Axon Enterprise Inc (AXON) 2005 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the 3rd quarter 2005 TASER International earnings conference call.

My name is Michelle and I will be your coordinator for today.

At this time, all participants are in a listen only mode.

We will be facilitating a question and answer session towards the end of today’s presentation. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Mr. Rick Smith, CEO.

Please proceed sir.

Good morning and thank you for joining us for the TASER International 3rd quarter 2005 conference call.

We will go ahead and get to the good stuff right away with my favorite part, Doug, tell us about the Safe Harbor Statement.

Thanks Rick.

Certain statements contained in this presentation may be deemed to be forward looking statements as defined by the Private Securities Litigation Reform Act of 1995 and TASER International intends that such forward-looking statements be subject to these Safe Harbor created thereby.

Such forward-looking statements relate to expected revenue and earnings growth, estimations regarding the size of our target markets, successful penetration of the law enforcement market, expansion of products sales to the private security, military and consumer self-defense markets, growth expectations for new and existing accounts, expansion of production capability, new product introductions, products safety and our business model.

We caution that these statements are qualified by important factors that could cause the actual results to differ materially from those reflected by the forward-looking statements contained in this presentation.

Such factors include, but are not limited to, market acceptance of our products; establishment and expansion of our direct and indirect distribution channels; attracting and retaining and the endorsement of key opinion leaders from the law enforcement community; the level of product technology and price competition for our products; the degree and rate of growth in the markets in which we compete and the accompanying demand for our products; potential delays in international and domestic orders; implementation risks of manufacturing automation; risks associated with rapid technological change, execution and implementation risks of new technology; new product introduction risks; ramping manufacture and production to meet demand; litigation resulting from alleged product related injuries and deaths; media publicity concerning product uses and allegations of injuring and deaths and the negative impact this could have on sales; product quality risks; potential fluctuations of quarterly operating results; competition, financial and budgetary constraints of prospects and customers; dependence upon sole limited source suppliers; fluctuations in component pricing; risks of governmental inquiries, investigations and regulations;

TASER product tests and reports; dependence upon key employees; employee retention risks; and other factors detailed in the Company’s filings with the Securities & Exchange Commission.

I will now turn the call back to Rick.

Okay, while this morning is of course our quarterly conference call to talk about our financial results, I want to start with what I think is the most significant piece of news this morning that really relates to the fundamental issues challenging this Company right now and that is the dismissal of the Borden wrongful death lawsuit against TASER.

For those of you that have been following the TASER saga over the past several years, you will recall that one of the primary flashpoints last year in the public controversy over TASER was when CBS National News did a story on the unfortunate and tragic death of a man named James Borden who died in an Indiana jail.

The implication by CBS, it was picked globally by news outlets around the world, was that Borden was the first case where a coroner had listed TASER as one of the causes of death in this case.

And obviously we all know the aftermath and the controversy that has been surrounding these and you will recall at the time, TASER National said we were looking at that case and we felt strongly that the scientific evidence showed that the TASER did not cause his tragic death, but rather it was related to other factors as related by experts.

This is the fifth dismissal of an injury or wrongful death case against TASER in the past 18 months and is consistent with our strategy of aggressively defending ourselves and defending our technology and helping the world look past the headlines to the facts.

Now if you look a little bit at the facts in the Borden case, there are a couple things that come to light.

Number one was, the coroner of this case, Dr. [Cord] admitted in his deposition that the comments on CBS were reckless.

More importantly in this case there was really only one retained expert, a man named James [Ruviary].

Mr. Ruviary was—came to national prominence when earlier this year he asserted that TASERS were capable of being fatal 50% of the time they were used and in fact our friend at Gannett and the Arizona Republic saw it fit to put Mr. Ruviary on the front page of the Arizona Republic and dedicate a full page inside to his rather outlandish theories as to TASER fatalities, which were certainly not backed up by real-world data.

Well, in the Borden case we got our chance to depose Mr. Ruviary and were we surprised at what we found.

Boy he held himself out to be a world expert in this area, we learned that Mr. Ruviary is indeed a high school drop out with no high school degree, he did get his GED, went back to correspondence school in his 50’s and got an online degree in Web Development and computer information systems, has no medical training and admits he'd never tested a TASER device, never experienced the discharge nor even witnessed the discharge of a TASER device.

Well as you can imagine, those are the highlights--there is a whole lot more that we found in the deposition.

On the other side of this equation, 14 world class experts came forth in a variety of fields to dispute the allegations about the implications of TASERS involvement, they came from the fields of electrophysiology, cardiovascular pathology, forensic psychiatry, pulmonary medicine, forensic pathology, toxicology, forensic engineering, statistics, experimental psychology, and electrical engineering.

And it's our belief that based on the preponderance of the evidence, the frankly overwhelming evidence, the plaintiff’s in this case sought fit to dismiss the claims.

We believe this is a very significant, and potentially turning point, for TASER in these cases, it will continue in the other cases that we are facing, to bring this caliber of expertise to the table.

[indiscernible] as well noted that we experienced some high legal costs this year.

I always tell our investors to think of them as an investment because now is the time that we are radical new technology, or disruptive technology and we are now setting the basis, both scientifically and legally, for a long-term foundation for this technology in the future.

The second case I would like to talk about was one that we experienced this quarter, somewhat by surprise—well, completely by surprise, we had lawsuit filed against the Company by the Village of Dolton, Illinois alleging that the police chief there had pulled our TASERS off of the street and that they felt the TASERS were dangerous and the TASER had misled them in the marketing.

Well you all probably saw within the past week or so, we actually released an affidavit or a declaration from the Chief of the Dolton, PD stating that in fact he didn’t make those statements.

He felt TASERS were safe and that the Mayor or someone in the Mayor’s office had pulled the TASERS off of the street on a day when he was off work.

In fact he believes that because of his disagreement with the Mayor that he did not agree with the decision to pull the TASERS off of the street, was one of the reasons that he was terminated according to an interview in the Associated Press.

We think this is pretty important stuff because, again, the Dolton case got a lot of pick up in the press about police departments so called “suing TASER” and a so called “Class Action Suit”, I would like to point out with over 8,000 agencies using our product and a very aggressive legal campaign, the lawyers that filed this suit by the way are the same lawyers, it's the same law firm that filed our first shareholder action.

I will let you draw your own conclusions there, but TASER is aggressively approaching our customer base throughout the country.

We have been contacted by numerous agencies and have received phone calls and e-mails and it is with some sense of pride that we know even the one agency that they supposedly gotten to file this case clearly, the chief himself, did not agree with it, and it looks like it came to the Mayor’s office instead.

We filed for a dismissal in that case and for emotions for sanctions for the frivolous lawsuit including, frankly, blatant lies in the allegations against us, including allegations about the chief's actions.

So, those are, again, I start again with litigation update with the two important cases because, as we all know, that is one of the real keys here, is the controversy about TASER, because we grew so far so fast, and revolutionized law enforcement, that really put us on a lot of people’s radar screens last year and we are committed to protecting the Company and defending those allegations.

Next I would like to talk about and improvement in cost controls and efficiency this quarter.

Sequentially, we saw better margins than we did in last quarter.

We saw significant improvement in process yields on some of our core productions items, Kathy will talk a bit to that.

We also saw some reduction in SG&A and that allowed us to retain profitability on weaker sales in our 3rd quarter, which as we mentioned in our last conference call, a seasonally--the seasonal adjustments make it the weakest quarter traditionally.

Although, over the past several years we saw such a significant up trend that we hadn’t seen the 3rd quarter drop over the 2nd in several years.

But--So we are proud of the fact our operations held firm and we are able to maintain profitability and positive cash flow.

Also this quarter, we saw some more research come to the forefront, the Canadian Police research council released a sweeping report providing new training guidelines, as well as indicating that they saw no link between—no definitive or scientific link between the TASER and these in-custody deaths and that the TASER was a very valuable tool, perhaps the best tool, if it is used quickly to safely restrain people in excited deliriums and get them medical help.

Another study that we saw this quarter was from the Hennepin county, Dr. [Japoe], looking at deaths in police custody.

They found out of 162 deaths, while TASER has been getting so much of the spotlight and headlines, 70% of those deaths, excluding trauma deaths, these are not gunshot wounds, these are people that died unexpectedly in custody, 70% of them no TASER was used.

So, in fact, that his conclusion was similar that there doesn't necessarily seem to be a correlation or plausible relation with the TASER, but in fact other factors such as drug use.

And by the way, when I talk real quick about Canada, I think it is important to point out, we've had a lot of people ask us, why doesn’t TASER make sweeping training or policy recommendations as to how TASERS should be used in the field.

Really, that is not our place as a manufacturer.

We have said this before.

Our job is to manufacture the device and clearly train people in operation, capabilities and limitations, but it terms of its use in the field, that really is up to local use of force and legal experts to determine what the right community standards and legal standards are for them to use the TASERS and we find recommendations like those coming out of Canada are extremely helpful when police experts really do pull the right expertise together and make recommendations that most appropriate for how to use TASERS most effectively and safely in their own geopolitical environments.

Thirdly, there was a book published this quarter by Dr. DeMayo, one of the real leaders in forensic pathology, on the issue of excited delirium, and we believe that's a very important document in that that book will draw more light unto this unfortunate and tragic disease that's really the underlying cause of these deaths and it will help to create a greater public understanding of what is going on when people die in police custody.

We also have several pending publications of major studies, both human and animal, on the effects of TASER that are currently in the peer review process from--some from institutions where we've provided sponsorships, some that we did not.

But we heard through the grapevine or in publication, including animal studies that have looked at some of the more controversial issues about drug interactions or cardiac devices, and those studies we're confident will answer many of the questions and continue to support the general safety of TASER devices.

And finally during the quarter, we saw police reports from the Columbus Police Department, San Bernardino Sheriffs, Putnam Police Department, the Charlotte, North Carolina Police Department, again with statistics coming back consistently showing lives saved, officer and suspect injuries reduced, so we are as resolute as ever.

We are very committed to our mission and we are continuing to achieve success with our customers and our customers are achieving success with our products.

With that, let me turn it over to Tom to talk about sales, Tom Smith.

Thank you and good morning.

Let’s start with a discussion on some of the numbers on where we are at as of the 3rd quarter.

Total TASER products that have been sold now over the last several years is totaling over 185,000 TASERS now out in the field.

During the 3rd quarter we sold 10,460 X26-models and our M-models were 866.

Now in the X, the 10,460 is up a little bit from the 2nd quarter with a little over 10,200 and the Ms have trimmed down a little bit from 1,034 in the 2nd quarter to 866.

But that is in addition to 100,000 units out there in the consumer marketplace.

On the cartridge sales, during the quarter we were at over--almost 173,000 cartridges, which gives a ratio during the quarter of 15 cartridges per TASER sold versus a the Q2 ratio of 24:1, where we had a large military order that obviously affected that ratio putting the number during the 2nd quarter to 165,000, again that is down to almost over 173,000 during Q3.

Also during the quarter, we processed 4,133 orders, down a little bit from Q2 of 4,289.

Our average sales per order during this 3rd quarter was $2,825, down a little bit of 3,079 during the quarter.

I think it is also interesting to note that the vast majority of the orders during this quarter came from the Law Enforcement Agencies with under 100 persons per agency.

Again showing that the smaller part agencies that can react and move a little bit quicker are continuing to do so.

During the quarter we added well over 500 new agencies taking our total now over 8000 agencies now testing and deploying our products.

But the bigger number that we wanted to track is the full deployment.

We added 254 new agencies going towards full deployment.

That's up from a number of 133 during the 2nd quarter.

In other words 24% of our customers are now at full deployment.

So again it's showing the customers that are using our product are continuing to adapt the technology and expand the base of their business.

During the quarter, we also attended 23 trade shows and conferences.

Other highlights that have helped out in the sales arena, there was discussion in the 2nd quarter of the Wisconsin state resolution or passage of new guidelines and policy, and Rick touched on this, but the policies need to be set by the law enforcement experts with community involvement, not by the manufacturer.

During the 3rd quarter we saw this by the Georgia Chiefs Police Association where they came out with policy guidelines and discussions for a state level.

We also had the major city Chiefs and several other internationally recognized leaders of law enforcement come out with resolutions supporting the technology and starting to discuss policy recommendations on a best practices scale during the quarter.

IES introduced their Interactive Judgmental Training System, which incorporated TASER simulators for law enforcement that in the end is going to assist in some of the training and questions that have been raised.

But also during the IACP, which is the International Association of Chiefs of Police Show, we introduced and visually showed the TASER Cam, which will go into production for shipments in 2006.

But this is a product that Rick will touch on a little bit more later that we’re very excited about to have increased accountability.

It was extremely well received and again we were actually showing video and showing what the product is and how it’s going to work.

And the real excitement in that basic system is that it is retrofittable to every X26 that we’ve sold.

It’s not a new system they have to buy, it’s simply an additional program battery pack that they can purchase that will go into all of the units that are already in the field, so agencies that already have the TASER X26 that want that capability, all they have to do is buy an accessory in 2006 and they will be able to upgrade to both audio and visual accountability for the officers and for the units in their field.

We also are continuing to focus on community and media education.

Obviously, there’s a lot of information out there that has been covered.

We’re trying to make sure that people are looking past the emotional headlines that simply sell newspapers, and some of the activist groups that are nothing more than media clipping services, and to look at the facts.

Rick talked about some of the studies that have been done by the quarter, and ultimately you have to look at the statistics from the agencies that are using this technology that show we are saving lives every day.

We’re reducing injuries.

We’re making the community safer.

And I think that’s where the discussion is starting to go now and we’re seeing a trend in that direction that as people are becoming more educated on the product and the technology, and understand that we are the wired version of the Star Trek TASER, we are here to stay and we’ve revolutionized law enforcement and now they’re looking at integration and understanding on how it’s going to be used by their local agencies.

Let’s talk about international.

International continues to be very exciting for us as we look forward.

During the quarter we announced two orders that totaled over $750,000.

Those orders came in from two different countries – one in Europe and one in the Asian market.

We’re continuing to see progress in the United Kingdom.

During the quarter we had two very, very high profile uses both by anti-terrorism teams.

The first one occurred in July in Birmingham to capture a suspect that was involved with the London bombings on the subway system over there.

A tremendous amount of coverage again giving the law enforcement community the opportunity to capture a suspected terrorist and be able to interrogate and get information from him rather than lose that opportunity for the loss of lack of information.

We had another use later in the quarter, I believe in September, at the Manchester Airport where a man was running around the airport with a package that they believed at the time was going to be a threat to the airlines, shut down the airport.

They were able to use the TASER to end a fight as they approached and fought with this gentleman who was very large.

Again, two very high profile uses, got an incredible amount of coverage internationally, and especially on the European continent, and a lot of media that has shown up that consistently discusses the use of TASERs by the UK police forces as they continue to expand their training, they continue to expand their TASER program with the firearms officers, and they continue to have discussions on where it’s going to go.

We mentioned previously in the 2nd quarter, I believe, about the UK rank and file wanting to -- over 90% voting to have TASERS available for them.

I believe, again, that you have to look at a nation that will move slowly, but they continue to move forward.

France is another country obviously that has had a lot of attention as they continue to move forward with their evaluation and upgrade of the police forces.

There’s been some governmental changes there with the new Minister of Interior, who in several press conferences during the quarter, talked specifically about TASER and the implementation for the police.

Discussed some numbers that he’s going to be evaluating next year and the progress on how they’re going forward with this program.

And again you’re not seeing a response from us until we actually get an order.

But again, we’re very excited about the opportunities we’ve continued to see both on the European continent as well as on the Internet -- on the Asian area as the TASER is validated with successful uses.

During the quarter, I believe, we also had another use in Singapore.

So, we’ve had several uses over there that are continuing to show the success of this product when it’s being used by law enforcement, not just domestically but internationally as well.

If we look at the sales numbers in the international market for the quarter, we had over 1.6 million during the quarter taking us to over 4.1 million in international revenue for the year.

That’s roughly 11.7% of our revenue in the quarter that came from the international markets versus last year was about an estimated 4%.

So, we’re continuing to see growth despite some of the controversy in the international markets.

Obviously, we’re very excited and we’ll continue to focus on our business.

One of the things we went through, something similar to this back in 2002, we stayed focused on our marketplace and we’re doing that same thing now.

We’re continuing to provide the facts, the medical science, the data, we’re not relying on emotion and we’re continuing to provide that to the media, to the community groups, to the law enforcement groups, and to the government personnel who are going to vote on budgets, but to save lives and reduce those injuries every day.

Obviously we’re looking forward to the 4th quarter and ultimately in 2006.

And with that, I’ll turn it over to Kathy to discuss Operations.

Good morning.

As Rick discussed, Q3 was a stronger quarter for the Operations Department.

During the quarter, we improved production yields, reduced inline scrap, controlled indirect expenditures, and focused on continued process improvement.

These combined efforts results in a 4.3% improvement in gross margins from the 2nd quarter of this year with 1.4 million less in revenue.

The 4.3 improvement during the quarter came from the combination of 1.6% reduction in direct expenses, and a 2.7% reduction in indirect manufacturing costs.

Our direct expense reduction was the result of improved efficiencies gained through the continuation of lien applications, as well as a shift in the sales mix to a higher volume of weapons cartridge sales.

The reduction and indirect expenses was primarily the reduction in inline scrap generated through process improvement seen focused on the X26 subassemblies and a reduction in landed costs for inventory.

During the 3rd quarter our manufacturing engineers worked closely with our line operators and our research and development engineers to analyze prior period yields.

Their efforts and continuous operator training resulted in more than a 21% improvement in the process yields for critical X26 subassembly, and a reduction of more than 100,000 in inline scrap as compared with the 2nd quarter of this year.

This focus on the X26 line not only improves our yields, but also streamlines the assembly resulting in record daily production numbers with fewer operators.

Our Operations team will continue to focus on improving and streamlining our assembly procedures as we prepare for new products moving into production the 1st quarter of 2006.

Our single greatest challenge in the support area of Operations is inventory reduction.

During the quarter we converted approximately $3.5 million from raw materials to work in-process or finished goods.

This compares to 3.1 million in the 2nd quarter.

However, as we continue to work on reducing on-hand quantities and push safety levels back to [subsidiary] suppliers, we’re faced with increases in raw materials resulting from price increases and mandatory purchase of key items.

Specifically, we transacted a one-time purchase of more than a $1 million from a supplier to provide our R&D team adequate time to spec a replacement for a discontinued electronic component.

We also conducted a similar transaction with a vendor overseas to insure we carry adequate stock for a critical component in our cartridge assembly that previously had a one-year lead-time.

Without the investments we made to protect our material requirements, our current inventory balance would be reduced by more than $1.1 million.

The last two quarters of 2005, although challenging in terms of declining revenue, have provided our Operations team with the chance to analyze and improve our systems and procedures for conducting business.

We’ve improved our throughput, increased profitability, increased line yield, implemented new reporting systems, and implemented enhanced quality assurance system.

We believe these improvements to our organization have placed us in a significantly stronger position to accommodate our future growth.

Throughout the remainder of 2005, we’ll continue to drive for improvements and find ways to further automate our processes and our procedures to ensure we remain the competitive leader in our industry.

With that, I’d like to turn the call over to Dan Behrendt, our CFO.

Thank you, good morning.

I'm just going cover the financial part of the presentation this morning.

Sales for the quarter were 11.7 million; this compares to 18.9 million in the prior year.

As Kathy indicated, one of the bright spots of the quarter was the gross margins as we saw 67.8% gross margins for the quarter.

A percent that sales based, this is an improvement of 4.3% over the 2nd quarter of 2005.

The improvements were driven by operating efficiencies and product mix and although we are down versus the prior year, we are encouraged by the improvements to gross margins we did see this quarter.

Selling general administration expenses were $7 million for the quarter; this is down $400,000 from the prior quarter.

Drivers behind the improvement were lower investor relations expenses due to the printing and mailing of the annual reports and proxies in the 2nd quarter, and lower travel-related expenses.

SG&A expenses are up versus the prior year due to increased salaries, legal expenses, insurance, public relations and professional expenses.

As we indicated in the call last quarter, we said we continue to invest in the research and development.

We spent $400,000 in the quarter, which is roughly $50,000 higher than last quarter, and roughly $300,000 higher than this prior year.

Additional spending continue to bear fruit for the Company.

We were very excited to introduce the TASER Cam product at the International Chiefs of Police Show in Miami during the quarter.

Income from Operations for the quarter is $473,000, with pretax income coming in at $780,000, aided by over $300,000 of interest income in the quarter.

Income tax expense of $509,000, which was significantly higher than the run-rate for the year was driven by an increase in nondeductible expenses like lobbying expense on the effective tax rate.

Net income for the quarter was $271,000.

I’d like to point out the income tax continues to be a non-cash item for the Company due to the significant tax assets.

We had $26.7 million worth of deferred taxes—tax assets on our books at the end of the quarter.

Year-to-date sales were $35.1 million compared to $48.4 million in the prior year.

Gross margins were 62.7% year-to-date.

Again, this is down versus prior the year, but we are encouraged by the favorable results of that third quarter and hope to see those continue as we move out.

SG&A expenses were $19.8 million year-to-date increases versus the prior year were due to the increased salaries, legal expenses, insurance, public relations, and professional expenses.

R&D for the year-to-date was $1.1 million, this compares to $623,000 in the prior year.

As I said before, this is an area we will continue to invest in moving forward.

The Company had year-to-date operating income of $1.1 million, and year-to-date interest income of over $850,000.

The year-to-date pretax income was 1.9 million and net income for the year was $948,000, which converts to $0.02 basic earnings per share and $0.01 diluted earnings per share.

So we move on to the balance sheet.

The Company had cash of $17.1 million as of September 30th, 2005 and the Company’s total cash and investment balances were over $42.7 million.

Accounts receivable $7.3 million is down versus the 12/31 balances due to lower sales levels.

Inventory remains constant at $9.2 million, which when compared is roughly the same as last quarter and as Kathy indicated, inventory management will be—will get increased focus as we move forward.

Currents assets were $40.7 million at the end of the quarter here and current liabilities were 6.4 million, this is down sharply from the beginning of the year mostly due to lower accounts payable and accrued liabilities.

There were no back debts and over $42 million in cash and investments.

The Company still feels very good about the strength in its balance sheet.

If you will look at the cash flow for the year at this point, the Company had year-to-date cash usage of $339,000.

One thing I think that is very positive for the quarter is that during the quarter we actually had cash flow generation from operations of over $450,000, which is a good trend as we move forward.

And with that I would like to turn the call over to Doug Klint who is our General Counsel.

Thanks, Dan.

We were notified in the third quarter that the SEC informal inquiry had moved to an investigation, and that the investigation had been expanded to now include examining the possible unauthorized acquisition of material non-public information by individuals outside the Company in an effort to manipulate the Company’s stock price.

I can’t speak on behalf of the SEC and what they are specifically investigating; however, I can speak of an incident which have raised our concern.

One such incident is related to events such as the one referenced in the January 8th, 2005 article in The New York Times by Alex Berenson.

In that article, Mr. Berenson describes details of a $700,000 purchase order document that “was provided by a person who will profit if TASER shares fall".

In other words, we are deeply concerned that someone who is actively short trading in our stock had improperly obtained a copy of a confidential internal document describing a material non-public piece of information related to our revenues.

We have no problem with the SEC investigating the controversy around TASER international.

We respect the investigative process.

What we have a serious issue with, is that we believe material non-public information was stolen from the Company.

With respect to the stockholder class action derivative lawsuits filed against the company, the shareholder class action lawsuit was consolidated in the Arizona Federal District court and we have filed motions for dismissal to dismiss a derivative lawsuit and we will be filing similar motions to dismiss in the shareholder class action suit.

As Rick mentioned earlier, we did have a class action lawsuit filed in the 3rd quarter by the Village of Dolton.

At this time, there is only one named plaintiff and we have filed motions for dismissal and for sanctions, based in part on the declaration of former Chief of Police, Ronald Burge.

While Rick comment on this case during his opening remarks, I would like to go into more details of what Chief Burge says in his declaration.

He confirms that he never received any complaints or negative comments from a Dolton police officer or a citizen of Dolton regarding a lack of safety, alleged danger, or alleged harm caused by the use of a TASER device by a police officer.

He also confirms that during the period in which the Dolton police officers used TASER devices, no injuries or deaths were ever reported that were related to the use of the TASER device.

He also stated he found the TASER devices to be effective and safe law enforcement tools that are beneficial to the efficacy and safety of law officers and they did not cause any lethal injuries.

It's interesting to note that the plaintiffs must not be too concerned about product safety since they are not seeking rescission or return of the TASER devices, but only money.

We believe this declaration goes to the heart of the plaintiff’s case against TASER and raises questions as to the motives of the Village of Dolton.

In July 2005, the company filed a lawsuit in the Superior Court in Maricopa County, Arizona against Gannett company, a parent company of the USA Today newspaper and the Arizona Republic for libel, false life invasion of privacy, injurious falsehood, and torturous interference with distance relations.

The complaint alleges that the defendants published an article in the USA Today newspaper on June 3rd, 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 that related to the safety of TASER products, resulting in substantial economic damages to TASER International, our customers and our shareholders.

The case in is the discovery phase and no trial date has been set.

We’ve had other litigation other than normal course of business.

We have a contract dispute with two former distributors.

In the [Hennigan] litigation, which is one of those distributors, we have moved for a directed verdict at the conclusion of the plaintiff’s case.

The court suspended the trial and a decision is pending on our motion.

We have a total of sixteen training demonstration injury cases that have been filed, with one case being dismissed and one dismissal is pending.

It’s important to note that the injuries were secondary to physical exertion type injuries, which are common in police training and for which we gave adequate warnings.

Plaintiffs also have not been able to prove a product defect.

We have a total of fifteen in-custody death cases with four case being dismissed, one being the Borden dismissal that was discussed by Rick earlier.

In these cases a TASER device has not been shown to be the proximate cause of death, and again, no product defect has been shown.

In addition, we have five excessive use of force cases where criminal suspects allege they were injured in the course of arrest or while in police custody.

I’d now like to turn the call back to Rick.

Okay, thanks Doug.

One important thing that I’d like to point out is, I believe we’re starting to see a shift that remains about TASER certainly in the public areas.

But we've seen a real shift from a debate primarily on the safety of the device to the appropriate use of the device, how it’s being used, the appropriateness of different types of applications, and we believe that one reason that the TASER Cam was so well received at the IACP, the TASER device already has two levels of accountability above and beyond any other police tool, the data port that records the time and date of every use and our ID tagging system called [AFID] that disperses ID tags so that you can determine exactly which officer fired his device and where he fired it.

With the new TASER Cam we’ll have an onboard audio-video recording device, this will give context to the use, what the subject was doing, how the police officer was verbally interacting in the period time leading up to the incident.

We believe that to be a powerful capability, primarily for law enforcement agencies to be able to refute allegations of misuse.

In our opinion, most of those allegations tend to be coming from individuals who don’t like the fact they were arrested.

I can quote one prominent UK police officer who told us that in his illustrious 30 year career, if you listened to the suspects he arrested, he never got the right guy.

The TASER Cam will help alleviate those disputes with indisputable audio-video evidence and we believe it will also help insure that agencies have a better tool to monitor officer behavior and that those sorts of monitoring tools, officers hold themselves to a higher standard when they know that their also being recorded as they are using these devices, so it’s a win-win situation all the way around.

I can tell you personally, I’ve talked to a number of agencies at the ICAP including some very large, some of the leading agencies in this country, that have indicated that the TASER Cam could tip the scales towards full deployment for them, where they would be looking at deploying the TASER with the TASER Cam to every officer because of this enhanced capability.

Now Tom mentioned, alluded a little bit earlier, this is not a Company that’s new to challenges.

In the late 1990’s we faced very difficult financial times.

This Company faced the edge of its—the brink of its own survival on several occasions and survived that and went on to thrive.

In 2002, our stock fell from a peak of, I believe, a little over $22.

We saw over 80% decline in stock price.

At that time, we believed it was related to a loss of interest in homeland security issues for TASER when Congress passed the gun, the bill to arm pilots with firearms and we also had a miss on one of our quarterly financials and separated from our then VP of Sales and Marketing.

At the time, we got a lot of feedback from people about all the different things we should be doing, go out and make acquisitions, do something, do something to get the stock price back is what we heard from a lot of folks who were very concerned.

And one thing we're really proud of, if you look back at that time, what we did was focus on the fundamentals of the business.

We didn’t get distracted, we didn’t go out and get defocused or try and do anything to just to gin up excitement.

What we did is we focused on serving our customer base, and even more importantly in –in development and introduction of the X26.

In May of 2003 we introduced the X26, the revenues took off as we all know.

We saw two years of, I believe, 150 and 175% year-over-year growth.

We saw significant improvement in our profitability.

The 3rd quarter last year, I believe was the peak where we were something like 54% operating income.

We saw tremendous return to our shareholders.

We went from around a $10 million market cap at the beginning of that time to almost $2 billion market cap at the peak.

And last year we were the Wall Street Journal’s top rated stock on the one and three year returns basis and we just got back this week from Fortune’s Small Business event where we were given the award of the #1 returning small CAP company by Fortune’s Small Business last year.

Of course, that was a bit of a bittersweet moment, that we’re now again sitting down over 80% in terms of stock price from where we ended last year and having had a very challenging and grueling year for both our shareholders and our employees.

But I can tell you what we’re doing is exactly what we did three years ago.

We are focused on our core business, we’re preserving and in fact generating cash from operations and we’re focused on new products and I think you’ll see 2006 to be a very exciting year for new products.

One geometric that I look at in terms of our innovation; last year we filed thirteen patents.

This year we anticipate we’ll have filed over thirty patents.

We have four major products in development and some of those we'll start get early next year, at least one of those with the TASER CAM.

We believe those products are every bit as revolutionary as what we did with the X26 and it's that sort of organic value creation that creates the most value for our shareholders, rather than going out trying to grow through acquisition, etc.

We knew with the X26, we had a real value generating machine on our hands if we could get it to market.

Like I said, we’ve got four of them now in the pipeline.

That’s where we’re focused and making sure that we provide top notch customer service to our customers and frankly, we’re investing a lot right now in litigation defense, but I can tell you, Doug and his team have done a fantastic job between Doug and our national litigation counsel, we’ve been bringing in paralegal support here to be able to take on more and more of the litigation support and we’re really not fighting twenty or thirty different cases, we’re fighting two general genre of cases for the most part, excluding the shareholder litigation, we’ve got injury and wrongful death cases.

We’re really developing a lot of expertise.

I look at that as part of our core business, just like part of our business is learning how to efficiently productively make TASERs.

It’s also being able to efficiently productively churn out litigation defenses with top notch world class experts and we’re getting--we’re getting quite good at it, in my opinion.

And I believe long term, that as plaintiff’s counsel warns that TASER is not an easy mark, that our policy is not to settle these types of cases, but to fight them to the best of our ability.

That we’re going to eventually, it is my opinion, it's in all the forward-looking statement here, but I think we’re going to see these things start to die down based on the continuing growing scientific and legal evidence that supports our cause.

So with that, I’m going to tell you, I am really excited about next year.

In terms of the 4th quarter, we’ve got some real opportunities, but as you know, this is a very difficult business to predict quarter-to-quarter.

So we still will be staying away from providing financial guidance, but long term, the guys in the black box here are doing some fantastic work.

We've got great stuff coming and we’re excited as ever.

It’s been a challenging year and we think we’re, hopefully, coming out of the eye storm here and ready to move into a real exciting time of growth and innovation again.

So, with that, I’m going to turn it over and open up, we’ll take a few questions and then we’ll call it a day.

Thank you, sir. [OPERATOR INSTRUCTIONS] And our first question comes from the line of Matthew McKay of Jeffries & Co. Please proceed.

Hi.

Sounds like you’ve been out doing a lot of work out there and I guess that’s how business got turned around, so congratulations on that.

I’d like to start off, got a--quite a few questions here, but first of all, maybe if you could just give a little bit of color out of what you’re hearing from existing customers and if there are any new customers out there that are starting to ask for price quotes?

Yeah, we’re hearing quite a bit from the customers.

Again, I think we talked about this earlier this year, that we didn’t see business go away, we saw some of the people that were coming to the business kind of go on the sidelines to see what was happening.

So, we are continuing to provide the quotes, we’re continuing to see the interest, I think Rick mentioned, the excitement around the trade show down in Miami and IACP.

So again, we saw a lot of our bread and butter come back, which is the vast majority of the agencies, which are under 100 hundred man agencies that can move quicker than the larger agencies.

Obviously, the larger agencies have city councils, mayors, and governments that have to get involved in those things, where the smaller agencies are able to react quicker.

They’ll have discretionary funds that they are able to use and that’s where the majority of our business is coming from.

So, I do think we are seeing renewed interest, I would say, as Rick mentioned that this is now changing from a discussion about the TASER to more of a discussion on the use of the TASER.

Yeah, I’d like to add a little more color to that.

You know, if terms of end-user feedback, we gotten just phenomenal e-mails of officers who didn’t have to kill somebody, that life-changing event because of the TASER.

We’ve seen continued positive feedback on the results.

And how does that translate into our business?

Well, as I think you saw this quarter, there was a dearth of large orders to be announced, but it was made up for with the smaller agencies.

And I don’t think this has to do with their speed of their decision making process.

Larger agencies tend to be involved in much larger political machines, in terms of the city councils, the mayors, etc. in large cities and in larger agencies, there’s a lot more media scrutiny in the major markers and, it’s my personal impression that that’s why some of the bigger agencies have slowed down.

I am personally aware of cases in the 1st quarter of this year we had a number of large orders that right on the cusp of breaking when the news about the SEC inquiry broke and a lot of those guys, and I talked to at least one Chief myself who said that they just couldn’t buy in that political environment.

It was just too risky for them, given the politics.

We are now starting to see some more rejuvenated interest, I would say.

There are a number of large agencies that we feel are getting back to the cusp, that they are getting more comfortable that we are coming out of the back end of the storm.

So, I do think there’s an opportunity, that in the 4th quarter, we could close some of the large orders that eluded us earlier this year, and I think when that starts to happen—if—you gotta get the first couple guys ready to go out and sort of break the—break the ice and the large agency market moving again.

My personal feeling is we're getting close.

Okay.

Great.

That's helpful.

And then with the inventory levels that you have right now, it's—it's hearing from just a couple distributors that they might have been having a little bit of a hard time getting some product, it sounds like it might have been some sourcing issues that you've been dealing with, but, it's sort of a two-part question.

One, have you sort of solved those issues and secondly, the current inventory level that you had going into the quarter, what does that imply in terms of what you can do in Q4 revenue?

Okay.

In terms of the material issues that they were talking about, we actually moved to a new, what we call a 'tier 1 circuit board house'.

That's one of the things that made a dramatic improvement on the quality of our X26 products.

And in doing that, we did run into some issues with them short term, which we were able to get our production numbers out towards the end of the quarter.

With respect to our inventory, we have been working very hard with our vendors to makes sure: A) We have adequate safety stock of very difficult to get parts, both here and with some of the suppliers.

So we are able to support whatever the sales department brings in for Q4.

We feel pretty good about our posturing there.

In terms of our capacity, we can build anywhere from 12 to 15 million depending on the mix of products we're asked to build with our current staff with no overtime.

So we can also ramp that very quickly to meet their demand.

The only—the other thing I would add—this is Rick—We intentionally really slowed down , and if fact I mean shutdown, a couple of the lines earlier in the quarter as we took time to go back and work through some of our process yield issues.

People accuse me sometimes of being a real—an overly optimistic guy but the slow down this year, my dad has a saying that when the tide lowers is when you see the rocks, when you are growing at 150 to 175% that really strains an organization and it—it's hard just getting the materials and production out.

When business got disrupted earlier this year, that did give us an opportunity then to actually go back, take a breath and really focus on some of the process yield issues.

So we—in addition to bringing up some new vendors, we also did some experiments on the lines and controlled experiments looking at different process changes and by the end of the quarter, we saw a—I'd personally—Kathy's group were a bunch of rock stars this quarter and we made improve production yields on a very difficult to manufacture X26 product dramatically.

And by the end of the quarter they were able to ramp production back and up and meet demand, but she's now got in place just really—I am very confident in their capabilities for them to meet just any level of demand we would see over the coming months and years.

Okay.

So pretty much all of those changes are behind you at this point it's safe to say?

Yes.

Okay.

Just moving over the TASER Cam, what’s the – first of all, I guess, what sort of – you talked a little bit about initial interest and you talked about 2006 for launching that X production.

Can you fine-tune that a little bit?

Is it 1st quarter, 2nd quarter, when do you think that’s going to actually hit production?

First quarter.

Right now we’re getting release tooling, we’ve got functional prototypes, we’re – there’s a fair amount of software involved – so we’re in the software – sort of late stages of software development and debug.

We anticipate it will be around December that we start getting initial production, then we’re anticipating 60 days of probably intensive—of pre-released testing.

So it would be mid 1st quarter, maybe late 1st quarter we start to see production volume shipping.

Okay.

And from talking to customers, how quickly do you expect that to ramp up?

That we really don’t have a good bead on yet, in terms of how quickly it would ramp up.

We’re not out—we're not out really pushing it hard yet because sometimes when you do that, for instance, they may have a whole pack their existing orders and try to lump that into--into one, so there’s always that balance between how hard you push on a product that you don’t have in production yet.

I would just say that qualitatively there was a heck of a lot of interest but we haven’t pushed – we haven’t gone in and pushed for the orders yet.

And actually, this is Tom, I could tell you that there is a lot of excitement, because again from the agencies that are out there with X26s all ready, it’s just an accessory item, it’s not a whole new platform, its adaptable back to what they currently have in place so it’s not a new sale only, it’s going to apply for both the new orders and in addition to existing customers.

I think that’s one of the things for us that’s really exciting about that system is that it is retrofittable without new capital outlay for new equipment.

Okay.

And actually on that point, maybe a year or two down the line, would you introduce a product that maybe just integrates completely with TASR Cam and to the TASER?

Well, we don’t usually talk about our R&D down the road.

We don’t want to give away too many secrets, but Rick mentioned that there are four in the pipe line and again we’re just not going to spend a whole lot of time on the ones that aren’t real close.

We do see the audio – the audio-video capability as important to future developments, so but that's – that's not going to be a one-odd shot and maybe we will be looking at further enhancing the integration into our products down the road.

Yeah.

Great.

Going over the margins here, you talked a little bit obviously about the improvement in the operations.

That gross margin, is that—is that a fair level where it’s going to stay going forward or is there improvement if that continues – do they continue to improve, or a little bit of color on where that potentially goes?

Okay.

Our margins are affected not only by our efficiencies and what we do on the floor but also the sales mix that flows through.

Last quarter, you saw a shift in that as a result of higher cartridges.

If we stay consistent with what our model is, which has been thirteen to fifteen cartridges per weapon, we should be able to at least maintain that, our goal is to continue to improve it.

We feel like we still have a lot of room to make some improvements both on the X and on the cartridge lines as we continue our lean application.

Okay.

But if--let’s say sales do pick up, chances are that mix is going to go down a little bit just because you will have higher TASR sales, so there’s a chance that margin would pick up a little bit, if you’re sort of in the early stages of a pick up in the business?

Margins should pick up as sales level go up because we can leverage the fixed piece of that as well.

Yeah.

And that ratio will go – could potentially go down as the handle sales go up to current the cartridge sales.

Right.

And last year we had ratios that were more like 12:1 where now we’re at that 50:1 so as that ratio goes down we should see better sales mix.

Right.

Yeah.

And then just on the SG&A, you sort of – you talked a little about just annual reports being the main reason why that went down.

Just on the legal cost in there, is SG&A--can that stay flat or potentially decline a little bit here?

Legal ended being fairly flat with last quarter.

Last quarter was up significantly from the prior and it sort of flattened out so I think that's terrible for us.

The—we had lots of push and takes in SG&A, but really the main drivers for the quarter were the 2nd quarter expenses for the printing and mailing of the annual report and proxy and we did see some lower travel related expenses this quarter as well.

This is Rick.

I would say for the 4th quarter, I wouldn’t look for any reductions in SG&A.

I think it’s going to be fairly flat.

And that next yea--it’s a little early for us to prognosticate.

Legal – we had fights in, Tom, in how many states?

22 states.

We had legislative fights in 22 states this year and so we’ve-- really lobbying and public relations expenses are up significantly.

It’s unclear as to if, frankly, if the SEC is able to wrap up their investigation and we think that will level out of steam and out of the public debate and may leave a lot of room for improvement where we don’t have to have this much activity next year.

Alternatively it could stay where it’s at and maybe even go up a bit, but if it gets to the short term I would say plan on roughly flat.

Okay.

And I know it’s hard to predict, but should we looking for any more dismissals on the horizon or any other sort of changes on the legal front.

We have dismissals pending in a number of other suits.

Frankly, we’re just waiting for judge’s decision on those.

And our philosophy is to aggressively defend these every opportunity we have, we are filing motions to dismiss and at the appropriate time, in most of these cases, we will be filing motion for summary judgment as well.

Okay.

Tax rate – does it go back to – does it stay up at this level given that you've got sort of the higher lobbying expenses or what tax rate you should we be using?

Yeah I’d look at the tax rate more on a year-to-date basis and take a look from that place because that’s what I would expect it to be at least in the near term.

And then obviously as our income, if the [per income] rises some of these permanent items like the lobbying will have a smaller impact on effective tax rate.

Okay.

And then just given that you are probably going to get back to being positive free-cash flow here.

Any – the cash on the balance sheet – any chance you’d become a more aggressive with share repurchase or especially down at these levels?

There’s always a chance and at this point I would say our strategy has been, given the nature of the challenges facing the Company, we’ve been pretty careful with our cash.

So anything is certainly possible, it's things we’ll take a look at, but we also want to be very careful not to go out there and put ourselves in a position where we’re spending our war chest at a time when we’re certainly at war.

So, yeah, wish I could give you more of a definitive answer but we’re certainly open to it, it’s something we have discussed and that we will continue to monitor and look at, at whether that’s an appropriate use of cash.

Okay.

Fair enough.

Thanks a lot guys.

[OPERATOR’S INSTRUCTIONS]

Well it looks as if we’ve pretty much lost everybody here, so we’ll go ahead and wrap up the call Tom?

Wrap her up.

Okay.

And if you have any additional questions folks you can go ahead and just give us a call directly and ask for Dan the CFO or Marcie in Investor Relations.

And with that we’ll thank everyone for attending our 3rd quarter 2005 conference call.

And we look forward to talking to you after the first of the year.

Bye-bye.

Ladies and gentleman, thank you for your participation in today’s conference call.

This does conclude your presentation and you may now disconnect.

Have a great day.