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Taser's Shocking Slide

By Burt Helm After a sevenfold surge in the shares of Taser International (TASR) last year, the stock has lost 87% of its value in 2005. The plummeting price reflects what's turning out to be a troubled year for the Scottsdale (Ariz.) maker of the Taser X26, a stun gun that temporarily paralyzes its victims with a jolt of electricity.

PEPPER SPRAY. In the autumn of 2004, Taser's future looked bright: Law enforcement gurus predicted the stun gun would soon replace pepper spray as standard issue for every police officer in the nation. And then the torrent of bad news began.

Media reports of serious injury and death following the use of Tasers by police multiplied. In November, Amnesty International weighed in, saying the weapons should be treated as lethal and that police used them too liberally. In January, Taser said the Securities & Exchange Commission was investigating whether the company made misleading statements about the safety of the stun gun.

Then, on Sept. 27, Taser said the SEC investigation was made formal and expanded to include possible stock manipulation by outside parties. Topping it off was yet another report - this one from Austin, Tex. - that a man had died shortly after being shot with a Taser by police. The company's shares tumbled 13%, to close at $6.35.

CARDIAC ARREST. Restoring Taser's allure will be a tall order. Law enforcement agencies are cutting back on orders. In February, a week after reports that one man died and a 14-year-old boy went into cardiac arrest in incidents involving Tasers in Chicago, the Chicago Police Dept. halted plans to buy an additional 200 Tasers, though it said it would still use the 200 it had already deployed. "There has been a lot of negative press coverage, and a lot of new customers put their orders on hold" in 2005, says Tom Smith, president and co-founder of Taser International.

That caution is showing up in Taser's financial performance. Second-quarter sales dropped 19%, to $13.2 million, from a year earlier, and net income plunged to $509,048, from $4.49 million, as costs surged.

DEARTH OF ORDERS. The sales outlook has become so bleak that in the fourth quarter of 2004 Taser stopped issuing earnings forecasts. "There was so much uncertainty in the market, and so much negativity [from the press and groups including Amnesty International] that it was just too hard for us to predict when orders were going to come in," says Smith.

In the current quarter Taser received two orders from overseas buyers worth a total of more than $775,000, he says. He declined to discuss other deals.

At least two analysts who follow Taser have dropped coverage of the stock. "I continued to see a dearth of orders, and there was just no visibility," says Joe Blankenship, an analyst with Source Capital Group, which stopped covering Taser early in 2005.

LEGAL FEES. Brian Ruttenbur, an analyst with Morgan Keegan, terminated his coverage in April. At the outset, "we anticipated strong demand for the company's products," Ruttenbur wrote in his final note on Taser. "We are no longer confident in our ability to accurately assess the outlook of the company going forward."

Making matters worse, Taser has been hit from all sides by lawsuits, ranging from shareholder complaints linked to the SEC investigation to wrongful-injury and -death suits. Legal fees in the second quarter alone were "over a million," says Smith. In the first half of 2005, general expenses -- including legal fees and public relations costs -- more than doubled from the year before, to $12.7 million.

Taser's financial woes aside, law enforcement agencies aren't yet giving up on the outfit. The Houston Police Dept., which made the largest investment in the technology with a $3.5 million order in 2004, remains one of Taser's biggest proponents.

DIGGING OUT. Still, in April the city established a special review committee to monitor Taser use after members of the community protested that a disproportionate number of minorities were being shocked with the weapon. While the review committee continues to meet, the Police Dept. says it still plans to issue a Taser stun gun to every officer by January, 2006.

Albert Arena, project manager in the Research Div. of the International Association of Chiefs of Police, says the organization feels the weapon "is safe within limits," if the right procedures and training programs are in place. However, "it's not a blanket endorsement," says Arena. "We do feel that more research is necessary to make some final pronouncements."

To dig out of its rut, Smith says, Taser must convince communities and law enforcement officials that the stun gun is in fact a safe and effective alternative to bullets and pepper spray. Customers "didn't put away their orders completely, but put them on hold" while they evaluate the current research on Taser's effects, he says. The company is launching an "educational campaign," he adds, to counter what he says are unfair criticisms by Amnesty International and others.

RECEIVING END. "They are trying to get back to where their [customer] base will recognize the weapon for what it is - a nonlethal weapon that may have consequences," says Blankenship at Source Capital Group. "Until you get past the scare and the fear-mongering, it's going to be difficult to determine" Taser's true prospects.

Meanwhile, many law enforcement agencies are awaiting the outcome of independent research. Wake Forest University and the National Institute of Justice are conducting studies that evaluate in-custody deaths involving Tasers, and law enforcement officials are watching closely, says Arena: "So much of [the data on Tasers] is so anecdotal. There's just not a lot of good research and statistics out there yet."

And after the research is completed, police departments will still have to convince the public that the weapons aren't a danger. "The community needs to be involved - and not just from the receiving end of the barb." Until that research is complete, the outlook for Taser remains blurry, and the heyday for its stock price may well remain in the past.

With John Cady

Helm is a reporter for BusinessWeek Online in New York

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