Exhibit 10.1


 


SECURITIES PURCHASE AGREEMENT


 


This Securities Purchase Agreement (this “Agreement”) is dated as of
March 31, 2004 among BIO-key International, Inc., a Minnesota corporation
(the “Company”), and the
purchasers identified on the signature pages hereto (each, a “Purchaser” and
collectively, the “Purchasers”).


 


WHEREAS, subject to the terms and conditions
set forth in this Agreement and pursuant to Section 4(2) of the Securities
Act of 1933, as amended (the “Securities
Act”), the Company desires to issue and sell to the
Purchasers, and the Purchasers, severally and not jointly, desire to purchase
from the Company, securities of the Company as more fully described in this
Agreement.


 


NOW, THEREFORE, IN CONSIDERATION of the
mutual covenants contained in this Agreement, and for other good and valuable
consideration the receipt and adequacy of which are hereby acknowledged, the
Company and the Purchasers agree as follows:


 


ARTICLE I


DEFINITIONS


 


1.1           Definitions.  In addition to the terms defined elsewhere
in this Agreement, the following terms have the meanings indicated:


 


“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 144 under the
Securities Act.


 


“Business Day”
means any day other than Saturday, Sunday or other day on which commercial
banks in The City of New York are authorized or required by law to remain
closed.


 


“Change of Control”
means the occurrence of any of the following in one or a series of related
transactions: (i) an acquisition after the date hereof by an individual or
legal entity or “group” (as described in Rule 13d-5(b)(1) under the Exchange
Act) of more than one-half of the voting rights or equity interests in the
Company; (ii) a replacement of more than one-half of the members of the
Company’s board of directors that is not approved by those individuals who are
members of the board of directors on the date hereof (or other directors
previously approved by such individuals); (iii) a merger or consolidation of
the Company or any significant Subsidiary or a sale of more than one-half of
the assets of the Company in one or a series of related transactions, unless
following such transaction or series of transactions, the holders of the
Company’s securities prior to the first such transaction continue to hold at
least two-thirds of the voting rights and equity interests in the surviving
entity or acquirer of such assets; (iv) a recapitalization, reorganization or
other transaction involving the Company or any significant Subsidiary that
constitutes or results in a transfer of more than one-half of the voting rights
or equity interests in the Company; (v) consummation of a “Rule 13e-3


 

















 


transaction”
as defined in Rule 13e-3 under the Exchange Act with respect to the Company, or
(vi) the execution by the Company or its controlling shareholders of a
definitive agreement providing for any of the foregoing events.


 


 “Closing” means the
closing of the purchase and sale of the Shares, and the Warrants pursuant to Section 2.1.


 


“Closing Price”
means, for any date, the price determined by the first of the following clauses
that applies: (a) if the Common Stock is then listed or quoted on an Eligible
Market or any other national securities exchange, the closing price per share
of the Common Stock for such date (or the nearest preceding date) on the
primary Eligible Market or exchange on which the Common Stock is then listed or
quoted; (b) if prices for the Common Stock are then quoted on the OTC
Bulletin Board, the closing price per share of the Common Stock for the last
transaction occurring on such date (or the nearest preceding date) so quoted;
(c) if prices for the Common Stock are then reported in the “Pink Sheets”
published by the National Quotation Bureau Incorporated (or a similar
organization or agency succeeding to its functions of reporting prices), the
most recent closing bid price per share of the Common Stock of the last transaction
occurring on the date so reported; or (d) in all other cases, the fair
market value of a share of Common Stock as determined by an independent
appraiser selected in good faith by Purchasers holding a majority of the
Securities.


 


“Closing Date”
means the date of the Closing.


 


“Commission”
means the Securities and Exchange Commission.


 


“Common Stock”
means the common stock of the Company, par value $.01 per share.


 


“Common
Stock Equivalents” means, collectively, Options and
Convertible Securities.


 


“Company Counsel”
means Choate, Hall & Stewart, counsel to the Company.


 


“Convertible
Securities” means any stock or securities (other than
Options) convertible into or exercisable or exchangeable for Common Stock.


 


“Effective Date”
means the date that the Registration Statement is first declared effective by
the Commission.


 


“Eligible Market”
means any of the New York Stock Exchange, the American Stock Exchange, the
NASDAQ National Market or the NASDAQ OTC Bulletin Board.


 


“Exchange Act”
means the Securities Exchange Act of 1934, as amended.


 


“Excluded Stock” means the issuance of Common Stock (A)
upon exercise or conversion of any options or other securities described in Schedule 3.1(f)
(provided that such exercise or conversion occurs in accordance with the terms
thereof, without material


 


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amendment or
modification, and that the applicable exercise or conversion price or ratio is
described in such schedule) or otherwise pursuant to any employee benefit plan
described in Schedule 3.1(f) or hereafter adopted by the Company
and approved by its shareholders or (B) in connection with any issuance of
shares or grant of options to employees, officers, directors or consultants of
the Company pursuant to a stock option plan or other incentive stock plan or
similar arrangement duly adopted by the Company’s board of directors or in
respect of the issuance of Common Stock upon exercise of any such options.


 


“Filing Date”
means April 30, 2004.


 


“Lien”
means any lien, charge, claim, security interest, encumbrance, right of first
refusal or other restriction.


 


“LP
Counsel” has the meaning set forth in Section 6.2(a).


 


“Losses”
means any and all losses, claims, damages, liabilities, settlement costs and
expenses, including, without limitation, costs of preparation and reasonable
attorneys’ fees.


 


“Options”
means any rights, warrants or options to subscribe for or purchase Common Stock
or Convertible Securities.


 


“Person”
means any individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or subdivision thereof) or any court or
other federal, state, local or other governmental authority or other entity of
any kind.


 


“Per Unit Purchase
Price” means $1.35.


 


“Proceeding”
means an action, claim, suit, investigation or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition),
whether commenced or threatened.


 


“Prospectus”
means the prospectus included in the Registration Statement (including, without
limitation, a prospectus that includes any information previously omitted from
a prospectus filed as part of an effective registration statement in reliance
upon Rule 430A promulgated under the Securities Act), as amended or
supplemented by any prospectus supplement, with respect to the terms of the
offering of any portion of the Registrable Securities covered by the
Registration Statement, and all other amendments and supplements to the
Prospectus including post effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.


 


“Purchaser Counsel”
has the meaning set forth in Section 6.2(a).


 


“Registrable Securities”
means any Common Stock (including Underlying Shares) issued or issuable
pursuant to the Transaction Documents, together with any


 


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securities
issued or issuable upon any stock split, dividend or other distribution,
recapitalization or similar event with respect to the foregoing.


 


“Registration
Statement” means the initial registration statement
required to be filed under Article VI and any additional registration
statements, including (in each case) the Prospectus, amendments and supplements
to such registration statement or Prospectus, including pre- and post-effective
amendments, all exhibits thereto, and all material incorporated by reference or
deemed to be incorporated by reference in such registration statement.


 


“Required
Effectiveness Date” means July 14, 2004.


 


“Rule 144,”
“Rule 415,” and “Rule 424” means Rule 144, Rule 415 and
Rule 424, respectively, promulgated by the Commission pursuant to the
Securities Act, as such Rules may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.


 


“Securities”
means the Shares, the Warrants and the Underlying Shares.


 


“Shares”
means an aggregate of 8,888,889 shares
of Common Stock, which are being issued and sold to the Purchasers at the
Closing.


 


“Subsidiary”
means any Person in which the Company, directly or indirectly, owns capital
stock or holds an equity or similar interest.


 


 “Trading Day” means
(a) any day on which the Common Stock is listed or quoted and traded on its
primary Trading Market, (b) if the Common Stock is not then listed or quoted
and traded on any Eligible Market, then a day on which trading occurs on the
NASDAQ National Market (or any successor thereto), or (c) if trading ceases to
occur on the NASDAQ National Market (or any successor thereto), any Business
Day.


 


“Trading Market”
means the NASDAQ OTC Bulletin Board or any other Eligible Market, or any
national securities exchange, market or trading or quotation facility on which
the Common Stock is then listed or quoted.


 


“Transaction
Documents” means this Agreement, the Warrants, the
Transfer Agent Instructions and any other documents or agreements executed in
connection with the transactions contemplated hereunder.


 


“Transfer Agent Instructions” means the Irrevocable Transfer Agent
Instructions, in the form of Exhibit C, executed by the Company and
delivered to and acknowledged in writing by the Company’s transfer agent.


 


“Underlying Shares”
means the shares of Common Stock issuable upon exercise of the Warrants.


 


“Unit”
means one Share and a Warrant to purchase .5 of a Share.


 


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“VWAP”
means, with respect to any particular Trading Day or for any particular period,
the volume weighted average trading
price per share of Common Stock on such Trading Day or for such period on an
Eligible Market as reported by Bloomberg, L.P., or any successor performing
similar functions.


 


“Warrants”
means, collectively, the Common Stock purchase warrants issued and sold under
this Agreement, in the form of Exhibit A, and any warrants issued upon
exercise of such warrants.


 


ARTICLE II


PURCHASE AND SALE


 


2.1           Closing.  Subject to the terms and conditions set
forth in this Agreement, at the Closing the Company shall issue and sell to
each Purchaser, and each Purchaser shall, severally and not jointly, purchase
from the Company, such number of Units indicated below such Purchaser’s name on
the signature page of this Agreement at the Per Unit Purchase Price.  The Closing shall take place at the offices
of Purchaser Counsel immediately following the execution hereof, or at such
other location or time as the parties may agree.


 


2.2           Closing Deliveries.


 


(a)           At the Closing, the Company
shall deliver or cause to be delivered to each Purchaser the following:


 


(i)                                     one
or more stock certificates, free and clear of all restrictive and other legends
(except as expressly provided in Section 4.1(b) hereof), evidencing
such number of Shares equal to the number of Units indicated below such
Purchaser’s name on the signature page of this Agreement, registered in the
name of such Purchaser;


 


(ii)                                  a
Warrant, registered in the name of such Purchaser, pursuant to which such
Purchaser shall have the right to acquire such number of Underlying Shares
indicated below such Purchaser’s name on the signature page of this Agreement,
on the terms set forth therein; and


 


(iii)                               duly
executed Transfer Agent Instructions acknowledged by the Company’s transfer
agent.


 


(b)           At
the Closing, each Purchaser shall deliver or cause to be delivered to the
Company an amount equal to the Per Unit Purchase Price multiplied by the number
of Units indicated below such Purchaser’s name on the signature page of this
Agreement, in United States dollars and in immediately available funds, by wire
transfer to an account designated in writing to such Purchaser by the Company
for such purpose.


 


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ARTICLE III


REPRESENTATIONS AND WARRANTIES


 


3.1           Representations and
Warranties of the Company.  The
Company hereby represents and warrants to each of the Purchasers as follows:


 


(a)           Subsidiaries.  The Company has no direct or indirect
Subsidiaries other than those listed in Schedule 3.1(a).  Except as disclosed in Schedule 3.1(a),
the Company owns, directly or indirectly, all of the capital stock or
comparable equity interests of each Subsidiary free and clear of any Lien and
all the issued and outstanding shares of capital stock or comparable equity
interest of each Subsidiary are validly issued and are fully paid,
non-assessable and free of preemptive and similar rights.


 


(b)           Organization and
Qualification.  Each of the Company
and the Subsidiaries is an entity duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization (as applicable), with the requisite power and authority to own and
use its properties and assets and to carry on its business as currently
conducted.  Neither the Company nor any
Subsidiary is in violation of any of the provisions of its respective
certificate or articles of incorporation, bylaws or other organizational or
charter documents.  Each of the Company
and the Subsidiaries is duly qualified to do business and is in good standing
as a foreign corporation or other entity in each jurisdiction in which the
nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not, individually or in the aggregate, (i)
adversely affect the legality, validity or enforceability of any Transaction
Document, (ii) have or result in a material adverse effect on the results of
operations, assets, prospects, business or condition (financial or otherwise)
of the Company and the Subsidiaries, taken as a whole on a consolidated basis,
or (iii) adversely impair the Company’s ability to perform fully on a timely
basis its obligations under any of the Transaction Documents (any of (i), (ii)
or (iii), a “Material Adverse Effect”).


 


(c)           Authorization;
Enforcement.  The Company has the
requisite corporate power and authority to enter into and to consummate the
transactions contemplated by each of the Transaction Documents and otherwise to
carry out its obligations hereunder and thereunder.  The execution and delivery of each of the Transaction Documents
by the Company and the consummation by it of the transactions contemplated hereby
and thereby have been duly authorized by all necessary action on the part of
the Company and no further consent or action is required by the Company, its
Board of Directors or its stockholders. 
Each of the Transaction Documents has been (or upon delivery will be)
duly executed by the Company and is, or when delivered in accordance with the
terms hereof, will constitute, the valid and binding obligation of the Company
enforceable against the Company in accordance with its terms.


 


(d)           No Conflicts.  The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby do not and will not (i) conflict
with or violate any provision of the Company’s or any Subsidiary’s certificate
or articles of incorporation, bylaws or other organizational or charter
documents, (ii) conflict with, or constitute a default (or an event that


 


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with notice or lapse of time or both would
become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation (with or without notice, lapse of time
or both) of, any agreement, credit facility, debt or other instrument
(evidencing a Company or Subsidiary debt or otherwise) or other understanding
to which the Company or any Subsidiary is a party or by which any property or
asset of the Company or any Subsidiary is bound or affected, or (iii) result in
a violation of any law, rule, regulation, order, judgment, injunction, decree
or other restriction of any court or governmental authority to which the
Company or a Subsidiary is subject (including federal and state securities laws
and regulations and the rules and regulations of any self-regulatory
organization to which the Company or its securities are subject), or by which
any property or asset of the Company or a Subsidiary is bound or affected.


 


(e)           Issuance of the
Securities.  The Securities
(including the Underlying Shares) are duly authorized and, when issued and paid
for in accordance with the Transaction Documents, will be duly and validly
issued, fully paid and nonassessable, free and clear of all Liens and shall not
be subject to preemptive rights or similar rights of stockholders.  The Company has reserved from its duly
authorized capital stock the maximum number of shares of Common Stock issuable
upon exercise of the Warrants.


 


(f)            Capitalization.  The number of shares and type of all
authorized, issued and outstanding capital stock, options and other securities
of the Company (whether or not presently convertible into or exercisable or
exchangeable for shares of capital stock of the Company) is as set forth in Schedule 3.1(f).  All outstanding shares of capital stock are
duly authorized, validly issued, fully paid and nonassessable and have been
issued in compliance with all applicable securities laws.  Except as disclosed in the SEC Reports (as
defined below) or Schedule 3.1(f), there are no outstanding
options, warrants, script 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 or any Subsidiary is or may
become bound to issue additional shares of Common Stock, or securities or
rights convertible or exchangeable into shares of Common Stock.  Except as set forth in SEC Reports, there
are no anti-dilution or price adjustment provisions contained in any security
issued by the Company (or in any agreement providing rights to security
holders) and the issue and sale of the Securities (including the Underlying
Shares) will not obligate the Company to issue shares of Common Stock or other
securities to any Person (other than the Purchasers) and will not result in a
right of any holder of Company securities to adjust the exercise, conversion,
exchange or reset price under such securities. 
To the knowledge of the Company, except as specifically disclosed in
filings made with the SEC and available on EDGAR, no Person or group of related
Persons beneficially owns (as determined pursuant to Rule 13d-3 under the
Exchange Act), or has the right to acquire, by agreement with or by obligation
binding upon the Company, beneficial ownership of in excess of 5% of the
outstanding Common Stock, ignoring for such purposes any limitation on the
number of shares of Common Stock that may be owned at any single time.


 


(g)           SEC Reports;
Financial Statements.  The Company
has filed all reports required to be filed by it under the Exchange Act,
including pursuant to Section 13(a) or 15(d) thereof, for the two (2)
years preceding the date hereof (or such shorter period as the Company was
required by law to file such material) (the foregoing materials (together with
any materials


 


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filed by the Company under the Exchange Act,
whether or not required) being collectively referred to herein as the “SEC Reports” and, together with this Agreement and the
Schedules to this Agreement, the “Disclosure Materials”)
on a timely basis or has received a valid extension of such time of filing and
has filed any such SEC Reports prior to the expiration of any such
extension.  The Company has delivered to
each Purchaser true, correct and complete copies of all SEC Reports filed
within the ten (10) days preceding the date hereof.  As of their respective dates, the SEC Reports complied in all
material respects with the requirements of the Securities Act and the Exchange
Act and the rules and regulations of the Commission promulgated thereunder, and
none of the SEC Reports, 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 Reports 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 fairly present in all material respects the financial position of
the Company and its consolidated subsidiaries 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.  All material
agreements to which the Company or any Subsidiary is a party or to which the
property or assets of the Company or any Subsidiary are subject are included as
part of or specifically identified in the SEC Reports.


 


(h)           Material Changes.  Since the date of the latest audited
financial statements included within the SEC Reports, except as specifically
disclosed in the SEC Reports or in Schedule 3.1(h), (i) there has
been no event, occurrence or development that, individually or in the
aggregate, has had or that could result in a Material Adverse Effect, (ii) the
Company has not incurred any liabilities (contingent or otherwise) other than
(A) trade payables and accrued expenses incurred in the ordinary course of
business consistent with past practice and (B) liabilities not required to be
reflected in the Company’s financial statements pursuant to GAAP or required to
be disclosed in filings made with the Commission, (iii) the Company has not
altered its method of accounting or the identity of its auditors, except as
disclosed in its SEC Reports, (iv) 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, and (v) the Company has not issued any equity securities to
any officer, director or Affiliate, except pursuant to existing Company
stock-based plans.


 


(i)            Absence of
Litigation.  There is no action,
suit, claim, proceeding, inquiry or investigation before or by any court,
public board, government agency, self-regulatory organization or body pending
or, to the knowledge of the Company, threatened against or affecting the
Company or any of its Subsidiaries that could, individually or in the
aggregate, have a Material Adverse Effect. 
Schedule 3.1(i) contains a complete list and summary
description of any pending or, to the knowledge of the Company, threatened
proceeding against or affecting the Company or any of its Subsidiaries, without
regard to whether it could, individually or in the aggregate, have a Material
Adverse Effect.


 


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(j)            Compliance.  Neither the Company nor any Subsidiary (i)
is 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 Subsidiary under), nor has the Company or any
Subsidiary 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 agreement
or 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) is in
violation of any order of any court, arbitrator or governmental body, or (iii)
is or has been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign, federal,
state and local laws relating to taxes, environmental protection, occupational
health and safety, product quality and safety and employment and labor matters,
except in each case as could not, individually or in the aggregate, have or
result in a Material Adverse Effect.


 


(k)           Title to Assets.  The Company and the Subsidiaries have good
and marketable title in fee simple to all real property owned by them that is
material to the business of the Company and the Subsidiaries and good and
marketable title in all personal property owned by them that is material to the
business of the Company and the Subsidiaries, in each case free and clear of
all Liens, except for Liens as do not materially affect the value of such
property and do not materially interfere with the use made and proposed to be
made of such property by the Company and the Subsidiaries. Any real property
and facilities held under lease by the Company and the Subsidiaries are held by
them under valid, subsisting and enforceable leases of which the Company and
the Subsidiaries are in compliance.


 


(l)            Certain Fees.  Except for the fees payable to Jesup &
Lamont, all of which are payable to registered broker-dealers, no brokerage or
finder’s fees or commissions are or will be payable by the Company to any
broker, financial advisor or consultant, finder, placement agent, investment
banker, bank or other Person with respect to the transactions contemplated by
this Agreement, and the Company has not taken any action that would cause any
Purchaser to be liable for any such fees or commissions.


 


(m)          Private Placement.  Neither the Company nor any Person acting on
the Company’s behalf has sold or offered to sell or solicited any offer to buy
the Securities by means of any form of general solicitation or
advertising.  Neither the Company nor
any of its Affiliates nor any Person acting on the Company’s behalf has,
directly or indirectly, at any time within the past six (6) months, made any
offer or sale of any security or solicitation of any offer to buy any security
under circumstances that would (i) eliminate the availability of the exemption
from registration under Regulation D under the Securities Act in connection
with the offer and sale of the Securities as contemplated hereby or (ii) cause
the offering of the Securities pursuant to the Transaction Documents to be
integrated with prior offerings by the Company for purposes of any applicable
law, regulation or stockholder approval provisions, including, without
limitation, under the rules and regulations of any Trading Market.  The Company is not, and is not an Affiliate
of, an “investment company” within the meaning of the Investment Company Act of
1940, as amended.  The Company is not a
United States real property holding corporation within the meaning of the
Foreign Investment in Real Property Tax Act of 1980.


 


(n)           Form S-3 Eligibility.  The Company is eligible to register its
Common Stock for resale by the Purchasers using Form S-3 promulgated under the
Securities Act.


 


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(o)           Listing and
Maintenance Requirements.  The
Company has not, in the two (2) years preceding the date hereof, received
notice (written or oral) 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, and has no reason to believe that it will not in the
foreseeable future continue to be, in compliance with all such listing and
maintenance requirements.


 


(p)           Registration Rights.  Except as described in Schedule 3.1(p),
the Company has not granted or agreed to grant to any Person any rights
(including “piggy-back” registration rights) to have any securities of the
Company registered with the Commission or any other governmental authority that
have not been satisfied.


 


(q)           Application of
Takeover Protections.  There is no
control share acquisition, business combination, poison pill (including any
distribution under a rights agreement) or other similar anti-takeover provision
under the Company’s charter documents or the laws of its state of incorporation
that is or could become applicable to any of the Purchasers as a result of the
Purchasers and the Company fulfilling their obligations or exercising their
rights under the Transaction Documents, including, without limitation, as a
result of the Company’s issuance of the Securities and the Purchasers’
ownership of the Securities.


 


(r)            Disclosure.  The Company confirms that neither it nor any
other Person acting on its behalf has provided any of the Purchasers or their
agents or counsel with any information that constitutes or might constitute
material, nonpublic information.  The
Company understands and confirms that each of the Purchasers will rely on the
foregoing representations in effecting transactions in securities of the
Company.  All disclosure provided to the
Purchasers regarding the Company, its business and the transactions
contemplated hereby, including the Schedules to this Agreement, furnished by or
on behalf of the Company are true and correct and do not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading. 
No event or circumstance has occurred or information exists with respect
to the Company or any of its Subsidiaries or its or their business, properties,
prospects, operations or financial conditions, which, under applicable law,
rule or regulation, requires public disclosure or announcement by the Company
but which has not been so publicly announced or disclosed.  The Company acknowledges and agrees
that (i) no Purchaser makes or has made any representations or warranties with
respect to the transactions contemplated hereby other than those specifically
set forth in Section 3.2 or (ii) any oral statement,
commitment or promise to the Company or, to its knowledge, any of its
representatives which is or was an inducement to the Company to enter into this
Agreement or otherwise.


 


(s)           Acknowledgment
Regarding Purchasers’ Purchase of Securities.  The Company acknowledges and agrees that each of the Purchasers
is acting solely in the capacity of an arm’s length purchaser with respect to
the Company and to this Agreement and the transactions contemplated
hereby.  The Company further
acknowledges that no Purchaser is acting as a financial advisor or fiduciary of
the Company (or in any similar capacity) with respect to this Agreement and the
transactions contemplated hereby and any advice given by any Purchaser or any
of their respective representatives or agents in connection with this Agreement
and the transactions contemplated hereby is merely incidental to the
Purchasers’ purchase of the


 


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Securities. 
The Company further represents to each Purchaser that the Company’s
decision to enter into this Agreement has been based solely on the independent
evaluation of the transactions contemplated hereby by the Company and its
representatives.


 


(t)            Patents and
Trademarks.  The Company and the
Subsidiaries have, or have rights to use, all patents, patent applications,
trademarks, trademark applications, service marks, trade names, copyrights,
licenses and other similar rights that are necessary or material for use in
connection with their respective businesses as described in the SEC Reports and
which the failure to so have could have a Material Adverse Effect
(collectively, the “Intellectual Property Rights”). Neither the Company nor any Subsidiary has received a
written notice that the Intellectual Property Rights used by the Company or any
Subsidiary violates or infringes upon the rights of any Person. To the
knowledge of the Company, all such Intellectual Property Rights are enforceable
and there is no existing infringement by another Person of any of the
Intellectual Property Rights.


 


(u)           Insurance.  The Company and the Subsidiaries are insured
by insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in
which the Company and the Subsidiaries are engaged.  Neither the Company nor any Subsidiary has any reason to believe
that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as
may be necessary to continue its business without a significant increase in
cost.


 


(v)           Regulatory Permits.  The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the failure
to possess such permits could not, individually or in the aggregate, have or
result in a Material Adverse Effect (“Material Permits”),
and neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any Material Permit.


 


(w)          Transactions With
Affiliates and Employees.  Except as
set forth in SEC Reports or in the Company’s annual report on Form 10-K, none
of the officers or directors of the Company and, to the knowledge of the
Company, none of the employees of the Company is presently a party to any
transaction with the Company or any Subsidiary (other than for services as
employees, officers and directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any officer, director or such employee or, to the knowledge of the
Company, any entity in which any officer, director, or any such employee has a
substantial interest or is an officer, director, trustee or partner.


 


(x)            Solvency.  Based on the financial condition of the
Company as of the Closing Date, (i) the Company’s fair saleable value of its
assets exceeds the amount that will be required to be paid on or in respect of
the Company’s existing debts and other liabilities (including known contingent
liabilities) as they mature; (ii) the Company’s assets do not constitute
unreasonably small capital to carry on its business for the current fiscal year
as now conducted and as proposed to be conducted including its capital needs
taking into account the


 


11

















 


particular capital requirements of the
business conducted by the Company, and projected capital requirements and
capital availability thereof; and (iii) the current cash flow of the Company,
together with the proceeds the Company would receive, were it to liquidate all
of its assets, after taking into account all anticipated uses of the cash,
would be sufficient to pay all amounts on or in respect of its debt when such
amounts are required to be paid.  The
Company does not intend to incur debts beyond its ability to pay such debts as
they mature (taking into account the timing and amounts of cash to be payable
on or in respect of its debt).


 


(y)           Going Concern.  Except as set forth on Schedule 3.1(y),
the Company and the Subsidiaries have no knowledge (upon receipt of the
proceeds of this transaction) that the Company’s independent public accountants
will issue an audit letter containing a “going concern” opinion in connection
with the Company’s annual report on Form 10-K pursuant to Section 13 or
15(d) under the Exchange Act for the fiscal year ended December 31, 2003
or otherwise.


 


(z)            Internal Accounting
Controls.  The Company and the
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management’s general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management’s general or specific authorization, and (iv) the recorded accountability
for assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.


 


3.2           Representations and
Warranties of the Purchasers.  Each
Purchaser hereby, as to itself only and for no other Purchaser, represents and
warrants to the Company as follows:


 


(a)           Organization;
Authority.  Such Purchaser is an
entity duly organized, validly existing and in good standing under the laws of
the jurisdiction of its organization with the requisite corporate or
partnership power and authority to enter into and to consummate the
transactions contemplated by the Transaction Documents and otherwise to carry
out its obligations hereunder and thereunder. 
The purchase by such Purchaser of the Shares and the Warrants hereunder
has been duly authorized by all necessary action on the part of such
Purchaser.  This Agreement has been duly
executed and delivered by such Purchaser and constitutes the valid and binding
obligation of such Purchaser, enforceable against it in accordance with its
terms.


 


(b)           Investment Intent.  Such Purchaser is acquiring the Securities
as principal for investment purposes only and not with a view to or for
distributing or reselling such Securities or any part thereof, without
prejudice, however, to such Purchaser’s right, subject to the provisions of
this Agreement, at all times to sell or otherwise dispose of all or any part of
such Securities pursuant to an effective registration statement under the
Securities Act or under an exemption from such registration and in compliance
with applicable federal and state securities laws.  Nothing contained herein shall be deemed a representation or
warranty by such Purchaser to hold Securities for any period of time.


 


12

















 


(c)           Purchaser Status;
Information.  At the time such
Purchaser was offered the Shares and the Warrants, it was, and at the date
hereof it is, an “accredited investor” as defined in Rule 501(a) under the
Securities Act.  The information provided
by such Purchaser in its Questionnaire (as defined below) is true and correct.


 


(d)           Experience
of such Purchaser.  Such Purchaser,
either alone or together with its representatives has such knowledge,
sophistication and experience in business and financial matters so as to be
capable of evaluating the merits and risks of the prospective investment in the
Securities, and has so evaluated the merits and risks of such investment.  Such Purchaser is able to bear the economic
risk of an investment in the Securities and, at the present time, is able to
afford a complete loss of such investment.


 


(e)           Restriction on Short Sales and Hedging. 
Such Purchaser will not sell, offer to sell, solicit offers to buy,
dispose of, loan, pledge or grant any right with respect to (collectively, a
“Disposition”), the Common Stock in violation of the Securities Act, nor will
such Purchaser engage in any hedging or other transaction which is designed to
or could reasonably be expected to lead to or result in a Disposition of Common
Stock by the Purchaser or any other person or entity in violation of the
Securities Act, in each case other than to the extent such Purchaser has an
offsetting position in or beneficial ownership of the Common Stock.


 


ARTICLE IV


OTHER AGREEMENTS OF THE PARTIES


 


4.1           Transfer
Restrictions.


 


(a)           Securities may only be
disposed of pursuant to an effective registration statement under the
Securities Act or pursuant to an available exemption from the registration
requirements of the Securities Act, and in compliance with any applicable state
securities laws.  In connection with any
transfer of Securities other than pursuant to an effective registration
statement or to the Company or pursuant to Rule 144(k), except as otherwise set
forth herein, the Company may require the transferor to provide to the Company
an opinion of counsel selected by the transferor, the form and substance of
which opinion shall be reasonably satisfactory to the Company, to the effect
that such transfer does not require registration under the Securities Act.  Notwithstanding the foregoing, the Company
hereby consents to and agrees to register on the books of the Company and with
its transfer agent, without any such legal opinion, any transfer of Securities
by a Purchaser to an Affiliate of such Purchaser, provided that the transferee
certifies to the Company that it is an “accredited investor” as defined in Rule
501(a) under the Securities Act.


 


(b)           The Purchasers agree to
the imprinting, so long as is required by this Section 4.1(b), of
the following legend on any certificate evidencing Securities:


 


NEITHER THESE SECURITIES NOR
THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED


 


13

















 


WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS.  NOTWITHSTANDING THE FOREGOING, THESE SECURITIES [AND THE
SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES] MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY SUCH SECURITIES.


 


Certificates evidencing Securities shall not be required to contain
such legend or any other legend (i) while a Registration Statement covering the
resale of such Securities is effective under the Securities Act, or (ii)
following any sale of such Securities pursuant to Rule 144, or (iii) if such
Securities are eligible for sale under Rule 144(k), or (iv) if such legend is
not required under applicable requirements of the Securities Act (including
judicial interpretations and pronouncements issued by the Staff of the Commission).  The Company shall cause its counsel to issue
the legal opinion included in the Transfer Agent Instructions to the Company’s
transfer agent on the Effective Date. 
Following the Effective Date or at such earlier time as a legend is no
longer required for certain Securities, the Company will no later than three
(3) Trading Days following the delivery by a Purchaser to the Company or the
Company’s transfer agent of a legended certificate representing such
Securities, deliver or cause to be delivered to such Purchaser a certificate
representing such Securities that is free from all restrictive and other
legends.  The Company may not make any
notation on its records or give instructions to any transfer agent of the
Company that enlarge the restrictions on transfer set forth in this
Section.  For so long as any Purchaser
owns Securities, the Company will not effect or publicly announce its intention
to effect any exchange, recapitalization or other transaction that effectively
requires or rewards physical delivery of certificates evidencing the Common
Stock.


 


(c)           The
Company acknowledges and agrees that a Purchaser may from time to time pledge
or grant a security interest in some or all of the Securities in connection with a bona fide margin
agreement or other loan or financing arrangement secured by the Securities
and, if required under the terms of such agreement, loan or arrangement, such
Purchaser may transfer pledged or secured Securities to the pledgees or secured
parties.  Such a pledge or transfer would
not be subject to approval of the Company and no legal opinion of the pledgee,
secured party or pledgor shall be required in connection therewith.  Further, no notice shall be required of such
pledge.  At the appropriate Purchaser’s
expense, the Company will execute and deliver such reasonable documentation as
a pledgee or secured party of Securities may reasonably request in connection
with a pledge or transfer of the Securities, including the preparation and
filing of any required prospectus supplement under Rule 424(b)(3) of the
Securities Act or other applicable provision of the Securities Act to
appropriately amend the list of Selling Stockholders thereunder.


 


14

















 


4.2           Furnishing of
Information.  As long as any
Purchaser owns Securities, the Company covenants to timely file (or obtain
extensions in respect thereof and file within the applicable grace period) all
reports required to be filed by the Company after the date hereof pursuant to
the Exchange Act.  Upon the request of
any Purchaser, the Company shall deliver to such Purchaser a written
certification of a duly authorized officer as to whether it has complied with
the preceding sentence. As long as any Purchaser owns Securities, if the
Company is not required to file reports pursuant to such laws, it will prepare
and furnish to the Purchasers and make publicly available in accordance with
paragraph (c) of Rule 144 such information as is required for the Purchasers to
sell the Securities under Rule 144.  The
Company further covenants that it will take such further action as any holder
of Securities may reasonably request to satisfy the provisions of Rule 144
applicable to the issuer of securities relating to transactions for the sale of
securities pursuant to Rule 144.


 


4.3           Integration.  The Company shall not, and shall use its
best efforts to ensure that no Affiliate of the Company shall, sell, offer for
sale or solicit offers to buy or otherwise negotiate in respect of any security
(as defined in Section 2 of the Securities Act) that would be integrated
with the offer or sale of the Securities in a manner that would require the
registration under the Securities Act of the sale of the Securities to the
Purchasers or that would be integrated with the offer or sale of the Securities
for purposes of the rules and regulations of any Trading Market.


 


4.4           Reservation of
Securities.  The Company shall
maintain a reserve from its duly authorized shares of Common Stock for issuance
pursuant to the Transaction Documents in such amount as may be required to
fulfill its obligations in full under the Transaction Documents.  In the event that at any time the then
authorized shares of Common Stock are insufficient for the Company to satisfy
its obligations in full under the Transaction Documents, the Company shall
promptly take such actions as may be required to increase the number of
authorized shares.


 


4.5           Subsequent
Placements.


 


(a)           Except with respect to
the Excluded Stock, from the date hereof until the Effective Date, the Company
will not, directly or indirectly, offer, sell, grant any option to purchase, or
otherwise dispose of (or announce any offer, sale, grant or any option to
purchase or other disposition of) any of its or the Subsidiaries’ equity or
equity equivalent securities, including without limitation any debt, preferred
stock or other instrument or security that is, at any time during its life and
under any circumstances, convertible into or exchangeable or exercisable for
Common Stock or Common Stock Equivalents (any such offer, sale, grant,
disposition or announcement being referred to as a “Subsequent Placement”).


 


(b)           From the Effective Date
until the one year anniversary thereof, the Company will not, directly or
indirectly, effect any Subsequent Placement unless the Company shall have first
complied with this Section 4.5(b).


 


(i)            The Company shall
deliver to each Purchaser a written notice (the “Offer”) of any proposed or intended issuance or
sale or exchange of the securities being offered (the “Offered Securities”) in a Subsequent Placement, which Offer
shall (w) identify and describe the Offered Securities, (x) describe the price
and other terms upon which they are to be issued, sold or exchanged, and the
number or amount of the Offered


 


15

















 


Securities to be issued, sold
or exchanged, (y) identify the Persons or entities to which or with which the
Offered Securities are to be offered, issued, sold or exchanged and (z) offer
to issue and sell to or exchange with each Purchaser (A) a pro rata portion of
the greater of (1) all of the Offered Securities but not exceeding $10 million
of such Offered Securities and (2) 50% of the Offered Securities, based on such
Purchaser’s pro rata portion of the aggregate purchase price paid by the
Purchasers for all of the Shares purchased hereunder (the “Basic Amount”), and (B) with respect to each Purchaser
that elects to purchase its Basic Amount, any additional portion of the Offered
Securities attributable to the Basic Amounts of other Purchasers as such
Purchaser shall indicate it will purchase or acquire should the other
Purchasers subscribe for less than their Basic Amounts (the “Undersubscription Amount”).


 


(ii)                                  To
accept an Offer, in whole or in part, a Purchaser must deliver a written notice
to the Company prior to the end of the ten (10) Trading Day period of the
Offer, setting forth the portion of the Purchaser’s Basic Amount that such
Purchaser elects to purchase and, if such Purchaser shall elect to purchase all
of its Basic Amount, the Undersubscription Amount, if any, that such Purchaser
elects to purchase (in either case, the “Notice of Acceptance”).  If the Basic Amounts subscribed for by all
Purchasers are less than the total of all of the Basic Amounts, then each
Purchaser who has set forth an Undersubcription Amount in its Notice of
Acceptance shall be entitled to purchase, in addition to the Basic Amounts
subscribed for, the Undersubscription Amount it has subscribed for; provided,
however, that if the Undersubscription Amounts subscribed for exceed the
difference between the total of all the Basic Amounts and the Basic Amounts
subscribed for (the “Available Undersubscription Amount”), each Purchaser who has subscribed for any
Undersubscription Amount shall be entitled to purchase on that portion of the
Available Undersubscription Amount as the Basic Amount of such Purchaser bears
to the total Basic Amounts of all Purchasers that have subscribed for
Undersubscription Amounts, subject to rounding by the Board of Directors to the
extent its deems reasonably necessary.


 


(iii)                               The
Company shall have five (5) Trading Days from the expiration of the period set
forth in Section 4.5(b)(ii) above to issue, sell or exchange all or
any part of such Offered Securities as to which a Notice of Acceptance has not
been given by the Purchasers (the “Refused Securities”),
but only to the offerees described in the Offer and only upon terms and
conditions (including, without limitation, unit prices and interest rates) that
are not more favorable to the acquiring Person or Persons or less favorable to
the Company than those set forth in the Offer.


 


(iv)                              In
the event the Company shall propose to sell less than all the Refused
Securities (any such sale to be in the manner and on the terms specified in Section 4.5(b)(iii)
above), then each Purchaser may, at its sole option and in its sole discretion,
reduce the number or amount of the Offered Securities specified in its Notice
of Acceptance to an amount that shall be not less than the number or amount of
the Offered Securities that the Purchaser elected to purchase pursuant to Section 4.5(b)(ii)
above multiplied by a fraction, (i) the numerator of which shall be the number
or amount of Offered Securities the Company actually proposes to issue, sell or
exchange (including Offered Securities to be issued or sold to Purchasers
pursuant to Section 4.5(b)(ii) above


 


16

















 


prior to such reduction) and
(ii) the denominator of which shall be the original amount of the Offered
Securities.  In the event that any
Purchaser so elects to reduce the number or amount of Offered Securities
specified in its Notice of Acceptance, the Company may not issue, sell or exchange
more than the reduced number or amount of the Offered Securities unless and
until such securities have again been offered to the Purchasers in accordance
with Section 4.5(b)(i) above.


 


(v)           Upon the closing of the
issuance, sale or exchange of all or less than all of the Refused Securities,
the Purchasers shall acquire from the Company, and the Company shall issue to
the Purchasers, the number or amount of Offered Securities specified in the
Notices of Acceptance, as reduced pursuant to Section 4.5(b)(iv)
above if the Purchasers have so elected, upon the terms and conditions
specified in the Offer.  The purchase by
the Purchasers of any Offered Securities is subject in all cases to the
preparation, execution and delivery by the Company and the Purchasers of a
purchase agreement relating to such Offered Securities reasonably satisfactory
in form and substance to the Purchasers and their respective counsel.


 


(vi)          Any Offered Securities
not acquired by the Purchasers or other persons in accordance with Section 4.5(b)(iii)
above may not be issued, sold or exchanged until they are again offered to the
Purchasers under the procedures specified in this Agreement.


 


(c)           The restrictions
contained in this Section 4.5 shall not apply to Excluded Stock.


 


4.6                                 Securities
Laws Disclosure; Publicity.  The Company
shall, on or before 8:30 a.m., New York City time, on April 2, 2004, issue
a press release acceptable to the Purchasers disclosing all material terms of
the transactions contemplated hereby. 
On the Closing Date, the Company shall file a Current Report on Form 8-K
with the Commission (the “8-K Filing”)
describing the terms of the transactions contemplated by the Transaction
Documents and including as exhibits to such Current Report on Form 8-K this
Agreement and the form of the Warrants, in the form required by the Exchange
Act.  Thereafter, the Company shall
timely file any filings and notices required by the Commission or applicable
law with respect to the transactions contemplated hereby and provide copies thereof
to the Purchasers promptly after filing. 
Except with respect to the 8-K Filing (a copy of which will be provided
to the Purchasers for their review as early as practicable prior to its
filing), the  Company shall, at least
two (2) Trading Days prior to the filing or dissemination of any disclosure
required by this paragraph, provide a copy thereof to the Purchasers for their
review.  The Company and the Purchasers
shall consult with each other in issuing any press releases or otherwise making
public statements or filings and other communications with the Commission or
any regulatory agency or Trading Market with respect to the transactions
contemplated hereby, and neither party shall issue any such press release or
otherwise make any such public statement, filing or other communication without
the prior consent of the other, except if such disclosure is required by law,
in which case the disclosing party shall promptly provide the other party with
prior notice of such public statement, filing or other communication.  Notwithstanding the foregoing, the Company
shall not publicly disclose the name of any Purchaser, or include the name of
any Purchaser in any filing with the Commission or any regulatory agency or
Trading Market, without the prior written


 


17

















 


consent of such Purchaser, except to the
extent such disclosure (but not any disclosure as to the controlling Persons
thereof) is required by law or Trading Market regulations, in which case the
Company shall provide the Purchasers with prior notice of such disclosure.  The Company shall not, and shall cause each
of its Subsidiaries and its and each of their respective officers, directors,
employees and agents not to, provide any Purchaser with any material nonpublic
information regarding the Company or any of its Subsidiaries from and after the
filing of the 8-K Filing without the express written consent of such
Purchaser.  In the event of a breach of
the foregoing covenant by the Company, any of its Subsidiaries, or any of its
or their respective officers, directors, employees and agents, in addition to
any other remedy provided herein or in the Transaction Documents, a Purchaser
shall have the right to make a public disclosure, in the form of a press
release, public advertisement or otherwise, of such material nonpublic
information without the prior approval by the Company, its Subsidiaries, or any
of its or their respective officers, directors, employees or agents.  No Purchaser shall have any liability to the
Company, its Subsidiaries, or any of its or their respective officers,
directors, employees, shareholders or agents for any such disclosure.  Subject to the foregoing, neither the
Company nor any Purchaser shall issue any press releases or any other public
statements with respect to the transactions contemplated hereby; provided,
however, that the Company shall be entitled, without the prior approval of any
Purchaser, to make any press release or other public disclosure with respect to
such transactions (i) in substantial conformity with the 8-K Filing and
contemporaneously therewith and (ii) as is required by applicable law and
regulations (provided that in the case of clause (i) each Purchaser shall be
consulted by the Company in connection with any such press release or other
public disclosure prior to its release). 
Each press release disseminated during the twelve (12) months preceding
the date of this Agreement did not at the time of release contain any untrue
statement of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.


 


4.7           Use of Proceeds.  The Company shall use the net proceeds from
the sale of the Securities hereunder for working capital purposes.


 


4.8           Reimbursement.  If any Purchaser or any of its Affiliates or
any officer, director, partner, controlling Person, employee or agent of a
Purchaser or any of its Affiliates (a “Related Person”)
becomes involved in any capacity in any Proceeding brought by or against any
Person in connection with or as a result of the transactions contemplated by
the Transaction Documents, the Company will indemnify and hold harmless such
Purchaser or Related Person for its reasonable legal and other expenses
(including the costs of any investigation, preparation and travel) and for any
Losses incurred in connection therewith, as such expenses or Losses are
incurred, excluding only Losses that result directly from such Purchaser’s or
Related Person’s gross negligence or willful misconduct.  In addition, the Company shall indemnify and
hold harmless each Purchaser and Related Person from and against any and all
Losses, as incurred, arising out of or relating to any breach by the Company of
any of the representations, warranties or covenants made by the Company in this
Agreement or any other Transaction Document, or any allegation by a third party
that, if true, would constitute such a breach. 
The conduct of any Proceedings for which indemnification is available
under this paragraph shall be governed by Section 6.4(c)
below.  The indemnification obligations
of the Company under this paragraph shall be in addition to any liability that
the Company may otherwise have and shall be binding upon and inure to the benefit
of any successors, assigns, heirs and personal representatives of the


 


18

















 


Purchasers and any such Related Persons.  The Company also agrees that neither the
Purchasers nor any Related Persons shall have any liability to the Company or
any Person asserting claims on behalf of or in right of the Company in
connection with or as a result of the transactions contemplated by the
Transaction Documents, except to the extent that any Losses incurred by the Company
result from the gross negligence or willful misconduct of the applicable
Purchaser or Related Person in connection with such transactions.  If the Company breaches its obligations under
any Transaction Document, then, in addition to any other liabilities the
Company may have under any Transaction Document or applicable law, the Company
shall pay or reimburse the Purchasers on demand for all costs of collection and
enforcement (including reasonable attorneys fees and expenses).  Without limiting the generality of the
foregoing, the Company specifically agrees to reimburse the Purchasers on
demand for all costs of enforcing the indemnification obligations in this
paragraph.


 


ARTICLE V


CONDITIONS


 


5.1           Conditions Precedent
to the Obligations of the Purchasers. 
The obligation of each Purchaser to acquire Securities at the Closing is
subject to the satisfaction or waiver by such Purchaser, at or before the
Closing, of each of the following conditions:


 


(a)           Representations and
Warranties.  The representations and
warranties of the Company contained herein shall be true and correct in all
material respects as of the date when made and as of the Closing as though made
on and as of such date; and


 


(b)           Performance.  The Company and each other Purchaser shall
have performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by the Transaction Documents to
be performed, satisfied or complied with by it at or prior to the Closing.


 


5.2           Conditions Precedent
to the Obligations of the Company. 
The obligation of the Company to sell Securities at the Closing is
subject to the satisfaction or waiver by the Company, at or before the Closing,
of each of the following conditions:


 


(a)           Representations and
Warranties.  The representations and
warranties of the Purchasers contained herein shall be true and correct in all
material respects as of the date when made and as of the Closing Date as though
made on and as of such date; and


 


(b)           Performance.  The Purchasers shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by the Transaction Documents to be performed, satisfied
or complied with by the Purchasers at or prior to the Closing.


 


19

















 


ARTICLE VI


REGISTRATION RIGHTS


 


6.1           Shelf Registration


 


(a)           As promptly as
possible, and in any event on or prior to the Filing Date, the Company shall
prepare and file with the Commission a “Shelf” Registration Statement covering
the resale of all Registrable Securities for an offering to be made on a
continuous basis pursuant to Rule 415. 
The Registration Statement shall be on Form S-3 (except if the Company
is not then eligible to register for resale the Registrable Securities on Form
S-3, in which case such registration shall be on another appropriate form in
accordance herewith as the Purchasers may consent) and shall contain (except if
otherwise directed by the Purchasers) the “Plan of Distribution” attached
hereto as Exhibit B.


 


(b)           The Company shall use
its best efforts to cause the Registration Statement to be declared effective
by the Commission as promptly as possible after the filing thereof, but in any
event prior to the Required Effectiveness Date, and shall use its best efforts
to keep the Registration Statement continuously effective under the Securities
Act until the fifth anniversary of the Effective Date or such earlier date when
all Registrable Securities covered by such Registration Statement have been
sold publicly (the “Effectiveness Period”).


 


(c)           The Company shall
notify each Purchaser in writing promptly (and in any event within one (1)
Business Day) after receiving notification from the Commission that the
Registration Statement has been declared effective.


 


(d)           Upon the occurrence of
any Event (as defined below) and on every monthly anniversary thereof until the
applicable Event is cured, as partial relief for the damages suffered therefrom
by the Purchasers (which remedy shall not be exclusive of any other remedies
available under this Agreement, at law or in equity), the Company shall pay to
each Purchaser an amount in cash, as liquidated damages and not as a penalty,
equal to 1% of the aggregate purchase price paid by such Purchaser hereunder
for the first month and 1% for each month thereafter, prorated for any partial
month.  The payments to which a Purchaser shall be entitled pursuant to this Section 6.1(d)
are referred to herein as “Event Payments”.  Any Event Payments payable pursuant to the
terms hereof shall apply on a pro-rata basis for any portion of a month prior
to the cure of an Event.   In the event the Company fails to
make Event Payments in a timely manner, such Event Payments shall bear interest
at the rate of 1% per month (prorated for partial months) until paid in full.


 


For such purposes, each of the following shall constitute an “Event”:


 


(i)            the Registration
Statement is not filed on or prior to the Filing Date or is not declared
effective on or prior to the Required Effectiveness Date;


 


(ii)           after the Effective
Date, a Purchaser is not permitted to sell Registrable Securities under the
Registration Statement (or a subsequent Registration Statement filed in
replacement thereof) for any reason for five (5) or more Trading Days (whether or
not consecutive);


 


20

















 


(iii)                               after
the Effective Date, any Registrable Securities covered by such Registration
Statement are not listed on an Eligible Market;


 


(iv)                              the
Common Stock is not listed or quoted, or is suspended from trading, on an
Eligible Market for a period of three (3) Trading Days (which need not be
consecutive Trading Days);


 


(v)                                 the
Company fails for any reason to deliver a certificate evidencing any Securities
to a Purchaser within three (3) Trading Days after delivery of such certificate
is required pursuant to any Transaction Document or the exercise rights of the
Purchasers pursuant to the Transaction Documents are otherwise suspended for
any reason; or


 


(vi)                              the
Company fails to have available a sufficient number of authorized but unissued
and otherwise unreserved shares of Common Stock available to issue Underlying
Shares upon any exercise of the Warrants or, at any time following the
Effective Date, any Shares or Underlying Shares are not listed on an Eligible
Market.


 


(e)                                  The Company shall
not, prior to the Effective Date of the Registration Statement, prepare and
file with the Commission a registration statement relating to an offering for
its own account or the account of others under the Securities Act of any of its
equity securities.


 


6.2                                 Registration
Procedures.  In connection with the
Company’s registration obligations hereunder, the Company shall:


 


(a)                                  Not less than three
(3) Trading Days prior to the filing of a Registration Statement or any related
Prospectus or any amendment or supplement thereto (including any document that
would be incorporated or deemed to be incorporated therein by reference), the
Company shall (i) furnish to the counsel designated by any Purchaser (each, a “Purchaser Counsel”, and Vertical Ventures,
L.L.C. has initially designated Proskauer Rose LLP “LP Counsel”) copies of all such documents proposed to be
filed, which documents (other than those incorporated or deemed to be
incorporated by reference) will be subject to the review of such Purchaser
Counsel, and (ii) cause its officers and directors, counsel and independent
certified public accountants to respond to such inquiries as shall be
necessary, in the reasonable opinion of respective counsel, to conduct a
reasonable investigation within the meaning of the Securities Act.  The Company shall not file a Registration
Statement or any such Prospectus or any amendments or supplements thereto to
which Purchasers holding a majority of the Registrable Securities shall
reasonably object.


 


(b)                                 (i) Prepare and file
with the Commission such amendments, including post-effective amendments, to
each Registration Statement and the Prospectus used in connection therewith as
may be necessary to keep the Registration Statement continuously effective as
to the applicable Registrable Securities for the Effectiveness Period and
prepare and file with the Commission such additional Registration Statements in
order to register for resale under the Securities Act all of the Registrable
Securities; (ii) cause the related Prospectus to be amended or supplemented by
any required Prospectus supplement, and as so supplemented or 


 


21

















 


amended to be filed pursuant to Rule 424; (iii) respond as promptly as
reasonably possible, and in any event within ten (10) days, to any comments
received from the Commission with respect to the Registration Statement or any
amendment thereto and as promptly as reasonably possible provide the Purchaser Counsel
true and complete copies of all correspondence from and to the Commission
relating to the Registration Statement; and (iv) comply in all material
respects with the provisions of the Securities Act and the Exchange Act with
respect to the disposition of all Registrable Securities covered by the
Registration Statement during the applicable period in accordance with the
intended methods of disposition by the Purchasers thereof set forth in the
Registration Statement as so amended or in such Prospectus as so supplemented


 


(c)                                  Notify the Purchasers
of Registrable Securities as promptly as reasonably possible, and (if requested
by any such Person) confirm such notice in writing no later than one (1)
Trading Day thereafter, of any of the following events: (i) the Commission
notifies the Company whether there will be a “review” of any Registration
Statement; (ii) the Commission comments in writing on any Registration
Statement (in which case the Company shall deliver to each Purchaser a copy of
such comments and of all written responses thereto); (iii) any Registration
Statement or any post-effective amendment is declared effective; (iv) the
Commission or any other Federal or state governmental authority requests any
amendment or supplement to any Registration Statement or Prospectus or requests
additional information related thereto; (v) the Commission issues any stop
order suspending the effectiveness of any Registration Statement or initiates
any Proceedings for that purpose; (vi) the Company receives notice of any
suspension of the qualification or exemption from qualification of any
Registrable Securities for sale in any jurisdiction, or the initiation or
threat of any Proceeding for such purpose; or (vii) the financial statements
included in any Registration Statement become ineligible for inclusion therein
or any statement made in any Registration Statement or Prospectus or any
document incorporated or deemed to be incorporated therein by reference is
untrue in any material respect or any revision to a Registration Statement,
Prospectus or other document is required so that it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.


 


(d)                                 Use its best efforts
to avoid the issuance of or, if issued, obtain the withdrawal of (i) any order
suspending the effectiveness of any Registration Statement, or (ii) any
suspension of the qualification (or exemption from qualification) of any of the
Registrable Securities for sale in any jurisdiction, as soon as possible.


 


(e)                                  Furnish to each
Purchaser and Purchaser Counsel, without charge, at least one (1) conformed
copy of each Registration Statement and each amendment thereto, including
financial statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent requested by
such Person (including those previously furnished or incorporated by reference)
promptly after the filing of such documents with the Commission.


 


(f)                                    Promptly deliver to
each Purchaser and Purchaser Counsel, without charge, as many copies of the
Prospectus or Prospectuses (including each form of prospectus) and each
amendment or supplement thereto as such Persons may reasonably request.  The Company hereby consents to the use of
such Prospectus and each amendment or supplement 


 


22

















 


thereto by each of the selling Purchasers in connection with the
offering and sale of the Registrable Securities covered by such Prospectus and
any amendment or supplement thereto.


 


(g)                                 (i) In the time and
manner required by each Trading Market, prepare and file with such Trading
Market an additional shares listing application covering all of the Registrable
Securities; (ii) take all steps necessary to cause such Registrable Securities
to be approved for listing on each Trading Market as soon as possible
thereafter; (iii) provide to the Purchasers evidence of such listing; and (iv)
maintain the listing of such Registrable Securities on each such Trading Market
or another Eligible Market.


 


(h)                                 Prior to any public
offering of Registrable Securities, use its best efforts to register or qualify
or cooperate with the selling Purchasers and Purchaser Counsel in connection
with the registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions within the United States as
any Purchaser requests in writing, to keep each such registration or
qualification (or exemption therefrom) effective during the Effectiveness
Period and to do any and all other acts or things necessary or advisable to
enable the disposition in such jurisdictions of the Registrable Securities
covered by a Registration Statement.


 


(i)                                     Cooperate with the
Purchasers to facilitate the timely preparation and delivery of certificates
representing Registrable Securities to be delivered to a transferee pursuant to
a Registration Statement, which certificates shall be free, to the extent
permitted by this Agreement, of all restrictive legends, and to enable such
Registrable Securities to be in such denominations and registered in such names
as any such Purchasers may request.


 


(j)                                     Upon the
occurrence of any event described in Section 6.2(c)(vii), as
promptly as reasonably possible, prepare a supplement or amendment, including a
post-effective amendment, to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither the Registration Statement nor such Prospectus
will contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.


 


(k)                                  Cooperate with any
due diligence investigation undertaken by the Purchasers in connection with the
sale of Registrable Securities, including, without limitation, by making
available any documents and information; provided that the Company will not deliver
or make available to any Purchaser material, nonpublic information unless such
Purchaser specifically requests in advance to receive material, nonpublic
information in writing.


 


(l)                                     Comply with all
applicable rules and regulations of the Commission.


 


In connection with the registration of the Registrable Securities, it
shall be a condition precedent to the obligations of the Company to complete
the registration pursuant to this Agreement with respect to the Registrable
Securities of a particular Purchaser (or to make any payments or other damages
to such Purchaser  pursuant to
Section 6.1) that such Purchaser shall furnish to the 


 


23

















 


Company the Selling Stockholder Questionnaire set forth on Exhibit D
hereto (the “Questionnaire”).


 


6.3                                 Registration
Expenses.  The Company shall pay (or
reimburse the Purchasers for) all fees and expenses incident to the performance
of or compliance with this Agreement by the Company, including without
limitation (a) all registration and filing fees and expenses, including without
limitation those related to filings with the Commission, any Trading Market and
in connection with applicable state securities or Blue Sky laws, (b) printing
expenses (including without limitation expenses of printing certificates for
Registrable Securities and of printing prospectuses requested by the
Purchasers), (c) messenger, telephone and delivery expenses, (d) fees and
disbursements of counsel for the Company and up to $10,000 in the aggregate for
the Purchaser Counsel for the Purchasers, (e) fees and expenses of all other
Persons retained by the Company in connection with the consummation of the
transactions contemplated by this Agreement, and (f) all listing fees to be
paid by the Company to the Trading Market.


 


6.4                                 Indemnification


 


(a)                                  Indemnification by
the Company.  The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Purchaser, the officers, directors, partners, members, agents, brokers (including
brokers who offer and sell Registrable Securities as principal as a result of a
pledge or any failure to perform under a margin call of Common Stock),
investment advisors and employees of each of them, each Person who controls any
such Purchaser (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) and the officers, directors, partners,
members, agents and employees of each such controlling Person, to the fullest
extent permitted by applicable law, from and against any and all Losses, as
incurred, arising out of or relating to any untrue or alleged untrue statement
of a material fact contained in the Registration Statement, any Prospectus or
any form of prospectus or in any amendment or supplement thereto or in any
preliminary prospectus, or arising out of or relating to any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein (in the case of any Prospectus or form of
prospectus or supplement thereto, in the light of the circumstances under which
they were made) not misleading, except to the extent, but only to the extent,
that (i) such untrue statements, alleged untrue statements, omissions or
alleged omissions are based solely upon information regarding such Purchaser
furnished in writing to the Company by such Purchaser expressly for use
therein, or to the extent that such information relates to such Purchaser or
such Purchaser’s proposed method of distribution of Registrable Securities and was
reviewed and expressly approved in writing by such Purchaser expressly for use
in the Registration Statement, such Prospectus or such form of Prospectus or in
any amendment or supplement thereto or (ii) in the case of an occurrence of an
event of the type specified in Section 6.2(c)(v)-(vii), the use by
such Purchaser of an outdated or defective Prospectus after the Company has
notified such Purchaser in writing that the Prospectus is outdated or defective
and prior to the receipt by such Purchaser of the Advice contemplated in Section 6.5.  The Company shall notify the Purchasers
promptly of the institution, threat or assertion of any Proceeding of which the
Company is aware in connection with the transactions contemplated by this
Agreement.


 


(b)                                 Indemnification by
Purchasers. Each Purchaser shall, severally and not jointly, indemnify and
hold harmless the Company, its directors, officers, agents and employees, 


 


24

















 


each Person who controls the Company (within the meaning of
Section 15 of the Securities Act and Section 20 of the Exchange Act),
and the directors, officers, agents or employees of such controlling Persons,
to the fullest extent permitted by applicable law, from and against all Losses
(as determined by a court of competent jurisdiction in a final judgment not
subject to appeal or review) arising solely out of any untrue statement of a
material fact contained in the Registration Statement, any Prospectus, or any
form of prospectus, or in any amendment or supplement thereto, or arising
solely out of any omission of a material fact required to be stated therein or
necessary to make the statements therein (in the case of any Prospectus or form
of prospectus or supplement thereto, in the light of the circumstances under
which they were made) not misleading to the extent, but only to the extent,
that such untrue statement or omission is contained in any information so
furnished in writing by such Purchaser to the Company specifically for
inclusion in such Registration Statement or such Prospectus or to the extent
that (i) such untrue statements or omissions are based solely upon information
regarding such Purchaser furnished in writing to the Company by such Purchaser
expressly for use therein, or to the extent that such information relates to
such Purchaser or such Purchaser’s proposed method of distribution of
Registrable Securities and was reviewed and expressly approved in writing by
such Purchaser expressly for use in the Registration Statement, such Prospectus
or such form of Prospectus or in any amendment or supplement thereto or (ii) in
the case of an occurrence of an event of the type specified in Section 6.2(c)(v)-(vii),
the use by such Purchaser of an outdated or defective Prospectus after the Company
has notified such Purchaser in writing that the Prospectus is outdated or
defective and prior to the receipt by such Purchaser of the Advice contemplated
in Section 6.5.  In no event
shall the liability of any selling Purchaser hereunder be greater in amount
than the dollar amount of the net proceeds received by such Purchaser upon the
sale of the Registrable Securities giving rise to such indemnification
obligation.


 


(c)                                  Conduct of
Indemnification Proceedings. If any Proceeding shall be brought or asserted
against any Person entitled to indemnity hereunder (an “Indemnified
Party”), such Indemnified Party shall promptly notify the Person
from whom indemnity is sought (the “Indemnifying Party”)
in writing, and the Indemnifying Party shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to the Indemnified
Party and the payment of all fees and expenses incurred in connection with
defense thereof; provided, that the failure of any Indemnified Party to give
such notice shall not relieve the Indemnifying Party of its obligations or
liabilities pursuant to this Agreement, except (and only) to the extent that it
shall be finally determined by a court of competent jurisdiction (which
determination is not subject to appeal or further review) that such failure
shall have proximately and materially adversely prejudiced the Indemnifying
Party.


 


An Indemnified Party shall have the right to employ separate counsel in
any such Proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Party or
Parties unless:  (i) the Indemnifying
Party has agreed in writing to pay such fees and expenses; or (ii) the
Indemnifying Party shall have failed promptly to assume the defense of such
Proceeding and to employ counsel reasonably satisfactory to such Indemnified
Party in any such Proceeding; or (iii) the named parties to any such Proceeding
(including any impleaded parties) include both such Indemnified Party and the
Indemnifying Party, and such Indemnified Party shall have been advised by
counsel that a conflict of interest is likely to exist if the same counsel were
to represent such Indemnified Party and the Indemnifying Party (in which case,
if such Indemnified Party notifies the Indemnifying 


 


25

















 


Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party).  The
Indemnifying Party shall not be liable for any settlement of any such
Proceeding effected without its written consent, which consent shall not be
unreasonably withheld.  No Indemnifying
Party shall, without the prior written consent of the Indemnified Party, effect
any settlement of any pending Proceeding in respect of which any Indemnified
Party is a party, unless such settlement includes an unconditional release of
such Indemnified Party from all liability on claims that are the subject matter
of such Proceeding.


 


All fees and expenses of the Indemnified Party (including reasonable
fees and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within ten (10)
Trading Days of written notice thereof to the Indemnifying Party (regardless of
whether it is ultimately determined that an Indemnified Party is not entitled
to indemnification hereunder; provided, that the Indemnifying Party may require
such Indemnified Party to undertake to reimburse all such fees and expenses to
the extent it is finally judicially determined that such Indemnified Party is
not entitled to indemnification hereunder).


 


(d)                                 Contribution.  If a claim for indemnification under Section 6.4(a)
or (b) is unavailable to an Indemnified Party (by reason of public
policy or otherwise), then each Indemnifying Party, in lieu of indemnifying
such Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable
considerations.  The relative fault of
such Indemnifying Party and Indemnified Party shall be determined by reference
to, among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission of
a material fact, has been taken or made by, or relates to information supplied
by, such Indemnifying Party or Indemnified Party, and the parties’ relative
intent, knowledge, access to information and opportunity to correct or prevent
such action, statement or omission.  The
amount paid or payable by a party as a result of any Losses shall be deemed to
include, subject to the limitations set forth in Section 6.4(c),
any reasonable attorneys’ or other reasonable fees or expenses incurred by such
party in connection with any Proceeding to the extent such party would have
been indemnified for such fees or expenses if the indemnification provided for
in this Section was available to such party in accordance with its terms.


 


The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6.4(d) were determined by pro
rata allocation or by any other method of allocation that does not take into
account the equitable considerations referred to in the immediately preceding
paragraph.  Notwithstanding the
provisions of this Section 6.4(d), no Purchaser shall be required
to contribute, in the aggregate, any amount in excess of the amount by which
the proceeds actually received by such Purchaser from the sale of the
Registrable Securities subject to the Proceeding exceeds the amount of any
damages that such Purchaser has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission.  No Person guilty of fraudulent
misrepresentation (within the meaning of 


 


26

















 


Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.


 


The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may
have to the Indemnified Parties.


 


6.5                                 Dispositions.  Each Purchaser agrees that it will comply
with the prospectus delivery requirements of the Securities Act as applicable
to it in connection with sales of Registrable Securities pursuant to the
Registration Statement.  Each Purchaser
further agrees that, upon receipt of a notice from the Company of the
occurrence of any event of the kind described in Sections 6.2(c)(v), (vi)
or (vii), such Purchaser will discontinue disposition of such
Registrable Securities under the Registration Statement until such Purchaser’s
receipt of the copies of the supplemented Prospectus and/or amended
Registration Statement contemplated by Section 6.2(j), or until it
is advised in writing (the “Advice”) by
the Company that the use of the applicable Prospectus may be resumed, and, in
either case, has received copies of any additional or supplemental filings that
are incorporated or deemed to be incorporated by reference in such Prospectus
or Registration Statement.  The Company
may provide appropriate stop orders to enforce the provisions of this
paragraph.


 


6.6                                 No Piggyback on
Registrations.  Neither the Company
nor any of its security holders (other than the Purchasers in such capacity
pursuant hereto and the holders of shares issued in connection with the
acquisition by the Company of Public Safety Group, Inc. and the Shaar Group
Ltd.) may include securities of the Company in the Registration Statement other
than the Registrable Securities, and the Company shall not after the date
hereof enter into any agreement providing any such right to any of its security
holders.


 


6.7                                 Piggy-Back
Registrations.  If at any time
during the Effectiveness Period there is not an effective Registration
Statement covering all of the Registrable Securities and the Company shall
determine to prepare and file with the Commission a registration statement
relating to an offering for its own account or the account of others under the
Securities Act of any of its equity securities, other than on Form S-4 or Form
S-8 (each as promulgated under the Securities Act) or their then equivalents
relating to equity securities to be issued solely in connection with any
acquisition of any entity or business or equity securities issuable in
connection with stock option or other employee benefit plans, then the Company
shall send to each Purchaser written notice of such determination and if,
within fifteen days after receipt of such notice, any such Purchaser shall so
request in writing, the Company shall include in such registration statement
all or any part of such Registrable Securities such Purchaser requests to be
registered.


 


ARTICLE VII


MISCELLANEOUS


 


7.1                                 Termination.  This Agreement may be terminated by the
Company or any Purchaser, by written notice to the other parties, if the
Closing has not been consummated by the third Business Day following the date
of this Agreement; provided that no such termination will affect the right of
any party to sue for any breach by the other party (or parties).


 


27

















 


7.2                                 Fees and Expenses.  At the Closing, the Company shall pay to
Vertical Ventures, LLC an aggregate of $30,000 for their legal fees and
expenses incurred in connection with its due diligence and the preparation and
negotiation of the Transaction Documents. 
In lieu of the foregoing payment, Vertical Ventures, LLC may retain such
amount at the Closing.  Except as
expressly set forth in the Transaction Documents to the contrary, each party
shall pay the fees and expenses of its advisers, counsel, accountants and other
experts, if any, and all other expenses incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of this
Agreement.  The Company shall pay all
transfer agent fees, stamp taxes and other taxes and duties levied in
connection with the issuance of the Securities.


 


7.3                                 Entire Agreement.  The Transaction Documents, together with the
Exhibits and Schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements
and understandings, oral or written, with respect to such matters, which the
parties acknowledge have been merged into such documents, exhibits and
schedules.  At or after the Closing, and
without further consideration, the Company will execute and deliver to the
Purchasers such further documents as may be reasonably requested in order to
give practical effect to the intention of the parties under the Transaction
Documents. Notwithstanding anything to the contrary herein, Securities may be
assigned to any Person in connection with a bona fide margin account or other
loan or financing arrangement secured by such Company Securities.


 


7.4                                 Notices.  Any and all notices or other communications
or deliveries required or permitted to be provided hereunder shall be in
writing and shall be deemed given and effective on the earliest of (a) the date
of transmission, if such notice or communication is delivered via facsimile at
the facsimile number specified in this Section prior to 6:30 p.m. (New
York City time) on a Trading Day, (b) the next Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section on a day that is not a Trading
Day or later than 6:30 p.m. (New York City time) on any Trading Day, (c) the
Trading Day following the date of deposit with a nationally recognized
overnight courier service, or (d) upon actual receipt by the party to whom such
notice is required to be given.  The
addresses and facsimile numbers for such notices and communications are those
set forth on the signature pages hereof, or such other address or facsimile
number as may be designated in writing hereafter, in the same manner, by any such
Person.


 


7.5                                 Amendments; 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 Purchasers collectively purchasing at least 51% of the
Shares or, in the case of a waiver, by the party against whom enforcement of
any such waiver 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 either party to exercise
any right hereunder in any manner impair the exercise of any such right.  Notwithstanding the foregoing, a waiver or
consent to depart from the provisions hereof with respect to a matter that
relates exclusively to the rights of Purchasers under Article VI
and that does not directly or indirectly affect the rights of other Purchasers
may be given by Purchasers holding at least a majority of the Registrable
Securities to which such waiver or consent relates.


 


28

















 


7.6                                 Construction.  The headings herein are for convenience
only, do not constitute a part of this Agreement and shall not be deemed to
limit or affect any of the provisions hereof. 
The language used in this Agreement will be deemed to be the language
chosen by the parties to express their mutual intent, and no rules of strict
construction will be applied against any party.


 


7.7                                 Successors and
Assigns.  This Agreement shall be
binding upon and inure to the benefit of the parties and their successors and
permitted assigns.  The Company may not
assign this Agreement or any rights or obligations hereunder without the prior
written consent of the Purchasers. Any Purchaser may assign its rights under
this Agreement to any Person to whom such Purchaser assigns or transfers any
Securities, provided such transferee agrees in writing to be bound, with
respect to the transferred Securities, by the provisions hereof that apply to
the “Purchasers.”  Notwithstanding
anything to the contrary herein, Securities may be assigned to any Person in
connection with a bona fide margin account or other loan or financing arrangement
secured by such Securities.


 


7.8                                 No Third-Party
Beneficiaries.  This Agreement is
intended for the benefit of the parties hereto and their respective successors
and permitted assigns and is not for the benefit of, nor may any provision
hereof be enforced by, any other Person, except that each Related Person is an
intended third party beneficiary of Section 4.8 and each
Indemnified Party is an intended third party beneficiary of Section 6.4
and (in each case) may enforce the provisions of such Sections directly against
the parties with obligations thereunder.


 


7.9                                 Governing
Law; Venue; Waiver Of Jury Trial.  ALL QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK. THE COMPANY AND PURCHASERS HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE
JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK,
BOROUGH OF MANHATTAN FOR THE ADJUDICATION OF ANY DISPUTE BROUGHT BY THE COMPANY
OR ANY PURCHASER HEREUNDER, IN CONNECTION HEREWITH OR WITH ANY TRANSACTION
CONTEMPLATED HEREBY OR DISCUSSED HEREIN (INCLUDING WITH RESPECT TO THE
ENFORCEMENT OF ANY OF THE TRANSACTION DOCUMENTS), AND HEREBY IRREVOCABLY WAIVE,
AND AGREE NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING BROUGHT BY THE
COMPANY OR ANY PURCHASER, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE
JURISDICTION OF ANY SUCH COURT, OR THAT SUCH SUIT, ACTION OR PROCEEDING IS
IMPROPER.  EACH PARTY HEREBY IRREVOCABLY
WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY
SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF VIA REGISTERED OR
CERTIFIED MAIL OR OVERNIGHT DELIVERY (WITH EVIDENCE OF DELIVERY) TO SUCH PARTY
AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT
SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE
THEREOF.  NOTHING CONTAINED HEREIN SHALL
BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER
PERMITTED BY LAW.  THE COMPANY AND
PURCHASERS HEREBY WAIVE ALL RIGHTS TO A TRIAL BY JURY.


 


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7.10                           Survival.  The representations, warranties, agreements
and covenants contained herein shall survive the Closing and the delivery
and/or exercise of the Securities, as applicable.


 


7.11                           Execution.  This Agreement may be executed in two (2) or
more counterparts, all of which when taken together shall be considered one and
the same agreement and shall become effective when counterparts have been
signed by each party and delivered to the other party, it being understood that
both parties need not sign the same counterpart.  In the event that any signature is delivered by facsimile
transmission, such signature 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 facsimile signature page were an original thereof.


 


7.12                           Severability.  If any provision of this Agreement is held
to be invalid or unenforceable in any respect, the validity and enforceability
of the remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.


 


7.13                           Rescission and Withdrawal
Right.  Notwithstanding anything to
the contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Purchaser exercises a right, election,
demand or option under a Transaction Document and the Company does not timely
perform its related obligations within the periods therein provided, then such
Purchaser may rescind or withdraw, in its sole discretion from time to time
upon written notice to the Company, any relevant notice, demand or election in
whole or in part without prejudice to its future actions and rights.


 


7.14                           Replacement of Securities.  If any certificate or instrument evidencing
any Securities is mutilated, lost, stolen or destroyed, the Company shall issue
or cause to be issued in exchange and substitution for and upon cancellation
thereof, or in lieu of and substitution therefor, a new certificate or
instrument, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and customary and reasonable
indemnity, if requested.  The applicants
for a new certificate or instrument under such circumstances shall also pay any
reasonable third-party costs associated with the issuance of such replacement
Securities.


 


7.15                           Remedies.  In addition to being entitled to exercise
all rights provided herein or granted by law, including recovery of damages,
each of the Purchasers and the Company will be entitled to specific performance
under the Transaction Documents.  The
parties agree that monetary damages may not be adequate compensation for any
loss incurred by reason of any breach of obligations described in the foregoing
sentence and hereby agrees to waive in any action for specific performance of
any such obligation the defense that a remedy at law would be adequate.


 


7.16                           Payment Set Aside.  To the extent that the Company makes a
payment or payments to any Purchaser hereunder or pursuant to the Warrants, or
any Purchaser enforces or exercises its rights hereunder or thereunder, and
such payment or payments or the proceeds of such enforcement or exercise or any
part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside, recovered from, disgorged by or are required to be
refunded, 


 


30

















 


repaid or otherwise restored to the Company by a trustee, receiver or any
other person under any law (including, without limitation, any bankruptcy law,
state or federal law, common law or equitable cause of action), then to the
extent of any such restoration the obligation or part thereof originally
intended to be satisfied shall be revived and continued in full force and
effect as if such payment had not been made or such enforcement or setoff had
not occurred.


 


7.17                           Adjustments in Share
Numbers and Prices.  In the event of
any stock split, subdivision, dividend or distribution payable in shares of
Common Stock (or other securities or rights convertible into, or entitling the
holder thereof to receive directly or indirectly shares of Common Stock),
combination or other similar recapitalization or event occurring after the date
hereof, each reference in any Transaction Document to a number of shares or a
price per share shall be amended to appropriately account for such event.


 


7.18                           Independent Nature of
Purchasers’ Obligations and Rights. 
The obligations of each Purchaser under any Transaction Document are
several and not joint with the obligations of any other Purchaser, and no
Purchaser shall be responsible in any way for the performance of the
obligations of any other Purchaser under any Transaction Document.  The decision of each Purchaser to purchase
Shares pursuant to this Agreement has been made by such Purchaser independently
of any other Purchaser and independently of any information, materials,
statements or opinions as to the business, affairs, operations, assets, properties,
liabilities, results of operations, condition (financial or otherwise) or
prospects of the Company or of the Subsidiary which may have been made or given
by any other Purchaser or by any agent or employee of any other Purchaser, and
no Purchaser or any of its agents or employees shall have any liability to any
other Purchaser (or any other person) relating to or arising from any such
information, materials, statements or opinions.  Nothing contained herein or in any Transaction Document, and no action
taken by any Purchaser pursuant thereto, shall be deemed to constitute the
Purchasers as a partnership, an association, a joint venture or any other kind
of entity, or create a presumption that the Purchasers are in any way acting in
concert or as a group with respect to such obligations or the transactions
contemplated by the Transaction Document. 
Each Purchaser acknowledges that no other Purchaser has acted as agent
for such Purchaser in connection with making its investment hereunder and that
no other Purchaser will be acting as agent of such Purchaser in connection with
monitoring its investment hereunder. 
Each Purchaser shall be entitled to independently protect and enforce
its rights, including without limitation the rights arising out of this Agreement
or out of the other Transaction Documents, and it shall not be necessary for
any other Purchaser to be joined as an additional party in any proceeding for
such purpose. Each Purchaser represents that it has been represented by its own
separate legal counsel in its review and negotiations of this Agreement and the
Transaction Documents.


 


[SIGNATURE PAGES TO FOLLOW]


 


31

















 


IN WITNESS WHEREOF, the parties hereto have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.


 


	
   

  	
  BIO-KEY INTERNATIONAL, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
  Michael W. DePasquale

  
	
   

  	
  Title:

  	
  Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
  Address for Notice:

  
	
   

  	
   

  	
   

  
	
   

  	
  Suite 175

  
	
   

  	
  1285 Corporate Center Drive

  
	
   

  	
  Eagan, MN 55121

  
	
   

  	
  Phone: (651) 687-0414

  
	
   

  	
  Attn:  Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
  Choate, Hall & Stewart

  
	
   

  	
   

  	
   

  
	
   

  	
  53 State Street

  
	
   

  	
  Boston, MA 02109

  
	
   

  	
  Facsimile No.: 617 248-4000

  
	
   

  	
  Telephone No.: 617 248-5000

  
	
   

  	
  Attn:  Charles J. Johnson,
  Esq.

  
					



 


[REMAINDER OF
PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGES FOR PURCHASERS FOLLOW]


 

















 


	
   

  	
  [PURCHASER ]

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Number of
  Units:                  
  [                        ]

  
	
   

  	
   

  	
   

  
	
   

  	
  Underlying Shares subject to

  
	
   

  	
  Warrants:
  [                        ]

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Address for Notice:

  
	
   

  	
   

  	
   

  
	
   

  	
  [

  	
  ]

  
	
   

  	
  [

  	
  ]

  
	
   

  	
  [

  	
  ]

  
	
   

  	
  [

  	
  ]

  
	
   

  	
  Facsimile No.:  [

  	
  ]

  
	
   

  	
  Telephone No.:  [

  	
  ]

  
	
   

  	
  Attn:  [

  	
  ]

  
						



 

















 


Exhibits:


 


A                                      Form
of Warrant


B                                        Plan
of Distribution


C                                        Transfer
Agent Instructions


D                                       Selling
Stockholder Questionnaire


 


Disclosure Schedules