EXHIBIT 10.1
SECURED CONVERTIBLE PROMISSORY NOTE PURCHASE AGREEMENT
THIS SECURED CONVERTIBLE PROMISSORY NOTE PURCHASE AGREEMENT (the
"Agreement") is made as of the 17th day of October, 2003, by and among Datakey,
Inc., a Minnesota corporation (the "Company"), and the investors listed on
Exhibit A hereto (each, an "Investor" and collectively, the "Investors").
A. The Company is in need of working capital for the operations
of its business and for the marketing of the Company's "smart cards."
B. The Investors are willing to lend the Company an aggregate of
$2,000,000 in a bridge financing transaction pursuant to the terms and
conditions set forth below.
NOW, THEREFORE, in consideration of the mutual promises set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
l. Purchase and Sale of Notes.
1.1 Authorization and Sale of Notes and Warrants.
(a) The Company shall authorize the issuance and sale to
Investors of Secured Convertible Promissory Notes in the form attached
hereto as Exhibit B with aggregate proceeds to the Company of
$2,000,000 (hereinafter collectively referred to as the "Notes" and
individually as a "Note"). Investors shall receive, without further
consideration, Warrants in the form attached hereto as Exhibit C,
entitling the holders thereof to purchase, in the aggregate, 4,000,000
shares of the Company's common stock, par value $0.05 per share
(hereinafter collectively referred to as the "Warrants" and
individually as a "Warrant").
(b) Subject to the terms and conditions of this
Agreement, each Investor agrees, severally and not jointly, to pay the
Company at Closing the amount set forth opposite the Investor's name on
Exhibit A. The Company agrees to sell and issue to each Investor at the
Closing a Note in the original principal amount as set forth opposite
the Investor's name on Exhibit A and a Warrant to purchase that number
of shares of the Company's common stock set forth opposite the
Investor's name on Exhibit A. The sale of the Notes and the issuance of
the Warrants to each Investor shall constitute a separate sale
hereunder and the Company's agreement with each of the Investors shall
be a separate agreement.
(c) The Company shall enter into a Registration Rights
Agreement with each Investor, to be dated as of the date of Closing, in
the form attached hereto as Exhibit D.
1.2 Closing. The closing of the separate purchases and sales of
the Notes and Warrants shall take place at the offices of Robins, Kaplan, ▇▇▇▇▇▇
& ▇▇▇▇▇▇ L.L.P., ▇▇▇▇ ▇▇▇▇▇▇▇
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Plaza, ▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇, by an exchange of
executed counterpart copies of this Agreement and the other closing documents
via facsimile and overnight courier between counsel for the Company and the
Investors (the "Closing"). At the Closing, the Company shall deliver to each
Investor a Note and each such Investor will thereafter pay the principal amount
of the Note to the Company by check or wire transfer. If at the Closing any of
the conditions specified in Section 5 of this Agreement shall not have been
fulfilled, each Investor shall, at its election, be relieved of all of its
obligations under this Agreement without thereby waiving any other right such
Investor may have by reason of such failure or such non-fulfillment. The Company
agrees and acknowledges that a portion of the amount paid by the Investors under
Section 1.1(b) above will be in the form of a personal check from certain
Investors. The parties agree that the Closing shall be deemed to have occurred
on October 17, 2003; provided, however, that if (a) the Company has not received
at least $1,500,000 in immediately available funds on or before October 24,
2003, and (b) the Company gives the Agents, as defined in the Notes, notice by
electronic mail or facsimile prior to 5:30 on October 24, 2003, and (c) such
deficiency is not cured by 5:30 p.m. on October 29, 2003, then the Company shall
have the option to rescind the Closing.
2. Board Observation Rights. Upon and after Closing, the Investors shall
be entitled to have two individuals selected by them attend and participate, on
a non-voting basis, all meetings of the Board of Directors of the Company, and
all meetings of the Executive Committee, Audit Committee, Compensation Committee
and such other committees of the Company's Board of Directors that may exist
until all of the Notes are paid in full or otherwise satisfied in full. The
attendance by such persons shall be conditioned upon their prior execution of
such confidentiality and non-disclosure restrictions as the Company deems
necessary and appropriate. The parties acknowledge and agree that such
representatives may be excluded from those portions of any meeting of the Board
in which such representatives' presence may jeopardize the attorney-client
privilege.
3. Representations and Warranties of the Company. As a material inducement
to the Investors to enter into this Agreement and purchase the Notes hereunder,
the Company hereby represents and warrants to each Investor that:
3.1 Organization, Good Standing and Qualification. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Minnesota. The Company is duly qualified to transact
business and is in good standing in each jurisdiction in which the failure so to
qualify would have a material adverse effect on its business or properties. The
Company has all required power and authority necessary to own and operate its
property, to carry on its business as now conducted and presently proposed to be
conducted and to carry out the transactions contemplated by this Agreement.
3.2 Capitalization and Voting Rights. The authorized capital of
the Company consists, or will consist immediately prior to the Closing, of:
(a) Preferred Stock. Four Hundred Thousand (400,000)
shares of Convertible Preferred Stock, liquidation value $2.50 per
share (the "Preferred Stock"), One Hundred Fifty Thousand (150,000) of
which shares are issued and outstanding. The rights,
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restrictions, privileges and preferences of the Preferred Stock are as
stated in the Company's Restated Articles of Incorporation, as amended.
(b) Common Stock. Twenty Million (20,000,000) shares of
common stock, par value $0.05 ("Common Stock"), of which Ten Million
Four Hundred Thirty-Three Thousand, Eight Hundred Forty (10,433,840)
shares are issued and outstanding.
(c) The outstanding shares of Preferred Stock and Common
Stock are all duly and validly authorized and issued, fully paid and
nonassessable and were issued in compliance with all applicable state
and federal laws concerning the issuance of securities.
(d) Except for (i) the conversion privileges of the
Preferred Stock, (ii) the conversion privileges of the Notes and
Warrants to be issued pursuant to this Agreement, and (iii) additional
rights to acquire Common Stock of the Company set forth on Schedule
3.2(d) to this Agreement, which is attached hereto and incorporated
herein by reference, there are not outstanding any options, warrants,
rights (including conversion or preemptive rights) or agreements for
the purchase or acquisition from the Company of any shares of its
capital stock.
(e) The Company is not a party or subject to any
agreement or understanding, and, to the Company's knowledge, there is
no agreement or understanding, between any persons or entities that
affects or relates to the voting or giving of written consents with
respect to any security or by a director of the Company.
3.3 Subsidiaries. The Company does not presently own or control,
directly or indirectly, or hold any rights to acquire, any interest in any other
corporation, association or other business entity. The Company is not a
participant in any joint venture, partnership or similar arrangement.
3.4 Authorization. All corporate action necessary on the part of
the Company, its officers, directors and shareholders for the authorization,
execution and delivery of this Agreement, the Notes, the Warrants, the
Registration Rights Agreement, the Security Agreement in the form attached
hereto as Exhibit E, and the Intellectual Property Security Agreement attached
hereto as Exhibit F (collectively, the "Transaction Agreements") and all other
agreements contemplated hereby or thereby to which the Company is a party, the
performance of all obligations of the Company hereunder and thereunder has been
taken or will be taken prior to the Closing. The Transaction Agreements and all
other agreements contemplated thereby to which the Company is a party constitute
valid and legally binding obligations of the Company, enforceable in accordance
with their respective terms, except (a) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors' rights generally, (b) as limited by laws
relating to the availability of specific performance, injunctive relief or other
equitable remedies, and (c) to the extent the indemnification provisions may be
limited by applicable laws.
3.5 Valid Issuance of Preferred and Common Stock. The Notes and
Warrants that are being purchased by the Investors hereunder, when issued, sold
and delivered in accordance with
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the terms of this Agreement for the consideration expressed herein, will be duly
and validly issued, fully paid and nonassessable and will be free of
restrictions on transfer, other than restrictions on transfer under the
applicable state and federal securities laws. The common stock issuable upon
conversion of the Notes and exercise of the Warrants purchased under this
Agreement has been duly and validly reserved for issuance and, upon issuance,
will be duly and validly issued, fully paid and nonassessable and will be free
of restrictions on transfer, other than restrictions on transfer under
applicable state and federal securities laws. Any capital stock of the Company
with rights senior to the common stock of the Company, when issued, sold and
delivered in accordance with the terms of this Agreement and in accordance with
the terms of the Notes or the Warrants, as applicable, will be duly and validly
issued, fully paid and nonassessable and will be free of restrictions on
transfer, other than restrictions on transfer under the applicable state and
federal securities laws.
3.6 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement other than a Form D to be filed with the
Securities and Exchange Commission and the filings required by applicable blue
sky laws.
3.7 Offering. Subject in part to the truth and accuracy of each
Investor's representations set forth in Section 4 of this Agreement, the offer,
sale and issuance of the Notes and Warrants as contemplated by this Agreement
are exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Act"), and the qualification or registration requirements of the
applicable blue sky laws. Neither the Company nor any authorized agent acting on
its behalf will take any action hereafter that would cause the loss of such
exemptions.
3.8 Litigation. There is no action, suit, proceeding or
investigation pending or, to the Company's knowledge, currently threatened
against the Company that questions the validity of the Transaction Agreements or
the right of the Company to enter into such agreements or to consummate the
transactions contemplated thereby, or that might result, either individually or
in the aggregate, in any material adverse changes in the business, assets or
condition of the Company, financially or otherwise, or any change in the current
equity ownership of the Company. The foregoing includes, without limitation,
actions, suits, proceedings or investigations pending or, to the Company's
knowledge, threatened involving the prior employment of any of the Company's
employees or their obligations under any agreements with prior employers. The
Company is not aware that it is a party or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or that the Company intends to initiate.
3.9 Patents and Trademarks.
(a) Schedule 3.9(a) to this Agreement contains a complete
and accurate list of all (i) patented or registered Intellectual
Property Rights (as defined below) owned or used by the Company, (ii)
pending patent applications and applications for registrations of other
Intellectual Property Rights filed by the Company, (iii) registered
trade names
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and corporate names owned or used by the Company, and (iv) all licenses
and other rights granted by the Company to any third party with respect
to any patented or registered Intellectual Property Rights. The Company
owns all right, title and interest in and to all of the patented or
registered Intellectual Property Rights listed, free and clear of all
liens, encumbrances or claims of others except for licenses made in the
ordinary course of business to resellers, Original Equipment
Manufacturers, and end users. To the best of its knowledge the Company
owns sufficient right, title and interest to, or has the right to use
pursuant to a valid license, all patented or registered Intellectual
Property Rights necessary for the operation of the business of the
Company as presently conducted and as presently proposed to be
conducted, free and clear of all liens, encumbrances or claims of
others. The Company has taken all necessary actions to maintain and
protect the Intellectual Property Rights that it owns. To the Company's
knowledge, there have been no claims made against the Company asserting
the invalidity, misuse or unenforceability of any of such Intellectual
Property Rights, and to the Company's knowledge, there are no valid
grounds for the same. The Company has not received any notices of, and
is not aware of any facts which indicate a likelihood of, any
infringement or misappropriation by, or conflict with, any third party
with respect to such Intellectual Property Rights (including, without
limitation, any demand or request that the Company license any rights
from a third party). To best of the Company's knowledge, none of its
employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject
to any judgment, decree or order of any court or administrative agency,
that would interfere with the use of his or her best efforts to promote
the interests of the Company or that would conflict with the Company's
business as presently conducted and as presently proposed to be
conducted. The Company does not believe it is or will be necessary to
utilize any inventions of any of its employees (or people it currently
intends to hire) made prior to their employment by the Company, except
for inventions that have been assigned or licensed to the Company as of
the date hereof.
(b) For purposes of this Agreement, "Intellectual
Property Rights" means all (i) patents, patent applications, patent
disclosures and inventions, (ii) trademarks, service marks, trade
dress, trade names, logos and corporate names and registrations and
applications for registration thereof together with all of the goodwill
associated therewith, (iii) copyrights (registered and unregistered)
and copyrightable works and registrations and applications for
registration thereof, (iv) mask works and registrations and
applications for registration thereof, (v) computer software, data,
data bases and documentation thereof, (vi) trade secrets and other
confidential information (including, without limitation, ideas,
formulas, compositions, inventions (whether patentable or unpatentable
and whether or not reduced to practice), know-how, manufacturing and
production processes and techniques, research and development
information, drawings, specifications, designs, plans, proposals,
technical data, financial and marketing plans and customer and supplier
lists and information), (vii) other intellectual property rights and
(viii) copies and tangible embodiments thereof (in whatever form or
medium).
3.10 Compliance with Other Instruments. The Company is not in
violation of or default under any provision of its Restated Articles of
Incorporation, as amended, or bylaws or in any material respect of any
instrument, judgment, order, writ, decree or contract to which it is a
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party or by which it is bound, including without limitation, any agreements with
suppliers or any licensing agreements or, to its knowledge, of any provision of
any federal or state statute, rule or regulation applicable to the Company. The
execution, delivery and performance of the Transaction Agreements and the
consummation of the transactions contemplated thereby will not result in any
such violation, or be in material conflict with or constitute, with or without
the passage of time and giving of notice, either a material default under any
such provision, instrument, judgment, order, writ, decree or contract or an
event that results in the creation of any lien, charge or encumbrance upon any
assets of the Company or the suspension, revocation, impairment, forfeiture or
nonrenewal of any permit, license, authorization or approval applicable to the
Company, its business or operations or any of its assets or properties. Neither
will the execution, delivery and performance of the Transaction Agreements and
the consummation of the transactions contemplated thereby cause any "change of
control" under any agreements to which the Company is a party, including but not
limited to (a) any employment agreements to which the Company is a party; (b)
any incentive or bonus plans, including but not limited to the Company's 2003
Executive Incentive Plan; (c) the Company's 1987 Stock Option Plan, the
Company's 1994 Consultant Stock Option Plan, the Company's 1997 Stock Option
Plan or the Company's 1998 Employee Stock Purchase Plan; or (d) the Company's
Shareholder Rights Plan.
3.11 Agreements; Action.
(a) Except as disclosed in filings the Company has made
with the Securities and Exchange Commission on or before the date
hereof, including periodic reports on Form 10-KSB, Form 10-QSB, on Form
8-K and proxy statements and registration statements ("SEC Filings"),
there are no agreements, understandings or proposed transactions
between the Company and any of its officers, directors, affiliates or
any affiliate thereof.
(b) There are no agreements, understandings, instruments,
contracts, proposed transactions, judgments, orders, writs or decrees
to which the Company is a party or by which it is bound that may
involve indemnification by the Company with respect to infringements of
proprietary rights, other than indemnification obligations arising from
purchase or sale agreements or license agreements entered into in the
ordinary course of business.
(c) Except as disclosed in SEC Filings, the Company has
not (i) declared or paid any dividends or authorized or made any
distribution upon or with respect to any class or series of its capital
stock, (ii) incurred any indebtedness for money borrowed or any other
liabilities in excess of $1,000,000 in the aggregate, (iii) made any
loans or advances to any person, other than in the ordinary course of
business, or (iv) sold, exchanged or otherwise disposed of any of its
assets or rights, other than the sale of its inventory in the ordinary
course of business.
3.12 Related-Party Transactions. Except as disclosed in SEC
Filings, no employee, shareholder, officer or director of the Company or member
of his or her immediate family is indebted to the Company, nor is the Company
indebted (or committed to make loans or extend or guarantee credit) to any of
them. To the Company's knowledge and except as disclosed in SEC Filings, none of
such persons has any direct or indirect ownership interest in any firm or
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corporation with which the Company is affiliated or with which the Company has a
business relationship, or any firm or corporation that competes with the
Company, except that employees, shareholders, officers or directors of the
Company and members of their immediate families may own stock in publicly traded
companies that may compete with the Company.
3.13 Financial Statements. The Company has delivered or made
available to each Investor its audited financial statements as contained in its
annual report on Form 10-KSB for the period ending December 31, 2002 and the
unaudited financial statements as contained in its quarterly report on Form
10-QSB for the period ending June 30, 2003 (the "Financial Statements"). The
foregoing Financial Statements are accurate and complete in all material
respects, are consistent with the books and records of the Company (which, in
turn, are accurate and complete in all material respects) and have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods indicated and with each other, except
that the unaudited Financial Statements may not contain all footnotes required
by generally accepted accounting principles. The Company does not have any
liabilities (whether accrued, absolute, unliquidated, contingent or otherwise,
whether or not known to the Company, whether due or to become due and regardless
of when asserted) arising out of transactions entered into at or prior to
December 31, 2002, or any action or inaction at or prior to December 31, 2002 or
any state of facts existing at or prior to December 31, 2002 other than (a)
liabilities and obligations incurred in the ordinary course of business after
December 31, 2002 (none of which is a liability resulting from breach of
contract, breach of warranty, tort, infringement, claim or lawsuit), and (b)
other liabilities and obligations expressly disclosed in the Financial
Statements. The Company is not a guarantor or indemnitor of any indebtedness of
any other person, firm or corporation.
3.14 Changes. Except as disclosed in SEC Filings, since June 30,
2003, there has not been:
(a) any material adverse change in the assets,
liabilities, financial condition or operating results of the Company;
(b) any damage, destruction or loss, whether or not
covered by insurance, materially and adversely affecting the assets,
properties, financial condition, operating results or business of the
Company;
(c) any waiver by the Company of a valuable right or of a
debt owed to it;
(d) any satisfaction or discharge of any lien (except the
lien held by Fidelity Bank), claim or encumbrance or payment of any
obligation by the Company, except in the ordinary course of business
and that is not material to the assets, properties, financial
condition, operating results or business of the Company;
(e) any change or amendment to a material contract or
arrangement by which the Company or any of its assets or properties is
bound or subject;
(f) any change in any compensation arrangement or
agreement with any key employee,
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(g) any sale, assignment or transfer of any patents or
patent applications, trademarks or trademark applications, service
marks, trade names, corporate names, copyrights or copyright
registrations, trade secrets or other intangible assets, or the
disclosure of any proprietary confidential information to any person
not under a duty to keep such information confidential;
(h) any resignation or termination of employment of any
key officer of the Company; and the Company is not aware of the
impending resignation or termination of employment of any such officer;
or
(i) any agreement or commitment by the Company to do any
of the things described in this Section 3.14.
3.15 Tax Returns. The Company has timely filed all tax returns
(federal, state and local) required to be filed by it and all Taxes (as defined
below), assessments and other government charges imposed upon the Company, or
upon any of the assets, income or franchises of the Company, have been timely
paid or, if not yet payable, are adequately accrued on the Company's books and
records. There are no actual or proposed Tax deficiencies, assessments or
adjustments with respect to the Company or any assets or operations of the
Company, and there are no ongoing or pending Tax audits by any taxing authority
against the Company. "Tax" or "Taxes" means any federal, state, local or foreign
income, gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, property, windfall, profits, environmental, customs,
capital stock, franchise, employees' income withholding, foreign or domestic
withholding, social security, unemployment, disability, real property, personal
property, sales, use, transfer, value added, alternative or add-on minimum or
other similar tax, governmental fee, governmental assessment or governmental
charge of any kind whatsoever, including any interest, penalties or additions to
Tax or additional amounts with respect to the foregoing.
3.16 Permits. To the best of its knowledge, the Company has all
franchises, permits, licenses and any similar authority necessary for the
conduct of its business, and the Company believes it can obtain, without undue
burden or expense, any similar authority for the conduct of its business as
planned to be conducted. The Company is not in default in any material respect
under any of such franchises, permits, licenses or other similar authority.
3.17 Environmental and Safety Laws. To the best of the Company's
knowledge, the Company, the operation of its business and any real property that
the Company owns or has owned, leases or has leased or otherwise occupies or
uses or has occupied or used (the "Premises") are in compliance with all
applicable Environmental Laws (as defined below) and orders or directives of any
governmental authorities having jurisdiction under such Environmental Laws. The
Company has not received any citation, directive, letter or other communication,
written or oral, or any notice of any proceeding, claim or lawsuit, from any
person arising out of the Company's ownership or occupation of the Premises, or
the conduct of its operations. For purposes of this Agreement, the term
"Environmental Laws" shall mean any Federal, state, local or foreign law,
ordinance, rule, regulation, permit and authorization pertaining to the
protection of human health or the environment.
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3.18 Disclosure. In addition to SEC Filings publicly available, the
Company has provided each Investor with all the information available to the
Company that such Investor has requested for deciding whether to purchase the
Notes and Warrants and all information that the Company believes is reasonably
necessary to enable such Investor to make such decision. To the best of its
knowledge, neither this Agreement (including all the exhibits attached hereto)
nor any certificates delivered in connection herewith contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements herein or therein not misleading in light of the circumstances
under which they were made.
3.19 Registration Rights. Except as provided in the Registration
Rights Agreement, or otherwise disclosed in SEC Filings, the Company has not
granted or agreed to grant any registration rights, including piggyback rights,
to any person or entity. The registration rights granted by the Company which
are still in effect are listed on Schedule 3.19 attached to this Agreement and
incorporated herein by reference.
3.20 Corporate Documents; Minute Books. The Company has made the
Restated Articles of Incorporation and bylaws of the Company available to the
Investors. In addition, the minute books of the Company available for review by
the Investors contain a complete summary of all meetings of directors and
shareholders since the time of incorporation and reflect all transactions
referred to in such minutes accurately in all material respects.
3.21 Title to Property and Assets. The property and assets the
Company owns are owned by the Company free and clear of all mortgages, liens,
loans and encumbrances, except (a) as reflected in the Financial Statements, (b)
for statutory liens for the payment of current taxes that are not yet
delinquent, and (c) for liens, encumbrances and security interests that arise in
the ordinary course of business and minor defects in title, none of which,
individually or in the aggregate, materially impair the Company's ownership or
use of such property or assets. With respect to the property and assets it
leases, the Company is in compliance with such leases in all material respects
and, to the best of the Company's knowledge, holds a valid leasehold interest
free of any liens, claims or encumbrances, subject to clauses (a), (b) and (c)
above.
3.22 Labor Agreements and Actions. The Company is not aware that
any officer or key employee, or that any group of employees of the Company,
intends to terminate their employment with the Company, nor does the Company
have a present intention to terminate the employment of any of the foregoing.
The employment of each officer and employee of the Company is terminable at the
will of the Company. Except as disclosed in SEC Filings or as disclosed to the
Investors, the Company is not a party to or bound by any currently effective
employment contract, deferred compensation agreement, bonus plan, incentive
plan, profit sharing plan, retirement agreement or other employee compensation
agreement. The Company has complied in all material respects with all applicable
state and federal equal employment opportunity and other laws related to
employment (including without limitation, provisions thereof relating to wages,
hours, equal opportunity, collective bargaining and the payment of social
security and other taxes), and the Company is not aware that it has any labor
relations problems (including without limitation, any union organization
activities, threatened or actual strikes or work stoppages or material
grievances). The Company is not bound by or subject to (and none of its assets
or properties is bound by or subject to) any written or oral, express or
implied, contract, commitment or arrangement with any labor union.
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4. Representations and Warranties of the Investors. Each Investor,
severally and not jointly with any other Investor, hereby represents, warrants
and covenants to the Company that:
4.1 Authorization. Such Investor has full power and authority to
enter into the Transaction Agreements, and each such agreement constitutes its
valid and legally binding obligation, enforceable in accordance with its terms,
except (a) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting enforcement of
creditors' rights generally, (b) as limited by laws relating to the availability
of specific performance, injunctive relief or other equitable remedies, and (c)
to the extent the indemnification provisions may be limited by applicable laws.
4.2 Purchase Entirely for Own Account. This Agreement is made with
such Investor in reliance upon such Investor's representation to the Company,
which by such Investor's execution of this Agreement such Investor hereby
confirms, that the Notes to be received by such Investor, the capital stock
issuable upon conversion thereof, the Warrants and the capital stock to be
issued upon exercise thereof (collectively, the "Securities") will be acquired
for investment for such Investor's own account, not as a nominee or agent, and
not with a view to the resale or distribution of any part thereof, and that such
Investor has no present intention of selling, granting any participation in or
otherwise distributing the same. By executing this Agreement, such Investor
further represents that such Investor does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Securities.
4.3 State of Residence. Each Investor represents that such
Investor is a resident of the state listed opposite such Investor's name on
Exhibit A attached hereto and incorporated herein by reference.
4.4 No Agreement Among the Investors. As of the date hereof, each
Investor represents that such Investor has not entered into an agreement with
one or more other Investors to act together for the purpose of acquiring,
holding, disposing or voting of securities or otherwise exercising control over
the Company. Each Investor represents that such Investor has no obligation to or
agreement with another Investor with respect to any equity securities or rights
to acquire equity securities of the Company. Each Investor represents that such
Investor will not own more than twenty (20%) of the issued and outstanding stock
of the Company as a result of the consummation of the transactions contemplated
by this Agreement, the Notes and the Warrants.
4.5 Disclosure of Information. Each Investor represents that it
has had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Notes and Warrants and
the business, properties, prospects and financial condition of the Company. The
foregoing, however, does not limit or modify the representations and warranties
of the Company in Section 3 of this Agreement or the right of the Investors to
rely thereon.
4.6 Investment Experience. Each Investor acknowledges that it is
able to fend for itself, can bear the economic risk of its investment, and has
such knowledge and experience in financial or business matters that it is
capable of evaluating the merits and risks of the investment
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in the Notes and Warrants. If other than an individual, such Investor also
represents it has not been organized for the purpose of acquiring the Notes and
Warrants.
4.7 Accredited Investor. Such Investor is an "accredited investor"
within the meaning of Rule 501 of Regulation D promulgated by the Securities and
Exchange Commission, as presently in effect.
4.8 Restricted Securities. Such Investor understands that the
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such Securities may be resold without registration under
the Act only in certain limited circumstances. In the absence of an effective
registration statement covering the Securities (or the capital stock issued on
conversion or exercise thereof) or an available exemption from registration
under the Act, the Notes and Warrants (and any capital stock issued on
conversion or exercise thereof) must be held indefinitely.
4.9 Further Limitations on Disposition. The Investor agrees not to
make any disposition of all or any portion of the Securities unless and until
the transferee has agreed in writing for the benefit of the Company to be bound
by this Section 4 and:
(a) There is then in effect a registration statement
under the Act covering such proposed disposition and such disposition
is made in accordance with such registration statement; or
(b) (i) Such Investor shall have notified the Company of
the proposed disposition and shall have furnished the Company with a
detailed statement of the circumstances surrounding the proposed
disposition, and (ii) if requested by the Company, such Investor shall
have furnished the Company with an opinion of counsel, reasonably
satisfactory to the Company that such disposition will not require
registration of such Securities under the Act. It is agreed that the
Company will not require opinions of an Investor's counsel for
transactions made pursuant to Rule 144 except in unusual circumstances,
unless the Company's transfer agent requires such opinion.
(c) Notwithstanding the provisions of subsections (a) and
(b) above, no such registration statement or opinion of counsel shall
be necessary for a transfer by an Investor that is a partnership to a
partner of such partnership or a retired partner of such partnership
who retires after the date hereof, or to the estate of any such partner
or retired partner or the transfer by gift, will or intestate
succession of any partner to his or her spouse or to the siblings,
lineal descendants or ancestors of such partner or his or her spouse,
if the transferee agrees in writing to be subject to the terms hereof
to the same extent as if he or she were an original Investor hereunder.
4.10 Legends. It is understood that the certificates evidencing the
Securities may bear any legend required by applicable blue sky laws as well as
the following legend:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER EITHER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR
11
APPLICABLE BLUE SKY LAWS, AND IS SUBJECT TO CERTAIN INVESTMENT
REPRESENTATIONS. THIS SECURITY MAY NOT BE SOLD, OFFERED FOR SALE OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER THE ACT
AND APPLICABLE BLUE SKY LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
5. Conditions of Investors' Obligations at Closing. The obligations of
each Investor under subsection 1.1 (b) of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions, the
waiver of which shall not be effective against any Investor who does not consent
in writing thereto:
5.1 Due Diligence. Each Investor shall have completed, to its own
full and complete satisfaction, its due diligence of the Company, including a
detailed review of past and projected financial performance.
5.2 No Material Adverse Developments. There will have been no
material adverse developments in the Company's business or prospects and absence
of default in any material obligation of the Company since the date of the
signing of this Agreement.
5.3 Representations and Warranties. The representations and
warranties of the Company contained in Section 3 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 date of such Closing.
5.4 Performance. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the Closing.
5.5 Closing Documents. The Company shall have delivered to each
Investor all of the following documents:
(a) An Officer's Certificate, dated the date of the
Closing, stating that the conditions specified in Section 5 of this
Agreement have been fulfilled and stating that there shall have been no
adverse change in the business, affairs, operations, properties, assets
or condition of the Company since the signing of this Agreement.
(b) A Secretary's Certificate, certifying copies of the
resolutions duly adopted by the Company's board of directors
authorizing the execution, delivery and performance of the Transaction
Agreements and each of the other agreements contemplated hereby, and
the issuance and sale of the Notes and Warrants and the consummation of
all other transactions contemplated by this Agreement; and
(c) Certificates of good standing issued by the secretary
of state for each state where the Company is authorized to do business.
5.6 Qualifications. All authorizations, approvals or permits, if
any, of any governmental authority or regulatory body of the United States or of
any state or foreign
12
jurisdiction that are required in connection with the lawful issuance and sale
of the Securities pursuant to this Agreement shall be duly obtained and
effective as of the Closing.
5.7 Proceedings and Documents. All corporate and other proceedings
in connection with the transactions contemplated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Investors' special counsel, and they shall have received all such
counterpart original and certified or other copies of such documents as they may
reasonably request.
5.8 Opinion of Company Counsel. Each Investor shall have received
from ▇▇▇▇▇▇▇▇▇▇ and ▇▇▇▇▇, P.A., counsel for the Company, an opinion, dated as
of the Closing, in the form attached hereto as Exhibit G.
5.9 Termination of Outstanding Financing Statements. All security
interests that were granted not in the ordinary course of business shall have
been terminated on or prior to Closing. The Company has delivered to the Agents
on or prior to Closing a termination statement covering the security interest
held by Fidelity Bank, to be filed by such Agents.
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 Investor shall have delivered
the purchase price specified in Section 1.1(b).
6.3 Qualifications. All authorizations, approvals or permits, if
any, of any governmental authority or regulatory body of the United States or of
any state or foreign jurisdiction that are required in connection with the
lawful issuance and sale of the Securities pursuant to this Agreement shall be
duly obtained and effective as of the Closing.
7. Indemnification. The Company agrees to indemnify and hold harmless each
Investor and its successors and assigns, together with any of their officers,
directors, or shareholders (such persons, the "Indemnified Parties"), from and
against any and all losses, damages, liabilities, obligations, costs or expenses
(any one such item being herein called a "Loss" and all such items being herein
collectively called "Losses") which are caused by or arise out of, or (in the
case of claims asserted against any Indemnified Parties by a third party)
alleged to result from, arise out of or have been incurred with respect to, (a)
any breach or default in the performance by the Company of any covenant or
agreement of the Company contained in this Agreement, (b) any breach of warranty
or inaccurate or erroneous representation made by the Company herein or in any
certificate or other instrument delivered by or on behalf of the Company
pursuant hereto, and (c) any and all actions, suits, proceedings, claims,
demands, judgments, costs and expenses (including costs and attorneys' fees)
arising out of the foregoing except when such actions, suits, proceedings,
claims, demands, judgments, costs and expenses arise as a result of the grossly
negligent or intentional actions or omissions of any Investor. Furthermore,
except for Losses
13
caused by or arising out of the gross negligence or willful misconduct of the
Company, any Losses resulting from (a) or (b) under this Agreement shall be
limited to the actual amount invested pursuant to this Agreement.
8. Miscellaneous.
8.1 Survival. The warranties, representations and covenants of the
Company and Investors and the indemnification obligations of each party
contained in or made pursuant to this Agreement shall survive the execution and
delivery of this Agreement and the Closing and shall in no way be affected by
any investigation of the subject matter thereof made by or on behalf of the
Investors or the Company.
8.2 Successors and Assigns. Except as otherwise provided herein,
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
permitted transferees of any Securities). Nothing in this Agreement, express or
implied, is intended to confer upon any party, other than the parties hereto or
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
8.3 Governing Law. This Agreement shall be governed by and
construed under the substantive laws of the State of Minnesota, without regard
to the conflicts of law provisions thereof, as applied to agreements among
Minnesota residents entered into and to be performed entirely within Minnesota.
8.4 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
8.5 Notices. All notices required or permitted hereunder shall be
in writing and shall be deemed effectively given: (a) upon personal delivery to
the party to be notified, (b) when sent by confirmed telex, electronic mail or
facsimile if sent during normal business hours of the recipient, if not, then on
the next business day; (c) five days after having been sent by registered or
certified mail, return receipt requested, postage prepaid; or (d) one day after
deposit with a nationally recognized overnight courier, specifying next day
delivery, with written verification of receipt. All communications shall be sent
to the address as set forth on Exhibit A attached hereto, or, in the case of the
Company, to the address set forth in the first paragraph of this Agreement, or
at such other address as such party may designate by ten days' advance written
notice to the other parties hereto.
8.6 Finder's Fee. Each party represents that it neither is nor
will be obligated for any finder's fee or commission in connection with this
transaction. The Company hereby acknowledges and agrees that it has paid
Sapphire Financial Group, LLC a $5,000 retainer and has agreed to pay to
Sapphire an additional fee of $50,000, reduced by the retainer net of expenses
incurred, plus warrants to purchase 10,000 shares of the capital stock of the
Company (the cash and the warrants are collectively referred to as the
"Financial Adviser's Fee"). The Company hereby agrees to indemnify and hold
harmless each Investor from any liability for any commission or compensation in
the nature of a finder's fee for which the Company or any of its officers,
employees or representatives is responsible and for the Financial Adviser's Fee,
(and
14
the costs and expenses of defending against such liability or asserted
liability). Each Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finder's fee (and the costs and expenses of defending against such liability or
asserted liability) for which such Investor or any of its officers, partners,
employees or representatives is responsible.
8.7 Fees and Expenses. Irrespective of whether the Closing is
effected, the Company shall pay all costs and expenses that it incurs with
respect to the negotiation, execution, delivery and performance of this
Agreement. Unless the failure to effect the Closing is due solely to the
Investors' unjustified unwillingness to pay the amounts required by Section
1.1(b), the Company shall also pay the expenses of the Investors. If the Closing
is effected, the Company shall, at the Closing, reimburse the reasonable fees of
special counsel for the Investors, not to exceed $20,000, and shall, upon
receipt of a ▇▇▇▇ therefor, reimburse the reasonable out of pocket expenses of
such counsel from October 2, 2003, the date of the term sheet, until the date of
Closing. If any action at law or in equity is necessary to enforce or interpret
the terms of the Transaction Agreements, the prevailing party shall be entitled
to reasonable attorneys' fees, costs and necessary disbursements in addition to
any other relief to which such party may be entitled.
8.8 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
70% of the then outstanding principal amount of all of the Notes. Any amendment
or waiver effected in accordance with this paragraph shall be binding upon each
holder of any securities purchased under this Agreement at the time outstanding
(including securities into which such securities are convertible) and each
future holder of all such securities and the Company.
8.9 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
8.10 Entire Agreement. This Agreement and the documents referred to
herein constitute the entire agreement among the parties and no party shall be
liable or bound to any other party in any manner by any warranties,
representations or covenants except as specifically set forth herein or therein.
8.11 Counterparts. This Agreement may be executed 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.
8.12 Acknowledgement Among Investors. Each Investor acknowledges,
as to itself, that such Investor is not relying upon any person, firm or
corporation, other than the Company and its officers and employees, in making
its investment or decision to invest in the Company. Each Investor agrees that
no other Investor (or their respective officers, directors or employees) shall
be liable for any action taken or omitted to be taken in connection with the
sale of the Notes and Warrants.
15
[Signature Pages Follow]
16
IN WITNESS WHEREOF, the parties have executed this Secured Convertible
Promissory Note Purchase Agreement as of the date first above written.
COMPANY:
DATAKEY, INC.
By: /s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇
-------------------------------
Name: ▇▇▇▇ ▇. ▇▇▇▇▇▇
Its: Vice President and CFO
IN WITNESS WHEREOF, the parties have executed this Secured Convertible
Promissory Note Purchase Agreement as of the date first above written.
INVESTOR:
________________________________________
By ________________________________
Its _______________________________
Print Address:
________________________________________
________________________________________
________________________________________
Tax ID No.: ____________________________
IN WITNESS WHEREOF, the parties have executed this Secured Convertible
Promissory Note Purchase Agreement as of the date first above written.
INVESTOR:
________________________________________
Print Name and Address:
________________________________________
________________________________________
________________________________________
Social Security No.: ___________________
SCHEDULE 3.2(d)
RIGHTS TO ACQUIRE COMMON STOCK OF DATAKEY, INC.
Common Stock Right/Security
------------ --------------
367,538 150,000 shares of Convertible Preferred stock
1,295,933 Warrants issued to investors as part of February 2001
financing (exercisable until November 30, 2003 at $0.70 and
then at $3.02 until February 20, 2006)
880,000 Warrants issued to investors and selling agent as part of
February 2000 financing (exercisable until February 2005,
with 800,000 at $5.00 and 80,000 at $5.50)
370,000 Warrants issued to investors and selling agent as part of
October 1999 financing (exercisable until October 2009, with
365,000 at $1.25 and 5,000 at $1.375)
10,000 Warrants issued to investor as part of June 1999 financing
(exercisable until June 2004 at $2.50)
37,890 Warrants issued to selling agent as part of May 1998
financing (exercisable until May 2008 at $6.60)
121,667 Shares reserved for 1987 Stock Option Plan (121,667 options
outstanding with exercise prices ranging from $3.00 to $7.25
and expiration dates ranging from January 2005 to June 2006)
85,000 Shares reserved for 1994 Consultant Stock Option Plan (35,000
options outstanding and exercisable until October 2005 at
$3.625)
1,634,896 Shares reserved for 1997 Stock Option Plan (1,496,720 options
outstanding with prices ranging from $.01 to $8.375);
expiration dates range from March 2007 to June 2013)
118,422 Shares reserved under the 1998 Employee Stock Purchase Plan
(shares issued to participants at 85% of the closing price at
the beginning or end of a 12-month phase, whichever is lower)
1,295,933 Warrants to be issued to certain holders of warrants issued
in the February 2001 financing, which warrants will have an
exercise price of $0.77.
120,000 Series B Preferred Stock
10,000 Warrants to purchase common stock issued to Sapphire at $0.77
per share
SCHEDULE 3.9
PATENTS AND TRADEMARKS
1. Patent Applications
Title: Administrative System for Smart Card Technology
Serial #: 60/485,284
Filing Date: July 7, 2003
2. Registered Trademarks
Trademark Registration No. Registration Date
--------- ---------------- -----------------
SIGNASURE 2359427 June 20, 2000
DATAKEY 1455104 September 1, 1987
DATAKEY 1457273 September 15, 1998
SCHEDULE 3.19
REGISTRATION RIGHTS IN EFFECT
1. ▇▇▇▇▇▇▇ Capital Management and Special Situations have registration
rights with respect to 1,295,933 shares of common stock.
EXHIBIT A
SCHEDULE OF INVESTORS
EXHIBIT B
FORM OF NOTE
EXHIBIT C
FORM OF WARRANT
EXHIBIT D
FORM OF REGISTRATION RIGHTS AGREEMENT
EXHIBIT E
FORM OF SECURITY AGREEMENT
EXHIBIT F
FORM OF INTELLECTUAL PROPERTY SECURITY AGREEMENT
EXHIBIT G
FORM OF OPINION OF COMPANY COUNSEL