SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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Form 10-KSB/A
(Amendment No. 2)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
0-20256
(Commission file number)
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Kurzweil Applied Intelligence, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
04-2815079
(IRS Employer Identification Number)
411 Waverley Oaks Road
Waltham, Massachusetts 02154
(Address, including zip code, of principal executive offices)
(617) 893-5151
(Registrant's telephone number, including area code)
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Securities registered
pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, Par Value $.01
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 filings
requirements for the past 90 days. Yes No X
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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 for
this Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was $15,890,222 on April 15, 1996. The number of shares of common
stock outstanding at April 15, 1996 was 6,766,460.
Documents Incorporated by Reference
Portions of Registrant's Definitive Proxy Statement for the Annual Meeting of
the Registrant to be held on June 21, 1996, which will be filed by the
Registrant within 120 days after the close of the fiscal year, are incorporated
by reference into Part III.
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PART I
Item 1. Business
For purposes of this Annual Report on Form 10-KSB, all references to fiscal
years 1994, 1995, 1996 and 1997 mean the fiscal year ending on January 31 in
such year.
GENERAL
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 further boost 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 386, 486 or
Pentium(TM)-based industry standard personal computer running MS-DOS(R) and
Windows(R).
RISK 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 of introductions of new and enhanced products
Operations
The Company experienced losses from operations in fiscal years 1994, 1995, and
1996. In June 1994 the Company took measures to reduce expenses and implement
stringent cost controls. In addition, the Company embarked on a program to
broaden distribution and increase research and development staffing and spending
to create new or enhanced products for both the medical and personal computer
markets and thereby to increase revenues. Delivery of the new and enhanced
products will not begin until the second fiscal quarter of fiscal 1997. The
delay in introducing these products combined with a slow down in orders from the
government sector adversely affected fiscal 1996 revenues and resulted in
operating losses that will continue into fiscal 1997, as the Company continues
its investment in research and development. In addition, there can be no
assurance that the Company's new and enhanced products will be purchased in
sufficient quantities to materially improve revenues.
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Financing
The Company has incurred operating losses since inception. Since operating
losses are expected to continue into 1997, it is critical to the Company's
future that it obtain additional financing. On May 10, 1996, the Company
received $2,376,000 from the private sale of 1,320,050 shares of Common Stock to
an investment fund at $2.00 per share. It is anticipated that such funds will
satisfy the Company's cash needs through the end of fiscal 1997. The long term
financial stability of the Company will be dependent on achieving sustained
profitable operations and obtaining additional financing.
There can be no assurance that any future additional financing will be available
on commercially reasonable terms, or at all, and the 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
Company is not able to obtain adequate financing, it will be forced to
restructure its operations, curtail its expenditures in research and
development, and attempt a merger with another company.
At January 31, 1996, the Company was not in compliance with Nasdaq By-Laws net
worth requirements for the continued listing of the Company's Common Stock on
the National Market. The Company believes that the financing it obtained on May
9, 1996 cures this non-compliance. If it does not, the Company will request from
Nasdaq an exemption pending the filing of the Company's quarterly report on Form
10-QSB, which the Company anticipates will demonstrate the required level of net
worth. If exemption is not granted, the Company will request that it be eligible
for re-admission 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 obtain re-admission to the
listing, it may not qualify for such re-admission for an undetermined period of
time. Suspension of the Company's stock from trading on the National Market
System may adversely affect the price of such stock.
PRODUCTS
The Company has two main product groups that sell and distribute the Company's
products to two distinctive markets.
The Medical Products Group sells, markets, and distributes the VoiceMED(R) and
Clinical Reporter(TM) product to the healthcare market. This vertical product
line provides clinical software systems utilizing voice recognition input to
create structured text documents.
The PC Applications Group sells, markets, and distributes the Kurzweil Voice for
Windows(R) product to the general personal computer market place. This
horizontal product line voice enables most Windows(R) applications to produce
voice generated text and documents.
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Medical Products Group
The Medical Products Group is dedicated to developing, marketing and supporting
medical reporting software systems for clinicians. These systems are used to
support the direct voice dictation of the clinical note. In addition, they can
also be configured as the front-end for a Computerized Patient Record (CPR)
system with an interface that extracts clinical data from the chart to populate
the clinical database. The goal of the Medical Products Group is to support
high-quality clinical data management while expediting the natural workflow of
the clinicians providing patient care.
The VoiceMED systems now have up to a 60,000 word vocabulary capacity, and run
on Intel-compatible hardware under the PC/DOS and Windows operating systems.
With systems in use at over 500 medical institutions, Kurzweil Medical Products
Group is a leader in the rapidly emerging market for medical reporting systems.
Kurzweil's medical products will have three essential elements that make them
both useful and effective.
1) A knowledge base for medical documentation that can be fully customized by
the user to meet his/her standard of care. These knowledge bases are used
to prompt users to create reports that:
(bullet) Provide a complete medical record to the clinical staff
in real time.
(bullet) Meet Resource Based Relative Value Scale (RBRVS)
standards to support reimbursement claims.
(bullet) Provide a comprehensive record of each clinical event
to minimize liability risk.
(bullet) Structure medical information at the point of entry for
use in outcomes analysis.
2) A fully-integrated, multi-modal user interface including keyboard, mouse,
pen, bar code and voice recognition that supports the clinician's
intuitive approaches to computing as they access and enter information
with the system. (These features will be available with the release of
Kurzweil Clinical Reporter(TM) system in the second quarter of fiscal
1997.)
3) Connections to department and/or hospital information systems. These
links support the seamless two-way transfer of critical information usin
standard formats such as HL-7.
The Kurzweil medical product line provides a solution for medical reporting in
six medical specialties:
(bullet) Emergency Medicine (bullet) Cardiology
(bullet) Radiology (bullet) Orthopedics
(bullet) Pathology (bullet) Primary Care
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VoiceMED products enable physicians and other healthcare professionals to
quickly and efficiently prepare complete, accurate, immediately available,
cost-efficient printed reports by voice. The VoiceMED family of products
currently marketed includes VoiceEM(R), VoiceRAD(R), VoicePATH(R),
VoiceDIALYSIS(TM), VoiceCATH(TM), VoiceORTHO(TM), and VoiceMED(R) for Primary
Care, each of which utilizes identical, discrete speech recognition technology
but has a customized knowledge base specific to the medical specialty.
VoiceMED(R) Products:
The VoiceMED family of products are voice-activated clinical reporting systems
designed for hospitals, clinics and urgent care facilities which have volume and
time-critical requirements for patient records and reports. The VoiceMED
products operate on a personal computer system running on a minimum of a 486
DX133 microprocessor on a DOS operating system with 32 megabytes of RAM.
VoiceEM(R) The Company's VoiceEM system has an extensive knowledge
base which assists the emergency medicine health care professional
in preparing complete and accurate reports. The system enhances
quality control and risk management by providing built-in prompts
for a wide range of complaints, from "sore throat" or "ankle sprain"
to "chest pain" or "auto accident", and for a complete medical
report from mode of patient's arrival and patient's history, to
diagnosis and disposition. VoiceEM helps health care professionals
comply with RBRVS requirements to ensure full medical reimbursement.
VoiceRAD(R) The VoiceRAD system was the Company's first commercially
available VoiceMED product. It enhances productivity in the
radiology market by eliminating transcription cost, and promptly
generating reports, often eliminating the need for telephone
consultations. Used by practicing radiologists, VoiceRAD covers all
major examination categories, including chest X-ray, mammography, CT
scan, ultrasound, and nuclear medicine. VoiceRAD can be configured
to print on virtually any site's patient radiology forms and can be
integrated with a variety of commercially available radiology
systems.
VoicePATH(R) The VoicePATH system allows for the rapid creation and
completion of patient reports, including gross and microscopic
descriptions, thereby eliminating the need for costly transcription
services. VoicePATH can be integrated with laboratory or hospital
information systems and can deliver reports to clinicians and all
departments, including billing and reimbursement, which can enhance
cash flow.
VoiceCATH(TM) The VoiceCATH system enables cardiologists to produce
reports on procedures such as angioplasty and catheterization,
instead of typing or dictation and transcription. Developed in
collaboration with practicing cardiologists, VoiceCATH can enhance
the speed of reporting as well as the quality of reports, promote
standardization of reporting, enhance staff productivity and speed
the billing process.
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VoiceMED(R) for Primary Care The VoiceMED system for Primary Care
extends the VoiceMED family of products to meet the needs of family
practitioners, general practitioners, internists and pediatricians.
Developed in collaboration with practicing physicians, VoiceMED for
Primary Care features an expanded knowledge base covering over 150
patient complaints. Patient reports and prescriptions can be
quickly, easily and accurately created by speaking into a personal
computer.
VoiceORTHO(TM) The VoiceORTHO system enables orthopedic surgeons to
complete patient information including medical history, exams,
interpretation, and procedures. Developed in collaboration with
practicing orthopedic surgeons, VoiceORTHO can enhance the speed of
reporting and quality of reports, promote standardization of
reporting, enhance staff productivity, and speed up the billing
process.
VoiceReport(R) The Company also markets the Kurzweil VoiceReport system, an
open-ended development system that can be used to create structured report
formats. Examples of application development projects for which VoiceReport is
being used include a system developed by a surgeon for use in his gynecological
oncology practice, and a compensation and pension examination system developed
by an agency of the United States Government. The Kurzweil VoiceReport system
consists of substantially the same components as a VoiceMED product, without the
medical knowledge base.
Clinical Reporter(TM)
In March of 1996, the Company announced a new Windows-based system for creating
complete Medical Reports by voice. The Kurzweil Clinical Reporter(TM) system
integrates the medical knowledge bases, structured report generator and the
KurzweilVOICE for Windows (version 2.0) voice product as the interface to
collect patient data and produce medical reports. The product was introduced at
the HIMSS tradeshow in March 1996 and will be shipped to customers in the second
quarter of fiscal 1997.
The Clinical Reporter product is available for emergency medicine, radiology and
pathology on its first release. This product will also be able to be run on
laptop computers and interface mobile monitors (cruise pads). The product can
also support mouse and pen input devices. Clinical Reporter for invasive
cardiology, primary care and orthopedics are expected to follow later in fiscal
1997.
The Clinical Reporter system will be designed to run on a Pentium 133 MHz system
with 32 megabytes of RAM on the Windows operating system.
In October 1995, the Company was awarded a $2 million grant by the Commerce
Department's National Institute of Standards and Technology (NIST) Advanced
Technology Program (ATP). The award provides funding for the development of
medical record documentation systems using open systems standards for linking
with other healthcare information systems, and applying user interface
technologies including large vocabulary speech recognition and pen combined with
flexibly structured knowledge bases to ensure ease of use. Medical record
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documentation systems are a prerequisite to the creation of useful clinical
databases for outcome studies, cost effectiveness studies, and other efforts to
improve both the quality and the cost effectiveness of medical care in the
United States.
The technology developed under the ATP grant will be capable of accepting
clinical information from the care giver (physician exam notes for example) and
feeding back information, such as clinical treatment guidelines, from central
data repositories.
PC Applications Group
Kurzweil VOICE(TM) for Windows. Kurzweil VOICE for Windows Release 1.0
incorporated a new version of the Company's large vocabulary,
speaker-independent, discrete speech recognition technology. Users can choose
either a 30,000-word or a 60,000-word active vocabulary. Kurzweil VOICE for
Windows Release 1.0 also has on-line knowledge, including acoustic recognition
models and spellings, for a total of 200,000 words. The system is
speaker-independent in that most users do not have to "train" the system on
their voice to achieve satisfactory initial accuracy. The Company announced
Kurzweil VOICE for Windows release 1.0 in April 1994 and shipments to customers
began in July 1994.
Kurzweil VOICE supports voice input for dictation, which enables the user to
create text and enter data simply by speaking; and navigation, which drives the
Windows operating system and Windows-based applications on a command and control
basis.
Kurzweil VOICE for Windows version 1.2 was released in November 1994 and it
shipped with the IBM MWave Windsurfer sound board as its platform. In June of
1995, Kurzweil VOICE for Windows 1.5 was released. Version 1.5 included improved
recognition accuracy, continuous digits, increased usability, and it shipped
with the Spectrum FX sound board.
In April 1996, the Company announced Kurzweil VOICE for Windows release 2.0.
Version 2.0 runs on the industry standard Sound Blaster 16 platform sound board.
This software only version combines a new, more accurate speech recognizing
engine, Windows 95 and network compatibility, improved features, improved
speaker independence and improved usability. The effective list price was
lowered to $ 695 for version 2.0
The minimum system requirements for Kurzweil VOICE for Windows Release 2.0
include a 486 DX4/75 microprocessor or higher, with a Pentium recommended for
Windows 95. Release 2.0 will take advantage of the additional processing power
of faster PCs to boost accuracy and throughput. Also required are 8MB of
dedicated RAM for the 30,000 and 16MB of dedicated RAM for 60,000 word
vocabulary options (RAM dedicated to Kurzweil VOICE is in addition to the RAM
required for the operating system and applications); 35MB of dedicated hard disk
space; VGA or higher resolution video adapter; and, Windows 95 or Windows 3.1x
(running in enhanced mode).
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Release 2.0 now runs with sound boards from Creative Labs, as well as other
Windows compatible, 16-bit sound boards; supports networks compatible with
Windows; and ships with the high-performance, noise-canceling Telex Nomad
microphone.
DESCRIPTION OF TECHNOLOGY
With the VoiceMED family of products, the Company has developed proprietary
technology that incorporates speech recognition, enabling software and knowledge
bases.
The Company's approach to speech recognition applies a broad variety of methods,
including techniques derived from statistical, phonetic and linguistic
approaches as well as advanced pattern recognition. The Company's speech
recognition technology is implemented as a collection of software "experts".
These experts focus on different aspects of the recognition process, including
acoustics, statistics, phonetics and linguistics. Results from all of the
experts are combined to provide a final recognition through the use of another
software module called the Expert Manager, which coordinates the activities of
the other software experts. If one expert is unable to recognize a spoken word
in a particular situation, the Company's multi-expert approach makes it more
likely that another expert will be able to recognize the word accurately.
The Company's enabling software includes: The Structured Report Generator,
comprised of a database manager, knowledge base shell and word processor; a
knowledge base editor (KBEdit(TM)) program that allows users and developers to
create and edit knowledge bases; and an on-line editor that permits users to
alter the knowledge base while dictating. The Structured Report Generator
includes the ability to respond to a "trigger phrase", which is a single spoken
word or phrase that can trigger an entire pre-defined report segment, with
"fill-in-the-blank" capability for customization. The Company's enabling
software permits users to create their own voice-activated structured reports,
and contains tools for modifying or creating knowledge bases and creating
customized reporting systems.
The Company has developed a set of techniques and development tools which
enables its knowledge engineering organization to develop knowledge bases in the
context of speech recognition. Knowledge engineering is a complex, analytical
process in which a particular field of expertise (a "domain") is organized into
a hierarchical data structure which can be stored and manipulated in a personal
computer. Building a knowledge base for voice reporting requires developing
domain specific vocabularies, appropriate trigger phrases and an underlying
logical framework. Once designed and combined with speech recognition
technology, the knowledge base permits professionals in a personal particular
field to use speech technology to generate reports which reflect their
professional training. The Company has devoted substantial time and resources in
developing and refining its knowledge bases, and has collaborated with
practicing physicians in relevant fields.
The Company continues its commitment to enhancing and developing the Company's
technology and products. The Company continues to increase staffing in the areas
of core recognition development, programming development and knowledge
engineering, shifting personnel from overhead/administration to research and
development.
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MARKETING, SALES AND DISTRIBUTION
The principal elements of the Company's VoiceMED and Clinical Reporter
distribution strategy are as follows:
(bullet) Unbundling of Product Offerings: VoiceMED customers have the option of
purchasing the software and sound board from the Company. They also
are able to buy personal computers and services -- such as
installation, training, ongoing support, and maintenance --
separately. This enables users to buy what they need, when they need
it.
(bullet) Pricing: Customers can purchase VoiceMED on a single-user basis,
rather than the previous workstation/multi-user basis. This approach
lowers the price per user. For example, the suggested list price to
purchase the software, PC and soundboard for an individual user is
$14,000. Previously, the minimum starting price was $27,900.
(bullet) Distribution: In the past, the Company primarily sold direct to end
users. Now, in addition to its own direct sales force, VoiceMED is
being distributed by value added resellers (VARs), system integrators
and dealers in the healthcare industry. The Company has (30) resellers
and (2) VARs that distribute the product.
(bullet) Customer Service and Support: The Company continues to provide a high
level of service and support to its customers and new distribution
partners alike. Offerings continue to include field-based
installation, training, ongoing support and maintenance, as well as
toll-free end-user support.
(bullet) Strategic Relationships and Alliances: The Company is striving to
establish relationships with key strategic partners within the
healthcare industry.
(bullet) Recurring Revenue. The Company's marketing and pricing objectives are
also focused on generating revenue from annually renewable contracts
for customer support and regular updates of its VoiceMED products.
As part of its marketing effort, the Company gathers input from customer
surveys, focus groups of current and potential users, advisory groups consisting
of practicing physicians and other health care professionals, as well as the
collation of customer feedback gathered from phone calls to the Company's
"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
addition, the Company relies on a number of these advisory groups to help direct
development activities. In some cases, members of these advisory groups assist
the Company's knowledge engineers in developing portions of the product. The
implementation of this marketing process has led to significant product
improvements, making it easier for customers to use the Company's VoiceMED
products and to become more productive in their work.
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The Company is involved in a wide range of promotional activities targeted at
potential VoiceMED 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.
The Company has a contract with the General Services Administration ("GSA") for
the period of April 1996 to May 1997 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 Kurzweil Voice for Windows distribution
strategy are as follows:
(bullet) On November 8, 1994, the Company entered into an agreement with Kolvox
Communications Inc. in Toronto, Canada. The agreement includes an OEM
activity whereby Kolvox has ported its LawTalk, LawTalk West
Publishing Edition, Office Talk and Voice Companion products to
Kurzweil Voice for Windows.
(bullet) As of April 1996, over 75 resellers have been signed up to resell
Kurzweil Voice for Windows in the United States, Canada, Australia,
and Europe.
(bullet) The Company distributes its Kurzweil Voice for Windows product through
six national personal computer software catalog distributors.
(bullet) The Company has a sales department that sells direct to end users for
new products and upgrades.
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. The
Company also utilizes its home page on the world wide web to facilitate its
presence on the internet.
Product sales to military and veterans hospitals owned by the United States
government totaled $1,922,000, and $3,525,000 and $1,127,000 or 20%, 28%, and
12% of the total revenues in fiscal years 1994, 1995, and 1996 respectively.
RESEARCH AND DEVELOPMENT
The Company has assembled a research and development team that includes
linguists, computer scientists, speech scientists, software engineers, knowledge
engineers and experts in pattern recognition and artificial intelligence
techniques. This team, consisting of 56 full-time people as of April 30, 1996,
is divided into four groups: the Core Group, which develops the underlying
speech recognition technology; the Development Group, which develops the user
interface, Structured Report Generator, and the application development tools;
the Knowledge Engineering Group, which develops "domain specific" knowledge
bases for the Company's products and assists applications developers
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outside the Company; and the Customer Education Group, which is responsible for
all print documentation, on-line help and tutorials.
The Company is currently focusing its resources on enhancing certain products
that already operate with the Windows operating system; developing a large and
medium vocabulary continuous speech recognition system; and continuing to
enhance the existing product lines.
In fiscal 1996, the Company delivered a voice recognition system operating on
Unix for GTE as part of a subcontract. This CHS.2 contract will voice enable
Unix applications on Sun Solaris workstations as part of a contract with the
U. S. Army extending to the year 2005.
On November 16, 1993, the Company announced that it had been awarded a grant
from the Advanced Technology Program at the National Institute of Standards
(NIST), a division of the United States Department of Commerce. The grant is a
three-year project totaling $1.8 million in cost reimbursement.
The NIST grant supports the Company's development of a spoken language interface
capable of controlling personal computer software applications through "natural
language" instruction in combination with a keyboard and a pointing device. The
effort is focused on a new speech recognition interface based on natural
language understanding and continuous speech technology, allowing for the
recognition and interpretation of commands in everyday "English" from a
continuous stream of words.
On October 4, 1995, the company announced that it was awarded a $2 million grant
by the Commerce Department's National Institute of Standards and Technology
(NIST) Advanced Technology Program (ATP).
The award provides funding for the development of medical record documentation
systems using open systems standards for linking with other health care
information systems, and applying user interface technologies including large
vocabulary speech-recognition and pen combined with flexibly structured
knowledge bases to assure ease of use. Medical record documentation systems are
a prerequisite to the creation of useful clinical databases for outcome studies,
cost effectiveness studies, and other efforts to improve both the quality and
the cost effectiveness of medical care in the United States.
The technology developed under the ATP grant will be two-way -- accepting
clinical information from the care giver (physician exam notes for example) and
feeding back information such as clinical treatment guidelines from central data
repositories.
SUPPORT SERVICES
Achieving a high level of customer satisfaction is a priority for the Company.
To this end, the Company offers a number of services to assist the customer in
becoming a successful user of its products. These services include in-house and
regional training programs, on-site installation and training, on-going
maintenance programs, a 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.
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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 and passes them along for
production. Software duplication, assembly and shipping are performed by the
Company's manufacturing organization for VoiceMED. There were 3 people in this
department as of April 30, 1996.
Manufacturing activities include the procurement of a printed circuit board
developed by the Company and fabricated by a third party supplier and its
integration with a personal computer and a microphone manufactured by others.
All quality control tests are performed by Company employees. The Company has or
believes that it can develop multiple sources of supply for all materials and
for the manufacture and assembly of products.
With respect to Kurzweil VOICE for Windows, 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, VoiceMED product line and Kurzweil VOICE for
Windows, which includes a large vocabulary, speaker-independence, structured
reporting capabilities, knowledge bases and noise tolerance, are the basis for
the Company's strengths. 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 VoiceMED family of products compete 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.
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With its Kurzweil VOICE for Windows product, the Company has begun to compete in
the personal computer market. The principal competitive factors in this market
are, application integration, ease of use, overall product functionality, and
over all price performance. This market is highly competitive and the Company
can make no assurances as to the ongoing market acceptance of these products.
The Company expects to encounter significant competition in this broader
personal computer market for voice recognition systems like Kurzweil VOICE for
Windows. The Company's primary competitors are Dragon and IBM, which offer
computer systems that compute directly with the Company's. Dragon Systems, Inc.
sells a large vocabulary speaker-dependent, discrete and continuous speech
recognition product for personal computers running on both MS-DOS and Windows.
IBM has also developed large vocabulary, speaker-dependent, discrete speech
products for personal computers. Many companies, including AT&T; Microsoft;
Bolt; Beranek and Newman; Voice Processing Corp.; Learnout & Hauspie; 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.
DRAGON SETTLEMENT AND CROSS LICENSE AGREEMENT
On September 23, 1993, the Company and Dragon Systems, Inc. ("Dragon") settled
certain patent infringement litigation between the companies, which included the
licensing and cross-licensing of certain patents related to continuous speech
and other aspects of speech recognition technology. The Company entered into
these agreements to avoid the cost, management distraction, and risks of
litigation with regard to the two patents which Dragon had asserted the Company
was infringing, and to obtain the right to use additional Dragon patents,
including all twelve patents issued to Dragon prior to the date of the agreement
and all future patents issued to Dragon for which applications are filed by
Dragon prior to the end of fiscal 1998. In consideration of such license, the
Company agreed to make payments to Dragon from fiscal 1994 through fiscal 1999,
starting at $625,000 annually and increasing each successive year by 13%. Of
these payments, $625,000 was charged to 1994 operations as a settlement for
products sold during periods prior to September 23, 1993. The Company paid
Dragon $1,331,000 and $798,000 in fiscal years 1994 and 1996, respectively, and
is committed to pay Dragon an additional total of $3,073,000 through fiscal
1999. Of the $3 million total due, the Company is required to pay $902,000 to
Dragon in fiscal 1997.
The Company has the option to extend its license by continuing to make such
payments to Dragon through fiscal 2006, at which time its license would be fully
paid. If the Company were to elect to renew its license each year, the
agreements provide that the Company would pay Dragon an aggregate of $13,539,000
in fiscal years 2000 through 2006. The Company currently believes that the
technology claimed to be covered by Dragon's patents is necessary to the
Company's current product viability and marketability. The Company cannot
provide any assurances that it will be successful in developing or acquiring
alternative technology that would not be covered or claimed to be covered by the
Dragon patents, thereby eliminating its need to continue to license the Dragon
patents in the future, or that, if the Company's products embody technology
claimed to be covered by Dragon's patents, and the Company elects not to
continue the license, the Company will be successful in any future litigation if
Dragon asserts claims of patent infringement.
13
<PAGE>
PROPRIETARY RIGHTS
The Company regards its software as proprietary and relies on a combination of
copyright, patent, trade secret and trademark laws and license agreements to
protect its rights. The Company also enters into software license agreements
with end-users of its products. Despite these precautions, it may be possible
for unauthorized third parties to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. The Company
has obtained thirteen United States patents (expiring between 2006 and 2009) on
various aspects of its speech recognition technology, and has nine United States
patent applications pending. There can be no assurance that any issued patents
will provide the Company with significant protection against competitors.
Certain of the Company's competitors have obtained patent protection and the
Company believes that certain of its competitors are seeking patent protection
on various aspects of their speech recognition technology.
EMPLOYEES
At April 30, 1996, the Company employed 106 persons, 35 in marketing, sales and
field support; 56 in product research, development and customer education; 6 in
manufacturing, systems integration and testing; and 9 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.
Item 3. Legal Proceedings
Class Action Litigation. Subsequent to the Company's announcement on April 28,
1994 that the Company and its auditors were reviewing certain aspects of the
Company's revenue recognition policies and practices and related matters, and
that the Company expected this review to result in a substantial loss for fiscal
1994, five purported class action lawsuits were filed in the United States
District Court for the District of Massachusetts. These lawsuits were eventually
combined to one class action suit. These lawsuits were purportedly brought by
and on behalf of purchasers of the Company's common stock pursuant or traceable
to the Company's Prospectus dated August 17, 1993 and in its aftermarket through
April 28, 1994. These lawsuits were filed against the Company and certain of
them also named as defendants Raymond C. Kurzweil (the Company's Founder, former
Chairman, Chief Technology Officer, director and former Co-Chief Executive
Officer), Bernard F. Bradstreet (former Co-Chief Executive Officer, President,
Chief Financial Officer, and director), the underwriters of the Company's August
1993 initial public offering of the Company's common stock (the "Common Stock"),
Robertson, Stephens & Co., L.P. and Needham & Company, Inc., and the Company's
former public accountants, Coopers & Lybrand L.L.P.
On April 27, 1995, the Company received final court approval of an agreement to
settle this litigation. In accordance with the settlement, the class members and
their counsel received 1,475,827 shares of Common Stock having a value of
$7,250,000 based on the average price of shares of Common Stock, as determined
by the closing prices during the five consecutive trading days starting May 19,
1995. In June 1995, the class members' counsel received their portion of the
shares, 442,748 shares in the aggregate. In March 1996, the remaining 1,033,079
shares of Common Stock were distributed to class
14
<PAGE>
members. In addition, as part of the settlement, the Company made a cash payment
of $250,000, and assigned any claims it might have against its former public
accountants, Coopers & Lybrand L.L.P., to the class members. The Company
believes these proceedings are now concluded as to the Company's involvement.
SEC Investigation. On June 3, 1994, the Company announced that it had been
notified by the Securities and Exchange Commission ("SEC") that the SEC had
commenced a formal investigation of the Company. The SEC requested that the
Company provide the SEC with certain documents concerning possible violations of
the federal securities laws in connection with the Company's public reports and
financial statements. On July 26, 1995 the Company announced that it had entered
into a settlement with the SEC. The Company agreed to an order pursuant to
Section 8A of the Securities Act of 1933 and Section 21C of the Securities
Exchange Act of 1934, whereby the Company agreed to cease and desist from
committing or causing any future violation of certain enumerated sections of
those acts and rules promulgated there under. The SEC's investigation of the
Company has now been concluded.
Department of Justice. In August 1994, the Company received a subpoena from the
U.S. Department of Justice ("DOJ") to produce documents in connection with a
grand jury investigation regarding the irregularities identified in the
information filed in the Company's previous press releases and financial
statements. The Company was not notified by the DOJ that it was a target or
subject of this investigation. On July 26, 1995, the Company announced that the
DOJ had concluded its investigation as to the Company without further action.
Nasdaq Proceedings. On June 3, 1994, the Company announced that it had been
notified by the National Association of Securities Dealers, Inc. ("NASD") that
it was conducting a review of trading in the Company's securities and had
requested that the Company provide it with certain documents and information.
The Company cooperated with the NASD in connection with this review. On July 26,
1995, the Company announced that the NASD had concluded its investigation as to
the Company without further action.
Texas Litigation. On September 11, 1995, one of the Company's shareholders
elected not to be included in the settlement of the shareholder class action
litigation, filed a complaint in Dallas County, Texas. The matter is entitled
Caffey v. Kurzweil Applied Intelligence, Inc., et al. Mr. Caffey's complaint
asserts that the Company and certain former officers and directors committed
fraud and violated Texas state law and unnamed federal securities laws. The
Complaint seeks $1,500,000 in damages.
The Company moved the case to the United States District Court for the Northern
District of Texas on November 6, 1995. The case was assigned Docket No.
3:95-CV-2660-J. On November 13, 1995, the Company filed an answer to the
complaint, which contained an offer of settlement pursuant to which the Company
offered to repurchase from Mr. Caffey his 1,000 shares of Company stock at the
original price he paid for such shares plus interest and certain attorneys'
fees. Mr. Caffey has rejected the Company's offer. This case is in the discovery
stage, and at this point, the Company does not believe that its outcome will
have an adverse effect on the financial position of the Company.
15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of the Company's results of operations and
liquidity is based on the Company's financial statements and should be read in
conjunction with the financial statements and notes thereto contained elsewhere
herein.
RESULTS OF OPERATIONS
The Company's revenues are derived from the sale of Company products, in
particular, from the sale of VoiceMED products and Kurzweil VOICE for Windows,
and from maintenance contracts. Total revenues increased from $10,127,000 in
fiscal 1994 to $12,362,000 in fiscal 1995, but decreased to $9,360,000 in
fiscal 1996. In fiscal year 1994, product and license revenue was derived solely
from the sale of VoiceMED products. In fiscal years 1995 and 1996, with the
release of Kurzweil VOICE for Windows 1.0 , product and license revenue was
derived from the sale of VoiceMED products and Kurzweil VOICE for Windows. These
sales totaled $10,273,000 and $901,000, respectively, in fiscal year 1995 and
$5,555,000 and $2,215,000, respectively, in fiscal year 1996. The gross margin
on these sales was 49% and 49%, respectively, in fiscal year 1995 and 38% and
37%, respectively, in fiscal year 1996. The increase in total revenues in 1995
was a result of shipments of Kurzweil VOICE for Windows and an increase in the
number of VoiceMED units sold. The decrease in total revenues from fiscal 1995
to fiscal 1996 was due to the lower volume of VoiceMED units sold. The
significant decrease in VoiceMED product shipments in fiscal 1996 was due to the
lower acceptance of the older DOS operating platform technology, an unexpected
reduction in the Company's direct sales force and a slowdown and cutback of
orders from the government sector. Product sales to military and veterans
hospitals owned by the United States government totaled $1,992,000, $3,525,000
and $1,127,000 or 20%, 28% and 12% of total revenues in fiscal years 1994, 1995
and 1996 respectively, due to the aforementioned reasons.
Maintenance revenue increased significantly from $970,000 in fiscal 1994 to
$1,188,000 in fiscal 1995 to $ 1,680,000 in fiscal 1996, as a result of a larger
installed customer base and programs implemented to increase maintenance
contracts. Product revenue fluctuated from $9,156,000 in fiscal 1994,
$11,174,000 in fiscal 1995, to $6,959,000 in fiscal 1996.
Cost of Product and Maintenance Revenue
Cost of product 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. Cost of product and maintenance revenue was $6,490,000 in fiscal 1994,
$5,689,000 in fiscal 1995, and $ 4,777,000 in fiscal 1996 representing 64%, 46%,
and 51% of total revenues, respectively.
The increase in costs in fiscal 1994 was principally due to $1,508,000 in costs
relating to the Dragon patent settlement and license agreement (See Item 1
"Dragon Settlement and Cross License Agreement"), the write-down of $362,000 of
previously capitalized software development costs due to
16
<PAGE>
the uncertainty of the recoverability of those projects costs, and an increase
in manufacturing and overhead support for higher sales levels that did not
materialize. The increase in the cost of product and maintenance as a percentage
of revenue in fiscal 1996 was a result of the increasing fixed cost of the
amortization expense for the Dragon patent settlement as a percent of the lower
revenue. Cost of product and maintenance revenue in fiscal 1995 and 1996
includes $1,107,000 in amortization expense for the Dragon patent settlement.
The inventory write-down of $800,000 in fiscal 1994 was based on a review of the
excess computer equipment inventory on hand and its net realizable value in the
rapidly changing computer product marketplace. There were no requirements for
inventory write-downs in fiscal 1995 or 1996.
Included in cost of product and maintenance revenue were royalty expenses of
$171,000, $192,000, and $96,000 for fiscal 1994, 1995, and 1996,
respectively. Also included was the amortization of capitalized software
development costs.
In the fourth quarter of fiscal 1996, the Company recorded a reserve against
capitalized software for $400,000 in light of the Company's declining revenues,
particularly in the last two quarters, and its dependence on the success of the
new products to be introduced in fiscal 1997. These factors caused management to
adjust capitalized software to its estimated net realizable value.
Capitalized software costs are amortized on a product by product basis
commencing with the release of the related software product. Amortization is on
a straight-line basis over the expected economic life, currently estimated at
three years. Amortization expense for fiscal years 1994, 1995 and 1996 was
$872,000, $790,000, and $1,081,000, respectively. Included in fiscal 1994
amortization is $362,000 relating to previously capitalized software development
costs that were written off due to the uncertainty relating to the
recoverability of those costs. Included in fiscal 1996 amortizaton is the
$400,000 reserve against capitalized software discussed above.
Sales and Marketing Expenses. Sales and marketing expenses include costs for
marketing, selling, and supporting the Company's products. These expenses
decreased from $6,488,000 in fiscal 1994 to $5,882,000 in fiscal 1995 to $
3,582,000 in fiscal 1996, representing 64%, 48% and 38% of total revenues,
respectively. The largest component of these costs relates to compensation for
sales and support personnel, travel, and office expenses. The Company's sales
and support personnel decreased from 33 persons at January 31, 1994 to 29
employees at January 31, 1995 and increased to 31 employees at January 31, 1996.
The decrease in fiscal 1995 and 1996 sales and marketing expenses was a result
of the Company reorganizing its distribution strategy for its VoiceMED product
line by focusing on value-added resellers, system integrators, and dealers and
using a smaller direct sales force. This reorganization resulted in a 20%
reduction in the Company's workforce, mainly in the sales and field support
organizations. The Company also closed almost all of its sales and support
offices, outside of the Waltham, Massachusetts facility, to reduce costs. See
Item 1 "Business - Marketing, Sales and Distribution".
17
<PAGE>
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 Statement of
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.
Total research and development expenses, net of capitalization, decreased from
$2,742,000 in fiscal 1994, to $2,587,000 in fiscal 1995, and to $2,341,000 in
fiscal 1996, representing 27%, 21% and 25% of total revenues, respectively. The
decrease in research and development expense in fiscal 1995 and 1996 was due to
the capitalization of the various development projects including upgrades and
new versions of Kurzweil VOICE for Windows and the development of the Kurzweil
Clinical Reporter for the Medical Products Group.
The Company's research and development personnel increased from 38 employees at
January 31, 1994, to 42 employees at January 31, 1995 and to 52 employees at
January 31, 1996. In order to maintain its competitive position and to develop
new and enhanced products, the Company intends to continue to devote substantial
resources to research and development.
General and Administrative Expenses. General and administrative expenses
decreased significantly from $4,209,000 in fiscal 1994 to $2,286,000 in fiscal
1995, and to $ 1,503,000 in fiscal 1996, representing 42%, 18% and 16% of total
revenues, respectively. The decrease from fiscal 1994 to fiscal 1995 was
primarily due to a charge of $2,000,000 in fiscal 1994 for expenses associated
with the Company's Audit Committee investigation, Securities and Exchange
Commission investigation, audit and stockholder lawsuits; and an increase in
general and administrative expenses including staffing, compensation, and costs
associated with being a public company. The decrease in fiscal 1996 was due to
continued emphasis on reducing overhead costs and stringent cost controls.
Included in general and administrative expenses was $80,000, $232,000 and
$105,000 as provisions for doubtful accounts for fiscal 1994, 1995, and 1996,
respectively.
Interest Income and Expense. Net interest expense primarily reflects interest
expense associated with capital lease obligations offset by interest income
generated by invested cash and marketable securities. Interest expense decreased
from $161,000 in fiscal 1994 to $19,000 in fiscal 1995 to $ 12,000 in fiscal
1996. The decrease from fiscal 1994 to fiscal 1995 was due to temporary
borrowings which preceded the Company's initial public offering in August 1993.
Interest income increased from $174,000 in fiscal 1994 to $219,000 in fiscal
1995, but decreased to $197,000 in fiscal 1996 due to a decrease in the amount
of invested cash.
Settlement of Stockholders Lawsuit. On April 27, 1995, the Company received
final court approval of the agreement to settle stockholder class action
litigation. The settlement provided for the class members to receive 1,475,827
shares of Common Stock having a value of $7,250,000. The number of shares of
Common Stock was based on the average price of the shares of Common Stock, as
determined by the closing prices during the five consecutive trading days
starting May 19, 1995. In June 1995, the class members' counsel received their
portion of the shares, 442,748 shares in the aggregate. In March 1996, the
remaining 1,033,079 shares were distributed to class members. In
18
<PAGE>
addition, the Company made a cash payment of $250,000 in fiscal 1996, and
assigned any claims it may have against its former public accountants,
Coopers & Lybrand L.L.P. to the class members.
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. The limitation impacts both the amount of the net
operating loss and tax credit carryforwards available to offset future income
and income tax liabilities. Limitations are imposed when an ownership change, as
defined by federal tax law, has occurred. The limitation depends in part upon
the value of the Company immediately prior to the ownership change. The Company
believes an ownership change did occur in connection with the Company's initial
public offering. As a result of this change, an annual limitation of
approximately $1,700,000 will be imposed on net operating loss carryforwards
existing as of the date of the initial public offering. Approximately,
$39,000,000 of the Company's net operating loss carryforwards as of January 31,
1996 are subject to this annual limitation. Prior to the initial public
offering, the Company may have incurred an ownership change in connection with
prior financings. If an ownership change did in fact occur in an earlier year,
the annual limitation and available carryforward could be reduced significantly.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1996, the Company's principal sources of liquidity were cash,
cash equivalents, and marketable securities of $2,585,000 and the Company's
working capital was $660,000. The Company's long term financial condition and
future growth will be dependent upon obtaining additional adequate financing and
achieving profitable operations.
The Company's operating activities used cash of $5,736,000 in fiscal 1994,
$2,459,000 in fiscal 1995, and $376,000 in fiscal 1996, primarily to fund the
Company's operations. The Company will be required to pay $902,000 to Dragon
Systems Inc., on June 1, 1996 as part of the patent cross license agreement.
(See Item 1 "Dragon settlement and Cross Licensing Agreement".)
The Company has incurred operating losses since its inception and these losses
are expected to continue into 1997. On May 10, 1996 the Company received
$2,376,000 for the private sale of 1,320,050 shares of Common Stock to an
investment fund. With the private financing placement it is anticipated that
those funds will satisfy the Company's cash needs through the end of fiscal
1997. The long term financial stability of the Company, however, is dependent on
achieving profitable operations and obtaining additional financing.
There can be no assurances that the May 10, 1996 financing will be sufficient to
sustain the Company's operations through fiscal 1997. The Company's future
capital requirements will depend on many factors, including the progress and
scope of its research and development programs. 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 additional financing is not obtained, the Company
19
<PAGE>
will be required to restructure its operations, curtail its spending in research
and developments, or attempt a merger with another company. The Company's
inability to obtain an audit opinion on its fiscal 1993 financial statements and
its statements of operations, cash flows, and stockholders equity for fiscal
1994 prevented the Company from seeking public financing in 1994 and 1995.
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.
At January 31, 1996 and April 30, 1996, the Company was not in compliance with
the net worth requirements of the By-Laws for the continued listing of the
Company's Common Stock on the National Market. The Company believes that the
recent private financing cured this non-compliance. If it does not, the Company
will request Nasdaq for an exemption pending the filing of the Company's
quarterly report on Form 10-QSB, which the Company anticipates will demonstrate
the required level of net worth. If an exemption is not granted, the Company
will request that it be eligible for re-admission without having to comply with
the higher initial listing requirements. If the Company does not meet listing
requirements, it may not qualify for re-admission for an undetermined period of
time. Suspension of the Company's stock from trading on the National Market
System may adversely affect the price of the Common Stock.
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 that are more established, benefit from greater
market recognition and have substantially greater financial, development and
marketing resources than the Company. Competitor 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 of 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 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 price of the Company's common stock would likely be materially adversely
affected.
20
<PAGE>
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 7. 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.
Item 8. Financial Statements and Supplementary Data
Report of Independent Accountants.
Balance Sheets at January 31, 1995 and 1996.
Statement of Operations for the years ended January 31, 1994
(unaudited), 1995 and 1996.
Statements of Changes in Stockholders' Equity for the years ended
January 31, 1994 (unaudited), 1995 and 1996.
Statements of Cash Flows for the years ended January 31, 1994
(unaudited), 1995 and 1996.
Notes to Financial Statements
Schedule II - Valuation and Qualifying Accounts
21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Directors of
Kurzweil Applied Intelligence, Inc.
We have audited the accompanying balance sheet of Kurzweil Applied Intelligence,
Inc. as of January 31, 1995 and 1996 and the related statements of operations,
stockholders' equity, and cash flows for the years then ended. Our audit also
included the financial statement schedule for the years ended January 31, 1995
and 1996 listed in the Index at Item 14(a) 2. These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kurzweil Applied Intelligence,
Inc. at January 31, 1995 and 1996 and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule for
the years ended January 31 1995 and 1996, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
The accompanying financial statements have been prepared assuming that Kurzweil
Applied Intelligence, Inc. will continue as a going concern. As more fully
described on Note 3 to the financial statements, the Company has incurred
substantial losses and had negative cash flows from operations in each of the
last three fiscal years and experienced a decline of approximately 25% in total
revenues during 1996 compared with the prior year. These conditions raise doubt
about the Company's ability to continue as a going concern. Management's plans
with regard to these matters are also described in Note 3. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
Boston, Massachusetts Ernst & Young LLP
March 29, 1996, except for
Note 3 as to which the date
is May 9, 1996
22
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
January 31,
-----------------------------------------------------------
1995 1996
--------------------- ----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $4,306,760 $2,083,898
Marketable securities available for sale 1,410,000 500,623
Trade accounts receivable, less allowances
of $315,000 and $287,000
at January 31, 1995 and 1996, respectively 1,428,398 1,221,469
Inventory 1,036,929 398,483
Other current assets 165,497 261,800
--------------------- ----------------------
Total current assets 8,347,584 4,466,273
Property and equipment, net 659,725 924,061
Intangible assets 2,793,622 1,744,976
Capitalized software development costs, net 1,112,055 1,592,850
Other assets 127,544 135,770
--------------------- ----------------------
Total assets $13,040,530 $8,863,930
===================== ======================
LIABILITIES
Current liabilities:
Accounts payable $666,142 $664,786
Accrued expenses 3,034,807 2,211,107
Capital lease obligations 131,483 28,688
Current portion of other long-term liabilities 798,062 901,810
--------------------- ----------------------
Total current liabilities 4,630,494 3,806,391
Capital lease obligations 10,684
Other long-term liabilities 3,072,793 2,169,128
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none issued and outstanding
Common stock, $.01 par value; 10,000,000 shares authorized;
5,253,535 and 5,733,387 shares issued and outstanding
at January 31, 1995 and 1996, respectively 52,535 57,334
Additional paid-in capital 55,421,116 57,647,425
Common stock to be issued 7,250,000 5,075,000
Adjustment to unrealized gains/(losses) on securities available
for sale (91,250)
Accumulated deficit (57,305,842) (59,891,348)
--------------------- ----------------------
Total stockholders' equity 5,326,559 2,888,411
--------------------- ----------------------
Total liabilities and stockholders' equity $13,040,530 $8,863,930
===================== ======================
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended January 31,
-----------------------------------------------------------------------
1994 1995 1996
-------------------- --------------------- -------------------------
(unaudited)
Revenues:
<S> <C> <C> <C>
Product and license revenue $9,156,927 $11,174,125 $7,680,006
Maintenance revenue 970,000 1,188,000 1,680,000
-------------------- --------------------- -------------------------
Total revenues 10,126,927 12,362,125 9,360,006
-------------------- --------------------- -------------------------
Operating costs and expenses:
Cost of product, license and maintenance revenue 6,490,206 5,688,685 4,776,578
Inventory write-down 800,000
Sales and marketing 6,488,340 5,881,827 3,581,677
Research and development 2,742,203 2,587,421 2,340,519
General and administrative 4,225,454 2,316,351 1,502,927
-------------------- --------------------- -------------------------
Total operating costs and expenses 20,746,203 16,474,284 12,201,701
-------------------- --------------------- -------------------------
Operating loss (10,619,276) (4,112,159) (2,841,695)
Interest expense 161,095 19,095 12,197
Interest income 174,446 219,293 196,637
Other (expense) income, net (9,824) (30,121) 71,749
Settlement of stockholders' lawsuit 7,250,000
-------------------- --------------------- -------------------------
Net loss ($10,615,749) ($11,192,082) ($2,585,506)
==================== ===================== =========================
Net loss per common share ($3.99) ($2.13) ($0.38)
==================== ===================== =========================
Weighted average number of common
shares outstanding 2,660,681 5,247,895 6,755,779
==================== ===================== =========================
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended January 31, 1994 (unaudited), 1995 and 1996
<TABLE>
<CAPTION>
Convertible Additional Common
Preferred Stock Common Paid-In Stock to be
---------------------------
Series A Series B Stock Capital Issued
------------- ------------- ------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1993 $20,380 $208,165 $782 $36,922,158
Issuance of 53,321 shares of common stock
at $1.50 - $11.00 per share to employees
and consultants upon exercise of options 533 80,729
Issuance of 2,123,500 shares of common stock
at $10.00 per share through a public
offering, net of expenses of $3,024,782 21,235 18,188,983
Conversion of Series A into common stock (20,380) 2,655 25,894
Conversion of Series B into common stock (208,165) 27,118 172,878
Issuance of 11,019 shares of common stock to
an existing stockholder at $7.00 per share
by surrender of right to an additional
15,408 shares 110 (94)
Payment of fractional shares (1,104)
Net loss
------------- ------------- ------------- ------------------ --------------
Balance at January 31, 1994 0 0 52,433 55,389,444
Issuance of 3,000 shares of common stock at
$7.00 per share to existing shareholder upon
exercise of warrants 30 20,970
Issuance of 7,224 shares of common stock
at $1.50 per share to employees upon exercise of
options, net of expenses 72 10,702
Common stock to be issued for settlement
of stockholders' lawsuit $7,250,000
Unrealized gains/(losses)
Net loss
------------- ------------- ------------- ------------------ --------------
Balance at January 31, 1995 0 0 52,535 55,421,116 7,250,000
Issuance of 37,104 shares of common stock
at $ 1.50 per share to employees upon exercise
of options, net of expenses 371 55,737
Common stock issued as partial settlement
of stockholders' lawsuit 4,428 2,170,572 (2,175,000)
Unrealized gain
Net Loss
Balance at January 31, 1996 $0 $0 $57,334 $57,647,425 $5,075,000
============= ============= ============= ================== ==============
</TABLE>
<TABLE>
<CAPTION>
Adjustment to
unrealized gains/
(losses) on Total
securities Accumulated Stockholders'
available for sale Deficit Equity
----------------- ------------------ -----------------
<S> <C> <C> <C>
Balance at January 31, 1993 ($35,498,011) $1,653,474
Issuance of 53,321 shares of common stock
at $1.50 - $11.00 per share to employees
and consultants upon exercise of options 81,262
Issuance of 2,123,500 shares of common stock
at $10.00 per share through a public
offering, net of expenses of $3,024,782 18,210,218
Conversion of Series A into common stock 8,169
Conversion of Series B into common stock (8,169)
Issuance of 11,019 shares of common stock to
an existing stockholder at $7.00 per share
by surrender of right to an additional
15,408 shares 16
Payment of fractional shares (1,104)
Net loss (10,615,749) (10,615,749)
----------------- ------------------ -----------------
Balance at January 31, 1994 (46,113,760) 9,328,117
Issuance of 3,000 shares of common stock at
$7.00 per share to existing shareholder upon
exercise of warrants 21,000
Issuance of 7,224 shares of common stock
at $1.50 per share to employees upon exercise of
options, net of expenses 10,774
Common stock to be issued for settlement
of stockholders' lawsuit 7,250,000
Unrealized gains/(losses) ($91,250) (91,250)
Net loss (11,192,082) (11,192,082)
----------------- ------------------ -----------------
Balance at January 31, 1995 (91,250) (57,305,842) 5,326,559
Issuance of 37,104 shares of common stock
at $ 1.50 per share to employees upon exercise
of options, net of expenses 56,108
Common stock issued as partial settlement
of stockholders' lawsuit
Unrealized gain 91,250 91,250
Net Loss (2,585,506) (2,585,506)
Balance at January 31, 1996 $0 ($59,891,348) $2,888,411
================= ================== =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended January 31,
-----------------------------------------------------------------
1994 1995 1996
----------------- -------------------- ---------------------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($10,615,749) ($11,192,082) ($2,585,506)
Adjustments to reconcile net loss to net cash
( used ) in operating activities:
Depreciation 509,000 519,081 565,074
Amortization 1,241,942 1,909,783 1,804,633
Provision for doubtful accounts 80,119 231,756 105,000
Settlement of stockholders' lawsuit 7,250,000
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable 929,120 (637,774) 101,929
Decrease (increase) in inventory (589,793) 633,736 638,446
Decrease (increase) in other assets 225,335 265,375 (179,038)
(Decrease) in accounts payable (330,365) (147,759) (1,356)
(Decrease) increase in accrued expenses
and other liabilities 2,814,283 (1,237,461) (825,555)
Net cash (used) in operating activities (5,736,108) (2,405,345) (376,373)
Cash flows from investing activities:
Purchase of marketable securities available for sale (11,000,000)
Sale of marketable securities available for sale 3,441,878 6,003,596 1,000,627
Payments for property and equipment, net (275,643) (509,248) (829,410)
Capitalized software development costs (278,441) (725,993) (1,162,273)
Net cash provided by (used) in investing activities (8,112,206) 4,768,355 (991,056)
Cash flows from financing activities:
Payment of notes payable (3,120,000)
Proceeds from issuance of notes payable 1,020,000
Payments on capital lease obligations (333,109) (187,975) (113,479)
Payments on licensing agreement (798,062)
Proceeds from issuance of capital stock, net 18,290,392 31,774 56,108
Net cash provided by (used) in financial activities 15,857,283 (156,201) (855,433)
Net increase (decrease) in cash 2,008,969 2,206,809 (2,222,862)
Cash and cash equivalents, beginning of period 90,982 2,099,951 4,306,760
Cash and cash equivalents, end of period $2,099,951 $4,306,760 $2,083,898
================= ==================== =====================
Supplementary disclosure of cash flow information:
Cash paid during year for:
Interest $161,095 $19,095 $12,197
Income taxes 10,981
Supplemental schedule of noncash financing activities:
Obligation incurred for Dragon license agreement $3,870,855
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
1. NATURE OF BUSINESS
Kurzweil Applied Intelligence, Inc. (the "Company") develops, markets and
supports automated speech recognition systems used to create documents and
interact with computers by voice. The Company has concentrated initially on the
health care industry, where there is a need for accurate and timely reporting
for patient care, risk management, billing and third party reimbursement. The
Company also developed and is marketing Kurzweil VOICE for Windows which
incorporates a large vocabulary, speaker-independent, and discrete speech
recognition technology running in the Windows operating environment.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts represented
in the financial statements and accompanying notes. Actual results could differ
from these estimates.
Cash and Cash Equivalents
Cash equivalents consist of liquid investments with original maturities of three
months or less at the date of acquisition. The carrying amount reported in the
balance sheet for cash and cash equivalents approximates fair value.
Marketable Securities
The Company classifies its investments in marketable securities as "available
for sale". Marketable securities are stated at fair market value and consist of
non-equity corporate securities and liquid U.S. Government obligations. As of
January 31, 1995, and 1996 unrealized losses are excluded from earnings and
reported as a separate component of stockholders' equity until realized.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined using the
first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Equipment and furniture and fixtures
are depreciated on the straight-line basis over the estimated useful life of the
asset, principally three years.
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Equipment under capital leases is amortized over the life of the asset or, if
less, over the term of the lease.
Research and Development Costs
Costs incurred in the research and development of new software products and
significant enhancements to existing software products are expensed in the
period incurred until technological feasibility has been established, after
which point they are capitalized until such products are saleable.
Capitalized software costs are amortized on a product by product basis
commencing with the release of the related software product. The amortization
included in product cost of revenue is the greater of the amount computed using
the ratio of current gross revenue to total current and anticipated gross
revenue or the straight-line method over the estimated useful life of the
product not to exceed three years. The Company uses the straight-line method and
amortizes software development costs over three years. The Company continually
compares the unamortized portion of capitalized software development costs to
the net realizable value of the related product. The net realizable value is the
estimated future gross revenue from the product reduced by estimated future
costs of completing and disposing of that product. The amount by which the
unamortized capitalized costs exceed the net realizable value is written - off.
Amortization expense for fiscal years 1994, 1995 and 1996 was $872,000,
$790,000, and $1,081,000, respectively. Included in fiscal year 1996 and 1994
amortization is $400,000 and $362,000, respectively, relating to previously
capitalized software development costs that were written - off due to the
uncertainty relating to the recoverability of those costs.
In October 1992, the Company was awarded a $380,000 Phase II Small Business
Innovation Research Grant. The grant is a government reimbursement arrangement
to be billed in quarterly installments, as costs are incurred. The Company's
policy is to offset research and development expense for amounts billed under
the grant. Billings totaled $106,000 and $274,000 for fiscal years 1994 and
1995, respectively.
In November 1993, the U.S. Department of Commerce selected the Company to
participate in the Department's Advanced Technology Program. Under the program,
the Company is developing software to allow users to operate their personal
computers through normal spoken language. The program is a government reimbursed
arrangement which is billed monthly as costs are incurred. The program runs from
March 1994 through February 1997. The Company's policy is to offset research and
development expense for amounts billed under the program. Billings totaled
$440,000 and $469,500 for fiscal year 1995 and 1996, respectively.
In December 1995, the Company announced it had been awarded a $2 million grant
by the Commerce Department's National Institute of Standards and Technology
(NIST) Advanced Technology Program (ATP). The award provides funding for the
development of medical record documentation systems using open systems standards
for linking with other health care
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
information systems, and applying user interface technologies including large
vocabulary speech-recognition and pen combined with flexibly structured
knowledge bases to assure ease of use. Medical record documentation systems are
a prerequisite to the creation of useful clinical databases for outcome studies,
cost effectiveness studies, and other efforts to improve both the quality and
the cost effectiveness of medical care in the United States.
The technology developed under the ATP grant will be two-way --- accepting
clinical information from the care giver (physician exam notes for example) and
feeding back information such as clinical treatment guidelines from central data
repositories. The program is a government reimbursement arrangement which is
billed monthly as costs are incurred. The program runs December 1995 through
November 1997. The Company's policy is to off set research and development
expense for the amounts billed under the program. Billings totaled $78,600 for
fiscal year 1996. Amounts funded by the government under these grants are paid
as costs are incurred. These grants do not contain provisions which would
require the Company to repay amounts advanced.
Revenue Recognition
Revenue from product sales is recorded at the time of shipment if no significant
obligation relating to the sale remains and collection is deemed probable.
Maintenance revenue is recognized ratably over the term of the maintenance
agreements. Maintenance revenue for the years ended January 31, 1994, 1995 and
1996 totaled $970,000, $1,188,000, and $ 1,680,000, respectively. Related cost
of maintenance revenue is expensed as incurred over the term of the maintenance
agreements.
In fiscal 1994, 1995, and 1996, product sales to military and veterans hospitals
owned by the United States government totaled $1,992,000, $2,329,000 and
$1,083,000, respectively, representing 20%, 19% and 12% of the Company's total
revenues.
Cost of Product and Maintenance Revenue
Cost of product 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.
Warranties and Customer Support
The Company's products include a 90 day warranty that products will be free from
defects in materials and workmanship and that the software will perform in
accordance with applicable specifications. The Company is obligated to repair or
replace, at its option, any products that do not meet specifications. The
Company currently receives a one year warranty from its existing
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
CPU vendor. This vendor-provided warranty reduces, in part, the Company's
warranty costs. An accrual is made for costs and is charged to expense at the
time of sale.
The Company provides post-sale customer support free of charge for a 90 day
period. An accrual is made for customer support at the time of sale and is
charged to expense.
Income Taxes
In fiscal 1994, the Company adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes" (SFAS 109), which requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. SFAS 109 also requires a valuation
allowance against net deferred tax assets if, based on the weighted available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized. The adoption of SFAS 109 did not have a material impact on
the Company's results of operations or financial position.
Stock Based Compensation
In October 1995, the FASB issued Statement No. 123, Accounting for Stock Based
Compensation. Presently, the Company grants stock options for a fixed number of
shares to employees with an exercise price equal to the fair value of the shares
at the date of grant. As allowed under the new standard, the Company accounts
for stock option grants in accordance with APB Opinion No. 25, Accounting for
Stock Issued to Employees, and accordingly, recognizes no compensation expense
for the stock option grants. The Company will continue to account for stock
options in this fashion.
Loss Per Share
Loss per share data is based solely on the weighted average number of shares of
common stock outstanding. The weighted average number of shares outstanding
includes the shares associated with the stockholders' lawsuit, which were
treated as outstanding for the entire year. The inclusion of common equivalent
shares outstanding have not been included because they would be anti-dilutive
under the treasury stock method.
The accompanying notes are an integral part of the financial statements.
30
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Impact of Recently Issued Accounting Standards
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company will adopt Statement 121 in the first
quarter of 1997 and, based on current circumstances, does not believe the effect
of adoption will be material.
Reclassifications
Certain prior years' amounts have been reclassified to conform to the current
year presentation.
3. STATUS OF OPERATIONS AND LEGAL PROCEEDINGS
Status of Operations
The Company has incurred substantial operating losses and has had negative cash
flow from operations in each of the last three fiscal years. Revenues have
declined significantly from fiscal 1995 to 1996 and management expects operating
losses to continue into fiscal 1997 as the Company continues to invest in new
product development.
In view of the Company's financial condition at January 31, 1996 and its current
operating plans for fiscal 1997, the Company has been seeking to raise
additional financing. On May 10, 1996 the Company raised approximately $2.3
million from the private placement of 1,320,050 shares of its common stock.
Management believes that such financing will be sufficient to sustain the
Company's operations through the end of fiscal 1997.
The long term viability of the Company depends on the ability to achieve
sustained profitable operations and obtaining additional financing.
There can be no assurances that the May 10, 1996 financing will be sufficient to
sustain the Company's operations through fiscal 1997. In the event such
financing is not sufficient to sustain the Company's operations through 1997,
the Company will seek to obtain additional financing. There can be no assurance
however, that such additional financing will be available at commercially
reasonable terms, if at all available. In the event the Company is unable to
obtain additional financing, it will be forced to curtail expenditures, or
attempt a merger with another company.
The accompanying notes are an integral part of the financial statements.
31
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
At January 31, 1996, the Company was not in compliance with Nasdaq By-Laws net
worth requirements for the continued listing of the Company's Common Stock on
the National Market. The Company believes that the financing it obtained on May
10, 1996 cures this non-compliance. If it does not, the Company will request
Nasdaq for an exemption pending the filing of the Company's quarterly report on
Form 10-QSB, which the Company anticipates will demonstrate the required level
of net worth. If an exemption is not granted, the Company will request that it
be eligible for re-admission 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 obtain re-admission to
the listing, it may not qualify for such re-admission for an undetermined period
of time. Suspension of the Company's stock from trading on the National Market
System may adversely affect the price of such stock.
Legal Proceedings
Class Action Litigation. The Company announced on April 28, 1994 that the
Company and its auditors were reviewing certain aspects of the Company's revenue
recognition policies and practices and related matters and that the Company
expected this review to result in a substantial loss for fiscal 1994.
Subsequently, five purported class action lawsuits were filed in the United
States District Court for the District of Massachusetts. These lawsuits were
purportedly brought by and on behalf of purchasers of the Company's common stock
pursuant or traceable to the Company's Prospectus dated August 17, 1993 and in
the aftermarket through April 28, 1994. These lawsuits were filed against the
Company. Certain of the lawsuits also named as defendants, Raymond C. Kurzweil
(the Company's former Chairman, Chief Technology Officer and former Co-Chief
Executive Officer), Bernard F. Bradstreet (former Co-Chief Executive Officer,
President, and Chief Financial Officer and director), and the underwriters of
the Company's August 1993 initial public offering of common stock, Robertson,
Stephens & Co., L.P., Needham & Company, Inc. and the Company's former auditors
Coopers & Lybrand L.L.P.
On April 27, 1995, the Company received final court approval of the agreement to
settle the stockholder class action litigation. In accordance with the
settlement, the class members and their counsel will receive 1,475,827 shares of
Common Stock having a value of $7,250,000 based on the average price of shares
of Common Stock, as determined by the closing prices during the five consecutive
trading days starting May 19, 1995. In June 1995, the class members' counsel
received their portion of the shares, 442,748 shares in the aggregate. In March
1996, the remaining 1,033,079 common shares were distributed to class members.
In addition, as part of the settlement, the Company made a cash payment of
$250,000, and assigned any claims it may have against its former public
accountants, Coopers & Lybrand L.L.P. to the class members. The Company believes
these proceedings are now concluded as to the Company's involvement.
The accompanying notes are an integral part of the financial statements.
32
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
SEC Investigation. On June 3, 1994, the Company announced that it had been
notified by the Securities and Exchange Commission ("SEC") that it had commenced
a formal investigation of the Company. The SEC has requested that the Company
provide certain documents concerning possible violations of the federal
securities laws in connection with the Company's public reports and financial
statements.
Pursuant to the Company's Certificate of Incorporation, and certain of its
contractual obligations, the Company may be obligated to indemnify its current
and former officers and directors and certain other persons under claims arising
from the lawsuits, and to reimburse certain costs incurred by such persons as a
result of the lawsuits. Matters relating to the indemnification of and
reimbursement of certain costs to former officers involved in the lawsuits may
be on-going. Based on the Company's investigation and other facts presented in
various legal proceedings, it is the Company's belief that the Company is not
responsible for costs incurred by such persons as a result of these lawsuits and
legal proceedings. Although there can be no assurances that the Company will not
face a loss, an estimate of the possible loss or range of loss, if any, could
not be made since the outcome of certain proceedings are not final and,
accordingly, no accrual is recorded. It is not expected that the loss, if any,
will have a materially adverse effect on the Company.
In fiscal 1994, the Company accrued a liability of $2,000,000 for the expected
costs of the restatement of its financial statements, legal costs associated
with the shareholder lawsuits, and costs of the SEC investigation and related
matters. At January 31, 1995 and 1996, the accrued liability has a remaining
balance of approximately $700,000 and $100,000, respectively. Subsequent to
January 31, 1996, the Company has reduced this accrual for costs incurred in
regard to assisting the government in its case against the former officers of
the Company.
On July 26, 1995 the Company announced that it had entered into a settlement
with the SEC. The Company agreed to a consent decree pursuant to Section 8A of
the Securities Act of 1933 and Section 21C of the SEC Exchange Act of 1934, that
Kurzweil Applied Intelligence, Inc. cease and desist from committing or causing
any violation of certain enumerated sections of those acts.
Nasdaq Proceedings. On June 3, 1994, the Company announced that it had been
notified by the National Association of Securities Dealers, Inc. ("NASD") that
it was conducting a review of trading in the Company's securities. On July 7,
1995, the Company was informed by NASD that it had concluded its review of the
trading activity of the Company's stock without further action.
The Company was in violation of the requirements for continued listing of its
common stock on the Nasdaq National Market due to its failure to file in a
timely fashion all required financial statements and public reports. The
Company's common stock was delisted from the Nasdaq National Market on November
14, 1994 and listed and traded on the Nasdaq SmallCap Market pursuant to a
temporary exemption from certain listing requirements.
The accompanying notes are an integral part of the financial statements.
33
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
On December 27, 1994, Nasdaq relisted the Company's Common Stock on the Nasdaq
National Market after Nasdaq's Listing Qualifications Committee determined that
the Company had substantially met all the criteria necessary for inclusion on
the National Market. See further discussion under "Status of Operations".
Department of Justice. In August 1994, the Company received a subpoena from the
U.S. Department of Justice ("DOJ") to produce documents in connection with a
grand jury investigation regarding the irregularities identified in the
information filed in the Company's previous press releases and financial
statements.
Texas Litigation. On September 11, 1995, one of the Company's shareholders who
opted out of the Shareholder Class Action Litigation of April 28, 1994 legal
proceedings, filed a complaint in Dallas County, Texas. The complaint asserted
that the Company and certain former officers and directors committed fraud and
violated Texas state law and unnamed federal securities laws. The Complaint
seeks $1,500,000 in damages. Management believes this case is without merit and
intends to defend its position vigorously. Management does not believe there is
a reasonable possibility of a material adverse outcome, if any, that will exceed
amounts already recognized. If any additional loss may occur, Management
believes that loss will not have a material adverse impact of the Company's
financial position or results of operations.
The accompanying notes are an integral part of the financial statements.
34
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
4. MARKETABLE SECURITIES
The following is a summary of available-for-sale securities. The fair values of
these securities are based on quoted market prices:
<TABLE>
<CAPTION>
Available-for-Sale
Securities
----------------------------------------------------------------------------------------
Gross Gross Estimated
Cost Unrealized Unrealized Fair
Gains Losses Value
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
January 31, 1996
U.S. Government $500,623 $500,623
obligations
---------------- --------------- -------------------- ----------------------
$500,623 $500,623
================ =============== ==================== ======================
January 31, 1995
U.S. Government $1,501,250 $ 91,250 $1,410,000
obligations
================ =============== ==================== ======================
$1,501,250 $ 91,250 $1,410,000
================ =============== ==================== ======================
</TABLE>
During the years ended January 31, 1995 and 1996, marketable debt
available-for-sale securities with a fair value at the date of sale of $
5,928,000 and $ 1,001,000 were sold, respectively. The gross realized losses on
such sales totaled approximately $ 82,000 in fiscal 1995. These losses are
included in other expenses in the Statement of Operations. The net adjustment to
unrealized holding losses on available-for-sale securities included as a
separate component of stockholders' equity totaled $ 91,250 in fiscal 1995.
There were no unrealized losses in fiscal 1996. There were no realized or
unrealized gains/(losses) recorded in fiscal 1994.
The accompanying notes are an integral part of the financial statements.
35
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
5. INVENTORY
Inventory as of January 31 consisted of:
1995 1996
--------------- -----------
Purchased parts $212,559 $338,807
Work in process 187,985
Finished goods 636,385 59,676
--------------- -----------
$1,036,929 $398,483
=============== ===========
6. PROPERTY AND EQUIPMENT
Property and equipment as of January 31 consisted of:
1995 1996
-------------------- ---------------------
Computer equipment $1,279,948 $2,109,455
Furniture and fixtures 40,353 45,340
-------------------- ---------------------
1,320,301 $2,154,795
Less accumulated depreciation
and amortization 660,576 1,230,734
-------------------- ---------------------
$659,725 $924,061
==================== =====================
7. 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 and $798,000 in fiscal 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
product sold during periods prior to September 23, 1993. The following mandatory
payments remain outstanding as of January 31, 1996:
The accompanying notes are an integral part of the financial statements.
36
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
June 1, 1996 901,810
June 1, 1997 1,019,460
June 1, 1998 1,151,523
-------------
Total $3,072,793
=============
The Company expensed $1,508,000, $1,107,600 and $1,107,600 during fiscal years
1994, 1995, and 1996, respectively. The expense recognized in fiscal year 1994
includes the Company's amortization of prepaid license fees and a charge to
operations of $625,000 representing a settlement for products sold during
periods prior to September 23, 1993. The remaining asset of $1,476,900 will be
amortized on a straight-line basis through May 31, 1997. 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 payments during the extension period would approximate $13.5 million.
8. ACCRUED EXPENSES
Accrued expenses as of January 31 consisted of:
1995 1996
-------------- --------------
Deferred revenue $1,138,840 $1,238,169
Accrued vacation 227,502 210,366
Unbilled receipts 352,132 317,896
Accrued warranties and customer support 295,901 175,198
Legal, investigative, and audit restatement
costs 698,637 100,000
Other 321,795 169,478
-------------- --------------
$3,034,807 $2,211,107
============== ==============
The accompanying notes are an integral part of the financial statements.
37
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
9. COMMITMENTS
The Company leases its headquarters under a noncancelable operating lease which
expires in June 2000. Annual rental payments will be approximately $402,000
through the end of the lease term. The Company also has a renewable annual lease
on a sales office. For the years ended January 31, 1994, 1995, and 1996, rent
expense totaled $539,000, $512,000 and $ 361,000, respectively.
10. CAPITAL STOCK
In August 1993, the Company closed an initial public offering of 2,123,500
shares of its common stock at $10.00 per share. An additional 291,500 shares
were sold by certain selling shareholders. The 2,123,500 shares included 315,000
shares issued pursuant to the execution of the underwriters over-allotment
option. After underwriting discounts and commissions, and offering expenses, the
net proceeds to the Company were $18,210,000. A portion of these proceeds was
used for payment of the Company's $1,500,000 bank debt and $1,920,000
subordinated debt to certain stockholders of the Company. Upon the closing of
the offering, all outstanding shares of the Company's Series A and Series B
convertible preferred stock automatically converted into shares of common stock.
Prior to the initial public offering in August 1993, certain shareholders
received exchange rights which exceeded their available holdings of Series A by
1,892,150 shares and, as a result, received warrants to purchase a total of
1,892,150 shares of Series B at $0.60 per share. As part of the offering, in
August 1993, 119,933 of warrants were exercised in a cashless transaction.
In connection with certain prior year financings, the Company issued warrants to
purchase shares of common stock which expire 5 years from their respective issue
dates. As of January 31, 1995 and 1996, there remained outstanding warrants to
purchase 157,760 shares of common stock at $7.00 per share.
In March 1994, as a result of the exercise of warrants, the Company issued to an
existing shareholder 3,000 shares of common stock. The warrants were exercisable
at a price of $7.00 per share.
During fiscal 1995 and 1996, 7,224 shares and 37,104 shares of common stock were
issued as a result of the exercise of stock options, respectively. The options
were exercisable at a price of $1.50 per share.
The accompanying notes are an integral part of the financial statements.
38
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
11. STOCK OPTIONS
In April 1995, the Company adopted the 1995 Stock Option Plan ( the 1995 Plan)
under which incentive and nonstatutory stock options may be granted to purchase
a total of 600,000 common shares. The option price per share and the expiration
date are determined by the Board of Directors at the date of grant. Incentive
stock options are granted at not less than their fair value as of the date of
grant and the options are generally vested over five years and exercisable over
ten years. Transactions in fiscal 1996 are as follows:
Option Option Price
Shares Per Share
--------------------- -----------------------
Granted 229,319 $4.125
Cancelled (24,425) $5.125
---------------------
Outstanding at January 31, 1996 204,894 $4.125
=====================
Available for future grant 395,102
=====================
Exercisable at January 31, 1996 21,177 $4.125
=====================
In April 1995, the Company adopted the 1995 Non-Employee Director Stock Option
Plan ( the Director Plan ) under which nonstatutory stock options are
automatically granted to non-employee directors to purchase a total of 100,000
common shares. The option price per share is equal to the fair market value per
share of common stock on the date of grant. The expiration date occurs on the
tenth anniversary date of the grant or the first anniversary of the date the
optionee ceases to serve as a director of the Company. Transactions in fiscal
1996 are as follows:
Option Option Price
Shares Per Share
--------------------- -----------------------
Granted 50,000 $4.375
---------------------
Outstanding at January 31, 1996 50,000 $4.375
=====================
Available for future grant 50,000
=====================
Exercisable at January 31, 1996 50,000 $4.375
=====================
The accompanying notes are an integral part of the financial statements.
39
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
In April 1992, the Company adopted the 1992 Stock Option Plan (the 1992 Plan)
under which incentive and nonstatutory stock options may be granted to purchase
a total of 150,000 common shares. The option price per share and the expiration
date are determined by the Board of Directors at the date of grant. Incentive
stock options are granted at not less than their fair value as of the date of
grant and the options are generally vested and exercisable over a four-year
period. In April 1993, shareholders increased the options available under the
1996 Plan to 450,000 shares. Transactions in fiscal 1994, 1995, and fiscal 1996
under the 1992 Plan are as follows:
Option Option Price
Shares Per Share
----------------- ------------------------
Outstanding at January 31, 1993 186,250 $4.125 - $15.50
Granted 59,759 $4.125 - $10.00
Exercised (160) $9.00
Cancelled (1,160) $4.125 - $10.00
-----------------
Outstanding at January 31, 1994 244,689 $4.125 - $15.50
Granted 288,751 $4.125
Cancelled (83,600) $9.00 - $15.50
-----------------
Outstanding at January 31, 1995 449,840 $4.125 - $15.50
Cancelled (344) $4.125
-----------------
Outstanding at January 31, 1996 449,496 $4.125 - $15.50
=================
Available for future grant 344
=================
Exercisable at January 31, 1996 171,511 $4.125 - $15.50
=================
Effective October 19, 1994, the Board of Directors approved the re-pricing of
certain stock options issued under the 1992 plan to $4.125 per share. Under this
Plan, 13,780 options were not re-priced.
In February 1990, the Company adopted the 1990 Stock Option Plan (the 1990 Plan)
under which incentive and nonstatutory stock options may be granted to purchase
a total of 400,000 common shares. In fiscal 1990, the number of shares
authorized was increased to 540,000. The option price per share and the
expiration date are determined by the Board of Directors at the date of grant.
Incentive stock options are granted at not less than their fair value as of the
date of grant and the options are generally vested and exercisable over a
four-year period. Transactions in fiscal 1994, 1995 and 1996, under the 1990
Plan are as follows:
The accompanying notes are an integral part of the financial statements.
40
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Option Option Price
Shares Per Share
--------------- -------------------
Outstanding at January 31, 1993 527,250 $1.50
Exercised (53,161) $1.50
Cancelled (878) $1.50
---------------
Outstanding at January 31, 1994 473,211 $1.50
Granted 31,249 $4.125
Exercised (7,224) $1.50
Cancelled (160,553) $1.50
---------------
Outstanding at January 31, 1995 336,683 $1.50 - $4.125
Granted 138,000 $5.125
Exercised (37,104) $1.50
Cancelled (4,723) $1.50
---------------
Outstanding at January 31, 1996 432,856 $1.50 - $5.125
===============
Available for future grant 36,449
===============
Exercisable at January 31, 1996 296,886 $1.50 - $5.125
===============
Holders of stock options granted under the 1990 Plan forfeited their rights to
exercise their stock options granted under the 1984 Stock Option Plan. As a
result, in fiscal 1990, 10,277 stock options previously granted and outstanding
under the 1984 Stock Option Plan were canceled.
The 1984 Stock Option Plan (the 1984 Plan) provides for the grant of incentive
and nonstatutory stock options as to a total of 18,975 common shares. The option
price per share and the expiration date were determined by the Board of
Directors at the date of grant. Incentive stock options were granted at not less
than their fair value as of the date of grant and the options generally were
vested and exercisable ratably over a five-year period. Transactions for the
years ended January 31, 1994, 1995, and 1996 under the 1984 Plan are as follows:
The accompanying notes are an integral part of the financial statements.
41
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Option Option Price
Shares Per Share
------------------ ------------------
Outstanding at January 31, 1993 2,314 $57.00 - $78.00
Cancelled (1,142) $57.00 - $78.00
------------------
Outstanding at January 31, 1994,
January 31, 1995 and January 31, 1996 1,172 $57.00 - $78.00
==================
Available for future grant 15,700
==================
Exercisable at January 31, 1996 1,172 $57.00 - $78.00
==================
See Note 10 for outstanding stock purchase warrants.
12. INCOME TAXES
A reconciliation of the Company's effective tax rate to the statutory federal
rate for the years ended January 31 is as follows:
1994 1995 1996
-------- ------ -------
Statutory federal rate (34.0)% (34.0)% (34.0)%
State income taxes, net of federal tax benefit 0.1 --- ---
Research and development credit (0.1) --- ---
Net losses without tax benefit --- 11.8 30.9
Permanent differences 0.2 22.2 3.1
Change in federal valuation allowance 33.8 --- ---
-------- ------ -------
--- --- ---
======== ====== =======
Permanent differences are primarily due to non-deductible officer's life
insurance, business meals and entertainment expenses and the settlement of the
stockholders' lawsuit.
The Company prospectively adopted the provisions of SFAS 109 as of February 1,
1993. Adoption did not have a material impact on the Company's results of
operations or financial position. Due to the uncertainty of realizing the
benefit of the deferred tax asset, a valuation allowance has been fully
provided.
The accompanying notes are an integral part of the financial statements.
42
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Deferred tax assets at January 31 consisted of:
1995 1996
--------------- ----------------
Assets:
Reserves $1,461,000 $1,196,000
Federal NOLs 15,764,000 16,909,000
Federal tax credit carryforwards 806,000 900,000
State NOLs and tax credits,
net of federal benefit 1,095,000 1,398,000
--------------- ----------------
Total assets 19,126,000 20,403,000
Liabilities:
Capitalized software (445,000) (796,000)
--------------- ----------------
Net deferred tax asset 18,681,000 19,607,000
Valuation allowance (18,681,000) (19,607,000)
--------------- ----------------
Deferred tax balance $0 $0
=============== ================
At January 31, 1995 and 1996, the Company had federal net operating loss
carryforwards of approximately $46,000,000 and $49,000,000, respectively. In
addition, at January 31, 1995 and 1996, the Company had federal tax credit
carryforwards of approximately $806,000 and $900,000, respectively. 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 may be subject to limitation under the provisions of Section 382
of the Internal Revenue Code.
13. EMPLOYEE BENEFIT PLAN
Effective February 1, 1993, the Company established an elective employee savings
plan, the Kurzweil A.I. 401(k) Retirement Plan ("the Plan"). This plan covers
substantially all employees. Contributions to the Plan are made by Plan
participants into the investments of their choice. The investments of the Plan
consist of mutual funds which meet the needs of employee investment objectives.
Administrative costs paid by the Company were approximately $6,900 in each of
fiscal years 1995 and 1996. The Company currently does not match employee
contributions.
The accompanying notes are an integral part of the financial statements.
43
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
14. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash, investments and trade receivables. The
Company places its cash with high quality credit institutions. At times, cash
balances may be in excess of the FDIC insurance limit.
Marketable securities include low risk non-equity corporate securities and U.S.
Government obligations. At January 31, 1995 and 1996, the Company had $1,410,000
and $501,000, respectfully, invested in highly liquid U.S. Government securities
and obligations. These securities are susceptible to market value depreciation
if certain changes in market conditions occur.
The Company performs on-going credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains
reserves for potential credit losses.
The accompanying notes are an integral part of the financial statements.
44
<PAGE>
KURZWEIL APPLIED INTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Schedule II - Valuation and Qualifying Accounts
Kurzweil Applied Intelligence, Inc.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------------------------------------------------
Description Balance at Additions Deductions Balance at End
Beginning of Period ----------------------------------------- of Period
Charged to Costs and Charged to Other
Expenses Accounts
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended January 31, 1996
Allowance for doubtful accounts $315,000 $105,000 $133,000 $287,000
Year Ended January 31, 1995
Allowance for doubtful accounts $100,000 $231,000 $ 16,000 $315,000
Year Ended January 31, 1994
Allowance for doubtful accounts $241,000 $ 80,000 $221,000 $100,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
45
<PAGE>
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: May 13, 1996 KURZWEIL APPLIED INTELLIGENCE, INC.
By /s/ Thomas E. Brew, Jr.
Thomas E. Brew, Jr.
President, Chief Executive Officer
Chairman of the Board of Directors
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/ Steven F. Kaplan * Director May 13, 1996
- --------------------------------------
Steven F. Kaplan
/s/ David R. A. Steadman * Director May 13, 1996
- --------------------------------------
David R. A. Steadman
/s/ James W. Storey * Director May 13, 1996
- --------------------------------------
James W. Storey
/s/ William R. Lonergan * Director May 13, 1996
- --------------------------------------
William R. Lonergan
/s/ Raymond C. Kurzweil Chief Technology Officer May 13, 1996
- --------------------------------------
Raymond C. Kurzweil
/s/ Thomas E. Brew, Jr. Chairman May 13, 1996
- -------------------------------------- President and Chief Executive Officer
Thomas E. Brew, Jr. (principal executive officer)
Director
60
<PAGE>
/s/ Thomas B. Doherty Chief Financial Officer May 13, 1996
- -------------------------------------- Vice President of Finance
Thomas B. Doherty and Treasurer
(principal financial and accounting officer)
By: /s/ Thomas E.Brew, Jr.
- --------------------------------------
Thomas E. Brew, Jr.
Attorney in Fact
61
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000769191
<NAME> Kurzweil Applied Intelligence, Inc.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> JAN-31-1996 JAN-31-1995
<PERIOD-START> FEB-1-1995 FEB-1-1994
<PERIOD-END> JAN-31-1996 JAN-31-1995
<EXCHANGE-RATE> 1 1
<CASH> 2,084 4,307
<SECURITIES> 501 1,410
<RECEIVABLES> 1,221 1,428
<ALLOWANCES> 0 0
<INVENTORY> 398 1,037
<CURRENT-ASSETS> 4,466 8,348
<PP&E> 924 660
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 8,864 13,040
<CURRENT-LIABILITIES> 3,807 4,630
<BONDS> 0 0
0 0
0 0
<COMMON> 57 53
<OTHER-SE> 2,831 5,274
<TOTAL-LIABILITY-AND-EQUITY> 8,864 13,040
<SALES> 9,360 12,362
<TOTAL-REVENUES> 9,360 12,362
<CGS> 4,777 5,689
<TOTAL-COSTS> 4,777 5,689
<OTHER-EXPENSES> 7,426 10,785
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 12 19
<INCOME-PRETAX> (2,586) (11,192)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,586) (11,192)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,586) (11,192)
<EPS-PRIMARY> (.38) (2.13)
<EPS-DILUTED> (.38) (2.13)
</TABLE>
