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
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
DATAKEY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
April 1, December 31,
1995 1994
(UNAUDITED)
<S> <C> <C>
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
</TABLE>
<PAGE>
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
<PAGE>
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
<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 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.
<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 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.
<PAGE>
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
<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 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)
<PAGE>
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
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.
<PAGE>
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.
<PAGE>
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
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)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> Apr-01-1995
<EXCHANGE-RATE> 1
<CASH> 138,675
<SECURITIES> 6,282,923
<RECEIVABLES> 1,000,896
<ALLOWANCES> 53,700
<INVENTORY> 1,399,448
<CURRENT-ASSETS> 9,064,232
<PP&E> 3,724,913
<DEPRECIATION> 2,055,286
<TOTAL-ASSETS> 10,987,312
<CURRENT-LIABILITIES> 789,258
<BONDS> 0
<COMMON> 141,479
0
375,000
<OTHER-SE> 9,580,575
<TOTAL-LIABILITY-AND-EQUITY> 10,987,312
<SALES> 1,908,238
<TOTAL-REVENUES> 1,912,588
<CGS> 1,272,318
<TOTAL-COSTS> 1,272,318
<OTHER-EXPENSES> 607,377
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 124,629
<INCOME-TAX> 43,000
<INCOME-CONTINUING> 81,629
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81,629
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
