SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No 2)
Filed by Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Materials Pursuant to ss.240.14a-11(c) or ss.240.14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
KURZWEIL APPLIED INTELLIGENCE, INC.
(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(j)(2) or Item 22(a)(2) of Schedule 14A
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) an 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided in
Exchange Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing
by registration statement number, or the Form or Schedule and the
date of its filing.
1) Amount Previously Paid: ________________________________
2) Form, Schedule or Registration Statement No.: ___________________
3) Filing Party: ________________________________
4) Date Filed: ________________________________
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KURZWEIL APPLIED INTELLIGENCE, INC.
411 Waverley Oaks Road
Waltham, Massachusetts 02154
(617) 893-5151
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
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To the Stockholders of Kurzweil Applied Intelligence, Inc.
Notice is hereby given that the 1996 Annual Meeting of Stockholders of Kurzweil
Applied Intelligence, Inc., a Delaware corporation, will be held as follows:
Date: Friday, July 19, 1996
Place: The Offices of the Company
411 Waverley Oaks Road
Waltham, Massachusetts
Time: 9:00 a.m., local time
Purposes: 1. To elect six directors to serve for a term of one year and
until their successors are elected and qualified.
2. To consider the adoption of an amendment to the Amended
and Restated Certificate of Incorporation of the Company
in order to increase the shares of common stock authorized
for issuance by the Company from 10,000,000 shares to
15,000,000 shares.
3. To approve a financing plan to sell shares of common stock
of the Company in a private placement.
4. To transact such other business as may properly come
before the meeting including, but not limited to the
adjournment of the meeting for purposes of soliciting
additional proxies to achieve a quorum or to obtain an
affirmative vote on proposals 2 and 3.
Only stockholders of record at the close of business on June 13, 1996 are
entitled to notice of, and to vote at, the meeting or any adjournment thereof.
June 28, 1996 By Order of the Board of Directors
Roger M. Barzun, Secretary
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE URGED TO SIGN,
DATE AND RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED. THE
EXECUTION OF YOUR PROXY WILL NOT AFFECT YOUR
RIGHT TO VOTE IN PERSON IF YOU ARE PRESENT AT THE MEETING.
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KURZWEIL APPLIED INTELLIGENCE, INC.
411 Waverley Oaks Road
Waltham, Massachusetts 02154
(617) 893-5151
PROXY STATEMENT
General Information
This Proxy Statement is furnished to stockholders of Kurzweil Applied
Intelligence, Inc., a Delaware corporation (the "Company"), in connection with
the solicitation of proxies by the Board of Directors of the Company for use at
the 1996 Annual Meeting of Stockholders to be held on July 19, 1996 at the
offices of the Company, 411 Waverley Oaks Road, Waltham, Massachusetts and at
any adjournment of the meeting. Proxies in the form enclosed will be voted at
the meeting if they are properly executed, dated and returned to the Company
prior to the meeting and are not revoked prior to the voting.
A proxy may be revoked at any time before it is voted (i) by giving to the
Secretary of the Company written notice of revocation executed by the
stockholder of record, which notice must be received prior to the vote being
taken on the matter or matters as to which the proxy is being revoked, (ii) by
delivering prior to the vote being taken on a given matter a duly executed proxy
bearing a later date, or (iii) by the stockholder of record attending the
meeting and voting the shares in person.
The Company's Annual Report (in substantially the form of its Annual Report on
Form 10-KSB) for the year ended January 31, 1996 is being mailed with this
Notice of Annual Meeting and Proxy Statement on or about June 28, 1996.
Matters to be Considered
The Annual Meeting has been called for the following purposes:
1. To elect six directors to serve for a term of one year and until their
successors are elected and qualified.
2. To consider the adoption of an amendment to the Amended and Restated
Certificate of Incorporation of the Company in order to increase the
shares of common stock authorized for issuance by the Company from
10,000,000 shares to 15,000,000 shares.
3. To approve a financing plan to sell shares of common stock of the
Company in a private placement.
4. To transact such other business as may properly come before the meeting
including, but not limited to the adjournment of the meeting for
purposes of soliciting additional proxies to achieve a quorum or to
obtain an affirmative vote on proposals 2 and 3.
Record Date and Voting
Only stockholders of record at the close of business on June 13, 1996 (the
"Record Date") are entitled to notice of, and to vote at, the meeting or any
adjournment thereof. At the close of business on the Record Date, there were
8,128,866 shares of the Company's common stock, $0.01 par value ("Common Stock")
so held.
The shares represented by duly executed proxies in the form solicited by the
Board of Directors will be voted at the meeting in accordance with the choices
specified. If a proxy is executed but no choice is specified, the shares will be
voted for each of the nominees for director, for items 2 and 3, above, and in
the discretion of the proxy holders as to the transaction of any other business
that may properly come before the meeting. Other than the possible adjournment
of the meeting for purposes of soliciting additional
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proxies to achieve a quorum or to obtain an affirmative vote on a proposal, the
directors do not know of any such other matter or business to be brought before
the meeting.
Quorum, Abstentions, Broker Non-Votes and Vote Required
The presence in person or representation by proxy of the holders of a majority
of the Common Stock entitled to vote is necessary to constitute a quorum for the
matters to be voted upon. In the absence of a quorum, the stockholders present
may nevertheless adjourn the meeting to a later date.
A holder of record of Common Stock is entitled to one vote for each share so
held on the Record Date. Abstentions and broker non-votes (i.e. the lack of a
vote on a matter as to which the holder has no voting authority) are counted for
the purposes of determining the presence or absence of a quorum for the
transaction of business at the meeting, but will not be treated as negative
votes and consequently will have no effect on the voting.
The affirmative vote of the holders of a plurality of the votes cast either in
person or by proxy is required to elect directors. Approval of Proposal 2
requires the affirmative vote of the holders of a majority of the shares of
Common Stock outstanding and entitled to vote on the matter. Approval of each of
Proposals 3 and 4 requires the affirmative vote of the holders of a majority of
the aggregate number of shares of common stock voted "for" and "against" such
matter.
Proxy Solicitation
The accompanying proxy is being solicited on behalf of the Board of Directors of
the Company. In addition to the use of the mails, proxies may be solicited by
directors, officers and employees of the Company, and if deemed necessary,
through a third party solicitation agent by means of personal interview,
telephone, facsimile or telegram. The Company will request banks, brokerage
houses and other custodians, nominees and fiduciaries to solicit their customers
who are beneficial owners of Common Stock and to forward solicitation materials
to such beneficial owners. The Company will reimburse them for their reasonable
out-of-pocket expenses incurred in such solicitation.
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PROPOSAL 1 -- ELECTION OF DIRECTORS
The Bylaws of the Company provide that the number of directors shall be
determined from time to time by the stockholders or the Board of Directors, but
that there shall be no less than three directors. In May 1996, the Board of
directors reduced the number of directors from seven to six as the result of the
resignation of Scott M. Sperling, a director elected at the 1995 Annual Meeting.
The directors elected at the 1996 Annual Meeting will hold office until the 1997
Annual Meeting and until their successors are elected and qualified. Each
nominee has expressed his intention to serve if elected. Should a nominee become
unavailable to serve, the proxy holders may vote each proxy (unless authority to
vote has been withheld for such nominee) for the election in his stead of any
other person the Board of Directors may recommend. The proxy solicited by this
Proxy Statement cannot be voted for more than the number of nominees named in
this Proxy Statement.
The following table lists the names and ages of the nominees for election as
directors, and in the case of nominees who are incumbent directors, the year in
which each was first elected a director of the Company:
Name Age Director Since
Thomas E. Brew, Jr. 53 1994
Steven F. Kaplan 40 1995
Raymond C. Kurzweil 48 1982
William R. Lonergan 71 1984
David R. A. Steadman 59 1995
James W. Storey 62 1995
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Principal Occupation and Business History of Nominees
Mr. Brew. Mr. Brew served as Acting Co-Chief Executive Officer and President of
the Company from May 1994 until November 1994 when he was elected President,
Chief Executive Officer and a director. In June 1995 he was elected, in
addition, Chairman of the Board of Directors. Prior to joining the Company, Mr.
Brew was Executive Vice President of Argus Management Corporation (of which he
was a founder) a firm that provides interim management services in crisis
situations, since 1988.
Mr. Kaplan. Mr Kaplan is an independent financial and strategy consultant,
assisting companies, buy out firms and venture capital firms to identify,
assess, structure and negotiate mergers, acquisitions, strategic investments and
divestitures as well as helping firms develop and implement business plans and
financial strategies. During 1994, Mr. Kaplan served as Chief Financial Officer
of Marcam Corporation, a software company. From 1990 to 1992, Mr. Kaplan was
Executive Vice President, Chief Financial Officer and Chief Strategic Officer of
AM International, Inc., a graphics art equipment and supplies company. Prior to
that, Mr. Kaplan was Senior Vice President, Chief Strategic Officer of AM
International and President of Harris Graphics Web Group, a manufacturing
division of AM International. Before joining AM International, Mr. Kaplan was a
Vice President and partner of the Boston Consulting Group.
Mr. Kurzweil. Mr. Kurzweil is a founder of the Company and has been Chief
Technology Officer since its inception in 1982. From 1982 until 1995 he was also
Chairman of the Board of Directors. He served as Chief Executive Officer from
1982 to 1991 and as Co-Chief Executive Officer from 1991 to November 1994. Mr.
Kurzweil serves as a director of Wang Laboratories, Inc., as Chairman of its
Strategy and Technology Committee.
Mr. Lonergan. Mr. Lonergan has served as a director of the Company since May
1984. He was a general partner of Oxford Partners a venture capital partnership,
from 1983 to 1995. Prior to that he was with Xerox Corporation for eight years,
most recently as Vice President Business Development. Mr. Lonergan serves as a
director of Zitel Corporation, a memory systems company, Dataware Technologies,
Inc. a CD ROM software company and Medical Sterilization, Inc.
Mr. Steadman. Mr. Steadman has served as President of Atlantic Management
Associates, Inc., a management services firm, since 1988. From 1990 to 1994 Mr.
Steadman served as President and Chief Executive Officer of Integra - A Hotel
and Restaurant Company. From 1987 to 1988 Mr. Steadman served as Chairman and
Chief Executive Officer of GCA Corporation, a manufacturer of automated capital
equipment used in the production of integrated circuits by semiconductor device
manufacturers. Mr. Steadman was a Vice President of Raytheon Company, a defense
electronics manufacturer, from 1980 to 1987, and served as President of Raytheon
Ventures, a venture capital division of Raytheon from 1985 to 1987. Mr. Steadman
is a director and Chairman of the Board of Directors of Aavid Thermal
Technologies, Inc., which manufactures thermal management products for the
semiconductor industry and produces computational fluid dynamic software;
Technology Service Group, Inc. a manufacturer of high technology pay telephone
components; and Wahlco Environmental Systems, Inc., a publicly traded
environmental equipment and services company. He is also a director of Vitronics
Corporation, a manufacturer of reflow soldering ovens for the electronics
industry.
Mr. Storey. Mr. Storey has been a business consultant and investment manager
since 1993. From 1987 to 1992, Mr. Storey was President of Wellingsley
Corporation, a private investment company. Prior to that, from 1981 to 1986, Mr.
Storey was President and Chief Executive Officer of Codex Corporation, a
manufacturer of data communications equipment, and a Vice President of its
parent company, Motorola, Inc. Mr. Storey is a director of Progress Software
Corporation and Westerbeke Corporation, a manufacturer of marine engines and
generator sets.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH NOMINEE FOR DIRECTOR.
Meetings of the Board of Directors and its Committees
The Board of Directors held six meetings during the fiscal year ended January
31, 1996, and each director attended all of the meetings of the Board held while
he was a director. The only standing committees of the Board are the Audit
Committee and the Compensation Committee.
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The Audit Committee (comprised of Messrs. Kaplan, Lonergan and Storey) reviews
the Company's system of internal controls, recommends the appointment of the
Company's independent public accountants, and periodically reviews their
services. The Audit Committee held two meetings during the fiscal year ended
January 31, 1996 and each incumbent member attended all of the meetings of the
Committee held while he was a member.
The Compensation Committee (comprised of Messrs. Steadman and Storey) reviews
and determines compensation payable to officers of the Company and administers
the Company's stock plans. The Compensation Committee held three meetings during
the year ended January 31, 1996 and each incumbent member attended all of the
meetings of the Committee held while he was a member.
Directors' Compensation
Directors who are employees of the Company receive no compensation, as such, for
services as members of the Board. Directors who are not employees of the Company
receive $1,000 in the aggregate for Board and committee meetings they attend on
a given day and are also reimbursed for out-of-pocket expenses incurred in
attending such meetings.
Non-employee directors of the Company also receive "formula" stock option grants
under the Company's 1995 Non-Employee Director Stock Option Plan approved by
stockholders on June 20, 1995. Each non-employee director serving at that date
received a fully-vested option to purchase 10,000 shares of Common Stock (the
"Initial Grants") and is automatically granted an additional option of 3,000
shares on each anniversary of that date so long as he is then serving as a
non-employee director. Each non-employee director first elected to the Board
after June 20, 1995 automatically receives an option to purchase 3,000 shares of
Common Stock on the date of his or her election and, so long as he or she is
then serving as a non-employee director, an additional option to purchase 3,000
shares of Common Stock on each anniversary of that date. All options under the
Plan are granted at an exercise price per share equal to the market value of a
share of Common Stock on the date of grant. Except for the Initial Grants, all
options vest as to one-half the shares six months after the grant date, and as
to an additional one-quarter of the shares at nine months and twelve months
after the grant date.
Certain Developments Relating to Legal Proceedings
Class Action Litigation. Subsequent to the Company's announcement on April 28,
1994 that the Company and its auditors were reviewing certain aspects of the
Company's revenue recognition policies and practices and related matters, and
that the Company expected this review to result in a substantial loss for fiscal
1994, five purported class action lawsuits were filed in the United States
District Court for the District of Massachusetts. These lawsuits were eventually
combined into one class action suit and were purportedly brought by and on
behalf of purchasers of the Company's common stock pursuant or traceable to the
Company's Prospectus dated August 17,1993 and in its aftermarket through April
28, 1994. These lawsuits were filed against the Company and certain of them also
named as defendants Raymond C. Kurzweil (the Company's Founder, Chief Technology
Officer, director and former Chairman and Co-Chief Executive Officer), Bernard
F. Bradstreet (former Co-Chief Executive Officer, President Chief Financial
Officer, and director), the underwriters of the Company's August 1993 initial
public offering of Common Stock, Robertson, Stephens & Co., L.P. and Needham &
Company, Inc., and the Company's former public accountants, Coopers & Lybrand
L.L.P.
On April 27, 1995, the Company received final court approval of an agreement to
settle this litigation. In accordance with the settlement, the class members and
their counsel received 1,475,827 shares of Common Stock having a value of
$7,250,000 based on the average price of shares of Common Stock, as determined
by the closing prices during the five consecutive trading days starting May 19,
1995. In June 1995, the class members' counsel received their portion of the
shares, 442,748 shares in the aggregate. In March 1996, the remaining 1,033,079,
shares of Common Stock were distributed to class members. In addition, as part
of the settlement, the Company made a cash payment of $250,000, and assigned any
claims it might have against its former public accountants, Coopers & Lybrand
L.L.P., to the class members. The Company believes these proceedings are now
concluded as to the Company's involvement.
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SEC Investigation. On June 3, 1994, the Company announced that it had been
notified by the Securities and Exchange Commission ("SEC") that the SEC had
commenced a formal investigation of the Company. The SEC requested that the
Company provide the SEC with certain documents concerning possible violations of
the federal securities laws in connection with the Company's public reports and
financial statements. On July 26, 1995 the Company announced that it had entered
into a settlement with the SEC. The Company agreed to an order pursuant to
Section 8A of the Securities Act of 1933 and Section 21C of the Securities
Exchange Act of 1934, whereby the Company agreed to cease and desist from
committing or causing any future violation of certain enumerated sections of
those acts and rules promulgated thereunder.
Department of Justice. In August 1994, the Company received a subpoena from the
U.S. Department of Justice ("DOJ") to produce documents in connection with a
grand jury investigation regarding the irregularity identified in the
information filed in the Company's previous press releases and financial
statements. On July 26, 1995, the Company announced that the DOJ had concluded
its investigation as to the Company without further action based on information
that the DOJ furnished by telephone to the Company's litigation counsel.
Nasdaq Proceedings. On June 3, 1994, the Company announced that it had been
notified by the National Association of Securities Dealers, Inc. ("NASD") that
it was conducting a review of trading in the Company's securities and had
requested that the Company provide it with certain documents and information.
Nasdaq has advised the Company that it has concluded its investigation as to the
Company without further action.
Texas Litigation. On September 11, 1995, one of the Company's shareholders who
elected not to be included in the settlement of the shareholder class action
litigation filed a complaint in Dallas County, Texas. The matter is entitled
Caffey v. Kurzweil Applied Intelligence. Inc. et a1. Mr. Caffey's complaint
asserts that the Company and certain former officers and directors committed
fraud and violated Texas state law and unnamed federal securities laws. The
Complaint seeks $1,500,000 in damages.
The Company moved the case to the United States District Court for the Northern
District of Texas on November 6, 1995. The case was assigned Docket No.
3:95-CV-2660-J. On November 13, 1995, the Company filed an answer to the
complaint, which contained an offer of settlement pursuant to which the Company
offered to repurchase from Mr. Caffey his 1,000 shares of Company stock at the
price he paid for such shares plus interest and certain attorneys' fees. Mr.
Caffey has rejected the Company's offer and has filed amended complaints to
include additional plaintiffs, including two of the Company's incumbent
directors, who were also defendants in the class action litigation described
above. This case is in the discovery stage, and at this point, the Company does
not believe that its outcome will have a material adverse effect on the
financial condition of the Company.
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PROPOSAL 2 - AMENDMENT TO THE CERTIFICATE OF INCORPORATION
The Amendment. On May 3, 1996 the Board of Directors of the Company adopted,
subject to stockholder approval, an amendment to the Company's Amended and
Restated Certificate of Incorporation (the "Certificate") and pursuant to
Delaware law declared such amendment to be advisable. The restatement amends
subsection (a) of Article Fourth of the Certificate by increasing the number of
shares of Common Stock that the Company is authorized to issue from 10,000,000
shares to 15,000,000 shares. If the amendment of the Certificate is approved by
stockholders, it will become effective upon its filing with the Secretary of
State of the State of Delaware.
The Additional Shares. The additional shares of Common Stock to be authorized
for issuance by the amendment would have rights identical to the currently
outstanding Common Stock, and the approval of the amendment by stockholders
would not affect the rights of holders of currently outstanding Common Stock
except for effects incidental to increasing the number of shares that the
Company is authorized to issue, including the dilutive effects on present
stockholders upon issuance of any of the additional shares.
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The availability or issuance of additional shares could have the effect of (i)
depressing the market price of the Common Stock and (ii) making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, a majority of the outstanding voting stock of the Company, although
the Company is not aware that any person or entity is interested in making such
an acquisition.
Issuance of Additional Shares. As a general matter, the issuance of the
additional authorized shares for such corporate purposes as the Board may deem
to be in the best interests of the Company does not require stockholder
approval, unless such approval is required by laws, rules or regulations
applicable to the Company. In addition to raising capital through equity
financing, the additional shares for which stockholder approval is sought may
also be used to purchase assets or services and to compensate employees or
consultants. Other than in connection with the financing plan described in
Proposal 3, below, the Company has no current plans to issue or to reserve for
issuance any of the additional shares of Common Stock.
May 1996 Private Placement. On May 1, 1996, there were 6,790,367 shares of
Common Stock issued and outstanding, and 1,889,133 shares reserved for issuance
under the Company's stock plans and outstanding warrants to purchase Common
Stock. Accordingly, at that date, the Company had a balance of 1,320,500 shares
available for issuance and not subject to any reserve.
Because of the Company's need for additional cash to fund its operations in
fiscal 1997, on May 9, 1996 the Company sold 1,320,050 shares of Common Stock at
$2.00 per share in a private sale to Special Situations Fund LP, for net
proceeds to the Company of approximately $2.37 million. This sale left a balance
of only 450 unreserved shares available for issuance.
Need for Additional Funds. At April 30, 1996, the Company's first fiscal quarter
end, the Company had a net worth of $1.631 million, which is less than the
Nasdaq National Market $4 million net worth requirement. The $2.376 million
raised through the May 1996 sale increased that net worth as of April 30, 1996
on a pro forma basis to only slightly more than $4.0 million. While these funds
are expected to be sufficient for the Company's working capital needs in fiscal
1997, the Company is seeking additional funding to cover research, development
and marketing expenses in fiscal 1998, to provide a cash reserve if revenues
fall short of expectations as they did in fiscal 1996, and to enable the Company
to meet and exceed the Nasdaq National Market $4 million net worth requirement
in the event the Company continues to incur losses. The Board of Directors,
therefore, believes that the increase in authorized shares of Common Stock is in
the best interests of the Company and its stockholders and is critical to its
future operations, because without the ability to sell additional shares of
Common Stock, the Company will be unable to carry out the financing plan that is
the subject of Proposal 3, below.
Consequences of Non-Approval. If this proposal is not approved by stockholders,
the Company will be unable to raise working capital through the issuance of
Common Stock or securities convertible into Common Stock, and since the Company
does not believe that it is able to raise working capital though the sale of
preferred stock or through borrowings; in such event, the Company would likely
be required to restructure its operations and curtail its spending in research
and development, attempt a merger or other strategic transaction with another
company, or seek protection under the bankruptcy laws.
If this Proposal 2 is approved, but Proposal 3 is not approved, under Nasdaq
Stock Market rules, the Company would be limited to raising additional equity
either (i) through the sale shares of Common Stock and securities exercisable
for or convertible into Common Stock equal to less than 20% of the number of
shares then outstanding (approximately 1.6 million shares), (ii) through the
sale of Common Stock at a price at least equal to its market value or (iii)
through the sale of preferred stock as discussed above. There can be no
assurance that the funds raised under (i) would be sufficient for the Company's
needs or that the Company would be successful in accomplishing the sales
described in (ii) and (iii).
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE AMENDMENT
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PROPOSAL 3 - APPROVAL OF A FINANCING PLAN
General Information
The Financing. The Company's stockholders are being requested to approve the
issuance of a maximum of 2.2 million shares of Common Stock and the reservation
for issuance pursuant to the issuance of warrants covering a maximum of an
additional 2.55 million shares of Common Stock in connection with a proposed
private sale to a limited number of accredited investors (the "Financing").
Since the investors have not yet been identified, and the sale price of the
shares has not been established, the precise number of shares to be issued and
to be reserved for issuance has yet to be determined, and there can be no
assurance that any shares will be sold. The Company will seek to raise a minimum
of $2.4 million and a maximum of $4.4 million on or before July 31, 1996 at a
per-share purchase price equal to the greater of (a) $2.00 per share or (b) 65%
of the average of the closing prices as reported on the Nasdaq National Market
for the five (5) trading days ending five (5) business days prior to the closing
of the sale. It is anticipated that the sale of the shares in the number
contemplated and at a discount to market could have a depressing effect on the
market price for the Company's Common Stock. Set forth below under the heading
"Price Range of Common Stock" are the high and low sale prices of the Common
Stock by fiscal quarter for the last two fiscal years and for the first fiscal
quarter of fiscal 1997.
The Board of Directors believes the proposed price to be fair value for the
Company in light of the following circumstances: (i) the Company's auditors have
issued a "going concern opinion" with respect to the financial condition of the
company at January 31, 1996 because of the risks involved in the Company
realizing the benefits of its investment in research and development and the
risk that the Company may not be able to meet its revenue projections; (ii) the
Company has a history of substantial losses since its inception; (iii) the
shares sold in the Financing will be "restricted securities" under securities
laws and therefore will not be readily saleable by the purchasers until such
time as their re-sale is registered by the Company; (iv) the stock may be
delisted from the Nasdaq National Market for the Company's failure to meet its
minimum net worth requirement at the end of fiscal 1996 and the first quarter of
1997, which would likely result in a loss of market value; and (v) the negative
effect on the Company's business and financial reputation of the recently
settled shareholder litigation that arose out of financial irregularities
committed by certain former members of the Company's management.
Requirement for Stockholder Approval. The Company is seeking stockholder
approval of the Financing pursuant to the NASD designation criteria for
continued inclusion of the Common Stock on the Nasdaq National Market. Section
5(i)1.(d)(ii) of Part III of Schedule D of the NASD By-Laws requires the Company
to obtain stockholder approval because (i) the shares may be sold in the
Financing at a price less than the greater of their book or market value; and
(ii) the number of shares sold or reserved for issuance under warrants may
exceed 20% of the number of shares of Common Stock issued and outstanding prior
to the Financing. Assuming all 2.2 million shares are sold and warrants to
purchase an additional 2.55 shares are issued in connection with the financing,
under Nasdaq rules the issuance would be deemed an issuance of 4.75 million
shares or 58.6% of the shares of Common Stock outstanding prior immediately to
the Financing. Warrants covering 2.2 million shares (the "additional warrants"
described under the heading "Placement Agency Agreement," below) may not be
required to be issued, in which event the Company would be deemed to be issuing
in the aggregate 2.55 shares or 31.5% of the shares of Common Stock outstanding
prior immediately to the Financing.
A closing of the Financing is expected to be held upon receipt of subscriptions
from prospective investors for not less than $2,400,000. The initial closing is
expected to occur on or about July 26, 1996 or such later date to which the
offering is extended by agreement of the Company and the placement agent, not to
exceed, however, sixty days. If subscriptions to purchase the minimum of
$2,400,000 are not received by the date the offering ends, the funds of
prospective investors will be returned to them.
Requirements for Additional Funds. While the funds raised through the May 1996
private placement of 1.3 million shares (described under Proposal 2, above) are
expected to be sufficient for the Company's needs in fiscal 1997, the Company is
seeking additional funding to cover research, development and marketing
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expenses in fiscal 1998 and to provide a cash reserve if revenues fall short of
expectations as they did in fiscal 1996. In addition, the funds will enable the
Company to maintain the minimum $4 million net worth requirement for continued
listing on the Nasdaq National Market.
Dependence on Proposal 2. The maximum number of shares can be issued and sold,
however, only with the approval by stockholders of this Proposal 3. In addition,
since the Company now has only 450 shares available for sale to potential
investors, the Financing is also dependent upon the approval by stockholders of
an increase in the number of shares of Common Stock the Company is authorized to
issue, which is the subject of Proposal 2, above.
Consequences of Non-Approval. If this proposal is not approved, under Nasdaq
Stock Market rules, the Company would be limited to raising additional equity
either (i) through the sale shares of Common Stock and warrants to purchase
Common Stock equal to less than 20% of the number of shares then outstanding
(approximately 1.6 million shares), (ii) through the sale of Common Stock at a
price per share at least equal to the greater of its market value, or (iii)
through the sale of preferred stock. There can be no assurance that the funds
raised under (i) would be sufficient for the Company's needs or that the Company
would be successful in accomplishing the sales described in (ii) and (iii).
Board Recommendation. Although the issuance of shares in the proposed Financing
will have a dilutive effect on the Company's current stockholders, the Board of
Directors believes that the Financing represents the best source of capital
available to the Company at this time, since raising capital through a public
offering of Common Stock involves considerable time and expense and is subject
to the uncertainties of the marketplace, among others. Accordingly, the Board of
Directors strongly recommends the approval of the proposed Financing. Reference
should be made to the financial statements of the Company and the notes thereto
set forth in the Company's Annual Report for the fiscal year ended January 31,
1996, which accompanies this Proxy Statement.
Use of Proceeds. The Company currently intends to use the proceeds of the
Financing for general corporate purposes, which include research and
development, product development and enhancement programs, new product
development, and sales and marketing programs. The allocation of the proceeds
will depend upon the Company's results of operations and business plans. The
Company is not seeking stockholder approval of any aspect of the proposed
Financing except the issuance and reservation for issuance of a number of shares
that is in excess of 20% of the issued and outstanding shares immediately prior
thereto at a per-share price that is below their book or market value.
Price Range of Common Stock
The Common Stock is traded on the Nasdaq National Market under the symbol KURZ.
The Company's Common Stock was traded on the Nasdaq SmallCap Market from
November 14 to December 27, 1994 when it was relisted on the Nasdaq National
Market. The following table reflects the range of high and low selling prices of
the Common Stock by fiscal quarter for fiscal years 1995 and 1996 and for the
first fiscal quarter of fiscal 1997. This information is based on prices
reported on the Nasdaq National Market.
Fiscal 1995 High Low
First Quarter (ended April 30, 1994) 14.250 4.000
Second Quarter (ended July 31, 1994) 7.000 2.750
Third Quarter (ended October 31, 1994) 7.000 2.625
Fourth Quarter (ended January, 1995) 6.500 3.875
Fiscal 1996
First Quarter (ended April 30, 1995) 6.000 4.375
Second Quarter (ended July 31, 1995) 5.250 2.750
Third Quarter (ended October 31, 1995) 4.750 2.750
Fourth Quarter (ended. January 31, 1996) 7.125 2.750
- 8 -
<PAGE>
Fiscal 1997
First Quarter (ended April 30, 1996) 4.375 2.375
THIS PROXY STATEMENT IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OF THE COMPANY. THE SECURITIES REFERRED TO IN THIS PROXY
STATEMENT AS PROPOSED TO BE SOLD OR AS HAVING BEEN SOLD WILL NOT BE AND HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS
AND MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES OR TO US PERSONS ABSENT
REGISTRATION UNDER SUCH ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES
LAWS OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREOF.
Placement Agency Agreement
The Company is currently negotiating an agreement (the "Agency Agreement") with
the investment banking firm (the "Placement Agent") that represented the Company
in the May 1996 private placement of shares described in Proposal 2, above.
Neither the Company nor any of its directors or officers has any relationship
with the Placement Agent other than as described herein. The Agency Agreement
has not been executed as of the date of this Proxy Statement. The following is a
summary of the anticipated material terms of the Agency Agreement.
The Placement Agent will assist the Company on a best efforts basis in raising a
minimum of $2.4 million and a maximum of $4.4 million on or before the offering
ends through the sale of up to 2.2 million shares of Common Stock (the "Shares")
to a limited number of "accredited investors" pursuant to the exemption from
registration afforded by Regulation D under the Securities Act of 1933 (the
"Act").
The Placement Agent will pay its own expenses incurred in the Financing, and the
Company will pay all of the other expenses incident to the Financing, including
any expenses related to the qualification of the sale of the Shares under state
securities laws.
The Company will be required to file a registration statement under the Act with
respect to the re-sale of the Shares on or before September 30, 1996, and to use
its diligent, good faith efforts to have the registration statement declared
effective as soon thereafter as possible, but in any event no later than
November 30, 1996. In the event that (i) the Company fails to file the
registration statement by September 30, 1996; (ii) the Company fails to use such
diligent, good faith efforts to have the registration statement declared
effective by November 30, 1996 and the registration statement is not declared
effective by such date; or (iii) the registration statement is not declared
effective on or before June 1, 1997 then, on each monthly anniversary of the
date of the earliest to occur of (i), (ii) or (iii) until the earlier of the
effective date of the registration statement or the 20th monthly anniversary of
such date, the Company will be required to issue to each purchaser of Shares
warrants to purchase a number of shares of Common Stock equal to 5% of the
number of Shares purchased by such purchaser.
As compensation for its services, the Company will pay the Placement Agent 10%
of the gross proceeds of the sale of the Shares and will issue to the Placement
Agent ten-year warrants to purchase in the aggregate a number of shares of
Common Stock equal to 10% of the number of Shares sold in the Financing at an
exercise price equal to the per-share price at which the Shares are sold. The
warrant term will be reduced to five years in the event that the Company
achieves certain revenue and earnings goals to be set forth in the Agency
Agreement. The warrants will not be exercisable by the Placement Agent for a
period of twelve months after the closing of the Financing. The Placement Agent
will have the right to cause some or all of the warrants to be issued to such
persons as it may direct, subject
- 9 -
<PAGE>
to applicable state and federal securities laws. In the event that no shares are
sold in the Financing, no compensation will be payable to the Placement Agent.
After the expiration of one year from the closing of the Financing, the warrant
holder will have a the right on one occasion to require the Company, at the
Company's expense, to register the sale of the underlying shares to the warrant
holder or the re-sale thereof by the warrant holder. The Company will be
required to keep the registration statement covering the shares underlying the
warrant effective, with certain exceptions, until those shares can be sold by
the warrant holder under the exemption afforded by Rule 144(k) under the Act.
The warrant holders also have a one-time right to include the warrant shares in
a registration statement filed by the Company, subject to certain exceptions.
Pursuant to the Agency Agreement, the Company will grant the Placement Agent a
right of first refusal to act as the Company's underwriter and placement agent
with respect to future public and private financings and to serve as the
Company's investment banker with respect to any potential acquisition, merger,
and like transactions for a period of three years from the closing of the
Financing, but only if the Placement Agent is able to meet the terms requested
by the Company or obtained from another underwriter or investment bank. In
addition, if an underwriter or investment bank selected by the Company is of
"national stature" (to be defined in the Agency Agreement), the Company's only
obligation will be to use reasonable efforts to have the Placement Agent
included as a co-participant in the transaction.
Consulting Agreement
The Company has entered into a financial consulting agreement with the Placement
Agent pursuant to which the Placement Agent has agreed to provide, upon the
Company's request, various financial advisory services for a period of two
years. As compensation for these services, the Company has agreed to issue a
five-year warrant to the Placement Agent to purchase 132,050 shares of Common
Stock at $2.00 per share, provided that the stockholders approve the increase in
the number of shares the Company is authorized to issue, which is the subject of
Proposal 2, above. The holder of this warrant will have substantially the same
registration rights as the holder of the warrants expected to be issued to the
Placement Agent as compensation for the Financing.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE FINANCING PLAN
-------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Common Stock at June 1, 1996 by (i) each person known by the
Company to own beneficially 5% or more of the outstanding Common Stock; (ii)
each of the directors and nominees for election as directors of the Company;
(iii) the executive officers named in the Summary Compensation Table, below; and
(iv) all directors and executive officers as a group. Except as otherwise
indicated in the footnotes, the Company believes that the beneficial owners of
the Common Stock listed below, based on information furnished by such owners,
have sole investment and voting power with respect to the shares of Common Stock
shown as beneficially owned by them.
- 10 -
<PAGE>
Security Ownership of Certain Beneficial Holders
Name and Address Number of Shares Percentage of
of Beneficial Owner of Common Stock Class
Special Situations Fund, L.P. 1,320,050(/1) 16.3%
153 East 53rd Street
New York, NY 10020
Phemus Corporation 959,808(/2) 11.7%
600 Atlantic Avenue
Boston, Massachusetts 02210
Xerox Corporation 959,808(/3) 11.6%
800 Long Ridge Road
Stamford, Connecticut 06904
Security Ownership of Management
Name and Address* of Number of Shares Percentage of
Beneficial Owner of Common Stock Class
Thomas E. Brew, Jr. 175,999(/4) 2.1%
Thomas B. Doherty 32,471(/5) **
Mark D. Flanagan 30,914(/6) **
Steven F. Kaplan 10,000(/7)
Raymond C. Kurzweil 191,267(/8) 2.71%
John J. Scarcella 7,549(/9) **
William R. Lonergan 12,870(/10) **
David R. A. Steadman 10,000(/7) **
James W. Storey 16,000(/10) **
All Directors and Executive
Officers as a Group
(11 Persons) 516,307(/11) 6.0%
- -----------------
* The address of each person is the address of the Company's offices in
Waltham, Massachusetts.
** Represents holdings of less than one percent.
1. Special Situations Fund purchased these shares on May 9, 1996 in a private
placement by the Company. See Proposals 2 and 3.
2. Includes 102,617 shares issuable on the exercise of currently exercisable
warrants to purchase Common Stock.
3. Excludes 168,222 shares owned by Fuji Xerox Co., Ltd. as to which Xerox
disclaims beneficial ownership, and includes 136,021 shares issuable on the
exercise of currently exercisable warrants to purchase Common Stock.
-11-
<PAGE>
4. Includes 174,999 shares subject to purchase under options within 60 days of
June 1, 1996 at prices ranging from $4.125 to $4.50 per share.
5. Includes 31,271 shares subject to purchase under options within 60 days of
June 1, 1996 at prices ranging from $4.125 to $5.125 per share.
6. These shares are subject to purchase under options within 60 days of June
1, 1996 at prices ranging from $4.125 to $5.125 per share.
7. These shares are currently exercisable under an option at $4.375 per share.
8. Includes 184,601 shares subject to purchase under options within 60 days of
June 1, 1996 at prices ranging from $1.50 to $4.125 per share. Mr. Kurzweil
disclaims beneficial ownership of the following shares included in this
number: (i) 466 shares held in an irrevocable trust (of which Mr. Kurzweil
is a trustee and has sole voting and investment power) for the benefit of
Mr. Kurzweil's children, mother, sister and his sister's children; (ii)
1,066 shares held in an irrevocable trust for the benefit of Mr. Kurzweil's
children; (iii) 2,133 shares held in a separate irrevocable trust for the
benefit of Mr. Kurzweil's wife; (iv) 133 shares held in a separate
irrevocable trust for the benefit of Mr. Kurzweil's sister; and (v) 1,066
shares held directly by Mr. Kurzweil's wife.
9. Includes 7,449 shares subject to purchase under options within 60 days of
June 1, 1996 at prices ranging from $1.50 to $5.125 per share.
10. Includes 10,000 shares exercisable under an option at $4.375 per share.
11. Includes 495,539 shares under options subject to purchase within 60 days of
June 1, 1996 at prices ranging from $1.50 to $5.125 per share.
Section 16(a) Reports.
Based solely on its review of copies of reports filed by reporting persons of
the Company pursuant to Section 16(a) of the Securities Exchange Act of 1934, or
a written representation from certain reporting persons that no Form 5 filing
was required for such person, the Company believes that all filings required to
be made by reporting persons of the Company were timely made in accordance with
the requirements of that Act.
-------------------------
- 12 -
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation the Company paid or accrued for
services rendered in the Company's fiscal years ended January 31, 1996, 1995 and
1994 by the Chief Executive Officer and the four other most highly compensated
executive officers of the Company whose compensation exceeded $100,000 in fiscal
1996 and who were serving at the end of the 1996 fiscal year.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
- ---------------------------------------------------------------------------- -------------------------------
Other
Annual Securities
Compen- Underlying All Other
Salary Bonus sation(/1) Options Compensation
Name and Principal Position Year ($) ($) ($) (#) ($)
<S> <C> <C> <C> <C> <C> <C>
THOMAS E. BREW, JR.(/2) 1996 250,000 100,000 -- --
President & Chief Executive 1995 62,500 25,000 -- 250,000 --
Officer
THOMAS B. DOHERTY(/3) 1996 134,394 -- -- 10,000 --
Vice President, Chief 1995 32,500 -- -- 50,000 --
Financial Officer & Treasurer
MARK D. FLANAGAN(/4) 1996 225,000 -- -- 10,000 --
Executive Vice President 1995 160,833 38,333 -- 20,000 --
1994 113,045 34,999 -- 30,000 --
RAYMOND C. KURZWEIL(/5) 1996 172,791 -- -- -- --
Chief Technology Officer 1995 180,999 -- -- -- --
1994 187,678 -- -- -- --
JOHN J. SCARCELLA(/6) 1996 171,300 -- -- 31,000 --
Vice President, Sales
</TABLE>
- ----------------------
1. Excludes perquisites and other personal benefits if the aggregate amount of
such items of compensation is less than the lesser of either $50,000 or 10%
of the total annual salary and bonus of the named executive officer.
2. Mr. Brew joined the Company in the fourth fiscal quarter of fiscal 1995.
3. Mr. Doherty joined the Company in the fourth fiscal quarter of fiscal 1995.
His options were granted at a per share exercise price equal to the per
share market value of the Common Stock on the date of grant ($5.125) and
vest in 20 quarterly installments commencing July 31, 1995. The vesting of
these options accelerates in the event of a consolidation or merger in
which the Company is not the surviving entity or a sale of substantially
all of the Company's assets.
4. Mr. Flanagan's options were granted at a per share exercise price equal to
the per share market value of the Common Stock on the date of grant
($5.125) and vest in 20 quarterly installments commencing July 31, 1995.
The vesting of these options accelerates in the event of a consolidation or
merger in which the Company is not the surviving entity or a sale of
substantially all of the Company's assets.
5. Mr. Kurzweil's salary in fiscal 1996 and 1995 reflects employment on a 75%
basis.
6. Mr. Scarcella became an executive officer of the Company in fiscal 1996.
The options granted to him in fiscal 1996 were granted at a per share
exercise price equal to the per share market value of the Common Stock on
the date of grant. Of the option shares, 6,000 were granted at an exercise
price of $5.125 and vest in 20 quarterly installments commencing July 31,
1995; and 25,000 were granted at an exercise price of $4.125, and vest in
16 quarterly installments commencing October 31, 1996.
- 13 -
<PAGE>
Option Grants in the Last Fiscal Year
The following table sets forth certain information with respect to stock options
granted to each of the Company's executive officers named in the Summary
Compensation Table, above, during the fiscal year ended January 31, 1996.
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term /5
------------------------------------------------------------ --------------------
Percent of Total
Options
Number of Granted to
Securities Employees in Exercise
Underlying Fiscal Year(/3) Price(/4) Expiration 5% 10%
Name Options 1996 ($) Date ($) ($)
<S> <C> <C> <C> <C> <C> <C>
Thomas E. Brew, Jr. -- -- -- -- -- --
Thomas B. Doherty 10,000(/1) 2.6% 5.125 04/18/05 32,230 81,679
Mark D. Flanagan 10,000(/1) 2.6% 5.125 04/18/05 32,230 81,679
Raymond F. Kurzweil -- -- -- -- -- --
John J. Scarcella 6,000(/1) 1.6% 5.125 04/18/05 19,338 49,007
John J. Scarcella 25,000(/2) 6.6% 4.125 09/07/05 64,054 164,354
</TABLE>
- -----------------
1. These options become exercisable in 20 quarterly installments commencing
July 31, 1996.
2. This option becomes exercisable in 16 quarterly installments commencing
October 31, 1996.
3. Based on an aggregate of 383,750 shares subject to options granted to
employees of the Company in the year fiscal ended January 31, 1996.
4. The exercise price per share of each option was equal to the per share
market value of the Common Stock on the date of grant.
5. The potential realizable value is calculated based on the term of the
option (ten years) at its date of grant. It is calculated by assuming that
the stock price on the date of grant appreciates at the indicated annual
rate compounded annually for the entire term of the option and that the
option is exercised and sold on the last day of its term for the
appreciated stock price. However, the optionee will not actually realize
any benefit from the option unless the market value of the Company's stock
price in fact increases over the option price.
-------------------------
- 14 -
<PAGE>
Aggregated Option Exercises in the Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth for each of the Company's executive officers
named in the Summary Compensation Table, above, certain information regarding
exercises of stock options during the fiscal year ended January 31, 1996 and
stock options held at that date. The "Value of Unexercised In-the-Money Options
at Fiscal Year End" is the difference between the market price of the Common
Stock subject to the option on January 31, 1996 ($3.75 per share) and the option
exercise (purchase) price.
<TABLE>
<CAPTION>
Shares Number of Securities Underlying Value of Unexercised In-the-
Acquired Unexercised Options at Fiscal Money Options at Fiscal Year
on Value Year End End ($)
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Thomas E. Brew, Jr. -- -- 83,333 166,667 -0- -0-
Thomas B. Doherty -- -- 21,885 38,115 -0- -0-
Mark D. Flanagan -- -- 23,671 36,328 -0- -0-
Raymond F. Kurzweil -- -- 179,839 21,428 340,353 -0-
John J. Scarcella -- -- 6,871 30,368 5,998 -0-
</TABLE>
Report of the Compensation Committee on Executive Compensation
This report has been prepared by the Compensation Committee of the Board of
Directors of the Company and addresses the Company's compensation policies with
respect to the Chief Executive Officer and executive officers of the Company in
general for the fiscal year ended January 31, 1996. Each member of the Committee
is a non-employee director.
Compensation Policy
The overall intent of the Committee in respect of executive officers is to
establish levels of compensation that provide appropriate incentives in order to
command high levels of individual performance and thereby increase the value of
the Company to its stockholders, and that are sufficiently competitive to retain
and attract the skills required for the success and profitability of the
Company. The principal components of executive compensation are salary, bonus
and stock options. During fiscal 1996, the Company did not have a formal
compensation or bonus Plan.
Chief Executive Officer's Compensation
The Chief Executive Officer's compensation for fiscal 1996 is based on a written
employment agreement that was negotiated and entered into between him and the
Company in November 1994. The agreement provides for (i) the payment of a salary
of $250,000, $300,000 and $350,000 for the twelve-month periods ending November
1, 1995, 1996 and 1997; (ii) the payment of bonuses of $100,000 and $50,000 for
the twelve-month periods ending November 1, 1995 and 1996; and (iii) the
granting in 1994 of an option to purchase 250,000 shares of Common Stock and an
additional option grant to offset the percentage dilutive effects of the shares
then expected to be issued in connection with the settlement of stockholder
litigation pending against the Company. This offset option was granted in May
1996, covers 50,000 shares and has the same vesting schedule as the original
option. The salary in the agreement was determined to be appropriate by the
members of the Committee based on the financial and legal difficulties that the
Company has experienced, the expertise and responsibility that the position
requires; the Chief Executive Officer's management experience in prior
employments, particularly with respect to financially troubled companies, and
the subjective judgement of the Committee members of a reasonable compensation
level.
Other Executive Officers
Salary. During fiscal 1996, the salary of each executive officer other than the
Chief Executive Officer was based in the case of long-term employees on the
level of his prior salary, any increase in responsibilities, and the subjective
judgement of the members of the Committee as to the value of the executive's
past contribution and potential future contribution to the profitability of the
business. In the case of Mr.
- 15 -
<PAGE>
Doherty, the Company's Chief Financial Officer, who joined the Company in
November 1994, his salary was based on his prior financial and accounting
experience, and in particular his experience with financially troubled
companies, and on terms designed to induce him to join the Company as a
full-time employee. In all cases, Committee members exercised their subjective
judgement as to what constitutes a compensation level that is fair and
calculated to retain the executive in the Company's employ.
Bonuses. No executive officer (other than the Chief Executive Officer) received
a bonus in fiscal 1996.
Stock Options. The Committee believes that stock ownership by executive officers
is important in aligning management's and stockholders' interests in the
enhancement of stockholder value over the long term. The exercise price of stock
options is equal to the market price of the Common Stock on the date of grant.
The stock option grants made to the executive officers in fiscal 1996 were made
based on the subjective judgement of the Committee members of the appropriate
recognition for services to the Company during the 1996 fiscal year.
Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the
Internal Revenue Code (enacted in 1993) generally disallows a tax deduction to
public companies for compensation over $1 million paid to its chief executive
officer and its four other most highly compensated executives. The Company's
compensation payable to any one executive officer (including potential income
from outstanding stock options) is currently and for the foreseeable future
unlikely to reach that threshold. Qualifying, performance-based compensation
will not be subject to the deduction limit if certain requirements are met. The
Committee currently intends to structure stock option grants to executive
officers in a manner that complies with the performance-based requirements of
the statute.
The Compensation Committee: David R. A. Steadman
James W. Storey
Compensation Committee Interlocks and Insider Participation
Decisions concerning executive compensation are made by the Compensation
Committee of the Board of Directors, which during fiscal 1996 consisted of Scott
M. Sperling and Messrs. Steadman and Storey, none of whom is or was an officer
or employee of the Company or any of its subsidiaries. During fiscal 1996, no
executive officer of the Company served as a director or member of a
compensation committee of any entity with which any director of the Company had
any relationship as a director or officer.
---------------------------
- 16 -
<PAGE>
The Performance Graph and the Report of the Compensation Committee on Executive
Compensation in this Proxy Statement are not and shall not be deemed
incorporated by reference into any filings of the Company with the Securities
and Exchange Commission by implication or by any reference in any such filings
to this Proxy Statement.
PERFORMANCE GRAPH
The following graph assumes an investment of $100 on August 17, 1993 (the date
the Company's Common Stock was first registered under Section 12 of the Exchange
Act) and compares yearly changes thereafter (through January 31, 1996) in the
market price of the Common Stock with (i) the Nasdaq Market Index for U.S.
Companies (a broad market index) and (ii) the Nasdaq Computer and Data
Processing Services Stocks, a published industry index.
The performance of the indices is shown on a total return (dividend
reinvestment) basis; however, the Company paid no dividends during the period
shown. The graph lines merely connect the beginning and end of the measuring
periods and do not reflect fluctuations between those dates.
[line graph]
17-Aug-93 31-Jan-94 31-Jan-95 31-Jan-96
Kurzweil Applied Intelligence, Inc. $100.00 $130.00 $53.00 $38.00
Nasdaq Computer & Data
Processing Services $100.00 $110.00 $124.00 $196.00
Nasdaq Market Index $100.00 $109.00 $104.00 $146.00
-17-
<PAGE>
AUDITORS
The firm of Ernst & Young LLP, certified public accountants, served as the
Company's independent public accountants to audit the Company's financial
statements for the fiscal year ending January 31, 1996. A representative of
Ernst & Young LLP is expected to be present at the Annual Meeting to make a
statement if he wishes to do so and to respond to appropriate questions.
SUBMISSION OF STOCKHOLDER PROPOSALS
Any stockholder who wishes to present a proposal for action at the 1997 Annual
Meeting of Stockholders and who wishes to have it set forth in the proxy
statement and identified in the form of proxy prepared by the Company, must
deliver such proposal to the Company at its principal executive offices no later
than January 15, 1997 and must meet the other requirements for inclusion set
forth in Regulation ss.240.14a-8 under the Securities Exchange Act of 1934.
INCORPORATION OF FORM 10-KSB AND 10-KSB/A BY REFERENCE
The Company's Annual Report on Form 10-KSB for the fiscal year ended January 31,
1996 and Amendment No. 1 and Amendment No. 2 thereto, both filed on Form
10-KSB/A are hereby incorporated herein by reference thereto.
June 28, 1996 By Order of the Board of Directors
Roger M. Barzun, Secretary
- 18 -
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
ANNUAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby (i) revokes previous proxies given with respect to the
shares of the common stock of Kurzweil Applied Intelligence, Inc. (the
"Company") noted on the reverse side hereof and registered in the name of the
undersigned (the "Shares"); (ii) acknowledges receipt of the Notice and Proxy
Statement dated June 28, 1996 in connection with the Annual Meeting of
Stockholders of the Company to be held on July 19, 1996 at 9:00 a.m. at the
Company's headquarters at 411 Waverley Oaks Road, Waltham, Massachusetts, or any
adjournment thereof; and (iii) appoints Thomas E. Brew, Jr., and Thomas B.
Doherty and Roger M. Barzun , or any one of them, each with full power to act
alone, the attorneys and proxies of the undersigned with power of substitution
to each, to vote all of the Shares that the undersigned is entitled to vote at
the 1996 Annual Meeting of Stockholders of the Company, and at any adjournment
thereof, with all the powers the undersigned would have had if personally
present at said meeting. Without limiting the generality of the authorization
hereby given, said proxies are, and each of them is instructed to vote or act as
follows on the matters to be voted upon set forth in said Proxy Statement.
If you wish to vote in accordance with the recommendations of the Board of
Directors, you need only sign and date this proxy on the reverse side -- you
need not mark any boxes.
CONTINUED AND TO BE SIGNED AND DATED ON THE REVERSE SIDE
[SEE REVERSE SIDE]
[Kurzweil Applied Intelligence, Inc. Proxy Card]
<PAGE>
- ---
|X|
- ---
Please mark
votes as in
this example
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
"FOR" THE ELECTION OF ALL NOMINEES AND "FOR" PROPOSALS 2, 3 AND 4.
1. Election of Directors
Nominees:Thomas E. Brew, Jr. Steven F. Kaplan,
Raymond C. Kurzweil, William R. Lonergan
David R. A. Steadman, James W. Storey
1. Election of FOR ALL WITHHOLD
Directors NOMINEES FROM ALL
[ ] [ ]
- -------------------------------------------------------------------------------
To withhold authority to vote for one or more nominees, write his name on the
line above.
Mark here [ ]
for address
change and
note the change
at left.
2. Approval of an Amendment to the Certificate
of Incorporation:
[ ] [ ] [ ]
FOR AGAINST ABSTAIN
3. Approval of the Financing Plan:
[ ] [ ] [ ]
FOR AGAINST ABSTAIN
4. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournment
thereof, including, but not limited to the adjournment of the meeting for
purposes of soliciting additional proxies to achieve a quorom or to obtain
an affirmative vote on proposals 2 and 3.
[ ] [ ] [ ]
FOR AGAINST ABSTAIN
Please sign exactly as your name appears hereon. Joint owners should both sign.
When signing as an attorney, executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please sign in full corporate
name by President or other authorized officer. If a partnership, please sign in
partnership name by authorized person.
Signature: __________________ Date:_________
Signature: __________________ Date:_________
PLEASE PROMPTLY MARK, SIGN, DATE AND RETURN THIS PROXY
USING THE ENCLOSED ENVELOPE.
[Kurzweil Applied Intelligence, Inc. Proxy Card]
