==========================================START OF PAGE 1====== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. Litigation Release No. 14895 / April 29, 1996 Accounting and Auditing Enforcement Release No. 777 / April 29, 1996 SECURITIES AND EXCHANGE COMMISSION v. KENDALL SQUARE RESEARCH CORPORATION, HENRY BURKHARDT III, PETER APPLETON JONES, AND KARL G. WASSMANN III, Civil Action No. 96-10869(MLW) (D. Mass.); IN THE MATTER OF THOMAS J. MACCORMACK, Admin. Proc. File No. 3-8993 The Securities and Exchange Commission announced the filing of a Complaint, in the United States District Court for the District of Massachusetts, against Kendall Square Research Corporation ("KSR" or the "Company"); Henry Burkhardt III, KSR's former president and chief executive officer; Peter Appleton Jones, KSR's former highest ranking sales executive; and Karl G. Wassmann III, KSR's former chief financial and accounting officer. KSR, a Massachusetts-based manufacturer of high performance computer systems, is presently in a bankruptcy proceeding. The Complaint, filed on April 29, 1996, alleges that the defendants violated the anti-fraud, periodic reporting, books and records, and internal accounting controls provisions of the federal securities laws. The individual defendants are alleged to have caused KSR to issue materially false and misleading financial statements for fiscal year 1992 and the first two quarters of 1993, which overstated the Company's revenues and earnings. In addition, the Complaint alleges that Burkhardt, Appleton Jones and Wassmann sold KSR stock while in possession of material nonpublic information regarding the Company's true financial condition. The Complaint alleges that the individual defendants repeat- edly caused KSR to recognize revenue from purported "sales" of its computers that were subject to material contingencies rendering revenue recognition improper under Generally Accepted Accounting Principles ("GAAP"). In a number of instances, payment by KSR's customers was contingent on the buyers' receipt of outside funding from third parties. Certain of these contingencies were contained in side letters to the purported sales contracts. The Complaint alleges that Burkhardt, Appleton Jones and Wassmann failed to inform KSR's independent auditors, Price Waterhouse & Co., as well as the Company's finance department, that transactions upon which the Company had recognized sales revenue were subject to such material contingencies, or misrepresented the status of the customer's ==========================================START OF PAGE 2====== funding arrangements. As a result of these improper revenue recognition practices, KSR's financial statements, as included in the Company's annual report on Form 10-K for fiscal year 1992, its quarterly reports on Form 10-Q for the first two fiscal quarters of 1993 and a registration statement on Form S-1 for a March 1993 secondary offering, were materially false and misleading. The Complaint also alleges that Burkhardt, Appleton Jones and Wassmann sold shares of the Company's common stock during August 1993 while in possession of material nonpublic information concerning the Company's true financial condition and results of operations. Specifically, the Complaint alleges that these individuals knew or were reckless in not knowing, at the time of their trades, that a substantial portion of KSR's reported revenue during 1992 and the first two quarters of 1993 did not conform with GAAP requirements for revenue recognition and that the Company's controller had deemed a substantial portion of KSR's receivables to be uncollectible. With respect to KSR, the Complaint seeks a permanent injunction against further violations of Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13a-1, 13a-13, and 12b-20 thereunder. The Complaint seeks the following from the individual defendants: (i) a permanent injunction from future violations of anti-fraud, periodic reporting, books and records and internal accounting controls provisions of the federal securities laws; (ii) disgorgement of a sum equivalent to losses avoided from the sale of KSR common stock and prejudgment interest thereon; (iii) payment of civil penalties; and (iv), with respect to Burkhardt and Appleton Jones, an Order that they be prohibited from serving as officers or directors of any public company. Simultaneously with the filing of the Complaint, the Commission submitted to the Court a proposed Final Judgment as to Henry Burkhardt III, consented to by Burkhardt, without admitting or denying the allegations contained in the Commission's Complaint. The Final Judgment: (i) permanently enjoins Burkhardt from future violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 10b-5, 13a-1, 13a-13, 12b-20, 13b2-1, and 13b2-2 thereunder; (ii) bars him from acting as an officer or director of any public company for a period of ten years; and (iii) orders Burkhardt to pay a total of $1.1 million repre- senting (a) disgorgement of losses avoided from his sales of KSR common stock, as alleged in the Complaint, in the amount of $804,000, with credit for $750,000, which amount Burkhardt previously paid to plaintiffs in a previous shareholder action; ==========================================START OF PAGE 3====== (b) an Insider Trading Sanctions Act penalty of $804,000; and (c) a civil penalty of $242,000. In addition, simultaneously with the filing of the Complaint, the Commission submitted to the Court a proposed Final Judgment as to Karl G. Wassmann III, consented to by Wassmann, without admitting or denying the allegations contained in the Commission's Complaint. The Final Judgment: (i) permanently enjoins Wassmann from future violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 10b-5, 13a-1, 13a-13, 12b-20, 13b2-1, and 13b2-2 thereunder, and (ii) orders Wassmann to pay disgorgement of $197,994, representing his losses avoided through his sale of KSR common stock, plus prejudgment interest thereon in the amount of $43,554, but waives payment of all but $40,000 of that amount based on Wassmann's demonstrated inability to pay a greater amount. In conjunction with this injunctive proceeding, Wassmann has consented to the entry of an Order, pursuant to Rule 102(2)(3)(i) of the Commission's Rules of Practice, permanently denying him the privilege of appearing or practicing as an accountant before the Commission, with the right to apply for readmission after five years from the date of entry of the Order. In a related matter, on April 29, 1996, the Commission instituted and simultaneously settled a public administrative proceeding pursuant to Section 21C of the Securities Exchange Act of 1934 as to Thomas J. MacCormack, KSR's former director of contract administration. See Admin. Proc. File No.3-8993. The settlement resulted in an Order requiring that MacCormack: (i) cease and desist from committing or causing violations of Section 10(b) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder; and (ii) pay $31,672.75, representing losses avoided from his sales of Kendall Square common stock while in possession of material nonpublic information and prejudgment interest thereon.