0001104659-03-023824.txt : 20031027 0001104659-03-023824.hdr.sgml : 20031027 20031027171737 ACCESSION NUMBER: 0001104659-03-023824 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20031027 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: DATAKEY INC CENTRAL INDEX KEY: 0000704914 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 411291472 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-35977 FILM NUMBER: 03959118 BUSINESS ADDRESS: STREET 1: 407 W TRAVELERS TRAIL CITY: BURNSVILLE STATE: MN ZIP: 55337 BUSINESS PHONE: 6128906850 MAIL ADDRESS: STREET 1: 407 WEST TRAVELERS TRAIL CITY: BURNSVILLE STATE: MN ZIP: 55337 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: LIPKIN RAYMOND A CENTRAL INDEX KEY: 0001056046 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: 161 FERNDALE AVE SOUTH CITY: WAYZATA STATE: MN ZIP: 55391 BUSINESS PHONE: 6124764558 MAIL ADDRESS: STREET 1: 161 FERNDALE AVE SOUTH CITY: WAYZATA STATE: MN ZIP: 55391 SC 13D/A 1 a03-4429_1sc13da.htm SC 13D/A

SEC 1746
(11-02)

Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.

	UNITED STATES	OMB APPROVAL
	SECURITIES AND EXCHANGE COMMISSION	OMB Number: 3235-0145
	Washington, D.C. 20549	Expires: December 31, 2005
	SCHEDULE 13D/A	Estimated average burden hours per response. . 11

Under the Securities Exchange Act of 1934
(Amendment No. 3)*

Datakey, Inc.

(Name of Issuer)

Common Stock, $.05 par value

(Title of Class of Securities)

237909 10 6

(CUSIP Number)

Jonathan B. Levy
Lindquist & Vennum P.L.L.P.
4200 IDS Center
80 South 8th Street
Minneapolis, MN 55402
Tel: 612-371-3211
Fax: 612-371-3207

(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)

October 17, 2003

(Date of Event which Requires Filing of this Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of §240.13d-1(e), 240.13d(f) or 240.13(d)-1(g), check the following box. [ ]

Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See Rule 13d-7 for other parties to whom copies are to be sent.

^* The remainder of this cover page shall be filled out for a reporting person’s initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter the disclosures provided in a prior cover page. The information required in the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 (“Act”) or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).

CUSIP No. 237909 10 6

	1.	Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only). Raymond A. Lipkin

	2.	Check the Appropriate Box if a Member of a Group (See Instructions)
		(a)			[ ]
		(b)			[ ]

	3.	SEC Use Only

	4.	Source of Funds (See Instructions) PF

	5.	Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) [ ]

	6.	Citizenship or Place of Organization State of Minnesota, Country of United States

Number of Shares Beneficially Owned by Each Reporting Person With			7.	Sole Voting Power 2,185,500 **

			8.	Shared Voting Power 110,000

			9.	Sole Dispositive Power 2,185,500 **

			10.	Shared Dispositive Power 110,000

	11.	Aggregate Amount Beneficially Owned by Each Reporting Person 2,296,500 Includes warrants exercisable within 60 days of October 17, 2003 to purchase an aggregate of 1,256,000 shares of common stock and a note convertible within 60 days of October 17, 2003 into 400,000 shares of common stock.

	12.	Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions) [ ]

	13.	Percent of Class Represented by Amount in Row (11) 19.0%

	14.	Type of Reporting Person (See Instructions) IN

Item 1.	Security and Issuer
	(a) Title of Class of Securities: Common stock, $.05 par value
	(b) Name of Issuer: Datakey, Inc. (the “Company”)
	(c) Address of Issuer’s Principal Executive Offices: 407 West Travelers Trail, Burnsville, Minnesota 55337

Item 2.	Identity and Background
	(a) Name of Person Filing: Raymond A. Lipkin
	(b) Residence or Business Address: 161 Ferndale Road South, Wayzata, MN 55391
	(c) Principal Occupation or Employment: Retired, previously an investment advisor
	(d) Conviction in a criminal proceeding during the last five years: None
	(e) Subject, during the last five years, to a judgment, decree or final order enjoining securities laws violations: None
	(f) Citizenship: State of Minnesota, Country of United States

Item 3.	Source and Amount of Funds or Other Consideration
	In connection with the private placement by Datakey, Inc. as described in Item 5(c) below (the “Private Placement”), on October 17, 2003, in exchange for $500,000 of Mr. Lipkin’s personal funds, Datakey, Inc. issued to Mr. Lipkin a secured convertible promissory note due October 17, 2004 in the principal amount of $500,000 (the “Lipkin Note”) and a seven-year warrant to purchase 1,000,000 shares of the Company’s common stock (the “Lipkin Warrant”).

Item 4.	Purpose of Transaction
	Mr. Lipkin has acquired the Lipkin Note and Lipkin Warrant, as described in this Amendment No. 3 to Schedule 13D for personal investment purposes using personal funds.
	Mr. Lipkin may, from time to time, (1) acquire additional shares of common stock or other securities of the Company (subject to availability at prices deemed favorable by Mr. Lipkin) in the open market, in privately negotiated transactions, or otherwise, or (2) attempt to dispose of shares of common stock or warrants to purchase common stock or the Lipkin Note or any other securities beneficially owned by Mr. Lipkin in the open market, in privately negotiated transactions or otherwise.

		Mr. Lipkin does not have any present plans or intentions that would result in or relate to any of the transactions described in subparagraphs (a) through (j) of Item 4 of Schedule 13D.

Item 5.		Interest in Securities of the Issuer
	(a)	Number and Percentage of Class beneficially owned:
		As of October 17, 2003, Mr. Lipkin holds (i) 530,500 shares of the Company’s common stock; (ii) warrants exercisable within 60 days of October 17, 2003 to purchase an aggregate of 1,256,000 shares of the Company’s common stock (including the Lipkin Warrants) and (iii) the Lipkin Note which is convertible within 60 days of October 17, 2003 into 400,000 shares of the Company’s common stock. See Item 5(c) below for a description of assumptions used to calculate the number of shares of common stock into which the Lipkin Note may be convertible.
		In addition, Mr. Lipkin may be deemed to be the beneficial owner of 20,000 shares of common stock held by his adult daughter by virtue of shared voting and dispositive power and 90,000 shares of common stock held by KOLOA Limited Partnership. Mr. Lipkin is the managing general managing partner of KOLOA Limited Partnership and Mr. Lipkin’s spouse is the only other general partner.
		Mr. Lipkin is the beneficial owner of 2,296,500 shares of the Company’s common stock representing 19.0% of the 10,433,840 shares of common stock of the Company outstanding as of October 17, 2003, as disclosed by the Company to Mr. Lipkin in connection with the Private Placement.
	(b)	Voting and Dispositive Power:
		Mr. Lipkin is the beneficial owner of 2,296,500 shares of the Company’s common stock with voting and dispositive power as follows: (i) with respect to the 530,500 shares of the Company’s common stock and warrants to purchase an aggregate of 1,256,000 shares of the Company’s common stock and the Lipkin Note held by Mr. Lipkin individually, Mr. Lipkin exercises sole voting and dispositive control; (ii) with respect to the 20,000 shares of the Company’s common stock held by Mr. Lipkin’s adult daughter, Mr. Lipkin shares dispositive and voting control with his adult daughter; (iii) with respect to the 90,000 shares held by KOLOA Limited Partnership, Mr. Lipkin exercises sole voting and dispositive control as the managing general partner of KOLOA Limited Partnership.
	(c)	Transactions within 60 days:
		On October 17, 2003, Datakey, Inc. completed the private placement (the “Private Placement”) of $2,000,000 aggregate principal amount of secured convertible promissory notes due October 17, 2004 (the “Notes”) and seven-year warrants to purchase an aggregate of 4,000,000 shares of the Company’s common stock at an exercise price of $0.77 per share (the “Warrants”). In connection with the Private Placement, the Company issued and sold to Mr. Lipkin a Note in the principal amount of $500,000 (the “Lipkin Note”) and a Warrant to purchase 1,000,000 shares of the Company’s common stock (the “Lipkin Warrant”).

		If, before the maturity date of the Notes, the Company offers its common stock, preferred stock or any other security that attaches rights to convert into, or acquire, capital stock of the Company (a “Subsequent Financing”), the holders of the Notes will have the right to participate in the Subsequent Financing by exchanging outstanding principal and accrued by unpaid interest related to the Notes into the securities offered in the Subsequent Financing on the same price per share offered in the Subsequent Financing.
		The outstanding principal and accrued but unpaid interest relating to the Notes is convertible at the option of the holder into shares of the Company’s common stock at a price per share equal to the greater of (a) $1.25 or (b) the price at which common stock is issued in a Subsequent Financing or the price at which securities offered in the Subsequent Financing may be convertible into, or exercisable for, common stock.
		For the purpose of calculating the number of shares beneficially owned by Mr. Lipkin upon conversion of the Lipkin Note, this Amendment No. 3 to Schedule 13D assumes the conversion price to be $1.25 per share of common stock and that the entire principal amount of $500,000 of the Lipkin Note is converted, for a total of 400,000 shares of the Company’s common stock issuable upon conversion of the Lipkin Note.
	(d)	Right to Direct the Receipt of Dividends: Not applicable.
	(e)	Last Date on Which Reporting Person Ceased to be a 5% Holder: Not applicable.

Item 6.		Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer
		In connection with the Private Placement, Mr. Lipkin entered into the following agreements each dated October 17, 2003 with respect to the Notes and Warrants:
		(a) Registration Rights Agreement which provides for demand registration rights and incidental registration rights (commonly called “piggy back” registration rights) with respect to the shares of common stock issuable upon exercise of the Warrants and shares of capital stock issuable upon conversion of the Notes;
		(b) Security Agreement and Grant of Security Interest in Patents, Trademarks and Licenses which, through the agents of the investors, grants to the investors in the Private Placement a security interest in certain of the Company’s assets; and
		(c) Inter-Creditor Agreement by which the investors in the Private Placement appointed certain persons as agents to enter into the Security Agreement and Intellectual Property Security Agreement on behalf of the investors in the Private Placement.

Item 7.		Material to Be Filed as Exhibits
		1. Datakey, Inc. Secured Convertible Promissory Note due October 17, 2004 in the principal amount of $500,000 issued to Raymond A. Lipkin.
		2. Warrant dated October 17, 2003 to purchase 1,000,000 shares of common stock of Datakey, Inc. issued to Raymond A. Lipkin.

	3. Registration Rights Agreement dated October 17, 2003 by and among Datakey, Inc. and the investors named therein.
	4. Security Agreement dated October 17, 2003 by Datakey, Inc. in favor of Mark Ravich and Richard Broms, as Agents.
	5. Grant of Security Interest in Patents, Trademarks and Licenses dated October 17, 2003 by Datakey, Inc. in favor of Mark Ravich and Richard Broms, as Agents.
	6. Inter-Creditor Agreement dated October 17, 2003 by and among Mark Ravich and Richard Broms and the lenders named therein.

Signature

After reasonable inquiry and to the best of its knowledge and belief, the undersigned certifies that the information set forth in this statement is true, complete and correct.

	October 27, 2003
	Date
	/s/ Raymond A. Lipkin
	Signature
	Raymond A. Lipkin
	Name/Title

EX-1 3 a03-4429_1ex1.htm EX-1

Exhibit 1

THIS SECURITY HAS NOT BEEN REGISTERED UNDER EITHER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE BLUE SKY LAWS, AND IS SUBJECT TO CERTAIN INVESTMENT REPRESENTATIONS. THIS SECURITY MAY NOT BE SOLD, OFFERED FOR SALE OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER THE ACT AND APPLICABLE BLUE SKY LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

DATAKEY, INC.

SECURED CONVERTIBLE PROMISSORY NOTE


$500,000.00		October 17, 2003

FOR VALUE RECEIVED, Datakey, Inc., a Minnesota corporation (the “Company”), promises to pay to the order of Raymond A. Lipkin, a Minnesota resident, or his successors and assigns (the “Holder”), at 161 Ferndale Road South, Wayzata, Minnesota 55391, or at such other place designated at any time by the Holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of Five Hundred Thousand and 00/100 dollars ($500,000.00), or so much thereof as may be outstanding from time to time, together with interest thereon as set forth herein (this “Note”). This Note is one of several notes being issued by the Company on the date hereof in a bridge financing with aggregate proceeds of $2,000,000.00 (each Note is collectively referred to hereinafter as the “Notes”). Each of the Notes shall be identical to the other Notes except with respect to the principal amount and the name of the holder.

1. Definitions. For purposes of this Note, the following terms shall have the definitions set forth below:

(a) “Acquisition Transaction” means the Company has entered into an agreement which provides for the occurrence of any one of the following: (i) any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation; (ii) any sale, lease, exclusive license, transfer or conveyance to another entity or person of all or substantially all of the assets of the Company or a liquidation of the Company; (iii) any statutory exchange of securities with another entity (except where the Company is the acquiring entity); and (iv) the acquisition of ownership by any person or group of more than 50% of the Company’s voting stock (whether or not approved by the Company’s Board of Directors) after the date hereof (whether or not such acquisition is from the Company or existing shareholders).

(b) “Financing Date” means the date of the closing of a Subsequent Financing pursuant to which the Company receives the first proceeds from the Subsequent Financing.

(c) “Financing Securities” means the shares of the Company’s capital stock sold in the Subsequent Financing or the shares of the Company’s capital stock which may be acquired upon conversion or exercise of the securities sold in the Subsequent

Financing, as applicable.

(d) “Maturity Date” means October 17, 2004.

(e) “Security Agreements” shall mean that certain Security Agreement and that certain Intellectual Property Security Agreement, both dated as of the date hereof, by and between the Company and the Agent (as defined herein).

(f) “Subsequent Financing” means any offering by the Company, commencing between the date hereof and the Maturity Date, of the following: (i) common stock; (ii) preferred stock; or (iii) any other security (including debt securities) that attaches rights to convert into, or acquire, capital stock of the Company.

(g) “Supermajority in Interest” as used herein shall mean the holders of at least seventy percent (70%) of the then outstanding principal amount of all Notes issued as of the date hereof.

2. Maturity. Except as set forth in Section 9 hereof, the entire outstanding principal balance hereof, together with all accrued and unpaid interest thereon, shall be due and payable on the Maturity Date.

3. Interest. This Note shall bear interest on the outstanding principal amount at the rate of ten percent (10%) per annum from the date hereof until the Note is paid in full.

4. Prepayment. This Note may be prepaid by the Company without penalty. Any cash payments made by the Company with regard to any of the Notes will be made simultaneously with regard to all of the Notes in an amount prorated among the Notes in proportion to the outstanding principal balances of each of the Notes.

5. Security; Rank Among the Notes; Appointment of Agents. This Note is secured by all the assets of the Company pursuant to the terms of the Security Agreements, and the payment of this Note shall rank equal in right of payment to each of the other Notes. By accepting and holding this Note, the Holder hereby (a) designates and appoints Mark Ravich and Richard Broms as agents for the Holder (the “Agents”), (b) authorizes the Agents to take such actions, to exercise such powers, and to perform such duties on behalf of the Holder as are expressly delegated to the Agents by the terms of the Security Agreements together with such other powers as are reasonably incidental thereto, and (c) directs the Agents to act in accordance with the Inter-Creditor Agreement, dated as of the date hereof, by and between the Agents and the Holders of the Notes hereof.

6. Conversion Rights; Participation Rights; Issuance of Common Stock Warrant.

(a) At any time prior to the payment in full or other satisfaction in full of this Note, the Holder shall have the right, but not the obligation, to convert some or all of the outstanding principal amount and any accrued and unpaid interest of this Note, into fully paid and nonassessable shares of the Company’s common stock at a price per share equal to the greater of (i) $1.25 and (ii) the price at which common stock is issued in a Subsequent Financing or the price at which securities offered in a Subsequent Financing may be convertible into, or exercisable for, common stock, as applicable.

(b) In the event that a Subsequent Financing is completed on or before the Maturity Date, the Holder hereof shall have the right, but not the obligation, to participate in such Subsequent Financing by exchanging some or all of the outstanding principal amount and any accrued and unpaid interest of this Note, into fully paid and nonassessable shares of Financing Securities concurrently with the closing of the Subsequent Financing on the Financing Date at a price per share equal to the purchase price of the Financing Securities in such Subsequent Financing.

(c) Upon any exchange in (b) above, the Holder shall become a party to the purchase agreement, if any, relating to the Subsequent Financing. By becoming a party to such agreement, the Holder hereof would become subject to the obligations and entitled to the benefits as purchasers of Financing Securities thereunder. Upon any conversion or exchange of this Note described in (a) or (b) above, the Holder hereof shall immediately surrender this Note (or a portion of this Note, as applicable) in exchange for stock certificates representing the appropriate number of shares of common stock or Financing Securities, as applicable, the number of which shall be rounded up to the nearest whole number, such that no fractional shares shall be issued.

(d) To induce the Holder to enter into and accept this Note, the Company agrees to and hereby does grant the Holder a warrant substantially in the form of Exhibit A attached hereto (the “Warrant”). The Warrant shall entitle the Holder to purchase from the Company 1,000,000 shares of the Company’s common stock (the “Warrant Shares”), at an exercise price per share equal to $0.77. Pursuant to the terms of the Warrant, the Holder’s right to purchase such shares shall be immediately exercisable and shall thereafter remain exercisable until October 17, 2010.

7. Payment in the Event of a Default under Section 9(e). If the Company defaults under Section 9(e) hereof prior to (a) the payment or other satisfaction in full by the Company of this Note, or (b) the conversion of this entire Note pursuant to Section 6, then the Company shall pay the Holder hereof, as of the date of the commencement of the event causing a default under Section 9(e) hereof, in complete satisfaction of this Note, an amount equal to two and one-half (2.5) times the sum of (a) the then outstanding principal balance of this Note and (b) the accrued and unpaid interest on the then outstanding principal balance unless such payment is prohibited or limited by law or an act of a court of law.

8. Payment in the Event of an Acquisition Transaction. If the Company consummates an Acquisition Transaction prior to (a) the payment or other satisfaction in full by the Company of this Note, or (b) the conversion of this entire Note pursuant to Section 6, then, within three (3) days of such Acquisition Transaction, the Company shall pay the Holder hereof, in complete satisfaction of this Note, an amount equal to all outstanding principal and accrued interest plus such Holder’s pro rata share of a premium payment of Five Hundred Thousand Dollars ($500,000), which shall be payable to all Holders, in the aggregate.

9. Events of Default and Acceleration. Any part or all of the then outstanding principal balance of this Note and interest due to the Holder hereunder shall become immediately due and payable, upon notice of the occurrence of any of the following events of default (each an “Event of Default”):

(a) the Company fails to make the payment of principal or interest of the Note

when the same becomes due and payable on the Maturity Date; or

(b) the Company fails to cure default in the payment of any indebtedness for borrowed money in excess of $25,000 owing to any other firm or person within the cure period, if any, applicable to such default or the default shall not have been waived in writing; or

(d) the Company shall generally fail to pay, or admit its inability to pay, its debts as they become due; or

(e) the Company shall apply for, consent to, or acquiesce in the appointment of a trustee, receiver or other custodian for itself or any of its property, or make a general assignment composition, or similar device for the benefit of its creditors; or a trustee, receiver or other custodian shall otherwise be appointed for the Company or any of its assets; an attachment or receivership of assets or any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding shall be commenced by or against the Company; or the Company shall take any corporate action to authorize, or in furtherance of, any of the foregoing.

10. Acknowledgement of the Company. The Company hereby represents and warrants that this Note has been authorized by all necessary corporate action, and all shares of the capital stock of the Company that may be issued upon the conversion of this Note will, upon issuance, be fully paid, nonassessable and free from all liens, with respect to the issue thereof, and, without limiting the generality of the foregoing, the Company will take all such action as may be reasonably necessary to insure that all such shares of the capital stock of the Company may be so issued without violation of any applicable law or regulation, or of any requirements of any national securities exchange upon which shares of capital stock of the Company may be listed. During the period within which the rights under Section 6(a) of this Note may be exercised, the Company shall reserve, for the purpose of the exercise of such rights, at least the number of shares of the common stock into which this Note may be convertible.

11. Attorneys’ Fees. If the principal and interest on this Note is not paid when due, whether or not collection is initiated by the prosecution of any suit, or by any other judicial proceeding, or this Note is placed in the hands of an attorney for collection, the Company shall pay, in addition to all other amounts owing hereunder, all court costs and reasonable attorneys’ fees incurred by the Holder in connection therewith.

12. Waiver and Consent. The Company hereby waives presentment for payment, notice of nonpayment, protest, notice of protest and all other notices, filing of suit and diligence in collecting the amounts due under this Note and agrees that the Holder shall not be required first to initiate any suit or exhaust its remedies against any other person or parties in order to enforce payment of this Note.

13. Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of Minnesota, without regard to conflict of laws provisions.

14. Miscellaneous Provisions. This Note shall be binding on the successors and assigns of the Company and inure to the benefit of the Holder, its successors, endorsees and assigns. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Note. This Note may not be changed orally, but only by an agreement in writing and signed by the party against whom enforcement of any waiver, change, modification or discharge is sought.

15. Amendments. Any provision of this Note may be amended or waived by the Supermajority in Interest; provided, however, the consent of the Holder shall be required for any amendment of (a) the principal amount of this Note or (b) the rate of interest applicable hereto.

IN WITNESS WHEREOF the Company has caused its duly authorized officer to execute this Note as of the date first above written.

DATAKEY, INC.

By:		/s/ Alan Shuler

Name:	Alan Shuler

Its:	VP & CFO

EX-2 4 a03-4429_1ex2.htm EX-2

Exhibit 2

WARRANT TO PURCHASE COMMON STOCK
of
DATAKEY, INC.
a Minnesota corporation

Void after October 17, 2010

This certifies that, for value received, Raymond A. Lipkin, or his successors or assigns (“Holder”), is entitled during the Exercise Period (as defined below), subject to the terms set forth below, to purchase from Datakey, Inc., a Minnesota corporation (the “Company”), up to 1,000,000 shares of the common stock of the Company (“Common Stock”) at the price of $0.77 per share (the “Purchase Price”), upon surrender of this Warrant at the principal office of the Company referred to below, with the subscription form attached hereto (the “Subscription Form”) duly executed, and simultaneous payment therefor in the manner specified in Section 1 hereof or in accordance with Section 5 hereof. The Purchase Price and the number of shares of capital stock purchasable hereunder are subject to adjustment as provided in Section 3 of this Warrant. This Warrant is issued in connection with that certain Secured Convertible Promissory Note, dated as of the date hereof, executed by the Company in favor of the Holder (the “Note”) and that certain Secured Convertible Promissory Note Purchase Agreement, dated as of the date hereof executed by the Company and the Holder (the “Purchase Agreement”).

As used herein, “Exercise Date” means the particular date (or dates) on which this Warrant is exercised. “Exercise Period” means the period during which this Warrant is exercisable; such period will begin on the date hereof and will end at 5:30 p.m., Central Standard Time, on October 17, 2010. “Issue Date” means the date hereof. “Warrant” includes this Warrant and any warrant delivered in substitution or exchange therefor as provided herein. “Warrant Shares” means any shares of capital stock acquired by Holder upon exercise of this Warrant.

1. Exercise.

(a) This Warrant may be exercised, in whole or in part, at any time or from time to time, on any business day during the Exercise Period, for all or any part of the number of shares of capital stock called for hereby, by surrendering it at the principal office of the Company at 407 West Travelers Trail, Burnsville, Minnesota 55337, together with a completed and executed Subscription Form, in accordance with Section 5 below or

together with delivery of a certified or cashier’s check in an amount equal to (i) the number and description of the shares of capital stock being purchased, multiplied by (ii) the Purchase Price.

(b) If, after the Issue Date and before the end of the Exercise Period the Company offers for sale capital stock of the Company with rights senior to Common Stock or securities with rights to acquire or convert into capital stock of the Company with rights senior to the Common Stock (a “Subsequent Financing”), then the Holder will have the right to participate in such Subsequent Financing as described in this Section 1(b) on the same terms and conditions on which other investors in such Subsequent Financing participate. The Company will give the Holder written notice of the terms and conditions of each Subsequent Financing at least ten (10) days prior to the closing of each Subsequent Financing in which the Holder has the right to participate under this Section 1(b). The Holder has the right to purchase in the Subsequent Financing up to that number of shares of the capital stock offered in the Subsequent Financing such that the number of shares of common stock into which such capital stock is convertible is equal to the number of shares of common stock into which this Warrant is exercisable. The purchase price of such capital stock shall be the price per share offered in the Subsequent Financing. The Holder may exercise this right by, at the closing of the Subsequent Financing, (i) surrendering some or all of this Warrant to the Company and (ii) paying the purchase price for the shares of capital stock offered in such Subsequent Financing to be purchased by the Holder. At such closing, and upon such surrender and payment, the Company shall (x) deliver to the Holder the number of shares of such capital stock so purchased, (y) cancel the portion of this Warrant so surrendered and (z) issue to the Holder a new warrant representing the rights of the portion of this Warrant not surrendered. The rights of the Holder under this Section 1(b) will terminate on the tenth (10th) business day following the closing of a transaction which results in $5,000,000 of additional equity financing to the Company.

(c) This Warrant may be exercised for less than the full number of shares as of the Exercise Date. Upon such partial exercise, this Warrant shall be surrendered, and a new Warrant of the same tenor and for the purchase of the Warrant Shares not purchased upon such exercise shall be issued to Holder by the Company.

(d) A Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of capital stock issuable upon such exercise shall be treated for all purposes as the holder of such shares of record as of the close of business on such date. As soon as practicable on or after such date, and in any event within five (5) business days thereafter, the Company shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of full shares of capital stock issuable upon such exercise, together with cash, in lieu of any fraction of a share, equal to such fraction of the current fair market value of one full share as reasonably determined in good faith by the Company’s Board of Directors (the “Board”).

2. Payment of Taxes. All shares of capital stock issued upon the exercise of a Warrant shall be validly issued, fully paid and non-assessable and the Company shall pay all taxes and other governmental charges that may be imposed in respect of the issue or delivery thereof, other than any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for shares of capital stock in any name other than that of the registered Holder of the Warrant surrendered in connection with the purchase of such shares, and in such case the Company shall not be required to issue or deliver any stock certificate until such tax or other charge has been paid or it has been established to the Company’s satisfaction that no tax or other charge is due.

3. Certain Adjustments.

(a) Automatic Adjustment. Any Company adjustment in the nature of a stock dividend, grant of stock split rights generally, reclassification, extraordinary dividend or distribution or other event which adjusts the number of authorized or issued capital stock or adds value to the shares (herein of dividends in cash, or property) shall accrue proportionately to the benefit of the Holder and the capital stock callable by the same as provided herein as if, each had exercised the Warrant and held Warrant Shares, plus all prior accretion, from the date of Warrant issuances to the date, or dates, this paragraph is triggered. Accordingly, for example, (i) a two for one common stock split, or a 100% stock dividend doubles the number of Warrant Shares obtainable upon Warrant exercise; (ii) a $10 cash dividend on each share of Common Stock means, on subsequent exercise, the Company issues the Holder $10 (without interest, for purposes of simplicity) per Warrant Share; (iii) an opportunity extended to shareholders to participate in a favorable arrangement (e.g. a so-called pre-emptive rights offering) or tag along rights shall be extended contemporaneously to the Holders on an as-if exercisable basis.

(b) Adjustment for Reorganization, Consolidation, Merger. In case of any reclassification or change of outstanding Company securities or of any reorganization of the Company (or any other entity, the stock or securities of which are at the time receivable upon the exercise of this Warrant) or any similar corporate reorganization on or after the date hereof, then and in each such case the Holder, upon the exercise hereof at any time after the consummation of such reclassification, change, reorganization, merger or conveyance, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise hereof prior to such consummation, the stock or other securities or property to which the Holder would have been entitled upon such consummation if the Holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in paragraph (a); and in each such case, the terms of this Section 3 shall be applicable to the Company securities properly receivable upon the exercise of this Warrant after such consummation.

(c) Adjustments for Dividends in Common Stock. In case at any time after the Issue Date the Company shall declare any dividend on the Common Stock (or any other securities that are at the time receivable upon the exercise of this Warrant) which is payable in shares of Common Stock (or any other securities that are at the time receivable

upon the exercise of this Warrant), the number of Warrant Shares evidenced hereby shall be proportionately increased and the Purchase Price shall be proportionately decreased.

(d) Stock Split and Reverse Stock Split. If the Company at any time or from time to time after the Issue Date effects a subdivision of the outstanding capital stock issuable upon exercise of this Warrant, the Purchase Price then in effect immediately before that subdivision shall be proportionately decreased and the number of shares of capital stock theretofore receivable upon the exercise of this Warrant shall be proportionately increased. If the Company at any time or from time to time after the Issue Date combines the outstanding shares of capital stock into a smaller number of shares, the Purchase Price then in effect immediately before that combination shall be proportionately increased and the number of shares of capital stock theretofore receivable upon the exercise of this Warrant shall be proportionately decreased. Each adjustment under this Section 3(d) shall become effective at the close of business on the date the subdivision or combination becomes effective.

(e) Sale of Shares in Down Round. In the event the Company at any time issues additional Common Stock, preferred stock, options, warrants or convertible securities after the Issue Date, other than securities currently outstanding, at a purchase price less than the then applicable Purchase Price for the Warrant Shares, then and in each such case, the Purchase Price for the Warrant Shares will be automatically reduced to such lower purchase price; provided, however, that no adjustment to the Purchase Price or the number of shares shall be made pursuant to this Section with respect to (i) the grant of options or stock to employees, consultants, officers or directors of the Company pursuant to stock option or stock purchase plans that have been approved by the Board of Directors of the Company on or before the Issue Date or are subsequently adopted by the Board of Directors of the Company and approved by the shareholders of the Company, (ii) the issuance of stock upon the exercise of any such options described in clause (i), (iii) the issuance of stock upon the conversion or exercise of any securities convertible into stock or any options or other rights to purchase stock outstanding or existing on the Issue Date and described on Schedule 3.2(d) to the Purchase Agreement, or (iv) the issuance and exercise of up to 1,295,933 warrants issued or to be issued to holders of warrants that were issued in connection with the Company’s February 2001 financing.

(i) For the purpose of making any adjustment in the Purchase Price as provided in this Section the consideration received by the Company for any issue or sale of Common Stock will be computed by aggregating:

(A) to the extent it consists of cash, the total amount of cash received by the Company (including cash received pursuant to Section 3(e)(ii)) before deduction of any offering expenses payable by the Company and any underwriting or similar commissions, compensation, or concessions paid or allowed by the Company in connection with such issue or sale; and

(B) to the extent it consists of property other than cash, the fair market value of that property as determined in good faith by the Company’s Board of Directors;

and dividing such total amount by the number of shares of common stock and common stock equivalents issued by the Company in such offering.

(ii) If the Company (A) grants or sells any rights or options to subscribe for, purchase, or otherwise acquire shares of Common Stock, or (B) issues or sells any security convertible into shares of Common Stock, then, in each case, when determining the adjustment to the Purchase Price in accordance with Section 3(e)(i) above, the purchase price of such securities will be determined by adding the total amount, if any, received or receivable by the Company as consideration for the granting or sale of the rights or options or the issue or sale of the convertible securities, plus the minimum aggregate amount of additional consideration payable to the Company on exercise or conversion of the securities. Such granting or issue or sale will be considered to be an issue or sale for cash of the maximum number of shares of Common Stock issuable on exercise or conversion at the price per share determined under this Section and the Purchase Price for the Warrant Shares will be adjusted as above provided to reflect (on the basis of that determination) the issue or sale. No further adjustment of the Purchase Price for the Warrant Shares will be made as a result of the actual issuance of shares of Common Stock on the exercise of any such rights or options or the conversion of any such convertible securities.

(f) Accountants’ Certificate as to Adjustment. In each case of an adjustment in the shares of capital stock receivable on the exercise of the Warrant, if the Holder so requests in writing, the Company at its expense shall cause independent public accountants of recognized standing selected by the Company (who may be the independent public accountants then auditing the books of the Company) to compute such adjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment and showing the facts upon which such adjustment is based. The Company will forthwith mail a copy of each such certificate to each holder of a Warrant at the time outstanding.

(g) Other Adjustments. In case any event shall occur as to which the provisions of this Sections 3 are not strictly applicable, but the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles of such sections, then, in each such case, the Company shall, at its expense, appoint a firm of independent public accountants of recognized national standing (who may be the independent public accountants then auditing the books of the Company) to issue a report which shall determine the adjustment, if any, on a basis consistent with the essential intent and principles established in such sections, necessary to preserve without dilution the purchase rights represented by this Warrant. Upon receipt of such report, the Company will promptly mail a copy thereof to the Holder and shall make the adjustments described therein. If at

any time conditions shall arise by reason of action taken by the Company which in the reasonable opinion of the Board of Directors are not adequately covered by the provisions hereof and which might materially and adversely affect the rights of the Holder or if at any time any such conditions are expected to arise by reason of any action contemplated by the Company, the Board of Directors shall make adjustments, if any (not inconsistent with the standards established in this Section), of the Warrant Price (including, if necessary, any adjustment as to the securities for which the Warrants may thereafter be exercisable) and any distribution which is or would be required to preserve the rights of the Holder.

(h) No Dilution or Impairment. The Company will not, by amendment of its Restated Articles of Incorporation, as amended, or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holders of the Warrants against dilution or other impairment.

4. Notices of Record Date. If, either (a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time receivable upon the exercise of the Warrants) for the purpose of entitling them to receive any dividend or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right, or (b) the Company undertakes a voluntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to each holder of a Warrant at the time outstanding a notice specifying, as the case may be, (1) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (2) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such stock or securities at the time receivable upon the exercise of the Warrants) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be mailed at least 30 days prior to the date therein specified.

5. Cashless Exercise.

(a) Holder may, at its option, in lieu of paying the Purchase Price upon exercise of this Warrant pursuant to Section 1 hereof, elect to instead receive a number of warrant Shares computed using the following formula:

X = Y(A-B)

where: X = the number of Warrant Shares issuable to Holder upon exercise under this Section 5; Y = the number of Warrant Shares requested by Holder on the Subscription

Form; A = the Fair Market Value (as defined below) of one share of Common Stock as of the exercise date; and B = the Purchase Price.

(b) As used in this Section 5, “Fair Market Value” of a share of capital stock on any particular date shall mean:

(i) if the exercise is in connection with an Acquisition Transaction (as defined in the Note), the fair market value of the Warrant Shares shall be deemed to be the value received by the holders of such stock pursuant to such Acquisition Transaction; or

(ii) if the exercise is not in connection with an Acquisition Transaction, and the capital stock is traded publicly on an exchange or national quotation system, Fair Market Value means the average of the closing bid and asked prices of the Company’s capital stock quoted in the over-the-counter market summary or the closing price quoted on any exchange on which the common stock is listed, whichever is applicable, as published in the Midwest Edition of the Wall Street Journal (or other reliable source if such quote is not available in the Wall Street Journal) for the ten (10) trading days immediately prior to but not including the date of determination of the fair market value; or

(iii) if (i) or (ii) is not applicable, the fair market value of the Warrant Shares thereof, as mutually determined by the Company and Holder or, if the Company and Holder are unable to reach such agreement, as determined by a nationally recognized independent investment banker or valuation consultant (which has not been retained by Holder or any of its Affiliates for the two years preceding such determination) selected in good faith by Holder’s Board of Directors.

6. Registration Rights. The Company shall take all actions necessary to grant to the Holder with respect to the Warrant Shares the registration rights granted to “Registrable Securities,” as that term is defined in that certain Registration Rights Agreement, dated as of the date hereof, by and between the Company and the Holders of the Notes (the “Registration Rights Agreement”). The Warrant Shares shall be entitled to the registration rights provided in the Registration Rights Agreement for so long as such rights shall be in effect. Thereafter, if at any time the Company shall of its own volition register any securities under the Act, the Company will give Holder at least thirty (30) days prior written notice thereof and, upon request, include in such registration, at the cost and expense of the Company, any capital stock held by Holder, in the amount so requested; provided, however, that the Company’s underwriters do not object to the inclusion of such securities in the registration statement. The Company agrees to use its best efforts, at its expense, to register or qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdiction as Holder shall reasonably request. In connection with any registration statement to be filed on behalf of the Company, the primary responsibility for preparing and filing such registration statement shall be that of the Company, but Holder shall furnish such information to the Company, in writing, as it may reasonably request to assist in the preparation of such registration statement.

7. No Rights as Shareholder. Prior to the exercise of this Warrant, the Holder shall not be entitled to any rights of a shareholder with respect to the Warrant Shares, including without limitation the right to vote such Warrant Shares, receive dividends or other distributions thereon, exercise preemptive rights or be notified of shareholder meetings, and such Holder shall not be entitled to any notice or other communication concerning the business or affairs of the Company. However, nothing in this Section 7 shall limit the right of the Holder to be provided the notices required under this Warrant. In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on such Holder to purchase any securities (upon exercise of this Warrant or otherwise) or as a shareholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company.

8. Compliance with Securities Act. The Holder, by acceptance hereof, agrees that this Warrant and the Warrant Shares to be issued upon exercise hereof are being acquired for investment and not with a view towards resale and that it will not offer, sell or otherwise dispose of this Warrant or any Warrant Shares to be issued upon exercise hereof except under circumstances which will not result in a violation of the Securities Act. Upon exercise of this Warrant, the Holder hereof shall confirm in writing, in the form of Exhibit A, that the Warrant Shares so purchased are being acquired for investment and not with a view toward distribution or resale. This Warrant and all shares of Warrant Shares issued upon exercise of this Warrant (unless registered under the Securities Act) shall be stamped or imprinted with the legend indicated on the first page of this Warrant.

9. Loss or Mutilation. Upon receipt by the Company of evidence satisfactory to it (in the exercise of reasonable discretion) of the ownership of and the loss, theft, destruction or mutilation of any Warrant and (in the case of loss, theft or destruction) of indemnity satisfactory to it (in the exercise of reasonable discretion), and (in the case of mutilation) upon surrender and cancellation thereof, the Company will execute and deliver in lieu thereof a new Warrant of like tenor.

10. Reservation of Capital Stock. The Company shall at all times reserve and keep available for issue upon the exercise of Warrants such number of its authorized but unissued shares of capital stock as will be sufficient to permit the exercise in full of all outstanding Warrants.

11. Notices. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first-class registered or certified mail, postage prepaid, to the address furnished to the Company by Holder.

12. Change; Waiver. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought.

13. Headings. The headings in this Warrant are for purposes of convenience in reference only, and shall not be deemed to constitute a part hereof.

14. Law Governing. This Warrant is delivered in Minnesota and shall be construed and enforced in accordance with and governed by the internal laws, and not the law of conflicts thereof.

IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Warrant as of the date first above written.

	DATAKEY, INC.

	By:	/s/ Alan Shuler

	its: VP & CFO


	ACCEPTED AND AGREED TO:


	/s/ Raymond A. Lipkin
	Sign Name

	Raymond A. Lipkin
	Print Name

SUBSCRIPTION FORM

(To be executed only upon exercise of Warrant)

The undersigned registered owner of this Warrant irrevocably exercises this Warrant and purchases of the number of shares of of DATAKEY, INC., a Minnesota corporation, purchasable with this Warrant, and herewith (check one of the following)

	(a)			makes payment therefore in the amount of $ ; or

	(b)			authorizes Datakey, Inc. to issue the shares in accordance with the Cashless Exercise Provisions of Section 5 of the Warrant.

The undersigned hereby represents and warrants that the undersigned is acquiring such shares for its own account for investment purposes only, and not for resale or with a view to distribution of such shares or any part thereof.

Dated:

			(Signature of Registered Owner)


			(Street Address)


			(City), (State), (Zip)

FORM OF ASSIGNMENT

FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock set forth below:

Name of Assignee		Address		No. of Shares

and does hereby irrevocably constitute and appoint Attorney to make such transfer on the books of DATAKEY, INC., a Minnesota corporation, maintained for the purpose, with full power of substitution in the premises.

Dated:



					(Signature)


					(Print Name)



(Witness)


(Print Name)

EX-3 5 a03-4429_1ex3.htm EX-3

Exhibit 3

REGISTRATION RIGHTS AGREEMENT

This Registration Rights Agreement (this “Agreement”) is made and entered into as of the 17th day of October, 2003, by and among Datakey, Inc., a Minnesota corporation (the “Company”) and each Investor listed on Exhibit A attached hereto and incorporated herein by reference (each, an “Investor” and collectively, the “Investors”).

RECITALS

A. The Company is in need of working capital for the operations of its business and for the marketing of the Company’s “smart cards.”

B. The Investors have agreed to lend the Company an aggregate of $2,000,000 in a bridge financing transaction pursuant to the terms and conditions of that certain Secured Convertible Promissory Note Purchase Agreement, dated as of the date hereof, by and between the Company and the Investors (the “Purchase Agreement”).

C. In connection with the execution of the Purchase Agreement, the Company has executed those certain Secured Convertible Promissory Notes, dated as of the date hereof, in favor of the Investors (the “Notes”) and those certain Warrants to purchase the capital stock of the Company (the “Warrants”).

D. The Company is required to issue shares of capital stock upon conversion of the Notes under certain conditions and is required to issue shares of capital stock upon exercise of the Warrants.

E. In order to induce the Lenders to invest $2,000,000 in the Company, the Company has agreed to enter into this Agreement pursuant to the terms and conditions hereinafter set forth.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Registration Rights. As used in this Agreement, “Registrable Securities” means any and all shares of capital stock, regardless of class or series, issued or issuable upon conversion of the Notes and upon exercise of the Warrants.

2. Demand Registrations.

(a) Investors who together hold at least Five Hundred Thousand (500,000) shares of the Registrable Securities may make one request on or before August 17, 2005 that the Company file a Registration Statement covering the resale or distribution by the Investors of the Registrable Securities (the “Initial Demand Registration”). Any Investor who is, immediately following the closing of the transactions contemplated by the

Purchase Agreement, an Affiliate of the Company may make one request that the Company file a Registration Statement covering the resale or distribution by such Investor of the Registrable Securities provided that such Investor is an Affiliate at the time of such request (an “Affiliate Demand Registration”). The Initial Demand Registration and the Affiliate Demand Registration are each referred to herein as a “Demand Registration.” Upon the receipt of a request for a Demand Registration, the Company will promptly file a registration statement on an appropriate form under the Securities Act of 1933, as amended (the “Securities Act”), relating to all Registrable Securities and shall use its best efforts to cause such registration statement to be declared effective no later than one hundred twenty (120) days after the date of the request from the Investors. Notwithstanding the foregoing, if at the time of the request to register the Registrable Securities, the Company is engaged in, or has fixed plans to engage in any other activity which, in the good faith determination of the Board of Directors of the Company, would be adversely affected by the Demand Registration to the material detriment of the Company, then the Company may at its option direct that such demand registration be delayed for a period not to exceed ninety (90) days. In addition, the Company shall not be required to effect any Demand Registration within ninety (90) days after the effective date of any other registration statement of the Company. For the purposes of this Agreement, “Affiliate” has the meaning given to it in Rule 144 of the Securities Act.

(b) The Demand Registration by the Investors shall state the intended method of disposition of the Registrable Securities. Upon receiving a request for a Demand Registration, the Company shall promptly take such steps as are necessary or appropriate to prepare for the registration of all of the Registrable Securities.

(c) A registration shall not constitute a Demand Registration until it has become effective and remains continuously effective for the Registration Period described in Section 4 hereof. In addition, a registration shall not constitute a Demand Registration if (i) after such Demand Registration has become effective, such registration or the related offer, sale or distribution of Registrable Securities is interfered with by any stop order, injunction or other order or requirement of the Securities and Exchange Commission (the “Commission”) or other governmental agency or court for any reason not attributable to the Investors and such interference is not thereafter eliminated, or (ii) the conditions to closing specified in the underwriting agreement, if any, entered into in connection with such Demand Registration are not satisfied or waived, other than by reason of a failure by the Investors.

(d) Notwithstanding the foregoing, the Company may at any time effect the Initial Demand Registration (prior to receipt of any request by Investors to do so) by filing the registration statement contemplated by this Section 2, notifying all Investors thereof and otherwise complying with all obligations of the Company hereunder in connection with such Initial Demand Registration, including without limitation the obligations of the Company under Section 4.

3. Incidental Registrations. At any time after the date of this Agreement, if the Company proposes to file a registration statement under the Securities Act with respect to an

offering by the Company for its own account or pursuant to a demand registration of any other investor, then the Company shall give written notice of such proposed filing to each of the Investors at least thirty (30) days before the anticipated filing date. Such notice shall describe the proposed registration and distribution and shall offer the Investors the opportunity to register all or a portion of the Registrable Securities then owned by such Investor (an “Incidental Registration”). The Company shall (within ten (10) days of the notice provided for in the preceding sentence) cause the managing underwriter or underwriters of a proposed underwritten offering (the “Managing Underwriter”) to permit each of the Investors who have requested in writing to participate in the Incidental Registration to include such Investors’ Registrable Securities in such offering on the same terms and conditions as the securities of the Company included therein, subject to the right of the Company and its underwriters to reduce the number of shares proposed to be registered pursuant to the Incidental Registration in view of market conditions. Such reduction shall not exceed 25% of the securities to be registered in the Incidental Registration. If there is any reduction in the number of Registrable Securities offered pursuant to the Incidental Registration, then no party other than the Company and the Investors may sell shares registered in the Incidental Registration.

4. Registration Period. The Company shall use its reasonable best efforts to keep any registration statement filed pursuant to this Agreement (a “Registration Statement”) continuously effective in order to permit the prospectus included therein to be lawfully delivered by the Investors for the following periods: (a) in the case of the Initial Demand Registration, until October 17, 2005, and (b) in the case of an Affiliate Demand Registration, for a period of 12 months from the date of its effectiveness. Notwithstanding the foregoing the Company shall not be obligated to keep effective any Registration Statement after all Registrable Securities (x) have been sold pursuant thereto or (y) are no longer restricted securities (as defined in Rule 144 under the Securities Act). The period during which any Registration Statement is required hereunder to be kept effective is referred to as the “Registration Period.” The Company shall be deemed not to have used its best efforts to keep the Registration Statement effective during the requisite period if it voluntarily takes any action that would result in Investors owning Registrable Securities covered thereby not being able to offer and sell such Shares during that period.

5. Compliance with Laws. Notwithstanding any other provisions of this Agreement to the contrary, the Company shall cause all Registration Statements and the related prospectuses and any amendments or supplements thereto, as of the effective date of the Registration Statement, amendment or supplement, (i) to comply in all material respects with the applicable requirements of the Securities Act and the rules and regulations of the Commission and (ii) not to contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

6. Registration - - General Provisions. In connection with any and all Registration Statements, the Company will comply with the following provisions:

(a) if the Registration Statement is to be underwritten, then the Company shall select the underwriters who shall be reasonably acceptable to the Investors selling Registrable Securities thereunder (the “Selling Investors”);

(b) prepare and file with the Commission such amendments to the Registration Statements and supplements to the prospectus contained therein as may be necessary to keep the Registration Statements effective for the period during which the prospectus is required to be current during the Registration Period;

(c) prior to filing the Registration Statements with the Commission, provide the Selling Investors with reasonable opportunities to review and comment on the Registration Statements;

(d) furnish to the Selling Investors and to the underwriters of the securities being registered, if any, such reasonable number of copies of the Registration Statements, preliminary prospectuses, final prospectuses and such other documents as the Selling Investors and the underwriters may reasonably request in order to facilitate the public offering of such securities;

(e) use its diligent, good faith efforts to register or qualify the resale of the Registrable Securities under such state securities or blue sky laws of such jurisdictions as the Selling Investors may request;

(f) notify the Selling Investors promptly after the Company receives notice of the time when the Registration Statement has become effective or a supplement to any prospectus forming a part of such Registration Statement has been filed with the Commission;

(g) notify the Selling Investors promptly of any request by the Commission for the amending or supplementing of the Registration Statements or prospectuses or for additional information;

(h) prepare and file with the Commission, promptly upon the request of the Selling Investors, any amendments or supplements to the Registration Statements or prospectuses which, in the opinion of the Selling Investors, are required under the Securities Act or the rules and regulations promulgated thereunder in connection with the distribution of the Registrable Securities;

(i) prepare and promptly file with the Commission any required amendment or supplement to the Registration Statements or prospectuses, and promptly notify the Selling Investors of the filing of such amendment or supplement to the Registration Statements or prospectuses, as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred, the result of which is that any such prospectus or any other prospectus then in effect would include an untrue statement

of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading;

(j) advise the Selling Investors promptly after it receives notice or obtains knowledge of the issuance of any stop order by the Commission or other governmental agency suspending the effectiveness of such Registration Statements or the initiation or threatening of any proceeding for that purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued;

(k) not file any amendment or supplement to the Registration Statements or prospectuses to which the Selling Investors have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules and regulations promulgated thereunder, after having been furnished with a copy thereof at least five business days prior to the filing thereof, unless in the opinion of counsel for the Company the filing of such amendment or supplement is reasonably necessary to protect the Company from any material liabilities under any applicable federal or state law and such filing will not violate applicable law;

(l) give the Selling Investors 30 days’ written notice prior to the voluntary termination of any registration statement in an Incidental Registration;

(m) at the request of the Selling Investors, furnish on the effective date of the Registration Statement: (i) opinions, dated such respective dates, of the counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the Selling Investors, covering such matters as the underwriters or Selling Investors may reasonably request, and (ii) letters, dated such respective dates, from the independent certified public accountants of the Company, addressed to the underwriters, if any, and to the Selling Investors, covering such matters as the underwriters or the Selling Investors may reasonably request, in which letter such accountants shall state (without limiting the generality of the foregoing) that they are independent certified public accountants within the meaning of the Securities Act and that in the opinion of such accountants the financial statements and other financial data of the Company included in the Registration Statement or the prospectus or any amendment or supplement thereto comply in all material respects with the applicable accounting requirements of the Securities Act.

7. Registration Expense. The Company shall pay all Registration Expenses (as defined below) in connection with the inclusion of the Registrable Shares in any registration statement, or application to register or qualify such shares under state securities laws, filed by the Company hereunder. For purposes of this Agreement, the term “Registration Expenses” means the filing fees payable to the Commission, any state agency and the National Association of Securities Dealers (the “NASD”); the fees and expenses of the Company’s legal counsel and independent certified public accountants in connection with the preparation and filing of the Registration Statements (and all amendments and supplements thereto) with the Commission;

and all expenses relating to the printing of the Registration Statements, prospectuses and various agreements executed in connection with the Registration Statements. The Company shall also bear all registration expenses of the Selling Investors (exclusive of underwriting discounts and commissions), including the expenses of one special counsel of the Selling Investors to be selected by a majority in interest of the Selling Investors.

8. Indemnification. With respect to the registration of the resale of the shares of Registerable Securities:

(a) To the fullest extent permitted by law, the Company will indemnify and hold harmless the Selling Investors, and their respective officers, directors, equity holders, employees, agents, independent contractors and underwriters (as defined in the Securities Act) and each person, who controls the Investors or its underwriters within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (all such persons indemnified under this subsection shall be referred to herein as the “Indemnified Parties”), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a “Violation”) by the Company: (i) any untrue statement of a material fact contained in the Registration Statements, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the offering covered by the Registration Statements; and the Company will reimburse the Indemnified Parties for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished to it expressly for use in connection with such registration by the Indemnified Parties.

(b) To the fullest extent permitted by law, each Selling Investor will, severally and not jointly, indemnify and hold harmless the Company, each of its directors, each of its officers, each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other investor selling securities under the Registration Statements against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such investor may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Selling Investor and

directly incorporated into the Registration Statements; and such Investor will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other investor, in connection with investigating or defending any such loss, claim, damage, liability or action if it is judicially determined that there was such a Violation; provided however, that in no event shall any indemnity under this Section exceed the gross proceeds from the offering received by such Selling Investor unless the Violation is the result of fraud on the part of such Selling Investor.

(c) The obligation of the Company and each Selling Investor under this Section shall survive the completion of any offering for resale of shares of the Registerable Securities in the Registration Statements, and otherwise.

9. Termination of Rights. The registration rights granted under this Agreement shall terminate as to any Investor on the date on which all shares held by such Investor can be resold without restrictions pursuant to Rule 144 promulgated by the Securities and Exchange Commission, as amended from time to time.

10. Miscellaneous.

(a) Except as otherwise provided herein, the provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given or made unless the Company has obtained the written consent of the holders of at least 70% of the outstanding principal remaining on the Notes.

(b) All notices and other communications provided for or permitted hereunder shall be made by hand delivery, telex, facsimile, overnight courier or registered first-class mail to the address set forth above for the Company and to the addresses set forth on Exhibit A, if to the Investors. All such notices and communications shall be deemed to have been duly given when delivered, if by hand, overnight courier or mail; when the appropriate answer back is received, if by telex; and when transmission is confirmed by the sending unit, if by facsimile.

(c) This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and both of which taken together shall constitute one and the same agreement.

(d) The headings to this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

(e) This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota without giving effect to the principles of choice or conflict of law thereof.

(f) In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any

respect for any reason, the validity, legality and enforceability of such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the Investors and the Company shall be enforceable to the fullest extent permitted by law.

(g) The remedies provided for in this Agreement shall be cumulative and in addition to all other remedies available, at law or in equity, and nothing herein shall limit any party’s right to pursue actual damages for any failure to comply with the terms of this Agreement.

IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above:

	DATAKEY, INC., a Minnesota corporation


	By:
		Name:
		Title:

IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above:

	INVESTORS:




	By:

	Name:

	Title:

EX-4 6 a03-4429_1ex4.htm EX-4

Exhibit 4

SECURITY AGREEMENT

THIS SECURITY AGREEMENT (the “Agreement”), dated and effective as of this 17th day of October, 2003, is made by DATAKEY, INC., a Minnesota corporation, with its chief executive office at 407 West Travelers Trail, Burnsville, Minnesota 55337 (hereinafter referred to as the “Debtor”), in favor of Mark Ravich and Richard Broms, each an individual, as agents (the “Agents”) for the benefit of all the investors (the “Lenders”) who purchased those certain Secured Convertible Promissory Notes issued by the Debtor dated of even date herewith (the “Secured Notes”) pursuant to that certain Secured Convertible Promissory Note Purchase Agreement, dated as of the date hereof, by and between the Debtor and the Lenders (the “Purchase Agreement”).

A. The Debtor intends to issue to the Lenders and the Lenders intend to purchase the Secured Notes from the Debtor pursuant to the Purchase Agreement, dated as of the date hereof, in the aggregate principal amount of $2,000,000.

B. The Purchase Agreement and the Secured Notes provide for the Lenders to make certain loans for the account of the Debtor and require the Debtor to grant the Agents, for the benefit of the Lenders, a security interest in all of the Debtor’s assets pursuant to the terms of this Agreement and that certain Intellectual Property Agreement, dated even herewith, by and among the Debtor and the Agents (the “Intellectual Property Security Agreement”).

NOW THEREFORE, in consideration of the premises set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is hereby agreed as follows:

ARTICLE I

DEFINITIONS

As used herein, the following terms shall have the meanings set forth in this Section. Other terms defined herein shall have the meanings ascribed to them herein.

“Accounts” shall have the meaning provided in Article 9.

“Article 9” shall mean Article 9 of the UCC.

“Chattel Paper” shall have the meaning provided in Article 9 and shall include, without limitation, all Electronic Chattel Paper and Tangible Chattel Paper.

“Collateral” shall mean all property in which a security interest is granted hereunder.

“Commercial Tort Claim” shall have the meaning provided in Article 9.

“Controlled Property” shall mean property of every kind and description in which Debtor has or may acquire any interest, now or hereafter at any time in the possession or control of the

Agent or the other lenders for any reason and all dividends and distributions on or other rights in connection with such property.

“Data Processing Records and Systems” shall mean all of Debtor’s now existing or hereafter acquired electronic data processing and computer records, software (including, without limitation, all “Software” as defined in Article 9), systems, manuals, procedures, disks, tapes and all other storage media and memory.

“Default” shall mean any event which if it continued uncured would, with notice or lapse of time or both, constitute an Event of Default.

“Document” shall have the meaning provided in Article 9.

“Electronic Chattel Paper” shall have the meaning provided in Article 9.

“Equipment” shall have the meaning provided in Article 9.

“Event of Default” shall have the meaning specified in Article VI hereof.

“Fixtures” shall have the meaning provided in Article 9.

“General Intangibles” shall have the meaning provided in Article 9 and shall include, without limitation, all Payment Intangibles.

“Debtor” shall have the meaning set forth in the preamble hereto.

“Instruments” shall have the meaning provided in Article 9.

“Insurance Proceeds” shall mean all proceeds of any and all insurance policies payable to Debtor with respect to any Collateral, or on behalf of any Collateral, whether or not such policies are issued to or owned by Debtor.

“Inventory” shall have the meaning provided in Article 9.

“Investment Property” shall have the meaning provided in the UCC.

“Letter of Credit Rights “ shall have the meaning provided in Article 9.

“Payment Intangibles” shall have the meaning provided in Article 9.

“Proceeds” shall have the meaning provided in Article 9.

“Products” shall mean any goods now or hereafter manufactured, processed or assembled with any of the Collateral.

“Supporting Obligations” shall have the meaning provided in Article 9.

“Tangible Chattel Paper” shall have the meaning provided in Article 9.

“UCC” shall mean the Uniform Commercial Code as enacted in the State of Minnesota, as amended from time to time.

ARTICLE II

SECURITY INTERESTS

As security for the payment of each and every debt, liability, and obligation of every type and description which the Debtor may now or at any time owe to the Lenders pursuant to the terms of the Secured Notes (the “Obligations”), Debtor hereby grants to the Agents, for the benefit of the Lenders, a first priority security interest in all of Debtor’s now owned or hereafter acquired or arising:

Accounts;

Chattel Paper;

Commercial Tort Claims, if any, described on Exhibit A attached hereto and incorporated herein by reference;

Controlled Property;

Documents;

Equipment and Fixtures;

General Intangibles;

Instruments;

Inventory;

Investment Property;

Letter of Credit Rights;

Proceeds (whether cash or non-cash Proceeds, including Insurance Proceeds and non-cash Proceeds of all types);

Products of all the foregoing; and

Supporting Obligations.

ARTICLE III

REPRESENTATIONS AND COVENANTS OF DEBTOR

Debtor represents, warrants and covenants that:

3.1 Authorization. The execution and performance of this Agreement have been duly authorized by all necessary action and do not and will not: (a) require any consent or approval of the shareholders of any entity, or the consent of any governmental entity; or (b) violate any provision of any indenture, contract, agreement or instrument to which it is a party or by which it is bound.

3.2 Title to Collateral. Debtor has good and marketable title to all of the Collateral and none of the Collateral is subject to any security interest except for the security interest created pursuant to this Agreement, the Intellectual Property Security Agreement, or other security interests listed on Exhibit A (such other security interests being “Permitted Liens”).

3.3 Liens. The security interest granted hereunder is granted to the Agent, for the benefit of the Lenders, on a pro rata basis.

3.4 Disposition or Encumbrance of Collateral. Debtor will not encumber, sell or otherwise transfer or dispose of the Collateral without the prior written consent of the Agents except as provided in this paragraph. Until a Default or Event of Default has occurred and is continuing, Debtor may sell Collateral consisting of: (a) Inventory in the ordinary course of business provided that Debtor receives as consideration for such sale an amount not less than the fair market value of the Inventory at the time of such sale; and (b) Equipment and Fixtures which in the judgment of Debtor have become obsolete or unusable in the ordinary course of business, provided that all net Proceeds greater than $20,000 of such sales of Equipment and Fixtures are delivered directly to the Agents for application to the Obligations in an amount prorated among the Secured Notes in proportion to the outstanding principal balance of each of the Secured Notes.

3.5 Maintenance of Tangible Collateral. Debtor will maintain the tangible Collateral in good condition and repair. At the time of attachment and perfection of the security interest granted pursuant hereto and thereafter, all tangible Collateral will be located and will be maintained only at the locations set forth on Exhibit A hereto. Except as otherwise permitted by Section 3.4, Debtor will not remove such Collateral from such locations unless, prior to any such removal, Debtor has given written notice to the Agents of the location or locations to which Debtor desires to remove the Collateral, the Agents have given their written consent to such removal, and Debtor has delivered to the Agents acknowledgment copies of financing statements filed where appropriate to continue the perfection of the security interest granted hereunder as a first priority security interest therein. The Agents’ security interest attaches to all of the Collateral wherever located and Debtor’s failure to inform the Agents of the location of any item or items of Collateral shall not impair the Agents’ security interest therein. Debtor hereby authorizes the Agents to file the financing statement in the form set forth in Exhibit B.

3.6 Notation on Chattel Paper. For purposes of the security interest granted pursuant to this Agreement, the Agents, for the benefit of the Lenders, have been granted a direct security interest in all Chattel Paper constituting part of the Collateral and such Chattel Paper is not claimed merely as Proceeds of Inventory. Upon the Agents’ request, Debtor will deliver to the Agents the original of all Chattel Paper. Debtor will not execute any copies of such Chattel Paper constituting part of the Collateral other than those which are clearly marked as a copy. The Agents may stamp any such Chattel Paper with a legend reflecting the Agents’ security interest therein.

3.7 Protection of Collateral. All expenses of protecting, storing, warehousing, insuring, handling and shipping of the Collateral, all costs of keeping the Collateral free of any liens, encumbrances and security interests prohibited by this Agreement and of removing the same if they should arise, and any and all excise, property, sales and use taxes imposed by any state, federal or local authority on any of the Collateral or in respect of the sale thereof, shall be borne and paid by Debtor and if Debtor fails to promptly pay any expenses or taxes when due, the Agent may, at his option, but shall not be required to pay the same whereupon the same shall constitute Obligations and shall be secured by the security interest granted hereunder.

3.8 Insurance. Debtor will procure and maintain, or cause to be procured and maintained, insurance issued by responsible insurance companies insuring the Collateral against damage and loss by theft, fire, collision (in the case of motor vehicles), and such other risks as are usually carried by owners of similar properties.

3.9 Compliance with Law. Debtor will not use the Collateral, or knowingly permit the Collateral to be used, for any unlawful purpose or in violation of any federal, state or municipal law.

3.10 Additional Documentation. During the period of time when any Secured Notes are outstanding, Debtor will execute, from time to time, such financing statements, assignments, and other documents covering the Collateral, including Proceeds, as the Agents may reasonably request in order to create, evidence, perfect, maintain or continue the security interest in the Collateral (including additional Collateral acquired by Debtor after the date hereof), and Debtor will pay the cost of filing the same in all public offices in which the Agents may deem filing to be appropriate and will notify the Agents promptly upon acquiring any additional Collateral that may require an additional filing. Upon request, Debtor will deliver to the Agents all Debtor’s Documents, Chattel Paper and Instruments constituting part of the Collateral.

3.11 Chief Executive Office; State of Incorporation. The location of the chief executive office of Debtor is located in Minnesota and will not be changed from such state without 30 days’ prior written notice to the Agents. Debtor warrants that its books and records concerning Accounts and Chattel Paper constituting part of the Collateral are located at its chief executive office. Debtor’s state of incorporation is Minnesota and Minnesota has been its state of incorporation since the date of Debtor’s incorporation. Debtor will not change its state of incorporation from Minnesota without 30 days’ prior written notice to the Agents, the Agents have given their written consent to such change, and Debtor has delivered to the Agents acknowledgment copies of financing statements filed where appropriate to continue the perfection of the Agent’s security interest as a first priority security interest therein.

3.12 Name of Debtor. Debtor’s exact legal name and type of legal entity is as set forth in the preamble hereto. Debtor has not used any other name within the past five years except those described on Exhibit A attached hereto. Neither Debtor nor, to Debtor’s knowledge, any predecessor in title to any of the Collateral has executed any financing statements or security agreements presently effective as to the Collateral except those described on Exhibit A attached hereto.

3.13 Power of Attorney. Debtor appoints the Agents, or any other person whom the Agents may from time to time designate, as Debtor’s attorney with power, to: (a) endorse Debtor’s name on any checks, notes, acceptances, drafts or other forms of payment or security evidencing or relating to any Collateral that may come into the Agent’s possession; (b) sign Debtor’s name on any invoice or bill of lading relating to any Collateral, on drafts against customers, on schedules and confirmatory assignments of Accounts, Chattel Paper, Documents or other Collateral, on notices of assignment, financing statements under the UCC and other public records, on verifications of accounts and on notices to customers; (c) notify the post office authorities to change the address for delivery of Debtor’s mail to an address designated by the Agents; (d) receive and open all mail addressed to Debtor; (e) send requests for verification of

Accounts, Chattel Paper, Instruments or other Collateral to customers; and (f) do all things necessary to carry out this Agreement; provided, however, that so long as no Event of Default has occurred and is continuing, the Agents shall not exercise the powers granted pursuant to this Section 3.13(c) or (d). Debtor ratifies and approves all acts of the attorney taken within the scope of the authority granted. Neither the Agents nor their attorneys will be liable for any acts of commission or omission nor for any error in judgment or mistake of fact or law, except for its willful misconduct or gross negligence. This power, being coupled with an interest, is irrevocable so long as any Obligation remains unpaid. Debtor waives presentment and protest of all instruments and notice thereof, notice of default and dishonor and all other notices to which Debtor may otherwise be entitled.

ARTICLE IV

COLLECTIONS

Except as otherwise provided in this Article IV, Debtor shall continue to collect, at its own expense, all amounts due or to become due to Debtor under the Accounts constituting part of the Collateral and all other Collateral. In connection with such collections, Debtor may take (and, at either Agent’s request shall take) such action as Debtor or the Agents may deem necessary or advisable to enforce collection of the Accounts and such other Collateral; provided, however, that the Agents shall have the right at any time after the occurrence and during the continuance of an Event of Default, without giving written notice to Debtor of the Agents’ intention to do so, to notify the account debtors under any Accounts or obligors with respect to such other Collateral of the assignment of such Accounts and such other Collateral to the Agents and to direct such account debtors or obligors to make payment of all amounts due or to become due to Debtor thereunder directly to the Agents and, upon such notification and at the expense of Debtor, to enforce collection of any such Accounts or other Collateral, and to adjust, settle or compromise the amount or payment thereof in the same manner and to the same extent as Debtor might have done, but unless and until the Agents do so or give Debtor other instructions, Debtor shall make all collections for the Agents.

ARTICLE V

ASSIGNMENT OF INSURANCE

Debtor hereby assigns to the Agents, as additional security for payment of the Obligations, any and all monies due or to become due under, and any and all other rights of Debtor with respect to, any and all policies of insurance covering the Collateral. So long as no Default or Event of Default has occurred and is continuing, Debtor may itself adjust and collect for any losses for all occurrences during any of Debtor’s fiscal years and Debtor may use the resulting Insurance Proceeds for the replacement, restoration or repair of the Collateral. After the occurrence and during the continuance of a Default or an Event of Default, the Agents may (but need not) in their own names or in Debtor’s name execute and deliver proofs of claim, receive such monies, and settle or litigate any claim against the issuer of any such policy and Debtor directs the issuer to pay any such monies directly to the Agents and the Agents, at their sole discretion and regardless of whether the Agents exercise their right to collect Insurance Proceeds under this sentence, may apply any Insurance Proceeds to the payment of the Obligations, whether due or not, in such order and manner as the Agents may elect or may

permit Debtor to use such Insurance Proceeds for the replacement, restoration or repair of the Collateral.

ARTICLE VI

EVENTS OF DEFAULT

Debtor shall be in default under this Agreement upon the happening of any of the following events or conditions (hereinafter referred to as an “Event of Default”): (a) Debtor fails to perform or observe any agreement, covenant, or condition required under this Agreement; or (b) Any warranty or representation made by Debtor in this Agreement shall be or becomes false or misleading in any material respect; or (c) Any Event of Default under the Secured Notes which is not waived in writing by the Agents, shall occur; (d) Any breach of the Purchase Agreement which is not waived in writing by the Agents; (e) Any breach of the Registration Rights Agreement, dated as of the date hereof, by and between the Debtor and each Lender (the “Registration Rights Agreement”) which is not waived in writing by the Agents; or (d) Any Event of Default under the Intellectual Property Security Agreement which is not waived in writing by the Agents, shall occur.

ARTICLE VII

RIGHTS AND REMEDIES ON DEFAULT

Upon the occurrence of an Event of Default, if Debtor has not cured such Event of Default within ten business days after written notice is sent to Debtor, then at any time thereafter until such Event of Default is cured to the satisfaction of the Agents, and in addition to the rights granted to the Agents under Articles IV and V hereof, the Agents may exercise any one or more of the following rights and remedies stated in this Article VII; provided, however, that the Agents shall have no right to exercise any remedial actions with regard to the Collateral, whether pursuant to this Article VII or applicable law, unless the Agents have obtained the prior written consent of the holders of more than fifty percent (50%) of the then outstanding principal amount of all Secured Notes issued on the date hereof. Upon receipt of such written consent, the Agents may:

7.1 Acceleration of Obligations. Declare any and all Obligations to be immediately due and payable, and the same shall thereupon become immediately due and payable without further notice or demand.

7.2 Deal with Collateral. In the name of Debtor or otherwise, demand, collect, receive and give receipt for, compound, compromise, settle and give acquittance for and prosecute and discontinue any suits or proceedings in respect of any or all of the Collateral.

7.3 Realize on Collateral. Take any action which the Agents may deem reasonably necessary or desirable in order to realize on the Collateral, including, without limitation, the power to perform any contract, to endorse in the name of Debtor any checks, drafts, notes, or other instruments or documents received in payment of or on account of the Collateral. The Agents may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. The Agents may sell the Collateral

without giving any warranties as to the Collateral. The Agents may specifically disclaim any warranties of title or the like. This procedure will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral.

7.4 Access to Property. Enter upon and into and take possession of all or such part or parts of the properties of Debtor, including lands, plants, buildings, machinery, equipment, Data Processing Records and Systems and other property as may be necessary or appropriate in the reasonable judgment of the Agents, to permit or enable the Agents to store, lease, sell or otherwise dispose of or collect all or any part of the Collateral, and use and operate said properties for such purposes and for such length of time as the Agents may reasonably deem necessary or appropriate for said purposes without the payment of any compensation to Debtor therefor. Debtor shall provide the Agents with all information and assistance requested by the Agents to facilitate the storage, leasing, sale or other disposition or collection of the Collateral after an Event of Default has occurred and is continuing.

7.5 Other Rights. Exercise any and all other rights and remedies available to it by law or by agreement, including rights and remedies under the UCC as adopted in the relevant jurisdiction or any other applicable law, and in connection therewith, the Agents may require Debtor to assemble the Collateral and make it available to the Agents at a place to be designated by the Agents, and any notice of intended disposition of any of the Collateral required by law shall be deemed reasonable if such notice is mailed or delivered to Debtor at its address as shown on the Agents’ records at least 10 days before the date of such disposition.

7.6 Application of Proceeds. All proceeds of Collateral shall be applied in accordance with Minnesota Statutes Section 336.9-608, and such proceeds applied toward the Obligations shall be applied to all of the Secured Notes in an amount prorated among the Secured Notes in proportion to the outstanding principal balance of each of the Secured Notes.

ARTICLE VIII

MISCELLANEOUS

8.1 No Liability on Collateral. It is understood that the Agents do not in any way assume any of Debtor’s obligations under any of the Collateral. Debtor hereby agrees to indemnify the Agents against all liability arising in connection with or on account of any of the Collateral, except for any such liabilities arising on account of the Agents’ gross negligence or willful misconduct.

8.2 No Waiver. The Agents shall not be deemed to have waived any of their rights hereunder or under any other agreement, instrument or paper signed by Debtor unless such waiver be in writing and signed by the Agents. No delay or omission on the part of the Agents in exercising any right shall operate as a waiver of such right or any other right. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion.

8.3 Remedies Cumulative. All rights and remedies of the Agents shall be cumulative and may be exercised singularly or concurrently, at their option, and the exercise or enforcement

of any one such right or remedy shall not bar or be a condition to the exercise or enforcement of any other.

8.4 Governing Law. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT, SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, except to the extent that the perfection of the security interest hereunder, or the enforcement of any remedies hereunder, with respect to any particular Collateral shall be governed by the laws of a jurisdiction other than the State of Minnesota.

8.5 Expenses. Debtor agrees to pay the reasonable attorneys’ fees and legal expenses incurred by the Agents in the exercise of any right or remedy available to them under this Agreement, whether or not suit is commenced, including, without limitation, attorneys’ fees and legal expenses incurred in connection with any appeal of a lower court’s order or judgment.

8.6 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of Debtor and the Agents.

8.7 Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.

8.8 No Obligation to Pursue Others. The Agents have no obligation to attempt to satisfy the Obligations by collecting them from any other person liable for them and the Agents may release, modify or waive any Collateral provided by any other person to secure any of the Obligations, all without affecting the Agents’ rights against Debtor. Debtor waives any right it may have to require the Agents to pursue any third person for any of the Obligations.

8.9 Termination. This Agreement shall terminate upon (a) the payment in full or other satisfaction of the Secured Notes by the Debtor, or (b) the conversion of all of the outstanding balance of the principal and accrued interest under the Secured Notes into fully paid and nonassessable shares of capital stock of the Company pursuant to Section 6 of the Secured Notes. Upon the Debtor’s request, the Agents shall promptly after termination of this Agreement execute and deliver to the Debtor (at the Debtor’s expense) such documents and instruments as are necessary to evidence such termination and release of the security interest granted herein on any applicable public record.

IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the date and year first above written.

		DATAKEY, INC. a Minnesota corporation


		By:
		Its:


Accepted and Agreed to by the AGENTS:


	Mark Ravich


	Richard Broms

EX-5 7 a03-4429_1ex5.htm EX-5

Exhibit 5

GRANT OF SECURITY INTEREST IN
PATENTS, TRADEMARKS AND LICENSES

THIS GRANT OF SECURITY INTEREST IN PATENTS, TRADEMARKS AND LICENSES (this “Agreement”) dated and effective as of this 17th day of October, 2003, is made by DATAKEY, INC., a Minnesota corporation, with its chief executive office at 407 West Travelers Trail, Burnsville, Minnesota 55337 (hereinafter referred to as the “Debtor”), in favor of Mark Ravich and Richard Broms, each an individual, as agents (the “Agents”) for the benefit of all the investors (“Lenders”) who purchased those certain Secured Convertible Promissory Notes issued by the Debtor dated of even date herewith (the “Secured Notes”) pursuant to that certain Secured Convertible Promissory Note Purchase Agreement, dated as of the date hereof, by and between the Debtor and the Lenders (the “Purchase Agreement”).

A. The Debtor intends to issue to the Lenders and the Lenders intend to purchase the Secured Notes from the Debtor, pursuant to the Purchase Agreement, for the aggregate principal amount of $2,000,000.

B. The Purchase Agreement and the Secured Notes provide for the Lenders to make certain loans for the account of the Debtor and require the Debtor to grant the Agents, for the benefit of the Lenders, a security interest in all of the Debtor’s assets pursuant to the terms of this Agreement and that certain Security Agreement, dated even herewith, by and among the Debtor and the Agent (the “General Security Agreement”).

NOW THEREFORE, in consideration of the premises set forth herein and for other good and valuable consideration, receipt and sufficiency of which is hereby acknowledged, the Company agrees as follows:

1. Grant of Security Interest. As security for the payment of each and every debt, liability, and obligation of every type and description which the Company may now or at any time owe to the Lenders pursuant to the terms of the Secured Notes (the “Obligations”), the Company hereby grants to the Agents, for the benefit of the Lenders, a security interest, effective immediately, in all of the Company’s right, title and interest in and to all of the following described property, whether now owned or hereafter acquired (collectively herein, the “Intellectual Property Collateral”):

(i) Patents and patent applications and/or registrations together with the inventions and improvements described and claimed therein including, without limitation, the patents and applications, if any, listed on Schedule A, attached hereto and made a part hereof, and any and all reissues and renewals thereof and all income, royalties, damages and payments now and hereafter due and/or payable in connection therewith including, without limitation, damages and payments for past or future infringements thereof (all of the foregoing are sometimes hereinafter individually and collectively referred to as the “Patent Collateral”);

(ii) Trademarks, service marks, trademark registrations and/or applications, service mark registrations and applications and tradenames including, without limitation,

the trademarks, service marks and applications, if any, listed on Schedule B attached hereto and made a part hereof, and any and all reissues and/or renewals thereof, and all income, royalties, damages and payments now and hereafter due and/or payable in connection therewith including, without limitation, damages and payments for past or future infringements thereof (all of the foregoing are sometimes hereinafter individually and collectively referred to as the “Trademark Collateral”);

(iii) Any license agreement in which the Company is or becomes licensed to use any patents and/or trademarks owned by a third party including, without limitation, the licenses, if any, listed on Schedule C attached hereto and made a part hereof (all of the foregoing are sometimes referred to herein individually and collectively as the “License Collateral”);

(iv) The goodwill of the Company’s business connected with and symbolized by the Intellectual Property Collateral; and

(v) All cash and non-cash proceeds of the foregoing.

2. Intent-to-Use Applications. Notwithstanding the foregoing provisions of Section 1, the Agent or Lenders acquires no security interest or other rights in the United States for any Trademark that is the subject of an intent-to-use application before the U.S. Patent and Trademark Office until such time as a verified amendment to allege use or verified statement of use is filed with the U.S. Patent and Trademark Office for such application. In no event will Agent or Lenders acquire any U.S. intent-to-use applications prior to the time that the Agent has acquired a Security Interest in such applications according to the conditions of the preceding sentence.

3. The Agents’ Rights. Upon the occurrence of any Event of Default hereunder, the Agents may exercise any one or more of the rights and remedies stated in this Agreement; provided, however, that the Agents shall have no right to exercise any remedial actions with regard to the Intellectual Property Collateral, whether pursuant to this Agreement or applicable law, unless the Agents have obtained the prior written consent of the holders of more than fifty percent (50%) of the then outstanding principal amount of all Secured Notes issued on the date hereof. The Agents shall have all the rights and remedies of a secured party under the Uniform Commercial Code and any other applicable state or federal laws. The Agents will give the Company reasonable notice of the time and place of any public sale of the Intellectual Property Collateral or the time after which any private sale of the Intellectual Property Collateral or any other intended disposition thereof is to be made. Unless otherwise provided by law, the requirement of reasonable notice shall be met if such notice is mailed, postage prepaid to the address of the Company set forth above (or such other address as the Company has given the Agents) at least ten (10) days before the date of such sale or disposition. In addition to the foregoing and all other rights and remedies of the Lenders upon the occurrence of any Event of Default hereunder, the Agents shall thereupon have the immediate right to transfer to himself or themselves, to sell, assign and transfer to any other person or persons all right,

title and interest in and to all or any part of the Intellectual Property Collateral. The Company agrees that, in the event that one or both Agents exercise their rights hereunder after written notification of such exercise from the Agents to the Company, the Company shall never thereafter, without the prior written authorization of the owner or owners of such Intellectual Property Collateral, use any of such Intellectual Property Collateral. The condition of the foregoing provision is such that unless and until there occurs an Event of Default under this Agreement, the Company shall continue to own and use the Intellectual Property Collateral in the normal course of its business and to enjoy the benefits, royalties and profits therefrom provided, however, that from and after the occurrence of an Event of Default such right will, upon the exercise by the Agents of the rights provided by this Agreement, be revoked and the right of the Company to enjoy the uses, benefits, royalties and profits of said Intellectual Property Collateral will wholly cease, whereupon the Agents or their transferee(s) shall be entitled to all of the Company’s right, title and interest in and to the Intellectual Property Collateral hereby so assigned. This Agreement will not operate to place upon the Agents any duty or responsibility to maintain the Intellectual Property Collateral.

4. Fees. The Company will pay all filing fees with respect to the security interest created hereby which either Agent may deem necessary or advisable in order to perfect and maintain the perfection of its security interest in the Intellectual Property Collateral.

5. Representations and Warranties. The Company represents and warrants that (a) the Company lawfully possesses and owns the Intellectual Property Collateral and that except for the security interest granted hereby, the Intellectual Property Collateral will be kept free from all liens, security interests, claims and encumbrances whatsoever excluding licenses to resellers and end-users made in the normal course of business; (b) except for licenses to resellers and end-users made in the normal course of business and except as provided for in this Agreement, the Company has not made or given any prior assignment, transfer or security interest in the Intellectual Property Collateral or any of the proceeds thereof; (c) none of the Intellectual Property Collateral has been adjudged in court to be invalid or unenforceable in whole or in part; and (d) to the knowledge of the Company, there are no infringements of the Intellectual Property Collateral excluding end-users exceeding the scope of the licenses granted the end-user. The Company further represents and warrants that it will, at its own expense, maintain the Intellectual Property Collateral to the extent practicable in its business including, but not limited to, filing all affidavits, paying all maintenance fees, annuities and renewals possible with respect to patents, trademark registrations and applications therefor.

6. Application of Proceeds. The proceeds of any sale, transfer or disposition of the Intellectual Property Collateral shall be applied first to all costs and expenses, including, but not limited to, reasonable attorneys’ fees and expenses and court costs, incurred by the Agents in connection with such sale and the exercise of the Agents’ rights and remedies hereunder, under the Secured Notes, and under the General Security Agreement; next, such proceeds shall be applied to the payment, in whole or in part, of the Obligations due the Lenders in an amount prorated among the Secured Notes in proportion to the outstanding principal balances of each of the Secured Notes; and the

balance, if any, shall be paid to the Company or as a court of competent jurisdiction may direct.

7. Defense of Claims. The Company will defend at its own cost and expense any action, claim or proceeding affecting the Intellectual Property Collateral or the interest of the Agent therein. The Company agrees to reimburse the Agents for all costs and expenses incurred by the Agents in defending any such action, claim or proceeding.

8. Rights Cumulative. This Agreement shall be in addition to the General Security Agreement and shall not be deemed to affect, modify or limit the General Security Agreement or the Secured Notes nor any rights that the Agents have under the General Security Agreement. The Company agrees to execute and deliver to the Agents (at the Company’s expense) any further documentation or papers necessary to carry out the intent or purpose of this Agreement including, but not limited to, financing statements under the Uniform Commercial Code, and amendments to this Agreement to evidence the grant of the security interest in Intellectual Property Collateral hereafter obtained by the Company.

9. Construction and Invalidity. Any provisions hereof contrary to, prohibited by or invalid under any laws or regulations shall be inapplicable and deemed omitted herefrom, but shall not invalidate the remaining provisions hereof.

10. CHOICE OF LAW. THE COMPANY AGREES THAT THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT AND ALL RIGHTS HEREUNDER SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA. THIS AGREEMENT TOGETHER WITH THE PURCHASE AGREEMENT, THE GENERAL SECURITY AGREEMENT AND THE SECURED NOTES CONSTITUTE THE ENTIRE AGREEMENT OF THE COMPANY AND THE AGENTS WITH RESPECT TO THE INTELLECTUAL PROPERTY COLLATERAL, CAN ONLY BE CHANGED OR MODIFIED IN WRITING AND SHALL BIND AND BENEFIT THE COMPANY, THE LENDERS AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS. THE COMPANY AND THE AGENTS EACH HEREBY EXPRESSLY WAIVES ANY RIGHT OF TRIAL BY JURY ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING HEREUNDER.

11. Events of Default. Any of the following constitutes an Event of Default under this Agreement:

(a) The Company fails to perform or observe any agreement, covenant or condition required under this Agreement;

(b) Any warranty or representation made by Company, in this Agreement shall be or becomes false or misleading in any material respect;

waived in writing by the Agents;

(d) Any breach of the Purchase Agreement which is not waived in writing by the Agents;

(e) Any breach of that certain Registration Rights Agreement, dated as of the date hereof, by and between the Company and each Investor (the “Registration Rights Agreement”) which is not waived in writing by the Agents; or

(f) The occurrence of any Event of Default under the General Security Agreement which is not waived in writing by the Agents.

12. Notices. The Company covenants and agrees that, with respect to the Intellectual Property Collateral, it will give the Agents written notice of:

(a) any written claim by a third party that the Company has infringed on the rights of a third party;

(b) any infringement by a third party on the rights of the Company of which the Company has knowledge, excluding use by licensed end-users in excess of use permitted by their end use license agreement; or

13. Further Assurances. The Company will execute such further documents as either Agent may reasonably require to further confirm or perfect the Agents’ rights under this Agreement in the Intellectual Property Collateral.

14. Termination. This Agreement shall terminate upon (a) the payment in full or other satisfaction of the Secured Notes by the Company, or (b) the conversion of all of the outstanding balance of the principal and accrued interest under the Secured Notes into fully paid and nonassessable shares of capital stock of the Company pursuant to Section 6 of the Secured Notes. Upon the Company’s request, the Agents shall promptly after any such termination execute and deliver to the Company (at the Company’s expense) such documents and instruments as are necessary to evidence such termination and release of the security interest granted herein on any applicable public record.

IN WITNESS WHEREOF, the parties hereto have duly executed this Grant of Security Interest in Patents, Trademarks and Licenses as of the date first set forth above.

			DATAKEY, INC., a Minnesota corporation
			(the “Company”)

			By:
			Name:
			Title:


Acknowledged and Accepted by the AGENTS:



Mark Ravich



Richard Broms

EX-6 8 a03-4429_1ex6.htm EX-6

Exhibit 6

INTER-CREDITOR AGREEMENT

THIS INTER-CREDITOR AGREEMENT is made effective this 17th day of October, 2003 by and among Mark Ravich and Richard Broms, (collectively, the “Collateral Agents”), and the lenders identified in Appendix A hereto (collectively the “Lenders” and each individually a “Lender”).

RECITALS

A. The Lenders are loaning to Datakey, Inc., a Minnesota corporation (“Datakey”), the aggregate principal sum of up to $2,000,000 pursuant to the terms of that certain Secured Convertible Promissory Note Purchase Agreement, dated as of the date hereof, by and between Datakey and the Lenders, those certain Promissory Notes (individually a “Note” and collectively the “Notes”) issued in connection therewith to each of the Lenders, and those certain Warrants to Purchase Common Stock of Datakey, granted to each of the Lenders (“Warrants”), each in the denominations set forth opposite each Lender’s name in Appendix A (the “Loans”).

B. The Lenders desire to appoint the Collateral Agents as their agents to enter into a Security Agreement and Intellectual Property Security Agreement with Datakey in the forms attached hereto as Appendix B and Appendix C regarding the Lenders’ security interest in certain of the assets of Datakey (the “Security Agreements”) and to authorize the Collateral Agents to take the actions as set forth herein on behalf of the Lenders.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing and the covenants set forth herein, the Collateral Agents and each Lender hereby agree as follows:

1. Appointment of Collateral Agents. Each Lender hereby irrevocably appoints and authorizes the Collateral Agents, or either of them, with power to act one without the other, to act as his, her or its agent under the Security Agreements and to exercise such powers hereunder as are specifically designated hereby, and to take such other actions as may be reasonably incidental thereto.

In furtherance of the foregoing, and not in limitation thereof, the Collateral Agents are individually and together authorized to (a) collect both principal and interest payments due and payable on the Loans; (b) execute the Security Agreements; (c) be the nominal secured party on UCC-1 financing statements and such other documents reasonably necessary to perfect the security interest granted under the Security Agreements; and (d) hold and dispose of the Collateral under the Security Agreements. Such appointment shall be revocable only by written action of the holders of not less than 70% of the outstanding principal amounts of the Loans terminating the current Collateral Agents and appointing a new Collateral Agent. The Collateral Agents hereby accept such appointment.

2. Transfer of Notes. Each Lender hereby agrees not to transfer the Notes during the term of this Agreement, unless such transfer is made expressly subject to the provisions of this Agreement.

3. Pro-Rata Payments and Forbearance. Each Lender agrees not to accept payments with respect to the Loans other than on a basis which is pro rata among themselves in accordance with their interests as set forth in Appendix A. In the event that one or more of the Lenders shall receive preferential payments of principal or interest of the Loans, the recipient Lender shall undertake to redistribute to the other Lenders any amounts of such payments as shall be necessary to maintain pro-rata payments to all Lenders with respect to the Loans. Each Lender agrees not to initiate any action against Datakey to collect upon the Loans, it being agreed that all such collection actions shall be taken by the Collateral Agents.

4. Collection Actions. The Collateral Agents individually or together may communicate to Datakey demands for payment of the Loans and provide to Datakey notice of default on such Loans. The Collateral Agents, however, may not take action to collect the Loans or foreclose upon the Collateral under the Security Agreement without the written authorization of the holders of more than 50% of the outstanding principal amounts of the Loans. Such authorization may be obtained in one or more written documents specifying such authorizations signed by the Lenders or at a meeting of the Lenders. Following an Event of Default under the Security Agreements, the Collateral Agents may call a meeting of the Lenders. Upon the receipt by the Collateral Agents of a written request of one or more of the Lenders for a meeting of the Lenders, the Collateral Agents will call a meeting of the Lenders.

5. Scope of Authority. The Collateral Agents shall be permitted to take or refrain from taking such collection actions as the Collateral Agents either individually or jointly deem appropriate. In furtherance of the foregoing, and not in limitation thereof, the Collateral Agents are authorized to enter into settlements and arrangements with Datakey and other creditors of Datakey, foreclose upon the Collateral and dispose of the Collateral in public or private sales. The Collateral Agents may employ legal counsel, business advisors, appraisers, auctioneers and other professionals in connection with the performance of the Collateral Agents’ responsibilities hereunder. Notwithstanding anything to the contrary in this Agreement, the Security Agreements, the Notes or the Warrants, the Collateral Agents may, with the prior written consent of the holders of at least 80% of the outstanding principal amounts of the Loans: (a) release any Collateral or agree to the release or modification of any of its rights or powers with respect to the Collateral or agree to or accept any other property in substitution for the Collateral; (b) release, modify or waive the liability of any person now or hereafter primarily or secondarily liable for the payment of any of the Obligations defined in the Security Agreements; (c) agree to any amendment, modification, renewal or extension of any of the Obligations, the Security Agreements or the Warrants; or (d) waive or release any claim against any existing or future obligor, guarantor or endorser of any of the Obligations. No Lender shall commit any of the foregoing acts during the term hereof with respect to any Obligation owing to such Lender.

6. Indemnification and Expenses. Each Lender shall indemnify and hold each of the Collateral Agents harmless with respect to liabilities and expenses the Collateral Agents may incur in acting as the Agents for the Lenders. Such indemnification and reimbursement shall be

made ratably according to each Lender’s respective outstanding principal balance of the Loans. The Collateral Agents may apply payments received from Datakey or from the disposition of the Collateral to satisfy the costs and expenses incurred by the Collateral Agents; provided, however, no such indemnification or reimbursement may be taken for any portion of liabilities or expenses resulting from the willful misconduct of a Collateral Agent.

7. Character of Actions. In acting hereunder, the Collateral Agents shall be deemed to be acting as agent for all of the Lenders including each Collateral Agent as a Lender. Neither Collateral Agent shall be deemed a trustee, receiver or assignee of the assets of Datakey.

8. Exculpation. Neither of the Collateral Agents nor any of their employees, agents or attorneys shall be liable for any action taken or omitted to be taken hereunder in connection with this Agreement, the Security Agreements, the Notes or the Warrants unless caused by his, her, its or their willful misconduct. Each Collateral Agent shall be entitled to rely upon advice of counsel with respect to legal matters, the advice of independent public accountants with respect to accounting matters and the advice of other experts with respect to matters which the Collateral Agent reasonably believes to be within such person’s professional or expert competence, and upon schedules, certificates, statements, reports, notices or other writings which the Collateral Agent reasonably believes to be genuine or to have been properly presented. Neither of the Collateral Agents nor any of the Collateral Agents’ employees or agents shall (a) be responsible for any recitals, representations or warranties contained in, or for the execution, validity, genuineness, effectiveness or enforceability, of this Agreement, the Security Agreements, or any other instrument or document delivered in connection with the Loans; (b) be responsible for the validity, genuineness, effectiveness, existence or value of any Collateral; (c) be under any duty to inquire into or pass upon any of the foregoing matters, or to make any inquiry concerning the performance by Datakey of its obligations; or (d) in any event, be liable for any action taken or omitted by him or them in his or their role as Collateral Agents. The agency hereby created shall in no way impair or alter any of the rights and powers of, or impose any duties or obligations upon, the Collateral Agents in their individual capacity as Lenders. Each Collateral Agent shall have the same rights and powers hereunder as any other Lender in his individual capacity as Lender, and may exercise or refrain from exercising the same as though he were not a Collateral Agent.

9. Credit Investigation. Each Lender acknowledges that it has made such inquiries and taken such care on its own behalf in making its Loan to Datakey as would have been the case had the Loan been made by such Lender without the intervention of the Collateral Agents or any other Lender. Each Lender agrees and acknowledges that the Collateral Agents make no representations or warranties about the creditworthiness of Datakey, or with respect to the legality, validity, sufficiency or enforceability of this Agreement, the Security Agreements, or any other instrument or document delivered in connection with the Loans.

10. Non-Payments. The Collateral Agents shall not be deemed to have knowledge of the occurrence of payments or non-payments by Datakey to the Lenders unless such Collateral Agent has received notice of such from a Lender or Datakey. In the event that the Collateral Agent receives a notice of nonpayment, the Collateral Agent shall give prompt notice thereof to all of the Lenders.

11. Obligation Several. The obligations of each Lender hereunder are the several obligations of such Lender and neither any Lender nor the Collateral Agents shall be responsible for the obligations of any other Lender hereunder, nor will the failure by the Collateral Agents or any Lender to perform any of its obligations hereunder relieve the Collateral Agents or any other Lender from the performance of its respective obligations hereunder.

12. Lender’s Reservation of Rights. Each Lender hereby reserves any rights and/or claims it may now or hereafter claim to have against any other Lender with respect to the Loans or the Secured Obligations; provided, however, that such reservation shall not modify, affect or limit the exculpation of the Collateral Agents pursuant to Section 8 of this Agreement; and provided further that no such reservation shall modify, alter or abrogate each Lender’s obligation to comply with the terms of this Agreement.

13. Resignation and Appointment of Successor Collateral Agents. Either or both of the Collateral Agents may resign as such and shall be discharged from his duties and obligations in his capacity as Collateral Agent under this Agreement at any time upon giving notice of such resignation to Datakey and the Lenders specifying a date (no less than 30 calendar days after the giving of such notice) when such resignation shall take effect. In the event of any resignation of a Collateral Agent, the remaining Collateral Agent shall act as the sole Collateral Agent hereunder. In the event of a resignation by both Collateral Agents, the Lenders holding more than 50% of the outstanding principal balance of the Loans shall as promptly as practicable appoint a successor Collateral Agent. If no successor Collateral Agent has both been appointed by the Lenders and accepted such appointment on or before the effective date specified in the resignation notice from the resigning Collateral Agents, then the resigning Collateral Agents, on behalf of the Lenders, may (but shall not be obligated to) appoint a successor Collateral Agent. Upon the acceptance of any appointment as Collateral Agent hereunder by a successor Collateral Agent, such successor Collateral Agent shall thereupon be entitled to receive from the prior Collateral Agents such documents of transfer and assignment as such successor Collateral Agent may reasonably request. Such successor Collateral Agent shall provide prompt written notice to Datakey of such appointment.

14. Notices. Any notice or other communication under this Agreement shall be in writing and mailed or delivered as follows:

(a) to Mark Ravich as Collateral Agent at:

Mark Ravich

11300 Overlook Drive

Minnetonka, MN 55305

(b) to Richard Broms as Collateral Agent at:

Richard Broms

4731 Wedgewood Drive

Minnetonka, MN 55345

Such addresses may be changed upon written notice to the Collateral Agents and all of the Lenders in compliance with this section.

All such notices, requests, demands and other communications shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed telex, electronic mail or facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt.

15. No Agreement with respect to Datakey’s Equity Securities. The purpose of this Agreement between the Lenders and the Collateral Agents is to provide for the coordinated administration of the Lenders’ interests under the Loans and the Security Agreements and the pro rata participation of the Lenders in any repayment of the Loans and in the collateral and any proceeds thereof. The Lenders hereby expressly represent and acknowledge that there is no agreement among them to act together for the purpose of acquiring, holding or disposing of securities of Datakey. The Lenders represent and acknowledge that they have no obligation or agreement with each other with respect to any equity securities or rights to acquire equity securities of Datakey. Moreover, the relationship of the Lenders shall not be deemed a joint venture, partnership, association, group or other entity.

16. Effective Execution Date and Counterparts. This Agreement will be executed in counterparts prior to initial disbursement of the proceeds from the Loans to Datakey and shall become effective on the disbursement of such proceeds. Additional Lenders may be added to this Agreement by execution of this Agreement in counterpart and by adding such Lenders to Appendix A hereto, up to the maximum Loan amount of $2,000,000. The Collateral Agents will mail to each Lender a copy of this Agreement, including the appendices attached hereto after the final disbursement of the proceeds from the Loans.

17. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota. Each Lender submits to the jurisdiction of the courts of the State of Minnesota in connection with matters arising under this Agreement.

Collateral Agents’ Signature to Inter-Creditor Agreement

IN WITNESS WHEREOF, the Collateral Agents have executed this Inter-Creditor Agreement as of the date first above written.

	COLLATERAL AGENTS



	Mark Ravich



	Richard Broms

Under the Securities Exchange Act of 1934 (Amendment No. 3)*

Signature

Under the Securities Exchange Act of 1934
(Amendment No. 3)*