-----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, DnneK+FlZ0m5rAc+KDd7aVe45vVlR8l2Ntxjg28RzW7ow1Otqvdoli83GRAchnZv 5/pTnT/Y65ViXLxE9WFn0Q== 0000914190-99-000383.txt : 19991117 0000914190-99-000383.hdr.sgml : 19991117 ACCESSION NUMBER: 0000914190-99-000383 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19991115 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: 333-90969 FILM NUMBER: 99756015 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 November 15, 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: Elizabeth McGraw Reiskytl, Esq. Fredrikson & Byron, P.A. 900 Second Avenue South, Suite 1100 Minneapolis, Minnesota 55402 (612) 347-7000 Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement as determined by market conditions and other factors and as Selling Shareholders shall determine. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: If any of the securities being registered on this form to be offered on a delayed or continuous basis, pursuant to Rule 415 under the Securities Act of 1933, check the following box: 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 429,978 $1.65625 $712,151.06 $197.98 $0.05 per share) - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- TOTAL 429,978 shares $197.98 - ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
(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 November 11, 1999, as reported by the Nasdaq SmallCap Market. 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. 429,978 SHARES OF COMMON STOCK This Prospectus relates to the offer and sale of up to 429,978 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 $7,210), 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 November 11, 1999 was $1.5625 per share. The Shares are comprised of 429,978 shares of Common Stock issued by the Company to certain investors on November 11, 1999 pursuant to a letter agreement dated October 29, 1999 between the Company and the Selling Shareholders. A copy of such agreement is filed as Exhibit 10.1 to the Form S-3 Registration Statement of which this is a part. 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. 4. The Company's Quarterly Report on Form 10-QSB for the quarter ended July 3, 1999; 5. The Company's Form 8-K dated October 25, 1999; and 6. The Company's Form 8-K dated October 29, 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 Prospectus, 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 incurred losses of $4,183,000 and $2,289,000 in 1997 and 1998, respectively, related primarily to the development of its information security products. Additional losses total $2,295,000 through October 2, 1999, and material losses will continue at least through the remainder of 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 unprofitable. Sales levels of such products are far below the Company's projections set at the beginning of 1999, and there is no assurance that sales of ISS products will ever be sufficient for the Company to attain profitability. 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. 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. 4. 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. 5. Dependence on Management and Technical Personnel: The Company's ability to meet its projections for the Company's information security business depends upon the efforts and abilities of its management team, its software engineers and other technical personnel. The Company's inability to retain such highly skilled persons due either to its current economic circumstances or the intense competition faced in the market for such persons would substantially limit the Company's ability to further its efforts in this new business venture. 6. Possible Delisting of Common Stock from Nasdaq SmallCap Market: Issuers listed on Nasdaq are subject to a rule requiring prior shareholder approval of the issuance of securities in a non-public offering involving the sale or issuance of Common Stock (or securities convertible into or exercisable for common stock) equal to 20 percent or more of the outstanding common stock, if such shares are sold for less than the market value of the stock. Shareholder approval is also required if the issuance of securities will result in a change of control of the Company. If Nasdaq regulators conclude that the October 1999 financing or such financing combined with the June 1999 private placement (either before or after the issuances of securities described in recently filed reports on Form 8-K) require such shareholder approval, and the Company is not successful in obtaining an appropriate exemption from the shareholder approval rule, the Company may likely face delisting from the Nasdaq SmallCap Market. If the Company is delisted, trading, if any, in the Company's Common Stock may then continue to be conducted in the non-Nasdaq over-the-counter market. As a result, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of the Company's Common Stock. In addition, the Company may be subject to other Securities and Exchange Commission rules imposing various sales practice requirements on broker-dealers who sell such securities, which may have an adverse effect on the ability of broker-dealers to sell the Company's Common Stock and may affect the ability of purchasers in this offering to sell the Company's Common Stock in the secondary market. 7. Need for additional capital: Even though the Company raised $1,500,000 pursuant to the October 1999 offering, the Company may require additional capital in 2000, the amount of which will depend primarily on the sales levels of the Company's information security products. To date, the Company has not been able to accurately project future information security product sales, and there is no assurance that its current sales projections will be met. If the Company is not successful in significantly increasing the sales levels of its integrated system solutions products in 2000, the Company may be forced at some point in 2000 or thereafter to curtail or discontinue operations unless it was then in a position to obtain the required additional capital. Such capital may not be available on terms satisfactory to the Company, or at all. 8. Delays in product delivery schedules: Datakey's success depends to a certain 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. 9. 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. 10. 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. 11. 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. 12. 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. 13. 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 December 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 Beneficially Number of Shares % Owned After Name Owned Offered Hereby Offering (1) Special Situations Private Equity Fund, L.P.(2) 749,184 338,479 7.1% Special Situations Technology Fund, L.P. (2) 202,016 91,499 1.9%
(1) The percentage of shares beneficially owned by each Selling Shareholder is based on 5,791,772 shares of Common Stock outstanding as of the date hereof. Assumes the sale of all the Shares being offered hereby. (2) Special Situations Private Equity Fund, L.P. and Special Situations Technology Fund, L.P. (the "Funds") may be deemed to be affiliates because they are managed by investment advisers principally owned by Mr. Austin W. Marxe and Mr. David M. Greenhouse, both of whom disclaim beneficial ownership in such shares. Special Situations Cayman Fund, L.P. is an affiliate of the Funds and owns 4,800 shares of Datakey Common Stock not included in the table above. 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 shares 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, including the shares of Common Stock offered hereby, are 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 6 Selling Shareholders 7 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 $200 Legal Fees and Expenses 2,000 Accounting Fees and Expenses 4,000 Printing 500 Miscellaneous 500 ================== Total Expenses $7,210 ================== 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 November 15, 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 Executive November 15, 1999 Carl P. Boecher Officer /s/ Alan G. Shuler Vice President and Chief November 15, 1999 Alan G. Shuler Financial Officer /s/ Thomas R. King Director and Secretary November 15, 1999 Thomas R. King /s/ Terrence W. Glarner Director November 15, 1999 Terrence W. Glarner /s/ Gary R. Holland Director November 15, 1999 Gary R. Holland /s/ Eugene W. Courtney Director November 15, 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 Letter Agreement dated October 29, 1999 between and among Datakey, Inc., Special Situations Private Equity Fund and Special Situations Technology Fund. 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 OF COUNSEL November 15, 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 429,978 shares of Common Stock of the Company by persons who are currently holders of Common Stock of the Company (the "Shares"). In connection with rendering this opinion, we have reviewed the following: 1. The Company's Restated Articles of Incorporation, as amended; 2. The Company's Bylaws, as amended; 3. Certain corporate resolutions, including resolutions of the Company's Board of Directors pertaining to the issuance by the Company of the Shares; and 4. 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 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. 900 Second Ave. S., #1100 Minneapolis, MN 55402 Telephone: (612) 347-7000 Facsimile: (612) 347-7077 EX-10.1 3 LETTER AGREEMENT Datakey, Inc. 407 West Travelers Trail Burnsville, MN 55337-2554 October 29, 1999 Mr. Austin Marxe Special Situations 153 East 53rd Street, 51st Floor New York, NY 10022 Dear Austin: The purpose of this letter is to confirm our understanding with respect to the conversion of outstanding shares of Series A Convertible Preferred Stock (the "Preferred Stock"), with 58,544 shares held by Special Situations Private Equity Fund, L.P. and 15,823 held by Special Situations Technology Fund, L.P. (collectively referred to as the Special Situations Funds). In exchange for the issuance of an aggregate of 940,000 shares of Common Stock to the Special Situations Funds, the Special Situations Funds agree (i) to surrender all outstanding shares of Preferred Stock, thereby releasing the Company of any dividend obligations and antidilution adjustment, and (ii) to surrender all warrants held by the Special Situations Funds to the Company, again forfeiting any antidilution or other adjustments that may result due to Datakey's current private placement described below or otherwise. As additional consideration for the issuance of the Common Stock, the Special Situations Funds agree to execute a waiver of any and all rights they have or might have to bring any action against the Company and its affiliates, whether for damages or equitable remedies, arising out of either their purchase of securities in the May 1998 offering or relating to Datakey's 1999 private offering of Common Stock and warrants. Datakey also agrees to register the 940,000 shares to be issued to the Special Situations Funds either by filing, by November 15, 1999, an amendment to the Form S-3 originally filed on June 12, 1998 or by filing a new registration statement on Form S-3 to cover the resale of such shares. You, as a representative of the Special Situations Funds, acknowledge that Special Situations Funds are aware of the current private offering Datakey, Inc. is conducting for up to $1,500,000 through the sale of Common Stock at $1.25 per share, with each share accompanied by one warrant to purchase one share of Common Stock at an exercise price of $1.25 per share. You also acknowledge on behalf of Special Situations Funds that you have had an opportunity to review documents, including the private placement memorandum relating thereto, or ask any questions related to such offering. In addition, you agree that the issuance of Common Stock pursuant to this letter agreement is contingent upon the closing of a minimum of $750,000 pursuant to such private placement. Please sign below to indicate agreement with the terms set forth in this letter. Sincerely, /s/ Carl Boecher Carl Boecher President and CEO Special Situations Private Special Situations Technology Equity Fund, L.P. Fund, L.P. By /s/ Austin Marxe By /s/ Austin Marxe Its Managing Director Its Managing Director EX-23.1 4 CONSENT OF MCGLADREY & PULLEN LLP EXHIBIT 23.1 Consent of Independent Accountants We hereby consent to the incorporation by reference in this Registration Statement on Form S-3 of our report, dated February 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 November 15, 1999 -----END PRIVACY-ENHANCED MESSAGE-----