Thursday, December 22, 2005

TASER: Stunning Gains?

Stun-gun maker, Taser International, Inc. (TASR - $7.20) shares have risen about 15 percent in trading over the last two days after the Company said that it no longer faced delisting from Nasdaq after filing its third-quarter report with securities regulators, and a wrongful death suit against the Company in its homestate of Arizona was dismissed.
It is the eighth wrongful death or injury lawsuit against Taser that has been dropped over the last 18 months. Nonetheless, this won't free the company from potential litigation in the future. In fact, management noted in its latest 10Q filing that the Company is currently named as a defendant in 43 lawsuits in which the plaintiffs alleged either wrongful death or personal injury in situations in which the TASER device was used (or present) by law enforcement officers or during training exercises. Taser does carry product liability insurance to help defray the costs associated with these claims, but the bottom-line will continue to be pressured by increased legal costs and higher insurance premiums.
After some initial fumbles, to management's credit, they have also been on a PR offensive. In December alone, the Company has released the following positive press: (i) "Police Use TASER Device to Save Suicidal Man from Slitting Wrists ." (ii) "TASER Ends Child-Hostage Crisis in Euclid, Ohio." And, (iii) "Armed Gunman Subdued with a TASER."
In July 2005, the Company filed a lawsuit against Gannett Co., Inc., parent company of the USA Today Newspaper and the Arizona Republic, for libel, alleging [among other legal issues] that the defendants published an article in the USA Today Newspaper on June 3, 2005 which was grossly incorrect and completely misrepresented the facts by overstating the electrical output of the TASER X26 by a factor of 1 million. The complaint also asserts that the defendants engaged in the ongoing publication of misleading articles related to the safety of TASER products, resulting in substantial economic damages to Taser International, its customers and its shareholders. The case is in the discovery phase and no trial date has been set.
Not to throw down a yellow flag when play looks great on the field, but....filed under Related Transactions: The Company charters aircraft for business travel from Four Futures Corporation and Thundervolt, LLC., which are wholly-owned by Thomas P. Smith, President of the Company, and Patrick W. Smith, Chief Executive Officer of the Company and Phillips W. Smith, Chairman of the Company’s Board, respectively. For the nine months ended September 30, 2005, the Company incurred charter expenses two both airlines of approximately $340,000 and $335,000, respectively. The Company, notes, however, that any personal use(s) of the aircraft(s) by the Mr. Smiths are billed to their respective airline charters for reimbursement. Further NO expenses were billed to Four Futures Corporation for personal use of the aircraft by Thomas Smith; and, approximately $293,000 was billed to Thundervolt, LLC, on behalf of Patrick W. Smith, Phillips W. Smith and Thomas P. Smith, for personal use of the aircraft. As of October 2005, a $36,000 in outstanding receivable was still owed from Patrick W. Smith and Thomas P. Smith. Still--one wonders how 'personal' and 'business travel' are so-defined.
As a result of on-going negative press coverage and increased litigation concerning the Company’s products and their use, the Company has experienced a 38% and 98% decline in sales and profits, respectively, for the nine months ended September 30, 2005, compared to the prior year. In particular, these events have resulted in longer sales cycles and delays in orders from prospective customers. Too, management seems to be extending credit terms to induce sales, for days-of-sales outstanding jumped 21 days (year-over-year) to 56 days for the period ended October 30, 2005.
As expected, the Company has also experienced significant increases in SG&A expenses for the nine months ended September 30, 2005 compared to the prior year, as additional resources have been devoted to legal, public relations and consulting activities.
10Q Detective noticed assets of $26.7 million, classified as deferred tax assets. The deferred tax asset reflects primarily the benefit of $26.0 million in loss carryforwards. This is of interest because management seems upbeat about the Company's future. Dusted off in Note No. 7 of the most recent 10Q filing:
  • SFAS No. 109 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of all available evidence, it is more likely than not that some or all of the deferred tax asset may not be realized. The Company has determined that no such valuation allowance is necessary.
  • Federal loss carryforwards expire in 2024 and state loss carryforwards expire in 2009. Realization of these loss carryforwards is dependent on the Company’s ability to generate sufficient taxable income to utilize the loss carryforwards. Although realization is not assured, management believes that the deferred tax asset will be utilized.
To the contrarian, the share price looks attractive, off some 78% from $33.45 per share, the 52-week high. Taser International has developed a 'less-than lethal' device with a brand name that is synonymous with the technology. In fact, though the Company vigorously defends its tradename, management should smile, for when a potential user thinks "stun-gun"--TASER comes to mind.
At present, the Company faces little threat from wannabees like Stinger Systems' (STIY.PK) projectile stun-darts and Law Enforcement Associates' (AID) MP1- stun pistol.
In December 1999, Taser introduced the ADVANCED TASER device for sale in the law enforcement market. Analysts estimate that Taser has only penetrated 12% -to- 15% of the potential domestic market.
In 2004, the Company introduced its new TASER X26 C Citizen Defense System, targeted to the private citizen self-defense market. Management believes that private citizen sales could become a more meaningful portion of revenues going forward depending on the success of the X26 C product and legislation relating to the purchase of TASER products by private citizens in each state. The TASER X26 product is currently banned for use by private citizens in at least seven states, including red states like Massachusetts and NewYork.
The Military, private security firms, guard services, correctional facilities, and U.S. commercial airlines--all represent legitimate markets for the TASER product(s). International markets are still in the nascent stage, accounting for less than 4% of annual sales.
In this tort-society, as Taser systems are deployed around the country, it is expected that litigation against the Company will always be a part of any 10Q filing. The catalyst(s) for a sustainable upward move in the share price will come when investors' perceive that management has regained control of its cost structure and that personal injury, misuse and other litigous claims no longer blunt sales opportunities.

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