<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, 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
490 Villaume Avenue
South St. Paul, MN 55075
(651) 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 10, 1999, there were 13,353,982 outstanding shares of Common
Stock.
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DESTRON FEARING CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 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 10
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings 13
Item 6 -- Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
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PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DESTRON FEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, 1998 AND SEPTEMBER 30, 1998
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
ASSETS December 31, September 30,
1998 1998
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 240 $ 104
Accounts receivable, net 2,798 2,212
Inventories, net 4,516 4,753
Vendor deposits 637 475
Prepaid expenses and other current assets 36 33
-------- --------
Total current assets 8,227 7,577
PROPERTY AND EQUIPMENT, net 1,999 1,922
GOODWILL, net 1,896 1,917
OTHER ASSETS, net 142 147
$ 12,264 $ 11,563
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 1,910 $ 1,278
Accounts payable 880 988
Customer deposits 815 865
Accrued liabilities 577 495
Current portion of long-term obligations 2,465 2,544
-------- --------
Total current liabilities 6,647 6,170
LONG-TERM OBLIGATIONS,
net of current portion 662 677
-------- --------
Total liabilities 7,309 6,847
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SHAREHOLDERS' EQUITY:
Common stock, $.01 par value;
20,000,000 shares authorized;
13,354,000 issued and outstanding 134 134
Additional paid-in capital 19,846 19,846
Accumulated deficit (15,025) (15,264)
-------- --------
Total shareholders' equity 4,955 4,716
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$ 12,264 $ 11,563
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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DESTRON FEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1987
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months ended December 31,
-------------------------------
1998 1997
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<S> <C> <C>
NET REVENUE $4,062 $2,630
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COSTS AND EXPENSES:
Cost of sales 2,631 1,883
Selling, general and administrative 667 780
Research and development 183 268
Interest expense and other 142 111
--------- ---------
Total costs and expenses 3,823 3,042
INCOME (LOSS) BEFORE INCOME TAXES 239 (412)
PROVISION FOR INCOME TAXES 0 0
NET INCOME (LOSS) $ 239 ($412)
--------- ---------
BASIC AND DILUTED EARNINGS
(LOSS) PER COMMON SHARE $0.02 ($0.03)
WEIGHTED AVERAGE
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING $13,354 $13,354
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
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DESTRON FEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended December 31
------------------------------
1998 1997
--------- ---------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 239 $ (412)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 116 133
Changes in operating items:
Accounts receivable (586) (99)
Inventories 237 45
Vendor deposits (162) (515)
Prepaid expenses and other current assets (3) 16
Accounts payable and accrued liabilities (26) 498
Customer deposits (50) 0
Net cash used in operating activities (235) (334)
INVESTING ACTIVITIES:
Purchases of fixed assets (167) (89)
Net cash used in investing activities (167) (89)
-------- --------
FINANCING ACTIVITIES:
Repayments of long-term obligations (94) (375)
Net borrowings on bank line of credit 632 695
Net cash provided by financing activities 538 320
-------- --------
NET CHANGE IN CASH 136 (103)
CASH, beginning of period 104 1,075
-------- --------
CASH, end of period $ 240 $ 972
-------- --------
-------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 139 $ 120
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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DESTRON FEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
(unaudited)
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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, 1998 SEPTEMBER 30, 1998
----------------- ------------------
<S> <C> <C>
Raw materials $2,203 $2,481
Finished goods 2,313 2,272
------- -------
Total inventories $4,516 $4,753
------- -------
------- -------
</TABLE>
3. NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common and common equivalent share is based on the
weighted average number of common and common equivalent shares outstanding for
the period. Common equivalent shares consist primarily of stock options granted
to employees, directors and others, and outstanding warrants. In fiscal 1998,
the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share." SFAS No. 128 established new accounting standards for
computing and presenting earnings (loss) per share data (EPS). Basic EPS is
computed by dividing net income (loss) by the weighted average number of shares
of common stock outstanding during the period, excluding potentially dilutive
securities. Diluted EPS is calculated using the treasury stock method and
reflects the dilutive effect of outstanding options, warrants and other
securities.
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A reconciliation of EPS calculations under SFAS No. 128 is as follows for the
quarter ended December 31 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED DECEMBER 31
-------------------------
1998 1997
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<S> <C> <C>
Net income (loss) $ 239 ($ 412)
-------- --------
-------- --------
Weighted average number of
common shares outstanding 13,354 13,294
Dilutive effect of stock options
and warrants after application
of the treasury stock method -- --
-------- --------
13,354 13,294
-------- --------
-------- --------
Basic and diluted earnings
(loss) per common share $ 0.02 ($ 0.03)
-------- --------
-------- --------
</TABLE>
4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS
No.131, which is effective for fiscal years beginning after December 15, 1997,
requires that public business enterprises report information about operating
segments in annual financial statements and selected information in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company is
currently evaluating the impact of SFAS No. 131 and will adopt the disclosure
requirements in its annual report for fiscal year 1999, when required.
5. LEGAL PROCEEDINGS
Colorado Patent Actions
On January 8, 1996, the Company commenced a patent infringement trial against
four competitors in the United States District Court of Colorado. (The patent
involved is No. 5,211,129, which relates to the Company's injectable transponder
technology.) 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 the Company'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. However, the Court of Appeals remanded to the
trial court for further proceedings the issue of whether the Company engaged in
inequitable conduct 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 no intent on the part of the Company to deceive
the Patent Office, and therefore that no inequitable conduct occurred and the
Company's `129 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 oral argument to the U.S. Court of
Appeals or the Federal Circuit was held on December 8, 1998.
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On January 26, 1999, the Court of Appeals entered an order affirming the U.S.
District Court's decision that the Company had not engaged in inequitable
conduct in obtaining the `129 patent and thus the patent was enforceable. The
order of the Court of Appeals has the effect of continuing the permanent
injunction entered by the United States District Court in Colorado which
prohibits the defendants from manufacturing, using, selling, or offering to sell
the transponders that violate the Company's `129 patent. The defendants may
attempt to appeal to the United States Supreme Court the January 26, 1999
decision of the Court of Appeals.
Further, during the pendency of the first appeal, the Company pursued a contempt
action against certain defendants for willful violations of the District Court's
permanent injunction. On November 7, 1997, a Magistrate Judge of the District
Court recommended that the defendants be found in willful contempt of the
permanent injunction and that the Company should be awarded double damages,
amounting to $33,000, as well as attorneys' fees and costs. On February 9, 1998,
the District Court Judge issued an Order adopting the Magistrate's
recommendation that the defendants were in contempt. This finding of contempt
has also been appealed and upheld.
On January 23, 1998, the Company filed a second Motion for Contempt against
certain defendants. Following a March 27, 1998 hearing, on April 23, 1998 the
Magistrate Judge entered a recommendation that the defendants be held in
contempt a second time, based upon their manufacture, use and sale of the ID-100
Zip Quill transponder product. The Company has requested treble 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 Magistrate Judge. The Company anticipates that the
District Court will have a hearing and rule on the matter in early 1999.
Minnesota Patent 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. This lawsuit has been stayed by agreement of
all parties pending the outcome of the appeal of the Colorado action.
Since the Company was successful in obtaining an affirmance of the judgment of
enforceability in the Colorado action, the Company's exposure, if any, in the
Minnesota litigation may be reduced. As a result of the favorable ruling in the
Colorado Action on February 9, 1998, and as indicated in the above paragraph,
the Minnesota litigation has been stayed pending the Federal Circuit Court
decision in the Colorado action. The Company is now assessing its alternatives
in the Minnesota Action in light of the January 26, 1999 decision of the Court
of Appeals in the Colorado Action.
Minnesota Class Action
On January 28, 1999, a class action lawsuit was commenced against the Company in
the United States District Court for the District of Minnesota on behalf of
persons who were shareholders of record of the Company's
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common stock on December 29, 1998 and received the Company's Proxy Statement
dated December 29, 1998 ("Proxy Statement") for the Company's annual meeting of
stockholders to be held on January 29, 1999 ("Annual Meeting"). The complaint
principally alleges violations of federal securities laws based on disclosures
in the Proxy Statement. The plaintiffs allege that the Proxy Statement failed to
inform the stockholders of their ability to exercise dissenters' rights in
connection with the proposed reverse stock split described in the Proxy
Statement. The Company believes the plaintiffs' case has no merit because the
Proxy Statement is believed to contain a complete and accurate description of
the proposed reverse stock split, including the absence of dissenters' rights.
In connection with the above-described class action lawsuit, on January 28,
1999, the plaintiffs filed a motion requesting an order that would prevent the
Company from holding the Annual Meeting or, in the alternative, that would
prevent it from holding the vote on the proposed reverse stock split. A hearing
on the motion was held on January 29, 1999 in the United States District Court
for the District of Minnesota. In a strongly worded order from the bench, Judge
James M. Rosenbaum ruled in favor of the Company and denied plaintiffs' motion,
which allowed the Company to hold the Annual Meeting as planned. The reverse
stock split was authorized but hasn't been acted on as of the date of the filing
of this 10-Q.
The Company intends to continue to vigorously defend this lawsuit.
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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, 1998, was $4,062,000, an
increase of $1,432,000 or 54% over the comparable quarter of fiscal 1998. Radio
Frequency Identification (RFID) revenues for 1999 gained 71% over the first
quarter of fiscal 1998 principally because of higher sales to the United States
fisheries market and to the companion animal markets in Europe. Visual
identification revenues also increased 33% over the prior year due to a greater
number of shipments to the existing customer base.
Cost of sales for the first quarter of fiscal 1999 was $2,631,000, an increase
of 40% over the comparable period of fiscal 1998. The higher amount in the
current fiscal year primarily results from the higher revenue levels.
Additionally, price reductions on components for the RFID products were realized
in the fiscal 1999 quarter and fixed production overhead costs were absorbed
over a higher revenue base in the current fiscal year. As a result, gross profit
as a percentage of revenue rose to 35% in the first quarter of fiscal 1999 from
28% in the first quarter of fiscal 1998.
Selling, general and administrative expenses were $867,000, an increase of 11%
over last year's comparable period. RFID selling expenses declined by 35% in the
first quarter of fiscal 1999 because of reductions in personnel and related
travel expense and lower expenditures for marketing research. General and
administrative expenses increased 47% in the current fiscal quarter over fiscal
1998 principally because of higher litigation expenses related to an appellate
hearing during the quarter and higher consulting expenses.
Research and development expenses were $183,000 in the first quarter of fiscal
1999 compared to $268,000 in the first quarter of last year, for a reduction of
32%. Lower usage of outside engineering resources and reduced travel expenses
were the principal reasons for the reduction in research and development
expenses.
Interest and other expense for the first quarter of fiscal 1999 was $142,000, an
increase of 28% over the fiscal first quarter amount of $111,000. Higher average
interest rates on the outstanding debt accounted for most of the increase in
fiscal 1999.
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 requirement of its domestic sales.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has utilized financing sources such as private and
public 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, 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 for at least fiscal 1999.
As reflected in the financial statements included in the Company's most recent
Annual Report on Form 10-K, the Company incurred a net loss of $1,980,000 for
the year ended September 30, 1998, and also experienced negative cash flow from
operations. In addition, the Company has not complied with certain payment terms
on its vendor note payable, as discussed below, and could also be placed in
default on its line-of-credit agreement based on the status of the vendor note.
Additionally, the Company's current line of credit agreement is effective
through June 30, 1999, and although management expects to be able to renew the
agreement, there can be no assurance that a renewal agreement with acceptable
terms will be reached. Fiscal 1999 cash flow projections are dependent on the
availability of an operating line of credit with sufficient borrowing base and
achievable financial covenants from the present lender or another financing
source. As a result of these events and conditions, the auditors' report on the
Company's financial statements as of and for the year ended September 30, 1998
contains a modification which indicates substantial doubt about the Company's
ability to continue as a going concern.
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Management believes that agreements will be reached with the above-mentioned
vendor to restructure the outstanding note and with the lender to renew the line
of credit agreement, and that cash available under the line of credit and
provided by operations will provide sufficient liquidity through at least fiscal
1999. However, there can be no assurance that the Company will be able to
achieve these plans.
The Company's operating activities used $235,000 during the three-month period
ended December 31, 1998. Net cash flow used in operations during the period
reflects net income, depreciation and amortization, and decreases in
inventories. These sources of funds were more than offset by uses of cash for
increases in accounts receivable and vendor deposits, and decreases in accounts
payable and accrued liabilities, and a reduction in customer deposits.
The Company's investing activities used $167,000 for the purchase of fixed
assets during the three-month period ended December 31, 1998. Its financing
activities provided $538,000 during the same period through a $632,000 increase
in line of credit borrowings, offset by repayments of long-term obligations of
$94,000.
As of December 31, 1998, the Company had net working capital of $1,580,000 with
a current ratio of 1.2 to 1.0, which represents a $173,000 increase in working
capital from September 30, 1998.
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 extensions
of the maturity date. Interest on the credit facility is paid monthly at an
annual rate equal to the greater of eight percent (8%) or prime plus one and
three-quarters percent (1 3/4%). At December 31, 1998, the Company had
outstanding borrowings of $1,910,000 under the facility and had a total maximum
availability under the borrowing formula of $3,236,000.
In June 1997, the Company completed an agreement with a vendor whereby a
$4,290,000 trade payable was converted into an unsecured promissory note. The
note provides for monthly payments of $175,000 in fiscal 1999. An additional
principal payment of $600,000 was required in October 1998 and further principal
payments are called for under certain conditions set forth in the agreement
related to the note. As of December 31, 1998, the note was bearing interest at
11.25% per annum. The scheduled term of the note is twenty-seven (27) months,
with the final payment due in August 1999.
In August 1998, the Company advised the vendor it could not comply with the
original payment schedule of the promissory note and requested that the vendor
reschedule the terms of the note to lower the monthly payment, retain the
previous 9.25% annual interest rate and extend the payment term by 52 months.
Beginning in September 1998, the Company unilaterally reduced the monthly
payment to $50,000 and, in October 1998, it did not make the required $600,000
payment. To date, there has been no definitive response to the Company's request
to restructure the terms of the promissory note. The balance of the note as of
September 30, 1998 was $2,488,000.
In November 1998, the Company received notice from The Nasdaq Stock Market that
the Company's common stock would be delisted from The Nasdaq Small Cap Market if
the closing bid price does not trade at or above $1.00 for 10 consecutive
trading days prior to February 17, 1999. The Company is currently evaluating
plans to comply with this requirement, including the possibility of a reverse
stock split that would convert up to five shares of currently issued and
outstanding shares of common stock into one issued and outstanding share of
common stock.
YEAR 2000
During fiscal 1997 and 1998, the Company undertook a comprehensive review of its
computer systems and related software to ensure that all systems would properly
recognize Year 2000 and continue to process data. The review encompassed
information technology systems, significant third party relationships and
manufactured product lines.
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Based upon this internal assessment, the Company upgraded major portions of its
information systems during the first quarter of fiscal 1998 to ensure Year 2000
compliance. The cost of evaluating and replacing certain business systems did
not have a significant impact on the Company's results of operations. The cost
of approximately $100,000 was funded through operating cash flows. These costs
were attributable primarily to the purchase of new software and equipment and
were expensed or capitalized on a basis consistent with the Company's accounting
policies for capital assets.
The Company is currently in the process of evaluating the Year 2000 preparedness
of its customers, suppliers and service providers by soliciting representations
and assurances from such third parties. If these representations prove to be
inadequate, the Company's business, financial condition and results of
operations could be adversely affected. With regard to its manufactured
electronic products, the Company believes that its embedded technologies are
Year 2000 compliant.
As of the date of this report, the Company also is in the process of preparing
contingency plans to address any remaining exposures to Year 2000 matters, after
consideration of the above plans. There can be no assurance that these plans
will successfully mitigate all Year 2000 risks.
FORWARD-LOOKING INFORMATION
The information set forth in the preceding paragraphs and certain areas
elsewhere in this 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Colorado Patent Actions
On January 8, 1996, the Company commenced a patent infringement
trial against four competitors in the United States District Court
of Colorado. (The patent involved is No. 5,211,129, which relates
to the Company's injectable transponder technology.) 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 the Company'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 that the Company's patent is valid and
was willfully infringed by the competitors. However, the Court of
Appeals remanded to the trial court for further proceedings the
issue of whether the Company engaged in inequitable conduct 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 no intent on the
part of the Company to deceive the Patent Office, and therefore
that no inequitable conduct occurred and the Company's `129 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
oral argument to the U.S. Court of Appeals for the Federal Circuit
was held on December 8, 1998.
On January 26, 1999, the Court of Appeals entered an order
affirming the U.S. District Court's decision that the Company had
not engaged in inequitable conduct in obtaining the `129 patent
and thus the patent was enforceable. The order of the Court of
Appeals has the effect of continuing the permanent injunction
entered by the United States District Court in Colorado which
prohibits the defendants from manufacturing, using, selling, or
offering to sell the transponders that violate the Company's `129
patent. The defendants may attempt to appeal to the United States
Supreme Court the January 26, 1999 decision of the Court of
Appeals.
Further, during the pendency of the first appeal, the Company
pursued a contempt action against certain defendants for willful
violations of the District Court's permanent injunction. On
November 7, 1997, a Magistrate Judge of the District Court
recommended that the defendants be found in willful contempt of
the permanent injunction and that the Company should be awarded
double damages, amounting to $33,000, as well as attorneys' fees
and costs. On February 9, 1998, the District Court Judge issued an
Order adopting the Magistrate's recommendation that the defendants
were in contempt. This finding of contempt has also been appealed
and upheld.
On January 23, 1998, the Company filed a second Motion for
Contempt against certain defendants. Following a March 27, 1998
hearing, on April 23, 1998 the Magistrate Judge entered a
recommendation that the defendants be held in contempt a second
time, based upon their manufacture, use and sale of the ID-100 Zip
Quill transponder product. The Company has requested treble
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 Magistrate Judge. The Company anticipates that the District
Court will have a hearing and rule on the matter in early 1999.
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Minnesota Patent 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. This lawsuit has been stayed by agreement of all
parties pending the outcome of the appeal of the Colorado action.
Since the Company was successful in obtaining an affirmance of the
judgment of enforceability in the Colorado Action, the Company's
exposure, if any, in the Minnesota litigation may be reduced. As a
result of the favorable ruling in the Colorado Action on
February 9, 1998, and as indicated in the above paragraph, the
Minnesota litigation has been stayed pending the Federal Circuit
Court decision in the Colorado action. The Company is now
assessing its alternatives in the Minnesota Action in light of
the January 26, 1999 decision of the Court of Appeals in the
Colorado Action.
Minnesota Class Action
On January 28, 1999, a class action lawsuit was commenced against
the Company in the United States District Court for the District
of Minnesota on behalf of persons who were shareholders of record
of the Company's common stock on December 29, 1998 and received
the Company's Proxy Statement dated December 29, 1998 ("Proxy
Statement") for the Company's annual meeting of stockholders to be
held on January 29, 1999 ("Annual Meeting"). The complaint
principally alleges violations of federal securities laws based on
disclosures in the Proxy Statement. The plaintiffs allege that the
Proxy Statement failed to inform the stockholders of their ability
to exercise dissenters' rights in connection with the proposed
reverse stock split described in the Proxy Statement. The Company
believes the plaintiffs' case has no merit because the Proxy
Statement is believed to contain a complete and accurate
description of the proposed reverse stock split, including the
absence of dissenters' rights.
In connection with the above-described class action lawsuit, on
January 28, 1999, the plaintiffs filed a motion requesting an
order that would prevent the Company from holding the Annual
Meeting or, in the alternative, that would prevent it from holding
the vote on the reverse stock split. A hearing on the motion was
held on January 29, 1999 in the United States District Court for
the District of Minnesota. In a strongly worded order from the
bench, Judge James M. Rosenbaum ruled in favor of the Company and
denied plaintiffs' motion, which allowed the Company to hold the
Annual Meeting as planned.
The Company intends to continue to vigorously defend this lawsuit.
- 14 -
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
Exhibit 11.1 Not filed
b. Reports on Form 8-K
No current reports on Form 8-K were filed during the
quarter ended December 31, 1998 or since December 31,
1998 and to the date of this Quarterly Report on Form
10-Q.
- 15 -
<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: 2/8/99 /s/Randolph K. Geissler
------------------------ -------------------------
By: Randolph K. Geissler
President
Chief Executive Officer
- 16 -
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