-----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, BKr+ePs9Rs9FcD4aOrbZ9a0BDLQXHKCZ2ozfPEXBfhMNFRldQ/8NoPoEjragQveJ w8EQeEZOC3ORvy55ScecTw== 0000914190-98-000315.txt : 19980818 0000914190-98-000315.hdr.sgml : 19980818 ACCESSION NUMBER: 0000914190-98-000315 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980704 FILED AS OF DATE: 19980817 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: 98692522 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 2ND QUARTER 1998 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 July 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 August 14, 1998, is 2,949,735. 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
July 4, December 31, 1998 1997 ----------- ------------ (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,748,701 $ 1,305,392 Trade receivables, less allowance for doubtful accounts of $31,707 and $30,000 1,047,562 634,267 Inventories 1,159,640 1,082,737 Prepaid and other 74,836 53,360 ----------- ------------ Total current assets 4,030,739 3,075,756 ----------- ------------ OTHER ASSETS Prepaid licenses at cost less amortization 1,000,925 996,611 of $92,676 and $89,890 Patents at cost, less amortization of $112,103 and $91,911 112,871 107,691 ----------- ------------ 1,113,796 1,104,302 ----------- ------------ EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost Production tooling 1,214,249 1,215,012 Equipment 3,004,135 2,956,269 Furniture and fixtures 304,852 298,771 Leasehold improvements 286,916 281,956 ----------- ------------ 4,810,152 4,752,008 Less accumulated depreciation (3,530,877) (3,278,760) ----------- ------------ 1,279,275 1,473,248 ----------- ------------ $ 6,423,810 $ 5,653,306 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 419,427 $ 184,103 Accrued severance obligation 77,400 185,672 Accrued license fees 439,000 439,000 Accrued dividends 15,799 0 Accrued expenses 227,885 316,157 ----------- ------------ Total current liabilities 1,179,511 1,124,932 ----------- ------------ SHAREHOLDERS' EQUITY Convertible preferred stock, voting, stated value $2.50 per share; authorized 400,000 shares; issued and outstanding 150,000 shares 375,000 375,000 Convertible preferred stock series A, voting, 8% cumulative, stated value $15.80 per share; authorized 150,000 shares; issued and outstanding 100,000 shares 1,580,000 0 Common stock, par value $.05 per share; authorized 10,000,000 shares; issued and outstanding 2,943,901 and 2,887,235 147,195 144,361 Additional paid-in capital 4,535,587 4,089,283 Accumulated deficit (1,393,483) (80,270) ----------- ------------ 5,244,299 4,528,374 ----------- ------------ $ 6,423,810 $ 5,653,306 =========== ============
See Notes to Consolidated Financial Statements 2 DATAKEY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended July 4, June 28, July 4, June 28, 1998 1997 1998 1997 Revenue $ 1,742,630 $ 1,934,129 $ 3,226,185 $ 3,343,930 Cost of goods sold 1,049,410 1,195,375 1,939,500 2,130,247 ----------- ----------- ----------- ----------- Gross Profit 693,220 738,754 1,286,685 1,213,683 Operating expenses: Research, development and engineering 412,839 1,047,175 811,962 2,063,527 Marketing and sales 502,519 393,625 978,676 788,000 General and administrative 210,529 217,810 422,845 429,366 ----------- ----------- ----------- ----------- Total operating expenses 1,125,887 1,658,610 2,213,483 3,280,893 ----------- ----------- ----------- ----------- Operating loss (432,667) (919,856) (926,798) (2,067,210) Interest income 12,843 43,537 24,384 119,154 ----------- ----------- ----------- ----------- Loss before income taxes (419,824) (876,319) (902,414) (1,948,056) ----------- ----------- ----------- ----------- Income tax expense 0 0 0 0 Net loss ($ 419,824) ($ 876,319) ($ 902,414) ($1,948,056) =========== =========== =========== =========== Basic and diluted loss per share ($ 0.28) ($ 0.30) ($ 0.45) ($ 0.67) =========== =========== =========== =========== Weighted average number of common shares outstanding 2,921,085 2,887,235 2,903,885 2,886,023 =========== =========== =========== ===========
See Notes to Consolidated Financial Statements 3 DATAKEY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended Six Months Ended July 4, June 28, July 4, June 28, 1998 1997 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net loss ($ 419,824) ($ 876,319) ($ 902,414) ($1,948,056) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 128,766 122,575 252,117 237,637 Amortization 11,543 30,827 22,978 39,788 Change in assets and liabilities (Increase) decrease: Trade receivables (152,553) (453,579) (413,295) (580,757) Inventories 10,016 (166,338) (76,903) (671,062) Prepaid expenses and other (349) 6,399 (21,476) (52,419) Prepaid license fees (10,000) (103,665) (7,100) (183,665) Increase (decrease) in: Accounts payable 109,195 4,887 235,324 365,942 Accrued expenses (85,914) (7,258) (88,270) 237,140 Accrued license fees 0 (109,750) 0 (109,750) Accrued severance (41,500) (47,100) (108,272) (88,600) ----------- ----------- ----------- ----------- Net cash used in operating activities (450,620) (1,599,321) (1,107,311) (2,753,802) ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of tooling and equipment (36,986) (200,446) (58,144) (464,309) Purchase of held-to-maturity securities 0 (41,192) 0 (113,999) Proceeds from maturity of held-to-maturity securities 0 2,502,421 0 4,517,583 Patent costs (12,954) (19,457) (25,372) (19,869) ----------- ----------- ----------- ----------- Net cash provided by(used in) investing activities (49,940) 2,241,326 (83,516) 3,919,406 ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of preferred stock 1,426,222 0 1,426,222 0 Net proceeds from issuance of common stock 207,914 0 207,914 18,727 ----------- ----------- ----------- ----------- Net cash provided by financing activities 1,634,136 0 1,634,136 18,727 ----------- ----------- ----------- ----------- Increase in cash and cash equivalents 1,133,576 642,005 443,309 1,184,331 CASH AND CASH EQUIVALENTS Beginning 615,125 682,356 1,305,392 140,030 ----------- ----------- ----------- ----------- Ending 1,748,701 1,324,361 1,748,701 1,324,361 =========== =========== =========== =========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Accrued preferred stock dividends 15,799 0 15,799 0 Obligation recorded in connection with prepaid license fees 0 768,250 0 768,250 ----------- ----------- ----------- ----------- 15,799 768,250 15,799 768,250 =========== =========== =========== ===========
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 July 4, 1998, and December 31, 1997, and results of its operations and cash flows for the three-month and six-month periods ended July 4, 1998, and June 28, 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. PRIVATE PREFERRED STOCK FINANCING The Company completed, in May 1998, a $1.58 million convertible preferred stock financing which entitles the preferred shareholders, for a two-year period, to convert their investment into common shares at 80% of the average closing price (for a 10 day period prior to conversion) of the Company's common stock with a maximum conversion price of $5.00 per share and a minimum conversion price of $2.75 per share. This "beneficial conversion" feature has been interpreted by the office of the SEC chief accountant to be an assumed preferred stock dividend of fourteen cents per common share, which must be taken into account when computing basic and diluted loss per share. BASIC AND DILUTED LOSS PER SHARE Basic and diluted loss per share, in accordance with Statement of Financial Accounting Standards No. 128 are as follows:
Three Months Ended Six Months Ended July 4, 1998 June 28, 1997 July 4, 1998 June 28, 1997 ----------- ----------- ----------- ----------- Net Loss $ (419,824) $ (876,319) $ (902,414) $(1,948,056) Less: Accrued preferred stock dividend (15,799) 0 (15,799) 0 Assumed preferred stock dividend (395,000) 0 (395,000) 0 ----------- ----------- ----------- ----------- Loss available to common stockholders $ (830,623) $ (876,319) $(1,313,213) $(1,948,056) =========== =========== =========== =========== Weighted average common shares 2,921,085 2,887,235 2,903,885 2,886,023 Basic and diluted loss per share $ (0.28) $ (0.30) $ (0.45) $ (0.67) =========== =========== =========== ===========
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 - Revenue for the three-month and six-month periods ended July 4, 1998, decreased by $191,499 and $117,745, or 10 and 4 percent, respectively, compared to the comparable 1997 periods. The decrease in revenue is due to unusually strong revenue in the second quarter of 1997. The newly introduced information security products are currently in evaluation or pilot program stages with several companies. If larger quantity orders are received in the second half of 1998, as the Company currently anticipates, revenue from the new products could exceed revenue from the existing products by the 1998 fourth quarter, in which case total 1998 revenue would then exceed 1997 revenue. The Company's ability to achieve acceptable revenue growth is primarily dependent on the generation of significant sales of its information security products which cannot at this time be assured. GROSS PROFIT MARGIN - Gross profit as a percentage of revenue increased to 40 percent in the three-month and six-month periods ended July 4, 1998, compared to 38 and 36 percent respectively, in the comparable 1997 periods. 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 about the current levels for the balance of 1998. OPERATING EXPENSES - Operating expense decreased by $532,723, or 32 percent, in the three-month period and $1,067,410 or 33 percent in the six-month period ended July 4, 1998, compared to the comparable 1997 periods. 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 $108,894 or 28 percent in the three-month period and $190,676 or 24 percent in the six-month period ended July 4, 1998, compared to the comparable 1997 periods 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 30 to 40 percent higher level than was incurred in 1997. INTEREST INCOME - Interest income declined $30,694, or 71 percent, in the three-month period ended July 4, 1998 and $94,770 or 80 percent in the six-month period ended July 4, 1998, compared to the comparable 1997 periods as proceeds from interest bearing accounts were utilized to fund new product development and product promotion activities. Interest income is expected to remain lower than the comparable 1997 periods for the balance of 1998. FINANCIAL CONDITION - During the three-month and six-month periods ended July 4, 1998, the Company had a net increase of $1,133,576 and $443,309 respectively, in cash and cash equivalents as compared to an increase of $642,005 and $1,184,331 respectively, in the comparable 1997 periods. The 1997 increases were primarily due to realization of proceeds from maturing marketable debt securities during the periods. Net cash used in operating activities decreased to $450,620 and $1,107,311 respectively, in the three-month and six-month periods ended July 4, 1998, compared to $1,599,321 and $2,753,802 respectively, in the comparable 1997 periods. The reduced use of cash in the 1998 periods is directly attributable to a reduction in the operating loss to $419,824 and $902,414 in the three-month and six-month periods respectively, in 1998, from $1,599,321 and $2,753,802 in 1997. Datakey's balance sheet reflects $2,851,228 in working capital as of July 4, 1998, and a current assets to current liabilities ratio of 3.42 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 $1 million bank line of credit, proceeds from the private preferred stock financing described above, and positive cash flow from operations later in the year if the Company returns to profitability as it currently expects. If 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 recent private preferred stock financing. In such circumstances, there is no assurance that the necessary funding would be available upon acceptable terms. The Company has evaluated the impact, if any, from the changeover of various computer systems during the year 2000. Based upon its current internal analysis and results of questions posed to major software and service suppliers, the Company feels that year 2000 will have no significant financial or operational impact. CAUTIONARY STATEMENTS The Management's Discussion and Analysis contains certain forward-looking statements relating primarily to the introduction and acceptance of the Company's information security products, the anticipated generation of significant revenue from such products in 1998 and the impact of year 2000 issues on its business. 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; (iv) market acceptance of the new products, and (v) the accuracy and reliability of the Company's and its suppliers' assessment and remediation of year 2000 issues. PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On May 15, 1998, the Company issued an aggregate of 100,000 shares of Series A Convertible Cumulative Preferred Stock and five-year warrants to purchase an aggregate of 188,095 shares of Common Stock for gross proceeds of $1,580,000. The shares were sold with the assistance of Miller, Johnson & Kuehn, Incorporated (MJK) to 12 accredited investors. MJK received commissions equal to $110,600 as part of the offering, and ten-year warrants to purchase 37,890 shares of Common Stock, with an exercise price of $6.60 per share. Because the offering was not a public offering and was offered only to accredited investors, the Company relied upon Section 4 (6) and Rule 506 of Regulation D of the Securities Act of 1933, as amended, for exemptions from the registration requirements of such Act. The shares of Series A Convertible Cumulative Preferred Stock have 8 percent dividend rights and are convertible into shares of Common Stock at any time on or before May 15, 2000. The conversion price is equal to 80 percent of the market price (equal to average closing bid price for the 10-day period prior to the conversion date), with the minimum and maximum conversion price of $2.75 and $5.00, respectively. Investor warrants were also granted and are exercisable at $6.30 per share for five years. The Company has filed a Registration Statement on Form S-3 covering the resale of the shares of Company Common Stock: (i) underlying the Series A preferred shares; (ii) issuable upon exercise of the agent and investor warrants; and (iii) issuable in connection with the payment of any dividends paid in Company Common Stock on the Series A preferred shares. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS DATAKEY, INC. AND SUBSIDIARY The Company held its Annual Meeting on Tuesday, June 2, 1998. Proxies for the Annual Meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934. There was no solicitation in opposition to management's nominees as listed in the Company's proxy statement, and all nominees were elected. By a vote of 2,810,986 shares in favor, with 3,425 shares opposed and 50 shares abstaining, the shareholders set the number of directors to be elected at six (6). The following persons were elected to serve as directors of the Company, by the votes indicated, until the next annual meeting of shareholders: NUMBER OF NUMBER OF VOTES NOMINEE VOTES FOR WITHHELD --------- --------- --------------- John H. Underwood 2,800,311 14,150 Terrence W. Glarner 2,805,261 9,200 Thomas R. King 2,805,261 9,200 Gary R. Holland 2,805,261 9,200 Eugene W. Courtney 2,804,761 9,700 Carl P. Boecher 2,804,761 9,700 The shareholders approved, by a vote of 1,300,162 for, 629,458 against, 5,673 abstaining and 879,168 broker non-votes, an increase of shares, from 500,000 to 800,000 in the Company's 1997 Stock Option Plan. The shareholders also ratified the appointment of McGladrey and Pullen, LLP, as independent auditors for the Company for the fiscal year ending December 31, 1998, by a vote of 2,810,286 shares in favor, 850 shares opposing and 3,325 shares abstaining. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits (a) Exhibit 27 Financial Data Schedule (only filed with electronic copy) (b) Reports on Form 8-K: The Company filed a Form 8-K on May 20, 1998, that fully described the details of the private preferred stock financing which was completed on May 15, 1998. SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated August 14, 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 JULY 4, 1998 EXHIBIT NO. DESCRIPTION 27 Financial Data Schedule EX-27 2 ART 5 FDS FOR 2ND QUARTER 1998
5 1 U.S. Dollars 6-MOS DEC-31-1998 JAN-01-1998 JUL-04-1998 1 1,748,701 0 1,079,269 31,707 1,159,640 4,030,739 4,810,152 3,530,877 6,423,810 1,179,511 0 0 1,955,000 147,195 3,142,104 6,423,810 3,226,185 3,226,185 1,939,500 1,939,500 2,213,483 0 0 0 0 (902,414) 0 0 0 (902,414) (.45) (.45)
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