-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hpzz77154VCrS9Rb07S/TZjOqUfTtNr3Ua9fD6pN00qRDgQkCPLyeepzW3gnDJJf FoTAU+edQeKQaA3KkbjBbQ== 0000950146-96-000974.txt : 19960617 0000950146-96-000974.hdr.sgml : 19960617 ACCESSION NUMBER: 0000950146-96-000974 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960430 FILED AS OF DATE: 19960614 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KURZWEIL APPLIED INTELLIGENCE INC /DE/ CENTRAL INDEX KEY: 0000769191 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 042815079 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-20256 FILM NUMBER: 96581329 BUSINESS ADDRESS: STREET 1: 411 WAVERLEY OAKS ROAD CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6178935151 10QSB 1 Securities and Exchange Commission Washington, DC 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 1, 1996 to April 30, 1996 ---------------- -------------- [ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------- --------------- Commission file number 0-20256 KURZWEIL APPLIED INTELLIGENCE, INC. - ------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Delaware 04-2815079 - ------------------------------- ---------------------------------- (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 411 Waverley Oaks Road, Waltham, Massachusetts 02154 - ------------------------------------------------------------------------------- (Address of principal executive offices) (617) 893-5151 - ------------------------------------------------------------------------------- (Issuer's telephone number) - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] On April 30, 1996, there were 6,790,367 shares of Common Stock outstanding. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] 1 KURZWEIL APPLIED INTELLIGENCE, INC. FORM 10-QSB INDEX Page Part I - Financial Information Item 1. Financial Statements Balance Sheets as of April 30, 1996 and January 31, 1996 3 Statements of Operations for the Three Month Period Ended April 30, 1996 and 1995 4 Statements of Cash Flows for the Three Month Period Ended April 30, 1996 and 1995 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II - Other Information Item 1. Legal Proceedings 12 Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 Exhibit Index 14 2 PART I - FINANCIAL INFORMATION KURZWEIL APPLIED INTELLIGENCE, INC. BALANCE SHEETS Unaudited (in thousands) Item 1. Financial Statements
April 30, January 31, 1996 1996 -------------- ------------- ASSETS Current assets: Cash and cash equivalents $1,441 $2,084 Marketable securities available for sale 501 Trade accounts receivable, less allowances of $258,000 and $287,000 at April 30, 1996 and January 31, 1996, respectively 1,394 1,221 Inventory 402 398 Other current assets 373 262 -------------- ------------- Total current assets 3,610 4,466 Property and equipment, net 861 924 Intangible assets 1,472 1,745 Capitalized software development costs, net 1,961 1,593 Other assets 141 136 -------------- ------------- Total assets $8,045 $8,864 ============== ============= LIABILITIES Current liabilities: Accounts payable $971 $665 Accrued expenses 2,355 2,211 Capital lease obligations 17 29 Current portion of other long-term liabilities 902 902 -------------- ------------- Total current liabilities 4,245 3,807 Other long-term liabilities 2,169 2,169 Commitments and contingencies STOCKHOLDERS' EQUITY Preferred stock, $.01 par value, 1,000,000 shares authorized; none issued and outstanding Common stock, $.01 par value; 10,000,000 shares authorized; 6,790,367 and 5,733,387 shares issued and outstanding at April 30, 1996 and January 31, 1996, respectively 68 57 Additional paid-in capital 62,748 57,647 Common stock to be issued 5,075 Accumulated deficit (61,185) (59,891) -------------- ------------- Total stockholders' equity 1,631 2,888 -------------- ------------- Total liabilities and stockholders' equity $8,045 $8,864 ============== ============= The accompanying notes are an integral part of the financial statements.
3 KURZWEIL APPLIED INTELLIGENCE, INC. STATEMENTS OF OPERATIONS Unaudited (in thousands, except for per share amounts) Three Months Ended April 30, ----------------------------------------- 1996 1995 ------------------ ------------------ Revenues: Product and license revenue $1,238 $2,325 Maintenance revenue 472 382 ------------------ ------------------ Total revenues 1,710 2,707 ------------------ ------------------ Operating costs and expenses: Cost of product, license and maintenance revenue 880 1,295 Sales and marketing 950 929 Research and development 678 478 General and administrative 532 329 ------------------ ------------------ Total operating costs and expenses 3,040 3,031 ------------------ ------------------ Operating loss (1,330) (324) Interest expense 2 Interest income 30 59 Other (expense) income, net 6 30 ------------------ ------------------ Net loss ($1,294) ($237) ================== ================== Net loss per common share ($0.19) ($0.04) ================== ================== Weighted average number of common shares outstanding 6,774,430 6,731,833 ================== ================== The accompanying notes are an integral part of the financial statements. 4 KURZWEIL APPLIED INTELLIGENCE, INC. STATEMENTS OF CASH FLOWS Unaudited (in thousands) Three Months Ended April 30, ------------------------ 1996 1995 ---------- ----------- Cash flows from operating activities: Net loss ($1,294) ($237) Adjustments to reconcile net loss to net cash (used) provided by operating activities: Depreciation 141 124 Amortization 428 500 Change in operating assets and liabilities: (Increase) in accounts receivable (173) (31) (Increase) decrease in inventory (4) 247 (Increase) in other assets (124) (130) Increase in accounts payable 306 261 Increase (decrease) in accrued expenses and other liabilities 144 (378) ---------- ----------- Net cash (used) provided by operating activities (576) 356 ---------- ----------- Cash flows from investing activities: Sale of marketable securities available for sale 501 Payments for property and equipment, net (78) (235) Capitalized software development costs (515) (341) ---------- ----------- Net cash (used) in investing activities (92) (576) ---------- ----------- Cash flows from financing activities: Payments on capital lease obligations (12) (16) Proceeds from issuance of capital stock, net 37 5 ---------- ----------- Net cash provided by (used) in financial activities 25 (11) ---------- ----------- Net (decrease) in cash (643) (231) Cash and cash equivalents, beginning of period 2,084 4,307 ---------- ----------- Cash and cash equivalents, end of period $1,441 $4,076 ========== =========== The accompanying notes are an integral part of the financial statements 5 KURZWEIL APPLIED INTELLIGENCE NOTES TO FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION --------------------- For purposes of this Form 10-QSB, all references to "Fiscal 1997" mean the fiscal year of Kurzweil Applied Intelligence, Inc. (the "Company") ending January 31, 1997. All references to "Fiscal 1996" mean the Company's fiscal year ended January 31, 1996. The accompanying financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation have been included. The results of operations of any interim period are not necessarily indicative of the results of operations for the fiscal year. For further information, refer to the financial statements and footnotes thereto included in the Company's 1996 Annual Report for the fiscal year ended January 31, 1996. 2. LEGAL PROCEEDINGS ----------------- Texas Litigation On September 11, 1995, one of the Company's shareholders who opted out of the Shareholder Class Action Litigation of April 28, 1994 legal proceedings, filed a complaint in Dallas County, Texas. The complaint asserted that the Company and certain former and current officers and directors committed fraud and violated Texas state law and unnamed federal securities laws. The shareholder seeks $1,500,000 in damages as a result of his purchase of 1,000 shares of the Company's Common Stock. Management believes that the amount of damages being claimed are excessive and without merit and intends to defend its position vigorously. Management does not believe there is a reasonable possibility of a material adverse outcome, if any, that will exceed amounts already reserved. If any additional loss may occur, management believes that loss will not have a material adverse impact on the Company's financial position or results of operations. Nasdaq Regulatory Requirements At April 30, 1996 the Company was not in compliance with NASD net worth requirements for the continued listing of the Company's Common Stock on the Nasdaq National Market. The Company believes that the financing it obtained on May 9, 1996 cures this non-compliance. If it does not, the Company will request from Nasdaq an exemption pending the filing of the Company's quarterly report on Form 10-QSB for the second quarter ending July 31, 1996, which the Company anticipates will demonstrate the required level of net worth. If exemption is not granted, the Company will request that it be eligible for re-admission without having to comply with the higher initial listing requirements. If the Company is not granted such an exemption and is required to meet the initial or relisting requirements to obtain re-admission to the listing, it may not qualify for such re-admission for an 6 undetermined period of time. Suspension of the Company's common stock from trading on the Nasdaq National Market may adversely affect the price thereof. 3. INTANGIBLE ASSETS AND OTHER LONG-TERM LIABILITIES ------------------------------------------------- On September 23, 1993, the Company and Dragon Systems, Inc. (Dragon) settled certain patent infringement litigation between the two companies. As part of such settlement, the Company licensed certain Dragon patents related to continuous speech and other aspects of speech recognition technology. The Company paid Dragon $1,331,250 in fiscal 1994 and $798,000 in fiscal 1996. Under the terms of this agreement, the Company was committed to make aggregate payments of $5,202,000 including $625,000 in settlement of amounts due for products sold during periods prior to September 23, 1993. The following mandatory payments remain outstanding as of April 30, 1996: June 1, 1996 901,810 June 1, 1997 1,019,460 June 1, 1998 1,151,523 ---------- Total $3,072,793 ========== The Company expensed $1,107,600 during fiscal year 1996, and will amortize the remaining asset of $1,200,000 on a straight-line basis through May 31, 1997. The Company expensed $277,000 relating to the Dragon agreement for the three months ended April 30, 1996. According to the agreement, the Company, if it chooses not to extend the license, has use of the licensed technology through May 31, 1997. The final payment will then be made in fiscal 1999. The Company, at its option, can annually extend the license of the technology through fiscal 2006, at which time the license would be fully paid. Total additional annual payments increasing at a rate of 13% per year during the extension period would approximate $13.5 million 4. Subsequent Event ---------------- On May 10, 1996 the Company received $2,376,000 from the private sale of 1,320,050 shares of common stock to an investment fund. Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations RESULTS OF OPERATIONS Total Revenues. The Company's total revenues consist of revenue from the sale and licensing of Company products and revenue from maintenance contracts. 7 Revenues for the three months ended April 30, 1996 totaled $1,710,000, 37% lower than the $2,707,000 in the same period of the prior year. The decrease was due to the lower volume of VoiceMED(R) units sold. The decrease in VoiceMED(R) product shipments was due to the lower acceptance of the older DOS operating platform technology and the continued slowdown of orders from the government sector. Maintenance revenue for the three months ended April 30, 1996 increased to $472,000 from $382,000 in the same period of the prior year. The increase is a result of the larger installed base of customers as well as the increased emphasis by the Company on programs to promote recurring revenue from maintenance contracts. Included in the revenue for the period ending April 30, 1996 was $400,000 in licensing fees from one customer for the Kurzweil VOICE(TM) for Windows product. Cost of Product and Maintenance Revenue. Cost of product and maintenance revenue includes hardware costs, manufacturing overhead, system replacement parts associated with maintenance contracts, third party software royalties and license fees, and amortization of capitalized software. Cost of product and maintenance revenue for the three months ended April 30, 1996 totaled $880,000 or 51% of total revenues, compared to $1,295,000 or 48% of total revenues in the same period of the prior year. The decrease in cost of product and maintenance revenues, in dollars, relates to the $400,000 in licensing fees for the Kurzweil VOICE for Windows product. On a percentage basis the cost of product and maintenance revenues increased during the three months ended April 30, 1996 as compared to the same period of the prior year due to the decrease in revenue and the recurring costs associated with the amortization of the Dragon license and capitalized software development costs. The Company also increased its reserve against capitalized software $100,000 for the quarter ended April 30, 1996 due to the uncertainty relating to recoverability of those software development costs. Sales and Marketing Expenses. Sales and marketing expenses include the costs for marketing, selling and supporting the Company's products. Sales and marketing expenses increased to $950,000 for the three months ended April 30, 1996 from $929,000 in the same period of the prior year, representing 55% and 34% of total revenues, respectively. This increase is attributable to having a fully staffed direct sales force of 8 people at April 30, 1996 compared to 4 direct sales people at April 30, 1995 Research and Development Expenses. Research and development expenditures consist principally of personnel costs, allocated facility costs, and associated equipment amortization and depreciation. A portion of the total research and development expenditures are capitalized in accordance with Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," the amortization of which is included in cost of product and maintenance revenue. 8 Total research and development expenses, net of capitalization, increased to $678,000 for the three month period ended April 30, 1996 from $478,000 in the same period of the prior year, representing 40% and 18% of total revenues, respectively. The increase in research and development expenses is associated with the Company's continued commitment to enhance and develop the Company's technology and products. This commitment included the increase in the research and development staff to 57 people as of April 30, 1996 as compared to 46 in the same period of the prior year. In April 1996, the Company successfully released Kurzweil VOICE(TM) for Windows 2.0 and is scheduled to begin shipping Clinical Reporter(TM), the new Windows(TM) based product for the Medical Applications Group, in the second quarter of fiscal 1997. General and Administrative Expenses. General and administrative expenses include those costs associated with general corporate needs and administrative functions. General and administration expenses increased to $532,000 for the three months ended April 30, 1996 from $329,000 in the same period of the prior year, representing 31% and 11% of total revenues, respectively. The difference is due to a $200,000 reserve relating to the Company's potential obligation under its corporate indemnification agreement with a former officer of the Company. Pursuant to the Company's Certificate of Incorporation, and certain of its contractual obligations, the Company may be obligated to indemnify its current and former officers, directors and certain other persons under claims arising from the Company's class action litigation, and to reimburse certain costs incurred by such persons as a result of the lawsuits, investigations and proceedings. On May 17, 1996 the Company received a claim from a former officer for indemnification for certain legal expenses, as a result of his acquittal on May 14, 1996 in a recent criminal trial. As a result of receiving this claim for indemnification, the Company is currently able to estimate the amount of costs associated with an unfavorable outcome related to these indemnification matters and has therefore accrued for such possibility. Management believes this claim is without merit and intends to defend its position vigorously. Income Taxes. At January 31, 1996, the Company had federal net operating loss carryforwards of approximately $49,000,000. In addition, at January 31, 1996, the Company had federal tax credit carryforwards of approximately $900,000. The net operating loss carryforwards expire during the years 1997 through 2009 and the tax credit carryforwards expire during the years 1997 through 2009. Substantially all of the Company's net operating loss and tax credit carryforwards are subject to limitation under the provisions of Section 382 of the Internal Revenue Code. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At April 30, 1996, the Company's principal source of liquidity was cash and cash equivalents of $1,440,000, as compared to cash and cash equivalents of $2,084,000 as of January 31, 1996. The Company's operating activities used cash of $576,000 for the three months ended April 30, 1996. The Company will be required to pay $902,000 to Dragon Systems Inc., on June 1, 1996 as part of the patent cross license agreement. (See Note 3 "Intangible Assets and Other Long - Term Liabilities" of Notes to Financial Statements.) On April 30, 1996 the Company had negative working capital of $635,000 as compared to positive working capital of $659,000 as of January 31, 1996. 9 The Company has incurred operating losses since its inception and these losses are expected to continue into 1997. On May 10, 1996 the Company received $2,376,000 from the private sale of 1,320,050 shares of Common Stock to an investment fund. The long term financial stability of the Company, however, is dependent on achieving profitable operations and obtaining additional financing. There can be no assurances that the funds raised in the May 10, 1996 financing will be sufficient to sustain the Company's operations through fiscal 1997. The Company's future capital requirements will depend on many factors, including the progress and scope of its research and development programs. To the extent that the Company is not able to fund its future operations through the sale of its products, the Company will need to obtain additional funds through private or public financing. There is no assurance that the Company can obtain such additional financing. If additional financing is not obtained, the Company will likely be required to restructure its operations, curtail its spending in research and development, or attempt a merger or other strategic alliance with another company. The Company's inability to obtain an audit opinion on its fiscal 1993 financial statements and its statements of operations, cash flows, and stockholders equity for fiscal 1994 prevented the Company from seeking public financing in 1994 and 1995. Public financing would be subject to market conditions and other uncertainties, and no assurance can be given that the Company could obtain public financing at any time. Either public or private equity financing is likely to result in dilution of the Company's existing stockholders. Certain Factors that May Affect Future Results The Company's future results are subject to substantial risks and uncertainties. The Company currently derives substantially all of its revenue from the sale of software licenses that utilize speech recognition to create text documents. The Company believes that factors affecting the ability of the Company's products to achieve general market acceptance include product performance, price, ease of adoption and learning. To be successful in the future the Company must respond promptly and effectively to the challenges of technological change and its competitors' innovations by continually enhancing its current products and developing new products on a timely basis. Certain current and potential competitors of the Company that are more established, benefit from greater market recognition and have substantially greater financial, development and marketing resources than the Company. Competitor pressures or other factors, including entry into new markets, may result in significant price erosion that could have a material adverse effect on the Company's result of operations. The Company believes that its operating results could vary significantly from quarter to quarter. The Company's license fee revenue in any quarter is substantially dependent of orders booked and shipped in that quarter. The timing of license fee revenue is influenced by a number of factors, including; the timing of individual orders and shipments of its products, customer buying patterns, changes and delays in product development, and the amount and timing of sales and marketing expenditures. Because the company's operating expenses are based on anticipated revenue levels and a high percentage of the Company's expenses are relatively fixed in the short term, variations in revenue can cause significant fluctuations in operating results from quarter to quarter and may result in anticipated quarterly earnings shortfalls or losses. In such event, the price of the Company's common stock would likely be materially adversely affected. Cautionary Statement From time to time, information provided by the Company or statements made by its employees may contain "forward-looking" information which involkes risk and uncertainties. In particular, statements contained in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, which are not historical facts (including, but not limited to statements concerning anticipated operating expense levels and such expense levels relative to the Company's total revenues and expected losses) are "forward-looking statements." The Company's actual future results may differ significantly from those stated in any forward-looking statements. Factors that may cause such differences include, but are not limited to the factors discussed above as well as the accuracy of the Company's internal estimates of revenue and operating expense levels. Each of these factors, and others, are discussed from time to time in the Company's Securities and Exchange Commission filings. 10 Part II - OTHER INFORMATION Item 1. Legal Proceedings Reference is made to Footnote 2 of Notes to the Financial Statements for a description of certain litigation and other legal proceedings. Item 6. Exhibits and Reports on Form 8-K 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description - ----------- ----------- 10.1 Selling Agency agreement dated May 7, 1996 between the Company and Miller, Johnson & Kuehn, Incorporated. 10.2 Purchase Agreement dated as of May 9, 1996 between the Company and Special Situations Fund, L.P. 10.3 Financial Consulting Agreement dated May 8, 1996 between the Company and Miller, Johnson & Kuehn, Incorporated. 27 Financial Data Schedule (EDGAR Filing only) (b) No Reports on Form 8-K have been filed during the quarter for which this report is filed. 11 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: June 14, 1996 KURZWEIL APPLIED INTELLIGENCE, INC. By: /s/ Thomas E. Brew, Jr. --------------------------------- Thomas E. Brew, Jr. President and Chief Executive Officer By: /s/ Thomas B. Doherty --------------------------------- Thomas B. Doherty Chief Financial Officer, Vice President of Finance and Treasurer (principal financial and chief accounting officer) 12 EXHIBIT INDEX Exhibit No. Description At Page - ----------- ----------- ------- 10.1 Selling Agency Agreement dated May 7, 1996 between the Company and Miller, Johnson & Kuehn, Incorporated. 10.2 Purchase Agreement dated as of May 9, 1996 between the Company and Special Situations Fund, L. P. 10.3 Financial Consulting Agreement dated May 8, 1996 between the Company and Miller, Johnson & Kuehn, Incorporated 27 Financial Data Schedule (EDGAR Filing only) 13 EX-10.1 2 SELLING AGENCY AGREEMENT KURZWEIL APPLIED INTELLIGENCE, INC. SELLING AGENCY AGREEMENT 1,320,050 SHARES OF COMMON STOCK Miller Johnson & Kuehn Incorporated Minneapolis, Minnesota 1660 South Highway 100 May 7, 1996 Suite 228 Minneapolis, MN 55416-1519 Gentlemen: The undersigned, Kurzweil Applied Intelligence, Inc., (the "Company") hereby confirms its agreement with you (the "Selling Agent") as follows: 1. DESCRIPTION OF OFFERING. The Company proposes to offer and sell up to 1,320,050 shares of its common stock, $.01 par value per share, (the "Shares") to private investors through you, as its agent (the "Offering") at a purchase price of $2.00 per share. Purchases will be made pursuant to a purchase agreement ("Purchase Agreement") between the Company and each investor. The terms of the Purchase Agreement shall be reasonably acceptable to the Company and the Selling Agent. 2. APPOINTMENT OF AGENT. On the basis of the warranties, representations and agreements of the parties hereto, the Company hereby appoints the Selling Agent, and the Selling Agent hereby accepts such appointment, to act as the Company's exclusive agent in connection with the offer and sale of the Shares to private investors, on a best efforts basis. The Selling Agent will use its best efforts to sell the Shares, but there is no commitment by the Selling Agent to purchase or sell all or any of the Shares. The Selling Agent may utilize the services of sub-agents, but the use of sub-agents shall not increase the compensation payable by the Company hereunder. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Selling Agent as follows: (a) The Company will prepare a disclosure document or package consisting of the Company's draft annual report on Form 10-KSB for the fiscal year ended January 31, 1996, the Company's annual report on Form 10-KSB for the fiscal year ended January 31, 1995, the Company's quarterly reports on Form 10-QSB for each of the three prior fiscal quarters, the Company's preliminary Proxy Statement for its 1996 Annual Meeting of Shareholders and the Company's press releases for the prior 12 months (which, together with any supplements or amendments thereto including any documents referred to or incorporated by reference therein is herein defined as the "Disclosure Package") with respect to the Shares which will (i) fairly present all material information regarding the Company; and (ii) will not include 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 not misleading in light of the circumstances under which they were made. The Company will also prepare and file a Form D, if applicable, with the Securities and Exchange Commission (the "Commission"). The Disclosure Package and Form D will be subject to your approval, which will not be unreasonably withheld. The Company has not taken, or omitted to take, any action and will not take, or omit to take, any action which would have the result of making the exemptions from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") or Regulation D thereunder unavailable for the offer and sale of the Shares. The Company and the Selling Agent shall mutually determine whether to issue a press release under Rule 135 of the Securities Act and the contents of such release. (b) As of the commencement date of the Offering and until and as of the date of any Closing (as hereinafter defined), the Disclosure Package will (i) fairly present all material information regarding the Company; and (ii) not include 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 not misleading in light of the circumstances under which they were made; provided, that the representations and warranties in this paragraph shall not apply to statements or omissions made in reliance upon written information furnished to the Company by the Selling Agent expressly for use in preparation of the Disclosure Package. (c) The financial statements (including all related schedules and notes) set forth in the Disclosure Package will fairly represent the financial condition and results of operations of the Company as of the dates and for the periods indicated; such statements will have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods indicated; and, in the event the Disclosure Package shall include a report of a public accountant, such report shall be by an independent public accountant within the meaning of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules and regulations promulgated thereunder. (d) The Company is duly incorporated and validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority to own its properties and conduct its business, as will be described in the Disclosure Package. The Company has no subsidiaries. (e) The Company is duly qualified to do business as a foreign corporation and is in good standing in all states or jurisdictions in which the ownership or leasing of its property or the conduct of its business requires such qualification and the failure to be so qualified would have a materially adverse effect on the Company's business. (f) The Company has full legal power, right and authority to enter into this Agreement and the Purchase Agreement. This Agreement and the Purchase Agreement have been duly authorized, and this Agreement has been and as of the date of Closing (as hereinafter defined) the Purchase Agreement will be executed and 2 delivered on behalf of the Company and this Agreement is, and the Purchase Agreement when delivered will be, the valid and binding obligation of the Company, subject, as to enforcement, to applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting the rights of creditors generally, to the exercise of judicial discretion as to the availability of equitable remedies such as specific performance and injunction and subject, as to enforcement of the indemnification provisions, to limitations under applicable securities laws. (g) Except as set forth in the Disclosure Package, the Company has all licenses, certificates, permits and other approvals from governmental and regulatory authorities necessary for the conduct of its business as it is currently being carried on and as will be described in the Disclosure Package, except those which would not have a material adverse effect on the Company if not obtained. (h) Except as set forth in the Disclosure Package, the Company owns or possesses all assets, patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets and rights necessary for the conduct of its business as it is currently being carried on and has not received any notice of conflict with the asserted rights of others in respect thereof. To the Company's knowledge, and except as will be set forth in the Disclosure Package or except as will not have a material adverse effect on the Company, no name which the Company uses and no other aspect of the business of the Company involves or gives rise to any infringement of, or license or similar fees for, any patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets or other similar rights of others. (i) Since the date of the Disclosure Package and other than as herein or therein contemplated (i) the Company has not incurred any material liabilities or obligations, contingent or otherwise, not in the ordinary course of business, (ii) the Company has not paid or declared any dividend or other distribution with respect to its outstanding capital stock, (iii) there has not been any change in the capital stock or any material increase in the long-term debt of the Company, or any issuance of shares of capital stock of the Company or of options, warrants, or rights to purchase capital stock of the Company, (iv) no material loss or damage (whether or not insured) to the property of the Company has been sustained, (v) no material legal or governmental proceeding, domestic or foreign, affecting the Company or the transactions contemplated by this Agreement has been instituted or, to the best of the Company's knowledge, threatened, and (vi) there has not been any material adverse change in the business, condition (financial or otherwise) or properties of the Company. 3 (j) The Company is not in breach, default or violation of, and the consummation of the transactions herein contemplated will not result in any breach of, any of the terms or conditions of, or constitute a default or violation under, (i) the Articles of Incorporation or By-Laws of the Company, (ii) any material indenture, agreement or other instrument to which the Company is now a party, or (iii) any law or any order, rule or regulation applicable to the Company of any court or of any federal or state regulatory body or administrative agency having jurisdiction over the Company or its property, except for such breaches, defaults or violations which would not have a material adverse effect on the Company. (k) No approval, authorization, consent or order of any governmental or public board or body or self-regulatory organization, other than in connection with or in compliance with the provisions of the Securities Act, the Exchange Act and the securities laws of various jurisdictions, is legally required for the sale of the Shares by the Company. (l) The Shares, when issued and delivered to the purchasers against payment therefor in accordance with the Purchase Agreement, will conform in all material respects to all statements made in relation thereto contained in the Disclosure Package, and will be validly issued, fully paid and non-assessable. (m) Except as set forth in the Disclosure Package, there are no pending, or to the Company's knowledge threatened or contemplated actions, suits or proceedings before or by any court or governmental agency, authority or body, or any arbitrator, which are not ordinary, routine and incidental to the business of the Company or which might reasonably be expected to result in any material adverse change in the business condition (financial or otherwise) or properties of the Company. (n) The Disclosure Package sets forth as of the date thereof the authorized capital stock of the Company, the number of shares which are issued and outstanding and the number of shares reserved for issuance upon exercise of options, warrants, rights and convertible instruments and there has been no material change in such amounts as of the date hereof. All outstanding shares of capital stock have been duly authorized, validly issued, are fully paid and nonassessable and have been issued pursuant to valid registrations under, or valid exemptions from, the registration requirements of, the Securities Act and appropriate state blue sky laws. The capital stock of the Company shall conform to the description thereof contained in the Disclosure Package. (o) The Company has good and marketable title, free and clear of all liens, encumbrances and equities, and of all charges or claims, to all of the real and personal property owned by it, except liens, encumbrances and equities, and charges or claims, which are not material and do not materially affect the value of such property or interfere with the conduct of its business and has valid and binding leases to all of the 4 real and personal property described in the Disclosure Package as under lease to it with such exceptions as do not materially interfere with the conduct of its business. (p) The Company has filed all federal, state and foreign income and franchise tax returns due prior to the date hereof and the date of the Closing and has paid all taxes, interest and penalties shown as due thereon; and the Company has received no notice of any material tax deficiency which has been asserted against the Company. (q) The Company has all requisite power and authority to issue, sell and deliver the Shares in accordance with and upon the terms set forth in this Agreement. The Company has duly taken all required action for the due and proper authorization, issuance, sale and delivery of the Shares. No preemptive rights of security holders of the Company exist with respect to the issuance and sale of the Shares by the Company. No security holder of the Company possesses any registration rights except as disclosed in the Disclosure Package. (r) In retaining and using the proceeds from the sale of the Shares, the Company will not be required to register as an "Investment Company" under the Investment Company Act of 1940, as amended. (s) Neither the Company, or to its knowledge any of its predecessors, any affiliated issuer nor any of the Company's directors, officers, beneficial owners of 10% or more of any class of its equity securities or other affiliates nor any promoter of the Company is subject to any of the disabilities enumerated in Exhibit E hereto and the representations and warranties contained therein are true and correct. (t) Other than as contemplated by this Agreement, the Company has not incurred any liability for any finder's or broker's fee or agent's commission in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. (u) On or prior to the Closing (as hereinafter defined) the Company will file a notice for the listing of the Shares offered hereby on the Nasdaq NMS. (v) The Company is subject to the reporting requirements of the Securities Act and the Exchange Act and (i) has timely filed all reports and statements required to be filed thereunder in the 12 month period prior to the date hereof except that with respect to the Company's annual report on Form 10-KSB for its fiscal year ended January 31, 1996 the Company has timely filed a Form 12b-25 and intends to file such 10-KSB within the time period permitted by such Form 12b-25; and (ii) each report and statement was true and complete in all material respects when filed. 4. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants 5 and agrees as follows: (a) The Company will promptly deliver to the Selling Agent and its counsel copies of the Disclosure Package and each amendment or supplement thereto. The Selling Agent is authorized on behalf of the Company to use and distribute copies of the Disclosure Package in connection with the sale of the Shares as, and to the extent, permitted by Federal and applicable state securities laws. (b) The Company will promptly notify the Selling Agent, by telephone and in writing of (i) the issuance of any stop order suspending the sale of securities of the Company, or of the institution or notice of intended institution of any action or proceeding for that purpose and (ii) any other communication directed to the Company by any public authority relating to the possible suspension of the qualification of the offer and sale of the securities of the Company in any state. (c) Until the Closing (as hereinafter defined) or the earlier termination of this Agreement, if any event relating to or affecting the Company, or of which the Company shall be advised in writing by the Selling Agent, shall occur as a result of which it is necessary, in the opinion of counsel for the Company or the Selling Agent, to supplement or amend the Disclosure Package in order to make the Disclosure Package not misleading in light of the circumstances existing at the time it is delivered to a purchaser of the Shares, the Company will forthwith prepare an amended or supplemented Disclosure Package (in form satisfactory to counsel for the Selling Agent) so that the amended or supplemented Disclosure Package will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time the Disclosure Package is delivered to such purchaser, not misleading. (d) The Company shall pay, or cause to be paid, all expenses incident to the performance of its obligations under this Agreement, including all expenses incident to the delivery of the Shares; the fees and expenses of counsel and accountants for the Company; the cost of filing the Form D and amendments thereto; and the cost of all blue sky filings, including legal expenses related thereto. The payment of all such fees and expenses shall not be conditioned upon the sale of any Shares. The Selling Agent will pay its own costs and expenses incident to the performance of its obligations under this agreement. (e) The Company will use the net proceeds from the sale of the Shares for working capital and general corporate purposes. (f) For a period of five years from the date hereof, the Company will furnish to the Selling Agent (i) within 100 days after the end of each fiscal year, a copy of the Company's annual report on Form 10-KSB or Form 10-K, including audited financial statements, together with a report thereon of its independent public 6 accountants, and (ii) within 55 days after the end of each of the first three quarters of each fiscal year, the Company's quarterly report on Form 10-Q or 10-QSB, including quarterly financial statements of the Company. (g) If, at any time prior to July 2, 1996, the Company intends to engage an underwriter, selling agent or placement agent in connection with any financing, the Company shall notify you in writing of such intention and the proposed terms of sale and you shall have the right of first refusal to act in that capacity in accordance with the following provisions. The Company shall thereafter promptly furnish you with such information concerning the business, condition and prospects of the Company as you may reasonably request. If, within twenty (20) days of the receipt of such notice of intention or a statement of terms, you do not accept in writing such offer to act as underwriter, selling agent or placement agent with respect to such financing upon the terms proposed, the Company shall be free to negotiate with other underwriters, selling agents or placement agents with respect to any such financing and to effect the same on such proposed terms. Before the Company shall accept any proposal on terms which materially vary from such proposed terms, your preferential right shall be reinstated and the same procedure with respect to such notified proposal as provided above shall be adopted. The failure by you to exercise this right of first refusal in any particular instance shall not affect in any way such right with respect to any subsequent financing undertaken by the Company at any time prior to July 2, 1996. Notwithstanding the foregoing, the provisions of this subsection shall not apply if the Company engages an underwriter, selling agent or placement agent of national stature; provided, however, that in such event the Company will use reasonable, good-faith efforts to have the Selling Agent included as a co-managing underwriter, selling agent or placement agent. (h) If, at any time prior to July 2, 1996, the Company shall undertake any strategic partnership, sale of the Company or its assets, merger, acquisition of stock or assets of another entity, or similar transaction, and shall elect to retain an investment banker or financial advisor in connection with such transaction, the Selling Agent shall be granted a right of first refusal to act as the Company's investment banker or financial advisor, in the same manner provided in subsection (g) above; provided, however, that this subsection (h) shall not apply if the Company retains an investment bank of national stature. (i) The Company shall register the resale of the Shares in accordance with the provisions of Exhibit A attached hereto. In the event that (i) the Company shall fail to file with the Commission the Registration Statement described in Exhibit A (the "Registration Statement") by September 30, 1996; (ii) the Company shall fail to use its diligent, good faith efforts to have the Registration Statement declared effective by the Commission by November 30, 1996 and the Registration Statement is not declared effective by November 30, 1996; or (iii) the Registration Statement has not been declared effective by the Commission by June 1, 1997, then, on the date of the first 7 to occur of (i), (ii) or (iii) above (the "Extra Warrant Date") and on each monthly anniversary of the Extra Warrant Date thereafter until the earlier of the effective date of the Registration Statement ("Effective Date") or the twentieth monthly anniversary of the Extra Warrant Date, the Company shall issue to each investor in the offering warrants ("Extra Warrants") to purchase a number of shares of common stock equal to 5% of the number of Shares purchased by such investor in the offering. Each Extra Warrant shall entitle the holder thereof to purchase one share of common stock during the five-year period commencing on the date of issuance. The exercise price of the Extra Warrants shall be $2.00 per share. The exercise price and number of Extra Warrants shall be subject to adjustment in the event of a merger acquisition, recapitalization or stock split or reverse stock split of shares of the Company, the issuance by the Company of a stock dividend or any similar event. The Company shall include the shares underlying the Extra Warrants in the registration pursuant to the Registration Statement. 5. OFFERING PERIOD. Subject to applicable law, the Selling Agent shall commence the offer and sale of the Shares to investors on or as soon as is reasonably practicable following the date hereof and, unless otherwise terminated hereunder shall continue to offer and sell the Shares to investors until the earlier of (i) the date on which all of the Shares are sold, (ii) May 15, 1996 (unless extended up to 30 days by the Company and the Selling Agent); (iii) such earlier date as the Selling Agent and the Company mutually agree to terminate the offering; or (iv) on such date as the Selling Agent terminates its obligations under this Agreement as provided in Section 10 hereof. "Termination Date," as used herein, shall refer to the date on which the offering is terminated in accordance with the preceding sentence. 6. DELIVERY; PAYMENT AND CLOSING. (a) A closing of the sale of Shares shall be held on or before May 15, 1996 at a mutually agreeable time at the offices of Leonard, Street and Deinard Professional Association, Minneapolis, Minnesota, unless some other time and place is mutually agreed upon by the Company and the Selling Agent. Additional closings may be held from time to time thereafter, if the offering period is extended as provided in Section 5(ii) until all of the Shares are sold (in any such case, a "Closing.") (b) All checks and other funds received by the Selling Agent in subscription for the Shares shall be held by Selling Agent in accordance with Rule 15c2-4 under the Exchange Act until the Closing of the sale of such Shares. All subscriptions are subject to the reasonable approval of the Company. 7. CONDITIONS TO CLOSING. The obligation of the Selling Agent to close the Offering shall be conditioned upon the satisfaction of the following at each Closing: (a) The receipt by the Selling Agent of an opinion of counsel to the 8 Company, substantially in the form of Exhibit B hereto. (b) The receipt by the Selling Agent of a certificate of the President and Chief Financial Officer of the Company, stating that the representations and warranties contained in Section 3 hereof are true and correct in all respects as of the date of the Closing, that the Company has performed all of its agreements and obligations to be performed under this Agreement and that the Disclosure Package, as of the date of Closing, contains all material statements which are required to be made therein, does not include 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 not misleading in light of the circumstances under which they were made, in the form attached hereto as Exhibit C. (c) The receipt by the Selling Agent of a certificate of the Secretary of the Company in the form attached hereto as Exhibit D. (d) The receipt by the Selling Agent of a certificate of the Company in the form attached hereto as Exhibit E. (e) The receipt by Selling Agent of the commission referred to in Section 8 hereof. (f) Such other documents, opinions and certificates as the Selling Agent may reasonably request. 8. SALES COMMISSIONS. (a) At each Closing, and conditioned thereon, the Selling Agent shall receive from the Company as a commission 10% of the gross proceeds received from the sale of the Shares at such Closing. The commissions shall be payable to or upon the order of the Selling Agent in immediately available Minneapolis funds and may, at the option of the Selling Agent, be netted against the gross proceeds to be delivered by the Selling Agent to the Company. (b) If, during the period commencing on the Termination Date, as defined herein, and ending on the first anniversary thereof, the Company shall sell any securities (including, but not limited to, shares of common stock, debentures or warrants) to Special Situations Cayman Fund L.P. or Special Situations Fund III L.P., the Selling Agent shall be entitled to receive upon the sale of such securities a commission consisting of a cash amount equal to 10% of the purchase price paid for such securities by such purchaser. Upon any termination of this Agreement, the Selling Agent will provide the Company with a list of persons whom the Selling Agent contacted. 9 9. INDEMNIFICATION. (a) The Company shall indemnify and hold harmless the Selling Agent, and each person who controls (as such term is defined by Rule 405 under the Securities Act) the Selling Agent within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint and several, to which the Selling Agent or such controlling persons may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Disclosure Package, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any material breach by the Company of any of its representations, warranties or covenants contained herein; and will reimburse the Selling Agent and each such controlling person for any legal or other expenses reasonably incurred by such Selling Agent or such controlling person (including in settlement of any litigation, if such settlement is effected with the written consent of the Company) in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that: (i) such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Selling Agent specifically for use in the preparation of the Disclosure Package or any additions or supplements thereto or (ii) a court of competent jurisdiction shall have determined by a final judgment that such loss, claim, damage, liability or cost resulted exclusively from actions taken or omitted to be taken by the Selling Agent or such controlling persons due to its or his gross negligence, bad faith or willful misconduct or a breach of this Agreement by Selling Agent or such controlling persons. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) The Selling Agent will indemnify and hold harmless the Company, each person who controls (as such term is defined under Rule 405 under the Securities Act) the Company within the meaning of the Securities Act, each of its directors, and each of its officers, against any losses, claims, damages or liabilities, joint and several, to which the Company, any such controlling person, director or officer may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Disclosure Package, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission is made in the Disclosure Package or any 10 additions or supplements thereto, or such amendment or such supplement, in reliance upon and in conformity with written information furnished to the Company by the Selling Agent specifically for use in the preparation thereof; and will reimburse the Company, any such controlling person, director or officer for any legal or other expenses reasonably incurred by them (including in settlement of any litigation, if such settlement is effected with the written consent of the Selling Agent) in connection with investigating or defending any such loss, claim, damage, liability or action. This indemnity agreement will be in addition to any liability which the Selling Agent may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section, notify each indemnifying party in writing of the commencement thereof. The indemnification provided for in this Section 9 shall not be available to any party who fails to so notify each indemnifying party to the extent that the indemnifying party to whom notification was not given was unaware of the action to which the notification would have related and was prejudiced by the failure to notify; provided, however, that the omission to so notify each indemnifying party will not relieve any indemnifying party from any liability which it may have to any indemnified party otherwise than under this section. In case any such action is brought against any indemnified party, and it seeks or intends to seek indemnity from an indemnifying party and notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel chosen by the indemnifying party and reasonably satisfactory to the indemnified party; provided, however, if the defendants in any such action (including any impleaded parties) include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be a conflict between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel (but the indemnifying party shall not be liable for the expenses of more than one such separate counsel), to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of its election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in connection with the assumption of legal defenses in accordance with the above proviso or (ii) the indemnifying party shall not have employed counsel reasonably satisfactory 11 to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party. In no event shall any indemnifying party be liable in respect of any amounts paid in settlement of any action unless the indemnifying party shall have approved the terms of such settlement. (d) As an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding as to which indemnification hereunder is sought, commencing on the one hundred eightieth day after the service of a summons and complaint on the Selling Agent with respect to an action for which indemnification is sought, the Company will reimburse the Selling Agent on a monthly basis for all reasonable legal fees or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Selling Agent for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is ultimately held to have been improper, the Selling Agent shall promptly return it to the party or parties that made such payment, together with interest, determined on the basis of the base rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by Norwest Bank Minnesota, N.A., ("Prime Rate"). Any such required interim reimbursement payments which are not made to the Selling Agent within 30 days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (e) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Sections 9(a) or 9(b) is for any reason held, by a court of competent jurisdiction, to be unenforceable as to any party entitled to indemnity, the Company and the Selling Agent, or any controlling person of the foregoing, shall contribute to the aggregate losses, claims, damages and liabilities (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted) to which the Company and the Selling Agent, or any controlling person of the foregoing, may be subject (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, on the one hand, and the Selling Agent on the other from the offering contemplated hereby or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and of the Selling Agent on the other in connection with the statements or omissions which resulted in such loss, claim, damage, liability or expense, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Selling Agent on the other shall be deemed to be in the same proportion as the 12 total net proceeds from the offering (before deducting expenses) received by the Company bear to the total sales commissions received by the Selling Agent. The relative fault of the Company, on the one hand, and of the Selling Agent on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Selling Agent and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. No person guilty of fraudulent misrepresentation or guilty of misstating or misrepresenting a material fact or failing to state a material fact shall be entitled to contribution, as to any liability arising from such fraudulent misrepresentation or omission, from any person who was not guilty of such fraudulent or other misrepresentation or omission. 10. TERMINATION. The Selling Agent shall have the right to terminate its obligations under this Agreement by giving the Company notice as hereinafter specified at any time on or prior to the Closing if the Company shall have failed, refused or been unable, at or prior to the Closing, to perform any agreement on its part to be performed; if there shall have been a breach of any warranty or representation contained herein, or because any other conditions of the Selling Agent's obligations set forth herein are not fulfilled. Any such termination shall be without liability of any party to any other party. 11. REPRESENTATIONS AND AGREEMENTS TO SURVIVE. The respective covenants, agreements, representations and warranties of the Company and the Selling Agent hereunder, as set forth in, or made pursuant to this Agreement, shall remain in full force and effect regardless of any investigation made by or on behalf of any such party or any of its directors or officers or any controlling person, and shall survive delivery of and payment for the Shares; and the indemnification agreements contained in Section 9 shall also survive any termination of this Agreement. 12. NOTICES. Except as otherwise expressly provided in this Agreement or duly noticed hereunder, all notices and other communications hereunder shall be in writing and, if given to the Selling Agent, shall be mailed, delivered or telegraphed and confirmed to Miller Johnson & Kuehn Incorporated, 5500 Wayzata Boulevard, Suite 800 - 8th Floor, Minneapolis, Minnesota 55416, Attention: Paul R. Kuehn, with a copy to its counsel, Leonard, Street and Deinard, 150 South Fifth Street, Suite 2300, Minneapolis, Minnesota 55402, Attention: John C. Kuehn or, if given to the Company, shall be mailed, delivered or telegraphed and confirmed to Kurzweil Applied Intelligence, Inc., 411 Waverley Oaks Road, Waltham, Massachusetts 02154, Attention: Thomas Brew, with a copy to its counsel, Roger M. Barzun, Esq., P.O. Box 767, Concord, Massachusetts 01742-0767. 13. MISCELLANEOUS. This Agreement shall inure to the benefit of and be binding upon the successors of the Selling Agent and of the Company. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person or corporation, other than the parties hereto and their successors, and the controlling persons and 13 directors and officers referred to in Section 9 hereof, any legal or equitable right, remedy or claim under or in respect to this Agreement or any provision hereof. The term "successors" shall not include any purchaser of the Shares merely by reason of such purchase. No subrogee of a benefited party shall be entitled to any benefits hereunder. If the foregoing expresses our agreement with you, kindly confirm by signing the acceptance on the enclosed counterpart hereof and return the same to us, whereupon this letter and your acceptance shall become and constitute a binding agreement between the Company and the Selling Agent in accordance with its terms. Very truly yours, KURZWEIL APPLIED INTELLIGENCE, INC. By_________________________________ Thomas E. Brew, Jr., President The terms set forth in the foregoing Selling Agency Agreement between Kurzweil Applied Intelligence, Inc. and Miller Johnson & Kuehn Incorporated are hereby accepted and confirmed. MILLER, JOHNSON & KUEHN INCORPORATED By_________________________________ Paul R. Kuehn, President 14 Exhibit A REGISTRATION RIGHTS 1. Required Registration. As soon as practicable but in no event later than September 30, 1996, the Company shall file a Registration Statement under the Securities Act covering the offering and sale of the Shares purchased by the Investors, and will diligently proceed to use its diligent, good faith efforts to have such Registration Statement become effective with the Securities and Exchange Commission (the "Commission") as soon as possible thereafter and in any event no later than November 30, 1996. 2. Registration - General Provisions. (a) Whenever the Company is required to effect the registration of Shares under the Securities Act, the Company will: (i) Prepare and file with the Commission a registration statement with respect to such securities, and use its diligent, good faith efforts to cause such registration statement to become effective and remain effective until the earlier of the date on which: (i) all Shares have been sold or (ii) the Shares may be sold without restriction pursuant to Rule 144(k) under the Securities Act; (ii) prepare and file with the Commission such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective for the period required by Section 2(a)(i) above; (iii) provide Investors' counsel with reasonable opportunities to review and comment on, and otherwise participate in, the preparation of such registration statement; (iv) furnish to the Investors participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as the Investors and underwriters may reasonably request in order to facilitate the public offering of such securities; (v) use its diligent, good faith efforts to register or qualify the securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as any such Investor may reasonably request, except that the Company shall not for any purpose be required to execute a general consent to service of process (which shall not include a "Uniform Consent to Service of Process" or other similar consent to service of 15 process which relates only to actions or proceedings arising out of or in connection with the sale of securities, or out of a violation of the laws of the jurisdiction requesting such consent) or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (vi) notify the Investors, promptly after it shall receive notice thereof, of the time when such registration statement has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; (vii) notify the Investors promptly of any request by the Commission for the amending or supplementing of such registration statement or prospectus or for additional information; (viii) prepare and file with the Commission, promptly upon the request of any Investor, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for such Investor (and concurred in by counsel for the Company), is required under the Act or the rules and regulations thereunder in connection with the distribution of the Shares by such Investor; (ix) prepare and promptly file with the Commission and promptly notify the Investors of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading; (x) advise the Investors, and the Investors' counsel, if any, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; (xi) not file any amendment or supplement to such registration statement or prospectus to which a majority in interest of the Investors shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Act or the rules and regulations thereunder, after having been furnished with a copy thereof at least five business days prior to the filing thereof, unless in the opinion of counsel for the Company the filing of such amendment or supplement is reasonably necessary to protect the Company from any liabilities 16 under any applicable federal or state law and such filing will not violate applicable law; and (xii) at the request of any such Investor, furnish on the effective date of the registration statement and, if such registration includes an underwritten public offering, at the closing provided for in the underwriting agreement: (i) opinions, dated such respective dates, of the counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the Investor or Investors making such request, covering such matters as such underwriters may reasonably request; and (ii) letters, dated such respective dates, from the independent certified public accountants of the Company, addressed to the underwriters, if any, and to the Investor or Investors making such request, covering such matters as such underwriters may reasonably request, in which letter such accountants shall state (without limiting the generality of the foregoing) that they are independent certified public accountants within the meaning of the Act and that in the opinion of such accountants the financial statements and other financial data of the Company included in the registration statement or the prospectus or any amendment or supplement thereto comply in all material respects with the applicable accounting requirements of the Act. (b) The Company shall pay all Registration Expenses (as defined below) in connection with the inclusion of Shares in any Registration Statement, or application to register or qualify Shares under state securities laws, filed by the Company hereunder, other than as set forth herein. For purposes of this Agreement, the term "Registration Expenses" means the filing fees payable to the Commission, any state agency and the National Association of Securities Dealers, Inc.; the fees and expenses of the Company's legal counsel and independent certified public accountants in connection with the preparation and filing of the Registration Statement (and all amendments and supplements thereto) with the Commission; and all expenses relating to the printing of the Registration Statement, prospectuses and various agreements executed in connection with the Registration Statement. Notwithstanding the foregoing, the Investor will pay the fees and expenses of any legal counsel Investor may engage, as well as the Investor's proportionate share of any custodian fees or commission or discounts which may be payable to any underwriter. (c) The Investors acknowledge that there may occasionally be times when the Company must suspend the use of the prospectus forming a part of the Registration Statement, when there exists material non-public information relating to the Company (including, but not limited to, an acquisition, merger, recapitalization, consolidation, reorganization or similar transaction (or negotiations with respect thereto)) which in the reasonable opinion of the Company's Board of Directors should not be disclosed. Accordingly, the Company may suspend resales pursuant to such Registration Statement for a period not to exceed ninety (90) days in any twenty-four (24) month period if the Company has been advised by counsel and the Board of Directors reasonably concurs that the information the Board reasonably believes should not be disclosed is material and therefore the prospectus forming a part of the Registration Statement is not current. Each Investor agrees that it shall not sell any Shares 17 pursuant to said prospectus during the period commencing at the time at which the Company gives the Investor notice of the suspension of such prospectus and ending at the time the Company gives the Investor notice that the Investor may thereafter effect sales pursuant to such prospectus. 18 (d) The Company hereby indemnifies the holder of the Shares, its officers and directors, and any person who controls such holder within the meaning of Section 15 of the Securities Act of 1933, against all losses, claims, damages and liabilities caused by any untrue statement of a material fact contained in any registration statement, prospectus, notification or offering circular (and as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus or caused by any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made except insofar as such losses, claims, damages or liabilities are caused by any untrue statement or omission contained in information furnished in writing to the Company by such holder expressly for use therein, and each such holder severally agrees that it will indemnify and hold harmless the Company and each of its officers who signs such registration statement and each of its directors and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act of 1933 with respect to losses, claims, damages or liabilities which are caused by any material untrue statement or omission contained in information furnished in writing to the Company by such holder expressly for use therein. 19 Exhibit B MATTERS TO BE COVERED IN OPINION OF ROGER M. BARZUN (1) The Company has been duly incorporated and is validly existing in good standing under the laws of the State of Delaware; has the requisite corporate power to own, lease and operate its properties and conduct its business as described in the Disclosure Package; and is duly qualified to do business as a foreign corporation in good standing in all jurisdictions where the ownership or leasing of its properties or the conduct of its business requires such qualification and in which the failure to be qualified or in good standing would have a material adverse effect on its business; (2) The Company has the corporate power to enter into the Selling Agency Agreement and the Purchase Agreement, and the Selling Agency Agreement and the Purchase Agreement have been duly and validly authorized, executed and delivered by or on behalf of the Company and are the valid and binding obligation of the Company, enforceable in accordance with its terms, subject, as to the enforcement or remedies, to applicable bankruptcy, insolvency, moratorium and other laws affecting the rights of creditors generally, and except that rights to indemnify may be limited by federal or state securities laws and subject to general principles of equity. (3) Both the number of authorized shares and the number of outstanding shares of capital stock of the Company set forth in the Disclosure Package under the caption "Description of Shares" are correct as of the date of the Disclosure Package and as of the date hereof. All outstanding capital stock of the Company has been duly authorized and validly issued, and is fully paid, and nonassessable. To the knowledge of such counsel, no preemptive rights, contractual or otherwise, of securities holders of the Company exist with respect to the issuance or sale of the Shares by the Company pursuant to this Agreement. The Shares conform as to matters of law in all material respects to the description concerning them made in the Disclosure Package, and such description accurately sets forth the material legal provisions thereof required to be set forth in the Disclosure Package, or any such amendment or supplement. (4) The Shares have been duly authorized and, upon delivery to the investors against payment therefor, will be validly issued, fully paid and nonassessable. (5) To such counsel's knowledge, the execution, delivery, and performance of this Agreement will not violate or conflict with the articles of incorporation or bylaws of the Company, nor will the execution, delivery and performance of this Agreement be in material contravention of any of the provisions of any note, indenture, mortgage, deed of trust, joint venture agreement, agreement or other instrument known to such counsel to which the Company is a party or by which it is bound and which is material to the business of the Company as a whole, or of any material law, rule or regulation of the United States or the State of Massachusetts or any order, writ, injunction or decree of any government, governmental agency, or court having jurisdiction over the Company or any of its properties 20 (except federal and state securities laws). (6) To the best of such counsel's knowledge, (A) there are no material statutes, agreements, contracts, leases, or other documents or material legal or governmental proceedings of a character required by the Act and the Rules and Regulations to be described or referred to in the Disclosure Package which are not so described and (B) all descriptions of legal or governmental proceedings and of agreements, contracts and leases contained in the Disclosure Package constitute fair and accurate summaries of such proceedings, agreements, contracts and leases and fairly present the information called for with respect to the same. (7) No authorization, approval or consent of any governmental authority or agency is necessary in connection with any issuance and sale of the Shares, as contemplated under this Agreement, except such as may be required under the Act or under state or other securities laws in connection with any purchase and distribution of such securities by the Selling Agent. (8) Assuming the accuracy of the representations and warranties of the purchaser in the Purchase Agreement, the offer and sale of the Shares are exempt from registration under the Securities Act of 1933. (9) To the best of such counsel's knowledge, the Company is not in default of its articles of incorporation or bylaws or of any of the agreements to which the Company is a party which have been identified by the Company as material agreements and which are listed on the attached Schedule 1. (10) Such counsel shall also state that, although such counsel are not opining as to, and cannot guarantee the accuracy and completeness of the statements contained in the Disclosure Package, in the course of such counsel's representation of the Company nothing has come to the attention of such counsel which causes them to believe that the Disclosure Package (except as to the financial statements and supporting financial data included or incorporated therein, as to which such counsel need express no opinion) contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that such statement does not require any statement concerning statements in, or omissions from, the Disclosure Package which are based upon and conform to written information furnished to the Company by the Selling Agent. In expressing the foregoing opinions, as to matters of fact, counsel may rely, to the extent reasonable, upon certificates of public officials and of the responsible officers of the Company. 21 Exhibit C OFFICERS' CERTIFICATE CERTIFICATE OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER Pursuant to Section 7(b) of the Selling Agency Agreement, dated _____________, 1996, (the "Agency Agreement") between Kurzweil Applied Intelligence, Inc. (the "Company") and Miller, Johnson & Kuehn, Incorporated, the undersigned, being the duly elected Chief Executive Officer and Chief Financial Officer, respectively, of the Company, hereby certify that: 1. Each of the representations and the warranties of the Company set forth in Section 3 of the Agency Agreement are true and correct on this date as if made by the Company on this date. 2. The Company has performed all of its agreements and obligations to be performed under the Agency Agreement. 3. The Disclosure Package of the Company, dated ____________, 1996, does not contain any 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 light of the circumstances under which they were made, not misleading. Dated: ____________, 1996 ___________________________ _________________ Chief Executive Officer ___________________________ __________________ Chief Financial Officer 22 Exhibit D CERTIFICATE OF SECRETARY I, _______________, the duly elected and acting Secretary of Kurzweil Applied Intelligence, Inc., a Delaware corporation (the "Company"), do hereby certify as follows: 1. Attached hereto as Exhibit A is a true, complete and correct copy of the Amended and Restated Certificate of Incorporation of the Company. There have been no amendments to such Amended and Restated Certificate of Incorporation of the Company and no amendments have been authorized or contemplated as of the date hereof, except as indicated in the Proxy Statement for the Company's Annual Meeting of Shareholders, dated _________________, 1996. 2. Attached hereto as Exhibit B is a true, correct and complete copy of the Bylaws of the Company. 3. Attached hereto as Exhibit C is a true, correct and complete copy of resolutions duly adopted by unanimous written action of the Board of Directors of the Company, effective _______________, 1996, which resolutions have not been amended or repealed and are in full force and effect on the date hereof. 4. The following persons are the duly qualified and acting officers of the Company duly elected or appointed to the offices set forth opposite their respective names, and the signatures set forth opposite their names are their true and genuine signatures: Name Office Signature ______________ President and Chief Executive Officer _____________________ ______________ Secretary, Treasurer and Chief Financial Officer _____________________ IN WITNESS WHEREOF, I have executed this Certificate the day of May, 1996. ________________, Secretary I, _________, do hereby certify that I am the duly elected, qualified and acting President and Chief Executive Officer of the Company, and do further certify that ________________ is the duly elected, qualified and acting Secretary of the Company and that the foregoing signature is his true and genuine signature. 23 Dated: May __, 1996 EXHIBIT E ISSUER BAD BOY CERTIFICATE 1. Neither the Issuer, any of its predecessors nor any affiliated issuer: (a) has filed a registration statement which is the subject of any pending proceeding or examination under Section 8 of the Securities Act of 1933 (the "1933 Act") or is the subject of any refusal order or stop order thereunder within the past five years; (b) is subject to any pending proceeding under Rule 258 promulgated under the 1933 Act or any similar rule adopted under Section 3(b) of the 1933 Act, or to an order entered thereunder within the past five years; (c) has been convicted within the past five years of any felony or misdemeanor in connection with the purchase or sale of any security or involving the making of any false filing with the United States Securities and Exchange Commission (the "SEC"); (d) is subject to any order, judgment, or decree of any court of competent jurisdiction temporarily or preliminary restraining or enjoining, or is subject to any order, judgment, or decree of any court of competent jurisdiction, entered within the past five years, permanently restraining or enjoining, such person from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security or involving the making of any false filing with the SEC; or (e) is subject to a United States Postal Service false representation order entered under Section 3005 of Title 39, United States Code, within the past five years; or is subject to a temporary restraining order or preliminary injunction entered under Section 3007 of Title 39, United States Code, with respect to conduct alleged to have violated Section 3005 of Title 39, United States Code. 2. None of the Issuer's directors, officers, general partners, or beneficial owners of 10% or more of any class of its equity securities ("Beneficial Owner") means a person having the power to vote or direct the vote and/or the power to dispose or direct the disposition of such securities), nor any of its promoters presently connected with it in any capacity: (a) has been convicted within the past ten years of any felony or misdemeanor in connection with the purchase or sale of any security, involving the making of a false filing with the SEC, or arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, or investment advisor; 1 (b) is subject to any order, judgment, or decree of any court of competent jurisdiction temporarily or preliminarily enjoining or restraining, or is subject to any order, judgment, or decree of any court of competent jurisdiction, entered within the past five years, permanently enjoining or restraining such person from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security or involving the making of a false filing with the SEC, or arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, or investment advisor; (c) is subject to an order of the SEC entered pursuant to Section 15(b), Section 15(B)(a) or 15(B)(c) of the Securities Exchange Act of 1934 (the "1934 Act"); or is subject to an order of the SEC entered pursuant to Section 203(e) or (f) of the Investment Advisors Act of 1940; (d) is suspended or expelled from membership in, or suspended or barred from association with a member of, an exchange registered as a national securities exchange pursuant to Section 6 of the 1934 Act, an association registered as a national securities association under Section 15A of the 1934 Act, or a Canadian securities exchange or association for any act or omission to act constituting conduct inconsistent with just and equitable principles of trade; or (e) is subject to a United States Postal Service false representation order entered under Section 3005 of Title 39, United States Code, within the past five years; or is subject to a restraining order or preliminary injunction entered under Section 3005 of Title 39, United States Code. 2 EX-10.2 3 PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT This Agreement is made and entered into as of the 8th day of May, 1996, between Kurzweil Applied Intelligence, Inc., a Delaware corporation (the "Company"), and each Investor listed on Schedule 1 hereto (the "Investor"). For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged by the Company and the Investor, the Company and the Investor agree as follows: 1. Sale and Purchase of Securities. Subject to the terms and conditions hereof, the Company agrees to sell to the Investor, and the Investor agrees to purchase from the Company on the Closing Date (as defined herein), the number of shares of common stock, $.01 par value per share of the Company (the "Shares") indicated on the acceptance page hereof at a purchase price of Two Dollars ($2.00) per Share. 2. Closing. The closing of the transactions contemplated by Section 1 of this Agreement shall take place at the offices of Leonard, Street and Deinard Professional Association, Minneapolis, Minnesota, at 10:00 a.m., Minnesota time, on May 8, 1996 (the "Closing Date") and/or at such other place or different time or day as may be mutually acceptable to the Investor and the Company. At the closing, the Company will deliver to the Investor a certificate, dated such closing date, representing the Shares purchased by the Investor registered in the name of the Investor (or its nominee) against payment to the Company of the purchase price of the Shares being purchased by the Investor. 3. Representations and Warranties by the Company. To induce the Investor to enter into this Agreement and to purchase the Shares, the Company hereby represents and warrants to the Investor as follows: 3.1 Disclosure Package. The disclosure document, dated May 7, 1996 delivered to the Investor (which, together with any supplements or amendments thereto including any documents referred to or incorporated by reference therein is herein defined as the "Disclosure Package") with respect to the Shares fairly presents all material information regarding the Company and of the date hereof and as of the date of the Closing, the Disclosure Package will (i) fairly present all material information regarding the Company; and (ii) not include 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 not misleading, in light of the circumstances under which they were made. 3.2 Organization, Standing, Etc. The Company is duly incorporated and validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority to own its properties and conduct its business as described in the Disclosure Package. The Company has no subsidiaries. The Company is duly qualified to do business as a foreign corporation and is in good standing in all states or jurisdictions in which the ownership or leasing of its property or the conduct of its business requires such qualification and the failure to be so qualified would have a materially adverse effect on the Company's business. 3.3 Financial Statements. The financial statements (including all related schedules and notes) set forth in the Disclosure Package fairly represent the financial condition and results of operations of the Company as of the dates and for the periods indicated; such statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods indicated; and, the report of the public accountant included in the Disclosure Package is issued by an independent public accountant within the meaning of the Securities Exchange Act of 1934 (the"Exchange Act") and the rules and regulations thereunder. 3.4 Authorization and Enforceability. The Company has full legal power, right and authority to enter into this Agreement. This Agreement has been duly authorized, executed and delivered on behalf of the Company and this Agreement is the valid and binding obligation of the Company, subject, as to enforcement, to applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting the rights of creditors generally, to the exercise of judicial discretion as to the availability of equitable remedies such as specific performance and injunction and subject, as to enforcement of the indemnification provisions, to limitations under applicable securities laws. 3.5 License and Approvals. Except as set forth in the Disclosure Package, the Company has all licenses, certificates, permits and other approvals from governmental and regulatory authorities necessary for the conduct of its business as it is currently being carried on and as will be described in the Disclosure Package, except those which would not have a material adverse effect on the Company if not obtained. 3.6 Intellectual Property. Except as set forth in the Disclosure Package, the Company owns or possesses all assets, patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets and rights necessary for the conduct of its business as it is currently being carried on and has not received any notice of conflict with the asserted rights of others in respect thereof. Except as set forth in the Disclosure Package or except as will not have a material adverse effect on the Company, no name which the Company uses and no other aspect of the business of the Company involves or gives rise to any infringement of, or license or similar fees for, any patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets or other similar rights of others. 3.7 Changes. Since the date of the Disclosure Package and other than as therein contemplated (i) the Company has not incurred any material liabilities or obligations, contingent or otherwise, not in the ordinary course of business, (ii) the Company has not paid or declared any dividend or other distribution with respect to its outstanding capital stock, (iii) there has not been any change in the capital stock or any material increase in the long-term 2 debt of the Company, or any issuance of shares of capital stock of the Company or of options, warrants, or rights to purchase capital stock of the Company, (iv) no material loss or damage (whether or not insured) to the property of the Company has been sustained, (v) no material legal or governmental proceeding, domestic or foreign, affecting the Company or the transactions contemplated by this Agreement has been instituted or, to the best of the Company's knowledge, threatened, and (vi) there has not been any material adverse change in the business, condition (financial or otherwise) or properties of the Company. 3.8 Defaults. The Company is not in breach, default or violation of, and the consummation of the transactions herein contemplated will not result in any breach of, any of the terms or conditions of, or constitute a default or violation under, (i) the Certificate of Incorporation or By-Laws of the Company, (ii) any material indenture, agreement or other instrument to which the Company is now a party, or (iii) any law or any order, rule or regulation applicable to the Company of any court or of any federal or state regulatory body or administrative agency having jurisdiction over the Company or its property, except for such breaches, defaults or violations which would not have a material adverse effect on the Company. 3.9 Consents. No approval, authorization, consent or order of any governmental or public board or body or self-regulatory organization, other than in connection with or in compliance with the provisions of the Securities Act of 1933 (the "Securities Act"), the Exchange Act and the securities laws of various jurisdictions, is legally required for the sale of the Shares by the Company. 3.10 Shares. The Shares, when issued and delivered against payment therefor in accordance with this Agreement, will conform in all material respects to all statements made in relation thereto contained in the Disclosure Package, and will be duly authorized, validly issued, fully paid and non-assessable and shall be free of any pledges, liens, encumbrances and restrictions. 3.11 Litigation/Proceedings. Except as set forth in the Disclosure Package, there are no pending or, to the Company's knowledge, threatened or contemplated actions, suits or proceedings before or by any court or governmental agency, authority or body, or any arbitrator, which are not ordinary, routine and incidental to the business of the Company or which might reasonably be expected to result in any material adverse change in the business condition (financial or otherwise) or properties of the Company. 3.12 Capital Stock. The Disclosure Package sets forth as of the date thereof the authorized capital stock of the Company, the number of shares which are issued and outstanding and the number of shares reserved for issuance upon exercise of options, warrants, rights and convertible instruments and there has been no material adverse change in such amounts as of the date hereof. All outstanding shares of capital stock have been duly authorized, validly issued, fully paid and nonassessable and have been issued pursuant to valid registrations under, or valid exemptions from, the registration requirements of, the Securities 3 Act and appropriate state blue sky laws. The capital stock of the Company conforms to the description thereof contained in the Disclosure Package. 3.13 Title to Properties. The Company has good and marketable title, free and clear of all liens, encumbrances and equities, and of all charges or claims, to all of the real and personal property owned by it, except liens, encumbrances and equities, and charges or claims, which are not material and do not materially affect the value of such property or interfere with the conduct of its business and has valid and binding leases to all of the real and personal property described in the Disclosure Package as under lease to it with such exceptions as do not materially interfere with the conduct of its business. 3.14 Tax Returns. The Company has filed all federal, state and foreign income and franchise tax returns due prior to the date hereof and has paid all taxes, interest and penalties shown as due thereon; and the Company has received no notice of any material tax deficiency which has been asserted against the Company. 3.15 Authority. The Company has all requisite power and authority to issue, sell and deliver the Shares in accordance with and upon the terms set forth in this Agreement. The Company has duly taken all required action for the due and proper authorization, issuance, sale and delivery of the Shares. No preemptive rights of security holders of the Company exist with respect to the issuance and sale of the Shares by the Company. No security holder of the Company possesses any registration rights except as disclosed in the Disclosure Package. 3.16 Investment Company. In retaining and using the proceeds from the sale of the Shares, the Company will not be required to register as an "Investment Company" under the Investment Company Act of 1940, as amended. 3.17 Bad Boy Certification. Neither the Company, or to its knowledge, any of its predecessors, any affiliated issuer nor any of the Company's directors, officers, beneficial owners of 10% or more of any class of its equity securities or other affiliates nor any promoter of the Company is subject to any of the disabilities enumerated in Exhibit A hereto and the representations and warranties contained therein are true and correct. 3.18 Fees and Commissions. Other than pursuant to agreements with Miller, Johnson and Kuehn Incorporated, the Company has not incurred any liability for any finder's or broker's fee or agent's commission in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. 3.19 Nasdaq NMS. On or prior to the Closing Date (as hereinafter defined) the Company will file a notice for the listing of the Shares offered hereby on the Nasdaq NMS. 3.20 Reporting. The Company is subject to the reporting requirements of the Securities Act and the Exchange Act and (i) has timely filed all reports and statements 4 required to be filed thereunder in the 12 month period prior to the date hereof, except that with respect to the Company's annual report on Form 10-KSB for its fiscal year ended January 31, 1996, the Company has timely filed a Form 12b-25 and intends to file such 10- KSB within the time period permitted by such Form 12b-25; and (ii) each report and statement was true and complete in all material respects when filed. 5 4. Representations of the Investor. The Investor represents for itself that: 4.1 Investment Intent. The Shares being acquired by the Investor are being purchased for investment for the Investor's own account and not with the view to, or for resale in connection with, any distribution or public offering thereof. The Investor understands that the Shares have not been registered under the Securities Act or any state securities laws by reason of their contemplated issuance in a transaction exempt from the registration requirements of the Securities Act and applicable state securities laws, and that the reliance of the Company upon these exemptions is predicated in part upon this representation by the Investor. The Investor further understands that the Shares may not be transferred or resold without (i) registration under the Securities Act and any applicable state securities laws, or (ii) an exemption from the requirements of the Securities Act and applicable state securities laws. 4.2 Location of Principal Office, Qualification as an Accredited Investor, Etc. The state in which the Investor's principal office is located is the State set forth in such Investor's address on Schedule 1 hereto. The Investor qualifies as an accredited investor for purposes of Regulation D promulgated under the Securities Act. The Investor acknowledges that the Company has made available to the Investor at a reasonable time prior to the execution of this Agreement the opportunity to ask questions and receive answers concerning the business and affairs of the Company and the terms and conditions of the sale of securities contemplated by this Agreement and to obtain any additional information (which the Company possesses or can acquire without unreasonable effort or expense) as may be necessary to verify the accuracy of information furnished to the Investor. The Investor (a) is able to bear the loss of its entire investment in the Shares without any material adverse effect on its business, operations or prospects, and (b) has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment to be made by it pursuant to this Agreement. 4.3 Acts and Proceedings. This Agreement has been duly authorized by all necessary action on the part of the Investor, has been duly executed and delivered by the Investor, and is a valid and binding agreement of the Investor. 5. Conditions of the Investor's Obligation. The obligation to purchase and pay for the Shares on the Closing Date is subject to the fulfillment prior to or on the Closing Date of the conditions set forth in this Section 5. In the event that any such condition is not satisfied to the satisfaction of the Investor, then the Investor shall not be obligated to proceed with the purchase of the Shares. 5.1 No Errors. Etc. The representations and warranties of the Company under this Agreement shall be true in all material respects as of the Closing Date with the same effect as though made on and as of the Closing Date. 6 5.2 Compliance with Agreement. The Company shall have performed and complied with all agreements or conditions required by this Agreement to be performed and complied with prior to or as of the Closing Date. 5.3 Certificate of Officers. The Company shall have delivered to the Investor a certificate, dated the Closing Date, executed by the President and the Chief Financial Officer of the Company and certifying to the satisfaction of the conditions specified in Sections 5.1 and 5.2. 5.4 Opinion of the Company's Counsel. The Company shall have delivered to the Investor an opinion, satisfactory to each of the Investors, of Roger M. Barzun, counsel for the Company, dated the closing date, in the form attached hereto as Exhibit B. 5.5 Supporting Documents. The Investor shall have received the following: (a) A copy of resolutions of the Board of Directors of the Company certified by the Secretary of the Company authorizing and approving the execution, delivery and performance of this Agreement and issuance of the Shares; (b) A certificate of incumbency executed by the Secretary of the Company certifying the names, titles and signatures of the officers authorized to execute this Agreement and further certifying that the certificate of incorporation and bylaws of the Company delivered to the Investor at the time of the execution of this Agreement have been validly adopted and have not been amended or modified; and (c) Such additional supporting documentation and other information with respect to the transactions contemplated hereby as the Investor may reasonably request. 5.6 Qualification Under State Securities Laws. All registrations, qualifications, permits and approvals required under applicable state securities laws for the lawful execution and delivery of this Agreement and the offer, sale, issuance and delivery of the Shares to the Investor at the closing shall have been obtained. 5.7 Proceeding and Documents. All corporate and other proceedings and actions taken in connection with the transactions contemplated hereby and all certificates, opinions, agreements, instruments and documents mentioned herein or incident to any such transaction shall be satisfactory in form and substance to the Investor. 6. Affirmative Covenants of the Company. The Company covenants and agrees as follows: 7 6.1 Corporate Existence. The Company will maintain its corporate existence in good standing and comply with all applicable laws and regulations of the United States or of any state or political subdivision thereof and of any government authority where failure to so comply would have a material adverse impact on the Company or its business or operations. 6.2 Books of Accounts and Reserves. The Company will keep books of record and account in which full, true and correct entries are made of all of its respective dealings, business and affairs, in accordance with generally accepted accounting principles. The Company will employ certified public accountants who are "independent" within the meaning of the accounting regulations of the Securities and Exchange Commission (the "Commission"). 6.3 Application of Proceeds. The net proceeds received by the Company from the sale of the Shares on the closing date shall be used for working capital and general corporate purposes. 6.4 Patents and Other Intangible Rights. The Company will apply for, or use its diligent good faith efforts to obtain assignments of, or licenses to use, all patents, trademarks, trade names and copyrights which in the opinion of a prudent and experienced businessperson operating in the industry in which the Company is operating are desirable or necessary for the conduct and protection of the business of the Company. 6.5 Registration. The Company will register the resale of the Shares in accordance with the provisions of Exhibit C attached hereto. In the event that (i) the Company shall fail to file with the Commission the Registration Statement described in Exhibit C (the "Registration Statement") by September 30, 1996; (ii) the Company shall fail to use its diligent, good faith efforts to have the Registration Statement declared effective by the Commission by November 30, 1996 and the Registration Statement is not declared effective by November 30, 1996; or (iii) the Registration Statement has not been declared effective by the Commission by June 1, 1997, then, on the date of the first to occur of (i), (ii) or (iii) above (the "Extra Warrant Date") and on each monthly anniversary of the Extra Warrant Date thereafter until the earlier of the effective date of the Registration Statement ("Effective Date") or the twentieth monthly anniversary of the Extra Warrant Date, the Company shall issue to each investor in the offering warrants ("Extra Warrants") to purchase a number of shares of common stock equal to 5% of the number of Shares purchased by such investor in the offering. Each Extra Warrant shall entitle the holder thereof to purchase one share of common stock during the five-year period commencing on the date of issuance. The exercise price of the Extra Warrants shall be $2.00 per share. The exercise price and number of Extra Warrants shall be subject to adjustment in the event of a merger acquisition, recapitalization or stock split or reverse stock split of shares of the Company, the issuance by the Company of a stock dividend or any similar event. The Company shall include the shares underlying the Extra Warrants in the registration pursuant to the Registration Statement. 7. Indemnification. 8 The Company will indemnify and hold harmless the Investor and each person, if any, who controls the Investor within the meaning of the Securities Act, from and against any and all loss, damage, liability, cost and expense to which the Investor or any such controlling person may become subject, insofar as such losses, damages, liabilities, costs or expenses caused by (i) any untrue statement or alleged untrue statement of any material fact contained herein, or arise out of or are based upon the omission or alleged omission to state herein a material fact required to be stated herein or necessary to make the statements herein, in light of the circumstances in which they were made, not misleading or (ii) any breach of any representation, warranty or agreement of the Company hereunder; provided, however, that the Company will not be liable in any such case to the extent that a court of competent jurisdiction shall have determined by a final judgement that such loss, damage, liability, cost or expense resulted exclusively from actions taken or omitted to be taken by the Investor or such controlling person due to its or his gross negligence, bad faith, willful misconduct or breach of this Agreement. Promptly after receipt by an indemnified party pursuant to this Section of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions, such indemnified party will, if a claim thereof is to be made against the Company pursuant to the provisions hereof, promptly notify the Company of the commencement thereof; but the omission to so notify the Company will not relieve it from any liability which it may have to any indemnified party otherwise than hereunder. In case such action is brought against any indemnified party and it notifies the Company of the commencement thereof, the Company shall have the right to participate in, and, to the extent that it may wish, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, if the defendants in any action include both the indemnified party and the Company and there is a conflict of interest which would prevent counsel for the indemnifying party from also representing the indemnified party, the indemnified party or parties shall have the right to select separate counsel for participation in the defense of such action on behalf of such indemnified party or parties. After notice from the Company to such indemnified party of its election so to assume the defense thereof, the Company will not be liable to such indemnified party pursuant to the provisions of this Section 7 for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless (i) the indemnified party shall have employed counsel in accordance with the proviso of the preceding sentence, (ii) the Company shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the notice of the commencement of the action, or (iii) the Company has authorized the employment of counsel for the indemnified party at the expense of the Company. 8. Restriction on Transfer of Shares. 8.1 Legend. Each certificate representing Shares shall be endorsed with a legend in substantially the form which follows: "The shares represented by this certificate may not be transferred without (i) the opinion of counsel satisfactory to this corporation that such transfer may lawfully be made without registration under the 9 federal Securities Act of 1933 and all applicable state securities laws or (ii) such registration." 8.2 Removal of Legend. Any legend endorsed on a certificate evidencing a security pursuant to Section 8.1 hereof shall be removed, and the Company shall issue a certificate without such legend to the holder of such security, if such security is being disposed of pursuant to a registration under the Securities Act or pursuant to Rule 144 or any similar rule then in effect or if such holder provides the Company with an opinion of counsel satisfactory to the Company to the effect that a transfer of such security may be made without registration. In addition, if the holder of such security delivers to the Company an opinion of such counsel to the effect that no subsequent transfer of such security will require registration under the Securities Act, the Company will promptly upon such contemplated transfer deliver new certificates evidencing such security that do not bear the legend set forth in Section 8.1. 9. Miscellaneous. 9.1 Changes, Waivers, Etc. Neither this Agreement nor any provisions hereof may be changed, waived, discharged or terminated orally, but only by a statement in writing, signed by the party against which enforcement of the change, waiver, discharge or termination is sought. 9.2 Notices. All notices, requests, consents and other communications required or permitted hereunder shall be in writing and shall be delivered, or mailed first-class postage prepaid, registered or certified mail: (a) if to Investor at their address listed on Schedule I attached hereto. or (b) if to the Company at Kurzweil Applied Intelligence, Inc., 411 Waverley Oaks Road, Waltham, MA 02154, Attention: President; or at such other address as the Company may specify by written notice to the Investor; with a copy to Roger M. Barzun, Esq., P.O. Box 767, Concord Massachusetts 01742-0767. and such notices and other communications shall for all purposes of this Agreement be treated as being effective or having been given if delivered personally, or, if sent by mail, when received. 9.3 Survival of Representations and Warranties, Etc. All representations and warranties and agreements contained herein shall survive the execution and delivery of this Agreement, any investigation at any time made by the Investor or on its behalf, and the sale and purchase of the Shares and payment therefor. All statements contained in any certificate, instrument or other writing delivered by or on behalf of the Company pursuant to 10 this Agreement (other than legal opinions) at the closing shall constitute representations and warranties by the Company hereunder. 9.4 Parties in Interest. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not, and, in particular, shall inure to the benefit of and be enforceable by the holder or holders from time to time of any of the Shares. 9.5 Headings. The headings of the articles and sections of this Agreement have been inserted for convenience of reference only and do not constitute a part of this Agreement. 9.6 Choice of Law. The laws of Massachusetts shall govern the validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties hereunder. 9.7 Counterparts. This Agreement may be executed at different times and in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date indicated above. Kurzweil Applied Intelligence, Inc. By ____________________________________ Thomas E. Brew, Jr., President 11 SCHEDULE 1 Special Situations Cayman Fund, L. P. 331,250 shares 153 East 53rd Street New York, NY 10022 Special Situations Fund III, L.P. 988,800 shares 153 East 53rd Street New York, NY 10022 12 ACCEPTANCE The undersigned hereby accepts and agrees to the terms and conditions set forth in the Stock Purchase Agreement attached hereto by and among Kurzweil Applied Intelligence, Inc. (the "Company") and certain investors listed on Schedule I thereto as the terms and conditions applicable to the purchase of _________ shares of the common stock, $.01 par value per share, of the Company for an aggregate purchase price of $________. By the execution of this acceptance, the undersigned hereby makes each of the representations contained in Section 5 of such Stock Purchase Agreement. The undersigned further represents that it qualifies as an "accredited investor" as that terms is defined in Regulation D under the Securities Act of 1933 because (check one): Accredited partnerships, corporations or other entities must initial one or more of the following statements: _____ The undersigned is a bank or savings and loan association as defined in Sections 3(a)(2) and 3(a)(5)(A), respectively, of the Act acting either in its individual or fiduciary capacity. _____ The undersigned is an insurance company as defined in Section 2(13) of the Act. _____ The undersigned is an investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act. _____ The undersigned is a Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958. _____ The undersigned is an employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 and either (check one or more, as applicable): _____ (a) the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment adviser; or _____ (b) the employee benefit plan has total assets in excess of $5,000,000; or 13 _____ (c) the plan is a self-directed plan with investment decisions made solely by persons who are "Accredited Investors" as defined under the Act. _____ The undersigned is a private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940. _____ The undersigned has total assets in excess of $5,000,000, was not formed for the specific purpose of acquiring Shares and is one or more of the following (check one or more, as appropriate): _____ (a) an organization described in Section 501(c)(3) of the Internal Revenue Code; or _____ (b) a corporation; or _____ (c) a Massachusetts or similar business trust; or _____ (d) a partnership. _____ The undersigned is a trust with total assets exceeding $5,000,000, which was not formed for the specific purpose of acquiring Shares and whose purchase is directed by a person who has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the investment in the Shares. The undersigned makes the following additional representation: This Agreement has been duly authorized by all necessary action on the part of the undersigned, has been duly executed by an authorized officer or representative of the undersigned, and is a legal, valid and binding obligation of the undersigned enforceable in accordance with its terms. 14 * * * * * * * * Dated: ________________, 1996 ENTITY INVESTORS _________________________________ Name of Entity, By_______________________________ *Signature Its______________________________ Title _________________________________ Name Typed or Printed _________________________________ Address to Which Correspon- dence Should be Directed ________________________________ _________________________________ City, State and Zip Code _________________________________ Tax Identification Number * The Certificate of Signatory must also be completed. 15 CERTIFICATE OF SIGNATORY (To be completed if Shares are being subscribed for by an entity) I, ____________________________________, the _______________ __________________ of ___________________________________________ (the "Entity"), hereby certify that I am empowered and duly authorized by the Entity to execute and carry out the terms of the Purchase Agreement and to purchase the Shares, and certify further that the Purchase Agreement has been duly and validly executed on behalf of the Entity and constitutes a legal and binding obligation of the Entity. IN WITNESS WHEREOF, I have set my hand this ____ day of ______________, 1995. ___________________________________ (Signature) 16 ISSUER BAD BOY CERTIFICATE 1. Neither the Issuer, any of its predecessors nor any affiliated issuer: (a) has filed a registration statement which is the subject of any pending proceeding or examination under Section 8 of the Securities Act of 1933 (the "1933 Act") or is the subject of any refusal order or stop order thereunder within the past five years; (b) is subject to any pending proceeding under Rule 258 promulgated under the 1933 Act or any similar rule adopted under Section 3(b) of the 1933 Act, or to an order entered thereunder within the past five years; (c) has been convicted within the past five years of any felony or misdemeanor in connection with the purchase or sale of any security or involving the making of any false filing with the United States Securities and Exchange Commission (the "SEC"); (d) is subject to any order, judgment, or decree of any court of competent jurisdiction temporarily or preliminary restraining or enjoining, or is subject to any order, judgment, or decree of any court of competent jurisdiction, entered within the past five years, permanently restraining or enjoining, such person from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security or involving the making of any false filing with the SEC; or (e) is subject to a United States Postal Service false representation order entered under Section 3005 of Title 39, United States Code, within the past five years; or is subject to a temporary restraining order or preliminary injunction entered under Section 3007 of Title 39, United States Code, with respect to conduct alleged to have violated Section 3005 of Title 39, United States Code. 2. None of the Issuer's directors, officers, general partners, or beneficial owners of 10% or more of any class of its equity securities ("Beneficial Owner") means a person having the power to vote or direct the vote and/or the power to dispose or direct the disposition of such securities), nor any of its promoters presently connected with it in any capacity: 17 (a) has been convicted within the past ten years of any felony or misdemeanor in connection with the purchase or sale of any security, involving the making of a false filing with the SEC, or arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, or investment advisor; (b) is subject to any order, judgment, or decree of any court of competent jurisdiction temporarily or preliminarily enjoining or restraining, or is subject to any order, judgment, or decree of any court of competent jurisdiction, entered within the past five years, permanently enjoining or restraining such person from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security or involving the making of a false filing with the SEC, or arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, or investment advisor; (c) is subject to an order of the SEC entered pursuant to Section 15(b), Section 15(B)(a) or 15(B)(c) of the Securities Exchange Act of 1934 (the "1934 Act"); or is subject to an order of the SEC entered pursuant to Section 203(e) or (f) of the Investment Advisors Act of 1940; (d) is suspended or expelled from membership in, or suspended or barred from association with a member of, an exchange registered as a national securities exchange pursuant to Section 6 of the 1934 Act, an association registered as a national securities association under Section 15A of the 1934 Act, or a Canadian securities exchange or association for any act or omission to act constituting conduct inconsistent with just and equitable principles of trade; or (e) is subject to a United States Postal Service false representation order entered under Section 3005 of Title 39, United States Code, within the past five years; or is subject to a restraining order or preliminary injunction entered under Section 3005 of Title 39, United States Code. 3. If subject to the requirements of Sections 13, 14, or 15(d) of the 1934 Act, the Issuer has filed all reports required by those sections during the past 12 calendar months (or for such shorter period that the Issuer was required to file such reports). Dated May 9, 1996. KURZWEIL APPLIED INTELLIGENCE, INC. By: ______________________________ Its: _____________________________ 18 EXHIBIT B MATTERS TO BE COVERED IN OPINION OF ROGER M. BARZUN (1) The Company has been duly incorporated and is validly existing in good standing under the laws of the State of Delaware; has the requisite corporate power to own, lease and operate its properties and conduct its business as described in the Disclosure Package; and is duly qualified to do business as a foreign corporation in good standing in all jurisdictions where the ownership or leasing of its properties or the conduct of its business requires such qualification and in which the failure to be qualified or in good standing would have a material adverse effect on its business; (2) The Company has the corporate power to enter into the Selling Agency Agreement and the Purchase Agreement, and the Selling Agency Agreement and the Purchase Agreement have been duly and validly authorized, executed and delivered by or on behalf of the Company and are the valid and binding obligation of the Company, enforceable in accordance with its terms, subject, as to the enforcement or remedies, to applicable bankruptcy, insolvency, moratorium and other laws affecting the rights of creditors generally, and except that rights to indemnify may be limited by federal or state securities laws and subject to general principles of equity. (3) Both the number of authorized shares and the number of outstanding shares of capital stock of the Company set forth in the Disclosure Package under the caption "Description of Shares" are correct as of the date of the Disclosure Package and as of the date hereof. All outstanding capital stock of the Company has been duly authorized and validly issued, and is fully paid, and nonassessable. To the knowledge of such counsel, no preemptive rights, contractual or otherwise, of securities holders of the Company exist with respect to the issuance or sale of the Shares by the Company pursuant to this Agreement. The Shares conform as to matters of law in all material respects to the description concerning them made in the Disclosure Package, and such description accurately sets forth the material legal provisions thereof required to be set forth in the Disclosure Package, or any such amendment or supplement. (4) The Shares have been duly authorized and, upon delivery to the investors against payment therefor, will be validly issued, fully paid and nonassessable. (5) To such counsel's knowledge, the execution, delivery, and performance of this Agreement will not violate or conflict with the articles of incorporation or bylaws of the Company, nor will the execution, delivery and performance of this Agreement be in material contravention of any of the provisions of any note, indenture, mortgage, deed of trust, joint venture agreement, agreement or other instrument known to such counsel to which the Company is a party or by which it is bound and which is material to the business of the Company as a whole, or of any material law, rule or regulation of the United States or the State of Massachusetts or any order, writ, injunction or decree of any government, governmental agency, or court having jurisdiction over the Company or any of its properties (except federal and state securities laws). 19 (6) To the best of such counsel's knowledge, (A) there are no material statutes, agreements, contracts, leases, or other documents or material legal or governmental proceedings of a character required by the Act and the Rules and Regulations to be described or referred to in the Disclosure Package which are not so described and (B) all descriptions of legal or governmental proceedings and of agreements, contracts and leases contained in the Disclosure Package constitute fair and accurate summaries of such proceedings, agreements, contracts and leases and fairly present the information called for with respect to the same. (7) No authorization, approval or consent of any governmental authority or agency is necessary in connection with any issuance and sale of the Shares, as contemplated under this Agreement, except such as may be required under the Act or under state or other securities laws in connection with any purchase and distribution of such securities by the Selling Agent. (8) Assuming the accuracy of the representations and warranties of the purchaser in the Purchase Agreement, the offer and sale of the Shares are exempt from registration under the Securities Act of 1933. (9) To the best of such counsel's knowledge, the Company is not in default of its articles of incorporation or bylaws or of any of the agreements to which the Company is a party which have been identified by the Company as material agreements and which are listed on the attached Schedule 1. (10) Such counsel shall also state that, although such counsel are not opining as to, and cannot guarantee the accuracy and completeness of the statements contained in the Disclosure Package, in the course of such counsel's representation of the Company nothing has come to the attention of such counsel which causes them to believe that the Disclosure Package (except as to the financial statements and supporting financial data included or incorporated therein, as to which such counsel need express no opinion) contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that such statement does not require any statement concerning statements in, or omissions from, the Disclosure Package which are based upon and conform to written information furnished to the Company by the Selling Agent. In expressing the foregoing opinions, as to matters of fact, counsel may rely, to the extent reasonable, upon certificates of public officials and of the responsible officers of the Company. 20 EXHIBIT C REGISTRATION RIGHTS 1. Required Registration. As soon as practicable but in no event later than September 30, 1996, the Company shall file a Registration Statement under the Securities Act covering the offering and sale of the Shares purchased by the Investors, and will diligently proceed to use its diligent, good faith efforts to have such Registration Statement become effective with the Securities and Exchange Commission (the "Commission") as soon as possible thereafter and in any event no later than November 30, 1996. 2. Registration - General Provisions. (a) Whenever the Company is required to effect the registration of Shares under the Securities Act, the Company will: (i) Prepare and file with the Commission a registration statement with respect to such securities, and use its diligent, good faith efforts to cause such registration statement to become effective and remain effective and keep the prospectus which forms a part of such registrations statement current until the earlier of the date on which: (i) all Shares have been sold or (ii) the Shares may be sold without restriction pursuant to Rule 144(k) under the Securities Act; (ii) prepare and file with the Commission such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective for the period required by Section 2(a)(i) above; (iii) provide Investors' counsel with reasonable opportunities to review and comment on, and otherwise participate in, the preparation of such registration statement; (iv) furnish to the Investors participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as the Investors and underwriters may reasonably request in order to facilitate the public offering of such securities; (v) use its diligent, good faith efforts to register or qualify the securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as any such Investor may reasonably request, except 21 that the Company shall not for any purpose be required to execute a general consent to service of process (which shall not include a "Uniform Consent to Service of Process" or other similar consent to service of process which relates only to actions or proceedings arising out of or in connection with the sale of securities, or out of a violation of the laws of the jurisdiction requesting such consent) or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (vi) notify the Investors, promptly after it shall receive notice thereof, of the time when such registration statement has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; (vii) notify the Investors promptly of any request by the Commission for the amending or supplementing of such registration statement or prospectus or for additional information; (viii) prepare and file with the Commission, promptly upon the request of any Investor, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for such Investor (and concurred in by counsel for the Company), is required under the Act or the rules and regulations thereunder in connection with the distribution of the Shares by such Investor; (ix) prepare and promptly file with the Commission and promptly notify the Investors of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading; (x) advise the Investors, and the Investors' counsel, if any, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; (xi) not file any amendment or supplement to such registration statement or prospectus to which a majority in interest of the Investors shall have reasonably objected on the grounds that such amendment or supplement does not 22 comply in all material respects with the requirements of the Act or the rules and regulations thereunder, after having been furnished with a copy thereof at least five business days prior to the filing thereof, unless in the opinion of counsel for the Company the filing of such amendment or supplement is reasonably necessary to protect the Company from any liabilities under any applicable federal or state law and such filing will not violate applicable law; and (xii) at the request of any such Investor, furnish on the effective date of the registration statement and, if such registration includes an underwritten public offering, at the closing provided for in the underwriting agreement: (i) opinions, dated such respective dates, of the counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the Investor or Investors making such request, covering such matters as such underwriters may reasonably request; and (ii) letters, dated such respective dates, from the independent certified public accountants of the Company, addressed to the underwriters, if any, and to the Investor or Investors making such request, covering such matters as such underwriters may reasonably request, in which letter such accountants shall state (without limiting the generality of the foregoing) that they are independent certified public accountants within the meaning of the Act and that in the opinion of such accountants the financial statements and other financial data of the Company included in the registration statement or the prospectus or any amendment or supplement thereto comply in all material respects with the applicable accounting requirements of the Act. (b) The Company shall pay all Registration Expenses (as defined below) in connection with the inclusion of Shares in any Registration Statement, or application to register or qualify Shares under state securities laws, filed by the Company hereunder, other than as set forth herein. For purposes of this Agreement, the term "Registration Expenses" means the filing fees payable to the Commission, any state agency and the National Association of Securities Dealers, Inc.; the fees and expenses of the Company's legal counsel and independent certified public accountants in connection with the preparation and filing of the Registration Statement (and all amendments and supplements thereto) with the Commission; and all expenses relating to the printing of the Registration Statement, prospectuses and various agreements executed in connection with the Registration Statement. Notwithstanding the foregoing, the Investor will pay the fees and expenses of any legal counsel Investor may engage, as well as the Investor's proportionate share of any custodian fees or commission or discounts which may be payable to any underwriter. (c) The Investors acknowledge that there may occasionally be times when the Company must suspend the use of the prospectus forming a part of the Registration Statement, when there exists material non-public information relating to the Company (including, but not limited to, an acquisition, merger, recapitalization, consolidation, reorganization or similar transaction (or negotiations with respect thereto)) which in the reasonable opinion of the Company's Board of Directors should not be disclosed. Accordingly, the Company may 23 suspend resales pursuant to such Registration Statement for a period not to exceed ninety (90) days in any twenty-four (24) month period if the Company has been advised by counsel and the Board of Directors reasonably concurs that the information the Board reasonably believes should not be disclosed is material and therefore the prospectus forming a part of the Registration Statement is not current. Each Investor agrees that it shall not sell any Shares pursuant to said prospectus during the period commencing at the time at which the Company gives the Investor notice of the suspension of such prospectus and ending at the time the Company gives the Investor notice that the Investor may thereafter effect sales pursuant to such prospectus. (d) The Company hereby indemnifies the holder of the Shares, its officers and directors, and any person who controls such holder within the meaning of Section 15 of the Securities Act of 1933, against all losses, claims, damages and liabilities caused by any untrue statement of a material fact contained in any registration statement, prospectus, notification or offering circular (and as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus or caused by any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made except insofar as such losses, claims, damages or liabilities are caused by any untrue statement or omission contained in information furnished in writing to the Company by such holder expressly for use therein, and each such holder severally agrees that it will indemnify and hold harmless the Company and each of its officers who signs such registration statement and each of its directors and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act of 1933 with respect to losses, claims, damages or liabilities which are caused by any material untrue statement or omission contained in information furnished in writing to the Company by such holder expressly for use therein. 24 EX-10.3 4 FINANCIAL CONSULTING AGREEMENT FINANCIAL CONSULTING AGREEMENT AGREEMENT made the 10th day of May, 1996, by and between Miller, Johnson & Kuehn Incorporated ("MJK") and Kurzweil Applied Intelligence, Inc. a Delaware corporation, (the "Company"). WHEREAS, MJK is an investment bank and, among other things, is engaged in the business of consulting with companies regarding valuation issues, acquisitions, dispositions and financings; and WHEREAS, the Company wishes to retain MJK as a financial consultant on the terms and conditions provided herein. NOW, THEREFORE, the parties hereto agree as follows: 1. The Company hereby retains MJK as a financial consultant and MJK will be reasonably available from time to time, during normal business hours, upon reasonable notice, to provide various financial advisory services including but not limited to shareholder relations, assisting in long term financial planning, corporate reorganization and expansion, capital structure and other assistance. These services shall be rendered by MJK at the request of the Company but at such time and place and in such manner (whether by conference, telephone, letter of otherwise) as the parties shall mutually agree. MJK shall make available such time as it, in its sole discretion, shall deem appropriate for the performance of its obligations under this Agreement. 2. MJK shall commence performance of the services described in paragraph 1 above on July 1, 1996 (the "Commencement Date") and shall remain available for the rendering of such services for a period of two (2) years thereafter. 3. As compensation for its services, the Company shall issue to MJK on the Commencement Date a ten-year warrant, in the form reasonably satisfactory to both parties, to purchase 132,005 shares of the Company's Common Stock exercisable at a price of $2.00 per share with piggyback and demand registration rights and customary anti-dilution provisions. MJK acknowledges that the Company must receive shareholder approval to authorize additional capital stock in order to reserve for issuance the shares of common stock issuable upon exercise of the warrant and the Company is seeking such approval at its 1996 Annual Meeting of Stockholders to be held on June 21, 1996. 4. MJK and the Company acknowledge that MJK is an independent contractor. MJK shall not hold itself out as, nor shall it take any action from which others might infer that it is, a partner, agent or joint venturer of the Company. MJK shall not take any action which binds, or purports to bind, the Company. 25 5. Inasmuch as damages at law would be difficult to ascertain in the event of the Company's failure or refusal to comply with paragraph 3 of this Agreement, MJK, in addition to, and not in limitation of, any of the rights, remedies, or damages available at law or in equity, shall (a) be entitled to specific enforcement of the Company's obligations under paragraph 3 hereof, and (b) be entitled to recover from the Company all costs and expenses, including reasonable attorney's fees in connection therewith, incurred by MJK seeking to enforce such obligations. 6. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. Neither party may assign this Agreement or its obligations hereunder without the prior written consent of the other party. This Agreement is intended to be, and is for the sole and exclusive benefit of the parties hereto and their respective successors and assigns, and for the benefit of no other person, and no other person will have any legal or equitable right, remedy or claim under, or in respect of this Agreement. 7. This Agreement may be executed in counterparts and each of such counterparts will for all purposes be deemed to be an original, and such counterparts will together constitute one and the same instrument. 8. This Agreement will be governed as to validity, interpretation, construction, effect and in all other respects by the internal laws of the State of Minnesota. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. MILLER, JOHNSON & KUEHN INCORPORATED By: __________________________________ Name: Paul R. Kuehn Title: President KURZWEIL APPLIED INTELLIGENCE, INC. By: __________________________________ Name: Thomas E. Brew, Jr. Title: President 26 Exhibit A COMMON STOCK WARRANT To Purchase 132,005 Shares of Common Stock of Kurzweil Applied Intelligence, Inc. July 1, 1996 THIS CERTIFIES THAT, in consideration for its services under the Financial Consulting Agreement, dated May 8, 1996 between Kurzweil Applied Intelligence, Inc. (the "Company"), a Delaware corporation, and Miller, Johnson & Kuehn, Incorporated ("MJK"), MJK or its registered assigns is entitled to subscribe for and purchase from the Company at any time after the date hereof to and including the Expiration Date (as defined in Section 1 hereof), One Hundred Thirty-two Thousand and Five (132,005) fully paid and nonassessable shares of the Company's Common Stock, $.01 par value, at a price of $2.00 per share: This Warrant is subject to the following provisions, terms and conditions: 1. Expiration; Exercise; Transferability. (a) This Warrant may be exercised in whole or in part, at any time after the date hereof to and including the Expiration Date. As used herein "Expiration Date" shall mean July 1, 2006 except that in the event the Company achieves the financial milestones listed on Schedule A attached hereto and provides to the holder hereof written notice and documentation of such achievement on or before August 31, 2000, then Expiration Date hereunder shall mean July 1, 2001. (b) The rights represented by this Warrant may be exercised by the holder hereof, in whole or in part (but not as to a fractional share of stock), by written notice of exercise delivered to the Company ten (10) days prior to the intended date of exercise and by the surrender of this Warrant (properly endorsed if required) at the principal office of the Company and upon payment to it by certified or bank check or wire transfer of the purchase price for such shares. (c) This Warrant may be transferred subject to the following conditions: (i) during the first year after the date of this Warrant, it may not be sold, transferred, assigned or hypothecated except to persons who are (x) both officers and shareholders of MJK, or (y) both officers and employees of MJK, and (ii) after such period, the Warrant shall be transferable without restriction, but subject to the opinion of counsel as provided by paragraph 7 herein that such transfer is not in violation of federal or state securities laws. 27 2. Issuance of Shares. The Company agrees that the shares purchased hereby shall be and are deemed to be issued to the record holder hereof as of the close of business on the date on which this Warrant shall have been exercised by surrender of the Warrant and payment for the shares. Subject to the provisions of the next succeeding paragraph, certificates for the shares of stock so purchased shall be delivered to the holder hereof within a reasonable time, not exceeding ten (10) days after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant representing the number of shares, if any, with respect to which this Warrant shall not then have been exercised shall also be delivered to the holder hereof within such time. Notwithstanding the foregoing, however, the Company shall not be required to deliver any certificate for shares of stock upon exercise of this Warrant, except in accordance with the provisions, and subject to the limitations, of paragraph 7 hereof. 3. Covenants of Company. The Company covenants and agrees that all shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized and issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issue thereof, and, without limiting the generality of the foregoing, the Company covenants and agrees that it will from time to time take all such action as may be required to assure that the par value per share of the common stock is at all times equal to or less than the then effective purchase price per share of the common stock issuable pursuant to this Warrant. The Company further covenants and agrees that, during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of shares of its common stock to provide for the exercise of the rights represented by this Warrant. 4. Anti-Dilution Adjustments. The above provisions are, however, subject to the following: (a) In case the Company shall at any time hereafter subdivide or combine the outstanding shares of common stock or declare a dividend payable in common stock, the exercise price of this Warrant in effect immediately prior to the subdivision, combination or record date for such dividend payable in common stock shall forthwith be proportionately increased, in the case of combination, or decreased, in the case of subdivision or dividend payable in common stock. Upon each adjustment of the exercise price, the holder of this Warrant shall thereafter be entitled to purchase, at the exercise price resulting from such adjustment, the number of shares obtained by multiplying the exercise price immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the exercise price resulting from such adjustment. 28 (b) No fractional shares of common stock are to be issued upon the exercise of this Warrant, but the Company shall pay a cash adjustment in respect of any fraction of a share which would otherwise be issuable in an amount equal to the same fraction of the market price per share of common stock on the day of exercise as determined in good faith by the Company. (c) If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of common stock shall be entitled to receive stock, securities or assets with respect to or in exchange for common stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holder hereof shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in this Warrant and in lieu of the shares of common stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such common stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the holder of this Warrant to the end that the provisions hereof (including without limitation provisions for adjustments of the Warrant purchase price and of the number of shares purchasable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Company shall not effect any such consolidation, merger or sale unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger, or the corporation purchasing such assets, shall assume by written instrument executed and mailed to the registered holder hereof at the last address of such holder appearing on the books of the Company, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase. Notwithstanding any language to the contrary set forth in this paragraph 4 (c), if an occurrence or event described herein shall take place in which the shareholders of the Company receive cash for their shares of common stock of the Company and a successor corporation or corporation purchasing assets shall survive the transaction then, at the election of the record holder hereof, such corporation shall be obligated to purchase this Warrant (or the unexercised part hereof) from the record holder without requiring the holder to exercise all or part of the Warrant. If such corporation refuses to so purchase this Warrant then the Company shall purchase the Warrant for cash. In either case the purchase price shall be the amount per share that shareholders of the outstanding common stock of the Company shall receive as a result of the transaction multiplied by the number of shares covered by the 29 Warrant, minus the aggregate exercise price of the Warrant. Such purchase shall be closed within 60 days following the election of the holder to sell this Warrant. (d) Upon any adjustment of the Warrant purchase price, then, and in each such case, the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the registered holder of this Warrant at the address of such holder as shown on the books of the Company, which notice shall state the Warrant purchase price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (e) If any event occurs as to which in the good faith determination of the Board of Directors of the Company the other provisions of this paragraph 4 are not strictly applicable or if strictly applicable would not fairly protect the purchase rights of the holder of this Warrant or of common stock in accordance with the essential intent and principles of such provisions, then the Board of Directors shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such purchase rights as aforesaid. 5. Common Stock. As used herein, the term "common stock" shall mean and include the Company's presently authorized shares of common stock and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution, dissolution or winding up of the Company; provided that the shares purchasable pursuant to this Warrant shall include shares designated as common stock of the Company on the date of original issue of this Warrant or, in the case of any reclassification of the outstanding shares thereof, the stock, securities or assets provided for in Section 4 above. 6. No Voting Rights. This Warrant shall not entitle the holder hereof to any voting rights or other rights as a stockholder of the Company. 7. Transfer of Warrant or Resale of Shares. In the event the holder of this Warrant desires to transfer this Warrant, or any common stock issued upon the exercise hereof, the holder shall provide the Company with a written notice describing the manner of such transfer and an opinion of counsel (reasonably acceptable to the Company) that the proposed transfer may be effected without registration or qualification (under any Federal or State law), whereupon such holder shall be entitled to transfer this Warrant or to dispose of shares of common stock received upon the previous exercise hereof in accordance with the notice delivered by such holder to the Company; provided, that an appropriate legend may be endorsed on this Warrant or the certificates for such shares respecting restrictions upon transfer thereof necessary or advisable in the opinion of counsel satisfactory to the Company to prevent further transfers which would be in violation of Section 5 of the Securities Act of 1933. 30 If, in the opinion of either of the counsel referred to in this paragraph 7, the proposed transfer or disposition described in the written notice given pursuant to this paragraph 7 may not be effected without registration or qualification of this Warrant or the shares of common stock issued upon the exercise hereof, the Company shall promptly give written notice thereof to the holder hereof, and such holder will limit its activities in respect to such proposed transfer or disposition as, in the opinion of both such counsel, are permitted by law. 8. Registration Rights. (a) If the Company proposes to claim an exemption under Section 3(b) for a public offering of any of its securities or to register under the Securities Act of 1933 (except by a claim of exemption or registration statement on a form that does not permit the inclusion of shares by its security holders) any of its securities, it will give written notice to all registered holders of Warrants, and all registered holders of shares of common stock acquired upon the exercise of Warrants and all registered holders of shares of common stock (the "Common Shares") acquired upon conversion of such common stock, of its intention to do so and, on the written request of any such registered holders given within twenty (20) days after receipt of any such notice, the Company will use its best efforts to cause all Common Shares which such holders shall have requested the registration or qualification thereof, to be included in such notification or registration statement proposed to be filed by the Company; provided, however, that nothing herein shall prevent the Company from, at any time, abandoning or delaying any such registration initiated by it. If any such registration shall be underwritten in whole or in part, the Company may require that the shares requested for inclusion pursuant to this section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. In the event that, in the good faith judgment of the managing underwriter of such public offering, the inclusion of all of the shares originally covered by a request for registration would reduce the number of shares to be offered by the Company or interfere with the successful marketing of the shares of stock offered by the Company, the number of shares otherwise to be included pursuant to this Section in the underwritten public offering may be reduced. Those shares which are thus excluded from the underwritten public offering shall be withheld from the market for a period, not to exceed 90 days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. All expenses of such offering, except the fees of special counsel to such holders and brokers' commissions or underwriting discounts payable by such holders, shall be borne by the Company. (b) Further, on one occasion only upon request by the holders of Warrants and/or the holders of shares issued upon the exercise of the Warrants who collectively (i) have the right to purchase at least 50% of the shares subject to the Warrants, (ii) hold directly at least 50% of the shares purchased hereunder, or (iii) have the right to purchase or hold directly an aggregate of at least 50% of the shares purchasable or purchased hereunder, the Company will promptly take all necessary steps, at the option of such holders, to register or qualify the sale of the Warrants or such shares by the holders thereof, or to register the 31 issuance by the Company of shares upon the exercise of Warrants, under the Securities Act of 1933 (and, upon the request of such holders, under Rule 415 thereunder) and such state laws as such holders may reasonably request; provided that (i) such request must be made by the Expiration Date; and (ii) the Company may delay the filing of any registration statement requested pursuant to this section to a date not more than ninety (90) days following the date of such request if in the opinion of the Company's principal investment banker at the time of such request such a delay is necessary in order not to adversely affect financing efforts then underway at the Company or if in the opinion of the Company such a delay is necessary or advisable to avoid disclosure of material nonpublic information. The costs and expenses directly related to any registration requested pursuant to this section, including but not limited to legal fees of the Company's counsel, audit fees, printing expense, filing fees and fees and expenses relating to qualifications under state securities or blue sky laws incurred by the Company shall be borne entirely by the Company; provided, however, that the persons for whose account the securities covered by such registration are sold shall bear the expenses of underwriting commissions applicable to their shares and fees of their legal counsel. If the holders of Warrants and the holders of shares of common stock underlying the Warrants are the only persons whose shares are included in the registration pursuant to this section, such holders shall bear the expense of inclusion of audited financial statements in the registration statement which are not dated as of the Company's normal fiscal year or are not otherwise prepared by the Company for its own business purposes. The Company shall keep effective and maintain any registration, qualification, notification or approval specified in this paragraph for such period as may be necessary for the holders of the Warrants and such common stock to dispose thereof, and from time to time shall amend or supplement, at the holder's expense, the prospectus or offering circular used in connection therewith to the extent necessary in order to comply with applicable law. If, at the time any written request for registration is received by the Company pursuant to this Section 8(b), the Company has determined to proceed with the actual preparation and filing of a registration statement under the Securities Act in connection with the proposed offer and sale for cash of any of its securities by it or any of its security holders, such written request shall be deemed to have been given pursuant to Section 8(a) hereof rather than this Section 8(b), and the rights of the holders of Warrants and or shares issued upon the exercise of the Warrants covered by such written request shall be governed by Section 8(a) hereof. The managing underwriter of an offering registered pursuant to this Section 8(b), if any, shall be selected by the holders of a majority of the Warrants and/or shares issued upon the exercise of the Warrants for which registration has been requested and shall be reasonably acceptable to the Company. Without the written consent of the holders of a majority of the Warrants and/or shares issued upon the exercise of the Warrants for which registration has been requested pursuant to this Section 8(b), neither the Company nor any other holder of securities of the Company may include securities in such registration if in the good faith judgment of the managing underwriter of such public offering the inclusion of such securities would interfere with the successful marketing of the Warrants and/or shares issued 32 upon the exercise of the Warrants or require the exclusion of any portion of the Warrants and/or shares issued upon the exercise of the Warrants to be registered. Subject to the preceding sentence, shares to be excluded from an underwritten public offering shall be selected in the manner provided in Section 8(a) hereof. (c) If and whenever the Company is required by the provisions of Sections 8(a) or 8(b) hereof to effect the registration of Warrants and/or shares issued upon the exercise of the Warrants under the Securities Act, the Company will: (i) Prepare and file with the Commission a registration statement with respect to such securities, and use its best efforts to cause such registration statement to become and remain effective for such period as may be reasonably necessary to effect the sale of such securities; (ii) prepare and file with the Commission such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective for such period as may be reasonably necessary to effect the sale of such securities; (iii) furnish to the security holders participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities; (iv) use its best efforts to register or qualify the securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as such participating holders may reasonably request in writing within 30 days following the original filing of such registration statement, except that the Company shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (v) notify the security holders participating in such registration, promptly after it shall receive notice thereof, of the time when such registration statement has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; (vi) notify such holders promptly of any request by the Commission for the amending or supplementing of such registration statement or prospectus or for additional information; (vii) prepare and file with the Commission, promptly upon the request of any such holders, any amendments or supplements to such registration 33 statement or prospectus which, in the opinion of counsel for such holders (and concurred in by counsel for the Company), is required under the Securities Act or the rules and regulations thereunder in connection with the distribution of the Warrants or shares by such holder; (viii) prepare and promptly file with the Commission and promptly notify such holders of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading; (ix) advise such holders, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; (x) not file any amendment or supplement to such registration statement or prospectus to which a majority in interest of such holders shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules and regulations thereunder, after having been furnished with a copy thereof at least five business days prior to the filing thereof, unless in the opinion of counsel for the Company the filing of such amendment or supplement is reasonably necessary to protect the Company from any liabilities under any applicable federal or state law and such filing will not violate applicable law; and (xi) at the request of any such holder, furnish on the effective date of the registration statement and, if such registration includes an underwritten public offering, at the closing provided for in the underwriting agreement: (i) opinions, dated such respective dates, of the counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the holder or holders making such request, covering such matters as such underwriters and holder or holders may reasonably request; and (ii) letters, dated such respective dates, from the independent certified public accountants of the Company, addressed to the underwriters, if any, and to the holder or holders making such request, covering such matters as such underwriters and holder or holders may reasonably request, in which letter such accountants shall state 34 (without limiting the generality of the foregoing) that they are independent certified public accountants within the meaning of the Securities Act and that in the opinion of such accountants the financial statements and other financial data of the Company included in the registration statement or the prospectus or any amendment or supplement thereto comply in all material respects with the applicable accounting requirements of the Securities Act. (d) The Company hereby indemnifies the holder of this Warrant and of any common stock issued or issuable hereunder, its officers and directors, and any person who controls such Warrant holder or such holder of common stock within the meaning of Section 15 of the Securities Act of 1933, against all losses, claims, damages and liabilities caused by any untrue statement of a material fact contained in any registration statement, prospectus, notification or offering circular (and as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus or caused by any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading except insofar as such losses, claims, damages or liabilities are caused by any untrue statement or omission contained in information furnished in writing to the Company by such Warrant holder or such holder of common stock expressly for use therein, and each such holder by its acceptance hereof severally agrees that it will indemnify and hold harmless the Company and each of its officers who signs such registration statement and each of its directors and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act of 1933 with respect to losses, claims, damages or liabilities which are caused by any untrue statement or omission contained in information furnished in writing to the Company by such holder expressly for use therein. 9. Additional Right to Convert Warrant. (a) The holder of this Warrant shall have the right to require the Company to convert this Warrant (the "Conversion Right") at any time prior to its expiration into shares of Common Stock as provided for in this Section 9. Upon exercise of the Conversion Right, the Company shall deliver to the holder (without payment by the holder of any Exercise Price) that number of shares of Common Stock equal to the quotient obtained by dividing (x) the value of the Warrant at the time the Conversion Right is exercised (determined by subtracting the aggregate Exercise Price for the Warrant Shares in effect immediately prior to the exercise of the Conversion Right from the aggregate Fair Market Value for the Warrant Shares immediately prior to the exercise of the Conversion Right) by (y) the Fair Market Value of one share of Common Stock immediately prior to the exercise of the Conversion Right. (b) The Conversion Right may be exercised by the holder, at any time or from time to time, prior to its expiration, on any business day by delivering a written notice in the form attached hereto (the "Conversion Notice") to the Company at the offices of the Company exercising the Conversion Right and specifying (i) the total number of shares of Stock the Warrantholder will purchase pursuant to such conversion and (ii) a place and date 35 not less than one nor more than 20 business days from the date of the Conversion Notice for the closing of such purchase. (c) At any closing under Section 9(b) hereof, (i) the holder will surrender the Warrant and (ii) the Company will deliver to the holder a certificate or certificates for the number of shares of Common Stock issuable upon such conversion, together with cash, in lieu of any fraction of a share, and (iii) the Company will deliver to the holder a new warrant representing the number of shares, if any, with respect to which the warrant shall not have been exercised. (d) "Fair Market Value" means, with respect to the Company's Common Stock, as of any date: (i) if the Common Stock is listed or admitted to unlisted trading privileges on any national securities exchange or is not so listed or admitted but transactions in the Common Stock are reported on the NASDAQ National Market System, the reported closing price of the Common Stock on such exchange or by the NASDAQ National Market System as of such date (or, if no shares were traded on such day, as of the next preceding day on which there was such a trade); or (ii) if the Common Stock is not so listed or admitted to unlisted trading privileges or reported on the NASDAQ National Market System, and bid and asked prices therefor in the over-the-counter market are reported by the NASDAQ system or National Quotation Bureau, Inc. (or any comparable reporting service), the mean of the closing bid and asked prices as of such date, as so reported by the NASDAQ System, or, if not so reported thereon, as reported by National Quotation Bureau, Inc. (or such comparable reporting service); or (iii) if the Common Stock is not so listed or admitted to unlisted trading privileges, or reported on the NASDAQ National Market System, and such bid and asked prices are not so reported by the NASDAQ system or National Quotation Bureau, Inc. (or any comparable reporting service), such price as the Company's Board of Directors determines in good faith in the exercise of its reasonable discretion. IN WITNESS WHEREOF, Kurzweil Applied Intelligence, Inc. has caused this Warrant to be executed by its duly authorized officers and this Warrant to be dated as of July 1, 1996. KURZWEIL APPLIED INTELLIGENCE, INC. By ______________________________ 36 EXERCISE FORM (TO BE SIGNED ONLY UPON EXERCISE OF WARRANT) KURZWEIL APPLIED INTELLIGENCE, INC. The undersigned, the holder of the within warrant, hereby irrevocably elects to exercise the purchase right represented by such warrant for, and to purchase thereunder ______________ shares of the Common Stock, $.01 par value, of Kurzweil Applied Intelligence, Inc. and herewith makes payment of $________________ therefor, and requests that the certificates for such shares be issued in the name of _____________________________________ and be delivered to _________________________________ whose address is _________________________ _______________________________________. Dated: ________________ ___________________________________ (Signature must conform in all respects to the name of holder as specified on the face of the warrant) (Address) (City - State - Zip) 37 ASSIGNMENT FORM (TO BE SIGNED ONLY UPON TRANSFER OF THE WARRANT) For value received, the undersigned hereby sells, assigns and transfers unto those individuals listed on Exhibit A, attached hereto, the right represented by the within warrant to purchase the number of shares opposite their names on the attached Exhibit A of Common Stock, $.01 par value, of Kurzweil Applied Intelligence, Inc. to which the within warrant relates, and appoints ______________________ attorney to transfer said right on the books of Kurzweil Applied Intelligence, Inc., with full power of substitution in the premises. Dated: ________________ MILLER, JOHNSON & KUEHN, INCORPORATED 1660 South Highway 100 Suite 228 Minneapolis, MN 55416 By___________________________________ In the presence of: _______________________________ _______________________________ 38 CONVERSION NOTICE (TO BE SIGNED ONLY UPON EXERCISE OF CONVERSION RIGHT SET FORTH IN SECTION 9 OF THE WARRANT) TO KURZWEIL APPLIED INTELLIGENCE, INC.: The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the Conversion Right set forth in Section 9 of such Warrant and to purchase _______________ shares of the Common Stock, of Kurzweil Applied Intelligence, Inc. The closing of this conversion shall take place at the offices of the undersigned on ____________________. Certificates for the shares to be delivered at the closing shall be issued in the name of ________________ whose address is ___________________________________________. Dated: ________________ ___________________________________ (Signature must conform in all respects to the name of holder as specified on the face of the Warrant) (Address) (City - State - Zip) 39 EX-27 5 ARTICLE 5 FDS
5 0000769191 Kurzweil Applied Intelligence, Inc. 1,000 USD 3-MOS 3-MOS JAN-31-1997 JAN-31-1996 FEB-1-1996 FEB-1-1995 APR-30-1996 APR-30-1995 1 1 1,441 2,084 0 501 1,394 1,221 0 0 373 398 3,610 4,466 861 924 0 0 8,045 8,864 4,245 3,807 0 0 0 0 0 0 68 57 1,563 2,831 8,045 8,864 1,710 2,707 1,710 2,707 880 1,295 880 1,295 0 0 0 0 (30) (57) (1,294) (267) 0 0 (1,294) (267) 0 0 0 0 0 0 (1,294) (237) (.19) (.04) (.19) (.04)
-----END PRIVACY-ENHANCED MESSAGE-----