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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 June 30, 2000
/ / | 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 (State or other jurisdiction of incorporation or organization) |
84-1079037 (I.R.S. Employer Identification No.) |
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 August 4, 2000, there were 13,651,330 outstanding shares of Common Stock.
DESTRON FEARING CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX |
Page |
||
---|---|---|---|
PART IFINANCIAL INFORMATION | |||
Item 1Financial Statements | 3 | ||
Item 2Management's Discussion and Analysis of Financial Condition and Results of Operations | 11 | ||
PART IIOTHER INFORMATION |
|||
Item 1Legal Proceedings | 14 | ||
Item 6Exhibits and Reports on Form 8-K | 16 | ||
Signatures | 17 |
2
DESTRON FEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, 2000 AND SEPTEMBER 30, 1999
(in thousands, except share and per share amounts)
|
June 30, 2000 |
September 30, 1999 |
|||||||
---|---|---|---|---|---|---|---|---|---|
ASSETS | |||||||||
CURRENT ASSETS: | |||||||||
Cash and cash equivalents | $ | 2,236 | $ | 1,027 | |||||
Accounts receivable, net | 2,481 | 1,757 | |||||||
Inventories, net | 3,909 | 3,827 | |||||||
Vendor deposits | 445 | 665 | |||||||
Prepaid expenses and other current assets | 117 | 102 | |||||||
Total current assets | 9,188 | 7,378 | |||||||
PROPERTY AND EQUIPMENT, net | 1,859 | 1,808 | |||||||
GOODWILL, net | 1,770 | 1,833 | |||||||
OTHER ASSETS, net | 110 | 127 | |||||||
$ | 12,927 | $ | 11,146 | ||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||
CURRENT LIABILITIES: | |||||||||
Accounts payable | $ | 685 | $ | 695 | |||||
Accrued liabilities | 424 | 571 | |||||||
Current portion of long-term obligations | 581 | 663 | |||||||
Total current liabilities | 1,690 | 1,929 | |||||||
LONG TERM OBLIGATIONS, | |||||||||
net of current portion | 66 | 796 | |||||||
Total liabilities | 1,756 | 2,725 | |||||||
SHAREHOLDERS' EQUITY: | |||||||||
Common stock, $.01 par value; 20,000,000 shares authorized; 13,646,380 and 13,443,000 shares issued and outstanding, respectively | 136 | 135 | |||||||
Common stock warrants | 100 | 100 | |||||||
Additional paid-in capital | 20,300 | 19,904 | |||||||
Accumulated deficit | (9,365 | ) | (11,718 | ) | |||||
Total shareholders' equity | 11,171 | 8,421 | |||||||
$ | 12,927 | $ | 11,146 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
DESTRON FEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(in thousands, except per share amounts)
|
Three Months Ended June 30 |
Nine Months Ended June 30 |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2000 |
1999 |
2000 |
1999 |
||||||||||||
NET SALES | $ | 4,192 | $ | 5,271 | $ | 14,991 | $ | 14,782 | ||||||||
COSTS AND EXPENSES: | ||||||||||||||||
Cost of Sales | 2,606 | 2,961 | 8,945 | 8,691 | ||||||||||||
Selling, general and administrative | 967 | 712 | 2,944 | 2,435 | ||||||||||||
Research and development | 273 | 192 | 760 | 594 | ||||||||||||
Interest (income) expense and other | (66 | ) | 77 | (62 | ) | 342 | ||||||||||
Total costs and expenses | 3,780 | 3,942 | 12,587 | 12,062 | ||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES | 412 | 1,329 | 2,404 | 2,720 | ||||||||||||
PROVISION FOR INCOME TAXES | 8 | 27 | 51 | 70 | ||||||||||||
NET INCOME (LOSS) BEFORE EXTRAORDINARY GAIN | 404 | 1,302 | 2,353 | 2,650 | ||||||||||||
EXTRAORDINARY GAIN ON DEBT RESTRUCTURING | | | | 472 | ||||||||||||
NET INCOME (LOSS) | $ | 404 | $ | 1,302 | $ | 2,353 | $ | 3,122 | ||||||||
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE: | ||||||||||||||||
Before extraordinary gain | $ | 0.03 | $ | 0.10 | $ | 0.17 | $ | 0.20 | ||||||||
Extraordinary gain | $ | | $ | | $ | | $ | 0.03 | ||||||||
$ | 0.03 | $ | 0.10 | $ | 0.17 | $ | 0.23 | |||||||||
WEIGHTED AVERAGE | ||||||||||||||||
COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: | ||||||||||||||||
Basic | 13,669 | 13,390 | 13,544 | 13,366 | ||||||||||||
Diluted | 14,488 | 13,463 | 14,238 | 13,397 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
DESTRON FEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(in thousands)
|
Nine Months Ended June 30, |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2000 |
1999 |
||||||||
OPERATING ACTIVITIES: | ||||||||||
Net income | $ | 2,353 | $ | 3,122 | ||||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||||
Extraordinary gain on debt restructuring | | (472 | ) | |||||||
Depreciation and amortization | 379 | 358 | ||||||||
Changes in operating items: | ||||||||||
Accounts receivable | (724 | ) | (343 | ) | ||||||
Inventories | (82 | ) | 1,149 | |||||||
Vendor Deposits, prepaid expenses and other current assets | 205 | (244 | ) | |||||||
Accounts payable and accrued liabilities | (157 | ) | (720 | ) | ||||||
Net cash provided by operating activities | 1,974 | 2,850 | ||||||||
INVESTING ACTIVITIES: | ||||||||||
Purchases of fixed assets | (350 | ) | (245 | ) | ||||||
Net cash used in investing activities | (350 | ) | (245 | ) | ||||||
FINANCING ACTIVITIES: | ||||||||||
Repayments of long-term obligations | (812 | ) | (1,014 | ) | ||||||
Net borrowings on bank line of credit | | (1,278 | ) | |||||||
Issuance of common stock | 397 | 43 | ||||||||
Net cash used in financing activities | (415 | ) | (2,249 | ) | ||||||
NET CHANGE IN CASH | 1,209 | 356 | ||||||||
CASH, beginning of period | 1,027 | 104 | ||||||||
CASH, end of period | $ | 2,236 | $ | 460 | ||||||
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||||
Interest paid | $ | 76 | $ | 330 | ||||||
Income taxes paid | $ | 28 | $ | | ||||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: | ||||||||||
Issuance of common stock warrants in connection with debt restructuring | $ | | $ | 100 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
DESTRON FEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
(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):
|
June 30, 2000 |
Sept. 30, 1999 |
|||||
---|---|---|---|---|---|---|---|
Raw materials | $ | 2,923 | $ | 2,607 | |||
Finished goods | 986 | 1,220 | |||||
Total inventories | $ | 3,909 | $ | 3,827 | |||
3. NET INCOME PER COMMON SHARE
Net income 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. The Company calculates earnings per share ("EPS") in accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." Basic EPS is computed by dividing net income 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.
6
A reconciliation of EPS calculations under SFAS No. 128 is as follows for the three months and nine months ended June 30 (in thousands, except per share amounts).
|
Three Months Ended June 30 |
Nine Months Ended June 30 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2000 |
1999 |
2000 |
1999 |
|||||||||
Net income | $ | 404 | $ | 1,302 | $ | 2,353 | $ | 3,122 | |||||
Weighted average number of common shares outstanding | 13,669 | 13,390 | 13,544 | 13,366 | |||||||||
Dilutive effect of stock options and warrants after application of the treasury stock method | 818 | 73 | 693 | 31 | |||||||||
14,487 | 13,463 | 14,237 | 13,397 | ||||||||||
Basic and diluted net income per common share | $ | 0.03 | $ | 0.10 | $ | 0.17 | $ | 0.23 | |||||
4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that changes in the fair value of derivative instruments be recognized currently in earnings, unless specific hedge accounting criteria are met. SFAS No. 133, as amended, will be effective for the Company on October 1, 2000. The Company is currently evaluating the impact of SFAS No. 133, but does not believe it will have a significant effect on its financial position or results of operations.
5. DEBT RESTRUCTURING
In June 1997, the Company completed an agreement with a vendor whereby $2,290,000 of a trade payable was converted into an unsecured term note. At September 30, 1998, the Company was in default on certain payment terms of this note.
In March 1999, the Company completed a restructuring of this note whereby the vendor assigned the note to a third party. Effective March 1, 1999, the new noteholder agreed to a reduction of the principal to $1,529,000 to reflect a 35% discount, with interest at 9.25% and monthly payments of $50,000 through January 2002. In connection with this restructuring, the Company granted warrants to the new noteholder to purchase 275,000 shares of the Company's common stock at $1.00 per share. The warrants are exercisable at any time through March 15, 2004. The warrants were recorded at their estimated fair value of $100,000 as of the date of issuance.
In accordance with the requirements of SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings", the Company recorded a net extraordinary gain on restructuring of $472,000.
7
In May 1999, the Company made an additional $600,000 cash payment against the principal of the note. The note was paid in full in May 2000.
6. SEGMENT DISCLOSURES
In fiscal year 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires the disclosure of certain information about operating segments in financial statements. The Company's reportable segments are based on the Company's method of internal reporting, which generally segregates the strategic business units into two segments:radio frequency identification (RFID), consisting primarily of the Company's electronic transponder identification technology sales, and visual identification, whereby the Company manufactures and sells animal identification tags. Segment information included in the accompanying consolidated balance sheets as of June 30 and September 30, 1999 and in the consolidated statements of operations for the three and nine month periods ended June 30, 2000 and 1999 is as follows:
|
Radio Frequency Identification |
Visual Identification |
Corporate (a) |
Total |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
3 Months ended June 30, 2000 | ||||||||||||
Net sales | $ | 2,627 | $ | 1,565 | $ | | $ | 4,192 | ||||
Income (loss) before income taxes | 617 | 273 | (478 | ) | 412 | |||||||
Identifiable assets | 6,716 | 3,380 | 2,831 | 12,927 | ||||||||
3 Months ended June 30, 1999 | ||||||||||||
Net sales | $ | 3,911 | $ | 1,360 | $ | | $ | 5,271 | ||||
Income (loss) before income taxes | 1,515 | 275 | (461 | ) | 1,329 | |||||||
Identifiable assets | 6,437 | 3,743 | 1,064 | 11,244 | ||||||||
9 Months ended June 30, 2000 | ||||||||||||
Net sales | $ | 9,968 | $ | 5,023 | $ | | $ | 14,991 | ||||
Income (loss) before income taxes | 2,833 | 1,139 | (1,568 | ) | 2,404 | |||||||
Identifiable assets | 6,716 | 3,380 | 2,831 | 12,927 | ||||||||
9 Months Ended June 30, 1999 | ||||||||||||
Net sales | $ | 9,762 | $ | 5,020 | $ | | $ | 14,782 | ||||
Income (loss) before income taxes | 3,181 | 1,174 | (1,163 | ) | 3,192 | |||||||
Identifiable assets | 6,437 | 3,743 | 1,064 | 11,244 |
8
7. LEGAL PROCEEDINGS
Colorado Patent Actions
On January 29, 1996, the Company prevailed in a patent infringement trial against four competitors in the United States District Court of Colorado. (The patent involved was No. 5,211,129, which relates to the Company's injectable transponder technology.) The judgment included an award of damages and a permanent injunction against the four competitors. The judgment is now final.
On February 9, 1998, the District Court Judge issued an Order finding two of the defendants in contempt of the permanent injunction and awarded the Company damages due to the contempt.
On January 23, 1998, the Company filed a second Motion for Contempt against certain of these defendants. 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 and based upon their offer to sell transponders to the Denver Metro Microchip Committee. On March 18, 1999, the District Court adopted the recommendation of the Magistrate Judge as to the Denver Metro Microchip Committee solicitation, but also concluded that the defendants' manufacture, use and sale of the ID-100 Zip Quill transponder product was not a contemptuous act and that the Company would need to initiate a new infringement action against the defendants regarding this product. On April 15, 1999, the Company appealed the District Court's decision as to the Zip Quill product. The Company's appeal from the refusal of the District Court to find the defendant in contempt with respect to the ID-100 Zip Quill transponder product was denied by the Court of Appeals. As to the finding of contempt regarding the Denver Metro Microchip Committee, on December 10, 1999, the District Court awarded double damages to the Company in the amount of $31,472 and ordered the defendants to pay this amount within ninety days. The defendants did not make the awarded payment within ninety days, therefore the Company filed a Motion for Contempt on May 11, 2000. A hearing was held before the district court on July 27, 2000. At the hearing the court found the defendants to be in contempt of the court's prior order of December 10, 1999. In addition, the court referred the case to the Magistrate Judge to conduct further proceedings to investigate assets of all of the defendants for the purpose of enforcing Destron's judgment.
Minnesota Patent Actions
On April 21, 1997, four plaintiffs (including three competitors found to be willful infringers in the Colorado patent infringement trial) 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.
9
Although the appeal in the Colorado action has been completed and the judgment in the Colorado action is final, the plaintiffs in the Minnesota litigation have not elected to vacate the stay, and hence the Minnesota action remains inactive.
8. PENDING TRANSACTION WITH APPLIED DIGITAL SOLUTIONS, INC.
On April 24, 2000, the Company announced that a definitive Merger Agreement had been signed pursuant to which Applied Digital Solutions, Inc. ("Applied Digital") (NASDAQ:ADSX) will acquire the Company in a tax-free exchange of common stock. The Company will merge with Digital Angel.net Inc., a wholly owned subsidiary of Applied Digital and the combined companies will do business under the Digital Angel.net Inc. name.
On May 26, 2000, the Company and Applied Digital announced an amendment to the Merger Agreement. The amendment modified the exchange ratio for the merger, eliminated the right of either party to terminate the agreement due to an increase or decrease in the price of Applied Digital common stock and prohibited Applied Digital from entering into an acquisition agreement with any other public company prior to the closing of this merger.
Under the terms of the Merger Agreement, as amended, the Company's stockholders will receive 1.50 shares of Applied Digital common stock for each share of common stock of the Company. Under the Merger Agreement, no further adjustments will be made to the exchange ratio due to changes in the price of Applied Digital common stock. After completion of the merger, the Company's stockholders will own an estimated 28% of Applied Digital common stock, before the exercise of assumed options and warrants.
On August 7, 2000, the Company and Applied Digital announced that their shareholder meetings originally scheduled for August 8, 2000 to vote on the proposed merger would instead be held on August 25, 2000. Management plans to use the additional time for Applied Digital to solicit proxies to ensure the company meets the quorum requirements for its special meeting of shareholders.
The Merger Agreement, which has already been approved by the Boards of Directors of Applied Digital and the Company, is subject to approval by Applied Digital shareholders and the Company's stockholders. Pending these shareholder approvals, the completion of the merger is expected during the third quarter of this year. No assurance can be given that the Merger Agreement will result in a transaction.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Recent Developments
On April 24, 2000, the Company signed a definitive merger agreement to be acquired by Applied Digital Solutions, Inc. See footnote 8 to the financial statements.
Results of Operations
Net income for the third quarter of fiscal year 2000 was $404,000 compared to $1,302,000 in the prior year's third quarter. Year-to-date net income of $2,353,000 was 11% below the same period last year, excluding a $472,000 extraordinary gain related to a debt restructuring. The decrease in net income for the quarter and year-to-date, excluding the extraordinary gain, was primarily the result of decreased sales of electronic products, increased R&D spending and investments in sales and marketing to support 2001 initiatives, and expenses associated with the pending acquisition by Applied Digital Solutions, Inc.
Net sales for the quarter ended June 30, 2000 of $4,192,000 were 20% less than the $5,271,000 reported for the comparable quarter of last year. In the third quarter of fiscal 2000, electronic product sales decreased 33% compared to the same quarter last year, primarily due to a significant reader system order for our fisheries market that was shipped in the third quarter of last year. Visual identification product revenue increased 15% from the comparable quarter of fiscal 1999. For the nine month period ended June 30, 2000, revenue was $14,991,000, or 1% above comparable fiscal 1999 revenue.
Cost of sales was $2,606,000 for the third quarter and $8,945,000 for the nine month year-to-date period, compared to $2,961,000 and $8,691,000 for the respective prior year periods. The gross profit margin for the third quarter was 38% compared to 44% for the same quarter in fiscal 1999. The decline in margin was due to changes in the sales mix, including the large reader order shipped in the third quarter last year and the decline in electronic product sales in the third fiscal quarter of this year. The fiscal 2000 year-to-date gross margin was 40% compared to 41% for the same period last year.
Selling, general and administrative expenses for the third quarter of fiscal 2000 were $967,000, compared to $712,000 in the third quarter of fiscal 1999. For the nine month period ended June 30, 2000, these expenses were $2,944,000, or 20% above last year's comparable period. The increase compared to last year was primarily due to increased market development and investor relations and other merger related expenses. Research and development expense for the third quarter and year-to-date period was $273,000 and $760,000, respectively, compared to $192,000 and $594,000 for the same periods last year. The higher research and development expense was due to increased use of outside consultants to support new product development activities.
Interest income and other of $66,000 in the third quarter of fiscal 2000 was $143,000 greater than the third quarter of fiscal 1999 due primarily to lower interest expense resulting from lower debt levels and interest income earned on cash balances.
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 June 30, 2000 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 the next twelve months. Also see discussion below regarding additional liquidity and cash flow considerations.
11
The Company's operating activities provided net cash of $1,974,000 during the nine months ended June 30, 2000, principally relating to net income of $2,353,000 and a decrease in vendor deposits, prepaid expenses and other current assets of $204,000 offset by an increase in accounts receivable of $724,000.
The Company's investing activities used $350,000 for the purchase of fixed assets during the nine month period ended June 30, 2000. Financing activities used net cash of $415,000 during the same period. The funds were principally used to pay off a long term debt obligation.
As of June 30, 2000, the Company had net working capital of $7,498,000, compared to $5,449,000 at September 30, 1999. The Company's balance sheet as of June 30, 2000 reflected a current ratio of 5.4 to 1.
The Company has a $3,000,000 revolving credit facility with Coast Business Credit, a division of Southern Pacific Thrift and 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 has been renewed through June 30, 2001, with provisions for extensions of the maturity date. Interest on the credit facility is paid monthly at a rate equal to the greater of 8% per annum or prime plus 13/4%. At June 30, 2000, the Company had no outstanding borrowings under the facility and had a maximum availability under the borrowing formula of $2,135,000.
In June 1997, the Company completed an agreement with a vendor whereby $4,290,000 of a trade payable was converted into a promissory note. In March 1999, the note was restructured, with a $472,000 extraordinary gain recorded in the second quarter of fiscal 1999. In May 1999, the Company made a one-time payment of $600,000 to further accelerate payment of the note. The note balance was paid in full in May 2000.
YEAR 2000
The Company evaluated the Year 2000 preparedness of its customers, suppliers and service providers by soliciting representations and assurances from such third parties. Through the date of this report on Form 10-Q, the Company has not experienced any significant difficulties with these third parties. However, if these parties do experience future Year 2000 compliance issues, the Company's business, financial condition and results of operations could be adversely affected. With regard to its manufactured electronic products, the Company continues to believe that its embedded technologies are Year 2000 compliant.
The Company has prepared contingency plans to address any remaining exposures to year 2000 matters. There can be no assurance that these plans will successfully mitigate any residual Year 2000 risks.
Forward-Looking Information
The information set forth in the preceding paragraphs and certain areas elsewhere in this Form 10-Q contains 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.
12
Colorado Patent Actions
On January 29, 1996, the Company prevailed in a patent infringement trial against four competitors in the United States District Court of Colorado. (The patent involved was No. 5,211,129, which relates to the Company's injectable transponder technology.) The judgment included an award of damages and a permanent injunction against the four competitors. The judgment is now final.
On February 9, 1998, the District Court Judge issued an Order finding two of the defendants in contempt of the permanent injunction and awarded the Company damages due to the contempt.
On January 23, 1998, the Company filed a second Motion for Contempt against certain of these defendants. 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 and based upon their offer to sell transponders to the Denver Metro Microchip Committee. On March 18, 1999, the District Court adopted the recommendation of the Magistrate Judge as to the Denver Metro Microchip Committee solicitation, but also concluded that the defendants' manufacture, use and sale of the ID-100 Zip Quill transponder product was not a contemptuous act and that the Company would need to initiate a new infringement action against the defendants regarding this product. On April 15, 1999, the Company appealed the District Court's decision as to the Zip Quill product. The Company's appeal from the refusal of the District Court to find the defendant in contempt with respect to the ID-100 Zip Quill transponder product was denied by the Court of Appeals. As to the finding of contempt regarding the Denver Metro Microchip Committee, on December 10, 1999, the District Court awarded double damages to the Company in the amount of $31,472 and ordered the defendants to pay this amount within ninety days. The defendants did not make the awarded payment within ninety days, therefore the Company filed a Motion for Contempt on May 11, 2000. A hearing was held before the district court on July 27, 2000. At the hearing the court found the defendants to be in contempt of the court's prior order of December 10, 1999. In addition, the court referred the case to the Magistrate Judge to conduct further proceedings to investigate assets of all of the defendants for the purpose of enforcing Destron's judgment.
Minnesota Patent Actions
On April 21, 1997, four plaintiffs (including three competitors found to be willful infringers in the Colorado patent infringement trial) 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.
Although the appeal in the Colorado action has been completed and the judgment in the Colorado action is final, the plaintiffs in the Minnesota litigation have not elected to vacate the stay, and hence the Minnesota action remains inactive.
13
Item 6. Exhibits and Reports on Form 8-K
The following exhibit is hereby incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended September 30, 1997:
The following exhibits are hereby incorporated by reference to Exhibits 10.2 and 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999:
Current reports on Form 8-K were filed on March 7, 2000, and May 2, 2000 relating to the proposed acquisition of Destron Fearing Corporation by Applied Digital Solutions, Inc. No other reports on Form 8-K were filed in the quarter ended June 30, 2000 or during the period from June 30, 2000 to the date of this report.
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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) |
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Dated: August 10, 2000 |
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/s/ JAMES P. SANTELLI By: James P. Santelli Vice President-Finance Chief Financial Officer |
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