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 July 1, 2000
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 15, 2000, is 8,204,379.
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>
July 1, December 31,
2000 1999
------------ ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,516,208 $ 344,922
Trade receivables, less allowance for
doubtful accounts of $26,000 1,642,495 1,474,480
Inventories 1,903,532 1,328,991
Prepaid and other 95,612 29,981
------------ ------------
Total current assets 7,157,847 3,178,374
------------ ------------
OTHER ASSETS
Prepaid licenses and patents at cost less amortization 520,420 668,036
of $519,603 and $364,832
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost
Production tooling 1,299,313 1,306,260
Equipment 2,851,142 2,768,214
Furniture and fixtures 317,102 317,103
Leasehold improvements 278,371 278,371
------------ ------------
4,745,928 4,669,948
Less accumulated depreciation (4,099,760) (3,917,996)
------------ ------------
646,168 751,952
------------ ------------
$ 8,324,435 $ 4,598,362
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 639,043 $ 803,887
Accrued compensation 312,878 197,335
Accrued expenses-other 38,802 97,144
------------ ------------
Total current liabilities 990,723 1,098,366
------------ ------------
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 20,000,000 shares; issued and outstanding
8,204,379 in 2000 and 6,322,285 in 1999 410,219 316,114
Additional paid-in capital 13,674,445 8,501,543
Accumulated deficit (7,125,952) (5,692,661)
------------ ------------
7,333,712 3,499,996
------------ ------------
$ 8,324,435 $ 4,598,362
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
DATAKEY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 1,836,700 $ 1,154,008 $ 3,610,077 $ 2,513,990
Cost of goods sold 895,749 708,203 1,983,429 1,502,192
----------- ----------- ----------- -----------
Gross Profit 940,951 445,805 1,626,648 1,011,798
Operating expenses:
Research, development
and engineering 635,494 563,775 1,269,343 1,040,957
Marketing and sales 775,604 546,543 1,315,788 1,135,952
General and administrative 315,602 238,329 572,659 468,810
----------- ----------- ----------- -----------
Total operating expenses 1,726,700 1,348,647 3,157,790 2,645,719
----------- ----------- ----------- -----------
Operating loss (785,749) (902,842) (1,531,142) (1,633,921)
Interest income (expense) 60,727 (4,277) 97,857 342
----------- ----------- ----------- -----------
Loss before
income taxes (725,022) (907,119) (1,433,285) (1,633,579)
Income tax expense 0 0 0 0
----------- ----------- ----------- -----------
Net loss ($ 725,022) ($ 907,119) ($1,433,285) ($1,633,579)
=========== =========== =========== ===========
Net loss attributable to common stockholders:
Net loss (725,022) (907,119) (1,433,285) (1,633,579)
Preferred stock dividends 0 (23,436) 0 (47,786)
----------- ----------- ----------- -----------
Net loss attributable to
common stockholders ($ 725,022) ($ 930,555) ($1,433,285) ($1,681,365)
=========== =========== =========== ===========
Basic and diluted
loss per share ($ 0.09) ($ 0.29) ($ 0.19) ($ 0.53)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 8,110,533 3,188,299 7,705,281 3,138,137
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
DATAKEY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
----------- ----------- ----------- -----------
CASH FLOWS FROM
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net loss ($ 725,022) ($ 907,119) ($1,433,285) ($1,633,579)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation 100,154 114,169 181,764 221,382
Amortization 99,220 13,350 154,771 34,493
Change in assets and liabilities
(Increase) decrease:
Trade receivables (468,737) (7,092) (168,015) 187,094
Inventories (521,858) (333,168) (574,541) (439,197)
Prepaid expenses and other (90,752) 58,783 (65,631) 12,275
Prepaid license fees and patent (2,167) (5,557) (7,155) (12,977)
Increase (decrease) in:
Accounts payable (36,548) 243,200 (164,844) 228,838
Accrued expenses 17,448 (62,430) 57,201 42,113
Accrued severance 0 (32,550) 0 (10,687)
----------- ----------- ----------- -----------
Net cash used in
operating activities (1,628,262) (918,414) (2,019,735) (1,370,245)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (10,564) (71,501) (75,980) (107,030)
----------- ----------- ----------- -----------
Net cash used in
investing activities (10,564) (71,501) (75,980) (107,030)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of
common stock 238,993 1,218,823 5,267,001 1,247,823
----------- ----------- ----------- -----------
Net cash provided by financing activities 238,993 1,218,823 5,267,001 1,247,823
----------- ----------- ----------- -----------
Increase (decrease) in cash and
cash equivalents (1,399,833) 228,908 3,171,286 (229,452)
CASH AND CASH EQUIVALENTS
Beginning 4,916,041 395,467 344,922 853,827
----------- ----------- ----------- -----------
Ending 3,516,208 624,375 3,516,208 624,375
=========== =========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Preferred stock dividend accrual 0 23,436 0 39,596
Preferred stock dividend converted to common stock 0 0 0 8,190
Conversion of preferred stock to common 0 0 0 151,520
----------- ----------- ----------- -----------
0 23,436 0 191,116
=========== =========== =========== ===========
</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 July 1, 2000, and December 31, 1999, and results of its operations and
cash flows for the three-month and six-month periods ended July 1, 2000, and
July 3, 1999. 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 2000 Datakey, Inc. Annual Report and in
Form 10-KSB for the year ended December 31, 1999.
OPERATING SEGMENTS
The Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information, for the year ended December 31, 1998. This statement
requires public enterprises to report selected information about operating
segments in annual and interim reports issued to shareholders. The adoption of
this statement had no impact on the Company's financial condition or results of
operations.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. The Company has
two reportable segments: Electronic Products (EP) and Integrated Systems
Solutions (ISS). The Electronic Products segment produces and markets
proprietary memory keys, cards, and custom-shaped tokens and systems that
utilize these products that serve as a convenient way to carry electronic
information. The Integrated Systems Solutions segment produces and markets
products for the information security market, which enable user identification
and authentication, secure data exchange, and information validation.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. There are no intersegment
transactions. The Company evaluates performance based on operating earnings of
the respective segments.
<TABLE>
<CAPTION>
Three Months Ended July 1, 2000 Six Months Ended July 1, 2000
--------------------------------------------- ----------------------------------------------
EP ISS UNALLOCATED TOTAL EP ISS UNALLOCATED TOTAL
---------- --------- -------- ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............... $ 897,188 $ 939,512 $ - $1,836,700 $2,211,770 $1,398,307 $ - $ 3,610,077
Interest income - - 60,727 60,727 - - 97,857 97,857
(expense).............
Depreciation and 72,303 127,071 - 199,374 126,503 210,032 - 336,535
amortization..........
Segment profit (loss). (72,320) (713,429) 60,727 (725,022) (29,949) (1,501,193) 97,857 (1,433,285)
-------- ---------- ------------- ----------- --------- -------- ------------- -------------
<CAPTION>
Three Months Ended July 3, 1999 Six Months Ended July 3, 1999
--------------------------------------------- ----------------------------------------------
EP ISS UNALLOCATED TOTAL EP ISS UNALLOCATED TOTAL
---------- --------- -------- ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............... $1,051,462 $ 102,546 $ - $1,154,008 $2,268,171 $ 245,819 $ - $ 2,513,990
Interest - - (4,277) (4,277) - - 342 342
income(expense).......
Depreciation and 100,205 27,314 - 127,519 193,177 62,698 - 255,875
amortization..........
Segment profit (loss). (51,666) (855,453) (4,277) (907,119) 104,089 (1,737,668) 342 (1,633,579)
---------- --------- -------- ---------- ---------- ---------- -------- -----------
</TABLE>
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 - Revenue for the three-month period ended July 1, 2000,
increased by $683,000, or 59 percent, and increased by $1,096,000 or 44% in the
six-month period ended July 1, 2000 as compared to the same periods in 1999. The
increase in revenue is due to a significant increase in revenue in the Company's
ISS business unit as customers and licensees are increasingly accepting the
Company's product offering.
Revenue in the EP business segment is somewhat soft with a reduction of
$154,000 in the three-month period and $56,000 in the six-month period ending
July 1, 2000 as compared to the same periods in 1999. The decline in revenue is
due to a reduction in component orders from a few of the Company's major
customers. The Company has introduced system level products for the EP unit
which management expects to revitalize revenue growth.
GROSS PROFIT MARGIN - Gross profit as a percentage of revenue increased
to 51 percent in the three-month period ended July 1, 2000, and 45 percent in
the six-month period ended July 1, 2000. The increase in margin is due to
favorable factory utilization at the higher revenue levels and also a large
element of license fee revenue that contains high gross margins.
OPERATING EXPENSES - Operating expenses increased by $378,000 or 28
percent, and $512,000 or 19 percent in the three-month and six-month periods,
respectively, ended July 1, 2000, when compared to those periods of 1999. The
increases are principally related to an increase of $229,000 in the three-month
period and $180,000 in the six-month period in sales and marketing expense to
continue advertising and promoting the Company's ISS product line. Research and
development expense also increased $72,000 in the three-month period and
$228,000 in the six-month period, as the Company continued to develop more
features and enhancements to its information security products. Other expense
increases are primarily increases in rent, corporate insurance, and salaries.
INTEREST INCOME - Interest income increased to $61,000 in the
three-month periods and $98,000 in the six-month period, ended July 1, 2000, as
the Company invested the proceeds from the sale of securities in late 1999 and
early 2000 in interest bearing accounts. Interest income is expected to trend
down over the balance of 2000 as a portion of the interest bearing accounts will
be used to fund the continuing investment in product development and product
promotion activities.
FINANCIAL CONDITION - The Company experienced a decrease in cash and
cash equivalents of $1,400,000 in the three-month period and an increase of
$3,171,000 for the six-month period ended July 1, 2000, compared to an increase
of $229,000 in the three-month period and a decrease of $229,000 for the
six-month period in 1999. The additional increase in cash in the six month
period is primarily attributable to the sale of common stock in a private
placement during February 2000 and from the sale of securities upon exercise of
warrants and stock options during the first and second quarters of 2000. The
additional decrease in cash in the second quarter of 2000 was due to a
significant increase in accounts receivable related to the ISS business unit and
an increase in inventory in anticipation of higher sales in the EP business
unit.
Datakey's balance sheet reflects $6,167,000 in working capital as of
July 1, 2000 and a current assets to current liabilities ratio of 7.22 to 1. The
Company believes that its current cash and cash equivalents in addition to its
$1 million bank line of credit, renewed in May 2000 will provide sufficient
funding for the balance of 2000.
<PAGE>
CAUTIONARY STATEMENTS
The Management's Discussion and Analysis contains certain forward-looking
statements relating to the continued acceptance of the Company's ISS products,
the implication that the ISS product revenue will continue to increase
significantly, and its ability to fund its operations. These statements are
subject to certain risks and uncertainties which may cause actual results to
differ materially from those projected. These risks and uncertainties include:
(i) a reduction in the market acceptance and demand for the Company's ISS
products; (ii) the success of current pilot programs and customer demand to
convert to production programs; (iii) the introduction of competitive
information security products; and (iv) the ability of the Company to attain
profitability and positive cash flows by significantly increasing ISS product
revenues while controlling expenses.
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 8, 2000, the Company sold 80,000 shares of common stock for $100,000
upon the exercise of a warrant held by an investor who acquired the warrant in
connection with a private placement completed on October 29, 1999. The Company
relied upon Section 4(2) of the Securities Act, which provides an exemption for
transactions not involving a public offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS
The Company held its Annual Meeting on Wednesday, May 31, 2000.
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 6,710,030 votes in favor, with 14,103 votes opposed, and 23,005 votes
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 VOTES
NOMINEE VOTES FOR WITHHELD
Terrence W. Glarner 6,726,813 20,325
Thomas R. King 6,725,413 21,725
Gary R. Holland 6,724,313 22,825
Eugene W. Courtney 6,726,813 20,325
Carl P. Boecher 6,727,913 19,225
The shareholders approved, by 3,421,414 votes for, 578,893 against, 15,235
abstaining, and 2,731,596 broker non-votes, an amendment to the Articles of
Incorporation, including an increase of authorized shares from 12,500,000 to
30,000,000 consisting of 20,000,000 common shares, 400,000 preferred shares and
9,600,000 undesignated shares..
The shareholders approved, by 6,081,792 votes for, 638,996 against, 26,350
abstaining, and no broker non-votes, an increase in the shares under the 1997
Stock Option Plan from 800,000 to 1,100,000
The shareholders also ratified the appointment of McGladrey and Pullen, LLP, as
independent auditors for the Company for the fiscal year ending December 31,
2000, by 6,705,939 votes in favor, 28,819 opposing and 12,380 abstaining.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
(a) Exhibit 27 Financial Data Schedule (only filed with electronic copy)
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated August 15, 2000 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 JULY 1, 2000
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule
