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Basis of Presentation
For purposes of this Form 10-QSB, all references to "Fiscal 1997" mean the
fiscal year of Kurzweil Applied Intelligence, Inc. (the "Company") ending
January 31, 1997. All references to "Fiscal 1996" mean the Company's fiscal year
ended January 31, 1996.
The accompanying condensed unaudited financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation have been included. The results of operations of any interim period are not necessarily indicative of the results of operations for the fiscal year. For further information, refer to the financial statements and footnotes thereto included in the Company's 1996 Annual Report for the fiscal year ended January 31, 1996.
Legal Proceedings
Texas Litigation On September 11, 1995, one of the Company's shareholders who
opted out of the shareholder class action litigation against the Company, which
was subsequently settled in April of 1995, filed a complaint in Dallas County,
Texas against the Company and certain of its current and former directors and
officers. The complaint asserts that the defendants committed fraud and violated
Texas state law and unnamed federal securities laws. The shareholder seeks
$1,500,000 in damages as a result of his purchase of 1,000 shares of the
Company's Common Stock. Management believes that the damages being claimed are
excessive and intends to defend its position vigorously.
Nasdaq Regulatory Requirements
At April 30, 1996 the Company was not in compliance with the Nasdaq net worth requirement for the listing of the Company's Common Stock on the Nasdaq National Market. The Company's filing of the Form 10-QSB for the period of July 31, 1996 demonstrated compliance and the Company's listing continued. This filing of Form 10-QSB for the period ended October 31, 1996 also demonstrated compliance, but there can be no assurance that the Company will be able to maintain its listing in future filings. Suspension of the Company's common stock from trading on the Nasdaq National Market may adversely affect the price of the Company's common stock.
Intangible Assets and other Long-Term Liabilities
On September 23, 1993, the Company and Dragon Systems, Inc. ("Dragon") settled
certain patent infringement litigation between the two companies. As part of
such settlement agreement, the Company licensed certain Dragon patents related
to continuous speech and other aspects of speech recognition technology. The
Company paid Dragon $1,331,250 in Fiscal 1994, $798,000 in Fiscal 1996 and
$901,810 in June 1996. Under the terms of this agreement, the Company was
committed to make aggregate payments of $5,202,000 including $625,000 in
settlement of amounts due for products sold during periods prior to September
23, 1993. The following mandatory payments remain outstanding as of October 31,
1996:
| June 1, 1997 | 1,019,460 |
| June 1, 1998 | 1,151,523 |
| Total | $2,170,983 |
The Company expensed $1,107,600 during Fiscal year 1996, and will amortize the remaining asset of $646,000 on a straight-line basis through May 31, 1997. The Company expensed $830,700 relating to the Dragon agreement for the nine months ended October 31, 1996. According to the agreement, the Company, if it chooses not to extend the license, has use of the licensed technology through May 31, 1997. The final payment will then be made in Fiscal 1999.
The Company, at its option, can annually extend the license of the technology through Fiscal 2006, at which time the license would be fully paid. Total additional annual payments increasing at a rate of 13% per year during the extension period would approximate $13.5 million.
Capital Stock
On May 3, 1996, the Company's Board of Directors adopted an amendment to the
Company's Amended and Restated Certificate of Incorporation to increase the
number of shares of common stock that the Company is authorized to issue from 10
million to 15 million shares. The amendment was approved by stockholders at the
Annual Meeting on July 19, 1996.
On May 10, 1996, the Company received approximately $2,376,000 from the private sale of 1,320,050 shares of common stock to an investment fund.
On July 31, 1996, the Company received approximately $1,669,500 from the private sale of 927,500 shares of common stock to accredited investors.
In connection with these private sales, the Company also issued 224,755 warrants to purchase shares of the Company's common stock at a price of $2.00 per share which are exercisable for a period of up to ten years.
Revenue
The Company's total revenues consist of revenue from the sale
and licensing of Company products and revenue from maintenance contracts.
Product sales for Kurzweil Voice for Windows increased to $587,000 for the three months ended October 31, 1996 as compared to $215,000 for the same period of the prior year. License fees for the Kurzweil Voice for Windows product for the quarter ended October 31, 1996 was $125,000 compared to $15,000 for the same period of the prior year.
Maintenance revenue for the three month period ended October 31, 1996 increased to $484,000 from $452,000 in the same period of the prior year. This increase was a result of the larger installed base of medical systems as compared to the same period of the prior year.
Maintenance revenue for the nine month period ended October 31, 1996
increased to $1,418,000 from $1,248,000 in the same period of the prior
year. The increase was a result of the larger installed base of customers
as well as the increased efforts by the Company to promote revenue from
maintenance contracts.
Cost of Sales
Cost of product, license and
maintenance revenue includes hardware costs, manufacturing overhead, system
replacement parts associated with maintenance contracts, third party software
royalties and license fees, and amortization of capitalized software.
Liquidity and Capital Resources
At October 31, 1996, the Company's principal source of liquidity was cash and
cash equivalents of $2,350,000 as compared to cash and cash equivalents of
$2,084,000 at January 31, 1996.
The Company's operating activities used cash of $1,708,000 for the nine months ended October 31, 1996. The Company will be required to pay $1,019,000 to Dragon Systems Inc., on June 1, 1997 as part of the patent cross license agreement. (See "Intangible Assets and Other Long-Term Liabilities")
At October 31, 1996 the Company had working capital of $1,153,000 as compared to working capital of $659,000 at January 31, 1996. This increase results primarily from the private placement equity sales less amounts used to fund the Company's losses and other commitments.
Accounts receivable has increased $1,107,000 since January 31, 1996 due largely to an increase in revenues, and one receivable of $400,000 from one customer that remains unpaid from the first quarter of Fiscal 1997. That one receivable relates to a contract pursuant to which the Company has fulfilled all its performance obligations. The Company is in negotiations with that customer in order to resolve the delay in payment.
In order to fund its losses through the transition period of new product introductions, on May 10, 1996 the Company raised approximately $2,376,000 from the private placement of 1,320,050 shares of Common Stock to an investment fund. On July 31, 1996 the Company received an additional $1,669,500 through the private placement of 927,500 shares of Common Stock to accredited investors. The Company believes it now has sufficient funds to sustain its operations through at least mid Fiscal 1998, although the Company's ability to sustain its operations will depend on, among other factors, the level and profitability of its revenues.
The longer term financial stability of the Company is dependent on achieving
profitable operations and obtaining additional financing. The Company's future
capital requirements will depend on many factors, including the progress and
scope of its research and development programs and the level and profitability
of sales. To the extent that the Company is not able to fund its future
operations through the sale of its products, the Company will need to obtain
additional funds through private or public financing. There is no assurance that
the Company can obtain such additional financing. If the Company requires
additional financing or additional financing is not obtained, the Company will
likely be required to restructure its operations, curtail its spending in
research and development, or attempt a merger or other strategic alliance with
another company. Public financing would be subject to market conditions and
other uncertainties, and no assurance can be given that the Company could obtain
public financing at any time. Either public or private equity financing is
likely to result in dilution of the Company's existing stockholders.
Certain Factors that May Affect Future Results
The Company's future results are subject to substantial risks and uncertainties. The Company currently derives substantially all of its revenue from the sale of software licenses that utilize speech recognition to create text documents.
The Company believes that factors affecting the ability of the Company's products to achieve general market acceptance include product performance, price, ease of adoption and learning. To be successful in the future the Company must respond promptly and effectively to the challenges of technological change and its competitors' innovations by continually enhancing its current products and developing new products on a timely basis. Certain current and potential competitors of the Company are more established, benefit from greater market recognition and have substantially greater financial, development and marketing resources than the Company. Competitive pressures or other factors, including entry into new markets, may result in significant price erosion that could have a material adverse effect on the Company's results of operations.
The Company believes that its operating results could vary significantly from quarter to quarter. The Company's revenues in any quarter are substantially dependent on orders booked and shipped in that quarter. The timing of revenue receipts is influenced by a number of factors, including; the timing of individual orders and shipments of its products, customer buying patterns, changes and delays in product development, and the amount and timing of sales and marketing expenditures. Because the Company's operating expenses are based on anticipated revenue levels and a high percentage of the Company's expenses are relatively fixed in the short-term, variations in revenues can cause significant fluctuations in operating results from quarter to quarter and may result in anticipated quarterly earnings shortfalls or losses.
Cautionary Statement
From time to time, information provided by the Company or statements made by its employees may contain "forward-looking" information which involves risk and uncertainties. In particular, statements beginning in the "Revenue" section, which are not historical facts (including, but not limited to statements concerning anticipated operating expense levels and such expense levels relative to the Company's total revenues and expected losses) are "forward-looking statements." The Company's actual future results may differ significantly from those stated in any forward-looking statements. Factors that may cause such differences include, but are not limited to the factors discussed above as well as the accuracy of the Company's internal estimates of revenue and operating expense levels. Each of these factors, and others, are discussed from time to time in the Company's Securities and Exchange Commission filings.
Kurzweil AI Q3 FY 1997 Statement of Operations
Kurzweil AI Q3 FY 1997 Balance Sheet
Kurzweil AI Q3 FY 1997 Cash Flow
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