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History of the Kurzweil AI Merger into Lernout & Hauspie

In late July 1996, Kurzweil's Chairman of the Board, President and Chief Executive Officer, Thomas E. Brew Jr., and Kurzweil's Executive Vice President, Mark D. Flanagan, contacted representatives of senior management at Lernout & Hauspie to explore the possibility of licensing Lernout & Hauspie's text-to-speech technology and of retaining Lernout & Hauspie to assist Kurzweil in making Kurzweil's speech recognition products available in European languages. In the course of that meeting, the representatives of Lernout & Hauspie raised the possibility of a business combination with Kurzweil to take advantage of the companies' complementary speech products and technology.

In September 1996, senior management of Lernout & Hauspie reviewed their assessment of Kurzweil and decided to invite Mr. Flanagan to a meeting to further discuss Kurzweil's technology. In mid-September, Mr. Flanagan met with Lernout & Hauspie management to discuss the companies' respective product offerings. Shortly thereafter, Lernout & Hauspie again expressed its interest in exploring a business combination, and the parties agreed to a meeting at the Fall Comdex computer trade show in Las Vegas.

At the Fall Comdex show in November 1996, Mr. Brew met with Gaston Bastiaens, Lernout & Hauspie's President, and discussed Kurzweil's products. Mr. Bastiaens again mentioned Lernout & Hauspie's interest in a possible business combination with Kurzweil. At that meeting Mr. Bastiaens requested, and Mr. Brew arranged for, a private demonstration of Kurzweil's speech recognition products.

On November 12, 1996, Kurzweil's Board of Directors held a regularly scheduled meeting at which Mr. Brew reported on the preliminary meetings that had taken place with Lernout & Hauspie. The Board authorized Kurzweil management to continue discussions with Lernout & Hauspie.

Messrs. Brew and Flanagan again met with Mr. Bastiaens on January 10, 1997. Until that time, the discussions had been general in nature and were designed to explore the areas in which the companies had complementary strengths and technologies. At the January 10 meeting, the parties identified more specific advantages of a combination of the two companies.

On January 22, 1997, Lernout & Hauspie and Kurzweil entered into a non-disclosure agreement to enable the parties to exchange confidential information in the course of their discussions regarding a possible business combination.

Messrs. Brew and Flanagan then met with Mr. Bastiaens together with other Lernout & Hauspie representatives on January 23, 1997. At this meeting, Kurzweil again demonstrated its products, after which a general discussion of Lernout & Hauspie's and Kurzweil's technologies ensued.

On January 27, 1997, at a regularly scheduled meeting of the Lernout & Hauspie Board of Directors, Lernout & Hauspie's management made an initial presentation on the considerations regarding, and received questions and comments of the Lernout & Hauspie Board with respect to, a possible business combination with Kurzweil. At this meeting, management's presentation included descriptions of Kurzweil's products and technologies, the results of preliminary due diligence through that date, and the possible risks and benefits of the proposed business combination. After consideration of management's presentation, the Lernout & Hauspie Board of Directors concluded that management should pursue discussions with Kurzweil regarding a possible business combination.

On January 30, 1997, Mr. Brew met with Mr. Bastiaens, who advised Mr. Brew that Lernout & Hauspie was interested in discussing further a business combination with Kurzweil. At this time the parties discussed specific issues relating to the combination, including valuation and the general structure and terms of the possible business combination.

As a result of this meeting, Mr. Brew convened a special meeting of the Kurzweil Board of Directors on February 3, 1997. Mr. Brew reviewed with the Board the discussions to date and indicated that Lernout & Hauspie appeared to have both a high level of interest in entering into a business combination with Kurzweil and the financial resources to do so. Raymond C. Kurzweil, a director and the Chief Technology Officer of Kurzweil, advised the directors that he was familiar with Lernout & Hauspie's technology and products and that in his view a business combination would be beneficial to each of the parties from a technological point of view.

At the February 3, 1997 Kurzweil Board of Directors meeting, the directors discussed a potential business combination, the timing of a possible transaction and the legal and financial advisors that Kurzweil might retain in connection with such a transaction. It was the consensus of both the directors and management of Kurzweil that no agreement should be entered into until substantially all of the contingencies over which the parties to a business combination have control were satisfied or otherwise eliminated, in particular those relating to price and structure and the due diligence examination of each company's technology, business and financial condition. Mr. Brew contacted Mr. Bastiaens after the meeting to convey Kurzweil's views with regard to the terms of the proposed combination.

At Kurzweil's regularly scheduled Board of Directors meeting on February 14, 1997, Mr. Brew reported that he had conveyed the Board's views to Lernout & Hauspie. The Kurzweil directors also held a preliminary discussion regarding the possibility of retaining a financial advisor to represent Kurzweil in the proposed business combination and requested that management contact several such firms with a view to determining the range of fees that might be charged for performance of services and the rendering of a fairness opinion to the Kurzweil Board of Directors.

On February 21, 1997, Mr. Brew and Mr. Bastiaens spoke by telephone and scheduled a meeting on March 3, 1997 to discuss the proposed business combination further. At the March 3rd meeting, Mr. Brew, Mr. Kurzweil and David R. A. Steadman, another director of Kurzweil, met with Mr. Bastiaens and Mr. Koen Bouwers, the President of Lernout & Hauspie's dictation division, as well as Messrs. Jo Lernout and Pot Hauspie, Managing Directors of Lernout & Hauspie, who joined the meeting by video teleconference. After a discussion of the general terms of the proposed business combination and certain logistical and operational details involved in consummating a business combination, the parties discussed specific issues relating to valuation and the structure of Lernout & Hauspie's proposal.

During the meeting. Messrs. Brew, Kurzweil and Steadman met separately to discuss the proposed terms and financial conditions of the business combination at length and in particular the fact that the proposal was substantially higher than Kurzweil's recent stock price, and was higher than Kurzweil's 52-week high stock price of $5.0625. It was the consensus of the meeting that Kurzweil should proceed to the negotiation of a definitive merger agreement based on the proposal. Messrs. Brew and Steadman then rejoined Messrs. Bastiaens, Bouwers, Lernout and Hauspie and indicated that they believed that a possible business combination could be reached on the terms offered by Lernout & Hauspie. Mr. Brew stated that he would, however, need to discuss the terms with the remaining Kurzweil directors.

Later on March 3,1997 and on March 4, 1997, Mr. Brew polled each of the Kurzweil directors who had not been at the March 3rd meeting, and each director indicated tentative approval of the proposal contingent upon the negotiation of a satisfactory merger agreement.

On March 4, 1997, Mr. Brew called Mr. Bastiaens and conveyed the Kurzweil Board's desire to move forward, subject to an acceptable agreement on all terms of the business combination and a satisfactory due diligence inquiry into Lernout & Hauspie's business and financial condition. Mr. Bastiaens also indicated that Lernout & Hauspie would not enter into any arrangements or agreements until due diligence inquiries had been completed to the satisfaction of both parties.

On March 5, 1997, legal and accounting advisors of Lernout & Hauspie and Kurzweil met to establish a schedule for the process by which each company would make available to the other technical, financial, business and other requested information and to assign responsibilities for the drafting of agreements and other documents required in connection with the proposed business combination.

At a special meeting of the Board of Directors of Kurzweil held on March 11, 1997, Mr. Brew informed the directors of the progress of the due diligence investigations of the two companies. The Kurzweil directors again discussed the advisability of Kurzweil retaining an investment banking firm to render a fairness opinion regarding the transaction and to otherwise assist Kurzweil in negotiating a definitive merger agreement. After discussing the contacts made by Kurzweil with possible candidates and the fees they proposed to charge, the Board of Directors selected Montgomery Securities ("Montgomery") as its financial advisor based on its national reputation, experience with technology companies and its proposed fee.

On March 12, 1997, Lernout & Hauspie contacted Hambrecht & Quist to begin discussions regarding the proposed business combination.

On March 24, 1997, the Kurzweil Board of Directors held another special meeting at which Mr. Brew provided an update on the progress of due diligence inquiries and an overview of a proposed merger agreement. The directors discussed certain terms of the proposed agreement and concluded that they reduced the value of the transaction and questioned whether Kurzweil would continue the discussions on this basis. Representatives of Montgomery also met with the directors at this meeting to discuss their proposed schedule for arriving at a fairness opinion. Directors discussed some of the key merger terms being proposed by Lernout & Hauspie and the desirability of obtaining short-term financing, since Kurzweil was focusing significant attention and energies on the proposed merger and not on raising additional working capital.

On March 25, 1997, management of Lernout & Hauspie and Kurzweil and their respective advisors met at the facilities of a Lernout & Hauspie subsidiary in Burlington, Massachusetts, to discuss the principal issues relating to the proposed merger agreement.

On April 8, 1997, Lernout & Hauspie formally engaged the services of Hambrecht & Quist as its financial advisor with regard to the proposed business combination.

Throughout March 1997 and the beginning of April 1997, management and the legal, accounting and financial advisors to Lernout & Hauspie and Kurzweil conducted their due diligence review of the respective companies. During this time, representatives of the two companies held numerous discussions regarding the terms of the proposed business combination and the potential synergies and operational issues associated with the proposed combination, resolving many of the issues raised by Kurzweil's directors at their March 24 meeting.

On April 10, 1997, at a special meeting of the Lernout & Hauspie Board of Directors called to review the progress of the business combination negotiations and to consider the approval of the Merger Agreement, representatives of Hambrecht & Quist made a presentation in which they reviewed certain strategic and financial analyses of the proposed business combination. Outside legal counsel to Lernout & Hauspie then reviewed with the Lernout & Hauspie Board its fiduciary duties in considering the proposed combination and reviewed the principal terms of the Merger Agreement and other documents related to the Merger. In addition, outside legal counsel and management representatives of Lernout & Hauspie presented the Lernout & Hauspie Board with the results of their due diligence review of Kurzweil and the management representatives presented a summary of the potential risks, synergies and benefits of the proposed combination. After consideration of the various presentations, and discussion of the issues raised in the course of such presentations, the Lernout & Hauspie Board concluded that the Merger was fair to, and in the best interests of Lernout & Hauspie and approved the Merger and the Merger Agreement and the other related agreements in substantially the form presented to the Lernout & Hauspie Board, as the same may be altered in the course of negotiations undertaken on behalf of Lernout & Hauspie by Mr. Bastiaens or any Managing Director.

Kurzweil's Board of Directors met on April 11, 1997. At this meeting the Kurzweil Board reviewed the key terms in the Merger Agreement and received a report from Montgomery. Outside legal counsel to Kurzweil reviewed with the Kurzweil Board its fiduciary duties in considering the proposed combination and reviewed the principal terms of the Merger Agreement and other documents related to the Merger. The Board discussed a variety of the terms set forth in the Merger Agreement, noting areas of concern and directing management and outside counsel to improve these terms to the maximum extent possible. The Board of Directors also discussed the terms of a proposed loan from Lernout & Hauspie. The Board directed management that the term of the loan was unacceptable as proposed and requested management to improve other provisions of the proposal. A representative of Montgomery then reported to the Board on the steps taken and methods used to arrive at a fairness opinion and concluded by advising the Board that Montgomery was in a position to render an opinion that the proposed Merger Consideration is fair to Kurzweil's stockholders from a financial point of view.

Negotiations between the management of Lernout & Hauspie and Kurzweil continued throughout April 11, 1997 to April 14, 1997 both as to the terms of the Merger Agreement, and as to the terms of the loan documents and certain other agreements related to the Merger Agreement. Final agreement on these and other issues was reached over the course of several discussions between Mr. Brew and Mr. Bastiaens over this four day period.

Kurzweil's Board of Directors met again on April 14, 1997 and reviewed with Montgomery and outside legal counsel the changes that had occurred over the course of the negotiations in the terms of the Merger Agreement and other related agreements, including the loan documents. A representative of Montgomery advised the Kurzweil Directors that in the opinion of Montgomery, the Merger Consideration to be received by the stockholders of Kurzweil was fair to the stockholders of Kurzweil from a financial point of view. The Board of Directors then authorized Kurzweil management to enter into the Merger Agreement and related agreements with Lernout & Hauspie and granted to them the authority to negotiate improvements in the terms to the extent they are able to do so. The Board of Directors also instructed management to solicit the approval of the Merger Agreement from the stockholders of Kurzweil.

On the evening of April 14, 1997, Lernout & Hauspie, Kurzweil and Merger Sub executed the Merger Agreement and certain related agreements.