-----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, U1klKkeZyfOl14RaSrKUNRkXEUT9aCitc2HkMxeX9BwcuNcyQ3FyMTlB/QaD4e/p eBZYOWhaB4MPJNkkQd5MUw== 0000914190-99-000261.txt : 19990730 0000914190-99-000261.hdr.sgml : 19990730 ACCESSION NUMBER: 0000914190-99-000261 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19990729 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: 333-84007 FILM NUMBER: 99673094 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 July __, 1999 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: James A. Korn, 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 (1) Price (1) Registration Fee - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- Common Stock (par value 540,513 shares $2.4375 $1,317,500.40 $366.27 $0.05 per share) Common Stock (par value 594,565 shares(2) $2.4375 $1,449,252.10 $402.89 $0.05 per share) TOTAL 1,135,078 shares $769.16 ========================= ====================== ======================= ====================== ======================
(1) 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 July 28, 1999, as reported by the Nasdaq SmallCap Market. (2) Represents shares issuable to Selling Shareholders upon the exercise of warrants and then offered for resale pursuant to this registration, including warrants to purchase 540,513 shares at $2.50 per share and warrants to purchase 54,052 shares at $2.70 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. 1,135,078 SHARES OF COMMON STOCK This Prospectus relates to the offer and sale of up to 1,135,078 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 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 SmallCap 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 SmallCap Market under the symbol of "DKEY." The closing sale price of the Common Stock on July 28, 1999 was $2.4375 per share. The Shares are comprised of 540,513 shares of Common Stock and five-year warrants to purchase an aggregate of 540,513 shares of the Company's Common Stock with an exercise price of $2.50 per share issued by the Company to certain investors on June 21, 1999 in a private offering. As part of the financing, the Company also issued to its agent warrants to purchase an aggregate of 54,052 shares of Common Stock at an exercise price of $2.70. 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 4. - -------------------------------------------------------------------------------- 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 ___________, 1999. 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 SmallCap 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 for the fiscal year ended December 31, 1998; 2. The Company's Quarterly Report on Form 10-QSB for the quarter ended April 3, 1999; 3. The Company's Form 8-K dated June 21, 1999. 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 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 memory products, consisting of an electronic key and support electronics, were introduced in 1981 for applications requiring convenient storage, transportation and management of information. The Company's current products utilize 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 memory devices 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 portable memory systems consist of one or more portable memory devices, 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 memory device is able to store and carry substantial amounts of information. When the memory device is used in conjunction and 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 end-user systems that utilize smart cards or smart keys and 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. Losses: The Company has incurred losses of $4,182,879 in 1997 and $2,289,375 in 1998 related primarily to the development of its information security products. Such losses are continuing in 1999. The Company's ability to obtain profitability is dependent on significantly increasing sales of its information security products, and there is no assurance the Company will be successful in this regard. 2. 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 development, manufacture and distribution of its information security products is consuming the majority of the Company's cash and is currently unprofitable. If, for any reason, the Company is unsuccessful in increasing the sales of its information security products, and attaining overall profitability, the Company's ability to continue operations in its current form would be doubtful. 3. Need for additional capital: While the Company recently closed a $1,351,282 private financing, the Company may require additional capital in 1999, the amount and timing of which will depend primarily on the sales levels of the Company's information security products. To date the Company's sales of such products has not met expectations and there is no assurance that product sales will increase sufficiently for the Company to attain profitability. Additional financing may not be available in terms satisfactory to the Company, or at all, in which case the Company would be forced to curtail or discontinue its information security operations. 4. Risk of rapid technological change: In the information security market, Datakey faces significant risks due to the rapid and continual 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 could provide this security. Such development could materially adversely affect Datakey's business. 5. 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. Based on the Company's experience to date, there are no assurances that Datakey's products will ultimately receive satisfactory customer acceptance or that investments already made and additional investments planned for 1999 will result in an acceptable financial return. 6. 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. 7. Price 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 end-user's product cost consists of royalties and license fees, which would need to be re-negotiated in order to maintain acceptable profit margins. 8. Risk of integrated information security products: Although the Company's new products are designed to 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. 9. 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. 10. 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. 11. Year 2000 Risks. The Company has been addressing the Year 2000 issue internally as well as with key suppliers and customers, with the goal of material compliance by September 1999. If such issues are not adequately resolved by the Company or key third parties, the Company could experience a delay in delivery of critical parts and supplies and/or key customers could experience a delay in delivery of needed Datakey parts. In the event that either of these scenarios occur, the Company's financial condition and results of operations will likely be materially adversely affected. 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. 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 Number of Owned Beneficially Owned Shares After Warrant Offered Offering Name Shares Shares(1) Total(2) Hereby(2) (3) Robert G. Allison 39,588 22,379 61,967 40,000 * John Altmann 5,000 5,000 10,000 10,000 * Gary A. Bergren 10,000 10,000 20,000 20,000 * Stanley Bodine 15,010 10,010 25,020 20,020 * Craig L. Campbell 20,088 12,379 32,467 20,000 * Elizabeth H. Confer 5,000 5,000 10,000 10,000 * Ogden W. Confer 10,000 10,000 20,000 20,000 * Jeff Dobbs 10,000 10,000 20,000 20,000 * Charles Dolsky 10,010 10,010 20,020 20,020 * Dan Dryer 5,000 5,000 10,000 10,000 * Keith Eastman 15,010 10,010 25,020 20,020 * Ellis Family Ltd. Partnership 30,000 20,000 50,000 40,000 * First Protection Corp. of Florida 10,000 10,000 20,000 20,000 * Luther Forde 34,010 10,010 44,020 20,020 * Dennis D. Gonyea 20,000 20,000 40,000 40,000 * Gary S. Kohler 10,252 12,978 23,230 20,000 * Leviticus Partners, L.P. 216,500 100,000 316,500 200,000 3.2% Raymond A. Lipkin 66,000 22,000 88,000 44,000 1.2% Betty L. McCulloch 15,010 10,010 25,020 20,020 * Kevin McHale 6,500 6,500 13,000 13,000 * Jon Nelson & Paula Nelson JT TEN 5,000 5,000 10,000 10,000 * Cathy Norelius 10,010 10,010 20,020 20,020 * Robert A. Olsen 20,010 10,010 30,020 20,020 * Steven J. Olson 15,010 10,010 25,020 20,020 * Industricorp & Co., Inc. FBO 79,919 38,810 118,729 40,000 2.1% Twin City Carpenters Pension Plan Daniel S. Perkins TTEE U/A DTD 20,027 11,762 31,789 16,000 * 05/12/88 FBO Daniel S. Perkins Trust(4) Patrice M. Perkins TTEE U/A DTD 20,027 11,762 31,789 16,000 * 05/12/88 FBO Patrice M. Perkins Trust(4) Richard C. Perkins(5) 10,000 10,000 20,000 20,000 * Piper Jaffray as Custodian FBO Richard C. 17,588 12,379 29,967 20,000 * Perkins IRA(5) Piper Jaffray as Custodian FBO James G. 8,000 8,000 16,000 16,000 * Peters, Sr. IRA Piper Jaffray as Custodian FBO David H. 8,000 8,000 16,000 16,000 * Potter IRA Pyramid Partners L.P. 101,078 108,389 209,467 200,000 * Raymond Harry Rice 4,923 4,923 9,846 9,846 * David E. Riviere 5,000 5,000 10,000 10,000 * Angeline Schnobrich 10,010 10,010 20,020 20,020 * Paul R. Kuehn -- 34,479 34,479 20,270 * David B. Johnson -- 34,479 34,479 20,270 * Eldon C. Miller -- 11,492 11,492 6,756 * Stanley D. Rahm -- 11,492 11,492 6,756 *
* Less than 1.0%. (1) Includes (i) an aggregate of 78,966 shares that may be purchased by certain Selling Shareholders upon exercise of warrants issued in May 1998, which shares are not being offered hereby, and (i) an aggregate of 594,565 shares that may be purchased by the Selling Shareholders upon exercise of warrants issued in June 1999, which shares are being offered hereby. (2) 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. (3) The percentage of shares beneficially owned by each Selling Shareholder is based on 3,651,772 shares of Common Stock outstanding as of the date hereof. Assumes the sale of all the Shares being offered hereby. (4) Includes shares and warrant shares owned jointly by Daniel S. Perkins and Patrice M. Perkins. (5) Shares held by Richard C. Perkins directly and through his retirement account are shown separately. The Selling Shareholders and the officers and directors of any of such Selling Shareholders 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 entitled 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 SmallCap 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, 1998 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 4 Use of Proceeds 5 Selling Shareholders 6 Plan of Distribution 8 Description of Securities 8 Legal Matters 8 Experts 8 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 $ 769 Legal Fees and Expenses 6,000 Accounting Fees and Expenses 2,000 Printing 500 Miscellaneous 2,000 --------- Total Expenses $11,269 ========= 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 July 29, 1999. 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 July 29, 1999 Carl P. Boecher Executive Officer /s/ Alan G. Shuler Vice President and Chief July 29, 1999 Alan G. Shuler Financial Officer /s/ Thomas R. King Director and Secretary July 29, 1999 Thomas R. King /s/ Terrence W. Glarner Director July 29, 1999 Terrence W. Glarner /s/ Gary R. Holland Director July 29, 1999 Gary R. Holland /s/ Eugene W. Courtney Director July 29, 1999 Eugene W. Courtney 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 (Incorporated by reference to Exhibit 3.1 to Form 10-KSB for fiscal year ended December 31, 1998) 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 Stock Purchase Agreement dated June 21, 1999 between the Company and certain investors 10.2 Registration Rights Agreement dated June 21, 1999 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-5.1 2 OPINION AND CONSENT July 29, 1999 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 1,135,078 shares of Common Stock of the Company by persons who are currently holders of Common Stock of the Company (the "Shares") or who may become such holders upon exercise or conversion of outstanding 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 Warrants and the Shares; 4. The Warrants; and 5. 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. The Shares to be sold by the selling shareholders named in the Registration Statement are or, upon exercise or conversion in accordance with the terms and conditions of the Warrants, 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. By /s/ Thomas R. King Thomas R. King, Vice President Fredrikson & Byron, P.A. 1100 International Centre 900 Second Avenue South Minneapolis, Minnesota 55402 Telephone: 612-347-7059 Fax: 612-347-7077 EX-10.1 3 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT This Agreement is made and entered into as of the 21st day of June, 1999, between Datakey, Inc., a Minnesota corporation (the "Company") and each of the persons listed on Schedule 1 to this Agreement (the "Investors"). Reference to any exhibits herein refers to the exhibits included in the Company's offering materials dated June 1, 1999 (the "Offering Materials"). For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged by the Company and each of 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 each Investor at the Closing (as defined herein), and each Investor severally agrees to purchase from the Company at the Closing, that number of shares of the Company's Common Stock (the "Shares") set forth opposite each Investor's name on Schedule 1 at a purchase price of two dollars and fifty cents ($2.50) per share, together with a five year warrant in the form attached hereto as Exhibit A (the "Warrant") to purchase that number of the Company's Common Stock set forth on Schedule 1 at an exercise price of two dollars and fifty cents ($2.50) per share. The Shares and the Warrants are referred to herein collectively as the "Securities." 2. Closing. The closing shall take place at the offices of Fredrikson & Byron, P.A., Minneapolis, Minnesota 55402, at 3:00 p.m., Minneapolis time, on June 21, 1999 (the "Closing") and/or at such other place or time as may be mutually acceptable to the Investors and the Company. At the Closing, subject to the satisfaction of the conditions in Section 6 below, the Company will deliver to each Investor a certificate representing the Shares purchased by such Investor, together with a Warrant representing the right to purchase that number of shares of Common Stock of the Company set forth opposite each Investor's name on Schedule 1, against payment of the purchase price therefor by certified check or wire transfer to the Company in the amounts set forth after their respective names in Schedule 1 hereto. 3. Representations and Warranties by the Company. To induce each Investor to enter into this Agreement and to purchase the number of Securities set forth after his or its name on Schedule 1, the Company hereby represents and warrants to each Investor that: 3.1 Organization, Standing, Etc. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota, and has the requisite corporate power and authority to own its properties and to carry on its business in all material respects as it is now being 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 materially adverse effect on the Company's business. 3.2 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 B (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 in 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. 3.3 Subsidiaries. The Company has one wholly owned subsidiary, Datakey FSC. 3.4 Financial Statements. Attached to this Agreement as Exhibit C are (a) the Company's annual reports on Form 10-KSB for the years ended December 31, 1997 and 1998, and (b) the Company's quarterly report on Form 10-QSB for the quarter ended April 3, 1999, (c) the Company's Proxy Statement for the Annual Meeting of Shareholders held in 1998 and in 1999 and (d) the Company's 1997 and 1998 Annual Reports. The financial statements included in such reports (i) are in accordance with the books and records of the Company, (ii) present fairly the financial condition of the Company at the balance sheet dates and the results of its operations for the periods therein specified, subject, in the case of the April 3, 1999 financial statements, to normal year-end adjustments, and (iii) have, in all material respects, been prepared in accordance with generally accepted accounting principles applied on a basis consistent with prior accounting periods. Without limiting the generality of the foregoing, the balance sheets included in such reports or notes thereto disclose all of the debts, liabilities and obligations of any nature (whether absolute, accrued or contingent and whether due or to become due) of the Company at December 31, 1998 and April 3, 1999, which, individually, or in the aggregate, are material or which in accordance with generally accepted accounting principles would be required to be disclosed in such balance sheets, and includes appropriate reserves for all taxes and other liabilities accrued as of such dates but not yet payable. 3.5 Tax Returns and Audits. All required federal, state and local tax returns and appropriate extension requests of the Company have been filed, and all federal, state and local taxes required to be paid with respect to such returns have been paid or due provision for the payment thereof has been made. The Company is not delinquent in any material respect in the payment of any such tax or in the payment of any assessment or governmental charge. The Company has not received notice of any tax deficiency proposed or assessed against it, and it has not executed any waiver of any statute of limitations on the assessment or collection of any tax. 3.6 Changes, Dividends, Etc. Except for the transactions contemplated by this Agreement, since April 3, 1999, 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 purchased 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; (x) materially increased the compensation payable, or to become payable, to any of its directors or employees, or made any bonus payment or similar arrangement with any directors or employees or increased the scope or nature of any fringe benefits provided of its employees or directors; or (xi) 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 April 3, 1999. 3.7 Title to Properties and Encumbrances. The Company has good and marketable title to all of its properties and assets, except for property disposed of in the ordinary course of business since April 3, 1999, which properties and assets are not subject to any mortgage, pledge, lease, lien, charge, security interest, encumbrance or restriction, except (a) those which are shown and described on the April 3, 1999, balance sheet or the notes thereto, (b) liens for taxes and assessments or other governmental charges or levies not at the time due or in respect of which the validity thereof shall currently be contested in good faith by appropriate proceedings, (c) statutory liens that have arisen in the ordinary course of business, or (d) those which do not materially affect the value of or interfere with the use made of such properties and assets. 3.8 Conditions. The plant, offices and equipment of the Company have been kept in good condition and repair in the ordinary course of business. 3.9 Litigation; Governmental Proceedings. There are no legal actions, suits, arbitrations or other legal, administrative or governmental proceedings or investigations pending or, to the knowledge of the Company, threatened against the Company, or its properties or business, and the Company is not aware of any facts which are likely to result in or form the basis for any such action, suit or other proceeding. The Company is not in default with respect to any judgment, order or decree of any court or any governmental agency or instrumentality with respect to which it is a party or is named as an affected person, nor to the best of its knowledge is the Company in default with respect to any other judgment, order or decree. The Company has not been threatened with any action or proceeding under any business or zoning ordinance, law or regulation. 3.10 Compliance With Applicable Laws or Other Instruments. To the best of the Company's knowledge, the business and operations of the Company have been and are being conducted in all material respects in accordance with all applicable laws, rules and regulations of all governmental authorities. 3.11 Shares, Warrants and Warrant Shares. The Shares and Warrants, when issued and paid for pursuant to the terms of this Agreement, will be duly authorized, validly issued and outstanding, fully paid and nonassessable and shall be free and clear of all pledges, liens, encumbrances and restrictions, except securities restrictions as set forth in Section 4 hereof. The Warrant Shares have been reserved for issuance and when issued upon exercise of the Warrants, will be duly authorized, validly issued and outstanding, fully paid, nonassessable and free and clear of all pledges, liens, encumbrances and restrictions, except as set forth in Section 4. 3.12 Securities Laws. Based in part upon the representations of the Investors, 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 offer, issuance, sale or delivery of the Shares, Warrants or Warrant Shares, other than the qualification thereof, if required, under applicable state securities laws, which qualification has been or will be effected as a condition of these sales. 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 and other accredited investors. Under the circumstances contemplated by this Agreement, the offer, issuance, sale and delivery of the Shares, Warrants or Warrant Shares will not, under current laws and regulations, require compliance with the prospectus delivery or registration requirements of the federal Securities Act of 1933, as amended (the "Securities Act"). The Company has filed all reports or other documentation that it is required to file by the federal Securities Exchange Act of 1934, as amended, 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 made, in the light of the circumstances under which they were made, not misleading. 3.13 Patents and Other Intangible Rights. To the best of its knowledge, the Company (a) owns or has the exclusive right to use, free and clear of all material liens, claims and restrictions, all patents, trademarks, service marks, trade names, copyrights, licenses and rights with respect to the foregoing, used in the conduct of its business as now conducted without infringing upon or otherwise acting adversely to the right or claimed right of any person under or with respect to any of the foregoing, (b) is not obligated or under any liability whatsoever to make any payments of a material nature by way of royalties, fees or otherwise to any owner of, licensor of, or other claimant to, any patent, trademark, trade name, copyright or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise, (c) owns or has the unrestricted right to use all trade secrets, including know-how, customer lists, inventions, designs, processes, computer programs and technical data necessary to the development, operation and sale of all products and services sold or proposed to be sold by it, free and clear of any rights, liens or claims of others, and (d) is not using any confidential information or trade secrets of others. 3.14 Capital Stock. At the date hereof, the Company is authorized by its articles of incorporation to issue 12,500,000 shares of capital stock, which consists of the following: (a) 10,000,000 shares of common stock, $.05 par value, of which there are outstanding 3,111,259 shares, (b) 400,000 shares of Convertible Preferred Stock, of which there are outstanding 150,000 shares, (c) 150,000 shares of Series A Convertible Preferred Stock, of which there are outstanding 74,367, and (d) 1,950,000 undesignated shares. All of the outstanding shares of the Company were duly authorized, validly issued and are fully paid and nonassessable. Other than with regard to the outstanding Convertible Preferred Stock and Series A Convertible Preferred Stock, or as otherwise disclosed on Exhibit B, there are no outstanding subscriptions, options, warrants, calls, contracts, demands, commitments, convertible securities or other agreements or arrangements of any character or nature whatever, other than this Agreement, under which the Company is obligated to issue any securities of any kind representing an ownership interest in the Company. All outstanding securities of the Company have been issued in full compliance with or an exemption or exemptions from the registration and prospectus delivery requirements of the Securities Act and from the regulation and qualification requirements of all applicable state securities laws. 3.15 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. 3.16 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. 3.17 Insurance Coverage. There are in full force policies of insurance issued by insurers of recognized responsibility insuring the Company and its properties and business against such losses and risks, and in such amounts, as in the Company's best judgment, after advice from its insurance broker, are acceptable for the nature and extent of such business and its resources. 3.18 No Brokers or Finders. Except for Miller, Johnson & Kuehn, Incorporated, which is assisting the Company in the transactions contemplated by this Agreement, no person, firm or corporation has or will have, as a result of any act or omission of the Company, any right, interest or valid claim against the Company or any Investor for any commission, fee or other compensation as a finder or broker in connection with the transactions contemplated by this Agreement. The Company will indemnify and hold each of the Investors harmless against any and all liability with respect to any such commission, fee or other compensation which may be payable or determined to be payable in connection with the transactions contemplated by this Agreement. 3.19 Disclosure. The Company has not knowingly withheld from the Investors any material facts relating to the assets, business, operations, financial condition or prospects of the Company. No representation or warranty in this Agreement or in any certificate, schedule or other document furnished or to be furnished to any Investor pursuant hereto or in connection with the transactions contemplated hereby contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact required to be stated herein or therein or necessary to make the statements herein or therein not misleading. 3.20 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 statements 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: 4.1 Investment Intent. The Securities being acquired by such Investor are being purchased for investment for such Investor's own account and not with the view to, or for resale in connection with, any distribution or public offering thereof. Such 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 transactions exempt from the registration requirements of the Securities Act and applicable state securities laws, and that the reliance of the Company and others upon these exemptions is predicated in part upon this representation by each Investors. Such Investor further understands that the Securities 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. Such Investor understands that an exemption from such registration is presently available pursuant to Rule 144 promulgated under the Securities Act by the Securities and Exchange Commission (the "Commission") but that in any event an Investor may not sell any securities pursuant to Rule 144 prior to the expiration of a one-year period after such Investor has acquired such securities. Such Investor understands that any sales pursuant to Rule 144 can be made only in full compliance with the provisions of Rule 144. 4.2 Location of Principal Office, Qualification as an Accredited Investor, Etc. The state in which such Investor's principal office (or domicile, if such Investor is an individual) is located is the state set forth in such Investor's address on Schedule 1. Unless otherwise indicated on such Investor's signature page to this Agreement, such Investor qualifies as an "accredited investor" for purposes of Regulation D promulgated under the Securities Act for the reasons specified after such investor's name on such signature page. Such Investor acknowledges that the Company has made available to such 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 such Investor. Such Investor (a) is able to bear the loss of its entire investment in the Shares without any material adverse effect on its business, operations or prospects, and (b) 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. 4.3 Acts and Proceedings. This Agreement has been duly authorized by all necessary action on the part of such Investor, has been duly executed and delivered by such Investor, and is a valid and binding agreement of such Investor. 4.4 No Brokers or Finders. Except for Miller, Johnson & Kuehn, Incorporated, which is assisting the Company in the transactions contemplated by this Agreement, no person, firm or corporation has or will have, as a result of any act or omission by such Investor, any right, interest or valid claim against the Company for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions contemplated by this Agreement. Such Investor will indemnify and hold the Company harmless against any and all liability with respect to any such commission, fee or other compensation which may be payable or determined to be payable as a result of the actions of such Investor in connection with the transactions contemplated by this Agreement. 4.5 Exculpation Among Investors. Such Investor acknowledges that in making his or its decision to invest in the Company, he or it is not relying on any other Investor or upon any person, firm or company, other than the Company and its officers, employees and/or directors. Such Investor agrees that no other Investor, nor the partners, employees, officers or controlling persons of any other Investor shall be liable for any actions taken by such Investor, or omitted to be taken by such Investor, in connection with such investment. 4.6 Legends. It is understood that the certificates evidencing the Shares may bear legends required by applicable federal and state securities laws as well as the following legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS. ADDITIONALLY, THE TRANSFER OF THESE SECURITIES IS SUBJECT TO THE CONDITIONS SPECIFIED IN THE REGISTRATION RIGHTS AGREEMENT DATED JUNE __, 1999, AMONG DATAKEY, INC. AND CERTAIN OTHER SIGNATORIES THERETO, AND NO TRANSFER OF THESE SECURITIES SHALL BE VALID OR EFFECTIVE UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED. 5. Conditions of Each Investor's Obligation. The obligation to purchase and pay for the Securities which each Investor has agreed to purchase on the closing date is subject to the fulfillment prior to or on the closing date of the conditions set forth in this Article 5. 5.1 Representations and Warranties. The representations and warranties of the Company under this Agreement shall be true in all material respects as of the closing date with the same effect as though made on and as of the closing date. 5.2 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 prior to or as of the closing date. 5.3 Certificate of Officers. The Company shall have delivered to Miller, Johnson & Kuehn, Incorporated a certificate, dated the closing date, executed by the President and the senior financial officers of the Company and certifying to the satisfaction of the conditions specified in Sections 5.1 and 5.2. 5.4 Opinion of the Company's Counsel. The Company shall have delivered to Miller, Johnson & Kuehn, Incorporated an opinion of Fredrikson & Byron, P.A., counsel for the Company, dated the closing date, to the effect that: (a) The Company is a corporation duly organized and validly existing in good standing under the laws of the state of its incorporation, and has the corporate power and authority to own and hold the properties owned and leased by it and to carry on the business in which it is engaged. The Company has the corporate power and authority to enter into this Agreement, to issue and sell the Shares, Warrants and the Warrant Shares and to carry out the provisions of this Agreement. (b) This Agreement has been duly authorized, executed and delivered by the Company, and is the legal, valid and binding agreement of the Company and is enforceable against the Company in accordance with its terms, subject, as to the enforcement of remedies, to limitations under applicable bankruptcy, insolvency, moratorium, reorganization, and other laws affecting the rights of creditors generally and to judicial limitations on the enforcement of the remedy of specific performance and other equitable remedies. (c) The Securities being purchased on the closing date have been duly authorized, validly issued and delivered by the Company, are fully paid and nonassessable, and are entitled to the rights, preferences and provisions of the Company's articles of incorporation and the benefits of the provisions of this Agreement applicable thereto. The certificates evidencing the Shares and the Warrants are in valid and sufficient form. (d) All corporate proceedings required by law or by the provisions of this Agreement to be taken by the Board of Directors and shareholders of the Company on or prior to such closing date in connection with the execution and delivery of this Agreement, the offer, issuance and sale of the Securities and the consummation of the transactions contemplated by this Agreement, have been duly and validly taken. (e) The Company is authorized by its articles of incorporation to issue 12,500,000 shares of capital stock, which consists of the following: (a) 10,000,000 shares of common stock, $.05 par value, of which there are outstanding 3,111,259 shares, (b) 400,000 shares of Convertible Preferred Stock, of which there are outstanding 150,000 shares, (c) 150,000 shares of Series A Convertible Preferred Stock, of which there are outstanding 74,367, and (d) 1,950,000 undesignated shares. All shares outstanding immediately prior to the closing date have been duly authorized and validly issued. Except for the Common Stock, the Convertible Preferred Stock and the Series A Convertible Preferred Stock, the Company has no other authorized series or class of capital stock and, to the best of such counsel's knowledge and without any special inquiry into this matter, has no outstanding options, warrants or other rights to acquire securities of the Company, other than as disclosed in Exhibit B. (f) The requisite number of Warrant Shares have been validly authorized and reserved for issuance upon exercise of the Warrants, and when issued upon such exercise, will be authorized, validly issued and outstanding, fully paid and nonassessable. To the best of such counsel's knowledge, except for with regard to the outstanding shares of Stock, no security holder of the Company is entitled to preemptive or similar rights as a result of the execution or delivery of this Agreement or the issuance of the Shares, Warrants, or Warrant Shares. (g) Assuming the accuracy of the representations made by the Investors in their Acceptances and Section 4 hereof, the offer, sale, issuance and delivery of the Securities to the Investors under the circumstances contemplated by this Agreement are exempt from the registration and prospectus delivery requirements of the Securities Act and all applicable state securities laws. (h) Except for matters disclosed as part of Exhibit B, such counsel has no knowledge of any litigation, proceeding or governmental investigation pending or threatened against the Company or its properties or business. (i) Nothing has come to the attention of counsel which would lead counsel to reasonably believe that the Company's business and operations are not being conducted in all material respects in compliance with applicable laws, rules, and regulations. 5.5 Supporting Documents. Miller, Johnson & Kuehn, Incorporated, as representatives for each investor, shall have received the following: (a) A copy of 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; (b) A certificate of incumbency executed by the Secretary of the Company certifying the names, titles and signatures of the officers authorized to execute this Agreement and further certifying that the articles of incorporation and bylaws of the Company delivered to legal counsel for the Investors at the time of the execution of this Agreement have been validly adopted and have not been amended or modified; (c) The certificates contemplated by Section 5.3 above; and (d) Such additional supporting documentation and other information with respect to the transactions contemplated hereby as legal counsel for the Investors may reasonably request. 5.6 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. 5.7 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 legal counsel for the Investors. 5.8 Registration Rights Agreement. The Company, each Investor and each of the parties listed on the signature page of Exhibit 5.8 shall enter into the Registration Rights Agreement dated as of the Closing in the form attached as Exhibit 5.8. 6. Conditions of the Company's Obligations at Closing. The obligations of the Company to each Investor under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions by that Investor. 6.1 Representations and Warranties. The representations and warranties of the Investor contained in Section 4 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 6.2 Payment of Purchase Price. The Investors shall have delivered the purchase price as specified in Section 1. 7. Affirmative Covenants of the Company. The Company covenants and agrees as follows: 7.1 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. 7.2 Books of Accounts and Reserves. 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 Commission. 7.3 Application of Proceeds. Unless otherwise approved by the Investors, the net proceeds received by the Company from the sale of the Shares on the closing date shall be used for the purposes set forth in the Use of Proceeds section of the Offering Materials. 7.4 Filing of Reports. The Company will make timely filings of such reports as are required to be filed by it with the Commission so that Rule 144 under the Securities Act or any successor provision thereto will be available to the security holders of the Company who were otherwise able to take advantage of the provisions of such Rule. 7.5 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. 8. Miscellaneous. 8.1 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: (a) if to any holder of any Shares addressed to such holder at its address as shown on the books of the Company, or at such other address as such holder may specify by written notice to the Company, or (b) if to the Company at 407 West Travelers Trail, Burnsville, MN 55337, Attention: President; or at such other address 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, or, if sent by mail, when received. 8.2 Survival of Representations and Warranties, Etc. All representations and warranties contained herein shall survive the execution and delivery of this Agreement, any investigation at any time made by the Investors or on their behalf, and the sale and purchase of the Shares 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. 8.3 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 Shares; provided, however, that a successor or assign of an Investor shall not be regarded as an "Investor." 8.4 Headings. The headings of the articles and sections of this Agreement have been inserted for convenience of reference only and do not constitute a part of this Agreement. 8.5 Choice of Law. The laws of Minnesota shall govern the validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties hereunder. 8.6 Counterparts. This Agreement may be executed at different times by different Investors 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. Notwithstanding any other section of this Agreement, the execution of this Agreement on different dates by different Investors shall not be deemed an amendment to this Agreement. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized representative and each of the Investors has an executed acceptance form attached to this Agreement. DATAKEY, INC. By: /s/ Alan G. Shuler Its: VP and Chief Financial Officer INVESTOR By: [SIGNED BY EACH PERSON ON SCHEDULE A] Its: ___________________________________ SCHEDULE A Investor Shares Warrants - --------- ------ -------- Robert G. Allison 20,000 20,000 John Altman 5,000 5,000 Gary A. Bergren 10,000 10,000 Stanley Bodine 10,010 10,010 Craig L. Campbell 10,000 10,000 Elizabeth H. Confer 5,000 5,000 Ogden W. Confer 10,000 10,000 Jeff Dobbs 10,000 10,000 Charles Dolsky 10,010 10,010 Dan Dryer 5,000 5,000 Keith Eastman 10,010 10,010 Ellis Family Ltd. Partnership 20,000 20,000 First Protection Corp. of Florida 10,000 10,000 Luther Forde 10,010 10,010 Dennis D. Gonyea 20,000 20,000 Gary S. Kohler 10,000 10,000 Leviticus Partners, L.P. 100,000 100,000 Raymond A. Lipkin 22,000 22,000 Betty L. McCulloch 10,010 10,010 Kevin McHale 6,500 6,500 Jon Nelson & Paula Nelson JT TEN 5,000 5,000 Cathy Norelius 10,010 10,010 Robert A. Olsen 10,010 10,010 Steven J. Olson 10,010 10,010 Industricorp & Co., Inc. 20,000 20,000 FBO Perkins Capital Management Daniel S. Perkins TTEE U/A DTD 8,000 8,000 05/12/88 FBO Daniel S. Perkins Patrice M. Perkins TTEE U/A DTD 8,000 8,000 05/12/88 FBO Patrice M. Perkins Richard C. Perkins 10,000 10,000 Piper Jaffray as Custodian 10,000 10,000 FBO Richard C. Perkins IRA Piper Jaffray as Custodian 8,000 8,000 FBO James G. Peters, Sr. IRA Piper Jaffray as Custodian 8,000 8,000 FBO David H. Potter IRA Pyramid Partners L.P. 100,000 100,000 Raymond Harry Rice 4,923 4,923 David E. Riviere 5,000 5,000 Angeline Schnobrich 10,010 10,010 ------ ------ TOTALS: 540,513 540,513 EX-10.2 4 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement is made and entered into as of the 21st day of June, 1999, 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 Stock Purchase Agreement, dated June 21, 1999 (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 (i) the resale of the Shares and (ii) the issuance and resale of the Warrant Shares, 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 and the Warrants Shares are 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 the Registrable Stock, within 30 days of the Closing date of the Purchase Agreement, and use its best 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 Registrable Stock has been sold, or (ii) one year 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 material 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 Expense. 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 120 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 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 120 days of the Closing date, (ii) all additional 1% of the Purchase Price if the Registration Statement is not declared effective by the Commission within 150 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 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 fullest extent permitted by law, the Company will indemnify and hold harmless each Investor, the trustees, partners, officers, directors and agents 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, agent, 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, agent, 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 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 an 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 Minnesota 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 Hennepin County, Minnesota, 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 have executed this Registration Rights Agreement as of the date first written above. Company: DATAKEY, INC. By: /s/ Carl P. Boecher Name: Carl P. Boecher Title: President and Chief Executive Officer Investors: By: [SIGNED BY EACH PERSON ON SCHEDULE A] Name: Title: By: Name: Title: SCHEDULE A Investor Shares Warrants - --------- ------ -------- Robert G. Allison 20,000 20,000 John Altman 5,000 5,000 Gary A. Bergren 10,000 10,000 Stanley Bodine 10,010 10,010 Craig L. Campbell 10,000 10,000 Elizabeth H. Confer 5,000 5,000 Ogden W. Confer 10,000 10,000 Jeff Dobbs 10,000 10,000 Charles Dolsky 10,010 10,010 Dan Dryer 5,000 5,000 Keith Eastman 10,010 10,010 Ellis Family Ltd. Partnership 20,000 20,000 First Protection Corp. of Florida 10,000 10,000 Luther Forde 10,010 10,010 Dennis D. Gonyea 20,000 20,000 Gary S. Kohler 10,000 10,000 Leviticus Partners, L.P. 100,000 100,000 Raymond A. Lipkin 22,000 22,000 Betty L. McCulloch 10,010 10,010 Kevin McHale 6,500 6,500 Jon Nelson & Paula Nelson JT TEN 5,000 5,000 Cathy Norelius 10,010 10,010 Robert A. Olsen 10,010 10,010 Steven J. Olson 10,010 10,010 Industricorp & Co., Inc. 20,000 20,000 FBO Perkins Capital Management Daniel S. Perkins TTEE U/A DTD 8,000 8,000 05/12/88 FBO Daniel S. Perkins Patrice M. Perkins TTEE U/A DTD 8,000 8,000 05/12/88 FBO Patrice M. Perkins Richard C. Perkins 10,000 10,000 Piper Jaffray as Custodian 10,000 10,000 FBO Richard C. Perkins IRA Piper Jaffray as Custodian 8,000 8,000 FBO James G. Peters, Sr. IRA Piper Jaffray as Custodian 8,000 8,000 FBO David H. Potter IRA Pyramid Partners L.P. 100,000 100,000 Raymond Harry Rice 4,923 4,923 David E. Riviere 5,000 5,000 Angeline Schnobrich 10,010 10,010 ------ ------ TOTALS: 540,513 540,513 EX-23.1 5 CONSENT OF MCGLADREY & PULLEN, LLP EXHIBIT 23.1 We hereby consent to the incorporation by reference in this Registration Statement on Form S-3 of our report, dated February 5, 1999, which appears in Item 7 of the annual report on Form 10-KSB of Datakey, Inc. and subsidiary for the year ended December 31, 1998. 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 July 29, 1999 -----END PRIVACY-ENHANCED MESSAGE-----