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