Item 1B.
Unresolved Staff Comments
None
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.
See discussion of Legal Proceedings in Note 8c to the financial statements included in Part II, Item 8 of this annual report.
Item 4.
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.
PART II
Item 5.
Item 5.
Market for Registrant’s 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”
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
The following selected financial data should be read in conjunction with our financial statements and the notes thereto, and with Item 7, “Management’s 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.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s 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:
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.
Item 8.
Item 8. Financial Statements and Supplementary Data
TASER INTERNATIONAL, INC.
BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
TASER INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(1)
Stock-based compensation was allocated as follows:
The accompanying notes are an integral part of these financial statements.
TASER INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2006, 2005 and 2004
(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 Company’s 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.
TASER INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
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 Company’s 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 Company’s 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 Company’s operating results and financial condition. Although the Company carries product liability insurance, significant litigation could also result in a diversion of management’s 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 Company’s existing or any future litigation will not have a material adverse effect on the Company’s revenues, financial condition or financial results.
The Company’s 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 Company’s 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 Company’s cash and investment accounts earned interest at an approximate rate of 3.9% during 2006 and 2.7% in 2005. Included in the Company’s 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.
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 management’s 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 Company’s sales are final and its customers do not have a right to return the product. Certain of the Company’s 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.
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:
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.
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 customer’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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:
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.
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 Company’s 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 Company’s 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 (“ISO”s) 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.”
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).
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:
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 Company’s 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 Company’s 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:
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.
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 Company’s financial statements.
s. Reclassifications
Certain reclassifications were made to the 2005 amounts to conform to the 2006 presentation.
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 Company’s 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:
The following table summarizes the contractual maturities of government sponsored entity securities at December 31:
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:
The unrealized losses on the Company’s 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.
NOTES TO FINANCIAL STATEMENTS - (Continued)
4. Inventory
Inventories consisted of the following at December 31:
5. Property and Equipment
Property and equipment consist of the following at December 31:
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.
NOTES TO FINANCIAL STATEMENTS - (Continued)
6. Intangible Assets
Intangible assets consist of the following at December 31:
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:
7. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities were comprised as follows at December 31:
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:
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 Company’s 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 Company’s products and the Company’s ability to meet its sales goals, including the validity of a $1.5 million sales order with the Company’s distributor, Davidson’s, in the fourth quarter of 2004. The consolidated complaint also alleges that product defects were leading to excessive product returns by customers.
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 Company’s 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 Company’s 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 Company’s 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 Company’s financial condition and future business prospects to commit insider trading of the Company’s 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 Company’s adoption of certain corporate governance provisions, settlement between the defendants and the Company’s insurance carrier, and the Company’s 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.
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 Hennigan’s case in chief, we made a motion to dismiss Hennigan’s case. The court issued a briefing schedule on our motion and the trial was suspended pending the court’s 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 court’s order and we agreed to pay plaintiff the nominal judgment and forego the Company’s 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 plaintiff’s 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.
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTES TO FINANCIAL STATEMENTS - (Continued)
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.
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 examiner’s 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 Company’s 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.
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 Company’s deferred tax assets and liabilities are as follows:
During the year ended December 31, 2006, the Company utilized approximately $9.8 million of its net operating loss carry forwards (“NOL’s”) for federal income tax purposes resulting in approximately $56.5 million of NOL’s remaining at December 31, 2006. The Company’s federal NOL carryforward expires in 2024.
In preparing the Company’s 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 Company’s 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 Company’s 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 NOL’s 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 Company’s 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 Company’s future operating results.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Significant components of the provision (benefit) for income taxes are as follows:
A reconciliation of the Company’s effective income tax rate to the federal statutory rate follows:
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 Company’s 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 Company’s 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 Company’s 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.
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 Company’s 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 Company’s 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 Company’s 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 Company’s 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, TASER’s Board of Directors authorized a stock repurchase program to acquire up to $10 million of the Company’s 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 Company’s 1999 Stock Option Plan (the “1999 Plan”) generally vest over a three-year period. The options issued under the Company’s 2001 Stock Option Plan (the “2001 Plan”) generally vest over a three-year period. The options issued under the Company’s 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 Company’s 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 Company’s 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.
NOTES TO FINANCIAL STATEMENTS - (Continued)
A summary of the Company’s 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:
The following table summarizes information about stock options outstanding and exercisable as of December 31, 2006:
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 Company’s 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.
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 Company’s 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 Company’s 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 Foundation’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s sole discretion.
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 Company’s 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:
NOTES TO FINANCIAL STATEMENTS - (Continued)
The corrections identified above did not change net cash provided by operating activities for the year ended December 31, 2005. The effect on the Company’s 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 employee’s 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.
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:
Statement of Cash Flow:
The following table summarizes changes in the previously reported information in Note 2p:
(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):
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 Company’s 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 management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Phoenix, Arizona
March 12, 2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
TASER International, Inc.
Scottsdale, Arizona
We have audited the accompanying 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 Company’s 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 Company’s 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.
Phoenix, Arizona
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)
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.
Controls and Procedures
Attached as exhibits to this Form 10-K are certifications of the Company’s 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 Company’s internal control over financial reporting and of management’s 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. Management’s 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 system’s 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 company’s 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 Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s 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 management’s 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 management’s 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.
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.
We have audited management’s assessment, included in the accompanying Management’s 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 Company’s 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 management’s assessment and an opinion on the effectiveness of the Company’s 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 management’s 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 company’s 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 company’s 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 company’s 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, management’s 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.
None.
PART III
Item 10.
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 Company’s 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.
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.
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.”
Equity Compensation Plan Information
The following table provides details of our equity compensation plans at December 31, 2006:
Refer to note 11c to the financial statements in Part II, Item 8 of this annual report for more information on the Company’s equity compensation plans.
Item 13.
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.
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.
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.
*
Management contract or compensatory plan or arrangement
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
Date: March 13, 2007
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.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
*
Management contract or compensatory plan or arrangement