<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
March 31, 1998
[ ] 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
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 May 14, 1998, there were 13,298,982 outstanding shares of Common Stock.
<PAGE>
DESTRON FEARING CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
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 14
</TABLE>
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<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DESTRON FEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 1998 AND SEPTEMBER 30, 1997
(in thousands, except share and per share amounts)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS March 31, September 30,
------ 1998 1997
---------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 193 $ 1,075
Accounts receivable, net 2,647 1,911
Inventories, net 4,913 5,292
Deposits on purchase commitments 396 162
Prepaid expenses and other current assets 30 49
-------- --------
Total current assets 8,179 8,489
PROPERTY AND EQUIPMENT, net 1,960 2,001
GOODWILL, net 1,959 2,001
OTHER ASSETS, net 158 191
-------- --------
$ 12,256 $ 12,682
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 877 $ 373
Accounts payable 901 524
Accrued liabilities 404 472
Current portion of long-term obligations 2,388 1,554
-------- --------
Total current liabilities 4,570 2,923
LONG-TERM OBLIGATIONS,
net of current portion 1,528 3,121
-------- --------
Total liabilities 6,098 6,044
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value;
20,000,000 shares authorized;
13,294,000 issued and outstanding 133 133
Additional paid-in capital 19,791 19,789
Accumulated deficit (13,766) (13,284)
-------- --------
Total shareholders' equity 6,158 6,638
-------- --------
$ 12,256 $ 12,682
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
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<PAGE>
DESTRON FEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE QUARTER AND SIX MONTHS ENDED MARCH 31, 1998 AND 1997
(in thousands, except per share amounts)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
----------------------- --------------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
NET REVENUE $4,350 $4,046 $6,980 $7,214
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales 2,892 2,494 4,775 4,451
Selling, general and administrative 1,095 1,032 1,875 1,737
Research and development 292 195 560 393
Interest expense and other 141 124 252 351
------ ------ ------ ------
Total costs and expenses 4,420 3,845 7,462 6,932
------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES (70) 201 (482) 282
PROVISION FOR INCOME TAXES -- -- -- --
------ ------ ------ ------
NET INCOME (LOSS) ($70) $201 ($482) $ 282
------ ------ ------ ------
------ ------ ------ ------
BASIC AND DILUTED EARNINGS
(LOSS) PER COMMON SHARE ($0.01) $0.02 ($0.04) $0.02
------ ------ ------ ------
------ ------ ------ ------
</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 SIX MONTHS ENDED MARCH 31, 1998 AND 1997
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended March 31,
--------------------------
1998 1997
----- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ($482) $ 282
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 247 253
Changes in operating items:
Accounts receivable (736) (1,892)
Inventories 379 420
Deposits on purchase commitments (234) --
Prepaid expenses and other current assets 19 --
Accounts payable and accrued liabilities 309 (239)
------ ------
Net cash used in operating activities (498) (1,176)
------ ------
INVESTING ACTIVITIES:
Purchases of fixed assets (131) (42)
------ ------
Net cash used in investing activities (131) (42)
------ ------
FINANCING ACTIVITIES:
Issuance of common stock, net 2 3,114
Repayments of long-term obligations (759) (25)
Net borrowings on bank line of credit 504 (866)
------ ------
Net cash provided by (used in) financing activities (253) 2,223
------ ------
NET CHANGE IN CASH (882) 1,005
CASH, beginning of period 1,075 39
------ ------
CASH, end of period $ 193 $1,044
------ ------
------ ------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 257 $ 343
------ ------
------ ------
</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
March 31, 1998 and 1997
(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>
March 31, 1998 September 30, 1997
-------------- ------------------
<S> <C> <C>
Raw materials $2,066 $2,354
Finished goods 2,847 2,938
------ ------
Total inventories $4,913 $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 used to finance working capital needs and new product
development.
4. 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 preliminary injunction requested by the Company.
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<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 $20,000.00. 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 no inequitable conduct occurred and the
Company's patent was enforceable. On February 9, 1998, the District Court Judge
issued an Order containing findings and conclusions and entered a Third Amended
Judgement confirming the Court's finding of no inequitable conduct. The
defendants have appealed this decision and a decision is not expected until late
1998 or early 1999.
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 February 9, 1998, the Court also issued an Order confirming the
Court's ruling on November 7, 1997 holding the defendants in contempt. This
finding of contempt has also been appealed by the defendants.
On January 23, 1998, the Company filed a second Motion for Contempt against the
defendants. Following a March 27, 1998 hearing, on April 23, 1998 the Chief
Magistrate Judge entered a recommendation that the defendants be held in
contempt based upon their manufacture, use and sale of the ID-100 Zip Quill
transponder product. Destron has requested damages, attorneys fees, costs and
sanctions against the defendants for their contempt of the District Court
permanent injunction. The defendants have objected to the recommendations of
the Chief Magistrate Judge. We anticipate that the District Court will have a
hearing and rule on the matter in due course.
Minnesota Actions
On December 17, 1996, the same three competitors found to be willful infringers
in the Colorado Actions 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.
-7-
<PAGE>
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.
In the event the Company is successful in obtaining an affirmance of the
Judgment of enforceability in the Colorado action, Destron's exposure in the
Minnesota litigation will likely not be material. As a result of the favorable
ruling in the Colorado Action on February 9, 1998, the plaintiffs in the
Minnesota litigation have sought a stay of the Minnesota actions until after the
Federal Circuit Court issues its decision, which is not expected until late
1998, at the earliest. Accordingly, it is expected that the Company's legal
fees during 1998 and early 1999 in the Minnesota litigation will not be
significant because of the stay that has been entered in the Minnesota
litigation.
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. The Company adopted SFAS No.
128 effective in the quarter ended December 31, 1997. As a result, all prior
period EPS data have been restated.
A reconciliation of EPS calculations under SFAS No. 128 is as follows for the
quarters and six-month periods ended March 31 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Quarter Ended March 31 Six Months Ended March 31
---------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) ($ 70) $2.01 ($482) $282
------ ------ ------ ------
------ ------ ------ ------
Weighted average number of
common shares outstanding 13,299 12,766 13,296 12,205
Dilutive effect of stock options
and warrants after application
of the treasury stock method --- 244 --- 244
------ ----- ------ -----
13,299 13,010 13,296 12,449
------ ----- ------ -----
------ ----- ------ -----
Basic and diluted earnings
(loss) per common share ($0.01) $0.02 ($0.04) $0.02
------ ----- ------ -----
------ ----- ------ -----
</TABLE>
-8-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net revenue for the quarter ended March 31, 1998 of $4,350,000 was 8% higher
than the $4,046,000 reported for the comparable quarter of fiscal 1997. For the
six-month period, fiscal 1998 revenue was $6,980,000 which represented a 3%
decrease from the fiscal 1997 amount. Revenue for the second quarter and
six-month period from Radio Frequency Identification (RFID) products was down by
1% and 10%, respectively, from last year with higher sales occurring in the
United States fisheries market while lower revenues were reported in Europe and
Japan. Visual identification revenue increased 19% in the second quarter and 7%
for the six-month period when compared to the fiscal 1997 amounts because of
increased unit sales of visual products.
Cost of sales of $2,892,000 for the second quarter and $4,775,000 for the
six-month period was higher than the comparable fiscal 1997 periods by 16% and
7%, respectively. The higher costs were attributable to higher revenues during
the quarter as well as to an unfavorable product mix and reduced manufacturing
productivity of visual identification products. Further, RFID costs increased
because of the costs to update and retrofit selected scanner technologies and
for the upgrade of electronic readers at certain animal shelters in the United
States. As a result of these factors, gross profit margins declined to 34% and
32% of revenue in the second quarter and six-month period of fiscal 1998,
respectively, compared to 38% for each of those periods in fiscal 1997.
Selling, general and administrative expenses for the second quarter of fiscal
1998 were $1,095,000 or 6% higher than for the same period last year. For the
six-month period ended March 31, 1998, these expenses were $1,875,000, which was
an 8% increase over last year's comparable period. RFID selling expenses
increased 106% for the quarter and 96% for the six-month period over the
respective fiscal 1997 periods. The salary and travel expense of personnel
hired to develop the United States livestock market, as well as the addition of
a sales person in Europe and related increases in international travel,
accounted for the higher expense over the fiscal 1997 levels. General and
administrative expense declined for both the second quarter and six-month period
of fiscal 1998 when compared to fiscal 1997, primarily because of reduced legal
expense this year.
Research and development expenses of $292,000 in the second quarter of fiscal
1998 increased 50% over last year and, for the six-month period, were up 42%
over fiscal 1997 to $560,000. The higher expense for the second quarter and
six-month period resulted principally from the salaries and travel expenses of
newly hired personnel and increased utilization of outside resources to develop
enhanced scanning products for the United States fisheries industry.
Interest and other of $141,000 in the second quarter of fiscal 1998 were 14%
higher than the $124,000 reported for the comparable 1997 period principally
because of interest expense incurred on higher average borrowings. For the
six-month period of fiscal 1998, interest and other declined 28% to $252,000
principally because fiscal 1997 included 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 March 31, 1998 and funds available under its existing
credit agreement combined with funds generated by operations will provide the
Company with adequate liquidity and capital resources for working capital and
other cash requirements through at least fiscal 1998.
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<PAGE>
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 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 $498,000 during the six-month period
ended March 31, 1998 primarily to finance the net loss incurred during that
period. Net cash used in the six-month period reflects increases in accounts
receivable and deposits on purchase commitments that were funded principally by
depreciation and amortization, decreases in inventories and increases in
accounts payable and accrued liabilities.
The Company's investing activities used $131,000 during the six-month period
ended March 31, 1998 for the purchase of fixed assets. Its financing activities
used net cash of $253,000 during the same period for repayments of long-term
obligations of $759,000, offset by increases in its net borrowings on its bank
line of credit of $504,000.
As of March 31, 1998, the Company had net working capital of $3,609,000 with a
current ratio of 1.79 to 1.0, which represents a $1,957,000 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 (13/4%). At March 31, 1998, the Company had
outstanding borrowings of $877,000 under the facility and had a maximum
availability under the borrowing formula of $2,338,000.
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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 March 31,
1998, 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.
Year 2000
The Company's internal information systems were upgraded during the first
quarter of fiscal 1998 to ensure year 2000 compliance. The total cost of the
implementation was not significant. Additionally, management believes that
current products offered for sale by the Company, as applicable, are also year
2000 compliant. The Company's operations with respect to the year 2000 may also
be affected by other entities with whom it transacts business. The Company is
currently unable to determine the potential impact, if any, that could result
from such entities' failure to adequately address this issue.
-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 preliminary 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 no
inequitable conduct occurred and the Company's patent was
enforceable. On February 9, 1998, the District Court Judge issued
an Order containing findings and conclusions and entered a Third
Amended Judgment confirming the Court's finding of no inequitable
conduct. The defendants appealed this decision and a decision is
not expected until late 1998 or early 1999.
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
February 9, 1998, the court also issued an Order confirming the
court's ruling on November 7, 1997 holding the defendants in
Contempt. This finding of contempt has also been appealed by the
Defendants.
On January 23, 1998, the Company filed a second Motion for
Contempt against the defendants. Following a March 27, 1998
hearing, on April 23, 1998 the Chief Magistrate Judge entered a
recommendation that the defendants be held in contempt based upon
their manufacture, use and sale of the ID-100 Zip Quill
transponder product. Destron has requested damages, attorneys
fees, costs and sanctions against the defendants for their
contempt of the District Court
-12-
<PAGE>
permanent injunction. The defendants have objected to the
recommendations of the Chief Magistrate Judge. We anticipate that
the District Court will have a hearing and rule on the matter in
due course.
Minnesota Actions
On December 17, 1996, the same three competitors found to be
willful infringers in the Colorado actions 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.
In the event the Company is successful in obtaining an affirmance
of the Judgment of enforceability in the Colorado Action,
Destron's exposure in the Minnesota litigation will not be
material. As a result of the favorable ruling in the Colorado
Action on February 9, 1998, the Plaintiffs in the Minnesota
litigation have sought a stay of the Minnesota actions until after
the Federal Circuit issues its decision, which is not expected
until late 1998, at the earliest. Accordingly, it is expected
that the Company's legal fees during 1998 and early 1999 in the
Minnesota litigation will be negligible because of the stay that
has been entered in the Minnesota litigation.
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 March 31, 1998 or since March 31, 1998 and to the date
of this Quarterly Report on Form 10-Q.
-13-
<PAGE>
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)
Dated: May 13, 1998 /s/ Thomas J. Ahmann
----------------------------
By Thomas J. Ahmann
Vice President Finance,
Chief Financial Officer
and Principal Accounting Officer
-14-
<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 March 31, Six Months Ended March 31,
----------------------- --------------------------
1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
Net income (loss) ($70) $201 ($482) $282
------ ------ ------- -------
------ ------ ------- -------
Weighted average number of common
and common equivalent shares
outstanding:
Weighted average number of
common shares outstanding 13,299 12,766 13,296 12,205
Dilutive effect of stock options and
warrants after application of the
treasury stock method -- 244 -- 244
------ ------ ------- -------
13,299 13,010 13,296 12,449
------ ------ ------- -------
------ ------ ------- -------
Basic and diluted earnings (loss) per
common and common equivalent share ($0.01) $0.02 ($0.04) $0.02
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
-15-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 193
<SECURITIES> 0
<RECEIVABLES> 2,780
<ALLOWANCES> (133)
<INVENTORY> 4,913
<CURRENT-ASSETS> 8,179
<PP&E> 3,112
<DEPRECIATION> (1,152)
<TOTAL-ASSETS> 12,256
<CURRENT-LIABILITIES> 4,570
<BONDS> 0
0
0
<COMMON> 19,924
<OTHER-SE> (13,766)
<TOTAL-LIABILITY-AND-EQUITY> 12,256
<SALES> 6,980
<TOTAL-REVENUES> 6,980
<CGS> 4,775
<TOTAL-COSTS> 4,775
<OTHER-EXPENSES> 2,430
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 257
<INCOME-PRETAX> (482)
<INCOME-TAX> 0
<INCOME-CONTINUING> (482)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (482)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
