-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H8kS2iPlpbH1U0ZdzhyDiVYzpIvXJeVb4iKYndb8uh6tkSLwGhiRBx8e+vbRU03U KcgvY9md0tIa+8sTiPrEdA== 0000704914-97-000005.txt : 19971114 0000704914-97-000005.hdr.sgml : 19971114 ACCESSION NUMBER: 0000704914-97-000005 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970927 FILED AS OF DATE: 19971112 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DATAKEY INC CENTRAL INDEX KEY: 0000704914 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 411291472 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-11447 FILM NUMBER: 97712825 BUSINESS ADDRESS: STREET 1: 407 W TRAVELERS TRAIL CITY: BURNSVILLE STATE: MN ZIP: 55337 BUSINESS PHONE: 6128906850 MAIL ADDRESS: STREET 1: 407 WEST TRAVELERS TRAIL CITY: BURNSVILLE STATE: MN ZIP: 55337 10QSB 1 FORM 10QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 27, 1997 Commission File Number 0-11447 DATAKEY, INC. (Exact name of small business issuer as specified in its charter) MINNESOTA 41-1291472 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 407 WEST TRAVELERS TRAIL, BURNSVILLE, MN 55337 Issuer's telephone number: (612) 890-6850 ----------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 / / APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares outstanding of the issuer's common equity, as of November 11, 1997, is 2,887,235. Transitional Small Business Disclosure Format (check one): Yes / / No /x/ 1 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS DATAKEY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
September 27, December 31, 1997 1996 --------------- ------------- (UNAUDITED) ASSETS ------ CURRENT ASSETS Cash and cash equivalents $1,470,050 $ 140,030 Investment in held-to-maturity securities 376,281 5,993,228 Trade receivables, less allowance for doubtful accounts of $41,141 and $45,000 1,153,125 634,538 Inventories 1,622,588 1,128,907 Prepaid and other 59,947 46,962 --------------- ------------- Total current assets 4,681,991 7,943,665 --------------- ------------- OTHER ASSETS Deferred taxes 325,000 325,000 Prepaid licenses at cost, less amortization of $54,361 in 1997 1,027,139 129,750 Patents at cost, less amortization of $133,348 and $105,531 112,340 99,236 --------------- ------------- 1,464,479 553,986 --------------- ------------- EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost Production tooling 1,206,310 1,179,021 Equipment 2,929,407 2,561,659 Furniture and fixtures 298,771 267,482 Leasehold improvements 281,956 234,452 --------------- ------------- 4,716,444 4,242,614 Less accumulated depreciation (3,135,177) (2,840,909) --------------- ------------- 1,581,267 1,401,705 --------------- ------------- $7,727,737 $9,899,356 =============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Accounts payable $471,998 $559,280 Accrued severance obligation 201,900 332,000 Accrued license fees-current portion 439,000 0 Accrued expenses 474,977 315,549 --------------- ------------- Total current liabilities 1,587,875 1,206,829 --------------- ------------- Accrued license fees, less current portion 109,750 0 SHAREHOLDERS' EQUITY Convertible preferred stock, voting, stated value $2.50 per share; authorized 400,000 shares; issued and outstanding 150,000 375,000 375,000 Common stock, par value $.05 per share; authorized 10,000,000 shares; issued and outstanding 2,887,235 and 2,882,069 144,362 144,103 Additional paid-in capital 4,089,283 4,070,815 Retained earnings 1,421,467 4,102,609 --------------- ------------- 6,030,112 8,692,527 --------------- ------------- $7,727,737 $9,899,356 =============== =============
See Notes to Consolidated Financial Statements 2 DATAKEY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 1997 1996 1997 1996 ------------ ------------ ------------ ------------ Revenue $1,603,846 $1,765,812 $4,947,776 $5,413,652 Cost of goods sold 1,096,332 1,166,843 3,226,579 3,408,019 ------------ ------------ ------------ ------------ Gross Profit 507,514 598,969 1,721,197 2,005,633 Operating expenses: Research, development and engineering 653,137 613,980 2,716,664 1,413,988 Marketing and sales 431,124 324,571 1,219,124 947,137 General and administrative 184,713 214,990 614,079 657,918 ------------ ------------ ------------ ------------ Total operating expenses 1,268,974 1,153,541 4,549,867 3,019,043 ------------ ------------ ------------ ------------ Operating loss (761,460) (554,572) (2,828,670) (1,013,410) Interest income 28,374 89,546 147,528 274,958 ------------ ------------ ------------ ------------ Loss before income taxes (733,086) (465,026) (2,681,142) (738,452) Income tax benefit 0 (167,000) 0 (264,600) ------------ ------------ ------------ ------------ Net loss ($733,086) ($298,026) ($2,681,142) ($473,852) ============ ============ ============ ============ Net loss per common share ($0.25) ($0.10) ($0.93) ($0.17) ============ ============ ============ ============ Weighted average number of common shares outstanding 2,887,235 2,880,403 2,886,431 2,854,707 ============ ============ ============ ============
See Notes to Consolidated Financial Statements 3 DATAKEY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 1997 1996 1997 1996 ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss ($733,086) ($298,026) ($2,681,142) ($473,852) Adjustments to reconcile net loss to net cash (used in) operating activities: Depreciation 131,642 115,973 369,279 341,503 Amortization 42,390 15,320 82,178 85,113 Change in assets and liabilities (Increase) decrease: Trade receivables 62,170 107,706 (518,587) (89,184) Inventories 177,381 225,995 (493,681) 290,854 Prepaid expenses and other 39,434 30,477 (12,985) (1,220) Prepaid license fees 165 0 (183,500) 0 Refundable income taxes 0 0 0 46,642 Increase (decrease) in: Accounts payable (453,224) (116,950) (87,282) (89,730) Accrued expenses (77,712) 74,186 159,428 147,732 Accrued license fees (109,750) 0 (219,500) 0 Accrued severance (41,500) 0 (130,100) 0 Deferred taxes 0 (167,500) 0 (264,600) Income taxes payable 0 0 0 0 ------------ ------------ ------------ ------------ Net cash (used in) operating activities (962,090) (12,819) (3,715,892) (6,742) ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of tooling and equipment (84,532) (32,030) (548,841) (291,810) Purchase of held-to-maturity securities (13,637) (2,751,368) (127,636) (5,343,464) Proceeds from maturity of held-to-maturity securities 1,227,000 2,060,000 5,744,583 5,329,000 Patent costs (21,052) (904) (40,921) (31,327) ------------ ------------ ------------ ------------ Net cash provided by (used in) investing activities 1,107,779 (724,302) 5,027,185 (337,601) ------------ ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of common stock 0 14,500 18,727 181,230 ------------ ------------ ------------ ------------ Net cash provided by financing activities 0 14,500 18,727 181,230 ------------ ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents 145,689 (722,621) 1,330,020 (163,113) CASH AND CASH EQUIVALENTS Beginning 1,324,361 1,272,738 140,030 713,230 ------------ ------------ ------------ ------------ Ending $1,470,050 $550,117 $1,470,050 $550,117 ============ ============ ============ ============ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Obligation recorded in connection with prepaid license fees $0 $0 $768,250 $0 ============ ============ ============ ============
See Notes to Consolidated Financial Statements 4 DATAKEY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GENERAL In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly Datakey's financial position as of September 27, 1997 and December 31, 1996 and results of its operations and cash flows for the three-month and nine-month periods ended September 27, 1997 and September 28, 1996. The adjustments that have been made are of a normal recurring nature. The accounting policies followed by the Company are set forth in Note 1 to the Company's financial statements in the 1996 Datakey, Inc. Annual Report and in Form 10-KSB for the year ended December 31, 1996. INVESTMENT IN HELD-TO-MATURITY SECURITIES The Company held marketable debt securities with an amortized cost of $376,281 as of September 27, 1997. As it is the intention of the Company to hold these securities to maturity, they are accounted for as "Held-to-Maturity Securities" as defined in FASB Statement No. 115. The market value of these U.S. Treasury Bill securities is $376,337. The unrealized gain, therefore, is $56. All of the Securities have a maturity date of less than twelve months. The Company has no marketable debt securities which are classified as Available-For-Sale Securities or Trading Securities. RECENT ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, which is effective for interim and annual reporting periods ending after December 15, 1997. The implementation of SFAS No. 128 is expected to change earnings per share by an immaterial amount. SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, Earnings Per Share, and replaces the presentation of primary earnings per share with a presentation of basic earnings per share. It also requires dual presentation for all entities with complex capital structures and provides guidance on other computational changes. 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION DATAKEY, INC. AND SUBSIDIARY RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS REVENUE - Net sales for the three-month period ended September 27, 1997 decreased by $161,966, or 9%, compared to the comparable 1996 period, while net sales for the nine-month period declined by $465,876, or 9%, due to a reduction in shipments to OEM product customers in the first and third quarters of 1997. Revenue in the OEM products business continues to be volatile from quarter to quarter and is likely to be soft again in the fourth quarter. The Company is continuing its development of advanced system-level products for the information security market. The initial versions of end-user products for the information security marketplace are currently available for sale and, based upon current expectations, are expected to result in limited revenue during the fourth quarter of 1997. As with any new product line, revenue will depend on customer acceptance, the extent of which is difficult to assess at this time. Based upon the Company's current expectations, the revenue for 1997 will not exceed the 1996 level. GROSS PROFIT MARGINS - Gross profit as a percentage of revenue decreased to 32% in the three-month period ended September 27, 1997 from 34% in the comparable period and declined to 35% in the nine-month period compared to 37% in the 1996 period. The decline in margin percentage in the three-month period and in the nine-month period is due to the lower level of sales as well as product costs related to introduction of the new products. OPERATING EXPENSES - Operating expenses increased by $115,433 and $1,530,824, or 10% and 51%, in the three-month and nine-month periods ended September 27, 1997, as compared to the same periods in 1996. The increased expenses are primarily attributable to a substantial increase in research and development and marketing expenses necessary to accelerate the market introduction of electronic token-based systems targeted at the corporate information security marketplace. Research and development expenses are expected to decline during the fourth quarter as compared to the first three quarters and will be below the amounts from the fourth quarter of 1996. Marketing and sales expenses are expected to increase by 15 to 20 percent in the fourth quarter of 1997, compared to the first three quarters, to support new product introductions. General and administrative expenses in 1997 are expected to decrease slightly from the 1996 level and will remain at approximately the quarterly rate reflected in the second and third quarters. 6 INTEREST INCOME - Interest income during the three-month and nine-month periods ended September 27, 1997, decreased $61,172 and $127,430, or 68% and 46% respectively, from the comparable periods in 1996. The lower level of interest income is a direct result of a reduced level of investment in held-to-maturity securities and interest bearing cash and cash equivalents. Interest income is expected to remain lower in the fourth quarter of 1997 as the Company intends to continue using the proceeds from maturing investments to fund continuing product development and marketing activities to support the Company's advanced information security products. INCOME TAXES - As of December 31, 1996, the Company recorded an income tax asset of $325,000 related to its net operating loss carryforwards. Management believes it is more likely than not that the Company will realize income in the future from its existing OEM products business, as well as income from its new advanced information security products business that will allow the Company to utilize a portion of the net operating loss carryforward to reduce future taxable income. However, the net deferred tax asset could be increased or reduced in the future if management's estimates of taxable income during the carryforward period change. The Company has not recorded a tax benefit in the current quarter, related to current operating losses, and does not plan to record a tax benefit in future quarters until such time as the profitability outlook in future periods justifies the resumption of income tax benefits. FINANCIAL CONDITION - During the nine-month period ended September 27, 1997, the Company had a net increase in cash and cash equivalents of $1,330,020, compared to a decrease of $163,113 in the comparable 1996 period. Investment in held-to-maturity securities decreased $5,616,947 in the 1997 period compared to an increase of $14,464 in the 1996 period. Cash, cash equivalents and investment in held-to-maturity securities were $1,846,331 at September 27, 1997, compared to $6,133,258 at December 31, 1996. The decrease of $4,286,927 is primarily the result of funding operating losses and other operating activities equal to $3,715,892 and in purchases of tooling and equipment equal to $548,841 for the nine months ended September 27, 1997. Datakey's balance sheet continues to reflect a strong financial position, with $3,094,116 in working capital and a current assets to current liabilities ratio of 2.9 to 1 as of September 27, 1997. The Company plans to continue new product development and marketing activities during the remainder of 1997 and expects to spend about $925,000 on these activities in the fourth quarter. Trade receivables increased by $519,000 in the nine-month period ended September 27, 1997, due to a substantial increase in revenue in September, 1997. Inventory levels increased $494,000 in the nine-month period primarily as a result of acquiring components to support sales of newly developed products which have not yet sold in material quantities. 7 The inventory levels are expected to level out or decline slightly in the fourth quarter of 1997 as the new products are sold. Payments on the accrued license fees will be approximately $110,000 in the fourth quarter of 1997. The Company intends to continue to fund such spending by a reduction in the Company's marketable debt securities. The Company will be able to fund its planned operations and continued development and promotional activities related to its new products in 1997. While it is too early to predict with certainty, the Company may need additional capital to fund its operations in 1998 even if the Company's end-user products receive the market acceptance currently projected. The Company is beginning to explore certain funding sources and is hopeful of consummating a private financing in the first quarter of 1998. If the market acceptance of the Company's end-user products is significantly less than the Company currently projects, or such market acceptance is slow to develop, the Company may need funds in addition to those which it hopes to raise in such private financing. In such circumstances, there is no assurance that the necessary funding would be available upon acceptable terms. CAUTIONARY STATEMENTS This Management's Discussion and Analysis contains certain forward looking statements relating primarily to the introduction of the Company's information security end-user products and the anticipated generation of revenue from such products. These statements are subject to certain risks and uncertainties which could cause results to differ from those projected. These risks and uncertainties, in addition to those discussed above, include: (i) the ability of the Company to successfully develop all of the new products under development and to control costs as necessary; (ii) the capability of the new products to function as currently anticipated; and (iii) market acceptance of the new products. 8 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits Exhibit 27 Financial Data Schedule (only filed with electronic copy) (b) The Company was not required to and did not file a Form 8-K during the quarter ended September 27, 1997. 9 SIGNATURES In accordance with the requirements of the Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated November 11, 1997 DATAKEY, INC. BY: /s/ Carl P. Boecher Carl P. Boecher President & Chief Executive Officer (Principal Executive Officer) BY: /s/ Alan G. Shuler Alan G. Shuler Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) 10 DATAKEY, INC. EXHIBIT INDEX TO FORM 10-QSB FOR QUARTER ENDED SEPTEMBER 27, 1997 EXHIBIT NO. DESCRIPTION 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1997 JAN-01-1997 SEP-27-1997 1,470,050 376,281 1,194,266 41,141 1,622,588 4,681,991 4,716,444 3,135,177 7,727,737 1,587,875 0 0 375,000 144,362 5,510,750 7,727,737 4,947,776 4,947,776 3,226,579 3,226,579 4,549,867 0 0 (2,681,142) 0 (2,681,142) 0 0 0 (2,681,142) (.93) (.93)
-----END PRIVACY-ENHANCED MESSAGE-----