SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act
of 1934 (Amendment No. ____)
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
DATAKEY, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing:
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
DATAKEY, INC.
----------------
NOTICE OF ANNUAL MEETING
to be held on June 2, 1998
----------------
TO THE SHAREHOLDERS OF DATAKEY, INC.:
The Annual Meeting of the Shareholders of Datakey, Inc., a Minnesota
corporation (the "Company"), will be held on Tuesday, June 2, 1998, at 3:30
p.m., Minneapolis time, at the Radisson Plaza Hotel, 35 South 7th Street,
Minneapolis, Minnesota, for the following purposes:
1. To set the number of directors to be elected at six (6).
2. To elect a Board of Directors to serve until the next annual
meeting of shareholders and until their successors are duly
elected and qualified.
3. To approve an increase in the number of shares reserved under
the Company's 1997 Stock Option Plan from 500,000 to 800,000
shares.
4. To ratify the appointment of McGladrey & Pullen, LLP as
independent auditors for the Company for the year ending
December 31, 1998.
5. To transact such other business as may properly come before the
meeting.
Shareholders of record at the close of business on May 4, 1998 are
entitled to notice of and to vote at the Annual Meeting or any adjournment
thereof.
Your attention is directed to the Proxy Statement accompanying this
Notice for a more complete statement of matters to be considered at the Annual
Meeting. A copy of the Annual Report for the year ended December 31, 1997 also
accompanies this Notice.
You are cordially invited to attend the Annual Meeting. Whether or not
you plan to attend the Annual Meeting, please sign, date and return your proxy
with the reply envelope provided.
By Order of the Board of Directors,
Thomas R. King
Secretary
Burnsville, Minnesota
Dated: May 5, 1998
PLEASE SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE.
<PAGE>
DATAKEY, INC.
-------------------------
PROXY STATEMENT
for
Annual Meeting of Shareholders
to be held on June 2, 1998
-------------------------
INTRODUCTION
Your proxy is solicited by the Board of Directors of Datakey, Inc. (the
"Company") for use at the Annual Meeting of Shareholders to be held on Tuesday,
June 2, 1998, at 3:30 p.m., at the Radisson Plaza Hotel, 35 South 7th Street,
Minneapolis, Minnesota, and at any adjournment thereof, for the purposes set
forth in the Notice of Annual Meeting.
The cost of soliciting proxies, including the cost of preparing,
assembling and mailing proxies and soliciting material, as well as the cost of
forwarding such material to the beneficial owners of stock, will be borne by the
Company. Directors, officers and regular employees of the Company may, without
compensation other than their regular compensation, solicit proxies personally
or by telephone.
Any shareholder giving a proxy may revoke it at any time prior to its
use at the Annual Meeting by giving written notice of such revocation to the
Secretary of the Company. The enclosed proxy, when properly signed and returned
to the Company, will be voted by the proxy holders at the Annual Meeting as
directed therein. Proxies which are signed by shareholders but which lack any
such specification will be voted in favor of the proposals set forth in the
Notice of Annual Meeting and in favor of the number and slate of directors
proposed by the Board of Directors and listed herein.
The presence at the Annual Meeting in person or by proxy of the holders
of a majority of the outstanding shares of the Company entitled to vote shall
constitute a quorum for the transaction of business. If a shareholder abstains
from voting as to any matter, then the shares held by such shareholder shall be
deemed present at the meeting for purposes of determining a quorum and for
purposes of calculating the vote with respect to such matter, but shall not be
deemed to have been voted in favor of such matter. An abstention as to any
proposal will therefore have the same effect as a vote against the proposal. If
a broker returns a "non-vote" proxy, indicating a lack of voting instructions by
the beneficial holder and a lack of discretionary authority on the part of the
broker to vote on a particular matter, then the shares covered by such non-vote
shall be deemed present at the meeting for purposes of determining a quorum but
shall not be deemed to be represented at the meeting for purposes of calculating
the vote with respect to such matter.
The mailing address of the offices of the Company is 407 West Travelers
Trail, Burnsville, Minnesota 55337. The Company expects that the Notice of
Annual Meeting, Proxy Statement, form of proxy, and Annual Report to
Shareholders will first be mailed to shareholders on or about May 5, 1998.
<PAGE>
OUTSTANDING SHARES AND VOTING RIGHTS
Shareholders entitled to notice of and to vote at the Annual Meeting
and any adjournment thereof are shareholders of record at the close of business
on May 4, 1998. Persons who are not shareholders of record on such date will not
be allowed to vote at the Annual Meeting. At the close of business on May 4,
1998, there were 2,909,735 shares of common stock, par value $.05 per share, and
150,000 shares of convertible preferred stock issued and outstanding. Each share
of common stock and convertible preferred stock is entitled to one vote on each
matter to be voted upon at the Annual Meeting. Holders of common stock and
convertible preferred stock are not entitled to cumulate their votes for the
election of directors.
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth the number of shares of the Company's
common stock and convertible preferred stock beneficially owned by (i) each
director and nominee for election to the Board of Directors of the Company; (ii)
each of the named executive officers in the Summary Compensation Table; (iii)
all directors and executive officers as a group; and (iv) to the best of the
Company's knowledge, all beneficial owners of more than 5% of the outstanding
shares of each class of the Company's stock as of May 4, 1998. Unless otherwise
indicated, the shareholders listed in the table have sole voting and investment
power with respect to the shares indicated.
<TABLE>
<CAPTION>
Convertible
Preferred
Common Shares Shares
Name (and Address of 5% Beneficially Percent of Beneficially Percent of
Holder) or Identity of Group(1) Owned(2) Class(2) Owned Class
<S> <C> <C> <C> <C>
Carl P. Boecher 52,500 (3) 1.8% -- --
Gary R. Holland 49,700 (4) 1.7% -- --
John H. Underwood 101,369 (5) 3.4% -- --
Terrence W. Glarner 19,600 (6) * -- --
Thomas R. King 15,950 (7) * -- --
Eugene W. Courtney 14,000 (8) * -- --
Alan G. Shuler 57,667 (9) 2.0% -- --
Norwest Corporation 245,600 (10) 8.4% -- --
Norwest Equity Partners V 640,516 (11) 20.9% 150,000 100.0%
Okabena Partnership K 242,600 (12) 8.3% -- --
Timothy A. Stepanek 276,500 (13)(14) 9.5% -- --
David M. Winton and 254,500 (13) 8.7% -- --
Sarah H. Winton
Nathaniel S. Thayer 200,746 6.9% -- --
All Directors and Executive 329,786 (15) 10.3% -- --
Officers as a Group (10
persons)
- ---------------------------
</TABLE>
* Less than 1% of the outstanding shares of common stock.
<PAGE>
(1) The addresses of the more than 5% holders are: Norwest Corporation and
Norwest Equity Partners V Norwest Center, Sixth & Marquette,
Minneapolis, MN 55479; Okabena Partnership K - 5140 Norwest Center, 90
South Seventh Street, Minneapolis, MN 55401; Timothy A. Stepanek and
David M. and Sarah H. Winton - 4422 IDS Center, 80 South Eighth Street,
Minneapolis, MN 55402; and Nathaniel S. Thayer, 150 Main Street, P.O.
Box 1325, Pawtucket, RI 02862.
(2) Under the rules of the Securities and Exchange Commission, shares not
actually outstanding are nevertheless deemed to be beneficially owned
by a person if such person has the right to acquire the shares within
60 days. Pursuant to such SEC rules, shares deemed beneficially owned
by virtue of a person's right to acquire them are also treated as
outstanding when calculating the percent of class owned by such person
and when determining the percentage owned by a group.
(3) Represents 52,500 shares which may be purchased by Mr. Boecher upon
exercise of currently exercisable options.
(4) Includes 49,000 shares which may be purchased by Mr. Holland upon
exercise of currently exercisable options and 700 shares held by Mr.
Holland's wife as custodian for their daughter.
(5) Includes 94,166 shares which may be purchased by Mr. Underwood upon
exercise of currently exercisable options.
(6) Includes 15,000 shares which may be purchased by Mr. Glarner upon
exercise of currently exercisable options.
(7) Includes 5,000 shares which may be purchased by Mr. King upon exercise
of a currently exercisable option.
(8) Represents 17,000 shares which may be purchased by Mr. Courtney upon
exercise of currently exercisable options.
(9) Includes 56,667 shares which may be purchased by Mr. Shuler upon
exercise of currently exercisable options.
(10) Represents shares held by a Norwest Bank Minnesota, N.A. ("Norwest
Bank"), a subsidiary of Norwest Corporation ("Norwest"), of which
242,600 shares are held by Norwest Bank as custodian for Okabena
Partnership K ("Okabena"). Norwest Bank has voting power but no
investment power over the shares it holds (see footnote (12) below with
respect to shares held for Okabena). Norwest disclaims beneficial
ownership of the shares held by Norwest Bank. All shares are held in a
fiduciary capacity. The Company has relied on information contained in
a Schedule 13G Amendment filed with the Securities and Exchange
Commission on January 30, 1998.
(11) Includes 150,000 shares which may be purchased by Norwest Equity
Partners V ("Norwest Equity"), a limited partnership, upon conversion
of preferred stock. Norwest Equity has sole voting and investment power
over the shares it holds; Itasca Partners V, L.L.P. is the managing
partner of Norwest Equity, and Daniel J. Haggerty, John E. Lindahl and
George J. Still Jr. are the three sole managing partners of Itasca. The
Company has relied on information contained in a Schedule 13D filed
with the Securities and Exchange Commission on April 11, 1997.
<PAGE>
(12) The shares are held by Norwest Bank as custodian for Okabena (see
footnote (10) above), but Okabena has investment power over the shares
and it has the right to intercede and vote the shares itself. Kohler
Capital Management, Inc., a Minnesota corporation has been engaged to
provide portfolio management services and investment advice to Okabena,
but it does not have voting power of the shares. Okabena Investment
Services, Inc. is the Managing Partner of Okabena. The Company has
relied on information contained in a Schedule 13D Amendment filed with
the Securities and Exchange Commission on November 21, 1997.
(13) Includes 104,500 shares held by Parsnip River Company, a limited
Partnership, and 150,000 shares held by Bond Investment Partners, a
Limited Partnership. Mr. and Mrs. Winton and Mr. Stepanek are general
partners of the limited partnerships and share voting and investment
control over the shares.
(14) Includes 15,000 shares held by Mr. Stepanek's wife and children and
7,000 shares held in a family trust.
(15) Includes 305,333 shares which may be purchased by the executive
officers and directors upon exercise of currently exercisable options.
DETERMINATION OF NUMBER AND ELECTION OF DIRECTORS
(Proposals #1 and #2)
The Bylaws of the Company provide that the number of directors to be
elected for the ensuing year shall be determined by the shareholders at each
meeting. The Board of Directors recommends that the number of directors to be
elected at the 1998 Annual Meeting be set at six (6).
Subject to approval by the shareholders of that recommendation, six (6)
directors will be elected at the Annual Meeting, each to serve until the next
annual meeting of shareholders and until a successor has been elected and
qualified.
All of the nominees are members of the present Board of Directors. In
connection with the Company's November 1, 1995 agreement with Mr. Holland for
consulting services, the Board agreed to appoint Mr. Holland to the Board. See
"Related Transactions."
Pursuant to the terms of a stock purchase agreement, Norwest Equity
Partners V ("Norwest Equity") has the right to designate an individual for one
directorship on the Company's Board of Directors. As of the date of this proxy
statement, Norwest Equity has not advised the Company that it intends to
designate an individual as a nominee for election as a director at the 1998
Annual Meeting.
<PAGE>
If, prior to the Annual Meeting, it should become known to the Board of
Directors that any one of the following individuals will be unable or unwilling
to serve as a director after the Annual Meeting, the proxies will be voted for
such substitute nominee as may be selected by the Board of Directors.
Alternatively, the proxies may, at the discretion of the Board of Directors, be
voted for such fewer number of nominees. The Board of Directors has no reason to
believe that any of the nominees will be unable or unwilling to serve.
Under applicable Minnesota law, approval of the proposals to set the
number of directors at six (6) and to elect the nominees to the Board of
Directors requires the affirmative vote of the holders of the greater of (i) a
majority of the voting power of the shares represented in person or by proxy at
the Annual Meeting with authority to vote on such matter, or (ii) a majority of
the voting power of the minimum number of shares that would constitute a quorum
for the transaction of business at the Annual Meeting.
Names, Principal Occupations for the Past Five Years and
Selected Other Information Concerning Nominees for Directors
DIRECTOR
NAME PRINCIPAL OCCUPATION SINCE AGE
Carl P. Boecher President and Chief Executive Officer of 1997 55
the Company
Gary R. Holland General Manager of Fargo Electronics, Inc. 1995 56
John H. Underwood General Manager Professional 1983 58
Technologies, Inc.
Terrence W. Glarner President of West Concord Ventures, Inc. 1992 55
Thomas R. King Shareholder of Fredrikson & Byron, P.A., 1980 57
Attorneys at Law
Eugene W. Courtney President and Chief Executive Officer of 1995 62
HEI, Inc.
Mr. Boecher has served as President and Chief Executive Officer of the
Company since December 1996. Mr. Boecher served as Vice President of Marketing
and Sales of the Company from January 1995 until December 1996. From May 1990 to
November 1994, Mr. Boecher served as Senior Vice President and Executive
Director of Business Development of DRS Military Systems, a division of
Diagnostic/Retrieval Systems in Oakland, New Jersey, a supplier of high
technology optical, data storage, processing and display and
simulation/stimulation systems and products. From 1971 to 1990, Mr. Boecher
served in several marketing positions with the Defense Systems Division of
Unisys Corporation, a supplier of data processing systems, products and
services, in St. Paul, Minnesota, most recently holding the position of
Executive Director, Product Marketing.
Mr. Holland has served as General Manager of Fargo Electronics, Inc., a
company that manufactures photo card equipment and products and provides related
services since June 1997. In addition, Mr. Holland has provided consulting
services as President of Decision Processes International of Minnesota, Inc.
since February 1996 and as the Managing Partner of Holland & Associates since
June 1992. From 1982 until 1992, Mr. Holland was President and Chief Executive
Officer of DataCard Corporation, a manufacturer of credit card equipment,
products and services. Mr. Holland has served as Chairman of the Company's Board
of Directors since November 1995. Mr. Holland also serves as a director of Check
Technology Corporation.
<PAGE>
Mr. Underwood has served as General Manager of Professional
Technologies, Inc., which provides rapid prototype molding and injection molding
services, since January 1998. Mr. Underwood served as Chief Executive Officer of
the Company from June 1983 until December 1996 and as President from June 1994
until December 1996. From March 1983 to June 1983, he served as Executive Vice
President and Chief Operating Officer of the Company. He also served as the
Company's President from July 1983 until his appointment as Chairman in December
1991, serving as Chairman until November 1995. Except for a few months when he
was employed by Transistor Electronics Corporation, Mr. Underwood was employed
for 18 years in various capacities by Fabri-Tek, Inc., an electronics
manufacturer located in Minneapolis, Minnesota, serving most recently as general
manager of the systems division in the United States and Hong Kong. Fabri-Tek's
systems division produces core memories for the industrial and military
marketplace.
Mr. Glarner has served as President of West Concord Ventures, Inc., a
venture capital firm, since February 1993. Mr. Glarner also serves as a
consultant to Norwest Venture Capital Management, Inc., an entity affiliated
with Norwest Growth Fund, Inc. From 1976 to January 1993, he was employed by
North Star Ventures, Inc., serving as President from February 1988 to January
1993. Prior to 1976, Mr. Glarner was Vice President of Dain Bosworth. Mr.
Glarner also serves as a director of FSI International, Inc., Aetrium, Inc.,
CIMA Labs Inc. and Premis Corporation.
Mr. King has been engaged in the private practice of law in
Minneapolis, Minnesota since 1965. He is a shareholder of the law firm of
Fredrikson & Byron, P.A., which serves as general counsel to the Company. Mr.
King has served as Secretary to the Company since 1980. Mr. King also serves as
a director of Sunrise Resources, Inc., a company which provides lease financing
for capital equipment.
Mr. Courtney has served as President and Chief Executive Officer of
HEI, Inc., a company which designs and manufactures microelectronics, since
1990, and he served as HEI's Executive Vice President from 1988 to 1990. In
addition, Mr. Courtney serves as a director of HEI, Inc.
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The names and ages of all the Company's executive officers and the
position each holds are listed below.
NAME POSITION AGE
Carl P. Boecher President and Chief Executive Officer 55
Alan G. Shuler Vice President and Chief Financial Officer 51
Michael J. Gallagher Vice President of Software and Systems 34
Engineering
Larry J. Haisting Vice President of Marketing and Customer 52
Service
Michael L. Sorensen Vice President and General Manager, 52
Electronic Products
See "Election of Directors" (Proposal #2) for Carl P. Boecher's
biography.
Alan G. Shuler has served as Vice President and Chief Financial Officer
of the Company since June 1992. From August 1991 to May 1992, Mr. Shuler served
as Vice President and Chief Financial Officer of Astrocom Corporation, a St.
Paul, Minnesota manufacturer of data communication equipment. From January 1988
through December 1990, Mr. Shuler was Senior Vice President and Chief Financial
Officer of FSI International, Inc., a Chaska, Minnesota manufacturer of
semiconductor equipment.
Michael J. Gallagher has served as Vice President of Software & Systems
Engineering of the Company since October 1997. From February 1996 to October
1997, Mr. Gallagher served as Engineering Manager of Custom Applications of
Secure Computing Corporation. From January 1988 to February 1996, Mr. Gallagher
served as Engineering Manager of System products for Unisys Corporation.
Larry J. Haisting joined the Company in February 1997 as Vice President
of Marketing and Sales and became Vice President of Marketing and Customer
Service of the Company in October 1997. From March 1992 to October 1996, Mr.
Haisting was employed by St. Paul Software, Inc., a software distributor in St.
Paul, Minnesota, serving most recently as Vice President, Marketing. From 1990
to 1991, Mr. Haisting was the Industry Sales Manager of EDI Solutions, Inc., a
software distributor in Minneapolis, Minnesota. From 1975 to 1990, Mr. Haisting
was involved in management and sales for several software and computer
companies.
Michael L. Sorensen joined the Company in April 1997 as Vice President
of Operations and became Vice President and General Manager, Electronic Products
on November 1997. From February 1995 to March 1997, Mr. Sorensen served as Vice
President of Operations for Despatch Industries, a custom oven and furnace
company, prior to which he provided consulting services to Despatch, beginning
in October 1994. From April 1992 to September 1994, Mr. Sorensen was the Plant
Manager of J. B. Martin Company, Inc., a manufacturer of three-dimensional
fabrics located in Leesville, South Carolina. Prior to April 1992, Mr. Sorensen
served in various engineering and operations positions with United Engineers and
Constructors, Inc., BASF Structural Materials, Inc., Celanese Corporation,
Abbott Laboratories and Corning Glass Works.
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF EXCHANGE ACT
Based on the Company's review of copies of forms filed with the
Securities and Exchange Commission or written representations from certain
reporting persons that no Forms 5 were required for those persons, in compliance
with Section 16(a) of the Securities Exchange Act of 1934, the Company believes
that during fiscal year 1997, all officers, directors, and greater than
ten-percent beneficial owners complied with the applicable filing requirements.
BOARD AND COMMITTEE MEETINGS
The Board of Directors held four meetings during 1997 and took action
by unanimous written consent four times during 1997. No director attended less
than 75% of the meetings of the Board and any committee of which the director
was a member. The Company has an Audit Committee, a Compensation Committee and a
Stock Option Committee. The Company does not have a nominating committee.
The members of the Audit Committee are Terrence W. Glarner, Thomas R.
King and Eugene W. Courtney. The Audit Committee recommends to the Board of
Directors the selection of independent accountants as well as the internal
accounting controls of the Company. The Audit Committee held two meetings during
1997.
The members of the Compensation Committee are Terrence W. Glarner,
Thomas R. King and Eugene W. Courtney. This committee recommends to the Board of
Directors from time to time the salaries to be paid to executive officers of the
Company and any plan for additional compensation it deems appropriate. The
Compensation Committee did not meet during 1997.
The members of the Stock Option Committee are Terrence W. Glarner,
Thomas R. King and Eugene W. Courtney. The Stock Option Committee administers
the Company's stock option plans. The Stock Option Committee met informally
eight times by telephone during 1997 and took subsequent action in writing.
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all cash compensation paid or to be paid
by the Company, as well as certain other compensation paid or accrued, during
each of the Company's last three fiscal years to the Chief Executive Officer
during fiscal 1997 and to the only other executive officer whose total annual
salary and bonus paid or accrued during fiscal year 1997 exceeded $100,000.
<TABLE>
<CAPTION>
Long Term Compensation
------------------------------------
Awards Payouts
------------------------- ----------
Restricted LTIP All Other
Name and Principal Fiscal Annual Compensation Stock Awards Payouts Compensation
Position Year Salary ($) Bonus ($) Other ($) ($) Options ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carl P. Boecher 1997 120,637 -- 1,656(1) -- 15,000 -- 2,698(2)
President and Chief 1996 98,840 7,275 1,241 -- 25,000 -- 1,740
Executive Officer 1995 90,721 21,889 996 -- 50,000 -- 13,931
Alan G. Shuler 1997 101,364 -- 1,261(1) -- 10,000 -- 2,586(2)
Vice President and 1996 97,550 9,300 1,120 -- -- -- 1,943
Chief Financial 1995 96,192 -- 939 -- 25,000 -- 811
Officer
</TABLE>
- ------------------------------
(1) Reimbursement for taxes on supplemental benefits.
(2) Term insurance premium paid by the Company and 401(K) plan matching
contribution.
Option Grants During 1997 Fiscal Year
The following table provides information regarding stock options
granted during fiscal 1997 to the named executive officers in the Summary
Compensation Table. The Company has not granted any stock appreciation rights.
<TABLE>
<CAPTION>
Percent of Total
Number of Shares Options Granted to Exercise or
Underlying Options Employees Base Price Per
Name Granted in Fiscal Year Share Expiration Date
<S> <C> <C> <C> <C>
Carl P. Boecher 15,000 (1) 6% $3.00 03/09/07
Alan G. Shuler 10,000 (1) 4% $3.00 03/09/07
- ------------------
</TABLE>
(1) The option was granted on March 10, 1997 and will become exercisable in
full on March 10, 2002, subject to acceleration if certain targets are
met. The exercise price is equal to the fair market value of the common
stock on the date of grant.
<PAGE>
Option Exercises During 1997 Fiscal Year and Fiscal Year-End Option Values
The following table provides information as to options exercised by the
named executive officers in the Summary Compensation Table during fiscal 1997
and the number and value of options at December 31, 1997. The Company has no
outstanding stock appreciation rights.
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Shares December 31, 1997 December 31, 1997
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable(1)
<S> <C> <C> <C> <C>
Carl P. Boecher -- -- 42,500 exercisable $16,875
47,500 unexercisable $25,625
Alan G. Shuler -- -- 56,667 exercisable $ 2,083
10,000 unexercisable $ 7,500
</TABLE>
(1) Value is calculated on the basis of the difference between the option
exercise price and $3.75, the closing sale price for the Company's
common stock at December 31, 1997 as quoted on the Nasdaq National
Market, multiplied by the number of shares underlying the option.
Compensation of Directors
Directors' Fees. The Chairman of the Board, Mr. Holland, currently
receives a $7,500 annual retainer, and all other independent Board members
receive a $2,500 annual retainer. Each independent Board member also receives
$1,000 for attendance at each meeting of the Board of Directors and $500 for
attendance at each committee meeting. Pursuant to Mr. Holland's consulting
agreement with the Company and prior to the June 1997 termination of such
agreement, such fees were not paid to Mr. Holland. See "Related Transactions."
Stock Option Grants to Non-Employee Directors. The 1997 Stock Option
Plan provides for automatic option grants to each director who is not an
employee of the Company (a "Non-Employee Director"). Upon initial election, a
Non-Employee Director receives an automatic grant of a nonqualified option to
purchase 15,000 shares of the common stock at an option price per share equal to
100% of the fair market value of the common stock on the date of such election,
which option becomes exercisable to the extent of 3,000 shares immediately and
on each of the first four anniversaries of the date of grant. Each Non-Employee
Director who is re-elected as a director of the Company or whose term of office
continues after a meeting of shareholders at which directors are elected shall,
as of the date of such re-election or shareholder meeting, automatically be
granted an immediately exercisable nonqualified option to purchase 3,000 shares
of the common stock at an option price per share equal to 100% of the fair
market value of the common stock on the date of such re-election or shareholder
meeting. No director shall receive more than one option to purchase 3,000 shares
pursuant to the formula plan in any one fiscal year. All options granted
pursuant to these provisions shall expire on the earlier of (i) three months
after the optionee ceases to be a director (except by death) and (ii) ten (10)
years after the date of grant. Notwithstanding the foregoing, in the event of
the death of a Non-Employee Director, any option granted to such Non-Employee
Director pursuant to this formula plan may be exercised at any time within six
months of the death of such Non-Employee Director or on the date on which the
option, by its terms expires, whichever is earlier.
<PAGE>
Employment Contracts and Termination of Employment Arrangements
The Company entered into a one-year employment agreement dated January
1, 1997, with Carl P. Boecher, the Company's President and Chief Executive
Officer, which replaced his January 9, 1995 agreement. The agreement
automatically renews for successive one-year terms unless terminated by either
party. The agreement has been automatically renewed for another one-year term
with an annual base salary of $126,000. The agreement provides for the payment
of a monthly car allowance of $500. The agreement does not provide for a bonus,
but Mr. Boecher is eligible to participate in the Company's Management Incentive
Plan. The agreement may be terminated with or without cause by either the
Company or Mr. Boecher upon thirty days' notice. If Mr. Boecher's employment is
terminated (i) by the Company without cause or by nonrenewal of the agreement,
(ii) by death or (iii) by disability, he is entitled to a severance payment
equal to his base monthly salary for twelve months. Mr. Boecher has agreed not
to compete with the Company for a period of one (1) year after termination of
his employment for any reason.
The Company entered into an employment agreement effective as of
January 1, 1995 with Alan G. Shuler, the Company's Vice President and Chief
Financial Officer, which agreement has a one-year term which automatically
renews for successive one-year terms if a termination notice is not given by
either party. The agreement has been automatically renewed for another one-year
term with a $103,480 annual base salary. The agreement provides for the payment
of a monthly car allowance of $400. The agreement does not provide for a bonus;
however, Mr. Shuler is eligible to participate in the Company's Management
Incentive Plan. The agreement may be terminated with or without cause by either
the Company or Mr. Shuler upon sixty days' notice. If Mr. Shuler's employment is
terminated by the Company without cause, he is entitled to his monthly base
salary for six months. If Mr. Shuler's employment is terminated within twelve
months of a change of control, or if he resigns within twelve months of a change
of control because of diminution of either position responsibilities or
remuneration, Mr. Shuler shall receive a severance payment equal to his annual
salary in effect at the time of the change of control, payable in twelve monthly
installments. Mr. Shuler has agreed not to compete with the Company during his
employment and during the time in which he is paid severance pursuant to the
agreement. Mr. Shuler also agreed that, during the one-year period following the
termination of his employment, for whatever reason, he will not solicit any of
the Company's employees to leave the Company and will not solicit the Company's
customers for the purpose of selling a competing product.
Related Transactions
Pursuant to a consulting agreement dated November 1, 1995 between the
Company and Gary R. Holland, Chairman of the Company, which agreement was
terminated on June 30, 1997, Mr. Holland received an annual fee of $100,000,
payable in monthly installments, for providing services to management for a
minimum of six days during each four-week period during the term of the
agreement. In connection with entering the agreement in 1995, Mr. Holland
received an option to purchase 35,000 shares of the Company's common stock at
$3.625, the fair market value on the date of grant, which option was granted
under the Company's Consultant Stock Option Plan. As long as Mr. Holland
received compensation pursuant to the terms of the agreement, he was not
eligible to receive the retainer and meeting fees paid to directors as set forth
in "Compensation of Directors;" however, he was eligible to receive options
under the formula plans described in such section. In accordance with the
agreement, Mr. Holland was elected as a director and appointed as Chairman of
the Board on November 10, 1995. Mr. Holland agreed not to compete with the
Company as long as he was providing the Company with consulting services or
serving as a director of the Company. In addition, Decision Processes
International of Minnesota, Inc., a corporation of which Mr. Holland is a
principal, provided consulting services to the Company for approximately $50,000
in fiscal year 1997.
<PAGE>
The Company and John H. Underwood, the Company's former President and
Chief Executive Officer, entered into a Separation Agreement and Release
("Separation Agreement") effective January 1, 1997. Pursuant to the Separation
Agreement, Mr. Underwood agrees that, through December 31, 1998, he will not (i)
compete with the Company, (ii) solicit any of the Company's employees to leave
the Company or (iii) interfere with the Company's customers. The Separation
Agreement provides that, through December 1998, Mr. Underwood shall receive
$12,500 each month, the amount of his monthly base salary on December 31, 1996,
and he shall be entitled to certain other benefits, including participation in
the Company's health coverage plans and outplacement fees not to exceed $6,000.
The termination dates of Mr. Underwood's stock options to purchase 16,666 shares
at $3.625 and 75,000 shares at $5.75 were extended to February 28, 1999. Mr.
Underwood agreed to release the Company from any and all rights and claims,
except as provided for in the Separation Agreement, in connection with his
employment and/or resignation.
APPROVAL OF AN INCREASE IN THE NUMBER OF SHARES
RESERVED UNDER THE COMPANY'S 1997 STOCK OPTION PLAN
(Proposal #3)
General
On February 27, 1997, the Board of Directors adopted the 1997 Stock
Option Plan (the "1997 Plan"), which 1997 Plan was approved by the shareholders
on June 4, 1997. A total of 500,000 shares were originally reserved for issuance
under the 1997 Plan. As of May 4, 1998, the Company had outstanding incentive
and nonqualified options for the purchase of an aggregate of 305,000 shares of
the Company's common stock with an average exercise price of $3.126 per share
granted under the Company's 1997 Plan. No options granted under the 1997 Plan
have been exercised as of May 4, 1998. In order to provide sufficient shares for
future options, the Board of Directors increased the number of shares reserved
under the 1997 Plan from 500,000 to 800,000 shares on April 14, 1998. The Board
believes that granting fairly-priced stock options to employees and directors is
an effective means to promote the future growth and development of the Company.
Such options, among other things, increase employees' and directors' proprietary
interest in the Company's success and enables the Company to attract and retain
qualified personnel. The Board therefore recommends that all shareholders vote
in favor of increasing the number of shares reserved under the 1997 Plan from
500,000 to 800,000.
<PAGE>
Summary of 1997 Stock Option Plan
A general description of the basic features of the 1997 Plan is
presented below, but such description is qualified in its entirety by reference
to the full text of the 1997 Plan, a copy of which may be obtained without
charge upon written request to Alan G. Shuler, the Company's Chief Financial
Officer.
Purpose. The purpose of the 1997 Plan is to promote the success of the
Company by facilitating the employment and retention of competent personnel and
by furnishing incentive to directors, officers and employees of the Company and
consultants and advisors to the Company, upon whose efforts the success of the
Company will depend to a large degree.
Term. Incentive stock options may be granted pursuant to the 1997 Plan
during a period of ten (10) years from the date the 1997 Plan was adopted by the
Board of Directors (until February 27, 2007), and nonqualified stock options may
be granted until the 1997 Plan is discontinued or terminated by the Board of
Directors.
Administration. With the exception of the stock options automatically
issued to Non-Employee Directors as described below, the 1997 Plan is
administered by the Board of Directors or the Stock Option Committee of the
Board of Directors, all of the members of which are "non-employee directors"
under Rule 16b-3 of the Securities Exchange Act of 1934 (collectively referred
to as the "Administrator"). The 1997 Plan gives broad powers to the
Administrator to administer and interpret the 1997 Plan, including the authority
to select the individuals to be granted options and to prescribe the particular
form and conditions of each option granted.
Eligibility. All employees of the Company or any subsidiary are
eligible to receive incentive stock options pursuant to the 1997 Plan. All
employees, officers and directors of and consultants and advisors to the Company
or any subsidiary are eligible to receive nonqualified stock options. As of May
4, 1998, the Company had approximately 60 employees, of which five are officers,
and five directors who are not employees.
Options. When an option is granted under the 1997 Plan, the
Administrator, at its discretion, specifies the option price and the number of
shares of Common Stock which may be purchased upon exercise of the option. The
exercise price of an incentive stock option set by the Administrator may not be
less than 100% of the fair market value of the Company's Common Stock, as that
term is defined in the 1997 Plan. Unless otherwise determined by the
Administrator, the exercise price of a nonqualified stock option will not be
less than 100% of the fair market value on the date of grant; provided, however,
that the exercise price may not be less than 85% of the fair market value on the
date of grant. The period during which an option may be exercised and whether
the option will be exercisable immediately, in stages, or otherwise is set by
the Administrator. Generally, an incentive stock option may not be exercisable
more than ten (10) years from the date of grant. Optionees may pay for shares
upon exercise of options with cash, certified check or Common Stock of the
Company valued at the stock's then "fair market value" as defined in the 1997
Plan. Each option granted under the 1997 Plan is generally nontransferable
during the lifetime of the optionee; however, the Administrator may, in its sole
discretion, permit the transfer of a nonqualified stock option to immediate
family members or to certain family trusts or family partnerships.
<PAGE>
Generally, under the form of option agreement which the Administrator
is currently using for options granted under the 1997 Plan, if the optionee's
affiliation with the Company terminates before expiration of the option for
reasons other than death or disability, the optionee has a right to exercise the
option for three months after termination of such affiliation or until the
option's original expiration date, whichever is earlier. If the termination is
because of death or disability, the option typically is exercisable until its
original stated expiration or until the 12-month anniversary of the optionee's
death or disability, whichever is earlier. The Administrator may impose
additional or alternative conditions and restrictions on the incentive or
nonqualified stock options granted under the 1997 Plan; however, each incentive
option must contain such limitations and restrictions upon its exercise as are
necessary to ensure that the option will be an incentive stock option as defined
under the Internal Revenue Code.
Change of Control. In the event that (i) the Company is acquired
through the sale of substantially all of its assets or through a merger or other
transaction (a "Transaction"), (ii) after the effective date of the 1997 Plan a
person or entity becomes the holder of 30% or more the Company's outstanding
Common Stock, or (iii) individuals who constituted the Board on the effective
date of the 1997 Plan ceased for any reason thereafter to constitute at least a
majority of the Board of Directors (with exceptions for individuals who are
nominated by the current Board of Directors), all outstanding options will
become immediately exercisable in full and will remain exercisable during the
remaining terms of such outstanding options, whether or not the participants to
whom the options have been granted remain employees of the Company or a
subsidiary. The acceleration of the exercisability of outstanding options may be
limited, however, if the acquiring party seeks to account for a Transaction on a
"pooling of interests" basis which would be precluded if such options are
accelerated. The Board may also take certain additional actions, such as
terminating the 1997 Plan, providing cash or stock valued at the amount equal to
the excess of the fair market value of the stock over the exercise price, or
allowing exercise of the options for stock of the succeeding company.
Automatic Grants to Non-Employee Directors. The 1997 Plan provides for
automatic option grants to each director who is not an employee of the Company
(a "Non-Employee Director"). Each Non-Employee Director who is elected for the
first time as a director shall automatically be granted a nonqualified option to
purchase 15,000 shares of the common stock at an option price per share equal to
100% of the fair market value of the common stock on the date of the
Non-Employee Director's initial election, which option is exercisable to the
extent of 3,000 shares immediately and on each of the first four anniversaries
of the date of grant. Each Non-Employee Director who is re-elected as a director
of the Company or whose term of office continues after a meeting of shareholders
at which directors are elected shall, as of the date of such re-election or
shareholder meeting, automatically be granted an immediately exercisable
nonqualified option to purchase 2,500 shares of the common stock at an option
price per share equal to 100% of the fair market value of the common stock on
the date of such re-election or shareholder meeting. No director shall receive
more than one option to purchase 2,500 shares pursuant to the formula plan in
any one fiscal year. All options granted pursuant to these provisions shall
expire on the earlier of (i) three months after the optionee ceases to be a
director (except by death) and (ii) ten (10) years after the date of grant.
Notwithstanding the foregoing, in the event of the death of a Non-Employee
Director, any option granted to such Non-Employee Director pursuant to this
formula plan may be exercised at any time within six months of the death of such
Non-Employee Director or on the date on which the option, by its terms expires,
whichever is earlier.
<PAGE>
Amendment. The Board of Directors may from time to time suspend or
discontinue the 1997 Plan or revise or amend it in any respect; provided,
however, that no such revision or amendment may impair the terms and conditions
of any outstanding option to the material detriment of the optionee without the
consent of the optionee, except as authorized in the event of a sale, merger,
consolidation or liquidation of the Company. The 1997 Plan may not be amended in
any manner that will cause incentive stock options to fail to meet the
requirements of Code Section 422, and may not be amended in any manner that
will: (i) materially increase the number of shares subject to the 1997 Plan
except as provided in the case of stock splits, consolidations, stock dividends
or similar events; (ii) change the designation of the class of employees
eligible to receive options; (iii) decrease the price at which options will be
granted; or (iv) materially increase the benefits accruing to optionees under
the 1997 Plan, without the approval of the shareholders, if such approval is
required to comply with Code Section 422 or the requirements of Section 16(b) of
the Act.
The Board of Directors will equitably adjust the maximum number of
shares of Common Stock reserved for issuance under the 1997 Plan, the number of
shares covered by each outstanding option and the option price per share in the
event of stock splits or consolidations, stock dividends or other transactions
in which the Company receives no consideration. Generally, the Board of
Directors may also provide for the protection of optionees in the event of a
merger, liquidation or reorganization of the Company.
Federal Income Tax Consequences of the 1997 Plan. Under present law, an
optionee will not realize any taxable income on the date a nonqualified stock
option is granted to the optionee pursuant to the 1997 Plan. Upon exercise of
the nonqualified stock option, however, the optionee will realize, in the year
of exercise, ordinary income to the extent of the difference between the option
price and the fair market value of the Company's Common Stock on the date of
exercise. Upon the sale of the shares, any resulting gain or loss will be
treated as capital gain or loss. The Company will be entitled to a tax deduction
in its fiscal year in which nonqualified stock options are exercised, equal to
the amount of compensation required to be included as ordinary income by those
optionees exercising such options.
Incentive stock options granted pursuant to the 1997 Plan are intended
to qualify for favorable tax treatment to the optionee under Code Section 422.
Under Code Section 422, an employee realizes no taxable income when the
incentive stock option is granted. If the employee has been an employee of the
Company or any subsidiary at all times from the date of grant until three months
before the date of exercise, the employee will realize no taxable income when
the option is exercised. If the employee does not dispose of shares acquired
upon exercise for a period of two years from the granting of the incentive stock
option and one year after receipt of the shares, the employee may sell the
shares and report any gain as capital gain. The Company will not be entitled to
a tax deduction in connection with either the grant or exercise of an incentive
stock option. If the employee should dispose of the shares prior to the
expiration of the two-year or one-year periods described above, the employee
will be deemed to have received compensation taxable as ordinary income in the
year of the early sale in an amount equal to the lesser of (i) the difference
between the fair market value of the Company's Common Stock on the date of
exercise and the option price of the shares, or (ii) the difference between the
sale price of the shares and the option price of shares. In the event of such an
early sale, the Company will be entitled to a tax deduction equal to the amount
recognized by the employee as ordinary income. The foregoing discussion ignores
the impact of the alternative minimum tax, which may particularly be applicable
to the year in which an incentive stock option is exercised.
<PAGE>
Plan Benefits. Because future grants of stock options are subject to
the discretion of the Administrator, the future benefits under the 1997 Plan
cannot be determined at this time, except for the automatic grants to
Non-Employee Directors as set forth above. The table below shows the total
number of shares underlying stock options that have been granted under the 1997
Plan as of May 4, 1998 to the named executive officers and the groups set forth.
Shares of Common Stock
Name and Position/Group Underlying Options Received
Carl P. Boecher 30,000
President and Chief Executive Officer
Alan G. Shuler 20,000
Vice President and Chief Financial Officer
Current Executive Officers 170,000
as a Group ( 5 persons)
Current Directors who are not 12,500
Executive Officers as a Group (5 persons)
Current Employees who are not 122,500
Executive Officers or Directors
as a Group (55 persons)
- -------------------
Vote Required. The Board of Directors recommends that the shareholders
approve the increase of shares under the 1997 Plan from 500,000 to 800,000.
Under applicable Minnesota law, approval of the increase of shares under the
1997 Plan requires the affirmative vote of the holders of the greater of (i) a
majority of the voting power of the shares represented in person or by proxy at
the Annual Meeting with authority to vote on such matter, or (ii) a majority of
the voting power of the minimum number of shares that would constitute a quorum
for the transaction of business at the Annual Meeting.
RATIFICATION OF APPOINTMENT OF AUDITORS
(Proposal #4)
The Board of Directors recommends that the shareholders ratify the
appointment of McGladrey & Pullen, LLP, as independent auditors for the Company
for the year ending December 31, 1998. McGladrey & Pullen, LLP has served as
independent auditors for the Company since 1980. McGladrey & Pullen, LLP
provided services in connection with the audit of the financial statements of
the Company for the year ended December 31, 1997, assistance with the Company's
Annual Report submitted to the Securities and Exchange Commission on Form 10-KSB
and quarterly reports filed with the Securities and Exchange Commission, and
consultation on matters relating to accounting and financial reporting.
<PAGE>
Representatives of McGladrey & Pullen, LLP are expected to be present
at the Annual Meeting and will be given an opportunity to make a statement if so
desired and to respond to appropriate questions.
1999 SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the annual
meeting in 1999 must be submitted to the Company in appropriate written form on
or before January 5, 1999 to be included in the Company's Proxy Statement and
related Proxy for the 1999 meeting.
OTHER BUSINESS
Management is not aware of any matters to be presented for action at
the Annual Meeting, except matters discussed in the Proxy Statement. If any
other matters properly come before the meeting, it is intended that the shares
represented by proxies will be voted in accordance with the judgment of the
persons voting the proxies.
ANNUAL REPORT TO SHAREHOLDERS
A copy of the Company's Annual Report to Shareholders for the fiscal
year ended December 31, 1997 accompanies this Notice of Annual Meeting and Proxy
Statement. No part of such Annual Report is incorporated herein and no part
thereof is to be considered proxy soliciting material.
FORM 10-KSB
THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH PERSON WHOSE PROXY IS
BEING SOLICITED, UPON WRITTEN REQUEST OF ANY SUCH PERSON, A COPY OF THE
COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31,
1997, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE
FINANCIAL STATEMENTS. THE COMPANY WILL FURNISH TO ANY SUCH PERSON ANY EXHIBIT
DESCRIBED IN THE LIST ACCOMPANYING THE FORM 10-KSB UPON THE ADVANCE PAYMENT OF
REASONABLE FEES RELATED TO THE COMPANY'S FURNISHING SUCH EXHIBIT(S). REQUESTS
FOR COPIES OF SUCH REPORT AND/OR EXHIBIT(S) SHOULD BE DIRECTED TO SHAREHOLDER
RELATIONS AT THE COMPANY'S PRINCIPAL ADDRESS.
By Order of the Board of Directors
Thomas R. King
Secretary
May 5, 1998
<PAGE>
DATAKEY, INC.
--------------
PROXY
for Annual Meeting to be held June 2, 1998
--------------
The undersigned hereby appoints Carl P. Boecher and Alan G. Shuler, and each of
them, with full power of substitution, his or her Proxies to represent and vote,
as designated below, all shares of voting stock of Datakey, Inc. registered in
the name of the undersigned at the 1998 Annual Meeting of Shareholders of the
Company to be held at the Radisson Plaza Hotel, 35 S. 7th Street, Minneapolis,
Minnesota, at 3:30 p.m., on Tuesday, June 2, 1998, and at any adjournment
thereof. The undersigned hereby revokes all proxies previously granted with
respect to such Annual Meeting.
The Board of Directors recommends that you vote "FOR" each proposal.
1. Set the number of directors at six (6).
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Elect Directors. Nominees:
Carl P. Boecher, Gary R. Holland, John H. Underwood,
Terrence W. Glarner, Thomas R. King and Eugene W. Courtney
[ ] FOR all nominees listed above [ ] WITHHOLD AUTHORITY to vote
(except those whose names have for all nominees listed above
been written on the line below)
3. Approve increase of shares under the 1997 Stock Option Plan from 500,000
to 800,000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Ratify the appointment of McGladrey & Pullen, LLP as independent
auditors for the Company for the year ending December 31, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. Other Matters. In their discretion, the Proxies are authorized to vote
upon such other business as may properly come before the Annual
Meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED FOR EACH PROPOSAL SPECIFICALLY IDENTIFIED ABOVE.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
Date: _____________, 1998 ___________________________________________
___________________________________________
PLEASE DATE AND SIGN ABOVE exactly as name
appears at the left, indicating, where
proper, official position or representative
capacity. For stock held in joint tenancy,
each joint owner should sign.
<PAGE>
DATAKEY, INC.
1997 STOCK OPTION PLAN
(AS AMENDED ON APRIL 14, 1998)
SECTION 1.
DEFINITIONS
As used herein, the following terms shall have the meanings indicated
below:
(a) "Committee" shall mean a Committee of two or more directors who
shall be appointed by and serve at the pleasure of the Board. As long
as the Company's securities are registered pursuant to Section 12 of
the Securities Exchange Act of 1934, as amended, then, to the extent
necessary for compliance with Rule 16b-3, or any successor provision,
each of the members of the Committee shall be a "Non-Employee
Director." For purposes of this Section 1(a) "Non-Employee Director"
shall have the same meaning as set forth in Rule 16b-3, or any
successor provision, as then in effect, of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended.
(b) The "Company" shall mean Datakey, Inc., a Minnesota corporation.
(c) "Fair Market Value" shall mean (i) if such stock is reported by the
Nasdaq National Market or Nasdaq SmallCap Market or is listed upon an
established stock exchange or exchanges, the reported closing price of
such stock by the Nasdaq National Market or Nasdaq SmallCap Market or
on such stock exchange or exchanges on the date the option is granted
or, if no sale of such stock shall have occurred on that date, on the
next preceding day on which there was a sale of stock; (ii) if such
stock is not so reported by the Nasdaq National Market or Nasdaq
SmallCap Market or listed upon an established stock exchange, the
average of the closing "bid" and "asked" prices quoted by the National
Quotation Bureau, Inc. (or any comparable reporting service) on the
date the option is granted, or if there are no quoted "bid" and "asked"
prices on such date, on the next preceding date for which there are
such quotes; or (iii) if such stock is not publicly traded as of the
date the option is granted, the per share value as determined by the
Board, or the Committee, in its sole discretion by applying principles
of valuation with respect to all such options.
(d) The "Internal Revenue Code" is the Internal Revenue Code of 1986,
as amended from time to time.
(e) "Non-Employee Director" shall mean members of the Board who are not
employees of the Company or any subsidiary.
(f) "Option Stock" shall mean Common Stock of the Company (subject to
adjustment as described in Section 13) reserved for options pursuant to
this Plan.
<PAGE>
(g) The "Optionee" means an employee of the Company or any Subsidiary
to whom an incentive stock option has been granted pursuant to Section
9; a consultant or advisor to or director (including a Non-Employee
Director), employee or officer of the Company or any Subsidiary to whom
a nonqualified stock option has been granted pursuant to Section 10; or
a Non-Employee Director to whom a nonqualified stock option has been
granted pursuant to Section 11.
(h) "Parent" shall mean any corporation which owns, directly or
indirectly in an unbroken chain, fifty percent (50%) or more of the
total voting power of the Company's outstanding stock.
(i) The "Plan" means the Datakey, Inc. 1997 Stock Option Plan, as
amended hereafter from time to time, including the form of Option
Agreements as they may be modified by the Board from time to time.
(j) A "Subsidiary" shall mean any corporation of which fifty percent
(50%) or more of the total voting power of outstanding stock is owned,
directly or indirectly in an unbroken chain, by the Company.
SECTION 2.
PURPOSE
The purpose of the Plan is to promote the success of the Company and
its Subsidiaries by facilitating the retention of competent personnel and by
furnishing incentive to officers, directors, employees, consultants, and
advisors upon whose efforts the success of the Company and its Subsidiaries will
depend to a large degree.
It is the intention of the Company to carry out the Plan through the
granting of stock options which will qualify as "incentive stock options" under
the provisions of Section 422 of the Internal Revenue Code, or any successor
provision, pursuant to Section 9 of this Plan, and through the granting of
"nonqualified stock options" pursuant to Sections 10 and 11 of this Plan.
Adoption of this Plan shall be and is expressly subject to the condition of
approval by the shareholders of the Company within twelve (12) months before or
after the adoption of the Plan by the Board of Directors. Any incentive stock
options granted after adoption of the Plan by the Board of Directors shall be
treated as nonqualified stock options if shareholder approval is not obtained
within such twelve-month period.
SECTION 3.
EFFECTIVE DATE OF PLAN
The Plan shall be effective as of the date of adoption by the Board of
Directors, subject to approval by the shareholders of the Company as required in
Section 2.
<PAGE>
SECTION 4.
ADMINISTRATION
The Plan shall be administered by the Board of Directors of the Company
(hereinafter referred to as the "Board") or by a Committee which may be
appointed by the Board from time to time (collectively referred to as the
"Administrator"). The Administrator shall have all of the powers vested in it
under the provisions of the Plan, including but not limited to exclusive
authority (where applicable and within the limitations described herein) to
determine, in its sole discretion, whether an incentive stock option or
nonqualified stock option shall be granted, the individuals to whom, and the
time or times at which, options shall be granted, the number of shares subject
to each option and the option price and terms and conditions of each option. The
Administrator shall have full power and authority to administer and interpret
the Plan, to make and amend rules, regulations and guidelines for administering
the Plan, to prescribe the form and conditions of the respective stock option
agreements (which may vary from Optionee to Optionee) evidencing each option and
to make all other determinations necessary or advisable for the administration
of the Plan. The Administrator's interpretation of the Plan, and all actions
taken and determinations made by the Administrator pursuant to the power vested
in it hereunder, shall be conclusive and binding on all parties concerned.
No member of the Board or the Committee shall be liable for any action
taken or determination made in good faith in connection with the administration
of the Plan. In the event the Board appoints a Committee as provided hereunder,
any action of the Committee with respect to the administration of the Plan shall
be taken pursuant to a majority vote of the Committee members or pursuant to the
written resolution of all Committee members.
SECTION 5.
PARTICIPANTS
The Administrator shall from time to time, at its discretion and
without approval of the shareholders, designate those employees, officers,
directors (including Non-Employee Directors), consultants, and advisors of the
Company or of any Subsidiary to whom nonqualified stock options shall be granted
under this Plan; provided, however, that consultants or advisors shall not be
eligible to receive stock options hereunder unless such consultant or advisor
renders bona fide services to the Company or Subsidiary and such services are
not in connection with the offer or sale of securities in a capital raising
transaction; and, provided further, that Non-Employee Directors will be granted
options pursuant to Section 11 hereof without further action by the
Administrator. The Administrator shall, from time to time, at its discretion and
without approval of the shareholders, designate those employees of the Company
or any Subsidiary to whom incentive stock options shall be granted under this
Plan. The Administrator may grant additional incentive stock options or
nonqualified stock options under this Plan to some or all participants then
holding options or may grant options solely or partially to new participants. In
designating participants, the Administrator shall also determine the number of
shares to be optioned to each such participant. The Board may from time to time
designate individuals as being ineligible to participate in the Plan.
<PAGE>
SECTION 6.
STOCK
The Stock to be optioned under this Plan shall consist of authorized
but unissued shares of Option Stock. Eight Hundred Thousand (800,000) shares of
Option Stock shall be reserved and available for options under the Plan;
provided, however, that the total number of shares of Option Stock reserved for
options under this Plan shall be subject to adjustment as provided in Section 13
of the Plan. In the event that any outstanding option under the Plan for any
reason expires or is terminated prior to the exercise thereof, the shares of
Option Stock allocable to the unexercised portion of such option shall continue
to be reserved for options under the Plan and may be optioned hereunder.
SECTION 7.
DURATION OF PLAN
Incentive stock options may be granted pursuant to the Plan from time
to time during a period of ten (10) years from the effective date as defined in
Section 3. Nonqualified stock options may be granted pursuant to the Plan from
time to time after the effective date of the Plan and until the Plan is
discontinued or terminated by the Board. Any incentive stock option granted
during such ten-year period and any nonqualified stock option granted prior to
the termination of the Plan by the Board shall remain in full force and effect
until the expiration of the option as specified in the written stock option
agreement and shall remain subject to the terms and conditions of this Plan.
SECTION 8.
PAYMENT
Optionees may pay for shares upon exercise of options granted pursuant
to this Plan with cash, personal check, certified check or, if approved by the
Administrator in its sole discretion, Common Stock of the Company valued at such
Stock's then Fair Market Value, or such other form of payment as may be
authorized by the Administrator. The Administrator may, in its sole discretion,
limit the forms of payment available to the Optionee and may exercise such
discretion any time prior to the termination of the option granted to the
Optionee or upon any exercise of the option by the Optionee.
With respect to payment in the form of Common Stock of the Company, the
Administrator may require advance approval or adopt such rules as it deems
necessary to assure compliance with Rule 16b-3, or any successor provision, as
then in effect, of the General Rules and Regulations under the Securities
Exchange Act of 1934, if applicable.
<PAGE>
SECTION 9.
TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS
Each incentive stock option granted pursuant to this Section 9 shall be
evidenced by a written stock option agreement (the "Option Agreement"). The
Option Agreement shall be in such form as may be approved from time to time by
the Administrator and may vary from Optionee to Optionee; provided, however,
that each Optionee and each Option Agreement shall comply with and be subject to
the following terms and conditions:
(a) Number of Shares and Option Price. The Option Agreement shall state
the total number of shares covered by the incentive stock option. To
the extent required to qualify the Option as an incentive stock option
under Section 422 of the Internal Revenue Code, or any successor
provision, the option price per share shall not be less than one
hundred percent (100%) of the Fair Market Value of the Common Stock per
share on the date the Administrator grants the option; provided,
however, that if an Optionee owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of
stock of the Company or of its Parent or any Subsidiary, the option
price per share of an incentive stock option granted to such Optionee
shall not be less than one hundred ten percent (110%) of the Fair
Market Value of the Common Stock per share on the date of the grant of
the option. The Administrator shall have full authority and discretion
in establishing the option price and shall be fully protected in so
doing.
(b) Term and Exercisability of Incentive Stock Option. The term during
which any incentive stock option granted under the Plan may be
exercised shall be established in each case by the Administrator. To
the extent required to qualify the Option as an incentive stock option
under Section 422 of the Internal Revenue Code, or any successor
provision, in no event shall any incentive stock option be exercisable
during a term of more than ten (10) years after the date on which it is
granted; provided, however, that if an Optionee owns stock possessing
more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or of its parent or any Subsidiary, the
incentive stock option granted to such Optionee shall be exercisable
during a term of not more than five (5) years after the date on which
it is granted.
The Option Agreement shall state when the incentive stock option
becomes exercisable and shall also state the maximum term during which
the option may be exercised. In the event an incentive stock option is
exercisable immediately, the manner of exercise of the option in the
event it is not exercised in full immediately shall be specified in the
Option Agreement. The Administrator may accelerate the exercisability
of any incentive stock option granted hereunder which is not
immediately exercisable as of the date of grant.
<PAGE>
(c) Other Provisions. The Option Agreement authorized under this
Section 9 shall contain such other provisions as the Administrator
shall deem advisable. Any such Option Agreement shall contain such
limitations and restrictions upon the exercise of the option as shall
be necessary to ensure that such option will be considered an
"incentive stock option" as defined in Section 422 of the Internal
Revenue Code or to conform to any change therein.
SECTION 10.
TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS
Each nonqualified stock option granted pursuant to this Section 10
shall be evidenced by a written Option Agreement. The Option Agreement shall be
in such form as may be approved from time to time by the Administrator and may
vary from Optionee to Optionee; provided, however, that each Optionee and each
Option Agreement shall comply with and be subject to the following terms and
conditions:
(a) Number of Shares and Option Price. The Option Agreement shall state
the total number of shares covered by the nonqualified stock option.
Unless otherwise determined by the Administrator, the option price per
share shall be one hundred percent (100%) of the Fair Market Value of
the Common Stock per share on the date the Administrator grants the
option.
(b) Term and Exercisability of Nonqualified Stock Option. The term
during which any nonqualified stock option granted under the Plan may
be exercised shall be established in each case by the Administrator.
The Option Agreement shall state when the nonqualified stock option
becomes exercisable and shall also state the maximum term during which
the option may be exercised. In the event a nonqualified stock option
is exercisable immediately, the manner of exercise of the option in the
event it is not exercised in full immediately shall be specified in the
stock option agreement. The Administrator may accelerate the
exercisability of any nonqualified stock option granted hereunder which
is not immediately exercisable as of the date of grant.
(c) Withholding. The Company or its Subsidiary shall be entitled to
withhold and deduct from future wages of the Optionee all legally
required amounts necessary to satisfy any and all withholding and
employment-related taxes attributable to the Optionee's exercise of a
nonqualified stock option. In the event the Optionee is required under
the Option Agreement to pay the Company, or make arrangements
satisfactory to the Company respecting payment of, such withholding and
employment-related taxes, the Administrator may, in its discretion and
pursuant to such rules as it may adopt, permit the Optionee to satisfy
such obligation, in whole or in part, by electing to have the Company
withhold shares of Common Stock otherwise issuable to the Optionee as a
result of the option's exercise equal to the amount required to be
withheld for tax purposes. Any stock elected to be withheld shall be
valued at its Fair Market Value, as of the date the amount of tax to be
withheld is determined under applicable tax law. The Optionee's
election to have shares withheld for this purpose shall be made on or
before the date the option is exercised or, if later, the date that the
amount of tax to be withheld is determined under applicable tax law.
Such election shall be approved by the Administrator and otherwise
comply with such rules as the Administrator may adopt to assure
compliance with Rule 16b-3, or any successor provision, as then in
effect, of the General Rules and Regulations under the Securities
Exchange Act of 1934, if applicable.
<PAGE>
(d) Other Provisions. The Option Agreement authorized under this
Section 10 shall contain such other provisions as the Administrator
shall deem advisable.
SECTION 11.
GRANTING OF OPTIONS TO NON-EMPLOYEE DIRECTORS
(a) Upon Joining Board. Each Non-Employee Director of the Company whose
initial election or appointment to the Board of Directors occurs on or
after the date this Plan is approved by the Company's shareholders
shall, as of the date of such election, automatically be granted an
option to purchase 15,000 shares of the Common Stock at an option price
per share equal to 100% of the Fair Market Value of the Common Stock on
such date. Options granted pursuant to this subsection (a) shall be
immediately exercisable to the extent of 3,000 shares subject to such
option and to the extent of an additional 3,000 shares on each of the
first, second, third and fourth anniversaries of the date of grant.
(b) Upon Re-election to Board. Each Non-Employee Director who, on and
after the date this Plan is approved by the Company's shareholders, is
re-elected as a director of the Company or whose term of office
continues after a meeting of shareholders at which directors are
elected shall, as of the date of such re-election or shareholder
meeting, automatically be granted an option to purchase 2,500 shares of
the Common Stock at an option price per share equal to 100% of the Fair
Market Value of the Common Stock on the date of such re-election or
shareholder meeting. Options granted pursuant to this subsection (b)
shall be immediately exercisable in full.
(c) General. No director shall receive more than one option pursuant to
subsection (b) of this Section 11 in any one fiscal year. All options
granted pursuant to this Section 11 shall be designated as nonqualified
options and shall be subject to the same terms and provisions as are
then in effect with respect to granting of nonqualified options to
officers and employees of the Company, including Section 13 of the
Plan, except that the option shall expire on the earlier of (i) three
months after the Optionee ceases to be a director (except by death) and
(ii) ten (10) years after the date of grant. Notwithstanding the
foregoing, in the event of the death of a Non-Employee Director, any
option granted to such Non-Employee Director pursuant to this Section
11 may be exercised at any time within six months of the death of such
Non-Employee Director or on the date on which the option, by its terms
expires, whichever is earlier.
<PAGE>
SECTION 12.
TRANSFER OF OPTION
No incentive stock option shall be transferable, in whole or in part,
by the Optionee other than by will or by the laws of descent and distribution
and, during the Optionee's lifetime, the option may be exercised only by the
Optionee. If the Optionee shall attempt any transfer of any incentive stock
option granted under the Plan during the Optionee's lifetime, such transfer
shall be void and the incentive stock option, to the extent not fully exercised,
shall terminate.
The Administrator may, in its sole discretion, permit the Optionee to
transfer any or all nonqualified stock options to any member of the Optionee's
"immediate family" as such term is defined in Rule 16a-1(e) promulgated under
the Securities Exchange Act of 1934, or any successor provision, or to one or
more trusts whose beneficiaries are members of such Optionee's "immediate
family" or partnerships in which such family members are the only partners;
provided, however, that the Optionee receives no consideration for the transfer
and such transferred nonqualified stock option shall continue to be subject to
the same terms and conditions as were applicable to such nonqualified stock
option immediately prior to its transfer.
SECTION 13.
RECAPITALIZATION, SALE, MERGER, EXCHANGE
OR LIQUIDATION
In the event of an increase or decrease in the number of shares of
Common Stock resulting from a subdivision or consolidation of shares or the
payment of a stock dividend or any other increase or decrease in the number of
shares of Common Stock effected without receipt of consideration by the Company,
the number of shares of Option Stock reserved under Section 6 hereof and the
number of shares of Option Stock covered by each outstanding option and the
price per share thereof shall be adjusted by the Board to reflect such change.
Additional shares which may be credited pursuant to such adjustment shall be
subject to the same restrictions as are applicable to the shares with respect to
which the adjustment relates.
Unless otherwise provided in the stock option agreement, in the event
of
(i) an acquisition of the Company by a corporation, partnership,
trust or other entity not controlled by the Company through
(A) the sale of substantially all of the Company's assets and
the consequent discontinuance of its business or (B) through a
merger, consolidation, exchange, reorganization,
reclassification, extraordinary dividend, divestiture or
liquidation of the Company, other than a merger or
consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing
to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at
least 80% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation (collectively
referred to as a "transaction"), or
<PAGE>
(ii) a change of control such that (A) any individual, partnership,
trust or other entity becomes after the effective date of the
Plan the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of 30% or more of
the combined voting power of the Company's outstanding
securities ordinarily having the right to vote at elections of
directors of the Company, or (B) individuals who constitute
the Board of Directors of the Company on the effective date of
the Plan cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director
subsequent to the effective date of the Plan whose election,
or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors
comprising the Board of Directors of the Company on the
effective date of the Plan (either by a specific vote or by
approval of the proxy statement of the Company in which such
person is named as a nominee for director, without objection
to such nomination) shall be, for purposes of this clause (B)
considered as though such person were a member of the Board of
Directors of the Company on the effective date of the Plan
(collectively referred to as a "change of control"),
all outstanding options shall become immediately exercisable, whether or not
such options had become exercisable prior to the transaction or change of
control; provided, however, that if the acquiring party seeks to have the
transaction accounted for on a "pooling of interests" basis and, in the opinion
of the Company's independent certified public accountants, accelerating the
exercisability of such options would preclude a pooling of interests under
generally accepted accounting principles, the exercisability of such options
shall not accelerate. In addition to the foregoing, in the event of such a
transaction or change of control, the Board may provide for one or more of the
following:
(a) the complete termination of this Plan and cancellation of
outstanding options not exercised prior to a date specified by the
Board (which date shall give Optionees a reasonable period of time in
which to exercise the options prior to the effectiveness of such
transaction);
(b) that Optionees holding outstanding incentive or nonqualified
options shall receive, with respect to each share of Option Stock
subject to such options, as of the effective date of any such
transaction, cash in an amount equal to the excess of the Fair Market
Value of such Option Stock on the date immediately preceding the
effective date of such transaction over the option price per share of
such options; provided that the Board may, in lieu of such cash
payment, distribute to such Optionees shares of stock of the Company or
shares of stock of any corporation succeeding the Company by reason of
such transaction, such shares having a value equal to the cash payment
herein; or
(c) the continuance of the Plan with respect to the exercise of options
which were outstanding as of the date of adoption by the Board of such
plan for such transaction and provide to Optionees holding such options
the right to exercise their respective options as to an equivalent
number of shares of stock of the corporation succeeding the Company by
reason of such transaction.
<PAGE>
The Board may restrict the rights of or the applicability of this Section 13 to
the extent necessary to comply with Section 16(b) of the Securities Exchange Act
of 1934, the Internal Revenue Code or any other applicable law or regulation.
The grant of an option pursuant to the Plan shall not limit in any way the right
or power of the Company to make adjustments, reclassifications, reorganizations
or changes of its capital or business structure or to merge, exchange or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its
business or assets.
SECTION 14.
SECURITIES LAW COMPLIANCE
No shares of Common Stock shall be issued pursuant to the Plan unless
and until there has been compliance, in the opinion of Company's counsel, with
all applicable legal requirements, including without limitation, those relating
to securities laws and stock exchange listing requirements. As a condition to
the issuance of Option Stock to Optionee, the Administrator may require Optionee
to (i) represent that the shares of Option Stock are being acquired for
investment and not resale and to make such other representations as the
Administrator shall deem necessary or appropriate to qualify the issuance of the
shares as exempt from the Securities Act of 1933 and any other applicable
securities laws, and (ii) represent that Optionee shall not dispose of the
shares of Option Stock in violation of the Securities Act of 1933 or any other
applicable securities laws.
As a further condition to the grant of any incentive or nonqualified
stock option or the issuance of Option Stock to Optionee, Optionee agrees to the
following:
(a) In the event the Company advises Optionee that it plans an
underwritten public offering of its Common Stock in compliance with the
Securities Act of 1933, as amended, and the underwriter(s) seek to
impose restrictions under which certain shareholders may not sell or
contract to sell or grant any option to buy or otherwise dispose of
part or all of their stock purchase rights of the underlying Common
Stock, Optionee will not, for a period not to exceed 180 days from the
prospectus, sell or contract to sell or grant an option to buy or
otherwise dispose of any incentive or nonqualified stock option granted
to Optionee pursuant to the Plan or any of the underlying shares of
Common Stock without the prior written consent of the underwriter(s) or
its representative(s).
(b) In the event the Company makes any public offering of its
securities and determines in its sole discretion that it is necessary
to reduce the number of issued but unexercised stock purchase rights so
as to comply with any states securities or Blue Sky law limitations
with respect thereto, the Board of Directors of the Company shall have
the right (i) to accelerate the exercisability of any incentive or
nonqualified stock option and the date on which such option must be
exercised, provided that the Company gives Optionee prior written
notice of such acceleration, and (ii) to cancel any options or portions
thereof which Optionee does not exercise prior to or contemporaneously
with such public offering.
<PAGE>
(c) In the event of a transaction (as defined in Section 13 of the
Plan) which is treated as a "pooling of interests" under generally
accepted accounting principles, Optionee will comply with Rule 145 of
the Securities Act of 1933 and any other restrictions imposed under
other applicable legal or accounting principles if Optionee is an
"affiliate" (as defined in such applicable legal and accounting
principles) at the time of the transaction, and Optionee will execute
any documents necessary to ensure compliance with such rules.
The Company reserves the right to place a legend on any stock
certificate issued upon exercise of an option granted pursuant to the Plan to
assure compliance with this Section 14.
SECTION 15.
RIGHTS AS A SHAREHOLDER
An Optionee (or the Optionee's successor or successors) shall have no
rights as a shareholder with respect to any shares covered by an option until
the date of the issuance of a stock certificate evidencing such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property), distributions or other rights for which the
record date is prior to the date such stock certificate is actually issued
(except as otherwise provided in Section 13 of the Plan).
SECTION 16.
AMENDMENT OF THE PLAN
The Board may from time to time, insofar as permitted by law, suspend
or discontinue the Plan or revise or amend it in any respect; provided, however,
that no such revision or amendment, except as is authorized in Section 13, shall
impair the terms and conditions of any option which is outstanding on the date
of such revision or amendment to the material detriment of the Optionee without
the consent of the Optionee. Notwithstanding the foregoing, no such revision or
amendment shall (i) materially increase the number of shares subject to the Plan
except as provided in Section 13 hereof, (ii) change the designation of the
class of employees eligible to receive options, (iii) decrease the price at
which options may be granted, or (iv) materially increase the benefits accruing
to Optionees under the Plan without the approval of the shareholders of the
Company if such approval is required for compliance with the requirements of any
applicable law or regulation. Furthermore, the Plan may not, without the
approval of the shareholders, be amended in any manner that will cause incentive
stock options to fail to meet the requirements of Section 422 of the Internal
Revenue Code.
SECTION 17.
NO OBLIGATION TO EXERCISE OPTION
The granting of an option shall impose no obligation upon the Optionee
to exercise such option. Further, the granting of an option hereunder shall not
impose upon the Company or any Subsidiary any obligation to retain the Optionee
in its employ for any period.
