<PAGE>
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 28, 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 November 12, 1996, is 2,880,403.
Transitional Small Business Disclosure Format (check one):
Yes / / No /x/
1
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
DATAKEY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 28, December 31,
1996 1995
----------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $550,117 $713,230
Investment in held-to-maturity securities 6,268,448 6,253,984
Trade receivables, less allowance for
doubtful accounts of $9,970 and $34,300 1,144,259 1,055,075
Inventories 932,084 1,222,938
Prepaid and other 53,397 52,177
Deferred taxes 109,000 109,000
Refundable income taxes 0 46,642
------------------------------
Total current assets 9,057,304 9,453,046
==============================
INTANGIBLES
Patent and license at cost, less amortization
of $162,565 and $118,702 145,730 158,264
Non-compete agreement, less amortization
of $165,000 and $123,750 0 41,250
------------------------------
145,730 199,514
==============================
DEFERRED TAXES 106,600 0
------------------------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost
Production tooling 1,192,599 1,109,524
Equipment 2,489,322 2,358,938
Furniture and fixtures 267,482 211,822
Leasehold improvements 234,452 211,761
------------------------------
4,183,855 3,892,045
Less accumulated depreciation (2,708,163) (2,366,660)
------------------------------
1,475,692 1,525,385
------------------------------
$10,785,326 $11,177,945
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $419,953 $509,683
Accrued expenses 446,404 298,672
------------------------------
Total current liabilities 866,357 808,355
------------------------------
DEFERRED TAXES 0 158,000
------------------------------
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;
outstanding 2,880,403 and 2,835,236 144,020 141,762
Additional paid-in capital 4,064,859 3,885,887
Retained earnings 5,335,090 5,808,941
------------------------------
9,918,969 10,211,590
------------------------------
$10,785,326 $11,177,945
==============================
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
<TABLE>
DATAKEY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
September 28 September 30, September 28 September 30,
1996 1995 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $1,758,999 $1,771,510 $5,400,871 $5,375,884
Cost of goods sold 1,166,843 1,209,219 3,408,019 3,606,434
---------------------------------------------------------------
Gross Profit 592,156 562,291 1,992,852 1,769,450
Other operating revenue 6,813 6,511 12,781 16,788
---------------------------------------------------------------
Total gross profit and
other operating revenue 598,969 568,802 2,005,633 1,786,238
---------------------------------------------------------------
Operating expenses:
Research, development
and engineering 613,980 180,220 1,413,988 520,284
Selling 324,571 283,279 947,137 866,677
General and administrative 214,990 166,029 657,918 495,637
---------------------------------------------------------------
Total operating expenses 1,153,541 629,528 3,019,043 1,882,598
---------------------------------------------------------------
Operating loss (554,572) (60,726) (1,013,410) (96,360)
Interest income 89,546 97,099 274,958 284,525
---------------------------------------------------------------
Income(loss) before
income taxes (465,026) 36,373 (738,452) 188,165
Income tax expense(benefit) (167,000) 12,000 (264,600) 64,400
---------------------------------------------------------------
Net income(loss) ($298,026) $24,373 ($473,852) $123,765
===============================================================
Net income(loss) per common and
common equivalent share (Primary
and fully diluted) ($0.10) $0.01 ($0.17) $0.04
===============================================================
Weighted average number of
common and common
equivalent shares
outstanding 2,880,403 2,986,690 2,854,707 2,981,516
===============================================================
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
<TABLE>
DATAKEY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
September 28 September 30, September 28, September 30,
1996 1995 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net Income(loss) ($298,026) $24,373 ($473,852) $123,765
Adjustments to reconcile net income(loss)
to net cash provided by(used in)
operating activities:
Depreciation 115,973 123,923 341,503 360,332
Amortization 15,320 42,760 85,113 109,264
Change in assets and liabilities
(Increase) decrease:
Trade receivables 107,706 (219,836) (89,184) (24,709)
Inventories 225,995 (104,276) 290,854 (16,298)
Prepaid expenses and other 30,477 22,149 (1,220) (20,165)
Refundable income taxes 0 0 46,642 101,680
Increase (decrease) in:
Accounts payable (116,950) 129,588 (89,730) (199,982)
Accrued expenses 74,186 38,937 147,732 70,122
Income taxes payable 0 11,630 0 53,727
Deferred taxes (167,500) 0 (264,600) 0
----------------------------------------------------------------
Net cash provided by(used in)
operating activities (12,819) 69,248 (6,742) 557,736
-----------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of tooling and equipment (32,030) (33,727) (291,810) (190,271)
Purchase of held-to-maturity
securities (2,751,368) (3,299,267) (5,343,464) (5,762,070)
Proceeds from maturity of
held-to-maturity securities 2,060,000 2,410,000 5,329,000 5,710,000
Patent and license costs (904) (11,207) (31,327) (46,166)
-----------------------------------------------------------------
Net cash provided by
investing activities (724,302) (934,201) (337,601) (288,507)
-----------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on non-compete 0 0 0 (82,500)
obligation
Net proceeds from issuance of
common stock 14,500 0 181,230 0
----------------------------------------------------------------
Net cash provided by (used in) 14,500 0 181,230 (82,500)
-----------------------------------------------------------------
Increase(decrease) in cash
and cash equivalents (722,621) (864,953) (163,113) 186,729
CASH AND CASH EQUIVALENTS
Beginning 1,272,738 1,306,721 713,230 255,039
-----------------------------------------------------------------
Ending $550,117 $441,768 $550,117 $441,768
=================================================================
</TABLE>
See Notes to Consolidated Financial Statements
4
<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 28, 1996 and December
31, 1995 and results of its operations and cash flows for the three-
month and nine-month periods ended September 28, 1996 and September
30, 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 $6,268,448 as of September 28, 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
$6,267,623. The unrealized loss, therefore, is $825.
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.
5
<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 28, 1996, decreased by $12,511 and increased by
$24,987, respectively, from the comparable periods of 1995.
Commercial sales increased by $61,276, or 1%, in the three-month
period, and decreased $35,318, or 1%, in the nine-month period ended
September 28, 1996, as compared to the same periods in 1995.
Commercial sales were 92% of total sales for the three-month period
and 86% of total sales for the nine-month period, as compared to 88%
and 87% in the comparable 1995 periods. The Company anticipates
that government sales will remain stable for the balance of 1996 and
that commercial sales in 1996 will be less than the commercial sales
in 1995. Revenue in the fourth quarter of 1996 and for the year
will be lower than the comparable 1995 periods due to a general
softness in business from our major customers.
GROSS PROFIT MARGINS - Gross profit as a percentage of net
sales increased to 34% and 37% in the three-month and nine-month
periods ended September 28, 1996, from 32% and 33% in the comparable
1995 periods. The increased gross profit margin is primarily due to
increased unit prices for standard products in excess of the unit
costs and improved manufacturing efficiencies. Gross profit margins
for the balance of 1996 are expected to exceed the levels attained
in 1995.
OPERATING EXPENSES - Operating expenses increased by $524,013
and $1,136,445, or 83% and 60%, in the three-month and nine-month
periods ended September 28, 1996, as compared to the same periods in
1995. The increased expenses are primarily attributable to a
substantial increase, as planned, in research and development and
marketing expenses necessary to expedite the market introduction of
sophisticated electronic token-based systems targeted at the rapidly
emerging corporate information security marketplace.
6
<PAGE>
INTEREST INCOME - Interest income during the three-month and
nine-month periods ended September 28, 1996, decreased $7,553 and
$9,567, or 8% and 3%, from the comparable periods in 1995. The
lower level of interest income is primarily due to a reduction in
the market interest rate on earnings from the Company's investment
in held-to-maturity securities. Interest income for the balance of
1996 is likely to be lower than comparable 1995 periods as a result
of continuation of the lower rate of interest and a declining
balance in held-to-maturity securities, as the Company will be
investing the proceeds of some of these securities as they mature to
fund its investment in new product development.
FINANCIAL CONDITION - During the nine-month period ended
September 28, 1996, the Company had a net decrease in cash and cash
equivalents of $163,113, compared to a net increase of $186,729 in
the comparable 1995 period. The decrease in cash and equivalents
during the nine-month period ended September 28, 1996 was primarily
due to the significant increase in spending on new product
development and marketing expense which also has resulted in a loss
for the three-month and nine-month periods. Cash, cash equivalents
and investment in held-to-maturity securities were $6,818,565 at
September 28, 1996.
The Company anticipates that its current working capital position of
$8,190,947 and internally generated cash flow will be sufficient to
fund its planned operations and investment in new product
development for the foreseeable future.
OUTLOOK FOR 1996 - The Company expects to report a significant
loss in 1996 due to a substantial increase in expenditures on
product development and promotion.
CAUTIONARY STATEMENTS
The discussion and analysis section involves risks and
uncertainties, including those described under the heading
"Cautionary Statements" included in Part I of the Company's Form
10-KSB for the year ended December 31, 1995.
7
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(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 28, 1996.
8
<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 12, 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)
9
<PAGE>
DATAKEY, INC.
EXHIBIT INDEX TO FORM 10-QSB
FOR QUARTER ENDED SEPTEMBER 28, 1996
EXHIBIT NO. DESCRIPTION
------------ ---------------------------------
11 Computation of Per Share Earnings
27 Financial Data Schedule
<TABLE>
EXHIBIT 11
DATAKEY, INC. AND SUBSIDIARY
COMPUTATION RE: EARNINGS PER SHARE
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
September 28 September 30, September 28, September 30,
1996 1995 1996 1995
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income(loss) ($298,026) $24,373 ($473,852) $123,765
=============================================================================================================
Primary Earnings Per Share
Shares:
Weighted average number of common
shares outstanding 2,880,403 2,829,570 2,854,707 2,829,570
Assuming conversion of preferred 0 150,000 0 150,000
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 0 7,120 0 1,946
- -------------------------------------------------------------------------------------------------------------
Weighted average number of
common and common equivalent
shares outstanding 2,880,403 2,986,690 2,854,707 2,981,516
=============================================================================================================
Primary Earnings Per share ($0.10) $0.01 ($0.17) $0.04
=============================================================================================================
Fully Diluted Earnings Per Share
Shares:
Weighted average number of common 2,880,403 2,829,570 2,880,403 2,829,570
shares outstanding
Assuming conversion of preferred 0 150,000 0 150,000
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 0 8,172 0 8,172
- -------------------------------------------------------------------------------------------------------------
Weighted average number of
common and common equivalent
shares outstanding 2,880,403 2,987,742 2,854,707 2,987,742
=============================================================================================================
Fully Diluted Earnings Per Share ($0.10) $0.01 ($0.17) $0.04
=============================================================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-28-1996
<EXCHANGE-RATE> 1
<CASH> 550,117
<SECURITIES> 6,268,448
<RECEIVABLES> 1,154,229
<ALLOWANCES> 9,970
<INVENTORY> 932,084
<CURRENT-ASSETS> 9,057,304
<PP&E> 4,183,855
<DEPRECIATION> 2,708,163
<TOTAL-ASSETS> 10,785,326
<CURRENT-LIABILITIES> 866,357
<BONDS> 0
0
375,000
<COMMON> 144,020
<OTHER-SE> 9,399,949
<TOTAL-LIABILITY-AND-EQUITY> 10,785,326
<SALES> 1,758,999
<TOTAL-REVENUES> 1,765,812
<CGS> 1,166,843
<TOTAL-COSTS> 1,166,843
<OTHER-EXPENSES> 1,153,541
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (465,026)
<INCOME-TAX> (167,000)
<INCOME-CONTINUING> (298,026)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (298,026)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
