SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 1998
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 15, 1998, is 2,909,735
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>
April 4, December 31,
1998 1997
----------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 615,125 $ 1,305,392
Trade receivables, less allowance for
doubtful accounts of $31,160 and $30,000 895,009 634,267
Inventories 1,169,656 1,082,737
Prepaid and other 74,487 53,360
----------- -----------
Total current assets 2,754,277 3,075,756
----------- -----------
OTHER ASSETS
Prepaid licenses at cost less amortization 992,175 996,611
of $91,426 and $89,890
Patents at cost, less amortization
of $101,810 and $91,911 110,210 107,691
----------- -----------
1,102,385 1,104,302
----------- -----------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost
Production tooling 1,205,249 1,215,012
Equipment 2,984,730 2,956,269
Furniture and fixtures 298,771 298,771
Leasehold improvements 284,416 281,956
----------- -----------
4,773,166 4,752,008
Less accumulated depreciation (3,402,111) (3,278,760)
----------- -----------
1,371,055 1,473,248
----------- -----------
$ 5,227,717 $ 5,653,306
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 310,232 $ 184,103
Accrued severance obligation 118,900 185,672
Accrued license fees 439,000 439,000
Accrued expenses 313,801 316,157
----------- -----------
Total current liabilities 1,181,933 1,124,932
----------- -----------
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 2,887,235 144,361 144,361
Additional paid-in capital 4,089,283 4,089,283
Retained earnings (562,860) (80,270)
----------- -----------
4,045,784 4,528,374
----------- -----------
$ 5,227,717 $ 5,653,306
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
DATAKEY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
April 4, March 29,
1998 1997
---- ----
<S> <C> <C>
Revenue $ 1,483,555 $ 1,409,801
Cost of goods sold 890,090 934,872
----------- -----------
Gross Profit 593,465 474,929
Operating expenses:
Research, development
and engineering 399,123 1,016,352
Marketing and sales 476,157 394,375
General and administrative 212,316 211,556
----------- -----------
Total operating expenses 1,087,596 1,622,283
----------- -----------
Operating loss (494,131) (1,147,354)
Interest income 11,541 75,617
----------- -----------
Loss before
income taxes (482,590) (1,071,737)
Income tax expense 0 0
----------- -----------
Net loss ($ 482,590) ($1,071,737)
=========== ===========
Basic and diluted
loss per share ($ 0.17) ($ 0.37)
=========== ===========
Weighted average number of
common shares outstanding 2,887,235 2,884,769
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
DATAKEY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
April 4, March 29,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net Income(loss) ($ 482,590) ($1,071,737)
Adjustments to reconcile net income(loss)
to net cash used in operating activities:
Depreciation 123,351 115,062
Amortization 11,435 8,961
Change in assets and liabilities
(Increase) decrease:
Trade receivables (260,742) (127,178)
Inventories (86,919) (504,724)
Prepaid expenses and other (21,127) (58,818)
Prepaid license fees 2,900 (80,000)
Increase (decrease) in:
Accounts payable 126,129 361,055
Accrued expenses (2,356) 244,398
Accrued severance (66,772) (41,500)
Income taxes payable 0 0
----------- -----------
Net cash used in
operating activities (656,691) (1,154,481)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of tooling and equipment (21,158) (263,863)
Purchase of held-to-maturity
securities 0 (72,807)
Proceeds from maturity of
held-to-maturity securities 0 2,015,162
Patent costs (12,418) (412)
----------- -----------
Net cash provided by(used in)
investing activities (33,576) 1,678,080
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of
common stock 0 18,727
----------- -----------
Net cash provided by (used in) financing activities 0 18,727
----------- -----------
Increase(decrease) in cash
and cash equivalents (690,267) 542,326
CASH AND CASH EQUIVALENTS
Beginning 1,305,392 140,030
----------- -----------
Ending $ 615,125 $ 682,356
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Obligation recorded in connection with prepaid
license fees $ 0 $ 768,250
=========== ===========
</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 April 4, 1998, and December 31, 1997, and results of its operations and
cash flows for the three-month period ended April 4, 1998, and March 29, 1997.
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 1997 Datakey, Inc. Annual Report and in
Form 10-KSB for the year ended December 31, 1997.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
DATAKEY, INC. AND SUBSIDIARY
RESULTS OF OPERATIONS AND FIANANCIAL CONDITION
RESULTS OF OPERATIONS
REVENUE - Revenue for the three-month period ended April 4, 1998,
increased by $73,754, or 5 percent, compared to the comparable 1997 period. The
increase in revenue is due to renewed orders from the Company's Electronic
Products customers as well as pilot program revenue from the Company's newly
introduced information security systems. The newly introduced information
security products are currently in evaluation or pilot program stages with
several companies. If larger quantity orders are received as the Company
currently anticipates, revenue from the new products could exceed revenue from
the existing products and total 1998 revenue will exceed 1997 revenue.
GROSS PROFIT MARGIN - Gross profit as a percentage of revenue increased
to 40 percent in the three-month period ended April 4, 1998, compared to 34
percent in the comparable 1997 period. The 1998 improvement in margin percentage
is due to improved factory direct labor utilization, a reduction in scrap and
yield loss, and a favorable product mix. The Company expects the gross profit
margin as a percentage of revenue to remain at the current levels, or improve
slightly, for the balance of 1998.
OPERATING EXPENSES - Operating expense decreased by $534,687, or 33
percent, in the three-month period ended April 4, 1998, compared to the
comparable 1997 period. The decrease is attributable to a substantial reduction
in research, development, and engineering (R&D) expense, offset in part by an
increase in marketing and sales expense. R&D expense declined substantially
because the initial major new product development phase was completed in late
1997, and the Company is now able to concentrate on product enhancements and
upgrades during 1998. Consequently, the Company expects to invest about 45
percent less on R&D in 1998 than in 1997. Marketing and sales expense increased
$81,782 or 21 percent in the three-month period ended April 4, 1998, compared to
the comparable 1997 period as the Company increased its advertising and
promotional activities for the newly introduced information security products.
Marketing and sales expenses are expected to continue at about a 40 percent
higher level than was incurred in 1997.
INTEREST INCOME - Interest income declined $64,076, or 85 percent, in
the three-month period ended April 4, 1998, compared to the comparable 1997
period as proceeds from interest bearing accounts were utilized to fund new
product development and product promotion activities. Interest income is
expected to decline further in the second quarter of 1998, and the Company may
incur interest expense from borrowing on the $1 million bank line of credit or
from a private placement of convertible preferred stock which is expected to be
completed in May, 1998.
<PAGE>
FINANCIAL CONDITION - During the three-month period ended April 4,
1998, the Company had a net decrease of $690,267 in cash and cash equivalents as
compared to an increase of $542,326 in the comparable 1997 period. The 1997
increase was primarily due to realization of $2,015,162 in proceeds from
maturing marketable debt securities during the period. Net cash used in
operating activities decreased to $656,691 in the three-month period ended April
4, 1998, compared to $1,154,481 in the comparable 1997 period. The reduced use
of cash is directly attributable to a reduction in the operating loss to
$482,590 in 1998, from $1,071,737 in 1997.
Datakey's balance sheet reflects $1,572,344 in working capital as of
April 4, 1998, and a current assets to current liabilities ratio of 2.33 to 1.
The Company expects to continue spending on R&D, at a reduced amount compared to
1997, and on marketing and sales activities at an increased amount compared to
1997. Inventory and accounts receivable levels are expected to increase during
the balance of 1998 to support the expected ramp-up in revenue from the
Company's new information security products. The Company believes that it will
have adequate financial resources to fund its operations and R&D and marketing
activities during 1998 through utilization of its bank line of credit, proceeds
from the private financing described above, and positive cash flow from
operations later in the year if the Company returns to profitability as it
currently expects. If the market acceptance of the Company's information
security products is slow to develop or does not develop as currently
anticipated, the Company may need funds in addition to its bank line and the
financing expected to be completed in May 1998. In such circumstances, there is
no assurance that the necessary funding would be available upon acceptable
terms.
CAUTIONARY STATEMENTS
The Management's Discussion and Analysis contains certain forward looking
statements relating primarily to the introduction of the Company's information
security products and the anticipated generation of significant revenue from
such products. The statements are subject to certain risks and uncertainties,
which could cause results to differ from those projected. These risks and
uncertainties, in addition to those discussed above, include: (i) the ability of
the Company to successfully develop all of the new products under development
and to control costs as necessary; (ii) the capability of the new products to
function as currently anticipated; (iii) the potential introduction of
competitive products by companies with greater resources than that of the
Company, and (iv) market acceptance of the new products.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 4, 1998.
<PAGE>
SIGNATUES
In accordance with the requirements of the 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 18, 1998 Datakey, Inc.
By: /s/Carl P. Boecher
Carl P. Boecher
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 APRIL 4, 1998
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> APR-04-1998
<EXCHANGE-RATE> 1
<CASH> 615,125
<SECURITIES> 0
<RECEIVABLES> 926,169
<ALLOWANCES> 31,160
<INVENTORY> 1,169,656
<CURRENT-ASSETS> 2,754,277
<PP&E> 4,773,166
<DEPRECIATION> 3,402,111
<TOTAL-ASSETS> 5,227,717
<CURRENT-LIABILITIES> 1,181,933
<BONDS> 0
0
375,000
<COMMON> 144,361
<OTHER-SE> 3,526,423
<TOTAL-LIABILITY-AND-EQUITY> 5,227,717
<SALES> 1,483,555
<TOTAL-REVENUES> 1,483,555
<CGS> 890,090
<TOTAL-COSTS> 890,090
<OTHER-EXPENSES> 1,087,596
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (482,590)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (482,590)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
