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 under ending March 30, 1996
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,
1996 is 2,845,737.
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>
March 30, 1996
(UNAUDITED) December 31, 1995
-------------- -----------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 515,133 $ 713,230
Investment in held -to- maturity securities 6,333,050 6,253,984
Trade receivables, less allowance for
doubtful accounts of $10,600 and $34,300 1,118,902 1,055,075
Inventories 1,243,903 1,222,938
Prepaid and other 94,866 52,177
Deferred tax assets 109,000 109,000
Refundable income taxes 46,642 46,642
--------- ----------
Total current assets 9,461,496 9,453,046
--------- ----------
INTANGIBLES
Patent and license at cost, less amortization
of $132,643 and $118,702 150,394 158,264
Non-compete agreement, less amortization
of $144,375 and $123,750 20,625 41,250
----------- ----------
171,019 199,514
----------- ----------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost
Production tools 1,146,302 1,109,524
Equipment 2,370,579 2,358,938
Furniture and fixtures 211,822 211,822
Leasehold improvements 211,761 211,761
----------- -----------
3,940,464 3,892,045
Less accumulated depreciation (2,477,032) (2,366,660)
----------- ------------
1,463,432 1,525,385
----------- ------------
$11,095,947 $11,177,945
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 445,189 $ 509,683
Accrued expenses 239,730 261,422
Income taxes payable 9,586 0
Warranty costs 13,483 37,250
---------- ---------
Total current liabilities 707,988 808,355
---------- ---------
DEFERRED TAX LIABILITY 158,000 158,000
---------- ---------
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; issued and outstanding
2,835,736 and 2,829,570 141,787 141,762
Additional paid-in capital 3,887,674 3,885,887
Retained earnings 5,825,498 5,808,941
----------- ----------
10,229,959 10,211,590
----------- ----------
$11,095,947 $11,177,945
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
DATAKEY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 30, 1996 April 1, 1995
---------------------------------- --------------------------------
<S> <C> <C>
Net Sales $1,733,311 $1,908,238
Cost of goods sold 1,037,335 1,272,318
---------------------------------- --------------------------------
Gross profit 695,976 635,920
Other operating revenue 2,406 4,350
---------------------------------- --------------------------------
Total gross profit and
other operating revenue 698,382 640,270
---------------------------------- --------------------------------
Operating expenses:
Research, development and engineering 274,576 170,197
Selling 282,256 282,314
General and administrative 208,975 154,866
---------------------------------- --------------------------------
Total operating expenses 765,807 607,377
---------------------------------- --------------------------------
Operating income (loss) (67,425) 32,893
Interest income 93,981 91,736
---------------------------------- --------------------------------
Income before income taxes 26,556 124,629
Income tax expense 10,000 43,000
---------------------------------- --------------------------------
Net income $ 16,556 $ 81,629
================================== ================================
Net income per common and common equivalent
share (Primary and fully diluted) $ 0.01 $ 0.03
================================== ================================
Weighted average number of common and
common equivalent shares outstanding 3,064,832 2,980,422
================================== ================================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
DATAKEY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 30, 1996 April 1, 1995
---------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $16,556 $81,629
Adjustments to reconciled net income to net cash provided by (used in)
operating activities:
Depreciation 110,372 118,351
Amortization 34,567 30,715
Change in assets and liabilities (increase) decrease:
Trade receivables (63,827) 243,697
Inventories (20,965) (50,463)
Prepaid expenses and other (42,689) (44,046)
Refundable income taxes 0 41,978
Increase (decrease) in:
Accounts payable (64,494) (295,329)
Accrued expenses (21,692) 38,069
Accrued warranty costs (23,767) 3,666
Income taxes payable 9,586 0
Deferred tax liability 0 0
--------------- -------------
Net cash used in operating activities (66,353) 168,267
--------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of tooling and equipment (48,419) (64,107)
Purchase of held-to-maturity securities (1,257,066) (1,192,347)
Proceeds from maturity of held-to-maturity securities 1,178,000 1,020,000
Patent and license costs (6,071) (6,927)
--------------- ---------------
Net cash used in investing activities (133,556) (243,381)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on non-compete obligation 0 (41,250)
Net proceeds from sale of common stock 1,812 0
------------------ ---------------
Net cash provided by (used in) financing activities 1,812 (41,250)
------------------ ---------------
Decrease in cash and cash equivalents (198,097) (116,364)
CASH AND CASH EQUIVALENTS
Beginning 713,230 255,039
----------------- ---------------
Ending $515,133 $138,675
================= ================
</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 March 30, 1996 and December 31, 1995 and results of its
operations and cash flows for the three-month periods ending March 30, 1996 and
April 1, 1995. 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 1995 Datakey, Inc. Annual Report and
in Form 10-KSB for the year ended December 31, 1995.
INVESTMENT IN HELD-TO-MATURITY SECURITIES
The Company held marketable debt securities with an amortized cost of
$6,333,050 as of March 30, 1996. 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 $6,330,926. The unrealized loss, therefore, is
$2,124.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OR OPERATION
DATAKEY, INC. AND SUBSIDIARY
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
REVENUE - Net sales for the three-month period ended March 30, 1996
declined $174,927 or 9% from the comparable period in 1995. Commercial sales
decreased $349,992 while government sales increased $175,065 during the 1996
three-month period. The decline in commercial sales in 1996 is due to lower
orders and delayed orders from some of our larger customers. Revenue for the
year is expected to exceed the 1995 annual revenue of $7,200,000, but may not
exceed the 1995 revenue in each of the remaining quarters.
GROSS PROFIT MARGINS - Gross profit as a percentage of net sales increased
to 40% in the three-month period ended March 30, 1996 compared to 33% in the
comparable 1995 period. The increased margin percentage is due to improvements
in manufacturing processes and a more favorable mix of higher margin products
during the quarter. The Company expects the gross margin percentage for the
balance of 1996 to improve compared to the 1995 margin of 33% but may not be as
favorable as was achieved during the first quarter.
OPERATING EXPENSES - Operating expenses increased $158,430, or 26%, in the
three-month period ended March 30, 1996 as compared to the same period in 1995.
This increase is due to new employees and contract services related to
accelerated development of advanced data security products as well as abnormally
low expenses in the 1995 period resulting from vacant positions in that period.
Research and development expenses are expected to be significantly higher
in 1996 as a result of the Company's decision to substantially accelerate the
product development process for data security products. Although the amount of
research and development spending in 1996 cannot be specified, the total is
likely to be three to four times the 1995 level of $700,000.
<PAGE>
Sales and marketing expense is expected to increase by 10 to 20% in 1996,
to promote and sell the advanced data security products under development.
Although little revenue is expected from the sale of these products during 1996,
a major product introduction is planned.
General and administrative expenses in 1996 are expected to increase at
approximately the rate of increase in revenue.
INTEREST INCOME - Interest income during the three-month period ended March
30, 1996 increased $2,245, or 2%, from the comparable period in 1995. The higher
level of interest income resulted from a higher level of investment in
held-to-maturity securities and interest bearing cash and cash equivalents.
Interest income is expected to trend downward during 1996 as the Company
utilizes cash from maturing investments to fund the Company's investment in
research and development and sales and marketing of advanced data security
products.
FINANCIAL CONDITION - During the three-month period ended March 30, 1996
the Company had a net decrease in cash and cash equivalents of $198,097 compared
to a decrease of $116, 364 in the comparable 1995 period. Investment in
held-to-maturity securities increased $79,066 in the 1996 period compared to an
increase of $172,347 in the 1995 period. Cash, cash equivalents and investment
in held-to-maturity securities were $6,848,183 at March 30, 1996.
Datakey's balance sheet continues to reflect a strong financial position,
with $8,753,508 in working capital and a current assets to current liabilities
ratio of 13.4 to 1 as of March 30, 1996. The Company expects its 1996
investments in capital equipment and tooling to be approximately double its
capital investments in 1995. The Company's working capital and investments are
sufficient to fund its planned operations and continued research and development
activities in 1996.
OUTLOOK FOR 1996 - The Company expects to report a loss in 1996 due to a
substantial increase in expenditures on product development and promotion.
Although increased revenue and profitability is expected in the core business,
this increased spending to develop and promote the data security business will
likely lead to a loss for the year.
CAUTIONARY STATEMENTS
Certain forward looking statements in this Management's Discussion and
Analysis section involve risks and uncertainties, including those described
under the heading "Cautionary Statements" included in Part I of the Company's
Form 10-K for fiscal year ended December 31, 1995.
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 (filed only with electronic copy)
(B) The Company was not required to and did not file a Form 8-K during the
quarter ended March 30, 1996.
<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, 1996 DATAKEY, INC.
BY: /s/ John H. Underwood
John H. Underwood
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)
<PAGE>
DATAKEY, INC.
EXHIBIT INDEX TO FORM 10-QSB
FOR QUARTER ENDED MARCH 30, 1996
EXHIBIT NO. DESCRIPTION
11 Computation of Per Share Earnings
27 Financial Data Schedule (filed only with electronic copy)
EXHIBIT 11
DATAKEY, INC. AND SUBSIDIARY
COMPUTATION RE: EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 30, 1996 April 1, 1995
----------------- ---------------
<S> <C> <C>
Earnings
Net Income $16,556 $81,629
Primary Earnings Per Share
Shares:
Weighted average number of common shares
outstanding 2,835,654 2,829,570
Assuming conversion of preferred stock 150,000 150,000
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 79,178 852
Weighted average number of common and
common equivalent shares outstanding 3,064,832 2,980,422
Primary Earnings Per Share $0.01 $0.03
Fully Diluted Earnings Per Share
Shares:
Weighted average number of common shares
outstanding 2,835,654 2,829,570
Assuming conversion of preferred stock 150,000 150,000
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 63,635 1,379
Weighted average number of common and
common equivalent shares outstanding 3,049,289 2,980,949
Fully Diluted Earnings Per Share $0.01 $0.03
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-30-1996
<EXCHANGE-RATE> 1
<CASH> 515,133
<SECURITIES> 6,333,050
<RECEIVABLES> 1,129,502
<ALLOWANCES> 10,600
<INVENTORY> 1,243,903
<CURRENT-ASSETS> 9,461,496
<PP&E> 3,940,464
<DEPRECIATION> 2,477,032
<TOTAL-ASSETS> 11,095,947
<CURRENT-LIABILITIES> 707,988
<BONDS> 0
0
375,000
<COMMON> 141,787
<OTHER-SE> 9,713,172
<TOTAL-LIABILITY-AND-EQUITY> 11,095,947
<SALES> 1,733,311
<TOTAL-REVENUES> 1,735,717
<CGS> 1,037,335
<TOTAL-COSTS> 1,037,335
<OTHER-EXPENSES> 765,807
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 26,556
<INCOME-TAX> 10,000
<INCOME-CONTINUING> 16,556
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,556
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
