-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AToia29R2WZKphzzGO+/LIlnzx3CJVBt+tFRnzhjL4Q8K+fs4RhSQgTc14d8vZT3 Xx83MkgRQkq6W+zt4JOlpQ== 0000914190-98-000239.txt : 19980615 0000914190-98-000239.hdr.sgml : 19980615 ACCESSION NUMBER: 0000914190-98-000239 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19980612 SROS: NASD FILER: 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: S-3 SEC ACT: SEC FILE NUMBER: 333-56711 FILM NUMBER: 98647240 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 S-3 1 FORM S-3 As filed with the Securities and Exchange Commission on June 12, 1998 Registration No. 333-_____ ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 DATAKEY, INC. (Name of Registrant as specified in its Charter) Minnesota 41-1291472 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) Datakey, Inc. 407 West Travelers Trail Burnsville, Minnesota 55337 (612) 890-6850 (Address and Telephone Number of Registrant's Principal Executive Offices) ----------------------------------------------------------------------- Alan G. Shuler, CFO Datakey, Inc. 407 West Travelers Trail Burnsville, Minnesota 55337 (612) 890-6850 (Name, Address and Telephone Number of Agent for Service) Copies to: Elizabeth McGraw Reiskytl, Esq. Fredrikson & Byron, P.A. 900 Second Avenue South, Suite 1100 Minneapolis, Minnesota 55402 (612) 347-7000 Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement as determined by market conditions and other factors and as Selling Shareholders shall determine. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: [ ] If any of the securities being registered on this form to be offered on a delayed or continuous basis, pursuant to Rule 415 under the Securities Act of 1933, check the following box: [X] If this Form is filed to register additional securities of an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [ ]
CALCULATION OF REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------------- Title of Each Proposed Maximum Proposed Maximum Class of Securities Amount to be Offering Price Aggregate Offering Amount of to be Registered Registered per Unit Price Registration Fee Common Stock (par 670,149 shares(1)(2) $5.59(3) $3,746,132.91(3) $1,105.11 value $0.05 per share) Common Stock (par 225,985 shares(4) $5.59 $1,263,256.15 $ 372.66 value $0.05 per share) TOTAL 896,134 shares $1,477.77 - ------------------------------------------------------------------------------------------------------------------
(1) Represents the maximum number of shares of Common Stock issuable upon conversion of the Series A Convertible Cumulative Preferred Stock (the "Preferred Stock") and the payment of dividends in shares of Common Stock, assuming a conversion price of $2.75. (2) Pursuant to Rule 416 under the Act, included in this registration are an indeterminate number of additional shares of Common Stock as may be issuable upon (i) conversion of the shares of the Preferred Stock described herein and (ii) payment of dividends thereon in additional shares of Common Stock pursuant to the anti-dilution and other provisions of such Preferred Stock. (3) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, as amended, (the "Act") and based upon the average of the high and low sale prices for such stock on June 11, 1998, as reported by the Nasdaq National Market. (4) Represents shares issuable to Selling Shareholders upon the exercise of warrants and then offered for resale pursuant to this registration, including warrants to purchase 188,095 shares at $6.30 per share and warrants to purchase 37,890 shares at $6.60 per share. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commissions, acting pursuant to aforesaid Section 8(a), may determine. PROSPECTUS DATAKEY, INC. 896,134 SHARES OF COMMON STOCK This Prospectus relates to the offer and sale of up to 896,134 shares of Common Stock (the "Shares"), par value $.05 per share, of Datakey, Inc., a Minnesota corporation (the "Company" or "Datakey"), that may be offered and sold from time to time by the shareholders described herein under "Selling Shareholders" (the "Selling Shareholders") or by pledgees, donees, transferees, or other successors in interest that receive such shares as a gift, distribution, or other non-sale related transfer. The Selling Shareholders may become holders of the Company's Common Stock upon conversion of outstanding shares of Series A Convertible Cumulative Preferred Stock (the "Preferred Stock") described herein, upon receipt of Common Stock issuable in lieu of cash dividends, or upon exercise of certain outstanding warrants to purchase shares of Company Common Stock granted at the same time as the Preferred Stock. The Selling Shareholders may offer their Shares from time to time through or to brokers or dealers in the over-the-counter market at market prices prevailing at the time of sale or in one or more negotiated transactions at prices acceptable to the Selling Shareholders. The Company will not receive any proceeds from the sale of Shares by the Selling Shareholders. See "Plan of Distribution." The Company will bear all expenses of the offering (estimated at $12,000), except that the Selling Shareholders will pay any applicable underwriter's commissions and expenses, brokerage fees or transfer taxes, as well as any fees and disbursements of counsel and experts for the Selling Shareholders. The Shares may be sold from time to time in transactions on the Nasdaq National Market at the market prices then prevailing, in privately negotiated transactions or otherwise. In connection with any sales, the Selling Shareholders and any brokers and dealers participating in such sales may be deemed to be "underwriters" within the meaning of the Securities Act. See "Plan of Distribution." Datakey's Common Stock is traded on the Nasdaq National Market under the symbol of "DKEY." The closing sale price of the Common Stock on June 11, 1998 was $5.6875 per share. On May 15, 1998, the Company issued to certain investors 100,000 shares of Preferred Stock and five-year warrants to purchase an aggregate of 188,095 shares of the Company's Common Stock with an exercise price of $6.30 per share. The Preferred Stock has dividend rights at an annual rate of eight percent (8%) of their original issuance price, with such dividends payable either in cash or in shares of the Company's Common Stock upon conversion of the Preferred Stock. The Preferred Stock is convertible through May 15, 2000 at a conversion rate equal to eighty percent (80%) of the market price (defined to equal the average closing bid price of the Company's Common Stock for the ten-day period prior to conversion), subject to the minimum and maximum conversion rates of $2.75 and $5.00, respectively. Any shares of Preferred Stock outstanding on May 15, 2000 will be automatically converted on the same terms as apply prior to such date. As part of the financing, the Company also issued to its agent warrants to purchase an aggregate of 37,890 shares of Common Stock at an exercise price of $6.60. The warrants issued to the investors and the agent are referred to herein as the "Warrants." ----------------------------------------------------------------------- The Common Stock offered by this Prospectus is speculative and involves a high degree of risk. See "Risk Factors" beginning on page 3. ----------------------------------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE- SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is June ___, 1998. No dealer, salesman or any other person is authorized to give any information or to make any representations, other then those contained or incorporated by reference in this Prospectus, in connection with the offering contemplated hereby, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the registered securities to which it relates or in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained or incorporated by reference herein is correct as of any time subsequent to its date. AVAILABLE INFORMATION Prior to this Offering, the Company has been subject to the reporting requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Commission. The Company has filed with the Washington, D.C. Office of the Commission a Registration Statement on Form S-3 under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the sale of the Shares. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Shares, reference is made to the Registration Statement, including the exhibits thereto. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement. The Registration Statement and the Company's Exchange Act reports, proxy statements and other information may be inspected by anyone without charge at the principal office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of all or any part of such material may be obtained upon payment of the prescribed fees from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Registration Statement and the Company Exchange Act filings may also be accessed through the Commission's Web site (http://www.sec.gov). The Company's Common Stock is currently listed on the Nasdaq National Market under the symbol "DKEY." DOCUMENTS INCORPORATED BY REFERENCE The following documents filed by the Company with the Commission are hereby incorporated by reference in this Prospectus and shall be deemed to be a part thereof: 1. The Company's Annual Report on Form 10-KSB, as amended by Form 10-KSB/A-1, for the fiscal year ended December 31, 1997; 2. The Company's Quarterly Report on Form 10-QSB for the quarter ended April 4, 1998; 3. The Company's Form 8-K dated May 19, 1998. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the offering of the Shares shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing of such documents. The Company will provide without charge to each person, including any beneficial owner, to whom a copy of this Prospectus is delivered, upon the written or oral request of such person, a copy of any or all of the documents incorporated herein by reference (not including the exhibits to such documents, unless such exhibits are specifically incorporated by reference in such documents). Requests for such copies should be directed to Alan G. Shuler, Chief Financial Officer, Datakey, Inc., 407 West Travelers Trail, Burnsville, Minnesota 55337, telephone (612) 890-6850. COMPANY SUMMARY Datakey, Inc. was incorporated under the laws of the State of Minnesota in 1976 under the name "The Systems Group, Inc." In 1980, the Company changed its name to Datakey, Inc. The Company provides product, subsystem and system solutions to record, store and transmit electronic information. Datakey also manufactures and sells products and systems directed to the information security market which will enable user identification and authentication, secure data exchange and information validation. It also provides OEM products, consisting of proprietary memory keys, cards and other custom-shaped tokens that serve as a convenient way to carry electronic information and are packaged to survive in portable environments. The Company's first portable information system, consisting of an electronic key and support electronics, was introduced in 1981 for applications requiring convenient storage, transportation and management of information. The Company's current system utilizes semiconductor technology to provide a storage device more versatile than conventional portable information products such as keys, badges and magnetic stripe cards. The Company's current product line of portable data carriers and associated interface products provide up to 16,384,000 bits of data storage which are used in a wide range of applications including communications security, computer security, facility security, vending and process control. Each of the Company's personal portable information systems consists of one or more portable data carriers, access devices and, for certain models, interface modules containing microprocessors. These components, together with the user's processor-based equipment, function as an integrated system allowing instantaneous processing of personalized data carried within a portable data carrier. Through the incorporation of advanced semiconductor memory technology, the Company's portable data carrier is able to store and carry substantial amounts of information. When the portable data carrier is used in conjunction with the other components of the Company's system, information can be selectively altered, added to or erased, as required, to effectively and reliably manage or control a particular activity or transaction. The Company has introduced an end-user system level product which is designed to provide electronic signatures on computer aided drafting (CAD) drawings and additional end-user systems that are designed to provide advanced information security utilizing digital signatures and encryption. These systems incorporate hardware and software to provide a higher level of security than is obtainable with current software only solutions. The Company's principal executive offices are located at 407 West Travelers Trail, Burnsville, Minnesota 55337, and its telephone number is (612) 890-6850. RISK FACTORS An investment in the Securities offered hereby involves a high degree of risk. The Securities offered hereby should not be purchased by persons who cannot afford the entire loss of their investment. Prospective investors should carefully consider the following factors, in addition to the other information presented in this Memorandum, in evaluating the Company and its businesses. This Prospectus contains certain forward-looking statements. The Company's actual results could differ materially from the results currently anticipated by management of the Company in such forward-looking statements as a result of a variety of factors, including, but not limited to, "Risk Factors" described below, and elsewhere, in this Prospectus. 1. Reliance on Information Security Products: The Company's future growth and profitability is to a significant extent dependent on the success of its information security (Integrated System Solutions) products, which is subject to all of the risks inherent in the establishment of any new business venture. The Company's future growth and profitability is subject to the continuing success of its information security product development efforts, but more importantly, to the success of its marketing and sales efforts. If, for any reason, the Company is unable to successfully build its information security product business, its ability to continue operations in its current form would be in doubt. 2. Risk of rapid technological change: In the information security market, Datakey faces significant risks due to the rapid changes in available technology. Datakey's information security end-user products such as SignaSURE CIP and SignaSURE ESS will integrate hardware tokens with software that provides a much higher level of security than software implementations alone. Software only solutions may be developed in the future which would provide this security. Such development could materially adversely affect Datakey's business. 3. Dependence on customer acceptance: While Datakey performs market research and beta testing to determine the viability of its new products, actual user acceptance will ultimately dictate the success of the marketing and sales efforts of new products such as SignaSURE CIP and ESS. There are no assurances that Datakey's products will ultimately receive satisfactory customer acceptance or that investments already made and additional investments planned for the remainder of 1998 will result in a financial return. 4. Delays in product delivery schedules: Datakey's success depends to some extent on its ability to meet its currently scheduled development timetable. Delays in the release of new products will cause operational inefficiencies, increased development costs and reduced revenues and may affect customer acceptance. 5. Competition: While Datakey believes that its strategy of providing token-based product solutions at a price that is competitive with software-only products is attainable, there are no assurances that competitive pressures will not force the Company to accept reduced margins to compete in the future. Large companies with significantly greater resources have recognized the need for information security and will likely enter this market as competitors with much greater financial resources. A portion of the new end-user products' cost consists of royalties and license fees which would need to be re-negotiated in order to maintain acceptable profit margins. 6. Risk of integrated information security products: Although the Company's new products will operate seamlessly with popular application programs, new application programs that integrate information security into their product could erode the future market for these Datakey products. 7. Dependence on new marketing and sales organization: The future revenue of Datakey end-user systems is dependent on the success of a new and untested marketing and direct sales organization. 8. Competition from other information transmission media: Corporate utilization of the Internet and internal intranets dictate a need for information security, but there are no assurances that other, more secure information transmission media may not become available in the future that would preclude the need for the type of information security provided by the Company's products. 9. Need for additional capital: The need for additional capital will depend primarily on the success of its information security products. If the Company is not successful with its integrated system solutions products, the Company may be forced to curtail or discontinue operations unless it can obtain significant additional capital. Such capital may not be available on terms satisfactory to the Company, or at all. USE OF PROCEEDS The Company is not selling any of the Shares and will not receive any proceeds from the sale of the Shares by the Selling Shareholders. SELLING SHAREHOLDERS Set forth below are the names of the Selling Shareholders, the number of shares of Common Stock of the Company beneficially owned by each of them on the date hereof, the number of shares offered hereby and the percentage of the outstanding Common Stock to be owned if all the shares registered hereunder are sold by the Selling Shareholders. To the knowledge of the Company, none of the Selling Shareholders has had within the past three years any material relationship with the Company except as set forth in the footnotes to the following table. The shares offered hereby shall be deemed to include shares offered by any pledgee, donee, transferee or other successor in interest of any of the Selling Shareholders listed below, provided that this prospectus is amended or supplemented if required by applicable law.
Number of Shares % Beneficially Owned Number of Owned ----------------------------------- Shares After Warrant Offered Offering Name Shares(1) Shares Total Hereby (2) - ----------------------------------- --------- ------- ----- --------- -------- Special Situations Private Equity Fund, L.P.(3) 336,362 110,119 446,481 446,481 * Special Situations Technology Fund, L.P.(3) 90,910 29,763 120,673 120,673 * Gary Kohler IRA 9,095 2,978 12,073 12,073 * Robert G. Allison 12,268 2,379 14,647 9,647 * Shirley A. Baxter, TTEE FBO Shirley A. Baxter Rev Trust U/A dtd 7/3/96 7,268 2,379 9,647 9,647 * Craig L. Campbell 7,268 2,379 9,647 9,647 * Piper Jaffray as Cust FBO Bradley A. Erickson IRA 7,268 2,379 9,647 9,647 * Piper Jaffray as Cust FBO Richard C. Perkins IRA 7,268 2,379 9,647 9,647 * David M. Westrum TTEE FBO David M. Westrum Rev Living Trust dtd 6/1/97 7,268 2,379 9,647 9,647 * Pyramid Partners, L.P. 25,625 8,389 34,014 34,014 * Industricorp & Co., Inc. FBO Twin City Carpenters Pension Plan 57,455 18,810 76,265 76,265 * Daniel S. and Patrice M. Perkins, JT 11,491 3,762 15,253 15,253 * Paul R. Kuehn 14,209 14,209 14,209 * David B. Johnson 14,209 14,209 14,209 * Eldon C. Miller 4,736 4,736 4,736 * Stanley D. Rahm 4,736 4,736 4,736 * ------- ------- ------- ------- TOTAL 579,545 225,985 805,531 800,531(4)
* Less than 1.0%. (1) The number of shares of Common Stock shown as beneficially owned and offered by the Selling Shareholders represents or includes the number of shares which the Company has initially agreed to register, assuming the minimum conversion price of $2.75 per share. The number of shares reflected herein may differ from the number of shares beneficially owned as reported by certain Selling Shareholders due to different assumptions with respect to the conversion price. Pursuant to Rule 416 under the Securities Act, the number of shares of Common Stock offered by the Selling Shareholders hereby and included in the Registration Statement of which this Prospectus is a part also includes such presently indeterminate number of additional shares as may be issued on conversion of the Preferred Stock and in payment of dividends thereon pursuant to the provisions of the Certificate of Designation for the Preferred Stock regarding determination of the applicable conversion price and the dividend calculation rate. Accordingly, the actual number of shares of Common Stock issued or issuable upon the conversion of the Preferred Stock and the payment of dividends thereon is subject to adjustment depending upon factors which cannot be predicted by the Company at this time, including among others, the future market prices of the Common Stock and the payment of dividends on the Preferred Stock in additional shares of Common Stock. Pursuant to the terms of the Certificate of Designation for the Preferred Stock, the Preferred Stock is convertible by each holder thereof and dividends are payable all in cash or all in shares of Common Stock. The above numbers assume that the Selling Shareholders will exercise the Warrants for cash. If the Selling Shareholders use the cashless exercise alternative, the actual number of shares of Common Stock issued will be fewer, depending on the market value of the underlying shares of Common Stock immediately prior to exercise. (2) The percentage of shares beneficially owned by each Selling Shareholder is based on 2,943,901 shares of Common Stock outstanding as of the date hereof. Assumes the sale of all the Shares being offered hereby. (3) Special Situations Private Equity Fund, L.P. and Special Situations Technology Fund, L.P. may be deemed to be affiliates because they are managed by investment advisers principally owned by Mr. Austin W. Marxe and Mr. David M. Greenhouse. Messrs. Marxe and Greenhouse disclaim beneficial ownership in such shares. (4) Does not include up to an additional 95,604 shares issuable in lieu of cash dividends occurring at a cumulative annual rate of 8%. The Selling Shareholders and their respective officers and directors have not held any positions or office or had any other material relationship with the Company or any of its affiliates within the past three years. The Company has agreed with the Selling Shareholders to file with the Commission, under the Securities Act, a Registration Statement of which this Prospectus forms a part, with respect to the resale of the Shares, and has agreed to prepare and file such amendments and supplements to the Registration Statement as may be necessary to keep the Registration Statement effective until the earlier of (i) five years from the effectiveness of the Registration Statement, or (ii) the date on which all of the Shares have been sold. PLAN OF DISTRIBUTION All or a portion of the Shares offered by the Selling Shareholders hereby may be sold from time to time by the Selling Shareholders or by pledgees, donees, transferees or other successors in interest. Such sales may be made in the over-the-counter market or otherwise at prices and at terms then prevailing or at prices related to the then current market price, or in negotiated transactions. The Shares may be sold by one or more of the following means: (a) ordinary brokerage or market making transactions and transactions in which the broker or dealer solicits purchasers; (b) block trades in which the broker or dealer so engaged will attempt to sell the Shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; and (c) purchases by a broker or dealer as principal and resales by such broker or dealer for its account pursuant to this Prospectus. In effecting sales, brokers or dealers engaged by the Selling Shareholders may arrange for other brokers or dealers to participate. Brokers or dealers will receive commissions or discounts from the Selling Shareholders in amounts to be negotiated immediately prior to the sale. Such brokers or dealers and any other participating brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales. In addition, any securities covered by this Prospectus which qualify for sale pursuant to Rule 144 under the Act may be sold under Rule 144 rather than pursuant to this Prospectus. The Company and the Selling Shareholders have agreed to indemnify each other against certain liabilities, including liabilities arising under the Securities Act. DESCRIPTION OF SECURITIES The aggregate number of shares of stock which the Company has the authority to issue is 12,500,000 shares, consisting of 10,000,000 shares of Common Stock, par value $.05, 400,000 of Convertible Preferred Stock, 150,000 shares of Series A Convertible Cumulative Preferred Stock and 1,950,000 shares of undesignated shares. Holders of Common Stock have no cumulative voting rights and no preemptive rights. Upon liquidation or dissolution, the holders of Common Stock will be entiteld to share ratably in all assets available for distribution after the payment or provision for payment of all debts and liabilities and subject to the rights of the holders of any preferred stock which may be outstanding. Each share of Common Stock is entitled to dividends as may from time to time be declared by the Board of Directors out of funds legally available therefor. The shares of Common Stock are quoted on the Nasdaq National Market under the symbol "DKEY." The outstanding shares of Common Stock are, and the shares of Common Stock offered hereby will be, fully paid and nonassessable. LEGAL MATTERS Certain legal matters associated with the Shares being offered hereby will be passed upon for the Company by Fredrikson & Byron, P.A., Minneapolis, Minnesota. EXPERTS The consolidated financial statements incorporated in this prospectus by reference from the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997 have been audited by McGladrey & Pullen, LLP, independent auditors, as stated in their report, which is incorporated herein by reference, and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. TABLE OF CONTENTS Page Available Information 2 Documents Incorporated By Reference 2 Company Summary 3 Risk Factors 3 Use of Proceeds 5 Selling Shareholders 5 Plan of Distribution 6 Description of Securities 7 Legal Matters 7 Experts 7 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution The estimated expenses in connection with this offering are as follows: Securities and Exchange Commission Filing Fee $ 1,478 Legal Fees and Expenses 6,000 Accounting Fees and Expenses 2,000 Printing 500 Miscellaneous 2,000 ======== Total Expenses $ 11,978 ======== Item 15. Indemnification of Directors and Officers. Section 302A.521 of the Minnesota Business Corporation Act provides that a corporation shall indemnify any person who was or is threatened to be made a party to any proceeding by reason of the former or present official capacity of such person, against judgments, penalties and fines, including, without limitation, excise taxes assessed against such person with respect to an employee benefit plan, settlements and reasonable expenses, including attorneys' fees and disbursements, incurred by such person in connection with the proceeding, if, with respect to the acts or omissions of such person complained of in the proceeding, such person has not been indemnified by another organization or employee benefit plan for the same expenses with respect to the same acts or omissions, acted in good faith, received no improper personal benefit and Section 302A.255 (which pertains to director conflicts of interest), if applicable, has been satisfied; in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; and in the case of acts or omissions by person in their official capacity for the corporation, reasonably believed that the conduct was in the best interests of the corporation, or in the case of acts or omissions by persons in their capacity for other organizations, reasonably believed that the conduct was not opposed to the best interests of the corporation. Section 302A.521 also permits Minnesota corporations to amend their Articles of Incorporation to limit or eliminate personal liability of directors to the corporation or its shareholders for monetary damages for breach of fiduciary duty; however, forbids any limitation or elimination of director liability for (i) a breach of the director's duty of loyalty, (ii) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) corporate distributions which are either illegal or in contravention of restrictions in the Articles, Bylaws or any agreement to which the corporation is a party, (iv) violations of Minnesota securities laws, (v) any transaction from which the director derived an improper personal benefit, or (vi) any act or omission occurring prior to the effective date of the provision in the corporation's Articles eliminating or limiting liability. Article 6.1 of the Registrant's Restated Articles of Incorporation, as amended, reads as follows: To the fullest extent permitted by the Minnesota Business Corporation Act as the same exists or may hereafter be amended, a director of this corporation shall not be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. The Company's Amended Bylaws provide for the indemnification of its directors, officers, employees and agents in accordance with, and to the fullest extent permitted by, Section 302A.521 of the Minnesota Business Corporation Act, as amended from time to time. Insofar as the indemnification of liabilities arising under the 1933 Act, as amended, may be permitted to directors, officers and controlling persons of the Company pursuant to the provisions of its Restated Articles of Incorporation, Restated Bylaws and the provisions of the Minnesota Business Corporation Act, or otherwise, the Company has been advised by counsel that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act, as amended, and is, therefore, unenforceable. Item 16. Exhibits. See Exhibit Index on page following signatures. Item 17. Undertakings. (a) The undersigned Registrant hereby undertakes: (1) To file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by section 10(a)(3) of the Securities Act; (ii) Reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represents a fundamental change in the information set forth in the registration statement; and (iii) Include any additional material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports file by the Registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Registration Statement. (2) That for determining liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities that remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. (c) The undersigned Registrant further undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (d) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Burnsville, State of Minnesota, on June 12, 1998. Datakey, Inc. By: /s/ Carl P. Boecher Carl P. Boecher President and Chief Executive Officer (Principal Executive Officer) By: /s/ Alan G. Shuler Alan G. Shuler Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) POWER OF ATTORNEY Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Each person whose signature to this Registration Statement appears below hereby constitutes and appoints Carl P. Boecher and Alan G. Shuler, and each of them, as his or her true and lawful attorney-in fact and agent, with full power and substitution, to sign on his or her behalf individually and in the capacity stated below and to perform any acts necessary to be done in order to file all amendments and post-effective amendments to this Registration Statement, and any and all instruments or documents filed as part of or in connection with this Registration Statement or the amendments thereto, and each of the undersigned does hereby ratify and confirm all that said attorney-in-fact and agent, or his or her substitutes, shall do or cause to be done by virtue hereof. Signatures Title Date /s/ Carl P. Boecher President and Chief June 12, 1998 Carl P. Boecher Executive Officer /s/ Alan G. Shuler Vice President and June 12, 1998 Alan G. Shuler Chief Financial Officer /s/ Thomas R. King Director and Secretary June 12, 1998 Thomas R. King Director Terrence W. Glarner /s/ Gary R. Holland Director June 12, 1998 Gary R. Holland /s/ Eugene W. Courtney Director June 12, 1998 Eugene W. Courtney /s/ John H. Underwood Director June 12, 1998 John H. Underwood SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 DATAKEY, INC. EXHIBIT INDEX TO FORM S-3 Exhibit Number Description 3.1 Restated Articles of Incorporation, as amended 4.1 Certificate of Designation of Series A Preferred Stock (included in Articles of Incorporation--see Exhibit 3.1) 5.1 Opinion and Consent of Fredrikson & Byron, P.A. 10.1 Preferred Stock Purchase Agreement dated May 15, 1998 between the Company and certain investors 10.2 Registration Rights Agreement dated May 15, 1998 between the Company and certain investors. 23.1 Consent of McGladrey & Pullen, LLP 23.2 Consent of Fredrikson & Byron, P.A. (included in Exhibit 5.1) 24.1 Powers of Attorney (included as part of the signature page hereto) EX-3.1 2 RESTATED ARTICLES CERTIFICATE OF RESTATED ARTICLES OF INCORPORATION OF DATAKEY, INC. We the undersigned William P. Flies and Thomas R. King, respectively the president and secretary of Datakey, Inc., a corporation subject to the provisions of the Minnesota Business Corporations Act, do hereby certify that, pursuant to action taken by the directors of the Corporation at a regularly scheduled meeting thereof and a majority vote of the outstanding shares of the Corporation present in person or by proxy at an annual meeting thereof, the Corporation effective as of May 24, 1982 elected to become governed by Minnesota Statutes Ch. 302A and, in addition, approved and adopted the following Restated Articles of Incorporation to supercede and take place of the existing Articles of Incorporation. ARTICLE I The name of the Corporation is Datakey, Inc. ARTICLE II The registered office of this Corporation is located at 12281 Nicollet Avenue South, Burnsville, Minnesota, 55337. ARTICLE III 3.01 The aggregate number of shares of stock which this Corporation shall have the authority to issue is 5,000,000. All common stock issued by the Corporation shall have a par value of $.05 per share. 3.02. The board of directors may from time to time establish by resolution different classes or series of shares and may fix the rights and preferences of said shares in any class or series. 3.03. No shareholder of the Corporation shall have any preemptive rights. 3.04. No shareholder shall be entitled to any cumulative voting rights. 3.05. The shareholders shall take action by the affirmative vote of the holders of a majority of the voting power of all voting shares outstanding, except where a larger proportion is required by law, these articles or a shareholder control agreement. ARTICLE IV The name and address of the original incorporator of this Corporation is: William P. Flies, 12808 Woodview Lane, Burnsville, Minnesota, 55337. ARTICLE V The names and addresses of the present board of directors are: William P. Flies Richard A. Walter 12281 Nicollet Avenue 10101 E. Bren Road Burnsville, MN 55337 Minnetonka, MN 55343 Thomas R. King Timothy P. Stepanek 600 Midwest Plaza Bldg. 1730 Midwest Plaza Bldg. Minneapolis, MN 55402 Minneapolis, MN 55402 IN WITNESS WHEREOF, we have hereunto set our hands this 24th day of May, 1982. /s/ William P. Flies William P. Flies, President /s/ Thomas R. King Thomas R. King, Secretary STATE OF MINNESOTA ) ) ss. COUNTY OF HENNEPIN ) William P. Flies and Thomas R. King, being duly sworn on oath, depose and say that they are, respectively, the president and secretary of Datakey, Inc., the corporation named in the foregoing certificate; that said certificate contains a true statement of the action of the shareholders and board of directors of said corporation; that said certificate is executed on behalf of said corporation by its express authority; and that they further acknowledge the same to be their free act and deed and the free act, and deed of said corporation. /s/ William Flies /s/ Thomas R. King Subscribed and sworn to before me this 24th day of May, 1982. /s/ Elizabeth A. Forehand Notary Public - Minnesota Hennepin County My commission expires 3-13-87 OFFICERS' CERTIFICATE OF DATAKEY, INC. We, the undersigned, John H. Underwood and Thomas R. King, the respective President and Secretary of Datakey, Inc., a corporation subject to the provisions of Minnesota Statutes, Chapter 302A, do hereby certify that the Minutes of Action Without Meeting of the Board of Directors of the corporation dated December 23, 1985, a copy of which is attached hereto and incorporated herein by reference, in which the Board of Directors authorized the issuance of Preferred Stock, were unanimously adopted and approved by such Board of Directors. IN WITNESS WHEREOF, we have subscribed our names this 23rd day of December, 1985. /s/ John H. Underwood John H. Underwood President /s/ Thomas R. King Thomas R. King Secretary STATE OF MINNESOTA ) ) ss. COUNTY OF HENNEPIN ) On this 23rd day of December, 1985, before a Notary Public within and for said County, personally appeared John H. Underwood and Thomas R. King, to me personally known, being by me duly sworn, and did say that they are the President and Secretary, respectively, of the corporation named above and that the said instrument was signed on behalf of the corporation and the persons who signed said instrument acknowledged it to be the free act and deed of said corporation. /s/ Diane M. Dossetto Notary Public - Minnesota Ramsey County My commission expires 7-10-90 MINUTES OF ACTION WITHOUT MEETING OF THE BOARD OF DIRECTORS OF DATAKEY, INC. The undersigned, being all of the members of the Board of Directors of Datakey, Inc., hereby adopt, by action without meeting, the following resolutions to be effective as of December 23, 1985, to-wit: RESOLVED: That the Preferred Stock authorizing resolutions, which resolutions are attached hereto as Exhibit A and which resolutions establish a class of Convertible Preferred Stock be and they hereby are adopted. FURTHER RESOLVED: That the officers of the corporation be, and they hereby are, authorized and directed to take whatever action is necessary to effect the foregoing resolutions. /s/ John H. Underwood John H. Underwood /s/ William P. Flies William P. Flies /s/ Timothy A. Stepanek Timothy A. Stepanek /s/ Thomas R. King Thomas R. King EXHIBIT A MINUTES OF ACTION WITHOUT MEETING OF THE BOARD OF DIRECTORS OF DATAKEY, INC. The undersigned, being all of the members of the Board of Directors of Datakey, Inc., hereby adopt, by action without meeting, the following resolution to be effective as of December 23, 1985, to-wit: WHEREAS, the Articles of Incorporation of Datakey, Inc., a Minnesota corporation, authorize the corporation to issue an aggregate of 5,000,000 shares of capital stock and empower the corporation's Board of Directors to establish from time to time by resolution different classes or series of shares and to fix the rights and preferences of said shares in any class or series; and WHEREAS, there currently are outstanding 2,979,750 shares of Common Stock, the remaining 2,020,250 authorized shares of capital stock being undesignated; and WHEREAS, the corporation's Board of Directors deems it to be in the best interests of the corporation and its shareholders to establish a second class of capital stock, Convertible Preferred Stock, having certain rights and preferences; NOW, THEREFORE, BE IT RESOLVED, that the 5,000,000 shares of capital stock authorized by the Articles of Incorporation of this corporation be, and they hereby are, designated as belonging to the following classes having the relative rights and preferences set forth below: Section 1. Shares and Classes Authorized. Of the 5,000,000 shares which the corporation is authorized to issue, 4,000,000 shares shall be designated Common Stock, par value $.05, 400,000 shares shall be designated Convertible Preferred Stock and 600,000 shares shall be undesignated capital stock. Section 2. Right and Preferences of Convertible Preferred Stock. The rights and preferences of the 400,000 shares of Convertible Preferred Stock shall be as set forth in Exhibit 1 which is attached hereto and made a part hereof. /s/ William P. Flies William P. Flies /s/ John H. Underwood John H. Underwood /s/ Timothy A. Stepanek Timothy A. Stepanek /s/ Thomas R. King Thomas R. King EXHIBIT 1 CERTIFICATE OF RIGHTS AND PREFERENCES OF CONVERTIBLE PREFERRED STOCK OF DATAKEY, INC. (A). Classification of Undesignated Shares. Of the 1,000,000 undesignated shares which the corporation is authorized to issue under its Articles of Incorporation, 400,000 of such shares shall all be classified as shares of Convertible Preferred Stock of the corporation (the "Preferred Stock"). Such shares of Preferred Stock, together with the 4,000,000 authorized shares of Common Stock of the corporation (the "Common Stock") and the balance of the undesignated shares of the corporation, are sometimes hereinafter collectively referred to as the "capital stock". (B). Voting Privileges. (a) General. Each holder of Preferred Stock shall have that number of votes on all matters submitted to the stockholders that is equal to the number of shares of Common Stock into which such holder's shares of Preferred Stock are then convertible, as hereinafter provided. Except as otherwise provided in subparagraph (b) below, and except as otherwise required by agreement or law, the shares of capital stock of the corporation shall vote as a single class on all matters submitted to the stockholders. (b) Without the affirmative vote of the holders (acting together as a class) of at least a majority (with respect to (1) below) or at least 90% (with respect to (2) below) of the shares of Preferred Stock at the time outstanding, the corporation shall not: (1) authorize or issue any shares of stock having a priority over Preferred Stock or ranking on a parity therewith as to the payment or distribution of assets upon the liquidation or dissolution, voluntary or involuntary, of the corporation; or (2) amend the Articles of Incorporation of the corporation so as to alter any existing provision relating to Preferred Stock. (c) No Cumulative Voting. No holder of shares of capital stock shall have any cumulative voting rights. (C). No Preemptive Rights. No holder of shares of any class of capital stock shall be entitled as such, as a matter of right, to subscribe for, purchase or receive any part of any new or additional issue of stock of any class whatsoever, or of securities convertible into or exchangeable for any stock of any class whatsoever, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend. (D). Cash Dividends. Any dividend declared must be payable with respect to all outstanding shares of capital stock of the corporation. In the event any dividend is declared with respect to the capital stock, each holder of Preferred Stock shall be paid such cash dividend on the basis of the number of shares of Common Stock into which such holder's shares of Preferred Stock are then convertible, as hereinafter provided. (E). Other Terms of the Preferred Stock. (a) Liquidation Preference. In the event of either an involuntary or a voluntary liquidation or dissolution of the corporation, the holders of shares of Preferred Stock shall be entitled to receive out of the assets of the corporation an amount equal to $2.50 per share. In the event of either an involuntary or voluntary liquidation or dissolution of the corporation, payment shall be made to the holders of the Preferred Stock in the amounts herein fixed before any payment shall be made or any assets distributed to the holders of the Common Stock or any other class of shares of the corporation ranking junior to the Preferred Stock with respect to payment of dividends or upon dissolution or liquidation of the corporation. If upon any such liquidation or dissolution of the corporation the assets available for distribution `shall be insufficient to pay the holders of all outstanding shares of Preferred Stock the full amounts to which they respectively shall be entitled, the holders of such shares shall share pro rata in any such distribution. The merger or consolidation of the corporation into or with another corporation or the merger or consolidation of any other corporation into or with the corporation (in which consolidation or merger the stockholders of the corporation receive distribution of cash or securities or other property as a result of such consolidation or merger), or the sale, transfer or other disposition of all or substantially all of the assets of the corporation, shall be deemed, for purposes of determining the amounts to be received by the holders of the Preferred Stock in such merger, consolidation, sale, transfer or other disposition, to be a liquidation or dissolution of the corporation for purposes of this subparagraph (a) if the holders of a majority of the outstanding shares of Preferred Stock so elect by giving written notice thereof to the corporation at least two days before the effective date of such event. If no such notice is given, the provisions of subparagraph (c)(7) hereof shall apply. Nothing hereinabove set forth shall affect in any way the right of each holder of shares of Preferred Stock to convert such shares at any time and from time to time in accordance with subparagraph (c) below. (b) Redemptions. Redemptions of shares of Preferred Stock by the corporation without the consent of the holders thereof are not permitted. Mandatory redemptions of shares of Preferred Stock by the corporation are not required. (c) Conversion Right; Mandatory Conversion. At the option of the holders thereof, the shares of Preferred Stock shall be convertible, at the office of the corporation (or at such other office or offices, if any, as the Board of Directors may designate), into fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100th of a share) of Common Stock of the corporation, at the conversion price, determined as hereinafter provided, in effect at the time of conversion, each share of the Preferred Stock being taken at $2.50 for the purpose of such conversion. The price at which shares of Common Stock shall be delivered upon conversion (herein called the "conversion price") shall be initially $2.50 per share of Common Stock (i.e., at an initial conversion rate of one share of Common Stock for each share of Preferred Stock), provided, however, that such initial conversion price shall be subject to adjustment from time to time in certain instances as hereinafter provided. The following provisions shall govern such right of conversion: (1) In order to convert shares of Preferred Stock into shares of Common Stock of the corporation, the holder thereof shall surrender at any office hereinabove mentioned the certificate or certificates therefor, duly endorsed to the corporation or in blank, and give written notice to the corporation at such office that such holder elects to convert such shares. Shares of Preferred Stock shall be deemed to have been converted immediately prior to the close of business on the day of the surrender of such shares for conversion as herein provided, and the person entitled to receive the shares of Common Stock of the corporation issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock at such time. As promptly as practicable on or after the conversion date, the corporation shall issue and deliver or cause to be issued and delivered at such office a certificate or certificates for the number of shares of Common Stock of the corporation issuable upon such conversion. (2) The conversion price shall be subject to adjustment from time to time as hereinafter provided. Upon each adjustment of the conversion price each holder of shares of Preferred Stock shall thereafter be entitled to receive the number of shares of Common Stock of the corporation obtained by multiplying the conversion price in effect immediately prior to such adjustment by the number of shares issuable pursuant to conversion immediately prior to such adjustment and dividing the product thereof by the conversion price resulting from such adjustment. (3) Except for the issuance of Conversion Stock and Warrant Stock (as those terms are defined in the Preferred Stock Purchase Agreement dated December 16, 1985 among the corporation and the Purchasers named therein) (a) if and whenever on or prior to June 30, 1987 the corporation shall issue or sell any shares of its Common Stock for a consideration per share less than the conversion price in effect immediately prior to the time of such issue or sale, then forthwith upon such issue or sale the conversion price shall be reduced to such lesser price, and (b) if and whenever after June 30, 1987 the corporation shall issue or sell any shares of its Common Stock for a consideration per share less than the conversion price in effect immediately prior to the time of such issue or sale, and/or the corporation shall issue or sell any shares of Common Stock for a consideration per share less than the market price on the date of such issue or sale, then forthwith upon such issue or sale the conversion price shall be reduced to the price (calculated to the nearest cent) determined by dividing (1) an amount equal to the sum of (aa) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the then existing conversion price, and (bb) the consideration, if any, received by the corporation upon such issue or sale, by (2) an amount equal to the sum of (aa) the number of shares of Common Stock outstanding immediately prior to such issue or sale and (bb) the number of shares of Common Stock thus issued or sold. For the purposes of this subparagraph (3), the following provisions (i) to (vii), inclusive, shall also be applicable: (i) In case at any time the corporation shall grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, (a) Common Stock or (b) any obligations or any shares of stock of the corporation which are convertible into, or exchangeable for, Common Stock (any of such obligations or shares of stock being hereinafter called "Convertible Securities") whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined by dividing (x) the total amount, if any, received or receivable by the corporation as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the, corporation upon the exercise of such rights or options, plus, in the case of such Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue of such Convertible Securities and upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options) shall be less than the conversion price in effect immediately prior to the time of the granting of such rights or options, then the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such rights or options shall (as of the date of granting of such rights or options) be deemed to have been issued for such price per share. Except as provided in subparagraph (6) below, no further adjustments of the conversion price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such rights or options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. (ii) In case the corporation shall issue or sell (whether directly or by assumption in a merger or otherwise) any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (x) the total amount received or receivable by the corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the corporation upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the conversion price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share, provided that (a) except as provided in subparagraph (6) below, no further adjustments of the conversion price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and (b) if any such issue or sale of such Convertible Securities is made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the conversion price have been or are to be made pursuant to other provisions of this subparagraph (3), no further adjustment of the conversion price shall be made by reason of such issue or sale. (iii) In case the corporation shall, after June 30, 1987, declare a dividend or make any other distribution upon any capital stock of the corporation payable in Common Stock or Convertible Securities, or in any rights or options to purchase any Common Stock or Convertible Securities, any Common Stock or Convertible Securities, or any such rights or options, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. (iv) In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the corporation therefor, without deducting therefrom any expenses incurred or any underwriting commissions or concessions paid or allowed by the corporation in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the corporation shall be deemed to be the fair value of such consideration as determined by the Board of Directors of the corporation, without deducting therefrom any expenses incurred or any underwriting commissions or concessions paid or allowed by the corporation in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase such Common Stock or Convertible Securities shall be issued in connection with any merger or consolidation in which the corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value as determined by the Board of Directors of the corporation of such portion of the assets and business of the non-surviving corporation or corporations as such Board shall determine to be attributable to such Common Stock, Convertible Securities, rights or options, as the case may be. In the event of any consolidation or merger of the corporation in which the corporation is not the surviving corporation or in the event of any sale of all or substantially all of the assets of the corporation for stock or other securities of any other corporation, the corporation shall be deemed to have issued a number of shares of its Common Stock for stock or securities of the other corporation computed on the basis of the actual exchange ratio on which the transaction was predicated and for a consideration equal to the fair market value on the date of such transaction of such stock or securities of the other corporation, and if any such calculation results in adjustment of the conversion price, the determination of the number of shares of Common Stock issuable upon conversion immediately prior to such merger, conversion or sale, for purposes of subparagraph (7) below, shall be made after giving effect to such adjustment of the conversion price. (v) In case the corporation shall take a record of the holders of its Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in Common Stock or in Convertible Securities, or in any rights or options to purchase any Common Stock or Convertible Securities, or (b) to subscribe for or purchase Common Stock or Convertible Securities, then the date of such record shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such rights of subscription or purchase, as the case may be. (vi) The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the corporation, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purpose of this subparagraph (3). (vii) "Market price" shall mean the average of the high and low prices of the Common Stock sales on all exchanges on which the Common Stock may at the time be listed, or, if there shall have been no sales on any such exchange on any such day, the average of the bid and asked prices at the end of such day, or, if the Common Stock shall not be so listed, the average of the bid and asked prices at the end of the day in the over-the-counter market, in each case averaged over a period of 20 consecutive business days prior to the date as of which "market price" is being determined. If at any time the Common Stock is not listed on any exchange or quoted in the over-the-counter market, the "market price" shall be deemed to be the higher of (i) the book value thereof as determined by any firm of independent public accountants of recognized standing selected by the Board of Directors of the corporation as of the last day of any month ending within 60 days preceding the date as of which the determination is to be made, or (ii) the fair value thereof determined in good faith by the Board of Directors of the corporation as of a date which is within 15 days of the date as of which the determination is to be made. (4) In case the corporation shall declare a dividend or make a distribution upon the Common Stock payable otherwise than out of earnings or earned surplus (including dividends or distributions in Common Stock or Convertible Securities, or in any rights or options to purchase any Common Stock or Convertible Securities), then thereafter each holder of shares of Preferred Stock upon the conversion thereof will be entitled to receive the number of shares of Common Stock into which such shares of Preferred Stock have been converted, and, in addition and without payment therefor, the cash, stock or other securities and other property which such holder would have received by way of dividends (otherwise than out of such earnings or surplus) if continuously since such holder became the record holder of such shares of Preferred Stock such holder (i) had been the record holder of the number of shares of Common Stock then received, and (ii) had retained all dividends or distributions in stock or securities (including Common Stock or Convertible Securities, or in any rights or options to purchase any Common Stock or Convertible Securities) payable in respect of such Common Stock or in respect of any stock or securities paid as dividends or distributions and originating directly or indirectly from such Common Stock. For the purposes of the foregoing a dividend or distribution other than in cash shall be considered payable out of earnings or earned surplus only to the extent that such earnings or surplus are charged an amount equal to the fair value of such dividend or distribution as determined by the Board of Directors of the corporation. (5) In case the corporation shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares, the conversion price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the corporation shall be combined into a smaller number of shares, the conversion price in effect immediately prior to such combination shall be proportionately increased. (6) If (i) the purchase price provided for in any right or option referred to in clause (i) of subparagraph (3), or (ii) the additional consideration, if any, payable upon the conversion or exchange of Convertible Securities referred to in clause (i) or clause (ii) of subparagraph (3), or (iii) the rate at which any Convertible Securities referred to in clause (i) or clause (ii) of subparagraph (3) are convertible into or exchangeable for Common Stock, shall change at any time (other than under or by reason of provisions designed to protect against dilution), the conversion price then in effect hereunder shall forthwith be increased or decreased to such conversion price as would have obtained had the adjustments made upon the issuance of such rights, options or Convertible Securities been made upon the basis of (a) the issuance of the number of shares of Common Stock theretofore actually delivered upon the exercise of such options or rights or upon the conversion or exchange of such Convertible Securities, and the total consideration received therefor, and (b) the issuance at the time of such change of any such options, rights, or Convertible Securities then still outstanding for the consideration, if any, received by the corporation therefor and to be received on the basis of such changed price; and on the expiration of any such option or right or the termination of any such right to convert or exchange such Convertible Securities, the conversion price then in effect hereunder shall forthwith be increased to such conversion price as would have obtained had the adjustments made upon the issuance of such rights or options or Convertible Securities been made upon the basis of the issuance o the shares of Common Stock theretofore actually delivered (and the total consideration received therefor) upon the exercise of such rights or options or upon the conversion or exchange of such Convertible Securities. If the purchase price provided for in any right or option referred to in clause (i) of subparagraph (3), or the rate at which any Convertible Securities referred to in clause (i) or clause (ii) of subparagraph (3) are convertible into or exchangeable for Common Stock, shall decrease at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of Common Stock upon the exercise of any such right or option or upon conversion or exchange of any such Convertible Security, the conversion price then in effect hereunder shall forthwith be decreased to such conversion price as would have obtained had the adjustments made upon the issuance of such right, option or Convertible Security been made upon the basis of the issuance of (and the total consideration received for) the shares of Common Stock delivered as aforesaid. (7) If any capital reorganization or reclassification of the capital stock of the corporation, or consolidation or merger of the corporation with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, and subject to subparagraph (a) above, lawful and adequate provision shall be made whereby the holders of Preferred Stock shall thereafter have the right to receive upon the basis and upon the terms and conditions specified herein and in lieu of the shares of the Common Stock of the corporation immediately theretofore receivable upon the conversion of Preferred Stock, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore receivable upon the conversion of Preferred Stock had such reorganization, reclassification, consolidation, merger or sale not taken place, plus all dividends unpaid and accumulated or accrued thereon to the date of such reorganization, reclassification, consolidation, merger or sale, and in any such case appropriate provision shall be made with respect to the rights and interests of the holders of Preferred Stock to the end that the provisions hereof (including without limitation provisions for adjustments of the conversion price and of the number of shares receivable upon the conversion of Preferred Stock) shall thereafter be applicable, as nearly as may be in relation to any shares of stock, securities or assets thereafter receivable upon the conversion of Preferred Stock. The corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the corporation) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument executed and mailed to the holders of Preferred Stock, at the last addresses of such holders appearing on the books of the corporation, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to receive. (8) Upon any adjustment of the conversion price, then and in each case the corporation shall give written notice thereof, by first-class mail, postage prepaid, addressed to the holders of Preferred Stock, at the addresses of such holders as shown on the books of the corporation, which notice shall state the conversion price resulting from such adjustment and the increase or decrease, if any, in the number of shares receivable at such price upon the conversion of Preferred Stock, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (9) In case at any time: (i) the corporation shall declare any cash dividend on its Common Stock at a rate in excess of the rate of the last cash dividend theretofore paid; (ii) the corporation shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than regular cash dividends) to the holders of its Common Stock; (iii) the corporation shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (iv) there shall be any capital reorganization, or reclassification of the capital stock of the corporation, or consolidation or merger of the corporation with, or sales of all or substantially all of its assets to, another corporation; or (v) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the corporation; then, in any one or more of said cases, the corporation shall give written notice, by first-class mail, postage prepaid, addressed to the holders of Preferred Stock at the addresses of such holders as shown on the books of the corporation, of the date on which (a) the books of the corporation shall close or a record shall be taken for such dividend, distribution or subscription rights, or (b) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, or winding up, as the case may be. Such written notice shall be given at least 20 days prior to the action in question and not less than 20 days prior to the record date or the date on which the corporation's transfer books are closed in respect thereto. (10) If any event occurs as to which in the opinion of the Board of Directors of the corporation the other provisions of this paragraph (c) are not strictly applicable or if strictly applicable would not fairly protect the rights of the holders of Preferred Stock in accordance with the essential intent and principles of such provisions, then the Board of Directors shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such rights as aforesaid. (11) As used in this paragraph (c) the term "Common Stock" shall mean and include the corporation's presently authorized Common Stock and shall also include any capital stock of any class of the corporation hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the corporation; provided that the shares receivable pursuant to conversion of shares of Preferred Stock shall include shares designated as Common Stock of the corporation as of the date of issuance of such shares of Preferred Stock, or, in case of any reclassification of the outstanding shares thereof, the stock, securities or assets provided for in subparagraph (7) above. (12) No fractional shares of Common Stock shall be issued upon conversion, but, instead of any fraction of a share which would otherwise be issuable, the corporation shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the market price per share of Common Stock, determined pursuant to subparagraph (3)(vii) above, as of the close of business on the day of conversion. Mandatory Conversion. Preferred Stock shall automatically be converted into shares of Common Stock of the corporation, without any act by the corporation or the holders of Preferred Stock, concurrently with the closing of the first public offering by the corporation of shares of Common Stock of the corporation registered under the Securities Act of 1933, as amended, in which (1) the offering is underwritten on a firm commitment basis by an underwriter, or a group of underwriters represented by an underwriter or underwriters, and (2) the aggregate public offering price of the securities sold for cash by the corporation in the offering, net of expenses payable by the corporation in connection with such offering, is at least $5,000,000, and (3) the public offering price per share of Common Stock is at least $5 (as adjusted from time to time to reflect stock splits, dividends, recapitalizations, combinations or the like). As used herein, the term "closing" shall mean the delivery by the corporation to the underwriters of certificates representing the shares of Common Stock of the corporation offered to the public against delivery to the corporation by such underwriters of payment therefor. The term "firm commitment basis" with respect to the underwriting of such public offering shall mean a commitment pursuant to a written underwriting agreement under which the nature of the underwriters' commitment is such that all securities will be purchased by such underwriters if any securities are purchased by such underwriters. Each holder of a share of Preferred Stock so converted shall be entitled to receive the full number of shares of Common Stock into which such share of Preferred Stock held by such holder could be converted if such holder had exercised its conversion right at the time of closing of such public offering. Upon such conversion, each holder of a share of Preferred Stock shall immediately surrender such share in exchange for appropriate stock certificates representing a share or shares of Common Stock of the corporation. ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION OF DATAKEY, INC. Pursuant to the provisions of Minnesota Statutes, Section 302A.135, the following Amendment of Section 3.01 of the Articles of Incorporation of Datakey, Inc. was adopted at a meeting of the shareholders of the corporation duly convened and held on the 6th day of May, 1986, by a vote of 84% of the voting power of all shares entitled to vote: "3.01 The aggregate number of shares of stock which this corporation shall have authority to issue is 12,500,000 shares, consisting of 10,000,000 shares of Common Stock, par value $.05, 400,000 shares of Preferred Stock and 2,100,000 undesignated shares." I swear that the foregoing is true and accurate and that I have the authority to sign this document on behalf of the corporation. /s/ John H. Underwood John H. Underwood, President STATE OF MINNESOTA ) ) SS. COUNTY OF Dakota ) The foregoing instrument was acknowledged before me this 25th day of June, 1986, by John H. Underwood, President of Datakey, Inc., a Minnesota corporation, on behalf of the corporation. /s/ Bette F. Feahr Notary Public - Minnesota Dakota County My commission expires 8-20-91 (Notarial Seal) ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORAT10N OF DATAKEY, INC. Pursuant to the provisions of Minnesota Statutes, Section 302A.135, the following Amendment of the Articles of Incorporation of Datakey, Inc., adding Article VI, was adopted at a meeting of the shareholders of the corporation duly convened and held on the May 12, 1987, by a majority vote of the voting power of all shares entitled to vote: "ARTICLE VI - LIMITATION OF DIRECTOR LIABILITY 6.1) To the fullest extent permitted by the Minnesota Business Corporation Act as the same exists or may hereafter be amended, a director of this corporation shall not be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director." I swear that the foregoing is true and accurate and that I have the authority to sign this document on behalf of the corporation. /s/ John H. Underwood John H. Underwood, President STATE OF MINNESOTA ) ) SS. COUNTY OF DAKOTA ) The foregoing instrument was acknowledged before me this 27 day of May, 1987, by John H. Underwood, President of Datakey, Inc., a Minnesota corporation, on behalf of the corporation. /s/ Bette F. Feahr Notary Public - Minnesota Dakota County My commission expires 8-20-91 (Notarial Seal) Notice of Change of Registered Office by DATAKEY, INC. Pursuant to Minnesota Statutes, Section 302A.123, the undersigned hereby certifies that the Board of Directors of the above named Minnesota Corporation has resolved to change the corporation's registered office or agent: FROM: Datakey, Inc. 12281 Nicollet Avenue South Burnsville, MN 55337 TO: Datakey, Inc. 407 West Travelers Trail Burnsville, MN 55337-2554 The new address may not be a post office box. It must be a street address, pursuant to Minnesota Statutes, Section 302A.011, Subd. 3. The effective date of the change will be the 1st day of July, 1987 or the day of filing of this certificate with the Secretary of State, whichever is later. I swear that the foregoing is true and accurate and that I have the authority to sign this document on behalf of the corporation. /s/ George H. M. Rountree George H. M. Rountree Vice President Finance July 11, 1988 State of Minnesota ) ) ss. County of Dakota ) The foregoing instrument was acknowledged before me on this 11th day of July, 1988. /s/ Bette F. Feahr Notary Public - Minnesota Dakota County My commission expires 8-20-91 State of Minnesota Department of State Filed: August 10, 1988 STATEMENT OF DESIGNATION OF SHARES OF DATAKEY, INC. The undersigned hereby certifies that the resolutions set forth on Exhibit A attached hereto were duly adopted by the Board of Directors of Datakey, Inc. on May 11, 1998. I swear that the foregoing is true and accurate and that I have the authority to sign this document on behalf of the corporation. May 14, 1998 DATAKEY, INC. /s/ Alan G. Shuler Alan G. Shuler Vice President and Chief Financial Officer EXHIBIT A DESIGNATION OF SERIES A CONVERTIBLE CUMULATIVE PREFERRED STOCK WHEREAS, pursuant to the Articles of Incorporation of this corporation, the Board of Directors has authority to establish, from the 2,100,000 undesignated shares of capital stock, one or more classes or series of shares, to designate each such class or series, and to fix the relative rights and preferences of each such class or series; and WHEREAS, the Board of Directors deem it advisable to designate shares of Series A Convertible Cumulative Preferred Stock; NOW, THEREFORE, RESOLVED, that of the 2,100,000 undesignated shares currently authorized, 150,000 shares are hereby designated as shares of Series A Convertible Cumulative Preferred Stock, which shares shall have the terms as set forth on Exhibit A hereto. EXHIBIT A RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK The rights, preferences, restrictions and other matters relating to the Series A Convertible Cumulative Preferred Stock (the "Series A Preferred Stock") are as follows: 1. Dividend Provisions. Upon issuance, dividends shall accrue on each share of outstanding Series A Preferred Stock at an annual rate equal to $1.264 per share per annum (8% of the Original Issue Price, as defined herein). Such dividends shall be cumulative and shall be payable upon any conversion of the Series A Preferred Stock pursuant to Section 3 hereof. Such dividends shall only be paid out of legally available funds of the Company. Such dividends shall be payable by the Company, in its sole discretion, all in cash or all by the issuance of a number of shares of the Company's unrestricted, freely tradable common stock equal to the dividends owing on the Series A Preferred Stock; provided, however, that prior to the payment of any such dividend by the issuance of shares of the Company's common stock, the Company shall deliver to the Investors an opinion of its counsel stating that all such shares have been validly registered, and that they are duly authorized, validly issued and nonassessable. For the purposes hereof, the number of shares of the Company's common stock issuable in lieu of any cash dividend payment shall equal the total dividend payment then due divided by the per share price of such stock. The per share price of the Company's common stock shall be determined based on the average closing bid price of such stock quoted on The Nasdaq Stock Market for the ten consecutive trading days prior to the payment of such dividends. Dividends on shares of the Series A Preferred Stock shall accrue beginning on the date of issuance of the shares of Series A Preferred Stock, shall compound on an annual basis and shall be payable upon conversion of the Series A Preferred Stock (a "Payment Date"). All accrued and unpaid dividends on the Series A Preferred Stock must be paid before any dividends may be declared or paid on any other junior series of preferred or common stock issued by the Company. 2. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of the previously issued Convertible Preferred Stock (the "Convertible Preferred Stock") and the Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of common stock by reason of their ownership thereof, an amount per share equal to $2.50 for the Convertible Preferred Stock, and for the Series A Preferred Stock the sum of (i) $15.80, as adjusted pursuant to Section 4(c) hereof (the "Original Issue Price"), and (ii) an amount equal to cumulative unpaid dividends on such shares (respectively, a "Liquidation Amount"). If upon the occurrence of such an event, the assets and funds thus distributed among the holders of the Convertible Preferred Stock and the Series A Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the holders of the Convertible Preferred Stock and the Series A Preferred Stock in proportion to the amount of such stock owned by each such holder multiplied by the appropriate Liquidation Amount. (b) Upon the completion of the distribution required by subparagraph (a) of this Section 2, if assets remain in the Company, the remaining assets of the Company shall be distributed ratably among the holders of the Company's common stock and the Series A Preferred Stock in proportion to the number of shares of common stock held by each (assuming full conversion of all shares of Series A Preferred Stock). (c) (i) For purposes of this Section 2, a liquidation, dissolution or winding up of the Company shall be deemed to be occasioned by, or to include, (A) the acquisition of the Company by another entity by means of any transaction or series of related transactions (including any reorganization, merger or consolidation but excluding any merger effected exclusively for the purpose of changing the domicile of the Company); or (B) a sale of all or substantially all of the assets of the Company, unless the Company's shareholders as constituted immediately prior to such acquisition or sale will, immediately after such acquisition or sale (by virtue of securities issued as consideration for the Company's acquisition or sale or otherwise) hold at least 50% of the voting power of the surviving or acquiring entity. (ii) In any of such events, if the consideration received by the Company is other than cash, its value will be deemed its fair market value. (iii) In the event the requirements of this Section 2 are not complied with, the Company shall forthwith either: (A) cause such closing to be postponed until such time as the requirements of this Section 2 have been complied with, or (B) cancel such transaction, in which event the rights, preferences and privileges of the holders of the Convertible Preferred Stock and the Series A Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in subsection 2(c)(iv) hereof. (iv) The Company shall give each holder of record of Convertible Preferred Stock and the Series A Preferred Stock written notice of such impending transaction not later than 20 days prior to the shareholders' meeting called to approve such transaction, or 20 days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction; provided, however, that the holder of any shares of then outstanding Convertible Preferred Stock or Series A Preferred Stock shall have the right during such 20-day period to convert such shares pursuant to Section 3 hereof. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 2, and the Company shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than 20 days after the Company has given the first notice provided for herein or sooner than ten days after the Company has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of the Convertible Preferred Stock and the Series A Preferred Stock that are entitled to such notice rights or similar notice rights and that represent at least a majority of the voting power of all then outstanding shares of each of the classes of preferred stock, voting separately as a class. 3. Conversion. (a) Conversion Right. At the option of the holder thereof, each share of Series A Preferred Stock shall be convertible at any time during the period commencing on the day on which the Series A Preferred Stock is issued and expiring on May 15, 2000 (the date which is the second anniversary of the date of issuance of the Series A Preferred Stock); provided, however, that such expiration date shall be extended for a number of days equal to the number of days beyond the 90th day following the date of issuance of the Series A Preferred Stock that the Registration Statement (as such term is defined in the Registration Rights Agreement, of even date herewith, entered into by and between the Company and the Investors set forth on Schedule A thereto) is not effective (such date, including any extension thereof pursuant to the foregoing proviso, being herein referred to as the "Second Anniversary"). The Series A Preferred Stock shall be convertible at the office of the Company or any transfer agent for such stock into such number of fully paid and nonassessable shares of the Company's common stock as is determined by dividing the Original Issue Price, subject to adjustment as provided in Section 4, by the Conversion Price applicable to such shares, determined as hereafter provided, in effect on the date the certificates representing such shares are surrendered for conversion (the "Conversion Date"). The Conversion Price shall be equal to the average closing bid price of one share of the Company's common stock as quoted by the Nasdaq SmallCap Market, the Nasdaq National Market or the principal exchange upon which shares of the Company's common stock may be listed, or, if the Company's common stock shall not then be quoted on the Nasdaq SmallCap Market or the Nasdaq National Market or listed on a national securities exchange, but shall otherwise be traded in the over-the-counter market, on such over-the-counter market for the ten-day period ending on the day prior to the Conversion Date (the "Trading Period") multiplied by .8 (the "Conversion Price"); provided, however, that in no event shall the Conversion Price exceed $5.00 per share or be less than $2.75 (the "Maximum Price" and "Minimum Price," respectively) per share; and provided, further, that appropriate adjustments shall be made in determining the average closing bid price if a recapitalization or other event affecting the Company's common stock shall occur during the Trading Period. (b) Dividend Payment. Should the Company, pursuant to Section 1 hereof, not elect to pay all outstanding, cumulative, accrued and unpaid dividends on the Series A Preferred Stock in shares of its common stock, the Company shall pay, in immediately available funds, to the holder of any shares of Series A Preferred Stock being converted, within two days, all such dividends on the date that it receives notice of such holder's intent to convert such shares pursuant to (d) below. Separately, should the Company elect to pay all outstanding, cumulative, accrued and unpaid dividends on the Series A Preferred Stock in shares of its common stock, it shall, within two business days of receiving a holder's notice of intent to convert, deliver certificates representing such shares to the holder of the Series A Preferred Stock. (c) Automatic Conversion. Any shares of Series A Preferred Stock remaining outstanding on the Second Anniversary shall be automatically converted pursuant to the conversion terms of Section 3(a) above. The Conversion Date with respect to such automatic conversion shall be the Second Anniversary. In any event, the Company shall, within two business days after automatic conversion of the Series A Preferred Stock, issue and deliver a certificate or certificates for the number of shares of the Company's common stock to which each former holder of Series A Preferred Stock is entitled. Notwithstanding the foregoing, no automatic conversion of the Series A Preferred Stock shall occur pursuant to this Section unless (i) all shares of the Company's common stock underlying the shares of Series A Preferred Stock may be sold pursuant to an effective registration statement under the Securities Act of 1933, as amended, (ii) the Company's common stock is listed and trading on The Nasdaq Stock Market, and (iii) the Company has reserved and available for issuance a number of shares of its common stock sufficient to cover conversion of all outstanding shares of Series A Preferred Stock. (d) Mechanics of Conversion. Before any holder of Series A Preferred Stock shall be entitled to convert the same into shares of the Company's common stock, he, she or it shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company or of any transfer agent for the Series A Preferred Stock, and shall give written notice, via facsimile, to the Company, at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of the Company's common stock are to be issued. The Company shall, immediately thereafter (and in any event no more than two business days thereafter), issue and deliver to such holder of Series A Preferred Stock at the address shown on the Company's records or at such other address as such party may designate by written notice to the Company, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of the Company's common stock to which such holder shall be entitled pursuant to Section 3(a) and a certificate representing shares of Series A Preferred Stock not so converted by the holder. Such conversion shall be deemed to have been made immediately prior to the close of business on the Conversion Date, and the person or persons entitled to receive the shares of the Company's common stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of the Company's common stock as of such date. (e) Mechanics of Automatic Conversion. On the Conversion Date with respect to the automatic conversion pursuant to subsection 3(c) above, the certificates representing shares of Series A Preferred Stock shall immediately represent that number of shares of the Company's common stock into which such shares are convertible. Holders of Series A Preferred Stock shall deliver their certificates, duly endorsed in blank, to the principal office of the Company, together with a notice setting out the name or names (with addresses) and denominations in which the certificates representing such shares of common stock issuable upon conversion are to be issued and including instructions for delivery thereof. The person entitled to receive the shares of the Company's common stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of common stock at and on the Conversion Date, and the rights of such person as a holder of shares of Series A Preferred Stock shall cease and terminate at and on the Conversion Date, in any case without regard to any failure by such holder to deliver the certificates or the notice required by this subsection 3(e). On the Conversion Date with respect to automatic conversion, the Company shall pay all outstanding, cumulative, accrued and unpaid dividends, either by the issuance of shares of its common stock or in cash, pursuant to the provisions set forth in (a) above; provided, however, that should the Company elect to pay such dividends by the issuance of additional shares of its common stock, the person entitled to receive such shares of the Company's common stock issuable upon such conversion shall be treated for all purposes as the record holder of such additional shares on the Conversion Date (f) No Impairment. The Company will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 3 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series A Preferred Stock against impairment. (g) No Fractional Shares. No fractional shares shall be issued upon the conversion of any share or shares of the Series A Preferred Stock, and the number of shares of the Company's common stock to be issued shall be rounded to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Series A Preferred Stock the holder is at the time converting into shares of the Company's common stock and the number of shares of such common stock issuable upon such aggregate conversion. (h) Notices of Record Date. In the event of any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Company shall mail to each holder of Series A Preferred Stock, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (i) Reservation of Stock Issuable Upon Conversion. The Company shall at all times reserve and keep available out of its authorized but unissued shares of common stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock, such number of its shares of its common stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred Stock; and if at any time the number of authorized but unissued shares of the Company's common stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, in addition to such other remedies as shall be available to the holder of such Series A Preferred Stock, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of common stock to such number of shares as shall be sufficient for such purposes, including engaging in best efforts to obtain the requisite shareholder approval of any necessary amendment to the Company's Articles of Incorporation. (j) Notices. Any notice required by the provisions of this Section 3 to be given to the holders of shares of Series A Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his, her or its address appearing on the books of the Company. 4. Anti-Dilution Provisions. The Original Issue Price shall be subject to adjustment from time to time upon the happening of any of the following events: (a) In the event the Company shall issue or sell any shares of its common stock (except as provided in paragraph (e) hereof) for a consideration per share less than the greater of (A) $5.00, or (B) 80% of the Market Price (as defined below) on the date of such issue or sale, then the Original Issue Price shall be increased to such greater price (calculated to the nearest cent) as shall be determined by multiplying the Original Issue Price by a fraction, the numerator of which shall be the number of shares of the Company's common stock outstanding immediately after the issuance or sale of such additional shares, and the denominator of which shall be the sum of (i) the number of shares of the Company's common stock outstanding immediately prior to the issuance or sale of such additional shares, and (ii) the number of shares of the Company's common stock which the aggregate consideration received for the issuance or sale of such additional shares would purchase at the greater of $5.00, or if such shares of the Company's common stock shall have been issued for a consideration per share less than 80% of the Market Price on the date of issuance or sale, the current Market Price. For purposes of this paragraph, all shares of the Company's common stock issuable upon exercise of outstanding options and warrants shall be deemed to be outstanding. (b) For the purposes of paragraph 4(a) above, the following subparagraphs (i) to (vii), inclusive, shall be applicable: (i) If at any time the Company shall issue or sell any rights to subscribe for, or any rights or options to purchase, shares of its common stock or any stock or other securities convertible into or exchangeable for such common stock (such convertible or exchangeable stock or securities being hereinafter called "Convertible Securities"), whether or not such rights or options or the right to convert or exchange any such Convertible Securities shall be immediately exercisable, and the price per share for which shares of the Company's common stock shall be issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined by dividing (1) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of such rights or options, plus, in the case of any such rights or options which shall relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (2) the total number of shares of the Company's common stock issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options) shall be less than the greater of (x) the $5.00, or (y) 80% of the Market Price at the time of such issue or sale, then the total number of shares of the Company's common stock issuable upon the exercise of such rights or options or upon conversion or exchange of the total amount of such Convertible Securities issuable upon the exercise of such rights or options shall (as of the date of granting of such rights or options) be deemed to be outstanding and to have been issued for such price per share, and except as provided in paragraph 4(d), no further adjustments of the Original Issue Price shall be made upon the actual issue of such shares of common stock or of such Convertible Securities, upon the exercise of such rights or options or upon the actual issue of such common stock upon conversion or exchange of such Convertible Securities. (ii) If at any time the Company shall issue or sell any Convertible Securities, whether or not the rights to exchange or convert thereunder shall be immediately exercisable, and the price per share for which shares of the Company's common stock shall be issuable upon such conversion or exchange (determined by dividing (1) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (2) the total number of shares of the Company's common stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the greater of (x) $5.00, or (y) 80% of the Market Price at the time of such issue or sale, then the total number of shares of the Company's common stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share, and, except as provided in paragraph 4(d), no further adjustments of the Original Issue Price shall be made upon the actual issue of such shares of common stock upon conversion or exchange of such Convertible Securities. In addition, if any issue or sale of such Convertible Securities shall be made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the Original Issue Price shall have been or shall be made pursuant to other provisions of this paragraph 4(b)(ii), no further adjustment of the Original Issue Price shall be made by reason of such issue or sale. (iii) If at any time the Company shall declare and pay a dividend or make any other distribution upon the shares of its common stock payable in such stock or Convertible Securities, any such stock or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. (iv) If at any time any shares of the Company's common stock or Convertible Securities or any rights or options to purchase shares of any such stock or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor, without deduction therefrom of any expenses incurred or any underwriting commissions or concessions or discounts paid or allowed by the Company in connection therewith. In case any shares of the Company's common stock or Convertible Securities or any rights or options to purchase any such common stock or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair value of such consideration as determined by the Company's Board of Directors, without deduction therefrom of any expenses incurred or any underwriting commissions or concessions or discounts paid or allowed by the Company in connection therewith. In case any shares of the Company's common stock or Convertible Securities or any rights or options to purchase any such common stock or Convertible Securities shall be issued in connection with any merger of another corporation into the Company, the amount of consideration therefor shall be deemed to be the fair value of the net assets of such merged corporation as determined by the Company's Board of Directors after deducting therefrom all cash and other consideration (if any) paid by the Company in connection with such merger. (v) If at any time the Company shall take a record of the holders of its common stock for the purpose of entitling them (1) to receive a dividend or other distribution payable in shares of the Company's common stock or in Convertible Securities, or (2) to subscribe for or purchase shares of the Company's common stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of the Company's common stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (vi) The number of shares of the Company's common stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, provided that such shares are neither issued, sold or otherwise distributed by the Company. (vii) For purposes hereof, the "Market Price" shall mean the average closing bid price of the Company's common stock on the Nasdaq SmallCap Market, the Nasdaq National Market or the principal exchange upon which shares of the Company's common stock may be listed, or, if the Company's common stock shall not then be quoted on the Nasdaq SmallCap Market or the Nasdaq National Market or listed on a national securities exchange, but shall otherwise be traded in the over-the-counter market, on such over-the-counter market, in each case for the ten day period immediately preceding any determination of such "Market Price" (subject to appropriate adjustments which shall be made in determining the average closing bid price if a recapitalization or other event affecting the Company's common stock shall occur during such 10-day period). If at any time shares of the Company's common stock shall not be quoted on the Nasdaq SmallCap Market or the Nasdaq National Market, listed on a national securities exchange, or otherwise traded in the over-the-counter market, the "Market Price" of a share of the Company's common stock shall be deemed to be the higher of (x) the book value thereof (as determined by any firm of independent public accountants of nationally recognized standing selected by the Company's Board of Directors) as of the last day of any month ending within 60 days preceding the date of determination, or (y) the fair value thereof (as determined in good faith by the Company's Board of Directors) as of a date which shall be within 15 days of the date of determination. (c) In case at any time the Company shall subdivide its outstanding shares of common stock into a greater number of shares, the Original Issue Price in effect immediately prior to such subdivision, the Maximum Price and the Minimum Price shall be proportionately reduced, and the Company shall subdivide the Series A Preferred Stock in the same proportion. In case at any time the outstanding shares of the Company's common stock shall be combined into a smaller number of shares, the Original Issue Price in effect immediately prior to such combination, the Maximum Price and the Minimum Price shall be proportionately increased, and the Company shall combine the Series A Preferred Stock in the same proportion. Any adjustment under this paragraph 4(c) shall become effective at the close of business on the date the subdivision or combination shall become effective. The Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Series A Preferred Stock to such number of shares as shall be sufficient for any such purposes, including engaging in best efforts to obtain the requisite shareholder approval of any necessary amendment to the Company's Articles of Incorporation. (d) If the purchase or exercise price provided for in any right or option referred to in paragraph 4(b)(i), or the rate at which any Convertible Securities referred to in paragraph 4(b)(i) or (ii) shall be convertible into or exchangeable for shares of the Company's common stock, shall change or a different purchase or exercise price or rate shall become effective at any time or from time to time (including any change resulting from termination of such right, option or convertible security), then, upon such change becoming effective, the Original Issue Price then in effect hereunder shall forthwith be increased or decreased to such Original Issue Price as would have been obtained had the adjustments made upon the granting or issuance of such rights or options or Convertible Securities been made upon the basis of (A) the issuance of the number of shares of the Company's common stock theretofore actually delivered upon the exercise of such options or rights or upon the conversion or exchange of such Convertible Securities, and (B) the granting or issuance at the time of such change of any such options, rights or Convertible Securities then still outstanding for the consideration, if any, received by the Company therefor and to be received on the basis of such changed price. (e) The Company shall not be required to make any adjustment to the Original Issue Price in the case of: (i) the granting, after the date hereof, by the Company of stock options under the Company's 1997 Stock Option Plan, so long as the shares of the Company's common stock underlying such options are covered by the 800,000 shares currently reserved for issuance under such plan as of the date hereof, assuming approval by the Company's shareholders of the 300,000 share increase at the Company's 1998 Annual Meeting of Shareholders; (ii) the issuance of shares of the Company's common stock, pursuant to the exercise of the options referred to in paragraph 4(e)(i) above or the exercise of any other options or warrants outstanding as of the date hereof; or (iii) the issuance of shares of the Series A Preferred Stock hereunder or of shares of the Company's common stock upon the conversion of any shares of the Series A Preferred Stock or upon the exercise of the Warrant or the Warrant issued to Miller, Johnson & Kuehn, Incorporated on the same date as the Preferred Stock Purchase Agreement to which this certificate of Designation is an Exhibit. 5. Voting Rights. The holder of each share of Series A Preferred Stock shall have the right to the number of votes on all matters submitted to the Company's shareholders that shall be equal to the number of shares of the Company's common stock into which such holder's shares of Series A Preferred Stock shall then be convertible (assuming a conversion as of the record date set for the vote). 6. Status of Converted Stock. In the event any shares of Series A Preferred Stock shall be converted pursuant to Section 3 hereof, the shares of Series A Preferred Stock so converted shall be canceled and shall not be issuable by the Company. The Articles of Incorporation of the Company shall be appropriately amended to effect the corresponding reduction in the Company's authorized capital stock. 7. Notice of Adjustment. The Company shall provide all holders of shares of Series A Preferred Stock five business days prior written notice of any adjustments in the Original Issue Price, the Maximum Price, the Minimum Price or any other adjustments made pursuant to the provisions hereof. EX-5.1 3 OPINION AND CONSENT OF COUNSEL June 11, 1998 Datakey, Inc. 407 West Travelers Trail Burnsville, Minnesota 55337 RE: REGISTRATION STATEMENT ON FORM S-3 - EXHIBIT 5.1 Gentlemen/Ladies: We have acted as counsel for Datakey, Inc. (the "Company") in connection with the Company's filing of a Registration Statement on Form S-3 (the "Registration Statement") relating to the registration under the Securities Act of 1933 (the "Act") of an offering of 896,134 shares of Common Stock (the "Shares") to be acquired by selling shareholders of the Company upon the conversion of outstanding shares of Series A Convertible Cumulative Preferred Stock (the "Preferred Stock") or upon exercise of certain stock purchase warrants (the "Warrants"). In connection with rendering this opinion, we have reviewed the following: 1. The Company's Restated Articles of Incorporation, as amended; 2. The Company's Bylaws, as amended; 3. Certain corporate resolutions, including resolutions of the Company's Board of Directors pertaining to the issuance by the Company of the shares of Preferred Stock, the Warrants and the Shares; 4. The Preferred Stock; 5. The Warrants; and 6. The Registration Statement. Based upon the foregoing and upon representations and information provided by the Company, we hereby advise you that in our opinion: 1. The Company's Restated Articles of Incorporation validly authorize the issuance of the Shares registered pursuant to the Registration Statement. 2. Upon exercise or conversion in accordance with the terms and conditions of the Preferred Stock or Warrants, the Shares to be sold by the selling shareholders named in the Registration Statement will be validly issued and outstanding, fully paid and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Matters" included in the Registration Statement and the related Prospectus. Very truly yours, FREDRIKSON & BYRON, P.A. /s/ Thomas R. King Thomas R. King, Vice President Fredrikson & Byron, P.A. 900 Second Ave. S., #1100 Minneapolis, MN 55402 Telephone: (612) 347-7000 Facsimile: (612) 347-7077 EX-10.1 4 PREFERRED STOCK PURCHASE AGREEMENT PREFERRED STOCK PURCHASE AGREEMENT This Preferred Stock Purchase Agreement is made and entered into as of the 15th day of May, 1998, between Datakey, Inc., a Minnesota corporation (the "Company"), and those investors whose names are listed on Schedule A attached hereto (collectively, the "Investors"). For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged by the Company and the Investors, the Company and the Investors agree as follows: 1. Sale and Purchase of Securities. Subject to the terms and conditions hereof, the Company agrees to sell to the Investors at the Closing (as defined herein), and the Investors agree to purchase from the Company at the Closing, such shares of the Company's Series A Convertible Cumulative Preferred Stock (the "Preferred Stock") with the rights and preferences provided in the Certificate of Designation for such Preferred Stock attached hereto as Exhibit A (the "Certificate of Designation") in the amounts set forth in Schedule A attached hereto, and a five-year Warrant in the form attached hereto as Exhibit B (the "Warrant") to purchase that number of shares of the Company's common stock, $.05 par value per share, set forth in Schedule A at an exercise price of $6.30 per share. The Preferred Stock and the Warrant are sometimes collectively referred to herein as the "Securities." 2. Closing. (a) Closing. The closing of the purchase and sale of the Securities hereunder shall take place at the offices of Leonard, Street and Deinard Professional Association, Minneapolis, Minnesota, at 1:30 p.m., Minnesota time, on May 15, 1998 or at such other place or different time or day as may be mutually acceptable to the Investors and the Company (the "Closing"). At the Closing, the Company will deliver to each Investor a Warrant representing the right to purchase that number of shares of the common stock of the Company set forth opposite such Investor's name on Schedule A attached hereto, dated such Closing date and will deliver to each Investor a certificate representing the number of shares of Preferred Stock set forth opposite such Investor's name on Schedule A and each Investor shall cause to be delivered to the Company a wire transfer or check payable to the Company in the amount set forth opposite such Investor's name on Schedule A. 3. Representations and Warranties by the Company. To induce the Investors to enter into this Agreement and to purchase the Securities, the Company hereby represents and warrants to the Investors as follows: (a) Disclosure. The Company has provided the Investors with all the information it has requested in deciding whether to purchase the Securities and all information the Company believes is necessary or appropriate relating to an investment in the Company. There are no facts which individually or in the aggregate materially adversely affect the business, assets, financial condition or prospects of the Company, except as set forth in this Agreement or any other written statements delivered in connection with this Agreement. This Agreement and the other written information delivered in connection with the transactions contemplated herein (collectively, the "Disclosed Information") fairly presents all material information regarding the Company as of the date hereof and, as of the date of the Closing, the Disclosed Information will (i) fairly present all material information regarding the Company, and (ii) not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (b) Organization, Good Standing, Etc. The Company is duly incorporated and validly existing as a corporation in good standing under the laws of the State of Minnesota, with power and authority to own its properties and conduct its business as now conducted and proposed to be conducted. The Company is duly qualified to do business as a foreign corporation and is in good standing in all states or jurisdictions in which the ownership or lease of its property or the conduct of its business requires such qualification and the failure to be so qualified would have a material adverse effect on the Company's business. The Company has one subsidiary. (c) Financial Statements. The financial statements (including all related schedules and notes) included in the Disclosed Information fairly represent the financial condition and results of operations of the Company as of the dates and for the periods indicated; such statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods indicated; and the report of the public accountant included in the Disclosed Information is issued by an independent public accountant within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder. (d) Authorization and Enforceability. The Company has full legal power, right and authority to enter into this Agreement and the Registration Rights Agreement among the Company and the Investors, the form of which is attached hereto as Exhibit E (the "Registration Rights Agreement") and to issue the Securities. This Agreement, the Registration Rights Agreement and the Securities, have been duly authorized, executed and delivered on behalf of the Company and are the valid and binding obligations of the Company, enforceable in accordance with their respective terms and subject, as to enforcement, to applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting the rights of creditors generally, to the exercise of judicial discretion as to the availability of equitable remedies such as specific performance and injunction and subject, as to enforcement of the indemnification provisions, to limitations under applicable securities laws. The Securities when delivered pursuant to the terms of this Agreement will be validly issued, fully paid and nonassessable. (e) License and Approvals. The Company has all licenses, certificates, permits and other approvals from governmental and regulatory authorities necessary for the conduct of its business as it is currently being conducted and as proposed to be conducted except those which would not have a material adverse effect or the Company if not obtained. (f) Intellectual Property. The Company owns or possesses all assets, patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets and rights necessary for the conduct of its business as it is currently being conducted and as proposed to be conducted and has not received any notice of conflict with the asserted rights of others in respect thereof. To the best of the Company's knowledge, no name which the Company uses and no other aspect of the business of the Company involves or gives rise to any infringement of, or license or similar fees for, any patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets or other similar rights of others. (g) Defaults. The Company is not in breach, default or violation of, and the execution of this Agreement and the Registration Rights Agreement and the consummation of the transactions herein and therein contemplated will not conflict with or result in any breach of, any of the terms or conditions of, or constitute a default or violation under, (i) the Articles of Incorporation, as amended, or Bylaws, as amended, of the Company, (ii) any indenture, agreement or other instrument to which the Company is now a party, or (iii) to the best of the Company's knowledge, any law or any order, rule or regulation applicable to the Company of any court or of any federal or state regulatory body or administrative agency having jurisdiction over the Company or its property. (h) Consents. No consent, authorization, approval, permit or order of or filing with any governmental or regulatory authority is required under current laws and regulations in connection with the execution and delivery of this Agreement or the Registration Rights Agreement or the offer, issuance, sale or delivery of the Securities, other than the qualification thereof, if required, under applicable state securities laws, which qualification has been or will be effected as a condition of the sale of the Securities to the Investors. The Company has not, directly or through an agent, offered the Securities or any similar securities for sale to, or solicited any offers to acquire such securities from, persons other than the Investors. Under the circumstances contemplated by this Agreement, the offer, issuance, sale and delivery of the Securities will not, under current laws and regulations, require compliance with the prospectus delivery or registration requirements of the Securities Act of 1933, as amended (the "Securities Act"). The Company has filed all reports or other documentation that it is required to file under the Exchange Act, any rules or regulations promulgated thereunder, the applicable rules and regulations of the National Association of Securities Dealers ("NASD") and all applicable state securities laws, and the information contained in such reports or other documents did not make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein made, in the light of the circumstances under which they were made, not misleading. (i) Valid Issuance of Preferred Stock. The Preferred Stock, when authorized, issued, sold and delivered in accordance with the terms hereof will be duly and validly issued, fully paid and nonassessable and will be free of restrictions on transfer other than under this Agreement, and, based in part upon the representations of the Investors in this Agreement, will be issued in compliance with federal and state securities laws. The Company has a sufficient number of shares of Preferred Stock authorized and reserved for issuance pursuant to the provisions of Section 4(c) of Exhibit A attached hereto. (j) Valid Issuance of Common Stock. The shares of the Company's common stock issuable upon conversion of the Preferred Stock and upon exercise of the Warrant have been reserved for issuance and, when issued and delivered in accordance with the terms thereof, will be duly authorized, validly issued, fully paid and non-assessable, shall be free of any pledges, liens, encumbrances and restrictions, and will be issued in compliance with all applicable federal and state securities laws. (k) Litigation/Proceedings. There are no pending, threatened or, to the Company's knowledge, contemplated actions, suits, proceedings or investigations before or by any court or governmental agency, authority or body, or any arbitrator, which are not ordinary, routine and incidental to the business of the Company or which might result in any material adverse change in the business condition (financial and other) or properties of the Company. (l) Capital Stock. The authorized capital stock of the Company consists of 12,500,000 shares, including the following: (a) 10,000,000 shares of common stock, of which 2,909,735 shares are issued and outstanding; (b) 400,000 shares of convertible preferred stock, of which 150,000 shares are issued and outstanding; (c) 150,000 shares of Series A Convertible Cumulative Preferred Stock; and (d) 1,950,000 undesignated shares. Except for an aggregate of 765,333 shares of the Company's common stock which are subject to outstanding options to employees under the Company's various stock option plans, there are no outstanding rights to acquire from the Company any shares of its capital stock. All outstanding shares of the Company's capital stock have been duly authorized, validly issued, fully paid and nonassessable and have been issued pursuant to valid registrations under, or valid exemptions from, the registration requirements of the Securities Act and appropriate state blue sky laws. (m) Title to Properties. The Company has good and marketable title, free and clear of all liens, encumbrances and equities, and of all charges or claims, to all of the real and personal property owned by it, except liens, encumbrances and equities, and charges or claims, which are not material and do not materially affect the value of such property or interfere with the conduct of the Company's business. The Company has valid and binding leases to all of the real and personal property necessary for the conduct of its business with such exceptions as do not materially interfere with the conduct of its business. (n) Tax Returns. The Company has filed all necessary federal, state and foreign income, franchise and other tax returns and has paid all taxes shown as due thereon, and the Company has received no notice of any tax deficiency which has been asserted against the Company. (o) Authority. The Company has all requisite power and authority to issue, sell and deliver the Preferred Stock and Warrant in accordance with and upon the terms set forth in this Agreement. The Company has duly taken all required action for the due and proper authorization, issuance, sale and delivery of the Preferred Stock and Warrant. No preemptive rights or other rights of subscription, first refusal or similar rights of security holders of the Company exist with respect to the issuance and sale of the Preferred Stock and Warrant by the Company or the shares of the Company's common stock issuable upon conversion and exercise, respectively, thereof. With the exception of the holder of the Convertible Preferred Stock (as such term is defined in Exhibit A attached hereto), no security holder of the Company possesses any registration rights. The issuance of the Securities and the shares of the Company's common stock underlying the Securities will not result in the issuance of any additional shares of the Company's common stock or the triggering of other anti-dilution or similar rights contained in any options, warrants or other securities issued by, or agreements of, the Company. (p) Investment Company. In retaining and using the proceeds from the sale of the Securities, the Company will not be required to register as an "Investment Company" under the Investment Company Act of 1940, as amended. (q) Bad Boy Certification. Neither the Company, any of its predecessors, any affiliated issuer nor any of the Company's directors, officers, beneficial owners of 10% or more of any class of its equity securities or other affiliates nor any promoter of the Company is subject to any of the disabilities enumerated in Exhibit C hereto and the representations and warranties contained therein are true and correct. (r) Fees and Commissions. Other than pursuant to agreements with Miller, Johnson & Kuehn, Incorporated, the Company has not incurred any liability for any finder's or broker's fee or agent's commission in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. (s) Changes, Dividends, Etc. Except for the transactions contemplated by this Agreement, since the date of the most recent financial statements of the Company provided to Investors, the Company has not: (i) incurred any debts, obligations or liabilities, absolute, accrued or contingent and whether due or to become due, except current liabilities incurred in the ordinary course of business which (individually or in the aggregate) will not materially and adversely affect the business, properties or prospects of the Company; (ii) paid any obligation or liability other than, or discharged or satisfied any liens or encumbrances other than those securing, current liabilities, in each case in the ordinary course of business; (iii) declared or made any payment to or distribution to its shareholders as such, or used or redeemed any of its shares of capital stock, or obligated itself to do so; (iv) mortgaged, pledged or subjected to lien, charge, security interest or other encumbrance any of its assets, tangible or intangible, except in the ordinary course of business; (v) sold, transferred or leased any of its assets except in the ordinary course of business; (vi) suffered any physical damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the tangible properties, business or prospects of the Company; (vii) encountered any labor difficulties or labor union organizing activities; (viii) issued or sold any shares of capital stock or other securities or granted any options other than to employees, warrants, or other purchase rights with respect thereto other than pursuant to this Agreement; (ix) made any acquisition or disposition of any material assets or became involved in any other material transaction, other than for fair value in the ordinary course of business; or (x) agreed to do any of the foregoing other than pursuant hereto. There has been no material adverse change in the financial condition, operations, results of operations or business of the Company since the date of the most recent financial statements of the Company provided to the Investors. (t) Reporting. The Company is subject to the reporting requirements of the Securities Act and the Exchange Act and (i) has timely filed all reports and statement required to be filed thereunder in the 12-month period prior to the date hereof, and (ii) each report and statement was true and complete in all material respects when filed. 4. Representations of the Investors. Each Investor represents for itself that: (a) Investment Intent. The Securities being acquired by the Investor are being purchased for investment for the Investor's own account and not with the view to, or for resale in connection with, any distribution or public offering thereof. The Investor understands that the Securities have not been registered under the Securities Act or any state securities laws by reason of their contemplated issuance in a transaction exempt from the registration requirements of the Securities Act and applicable state securities laws, and that the reliance of the Company upon these exemptions is predicated in part upon this representation by the Investor. The Investor further understands that the Securities, and the shares of the Company's common stock issuable upon conversion or exercise thereof, may not be transferred or resold without (i) registration under the Securities Act and any applicable state securities laws, or (ii) an exemption from the requirements of the Securities Act and applicable state securities laws. (b) Location of Principal Office, Qualification as an Accredited Investor, Etc. The state in which the Investor's principal office is located is the State set forth in the Investor's address on Schedule A attached hereto. The Investor qualifies as an accredited investor for purposes of Regulation D promulgated under the Securities Act. The Investor acknowledges that the Company has made available to the Investor at a reasonable time prior to the execution of this Agreement the opportunity to ask questions and receive answers concerning the business and affairs of the Company and the terms and conditions of the sale of Securities contemplated by this Agreement and to obtain any additional information (which the Company possesses or can acquire without unreasonable effort or expense) as may be necessary to verify the accuracy of information furnished to the Investor. The Investor (i) is able to bear the loss of its entire investment in the Securities without any material adverse effect on its business, operations or prospects, and (ii) has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment to be made by it pursuant to this Agreement. (c) Acts and Proceedings. This Agreement has been duly authorized by all necessary action on the part of the Investor, has been duly executed and delivered by the Investor, and is a valid and binding agreement of the Investor. 5. Conditions of the Investors' Obligation. The obligation to purchase and pay for the Securities at the Closing is subject to the fulfillment prior to or on the Closing date of the conditions set forth in this Section 5. In the event that any such condition is not satisfied to the satisfaction of each Investor, then the Investors shall not be obligated to proceed with the purchase of the Securities at the Closing. (a) Representations and Warranties. The representations and warranties of the Company under this Agreement shall be true on and as of the Closing date with the same effect as though made on and as of the Closing date. (b) Compliance with Agreement. The Company shall have performed and complied with all agreements or conditions required by this Agreement to be performed and complied with by it prior to or as of the Closing date. (c) Certificate of Officers. The Company shall have delivered to the Investors a certificate, dated the Closing date, executed by the President and the Chief Financial Officer of the Company, and certifying to the satisfaction of the conditions specified in Sections 5(a) and 5(b). (d) Opinion of the Company's Counsel. The Investors shall have received from Fredrikson & Byron, P.A., counsel for the Company, an opinion, dated the Closing date, in the form attached hereto as Exhibit D. (e) Supporting Documents. The Investors shall have received the following: (i) A copy of the resolutions of the Board of Directors of the Company certified by the Secretary of the Company authorizing and approving the execution, delivery and performance of this Agreement and issuance of the Securities; (ii) A certificate of incumbency executed by the Secretary of the Company certifying the names, titles and signatures of the officers of the Company authorized to execute this Agreement and further certifying that the Articles of Incorporation and Bylaws of the Company delivered to the Investors at the time of the execution of this Agreement have been validly adopted and have not been amended or modified; and (iii) A copy of the Articles of Incorporation and Bylaws of the Company as of such date and such additional supporting documentation and other information with respect to the transactions contemplated hereby as the Investors may reasonably request. (f) Qualification Under State Securities Laws. All registrations, qualifications, permits and approvals required under applicable state securities laws for the lawful execution and delivery of this Agreement and the offer, sale, issuance and delivery of the Securities to the Investors at the Closing shall have been obtained. (g) Proceeding and Documents. All corporate and other proceedings and actions taken in connection with the transactions contemplated hereby and all certificates, opinions, agreements, instruments and documents mentioned herein or incident to any such transaction shall be satisfactory in form and substance to the Investors. (h) File Certificate of Designation. It shall be a condition to the Investors' obligation to close the transactions contemplated hereby that the Company have filed the Certificate of Designation with the Secretary of State of the State of Minnesota and that such certificate be accepted and duly filed by such Secretary's office. (i) Execution of Registration Rights Agreement. It shall be a condition to the Investors' obligation to close the transactions contemplated hereby that the Company execute and deliver to the Investors the Registration Rights Agreement attached hereto as Exhibit E. 6. Affirmative Covenants of the Company. The Company covenants and agrees as follows: (a) Corporate Existence. The Company will maintain its corporate existence in good standing and comply with all applicable laws and regulations of the United States or of any state or political subdivision thereof and of any government authority where failure to so comply would have a material adverse impact on the Company or its business or operations. (b) Books of Accounts. The Company will keep books of record and account in which full, true and correct entries are made of all of its respective dealings, business and affairs, in accordance with generally accepted accounting principles. The Company will employ certified public accountants who are "independent" within the meaning of the accounting regulations of the Securities and Exchange Commission. (c) Patents and Other Intangible Rights. The Company will apply for, or obtain assignments of, or licenses to use, all patents, trademarks, trade names and copyrights which in the opinion of a prudent and experienced businessperson operating in the industry in which the Company is operating are desirable or necessary for the conduct and protection of the business of the Company. (d) Certain Information. For a period of five years from the date hereof, the Company will furnish to the Investors (i) within 90 days after the end of each fiscal year, a copy of the Company's annual report on Form 10-K, including audited financial statements, together with a report thereon of its independent public accountant; (ii) within 45 days after the end of each of the first three quarters of each fiscal year, the Company's quarterly report on Form 10-Q, including quarterly condensed financial statements of the Company; and (iii) as soon as practicable after filing, any other report or statement filed by the Company under the Securities Act or the Exchange Act. The requirements of this Section will be met with respect to a particular form if such form is available to the Investors in electronic format on the Internet within the periods specified above for such form. (e) Timely Filings. The Company will timely file all reports and statements to be filed by the Company pursuant to the reporting requirements of the Securities Act and the Exchange Act and each such report and statement will be true and complete in all material respects when filed. (f) Indemnification. The Company will indemnify and hold harmless the Investors and each person, if any, who controls the Investors within the meaning of the Securities Act, from and against any and all loss, damage, liability, cost and expense to which the Investors or any such controlling person may become subject, insofar as such losses, damages, liabilities, costs or expenses are caused by (i) any untrue statement or alleged untrue statement of any material fact contained herein, or arise out of or are based upon the omission or alleged omission to state herein a material fact required to be stated herein or necessary to make the statements herein, in light of the circumstances in which they were made, not misleading, or (ii) any breach of any representation, warranty or agreement of the Company hereunder; provided, however, that the Company will not be liable in any such case to the extent that a court of competent jurisdiction shall have determined by a final judgment that such loss, damage, liability, cost or expense resulted exclusively from actions taken or omitted to be taken by the Investors or such controlling person due to their, his or her gross negligence, bad faith, willful misconduct or breach of this Agreement. Promptly after receipt by the Investors pursuant to this Section of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions, the Investors will, if a claim thereof is to be made against the Company pursuant to the provisions hereof, promptly notify the Company of the commencement thereof; but the omission to so notify the Company will not relieve it from any liability which it may have to the Investors otherwise than hereunder. In case such action is brought against the Investors and they notify the Company of the commencement thereof, the Company shall have the right to participate in, and, to the extent that it may wish, to assume the defense thereof, with counsel satisfactory to the Investors; provided, however, if the defendants in any action include both the Investors and the Company and there is a conflict of interest which would prevent counsel for the Company from also representing the Investors, the Investors shall have the right to select separate counsel for participation in the defense of such action on behalf of the Investors. After notice from the Company to the Investors of its election so to assume the defense thereof, the Company will not be liable to the Investors pursuant to the provisions of this Section for any legal or other expense subsequently incurred by the Investors in connection with the defense thereof other than reasonable costs of investigation, unless (i) the Investors shall have employed counsel in accordance with the proviso of the preceding sentence, (ii) the Company shall not have employed counsel satisfactory to the Investors to represent the Investors within a reasonable time after the notice of the commencement of the action, or (iii) the Company has authorized the employment of counsel for the Investors at the expense of the Company. (g) Fees of Counsel. At the Closing, the Company shall pay the fees and expenses of legal counsel to the Investors as well as the fees and expenses of counsel to Miller, Johnson & Kuehn, Incorporated ("MJK") incurred through the date of the Closing. In addition, at the Closing, the Company shall pay MJK 7% of the Purchase Price and shall issue MJK a warrant to purchase that number of shares of the Company's common stock equal to 10% of the number of shares of the Company's common stock issuable upon conversion of the Preferred Stock sold by the Company to the Investors at the Closing, assuming the conversion of the Preferred Stock on the date of Closing. The exercise price of MJK's warrant shall be 110% of the closing bid price of the Company's common stock on the day prior to Closing. (h) Reservation of Shares. The Company will, at all times, reserve and keep available (i) authorized and unissued shares of Preferred Stock sufficient for issuance pursuant to the terms of Section 4(c) of Exhibit A attached hereto, and (ii) authorized and unissued shares of its common stock sufficient for issuance upon conversion of the Preferred Stock and exercise of the Warrant. 7. Restriction on Transfer of Preferred Stock, Warrant and Shares. (a) Legend. Each share of Preferred Stock, each Warrant, and each certificate representing shares of the Company's common stock shall be endorsed with a legend in substantially the form which follows: "The securities represented by this certificate may not be transferred without (i) the opinion of counsel satisfactory to this corporation that such transfer may lawfully be made without registration under the Securities Act of 1933, as amended, and all applicable state securities laws, or (ii) such registration." (b) Removal of Legend. Any legend endorsed on a certificate evidencing a security pursuant to Section 7(a) hereof shall be removed, and the Company shall issue a certificate without such legend to the holder of such security, if such security is being disposed of pursuant to a registration under the Securities Act or pursuant to Rule 144 or any similar rule then in effect or if such holder provides the Company with an opinion of counsel satisfactory to the Company to the effect that a transfer of such security may be made without registration. In addition, if the holder of such security delivers to the Company an opinion of such counsel to the effect that no subsequent transfer of such security will require registration under the Securities Act, the Company will promptly upon such contemplated transfer deliver new certificates evidencing such security that do not bear the legend set forth in Section 7(a). 8. Miscellaneous. (a) Changes, Waivers, Etc. Neither this Agreement nor any provisions hereof may be changed, waived, discharged or terminated orally, but only by a statement in writing, signed by the party against which enforcement of the change, waiver, discharge or termination is sought. (b) Notices. All notices, requests, consents and other communications required or permitted hereunder shall be in writing and shall be delivered, or mailed first-class postage prepaid, registered or certified mail or shall be sent by facsimile transmission followed by mailed copy: if to the Investors at their respective addresses set forth on Schedule A, or at such other address or facsimile number as any Investor may specify in writing to the Company; or if to the Company at Datakey, Inc., 407 West Travelers Trail, Burnsville, Minnesota 55337, Attention: President, facsimile number (612) 890-2726; or at such other address or facsimile number as the Company may specify by written notice to the Investors; and such notices and other communications shall for all purposes of this Agreement be treated as being effective or having been given if delivered personally, if sent by mail, when received, or, if sent by facsimile, upon the sender's receipt of confirmation from its facsimile machine of transmission. (c) Survival of Representations and Warranties. All representations and warranties and agreements contained herein shall survive the execution and delivery of this Agreement, any investigation at any time made by the Investors or on its behalf, and the sale and purchase of the Securities and payment therefor. All statements contained in any certificate, instrument or other writing delivered by or on behalf of the Company pursuant to this Agreement (other than legal opinions) at the Closing shall constitute representations and warranties by the Company hereunder. (d) Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and do not constitute a part of this Agreement. (e) Choice of Law. The laws of the state of New York shall govern the validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties hereunder. Each of the Company and the Investors irrevocably consent to the exclusive jurisdiction of the United States Federal courts and state courts, located in New York County, New York, in any suit or proceeding relating to, based on or arising under this Agreement and irrevocably agree that all claims in respect of such suit or proceeding may be determined in such courts. The Company irrevocably waives the defense of an inconvenient forum to the maintenance of such suit or proceeding. Service of process on the Company mailed by first class mail shall be deemed in every respect effective service of process upon the Company in any such suit or proceeding. Nothing herein shall affect the right of any Investor to serve process in any manner permitted by law. (f) Counterparts. This Agreement may be executed at different times and in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (g) Parties in Interest. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not, and, in particular, shall inure to the benefit of and be enforceable by the holder or holders from time to time of any of the Securities. (h) Entire Agreement. This Agreement, including and incorporating all Exhibits and Schedules hereto, constitutes and contains the entire agreement and understanding of the parties regarding the subject matter of this Agreement and supersedes any and all prior negotiations, correspondence, understandings and agreements, written or oral, among the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date indicated above. Datakey, Inc. Special Situations Private Equity Fund, L.P.: By: /s/ Alan Shuler By: /s/ David Greenhouse Its: Chief Financial Officer Its: Tax Identification Number: Special Situations Technology Fund, L.P.: Robert G. Allison By: /s/ David Greenhouse By: /s/ Richard C. Perkins Its: Attorney-in-Fact Tax Identification Number: Tax Identification Number: Shirley A. Baxter, TTEE FBO Shirley A. Baxter Revocable Craig L. Campbell Trust U/A DTD 7-3-96 By: /s/ Richard C. Perkins By: /s/ Richard C. Perkins Attorney-in-Fact Attorney-in Fact Tax Identification Number: Tax Identification Number: Piper Jaffray as Custodian FBO Bradley Piper Jaffray as Custodian A. Erickson IRA 480-263177-102 FBO Richard C. Perkins By: /s/ Richard C. Perkins By: /s/ Richard C. Perkins Attorney-in-Fact Attorney-in Fact Tax Identification Number: 41-1422918 Tax Identification Number: 41-1422918 David M. Westrum, TTEE FBO David M. Westrum Revocable Living Trust Pyramid Partners, L.P. U/A DTD 6-1-97 By: /s/ Richard C. Perkins By: /s/ Richard C. Perkins Attorney-in-Fact Attorney-in Fact Tax Identification Number: Tax Identification Number: Industricorp & Co., Inc. Daniel S. & Patricia M. Perkins JT FBO Twin City Carpenters Pension Plan /s/ Karen McKernan /s/ Daniel S. Perkins By: Union Bank & Trust, Daniel S. Perkins Its Officer /s/ Patrice M. Perkins Patrice M. Perkins Tax Identification Number: Gary Kohler IRA /s/ Gary S. Kohler By: Gary Kohler Schedule A-2 SCHEDULE A INVESTORS
Names and Address Preferred Shares Warrant Shares Amount ($) Special Situations Private Equity 58,544 110,119 $924,995.20 Fund, L.P. 153 East 53rd Street 51st Floor New York, New York 10022 Special Situations Technology Fund, 15,823 29,763 $250,003.40 L.P. 153 East 53rd Street 51st Floor New York, New York 10022 Gary Kohler IRA 1,583 2,978 $25,011.40 Robert G. Allison 1,265 2,379 $19,987.00 Shirley A. Baxter, TTEE FBO Shirley 1,265 2,379 $19,987.00 A. Baxter Revocable Trust U/A DTD 7-3-96 Craig L. Campbell 1,265 2,379 $19,987.00 Piper Jaffray as Custodian FBO 1,265 2,379 $19,987.00 Bradley A. Erickson IRA 480-263177-102 Piper Jaffray as Custodian FBO 1,265 2,379 $19,987.00 Richard C. Perkins IRA 980-576-905-610 David M. Westrum TTEE 1,265 2,379 $19,987.00 FBO David M. Westrum Revocable Living Trust U/A DTD 6-1-97 Pyramid Partners L.P. 4,460 8,389 70,468.00 Industricorp & Co., Inc. 10,000 18,810 $158,000.00 FBO Twin City Carpenters Pension Plan Daniel S. and Patrice M. Perkins, JT 2,000 3,762 $31,600.00 ------- ------- ------------- TOTALS 100,000 188,095 $1,580,000.00
EXHIBIT A RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK The rights, preferences, restrictions and other matters relating to the Series A Convertible Cumulative Preferred Stock (the "Series A Preferred Stock") are as follows: 1. Dividend Provisions. Upon issuance, dividends shall accrue on each share of outstanding Series A Preferred Stock at an annual rate equal to $1.264 per share per annum (8% of the Original Issue Price, as defined herein). Such dividends shall be cumulative and shall be payable upon any conversion of the Series A Preferred Stock pursuant to Section 3 hereof. Such dividends shall only be paid out of legally available funds of the Company. Such dividends shall be payable by the Company, in its sole discretion, all in cash or all by the issuance of a number of shares of the Company's unrestricted, freely tradable common stock equal to the dividends owing on the Series A Preferred Stock; provided, however, that prior to the payment of any such dividend by the issuance of shares of the Company's common stock, the Company shall deliver to the Investors an opinion of its counsel stating that all such shares have been validly registered, and that they are duly authorized, validly issued and nonassessable. For the purposes hereof, the number of shares of the Company's common stock issuable in lieu of any cash dividend payment shall equal the total dividend payment then due divided by the per share price of such stock. The per share price of the Company's common stock shall be determined based on the average closing bid price of such stock quoted on The Nasdaq Stock Market for the ten consecutive trading days prior to the payment of such dividends. Dividends on shares of the Series A Preferred Stock shall accrue beginning on the date of issuance of the shares of Series A Preferred Stock, shall compound on an annual basis and shall be payable upon conversion of the Series A Preferred Stock (a "Payment Date"). All accrued and unpaid dividends on the Series A Preferred Stock must be paid before any dividends may be declared or paid on any other junior series of preferred or common stock issued by the Company. 2. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of the previously issued Convertible Preferred Stock (the "Convertible Preferred Stock") and the Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of common stock by reason of their ownership thereof, an amount per share equal to $2.50 for the Convertible Preferred Stock, and for the Series A Preferred Stock the sum of (i) $15.80, as adjusted pursuant to Section 4(c) hereof (the "Original Issue Price"), and (ii) an amount equal to cumulative unpaid dividends on such shares (respectively, a "Liquidation Amount"). If upon the occurrence of such an event, the assets and funds thus distributed among the holders of the Convertible Preferred Stock and the Series A Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the holders of the Convertible Preferred Stock and the Series A Preferred Stock in proportion to the amount of such stock owned by each such holder multiplied by the appropriate Liquidation Amount. (b) Upon the completion of the distribution required by subparagraph (a) of this Section 2, if assets remain in the Company, the remaining assets of the Company shall be distributed ratably among the holders of the Company's common stock and the Series A Preferred Stock in proportion to the number of shares of common stock held by each (assuming full conversion of all shares of Series A Preferred Stock). (c) (i) For purposes of this Section 2, a liquidation, dissolution or winding up of the Company shall be deemed to be occasioned by, or to include, (A) the acquisition of the Company by another entity by means of any transaction or series of related transactions (including any reorganization, merger or consolidation but excluding any merger effected exclusively for the purpose of changing the domicile of the Company); or (B) a sale of all or substantially all of the assets of the Company, unless the Company's shareholders as constituted immediately prior to such acquisition or sale will, immediately after such acquisition or sale (by virtue of securities issued as consideration for the Company's acquisition or sale or otherwise) hold at least 50% of the voting power of the surviving or acquiring entity. (ii) In any of such events, if the consideration received by the Company is other than cash, its value will be deemed its fair market value. (iii) In the event the requirements of this Section 2 are not complied with, the Company shall forthwith either: (A) cause such closing to be postponed until such time as the requirements of this Section 2 have been complied with, or (B) cancel such transaction, in which event the rights, preferences and privileges of the holders of the Convertible Preferred Stock and the Series A Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in subsection 2(c)(iv) hereof. (iv) The Company shall give each holder of record of Convertible Preferred Stock and the Series A Preferred Stock written notice of such impending transaction not later than 20 days prior to the shareholders' meeting called to approve such transaction, or 20 days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction; provided, however, that the holder of any shares of then outstanding Convertible Preferred Stock or Series A Preferred Stock shall have the right during such 20-day period to convert such shares pursuant to Section 3 hereof. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 2, and the Company shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than 20 days after the Company has given the first notice provided for herein or sooner than ten days after the Company has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of the Convertible Preferred Stock and the Series A Preferred Stock that are entitled to such notice rights or similar notice rights and that represent at least a majority of the voting power of all then outstanding shares of each of the classes of preferred stock, voting separately as a class. 3. Conversion. (a) Conversion Right. At the option of the holder thereof, each share of Series A Preferred Stock shall be convertible at any time during the period commencing on the day on which the Series A Preferred Stock is issued and expiring on May 15, 2000 (the date which is the second anniversary of the date of issuance of the Series A Preferred Stock); provided, however, that such expiration date shall be extended for a number of days equal to the number of days beyond the 90th day following the date of issuance of the Series A Preferred Stock that the Registration Statement (as such term is defined in the Registration Rights Agreement, of even date herewith, entered into by and between the Company and the Investors set forth on Schedule A thereto) is not effective (such date, including any extension thereof pursuant to the foregoing proviso, being herein referred to as the "Second Anniversary"). The Series A Preferred Stock shall be convertible at the office of the Company or any transfer agent for such stock into such number of fully paid and nonassessable shares of the Company's common stock as is determined by dividing the Original Issue Price, subject to adjustment as provided in Section 4, by the Conversion Price applicable to such shares, determined as hereafter provided, in effect on the date the certificates representing such shares are surrendered for conversion (the "Conversion Date"). The Conversion Price shall be equal to the average closing bid price of one share of the Company's common stock as quoted by the Nasdaq SmallCap Market, the Nasdaq National Market or the principal exchange upon which shares of the Company's common stock may be listed, or, if the Company's common stock shall not then be quoted on the Nasdaq SmallCap Market or the Nasdaq National Market or listed on a national securities exchange, but shall otherwise be traded in the over-the-counter market, on such over-the-counter market for the ten-day period ending on the day prior to the Conversion Date (the "Trading Period") multiplied by .8 (the "Conversion Price"); provided, however, that in no event shall the Conversion Price exceed $5.00 per share or be less than $2.75 (the "Maximum Price" and "Minimum Price," respectively) per share; and provided, further, that appropriate adjustments shall be made in determining the average closing bid price if a recapitalization or other event affecting the Company's common stock shall occur during the Trading Period. (b) Dividend Payment. Should the Company, pursuant to Section 1 hereof, not elect to pay all outstanding, cumulative, accrued and unpaid dividends on the Series A Preferred Stock in shares of its common stock, the Company shall pay, in immediately available funds, to the holder of any shares of Series A Preferred Stock being converted, within two days, all such dividends on the date that it receives notice of such holder's intent to convert such shares pursuant to (d) below. Separately, should the Company elect to pay all outstanding, cumulative, accrued and unpaid dividends on the Series A Preferred Stock in shares of its common stock, it shall, within two business days of receiving a holder's notice of intent to convert, deliver certificates representing such shares to the holder of the Series A Preferred Stock. (c) Automatic Conversion. Any shares of Series A Preferred Stock remaining outstanding on the Second Anniversary shall be automatically converted pursuant to the conversion terms of Section 3(a) above. The Conversion Date with respect to such automatic conversion shall be the Second Anniversary. In any event, the Company shall, within two business days after automatic conversion of the Series A Preferred Stock, issue and deliver a certificate or certificates for the number of shares of the Company's common stock to which each former holder of Series A Preferred Stock is entitled. Notwithstanding the foregoing, no automatic conversion of the Series A Preferred Stock shall occur pursuant to this Section unless (i) all shares of the Company's common stock underlying the shares of Series A Preferred Stock may be sold pursuant to an effective registration statement under the Securities Act of 1933, as amended, (ii) the Company's common stock is listed and trading on The Nasdaq Stock Market, and (iii) the Company has reserved and available for issuance a number of shares of its common stock sufficient to cover conversion of all outstanding shares of Series A Preferred Stock. (d) Mechanics of Conversion. Before any holder of Series A Preferred Stock shall be entitled to convert the same into shares of the Company's common stock, he, she or it shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company or of any transfer agent for the Series A Preferred Stock, and shall give written notice, via facsimile, to the Company, at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of the Company's common stock are to be issued. The Company shall, immediately thereafter (and in any event no more than two business days thereafter), issue and deliver to such holder of Series A Preferred Stock at the address shown on the Company's records or at such other address as such party may designate by written notice to the Company, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of the Company's common stock to which such holder shall be entitled pursuant to Section 3(a) and a certificate representing shares of Series A Preferred Stock not so converted by the holder. Such conversion shall be deemed to have been made immediately prior to the close of business on the Conversion Date, and the person or persons entitled to receive the shares of the Company's common stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of the Company's common stock as of such date. (e) Mechanics of Automatic Conversion. On the Conversion Date with respect to the automatic conversion pursuant to subsection 3(c) above, the certificates representing shares of Series A Preferred Stock shall immediately represent that number of shares of the Company's common stock into which such shares are convertible. Holders of Series A Preferred Stock shall deliver their certificates, duly endorsed in blank, to the principal office of the Company, together with a notice setting out the name or names (with addresses) and denominations in which the certificates representing such shares of common stock issuable upon conversion are to be issued and including instructions for delivery thereof. The person entitled to receive the shares of the Company's common stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of common stock at and on the Conversion Date, and the rights of such person as a holder of shares of Series A Preferred Stock shall cease and terminate at and on the Conversion Date, in any case without regard to any failure by such holder to deliver the certificates or the notice required by this subsection 3(e). On the Conversion Date with respect to automatic conversion, the Company shall pay all outstanding, cumulative, accrued and unpaid dividends, either by the issuance of shares of its common stock or in cash, pursuant to the provisions set forth in (a) above; provided, however, that should the Company elect to pay such dividends by the issuance of additional shares of its common stock, the person entitled to receive such shares of the Company's common stock issuable upon such conversion shall be treated for all purposes as the record holder of such additional shares on the Conversion Date (f) No Impairment. The Company will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 3 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series A Preferred Stock against impairment. (g) No Fractional Shares. No fractional shares shall be issued upon the conversion of any share or shares of the Series A Preferred Stock, and the number of shares of the Company's common stock to be issued shall be rounded to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Series A Preferred Stock the holder is at the time converting into shares of the Company's common stock and the number of shares of such common stock issuable upon such aggregate conversion. (h) Notices of Record Date. In the event of any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Company shall mail to each holder of Series A Preferred Stock, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (i) Reservation of Stock Issuable Upon Conversion. The Company shall at all times reserve and keep available out of its authorized but unissued shares of common stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock, such number of its shares of its common stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred Stock; and if at any time the number of authorized but unissued shares of the Company's common stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, in addition to such other remedies as shall be available to the holder of such Series A Preferred Stock, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of common stock to such number of shares as shall be sufficient for such purposes, including engaging in best efforts to obtain the requisite shareholder approval of any necessary amendment to the Company's Articles of Incorporation. (j) Notices. Any notice required by the provisions of this Section 3 to be given to the holders of shares of Series A Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his, her or its address appearing on the books of the Company. 4. Anti-Dilution Provisions. The Original Issue Price shall be subject to adjustment from time to time upon the happening of any of the following events: (a) In the event the Company shall issue or sell any shares of its common stock (except as provided in paragraph (e) hereof) for a consideration per share less than the greater of (A) $5.00, or (B) 80% of the Market Price (as defined below) on the date of such issue or sale, then the Original Issue Price shall be increased to such greater price (calculated to the nearest cent) as shall be determined by multiplying the Original Issue Price by a fraction, the numerator of which shall be the number of shares of the Company's common stock outstanding immediately after the issuance or sale of such additional shares, and the denominator of which shall be the sum of (i) the number of shares of the Company's common stock outstanding immediately prior to the issuance or sale of such additional shares, and (ii) the number of shares of the Company's common stock which the aggregate consideration received for the issuance or sale of such additional shares would purchase at the greater of $5.00, or if such shares of the Company's common stock shall have been issued for a consideration per share less than 80% of the Market Price on the date of issuance or sale, the current Market Price. For purposes of this paragraph, all shares of the Company's common stock issuable upon exercise of outstanding options and warrants shall be deemed to be outstanding. (b) For the purposes of paragraph 4(a) above, the following subparagraphs (i) to (vii), inclusive, shall be applicable: (i) If at any time the Company shall issue or sell any rights to subscribe for, or any rights or options to purchase, shares of its common stock or any stock or other securities convertible into or exchangeable for such common stock (such convertible or exchangeable stock or securities being hereinafter called "Convertible Securities"), whether or not such rights or options or the right to convert or exchange any such Convertible Securities shall be immediately exercisable, and the price per share for which shares of the Company's common stock shall be issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined by dividing (1) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of such rights or options, plus, in the case of any such rights or options which shall relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (2) the total number of shares of the Company's common stock issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options) shall be less than the greater of (x) the $5.00, or (y) 80% of the Market Price at the time of such issue or sale, then the total number of shares of the Company's common stock issuable upon the exercise of such rights or options or upon conversion or exchange of the total amount of such Convertible Securities issuable upon the exercise of such rights or options shall (as of the date of granting of such rights or options) be deemed to be outstanding and to have been issued for such price per share, and except as provided in paragraph 4(d), no further adjustments of the Original Issue Price shall be made upon the actual issue of such shares of common stock or of such Convertible Securities, upon the exercise of such rights or options or upon the actual issue of such common stock upon conversion or exchange of such Convertible Securities. (ii) If at any time the Company shall issue or sell any Convertible Securities, whether or not the rights to exchange or convert thereunder shall be immediately exercisable, and the price per share for which shares of the Company's common stock shall be issuable upon such conversion or exchange (determined by dividing (1) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (2) the total number of shares of the Company's common stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the greater of (x) $5.00, or (y) 80% of the Market Price at the time of such issue or sale, then the total number of shares of the Company's common stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share, and, except as provided in paragraph 4(d), no further adjustments of the Original Issue Price shall be made upon the actual issue of such shares of common stock upon conversion or exchange of such Convertible Securities. In addition, if any issue or sale of such Convertible Securities shall be made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the Original Issue Price shall have been or shall be made pursuant to other provisions of this paragraph 4(b)(ii), no further adjustment of the Original Issue Price shall be made by reason of such issue or sale. (iii) If at any time the Company shall declare and pay a dividend or make any other distribution upon the shares of its common stock payable in such stock or Convertible Securities, any such stock or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. (iv) If at any time any shares of the Company's common stock or Convertible Securities or any rights or options to purchase shares of any such stock or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor, without deduction therefrom of any expenses incurred or any underwriting commissions or concessions or discounts paid or allowed by the Company in connection therewith. In case any shares of the Company's common stock or Convertible Securities or any rights or options to purchase any such common stock or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair value of such consideration as determined by the Company's Board of Directors, without deduction therefrom of any expenses incurred or any underwriting commissions or concessions or discounts paid or allowed by the Company in connection therewith. In case any shares of the Company's common stock or Convertible Securities or any rights or options to purchase any such common stock or Convertible Securities shall be issued in connection with any merger of another corporation into the Company, the amount of consideration therefor shall be deemed to be the fair value of the net assets of such merged corporation as determined by the Company's Board of Directors after deducting therefrom all cash and other consideration (if any) paid by the Company in connection with such merger. (v) If at any time the Company shall take a record of the holders of its common stock for the purpose of entitling them (1) to receive a dividend or other distribution payable in shares of the Company's common stock or in Convertible Securities, or (2) to subscribe for or purchase shares of the Company's common stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of the Company's common stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (vi) The number of shares of the Company's common stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, provided that such shares are neither issued, sold or otherwise distributed by the Company. (vii) For purposes hereof, the "Market Price" shall mean the average closing bid price of the Company's common stock on the Nasdaq SmallCap Market, the Nasdaq National Market or the principal exchange upon which shares of the Company's common stock may be listed, or, if the Company's common stock shall not then be quoted on the Nasdaq SmallCap Market or the Nasdaq National Market or listed on a national securities exchange, but shall otherwise be traded in the over-the-counter market, on such over-the-counter market, in each case for the ten day period immediately preceding any determination of such "Market Price" (subject to appropriate adjustments which shall be made in determining the average closing bid price if a recapitalization or other event affecting the Company's common stock shall occur during such 10-day period). If at any time shares of the Company's common stock shall not be quoted on the Nasdaq SmallCap Market or the Nasdaq National Market, listed on a national securities exchange, or otherwise traded in the over-the-counter market, the "Market Price" of a share of the Company's common stock shall be deemed to be the higher of (x) the book value thereof (as determined by any firm of independent public accountants of nationally recognized standing selected by the Company's Board of Directors) as of the last day of any month ending within 60 days preceding the date of determination, or (y) the fair value thereof (as determined in good faith by the Company's Board of Directors) as of a date which shall be within 15 days of the date of determination. (c) In case at any time the Company shall subdivide its outstanding shares of common stock into a greater number of shares, the Original Issue Price in effect immediately prior to such subdivision, the Maximum Price and the Minimum Price shall be proportionately reduced, and the Company shall subdivide the Series A Preferred Stock in the same proportion. In case at any time the outstanding shares of the Company's common stock shall be combined into a smaller number of shares, the Original Issue Price in effect immediately prior to such combination, the Maximum Price and the Minimum Price shall be proportionately increased, and the Company shall combine the Series A Preferred Stock in the same proportion. Any adjustment under this paragraph 4(c) shall become effective at the close of business on the date the subdivision or combination shall become effective. The Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Series A Preferred Stock to such number of shares as shall be sufficient for any such purposes, including engaging in best efforts to obtain the requisite shareholder approval of any necessary amendment to the Company's Articles of Incorporation. (d) If the purchase or exercise price provided for in any right or option referred to in paragraph 4(b)(i), or the rate at which any Convertible Securities referred to in paragraph 4(b)(i) or (ii) shall be convertible into or exchangeable for shares of the Company's common stock, shall change or a different purchase or exercise price or rate shall become effective at any time or from time to time (including any change resulting from termination of such right, option or convertible security), then, upon such change becoming effective, the Original Issue Price then in effect hereunder shall forthwith be increased or decreased to such Original Issue Price as would have been obtained had the adjustments made upon the granting or issuance of such rights or options or Convertible Securities been made upon the basis of (A) the issuance of the number of shares of the Company's common stock theretofore actually delivered upon the exercise of such options or rights or upon the conversion or exchange of such Convertible Securities, and (B) the granting or issuance at the time of such change of any such options, rights or Convertible Securities then still outstanding for the consideration, if any, received by the Company therefor and to be received on the basis of such changed price. (e) The Company shall not be required to make any adjustment to the Original Issue Price in the case of: (i) the granting, after the date hereof, by the Company of stock options under the Company's 1997 Stock Option Plan, so long as the shares of the Company's common stock underlying such options are covered by the 800,000 shares currently reserved for issuance under such plan as of the date hereof, assuming approval by the Company's shareholders of the 300,000 share increase at the Company's 1998 Annual Meeting of Shareholders; (ii) the issuance of shares of the Company's common stock, pursuant to the exercise of the options referred to in paragraph 4(e)(i) above or the exercise of any other options or warrants outstanding as of the date hereof; or (iii) the issuance of shares of the Series A Preferred Stock hereunder or of shares of the Company's common stock upon the conversion of any shares of the Series A Preferred Stock or upon the exercise of the Warrant or the Warrant issued to Miller, Johnson & Kuehn, Incorporated on the same date as the Preferred Stock Purchase Agreement to which this certificate of Designation is an Exhibit. 5. Voting Rights. The holder of each share of Series A Preferred Stock shall have the right to the number of votes on all matters submitted to the Company's shareholders that shall be equal to the number of shares of the Company's common stock into which such holder's shares of Series A Preferred Stock shall then be convertible (assuming a conversion as of the record date set for the vote). 6. Status of Converted Stock. In the event any shares of Series A Preferred Stock shall be converted pursuant to Section 3 hereof, the shares of Series A Preferred Stock so converted shall be canceled and shall not be issuable by the Company. The Articles of Incorporation of the Company shall be appropriately amended to effect the corresponding reduction in the Company's authorized capital stock. 7. Notice of Adjustment. The Company shall provide all holders of shares of Series A Preferred Stock five business days prior written notice of any adjustments in the Original Issue Price, the Maximum Price, the Minimum Price or any other adjustments made pursuant to the provisions hereof. EXHIBIT B NEITHER THIS WARRANT NOR THE SECURITIES INTO WHICH THIS WARRANT IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS. DATAKEY, INC. WARRANT Warrant No. [__] May 15, 1998 DATAKEY, INC., a Minnesota corporation (the "Company"), hereby certifies that, for value received, __________, or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company _______ shares of common stock, par value $.05 per share ("Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price equal to $6.30 per share (as adjusted from time to time as provided in Section 8 hereof, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including May 14, 2003 (the "Expiration Date"), and subject to the following terms and conditions: 1. Registration of Warrant. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Registration of Transfers and Exchanges. (a) Subject to the provisions of (b) below, the Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at the office specified in or pursuant to the terms hereof. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of a Holder of this Warrant. (b) In the event the Holder of this Warrant desires to transfer this Warrant, or any Warrant Shares issued upon the exercise hereof prior to the registration thereof pursuant to Section 4, the Holder shall provide the Company with a written notice describing the manner of such transfer and an opinion of counsel (reasonably acceptable to the Company) that the proposed transfer may be effected without registration or qualification (under any federal or state law), whereupon such Holder shall be entitled to transfer this Warrant or to dispose of any Warrant Shares in accordance with the notice delivered by such Holder to the Company; provided, however, that an appropriate legend may be endorsed on this Warrant or the certificates for such Warrant Shares respecting restrictions upon transfer thereof necessary or advisable in the opinion of counsel satisfactory to the Company to prevent further transfers which would be in violation of Section 5 of the Securities Act. (c) This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company specified in or pursuant to the terms hereof for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. Any such New Warrants will be dated the date of such exchange. 3. Duration and Exercise of Warrants. (a) This Warrant shall be exercisable by the registered Holder on any business day before 5:00 P.M., Minneapolis, Minnesota time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:00 P.M., Minneapolis, Minnesota time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. Except as set forth in Section 13 hereof, this Warrant may not be redeemed by the Company. (b) Subject to provisions elsewhere contained in this Warrant, upon surrender of this Warrant, with the Form of Election to Purchase attached hereto duly completed and signed, to the Company at its address for notice as set forth in Section 11 hereof, and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in lawful money of the United States of America, in cash or by certified or official bank check or checks, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than two business days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. A "Date of Exercise" means the date on which the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the Holder hereof to be purchased. (c) This Warrant shall be exercisable either in its entirety or for a portion of the number of Warrant Shares. If this Warrant is exercised for a number of Warrant Shares which is less than all of the Warrant Shares which may be purchased under this Warrant, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. 4. Registration Provisions. The shares of Common Stock underlying this Warrant shall be registered by the Company under the Securities Act pursuant to the terms of that Registration Rights Agreement, dated May 15, 1998, by and between the Company and Holder. 5. Payment of Taxes. The Company will pay all taxes attributable to the transfer of this Warrant or the issuance of Warrant Shares upon the exercise of this Warrant. 6. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if reasonably satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may reasonably prescribe. 7. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued shares of Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 8). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized and issued and fully paid and nonassessable. 8. Certain Adjustments. The Exercise Price and the number of Warrant Shares purchasable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the happening of any of the following events: (a) In the event the Company shall issue or sell any shares of its Common Stock (except as provided in paragraph (f) hereof) for a consideration per share less than the greater of (A) the Exercise Price, or (B) 80% of the Market Price (as defined below) on the date of such issue or sale, then the Exercise Price shall be reduced to such price (calculated to the nearest cent) as shall be determined by multiplying the Exercise Price by a fraction, the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to the issuance or sale of such additional shares, and (ii) the number of shares of Common Stock which the aggregate consideration received for the issuance or sale of such additional shares would purchase at the greater of the Exercise Price, or if such shares of Common Stock shall have been issued for a consideration per share less than 80% of the Market Price on the date of issuance or sale, the current Market Price, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after the issuance or sale of such additional shares. For purposes of this paragraph, all shares of the Common Stock issuable upon exercise of outstanding options and warrants shall be deemed to be outstanding. (b) For the purposes of Section 8(a) above, the following subparagraphs (i) to (vii), inclusive, shall be applicable: (i) If at any time the Company shall issue or sell any rights to subscribe for, or any rights or options to purchase, shares of Common Stock or any stock or other securities convertible into or exchangeable for such Common Stock (such convertible or exchangeable stock or securities being hereinafter called "Convertible Securities"), whether or not such rights or options or the right to convert or exchange any such Convertible Securities shall be immediately exercisable, and the price per share for which shares of Common Stock shall be issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined by dividing (1) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of such rights or options, plus, in the case of any such rights or options which shall relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (2) the total number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options) shall be less than the greater of (x) the Exercise Price, or (y) 80% of the Market Price at the time of such issue or sale, then the total number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion or exchange of the total amount of such Convertible Securities issuable upon the exercise of such rights or options shall (as of the date of granting of such rights or options) be deemed to be outstanding and to have been issued for such price per share, and except as provided in Section 8(e), no further adjustments of the Exercise Price shall be made upon the actual issue of such shares of Common Stock or of such Convertible Securities, upon the exercise of such rights or options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. (ii) If at any time the Company shall issue or sell any Convertible Securities, whether or not the rights to exchange or convert thereunder shall be immediately exercisable, and the price per share for which shares of Common Stock shall be issuable upon such conversion or exchange (determined by dividing (1) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (2) the total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the greater of (x) the Exercise Price, or (y) 80% of the Market Price at the time of such issue or sale, then the total number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share, and, except as provided in Section 8(e), no further adjustments of the Exercise Price shall be made upon the actual issue of such shares of Common Stock or upon conversion or exchange of such Convertible Securities. In addition, if any issue or sale of such Convertible Securities shall be made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the Exercise Price shall have been or shall be made pursuant to other provisions of this Section 8(b)(ii), no further adjustment of the Exercise Price shall be made by reason of such issue or sale. (iii) If at any time the Company shall declare and pay a dividend or make any other distribution upon the shares of Common Stock payable in such stock or Convertible Securities, any such stock or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. (iv) If at any time any shares of Common Stock or Convertible Securities or any rights or options to purchase shares of any such stock or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor, without deduction therefrom of any expenses incurred or any underwriting commissions or concessions or discounts paid or allowed by the Company in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than received by the Company shall be deemed to be the fair value of such consideration as determined by the Company's Board of Directors, without deduction therefrom of any expenses incurred or any underwriting commissions or concessions or discounts paid or allowed by the Company in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued in connection with any merger of another corporation into the Company, the amount of consideration therefor shall be deemed to be the fair value of the net assets of such merged corporation as determined by the Company's Board of Directors after deducting therefrom all cash and other consideration (if any) paid by the Company in connection with such merger. (v) If at any time the Company shall take a record of the holders of Common Stock for the purpose of entitling them (1) to receive a dividend or other distribution payable in shares of Common Stock or in Convertible Securities, or (2) to subscribe for or purchase shares of Common Stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (vi) The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, provided that such shares are neither issued, sold or otherwise distributed by the Company. (vii) For purposes hereof, the "Market Price" shall mean the average closing bid price of the Common Stock on the Nasdaq SmallCap Market, the Nasdaq National Market or the principal exchange upon which shares of Common Stock may be listed, or, if the Common Stock shall not then be quoted on the Nasdaq SmallCap Market or the Nasdaq National Market or listed on a national securities exchange, but shall otherwise be traded in the over-the-counter market, on such over-the-counter market, in each case for the ten day period immediately preceding the date of determination of such "Market Price." If at any time shares of Common Stock shall not be quoted on the Nasdaq SmallCap Market or the Nasdaq National Market, listed on a national securities exchange, or otherwise traded in the over-the-counter market, the "Market Price" of a share of Common Stock shall be deemed to be the higher of (x) the book value thereof (as determined by any firm of independent public accounts of nationally recognized standing selected in good faith by the Company's Board of Directors) as of the last day of any month ending within 60 days preceding the date of determination, or (y) the fair value thereof (as determined in good faith by the Company's Board of Directors) as of a date which shall be within 15 days of the date of determination. (c) In case at any time the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Exercise Price shall be proportionately reduced. In case at any time the outstanding shares of Common Stock shall be combined into a smaller number of shares, the Exercise Price shall be proportionately increased. Any adjustment under this Section 8(c) shall become effective at the close of business on the date the subdivision or combination shall become effective. (d) The Company shall provide the Holder with at least ten days prior written notice of any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of the Company's assets to another corporation. Further, if any of the foregoing events shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holder hereof shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in this Warrant and in lieu of the shares of Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holder of this Warrant to the end that the provisions hereof (including provisions for adjustments of the Warrant purchase price and of the number of shares of Common Stock purchasable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Company shall not effect any such consolidation, merger or sale unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger, or the corporation purchasing such assets, shall assume by operation of law or written instrument, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase. Notice of such assumption shall be promptly mailed to the registered holder hereof at the last address of such holder appearing on the books of the Company. (e) If the purchase or exercise price provided for in any right or option referred to in Section 8(b)(i), or the rate at which any Convertible Securities referred to in Section 8(b)(i) or (ii) shall be convertible into or exchangeable for shares of Common Stock, shall change or a different purchase or exercise price or rate shall become effective at any time or from time to time (including any change resulting from termination of such right, option or convertible security), then, upon such change becoming effective, the Exercise Price shall forthwith be increased or decreased to such Exercise Price as would have been obtained had the adjustments made upon the granting or issuance of such rights or options or Convertible Securities been made upon the basis of (A) the issuance of the number of shares of Common Stock theretofore actually delivered upon the exercise of such options or rights or upon the conversion or exchange of such Convertible Securities, and (B) the granting or issuance at the time of such change of any such options, rights or Convertible Securities then still outstanding for the consideration, if any, received by the Company therefor and to be received on the basis of such changed price. (f) The Company shall not be required to make any adjustment to the Exercise Price in the case of: (i) the granting, after the date hereof, by the Company of stock options under the Company's 1997 Stock Option Plan, so long as the shares of Common Stock underlying such options are covered by the 800,000 shares currently reserved for issuance under such plan as of the date hereof, assuming approval of the Company's shareholders of the 300,000 share increase at the Company's 1998 Annual Meeting of Shareholders; (ii) the issuance of shares of Common Stock, pursuant to the exercise of the options referred to in Section 8(e)(i) above or the exercise of any other options or warrants outstanding as of the date hereof; or (iii) the issuance of shares of the Preferred Stock pursuant to the Preferred Stock Purchase Agreement to which this Warrant is an Exhibit or of shares of Common Stock upon the conversion of any shares of such Preferred Stock or upon the exercise of this Warrant or any warrants issued to Miller, Johnson & Kuehn, Incorporated on the same date as the Preferred Stock Purchase Agreement to which this Warrant is an Exhibit. (g) Whenever the Exercise Price payable upon exercise of this Warrant shall be adjusted pursuant to this Section, the number of Warrant Shares purchasable upon exercise of this Warrant shall be simultaneously adjusted by multiplying the number of Warrant Shares issuable immediately prior to such adjustment by the Exercise Price in effect immediately prior to such adjustment and dividing the product so obtained by the Exercise Price, as adjusted. 9. Payment of Exercise Price. The Holder may pay the Exercise Price in cash or pursuant to a cashless exercise, as set forth below. (a) Cash Exercise. The Holder shall deliver immediately available funds. (b) Cashless Exercise. The Holder shall surrender this Warrant to the Company together with a notice of cashless exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows: X = Y (A-B)/A where: X = the number of Warrant Shares to be issued to the Holder. Y = the number of Warrant Shares with respect to which this Warrant is being exercised. A = the average of the closing bid prices of the Common Stock for the five trading days immediately prior to (but not including) the Date of Exercise. B = the Exercise Price. For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have been commenced, on the issue date. 10. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 10, be issuable on the exercise of this Warrant, the Company shall, at its option, (i) pay an amount in cash equal to the Exercise Price multiplied by such fraction, or (ii) round the number of Warrant Shares issuable, up to the next whole number. 11. Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section, (ii) the business day following the date of mailing, if sent by a nationally recognized overnight courier service, or (iii) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (1) if to the Company, to 407 West Travelers Trail, Burnsville, MN 55337, Attention: President, facsimile No.: (612) 890-2726, or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section 11. 12. Warrant Agent. (a) The Company shall serve as warrant agent under this Warrant. Upon 30 days' notice to the Holder, Company may appoint a new warrant agent. (b) Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 13. Call of Warrant. Subject to the conditions set forth below, the Company shall be permitted to call this Warrant from the Holder in the event that the closing bid price for shares of the Common Stock is at least $8-5/8 for ten consecutive trading days prior to the Expiration Date of this Warrant. Notwithstanding the foregoing, the Company may only exercise its right to call this Warrant from the Holder if at the time of such call (i) all Warrant Shares may be sold pursuant to an effective registration statement under the Securities Act, (ii) the Common Stock is listed and trading on The Nasdaq Stock Market, and (iii) the Company has reserved and available for issuance a number of shares of its Common Stock sufficient to cover the exercise of this Warrant in full. The Company must provide the Holder with at least 20 days advance written notice (the "Warrant Notice") of its intent to call this Warrant pursuant to the terms hereof and the Holder shall have 20 business days from the date of receipt of the Warrant Notice to exercise this Warrant (the "Sale Period"). If the Holder does not exercise this Warrant during the Sale Period, the Holder shall surrender this Warrant to the Company at the end of the Sale Period for cancellation by the Company, and the Company shall transfer to the Holder, via wire transfer of immediately available funds, an amount equal to $.10 multiplied by the number of shares of Common Stock subject to exercise of this Warrant. Notwithstanding the foregoing, the Sale Period shall be extended by that number of days during such period for which the registration, listing and reservation requirements set forth in clauses (i)-(iii) of this Section 13 shall not be satisfied. 14. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Warrant may be amended only in writing signed by the Company and the Holder. (b) Subject to Section 14(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant; this Warrant shall be for the sole and exclusive benefit of the Company and the Holder. (c) This Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without regard to the principles of conflicts of law thereof. Each of the Company and the Holder irrevocably consent to the exclusive jurisdiction of the United States Federal courts and state courts, located in New York County, New York, in any suit or proceeding relating to, based on or arising under this Agreement and irrevocably agree that all claims in respect of such suit or proceeding may be determined in such courts. The Company irrevocably waives the defense of an inconvenient forum to the maintenance of such suit or proceeding. Service of process on the Company mailed by first class mail shall be deemed in every respect effective service of process upon the Company in any such suit or proceeding. Nothing herein shall affect the right of the Holder to serve process in any manner permitted by law. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. IN WITNESS WHEREOF, Datakey, Inc. has caused this Warrant to be executed by its duly authorized officer and this Warrant to be dated as of May 15, 1998. DATAKEY, INC. By __________________________________ Its: ___________________________ FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To DATAKEY, INC. In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase __________ shares of Common Stock, par value $.05 per share, of Datakey, Inc. and (i) ______ encloses herewith $_______ in cash or certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant, or (ii) _____ hereby elects to exercise the enclosed Warrant pursuant to the cashless exercise provisions set forth therein (mark one). The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER -------------------------------------------- - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dated: ______________________ Name of Holder: (Print)______________________________________ (By:)________________________________________ (Name:)______________________________________ (Title:)_____________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) FORM OF ASSIGNMENT (To be completed and signed only upon transfer of Warrant) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ____________________________ the right represented by the within Warrant to purchase ______ shares of Common Stock of Datakey, Inc. to which the within Warrant relates and appoints ________________ attorney to transfer said right on the books of Datakey, Inc. with full power of substitution in the premises. Dated: - ------------------- ----------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ----------------------------------- Address of Transferee ----------------------------------- ----------------------------------- In the presence of: - ----------------------------- EXHIBIT C COMPANY BAD BOY CERTIFICATE 1. Neither the Company, any of its predecessors nor any affiliated corporation: (a) has filed a registration statement which is the subject of any pending proceeding or examination under Section 8 of the Securities Act or is the subject of any refusal order or stop order thereunder within the past five years; (b) is subject to any pending proceeding under Rule 258 promulgated under the Securities Act or any similar rule adopted under Section 3(b) of the Securities Act, or to an order entered thereunder within the past five years; (c) has been convicted within the past five years of any felony or misdemeanor in connection with the purchase or sale of any security or involving the making of any false filing with the Commission; (d) is subject to any order, judgment, or decree of any court of competent jurisdiction temporarily or preliminary restraining or enjoining, or is subject to any order, judgment, or decree of any court of competent jurisdiction, entered within the past five years, permanently restraining or enjoining, such person from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security or involving the making of any false filing with the Commission; or (e) is subject to a United States Postal Service false representation order entered under Section 3005 of Title 39, United States Code, within the past five years, or is subject to a temporary restraining order or preliminary injunction entered under Section 3007 of Title 39, United States Code, with respect to conduct alleged to have violated Section 3005 of Title 39, United States Code. 2. None of the Company's directors, officers, general partners, or beneficial owners of 10% or more of any class of its equity securities, nor any of its promoters presently connected with it in any capacity: (a) has been convicted within the past ten years of any felony or misdemeanor in connection with the purchase or sale of any security, involving the making of a false filing with the Commission, or arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, or investment advisor; (b) is subject to any order, judgment, or decree of any court of competent jurisdiction temporarily or preliminarily enjoining or restraining, or is subject to any order, judgment, or decree of any court of competent jurisdiction, entered within the past five years, permanently enjoining or restraining such person from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security or involving the making of a false filing with the Commission, or arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, or investment advisor; (c) is subject to an order of the Commission entered pursuant to Section 15(b), Section 15(B)(a) or 15(B)(c) of the Exchange Act; or is subject to an order of the Commission entered pursuant to Section 203(e) or (f) of the Investment Advisors Act of 1940; (d) is suspended or expelled from membership in, or suspended or barred from association with a member of, an exchange registered as a national securities exchange pursuant to Section 6 of the Exchange Act, an association registered as a national securities association under Section 15A of the Exchange Act, or a Canadian securities exchange or association for any act or omission to act constituting conduct inconsistent with just and equitable principles of trade; or (e) is subject to a United States Postal Service false representation order entered under Section 3005 of Title 39, United States Code, within the past five years; or is subject to a restraining order or preliminary injunction entered under Section 3005 of Title 39, United States Code. For the purposes hereof, Beneficial Owner means a person having the power to vote or direct the vote or the power to dispose or direct the disposition of any of the Company's securities. 3. The Company has filed all reports required by the Exchange Act during the past 12 calendar months. EX-10.2 5 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement is made and entered into as of the 15th day of May, 1998, by and among Datakey, Inc., a Minnesota corporation (the "Company") and the Investors listed on Schedule A attached hereto (individually, an "Investor" and collectively, the "Investors"). RECITALS A. The Investors and the Company have entered into that certain Preferred Stock Purchase Agreement, dated May 15, 1998 (the "Purchase Agreement"). B. It is a condition to the transactions contemplated in the Purchase Agreement that the Company provide the registration and other rights provided herein and the parties hereto desire to provide for such rights on the terms and conditions contained herein. NOW, THEREFORE, in consideration of the premises and covenants contained herein, the parties hereto agree as follows: 1. Defined Terms. Unless otherwise noted, all capitalized terms used herein shall have the meanings afforded them in the Purchase Agreement and the Exhibits attached thereto. 2. Required Registration. Within 30 days of the Closing date (the "File Date"), the Company shall file a Registration Statement under the Securities Act of 1933, as amended (the "Securities Act"), in accordance with the provisions of either Form S-1 or Form S-3, as required by the Securities and Exchange Commission (the "Commission") covering the resale of the shares of the Company's common stock (i) underlying the Preferred Stock, (ii) underlying the Warrants issued by the Company to Investors of even date herewith (collectively, the "Warrant"), and (iii) issuable by the Company in payment of the dividends on the shares of the Preferred Stock (the "Dividends") and will use its best efforts to have such Registration Statement become effective with the Commission as soon as possible thereafter, and in any event, within 90 days of the date on which it is filed. The shares of the Company's common stock underlying the Preferred Stock and the Warrants and issuable in payment of the Dividends is referred to herein as the "Registrable Stock." 3. Registration - General Provisions. In connection with the registration of the Registrable Stock under the Securities Act, the Company will: (a) prepare and file with the Commission a registration statement with respect to such securities, within 30 days of the Closing date, and use its diligent, good faith efforts to cause such registration statement to become effective within 90 days of the date it is filed and keep the prospectus which is a part of such Registration Statement current until the earlier of the date on which: (i) all such shares have been sold, or (ii) five years after the date it is declared effective by the Commission; (b) prepare and file with the Commission such amendments to such Registration Statement and supplements to the prospectus contained therein as may be necessary to keep such Registration Statement effective for the period required by Section 3(a) above; (c) provide the Investors' counsel with reasonable opportunities to review and comment on, and otherwise participate in, the preparation of such Registration Statement; (d) furnish to the Investors participating in such registration and to the underwriters of the securities being registered, if any, such reasonable number of copies of the Registration Statement, preliminary prospectus, final prospectus and such other documents as the Investors and underwriters may reasonably request in order to facilitate the public offering of such securities; (e) use its diligent, good faith efforts to register or qualify the securities covered by such Registration Statement under such state securities or blue sky laws of such jurisdictions as the Investors may reasonably request, except that the Company shall not for any purpose be required to execute a general consent to service of process (which shall not include a "Uniform Consent to Service of Process" or other similar consent to service of process which relates only to actions or proceedings arising out of or in connection with the sale of securities, or out of a violation of the laws of the jurisdiction requesting such consent) or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (f) notify the Investors, promptly after it shall receive notice thereof, of the time when such Registration Statement has become effective or a supplement to any prospectus forming a part of such Registration Statement has been filed with the Commission; (g) notify the Investors promptly of any request by the Commission for the amending or supplementing of such Registration Statement or prospectus or for additional information; (h) prepare and file with the Commission, promptly upon the request of the Investors, any amendments or supplements to such Registration Statement or prospectus which, in the opinion of counsel for the Investors (and concurred in by counsel for the Company), is required under the Securities Act or the rules and regulations promulgated thereunder in connection with the distribution of the shares of the Company's common stock by the Investors; (i) prepare and promptly file with the Commission and promptly notify the Investors of the filing of such amendment or supplement to such Registration Statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading; (j) advise the Investors, and the Investors' counsel, if any, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such Registration Statement or the initiation or threatening of any proceeding for that purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; (k) not file any amendment or supplement to such Registration Statement or prospectus to which the Investors shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules and regulations promulgated thereunder, after having been furnished with a copy thereof at least five business days prior to the filing thereof, unless in the opinion of counsel for the Company the filing of such amendment or supplement is reasonably necessary to protect the Company from any liabilities under any applicable federal or state law and such filing will not violate applicable law; and (l) at the request of the Investors, furnish on the effective date of the Registration Statement and, if such registration includes an underwritten public offering, at the closing provided for in the underwriting agreement: (i) opinions, dated such respective dates, of the counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the Investors making such request, covering such matters as such underwriters or Investors may reasonably request, and (ii) letters, dated such respective dates, from the independent certified public accountants of the Company, addressed to the underwriters, if any, and to the Investors, covering such matters as such underwriters or Investors may reasonably request, in which letter such accountants shall state (without limiting the generality of the foregoing) that they are independent certified public accountants within the meaning of the Securities Act and that in the opinion of such accountants the financial statements and other financial data of the Company included in the Registration Statement or the prospectus or any amendment or supplement thereto comply in all material respects with the applicable accounting requirements of the Securities Act. 4. Registration Expenses. The Company shall pay all Registration Expenses (as defined below) in connection with the inclusion of shares of the Company's common stock in any Registration Statement, or application to register or qualify such shares under state securities laws, filed by the Company hereunder, other than as set forth herein. For purposes of this Agreement, the term "Registration Expenses" means the filing fees payable to the Commission, any state agency and the NASD; the fees and expenses of the Company's legal counsel and independent certified public accountants in connection with the preparation and filing of the Registration Statement (and all amendments and supplements thereto) with the Commission; and all expenses relating to the printing of the Registration Statement, prospectuses and various agreements executed in connection with the Registration Statement. Notwithstanding the foregoing, the Investors will pay the fees and expenses of any legal counsel the Investors may engage, as well as the Investors' proportionate share of any custodian fees or commission or discounts which may be payable to any underwriter. 5. Penalty Payments. In the event that the Registration Statement relating to the resale of the Registrable Stock is not (i) filed with the Commission by the Company on or before the File Date, or (ii) declared effective by the Commission within 150 days of the Closing date, then, the Company shall pay the Investors the following amounts ("Penalty Payments"): (i) 1% of the purchase price of the Preferred Stock (the "Purchase Price") paid by the Investors to the Company if (A) the Registration Statement is not filed with the Commission by the File Date, and/or (B) the Registration Statement is not declared effective by the Commission within 150 days of the Closing date, (ii) an additional 1% of the Purchase Price if the Registration Statement is not declared effective by the Commission within 180 days of the Closing date, and (iii) an additional 3% of the Purchase Price for each 30-day period thereafter in which the Registration Statement is not declared effective by the Commission. Penalties for failure to file and/or to obtain effectiveness shall be cumulative. The Company shall be liable to the Investor for a full 30-day period, determined in accordance with the above schedule, regardless of by how many days it misses one of the targeted filing or effective dates set forth above. All such Penalty Payments shall be immediately payable by the Company to the Investors (on a pro rata basis based on the number of shares of Preferred Stock purchased by each under the Purchase Agreement) via wire transfer of immediately available funds by the close of business on last day of each respective period set forth above. 6. Indemnification. With respect to the registration of the resale of the shares of Registrable Stock: (a) to the extent permitted by law, the Company will indemnify and hold harmless each Investor, the trustees, partners, officers and directors of each Investor, any underwriter (as defined in the Securities Act) for such Investor and each person, if any, who controls such Investor or underwriter within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation") by the Company: (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the offering covered by the Registration Statement; and the Company will reimburse each such Investor, trustee, partner, officer, director, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 6 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished to it expressly for use in connection with such registration by an Investor, trustee, partner, officer, director, underwriter or controlling person of an Investor. (b) to the extent permitted by law, each Investor will indemnify and hold harmless the Company, each of its directors, each of its officers, each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other Investor selling securities under the Registration Statement or any of such other Investor's, trustees, partners, directors or officers or any person who controls such Investor, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such Investor, or trustee, partner, director, officer or controlling person of such other Investor may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Investor and stated to be specifically for use in connection with such registration; and each such Investor will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Investor, or trustee, partner, officer, director or controlling person of such other Investor in connection with investigating or defending any such loss, claim, damage, liability or action if it is judicially determined that there was such a Violation; provided, however, that the indemnity agreement contained in this Section 6 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Investor, which consent shall not be unreasonably withheld; provided further, that in no event shall any indemnity under this Section 6 exceed the gross proceeds from the offering received by such Investor unless the Violation is the result of fraud on the part of such Investor. (c) promptly after receipt by an indemnified party under this Section of notice of the commencement of any action (including any governmental action), such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party; and provided further, that if there is more than one indemnified party, the indemnifying party shall pay for the fees and expenses of one counsel for any and all indemnified parties to be mutually agreed upon by such indemnified parties, unless representation of an indemnified party by the counsel retained by the other indemnified parties would be inappropriate due to actual or potential differing interests between such indemnified parties. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section. (d) if the indemnification provided for in this Section is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall to the extent permitted by applicable law, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. No person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11 of the Securities Act) shall be entitled to contribution from any person or entity who shall not have been guilty of such fraudulent misrepresentation. (e) the obligation of the Company and the Investors under this Section shall survive the completion of any offering for resale of shares of the Registrable Stock in the Registration Statement, and otherwise. 7. Limitation on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of all of the Investors, enter into any agreement with any person or persons providing for the granting to such holder of registration rights pari passu or senior to those granted to Investors pursuant to this Agreement, or of registration rights which might cause a reduction in the number of shares includable by the Investors in any registration. 8. Miscellaneous. (a) The Company shall not hereafter enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Investors in this Agreement. (b) Except as otherwise provided herein, the provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given or made unless the Company has obtained the written consent of the Investors. (c) All notices and other communications provided for or permitted hereunder shall be made by hand delivery, telex, facsimile, overnight courier or registered first-class mail: (i) if to an Investor, at the address set forth on Schedule A attached hereto; (ii) if to the Company, at the address set forth in the Purchase Agreement. All such notices and communications shall be deemed to have been duly given: when delivered, if by hand, overnight courier or mail; when the appropriate answer back is received, if by telex; when transmission is confirmed by the sending unit, if by facsimile. (d) This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (e) The headings to this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (f) This Agreement shall be governed by and construed in accordance with the laws of the State of New York without giving effect to the principles of choice or conflict of law thereof. Each of the Company and the Investors irrevocably consent to the exclusive jurisdiction of the United States Federal courts and state courts, located in New York County, New York, in any suit or proceeding relating to, based on or arising under this Agreement and irrevocably agree that all claims in respect of such suit or proceeding may be determined in such courts. The Company irrevocably waives the defense of an inconvenient forum to the maintenance of such suit or proceeding. Service of process on the Company mailed by first class mail shall be deemed in every respect effective service of process upon the Company in any such suit or proceeding. Nothing herein shall affect the right of any Investor to serve process in any manner permitted by law. (g) In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the Investors and the Company shall be enforceable to the fullest extent permitted by law. (h) The remedies provided for in this Agreement shall be cumulative and in addition to all other remedies available, at law or in equity, and nothing herein shall limit a holder's right to pursue actual damages for any failure by the Company to comply with the terms of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date indicated above. Datakey, Inc. Special Situations Private Equity Fund, L.P.: By: /s/ Alan Shuler By: /s/ David Greenhouse Its: Chief Financial Officer Its: Tax Identification Number: Special Situations Technology Fund, L.P.: Robert G. Allison By: /s/ David Greenhouse By: /s/ Richard C. Perkins Its: Attorney-in-Fact Tax Identification Number: Tax Identification Number: Shirley A. Baxter, TTEE FBO Shirley A. Baxter Revocable Craig L. Campbell Trust U/A DTD 7-3-96 By: /s/ Richard C. Perkins By: /s/ Richard C. Perkins Attorney-in-Fact Attorney-in Fact Tax Identification Number: Tax Identification Number: Piper Jaffray as Custodian FBO Bradley Piper Jaffray as Custodian A. Erickson IRA 480-263177-102 FBO Richard C. Perkins By: /s/ Richard C. Perkins By: /s/ Richard C. Perkins Attorney-in-Fact Attorney-in Fact Tax Identification Number: 41-1422918 Tax Identification Number: 41-1422918 David M. Westrum, TTEE FBO David M. Westrum Revocable Living Trust Pyramid Partners, L.P. U/A DTD 6-1-97 By: /s/ Richard C. Perkins By: /s/ Richard C. Perkins Attorney-in-Fact Attorney-in Fact Tax Identification Number: Tax Identification Number: Industricorp & Co., Inc. Daniel S. & Patricia M. Perkins JT FBO Twin City Carpenters Pension Plan /s/ Karen McKernan /s/ Daniel S. Perkins By: Union Bank & Trust, Daniel S. Perkins Its Officer /s/ Patrice M. Perkins Patrice M. Perkins Tax Identification Number: Gary Kohler IRA /s/ Gary S. Kohler By: Gary Kohler Schedule A-1 SCHEDULE A INVESTORS Special Situations Private Equity Fund, L.P. 153 East 53rd Street 51st Floor New York, New York 10022 Special Situations Technology Fund, L.P. 153 East 53rd Street 51st Floor New York, New York 10022 Gary Kohler IRA Robert G. Allison Shirley A. Baxter, TTEE FBO Shirley A. Baxter Revocable Trust U/A DTD 7-3-96 Craig L. Campbell Piper Jaffray as Custodian FBO Bradley A. Erickson IRA 480-263177-102 Piper Jaffray as Custodian FBO Richard C. Perkins IRA 980-576-905-610 David M. Westrum TTEE FBO David M. Westrum Revocable Living Trust U/A DTD 6-1-97 Pyramid Partners L.P. Industricorp & Co., Inc. FBO Twin City Carpenters Pension Plan Daniel S. and Patrice M. Perkins, JT EX-23.1 6 CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Registration Statement on Form S-3 of our report, dated February 3, 1998, which appears in the Annual Report on Form 10-KSB of Datakey, Inc. and Subsidiary for the year ended December 31, 1997. We also consent to the reference to our Firm under the caption "Experts" in the aforementioned Registration Statement. /s/ McGladrey & Pullen, LLP McGLADREY & PULLEN, LLP Minneapolis, Minnesota June 10, 1998 -----END PRIVACY-ENHANCED MESSAGE-----