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 30, 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
November 13, 1995, is 2,829,570.
Transitional Small Business Disclosure Format (check one):
Yes No x
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
DATAKEY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $441,768 $255,039
Investment in held-to-maturity securities 6,162,646 6,110,576
Trade receivables, less allowance for doubtful 1,215,602 1,190,893
accounts of $31,986 and $53,700
Inventories 1,365,283 1,348,985
Prepaid and other 46,407 26,242
Deferred tax assets 166,000 166,000
Refundable income taxes 0 101,680
- -------
Total current assets 9,397,706 9,199,415
--------- ---------
INTANGIBLES
Patent and license at cost, less amortization of 152,268 153,491
$149,200 and $101,811
Non-compete agreement, less amortization of 61,875 123,750
$103,125 and $41,250 ------ -------
214,143 277,241
------- -------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost
Production tools 1,088,348 1,027,206
Equipment 2,339,146 2,211,216
Furniture and fixtures 211,822 211,822
Leasehold improvements 211,761 210,562
------- -------
3,851,077 3,660,806
Less accumulated depreciation (2,297,267) (1,936,935)
----------- -----------
1,553,810 1,723,871
--------- ---------
$11,165,659 $11,200,527
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $558,894 $758,876
Accrued expenses 280,057 192,726
Non-compete obligation 0 82,500
Income taxes payable 53,727 0
Warranty costs 32,791 50,000
------ ------
Total current liabilities 925,469 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 375,000 375,000
and outstanding 150,000
Common stock, par value $.05 per share;
authorized 10,000,000 shares; issued and 141,479 141,479
outstanding 2,829,570
Additional paid-in capital 3,865,631 3,865,631
Retained earnings 5,757,080 5,633,315
--------- ---------
10,139,190 10,015,425
See Notes to Consolidated Financial Statements
---------- ----------
$11,165,659 $11,200,527
----------- -----------
</TABLE>
<PAGE>
DATAKEY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, October 1, September 30, October 1,
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales $1,771,510 $1,292,908 $5,375,884 $3,751,893
Cost of goods sold 1,209,219 934,773 3,606,435 2,707,948
Gross Profit 562,291 358,135 1,769,449 1,043,945
Other operating revenue 6,511 19,588 16,788 53,292
Total gross profit and 568,802 377,723 1,786,237 1,097,237
other operating revenue
Operating expenses:
Research, development and engineering 180,220 177,666 520,282 599,411
Selling 283,279 232,104 866,677 695,824
General and administrative 166,029 142,963 495,637 463,452
Total operating expenses 629,528 552,733 1,882,596 1,758,687
Operating income (loss) (60,726) (175,010) (96,359) (661,450)
Nonoperating income:
Interest income 96,786 91,101 284,285 201,962
Other income 313 1,132 239 312
97,099 92,233 284,524 202,274
Income (loss) before income taxes 36,373 (82,777) 188,165 (459,176)
Income tax expense (benefit) 12,000 (28,000) 64,400 (154,000)
Net income (loss) $24,373 ($54,777) $123,765 ($305,176)
Net income (loss) per common and common $0.01 ($0.02) $0.04 ($0.11)
equivalent share (Primary and fully
diluted)
Weighted average number of common and 2,986,690 2,829,237 2,981,516 2,829,126
common equivalent shares outstanding
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
DATAKEY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, October 1, September 30, October 1,
1994 1994 1995 1994
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $24,373 ($54,777) $123,765 ($305,176)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 123,923 104,947 360,332 281,573
Amortization 42,760 30,875 109,264 49,802
Change in assets and liabilities (Increase) decrease:
Trade receivables (219,836) (356,068) (24,709) 440,945
Inventories (104,276) (188,746) (16,298) (445,349)
Prepaid expenses and other 22,149 35,915 (20,165) 11,582
Refundable income taxes 0 (28,210) 101,680 (17,187)
Increase (decrease) in:
Accounts payable 129,588 218,824 (199,982) (156,573)
Accrued expenses 35,296 63,915 87,331 (145,769)
Accrued warranty costs 3,641 4,405 (17,209) 4,471
Income taxes payable 11,630 0 53,727 0
------ - ------ -
Net cash provided by (used in) operating activities 69,248 (168,920) 557,736 (281,681)
------ --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of tooling and equipment (33,727) (296,474) (190,271) (504,047)
Purchase of held-to-maturity securities (3,299,267) (2,303,245) (5,762,070) (7,356,049)
Process from maturity of held-to-maturity securities 2,410,000 1,373,533 5,710,000 5,784,235
Patent and license costs (11,207) (5,777) (46,166) (52,502)
-------- ------- -------- --------
Net cash (used in) investing activities (934,201) (1,231,963) (288,507) (2,128,363)
--------- ----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on non-compete obligation 0 (41,250) (82,500) (41,250)
Net proceeds from sale of common stock 0 0 0 0
- - - -
Net cash (used in) financing activities 0 (41,250) (82,500) (41,250)
- -------- -------- --------
Increase (decrease) in cash and cash equivalents (864,953) (1,442,133) 186,729 (2,451,294)
CASH AND CASH EQUIVALENTS
Beginning 1,306,721 1,818,639 255,039 2,827,800
--------- --------- ------- ---------
Ending $441,768 $376,506 $441,768 $376,506
-------- -------- -------- --------
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
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 30, 1995 and December 31, 1994 and results of its operations and
cash flows for the three-month and nine-month periods ended September 30, 1995
and October 1, 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 $6,162,646
as of September 30, 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 $6,164,325. The unrealized gain, therefore, is $1,679.
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.
<PAGE>
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 and nine-month periods ended
September 30, 1995, increased by $478,602 and $1,623,991, or 37% and 43%,
respectively. The increase in sales in both periods was driven by a significant
increase in commercial sales. Commercial sales increased by $426,473, or 38%, in
the three-month period, and $1,804,095, or 62%, in the nine-month period ended
September 30, 1995, as compared to the same periods in 1994. Commercial sales
were 88% and 87% of total sales for the three-month and nine-month periods ended
September 30, 1995, as compared to 87% and 71% in 1994. The Company anticipates
that government sales will remain stable for the balance of 1995 and that
commercial sales in 1995 will exceed the commercial sales in the comparable 1994
quarters. While the Company anticipates improved sales in 1995 compared to 1994,
there is no assurance that revenues in the fourth quarter of 1995 will reflect
significant improvement over the first three quarters of 1995.
GROSS PROFIT MARGINS - Gross profit as a percentage of net sales
increased to 32% and 33% in the three-month period and nine-month periods ended
September 30, 1995, respectively from 28% in the comparable 1994 periods. 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.
OPERATING EXPENSES - Operating expenses increased by $76,795 and
$123,909, or 14% and 7%, in the three-month and nine-month periods ended
September 30, 1995, respectively as compared to the same periods in 1994. The
increased expenses in 1995 are primarily the result of costs related to
personnel added during 1995 and increases in sales and marketing expenses
necessary to develop the higher level of sales. Operating expenses as a
percentage of net sales are 36% and 35% in the 1995 three- and nine-month
periods, respectively, compared to 43% and 47% in the comparable 1994 periods.
The Company expects 1995 operating expenses to continue trending upward through
the remainder of 1995.
<PAGE>
NONOPERATING INCOME - Nonoperating income during the three-month and
nine-month periods ended September 30, 1995, increased $4,866 and $82,250,
respectively or 5% and 41%, from the comparable periods in 1994. The higher
level of non-operating income is primarily the result of an increase in the
interest rate on earnings from the Company's interest-bearing cash, cash
equivalents and held- to-maturity securities.
FINANCIAL CONDITION - During the nine-month period ended September 30,
1995, the Company had a net increase in cash and cash equivalents of $186,729,
compared to a net decrease of $2,451,294 in the comparable 1994 period. The 1994
decrease in cash and cash equivalents was principally due to an increased
investment in held- to-maturity debt securities. The increase in cash and
equivalents during the nine-month period ended September 30, 1995 was reduced by
a $52,070 increased investment in marketable debt securities. Cash, cash
equivalents and investment in held-to-maturity securities were $6,604,414 at
September 30, 1995.
The Company anticipates that its current working capital position of $8,472,237
and internally generated cash flow will be sufficient to fund its planned
operations for the foreseeable future.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
DATAKEY, INC. AND SUBSIDIARY
(a) Exhibits
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 September 30, 1995.
<PAGE>
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 November 13, 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
Accounting Officer)
<PAGE>
DATAKEY, INC.
EXHIBIT INDEX TO FORM 10-QSB
FOR QUARTER ENDED SEPTEMBER 30, 1995
EXHIBIT NO. DESCRIPTION
11 Computation of Per Share Earnings
27 Financial Data Schedule
EXHIBIT 11
DATAKEY, INC. AND SUBSIDIARY
COMPUTATION RE: EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, October 1, September 30, October 1,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Earnings
Net Income (loss) $24,373 ($54,777) $123,765 ($305,176)
------- --------- -------- ----------
Primary Earnings (Loss) Per Share
Shares:
Weighted average number of common shares outstanding 2,829,570 2,829,237 2,829,570 2,829,126
Assuming conversion of preferred stock 150,000 0 150,000 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 7,120 0 1,946 0
---------- --------- ---------- ----------
Weighted average number of common and common
equivalent shares outstanding 2,986,690 2,829,237 2,981,516 2,829,126
--------- --------- --------- ---------
Primary Earnings (Loss) Per share $0.01 ($0.02) $0.04 ($0.11)
----- ------- ----- -------
Fully Diluted Earnings (Loss) Per Share
Shares:
Weighted average number of common
shares outstanding 2,829,570 2,829,237 2,829,570 2,829,126
Assuming conversion of preferred stock 150,000 0 150,000 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 the higher of the average market
price or the ending market price 8,172 0 8,172 0
---------- ----------- ----------- -----------
Weighted average number of
common and common equivalent
shares outstanding 2,987,742 2,829,237 2,987,742 2,829,126
--------- --------- --------- ---------
Fully Diluted Earnings (Loss) Per Share $0.01 ($0.02) $0.04 ($0.11)
----- ------- ----- -------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 441,768
<SECURITIES> 6,162,646
<RECEIVABLES> 1,247,588
<ALLOWANCES> 31,986
<INVENTORY> 1,365,283
<CURRENT-ASSETS> 9,397,206
<PP&E> 3,851,077
<DEPRECIATION> 2,297,267
<TOTAL-ASSETS> 11,165,659
<CURRENT-LIABILITIES> 925,469
<BONDS> 0
<COMMON> 141,479
0
375,000
<OTHER-SE> 9,622,711
<TOTAL-LIABILITY-AND-EQUITY> 11,165,659
<SALES> 5,375,884
<TOTAL-REVENUES> 5,392,672
<CGS> 3,606,435
<TOTAL-COSTS> 3,606,435
<OTHER-EXPENSES> 1,882,596
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 188,165
<INCOME-TAX> 64,400
<INCOME-CONTINUING> 123,765
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 123,765
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
