<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 June 29, 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 August 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>
June 29, December 31,
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $1,272,738 $ 713,230
Investment in held-to-maturity securities 5,577,079 6,253,984
Trade receivables, less allowance for
doubtful accounts of $10,600 and $34,300 1,251,965 1,055,075
Inventories 1,158,079 1,222,938
Prepaid and other 83,874 52,177
Deferred taxes 177,531 109,000
Refundable income taxes 0 46,642
----------- ----------
Total current assets 9,521,267 9,453,046
=========== ==========
INTANGIBLES
Patent and license at cost, less amortization
of $147,245 and $118,702 160,145 158,264
Non-compete agreement, less amortization
of $165,000 and $123,750 0 41,250
----------- ----------
160,145 199,514
=========== ==========
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost
Production tooling 1,220,956 1,109,524
Equipment 2,481,417 2,358,938
Furniture and fixtures 215,000 211,822
Leasehold improvements 234,452 211,761
----------- ----------
4,151,825 3,892,045
Less accumulated depreciation (2,592,190) (2,366,660)
----------- -----------
1,559,635 1,525,385
----------- -----------
$11,241,047 $11,177,945
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $536,903 $ 509,683
Accrued expenses 343,649 298,672
---------- ----------
Total current liabilities 880,552 808,355
---------- ----------
DEFFERRED TAXES 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;
outstanding 2,880,403 and 2,835,236 143,820 141,762
Additional paid-in capital 4,050,559 3,885,887
Retained earnings 5,633,116 5,808,941
---------- ----------
10,202,495 10,211,590
---------- ----------
$11,241,047 $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 Six Months Ended
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net Sales $1,908,561 $1,696,136 $3,641,872 $3,604,374
Cost of goods sold 1,203,841 1,124,898 2,241,176 2,397,216
---------- ---------- ---------- ----------
Gross Profit 704,720 571,238 1,400,696 1,207,158
Other operating revenue 3,562 5,927 5,968 10,277
---------- ---------- ---------- ----------
Total gross profit and
other operating revenue 708,282 577,165 1,406,664 1,217,435
---------- ---------- ---------- ----------
Operating expenses:
Research, development
and engineering 525,432 169,865 800,008 340,062
Selling 340,310 301,084 622,566 583,398
General and administrative 233,953 174,742 442,928 329,608
---------- ---------- ---------- ----------
Total operating expenses 1,099,695 645,691 1,865,502 1,253,068
---------- ---------- ---------- ----------
Operating loss (391,413) (68,526) (458,838) (35,633)
Interest income 91,431 95,689 185,412 187,425
---------- ---------- ---------- ----------
Income (loss) before
income taxes (299,982) 27,163 (273,426) 151,792
Income tax expense (benefit) (107,600) 9,400 (97,600) 52,400
---------- ---------- ---------- ----------
Net income (loss) ($ 192,382) $ 17,763 ($175,826) $ 99,392
========== ========== ========== ==========
Net income (loss) per common and
common equivalent share (Primary
and fully diluted) ($0.07) $0.01 ($0.06) $0.03
========== ========== ========== ==========
Weighted average number of
common and common
equivalent shares
outstanding 2,879,087 2,982,314 2,841,788 2,980,630
========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
<TABLE>
DATAKEY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net Income(loss) ($192,382) $17,763 ($175,826) $99,392
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depreciation 115,158 118,058 225,530 236,409
Amortization 35,226 35,789 69,793 66,504
Change in assets and liabilites
(Increase) decrease:
Trade receivables (133,063) (48,570) (196,890) 195,127
Inventories 85,824 138,441 64,859 87,978
Prepaid expenses and other 10,992 1,732 (31,697) (42,314)
Refundable income taxes 46,642 59,702 46,642 101,680
Increase (decrease) in:
Accounts payable 91,714 (19,481) 27,220 (329,570)
Accrued expenses 90,436 (25,310) 44,977 31,185
Income taxes payable (9,586) 42,097 0 42,097
Deferred taxes (68,531) 0 (68,531) 0
---------- ---------- ---------- ----------
Net cash provided by
operating activities 72,430 320,221 6,077 488,488
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of tooling and equipment (211,361) (92,437) (259,780) (156,544)
Purchase of held-to-maturity
securities (1,335,029) (1,270,456) (2,592,125) (2,462,803)
Proceeds from maturity of
held-to-maturity securities 2,091,000 2,280,000 3,269,000 3,300,000
Patent and license costs (24,353) (28,032) (30,424) (34,959)
---------- ---------- ---------- ----------
Net cash provided by
investing activities 520,257 889,075 386,671 645,694
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on non-compete 0 (41,250) 0 (82,500)
obligation
Net proceeds from issuance of
common stock 164,918 0 166,730 0
---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities 164,918 (41,250) 166,730 (82,500)
---------- ---------- ---------- ----------
Increase in cash
and cash equivalents 757,605 1,168,046 559,478 1,051,682
CASH AND CASH EQUIVALENTS
Beginning 515,133 138,675 713,260 255,039
---------- ---------- ---------- ----------
Ending $1,272,738 $1,306,721 1,272,738 $1,306,721
========== ============= ========== ==========
</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 June 29, 1996 and
December 31, 1995 and results of its operations and cash flows
for the three-month and six-month periods ended June 29, 1996 and
July 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 $5,577,079 as of June 29, 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 $5,568,302. The unrealized loss, therefore, is
$8,777.
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 six-month
periods ended June 29, 1996, increased by $212,425 and $37,498,
or 12% and 1%, respectively. Commercial sales increased by
$253,400, or 19%, in the three-month period, and decreased
$96,593, or 3%, in the six-month period ended June 29, 1996, as
compared to the same periods in 1995. Commercial sales were 84%
of total sales for the three-month and six-month periods ended
June 29, 1996, as compared to 80% 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 exceed the commercial sales in 1995. While the
Company anticipates improved sales in 1996 compared to 1995,
there is no assurance that revenues in the remaining quarters of
1996 will reflect significant improvement over the first two
quarters of 1996. 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 37% and 39% in the three-month and six-
month periods ended June 29, 1996, from 34% and 33% in the
comparable 1995 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, 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
$454,004 and $612,434, or 70% and 49%, in the three-month and
six-month periods ended June 29, 1996, as compared to the same
periods in 1995. The increased expenses are primarily
attributable to a substantial increase 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
six-month periods ended June 29, 1996, decreased $4,528 and
$2,013, or 5% and 1%, 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 a declining balance in held-to-maturity
securities, as the Company plans to invest the proceeds of some of
these securities as they mature to fund its investment in new
product development.
FINANCIAL CONDITION - During the six-month period ended June
29, 1996, the Company had a net increase in cash and cash
equivalents of $559,478, compared to a net increase of $1,051,682
in the comparable 1995 period. The increase in cash and
equivalents during the six-month period ended June 29, 1996 was
offset by a $676,905 decreased investment in held-to-maturity
securities. Cash, cash equivalents and investment in held-to-
maturity securities were $6,849,817 at June 29, 1996.
The Company anticipates that its current working capital position
of $8,640,715 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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
SHAREHOLDERS
DATAKEY, INC. AND SUBSIDIARY
The Company held its Annual Meeting on Wednesday, June 5, 1996.
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 a vote of 2,823,447 shares in favor, with 8,600 shares opposed
and 11,265 shares 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
NOMINEE VOTES FOR VOTES WITHHELD
- ------------------ ------------ ---------------
John H. Underwood 2,725,262 118,050
Terrence W. Glarner 2,737,137 106,175
Thomas R. King 2,737,012 106,300
Gary R. Holland 2,736,837 106,475
Eugene W. Courtney 2,736,837 106,475
The shareholders approved an amendment, by a vote of 1,813,715
for, 441,535 against, 11,890 abstaining and 576,172 broker
non-votes, to increase the number of shares reserved under
the Company's 1987 Stock Option Plan from 550,000 to 800,000.
The shareholders also approved, by a vote of 2,385,728 for,
332,205 against, 16,510 abstaining and 108,869 broker non-
votes, an amendment to the Company's 1987 Stock Option Plan
to provide for the grant of nonqualified stock options to
non-employee directors under a formula plan.
The shareholders also ratified the appointment of McGladrey &
Pullen, LLP, as independent auditors for the Company for the
fiscal year ending December 31, 1996, by a vote of 2,808,247
shares in favor, 19,900 shares opposing and 15,165 shares
abstaining.
8
<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 June 29, 1996.
9
<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 August 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)
10
<PAGE>
DATAKEY, INC.
EXHIBIT INDEX TO FORM 10-QSB
FOR QUARTER ENDED JUNE 29, 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 Six Months Ended
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Earnings
Net Income(loss) ($192,382) $ 17,763 ($175,826) $ 99,392
=================================================================================================
Primary Earnings Per Share
Shares:
Weighted average number of common
shares outstanding 2,879,087 2,829,570 2,841,788 2,829,570
Assuming conversion of preferred stock 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 2,744 0 1,060
- -------------------------------------------------------------------------------------------------
Weighted average number of
common and common equivalent
shares outstanding 2,879,087 2,982,314 2,841,788 2,980,630
=================================================================================================
Primary Earnings Per share ($0.07) $0.01 ($0.06) $0.03
=================================================================================================
Fully Diluted Earnings Per Share
Shares:
Weighted average number of common 2,879,087 2,829,570 2,879,087 2,829,570
shares outstanding
Assuming conversion of preferred stock 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 6,697 0 6,697
- -------------------------------------------------------------------------------------------------
Weighted average number of
common and common equivalent
shares outstanding 2,879,087 2,986,267 2,879,087 2,986,267
=================================================================================================
Fully Diluted Earnings Per Share ($0.07) $0.01 ($0.06) $0.03
=================================================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-29-1996
<EXCHANGE-RATE> 1
<CASH> 1,272,738
<SECURITIES> 5,577,079
<RECEIVABLES> 1,262,565
<ALLOWANCES> 10,600
<INVENTORY> 1,158,079
<CURRENT-ASSETS> 9,521,267
<PP&E> 4,151,825
<DEPRECIATION> 2,592,190
<TOTAL-ASSETS> 11,241,047
<CURRENT-LIABILITIES> 880,552
<BONDS> 0
0
375,000
<COMMON> 143,820
<OTHER-SE> 9,683,675
<TOTAL-LIABILITY-AND-EQUITY> 11,241,047
<SALES> 1,908,561
<TOTAL-REVENUES> 1,912,123
<CGS> 1,203,841
<TOTAL-COSTS> 1,203,841
<OTHER-EXPENSES> 1,099,695
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (273,426)
<INCOME-TAX> (97,600)
<INCOME-CONTINUING> (175,826)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (175,826)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
