Exhibit 10.3
 
SECURITIES PURCHASE AGREEMENT
 
THIS SECURITIES PURCHASE AGREEMENT (“Agreement”) is made as of this 26th day of
February, 2013 by and between BIO-key International, Inc., a Delaware
corporation (the “Company”), and DRNC Holdings, Inc., a Delaware corporation
(the “Investor”).
 
Recitals:
 
The Company desires to issue and sell to the Investor, and the Investor desires
to purchase from the Company, 4,026,935 shares (the “Shares”) of common stock,
par value $0.0001 per share (the “Common Stock”), of the Company for an
aggregate purchase price of $402,693.50 (the “Purchase Price”).
 
NOW, THEREFORE, in consideration of the mutual promises made herein and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the Company and the Investor hereby agree as follows:
 
1.           Definitions.  In addition to those terms defined above and
elsewhere in this Agreement, for the purposes of this Agreement, the following
terms shall have the meanings set forth in this Section 1:
 
“Affiliate” means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a
Person as such terms are used in and construed under Rule 405 under the 1933
Act.
 
“Action” has the meaning set forth in Section 4.7.
 
“Business Day” means a day, other than a Saturday or Sunday, on which banks in
New Jersey are open for the general transaction of business.
 
“Closing” means the closing of the transactions contemplated by this Agreement.
 
“Closing Date” means the date of the Closing.
 
“Commission” means the United States Securities and Exchange Commission or any
successor thereto.
 
“Common Stock” has the meaning set forth in the Recitals.
 
“Common Stock Equivalents” means any securities of the Company which would
entitle the holder thereof to acquire at any time Common Stock, including,
without limitation, any debt, preferred stock, rights, options, warrants or
other instrument that is at any time convertible into or exercisable or
exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock.
 
 
 

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“Debt” means, with respect to any Person, without duplication, (i)
indebtedness  of such Person for borrowed money; (ii) the principal of and
premium, coupon or interest obligations (if any) in respect of obligations of
such Person evidenced by bonds, debentures, notes or other similar instruments
(whether of a convertible nature or otherwise); (iii) all obligations for the
reimbursement of any obligor on any letter of credit, banker's acceptance,
guarantee, surety, performance bond, or similar transaction; (iv) all
obligations of such Person under capital or financing leases; (v) guarantees in
respect of Indebtedness referred to in clauses (i) through (iv) above and clause
(vii) below; (vi) all obligations of any other Person of the type referred to in
clauses (i) through (iv) which are secured by any lien or encumbrance on any
property or asset of such Person; (vii) all obligations under any swap, hedging
or similar agreement or combination thereof designed to protect against
fluctuations in interest rates, currency exchange rates or other changes in
value; (viii) any amendment, supplement, modification, deferral, renewal,
extension, refunding or refinancing or any liability or obligation of the types
referred to in clauses (i) through (vii) above; and (ix) any and all amounts of
any prepayment premium, penalties, break fees, expenses and other similar
obligations which would arise if any of the Debt referred to in the foregoing
clauses (i) through (viii) were prepaid, extinguished, unwound or settled in
full as of the date hereof.
 
“GAAP” has the meaning set forth in Section 4.10.
 
“Investor Party” has the meaning set forth in Section 6.1.
 
“Loan Documents” means the Note, any Note Guarantee, the Note Purchase Agreement
and the Note Security Agreement.
 
“Losses” has the meaning set forth in Section 6.1.
 
“Material Adverse Effect” means any event, circumstance, condition, development
or effect that, individually or in the aggregate with other events,
circumstances, conditions, developments and effects, has a material adverse
effect on the assets, liabilities, properties, results of operations, condition
(financial or otherwise), prospects or business of the Company and its
Subsidiaries taken as a whole.
 
“Note” has the meaning set forth in the Note Purchase Agreement.
 
“Note Guarantee” has the meaning set forth in the Note Purchase Agreement.
 
“Note Purchase Agreement” means that certain Note Purchase Agreement, dated as
of the date hereof, by and between the Company and the Investor.
 
“Note Security Agreement” has the meaning set forth in the Note Purchase
Agreement.
 
“Person” means an individual, corporation, partnership, limited liability
company, trust, business trust, association, joint stock company, joint venture,
sole proprietorship, unincorporated organization, governmental authority or any
other form of entity not specifically listed herein.
 
“Purchase Price” has the meaning set forth in the Recitals.
 
“Registration Statement” has the meaning set forth in Section 6.2.
 
 
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“SEC Filings” has the meaning set forth in Section 4.10.
 
“Shares” has the meaning set forth in the Recitals.
 
“Subsidiary” of any Person means any Person of which securities or other
ownership interests representing more than fifty percent of the equity or more
than fifty percent of the ordinary voting power or, in the case of a
partnership, more than fifty percent of the general partnership ownership
interests are, as of such date, owned, controlled or held by, or a majority of
such entity's gains or losses is entitled to be allocated to, the applicable
Person or one or more subsidiaries of such Person.
 
“Trading Day” means a day on which the principal Trading Market is open for
trading.
 
“Trading Market” means any of the following markets or exchanges on which the
Common Stock is listed or quoted for trading on the date in question: the AMEX,
the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select
Market, the New York Stock Exchange or OTC Bulletin Board (or any successors to
any of the foregoing).
 
“Transaction Documents” means this Agreement and the Loan Documents.
 
“Transfer” means to sell, assign, transfer or dispose of.
 
“Versant Lien” shall mean the security interest granted by the Company in favor
of Versant Funding LLC in connection with the Factoring Agreement dated December
20, 2011, by and between the Company and Versant Funding LLC, under the Security
Agreement dated December 20, 2011, by and between the Company and Versant
Funding LLC.
 
“1933 Act” means the Securities Act of 1933, as amended.
 
“1934 Act” means the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder.
 
2.           Purchase and Sale of the Shares.  Subject to the terms and
conditions of this Agreement, at the Closing, the Investor shall purchase, and
the Company shall sell and issue to the Investor, the Shares in exchange for the
Purchase Price.  The Investor shall pay the Purchase Price, in United States
dollars, by wire transfer of immediately available funds to the Company’s
account set forth on Schedule I attached hereto.
 
3.           Closing.  The Closing shall take place on the date hereof following
the satisfaction (or waiver) of the conditions to Closing set forth in Section 7
through an exchange of consideration and documents using wire transfers,
overnight courier service, electronic mail and/or facsimile transmission, or at
such other time and place and by such other means as the Company and the
Investor mutually agree upon.  At the Closing, the Company shall deliver to the
Investor a stock certificate, registered in the name of the Investor,
representing the Shares.
 
 
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4.           Representations and Warranties of the Company.  The Company hereby
represents and warrants to the Investor on and as of date hereof, that, except
as disclosed in the SEC Filings other than disclosures in such SEC Filings
contained under the heading “Risk Factors,” any disclosures contained in any
“forward-looking statements” disclaimer or any other statements that are
predictive or forward-looking in nature:
 
4.1           Organization, Good Standing and Qualification.  Each of the
Company and its Subsidiaries is a corporation duly incorporated, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and has all requisite corporate power and authority to carry on
its business as now conducted and to own its properties.  Neither the Company
nor any of its Subsidiaries is in violation or default of any of the provisions
of its certificate or articles of incorporation, operating agreement, bylaws or
other organizational or charter documents.  Each of the Company and its
Subsidiaries is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the conduct of its business or its
ownership or its leasing of property makes such qualification or licensing
necessary, unless the failure to so qualify would not reasonably be expected to
have a Material Adverse Effect.
 
4.2           Authorization.  The Company has full power and authority and has
taken all requisite action on the part of the Company for (i) the authorization,
execution and delivery of the Transaction Documents, (ii) the authorization of
the performance of all obligations of the Company hereunder or thereunder, and
(iii) the authorization, issuance (or reservation for issuance) and delivery of
the Shares.  The Transaction Documents constitute the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability, relating
to or affecting creditors’ rights generally.
 
4.3           Valid Issuance.  The Shares and the Note have been duly and
validly authorized and, when issued and paid for pursuant to this Agreement,
will be validly issued, (in the case of the Shares) fully paid and
nonassessable, and shall be free and clear of all encumbrances and restrictions,
except for restrictions on transfer set forth in this Agreement or imposed by
applicable securities laws.
 
4.4           Consents.  The execution, delivery and performance by the Company
of the Transaction Documents and the offer, issuance and sale of the Shares and
the Note require no consent of, action by or in respect of, no notice to, or
filing with, any Person, governmental body, agency, or official other than
filings that have been made pursuant to applicable state securities laws and
post-sale filings pursuant to applicable state and federal securities laws which
the Company undertakes to file within the applicable time periods.
 
4.5           No Conflict, Breach, Violation or Default.  The execution,
delivery and performance of the Transaction Documents by the Company and the
issuance and sale of the Shares and the Note will not conflict with or result in
a breach or violation of any of the terms and provisions of, or constitute a
default under (i) the Company’s Certificate of Incorporation or the Company
Bylaws, both as in effect on the date hereof, or (ii)(a) any statute, rule,
regulation or order of any governmental agency or body, any exchange, or any
court, domestic or foreign, having jurisdiction over the Company or any of its
Subsidiaries or any of its respective assets or properties, or (b) any agreement
or instrument to which the Company is a party or by which the Company or any of
its Subsidiaries is bound or to which any of their respective assets or
properties is subject.
 
 
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4.6           Certificates, Authorities and Permits.  Each of the Company and
its Subsidiaries possesses adequate certificates, authorities or permits issued
by appropriate governmental agencies or bodies (including the Federal
Communications Commission) necessary to conduct the business now operated by it,
and neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate,
authority or permit that, if determined adversely to the Company or any
Subsidiary, could reasonably be expected to have a Material Adverse Effect,
individually or in the aggregate.
 
4.7           Litigation.  There are no pending or, to the knowledge of the
Company, threatened actions, suits or proceedings before a court of competent
jurisdiction or a tribunal (collectively, an “Action”) against the Company or
any Subsidiary which (i) adversely affects or challenges the legality, validity
or enforceability of any of the Transaction Documents or the issuance of the
Shares or the Note or (ii) could, if there were an unfavorable decision,
reasonably be expected to have a Material Adverse Effect.  Neither the Company
nor any of its Subsidiaries is nor has any of them been within the last five (5)
years the subject of any Action involving a claim of violation of or liability
under federal or state securities laws or a claim of breach of fiduciary
duty.  To the knowledge of the Company, there has not been and there is not
pending or contemplated any investigation by the Commission targeting the
Company or any of its
 
Subsidiaries or any current or former director or officer of the Company or any
of its Subsidiaries in respect of any actions by such director or officer with
respect to the Company or any of its Subsidiaries.
 
4.8           Brokers and Finders.  No Person will have, as a result of the
issuance of the Shares or the Note, any valid right, interest or claim against
or upon the Company or the Investor or any of their respective Affiliates for
any commission, fee or other compensation pursuant to any agreement, arrangement
or understanding entered into by or on behalf of the Company or any of its
Affiliates.
 
4.9           Private Placement.  Subject to the accuracy of the representations
and warranties of the Investor contained in Section 5 hereof, the offer and sale
of the Shares to the Investor as contemplated hereby is exempt from the
registration requirements of the 1933 Act.
 
4.10           SEC Filings.  The Company has filed all reports, schedules,
forms, statements and other documents required to be filed by the Company under
the 1933 Act and the 1934 Act, including pursuant to Section 13(a) or 15(d)
thereof, for the twelve (12) months immediately preceding the date hereof (the
foregoing materials, including the exhibits thereto and documents incorporated
by reference therein being collectively referred to herein as the “SEC Filings”)
on a timely basis or has received a valid extension of such time of filing and
has filed any such SEC Filings prior to the expiration of any such
extension.  As of their respective dates, the SEC Filings complied in all
material respects with the requirements of the 1933 Act and the 1934 Act, as
applicable, and none of the SEC Filings, when filed, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.  The
financial statements of the Company included in the SEC Filings comply in all
material respects with applicable accounting requirements and the rules and
regulations of the Commission with respect thereto as in effect at the time of
filing.  Such financial statements have been prepared in accordance with United
States generally accepted accounting principles applied on a consistent basis
during the periods involved (“GAAP”), except as may be otherwise specified in
such financial statements or the notes thereto and except that unaudited
financial statements may not contain all footnotes required by GAAP, and fairly
present in all material respects the financial position of the Company as of and
for the dates thereof and the results of operations and cash flows for the
periods then ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments.
 
 
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4.11           Capitalization.  The capitalization of the Company is as set
forth in the Company’s Annual Report on Form 10-K filed on April 4, 2012.  The
Company has not issued any capital stock since April 4, 2012, other than
pursuant to the exercise of employee and director stock options under the
Company’s equity compensation plans, the issuance of employee and director
equity compensation under the Company’s equity compensation plans and the
issuance of shares of Common Stock to employees and directors pursuant to the
Company’s equity compensation plans.  No Person has any right of first refusal,
preemptive right, right of participation, or any similar right to participate in
the transactions contemplated by the Transaction Documents.  Except as a result
of the purchase and sale of the Shares, there are no outstanding options,
warrants, scrip rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities, rights or obligations convertible into or
exercisable or exchangeable for, or giving any Person any right to subscribe for
or acquire, any shares of Common Stock, or contracts, commitments,
understandings or arrangements by which the Company is or may become bound to
issue additional shares of Common Stock or Common Stock Equivalents.  The
issuance and sale of the Shares will not obligate the Company to issue shares of
Common Stock or other securities to any Person (other than the Investor) and
will not result in a right of any holder of Company securities to adjust the
exercise, conversion, exchange or reset price under any of such securities.  All
of the outstanding shares of capital stock of the Company are validly issued,
fully paid and nonassessable, have been issued in compliance with all federal
and state securities laws, and none of such outstanding shares was issued in
violation of any preemptive rights or similar rights to subscribe for or
purchase securities.  Except for agreements filed as exhibits to the SEC
Filings, there are no stockholders agreements, voting agreements or other
similar agreements with respect to the Company’s capital stock to which the
Company is a party or, to the knowledge of the Company, between or among any of
the Company’s stockholders.
 
4.12           Material Changes; Undisclosed Events or Liabilities.
 
(a)           Since the date of the latest audited financial statements included
within the SEC Filings, (i) there has been no event, circumstance, condition,
development or effect that, individually or in the aggregate with other  events,
circumstances, conditions, developments and effects, has had or that could
reasonably be expected to have a Material Adverse Effect, (ii) the Company has
not altered its method of accounting, (iii) the Company has not declared or made
any dividend or distribution of cash or other property to its stockholders or
purchased, redeemed or made any agreements to purchase or redeem any shares of
its capital stock, (iv) the Company and its Subsidiaries have not sold or
disposed of any assets or properties that, individually or in the aggregate, are
material outside the ordinary course of business or suffered any loss,
destruction or damage to any assets or properties that, individually or in the
aggregate, are material, and (v) the Company has not issued any equity
securities to any officer, director or Affiliate, except pursuant to existing
Company stock option plans. The Company and its Subsidiaries do not have any
liabilities or obligations (contingent or otherwise) that, individually or in
the aggregate, have had or could reasonably be expected to have, a Material
Adverse Effect, other than (A) liabilities and obligations reflected in the most
recent balance sheet of the Company filed with the Commission, (B) trade
payables and accrued expenses incurred in the ordinary course of business
consistent with past practice since the date of such balance sheet, (C)
liabilities arising in the ordinary course of business and not resulting from
any violation of law or breach of contract that are not required to be reflected
in the Company’s financial statements pursuant to GAAP or disclosed in filings
made with the Commission, and (D) pursuant to or as contemplated by this
Agreement.
 
 
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(b)           As of the Closing, the Company and its Subsidiaries will have no
outstanding Debt other than the Note.  There is no outstanding mortgage, deed of
trust, pledge, lien, security interest or other charge or encumbrance (including
the lien or retained security title of a conditional vendor) of any nature, upon
or with respect to any of the properties or assets of the Company and its
Subsidiaries, except for mortgages, deeds of trust, pledges, liens, security
interests or other charges or encumbrances (i) imposed by law for taxes,
assessments or governmental charges or levies on property of the Company or any
Subsidiary that are (1) not yet be due, or (2) (x) are being contested in good
faith and by appropriate proceedings and (y) the Company or such Subsidiary has
set aside on its books adequate reserves with respect thereto in accordance with
GAAP; (ii) carriers’, warehousemen’s and mechanics’ liens and other similar
liens imposed by law, arising in the ordinary course of business and securing
obligations that are not overdue by more than 30 days; (iii) arising out of
pledges or deposits under workmen’s compensation laws, unemployment insurance,
old age pensions, or other social security or retirement benefits, or similar
legislation; (iv) securing the performance of bids, tenders, contracts (other
than for the repayment of borrowed money), statutory obligations and surety
bonds, in each case in the ordinary course of business; (v) in the nature of
zoning restrictions, easements and rights or restrictions of record on the use
of real property imposed by law or arising in the ordinary course of business
which do not materially detract from the affected property’s value or impair its
use or interfere with the ordinary course of conduct of the Company or any of
its Subsidiaries; (vi) arising by operation of law in favor of the owner or
sublessor of leased premises and confined to the real property rented; or (vii)
arising out of the Versant Lien.
 
4.13           Compliance.  The Company and its Subsidiaries: (i) are not in
default under or in violation of (and no event has occurred that has not been
waived that, with notice or lapse of time or both, would result in a default by
the Company or any of its Subsidiaries under), nor has the Company or any of its
Subsidiaries received notice of a claim that it is in default under or that it
is in violation of, any indenture, loan or credit agreement or any other
material written agreement or written instrument to which it is a party or by
which it or any of its properties is bound (whether or not such default or
violation has been waived), (ii) are not in violation of any judgment, decree or
order of any court, arbitrator or governmental body in which the Company or any
of its Subsidiaries is named as a party, and (iii) since January 1, 2010 have
not been in violation of any statute, rule, ordinance or regulation of any
governmental authority, including without limitation all foreign, federal, state
and local laws applicable to its business and all such laws that affect the
environment, except in each case as could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
 
 
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4.14           Listing and Maintenance Requirements.  The Common Stock is
registered pursuant to Section 12(g) of the 1934 Act, and the Company has taken
no action designed to terminate the registration of the Common Stock under the
1934 Act nor has the Company received any written notification that the
Commission is contemplating terminating such registration.  The Company has not,
in the 12 months preceding the date hereof, received written notice from any
Trading Market on which the Common Stock is or has been listed or quoted to the
effect that the Company is not in compliance with the listing or maintenance
requirements of such Trading Market. The Company is in compliance with all such
listing and maintenance requirements in all material respects.
 
4.15           Representations Complete.  None of the representations or
warranties made by the Company in this Agreement, and none of the statements
made in any exhibit, schedule or certificate furnished by the Company pursuant
to this Agreement or any Transaction Document, contains or will contain at the
Closing any untrue statement of a material fact, or omits or will omit at the
Closing to state any material fact necessary in order to make the statements
contained herein or therein, in the light of the circumstances under which made,
not misleading.
 
5.           Representations, Warranties and Agreements of the Investor.  The
Investor hereby represents and warrants to the Company on and as of the date
hereof that:
 
5.1           Authorization.  The execution, delivery and performance by the
Investor of the Transaction Documents to which the Investor is a party have been
duly authorized and will each constitute the valid and legally binding
obligation of the Investor, enforceable against the Investor in accordance with
their respective terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability, relating
to or affecting creditors’ rights generally.
 
5.2           Purchase Entirely for Own Account.  The Shares will be acquired
for the Investor’s own account, not as nominee or agent, and not with a view to
the resale or distribution of any part thereof in violation of the 1933 Act, and
the Investor has no present intention of selling, granting any participation in,
or otherwise distributing the same in violation of the 1933 Act; provided,
however, by making the representations herein, the Investor does not agree, or
make any representation or warranty, to hold any of the Shares for any minimum
or other specific term and reserves the right to dispose of the Shares at any
time in accordance with or pursuant to a registration statement or an exemption
under the 1933 Act but subject at all times to the transfer restrictions set
forth in Section 8.  The Investor is acquiring the Shares hereunder in the
ordinary course of its business. The Investor is not a registered broker dealer
or an entity engaged in the business of being a broker dealer.
 
5.3           Investment Experience.  The Investor acknowledges that it can bear
the economic risk and complete loss of its investment in the Shares and has such
knowledge and experience in financial or business matters that it is capable of
evaluating the merits and risks of the investment contemplated hereby.
 
 
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5.4           Disclosure of Information.  The Investor has had an opportunity to
receive all additional information related to the Company requested by it and to
ask questions of and receive answers from the Company regarding the Company, its
business and the terms and conditions of the offering of the Shares.
 
5.5           Restricted Securities.  The Investor understands that the Shares
are characterized as “restricted securities” under the U.S. 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 1933 Act only in
certain limited circumstances.
 
5.6           Legends.
 
(a)           It is understood that, except as provided below, certificates
evidencing the Shares may bear the following or any similar legend:
 
“The securities represented hereby may not be transferred unless (A)(i) such
securities have been registered for sale pursuant to the Securities Act of 1933,
as amended, or (ii) the Company has received an opinion of counsel satisfactory
to it that such transfer may lawfully be made without registration under the
Securities Act of 1933 or qualification under applicable state securities laws
and (B) such transfer is in compliance with the terms of the Purchase Agreement
between the Company and the Investor, including the transfer restrictions set
forth in Section 8 thereof.”
 
(b)           If required by the authorities of any state in connection with the
issuance of sale of the Shares, the legend required by such state authority.
 
(c)           The Investor acknowledges and agrees that the Shares are subject
to the transfer restrictions set forth in Section 8 of this Agreement.
 
5.7           Accredited Investor.  The Investor is an “accredited investor” as
defined in Rule 501(a) of Regulation D, as amended, under the 1933 Act.
 
5.8           No General Solicitation.  The Investor did not learn of the
investment in the Shares as a result of any “general advertising” or “general
solicitation” as those terms are contemplated in Regulation D, as amended, under
the 1933 Act.
 
5.9           Brokers and Finders.  No Person will have, as a result of the
issuance of the Shares, any valid right, interest or claim against or upon the
Company or the Investor for any commission, fee or other compensation pursuant
to any agreement, arrangement or understanding entered into by or on behalf of
the Investor.
 
 
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5.10           Restriction on Hedging.  For so long as the Investor owns the
Shares, the Investor will not engage in, and has not engaged in prior to the
Closing Date, directly or indirectly, any hedging or other transaction which is
designed to or reasonably expected to reduce the Investor’s risk with respect
to, or hedge against losses in respect of, shares of Common Stock. Such
prohibited hedging or other transactions would include without limitation any
short position or sale or any purchase, sale or grant of any right (including
without limitation any put option or put equivalent position or call option or
call equivalent position) with respect to any of the shares of Common Stock or
with respect to any security that includes, relates to, or derives any
significant part of its value from such shares.  For the avoidance of doubt,
nothing in this Section 5.10 is intended to preclude the Investor from effecting
a Transfer of Shares (or any other shares of Common Stock hereafter acquired or
received by the Investor in accordance with the provisions of this Agreement)
pursuant to an effective registration statement or otherwise in compliance with
applicable securities laws.
 
6.           Other Agreements of the Parties.
 
6.1           Indemnification.
 
(a)           Subject to the provisions of this Section 6.1, each party (an
“Indemnifying Party”) will indemnify and hold the other party and such other
party’s directors, officers, shareholders, members, partners, employees and
agents, each Person who controls the such other party (within the meaning of
Section 15 of the 1933 Act and Section 20 of the 1934 Act), and the directors,
officers, shareholders, agents, members, partners or employees of such
controlling persons (each, an “Indemnified Party”) harmless from any and all
losses (including any diminution in value), liabilities, obligations, claims,
contingencies, damages, costs and expenses, including all judgments, amounts
paid in settlements, court costs and reasonable attorneys’ fees and costs of
investigation (“Losses”) that any such Indemnified Party may suffer or incur as
a result of or relating to any breach of any of the representations, warranties,
covenants or agreements made by the Indemnifying Party in this Agreement or in
the other Transaction Documents.  If any action shall be brought against any
Indemnified Party in respect of which indemnity may be sought pursuant to this
Agreement, the Indemnified Party shall promptly notify the Indemnifying Party in
writing, and the Indemnifying Party shall have the right to assume the defense
thereof with counsel of its own choosing reasonably acceptable to the
Indemnified Party.  Any Indemnified Party shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party.  An Indemnifying Party will not be liable to any Indemnified
Party under this Agreement (x) for any Losses constituting punitive, exemplary
or special damages, except to the extent awarded to a third party; (y) for any
settlement by an Indemnified Party effected without the Indemnifying Party’s
prior written consent (which shall not be unreasonably withheld); or (z) to the
extent, but only to the extent that a loss, claim, damage or liability is
attributable to the breach by an Indemnified Party or its Affiliate of any of
the representations, warranties, covenants or agreements made by such
Indemnified Party or its Affiliate in this Agreement or in the other Transaction
Documents, any violations by the Indemnified Party or its Affiliate of state or
federal securities laws or any conduct by the Indemnified Party or its Affiliate
which constitutes fraud, gross negligence, willful misconduct or malfeasance.
 
 
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(b)           If the Closing occurs, except in the case of fraud, the Company
shall not be liable for any Losses for breach of the representations and
warranties of the Company contained herein (i) unless and until the aggregate
claims therefor exceed $5,000 or (ii) for an aggregate amount in excess of the
150% of the Purchase Price.
 
6.2           Registration.  Within one hundred twenty (120) days after the
Closing, the Company agrees to file with the Commission a registration statement
(the “Registration Statement”) to register the Shares (and any other shares of
Common Stock hereafter acquired or received by the Investor in accordance with
the provisions of this Agreement).  The Company will use its best efforts to
cause the Registration Statement to be declared effective within sixty (60) days
(or 90 days in the event of review by the Commission) following the date of
filing. In connection with any such Registration Statement, the Company shall
enter into a selling stockholder agreement with the Investor in customary form
for a registered secondary offering which shall, among other things, provide for
indemnification and contribution in favor of the Investor.
 
6.3           Listing of Common Stock.  The Company hereby agrees to use its
commercially reasonable efforts to maintain the listing or quotation of the
Common Stock on the OTC Bulletin Board, and the Company shall promptly apply to
list or quote all of the Shares. The Company agrees, if the Company applies to
have the Common Stock traded on any other Trading Market, it will then include
in such application all of the Shares (and any other shares of Common Stock
hereafter acquired or received by the Investor in accordance with the provisions
of this Agreement), and will take such other action as is necessary to cause all
of the Shares (and any other shares of Common Stock hereafter acquired or
received by the Investor in accordance with the provisions of this Agreement) to
be listed or quoted on such Trading Market as promptly as possible.
 
6.4           Anti-Dilution.   If at any time within nine (9) months from the
Closing Date the Company sells or issues any Common Stock or Common Stock
Equivalents (other than sales or issuances to directors, officers, employees or
independent contractors in the ordinary course of business for compensation
purposes and stock splits and stock dividends payable in respect of the Common
Stock) having a purchase, exercise or conversion price per share of Common Stock
less than the purchase price per Share paid by the Investor under this Agreement
(appropriately adjusted to account for any stock split, stock dividend or
similar change affecting the Common Stock) (such price per share, as amended by
reason of any adjustment or adjustments under this Section 6.4, the “Per Share
Price”), then in such event the Per Share  Price shall automatically be reduced
to be equal to the lowest price per share of Common Stock paid or payable in any
such sale or issuance and the Company shall issue to the Investor a number of
additional validly issued, fully paid and non-assessable shares of Common Stock
such that the aggregate number of shares of Common Stock issued to the Investor
pursuant to this Agreement shall equal the result obtained by dividing the
Purchase Price by the Per Share Price.
 
6.5           Changes in Outstanding Common Stock.  The Company shall promptly
(and in any event within five (5) Business Days of any such event) notify the
Investor of any change in the number of outstanding shares of Common Stock that
results in the Investor owning more than five per cent (5%) of the outstanding
shares of Common Stock.
 
 
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7.           Conditions to Closing.
 
7.1           Conditions to the Investor’s Obligations. The obligation of the
Investor to purchase the Shares at the Closing is subject to the fulfillment, on
or prior to the Closing Date, of the following conditions, any of which may be
waived by the Investor:
 
(a)           The representations and warranties made by the Company in Section
4 hereof shall be true and correct in all material respects at all times prior
to and on the Closing Date.
 
(b)           The Company shall have obtained in a timely fashion any and all
consents, approvals and waivers necessary or appropriate for consummation of the
purchase and sale of the Shares and the Note, and all of which shall be and
remain so long as necessary in full force and effect.
 
(c)           No judgment, writ, order, injunction, award or decree of or by any
court, or judge, justice or magistrate, or any order of or by any governmental
authority, shall have been issued, and no action or proceeding shall have been
instituted by any governmental authority, or self-regulatory organization
enjoining or preventing the consummation of the transactions contemplated hereby
or in the other Transaction Documents.
 
(d)           The Company shall have delivered to the Investor the Note Purchase
Agreement and the Note Security Agreement, duly executed by the Company.
 
(e)           The Company shall have delivered to the Investor the Note, duly
executed by the Company.
 
(f)           All agreements, documents and instruments required to be executed,
delivered, filed and/or recorded in connection with the Note Purchase Agreement
and the Note Security Agreement, including, without limitation, UCC financing
statements, shall have been so executed and delivered and shall be in proper
form for filing and/or recording.
 
(g)           The Company shall consummate, concurrently with the Closing, the
issuance and sale of additional shares of Common Stock having an aggregate
purchase price of $500,000 (the “Additional Issuance”) on terms no less
favorable to the Company than the terms of this Agreement.  If any term or
provision of such Additional Issuance is more favorable to the purchaser of such
Common Stock than the terms of this Agreement, the terms and provisions of this
Agreement shall be amended, prior to the Closing, to be no less favorable to the
Investor than the terms and provisions of such Additional Issuance.
 
7.2           Conditions to Obligations of the Company. The Company’s obligation
to sell and issue the Shares to the Investor at the Closing is subject to the
fulfillment to the satisfaction of the Company on or prior to the Closing Date
of the following conditions, any of which (other than subsection (b) below) may
be waived by the Company:
 
(a)           The representations and warranties made by the Investor in Section
5 hereof shall be true and correct at all times prior to and on the Closing
Date.
 
 
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(b)           The Investor shall have delivered the Purchase Price to the
Company.
 
(c)           No judgment, writ, order, injunction, award or decree of or by any
court, or judge, justice or magistrate, or any order of or by any governmental
authority, shall have been issued, and no action or proceeding shall have been
instituted by any governmental authority, or self-regulatory organization
enjoining or preventing the consummation of the transactions contemplated hereby
or in the other Transaction Documents.
 
(d)           The Investor shall have delivered to the Company the Note Purchase
Agreement, duly executed by the Investor.
 
8.           Transfer Restrictions.  The Shares may not be Transferred by the
Investor prior to the six-month anniversary of the Closing Date.  Following the
six-month anniversary of the Closing Date, the Investor may, subject to
compliance with applicable securities laws, Transfer Shares.  The Investor
acknowledges and agrees that the Company shall issue to its transfer agent such
instructions, directions and stop transfer orders as are necessary to implement
the provision of this Section 8.
 
9.           Miscellaneous.
 
9.1           Survival.  All representations and warranties contained in this
Agreement shall be deemed to be representations and warranties as of the date
hereof, and such representations and warranties, together with the right to
assert a claim in respect thereof, shall survive the Closing until the
expiration of the applicable statute of limitations, with the exception of the
representations and warranties contained in Sections 4.6, 4.7, 4.9, 4.10, 4.12,
4.13, 4.14 and 4.15, which shall survive until the eighteen-month anniversary of
the date hereof.  The covenants and agreements contained in this Agreement shall
survive the Closing Date until the expiration of the applicable statute of
limitations.
 
9.2           Successors and Assigns.  The provisions of this Agreement shall
inure to the benefit of and be binding upon the respective successors and
assigns of the parties.  Neither the Company nor the Investor may assign this
Agreement or any of its rights or obligations hereunder without the prior
written consent of the other party; provided, however, that the Investor may
assign some or all of its rights hereunder to any Affiliate of the Investor
without the consent of the Company.  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.
 
9.3           Counterparts; Faxes.  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.  In the event that any
signature is delivered by facsimile transmission or by an e-mail which contains
a portable document format (.pdf) file of an executed signature page, such
signature page shall create a valid and binding obligation of the party
executing (or on whose behalf such signature is executed) with the same force
and effect as if such signature page were an original thereof.
 
 
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9.4           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.
 
9.5           Notices.  Any notices, demands and communications to a party
hereunder shall be in writing and shall be deemed to have been duly given and
received (a) if delivered personally, as of the date received, (b) if delivered
by certified mail, return receipt requested, three business days after being
mailed, (c) if delivered by a nationally recognized overnight delivery service,
two business days after being entrusted to such delivery service, or (d) if sent
via facsimile, electronic mail or similar electronic transmission, as of the
date received, to such party at its address set forth below (or such other
address as it may from time to time designate in writing to the other parties
hereto):
 
If to the Company:
 
BIO-key International, Inc.
3349 Highway 138
Building D, Suite A
Wall, NJ 07719
Attention:  Mike DePasquale, President and CEO
Fax:  (732) 359-1101
 
With a copy to:
 
Choate, Hall & Stewart LLP
Two International Place
Boston, MA  02110
Facsimile:  (617) 248-4000
Attention:  Charles J. Johnson, Esq.
 
If to the Investor:
 
DRNC Holdings, Inc.
200 Bellevue Parkway,
Suite 300
Wilmington, DE 19809-3727
Facsimile: (302) 281-3763
Attention: General Counsel
 
With a copy to:
 
Wilson, Sonsini, Goodrich & Rosati, P.C.
1301 Avenue of the Americas
40th Floor
New York, New York 10019-6022
Facsimile: (212) 999-5899
Attention:  Warren S. de Wied, Esq.
 
 
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9.6           Expenses.  The Company and the Investor shall each bear their own
expenses in connection with the negotiation, preparation, execution and delivery
of this Agreement.
 
9.7           Amendments and Waivers.  No provision of this Agreement may be
waived or amended except in a written instrument signed, in the case of an
amendment, by the Company and the Investor, or in the case of a waiver, by the
party against whom enforcement of any such waived provision is sought.  No
waiver of any default with respect to any provision, condition or requirement of
this Agreement shall be deemed to be a continuing waiver in the future or a
waiver of any subsequent default or a waiver of any other provision, condition
or requirement hereof, nor shall any delay or omission of any party to exercise
any right hereunder in any manner impair the exercise of any such right.  Any
amendment or waiver effected in accordance with this Section 9.7 shall be
binding upon each holder of the Shares at the time outstanding, each future
holder of the Shares, and the Company.
 
9.8           Publicity.  No public release or announcement concerning the
transactions contemplated by the Transaction Documents shall be issued by the
Company or the Investor without the prior consent of the Company (in the case of
a release or announcement by the Investor) or the Investor (in the case of a
release or announcement by the Company) (which consents shall not be
unreasonably withheld), except as such release or announcement may be required
by law or the applicable rules or regulations of any securities exchange or
securities market on which the Shares are then listed and
trading.  Notwithstanding the foregoing, to the extent that any public release
or announcement is made by or on behalf of the Company, confidential treatment
shall be sought by the Company with respect to any information that the parties
mutually agree with the advice of counsel consists of business trade secrets or
other confidential commercial or financial information in accordance with the
requirements of the Freedom of Information Act and the rules and regulations
thereunder.  The parties shall cooperate in connection with the preparation and
submission of any such request for confidential treatment and the Company shall
promptly notify the Investor of any communication by the Commission with respect
to any request for confidential treatment submitted by the Company or any legal
proceeding seeking disclosure of any confidential information and shall permit
the Investor to participate in any response by the Company to any request by the
Commission seeking disclosure of any confidential information. If disclosure of
any confidential information is sought by a court or arbitrator in any
proceeding by a third party, prior to any such disclosure the Company shall, to
the extent permitted by law and reasonably practicable, notify the Investor so
that the Investor has a reasonable opportunity to contest, limit or protect
against such disclosure; provided, further, that the Company shall seek
appropriate confidentiality prior to making such disclosure or use.
 
9.9           Severability.  Any provision of this Agreement that is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof but shall be interpreted as if it
were written so as to be enforceable to the maximum extent permitted by
applicable law, and any such prohibition or unenforceability in any jurisdiction
shall not invalidate or render unenforceable such provision in any other
jurisdiction.  To the extent permitted by applicable law, the parties hereby
waive any provision of law which renders any provision hereof prohibited or
unenforceable in any respect.
 
 
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9.10           Entire Agreement.  This Agreement, including Schedule I and each
other exhibit and schedule attached hereto, and the other Transaction Documents
constitute the entire agreement among the parties hereof with respect to the
subject matter hereof and thereof and supersede all prior agreements and
understandings, both oral and written, between the parties with respect to the
subject matter hereof and thereof.  Prior drafts or versions of this Agreement
shall not be used to interpret this Agreement.
 
9.11           Further Assurances.  The parties shall execute and deliver all
such further instruments and documents and take all such other actions as may
reasonably be required to carry out the transactions contemplated hereby and to
evidence the fulfillment of the agreements herein contained.
 
9.12           Governing Law; Consent to Jurisdiction.  This Agreement shall be
governed by, and construed in accordance with, the internal laws of the State of
New York without regard to the choice of law principles thereof.  Each of the
parties hereto irrevocably submits to the exclusive jurisdiction of the courts
of the State of New York located in New York, New York and the United States
District Court for the Southern District of New York located in New York, New
York for the purpose of any suit, action, proceeding or judgment relating to or
arising out of this Agreement and the transactions contemplated hereby.  Service
of process in connection with any such suit, action or proceeding may be served
on each party hereto anywhere in the world by the same methods as are specified
for the giving of notices under this Agreement.  Each of the parties hereto
irrevocably consents to the jurisdiction of any such court in any such suit,
action or proceeding and to the laying of venue in such court.  Each party
hereto irrevocably waives any objection to the laying of venue of any such suit,
action or proceeding brought in such courts and irrevocably waives any claim
that any such suit, action or proceeding brought in any such court has been
brought in an inconvenient forum. EACH PARTY HERETO HEREBY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING
TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON
CONTRACT, TORT OR ANY OTHER THEORY).
 
[signature page follows]
 
 
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IN WITNESS WHEREOF, the parties have caused their duly authorized officers to
execute this Purchase Agreement as of the date first above written.
 
BIO-KEY INTERNATIONAL, INC.
 
 
 
By:   /s/ Michael W. DePasquale                     
Name:  Michael DePasquale
Title:  Chief Executive Officer
 
 
DRNC HOLDINGS, INC.
 
 
 
By:  /s/ Daniel Mullarkey                                   
Name: Daniel Mullarkey
Title: Treasurer
 
 
[Signature Page to Purchase Agreement]
 
 
 

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SCHEDULE I
 
Wire instructions for the Company
 
 

PAY TO: SILICON VALLEY BANK   3003 TASMAN DRIVE, SANTA CLARA, CA 95054   UNITED
STATES OF AMERICA     ROUTING & TRANSIT #: 121140399     SWIFT CODE: SVBKUS6S  
  FOR CREDIT OF: BIO-key International, Inc.   85 Rangeway Road, BLDG 1   North
Billerica, MA 01862   UNITED STATES OF AMERICA     FINAL CREDIT ACCOUNT:
3300615308

 
 
I-1