<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______ to ______
Commission file number: 0-23607
APPLIED VOICE RECOGNITION, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 76-0513154
- - ----------------------------------------------------------------------
(State or other Jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
4615 Post Oak Place, Suite 111, Houston, TX 77027
(Address of principal executive offices)
(713) 621-5678
(Issuer 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 Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [_]
Number of shares of Common Stock outstanding as of November 16, 1998:
14,479,949
Transitional Small Business Disclosure Format (Check One):
Yes [_] No [x]
<PAGE>
PART I.
FINANCIAL INFORMATION
This report includes "forward looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements other than statements of
historical fact included in this report are forward looking statements. Such
forward looking statements include, without limitation, statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" regarding the Company's estimate
of sufficiency of existing capital resources and its ability to raise additional
capital to fund cash requirements for future operations and acquisitions.
Although the Company believes the expectations reflected in such forward looking
statements are reasonable, it can give no assurance that such expectations
reflected in such forward looking statements will prove to have been correct.
The ability to achieve the Company's expectations is contingent upon a number of
factors which include (i) ongoing cost of research and development activities,
(ii) effect of any current or future competitive products, (iii) the Company's
ability to produce and market its products in the healthcare transcription
industry, (iv) the retention of key personnel and (v) capital market conditions.
This Report may contain trademarks and service marks of other companies.
ITEM 1. FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
- - ----------------------------------------------------------------------------------------------------------
<S> <C>
Balance sheet as of September 30, 1998 3
Statement of operations for the three months ended September 30, 1998 and nine months ended
September 30, 1998 4
Statement of stockholders' equity for the nine months ended September 30, 1998 5
Statement of cash flows for the nine months ended September 30, 1998 6
Note to financial statements 7
</TABLE>
2
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APPLIED VOICE RECOGNITION, INC.
FORM 10QSB
QUARTER ENDED SEPTEMBER 30, 1998
Balance Sheet for the period ending
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1998
------------------
<S> <C>
ASSETS
Cash and cash equivalents 1,396,301
Accounts receivable, net of allowance of $68,500 104,713
Inventory 73,078
Deposits and prepaid expenses 24,675
Deferred expenses 249,142
------------------
Total current assets 1,847,910
Property plant and equipment, net of accumulated depreciation of $122,755 409,532
Long-Term portion of deferred expenses 150,000
Other assets:
Capitalized software costs, net of accumulated depreciation of $56,764 411,169
Investments 133,924
Goodwill, net of accumulated amortization of $6,110 50,293
------------------
Total other assets 595,386
TOTAL ASSETS 3,002,828
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade payables 140,770
Accrued expenses 36,564
Stock dividend payable 111,688
Note payable to related party 37,091
Current portion of capital lease obligation 10,455
Current portion of long-term debt 8,882
Deferred revenue 61,035
------------------
Total current liabilities 406,484
Capital lease, net of current portion 31,109
Long-term debt, net of current portion 4,379
------------------
Total liabilities 441,972
Preferred stock; $.10 par value; 2,000,000 shares authorized.
Series A; 312,500 shares issued and outstanding 31,250
Series B; 2,285 shares issued and 2,285 outstanding 229
Series C; 231,788 shares issued and outstanding 23,179
Common stock; $.001 par value; 50,000,000 shares authorized;
14,454,702 issued and outstanding 14,454
Paid-in-capital 14,044,606
Accumulated comprehensive loss (169,201)
Accumulated deficit (11,383,660)
------------------
Total stockholders equity 2,560,856
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 3,002,828
==================
See notes to financial statements
</TABLE>
3
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APPLIED VOICE RECOGNITION, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1998
Statement of operations for the three and nine month periods ended
September 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
--------------------------------------- ---------------------------------------
September 30, 1997 September 30, 1997
September 30, 1998 Restated September 30, 1998 Restated
--------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 475,303 $ 785,327 $ 100,144 $ 332,176
Cost of sales 257,718 431,514 71,982 160,639
--------------------------------------- ---------------------------------------
Gross margin 217,585 353,813 28,162 171,537
Operating expenses:
Marketing and sales 943,256 657,474 191,817 338,848
General and administrative 3,642,816 1,824,887 1,374,430 757,150
Research and development 452,980 210,106 136,182 37,745
--------------------------------------- ---------------------------------------
Total operating expenses 5,039,052 2,692,467 1,702,429 1,133,743
Operating margin (4,821,467) (2,338,654) (1,674,267) (962,206)
Other:
Interest income 61,405 14,661 38,710 9,481
Interest expense (79,860) (409,012) (1,848) (189,310)
Loss on investments (500,000) - (500,000) -
--------------------------------------- ---------------------------------------
Total other (518,455) (394,351) (463,138) (179,829)
Net Loss $ (5,339,922) $ (2,733,005) $ (2,137,405) $ (1,142,035)
======================================= =======================================
Statement of comprehensive loss:
Unrealized holiding (Loss) Gain (598,874) - 17,145 -
--------------------------------------- ---------------------------------------
Comprehensive loss $ (5,938,796) $ (2,733,005) $ (2,120,260) $ (1,142,035)
======================================= =======================================
Basic and diluted loss per share (0.43) (0.25) (0.18) (0.10)
Weighted average shares outstanding 13,416,292 11,126,281 13,991,606 11,391,454
</TABLE>
See notes to finanical statements
4
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<TABLE>
<CAPTION>
APPLIED VOICE RECOGNITION, INC.
FORM 10QSB
QUARTER ENDED SEPTEMBER 30, 1998
Statement of stockholders equity
Quarter Ended September 30, 1998
Common Stock Preferred Stock Preferred Stock Preferred Stock
Issued Issued Series A Issued Series B Issued Series C
____________________ ___________________ _________________ __________________ __________
Shares Amount Shares Amount Shares Amount Shares Amount Common
___________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning balance at January 1, 12,989,820 $ 12,990 312,500 $ 31,250 - $ - - $ - $6,213,204
Issuance of 129,399 shares of
common stock in lieu of
officer's compensation 129,399 129 - - - - - - 285,059
Issuance of 14,407 shares of
common stock in lieu of employee
cash bonuses 14,047 14 - - - - - - 33,418
Issuance of 44,286 shares of
common stock for services 44,286 44 - - - - - - 78,956
Issuance of additional 56,000
shares of common stock as part
of previous stock transaction. 56,000 56 - - - - - - (56)
Exercise of options to purchase
51,167 shares of common stock 51,167 50 - - - - - - 90,259
Sale of 3,000 shares of Series B
Preferred stock for $3,000,000
in connection with private
placement - - - - 3,000 300 - - -
Sale of 220,750 shares of Series
C Preferred stock for $2,207,500
in connection with private
placement - - - - - - 220,750 22,075 -
Private placement costs
attributed to options issued in
connection with Series C Private
Placement - - - - - - - - 28,697
Cash expenditure related to
private placement sale of Series
C Preferred Stock - - - - - - - - -
Private placement costs
attributed to Series C Preferred
shares issued in connection with
Series C Private Placement - - - - - - 11,038 1,104 -
Issuance of options to purchase
382,000 shares of common stock
for consulting services - - - - - - - - 196,960
Issuance of options to purchase
755,000 shares of common stock
for advisory services - - - - - - - - 274,400
Deemed dividend related to
discount on conversion of Series
B Preferred stock - - - - - - - - -
Conversion of 715 shares of
Series B Preferred Stock in
exchange for 1,147,171 shares of
common stock 1,147,171 1,147 - - (715) (72) - - 1,048,116
Series B Preferred Stock
Dividend paid with common stock 22,812 23 - - - - - - 20,275
Accrued dividend on Preferred
Stock Series A & C - - - - - - - - -
Unrealized holding loss - - - - - - - - -
Investment write-off - - - - - - - - -
Net loss for the nine months
ended September 30, 1998 - - - - - - - - -
Ending balance at September 30,
1998 14,454,702 $ 14,454 312,500 $ 31,250 2,285 $ 229 231,788 $23,179 $ 8,269,288
===================================================================================================================================
Paid In Capital
----------------------------------- Reduction of Unrealized
Preferred Preferred Preferred Paid-In Holding Retained
Series A Series B Series C Capital Gain/(loss) Deficit Total
----------------------------------------------------------------------------------------------
Beginning balance at January 1, $ 2,468,750 $ _ $ _ $ (1,140,433) $ 62,221 $ (5,368,382) $ 2,279,600
Issuance of 129,399 shares of
common stock in lieu of
officer's compensation - - - - - - 285,188
Issuance of 14,407 shares of
common stock in lieu of employee
cash bonuses - - - - - - 33,432
Issuance of 44,286 shares of
common stock for services - - - - - - 79,000
Issuance of additional 56,000
shares of common stock as part
of previous stock transaction. - - - - - - -
Exercise of options to purchase
51,167 shares of common stock - - - - - - 90,309
Sale of 3,000 shares of Series B
Preferred stock for $3,000,000
in connection with private
placement - 2,999,700 - - - - 3,000,000
Sale of 220,750 shares of Series
C Preferred stock for $2,207,500
in connection with private
placement - - 2,185,425 - - - 2,207,500
Private placement costs
attributed to options issued in
connection with Series C Private
Placement - - - (28,697) - - -
Cash expenditure related to
private placement sale of Series
C Preferred Stock - - - (242,825) - - (242,825)
Private placement costs
attributed to Series C Preferred
shares issued in connection with
Series C Private Placement - - 109,276 (110,380) - - -
Issuance of options to purchase
382,000 shares of common stock
for consulting services - - - - - - 196,960
Issuance of options to purchase
755,000 shares of common stock
for advisory services - - - - - - 274,400
Deemed dividend related to
discount on conversion of Series
B Preferred stock - 583,694 - - - (583,694) -
Conversion of 715 shares of
Series B Preferred Stock in
exchange for 1,147,171 shares of
common stock - (1,049,192) - - - - -
Series B Preferred Stock
Dividend paid with common stock - - - - - (20,298) -
Accrued dividend on Preferred
Stock Series A & C - - - - - (71,364) (71,364)
Unrealized holding loss - - - - (598,874) - (598,874)
Investment write-off - - - - 367,452 - 367,452
Net loss for the nine months
ended September 30, 1998 - - - - - (5,339,922) (5,339,922)
----------------------------------------------------------------------------------------------
Ending balance at September 30,
1998 $ 2,468,750 $ 2,534,202 $2,294,701 $(1,522,335) $ (169,201) $(11,383,660) $ 2,560,856
==============================================================================================
</TABLE>
5
<PAGE>
APPLIED VOICE RECOGNITION, INC.
FORM 10QSB
QUARTER ENDED SEPTEMBER 30, 1998
Statements of Cash Flow for the periods ending
September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------------
September 30, 1997
September 30, 1998 Restated
----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net (loss) (5,339,922) (2,733,005)
Adjustments to reconcile net (loss) to cash provided by
operating activities:
Depreciation 119,403 47,241
Loss on investment 500,000 -
Stock issued for services 79,000 275,000
Stock issued as compensation 318,620 -
Stock options and warrants issued for services 145,857 224,558
Changes in operating assets and liabilities:
Accounts receivable 443,189 (68,500)
Inventory 180,121 (164,457)
Deposits and prepaids (75,338) (137,009)
Deferred revenues (7,599) 151,772
Accounts payable and accrued expenses (583,408) 297,445
--------------------------------
NET CASH USED BY OPERATING ACTIVITIES (4,220,077) (2,106,955)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (204,050) (211,334)
Capitalized R&D costs (302,882) (186,297)
--------------------------------
NET CASH USED BY INVESTING ACTIVITIES (506,932) (397,631)
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds from stockholders - 180,000
Loan proceeds from third parties - 586,500
Capital lease financing - 55,047
Principal payment on stockholder debt (89,159) (207,500)
Principal payment on third party debt (41,960) (586,305)
Principal payments under capital lease (7,787) (4,242)
Warrants/options granted in connection with bridge loans - 278,400
Sale of preferred stock - Series B 3,000,000 -
Sale of preferred stock - Series C 2,207,500 -
Private placement cash expenditures (242,825) (559,677)
Sale of common stock - 5,303,000
Stock options/warrants exercised 90,306 9,916
--------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,916,075 5,055,139
NET INCREASE (DECREASE) IN CASH 189,066 2,550,553
--------------------------------
Cash at the beginning of the period 1,207,235 556,997
================================
CASH AT END OF PERIOD 1,396,301 3,107,550
================================
</TABLE>
See notes to financial statements
6
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 NATURE OF BUSINESS
Applied Voice Recognition, Inc. (the "Company"), develops and markets voice-
enabled computer software programs tailored for general use and for the
healthcare industry. In addition to this, the Company provides traditional and
electronic transcription services to healthcare professionals in ten states
through its Dallas, Texas based transcription company.
The Company is a Delaware Corporation, which reincorporated on January 29, 1998.
Prior to this, the Company was a Utah corporation by virtue of a share exchange
that was treated as a reverse merger with Summa Vest, Inc., an inactive publicly
traded shell, incorporated on July 22, 1985.
NOTE 2 - 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 3 - REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position 97-2, "Software Revenue Recognition"
("SOP97-2"). SOP 97-2 generally requires revenue earned on software
arrangements involving multiple elements (e.g. software products, upgrades,
enhancements, 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
7
<PAGE>
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.
Fees for transcription-related services are based primarily on contracted rates,
and revenue is recognized upon the rendering of services and delivery of
transcribed materials. For the quarter ended and nine months ended September
30, 1998, the Company recognized approximately $108,000 and $229,000 of
transcription-related revenues, respectively.
NOTE 4 - 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. Statement 130 requires
unrealized gains or losses on the Company's available-for-sale securities, which
prior to adoption were reported separately in shareholders' equity, to be
included in comprehensive income (see Note 10).
NOTE 5 - ACCOUNTS RECEIVABLE WRITE-OFF
During the second quarter of 1998, the collectibility of the receivable due from
Voice It Worldwide, Inc., was assessed to be uncertain. Because of this, the
Company wrote-off the entire receivable balance of approximately $708,000. Of
this amount, $500,000 had previously been reserved. The Company will continue to
pursue collection of the receivable balance.
NOTE 6 - CAPITALIZED SOFTWARE COSTS
The costs of direct labor and allocated overhead related to research and
development activities for products that are technologically feasible are
capitalized from the time they become technologically feasible until 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 three month and nine month
periods ended September 30, 1998, the Company capitalized approximately $160,000
and $303,000, respectively, of relevant costs.
NOTE 7 PREFERRED STOCK TRANSACTIONS
On March 11, 1998, the Company sold in a private placement 3,000 shares of
Series B Convertible Preferred Stock (the "Series B Preferred Shares"), par
value $.10 per share, for a purchase price of $1,000 per share, to two
accredited investors (the "Purchasers"). The Series B 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, the
Purchasers are entitled to convert the entire face amount of the Series B
Preferred Shares, plus accrued and unpaid dividends. The Series B Preferred
Shares, plus accrued and unpaid dividends, are subject to automatic conversion
on March 11, 2000. In both cases, the Series B Preferred Shares are convertible
at a rate equal to 78% of the five day average closing bid
8
<PAGE>
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, of which $271,011 was recognized upon the conversion
of 715 shares of the Series B Preferred Shares. The remainder of the dividend
will be recognized on December 31, 1998. The Company has the right to redeem the
Series B Preferred Shares, plus accrued dividends, at a rate equal to 127.5% of
the purchase price of the Series B Preferred Shares being redeemed.
On July 28, 1998, the Company sold in a private placement 220,750 shares of
Series C Convertible Preferred Stock (the "Series C Preferred Shares"), par
value $.10 per share, for a purchase price of $10 per share, to accredited
investors. The Series C Preferred Shares pay a 4% cumulative dividend payable in
arrears at the time of each conversion. Dividends are payable quarterly and in
arrears on the first day of each January, April, July, and October commencing on
October 1, 1998. The Company has accrued $15,246 of dividends as of September
30, 1998. Each of the Series C Preferred Shares converts into ten shares of
common stock and may be converted at anytime. The Series C Preferred Shares are
not subject to automatic conversion. Any shares of the Series C Preferred
Shares and any accrued but unpaid dividends may be redeemed, at the Company's
option, after the fifth anniversary of the date of their issuance, at a
redemption price of $10 per share. In addition to the above-referenced shares,
an additional 11,038 Series C Preferred Shares were issued to Equity Services,
LTD. ("ESL"), as part of their compensation for placing the Series C Preferred
Shares. As of July 28, 1998, the market value of the shares issued to ESL was
approximately $110,000. These shares were issued under the same terms and
conditions as those sold in this private placement.
NOTE 8 PREFERRED STOCK CONVERSIONS
On four separate occasions, during the months of July 1998 and August 1998, the
investors of the Series B Convertible Preferred Shares exercised their
conversion right, and converted 715 shares of preferred stock in exchange for
1,147,171 shares of the Company's common stock. The preferred shares converted
into common stock at a rate equal to 78% of the five-day average closing bid
price of the five consecutive days preceding the date of each conversion. As a
result of this discount from the market price, the Company has incurred a
dividend of approximately $584,000.
On October 1, 1998, the Company and the investors of Series B Preferred Stock
agreed not to convert any additional shares of the Series B Preferred Stock
prior to the close of business on December 31, 1998.
NOTE 9 - STOCK OPTIONS GRANTED
On March 11, 1998, the Company granted to a third party options to purchase
150,000 shares of the Company's common stock, with an exercise price of $2.30.
The options were granted in exchange for their assistance with the private
placement of 3,000 shares of Series B Convertible Preferred Stock. As a result
of this option grant, the Company recognized $61,500 of expense allocable to
paid-in-capital. The cost was valued using the Black-Scholes model.
9
<PAGE>
On April 1, 1998, the Company granted to two consultants options to purchase
350,000 shares of the Company's common stock, each with an exercise price of
$2.69. The options were granted in exchange for consulting services. Of the
options granted, 250,000 were granted to a board member whose consulting
services were devoted to the development of the Company's new transcription
related product VoiceCOMMANDER 99(TM). As a result of these option grants, the
Company has recorded $196,000 of deferred consulting expense. The expense is
amortizable over the one year life of the consulting agreements. For the quarter
ended and nine months ended September 30, 1998, the Company amortized $49,000
and $114,000 of related expense, respectively.
On June 6, 1998, the Company granted to the Company's Medical Advisory Board
options to purchase 255,000 shares of the Company's common stock, each with an
exercise price of $2.06. The options were granted in exchange for advisory
services related to the Company's business efforts in the health care industry.
As a result of the option grants, the Company has recognized $224,400 of
deferred consulting expense. The expense is amortizable over the three year life
of the medical advisory agreements. For the quarter ended and nine months ended
September 30, 1998, the Company amortized $18,700 and $24,933 of related
expense, respectively.
On July 22, 1998, the Company granted to an investment banking firm options to
purchase 500,000 shares of the Company's common stock, with an exercise price of
$1.50. The options were granted in exchange for their financial advisory
services and assistance with private placements. As a result of these option
grants, the Company has recorded $50,000 of deferred consulting expense. The
expense is amortizable over the one year life of the agreement. For the quarter
ended and nine months ended September 30, 1998, the Company amortized $12,500
and $20,000 of related expense, respectively.
On July 31, 1998, the Company granted to a third party an option to purchase
220,750 shares of the Company's common stock, with an exercise price of $1.50.
The options were granted in exchange for their assistance with the private
placement of 220,750 shares of Series C Convertible Preferred Stock. As a
result of this option grant, the Company recognized $28,697 of cost allocable to
paid-in-capital. The expense was valued using the black-scholes model.
During 1998, the Company granted to employees and officers options to purchase
875,000 shares of the Company's common stock. The exercise price of these
options range from a low of $.69 to a high of $3.12. These options were granted
under the 1997 Incentive Plan.
NOTE 10 - INVESTMENT VALUATION
On December 31, 1997, the Company purchased 471,700 shares of Voice It WorldWide
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 NASDAQ 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. Furthermore, in November 1998 Voice It declared Chapter 11
Bankruptcy. Based on these facts, the Company has deemed its investment in
Voice It
10
<PAGE>
to be permanently impaired and has recognized a loss of $500,000. The Company
continues to monitor its investment in Wade Cook common stock on a held-for-sale
basis. For the three months and nine months ended September 30, 1998, the
Company recorded an unrealized holding gain of approximately $17,000 and an
unrealized holding loss of approximately $231,000, respectively. These amounts
are reflected in the statement of comprehensive loss.
NOTE 11 VALUE ADDED RESELLER AGREEMENT
On September 30, 1998 the Company entered into a "Value Added Reseller
Agreement" ("VAR Agreement") with Lernout & Hauspie Speech Products (L&H). L&H
develops and licenses dictation software for use in the health care industry.
The VAR Agreement gives the Company rights to a world-wide non-exclusive license
of certain software products developed by L&H. In exchange for this right, the
Company agreed to prepay L&H $300,000. This amount is due on December 15, 1998.
NOTE 12 COMMITMENTS AND CONTINGENCIES
On March 22, 1997, the Company's predecessor Applied Voice Technologies
Partners, LTD and Nevada Gold & Casinos, Inc. ("Nevada Gold") completed a non-
binding letter of intent ("LOI") that called for the creation of a joint venture
for the development and marketing of voice activated gaming technology.
According to Nevada Gold, it entered into two lease agreements, on furniture and
computer equipment, pursuant to the terms of the LOI. Despite the willingness
of both parties to execute the terms of the LOI, the joint venture was never
created. On September 25, 1998, Nevada Gold filed a claim of breach of contract
and unjust enrichment against the Company for failure to reimburse Nevada Gold
for payments it made under the lease agreements. The Company has engaged legal
counsel to research the matter.
NOTE 13 - SUBSEQUENT EVENT - PRIVATE PLACEMENT SERIES D
The Company is in the process of preparing a private placement memorandum that
calls for the sale of up to 50,000 shares of Series D Preferred Stock (the
"Series D Preferred Shares"), par value $.10 per share, at a price of $100 per
share, to accredited investors.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's current revenue is derived from:
i the sale of licenses of its medical dictation voice recognition software
applications and training and maintenance services associated with the
installation and on-going use of the software.
ii the sale of traditional transcription services.
iii and Computer hardware that is bundled with the software application at the
customer's request
The sale of medical dictation software and related services (item i) and sale of
transcription services (item ii) comprise over 90% of total revenues.
During 1997 and early 1998, the Company's marketing focus centered around the
Personal and Professional Editions of VoiceCOMMANDER 4.0. These two products
were sold to the general business community through retail sales channels or via
the Company's Houston based sales force.
In the second quarter of 1998, the Company redesigned the functionality of the
Professional Edition of VoiceCOMMANDER 4.0. ("VoiceCOMMANDER Healthcare") to
meet the medical dictation needs of healthcare professionals. VoiceCOMMANDER
Healthcare is marketed and sold as a bundled package that includes, among other
peripherals, a PC and a hand-held digital recorder. VoiceCOMMANDER Healthcare
allows physicians to dictate and record patient notes on the hand-held digital
recorder as they make their patient visits. The information is then downloaded
to a specially-equipped PC where it is automatically transcribed, via voice
recognition, to formatted text, with a high degree of accuracy and minimal need
for transcriptionist intervention. VoiceCOMMANDER Healthcare has been sold since
May 1998 as a complete solution to the in-house transcription needs of
physicians.
The Company has undertaken the development of a product that will provide
healthcare professionals with a tool for internet based transcription and
dictation services. The new product, named VoiceCOMMANDER 99(TM), will provide
a completely mobile dictation solution designed to improve the quality and
reduce the costs of healthcare information needs, through the use of voice
recognition, handheld digital recording technology, and internet driven
technologies. The New Product is scheduled to be released late in the fourth
quarter of 1998 or early 1999.
To facilitate a quick and efficient roll-out of the New Product, the Company has
developed a plan to acquire medical transcription companies. While the Company
may complete some acquisitions in 1998, it anticipates that most of the activity
under its acquisition plan will occur in 1999 and beyond. Although, the
Company's initial geographic focus will be centered on sixteen key metropolitan
markets in the
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United States, the Company may make acquisitions outside this area, if the
Company identifies suitable acquisition targets.
Thus far, the Company has acquired one transcription company based in Dallas,
Texas, with a customer base of approximately 160 physicians in ten states. In
addition to this, the Company has executed letters of intent to acquire
transcription operations in New York City and Denver, Colorado. The completion
of these acquisitions is subject to the completion of due diligence work,
capital availability, and reaching mutually agreeable contract terms.
As a result of the implementation of VoiceCOMMANDER 99(TM), and the related
strategy, the Company has increased its spending in research and development,
sales and marketing, and general and administrative expenses. To the extent that
such expenditures are not followed by increased revenues, the Company's
business, results of operations and financial condition could be materially and
adversely affected.
The Year 2000 (the "Y2K") issue is the result of computer programs that are
written using two digits rather than four to define the applicable year.
Computer equipment, software and other devices with embedded technology that are
time-sensitive such as computer systems, related software, telephone systems,
etc. may recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, temporary inability to process data,
and materially impact its financial condition.
The Company has undertaken various initiatives to ensure that it is prepared for
the Y2K issue. To date, none of the software manufactured by the Company is
time sensitive. The development team of the Company is knowledgeable on the
sensitivity of the Y2K issue and is required to take this into account when
developing future applications. With regard to third party software and
hardware, bundled with the Company's product and future products, the Company
has not initiated formal communications with material third parties to determine
the extent to which the Company may be vulnerable to those third parties'
failure to remediate their Y2K problems. However, the Company is presently
unaware of any Y2K issues that have been encountered by third parties, which
could have a negative impact on the Company. The current systems used by the
Company, to account for its day to day operations, were recently purchased and
are Y2K ready. As for future enhancements or additions to the current system,
the Company has established a clear directive that requires these to be Y2K
ready, prior to purchase. With the Company's expansion effort comes the risk
that acquired systems may be date sensitive and Y2K non-compliant. To mitigate
this problem, the Company's MIS department is required to assess each acquired
system and to establish and execute remediation plans to correct any Y2K
deficiency.
At this time, the Company does not believe that its exposure to potential Y2K
issues is significant enough to warrant development of a contingency plan.
However, the Company plans to continually monitor its exposure to assess the
necessity of such plan in 1999.
The Company estimates that the costs associated with the Y2K issue will not be
material, and as such will not have a significant impact on the
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Company's financial position or operating results. However, the failure to
correct a material Y2K problem could result in an interruption in the Company's
normal business activities or operations. Such failure could materially and
adversely affect the Company's results of operation, liquidity, and financial
condition.
RESULTS OF OPERATIONS:
Three months ended September 30, 1998 vs. three months ended September 30, 1997
and nine months ended September 30, 1998 vs. nine months ended September 30,
1997.
REVENUES: Net revenues of the Company originate from the sale of voice
recognition software licenses, hardware, and related maintenance, and for 1998
include revenues received from the sale of transcription services. Net revenues
for the Company decreased 70% in the third quarter of 1998 to $100,144, down
$232,032 from the third quarter of 1997. For the first nine months, net sales
of $475,303 were $310,024 or 39% lower than the same period in 1997. The
decrease, in both periods, is wholly attributable to the transition of the
Company's marketing focus from the broad-based commercial market to the
healthcare transcription market.
COST OF SALES: Cost of sales consists primarily of hardware costs and
transcription labor costs. In addition, but not as significant, cost of sales
also includes the amortization of capitalized development costs. Cost of sales
decreased 55% in the third quarter of 1998 to $71,982, down $88,657 from the
third quarter of 1997. The gross margin for the third quarter of 1998 was 28%
this compares to 52% for the same period in 1997. The decreased gross margin is
attributable to the increase in transcription revenue relative to software and
hardware sales. Transcription revenues are heavily burdened by direct labor
costs that are classified as cost of sales. For the first nine months, of 1998
cost of sales of $257,718 were $173,796 or 40% lower than the same period in
1997. This decrease is directly attributable to the decrease in net sales. The
gross margin for these periods remained relatively constant.
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 decreased 43% in the third quarter of
1998 to $191,817, down $147,031 from the third quarter of 1997. The decrease is
attributable to the decrease in size of the marketing and sales staff. The
marketing and sales staff decreased in size from an average of 15 full time
employees for the quarter ended 1997 to 10 full time employees for the same
period ended 1998. For the first nine months of 1998, marketing and sales
expense of $943,256 were $285,782 or 43% higher than the same period in 1997.
Of the total increase, approximately $164,000 is attributable to severance paid
on a terminated employment contract. In addition to this, the average size of
the marketing and sales staff increased during the nine months ended 1998 as
compared to same in 1997. The marketing and sales staff increased in size from
an average of 10 full time employees for the nine months ended 1997 to 12 full
time employees for the same period ended 1998. Another item affecting the
increase in marketing and sales expense relates to incremental tradeshow
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expenditures of approximately $73,000 for the nine months ended September 30,
1998 as compared to the same period in 1997. The balance of the increase relates
to on-going costs associated with printing and press, travel, and other
marketing related expenses. These expenditures increased as the result of the
Company's overall head count 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 82% in the third quarter of 1998 to $1,374,430,
up $617,280 from the third quarter of 1997. For the first nine months of 1998,
general and administrative expense of $3,642,816 was $1,817,929 or 100% higher
than the same period in 1997. These increases are attributable mainly to
increased administrative and executive personnel and associated recruiting
costs, which amounted to approximately $456,000 of the total increase. Another
factor contributing to the increase includes additional consulting, legal, and
accounting services of approximately $464,000. Consulting services were incurred
in connection with the continuation of the development of a strategic plan to
assist the Company in expanding into the medical transcription market.
Consulting services were also employed to aid in the day to day operations of
the Company. In addition, legal and accounting expenditures were incurred in
association with various SEC filings, the annual audit, quarterly reviews,
several tax filings, and general advisory services. Another factor contributing
to the increase is approximately $272,000 of incremental investor relation fees
that were incurred and amortized into expense during the quarter. In addition to
this, approximately $348,000 of incremental bad debt was recorded in the current
year to account for the receivable from Voice It that was written off. All other
general and administrative costs increased approximately $278,000 due to higher
telephone, occupancy, travel, depreciation and general office expenses. These
expenditures increased as the result of the Company's overall headcount growth.
RESEARCH AND DEVELOPMENT EXPENSE: Research and development expense consists
primarily of personnel costs including salaries, benefits and consultant costs
related to the development of the Company's products. Research and development
expense increased 261% in the third quarter of 1998 to $136,182, up $98,437 from
the third quarter of 1997. For the first nine months of 1998, research and
development expense of $452,980 was $242,874 or 116% higher than the same period
in 1997. The quarter to date and year to date increase, in research and
development costs, is wholly attributable to the increase in personnel and
increase in use of development related consulting services. The Company has
increased its efforts centered around the enhancement and development of its
products including VoiceCOMMANDER Healthcare, and the newest product,
VoiceCOMMANDER 99(TM).
INTEREST INCOME: Interest income consists primarily of interest earned on cash
and cash equivalents. Interest income increased 308% in the third quarter of
1998 to $38,710, up $29,229 from the third quarter of 1997. For the first nine
months of 1998, interest income of $61,405 was $47,744 or 319% higher than the
same period in 1997. The increase is wholly attributable to the current year
increase in invested funds as compared to same in prior year.
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INTEREST EXPENSE: Interest expense decreased 99% in the third quarter of 1998 to
$1,848, down $187,462 from the third quarter of 1997. For the first nine months
of 1998, interest expense of $79,860 was $329,152 or 80% lower than the same
period in 1997. The decrease is wholly attributable to the current year
decrease in average debt outstanding.
LOSS ON INVESTMENTS: For the quarter and nine months ended September 30, 1998,
the Company recorded a loss on investments of $500,000. This is attributable to
an investment in the common stock of Voice It Worldwide, Inc. ("Voice It") that
was deemed worthless upon the occurrence of certain events. Voice It was
delisted from trading on the Small Cap market for failure to comply with certain
NASDAQ maintenance standards and, subsequent to this, declared Chapter 11
Bankruptcy.
INCOME TAXES: The Company has incurred losses since inception and, therefore,
has not been subject to federal income taxes. As of September 30, 1998, the
Company had generated net operating losses ("NOLs"), for financial reporting
purposes, of approximately $9.9 million available to reduce future federal
income taxes. These carry-forwards will begin to expire in 2011. The ability of
the Company to utilize the carry-forwards is dependent upon the Company
generating sufficient taxable income, and may be affected by annual limitations
on the use of such carry-forwards 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 87% in the third quarter of 1998 to $2,137,405, up
$995,370 from the $1,142,035 net loss recorded for the third quarter of 1997.
For the first nine months of 1998, net loss of $5,339,922 was $2,606,917 or 95%
higher than the $2,733,005 net loss recorded over the same period in 1997. These
increases are primarily attributable to increased operating expenditures of
approximately $2,347,000 over the nine month period. The remaining difference is
attributable to the increase in other expenses, and decreased sales.
Through the period ended September 30, 1998, the Company has incurred operating
losses, since inception, of approximately $9.9 million. 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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998 the Company had cash and cash equivalents of $1,396,301
and working capital of $1,441,426.
Net cash used by operating activities increased $2,113,122 from $2,106,955 for
the nine months ended September 30, 1997 to $4,220,077 for the nine months ended
September 30, 1998. The increase is primarily attributable to the increase in
operating losses, of approximately $2,606,917 sustained by the Company for the
nine months ended September 30, 1998 compared to the same period in 1997. The
balance of the difference is attributable to changes in working capital and
increase in non-cash related expenditures.
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For the nine months ended September 30, 1998 investing activities totaled
$506,932. This total is comprised of purchases of property, plant and
equipment, and capitalization of development costs of $204,050 and $302,882,
respectively.
Net cash provided by financing activities amounted to $4,916,075. This is
primarily comprised of $5,207,500 of funding attributable to the Company's
Series B and Series C Preferred Stock private placements (as described below).
The difference of $291,425 is attributable to several factors. First of all,
the Company paid $138,906 associated with principal payments on debt and a
capital lease. Secondly, cash expenditures of $242,825 were incurred in
connection with the private placements. Finally, cash of $90,306 was received
in connection with options that were exercised.
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, development of its administrative function, and
acquisition of medical transcription companies. Additionally, the Company's
liquidity will also be reduced as amounts are used for purchases of capital
assets.
On March 11, 1998 the Company completed a private placement of 3,000 shares of
Series B Convertible Preferred Stock for gross proceeds of $3,000,000. These
shares have a par value of $.10 and were priced at $1,000 per share. The
Company incurred $300,000 in costs associated with the private placement, which
resulted in net proceeds to the Company of $2,700,000
On July 30, 1998 the Company completed a private placement of 220,750 shares of
Series C Convertible Preferred Stock for gross proceeds of $2,207,500. These
shares have a par value of $.10 and were priced at $10 per share. The Company
incurred $242,825 in costs associated with the private placement, which resulted
in net proceeds to the Company of $1,964,675.
If the Company pursues its planned strategy of growth through acquisitions, the
combined funding, received thus far, plus anticipated revenues will not be
sufficient to sustain the Company's current year operating needs and fund
acquisitions. To secure additional funding, the Company is conducting
discussions with current investors who have expressed interest in providing
additional capital. In addition, the Company has fostered contractual
relationships with Sands Brothers & Co. LTD to become its investment banker and
KCSA Worldwide for investor relations. With regard to Sands Brothers, they are
currently assisting the Company in preparing a Private Placement Memorandum
under Regulation D of the SEC code. Furthermore, the Company is currently
negotiating a business relationship with a public company, devoted to voice
recognition sales and development. This relationship contemplates a material
investment in AVRI. Note, however, that if the Company is unable to obtain
sufficient financing, there can be no assurance that the Company will be able to
successfully fund its operations or implement its acquisition strategy.
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PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NEVADA GOLD
On March 22, 1997, the Company and Nevada Gold & Casinos, Inc. ("Nevada Gold")
completed a non-binding letter of intent ("LOI") that called for the creation of
a joint venture for the development and marketing of voice activated gaming
technology. According to Nevada Gold, it entered into two lease agreements, on
furniture and computer equipment, pursuant to the terms of the LOI. Despite the
willingness of both parties to execute the terms of the LOI, the joint venture
was never created. On September 25, 1998, in the 164/th/ Judicial District Court
of Harris County, Texas, Nevada Gold filed a claim of breach of contract and
unjust enrichment against the Company for failure to reimburse Nevada Gold for
payments it made under the lease agreements. The Company has engaged legal
counsel to research the matter.
VOICE IT WORLDWIDE, INC.
A material part of AVRI's prior strategy in marketing one of its products
through third-party retailers and distributors included a joint development and
distribution agreement entered into with Voice It Worldwide, Inc. ("Voice It")
in December 1997. At the time, Voice It was a manufacturer and distributor of
digital handheld recorders to 5,000 points of retail distribution throughout the
U.S., including major catalogue retailers such as Sharper Image and nationwide
chain retailers such as Staples and Kmart. Pursuant to the agreement, Voice It
purchased 50,000 VC4 software licenses from the Company for resale through its
retail distribution points throughout the U.S. for an aggregate purchase price
of $1 million and AVRI purchased 471,700 shares of Voice It's common stock for
$500,000. In the opinion of the Company, Voice It breached its agreement with
the Company by, among other things, failing to make the contractually agreed
upon payments for the software licenses. While the Company sought arbitration on
the matter, that matter was stayed as a result of the recent bankruptcy of Voice
It. As of the date of this Memorandum, AVRI had written off all receivables due
to the Company from Voice It and written down the value of its investment in
Voice It to zero.
ITEM 2. CHANGES IN SECURITIES
RECENT SALES OR ISSUANCE'S OF UNREGISTERED SECURITIES
On July 30, 1998, the Company sold in a private placement, under Rule 506 of
Regulation D, 220,750 shares of Series C Convertible Preferred Stock, par value
$.10 per share (the "Series C Private Placement") for a sales price of $10 per
share, to accredited investors. The terms of the Series C Private Placement are
discussed in footnote 9 to the financial statements included herein. On July
30, 1998, the Company issued Equity Services, LTD 11,038 shares of the Company's
common stock in exchange for their assistance with the private placement under
Rule 506 of Regulation D.
OPTIONS AND WARRANTS ISSUED
On March 11, 1998, the Company granted to a third party options to purchase
150,000 shares of the Company's common stock, with an exercise price of $2.30.
The options were granted in exchange for their assistance with the private
placement of 3,000 shares of Series B Convertible Preferred Stock.
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On April 1, 1998, the Company granted to two consultants options to purchase
350,000 shares of the Company's common stock, with an exercise price of $2.69.
The options were granted in exchange for consulting services. Of the options
granted, 250,000 were granted to a board member whose consulting services were
devoted to the development of the Company's new product VoiceCOMMANDER 99(TM).
On June 6, 1998, the Company granted to the Company's Medical Advisory Board
options to purchase 255,000 shares of the Company's common stock, with an
exercise price of $2.06. The options were granted in exchange for advisory
services related to the Company's business efforts in the health care industry.
On July 31, 1998, the Company granted to a third party an option to purchase
220,750 shares of the Company's common stock, with an exercise price of $1.50.
The options were granted in exchange for their assistance with the private
placement of 220,750 shares of Series C Convertible Preferred Stock.
During 1998, the Company granted to employees and officers options to purchase
875,000 shares of the Company's common stock. The exercise price of these
options range from a low of $.69 to a high of $3.12. These options were granted
under the 1997 Incentive Plan.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
NEW BOARD MEMBER
Mr. Daniel Dornier was appointed to the Board of Directors on July 31, 1998 to
replace J. Nolan Bedford as a Class III Director. Mr. Dornier served as an
investment banker with SBC-Warburg Dillon Reed from August 1991 to June 1993.
From June 1993 to June 1995, Mr. Dornier served as a private investment manager
for various companies owned by the Dornier family. From 1995 to the present, Mr.
Dornier has served as President of Dornier Capital Advisors, where he manages
investment portfolios of high net worth individuals in Europe and the United
States.
NEW BUSINESS PLAN
Since the filing of the Company's 1997 10KSB, the Company has significantly
altered its business focus. A detail discussion of this follows:
OVERVIEW: Applied Voice Recognition, Inc. is the creator and developer of
the VOICECOMMANDER (R) software line of products. VOICECOMMANDER, introduced in
1994, was one of the first office suites utilizing voice recognition as a cost
and labor saving desktop tool for computer users. Subsequent versions of
VOICECOMMANDER were introduced in 1996, 1997 and 1998. Following four years of
application development experience and approximately 13 million dollars invested
toward targeting the general retail market with VOICECOMMANDER, AVRI plans to
release VOICECOMMANDER 99 (sometimes referred to herein as VC99) to the medical
transcription market in the fourth quarter of 1998.
AVRI believes that VOICECOMMANDER 99 will be the "state of the art"
technology in medical transcription, a $6.6 billion market in annual revenues.
VOICECOMMANDER 99 will be a suite of medical dictation products that utilizes
voice recognition, secure internet communication and traditional transcription
methodology to improve the quality and reduce the cost of health care
information systems. Physicians using VOICECOMMANDER 99 will be provided a
handheld digital recorder, which will automatically download into a computer for
conversion from speech to text. The printed text will be edited and reviewed for
accuracy by either the physician or his staff if editing is done in house or by
AVRI transcriptionists if editing is performed off site. VOICECOMMANDER 99 is
intended to provide a completely mobile solution for the busy physician.
AVRI plans to leverage the technology enhancements of VOICECOMMANDER 99
with the benefits of lower labor costs in overseas markets to significantly
increase the margin of medical transcription profits while simultaneously
providing physicians with enhanced service, reduced turnaround time and lower
costs of medical transcription.
AVRI intends to penetrate the medical transcription market by acquiring and
consolidating smaller, independent transcription companies in up to fifteen
major markets throughout the United States. The Company believes that many of
these 1,500 independent companies currently suffer from capital deficiency and
qualified transcriptionists shortages. AVRI's business plan includes the
purchase of up to 28 independent transcription companies over the next 39 months
utilizing 25% to 35% cash down and equity for the remainder of the purchase
price. Initial discussions with a number of these companies have led AVRI to
believe that, assuming sufficient capital is available to AVRI, it will be able
to acquire independent transcription companies utilizing this strategy; however,
the Company is in the early stages of implementing this business plan. Once
AVRI has acquired a medical transcription company in a particular market, the
Company plans to add sales personnel and focus efforts on building sales within
the new market as well as converting customers of the acquired company to the
VOICECOMMANDER 99 suite of products.
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AVRI acquired its first independent transcription company in March, 1998.
The Company has executed letters of intent to acquire transcription operations
in Manila, New York and Denver in the fourth quarter of 1998. These
acquisitions are accretive to the Company and are projected to increase annual
revenue by nearly $2 million in 1999. Additionally, the Manila operation is
designed to substantially reduce AVRI's U.S. labor costs factor. Current
transcription labor rates can be as much as 70% of gross revenue. In
conjunction with the cost savings generated using voice recognition and overseas
transcriptionists, AVRI believes labor costs can be reduced by as much as one-
half over the next three years. As of the date of this Memorandum, definitive
purchase agreements had not been entered into with any of these targets and
capital to complete these acquisitions is not yet in place. Accordingly, no
assurance can be given that AVRI will acquire any of the companies described
above.
As a result of the implementation of VC99 and the related strategy, the
Company has increased its spending in research and development, sales and
marketing, and general and administrative expenses. To the extent that such
expenditures are not followed by increased revenues, the Company's business,
results of operations and financial condition could be materially and adversely
affected.
The Company's long-term strategic objectives are to: (i) continue to develop
and improve its suite of voice recognition medical dictation products referred
to herein as VC99, (ii) pursue strategic acquisitions of technology which will
enable the Company to improve or expand its product offerings and provide a
complete solution for the medical transcription market, (iii) pursue strategic
acquisitions in the medical transcription area in order to establish a market
for its medical transcription solutions through vertical integration, and (iv)
add sales and technical support in new markets acquired through strategic
acquisitions in the medical transcription area.
CURRENT PRODUCT AND RELATIONSHIP TO VOICECOMMANDER 99: In the second quarter
of 1998, the Company developed the Professional Edition of VOICECOMMANDER(TM)
4.0. ("VCPE") to meet the medical dictation needs of healthcare professionals.
VCPE is currently being marketed and sold as a bundled package that includes,
among other peripherals, a PC and a hand-held digital recorder. VCPE allows
physicians to dictate and record patient notes on the hand-held digital recorder
as they make their patient visits. The information is then downloaded to a pre-
equipped PC where it is automatically transcribed, via voice recognition, to
formatted text, with a high degree of accuracy and minimal transcriptionist
intervention. VCPE has been sold since May 1998 as the solution to the in-house
transcription needs of physicians.
VCPE, sold to healthcare professionals and their companies, includes some of
the functionality of the VOICECOMMANDER originally developed by AVRI for the
general market, plus medical lexicons, custom designed medical forms templates
and specific medical vocabularies to increase the professionals' rate of speech
recognition. VCPE includes training and installation assistance from the
Company's technical personnel, and generally sells for a unit price of under
$15,000, including hardware. To date, a limited number of VCPE units have been
sold due to both the recent introduction of this product and the Company's
belief that it should offer what it views as the more complete solution to
physicians' medical transcription needs prior to converting a customer to voice
recognition.
While VCPE can be a viable product in its own right, management believes that
it should be but a portion of the entire medical transcription solution offered
to its customers. Accordingly, the Company is finalizing the development of a
suite of products that will provide healthcare professionals with a tool for
secure internet based transcription and dictation services. The new suite of
products, named VOICECOMMANDER(TM) 99 ("VC99"), will provide a completely mobile
dictation solution designed to improve the quality and reduce the costs of
healthcare information needs, through the use of voice recognition, handheld
digital recording technology, and internet driven technologies. Where VCPE
provides an in-house solution to the medical transcription needs of physicians,
VC99 is intended to provide physicians with the choice of editing their medical
records in-house through their own employees or communicating their data via the
internet to AVRI for transcription and editing through the Company's staff of
transcriptionists.
To date, the Company has had limited revenues from sales of its products.
However, the Company expects that in the foreseeable future it will derive
substantially all of its revenues from sales of VC99 and related products and
from fees for related services. As a result, any factors adversely affecting
the sales of the VC99 line, such as increased price competition or the
introduction of technologically superior products could have a material adverse
effect on the Company. The Company's future financial performance will depend
in significant part on its ability to develop and introduce new releases of VC99
with enhanced features and functionalities and related products. There can be
no assurance that
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any such new releases or products will be successfully developed or achieve
market acceptance.
CURRENT SERVICES OFFERED: In March 1998, the Company began its expansion into
the transcription segment of the healthcare industry by acquiring Transcription
Resources ("TR") of Dallas, Texas. TR has a customer base of approximately 160
physicians in ten states with average monthly revenues during the prior twelve
months of approximately $37,000. AVRI has determined not to introduce VCPE to
the customers of TR, but rather to wait for the completion of VC99. To many, the
change to voice recognition technology represents a significant change in their
transcription methodology, and the Company believes the more complete solution
represented by VC99 should be offered to these customers, rather than converting
them to VCPE followed by VC99. While the revenues of TR are not significant,
AVRI believes that operation of this segment of their business for the greater
portion of 1998 has given the Company valuable experience that will prepare AVRI
to pursue its acquisition strategy. Following the acquisition of TR, AVRI also
gained the services of TR's former owner, Cathy Clemons, who now serves as the
Company's Director of Transcription Operations. The Company expects that Ms.
Clemons will play a major role for AVRI in integrating the transcription
companies expected to be acquired by the Company.
HISTORY OF THE COMPANY AND PRODUCT DEVELOPMENT: The Company's predecessor,
Voice Technology Partners, L.P., a Texas limited partnership (the
"Partnership"), was founded in 1994. On August 15, 1996, the Partnership was
incorporated as a Delaware corporation. Thereafter, on December 11, 1996, the
Company completed a share exchange with Summa Vest, Inc., a Utah corporation,
which immediately thereafter changed its name to Applied Voice Recognition, Inc.
The share exchange was accounted for as a reverse merger. On January 26, 1998,
the Company reincorporated as a Delaware corporation. AVRI and its predecessors
are referred to herein collectively as the "Company."
Upon its formation in 1994, the Company was a development stage company,
primarily engaged in the development of its first voice recognition application,
VOICECOMMANDER(TM) ("VC"). The first version of VC ("VC1") was developed using
software licensed from Kurzweil Applied Intelligence, Inc. ("Kurzweil"), and
allowed the user to perform basic word processing tasks through the use of voice
commands, such as dictating letters and faxes, using a self contained contact
manager and pre-formatted templates. The Kurzweil software engine upon which
VC1 was based was a discreet speech voice recognition component. The discreet
speech concept required the user to pause briefly between words, which limited
dictation speeds to between 35 and 50 words per minute.
In the second quarter of 1995, the Company completed development of the second
version of VC, VOICECOMMANDER(TM) 2.0 ("VC2"). VC2 had similar features as VC1,
but added certain applications such as a voice activated phone dialer, as well
as additional pre-formatted forms and templates. VC2 was based upon Dragon
Dictate, a discreet speech voice recognition software engine developed by
Dragon. The Company introduced VOICECOMMANDER(TM) 3.0 ("VC3") in early 1996.
VC3 included several new applications, including voice activated e-mail and
internet access. The Company continued to use Dragon products for the voice
recognition software engine upon which VC3 was based. Given the Company's
ongoing research and development efforts, the Company did not undertake an
extensive sales and marketing effort regarding the VC1, VC2 and VC3 products,
with the result that sales of these products were limited.
In December 1996, the Company concluded negotiations with IBM for a
nonexclusive original equipment manufacturing license (the "IBM License") for
IBM's software engine, Voice Type. The Company shortly thereafter began a new
development program utilizing Voice Type. Due to the relatively inexpensive cost
of the IBM software engine, the IBM License allowed the Company to develop voice
recognition applications, which could sell for significantly less than its
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previous applications. In 1997, IBM developed the ViaVoice software engine
which utilized continuous speech recognition technology in contrast to the
earlier discreet speech engines. This continuous speech improvement eliminated
the cumbersome requirement of pausing between words. In early 1997, the Company
incorporated the ViaVoice software engine into its development program for the
next generation of VC. VOICECOMMANDER(TM) 4.0 ("VC4"), which utilizes the
ViaVoice engine, was demonstrated in September 1997, and subsequently released
into the mass market in November 1997.
All of the Company's current products now utilize the ViaVoice speech
recognition technology from International Business Machines Corp. ("IBM"). The
Company pays IBM a license fee for each unit of the Company's product that it
sells. The Company believes that if IBM discontinued or was unable to
manufacture or support ViaVoice or terminated its agreement with the Company
that, with adequate time, the Company could develop its products to utilize
speech technology from companies in addition to IBM, and the Company is
currently in the process of developing products for this alternative technology.
However, there can be no assurances that the Company will ever be able to
successfully develop such products. If the Company is unable to utilize the
ViaVoice technology, for any reason, and is unable to develop products capable
of utilizing alternative technology, the Company's business, results of
operations and financial condition would be materially adversely affected.
For a brief period, the Company marketed VC4 through a combination of
infomercials and catalogue sales. When this marketing effort resulted in low
sales volumes, the Company decided to market VC4 through third-party retailers
and distributors with established distribution systems and access to retail
sales outlets, so that it could remain focused on the marketing and development
of the professional edition of VC4 to the healthcare industry. A material part
of AVRI's strategy in marketing VC4 through third-party retailers and
distributors included an joint development and distribution agreement entered
into with Voice It Worldwide, Inc. ("Voice It") in December 1997.
At the time, Voice It was a manufacturer and distributor of digital handheld
recorders to 5,000 points of retail distribution throughout the U.S., including
major catalogue retailers such as Sharper Image and nationwide chain retailers
such as Staples and Kmart. Pursuant to the agreement, Voice It purchased
50,000 VC4 software licenses from the Company for resale through its retail
distribution points throughout the U.S. for an aggregate purchase price of $1
million and AVRI purchased 471,700 shares of Voice It's common stock for
$500,000. In the opinion of the Company, Voice It breached its agreement with
the Company by, among other things, failing to make the contractually agreed
upon payments for the software licenses. In October, 1998, Voice It filed for
Chapter 11 protection under the Federal Bankruptcy laws.
In 1998, the Company's marketing focus centered on the Professional Edition of
VOICECOMMANDER (TM) 4.0. This product is sold to the medical community through
the Company's Houston based sales force.
INDUSTRY BACKGROUND: The creation of written documents is a fundamental
activity in the professional, business and governmental worlds. The traditional
text creation methods, including handwriting, dictation or typing on a keyboard,
suffer from limitations that can make the process inefficient, slow or
inaccurate. Voice-activated text creation can provide significant productivity
gains compared with the other methods now available, combining the speed of
dictation with the advantages of immediate inspection and correction. The
ability to create text through a voice-activated system can eliminate a material
portion of traditional transcription and editing steps.
Although research into the uses of speech to text voice recognition has been
conducted for over 20 years, practical uses of the technology have only become
manifest recently. The two technological breakthroughs which have allowed
practical application of voice recognition to every day business activities are
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(i) the increase in processing speed of the computer chip, and (ii) the
development of software "engines" which allow continuous speech to be
interpreted without pauses between words. These software "engines" are software
programs that interact with the user's computer and interpret the human voice
into written text. The Company's research and development efforts have focused
on writing the computer programs or applications that interface between the
engine and the computer user to make the computer user's job easier or more
efficient.
The voice recognition industry saw dramatic developments in 1997. Several
major software "engine" manufacturers, notably IBM and Dragon Systems, Inc.
("Dragon") introduced continuous speech versions of their speech to text
products during 1997. Also, processing speeds of computer processors continued
to increase and price to performance ratios continued to improve. Finally, the
prices charged for the basic software engines to perform continuous speech
recognition dropped to under $100 per license at the retail level.
The ASR market has only recently begun to develop, and is characterized by
rapidly changing technology, evolving industry standards and customer demands,
and frequent new product introductions and enhancements. The ASR market is
highly dependent upon the increased use of speech recognition technology and
continued price and performance improvements in personal computers, as new
generations of microprocessors are developed and introduced. The Company's
future operating results will depend upon the emergence of ASR technology, the
Company's ability to develop and improve its technology and the successful
implementation of the Company's marketing plan.
HEALTHCARE TRANSCRIPTION MARKET: In late 1997, the Company decided to focus
its research and development efforts on developing and marketing VCPE to the
healthcare transcription market. Transcription, in the healthcare market, is the
process of reducing a physician's daily patient notes from a handwritten or
recorded format to typewritten text. Currently, most healthcare transcription is
performed by manually typing the doctors' notes. The notes are either
transcribed in-house or transmitted by phone lines or courier to an outside
service. According to the Medical Transcription Industry Association ("MTIA"),
physicians in the U.S. are currently spending over $6.6 billion dollars per year
on transcription. Whether it is performed in-house or outsourced to professional
transcription services, most of the costs associated with transcription are
attributable to labor in the form of typing and quality assurance. Therefore,
the Company believes that utilizing voice recognition technology to eliminate
the requirement of manual typing of data could significantly reduce the costs
associated with transcription. The healthcare transcription market includes
individual physicians, physician groups and hospitals. Many hospitals have their
own in house transcription departments.
MARKETING AND DISTRIBUTION STRATEGY: The Company's market strategy is to
create an organization focused on developing and marketing VC99 to the
healthcare transcription market. AVRI's marketing efforts are expected to be
both though a Houston based marketing staff and through the transcription
companies AVRI expects to acquire in various regions.
SUPPORT SERVICES: Services offered by AVRI to assist its customers include in-
house training programs, on-site installation and training, a hot line for
telephone support during the maintenance period, on-line tutor programs for new
users, and an extensive package of documentation. The Company has a site
implementation program that is designed to assist professionals in planning the
introduction of voice products into their departments. As part of this program,
the Company's employees act as consultants, using their knowledge of how best to
integrate the Company's products into a client's environment. AVRI anticipates
that each market served by transcription companies acquired by AVRI will include
its own technical support presence.
Generally, the Company's products include a one-year warranty that the
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
the warranty. The Company also offers annual maintenance agreements for extended
technical support.
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COMPETITION: As the Company implements its strategy of acquiring and operating
medical transcription companies, it will expect to compete in a highly
fragmented industry that is predominately populated by small, regional or local
companies, with a limited number of national companies. It is estimated by MTIA
that the total annual cost of transcribing medical records in the United States
is greater than $6.6 billion. Of this amount, MTIA reports that approximately $1
billion is currently outsourced to medical transcription companies. This
outsourced medical transcription market is highly competitive. Medical
transcription companies provide transcription services offsite for a fee and use
traditional dictation methodologies. These methods include transcribing from
handwritten documents, tapes and over the phone line submission of dictation.
According to the MTIA, there are over 1,500 companies providing medical
transcription services in the United States; however, less than 30 of these
companies have significant sales volume and a national or regional customer
base. AVRI believes there are three industry leaders currently providing medical
transcription services. Medquist Inc. is a public company whose revenues for the
nine months ended September 30, 1998 were approximately $104,000,000. In
addition, in September, 1998, Medquist signed a definitive agreement to acquire
one of the other national medical transcriptions companies, MRC Group, Inc. The
combined companies are expected to generate in excess of $260 million in current
revenues by serving more than 1,400 major health care customers through a
nationwide network of over 100 service centers and 6,000 medical
transcriptionists. The other industry leader is Rodeer Systems, Inc., a
privately held company, which owns and operates 30 offices in 12 states and
employs over 900 transcriptionists. The Company believes that it will compete
for clients on the basis of price, ability to customize services and the
reliability, accuracy and turnaround time of transcribed reports. In addition to
competition, the market available to the Company is limited by healthcare
organizations that maintain in-house transcription departments.
The market for automated speech recognition products and services is highly
competitive. There are no substantial barriers to entry, and the Company
expects that competition will continue to intensify. Although the Company
believes that the diverse segments of the ASR technology market will provide
opportunities for more than one supplier of products and services similar to
those of the Company, it is possible that a single supplier may dominate one or
more market segments. The Company believes that the principal competitive
factors in this market are name recognition, performance, ease of use, variety
of value-added services, functionality and features and quality of support. A
number of companies offer competitive products addressing certain of the
Company's target markets.
The Company is not aware of any major direct competitors concentrating their
efforts on offering a complete voice to text medical transcription solution that
includes software, personalized training and vocabularies and a hand held
dictation device. Generic voice to text software providers (IBM, Lernout and
Hauspie, Dragon Systems, Phillips) are potential competitors in the medical
transcription marketplace. In fact, several of these voice-recognition vendors
currently offer packaged solutions to the healthcare marketplace; however, they
do not offer an overall integrated voice recognition solution to end users that
AVRI intends to offer.
PATENTS, TRADEMARKS AND LICENSES: The Company regards its software as
proprietary and relies on a combination of copyright and trade secret laws in
attempting to protect its rights. The Company enters into software license
agreements with end-users of its products which outlines the terms and
conditions under which the Company's products can be used. Despite these
precautions, it may be possible for unauthorized thirdparties to copy aspects of
the Company's products or to obtain and use information that the Company regards
as proprietary.
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The Company has applied for four U.S. Patents on various aspects of its
speech recognition technology, and three of the applications are pending. In
September 1998, the Company's U.S. patent 5,812,977 was issued on a PC-based
graphical user interface for voice applications. This patent covers the
Company's graphical user interfaces ("GUI's") integrated with voice recognition
technology as a primary interface for a PC. Additionally, it includes an
intelligent, real-time help system that tracks what the user is attempting to
accomplish and provides visual and/or vocal assistance. In June 1998, the
Company's second application was allowed and all fees paid on U.S. Patent
describing the use of voice recognition technology in the editing of documents.
This patent covers the use of voice, combined with graphical navigation marks
that allows a user to quickly and easily navigate and correct a document. There
can be no assurance that any additional patents will be issued and, with respect
to the patent already issued and any others that may in the future be issued,
there can be no assurance that such patents will provide the Company with
significant protection against competitors.
The Company has been granted U.S. trademarks for each of APPLIED VOICE
RECOGNITION, VOICECOMMANDER, CADCOMMANDER, and MIKE ROFONE (word mark). In
addition the Company has applied for U.S. trademarks for SPEECHCOMMANDER,
CONSOLECOMMANDER, LAWCOMMANDER, TELECOMMANDER, INFLIGHT-COMMANDER, miscellaneous
designs of the Mike Rofone character, VoiceCOMMANDERLocator, GIVING PEOPLE POWER
OVER TECHNOLOGY, It's About Time, Voice Experts, and StarCOMMANDER, all of which
are pending. There can be no assurance that any further trademark registrations
will be issued or, if issued, will provide the Company with significant
protection against competitors.
Certain of the Company's competitors have obtained, and the Company
believes that certain of its competitors are seeking, patent protection on
various aspects of their speech recognition technology. Substantially all of
its competitors have significantly greater resources than the Company. The
Company believes that, because of the rapid pace of technological change in the
software industry, factors such as the technological and creative skills of its
personnel are more important to establishing and maintaining a technology
leadership position than are the various legal protections of its technology.
Litigation, which could result in substantial cost to and diversion of
effort by the Company, may be necessary to enforce any patent issued to the
Company, to protect trade secrets or know-how owned by the Company or to
determine the scope and validity of the proprietary rights of others. Adverse
findings in any proceeding could subject the Company to significant liabilities
to third parties, require the Company to seek licenses from third parties and
adversely affect the Company's ability to sell its products. The Company is not
aware of any controversy leading to litigation relating to intellectual property
issues. However, there can be no assurances that the products and services
offered by the Company will not infringe on patent or other rights offered by
others, licenses for which might not be available to the Company.
GOVERNMENT REGULATION: The healthcare industry is subject to changing
political, economic and regulatory influences that may affect the outsourcing
arrangements of healthcare providers. Federal and state legislators have
proposed programs to reform the United States healthcare system and other
proposals are in the development stage. In general, these programs and proposals
tend to emphasize managed care, seek to lower reimbursement rates and otherwise
attempt to control the environment in which providers operate.
In providing its services, the Company is subject to certain statutory,
regulatory and common law requirements regarding the confidentiality of such
medical information. The Company requires its personnel to agree to keep all
medical information confidential and monitors compliance with applicable
confidentiality requirements.
Federal and state regulators are making increasing efforts to investigate
claims of false billing for government reimbursement and have secured
substantial payments from healthcare providers to resolve these claims. Because
these claims often result from a lack of appropriate documentation to support
billing, these government investigative efforts may stimulate a need for more
comprehensive transcription services. Additionally, healthcare accreditation
organizations and governmental authorities have begun to require more efficient
transcription of patient medical records as part of the requirements for a
hospital or other healthcare organization to receive and maintain its
accreditation.
It presently cannot be determined if any additional healthcare legislation
or self-regulatory proposals (whether relating to reimbursement, accreditation,
billing practices, confidentiality, the healthcare industry in general or
otherwise) will be introduced, the form that any such legislation or proposals
would take, whether such legislation or proposals would be enacted or adopted
and, if enacted or adopted, what effect, if any, such legislation or proposals
would have on the healthcare industry in general and the Company in particular.
OFFICERS' COMPENSATION
As of September 30, 1998, the year to date cash compensation of the Company's
existing officers amounted to approximately $334,000. In addition to this, the
Company's officers also received compensation in the form of 79,762 shares of
the Company's common stock. Tim Connolly, the Chief Executive Officer of the
Company, was paid approximately $120,000 in cash and received additional
compensation in the form of 32,143 shares of the Company's common stock.
According to a board resolution, the officers are restricted from trading the
common stock issued to them without approval of The Board of Directors. To date,
none of the officers have traded any of the stock received. Since the date the
stock was issued through the date of this report, the stock value has decreased
by approximately 60%.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
3.1* Certificate of Designation for the Series C Preferred Stock as
filed with the Delaware Secretary of State on July 30, 1998.
4.1* Registration Rights Agreement between the Company and the Series C
Preferred Stock Investors dated July 30, 1998.
10.1* Investor Subscription Agreement between the Company and the Series
C Preferred Stock Investors dated July 30, 1998.
10.2* Placement Agreement between the Company and the Placement Agent
for the Series C Preferred Stock investors dated July 30, 1998.
10.4* First Amendment to Investor Subscription Agreement between the
Company and the Series C Preferred Investors dated July 30, 1998.
11.1 Robin P. Ritchie employment contract
11.2 Milton A. Spiegelhauer employment contract
12.1 Value Added Reseller Agreement
27.1 Financial Data Schedule.
* Filed with second quarter 10-QSB
(b) Reports on Form 8-K
None
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant 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
November 16, 1998
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EXHIBIT 11.1
EMPLOYMENT AGREEMENT
(ROBIN P. RITCHIE)
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of August 1,
1998 (the "Effective Date"), by and between APPLIED VOICE RECOGNITION, INC., a
Delaware corporation ("Employer"), and ROBIN P. RICHIE, an individual residing
in Harris County, Texas ("Employee").
W I T N E S S E T H:
-------------------
WHEREAS, Employer and Employee desire to enter into an agreement regarding
Employee's employment with Employer pursuant to the terms and conditions set
forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and intending to be legally bound
hereby, the parties covenant and agree as follows:
1. EMPLOYMENT. Employer hereby employs Employee and Employee hereby accepts
employment with Employer on the terms and conditions set forth in this
Agreement.
2. TERM OF EMPLOYMENT. The term of Employee's employment hereunder (the
"Term") shall commence as of August 1, 1998 (the "Commencement Date") and shall
continue (subject to termination by either Employer or Employee as hereinafter
provided) for an initial term (the "Initial Term") expiring on July 31, 2002
(the "Expiration Date"). The Expiration Date shall be automatically extended
unless terminated by Employer or Employee for successive one year periods
following the expiration of the Initial Term. If Employer desires to terminate
Employee's employment under this Agreement at the end of the Initial Term or at
the end of any succeeding one year term, Employer shall give written notice of
such desire to Employee at least one month prior to the expiration of the
Initial Term or any succeeding one year term. If Employee desires to terminate
Employee's employment under this Agreement at the end of the Initial Term or at
the end of any succeeding one year term, Employee shall give written notice of
such desire to Employer at least one month prior to the expiration of the
Initial Term or any succeeding one year term. At the expiration of the then
existing term, Employer shall have no further obligation to Employee other than
payment of earned and unpaid Base Salary (as hereafter defined) and bonuses
under Sections 3(a) and 3(b), respectively, and Employee shall have no further
obligation to Employer except as set forth in Sections 7, 8, 9 and 10.
3. COMPENSATION AND OTHER BENEFITS.
a. As compensation for all services rendered by Employee in performance of
Employee's duties or obligations under this Agreement, Employer shall pay
Employee
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a monthly base salary of TWELVE THOUSAND FIVE HUNDRED AND 00/100 DOLLARS
($12,500.00) (the "Base Salary"). Employee's Base Salary shall be payable in
equal semi-monthly installments or in the manner and on the timetable which
Employer's payroll is customarily handled or at such intervals as Employer and
Employee may hereafter agree to from time to time. Employer agrees to review
Employee's performance on a quarterly basis and to consider an increase in
Employee's Base Salary on an annual basis, beginning on the first anniversary of
the Commencement Date. Employee's salary may, but is not required to, be
increased from time to time, based upon Employee's performance and other
relevant factors, as Employer may deem appropriate, without affecting any other
provisions of this Agreement.
b. In addition to receiving the Base Salary provided for in
Section 3(a), for the portion of the calendar year beginning with the
Commencement Date and each calendar year thereafter during the Term hereof,
Employee shall be entitled to a bonus of up to $100,000 per year (or pro rata
for portions of a year) if, and only if, Employee has met the performance
criteria set by Employer for the applicable year. In connection therewith,
Employer agrees that by September 1, 1998 and by January 31 of each year
thereafter, it shall set the performance criteria for Employee's bonus to be
earned during the applicable year and shall communicate such criteria to
Employee in writing. If Employee successfully meets the performance criteria
established by Employer (in the discretion of Employer), Employer shall pay to
Employee the bonus within thirty (30) days of the end of the applicable year.
c. Employee shall be entitled to be reimbursed by Employer for all
reasonable and necessary expenses incurred by Employee in carrying out
Employee's duties under this Agreement in accordance with Employer's standard
policies regarding such reimbursements.
d. Beginning within thirty (30) days of the Commencement Date,
Employee shall be entitled during the Term, upon satisfaction of all eligibility
requirements, if any, to participate in all health, dental, disability, life
insurance and other benefit programs now or hereafter established by Employer
which cover substantially all other of Employer's employees and shall receive
such other benefits as may be approved from time to time by Employer.
e. Employee shall be entitled to receive two weeks of paid
vacation for each year during the Term following the first anniversary of the
Commencement Date and shall be entitled to receive paid holidays as enjoyed by
all other employees of Employer.
4. DUTIES.
a. Employee is employed to act as Chief Operating Officer of
the Employer and in such other office or position as shall be assigned to
Employee from time to time by Employer, and to perform such duties as are
commensurate with Employee's position with Employer.
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b. Employee agrees that during the period of employment, Employee
shall devote full-time efforts to Employee's duties as an employee of Employer
and Employee shall use Employee's best efforts to perform the duties of
Employee's position in an efficient and competent manner and shall use
Employee's best efforts to promote the interests of Employer and any affiliated
companies.
c. During the period of employment, Employee agrees not to (i)
solely or jointly with others undertake or join any planning for or organization
of any business activity competitive with the business activities of Employer,
and (ii) directly or indirectly, engage or participate in any other activities
in conflict with the best interests of Employer.
d. Employee agrees that during the period of employment Employee
shall refer to Employer all opportunities in the computer industry related to
voice recognition software designs and applications to which Employee might
become exposed in carrying out Employee's duties and responsibilities hereunder.
5. STOCK OPTION PLAN. As a further inducement to Employee to accept
employment upon the terms set forth herein and in consideration of Employee's
execution of this Agreement, Employee shall be granted options entitling
Employee to purchase 300,000 shares of Employer's common stock, par value $0.001
(the "Options"), pursuant to, and Employee shall be entitled to otherwise
participate in, that certain Applied Voice Recognition, Inc. 1997 Incentive
Plan, as amended from time to time. The granting instrument for the Options
will provide, in addition to other terms set forth therein, that (i) the
purchase price for the Options shall be the average bid and ask price for
Employer's shares of common stock on the NASDAQ OTCBB (or any national
securities exchange hereafter listing Employer's common stock) on the day prior
to the Commencement Date, and (ii) one fourth (1/4th) of the Options (being
options to purchase 75,000 shares) will vest on the first anniversary date of
the Commencement Date, and one thirty-sixth (1/36th) of the remaining Options
(being options to purchase 6,250 shares) will vest on the last day of each month
following the first anniversary date of the Commencement Date.
6. TERMINATION OF EMPLOYMENT. Employee's employment and this Agreement
shall terminate upon the earliest to occur of any of the following events (the
actual date of such termination being referred to herein as the "Termination
Date"):
a. The termination of the Agreement pursuant to Section 2.
b. Employee's employment pursuant hereto shall terminate in the
event of the death of Employee.
c. Employer may terminate Employee's employment under this
Agreement for cause without any prior notice (except as set forth in
subparagraph (3) below), upon the occurrence of any of the following events:
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(1) any embezzlement or wrongful diversion of funds of
Employer or any affiliate of Employer by Employee;
(2) gross malfeasance by Employee in the conduct of
Employee's duties;
(3) breach of this Agreement and the failure to cure such
breach following reasonable notice thereof;
(4) gross neglect by Employee in carrying out Employee's
duties; or
(5) the failure of Employee to be able to perform
Employee's duties hereunder for a period of not less than ninety (90)
days by reason of disability. For purposes of this Agreement, Employee
shall be deemed to have become disabled when the Board of Directors of
Employer, upon the advice of a qualified physician, shall have
determined that Employee has become physically or mentally incapable
(excluding infrequent and temporary absences due to ordinary illness)
of performing Employee's duties under this Agreement. Before making
any termination decision pursuant to this Section 6(c)(5), the Board
of Directors of Employer shall determine whether there is any
reasonable accommodation (within the meaning of the Americans with
Disabilities Act) which would enable Employee to perform the essential
functions of Employee's position under this Agreement despite the
existence of any such disability. If such a reasonable accommodation
is possible, Employer shall make that accommodation and shall not
terminate Employee's employment hereunder based on such disability.
d. If Employee's employment is terminated for any of the
reasons specified in Section 6, Employer shall no longer be obligated to make
the payments specified under Section 3 or to pay to Employee any other
compensation or benefits whatsoever, except as may otherwise be provided in
Section 6(e). Notwithstanding the foregoing, if for any reason Employee's
employment is terminated hereunder, any salary or bonus payable under Sections
3(a) or 3(b) which shall have been earned but not yet paid shall be paid by
Employer to Employee or Employee's estate, as the case may be.
e. Employer shall have the right to terminate Employee's
employment hereunder without prior notice and without cause; provided, however,
in such event, Employee shall continue to receive his Base Salary for six (6)
months following the date of such termination. If this Agreement is terminated
by Employer under this Section 6(e), any Options that would otherwise vest on or
before the next vesting period (be it annual or monthly) shall automatically
become fully vested immediately upon termination; however, any additional
unvested Options shall be cancelled upon termination. Notwithstanding the
foregoing, the prior provisions of this Section 6(e) shall be void and of no
force or effect in the event of (i) the sale of
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substantially all of the assets of Employer, (ii) the merger of Employer into
another entity, or (iii) the merger of another entity into Employer if, as a
result of any transaction described in clause (i), (ii) or (iii), the
shareholders of Employer do not control a majority of the shares of the
surviving entity. In the event of any such sale or merger, any of the Options
that have not yet vested shall immediately vest.
7. INVENTIONS AND CREATIONS BELONG TO EMPLOYER.
a. Any and all inventions, discoveries, improvements or creations
(collectively, "Creations") which Employee has conceived or made or may conceive
or make during the period of employment in any way, directly or indirectly,
connected with Employer's business shall be the sole and exclusive property of
Employer. Employee agrees that all copyrightable works created by Employee or
under Employer's direction in connection with Employer's business are "works
made for hire" and shall be the sole and complete property of Employer and that
any and all copyrights to such works shall belong to Employer. To the extent any
of the works described in the preceding sentence are not deemed to be "works
made for hire," Employee hereby assigns all proprietary rights, including
copyright, in these works to Employer without further compensation.
b. Employee further agrees to (i) disclose promptly to Employer all
such Creations which Employee has made or may make solely, jointly or commonly
with others during the period of employment to the extent connected with
Employer's business, (ii) assign all such Creations to Employer, and (iii)
execute and sign any and all applications, assignments or other instruments
which Employer may deem necessary in order to enable Employer, at Employer's
expense, to apply for, prosecute and obtain copyrights, patents or other
proprietary rights in the United States and foreign countries or in order to
transfer to Employer all right, title and interest in said Creations.
8. CONFIDENTIALITY; OWNERSHIP OF INFORMATION. Employer promises
that Employer will, during the Term, provide Employee with access to such
Confidential Information (as defined in Section 8(a)) owned by Employer and that
is used in the operation of Employer's business as reasonably necessary to allow
Employee to perform Employee's obligations hereunder. Employee acknowledges
that Employer has agreed to provide Employee with a definite term of employment
and with access to such Confidential Information of Employer during that term of
employment.
a. DEFINITION. For purposes of this Agreement, "Confidential
Information" means any and all information relating directly or indirectly to
Employer that is not generally ascertainable from public or published
information or trade sources and that represents proprietary information to
Employer, excluding, however, (i) Employees' business contacts, (ii) information
already known to Employee prior to Employee's employment with Employer, and
(iii) information required to be divulged in any legal or administrative
proceeding in which Employee is involved. Confidential Information shall
consist of, for example, and not intending to be inclusive, (A) software (source
and object codes), algorithms, computer processing
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systems, techniques, methodologies, formulae, processes, compilations of
information, drawings, proposals, job notes, reports, records and
specifications, and (B) information concerning any matters relating to the
business of Employer, any of its customers, prospective customers, customer
contacts, licenses, the prices it obtains or has obtained for the licensing of
its software products and services, or any other information concerning the
business of Employer and Employer's good will.
b. NO DISCLOSURE. During the Term and at all times thereafter,
Employee shall not disclose or use in any manner, directly or indirectly, and
shall use Employee's best efforts and shall take all reasonable precautions to
prevent the disclosure of, any such trade secrets or other Confidential
Information, except to the extent required in the performance of Employee's
duties or obligations to Employer hereunder or by express prior written consent
of a duly authorized officer or director of Employer (other than Employee).
c. OWNERSHIP OF INFORMATION. Such Confidential Information is
and shall remain the sole and exclusive property and proprietary information of
Employer or Employer's customers, as the case may be, and is disclosed in
confidence by Employer or permitted to be acquired from such customers in
reliance on Employee's agreement to maintain such Confidential Information in
confidence and not to use or disclose such Confidential Information to any other
person except in furtherance of Employer's business.
d. RETURN OF MATERIAL. Upon the expiration or earlier
termination of this Agreement for any reason, Employee shall immediately turn
over to Employer all documents, disks or other magnetic media, or other material
in Employee's possession or under Employee's control that (i) may contain or be
derived from Creations or Confidential Information, or (ii) are connected with
or derived from Employee's services to Employer. Employee shall not retain any
Confidential Information in any form (e.g., computer hard drive, microfilm,
etc.) upon the expiration or earlier termination of this Agreement.
9. NONCOMPETE; WORKING FOR COMPETITOR. In consideration of Employee's
employment by Employer, Employee will not, at any time during the Term or at any
time for twenty-four (24) months subsequent to any termination of Employee's
employment pursuant to the provisions of Section 6(c) or the voluntary
termination of employment by Employee pursuant to Section 2, directly or
indirectly, within the United States, Canada, Mexico, South America or Europe,
for Employee's own account or on behalf of any direct competitors of Employer,
engage in any business or transaction involving the design, installation,
integration, service or consulting with respect to voice recognition software
designs and applications (whether as an employee, employer, independent
contractor, consultant, agent, principal, partner, stockholder, corporate
officer, director or in any other individual or representative capacity),
without the prior written consent of Employer, which consent may be withheld by
Employer in Employer's sole and absolute discretion.
10. NON-SOLICITATION OF EMPLOYEES. During the Term and for a period of
twenty-four (24) months after the date of termination of employment, Employee
will not in any
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way, directly or indirectly (i) induce or attempt to induce any employee of
Employer to quit employment with Employer; (ii) otherwise interfere with or
disrupt Employer's relationship with its employees; (iii) solicit, entice or
hire away any employee of Employer; or (iv) hire or engage any employee of
Employer or any former employee of Employer whose employment with Employer
ceased less than one year before the date of such hiring or engagement. Employee
acknowledges that any attempt on the part of Employee to induce others to leave
Employer's employ, or any effort by Employee to interfere with Employer's
relationship with its other employees would be harmful and damaging to Employer.
11. EMPLOYEE'S ACKNOWLEDGEMENT. It is the express intention of
Employee and Employer to comply with sections 15.50 et seq. of the Texas
Business and Commerce Code in effect as of the date of execution hereof.
Employee stipulates that the provisions of this Agreement are not oppressive or
overly burdensome to Employee and will not prevent Employee from earning an
income following termination of this Agreement. Employee warrants and
represents that:
a. Employee is familiar with non-compete and non-solicitation
covenants;
b. Employee has discussed or acknowledges the opportunity to
discuss the provisions of the non-compete and non-solicitation covenants
contained herein with Employee's attorney and has concluded that such provisions
(including, without limitation, the right to equitable relief and the length of
time provided for herein) are fair, reasonable and just under the circumstances;
c. Employee is fully aware of the obligations, limitations and
liabilities included in the non-compete and non-solicitation covenants contained
in this Agreement;
d. The scope of activities covered hereby are substantially
similar to those activities to be performed by Employee under this Agreement;
e. The twenty-four (24) month non-compete and non-solicitation
period is a reasonable restriction, giving consideration to the following
factors: (1) Employee and Employer reasonably anticipate that this Agreement,
although terminable under certain provisions, will continue in effect for
sufficient duration to allow Employee to attain superior bargaining strength and
an ability for unfair competition with respect to the customers covered hereby;
(2) the duration of the twenty-four (24) month non-compete and non-solicitation
period is a reasonably necessary period to allow Employer to restore its
position of equivalent bargaining strength and fair competition with respect to
those customers covered hereby; and (3) historically, employees of all types
have remained with Employee for a duration of longer than the duration of the
twenty-four (24) month non-compete and non-solicitation period; and
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f. The limitations contained in this Agreement with respect to
geographic area, duration and scope of activity are reasonable; however, if any
court shall determine that the geographic area, duration or scope of activity of
any restriction contained in this Agreement is unenforceable, it is the
intention of the parties that such restrictive covenants set forth herein shall
not thereby be terminated, but shall be deemed amended to the extent required to
render such covenants valid and enforceable.
12. REMEDIES; INJUNCTION. In the event of a breach or threatened
breach by Employee of any of the provisions of this Agreement, Employee agrees
that Employer, in addition to and not in limitation of any other rights,
remedies or damages available to Employer at law or in equity, shall be entitled
to a permanent injunction without the necessity of proving actual monetary loss
in order to prevent or restrain any such breach by Employee or by Employee's
partners, agents, representatives, servants, employees and/or any and all
persons directly or indirectly acting for or with Employee. It is expressly
understood between the parties that this injunctive or other equitable relief
shall not be Employer's exclusive remedy for any breach of this Agreement, and
Employer shall be entitled to seek any other relief or remedy which it may have
by contract, statute, law or otherwise for any breach hereof.
13. ARBITRATION. The parties agree that all disputes or questions
arising in connection with this Agreement and/or the termination of Employee's
employment hereunder shall be settled by a single arbitrator pursuant to the
rules of the American Arbitration Association in the City of Houston, Texas, and
the award of the arbitrators shall be final, non-appealable, conclusive and
enforceable in a court of competent jurisdiction; provided, however,
notwithstanding the foregoing, in no event shall any dispute, claim or
disagreement arising under Sections 7, 8, 9 and 10 of this Agreement that
requires injunctive or other equitable relief be required to be submitted to
arbitration pursuant to this provision or otherwise.
14. NOTICES. Any notice, demand or request which may be permitted,
required or desired to be given in connection therewith shall be given in
writing and directed to Employer and Employee as follows:
If to Employer, at: Applied Voice Recognition, Inc.
4615 Post Oak Place, Suite 111
Houston, Texas 77027
Attention: Chairman
Facsimile No.: (713) 621-5870
with a copy to: Boyar, Simon & Miller
4265 San Felipe, Suite 1200
Houston, Texas 77027
Attention: Gary W. Miller, Esq.
Facsimile No.: (713) 552-1758
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or, if to Employee, at: Mr. Robin P. Ritchie
1611 Wild Rye Trail
Sugar Land, Texas 77479
Notices shall be deemed properly delivered and received when and if either: (i)
personally delivered; (ii) delivered by nationally-recognized overnight courier;
(iii) when deposited in the U.S. Mail, by registered or certified mail, return
receipt requested, postage prepaid; or (iv) sent via facsimile transmission with
confirmation mailed by regular U.S. mail. Any party may change its notice
address for purposes hereof to any address within the continental United States
by giving written notice of such change to the other parties hereto at least
fifteen days prior to the intended effective date of such change.
15. 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 of last resort, Employer and
Employee 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.
16. ASSIGNMENT. This Agreement may not be assigned by any party
without the prior written consent of the other parties.
17. BINDING AGREEMENT. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto, and their respective legal
representatives, heirs, successors and permitted assigns.
18. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas.
19. ATTORNEYS FEES. In the event of any dispute between the parties
regarding this Agreement, the prevailing party shall be entitled to be
reimbursed for such prevailing party's attorneys fees and costs of court by the
non-prevailing party.
20. AGREEMENT READ, UNDERSTOOD AND FAIR. Employee has carefully read
and considered all provisions of this Agreement and agrees that all of the
restrictions set forth are fair and reasonable and are reasonably required for
the protection of the interests of Employer.
(Remainder of Page Intentionally Left Blank)
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on this
____ day of July, 1998, effective as of the Effective Date.
EMPLOYER:
--------
APPLIED VOICE RECOGNITION, INC., a
Delaware corporation
By:
-------------------------------
Timothy J. Connolly, Chairman
EMPLOYEE:
--------
----------------------------------
ROBIN P. RITCHIE
Signature Page to
Employment Agreement
(Robin P. Ritchie)
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<PAGE>
EXHIBIT 11.2
EMPLOYMENT AGREEMENT
(Milton A. Spiegelhauer)
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of August 31,
1998 (the "Effective Date"), by and between APPLIED VOICE RECOGNITION, INC., a
Delaware corporation ("Employer"), and MILTON A. SPIEGELHAUER, an individual
residing in Spring, Texas ("Employee").
W I T N E S S E T H:
-------------------
WHEREAS, Employer and Employee desire to enter into an agreement regarding
Employee's employment with Employer pursuant to the terms and conditions set
forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and intending to be legally bound
hereby, the parties covenant and agree as follows:
1. EMPLOYMENT. Employer hereby employs Employee and Employee hereby accepts
employment with Employer on the terms and conditions set forth in this
Agreement.
2. TERM OF EMPLOYMENT. The term of Employee's employment hereunder (the
"Term") shall commence as of September 14, 1998 (the "Commencement Date") and
shall continue (subject to termination by either Employer or Employee as
hereinafter provided) for an initial term (the "Initial Term") expiring on
August 31, 2001 (the "Expiration Date"). The Expiration Date shall be
automatically extended unless terminated by Employer or Employee for successive
one year periods following the expiration of the Initial Term. If Employer
desires to terminate Employee's employment under this Agreement at the end of
the Initial Term or at the end of any succeeding one year term, Employer shall
give written notice of such desire to Employee at least one month prior to the
expiration of the Initial Term or any succeeding one year term. If Employee
desires to terminate Employee's employment under this Agreement at the end of
the Initial Term or at the end of any succeeding one year term, Employee shall
give written notice of such desire to Employer at least one month prior to the
expiration of the Initial Term or any succeeding one year term. At the
expiration of the then existing term, Employer shall have no further obligation
to Employee other than payment of earned and unpaid Base Salary (as hereafter
defined) and bonuses under Sections 3(a) and 3(b), respectively, and Employee
shall have no further obligation to Employer except as set forth in Sections 7,
8, 9 and 10.
3. COMPENSATION AND OTHER BENEFITS.
a. As compensation for all services rendered by Employee in performance of
Employee's duties or obligations under this Agreement, Employer shall pay
Employee a monthly base salary (the "Base Salary") as follows:
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(i) for the period from the Commencement Date through February
28, 1999, the sum of TEN THOUSAND FIVE HUNDRED EIGHTY-THREE AND NO/100
DOLLARS ($10,583.00);
(ii) for the period of March 1, 1999 through August 31, 1999,
the sum of ELEVEN THOUSAND SEVEN HUNDRED FIFTY AND NO/100 DOLLARS
($11,750.00); and
(iii) for the period of September 1, 1999 through the Expiration
Date, the sum of TWELVE THOUSAND TWO HUNDRED FIFTY AND NO/100 DOLLARS
($12,250.00).
Employee's Base Salary shall be payable in equal semi-monthly installments or
in the manner and on the timetable which Employer's payroll is customarily
handled or at such intervals as Employer and Employee may hereafter agree to
from time to time.
b. In addition to receiving the Base Salary provided for in
Section 3(a), for the portion of the calendar year beginning with the
Commencement Date and each calendar year thereafter during the Term hereof,
Employee shall be entitled to a bonus of up to $153,000 per year (or pro rata
for portions of a year) if, and only if, Employee has met the performance
criteria set by Employer for the applicable year. In connection therewith,
Employer agrees that by October 1, 1998 and by January 31 of each year
thereafter, it shall set the performance criteria for Employee's bonus to be
earned during the applicable year and shall communicate such criteria to
Employee in writing. If Employee successfully meets the performance criteria
established by Employer (in the discretion of Employer), Employer shall pay to
Employee the bonus within thirty (30) days of the end of the bonus period.
c. Employee shall be entitled to be reimbursed by Employer for
all reasonable and necessary expenses incurred by Employee in carrying out
Employee's duties under this Agreement in accordance with Employer's standard
policies regarding such reimbursements.
d. Beginning within thirty (30) days of the Commencement Date,
Employee shall be entitled during the Term, upon satisfaction of all eligibility
requirements, if any, to participate in all health, dental, disability, life
insurance and other benefit programs now or hereafter established by Employer
which cover substantially all other of Employer's employees and shall receive
such other benefits as may be approved from time to time by Employer.
e. Employee shall be entitled to receive two weeks of paid
vacation for each year during the Term following the first anniversary of the
Commencement Date and shall be entitled to receive paid holidays as enjoyed by
all other employees of Employer.
f. Employee shall be entitled, during the Term of this
Agreement, to receive a monthly automobile allowance of $750.
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<PAGE>
4. DUTIES.
a. Employee is employed to act as Vice President of Sales and
Marketing of the Employer and in such other office or position as shall be
assigned to Employee from time to time by Employer, and to perform such duties
as are commensurate with Employee's position with Employer.
b. Employee agrees that during the period of employment, Employee
shall devote full-time efforts to Employee's duties as an employee of Employer
and Employee shall use Employee's best efforts to perform the duties of
Employee's position in an efficient and competent manner and shall use
Employee's best efforts to promote the interests of Employer and any affiliated
companies.
c. During the period of employment, Employee agrees not to (i)
solely or jointly with others undertake or join any planning for or organization
of any business activity competitive with the business activities of Employer,
and (ii) directly or indirectly, engage or participate in any other activities
in conflict with the best interests of Employer.
d. Employee agrees that during the period of employment Employee
shall refer to Employer all opportunities in the computer industry related to
voice recognition software designs and applications to which Employee might
become exposed in carrying out Employee's duties and responsibilities hereunder.
5. STOCK OPTION PLAN. As a further inducement to Employee to accept
upon the terms set forth herein and in consideration of Employee's
execution of this Agreement, Employee shall be granted options entitling
Employee to purchase 150,000 shares of Employer's common stock, par value $0.001
(the "Options"), pursuant to, and Employee shall be entitled to otherwise
participate in, that certain Applied Voice Recognition, Inc. 1997 Incentive
Plan, as amended from time to time. The granting instrument for the Options
will provide, in addition to other terms set forth therein, that (i) the
purchase price for the Options shall be the closing price for Employer's shares
of common stock on the NASDAQ OTCBB (or any national securities exchange
hereafter listing Employer's common stock) on the day prior to the Commencement
Date, and (ii) one third (1/3rd) of the Options (being options to purchase
50,000 shares) will vest on the first anniversary date of the Commencement Date,
and approximately one twenty-fourth (1/24th) of the remaining Options will vest
on the last day of each month following the first anniversary date of the
Commencement Date (specifically options to purchase 2,083 shares on the last day
of months one through twenty-three and 2,091 shares on the last day of the
twenty-fourth month).
6. TERMINATION OF EMPLOYMENT. Employee's employment and this
Agreement shall terminate upon the earliest to occur of any of the following
events (the actual date of such termination being referred to herein as the
"Termination Date"):
a. The termination of the Agreement pursuant to Section 2.
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<PAGE>
b. Employee's employment pursuant hereto shall terminate in the
event of the death of Employee.
c. Employer may terminate Employee's employment under this
Agreement for cause without any prior notice (except as set forth in
subparagraph (3) below), upon the occurrence of any of the following events:
(1) any embezzlement or wrongful diversion of funds of
Employer or any affiliate of Employer by Employee;
(2) gross malfeasance by Employee in the conduct of
Employee's duties;
(3) breach of this Agreement and the failure to cure such
breach following reasonable notice thereof;
(4) gross neglect by Employee in carrying out Employee's
duties; or
(5) the failure of Employee to be able to perform
Employee's duties hereunder for a period of not less than ninety (90)
days by reason of disability. For purposes of this Agreement, Employee
shall be deemed to have become disabled when the Board of Directors of
Employer, upon the advice of a qualified physician, shall have
determined that Employee has become physically or mentally incapable
(excluding infrequent and temporary absences due to ordinary illness)
of performing Employee's duties under this Agreement. Before making
any termination decision pursuant to this Section 6(c)(5), the Board
of Directors of Employer shall determine whether there is any
reasonable accommodation (within the meaning of the Americans with
Disabilities Act) which would enable Employee to perform the essential
functions of Employee's position under this Agreement despite the
existence of any such disability. If such a reasonable accommodation
is possible, Employer shall make that accommodation and shall not
terminate Employee's employment hereunder based on such disability.
d. If Employee's employment is terminated for any of the reasons
specified in Section 6, Employer shall no longer be obligated to make the
payments specified under Section 3 or to pay to Employee any other compensation
or benefits whatsoever, except as may otherwise be provided in Section 6(e).
Notwithstanding the foregoing, if for any reason Employee's employment is
terminated hereunder, any salary or bonus payable under Sections 3(a) or 3(b)
which shall have been earned but not yet paid shall be paid by Employer to
Employee or Employee's estate, as the case may be.
e. Employer shall have the right to terminate Employee's employment
hereunder without prior notice and without cause; provided, however, in such
event, Employee shall continue to receive his Base Salary for six (6) months
following the date of such
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<PAGE>
termination. If this Agreement is terminated by Employer under this Section
6(e), any Options that would otherwise vest on or before the next vesting period
(be it annual or monthly) shall automatically become fully vested immediately
upon termination; however, any additional unvested Options shall be cancelled
upon termination. Notwithstanding the foregoing, the prior provisions of this
Section 6(e) shall be void and of no force or effect in the event of (i) the
sale of substantially all of the assets of Employer, (ii) the merger of Employer
into another entity, or (iii) the merger of another entity into Employer if, as
a result of any transaction described in clause (i), (ii) or (iii), the
shareholders of Employer do not control a majority of the shares of the
surviving entity. In the event of any such sale or merger, any of the Options
that have not yet vested shall immediately vest.
7. INVENTIONS AND CREATIONS BELONG TO EMPLOYER.
a. Any and all inventions, discoveries, improvements or creations
(collectively, "Creations") which Employee has conceived or made or may conceive
or make during the period of employment in any way, directly or indirectly,
connected with Employer's business shall be the sole and exclusive property of
Employer. Employee agrees that all copyrightable works created by Employee or
under Employer's direction in connection with Employer's business are "works
made for hire" and shall be the sole and complete property of Employer and that
any and all copyrights to such works shall belong to Employer. To the extent any
of the works described in the preceding sentence are not deemed to be "works
made for hire," Employee hereby assigns all proprietary rights, including
copyright, in these works to Employer without further compensation.
b. Employee further agrees to (i) disclose promptly to Employer all
such Creations which Employee has made or may make solely, jointly or commonly
with others during the period of employment to the extent connected with
Employer's business, (ii) assign all such Creations to Employer, and (iii)
execute and sign any and all applications, assignments or other instruments
which Employer may deem necessary in order to enable Employer, at Employer's
expense, to apply for, prosecute and obtain copyrights, patents or other
proprietary rights in the United States and foreign countries or in order to
transfer to Employer all right, title and interest in said Creations.
8. CONFIDENTIALITY; OWNERSHIP OF INFORMATION. Employer promises
that Employer will, during the Term, provide Employee with access to such
Confidential Information (as defined in Section 8(a)) owned by Employer and that
is used in the operation of Employer's business as reasonably necessary to allow
Employee to perform Employee's obligations hereunder. Employee acknowledges
that Employer has agreed to provide Employee with a definite term of employment
and with access to such Confidential Information of Employer during that term of
employment.
a. DEFINITION. For purposes of this Agreement, "Confidential
Information" means any and all information relating directly or indirectly to
Employer that is not generally ascertainable from public or published
information or trade sources and that represents proprietary information to
Employer, excluding, however, (i) Employees' business contacts, (ii) information
already known to Employee prior to Employee's employment with Employer, and
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<PAGE>
(iii) information required to be divulged in any legal or administrative
proceeding in which Employee is involved. Confidential Information shall consist
of, for example, and not intending to be inclusive, (A) software (source and
object codes), algorithms, computer processing systems, techniques,
methodologies, formulae, processes, compilations of information, drawings,
proposals, job notes, reports, records and specifications, and (B) information
concerning any matters relating to the business of Employer, any of its
customers, prospective customers, customer contacts, licenses, the prices it
obtains or has obtained for the licensing of its software products and services,
or any other information concerning the business of Employer and Employer's good
will.
b. NO DISCLOSURE. During the Term and at all times thereafter,
Employee shall not disclose or use in any manner, directly or indirectly, and
shall use Employee's best efforts and shall take all reasonable precautions to
prevent the disclosure of, any such trade secrets or other Confidential
Information, except to the extent required in the performance of Employee's
duties or obligations to Employer hereunder or by express prior written consent
of a duly authorized officer or director of Employer (other than Employee).
c. OWNERSHIP OF INFORMATION. Such Confidential Information is
and shall remain the sole and exclusive property and proprietary information of
Employer or Employer's customers, as the case may be, and is disclosed in
confidence by Employer or permitted to be acquired from such customers in
reliance on Employee's agreement to maintain such Confidential Information in
confidence and not to use or disclose such Confidential Information to any other
person except in furtherance of Employer's business.
d. RETURN OF MATERIAL. Upon the expiration or earlier
termination of this Agreement for any reason, Employee shall immediately turn
over to Employer all documents, disks or other magnetic media, or other material
in Employee's possession or under Employee's control that (i) may contain or be
derived from Creations or Confidential Information, or (ii) are connected with
or derived from Employee's services to Employer. Employee shall not retain any
Confidential Information in any form (e.g., computer hard drive, microfilm,
etc.) upon the expiration or earlier termination of this Agreement.
9. NONCOMPETE; WORKING FOR COMPETITOR. In consideration of Employee's
employment by Employer, Employee will not, at any time during the Term or at any
time for twenty-four (24) months subsequent to any termination of Employee's
employment pursuant to the provisions of Section 6(c) or the voluntary
termination of employment by Employee pursuant to Section 2, directly or
indirectly, within the United States, Canada, Mexico, South America or Europe,
for Employee's own account or on behalf of any direct competitors of Employer,
engage in any business or transaction involving the design, installation,
integration, service or consulting with respect to voice recognition software
designs and applications (whether as an employee, employer, independent
contractor, consultant, agent, principal, partner, stockholder, corporate
officer, director or in any other individual or representative capacity),
without the prior written consent of Employer, which consent may be withheld by
Employer in Employer's sole and absolute discretion.
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<PAGE>
10. NON-SOLICITATION OF EMPLOYEES. During the Term and for a period of
twenty-four (24) months after the date of termination of employment, Employee
will not in any way, directly or indirectly (i) induce or attempt to induce any
employee of Employer to quit employment with Employer; (ii) otherwise interfere
with or disrupt Employer's relationship with its employees; (iii) solicit,
entice or hire away any employee of Employer; or (iv) hire or engage any
employee of Employer or any former employee of Employer whose employment with
Employer ceased less than one year before the date of such hiring or engagement.
Employee acknowledges that any attempt on the part of Employee to induce others
to leave Employer's employ, or any effort by Employee to interfere with
Employer's relationship with its other employees would be harmful and damaging
to Employer.
11. EMPLOYEE'S ACKNOWLEDGEMENT. It is the express intention of
Employee and Employer to comply with sections 15.50 et seq. of the Texas
Business and Commerce Code in effect as of the date of execution hereof.
Employee stipulates that the provisions of this Agreement are not oppressive or
overly burdensome to Employee and will not prevent Employee from earning an
income following termination of this Agreement. Employee warrants and
represents that:
a. Employee is familiar with non-compete and non-solicitation
covenants;
b. Employee has discussed or acknowledges the opportunity to discuss
the provisions of the non-compete and non-solicitation covenants contained
herein with Employee's attorney and has concluded that such provisions
(including, without limitation, the right to equitable relief and the length of
time provided for herein) are fair, reasonable and just under the circumstances;
c. Employee is fully aware of the obligations, limitations and
liabilities included in the non-compete and non-solicitation covenants contained
in this Agreement;
d. The scope of activities covered hereby are substantially similar to
those activities to be performed by Employee under this Agreement;
e. The twenty-four (24) month non-compete and non-solicitation period
is a reasonable restriction, giving consideration to the following factors: (1)
Employee and Employer reasonably anticipate that this Agreement, although
terminable under certain provisions, will continue in effect for sufficient
duration to allow Employee to attain superior bargaining strength and an ability
for unfair competition with respect to the customers covered hereby; (2) the
duration of the twenty-four (24) month non-compete and non-solicitation period
is a reasonably necessary period to allow Employer to restore its position of
equivalent bargaining strength and fair competition with respect to those
customers covered hereby; and (3) historically, employees of all types have
remained with Employee for a duration of longer than the duration of the twenty-
four (24) month non-compete and non-solicitation period; and
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f. The limitations contained in this Agreement with respect to
geographic area, duration and scope of activity are reasonable; however, if any
court shall determine that the geographic area, duration or scope of activity of
any restriction contained in this Agreement is unenforceable, it is the
intention of the parties that such restrictive covenants set forth herein shall
not thereby be terminated, but shall be deemed amended to the extent required to
render such covenants valid and enforceable.
12. REMEDIES; INJUNCTION. In the event of a breach or threatened
breach by Employee of any of the provisions of this Agreement, Employee agrees
that Employer, in addition to and not in limitation of any other rights,
remedies or damages available to Employer at law or in equity, shall be entitled
to a permanent injunction without the necessity of proving actual monetary loss
in order to prevent or restrain any such breach by Employee or by Employee's
partners, agents, representatives, servants, employees and/or any and all
persons directly or indirectly acting for or with Employee. It is expressly
understood between the parties that this injunctive or other equitable relief
shall not be Employer's exclusive remedy for any breach of this Agreement, and
Employer shall be entitled to seek any other relief or remedy which it may have
by contract, statute, law or otherwise for any breach hereof.
13. ARBITRATION. The parties agree that all disputes or questions
arising in connection with this Agreement and/or the termination of Employee's
employment hereunder shall be settled by a single arbitrator pursuant to the
rules of the American Arbitration Association in the City of Houston, Texas, and
the award of the arbitrators shall be final, non-appealable, conclusive and
enforceable in a court of competent jurisdiction; provided, however,
notwithstanding the foregoing, in no event shall any dispute, claim or
disagreement arising under Sections 7, 8, 9 and 10 of this Agreement that
requires injunctive or other equitable relief be required to be submitted to
arbitration pursuant to this provision or otherwise.
14. NOTICES. Any notice, demand or request which may be permitted,
required or desired to be given in connection therewith shall be given in
writing and directed to Employer and Employee as follows:
If to Employer, at: Applied Voice Recognition, Inc.
4615 Post Oak Place, Suite 111
Houston, Texas 77027
Attention: Chairman
Facsimile No.: (713) 621-5870
8
<PAGE>
with a copy to: Boyar, Simon & Miller
4265 San Felipe, Suite 1200
Houston, Texas 77027
Attention: Gary W. Miller, Esq.
Facsimile No.: (713) 552-1758
or, if to Employee, at: Mr. Milton A. Spiegelhauer
6602 Chancellor Drive
Spring, Texas 77374
Notices shall be deemed properly delivered and received when and if either: (i)
personally delivered; (ii) delivered by nationally-recognized overnight courier;
(iii) when deposited in the U.S. Mail, by registered or certified mail, return
receipt requested, postage prepaid; or (iv) sent via facsimile transmission with
confirmation mailed by regular U.S. mail. Any party may change its notice
address for purposes hereof to any address within the continental United States
by giving written notice of such change to the other parties hereto at least
fifteen days prior to the intended effective date of such change.
15. 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 of last resort, Employer and
Employee 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.
16. ASSIGNMENT. This Agreement may not be assigned by any party without the
prior written consent of the other parties.
17. BINDING AGREEMENT. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto, and their respective legal
representatives, heirs, successors and permitted assigns.
18. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
19. ATTORNEYS FEES. In the event of any dispute between the parties
regarding this Agreement, the prevailing party shall be entitled to be
reimbursed for such prevailing party's attorneys fees and costs of court by the
non-prevailing party.
20. AGREEMENT READ, UNDERSTOOD AND FAIR. Employee has carefully read and
considered all provisions of this Agreement and agrees that all of the
restrictions set forth are fair and reasonable and are reasonably required for
the protection of the interests of Employer.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on this
____ day of August, 1998, effective as of the Effective Date.
EMPLOYER:
--------
APPLIED VOICE RECOGNITION, INC., a
Delaware corporation
By:
-------------------------------
Timothy J. Connolly, Chairman
EMPLOYEE:
--------
-----------------------------------
MILTON A. SPIEGELHAUER
Signature Page to
Employment Agreement
(Milton A. Spiegelhauer)
10
<PAGE>
EXHIBIT 12.1
FINAL CONFIDENTIAL
VALUE ADDED RESELLER AGREEMENT
BY AND BETWEEN
APPLIED VOICE RECOGNITION, INC. (AVRI) ("VAR")
AND
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. ("L&H")
Effective Date: September 30, 1998 Initial Term: Through December 31, 1999
------------------- --------------------------
VAR CORPORATE NAME: Applied Voice Recognition, Inc. (VAR)
----------------------------------------------------------
Incorporated under the Laws of:
----------------------------------------------
Address: 4615 Post Oak Place, Suite III
---------------------------------------------------------
Houston, Texas 77027
---------------------------------------------------------
Phone: Fax:
----------------------- ------------------------
VAR NOTICES ADDRESS:
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
Attention:
---------------------------------------------------------
Phone: Fax:
----------------------- ------------------------
L&H CORPORATE NAME: Lernout & Hauspie Speech Products N.V.
----------------------------------------------------------
Incorporated under the Laws of: Belgium
----------------------------------------------
Address: Sint-Krisbllnetrast 7
---------------------------------------------------------
8900 loper, BELGIUM
---------------------------------------------------------
Phone: 33/67.22.8888 Fax: 32/67.20.8489
----------------------- ------------------------
L&H NOTICES ADDRESS:Same as above Attn: Legal Department, AND COPY TO:
---------------------------------------------------------
Lernout & Hauspie Speech Products USA, Inc.
---------------------------------------------------------
52 Third Avenue, Burlington, MA 01803
---------------------------------------------------------
Attention: Contract Manager
---------------------------------------------------------
Phone: 781/203-5000 Fax: 781/238-0985
----------------------- ------------------------
THIS AGREEMENT IS GOVERNED BY THE ATTACHED TERMS AND CONDITIONS. VAR AND L&H
ACKNOWLEDGE THAT THEY HAVE READ AND AGREE TO BE BOUND BY THE ATTACHED TERMS AND
CONDITIONS. IN WITNESS WHEREOF, THIS AGREEMENT HAS BEEN DULY EXECUTED BY THE
PARTIES HERETO, AS OF THE EFFECTIVE DATE.
VAR: L&H:
By: /s/ Timothy J. Connolly By: /s/ Patrick D. Schnider
------------------------------- ----------------------------
Name: Timothy J. Connolly Name: Patrick D. Schnider
Title: Chairman & CEO Title: Senior Vice President
<PAGE>
FINAL CONFIDENTIAL
RECITALS:
- - --------
WHEREAS, L&H is engaged in developing and licensing dictation software programs
for use in the medical field;
WHEREAS, AVRI is a software development and solutions provider. AVRI builds,
packages and sells applications and solutions that utilize voice tools which
include, but may not be limited to, speech recognition, voice authentication,
voice verification, speech-to-text, language modeling, vocabulary creation,
dictionary creation and audio compression.
WHEREAS, AVRI desires to obtain certain rights, as hereinafter described, in
said software programs and its related documentation and;
WHEREAS L&H is willing to grant to AVRI said rights with respect to said
software programs;
NOW, THEREFORE, in consideration of the mutual covenants and conditions
hereinafter set forth, the parties hereby agree as follows:
ARTICLE I: DEFINITIONS
- - ----------------------
The following terms shall have the meanings ascribed to them herein whenever
they are used in this Agreement, unless otherwise clearly indicated by the
context.
1.1 "Software" shall mean the Software delivered to VAR hereunder, as
described in Addendum A, to be adapted to work with the VAR Product;
Documentation for the Software, which is customarily provided by L&H as a
part of the Software; and all Corrections of the Software. This shall
include enhancements and upgrades of the Software, provided that VAR is
current on all maintenance payments that become due hereunder.
1.2 "Documentation" shall mean those visually-readable materials, in English,
developed by or for L&H for use in connection with the Software.
Documentation includes operating instructions, input information and
format specifications.
1.3 "Corrections" shall mean changes made in the Software and/or
Documentation.
1.4 "End User" shall mean the customers of VAR or of Third Parties, who will
only be granted the right to use the Software in standalone form or in
connection with the VAR Product.
1.5 "VAR Product" shall mean the application(s) made or services provided by
VAR, as identified in Addendum A.
1.6 "Third Party" shall include original equipment manufacturers,
distributors, system houses, value added resellers and other such
entities engaged in doing business with VAR, and who acquire the VAR
Product incorporating the Software, for distribution purposes only.
1.7 "Services" shall mean the speech-to-text transcription services which are
more fully described in Addendum A.
1.8 "Services Software" shall mean the software delivered to VAR hereunder,
as specified in Addendum A, which shall be used with the Services.
- - -------------------------------------------------------------------------------
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ARTICLE II: BACKGROUND REQUIREMENTS OF A VAR LICENSE
- - -----------------------------------------------------
2.1 This license is intended to allow a Value Added Reseller (VAR) to make and
distribute copies of the Software and Services Software for restricted use
by the VAR's and Third Parties' End Users, and to resell the Services to
End Users.
2.2 The Software may only be distributed and used in conjunction with
substantial value added products or services provided by the VAR.
2.3 The VAR is required to submit a prototype copy of its complete proposed
VAR Product, including the desired implementation of Software and the
proposed VAR end user license to L&H for review and approval prior to any
distribution of copies of the Software, incorporated in the VAR Product.
L&H shall complete such review within ten (10) days after receipt of the
VAR Product and shall at that time either provide written notice of
acceptance of the VAR Product, or provide reasonable requests to VAR for
changes that should be incorporated in order for L&H to accept the VAR
Product. Once VAR has made such changes in an acceptable manner, L&H shall
then accept the VAR Product. L&H shall not unreasonably withhold its
approval of the revised VAR Product.
2.4 At the moment the VAR Product has been approved by L&H and the required
royalties are paid, VAR may distribute the Software as component parts of
its VAR Product for use in accordance with the approved VAR end user
license.
2.5 VAR shall provide the Services with the Services Software to End Users,
in accordance with L&H's standard terms and conditions, a copy of which is
attached hereto as Addendum D.
ARTICLE III: GRANT OF LICENSE
- - ------------------------------
3.1 In consideration for the payments made under this Agreement, L&H hereby
grants to VAR and VAR accepts from L&H, a world-wide non-exclusive, non-
transferable license, subject to all applicable terms and conditions
hereof, to:
a) use the Software solely in connection with VAR's development,
distribution and provision of technical support for the VAR Product
incorporating the Software;
b) make copies of the Software with the sole purpose to incorporate into
the VAR Product;
c) distribute to End Users, directly or indirectly through Third Parties,
copies of the Software incorporated into the VAR Product;
d) distribute copies of the Software to End Users in shrink-wrap,
standalone form, according to the terms and conditions of L&H's
current Authorized Reseller program;
e) incorporate all or part of the Documentation into the VAR Product
documentation, provided VAR properly incorporates and references L&H's
trademarks and copyrights in the documentation.
f) make copies of the Services Software for distribution to End Users for
use with the Services;
3.2 All distributions by Third Parties in accordance with Article 3.1c shall
be pursuant to written agreements that incorporate applicable terms and
conditions hereof.
3.3 In consideration for the non-refundable pre-payment to which VAR has
committed hereunder, L&H hereby grants to VAR the exclusive right to use
the Services in conjunction with language models developed through the
performance of the Services, using data received from VAR, into the non-
hospital solutions market within North America. This exclusivity shall
expressly exclude Services for hospitals (e.g., and specifically for
radiology, pathology and emergency medicine). Within thirty (30) days
after the
- - -------------------------------------------------------------------------------
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<PAGE>
FINAL CONFIDENTIAL
Effective Date of this Agreement, VAR shall submit a list of proposed
exclusive language model specialties of approval or rejection by L&H.
Exclusivity granted for a specific language model shall be valid for a
period of six (6) months after the first installation of that language
model specialty developed using VAR's data, for use with the Services. If
VAR is in breach of any term of this Agreement, this exclusivity shall
automatically revert to a non-exclusivity.
ARTICLE IV: ROYALTIES/PAYMENTS
- - -------------------------------
4.1 In consideration for the rights granted hereunder, VAR shall make royalty
payments to L&H for each royalty-bearing copy of the Software, pursuant to
Addendum C.
4.2 VAR shall make payments to L&H for the Services performed hereunder,
pursuant to Addendum C.
ARTICLE V: MAINTENANCE
- - -----------------------
5.1 L&H, upon request of VAR, agrees to provide maintenance to VAR throughout
the term of this Agreement, at the cost as defined in Addendum C.
5.2 If End Users desire maintenance from L&H, End Users may enter into a
yearly maintenance agreement with L&H, and such maintenance shall be
offered at L&H's then-current maintenance costs.
ARTICLE VI: WARRANTY
- - ---------------------
6.1 L&H warrants that it has the right to grant the licenses and rights
contained in this Agreement.
6.2 L&H warrants that the Software will function substantially in accordance
with the specifications set forth in the Documentation. VAR acknowledges
that the Software is of such complexity that it may have inherent defects
and agrees that if any deviations from the specification exist, as VAR's
exclusive remedy and L&H's sole responsibility, L&H shall use its best
efforts to eliminate promptly any signification deviations reported to it
by VAR in writing. This warranty shall expire nine (9) months after the
Effective Date of this Agreement. Deviations discovered after the
expiration of the warranty period shall be handled under maintenance, as
set forth in Addendum C.
6.3 EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, L&H MAKES AND VAR
RECEIVES, NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. L&H
DOES NOT WARRANT THAT ANY OR ALL FAILURES, DEFECTS OR ERRORS WILL BE
CORRECTED, OR WARRANT THAT THE FUNCTIONS CONTAINED IN THE SOFTWARE AND/OR
SERVICES SOFTWARE WILL MEET END USER'S REQUIREMENTS. VAR ACKNOWLEDGES THAT
L&H HAS MADE NO REPRESENTATIONS REGARDING WARRANTY OR LIABILITY OTHER THAN
AS STATED IN THIS AGREEMENT.
6.4 In the event L&H is unable to correct the deviations reported in writing
by VAR during the Warranty Period within three (3) months after the
receipt of such written notice, and provided that VAR has given L&H the
information and cooperation needed in order to correct the deviations,
there will be mutual consent to terminate this Agreement, if, based on the
deviations, this Agreement fails of its particular purpose.
ARTICLE VII: INDEMNITY
- - -----------------------
7.1 L&H shall indemnify and defend VAR against any claim that the Software
infringes any third party copyright when used in accordance with the terms
of this Agreement, provided however that VAR shall
- - -------------------------------------------------------------------------------
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<PAGE>
FINAL CONFIDENTIAL
give L&H prompt notice of such claim and shall give information, reasonable
assistance and authority to defend or settle the claim. L&H shall have the
right, at its option, either to obtain for VAR the right to continue using
the Software, substitute other software with equivalent functional
capabilities, modify the Software so that it is no longer infringing while
retaining equivalent functions, or terminate this Agreement and refund the
amounts paid hereunder by VAR.
7.2 L&H shall have no liability to VAR or End Users in the event infringement
of any intellectual property right arises from components of a VAR Product
which are not derived directly from the Software operating on the VAR
Product but which are introduced into a VAR Product by VAR, or which result
from compliance with VAR's designs specifications or instructions or from
modification by VAR of the Software.
ARTICLE VIII: TERM
- - -------------------
8.1 The Initial Term of this Agreement shall commence on the Effective Date
herein and shall continue until December 31, 1999. Thereafter, this
Agreement shall be automatically renewed for one (1) year periods unless
terminated or canceled as provided in Section 8.2 or 8.2:
8.2 This Agreement may be terminated for cause, as follows:
a) by L&H, if VAR fails to make timely payments or provide royalty
reports as required hereunder, and any such failure is not remedied
within thirty (30) days after receipt of written notice;
b) by L&H, if VAR expressly or impliedly repudiates this license by
refusing to observe the restricted use or confidentiality requirements
as mentioned in this Agreement, L&H may terminate this Agreement
immediately, by providing written notice to VAR stating such breach;
c) by either party, if a party ceases its business activities as a result
of bankruptcy, dissolution, liquidation, or other causes, the other
party may immediately terminate this Agreement by providing written
notice to that party.
8.3 After the Initial Term as defined hereabove, this Agreement may be
terminated by either party without cause by giving the other party a
ninety (90) days written notice.
8.4 Any termination or cancellation of this Agreement shall promptly terminate
VAR's rights as defined in Article III, provided however that such
termination shall not terminate or affect sublicenses previously and
properly granted to End Users, being it that such termination is not due
to breach of contract by VAR. If End Users desire to have continued
maintenance of the Software from L&H, L&H will make such support available
to the End User under L&H's standard terms and conditions for such
support.
8.5 No termination or cancellation of this Agreement shall affect the
obligation of VAR to collect and distribute to L&H all payments, which
have become or will be due from End Users and any other payments which
have become due hereunder.
8.6 For the purposes of this Agreement "immediately" shall mean five (5) days
after postal date of a written notice or the date of delivery of the
courier mail company, whichever comes first.
ARTICLE IX: LIABILITY
- - ----------------------
9.1 Limitation on Darrages:
-----------------------
In no event will L&H be liable for any loss of or damage to revenues,
profits or goodwill or other special, incidental indirect or consequential
damages of any kind, resulting from its performance or failure to perform
pursuant to the terms of this Agreement or any of the attachments hereto or
resulting from the furnishing, performance, or use or loss of use of any
Software or Services Software or other materials
- - -------------------------------------------------------------------------------
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<PAGE>
FINAL CONFIDENTIAL
delivered to VAR hereunder, including, without limitation, any
interruption of business, whether resulting from breach of contract,
breach of warranty, or any other cause (including negligence), even if L&H
has been advised of the possibility of such damages.
9.2 Maximum Liability:
-----------------
L&H's total liability to VAR from any and all causes shall be limited to
the total amount of royalties actually paid by VAR to L&H, including but
not limited to the non-refundable pre-paid royalties to which VAR has
committed hereunder.
L&H's limitation of liability is cumulative with all VAR's payments being
aggregated to determine satisfaction of the limit. The existence of more
than one claim will not enlarge or extend the limit.
ARTICLE X: CONFIDENTIAL INFORMATION
- - ------------------------------------
10.1 Each party agrees not to disclose any trade secrets or confidential
information transferred to it by the other party which are identified in
writing as confidential ("Trade Secrets"). Each party shall take the same
action and utilize at least the same precautions in preventing
unauthorized disclosures of the other party's Trade Secrets as it uses
with regard to its own secrets and confidential information of similar
nature.
10.2 The obligation of each party not to use or disclose Trade Secrets of the
other party shall survive the termination or cancellation of this
Agreement. However, neither party shall be obligated to protect Trade
Secrets of the other party under any provision of this Agreement in the
event the aforesaid:
a) are known to or developed by the receiving party without restriction
independently of the disclosing party.
b) are or become generally known to the public by other than a breach of
duty hereunder by the receiving party.
c) which the disclosing party agrees in writing is free of such
restrictions,
d) which at the time of disclosure to the receiving party was known to
such party free of restrictions.
The obligation of one party not to use or disclose said Trade Secrets of
the other party will remain in effect until one of these exceptions
occurs.
10.3 Since unauthorized transfer of either party's Trade Secrets will
substantially diminish their value and injure a party in ways that may not
be remedied fully by money, one party's breach of these Article X
obligations may entitle the other party to equitable relief (including
orders for specific performance and injunctions) as well as monetary
damages.
10.4 In consideration for the exclusivity granted to VAR under section VAR
shall provide L&H with data from its third parties and end users,
including but not limited to printed and electronic medical reports.
Notwithstanding any other provision of this Agreement to the contrary, L&H
may utilize any data submitted to L&H by VAR pursuant to this Agreement on
a royalty-free basis in its normative databases, and to incorporate such
data in studies, analyses and products prepared by L&H, to develop
language models and to otherwise be used in its normal business, without
any restriction other than those mentioned in this Section 10.4. No such
data as released by L&H will be identified as originating from VAR, nor
will it identify any patient, provider or payor, nor will such data be
utilized in any study, report or publication without first being mixed
with a significant body of other data such that neither VAR nor any
patient, provider or payor can be identified, unless VAR expressly
consents in writing. L&H's rights to use such data shall survive the
termination of this Agreement perpetually. All products, studies and
analyses using said data shall be and remain the sole property of L&H.
- - -------------------------------------------------------------------------------
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<PAGE>
FINAL CONFIDENTIAL
ARTICLE XI: RESTRICTED USE
- - ---------------------------
11.1 VAR shall not use or distribute or have distributed the Software or
Documentation as such, or in connection with or on any equipment or
services other than the VAR Product. VAR shall not use or distribute or
have distributed the Services Software except in connection with the
Services.
11.2 VAR shall not recreate generate or reverse-engineer any portion or
version of any delivered Software or Services Software or attempt any of
the foregoing or aid, abet or permit others to do so, provided, however,
if such is permitted by local law, all results shall be the sole property
of L&H. VAR is not allowed to make any derivative works based on or make
any modifications to the Software or Services Software, provided, however
that VAR shall be entitled to modify knowledge bases and templates within
the Software to make them specific to the VAR Product and End Users
preferences.
11.3 VAR expressly agrees not to commercialize the SOftware in a manner which
enables a third party to make, use, or distribute additional applications
other than the VAR Product.
11.4 VAR acknowledges that unauthorized reproduction or use of any (delivered)
Software or Services Software as provided in this Article XI is a breach
of a material obligation of this Agreement and is subject to any available
remedies for such breach.
ARTICLE XII: TITLE AND RIGHTS TO SOFTWARE AND MODIFICATIONS AND VAR PRODUCT
- - ---------------------------------------------------------------------------
12.1 The grant of license and distribution rights to VAR under Article III
hereof are VAR's only rights to the Software, Services Software and
Documentation. Title, interests and rights to all delivered Software,
Services Software and Documentation shall always remain in L&H or its
licensor. Furthermore, the grant of such license shall not restrict
licensing by L&H in any manner, and L&H shall have full rights, use and
access to any modifications jointly developed by VAR and L&H as a result
of the Interconnect of the Software to the VAR Product.
12.2 Title, interests and rights to the VAR Product shall always remain in VAR,
excluding L&H's intellectual property rights incorporated therein.
ARTICLE XIII: TAXES
- - --------------------
13.1 The Software and Services Software licensed hereunder are intended
principally for use by End Users and therefore should be exempt from
sales, use, excise and other similar taxes. However, if such tax, or any
import duty, or export duty, should be imposed on L&H directly as a result
of VAR's sales of the VAR Product, VAR shall either bear such tax or duty
by a direct payment to the taxing authority or shall reimburse L&H for
such tax or duty paid by L&H.
ARTICLE XIV: USE OF LOGO & MARKETING
- - -------------------------------------
14.1 VAR agrees to include the L&H Corporate Logo to its products using the
Software, or any other relevant logo at the request of L&H. This logo must
appear on the packaging of the VAR Product, and be mentioned in the
accompanying user documentation. VAR's use of the L&H Corporate Logo must
be approved by L&H in accordance with Section 2.3.
14.2 VAR agrees to issue with L&H a joint press release from time to time as
mutually agreed upon by the parties. All press releases must be approved
in writing by L&H and VAR prior to release.
14.3. The parties agree to work together in god faith to identify opportunities
for co-marketing of the Software and VAR Product and Services Software and
Services. All such co-marketing shall be subject to the approval of both
parties, on a case-by-case basis.
- - -------------------------------------------------------------------------------
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FINAL CONFIDENTIAL
ARTICLE XV: MISCELLANEOUS
- - --------------------------
15.1 This Agreement shall be deemed to have been entered into and shall be
construed, governed and interpreted in accordance with the laws of the
Commonwealth of Massachusetts, without giving effect to principles of
conflict of law.
15.2 The invalidity or unenforceability of any particular provision of this
Agreement shall not affect the other provisions, and this Agreement shall
be construed in all respects as if such invalid or unenforceable
provisions were omitted.
15.3 The failure of either party to insist, in any one or more instances, upon
the performance of any of the terms of this Agreement or to exercise any
right hereunder, shall not be construed as a waiver of the future
performance of any such term or the future exercise of such right.
15.4 Whenever any occurrence (e.g. an event of force majeure) is delaying or
threatens to delay L&H's timely performance under this Agreement, L&H
will promptly give notice thereof, including all relevant information with
respect thereto, to VAR.
15.5 It is hereby agreed that the rights and obligations of the parties hereto
contained in Articles IV VIII, IX, X, XI, XII, XIII, XV and the Addenda
referenced therein, shall survive and continue after any termination or
cancellation of this Agreement and shall bind the parties, their
successors, their assigns and their legal representatives.
15.6 This Agreement sets forth and shall constitute the entire agreement
between VAR and L&H with respect to the subject matter thereof, and shall
supersede any and all prior agreements, understandings, promises and
representations made by one party to the other concerning the subject
matter herein and the terms and conditions applicable thereto. This
Agreement may not be released, discharged, supplemented, interpreted,
amended or modified in any manner except by an instrument in writing
signed by a duly authorized officer or representative of each of the
parties hereto as is specially provided elsewhere in this Agreement.
15.7 In making and performing this Agreement, the parties act and shall act at
all times as independent contractors and nothing contained in this
Agreement shall be construed or implied to create the relationship of
partner or of employer and employees between the parties. At no time shall
either party make commitments for or in the name of the other party.
15.8 VAR is nt allowed to assign the license rights granted hereunder without
L&H's prior written consent, which shall not be unreasonably withheld.
15.9 All notices under this Agreement shall be sent to the address here above
mentioned. All such notices shall be deemed to be received by the other
party three (3) days after the postal date or on the date of signature of
the receipt of delivery by a courier mail company.
15.10 The Addenda referenced in this Agreement, and the specifications
referenced therein, as well as other documentation referenced in this
Agreement which define the obligations of the parties are a part of this
Agreement with the same force and effect as if fully set forth herein.
15.11 All disputes, claims, and/or requests for specific contractual
performance, or other equitable relief, or damages or any other matters in
question between the parties arising out of this Agreement shall be
submitted for arbitration, provided that the parties have first made their
best faith efforts to resolve such matters together. Demand shall be made
to the American Arbitration Association ("AAA") and shall be
- - -------------------------------------------------------------------------------
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FINAL CONFIDENTIAL
conducted in New York, New York by a panel of three (3) arbitrators. L&H
and VAR shall each choose one (1) panel member, from a panel of persons
having experience with and knowledge of electronic computers, computer
software and the computer business. The third member shall be an
independent party, chosen by the first two members. At least one member of
the panel must have a legal background. Arbitration shall be in accordance
with the commercial rules of the AAA. The Award of the Arbitrators shall
be final and judgement may be entered upon it in any court having
jurisdiction thereof, and the prevailing party shall be entitled to costs
and reasonable attorney's fees arising out of Arbitration.
15.2 The parties agree that VAR shall have no obligation to utilize the
Services, if in VAR's sole opinion, the Services are not appropriate to
the business plan of VAR. VAR shall notify L&H by December 31, 1998 of
their decision to use the Services.
- - -------------------------------------------------------------------------------
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FINAL CONFIDENTIAL
ADDENDUM A
SOFTWARE AND SERVICES SOFTWARE FUNCTIONAL SPECIFICATION
AND SERVICES
Software and Services Software Functional Specification
1.1. VAR agrees having received the Software, having the following
reference:
L&H VOICE XPRESS FOR MEDICINE(TM) GENERAL MEDICINE EDITION V1.1
L&H VOICE XPRESS FOR MEDICINE(TM) EMERGENCY MEDICINE EDITION V1.1
L&H VOICE XPRESS FOR MEDICINE(TM) MENTAL HEALTH EDITION V1.1
L&H VOICE XPRESS FOR MEDICINE(TM) PATHOLOGY EDITION V1.1
L&H VOICE XPRESS FOR MEDICINE(TM) PRIMARY CARE EDITION V1.1
L&H VOICE XPRESS FOR MEDICINE(TM) RADIOLOGY EDITION V1.1
1.2. VAR agrees having received the Services Software, having the
following reference:
CORRECTIONIST SOFTWARE - NOT WEB-BASED
L&H has provided VAR with a version of the Correctionist Software
that is not web-based. VAR may further provide the Correctionist
Software to its End Users. This software assists in the review and
editing of draft documents produced by the Services. This beta
version of the Correctionist Software is provided "AS IS" without
warranty of any kind. End Users who wish to use the Services will
use this software for correction of draft documents. Audio data
relating to these draft documents will be played through methods
that the End User has traditionally used.
1.3. Reference is made to the Documentation as provided for in the
Software and Services Software.
1.4. Furthermore, by signing this Agreement, VAR accepts that the
Software and Services Software meets the functional
specification(s).
B. SERVICES:
Speech-to-text transcription services employing telephony speech recognition
technology for use in the healthcare industry, which is designed to enable
VAR and VAR's End Users to increase productivity of their labor forces and
reduce costs. This service is capable of receiving audio files and
processing these into draft documents. Audio files will typically be
captured via a digital recording source of agreed quality and sent for
processing via e-mail.
VAR's End User must have a method of displaying draft text on a computer
screen and playing back the source audio which relates to this draft text.
VAR shall provide the Transcription Correctionist Software to the End User
which the End User will use to view composite audio/text documents which
display text in a cursor-synchronized fashion. L&H has provided VAR with a
Gold Master CD-ROM that contains this software, which VAR can copy and
provide to its customers as needed.
To provide the Services, approximately twenty (20) reports and the related
way files are processed at no additional cost for each speaker, which are
secured from the individual or institution by VAR. From the reports and the
related language models, voice profiles are created for the individual
users. Once the profile is created, a transcription is created from the
profile each time the person dictates to an acceptable device. Acceptable
devices include a telephone, Dictaphone or Lanier digital recording system,
certain handheld digital recordings, etc. The Services take the doctor's
recorded audio as its input and deliver a composite audio-text draft as its
output. The value proposition to the End User is that it should be able to
derive a 2-3x productivity gain.
- - --------------------------------------------------------------------------------
AVRI/Lernout & Hauspie Speech Page 10 09/30/98
Products, NV
VAR AGREEMENT (04) (09/19/98)
<PAGE>
FINAL CONFIDENTIAL
ADDENDUM B
VAR PRODUCT & SERVICE LANGUAGE MODELS
A. VAR PRODUCT
The Software will be incorporated into the following application(s):
VOICECOMMANDER(TM) 99: An integrated medical transcription suite which uses
continuous speech for data entry of patient encounters. This continuous
speech dictation product is targeted towards the medical transcription
market.
VOICECOMMANDER(TM) DIGITAL RECORDER OR PDA: AVRI will bundle a handheld
digital recorder with the Software to develop a product that will be
marketed to the healthcare industry.
B. SERVICE LANGUAGE MODELS
Language models will promptly be developed using VAR's data, during the
provision of the Services. VAR may use such language models as it further
uses the Services, subject to L&H's approval, which approval shall not be
unreasonably withheld. Each specialty language model must be submitted to
L&H for approval prior to use, as set forth in Section 2.3. of this
Agreement. Upon acceptance of the language model by L&H, VAR shall be
authorized to provide the Services with the approved language model.
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Products, NV
VAR AGREEMENT (D4) (09/19/98)
<PAGE>
FINAL CONFIDENTIAL
ADDENDUM C
ROYALTIES, SERVICE FEES
SUPPORT AND TRAINING
1. QUANTITY AND PAYMENT COMMITMENTS
A) VAR hereby commits to a non-refundable pre-payment in amount of $300,000
US Dollars ($300,000 USD).
B) VAR will therefore pay to L&H the above-described payment, in full, on or
before December 15, 1998. This non-refundable pre-payment will be
credited against Software royalty payments and Service Fees as described
in this Agreement.
2. ROYALTIES
A) The pricing for the Software and the royalties shall be as follows:
<TABLE>
<CAPTION>
SOFTWARE SRP VAR VAR PRICE
DISCOUNT* (ROYALTY)
- - ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
L&H Voice Xpress for Medicine - General Medicine $499 50% $249.50
- - ---------------------------------------------------------------------------------------
L&H Voice Xpress for Medicine - Emergency Medicine $1,499 50% $749.50
- - ---------------------------------------------------------------------------------------
L&H Voice Xpress for Medicine - Mental Health $1,499 50% $749.50
- - ---------------------------------------------------------------------------------------
L&H Voice Xpress for Medicine - Pathology $1,499 50% $749.50
- - ---------------------------------------------------------------------------------------
L&H Voice Xpress for Medicine - Primary Care $1,499 50% $749.50
- - ---------------------------------------------------------------------------------------
L&H Voice Xpress for Medicine - Radiology $1,499 50% $749.50
- - ---------------------------------------------------------------------------------------
</TABLE>
* In consideration for the non-refundable pre-payment on royalties as
described in Section 1 above, VAR shall be entitled to receive a VAR
discount as defined here.
The parties agree to review the royalty pricing as set forth above at the
moment that the VAR Product is commercially available and make
adjustments if mutually deemed appropriate.
B) The number of royalty-bearing copies shall be calculated as follows:
I) FOR SOFTWARE (EXCLUDING L&H VOICE XPRESS FOR MEDICINE(TM) GENERAL
MEDICINE EDITION) INCORPORATED INTO THE VAR PRODUCT: The number of
royalty-bearing copies equals the number of VAR Products that are
sold by VAR, multiplied by the number of copies of Software
integrated into the VAR Product multiplied with the number of voice
profiles licensed for each copy of the Software.
II) FOR THE L&H VOICE XPRESS FOR MEDICINE(TM) GENERAL MEDICINE EDITION
SOFTWARE: The number of royalty-bearing copies equals the number of
VAR Products that are sold by VAR, multiplied by the number of
workstations on which the VAR Product incorporating the Software
shall run. A workstation may have up to six (6) users.
III) FOR SOFTWARE (EXCLUDING L&H VOICE XPRESS FOR MEDICINE(TM) GENERAL
MEDICINE EDITION) SOLD IN STANDALONE FORM: The number of royalty-
bearing copies shall equal the number of copies of the Software
sold, multiplied by the number of voice profiles licensed for each
copy.
- - --------------------------------------------------------------------------------
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VAR AGREEMENT (04) (09/19/98)
<PAGE>
FINAL CONFIDENTIAL
IV) FOR SOFTWARE SOLD IN STANDALONE FORM: The number of royalty-bearing
copies shall equal the number of copies of the Software sold. Each
workstation shall have one (1) copy of the Software installed, with
a maximum of six (6) users.
C) Royalties due shall be paid on a quarterly basis. VAR will provide L&H
with calendar quarterly reports showing the number of sites where the VAR
Product incorporating the Software were installed during that quarter,
the number of workstations and/or users at each site, as appropriate, and
the gross revenues associated with each such site installation,
commencing three (3) months after the Effective Date of this Agreement.
These quarterly reports shall be provided to L&H within ten (10) days
after each quarter. VAR shall, at the same time, transfer the amount of
royalties due to L&H for all such royalties due, or if VAR's non-
refundable pre-payment has not yet been exhausted, credit the amount of
royalties due.
D) VAR shall keep a separate register in which it shall record the exact
number of installed sites and the gross revenues from each installed
site, and any other information relevant for determining the amount of
royalties payable.
L&H shall have the right to conduct an audit of VAR's records relative to
the performance of this Agreement, no more than once yearly. Such audit
shall be conducted by a mutually acceptable auditing firm, independent of
the parties. VAR's approval of the time and place for the audit requested
by L&H shall not be unreasonably withheld.
Any audit shall be performed during normal business hours. In the event
that such audit reveals an underpayment to L&H, VAR shall pay L&H such
underpayment within thirty (30) days, as well as the audit costs. Those
audit costs shall only be paid by VAR if the underpayment is greater than
five percent (5%) for the applicable quarter(s).
3. SERVICE FEES
A) Service Fees due to L&H shall be calculated on the basis of accuracy and
the savings derived from the use of the Services, as set forth below. For
the purposes of this Agreement, the parties agree that the fully-weighted
cost of transcription services is nine cents ($0.09) per line. The
parties shall split the assumed cost savings 50/50, as outlined below.
i) First six (6) months of this Agreement:
ACCURACY % COST SERVICE FEE
LEVEL SAVINGS SAVINGS DUE TO L&H
---------------------------------------------------------------
**85%* 0% n/a n/a
---------------------------------------------------------------
85% - 89% 40% $0.036 $ 0.018
---------------------------------------------------------------
90% - 94% 50% $0.045 $0.0225
---------------------------------------------------------------
95% + 60% $0.054 $ 0.027
---------------------------------------------------------------
** Less than
ii) After the first six (6) months of this Agreement, the parties hereto
shall review the results of the first six months and if the
assumptions on cost and cost savings hold true, the pricing beyond the
first six months shall be as set forth in the following grid. If the
assumptions were incorrect, the parties shall negotiate in good faith
to determine the pricing changes that will be necessary.
- - --------------------------------------------------------------------------------
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VAR AGREEMENT (04) (09/19/98)
<PAGE>
FINAL CONFIDENTIAL
ACCURACY % COST SERVICE FEE
LEVEL SAVINGS SAVINGS DUE TO L&H
--------------------------------------------------------------
**85%* 0% n/a n/a
---------------------------------------------------------------
85% - 89% 50% $ 0.045 $0.0225
---------------------------------------------------------------
90% - 94% 60% $ 0.054 $ 0.027
---------------------------------------------------------------
95% + 65% $0.0585 $0.02925
---------------------------------------------------------------
* If the accuracy is below 85%, VAR shall not use the Services, unless
otherwise agreed upon in writing by the parties.
** Less than
The parties agree to review equivalent pricing methods on a case-by-case
basis. If different pricing models are agreed upon, such shall be set
forth in writing and signed by both parties.
B) ACCURACY: For the purposes of this Agreement, "accuracy" shall mean the
number of words in a transcribed line which are accurately transcribed
relative to the original dictation, divided by the total number of words
in that line and multiplied by one hundred (100). For the avoidance of
doubt, if End Users fail to dictate punctuation, such punctuation will
not appear in resulting transcripts. Similarly, if End Users mistakenly
dictate words which are not intended to be in the eventual report
(stammers, corrections, etc.), and if these words appear in the resulting
documents, they will not be counted as errors.
C) LINES AND CHARACTERS: For the purposes of this Agreement, a "line" shall
be defined as a sixty-five (65) character line of text generated by an
End User. In the case of a partial line that is more than 32 characters
long, the full line shall be charged for. For the purposes of this
Agreement, a "character" shall mean any printed character, symbol,
keystroke, carriage return, or any of the foregoing generated by voice
commands.
4. MOST FAVORED NATIONS PRICING
In the event that L&H provides royalty pricing in a VAR agreement with terms
and conditions substantially similar to this Agreement to any other person
or party more favorable than these provided to VAR hereabove, VAR's royalty
pricing shall be automatically amended and revised without further action of
the parties, commensurate with such royalty pricing, so long as VAR is in
compliance with the terms and conditions of this Agreement.
5. MAINTENANCE
A) Maintenance will be available to VAR during the term of this agreement,
at a cost to VAR of ten percent (10%) of the royalties due to L&H per
quarter, with a minimum quarterly maintenance fee of Three Thousand Five
Hundred US Dollars ($3,500 USD). Maintenance for the first year of this
Agreement, for a total of Fourteen Thousand US Dollars ($14,000 USD), may
be credited against the non-refundable pre-payment to which VAR has
committed hereabove. Maintenance shall consist of the following services:
I) TELEPHONE SUPPORT
L&H shall provide telephone consulting services to VAR's designated
personnel to assist such personnel in resolving problems, obtaining
clarification relative to the Software and Documentation and
providing assistance regarding suspected defects or errors in the
Software or Documentation. Said services shall be provided during
normal business hours (Eastern Time), Mondays through Fridays
(excluding US legal holidays) and L&H shall furnish the names,
telephone and fax numbers of its personnel, as well as a list of the
current holidays.
II) WRITTEN SUPPORT
L&H agrees to diligently work for the resolution of defects and
errors in the Software and/or Documentation.
- - --------------------------------------------------------------------------------
AVRI/Lernout & Hauspie Speech Page 14 09/30/98
Products, NV
VAR AGREEMENT (04) (09/19/98)
<PAGE>
III) UPDATES
For the purposes of this Agreement, "Updates" shall mean corrections and
bug fixes made to the Software, Documentation, Services Software and
Services. L&H shall keep VAR advised of the status of all Updates made
by L&H or L&H's licensor for the Software and Documentation, and Updates
to the Services Software and Services during the term of this Agreement.
At the request of VAR, L&H shall provide one (1) copy of the current
release of the Software incorporating such Updates.
IV) ACCESS TO SENIOR DEVELOPER
L&H shall provide VAR with access to a senior developer who will be
VAR's main point of contact for support. L&H will identify this person
within sixty (60) days after the Effective Date of this Agreement and
shall provide VAR with such person's contact information at that time.
V) TOOLS
VAR has expressed an interest in the following L&H tools which may be of
use to VAR in porting their product to the L&H Software, which shall be
provided to VAR upon request, provided that VAR is current on
maintenance payments:
. Voice recognition tool-sets that allow the creation of applications
. Voice authentication and verification tool-set
. Speech-to-text tool-set
. Context creation tool-set
. Vocabulary creation tool-set
. Audio compression and expansion tool-set
B) EXCEPTIONS TO MAINTENANCE PROGRAM
The following items are expressly excluded from the maintenance program and
shall, as such, be invoiced at the then-current engineering fees:
i) Maintenance of software not delivered by L&H;
ii) Repairs caused by other causes than normal use or repairs caused by
force majeure (such as, but not limited to, fire, flood, failure of
electric power or air conditioning);
iii) Repairs required by the fact that maintenance has been performed by a
third party, not authorized by L&H.
iv) ON-SITE IMPLEMENTATION AND INTERCONNECT SUPPORT: VAR shall be
responsible for the interconnect and implementation of its customers'
systems. In the event that VAR requires L&H's assistance with the
interconnect or implementation of a customer's system, L&H will
provide on-site support at a rate of One Thousand US Dollars ($1,000
USD) per day, plus reasonable travel and lodging expenses.
6. UPGRADES AND ADDITIONAL LANGUAGE VERSIONS
For the purposes of this Agreement, "Upgrades" shall be defined as any
modification(s) or enhancement(s) to the Development Software which provide
new feature(s) or function(s). VAR and L&H agree to negotiate in good faith
to determine the applicable pricing and other relevant terms for Upgrades.
Provided that VAR has met all its obligations under this Agreement at the
moment the Upgrade becomes commercially available, VAR shall be entitled to
favored pricing for such upgrade.
In the event that L&H makes commercially available additional language
versions of the Software, the parties agree to negotiate in good faith to
determine the applicable pricing and other relevant terms for such additional
language versions.
- - --------------------------------------------------------------------------------
AVR/Lernout & Hauspie Speech Page 15 09/30/98
Products, NV
VAR AGREEMENT (04) (09/10/98)
<PAGE>
7. TRANING
L&H requires VAR to attend, at VAR's expense, periodic training sessions, at
least one per year, designed to introduce the proper techniques and
information to properly license the Software. Cost of the training sessions
is $1,250 per day, and said sessions may be two or three days long and may be
conducted two or three times per year. In consideration to the non-refundable
pre-payment on royalties to which VAR has committed hereabove, L&H shall
provide VAR with one (1) week of training at no cost. Such training shall be
conducted at L&H's facilities in Burlington, Massachusetts and VAR shall
cover its travel costs associated with attending such training. VAR may
attend such training with up to six (6) employees.
8. OTHER FEES
Any support or training provided by L&H under this Agreement, except as
otherwise provided for herein, will be invoiced at the end of each month in
which said services are provided. Unless othewise provided in writing, all
invoices are payable within thirty (30) days after invoice date.
9. LATE PAYMENTS
Failing payment on time as mentioned here above, VAR shall be deemed to be in
default, such without any notice or injunction being required. In such case,
VAR shall be liable for interest at the rate of twelve percent (12%) per
annum of the total amount due.
10. VALIDITY
If this Agreement is not signed on or before September 30, 1998, the pricing
in this offer is subject to change.
- - --------------------------------------------------------------------------------
AVR/Lernout & Hauspie Speech Page 16 09/30/98
Products, NV
VAR AGREEMENT (04) (09/10/98)
<TABLE> <S> <C>
<PAGE>
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<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 1,396,301 0
<SECURITIES> 133,924 0
<RECEIVABLES> 173,213 0
<ALLOWANCES> (68,500) 0
<INVENTORY> 73,078 0
<CURRENT-ASSETS> 1,847,910 0
<PP&E> 532,287 0
<DEPRECIATION> (122,755) 0
<TOTAL-ASSETS> 3,002,828 0
<CURRENT-LIABILITIES> 406,484 0
<BONDS> 0 0
0 0
54,658 0
<COMMON> 14,454 0
<OTHER-SE> 2,491,745 0
<TOTAL-LIABILITY-AND-EQUITY> 3,002,828 0
<SALES> 475,303 785,327
<TOTAL-REVENUES> 536,708 799,988
<CGS> 257,718 431,514
<TOTAL-COSTS> 5,039,052 2,692,467
<OTHER-EXPENSES> 500,000 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 79,860 409,012
<INCOME-PRETAX> (5,339,922) (2,733,005)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,339,922) (2,733,005)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
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<NET-INCOME> (5,339,922) (2,733,005)
<EPS-PRIMARY> (.43) (.25)
<EPS-DILUTED> (.43) (.25)
</TABLE>
