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 May 26, 1999
----------------------
TO THE SHAREHOLDERS OF DATAKEY, INC.:
The Annual Meeting of the Shareholders of Datakey, Inc., a Minnesota
corporation (the "Company"), will be held on Wednesday, May 26, 1999, 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 five (5).
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 the Company's 1998 Employee Stock Purchase Plan.
4. To ratify the appointment of McGladrey & Pullen, LLP as
independent auditors for the Company for the year ending
December 31, 1999.
5. To transact such other business as may properly come before
the meeting.
Shareholders of record at the close of business on April 7, 1999 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, 1998 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: April 19, 1999
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 May 26, 1999
-------------------------
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
Wednesday, May 26, 1999, 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 April 19, 1999.
<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 April 7, 1999. 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 April
7, 1999, there were 3,111,259 shares of common stock, par value $.05 per share,
150,000 shares of convertible preferred stock and 74,367 shares of series A
convertible preferred cumulative stock issued and outstanding. The holders of
common stock and convertible preferred stock are entitled to one vote for each
share held and may vote on each matter to be voted upon at the Annual Meeting.
Each share of series A convertible preferred cumulative stock is entitled to the
number of votes equal to the number of shares such series A convertible
preferred stock is convertible into, which is 5.745455, or a total of 427,272
votes as of the record date. Holders of the capital 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, convertible preferred stock and series a 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 April 7, 1999. Unless otherwise indicated, the shareholders listed in the
table have sole voting and investment power with respect to the shares
indicated.
<TABLE>
<CAPTION>
Series A Convertible
Convertible Cumulative
Common Stock(2) Preferred Stock Preferred Stock
Name (and Address --------------------------- ------------------------ ----------------------
of 5% Owners) or Identity Percent Percent Percent of
of Group(1) Shares of Class Shares of Class Shares Class
----------- ------ -------- ------ -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Carl P. Boecher 68,750 (3) 2.2% -- -- -- --
Gary R. Holland 55,200 (4) 1.7% -- -- -- --
John H. Underwood 87,203 (5) 2.7% -- -- -- --
Terrence W. Glarner 22,100 (6) * -- -- -- --
Thomas R. King 18,450 (7) * -- -- -- --
Eugene W. Courtney 24,500 (8) * -- -- -- --
Alan G. Shuler 47,667 (9) 1.5% -- -- -- --
Michael L. Sorensen 16,000 (10) * -- -- -- --
Norwest Equity 640,516 (11) 19.6% 150,000 100% -- --
Partners V
Special Situations 576,954 (12) 15.7% -- -- 74,367 100%
Perkins Capital 529,999 (13) 17.0% -- -- -- --
Management, Inc.
Timothy A. Stepanek 294,286 (14)(15) 9.5% -- -- -- --
David M. Winton and 272,500 (14) 8.8% -- -- -- --
Sarah H. Winton
All Directors and 339,870 (16) 9.9% -- -- -- --
Executive Officers as
a Group (8 persons)
- ---------------------------
</TABLE>
<PAGE>
* Less than 1% of the outstanding shares of common stock.
(1) The addresses of the more than 5% holders are: Norwest Equity Partners
V - Norwest Center, Sixth & Marquette, Minneapolis, MN 55479; Special
Situations - 153 East 53rd Street, 51st Floor, New York, NY 10022;
Perkins Capital Management, Inc. - 730 East Lake Street, Wayzata, MN
55391-1769; and Timothy A. Stepanek and David M. and Sarah H. Winton -
4422 IDS Center, 80 South Eighth Street, Minneapolis, MN 55402.
(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 68,750 shares which may be purchased by Mr. Boecher upon
exercise of currently exercisable options.
(4) Includes 54,500 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 80,000 shares which may be purchased by Mr. Underwood upon
exercise of currently exercisable options.
(6) Includes 17,500 shares which may be purchased by Mr. Glarner upon
exercise of currently exercisable options.
(7) Includes 7,500 shares which may be purchased by Mr. King upon exercise
of currently exercisable options.
(8) Includes 19,500 shares which may be purchased by Mr. Courtney upon
exercise of currently exercisable options.
(9) Includes 46,667 shares which may be purchased by Mr. Shuler upon
exercise of currently exercisable options.
(10) Represents 16,000 shares which may be purchased by Mr. Sorensen upon
exercise of currently exercisable options.
<PAGE>
(11) Includes 150,000 shares which may be purchased by Norwest Equity
Partners V ("Norwest Equity"), a limited partnership, upon conversion
of convertible preferred stock. Norwest Equity has sole voting and
investment power over the shares it holds; Itasca Partners V, L.L.P.
("Itasca") is the general partner of Norwest Equity, and Daniel J.
Haggerty, John E. Lindahl and George J. Still Jr. are the general
partners of Itasca, all of whom may be deemed to beneficially own the
shares held by Norwest Equity. The Company has relied on information
contained in a Schedule 13D filed by Norwest Equity, Itasca and Messrs.
Haggerty, Lindahl and Still with the Securities and Exchange Commission
on April 11, 1997.
(12) Represents (i) 446,481 shares held by Special Situations Private Equity
Fund, L.P. ("Equity Fund"), of which 336,362 shares are issuable upon
conversion of 58,544 shares of Series A Convertible Cumulative
Preferred Stock ("Series A Stock") pursuant to a conversion price of
$2.75 on the record date and 110,119 shares are issuable upon exercise
of a currently exercisable warrant; (ii) 120,673 shares held by Special
Situations Technology Fund, L.P. ("Technology Fund"), of which 90,910
shares are issuable upon conversion of 15,823 shares of Series A Stock
pursuant to a conversion price of $2.75 on the record date and 29,763
shares are issuable upon exercise of a currently exercisable warrant;
and 9,800 shares held by Special Situations Cayman Fund, L.P. ("Cayman
Fund"). MG Advisers, L.L.C. ("MG Advisers") is the General Partner of
and investment adviser to the Equity Fund; SST Advisers, L.L.C., Inc.
("SST Advisers") is the General Partner of and investment adviser to
the Technology Fund; and AWM Investment Company ("AWM Investment") is
the General Partner of and investment adviser to the Cayman Fund.
Equity Fund, Technology Fund, Cayman Fund, MG Advisers, SST Advisers
and AWM Investment have the power to vote or direct the vote and the
power to dispose or to direct the disposition of the shares. In
addition, Austin W. Marxe and David Greenhouse, in their capacities as
officers, directors and principal shareholders of MG Advisers, SST
Advisers and AWM Investment have the power to vote or direct the vote
and the power to dispose or to direct the disposition of the shares.
The Company has relied on information contained in a Schedule 13G
Amendment dated as of December 31, 1998 on file with the Securities and
Exchange Commission and other information known by the Company.
(13) Represents shares held for clients of Perkins Capital Management, Inc.
("Perkins"). Perkins has sole dispositive power over all of the shares
and has sole voting power over 133,158 of the shares. The Company has
relied on information contained in a Schedule 13G Amendment dated
February 2, 1999 on file with the Securities and Exchange Commission
(14) Includes 122,500 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.
(15) Includes 14,786 shares held by Mr. Stepanek's wife and children and
7,000 shares held in a family trust.
(16) Includes 310,417 shares which may be purchased by the current executive
officers and directors upon exercise of currently exercisable options.
<PAGE>
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 1999 Annual Meeting be set at five (5).
Subject to approval by the shareholders of that recommendation, five
(5) 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. John
H. Underwood, a current director of the Company, has declined to stand for
reelection at the Annual Meeting. 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 1999
Annual Meeting.
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 five (5) 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.
<PAGE>
Names, Principal Occupations for the Past Five Years and
Selected Other Information Concerning Nominees for Directors
<TABLE>
<CAPTION>
DIRECTOR
NAME PRINCIPAL OCCUPATION SINCE AGE
<S> <C> <C> <C>
Carl P. Boecher President and Chief Executive Officer of 1997 56
the Company
Gary R. Holland President and Chief Executive Officer of 1995 57
Fargo Electronics, Inc.
Terrence W. Glarner President of West Concord Ventures, Inc. 1992 56
Thomas R. King Shareholder of Fredrikson & Byron, P.A., 1980 58
Attorneys at Law
Eugene W. Courtney Consultant 1995 63
</TABLE>
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 currently serves as President and Chief Executive Officer
of Fargo Electronics, Inc., a company that manufactures photo card equipment and
products and provides related services, which company he joined in June 1997 as
General Manager. 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.
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 (n/k/a Dain
Rauscher). 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.
<PAGE>
Mr. Courtney has served as an independent consultant since December
1998. Mr. Courtney served as Chief Executive Officer of HEI, Inc., a company
which designs and manufactures microelectronics, from 1990 until December 1998.
Mr. Courtney also served as HEI's President from 1990 to July 1998, and he
served as HEI's Executive Vice President from 1988 to 1990. Mr. Courtney
currently serves as a director of HEI, Inc.
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 56
Alan G. Shuler Vice President and Chief Financial Officer 52
Michael L. Sorensen Vice President and General Manager, 53
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 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>
SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE
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 1998, all officers, directors, and greater than
ten-percent beneficial owners complied with the applicable filing requirements,
except that one transaction by Mr. Underwood was reported on a Form 5 that was
not timely filed.
BOARD AND COMMITTEE MEETINGS
The Board of Directors held four meetings during 1998 and took action
by unanimous written consent twice during 1998. No director attended less than
75% of the meetings of the Board and any committee of which the director was a
member. The Company does not have a nominating committee. During 1998, the
Company had an Audit Committee, a Compensation Committee and a Stock Option
Committee.
During 1998, the members of the Audit Committee were Terrence W.
Glarner, Thomas R. King and Eugene W. Courtney. Gary R. Holland joined the Audit
Committee as of January 1, 1999. 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 met twice during 1998.
During 1998, the members of the Compensation Committee were 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 met twice during 1998.
During 1998, the members of the Stock Option Committee were 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 twice by telephone during 1998 and made recommendations to the Board
for action.
On January 27, 1999, the Compensation Committee and Stock Option
Committee were combined into one committee to carry on the functions of each of
the individual committees. The Board appointed Terrence W. Glarner, Thomas R.
King, Eugene W. Courtney and Gary R. Holland to serve as its members.
<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 1998 and to the other executive officers whose total annual salary
and bonus paid or accrued during fiscal year 1998 exceeded $100,000.
<TABLE>
<CAPTION>
Long Term Compensation
-------------------------------------
Awards Payouts
Annual Compensation ------------------------- -----------
---------------------------------- Restricted LTIP All Other
Name and Principal Fiscal Stock Payouts Compensation
Position Year Salary ($) Bonus ($) Other ($) Awards($) Options ($) ($)
- ------------------------- ------ ---------- --------- --------- --------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carl P. Boecher 1998 130,426 -- 1,796 (1) -- 65,000 -- 3,069 (2)
President and Chief 1997 120,637 -- 1,656 -- 15,000 -- 2,698
Executive Officer 1996 98,840 7,275 1,241 -- 25,000 -- 1,740
Alan G. Shuler 1998 110,228 -- 1,352 (1) -- 30,000 -- 2,805 (2)
Vice President and 1997 101,364 -- 1,261 -- 10,000 -- 2,586
Chief Financial Officer 1996 97,550 9,300 1,120 -- -- -- 1,943
Michael L. Sorensen 1998 106,269 -- 1,945 (1) -- 30,000 -- 2,616 (2)
Vice President and 1997 62,307 -- 476 -- 50,000 -- 722
General Manager,
Electronic Products
</TABLE>
- ------------------------------
(1) Represents reimbursement for taxes on supplemental benefits.
(2) Represents term insurance premium paid by the Company and 401(K) plan
matching contribution.
Option Grants During 1998 Fiscal Year
The following table provides information regarding stock options
granted during fiscal 1998 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 (1) Expiration Date
- ---- ----------------------- -------------------- --------- ---------------
<S> <C> <C> <C> <C>
Carl P. Boecher 15,000 (2) 4.4% $3.625 01/19/08
50,000 (3) 14.6% $5.00 07/26/08
Alan G. Shuler 10,000 (2) 2.9% $3.625 01/19/08
20,000 (4) 5.8% $5.00 07/26/08
Michael L. Sorensen 10,000 (2) 2.9% $3.625 01/19/08
20,000 (4) 5.8% $3.625 07/26/08
- ------------------
</TABLE>
(1) The exercise price is equal to the fair market value of the common
stock on the date of grant.
<PAGE>
(2) The option was granted on January 20, 1998 and will become exercisable
in full on January 2, 2003, subject to acceleration if certain targets
are met.
(3) The option was granted on July 27, 1998 and will become exercisable to
the extent of 16,500 shares on each of July 27, 1999 and July 27, 2000
and 17,000 shares on July 27, 2001.
(4) The option was granted on July 27, 1998 and will become exercisable to
the extent of 6,600 shares on each of July 27, 1999 and July 27, 2000
and 6,800 shares on July 27, 2001.
Option Exercises During 1998 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 1998
and the number and value of options at December 31, 1998. 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, 1998 December 31, 1998
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable(1)
<S> <C> <C> <C> <C>
Carl P. Boecher -- -- 58,750 exercisable $0 exercisable
96,250 unexercisable $0 unexercisable
Alan G. Shuler -- -- 46,667 exercisable $0 exercisable
40,000 unexercisable $0 unexercisable
Michael L. Sorensen -- -- 18,000 exercisable $6,000 exercisable
72,000 unexercisable $24,000 unexercisable
</TABLE>
(1) Value is calculated on the basis of the difference between the option
exercise price and $3.00, the closing sale price for the Company's
common stock at December 31, 1998 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."
<PAGE>
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 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.
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. The agreement automatically renews for successive one-year terms unless
terminated by either party. The agreement has been automatically renewed for a
current one-year term with an annual base salary of $132,300. The agreement
provides for the payment of a monthly car allowance, and Mr. Boecher currently
receives $600 per month. 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 year after termination of his employment
for any reason.
The Company entered into a one-year employment agreement effective as
of January 1, 1995 with Alan G. Shuler, the Company's Vice President and Chief
Financial Officer. The agreement automatically renews for successive one-year
terms if a termination notice is not given by either party. The agreement has
been automatically renewed for a current one-year term with a $109,000 annual
base salary. The agreement provides for the payment of a monthly car allowance,
and Mr. Shuler currently receives $500. 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
<PAGE>
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.
The Company entered into a one-year employment agreement effective as
of April 16, 1997 with Michael L. Sorensen, the Company's Vice President and
General Manager, Electronic Products. The agreement automatically renews for
successive one-year terms if a termination notice is not given by either party.
The agreement provided for an initial annual base salary of $90,000 and has been
automatically renewed for another one-year term with a base salary of $105,000.
The agreement provides for the payment of a monthly car allowance, and Mr.
Sorensen currently receives $500. The agreement does not provide for a bonus;
however, Mr. Sorensen is eligible to participate in the Company's Management
Incentive Plan. If the agreement is terminated without cause, including by the
Company at the end of any one-year extension or pursuant to the death or
disability of Mr. Sorensen, Mr. Sorensen is entitled to his monthly base salary
for six months. If Mr. Sorensen's employment is terminated within six months of
a change of control, or if he resigns within six months of a change of control
because of diminution of either position responsibilities or remuneration, Mr.
Sorensen shall receive a severance payment equal to his base salary for a
six-month period in effect at the time of the change of control, payable in six
monthly installments. Mr. Sorensen 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. Sorensen also agreed that, during the six-month 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.
The Company and John H. Underwood, a current director and the Company's
former President and Chief Executive Officer, entered into a Separation
Agreement and Release ("Separation Agreement") effective January 1, 1997.
<PAGE>
Pursuant to the Separation Agreement, Mr. Underwood agreed that, through
December 31, 1998, he would 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 provided that, through December
1998, Mr. Underwood would receive $12,500 each month, the amount of his monthly
base salary on December 31, 1996, and he would be entitled to certain other
benefits, including participation in the Company's health coverage plans and
outplacement fees not to exceed $6,000. 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 1998 EMPLOYEE STOCK PURCHASE PLAN
(Proposal #3)
General
On October 20, 1998, the Board of Directors adopted, subject to
shareholder approval, the Company's 1998 Employee Stock Purchase Plan (the
"Stock Purchase Plan"). A general description of the basic features of the Stock
Purchase Plan is presented below, but such description is qualified in its
entirety by reference to the full text of the Stock Purchase Plan, a copy of
which may be obtained without charge upon written request to Alan G. Shuler, the
Company's Chief Financial Officer.
Description of the 1998 Employee Stock Purchase Plan
Purpose. The purpose of the Stock Purchase Plan is to encourage stock
ownership by the Company's employees and in so doing to provide an incentive to
remain in the Company's employ, to improve operations, to increase profits and
to contribute more significantly to the Company's success.
Eligibility. The Stock Purchase Plan permits employees to purchase
stock of the Company at a favorable price and possibly with favorable tax
consequences to the employees. Generally speaking, all full-time and part-time
employees (including officers) of the Company (or of those subsidiaries, if any,
authorized by the Board from time to time) who have been employed by the Company
(or a subsidiary) for at least 30 days and who are customarily employed for more
than 20 hours per week are eligible to participate in any of the phases of the
Stock Purchase Plan. However, any employee who would own (as determined under
the Internal Revenue Code), immediately after the grant of an option, stock
possessing 5% or more of the total combined voting power or value of all classes
of the stock of the Company cannot purchase stock through the Stock Purchase
Plan. Currently, no employee would be excluded from participation by this
limitation. As of April 7, 1999, the Company had approximately 60 full-time and
part-time employees eligible to participate.
Administration; Term. The Stock Purchase Plan will be administered by
the Compensation Committee. The Stock Purchase Plan gives broad powers to the
Committee to administer and interpret the Stock Purchase Plan, including the
authority to limit the number of shares that may be optioned under the Stock
Purchase Plan during a phase. The Stock Purchase Plan will terminate on December
31, 2003, unless the Board of Directors extends the term of the Plan.
<PAGE>
Options. Phases of the Stock Purchase Plan will commence on January 1
of each year (or the first day of such other months as the Board may determine).
The first phase commenced on January 1, 1999 and will end on December 31, 1999.
Before the commencement date of the phase, each participating employee must
elect to have a certain percentage of his or her compensation deducted during
each pay period in such phase; provided, however, that the payroll deductions
during a phase must not exceed 10% of the participant's compensation.
The employee may decrease his or her payroll deduction percentage once
during a phase. The employee may also request that any further payroll
deductions be discontinued until the next phase, or may request a withdrawal of
all accumulated payroll deductions.
Based on the amount of accumulated payroll deductions made at the end
of the phase, shares will be purchased by each employee at the termination date
of such phase (generally twelve months after the commencement date). The
purchase price to be paid by the employees will be the lower of the amount
determined under Paragraphs A and B below:
A. 85% of the closing price of the Company's Common Stock quoted
by the Nasdaq National Market as of the commencement date of
the phase; or
B. 85% of the closing price of the Company's Common Stock quoted
by the Nasdaq National Market as of the termination date of
the phase.
The closing price of the Company's Common Stock on April 7, 1999 was
$2.875 per share.
As required by tax law, an employee may not, during any calendar year,
receive options under the Stock Purchase Plan for shares which have a total fair
market value in excess of $25,000 determined at the time such options are
granted. Any amount not used to purchase shares will be carried over to the next
phase, unless the employee requests a refund of that amount. No interest is paid
by the Company on funds withheld, and such funds are used by the Company for
general operating purposes.
If the employee dies or terminates employment for any reason before the
end of the phase, the employee's payroll deductions will be refunded, without
interest, after the end of the phase.
Amendment. The Board of Directors may, from time to time, revise or
amend the Stock Purchase Plan as the Board may deem proper and in the best
interest of the Company or as may be necessary to comply with Section 423 of the
Internal Revenue Code (the "Code"); provided, that no such revision or amendment
may (i) increase the total number of shares for which options may be granted
under the Stock Purchase Plan except as provided in the case of stock splits,
consolidations, stock dividends or similar events, (ii) modify requirements as
to eligibility for participation in the Stock Purchase Plan, or (iii) materially
increase the benefits accruing to participants under the Stock Purchase Plan,
without prior approval of the Company's stockholders, if such approval is
required to comply with Code Section 423, the requirements of Section 16(b) of
the Securities Exchange Act of 1934 (the "Act"), or other applicable federal or
state laws.
<PAGE>
Shares Reserved. Under the Stock Purchase Plan, 100,000 shares of the
Company's Common Stock are reserved for issuance during the duration of the
Stock Purchase Plan. The Board of Directors shall equitably adjust the number of
shares remaining reserved for grant, the number of shares of stock subject to
outstanding options and the price per share of stock subject to an option in the
event of certain increases or decreases in the number of outstanding shares of
Common Stock of the Company effected as a result of stock splits or
consolidations, stock dividends or other transactions in which the Company
receives no consideration.
Federal Income Tax Consequences of the Stock Purchase Plan. Options
granted under the Stock Purchase Plan are intended to qualify for favorable tax
treatment to the employees under Code Sections 421 and 423. Employee
contributions are made on an after-tax basis. Under existing federal income tax
provisions, no income is taxable to the optionee upon the grant or exercise of
an option if the optionee remains an employee of the Company or one of its
subsidiaries at all times from the date of grant until three months before the
date of exercise. In addition, certain favorable tax consequences may be
available to the optionee if shares purchased pursuant to the Stock Purchase
Plan are not disposed of by the optionee within two years after the date the
option was granted nor within one year after the date of transfer of purchased
shares to the optionee. The Company generally will not receive an income tax
deduction upon either the grant or exercise of the option.
Plan Benefits. Because participation in the Stock Purchase Plan is
voluntary, the future benefits that may be received by participating individuals
or groups under the Stock Purchase Plan cannot be determined at this time.
Vote Required
The Board of Directors recommends that the shareholders approve the
1998 Employee Stock Purchase Plan. Approval of the Stock Purchase Plan requires
the affirmative vote of the greater of (i) a majority of the shares represented
at the Annual Meeting in person or by proxy 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, 1999. 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, 1998, 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.
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.
<PAGE>
SHAREHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
Proposals of shareholders intended to be presented at the annual
meeting in the year 2000 must be submitted to the Company in appropriate written
form on or before December 20, 1999 to be included in the Company's Proxy
Statement and related Proxy for the 2000 meeting. Shareholder proposals intended
to be presented at the annual meeting in 2000 but not be included in the proxy
materials sent to shareholders will not be considered timely unless received by
the Company on or before March 4, 2000.
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, 1998 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,
1998, 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
April 19, 1999
<PAGE>
DATAKEY, INC.
--------------
PROXY
for Annual Meeting to be held May 26, 1999
--------------
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 1999 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 Wednesday, May 26, 1999, 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 five (5).
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Elect Directors. Nominees: Carl P. Boecher, Gary R. Holland,
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 1998 Employee Stock Purchase Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Ratify the appointment of McGladrey & Pullen, LLP as independent
auditors for the Company for the year ending December 31, 1999.
[ ] 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: ___________________, 1999 __________________________________________
__________________________________________
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. 2228415-2
<PAGE>
DATAKEY, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
ARTICLE I - ESTABLISHMENT OF PLAN
1.01 Adoption by Board of Directors. By action of the Board of Directors of
Datakey, Inc. (the "Corporation") on October 20, 1998, subject to
approval by its shareholders, the Corporation has adopted an employee
stock purchase plan pursuant to which eligible employees of the
Corporation and certain of its Subsidiaries may be offered the
opportunity to purchase shares of Stock of the Corporation. The terms
and conditions of this Plan are set forth in this plan document, as
amended from time to time as provided herein. The Corporation intends
that the Plan shall qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code of 1986, as amended from time
to time, (the "Code") and shall be construed in a manner consistent
with the requirements of Code Section 423 and the regulations
thereunder.
1.02 Shareholder Approval and Term. This Plan shall become effective upon
its adoption by the Board of Directors and shall terminate December 31,
2003; provided, however, that the Plan shall be subject to approval by
the shareholders of the Corporation within twelve (12) months after the
Plan is adopted by the Board in the manner provided under Code Section
423 and the regulations thereunder; and provided, further that the
Board of Directors may extend the term of the Plan for such period as
the Board, in its sole discretion, deems advisable. In the event the
shareholders fail to approve the Plan within twelve (12) months after
the Plan is adopted by the Board, this Plan shall not become effective
and shall have no force and effect, participation in the Plan shall
immediately cease, all outstanding options shall immediately be
canceled and all payroll deductions shall be returned to the
Participants without interest. No shares of stock shall be issued to
any Participant for any Phase unless and until the shareholders approve
the Plan within such twelve-month period.
ARTICLE II - PURPOSE
2.01 Purpose. The primary purpose of the Plan is to provide an opportunity
for Eligible Employees of the Corporation to become shareholders of the
Corporation, thereby providing them with an incentive to remain in the
Corporation's employ, to improve operations, to increase profits and to
contribute more significantly to the Corporation's success.
<PAGE>
ARTICLE III - DEFINITIONS
3.01 "Administrator" means the Board of Directors or such Committee
appointed by the Board of Directors to administer the Plan. The Board
or the Committee may, in its sole discretion, authorize the officers of
the Corporation to carry out the day-to-day operation of the Plan. In
its sole discretion, the Board may take such actions as may be taken by
the Administrator, in addition to those powers expressly reserved to
the Board under this Plan.
3.02 "Board of Directors" or "Board" means the Board of Directors of
Datakey, Inc.
3.03 "Compensation" means the Participant's base compensation, excluding
commissions, overtime and all bonuses.
3.04 "Corporation" means Datakey, Inc., a Minnesota corporation.
3.05 "Eligible Employee" means any employee who, as determined on or
immediately prior to an Enrollment Period, is a United States full-time
or part-time employee of the Corporation or one of its Subsidiaries,
has been employed by the Corporation or Subsidiary for at least thirty
(30) days prior to such Enrollment Period and is customarily employed
for more than twenty (20) hours per week.
3.06 "Enrollment Period" means the period determined by the Administrator
for purposes of accepting elections to participate during a Phase from
Eligible Employees.
3.07 "Fiscal Year" means the fiscal year of the Corporation, which is the
twelve-month period beginning January 1 and ending December 31 each
year.
3.08 "Participant" means an Eligible Employee who has been granted an option
and is participating during a Phase through payroll deductions, but
shall exclude those employees subject to the limitations described in
Section 9.03 below.
3.09 "Phase" means the period beginning on the date that the option was
granted, otherwise referred to as the commencement date of the Phase,
and ending on the date that the option was exercised, otherwise
referred to as the termination date of the Phase.
3.10 "Plan" means the Datakey, Inc. 1998 Employee Stock Purchase Plan.
3.11 "Stock" means the voting common stock of the Corporation.
3.12 "Subsidiary" means any corporation defined as a subsidiary of the
Corporation in Code Section 424(f) as of the effective date of the
Plan, and such other corporations that qualify as subsidiaries of the
Corporation under Code Section 424(f) as the Board approves to
participate in this Plan from time to time.
<PAGE>
ARTICLE IV - ADMINISTRATION
4.01 Administration. Except for those matters expressly reserved to the
Board pursuant to any provisions of the Plan, the Administrator shall
have full responsibility for administration of the Plan, which
responsibility shall include, but shall not be limited to, the
following:
(a) The Administrator shall, subject to the provisions of the
Plan, establish, adopt and revise such rules and procedures
for administering the Plan, and shall make all other
determinations as it may deem necessary or advisable for the
administration of the Plan;
(b) The Administrator shall, subject to the provisions of the
Plan, determine all terms and conditions that shall apply to
the grant and exercise of options under this Plan, including,
but not limited to, the number of shares of Stock that may be
granted, the date of grant, the exercise price and the manner
of exercise of an option. The Administrator may, in its
discretion, consider the recommendations of the management of
the Corporation when determining such terms and conditions;
(c) The Administrator shall have the exclusive authority to
interpret the provisions of the Plan, and each such
interpretation or determination shall be conclusive and
binding for all purposes and on all persons, including, but
not limited to, the Corporation and its Subsidiaries, the
shareholders of the Corporation and its Subsidiaries, the
Administrator, the directors, officers and employees of the
Corporation and its Subsidiaries, and the Participants and the
respective successors-in-interest of all of the foregoing; and
(d) The Administrator shall keep minutes of its meetings or other
written records of its decisions regarding the Plan and shall,
upon requests, provide copies to the Board.
ARTICLE V - PHASES OF THE PLAN
5.01 Phases. The Plan shall be carried out in one or more Phases of twelve
(12) months each. Unless otherwise determined by the Administrator, in
its discretion, Phases shall commence on January 1 of each fiscal year
during the term of the Plan, with the first phase commencing on January
1, 1999 and ending on December 31, 1999. No two Phases shall run
concurrently.
<PAGE>
5.02 Limitations. The Administrator may, in its discretion, limit the number
of shares available for option grants during any Phase as it deems
appropriate. Without limiting the foregoing, in the event all of the
shares of Stock reserved for the grant of options under Section 12.01
is issued pursuant to the terms hereof prior to the commencement of one
or more Phases or the number of shares of Stock remaining is so small,
in the opinion of the Administrator, as to render administration of any
succeeding Phase impracticable, such Phase or Phases may be canceled or
the number of shares of Stock limited as provided herein. In addition,
if, based on the payroll deductions authorized by Participants at the
beginning of a Phase, the Administrator determines that the number of
shares of Stock which would be purchased at the end of a Phase exceeds
the number of shares of Stock remaining reserved under Section 12.01
hereof for issuance under the Plan, or if the number of shares of Stock
for which options are to be granted exceeds the number of shares
designated for option grants by the Administrator for such Phase, then
the Administrator shall make a pro rata allocation of the shares of
Stock remaining available in as nearly uniform and equitable a manner
as the Administrator shall consider practicable as of the commencement
date of the Phase or, if the Administrator so elects, as of the
termination date of the Phase. In the event such allocation is made as
of the commencement date of a Phase, the payroll deductions which
otherwise would have been made on behalf of Participants shall be
reduced accordingly.
ARTICLE VI - ELIGIBILITY
6.01 Eligibility. Subject to the limitations described in Section 9.03, each
employee who is an Eligible Employee on or immediately prior to the
commencement of a Phase shall be eligible to participate in such Phase.
If, in the discretion of the Administrator, any Phase commences on a
date other than January 1, whether an employee is an Eligible Employee
shall be determined on a date selected by the Administrator, which date
shall be at least thirty (30) days prior to the commencement date of
the Phase.
ARTICLE VII - PARTICIPATION
7.01 Participation. Participation in the Plan is voluntary. An Eligible
Employee who desires to participate in any Phase of the Plan must
complete the Plan enrollment form provided by the Administrator and
deliver such form to the Administrator or its designated representative
during the Enrollment Period established by the Administrator prior to
the commencement date of the Phase.
<PAGE>
7.02 Subsequent Phases. An Eligible Employee who elects to participate in a
Phase of a fiscal year shall be deemed to have elected to participate
in each subsequent Phase unless such Participant elects to discontinue
payroll deductions during a Phase or exercises his or her right to
withdraw amounts previously withheld, as provided under Article X
hereof. In such event, such Participant must complete a change of
election form or a new Plan enrollment form and file such form with the
Administrator during the Enrollment Period prior to the next Phase with
respect to which the Eligible Employee wishes to participate.
ARTICLE VIII - PAYMENT: PAYROLL DEDUCTIONS
8.01 Enrollment. Each Eligible Employee electing to participate shall
indicate such election on the Plan enrollment form and designate
therein a percentage of such Participant's Compensation during each pay
period during the Phase. Subject to the Participant's right to
discontinue payroll deductions as provided in Section 10.02, such
percentage shall be at least one percent (1%) but not more than ten
percent (10%) of such Participant's Compensation to be paid during such
Phase, or such other maximum percentage as the Administrator may
establish from time to time. In order to be effective, such Plan
enrollment form must be properly completed and received by the
Administrator by the due date indicated on such form, or by such other
date established by the Administrator.
8.02 Payroll Deductions. Payroll deductions for a Participant shall commence
with the paycheck issued immediately after the commencement date of the
Phase and shall terminate with the paycheck issued immediately prior to
the termination date of that Phase, unless the Participant elects to
discontinue payroll deductions or exercises his or her right to
withdraw all accumulated payroll deductions previously withheld during
the Phase as provided in Article X hereof. The authorized payroll
deductions shall be made over the pay periods of such Phase by
deducting from the Participant's Compensation for each such pay period
that dollar amount specified by the Participant in the Plan enrollment
form.
Unless the Participant elected to discontinue payroll deductions or
exercised his or her right to withdraw all accumulated payroll
deductions previously withheld during the preceding Phase (in which
event the Participant must complete a change of election form or a new
Plan enrollment form, as the case may be, to continue participation for
any subsequent Phase), the Corporation shall continue to withhold from
such Participant's Compensation the same designated percentage
specified by the Participant in the most recent Plan enrollment form
previously completed by the Participant for all subsequent Phases;
provided, however, that the Participant may, if he or she so chooses,
discontinue payroll deductions for any or all such subsequent Phases by
properly completing a new enrollment form during the Enrollment Period
for such subsequent Phase and delivering such form to the Administrator
by the due date for receipt of such forms for that Phase.
<PAGE>
8.03 Change in Compensation During a Phase. In the event that the
Participant's Compensation is increased or decreased during a Phase for
any reason so that the amount actually withheld on behalf of the
Participant as of the termination date of the Phase is different from
the amount anticipated to be withheld as determined on the commencement
date of the Phase, then the extent to which the Participant may
exercise his or her option shall be based on the amounts actually
withheld on his or her behalf, subject to the limitations in Article
IX. In the event of a change in the pay period of any Participant, such
as from biweekly to monthly, an appropriate adjustment shall be made to
the deduction in each new pay period so as to insure the deduction of
the proper amount authorized by the Participant.
8.04 Decreases During a Phase. In addition to the right to discontinue or
withdraw payroll deductions during a Phase as provided in Article X, a
Participant may decrease the percentage of Compensation designated to
be deducted as payroll deductions during a Phase (but not below 1%) by
completing and filing such forms as the Administrator may require. Such
decrease shall be effective with the next payroll period beginning
after the date that the Administrator receives such forms and shall
apply to all remaining Compensation paid during the Phase. The
Participant may exercise the right to decrease his or her payroll
deductions only once during each Phase.
ARTICLE IX - OPTIONS
9.01 Grant of Option. Subject to Article X, a Participant who has elected to
participate in the manner described in Article VIII and who is employed
by the Corporation or a Subsidiary as of the commencement date of a
Phase shall be granted an option as of such date to purchase that
number of whole shares of Stock determined by dividing the total amount
to be credited to the Participant's account by the option price per
share set forth in Section 9.02(a) below. The option price per share
for such Stock shall be determined under Section 9.02 hereof, and the
number of shares exercisable shall be determined under Section 9.03
hereof.
9.02 Option Price. Subject to the limitations hereinbelow, the option price
for such Stock shall be the lower of the amounts determined under
paragraphs (a) and (b) below:
(a) Eighty-five percent (85%) of the closing price for a share
of the Corporation's Stock as reported on the Nasdaq National
Market, Nasdaq SmallCap Market or on an established securities
exchange as of the commencement date of the Phase; or
<PAGE>
(b) Eighty-five percent (85%) of the closing price for a share
of the Corporation's Stock as reported on the Nasdaq National
Market, Nasdaq SmallCap Market or on an established securities
exchange as of the termination date of the Phase.
In the event that the commencement or termination date of a Phase is a
Saturday, Sunday or holiday, the amounts determined under the foregoing
subsections shall be determined using the price as of the last
preceding trading day.
If the Corporation's Stock is not listed on the Nasdaq National Market,
Nasdaq SmallCap Market or on an established securities exchange, then
the option price shall equal the lesser of (i) eighty-five percent
(85%) of the fair market value of a share of the Corporation's Stock as
of the commencement date of the Phase; or (ii) eighty-five percent
(85%) of the fair market value of such stock as of the termination date
of the Phase. Such "fair market value" shall be determined by the
Board.
9.03 Limitations. No employee shall be granted an option hereunder:
(a) Which permits his or her rights to purchase Stock under
all employee stock purchase plans of the Corporation or its
Subsidiaries to accrue at a rate which exceeds Twenty-Five
Thousand Dollars ($25,000) of fair market value of such Stock
(determined at the time such option is granted) for each
calendar year in which such option is outstanding at any time;
(b) If such employee would own and/or hold, immediately after
the grant of the option, Stock possessing five percent (5%) or
more of the total combined voting power or value of all
classes of stock of the Corporation or of any Subsidiary. For
purposes of determining stock ownership under this paragraph,
the rules of Section 424(d) of the Code and the regulations
thereunder shall apply.
(c) Which, if exercised, would cause the limits established by
the Administrator under Section 5.02 to be exceeded.
9.04 Exercise of Option. Subject to a Participant's right to withdraw in the
manner provided in Section 10.01, a Participant's option for the
purchase of shares of Stock will be exercised automatically on the
termination date of that Phase. However, in no event shall a
Participant be allowed to exercise an option for more shares of Stock
than can be purchased with the payroll deductions accumulated by the
Participant in his or her bookkeeping account during such Phase.
<PAGE>
9.05 Delivery of Shares. As promptly as practicable after the termination of
any Phase, the Corporation's transfer agent or other authorized
representative shall deliver to each Participant herein certificates
for that number of whole shares of Stock purchased upon the exercise of
the Participant's option. The Corporation may, in its sole discretion,
arrange with the Corporation's transfer agent or other authorized
representative to establish, at the direction of the Participant,
individual securities accounts to which will be credited that number of
whole shares of Stock that are purchased upon such exercise, such
securities account to be subject to such terms and conditions as may be
imposed by the transfer agent or authorized representative.
The shares of the Corporation's common stock to be delivered to a
Participant pursuant to the exercise of an option under Section 9.04 of
the Plan will be registered in the name of the Participant or, if the
Participant so directs by written notice to the Administrator prior to
the termination date of the Phase, in the names of the Participant and
one other person the Participant may designate as his joint tenant with
rights of survivorship, to the extent permitted by law.
Any accumulated payroll deductions remaining after the exercise of the
Participant's option shall be returned to the Participant, without
interest, on the first paycheck issued for the payroll period which
begins on or immediately after the commencement date of next Phase;
provided, however, that the Corporation may, under rules of uniform
application, retain such remaining amount in the Participant's
bookkeeping account and apply it toward the purchase of shares of Stock
in the next succeeding Phase, unless the Participant requests a
withdrawal of such amount pursuant to Section 10.01.
ARTICLE X - WITHDRAWAL OR
DISCONTINUATION OF PAYROLL WITHHOLDINGS
10.01 Withdrawal. At any time during the Phase, a Participant may request a
withdrawal of all accumulated payroll deductions then credited to the
Participant's bookkeeping account by completing a change of election
form and filing such form with the Administrator. The Participant's
request shall be effective as of the beginning of the next payroll
period immediately following the date that the Administrator receives
the Participant's properly completed change of election form. As soon
as administratively feasible after such payroll period, all payroll
deductions credited to a bookkeeping account for the Participant will
be paid to such Participant, without interest, and no further payroll
deductions will be made during that Phase or any future Phase unless
the Participant completes a new Plan enrollment form as provided in
Section 8.02 above. If the Participant requests a withdrawal, the
option granted to the Participant under that Phase of the Plan shall
immediately lapse and shall not be exercisable. Partial withdrawals of
payroll deductions are not permitted. A participant may request a
withdrawal once during a Phase.
<PAGE>
Notwithstanding the foregoing, in order to be effective for a
particular Phase, the Participant's request for withdrawal must be
properly completed and received by the Administrator on or before the
December 1 immediately preceding the termination date of the Phase, or
on or before such other date established by the Administrator. Requests
for withdrawal that are received after that due date shall not be
effective and no withdrawal shall be made, unless otherwise determined
by the Administrator.
10.02 Discontinuation. At any time during the Phase, a Participant may also
request that the Administrator discontinue any further payroll
deductions that would otherwise be made during the remainder of the
Phase by completing a change of election form and filing such form with
the Administrator on or before the December 1 immediately preceding the
termination date of the Phase, or on or before such other date
established by the Administrator. The Participant's request shall be
effective as of the beginning of the next payroll period immediately
following the date that the Administrator receives the Participant's
properly completed change of election form. Upon the effective date of
the Participant's request, the Corporation will discontinue making
payroll deductions for such Participant for that Phase, and all future
Phases, unless the Participant completes another change of election
form as provided above.
ARTICLE XI - TERMINATION OF EMPLOYMENT
11.01 Termination. If, on or before the termination date of any Phase, a
Participant's employment terminates with the Corporation for any
reason, voluntarily or involuntarily, including by reason of retirement
or death, the payroll deductions credited to such Participant's
bookkeeping account for such Phase, if any, will be returned to the
Participant, without interest, and any options granted to such
Participant under the Plan shall immediately lapse and shall not be
exercisable. The return of such payroll deductions shall be made to the
Participant as soon as administratively practicable following the
Participant's termination of employment. In the event that such
termination occurs near the end of a Phase and the Corporation is
unable to discontinue payroll deductions for such Participant for his
or her final paycheck(s), such deductions shall still be made but shall
be returned to the Participant as provided herein. In no event shall
the accumulated payroll deductions be used to purchase any shares of
Stock.
If the option lapses as a result of the Participant's death, any
accumulated payroll deductions credited to the Participant's
bookkeeping account will be paid to the Participant's estate, without
interest. In the event a Participant dies after exercise of the
Participant's option but prior to delivery of the Stock to be
transferred pursuant to the exercise of the option under Section 9.04
above, any such Stock and/or accumulated payroll deductions remaining
after such exercise shall be paid by the Corporation to the
Participant's estate.
<PAGE>
The Corporation will not be responsible for or be required to give
effect to the disposition of any cash or Stock or the exercise of any
option in accordance with any will or other testamentary disposition
made by such Participant or in accordance with the provisions of any
law concerning intestacy, or otherwise. No person shall, prior to the
death of a Participant, acquire any interest in any Stock, in any
option or in the cash credited to the Participant's bookkeeping account
during any Phase of the Plan.
11.02 Subsidiaries. In the event that any Subsidiary ceases to be a
Subsidiary of the Corporation, the employees of such Subsidiary shall
be considered to have terminated their employment for purposes of
Section 11.01 hereof as of the date the Subsidiary ceased to be a
Subsidiary of the Corporation.
ARTICLE XII - STOCK RESERVED FOR OPTIONS
12.01 Shares Reserved. One Hundred Thousand (100,000) shares of Stock, which
may be authorized but unissued shares of the Corporation (or the number
and kind of securities to which said 100,000 shares may be adjusted in
accordance with Section 14.01 hereof) are reserved for issuance upon
the exercise of options to be granted under the Plan. Shares subject to
the unexercised portion of any lapsed or expired option may again be
subject to option under the Plan.
12.02 Rights as Shareholder. The Participant shall have no rights as a
shareholder with respect to any shares of Stock subject to the
Participant's option until the date of the issuance of a stock
certificate evidencing such shares as provided in Section 9.05. 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
14.01 hereof.
ARTICLE XIII - ACCOUNTING AND USE OF FUNDS
13.01 Bookkeeping Account. Payroll deductions for Participants shall be
credited to bookkeeping accounts, established by the Corporation for
each such Participant under the Plan. A Participant may not make any
cash payments into such account. Such account shall be solely for
bookkeeping purposes and shall not require the Corporation to establish
any separate fund or trust hereunder. All funds from payroll deductions
received or held by the Corporation under the Plan may be used, without
limitation, for any corporate purpose by the Corporation, which shall
not be obligated to segregate such funds from its other funds. In no
event shall Participants be entitled to interest on the amounts
credited to such bookkeeping accounts.
ARTICLE XIV - ADJUSTMENT PROVISION
14.01 General. Subject to any required action by the shareholders of the
Corporation, in the event of an increase or decrease in the number of
outstanding shares of Stock or in the event the Stock is changed into
or exchanged for a different number or kind of shares of stock or other
securities of the Corporation or another corporation by reason of a
reorganization, merger, consolidation, divestiture (including a
spin-off), liquidation, recapitalization, reclassification, stock
dividend, stock split, combination of shares, rights offering or any
other change in the corporate structure or shares of the Corporation,
the Board (or, if the Corporation is not the surviving corporation in
any such transaction, the board of directors of the surviving
corporation), in its sole discretion, shall adjust the number and kind
of securities subject to and reserved under the Plan and, to prevent
the dilution or enlargement of rights of those Eligible Employees to
whom options have been granted, shall adjust the number and kind of
securities subject to such outstanding options and, where applicable,
the exercise price per share for such securities.
In the event of sale by the Corporation of substantially all of its
assets and the consequent discontinuance of its business, or in the
event of a merger, exchange, consolidation, reorganization, divestiture
(including a spin-off), liquidation, reclassification or extraordinary
dividend (collectively referred to as a "transaction"), after which the
Corporation is not the surviving corporation, the Board may, in its
sole discretion, at the time of adoption of the plan for such
transaction, provide for one or more of the following:
(a) The acceleration of the exercisability of outstanding options
granted at the commencement of the Phase then in effect, to
the extent of the accumulated payroll deductions made as of
the date of such acceleration pursuant to Article VIII hereof;
(b) The complete termination of this Plan and a refund of amounts
credited to the Participants' bookkeeping accounts hereunder;
or
(c) The continuance of the Plan only with respect to completion of
the then current Phase and the exercise of options thereunder.
In the event of such continuance, Participants shall have the
right to exercise their options as to an equivalent number of
shares of stock of the corporation succeeding the Corporation
by reason of such transaction.
<PAGE>
In the event of a transaction where the Corporation survives, then the
Plan shall continue in effect, unless the Board takes one or more of
the actions set forth above. The grant of an option pursuant to the
Plan shall not limit in any way the right or power of the Corporation
to make adjustments, reclassifications, reorganizations or changes in
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.
ARTICLE XV - NONTRANSFERABILITY OF OPTIONS
15.01 Nontransferability. Options granted under any Phase of the Plan shall
not be transferable and shall be exercisable only by the Participant
during the Participant's lifetime.
15.02 Nonalienation. Neither payroll deductions granted to a Participant's
account, nor any rights with regard to the exercise of an option or to
receive Stock under any Phase of the Plan may be assigned, transferred,
pledged or otherwise disposed of in any way by the Participant. Any
such attempted assignment, transfer, pledge or other disposition shall
be null and void and without effect, except that the Corporation may,
at its option, treat such act as an election to withdraw in accordance
with Section 10.01.
ARTICLE XVI - AMENDMENT AND TERMINATION
16.01 General. The Plan may be terminated at any time by the Board of
Directors, provided that, except as permitted in Section 14.01 hereof,
no such termination shall take effect with respect to any options then
outstanding. The Board may, from time to time, amend the Plan as it may
deem proper and in the best interests of the Corporation or as may be
necessary to comply with Code Section 423, as amended, and the
regulations thereunder, or other applicable laws or regulations;
provided, however, no such amendment shall, without the consent of a
Participant, materially adversely affect or impair the right of a
Participant with respect to any outstanding option; and provided,
further, that no such amendment shall:
(a) increase the total number of shares for which options may be
granted under the Plan (except as provided in Section 14.01
herein);
(b) modify the group of Subsidiaries whose employees may be
eligible to participate in the Plan or materially modify any
other requirements as to eligibility for participation in the
Plan; or
(c) materially increase the benefits accruing to Participants
under the Plan;
without the approval of the Corporation's shareholders, if such
approval is required for compliance with Code Section 423, as amended,
and the regulations thereunder, or other applicable laws or
regulations.
ARTICLE XVII - NOTICES
17.01 General. All notices, forms, elections or other communications in
connection with the Plan or any Phase thereof shall be in such form as
specified by the Corporation or the Administrator from time to time,
and shall be deemed to have been duly given when received by the
Participant or his or her personal representative or by the Corporation
or its designated representative, as the case may be.
