<PAGE>
FORM 10-KSB/A
(Amendment No. 1)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended January 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________________ to________________________
Commission file number: 0-20256
KURZWEIL APPLIED INTELLIGENCE, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2815079
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
411 Waverley Oaks Road
Waltham, Massachusetts 02154
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (617) 893-5151
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, $0.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Issuer's revenues for its most recent fiscal year: $8,547,000
At April 15, 1997 the aggregate market value of the voting stock held by non-
affiliates of the registrant was $25,907,330.
At April 15, 1997, the registrant had 9,085,760 shares of its common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
Page No. 1 of 11
<PAGE>
PART III
Item 10. Directors And Executive Officers of The Registrant
The following sets forth the name and age of each director and executive officer
of the Company, his positions and offices with the Company, his period of
service with the Company and his business experience for at least the past five
years, and with respect to directors, their present principal occupation and
other directorships held in public companies.
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.
<TABLE>
<CAPTION>
Name Age Director Since
---- --- --------------
<S> <C> <C>
Thomas E. Brew, Jr. ................................. 54 1994
Steven F. Kaplan..................................... 41 1995
Raymond C. Kurzweil.................................. 49 1982
William R. Lonergan.................................. 72 1984
David R. A. Steadman................................. 59 1995
James W. Storey...................................... 63 1995
</TABLE>
--------
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 Chairman of
the Board of Directors. Prior to joining the Company, Mr. Brew was a founder and
had served since 1988 as Executive Vice President of Argus Management
Corporation, a firm which provides interim management services in crisis
situations.
Mr. Kaplan. Mr Kaplan has been Executive Vice President and Chief Financial
Officer of The Coleman Company, Inc., a diversified manufacturer of outdoor
recreation and hardware products, since August 1996. From 1993 to August 1996
he was 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, and from 1990 to 1992, he was
Executive Vice President, Chief Financial Officer and Chief Strategic Officer
of AM International, Inc., a graphics art equipment and supplies company.
Prior thereto, 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. and as
Chairman of its Strategy and Technology Committee.
Mr. Lonergan. Mr. Lonergan was a general partner of Oxford Partners, a
venture capital partnership, from 1983 to 1995. Prior to 1983, 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 been 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, and from 1987 to 1988, as Chairman and Chief
Executive Officer of GCA Corporation, a manufacturer of automated
semiconductor capital equipment. From 1980 to 1987 Mr. Steadman was a Vice
President of Raytheon Company, a defense electronics manufacturer, and served
in various management positions, most recently as President of its venture
capital division. Mr. Steadman is Chairman of the Board of Directors of
Technology Service Group, Inc., a manufacturer of high technology pay
telephone components and Wahlco Environmental Systems, Inc., a manufacturer of
environmental conditioning systems. He is also a director of Aavid Thermal
Technologies, Inc., which manufactures thermal management products and
produces computational fluid dynamics software, and Vitronics Corporation, a
manufacturer of reflow soldering ovens.
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. 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.
Executive Officers
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<PAGE>
Executive Officers are elected by the Board of Directors and serve until they
resign or are removed by the Board. The Company's executive officers who served
as such during fiscal 1997 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Thomas E. Brew, Jr. .............. 54 Chairman of the Board of Directors
President, Chief Executive Officer
Thomas B. Doherty................. 38 Chief Financial Officer, Vice President
of Finance and Treasurer
Mark D. Flanagan.................. 44 Executive Vice President
W. Francis Ganong................. 44 Vice President, Research
Raymond C. Kurzweil............... 49 Chief Technology Officer
John J. Scarcella................. 42 Vice President of Sales
</TABLE>
The business experience of Messrs. Brew and Kurzweil is set forth above under
the listing of directors of the Company.
Mr. Doherty. Mr. Doherty became the Company's Vice President of Finance,
Treasurer and Chief Financial Officer on November 1, 1994. He had been serving
as Acting Chief Financial Officer of the Company since May 23, 1994. Prior
thereto, Mr. Doherty had been a financial consultant at Argus since 1988.
Mr. Flanagan. Mr. Flanagan joined the Company in January 1993 and was elected
Vice President of Business Development in May 1993. Mr. Flanagan was elected
Executive Vice President in June 1994. Prior to joining the Company, Mr.
Flanagan served as President and Chief Executive Officer of Lotus Publishing
Corporation, a subsidiary of International Data Group, Inc. from 1991 to 1992.
Mr. Flanagan also worked at Lotus Development Corporation from 1988 to 1991 in
various positions including President of Lotus Publishing Corporation and Vice
President of Corporate Marketing from 1988 to 1989.
Mr. Ganong. Mr. Ganong joined the Company in 1982 and became Vice President,
Research in May 1993. Mr. Ganong was formerly Director of Research. Mr. Ganong
holds a Ph.D. and is a graduate of MIT and Harvard.
Mr. Scarcella. Mr. Scarcella joined the Company in 1985 as a Sales Manager for
its Mid-Atlantic territory. Prior to being elected Vice President of Sales in
September 1995, he served as Vice President of National Accounts and Government
Operations.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities ("Insiders") to file reports of ownership and
certain changes in ownership with the Securities and Exchange Commission and to
furnish the Company with copies of those reports.
Based solely on a review of those reports and amendments thereto furnished
to the Company during its most recent fiscal year or written representations by
Insiders that no Forms 5 were required to be filed, the Company believes that
during the fiscal year ended January 31, 1997, all Section 16(a) filing
requirements applicable to Insiders were satisfied.
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<PAGE>
Item 11. Executive Compensation.
This item contains information about compensation, stock options grants,
employment arrangements and other matters concerning certain of the executive
officers and the directors of the Company.
Summary Compensation Table
The following table sets forth the compensation the Company paid or accrued
for services rendered in fiscal years ended January 31, 1997, 1996 and 1995 by
the Chief Executive Officer and the four other most highly compensated executive
officers of the Company whose compensation exceeded $100,000 in fiscal 1997 and
who were serving at the end of the 1997 fiscal year.
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
---------------------------------------- -----------------------
Securities
Other Annual Underlying All Other
Name and Principal Fiscal Salary(1) Bonus Compensation(2) Options Compensation
Position Year ($) ($) ($) (#)(3) ($)
- ------------------ ------ --------- ------- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Thomas E. Brew, Jr.(4).. 1997 300,000 50,000 -- 300,000 --
Chairman, President & 1996 250,000 100,000 -- -- --
Chief Executive Officer 1995 62,500 25,000 -- 250,000 --
Thomas B. Doherty(5).... 1997 136,500 -- -- 80,000 --
Vice President, Chief 1996 134,394 -- -- 10,000 --
Financial Officer & 1995 32,500 -- -- 50,000 --
Treasurer
Mark D. Flanagan(6)..... 1997 175,000 50,000 -- 80,000 --
Executive Vice 1996 175,000 50,000 -- 10,000 --
President 1995 160,833 38,333 -- 20,000 --
Raymond C. Kurzweil(7).. 1997 103,984 -- -- 50,000 --
Chief Technology 1996 172,791 -- -- -- --
Officer 1995 180,999 -- -- -- --
John J. Scarcella(8).... 1997 193,828 -- -- 34,520 --
Vice President, Sales 1996 171,300 -- -- 31,000 --
</TABLE>
- --------
(1) Includes sales commissions.
(2) 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.
(3) Effective July 31, 1996 the Compensation Committee voted to reduce the
exercise price per share of employee stock options, the exercise price of
which was in excess of the per share market value of the Company's common
stock ("Common Stock") on that date ($2.437) to that per share market value
if the optionee agreed to amend each of his or her option agreements so that
the portion of the re-priced option that was vested at April 30, 1996 would
cease to be vested and would then vest in two substantially equal
installments on July 31, 1997 and July 31, 1998. Under the rules and
regulations of the Securities and Exchange Commission, the re-priced option
shares are deemed to have been granted on the date of the re-pricing. See
"Report on Ten Year Option Re-Pricings."
(4) Mr. Brew joined the Company in the fourth quarter of fiscal 1995. Of the
number of shares shown as underlying options granted in fiscal 1997,
250,000 shares are covered by options granted in prior years which were
re-priced in July 1996 (see footnote 3, above).
(5) Mr. Doherty joined the Company in the fourth quarter of fiscal 1995. Of the
number of shares shown as underlying options granted in fiscal 1997,
60,000 shares are covered by options granted in prior years which were re-
priced in July 1996 (see footnote 3, above).
(6) Of the number of shares shown as underlying options granted in fiscal
1997, 60,000 shares are covered by options granted in prior years which
were re-priced in July 1996 (see footnote 3, above).
(7) Mr. Kurzweil's salary in fiscal 1997 reflects employment on a 35% basis
and in fiscal 1996 and fiscal 1995 reflects employment on a 75% basis. The
number of shares shown as underlying options granted in fiscal 1997 are
shares covered by options granted in prior years which were re-priced in
July 1996 (see footnote 3, above).
(8) Mr. Scarcella became an executive officer of the Company in fiscal 1996. The
number of shares shown as underlying options granted in fiscal 1997 are
shares covered by options granted in prior years which were re-priced in
July 1996 (see footnote 3, above).
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 during the fiscal year ended January 31, 1997. For purposes
of this table, options re-priced on July 31, 1996 are considered under
Securities and Exchange Commission regulations to have been re-granted on that
date. Accordingly, the information under the columns entitled "Number of
Securities Underlying Options," "Percent of Total Options Granted to Employees
in FY 1997," and "Potential Realizable Value at Assumed Annual Rates of Stock
Price Appreciation for Option Term" are all computed on that basis. The
expiration dates of the re-priced options were not affected by the re-pricing.
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------
Potential Realizable
Percent Of Value At Assumed
Total Annual Rates Of Stock
Options Price Appreciation For
Number Of Granted To Option Term(3)
Securities Employees In Exercise -----------------------
Underlying FY 1997(1) Price(2) Expiration 5% 10%
Name Options (%) ($) Date ($) ($)
---- ---------- ------------ -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Thomas E. Brew, Jr. 250,000* 24.6 2.437 10/19/04 300,567 724,300
**(4).................. 50,000 4.9 2.437 10/19/04 60,113 144,860
Thomas B. Doherty 50,000* 4.9 2.437 10/19/04 60,113 144,860
**(5).................. 10,000* 1.0 2.437 04/18/05 12,913 31,553
20,000 1.9 2.437 05/13/06 29,818 75,097
Mark D. Flanagan **(6).. 30,000* 2.9 2.437 06/21/03 29,214 67,880
20,000* 1.9 2.437 10/19/04 24,045 57,944
10,000* 1.0 2.437 04/18/05 12,913 31,553
20,000 1.9 2.437 05/13/06 29,818 75,097
Raymond F. Kurzweil(7).. 50,000* 4.9 2.437 12/18/02 44,525 102,052
John J. Scarcella(8).... 3,520* 0.3 2.437 12/31/02 3,154 7,238
6,000* 0.6 2.437 04/18/05 7,748 18,932
25,000* 2.4 2.437 09/07/05 34,070 84,165
</TABLE>
- --------
-4-
<PAGE>
* These options were granted in prior years, but were re-priced in July 1996.
See footnote 2, below.
** In the event of a change in control of the Company the options of Messrs.
Brew, Doherty and Flanagan become exercisable in full. A change in control
for purposes of the option agreements will occur if the Merger is
consummated. See Item 1. "General" and "Employment Agreements, Termination
of Employment and Change-in-Control Arrangements," below.
(1) Based on a total of 1,012,646 shares of which (i) 322,000 shares are subject
to options granted to employees in the fiscal year ended January 31, 1997,
plus (ii) 690,646 shares subject to options granted in prior years that were
re-priced in July 1996. See footnote 2, below.
(2) The original exercise price per share of each option was equal to the
market value on the date of grant. Effective July 31, 1996, the exercise
price per share was reduced to $2.437, the closing price per share of
Common Stock on the Nasdaq National Market on that date. These re-pricings
were part of a Company-wide re-pricing of options authorized by the
Compensation Committee of the Board of Directors on July 31, 1996. Optionees
who elected the re-pricing of their options were required, in consideration,
to agree to the amendment of their re-priced options so that shares vested
as of April 30, 1996 would cease to be so vested and instead would vest in
two substantially equal installments on July 31, 1997 and July 31, 1998. See
"Report on Ten-Year Option Re-Pricings," below.
(3) The potential realizable value is calculated based on the term of the option
at its date of grant (or in the case of re-priced options, the date of re-
pricing) 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. However, the optionee will not actually realize any benefit from the
option unless the market value of Common Stock exceeds the option exercise
price at the time of exercise.
(4) The option to purchase 50,000 shares was granted to Mr. Brew in May 1996
pursuant to his November 1994 Employment Agreement to offset the
percentage dilutive effects of the shares issued in connection with the
settlement of stockholder litigation pending against the Company in 1994.
See "Employment Agreements, Termination of Employment and Change-in-Control
Arrangements," below. As a result of the re-pricing of options in July 1996
(see footnote 2, above), Mr. Brew's options to purchase 150,000 shares vest
in equal quarterly installments on the last day of each calendar quarter,
commencing June 30, 1996, and options to purchase 150,000 shares vest in two
equal installments on July 31, 1997 and July 31, 1998.
(5) As a result of the re-pricing of options in July 1996 (see footnote 2,
above), Mr. Doherty's options to purchase 53,000 shares vest in equal
quarterly installments on the last day of each fiscal quarter, commencing
July 31, 1996, and options to purchase 27,000 shares vest in two equal
installments on July 31, 1997 and July 31, 1998.
(6) As a result of the re-pricing of options in July 1996 (see footnote 2,
above), Mr. Flanagan's options to purchase 52,285 shares vest in equal
quarterly installments on the last day of each fiscal quarter, commencing
July 31, 1996, and options to purchase 27,715 shares vest in two equal
installments on July 31, 1997 and July 31, 1998.
(7) As a result of the re-pricing of options in July 1996 (see footnote 2,
above), Mr. Kurzweil's options to purchase 15,000 shares vest in equal
quarterly installments on the last day of each fiscal quarter, commencing
July 31, 1996, and options to purchase 35,000 shares vest in two equal
installments on July 31, 1997 and July 31, 1998.
(8) As a result of the re-pricing of options in July 1996 (see footnote 2,
above), Mr. Scarcella's options to purchase 1,056 shares vest in equal
quarterly installments on the last day of each calendar quarter,
commencing June 30, 1996; options to purchase 30,053 shares vest in equal
quarterly installments on the last day of each fiscal quarter, commencing
July 31, 1996; and options to purchase 3,411 shares vest in two equal
installments on July 31, 1997 and July 31, 1998.
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 certain information regarding stock
options held at January 31, 1997. No executive officer named in the Summary
Compensation Table exercised any options during fiscal 1997. The "Value of
Unexercised In-the-Money Options at Fiscal Year End" is the difference between
the closing market price of the Common Stock as reported on the Nasdaq
National Market on January 31, 1997 ($3.875 per share) and the option exercise
price.
<TABLE>
<CAPTION>
Number Of Securities Value Of Unexercised
Underlying Unexercised In-The-Money
Options At Fiscal Year End Options At Fiscal Year End($)
------------------------------ --------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Thomas E. Brew, Jr. .... 75,000 225,000 107,850 323,550
Thomas B. Doherty....... 14,000 66,000 20,132 94,908
Mark D. Flanagan........ 11,857 68,143 17,050 97,989
Raymond F. Kurzweil..... 158,768 42,500 370,046 61,115
John J. Scarcella....... 7,266 29,919 12,946 43,042
</TABLE>
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<PAGE>
Report On Ten-Year Option Re-Pricings
The following table sets forth all re-pricings of options held by current
executive officers of the Company since August 1993 when the Company became a
reporting company pursuant to Section 13(a) or 15(d) of the Exchange Act. In
all cases, the new exercise price was equal to the price set forth under the
column entitled "Market Price of Underlying Securities At Time of Re-Pricing."
<TABLE>
<CAPTION>
Length Of
Original Option
Number Of Market Price Term
Securities Of Underlying Remaining At
Underlying Securities At Exercise Price At Date Of Re-
Date Of Re- Options Re- Time Of Re- Time Of Re- Pricing
Name And Position Pricing Priced(#) Pricing($) Pricing($) (In Years)(#)
----------------- ----------- ----------- ------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Thomas E. Brew, Jr. .... 07/31/96(1) 250,000 2.437 4.125 8.2
Chairman, President & 50,000 2.437 4.500 8.2
Chief Executive Officer
Raymond C. Kurzweil..... 10/19/94(2) 50,000 4.125 9.00 8.2
Chief Technology 07/31/96 50,000 2.437 4.125 6.4
Officer
Thomas B. Doherty....... 07/31/96 50,000 2.437 4.125 8.2
Vice President, Chief 10,000 2.437 5.125 8.7
Financial Officer & 20,000 2.437 4.500 9.8
Treasurer
Mark D. Flanagan........ 10/19/94(2) 30,000 4.125 9.00 8.7
Executive Vice 07/31/96 30,000 2.437 4.125 6.9
President 20,000 2.437 4.125 8.2
10,000 2.437 5.125 8.7
20,000 2.437 4.500 9.8
John J. Scarcella....... 10/19/94(2) 3,520 4.125 9.00 8.2
Vice President, Sales 07/31/96 3,520 2.437 5.125 6.4
6,000 2.437 5.125 8.7
25,000 2.437 4.125 9.1
W. Francis Ganong....... 10/19/94(2) 4,800 4.125 9.00 8.2
Vice President, 07/31/96 4,800 2.437 4.125 6.4
Research 10,000 2.437 5.125 8.7
7,500 2.437 4.500 9.8
</TABLE>
- --------
(1) The option re-pricing of July 31, 1996 was carried out in connection with
the sale of approximately 2.24 million aggregate shares of Common Stock
pursuant to two private placements in May 1996 and July 1996, which
the Compensation Committee believes had a dilutive effect on the Company's
stock price. Optionees who elected the re-pricing of their options were
required, in consideration, to agree to the amendment of their re-priced
options so that shares vested as of April 30, 1996 would cease to be so
vested and instead would vest in two substantially equal installments on
July 31, 1997 and July 31, 1998. All but nine eligible employees elected
to re-price some or all of their options.
(2) The option re-pricing of October 19, 1994 was carried out in connection
with the formation of a new management team in late 1994. At that time
the Company was suffering from the actions of certain members of prior
management (all of whom have left the Company) that had resulted in the
improper recording of revenues and the erroneous recording of
capitalization costs. In anticipation of Messrs. Brew and Doherty
commencing full-time employment with the Company and the granting of options
to them in that connection, the Compensation Committee decided that it was
appropriate to re-price all options with an exercise price of $9.00 per
share (held by a total of 52 optionees) as an inducement to them to remain
with the Company and to assist it in achieving a financial recovery.
The Compensation Committee: David R. A. Steadman
William R. Lonergan
James W. Storey
Employment Agreements, Termination Of Employment And Change-In-Control
Arrangements
Mr. Brew is employed pursuant to an employment agreement dated as of November
1, 1994, as amended in March, 1997, which 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, respectively; (ii) the payment of bonuses of
$100,000 and $50,000 for the twelve-month periods ending November 1, 1995 and
1996, respectively; and (iii) the granting in 1994 of a ten-year option vesting
in quarterly installments over a five-year period to purchase 250,000 shares of
Common Stock and an additional option grant to offset the percentage dilutive
effects of shares issued in connection with the settlement of stockholder
litigation then pending against the Company. In May 1996 the Company granted to
Mr. Brew this offset option to purchase 50,000 shares of Common Stock with the
same vesting schedule and expiration date as the option granted in 1994. The
employment agreement also provides that in the event of the termination of Mr.
Brew's employment by reason of the expiration of the agreement on November 1,
1997, or if prior to expiration of the agreement his employment is terminated
without cause, or a change in control of the Company occurs, the Company will
pay Mr. Brew one year's salary in a lump sum on the effective date of such
termination, expiration or change in control and provide him current benefits
until November 1, 1997 or for one year from the date of such termination,
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<PAGE>
expiration or change in control, whichever period is longer. In addition, in the
event of a change in control Mr. Brew's options become fully exercisable. A
change in control will occur for purposes of these agreements if the Merger
described in Item 1. under the heading "General" is consummated.
Messrs. Doherty and Flanagan have entered into agreements with the Company
providing that in the event of a change in control the Company will pay Mr.
Doherty $68,000 and Mr. Flanagan $225,000, respectively, in a lump sum on the
effective date of the change in control and will continue to provide each of
them with current benefits for a period of one year thereafter. In addition,
their stock options by their terms become fully exercisable in the event of a
change in control. A change in control will occur for purposes of these
agreements if the Merger described in Item 1. under the heading "General" is
consummated.
In addition, all unexercised options held by non-employee directors of the
Company immediately vest in the event the Merger is consummated.
Report Of The Compensation Committee On Executive Compensation
This report has been prepared by the Compensation Committee (the "Committee")
of the Board of Directors and addresses the Company's compensation policies with
respect to the Chief Executive Officer and executive officers in general for the
fiscal year ended January 31, 1997. 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 1997, the Company did not have a formal
compensation or bonus plan.
Chief Executive Officer's Compensation
The Chief Executive Officer's compensation for fiscal 1997 was based on a
written employment agreement that was negotiated and entered into in November
1994 and subsequently amended in March, 1997. See "Employment Agreements,
Termination of Employment and Change-in-Control Arrangements," above. The Chief
Executive Officer's compensation was determined to be appropriate by the members
of the Committee at such time based on the financial and legal difficulties that
the Company had experienced; the expertise and responsibility that the position
requires; the Chief Executive Officer's management experience in prior
employment, particularly with respect to troubled companies; and the subjective
judgment of the Committee members of a reasonable compensation level.
Other Executive Officers
Salary. During fiscal 1997, the salary of each executive officer other than
the Chief Executive Officer was based on prior salary level (in the case of
long-term employees), any increase during the year in responsibilities, and
the subjective judgment 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. Doherty, Vice President,
Chief Financial Officer and Treasurer, who joined the Company in November 1994,
salary was based on his prior financial and accounting experience, (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 judgment as to what
constitutes a compensation level that is fair and calculated to retain the
executive in the Company's employ.
Bonuses. Kurzweil has no formal bonus program. A bonus was paid to one
executive officer (other than the Chief Executive Officer) based on an
informal agreement with the officer made in 1994.
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 executive officers in fiscal 1997
were made based on the subjective judgment of the Committee members of the
appropriate recognition for services to the Company during the 1997 fiscal year
and prior years. For a discussion of the decision by the Committee in fiscal
1997 to offer optionees, including executive officers, the opportunity to
reduce the price of their options, see "Report on Ten-Year Option Re-Pricings,"
above.
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) in any one tax year is 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
William R. Lonergan
James W. Storey
-7-
<PAGE>
Compensation Committee Interlocks And Insider Participation
Decisions concerning executive compensation are made by the Compensation
Committee of the Board of Directors, which during fiscal 1997 consisted of
Messrs. Steadman, Lonergan and Storey, none of whom is or was an officer or
employee of the Company or any of its subsidiaries. During fiscal 1997, 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.
Performance Graph
The following graph assumes an investment of $100 on August 17, 1993 (the date
the Common Stock was first registered under Section 12 of the Exchange Act) and
compares yearly changes thereafter through January 31, 1997 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).
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
August 17, 1993 January 31, 1994 January 31, 1995 January 31, 1996 January 31, 1997
<S> <C> <C> <C> <C> <C>
Kurzweil Applied Intelligence, Inc $100.00 $130.00 $53.00 $38.00 $38.75
Nasdaq Computer & Data Processing
Service Stocks $100.00 $110.00 $124.00 $198.00 $265.00
Nasdaq Market Index $100.00 $109.00 $104.00 $146.00 $191.00
</TABLE>
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 connect the beginning and end of the measuring periods
and do not reflect fluctuations between those dates. The price of the Common
Stock during the period shown is not necessarily indicative of its future
performance.
The Performance Graph and the Report of the Compensation Committee on
Executive Compensation in this Annual Report on Form 10-KSB 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 Annual Report on Form 10-KSB.
Directors' Compensation
Directors who are employees of the Company receive no compensation 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. All directors are reimbursed for out-of-pocket expenses incurred in
attending meetings.
Nonemployee directors of the Company also receive "formula" stock option
grants under the Company's 1995 Nonemployee Director Stock Option Plan (the
"Director 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 to purchase 3,000 shares of Common Stock 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 of Directors 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 Director 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.
Item 12. Security Ownership of Certain Beneficial Holders and Management.
The following tables set forth certain information regarding beneficial
ownership of the Company's common stock ("Common Stock") at April 15, 1997 (i)
by each person known by the Company to own beneficially more than 5% of the
outstanding Common Stock; (ii) by each director; (iii) by the executive officers
named in the Summary Compensation Table in Item 11. above; and (iv) by all
directors and executive officers as a group. The numbers and percentages are
based on 9,085,760 shares of Common Stock outstanding on April 15, 1997 and
assume, for each person or group listed, the exercise of all warrants and stock
options held by such person or group that are exercisable within 60 days of
April 15, 1997, in accordance with Rule 13d-3(d)(1) of the Exchange Act, but not
the exercise of such stock options or warrants owned by any other person. Except
as otherwise indicated in the footnotes, the Company believes that the
beneficial owners of 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.
-8-
<PAGE>
Security Ownership Of Certain Beneficial Holders
<TABLE>
<CAPTION>
Number Of
Name And Address Shares Of Percentage
Of Beneficial Owner Common Stock Of Class
------------------- ------------ ----------
<S> <C> <C>
Special Situations Fund, L.P. ..................... 1,445,050(1) 15.90%
153 East 53rd Street
New York, NY 10020
Xerox Corporation.................................. 876,121(2) 9.60%
800 Long Ridge Road
Stamford, Connecticut 06904
WisdomTree Capital Management, Inc. ............... 737,200(3) 8.11%
WisdomTree Offshore, Ltd.
WisdomTree Associates, L.P.
1633 Broadway, 38th Floor
New York, NY 10019
</TABLE>
Security Ownership Of Management
<TABLE>
<CAPTION>
Number Of Shares
Name Of Beneficial Owner Of Common Stock Percentage Of Class
------------------------ ---------------- -------------------
<S> <C> <C>
Thomas E. Brew, Jr. ..................... 101,000(4) 1.10%
Thomas B. Doherty........................ 19,866(5) *
Mark D. Flanagan......................... 15,809(6) *
Raymond C. Kurzweil...................... 167,934(7) 1.82%
John J. Scarcella........................ 9,420(8) *
Steven F. Kaplan......................... 12,250(9) *
William R. Lonergan...................... 12,250(9) *
David R. A. Steadman..................... 12,250(9) *
James W. Storey.......................... 18,250(10) *
All Directors and Executive Officers as a
Group (10 Persons)...................... 396,254(11) 4.19%
</TABLE>
- --------
* Represents holdings of less than one percent.
(1) Special Situations Fund L.P. purchased 1,320,050 of these shares on
May 9, 1996 and the balance on April 15, 1997.
(2) Excludes 168,222 shares owned by Fuji Xerox Co., Ltd. as to which Xerox
disclaims beneficial ownership, and includes 53,143 shares issuable on
the exercise of currently exercisable warrants to purchase Common Stock.
(3) According to a Form 13D dated February 4, 1997 and filed by WisdomTree
Capital Management, Inc., WisdomTree Offshore, Ltd. and WisdomTree
Associates, L.P., WisdomTree Capital Management, Inc. has shared voting
and dispositive power as to 475,700 of these shares, and WisdomTree
Offshore, Ltd. has shared voting and dispositive power as to 261,500 of
these shares. The foregoing entities may be deemed to be a group under
applicable securities laws, but the entities disclaim group membership.
(4) Includes 100,000 shares subject to purchase under stock options
exercisable within 60 days of April 15, 1997 at a price of $2.437 per
share.
(5) Includes 18,666 shares subject to purchase under stock options
exercisable within 60 days of April 15, 1997 at a price of $2.437 per
share.
(6) These shares are subject to purchase under stock options exercisable
within 60 days of April 15, 1997 at a price of $2.437 per share.
(7) Includes 161,268 shares subject to purchase under stock options
exercisable within 60 days of April 15, 1997 at prices ranging from $1.50
to $2.437 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 9,320 shares subject to purchase under stock options exercisable
within 60 days of April 15, 1997 at prices ranging from $1.50 to $2.437
per share.
(9) These shares are subject to purchase under stock options exercisable
within 60 days of April 15, 1997 at prices ranging from $2.875 to $4.375
per share.
(10) Includes 12,250 shares subject to purchase under stock options
exercisable within 60 days of April 15, 1997 at prices ranging from
$2.875 to $4.375 per share.
(11) Includes 378,356 shares subject to purchase under stock options
exercisable within 60 days of April 15, 1997 at prices ranging from $1.50
to $4.375 per share.
-9-
<PAGE>
Item 13. Certain Relationships and Related Transactions.
On May 9, 1996, the Company sold 1,320,050 shares of its common stock at a
purchase price of $2.00 per share in a private placement to Special Situations
Fund, L.P., which thereby became a 5% or greater stockholder of the Company
yielding net proceeds to the Company of approximately $2,376,000. See Item 12.,
above.
-10-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
KURZWEIL APPLIED INTELLIGENCE, INC.
Date: May 29, 1997 By: /s/ Thomas E. Brew, Jr.*
------------------------------
Thomas E. Brew, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/ Thomas E. Brew, Jr.* Chairman of the Board of Directors May 29, 1997
- ---------------------------- President & Chief Executive Officer
Thomas E. Brew, Jr.
Chief Financial Officer May 29, 1997
Vice President of Finance &
/s/ Thomas B. Doherty* Treasurer (principal accounting and
- ---------------------------- financial officer)
Thomas B. Doherty
/s/ Raymond C. Kurzweil* Chief Technology Officer May 29, 1997
- ---------------------------- Director
Raymond C. Kurzweil
/s/ Steven F. Kaplan * May 29, 1997
- ---------------------------- Director
Steven F. Kaplan
/s/ William R. Lonergan* May 29, 1997
- ---------------------------- Director
William R. Lonergan
/s/ David R. A. Steadman* May 29, 1997
- ---------------------------- Director
David R. A. Steadman
/s/ James W. Storey * May 29, 1997
- ---------------------------- Director
James W. Storey
*By: /s/ Roger M. Barzun
------------------------
Roger M. Barzun
Attorney-in-fact
</TABLE>
-11-
