-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, UHDwzowZ6+td86EXia+8gWASo3dydBW3vMNbIiYM0b6yVBWlSsha93bAHKIFbY6+ bHZSeyCZ6Rp6zbY3zuP7Tg== 0000914190-95-000005.txt : 19950530 0000914190-95-000005.hdr.sgml : 19950530 ACCESSION NUMBER: 0000914190-95-000005 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950401 FILED AS OF DATE: 19950511 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DATAKEY INC CENTRAL INDEX KEY: 0000704914 STANDARD INDUSTRIAL CLASSIFICATION: 3690 IRS NUMBER: 411291472 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-11447 FILM NUMBER: 95536679 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 10-Q 1 QUARTERLY REPORT 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 April 1, 1995 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 May 10, 1995, is 2,829,570. Transitional Small Business Disclosure Format (check one): Yes No x PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS DATAKEY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
April 1, December 31, 1995 1994 (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents $ 138,675 $ 255,039 Investment in held-to-maturity securities 6,282,923 6,110,576 Trade receivables, less allowance for doubtful accounts of $53,700 947,196 1,190,893 Inventories 1,399,448 1,348,985 Prepaid and other 70,288 26,242 Deferred tax assets 166,000 166,000 Refundable income taxes 59,702 101,680 Total current assets 9,064,232 9,199,415 INTANGIBLES Patent and license at cost, less amortization of $111,901 and $101,811 150,328 153,491 Non-compete agreement, less amortization of $61,875 and $41,250 103,125 123,750 253,453 277,241 EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost Production tools 1,057,988 1,027,206 Equipment 2,243,491 2,211,216 Furniture and fixtures 211,822 211,822 Leasehold improvements 211,612 210,562 3,724,913 3,660,806 Less accumulated depreciation (2,055,286) (1,936,935) 1,669,627 1,723,871 $ 10,987,312 $ 11,200,527 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 463,547 $ 758,876 Accrued expenses 230,795 192,726 Non-compete obligation 41,250 82,500 Warranty costs 53,666 50,000 Total current liabilities 789,258 1,084,102 DEFERRED TAX LIABILITY 101,000 101,000 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; outstanding 2,829,570 141,479 141,479 Additional paid-in capital 3,865,631 3,865,631 Retained earnings 5,714,944 5,633,315 10,097,054 10,015,425 $ 10,987,312 $ 11,200,527 See Notes to Consolidated Financial Statements
DATAKEY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended April 1, April 2, 1995 1994 Net Sales $1,908,238 $1,373,475 Cost of goods sold 1,272,318 969,342 Gross Profit 635,920 404,133 Other operating revenue 4,350 18,890 Total gross profit and other operating revenue 640,270 423,023 Operating expenses: Research, development and engineering 170,197 233,210 Selling 282,314 222,480 General and administrative 154,866 163,863 Total operating expenses 607,377 619,553 Operating income (loss) 32,893 (196,530) Nonoperating income(expense): Interest income 91,546 60,445 Other income (expense) 190 (824) 91,736 59,621 Income (loss) before income taxes 124,629 (136,909) Income tax expense (benefit) 43,000 (45,000) Net income (loss) $ 81,629 ($ 91,909) Net income (loss) per common and common equivalent share (Primary and fully diluted) $ 0.03 ($ 0.03) Weighted average number of common and common equivalent shares outstanding 2,980,422 2,829,070 See Notes to Consolidated Financial Statements DATAKEY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended April 1, April 2, 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES Net Income (loss) $ 81,629 ($ 91,909) Adjustments to reconcile net income (loss) to net cash provide by(used in) operating activities: Depreciation 118,351 87,646 Amortization 30,715 9,193 Change in assets and liabilities (Increase) decrease: Trade receivables 243,697 419,162 Inventories (50,463) (251,857) Prepaid expenses and other (44,046) (17,386) Deferred tax asset 0 0 Refundable income taxes 41,978 (45,250) Increase (decrease) in: Accounts payable (295,329) (226,163) Accrued expenses 38,069 (131,041) Accrued warranty costs 3,666 (3,528) Income taxes payable 0 0 Deferred tax liability 0 0 Net cash provided by (used in) operating activities 168,267 (251,133) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of tooling and equipment (64,107) (142,816) Purchase of held-to-maturity securities (1,192,347) 0 Proceeds from maturity of held-to-maturity securities 1,020,000 1,893,216 Patent and license costs (6,927) (33,213) Net cash provided by (used in) investing activities (243,381) 1,717,187 CASH FLOWS FROM FINANCING ACTIVITIES Payments on non-compete (41,250) 0 obligation Net proceeds from sale of common stock 0 0 Net cash provided (used in) financial activities (41,250) 0 Increase (decrease) in cash and cash equivalents (116,364) 1,466,054 CASH AND CASH EQUIVALENTS Beginning 255,039 2,827,800 Ending $ 138,675 $ 4,293,854 See Notes to Consolidated Financial Statements 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 April 1, 1995 and December 31, 1994 and results of its operations and cash flows for the three-month period ended April 1, 1995 and April 2, 1994. 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 1994 Datakey, Inc. Annual Report and in Form 10-KSB for the year ended December 31, 1994. INVESTMENT IN HELD-TO-MATURITY SECURITIES The Company held marketable debt securities with an amortized cost of $6,282,923 as of April 1, 1995. 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 $6,281,819. The unrealized loss, therefore, is $1,104. 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. NON-COMPETE AGREEMENT The Company entered into a two year non-compete agreement with its former president which provides for monthly payments of $13,750 over a twelve month period. The amortization of this agreement is on a straight line basis over 24 months beginning July, 1994 whereas the payment obligation is reflected as a current liability. 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 April 1, 1995, increased by $534,763, or 39%, from the comparable period in 1994. The increase in sales is due to a substantial increase in commercial sales offset by a decline in government sales. Sales to the government sector were $122,516, a decline of $437,193, or 78%, in the three-month period, while commercial sales increased 119%, or $971,956, to $1,785,722. Commercial sales were 93% of total revenue in the three-month period ended April 1, 1995, compared to 58% in the 1994 period. The Company anticipates that government sales will remain stable for the balance of 1995 and that commercial sales in 1995 will continue to exceed the commercial sales in the comparable 1994 quarter. While the Company anticipates improved sales in 1995, there is no assurance that revenues in the remaining three quarters of 1995 will reflect significant improvement over the first quarter of 1995. Because of the uncertainty of its OEM business, quarterly revenues may fluctuate. GROSS PROFIT MARGINS - Gross profit as a percentage of net sales increased to 33% in the three-month period ended April 1, 1995, from 29% in the comparable 1994 period. The increased gross profit margin, in dollars as well as percentage of net sales, is primarily due to absorption of fixed and semi-fixed manufacturing costs over a higher level of sales. Gross profits for the balance of 1995 are expected to exceed the levels attained in 1994 but will likely remain below 35% as a percentage of net sales. OPERATING EXPENSES - Operating expenses declined $12,176, or 2%, in the three-month period ended April 1, 1995, as compared to the same period in 1994. The reduced expenses are the result of a general expense reduction enacted during 1994 and vacant positions which have not yet been filled. The Company expects 1995 operating expenses to trend upward throughout the year and exceed the quarterly expenses for the comparable 1994 periods, but as a result of a higher level of anticipated sales, the expenses as a percentage of sales should be lower than the percentage in 1994. NONOPERATING INCOME - Nonoperating income during the three-month period ended April 1, 1995, increased $32,115, or 54%, from the comparable period in 1994. The higher level of non-operating income is primarily the result of an increase in the interest rate on earnings from the interest-bearing cash, cash equivalents and held-to-maturity securities. FINANCIAL CONDITION - During the three-month period ended April 1, 1995, the Company had a net decrease in cash and cash equivalents of $116,364, compared to a net increase of $1,466,054 in the comparable 1994 period. The shift from a cash and cash equivalents net increase in 1994 to a net decrease in the comparable 1995 period is the result of a decision by management to invest the Company's cash in higher interest rate marketable debt securities with initial maturities beyond 90 days. The decline in cash and equivalents during the three-month period ended April 1, 1995 was offset by a $172,347 increased investment in marketable debt securities. Cash, cash equivalents and investment in held-to-maturity securities were $6,421,598 at April 1, 1995. The Company anticipates that its current working capital position of $8,274,974 and internally generated cash flow will be sufficient to fund its planned operations for the foreseeable future. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K DATAKEY, INC. AND SUBSIDIARY (A) Exhibits Exhibit 10 Employment Agreement dated January 1, 1995 with John H. Underwood* Exhibit 11 Computation of Per Share Earnings 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 April 1, 1995. * Indicates management contract SIGNATURES Pursuant to the requirements of Section 13 and 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated May 10, 1995 DATAKEY, INC. BY: /s/ John H. Underwood John H. Underwood Chairman & Chief Executive Officer (Principal Executive Officer) BY: /s/ Alan G. Shuler Alan G. Shuler Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) DATAKEY, INC. EXHIBIT INDEX TO FORM 10-QSB FOR QUARTER ENDED APRIL 1, 1995 EXHIBIT NO. DESCRIPTION 10 Employment agreement dated January 1, 1995, with John H. Underwood 11 Computation of Per Share Earnings 27 Financial Data Schedule EX-10 2 EXHIBIT 10 EXHIBIT 10 EMPLOYMENT AGREEMENT This Employment Agreement made and entered into effective as of the first day of January 1995, by and between Datakey, Inc., a Minnesota corporation (the "Company" or "Datakey") and John H. Underwood ("Executive"). RECITALS John H. Underwood has been an executive of the Company since 1983. He currently serves as Chairman of the Board of Directors, President and Chief Executive Officer. The Board of Directors and the Executive are desirous that the Executive continue to serve the Company in these capacities under the following terms and conditions. AGREEMENT 1. Employment a. Datakey agrees to continue to employ Executive on a full-time basis as President and CEO of Datakey. b. Executive agrees that he will, at all times, faithfully, industriously, and, to the best of his abilities, experience and talents, continue to perform all the duties and responsibilities that may be required of him as an officer of Datakey. 2. Term of Employment a. Subject to the terms and conditions hereof, Executive shall be employed for a term ("Employment Term") commencing on January 1, 1995, and terminating on December 31, 1995, unless extended as set forth in Subsection 2b below. b. This Agreement will be renewed automatically after December 31, 1995, for additional one-year periods unless either party gives the other party written notice 30 days before December 31, 1995 or before the end of one-year period thereafter of his or its intention to terminate the Agreement. 3. Base Compensation As compensation for his services to Datakey, Executive shall be paid a monthly salary of $12,500, payable in accordance with Datakey's periodic payment periods. 4. Other Benefits a. Vacation. Executive will receive four weeks of vacation for every twelve months of employment. b. Automobile Allowance. During the term of this Agreement, Datakey will pay Executive $500 per month to be applied toward his automobile expenses. c. Miscellaneous. During the term of this Agreement, Executive will be eligible to receive the other benefits described in the attached Exhibit A, subject to such changes as Datakey may adopt from time to time for salaried employees generally. 5. Termination a. Notwithstanding Section 2 above, the Employment Term or any extension thereof shall terminate upon the happening of any of the following events: (i) Mutual written agreement between the Board of Directors of Datakey and Executive to terminate his employment. (ii) Executive's death. (iii) Executive's disability defined as physically or mentally unable to perform as Chief Executive Officer for a period of six consecutive months, or (iv) For cause (as defined below) upon written notice from the Board of Directors specifying the nature of the cause. b. For purposes of this Agreement, "cause" shall include commission of any felony, misdemeanor, any act of fraud or dishonesty in connection with the affairs of Datakey. 6. Payment Upon Termination of Employment for Cause If Executive is terminated for cause, Executive shall not be eligible to receive any severance benefits. The date of termination under this Section 6 shall be on the day the notice of termination for cause is given and Executive shall be entitled to no additional compensation past the date of such notice. 7. Payment Upon Termination of Employment Without Cause a. If Executive is terminated without cause, Executive shall receive a severance payment equal to his base compensation payable for twenty-four months in accordance with Datakey's payment periods beginning on the 10th of the first month following the last month of his employment term. Such severance payments will begin during the first month following the last day of his employment. b. Base compensation shall be deemed to be no less than $12,500 per month. c. The payments provided for under this Section 7 shall, in the event of Executive's death, continue and shall be payable to his wife if she survives or, if not, to his estate. d. The Company will also expend up to $6,000 to be applied only to outplacement counseling of Executive's choice. e. The Company will continue to provide medical and health coverage, under its plans as they currently exist or may hereafter be amended, at Company subsidized rates during the 24-month severance pay period. Thereafter, Executive and his covered dependents will be entitled to elect to continue coverage under COBRA to the extent it is available. Coverage by the Company or under COBRA will end on the earlier of Executive's obtaining new employment, which gives him the ability to provide medical and health insurance coverage for himself and his family through his new employer, or the failure to pay any premium when due. 8. Payment Upon Termination of Agreement by Either Party on December 31, 1995 or at the End of Any One-Year Extension. a. If either party decides to terminate the Employment Agreement on December 31, 1995 or as of the end of any one-year extension, Executive shall receive his base compensation for twenty-four months beginning on the 10th of the first month following the last month of the Employment Term in accordance with Datakey's payment periods. b. The payments provided for under this Section 8 shall, in the event of Executive's death, continue and shall be payable to his wife if she survives or, if not, to his estate. c. The Company will also expend up to $6,000 to be applied only to outplacement counseling of Executive's choice. d. The Company will continue to provide medical and health coverage, under its plans as they currently exist or may hereafter be amended, at Company subsidized rates during the 24-month severance pay period. Thereafter, Executive and his covered dependents will be entitled to elect to continue coverage under COBRA to the extent it is available. Coverage by the Company or under COBRA will end on the earlier of Executive's obtaining new employment, which gives him the ability to provide medical and health insurance coverage for himself and his family through his new employer, or the failure to pay any premium when due. 9. Nondisclosure Except by written permission from Datakey, Executive shall never disclose or use any trade secrets, sales projections, formulations, customer lists or information, product specifications or information, credit information, production know-how, research and development plans or other information not generally known to the public ("Confidential Information") acquired or learned by Executive during the course, and on account, of his employment, whether or not developed by Executive, except as such disclosure or use may be required by his duties to Datakey, and then only in strict accordance with his obligations of service and loyalty thereto. Upon termination of employment, Executive agrees to deliver to Datakey all Confidential Information. 10. Specific Performance Executive acknowledges that a breach of this Employment Agreement would cause Datakey irreparable injury and damage which could not be remedied or adequately compensated by damages at law; therefore, Executive expressly agrees that Datakey shall be entitled, in addition to any other remedies legally available, to injunctive and/or other equitable relief to prevent a breach of this Employment Agreement. 11. Noncompetition a. For a period of two (2) years from and after the end of the Employment Term or any extension thereof or after termination of employment, Executive will not, directly or indirectly, alone or in any capacity with another legal entity, (i) engage in any activity that competes in any respect with Datakey, (ii) contact or in any way interfere or attempt to interfere with the relationship of Datakey with any current or potential customers of Datakey, or (iii) employ or attempt to employ any employee of Datakey (other than a former employee thereof after such employee has terminated employment with the Datakey), and b. Executive acknowledges that Datakey markets products throughout the United States and that Datakey would be harmed if Executive conducted any of the activities described in this Section 11 anywhere in the United States. Therefore, Executive agrees that the covenants contained in this Section 11 shall apply to all portions of and throughout, the United States. c. Executive acknowledges that if he fails to fulfill his obligations under this Section 11, the damages to Datakey would be very difficult to determine. Therefore, in addition to any other rights or remedies available to Datakey at law, in equity, or by statute, Executive hereby consents to the specific enforcement of the provisions of this Section 11 by Datakey through an injunction or restraining order issued by the appropriate court. d. To the extent any provision of this Section 11 shall be invalid or unenforceable, it shall be considered deleted herefrom and the remainder of such provision and this Section 11 shall be unaffected and shall continue in full force and effect. In furtherance to and not in limitation of the foregoing, should the duration or geographical extent of, or business activities covered by, any provision of this Section 11 be in excess of that which is valid and enforceable under applicable law, then such provision shall be construed to cover only that duration, extent or activities which are validly and enforceably covered. Executive acknowledges the uncertainty of the law in this respect and expressly stipulates that this Section 11 be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its expressed terms) possible under applicable laws. 12. Miscellaneous a. Waiver by Datakey of a breach of any provision of this Agreement by Executive shall not operate or be construed as a waiver of any subsequent breach by Executive. b. This Agreement shall be binding upon and inure to the benefit of Datakey, its successors and assigns, and as to Executive, his heirs, personal representatives, estate, legatees, and assigns. c. This Agreement constitutes the entire agreement between the parties hereto with resect to the subject matter hereof and supersedes all prior agreements whether written or oral relating hereto. d. This Agreement shall be governed by and construed under the laws of the State of Minnesota. IN WITNESS WHEREOF, the parties have hereto executed this Employment Agreement effective as of the day and year first above written. DATAKEY, INC. By Independent Committee of Board of Directors /s/ Thomas R. King Thomas R. King /s/ Terrance W. Glarner Terrance W. Glarner /s/ John H. Underwood John H. Underwood, Executive EX-11 3 EXHIBIT 11 EXHIBIT 11 DATAKEY, INC. AND SUBSIDIARY COMPUTATION RE: EARNINGS PER SHARE (UNAUDITED Three Months Ended April 1, April 2, 1995 1994 Earnings Net Income(loss) $81,629 ($91,909) Primary Earnings(Loss) Per Share Shares: Weighted average number of common shares outstanding 2,829,570 2,829,070 Assuming conversion of preferred stock 150,000 0 Assuming exercise of options and warrants reduced by the number of shares which could have been purchased with the proceeds from exercise of such options and warrants (treasury stock method) using average market price 852 0 Weighted average number of common and common equivalent shares outstanding 2,980,422 2,829,070 Primary Earnings (Loss) Per share $0.03 ($0.03) Fully Diluted Earnings(Loss) Per Share Shares: Weighted average number of common shares outstanding 2,829,570 2,829,070 Assuming conversion of preferred stock 150,000 0 Assuming exercise of options and warrants reduced by the number of shares which could have been purchased with the proceeds from exercise of such options and warrants (treasury stock method) using ending market price 1,379 0 Weighted average number of common and common equivalent shares outstanding 2,980,949 2,829,070 Fully Diluted Earnings(Loss) Per Share $0.03 ($0.03) EX-27 4 FDS --
5 1 U.S. Dollars 3-mos DEC-31-1995 Apr-01-1995 1 138,675 6,282,923 1,000,896 53,700 1,399,448 9,064,232 3,724,913 2,055,286 10,987,312 789,258 0 141,479 0 375,000 9,580,575 10,987,312 1,908,238 1,912,588 1,272,318 1,272,318 607,377 0 0 124,629 43,000 81,629 0 0 0 81,629 .03 .03
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