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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
March 31, 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) |
784-1079037 (I.R.S. Employer Identification No.) |
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| 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 April 24, 2000, there were 13,640,772 outstanding shares of Common Stock.
DESTRON FEARING CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
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Page |
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| PART I—FINANCIAL INFORMATION | |||||
| Item 1—Financial Statements | 3 | ||||
| Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations | 11 | ||||
| PART II—OTHER INFORMATION | |||||
| Item 1—Legal Proceedings | 14 | ||||
| Item 6—Exhibits and Reports on Form 8-K | 15 | ||||
| Signatures | 16 | ||||
2
Item 1. FINANCIAL STATEMENTS
DESTRON FEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 2000 AND SEPTEMBER 30, 1999
(in thousands, except share and per share amounts)
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March 31, 2000 |
September 30, 1999 |
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|---|---|---|---|---|---|---|---|
| ASSETS | |||||||
| CURRENT ASSETS: |
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| Cash and cash equivalents | $ | 1,078 | $ | 1,027 | |||
| Accounts receivable, net | 4,143 | 1,757 | |||||
| Inventories, net | 3,875 | 3,827 | |||||
| Vendor deposits | 321 | 665 | |||||
| Prepaid expenses and other current assets | 94 | 102 | |||||
| Total current assets | 9,511 | 7,378 | |||||
| PROPERTY AND EQUIPMENT, net | 1,748 | 1,808 | |||||
| GOODWILL, net | 1,791 | 1,833 | |||||
| OTHER ASSETS, net | 115 | 127 | |||||
| $ | 13,165 | $ | 11,146 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
| CURRENT LIABILITIES: |
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| Accounts payable | $ | 855 | $ | 695 | |||
| Accrued liabilities | 453 | 571 | |||||
| Current portion of long-term obligations | 446 | 663 | |||||
| Total current liabilities | 1,754 | 1,929 | |||||
| LONG TERM OBLIGATIONS, net of current portion | 651 | 796 | |||||
| Total liabilities | 2,405 | 2,725 | |||||
| SHAREHOLDERS' EQUITY: | |||||||
| Common stock, $.01 par value; 20,000,000 shares authorized; 13,640,772 and 13,443,000 shares issued and outstanding, respectively | 136 | 135 | |||||
| Common stock warrants | 100 | 100 | |||||
| Additional paid-in capital | 20,293 | 19,904 | |||||
| Accumulated deficit | (9,769 | ) | (11,718 | ) | |||
| Total shareholders' equity | 10,760 | 8,421 | |||||
| $ | 13,165 | $ | 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 SIX MONTHS ENDED MARCH 31, 2000 AND 1999
(in thousands, except per share amounts)
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Three Months Ended March 31, |
Six Months Ended March 31, |
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2000 |
1999 |
2000 |
1999 |
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| NET SALES | $ | 6,615 | $ | 5,449 | $ | 10,798 | $ | 9,511 | ||||
| COSTS AND EXPENSES: | ||||||||||||
| Cost of sales | 3,814 | 3,099 | 6,339 | 5,730 | ||||||||
| Selling, general and administrative | 1,110 | 856 | 1,977 | 1,723 | ||||||||
| Research and development | 261 | 219 | 486 | 402 | ||||||||
| Interest expense and other | 3 | 123 | 4 | 265 | ||||||||
| Total costs and expenses | 5,188 | 4,297 | 8,806 | 8,120 | ||||||||
| INCOME BEFORE INCOME TAXES | 1,427 | 1,152 | 1,992 | 1,391 | ||||||||
| PROVISION FOR INCOME TAXES | 30 | 43 | 43 | 43 | ||||||||
| INCOME BEFORE EXTRAORDINARY GAIN | 1,397 | 1,109 | 1,949 | 1,348 | ||||||||
| EXTRAORDINARY GAIN ON DEBT RESTRUCTURING | — | 472 | — | 472 | ||||||||
| NET INCOME | $ | 1,397 | $ | 1,581 | $ | 1,949 | $ | 1,820 | ||||
| BASIC AND DILUTED NET INCOME PER COMMON SHARE: | ||||||||||||
| Before extraordinary gain | $ | 0.10 | $ | 0.08 | $ | 0.14 | $ | 0.10 | ||||
| Extraordinary gain | — | $ | 0.04 | — | $ | 0.04 | ||||||
| $ | 0.10 | $ | 0.12 | $ | 0.14 | $ | 0.14 | |||||
| WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING | ||||||||||||
| Basic | 13,523 | 13,354 | 13,495 | 13,354 | ||||||||
| Diluted | 14,368 | 13,370 | 14,113 | 13,362 | ||||||||
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 SIX MONTHS ENDED MARCH 31, 2000 AND 1999
(in thousands)
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Six Months Ended March 31, |
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|---|---|---|---|---|---|---|---|
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2000 |
1999 |
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| OPERATING ACTIVITIES: | |||||||
| Net income | $ | 1,949 | $ | 1,820 | |||
| Adjustments to reconcile net income to net cash used in operating activities: | |||||||
| Extraordinary gain on debt restructuring | — | (472 | ) | ||||
| Depreciation and amortization | 269 | 237 | |||||
| Changes in operating items: | |||||||
| Accounts receivable | (2,386 | ) | (1,531 | ) | |||
| Inventories | (48 | ) | 176 | ||||
| Vendor deposits | 344 | (70 | ) | ||||
| Prepaid expenses and other current assets | 8 | (41 | ) | ||||
| Accounts payable and accrued liabilities | 42 | 259 | |||||
| Customer deposits | — | (12 | ) | ||||
| Net cash provided by operating activities | 178 | 366 | |||||
| INVESTING ACTIVITIES: |
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| Purchases of fixed assets | (155 | ) | (241 | ) | |||
| Net cash used in investing activities | (155 | ) | (241 | ) | |||
| FINANCING ACTIVITIES: | |||||||
| Repayments of long-term obligations | (362 | ) | (243 | ) | |||
| Net borrowings on bank line of credit | — | 550 | |||||
| Issuance of common stock | 390 | — | |||||
| Net cash provided by (used in) financing activities | 28 | 307 | |||||
| NET CHANGE IN CASH | 51 | 432 | |||||
| CASH, beginning of period | 1,027 | 104 | |||||
| CASH, end of period | $ | 1,078 | $ | 536 | |||
| SUPPLEMENTAL CASH FLOW INFORMATION: | |||||||
| Interest paid | $ | 52 | $ | 259 | |||
| Income taxes paid | $ | 43 | $ | 43 | |||
| 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
MARCH 31, 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):
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March 31, 2000 |
Sept. 30, 1999 |
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|---|---|---|---|---|---|---|
| Raw materials | $ | 2,814 | $ | 2,607 | ||
| Finished goods | 1,061 | 1,220 | ||||
| Total inventories | $ | 3,875 | $ | 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 six months ended March 31 (in thousands, except per share amounts).
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Three Months Ended March 31 |
Six Months Ended March 31, |
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2000 |
1999 |
2000 |
1999 |
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| Net income | $ | 1,397 | $ | 1,581 | $ | 1,949 | $ | 1,820 | ||||
| Weighted average number of common shares outstanding | 13,523 | 13,354 | 13,495 | 13,354 | ||||||||
| Dilutive effect of stock options and warrants after application of the treasury stock method | 845 | 16 | 618 | 8 | ||||||||
| 14,368 | 13,370 | 14,113 | 13,362 | |||||||||
| Basic and diluted net income per common share | $ | 0.10 | $ | 0.12 | $ | 0.14 | $ | 0.14 | ||||
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.
In May 1999, the Company made an additional $600,000 cash payment against the principal of the note.
7
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 March 31 and September 30, 1999 and in the consolidated statements of operations for the three and six month periods ended March 31, 2000 and 1999 is as follows:
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Radio Frequency Identification |
Visual Identification |
Corporate(a) |
Total |
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|---|---|---|---|---|---|---|---|---|
| 3 Months ended March 31, 2000 | ||||||||
| Net sales | 4,512 | 2,103 | 6,615 | |||||
| Income (loss) before income taxes | 1,459 | 576 | (608 | ) | 1,427 | |||
| Identifiable assets | 7,442 | 4,184 | 1,539 | 13,165 | ||||
| 3 Months ended March 31, 1999 | ||||||||
| Net sales | 3,309 | 2,140 | 5,449 | |||||
| Income (loss) before income taxes | 1,072 | 629 | (77 | ) | 1,624 | |||
| Identifiable assets | 7,920 | 4,482 | 1,063 | 13,465 | ||||
| 6 Months ended March 31, 2000 | ||||||||
| Net sales | 7,340 | 3,458 | 10,798 | |||||
| Income (loss) before income taxes | 2,216 | 866 | (1,090 | ) | 1,992 | |||
| Identifiable assets | 7,442 | 4,184 | 1,539 | 13,165 | ||||
| 6 Months ended March 31, 1999 | ||||||||
| Net sales | 5,851 | 3,660 | 9,511 | |||||
| Income (loss) before income taxes | 1,666 | 899 | (702 | ) | 1,863 | |||
| Identifiable assets | 7,920 | 4,482 | 1,063 | 13,465 |
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.
8
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 $31,471.54 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.
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.
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. (NASDAQ:ADSX) will acquire Destron Fearing Corporation in a tax-free exchange of common stock. Destron Fearing will merge with Digital Angel.net Inc., a wholly owned subsidiary of Applied Digital Solutions, Inc. and the combined companies will do business under the Digital Angel.net Inc. name.
9
The terms of the agreement require Applied Digital Solutions to acquire all of the outstanding capital stock of Destron Fearing with newly-issued shares of Applied Digital Solutions' common stock in a transaction that is expected to be tax-free to shareholders. Destron Fearing stockholders will receive 0.75 shares of Applied Digital Solutions stock for every share of Destron Fearing; provided, however, if during the time period immediately prior to closing the average price of Applied Digital Solutions' common stock is less than $8.00 per share or more than $16.00 per share, the exchange ratio would be adjusted to provide that Destron Fearing stockholders receive a minimum of $6.00 or a maximum of $12.00 per share in value of Applied Digital Solutions' common stock. If the average price is below $6.00 or more than $24.00, either Applied Digital Solutions or Destron Fearing can terminate the merger agreement. The "average price" is the average per share last daily closing price of Applied Digital Solutions' common stock as quoted on The Nasdaq National Market during the 20 consecutive trading days preceding the fifth trading day immediately preceding the closing date for the merger. All outstanding Destron Fearing options and warrants will be assumed by Applied Digital Solutions based on the exchange ratio. Based on 13,640,772 shares of Destron Fearing common stock currently outstanding, an assumed exchange ratio of .75 and without taking into account the exercise of options and warrants assumed by Applied Digital Solutions, Destron Fearing stockholders will own an estimated 17% of Applied Digital Solutions common stock upon the closing of the merger.
The agreement, which has already been approved by Boards of Directors of Applied Digital Solutions and Destron Fearing, is subject to approval by Applied Digital Solutions shareholders and Destron Fearing stockholders, as well as regulatory review, including Hart-Scott Rodino. Pending these approvals, the completion of the merger is expected at the end of the second quarter of this year. No assurance can be given that the merger agreement will result in a transaction.
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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 second quarter of fiscal year 2000 was $1,397,000 compared to $1,581,000 in the prior year's second quarter. Last year's amount included an extraordinary gain of $472,000 related to a debt restructuring. Year-to-date net income of $1,949,000 was 45% above same period last year, excluding the $472,000 extraordinary gain. The increase in net income for the quarter and year-to-date, excluding the extraordinary gain, was primarily the result of increased sales of electronic products.
Net sales for the quarter ended March 31, 2000 of $6,615,000 was 21% higher than the $5,449,000 reported for the comparable quarter of last year. In the second quarter of fiscal 2000, electronic product sales grew 36% compared to the same quarter last year primarily due to increased sales to the fishery markets. Visual identification product revenue decreased 2% from the comparable quarter of fiscal 1999. For the six month period, revenue was $10,798,000, or 14% above comparable fiscal 1999 revenue. The increase was due to increased electronic product sales, particularly in the fishery and European companion animal markets.
Cost of sales was $3,814,000 for the second quarter and $6,339,000 for the six month year-to-date period, compared to $3,098,000 and $7,730,000 for the respective prior year periods. The gross profit margin for the second quarter was 42% compared to 43% for the same quarter in fiscal 1999. The fiscal 2000 year-to-date gross margin was 41% compared to 40% for the same period last year.
Selling, general and administrative expenses for the second quarter of fiscal 2000 were $1,110,000, compared to $856,000 in the second quarter of fiscal 1999. For the six month period ended March 31, 2000, these expenses were $1,977,000, or 15% above last year's comparable period. The increase was primarily due to increased market development and investor relations expenses compared to last year. Research and development expense for the second quarter and year-to-date period was $261,000 and $486,000, respectively, compared to $219,000 and $402,000 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 and other of $3,000 in the second quarter of fiscal 2000 was $120,000 lower than the second quarter of fiscal 1999 due to lower interest expense resulting from lower debt levels.
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, 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 $178,000 during the six months ended March 31, 2000, principally relating to net income of $1,949,000 offset by an increase in accounts receivable of $2,386,000.
The Company's investing activities used $155,000 for the purchase of fixed assets during the six month period ended March 31, 2000. Financing activities provided net cash of $28,000 during the same period. The funds were provided by the exercise of stock options and were used primarily to reduce long term debt obligations.
As of March 31, 2000, the Company had net working capital of $7,757,000, compared to $5,449,000 at September 30, 1999. The Company's balance sheet as of March 31, 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 March 31, 2000, the Company had no outstanding borrowings under the facility and had a maximum availability under the borrowing formula of $3,000,000.
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 Company plans to continue making monthly payments of $50,000 until the restructured note is paid in full in November 2000. While management believes that this restructuring will improve the Company's ability to meet its ongoing cash flow requirements in the foreseeable future, there can be no assurance in this regard.
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
12
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.
13
Item 1. 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 $31,471.54 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.
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.
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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:
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 March 31, 2000 or during the period from March 31, 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: May 11, 2000 |
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By: |
/s/ JAMES P. SANTELLI James P. Santelli Vice President-Finance Chief Financial Officer |
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