Exhibit 10.1

 

SETTLEMENT AND MUTUAL RELEASE AGREEMENT

 

This Agreement (“Agreement”) is made effective as of July 2, 2009 (the
“Effective Date”) by and between LONGVIEW SPECIAL FINANCE, INC., a British
Virgin Islands corporation (“Longview Finance”), and LONGVIEW FUND, L.P., a
limited partnership formed under California law (“Longview Fund,” and together
with Longview Finance, the “Longview Entities”), on the one hand, and BIO-KEY
INTERNATIONAL, INC., a Delaware corporation (“BIO-key”), on the other hand. 
Each of Longview Finance, Longview Fund and BIO-key may hereinafter individually
be referred to as a “Party” and may hereinafter collectively be referred to as
the “Parties.”

 

RECITALS

 

WHEREAS, on January 23, 2006, the Parties entered into a Securities Purchase
Agreement (the “Series B Agreement”) pursuant to which the Longview Entities
obtained shares of BIO-key’s Series B Convertible Preferred Stock, $0.0001 par
value per share (“Series B Preferred Stock”);

 

WHEREAS, on August 10, 2006, the Parties entered into a Securities Exchange
Agreement (the “Series C Agreement”) pursuant to which the Longview Entities
obtained shares of BIO-key’s Series C Convertible Preferred Stock, $0.0001 par
value per share (“Series C Preferred Stock”);

 

WHEREAS, BIO-key has issued shares of its Series A Convertible Preferred Stock,
$0.0001 par value per share (“Series A Preferred Stock”), to certain of its
shareholders, and certain other entities and individuals have obtained shares of
Series B Preferred Stock and Series C Preferred Stock pursuant to the Series B
Agreement and the Series C Agreement, respectively (such holders of preferred
stock are collectively referred to herein as the “Other Holders of Preferred
Stock”);

 

WHEREAS, the Longview Entities have alleged that BIO-key was required, on or
about January 10, 2009, to redeem in cash all of the shares of Series B
Preferred Stock and Series C Preferred Stock held by the Longview Entities;

 

WHEREAS, BIO-key asserts that each of the Other Holders of Preferred Stock have
agreed to defer their right, if any, to redemption of their shares of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock until
December 31, 2009, or otherwise have not pursued their rights, if any, to
redemption of their shares on or about January 10, 2009;

 

WHEREAS, on February 2, 2009, the Longview Entities filed a lawsuit against
BIO-key in the United Stated District Court for the Southern District of New
York (Civil Action No. 09-00904) (the “Lawsuit”) seeking to compel BIO-key to
redeem their shares of Series B Preferred Stock and Series C Preferred Stock;

 

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WHEREAS, Longview Finance has alleged that BIO-key owes it $780,780.00;

 

WHEREAS, Longview Fund has alleged that BIO-key owes it $2,105,783.00;

 

WHEREAS, BIO-key has denied any liability in the Lawsuit, has raised
particularized affirmative defenses to the claims of the Longview Entities, and
has requested that the Court dismiss the Lawsuit in its entirety;

 

WHEREAS, the Parties, without admission of any liability or fault and following
good faith negotiations, now desire to settle, compromise and resolve amicably
their disputes and to avoid the expense, inconvenience, distraction and risks of
litigation; and

 

NOW, THEREFORE, in consideration of the aforesaid recitals and the covenants
described herein, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Parties agree as follows:

 

TERMS OF SETTLEMENT

 

1.             Recitals.  The foregoing recitals are made an integral part of
this Agreement and are binding on the Parties.

 

2.             Settlement Payments.  For and in consideration of the full and
final settlement of any and all claims that are, could have been or might in the
future be asserted by either or both of the Longview Entities against BIO-key
arising out of or in connection with, or in any way related to, the Lawsuit or
the Series B Preferred Stock and Series C Preferred Stock, BIO-key agrees to
make the following payments by wire transfer pursuant to wire transfer
instructions delivered to BIO-key by each of the Longview Entities:

 

A.            BIO-key shall pay to Longview Finance a total cash settlement
amount of $585,585.00.  BIO-key shall make payment of such settlement amount as
follows: (i) within three (3) business days following the date that this
Agreement is executed by all of the Parties (the “Execution Date”), BIO-key
shall pay to Longview Finance the sum of $292,793.00 (the “Initial Longview
Finance Payment”); and (ii) within 120 days following the Execution Date,
BIO-key shall pay to Longview Finance the remaining sum of $292,792.00 (the
“Final Longview Finance Payment”).

 

B.            BIO-key shall pay to Longview Fund a total cash settlement amount
of $1,579,337.00.  BIO-key shall make payment of such settlement amount as
follows: (i) within three (3) business days following the Execution Date,
BIO-key shall pay to Longview Fund the sum of $789,669.00 (the “Initial Longview
Fund Payment”); and (ii) within 120 days following the Execution Date, BIO-key
shall pay to Longview Fund the remaining sum of $789,668.00 (the “Final Longview
Fund Payment”).  Hereinafter, the term “Final Payment Date” shall refer to the
earlier date of (i) 120 days following the Execution Date, or (ii) the day on
which BIO-key has

 

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completed its payment of both the Final Longview Finance Payment and the Final
Longview Fund Payment.

 

C.            All dividends with respect to the shares of Series B Preferred
Stock (as set forth in the Certificate of Designation of the Preferred Stock of
BIO-key International, Inc. to be Designated Series B Convertible Preferred
Stock filed with the Delaware Secretary of State) and Series C Preferred Stock
(as set forth in the Certificate of Designation of the Preferred Stock of
BIO-key International, Inc. to be Designated Series C Convertible Preferred
Stock filed with the Delaware Secretary of State) held by the Longview Entities
shall cease to accrue immediately after the Initial Longview Finance Payment and
Initial Longview Fund Payment are made by BIO-key.

 

D.            No interest shall accrue on the Initial Longview Finance Payment
or the Initial Longview Fund Payment owed hereunder.  Interest shall accrue on
the Final Longview Finance Payment and the Final Longview Fund Payment at the
rate of seventeen percent (17%) per annum.  Such interest shall be calculated on
the basis of a 360 day year and shall be payable on the Final Payment Date. 
Each such interest payment shall hereinafter be referred to as an “Interest
Payment.”  Each Interest Payment shall be paid in shares of BIO-key’s common
stock, $0.0001 par value per share (“Common Stock”).  The number of such shares
to be issued by BIO-key to each Longview Entity on the Final Payment Date shall
be determined by dividing (x) the aggregate amount of the applicable Interest
Payment owed to such Longview Entity by (y) the average closing bid price for
one share of Common Stock, as reported by Bloomberg, L.P. (or such successor to
its function of reporting share prices) during the ten (10) consecutive trading
day period ending on the day prior to the Final Payment Date.  A certificate
representing the Common Stock issuable in payment of each such Interest Payment
shall be delivered to the applicable Longview Entity on the Final Payment Date.

 

E.            If BIO-key should fail to pay as and when due either the Final
Longview Finance Payment or the Final Longview Fund Payment, then commencing on
the date of such payment default interest shall begin to accrue on such unpaid
amount(s) at the rate of twenty percent (20%) per annum.

 

F.             BIO-key shall be entitled to pre-pay, in whole or in part, the
remaining unpaid amounts owed hereunder plus accrued interest at any time
without penalty.

 

G.            Within two (2) business days after the Final Payment Date, each
Longview Entity shall surrender the original certificate or certificates
representing all of its shares of Series B Preferred Stock and Series C
Preferred Stock (or, if such holder alleges that any such certificate has been
lost, stolen or destroyed, a lost certificate affidavit and agreement acceptable
to BIO-key to indemnify BIO-key against any claim that may be made against
BIO-key on account of the alleged loss, theft or destruction of such
certificate) to BIO-key (via physical delivery or overnight mail) at the address
specified for BIO-key in Section 12 hereof.  Notwithstanding that the
certificates evidencing any such shares of Series B Preferred Stock or Series C
Preferred Stock shall not have been surrendered, all remaining rights with
respect to

 

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such shares shall forthwith after the Final Payment Date terminate.  For the
avoidance of doubt, any shares of Series B Preferred Stock or Series C Preferred
Stock held by the Longview Entities shall, immediately upon the payment of the
Final Longview Finance Payment and the Final Longview Fund Payment on the Final
Payment Date, be automatically and immediately cancelled and retired and shall
not be reissued, sold or transferred.  Following their receipt of such payments,
neither of the Longview Entities may exercise any voting or other rights granted
to the holders of Series B Preferred Stock or Series C Preferred Stock.

 

3.             Default.  If BIO-key should fail to pay as and when due any
payment required under this Agreement (a “Default”), the Longview Entities or
their counsel shall give notice thereof to BIO-key and its counsel, and BIO-key
shall have until the fifteenth (15th) day following the date of its receipt of
the Longview Entities’ notice (the “Cure Date”) to cure any such Default. 
Provided, however, no notice is required for and BIO-key shall have no cure
period related to any BIO-key failure to timely make the Initial Longview
Finance Payment or the Initial Longview Fund Payment.

 

4.             Remedies Upon Event of Default.  In the event there exists a
Default, after the giving of notice as required under this Agreement, that is
not timely cured as set forth in Section 3 above (an “Uncured Default”), then
all unpaid amounts, plus accrued and unpaid interest due thereon, shall
automatically become immediately due and payable.  Moreover, in the event of an
Uncured Default, the defaulted settlement amount then owed shall be increased to
the original unpaid amount claimed by the Longview Entities solely with respect
to that defaulted settlement amount.  So long as there is no Uncured Default
existing, the Longview Entities and their counsel shall forbear from demanding
the payment of any amounts owed from BIO-key or exercising any rights or
remedies against BIO-key related to this Agreement.

 

5.             Release of Claims.

 

A.            In consideration of the undertakings and covenants set forth in
this Agreement and of the other consideration set forth hereinabove, which the
Parties acknowledge to be sufficient and adequate consideration in all respects,
the Parties, as of the Effective Date, release and forever discharge each other
and their respective predecessors, successors, heirs, assigns, employees,
agents, officers, directors, attorneys, partners, subsidiaries, affiliates and
divisions (also jointly referred to herein as “Released Parties”), from any and
all claims, demands, causes of action, obligations, damages, attorneys’ fees,
costs and liabilities, whether or not now known, suspected or claimed, which the
Parties ever had and/or now have or may have against the Released Parties, or
any of them, including without limitation all claims that were or could have
been alleged in the Lawsuit.

 

B.            Notwithstanding any other provision of this Agreement, the
releases contained herein shall not limit, affect, or apply to any of the
Parties’ obligations under this Agreement.

 

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C.            Each Party hereto acknowledges that it has been informed by its
respective counsel of the provisions of section 1542 of the California Civil
Code and the possible applicability of those provisions to this Agreement.  With
the advice of its respective counsel, to the extent the releases in this
Agreement are deemed to be general releases in connection with the matters they
encompass, each Party hereto hereby expressly waives and relinquishes all rights
and benefits which they have or may in the future have under section 1542 of the
California Civil Code which reads as follows:

 

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH
IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH
THE DEBTOR.

 

All Parties hereto acknowledge that they may hereafter discover facts which are
different from or in addition to those which they now know or believe to be true
with respect to the Agreement or to the matters herein released, and they agree
that the Agreement shall be and remain in full force and effect in all respects
notwithstanding any such different or additional facts.  The foregoing
references to California law shall not in any way derogate from the provisions
of Paragraph 7 below, it being understood and agreed by all Parties that, as
provided for in Paragraph 7, New York law shall govern this Agreement.

 

Longview Special Finance, Inc.

 

 

 

 

 

Longview Fund, L.P.

 

 

 

 

 

BIO-key International, Inc.

 

 

 

6.             Dismissal of the Lawsuit.  Contemporaneous with the payment of
the Initial Longview Finance Payment and the Initial Longview Fund Payment.,
counsel of record for the Parties shall sign and file a joint Stipulation of
Dismissal pursuant to which the Parties shall dismiss with prejudice all claims
and requests for injunctive relief asserted in the Lawsuit.

 

7.             Governing Law.  This Agreement and the rights and obligations of
the Parties herein shall be governed by, and construed in accordance with, the
internal laws of the state of New York (without giving effect to its principles
of conflicts of law).

 

8.             Choice of Forum and Venue.  The Parties hereby consent to the
jurisdiction of any state court located within the state of New York and
irrevocably agree that all actions or proceedings related to this Agreement
shall be litigated in such courts and each party waives any defense of forum non
conveniens.

 

9.             Successor and Assigns.  This Agreement and the covenants and
conditions

 

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contained herein shall apply to, be binding upon, and inure to the benefit of
the respective representatives, assigns, successors, employees and insurers of
the Parties hereto.

 

10.          No Prior Assignments.  The Parties represent that there has been no
assignment, sale, or transfer, by operation of law or otherwise of any claim,
right or interest released and that each of the Parties has the authority and
right to settle, compromise and release any claim, right or interest released.

 

11.          Representations and Warranties.   Each Party represents and
warrants to the other Parties as follows:

 

A.            This Agreement is the product of negotiation and preparation by
and between the Parties and their respective attorneys.  Therefore, each Party
acknowledges and agrees that this Agreement shall not be deemed prepared or
drafted by one Party or another and should be construed accordingly.

 

B.            The Parties have not made any statement or representation
regarding any facts relied upon in entering into this Agreement and no Party has
relied upon any statements, representations or comments made by any other Party
in executing this Agreement, or in making this settlement, except as expressly
stated in this Agreement.  Each Party further represents and warrants that the
consideration recited in this Agreement is the sole and only consideration for
this Agreement, and that no representations, promises or inducements have been
made by any Party or its officers, employees, agents or attorneys thereof other
than those appearing in this Agreement.

 

C.                                    Each Party has read this Agreement and
understands its contents.

 

D.            Each Party has full corporate or limited partnership power and
authority, as the case may be, to execute and deliver this Agreement.

 

E.            Each Party acknowledges and agrees that this Agreement is entered
into as part of a compromise and settlement of disputed claims.  Each Party
further acknowledges and agrees that acceptance of this Agreement is not an
admission of any facts, matter or things.  Neither this Agreement nor any of its
terms shall be offered or received as evidence in any proceeding in any forum as
an admission of any liability or wrongdoing on the part of any person released
by this Agreement, except a proceeding related to this Agreement.

 

F.             Each of the Longview Entities acknowledges and agrees that
(i) some or all of the Other Holders of Preferred Stock may receive different
rates of recovery (either higher or lower) with respect to the redemption of
their shares of Series A Preferred Stock, Series B Preferred Stock and/or
Series C Preferred Stock (including, potentially, payment of any such redemption
amount in full) than the rate of recovery contemplated by this Agreement and
(ii) any number of factors may affect such rates of recovery obtained by the
Other Holders of Preferred Stock, including but not limited to BIO-key’s cash
flow from operations, BIO-key’s ability to

 

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obtain additional equity or debt financing, BIO-key’s sales of assets outside of
the ordinary course of its business, whether the particular Other Holders of
Preferred Stock have complied with all of their contractual obligations, and
other similar factors.

 

12.          Notices.  Unless otherwise expressly provided herein, any notices
to be furnished under this Agreement will be sufficient if in writing and
(i) hand delivered, (ii) sent by certified or registered mail, (iii) by
nationally recognized overnight courier, (iv) by facsimile or (v) by e-mail, if
notice is also contemporaneously sent by one of the other methods of delivery. 
Notices sent pursuant to the provisions of this section shall be deemed
delivered on the earlier of actual receipt or two (2) business days after
transmittal.  All notices shall be addressed as follows:

 

If to Longview Special Finance, Inc.:

 

Arie Rabinowitz
L. H. Financial Services Corp.
150 Central Park South
New York, NY 10019

 

with a copy (which shall not constitute notice) to:

 

Edward M. Grushko, Esq.

Grushko & Mittman, P.C.

551 Fifth Avenue, Suite 1601

New York, NY 10176

 

If to Longview Fund, L.P.:

 

Peter Benz

Viking Asset Management, LLC
505 Sansome Street, Ste. 1275
San Francisco, CA 94111

 

with a copy (which shall not constitute notice) to:

 

Edward M. Grushko, Esq.

Grushko & Mittman, P.C.

551 Fifth Avenue, Suite 1601

New York, NY 10176

 

If to BIO-key:

 

BIO-key International, Inc.

3349 Highway 138

Building D, Suite B

 

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Wall, NJ 07719

Attn:  Michael W. DePasquale

Telephone:  732-359-1111

E-Mail:  mike.depasquale@bio-key.com

 

with a copy (which shall not constitute notice) to:

 

Choate, Hall & Stewart LLP

Two International Place

Boston, Massachusetts 02110

Attention:  Charles J. Johnson, Esq.

Facsimile: 617-248-4000

E-mail:  cjohnson@choate.com

 

The Parties may at any time change the address to which notices are to be given
to it by notice to the other in accordance with the terms hereof.

 

13.          Counterparts.  This Agreement may be executed in one or more
counterparts, by either facsimile or scanned signatures, each of which shall be
deemed to be an original, but all of which together shall constitute one and the
same instrument.

 

14.          Independent Representation.  Each Party acknowledges that it has
been represented by independent counsel of its own choosing throughout the
negotiations which preceded the execution of this Agreement, and that this
Agreement was executed with the consent and advice of such independent legal
counsel.

 

15.          Entire Agreement.  This Agreement constitutes the entire agreement,
and supersedes all prior written agreements, arrangements, communications and
understandings and all prior and contemporaneous oral agreements, arrangements,
communications and understandings among the Parties with respect to the subject
matter of this Agreement.

 

16.          Amendment.  This Agreement may not be amended, modified or
supplemented in any manner, whether by course of conduct or otherwise, except by
an instrument in writing signed on behalf of each Party and otherwise as
expressly set forth herein.

 

17.          Severability.  Whenever possible, each provision or portion of any
provision of this Agreement shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision or portion of any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability shall not affect any other provision
or portion of any provision in such jurisdiction, and this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision or portion of any provision had never been
contained herein.

 

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18.          Waiver.  No failure or delay of either Party in exercising any
right or remedy hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such right or power, or any course of
conduct, preclude any other or further exercise thereof or the exercise of any
other right or power.  The rights and remedies of the Parties hereunder are
cumulative and are not exclusive of any rights or remedies which they would
otherwise have hereunder.  Any agreement on the part of either Party to any such
waiver shall be valid only if set forth in a written instrument executed and
delivered by a duly authorized officer on behalf of such Party.

 

19.          Further Assurances.  From time to time after the execution of this
Agreement, and for no further consideration, each of the Parties shall execute,
acknowledge and deliver such assignments, transfers, consents and other
documents and instruments and take such other actions as may be necessary or
desirable to consummate and make effective the transactions contemplated by this
Agreement.

 

[signature page follows]

 

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WHEREFORE, the Parties hereto have executed this Agreement as of the date first
set forth above.

 

 

BIO-KEY INTERNATIONAL, INC.

 

 

 

 

 

By:

 

 

 

 

 

Name:

 

 

 

 

 

Title:

 

 

 

 

 

 

 

 

LONGVIEW SPECIAL FINANCE, INC.

 

 

 

 

By:

 

 

 

 

 

Name:

 

 

 

 

 

Title:

 

 

 

 

 

 

 

 

LONGVIEW FUND, L.P.

 

 

 

 

By:

 

 

 

 

 

Name:

 

 

 

 

 

Title:

 

 

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