<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
________________________________________________________________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from January 1, 1998 to March 31, 1998
Commission file number: 0-23607
APPLIED VOICE RECOGNITION, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-051318
- ---------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
4615 Post Oak Place., Suite 111, Houston, TX 77027
(Address of principal executive offices including zip code)
(713) 621-5678
(Registrant's telephone number, including area code)
Check whether the issuer (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 filing requirements for the past
90 days.
Yes [X] No [ ]
Number of shares of Common Stock outstanding as of April 30, 1998: 13,197,353
<PAGE>
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item PAGE
- ---------------------------------------------------------------
<S> <C>
Balance sheet as of March 31, 1998 3
Statements of operations for the three months ended March
31, 1998 and 1997 4
Statement of stockholders equity for the three months
ended March 31, 1998 5
Statement of cash flows for the three months ended
March 31, 1998 and 1997 6
Notes to financial statements 7
</TABLE>
2
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PART I.
APPLIED VOICE RECOGNITION, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
BALANCE SHEET FOR THE PERIOD ENDED
MARCH 31, 1998
(UNAUDITED)
Item 1: Financial Statements
<TABLE>
<CAPTION>
March 31,
1998
----------
ASSETS
<S> <C>
Cash and cash equivalents 2,624,800
Accounts receivable, net of
allowance of $535,000 and $0 for
1998 and 1997, respectively. 428,711
264,091
Inventory
Deposits, prepaid expenses, and
deferred expenses 339,506
----------
Total current assets 3,657,108
Property plant and equipment, net 217,311
Other assets:
Capitalized software cost, net of
accumulated amortization of
$21,031 193,305
Investments 552,700
Goodwill, net of
amortization of $483 55,920
----------
Total other 801,925
TOTAL ASSETS 4,676,344
==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Trade payable 333,254
Royalties payable 207,154
Accrued expenses 113,262
Stock dividend payable 40,326
Note payable to related party 162,091
Current portion of capital
lease 9,848
Current portion of
long-term debt 31,896
Deferred revenue 63,927
----------
Total current liabilities 961,758
Note payable to related party
net of current portion 1,250
Capital lease, net of
current portion 36,493
Long-term debt, net of
current portion 9,318
----------
Total long-term liabilities 47,061
Preferred stock; $.10 par value;
2,000,000 shares authorized.
Series A; 312,500 and -0- shares
issued and outstanding for 1998
and 1997, respectively. 31,250
Series B; 3,000 and -0- shares
issued and outstanding for 1998
and 1997, respectively. 300
Common stock; $.001 par
value; 50,000,000 shares
authorized; 13,185,356
shares issued and
outstanding for 1998 and
1997, respectively. 13,185
Paid-in-capital 10,836,892
Unrealized holding
gain/(Loss) (250,425)
Accumulated deficit (6,963,677)
----------
Total stockholders equity 3,667,525
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 4,676,344
==========
</TABLE>
See notes to financial statements
3
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APPLIED VOICE RECOGNITION, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
STATEMENTS OF OPERATIONS FOR THE PERIODS ENDING
MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
- Restated
-------------------------------
<S> <C> <C>
Net revenues $ 175,687 $ 215,954
Cost of sales 93,381 135,540
-------------------------------
Gross margin 82,306 80,414
Operating expenses:
Marketing and sales 279,765 162,780
General and administrative 1,185,903 448,413
Research and development 180,775 59,933
-------------------------------
Total operating expenses 1,646,443 671,126
Operating margin (1,564,137) (590,712)
Other expenses:
Interest income 9,615 4,052
Interest expense (40,773) (38,700)
-------------------------------
Total other expense (31,158) (34,648)
Net Loss (1,595,295) (625,360)
===============================
Statement of comprehensive
income and loss
Unrealized holding Loss (312,646)
-------------------------------
Comprehensive loss (1,907,941) (625,360)
===============================
Basic and diluted
(loss) per share (0.12) (0.06)
Weighted average
shares outstanding 13,053,806 10,730,603
</TABLE>
See notes to financial statements
4
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APPLIED VOICE RECOGNITION, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Preferred Stock
Issued Issued Series A
------------------------------------ ---------------------------
Shares Amount Shares Amount
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance at January 1, 1998 12,989,820 $ 12,990 312,500 $ 31,250
Issuance of 84,286 shares of common stock in lieu of
officer's compensation 84,286 84 - -
Issuance of 14,407 shares of common stock in lieu of
employee cash bonuses 14,047 14 - -
Issuance of 14,286 shares of common stock for services 14,286 14 - -
Issuance of additional 56,250 shares of common stock
as part of previous stock tranction. 56,250 56 - -
Exercise of option to purchase 10,000 shares of
common stock for $2.55 per share 10,000 10 - -
Exercise of option to purchase 16,667 shares of
common stock for $.14 per share 16,667 17 - -
Sale of 3,000 shares of Series B Preferred stock
for $3,000,000 in connection with private placement - - - -
Unrealized holding loss - - - -
Net loss for the quarter ended 3/31/98 - - - -
-------------------------------------------------------------------
Ending balance at March 31, 1998 13,185,356 $ 13,185 312,500 $ 31,250
===================================================================
Preferred Stock
Issued Series B Paid In Capital
-------------------------------- ---------------------------------------
Shares Amount Common Preferred
----------------------------------------------------------------------------
Beginning balance at January 1, 1998 - $ - $ 6,213,204 $ 2,468,750
Issuance of 84,286 shares of common stock in lieu of
officer's compensation - - 200,516 -
Issuance of 14,407 shares of common stock in lieu of
employee cash bonuses - - 33,418 -
Issuance of 14,286 shares of common stock for services - - 33,986 -
Issuance of additional 56,250 shares of common stock
as part of previous stock tranction. - - (56) -
Exercise of option to purchase 10,000 shares of
common stock for $2.55 per share - - 25,490 -
Exercise of option to purchase 16,667 shares of
common stock for $.14 per share - - 2,317 -
Sale of 3,000 shares of Series B Preferred stock
for $3,000,000 in connection with private placement 3,000 300 - 2,999,700
Unrealized holding loss - - - -
Net loss for the quarter ended 3/31/98 - - - -
---------------------------------------------------------------------------
Ending balance at March 31, 1998 3,000 $ 300 $ 6,508,875 $ 5,468,450
===========================================================================
Reduction of Unrealized
Paid-In Holding Retained
Capital Gain/(loss) Deficit
---------------------------------------------------------------------------
Beginning balance at January 1, 1998 $ (1,140,433) $ 62,221 $ (5,368,382)
Issuance of 84,286 shares of common stock in lieu of
officer's compensation - - -
Issuance of 14,407 shares of common stock in lieu of
employee cash bonuses - - -
Issuance of 14,286 shares of common stock for services - - -
Issuance of additional 56,250 shares of common stock
as part of previous stock tranction. - - -
Exercise of option to purchase 10,000 shares of
common stock for $2.55 per share - - -
Exercise of option to purchase 16,667 shares of
common stock for $.14 per share - - -
Sale of 3,000 shares of Series B Preferred stock
for $3,000,000 in connection with private placement - - -
Unrealized holding loss - (312,646) -
Net loss for the quarter ended 3/31/98 - - (1,595,295)
-------------------------------------------------------------------------
Ending balance at March 31, 1998 $ (1,140,433) $ (250,425) $ (6,963,677)
=========================================================================
Total
-------------------
Beginning balance at January 1, 1998 $ 2,279,600
Issuance of 84,286 shares of common stock in lieu of
officer's compensation 200,600
Issuance of 14,407 shares of common stock in lieu of
employee cash bonuses 33,432
Issuance of 14,286 shares of common stock for services 34,001
Issuance of additional 56,250 shares of common stock
as part of previous stock tranction. -
Exercise of option to purchase 10,000 shares of
common stock for $2.55 per share 25,500
Exercise of option to purchase 16,667 shares of
common stock for $.14 per share 2,333
Sale of 3,000 shares of Series B Preferred stock
for $3,000,000 in connection with private placement 3,000,000
Unrealized holding loss (312,646)
Net loss for the quarter ended 3/31/98 (1,595,295)
------------------
Ending balance at March 31, 1998 3,667,525
==================
</TABLE>
5
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APPLIED VOICE RECOGNITION, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 1998 AND 1997
STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDING MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
----------- ---------
Restated
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,595,295) $(625,360)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 28,394 6,967
Stock and warrants issued for services 34,000 129,750
Stock issued in lieu of compensation 234,031 -
Bad debt expense 100,000 -
Changes in assets and liabilities:
Accounts receivable 19,191 (43,052)
Inventory 55,573 (20,609)
Deposits, prepaid expenses, goodwill, and
Deferred expenditures (3,400) 33,750
Investments (312,646) -
Accounts payable and accrued expenses (107,070) -
Deferred revenues (4,707) 79,047
----------- ---------
Net cash used in operating activities (1,551,929) (439,507)
INVESTING ACTIVITIES
Purchase of property and equipment (29,118) (76,057)
Capitalized software costs (49,295) -
----------- ---------
Net cash used in investing activities (78,413) (76,057)
FINANCING ACTIVITIES
Note payable to related party 37,091 250,000
Payments on notes payable (14,008) (3,418)
Payments under capital lease obligation (3,010) -
Sale of preferred stock associated with private
Placement 3,000,000 -
Stock options and warrants exercised 27,834 -
----------- ---------
Net cash provided by financing activities 3,047,907 246,582
----------- ---------
Net increase in cash and cash equivalents 1,417,565 (268,982)
Cash and cash equivalents at beginning of year 1,207,235 556,997
----------- ---------
Cash and cash equivalents at end of year $ 2,624,800 $ 288,015
=========== =========
See notes to financial statements
</TABLE>
6
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO FINANCIAL STATEMENT
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Applied Voice
Recognition, Inc., a Delaware corporation (the "Company"), have been prepared in
accordance with generally accepted accounting principles and the rules of the
Securities and Exchange Commission (the "SEC"), and should be read in
conjunction with the audited financial statements and notes thereto contained in
the Company's latest Annual Report filed with the SEC on Form 10-KSB, as
amended. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of financial position
and the results of operations for the interim periods presented have been
reflected herein. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. Notes to
the financial statements which would substantially duplicate the disclosure
contained in the audited financial statements for the most recent fiscal year,
1997, as reported in the Form 10-KSB, have been omitted.
NOTE 2 - REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP
97-2"). SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements (e.g. software products, upgrades, enhancements and
customer support, installation and training) to be allocated to each element on
the relative fair values of the elements. The fair value of an element is based
on evidence, which is specific to the vendor. The revenue allocated to software
products, including specified upgrades or enhancements, generally is recognized
upon delivery of the products. The revenue allocated to unspecified upgrades
and updates and post contract customer support generally is recognized when
upgrades are delivered or as the services are performed. If there is not
appropriate evidence of the fair value for all elements of the arrangement, all
revenue from the arrangement is deferred until such evidence exists or until all
elements are delivered. In March 1998, the AICPA issued SOP 98-4 which defers
for one year the implementation of the provisions of SOP 97-2 relating to the
fair value determination of each revenue element. The Company has adopted
SOP 97-2, however, the impact of this is not considered to be significant.
NOTE 3 - COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this statement had no impact on the Company's net loss or shareholders' equity.
Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders' equity, to be
included in comprehensive income.
NOTE 4 - CAPITALIZED SOFTWARE COSTS
The costs of direct labor and allocated overhead specific to research and
development activities for products which are technologically feasible are
capitalized through the date of market release. All other research and
development costs are charged against earnings in the period incurred. Amounts
capitalized are amortized on a straight-line basis over a three-year life. For
the quarter ended March 31, 1998, the Company capitalized approximately $49,000
of relevant costs.
NOTE 5 - PRIVATE PLACEMENT
On March 11, 1998, the Company sold in a private placement 3,000 shares of
Series B Convertible Preferred Stock ("the Preferred Shares"), par value $.10
per share (the "Series B Preferred Stock"), for a purchase price of $1,000 per
share, to two accredited investors ("the Purchasers"). The Preferred Shares pay
a 5% cumulative dividend payable in arrears at the time of each conversion. The
dividend is payable in cash or stock at the Company's option. At any time after
the earlier of June 24, 1998 or the date
7
<PAGE>
on which a registration statement covering the shares of common stock issuable
upon conversion is deemed effective, the Purchasers are entitled to convert the
entire face amount of the Preferred Shares, plus accrued and unpaid dividends.
The Preferred Shares, plus accrued and unpaid dividends, are subject to
automatic conversion on March 11, 2000. In both cases, the Preferred Shares are
convertible at a rate equal to 78% of the five day average closing bid price for
the five consecutive trading days immediately preceding the date of conversion.
This discount from the market price will result in a deemed dividend of
approximately $830,000, to be recorded ratably upon each conversion of the
Preferred Shares. At any time, the Company has the right to redeem the Preferred
Shares, plus accrued dividends, at a rate equal to 127.5% of the purchase price
of the Preferred Shares being redeemed.
NOTE 6 - ACQUISITION OF MEDICAL TRANSCRIPTION SERVICES BUSINESS
On March 17, 1998, the Company purchased certain assets of Transcription
Resources ("TR"). TR is a sole proprietorship, based in Dallas, which provides
transcription services to numerous medical groups located through out the
country. The acquisition is in line with the Company's strategic plan to develop
and market a professional edition of its software product tailored to the
medical transcription industry. The Company acquired TR for a purchase price of
$150,000, net of liabilities assumed, or $37,091. The net amount is payable in
the form of a non-interest bearing note and matures on December 31, 1998. The
acquisition of TR resulted in approximately $56,000 of goodwill on the books.
This will be amortized over a five-year period.
NOTE 7 - INVESTMENT VALUATION
On December 31, 1997, the Company purchased 471,700 shares of Voice It World
Wide Inc. ("Voice It") common stock for $500,000. On April 13, 1998, Voice It's
common stock was delisted from trading on The Nasdaq Small Cap Market for
failure to comply with certain SEC maintenance standards. The common stock of
Voice It is now traded on the Over The Counter Bulletin Board. Subsequent to
this event, the market price of Voice It's common stock dropped and has remained
at a lower value. The Company has adjusted the carrying value of the investment
by approximately $321,000, at March 31, 1998.
NOTE 8 - STOCK ISSUANCE IN LIEU OF COMPENSATION
On March 6, 1998, 84,286 shares of common stock, valued at $200,601, were issued
to certain officers of the Company. This stock was issued in lieu of
compensation for the months of February, March and April. As of March 31, 1998,
$133,734, of the value, was amortized to expense. The remaining balance of
$66,867 is deferred and will be amortized during the month of April.
NOTE 9 - DISCONTINUANCE OF MERGER NEGOTIATIONS
On March 17, 1998, the Company entered into a letter of intent with Voice It for
the two companies to merge. The letter of intent was subject to the completion
of the merger negotiations by March 31, 1998. On that date, the letter of intent
expired according to its own terms, and the companies announced that they do not
intend to proceed with the merger.
NOTE 10 - RESTATEMENT
As described, in detail, in the 1997 10-KSB, as amended, the 1996 financial
statements were re-stated to reflect additional compensation and financing costs
associated with equity transactions, and to reflect proper accounting treatment
of the reorganization of the Company, which occurred on August 15, 1996.
The Quarter Ended March 31, 1997 has been restated as follows:
The Company issued warrants to purchase 300,000 shares of common stock to two
individuals for services rendered and did not record associated compensation
expense which pertains to the quarter ended March 31, 1997. The Company
restated the 1997 first quarter financial statements to reflect $129,750 of
relevant compensation expense, related to the granting of those warrants.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's revenue is derived primarily from the sale of licenses and
royalties for its voice recognition computer software applications and training
and maintenance services associated with the installation of the computer
software. Computer hardware is bundled with the software application at the
customer's request. The Company purchases its computer hardware from a third
party and installs the computer software on the purchased hardware for delivery
to the customer. All sales are recognized by the Company upon delivery to and
acceptance by the customer with the exception of maintenance services which are
recognized ratably over the term of the maintenance agreement, typically one
year.
The Company's voice recognition software is written to work in tandem
with speech recognition software "engines." For each software license sold the
Company pays a royalty to the developer of the software engine. In most cases
the Company's software applications sold in 1997 were written to work with the
IBM software engine.
The Company was formed in 1994, and began significant marketing efforts
of its products in 1997. As a result, the Company generated sales of $175,687 in
the first quarter of 1998, and has incurred operating losses since inception of
approximately 7,792,000. To date, the Company's operations have not been
profitable and there is no assurance that they will become profitable in the
future. As a result, the Company believes that its historical results of
operations for the periods presented may not be directly comparable.
Sales of the Personal Edition of VoiceCOMMANDER 4.0 software are subject
to seasonal fluctuations. Typically, 40% or more of the annual sales of the
product in the retail market will occur in the fourth quarter of the year. Sales
of the Professional Edition of VoiceCOMMANDER 4.0 are less sensitive to seasonal
fluctuations and are expected to occur ratably over the year. Prices charged for
the Company's software are subject to inflationary impacts as they occur from
time to time in the normal course of business. In addition, the Company plans to
significantly increase its operating expenses to fund greater levels of research
and development, increase its sales and marketing operations, develop new
distribution channels, broaden its customer support capabilities and establish
brand identity and strategic alliances. To the extent that such expenses precede
or are not subsequently followed by increased revenues, the Company's business,
results of operations and financial condition will be materially adversely
affected.
RESULTS OF OPERATIONS:
Quarter ended March 31, 1998 vs. Quarter ended March 31, 1997
REVENUES: Net revenues decreased approximately $40,300, from $215,954 in the
first quarter of 1997 to $175,687 in the first quarter of 1998, a decrease of
approximately 19%. This decrease is attributed to the Company's strategic plan
to develop and market a professional edition of its software product tailored to
the medical transcription industry. Since the product and concept are new to
the sales force, a greater amount of time has been spent in developing the
necessary "know-how" of the product. As a result, sales volume decreased.
COST OF SALES: Cost of sales decreased approximately $42,000, from $135,540 in
the first quarter of 1997 to $93,381 in the first quarter of 1998, a decrease of
approximately 31%. This decrease is directly attributed to the decrease in net
sales and increased software sales in comparison to hardware sales. In the
first quarter of 1998, software sales comprised 58% of software and hardware
sales combined. During the same period in 1997, software sales comprised 46% of
the same revenue mix. In most cases, software sales generate a greater gross
margin than do hardware sales.
MARKETING AND SALES EXPENSE: Marketing and sales expense consists primarily of
salaries and commissions of marketing and sales personnel and promotional
expenditures. Marketing and sales expense increased approximately $117,000, from
$162,780 in the first quarter of 1997 to $279,765 in the first quarter of 1998,
an increase of approximately 72%. Of the total increase, approximately $93,000
is attributed to the expansion of the marketing and sales team. The expansion is
attributed to growth and the Company's goal to accelerate marketing and sales of
the Company's product in the Houston area. Another item, affecting the increase,
relates to incremental trade show expenditures of approximately $20,000. The
Company participated in a trade show in connection with the joint-product
development venture between the Company and Voice It Worldwide. The balance of
the increase relates to on-going costs associated with advertising, printing and
press, and other marketing related expenses. These expenditures increased as the
result of the Company's growth.
GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative expense is
comprised primarily of compensation and related expenditures for administrative
and executive personnel, professional fees associated with legal, consulting,
and accounting services, and general corporate overhead. General and
administrative expense increased approximately $737,000, from $448,413 in the
first quarter of 1997 to $1,185,903 in the first quarter of 1998, an increase of
approximately 164%. The increase is attributable mainly to increased
administrative and executive personnel and associated recruiting costs, which
amounted to approximately $246,000 of the total increase. Another factor
contributing to the increase includes additional consulting, legal, and
accounting services of approximately $214,000. Consulting services were incurred
in connection with the development of a strategic plan to assist the Company in
expanding into the medical transcription market. Consulting services were also
solicited to aid in the day to day operations of the Company. Legal and
accounting expenditures were incurred in association with various SEC filings,
the most recent private placement, the annual audit, and several tax filings.
Another factor contributing to the increase is $75,000 of investor relation fees
that were amortized into expense during the quarter. In addition to this,
approximately $73,000 were recorded in the current quarter to account for five
months worth of severance payable to a former officer of the Company. All other
general and administrative costs increased approximately $129,000 due to
9
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higher telephone, occupancy, travel, bad debt and general office expenses.
These expenditures increased as the result of the Company's growth.
RESEARCH AND DEVELOPMENT EXPENSE: Research and development expense consist
primarily of personnel costs including salaries and benefits and consultant
costs related to the research and development of the Company's product.
Research and development expenses increased approximately $121,000, from $59,933
in the first quarter of 1997 to $180,775 in the first quarter of 1998, an
increase of approximately 202%. The increase is wholly attributable to the
increase in research and development personnel and contract labor and reflects
the incremental efforts focused on the enhancement and development of the
Company's Mass Marketing and Professional Medical Dictation Edition of its
software product.
INTEREST INCOME: Interest income consists primarily of interest earned on cash
and cash equivalents. Interest income increased approximately $6,000 from
$4,052 in the first quarter of 1997 to $9,615 in the first quarter of 1998, an
increase of approximately 137%. The increase is attributed to invested funds
received as the result of the Company's private placement activities during the
current and previous fiscal year, but unused in operations.
INTEREST EXPENSE: Approximately $34,000 of deferred financing costs has been
amortized into interest expense in each of the quarters ended March 31, 1998 and
March 31, 1997. The deferred financing cost relates to a note payable to a
trust. Because the amortization amount is constant between quarters, and since
interest incurred on other notes is not significant, interest expense between
periods remained relatively constant.
INCOME TAXES: The Company has incurred losses since inception and, therefore,has
not been subject to federal income taxes. As of March 31, 1998, the Company had
generated net operating losses ("NOLs"), for financial reporting purposes, of
approximately $5.5 million available to reduce future federal income taxes.
These carryforwards will begin to expire in 2011. The ability of the Company to
utilize the carryforwards is dependent upon the Company generating sufficient
taxable income, and may be affected by annual limitations on the use of such
carryforwards if a change of control occurs due to future sales of the Company's
capital stock. The Company has recorded a valuation allowance for all net
deferred tax assets, including NOLs.
NET LOSS: Net loss increased approximately $970,000, from $(625,360) in the
first quarter of 1997 to $(1,595,295) in the first quarter of 1998, an increase
of approximately 155%. The increase is primarily attributed to increased
operating expenditures of approximately $975,000. The difference is attributed
to a favorable change in gross profit and other expenses of approximately
$5,000.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998 the Company had cash and cash equivalents of approximately
$2,624,800 and working capital of approximately $2,695,000.
Net cash used by operating activities increased approximately $1,112,000 from
$439,507 in the first quarter of 1997 to $1,551,928 in the first quarter of
1998. The increase is primarily attributable to the $969,935 increase in
operating losses sustained by the Company in the first quarter of 1998 vs. the
same period in 1997.
In the first quarter of 1998 investing activities totaled $78,413. This total
is comprised of purchases of property, plant and equipment, and capitalization
of development costs of $29,118 and $49,295, respectively.
Net cash provided by financing activities amounted to approximately $3,048,000.
This is primarily comprised of the Company's recent private placement (as
described below). The remaining cash activity of approximately $48,000 relates
to inflows of approximately $37,000 and $28,000 associated with a note payable
and stock option exercise, respectively, and outflows of approximately $17,000
attributed to payments on debt.
10
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The Company continues to incur operating losses and will continue to need
additional working capital to fund its research, development and marketing
efforts for the next fiscal year. The Company's liquidity will be reduced as
amounts are expended for continuing research and development, expansion of sales
and marketing activities and development of its administrative function.
Additionally, the Company's liquidity will also be reduced as amounts are used
for purchases of capital assets.
The Company decided in the fourth quarter of 1997 to issue additional equity or
debt instruments for cash. On March 11, 1998 the Company completed a private
placement of $3,000,000. The placement was comprised of 3,000 shares of Series B
Convertible Preferred Stock. These shares have a par value of $.10 and are
priced at $1,000 per share. The Company believes that this funding plus
anticipated revenue will be sufficient to meet its minimum plan objectives for
the next year. This level of funding plus anticipated sales revenues should be
sufficient to allow the Company to continue its Houston focused sales efforts
and the completion of a basic medical transcription voice recognition software
solution.
However, if the Company chooses to accelerate its marketing and sales efforts
beyond the Houston, Texas market and increase its product development efforts
regarding its medical transcription voice recognition solution, the Company's
current cash position plus cash generated by operations will be insufficient to
satisfy the Company's liquidity requirements. On or about May 8, 1998, the
Company and an investment group, that participated in one of the Company's
previous private placement, agreed to the terms of an agreement that will
provide for additional funding of $3,000,000. However, there can be no
assurances that this investment group will complete this financing, or that
additional funds can be raised on acceptable terms or at all, if the proposed
financing is not completed.
If the Company chooses to accelerate its acquisition of technology or other
companies, in particular medical transcription companies, then significant
additional capital over and above the amounts detailed above will be required to
meet these objectives. In that case, the Company may resort to additional
funding through the sale of equity or convertible debt securities. Such option
will result in additional material dilution to the Company's stockholders'.
There can be no assurance that the Company will be able to raise such capital
when needed, or on terms commercially favorable to the Company, if at all.
11
<PAGE>
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
RECENT SALES OR ISSUANCE'S OF UNREGISTERED SECURITIES
On March 11, 1998, the Company sold in a private placement 3,000 shares of
Series B Convertible Preferred Stock, par value $.10 per share (the "Series B
Private Placement") for a purchase price of $1,000 per share, to two accredited
investors. The terms of the Series B Private Placement are discussed in footnote
5 to the financial statements included herein.
On March 11, 1998, the Company granted Continental Capital & Equity Corporation
an option to purchase 150,000 shares of the Company's common stock with an
exercise price of $2.2313 per share in exchange for promotional type services.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
REINCORPORATION: On January 29, 1998, the Company completed its reincorporation
into Delaware. The details of the reincorporation were reported in a Form S-K
which was filed on January 20, 1998.
DISCONTINUANCE OF MERGER NEGOTIATIONS: On March 17, 1998, the Company entered
into a letter of intent with Voice It Worldwide, Inc. for the two companies to
merge. The letter of intent was subject to the completion of the merger
negotiations by March 31 1998. On that date, the letter of intent expired
according to its own terms, and the companies announced that they do not intend
to proceed with the merger.
EMPLOYMENT TERMINATION AGREEMENT: On August 15, 1996, the Company entered into
an employment agreement with Janet E. Carson (now Janet Carson Connolly) as the
Company's VP of Marketing. On April 30, 1998, the Company and Ms. Carson
Connolly mutually agreed to terminate the employment agreement. The employment
agreement was not terminated for cause of any kind, but to mitigate any
appearance of a conflict of interest, as Ms. Carson Connolly is the spouse of
Timothy J. Connolly, the Company's Chief Executive Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12
<PAGE>
EXHIBIT DESCRIPTION OF EXHIBIT
- ------- ----------------------
2.1 Plan and Agreement of Merger between Applied Voice Recognition, Inc., a
Utah corporation and the Company dated November 7, 1997. (Exhibit 2.1 to
the Company's Current Report on Form 8-K as filed with the Commission on
January 20, 1998 is incorporated herein by reference).
2.2 Asset Purchase Agreement by and between Transcription Resources dated
March 17, 1998. (Exhibit 2.2 to the Company's Form 10-KSB for the period
ended December 31, 1997, as filed with the Commission on April 15, 1998,
is incorporated herein by reference)
3.1 Amended and Restated Certificate of Incorporation as filed with the
Delaware Secretary of State on January 29, 1998. (Exhibit 4.1 to the
Company's Current Report on Form 8-K as filed with the Commission on
January 20, 1998 is incorporated herein by reference).
3.2 Certificate of Designation for the Series A Preferred Stock as filed
with the Delaware Secretary of State on January 29, 1998. (Exhibit 4.2
to the Company's Current Report on Form 8-K as filed with the Commission
on January 20, 1998 is incorporated herein by reference).
3.3 Certificate of Ownership and Merger of Applied Voice Recognition, Inc.,
a Utah corporation, with and into the Company dated January 26, 1998 as
filed with the Delaware Secretary of State on January 29, 1998. (Exhibit
3.3 to the Company's Form 10-KSB for the period ended December 31, 1997,
as filed with the Commission on April 15, 1998, is incorporated herein
by reference)
3.4 Certificate of Designation for the Series B Preferred Stock as filed
with the Delaware Secretary of State on March 11, 1998. (Exhibit 3.4 to
the Company's Form 10-KSB for the period ended December 31, 1997, as
filed with the Commission on April 15, 1998, is incorporated herein by
reference)
4.1 Amended and Restated Registration Rights Agreement between the company
and Entrepreneurial Investors, Ltd., a Bahamas Company ("EIL") dated
January 8, 1998. (Exhibit 4.3 to the Company's Form 10-KSB for the
period ended December 31, 1997, as filed with the Commission on April
15, 1998, is incorporated herein by reference)
4.2 Form of Registration Rights Agreement between the Company and the Series
B Preferred Stock investors dated March 11, 1998. (Exhibit 4.6 to the
Company's Form 10-KSB for the period ended December 31, 1997, as filed
with the Commission on April 15, 1998, is incorporated herein by
reference)
10.1 1997 Incentive Plan effective as of October 1, 1997 (Exhibit 4.1 to the
Company's Form S-8 (No. 333-44191) as filed with the Commission on
January 13, 1998, is incorporated herein by reference).
*10.2 Agreement with Respect to Termination of Employment between the Company
and Jan Carson Connolly (f/k/a Janet E. Carson) dated as of
April 30, 1998.
*27.1 Financial Data Schedule.
- -----------------
* filed herewith
(b) Reports on Form 8-K
On January 20, 1998, the Company filed a current report on Form 8-K
reporting the Company's reincorporation into Delaware and the approval
of the Company's 1997 incentive plan.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
APPLIED VOICE RECOGNITION, INC.
By /s/ WILLIAM T. KENNEDY
----------------------------------------------
William T. Kennedy
Chief Financial Officer on behalf of the
Company and as Chief Accounting Officer
May 15, 1998
14
<PAGE>
EXHIBIT 10.2
AGREEMENT WITH RESPECT TO TERMINATION OF EMPLOYMENT
This Agreement with Respect to Termination of Employment (this
"Agreement"), dated as of the 30th day of April, 1998, is by and between APPLIED
VOICE RECOGNITION, INC., a Delaware corporation (the "Corporation"), and JANET
E. CARSON, an individual residing in Houston, Texas ("Carson").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Carson is currently employed by the Corporation pursuant to the
terms of that certain Employment Agreement between Carson and the Corporation
dated as of August 15, 1996 (the "Employment Agreement");
WHEREAS, the Corporation and Carson have agreed that Carson's employment
with the Corporation shall be terminated pursuant to the terms and conditions
contained herein; and
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained herein and the recitals of facts set forth above, the truth and
accuracy of which are hereby acknowledged and incorporated herein, the receipt
and sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
1. TERMINATION OF EMPLOYMENT. Notwithstanding anything to the
contrary contained in the Employment Agreement, effective as of the close of
business on April 30, 1998, the employment of Carson with the Corporation shall
be terminated. In connection therewith, Carson shall resign as of that date as
Vice President and Secretary of the Corporation, and execution of this Agreement
by Carson shall constitute her resignation as Vice President and Secretary of
the Corporation as of the close of business on April 30, 1998. While it is
anticipated that Carson shall continue her term as a member of the Board of
Directors of the Corporation, following the termination of her employment,
Carson will no longer be involved in the day-to-day operations of the
Corporation, and will not represent the Corporation in any capacity other than
as a board member. To the extent that the terms of this Agreement are
inconsistent with the terms of the Employment Agreement, the terms of this
Agreement shall prevail. Except as modified by this Agreement, the Employment
Agreement shall continue in full force and effect and all terms, provisions,
covenants, agreements and conditions relating to the period following the
Expiration Date (as defined in the Employment Agreement) are and shall remain
unchanged.
2. SEVERANCE COMPENSATION. Immediately upon the execution of this
Agreement, the Corporation will deliver to Carson a company check in the amount
of Seventy-Five Thousand and No/100 Dollars ($75,000.00). In addition, the
Corporation will issue to Carson 45,113 shares of the Corporation's common
stock, which amount was determined by employing the same
-1-
<PAGE>
formula used during the first quarter of 1998 to provide the Corporation's upper
management with additional compensation in the form of common stock, under the
same terms and conditions as granted to management at that time. Except as
described above, Carson agrees that she shall have no claims against the
Corporation arising out of the termination of her employment, and Carson waives
any rights and claims, if any, she may have against the Corporation to any
severance package or other compensation.
3. MUTUAL RELEASES.
(a) In consideration of the foregoing, Carson does hereby RELEASE,
ACQUIT and FOREVER DISCHARGE, the Corporation, for itself and its shareholders,
officers, directors, employees, agents and representatives, from any and all
claims, liabilities, obligations, indebtedness, demands and causes of action,
known or unknown existing as of the date hereof and relating, directly or
indirectly to the relationship between the Corporation and Carson, except as may
relate to this Agreement and any provisions of the Employment Agreement that by
its terms are to continue after the Expiration Date (as defined in the
Employment Agreement).
(b) In consideration of the foregoing, the Corporation does hereby
RELEASE, ACQUIT and FOREVER DISCHARGE, Carson, for herself and her successors
and assigns, from any and all claims, liabilities, obligations, indebtedness,
demands and causes of action, known or unknown existing as of the date hereof
and relating, directly or indirectly to the relationship between the Corporation
and Carson, except as may relate to this Agreement and any provisions of the
Employment Agreement that by its terms are to continue after the Expiration Date
(as defined in the Employment Agreement).
4. NOTICE. Any notice, request, reply, instruction, or other
communication provided or permitted in this Agreement must be given in writing
and may be served by depositing same in the United States mail in certified or
registered form, postage prepaid, return receipt requested.
If to the Corporation, at: 4615 Post Oak, Suite 111
Houston, Texas 77027
or, if to Carson, at: 8602 Pasture View Lane
Houston, Texas 77024
or to such other address as may be specified in a notice given in accordance
with this paragraph. Unless actual receipt is required by any provision of this
Agreement, notice deposited in the United States mail in the manner herein
prescribed shall be effective on dispatch.
5. SEVERABILITY. If any provision of this Agreement is rendered or
declared illegal or unenforceable by reason of any existing or subsequently
enacted legislation or by decree of a court
-2-
<PAGE>
of last resort, the Corporation and Carson shall promptly meet and negotiate
substitute provisions for those rendered or declared illegal or unenforceable,
but all the remaining provisions of this Agreement shall remain in full force
and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement at
Houston, Texas, as of the date first above written.
CORPORATION: APPLIED VOICE RECOGNITION, INC.
-----------
By: /s/ Michael J. Wilson
--------------------------------------
Michael J. Wilson, Vice Chairman
CARSON: /s/ Janet E. Carson
------ --------------------------------------
JANET E. CARSON
-3-
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