-----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, CFOonLspLBDHyCwUW64lUYILuE5PUlxEEz2nVuaes3hxF6AZ+kcAhOjcmaKfpOjm SyKjZKdFwAP/4jZ3mrmYyA== 0000914190-99-000304.txt : 19990818 0000914190-99-000304.hdr.sgml : 19990818 ACCESSION NUMBER: 0000914190-99-000304 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19990817 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: 99694370 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 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 3, 1999 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 17, 1999, are 3,651,772. 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 3, December 31, 1999 1998 ---------- ---------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents $624,375 $853,827 Trade receivables, less allowance for doubtful accounts of $30,000 672,542 859,636 Inventories 1,447,145 1,007,948 Prepaid and other 43,962 56,237 ---------- ---------- Total current assets 2,788,024 2,777,648 ---------- ---------- OTHER ASSETS Prepaid licenses at cost less amortization 544,701 554,425 of $110,430 and $95,705 Patents at cost, less amortization of $153,586 and $133,818 108,265 120,056 ---------- ---------- 652,966 674,481 ---------- ---------- EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost Production tooling 1,257,389 1,251,857 Equipment 2,975,841 3,012,184 Furniture and fixtures 304,853 304,853 Leasehold improvements 263,021 286,916 ---------- ---------- 4,801,104 4,855,810 Less accumulated depreciation (3,831,305) (3,771,659) ---------- ---------- 969,799 1,084,151 ---------- ---------- $4,410,789 $4,536,280 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $664,711 $435,873 Accrued severance obligation 0 10,687 Accrued expenses 260,299 218,186 Accrued dividends 106,619 67,023 ---------- ---------- Total current liabilities 1,031,629 731,769 ---------- ---------- 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 74,367 in 1999 and 100,000 shares in 1998 1,174,999 1,326,519 Common stock, par value $.05 per share; authorized 10,000,000 shares; issued and outstanding 3,651,772 in 1999 and 3,045,704 in 1998 182,589 152,285 Additional paid-in capital 6,170,894 4,793,665 Accumulated deficit (4,524,322) (2,842,958) ---------- ---------- 3,379,160 3,804,511 ---------- ---------- $4,410,789 $4,536,280 ========== ==========
See Notes to Consolidated Financial Statements 2 DATAKEY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended July 3, July 4, July 3, July 4, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Revenue $ 1,154,008 $ 1,742,630 $ 2,513,990 $ 3,226,185 Cost of goods sold 708,203 1,049,410 1,502,192 1,939,500 ----------- ----------- ----------- ----------- Gross Profit 445,805 693,220 1,011,798 1,286,685 Operating expenses: Research, development and engineering 563,775 412,839 1,040,957 811,962 Marketing and sales 546,543 502,519 1,135,952 978,676 General and administrative 238,329 210,529 468,810 422,845 ----------- ----------- ----------- ----------- Total operating expenses 1,348,647 1,125,887 2,645,719 2,213,483 ----------- ----------- ----------- ----------- Operating loss (902,842) (432,667) (1,633,921) (926,798) Interest income (expense) (4,277) 12,843 342 24,384 ----------- ----------- ----------- ----------- Loss before income taxes (907,119) (419,824) (1,633,579) (902,414) Income tax expense 0 0 0 0 ----------- ----------- ----------- ----------- Net loss ($ 907,119) ($ 419,824) ($1,633,579) ($ 902,414) =========== =========== =========== =========== Net loss attributable to common stockholders: Net loss (907,119) (419,824) (1,633,579) (902,414) Preferred stock dividends (23,436) (410,799) (47,786) (410,799) ----------- ----------- ----------- ----------- Net loss attributable to common stockholders ($ 930,555) ($ 830,623) ($1,681,365) ($1,313,213) =========== =========== =========== =========== Basic and diluted loss per share ($ 0.29) ($ 0.28) ($ 0.53) ($ 0.45) =========== =========== =========== =========== Weighted average number of common shares outstanding 3,188,299 2,921,085 3,138,137 2,903,885 =========== =========== =========== ===========
See Notes to Consolidated Financial Statements 3 DATAKEY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended Six Months Ended July 3, July 4, July 3, July 4, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss ($ 907,119) ($ 419,824) ($1,633,579) ($ 902,414) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 114,169 128,766 221,382 252,117 Amortization 13,350 11,543 34,493 22,978 Change in assets and liabilities (Increase) decrease: Trade receivables (7,092) (152,553) 187,094 (413,295) Inventories (333,168) 10,016 (439,197) (76,903) Prepaid expenses and other 58,783 (349) 12,275 (21,476) Prepaid license fees (5,000) (10,000) (5,000) (7,100) Increase (decrease) in: Accounts payable 243,200 109,195 228,838 235,324 Accrued expenses (62,430) (85,914) 42,113 (88,270) Accrued severance (32,550) (41,500) (10,687) (108,272) ---------- ---------- ---------- ---------- Net cash used in operating activities (917,857) (450,620) (1,362,268) (1,107,311) ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of tooling and equipment (71,501) (36,986) (107,030) (58,144) Patent costs (557) (12,954) (7,977) (25,372) ---------- ---------- ---------- ---------- Net cash used in investing activities (72,058) (49,940) (115,007) (83,516) ---------- ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of preferred stock 0 1,426,222 0 1,426,222 Net proceeds from issuance of common stock 1,218,823 207,914 1,247,823 207,914 ---------- ---------- ---------- ---------- Net cash provided by financing activities 1,218,823 1,634,136 1,247,823 1,634,136 ---------- ---------- ---------- ---------- Increase (decrease) in cash and cash equivalents 228,908 1,133,576 (229,452) 443,309 CASH AND CASH EQUIVALENTS Beginning 395,467 615,125 853,827 1,305,392 ---------- ---------- ---------- ---------- Ending 624,375 1,748,701 624,375 1,748,701 ---------- ---------- ---------- ---------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Preferred stock dividend accrual 23,436 15,799 39,596 15,799 Preferred stock dividend converted to common stock 0 0 8,190 0 Conversion of preferred stock to common 0 0 151,520 0 ---------- ---------- ---------- ---------- 23,436 15,799 191,116 15,799 ========== ========== ========== ==========
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 3, 1999, and December 31, 1998, and results of its operations and cash flows for the three-month and six-month periods ended July 3, 1999, and July 4, 1998. 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 1998 Datakey, Inc. Annual Report and in Form 10-KSB for the year ended December 31, 1998. PRIVATE COMMON STOCK FINANCING The Company completed, in June 1999, a $1.35 million private equity financing with 35 accredited investors. Each investor paid $2.50 per common share, the closing bid price of the stock, and received a five-year warrant to purchase, for $2.50, one common share for each share purchased. A portion of the proceeds were used to pay off the bank credit line and to provide working capital. OPERATING SEGMENTS The Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, for the year ended December 31, 1998. This statement requires public enterprises to report selected information about operating segments in annual and interim reports issued to shareholders. The adoption of this statement had no impact on the Company's financial condition or results of operations. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. The Company has two reportable segments: Electronic Products (EP) and Integrated Systems Solutions (ISS). The Electronic Products segment produces and markets proprietary memory keys, cards, and other custom-shaped tokens that serve as a convenient way to carry electronic information. The Integrated Systems Solutions segment produces and markets products for the information security market, which enable user identification and authentication, secure data exchange, and information validation. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. There are no intersegment transactions. The Company evaluates performance based on operating earnings of the respective segments.
--------------------------------------------- ---------------------------------------------- Three Months Ended July 3, 1999 Six Months Ended July 3, 1999 --------------------------------------------- ---------------------------------------------- EP ISS UNALLOCATED TOTAL EP ISS UNALLOCATED TOTAL ---------- -------- ----------- ---------- --------- -------- ----------- ----------- Revenue............... $1,051,462 $102,546 $ - $1,154,008 $2,268,171 $ 245,819 $ - $ 2,513,990 Interest income (expense)............. - - (4,277) (4,277) - - 342 342 Depreciation and amortization.......... 100,182 27,314 - 127,496 195,397 62,698 - 258,095 Segment profit (loss). (51,666) (855,453) (4,277) (907,119) 104,089 (1,737,668) 342 (1,633,579) ---------- -------- ----------- ---------- --------- -------- ----------- ----------- Three Months Ended July 4, 1998 Six Months Ended July 4, 1998 --------------------------------------------- ---------------------------------------------- EP ISS UNALLOCATED TOTAL EP ISS UNALLOCATED TOTAL ---------- -------- ----------- ---------- --------- -------- ----------- ----------- Revenue............... $1,697,636 $ 44,994 $ - $1,742,630 $3,062,930 $ 163,255 $ - $ 3,226,185 Interest income(expense)....... - - 12,843 12,843 - - 24,384 24,384 Depreciation and amortization.......... 117,031 23,034 - 140,065 232,303 45,640 - 277,943 Segment profit (loss). 335,732 (768,399) 12,843 (419,824) 537,409 (1,464,207) 24,384 (902,414)
6 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 July 3, 1999, decreased by $589,000, or 34 percent, compared to the comparable 1998 period. The decline in revenue is due to a reduction in shipments to a few major Electronic Products (EP) customers during the first half of 1999. Shipments to Information Security Systems (ISS) customers increased only marginally. Two major EP customers have resumed shipments during the second quarter and now indicate their requirements for the year will exceed the total for 1998. Additionally, other EP customers are expected to increase shipments during 1999 and the Company expects to secure several new pilot programs in the ISS business units, as well as convert a few pilot programs to production deployment phase during the balance of 1999. Should the Company be successful in arranging new ISS pilot programs and production deployments, as management currently expects, revenue in 1999 is expected to exceed that achieved in 1998. GROSS PROFIT MARGIN - Gross profit as a percentage of revenue decreased to 39 percent in the three-month period ended July 3, 1999, and remained at 40 percent in the six-month period ended July 3, 1999. The reduction in margin in the three-month period ended July 3, 1999, is primarily the result of unfavorable factory utilization due to the reduction in revenue. 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 1999. OPERATING EXPENSES - Operating expenses increased by $223,000 or 20 percent, and $432,000 or 20 percent in the three-month and six-month periods, respectively, ended July 3, 1999, compared to the comparable 1998 periods. The increases are principally related to an increase of $44,000 in the three-month period and $157,000 in the six-month period in sales and marketing expense to continue advertising and promoting the Company's ISS product line. Research and development expense also increased $151,000 in the three-month period and $229,000 in the six-month period, as the Company continued to develop more features and enhancements to its information security products. Other expense increases are primarily general inflationary increases in rent, corporate insurance, and salaries. The Company expects to continue spending on product promotional and product developmental activities in 1999 at a rate that will trend upward on a quarterly basis. Spending on general and administrative expenses are expected to remain at about the level incurred in the second quarter. INTEREST INCOME (EXPENSE) - Interest income (expense) declined from $13,000 income to $4,000 expense in the three-month periods and from $24,000 income to $300 income in the six-month periods, ended July 3, 1999, compared to the comparable 1998 period as proceeds from interest bearing accounts were utilized to fund new product development and product promotion activities, and the Company began borrowing on its working capital line of credit. Interest income is expected to resume in the third quarter as the Company has invested the proceeds of its recent private equity placement in an interest-bearing account. 7 FINANCIAL CONDITION - The Company experienced an increase in cash and cash equivalents of $229,000 in the three-month period ended July 3, 1999, and a decrease of $229,000 for the six-month period ended July 3, 1999, compared to increases of $1,134,000 and $443,000 for the comparable three and six-month periods in 1998. The additional decreases in cash in 1999, versus the comparable 1998 periods, result from an increase in the operating losses in the three and six-month periods, compared to 1998, and because proceeds from a private equity placement in 1999 were approximately $207,000 lower than in 1998. Datakey's balance sheet reflects $1,756,000 in working capital as of July 3, 1999 and a current assets to current liabilities ratio of 2.70 to 1. The Company expects to continue spending on R&D and on marketing and sales activities at an increased amount compared to 1998. Inventory and accounts receivable levels are expected to increase during the balance of 1999 to support the expected ramp-up in revenue from the Company's new information security products. The Company believes that in addition to its $1 million bank line of credit, renewed in April 1999 for an additional year, it likely will need to obtain equity financing in addition to the amount secured in June 1999 to be able to fund its operations, and has engaged an investment banker to seek such financing. The Company's ability to obtain such financing may depend on the progress it makes in significantly increasing ISS product sales. There is no assurance that a significant increase in ISS sales will occur or that the Company will be able to obtain the required equity financing. YEAR 2000 - The Company began addressing the Year 2000 issue in 1997 using a multi-step approach, including inventory and assessment, remediation and testing, and contingency planning. The Company, with the assistance of outside consultants, began by analyzing and testing its major internal software programs to determine the level of compliance with the changeover in Year 2000. At this point the Company believes all "mission critical" systems are either materially compliant or will be materially compliant by September 30, 1999, with minor software upgrades. The Company is currently seeking assurances from key suppliers and customers regarding their Year 2000 readiness. The Company has not yet completed this part of the assessment phase and cannot predict the outcomes of other companies' remediation efforts. The Company currently plans to substantially complete its Year 2000 compliance efforts by September 30, 1999. The Company has also formed a team to develop contingency plans by September 30, 1999; in the event certain suppliers are unable to deliver critical parts and components in early 2000. At this time, the Company believes that its most reasonably likely worst case scenario is that the Company could experience delays in delivery of critical parts and supplies and/or key customers could experience a delay in delivery of needed Datakey parts. In the event that either of these scenarios occurs, the Company expects that it would have a material adverse effect on the Company's financial condition and results of operations. The Company estimates that the total cost of efforts, in 1999, to make hardware and software Year 2000 compliant, will be approximately $20,000. 8 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, the anticipated generation of significant revenue from such products, an increase in sales of its electronic products, and its ability to fund its operations in 1999. 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. 9 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On June 21, 1999, the Company issued an aggregate of 540,513 shares of common stock at $2.50 per share and five-year warrants to purchase 540,513 shares of common stock at $2.50 for gross proceeds of $1,350,000. The shares were sold with the assistance of Miller, Johnson & Kuehn, Incorporated (MJK) to 35 accredited investors. MJK received commissions equal to $99,053 plus accountable expenses as part of the offering, and ten-year warrants to purchase 54,052 shares of Common Stock, with an exercise price of $2.70 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 Company has filed a Registration Statement on Form S-3 covering the resale of the shares of Company Common Stock issued in connection with the offering and those shares issuable upon exercise of the agent and investor warrants. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS The Company held its Annual Meeting on Wednesday, May 26, 1999. 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 2,804,460 votes in favor, with 16,240 votes opposed, and 2,806 votes abstaining, the shareholders set the number of directors to be elected at five (5). 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 Terrence W. Glarner 2,805,374 18,132 Thomas R. King 2,805,374 18,132 Gary R. Holland 2,805,374 18,132 Eugene W. Courtney 2,805,374 18,132 Carl P. Boecher 2,805,374 18,132 The shareholders approved, by 2,749,761 votes for, 60,772 against, 4,250 abstaining, and 8,723 broker non-votes, the Company's 1998 Employee Stock Purchase 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, 1999, by 2,807,345 votes in favor, 11,647 opposing and 4,514 abstaining. 10 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 June 28, 1999, that fully described the details of the private placement of common stock and warrants, which was completed on June 21, 1999. 11 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 17, 1999 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) 12 Datakey, Inc. EXHIBIT INDEX TO FORM 10-QSB FOR QUARTER ENDED JULY 3, 1999 EXHIBIT NO. DESCRIPTION 27 Financial Data Schedule 13 EX-27 2 ART 5 FDS FOR 2ND QUARTER
5 1 U.S. Dollars 6-MOS DEC-31-1999 JAN-01-1999 JUL-03-1999 1 624,375 0 702,542 30,000 1,447,145 2,788,024 4,801,104 3,831,305 6,423,810 1,031,629 0 0 1,549,999 182,589 1,646,572 4,410,789 2,513,990 2,513,990 1,502,192 1,502,192 2,645,719 0 0 0 0 (1,633,579) 0 0 0 (1,633,579) (.53) (.53)
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