<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the Transition Period From
____________ to ____________
Commission file number 0-19688
DESTRON FEARING CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 84-1079037
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
490 Villaume Avenue
South St. Paul, MN 55075
(612) 455-1621
(Address of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
As of February 13, 1998, there were 13,298,982 outstanding shares of Common
Stock.
<PAGE>
DESTRON FEARING CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1997
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements 3
Item 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings 12
Item 6 -- Exhibits and Reports on Form 8-K 13
Signatures 13
</TABLE>
-2-
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DESTRON FEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, 1997 AND SEPTEMBER 30, 1997
(in thousands, except share and per share amounts)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS December 31, September 30,
1997 1997
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 972 $ 1,075
Accounts receivable, net 2,010 1,911
Inventories, net 5,247 5,292
Deposits on purchase commitments 677 162
Prepaid expenses and other current assets 33 49
-------- --------
Total current assets 8,939 8,489
PROPERTY AND EQUIPMENT, net 2,006 2,001
GOODWILL, net 1,980 2,001
OTHER ASSETS, net 163 191
-------- --------
$ 13,088 $ 12,682
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 1,068 $ 373
Accounts payable 1,073 524
Accrued liabilities 421 472
Current portion of long-term obligations 2,266 1,554
-------- --------
Total current liabilities 4,828 2,923
LONG-TERM OBLIGATIONS,
net of current portion 2,034 3,121
-------- --------
Total liabilities 6,862 6,044
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value;
20,000,000 shares authorized;
13,294,000 and 11,644,000 shares
issued and outstanding, respectively 133 133
Additional paid-in capital 19,789 19,789
Accumulated deficit (13,696) (13,284)
-------- --------
Total shareholders' equity 6,226 6,638
-------- --------
$ 13,088 $ 12,682
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
-3-
<PAGE>
DESTRON FEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(in thousands, except per share amounts)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended December 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
NET REVENUE $2,630 $ 3,168
------ --------
COSTS AND EXPENSES:
Cost of sales 1,883 1,957
Selling, general and administrative 780 705
Research and development 268 198
Interest expense and other 111 227
------ --------
Total costs and expenses 3,042 3,087
------ --------
INCOME (LOSS) BEFORE INCOME TAXES (412) 81
PROVISION FOR INCOME TAXES -- --
------ --------
NET INCOME (LOSS) $ (412) $ 81
------ --------
------ --------
BASIC AND DILUTED EARNINGS
(LOSS) PER COMMON SHARE $(0.03) $ 0.01
------ --------
------ --------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-4-
<PAGE>
DESTRON FEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(in thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended December 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (412) $ 81
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 133 127
Changes in operating items:
Accounts receivable (99) (1,052)
Inventories 45 419
Prepaid expenses and other current assets (499) (4)
Accounts payable and accrued liabilities 498 53
------ -------
Net cash used in operating activities (334) (376)
------ -------
INVESTING ACTIVITIES:
Purchases of fixed assets (89) (15)
------ -------
Net cash (used in) investing activities (89) (15)
------ -------
FINANCING ACTIVITIES:
Issuance of common stock, net -- 5
Repayments of long-term obligations (375) (7)
Net borrowings on bank line of credit 695 410
------ -------
Net cash provided by financing activities 320 408
------ -------
NET CHANGE IN CASH (103) 17
CASH, beginning of period 1,075 39
------ -------
CASH, end of period $ 972 $ 56
------ -------
------ -------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 120 $ 216
------ -------
------ -------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-5-
<PAGE>
DESTRON FEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(unaudited)
- -------------------------------------------------------------------------------
1. GENERAL
The information included in the accompanying consolidated interim financial
statements is unaudited and should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in the most
recent Annual Report on Form 10-K filed for Destron Fearing Corporation and
its subsidiaries (collectively, the "Company"). In the opinion of management,
all adjustments, consisting of normal recurring items, necessary for a fair
presentation of the financial position and results of operations for the
interim periods presented have been reflected herein. The results of
operations for interim periods are not necessarily indicative of the results
to be expected for the entire fiscal year.
2. INVENTORIES
Inventories are valued at the lower of first in, first out cost or market,
and consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
----------------- ------------------
<S> <C> <C>
Raw materials $2,310 $2,354
Finished goods 2,937 2,938
------ ------
Total inventories $5,247 $5,292
------ ------
------ ------
</TABLE>
3. PRIVATE PLACEMENTS OF COMMON STOCK
In January 1997, the Company sold an aggregate of 650,000 shares of common
stock to two United States investors for gross proceeds of $1.3 million.
Also in January 1997, the Company sold an aggregate of 1,000,000 shares of
common stock in a private placement to three foreign investors pursuant to
Regulation S under the Securities Act of 1933 for gross proceeds of
$2,000,000. The proceeds from these offerings have been and will be used to
finance working capital needs and new product development.
4. LEGAL PROCEEDINGS
Colorado Action
In November 1993, the Company initiated a lawsuit for patent infringement
against three competitors in the U.S. District Court in Colorado. (The
patent involved is No. 5,211,129, which relates to the Company's injectable
transponder technology.) At a hearing on November 12, 1993, the Court found
that it did not have jurisdiction in Colorado over two of the competitors and
dismissed the Colorado case against them without prejudice. The Court
suggested that the third competitor may be an infringer on the patent, but
did not order the temporary injunction requested by the Company.
-6-
<PAGE>
On December 1, 1993, the two dismissed competitors commenced an action
against the Company in U.S. District Court for Southern Illinois requesting
actual damages of $20,000,000. This action was subsequently transferred to
the U.S. District Court of Colorado. In the suit, the plaintiffs sought to
invalidate the above-described patent of the Company and alleged unfair
competition, violation of U.S. antitrust laws, interference with business
relationships and abuse of process due to the actions the Company had
allegedly taken in obtaining, announcing and enforcing its patent rights
against the plaintiffs.
The trial in the litigation commenced on January 8, 1996. On January 29,
1996, the jury in the trial returned a verdict in favor of the Company, found
that the defendants had willfully infringed on the Company's patent, and
awarded damages of $444,000, including prejudgment interest. The defendants
appealed the judgment against them, and the Company cross-appealed the
failure of the court to increase Destron's damages. On July 24, 1997, the
Court of Appeals for the Federal Circuit handed down its decision in the
appeal. The decision of the Court of Appeals affirmed the trial court's
judgment, holding the Company's patent is valid and was willfully infringed
by the competitors. In addition, the issue of inequitable conduct was
remanded to the trial court for further proceedings as to the Company's
intent in prosecuting the patent application before the United States Patent
Office.
On November 7, 1997, the U.S. District Court of Colorado, on remand on the
issue of inequitable conduct, found that the Company's patent was enforceable
because of the lack of clear and convincing evidence of inequitable conduct
before the U.S. Patent and Trademark Office.
Further, during the pendency of the appeal, the Company pursued a contempt
action against the defendants for willful violations of the District Court's
permanent injunction. On November 7, 1997, the District Court found the
defendants in willful contempt of the permanent injunction and awarded the
Company double damages, amounting to $33,000, as well as attorneys' fees and
costs. On January 23, 1998, the Company filed a second Motion for Contempt
against the defendants. The Court has not ruled upon that Motion as of the
date of this Quarterly Report on Form 10-Q.
The defendants have failed to pay the Company on either of its judgments.
Accordingly, the Company has instituted a supplemental proceeding in the
Colorado action, requesting seizure and sale of various assets in an attempt
to collect its judgment. Issues raised in the proceeding have been fully
briefed and argued. As of the date of this Quarterly Report on Form 10-Q,
the Company is awaiting the Court's decision on the outstanding motion.
Minnesota Actions
On December 17, 1996, three competitors filed a lawsuit against the Company
and its United States distributor, Schering-Plough, in the United States
District Court for the District of Minnesota. The plaintiffs alleged that
the defendants participated in unfair competition, breached an oral contract
and infringed on three of the plaintiffs' United States patents. On January
24, 1997, the plaintiffs withdrew this lawsuit in its entirety.
On April 21, 1997, four plaintiffs (including the three competitors
identified in the foregoing paragraph) filed a lawsuit against the Company
and Schering-Plough and another of the Company's competitors in the United
States District Court for the District of Minnesota. The plaintiffs allege
that the defendants participated in unfair competition, breached an oral
agreement and infringed on three of the plaintiffs' United States patents and
requested that the Court award compensatory and treble damages of an
unspecified amount.
On May 16, 1997, the plaintiffs amended the lawsuit and, in their complaint
as amended, allege patent infringement, false advertising, unfair competition
and attempted monopolization on the part of the Company, among other matters,
stemming from the ISO standards. While management of the Company is unable,
at this time, to estimate the potential impact of this litigation, the
Company and its legal counsel believe that its products do not infringe any
valid asserted claims of the patents owned by the plaintiffs, that the false
advertising and unfair competition claims are without merit, that the Company
is likely to prevail on the attempted monopolization
-7-
<PAGE>
claim, and that the ultimate outcome of this litigation will not have a
significant adverse impact on the Company's future financial position, cash
flows or result of operations. However, any litigation has an inherent risk
of loss at trial, and there can be no assurance of the ultimate outcome of
this lawsuit. Furthermore, the costs of litigation could be substantial.
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No.
128). SFAS No. 128 replaces primary EPS with basic EPS. Basic EPS is
computed by dividing reported earnings (loss) by weighted average shares
outstanding, excluding potentially dilutive securities. Fully diluted EPS,
termed diluted EPS under SFAS No. 128, is also to be disclosed. This
standard establishes new guidelines for computing and presenting earnings
(loss) per share (EPS). The Company adopted SFAS No. 128 effective in the
quarter ended December 31, 1997. As a result, the Company's reported EPS data
have been restated as follows for the quarter ended December 31, 1996:
<TABLE>
<S> <C>
Primary earnings per share as reported $0.01
Effect of SFAS No. 128 --
-----
Basic earnings per share as restated $0.01
-----
-----
Fully diluted earnings per share as reported $ --
Effect of SFAS No. 128 $0.01
-----
Diluted earnings per share as restated $0.01
-----
-----
</TABLE>
A reconciliation of EPS calculations under SFAS No. 128 is as follows for the
quarters ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Net income (loss) $ (412) $ 81
------- -------
------- -------
Weighted average number of common
shares outstanding 13,294 11,644
Dilutive effect of stock options and
warrants after application of the
treasury stock method -- 302
------- -------
13,294 11,946
------- -------
------- -------
Basic and diluted earnings (loss)
per common share $ (0,03) $ 0.01
------- -------
------- -------
</TABLE>
-8-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net revenue for the first quarter ended December 31, 1997, was $2,630,000, a
decrease of $538,000 or 17% from the comparable quarter of fiscal 1997.
Radio Frequency Identification (RFID) revenues for 1998 declined 22% from the
first quarter of fiscal 1997 because of lower sales in Japan and Europe,
partially offset by higher revenues in the United States fisheries market.
Visual identification revenue also declined 10% in the first quarter of
fiscal 1998 from the level in comparable fiscal 1997 period. During the
first quarter last year, visual identification revenues were higher than
normal as a result of certain large shipments to existing customers which did
not occur in the fiscal 1998 quarter.
Cost of sales for the first quarter of fiscal 1998 was $1,883,000, a decrease
of 4% from the comparable period of fiscal 1997. The decrease in the current
fiscal year reflects lower revenue levels offset by higher material and
overhead costs. Further, fixed overhead costs in the current period were
absorbed over a lower revenue base which, along with an unfavorable product
mix, contributed to a lower gross profit margin. As a percentage of revenue,
gross profit was 28% in the first quarter of fiscal 1998 as compared to 38%
in the first quarter of fiscal 1997.
Selling, general and administrative expenses for the first quarter of fiscal
1998 were $780,000, an increase of 11% over last year's comparable period.
RFID selling expenses increased principally because of higher salaries and
travel expense brought about by personnel additions to support the Company's
livestock market development efforts. General and administrative expenses
declined in the first quarter of fiscal 1998 period relative to last year
principally due to lower legal expenses.
Research and development expenses were $268,000 in the first quarter of
fiscal 1998 compared to $198,000 in the first quarter of last year, for an
increase of 35%. Higher salary expense resulting from personnel additions
and the development of prototype scanning products for the United States
fisheries industry were the principal reasons for the current year's increase
in research and development expenses.
Interest and other for the first quarter of fiscal 1998 was $111,000, a
decrease of 51% over the first quarter fiscal 1997 amount of $227,000.
Interest expense declined in the current fiscal year, even though average
outstanding borrowings were higher, because the first quarter of fiscal 1997
included recognition of imputed interest on an outstanding balance payable to
a vendor.
The Company derives a significant portion of its revenue from export sales.
The gross profit and cash requirements of these sales do not vary materially
from the requirements of its domestic sales.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has utilized financing sources such as public and
private equity offerings and borrowings from financial institutions and
individual investors to fund its operating activities. The Company believes
that its cash on hand at December 31, 1997 and funds available under its
existing credit agreement combined with funds generated by operations and
remaining funds from private placements of common stock in 1997 will provide
the Company with adequate liquidity and capital resources for working capital
and other cash requirements.
However, the information set forth in the preceding paragraph, and elsewhere
in this Quarterly Report on Form 10-Q, is forward-looking information.
Therefore, if, for any reason (including, without limitation, those described
below), the Company's operations require more capital than anticipated,
revenues do not reach anticipated levels, or cash flow needs are greater than
planned, the Company may need additional financing
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<PAGE>
in order to maintain its operations. There can be no assurance that the
Company would be able to obtain any required additional financing when needed
or that such financing, if obtained, would be on terms favorable or
acceptable to the Company. If the Company was unable to obtain additional
financing when needed and under acceptable conditions, it would be required
to significantly scale back plans for growth and perhaps reduce the scope of
its operations. Factors that may affect the Company's revenues, use of
capital, expenses and/or cash flow, and that would cause actual results to
differ materially from those anticipated include, but are not limited to, the
introduction of competing products with performance equivalent to or
exceeding that of the Company's products, a claim (whether or not
successfully made) that the Company's products infringe a patent held by
another company or individual, any performance problems involving the
Company's products, changes in technology that could cause the Company's
products to become obsolete, the departure of key members of management
and/or key employees, regulatory requirements that would make the Company's
products difficult or uneconomical to produce, and general economic
conditions.
The Company's operating activities used $334,000 during the three-month
period ended December 31, 1997, primarily to finance the net loss incurred
during that period. Net cash used in the three-month period reflects
increases in accounts receivable and prepaid expenses and other current
assets that were funded principally by depreciation and amortization and
increases in accounts payable and accrued liabilities.
The Company's investing activities used $89,000 during the three-month period
ended December 31, 1997, for the purchase of fixed assets. Its financing
activities provided net cash of $320,000 during the same period through
increases in its net line of credit borrowings totaling $695,000, offset by
repayments of long-term obligations totaling $375,000.
As of December 31, 1997, the Company had net working capital of $4,111,000
with a current ratio of 1.85 to 1.0, which represents a $1,455,000 decrease
in working capital from September 30, 1997.
In March and April 1996, the Company borrowed a total of $900,000 from
private investors through the issuance of unsecured notes due October 21,
1997 and bearing interest at the rate of 11% per annum. Funds received from
these notes were used to retire outstanding indebtedness and to provide
additional working capital for operations. These notes were repaid in August
1997.
In April 1996, the Company borrowed $658,000 from a commercial bank through
the issuance of an 8.98% promissory note collateralized by its real estate.
The proceeds of the loan were used to retire a previous bank loan and
industrial development revenue bonds, and to provide additional working
capital for operations.
In January 1997, the Company sold an aggregate of 650,000 shares of common
stock to two United States investors for gross proceeds of $1.3 million.
Also in January 1997, the Company sold an aggregate of 1,000,000 shares of
common stock in a private placement to three foreign investors pursuant to
Regulation S under the Securities Act of 1933 for gross proceeds of
$2,000,000.
In June 1997, the Company entered into a $3,000,000 revolving credit facility
with Coast Business Credit, a division of Southern Pacific Thrift & Loan
Association of Los Angeles, California. The credit facility is secured by
all of the Company's receivables, inventories, investment property, equipment
and general intangibles, as defined in the agreement. Borrowings under the
facility are payable on demand and are limited to a portion of eligible
accounts receivable and inventories, as defined in a borrowing formula in the
agreement. The agreement is effective through June 30, 1999, with provisions
for automatic extensions of the maturity date. Interest on the credit
facility is paid monthly at a rate equal to the greater of eight percent (8%)
or prime plus one and three-quarters percent (1 3/4%). At December 31, 1997,
the Company had outstanding borrowings of $1,068,000 under the facility and
had a maximum availability under the borrowing formula of $1,304,000. The
new revolving credit facility replaced a previous credit line agreement with
a bank, and it will be used for general corporate working capital needs.
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<PAGE>
In June 1997, the Company completed an agreement with a vendor whereby
$4,290,000 of an account payable was converted into a promissory note. The
note provides for monthly payments of $150,000 in fiscal 1998 and $175,000 in
fiscal 1999. An additional principal payment of $600,000 is required in
October 1998 and further principal payments are called for under certain
conditions set forth in the agreement. The note bears interest at 9.25% per
annum as of December 31, 1997, with a scheduled increase to 11.25% per annum
at the beginning of fiscal year 1999. The scheduled term of the note is
twenty-seven (27) months, with the final payment due in August 1999.
-11-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Colorado Actions
In November 1993, the Company initiated a lawsuit for patent
infringement against three competitors in the U.S. District Court in
Colorado. (The patent involved is No. 5,211,129, which relates to the
Company's injectable transponder technology.) At a hearing on
November 12, 1993, the Court found that it did not have jurisdiction
in Colorado over two of the competitors and dismissed the Colorado
case against them without prejudice. The Court suggested that the
third competitor may be an infringer on the patent, but did not order
the temporary injunction requested by the Company.
On December 1, 1993, the two dismissed competitors commenced an action
against the Company in U.S. District Court for Southern Illinois
requesting actual damages of $20,000,000. This action was subsequently
transferred to the U.S. District Court of Colorado. In the suit, the
plaintiffs sought to invalidate the above-described patent of the
Company and alleged unfair competition, violation of U.S. antitrust
laws, interference with business relationships and abuse of process
due to the actions the Company had allegedly taken in obtaining,
announcing and enforcing its patent rights against the plaintiffs.
The trial in the litigation commenced on January 8, 1996. On January
29, 1996, the jury in the trial returned a verdict in favor of the
Company and found that the defendants had willfully infringed on the
Company's patent and awarded damages of $444,000, including
prejudgment interest. The defendants appealed the judgment against
them, and the Company cross-appealed the failure of the court to
increase Destron's damages. On July 24, 1997, the Court of Appeals
for the Federal Circuit handed down its decision in the appeal. The
decision of the Court of Appeals affirmed the trial court's judgment,
holding the Company's patent is valid and was willfully infringed by
the competitors. In addition, the issue of inequitable conduct was
remanded to the trial court for further proceedings as to the
Company's intent in prosecuting the patent application before the
United States Patent Office.
On November 7, 1997, the U.S. District Court of Colorado, on remand on
the issue of inequitable conduct, found that the Company's patent was
enforceable because of the lack of clear and convincing evidence of
inequitable conduct before the U.S. Patent and Trademark Office.
Further, during the pendency of the appeal, the Company pursued a
contempt action against the defendants for willful violations of the
District Court's permanent injunction. On November 7, 1997, the
District Court found the defendants in willful contempt of the
permanent injunction and awarded the Company double damages, amounting
to $33,000, as well as attorneys' fees and costs. On January 23,
1998, the Company filed a second Motion for Contempt against the
defendants. The Court has not ruled upon that Motion as of the date
of this Quarterly Report on Form 10-Q.
The defendants have failed to pay the Company on either of its
judgments. Accordingly, the Company has instituted a supplemental
proceeding in the Colorado action, requesting seizure and sale of
various assets in an attempt to collect its judgment. Issues raised
in the proceeding have been fully briefed and argued. As of the date
of this Quarterly Report on Form 10-Q, the Company awaits the Court's
decision on the outstanding motion.
-12-
<PAGE>
Minnesota Actions
On December 17, 1996, three competitors filed a lawsuit against the
Company and its United States distributor, Schering-Plough, in the
United States District Court for the District of Minnesota. The
plaintiffs alleged that the defendants participated in unfair
competition, breached an oral contract and infringed on three of the
plaintiffs' United States patents. On January 24, 1997, the
plaintiffs withdrew this lawsuit in its entirety.
On April 21, 1997, four plaintiffs (including the three competitors
identified in the foregoing paragraph) filed a lawsuit against the
Company and Schering-Plough and another of the Company's competitors
in the United States District Court for the District of Minnesota.
The plaintiffs allege that the defendants participated in unfair
competition, breached an oral agreement and infringed on three of the
plaintiffs' United States patents and requested that the Court award
compensatory and treble damages of an unspecified amount.
On May 16, 1997, the plaintiffs amended the lawsuit and, in their
complaint as amended, allege patent infringement, false advertising,
unfair competition and attempted monopolization on the part of the
Company, among other matters, stemming from the ISO standards. While
management of the Company is unable, at this time, to estimate the
potential impact of this litigation, the Company and its legal counsel
believe that its products do not infringe any valid asserted claims of
the patents owned by the plaintiffs, that the false advertising and
unfair competition claims are without merit, that the Company is
likely to prevail on the attempted monopolization claim, and that the
ultimate outcome of this litigation will not have a significant
adverse impact on the Company's future financial position, cash flows
or result of operations. However, any litigation has an inherent risk
of loss at trial, and there can be no assurance of the ultimate
outcome of this lawsuit. Furthermore, the costs of litigation could
be substantial.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
Exhibit 11.1 Calculation of Net Income (Loss) Per Common
and Common Equivalent Share
b. Reports on Form 8-K
No current reports on Form 8-K were filed during the quarter
ended December 31, 1997 or since December 31, 1997 and to
the date of this Quarterly Report on Form 10-Q.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DESTRON FEARING CORPORATION
(Registrant)
/s/ Thomas J. Ahmann
----------------------------------
By Thomas J. Ahmann
Vice President Finance,
Chief Financial Officer
and Principal Accounting Officer
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<PAGE>
Exhibit 11.1
DESTRON FEARING CORPORATION
Calculation of Basic And Diluted Earnings (Loss) Per Common and
Common Equivalent Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended December 31,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Net income (loss) $ (412) $ 81
------- -------
------- -------
Weighted average number of common
and common equivalent shares
outstanding:
Weighted average number of
common shares outstanding 13,294 11,644
Dilutive effect of stock options and
warrants after application of the
treasury stock method -- 302
------- -------
13,294 11,946
------- -------
------- -------
Basic and diluted earnings (loss) per
common and common equivalent share $ (0.03) $ 0.01
------- -------
------- -------
</TABLE>
-14-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 972
<SECURITIES> 0
<RECEIVABLES> 2,140
<ALLOWANCES> (130)
<INVENTORY> 5,247
<CURRENT-ASSETS> 8,939
<PP&E> 3,070
<DEPRECIATION> (1,064)
<TOTAL-ASSETS> 13,088
<CURRENT-LIABILITIES> 4,828
<BONDS> 0
0
0
<COMMON> 19,922
<OTHER-SE> (13,696)
<TOTAL-LIABILITY-AND-EQUITY> 13,088
<SALES> 2,630
<TOTAL-REVENUES> 2,630
<CGS> 1,883
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<INCOME-PRETAX> (412)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (412)
<EPS-PRIMARY> 0.01
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</TABLE>
