,694,186 | $ | 14,980,493 | ||||
1-3 years |
10,984,250 | 22,531,740 | ||||||
$ | 33,678,436 | $ | 37,512,233 | |||||
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, 2006:
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 |
$ | 5,610,806 | $ | (12,185 | ) | $ | 24,282,055 | $ | (209,664 | ) | $ | 29,892,861 | $ | (221,849 | ) |
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, 2006.
41
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NOTES TO FINANCIAL STATEMENTS (Continued)
4. Inventory
Inventories consisted of the following at December 31:
2006 | 2005 | |||||||
(As restated) | ||||||||
Raw materials and work-in-process |
$ | 5,990,238 | $ | 8,054,683 | ||||
Finished goods |
3,490,709 | 2,311,403 | ||||||
Reserve for excess and obsolete inventory |
(223,201 | ) | (260,750 | ) | ||||
Total Inventory |
$ | 9,257,746 | $ | 10,105,336 | ||||
5. Property and Equipment
Property and equipment consist of the following at December 31:
Estimated | ||||||||||||
Useful Life | 2006 | 2005 | ||||||||||
Land |
$ | 2,899,962 | $ | 2,899,962 | ||||||||
Building |
39 Years | 13,537,095 | 13,170,716 | |||||||||
Production Equipment |
3-7 Years | 2,873,826 | 2,147,271 | |||||||||
Telephone Equipment |
5 Years | 297,618 | 297,618 | |||||||||
Computer Equipment |
3-5 Years | 3,650,054 | 3,226,816 | |||||||||
Furniture and Office Equipment |
5-7 Years | 1,745,712 | 1,500,368 | |||||||||
Vehicles |
5 Years | 242,232 | 168,845 | |||||||||
Total Cost |
25,246,499 | 23,411,596 | ||||||||||
Less: Accumulated Depreciation |
(4,403,867 | ) | (2,349,842 | ) | ||||||||
Net Property and Equipment |
$ | 20,842,632 | $ | 21,061,754 | ||||||||
Depreciation and amortization
expense for the years ended December 31, 2006, 2005 and 2004 was
$2,058,937, $1,670,339 and $512,668, respectively. Assets recorded under capital leases included in
property and equipment were $146,000 of December 31, 2006 and 2005. Related accumulated
amortization was $73,599 and $28,399 as of December 31, 2006 and 2005, respectively. Amortization
expense for the years ended December 31, 2006, 2005 and 2004 related to capital leases was $45,200,
$26,701 and $7,589, respectively.
42
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NOTES TO FINANCIAL STATEMENTS (Continued)
6. Intangible Assets
Intangible assets consist of the following at December 31:
2006 | 2005 | |||||||||||||||||||||||||||
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 | $ | 60,000 | $ | | $ | 60,000 | $ | 56,000 | $ | 4,000 | |||||||||||||||
Issued patents |
4 to 15 Years | 248,984 | 84,248 | 164,736 | 168,280 | 59,238 | 109,042 | |||||||||||||||||||||
Issued trademarks |
9 to 11 Years | 15,434 | 2,200 | 13,234 | 14,198 | 695 | 13,503 | |||||||||||||||||||||
Non compete agreement |
7 Years | 50,000 | 25,000 | 25,000 | 50,000 | 17,857 | 32,143 | |||||||||||||||||||||
374,418 | 171,448 | 202,970 | 292,478 | 133,790 | 158,688 | |||||||||||||||||||||||
Unamortized intangible assets |
||||||||||||||||||||||||||||
TASER Trademark |
900,000 | 900,000 | 900,000 | 900,000 | ||||||||||||||||||||||||
Patents and trademarks pending |
429,530 | 429,530 | 282,095 | 282,095 | ||||||||||||||||||||||||
1,329,530 | 1,329,530 | 1,182,095 | 1,182,095 | |||||||||||||||||||||||||
Total intangible assets |
$ | 1,703,948 | $ | 171,448 | $ | 1,532,500 | $ | 1,474,573 | $ | 133,790 | $ | 1,340,783 | ||||||||||||||||
Amortization expense for the years ended December 31, 2006, 2005 and 2004 was $37,658,
$42,399 and $39,125, respectively.
Estimated amortization for intangible assets with finite lives for the next five years and
thereafter is as follows:
2007 |
$ | 36,975 | ||
2008 |
36,975 | |||
2009 |
25,053 | |||
2010 |
16,899 | |||
2011 |
9,443 | |||
Thereafter |
77,625 | |||
$ | 202,970 | |||
7. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities were comprised as follows at December 31:
2006 | 2005 | |||||||
(As restated) | ||||||||
Accounts payable |
$ | 4,554,203 | $ | 4,027,335 | ||||
Accrued salaries and benefits |
832,576 | 481,491 | ||||||
Accrued expenses |
689,560 | 954,908 | ||||||
Accrued warranty expense |
713,135 | 851,920 | ||||||
Total |
$ | 6,789,474 | $ | 6,315,654 | ||||
43
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NOTES TO FINANCIAL STATEMENTS (Continued)
8. Commitments and Contingencies
a. Lease Obligations
The Company has 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%.
Future minimum lease payments under lease obligations are as follows for the years ending December
31:
2007 |
$ | 50,391 | ||
2008 |
22,372 | |||
2009 |
8,362 | |||
2010 |
5,575 | |||
Thereafter |
| |||
Total |
$ | 86,700 | ||
Less amount representing interest |
(10,512 | ) | ||
Present value of minimum lease payments |
76,188 | |||
Current portion of capital lease obligations |
(45,214 | ) | ||
Capital lease obligations, net of current portion |
$ | 30,974 | ||
The Company has entered into operating leases for various office space, storage
facilities 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 expired in 2006. Rent expense, net of sublease income under these operating leases for
the years ended December 31, 2006, 2005 and 2004, was approximately $76,000, $265,000 and $340,000,
respectively.
b. Purchase Commitments
The Company has no significant purchase commitments outstanding at December 31,
2006.
c. Litigation
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
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 was not 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.
44
Table of Contents
NOTES TO FINANCIAL STATEMENTS (Continued)
On October 11, 2006, the parties filed a joint Stipulation of Settlement and related
documents, setting forth terms of settlement including, among other things, full releases of any
and all related known or unknown claims among the plaintiff, plaintiff class and the defendants,
and payment of $20 million from TASER for the benefit of the plaintiff class to be comprised of $12
million in cash (approximately $4.1 million to be provided from the Directors and Officers
Liability Insurance policy), and $8 million in Company common stock valued as set forth in the
Stipulation. At the Companys election, the stock portion of the settlement may be funded with
cash. On December 14, 2006, the Court entered an order, which among other things, approved
preliminarily the Stipulation of Settlement, provided for notice of the Settlement, set forth for
the submissions of objections to and exclusions from the Settlement, and set a final Settlement
Hearing.
Any settlement of the consolidated securities class actions is conditioned upon final approval
by the Court and other factors. There is no assurance that the settlement will be completed on the
terms set forth in the parties Stipulation of Settlement and related documents filed with the
Court, or at all. In the event that a settlement occurs, it is expected that the consolidated
securities class actions will be dismissed.
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. On March 17, 2006, the Court denied the motions to dismiss. Defendants answered
the consolidated complaint on April 21, 2006. Discovery has commenced and no trial date has been
set.
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 December 8, 2006, the parties filed with the Arizona District Court a joint Stipulation of
Settlement and related documents, which set forth the terms of settlement of the Arizona District
Court action, the Arizona Superior Court action and the Delaware Chancery Court action. Settlement
terms include, among other things, the Companys adoption of certain corporate governance
provisions, settlement between the defendants and the Companys insurance carrier, and the
Companys payment of plaintiffs attorneys fees in the amount of $1.75 million in Company common
stock valued as set forth in the Stipulation. On December 13, 2006, the Arizona District Court
entered an order, which among other things, approved preliminarily the Stipulation of Settlement,
provided for notice of the Settlement, set forth for the submissions of objections to the
Settlement, and set a final Settlement Hearing.
Any settlement of the derivative actions is conditioned upon final approval by the Court and
other factors. There is no assurance that the settlement will be completed on the terms set forth
in the parties Stipulation of Settlement and related documents filed with the Court, or at all.
In the event that a settlement occurs, it is expected that the derivative actions will be
dismissed.
Proposed Class Action and Derivative Lawsuit Settlement
The total litigation settlement expenses reflected in the income statement for the year ended
December 31, 2006 are $17.65 million, which are net of insurance proceeds after legal fees. The
terms of the agreement call for the Company to pay approximately $12 million of cash, $4.1million
of which will be provided by insurance. In addition, the Company will make a final payment of $8
million of stock or cash at our discretion for the shareholder lawsuit and a payment of $1.75
million in stock for the derivative lawsuits. The Company made the initial payment of $12 million
using existing cash balances of $7.9 million and insurance proceeds received of $4.1million in
December of 2006 and expects to make the final payment in the first quarter of 2007 using existing
cash balances and/or cash generated from operations. The Company has a remaining litigation
settlement liability of $9.75 million at December 31, 2006 related to the final settlement of the
shareholder and derivative lawsuits.
45
Table of Contents
NOTES TO FINANCIAL STATEMENTS (Continued)
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 with a copy of the
complaint. 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 claimed the exclusive right to sell our products to many of the
largest law enforcement, corrections, and military agencies in the United States. 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. On August 4, 2006 the Court issued an opinion and order
dismissing with prejudice all of plaintiffs claims, except the Court set a briefing schedule for an
alleged remaining nominal claim. On September 28, 2006, the court entered an order granting
judgment for plaintiff in the amount of the nominal claim. In October 2006, we reached a settlement
agreement under which plaintiff agreed not to appeal the courts order and we agreed to pay
plaintiff the nominal judgment and forego the Companys claim for an award of attorneys fees as the
prevailing party under an offer of judgment.
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. On September 29,
2006, the case was dismissed without prejudice by stipulation of the parties.
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 it purchased the TASER device and is 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. In October 2006, the Company reached an
agreement with the plaintiff to dismiss this lawsuit, the terms of which are subject to a
confidentiality agreement. On November 8, 2006, the parties filed a stipulation of voluntary
dismissal with prejudice.
Product Liability Litigation
The Company is currently named as a defendant in 54 lawsuits in which the plaintiffs allege
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. Companion cases arising from the
same incident have been combined into one for reporting purposes. In addition, 37 other lawsuits
have been dismissed and are not included in this number. Two of the lawsuits that have been
dismissed or judgment entered in favor of TASER, are on appeal. With respect to each of these
pending 54 lawsuits, the following table 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 that 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. 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.
46
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NOTES TO FINANCIAL STATEMENTS (Continued)
Month | ||||||||
Plaintiff | Served | Jurisdiction | Claim Type | Status | ||||
Alvarado
|
4/2003 | CA Superior Court | Wrongful Death | Jury Verdict for TASER | ||||
City of Madera
|
6/2003 | CA Superior Court | Wrongful Death | Dismissed by Summary Judgment, Appeal Pending | ||||
Pierson, Maxine
|
11/2004 | US District Court, CD CA | Wrongful Death | Dismissed With Prejudice | ||||
Glowczenski
|
10/2004 | US District Court, ED NY | Wrongful Death | Discovery Phase | ||||
LeBlanc
|
12/2004 | CA Superior Court, Los Angeles County | 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 | ||||
Sanders
|
5/2005 | US District Court ED CA | Wrongful Death | Discovery Phase | ||||
Fleming
|
5/2005 | US District Court ED LA | Wrongful Death | Dismissed With Prejudice | ||||
Woolfolk
|
6/2005 | US District Court MD FL | Wrongful Death | Dismissed Without Prejudice | ||||
Graff
|
9/2005 | US District Court, AZ | Wrongful Death | Discovery Phase | ||||
Holcomb
|
9/2005 | US District Court, ND OH | Wrongful Death | Dismissed with Prejudice | ||||
Tucker
|
10/2005 | US District Court, NV | Wrongful Death | Discovery Phase | ||||
Heston
|
11/2005 | US District Court, ND CA | Wrongful Death | Discovery Phase | ||||
Rosa
|
11/2005 | US District Court, ND CA | Wrongful Death | Discovery Phase | ||||
Gosserand
|
10/2005 | US District Court, ED LA | Wrongful Death | Dismissed by Summary Judgment | ||||
ODonnell/Hasse
|
11/2005 | Circuit Court, Cook County, IL | Wrongful Death | Dismissed by Summary Judgment | ||||
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 | Dismissed with Prejudice | ||||
Robert Williams
|
1/2006 | US District Court, TX | Wrongful Death | Case Stayed | ||||
Lee
|
1/2006 | Davidson County, TN Circuit Court | Wrongful Death | Discovery Phase, Trial Scheduled for June 2008. | ||||
Zaragoza
|
2/2006 | CA Superior Court, Sacramento County | Wrongful Death | Discovery Phase | ||||
Tapia
|
4/2006 | CA Superior Court, Los Angeles County | Wrongful Death | Discovery Phase, Trial Scheduled for 8/2007 | ||||
Kinkle
|
6/2006 | US District Court, ND MS | Wrongful Death | Dismissed With Prejudice | ||||
Nunez
|
6/2006 | 72 nd District Court, Lubbock County, TX | Wrongful Death | Discovery Phase | ||||
Bagnell
|
7/2006 | Supreme Court for British Columbia, Canada | Wrongful Death | Discovery Phase | ||||
Salazar
|
7/2006 | Maricopa County Superior Court, AZ | Wrongful Death | Discovery Phase | ||||
Gillson
|
7/2006 | US District Court, NV | Wrongful Death | Discovery Phase | ||||
Hollman
|
8/2006 | US District Court, ED NY | Wrongful Death | Discovery Phase | ||||
Oliver
|
9/2006 | US District Court, MD FL, Orlando | Wrongful Death | Discovery Phase | ||||
Teran/LiSaola
|
10/2006 | CA District Court | Wrongful Death | Discovery Phase | ||||
Short, Rhonda
|
10/2006 | US District Court, ND TX, Forth Worth | Wrongful Death | Discovery Phase | ||||
Fernandez
|
11/2006 | US District Court, ND CA | Wrongful Death | Discovery Phase | ||||
Brown
|
12/2006 | 15th Judicial District Court, Lafayette Parish, LA | Wrongful Death | Discovery Phase | ||||
Moreno
|
12/2006 | CA Superior Court, Los Angeles County (Companion to LeBlanc Litigation) | Wrongful Death | Discovery Phase | ||||
Augustine
|
1/2007 | 11th Judicial Circuit Court, Miami-Dade County, FL | Wrongful Death | Discovery Phase | ||||
Nunez
|
1/2007 | US District Court, ND TX, Amarillo (Companion to TX State Court lawsuit) | Wrongful Death | Complaint Served | ||||
Smith
|
2/2007 | Civil District Court, Orleans Parish, LA | Wrongful Death | Complaint Served | ||||
Pierson, Preston
|
2/2007 | Superior Court of CA, San Bernardino County | Wrongful Death | Complaint Served | ||||
Son Thompson
|
3/2007 | US District Court, MD FL, Ft. Myers | Wrongful Death | Complaint Served |
47
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NOTES TO FINANCIAL STATEMENTS (Continued)
Month | ||||||||
Plaintiff | Served | Jurisdiction | Claim Type | Status | ||||
Powers
|
11/2003 | AZ Superior Court | Training Injury | Verdict for TASER, Appeal Pending | ||||
Cook
|
8/2004 | NV District 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 | Dismissed with Prejudice | ||||
Wagner
|
8/2005 | AZ Superior Court | Training Injury | Dismissed with Prejudice | ||||
Gerdon
|
8/2005 | AZ Superior Court | Training Injury | Discovery Phase | ||||
Gallant
|
8/2005 | AZ Superior Court | Training Injury | Dismissed with Prejudice | ||||
Herring
|
8/2005 | Circuit Court of City of St. Louis, MO | Training Injury | Discovery Phase, Trial Scheduled for 9/2007 | ||||
Stewart
|
10/2005 | Circuit Court for Broward County, FL | Training Injury | Discovery Phase | ||||
Lewandowski
|
1/2006 | US District Court, NV | Training Injury | Partial Motion to Dismiss Granted, Discovery Phase | ||||
Peterson
|
1/2006 | US District Court, NV | Training Injury | Discovery Phase | ||||
Husband
|
3/2006 | British Columbia Supreme Court, Canada | Training Injury | Discovery Phase | ||||
Wright
|
4/2006 | US District Court, SD OH, Cincinatti | Training Injury | Discovery Phase, Trial Scheduled for 12/2007 | ||||
Richthofen
|
7/2006 | 22 nd Judicial District Court, St. Tammany Parish, LA | Training Injury | Discovery Phase | ||||
Wilson
|
8/2006 | US District Court, ND GA | Training Injury | Discovery Phase | ||||
Gray
|
8/2006 | Second Judicial District, Davis County, Utah | Training Injury | Dismissed with Prejudice | ||||
Diamond
|
8/2006 | Circuit Court, Douglas County, Oregon | Training Injury | Discovery Phase | ||||
Cuckovic
|
8/2006 | Circuit Court, McDonald County, Missouri | Personal Injury | Discovery Phase | ||||
Cosby
|
8/2004 | US District Court, SD NY | Injury During Arrest | Dismissed by Summary Judgment | ||||
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 | Discovery Phase | ||||
Wieffenbach
|
6/2006 | Circuit Court of 12 th Judicial District, Will County, Il | Injury During Arrest | Discovery Phase | ||||
Cruz
|
7/2006 | CA Superior Court, Los Angeles County | Injury During Arrest | Discovery Phase | ||||
Turner
|
8/2006 | US District Court, CD, CA | Injury During Arrest | Dismissed with Prejudice | ||||
Molina
|
9/2006 | US District Court, ND West Virginia | Injury During Detention | Discovery Phase | ||||
Short, Harvey
|
10/2006 | US District Court, SD West Virginia | Injury During Arrest | Complaint Served | ||||
Payne
|
10/2006 | Circuit Court of Cook County, Illinois | Injury During Arrest | Discovery Phase | ||||
Powell
|
12/2006 | US District Court, ND IL, Eastern Division | Injury During Arrest (3rd Party Complaint against TASER) | Complaint Served |
In December 2005, 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 and the Company assumed all future potential liability and costs
from and after the date the settlement and release agreement was signed. After offsetting
approximately $149,000 in legal expenses to defend and win the trial, the Company has recorded the
remaining balance of approximately $426,000 as deferred insurance settlement proceeds 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.
During the years ended December 31, 2006 and 2005, the Company expended approximately $51,000 and
$98,000, respectively, in connection with the appeal and reduced the deferred amount by these
costs.
In November 2006, the Company received a defense verdict in the Alvarado v. Taser
International in-custody death case. In September 2006, 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 $225,000 from its liability
insurance provider associated with a settlement and release agreement and the Company assumed all
future potential liability and costs from and after the date the settlement and release agreement
was signed. The Company has recorded the $225,000 as deferred insurance settlement proceeds 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.
During the year ended December 31, 2006, the Company expended approximately $142,000 in connection
with the trial and appeal and reduced the deferred amount by these costs.
48
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NOTES TO FINANCIAL STATEMENTS (Continued)
Other Litigation
In January 2005, we filed a complaint 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 which relates to trademark violations. The defendants have filed a counterclaim
against the Company alleging defamation. This case settled pursuant to a confidentiality agreement
and was dismissed in December 2006.
In February 2005, we filed a complaint 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 have been granted and patents have been issued for
both applications as U.S. Patent No. US 7,145,762 and U.S. Patent No. US 7,102,870. Mr. Nerheim
assigned his interest in these patents 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. 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. In March 2006, the Court
issued a temporary restraining order and a preliminary injunction preventing Mr. Watkins from
selling, assigning, transferring or licensing this patent to a third party during the duration of
this litigation. On August 2, 2006, the Court issued an order granting our motion for partial
summary judgment on liability, leaving open the matter of remedies and other residual issues for
resolution in subsequent proceedings. We filed a motion for summary judgment in January 2007
requesting an equitable assignment or constructive trust of Mr. Watkins interest in U.S. Patent No.
US 6,999,295, which motion was granted by the Court in March 2007. On February 5, 2007, the Disciplinary
Commission of the Supreme Court of Arizona recommended that Mr. Watkins be disbarred as a result of
his conduct in this matter.
In November 2005 and April 2006, we filed lawsuits in Marion County Circuit Court, Indiana and
in Fairfax County Circuit Court, Virginia, respectively, 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 an adverse third-party
witness. Mr. Ruggieri has counterclaimed for defamation and infliction of distress. In October
2006, we reached a settlement agreement with Mr. Ruggieri and a dismissal was entered in this
litigation.
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 an 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.
In June 2006, we filed a lawsuit in U.S. District Court for the Central District of California
against Bestex Company, Inc. for patent infringement, false patent marking, unfair competition and
breach of written contract. Bestex filed a counterclaim for unfair competition and false
advertising. Both parties filed motions for summary judgment, which motions were granted and the
matter was resolved on those motions before the Court in January 2007.
In November 2006, we filed a lawsuit against the Chief Medical Examiner of Summit County, OH,
in the Court of Common Pleas of Summit County Ohio, to correct erroneous cause of death
determinations relating to the autopsy reports prepared by medical examiner, Dr. Lisa Kohler, which
associate the TASER device as being a contributing factor in the deaths of Richard Holcomb and
Dennis Hyde. We asked the Court to order a hearing on the appropriate causes of death of Mr. Hyde
and Mr. Holcomb, and to order changes in the medical examiners cause of death determinations for
both Mr. Hyde and Mr. Holcomb removing all references to any TASER device causing or contributing
to the causes of death for Mr. Hyde or Mr. Holcomb. Defendant filed a motion to dismiss for lack
of standing and that motion was denied by the Court in January 2007. This case is in the discovery
phase.
In January 2007, we filed a lawsuit in the U.S. District Court for Arizona against Stinger
Systems, Inc. alleging patent infringement, patent false marking, and false advertising. Defendant
filed an answer but discovery has not yet begun and no trial date has been set.
General
From time to time, the Company is notified that it may be a party to a lawsuit or that a claim
is being made against it. It is the Companys policy to not disclose the specifics of any claim or
threatened lawsuit until the summons and complaint are actually served
on the Company. We intend to pursue and defend any lawsuit filed against or by the Company
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 expense,
liability or 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.
The Company may settle a lawsuit in situations where a settlement can be obtained for nuisance
value and for an amount that is expected to be less than the cost of defending a lawsuit. Due to
the confidentiality of our litigation strategy and the confidentiality agreements that are executed
in the event of a settlement, the Company does not identify or comment on which lawsuits have been
settled or the amount of any settlement.
49
Table of Contents
NOTES TO FINANCIAL STATEMENTS (Continued)
d. Employment Agreements
The Company has employment agreements with its Chairman, Chief Executive Officer,
President, 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, or 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 $1,034,000 in the aggregate at December 31, 2006.
9. Income Taxes
Significant components of the Companys deferred tax assets and liabilities are as
follows:
December 31, | ||||||||
2006 | 2005 | |||||||
(As restated) | ||||||||
Deferred income tax assets |
||||||||
Net operating loss carryforward |
$ | 21,677,987 | $ | 25,479,543 | ||||
Reserves and accruals |
4,906,310 | 1,042,452 | ||||||
Non-employee stock option expense |
311,363 | 310,637 | ||||||
Non-qualified stock option expense |
99,315 | | ||||||
Capitalized R&D |
1,405,798 | 543,849 | ||||||
Charitable contributions |
326,961 | 204,580 | ||||||
Alternative minimum tax carryforward |
276,212 | 40,355 | ||||||
Deferred income tax assets |
29,003,946 | 27,621,416 | ||||||
Deferred income tax liabilities |
||||||||
Depreciation |
(537,237 | ) | (583,512 | ) | ||||
Amortization |
(52,497 | ) | (41,616 | ) | ||||
Deferred income tax liabilities |
(589,734 | ) | (625,128 | ) | ||||
Net deferred income tax assets before valuation allowance |
28,414,212 | 26,996,288 | ||||||
Less: Valuation allowance |
(250,000 | ) | | |||||
Net deferred income tax assets |
$ | 28,164,212 | $ | 26,996,288 | ||||
Reported as: |
||||||||
Current deferred tax assets |
$ | 12,295,493 | $ | 6,955,500 | ||||
Long-term deferred tax assets |
15,868,719 | 20,040,788 | ||||||
$ | 28,164,212 | $ | 26,996,288 | |||||
During the year ended December 31, 2006, the Company utilized approximately $9.8
million of its net operating loss carry forwards (NOLs) for federal income tax purposes
resulting in approximately $56.5 million of NOLs remaining at December 31, 2006. The Companys
federal NOL carryforward expires in 2024.
In preparing the Companys financial statements, management has assessed the likelihood that
its deferred tax assets will be realized from future taxable income. In evaluating the ability to
recover its deferred income tax assets, management considers all available positive and negative
evidence, including the Companys operating results, ongoing tax planning and forecasts of future
taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it
is determined that it is more likely than not that some portion or all of the net deferred tax
assets will not be realized. Management exercises significant judgment in
determining the Companys provisions for income taxes, its deferred tax assets and liabilities and
its future taxable income for purposes of assessing its ability to utilize any future tax benefit
from its deferred tax assets. Although management believes that its 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 a result of the shareholder litigation
settlement expense recorded in the second quarter of 2006, the Company has recorded an additional
valuation allowance of $250,000 against its deferred tax assets for Arizona NOLs as of December
31, 2006. Management believes that, other than as previously described, as of December 31, 2006,
based on an evaluation and projections of future sales and profitability, no other valuation
allowance was deemed necessary as management concluded that it is more likely than not that the
Companys 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.
The Company is currently under audit by the United States Internal Revenue Service for its
2004 fiscal year. The audit process has only recently begun and the Company is unable to determine
the outcome of the audit process at this time. There can be no assurance that the final outcome of
this audit will not have an adverse effect on the Companys future operating results.
50
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NOTES TO FINANCIAL STATEMENTS (Continued)
Significant components of the provision (benefit) for income taxes are as follows:
For the Year Ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
(As restated) | ||||||||||||
Current |
||||||||||||
Federal |
$ | 235,863 | $ | 1,985,212 | $ | 9,773,679 | ||||||
State |
36,161 | 189,201 | 1,537,429 | |||||||||
Total Current |
272,024 | 2,174,413 | 11,311,108 | |||||||||
Deferred |
||||||||||||
Federal |
(1,292,900 | ) | (523,441 | ) | 627,985 | |||||||
State |
124,976 | (2,062 | ) | 99,907 | ||||||||
Total Deferred |
(1,167,924 | ) | (525,503 | ) | 727,892 | |||||||
Provision (benefit) for Income Taxes |
$ | (895,900 | ) | $ | 1,648,910 | $ | 12,039,000 | |||||
A reconciliation of the Companys effective income tax rate to the federal statutory rate
follows:
For the Year Ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Federal statutory rate |
(35.0 | )% | 35.0 | % | 35.0 | % | ||||||
State tax, net of federal benefit |
(3.4 | )% | 3.4 | % | 3.4 | % | ||||||
Nondeductible lobbying expenses
and other permanent differences |
13.9 | % | 19.5 | % | 0.5 | % | ||||||
Change in valuation allowance |
5.0 | % | 0.0 | % | 0.0 | % | ||||||
Other |
1.5 | % | 0.0 | % | 0.0 | % | ||||||
Effective income tax rate |
(18.0 | )% | 57.9 | % | 38.9 | % | ||||||
10. Line of Credit
The Company entered into a line of credit agreement on July 13, 2004. 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, 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, 2006, the available borrowing
under the existing line of credit was $7.6 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, 2006.
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. At December 31, 2006, the Company was in compliance with all covenants.
11. Stockholders Equity
a. Common Stock and Preferred 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
designated as common stock and preferred stock, each having a par value of $0.00001 per share.
The number of shares the Company is authorized to issue is 50 million shares of common
stock and 25 million shares of preferred stock.
51
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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.
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 received two shares of common stock for every one share of common stock held on
that date, effective February 11, 2004.
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 received one share of common stock for every one share of common stock held on that
date, effective April 29, 2004.
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 received one share of common stock for every one share of common stock held on
that date, effective November 29, 2004.
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. Stock Repurchase
In August 2006, TASERs Board of Directors authorized a stock repurchase program to acquire up
to $10 million of the Companys outstanding common stock. During the third quarter of 2006, the
Company repurchased 300,000 shares at a weighted average cost of $7.36 per share and a total cost
of approximately $2.2 million.
c. Stock Option Plans
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 three-year period, however a number of options issued
under this plan within fiscal 2005 had vesting terms of one year. 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, 2006, 5,340,411
options are remaining for future grants.
During 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 vested over a one-year
period. The total compensation cost associated with the options granted to consultants in 2004 was
$625,714.
52
Table of Contents
NOTES TO FINANCIAL STATEMENTS (Continued)
A summary of the Companys stock options, adjusted for stock splits in the form of stock
dividends, at December 31, 2006, 2005 and 2004 and for the years then ended is presented in the
table below:
2006 | 2005 | 2004 | ||||||||||||||||||||||
Weighted Average | Weighted Average | Weighted Average | ||||||||||||||||||||||
Options | Exercise Price | Options | Exercise Price | Options | Exercise Price | |||||||||||||||||||
Options outstanding, beginning of year |
6,161,933 | $ | 4.92 | 5,644,518 | $ | 3.19 | 10,283,808 | $ | 0.91 | |||||||||||||||
Granted |
192,038 | $ | 8.66 | 1,550,297 | $ | 9.00 | 2,451,260 | $ | 8.94 | |||||||||||||||
Exercised |
(301,320 | ) | $ | 2.48 | (946,498 | ) | $ | 0.99 | (6,912,892 | ) | $ | 1.85 | ||||||||||||
Expired/terminated |
(150,469 | ) | $ | 6.29 | (86,384 | ) | $ | 6.78 | (177,658 | ) | $ | 2.90 | ||||||||||||
Options outstanding, end of year |
5,902,182 | $ | 5.13 | 6,161,933 | $ | 4.92 | 5,644,518 | $ | 3.19 | |||||||||||||||
Exercisable at end of year |
5,608,322 | $ | 4.88 | 5,538,047 | $ | 4.87 | 2,898,472 | $ | 4.25 | |||||||||||||||
Options available for grant at end of year |
5,340,411 | 5,381,980 | 6,832,750 | |||||||||||||||||||||
Weighted average fair value of options granted during the year |
$ | 4.49 | $ | 4.71 | $ | 4.42 |
The following table summarizes information about stock options outstanding and exercisable as
of December 31, 2006:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted Average | ||||||||||||||||||||
Weighted | Remaining | Weighted | ||||||||||||||||||
Number | Average | Contractual | Number | Average | ||||||||||||||||
Range of Exercise Price | Outstanding | Exercise Price | Life Life | Exercisable | Exercise Price | |||||||||||||||
$0.28 $0.99 |
1,308,180 | $ | 0.36 | 5.8 | 1,308,180 | $ | 0.36 | |||||||||||||
$1.03 $2.41 |
1,688,532 | $ | 1.54 | 2.6 | 1,688,532 | $ | 1.55 | |||||||||||||
$5.89 $9.65 |
2,412,998 | $ | 8.08 | 7.1 | 2,207,038 | $ | 8.07 | |||||||||||||
$10.10 $19.76 |
427,172 | $ | 14.35 | 7.7 | 348,070 | $ | 14.70 | |||||||||||||
$20.12 $29.98 |
65,300 | $ | 23.86 | 7.3 | 56,502 | $ | 23.60 | |||||||||||||
$0.28 $29.98 |
5,902,182 | $ | 5.13 | 5.6 | 5,608,322 | $ | 4.88 | |||||||||||||
At
December 31, 2006 the Company had 293,860 unvested options
outstanding with a weighted average exercise price of $9.94 and
weighted average remaining contractual life of 8.9 years. Of the
unvested options outstanding, the Company expects that 290,128
options will ultimately vest based on its historical experience.
The aggregate intrinsic value of options outstanding and options exercisable at
December 31, 2006 was $20.2 million. The aggregate
intrinsic value of unvested options at December 31, 2006 was
$53,000. Aggregate intrinsic value represents the difference between
the Companys closing stock price on the last trading day of the fiscal period, which was $7.61 as
of December 31, 2006, and the exercise price multiplied by the number of options outstanding. Total
intrinsic value of options exercised was $1.9 million, $7.9 million and $97.2 million for the years
ended December 31, 2006, 2005 and 2004, respectively. As of December 31, 2006, total unrecognized
stock-based compensation expense related to non-vested stock options was approximately $1.3
million, which is expected to be recognized over a weighted average period of approximately 11
months.
The total fair value of options vested was approximately $14.1 million, $13.1 million and $5.8
million for the years ended December 31, 2006, 2005 and 2004, respectively.
53
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NOTES TO FINANCIAL STATEMENTS (Continued)
12. Related Party Transactions
Aircraft charter
Prior to 2006, the Company chartered an aircraft for business travel from Four Futures
Corporation (Four Futures), which is wholly-owned by Thomas P. Smith, President of the Company,
and his family. Beginning in 2006, the Company began reimbursing Thomas P. Smith for business use
of his personal aircraft. For the year ended December 31, 2006, the Company incurred expenses of
approximately $487,000 to Thomas P. Smith and Four Futures. For the years ended December 31, 2005
and 2004, the Company incurred expenses of approximately $434,000 and $154,000, respectively, to
Thomas P. Smith and Four Futures. Any personal use of the aircraft by Mr. Smith prior to 2006 was
billed to Four Futures for reimbursement. At December 31, 2006 and December 31, 2005, the Company
had outstanding payables of approximately $36,000 and $67,000, respectively to Thomas P. Smith, and
no amounts due from Thomas P. Smith or Four Futures. The Company believes that the rates charged by
Mr. Smith or Four Futures are equal to or below commercial rates the Company would pay to charter
similar aircraft from independent charter companies.
Prior to 2006, the Company also chartered an aircraft for business travel from Thundervolt,
LLC (Thundervolt), which is wholly owned by Patrick W. Smith, Chief Executive Officer of the
Company, and Phillips W. Smith, Chairman of the Companys Board. During January 2006, the Company
ceased the charter of this aircraft. For the years ended December 31, 2005 and 2004, the Company
incurred charter expenses of approximately $419,000 and $191,000, respectively, to Thundervolt. Any
personal use of the aircraft by Patrick, Phillips or Thomas Smith was billed to Thundervolt, or
directly to the individual, for reimbursement. For the year ended December 31, 2005, the Company
billed approximately $470,000 to Thundervolt, Patrick W. Smith, Phillips W. Smith and Thomas P.
Smith for personal use of the aircraft. No amounts were billed for personal use in 2004. The Company believes that the rates charged by Thundervolt
were equal to or below commercial rates the Company would pay to charter similar aircraft from
independent charter companies.
The Company 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.
TASER Foundation
In November 2004, the Company established the TASER Foundation. The TASER Foundation is an
Internal Revenue Code Section 501(c)(3) non-profit corporation and has been granted tax exempt
status by the IRS. 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. Daniel M. Behrendt, an officer of the Company,
serves on the Board of Directors of the TASER Foundation. Patrick W. Smith and Thomas P. Smith
resigned from the Board of Directors of the TASER Foundation in January 2006. Over half of the
initial $1 million endowment was contributed directly by the Companys 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, 2006, 2005 and
2004, the Company incurred approximately $228,000, $119,000 and $32,000, respectively, in such
administrative costs. For the years ended December 31, 2006 and 2005, the Company contributed
$275,000 and $325,000, respectively, to the TASER Foundation.
Consulting services
Beginning in August 2005, the Company agreed to engage Mark Kroll, a member of the Board of
Directors to provide consultancy services. The expenses related to these services for the two years
ended December 31, 2006 and 2005 were approximately $197,000 and $42,000, respectively. At December
31, 2006 and 2005, the Company had accrued liabilities of approximately $24,000 and $42,000,
respectively, related to these services.
13. Employee Benefit Plan
In January 2006, the Company established a defined contribution profit sharing 401(k) plan
(the Plan) for eligible employees, which is qualified under Sections 401(a) and 401(k) of the
Internal Revenue Code of 1986, as amended. Employees are entitled to make tax-deferred
contributions of up to the maximum allowed by law of their eligible compensation, but not exceeding
$15,000. The Company matches 50% of the first 6% of eligible compensation contributed to the Plan
by each participant. The Companys matching contributions cliff vest at 20% per annum and are fully
vested after five years of service, at age 59 1/2 regardless of service, upon the death or
permanent disability of the employee, or upon termination of the Plan. The Companys matching
contributions to the Plan for the year ended December 31, 2006 were approximately $201,000. Future
matching or profit sharing contributions to the Plan are at the Companys sole discretion.
54
Table of Contents
NOTES TO FINANCIAL STATEMENTS (Continued)
14.
2005 and 2004 restatements
2005 Manufacturing overhead methodology and error corrections
On
May 11, 2006, the Company concluded that its unaudited financial statements at March 31,
2005, June 30, 2005 and September 30, 2005 and for the periods then ended, included in its Form
10-Qs for the periods ended March 31, 2005, June 30, 2005 and September 30, 2005, respectively,
should no longer be relied upon due to an error in those unaudited financial statements which resulted in the
incorrect calculation of manufacturing overhead costs being applied to inventory. The Company has
restated its unaudited results for the quarters ended March 31, 2005, June 30, 2005 and September, 30 2005.
No restatement of the Companys financial statements for the years ended December 31, 2005 and
December 31, 2004 is necessary as a result of the matters discussed below as the Company has
determined they are not material to those periods based on the materiality guidelines contained in
SEC Staff Accounting Bulletin No. 99 Materiality.
During the first quarter of 2006, the Company determined that its historical methodology for
the calculation of indirect manufacturing overhead costs applied to inventory was incorrect and
also identified a clerical error in the calculation of the overhead applied to inventory for the
three months ended December 31, 2005. The Company originally recorded an adjustment in the first
quarter of 2006 to correct the net cumulative impact of the change in methodology and the clerical
error. However, as it was subsequently determined that because the impact of correcting the
methodology related to prior periods was material to the operating results of the first quarter of
2006, a further adjustment was necessary to reflect the cumulative impact against the relevant
prior year periods. Additionally, the Company has recorded the impact of previously unrecorded
adjustments related to cut-off errors primarily for legal and professional fees and the related
income tax effects which were previously deemed to be immaterial.
A summary of the impact to correct the cumulative amount of manufacturing overhead applied to
inventory, record previously unrecorded proposed cut-off errors and the related income tax effects
on the income statement and balance sheet for the year ended December 31, 2005 is as follows:
Year Ended December 31, 2005 | ||||||||||||||||
As Previously | Overhead | Cut-off | ||||||||||||||
Reported | Adjustments | Adjustments | As Restated | |||||||||||||
Statements of Income |
||||||||||||||||
Indirect manufacturing expense |
$ | 4,667,421 | $ | 585,049 | $ | | $ | 5,252,470 | ||||||||
Total Cost of Products Sold |
17,511,237 | 585,049 | | 18,096,286 | ||||||||||||
Gross Margin |
30,182,944 | (585,049 | ) | | 29,597,895 | |||||||||||
Sales, general and administrative expenses |
27,058,242 | (484,043 | ) | (90,714 | ) | 26,483,485 | ||||||||||
Income from operations |
1,550,654 | (101,006 | ) | 90,714 | 1,540,362 | |||||||||||
Income before provision for income taxes |
2,715,718 | (101,006 | ) | 90,714 | 2,705,426 | |||||||||||
Provision for income taxes |
1,652,861 | (38,775 | ) | 34,824 | 1,648,910 | |||||||||||
Net income |
$ | 1,062,857 | $ | (62,231 | ) | $ | 55,890 | $ | 1,056,516 | |||||||
Income per common share |
||||||||||||||||
Basic |
$ | 0.02 | $ | | $ | | $ | 0.02 | ||||||||
Diluted |
$ | 0.02 | $ | | $ | | $ | 0.02 |
55
Table of Contents
NOTES TO FINANCIAL STATEMENTS (Continued)
Year Ended December 31, 2005 | ||||||||||||||||
As Previously | Overhead | Cut-off | ||||||||||||||
Reported | Adjustments | Adjustments | As Restated | |||||||||||||
Balance Sheet |
||||||||||||||||
Inventory |
$ | 10,283,390 | $ | (178,054 | ) | $ | | $ | 10,105,336 | |||||||
Total current assets |
42,427,856 | (178,054 | ) | | 42,249,802 | |||||||||||
Deferred income tax asset |
19,959,681 | 68,777 | 12,330 | 20,040,788 | ||||||||||||
Total assets |
112,338,194 | (109,277 | ) | 12,330 | 112,241,247 | |||||||||||
Accounts payable and accrued liabilities |
6,285,274 | | 30,380 | 6,315,654 | ||||||||||||
Total current liabilities |
7,556,321 | | 30,380 | 7,586,701 | ||||||||||||
Total liabilities |
8,472,492 | | 30,380 | 8,502,872 | ||||||||||||
Retained earnings |
25,122,221 | (109,277 | ) | (18,050 | ) | 24,994,894 | ||||||||||
Total stockholders equity |
103,865,702 | (109,277 | ) | (18,050 | ) | 103,738,375 | ||||||||||
Total liabilities and stockholder equity |
$ | 112,338,194 | $ | (109,277 | ) | $ | 12,330 | $ | 112,241,247 |
The corrections identified above did not change net cash provided by operating activities for the
year ended December 31, 2005. The effect on the Companys December 31, 2004 net income, earnings
per share, cashflow from operations and stockholders equity are deemed to be immaterial and
therefore no restatement was deemed necessary. The Company has recorded an adjustment of $120,986
to its opening 2005 retained earnings balance on the statement of shareholders equity to reflect
the impact of these corrections.
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, 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 payroll 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 decreased 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.
56
Table of Contents
NOTES TO FINANCIAL STATEMENTS (Continued)
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.
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 |
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 2p:
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. |
15. Selected Quarterly Financial Data (unaudited)
Selected quarterly financial data for years ended December 31, 2006 and 2005 follows (in thousands
except for per share data):
Quarter Ended | ||||||||||||||||
Mar.31, 2006 | Jun.30, 2006 | Sep.30, 2006 | Dec. 31, 2006 | |||||||||||||
(a) | ||||||||||||||||
Net sales |
$ | 13,893,563 | $ | 16,225,197 | $ | 18,311,543 | $ | 19,287,548 | ||||||||
Gross margin |
$ | 8,954,694 | $ | 10,390,623 | $ | 11,631,980 | $ | 12,201,764 | ||||||||
Net income (loss) |
$ | 805,979 | $ | (9,606,584 | ) | $ | 2,395,898 | $ | 2,317,028 | |||||||
Basic net income (loss) per
share |
$ | 0.01 | $ | (0.15 | ) | $ | 0.04 | $ | 0.04 | |||||||
Diluted net income (loss)
per share |
$ | 0.01 | $ | (0.15 | ) | $ | 0.04 | $ | 0.04 |
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 |
$ | 5,565,140 | $ | 8,191,523 | $ | 7,739,901 | $ | 8,101,331 | ||||||||
Net income |
$ | 5,393 | $ | 497,117 | $ | 374,880 | $ | 179,126 | ||||||||
Basic net income per share |
$ | 0.00 | $ | 0.01 | $ | 0.01 | $ | 0.00 | ||||||||
Diluted net income per share |
$ | 0.00 | $ | 0.01 | $ | 0.01 | $ | 0.00 |
a) | As discussed in Note 8c, in 2006 we reached an agreement to settle our securities class action and shareholder derivative lawsuits. The total litigation settlement expenses reflected in the income statement for the quarter ended June 30, 2006 were $17.65 million. |
57
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
TASER International, Inc.
We have audited the accompanying balance sheets of TASER International, Inc. (the
Company) as of December 31, 2006 and 2005 and the related statements of operations, stockholders
equity, and cash flows for each of the two years in the period ended December 31, 2006. 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, 2006 and 2005, and
the results of its operations and its cash flows for each of the two years in the period ended December 31, 2006 in
conformity with accounting principles generally accepted in the United States of America.
Our audit was conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The
Schedule II Valuation and Qualifying Accounts
is presented for purposes of additional analysis and is not a
required part of the basic financial statements. This schedule has
been subjected to the auditing procedures applied in the audit of the
basic financial statements and in our opinion, is fairly stated in
all material respects in relation to the basic financial statements
taken as a whole.
As discussed in Note 2p to the financial statements, the Company has
adopted Financial Accounting Standards Board Statement No. 123(R),
Share Based Payments (SFAS 123R) in 2006. Also as discussed in Note 14 to the financial statements, the accompanying 2005 financial statements
have been restated.
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, 2006, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated March 12, 2007 expressed an unqualified opinion on managements
assessment of the effectiveness of the Companys internal control over financial reporting and an
unqualified opinion on the effectiveness of the Companys internal control over financial
reporting.
/s/ GRANT THORNTON LLP | ||||
Grant Thornton LLP | ||||
Phoenix, Arizona
March 12, 2007
March 12, 2007
58
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
TASER International, Inc.
Scottsdale, Arizona
Scottsdale, Arizona
We have
audited the accompanying statements of income, stockholders equity, and
cash flows of TASER International, Inc. (the
Company) for the year ended December 31, 2004. Our audit also included the financial statement
schedule for the year ended December 31, 2004 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 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. 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the
results of operations and cash flows of TASER International, Inc. for
the year ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion, such financial
statement schedule for the year ended December 31, 2004, 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 to the financial statements, the
accompanying 2004 financial statements have been restated.
/s/ DELOITTE & TOUCHE LLP | ||||
Deloitte & Touche LLP | ||||
Phoenix, Arizona
March 31, 2005
March 31, 2005
(May 23, 2005 as to the effects of the restatement of operations for 2004, discussed in Note 14 to the financial statements)
59
Table of Contents
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.
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 CEO and our CFO, 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, our CEO and our CFO have concluded that our
disclosure controls and procedures are effective to ensure that information we are required to
disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is
recorded, processed, summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management,
including our CEO and our CFO, 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.
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, 2006, the
end of our fiscal year. Management based its assessment on criteria established in Internal
ControlIntegrated 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.
Conclusion
Based on our assessment, management has concluded that our internal control over financial
reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
reporting purposes in accordance with generally accepted accounting principles. 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
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 herein.
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Changes in internal control over financial reporting
During the three months ended December 31, 2006, there were no changes 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 have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
TASER International, Inc.
TASER International, Inc.
We have audited managements assessment, included in the accompanying Managements Annual Report on
Internal Control over Financial Reporting, that TASER International, Inc. (the Company) (a
Delaware Corporation) maintained effective internal control over financial reporting as of December
31, 2006 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 opinion.
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.
In our opinion, managements assessment that TASER International, Inc. maintained effective
internal control over financial reporting as of December 31, 2006, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our opinion, TASER International, Inc.
maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2006, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the balance sheets of TASER International, Inc. as of December
31, 2006 and 2005, and the related statements of operations, stockholders equity and cash flows
for each of the two years in the period ended December 31, 2006
and our report dated March 12, 2007
expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP | ||||
Phoenix, Arizona | ||||
March 12, 2007 |
Item 9B. | Other Information |
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
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 2007 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, 2006 (the Proxy Statement).
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 Proxy
Statement for the 2007 Annual Meeting of Stockholders under the heading Executive Officers.
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 Proxy Statement for the
2007 Annual Meeting of Stockholders under the heading Security Ownership of Certain Beneficial
Owners and Management Section 16(a) Beneficial Ownership Reporting Compliance.
The information concerning significant employees and family relationships is
incorporated herein by reference to the information to be set forth in our Proxy Statement for the
2007 Annual Meeting of Stockholders under the heading Significant Employees and Family
Relationships.
The information concerning the Companys code of ethics is incorporated herein by
reference to the information to be set forth in our Proxy Statement for the 2007 Annual Meeting of
Stockholders under the heading Code of Ethics.
Item 11. Executive Compensation
The information concerning executive compensation is incorporated herein by reference to
the information to be set forth in our Proxy Statement for the 2007 Annual Meeting of Stockholders
under the heading Executive Compensation.
The information concerning compensation of directors is incorporated herein by reference
to the information to be set forth in our Proxy Statement for the 2007 Annual Meeting of
Stockholders under the heading Compensation of Directors.
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 Proxy
Statement for the 2007 Annual Meeting of Stockholders under the heading Security Ownership of
Certain Beneficial Owners and Management.
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Equity Compensation Plan Information
The following table provides details of our equity compensation plans at December 31,
2006:
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 | 5,902,182 | $ | 5.13 | 5,340,411 | |||||||||||
Equity compensation
plans not approved
by security holders |
0 | 0 | $ | | 0 | |||||||||||
Total |
23,352,500 | 5,902,182 | $ | 5.13 | 5,340,411 | |||||||||||
Refer to note 11c to the financial statements in Part II, Item 8 of this annual
report for more information on the Companys equity compensation plans.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information concerning certain relationships and related transactions is
incorporated herein by reference to the information to be set forth in our Proxy Statement for the
2007 Annual Meeting of Stockholders under the heading Certain Relationships and Related
Transactions.
Item 14. Principal Accountant Fees and Services
The information covering principal accountant fees and services required by this
item is incorporated by reference to the information in 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 the information in our Proxy Statement, under
the heading Audit Committee Pre-Approval and Permissible Non-Audit Services of Independent Public
Accountants.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) | The following documents are filed as part of this report: | |
1. | Financial Statements: | |
All financial statements as set forth under Item 8 of this report. | ||
2. | Supplementary Financial Statement Schedules: | |
Schedule II Valuation and Qualifying Accounts |
Other schedules have not been included because they are not applicable or because the information
is included elsewhere in this report.
3. | Exhibits: |
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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) | |
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, as amended. | |
10.17
|
Amendment to Credit Agreement dated as of October 31, 2006 between the Company and JP Morgan Chase Bank (incorporated by reference to exhibit 10.17 to Form 8-K, filed November 1, 2006) | |
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
|
Principal Executive Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) | |
31.2
|
Principal Financial Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) | |
32
|
Principal Executive Officer and Principal 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 |
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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 13, 2007
By: | /s/ PATRICK W. SMITH | |||
Patrick W. Smith | ||||
Chief Executive Officer | ||||
Date:
March 13, 2007
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
|
Director | March 13, 2007 | ||
/s/ THOMAS P. SMITH
|
Director | March 13, 2007 | ||
Thomas P. Smith |
||||
/s/ MATTHEW R. MCBRADY*
|
Director | March 13, 2007 | ||
Matthew R. McBrady |
||||
/s/ BRUCE R. CULVER*
|
Director | March 13, 2007 | ||
/s/ JUDY MARTZ*
|
Director | March 13, 2007 | ||
/s/ MARK W. KROLL*
|
Director | March 13, 2007 | ||
/s/ MICHAEL GARNREITER*
|
Director | March 13, 2007 | ||
/s/
JOHN S. CALDWELL*
|
Director | March 13, 2007 |
*By: | /s/ PATRICK W. SMITH | |||
Patrick W. Smith, Attorney in Fact | ||||
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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, 2006 |
$ | 110,882 | $ | | $ | | $ | (830 | ) | $ | 110,052 | |||||||||
Year ended December 31, 2005 |
$ | 120,000 | $ | 26,620 | $ | | $ | (35,738 | ) | $ | 110,882 | |||||||||
Year ended December 31, 2004 |
$ | 30,000 | $ | 90,000 | $ | | $ | | $ | 120,000 | ||||||||||
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Exhibit | ||||
Number | Description | |||
10.16* | TASER
2004 Outside Directors Stock Option Plan, as amended. |
|||
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 | Principal Executive Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) |
|||
31.2 | Principal Financial Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) |
|||
32 | Principal Executive Officer and Principal 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 |
67