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General Items
The Company was incorporated in 1983 in Delaware as a successor by merger to Kurzweil Alpha Systems, Inc., a Massachusetts corporation which had been formed in 1982. The Company's principal executive offices are located at 411 Waverley Oaks Road, Waltham, Massachusetts 02154, and its telephone number is (617) 893-5151.
The Company develops, markets and supports automated speech recognition systems used to create documents and interact with computers by voice, and structured report generating software systems. The Company's speech recognition technology is speaker-independent, in that most users do not have to "train" the system on their voice to achieve satisfactory initial accuracy, and it is speaker-adaptive, in that the system is able to adapt with use to the acoustic, phonetic and linguistic patterns of individual users, and thereby further boosting accuracy. The Company's large vocabulary systems, which recognize up to 60,000 words, accept discrete speech, which requires the user to pause briefly between words. The Company's software technology is designed to run on 486 or Pentium(TM)-based industry standard personal computers running MS-DOS(R) and the Windows(R) operating systems.
On April 15, 1997 the Company announced that it has entered into an Agreement and Plan of Merger with Lernout & Hauspie, Speech Products, N.V. ("L&H"), a Belgium corporation listed on the Nasdaq National Market (Nasdaq Symbol: LHSPF), and a subsidiary of L&H ("L&H USA") pursuant to which each outstanding share of the Company's Common Stock will be exchanged for $4.20 in cash and $1.05 in common stock of L&H, subject to adjustment in certain circumstances. The closing of the business combination is subject to certain conditions and approvals, including the approval of the stockholders of the Company. See Item 7. " Management's Discussion and Analysis of Financial Condition and Results of Operations - Merger with Lernout & Hauspie Speech Products, N.V."
RISKS AND UNCERTANTIES
There are certain risks associated with the Company's business. The most
critical relate to obtaining financing to continue operations and fund
anticipated losses, and the timing and success of new and enhanced product
introductions.
Operations
The Company experienced losses from operations in fiscal years 1995, 1996, and
1997. Beginning in 1994, the Company increased research and development staffing
and spending to develop new and enhanced products for both the medical and
personal computer markets in order to increase revenue. The delay in the
delivery of the new and enhanced products, and the decrease in revenues from the
DOS-based VoiceMED(R) medical products adversely affected fiscal 1996 and fiscal
1997 revenues, and resulted in operating losses which are expected to continue
into fiscal 1998, as the Company continues its investment in research and
development. The Company introduced new and enhanced products during the second
half of fiscal 1997, but there can be no assurance that these new and enhanced
products will be purchased in sufficient quantities to materially improve
revenues or create profits.
Financing
The Company has incurred operating losses since its inception. Since operating
losses are expected to continue into fiscal 1998 it is critical to the Company's
future that the Company obtain additional financing. If the proposed merger with
L&H is not consummated, the Company may be required to sell or license all or
part of its operations or technology. The long term financial stability of the
Company will be dependent upon achieving sustained profitable operations, and
obtaining additional financing, or selling all or part of the Company.
There can be no assurance that any future additional financing will be available
on commercially reasonable terms, or at all, and the success or lack of success
of the Company's new and enhanced products may have a critical effect on the
Company's ability to raise funds through the sale of stock or otherwise. In the
event that the proposed merger is not consummated, and the Company is unable to
promptly obtain additional financing, the Company will be forced to restructure
its operations, curtail its expenditures in research and development, sell all
or part of the Company, possibly attempt a merger with another company, or seek
protection under the bankruptcy laws.
At January 31, 1997, the Company was not in compliance with the Nasdaq By-Laws
net worth requirements for the continued listing of the Company's Common Stock
on the Nasdaq National Market. The Company will request an exemption from Nasdaq
for the continued listing of the Common Stock on the Nasdaq National Market
pending the stockholder approval of the merger with L&H. If an exemption is not
granted, the Company will request that it be eligible for re-admission to the
Nasdaq National market without having to comply with the higher initial listing
requirements. If the Company is not granted such an exemption and is required to
meet the initial or relisting requirements to be re-admitted for listing on the
Nasdaq National Market, it may not qualify for such re-admission for an
undetermined period of time. Any delisting of the Company's Common Stock from
trading on the Nasdaq National Market may adversely affect the price of the
Company's Common Stock.
To finance the Company's working capital needs, L&H USA has agreed to loan to
the Company up to $1.5 million under a line of credit (the "Loan") pursuant to
the terms of a Loan Agreement dated April 14, 1997 (the "Loan Agreement"). The
Company may, subject to the terms and conditions of the Loan Agreement, draw on
the line of credit until June 30, 1997. The Loan is evidenced by a line of
credit note dated April 14, 1997 in the original principal amount of $1.5
million ( the "Note). The Note bears interest at the "prime rate" as published
in The Wall Street Journal on April 14, 1997. All outstanding principal and
interest under the Note is due and payable in full on October 31, 1997, and is
secured by the Company's assets. See Item 7. "Management's Discussion and
Analysis of Financial Cindition and Results of Operations - Merger with Lernout
& Hauspie Speech Products, N.V."
MARKETING, SALES AND DISTRIBUTION
The principal elements of the Company's Medical Products Group distribution
strategy are as follows:
The Company is involved in a wide range of promotional activities targeted at
potential Medical Products Group users. The Company conducts marketing programs
including direct mail, public relations, advertising, and trade shows. The
Company also presents its products on its own home page on the world wide web.
(kurzweil.com.)
The Company has a contract with the General Services Administration ("GSA") for
the period of March 1997 to March 1998 under which various government agencies
may order certain of the Company's products in minimum and maximum amounts
through the GSA at discount prices specified in the GSA contract.
The principle elements of the Company's PC Application Groups distribution
strategy are as follows:
SUPPORT SERVICES
Achieving a high level of customer satisfaction is a priority for the Company.
To meet this goal, the Company offers a number of services to assist its
customers in becoming successful users of its products. These services include
in-house and regional training programs, on-site installation and training,
ongoing maintenance programs, a support service hot-line for end-user telephone
support during the warranty period (available 8:00 a.m. to 8:00 p.m., Eastern
Time, Monday through Friday), a multi-media on-line tutor for new users, and
extensive documentation.
The Company currently offers a 90-day warranty that guarantees its products will
be free from defects in materials and workmanship and that the software will
perform in accordance with stated specifications. The Company is obligated to
repair or replace, at its option, any products that do not meet the warranty.
Annual maintenance agreements are offered after the expiration of the initial
warranty period.
MANUFACTURING
The Company's product development organization produces a set of master
diskettes and documentation for each product which are then used for production
in quantity. Software duplication, assembly and shipping are performed by the
Company's manufacturing organization for the Medical Products Group. There were
four people in this department as of April 15, 1997 .
For the PC Applications Group, the Company utilizes a third-party manufacturing
and fulfillment house to print the documentation, reproduce the software, and
package and ship the product to customers.
To date, the Company has not experienced any material difficulties or delays in
production and distribution of its products.
COMPETITION
The speech recognition industry is highly competitive and characterized by
rapidly advancing technology. In order to maintain or improve its position in
this industry, the Company must enhance its current products continually and
develop and introduce new products that address the rapidly changing needs of
the marketplace.
The Company believes that the combination of features currently available in the
discrete speech technology, including the Medical Products and the PC
Applications products, are the basis for the Company's strengths. Yet with the
advancement of the Company's competitors into continuous speech products, it is
important that the Company strive to meet those advancements. Nonetheless, no
assurance can be given that the Company will be able to compete effectively in
the future.
In the healthcare market, the Company's Medical Products Group competes with
traditional report generation methodologies (such as handwritten notes, tape
dictation, transcription, keyboard entry systems, pen-based task systems, and
mouse entry systems) as well as a limited number of speech recognition systems.
The principal competitive factors in the clinical reporting market are product
functionality, performance, ease of use, support services and price. The
Company's PC Applications Group is competing in the general personal computer
market. The principal competitive factors in this market are, application
integration, ease of use, overall product functionality, and overall
price/performance. This market is highly competitive and the Company can make no
assurances as to the ongoing market acceptance of its products.
The Company expects to encounter significant competition in this broader
personal computer market. The Company's primary competitors are Dragon Systems,
Inc.("Dragon") and IBM, which offer products that compete directly with the
Company's. Dragon sells a large vocabulary speaker-independent, discrete and
continuous speech recognition product for personal computers running on both
MS-DOS and Windows. IBM has also developed and sells large vocabulary,
speaker-independent, discrete speech products for personal computers.
Many companies, including AT&T, Microsoft, Bolt, Beranek and Newman, Voice
Processing Corp., Lernout & Hauspie Speech Products N.V., Philips, and Apple
Computer, Inc. among others, have either announced or are known to be involved
in speech recognition research and development activities. Many of the Company's
potential competitors in this market have financial, technical and marketing
resources that are substantially greater than those available to the Company.
EMPLOYEES
At April 15, 1997, the Company employed a total of 113 persons, 36 of which are
in marketing, sales and customer/field support, 64 of which are in product
research, development and customer education, four of which are in
manufacturing, systems integration and testing, and nine of which are in
management, finance and administrative activities. None of the Company's
employees is represented by a labor union. The Company believes that its
employee relations are good.
DESCRIPTION OF PROPERTY
The Company occupies approximately 27,000 square feet of space at its
headquarters in Waltham, Massachusetts under a lease expiring in fiscal 2000.
The current annual rent under this lease is approximately $400,000. The Company
currently has no arrangements to extend this lease or to lease alternate
premises. However, the Company believes that suitable space will be available
upon expiration of its Waltham lease to conduct the Company's operations. In the
past, the Company has leased a number of small sales and support offices
throughout the United States. During 1994, the Company closed all but one of its
sales and support offices. The Company's aggregate annual rental expense for the
one facility which remained open during fiscal 1995, 1996, and 1997 was
approximately $4,500, $5,700 and $4,680, respectively. The Company believes that
its existing facilities are adequate for its current needs.
As part of its marketing effort, the Company gathers input from physician
advisor groups consisting of practicing physicians and other healthcare
professionals, as well as the collation of customer feedback gathered from phone
calls to the Company's support service "hot-line", the sales and support staff,
the research and development staff, and management. After collecting, analyzing
and prioritizing the data, the Company determines the specifications for
features and functions of the next set of product releases in the context of the
Company's own strategic planning. In some cases, physicians and clinicians
assist the Company's knowledge engineers in developing portions of the product.
The implementation of this process has led to significant product improvements,
making it easier for customers to use the Company's Clinical Reporter products
and to become more productive in their work.
The Company is involved in a wide range of marketing and promotional activities
targeted at the general personal computer marketplace. The Company conducts
programs utilizing a public relations firm, direct mail, and trade shows, and
uses its home page on the World Wide Web to facilitate its presence on the
internet and to the general public.
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May 2, 1997