SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
(Amendment No 1)
Filed by Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] 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.
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(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, June 21. 1996
Place: The Offices of the Company
411 Waverley Oaks Road
Waltham, Massachusetts
Time: 9:00 a.m., local time
Purposes: To elect six directors to serve for a term of one year and until
their successors are elected and qualified;
To consider the adoption of a restatement of 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.
To approve a financing plan to sell shares of Common Stock of the
Company in a private placement.
To transact such other business as may properly come before the
meeting or any adjournment thereof.
Only stockholders of record at the close of business on April 30, 1996 are
entitled to notice of, and to vote at, the meeting or any adjournment thereof.
May __, 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 June 21, 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, (ii) by delivering 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-K) for the year ended January 31, 1996 is being mailed with this Notice
of Annual Meeting and Proxy Statement on or about May __, 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 a restatement of 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.
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
or any adjournment thereof.
Record Date and Voting
Only stockholders of record at the close of business on April 30, 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
6,790,367 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. The directors do not know of any such
other matter or business to be brought before the meeting.
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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. There are currently six
directors. 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 58 1995
James W. Storey 62 1995
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. 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.
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Mr. Kaplan. Mr Kaplan is an independent financial and strategy consultant,
assisting companies, buyout 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 Aavid Thermal Technologies, Inc.,
which manufactures thermal management products for the semiconductor industry
and produces computational fluid dynamic software; and is a director of
Vitronics Corporation, a manufacturer of reflow soldering ovens for the
electronics industry, and Wahlco Environmental Systems, Inc., a publicly traded
environmental equipment and services company.
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.
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 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
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Compensation Committee held three meetings during the year ended January 31,
1996 and each 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.
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PROPOSAL 2 - AMENDMENT AND RESTATEMENT OF THE CERTIFICATE OF INCORPORATION
On May 3, 1996 the Board of Directors of the Company adopted, subject to
stockholder approval, a restatement of the Company's Amended and Restated
Certificate of Incorporation (the "Certificate") and pursuant to Delaware law
declared such restatement to be advisable. The restatement amends 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. The
restatement of the Certificate also incorporates amendments made to the
Certificate since its filing and eliminates provisions that are no longer in
effect.
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. The availability or issuance of additional shares could
have the effect of 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. If the restatement of the
Certificate is approved by stockholders, it will become effective upon its
filing with the Secretary of State of the State of Delaware.
At April 30, 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 future operations,
on May 9, 1996 the Company sold 1,320,050 shares of Common Stock in a private
placement, leaving a balance of only 450 unreserved shares available for
issuance. 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.
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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.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
APPROVAL OF THE RESTATEMENT OF THE CERTIFICATE
PROPOSAL 3 - APPROVAL OF A FINANCING PLAN
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 2.553
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 shares will 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.
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 may exceed 20% of the number of shares of Common Stock issued and
outstanding prior to the Financing.
The proposed Financing is the result of the Company's need to raise additional
cash to fund its operations. 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. 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. If the Company
does not obtain the working capital expected to be raised in the Financing, the
Company could be forced to restructure or curtail its operations. 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.
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.
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.
Company is currently negotiating an agreement (the "Agency Agreement") with the
investment banking firm (the "Placement Agent") that represented the Company in
the sale 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 agreement is expected to contain the terms
described below. However, the
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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.
Under the proposed 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 July 1, 1996 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 sale price per Share is
expected to be equal to the greater of $2.00 or 65% of an average closing price
of the Common Stock prior to the closing of the Financing, and the Board of
directors believes this to be fair value under the circumstances. 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.
After the closing of the Financing, the Company will be required to file on or
before September 30, 1996 a registration statement covering the re-sale of the
Shares and to use good faith diligent efforts to cause the registration
statement to become effective on or before November 30, 1996. In the event that
the Company is unsuccessful in having the registration statement declared
effective by the Securities and Exchange Commission on or before June 1, 1997,
the Company will be required to issue five-year warrants to the investors in the
Financing covering a number of shares that increases for each month after June
1, 1997 that the registration statement has not been declared effective, up to a
number equal to the number of Shares sold in the Financing. These warrants, if
required to be issued, would be exercisable at the same price as the shares sold
in the Financing.
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 private placement
at an exercise price equal to the per-share price at which Shares are sold in
the Financing. 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 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 the shares underlying the
warrants 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 the like 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.
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 or
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reserve for issuance, which is the subject of Proposal 2, above. The warrant
holder 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
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Common Stock at May 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.
Security Ownership of Certain Beneficial Holders
Name and Address of Number of Shares Percentage of
Beneficial Owner of Common Stock Class
Phemus Corporation 959,808 /1 13.9%
600 Atlantic Avenue
Boston, Massachusetts 02210
Xerox Corporation 959,808 /2 13.9%
800 Long Ridge Road
Stamford, Connecticut 06904
Scudder, Stevens & Clark, Inc 383,150 /3 5.64%
345 Park Avenue
New York, New York
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Security Ownership of Management
Name and Address of Number of Shares Percentage of
Beneficial Owner * of Common Stock Class
Thomas E. Brew, Jr. 126,000 /4 1.8%
Thomas B. Doherty 27,778 /5 **
Mark D. Flanagan 27,293 /6 **
Steven F. Kaplan 10,000 /10
Raymond C. Kurzweil 188,886 /7 2.71%
John J. Scarcella 7,233 /8 **
William R. Lonergan 12,870 /9 **
David R. A. Steadman 10,000 /9 **
James W. Storey 16,000 /10 **
All Directors and Executive
Officers as a Group
(11 Persons) 369,957 /11 5.17%
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* The address of each person is the address of the Company's offices in
Waltham, Massachusetts.
** Represents holdings of less than one percent.
1. Includes 102,617 shares issuable on the exercise of currently exercisable
warrants to purchase Common Stock.
2. 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.
3. The information concerning this holder is based solely on information
contained in a filing it has made with the Securities and Exchange
Commission pursuant to Section 13(d) or 13(g) of the Securities Exchange Act
of 1934. The filing indicates that Scudder, Stevens & Clark, Inc. is filing
on behalf of itself and Scudder, Stevens & Clark of Canada Ltd. and Scudder,
Stevens & Clark du Canada Ltee., all of which are registered investment
advisers, and that it has sole voting power as to 94,350 of these shares,
shared voting power as to 216,000 of these shares and sole dispositive power
as to all of these shares.
4. Includes 125,000 shares subject to purchase under an option within 60 days
of May 1, 1996 at $4.125 per share.
5. Includes 26,578 shares subject to purchase under options within 60 days of
May 1, 1996 at prices of $4.125 and $5.125 per share.
6. Includes 27,293 shares subject to purchase under options within 60 days of
May 1, 1996 at prices of $4.125 and $5.125 per share.
7. Includes 182,220 shares subject to purchase under options within 60 days of
May 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.
8. Includes 7,133 shares subject to purchase under options within 60 days of
May 1, 1996 at prices ranging from $1.50 per share to $5.125 per share.
9. These shares are currently exercisable under an option at $4.375 per share.
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<PAGE>
10. Includes 10,000 shares currently exercisable under an option at $4.375
per share.
11. Includes 361,091 shares under options subject to purchase within 60 days
of May 1, 1996 at prices ranging from $1.50 per share 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.
-------------------------
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 /2 1996 134,394 -- -- 10,000 /5 --
Vice President, 1995 32,500 -- -- 50,000 --
Chief Financial Officer &
Treasurer
MARK D. FLANAGAN 1996 225,000 -- -- 10,000 /5 --
Executive Vice President 1995 160,833 38,333 -- 20,000 --
1994 113,045 34,999 -- 30,000 --
RAYMOND C. KURZWEIL /3 1996 172,791 -- -- -- --
Chief Technology Officer 1995 180,999 -- -- -- --
1994 187,678 -- -- -- --
JOHN J. SCARCELLA /4 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. Messrs. Brew and Doherty joined the Company in the fourth fiscal quarter of
fiscal 1995.
3. Mr. Kurzweil's is paid a salary reflecting employment on a 75% basis.
4. 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
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<PAGE>
$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.
5. These 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 ($5.125) and
vest in 20 quarterly installments commencing July 31, 1995. The vesting of
these options accelerates in the event of a consolidation or merger in which
the Company is not the surviving entity or a sale of substantially all of
the Company's assets.
Option Grants in the Last Fiscal Year
The following table sets forth certain information with respect to stock options
granted to each of the Company's executive officers named in the Summary
Compensation Table, above, during the fiscal year ended January 31, 1996:
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term /5
---------------------------------------------------- ----------------
Percent of Total
Options
Number of Granted to
Securities Employees in Exercise
Underlying Fiscal Year /3 Price /4 Expiration 5% 10%
Name Options 1996 ($) 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, 1995.
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.
-------------------------
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<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
expected to be issued in connection with the settlement of stockholder
litigation pending against the Company. 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
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<PAGE>
executive's past contribution and potential future contribution to the
profitability of the business. In the case of Mr. 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.
---------------------------
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<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.
[TABULAR REPRESENTATION OF LINE CHART]
<TABLE>
<CAPTION>
17-Aug-93 31-Jan-94 31-Jan-95 31-Jan-96
<S> <C> <C> <C> <C>
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
</TABLE>
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<PAGE>
AUDITORS
Ernst & Young LLP. 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.
May __, 1996 By Order of the Board of Directors
Roger M. Barzun, Secretary
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