Exhibit 10.41

 

SECURITIES EXCHANGE AGREEMENT

 

This Securities Exchange Agreement (this “Agreement”) is entered into as of
December 31, 2010 by and among BIO-key International, Inc., a Delaware
corporation (the “Company”), The Shaar Fund, Ltd. (“Shaar”) and Thomas J.
Colatosti (“TJC” and, together with Shaar, collectively the “Holders” and each
individually a “Holder”).

 

Introduction

 

Shaar is the holder of 27,932 shares (the “Shaar Exchanged Shares”) of the
Company’s Series D 7% Convertible Preferred Stock, $0.0001 par value per share
(the “Series D Preferred Stock”).  TJC is the holder of 2,625 shares (the “TJC
Exchanged Shares” and, together with the Shaar Exchanged Shares, collectively
the “Exchanged Shares”) of Series D Preferred Stock.

 

Shaar is also the holder of a Seven Percent (7%) Convertible Promissory Note
dated December 28, 2009 issued by the Company to Shaar in the original principal
amount of $673,079 (the “Shaar Exchanged Note”) and TJC is the holder of a Seven
Percent (7%) Convertible Promissory Note dated December 28, 2009 issued by the
Company to TJC in the original principal amount of $64,878 (the “TJC Exchanged
Note” and, together with the Shaar Exchanged Note, collectively the “Exchanged
Notes”).

 

Shaar is also the holder of (i) a Warrant dated January 23, 2006 to purchase up
to 225,000 shares of the Company’s common stock, $0.0001 par value per share
(“Common Stock”), (ii) a Warrant dated August 10, 2006 to purchase up to 133,333
shares of Common Stock and (iii) a Warrant dated December 28, 2009 to purchase
up to 4,750,000 shares of Common Stock (collectively, the “Shaar Exchanged
Warrants”).

 

The Holders and the Company desire to exchange the Exchanged Shares, including
all accrued and unpaid dividends thereon to and including the Closing Date (as
defined below), and the Exchanged Notes for the Secured Notes (as defined below)
and, in the case of Shaar, the Shaar Exchanged Warrants for the New Shaar
Warrant (as defined below), in each case on the terms and conditions set forth
in this Agreement.

 

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:

 

1.                                      Exchange of the Exchanged Shares,
Exchanged Notes and Shaar Exchanged Warrants for the Secured Notes and the New
Shaar Warrant.

 

1.1.                            Authorization of the Secured Notes.  The Company
has authorized the issuance of Seven Percent (7%) Secured Promissory Notes, each
to be in the form attached as Exhibit A hereto, in the respective original
principal amounts set forth on Schedule I attached hereto (collectively, the
“Secured Notes”) to Shaar and TJC on the terms and conditions set forth in

 

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this Agreement.  Each Holder hereby consents to the issuance of his or its
Secured Note, and the indebtedness represented thereby, on the terms and
conditions set forth in this Agreement.

 

1.2                               Authorization of the New Shaar Warrant.  The
Company has authorized the issuance of a Warrant to purchase up to 8,000,000
shares of Common Stock, in the form attached hereto as Exhibit B (the “New Shaar
Warrant”), to Shaar on the terms and conditions set forth in this Agreement.

 

1.3                               The Exchange.

 

(a)                                  In exchange for the delivery by Shaar of
the Shaar Exchanged Shares, the Shaar Exchanged Note and the Shaar Exchanged
Warrants, the Company agrees, in full settlement of the Company’s obligations to
Shaar as of the Closing Date under the Series D Certificate of Designation (as
defined below), the Shaar Exchanged Shares, the Shaar Exchanged Note and the
Shaar Exchanged Warrants, to issue and deliver to Shaar its Secured Note, the
Security Agreement, as defined below, and the New Shaar Warrant (the “Shaar
Exchange”).

 

(b)                                 In exchange for the delivery by TJC of the
TJC Exchanged Shares and the TJC Exchanged Note, the Company agrees, in full
settlement of the Company’s obligations to TJC as of the Closing Date under the
Series D Certificate of Designation, the TJC Exchanged Shares and the TJC
Exchanged Note, to issue and deliver to TJC his Secured Note and the Security
Agreement (the “TJC Exchange” and, together with the Shaar Exchange, the
“Exchange”).

 

(c)                                  Other than as set forth in this Agreement,
the Exchange shall be made without any additional consideration payable to or by
the Holders or the Company.  As used herein, “Series D Certificate of
Designation” means the Certificate of Designation of the Company filed with the
Secretary of State of the State of Delaware on December 28, 2009, which provides
for the designation of the rights and preferences of the Series D Preferred
Stock.

 

1.4                               Closing.  The closing of the Exchange on the
terms and conditions set forth in this Agreement (the “Closing”) shall take
place remotely via the exchange of documents and signatures at 10:00 a.m. EST on
(a) the later of December 31, 2010 or the date that is five (5) days after the
satisfaction or waiver of all of the conditions set forth in Section 4 hereof or
(b) on such other date as the parties hereto may agree (the “Closing Date”).

 

1.5                               Closing Documents and Payments.

 

(a)                                  At the Closing, (i) the Company shall
deliver to each Holder (A) its or his Secured Note and the Security Agreement,
and (B) in the case of Shaar, its New Shaar Warrant and (ii) each Holder shall
deliver to the Company (A) stock certificate(s) representing its or his
Exchanged Shares, together with a duly executed transfer power transferring its
or his Exchanged Shares to the Company for cancellation, (B) its or his original
Exchanged Note, together with a duly executed transfer power transferring its or
his Exchanged Note to the Company for cancellation, and (C) in the case of
Shaar, its Shaar Exchanged Warrants.

 

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(b)                                 At the Closing, the Company will make a cash
payment to Shaar in the amount of $500,000 by wire transfer of immediately
available funds to an account designated by Shaar prior to the Closing.

 

(c)                                  On January 31, 2011, the Company will make
a cash payment to Shaar in the amount of $125,209 by wire transfer of
immediately available funds to the account designated by Shaar pursuant to
Section 1.5(b) above.  The parties hereto acknowledge and agree that such amount
represents the full satisfaction of the Company’s obligations to Shaar pursuant
to all accrued and unpaid dividends with respect to the Company’s Series B
Convertible Preferred Stock and Series C Convertible Preferred Stock and that,
upon its receipt of such payment, Shaar shall not have any further rights to any
such dividends.

 

2.                                      Representations and Warranties of the
Holder.  Each Holder, severally and not jointly, represents and warrants to the
Company as follows:

 

2.1.                            Title.  Such Holder has good title to his or its
Exchanged Shares and Exchanged Note, and, in the case of Shaar, the Shaar
Exchanged Warrants, free and clear of any and all restrictions, encumbrances,
liens, rights, title or interests of others, other than restrictions under
applicable securities laws.

 

2.2.                            Authority.  Such Holder has the requisite power
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby and to deliver his or its Exchanged Shares and Exchanged
Note and, in the case of Shaar, the Shaar Exchanged Warrants, to the Company in
accordance herewith.

 

3.                                      Representations and Warranties of the
Company.  The Company represents and warrants to each Holder as follows:

 

3.1.                            Entity Matters.  The Company is duly organized
and validly existing in good standing under the laws of the State of Delaware,
has all requisite power and authority to conduct its business and to own its
property as the same is and shall be conducted or owned, and is qualified to do
business as a foreign corporation in all locations required under the laws of
each jurisdiction in which it does business and under which the failure so to
qualify and remain in good standing would have a material adverse effect on the
Company.  The execution of this Agreement, the Secured Notes, the Security and
Subordination Agreement dated as of even date herewith made by the Company in
favor of Shaar, TJC and The Shaar Fund, Ltd., as collateral agent thereunder
(the “Security Agreement”), and the New Shaar Warrant (collectively, the
“Exchange Documents”) will not violate the Company’s Certificate of
Incorporation or By-Laws.

 

3.2.                            No Violation.  The performance by the Company of
its obligations hereunder or under any other Exchange Document does not
constitute a violation of any law, order, regulation, contract, or agreement to
which the Company is a party or by which the Company or the Company’s property
may be bound and does not require any filing or registration with, or any
permit, license, consent, or approval of, any governmental agency or regulatory
authority, or the waiver, consent or approval of any other party which has not
been or will not be duly obtained as of the Closing Date.

 

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3.3.                            No Litigation.  There is no litigation or
arbitration pending or, to the Company’s knowledge, threatened against the
Company which, if adversely decided, could materially impair the ability of the
Company to pay and perform the Company’s obligations under any Exchange
Document.

 

3.4.                            Exchange Documents Enforceable.  The Exchange
Documents have been duly authorized, executed, and delivered by the Company and
are legal, valid, and binding instruments, enforceable against the Company in
accordance with their respective terms, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application affecting enforcement of creditors’ rights and general principles of
equity that restrict the availability of equitable or legal remedies.

 

4.                                      Conditions Precedent to the Holders’
Obligations.  It shall be a condition precedent to the Holders’ obligations
under this Agreement that all of the following requirements are satisfied:

 

4.1.                            Representations and Warranties.  All
representations and warranties made by or on behalf of the Company herein shall
be true, correct and complete in all material respects on and as of the Closing
Date.

 

4.2.                            Additional Conditions Precedent.  Each Holder
shall have received each of the following, as applicable:

 

(a)                                  its or his Secured Note executed and
delivered by the Company in favor of such Holder;

 

(b)                                 a copy of the Security Agreement executed
and delivered by the Company in favor of the agent thereunder;

 

(c)                                  in the case of Shaar, the New Shaar Warrant
executed and delivered by the Company; and

 

(d)                                 such other and further documents, agreements
and instruments as the Holders or their counsel may reasonably require to
evidence, confirm or give effect to the undertakings of the Company set forth
herein.

 

5.                                      Miscellaneous.

 

5.1.                            Governing Law.  THIS AGREEMENT AND EACH OTHER
EXCHANGE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAWS.  ANY ACTION BROUGHT BY ANY PARTY AGAINST ANOTHER CONCERNING THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT AND EACH OTHER EXCHANGE AGREEMENT
SHALL BE BROUGHT ONLY IN THE STATE COURTS OF NEW YORK OR IN THE FEDERAL COURTS
LOCATED IN THE STATE OF NEW YORK, IN EACH CASE SITTING IN THE CITY OF NEW YORK,
BOROUGH OF MANHATTAN.  ALL PARTIES AND THE INDIVIDUALS EXECUTING THIS AGREEMENT
AND THE OTHER EXCHANGE AGREEMENTS ON

 

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BEHALF OF THE COMPANY AGREE TO SUBMIT TO THE JURISDICTION OF SUCH COURTS AND
WAIVE TRIAL BY JURY.  IN THE EVENT THAT ANY PROVISION OF THIS AGREEMENT OR ANY
OTHER EXCHANGE AGREEMENT DELIVERED IN CONNECTION HEREWITH IS INVALID OR
UNENFORCEABLE UNDER ANY APPLICABLE STATUTE OR RULE OF LAW, THEN SUCH PROVISION
SHALL BE DEEMED INOPERATIVE TO THE EXTENT THAT IT MAY CONFLICT THEREWITH AND
SHALL BE DEEMED MODIFIED TO CONFORM WITH SUCH STATUTE OR RULE OF LAW.  ANY SUCH
PROVISION WHICH MAY PROVE INVALID OR UNENFORCEABLE UNDER ANY LAW SHALL NOT
AFFECT THE VALIDITY OR ENFORCEABILITY OF ANY OTHER PROVISION OF THIS AGREEMENT
OR ANY OTHER EXCHANGE AGREEMENT.

 

5.2.                            Survival.  The representations, warranties,
covenants and agreements made herein shall survive any investigation made by the
Holders and for one year after the date of the closing of the transactions
contemplated hereby.  All statements as to factual matters contained in any
certificate or other instrument delivered by or on behalf of the Company
pursuant hereto in connection with the transactions contemplated hereby shall be
deemed to be representations and warranties by the Company hereunder solely as
of the date of such certificate or instrument, unless otherwise specified
therein.

 

5.3.                            Successors.  Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, heirs, executors and administrators of the parties
hereto.  No Holder may assign its rights hereunder to a competitor of the
Company.  The Company may not assign its rights or delegate its obligations
hereunder to a third party without obtaining the consent of the Holders, such
consent not to be unreasonably withheld or delayed.

 

5.4.                            Entire Agreement.  This Agreement, the other
Exchange Documents, the exhibits and schedules hereto and thereto and the other
documents delivered pursuant hereto constitute the full and entire understanding
and agreement between the parties with regard to the subjects hereof and no
party shall be liable or bound to any other in any manner by any
representations, warranties, covenants and agreements except as specifically set
forth herein and therein.

 

5.5.                            Amendments and Waivers.  This Agreement may be
amended or modified only upon the written consent of the Company and each
Holder.

 

5.6.                            Delays or Omissions.  It is agreed that no delay
or omission to exercise any right, power or remedy accruing to any party, upon
any breach, default or noncompliance by another party under this Agreement or
the other Exchange Documents, shall impair any such right, power or remedy, nor
shall it be construed to be a waiver of any such breach, default or
noncompliance, or any acquiescence therein, or of or in any similar breach,
default or noncompliance thereafter occurring.  All remedies, either under this
Agreement or the other Exchange Documents, by law or otherwise afforded to any
party, shall be cumulative and not alternative.

 

5.7.                            Notices.  All notices and other communications
given or made pursuant to this Agreement shall be in writing and shall be deemed
effectively given upon the earlier of actual

 

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receipt or:  (a) personal delivery to the party to be notified, (b) when sent,
if sent by electronic mail or facsimile during normal business hours of the
recipient, and if not sent during normal business hours, then on the recipient’s
next business day, (c) five (5) days after having been sent by registered or
certified mail, return receipt requested, postage prepaid, or (d) one
(1) business day after deposit with a nationally recognized overnight courier,
freight prepaid, specifying next business day delivery, with written
verification of receipt.  All communications shall be sent to the respective
parties at the following addresses or to such other e-mail address, facsimile
number or address as subsequently modified by written notice given in accordance
with this Section:

 

If to the Company or to TJC, to: or c/o

 

BIO-key International, Inc.

3349 Highway 138

 

 

Building D, Suite B

 

 

Wall, NJ 07719

 

 

Attn: Chief Executive Officer

 

 

Facsimile: (732) 359-1101

 

 

 

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

 

Choate, Hall & Stewart LLP

Two International Place

 

 

Boston, MA 02110

 

 

Attention: Charles J. Johnson, Esq.

 

 

Facsimile: (617) 248-4000

 

 

 

If to Shaar, to:

 

The Shaar Fund Ltd.

 

 

c/o Maarten Robberts

 

 

SS&C Fund Services N.V.

 

 

Pareraweg 45

 

 

Curacao, Netherlands Antilles

 

 

Facsimile: (599-9) 434-3560

 

 

 

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

 

Meltzer, Lippe, Goldstein & Breitstone, LLP

190 Willis Avenue

 

 

Mineola, NY 11501

 

 

Attention: Ira R. Halperin, Esq.

 

 

Facsimile: (516) 747-0653

 

5.8.                            Titles and Subtitles.  The titles of the
sections and subsections of this Agreement are for convenience of reference only
and are not to be considered in construing this Agreement.

 

5.9.                            Facsimile Signatures; Counterparts.  This
Agreement may be executed by facsimile signatures and in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.

 

5.10.                     Broker’s Fees.  Each party hereto represents and
warrants that no agent, broker, investment banker, person or firm acting on
behalf of or under the authority of such party hereto is or will be entitled to
any broker’s or finder’s fee or any other commission directly or indirectly in
connection with the transactions contemplated herein.  Each party hereto further
agrees to

 

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indemnify each other party for any claims, losses or expenses incurred by such
other party as a result of the representation by such party in this Section 5.10
being untrue.

 

5.11.                     Construction.  Each party acknowledges that its legal
counsel participated in the preparation of this Agreement and the other Exchange
Documents and, therefore, stipulates that the rule of construction that
ambiguities are to be resolved against the drafting party shall not be applied
in the interpretation of this Agreement to favor any party against the other.

 

5.12.                     Fees and Expenses.   The Company agrees to pay the
reasonable fees and expenses of Meltzer, Lippe, Goldstein & Breitstone, LLP, as
counsel to Shaar, in connection with the negotiation, execution and delivery of
this Agreement, the Secured Notes, the Security Agreement and the New Shaar
Warrant, and the consummation of the transactions contemplated hereby and
thereby.

 

[Signature pages follow]

 

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IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as a
sealed instrument as of the date first written above.

 

 

 

THE COMPANY:

 

 

 

BIO-KEY INTERNATIONAL, INC.

 

 

 

 

 

By:

 

 

 

Name:

 

 

Title:

 

[Signature Page to Securities Exchange Agreement]

 

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THE HOLDERS:

 

 

 

THE SHAAR FUND, LTD.

 

 

 

By: SS&C Fund Services N.V.

 

 

 

 

 

By:

 

 

 

Name:

 

 

Title:

 

 

 

 

 

 

 

Thomas J. Colatosti

 

[Signature Page to Securities Exchange Agreement]

 

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Exhibit A

 

Form of Secured Notes

 

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Exhibit B

 

Form of New Shaar Warrant

 

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Schedule I

 

Holder

 

Original Principal Amount

 

 

 

 

 

The Shaar Fund, Ltd.

 

$

3,157,759

 

 

 

 

 

Thomas J. Colatosti

 

$

350,804

 

 

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