Securities and Exchange Commission
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1996
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission file number 0-20256
KURZWEIL APPLIED INTELLIGENCE, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 04-2815079
- -------------------------------- -------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
411 Waverley Oaks Road, Waltham, Massachusetts 02154
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(617) 893-5151
- --------------------------------------------------------------------------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
On July 31, 1996, there were 9,056,916 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [] No [X]
1
KURZWEIL APPLIED INTELLIGENCE, INC.
FORM 10-QSB
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements
Balance Sheets as of July 31, 1996 and January 31, 1996 3
Statements of Operations for the Three and Six Month Periods
Ended July 31, 1996 and 1995 4
Statements of Cash Flows for the Three and Six Month Periods
Ended July 31, 1996 and 1995 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II - Other Information
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit Index 15
2
PART I - FINANCIAL INFORMATION
KURZWEIL APPLIED INTELLIGENCE, INC.
BALANCE SHEETS
Unaudited
(in thousands)
Item 1. Financial Statements
July 31, January 31,
1996 1996
-------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $3,179 $2,084
Marketable securities available for sale 501
Trade accounts receivable, less allowances of $258,000 and
$287,000 at July 31, 1996 and January 31, 1996,
respectively 2,124 1,221
Inventory 473 398
Other current assets 343 262
-------------- ------------
Total current assets 6,119 4,466
Property and equipment, net 821 924
Intangible assets 1,192 1,745
Capitalized software development costs, net 2,252 1,593
Other assets 115 136
-------------- ------------
Total assets $10,499 $8,864
============== ============
LIABILITIES
Current liabilities:
Accounts payable $1,151 $665
Accrued expenses 2,266 2,211
Capital lease obligations 17 29
Current portion of other long-term liabilities 1,019 902
-------------- ------------
Total current liabilities 4,453 3,807
Other long-term liabilities 1,152 2,169
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none issued and outstanding
Common stock, $.01 par value; 15,000,000 and 10,000,000 shares
authorized at July 31, 1996 and January 31, 1996,
respectively; 9,056,916 and 5,733,387 shares issued and
outstanding at July 31, 1996 and January 31, 1996,
respectively 91 57
Additional paid-in capital 66,726 57,647
Common stock to be issued 5,075
Accumulated deficit (61,923) (59,891)
-------------- ------------
Total stockholders' equity 4,894 2,888
-------------- ------------
Total liabilities and stockholders' equity $10,499 $8,864
============== ============
The accompanying notes are an integral part of the financial statements.
3
KURZWEIL APPLIED INTELLIGENCE, INC.
STATEMENTS OF OPERATIONS
Unaudited
(in thousands, except for per share amounts)
Three Months Ended Six Months Ended
July 31, July 31,
--------------------------- -------------------------
1996 1995 1996 1995
------------ --------- ---------- ---------
Revenues:
Product and license revenue $1,735 $2,101 $2,973 $4,427
Maintenance revenue 462 415 934 797
------------ --------- ---------- ---------
Total revenues 2,197 2,516 3,907 5,224
------------ --------- ---------- ---------
Operating costs and expenses:
Cost of product, license and
maintenance revenue 860 961 1,741 2,256
Sales and marketing 989 873 1,939 1,803
Research and development 753 638 1,431 1,116
General and administrative 364 404 896 740
------------ --------- ---------- ---------
Total operating costs and expenses 2,966 2,876 6,007 5,915
------------ --------- ---------- ---------
Operating loss (769) (360) (2,100) (691)
Interest expense 1 4 2 6
Interest income 27 53 58 112
Other (expense) income, net 5 13 12 50
============ ========= ========== =========
Net loss ($738) ($298) ($2,032) ($535)
============ ========= ========== =========
Net loss per common share ($0.09) ($0.04) ($0.27) ($0.08)
============ ========= ========== =========
Weighted average number of common
shares outstanding 8,440,978 6,757,632 7,616,860 6,744,916
============ ========= ========== =========
The accompanying notes are an integral part of the financial statements.
4
KURZWEIL APPLIED INTELLIGENCE, INC.
STATEMENTS OF CASH FLOWS
Unaudited
(in thousands)
Six Months Ended July 31,
-----------------------------------
1996 1995
----------- -----------
Cash flows from operating activities:
Net loss ($2,032) ($535)
Adjustments to reconcile net loss to net cash
( used ) by operating activities:
Depreciation 260 256
Amortization 904 953
Provision on doubtful accounts 5
Change in operating assets and liabilities:
(Increase) in accounts receivable (903) (94)
(Increase) decrease in inventory (75) 320
(Increase) in other assets (68) (106)
Increase (decrease) in accounts payable 486 (56)
Increase (decrease) in accrued expenses
and other liabilities 55 (858)
---------- -----------
Net cash (used) by operating activities (1,373) (115)
---------- -----------
Cash flows from investing activities:
Sale of marketable securities available for sale 501
Payments for property and equipment, net (157) (326)
Capitalized software development costs (1,000) (611)
---------- -----------
Net cash (used) in investing activities (656) (937)
---------- -----------
Cash flows from financing activities:
Payments on capital lease obligations (12) (47)
Payments on licensing agreement (902) (798)
Proceeds from issuance of capital stock, net 4,038 56
---------- -----------
Net cash provided by (used) in financial activities 3,124 (789)
---------- -----------
Net increase (decrease) in cash 1,095 (1,841)
Cash and cash equivalents, beginning of period 2,084 4,307
---------- -----------
Cash and cash equivalents, end of period $3,179 $2,466
========== ===========
The accompaying notes are an integral part of the financial statements
5
KURZWEIL APPLIED INTELLIGENCE
NOTES TO FINANCIAL STATEMENTS
1. 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 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.
2. LEGAL PROCEEDINGS
-----------------
Texas Litigation On September 11, 1995, one of the Company's shareholders who
opted out of the shareholder class action litigation, 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. Management does not believe there is
a reasonable possibility of a material adverse outcome that will exceed amounts
already reserved. If any additional loss occurs, management believes that the
loss will not have a material adverse impact on the Company's financial position
or results of operations.
Nasdaq Regulatory Requirements
- ------------------------------
At April 30, 1996 the Company was not in compliance with NASD net worth
requirements for the continued listing of the Company's Common Stock on the
Nasdaq National Market. The Company received from Nasdaq an extension of time
until August 19, 1996 to demonstrate compliance with the continued listing
requirements. The Company believes that with the filing of this Form 10-QSB on
August 19, 1996, the Company will be in compliance as of July 31, 1996.
There can be no assurance that the Company will be able to maintain its
listing. 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.
6
3. 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, 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 July 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 $923,000 on a straight-line basis through May 31, 1997. The
Company expensed $544,000 relating to the Dragon agreement for the six months
ended July 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
4. 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.
7
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Total Revenues. The Company's total revenues consist of revenue from the sale
and licensing of Company products and revenue from maintenance contracts.
Three months. Revenue for the three months ended July 31, 1996 totaled
$2,197,000, 13% lower than the $2,516,000 of revenue in the same period of
the prior year. The decrease in revenue was a result of lower license fees
for the Kurzweil Voice for Windows product for the quarter ended July 31,
1996 of $62,000 as compared to $635,000 for the same period of the prior
year. Included in the revenue for the quarter ended July 31, 1995 was
$600,000 in license fees from one customer of the Kurzweil Voice for
Windows product.
On July 30, 1996, the Company released for shipment the new Kurzweil
Clinical Reporter system, the Company's Windows based medical reporting
product. This release was responsible for the increase in medical product
revenues to $1,066,000 for the second quarter ended July 31, 1996 as
compared to $1,040,000 for the same period of the prior year.
Maintenance revenue for the three month period ended July 31, 1996
increased to $462,000 from $415,000 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.
Six Months. Revenue for the six months ended July 31, 1996 totaled
$3,907,000, 25% lower than the $5,224,000 of revenue in the same period of
the prior year. Lower shipments of the Company's VoiceMED products and
lower license fees for the Kurzweil Voice for Windows product was
responsible for the decline in sales for the six month period.
Maintenance revenue for the six month period ended July 31, 1996 increased
to $934,000 from $797,000 in the same period of the prior year. The
increase is a result of the larger installed base of customers as well as
the increased emphasis by the Company on programs to promote receiving
revenue from maintenance contracts.
Cost of Product, License and Maintenance Revenue. 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.
8
Three months. Cost of product, license and maintenance revenue for the
three months ended July 31, 1996 totaled $860,000 or 39% of total
revenues, compared to $961,000 or 38% of total revenues in the same period
of the prior year.
Six Months. Cost of product, license and maintenance revenue for the six
months ended July 31, 1996 totaled $1,741,000 or 44% of total revenues,
compared to $2,256,000 or 43% of total revenues in the same period of the
prior year.
Sales and Marketing Expenses. Sales and marketing expenses include the costs
for marketing, selling and supporting the Company's products.
Three Months. Sales and marketing expenses increased to $989,000 for the
three months ended July 31, 1996 from $873,000 in the same period of the
prior year, representing 45% and 35% of total revenues, respectively. The
increase in expenses was primarily the result of the increased spending to
launch and promote the new Kurzweil Clinical Reporter product line during
the quarter ended July 31, 1996. Those higher expenses included increased
sales force, trade shows, promotion and collateral marketing materials.
Six Months. Sales and marketing expenses increased to $1,939,000 for the
six months ended July 31, 1996 from $1,803,000 in the same period of the
prior year, representing 49% and 35% of total revenues, respectively. The
higher expenses were primarily the result of the increased spending to
launch and promote the new Kurzweil Clinical Reporter product line in the
six months ended July 31, 1996.
Research and Development Expenses. Research and development expenditures consist
principally of personnel costs, allocated facility costs, and associated
equipment amortization and depreciation. A portion of the total research and
development expenditures are capitalized in accordance with Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," the amortization of which is included in cost of
product and maintenance revenue.
Three Months. Total research and development expenses, net of
capitalization, for the three month period ended July 31, 1996 increased
to $753,000 or 32% of total revenues, compared to $638,000 or 25% of total
revenues in the same period of the prior year. The increase was primarily
the result of the Company's continued commitment to the development and
enhancement of new products and technology. The research and development
group including technical documentation had 67 people at July 31, 1996 as
compared to 52 at the end of July of the prior year.
9
Six Months. Total research and development expenses, net of
capitalization, increased to $1,431,000 for the six months ended July 31,
1996 from $1,116,000 in the same period of the prior year, representing
35% and 21% of total revenues, respectively. The increased staffing and
applicable expenses were responsible for the increase in expenses for the
comparable periods.
General and Administrative Expenses. General and administrative expenses include
those costs associated with general corporate needs and administrative
functions.
Three months. General and administrative expenses decreased to $364,000
for the three months ended July 31, 1996 from $404,000 in the same period
of the prior year, representing 15% and 16% of total revenues,
respectively. The decrease was attributable to the Company's continuing
efforts to reduce overhead expenses.
Six months. General and administrative expenses increased to $896,000 for
the six months ended July 31, 1996 from $740,000 in the same period of the
prior year, representing 22% and 14% of total revenues, respectively. The
increase was primarily a result of reserves taken during the first
quarter of fiscal 1997 for litigation expenses.
Income Taxes. At January 31, 1996, the Company had federal net operating loss
carryforwards of approximately $49,000,000. In addition, at January 31, 1996,
the Company had federal tax credit carryforwards of approximately $900,000. The
net operating loss carryforwards expire during the years 1997 through 2009 and
the tax credit carryforwards expire during the years 1997 through 2009.
Substantially all of the Company's net operating loss and tax credit
carryforwards are subject to limitation under the provisions of Section 382 of
the Internal Revenue Code.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At July 31, 1996, the Company's principal source of liquidity was cash and cash
equivalents of $3,179,000 , as compared to cash and cash equivalents of
$2,084,000 at January 31, 1996.
The Company's operating activities used cash of $1,373,000 for the six months
ended July 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 Note 3 "Intangible Assets and Other Long - Term Liabilities" of Notes to
Financial Statements.)
At July 31, 1996 the Company had working capital of $1,666,000 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.
10
In order to fund its losses through the transition period of new product
introductions, the Company initiated the process to raise funds through a
private placement of its common stock. 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 an additional
$1,669,500 through the private sale of 927,500 shares of common stock to
accredited investors. The Company has sufficient funds to sustain its operations
through at least fiscal 1997.
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 which 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 result of operations.
The Company believes that its operating results could vary significantly from
quarter to quarter. The Company's license fee revenue in any quarter is
substantially dependent on orders booked and shipped in that quarter. The timing
of license fee revenue 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
11
and a high percentage of the Company's expenses are relatively fixed in the
short-term, variations in revenue can cause significant fluctuations in
operating results from quarter to quarter and may result in anticipated
quarterly earnings shortfalls or losses. In such event, the market price of the
Company's common stock would likely be materially adversely affected.
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 contained in Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations, 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.
12
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Reference is made to Footnote 2 of Notes to the Financial Statements for a
description of certain litigation and other legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On July 19, 1996, the Company held its Annual Meeting of Stockholders. The
matters considered at the meeting consisted of the following.
1. The election of six directors to serve for a term of one year and until
their successors are elected and qualified. The results of the voting were
as follows:
Nominee Votes For Votes Withheld
------------------- --------- --------------
Thomas E. Brew, Jr. 4,610,762 55,275
Steven F. Kaplan 4,610,108 55,929
Raymond C. Kurzweil 4,610,258 64,779
William R. Lonergan 4,587,329 78,708
David R. A. Steadman 4,585,983 80,054
James W. Storey 4,585,683 80,354
2. The approval of an amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the shares of common stock the
Company is authorized to issue from 10 million shares to 15 million shares.
The results of the voting were as follows:
For Against Abstain No Vote
--- ------- ------- -------
4,593,087 66,030 6,920 0
3. The approval of a financing plan to sell shares of common stock of the
Company in a private placement. The results of the voting were as follows:
For Against Abstain No Vote
--- ------- ------- -------
4,591,582 63,987 10,468 0
4. To transact other business including the adjournment of the meeting for
purposes of soliciting additional proxies to achieve a quorum or to obtain
an affirmative vote on other proposals. The results of the voting were as
follows:
For Against Abstain No Vote
--- ------- ------- -------
4,278,017 373,252` 14,768 0
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
---------- ------------
3.1 Restated Certificate of incorporation filed with the
Delaware Secretary of State on July 25, 1996.
10.1 Selling Agency agreement dated July 3, 1996 between the
Company and Miller, Johnson & Kuehn, Incorporated and Form of
Warrant
10.2 Form of Subscription Agreement and Letter of Investment Intent
27 Financial Data Schedule (EDGAR Filing only)
(b) Reports on Form 8-K. During the second fiscal quarter of Fiscal
1997, the following reports on Form 8-K were filed:
Date: May 9, 1996
Item Reported: Item 5 Other Events (Private Placements)
Date: June 28, 1996
Item Reported: Item 4. Changes In Registrant's Certifying
Accountant
No financial statements were filed with the foregoing reports.
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: August 19, 1996 KURZWEIL APPLIED INTELLIGENCE, INC.
By: /s/ Thomas E. Brew, Jr.
-------------------------------------
Thomas E. Brew, Jr.
President and Chief Executive Officer
By: /s/ Thomas B. Doherty
-------------------------------------
Thomas B. Doherty
Chief Financial Officer, Vice
President of inance and Treasurer
(principal financial and chief
accounting officer)
14
EXHIBIT INDEX
Exhibit No. Description At Page
- ---------- ----------- -------
3.1 Restated Certificate of Incorporation filed with the
Delaware Secretary of State on July 25, 1996
10.1 Selling Agency Agreement dated July 3, 1996 between
the Company and Miller, Johnson & Kuehn, Incorporated
and Form of Warrant
10.2 Form of Subscription Agreement and Letter of
Investment Intent
27 Financial Data Schedule (EDGAR Filing only)
15