As filed with the Securities and Exchange Commission on June 12, 1998
Registration No. 333-_____
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
DATAKEY, INC.
(Name of Registrant as specified in its Charter)
Minnesota 41-1291472
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
Datakey, Inc.
407 West Travelers Trail
Burnsville, Minnesota 55337
(612) 890-6850
(Address and Telephone Number of Registrant's Principal Executive Offices)
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Alan G. Shuler, CFO
Datakey, Inc.
407 West Travelers Trail
Burnsville, Minnesota 55337
(612) 890-6850
(Name, Address and Telephone Number of Agent for Service)
Copies to:
Elizabeth McGraw Reiskytl, Esq.
Fredrikson & Byron, P.A.
900 Second Avenue South, Suite 1100
Minneapolis, Minnesota 55402
(612) 347-7000
Approximate date of commencement of proposed sale to the public: From
time to time after the effective date of this Registration Statement as
determined by market conditions and other factors and as Selling Shareholders
shall determine.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities being registered on this form to be offered on
a delayed or continuous basis, pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this Form is filed to register additional securities of an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------
Title of Each Proposed Maximum Proposed Maximum
Class of Securities Amount to be Offering Price Aggregate Offering Amount of
to be Registered Registered per Unit Price Registration Fee
<S> <C> <C> <C> <C>
Common Stock (par 670,149 shares(1)(2) $5.59(3) $3,746,132.91(3) $1,105.11
value $0.05 per share)
Common Stock (par 225,985 shares(4) $5.59 $1,263,256.15 $ 372.66
value $0.05 per share)
TOTAL 896,134 shares $1,477.77
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</TABLE>
(1) Represents the maximum number of shares of Common Stock issuable upon
conversion of the Series A Convertible Cumulative Preferred Stock (the
"Preferred Stock") and the payment of dividends in shares of Common Stock,
assuming a conversion price of $2.75.
(2) Pursuant to Rule 416 under the Act, included in this registration are an
indeterminate number of additional shares of Common Stock as may be issuable
upon (i) conversion of the shares of the Preferred Stock described herein and
(ii) payment of dividends thereon in additional shares of Common Stock pursuant
to the anti-dilution and other provisions of such Preferred Stock.
(3) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended, (the
"Act") and based upon the average of the high and low sale prices for such stock
on June 11, 1998, as reported by the Nasdaq National Market.
(4) Represents shares issuable to Selling Shareholders upon the exercise of
warrants and then offered for resale pursuant to this registration, including
warrants to purchase 188,095 shares at $6.30 per share and warrants to purchase
37,890 shares at $6.60 per share.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Commissions, acting pursuant to aforesaid
Section 8(a), may determine.
<PAGE>
PROSPECTUS
DATAKEY, INC.
896,134 SHARES OF COMMON STOCK
This Prospectus relates to the offer and sale of up to 896,134 shares
of Common Stock (the "Shares"), par value $.05 per share, of Datakey, Inc., a
Minnesota corporation (the "Company" or "Datakey"), that may be offered and sold
from time to time by the shareholders described herein under "Selling
Shareholders" (the "Selling Shareholders") or by pledgees, donees, transferees,
or other successors in interest that receive such shares as a gift,
distribution, or other non-sale related transfer. The Selling Shareholders may
become holders of the Company's Common Stock upon conversion of outstanding
shares of Series A Convertible Cumulative Preferred Stock (the "Preferred
Stock") described herein, upon receipt of Common Stock issuable in lieu of cash
dividends, or upon exercise of certain outstanding warrants to purchase shares
of Company Common Stock granted at the same time as the Preferred Stock. The
Selling Shareholders may offer their Shares from time to time through or to
brokers or dealers in the over-the-counter market at market prices prevailing at
the time of sale or in one or more negotiated transactions at prices acceptable
to the Selling Shareholders. The Company will not receive any proceeds from the
sale of Shares by the Selling Shareholders. See "Plan of Distribution."
The Company will bear all expenses of the offering (estimated at
$12,000), except that the Selling Shareholders will pay any applicable
underwriter's commissions and expenses, brokerage fees or transfer taxes, as
well as any fees and disbursements of counsel and experts for the Selling
Shareholders.
The Shares may be sold from time to time in transactions on the Nasdaq
National Market at the market prices then prevailing, in privately negotiated
transactions or otherwise. In connection with any sales, the Selling
Shareholders and any brokers and dealers participating in such sales may be
deemed to be "underwriters" within the meaning of the Securities Act. See "Plan
of Distribution."
Datakey's Common Stock is traded on the Nasdaq National Market under
the symbol of "DKEY." The closing sale price of the Common Stock on June 11,
1998 was $5.6875 per share.
On May 15, 1998, the Company issued to certain investors 100,000 shares
of Preferred Stock and five-year warrants to purchase an aggregate of 188,095
shares of the Company's Common Stock with an exercise price of $6.30 per share.
The Preferred Stock has dividend rights at an annual rate of eight percent (8%)
of their original issuance price, with such dividends payable either in cash or
in shares of the Company's Common Stock upon conversion of the Preferred Stock.
The Preferred Stock is convertible through May 15, 2000 at a conversion rate
equal to eighty percent (80%) of the market price (defined to equal the average
closing bid price of the Company's Common Stock for the ten-day period prior to
conversion), subject to the minimum and maximum conversion rates of $2.75 and
$5.00, respectively. Any shares of Preferred Stock outstanding on May 15, 2000
will be automatically converted on the same terms as apply prior to such date.
As part of the financing, the Company also issued to its agent warrants to
purchase an aggregate of 37,890 shares of Common Stock at an exercise price of
$6.60. The warrants issued to the investors and the agent are referred to herein
as the "Warrants."
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The Common Stock offered by this Prospectus is
speculative and involves a high degree of risk.
See "Risk Factors" beginning on page 3.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is June ___, 1998.
<PAGE>
No dealer, salesman or any other person is authorized to give any
information or to make any representations, other then those contained or
incorporated by reference in this Prospectus, in connection with the offering
contemplated hereby, and, if given or made, such information or representations
must not be relied upon as having been authorized by the Company. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any securities other than the registered securities to which it relates or
in any jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the date
hereof or that the information contained or incorporated by reference herein is
correct as of any time subsequent to its date.
AVAILABLE INFORMATION
Prior to this Offering, the Company has been subject to the reporting
requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Commission. The Company has filed with the Washington, D.C. Office of the
Commission a Registration Statement on Form S-3 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the sale of the Shares.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the Shares, reference is made to the Registration
Statement, including the exhibits thereto. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement. The Registration Statement and the Company's Exchange Act reports,
proxy statements and other information may be inspected by anyone without charge
at the principal office of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of all or any part of such material may be obtained upon
payment of the prescribed fees from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Registration
Statement and the Company Exchange Act filings may also be accessed through the
Commission's Web site (http://www.sec.gov). The Company's Common Stock is
currently listed on the Nasdaq National Market under the symbol "DKEY."
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission are
hereby incorporated by reference in this Prospectus and shall be deemed to be a
part thereof:
1. The Company's Annual Report on Form 10-KSB, as amended by Form
10-KSB/A-1, for the fiscal year ended December 31, 1997;
2. The Company's Quarterly Report on Form 10-QSB for the quarter
ended April 4, 1998;
3. The Company's Form 8-K dated May 19, 1998.
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to
the termination of the offering of the Shares shall be deemed to be incorporated
by reference in this Prospectus and to be a part hereof from the date of filing
of such documents.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any or all of the documents
incorporated herein by reference (not including the exhibits to such documents,
unless such exhibits are specifically incorporated by reference in such
documents). Requests for such copies should be directed to Alan G. Shuler, Chief
Financial Officer, Datakey, Inc., 407 West Travelers Trail, Burnsville,
Minnesota 55337, telephone (612) 890-6850.
<PAGE>
COMPANY SUMMARY
Datakey, Inc. was incorporated under the laws of the State of Minnesota
in 1976 under the name "The Systems Group, Inc." In 1980, the Company changed
its name to Datakey, Inc. The Company provides product, subsystem and system
solutions to record, store and transmit electronic information. Datakey also
manufactures and sells products and systems directed to the information security
market which will enable user identification and authentication, secure data
exchange and information validation. It also provides OEM products, consisting
of proprietary memory keys, cards and other custom-shaped tokens that serve as a
convenient way to carry electronic information and are packaged to survive in
portable environments.
The Company's first portable information system, consisting of an
electronic key and support electronics, was introduced in 1981 for applications
requiring convenient storage, transportation and management of information. The
Company's current system utilizes semiconductor technology to provide a storage
device more versatile than conventional portable information products such as
keys, badges and magnetic stripe cards. The Company's current product line of
portable data carriers and associated interface products provide up to
16,384,000 bits of data storage which are used in a wide range of applications
including communications security, computer security, facility security, vending
and process control.
Each of the Company's personal portable information systems consists of
one or more portable data carriers, access devices and, for certain models,
interface modules containing microprocessors. These components, together with
the user's processor-based equipment, function as an integrated system allowing
instantaneous processing of personalized data carried within a portable data
carrier. Through the incorporation of advanced semiconductor memory technology,
the Company's portable data carrier is able to store and carry substantial
amounts of information. When the portable data carrier is used in conjunction
with the other components of the Company's system, information can be
selectively altered, added to or erased, as required, to effectively and
reliably manage or control a particular activity or transaction.
The Company has introduced an end-user system level product which is
designed to provide electronic signatures on computer aided drafting (CAD)
drawings and additional end-user systems that are designed to provide advanced
information security utilizing digital signatures and encryption. These systems
incorporate hardware and software to provide a higher level of security than is
obtainable with current software only solutions.
The Company's principal executive offices are located at 407 West
Travelers Trail, Burnsville, Minnesota 55337, and its telephone number is (612)
890-6850.
RISK FACTORS
An investment in the Securities offered hereby involves a high degree
of risk. The Securities offered hereby should not be purchased by persons who
cannot afford the entire loss of their investment. Prospective investors should
carefully consider the following factors, in addition to the other information
presented in this Memorandum, in evaluating the Company and its businesses. This
Prospectus contains certain forward-looking statements. The Company's actual
results could differ materially from the results currently anticipated by
management of the Company in such forward-looking statements as a result of a
variety of factors, including, but not limited to, "Risk Factors" described
below, and elsewhere, in this Prospectus.
1. Reliance on Information Security Products: The Company's future growth and
profitability is to a significant extent dependent on the success of its
information security (Integrated System Solutions) products, which is subject to
all of the risks inherent in the establishment of any new business venture. The
Company's future growth and profitability is subject to the continuing success
of its information security product development efforts, but more importantly,
to the success of its marketing and sales efforts. If, for any reason, the
Company is unable to successfully build its information security product
business, its ability to continue operations in its current form would be in
doubt.
2. Risk of rapid technological change: In the information security market,
Datakey faces significant risks due to the rapid changes in available
technology. Datakey's information security end-user products such as SignaSURE
<PAGE>
CIP and SignaSURE ESS will integrate hardware tokens with software that provides
a much higher level of security than software implementations alone. Software
only solutions may be developed in the future which would provide this security.
Such development could materially adversely affect Datakey's business.
3. Dependence on customer acceptance: While Datakey performs market research
and beta testing to determine the viability of its new products, actual user
acceptance will ultimately dictate the success of the marketing and sales
efforts of new products such as SignaSURE CIP and ESS. There are no assurances
that Datakey's products will ultimately receive satisfactory customer acceptance
or that investments already made and additional investments planned for the
remainder of 1998 will result in a financial return.
4. Delays in product delivery schedules: Datakey's success depends to some
extent on its ability to meet its currently scheduled development timetable.
Delays in the release of new products will cause operational inefficiencies,
increased development costs and reduced revenues and may affect customer
acceptance.
5. Competition: While Datakey believes that its strategy of providing
token-based product solutions at a price that is competitive with software-only
products is attainable, there are no assurances that competitive pressures will
not force the Company to accept reduced margins to compete in the future. Large
companies with significantly greater resources have recognized the need for
information security and will likely enter this market as competitors with much
greater financial resources. A portion of the new end-user products' cost
consists of royalties and license fees which would need to be re-negotiated in
order to maintain acceptable profit margins.
6. Risk of integrated information security products: Although the Company's
new products will operate seamlessly with popular application programs, new
application programs that integrate information security into their product
could erode the future market for these Datakey products.
7. Dependence on new marketing and sales organization: The future revenue of
Datakey end-user systems is dependent on the success of a new and untested
marketing and direct sales organization.
8. Competition from other information transmission media: Corporate
utilization of the Internet and internal intranets dictate a need for
information security, but there are no assurances that other, more secure
information transmission media may not become available in the future that would
preclude the need for the type of information security provided by the Company's
products.
9. Need for additional capital: The need for additional capital will depend
primarily on the success of its information security products. If the Company is
not successful with its integrated system solutions products, the Company may be
forced to curtail or discontinue operations unless it can obtain significant
additional capital. Such capital may not be available on terms satisfactory to
the Company, or at all.
<PAGE>
USE OF PROCEEDS
The Company is not selling any of the Shares and will not receive any
proceeds from the sale of the Shares by the Selling Shareholders.
SELLING SHAREHOLDERS
Set forth below are the names of the Selling Shareholders, the number
of shares of Common Stock of the Company beneficially owned by each of them on
the date hereof, the number of shares offered hereby and the percentage of the
outstanding Common Stock to be owned if all the shares registered hereunder are
sold by the Selling Shareholders. To the knowledge of the Company, none of the
Selling Shareholders has had within the past three years any material
relationship with the Company except as set forth in the footnotes to the
following table. The shares offered hereby shall be deemed to include shares
offered by any pledgee, donee, transferee or other successor in interest of any
of the Selling Shareholders listed below, provided that this prospectus is
amended or supplemented if required by applicable law.
<TABLE>
<CAPTION>
Number of Shares %
Beneficially Owned Number of Owned
----------------------------------- Shares After
Warrant Offered Offering
Name Shares(1) Shares Total Hereby (2)
- ----------------------------------- --------- ------- ----- --------- --------
<S> <C> <C> <C> <C> <C>
Special Situations Private Equity
Fund, L.P.(3) 336,362 110,119 446,481 446,481 *
Special Situations Technology
Fund, L.P.(3) 90,910 29,763 120,673 120,673 *
Gary Kohler IRA 9,095 2,978 12,073 12,073 *
Robert G. Allison 12,268 2,379 14,647 9,647 *
Shirley A. Baxter, TTEE FBO Shirley A.
Baxter Rev Trust U/A dtd 7/3/96 7,268 2,379 9,647 9,647 *
Craig L. Campbell 7,268 2,379 9,647 9,647 *
Piper Jaffray as Cust FBO Bradley A.
Erickson IRA 7,268 2,379 9,647 9,647 *
Piper Jaffray as Cust FBO Richard C.
Perkins IRA 7,268 2,379 9,647 9,647 *
David M. Westrum TTEE FBO David M.
Westrum Rev Living Trust dtd 6/1/97 7,268 2,379 9,647 9,647 *
Pyramid Partners, L.P. 25,625 8,389 34,014 34,014 *
Industricorp & Co., Inc. FBO Twin City
Carpenters Pension Plan 57,455 18,810 76,265 76,265 *
Daniel S. and Patrice M. Perkins, JT 11,491 3,762 15,253 15,253 *
Paul R. Kuehn 14,209 14,209 14,209 *
David B. Johnson 14,209 14,209 14,209 *
Eldon C. Miller 4,736 4,736 4,736 *
Stanley D. Rahm 4,736 4,736 4,736 *
------- ------- ------- -------
TOTAL 579,545 225,985 805,531 800,531(4)
</TABLE>
* Less than 1.0%.
(1) The number of shares of Common Stock shown as beneficially owned and
offered by the Selling Shareholders represents or includes the number
of shares which the Company has initially agreed to register, assuming
the minimum conversion price of $2.75 per share. The number of shares
reflected herein may differ from the number of shares beneficially
owned as reported by certain Selling Shareholders due to different
assumptions with respect to the conversion price. Pursuant to Rule 416
<PAGE>
under the Securities Act, the number of shares of Common Stock offered
by the Selling Shareholders hereby and included in the Registration
Statement of which this Prospectus is a part also includes such
presently indeterminate number of additional shares as may be issued on
conversion of the Preferred Stock and in payment of dividends thereon
pursuant to the provisions of the Certificate of Designation for the
Preferred Stock regarding determination of the applicable conversion
price and the dividend calculation rate. Accordingly, the actual number
of shares of Common Stock issued or issuable upon the conversion of the
Preferred Stock and the payment of dividends thereon is subject to
adjustment depending upon factors which cannot be predicted by the
Company at this time, including among others, the future market prices
of the Common Stock and the payment of dividends on the Preferred Stock
in additional shares of Common Stock. Pursuant to the terms of the
Certificate of Designation for the Preferred Stock, the Preferred Stock
is convertible by each holder thereof and dividends are payable all in
cash or all in shares of Common Stock. The above numbers assume that
the Selling Shareholders will exercise the Warrants for cash. If the
Selling Shareholders use the cashless exercise alternative, the actual
number of shares of Common Stock issued will be fewer, depending on the
market value of the underlying shares of Common Stock immediately prior
to exercise.
(2) The percentage of shares beneficially owned by each Selling Shareholder
is based on 2,943,901 shares of Common Stock outstanding as of the date
hereof. Assumes the sale of all the Shares being offered hereby.
(3) Special Situations Private Equity Fund, L.P. and Special Situations
Technology Fund, L.P. may be deemed to be affiliates because they are
managed by investment advisers principally owned by Mr. Austin W. Marxe
and Mr. David M. Greenhouse. Messrs. Marxe and Greenhouse disclaim
beneficial ownership in such shares.
(4) Does not include up to an additional 95,604 shares issuable in lieu of
cash dividends occurring at a cumulative annual rate of 8%.
The Selling Shareholders and their respective officers and directors
have not held any positions or office or had any other material relationship
with the Company or any of its affiliates within the past three years.
The Company has agreed with the Selling Shareholders to file with the
Commission, under the Securities Act, a Registration Statement of which this
Prospectus forms a part, with respect to the resale of the Shares, and has
agreed to prepare and file such amendments and supplements to the Registration
Statement as may be necessary to keep the Registration Statement effective until
the earlier of (i) five years from the effectiveness of the Registration
Statement, or (ii) the date on which all of the Shares have been sold.
PLAN OF DISTRIBUTION
All or a portion of the Shares offered by the Selling Shareholders
hereby may be sold from time to time by the Selling Shareholders or by pledgees,
donees, transferees or other successors in interest. Such sales may be made in
the over-the-counter market or otherwise at prices and at terms then prevailing
or at prices related to the then current market price, or in negotiated
transactions. The Shares may be sold by one or more of the following means: (a)
ordinary brokerage or market making transactions and transactions in which the
broker or dealer solicits purchasers; (b) block trades in which the broker or
dealer so engaged will attempt to sell the Shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; and
(c) purchases by a broker or dealer as principal and resales by such broker or
dealer for its account pursuant to this Prospectus. In effecting sales, brokers
or dealers engaged by the Selling Shareholders may arrange for other brokers or
dealers to participate. Brokers or dealers will receive commissions or discounts
from the Selling Shareholders in amounts to be negotiated immediately prior to
the sale. Such brokers or dealers and any other participating brokers or dealers
may be deemed to be "underwriters" within the meaning of the Securities Act in
connection with such sales. In addition, any securities covered by this
Prospectus which qualify for sale pursuant to Rule 144 under the Act may be sold
under Rule 144 rather than pursuant to this Prospectus.
The Company and the Selling Shareholders have agreed to indemnify each
other against certain liabilities, including liabilities arising under the
Securities Act.
<PAGE>
DESCRIPTION OF SECURITIES
The aggregate number of shares of stock which the Company has the
authority to issue is 12,500,000 shares, consisting of 10,000,000 shares of
Common Stock, par value $.05, 400,000 of Convertible Preferred Stock, 150,000
shares of Series A Convertible Cumulative Preferred Stock and 1,950,000 shares
of undesignated shares. Holders of Common Stock have no cumulative voting rights
and no preemptive rights. Upon liquidation or dissolution, the holders of Common
Stock will be entiteld to share ratably in all assets available for distribution
after the payment or provision for payment of all debts and liabilities and
subject to the rights of the holders of any preferred stock which may be
outstanding. Each share of Common Stock is entitled to dividends as may from
time to time be declared by the Board of Directors out of funds legally
available therefor. The shares of Common Stock are quoted on the Nasdaq National
Market under the symbol "DKEY." The outstanding shares of Common Stock are, and
the shares of Common Stock offered hereby will be, fully paid and nonassessable.
LEGAL MATTERS
Certain legal matters associated with the Shares being offered hereby
will be passed upon for the Company by Fredrikson & Byron, P.A., Minneapolis,
Minnesota.
EXPERTS
The consolidated financial statements incorporated in this prospectus
by reference from the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997 have been audited by McGladrey & Pullen, LLP, independent
auditors, as stated in their report, which is incorporated herein by reference,
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
TABLE OF CONTENTS
Page
Available Information 2
Documents Incorporated By Reference 2
Company Summary 3
Risk Factors 3
Use of Proceeds 5
Selling Shareholders 5
Plan of Distribution 6
Description of Securities 7
Legal Matters 7
Experts 7
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The estimated expenses in connection with this offering are as follows:
Securities and Exchange Commission Filing Fee $ 1,478
Legal Fees and Expenses 6,000
Accounting Fees and Expenses 2,000
Printing 500
Miscellaneous 2,000
========
Total Expenses $ 11,978
========
Item 15. Indemnification of Directors and Officers.
Section 302A.521 of the Minnesota Business Corporation Act provides
that a corporation shall indemnify any person who was or is threatened to be
made a party to any proceeding by reason of the former or present official
capacity of such person, against judgments, penalties and fines, including,
without limitation, excise taxes assessed against such person with respect to an
employee benefit plan, settlements and reasonable expenses, including attorneys'
fees and disbursements, incurred by such person in connection with the
proceeding, if, with respect to the acts or omissions of such person complained
of in the proceeding, such person has not been indemnified by another
organization or employee benefit plan for the same expenses with respect to the
same acts or omissions, acted in good faith, received no improper personal
benefit and Section 302A.255 (which pertains to director conflicts of interest),
if applicable, has been satisfied; in the case of a criminal proceeding, had no
reasonable cause to believe the conduct was unlawful; and in the case of acts or
omissions by person in their official capacity for the corporation, reasonably
believed that the conduct was in the best interests of the corporation, or in
the case of acts or omissions by persons in their capacity for other
organizations, reasonably believed that the conduct was not opposed to the best
interests of the corporation.
Section 302A.521 also permits Minnesota corporations to amend their
Articles of Incorporation to limit or eliminate personal liability of directors
to the corporation or its shareholders for monetary damages for breach of
fiduciary duty; however, forbids any limitation or elimination of director
liability for (i) a breach of the director's duty of loyalty, (ii) acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (iii) corporate distributions which are either illegal or in
contravention of restrictions in the Articles, Bylaws or any agreement to which
the corporation is a party, (iv) violations of Minnesota securities laws, (v)
any transaction from which the director derived an improper personal benefit, or
(vi) any act or omission occurring prior to the effective date of the provision
in the corporation's Articles eliminating or limiting liability.
Article 6.1 of the Registrant's Restated Articles of Incorporation, as
amended, reads as follows:
To the fullest extent permitted by the Minnesota Business Corporation
Act as the same exists or may hereafter be amended, a director of this
corporation shall not be personally liable to the corporation or its
shareholders for monetary damages for breach of fiduciary duty as a
director.
The Company's Amended Bylaws provide for the indemnification of its
directors, officers, employees and agents in accordance with, and to the fullest
extent permitted by, Section 302A.521 of the Minnesota Business Corporation Act,
as amended from time to time.
<PAGE>
Insofar as the indemnification of liabilities arising under the 1933
Act, as amended, may be permitted to directors, officers and controlling persons
of the Company pursuant to the provisions of its Restated Articles of
Incorporation, Restated Bylaws and the provisions of the Minnesota Business
Corporation Act, or otherwise, the Company has been advised by counsel that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act, as amended, and is, therefore,
unenforceable.
Item 16. Exhibits.
See Exhibit Index on page following signatures.
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of
the Securities Act;
(ii) Reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which,
individually or in the aggregate, represents a fundamental
change in the information set forth in the registration
statement; and
(iii) Include any additional material information with respect
to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports file by the Registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement.
(2) That for determining liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities that remain unsold at the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
(c) The undersigned Registrant further undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
<PAGE>
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(d) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Burnsville, State of Minnesota, on June 12, 1998.
Datakey, Inc.
By: /s/ Carl P. Boecher
Carl P. Boecher
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Alan G. Shuler
Alan G. Shuler
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature to this
Registration Statement appears below hereby constitutes and appoints Carl P.
Boecher and Alan G. Shuler, and each of them, as his or her true and lawful
attorney-in fact and agent, with full power and substitution, to sign on his or
her behalf individually and in the capacity stated below and to perform any acts
necessary to be done in order to file all amendments and post-effective
amendments to this Registration Statement, and any and all instruments or
documents filed as part of or in connection with this Registration Statement or
the amendments thereto, and each of the undersigned does hereby ratify and
confirm all that said attorney-in-fact and agent, or his or her substitutes,
shall do or cause to be done by virtue hereof.
Signatures Title Date
/s/ Carl P. Boecher President and Chief June 12, 1998
Carl P. Boecher Executive Officer
/s/ Alan G. Shuler Vice President and June 12, 1998
Alan G. Shuler Chief Financial Officer
/s/ Thomas R. King Director and Secretary June 12, 1998
Thomas R. King
Director
Terrence W. Glarner
/s/ Gary R. Holland Director June 12, 1998
Gary R. Holland
/s/ Eugene W. Courtney Director June 12, 1998
Eugene W. Courtney
/s/ John H. Underwood Director June 12, 1998
John H. Underwood
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
DATAKEY, INC.
EXHIBIT INDEX TO FORM S-3
Exhibit
Number Description
3.1 Restated Articles of Incorporation, as amended
4.1 Certificate of Designation of Series A Preferred Stock (included in
Articles of Incorporation--see Exhibit 3.1)
5.1 Opinion and Consent of Fredrikson & Byron, P.A.
10.1 Preferred Stock Purchase Agreement dated May 15, 1998 between the
Company and certain investors
10.2 Registration Rights Agreement dated May 15, 1998 between the Company
and certain investors.
23.1 Consent of McGladrey & Pullen, LLP
23.2 Consent of Fredrikson & Byron, P.A. (included in Exhibit 5.1)
24.1 Powers of Attorney (included as part of the signature page hereto)
CERTIFICATE OF
RESTATED ARTICLES OF INCORPORATION OF
DATAKEY, INC.
We the undersigned William P. Flies and Thomas R. King, respectively
the president and secretary of Datakey, Inc., a corporation subject to the
provisions of the Minnesota Business Corporations Act, do hereby certify that,
pursuant to action taken by the directors of the Corporation at a regularly
scheduled meeting thereof and a majority vote of the outstanding shares of the
Corporation present in person or by proxy at an annual meeting thereof, the
Corporation effective as of May 24, 1982 elected to become governed by Minnesota
Statutes Ch. 302A and, in addition, approved and adopted the following Restated
Articles of Incorporation to supercede and take place of the existing Articles
of Incorporation.
ARTICLE I
The name of the Corporation is Datakey, Inc.
ARTICLE II
The registered office of this Corporation is located at 12281 Nicollet
Avenue South, Burnsville, Minnesota, 55337.
ARTICLE III
3.01 The aggregate number of shares of stock which this Corporation
shall have the authority to issue is 5,000,000. All common stock issued by the
Corporation shall have a par value of $.05 per share.
3.02. The board of directors may from time to time establish by
resolution different classes or series of shares and may fix the rights and
preferences of said shares in any class or series.
3.03. No shareholder of the Corporation shall have any preemptive
rights.
3.04. No shareholder shall be entitled to any cumulative voting rights.
3.05. The shareholders shall take action by the affirmative vote of the
holders of a majority of the voting power of all voting shares outstanding,
except where a larger proportion is required by law, these articles or a
shareholder control agreement.
<PAGE>
ARTICLE IV
The name and address of the original incorporator of this Corporation
is: William P. Flies, 12808 Woodview Lane, Burnsville, Minnesota, 55337.
ARTICLE V
The names and addresses of the present board of directors are:
William P. Flies Richard A. Walter
12281 Nicollet Avenue 10101 E. Bren Road
Burnsville, MN 55337 Minnetonka, MN 55343
Thomas R. King Timothy P. Stepanek
600 Midwest Plaza Bldg. 1730 Midwest Plaza Bldg.
Minneapolis, MN 55402 Minneapolis, MN 55402
IN WITNESS WHEREOF, we have hereunto set our hands this 24th day of
May, 1982.
/s/ William P. Flies
William P. Flies, President
/s/ Thomas R. King
Thomas R. King, Secretary
STATE OF MINNESOTA )
) ss.
COUNTY OF HENNEPIN )
William P. Flies and Thomas R. King, being duly sworn on oath, depose
and say that they are, respectively, the president and secretary of Datakey,
Inc., the corporation named in the foregoing certificate; that said certificate
contains a true statement of the action of the shareholders and board of
directors of said corporation; that said certificate is executed on behalf of
said corporation by its express authority; and that they further acknowledge the
same to be their free act and deed and the free act, and deed of said
corporation.
/s/ William Flies
/s/ Thomas R. King
Subscribed and sworn to before me this 24th day of May, 1982.
/s/ Elizabeth A. Forehand
Notary Public - Minnesota
Hennepin County
My commission expires 3-13-87
<PAGE>
OFFICERS' CERTIFICATE OF
DATAKEY, INC.
We, the undersigned, John H. Underwood and Thomas R. King, the
respective President and Secretary of Datakey, Inc., a corporation subject to
the provisions of Minnesota Statutes, Chapter 302A, do hereby certify that the
Minutes of Action Without Meeting of the Board of Directors of the corporation
dated December 23, 1985, a copy of which is attached hereto and incorporated
herein by reference, in which the Board of Directors authorized the issuance of
Preferred Stock, were unanimously adopted and approved by such Board of
Directors.
IN WITNESS WHEREOF, we have subscribed our names this 23rd day of
December, 1985.
/s/ John H. Underwood
John H. Underwood
President
/s/ Thomas R. King
Thomas R. King
Secretary
STATE OF MINNESOTA )
) ss.
COUNTY OF HENNEPIN )
On this 23rd day of December, 1985, before a Notary Public within and
for said County, personally appeared John H. Underwood and Thomas R. King, to me
personally known, being by me duly sworn, and did say that they are the
President and Secretary, respectively, of the corporation named above and that
the said instrument was signed on behalf of the corporation and the persons who
signed said instrument acknowledged it to be the free act and deed of said
corporation.
/s/ Diane M. Dossetto
Notary Public - Minnesota
Ramsey County
My commission expires 7-10-90
<PAGE>
MINUTES OF ACTION WITHOUT MEETING
OF THE BOARD OF DIRECTORS OF
DATAKEY, INC.
The undersigned, being all of the members of the Board of Directors of
Datakey, Inc., hereby adopt, by action without meeting, the following
resolutions to be effective as of December 23, 1985, to-wit:
RESOLVED: That the Preferred Stock authorizing resolutions, which
resolutions are attached hereto as Exhibit A and which resolutions
establish a class of Convertible Preferred Stock be and they hereby are
adopted.
FURTHER RESOLVED: That the officers of the corporation be, and they
hereby are, authorized and directed to take whatever action is
necessary to effect the foregoing resolutions.
/s/ John H. Underwood
John H. Underwood
/s/ William P. Flies
William P. Flies
/s/ Timothy A. Stepanek
Timothy A. Stepanek
/s/ Thomas R. King
Thomas R. King
<PAGE>
EXHIBIT A
MINUTES OF ACTION
WITHOUT MEETING OF THE
BOARD OF DIRECTORS OF DATAKEY, INC.
The undersigned, being all of the members of the Board of Directors of
Datakey, Inc., hereby adopt, by action without meeting, the following resolution
to be effective as of December 23, 1985, to-wit:
WHEREAS, the Articles of Incorporation of Datakey, Inc., a Minnesota
corporation, authorize the corporation to issue an aggregate of 5,000,000 shares
of capital stock and empower the corporation's Board of Directors to establish
from time to time by resolution different classes or series of shares and to fix
the rights and preferences of said shares in any class or series; and
WHEREAS, there currently are outstanding 2,979,750 shares of Common
Stock, the remaining 2,020,250 authorized shares of capital stock being
undesignated; and
WHEREAS, the corporation's Board of Directors deems it to be in the
best interests of the corporation and its shareholders to establish a second
class of capital stock, Convertible Preferred Stock, having certain rights and
preferences;
NOW, THEREFORE, BE IT RESOLVED, that the 5,000,000 shares of capital
stock authorized by the Articles of Incorporation of this corporation be, and
they hereby are, designated as belonging to the following classes having the
relative rights and preferences set forth below:
Section 1. Shares and Classes Authorized.
Of the 5,000,000 shares which the corporation is authorized to issue,
4,000,000 shares shall be designated Common Stock, par value $.05, 400,000
shares shall be designated Convertible Preferred Stock and 600,000 shares shall
be undesignated capital stock.
Section 2. Right and Preferences of Convertible Preferred Stock.
The rights and preferences of the 400,000 shares of Convertible
Preferred Stock shall be as set forth in Exhibit 1 which is attached hereto and
made a part hereof.
/s/ William P. Flies
William P. Flies
/s/ John H. Underwood
John H. Underwood
/s/ Timothy A. Stepanek
Timothy A. Stepanek
/s/ Thomas R. King
Thomas R. King
<PAGE>
EXHIBIT 1
CERTIFICATE OF RIGHTS AND PREFERENCES
OF
CONVERTIBLE PREFERRED STOCK
OF
DATAKEY, INC.
(A). Classification of Undesignated Shares.
Of the 1,000,000 undesignated shares which the corporation is
authorized to issue under its Articles of Incorporation, 400,000 of such shares
shall all be classified as shares of Convertible Preferred Stock of the
corporation (the "Preferred Stock"). Such shares of Preferred Stock, together
with the 4,000,000 authorized shares of Common Stock of the corporation (the
"Common Stock") and the balance of the undesignated shares of the corporation,
are sometimes hereinafter collectively referred to as the "capital stock".
(B). Voting Privileges.
(a) General. Each holder of Preferred Stock shall have that
number of votes on all matters submitted to the stockholders that is equal to
the number of shares of Common Stock into which such holder's shares of
Preferred Stock are then convertible, as hereinafter provided. Except as
otherwise provided in subparagraph (b) below, and except as otherwise required
by agreement or law, the shares of capital stock of the corporation shall vote
as a single class on all matters submitted to the stockholders.
(b) Without the affirmative vote of the holders (acting
together as a class) of at least a majority (with respect to (1) below) or at
least 90% (with respect to (2) below) of the shares of Preferred Stock at the
time outstanding, the corporation shall not:
(1) authorize or issue any shares of stock having a priority over
Preferred Stock or ranking on a parity therewith as to the
payment or distribution of assets upon the liquidation or
dissolution, voluntary or involuntary, of the corporation; or
(2) amend the Articles of Incorporation of the corporation so as
to alter any existing provision relating to Preferred Stock.
(c) No Cumulative Voting. No holder of shares of capital stock
shall have any cumulative voting rights.
(C). No Preemptive Rights.
No holder of shares of any class of capital stock shall be entitled as
such, as a matter of right, to subscribe for, purchase or receive any part of
any new or additional issue of stock of any class whatsoever, or of securities
convertible into or exchangeable for any stock of any class whatsoever, whether
now or hereafter authorized and whether issued for cash or other consideration
or by way of dividend.
<PAGE>
(D). Cash Dividends.
Any dividend declared must be payable with respect to all outstanding
shares of capital stock of the corporation. In the event any dividend is
declared with respect to the capital stock, each holder of Preferred Stock shall
be paid such cash dividend on the basis of the number of shares of Common Stock
into which such holder's shares of Preferred Stock are then convertible, as
hereinafter provided.
(E). Other Terms of the Preferred Stock.
(a) Liquidation Preference. In the event of either an
involuntary or a voluntary liquidation or dissolution of the corporation, the
holders of shares of Preferred Stock shall be entitled to receive out of the
assets of the corporation an amount equal to $2.50 per share. In the event of
either an involuntary or voluntary liquidation or dissolution of the
corporation, payment shall be made to the holders of the Preferred Stock in the
amounts herein fixed before any payment shall be made or any assets distributed
to the holders of the Common Stock or any other class of shares of the
corporation ranking junior to the Preferred Stock with respect to payment of
dividends or upon dissolution or liquidation of the corporation. If upon any
such liquidation or dissolution of the corporation the assets available for
distribution `shall be insufficient to pay the holders of all outstanding shares
of Preferred Stock the full amounts to which they respectively shall be
entitled, the holders of such shares shall share pro rata in any such
distribution.
The merger or consolidation of the corporation into or with
another corporation or the merger or consolidation of any other corporation into
or with the corporation (in which consolidation or merger the stockholders of
the corporation receive distribution of cash or securities or other property as
a result of such consolidation or merger), or the sale, transfer or other
disposition of all or substantially all of the assets of the corporation, shall
be deemed, for purposes of determining the amounts to be received by the holders
of the Preferred Stock in such merger, consolidation, sale, transfer or other
disposition, to be a liquidation or dissolution of the corporation for purposes
of this subparagraph (a) if the holders of a majority of the outstanding shares
of Preferred Stock so elect by giving written notice thereof to the corporation
at least two days before the effective date of such event. If no such notice is
given, the provisions of subparagraph (c)(7) hereof shall apply.
Nothing hereinabove set forth shall affect in any way the
right of each holder of shares of Preferred Stock to convert such shares at any
time and from time to time in accordance with subparagraph (c) below.
(b) Redemptions. Redemptions of shares of Preferred Stock by
the corporation without the consent of the holders thereof are not permitted.
Mandatory redemptions of shares of Preferred Stock by the corporation are not
required.
<PAGE>
(c) Conversion Right; Mandatory Conversion. At the option of
the holders thereof, the shares of Preferred Stock shall be convertible, at the
office of the corporation (or at such other office or offices, if any, as the
Board of Directors may designate), into fully paid and nonassessable shares
(calculated as to each conversion to the nearest 1/100th of a share) of Common
Stock of the corporation, at the conversion price, determined as hereinafter
provided, in effect at the time of conversion, each share of the Preferred Stock
being taken at $2.50 for the purpose of such conversion. The price at which
shares of Common Stock shall be delivered upon conversion (herein called the
"conversion price") shall be initially $2.50 per share of Common Stock (i.e., at
an initial conversion rate of one share of Common Stock for each share of
Preferred Stock), provided, however, that such initial conversion price shall be
subject to adjustment from time to time in certain instances as hereinafter
provided. The following provisions shall govern such right of conversion:
(1) In order to convert shares of Preferred Stock into shares of
Common Stock of the corporation, the holder thereof shall
surrender at any office hereinabove mentioned the certificate
or certificates therefor, duly endorsed to the corporation or
in blank, and give written notice to the corporation at such
office that such holder elects to convert such shares. Shares
of Preferred Stock shall be deemed to have been converted
immediately prior to the close of business on the day of the
surrender of such shares for conversion as herein provided,
and the person entitled to receive the shares of Common Stock
of the corporation issuable upon such conversion shall be
treated for all purposes as the record holder of such shares
of Common Stock at such time. As promptly as practicable on or
after the conversion date, the corporation shall issue and
deliver or cause to be issued and delivered at such office a
certificate or certificates for the number of shares of Common
Stock of the corporation issuable upon such conversion.
(2) The conversion price shall be subject to adjustment from time
to time as hereinafter provided. Upon each adjustment of the
conversion price each holder of shares of Preferred Stock
shall thereafter be entitled to receive the number of shares
of Common Stock of the corporation obtained by multiplying the
conversion price in effect immediately prior to such
adjustment by the number of shares issuable pursuant to
conversion immediately prior to such adjustment and dividing
the product thereof by the conversion price resulting from
such adjustment.
(3) Except for the issuance of Conversion Stock and Warrant Stock
(as those terms are defined in the Preferred Stock Purchase
Agreement dated December 16, 1985 among the corporation and
the Purchasers named therein) (a) if and whenever on or prior
to June 30, 1987 the corporation shall issue or sell any
shares of its Common Stock for a consideration per share less
than the conversion price in effect immediately prior to the
time of such issue or sale, then forthwith upon such issue or
sale the conversion price shall be reduced to such lesser
price, and (b) if and whenever after June 30, 1987 the
corporation shall issue or sell any shares of its Common Stock
for a consideration per share less than the conversion price
in effect immediately prior to the time of such issue or sale,
and/or the corporation shall issue or sell any shares of
<PAGE>
Common Stock for a consideration per share less than the
market price on the date of such issue or sale, then forthwith
upon such issue or sale the conversion price shall be reduced
to the price (calculated to the nearest cent) determined by
dividing (1) an amount equal to the sum of (aa) the number of
shares of Common Stock outstanding immediately prior to such
issue or sale multiplied by the then existing conversion
price, and (bb) the consideration, if any, received by the
corporation upon such issue or sale, by (2) an amount equal to
the sum of (aa) the number of shares of Common Stock
outstanding immediately prior to such issue or sale and (bb)
the number of shares of Common Stock thus issued or sold.
For the purposes of this subparagraph (3), the
following provisions (i) to (vii), inclusive, shall also be
applicable:
(i) In case at any time the corporation shall grant
(whether directly or by assumption in a merger or
otherwise) any rights to subscribe for or to
purchase, or any options for the purchase of, (a)
Common Stock or (b) any obligations or any shares of
stock of the corporation which are convertible into,
or exchangeable for, Common Stock (any of such
obligations or shares of stock being hereinafter
called "Convertible Securities") whether or not such
rights or options or the right to convert or exchange
any such Convertible Securities are immediately
exercisable, and the price per share for which Common
Stock is issuable upon the exercise of such rights or
options or upon conversion or exchange of such
Convertible Securities (determined by dividing (x)
the total amount, if any, received or receivable by
the corporation as consideration for the granting of
such rights or options, plus the minimum aggregate
amount of additional consideration payable to the,
corporation upon the exercise of such rights or
options, plus, in the case of such Convertible
Securities, the minimum aggregate amount of
additional consideration, if any, payable upon the
issue of such Convertible Securities and upon the
conversion or exchange thereof, by (y) the total
maximum number of shares of Common Stock issuable
upon the exercise of such rights or options or upon
the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such rights
or options) shall be less than the conversion price
in effect immediately prior to the time of the
granting of such rights or options, then the total
maximum number of shares of Common Stock issuable
upon the exercise of such rights or options or upon
conversion or exchange of the total maximum amount of
such Convertible Securities issuable upon the
exercise of such rights or options shall (as of the
date of granting of such rights or options) be deemed
to have been issued for such price per share. Except
<PAGE>
as provided in subparagraph (6) below, no further
adjustments of the conversion price shall be made
upon the actual issue of such Common Stock or of such
Convertible Securities upon exercise of such rights
or options or upon the actual issue of such Common
Stock upon conversion or exchange of such Convertible
Securities.
(ii) In case the corporation shall issue or sell (whether
directly or by assumption in a merger or otherwise)
any Convertible Securities, whether or not the rights
to exchange or convert thereunder are immediately
exercisable, and the price per share for which Common
Stock is issuable upon such conversion or exchange
(determined by dividing (x) the total amount received
or receivable by the corporation as consideration for
the issue or sale of such Convertible Securities,
plus the minimum aggregate amount of additional
consideration, if any, payable to the corporation
upon the conversion or exchange thereof, by (y) the
total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such
Convertible Securities) shall be less than the
conversion price in effect immediately prior to the
time of such issue or sale, then the total maximum
number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible
Securities shall (as of the date of the issue or sale
of such Convertible Securities) be deemed to be
outstanding and to have been issued for such price
per share, provided that (a) except as provided in
subparagraph (6) below, no further adjustments of the
conversion price shall be made upon the actual issue
of such Common Stock upon conversion or exchange of
such Convertible Securities, and (b) if any such
issue or sale of such Convertible Securities is made
upon exercise of any rights to subscribe for or to
purchase or any option to purchase any such
Convertible Securities for which adjustments of the
conversion price have been or are to be made pursuant
to other provisions of this subparagraph (3), no
further adjustment of the conversion price shall be
made by reason of such issue or sale.
(iii) In case the corporation shall, after June 30, 1987,
declare a dividend or make any other distribution
upon any capital stock of the corporation payable in
Common Stock or Convertible Securities, or in any
rights or options to purchase any Common Stock or
Convertible Securities, any Common Stock or
<PAGE>
Convertible Securities, or any such rights or
options, as the case may be, issuable in payment of
such dividend or distribution shall be deemed to have
been issued or sold without consideration.
(iv) In case any shares of Common Stock or Convertible
Securities or any rights or options to purchase any
such Common Stock or Convertible Securities shall be
issued or sold for cash, the consideration received
therefor shall be deemed to be the amount received by
the corporation therefor, without deducting therefrom
any expenses incurred or any underwriting commissions
or concessions paid or allowed by the corporation in
connection therewith. In case any shares of Common
Stock or Convertible Securities or any rights or
options to purchase any such Common Stock or
Convertible Securities shall be issued or sold for a
consideration other than cash, the amount of the
consideration other than cash received by the
corporation shall be deemed to be the fair value of
such consideration as determined by the Board of
Directors of the corporation, without deducting
therefrom any expenses incurred or any underwriting
commissions or concessions paid or allowed by the
corporation in connection therewith. In case any
shares of Common Stock or Convertible Securities or
any rights or options to purchase such Common Stock
or Convertible Securities shall be issued in
connection with any merger or consolidation in which
the corporation is the surviving corporation, the
amount of consideration therefor shall be deemed to
be the fair value as determined by the Board of
Directors of the corporation of such portion of the
assets and business of the non-surviving corporation
or corporations as such Board shall determine to be
attributable to such Common Stock, Convertible
Securities, rights or options, as the case may be. In
the event of any consolidation or merger of the
corporation in which the corporation is not the
surviving corporation or in the event of any sale of
all or substantially all of the assets of the
corporation for stock or other securities of any
other corporation, the corporation shall be deemed to
have issued a number of shares of its Common Stock
for stock or securities of the other corporation
computed on the basis of the actual exchange ratio on
which the transaction was predicated and for a
consideration equal to the fair market value on the
date of such transaction of such stock or securities
of the other corporation, and if any such calculation
results in adjustment of the conversion price, the
determination of the number of shares of Common Stock
issuable upon conversion immediately prior to such
merger, conversion or sale, for purposes of
subparagraph (7) below, shall be made after giving
effect to such adjustment of the conversion price.
<PAGE>
(v) In case the corporation shall take a record of the
holders of its Common Stock for the purpose of
entitling them (a) to receive a dividend or other
distribution payable in Common Stock or in
Convertible Securities, or in any rights or options
to purchase any Common Stock or Convertible
Securities, or (b) to subscribe for or purchase
Common Stock or Convertible Securities, then the date
of such record shall be deemed to be the date of the
issue or sale of the shares of Common Stock deemed to
have been issued or sold upon the declaration of such
dividend or the making of such other distribution or
the date of the granting of such rights of
subscription or purchase, as the case may be.
(vi) The number of shares of Common Stock outstanding at
any given time shall not include shares owned or held
by or for the account of the corporation, and the
disposition of any such shares shall be considered an
issue or sale of Common Stock for the purpose of this
subparagraph (3).
(vii) "Market price" shall mean the average of the high and
low prices of the Common Stock sales on all exchanges
on which the Common Stock may at the time be listed,
or, if there shall have been no sales on any such
exchange on any such day, the average of the bid and
asked prices at the end of such day, or, if the
Common Stock shall not be so listed, the average of
the bid and asked prices at the end of the day in the
over-the-counter market, in each case averaged over a
period of 20 consecutive business days prior to the
date as of which "market price" is being determined.
If at any time the Common Stock is not listed on any
exchange or quoted in the over-the-counter market,
the "market price" shall be deemed to be the higher
of (i) the book value thereof as determined by any
firm of independent public accountants of recognized
standing selected by the Board of Directors of the
corporation as of the last day of any month ending
within 60 days preceding the date as of which the
determination is to be made, or (ii) the fair value
thereof determined in good faith by the Board of
Directors of the corporation as of a date which is
within 15 days of the date as of which the
determination is to be made.
<PAGE>
(4) In case the corporation shall declare a dividend or make a
distribution upon the Common Stock payable otherwise than out
of earnings or earned surplus (including dividends or
distributions in Common Stock or Convertible Securities, or in
any rights or options to purchase any Common Stock or
Convertible Securities), then thereafter each holder of shares
of Preferred Stock upon the conversion thereof will be
entitled to receive the number of shares of Common Stock into
which such shares of Preferred Stock have been converted, and,
in addition and without payment therefor, the cash, stock or
other securities and other property which such holder would
have received by way of dividends (otherwise than out of such
earnings or surplus) if continuously since such holder became
the record holder of such shares of Preferred Stock such
holder (i) had been the record holder of the number of shares
of Common Stock then received, and (ii) had retained all
dividends or distributions in stock or securities (including
Common Stock or Convertible Securities, or in any rights or
options to purchase any Common Stock or Convertible
Securities) payable in respect of such Common Stock or in
respect of any stock or securities paid as dividends or
distributions and originating directly or indirectly from such
Common Stock. For the purposes of the foregoing a dividend or
distribution other than in cash shall be considered payable
out of earnings or earned surplus only to the extent that such
earnings or surplus are charged an amount equal to the fair
value of such dividend or distribution as determined by the
Board of Directors of the corporation.
(5) In case the corporation shall at any time subdivide its
outstanding shares of Common Stock into a greater number of
shares, the conversion price in effect immediately prior to
such subdivision shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock of
the corporation shall be combined into a smaller number of
shares, the conversion price in effect immediately prior to
such combination shall be proportionately increased.
(6) If (i) the purchase price provided for in any right or option
referred to in clause (i) of subparagraph (3), or (ii) the
additional consideration, if any, payable upon the conversion
or exchange of Convertible Securities referred to in clause
(i) or clause (ii) of subparagraph (3), or (iii) the rate at
which any Convertible Securities referred to in clause (i) or
clause (ii) of subparagraph (3) are convertible into or
exchangeable for Common Stock, shall change at any time (other
than under or by reason of provisions designed to protect
against dilution), the conversion price then in effect
hereunder shall forthwith be increased or decreased to such
conversion price as would have obtained had the adjustments
made upon the issuance of such rights, options or Convertible
Securities been made upon the basis of (a) the issuance of the
number of shares of Common Stock theretofore actually
delivered upon the exercise of such options or rights or upon
the conversion or exchange of such Convertible Securities, and
the total consideration received therefor, and (b) the
issuance at the time of such change of any such options,
rights, or Convertible Securities then still outstanding for
the consideration, if any, received by the corporation
therefor and to be received on the basis of such changed
price; and on the expiration of any such option or right or
the termination of any such right to convert or exchange such
Convertible Securities, the conversion price then in effect
<PAGE>
hereunder shall forthwith be increased to such conversion
price as would have obtained had the adjustments made upon the
issuance of such rights or options or Convertible Securities
been made upon the basis of the issuance o the shares of
Common Stock theretofore actually delivered (and the total
consideration received therefor) upon the exercise of such
rights or options or upon the conversion or exchange of such
Convertible Securities. If the purchase price provided for in
any right or option referred to in clause (i) of subparagraph
(3), or the rate at which any Convertible Securities referred
to in clause (i) or clause (ii) of subparagraph (3) are
convertible into or exchangeable for Common Stock, shall
decrease at any time under or by reason of provisions with
respect thereto designed to protect against dilution, then in
case of the delivery of Common Stock upon the exercise of any
such right or option or upon conversion or exchange of any
such Convertible Security, the conversion price then in effect
hereunder shall forthwith be decreased to such conversion
price as would have obtained had the adjustments made upon the
issuance of such right, option or Convertible Security been
made upon the basis of the issuance of (and the total
consideration received for) the shares of Common Stock
delivered as aforesaid.
(7) If any capital reorganization or reclassification of the
capital stock of the corporation, or consolidation or merger
of the corporation with another corporation, or the sale of
all or substantially all of its assets to another corporation
shall be effected in such a way that holders of Common Stock
shall be entitled to receive stock, securities or assets with
respect to or in exchange for Common Stock, then, as a
condition of such reorganization, reclassification,
consolidation, merger or sale, and subject to subparagraph (a)
above, lawful and adequate provision shall be made whereby the
holders of Preferred Stock shall thereafter have the right to
receive upon the basis and upon the terms and conditions
specified herein and in lieu of the shares of the Common Stock
of the corporation immediately theretofore receivable upon the
conversion of Preferred Stock, such shares of stock,
securities or assets as may be issued or payable with respect
to or in exchange for a number of outstanding shares of such
Common Stock equal to the number of shares of such stock
immediately theretofore receivable upon the conversion of
Preferred Stock had such reorganization, reclassification,
consolidation, merger or sale not taken place, plus all
dividends unpaid and accumulated or accrued thereon to the
date of such reorganization, reclassification, consolidation,
merger or sale, and in any such case appropriate provision
shall be made with respect to the rights and interests of the
holders of Preferred Stock to the end that the provisions
<PAGE>
hereof (including without limitation provisions for
adjustments of the conversion price and of the number of
shares receivable upon the conversion of Preferred Stock)
shall thereafter be applicable, as nearly as may be in
relation to any shares of stock, securities or assets
thereafter receivable upon the conversion of Preferred Stock.
The corporation shall not effect any such consolidation,
merger or sale, unless prior to the consummation thereof the
successor corporation (if other than the corporation)
resulting from such consolidation or merger or the corporation
purchasing such assets shall assume by written instrument
executed and mailed to the holders of Preferred Stock, at the
last addresses of such holders appearing on the books of the
corporation, the obligation to deliver to such holder such
shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holder may be entitled to
receive.
(8) Upon any adjustment of the conversion price, then and in each
case the corporation shall give written notice thereof, by
first-class mail, postage prepaid, addressed to the holders of
Preferred Stock, at the addresses of such holders as shown on
the books of the corporation, which notice shall state the
conversion price resulting from such adjustment and the
increase or decrease, if any, in the number of shares
receivable at such price upon the conversion of Preferred
Stock, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is
based.
(9) In case at any time:
(i) the corporation shall declare any cash dividend on
its Common Stock at a rate in excess of the rate of
the last cash dividend theretofore paid;
(ii) the corporation shall pay any dividend payable in
stock upon its Common Stock or make any distribution
(other than regular cash dividends) to the holders of
its Common Stock;
(iii) the corporation shall offer for subscription pro rata
to the holders of its Common Stock any additional
shares of stock of any class or other rights;
(iv) there shall be any capital reorganization, or
reclassification of the capital stock of the
corporation, or consolidation or merger of the
corporation with, or sales of all or substantially
all of its assets to, another corporation; or
(v) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the
corporation;
then, in any one or more of said cases, the corporation shall
give written notice, by first-class mail, postage prepaid,
addressed to the holders of Preferred Stock at the addresses
of such holders as shown on the books of the corporation, of
the date on which (a) the books of the corporation shall close
or a record shall be taken for such dividend, distribution or
subscription rights, or (b) such reorganization,
reclassification, consolidation, merger, sale, dissolution,
<PAGE>
liquidation or winding up shall take place, as the case may
be. Such notice shall also specify the date as of which the
holders of Common Stock of record shall participate in such
dividend, distribution or subscription rights, or shall be
entitled to exchange their Common Stock for securities or
other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution,
liquidation, or winding up, as the case may be. Such written
notice shall be given at least 20 days prior to the action in
question and not less than 20 days prior to the record date or
the date on which the corporation's transfer books are closed
in respect thereto.
(10) If any event occurs as to which in the opinion of the Board of
Directors of the corporation the other provisions of this
paragraph (c) are not strictly applicable or if strictly
applicable would not fairly protect the rights of the holders
of Preferred Stock in accordance with the essential intent and
principles of such provisions, then the Board of Directors
shall make an adjustment in the application of such
provisions, in accordance with such essential intent and
principles, so as to protect such rights as aforesaid.
(11) As used in this paragraph (c) the term "Common Stock" shall
mean and include the corporation's presently authorized Common
Stock and shall also include any capital stock of any class of
the corporation hereafter authorized which shall not be
limited to a fixed sum or percentage in respect of the rights
of the holders thereof to participate in dividends or in the
distribution of assets upon the voluntary or involuntary
liquidation, dissolution or winding up of the corporation;
provided that the shares receivable pursuant to conversion of
shares of Preferred Stock shall include shares designated as
Common Stock of the corporation as of the date of issuance of
such shares of Preferred Stock, or, in case of any
reclassification of the outstanding shares thereof, the stock,
securities or assets provided for in subparagraph (7) above.
(12) No fractional shares of Common Stock shall be issued upon
conversion, but, instead of any fraction of a share which
would otherwise be issuable, the corporation shall pay a cash
adjustment in respect of such fraction in an amount equal to
the same fraction of the market price per share of Common
Stock, determined pursuant to subparagraph (3)(vii) above, as
of the close of business on the day of conversion.
Mandatory Conversion. Preferred Stock shall automatically be converted into
shares of Common Stock of the corporation, without any act by the corporation or
the holders of Preferred Stock, concurrently with the closing of the first
public offering by the corporation of shares of Common Stock of the corporation
registered under the Securities Act of 1933, as amended, in which (1) the
offering is underwritten on a firm commitment basis by an underwriter, or a
group of underwriters represented by an underwriter or underwriters, and (2) the
aggregate public offering price of the securities sold for cash by the
corporation in the offering, net of expenses payable by the corporation in
connection with such offering, is at least $5,000,000, and (3) the public
offering price per share of Common Stock is at least $5 (as adjusted from time
to time to reflect stock splits, dividends, recapitalizations, combinations or
the like). As used herein, the term "closing" shall mean the delivery by the
corporation to the underwriters of certificates representing the shares of
Common Stock of the corporation offered to the public against delivery to the
corporation by such underwriters of payment therefor. The term "firm commitment
basis" with respect to the underwriting of such public offering shall mean a
commitment pursuant to a written underwriting agreement under which the nature
of the underwriters' commitment is such that all securities will be purchased by
such underwriters if any securities are purchased by such underwriters. Each
holder of a share of Preferred Stock so converted shall be entitled to receive
the full number of shares of Common Stock into which such share of Preferred
Stock held by such holder could be converted if such holder had exercised its
conversion right at the time of closing of such public offering. Upon such
conversion, each holder of a share of Preferred Stock shall immediately
surrender such share in exchange for appropriate stock certificates representing
a share or shares of Common Stock of the corporation.
<PAGE>
ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION
OF
DATAKEY, INC.
Pursuant to the provisions of Minnesota Statutes, Section 302A.135, the
following Amendment of Section 3.01 of the Articles of Incorporation of Datakey,
Inc. was adopted at a meeting of the shareholders of the corporation duly
convened and held on the 6th day of May, 1986, by a vote of 84% of the voting
power of all shares entitled to vote:
"3.01 The aggregate number of shares of stock which this
corporation shall have authority to issue is 12,500,000 shares,
consisting of 10,000,000 shares of Common Stock, par value $.05,
400,000 shares of Preferred Stock and 2,100,000 undesignated shares." I
swear that the foregoing is true and accurate and that I have the
authority to sign this document on
behalf of the corporation.
/s/ John H. Underwood
John H. Underwood, President
STATE OF MINNESOTA )
) SS.
COUNTY OF Dakota )
The foregoing instrument was acknowledged before me this 25th day of
June, 1986, by John H. Underwood, President of Datakey, Inc., a Minnesota
corporation, on behalf of the corporation.
/s/ Bette F. Feahr
Notary Public - Minnesota
Dakota County
My commission expires 8-20-91
(Notarial Seal)
<PAGE>
ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORAT10N
OF
DATAKEY, INC.
Pursuant to the provisions of Minnesota Statutes, Section 302A.135, the
following Amendment of the Articles of Incorporation of Datakey, Inc., adding
Article VI, was adopted at a meeting of the shareholders of the corporation duly
convened and held on the May 12, 1987, by a majority vote of the voting power of
all shares entitled to vote:
"ARTICLE VI - LIMITATION OF DIRECTOR LIABILITY
6.1) To the fullest extent permitted by the Minnesota Business
Corporation Act as the same exists or may hereafter be amended, a
director of this corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for breach of
fiduciary duty as a director."
I swear that the foregoing is true and accurate and that I have the
authority to sign this document on behalf of the corporation.
/s/ John H. Underwood
John H. Underwood, President
STATE OF MINNESOTA )
) SS.
COUNTY OF DAKOTA )
The foregoing instrument was acknowledged before me this 27 day of May,
1987, by John H. Underwood, President of Datakey, Inc., a Minnesota corporation,
on behalf of the corporation.
/s/ Bette F. Feahr
Notary Public - Minnesota
Dakota County
My commission expires 8-20-91
(Notarial Seal)
<PAGE>
Notice of Change of Registered Office
by
DATAKEY, INC.
Pursuant to Minnesota Statutes, Section 302A.123, the undersigned hereby
certifies that the Board of Directors of the above named Minnesota Corporation
has resolved to change the corporation's registered office or agent:
FROM: Datakey, Inc.
12281 Nicollet Avenue South
Burnsville, MN 55337
TO: Datakey, Inc.
407 West Travelers Trail
Burnsville, MN 55337-2554
The new address may not be a post office box. It must be a street address,
pursuant to Minnesota Statutes, Section 302A.011, Subd. 3.
The effective date of the change will be the 1st day of July, 1987 or the day of
filing of this certificate with the Secretary of State, whichever is later.
I swear that the foregoing is true and accurate and that I have the authority to
sign this document on behalf of the corporation.
/s/ George H. M. Rountree
George H. M. Rountree
Vice President Finance
July 11, 1988
State of Minnesota )
) ss.
County of Dakota )
The foregoing instrument was acknowledged before me on this 11th day of
July, 1988.
/s/ Bette F. Feahr
Notary Public - Minnesota
Dakota County
My commission expires 8-20-91
State of Minnesota
Department of State
Filed: August 10, 1988
<PAGE>
STATEMENT OF DESIGNATION OF SHARES
OF
DATAKEY, INC.
The undersigned hereby certifies that the resolutions set forth on
Exhibit A attached hereto were duly adopted by the Board of Directors of
Datakey, Inc. on May 11, 1998.
I swear that the foregoing is true and accurate and that I have the
authority to sign this document on behalf of the corporation.
May 14, 1998
DATAKEY, INC.
/s/ Alan G. Shuler
Alan G. Shuler
Vice President and Chief Financial Officer
<PAGE>
EXHIBIT A
DESIGNATION OF SERIES A CONVERTIBLE CUMULATIVE PREFERRED STOCK
WHEREAS, pursuant to the Articles of Incorporation of this corporation,
the Board of Directors has authority to establish, from the 2,100,000
undesignated shares of capital stock, one or more classes or series of shares,
to designate each such class or series, and to fix the relative rights and
preferences of each such class or series; and
WHEREAS, the Board of Directors deem it advisable to designate shares
of Series A Convertible Cumulative Preferred Stock;
NOW, THEREFORE, RESOLVED, that of the 2,100,000 undesignated shares
currently authorized, 150,000 shares are hereby designated as shares of Series A
Convertible Cumulative Preferred Stock, which shares shall have the terms as set
forth on Exhibit A hereto.
<PAGE>
EXHIBIT A
RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK
The rights, preferences, restrictions and other matters relating to the
Series A Convertible Cumulative Preferred Stock (the "Series A Preferred Stock")
are as follows:
1. Dividend Provisions. Upon issuance, dividends shall accrue on each
share of outstanding Series A Preferred Stock at an annual rate equal to $1.264
per share per annum (8% of the Original Issue Price, as defined herein). Such
dividends shall be cumulative and shall be payable upon any conversion of the
Series A Preferred Stock pursuant to Section 3 hereof. Such dividends shall only
be paid out of legally available funds of the Company. Such dividends shall be
payable by the Company, in its sole discretion, all in cash or all by the
issuance of a number of shares of the Company's unrestricted, freely tradable
common stock equal to the dividends owing on the Series A Preferred Stock;
provided, however, that prior to the payment of any such dividend by the
issuance of shares of the Company's common stock, the Company shall deliver to
the Investors an opinion of its counsel stating that all such shares have been
validly registered, and that they are duly authorized, validly issued and
nonassessable. For the purposes hereof, the number of shares of the Company's
common stock issuable in lieu of any cash dividend payment shall equal the total
dividend payment then due divided by the per share price of such stock. The per
share price of the Company's common stock shall be determined based on the
average closing bid price of such stock quoted on The Nasdaq Stock Market for
the ten consecutive trading days prior to the payment of such dividends.
Dividends on shares of the Series A Preferred Stock shall accrue beginning on
the date of issuance of the shares of Series A Preferred Stock, shall compound
on an annual basis and shall be payable upon conversion of the Series A
Preferred Stock (a "Payment Date"). All accrued and unpaid dividends on the
Series A Preferred Stock must be paid before any dividends may be declared or
paid on any other junior series of preferred or common stock issued by the
Company.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up
of the Company, either voluntary or involuntary, the holders of the previously
issued Convertible Preferred Stock (the "Convertible Preferred Stock") and the
Series A Preferred Stock shall be entitled to receive, prior and in preference
to any distribution of any of the assets of the Company to the holders of common
stock by reason of their ownership thereof, an amount per share equal to $2.50
for the Convertible Preferred Stock, and for the Series A Preferred Stock the
sum of (i) $15.80, as adjusted pursuant to Section 4(c) hereof (the "Original
Issue Price"), and (ii) an amount equal to cumulative unpaid dividends on such
shares (respectively, a "Liquidation Amount"). If upon the occurrence of such an
event, the assets and funds thus distributed among the holders of the
Convertible Preferred Stock and the Series A Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then, the entire assets and funds of the Company legally
available for distribution shall be distributed ratably among the holders of the
Convertible Preferred Stock and the Series A Preferred Stock in proportion to
the amount of such stock owned by each such holder multiplied by the appropriate
Liquidation Amount.
<PAGE>
(b) Upon the completion of the distribution required by
subparagraph (a) of this Section 2, if assets remain in the Company, the
remaining assets of the Company shall be distributed ratably among the holders
of the Company's common stock and the Series A Preferred Stock in proportion to
the number of shares of common stock held by each (assuming full conversion of
all shares of Series A Preferred Stock).
(c) (i) For purposes of this Section 2, a liquidation,
dissolution or winding up of the Company shall be deemed to be occasioned by, or
to include, (A) the acquisition of the Company by another entity by means of any
transaction or series of related transactions (including any reorganization,
merger or consolidation but excluding any merger effected exclusively for the
purpose of changing the domicile of the Company); or (B) a sale of all or
substantially all of the assets of the Company, unless the Company's
shareholders as constituted immediately prior to such acquisition or sale will,
immediately after such acquisition or sale (by virtue of securities issued as
consideration for the Company's acquisition or sale or otherwise) hold at least
50% of the voting power of the surviving or acquiring entity.
(ii) In any of such events, if the consideration received
by the Company is other than cash, its value will be deemed its fair market
value.
(iii) In the event the requirements of this Section 2 are
not complied with, the Company shall forthwith either:
(A) cause such closing to be postponed until
such time as the requirements of this Section 2 have been complied with, or
(B) cancel such transaction, in which event
the rights, preferences and privileges of the holders of the Convertible
Preferred Stock and the Series A Preferred Stock shall revert to and be the same
as such rights, preferences and privileges existing immediately prior to the
date of the first notice referred to in subsection 2(c)(iv) hereof.
(iv) The Company shall give each holder of record of
Convertible Preferred Stock and the Series A Preferred Stock written notice of
such impending transaction not later than 20 days prior to the shareholders'
meeting called to approve such transaction, or 20 days prior to the closing of
such transaction, whichever is earlier, and shall also notify such holders in
writing of the final approval of such transaction; provided, however, that the
holder of any shares of then outstanding Convertible Preferred Stock or Series A
Preferred Stock shall have the right during such 20-day period to convert such
shares pursuant to Section 3 hereof. The first of such notices shall describe
the material terms and conditions of the impending transaction and the
provisions of this Section 2, and the Company shall thereafter give such holders
prompt notice of any material changes. The transaction shall in no event take
place sooner than 20 days after the Company has given the first notice provided
for herein or sooner than ten days after the Company has given notice of any
material changes provided for herein; provided, however, that such periods may
be shortened upon the written consent of the holders of the Convertible
Preferred Stock and the Series A Preferred Stock that are entitled to such
notice rights or similar notice rights and that represent at least a majority of
the voting power of all then outstanding shares of each of the classes of
preferred stock, voting separately as a class.
<PAGE>
3. Conversion.
(a) Conversion Right. At the option of the holder thereof,
each share of Series A Preferred Stock shall be convertible at any time during
the period commencing on the day on which the Series A Preferred Stock is issued
and expiring on May 15, 2000 (the date which is the second anniversary of the
date of issuance of the Series A Preferred Stock); provided, however, that such
expiration date shall be extended for a number of days equal to the number of
days beyond the 90th day following the date of issuance of the Series A
Preferred Stock that the Registration Statement (as such term is defined in the
Registration Rights Agreement, of even date herewith, entered into by and
between the Company and the Investors set forth on Schedule A thereto) is not
effective (such date, including any extension thereof pursuant to the foregoing
proviso, being herein referred to as the "Second Anniversary"). The Series A
Preferred Stock shall be convertible at the office of the Company or any
transfer agent for such stock into such number of fully paid and nonassessable
shares of the Company's common stock as is determined by dividing the Original
Issue Price, subject to adjustment as provided in Section 4, by the Conversion
Price applicable to such shares, determined as hereafter provided, in effect on
the date the certificates representing such shares are surrendered for
conversion (the "Conversion Date"). The Conversion Price shall be equal to the
average closing bid price of one share of the Company's common stock as quoted
by the Nasdaq SmallCap Market, the Nasdaq National Market or the principal
exchange upon which shares of the Company's common stock may be listed, or, if
the Company's common stock shall not then be quoted on the Nasdaq SmallCap
Market or the Nasdaq National Market or listed on a national securities
exchange, but shall otherwise be traded in the over-the-counter market, on such
over-the-counter market for the ten-day period ending on the day prior to the
Conversion Date (the "Trading Period") multiplied by .8 (the "Conversion
Price"); provided, however, that in no event shall the Conversion Price exceed
$5.00 per share or be less than $2.75 (the "Maximum Price" and "Minimum Price,"
respectively) per share; and provided, further, that appropriate adjustments
shall be made in determining the average closing bid price if a recapitalization
or other event affecting the Company's common stock shall occur during the
Trading Period.
(b) Dividend Payment. Should the Company, pursuant to Section
1 hereof, not elect to pay all outstanding, cumulative, accrued and unpaid
dividends on the Series A Preferred Stock in shares of its common stock, the
Company shall pay, in immediately available funds, to the holder of any shares
of Series A Preferred Stock being converted, within two days, all such dividends
on the date that it receives notice of such holder's intent to convert such
shares pursuant to (d) below. Separately, should the Company elect to pay all
outstanding, cumulative, accrued and unpaid dividends on the Series A Preferred
Stock in shares of its common stock, it shall, within two business days of
receiving a holder's notice of intent to convert, deliver certificates
representing such shares to the holder of the Series A Preferred Stock.
(c) Automatic Conversion. Any shares of Series A Preferred
Stock remaining outstanding on the Second Anniversary shall be automatically
converted pursuant to the conversion terms of Section 3(a) above. The Conversion
Date with respect to such automatic conversion shall be the Second Anniversary.
In any event, the Company shall, within two business days after automatic
conversion of the Series A Preferred Stock, issue and deliver a certificate or
<PAGE>
certificates for the number of shares of the Company's common stock to which
each former holder of Series A Preferred Stock is entitled. Notwithstanding the
foregoing, no automatic conversion of the Series A Preferred Stock shall occur
pursuant to this Section unless (i) all shares of the Company's common stock
underlying the shares of Series A Preferred Stock may be sold pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
(ii) the Company's common stock is listed and trading on The Nasdaq Stock
Market, and (iii) the Company has reserved and available for issuance a number
of shares of its common stock sufficient to cover conversion of all outstanding
shares of Series A Preferred Stock.
(d) Mechanics of Conversion. Before any holder of Series A
Preferred Stock shall be entitled to convert the same into shares of the
Company's common stock, he, she or it shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Company or of any
transfer agent for the Series A Preferred Stock, and shall give written notice,
via facsimile, to the Company, at its principal corporate office, of the
election to convert the same and shall state therein the name or names in which
the certificate or certificates for shares of the Company's common stock are to
be issued. The Company shall, immediately thereafter (and in any event no more
than two business days thereafter), issue and deliver to such holder of Series A
Preferred Stock at the address shown on the Company's records or at such other
address as such party may designate by written notice to the Company, or to the
nominee or nominees of such holder, a certificate or certificates for the number
of shares of the Company's common stock to which such holder shall be entitled
pursuant to Section 3(a) and a certificate representing shares of Series A
Preferred Stock not so converted by the holder. Such conversion shall be deemed
to have been made immediately prior to the close of business on the Conversion
Date, and the person or persons entitled to receive the shares of the Company's
common stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of the Company's common stock as of
such date.
(e) Mechanics of Automatic Conversion. On the Conversion Date
with respect to the automatic conversion pursuant to subsection 3(c) above, the
certificates representing shares of Series A Preferred Stock shall immediately
represent that number of shares of the Company's common stock into which such
shares are convertible. Holders of Series A Preferred Stock shall deliver their
certificates, duly endorsed in blank, to the principal office of the Company,
together with a notice setting out the name or names (with addresses) and
denominations in which the certificates representing such shares of common stock
issuable upon conversion are to be issued and including instructions for
delivery thereof. The person entitled to receive the shares of the Company's
common stock issuable upon such conversion shall be treated for all purposes as
the record holder of such shares of common stock at and on the Conversion Date,
and the rights of such person as a holder of shares of Series A Preferred Stock
shall cease and terminate at and on the Conversion Date, in any case without
regard to any failure by such holder to deliver the certificates or the notice
required by this subsection 3(e). On the Conversion Date with respect to
automatic conversion, the Company shall pay all outstanding, cumulative, accrued
and unpaid dividends, either by the issuance of shares of its common stock or in
cash, pursuant to the provisions set forth in (a) above; provided, however, that
should the Company elect to pay such dividends by the issuance of additional
shares of its common stock, the person entitled to receive such shares of the
Company's common stock issuable upon such conversion shall be treated for all
purposes as the record holder of such additional shares on the Conversion Date
<PAGE>
(f) No Impairment. The Company will not, by amendment of its
Articles of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Section 3 and in the taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of the
holders of the Series A Preferred Stock against impairment.
(g) No Fractional Shares. No fractional shares shall be issued
upon the conversion of any share or shares of the Series A Preferred Stock, and
the number of shares of the Company's common stock to be issued shall be rounded
to the nearest whole share. Whether or not fractional shares are issuable upon
such conversion shall be determined on the basis of the total number of shares
of Series A Preferred Stock the holder is at the time converting into shares of
the Company's common stock and the number of shares of such common stock
issuable upon such aggregate conversion.
(h) Notices of Record Date. In the event of any taking by the
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any other right, the Company shall mail to each holder of Series A
Preferred Stock, at least 20 days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and character of such
dividend, distribution or right.
(i) Reservation of Stock Issuable Upon Conversion. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of common stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred Stock, such number of its shares of its
common stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of the Series A Preferred Stock; and if at any time
the number of authorized but unissued shares of the Company's common stock shall
not be sufficient to effect the conversion of all then outstanding shares of the
Series A Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Series A Preferred Stock, the Company will take
such corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of common stock to such number of
shares as shall be sufficient for such purposes, including engaging in best
efforts to obtain the requisite shareholder approval of any necessary amendment
to the Company's Articles of Incorporation.
(j) Notices. Any notice required by the provisions of this
Section 3 to be given to the holders of shares of Series A Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his, her or its address appearing on the
books of the Company.
<PAGE>
4. Anti-Dilution Provisions.
The Original Issue Price shall be subject to adjustment from
time to time upon the happening of any of the following events: (a) In the event
the Company shall issue or sell any shares of its common stock (except as
provided in paragraph (e) hereof) for a consideration per share less than the
greater of (A) $5.00, or (B) 80% of the Market Price (as defined below) on the
date of such issue or sale, then the Original Issue Price shall be increased to
such greater price (calculated to the nearest cent) as shall be determined by
multiplying the Original Issue Price by a fraction, the numerator of which shall
be the number of shares of the Company's common stock outstanding immediately
after the issuance or sale of such additional shares, and the denominator of
which shall be the sum of (i) the number of shares of the Company's common stock
outstanding immediately prior to the issuance or sale of such additional shares,
and (ii) the number of shares of the Company's common stock which the aggregate
consideration received for the issuance or sale of such additional shares would
purchase at the greater of $5.00, or if such shares of the Company's common
stock shall have been issued for a consideration per share less than 80% of the
Market Price on the date of issuance or sale, the current Market Price. For
purposes of this paragraph, all shares of the Company's common stock issuable
upon exercise of outstanding options and warrants shall be deemed to be
outstanding.
(b) For the purposes of paragraph 4(a) above, the following
subparagraphs (i) to (vii), inclusive, shall be applicable:
(i) If at any time the Company shall issue or sell any
rights to subscribe for, or any rights or options to purchase, shares of its
common stock or any stock or other securities convertible into or exchangeable
for such common stock (such convertible or exchangeable stock or securities
being hereinafter called "Convertible Securities"), whether or not such rights
or options or the right to convert or exchange any such Convertible Securities
shall be immediately exercisable, and the price per share for which shares of
the Company's common stock shall be issuable upon the exercise of such rights or
options or upon conversion or exchange of such Convertible Securities
(determined by dividing (1) the total amount, if any, received or receivable by
the Company as consideration for the granting of such rights or options, plus
the minimum aggregate amount of additional consideration payable to the Company
upon the exercise of such rights or options, plus, in the case of any such
rights or options which shall relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable upon the issue or
sale of such Convertible Securities and upon the conversion or exchange thereof,
by (2) the total number of shares of the Company's common stock issuable upon
the exercise of such rights or options or upon the conversion or exchange of all
such Convertible Securities issuable upon the exercise of such rights or
options) shall be less than the greater of (x) the $5.00, or (y) 80% of the
Market Price at the time of such issue or sale, then the total number of shares
of the Company's common stock issuable upon the exercise of such rights or
options or upon conversion or exchange of the total amount of such Convertible
Securities issuable upon the exercise of such rights or options shall (as of the
date of granting of such rights or options) be deemed to be outstanding and to
have been issued for such price per share, and except as provided in paragraph
4(d), no further adjustments of the Original Issue Price shall be made upon the
actual issue of such shares of common stock or of such Convertible Securities,
upon the exercise of such rights or options or upon the actual issue of such
common stock upon conversion or exchange of such Convertible Securities.
<PAGE>
(ii) If at any time the Company shall issue or sell
any Convertible Securities, whether or not the rights to exchange or convert
thereunder shall be immediately exercisable, and the price per share for which
shares of the Company's common stock shall be issuable upon such conversion or
exchange (determined by dividing (1) the total amount received or receivable by
the Company as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the conversion or exchange thereof, by (2) the
total number of shares of the Company's common stock issuable upon the
conversion or exchange of all such Convertible Securities) shall be less than
the greater of (x) $5.00, or (y) 80% of the Market Price at the time of such
issue or sale, then the total number of shares of the Company's common stock
issuable upon conversion or exchange of all such Convertible Securities shall
(as of the date of the issue or sale of such Convertible Securities) be deemed
to be outstanding and to have been issued for such price per share, and, except
as provided in paragraph 4(d), no further adjustments of the Original Issue
Price shall be made upon the actual issue of such shares of common stock upon
conversion or exchange of such Convertible Securities. In addition, if any issue
or sale of such Convertible Securities shall be made upon exercise of any rights
to subscribe for or to purchase or any option to purchase any such Convertible
Securities for which adjustments of the Original Issue Price shall have been or
shall be made pursuant to other provisions of this paragraph 4(b)(ii), no
further adjustment of the Original Issue Price shall be made by reason of such
issue or sale.
(iii) If at any time the Company shall declare and
pay a dividend or make any other distribution upon the shares of its common
stock payable in such stock or Convertible Securities, any such stock or
Convertible Securities, as the case may be, issuable in payment of such dividend
or distribution shall be deemed to have been issued or sold without
consideration.
(iv) If at any time any shares of the Company's
common stock or Convertible Securities or any rights or options to purchase
shares of any such stock or Convertible Securities shall be issued or sold for
cash, the consideration received therefor shall be deemed to be the amount
received by the Company therefor, without deduction therefrom of any expenses
incurred or any underwriting commissions or concessions or discounts paid or
allowed by the Company in connection therewith. In case any shares of the
Company's common stock or Convertible Securities or any rights or options to
purchase any such common stock or Convertible Securities shall be issued or sold
for a consideration other than cash, the amount of the consideration other than
cash received by the Company shall be deemed to be the fair value of such
consideration as determined by the Company's Board of Directors, without
deduction therefrom of any expenses incurred or any underwriting commissions or
concessions or discounts paid or allowed by the Company in connection therewith.
In case any shares of the Company's common stock or Convertible Securities or
any rights or options to purchase any such common stock or Convertible
Securities shall be issued in connection with any merger of another corporation
into the Company, the amount of consideration therefor shall be deemed to be the
fair value of the net assets of such merged corporation as determined by the
Company's Board of Directors after deducting therefrom all cash and other
consideration (if any) paid by the Company in connection with such merger.
<PAGE>
(v) If at any time the Company shall take a record
of the holders of its common stock for the purpose of entitling them (1) to
receive a dividend or other distribution payable in shares of the Company's
common stock or in Convertible Securities, or (2) to subscribe for or purchase
shares of the Company's common stock or Convertible Securities, then such record
date shall be deemed to be the date of the issue or sale of the shares of the
Company's common stock deemed to have been issued or sold upon the declaration
of such dividend or the making of such other distribution or the date of the
granting of such right of subscription or purchase, as the case may be.
(vi) The number of shares of the Company's common
stock outstanding at any given time shall not include shares owned or held by or
for the account of the Company, provided that such shares are neither issued,
sold or otherwise distributed by the Company.
(vii) For purposes hereof, the "Market Price" shall
mean the average closing bid price of the Company's common stock on the Nasdaq
SmallCap Market, the Nasdaq National Market or the principal exchange upon which
shares of the Company's common stock may be listed, or, if the Company's common
stock shall not then be quoted on the Nasdaq SmallCap Market or the Nasdaq
National Market or listed on a national securities exchange, but shall otherwise
be traded in the over-the-counter market, on such over-the-counter market, in
each case for the ten day period immediately preceding any determination of such
"Market Price" (subject to appropriate adjustments which shall be made in
determining the average closing bid price if a recapitalization or other event
affecting the Company's common stock shall occur during such 10-day period). If
at any time shares of the Company's common stock shall not be quoted on the
Nasdaq SmallCap Market or the Nasdaq National Market, listed on a national
securities exchange, or otherwise traded in the over-the-counter market, the
"Market Price" of a share of the Company's common stock shall be deemed to be
the higher of (x) the book value thereof (as determined by any firm of
independent public accountants of nationally recognized standing selected by the
Company's Board of Directors) as of the last day of any month ending within 60
days preceding the date of determination, or (y) the fair value thereof (as
determined in good faith by the Company's Board of Directors) as of a date which
shall be within 15 days of the date of determination.
(c) In case at any time the Company shall subdivide
its outstanding shares of common stock into a greater number of shares, the
Original Issue Price in effect immediately prior to such subdivision, the
Maximum Price and the Minimum Price shall be proportionately reduced, and the
Company shall subdivide the Series A Preferred Stock in the same proportion. In
case at any time the outstanding shares of the Company's common stock shall be
combined into a smaller number of shares, the Original Issue Price in effect
immediately prior to such combination, the Maximum Price and the Minimum Price
shall be proportionately increased, and the Company shall combine the Series A
Preferred Stock in the same proportion. Any adjustment under this paragraph 4(c)
shall become effective at the close of business on the date the subdivision or
combination shall become effective. The Company will take such corporate action
as may, in the opinion of its counsel, be necessary to increase its authorized
but unissued shares of Series A Preferred Stock to such number of shares as
shall be sufficient for any such purposes, including engaging in best efforts to
obtain the requisite shareholder approval of any necessary amendment to the
Company's Articles of Incorporation.
<PAGE>
(d) If the purchase or exercise price provided for in any
right or option referred to in paragraph 4(b)(i), or the rate at which any
Convertible Securities referred to in paragraph 4(b)(i) or (ii) shall be
convertible into or exchangeable for shares of the Company's common stock, shall
change or a different purchase or exercise price or rate shall become effective
at any time or from time to time (including any change resulting from
termination of such right, option or convertible security), then, upon such
change becoming effective, the Original Issue Price then in effect hereunder
shall forthwith be increased or decreased to such Original Issue Price as would
have been obtained had the adjustments made upon the granting or issuance of
such rights or options or Convertible Securities been made upon the basis of (A)
the issuance of the number of shares of the Company's common stock theretofore
actually delivered upon the exercise of such options or rights or upon the
conversion or exchange of such Convertible Securities, and (B) the granting or
issuance at the time of such change of any such options, rights or Convertible
Securities then still outstanding for the consideration, if any, received by the
Company therefor and to be received on the basis of such changed price.
(e) The Company shall not be required to make any adjustment
to the Original Issue Price in the case of:
(i) the granting, after the date hereof, by the
Company of stock options under the Company's 1997 Stock Option Plan, so long as
the shares of the Company's common stock underlying such options are covered by
the 800,000 shares currently reserved for issuance under such plan as of the
date hereof, assuming approval by the Company's shareholders of the 300,000
share increase at the Company's 1998 Annual Meeting of Shareholders;
(ii) the issuance of shares of the Company's common
stock, pursuant to the exercise of the options referred to in paragraph 4(e)(i)
above or the exercise of any other options or warrants outstanding as of the
date hereof; or
(iii) the issuance of shares of the Series A
Preferred Stock hereunder or of shares of the Company's common stock upon the
conversion of any shares of the Series A Preferred Stock or upon the exercise of
the Warrant or the Warrant issued to Miller, Johnson & Kuehn, Incorporated on
the same date as the Preferred Stock Purchase Agreement to which this
certificate of Designation is an Exhibit.
5. Voting Rights. The holder of each share of Series A Preferred Stock
shall have the right to the number of votes on all matters submitted to the
Company's shareholders that shall be equal to the number of shares of the
Company's common stock into which such holder's shares of Series A Preferred
Stock shall then be convertible (assuming a conversion as of the record date set
for the vote).
6. Status of Converted Stock. In the event any shares of Series A
Preferred Stock shall be converted pursuant to Section 3 hereof, the shares of
Series A Preferred Stock so converted shall be canceled and shall not be
issuable by the Company. The Articles of Incorporation of the Company shall be
appropriately amended to effect the corresponding reduction in the Company's
authorized capital stock.
7. Notice of Adjustment. The Company shall provide all holders of
shares of Series A Preferred Stock five business days prior written notice of
any adjustments in the Original Issue Price, the Maximum Price, the Minimum
Price or any other adjustments made pursuant to the provisions hereof.
June 11, 1998
Datakey, Inc.
407 West Travelers Trail
Burnsville, Minnesota 55337
RE: REGISTRATION STATEMENT ON FORM S-3 - EXHIBIT 5.1
Gentlemen/Ladies:
We have acted as counsel for Datakey, Inc. (the "Company") in
connection with the Company's filing of a Registration Statement on Form S-3
(the "Registration Statement") relating to the registration under the Securities
Act of 1933 (the "Act") of an offering of 896,134 shares of Common Stock (the
"Shares") to be acquired by selling shareholders of the Company upon the
conversion of outstanding shares of Series A Convertible Cumulative Preferred
Stock (the "Preferred Stock") or upon exercise of certain stock purchase
warrants (the "Warrants").
In connection with rendering this opinion, we have reviewed the
following:
1. The Company's Restated Articles of Incorporation, as amended;
2. The Company's Bylaws, as amended;
3. Certain corporate resolutions, including resolutions of the
Company's Board of Directors pertaining to the issuance by the
Company of the shares of Preferred Stock, the Warrants and the
Shares;
4. The Preferred Stock;
5. The Warrants; and
6. The Registration Statement.
Based upon the foregoing and upon representations and information
provided by the Company, we hereby advise you that in our opinion:
1. The Company's Restated Articles of Incorporation validly
authorize the issuance of the Shares registered pursuant to
the Registration Statement.
2. Upon exercise or conversion in accordance with the terms and
conditions of the Preferred Stock or Warrants, the Shares to
be sold by the selling shareholders named in the Registration
Statement will be validly issued and outstanding, fully paid
and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" included in the Registration Statement and the related Prospectus.
Very truly yours,
FREDRIKSON & BYRON, P.A.
/s/ Thomas R. King
Thomas R. King, Vice President
Fredrikson & Byron, P.A.
900 Second Ave. S., #1100
Minneapolis, MN 55402
Telephone: (612) 347-7000
Facsimile: (612) 347-7077
PREFERRED STOCK PURCHASE AGREEMENT
This Preferred Stock Purchase Agreement is made and entered into as of
the 15th day of May, 1998, between Datakey, Inc., a Minnesota corporation (the
"Company"), and those investors whose names are listed on Schedule A attached
hereto (collectively, the "Investors").
For good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged by the Company and the Investors, the Company and the
Investors agree as follows:
1. Sale and Purchase of Securities. Subject to the terms and
conditions hereof, the Company agrees to sell to the Investors at the Closing
(as defined herein), and the Investors agree to purchase from the Company at the
Closing, such shares of the Company's Series A Convertible Cumulative Preferred
Stock (the "Preferred Stock") with the rights and preferences provided in the
Certificate of Designation for such Preferred Stock attached hereto as Exhibit A
(the "Certificate of Designation") in the amounts set forth in Schedule A
attached hereto, and a five-year Warrant in the form attached hereto as Exhibit
B (the "Warrant") to purchase that number of shares of the Company's common
stock, $.05 par value per share, set forth in Schedule A at an exercise price of
$6.30 per share. The Preferred Stock and the Warrant are sometimes collectively
referred to herein as the "Securities."
2. Closing.
(a) Closing. The closing of the purchase and sale of the
Securities hereunder shall take place at the offices of Leonard, Street and
Deinard Professional Association, Minneapolis, Minnesota, at 1:30 p.m.,
Minnesota time, on May 15, 1998 or at such other place or different time or day
as may be mutually acceptable to the Investors and the Company (the "Closing").
At the Closing, the Company will deliver to each Investor a Warrant representing
the right to purchase that number of shares of the common stock of the Company
set forth opposite such Investor's name on Schedule A attached hereto, dated
such Closing date and will deliver to each Investor a certificate representing
the number of shares of Preferred Stock set forth opposite such Investor's name
on Schedule A and each Investor shall cause to be delivered to the Company a
wire transfer or check payable to the Company in the amount set forth opposite
such Investor's name on Schedule A.
3. Representations and Warranties by the Company. To induce the
Investors to enter into this Agreement and to purchase the Securities, the
Company hereby represents and warrants to the Investors as follows:
(a) Disclosure. The Company has provided the Investors with
all the information it has requested in deciding whether to purchase the
Securities and all information the Company believes is necessary or appropriate
relating to an investment in the Company. There are no facts which individually
or in the aggregate materially adversely affect the business, assets, financial
condition or prospects of the Company, except as set forth in this Agreement or
any other written statements delivered in connection with this Agreement. This
Agreement and the other written information delivered in connection with the
transactions contemplated herein (collectively, the "Disclosed Information")
<PAGE>
fairly presents all material information regarding the Company as of the date
hereof and, as of the date of the Closing, the Disclosed Information will (i)
fairly present all material information regarding the Company, and (ii) not
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading.
(b) Organization, Good Standing, Etc. The Company is duly
incorporated and validly existing as a corporation in good standing under the
laws of the State of Minnesota, with power and authority to own its properties
and conduct its business as now conducted and proposed to be conducted. The
Company is duly qualified to do business as a foreign corporation and is in good
standing in all states or jurisdictions in which the ownership or lease of its
property or the conduct of its business requires such qualification and the
failure to be so qualified would have a material adverse effect on the Company's
business. The Company has one subsidiary.
(c) Financial Statements. The financial statements (including
all related schedules and notes) included in the Disclosed Information fairly
represent the financial condition and results of operations of the Company as of
the dates and for the periods indicated; such statements have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods indicated; and the report of the public accountant
included in the Disclosed Information is issued by an independent public
accountant within the meaning of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations thereunder.
(d) Authorization and Enforceability. The Company has full
legal power, right and authority to enter into this Agreement and the
Registration Rights Agreement among the Company and the Investors, the form of
which is attached hereto as Exhibit E (the "Registration Rights Agreement") and
to issue the Securities. This Agreement, the Registration Rights Agreement and
the Securities, have been duly authorized, executed and delivered on behalf of
the Company and are the valid and binding obligations of the Company,
enforceable in accordance with their respective terms and subject, as to
enforcement, to applicable bankruptcy, insolvency, reorganization, moratorium
and other laws affecting the rights of creditors generally, to the exercise of
judicial discretion as to the availability of equitable remedies such as
specific performance and injunction and subject, as to enforcement of the
indemnification provisions, to limitations under applicable securities laws. The
Securities when delivered pursuant to the terms of this Agreement will be
validly issued, fully paid and nonassessable.
(e) License and Approvals. The Company has all licenses,
certificates, permits and other approvals from governmental and regulatory
authorities necessary for the conduct of its business as it is currently being
conducted and as proposed to be conducted except those which would not have a
material adverse effect or the Company if not obtained.
(f) Intellectual Property. The Company owns or possesses all
assets, patents, patent applications, trademarks, service marks, trade names,
trademark registrations, service mark registrations, copyrights, licenses,
inventions, trade secrets and rights necessary for the conduct of its business
<PAGE>
as it is currently being conducted and as proposed to be conducted and has not
received any notice of conflict with the asserted rights of others in respect
thereof. To the best of the Company's knowledge, no name which the Company uses
and no other aspect of the business of the Company involves or gives rise to any
infringement of, or license or similar fees for, any patents, patent
applications, trademarks, service marks, trade names, trademark registrations,
service mark registrations, copyrights, licenses, inventions, trade secrets or
other similar rights of others.
(g) Defaults. The Company is not in breach, default or
violation of, and the execution of this Agreement and the Registration Rights
Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with or result in any breach of, any of the terms
or conditions of, or constitute a default or violation under, (i) the Articles
of Incorporation, as amended, or Bylaws, as amended, of the Company, (ii) any
indenture, agreement or other instrument to which the Company is now a party, or
(iii) to the best of the Company's knowledge, any law or any order, rule or
regulation applicable to the Company of any court or of any federal or state
regulatory body or administrative agency having jurisdiction over the Company or
its property.
(h) Consents. No consent, authorization, approval, permit or
order of or filing with any governmental or regulatory authority is required
under current laws and regulations in connection with the execution and delivery
of this Agreement or the Registration Rights Agreement or the offer, issuance,
sale or delivery of the Securities, other than the qualification thereof, if
required, under applicable state securities laws, which qualification has been
or will be effected as a condition of the sale of the Securities to the
Investors. The Company has not, directly or through an agent, offered the
Securities or any similar securities for sale to, or solicited any offers to
acquire such securities from, persons other than the Investors. Under the
circumstances contemplated by this Agreement, the offer, issuance, sale and
delivery of the Securities will not, under current laws and regulations, require
compliance with the prospectus delivery or registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"). The Company has filed
all reports or other documentation that it is required to file under the
Exchange Act, any rules or regulations promulgated thereunder, the applicable
rules and regulations of the National Association of Securities Dealers ("NASD")
and all applicable state securities laws, and the information contained in such
reports or other documents did not make any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
therein made, in the light of the circumstances under which they were made, not
misleading.
(i) Valid Issuance of Preferred Stock. The Preferred Stock,
when authorized, issued, sold and delivered in accordance with the terms hereof
will be duly and validly issued, fully paid and nonassessable and will be free
of restrictions on transfer other than under this Agreement, and, based in part
upon the representations of the Investors in this Agreement, will be issued in
compliance with federal and state securities laws. The Company has a sufficient
number of shares of Preferred Stock authorized and reserved for issuance
pursuant to the provisions of Section 4(c) of Exhibit A attached hereto.
<PAGE>
(j) Valid Issuance of Common Stock. The shares of the
Company's common stock issuable upon conversion of the Preferred Stock and upon
exercise of the Warrant have been reserved for issuance and, when issued and
delivered in accordance with the terms thereof, will be duly authorized, validly
issued, fully paid and non-assessable, shall be free of any pledges, liens,
encumbrances and restrictions, and will be issued in compliance with all
applicable federal and state securities laws.
(k) Litigation/Proceedings. There are no pending, threatened
or, to the Company's knowledge, contemplated actions, suits, proceedings or
investigations before or by any court or governmental agency, authority or body,
or any arbitrator, which are not ordinary, routine and incidental to the
business of the Company or which might result in any material adverse change in
the business condition (financial and other) or properties of the Company.
(l) Capital Stock. The authorized capital stock of the
Company consists of 12,500,000 shares, including the following: (a) 10,000,000
shares of common stock, of which 2,909,735 shares are issued and outstanding;
(b) 400,000 shares of convertible preferred stock, of which 150,000 shares are
issued and outstanding; (c) 150,000 shares of Series A Convertible Cumulative
Preferred Stock; and (d) 1,950,000 undesignated shares. Except for an aggregate
of 765,333 shares of the Company's common stock which are subject to outstanding
options to employees under the Company's various stock option plans, there are
no outstanding rights to acquire from the Company any shares of its capital
stock. All outstanding shares of the Company's capital stock have been duly
authorized, validly issued, fully paid and nonassessable and have been issued
pursuant to valid registrations under, or valid exemptions from, the
registration requirements of the Securities Act and appropriate state blue sky
laws.
(m) Title to Properties. The Company has good and marketable
title, free and clear of all liens, encumbrances and equities, and of all
charges or claims, to all of the real and personal property owned by it, except
liens, encumbrances and equities, and charges or claims, which are not material
and do not materially affect the value of such property or interfere with the
conduct of the Company's business. The Company has valid and binding leases to
all of the real and personal property necessary for the conduct of its business
with such exceptions as do not materially interfere with the conduct of its
business.
(n) Tax Returns. The Company has filed all necessary federal,
state and foreign income, franchise and other tax returns and has paid all taxes
shown as due thereon, and the Company has received no notice of any tax
deficiency which has been asserted against the Company.
(o) Authority. The Company has all requisite power and
authority to issue, sell and deliver the Preferred Stock and Warrant in
accordance with and upon the terms set forth in this Agreement. The Company has
duly taken all required action for the due and proper authorization, issuance,
sale and delivery of the Preferred Stock and Warrant. No preemptive rights or
other rights of subscription, first refusal or similar rights of security
holders of the Company exist with respect to the issuance and sale of the
Preferred Stock and Warrant by the Company or the shares of the Company's common
stock issuable upon conversion and exercise, respectively, thereof. With the
<PAGE>
exception of the holder of the Convertible Preferred Stock (as such term is
defined in Exhibit A attached hereto), no security holder of the Company
possesses any registration rights. The issuance of the Securities and the shares
of the Company's common stock underlying the Securities will not result in the
issuance of any additional shares of the Company's common stock or the
triggering of other anti-dilution or similar rights contained in any options,
warrants or other securities issued by, or agreements of, the Company.
(p) Investment Company. In retaining and using the proceeds
from the sale of the Securities, the Company will not be required to register as
an "Investment Company" under the Investment Company Act of 1940, as amended.
(q) Bad Boy Certification. Neither the Company, any of its
predecessors, any affiliated issuer nor any of the Company's directors,
officers, beneficial owners of 10% or more of any class of its equity securities
or other affiliates nor any promoter of the Company is subject to any of the
disabilities enumerated in Exhibit C hereto and the representations and
warranties contained therein are true and correct.
(r) Fees and Commissions. Other than pursuant to agreements
with Miller, Johnson & Kuehn, Incorporated, the Company has not incurred any
liability for any finder's or broker's fee or agent's commission in connection
with the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby.
(s) Changes, Dividends, Etc. Except for the transactions
contemplated by this Agreement, since the date of the most recent financial
statements of the Company provided to Investors, the Company has not: (i)
incurred any debts, obligations or liabilities, absolute, accrued or contingent
and whether due or to become due, except current liabilities incurred in the
ordinary course of business which (individually or in the aggregate) will not
materially and adversely affect the business, properties or prospects of the
Company; (ii) paid any obligation or liability other than, or discharged or
satisfied any liens or encumbrances other than those securing, current
liabilities, in each case in the ordinary course of business; (iii) declared or
made any payment to or distribution to its shareholders as such, or used or
redeemed any of its shares of capital stock, or obligated itself to do so; (iv)
mortgaged, pledged or subjected to lien, charge, security interest or other
encumbrance any of its assets, tangible or intangible, except in the ordinary
course of business; (v) sold, transferred or leased any of its assets except in
the ordinary course of business; (vi) suffered any physical damage, destruction
or loss (whether or not covered by insurance) materially and adversely affecting
the tangible properties, business or prospects of the Company; (vii) encountered
any labor difficulties or labor union organizing activities; (viii) issued or
sold any shares of capital stock or other securities or granted any options
other than to employees, warrants, or other purchase rights with respect thereto
other than pursuant to this Agreement; (ix) made any acquisition or disposition
of any material assets or became involved in any other material transaction,
other than for fair value in the ordinary course of business; or (x) agreed to
do any of the foregoing other than pursuant hereto. There has been no material
adverse change in the financial condition, operations, results of operations or
business of the Company since the date of the most recent financial statements
of the Company provided to the Investors.
<PAGE>
(t) Reporting. The Company is subject to the reporting
requirements of the Securities Act and the Exchange Act and (i) has timely filed
all reports and statement required to be filed thereunder in the 12-month period
prior to the date hereof, and (ii) each report and statement was true and
complete in all material respects when filed.
4. Representations of the Investors. Each Investor represents for
itself that:
(a) Investment Intent. The Securities being acquired by the
Investor are being purchased for investment for the Investor's own account and
not with the view to, or for resale in connection with, any distribution or
public offering thereof. The Investor understands that the Securities have not
been registered under the Securities Act or any state securities laws by reason
of their contemplated issuance in a transaction exempt from the registration
requirements of the Securities Act and applicable state securities laws, and
that the reliance of the Company upon these exemptions is predicated in part
upon this representation by the Investor. The Investor further understands that
the Securities, and the shares of the Company's common stock issuable upon
conversion or exercise thereof, may not be transferred or resold without (i)
registration under the Securities Act and any applicable state securities laws,
or (ii) an exemption from the requirements of the Securities Act and applicable
state securities laws.
(b) Location of Principal Office, Qualification as an
Accredited Investor, Etc. The state in which the Investor's principal office is
located is the State set forth in the Investor's address on Schedule A attached
hereto. The Investor qualifies as an accredited investor for purposes of
Regulation D promulgated under the Securities Act. The Investor acknowledges
that the Company has made available to the Investor at a reasonable time prior
to the execution of this Agreement the opportunity to ask questions and receive
answers concerning the business and affairs of the Company and the terms and
conditions of the sale of Securities contemplated by this Agreement and to
obtain any additional information (which the Company possesses or can acquire
without unreasonable effort or expense) as may be necessary to verify the
accuracy of information furnished to the Investor. The Investor (i) is able to
bear the loss of its entire investment in the Securities without any material
adverse effect on its business, operations or prospects, and (ii) has such
knowledge and experience in financial and business matters that it is capable of
evaluating the merits and risks of the investment to be made by it pursuant to
this Agreement.
(c) Acts and Proceedings. This Agreement has been duly
authorized by all necessary action on the part of the Investor, has been duly
executed and delivered by the Investor, and is a valid and binding agreement of
the Investor.
5. Conditions of the Investors' Obligation. The obligation to purchase
and pay for the Securities at the Closing is subject to the fulfillment prior to
or on the Closing date of the conditions set forth in this Section 5. In the
event that any such condition is not satisfied to the satisfaction of each
Investor, then the Investors shall not be obligated to proceed with the purchase
of the Securities at the Closing.
<PAGE>
(a) Representations and Warranties. The representations and
warranties of the Company under this Agreement shall be true on and as of the
Closing date with the same effect as though made on and as of the Closing date.
(b) Compliance with Agreement. The Company shall have
performed and complied with all agreements or conditions required by this
Agreement to be performed and complied with by it prior to or as of the Closing
date.
(c) Certificate of Officers. The Company shall have delivered
to the Investors a certificate, dated the Closing date, executed by the
President and the Chief Financial Officer of the Company, and certifying to the
satisfaction of the conditions specified in Sections 5(a) and 5(b).
(d) Opinion of the Company's Counsel. The Investors shall
have received from Fredrikson & Byron, P.A., counsel for the Company, an
opinion, dated the Closing date, in the form attached hereto as Exhibit D.
(e) Supporting Documents. The Investors shall have received
the following:
(i) A copy of the resolutions of the Board of
Directors of the Company certified by the Secretary of the Company authorizing
and approving the execution, delivery and performance of this Agreement and
issuance of the Securities;
(ii) A certificate of incumbency executed by
the Secretary of the Company certifying the names, titles and signatures of the
officers of the Company authorized to execute this Agreement and further
certifying that the Articles of Incorporation and Bylaws of the Company
delivered to the Investors at the time of the execution of this Agreement have
been validly adopted and have not been amended or modified; and
(iii) A copy of the Articles of Incorporation and
Bylaws of the Company as of such date and such additional supporting
documentation and other information with respect to the transactions
contemplated hereby as the Investors may reasonably request.
(f) Qualification Under State Securities Laws. All
registrations, qualifications, permits and approvals required under applicable
state securities laws for the lawful execution and delivery of this Agreement
and the offer, sale, issuance and delivery of the Securities to the Investors at
the Closing shall have been obtained.
(g) Proceeding and Documents. All corporate and other
proceedings and actions taken in connection with the transactions contemplated
hereby and all certificates, opinions, agreements, instruments and documents
mentioned herein or incident to any such transaction shall be satisfactory in
form and substance to the Investors.
(h) File Certificate of Designation. It shall be a condition
to the Investors' obligation to close the transactions contemplated hereby that
the Company have filed the Certificate of Designation with the Secretary of
State of the State of Minnesota and that such certificate be accepted and duly
filed by such Secretary's office.
<PAGE>
(i) Execution of Registration Rights Agreement. It shall be a
condition to the Investors' obligation to close the transactions contemplated
hereby that the Company execute and deliver to the Investors the Registration
Rights Agreement attached hereto as Exhibit E.
6. Affirmative Covenants of the Company. The Company covenants and
agrees as follows:
(a) Corporate Existence. The Company will maintain its
corporate existence in good standing and comply with all applicable laws and
regulations of the United States or of any state or political subdivision
thereof and of any government authority where failure to so comply would have a
material adverse impact on the Company or its business or operations.
(b) Books of Accounts. The Company will keep books of record
and account in which full, true and correct entries are made of all of its
respective dealings, business and affairs, in accordance with generally accepted
accounting principles. The Company will employ certified public accountants who
are "independent" within the meaning of the accounting regulations of the
Securities and Exchange Commission.
(c) Patents and Other Intangible Rights. The Company will
apply for, or obtain assignments of, or licenses to use, all patents,
trademarks, trade names and copyrights which in the opinion of a prudent and
experienced businessperson operating in the industry in which the Company is
operating are desirable or necessary for the conduct and protection of the
business of the Company.
(d) Certain Information. For a period of five years from the
date hereof, the Company will furnish to the Investors (i) within 90 days after
the end of each fiscal year, a copy of the Company's annual report on Form 10-K,
including audited financial statements, together with a report thereon of its
independent public accountant; (ii) within 45 days after the end of each of the
first three quarters of each fiscal year, the Company's quarterly report on Form
10-Q, including quarterly condensed financial statements of the Company; and
(iii) as soon as practicable after filing, any other report or statement filed
by the Company under the Securities Act or the Exchange Act. The requirements of
this Section will be met with respect to a particular form if such form is
available to the Investors in electronic format on the Internet within the
periods specified above for such form.
(e) Timely Filings. The Company will timely file all reports
and statements to be filed by the Company pursuant to the reporting requirements
of the Securities Act and the Exchange Act and each such report and statement
will be true and complete in all material respects when filed.
(f) Indemnification. The Company will indemnify and hold
harmless the Investors and each person, if any, who controls the Investors
within the meaning of the Securities Act, from and against any and all loss,
damage, liability, cost and expense to which the Investors or any such
controlling person may become subject, insofar as such losses, damages,
<PAGE>
liabilities, costs or expenses are caused by (i) any untrue statement or alleged
untrue statement of any material fact contained herein, or arise out of or are
based upon the omission or alleged omission to state herein a material fact
required to be stated herein or necessary to make the statements herein, in
light of the circumstances in which they were made, not misleading, or (ii) any
breach of any representation, warranty or agreement of the Company hereunder;
provided, however, that the Company will not be liable in any such case to the
extent that a court of competent jurisdiction shall have determined by a final
judgment that such loss, damage, liability, cost or expense resulted exclusively
from actions taken or omitted to be taken by the Investors or such controlling
person due to their, his or her gross negligence, bad faith, willful misconduct
or breach of this Agreement. Promptly after receipt by the Investors pursuant to
this Section of notice of the commencement of any action involving the subject
matter of the foregoing indemnity provisions, the Investors will, if a claim
thereof is to be made against the Company pursuant to the provisions hereof,
promptly notify the Company of the commencement thereof; but the omission to so
notify the Company will not relieve it from any liability which it may have to
the Investors otherwise than hereunder. In case such action is brought against
the Investors and they notify the Company of the commencement thereof, the
Company shall have the right to participate in, and, to the extent that it may
wish, to assume the defense thereof, with counsel satisfactory to the Investors;
provided, however, if the defendants in any action include both the Investors
and the Company and there is a conflict of interest which would prevent counsel
for the Company from also representing the Investors, the Investors shall have
the right to select separate counsel for participation in the defense of such
action on behalf of the Investors. After notice from the Company to the
Investors of its election so to assume the defense thereof, the Company will not
be liable to the Investors pursuant to the provisions of this Section for any
legal or other expense subsequently incurred by the Investors in connection with
the defense thereof other than reasonable costs of investigation, unless (i) the
Investors shall have employed counsel in accordance with the proviso of the
preceding sentence, (ii) the Company shall not have employed counsel
satisfactory to the Investors to represent the Investors within a reasonable
time after the notice of the commencement of the action, or (iii) the Company
has authorized the employment of counsel for the Investors at the expense of the
Company.
(g) Fees of Counsel. At the Closing, the Company shall pay
the fees and expenses of legal counsel to the Investors as well as the fees and
expenses of counsel to Miller, Johnson & Kuehn, Incorporated ("MJK") incurred
through the date of the Closing. In addition, at the Closing, the Company shall
pay MJK 7% of the Purchase Price and shall issue MJK a warrant to purchase that
number of shares of the Company's common stock equal to 10% of the number of
shares of the Company's common stock issuable upon conversion of the Preferred
Stock sold by the Company to the Investors at the Closing, assuming the
conversion of the Preferred Stock on the date of Closing. The exercise price of
MJK's warrant shall be 110% of the closing bid price of the Company's common
stock on the day prior to Closing.
(h) Reservation of Shares. The Company will, at all times,
reserve and keep available (i) authorized and unissued shares of Preferred Stock
sufficient for issuance pursuant to the terms of Section 4(c) of Exhibit A
attached hereto, and (ii) authorized and unissued shares of its common stock
sufficient for issuance upon conversion of the Preferred Stock and exercise of
the Warrant.
<PAGE>
7. Restriction on Transfer of Preferred Stock, Warrant and Shares.
(a) Legend. Each share of Preferred Stock, each Warrant, and
each certificate representing shares of the Company's common stock shall be
endorsed with a legend in substantially the form which follows:
"The securities represented by this certificate may not be transferred
without (i) the opinion of counsel satisfactory to this corporation
that such transfer may lawfully be made without registration under the
Securities Act of 1933, as amended, and all applicable state securities
laws, or (ii) such registration."
(b) Removal of Legend. Any legend endorsed on a certificate
evidencing a security pursuant to Section 7(a) hereof shall be removed, and the
Company shall issue a certificate without such legend to the holder of such
security, if such security is being disposed of pursuant to a registration under
the Securities Act or pursuant to Rule 144 or any similar rule then in effect or
if such holder provides the Company with an opinion of counsel satisfactory to
the Company to the effect that a transfer of such security may be made without
registration. In addition, if the holder of such security delivers to the
Company an opinion of such counsel to the effect that no subsequent transfer of
such security will require registration under the Securities Act, the Company
will promptly upon such contemplated transfer deliver new certificates
evidencing such security that do not bear the legend set forth in Section 7(a).
8. Miscellaneous.
(a) Changes, Waivers, Etc. Neither this Agreement nor any
provisions hereof may be changed, waived, discharged or terminated orally, but
only by a statement in writing, signed by the party against which enforcement of
the change, waiver, discharge or termination is sought.
(b) Notices. All notices, requests, consents and other
communications required or permitted hereunder shall be in writing and shall be
delivered, or mailed first-class postage prepaid, registered or certified mail
or shall be sent by facsimile transmission followed by mailed copy:
if to the Investors at their respective addresses
set forth on Schedule A, or at such other address or facsimile number as any
Investor may specify in writing to the Company; or
if to the Company at Datakey, Inc., 407 West Travelers
Trail, Burnsville, Minnesota 55337, Attention: President, facsimile number (612)
890-2726; or at such other address or facsimile number as the Company may
specify by written notice to the Investors;
<PAGE>
and such notices and other communications shall for
all purposes of this Agreement be treated as being effective or having been
given if delivered personally, if sent by mail, when received, or, if sent by
facsimile, upon the sender's receipt of confirmation from its facsimile machine
of transmission.
(c) Survival of Representations and Warranties. All
representations and warranties and agreements contained herein shall survive the
execution and delivery of this Agreement, any investigation at any time made by
the Investors or on its behalf, and the sale and purchase of the Securities and
payment therefor. All statements contained in any certificate, instrument or
other writing delivered by or on behalf of the Company pursuant to this
Agreement (other than legal opinions) at the Closing shall constitute
representations and warranties by the Company hereunder.
(d) Headings. The headings of the sections of this Agreement
have been inserted for convenience of reference only and do not constitute a
part of this Agreement.
(e) Choice of Law. The laws of the state of New York shall
govern the validity of this Agreement, the construction of its terms and the
interpretation of the rights and duties of the parties hereunder. Each of the
Company and the Investors irrevocably consent to the exclusive jurisdiction of
the United States Federal courts and state courts, located in New York County,
New York, in any suit or proceeding relating to, based on or arising under this
Agreement and irrevocably agree that all claims in respect of such suit or
proceeding may be determined in such courts. The Company irrevocably waives the
defense of an inconvenient forum to the maintenance of such suit or proceeding.
Service of process on the Company mailed by first class mail shall be deemed in
every respect effective service of process upon the Company in any such suit or
proceeding. Nothing herein shall affect the right of any Investor to serve
process in any manner permitted by law.
(f) Counterparts. This Agreement may be executed at different
times and in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
(g) Parties in Interest. All the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the respective successors and assigns of the parties hereto, whether so
expressed or not, and, in particular, shall inure to the benefit of and be
enforceable by the holder or holders from time to time of any of the Securities.
(h) Entire Agreement. This Agreement, including and
incorporating all Exhibits and Schedules hereto, constitutes and contains the
entire agreement and understanding of the parties regarding the subject matter
of this Agreement and supersedes any and all prior negotiations, correspondence,
understandings and agreements, written or oral, among the parties with respect
to the subject matter hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date indicated
above.
Datakey, Inc. Special Situations Private Equity Fund, L.P.:
By: /s/ Alan Shuler By: /s/ David Greenhouse
Its: Chief Financial Officer Its:
Tax Identification Number:
Special Situations Technology Fund, L.P.: Robert G. Allison
By: /s/ David Greenhouse By: /s/ Richard C. Perkins
Its: Attorney-in-Fact
Tax Identification Number: Tax Identification Number:
Shirley A. Baxter, TTEE
FBO Shirley A. Baxter Revocable Craig L. Campbell
Trust U/A DTD 7-3-96
By: /s/ Richard C. Perkins By: /s/ Richard C. Perkins
Attorney-in-Fact Attorney-in Fact
Tax Identification Number: Tax Identification Number:
Piper Jaffray as Custodian FBO Bradley Piper Jaffray as Custodian
A. Erickson IRA 480-263177-102 FBO Richard C. Perkins
By: /s/ Richard C. Perkins By: /s/ Richard C. Perkins
Attorney-in-Fact Attorney-in Fact
Tax Identification Number: 41-1422918 Tax Identification Number: 41-1422918
David M. Westrum, TTEE
FBO David M. Westrum
Revocable Living Trust Pyramid Partners, L.P.
U/A DTD 6-1-97
By: /s/ Richard C. Perkins By: /s/ Richard C. Perkins
Attorney-in-Fact Attorney-in Fact
Tax Identification Number: Tax Identification Number:
<PAGE>
Industricorp & Co., Inc. Daniel S. & Patricia M. Perkins JT
FBO Twin City Carpenters Pension Plan
/s/ Karen McKernan /s/ Daniel S. Perkins
By: Union Bank & Trust, Daniel S. Perkins
Its Officer /s/ Patrice M. Perkins
Patrice M. Perkins
Tax Identification Number:
Gary Kohler IRA
/s/ Gary S. Kohler
By: Gary Kohler
<PAGE>
Schedule A-2
SCHEDULE A
INVESTORS
<TABLE>
<CAPTION>
Names and Address Preferred Shares Warrant Shares Amount ($)
<S> <C> <C> <C>
Special Situations Private Equity 58,544 110,119 $924,995.20
Fund, L.P.
153 East 53rd Street
51st Floor
New York, New York 10022
Special Situations Technology Fund, 15,823 29,763 $250,003.40
L.P.
153 East 53rd Street
51st Floor
New York, New York 10022
Gary Kohler IRA 1,583 2,978 $25,011.40
Robert G. Allison 1,265 2,379 $19,987.00
Shirley A. Baxter, TTEE FBO Shirley 1,265 2,379 $19,987.00
A. Baxter Revocable Trust
U/A DTD 7-3-96
Craig L. Campbell 1,265 2,379 $19,987.00
Piper Jaffray as Custodian FBO 1,265 2,379 $19,987.00
Bradley A. Erickson
IRA 480-263177-102
Piper Jaffray as Custodian FBO 1,265 2,379 $19,987.00
Richard C. Perkins
IRA 980-576-905-610
David M. Westrum TTEE 1,265 2,379 $19,987.00
FBO David M. Westrum
Revocable Living Trust
U/A DTD 6-1-97
Pyramid Partners L.P. 4,460 8,389 70,468.00
Industricorp & Co., Inc. 10,000 18,810 $158,000.00
FBO Twin City Carpenters Pension Plan
Daniel S. and Patrice M. Perkins, JT 2,000 3,762 $31,600.00
------- ------- -------------
TOTALS 100,000 188,095 $1,580,000.00
</TABLE>
<PAGE>
EXHIBIT A
RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK
The rights, preferences, restrictions and other matters relating to the
Series A Convertible Cumulative Preferred Stock (the "Series A Preferred Stock")
are as follows:
1. Dividend Provisions. Upon issuance, dividends shall accrue on each
share of outstanding Series A Preferred Stock at an annual rate equal to $1.264
per share per annum (8% of the Original Issue Price, as defined herein). Such
dividends shall be cumulative and shall be payable upon any conversion of the
Series A Preferred Stock pursuant to Section 3 hereof. Such dividends shall only
be paid out of legally available funds of the Company. Such dividends shall be
payable by the Company, in its sole discretion, all in cash or all by the
issuance of a number of shares of the Company's unrestricted, freely tradable
common stock equal to the dividends owing on the Series A Preferred Stock;
provided, however, that prior to the payment of any such dividend by the
issuance of shares of the Company's common stock, the Company shall deliver to
the Investors an opinion of its counsel stating that all such shares have been
validly registered, and that they are duly authorized, validly issued and
nonassessable. For the purposes hereof, the number of shares of the Company's
common stock issuable in lieu of any cash dividend payment shall equal the total
dividend payment then due divided by the per share price of such stock. The per
share price of the Company's common stock shall be determined based on the
average closing bid price of such stock quoted on The Nasdaq Stock Market for
the ten consecutive trading days prior to the payment of such dividends.
Dividends on shares of the Series A Preferred Stock shall accrue beginning on
the date of issuance of the shares of Series A Preferred Stock, shall compound
on an annual basis and shall be payable upon conversion of the Series A
Preferred Stock (a "Payment Date"). All accrued and unpaid dividends on the
Series A Preferred Stock must be paid before any dividends may be declared or
paid on any other junior series of preferred or common stock issued by the
Company.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up
of the Company, either voluntary or involuntary, the holders of the previously
issued Convertible Preferred Stock (the "Convertible Preferred Stock") and the
Series A Preferred Stock shall be entitled to receive, prior and in preference
to any distribution of any of the assets of the Company to the holders of common
stock by reason of their ownership thereof, an amount per share equal to $2.50
for the Convertible Preferred Stock, and for the Series A Preferred Stock the
sum of (i) $15.80, as adjusted pursuant to Section 4(c) hereof (the "Original
Issue Price"), and (ii) an amount equal to cumulative unpaid dividends on such
shares (respectively, a "Liquidation Amount"). If upon the occurrence of such an
event, the assets and funds thus distributed among the holders of the
Convertible Preferred Stock and the Series A Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then, the entire assets and funds of the Company legally
available for distribution shall be distributed ratably among the holders of the
Convertible Preferred Stock and the Series A Preferred Stock in proportion to
the amount of such stock owned by each such holder multiplied by the appropriate
Liquidation Amount.
<PAGE>
(b) Upon the completion of the distribution required by
subparagraph (a) of this Section 2, if assets remain in the Company, the
remaining assets of the Company shall be distributed ratably among the holders
of the Company's common stock and the Series A Preferred Stock in proportion to
the number of shares of common stock held by each (assuming full conversion of
all shares of Series A Preferred Stock).
(c) (i) For purposes of this Section 2, a liquidation,
dissolution or winding up of the Company shall be deemed to be occasioned by, or
to include, (A) the acquisition of the Company by another entity by means of any
transaction or series of related transactions (including any reorganization,
merger or consolidation but excluding any merger effected exclusively for the
purpose of changing the domicile of the Company); or (B) a sale of all or
substantially all of the assets of the Company, unless the Company's
shareholders as constituted immediately prior to such acquisition or sale will,
immediately after such acquisition or sale (by virtue of securities issued as
consideration for the Company's acquisition or sale or otherwise) hold at least
50% of the voting power of the surviving or acquiring entity.
(ii) In any of such events, if the consideration
received by the Company is other than cash, its value will be deemed its fair
market value.
(iii) In the event the requirements of this Section 2
are not complied with, the Company shall forthwith either:
(A) cause such closing to be postponed until
such time as the requirements of this Section 2 have been complied with, or
(B) cancel such transaction, in which event
the rights, preferences and privileges of the holders of the Convertible
Preferred Stock and the Series A Preferred Stock shall revert to and be the same
as such rights, preferences and privileges existing immediately prior to the
date of the first notice referred to in subsection 2(c)(iv) hereof.
(iv) The Company shall give each holder of record of
Convertible Preferred Stock and the Series A Preferred Stock written notice of
such impending transaction not later than 20 days prior to the shareholders'
meeting called to approve such transaction, or 20 days prior to the closing of
such transaction, whichever is earlier, and shall also notify such holders in
writing of the final approval of such transaction; provided, however, that the
holder of any shares of then outstanding Convertible Preferred Stock or Series A
Preferred Stock shall have the right during such 20-day period to convert such
shares pursuant to Section 3 hereof. The first of such notices shall describe
the material terms and conditions of the impending transaction and the
provisions of this Section 2, and the Company shall thereafter give such holders
prompt notice of any material changes. The transaction shall in no event take
<PAGE>
place sooner than 20 days after the Company has given the first notice provided
for herein or sooner than ten days after the Company has given notice of any
material changes provided for herein; provided, however, that such periods may
be shortened upon the written consent of the holders of the Convertible
Preferred Stock and the Series A Preferred Stock that are entitled to such
notice rights or similar notice rights and that represent at least a majority of
the voting power of all then outstanding shares of each of the classes of
preferred stock, voting separately as a class.
3. Conversion.
(a) Conversion Right. At the option of the holder thereof,
each share of Series A Preferred Stock shall be convertible at any time during
the period commencing on the day on which the Series A Preferred Stock is issued
and expiring on May 15, 2000 (the date which is the second anniversary of the
date of issuance of the Series A Preferred Stock); provided, however, that such
expiration date shall be extended for a number of days equal to the number of
days beyond the 90th day following the date of issuance of the Series A
Preferred Stock that the Registration Statement (as such term is defined in the
Registration Rights Agreement, of even date herewith, entered into by and
between the Company and the Investors set forth on Schedule A thereto) is not
effective (such date, including any extension thereof pursuant to the foregoing
proviso, being herein referred to as the "Second Anniversary"). The Series A
Preferred Stock shall be convertible at the office of the Company or any
transfer agent for such stock into such number of fully paid and nonassessable
shares of the Company's common stock as is determined by dividing the Original
Issue Price, subject to adjustment as provided in Section 4, by the Conversion
Price applicable to such shares, determined as hereafter provided, in effect on
the date the certificates representing such shares are surrendered for
conversion (the "Conversion Date"). The Conversion Price shall be equal to the
average closing bid price of one share of the Company's common stock as quoted
by the Nasdaq SmallCap Market, the Nasdaq National Market or the principal
exchange upon which shares of the Company's common stock may be listed, or, if
the Company's common stock shall not then be quoted on the Nasdaq SmallCap
Market or the Nasdaq National Market or listed on a national securities
exchange, but shall otherwise be traded in the over-the-counter market, on such
over-the-counter market for the ten-day period ending on the day prior to the
Conversion Date (the "Trading Period") multiplied by .8 (the "Conversion
Price"); provided, however, that in no event shall the Conversion Price exceed
$5.00 per share or be less than $2.75 (the "Maximum Price" and "Minimum Price,"
respectively) per share; and provided, further, that appropriate adjustments
shall be made in determining the average closing bid price if a recapitalization
or other event affecting the Company's common stock shall occur during the
Trading Period.
(b) Dividend Payment. Should the Company, pursuant to Section
1 hereof, not elect to pay all outstanding, cumulative, accrued and unpaid
dividends on the Series A Preferred Stock in shares of its common stock, the
Company shall pay, in immediately available funds, to the holder of any shares
of Series A Preferred Stock being converted, within two days, all such dividends
on the date that it receives notice of such holder's intent to convert such
shares pursuant to (d) below. Separately, should the Company elect to pay all
outstanding, cumulative, accrued and unpaid dividends on the Series A Preferred
Stock in shares of its common stock, it shall, within two business days of
receiving a holder's notice of intent to convert, deliver certificates
representing such shares to the holder of the Series A Preferred Stock.
<PAGE>
(c) Automatic Conversion. Any shares of Series A Preferred
Stock remaining outstanding on the Second Anniversary shall be automatically
converted pursuant to the conversion terms of Section 3(a) above. The Conversion
Date with respect to such automatic conversion shall be the Second Anniversary.
In any event, the Company shall, within two business days after automatic
conversion of the Series A Preferred Stock, issue and deliver a certificate or
certificates for the number of shares of the Company's common stock to which
each former holder of Series A Preferred Stock is entitled. Notwithstanding the
foregoing, no automatic conversion of the Series A Preferred Stock shall occur
pursuant to this Section unless (i) all shares of the Company's common stock
underlying the shares of Series A Preferred Stock may be sold pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
(ii) the Company's common stock is listed and trading on The Nasdaq Stock
Market, and (iii) the Company has reserved and available for issuance a number
of shares of its common stock sufficient to cover conversion of all outstanding
shares of Series A Preferred Stock.
(d) Mechanics of Conversion. Before any holder of Series A
Preferred Stock shall be entitled to convert the same into shares of the
Company's common stock, he, she or it shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Company or of any
transfer agent for the Series A Preferred Stock, and shall give written notice,
via facsimile, to the Company, at its principal corporate office, of the
election to convert the same and shall state therein the name or names in which
the certificate or certificates for shares of the Company's common stock are to
be issued. The Company shall, immediately thereafter (and in any event no more
than two business days thereafter), issue and deliver to such holder of Series A
Preferred Stock at the address shown on the Company's records or at such other
address as such party may designate by written notice to the Company, or to the
nominee or nominees of such holder, a certificate or certificates for the number
of shares of the Company's common stock to which such holder shall be entitled
pursuant to Section 3(a) and a certificate representing shares of Series A
Preferred Stock not so converted by the holder. Such conversion shall be deemed
to have been made immediately prior to the close of business on the Conversion
Date, and the person or persons entitled to receive the shares of the Company's
common stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of the Company's common stock as of
such date.
(e) Mechanics of Automatic Conversion. On the Conversion Date
with respect to the automatic conversion pursuant to subsection 3(c) above, the
certificates representing shares of Series A Preferred Stock shall immediately
represent that number of shares of the Company's common stock into which such
shares are convertible. Holders of Series A Preferred Stock shall deliver their
certificates, duly endorsed in blank, to the principal office of the Company,
together with a notice setting out the name or names (with addresses) and
denominations in which the certificates representing such shares of common stock
issuable upon conversion are to be issued and including instructions for
delivery thereof. The person entitled to receive the shares of the Company's
common stock issuable upon such conversion shall be treated for all purposes as
the record holder of such shares of common stock at and on the Conversion Date,
and the rights of such person as a holder of shares of Series A Preferred Stock
<PAGE>
shall cease and terminate at and on the Conversion Date, in any case without
regard to any failure by such holder to deliver the certificates or the notice
required by this subsection 3(e). On the Conversion Date with respect to
automatic conversion, the Company shall pay all outstanding, cumulative, accrued
and unpaid dividends, either by the issuance of shares of its common stock or in
cash, pursuant to the provisions set forth in (a) above; provided, however, that
should the Company elect to pay such dividends by the issuance of additional
shares of its common stock, the person entitled to receive such shares of the
Company's common stock issuable upon such conversion shall be treated for all
purposes as the record holder of such additional shares on the Conversion Date
(f) No Impairment. The Company will not, by amendment of its
Articles of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Section 3 and in the taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of the
holders of the Series A Preferred Stock against impairment.
(g) No Fractional Shares. No fractional shares shall be issued
upon the conversion of any share or shares of the Series A Preferred Stock, and
the number of shares of the Company's common stock to be issued shall be rounded
to the nearest whole share. Whether or not fractional shares are issuable upon
such conversion shall be determined on the basis of the total number of shares
of Series A Preferred Stock the holder is at the time converting into shares of
the Company's common stock and the number of shares of such common stock
issuable upon such aggregate conversion.
(h) Notices of Record Date. In the event of any taking by the
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any other right, the Company shall mail to each holder of Series A
Preferred Stock, at least 20 days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and character of such
dividend, distribution or right.
(i) Reservation of Stock Issuable Upon Conversion. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of common stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred Stock, such number of its shares of its
common stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of the Series A Preferred Stock; and if at any time
the number of authorized but unissued shares of the Company's common stock shall
not be sufficient to effect the conversion of all then outstanding shares of the
Series A Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Series A Preferred Stock, the Company will take
such corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of common stock to such number of
shares as shall be sufficient for such purposes, including engaging in best
efforts to obtain the requisite shareholder approval of any necessary amendment
to the Company's Articles of Incorporation.
<PAGE>
(j) Notices. Any notice required by the provisions of this
Section 3 to be given to the holders of shares of Series A Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his, her or its address appearing on the
books of the Company.
4. Anti-Dilution Provisions.
The Original Issue Price shall be subject to adjustment from
time to time upon the happening of any of the following events: (a) In the event
the Company shall issue or sell any shares of its common stock (except as
provided in paragraph (e) hereof) for a consideration per share less than the
greater of (A) $5.00, or (B) 80% of the Market Price (as defined below) on the
date of such issue or sale, then the Original Issue Price shall be increased to
such greater price (calculated to the nearest cent) as shall be determined by
multiplying the Original Issue Price by a fraction, the numerator of which shall
be the number of shares of the Company's common stock outstanding immediately
after the issuance or sale of such additional shares, and the denominator of
which shall be the sum of (i) the number of shares of the Company's common stock
outstanding immediately prior to the issuance or sale of such additional shares,
and (ii) the number of shares of the Company's common stock which the aggregate
consideration received for the issuance or sale of such additional shares would
purchase at the greater of $5.00, or if such shares of the Company's common
stock shall have been issued for a consideration per share less than 80% of the
Market Price on the date of issuance or sale, the current Market Price. For
purposes of this paragraph, all shares of the Company's common stock issuable
upon exercise of outstanding options and warrants shall be deemed to be
outstanding.
(b) For the purposes of paragraph 4(a) above, the following
subparagraphs (i) to (vii), inclusive, shall be applicable:
(i) If at any time the Company shall issue or sell any
rights to subscribe for, or any rights or options to purchase, shares of its
common stock or any stock or other securities convertible into or exchangeable
for such common stock (such convertible or exchangeable stock or securities
being hereinafter called "Convertible Securities"), whether or not such rights
or options or the right to convert or exchange any such Convertible Securities
shall be immediately exercisable, and the price per share for which shares of
the Company's common stock shall be issuable upon the exercise of such rights or
options or upon conversion or exchange of such Convertible Securities
(determined by dividing (1) the total amount, if any, received or receivable by
the Company as consideration for the granting of such rights or options, plus
the minimum aggregate amount of additional consideration payable to the Company
upon the exercise of such rights or options, plus, in the case of any such
rights or options which shall relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable upon the issue or
sale of such Convertible Securities and upon the conversion or exchange thereof,
by (2) the total number of shares of the Company's common stock issuable upon
the exercise of such rights or options or upon the conversion or exchange of all
such Convertible Securities issuable upon the exercise of such rights or
options) shall be less than the greater of (x) the $5.00, or (y) 80% of the
Market Price at the time of such issue or sale, then the total number of shares
of the Company's common stock issuable upon the exercise of such rights or
<PAGE>
options or upon conversion or exchange of the total amount of such Convertible
Securities issuable upon the exercise of such rights or options shall (as of the
date of granting of such rights or options) be deemed to be outstanding and to
have been issued for such price per share, and except as provided in paragraph
4(d), no further adjustments of the Original Issue Price shall be made upon the
actual issue of such shares of common stock or of such Convertible Securities,
upon the exercise of such rights or options or upon the actual issue of such
common stock upon conversion or exchange of such Convertible Securities.
(ii) If at any time the Company shall issue or sell any
Convertible Securities, whether or not the rights to exchange or convert
thereunder shall be immediately exercisable, and the price per share for which
shares of the Company's common stock shall be issuable upon such conversion or
exchange (determined by dividing (1) the total amount received or receivable by
the Company as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the conversion or exchange thereof, by (2) the
total number of shares of the Company's common stock issuable upon the
conversion or exchange of all such Convertible Securities) shall be less than
the greater of (x) $5.00, or (y) 80% of the Market Price at the time of such
issue or sale, then the total number of shares of the Company's common stock
issuable upon conversion or exchange of all such Convertible Securities shall
(as of the date of the issue or sale of such Convertible Securities) be deemed
to be outstanding and to have been issued for such price per share, and, except
as provided in paragraph 4(d), no further adjustments of the Original Issue
Price shall be made upon the actual issue of such shares of common stock upon
conversion or exchange of such Convertible Securities. In addition, if any issue
or sale of such Convertible Securities shall be made upon exercise of any rights
to subscribe for or to purchase or any option to purchase any such Convertible
Securities for which adjustments of the Original Issue Price shall have been or
shall be made pursuant to other provisions of this paragraph 4(b)(ii), no
further adjustment of the Original Issue Price shall be made by reason of such
issue or sale.
(iii) If at any time the Company shall declare and pay a
dividend or make any other distribution upon the shares of its common stock
payable in such stock or Convertible Securities, any such stock or Convertible
Securities, as the case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without consideration.
(iv) If at any time any shares of the Company's common
stock or Convertible Securities or any rights or options to purchase shares of
any such stock or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by the
Company therefor, without deduction therefrom of any expenses incurred or any
underwriting commissions or concessions or discounts paid or allowed by the
Company in connection therewith. In case any shares of the Company's common
stock or Convertible Securities or any rights or options to purchase any such
common stock or Convertible Securities shall be issued or sold for a
<PAGE>
consideration other than cash, the amount of the consideration other than cash
received by the Company shall be deemed to be the fair value of such
consideration as determined by the Company's Board of Directors, without
deduction therefrom of any expenses incurred or any underwriting commissions or
concessions or discounts paid or allowed by the Company in connection therewith.
In case any shares of the Company's common stock or Convertible Securities or
any rights or options to purchase any such common stock or Convertible
Securities shall be issued in connection with any merger of another corporation
into the Company, the amount of consideration therefor shall be deemed to be the
fair value of the net assets of such merged corporation as determined by the
Company's Board of Directors after deducting therefrom all cash and other
consideration (if any) paid by the Company in connection with such merger.
(v) If at any time the Company shall take a record of
the holders of its common stock for the purpose of entitling them (1) to receive
a dividend or other distribution payable in shares of the Company's common stock
or in Convertible Securities, or (2) to subscribe for or purchase shares of the
Company's common stock or Convertible Securities, then such record date shall be
deemed to be the date of the issue or sale of the shares of the Company's common
stock deemed to have been issued or sold upon the declaration of such dividend
or the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be.
(vi) The number of shares of the Company's common stock
outstanding at any given time shall not include shares owned or held by or for
the account of the Company, provided that such shares are neither issued, sold
or otherwise distributed by the Company.
(vii) For purposes hereof, the "Market Price" shall mean
the average closing bid price of the Company's common stock on the Nasdaq
SmallCap Market, the Nasdaq National Market or the principal exchange upon which
shares of the Company's common stock may be listed, or, if the Company's common
stock shall not then be quoted on the Nasdaq SmallCap Market or the Nasdaq
National Market or listed on a national securities exchange, but shall otherwise
be traded in the over-the-counter market, on such over-the-counter market, in
each case for the ten day period immediately preceding any determination of such
"Market Price" (subject to appropriate adjustments which shall be made in
determining the average closing bid price if a recapitalization or other event
affecting the Company's common stock shall occur during such 10-day period). If
at any time shares of the Company's common stock shall not be quoted on the
Nasdaq SmallCap Market or the Nasdaq National Market, listed on a national
securities exchange, or otherwise traded in the over-the-counter market, the
"Market Price" of a share of the Company's common stock shall be deemed to be
the higher of (x) the book value thereof (as determined by any firm of
independent public accountants of nationally recognized standing selected by the
Company's Board of Directors) as of the last day of any month ending within 60
days preceding the date of determination, or (y) the fair value thereof (as
determined in good faith by the Company's Board of Directors) as of a date which
shall be within 15 days of the date of determination.
<PAGE>
(c) In case at any time the Company shall subdivide its
outstanding shares of common stock into a greater number of shares, the Original
Issue Price in effect immediately prior to such subdivision, the Maximum Price
and the Minimum Price shall be proportionately reduced, and the Company shall
subdivide the Series A Preferred Stock in the same proportion. In case at any
time the outstanding shares of the Company's common stock shall be combined into
a smaller number of shares, the Original Issue Price in effect immediately prior
to such combination, the Maximum Price and the Minimum Price shall be
proportionately increased, and the Company shall combine the Series A Preferred
Stock in the same proportion. Any adjustment under this paragraph 4(c) shall
become effective at the close of business on the date the subdivision or
combination shall become effective. The Company will take such corporate action
as may, in the opinion of its counsel, be necessary to increase its authorized
but unissued shares of Series A Preferred Stock to such number of shares as
shall be sufficient for any such purposes, including engaging in best efforts to
obtain the requisite shareholder approval of any necessary amendment to the
Company's Articles of Incorporation.
(d) If the purchase or exercise price provided for in any
right or option referred to in paragraph 4(b)(i), or the rate at which any
Convertible Securities referred to in paragraph 4(b)(i) or (ii) shall be
convertible into or exchangeable for shares of the Company's common stock, shall
change or a different purchase or exercise price or rate shall become effective
at any time or from time to time (including any change resulting from
termination of such right, option or convertible security), then, upon such
change becoming effective, the Original Issue Price then in effect hereunder
shall forthwith be increased or decreased to such Original Issue Price as would
have been obtained had the adjustments made upon the granting or issuance of
such rights or options or Convertible Securities been made upon the basis of (A)
the issuance of the number of shares of the Company's common stock theretofore
actually delivered upon the exercise of such options or rights or upon the
conversion or exchange of such Convertible Securities, and (B) the granting or
issuance at the time of such change of any such options, rights or Convertible
Securities then still outstanding for the consideration, if any, received by the
Company therefor and to be received on the basis of such changed price.
(e) The Company shall not be required to make any adjustment
to the Original Issue Price in the case of:
(i) the granting, after the date hereof, by the Company
of stock options under the Company's 1997 Stock Option Plan, so long as the
shares of the Company's common stock underlying such options are covered by the
800,000 shares currently reserved for issuance under such plan as of the date
hereof, assuming approval by the Company's shareholders of the 300,000 share
increase at the Company's 1998 Annual Meeting of Shareholders;
(ii) the issuance of shares of the Company's common
stock, pursuant to the exercise of the options referred to in paragraph 4(e)(i)
above or the exercise of any other options or warrants outstanding as of the
date hereof; or
<PAGE>
(iii) the issuance of shares of the Series A Preferred
Stock hereunder or of shares of the Company's common stock upon the conversion
of any shares of the Series A Preferred Stock or upon the exercise of the
Warrant or the Warrant issued to Miller, Johnson & Kuehn, Incorporated on the
same date as the Preferred Stock Purchase Agreement to which this certificate of
Designation is an Exhibit.
5. Voting Rights. The holder of each share of Series A Preferred Stock
shall have the right to the number of votes on all matters submitted to the
Company's shareholders that shall be equal to the number of shares of the
Company's common stock into which such holder's shares of Series A Preferred
Stock shall then be convertible (assuming a conversion as of the record date set
for the vote).
6. Status of Converted Stock. In the event any shares of Series A
Preferred Stock shall be converted pursuant to Section 3 hereof, the shares of
Series A Preferred Stock so converted shall be canceled and shall not be
issuable by the Company. The Articles of Incorporation of the Company shall be
appropriately amended to effect the corresponding reduction in the Company's
authorized capital stock.
7. Notice of Adjustment. The Company shall provide all holders of
shares of Series A Preferred Stock five business days prior written notice of
any adjustments in the Original Issue Price, the Maximum Price, the Minimum
Price or any other adjustments made pursuant to the provisions hereof.
<PAGE>
EXHIBIT B
NEITHER THIS WARRANT NOR THE SECURITIES INTO WHICH THIS WARRANT IS
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE AND HAVE BEEN ISSUED IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN
COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS.
DATAKEY, INC.
WARRANT
Warrant No. [__] May 15, 1998
DATAKEY, INC., a Minnesota corporation (the "Company"), hereby
certifies that, for value received, __________, or its registered assigns
("Holder"), is entitled, subject to the terms set forth below, to purchase from
the Company _______ shares of common stock, par value $.05 per share ("Common
Stock"), of the Company (each such share, a "Warrant Share" and all such shares,
the "Warrant Shares") at an exercise price equal to $6.30 per share (as adjusted
from time to time as provided in Section 8 hereof, the "Exercise Price"), at any
time and from time to time from and after the date hereof and through and
including May 14, 2003 (the "Expiration Date"), and subject to the following
terms and conditions:
1. Registration of Warrant. The Company shall register this Warrant,
upon records to be maintained by the Company for that purpose (the "Warrant
Register"), in the name of the record Holder hereof from time to time. The
Company may deem and treat the registered Holder of this Warrant as the absolute
owner hereof for the purpose of any exercise hereof or any distribution to the
Holder, and for all other purposes, and the Company shall not be affected by
notice to the contrary.
2. Registration of Transfers and Exchanges.
(a) Subject to the provisions of (b) below, the Company shall
register the transfer of any portion of this Warrant in the Warrant Register,
upon surrender of this Warrant, with the Form of Assignment attached hereto duly
completed and signed, to the Company at the office specified in or pursuant to
the terms hereof. Upon any such registration or transfer, a new warrant to
<PAGE>
purchase Common Stock, in substantially the form of this Warrant (any such new
warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred
shall be issued to the transferee and a New Warrant evidencing the remaining
portion of this Warrant not so transferred, if any, shall be issued to the
transferring Holder. The acceptance of the New Warrant by the transferee thereof
shall be deemed the acceptance by such transferee of all of the rights and
obligations of a Holder of this Warrant.
(b) In the event the Holder of this Warrant desires to
transfer this Warrant, or any Warrant Shares issued upon the exercise hereof
prior to the registration thereof pursuant to Section 4, the Holder shall
provide the Company with a written notice describing the manner of such transfer
and an opinion of counsel (reasonably acceptable to the Company) that the
proposed transfer may be effected without registration or qualification (under
any federal or state law), whereupon such Holder shall be entitled to transfer
this Warrant or to dispose of any Warrant Shares in accordance with the notice
delivered by such Holder to the Company; provided, however, that an appropriate
legend may be endorsed on this Warrant or the certificates for such Warrant
Shares respecting restrictions upon transfer thereof necessary or advisable in
the opinion of counsel satisfactory to the Company to prevent further transfers
which would be in violation of Section 5 of the Securities Act.
(c) This Warrant is exchangeable, upon the surrender hereof
by the Holder to the office of the Company specified in or pursuant to the terms
hereof for one or more New Warrants, evidencing in the aggregate the right to
purchase the number of Warrant Shares which may then be purchased hereunder. Any
such New Warrants will be dated the date of such exchange.
3. Duration and Exercise of Warrants.
(a) This Warrant shall be exercisable by the registered
Holder on any business day before 5:00 P.M., Minneapolis, Minnesota time, at any
time and from time to time on or after the date hereof to and including the
Expiration Date. At 5:00 P.M., Minneapolis, Minnesota time on the Expiration
Date, the portion of this Warrant not exercised prior thereto shall be and
become void and of no value. Except as set forth in Section 13 hereof, this
Warrant may not be redeemed by the Company.
(b) Subject to provisions elsewhere contained in this
Warrant, upon surrender of this Warrant, with the Form of Election to Purchase
attached hereto duly completed and signed, to the Company at its address for
notice as set forth in Section 11 hereof, and upon payment of the Exercise Price
multiplied by the number of Warrant Shares that the Holder intends to purchase
hereunder, in lawful money of the United States of America, in cash or by
certified or official bank check or checks, all as specified by the Holder in
the Form of Election to Purchase, the Company shall promptly (but in no event
later than two business days after the Date of Exercise (as defined herein))
issue or cause to be issued and cause to be delivered to the Holder and in such
name or names as the Holder may designate, a certificate for the Warrant Shares
issuable upon such exercise. Any person so designated by the Holder to receive
Warrant Shares shall be deemed to have become holder of record of such Warrant
Shares as of the Date of Exercise of this Warrant.
<PAGE>
A "Date of Exercise" means the date on which the
Company shall have received (i) this Warrant (or any New Warrant, as
applicable), with the Form of Election to Purchase attached hereto (or attached
to such New Warrant) appropriately completed and duly signed, and (ii) payment
of the Exercise Price for the number of Warrant Shares so indicated by the
Holder hereof to be purchased.
(c) This Warrant shall be exercisable either in its entirety
or for a portion of the number of Warrant Shares. If this Warrant is exercised
for a number of Warrant Shares which is less than all of the Warrant Shares
which may be purchased under this Warrant, the Company shall issue or cause to
be issued, at its expense, a New Warrant evidencing the right to purchase the
remaining number of Warrant Shares for which no exercise has been evidenced by
this Warrant.
4. Registration Provisions. The shares of Common Stock underlying this
Warrant shall be registered by the Company under the Securities Act pursuant to
the terms of that Registration Rights Agreement, dated May 15, 1998, by and
between the Company and Holder.
5. Payment of Taxes. The Company will pay all taxes attributable to
the transfer of this Warrant or the issuance of Warrant Shares upon the exercise
of this Warrant.
6. Replacement of Warrant. If this Warrant is mutilated, lost, stolen
or destroyed, the Company shall issue or cause to be issued in exchange and
substitution for and upon cancellation hereof, or in lieu of and substitution
for this Warrant, a New Warrant, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction and indemnity, if
reasonably satisfactory to it. Applicants for a New Warrant under such
circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable charges as the Company may reasonably
prescribe.
7. Reservation of Warrant Shares. The Company covenants that it will
at all times reserve and keep available out of the aggregate of its authorized
but unissued shares of Common Stock, solely for the purpose of enabling it to
issue Warrant Shares upon exercise of this Warrant as herein provided, the
number of Warrant Shares which are then issuable and deliverable upon the
exercise of this entire Warrant, free from preemptive rights or any other actual
contingent purchase rights of persons other than the Holder (taking into account
the adjustments and restrictions of Section 8). The Company covenants that all
Warrant Shares that shall be so issuable and deliverable shall, upon issuance
and the payment of the applicable Exercise Price in accordance with the terms
hereof, be duly and validly authorized and issued and fully paid and
nonassessable.
<PAGE>
8. Certain Adjustments. The Exercise Price and the number of Warrant
Shares purchasable upon the exercise of this Warrant shall be subject to
adjustment from time to time upon the happening of any of the following events:
(a) In the event the Company shall issue or sell any shares
of its Common Stock (except as provided in paragraph (f) hereof) for a
consideration per share less than the greater of (A) the Exercise Price, or (B)
80% of the Market Price (as defined below) on the date of such issue or sale,
then the Exercise Price shall be reduced to such price (calculated to the
nearest cent) as shall be determined by multiplying the Exercise Price by a
fraction, the numerator of which shall be the sum of (i) the number of shares of
Common Stock outstanding immediately prior to the issuance or sale of such
additional shares, and (ii) the number of shares of Common Stock which the
aggregate consideration received for the issuance or sale of such additional
shares would purchase at the greater of the Exercise Price, or if such shares of
Common Stock shall have been issued for a consideration per share less than 80%
of the Market Price on the date of issuance or sale, the current Market Price,
and the denominator of which shall be the number of shares of Common Stock
outstanding immediately after the issuance or sale of such additional shares.
For purposes of this paragraph, all shares of the Common Stock issuable upon
exercise of outstanding options and warrants shall be deemed to be outstanding.
(b) For the purposes of Section 8(a) above, the following
subparagraphs (i) to (vii), inclusive, shall be applicable:
(i) If at any time the Company shall issue or sell any
rights to subscribe for, or any rights or options to purchase, shares of Common
Stock or any stock or other securities convertible into or exchangeable for such
Common Stock (such convertible or exchangeable stock or securities being
hereinafter called "Convertible Securities"), whether or not such rights or
options or the right to convert or exchange any such Convertible Securities
shall be immediately exercisable, and the price per share for which shares of
Common Stock shall be issuable upon the exercise of such rights or options or
upon conversion or exchange of such Convertible Securities (determined by
dividing (1) the total amount, if any, received or receivable by the Company as
consideration for the granting of such rights or options, plus the minimum
aggregate amount of additional consideration payable to the Company upon the
exercise of such rights or options, plus, in the case of any such rights or
options which shall relate to Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable upon the issue or sale of
such Convertible Securities and upon the conversion or exchange thereof, by (2)
the total number of shares of Common Stock issuable upon the exercise of such
rights or options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such rights or options) shall be less
than the greater of (x) the Exercise Price, or (y) 80% of the Market Price at
the time of such issue or sale, then the total number of shares of Common Stock
issuable upon the exercise of such rights or options or upon conversion or
exchange of the total amount of such Convertible Securities issuable upon the
exercise of such rights or options shall (as of the date of granting of such
rights or options) be deemed to be outstanding and to have been issued for such
price per share, and except as provided in Section 8(e), no further adjustments
of the Exercise Price shall be made upon the actual issue of such shares of
Common Stock or of such Convertible Securities, upon the exercise of such rights
or options or upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities.
(ii) If at any time the Company shall issue or sell any
Convertible Securities, whether or not the rights to exchange or convert
thereunder shall be immediately exercisable, and the price per share for which
shares of Common Stock shall be issuable upon such conversion or exchange
<PAGE>
(determined by dividing (1) the total amount received or receivable by the
Company as consideration for the issue or sale of such Convertible Securities,
plus the minimum aggregate amount of additional consideration, if any, payable
to the Company upon the conversion or exchange thereof, by (2) the total number
of shares of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities) shall be less than the greater of (x) the Exercise
Price, or (y) 80% of the Market Price at the time of such issue or sale, then
the total number of shares of Common Stock issuable upon conversion or exchange
of all such Convertible Securities shall (as of the date of the issue or sale of
such Convertible Securities) be deemed to be outstanding and to have been issued
for such price per share, and, except as provided in Section 8(e), no further
adjustments of the Exercise Price shall be made upon the actual issue of such
shares of Common Stock or upon conversion or exchange of such Convertible
Securities. In addition, if any issue or sale of such Convertible Securities
shall be made upon exercise of any rights to subscribe for or to purchase or any
option to purchase any such Convertible Securities for which adjustments of the
Exercise Price shall have been or shall be made pursuant to other provisions of
this Section 8(b)(ii), no further adjustment of the Exercise Price shall be made
by reason of such issue or sale.
(iii) If at any time the Company shall declare and pay
a dividend or make any other distribution upon the shares of Common Stock
payable in such stock or Convertible Securities, any such stock or Convertible
Securities, as the case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without consideration.
(iv) If at any time any shares of Common Stock or
Convertible Securities or any rights or options to purchase shares of any such
stock or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by the
Company therefor, without deduction therefrom of any expenses incurred or any
underwriting commissions or concessions or discounts paid or allowed by the
Company in connection therewith. In case any shares of Common Stock or
Convertible Securities or any rights or options to purchase any such Common
Stock or Convertible Securities shall be issued or sold for a consideration
other than cash, the amount of the consideration other than received by the
Company shall be deemed to be the fair value of such consideration as determined
by the Company's Board of Directors, without deduction therefrom of any expenses
incurred or any underwriting commissions or concessions or discounts paid or
allowed by the Company in connection therewith. In case any shares of Common
Stock or Convertible Securities or any rights or options to purchase any such
Common Stock or Convertible Securities shall be issued in connection with any
merger of another corporation into the Company, the amount of consideration
therefor shall be deemed to be the fair value of the net assets of such merged
corporation as determined by the Company's Board of Directors after deducting
therefrom all cash and other consideration (if any) paid by the Company in
connection with such merger.
<PAGE>
(v) If at any time the Company shall take a record of
the holders of Common Stock for the purpose of entitling them (1) to receive a
dividend or other distribution payable in shares of Common Stock or in
Convertible Securities, or (2) to subscribe for or purchase shares of Common
Stock or Convertible Securities, then such record date shall be deemed to be the
date of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(vi) The number of shares of Common Stock outstanding
at any given time shall not include shares owned or held by or for the account
of the Company, provided that such shares are neither issued, sold or otherwise
distributed by the Company.
(vii) For purposes hereof, the "Market Price" shall
mean the average closing bid price of the Common Stock on the Nasdaq SmallCap
Market, the Nasdaq National Market or the principal exchange upon which shares
of Common Stock may be listed, or, if the Common Stock shall not then be quoted
on the Nasdaq SmallCap Market or the Nasdaq National Market or listed on a
national securities exchange, but shall otherwise be traded in the
over-the-counter market, on such over-the-counter market, in each case for the
ten day period immediately preceding the date of determination of such "Market
Price." If at any time shares of Common Stock shall not be quoted on the Nasdaq
SmallCap Market or the Nasdaq National Market, listed on a national securities
exchange, or otherwise traded in the over-the-counter market, the "Market Price"
of a share of Common Stock shall be deemed to be the higher of (x) the book
value thereof (as determined by any firm of independent public accounts of
nationally recognized standing selected in good faith by the Company's Board of
Directors) as of the last day of any month ending within 60 days preceding the
date of determination, or (y) the fair value thereof (as determined in good
faith by the Company's Board of Directors) as of a date which shall be within 15
days of the date of determination.
(c) In case at any time the Company shall subdivide its
outstanding shares of Common Stock into a greater number of shares, the Exercise
Price shall be proportionately reduced. In case at any time the outstanding
shares of Common Stock shall be combined into a smaller number of shares, the
Exercise Price shall be proportionately increased. Any adjustment under this
Section 8(c) shall become effective at the close of business on the date the
subdivision or combination shall become effective.
(d) The Company shall provide the Holder with at least ten
days prior written notice of any capital reorganization or reclassification of
the capital stock of the Company, or consolidation or merger of the Company with
another corporation, or the sale of all or substantially all of the Company's
assets to another corporation. Further, if any of the foregoing events shall be
effected in such a way that holders of Common Stock shall be entitled to receive
stock, securities or assets with respect to or in exchange for Common Stock,
<PAGE>
then, as a condition of such reorganization, reclassification, consolidation,
merger or sale, lawful and adequate provision shall be made whereby the holder
hereof shall thereafter have the right to purchase and receive, upon the basis
and upon the terms and conditions specified in this Warrant and in lieu of the
shares of Common Stock of the Company immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby, such stock,
securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding shares of such Common Stock equal to the number of
shares of such stock immediately theretofore purchasable and receivable upon the
exercise of the rights represented hereby had such reorganization,
reclassification, consolidation, merger or sale not taken place, and in any such
case appropriate provisions shall be made with respect to the rights and
interests of the Holder of this Warrant to the end that the provisions hereof
(including provisions for adjustments of the Warrant purchase price and of the
number of shares of Common Stock purchasable upon the exercise of this Warrant)
shall thereafter be applicable, as nearly as may be, in relation to any shares
of stock, securities or assets thereafter deliverable upon the exercise hereof.
The Company shall not effect any such consolidation, merger or sale unless prior
to the consummation thereof the successor corporation (if other than the
Company) resulting from such consolidation or merger, or the corporation
purchasing such assets, shall assume by operation of law or written instrument,
the obligation to deliver to such holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such holder may be
entitled to purchase. Notice of such assumption shall be promptly mailed to the
registered holder hereof at the last address of such holder appearing on the
books of the Company.
(e) If the purchase or exercise price provided for in any
right or option referred to in Section 8(b)(i), or the rate at which any
Convertible Securities referred to in Section 8(b)(i) or (ii) shall be
convertible into or exchangeable for shares of Common Stock, shall change or a
different purchase or exercise price or rate shall become effective at any time
or from time to time (including any change resulting from termination of such
right, option or convertible security), then, upon such change becoming
effective, the Exercise Price shall forthwith be increased or decreased to such
Exercise Price as would have been obtained had the adjustments made upon the
granting or issuance of such rights or options or Convertible Securities been
made upon the basis of (A) the issuance of the number of shares of Common Stock
theretofore actually delivered upon the exercise of such options or rights or
upon the conversion or exchange of such Convertible Securities, and (B) the
granting or issuance at the time of such change of any such options, rights or
Convertible Securities then still outstanding for the consideration, if any,
received by the Company therefor and to be received on the basis of such changed
price.
(f) The Company shall not be required to make any adjustment
to the Exercise Price in the case of:
(i) the granting, after the date hereof, by the Company
of stock options under the Company's 1997 Stock Option Plan, so long as the
shares of Common Stock underlying such options are covered by the 800,000 shares
currently reserved for issuance under such plan as of the date hereof, assuming
approval of the Company's shareholders of the 300,000 share increase at the
Company's 1998 Annual Meeting of Shareholders;
<PAGE>
(ii) the issuance of shares of Common Stock, pursuant
to the exercise of the options referred to in Section 8(e)(i) above or the
exercise of any other options or warrants outstanding as of the date hereof; or
(iii) the issuance of shares of the Preferred Stock
pursuant to the Preferred Stock Purchase Agreement to which this Warrant is an
Exhibit or of shares of Common Stock upon the conversion of any shares of such
Preferred Stock or upon the exercise of this Warrant or any warrants issued to
Miller, Johnson & Kuehn, Incorporated on the same date as the Preferred Stock
Purchase Agreement to which this Warrant is an Exhibit.
(g) Whenever the Exercise Price payable upon exercise of this
Warrant shall be adjusted pursuant to this Section, the number of Warrant Shares
purchasable upon exercise of this Warrant shall be simultaneously adjusted by
multiplying the number of Warrant Shares issuable immediately prior to such
adjustment by the Exercise Price in effect immediately prior to such adjustment
and dividing the product so obtained by the Exercise Price, as adjusted.
9. Payment of Exercise Price. The Holder may pay the Exercise Price in
cash or pursuant to a cashless exercise, as set forth below.
(a) Cash Exercise. The Holder shall deliver immediately
available funds.
(b) Cashless Exercise. The Holder shall surrender this
Warrant to the Company together with a notice of cashless exercise, in which
event the Company shall issue to the Holder the number of Warrant Shares
determined as follows:
X = Y (A-B)/A
where:
X = the number of Warrant Shares to be issued to the
Holder.
Y = the number of Warrant Shares with respect to
which this Warrant is being exercised.
A = the average of the closing bid prices of the
Common Stock for the five trading days immediately prior to (but not including)
the Date of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have been
commenced, on the issue date.
10. Fractional Shares. The Company shall not be required to issue or
cause to be issued fractional Warrant Shares on the exercise of this Warrant.
The number of full Warrant Shares which shall be issuable upon the exercise of
this Warrant shall be computed on the basis of the aggregate number of Warrant
Shares purchasable on exercise of this Warrant so presented. If any fraction of
a Warrant Share would, except for the provisions of this Section 10, be issuable
on the exercise of this Warrant, the Company shall, at its option, (i) pay an
amount in cash equal to the Exercise Price multiplied by such fraction, or (ii)
round the number of Warrant Shares issuable, up to the next whole number.
<PAGE>
11. Notices. Any and all notices or other communications or deliveries
hereunder shall be in writing and shall be deemed given and effective on the
earliest of (i) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section, (ii) the business day following the date of mailing, if sent by a
nationally recognized overnight courier service, or (iii) upon actual receipt by
the party to whom such notice is required to be given. The addresses for such
communications shall be: (1) if to the Company, to 407 West Travelers Trail,
Burnsville, MN 55337, Attention: President, facsimile No.: (612) 890-2726, or
(ii) if to the Holder, to the Holder at the address or facsimile number
appearing on the Warrant Register or such other address or facsimile number as
the Holder may provide to the Company in accordance with this Section 11.
12. Warrant Agent.
(a) The Company shall serve as warrant agent under this
Warrant. Upon 30 days' notice to the Holder, Company may appoint a new warrant
agent.
(b) Any corporation into which the Company or any new warrant
agent may be merged or any corporation resulting from any consolidation to which
the Company or any new warrant agent shall be a party or any corporation to
which the Company or any new warrant agent transfers substantially all of its
corporate trust or shareholders services business shall be a successor warrant
agent under this Warrant without any further act. Any such successor warrant
agent shall promptly cause notice of its succession as warrant agent to be
mailed (by first class mail, postage prepaid) to the Holder at the Holder's last
address as shown on the Warrant Register.
13. Call of Warrant. Subject to the conditions set forth below, the
Company shall be permitted to call this Warrant from the Holder in the event
that the closing bid price for shares of the Common Stock is at least $8-5/8 for
ten consecutive trading days prior to the Expiration Date of this Warrant.
Notwithstanding the foregoing, the Company may only exercise its right to call
this Warrant from the Holder if at the time of such call (i) all Warrant Shares
may be sold pursuant to an effective registration statement under the Securities
Act, (ii) the Common Stock is listed and trading on The Nasdaq Stock Market, and
(iii) the Company has reserved and available for issuance a number of shares of
its Common Stock sufficient to cover the exercise of this Warrant in full. The
Company must provide the Holder with at least 20 days advance written notice
(the "Warrant Notice") of its intent to call this Warrant pursuant to the terms
hereof and the Holder shall have 20 business days from the date of receipt of
the Warrant Notice to exercise this Warrant (the "Sale Period"). If the Holder
does not exercise this Warrant during the Sale Period, the Holder shall
surrender this Warrant to the Company at the end of the Sale Period for
cancellation by the Company, and the Company shall transfer to the Holder, via
wire transfer of immediately available funds, an amount equal to $.10 multiplied
by the number of shares of Common Stock subject to exercise of this Warrant.
Notwithstanding the foregoing, the Sale Period shall be extended by that number
of days during such period for which the registration, listing and reservation
requirements set forth in clauses (i)-(iii) of this Section 13 shall not be
satisfied.
<PAGE>
14. Miscellaneous.
(a) This Warrant shall be binding on and inure to the benefit
of the parties hereto and their respective successors and permitted assigns.
This Warrant may be amended only in writing signed by the Company and the
Holder.
(b) Subject to Section 14(a), above, nothing in this Warrant
shall be construed to give to any person or corporation other than the Company
and the Holder any legal or equitable right, remedy or cause under this Warrant;
this Warrant shall be for the sole and exclusive benefit of the Company and the
Holder.
(c) This Warrant shall be governed by and construed and
enforced in accordance with the internal laws of the State of New York without
regard to the principles of conflicts of law thereof. Each of the Company and
the Holder irrevocably consent to the exclusive jurisdiction of the United
States Federal courts and state courts, located in New York County, New York, in
any suit or proceeding relating to, based on or arising under this Agreement and
irrevocably agree that all claims in respect of such suit or proceeding may be
determined in such courts. The Company irrevocably waives the defense of an
inconvenient forum to the maintenance of such suit or proceeding. Service of
process on the Company mailed by first class mail shall be deemed in every
respect effective service of process upon the Company in any such suit or
proceeding. Nothing herein shall affect the right of the Holder to serve process
in any manner permitted by law.
(d) The headings herein are for convenience only, do not
constitute a part of this Warrant and shall not be deemed to limit or affect any
of the provisions hereof.
In case any one or more of the provisions of this Warrant shall be invalid or
unenforceable in any respect, the validity and enforceability of the remaining
terms and provisions of this Warrant shall not in any way be affected or
impaired thereby and the parties will attempt in good faith to agree upon a
valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Warrant.
IN WITNESS WHEREOF, Datakey, Inc. has caused this Warrant to be
executed by its duly authorized officer and this Warrant to be dated as of May
15, 1998.
DATAKEY, INC.
By __________________________________
Its: ___________________________
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To DATAKEY, INC.
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase __________
shares of Common Stock, par value $.05 per share, of Datakey, Inc. and (i)
______ encloses herewith $_______ in cash or certified or official bank check or
checks, which sum represents the aggregate Exercise Price (as defined in the
Warrant) for the number of shares of Common Stock to which this Form of Election
to Purchase relates, together with any applicable taxes payable by the
undersigned pursuant to the Warrant, or (ii) _____ hereby elects to exercise the
enclosed Warrant pursuant to the cashless exercise provisions set forth therein
(mark one).
The undersigned requests that certificates for the shares of Common
Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR TAX
IDENTIFICATION NUMBER
--------------------------------------------
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If the number of shares of Common Stock issuable upon this exercise
shall not be all of the shares of Common Stock which the undersigned is entitled
to purchase in accordance with the enclosed Warrant, the undersigned requests
that a New Warrant (as defined in the Warrant) evidencing the right to purchase
the shares of Common Stock not issuable pursuant to the exercise evidenced
hereby be issued in the name of and delivered to:
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dated: ______________________ Name of Holder:
(Print)______________________________________
(By:)________________________________________
(Name:)______________________________________
(Title:)_____________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant)
<PAGE>
FORM OF ASSIGNMENT
(To be completed and signed only upon transfer of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ____________________________ the right represented by the within Warrant to
purchase ______ shares of Common Stock of Datakey, Inc. to which the within
Warrant relates and appoints ________________ attorney to transfer said right on
the books of Datakey, Inc. with full power of substitution in the premises.
Dated:
- -------------------
-----------------------------------
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
-----------------------------------
Address of Transferee
-----------------------------------
-----------------------------------
In the presence of:
- -----------------------------
<PAGE>
EXHIBIT C
COMPANY BAD BOY CERTIFICATE
1. Neither the Company, any of its predecessors nor any affiliated
corporation:
(a) has filed a registration statement which is the subject of
any pending proceeding or examination under Section 8 of the Securities Act or
is the subject of any refusal order or stop order thereunder within the past
five years;
(b) is subject to any pending proceeding under Rule 258
promulgated under the Securities Act or any similar rule adopted under Section
3(b) of the Securities Act, or to an order entered thereunder within the past
five years;
(c) has been convicted within the past five years of any
felony or misdemeanor in connection with the purchase or sale of any security or
involving the making of any false filing with the Commission;
(d) is subject to any order, judgment, or decree of any court
of competent jurisdiction temporarily or preliminary restraining or enjoining,
or is subject to any order, judgment, or decree of any court of competent
jurisdiction, entered within the past five years, permanently restraining or
enjoining, such person from engaging in or continuing any conduct or practice in
connection with the purchase or sale of any security or involving the making of
any false filing with the Commission; or
(e) is subject to a United States Postal Service false
representation order entered under Section 3005 of Title 39, United States Code,
within the past five years, or is subject to a temporary restraining order or
preliminary injunction entered under Section 3007 of Title 39, United States
Code, with respect to conduct alleged to have violated Section 3005 of Title 39,
United States Code.
2. None of the Company's directors, officers, general partners, or
beneficial owners of 10% or more of any class of its equity securities, nor any
of its promoters presently connected with it in any capacity:
(a) has been convicted within the past ten years of any felony
or misdemeanor in connection with the purchase or sale of any security,
involving the making of a false filing with the Commission, or arising out of
the conduct of the business of an underwriter, broker, dealer, municipal
securities dealer, or investment advisor;
(b) is subject to any order, judgment, or decree of any court
of competent jurisdiction temporarily or preliminarily enjoining or restraining,
or is subject to any order, judgment, or decree of any court of competent
jurisdiction, entered within the past five years, permanently enjoining or
restraining such person from engaging in or continuing any conduct or practice
in connection with the purchase or sale of any security or involving the making
of a false filing with the Commission, or arising out of the conduct of the
business of an underwriter, broker, dealer, municipal securities dealer, or
investment advisor;
<PAGE>
(c) is subject to an order of the Commission entered pursuant
to Section 15(b), Section 15(B)(a) or 15(B)(c) of the Exchange Act; or is
subject to an order of the Commission entered pursuant to Section 203(e) or (f)
of the Investment Advisors Act of 1940;
(d) is suspended or expelled from membership in, or suspended
or barred from association with a member of, an exchange registered as a
national securities exchange pursuant to Section 6 of the Exchange Act, an
association registered as a national securities association under Section 15A of
the Exchange Act, or a Canadian securities exchange or association for any act
or omission to act constituting conduct inconsistent with just and equitable
principles of trade; or
(e) is subject to a United States Postal Service false
representation order entered under Section 3005 of Title 39, United States Code,
within the past five years; or is subject to a restraining order or preliminary
injunction entered under Section 3005 of Title 39, United States Code.
For the purposes hereof, Beneficial Owner means a person having the power to
vote or direct the vote or the power to dispose or direct the disposition of any
of the Company's securities.
3. The Company has filed all reports required by the Exchange Act
during the past 12 calendar months.
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement is made and entered into as of the
15th day of May, 1998, by and among Datakey, Inc., a Minnesota corporation (the
"Company") and the Investors listed on Schedule A attached hereto (individually,
an "Investor" and collectively, the "Investors").
RECITALS
A. The Investors and the Company have entered into that certain
Preferred Stock Purchase Agreement, dated May 15, 1998 (the "Purchase
Agreement").
B. It is a condition to the transactions contemplated in the Purchase
Agreement that the Company provide the registration and other rights provided
herein and the parties hereto desire to provide for such rights on the terms and
conditions contained herein.
NOW, THEREFORE, in consideration of the premises and covenants
contained herein, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise noted, all capitalized terms used
herein shall have the meanings afforded them in the Purchase Agreement and the
Exhibits attached thereto.
2. Required Registration. Within 30 days of the Closing date (the "File
Date"), the Company shall file a Registration Statement under the Securities Act
of 1933, as amended (the "Securities Act"), in accordance with the provisions of
either Form S-1 or Form S-3, as required by the Securities and Exchange
Commission (the "Commission") covering the resale of the shares of the Company's
common stock (i) underlying the Preferred Stock, (ii) underlying the Warrants
issued by the Company to Investors of even date herewith (collectively, the
"Warrant"), and (iii) issuable by the Company in payment of the dividends on the
shares of the Preferred Stock (the "Dividends") and will use its best efforts to
have such Registration Statement become effective with the Commission as soon as
possible thereafter, and in any event, within 90 days of the date on which it is
filed. The shares of the Company's common stock underlying the Preferred Stock
and the Warrants and issuable in payment of the Dividends is referred to herein
as the "Registrable Stock."
3. Registration - General Provisions. In connection with the
registration of the Registrable Stock under the Securities Act, the Company
will:
(a) prepare and file with the Commission a registration
statement with respect to such securities, within 30 days of the Closing date,
and use its diligent, good faith efforts to cause such registration statement to
become effective within 90 days of the date it is filed and keep the prospectus
which is a part of such Registration Statement current until the earlier of the
date on which: (i) all such shares have been sold, or (ii) five years after the
date it is declared effective by the Commission;
<PAGE>
(b) prepare and file with the Commission such amendments to
such Registration Statement and supplements to the prospectus contained therein
as may be necessary to keep such Registration Statement effective for the period
required by Section 3(a) above;
(c) provide the Investors' counsel with reasonable
opportunities to review and comment on, and otherwise participate in, the
preparation of such Registration Statement;
(d) furnish to the Investors participating in such
registration and to the underwriters of the securities being registered, if any,
such reasonable number of copies of the Registration Statement, preliminary
prospectus, final prospectus and such other documents as the Investors and
underwriters may reasonably request in order to facilitate the public offering
of such securities;
(e) use its diligent, good faith efforts to register or
qualify the securities covered by such Registration Statement under such state
securities or blue sky laws of such jurisdictions as the Investors may
reasonably request, except that the Company shall not for any purpose be
required to execute a general consent to service of process (which shall not
include a "Uniform Consent to Service of Process" or other similar consent to
service of process which relates only to actions or proceedings arising out of
or in connection with the sale of securities, or out of a violation of the laws
of the jurisdiction requesting such consent) or to qualify to do business as a
foreign corporation in any jurisdiction wherein it is not so qualified;
(f) notify the Investors, promptly after it shall receive
notice thereof, of the time when such Registration Statement has become
effective or a supplement to any prospectus forming a part of such Registration
Statement has been filed with the Commission;
(g) notify the Investors promptly of any request by the
Commission for the amending or supplementing of such Registration Statement or
prospectus or for additional information;
(h) prepare and file with the Commission, promptly upon the
request of the Investors, any amendments or supplements to such Registration
Statement or prospectus which, in the opinion of counsel for the Investors (and
concurred in by counsel for the Company), is required under the Securities Act
or the rules and regulations promulgated thereunder in connection with the
distribution of the shares of the Company's common stock by the Investors;
(i) prepare and promptly file with the Commission and promptly
notify the Investors of the filing of such amendment or supplement to such
Registration Statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event shall
have occurred as the result of which any such prospectus or any other prospectus
as then in effect would include an untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein, in the
light of the circumstances in which they were made, not misleading;
<PAGE>
(j) advise the Investors, and the Investors' counsel, if any,
promptly after it shall receive notice or obtain knowledge thereof, of the
issuance of any stop order by the Commission suspending the effectiveness of
such Registration Statement or the initiation or threatening of any proceeding
for that purpose and promptly use its best efforts to prevent the issuance of
any stop order or to obtain its withdrawal if such stop order should be issued;
(k) not file any amendment or supplement to such Registration
Statement or prospectus to which the Investors shall have reasonably objected on
the grounds that such amendment or supplement does not comply in all material
respects with the requirements of the Securities Act or the rules and
regulations promulgated thereunder, after having been furnished with a copy
thereof at least five business days prior to the filing thereof, unless in the
opinion of counsel for the Company the filing of such amendment or supplement is
reasonably necessary to protect the Company from any liabilities under any
applicable federal or state law and such filing will not violate applicable law;
and
(l) at the request of the Investors, furnish on the effective
date of the Registration Statement and, if such registration includes an
underwritten public offering, at the closing provided for in the underwriting
agreement: (i) opinions, dated such respective dates, of the counsel
representing the Company for the purposes of such registration, addressed to the
underwriters, if any, and to the Investors making such request, covering such
matters as such underwriters or Investors may reasonably request, and (ii)
letters, dated such respective dates, from the independent certified public
accountants of the Company, addressed to the underwriters, if any, and to the
Investors, covering such matters as such underwriters or Investors may
reasonably request, in which letter such accountants shall state (without
limiting the generality of the foregoing) that they are independent certified
public accountants within the meaning of the Securities Act and that in the
opinion of such accountants the financial statements and other financial data of
the Company included in the Registration Statement or the prospectus or any
amendment or supplement thereto comply in all material respects with the
applicable accounting requirements of the Securities Act.
4. Registration Expenses. The Company shall pay all Registration
Expenses (as defined below) in connection with the inclusion of shares of the
Company's common stock in any Registration Statement, or application to register
or qualify such shares under state securities laws, filed by the Company
hereunder, other than as set forth herein. For purposes of this Agreement, the
term "Registration Expenses" means the filing fees payable to the Commission,
any state agency and the NASD; the fees and expenses of the Company's legal
counsel and independent certified public accountants in connection with the
preparation and filing of the Registration Statement (and all amendments and
supplements thereto) with the Commission; and all expenses relating to the
printing of the Registration Statement, prospectuses and various agreements
executed in connection with the Registration Statement. Notwithstanding the
foregoing, the Investors will pay the fees and expenses of any legal counsel the
Investors may engage, as well as the Investors' proportionate share of any
custodian fees or commission or discounts which may be payable to any
underwriter.
<PAGE>
5. Penalty Payments. In the event that the Registration Statement
relating to the resale of the Registrable Stock is not (i) filed with the
Commission by the Company on or before the File Date, or (ii) declared effective
by the Commission within 150 days of the Closing date, then, the Company shall
pay the Investors the following amounts ("Penalty Payments"): (i) 1% of the
purchase price of the Preferred Stock (the "Purchase Price") paid by the
Investors to the Company if (A) the Registration Statement is not filed with the
Commission by the File Date, and/or (B) the Registration Statement is not
declared effective by the Commission within 150 days of the Closing date, (ii)
an additional 1% of the Purchase Price if the Registration Statement is not
declared effective by the Commission within 180 days of the Closing date, and
(iii) an additional 3% of the Purchase Price for each 30-day period thereafter
in which the Registration Statement is not declared effective by the Commission.
Penalties for failure to file and/or to obtain effectiveness shall be
cumulative. The Company shall be liable to the Investor for a full 30-day
period, determined in accordance with the above schedule, regardless of by how
many days it misses one of the targeted filing or effective dates set forth
above. All such Penalty Payments shall be immediately payable by the Company to
the Investors (on a pro rata basis based on the number of shares of Preferred
Stock purchased by each under the Purchase Agreement) via wire transfer of
immediately available funds by the close of business on last day of each
respective period set forth above.
6. Indemnification. With respect to the registration of the resale of
the shares of Registrable Stock:
(a) to the extent permitted by law, the Company will indemnify
and hold harmless each Investor, the trustees, partners, officers and directors
of each Investor, any underwriter (as defined in the Securities Act) for such
Investor and each person, if any, who controls such Investor or underwriter
within the meaning of the Securities Act or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), against any losses, claims, damages, or
liabilities (joint or several) to which they may become subject under the
Securities Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any of the following statements, omissions or violations
(collectively a "Violation") by the Company: (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the Exchange Act or any state securities law in connection with the offering
covered by the Registration Statement; and the Company will reimburse each such
Investor, trustee, partner, officer, director, underwriter or controlling person
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this Section 6
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability
or action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished to
it expressly for use in connection with such registration by an Investor,
trustee, partner, officer, director, underwriter or controlling person of an
Investor.
<PAGE>
(b) to the extent permitted by law, each Investor will
indemnify and hold harmless the Company, each of its directors, each of its
officers, each person, if any, who controls the Company within the meaning of
the Securities Act, any underwriter and any other Investor selling securities
under the Registration Statement or any of such other Investor's, trustees,
partners, directors or officers or any person who controls such Investor,
against any losses, claims, damages or liabilities (joint or several) to which
the Company or any such director, officer, controlling person, underwriter or
other such Investor, or trustee, partner, director, officer or controlling
person of such other Investor may become subject under the Securities Act, the
Exchange Act or other federal or state law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereto) arise out of or are based
upon any Violation, in each case to the extent (and only to the extent) that
such Violation occurs in reliance upon and in conformity with written
information furnished by such Investor and stated to be specifically for use in
connection with such registration; and each such Investor will reimburse any
legal or other expenses reasonably incurred by the Company or any such director,
officer, controlling person, underwriter or other Investor, or trustee, partner,
officer, director or controlling person of such other Investor in connection
with investigating or defending any such loss, claim, damage, liability or
action if it is judicially determined that there was such a Violation; provided,
however, that the indemnity agreement contained in this Section 6 shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability
or action if such settlement is effected without the consent of the Investor,
which consent shall not be unreasonably withheld; provided further, that in no
event shall any indemnity under this Section 6 exceed the gross proceeds from
the offering received by such Investor unless the Violation is the result of
fraud on the part of such Investor.
(c) promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action (including any governmental
action), such indemnified party shall, if a claim in respect thereof is to be
made against any indemnifying party under this Section, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party; and provided further, that if there is more than one
indemnified party, the indemnifying party shall pay for the fees and expenses of
one counsel for any and all indemnified parties to be mutually agreed upon by
such indemnified parties, unless representation of an indemnified party by the
counsel retained by the other indemnified parties would be inappropriate due to
actual or potential differing interests between such indemnified parties. The
failure to deliver written notice to the indemnifying party within a reasonable
time of the commencement of any such action, if materially prejudicial to its
ability to defend such action, shall relieve such indemnifying party of any
liability to the indemnified party under this Section, but the omission so to
deliver written notice to the indemnifying party will not relieve it of any
liability that it may have to any indemnified party otherwise than under this
Section.
<PAGE>
(d) if the indemnification provided for in this Section is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any losses, claims, damages or liabilities referred to
herein, the indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall to the extent permitted by applicable law, contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the Violation(s) that resulted in such
loss, claim, damage or liability, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by a court of law by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the indemnifying party or by the indemnified party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. No person or entity guilty of
fraudulent misrepresentation (within the meaning of Section 11 of the Securities
Act) shall be entitled to contribution from any person or entity who shall not
have been guilty of such fraudulent misrepresentation.
(e) the obligation of the Company and the Investors under this
Section shall survive the completion of any offering for resale of shares of the
Registrable Stock in the Registration Statement, and otherwise.
7. Limitation on Subsequent Registration Rights. From and after the
date of this Agreement, the Company shall not, without the prior written consent
of all of the Investors, enter into any agreement with any person or persons
providing for the granting to such holder of registration rights pari passu or
senior to those granted to Investors pursuant to this Agreement, or of
registration rights which might cause a reduction in the number of shares
includable by the Investors in any registration.
8. Miscellaneous.
(a) The Company shall not hereafter enter into any agreement
with respect to its securities that is inconsistent with the rights granted to
the Investors in this Agreement.
(b) Except as otherwise provided herein, the provisions of
this Agreement may not be amended, modified or supplemented, and waivers or
consents to or departures from the provisions hereof may not be given or made
unless the Company has obtained the written consent of the Investors.
<PAGE>
(c) All notices and other communications provided for or
permitted hereunder shall be made by hand delivery, telex, facsimile, overnight
courier or registered first-class mail:
(i) if to an Investor, at the address set forth on
Schedule A attached hereto;
(ii) if to the Company, at the address set forth in the
Purchase Agreement.
All such notices and communications shall be deemed to have been duly given:
when delivered, if by hand, overnight courier or mail; when the appropriate
answer back is received, if by telex; when transmission is confirmed by the
sending unit, if by facsimile.
(d) This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(e) The headings to this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(f) This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to the
principles of choice or conflict of law thereof. Each of the Company and the
Investors irrevocably consent to the exclusive jurisdiction of the United States
Federal courts and state courts, located in New York County, New York, in any
suit or proceeding relating to, based on or arising under this Agreement and
irrevocably agree that all claims in respect of such suit or proceeding may be
determined in such courts. The Company irrevocably waives the defense of an
inconvenient forum to the maintenance of such suit or proceeding. Service of
process on the Company mailed by first class mail shall be deemed in every
respect effective service of process upon the Company in any such suit or
proceeding. Nothing herein shall affect the right of any Investor to serve
process in any manner permitted by law.
(g) In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of such provision in every other respect and of the
remaining provisions contained herein shall not be in any way impaired thereby,
it being intended that all of the rights and privileges of the Investors and the
Company shall be enforceable to the fullest extent permitted by law.
(h) The remedies provided for in this Agreement shall be
cumulative and in addition to all other remedies available, at law or in equity,
and nothing herein shall limit a holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date indicated
above.
Datakey, Inc. Special Situations Private Equity Fund, L.P.:
By: /s/ Alan Shuler By: /s/ David Greenhouse
Its: Chief Financial Officer Its:
Tax Identification Number:
Special Situations Technology Fund, L.P.: Robert G. Allison
By: /s/ David Greenhouse By: /s/ Richard C. Perkins
Its: Attorney-in-Fact
Tax Identification Number: Tax Identification Number:
Shirley A. Baxter, TTEE
FBO Shirley A. Baxter Revocable Craig L. Campbell
Trust U/A DTD 7-3-96
By: /s/ Richard C. Perkins By: /s/ Richard C. Perkins
Attorney-in-Fact Attorney-in Fact
Tax Identification Number: Tax Identification Number:
Piper Jaffray as Custodian FBO Bradley Piper Jaffray as Custodian
A. Erickson IRA 480-263177-102 FBO Richard C. Perkins
By: /s/ Richard C. Perkins By: /s/ Richard C. Perkins
Attorney-in-Fact Attorney-in Fact
Tax Identification Number: 41-1422918 Tax Identification Number: 41-1422918
David M. Westrum, TTEE
FBO David M. Westrum
Revocable Living Trust Pyramid Partners, L.P.
U/A DTD 6-1-97
By: /s/ Richard C. Perkins By: /s/ Richard C. Perkins
Attorney-in-Fact Attorney-in Fact
Tax Identification Number: Tax Identification Number:
Industricorp & Co., Inc. Daniel S. & Patricia M. Perkins JT
FBO Twin City Carpenters Pension Plan
/s/ Karen McKernan /s/ Daniel S. Perkins
By: Union Bank & Trust, Daniel S. Perkins
Its Officer /s/ Patrice M. Perkins
Patrice M. Perkins
Tax Identification Number:
Gary Kohler IRA
/s/ Gary S. Kohler
By: Gary Kohler
<PAGE>
Schedule A-1
SCHEDULE A
INVESTORS
Special Situations Private Equity Fund, L.P.
153 East 53rd Street
51st Floor
New York, New York 10022
Special Situations Technology Fund, L.P.
153 East 53rd Street
51st Floor
New York, New York 10022
Gary Kohler IRA
Robert G. Allison
Shirley A. Baxter, TTEE
FBO Shirley A. Baxter Revocable Trust
U/A DTD 7-3-96
Craig L. Campbell
Piper Jaffray as Custodian
FBO Bradley A. Erickson
IRA 480-263177-102
Piper Jaffray as Custodian FBO
Richard C. Perkins
IRA 980-576-905-610
David M. Westrum TTEE
FBO David M. Westrum
Revocable Living Trust
U/A DTD 6-1-97
Pyramid Partners L.P.
Industricorp & Co., Inc.
FBO Twin City Carpenters Pension Plan
Daniel S. and Patrice M. Perkins, JT
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-3 of our report, dated February 3, 1998, which appears in
the Annual Report on Form 10-KSB of Datakey, Inc. and Subsidiary for the year
ended December 31, 1997. We also consent to the reference to our Firm under the
caption "Experts" in the aforementioned Registration Statement.
/s/ McGladrey & Pullen, LLP
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
June 10, 1998
