-----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, Nuz4fBgPNQR1vYHb/9QiGIp+zlX7XssQ4EwuHYWGqVsbic/KxAmKsNcT6QMuVCBx K/GUzM8tprbEK0C3W1CScA== 0000914190-98-000217.txt : 19980519 0000914190-98-000217.hdr.sgml : 19980519 ACCESSION NUMBER: 0000914190-98-000217 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980404 FILED AS OF DATE: 19980518 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: 98627148 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 10-QSB FOR 1ST QUARTER SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (X) QUARTERY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 4, 1998 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 15, 1998, is 2,909,735 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 4, December 31, 1998 1997 ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents $ 615,125 $ 1,305,392 Trade receivables, less allowance for doubtful accounts of $31,160 and $30,000 895,009 634,267 Inventories 1,169,656 1,082,737 Prepaid and other 74,487 53,360 ----------- ----------- Total current assets 2,754,277 3,075,756 ----------- ----------- OTHER ASSETS Prepaid licenses at cost less amortization 992,175 996,611 of $91,426 and $89,890 Patents at cost, less amortization of $101,810 and $91,911 110,210 107,691 ----------- ----------- 1,102,385 1,104,302 ----------- ----------- EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost Production tooling 1,205,249 1,215,012 Equipment 2,984,730 2,956,269 Furniture and fixtures 298,771 298,771 Leasehold improvements 284,416 281,956 ----------- ----------- 4,773,166 4,752,008 Less accumulated depreciation (3,402,111) (3,278,760) ----------- ----------- 1,371,055 1,473,248 ----------- ----------- $ 5,227,717 $ 5,653,306 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 310,232 $ 184,103 Accrued severance obligation 118,900 185,672 Accrued license fees 439,000 439,000 Accrued expenses 313,801 316,157 ----------- ----------- Total current liabilities 1,181,933 1,124,932 ----------- ----------- 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 2,887,235 144,361 144,361 Additional paid-in capital 4,089,283 4,089,283 Retained earnings (562,860) (80,270) ----------- ----------- 4,045,784 4,528,374 ----------- ----------- $ 5,227,717 $ 5,653,306 =========== ===========
See Notes to Consolidated Financial Statements 2 DATAKEY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended April 4, March 29, 1998 1997 ---- ---- Revenue $ 1,483,555 $ 1,409,801 Cost of goods sold 890,090 934,872 ----------- ----------- Gross Profit 593,465 474,929 Operating expenses: Research, development and engineering 399,123 1,016,352 Marketing and sales 476,157 394,375 General and administrative 212,316 211,556 ----------- ----------- Total operating expenses 1,087,596 1,622,283 ----------- ----------- Operating loss (494,131) (1,147,354) Interest income 11,541 75,617 ----------- ----------- Loss before income taxes (482,590) (1,071,737) Income tax expense 0 0 ----------- ----------- Net loss ($ 482,590) ($1,071,737) =========== =========== Basic and diluted loss per share ($ 0.17) ($ 0.37) =========== =========== Weighted average number of common shares outstanding 2,887,235 2,884,769 =========== ===========
See Notes to Consolidated Financial Statements 3 DATAKEY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended April 4, March 29, 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income(loss) ($ 482,590) ($1,071,737) Adjustments to reconcile net income(loss) to net cash used in operating activities: Depreciation 123,351 115,062 Amortization 11,435 8,961 Change in assets and liabilities (Increase) decrease: Trade receivables (260,742) (127,178) Inventories (86,919) (504,724) Prepaid expenses and other (21,127) (58,818) Prepaid license fees 2,900 (80,000) Increase (decrease) in: Accounts payable 126,129 361,055 Accrued expenses (2,356) 244,398 Accrued severance (66,772) (41,500) Income taxes payable 0 0 ----------- ----------- Net cash used in operating activities (656,691) (1,154,481) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of tooling and equipment (21,158) (263,863) Purchase of held-to-maturity securities 0 (72,807) Proceeds from maturity of held-to-maturity securities 0 2,015,162 Patent costs (12,418) (412) ----------- ----------- Net cash provided by(used in) investing activities (33,576) 1,678,080 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of common stock 0 18,727 ----------- ----------- Net cash provided by (used in) financing activities 0 18,727 ----------- ----------- Increase(decrease) in cash and cash equivalents (690,267) 542,326 CASH AND CASH EQUIVALENTS Beginning 1,305,392 140,030 ----------- ----------- Ending $ 615,125 $ 682,356 =========== =========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Obligation recorded in connection with prepaid license fees $ 0 $ 768,250 =========== ===========
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 April 4, 1998, and December 31, 1997, and results of its operations and cash flows for the three-month period ended April 4, 1998, and March 29, 1997. 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 1997 Datakey, Inc. Annual Report and in Form 10-KSB for the year ended December 31, 1997. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION DATAKEY, INC. AND SUBSIDIARY RESULTS OF OPERATIONS AND FIANANCIAL CONDITION RESULTS OF OPERATIONS REVENUE - Revenue for the three-month period ended April 4, 1998, increased by $73,754, or 5 percent, compared to the comparable 1997 period. The increase in revenue is due to renewed orders from the Company's Electronic Products customers as well as pilot program revenue from the Company's newly introduced information security systems. The newly introduced information security products are currently in evaluation or pilot program stages with several companies. If larger quantity orders are received as the Company currently anticipates, revenue from the new products could exceed revenue from the existing products and total 1998 revenue will exceed 1997 revenue. GROSS PROFIT MARGIN - Gross profit as a percentage of revenue increased to 40 percent in the three-month period ended April 4, 1998, compared to 34 percent in the comparable 1997 period. The 1998 improvement in margin percentage is due to improved factory direct labor utilization, a reduction in scrap and yield loss, and a favorable product mix. The Company expects the gross profit margin as a percentage of revenue to remain at the current levels, or improve slightly, for the balance of 1998. OPERATING EXPENSES - Operating expense decreased by $534,687, or 33 percent, in the three-month period ended April 4, 1998, compared to the comparable 1997 period. The decrease is attributable to a substantial reduction in research, development, and engineering (R&D) expense, offset in part by an increase in marketing and sales expense. R&D expense declined substantially because the initial major new product development phase was completed in late 1997, and the Company is now able to concentrate on product enhancements and upgrades during 1998. Consequently, the Company expects to invest about 45 percent less on R&D in 1998 than in 1997. Marketing and sales expense increased $81,782 or 21 percent in the three-month period ended April 4, 1998, compared to the comparable 1997 period as the Company increased its advertising and promotional activities for the newly introduced information security products. Marketing and sales expenses are expected to continue at about a 40 percent higher level than was incurred in 1997. INTEREST INCOME - Interest income declined $64,076, or 85 percent, in the three-month period ended April 4, 1998, compared to the comparable 1997 period as proceeds from interest bearing accounts were utilized to fund new product development and product promotion activities. Interest income is expected to decline further in the second quarter of 1998, and the Company may incur interest expense from borrowing on the $1 million bank line of credit or from a private placement of convertible preferred stock which is expected to be completed in May, 1998. FINANCIAL CONDITION - During the three-month period ended April 4, 1998, the Company had a net decrease of $690,267 in cash and cash equivalents as compared to an increase of $542,326 in the comparable 1997 period. The 1997 increase was primarily due to realization of $2,015,162 in proceeds from maturing marketable debt securities during the period. Net cash used in operating activities decreased to $656,691 in the three-month period ended April 4, 1998, compared to $1,154,481 in the comparable 1997 period. The reduced use of cash is directly attributable to a reduction in the operating loss to $482,590 in 1998, from $1,071,737 in 1997. Datakey's balance sheet reflects $1,572,344 in working capital as of April 4, 1998, and a current assets to current liabilities ratio of 2.33 to 1. The Company expects to continue spending on R&D, at a reduced amount compared to 1997, and on marketing and sales activities at an increased amount compared to 1997. Inventory and accounts receivable levels are expected to increase during the balance of 1998 to support the expected ramp-up in revenue from the Company's new information security products. The Company believes that it will have adequate financial resources to fund its operations and R&D and marketing activities during 1998 through utilization of its bank line of credit, proceeds from the private financing described above, and positive cash flow from operations later in the year if the Company returns to profitability as it currently expects. If the market acceptance of the Company's information security products is slow to develop or does not develop as currently anticipated, the Company may need funds in addition to its bank line and the financing expected to be completed in May 1998. In such circumstances, there is no assurance that the necessary funding would be available upon acceptable terms. CAUTIONARY STATEMENTS The Management's Discussion and Analysis contains certain forward looking statements relating primarily to the introduction of the Company's information security products and the anticipated generation of significant revenue from such products. The 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; (iii) the potential introduction of competitive products by companies with greater resources than that of the Company, and (iv) market acceptance of the new products. 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 April 4, 1998. SIGNATUES 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 May 18, 1998 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) Datakey, Inc. EXHIBIT INDEX TO FORM 10-QSB FOR QUARTER ENDED APRIL 4, 1998 EXHIBIT NO. DESCRIPTION 27 Financial Data Schedule EX-27 2 FDS FOR 1ST QUARTER FORM 10-QSB
5 1 U.S. Dollars 3-MOS DEC-31-1998 JAN-01-1998 APR-04-1998 1 615,125 0 926,169 31,160 1,169,656 2,754,277 4,773,166 3,402,111 5,227,717 1,181,933 0 0 375,000 144,361 3,526,423 5,227,717 1,483,555 1,483,555 890,090 890,090 1,087,596 0 0 0 0 (482,590) 0 0 0 (482,590) (.17) (.17)
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