Exhibit 99.3
EXECUTION COPY
THIS NOTE AND THE INDEBTEDNESS
EVIDENCED HEREBY ARE SUBJECT TO THE PROVISIONS OF THAT CERTAIN
INTERCREDITOR AND SUBORDINATION AGREEMENT (AS AMENDED, MODIFIED
AND/OR SUPPLEMENTED, THE “SUBORDINATION AGREEMENT”)
DATED AS OF SEPTEMBER 29, 2004 AMONG SHAAR FUND, LTD., AS
PURCHASER AGENT, LAURUS MASTER FUND, LTD., AS COLLATERAL AGENT,
AETHER SYSTEMS, INC., BIO-KEY INTERNATIONAL, INC. AND PUBLIC SAFETY
GROUP, INC.; AND EACH HOLDER OF THIS NOTE, BY ITS ACCEPTANCE
HEREOF, SHALL BE BOUND BY THE PROVISIONS OF THE SUBORDINATION
AGREEMENT.
THIS NOTE AND THE COMMON SHARES
ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. THIS NOTE AND THE COMMON SHARES ISSUABLE
UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO BIO-KEY INTERNATIONAL, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED.
SECURED CONVERTIBLE TERM
NOTE
FOR VALUE RECEIVED, BIO-KEY
INTERNATIONAL, INC., a Delaware corporation (the “
Borrower ”), hereby promises to pay to LAURUS MASTER
FUND, LTD., c/o M&C Corporate Services Ltd., P.O. Box
309 G.T., Ugland House, South Church Street, Grand Cayman,
Cayman Islands, Fax: 345-949-9877 (the “ Holder
”) or its registered assigns or successors in interest, on
order, the sum of Two Million Dollars ($2,000,000), together with
any accrued and unpaid interest hereon, on June 7, 2008 (the
“ Maturity Date ”) if not sooner
paid.
Capitalized terms used herein
without definition shall have the meanings ascribed to such terms
in that certain Securities Purchase Agreement dated as of the date
hereof between the Borrower and the Holder (as amended, modified or
supplemented from time to time, the “ Purchase
Agreement ”).
The following terms shall apply to
this Note:
ARTICLE I
INTEREST &
AMORTIZATION
1.1(a) Interest Rate .
Subject to Sections 4.11 and 5.6 hereof, interest payable on this
Note shall accrue at a rate per annum (the “Interest
Rate”) equal to the “prime rate” published in
The Wall Street Journal from time to time, plus two percent
(2.0%). The prime rate shall be increased or decreased as the
case may be for each increase or decrease in the prime rate in an
amount equal to
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such increase or decrease in the
prime rate; each change to be effective as of the day of the change
in such rate. Subject to Section 1.1(b) hereof, the
Interest Rate shall not be less than six percent (6.0%) per
annum. Interest shall be (i) calculated on the basis of
a 360 day year, and (ii) payable monthly, in arrears,
commencing on July 1, 2005 and on the first business day of
each consecutive calendar month thereafter until the Maturity Date
(and on the Maturity Date), whether by acceleration or otherwise
(each, a “ Repayment Date ”).
1.1 (b) Interest Rate
Adjustment . The Interest Rate shall be calculated on the last
business day of each month hereafter until the Maturity Date (each
a “Determination Date”) and shall be subject to
adjustment as set forth herein. If (i) the Borrower
shall have registered the shares of the Borrower’s common
stock underlying each of the conversion of the Note and that
certain warrant issued to Holder on a registration statement
declared effective by the Securities and Exchange Commission (the
“SEC”), and (ii) the market price (the
“Market Price”) of the Common Stock as reported by
Bloomberg, L.P. on the Principal Market (as defined below) for the
five (5) trading days immediately preceding a Determination
Date exceeds the then applicable Fixed Conversion Price by at least
twenty five percent (25%), the Interest Rate for the succeeding
calendar month shall automatically be reduced by 200 basis points
(200 b.p.) (2.0%) per annum for each incremental twenty five
percent (25%) increase in the Market Price of the Common Stock
above the then applicable Fixed Conversion Price. If (i) the
Borrower shall not have registered the shares of the
Borrower’s common stock underlying the conversion of the Note
and that certain warrant issued to Holder on a registration
statement declared effective by the SEC and which remains
effective, and (ii) the Market Price of the Common Stock as
reported by Bloomberg, L.P. on the principal market for the five
(5) trading days immediately preceding a Determination Date
exceeds the then applicable Fixed Conversion Price by at least
twenty five percent (25%), the Interest Rate for the succeeding
calendar month shall automatically be decreased by 100 basis points
(100 b.p.) (1.0%) per annum for each incremental twenty five
percent (25%) increase in the Market Price of the Common Stock
above the then applicable Fixed Conversion Price.
Notwithstanding the foregoing (and anything to the contrary
contained in herein), in no event shall the Interest Rate be less
than zero percent (0%).
1.2
Minimum Monthly Principal
Payments . Amortizing
payments of the aggregate principal amount outstanding under this
Note at any time (the “ Principal Amount
”) shall begin on October 1, 2005 and shall recur on the
first business day of each succeeding month thereafter until the
Maturity Date (each, an “ Amortization Date
”). Subject to Article 3 below, beginning on the
first Amortization Date, the Borrower shall make monthly payments
to the Holder on each Repayment Date, each in the amount of
$62,500, together with any accrued and unpaid interest to date on
such portion of the Principal Amount plus any and all other amounts
which are then owing under this Note, the Purchase Agreement or any
other Related Agreement but have not been paid (collectively, the
“ Monthly Amount ”). Any Principal Amount that
remains outstanding on the Maturity Date shall be due and payable
on the Maturity Date.
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ARTICLE II
CONVERSION
REPAYMENT
2.1
(a) Payment of Monthly
Amount in Cash or Common Stock . Each month by the fifth
(5 th ) business day prior to each Repayment Date (the
“ Notice Date ”), the Holder shall deliver to
Borrower a written notice in the form of Exhibit B attached
hereto (each, a “ Repayment Notice ”) stating
whether, according to the Conversion Criteria (as defined below),
the Monthly Amount payable on the next Repayment Date shall be paid
in cash or Common Stock, or a combination of both. If a
Repayment Notice is not delivered by the Holder on or before the
applicable Notice Date for such Repayment Date, then the Borrower
shall pay the Monthly Amount due on such Repayment Date in
cash. Any portion of the Monthly Amount paid in cash on a
Repayment Date, shall be paid to the Holder in an amount equal to
102% of such amount. The number of such shares to be issued
by the Borrower to the Holder on such Repayment Date (in respect of
such portion of the Monthly Amount converted into in shares of
Common Stock pursuant to Section 2.1(b)), shall be the number
determined by dividing (x) the portion of the Monthly Amount
converted into shares of Common Stock, by (y) the then applicable
Fixed Conversion Price. For purposes hereof, the
initial “ Fixed Conversion Price ” means
$1.35.
(b)
Monthly Amount Conversion
Guidelines .
Subject to Sections 2.1(a), 2.2, and 3.2 hereof, the Holder shall
convert into shares of Common Stock all or a portion of the Monthly
Amount due on each Repayment Date according to the following
guidelines (the “ Conversion Criteria ”):
(i) the average closing price of the Common Stock as reported
by Bloomberg, L.P. on the Principal Market for the five
(5) trading days immediately preceding such Repayment Date
shall be greater than or equal to 110% of the Fixed Conversion
Price and (ii) the amount of such conversion does not exceed
twenty five percent (25%) of the aggregate dollar trading volume of
the Common Stock for the twenty two (22) day trading period
immediately preceding delivery of a Repayment Notice.
If the Conversion Criteria are not met, the Holder shall convert
only such part of the Monthly Amount that meets the Conversion
Criteria. Any part of the Monthly Amount due on a Repayment Date
that the Holder has not been able to convert into shares of Common
Stock due to failure to meet the Conversion Criteria, shall be paid
by the Borrower in cash at the rate of 102% of the Monthly Amount
otherwise due on such Repayment Date, within three
(3) business days of the applicable Repayment Date.
2.2
No Effective
Registration .
Notwithstanding anything to the contrary herein, none of the
Borrower’s obligations to the Holder may be converted into
Common Stock unless (i) either (x) an effective current
Registration Statement (as defined in the Registration Rights
Agreement) covering the shares of Common Stock to be issued in
connection with satisfaction of such obligations exists or (y) an
exemption from registration of the Common Stock is available to
pursuant to Rule 144 of the Securities Act and
(ii) no Event of Default hereunder exists and is continuing,
unless such Event of Default is cured within any applicable cure
period or is otherwise waived in writing by the Holder in whole or
in part at the Holder’s option.
2.3
Optional Redemption in
Cash . The Borrower
will have the option of prepaying this
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Note (“ Optional
Redemption ”) by paying to the Holder a sum of money
equal to one hundred ten percent (110%) of the principal amount of
this Note together with accrued but unpaid interest thereon and any
and all other sums due, accrued or payable to the Holder arising
under this Note, the Purchase Agreement, or any Related Agreement
(the “ Redemption Amount ”) outstanding on the
Redemption Payment Date (defined below). The Borrower shall
deliver to the Holder a written notice of redemption (the “
Notice of Redemption ”) specifying the date for such
Optional Redemption (the “ Redemption Payment Date
”) which date shall be seven (7) business days after the
date of the Notice of Redemption (the “ Redemption
Period ”); provided, however, that in no event may the
Borrower pay the Holder any amount in respect of the exercise of
any such Optional Redemption (of all or any portion of this Note)
unless the Borrower shall concurrently (i) deposit additional
cash collateral with Aether in an amount equal to the aggregate
amount to be paid to the Holder and all other Purchasers in
connection with such Optional Redemption (the “Prepayment
Amount” ) and (ii) prepay the Shaar Notes
collectively by an aggregate amount equal to the Prepayment
Amount. A Notice of Redemption shall not be effective with
respect to any portion of this Note for which the Holder has a
pending election to convert pursuant to Section 3.1, or for
conversions initiated or made by the Holder pursuant to
Section 3.1 during the Redemption Period. The Redemption
Amount shall be determined as if such Holder’s conversion
elections had been completed immediately prior to the date of the
Notice of Redemption. On the Redemption Payment Date, the
Redemption Amount must be paid in good funds to the Holder.
In the event the Borrower fails to pay the Redemption Amount on the
Redemption Payment Date as set forth herein, then (i) such
Redemption Notice will be null and void and (ii) the Borrower
shall no longer have the right to exercise the Optional Redemption
as set forth herein. Each of the terms “Aether”,
“Aether Note”, “Shaar Note” has the meaning
given to such term in the Subordination Agreement.
ARTICLE III
CONVERSION RIGHTS
3.1.
Holder’s Conversion
Rights . The Holder
shall have the right, but not the obligation, to convert all or any
portion of the then aggregate outstanding principal amount of this
Note, together with interest and fees due hereon, into shares of
Common Stock subject to the terms and conditions set forth in this
Article III. The Holder may exercise such right by
delivery to the Borrower of a written notice of conversion not less
than one (1) business day prior to the date upon which such
conversion shall occur.
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3.2
Conversion
Limitation . Notwithstanding
anything contained herein to the contrary, the Holder shall not be
entitled to convert pursuant to the terms of this Note an amount
that would be convertible into that number of Conversion Shares
which would exceed the difference between the number of shares of
Common Stock beneficially owned by such Holder or issuable upon
exercise of warrants held by such Holder and 4.99% of the
outstanding shares of Common Stock of the Borrower. For the
purposes of the immediately preceding sentence, beneficial
ownership shall be determined in accordance with
Section 13(d) of the Exchange Act and Regulation
13d-3
