-----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, TKQVSl1jVdelC96yjHPPcGeUuykkfK1FycAZ547DS+B92C2thd9BiqJXn/APKwvI WeUreqEZu4toySR4uX05Eg== 0001029869-97-000526.txt : 19970425 0001029869-97-000526.hdr.sgml : 19970425 ACCESSION NUMBER: 0001029869-97-000526 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970414 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970424 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KURZWEIL APPLIED INTELLIGENCE INC /DE/ CENTRAL INDEX KEY: 0000769191 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 042815079 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20256 FILM NUMBER: 97586725 BUSINESS ADDRESS: STREET 1: 411 WAVERLEY OAKS ROAD CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6178935151 8-K 1 KURZWEIL APPLIED INTELLIGENCE, INC. FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) April 14, 1997 KURZWEIL APPLIED INTELLIGENCE, INC. (Exact name of registrant as specified in its charter) Delaware 0-20256 04-2815079 (State or other jurisdiction (Commission (I.R.S. Employer of incorporation) File Number) Identification No.) 411 Waverley Oaks Road Waltham, Massachusetts 02154 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (617) 893-5151 Exhibit Index at Page 4 Page 1 of 4 Item 5. Other Events On April 14, 1997, Kurzweil Applied Intelligence, Inc. (the "Company") entered into an Agreement and Plan of Merger (the "Merger Agreement") with Lernout & Hauspie Speech Products N.V. and a wholly-owned subsidiary of Lernout & Hauspie. The Merger Agreement provides for the merger of that subsidiary into the Company and for the Company to be the surviving corporation. The closing of the merger is subject to certain conditions and approvals, including the approval of the Company's stockholders. Under the terms of the Merger Agreement, at the effective time of the merger, each share of Company common stock will be converted into and represent the right to receive $4.20 in cash and a fraction of a share of Lernout & Hauspie common stock, no par value. The fraction is based on a conversion ratio equal to $1.05 divided by the average closing price per share of Lernout & Hauspie's common stock on the Nasdaq National Market for the ten consecutive trading days ending with the last trading day prior to the date of the Company's 1997 Annual Meeting of Stockholders, except that the conversion ratio will be no less than 0.047549 of a share of Lernout & Hauspie common stock for each share of Company common stock and no more than 0.058115 of a share of Lernout & Hauspie common stock for each share of Company common stock. As part of the consideration for Lernout & Hauspie entering into the Merger Agreement, the Company has granted Lernout & Hauspie an option pursuant to a Stock Option Agreement dated as of April 14, 1997 to purchase up to 16% of the Company's shares outstanding during the option term at a purchase price of $5.25 per share, exercisable under certain circumstances in the event of the termination of the Merger Agreement. The Company has the right to repurchase the option and any shares purchased under the option under certain circumstances. In addition, pursuant to a Loan Agreement dated as of April 14, 1997, Lernout & Hauspie's United States subsidiary, Lernout & Hauspie Speech Products USA, Inc. ("L&H USA"), has agreed to make available to the Company until October 31, 1997 a line of credit of $1.5 million for working capital purposes. In consideration of the line of credit, the Company has issued to L&H USA a warrant to purchase 185,000 shares of Company common stock at a purchase price of $3.21 per share. The foregoing summaries of the Merger Agreement, the Stock Option Agreement, the Loan Agreement and the warrant are not intended to be complete statements of all of the material terms of those agreements. The summaries are qualified in their entirety by the agreements themselves and related agreements that are filed herewith as Exhibits 99.2 through 99.7. Item 7. Financial Statements and Exhibits (c) Exhibits. 2.1 Agreement and Plan of Merger dated as of April 14, 1997 between Kurzweil Applied Intelligence, Inc., Lernout & Hauspie Speech Products N.V. and Trappist Acquisition Corp. 10.1 Stock Option Agreement dated as of April 14, 1997 between Kurzweil Applied Intelligence, Inc. and Lernout & Hauspie Speech Products N.V. - 2 - 10.2 Loan Agreement dated as of April 14, 1997 between Kurzweil Applied Intelligence, Inc. and Lernout & Hauspie Speech Products USA, Inc. 10.3 Common Stock Warrant dated April 14, 1997 issued by Kurzweil Applied Intelligence, Inc. 10.4 Line of Credit Note dated April 14, 1997. 10.5 Security Agreements dated as of April 14, 1997 between Kurzweil Applied Intelligence, Inc. and Lernout & Hauspie Speech Products USA, Inc. 99.1 Press release of Kurzweil Applied Intelligence, Inc. dated April 14, 1997. ------------------------ SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Kurzweil Applied Intelligence, Inc. Date: April 17, 1997 By: /s/ Thomas E. Brew, Jr. ---------------------------- Thomas E. Brew, Jr. President & Chief Executive Officer - 3 -
EXHIBIT INDEX Exhibit No. Description At Page - ----------- ----------- ------- 2.1 Agreement and Plan of Merger dated as of April 14, 1997 between Kurzweil Applied Intelligence, Inc., Lernout & Hauspie Speech Products N.V. and Trappist Acquisition Corp. 10.1 Stock Option Agreement dated as of April 14, 1997 between Kurzweil Applied Intelligence, Inc. and Lernout & Hauspie Speech Products N.V. 14, 1997 10.2 Loan Agreement dated as of April 14, 1997 between Kurzweil Applied Intelligence, Inc. and Lernout & Hauspie Speech Products USA, Inc. 10.3 Common Stock Warrant dated April 14, 1997 issued by Kurzweil Applied Intelligence, Inc. 10.4 Line of Credit Note dated April 14, 1997. 10.5 Security Agreements dated as of April 14, 1997 between Kurzweil Applied Intelligence, Inc. and Lernout & Hauspie Speech Products USA, Inc. 99.1 Press Release of Kurzweil Applied Intelligence, Inc. dated April
- 4 - EX-2.1 2 AGREEMENT AND PLAN OF MERGER - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER BY AND AMONG LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. TRAPPIST ACQUISITION CORP. AND KURZWEIL APPLIED INTELLIGENCE, INC. DATED: APRIL 14, 1997 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ TABLE OF CONTENTS ARTICLE I THE MERGER..............................................................................................1 1.1 THE MERGER....................................................................................................1 1.2 THE CLOSING...................................................................................................1 1.3 ACTIONS AT THE CLOSING........................................................................................2 1.4 ADDITIONAL ACTIONS............................................................................................2 1.5 CONVERSION OF SHARES..........................................................................................2 1.6 APPRAISAL RIGHTS..............................................................................................4 1.7 EXCHANGE OF SHARES............................................................................................4 1.8 DIVIDENDS.....................................................................................................6 1.9 OPTIONS AND WARRANTS..........................................................................................6 1.10 CERTIFICATE OF INCORPORATION.................................................................................7 1.11 BYLAWS.......................................................................................................8 1.12 DIRECTORS AND OFFICERS.......................................................................................8 1.13 NO FURTHER RIGHTS............................................................................................8 1.14 CLOSING OF TRANSFER BOOKS....................................................................................8 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY..........................................................8 2.1 ORGANIZATION AND QUALIFICATION OF THE COMPANY.................................................................8 2.2 CAPITALIZATION................................................................................................9 2.3 SUBSIDIARIES.................................................................................................10 2.4 AUTHORIZATION OF TRANSACTION.................................................................................10 2.5 PRESENT COMPLIANCE WITH OBLIGATIONS AND LAWS.................................................................10 2.6 NO CONFLICT OF TRANSACTION WITH OBLIGATIONS AND LAWS.........................................................10 2.7 REPORTS AND FINANCIAL STATEMENTS.............................................................................11 2.8 ABSENCE OF UNDISCLOSED LIABILITIES...........................................................................12 2.9 ABSENCE OF CERTAIN CHANGES...................................................................................12 2.10 PAYMENT OF TAXES............................................................................................14 2.11 TITLE TO PROPERTIES; LIENS; CONDITION OF PROPERTIES.........................................................15 2.12 INVENTORIES; ACCOUNTS RECEIVABLE............................................................................15 2.13 INTELLECTUAL PROPERTY RIGHTS................................................................................16 2.14 CONTRACTS AND COMMITMENTS...................................................................................17 2.15 LABOR AND EMPLOYEE RELATIONS................................................................................18 2.16 EMPLOYEE BENEFITS AND ERISA.................................................................................19 2.17 ENVIRONMENTAL MATTERS.......................................................................................21 2.18 PERMITS.....................................................................................................21 2.19 WARRANTY OR OTHER CLAIMS....................................................................................21 2.20 CLAIMS AND LEGAL PROCEEDINGS................................................................................22 2.21 BORROWINGS AND GUARANTEES...................................................................................22 2.22 FINANCIAL SERVICE RELATIONS AND POWERS OF ATTORNEY..........................................................22 2.23 INSURANCE...................................................................................................22 2.24 GOVERNMENT CONTRACTS........................................................................................23 2.25 CORPORATE BOOKS AND RECORDS.................................................................................23 2.26 TRANSACTION FEE.............................................................................................23 2.27 TRANSACTIONS WITH INTERESTED PERSONS........................................................................23 2.28 ABSENCE OF SENSITIVE PAYMENTS...............................................................................23 2.29 DISCLOSURE OF MATERIAL INFORMATION..........................................................................24 2.30 REGULATORY CORRESPONDENCE...................................................................................24 2.31 STATE ANTITAKEOVER STATUTES.................................................................................24 2.32 COMPANY ACTION..............................................................................................24 2.33 HSR ACT.....................................................................................................25
- -------------------------------------------------------------------------------- Agreement and Plan of Merger Page i Execution Copy ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PARENT AND THE ACQUISITION SUBSIDIARY.........................25 3.1 ORGANIZATION OF PARENT AND ACQUISITION SUBSIDIARY............................................................25 3.2 CAPITALIZATION...............................................................................................26 3.3 AUTHORIZATION OF TRANSACTION.................................................................................26 3.4 NO CONFLICT OF TRANSACTION WITH OBLIGATIONS AND LAWS.........................................................26 3.5 REPORTS AND FINANCIAL STATEMENTS.............................................................................27 3.6 CLAIMS AND LEGAL PROCEEDINGS.................................................................................28 3.7 DISCLOSURE OF MATERIAL INFORMATION...........................................................................28 3.8 PARENT ACTION................................................................................................28 3.9 SHAREHOLDER VOTE NOT REQUIRED................................................................................29 3.10 TRANSACTION FEES............................................................................................29 3.11 FINANCING...................................................................................................29 3.12 PRIOR ACTIVITIES OF ACQUISITION SUBSIDIARY..................................................................29 3.13 PERMITS.....................................................................................................29 3.14 ABSENCE OF SENSITIVE PAYMENTS...............................................................................29 3.15 HSR ACT.....................................................................................................30 3.16 PRESENT COMPLIANCE WITH OBLIGATIONS AND LAWS................................................................30 ARTICLE IV COVENANTS.............................................................................................30 4.1 REASONABLE BEST EFFORTS.....................................................................................30 4.2 NOTICES AND CONSENTS.........................................................................................30 4.3 SPECIAL MEETING, PROSPECTUS/PROXY STATEMENT AND REGISTRATION STATEMENT; FAIRNESS OPINION.....................30 4.4 OPERATION OF BUSINESS.......................................................................................32 4.5 ACCESS.......................................................................................................34 4.6 NOTICE OF BREACHES...........................................................................................34 4.7 EXCLUSIVITY..................................................................................................35 4.8 LISTING OF MERGER SHARES.....................................................................................35 4.9 INDEMNIFICATION..............................................................................................36 4.10 FILING OF ANNUAL REPORTS....................................................................................36 4.11 HART-SCOTT-RODINO...........................................................................................37 4.12 EMPLOYEE WELFARE............................................................................................37 4.13 TAX RETURNS; GOOD STANDING..................................................................................37 4.14 LOAN TO COMPANY.............................................................................................37 ARTICLE V CONDITIONS TO CONSUMMATION OF MERGER...................................................................37 5.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS.......................................................................37 5.2 CONDITIONS TO OBLIGATIONS OF THE PARENT AND THE ACQUISITION SUBSIDIARY.......................................38 5.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY.....................................................................39 ARTICLE VI TERMINATION AND ABANDONMENT...........................................................................40 6.1 TERMINATION..................................................................................................40 6.2 TERMINATION BY THE PARENT....................................................................................41 6.3 TERMINATION BY THE COMPANY...................................................................................41 6.4 PROCEDURE FOR TERMINATION....................................................................................42 6.5 EFFECT OF TERMINATION AND ABANDONMENT........................................................................42 ARTICLE VII MISCELLANEOUS........................................................................................43 7.1 FEES AND EXPENSES............................................................................................43 7.2 NOTICES......................................................................................................44 7.3 PUBLICITY AND DISCLOSURES....................................................................................45 7.4 ENTIRE AGREEMENT.............................................................................................45 7.5 SEVERABILITY.................................................................................................45
- ------------------------------------------------------------------------------- Agreement and Plan of Merger Page ii Execution Copy 7.6 ASSIGNABILITY................................................................................................45 7.7 AMENDMENTS AND WAIVERS.......................................................................................46 7.8 GOVERNING LAW; VENUE.........................................................................................46 7.9 REMEDIES.....................................................................................................46 7.10 COUNTERPARTS................................................................................................46 7.11 EFFECT OF TABLE OF CONTENTS AND HEADINGS....................................................................47 7.12 NO THIRD PARTY BENEFICIARIES................................................................................47 7.13 KNOWLEDGE...................................................................................................47 7.14 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES...............................................................47 7.15 INTEGRATION OF EXHIBITS.....................................................................................47 ARTICLE VIII DEFINITIONS.........................................................................................47 SIGNATURES.......................................................................................................50 LIST OF SCHEDULES AND EXHIBITS...................................................................................51
Agreement and Plan of Merger Page iii Execution Copy AGREEMENT AND PLAN OF MERGER AGREEMENT entered into as of the 14th day of April, 1997, by and among Lernout & Hauspie Speech Products N.V., a Belgian corporation, with its principal place of business in Ieper, Belgium(the "Parent"), Trappist Acquisition Corp., a Delaware corporation and wholly owned subsidiary of the Parent, with its principal place of business in Burlington, Massachusetts (the "Acquisition Subsidiary"), and Kurzweil Applied Intelligence, Inc., a Delaware corporation, with its principal place of business in Waltham, Massachusetts ("the Company"). The Parent, the Acquisition Subsidiary and the Company are referred to collectively herein as the "Parties." WHEREAS, the Boards of Directors of each of the Parties have agreed that it is in their best interests for the Acquisition Subsidiary to merge with and into the Company upon the terms and conditions set forth herein. The Boards of Directors of the Parent, Acquisition Subsidiary and the Company have approved the merger. WHEREAS, this Agreement contemplates a merger of the Acquisition Subsidiary with and into the Company and in such merger, the stockholders of the Company will receive a combination of cash and capital stock of the Parent in exchange for their capital stock of the Company. NOW, THEREFORE, in consideration of the mutual agreements herein contained, the Parties hereto agree as follows: ARTICLE I THE MERGER 1.1 The Merger. Upon and subject to the terms and conditions of this Agreement and in accordance with the Delaware General Corporation Law ("DGCL"), the Acquisition Subsidiary shall be merged with and into the Company (with such merger referred to herein as the "Merger") at the Effective Time (as defined below). From and after the Effective Time, the separate corporate existence of the Acquisition Subsidiary shall cease and the Company shall continue as the surviving corporation in the Merger (the "Surviving Corporation"). The "Effective Time" shall be the time at which the Company and the Acquisition Subsidiary file a certificate of merger in substantially the form attached hereto as Exhibit A (the "Certificate of Merger") in accordance with the relevant provisions of the DGCL, with the Secretary of State of the State of Delaware. The Merger shall have the effects set forth in Sections 251 and 259 of the DGCL. 1.2 The Closing. The closing of the Merger (the "Closing") shall take place at the offices of Brown, Rudnick, Freed & Gesmer in Boston, Massachusetts, commencing at 9:00 a.m. local time on the first business day after the receipt of Requisite Stockholder Approval (as defined in Section 2.4), provided that on or prior thereto, all the conditions to the obligations of the Parties to consummate the transactions contemplated hereby as set forth in Article V have - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 1 Execution Copy been satisfied or waived, or on such other mutually agreeable later date as soon as practicable after the satisfaction or waiver of all conditions to the obligations of the Parties to consummate the transactions contemplated hereby (the "Closing Date"); provided, however, that the Closing Date shall be no later than August 15, 1997. 1.3 Actions at the Closing. At the Closing, subject to the satisfaction or waiver of all of the conditions set forth in Article V not theretofore satisfied or waived, (a) the Company and the Acquisition Subsidiary shall file with the Secretary of State of the State of Delaware the Certificate of Merger and (b) the Acquisition Subsidiary shall deliver the Merger Consideration (as defined below) to ChaseMellon Shareholder Services or such other entity reasonably satisfactory to the Company and the Parent to act as the exchange agent (the "Exchange Agent") in accordance with Section 1.7. 1.4 Additional Actions. The Surviving Corporation may, at any time after the Effective Time, take any action, including executing and delivering any document, in the name and on behalf of either the Company or the Acquisition Subsidiary, in order to consummate the transactions contemplated by this Agreement. 1.5 Conversion of Shares. At the Effective Time, by virtue of the Merger and without any action on the part of any Party or the holder of any of the following securities: (a) Each share of common stock, $.01 par value per share, of the Company ("Company Shares") issued and outstanding immediately prior to the Effective Time (other than (i) Company Shares owned by stockholders who, pursuant to the DGCL, properly perfect their rights to appraisal in accordance with Section 262 of the DGCL ("Dissenting Stockholders") and (ii) Company Shares owned by the Parent or the Acquisition Subsidiary and (iii) Company Shares held in the Company's treasury) and each O&W Company Share (as defined in Section 1.9) shall be converted into and represent the right to receive $4.20 in cash (the "Cash Consideration"), and after conversion as provided in clauses (b) and (c) below, such number of shares of common stock, no par value per share, of the Parent ("Parent Common Stock") as is equal to the Conversion Ratio (the "Stock Consideration"). The "Conversion Ratio" shall equal $1.05 divided by the Average Market Value; provided, however, that if the Average Market Value is greater than $22.08250 , then the Conversion Ratio shall equal 0.047549 ; and, provided, further, that if the Average Market Value is less than $18.06750 , then the Conversion Ratio shall equal 0.058115. For purposes hereof, the term "Average Market Value" means the arithmetic average (rounded to the nearest five decimal places) of the closing price per share of the Parent Common Stock as reported on the Nasdaq National Market for the ten (10) consecutive trading days ending with the last trading day prior to the date of the Special Meeting (as defined in Section 4.3(a)). The number of shares of Parent Common Stock so issuable shall be subject to equitable adjustment in the event that the Parent changes the number of shares of Parent Common Stock issued and outstanding prior to the Effective Time as a result of a stock split, stock dividend or similar recapitalization with respect to the Parent Common Stock. - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 2 Execution Copy Stockholders of record of the Company together with persons deemed to hold O&W Company Shares (determined pursuant to Section 1.9(a)), in each case as of the Effective Time ("Company Stockholders") other than Dissenting Stockholders, shall be entitled to receive all of the Cash Consideration and the Stock Consideration into which their Company Shares and O&W Company Shares were converted pursuant to this Section 1.5(a) (the "Merger Shares") upon tender of their Company Shares or O&W Agreements (as defined in Section 1.7(a)) as set forth in Section 1.7 below. (b) In order to effectuate the Merger and the delivery of Parent Common Stock in connection with the Merger, at the Closing Parent shall deliver the Parent Common Stock to be issued hereunder by issuing a global automatically convertible bond (the "ACO") in the original principal amount equal to the Average Market Value per share (determined without regard to the $22.08250 and $18.06750 limitation) multiplied by the aggregate number of shares of Parent Common Stock to be issued in connection with the Merger pursuant to this Section 1.5 (the "ACO Principal Amount") in form reasonably acceptable to the parties hereto, to the Exchange Agent as agent for and for the benefit of the Company Stockholders. (c) At the Closing, the Exchange Agent, on behalf of the Company Stockholders , shall convert the ACO to the capital of Parent in return for that number of duly authorized, validly issued, fully paid and non-assessable shares of Parent Common Stock determined by dividing the ACO Principal Amount by the Average Market Value per share (determined without regard to the $22.08250 and $18.06750 limitation) of Parent's Common Stock; provided, however, that such number of shares shall be rounded to the nearest whole number. To effectuate the foregoing at the Closing the Exchange Agent shall present the ACO to a public notary to effect the conversion of the ACO to the capital of Parent and the issuance of shares of Parent Common Stock on the Closing Date as set forth in this Section 1.5 and Section 1.9(a). (d) No certificates or scrip representing fractional Merger Shares shall be issued to former Company Stockholders upon the surrender for exchange of Certificates (as defined in Section 1.7(a)) or O&W Agreements, and such former Company Stockholders shall not be entitled to any voting rights, rights to receive any dividends or distributions or other rights as a stockholder of the Parent with respect to any fractional Merger Shares that would otherwise be issued to such former Company Stockholders. In lieu of any fractional Merger Shares that would otherwise be issued, each former Company Stockholder that would have been entitled to receive a fractional Merger Share shall, upon proper surrender of such person's Certificates or O&W Agreements representing such fractional Merger Shares, receive cash in an amount equal to such fractional Merger Share multiplied by the Average Market Value (without regard to the $22.08250 and $18.06750 limitation). The Cash Consideration, the Merger Shares and the cash to be received in lieu of fractional Merger Shares are collectively referred to herein as the "Merger Consideration." (e) Each Company Share held in the Company's treasury immediately prior to the Effective Time and each Company Share owned by the Parent or the Acquisition - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 3 Execution Copy Subsidiary shall, by virtue of the Merger and without any further action, be canceled and retired without payment of any consideration therefor. (f) Each share of common stock, $.01 par value per share, of the Acquisition Subsidiary ("Acquisition Subsidiary Common Stock") issued and outstanding immediately prior to the Effective Time shall be converted into and thereafter evidence one share of common stock, $.01 par value per share, of the Surviving Corporation. 1.6 Appraisal Rights. (a) Notwithstanding any provision of this Agreement to the contrary, any Company Shares held by a Dissenting Stockholder shall not be converted into the right to receive Merger Consideration pursuant to Section 1.5(a), but such Dissenting Stockholder shall only be entitled to such payments as are provided by the DGCL. (b) Notwithstanding the provisions of Section 1.6(a), if any Dissenting Stockholder shall effectively withdraw or lose (through failure to perfect or otherwise) his right to appraisal, then, as of the later of the Effective Time or the occurrence of such event, such Dissenting Stockholder's Company Shares shall automatically be converted into the right to receive Merger Consideration as provided in Section 1.5(a), without interest thereon. (c) The Company shall give the Parent (i) prompt notice of any written demands for appraisal of any Company Shares, withdrawals of such demands, and any other instruments that relate to such demands received by the Company, and (ii) the opportunity to participate in all negotiations and proceedings with respect to demands for appraisal under the DGCL. The Company shall not, without the prior written consent of the Parent, make any payment with respect to any demands for appraisal of Company Shares or offer to settle or settle any such demands. 1.7 Exchange of Shares. (a) Prior to the Effective Time, the Parent and the Company shall mutually appoint the Exchange Agent (or such other Exchange Agent as the parties shall mutually agree) to effect the exchange for the Merger Consideration of certificates that, immediately prior to the Effective Time, represented Company Shares ("Certificates"), and Options and Warrants that, at the Effective Time, will be deemed to be converted into O&W Company Shares ("O&W Agreements"). On or before the Closing Date, the Parent shall deliver to the Exchange Agent or its nominee, in trust for the benefit of holders of Certificates and O&W Agreements, the Cash Consideration and, a certificate (issued in the name of the Exchange Agent or its nominee) representing the ACO , as described in Section 1.5(b) which on the Closing Date shall be converted into shares of Parent Common Stock, in accordance with Section 1.5(c) such that on such date at the Closing, a certificate or certificates representing the Merger Shares shall be available for distribution by the Exchange Agent. As soon as practicable after the Effective Time and no later than five (5) days thereafter, the Parent shall cause the Exchange Agent to send a notice and a transmittal form to each holder of a Certificate or O&W Agreement (other than - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 4 Execution Copy those surrendered and paid for at the Closing) advising such holder of the effectiveness of the Merger and the procedure for surrendering to the Exchange Agent such Certificate or O&W Agreement in exchange for the Merger Consideration. Each holder of a Certificate or O&W Agreement, upon proper surrender thereof to the Exchange Agent in accordance with the instructions in such notice, shall be entitled to receive in exchange therefor (subject to any taxes required to be withheld) the Merger Consideration, without interest, determined pursuant to Sections 1.5(a) and (b). Until properly surrendered, each such Certificate or O&W Agreement shall be deemed for all purposes to evidence only the right to receive the Merger Consideration determined pursuant to Sections 1.5(a) and (b). Holders of Certificates shall not be entitled to receive certificates for the Merger Shares or cash payments to which they would otherwise be entitled until such Certificates or O&W Agreement are properly surrendered, or an affidavit is delivered pursuant to Section 1.7(c). (b) If any Merger Consideration is to be issued or paid in the name of a person other than the person in whose name the Certificate or O&W Agreement surrendered in exchange therefor is registered, it shall be a condition to the issuance and payment of such Merger Consideration that (i) the Certificate or O&W Agreement so surrendered shall be transferable, and shall be properly assigned, endorsed or accompanied by appropriate stock powers, (ii) such transfer shall otherwise be proper and (iii) the person requesting such transfer shall pay to the Exchange Agent any transfer or other taxes payable by reason of the foregoing or establish to the satisfaction of the Exchange Agent that such taxes have been paid or are not required to be paid. Notwithstanding the foregoing, neither the Exchange Agent nor any Party shall be liable to a holder of Company Shares for any Merger Consideration issuable or payable to such holder that is delivered to a public official in accordance with applicable abandoned property, escheat or similar laws. (c) In the event any Certificate or O&W Agreement shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate or O&W Agreement to be lost, stolen or destroyed, the Parent shall direct the Exchange Agent to issue in exchange for such lost, stolen or destroyed Certificate or O&W Agreement the Merger Consideration issuable or payable in exchange therefor pursuant to Section 1.5. The Board of Directors of the Parent may, in its discretion and as a condition precedent to the issuance or payment thereof, require the owner of such lost, stolen or destroyed Certificate or O&W Agreement to give the Parent a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against the Parent with respect to the Certificate or O&W Agreement alleged to have been lost, stolen or destroyed. (d) The Exchange Agent shall invest the cash portion of the Merger Consideration as directed by the Parent; provided, however, that all risk of loss related to such investments shall be borne by the Parent. (e) Promptly following the date which is twelve (12) months after the Closing Date, the Exchange Agent shall (i) return to the Parent all Merger Consideration (including the proceeds of any investments thereof) in its possession, other than shares of Parent Common Stock and (ii) return all shares of Parent Common Stock included in the Merger - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 5 Execution Copy Consideration to the Belgian Caisse des depots et Consignations or any similar institution. Thereafter, the Exchange Agent's duties shall terminate. Thereafter, each holder of a Certificate or O&W Agreement may surrender such Certificate or O&W Agreement to the Parent and, subject to applicable abandoned property, escheat and similar laws, receive in exchange therefor the Merger Consideration (with the cash portion of such consideration to be provided by the Parent and the Parent Common Stock portion of such consideration to be provided by the Belgian Caisse des depots et Consignations or such other institution that holds such shares of Parent Common Stock), without interest. 1.8 Dividends. No dividends or other distributions that are payable to the holders of record of Parent Common Stock as of a date on or after the Effective Time shall be paid to former Company Stockholders entitled by reason of the Merger to receive Merger Shares until such holders surrender their Certificates or O&W Agreements in accordance with Section 1.7. Upon such surrender, the Parent shall pay or deliver to the persons in whose name the certificates representing such Merger Shares are issued any dividends or other distributions that are payable to the holders of record of Parent Common Stock as of a date on or after the Effective Time and which were paid or delivered between the Effective Time and the time of such surrender provided that no such person shall be entitled to receive any interest on such dividends or other distributions. 1.9 Options and Warrants. (a) At the Effective Time, all (i) options to purchase Company Shares issued by the Company pursuant to its stock option plans or otherwise ("Options"), and (ii) warrants to purchase Company Shares ("Warrants"), in each case to the extent vested or exercisable on or prior to the Effective Date or as a result of the consummation of the Merger, shall be, to the extent permitted by the terms thereof or agreed to by the holder thereof, terminated and each holder of such Options and Warrants which have a per share exercise price less than the aggregate per share dollar value of the Merger Consideration (determined without regard to the $22.08250 and $18.06750 limitation) (such amount, the "Per Share Dollar Value"), shall receive therefor Merger Consideration determined in accordance with Section 1.5(a), based upon a number of Company Shares equal to the quotient of (i) the number of Company Shares subject to each such Option or Warrant held by such holder multiplied by the difference between the Per Share Dollar Value and the exercise price of each such Option and Warrant , divided by (ii) the Per Share Dollar Value (collectively, the "O&W Company Shares"). (b) At the Effective Time, the Parent shall substitute substantially equivalent options and warrants to purchase Parent Common Stock for all Options and Warrants to the extent unvested or unexerciseable on or prior to the Effective Time or as a result of consummation of the Merger. Immediately after the Effective Time, each unvested Option and Warrant outstanding immediately prior to the Effective Time shall be deemed to constitute an option or warrant to acquire, on the same terms and conditions as were applicable under such Option or Warrant at the Effective Time (without giving effect to the Merger), such number of shares of Parent Common Stock as is equal to the number of Company Shares subject to the unexercised portion of such Option or Warrant multiplied by the Option Conversion Ratio - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 6 Execution Copy 2 (except as otherwise provided in the applicable instrument, with any fraction resulting from such multiplication to be paid in cash upon the exercise of such substitute option or warrant based upon the closing price of Parent Common Stock on the Nasdaq National Market on the date of exercise). The "Option Conversion Ratio" shall equal a fraction, the numerator of which shall be $5.25 and the denominator of which shall be the denominator used in clause 1.5(a) to determine the Conversion Ratio, rounded to the nearest five decimal places. The exercise price per share of each such substituted option and warrant shall be equal to the exercise price of such Option or Warrant immediately prior to the Effective Time, divided by the Option Conversion Ratio. The terms, exercisability and, vesting schedule, and all of the other terms of the Options and Warrants shall, to the extent permitted under Belgian law, otherwise remain substantially unchanged. Without limiting the foregoing, for purposes of determining vesting of the Options and otherwise, employees of the Company will be credited for their full term during which they were employed by the Company. (c) At or prior to the Effective Time, the Parent or the Surviving Corporation shall deliver to the holders of the Options and Warrants subject to Section 1.9(a) appropriate notices setting forth such holders' rights pursuant to such Options or Warrants and instructions for surrendering to the Exchange Agent such Option or Warrant in exchange for the Merger Consideration. As soon as practicable after the Effective Time, the Parent or the Surviving Corporation shall deliver to the holders of Options and Warrants subject to substitution under Section 1.9(b) hereof appropriate notices setting forth such holders' rights pursuant to such substituted options or warrants, together with the agreements evidencing such substituted options or warrants. (d) The Parent shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Parent Common Stock for delivery upon exercise of the substituted options and warrants granted in accordance with this Section 1.9. As soon as practicable after the Effective Time, and in any event within thirty (30) days thereafter, the Parent shall file a Registration Statement on Form S-8 (or any successor form) under the Securities Act of 1933, as amended (the "Securities Act") with respect to all shares of Parent Common Stock subject to substituted options and warrants that may be registered on Form S-8, and shall use commercially reasonable efforts to maintain the effectiveness of such Registration Statement for so long as such substituted options and warrants remain outstanding. (e) The Company shall use commercially reasonable efforts to obtain, prior to the Closing, the consent from each holder of an Option or Warrant to the amendment of or substitution for such Option or Warrant pursuant to this Section 1.9 (unless such consent is not required under the terms of the applicable agreement, instrument or plan). 1.10 Certificate of Incorporation. The Certificate of Incorporation of the Surviving Corporation shall be the Certificate of Incorporation of the Company as amended and restated in the Certificate of Merger. - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 7 Execution Copy 4 1.11 Bylaws. The Bylaws of the Surviving Corporation shall be the Bylaws of the Acquisition Subsidiary immediately prior to the Effective Time, except that the name of the corporation set forth therein shall be changed to the name of the Company. 1.12 Directors and Officers. The directors of the Acquisition Subsidiary immediately prior to the Effective Time shall become the directors of the Surviving Corporation as of the Effective Time. The officers of the Acquisition Subsidiary immediately prior to the Effective Time shall be the officers of the Surviving Corporation after the Effective Time, retaining their respective positions. 1.13 No Further Rights. From and after the Effective Time, no Company Shares shall be deemed to be outstanding, and holders of Certificates shall cease to have any rights with respect thereto, other than the right to receive Merger Consideration or as otherwise provided herein or by law. 1.14 Closing of Transfer Books. At the Effective Time, the stock transfer books of the Company shall be closed and no transfer of Company Shares shall thereafter be made. If, after the Effective Time, Certificates are presented to the Surviving Corporation, the Parent or the Exchange Agent, they shall be canceled and exchanged for Merger Consideration in accordance with Sections 1.5(a) and (b), subject to applicable law in the case of Company Shares held by Dissenting Stockholders. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Parent that the statements contained in this Article II are true and correct, except as set forth in the disclosure schedule attached hereto (the "Company Disclosure Schedule"). The Company Disclosure Schedule shall be initialed by the Parties and shall be arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Article II; provided, however, that any matter disclosed in any Section hereof or on any part of the Company Disclosure Schedule shall be deemed disclosed for purposes of every Section hereof and every part of the Company Disclosure Schedule; provided, further, that the Company shall make a good faith effort to include any disclosure (by cross-reference or repeating the disclosure) that is required by more than one representation and warranty in each applicable portion of the Company Disclosure Schedule. 2.1 Organization and Qualification of the Company. Except as set forth on Schedule 2.1(a) of the Company Disclosure Schedule, the Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with full power and authority to own, lease and operate its properties and to conduct its business in the manner and in the places where such properties are owned or leased or such business is conducted by it. The copies of the Company's Certificate of Incorporation as amended to date ("Charter"), certified by the Delaware Secretary of State, and of the Company's Bylaws as amended to date, certified by the Company's Secretary, copies of which have previously been - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 8 Execution Copy provided to the Parent, are, and will be at the Closing, complete and correct. Except as set forth on Schedule 2.1(a) of the Company Disclosure Schedule, the Company is duly qualified to do business and in good standing as a foreign corporation in the jurisdictions identified in Schedule 2.1(a) and it is not required to be licensed or qualified to conduct its business or own its property in any other jurisdiction, except where the failure to be so licensed or qualified would not, individually or in the aggregate, have a Company Material Adverse Effect. A "Company Material Adverse Effect" is defined as any change, event or other occurrence that has, or is reasonably likely to have, individually or in the aggregate, a material adverse impact on the business, properties, operations, prospects, assets, revenues or condition (financial or otherwise) of the Company taken as a whole; provided, however, that "Company Material Adverse Effect" shall be deemed to exclude the impact of any continuation of any existing unfavorable business or financial trend (which has been disclosed in Schedule 2.1(b) of the Company Disclosure Schedule) without a material worsening thereof. 2.2 Capitalization. The authorized capital stock of the Company consists of (i) 1,000,000 shares of preferred stock, $.01 par value, none of which is issued and outstanding, and (ii) 15,000,000 shares of common stock, $.01 par value, of which the number of issued and outstanding shares is set forth on Schedule 2.2(b) of the Company Disclosure Schedule and no shares are held in the treasury of the Company. All issued and outstanding Company Shares are, and all Company Shares that may be issued upon the exercise of Options and Warrants, upon issuance in accordance with the terms and conditions specified in the instruments pursuant to which they are issuable and upon payment therefor, will be duly authorized and validly issued, fully paid, nonassessable, and free of all preemptive rights. Except as set forth on Schedule 2.2(a) of the Company Disclosure Schedule, the Company is subject to no material liability on account of the issuance or sale of any securities, including, without limitation, all outstanding Company Shares. Except as set forth on Schedule 2.2(b) of the Company Disclosure (including as applicable, the number of Company Shares subject to each instrument and the extent to which the rights granted under such instrument are vested or may be exercised), there are no (i) outstanding or authorized subscriptions, warrants, options or other rights granted by the Company or binding upon the Company to purchase or acquire, or preemptive rights with respect to the issuance or sale of, the capital stock of the Company or which obligate the Company to issue any additional shares of its capital stock or any securities convertible into or evidencing the right to subscribe for any shares of its capital stock, (ii) other securities of the Company directly or indirectly convertible into or exchangeable for shares of capital stock of the Company, (iii) restrictions on the transfer of the Company's capital stock imposed by or agreed to by the Company or of which the Company is otherwise aware (other than restrictions under the Securities Act and state securities laws), (iv) voting rights with respect to the capital stock of the Company other than as set forth in the DGCL and the Company's Charter and Bylaws, or (v) stock appreciation, phantom stock or similar rights granted by the Company. Schedule 2.2(c) of the Company Disclosure Schedule identifies each holder of Options and Warrants and the number of Company Shares subject to such Option or Warrant, which Options or Warrants (x) by their terms require the Parent to assume such Options or Warrants, (y) contain terms and conditions that would result in acceleration of the vesting schedule or exercise period set forth therein upon the consummation of the Merger, or (z) contain terms and conditions that would not allow the Company to terminate such Options or Warrants in accordance with Section 1.9(a) above. - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 9 Execution Copy 2.3 Subsidiaries. There is no corporation with respect to which the Company, directly or indirectly, has the power to vote or direct the voting of sufficient securities to elect 50% or more of the directors (a "Subsidiary"). The Company does not control directly or indirectly or have any direct or indirect equity or similar participation in any corporation, joint venture, partnership, trust, or other business association. 2.4 Authorization of Transaction. Subject to the conditions precedent set forth herein, the Company has all requisite power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the Merger and the transactions contemplated hereby. The execution and delivery of this Agreement and, subject to the approval of the Merger and this Agreement by a majority of the votes represented by the outstanding Company Shares entitled to vote on this Agreement and the Merger (the "Requisite Stockholder Approval"), the performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of the Company. Each of this Agreement and the Option Agreement (as defined in Section 2.32) has been duly and validly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent that its enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors' rights generally or by general equitable principles including the Chancery Court of the State of Delaware. 2.5 Present Compliances with Obligations and Laws. Except as set forth on Schedule 2.5 of the Company Disclosure Schedule, the Company is not: (a) in violation of its Charter or Bylaws; (b) in default in the performance of any obligation, agreement or condition of any debt instrument which (with or without the passage of time or the giving of notice) affords to any person the right to accelerate any indebtedness or terminate any right; (c) in default of or breach of (with or without the passage of time or the giving of notice) any other contract to which it is a party or by which it or its assets are bound; or (d) in violation of any law, regulation, administrative order or judicial order, decree or judgment applicable to it or its business or assets, except where any violation or default under items (b), (c), or (d) would not, individually or in the aggregate, have a Company Material Adverse Effect. 2.6 No Conflict of Transaction With Obligations and Laws. Subject to compliance with the applicable requirements of the Securities Act, any applicable state securities laws, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the rules of the Nasdaq National Market, the filing of the Certificate of Merger as required by the DGCL, and obtaining the consents listed on Schedule 2.6(a) of the Company Disclosure Schedule, neither the execution, delivery and performance of this Agreement by the Company, nor the performance by the Company of the transactions contemplated hereby, will: (i) constitute a breach or violation of the Charter or Bylaws of the Company; (ii) require any consent, waiver, exemption, approval or authorization of, declaration, filing or registration with, or giving of notice to any person, court, arbitration tribunal, administrative agency or commission or other governmental or regulatory agency or authority; (iii) constitute (with or without the passage of time or the giving of notice) a breach of, or default under, any debt instrument to which the Company is a party, or give any person the right to accelerate any indebtedness or terminate, modify or cancel any right with respect to any debt instrument; (iv) constitute (with or without the passage of time or giving of notice) a - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 10 Execution Copy breach of, or default under, any debt instrument to which the Company is a party, or give any person the right to accelerate any indebtedness or terminate, modify or cancel any right with respect to any debt instrument; (iv) constitute (with or without the passage of time or giving of notice) a default under or breach of any other agreement, instrument or obligation to which the Company is a party or by which the Company or any of its assets are bound; (v) result in the creation of any lien or encumbrance upon any of the assets of the Company; (vi) result in a violation of any law or regulation applicable to the Company or its business or assets, (vii) result in a violation of any administrative order or judicial order, decree or judgment applicable to the Company, or its business or assets; or (viii) invalidate or adversely affect any permit, license or authorization used in the Company's business, excluding from clauses (ii) (iii), (iv), (vi) and (viii), any consent, filing, conflict, default, violation or other matter which would not, either individually or in the aggregate, either have a Company Material Adverse Effect or materially impair or preclude the Company's ability to consummate the Merger or the transactions contemplated hereby. Except as set forth in Schedule 2.6(b) of the Company Disclosure Schedule, neither the execution, delivery and performance of this Agreement nor the performance of the transactions contemplated hereby will give rise to a right of any party (other than the Company), under the terms thereof to terminate, modify or cancel any material contract, agreement or other instrument to which the Company is a party or by which the Company or its properties are affected which contract, agreement or other instrument is required to be disclosed in the Company Disclosure Schedule. 2.7 Reports and Financial Statements (a) The Company has previously furnished to the Parent complete and accurate copies, as amended or supplemented, of its (a) Annual Report on Form 10-K or Form 10-KSB for the fiscal years ended January 31, 1995 and 1996, as filed with the Securities and Exchange Commission (the "SEC"), and amendments thereto, (b) proxy statements relating to all meetings of its stockholders (whether annual or special) since September 6, 1994, (c) all other final reports or registration statements, other than Registration Statements on Form S-8, filed by the Company with the SEC since September 6, 1994 and (d) the draft Annual Report on form 10-KSB for the fiscal year ended January 31, 1997 (the "Draft Report") , (such annual reports, proxy statements, registration statements, Draft Report and other filings, together with any amendments or supplements thereto, are collectively referred to herein as the "Company Reports"). The Company Reports constitute all of the documents filed or required to be filed by the Company with the SEC since September 6, 1994, other than Registration Statements on Form S-8. The Parties acknowledge and agree that the Draft Report shall be substantially updated to include such information as the Company deems necessary to disclose therein, which information has previously been disclosed to Parent. As of their respective dates and subject to the immediately preceding sentence with respect to the Draft Report as of the date hereof (as supplemented by the information disclosed herein), the Company Reports did 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. The audited financial statements and unaudited interim financial statements of the Company included in the Company Reports (together, the "Financial Statements") (i) comply as to form in all material respects with applicable accounting requirements and the published rules and - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 11 Execution Copy regulations of the SEC with respect thereto, (ii) have been prepared in accordance with United States generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods covered thereby (except as may be indicated therein or in the notes thereto, and in the case of quarterly financial statements, as permitted by Form 10-Q or Form 10-QSB under the Exchange Act and subject to normal recurring year-end adjustments), (iii) fairly present the financial condition, results of operations and cash flows of the Company as of the respective dates thereof and for the periods referred to therein, and (iv) are consistent in all material respects with the books and records of the Company. The Company has also previously furnished to the Parent all documents prepared by the Company and used in connection with any offer or sale of securities by the Company since September 6, 1994. (b) The balance sheet contained in the Draft Report including the footnotes thereto, is sometimes referred to hereinafter as the "Base Balance Sheet." (c) The books of account of the Company are complete and correct in all material respects. The (i) current books of account and (ii) to the extent the same are in the Company's possession, auditor's letters to management of the Company for the past five (5) years and other significant correspondence from or to such auditors during such period, if any, have been made available to the Parent. 2.8 Absence of Undisclosed Liabilities. Except as disclosed in Schedule 2.8 of the Company Disclosure Schedule and except for liabilities and obligations arising in connection with this Agreement, the Company has no material liabilities or obligations of any nature, except (i) the liabilities recorded on the Base Balance Sheet and the notes thereto, and (ii) the liabilities and obligations incurred since the date of the Base Balance Sheet in the ordinary course of business and consistent with past practice that would not, as the Company reasonably foresees, individually or in the aggregate, have a Company Material Adverse Effect. 2.9 Absence of Certain Changes. Except as disclosed in Schedule 2.9 of the Company Disclosure Schedule or in the notes to the Financial Statements, since the date of the Base Balance Sheet there has not been: (a) any change in the financial condition, working capital, earnings, reserves, properties, assets, liabilities, business or operations of the Company which change by itself or in conjunction with all other such changes, whether or not arising in the ordinary course of business has had a Company Material Adverse Effect; (b) any material contingent liability incurred by the Company as guarantor or otherwise with respect to the obligations of others; (c) any mortgage, encumbrance or lien placed on any of the properties of the Company which remains in existence on the date hereof ; - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 12 Execution Copy (d) any material obligation or material liability incurred by the Company other than obligations and liabilities incurred in the ordinary course of business and consistent with past practice; (e) any material purchase, sale or other disposition, or any agreement or other arrangement for the purchase, sale or other disposition, of any material properties or assets of the Company, other than in the ordinary course of business and consistent with past practice; (f) any damage, destruction or loss, whether or not covered by insurance, that have had or is reasonably likely to have a Company Material Adverse Affect; (g) any union organization attempts or claim of unfair labor practices (other than routine internal employee grievances) involving the Company, any change in the compensation payable or to become payable by the Company to any of its officers, or, other than in the ordinary course of business and consistent with past practices, its employees or agents, or any change in any bonus, pension, or profit sharing payment, entitlement or arrangement made to or with any of such officers, employees or agents; (h) any change with respect to the management personnel of the Company that has had or is reasonably likely to have a Company Material Adverse Effect; (i) any payment or discharge of a material lien, claim, obligation or liability of the Company which was not shown on the Base Balance Sheet or incurred in the ordinary course of business and consistent with past practice thereafter; (j) any obligation or liability incurred by the Company to any of its employees, officers, directors or shareholders or any loans or advances made by the Company to any of its officers, directors or shareholders except normal compensation, benefits and expense allowances payable in the ordinary course of business consistent with past practice; (k) any write-down of the value of any inventory (including write-downs by reason of shrinkage or mark-down), except for write-downs and write-offs that are in the aggregate less than $15,000 incurred in the ordinary course of business and consistent with past practice; (l) any disposal or lapse of any rights to the use of any trademark, tradename, patent or copyright, or disposal of or disclosure by the Company to any person other than the Parent or employees of the Company of any trade secret, formula, process or know-how not theretofore a matter of public knowledge other than pursuant to confidentiality agreements; (m) any change in any method of accounting or accounting practice; (n) any action taken to issue, sell, deliver or agree or commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase or otherwise) or authorize the issuance, sale or delivery of, or - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 13 Execution Copy redeem or repurchase, any stock of any class or any other securities or any rights, warrants or options to acquire any such stock or other securities (except pursuant to the redemption, conversion or exercise of the Options and Warrants outstanding on the date hereof), or amend any of the terms of any such convertible securities or Options or Warrants (except as contemplated in this Agreement); (o) any action taken to split, combine or reclassify any shares of its capital stock; declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock; (p) any action taken to alter, modify, amend or issue any option, warrant or other right to purchase Company Shares (other than to Parent); (q) any action taken to alter, modify or amend or enter into any agreement with any management personnel of the Company; or (r) any agreement, whether in writing or otherwise, to take any action described in this Section 2.09. 2.10 Payment of Taxes. Except as set forth on Schedule 2.10 of the Company Disclosure Schedule, the Company has duly and timely filed all Federal, state, local, and foreign government income, excise, gross receipts or franchise tax returns, real estate and personal property tax returns, sales and use tax returns, employee tax and contribution returns, and all other tax returns, reports and declarations, including valid extensions therefore, or estimated taxes required to be filed by them, with respect to all applicable taxes ("Tax Returns"), including without limitation, with respect to all income, profit, franchise, sales, use, real property, personal property, ad valorem, excise, employment, social security and wage withholding, severance, stamp, occupation, and windfall profits taxes, of every kind, character or description, and imposed by any government or quasi-governmental authority (domestic or foreign), and any interest or fines, and any and all penalties or additions relating to such taxes, charges, fees, levies or other assessments ("Taxes") except to the extent that such failures to file, taken together do not, individually or in the aggregate, have a Company Material Adverse Effect. All of the Tax Returns are complete and correct in all material respects. All Taxes shown to be due on each Tax Return have been paid, reserved against or are being contested in good faith by the Company (which contest is being diligently pursued and is described on Schedule 2.10 of the Company Disclosure Schedule). All Taxes and other assessments and levies which the Company is required to withhold or collect have been withheld or collected and paid over or will be paid over to proper governmental authorities as required except for the collection of sales or use taxes in such amounts as would not have a Company Material Adverse Effect. Except as set forth on Schedule 2.10 of the Company Disclosure Schedule, to the Company's knowledge the Tax Returns have never been examined by any government entity, including the Internal Revenue Service and the Massachusetts Department of Revenue. Except as set forth on Schedule 2.10 of the Company Disclosure Schedule, the Company has no knowledge of any intention on the part of any government entity to examine any of the Tax Returns. Except as set forth on Schedule 2.10 of the Company Disclosure Schedule, no deficiencies have been asserted or assessments - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 14 Execution Copy made against the Company, nor is the Internal Revenue Service nor any other taxing authority now asserting or, to the knowledge of the Company, threatening to assert against the Company any deficiency or claim for additional taxes or interest thereon or penalties in connection therewith. The Company has not waived any statute of limitations for any year, which waiver is still in effect. To the Company's knowledge, the provisions for taxes reflected in the above-mentioned financial statements are adequate, in all material respects, to cover any tax liabilities of the Company. The Company has not filed a consent under Section 341(f) of the Code. The Company has not ever been part of an affiliated group filing consolidated returns, or entered into any tax allocation or tax sharing agreement. 2.11 Title to Properties; Liens; Condition of Properties. (a) The Company does not own, directly or indirectly, any real property. The Company has delivered or made available to Parent true, correct and complete copies of all material leases, subleases, rental agreements, contracts of sale, tenancies or licenses related to any of the real or personal property currently used by the Company in its business. (b) The Company owns outright all of its personal property which is not leased and to the Company's knowledge, all of its leases are valid, binding and enforceable in accordance with their terms against the parties thereto and each such lease is subsisting and no material default exists under any thereof. The Company has not received written notice that any party to any such lease intends to cancel, terminate or refuse to renew the same. (c) None of the personal property owned by the Company is subject to any mortgage, pledge, deed of trust, lien (other than for taxes not yet due and payable), conditional sale agreement or security title, except as specifically disclosed in Schedule 2.11 of the Company Disclosure Schedule or in the Base Balance Sheet. (d) All machinery and equipment of the Company are in reasonable working order and repair, in view of their age, are adequate for the uses to which they are being put, have been reasonably maintained and conformed in all material respects with all applicable ordinances, regulations and safety or other laws. 2.12 Inventories; Accounts Receivable. (a) All inventories of finished goods and raw materials of the Company reflected on the Base Balance Sheet were as of the date thereof , and those existing at the Closing will to the Company's knowledge be, except as reserved against in accordance with GAAP, of a quality and quantity salable in the ordinary course of the business of the Company and are recorded on the Company's books and records at the lower of cost or market price. Purchase commitments for raw materials and parts are not in excess of anticipated requirements, and none are at prices materially in excess of current market prices. Except as set forth in Schedule 2.12 of the Company Disclosure Schedule, since the date of the Base Balance Sheet, no inventory items have been sold or disposed of except through sales in the ordinary course of business and consistent with past practice. - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 15 Execution Copy (b) All of the accounts receivable of the Company shown or reflected on the Base Balance Sheet, less a reserve for bad debts in the amount shown on the Base Balance Sheet, are, and those existing at the time of Closing, less the reserve related thereto, will be, valid and to the Company's knowledge, enforceable claims which arose out of transactions with unaffiliated parties. Except as set forth in Schedule 2.12 of the Company Disclosure Schedule, no customer has informed the Company of its intention to resist or delay paying any receivable. 2.13 Intellectual Property Rights. (a) The Company owns or possesses the adequate right to use all Intellectual Property Rights (as defined below) necessary to the conduct of its business as it is presently being conducted or as presently contemplated to be conducted in 1997. Schedule 2.13(a) of the Company Disclosure Schedule contains a list of all patents, trade names, registered copyrights, trademarks and service marks, and applications for the same owned by the Company. Except as set forth on Schedule 2.13(a), the Company has unencumbered title to the Intellectual Property Rights set forth in Schedule 2.13(a) which are listed as owned by the Company and to the Company's knowledge there are no pending challenges to such title nor, to the knowledge of the Company, have others threatened to challenge such title. No rights or licenses to use Intellectual Property Rights have been granted or acquired by the Company except licenses associated with sales of products to end user customers in the ordinary course of business and consistent with past practice or those listed in Schedule 2.13(b) of the Company Disclosure Schedule. Schedule 2.13(c) of the Company Disclosure Schedule lists all material licenses, agreements, obligations and contracts relating to the Intellectual Property Rights to which the Company is a party or by which, to the Company's knowledge, the Company is bound, except licenses associated with sales of products to end user customers in the ordinary course of business and consistent with past practice. Each of the licenses, agreements, obligations and contracts listed in Schedule 2.13(c) (i) is in full force and effect, (ii) the Company is not in default under any such instrument, and (iii) there are no outstanding, or to the knowledge of the Company, threatened, disputes or disagreements with respect to any such instrument. Except as listed in Schedule 2.13(d) of the Company Disclosure Schedule, to the knowledge of the Company, there have been (i) no claims or assertions made by others that the Company has infringed any Intellectual Property Rights of others by the sale of products or any other activity in the preceding five year period and (ii) to the Company's knowledge no infringements by the Company during such period. Except as set forth in Schedule 2.13(e) of the Company Disclosure Schedule, the Company has no knowledge of any infringement of Intellectual Property Rights of the Company by others. All such patents, registered trademarks, service marks, and copyrights owned by the Company are in good standing and are recorded on the public record in the name of the Company, except for those failures to be in good standing and so recorded that would not, individually or in the aggregate, have a Company Material Adverse Effect. True, complete and correct copies of all material listed in Schedules 2.13(a), 2.13(b), 2.13(c), 2.13(d) and 2.13(e) of the Company Disclosure Schedule have been delivered or made available to the Parent. For purposes of this Agreement, "Intellectual Property Rights" shall mean all of the Company's rights relating to patents, trademarks, service marks, tradenames, copyrights, mask works, - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 16 Execution Copy inventions, processes, trade secrets, know-how, software and any documentation relating to the manufacture, marketing and maintenance of products by the Company. (b) Except as listed on Schedule 2.13(f) of the Company Disclosure Schedule, all current full-time employees of and technical consultants to the Company have entered into proprietary information and invention agreements with the Company and copies of such agreements have been made available or provided to Parent. Except as set forth on Schedule 2.13(f) of the Company Disclosure Schedule, to the Company's knowledge, no employee of the Company has entered into any agreement that prohibits him from performing the work in which the employee is presently engaged or requires the employee to transfer, assign, or disclose information concerning his work to anyone other than the Company. (c) The manner in which the Company has manufactured, packaged, shipped, advertised, labeled and sold its products complies in all material respects with all the material applicable laws and regulations pertaining thereto. Except as set forth on Schedule 2.13(g) of the Company Disclosure Schedule, the Company has not deposited, and is not obligated to deposit, any source code regarding its products into any source code escrows or similar arrangements and the Company is not under any contractual or other obligation to disclose the source code or, other than to end-users or bundlers, any other material proprietary information included in or relating to its products. 2.14 Contracts and Commitments. (a) Except for contracts, commitments, plans, agreements and licenses described in Schedule 2.14(a), Schedule 2.13(b) or Schedule 2.15 of the Company Disclosure Schedule (correct and complete copies of which, if written, have been delivered or made available to the Parent), the Company is not a party to or subject to: (i) any contract or agreement for the purchase of any commodity, material, equipment or asset, except purchase orders in the ordinary course for less than $10,000 each, such orders not exceeding in the aggregate $50,000; (ii) any other contracts or agreements creating any obligations of the Company after the date of the Base Balance Sheet of $20,000 or more with respect to any such contract or agreement, other than sales and purchase commitments in the ordinary course of business and consistent with past practice; (iii) any contract or agreement providing for the purchase of all or substantially all of its requirements of a particular product from a supplier; (iv) any material contract or agreement which by its terms does not terminate or is not terminable without penalty by the Company (or its successor or assign) within 90 days after the date hereof; - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 17 Execution Copy (v) any contract or agreement for the sale, license or lease of its products not made in the ordinary course of business and consistent with past practice; (vi) any contract with any sales agent or distributor of products of the Company; (vii) any contract containing covenants limiting the freedom of the Company to compete in any line of business or with any person or entity; (viii) any material license or franchise agreement (as licensor or licensee or franchisor or franchisee); (ix) any arrangement or obligation with respect to the return of inventory or merchandise other than on account of a defective condition, incorrect quantities or missed delivery dates; or (x) any contract, subcontract or other agreement with any agency of the United States government or other governmental entity . (b) The Company is not in material default under any contracts, commitments, plans, agreements or licenses described in Schedule 2.14(a) of the Company Disclosure Schedule nor does the Company have knowledge of any termination, cancellation, limitation or modification or change in any business relationship with any material supplier or customer contemplated by such customer or supplier. For the purposes hereof, a supplier is material if it accounted for more than $25,000 of the orders of the Company for purchases of raw materials and other products essential to its manufacturing processes during either of the last two completed fiscal years. A customer is material if it accounted for more than $25,000 of the orders of the Company in either of the last two completed fiscal years. Except as set forth on Schedule 2.14(b) of the Company Disclosure Schedule, the Company has not had any customer who accounted, directly or indirectly, for more than five percent (5%) of its sales during the last two fiscal years and the Company has no supplier from whom it has purchased more than five percent (5%) of the goods and services that it purchased during the last two fiscal years. 2.15 Labor and Employee Relations. (a) Except as shown on Schedule 2.15(a) of the Company Disclosure Schedule, there are no currently effective material written consulting or employment agreements or other material agreements with individual consultants or employees to which the Company is a party. Complete and accurate copies of all such written agreements have been delivered or made available to Parent. Also shown on Schedule 2.15(a) of the Company Disclosure Schedule are the name and rate of compensation (including all salary, bonus, benefit and compensation) of each officer and employee of the Company, including all bonus compensation. (b) None of the employees of the Company is covered by any collective bargaining agreement with any trade or labor union, employees' association or similar - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 18 Execution Copy association. The Company has complied in all material respects with applicable laws, rules and regulations relating to the employment of labor, including without limitation those relating to wages, hours, unfair labor practices, discrimination, and payment of social security and similar taxes. There are no representation elections, arbitration proceedings, labor strikes, slowdowns or stoppages, material grievances or other labor troubles pending, or, to the knowledge of the Company, overtly threatened, with respect to the employees of the Company. (c) Except as set forth on Schedule 2.15(c), there are no complaints against the Company pending or, to the knowledge of the Company, overtly threatened before the National Labor Relations Board or any similar foreign, state or local labor agencies, or before the Equal Employment Opportunity Commission or any similar foreign, state or local agency, by or on behalf of any employee or former employee of the Company. (d) There is no material contingent liability for severance pay, accrued vacation pay for prior years or similar items as of the date of the Base Balance Sheet not set forth on the Base Balance Sheet or on Schedule 2.15(d) of the Company Disclosure Schedule. Except as set forth on Schedule 2.15(d), the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not trigger any severance pay obligation under any contract or to the Company's knowledge, assuming the Surviving Corporation does not terminate employees, at law. (e) The Company has provided or made available to Parent a description of all written and other material employment policies under which the Company operates. (f) Except where the failure to so be in compliance, individually or in the aggregate, would not have a Company Material Adverse Effect, the Company is in compliance with all Federal, foreign (as applicable), and state worker's safety laws and requirements. (g) Except as disclosed on Schedule 2.15(g) of the Company Disclosure Schedule, to the knowledge of the Company, no executive, key employee or group of employees has any plans to terminate his or her employment with the Company. (h) No salaried or commissioned employee has left the employment of the Company since the date of the Base Balance Sheet, except where such departure would not be reasonably likely to have a Company Material Adverse Effect. 2.16 Employee Benefits and ERISA. (a) Schedule 2.16(a) of the Company Disclosure Schedule sets forth a list of all employee compensation and benefit plans, agreements, commitments or arrangements of any type for any current or former employee, officer or director, or dependent thereof, of the Company which is: - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 19 Execution Copy (i) an employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); or (ii) a compensation, stock purchase, stock option, stock bonus, stock appreciation, severance, health, welfare, life, disability or other benefit plan, fund, program or arrangement which is not covered by clause (i) above. (Hereinafter, "ERISA Benefit Plan" refers to plans or arrangements under clause (i) above and "Benefit Plan" refers to plans or arrangements under clauses (i) and (ii) above.) (b) There are no Benefit Plans of the Company with respect to which the Company has any liability or contingent liability not listed on Schedule 2.16(b) of the Company Disclosure Schedule. There have been no multiemployer plans within the meaning of Section 3(37) or 4001(a)(3) of ERISA or defined benefit plans within the meaning of Section 3(35) of ERISA covering employees or former employees of the Company or ERISA Affiliate within the last ten (10) years; for purposes of this sentence, "ERISA Affiliate" means any trade or business, whether or not incorporated, that together with the Company, would be deemed to be a controlled group, affiliated service group or "single employer" within the meaning of section 4001 of ERISA or section 414(b),(c)(m),or (o) of the Code. (c) With respect to each Benefit Plan described on Schedule 2.16 (c), the Company has furnished or made available to Parent complete and accurate copies of each Benefit Plan, including all amendments thereto, the three most recent Form 5500s (if required), the most recent Internal Revenue Service determination letter (if any), all summary plan descriptions and any summaries of material modifications (if any), summary annual reports (if any), and all reports (if any) of the ERISA Benefit Plan required by ERISA and the regulations thereunder. The Company has also furnished Parent copies of any material insurance contracts or trust agreements through which any ERISA Benefit Plan is funded, any custodial or investment contracts relating to assets or benefits under the ERISA Benefit Plan, and any contracts relating to record keeping or administration for the ERISA Benefit Plan. To the knowledge of the Company, there has not been any material adverse change occurring with respect to any ERISA Benefit Plan since the date of the most recently completed and filed annual report. (d) Each ERISA Benefit Plan which is a pension plan within the meaning of Section 3(2) of ERISA which is intended to be qualified under Section 401(a) of the Code is so qualified, any trust through which it is funded is exempt from tax under Section 501(a) of the Code. Any cash or deferred arrangement of an ERISA Benefit Plan is a qualified cash or deferred arrangement under Section 401(k) of the Code. (e) With respect to each Benefit Plan: (i) each Benefit Plan materially complies currently and in all material respects complied in the past, as to form and operation, with the provisions of all applicable Federal and state laws, such as ERISA and the Code, including without limitation all requirements regarding discrimination, disclosure, and continuation coverage (under Section - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 20 Execution Copy 4980B of the Code); and the Company has not, and to the knowledge of the Company no other party has engaged in a nonexempt "prohibited transaction" (as defined in Section 4975 of the Code or enumerated in Section 406(a) or (b) of ERISA) with respect to an ERISA Benefit Plan or engaged in other activities which would constitute a breach of fiduciary duty with respect to which the Company or any Benefit Plan may be liable or otherwise damaged in any material respect; (ii) to the Company's knowledge, no such Benefit Plan is currently under audit or investigation by any governmental agency or body, and there are no actions, suits or claims (other than routine claims for benefits) pending or to the Company's knowledge threatened against any of the Benefit Plans or against the assets of any Benefit Plan; and (iii) all premiums due in connection with the Benefit Plan and premiums for life and health insurance and annuity contracts, have been paid in full when due or within any applicable grace period; (iv) all reports and filings made pursuant to ERISA, including without limitation all Form 5500s and attachments, summary annual reports, and any other documents reasonably necessary to enable Parent to perform its responsibilities with respect to any employee program subsequent to the Closing, are and shall be available at the offices of the Company on and immediately after the Closing. (f) Except as required by COBRA or the Family Medical Leave Act, the Company has not made any promises or incurred any obligation to provide any health or other welfare benefits to any retirees, former employees, or their dependents. 2.17 Environmental Matters. The Company has complied in all respects with all applicable environmental laws, where the failure to so comply would result in a Company Material Adverse Effect. 2.18 Permits. The Company holds all licenses, permits, registrations, orders, authorizations, approvals and franchises which are required to permit it to conduct its business as presently conducted, except where the failure to hold such licenses, permits, registrations, orders, authorizations, approvals or franchises would not, individually or in the aggregate, have a Company Material Adverse Effect. All such licenses, permits, registrations, orders, authorizations, approvals and franchises are listed on Schedule 2.18 of the Company Disclosure Schedule and are now to the Company's knowledge, valid and in full force and effect, and the Surviving Corporation, unless otherwise indicated on Schedule 2.18 of the Company Disclosure Schedule, shall have full benefit of the same. The Company has not received any notification of any asserted present failure (or past and unremedied failure) by it to have obtained any such license, permit, registration, order, authorization, approval or franchise. 2.19 Warranty or Other Claims. Except as disclosed on Schedule 2.19 of the Company Disclosure Schedule, no product manufactured, sold, leased or licensed by the - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 21 Execution Copy Company is subject to any guaranty, warranty or right of return beyond the applicable standard terms and conditions of sale, lease or license, which have been made available to the Parent or which may be imposed by law. Schedule 2.19 of the Company Disclosure Schedule sets forth the aggregate expenses incurred by the Company in fulfilling its obligations under its guaranty, warranty and right of return provisions during each of the last two completed fiscal years. Except as set forth in Schedule 2.19 of the Company Disclosure Schedule, there are no existing or, to the knowledge of the Company threatened claims against the Company for services or merchandise which are defective or fail to meet any service or product warranties other than in the ordinary course of business consistent with past experience. Except as set forth in Schedule 2.19 of the Company Disclosure Schedule, no claim has been asserted against the Company since August 1, 1996 for renegotiation or price redetermination of any completed business transaction. The Company's products are free from known significant defects and to the knowledge of the Company, conform to the specifications, documentation and sample demonstration furnished to the Company's customers and made available to Parent. 2.20 Claims and Legal Proceedings. Except for matters described in Schedule 2.20 of the Company Disclosure Schedule, there are no claims, actions, suits, arbitrations, proceedings or investigations pending (or, to the knowledge of the Company, threatened) against the Company, and there are no outstanding court orders, court decrees, or court stipulations to which the Company is a party or by which any of its assets are bound, any of which (a) affect this Agreement or the transactions contemplated hereby, or (b) materially restrict the present business properties, operations, prospects, assets, revenues or condition (financial or otherwise) of the Company, or (c) would, individually or in the aggregate have a Company Material Adverse Effect or materially impair or preclude the Company's ability to consummate the Merger or the other transactions contemplated hereby. 2.21 Borrowing and Guarantees. Except as shown on Schedule 2.21 of the Company Disclosure Schedule, there are no agreements and undertakings pursuant to which the Company (a) is borrowing or is entitled to borrow any money, (b) is lending or has committed itself to lend any money, or (c) is a guarantor or surety with respect to the obligations of any person. Complete and accurate copies of all such written agreements have been delivered or otherwise made available to Parent. 2.22 Financial Service Relations and Powers of Attorney. All of the arrangements which the Company has with any bank depository institution or other financial services entity, whether or not in the Company's name, are described on Schedule 2.22 hereto, indicating with respect to each of such arrangements the type of arrangement maintained (such as checking account, borrowing arrangement, safe deposit box, etc.), the banking institution and the person or persons authorized in respect thereof. The Company does not have any outstanding powers of attorney. 2.23 Insurance. Schedule 2.23 of the Company Disclosure Schedule lists all insurance policies in force on the date hereof covering the businesses, properties and assets of the Company and all outstanding claims against such policies. All such policies are currently in - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 22 Execution Copy effect. Except as set forth on Schedule 2.23 of the Company Disclosure Schedule, the Company has not received notice of the cancellation of any such insurance in effect on the date hereof. 2.24 Government Contracts. The Company has not ever had a contract or subcontract terminated for default and has never been determined to be "nonresponsible" by any agency of the United States government. The Company does not have any outstanding agreements, contracts or commitments that require it to obtain or maintain a government security clearance. 2.25 Corporate Books and Records. The minute books and stock ledgers of the Company, copies of which have been made available for inspection by Parent, accurately record all material action taken by the Company's stockholders, board of directors and committees thereof. 2.26 Transaction Fee. Except for Montgomery Securities, which will receive a fee of $375,000 plus out-of-pocket expenses up to $25,000, the Company has not employed any investment banker, broker, finder or intermediary in connection with the transactions contemplated hereby who is entitled to a fee or any commission the receipt of which is conditioned upon the consummation of the Merger. The Company has provided the Parent with a true and complete copy of the retainer letter for the services of Montgomery Securities, and the Company has no other agreements, obligations or understandings in connection therewith. 2.27 Transactions with Interested Persons. Except as disclosed in Schedule 2.27 of the Company Disclosure Schedule, no director, executive officer, or to the Company's knowledge, supervisory employee, or stockholder of the Company, or their respective spouses or children, (i) owns, directly or indirectly, on an individual or joint basis, any material interest in, or serves as an officer or director of, any customer, competitor or supplier of the Company or any organization which has a material contract or arrangement with the Company, or (ii) has any material contract or agreement with the Company other than as disclosed on a schedule hereto, and all such agreements are, except as noted on such schedule, on arms-length terms. 2.28 Absence of Sensitive Payments. Neither the Company, nor to the knowledge of the Company, any of the Company's directors, officers, agents, stockholders or employees, on behalf of the Company: (a) has made or has agreed to make any contributions, payments or gifts of funds or property to any governmental official, employee or agent where either the payment or the purpose of such contribution, payment or gift was or is illegal under the laws of the United States, any state thereof, or any other jurisdiction (foreign or domestic); (b) has established or maintained any unrecorded fund or asset for any purpose; or (c) has made or has agreed to make any contribution or expenditure, or has reimbursed any political gift or contribution or expenditure made by any other person to - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 23 Execution Copy candidates for public office, whether Federal, state or local (foreign or domestic) where such contributions were a violation of applicable law. 2.29 Disclosure of Material Information. No representation or warranty by the Company contained in this Agreement, and no statement contained in the Company Disclosure Schedule, any exhibit to this Agreement or certificate issued by or to be issued by the Company and furnished or to be furnished to Parent pursuant to this Agreement contains or will contain any untrue statement of a material fact or omits, or will omit to state any material fact necessary, in light of the circumstances under which it was or will be made, in order to make the statements herein or therein not misleading. 2.30 Regulatory Correspondence. The Company has made available to the Parent true and correct copies of any and all material correspondence in the Company's possession, from or to any governmental or regulatory agencies or bodies since September 6, 1994 years, including, without limitation, all significant correspondence with the Securities and Exchange Commission, the National Association of Securities Dealers and the United States Justice Department. 2.31 State Antitakeover Statutes. The Company has granted all approvals and taken all other steps necessary to exempt the Merger and the other transactions contemplated hereby from the requirements and provisions of Section 203 of the DGCL. 2.32 Company Action. (a) The Board of Directors of the Company, at a meeting duly called and held, has by the unanimous vote of all directors present (i) determined that the Merger is fair and in the best interests of the Company and its stockholders, (ii) approved the Merger in accordance with the provisions of the DGCL, (iii) approved this Agreement, the Certificate of Merger and the Option Agreement, (iv) authorized the execution and delivery of this Agreement, the Certificate of Merger and, the Option Agreement, and (v) directed that this Agreement and the Merger be submitted to the Company Stockholders for their approval and resolved to recommend that Company Stockholders vote in favor of the approval of this Agreement and the Merger. (b) The Board of Directors has received the opinion of Montgomery Securities dated of recent date, satisfactory to the Company and its Board of Directors to the effect that the terms of the Merger are fair to the Company Stockholders from a financial point of view (the "Montgomery Opinion"). (c) On the date hereof, the Company has entered into an option agreement (the "Option Agreement") with the Parent in substantially the form attached hereto as Exhibit B pursuant to which the Company grants the Parent an option, under certain circumstances whereby this Agreement is terminated and the Merger does not take place as contemplated herein, to purchas Company Shares from time to time at a price of $5.25 per share. - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 24 Execution Copy (d) The Company shall use its reasonable efforts to obtain and deliver to the Parent the written agreement of all executive officers and directors, to the extent such persons own Company Shares (the "Company Affiliates") substantially in the form attached hereto as Exhibit C (an "Affiliate Agreement") pursuant to which each of the Company Affiliates shall (i) acknowledge that the Merger Shares are subject to certain resale restrictions under Rule 145 of the Securities Act, and (ii) with respect to the Company Affiliates who are directors or executive officers of the Company, such Company Affiliates shall agree to vote all Company Shares owned by them or over which they have voting control, in favor of the Merger and this Agreement and irrevocably grant a proxy, coupled with an interest, to the Parent or its designee to vote such Company Shares in favor of this Agreement the Merger. Schedule 2.32 of the Company Disclosure Schedule identifies all such persons who are as of the date hereof Company Affiliates. (e) The Board of Directors of the Company has authorized the Company to enter into a license agreement (the "License Agreement") with the Parent pursuant to which the Company grants the Parent a license, on commercially reasonable terms and conditions no more favorable than the Company would provide to any acceptable unaffiliated third party, to use any and all intellectual property rights and proprietary technology of the Company, in the event this Agreement is terminated for any reason and the Merger does not take place as contemplated herein 2.33 HSR Act. The Company is not controlled by a $100,000,000 person within the meaning of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PARENT AND THE ACQUISITION SUBSIDIARY Each of the Parent and the Acquisition Subsidiary hereby jointly and severally represent and warrant to the Company as follows: 3.1 Organization of Parent and Acquisition Subsidiary. The Parent is a corporation duly organized, validly existing and in good standing under the laws of Belgium with full corporate power and authority to own or lease its properties and to conduct its business in the manner and in the places where such properties are owned or leased or such business is conducted by it. The Acquisition Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with full corporate power and authority to own or lease its properties and to conduct its business in the manner and in the places where such properties are owned or leased or such business is conducted by it. The Parent owns all of the issued and outstanding capital stock of the Acquisition Subsidiary. The Acquisition Subsidiary was formed solely for the purpose of the Merger and engaging in the transactions contemplated hereby. The copies of the Parent's Restated Articles of Incorporation and the Acquisition Subsidiary's Certificate of Incorporation, each as amended to date, certified in the case of the Acquisition Subsidiary by the Delaware Secretary of State, and of the Acquisition - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 25 Execution Copy Subsidiary's Bylaws, as amended to date, certified by the Secretary of the Acquisition Subsidiary copies of which have been delivered to the Company, are, and, subject to any and all amendments described in that certain proxy statement dated April 9, 1997 (a copy of which has also been delivered to the Company), will be at the Closing, complete and correct. 3.2 Capitalization. All of the Merger Shares will be, when issued in accordance with this Agreement, duly authorized, validly issued, fully paid, nonassessable and free of all preemptive rights. There are no authorized or outstanding options, warrants, calls, rights, commitments or other agreements of any character to which the Acquisition Subsidiary is a party or by which it is bound requiring it to issue, transfer, sell, purchase, redeem or acquire any shares of capital stock or any securities or rights convertible into, exchangeable for, or evidencing the right to subscribe for or acquire, any shares of capital stock of Acquisition Subsidiary. The capitalization of the Parent reflected in the Draft Audited Financial Statements (as defined in Section 3.5) is correct and complete as of the date set forth therein. 3.3 Authorization of Transaction. Each of the Parent and the Acquisition Subsidiary has all requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder and to consummate the Merger and the transactions contemplated hereby. The execution and delivery of this Agreement and the performance of this Agreement and a consummation by each of the Parent and the Acquisition Subsidiary of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of each of the Parent and the Acquisition Subsidiary. This Agreement has been duly and validly executed and delivered by each of the Parent and the Acquisition Subsidiary and constitutes valid and binding obligations of the Parent and the Acquisition Subsidiary, enforceable against them in accordance with its terms, except to the extent that its enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors' rights generally or by general equitable principles. 3.4 No Conflict of Transaction With Obligations and Laws. Subject to compliance with the applicable requirements of the Coordinated Laws on Commercial Companies of Belgium (which have been described in a memorandum which has been made available to the Company), the Securities Act, any applicable state takeover or securities laws, the Exchange Act, the Nasdaq National Market and the filing of the Certificate of Merger and any other documents as required by the DGCL, neither the execution, delivery and performance of this Agreement, nor the performance of the transactions contemplated hereby, will: (i) constitute a breach or violation of the Charter or Bylaws of the Parent or the Acquisition Subsidiary; (ii) require any consent, waiver, exemption, approval or authorization of, declaration, filing or registration with, or giving of notice to any person, court, arbitration tribunal, administrative agency or commission or other governmental or regulatory agency or authority; (iii) except as set forth on Schedule 3.4, conflict with or constitute (with or without the passage of time or the giving of notice) a breach of, or default under, any debt instrument to which the Parent (including any subsidiary of the Parent) or the Acquisition Subsidiary is a party, or give any person the right to accelerate any indebtedness or terminate, modify or cancel any right with respect to any debt instrument; (iv) constitute (with or without the passage of time or giving of notice) a default under or breach of any other agreement, instrument or obligation to which the Parent (including any subsidiary of the Parent) - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 26 Execution Copy or the Acquisition Subsidiary is a party or by which the Parent (including any subsidiary of the Parent) or the Acquisition Subsidiary or any of their assets are bound; (v) result in the creation of any lien or encumbrance upon any of the assets of the Parent (including any subsidiary of the Parent) or the Acquisition Subsidiary; (vi) result in a violation of any law, regulation, administrative order or judicial order, decree or judgment applicable to the Parent (including any subsidiary of the Parent) or the Acquisition Subsidiary, or their businesses or assets; or (vii) invalidate or adversely affect any permit, license or authorization used in the Parent's (including any subsidiary of the Parent) or the Acquisition Subsidiary's business, excluding from clauses (ii) through (vii) consents, waivers, exemptions, approvals or authorizations, declarations, filings or registrations, notices, conflicts, breaches, defaults, liens or encumbrances, or violations which would not, either individually or in the aggregate, either have a Parent Material Adverse Effect or materially impair or preclude the Parent's or the Acquisition Subsidiary's ability to consummate the Merger or the transactions contemplated hereby. Except as set forth on Schedule 3.4 hereof, neither the execution, delivery and performance of this Agreement nor the performance of the transactions contemplated hereby will give rise to a right of any party (other than the Parent or the Acquisition Subsidiary) to terminate, modify or cancel any material contract, agreement or other instrument to which the Parent is a party or by which the Parent or its properties are affected. A "Parent Material Adverse Effect" is defined as any fact, change, event or any other occurrence or circumstance that has, or is reasonably likely to have, individually or in the aggregate, a material adverse impact on the business, properties, operations, prospects, assets, revenues or condition (financial or otherwise) of the Parent and its subsidiaries taken as a whole; provided, however, that "Parent Material Adverse Effect" shall be deemed to exclude the impact of any continuation of any existing unfavorable business or financial trend (which has been disclosed herein) without a material worsening thereof. 3.5 Reports and Financial Statements (a) The Parent has previously furnished to the Company complete and accurate copies, as amended or supplemented, of its (a) Annual Report on Form 20-F for the fiscal year 1995 as filed with the SEC, and any amendments thereto, (b) proxy statements relating to all meetings of its stockholders (whether annual or special) since December 6, 1995, (c) all other reports or registration statements, other than Registration Statements on Form S-8, filed by the Parent with the SEC since December 6, 1995 and (d) the draft consolidated audited financial statements for the fiscal year ended December 31, 1996 (the "Draft Audited Financial Statements") together with a draft of management's discussion and analysis of financial condition and operations (such annual report, proxy statements, registration statements, Draft Audited Financial Statements and other filings, together with any amendments or supplements thereto, are collectively referred to herein as the "Parent Reports"). The Parent Reports constitute all of the documents filed or required to be filed by the Parent with the SEC since December 6, 1995, other than any Registration Statement on Form S-8. As of their respective dates, the Parent Reports and that certain Private Placement Memorandum dated April 4, 1997 ( a copy of which has been provided to the Company) and the Parent Reports incorporated therein by reference, did 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 - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 27 Execution Copy circumstances under which they were made, not misleading. The consolidated audited financial statements of the Parent included in the Parent Reports (together, the "Parent Financial Statements") (i) comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, (ii) have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby (except as may be indicated therein or in the notes thereto), (iii) fairly present the consolidated financial condition, results of operations and cash flows of the Parent and each of its subsidiaries as of the respective dates thereof and for the periods referred to therein, and (iv) are consistent in all material respects with the books and records of the Parent. The Parent has also previously made available to the Company all documents used in connection with any offer or sale of securities, for purposes of raising capital, by the Parent since December 6, 1995. (b) The consolidated balance sheet contained in the Draft Audited Financial Statements, including the footnotes thereto, is sometimes referred to hereinafter as the "Parent Base Balance Sheet." (c) The books of account of the Parent are complete and correct in all material respects. The current books of account and auditor's letters to management of the Parent since December 6, 1995 and other significant correspondence from or to such auditors during such period, if any, have been made available to the Company. 3.6 Claims and Legal Proceedings. There are no claims, actions, suits, arbitrations, proceedings or investigations pending (or, to the best knowledge of Parent, threatened) against Parent or any of its subsidiaries, and there are no outstanding court orders, court decrees, or court stipulations to which Parent or any of its subsidiaries is a party or by which any of their respective assets are bound, any of which (a) affect this Agreement or the transactions contemplated hereby, or (b) materially restrict the present business, properties, operations, prospects, assets or condition, financial or otherwise, of Parent or any of its subsidiaries, or (c) would, individually or in the aggregate have a Parent Material Adverse Effect or materially impair or preclude the Parent's or the Acquisition Subsidiary's ability to consummate the Merger or the other transactions contemplated hereby. 3.7 Disclosure of Material Information. No representation or warranty by the Parent or the Acquisition Subsidiary contained in this Agreement, and no statement contained in the Parent's disclosure schedule or any exhibit to this Agreement or certificate issued by or to be issued by the Parent or the Acquisition Subsidiary and furnished or to be furnished to the Company pursuant to this Agreement contains or will contain any untrue statement of a material fact or omits, or will omit to state any material fact necessary, in light of the circumstances under which it was or will be made, in order to make the statements herein or therein not misleading. 3.8 Parent Action. The Parent has received the opinion of Hambrecht & Quist satisfactory to the Parent to the effect that the terms of the Merger are fair to the Parent from a financial point of view. A copy of such letter has been previously furnished to the Company. - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 28 Execution Copy 3.9 Shareholder Vote Not Required. No vote of the holders of the outstanding shares of Parent Common Stock is required to approve this Agreement, the Merger or the transactions contemplated by this Agreement. 3.10 Transaction Fees. Except for Hambrecht & Quist, neither the Parent nor the Acquisition Subsidiary has employed any investment banker, broker, finder or intermediary in connection with the transactions contemplated hereby who might be entitled to a fee or any commission the receipt of which is conditioned upon the consummation of the Merger. 3.11 Financing. The Acquisition Subsidiary and the Parent have sufficient funds and/or available financing to pay the Merger Consideration for all Company Shares, the O&W Company Shares and all fees and expenses related to the Merger. 3.12 Prior Activities of Acquisition Subsidiary. The Acquisition Subsidiary has not incurred any liabilities or obligations, except those incurred in connection with its organization or with the negotiation of this Agreement or the performance hereof, and the financing of the Merger and the consummation of the transactions contemplated thereby. Except as contemplated by the foregoing, Acquisition Subsidiary has not engaged in any business activities of any type or kind whatsoever, nor entered into any agreements or arrangements with any person, nor is it subject to or bound by any obligation or undertaking. 3.13 Permits. Each of the Parent and the Acquisition Subsidiary holds all licenses, permits, registrations, orders, authorizations, approvals and franchises which are required to permit it to conduct its business as presently conducted, except where the failure to hold such licenses, permits, registrations, orders, authorizations, approvals or franchises would not, individually or in the aggregate, have a Parent Material Adverse Effect. 3.14 Absence of Sensitive Payments. Neither the Parent, nor to the knowledge of the Parent, any of the Parent's directors, officers, agents, stockholders or employees, on behalf of the Parent: (a) has made or agreed to make any contributions, payments or gifts of funds or property to any governmental official, employee or agent where either the payment or the purpose of such contribution, payment or gift was or is illegal under the laws of the United States, any state thereof or any other jurisdiction (foreign or domestic); (b) has established or maintained any unrecorded fund or asset for any purpose, or has made any false or artificial entries on any of its books or records for any reason; or (c) has made or has agreed to make any contribution or expenditure, or has reimbursed any political gift or contribution or expenditure made by any other person to candidates for public office, whether Federal, state or local (foreign or domestic), where such contributions were in violation of applicable law. - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 29 Execution Copy 3.15 HSR Act. The Parent is not controlled by a $100,000,000 person within the meaning of the HSR Act. 3.16 Present Compliance with Obligations and Laws. The Parent is not: (a) in violation of its Charter or Bylaws; (b) in default in the performance of any obligation, agreement or condition of any debt instrument which (with or without the passage of time or the giving of notice) affords to any person the right to accelerate any indebtedness or terminate any right; (c) in default of or breach of (with or without the passage of time or the giving of notice) any other contract to which it is party or by which it or its assets are bound; or (d) in violation of any law, regulation, administrative order or juridical order, decree, or judgment applicable to it or its business or assets, accept where any violation or default under items (b), (c) or (d) would not, individually or in the aggregate, have a Parent Material Adverse Effect. ARTICLE IV COVENANTS 4.1 Reasonable Best Efforts. Each of the Parties shall use, and the Parent shall cause the Acquisition Subsidiary to use, reasonable best efforts to take all actions and to do all things necessary, proper or advisable to consummate the Merger and the transactions contemplated by this Agreement, including, but not limited to the delivery of certificates reasonably requested in connection with any opinions to be delivered hereunder. 4.2 Notices and Consents. Each of the Parties shall use reasonable best efforts to obtain, at its reasonable expense, all such waivers, permits, consents, approvals or other authorizations from third parties and governmental entities or authorities, and to effect all such registrations, filings and notices with or to third parties and governmental entities or authorities, as may be necessary or desirable in connection with the transactions contemplated by this Agreement. 4.3 Special Meeting, Prospectus/Proxy Statement and Registration Statement; Fairness Opinion. (a) The Parent and the Company shall jointly prepare, and the Company shall file with the SEC under the Exchange Act, subject to the other provisions of this Agreement, proxy materials for the purpose of soliciting proxies from Company Stockholders to vote in favor of the adoption of this Agreement and the approval of the Merger at a meeting of Company Stockholders to be called and held for such purpose (and if so determined by the Company, for the annual election of directors and the ratification and appointment of its auditors) (the "Special Meeting"). Such proxy materials shall be in the form of a prospectus/proxy statement to be used for the purpose of offering the Merger Shares to Company Stockholders and soliciting such proxies from Company Stockholders (such prospectus/proxy statement, together with any accompanying letter to stockholders, notice of meeting and form of proxy, shall be referred to herein as the "Prospectus/Proxy Statement"). The Parent and Acquisition Subsidiary shall furnish to the Company all information concerning the Parent and Acquisition Subsidiary as - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 30 Execution Copy the Company may reasonably request in connection with the preparation of the Prospectus/Proxy Statement. The Parent and its counsel shall be given an opportunity to review and comment on the Prospectus/Proxy Statement prior to its filing with the SEC. The Company, with the assistance of the Parent, shall promptly respond to any SEC comments on the Prospectus/Proxy Statement and shall otherwise use reasonable best efforts to resolve as promptly as practicable all SEC comments thereon. (b) A copy of the Montgomery Opinion shall be delivered by the Company to the Parent no later than the day that the preliminary proxy materials described in subparagraph (a) above are first filed with the SEC. (c) The Parent shall prepare and file with the SEC under the Securities Act and all other applicable regulatory bodies as soon as reasonably practicable, a Registration Statement on Form F-4 with respect to shares of Parent Common Stock to be issued in the Merger (the "Registration Statement"), which shall include the Prospectus/ Proxy Statement as a part thereof. The Company and its counsel shall be given an opportunity to review and comment on the Registration Statement prior to its filing with the SEC. The Parent, with the assistance of the Company, shall promptly respond to any SEC comments on the Registration Statement and shall otherwise use reasonable best efforts to cause the Registration Statement to be declared effective as promptly as practicable. The Parent shall also take any and all such actions to satisfy the requirements of the Securities Act, including Rule 145 thereunder, and the Exchange Act. Prior to the Closing Date, the Parent shall use its reasonable, good faith efforts to cause the shares of Parent Common Stock to be issued pursuant to the Merger to be registered or qualified under all applicable securities or Blue Sky laws of each of the states and territories of the United States, and to take any other such actions which may be necessary to enable the Parent Common Stock to be issued pursuant to the Merger in each such jurisdiction. (d) Promptly following the resolution of all SEC comments on the Prospectus/Proxy Statement and the declaration of effectiveness of the Registration Statement, the Company shall distribute the Prospectus/Proxy Statement to its stockholders and, pursuant thereto, shall call the Special Meeting in accordance with the DGCL and subject to the other provisions of this Agreement, solicit proxies from Company Stockholders to vote in favor of the adoption of this Agreement and the approval of the Merger at the Special Meeting. (e) The Company shall comply with all applicable provisions of and rules under the Exchange Act and all applicable provisions of the DGCL in the preparation, filing and distribution of the Prospectus/Proxy Statement, the solicitation of proxies thereunder, and the calling and holding of the Special Meeting. Without limiting the foregoing, the Company shall ensure that the Prospectus/Proxy Statement does not, as of the date on which it is distributed to Company Stockholders, and as of the date of the Special Meeting, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading (provided that the Company shall not be responsible for the accuracy or completeness of any information relating to the Parent and the Acquisition Subsidiary or any other information furnished by the Parent in writing for inclusion in the Prospectus/Proxy Statement). The information supplied by the - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 31 Execution Copy Company for inclusion in the Registration Statement will not as of the effective date of the Registration Statement (or any amendment or supplement thereto) or at the time of the Special Meeting, contain any statement which, at such time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omits to state any material fact required to be stated therein or necessary in order to make the statements therein not false or misleading. (f) The Parent shall comply with all applicable provisions of and rules under the Securities Act and state securities laws in the preparation, filing and distribution of the Registration Statement and the offering and issuance of the Merger Shares. Without limiting the foregoing, the Parent shall ensure that the Registration Statement does not, as of its effective date, and as of the date of the Special Meeting, 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 not misleading (provided that the Parent shall not be responsible for the accuracy or completeness of any information relating to the Company or any other information furnished by the Company in writing for inclusion in the Registration Statement). The information supplied by the Parent for inclusion in the Prospectus/Proxy Statement to be sent to the stockholders of the Company in connection with the Special Meeting will not, on the date the Prospectus/Proxy Statement (or any amendment or supplement thereto) is first mailed to stockholders of the Company or at the time of the Special Meeting, contain any statement which, at such time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omits to state any material fact required to be stated therein or necessary in order to make the statements therein not false or misleading. (g) The Company, acting through its Board of Directors, shall include in the Prospectus/Proxy Statement the recommendation of its Board of Directors that the Company Stockholders vote in favor of the adoption of this Agreement and the approval of the Merger, and shall otherwise use reasonable best efforts to obtain the Requisite Stockholder Approval. Notwithstanding the foregoing, the obligations set forth in this paragraph (g) shall not apply (and the Board of Directors shall be permitted to modify or withdraw any such recommendation previously made) if the Board of Directors of the Company, after consultation with and based upon the written advice of independent legal counsel (who may be the Company's regular legal counsel), determines in good faith that to not withdraw such recommendation would constitute a breach of the fiduciary duties of the Board of Directors under applicable law. 4.4 Operation of Business. Except as contemplated by this Agreement, during the period from the date of this Agreement to the Effective Time, the Company shall (and shall cause each Subsidiary to) conduct its operations in the ordinary course of business and consistent with past practice and in compliance in all material respects with applicable laws and regulations and, to the extent consistent therewith, use reasonable efforts to preserve intact its current business organization, keep its physical assets in good working condition, keep available the services of its current officers and employees and preserve its relationships with customers, suppliers and others having business dealings with it to the end that its goodwill and ongoing business shall not be impaired in any material respect. Without limiting the generality of the foregoing, prior to the Effective Time, the Company shall not, without the written consent of the Parent: - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 32 Execution Copy (a) issue, sell, deliver or agree or commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase or otherwise) or authorize the issuance, sale or delivery of, or redeem or repurchase, any stock of any class or any other securities or any rights, warrants or options to acquire any such stock or other securities, or amend any of the terms of any such convertible securities, Options or Warrants, other than the issuance of Company Shares upon the exercise of outstanding Options and Warrants; (b) split, combine or reclassify any shares of its capital stock or declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock; (c) except in the ordinary course of business and consistent with past practice: create, incur or assume any debt not currently outstanding (including obligations in respect of capital leases) other than loans incurred to satisfy the working capital needs of the Company; assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the obligations of any other person; or make any loans, advances or capital contributions to, or investments in, any other person; (d) enter into, adopt or amend any ERISA Benefit Plan or Benefit Plan or any employment or severance agreement or arrangement or (except for normal increases in the ordinary course of business and consistent with past practice) increase in any manner the compensation or fringe benefits of, or materially modify the employment terms of, its directors, officers or employees, generally or individually, or pay any benefit not required by the terms in effect on the date hereof of any existing ERISA Benefit Plan or Benefit Plan; (e) acquire, sell, lease, encumber or dispose of any shares or other equity interests in or securities of any corporation, partnership, association or other business organization or division thereof or any assets, other than purchases and sales of assets in the ordinary course of business and consistent with past practice; (f) amend its Charter or Bylaws; (g) change in any material respect its accounting methods, principles or practices, except insofar as may be required by a generally applicable change in GAAP; (h) discharge or satisfy any security interest, lien or other encumbrance or pay any obligation or liability other than in the ordinary course of business and consistent with past practice; (i) mortgage or pledge any of its property or assets or subject any such assets to any security interest, lien or other encumbrance, except to fund the Company's working capital needs; - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 33 Execution Copy (j) sell, assign, transfer or license any Intellectual Property Assets, other than in the ordinary course of business and consistent with past practice; (k) enter into, amend, terminate, take or omit to take any action that would constitute a violation of or default under, or waive any material rights under, any material contract or agreement; (1) make or commit to make any capital expenditure in excess of $10,000 per item or $50,000 in the aggregate; (m) take any action or fail to take any action permitted by this Agreement with the knowledge that such action or failure to take action would result in (i) any of the representations and warranties of the Company set forth in this Agreement becoming untrue in any material respect or (ii) any of the conditions to the Merger set forth in Article V not being satisfied; or (n) agree in writing or otherwise to take any of the foregoing actions. In addition, the Company shall not without prior oral consultation with the Parent hire any employees or retain any consultants other than nonmanagement or nonsupervisory personnel in the ordinary course of business. 4.5 Access. Each party shall permit representatives of the other to have access (at all reasonable times and in a manner so as not to interfere with the normal business operations of the other party) to all premises, properties, financial and accounting records, contracts, other records and documents, and personnel of or pertaining to such party. Each Party (a) shall treat and hold as confidential any Confidential Information (as defined below), (b) shall not use any of the Confidential Information except in connection with this Agreement, and (c) if this Agreement is terminated for any reason whatsoever, shall return to the disclosing Party all tangible embodiments (and all copies) thereof which are in its possession. For purposes of this Agreement, "Confidential Information" means any information of the disclosing Party that is furnished to another Party by the disclosing Party in connection with this Agreement: provided, however, that it shall not include any information (i) which, at the time of disclosure, is available publicly, (ii) which, after disclosure, becomes available publicly through no fault of the receiving Party, (iii) which the receiving Party demonstrates it knew or to which the receiving Party had legal access prior to disclosure, or (iv) which is required by law to be disclosed. 4.6 Notice of Breaches. The Company shall promptly deliver to the Parent written notice of any event or development that would (a) render any statement, representation or warranty of the Company in this Agreement (including the Company Disclosure Schedule) inaccurate or incomplete in any material respect, or (b) constitute or result in a breach by the Company of, or a failure by the Company to comply with, any agreement or covenant in this Agreement applicable to such Party. The Parent or the Acquisition Subsidiary shall promptly deliver to the Company written notice of any event or development that would (i) render any statement, representation or warranty of the Parent or the Acquisition Subsidiary in this - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 34 Execution Copy Agreement inaccurate or incomplete in any material respect, or (ii) constitute or result in a breach by the Parent or the Acquisition Subsidiary of, or a failure by the Parent or the Acquisition Subsidiary to comply with, any agreement or covenant in this Agreement applicable to such Party. No such disclosure shall be deemed to avoid or cure any such misrepresentation or breach. 4.7 Exclusivity. (a) The Company shall not, and the Company shall use reasonable best efforts to cause each of its officers, directors, employees, representatives and agents not to, directly or indirectly, (i) encourage, solicit, initiate, engage or participate in negotiations with any person or entity (other than the Parent) concerning any merger, consolidation, sale of material assets, tender offer, recapitalization, material accumulation of Company Shares, proxy solicitation or other business combination involving the Company, or any division of the Company (an "Acquisition Transaction") or (ii) or take any other action intended or designed to facilitate the efforts of any person or entity (other than Parent) relating to a possible Acquisition Transaction. (b) Notwithstanding anything herein to the contrary, in the event that there is an unsolicited proposal for or an unsolicited indication of a serious interest in entering into, an Acquisition Transaction from a bona fide financially capable third party that contains no financing contingency, the Company, at its discretion, shall be permitted to furnish to and communicate with any such party all publicly available information requested by such party. In the event that such party requests information in addition to that which is publicly available, the Company may furnish to and communicate with such third party non-public information and otherwise negotiate with such party, only if (i) two (2) business days prior written notice shall have been given to the Parent and (ii)(A) the Company's Board of Directors shall have been advised in writing by its investment banker that it believes such third party is financially capable, without any financing contingency, of consummating an Acquisition Transaction, (B) the Company's Board of Directors shall have been advised, by the written opinion of outside counsel to the Company, that any failure to provide such non-public information to such party would constitute a breach of the fiduciary responsibilities of the Board of Directors to the Company Stockholders and (C) the Company's Board of Directors, after weighing such advice, determines that failing to furnish such information would constitute a breach of the Board's fiduciary duties. Notwithstanding anything herein to the contrary, nothing shall prohibit the Board of Directors of the Company from responding to a tender offer or complying with its obligations under Sections 14d-9 or 14e-2 of the Exchange Act. 4.8 Listing of Merger Shares. On or before the Effective Time, the Parent shall list the Merger Shares on the Nasdaq National Market. - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 35 Execution Copy 4.9 Indemnification. (a) The Parent and the Acquisition Subsidiary agree that all rights to indemnification for acts or omissions occurring prior to the Effective Time of the Merger now existing in favor of the current directors and officers of the Company as provided in the Charter or Bylaws of the Company or in any indemnification agreements shall survive the Merger and shall continue in full force and effect in accordance with their terms. (b) For a period of six (6) years after the Effective Time, the Surviving Corporation shall cause to be maintained in effect the current policies of directors' and officers' liability insurance maintained by the Company (or policies of at least the same coverage and amounts containing terms and conditions which are no less advantageous) with respect to claims arising from facts or events which occurred before the Effective Time; provided, however, that the Surviving Corporation shall not be obligated to make annual premium payments for such insurance to the extent that such premiums exceed an amount equal to 200% of the annual premiums paid as of the date hereof by the Company for such insurance and if such premiums exceed such amount the Surviving Corporation shall purchase insurance policies in amounts and with coverage as reasonably can be purchased for such amount. (c) Parent agrees to be jointly and severally liable with the Company and the Surviving Corporation for their indemnification obligations to the Company's current directors and officers, in all capacities in which such directors or officers served the Company prior to the Effective Time, as set forth in the Company's Charter and Bylaws or in any indemnification agreements by and between the Company and such current directors and officers and to the extent such indemnification by the Company is permitted under DGCL. (d) Parent further agrees to be jointly and severally liable with the Surviving Corporation for any indemnification obligation it may have to directors (in any capacity) of the Company who continue to serve as directors of the Surviving Corporation after the Effective Time pursuant to any indemnification agreements entered into by the Company with such directors, with respect to acts or events (in any capacity) while serving as a director of the Surviving Corporation on or after the Effective Time to the extent such indemnification by the Surviving Corporation is permitted under DGCL. (e) In the event the Parent or any of its successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any person, then, and in each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of the Parent assume the obligations set forth in this Section 4.9. (f) The provisions of this Section 4.9 are intended to be for the benefit of, and shall be enforceable by, each indemnified party and his or her heirs and representatives. 4.10 Filing of Annual Reports. As soon as practicable following the execution of this Agreement, Parent shall use its reasonable best efforts to file its Annual Report on Form 20-F for - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 36 Execution Copy the fiscal year ended December 31, 1996 with the SEC and the Company shall use its reasonable best efforts to file its Annual Report on Form 10-KSB for the fiscal year ended January 31, 1997 with the SEC. 4.11 Hart-Scott-Rodino To each party's knowledge, based upon the published financial statements of each party and the representations set forth herein, no filing pursuant to the HSR Act is required to be made with respect to the Merger and the other transactions contemplated hereby. In the event that such filing may be required at a later date as a result of either or both parties' publication of further financial information, such additional governmental approval requirement and the approvals required for the consummation of the transactions contemplated hereby shall not constitute a breach of any covenants or representations and warranties under this Agreement, and each party shall use all commercially reasonable efforts to file as promptly as practicable such Notification and Report Forms under the HSR Act with the Federal Trade Commission and the Antitrust Division of the Department of Justice, and use all commercially reasonable efforts to respond as promptly as practicable to all inquiries received from such governmental agencies for additional information or documentation in order to obtain as soon as practicable all necessary governmental approvals, if any, for the transactions contemplated hereby under the HSR Act. In the event that a filing is required under the HSR Act, the outside Closing Date shall be extended for a period of 45 days. 4.12 Employee Welfare. Parent agrees to honor, and to cause the Surviving Corporation to honor, in accordance with their terms, all arrangements described in Schedule 4.12 of the Company Disclosure Schedule. The provisions of this Section 4.12 are intended to be for the benefit of, and enforceable by, each of the persons set forth in Schedule 4.12 of the Company Disclosure Schedule and their heirs and representatives. 4.13 Tax Returns: Good Standing. As soon as practicable following the execution of this Agreement, and in any event prior to the Closing Date, the Company shall (i) file its 1995 Federal tax return, (ii) file tax returns in Massachusetts covering the past three years, and (iii) take any and all action necessary to bring itself into good standing in the State of Delaware. 4.14 Loan to Company. The Parent shall cause its subsidiary to make funds available to the Company in accordance with that certain Loan Agreement by and between the Company and Lernout & Hauspie Speech Products USA, Inc., a wholly-owned subsidiary of the Parent ("L&H USA"), dated the date hereof (the "Loan Agreement"). The Company shall, and the Parent shall cause L&H USA to, comply in all material respects with their respective agreements, obligations and covenants under the Loan Agreement. ARTICLE V CONDITIONS TO CONSUMMATION OF MERGER 5.1 Conditions to Each Party's Obligations. The respective obligations of each Party to consummate the Merger are subject to the satisfaction of or waiver by each of the Parties of the following conditions: - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 37 Execution Copy (a) this Agreement and the Merger shall have received the Requisite Stockholder Approval; (b) the Registration Statement shall have become effective in accordance with the provisions of the Securities Act and applicable state securities laws, and no stop order suspending the effectiveness of the Registration Statement shall have been issued by the SEC or any state and remain in effect; and (c) the Merger Shares shall have been authorized for listing on the Nasdaq National Market. 5.2 Conditions to Obligations of the Parent and the Acquisition Subsidiary. The obligation of each of the Parent and Acquisition Subsidiary to consummate the Merger is subject to the satisfaction of or waiver by the Parent and the Acquisition Subsidiary of the following additional conditions: (a) the Company shall have obtained all of the waivers, permits, consents, approvals or other authorizations, and effected all registrations, filings and notices the failure of which to obtain would result in a Company Material Adverse Effect; (b) the representations and warranties of the Company set forth in Article II shall be true and correct in all material respects when made on the date hereof and shall be true and correct in all material respects as of the Effective Time as if made as of the Effective Time, except for representations and warranties made as of a specific date, which shall be true and correct in all material respects as of such date and except if such inaccuracies individually or in the aggregate do not cause a Company Material Adverse Effect; (c) the Company shall have performed or complied in all material respects with its agreements and covenants required to be performed or complied with under this Agreement as of or prior to the Effective Time; (d) the Company shall have delivered to the Parent and the Acquisition Subsidiary a certificate of its Chairman, President or Chief Financial Officer to the effect that each of the conditions specified in clause (a) of Section 5.1 and clauses (a) through (c) of this Section 5.2 is satisfied; (e) the Parent and the Acquisition Subsidiary shall have received from Mintz Levin Cohn Ferris Glovsky and Popeo, P.C., counsel to the Company, an opinion with respect to the matters set forth in Exhibit D attached hereto, addressed to the Parent and the Acquisition Subsidiary and dated as of the Closing Date; (f) no action, suit or proceeding shall be pending or threatened before any governmental entity or authority which is reasonably likely to (i) prevent consummation of any - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 38 Execution Copy of the transactions contemplated by this Agreement, (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation or (iii) affect materially and adversely the right of the Parent to own, operate or control any of the assets and operations of the Surviving Corporation following the Merger, and no such judgment, order, decree, stipulation or injunction shall be in effect; provided, however, that the Parent shall contest or cooperate with the Company in contesting, as applicable, the action, suit or proceeding and if any injunction or order has been so issued will use reasonable efforts to have it dismissed; (g) the number of shares of Company Stock held by Dissenting Stockholders shall not exceed 7% of the issued and outstanding Company Shares; (h) all vested or exercisable Options and Warrants that have an exercise price per share greater than the Per Share Dollar Value shall have been amended, to the extent necessary, such that they may be terminated in accordance with Section 1.9(a) hereof; and (i) from the date of this Agreement to the Effective Time, there shall not have been any event or development which results in a Company Material Adverse Effect, nor shall there nave occurred any event or development which is reasonably likely to result in a Company Material Adverse Effect. 5.3 Conditions to Obligations of the Company. The obligation of the Company to consummate the Merger is subject to the satisfaction of or waiver by the Company of the following additional conditions: (a) the representations and warranties of the Parent and the Acquisition Subsidiary set forth in Article III (other than Section 3.6(a)) shall be true and correct in all material respects when made on the date hereof and shall be true and correct in all material respects as of the Effective Time as if made as of the Effective Time, except for representations and warranties made as of a specific date, which shall be true and correct in all material respects as of such date; (b) each of the Parent and the Acquisition Subsidiary shall have performed or complied with in all material respects its agreements and covenants required to be performed or complied with under this Agreement as of or prior to the Effective Time; (c) each of the Parent and the Acquisition Subsidiary shall have delivered to the Company a certificate of its Chairman and Chief Financial Officer to the effect that each of the conditions specified in clauses (b) and (c) of Section 5.1 and clauses (a), (b) and (d) of this Section 5.3 is satisfied in all respects; (d) the Parent and the Acquisition Subsidiary shall have obtained all waivers, permits, consents, approvals or other authorizations and effected all registrations, filings and notices, the failure of which to obtain would result in a Parent Material Adverse Effect; - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 39 Execution Copy (e) no writ, order, decree or injunction of a court of competent jurisdiction or governmental entity shall have been entered against the Parent, the Acquisition Subsidiary or the Company which prohibits the consummation of the Merger; provided, however, that the Company shall have contested or cooperated with Parent or the Acquisition Subsidiary, as applicable, in contesting, the action suit or proceeding giving rise to such writ, order, decree or injunction and shall have used reasonable efforts to have the same dismissed; (f) if any court of competent jurisdiction in the United States or other governmental body in the United States shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the Merger which has not been dismissed or vacated; provided, however, that the Company shall have contested or cooperated with the Parent or the Acquisition Subsidiary in contesting, as applicable, the action, suit or preceding pursuant to which such order was issued and shall have used reasonable efforts to have such order dismissed; (g) the Company shall have received from Brown, Rudnick, Freed & Gesmer, United States counsel to the Parent and the Acquisition Subsidiary an opinion with respect to the matters set forth in Exhibit E attached hereto, addressed to the Company and dated as of the Closing Date; and (h) the Company shall have received from Loeff Claeys Verbeke, Belgian counsel to the Parent an opinion with respect to the matters set forth in Exhibit F attached hereto, addressed to the Company and dated as of the Closing Date. ARTICLE VI TERMINATION AND ABANDONMENT 6.1 Termination. In connection with the structure of the transactions as described in this Agreement, the parties have agreed that this Agreement shall not be terminated, nor the Merger abandoned, except in accordance with the provisions of this Article VI, all strictly construed against the Party seeking such termination. This Agreement may be terminated and the Merger may be abandoned any time prior to the Effective Time, whether before or after approval by the Company Stockholders: (i) by mutual written consent of the Boards of Directors of the Parent and the Company; (ii) by either the Parent or the Company, if, without fault of such terminating party, the Merger shall not have been consummated on or before August 15, 1997; (iii) by either the Parent or the Company, if any court of competent jurisdiction in the United States or other governmental body in the United States shall have issued an order (other than a temporary restraining order), decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the Merger, and such order, decree ruling or other action shall - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 40 Execution Copy have become final and nonappealable provided that the party seeking termination shall have diligently contested such ruling; (iv) by either the Parent or the Company, if this Agreement and the Merger fail to receive the Requisite Stockholder Approval; or (v) by either Parent or the Company if (i) the Board of Directors of the Company shall withdraw, modify or change its recommendation so that it is not in favor of this Agreement or the Merger or shall have resolved to do any of the foregoing or (ii) the Board of Directors of the Company shall have recommended or resolved to recommend to its stockholders an Acquisition Transaction other than the Merger. 6.2 Termination by the Parent. This Agreement may be terminated and the Merger may be abandoned by action of the Board of Directors of the Parent, at any time prior to the Effective Time, before or after the approval by the Company Stockholders, if: (i) the Company shall have failed to comply in any material respect with any of the covenants or agreements contained in this Agreement such that the Closing condition set forth in Section 5.2(c) would not be satisfied ; provided, however, that if such failure or failures are capable of being cured prior to the Effective Time, such failure, or failures shall not have been cured within fifteen (15) days of delivery to the Company of written notice of such failure or failures. (ii) there exists a breach or breaches of any representation or warranty of the Company contained in this Agreement in any material respect such that the Closing condition set forth in Section 5.2(b) would not be satisfied; provided, however, that if such failure, breach or breaches are capable of being cured prior to the Effective Time, such failure, breach or breaches shall not have been cured within fifteen (15) days (except that with respect to Section 4.14 the period shall be seven (7) days) of delivery to the Company of written notice of such failure, breach or breaches; or (iii) the Company shall furnish or disclose non-public information to a third party with respect to any Acquisition Transaction, or shall have resolved to do the foregoing and publicly disclose such resolution. 6.3 Termination by the Company. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, before or after the approval by the Company Stockholders, by action of the Board of Directors of the Company, if: (i) the Parent or the Acquisition Subsidiary shall have failed to comply in any material respect with any of the covenants or agreements contained in this Agreement such that the closing condition set forth in Section 5.3(b) would not be satisfied ; provided, however, that if such failure or failures are capable of being cured prior to the Effective Time, such failure, or - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 41 Execution Copy failures shall not have been cured within fifteen (15) days of delivery to the Parent of written notice of such failure or failures; or (ii) there exists a breach or breaches of any representation or warranty of the Parent or the Acquisition Subsidiary contained in this Agreement in any material respect such that the Closing condition set forth in Section 5.3(a) would not be satisfied; provided, however that if such failure, breach or breaches are capable of being cured prior to the Effective Time, such failure, breach or breaches shall not be cured within fifteen (15) days (except that with respect to Section 4.14 the period shall be seven (7) days) of delivery to the Parent of written notice of such failure, breach or breaches. 6.4 Procedure for Termination. In the event of termination and abandonment of the Merger by the Parent or the Company pursuant to this Article VI, written notice thereof shall forthwith be given to the other. 6.5 Effect of Termination and Abandonment. (a) In the event of termination of this Agreement and abandonment of the Merger pursuant to this Article VI, no Party hereto (or any of its directors or officers) shall have any liability or further obligation to any other Party to this Agreement, except as provided in Section 4.5 (regarding confidentiality) and this Section 6.5 and except that nothing herein shall relieve any Party from liability for any breach of this Agreement. (b) In the event of: a termination of this Agreement pursuant to Sections 6.1(iv) or (v), or any termination of this Agreement by the Parent pursuant to Section 6.2, then the Company shall , within five (5) business days thereafter, pay the Parent by wire transfer of immediately available funds to an account specified by the Parent up to $1.5 million for all documented out of pocket reasonable fees and expenses incurred by the Parent (including the reasonable fees and expenses of counsel, accountants, consultants and advisors) in connection with this Agreement and the transactions contemplated hereby (subject to such $1.5 million limit, "Parent Documented Expenses"). (c) In the event of a termination of this Agreement pursuant to Section 6.1(v) , the Company shall, within five (5) business days thereafter, pay the Parent by wire transfer of immediately available funds to an account specified by the Parent a fee of $2.2 million (the "Termination Fee"), less any Parent Documented Expenses paid to Parent. (d) To the extent that the Termination Fee has not already become payable and been paid, and, if prior to any termination pursuant to Sections 6.1 (iii) (if and only if the action arose out of or relates to a competing Business Combination Transaction) or (iv), or Sections 6.2(i) or (iii) any person shall have made or discussed with the Company a proposal concerning a Business Combination Transaction and prior to or within twelve (12) months after the termination of this Agreement the Company or any of its Subsidiaries, or any Company Affiliate enters into a definitive agreement with a third party with respect to a Business Combination Transaction or a Business Combination Transaction is effected, then the Company, - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 42 Execution Copy prior to entering into any such definitive agreement or any such Business Combination Transaction being effected, shall, within five (5) business days thereafter, pay the Parent by wire transfer of immediately available funds to an account specified by the Parent the Termination Fee, less any Parent Documented Expenses paid to Parent. (e) As used in this Section 6.5, the term "Business Combination Transaction" shall mean any of the following involving the Company or any subsidiary of the Company, that is material to the business, results of operation, prospects or financial condition of the Company : (1) any merger, consolidation, share exchange, business combination or other similar transaction (other than the Merger) in which the shareholders of the Company would own less than 75% of the surviving entity following the consummation thereof; (2) any sale, lease, exchange, transfer or other disposition of 50% or more of the assets of the Company and its Subsidiaries, taken as a whole, in a single transaction or series of transactions; or (3) the acquisition by a person or entity, or any "group" (as such term is defined under Section 13(d) of the Exchange Act and the rules and regulations thereunder) of beneficial ownership of 25% or more of the Company Shares, whether by tender offer, exchange offer or otherwise. (f) In the event of a termination of this Agreement by the Company, pursuant to Section 6.3 (i) or (ii) then the Parent shall promptly pay the Company by wire transfer of immediately available funds to an account specified by the Company up to $1.5 million for all documented fees and expenses incurred by the Company (including the reasonable fees and expenses of counsel, accountants, consultants and advisors) in connection with this Agreement and the transactions contemplated hereby. ARTICLE VII MISCELLANEOUS 7.1 Fees and Expenses. All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense provided that the Parent and the Company shall share equally all fees and expenses in connection with the filing of the Registration Statement and the printing and mailing of the Prospectus/Proxy Statement. The Parent acknowledges and agrees that the Company has disclosed that it is obligated and will become further obligated for fees and expenses (including fees and expenses of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. and Roger M. Barzun, Esquire, its counsel, Arthur Anderson & Co., LLP, its independent accountants, and Montgomery Securities, its financial advisor) incurred by it in connection with the Merger and the transactions contemplated hereby. It is understood and agreed that certain of such fees and expenses may be paid by the Company prior to the execution of this Agreement, and the Parent agrees to refrain from taking any action which would prevent or delay the payment of reasonable fees and expenses by the Company. Further, the Parent agrees to take, and cause the Acquisition Subsidiary to take, all action necessary to cause the Surviving Corporation to pay promptly any of the foregoing reasonable fees and expenses incurred, but not paid, by the Company prior to the Effective Time. - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 43 Execution Copy 7.2 Notices. Any notice or other communication in connection with this Agreement shall be deemed to be delivered if in writing (or in the form of a facsimile transmission, receipt telephonically confirmed) addressed as provided below and if either (a) actually delivered electronically or physically at said address, or (b) in the case of a letter, three (3) business days shall have elapsed after the same shall have been sent by nationally recognized overnight courier: If to the Company to: Kurzweil Applied Intelligence, Inc. 441 Waverly Oaks Road Waltham, MA 02154 Attn: Chief Executive Officer Tel: 617-893-5151 Fax: 617-893-6525 with a copy to: Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. One Financial Center Boston, Massachusetts 02111 Attn: Peter F. Demuth, Esq. Tel: 617-542-6000 Fax: 617 542-2241 If to the Parent or the Acquisition Subsidiary, to: Lernout & Hauspie Speech Products N.V. Sint-Krispijnstraat 7 8900 Ieper, Belgium Attn: President Tel: 011 32 57 219500 Fax: 011 32 57 208489 and Lernout & Hauspie Speech Products USA, Inc. 20 Burlington Mall Road Burlington, MA 01803 Attn: President Tel: 617-238-0960 Fax: 617-238-0986 with a copy to: - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 44 Execution Copy Lernout & Hauspie Speech Products N.V. Sint-Krispijnstraat 7 8900 Ieper, Belgium Attn: Legal Department Tel: 011 32 57 219500 Fax: 011 32 57 208489 Brown, Rudnick, Freed & Gesmer, P.C. One Financial Center Boston, MA 02111 Attn: Lawrence M. Levy, Esquire Tel: 617-856-8200 Fax: 617-856-8201 and in any case at such other address as the addressee shall have specified by written notice. All periods of notice shall be measured from the date of delivery thereof. 7.3 Publicity and Disclosure. No Party shall issue or approve any press releases or any public disclosure or announcement, either written or oral, of the transactions contemplated by this Agreement without the prior knowledge and written consent of the other parties; provided, however, that any Party may make any public disclosure it believes in good faith is required by law or regulation (in which case the disclosing Party shall advise the other Parties and provide them with a copy of the proposed disclosure prior to making the disclosure). 7.4 Entire Agreement. This Agreement (including all exhibits or schedules appended to this Agreement and all documents delivered pursuant to or referred to in this Agreement, all of which are hereby incorporated herein by reference) constitutes the entire agreement between the parties, and all promises, representations, understandings, warranties and agreements with reference to the subject matter hereof and inducements to the making of this Agreement relied upon by any party hereto, have been expressed herein or in the documents incorporated herein by reference. 7.5 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision hereof. 7.6 Assignability. This Agreement may not be assigned otherwise than by operation of law (a) by the Parent or the Acquisition Subsidiary without the prior written consent of the Company or (b) by the Company without the prior written consent of the Parent. However, any or all rights of the Parent to receive performance (but not the obligations of the Parent to Company hereunder) of the Company hereunder, may be assigned by the Parent to any direct or indirect subsidiary, parent or other affiliate of the Parent. This Agreement shall inure to the benefit of and be binding upon the Parties hereto and their respective successors and permitted assigns. - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 45 Execution Copy 7.7 Amendments and Waivers. The Parties may mutually amend any provision of this Agreement at any time prior to the Effective Time with the prior authorization of their respective Boards of Directors; provided, however, that any amendment effected subsequent to the Requisite Stockholder Approval shall be subject to the restrictions contained in the DGCL. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by all of the Parties. No waiver by any Party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 7.8 Governing Law; Venue (a) Except as otherwise required under Belgian law, this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware (other than the choice of law principles thereof), except that any representations and warranties with respect to real and tangible property shall be governed by and construed in accordance with the laws of the jurisdiction where such property is situated if other than in the State of Delaware. (b) Any claim, action, suit or other proceeding initiated by any Party, under or in connection with this Agreement may be asserted, brought, prosecuted and maintained in any Federal or state court in the State of Delaware, as the Party bringing such action, suit or proceeding shall elect, having jurisdiction over the subject matter thereof, and the Parties hereby waive any and all rights to object to the laying of venue in any such court and to any right to claim that any such court may be an inconvenient forum. Each of the Parties hereby submit themselves to the jurisdiction of each such court and agree that service of process on them in any such action, suit or proceeding may be effected by the means by which notices are to be given to it under this Agreement. 7.9 Remedies. The Parties hereto acknowledge that the remedy at law for any breach of the obligations undertaken by the Parties hereto is and will be insufficient and inadequate and that the Parties hereto shall be entitled to equitable relief, in addition to remedies at law. In the event of any action to enforce the provisions of this Agreement, each of the Parties shall waive the defense that there is an adequate remedy at law. Without limiting any remedies the Parties may otherwise have hereunder or under applicable law, in the event any Party refuses to perform its obligations under this Agreement, the other Parties shall have, in addition to any other rights at law or equity, the right to specific performance. 7.10 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 46 Execution Copy 7.11 Effect of Table of Contents and Headings. Any table of contents, title of an article or section heading herein contained is for convenience of reference only and shall not affect the meaning of construction of any of the provisions hereof. 7.12 No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any person other than the Parties and their respective successors and permitted assigns; provided, however, that the provisions in Article I concerning issuance of the Merger Shares are intended for the benefit of the Company Stockholders and Sections 4.9 and 4.12 are intended for the benefit of the individuals specified therein and their respective legal representatives. 7.13 Knowledge. "To the knowledge," "to the best knowledge, information and belief," or any similar phrase shall be deemed to refer to the knowledge of the directors and executive officers of a party and to include the assurance that such knowledge is based upon a reasonable investigation by such persons, unless otherwise expressly provided. 7.14 Nonsurvival of Representations and Warranties. None of the representations, warranties, covenants and agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time, except for those covenants and agreements contained herein and therein which by their terms apply in whole or in part after the Effective Time. 7.15 Integration of Exhibits. All Exhibits and Schedules attached to this Agreement are integral parts of this Agreement as if fully set forth herein, and all statements appearing therein shall be deemed disclosed for all purposes and not only in connection with the specific representation in which they are explicitly referenced. ARTICLE VIII DEFINITIONS The following capitalized terms used herein shall have the meanings ascribed in the indicated sections. ACO..................................................................................... 1.5(b) ACO Principal Amount.................................................................... 1.5(b) Acquisition Subsidiary.................................................................. First Paragraph Acquisition Transaction................................................................. 4.7(a) Affiliate Agreement..................................................................... 2.33(a) Average Market Value.................................................................... 1.5(a) Base Balance Sheet...................................................................... 2.7(b) Benefit Plan............................................................................ 2.16(a)(iii) Business Combination Transaction........................................................ 6.5(b) Certificate of Merger................................................................... 1.1
- -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 47 Execution Copy Certificates............................................................................ 1.7(a) Charter................................................................................. 2.1 Closing................................................................................. 1.2 Closing Date............................................................................ 1.2 Code.................................................................................... 1.9(a) Company................................................................................. First Paragraph Company Affiliates...................................................................... 2.32(d) Company Disclosure Schedule............................................................. First Paragraph of Article II Company Material Adverse Effect......................................................... 2.1 Company Reports......................................................................... 2.7(a) Company Shares.......................................................................... 1.5(a) Company Stockholders.................................................................... 1.5(a) Confidential Information................................................................ 4.5 Conversion Ratio........................................................................ 1.5(a) DGCL.................................................................................... 1.1 Effective Time.......................................................................... 1.1 ERISA................................................................................... 2.16(a)(i) ERISA Affiliate......................................................................... 2.16(a) ERISA Benefit Plan...................................................................... 2.16(a)(iii) Escrow Agent............................................................................ 1.7(a) Escrow Agreement........................................................................ 1.7(a) Escrow Amount........................................................................... 1.7(a) Exchange Act............................................................................ 2.6 Exchange Agent.......................................................................... 1.3 Financial Statements.................................................................... 2.7(a) GAAP.................................................................................... 2.7(a) HSR Act................................................................................. 2.33 Indemnification Representative.......................................................... 1.7(a) Intellectual Property Rights............................................................ 2.13(a) Merger.................................................................................. 1.1 Merger Consideration.................................................................... 1.5(b) Merger Shares........................................................................... 1.5(a) Options................................................................................. 1.9(a) Option Conversion Ratio 1.9(b) O&W Agreements.......................................................................... 1.7(a) O&W Company Shares...................................................................... 1.9(a) Parent.................................................................................. First Paragraph Parent Base Balance Sheet............................................................... 3.5(b) Parent Common Stock..................................................................... 1.5(a) Parent Documented Expenses.............................................................. 6.5(b) Parent Financial Statements............................................................. 3.5(a) Parent Material Adverse Effect.......................................................... 3.4 Parent Reports.......................................................................... 3.5(a) Parties................................................................................. First Paragraph
- -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 48 Execution Copy PBGC.................................................................................... 2.16(g)(ii) Prospectus/Proxy Statement.............................................................. 4.3(a) Registration Statement.................................................................. 4.3(c) Requisite Stockholder Approval.......................................................... 2.4 SEC..................................................................................... 2.7(a) Securities Act.......................................................................... 1.9(c) Site.................................................................................... 2.17(a) Special Meeting......................................................................... 4.3(a) Subsidiary.............................................................................. 2.3 Surviving Corporation................................................................... 1.1 Tax Returns............................................................................. 2.10 Taxes................................................................................... 2.10 Termination Fee......................................................................... 6.5(b) Warrants................................................................................ 1.9(a)
[THE REMAINDER OF THIS PAGE IS LEFT BLANK INTENTIONALLY] - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 49 Execution Copy IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed as an instrument under seal in multiple counterparts as of the date set forth above by their duly authorized representatives. 0 LERNOUT & HAUSPIE SPEECH PRODUCTS, N.V. BY: /s/ P. Haiispic ---------------------------------- Name: Pol haiispic Title: Managing Director TRAPPIST ACQUISITION CORP. BY: /s/ A. Baction ----------------------------------- Name: A. Baction Title: President KURZWEIL APPLIED INTELLIGENCE, INC. BY: /s/ Thomas E. Brew Jr. ----------------------------------- Name: Thomas E. Brew, Jr. Title: President CEO AGREEMENT AND PLAN OF MERGER List of Schedules and Exhibits Schedule 2.1- Organization and Qualification of the Company Schedule 2.2(a) Capitalization Schedule 2.2(b) - Capitalization Schedule 2.2(c) - Capitalization Schedule 2.5 - Present Compliance with Obligations and Laws Schedule 2.6(a)- No Conflict of Transaction with Obligations and Laws Schedule 2.6(b) - No Conflict of Transaction with Obligations and Laws Schedule 2.8- Absence of Undisclosed Liabilities Schedule 2.9- Absence of Certain Changes Schedule 2.10- Payment of Taxes Schedule 2.11 - Title to Properties; Liens; Condition of Properties Schedule 2.12- Liabilities Schedule 2.13(a) - Intellectual Property Rights Schedule 2.13(b) - Intellectual Property Rights Schedule 2.13(c) - Intellectual Property Rights Schedule 2.13(d) - Intellectual Property Rights Schedule 2.13(e) - Intellectual Property Rights Schedule 2.13(f) - Intellectual Property Rights Schedule 2.13(g) - Intellectual Property Rights Schedule 2.14(a) - Contracts and Commitments Schedule 2.14(b) - Contracts and Commitments Schedule 2.15- Labor and Employee Relations Schedule 2.15(a) - Labor and Employee Relations Schedule 2.15(c) - Labor and Employee Relations Schedule 2.15(d) - Labor and Employee Relations Schedule 2.15(g) - Labor and Employee Relations Schedule 2.16(a) - Employee Benefits and ERISA Schedule 2.16(b) - Employee Benefits and ERISA Schedule 2.16(c) - Employee Benefits and ERISA Schedule 2.18 - Permits Schedule 2.19 - Warranty or Other Claims Schedule 2.20 - Claims and Legal Proceedings Schedule 2.21 - Borrowings and Guarantees Schedule 2.22 - Financial Service Relations and Powers of Attorney Schedule 2.23 - Insurance Schedule 2.27 - Transactions with Interested Persons Schedule 2.32 - Company Affiliates Schedule 3.4 - No Conflict of Transaction With Obligations and Laws Schedule 4.12 - Employee Welfare - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 51 Execution Copy Exhibit A - Certificate of Merger Exhibit B - Option Agreement Exhibit C - Affiliate Agreement Exhibit D - Opinion of Counsel to the Company Exhibit E - Opinion of US Counsel to the Parent and the Acquisition Subsidiary Exhibit F - Opinion of Belgian Counsel to the Parent - -------------------------------------------------------------------------------- Agreement and Plan of Merger Page 52 Execution Copy EX-10.1 3 ADDITIONAL EXHIBITS STOCK OPTION AGREEMENT THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO CERTAIN PROVISIONS CONTAINED HEREIN AND TO RESALE RESTRICTIONS UNDER THE SECURITIES ACT OF 1933, AS AMENDED AND APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED WITHOUT REGISTRATION OR AN EXEMPTION THEREFROM STOCK OPTION AGREEMENT, dated April 14, 1997, between KURZWEIL APPLIED INTELLIGENCE, INC., a Delaware corporation ("Issuer"), and LERNOUT & HAUSPIE SPEECH PRODUCTS N.V., a Belgian corporation ("Grantee"). W I T N E S S E T H: WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of Merger of even date herewith (the "Merger Agreement"), which agreement has been executed by the parties hereto simultaneously with this Agreement. All capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in the Merger Agreement. WHEREAS, as a condition to Grantee's entering into the Merger Agreement and in consideration therefor, Issuer has agreed to grant Grantee the Option (as hereinafter defined). NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein and in the Merger Agreement, the parties hereto agree as follows: l. (a) Issuer hereby grants to Grantee an unconditional, irrevocable option (the "Option") to purchase, subject to the terms hereof, up to 1,454,076 fully paid and nonassessable shares of Issuer's Common Stock, par value $.01 per share ("Common Stock"), at a price of $5.25 per share (the "Option Price"); provided further that in no event shall the number of shares of Common Stock for which this Option is exercisable exceed 16% of the Issuer's issued and outstanding shares of Common Stock. The number of shares of Common Stock that may be received upon the exercise of the Option and the Option Price are subject to adjustment as herein set forth. (b) In the event that any additional shares of Common Stock are issued or otherwise become outstanding after the date of this Agreement (other than pursuant to this Agreement), the number of shares of Common Stock subject to the Option shall be increased so that, after such issuance, it equals 16% (less such number previously acquired upon exercise hereof) of the number of shares of Common Stock then issued and outstanding without giving effect to any shares subject or issued pursuant to the Option. Nothing contained in this Section l(b) or elsewhere in this Agreement shall be deemed to authorize Issuer or Grantee to breach any provision of the Merger Agreement. - -------------------------------------------------------------------------------- STOCK OPTION AGREEMENT Page 1 2. (a) The Holder (as hereinafter defined) may exercise the Option, in whole or in part, at any time or from time to time for a period (the "Exercise Period") commencing upon the satisfaction of all of the conditions set forth in Section 2(b)(i), (ii), (iii) and (iv), and ending on the later to occur of (i) twelve (12) months from the date of the termination of the Merger Agreement, (ii) ninety (90) days following the consummation of a Business Combination Transaction effected during the twelve (12) month period referred to in clause (i), or (iii) ninety (90) days following the consummation of a Business Combination Transaction effected after the twelve (12) month period referred to in clause (i), but with respect to which the Issuer or any of its Subsidiaries or Affiliates has entered into a definitive agreement with a third party within said twelve (12) month period. The term "Holder" shall mean the holder or holders of the Option. (b) The obligation of the Issuer to sell shares of Common Stock subject to this Option is subject to the satisfaction of all of the following conditions: (i) The conditions requiring the Issuer to pay the Grantee the Termination Fee pursuant to Section 6.5 of the Merger Agreement shall have occurred; (ii) Prior to or within twelve (12) months after the termination of the Merger Agreement, the Issuer or any of its Subsidiaries, or any Company Affiliate shall have entered into a definitive agreement with a third party with respect to a Business Combination Transaction or a Business Combination Transaction shall have been effected; (iii) There shall be no preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, nor any statute, rule, regulation or order promulgated or enacted by any governmental authority, prohibiting or otherwise restraining such exercise of the Option; and (iv) The representations and warranties of Grantee contained in Section 12 hereof shall be true and correct in all material respects on the date thereof as if made on such date. This Option shall terminate, and the Grantee shall have no rights hereunder in the event that (a) the Merger contemplated by the Merger Agreement is consummated, (b) the Merger Agreement is terminated under circumstances that could not give rise to the satisfaction of the conditions set forth in clause 2(b)(i) of this Option, or (c) Holder fails to exercise the Option prior to the expiration of the Exercise Period. (c) Issuer shall notify Grantee promptly in writing of the occurrence of an event described in clause 2(b)(ii) (a "Triggering Event"), it being understood that the giving of such notice by Issuer shall not be a condition to the right of the Holder to exercise the option. (d) In the event the Holder is entitled to and wishes to exercise the Option, it shall send to Issuer a written notice (the date of which being herein referred to as the "Notice Date") - -------------------------------------------------------------------------------- STOCK OPTION AGREEMENT Page 2 specifying (i) the total number of shares it will purchase pursuant to such exercise and (ii) a place in the Eastern United States and date not earlier than three (3) business days nor later than thirty (30) days from the Notice Date for the closing of such purchase (the "Closing Date"); provided that if prior notification to or approval of any regulatory agency is required in connection with such purchase, the Holder and, to the extent required, the Issuer shall promptly file the required notice or application for approval and shall expeditiously process the same and the period of time that otherwise would run pursuant to this sentence shall run instead from the date on which any required notification periods have expired or been terminated or such approvals have been obtained and any requisite waiting period or periods shall have passed. Any exercise of the Option shall be deemed to occur on the Notice Date relating thereto. (e) At the closing referred to in subsection (d) of this Section 2, the Holder shall pay to Issuer the aggregate purchase price for the shares of Common Stock purchased pursuant to the exercise of the Option in immediately available funds by wire transfer to a bank account designated by Issuer. The failure or refusal of Issuer to designate a bank account for deposit of the purchase price shall not preclude the Holder from exercising the Option. (f) At such closing, simultaneously with the delivery of immediately available funds, Issuer shall deliver to the Holder a certificate or certificates representing the number of shares of Common Stock purchased by the Holder and, if the Option should be exercised in part only, a new Option evidencing the rights of the Holder thereof to purchase the balance of the shares purchasable hereunder, and the Holder shall deliver to issuer the original executed copy of this Agreement and a letter agreeing that the Holder will not offer to sell or otherwise dispose of such shares in violation of applicable law or the provisions of this Agreement. (g) Certificates for Common Stock delivered at a closing hereunder may be endorsed with a restrictive legend that shall read substantially as follows: "'The transfer of the shares represented by this certificate is subject to certain provisions of an agreement between the registered holder hereof and Trappist, Inc. and to resale restrictions arising under the Securities Act of 1933, as amended, and applicable state law. A copy of such agreement is on file at the principal office of Trappist, Inc. and will be provided to the holder hereof without charge upon receipt by Trappist, Inc. of a written request therefor." It is understood and agreed that: (i) the reference to the resale restrictions of the Securities Act of 1933, as amended (the "1933 Act"), in the above legend shall be removed by delivery of substitute certificate(s) without such reference if the Holder shall have delivered to Issuer a copy of a letter from the staff of the SEC, or an opinion of counsel, in form and substance reasonably satisfactory to Issuer to the effect that such legend is not required for purposes of the 1933 Act; (ii) the reference to the provisions of this Agreement in the above legend shall be removed by delivering of substitute certificate(s) without such reference if shares have been sold or transferred in compliance with the provisions of this Agreement and under circumstances that do not require the retention of such reference; and (iii) the legend shall be removed in its entirety if - -------------------------------------------------------------------------------- STOCK OPTION AGREEMENT Page 3 the conditions in the preceding clauses (i) and (ii) are both satisfied. In addition, such certificates shall bear any other legend as may be required by law. (i) Upon the giving by the Holder to Issuer of the irrevocable written notice of exercise of the Option provided for under subsection (d) of this Section 2 and the tender of the applicable purchase price, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of Issuer shall then be closed or that certificates representing such shares of Common Stock shall not then be actually delivered to the Holder. Issuer shall pay all expenses, and any and all United States federal, state and local taxes and other charges that may be payable by the Issuer in connection with the preparation, issue and delivery of stock certificates under this Section 2 in the name of the Holder. 3. Issuer agrees: (i) that it shall at all times maintain, free from preemptive rights, sufficient authorized but unissued or treasury shares of Common Stock so that the Option may be exercised without additional authorization of Common Stock after giving effect to all other options, warrants, convertible securities and other rights to purchase Common Stock, (ii) that it will not, by charter amendment or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act, intentionally avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by Issuer; and (iii) promptly to take all action as may from time to time be required (including complying with all premerger notification reporting and waiting period requirements specified in 15 U.S.C. 18a and regulations promulgated thereunder in order to permit the Holder to exercise the Option and the Issuer to duly and effectively issue shares of Common Stock pursuant hereto. 4. This Agreement (and the Option granted hereby) are exchangeable, without expense, at the option of the Holder, upon presentation and surrender of this Agreement at the principal office of Issuer, for other Agreements providing for Options of different denominations entitling the holder thereof to purchase, on the same terms and subject to the same conditions as are set forth herein, in the aggregate the same number of shares of Common Stock purchasable hereunder. The terms "Agreement" and "Option" as used herein include any Stock Option Agreements and related Options for which this Agreement (and the Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Agreement, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like tenor and date. 5. In addition to the adjustment in the number of shares of Common Stock that are purchasable upon exercise of the Option pursuant to Section 1 of this Agreement, the number of shares of Common Stock purchasable upon the exercise of the Option and the Option Price shall be subject to adjustment from time to time as provided in this Section 5. In the event of any change in, or distributions in respect of, the Common Stock by reason of stock dividends, split-ups, mergers, recapitalizations, combinations, subdivisions, conversions, exchanges of shares, - -------------------------------------------------------------------------------- STOCK OPTION AGREEMENT Page 4 or the like, the type and number of shares of Common Stock purchasable upon exercise hereof and the Option Price shall be appropriately adjusted in such manner as shall fully preserve the economic benefits provided hereunder and proper provision shall be made in any agreement governing any such transaction to provide for such proper adjustment and the full satisfaction of the Issuer's obligations hereunder. 6. Upon the occurrence of a Triggering Event that occurs prior to the end of the Exercise Period, Issuer shall, at the request of Grantee delivered within 90 days of such Triggering Event, promptly prepare, file and keep current a shelf registration statement under the 1933 Act covering any shares issued and issuable pursuant to this Option and shall use its reasonable best efforts to cause such registration statement to become effective and remain current in order to permit the sale or other disposition of any shares of Common Stock issued upon total or partial exercise of this Option ("Option Shares") in accordance with any plan of disposition requested by Grantee. Issuer will use its reasonable best efforts to cause such registration statement first to become effective and then to remain effective for such period not in excess of 180 days from the day such registration statement first becomes effective or such shorter time as may be reasonably necessary to effect such sales or other dispositions. Grantee shall have the right to demand only one such registration. The foregoing notwithstanding, if, at the time of any request by Grantee for registration of the Option Shares as provided above, Issuer is in registration with respect to an underwritten public offering of shares of Common Stock, and if in the good faith judgment of the managing underwriter or managing underwriters, or, if none, the sole underwriter or underwriters, of such offering the inclusion of the Holder's Option Shares would interfere with the successful marketing of the shares of Common Stock offered by Issuer, the number of Option Shares otherwise to be covered in the registration statement contemplated hereby may be reduced; and provided, however, that after any such required reduction the number of Option Shares to be included in such offering for the account of the Holder shall constitute at least 25% of the total number of shares to be sold by the Holder and Issuer in the aggregate; and provided further, however, that if such reduction occurs, then the Issuer shall file a registration statement for the balance as promptly as practical and no reduction shall thereafter occur. Each such Holder shall provide all information reasonably requested by Issuer for inclusion in any registration statement to be filed hereunder. If requested by any such Holder in connection with such registration, Issuer shall become a party to any underwriting agreement relating to the sale of such shares, but only to the extent of obligating itself in respect of representations, warranties, indemnities and other agreements customarily included in such underwriting agreements for the Issuer. As a condition to the Company's obligations under this paragraph the Holder shall either first exercise this Option or irrevocably agree to exercise this Option upon or prior to the effective date of the Registration Statement. 7. (a) (i) At any time following the date on which this Option became exercisable and (ii) at or within 30 days following the exercise of the Option, either in whole or in part, upon request of the Issuer, Holder shall in the case of clause (i) tender the Option, and in the case of clause (ii) tender the Option Shares to the Issuer for repurchase with respect to the Option (the "Option Repurchase Price") at a repurchase price equal to the product obtained by multiplying (1) the number of shares as to which this Option is then exercisable by (2) the - -------------------------------------------------------------------------------- STOCK OPTION AGREEMENT Page 5 difference between the market offer price (defined below) and the exercise price per share, and with respect to the Option Shares at a price (the "Option Share Repurchase Price") equal to the market/offer price (as defined below) multiplied by the number of Option Shares to be repurchased. The term "market/offer price" shall mean the highest of (i) the price per share of Common Stock at which a tender offer or exchange offer therefor has been made, (ii) the price per share of Common Stock to be paid by any third party pursuant to an agreement with Issuer contemplating a Business Combination, (iii) the highest closing price per share of the Common Stock for the thirty (30) trading days immediately preceding the Issuer's election hereunder; or (iv) in the event of a sale of all or a substantial portion of Issuer's assets, the sum of the price paid in such sale for such assets and the current market value of the remaining net assets of Issuer, divided by the number of shares of Common Stock of Issuer outstanding at the time of such sale. In determining the market/offer price, the value of consideration other than cash shall be determined by a nationally recognized investment banking firm selected by the Holder and reasonably acceptable to the Issuer. (b) Upon Issuer's request pursuant to Section 7(a), Holder shall surrender to Issuer, at its principal office, certificates for the Option Shares to be repurchased. Within five business days after the surrender of the certificates representing Option Shares to be repurchased, Issuer shall deliver or cause to be delivered to the Holder the Option Share Repurchase Price therefor. 8. (a) In the event that prior to the expiration of the Exercise Period, Issuer shall enter into an agreement (i) to consolidate with or merge into any person, other than Grantee or one of its Subsidiaries, and Issuer shall not be the continuing or surviving Corporation of such consolidation or merger, (ii) to permit any person, other than Grantee or one of its Subsidiaries, to merge into Issuer and Issuer shall be the continuing or surviving corporation, but, in connection with such merger, the then outstanding shares of Common Stock shall be changed into or exchanged for stock or other securities of any other person or cash or any other property or the then outstanding shares of Common Stock shall after such merger represent less than 50% of the outstanding voting shares and voting share equivalents of the merged company, or (iii) to sell or otherwise transfer all or substantially all of its assets to any person, other than Grantee or one of its Subsidiaries, then, and in each such case, the agreement governing such transaction shall make proper provision so that the Issuer's obligation under this Option shall, upon the consummation of any such transaction and upon the terms and conditions set forth herein, be converted into, or exchanged for, an option (the "Substitute Option"), at the election of the Holder, of either (x) the Acquiring Corporation (as hereinafter defined) or (y) any person that controls the Acquiring Corporation (as defined below). (b) The following terms have the meanings indicated: (1) "Acquiring Corporation" shall mean (i) the continuing or surviving corporation of a consolidation or merger with Issuer (if other than Issuer), (ii) Issuer in a merger in which Issuer is the continuing or surviving person, and (iii) the transferee of all or substantially all of Issuer's assets. - -------------------------------------------------------------------------------- STOCK OPTION AGREEMENT Page 6 (2) "Substitute Common Stock" shall mean the common stock issued by the issuer of the Substitute Option upon exercise of the Substitute Option. (c) The Substitute Option shall have the same terms as the Option, provided, that if the terms of the Substitute Option cannot, for legal reasons, be the same as the Option, such terms shall be as similar as possible and in no event less advantageous to the Holder. The issuer of the Substitute Option shall also enter into an agreement with the then Holder or Holders of the Substitute Option in substantially the same form as this Agreement, which shall be applicable to the Substitute Option. (d) The Substitute Option shall be exercisable for such number of shares of Substitute Common Stock as is equal to the market/offer price multiplied by the number of shares of Common Stock for which the Option is then exercisable, divided by the Average Price (which shall mean the average closing price of a share of the Substitute Common Stock for the thirty (30) trading days immediately preceding the consolidation, merger or sale in question). The exercise price of the Substitute Option per share of Substitute Common Stock shall then be equal to the Option Price multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock for which the Option is then exercisable and the denominator of which shall be the number of shares of Substitute Common Stock for which the Substitute Option is exercisable. (e) In no event, pursuant to any of the foregoing paragraphs, shall the Substitute Option be exercisable for more than 16% of the shares of Substitute Common Stock outstanding prior to exercise of the Substitute Option. In the event that the Substitute Option would be exercisable for more than 16% of the shares of Substitute Common Stock outstanding prior to exercise but for this clause (e), the excess shall be canceled. (f) Issuer shall not enter into any transaction described in subsection (a) of this Section 8 unless the Acquiring Corporation and any person that controls the Acquiring Corporation assume in writing all the obligations of Issuer hereunder. 9. (a) At any time after the issuance of the Substitute Option or at or within thirty days after exercise of the Substitute Option, either in whole or in part, upon request of the Substitute Option Issuer, the Substitute Option Holder shall tender the Substitute Option or the Substitute Option Shares to the Substitute Option Issuer for repurchase at a price with respect to the Substitute Option (the "Substitute Option Repurchase Plan") equal to the number of shares under the Substitute Option multiplied by the difference between the highest closing price (as defined below) and the exercise price, and with respect to the Substitute Option Shares (the "Substitute Option Share Repurchase Price") equal to the highest closing price (as defined below) multiplied by the number of Substitute Option Shares to be repurchased. The term "highest closing price" shall mean the highest closing price for shares of Substitute Common Stock within the thirty (30) trading day period immediately preceding the date the Substitute Option Issuer gives notice of the required repurchase of the Substitute Option or the Substitute Option Shares to be repurchased. - -------------------------------------------------------------------------------- STOCK OPTION AGREEMENT Page 7 (b) Upon the Substitute Option Issuer's request, the Substitute Option Holder shall surrender to the Substitute Option Issuer, at its principal office the Substitute Option or the certificates for the Substitute Option Shares to be repurchased. As promptly as practicable, and in any event within five business days after the surrender of the certificates representing Substitute Option Shares to be repurchased the Substitute Option Issuer shall deliver or cause to be delivered to the Substitute Option Holder the Substitute Option Repurchase Price or the Substitute Option Share Repurchase Price as applicable. 10. The period for exercise of certain rights under Sections 2 and 6 shall be extended: (i) to the extent necessary to obtain all regulatory approvals for the exercise of such rights, and for the expiration of all statutory waiting periods; and (ii) to the extent necessary under Section 16(b) of the 1934 Act by reason of such exercise. 11. Issuer hereby represents and warrants to Grantee as follows: (a) Issuer has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of Issuer and no other corporate proceedings on the part of Issuer are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly and validly executed and delivered by Issuer. (b) Issuer has taken all necessary corporate action to authorize and reserve and to permit it to issue, and at all times from the date hereof through the termination of this Agreement in accordance with its terms will have reserved for issuance upon the exercise of the Option, that number of shares of Common Stock equal to the maximum number of shares of Common Stock at any time and from time to time issuable hereunder, and all such shares, upon issuance pursuant hereto, will be duly authorized, validly issued, fully paid, nonassessable, and will be delivered free and clear of all claims, liens, encumbrances and security interests created by the Issuer or the Acquiring Corporation (as applicable) and not subject to any preemptive rights. (c) Issuer has taken and will take all action so that the entering into of this Option Agreement, the acquisition of shares of Common Stock hereunder and the other transactions contemplated hereby do not and will not result in the grant of any preemptive, anti-dilution or other similar rights to any person under any other agreement. 12. Grantee hereby represents and warrants to Issuer that: (a) Grantee has all requisite corporate power and authority to enter into this Agreement and, subject to any approvals or consents referred to herein, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the - -------------------------------------------------------------------------------- STOCK OPTION AGREEMENT Page 8 consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Grantee. This Agreement has been duly executed and delivered by Grantee. (b) The Option is not being, and any shares of Common Stock or other securities acquired by Grantee upon exercise of the Option will not be, acquired with a view to the public distribution thereof and will not be transferred or otherwise disposed of except in a transaction registered or exempt from registration under the Securities Act. 13. Neither of the parties hereto may assign any of its rights or obligations under this Option Agreement or the Option created hereunder to any other person, without the express written consent of the other party. 14. Each of Grantee and Issuer will use its best efforts to make all filings with, and to obtain consents of, all third parties and governmental authorities necessary to the consummation of the transactions contemplated by this Agreement, including without limitation making application to list the shares of Common Stock issuable hereunder on the Nasdaq National Market, or any other exchange or market upon which the Issuer's securities are traded, upon official notice of issuance 15. The parties hereto acknowledge that damages would be an inadequate remedy for a breach of this Agreement by either party hereto and that the obligations of the parties hereto shall be enforceable by either party hereto through injunctive or other equitable relief. 16. If any term, provision, covenant or restriction contained in this Agreement is held by a court or a federal or state regulatory agency of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions and covenants and restrictions contained in this Agreement shall remain in full force and effect, and shall in no way be affected, impaired or invalidated. If for any reason such court or regulatory agency determines that the Holder is not permitted to acquire, or Issuer is not permitted to repurchase pursuant to Section 7 or 9, the full number of shares of Common Stock provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or 5 hereof), it is the express intention of Issuer to allow the Holder to acquire or to allow the Issuer to repurchase such lesser number of shares as may be permissible, without any amendment or modification hereof. 17. All notices, requests, claims, demands and other communications hereunder shall be deemed to have been duly given when delivered in person, by telecopy, or by registered or certified mail (postage prepaid, return receipt requested) or reputable overnight (two business days for international deliveries) courier at the respective addresses of the parties set forth in the Merger Agreement. 18. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. - -------------------------------------------------------------------------------- STOCK OPTION AGREEMENT Page 9 19. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. 20. Except as otherwise expressly provided herein, each of the parties hereto shall bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder, including fees and expenses of its own financial consultants, investment bankers, accountants and counsel. 21. Except as otherwise expressly provided herein or in the Merger Agreement, this Agreement contains the entire agreement between the parties with respect to the transactions contemplated hereunder and supersedes all prior arrangements or understandings with respect thereof, written or oral. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing in this Agreement, expressed or implied, is intended to confer upon any party, other than the parties hereto, and their respective successors and permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] - -------------------------------------------------------------------------------- STOCK OPTION AGREEMENT Page 10 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its officers thereunto duly authorized, all as of the date first above written. LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. By: /s/ Jo Lernout Name: Jo Lernout Title: Managing Director KURZWEIL APPLIED INTELLIGENCE, INC. By: /s/ Thomas E. Brew, Jr. Name: Thomas E. Brew, Jr. Title: President - -------------------------------------------------------------------------------- STOCK OPTION AGREEMENT Page 11 EX-10.2 4 LOAN AGREEMENT LOAN AGREEMENT LOAN AGREEMENT dated as of April 14, 1997 entered into by and between Lernout & Hauspie Speech Products USA, Inc., a Delaware corporation having a place of business at 20 Burlington Mall Road, Burlington, Massachusetts 01803 ("Lender") and Kurzweil Applied Intelligence, Inc., a Delaware corporation having a place of business in Waltham, Massachusetts ("Borrower"). W I T N E S S E T H: -------------------- WHEREAS, Borrower has requested that Lender make available to Borrower a line of credit in the amount of up to $1,500,000 to finance Borrower's license payments and working capital needs; WHEREAS, Lender is willing to do so, but only on the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the mutual conditions and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower and Lender agree as follows. 1. CERTAIN DEFINITIONS. As used herein the terms set forth on Schedule I hereto shall have the meanings set forth thereon. 2. THE LOAN. (a) At any time after the date hereof through June 30, 1997 (the "Commitment Period"), Lender shall, at Borrower's request, make a loan to Borrower (the "Loan"), subject to the terms and conditions contained in this Agreement and in an aggregate amount not to exceed $1,500,000. Once repaid, the Loan may not be reborrowed. The Loan shall be due and payable as set forth in the Line of Credit Note. (b) The Loan shall be evidenced by the Line of Credit Note in the form of Exhibit A hereto. The Loan shall bear interest and be payable as set forth in the Line of Credit Note. (c) Proceeds of the Loan shall be used by Borrower to finance Borrower's license payments and working capital needs. (d) Borrower may request that Lender advance the Loan on not less than seven (7) days' prior written notice to Lender, made after the satisfaction of the conditions precedent set forth below. The Lender shall make only one advance hereunder. Lender shall make the Loan available to Borrower by wire transfer or otherwise as Borrower requests in its notice to advance the Loan (provided that Borrower shall reimburse Lender for any administrative expense (wire transfer fees and the like) incurred by Lender in connection with such advance methods, except for an advance by bank or certified check). 3. REPRESENTATIONS AND WARRANTIES. The representations and warranties made by Borrower to Lender with respect to its business, properties, financial statements and related matters under Article II of that certain Agreement and Plan of Merger by and among Borrower, Lernout & Hauspie Speech Products N.V. and Trappist Acquisition Corp. dated as of April 14, 1997 (the "Merger Agreement") are hereby incorporated by reference. By executing this Agreement, Borrower shall be deemed to have made such representations and warranties as of the date hereof. In addition, the Borrower represents as follows: (a) Its exact legal name is as set forth in the preamble to this Agreement and Borrower is not generally known by or using any fictitious or other name or trade name or style. (b) Its chief executive office and the office where it keeps its books and records concerning its assets is that shown in the preamble to this Agreement. 4. BORROWER'S AGREEMENTS. The agreements and covenants made by Borrower to Lender under Article IV of the Merger Agreement are hereby incorporated by reference. By executing this Agreement, Borrower shall be deemed to have made such agreements and covenants as of the date hereof. In addition, the Borrower agrees as follows: (a) Borrower will notify Lender, at least thirty (30) days prior to any such event, of any change in Borrower's exact legal name, any change in its place of business or location as set forth in the preamble to this Agreement, or its establishment of any new place of business or location, or any change in Borrower's organizational structure. (b) Borrower will not incur any indebtedness or other obligations after the date of this Agreement from Prospect Leasing Division of Bankers Leasing Association, Inc. 5. EVENTS OF DEFAULT; REMEDIES. Upon the occurrence and during the continuance of an Event of Default (as defined on Schedule I hereto), (a) the Borrower shall have no further right to request the Loan hereunder, (b) the Loan shall bear interest at the Default Rate of Interest, as defined in the Line of Credit Note, (c) the Lender may by notice to Borrower accelerate the payment of the Loan and all other obligations of Borrower hereunder and demand payment thereof; and (d) Lender may proceed to enforce payment of any of the foregoing and shall have and may exercise any and all rights under the Uniform Commercial Code or which are afforded to Lender herein, in the Security Agreement and other collateral documents executed in connection herewith, or otherwise. Notwithstanding the foregoing, Lender shall forbear from the exercise of its rights to foreclose or otherwise realize upon or take possession of or use Borrower's intellectual property (including without limitation, patents, trademarks and copyrights) until the earlier of ninety(90) days after the occurrence of an Event of Default or January 31, 1998, so long as (i) there occurs and is continuing no Event of Default of the type described in subsections (f) or (g) of the definition of such term, and (ii) Borrower does not take any action to contest the validity or priority of Lender's lien and security interest in such intellectual property, or any other collateral. 6. EXPENSES. Borrower agrees to pay Lender on demand any and all reasonable out-of-pocket costs and expenses of any nature (including without limitation reasonable attorneys' fees and disbursements) which may be incurred by Lender in connection with exercise of Lender's rights against the Borrower after an Event of Default; any exercise of Lender's right of acceleration; any enforcement, collection or other proceedings with respect to the Loan; or any bankruptcy, insolvency or other similar proceedings of the Borrower. 7. CONDITIONS PRECEDENT. Borrower acknowledges and agrees that Lender will not make the Loan hereunder, nor will Lender entertain any request from Borrower for the Loan hereunder, unless and until all of the following conditions have been satisfied and remain satisfied as of the date of funding the Loan: (a) Representations and Warranties. Borrower's representations and warranties contained herein shall be correct and complete in all material respects; (b) Covenants. Borrower shall be in compliance in all material respects with all covenants and agreements contained herein; (c) No Events of Default. There shall exist no Event of Default or any event which, with the passage of time or the giving of notice or both, would constitute an Event of Default; (d) Delivery of Documents. Borrower shall have delivered, or caused to be delivered, to Lender the documents listed on Schedule II, duly executed bythe Borrower, and in form and substance reasonably satisfactory to Lender; (e) Merger Agreement. The Merger Agreement shall not have been terminated by any party thereto, nor shall the Merger (as defined in the Merger Agreement) have been abandoned (provided that the termination of the Merger Agreement or abandonment of the Merger by Lernout & Hauspie Speech Products, N.V. other than explicitly in accordance with the Merger Agreement shall not constitute the failure of this condition). 8. MISCELLANEOUS PROVISIONS. (a) Notices. Unless otherwise specified herein, all other notices hereunder shall be in writing directed to the addresses shown at the end of this Agreement. Written notices and communications shall be effective and shall be deemed received on the day when delivered by hand or by facsimile transmission; on the next business day, if by commercial overnight courier; and on the third business day, if by registered or certified mail, postage prepaid. (b) No Waiver. No failure to exercise and no delay in exercising, on the part of Lender, any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right or remedy. Waiver by Lender of any right or remedy on any one occasion shall not be construed as a bar to or waiver thereof or of any other right or remedy on any future occasion. Lender's rights and remedies hereunder, under any agreement or instrument supplemental hereto or under any other agreement or instrument shall be cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. (c) Assignment. This Agreement shall be binding upon and shall inure to the benefit of Borrower and Lender and their respective successors and assigns; PROVIDED THAT Borrower may not assign or transfer any rights or obligations hereunder without Lender's prior written consent. (d) Governing Law; Jurisdiction. This Agreement shall be governed by the laws of the Commonwealth of Massachusetts (other than its laws relating to conflicts of laws). [SIGNATURE PAGE TO LOAN AGREEMENT] Executed as an instrument under seal on the date set forth above. KURZWEIL APPLIED INTELLIGENCE, INC. By: /s/ Thomas E. Brew Jr. -------------------------------- Name: Thomas E. Brew Jr. Title: President & CEO Address: -------- 411 Waverley Oaks Road Waltham, MA 02154 LERNOUT & HAUSPIE SPEECH PRODUCTS USA, INC. By: /s/ Gaston Bastiaens -------------------------------- Name: Gaston Bastiaens Title: President Address: -------- 20 Burlington Mall Road Burlington, MA 01803 EXHIBIT A --------- [LINE OF CREDIT NOTE] LINE OF CREDIT NOTE $1,500,000.00 Boston, Massachusetts April 14, 1997 FOR VALUE RECEIVED, the undersigned KURZWEIL APPLIED INTELLIGENCE, INC. a Delaware corporation ("Maker"), hereby promises to pay to the order of LERNOUT & HAUSPIE SPEECH PRODUCTS USA, INC., a Delaware corporation, at its place of business at 20 Burlington Mall Road, Burlington, Massachusetts 01803 ("Lender"), the sum of ONE MILLION FIVE HUNDRED THOUSAND DOLLARS ($1,500,000.00), or so much as may have been advanced to Maker as provided in that certain Loan Agreement (the "Loan Agreement") dated as of the date hereof between Maker and Lender, together with interest on the unpaid principal amount from time to time outstanding prior to demand at a fixed rate per annum equal to the Prime Rate in effect as of the date hereof. Prior to the occurrence of an Event of Default, as defined in the Loan Agreement, interest shall accrue but shall not be payable currently. All outstanding principal and interest shall be due and payable in full on October 31, 1997. After the occurrence and during the continuance of an Event of Default, (a) principal outstanding hereunder shall bear interest at a fixed rate equal to the sum of the Prime Rate in effect as of the date hereof plus three percent (3%) per annum (the "Default Rate of Interest"), and (b) the Lender shall be entitled to accelerate all outstanding principal and interest due hereunder and demand immediate payment in full of the same. Interest and fees shall be calculated on the basis of a 360-day year times the actual number of days elapsed. "Prime Rate," as used herein, shall mean for any day the highest "prime rate" published in The Wall Street Journal under the heading "Money Rates" on such day (or on the next day on which The Wall Street Journal is published). In no event shall interest payable hereunder exceed the highest rate permitted by applicable law. To the extent any interest received by Lender exceeds the maximum amount permitted, such payment shall be credited to principal, and any excess remaining after full payment of principal shall be refunded to Maker. This Note evidences borrowings under the Loan Agreement and is secured by and entitled to the benefits of the provisions of the Loan Agreement and any other instruments or documents executed in connection therewith. The principal of this Note is subject to prepayment in full or in part at any time without premium or penalty. Maker and all guarantors and endorsers hereby waive presentment, demand, notice, protest, and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note, and assent to extensions of the time of payment or forbearance or other indulgence without notice. No delay or omission of Lender in exercising any right or remedy hereunder shall constitute a waiver of any such right or remedy. Acceptance by Lender of any payment after demand shall not be deemed a waiver of such demand. A waiver on one occasion shall not operate as a bar to or waiver of any such right or remedy on any future occasion. Executed as an instrument under seal as of the date first above written. WITNESS: KURZWEIL APPLIED INTELLIGENCE, INC. /s/ By: /s/ Thomas E. Brew Jr. - ----------------------------- -------------------------------- Name: Thomas E. Brew Jr. Title: President & CEO -2- SCHEDULE I ---------- DEFINITIONS ----------- "Event of Default" means any one or more of the following events: (a) failure by Borrower to pay any principal, interest or other amount due hereunder or on account of the Loan, within five (5) days of the date when due; (b) failure by Borrower to perform or discharge, observe or comply with any of its covenants or agreements set forth herein or in the Line of Credit Note or Security Agreement, (or any of the other security documents delivered in connection herewith), or under Article IV of the Merger Agreement in accordance with the terms thereof (provided that except for defaults under Sections 4.4(c), (e), (i) or (j) of the Merger Agreement, such failure shall not constitute an Event of Default unless the same has not been waived by Lender or cured within 15 days after the occurrence of failure); (c) any representation, warranty of Borrower to Lender set forth herein is found to have been false or misleading in any material respect as of the time when made; (d) Borrower's liquidation, termination, dissolution or ceasing to carry on any substantial part of its current business; (e) The consummation of any Business Combination Transaction, as defined in Section 6.5(e) of the Merger Agreement. (f) commencement by Borrower of a voluntary proceeding seeking relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law, or seeking appointment of a trustee, receiver, liquidator or other similar official for it or any substantial part of its assets; or its consent to any of the foregoing in an involuntary proceeding against it; or Borrower shall generally not be paying its debts as they become due or admit in writing its inability to do so; or an assignment for the benefit of, or the offering to or entering into by Borrower of any composition, extension, reorganization or other agreement or arrangement with, its creditors; or (g) commencement of an involuntary proceeding against Borrower seeking relief with respect to it or its debts under any bankruptcy, insolvency or other similar law, or seeking appointment of a trustee, receiver, liquidator or other similar official for it or any substantial part of its assets, which proceeding is not dismissed or stayed within sixty (60) days. "Line of Credit Note" means the note executed and delivered by Borrower to Lender in the form of Exhibit A hereof, made to evidence the Loan. "Loan" has the meaning given in Section 2(a) hereof. SCHEDULE II ----------- CLOSING AGENDA -------------- $1,500,000 Loan from Lernout & Hauspie Speech Products USA, Inc. to Kurzweil Applied Intelligence, Inc. Closing Date: April __, 1997
Responsible Document Party -------- ----- 1. Loan Agreement BRF&G 2. Line of Credit Note BRF&G 3. Security Agreement BRF&G 4. Patent Collateral Assignment and Security Agreement BRF&G 5. Trademark Collateral Assignment and Security Agreement BRF&G 6. Copyright Security Agreement BRF&G 7. UCC financing statements BRF&G 8. Stock Warrant BRF&G 9. Casualty and Liability Insurance Certificates, showing Lender as Borrower loss payee and additional insured
EX-10.3 5 COMMON STOCK WARRANT THE TRANSFER OF THIS WARRANT IS SUBJECT TO RESALE RESTRICTIONS UNDER THE SECURITIES ACT OF 1933, AS AMENDED AND APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED WITHOUT REGISTRATION OR AN EXEMPTION THEREFROM COMMON STOCK WARRANT To Purchase 185,000 Shares of Common Stock of Kurzweil Applied Intelligence, Inc. April 14, 1997 THIS CERTIFIES THAT, in consideration for the commitment of Lernout & Hauspie Speech Products USA, Inc. ("L&H USA"), a Delaware corporation and wholly owned subsidiary of Lernout & Hauspie Speech Products N.V., a Belgian corporation (said parent corporation being referred to herein as "L&H") to lend up to $1,500,000 to Kurzweil Applied Intelligence, Inc. (the "Company"), a Delaware corporation, pursuant to a Loan Agreement (the "Loan Agreement") of even date herewith between L&H USA and the Company, L&H USA 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 Eighty-Five Thousand (185,000) fully paid and nonassessable shares of the Company's common stock $.01 par value, at a price of $3.21 per share of common stock. 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; provided, however, that the holder's right to exercise this Warrant shall expire immediately upon the failure of L&H USA to make the loan as required under the Loan Agreement and the termination by the Company of that certain Agreement and Plan of Merger dated the date hereof among the Company, L&H and a wholly owned subsidiary of L&H (the "Merger Agreement"), pursuant to Section 6.3 of the Merger Agreement; and provided further that the Holder may not exercise this Warrant for so long as L&H USA is in default of its obligation to loan funds in accordance with the terms of the Loan Agreement and such default is continuing. As used herein "Expiration Date" shall mean April 14, 2002 or the Effective Date (as defined under the Merger Agreement). (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 -1- 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 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. 2. Issuance of Shares. ------------------- The Company agrees that the shares issuable under this Warrant 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 the shares paid for, 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 issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized and issued, fully paid, nonassessable, 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 2 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. (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 3 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 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 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 4 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. If, in the opinion of 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 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, as amended (the "Securities Act") (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 (the "Common Shares"), 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 5 the Warrants or such shares by the holders thereof, or to register the issuance by the Company of shares upon the exercise of Warrants, under the Securities Act (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 no earlier than August 15, 1997 and no later than 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 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 6 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 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; 7 (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 (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. 8 (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, 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 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 common stock the Warrantholder will purchase pursuant to such conversion and (ii) a place and date 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. 9 (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; the reported closing price of the common stock on such exchange or by the Nasdaq National Market 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, and bid and asked prices therefor in the over-the-counter market are reported by the Nasdaq 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 if the common stock is not so listed or admitted to unlisted trading privileges, or reported on the Nasdaq National Market, 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. 10 10. Lost Warrants or Stock Certificates. ------------------------------------ The Company covenants to the holder hereof that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant or any stock certificate issued upon exercise hereof and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 11 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 April 14, 1997. KURZWEIL APPLIED INTELLIGENCE, INC. By --------------------------------------- 12 EXERCISE FORM (TO BE SIGNED ONLY UPON EXERCISE OF WARRANT) KURZWEIL APPLIED INTELLIGENCE, INC. The undersigned, the holder of the attached 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 ______________ _________. LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. Dated: By: --------------------------------- ---------------------------------- (Address) (City - State - Zip) 13 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 attached 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. Dated: LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. By: ----------------------------------- In the presence of: - ------------------------------ - ------------------------------ 14 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 attached 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) EX-10.4 6 LINE OF CREDIT NOTE LINE OF CREDIT NOTE $1,500,000.00 Boston, Massachusetts April 14, 1997 FOR VALUE RECEIVED, the undersigned KURZWEIL APPLIED INTELLIGENCE, INC. a Delaware corporation ("Maker"), hereby promises to pay to the order of LERNOUT & HAUSPIE SPEECH PRODUCTS USA, INC., a Delaware corporation, at its place of business at 20 Burlington Mall Road, Burlington, Massachusetts 01803 ("Lender"), the sum of ONE MILLION FIVE HUNDRED THOUSAND DOLLARS ($1,500,000.00), or so much as may have been advanced to Maker as provided in that certain Loan Agreement (the "Loan Agreement") dated as of the date hereof between Maker and Lender, together with interest on the unpaid principal amount from time to time outstanding prior to demand at a fixed rate per annum equal to the Prime Rate in effect as of the date hereof. Prior to the occurrence of an Event of Default, as defined in the Loan Agreement, interest shall accrue but shall not be payable currently. All outstanding principal and interest shall be due and payable in full on October 31, 1997. After the occurrence and during the continuance of an Event of Default, (a) principal outstanding hereunder shall bear interest at a fixed rate equal to the sum of the Prime Rate in effect as of the date hereof plus three percent (3%) per annum (the "Default Rate of Interest"), and (b) the Lender shall be entitled to accelerate all outstanding principal and interest due hereunder and demand immediate payment in full of the same. Interest and fees shall be calculated on the basis of a 360-day year times the actual number of days elapsed. "Prime Rate," as used herein, shall mean for any day the highest "prime rate" published in The Wall Street Journal under the heading "Money Rates" on such day (or on the next day on which The Wall Street Journal is published). In no event shall interest payable hereunder exceed the highest rate permitted by applicable law. To the extent any interest received by Lender exceeds the maximum amount permitted, such payment shall be credited to principal, and any excess remaining after full payment of principal shall be refunded to Maker. This Note evidences borrowings under the Loan Agreement and is secured by and entitled to the benefits of the provisions of the Loan Agreement and any other instruments or documents executed in connection therewith. The principal of this Note is subject to prepayment in full or in part at any time without premium or penalty. Maker and all guarantors and endorsers hereby waive presentment, demand, notice, protest, and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note, and assent to extensions of the time of payment or forbearance or other indulgence without notice. No delay or omission of Lender in exercising any right or remedy hereunder shall constitute a waiver of any such right or remedy. Acceptance by Lender of any payment after demand shall not be deemed a waiver of such demand. A waiver on one occasion shall not operate as a bar to or waiver of any such right or remedy on any future occasion. Executed as an instrument under seal as of the date first above written. WITNESS: KURZWEIL APPLIED INTELLIGENCE, INC. /s/ By: /s/ Thomas E. Brew Jr. - ----------------------------- -------------------------------- Name: Thomas E. Brew Jr. Title: President & CEO -2- EX-10.5 7 SECURITY AGREEMENTS SECURITY AGREEMENT SECURITY AGREEMENT made by KURZWEIL APPLIED INTELLIGENCE, INC. (the "Debtor") in favor of LERNOUT & HAUSPIE SPEECH PRODUCTS USA, INC. (the "Secured Party"). In consideration of the agreement of Secured Party to extend credit or other financial accommodations to the Debtor, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Debtor hereby agrees for the benefit of Secured Party as follows: 1. Grant of Security Interest. As collateral security for the payment and performance when due of the Obligations (defined below), the Debtor hereby collaterally assigns, mortgages, and pledges to Secured Party, and hereby grants to Secured Party a security interest in, all of the Debtor's right, title and interest in, to and under the Collateral (defined below). "Collateral" means all the Debtor's present and future right, title and interest in and to any of the following property, wherever located and whether now owned or hereafter acquired: All of the Debtor's tangible and intangible personal property, including without limitation, all inventory, equipment and other goods, all accounts receivable, notes, drafts, acceptances, instruments and documents, chattel paper, general intangibles, deposit accounts, books and records, and all cash and non-cash proceeds of the foregoing in whatever form received, including without limitation insurance proceeds, but excluding rights (other than payment rights) under agreements to the extent that the inclusion of such rights would cause a default by the Borrower under the terms of any agreement. Any of the foregoing terms which are specifically defined in the Uniform Commercial Code as in effect in the Commonwealth of Massachusetts shall have the meanings given therein. "Obligations" means any and all payment and performance obligations of the Debtor to Secured Party, now existing or hereafter arising, direct or indirect, absolute or contingent, due or to become due, liquidated or unliquidated, arising under that certain Loan Agreement between Debtor and Secured Party dated as of the date hereof (the "Loan Agreement"), and that certain $1,500,000 Line of Credit Note executed by Debtor to the order of Secured Party in connection therewith, and each other document executed and delivered to secure such obligations. 2. Secured Party's Rights and Obligations. Debtor shall remain liable under all accounts receivable, instruments and documents and general intangibles. Secured Party shall not have any obligation or liability under any accounts receivable, instruments and documents or general intangibles by reason of this Security Agreement or the exercise of Secured Party's rights and remedies hereunder, nor shall Secured Party be required to perform the Debtor's obligations pursuant thereto. Secured Party shall have no obligation to inquire as to the sufficiency of any payment received by it on account of any of Debtor's accounts receivable or to take any action to collect or enforce the payment of any account receivable. 3. Further Assurances. Debtor will join with Secured Party in executing such UCC financing statements as Secured Party may reasonably request. At Secured Party's request from time to time, the Debtor will execute and deliver any and all such further instruments and documents and take such further actions as Secured Party may reasonably deem desirable in obtaining the full benefits of this Security Agreement. The Debtor also hereby authorizes Secured Party to execute on behalf of the Debtor and file UCC financing or continuation statements with appropriate jurisdictions in order to perfect the security interests granted herein. 4. Events of Default. The occurrence of any Event of Default as defined in the Loan Agreement shall constitute an Event of Default hereunder. 5. Remedies Upon Default. Upon the occurrence and during the continuance of any Event of Default, and subject to the terms of the Loan Agreement: (a) Secured Party may declare all Obligations secured hereby immediately due and payable and shall have all of the rights and remedies of a secured party under the Uniform Commercial Code as now in effect in the Commonwealth of Massachusetts or under other applicable law. (b) Secured Party may notify Debtor's account or contract debtors (or other obligors whose obligations to Debtor secure this agreement) of Secured Party's security interest and that such account or contract debtors are to make payments directly to Secured Party. Secured Party may send this notice in Debtor's name or in Secured Party's name, and at Secured Party's request Debtor will join in Secured Party's notice, provide written confirmation of Secured Party's security interest and request that payment be sent to Secured Party. Secured Party may enforce this obligation by specific performance. Secured Party may collect all amounts due on the accounts and accounts receivable. Upon and after notification by Secured Party to Debtor, Debtor shall hold any proceeds and collections of any of the collateral in trust for Secured Party and shall not commingle such proceeds or collections with any other of Debtor's funds, and Debtor shall deliver all such proceeds to Secured Party immediately upon Debtor's receipt thereof in the identical form received and duly endorsed or assigned to Secured Party. (c) At the request of Secured Party, the Debtor shall cause the Collateral, or such portion of the Collateral as Secured Party may direct, to be assembled for Secured Party at such location (including, without limitation, Debtor's business address) as Secured Party may request. Secured Party will give to the Debtor reasonable notice of the time and place of any public sale of Collateral or of the time after which any private sale or other intended disposition thereof is to be made. Such requirement of reasonable notice shall be met if such notice is delivered to the address of the Debtor set forth in this Agreement at least fifteen (15) days before the time of the proposed sale or disposition. Any such sale may take place from Debtor's location or such other location as Secured Party may designate. Debtor shall remain liable for any deficiency in payment of the Obligations after any such sale. (d) Notwithstanding the foregoing, Secured Party shall forbear from the exercise of its rights to foreclose or otherwise realize upon or take possession of or use Debtor's intellectual -2- property (including without limitation, patents, trademarks and copyrights) until the earlier of ninety (90) days after the occurrence of an Event of Default or January 31, 1998, so long as (i) there occurs and is continuing no Event of Default of the type described in subsections (f) or (g) of the definition of such term as set forth in the Loan Agreement, and (ii) Debtor does not take any action to contest the validity or priority of Secured Party's lien and security interest in such intellectual property, or any other collateral. Debtor hereby irrevocably appoints Secured Party as its true and lawful attorney-in-fact with full power of substitution to take any of the foregoing actions in the name of the Debtor or Secured Party to carry out the terms of this Agreement and to protect, enforce, preserve or perfect Secured Party's rights hereunder. Such power of attorney is irrevocable and shall be deemed to be coupled with an interest. 6. Miscellaneous. Expenses of enforcing Secured Party's rights hereunder after and during the continuance of an Event of Default including, but not limited to, preparation for sale, selling or the like and Secured Party's reasonable attorneys' fees and other expenses shall be payable by Debtor and shall be secured hereby. None of the terms or provisions of this Agreement may be waived, altered, modified or amended except by an instrument in writing, duly executed by Secured Party and Debtor. Secured Party's rights and remedies hereunder or under any other agreement or instrument shall be cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. This Agreement shall be binding on and inure to the benefit of the respective successors and assigns of the Debtor and Secured Party. This Agreement shall be governed by the laws of the Commonwealth of Massachusetts. EXECUTED an instrument under seal as of April 14, 1997. KURZWEIL APPLIED INTELLIGENCE, INC. By: ------------------------------- Name: Title: UCC financing statements to be filed in: Secretary of State, Massachusetts Town of Waltham, Massachusetts Secretary of State, Virginia Fairfax County, Virginia -3- PATENT SECURITY AGREEMENT ------------------------- AGREEMENT dated as of April 14, 1997 made by KURZWEIL APPLIED INTELLIGENCE, INC., a Delaware corporation with its chief executive office located at 411 Waverley Oaks Road, Waltham, Massachusetts 02154 ("Borrower"), in favor of LERNOUT & HAUSPIE SPEECH PRODUCTS USA, INC., a Delaware corporation with a place of business at 20 Burlington Mall Road, Burlington, Massachusetts 01803, and its successors, assigns, and other legal representatives ("Secured Party"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Borrower and Secured Party are parties to a Loan Agreement, dated as of April 14, 1997 (the "Loan Agreement"), and certain agreements, documents and instruments entered into pursuant thereto, (collectively, with the Loan Agreement, the "Loan Documents"), pursuant to which Secured Party has agreed to make certain loans to Borrower; and WHEREAS, Secured Party's willingness to enter into the Loan Documents and make the loans and credit accommodations available thereunder is subject to the condition, among others, that Borrower execute and deliver this Patent Security Agreement; NOW, THEREFORE, in consideration of the premises and for one dollar ($1.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in addition to, and not in limitation of, any rights of the Secured Party under the Loan Documents, Borrower hereby agrees for the benefit of Secured Party as follows: 1. DEFINITIONS. ------------ 1.1 All capitalized terms used herein and not otherwise defined herein shall have the respective meanings provided therefore in the Loan Agreement. In addition, the following terms shall have the meanings set forth in this Section 1 or elsewhere in this Security Agreement referred to below: "PTO" shall mean the United States Patent and Trademark Office. "Patents" shall mean all of the following now or hereafter owned by the Borrower: (a) all letters patent of the United States or any other country, and all applications for letters patent of the United States or any other country; (b) all re-issues, continuations, divisions, continuations-in-part, renewals or extensions thereof; 1 (c) the inventions disclosed or claimed therein, including the right to make, use, practice and/or sell (or license or otherwise transfer or dispose of) the inventions disclosed or claimed therein; and (d) the right (but not the obligation) to make and prosecute applications for such Patents. Patents shall include but not be limited to those set forth on Schedule A attached hereto. "Patent Collateral" shall mean all of the Borrower's right, title and interest in and to all of the Patents, the Patent License Rights, and the Patent Rights, and all additions, improvements, and accessions to, all substitutions for and replacements of, and all products and Proceeds (including insurance proceeds) of any and all of the foregoing, and all books and records and technical information and data describing or used in connection with any and all such rights, interests, assets or property. "Patent License Rights" shall mean any and all past, present or future rights and interests of the Borrower pursuant to any and all past, present and future licensing agreements in favor of the Borrower, or to which the Borrower is a party, pertaining to any Patents or Patent Rights, owned or used by third parties in the past, present or future, including the right to enforce, sue and recover for, any past, present or future breach or violation of any such agreements but only to the extent that the inclusion thereof in this Agreement does not and will not cause a default under the terms of any agreement (except that all payment rights of Borrower shall be included in this Agreement). "Patent Rights" shall mean any and all past, present or future rights in, to and associated with the Patents throughout the world, whether arising under federal law, state law, common law, foreign law, or otherwise, including but not limited to the following: all such rights arising out of or associated with the Patents; the right (but not the obligation) to register claims under any federal, state or foreign patent law or regulation; the right (but not the obligation) to sue or bring opposition or bring cancellation proceedings for any and all past, present and future infringements of or any other damages or injury to the Patents or the Patent Rights, and the rights to damages or profits due or accrued arising out of or in connection with any such past, present or future infringement, damage or injury; and the Patent License Rights. "Proceeds" shall mean any consideration received from the sale, exchange, license, lease or other disposition or transfer of any right, interest, asset or property which constitutes Patent Collateral, any value received as a consequence of the ownership, possession, use or practice of any Patent Collateral, and any payment received from any insurer or other person or entity as a result of the destruction or the loss, theft or other involuntary conversion, of whatever nature, of any right, interest, asset or property which constitutes Patent Collateral. 2 2. GRANT OF SECURITY; COLLATERAL ASSIGNMENT. ----------------------------------------- 2.1 Grant of Security Interest. As collateral security for the complete and timely performance and satisfaction of all Obligations (as defined in the Security Agreement from Borrower to Secured Party dated April 14, 1997), the Borrower hereby unconditionally grants to Secured Party, a continuing security interest in and lien on the Patent Collateral, and pledges, mortgages and hypothecates the Patent Collateral to Secured Party. 2.2 Supplemental to Loan Documents. The parties expressly acknowledge and agree that they have executed and delivered the Loan Documents pursuant to which the Borrower unconditionally granted to Secured Party, a continuing security interest in and lien on the Collateral (including the Patent Collateral). In no event shall this Security Agreement, or the recordation of this Security Agreement (or any document hereunder) with the PTO, or any other governmental or public office or agency, adversely affect or impair, in any way or to any extent, the other Loan Documents, the security interest of Secured Party in the Collateral (including the Patent Collateral) pursuant to the other Loan Documents, the attachment and perfection of such security interest under the Code, or the present or future rights and interests of Secured Party in and to the Collateral under or in connection with this Security Agreement, the other Loan Documents, and/or the Code. Any and all rights and interests of Secured Party in and to the Patent Collateral (and any and all obligations of the Borrower with respect to the Patent Collateral) provided herein, or arising hereunder or in connection herewith, shall only supplement and be cumulative and in addition to the rights and interests of Secured Party (and the obligations of the Borrower) in, to or with respect to the Collateral (including the Patent Collateral) provided in or arising under or in connection with the other Loan Documents. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER. The Borrower represents and warrants to, and covenants and agrees with, Secured Party, as follows: 3.1 Title. The Borrower will, subject to its reasonable business judgment, take all actions as it shall determine to defend its right, title and interests in and to the Patents and the Patent Collateral against claims of any third parties. 3.2 Maintenance of Patent Collateral. The Borrower shall take such actions (including but not limited to institution and maintenance of suits, proceedings or actions) it determines to be appropriate to maintain, protect, preserve, care for and enforce the Patent Collateral. 3.3 No Infringements. The Borrower shall use reasonable efforts consistent with past practices to protect against any infringement or unauthorized or improper use of the Patents. In the event any such infringement or unauthorized or improper use by any third party has been reasonably established by the Borrower, the Borrower shall promptly notify Secured Party. 3 3.4 Filing for Perfection of Interest. Borrower acknowledges that Secured Party may cause this Security Agreement to be recorded with the PTO. 4. REMEDIES UPON AN EVENT OF DEFAULT. During the continuance of an Event of Default: (a) Secured Party may declare all Obligations secured hereby immediately due and payable and shall have all of the rights and remedies of a secured party under the Uniform Commercial Code as now in effect in the Commonwealth of Massachusetts or under other applicable law. (b) Secured Party may notify any obligors with respect to the Patent Collateral of Secured Party's security interest and that such obligors are to make payments directly to Secured Party. Secured Party may send this notice in Borrower's name or in Secured Party's name, and at Secured Party's request Borrower will join in Secured Party's notice, provide written confirmation of Secured Party's security interest and request that payment be sent to Secured Party. Secured Party may enforce this obligation by specific performance. Secured Party may collect all amounts due from such obligors. Upon and after notification by Secured Party to Borrower, Borrower shall hold any proceeds and collections of any of the Patent Collateral in trust for Secured Party and shall not commingle such proceeds or collections with any other of Borrower's funds, and Borrower shall deliver all such proceeds to Secured Party immediately upon Borrower's receipt thereof in the identical form received and duly endorsed or assigned to Secured Party. (c) Secured Party will give to the Borrower reasonable notice of the time and place of any public sale of Patent Collateral or of the time after which any private sale or other intended disposition thereof is to be made. Such requirement of reasonable notice shall be met if such notice is delivered to the address of the Borrower set forth in this Agreement at least fifteen (15) days before the time of the proposed sale or disposition. Any such sale may take place from Borrower's location or such other location as Secured Party may designate. Borrower shall remain liable for any deficiency in payment of the Obligations after any such sale. (d) Notwithstanding the foregoing, Secured Party shall forbear from the exercise of its rights to foreclose or otherwise realize upon or take possession of or use Borrower's Patent Collateral until the earlier of ninety (90) days after the occurrence of an Event of Default or January 31, 1998, so long as (i) there occurs and is continuing no Event of Default of the type described in subsections (f) or (g) of the definition of such term as set forth in the Loan Agreement, and (ii) Borrower does not take any action to contest the validity or priority of Secured Party's lien and security interest in such intellectual property, or any other collateral. Borrower hereby irrevocably appoints Secured Party as its true and lawful attorney-in-fact with full power of substitution to take any of the foregoing actions in the name of the Borrower or Secured Party to carry out the terms of this Agreement and to protect, enforce, preserve or perfect Secured Party's rights hereunder. Such power of attorney is irrevocable and shall be deemed to be coupled with an interest. 4 (e) No Obligation of Secured Party. Nothing herein shall be construed as obligating Secured Party to take any of the foregoing actions at any time. 5. LIABILITIES, INDEMNITY AND COSTS. --------------------------------- 5.1 Liability for Uses of Patent Collateral. The Borrower shall be liable for any and all uses or misuses of and the practice, manufacture, sales (or other transfers or dispositions) of any of the Patent Collateral by the Borrower and its affiliates. The Borrower shall also be exclusively liable for any claim, suit, loss, damage, expense or liability arising out of or in connection with the fault, negligence, acts or omissions of the Borrower (regardless of whether such fault, negligence, acts or omissions occurred or occur prior to or after such license termination). 5.2 License Agreement Obligations. Nothing in this Security Agreement shall relieve the Borrower from any performance of any covenant, agreement or obligation of the Borrower under any license agreement now or hereafter in effect licensing any part of the Patent Collateral, or from any liability to any licensee or licensor under any such license agreement or to any other party, or shall impose any liability on Secured Party for any act or omission of the Borrower in connection with any such license agreement. 6. POWER OF ATTORNEY. The provisions of this Section 6 shall be subject in all events to the terms and conditions of the Loan Agreement. 6.1 Grant. The Borrower hereby grants to Secured Party, and any officer or agent of Secured Party as Secured Party may designate in its sole discretion, a power of attorney, thereby constituting and appointing Secured Party (and Secured Party's designee) its true and lawful attorney-in-law and attorney-in-fact, effective upon the occurrence and during the continuation of an Event of Default, for the purpose of assigning, selling, licensing or otherwise transferring or disposing of all right, title and interest of the Borrower in and to any of the Patent Collateral in accordance with the terms hereof. The Borrower hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. 6.2 Irrevocable. The foregoing power of attorney is coupled with an interest and is irrevocable until this Security Agreement shall terminate. 7. General Provisions. ------------------- 7.1 Loan Agreement Controls. This Security Agreement is supplemental to the Loan Agreement, the terms of which, including, without limitation, the notice and governing law provisions, consent to service of process and jurisdiction and prohibition on non-written waivers, the Borrower expressly accepts, confirms and acknowledges are incorporated herein by reference. 5 In the event of any irreconcilable conflict between the provisions of this Security Agreement and the Loan Agreement the provisions of the Loan Agreement shall control. 7.2 Specific Enforcement. Due to the unique nature of the Patent Collateral, and in order to preserve its value, the Borrower agrees that the Borrower's agreements, duties and obligations under this Security Agreement shall be subject to specific enforcement and other appropriate equitable orders and remedies. IN WITNESS WHEREOF, Borrower has caused this Security Agreement to be executed by its duly authorized officer as of the date first written above. WITNESS: KURZWEIL APPLIED INTELLIGENCE, INC. By: - ------------------------------------- ------------------------------- Name: Title: STATE: COUNTY: ____________ __, 1997 Then personally appeared the above-named ______________ and stated that he is a duly authorized _______________ of Kurzweil Applied Intelligence, Inc. (the "Corporation") and acknowledged the foregoing instrument to be his free act and deed, and the free act and deed of said Corporation, before me, ------------------------------- Notary Public My Commission Expires: 6 SCHEDULE A TO PATENT COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT PATENTS ------- See Attached. 7 TRADEMARK SECURITY AGREEMENT ---------------------------- AGREEMENT dated as of April 14, 1997 made by KURZWEIL APPLIED INTELLIGENCE, INC., a Delaware corporation with chief executive office at 411 Waverley Oaks Road, Waltham, Massachusetts 02154 ("Borrower"), in favor of LERNOUT & HAUSPIE SPEECH PRODUCTS USA, INC., a Delaware corporation with a place of business at 20 Burlington Mall Road, Burlington, Massachusetts 01803, and its successors, assigns, and other legal representatives ("Secured Party"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Borrower and Secured Party are parties to a Loan Agreement, dated as of April 14, 1997 (the "Loan Agreement"), and certain supplements, agreements and instruments entered into pursuant thereto as such may be amended, modified or supplemented from time to time (collectively, with the Loan Agreement, the "Loan Documents"), pursuant to which Secured Party may make certain loans to Borrower; and WHEREAS, Secured Party's willingness to enter into the Loan Documents and make the loans and credit accommodations available thereunder is subject to the condition, among others, that Borrower execute and deliver this Trademark Security Agreement; NOW, THEREFORE, in consideration of the premises and for one dollar ($1.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in addition to, and not in limitation of, any rights of the Secured Party under the Loan Documents, Borrower hereby agrees for the benefit of Secured Party as follows: 1. DEFINITIONS. ------------ 1.1 All capitalized terms used herein shall have the respective meanings provided therefor in the Loan Documents. In addition, the following terms shall have the meanings set forth in this Section 1 or elsewhere in this Security Agreement referred to below: "Proceeds" shall mean any consideration received from the sale, exchange, license, lease or other transfer or disposition of any right, interest, asset or property which constitutes Trademark Collateral, any value received as a consequence of the ownership, possession, or use of any Trademark Collateral, and any payment received from any insurer or other person or entity as a result of the destruction, loss, theft or other involuntary conversion of whatever nature of any right, interest, asset or property which constitutes Trademark Collateral. "PTO" shall mean the United States Patent and Trademark Office. "Trademarks" shall mean all of the trademarks, service marks, designs, logos, indicia, trade names, corporate names, company names, business names, fictitious business names, trade styles, elements of package or trade dress, and/or other source and/or -1- product or service identifiers, and general intangibles of like nature, used or associated with or appurtenant to the products, services and business of the Borrower, which (i) are set forth on Schedule A attached hereto, or (ii) have been adopted, acquired, owned, held or used by the Borrower and are now owned, held or used by the Borrower, in the Borrower's business, or with the Borrower's products and services, or in which the Borrower has any right, title or interest, or (iii) are in the future adopted, acquired, owned, held and/or used by the Borrower in the Borrower's business or with the Borrower's products and services, or in which the Borrower in the future acquires any right, title or interest. "Trademark Collateral" shall mean all of the Borrower's right, title and interest (to the extent Borrower has any such right, title or interest) in and to all of the Trademarks, the Trademark Registrations, the Trademark Rights, and all additions, improvements and accessions to, substitutions for, replacements of, and all products and Proceeds (including insurance proceeds) of any and all of the foregoing provided, however, that Trademark Collateral shall exclude all rights of Borrower (except payment rights) to the extent that the inclusion of such rights would cause a default by Borrower under the terms of any agreement. "Trademark Registrations" shall mean all past, present or future federal, state, local and foreign registrations of the Trademarks (and all renewals and extensions of such registrations), all past, present and future applications for any such registrations of the Trademarks (and any such registrations thereof upon approval of such applications), together with the right (but not the obligation) to apply for such registrations (and prosecute such applications), and to take any and all actions necessary or appropriate to maintain such registrations in effect and/or renew and extend such registrations. "Trademark Rights" shall mean any and all past, present or future rights in, to and associated with the Trademarks throughout the world, whether arising under federal law, state law, common law, foreign law or otherwise, including but not limited to the following: all such rights arising out of or associated with the Trademark Registrations; the right (but not the obligation) to register claims under any state, federal or foreign trademark law or regulation; the right (but not the obligation) to sue or bring opposition or cancellation proceedings for any and all past, present and future infringements or dilution of or any other damages or injury to the Trademarks, the Trademark Rights, and the rights to damages or profits due or accrued arising out of or in connection with any such past, present or future infringement, dilution, damage or injury. "Use" of any Trademark shall include all uses of such Trademark by, for or in connection with the Borrower or its business or for the direct or indirect benefit of the Borrower or its business, including but not limited to all such uses by the Borrower itself, by any of the affiliates of the Borrower, or by any licensee or contractor of the Borrower. -2- 2. GRANT OF SECURITY; COLLATERAL ASSIGNMENT. ----------------------------------------- 2.1 Grant of Security Interest. As collateral security for the complete and timely payment, performance and satisfaction of all Obligations (as defined in the Security Agreement from Borrower to Secured Party dated April 14, 1997), the Borrower hereby unconditionally grants to the Secured Party, a continuing security interest in and lien on the Trademark Collateral, and pledges, mortgages and hypothecates (but does not transfer title to) the Trademark Collateral to the Secured Party. 2.2 Supplemental to Loan Documents. The parties expressly acknowledge and agree that the Borrower has delivered the Loan Documents pursuant to which the Borrower unconditionally granted to the Secured Party a continuing security interest in and lien on the Collateral (including the Trademark Collateral). In no event shall this Security Agreement, or the recordation of this Security Agreement (or any document hereunder) with the PTO, adversely affect or impair, in any way or to any extent, the Loan Documents, the security interest of the Secured Party in the Collateral (including the Trademark Collateral) pursuant to the Loan Documents, the attachment and perfection of such security interest under the Code, or the present or future rights and interests of the Secured Party in and to the Collateral under or in connection with the Loan Documents, this Security Agreement and/or the Code. Any and all rights and interests of the Secured Party in and to the Trademark Collateral (and any and all obligations of the Borrower with respect to the Trademark Collateral) provided herein, or arising hereunder or in connection herewith, shall only supplement and be cumulative and in addition to the rights and interests of the Secured Party (and the obligations of the Borrower) in, to or with respect to the Collateral (including the Trademark Collateral) provided in or arising under or in connection with the other Loan Documents. 3. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to, and covenants and agrees with, Secured Party, as follows: 3.1 Title. The Borrower will subject to its reasonable business judgment, take all actions as it shall determine to defend its right, title and interests in and to the Trademarks and the Trademark Collateral against claims of any third parties. 3.2 Maintenance of Trademark Collateral. The Borrower shall take such actions (including but not limited to institution and maintenance of suits, proceedings or actions) as it determines to be appropriate to maintain, protect, preserve, care properly for and enforce the Trademarks and the Trademark Registrations, Trademark Rights and to preserve the Borrower's rights in the Trademarks. 3.3 No Infringements. To the best of the Borrower's knowledge and belief, there is at present no material infringement or unauthorized or improper use of the Trademarks or the Trademark Registrations or the Trademark Rights related thereto. In the event any such infringement or unauthorized or improper use by any third party has been reasonably established -3- by the Borrower, the Borrower shall promptly notify the Secured Party and shall have the right to sue and recover therefor and to retain any and all damage so recovered or obtained. 4. RIGHTS OF AND LIMITATIONS ON SECURED PARTY. ------------------------------------------- 4.1 Borrower to Remain Liable. It is expressly agreed by Borrower that Borrower shall remain liable to observe and perform all the conditions and obligations to be observed and performed by it relating to the Trademark Collateral. Secured Party shall not have any obligation or liability under or in relation to the Trademark Collateral by reason of the execution and delivery of this Security Agreement and Secured Party's rights hereunder, or the grant of a security interest by Borrower to Secured Party of, or the receipt in accordance with this Agreement by Secured Party of, any payment relating to any Trademarks, nor shall Secured Party be required or obligated in any manner to perform or fulfill any of the obligations of Borrower relating to the Trademark Collateral or be liable to any party on account of Borrower's use of the Trademark Collateral. 4.2 Specific Enforcement. Due to the unique nature of the Trademark Collateral, and in order to preserve its value, the Borrower agrees that the Borrower's agreements, duties and obligations under this Security Agreement shall be subject to specific enforcement and other appropriate equitable orders and remedies. 5. REMEDIES UPON AN EVENT OF DEFAULT. During the continuance of an Event of Default: (a) Secured Party may declare all Obligations secured hereby immediately due and payable and shall have all of the rights and remedies of a secured party under the Uniform Commercial Code as now in effect in the Commonwealth of Massachusetts or under other applicable law. (b) Secured Party may notify any obligors with respect to the Trademark Collateral of Secured Party's security interest and that such obligors are to make payments directly to Secured Party. Secured Party may send this notice in Borrower's name or in Secured Party's name, and at Secured Party's request Borrower will join in Secured Party's notice, provide written confirmation of Secured Party's security interest and request that payment be sent to Secured Party. Secured Party may enforce this obligation by specific performance. Secured Party may collect all amounts due from such obligors. Upon and after notification by Secured Party to Borrower, Borrower shall hold any proceeds and collections of any of the Trademark Collateral in trust for Secured Party and shall not commingle such proceeds or collections with any other of Borrower's funds, and Borrower shall deliver all such proceeds to Secured Party immediately upon Borrower's receipt thereof in the identical form received and duly endorsed or assigned to Secured Party. (c) Secured Party will give to the Borrower reasonable notice of the time and place of any public sale of Trademark Collateral or of the time after which any private sale or other intended disposition thereof is to be made. Such requirement of reasonable notice shall be met if -4- such notice is delivered to the address of the Borrower set forth in this Agreement at least fifteen (15) days before the time of the proposed sale or disposition. Any such sale may take place from Borrower's location or such other location as Secured Party may designate. Borrower shall remain liable for any deficiency in payment of the Obligations after any such sale. (d) Notwithstanding the foregoing, Secured Party shall forbear from the exercise of its rights to foreclose or otherwise realize upon or take possession of or use Borrower's Trademark Collateral until the earlier of ninety (90) days after the occurrence of an Event of Default or January 31, 1998, so long as (i) there occurs and is continuing no Event of Default of the type described in subsections (f) or (g) of the definition of such term as set forth in the Loan Agreement, and (ii) Borrower does not take any action to contest the validity or priority of Secured Party's lien and security interest in such intellectual property, or any other collateral. Borrower hereby irrevocably appoints Secured Party as its true and lawful attorney-in-fact with full power of substitution to take any of the foregoing actions in the name of the Borrower or Secured Party to carry out the terms of this Agreement and to protect, enforce, preserve or perfect Secured Party's rights hereunder. Such power of attorney is irrevocable and shall be deemed to be coupled with an interest. 6. GENERAL PROVISIONS. This Security Agreement is supplemental to the Loan Agreement, the terms of which, including, without limitation, the notice and governing law provisions, consent to service of process and jurisdiction and prohibitions on non-written waivers, the Borrower expressly accepts, confirms and acknowledges are incorporated herein by reference. In the event of any irreconcilable conflict between the provisions of this Security Agreement and the Loan Agreement, the provisions of the Loan Agreement shall govern. IN WITNESS WHEREOF, Borrower has caused this Security Agreement to be executed by its duly authorized officer as of the date first written above. WITNESS: KURZWEIL APPLIED INTELLIGENCE, INC. By: - ---------------------------------- -------------------------------- Name: ------------------------- Title: ------------------------- -5- STATE: COUNTY: April __, 1997 Then personally appeared the above-named ______________ and stated that he is a duly authorized _______________ of Kurzweil Applied Intelligence, Inc. (the "Corporation") and acknowledged the foregoing instrument to be his free act and deed, and the free act and deed of said Corporation, before me, ------------------------------------- Notary Public My Commission Expires: -6- SCHEDULE A TO TRADEMARK COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT TRADEMARKS, TRADEMARK REGISTRATION, ----------------------------------- SERVICE MARKS ------------- See Attached. -7- COPYRIGHT SECURITY AGREEMENT AGREEMENT dated as of April 14, 1997 made by KURZWEIL APPLIED INTELLIGENCE, INC., a Delaware corporation with its chief executive office located at 411 Waverley Oaks Road, Waltham, Massachusetts 02154 ("Borrower"), in favor of LERNOUT & HAUSPIE SPEECH PRODUCTS USA, INC., a Delaware corporation with a place of business at 20 Burlington Mall Road, Burlington, Massachusetts 01803, and its successors, assigns, and other legal representatives ("Secured Party"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Borrower and Secured Party are parties to a Loan Agreement, dated as of April 14, 1997, and certain agreements, documents and instruments entered into pursuant thereto, or in connection therewith, as may be amended, supplemented or modified from time to time (the "Loan Agreement"), pursuant to which Secured Party and Borrower have agreed to certain financial arrangements; and WHEREAS, Secured Party's willingness to make loans and provide credit accommodations pursuant to the Loan Agreement is subject to the condition, among others, that Borrower execute and deliver this Copyright Security Agreement; NOW THEREFORE, in consideration of the premises and for one dollar ($1.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in addition to, and not in limitation of, any rights of the Secured Party under the Loan Agreement, Borrower hereby agrees for the benefit of Secured Party as follows: 1. DEFINITIONS; RULES OF INTERPRETATION. ------------------------------------- 1.1. Definitions. All capitalized terms used herein and not otherwise defined herein shall have the respective meanings provided therefor in the Loan Agreement. In addition, the following terms shall have the meanings set forth in this Section 1 or elsewhere in this Agreement referred to below: "Agreement" shall mean this Copyright Security Agreement, as it may be amended or supplemented from time to time. "Copyright Collateral" shall mean all of the Borrower's right, title and interest in and to all of the Copyrights, the Copyright Registrations, the Copyright Rights, and all additions, improvements and accessions to, substitutions for, replacements of, and all products and Proceeds (including insurance proceeds) of any and all of the foregoing. Copyright Collateral does not include copies of copyrighted works held by the Borrower as inventory which is not characterized as spare parts inventory and does not include rights (other than payment rights) under agreements to the extent that the inclusion of such rights would cause a default by Borrower under the terms of any agreement. "Copyright Office" shall mean the United States Copyright Office. "Copyright Registrations" shall mean all past, present or future federal, state, local and foreign registrations, supplemental registrations and recordings of the Copyrights (and all renewals and extensions of such registrations and recordings), including all such registrations in the Copyright Office, all past, present and future applications for any such registrations and recordings of the Copyrights (and any such registrations and recordings thereof upon approval of such applications), together with the right (but not the obligation) to apply for such registrations and recordings (and prosecute such applications), and to take any and all actions necessary or appropriate to maintain such registrations and recordings in effect and/or to renew and extend such registrations and recordings. "Copyright Rights" shall mean any and all past, present or future rights in, to and associated with the Copyrights throughout the world, whether arising under federal law, state law, common law, foreign law, international treaty or convention, or otherwise, including but not limited to the following: all such rights arising out of or associated with the Copyright Registrations; the right (but not the obligation) to register claims under any state, federal or foreign copyright law or regulation; the right (but not the obligation) to sue or bring cancellation or other actions or proceedings for any and all past, present and future infringements of or any other damages or injury to the Copyrights or the Copyright Rights, and the rights to damages or profits due or accrued arising out of or in connection with any such past, present or future infringement, damage or injury. "Copyrights" shall mean all Copyright Rights, which (i) are set forth on Schedule A attached hereto, or (ii) are now owned by the Borrower, or in which the Borrower has any right, title or interest, or (iii) are hereafter acquired by the Borrower or in which the Borrower hereafter acquires any right, title or interest. "Loan Agreement" shall have the meaning given such term in the recitals hereto. "Proceeds" shall mean any consideration received from the sale, exchange, license, lease or other transfer or disposition of any right, interest, asset or property which constitutes Copyright Collateral, any value received as a consequence of the ownership, possession, or use of any Copyright Collateral, and any payment received from any insurer or other person or entity as a result of the destruction, loss, theft or other involuntary conversion of whatever nature of any right, interest, asset or property which constitutes Copyright Collateral. 1.2. UCC Terms. Unless otherwise defined herein or in the Loan Agreement, terms used in Article 9 of the Uniform Commercial Code of the Commonwealth of Massachusetts are used herein as therein defined. 1.3. Rules of Interpretation. All definitions (whether set forth herein or by reference) shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include," "includes" and "including" shall be deemed to be followed by the -2- phrase "without limitation" or the phrase "but not limited to" All reference herein to Sections, Exhibits and Schedules shall be deemed references to Sections of and Exhibits and Schedules to this Agreement unless the context otherwise requires. 2. GRANT OF SECURITY. 2.1. Grant of Security Interest. As collateral security for the complete and timely payment, performance and satisfaction of all Obligations (as defined in the Security Agreement from Borrower to Secured Party dated April 14, 1997), the Borrower hereby unconditionally grants to the Secured Party, a continuing security interest in and lien on the Copyright Collateral, and pledges, mortgages and hypothecates (but does not transfer title to) the Copyright Collateral to the Secured Party. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER. The Borrower represents and warrants to, and covenants and agrees with, the Secured Party, as follows: 3.1. Title. Except as set forth in the Loan Agreement, the Borrower is and will continue to be the sole and exclusive owner of the entire legal and beneficial right, title and interest in and to the Copyright Collateral, free and clear of any lien, charge, security interest or other encumbrance, except for the security interest and conditional assignment created by this Agreement, and the Loan Agreement, and except for liens and encumbrances explicitly permitted pursuant to the Loan Agreement. To the extent deemed necessary or appropriate by the Borrower in its reasonable business judgment, the Borrower will defend its right, title and interests in and to the Copyright Collateral against claims of any third parties. 3.2. Maintenance of Copyright Collateral. The Borrower shall take such actions (including but not limited to institution and maintenance of suits, proceedings or actions) as it determines to be appropriate (in its reasonable business judgment) to maintain protect, preserve, care properly for and enforce the Copyright Collateral. 3.3. No Abandonment. Except as is in the Borrower's reasonable business judgment, the Borrower shall not abandon or dedicate to the public any of the Copyrights or the Copyright Registrations or Copyright Rights related thereto, nor do any act nor omit to do any act if such act or omission is of a character that tends to cause or contribute to the abandonment or dedication to the public of any Copyright Collateral. 3.4. No Infringements. The Borrower shall use commercially reasonable efforts to protect against, and consistent with its past practices and reasonable business judgment shall take actions with respect to, infringements or unauthorized or improper uses with respect to the Copyright Collateral. In the event of any material infringements or unauthorized or improper uses of any such property of material value, the Borrower shall promptly notify the Secured Party and shall have the right to sue and recover therefor and to retain any and all damages so recovered or obtained. In the event the Borrower fails so to sue or bring legal action, the -3- Borrower shall notify the Secured Party within sixty (60) days after the date of original notice to the Secured Party. 3.5. Maintenance of Registrations. The Borrower, with counsel of its own choosing and at its expense, shall take actions which the Borrower in its reasonable business judgment determines are necessary and appropriate to preserve and maintain in full force and effect the Copyrights, Copyright Registrations and Copyright Rights. 3.6. Filings for Perfection of Interest. The Borrower acknowledges and agrees that a copy of this Agreement (or instruments executed and delivered pursuant hereto) may be filed by Secured Party and recorded with the Copyright Office with respect to the Borrower's Copyrights registered at present or in the future with the Copyright Office (or with respect to which registration applications are at present or in the future pending or filed with the Copyright Office). 4. ENFORCEMENT OF COPYRIGHT RIGHTS. -------------------------------- 4.1. In General. Except as otherwise provided in Section 4.2 hereof, the Borrower shall have the right as it deems appropriate to commence and prosecute in its own name, as real party in interest, for its own benefit and at its own expense, such suits, proceedings or other actions to restrain, prevent or recover for infringement, misuse, misappropriation, unfair competition, or other damage or injury as are in its reasonable business judgment necessary or appropriate to maintain, protect and enforce the Copyrights, the Copyright Registrations and the Copyright Rights. 4.2. Upon Event of Default. Upon the occurrence and during the continuation of an Event of Default: (a) Secured Party may declare all Obligations secured hereby immediately due and payable and shall have all of the rights and remedies of a secured party under the Uniform Commercial Code as now in effect in the Commonwealth of Massachusetts or under other applicable law. (b) Secured Party may notify any obligors with respect to the Copyright Collateral of Secured Party's security interest and that such obligors are to make payments directly to Secured Party. Secured Party may send this notice in Borrower's name or in Secured Party's name, and at Secured Party's request Borrower will join in Secured Party's notice, provide written confirmation of Secured Party's security interest and request that payment be sent to Secured Party. Secured Party may enforce this obligation by specific performance. Secured Party may collect all amounts due from such obligors. Upon and after notification by Secured Party to Borrower, Borrower shall hold any proceeds and collections of any of the Copyright Collateral in trust for Secured Party and shall not commingle such proceeds or collections with any other of Borrower's funds, and Borrower shall deliver all such proceeds to Secured Party immediately upon Borrower's receipt thereof in the identical form received and duly endorsed or assigned to Secured Party. -4- (c) Secured Party will give to the Borrower reasonable notice of the time and place of any public sale of Copyright Collateral or of the time after which any private sale or other intended disposition thereof is to be made. Such requirement of reasonable notice shall be met if such notice is delivered to the address of the Borrower set forth in this Agreement at least fifteen (15) days before the time of the proposed sale or disposition. Any such sale may take place from Borrower's location or such other location as Secured Party may designate. Borrower shall remain liable for any deficiency in payment of the Obligations after any such sale. (d) Notwithstanding the foregoing, Secured Party shall forbear from the exercise of its rights to foreclose or otherwise realize upon or take possession of or use Borrower's Copyright Collateral until the earlier of ninety (90) days after the occurrence of an Event of Default or January 31, 1998, so long as (i) there occurs and is continuing no Event of Default of the type described in subsections (f) or (g) of the definition of such term as set forth in the Loan Agreement, and (ii) Borrower does not take any action to contest the validity or priority of Secured Party's lien and security interest in such intellectual property, or any other collateral. Borrower hereby irrevocably appoints Secured Party as its true and lawful attorney-in-fact with full power of substitution to take any of the foregoing actions in the name of the Borrower or Secured Party to carry out the terms of this Agreement and to protect, enforce, preserve or perfect Secured Party's rights hereunder. Such power of attorney is irrevocable and shall be deemed to be coupled with an interest. 5. LIABILITIES ----------- Liability for Uses of Copyright Collateral. The Borrower shall be liable for any and all uses or misuses of any of the Copyright Collateral by itself and its affiliates. The Borrower shall also be exclusively liable for any claim, suit, loss, damage, expense or liability arising out of or in connection with the fault, negligence, acts or omissions of the Borrower (regardless of whether such fault, negligence, acts or omissions occurred or occur prior to or after termination). This Section 5 is for the purpose of establishing and allocating, as between the Borrower and the Secured Party, certain liabilities; it is not intended to create any affirmative obligations of the Borrower to the Secured Party other than those set forth elsewhere in this Agreement, and the Loan Agreement. 6. POWER OF ATTORNEY ----------------- 6.1. Grant. The Borrower hereby grants to the Secured Party, and any officer or agent of the Secured Party as the Secured Party may designate in its sole discretion, a power of attorney, thereby constituting and appointing the Secured Party (and the Secured Party's designee) its true and lawful attorney-in-law and attorney-in-fact, effective upon the occurrence and during the continuation of an Event of Default, for the purpose of assigning, selling, licensing or otherwise transferring or disposing of all right, title and interest of the Borrower in and to any of the Copyright Collateral in accordance with the terms hereof. The Borrower hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. -5- 6.2. Irrevocable. The foregoing power of attorney is coupled with an interest and is irrevocable until this Agreement shall terminate. 7. SPECIFIC ENFORCEMENT. Due to the unique nature of the Copyright Collateral, and in order to preserve its value, the Borrower agrees that the Borrower's agreements, duties and obligations under this Agreement shall be subject to specific enforcement and other appropriate equitable orders and remedies. 8. TERMINATION. This Agreement shall create a continuing security interest in and conditional assignment of the Copyright Collateral. Upon payment and satisfaction in full of the Obligations, and the termination of all commitments of the Secured Party set forth in the Loan Agreement, this Agreement shall automatically terminate and shall be of no further force and effect, and the security interest granted hereby shall terminate and all rights to the Copyright Collateral shall revert to the Borrower. Upon any such termination, the Secured Party shall execute and deliver to the Borrower such documents, and shall take such other actions, as may reasonably be requested by the Borrower to evidence or record such termination. 9. PROVISIONS OF GENERAL APPLICATION. 9.1. Loan Agreement Controls. In the event of any irreconcilable conflict between the provisions of this Agreement and the Loan Agreement the provisions of the Loan Agreement shall control. 9.2. Severability. In the event any term or provision of this Agreement shall for any reason be held to be invalid, illegal or unenforceable to any extent or in any respect, or otherwise determined to be of no effect, in any jurisdiction, such invalidity, illegality, unenforceability or determination shall affect only such term or provision, or part thereof, in only such jurisdiction. The parties agree they will negotiate in good faith to replace any provision so held invalid, illegal or unenforceable, or so determined, with a valid, enforceable and effective provision which is as similar as possible in substance and effect to the provision which is invalid, illegal, unenforceable or of no effect. IN WITNESS WHEREOF, the Borrower, by its duly authorized officer, have duly executed this Agreement, as an instrument under seal, as of the date first set forth above. KURZWEIL APPLIED INTELLIGENCE, INC. By: ------------------------------------- Name: Title: -6- COMMONWEALTH OF MASSACHUSETTS County: ______________________ April __, 1997 Then personally appeared the above-named _______________ and stated that he is the duly authorized officer of Kurzweil Applied Intelligence, Inc. and acknowledged the foregoing instrument to be his/her free act and deed, and the free act and deed of said corporation, before me. ----------------------------------- Notary Public My Commission Expires: -7- SCHEDULE A -8- EX-99.1 8 ADDITIONAL EXHIBITS EXHIBIT 99.1 FOR IMMEDIATE RELEASE - --------------------- Contact: Thomas B. Doherty Chief Financial Officer Kurzweil Applied Intelligence, Inc. Tel.: (617) 893-5151 KURZWEIL APPLIED INTELLIGENCE, INC. ANNOUNCES MERGER AGREEMENT WITH LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND UNAUDITED FINANCIAL RESULTS FOR THE FISCAL YEAR ENDED JANUARY 31, 1997 WALTHAM, Mass., April 14, 1997 --- Kurzweil Applied Intelligence, Inc. (NASDAQ: KURZ) today announced the signing of a definitive merger agreement which provides for a merger with Lernout & Hauspie Speech Products N.V., a Belgian corporation listed on the Nasdaq National Market (NASDAQ: LHSPF) and a developer of advanced speech technology for various commercial applications and products. Under the terms of the merger agreement, which has been approved by the Boards of Directors of both companies, Kurzweil AI shareholders will receive $4.20 in cash and $1.05 in Lernout & Hauspie stock for each share of Kurzweil AI common stock, subject to adjustment under certain circumstances. As a result of the transaction, Kurzweil AI will become a wholly-owned subsidiary of Lernout & Hauspie. The acquisition will be accounted for using purchase accounting, and the closing is subject to certain conditions and approvals, including the approval of Kurzweil AI's shareholders. The parties currently anticipate that the transaction will be consummated in June 1997. In addition, to finance Kurzweil AI's working capital needs prior to the closing of the acquisition, Lernout & Hauspie has agreed to make available to Kurzweil AI a line of credit of up to $1,500,000. Thomas E. Brew, Jr., the Company's President and Chief Executive Officer, said: "Kurzweil AI is pleased to be joining forces with internationally-recognized Lernout & Hauspie. We expect the combined companies' strengths will lead to the introduction of innovative speech products and increased market share in the speech recognition technology arena. Our recent entry into the PC retail channel is now starting to significantly increase revenues for our PC applications products which I believe will result in increased revenues in the succeeding quarters in fiscal 1998. In addition, our medical software and PC applications research and development teams will add an extra dimension to Lernout & Hauspie's increasing focus on the growing voice-enabled PC market." Kurzweil AI also released its unaudited financial results for the fiscal year ended January 31, 1997. The Company reported revenue of $8,547,000 and a net loss of $4,140,000 or ($.50) per share, for the fiscal year ended January 31, 1997 as compared to revenue of $9,360,000 and a net loss of $2,586,000 or ($.38) per share for the fiscal year ended January 31, 1996. The Company reported revenue of $2,193,000 for the fourth quarter ended January 31, 1997, a 5% increase over the $2,096,000 of revenue reported for the same period in the prior fiscal year. The net loss in the fourth quarter of fiscal 1997 was $1,425,000 or ($.16) per share, as compared to a net loss of $1,282,000 or ($.19) per share for the fourth quarter of fiscal 1996. The Company has attached unaudited balance sheets and statements of operations for the fiscal years ended January 31, 1997 and January 31, 1996. - 5 - Kurzweil Applied Intelligence, Inc., headquartered in Waltham, Mass., was founded in 1982. The Company develops, markets and supports automated voice recognition systems used to create documents and interact with personal computers by voice. ### All product names referenced herein are trademarks of their respective companies. This release and other information related to Kurzweil Applied Intelligence, Inc. can be referenced on the Company's home page on the World Wide Web at http://www.kurzweil.com, or by calling (671) 893-5151. ### This press release contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and are subject to a number of risks, factors and uncertainties, including but not limited to economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices, which could cause the actual results or performance of the Company to differ materially from those described herein. For a more detailed description of the risks, factors and uncertainties affecting the Company, refer to the discussions under the headings "Certain Factors That May Affect Future Results" and "Cautionary Statement" in the Company's Annual Report on Form 10-KSB and other of the Company's publicly available filings with the Securities and Exchange Commission ### - 6 - KURZWEIL APPLIED INTELLIGENCE, INC. BALANCE SHEETS (unaudited) (in thousands, except for per share data)
January 31, 1997 January 31, 1996 ---------------- ---------------- ASSETS Current assets: Cash and cash equivalents $456 $2,084 Marketable securities available for sale 982 501 Trade accounts receivable, net 2,158 1,221 Inventory 354 398 Other current assets 188 262 ------- ------- Total current assets 4,138 4,466 Property and equipment, net 721 924 Intangible assets 678 1,745 Capitalized software development costs, net 2,532 1,593 Other assets 104 136 ------- ------- Total assets $8,173 $8,864 ======= ======= LIABILITIES Current liabilities: Accounts payable $1,115 $665 Accrued expenses 2,100 2,211 Capital lease obligations 29 Current portion of other long-term liabilities 1,019 902 ------- ------- Total current liabilities 4,234 3,807 Capital lease obligations Other long-term liabilities 1,152 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, 15,000,000 shares authorized; 9,061,880 and 5,773,387 shares issued and outstanding respectively 91 57 Additional paid-in capital 66,727 57,647 Common stock to be issued 5,075 Accumulated deficit (64,031) (59,891) Total stockholders' equity 2,787 2,888 -------- -------- Total liabilities and stockholders' equity $8,173 $8,864 ======== ========
- 7 - KURZWEIL APPLIED INTELLIGENCE, INC. STATEMENTS OF OPERATIONS (unaudited) (in thousands, except for per share data)
Three Months Ended January 31, Twelve Months Ended January 31, ------------------------------- ------------------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Revenues $2,193 $2,096 $8,547 $9,360 Operating costs and expenses: Cost of product and maintenance revenue 1,158 1,521 3,937 4,777 Sales and marketing 1,168 878 4,057 3,582 Research and development 818 578 3,066 2,340 General and administrative 512 454 1,752 1,503 ---------- ---------- ---------- ---------- Total operating costs and expenses 3,656 3,431 12,812 12,202 ---------- ---------- ---------- ---------- Operating loss (1,463) (1,335) (4,265) (2,842) Interest expense 2 3 12 Interest income 38 46 115 196 Other (expense) income, net 9 13 72 Net loss ($1,425) ($1,282) ($4,140) ($2,586) ========== ========== ========== ========== Net loss per common share ($0.16) ($0.19) ($0.50) ($0.38) ========== ========== ========== ========== Weighted average number of common shares outstanding 9,060,555 6,766,466 8,342,157 6,755,779 ========== ========== ========== ==========
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