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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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's telephone number, including area code)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the 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 July 30, 1999: 16,555,340
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES [_] NO [X]
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APPLIED VOICE RECOGNITION, INC.
DBA e-DOCS.net
TABLE OF CONTENTS
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 1999................ 4
Consolidated Statements of Operations for the three and six
months ended June 30, 1999 and 1998........................ 5
Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 1998........................ 6
Notes to Unaudited Consolidated Financial Statements......... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................ 17
Item 2. Changes in Securities........................................ 17
Item 5. Other Information............................................ 18
Item 6. Exhibits and Reports on Form 8-K............................. 18
Signatures............................................................. 19
2
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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 AS TO
ESTIMATES, EXPECTATIONS, BELIEFS, PLANS, AND OBJECTIVES CONCERNING THE COMPANY'S
FUTURE FINANCIAL AND OPERATING PERFORMANCE, AND AS INCLUDED IN "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. THE FORWARD
LOOKING STATEMENTS ARE SUBJECT TO ASSUMPTIONS AND BELIEFS BASED ON CURRENT
INFORMATION KNOWN TO THE COMPANY AND FACTORS THAT ARE SUBJECT TO UNCERTAINTIES,
RISK AND OTHER INFLUENCES, WHICH ARE OUTSIDE THE COMPANY'S CONTROL, AND COULD
YIELD RESULTS DIFFERING MATERIALLY FROM THOSE ANTICIPATED. THE ABILITY TO
ACHIEVE THE COMPANY'S EXPECTATIONS IS CONTINGENT UPON A NUMBER OF FACTORS WHICH
INCLUDE (I) THE COMPANY'S ABILITY TO PRODUCE AND MARKET ITS PRODUCTS IN THE
HEALTHCARE TRANSCRIPTION INDUSTRY, (II) EFFECT OF ANY CURRENT OR FUTURE
COMPETITIVE PRODUCTS, (III) ONGOING COST OF RESEARCH AND DEVELOPMENT ACTIVITIES,
(IV) THE RETENTION OF KEY PERSONNEL, AND (V) AVAILABILITY OF SUFFICIENT CAPITAL
AND CAPITAL MARKET CONDITIONS. "E-DOCS.NET(TM)" AND "VOICECOMMANDER(TM)" ARE OUR
TRADEMARKS. THIS REPORT MAY CONTAIN TRADEMARKS AND SERVICE MARKS OF OTHER
COMPANIES.
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ITEM 1. FINANCIAL STATEMENTS
APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................. $ 1,377,913 $ 357,984
Accounts receivable, net ................................... 213,305 1,143,159
Other receivable ........................................... 1,000,000 --
Other current assets ....................................... 337,718 149,474
------------ ------------
TOTAL CURRENT ASSETS ..................................... 2,928,936 1,650,617
Prepaid licenses ............................................... 1,000,000 1,300,000
Property and equipment, net .................................... 697,298 1,054,703
Goodwill, net .................................................. 657,888 1,500,401
Intangible and other assets .................................... 1,010,408 1,793,376
------------ ------------
TOTAL ASSETS ............................................. $ 6,294,530 $ 7,299,097
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade payables and accruals ................................ $ 1,293,778 $ 1,773,042
Notes payable .............................................. 335,333 1,500,000
Current portion of long-term debt .......................... 350,919 261,884
------------ ------------
TOTAL CURRENT LIABILITIES ................................ 1,980,030 3,534,926
Preferred stock obligations .................................... 708,827 1,722,924
Obligations payable in common stock ............................ 170,036 369,453
Long-term debt, net of current portion ......................... 98,666 448,265
------------ ------------
TOTAL LIABILITIES ........................................ 2,957,559 6,075,568
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 2,000,000 shares authorized
Series A - 186,000 shares issued and outstanding ......... 1,488,000 1,488,000
Series B - 2,285 and 1,817 shares issued and outstanding . 2,507,439 1,993,881
Series C - 153,538 shares issued and outstanding ......... 1,129,107 1,129,107
Series D - 3,000 and 5,000 shares issued and outstanding . 2,215,000 3,940,000
Common stock, $.001 par, 50,000,000 shares authorized,
16,040,994 and 16,555,340 issued and oustanding .......... 160,040 16,555
Additional paid in capital ................................. 8,591,424 9,347,659
Warrants ................................................... 2,241,483 2,520,984
Accumulated deficit ........................................ (14,851,522) (19,212,657)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ............................... 3,336,971 1,223,529
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............... $ 6,294,530 $ 7,299,097
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</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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APPLIED VOICE RECOGNITIONS, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE:
Medical Transcription .................... $ 103,273 $ 1,131,741 $ 120,661 $ 1,880,910
Consulting, hardware, software and related 96,199 -- 254,498 469,949
------------ ------------ ------------ ------------
TOTAL REVENUE .......................... 199,472 1,131,741 375,159 2,350,859
COST OF SALES:
Medical Transcription .................... 63,267 795,170 70,389 1,295,915
Consulting, hardware, software and
related ................................ 29,088 -- 115,347 52,567
------------ ------------ ------------ ------------
GROSS MARGIN ........................... 107,117 336,571 189,423 1,002,377
OPERATING EXPENSES:
Marketing and sales ...................... 471,674 179,750 751,439 349,042
General and administrative ............... 1,178,632 2,414,192 2,364,535 3,939,519
Research and development ................. 39,874 232,624 220,649 495,865
------------ ------------ ------------ ------------
OPERATING LOSS ......................... (1,583,063) (2,489,995) (3,147,200) (3,782,049)
OTHER INCOME (EXPENSE):
Interest income .......................... 13,080 8,873 22,695 20,834
Interest expense ......................... (37,239) (243,023) (78,012) (289,856)
Other, net ............................... -- (66,002) -- (58,399)
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) ........... (24,159) (300,152) (55,317) (327,421)
------------ ------------ ------------ ------------
NET LOSS ..................................... $ (1,607,222) $ (2,790,147) $ (3,202,517) $ (4,109,470)
============ ============ ============ ============
PREFERRED STOCK DIVIDENDS .................... 45,561 160,549 45,561 251,665
------------ ------------ ------------ ------------
NET LOSS TO COMMON STOCKHOLDERS .............. $ (1,652,783) $ (2,950,696) $ (3,248,078) $ (4,361,135)
============ ============ ============ ============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (.12) $ (.18) $ (.25) $ (.27)
============ ============ ============ ============
SHARES USED IN COMPUTING NET LOSS PER
COMMON SHARE - BASIC AND DILUTED ........... 13,149,384 16,121,247 13,149,384 16,077,881
============ ============ ============ ============
STATEMENT OF COMPREHENSIVE LOSS:
Net loss ................................. $ (1,607,222) $ (2,790,147) $ (3,202,517) $ (4,109,470)
Unrealized holding gain (loss) ........... 64,079 -- (248,567) --
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS ........................... $ (1,543,143) $ (2,790,147) $ (3,451,084) $ (4,109,470)
============ ============ ============ ============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1998 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................ $(3,202,517) $(4,109,470)
Adjustments to reconcile net income to cash used in operating activities:
Depreciation and amortization ......................................... 70,998 285,661
Stock issued for services ............................................. 34,001 5,529
Stock issued as compensation .......................................... 318,620 32,916
Stock options and warrants issued for services ........................ 196,000 --
Accretion of preferred stock obligations and warrant amortization ..... -- 207,077
Changes in operating assets and liabilities:
Accounts receivable ................................................... 466,842 (760,142)
Accounts payable and accruals ......................................... (608,785) 332,371
Other, net ............................................................ (172,148) 192,763
----------- -----------
Net cash used by operating activities ............................... (2,896,989) (3,813,295)
CASH FLOW FROM INVESTING ACTIVITIES:
Cash paid for acquisitions .............................................. -- (736,857)
Purchase of equipment ................................................... (102,919) (321,533)
Capitalized research and development costs .............................. (143,074) --
----------- -----------
Net cash used by investing activities ............................... (245,993) (1,058,390)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock and warrants .................. 3,000,000 2,700,000
Proceeds from issuance of debt and warrants ............................. -- 1,742,529
Proceeds from the exercise of common stock options and warrants ......... 90,308 10,000
Debt repayments ......................................................... (133,434) (600,773)
----------- -----------
Net cash provided by financing activities ........................... 2,956,874 3,851,756
NET DECREASE IN CASH ........................................................ (186,108) (1,019,929)
CASH AND CASH EQUIVALENTS:
Beginning of period ..................................................... 1,207,235 1,377,913
----------- -----------
End of period ........................................................... $ 1,021,127 $ 357,984
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</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Applied Voice
Recognition, Inc., a Delaware corporation (the "Company"), have been prepared in
accordance with generally accepted accounting principles and the rules of the
Securities and Exchange Commission (the "SEC"), and should be read in
conjunction with the audited financial statements and notes thereto contained in
the Company's latest Annual Report filed with the SEC on Form 10-KSB. All
significant intercompany accounts and transactions have been eliminated. 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,
1998, as reported in the Form 10-KSB, have been omitted.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. For the year ended December
31, 1998, the Company incurred a net loss of approximately $8.3 million and had
negative cash flow from operations of approximately $6.0 million, and for the
six months ended June 30, 1999 the Company incurred a net loss of $4.1 million
and negative cash flow from operations of approximately $3.8 million. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The Company is currently pursuing additional financing, although
there can be no assurance that the Company will be successful in its financing
efforts or that such financing will be on terms favorable to the Company. The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
Certain reclassifications have been made to prior year balances in order to be
consistent with current year presentation.
2. ACQUISITIONS
The following acquisitions, all of which have been accounted for using the
purchase method of accounting, have been included in the consolidated financial
statements since the date of acquisition. The pro forma effects of these
acquisitions, individually or in the aggregate, are not material to the
Company's financial condition or the results of operations.
A WORD ABOVE. In May 1999, the Company acquired A Word Above, Inc., a medical
transcription services company operating in the greater Houston, Texas
metropolitan area since January 1988. Total consideration consisted of $300,000
in cash and a $700,000 Series 2 Preferred Stock Obligation (see description
below), payable in three annual installments.
PRN TRANSCRIPTION. In February 1999, the Company purchased the assets of PRN
Transcription, Inc., ("PRN") a medical transcription services company operating
in eastern Texas since 1988. Total consideration consisted of $200,000 in cash,
a $377,000 Series 2 Preferred Stock Obligation (see description below), payable
in three annual installments and a contingent $174,000 Series 2 Preferred Stock
Obligation. The contingent Series 2 Preferred Stock Obligation is payable upon
PRN achieving certain revenue targets, as defined.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AM TRANSCRIPTION. In February 1999, the Company purchased the assets of AM
Transcription, Inc., a medical transcription services provider operating in the
greater Dallas, Texas metropolitan area since 1990. Total consideration
consisted of $200,000 in cash, assumption of approximately $56,000 of capital
lease obligations and a $194,000 Series 2 Preferred Stock Obligation (see
description below), payable in three annual installments.
REYNA TRANSCRIPTION. In February 1999, the Company purchased the assets of Reyna
Transcriptions, Inc., a medical transcription services company operating in the
greater Houston, Texas metropolitan area since 1989. Total consideration
consisted of $75,000 in cash and a $175,000 promissory note, and assumption of
approximately $8,000 of capital lease obligations. The promissory note bears
interest at 8% and is payable in three annual installments of principal and
interest.
The Series 2 Preferred Stock Obligations require the Company to issue preferred
stock ("Preferred Stock") in three annual installments from the anniversary date
of the acquisition. The Preferred Stock will have a liquidation preference and
stated value of $100 per share and carries an 8% cumulative dividend payable in
cash or in additional shares of Preferred Stock at the Company's option.
Dividends are payable quarterly and in arrears on the first day of each January,
April, July and October commencing on January 1, 2000. Each share of the
Preferred Stock when issued will be convertible, at any time, into a number of
shares of common stock equal to (i) $100 per share of Preferred Stock being
converted, plus any earned, but unpaid dividends, if any, divided by (ii) the
greater of $1.00 per share or the average daily closing price of the Company's
Common Stock for the thirty day period immediately preceding the effective date
of any such conversion on the Over-The-Counter Bulletin Board. The Series 2
Preferred Stock Obligations have been recorded at their present value for
purposes of purchase accounting.
The Company has agreed to register such shares of common stock issued upon
conversion of the Preferred Stock for resale under the Securities Act of 1933,
as amended, at the expense of the Company. These shares of Preferred Stock are
subject to automatic conversion if the Company undertakes an underwritten public
offering with an aggregate market value of $10,000,000 or more. Any shares of
the Preferred Stock may be redeemed, at the Company's option, after the third
anniversary of the date of their issuance, at a redemption price of $100 per
share plus any accrued but unpaid dividends. Except as otherwise required by the
Delaware General Corporate Law, the holders of the Preferred Stock shall have no
voting rights.
3. SERIES D PREFERRED STOCK AND WARRANTS
On December 31, 1998, the company entered into a Series D Preferred Stock and
Warrant Purchase Agreement (the "Series D Agreement") to sell up to 5,000 shares
of Series D Convertible Preferred Stock. These shares have a par value of $.10
and were priced at $1,000 per share and were sold to L&H Investment Co., N.V.,
(the "Stockholder"). The Series D Agreement was structured into three closings
of 2,000 shares, 1,000 shares, and 2,000 shares respectively. Each closing was
subject to the Company meeting certain financial and/or operational targets. In
connection with each closing, the Company issued warrants, expiring December 31,
2003, to purchase 1,500,000, 500,000 and 500,000 shares, respectively, at an
exercise price of $1.25 per share. Pursuant to the Series D Agreement, two
representatives of the Stockholder were appointed to the Company's board of
directors.
As of December 31, 1998, the Company had achieved the first and second targets
and received the funding for the first target. The funding for the second target
was received in January 1999. The Company achieved the third target and received
the related funding for the third closing in March 1999. The Series D
Convertible Preferred Stock and warrants have been recorded at their respective
fair values.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In addition to the Series D Agreement, the Company entered into a convertible
promissory note and warrant purchase agreement, dated May 24, 1999, with the
Stockholder and a value-added resellers agreement with Lernout & Hauspie Speech
Products N.V., an affiliate of the Stockholder, dated September 30, 1998
(amended December 27, 1998); see discussion of the convertible promissory note
and warrant agreement in Note 4., and the value added resellers agreement in
Note 8.
4. CONVERTIBLE PROMISSORY NOTE AND WARRANT
The Company received aggregate proceeds of $1,500,000 from a convertible
promissory note (the "Promissory Note") and a warrant (the "Warrant") which were
issued pursuant to the Convertible Promissory Note and Warrant Purchase
Agreement (the "Purchase Agreement"), dated May 24, 1999, with the Stockholder.
The Promissory Note bears interest at 9% and matures the earlier of November 24,
1999, a purchase of a majority of the stock of the Company or a sale of
substantially all of the Company's assets. The Promissory Note and accrued
interest automatically convert upon the completion of the Next Qualified Equity
Financing ("Equity Financing"), as defined, into the same class and series, and
have the same rights and limitations including, but not limited to anti-dilution
protection and registration rights, as the Company's stock, which is the subject
of the Equity Financing ("Next Stock"). The conversion price is the lower of the
per share purchase price of Next Stock and $1.00; the conversion feature expires
November 24, 1999.
Pursuant to the Purchase Agreement, the Company will issue the Warrant to the
Stockholder at an initial exercise price of $1.25 per share of common stock,
subject to anti-dilution protection as defined, expiring May 31, 2002. The
Warrant may be exercised for the number of shares of common stock equal to the
coverage ratio ("Coverage Ratio") times the principal amount of the Promissory
Note divided by the per share value of the Company's common stock sold in the
Equity Financing. The Coverage Ratio shall be 20% if the Equity Financing has
occurred on or before July 24, 1999 and increases by 10% per month until the
Company completes the Equity Financing or the Coverage Ratio reaches 60% (after
October 24, 1999). The fair value of the Warrant is being expensed as a finance
charge in accordance with the monthly increase in the Coverage Ratio. During the
three months ended June 30, 1999, the Company recognized $147,000 of finance
charges related to the Warrant.
5. SALES AND LEASE BACK
On March 22, 1999, the Company completed a sale and lease back agreement (the
"Agreement") with Commercial Money Center. In accordance with the Agreement, the
Company sold computer equipment, software, office equipment and furniture, with
an aggregate net book value of $202,270, for $240,000. The company recorded
$37,730 of unearned profit on the sale and will amortize this into other income
over three years.
6. STOCKHOLDERS' EQUITY
During the six months ended June 30, 1999, pursuant to the terms of the Series B
Preferred Stock, 468 shares of Series B Preferred stock were exchanged for
425,733 shares of common stock.
During the six months ended June 30, 1999, warrants to purchase 400,000 shares
of common stock expired. The warrants had an original fair value of $143,000,
which was reclassified from warrants to additional paid-in capital.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. EARNINGS PER SHARE
Basic earnings per common share is based on the weighted average number of
common shares outstanding during the period, while diluted earnings per common
share considers all potentially dilutive securities that were outstanding during
the period. The Company has potentially dilutive securities outstanding
including stock options, warrants, convertible debt and convertible preferred
stock. Both basic and diluted earnings per common share are the same for each of
the periods presented as inclusion of such potentially dilutive securities was
antidilutive.
8. COMMITMENTS AND CONTINGENCIES
LITIGATION
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. On June 17, 1999, the Company
and Nevada Gold entered into a compromise settlement agreement, pursuant to
which the Company paid Nevada Gold $10,000 and agreed to pay an additional
obligation of $60,192. The additional obligation to Nevada Gold bears interest
at 12% per annum and is payable in quarterly installments of principal and
interest of $11,065 through December 15, 2000.
On August 2, 1999, the Company, pursuant to the First Amendment to Employment
Agreement by Timothy J. Connolly and the Company, assumed the responsibility for
the defense and resolution of and agreed to indemnify the employee for any loss,
damages, claims or expenses in connection with the pending litigation styled
"RANDALL B. MCDONALD, JR. AND RANDALL B. MCDONALD LIFE INSURANCE TRUST II VS.
TIMOTHY J. CONNOLLY, ET AL. CASE NO. 1999-09379, DISTRICT COURT OF HARRIS
COUNTY, 113TH JUDICIAL DISTRICT." The plaintiff is alleging improper dilution to
their ownership, which originated from the plaintiff's debt and equity
participation in Applied Voice Recognition, L.P., predecessor entity to Applied
Voice Recognition, Inc., as a limited partner. The Company intends to contest
the case vigorously. Other than exchanging basic information relating to the
contentions of the parties, the parties have not yet commenced formal discovery
in the litigation. Therefore, it is not possible at this time to determine what
the ultimate resolution of the matter will be or what portion of a settlement,
if one is reached at any point in the litigation, will be contributed by the
Company.
The Company is subject to claims and litigation in the ordinary course of
business. Management does not believe that such claims and litigation,
individually or in the aggregate, will result in a material adverse impact to
the Company's results of operations or financial position.
PURCHASE COMMITMENTS
On July 12, 1999, the Company has entered into remarketer/integrator agreement
with an equipment manufacturer, which provides the Company equipment at prices
discounted from the retail list price, provided that the Company meets certain
volume purchase requirements. The term of the agreement is for one year, with
automatic renewals for successive one year terms. The agreement may be
terminated
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
by either party upon 30 days written notice after the completion of the initial
term and be terminated by the equipment manufacturer upon any material breach,
as defined, or failure to pay, or upon the equipment manufacturer's good faith
belief that the exporting of products is in violation of applicable export laws.
CONSULTING AGREEMENTS WITH BOARD MEMBER
The Company, on June 19, 1999, entered into a consulting agreement with an
individual who is a member of the Company's board of directors (the "Board
Member") for business advisory services. Pursuant to the agreement, the Company
will pay the Board Member an hourly rate and 1,500 options per day. The Company
anticipates that this obligation will not exceed $15,000 and 15,000 options. The
options will have an exercise price of $1.125 (the closing price of the
Company's stock on the date the agreement was entered into).
VALUE-ADDED RESELLERS AGREEMENT WITH AN AFFILIATE OF THE STOCKHOLDER
On September 30, 1998 (amended December 27, 1998), the Company entered into a
value added reseller agreement ("VAR Agreement") with Lernout & Hauspie Speech
Products, N.V., an affiliate of the Stockholder (the "Affiliate") for the use of
the Affiliate's speech dictation software (the "Affiliate Software") which is to
be integrated with the Company's VoiceCOMMANDER 99 speech recognition software
in order to provide medical transcriptions services at a lower cost than
traditional transcription technologies. Under the terms of the VAR Agreement,
the Company will pay the Affiliate a service fee equal to 50 percent of the cost
savings achieved through the use of the VoiceCOMMANDER 99 product, when it
includes the Affiliate Software. Pursuant to the September 30, 1998 agreement
and the December 27, 1998 amendment, the Company made nonrefundable prepayments
of service fees totaling $1,300,000. The initial term of the VAR Agreement is
until December 31, 1999 and is automatically renewable for one year periods. The
Company or the Affiliate may terminate the VAR Agreement at any time, without
cause, after the initial term by giving 90 days written notice. The value of the
prepayments is dependent upon the (i) successful integration of the Affiliate
Software with VoiceCOMMANDER 99, (ii) customer acceptance of VoiceCOMMANDER 99
as a dictation platform (iii) generating sufficient revenue utilizing
VoiceCOMMANDER 99, and obtaining the related cost savings, and (iv) the
continuation of the VAR Agreement. There can be no assurance that such items
will take place.
9. SUBSEQUENT EVENT
On July 20, 1999, the Company borrowed a total of $750,000 pursuant to
convertible promissory note and warrant purchase agreements with companies
affiliated with two board members. The promissory notes bear interest at 9% and
mature the earlier of November 24, 1999, a purchase of a majority of the stock
of the Company or a sale of substantially all of the Company's assets. The
promissory notes automatically convert upon the completion of the next qualified
equity financing, as defined, into the same class and series, and have the same
rights and limitations including, but not limited to anti-dilution protection
and registration rights, as the Company's stock, which is the subject of the
next qualified equity financing. The conversion price is the lower of the per
share purchase price of the Company's stock in the next qualified equity
financing and $1.00.
In connection with the promissory notes, the Company will issue certain
companies affiliated with the board members warrants, at an initial exercise
price of $1.25 per share of common stock, subject to anti-dilution protection as
defined, expiring July 31, 2002. The Warrant may be exercised for the number of
shares of common stock equal to the coverage ratio ("Coverage Ratio") times the
principal amount of the
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APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
DBA e-DOCS.net
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
promissory note divided by the per share value of the Company's common stock
sold in the next qualified equity offering. The Coverage Ratio shall be 15% if
the next qualified equity financing has occurred on or before August 20, 1999,
20% if the next qualified equity financing occurs after August 20, 1999, but on
or before September 20, 1999, and increases by 10% per month until the Company
completes the next qualified financing or the Coverage Ratio reaches 50% (after
November 24, 1999).
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's principal business is providing value-added medical transcription
services. Medical transcription is the conversion of dictated information into a
standard text format for inclusion in a patient's permanent medical records.
Additionally, the Company receives revenues from the sale of licenses of its
dictation voice recognition software applications (including training and
maintenance services) and the sale of computer hardware that is bundled with
software applications at the customer's request.
The Company's principal business strategies are to (i) consolidate the
fragmented medical transcription industry by pursuing strategic acquisitions
that provide entry into to new markets or compliment existing operations; (ii)
reduce the cost of providing medical transcription services by utilizing the
internet and VoiceCOMMANDER 99(TM) voice recognition technology; (iii) build the
Company's capacity to provide medical transcription services by recruiting and
training additional transcriptionists, primarily in the Philippines; and (v)
improve cash flows. Additionally, the Company believes that communications
expense, a significant cost component of medical transcription services, can be
reduced by implementing secure internet and voice compression technology to
transmit voice and text transcription files. The Company believes utilizing this
"e-commerce" business model, with technology currently available to the Company,
significantly reduces cost of transmission as compared to standard voice,
non-compressed transmission of data.
As of June 30, 1999, the Company had acquired medical transcription service
providers in Texas, Colorado, Florida, New York and a transcription center
located in Manila, the Philippines. The Company intends to continue to pursue
acquisitions, provided that the Company is able to identify attractive and
willing acquisition candidates and that sufficient funding is made available.
There can be no assurance that such acquisition candidates can be identified or
that sufficient funding can be obtained on terms favorable to the Company.
The Company believes that significant cost savings can be achieved, by utilizing
the transcription center in the Philippines, primarily due to the availability
of transcriptionists at favorable levels of compensation. Management is aware
that there are additional business risks inherent in offshore business
operations, including, but not limited to, currency fluctuations, civil unrest
and inadequate services and communications infrastructure. Management continues
to monitor the risk factors on a on-going basis and has reviewed the existing
infrastructure in the Philippines and believes that the services and
communications infrastructure is adequate to meet the needs of the Company for
the foreseeable future.
Prior to the first quarter of 1998, the Company's principal efforts were focused
on the sales of VoiceCOMMANDER 4.0(TM). This version of the Company's voice
recognition software was sold to the general business community through retail
sales channels and the Company's internal sales force. In the first quarter of
1998, the Company narrowed the focus of its business plan to concentrate its
efforts on medical transcription services. In May 1998, the Company began
development of a software product that provides healthcare professionals with a
tool for internet based transcription and dictation services. The new product,
VoiceCOMMANDER 99, provides a mobile dictation solution designed to improve the
quality and reduce the costs of healthcare information needs.
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RESULTS OF OPERATIONS
Net revenues for the three months ended June 30, 1999 and 1998 were $1,131,741
and $199,472, respectively, representing an increase of 467.4%. Net revenues for
the six months ended June 30, 1999 and 1998, were $2,350,859 and $375,159,
respectively, representing an increase of approximately 526.6%. The increase in
revenues is primarily attributable to the Company's acquisition of medical
transcription service companies. Additionally, the six month period ended June
30, 1999 includes approximately $300,000 of consulting fees for services
provided to an affiliate of a stockholder, which was non-recurring in nature.
Although there can be no assurances, the Company anticipates that revenue will
continue to increase as the Company continues to implement its strategy of
acquiring medical transcription service companies.
Cost of sales increased to $795,170 for the three months ended June 30, 1999
from $92,355 for the three months ended June 30, 1998. Cost of sales increased
to $1,348,482 for the six months June 30, 1999 from $185,736 for the six months
ended June 30, 1998. The increase in cost of sales is primarily due to
additional transcription labor costs resulting from the increase transcription
service revenues. As a percentage of revenue, cost of sales increased to 70.3%
and 57.4% for the three and six months ended June 30, 1999, respectively, from
46.3% and 49.5% for the three and six months ended June 30, 1998. The increase
as a percentage of revenue is primarily attributable to the change in the
Company's revenue mix from high margin software and consulting sales to lower
margin transcription services.
Marketing and sales expense for the three months ended June 30, 1999 and 1998
were $179,750 and $471,674, respectively, representing a decrease of
approximately 61.9%. Marketing and sales expense for the six months ended June
30, 1999 and 1998 were $349,042 and $751,439, respectively, representing a
decrease of approximately 53.6%. The decrease in marketing and sales expense is
primarily attributable to the Company concentrating on providing medical
transcription services and not promoting the Company's voice recognition
products for commercial sale.
General and administrative expense for the three months ended June 30, 1999 and
1998 were $2,414,192 and $1,178,632, respectively, representing an increase of
approximately 104.8%. General and administrative expense for the six months
ended June 30, 1999 and 1998 were $3,939,519 and $2,364,535, respectively,
representing an increase of approximately 66.6%. The increase in general and
administrative expense is attributable to consulting services incurred in
connection with the beta testing, development, and roll-out of VoiceCOMMANDER
99(TM), expenses incurred for the development of information used for billing
purposes and for various performance metrics, and legal and financial advisory
fees incurred as the Company pursued additional funding. Additionally, there was
an increase in spending on administrative and executive personnel, resulting
from the development of the acquisition program and the filling of key
management positions.
Research and development expenses were $232,624 and $495,865 for the three and
six months ended June 30, 1999, respectively, as compared to $39,874 and
$220,649 for the three and six months ended June 30, 1998, respectively. The
increase in research and development costs is attributable to expenditures for
the quality assurance review of VoiceCOMMANDER 99(TM) and the development of
macros, to be incorporated into VoiceCOMMANDER 99(TM), which will streamline the
transcription process.
Interest expense increased to $243,023 and $289,856 for the three and six months
ended June 30, 1999, respectively, compared to $37,239 and $78,012 for the three
and six months ended June 30, 1998, respectively. The increase is primarily due
to the issuance of promissory notes, debt obligations due to former owners of
the acquired businesses and non-cash charges related to warrants issued in
connection with debt financings. The warrants are recorded at their fair values
as an original issue discount to the
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debt and are amortized over the life of the related debt using the effective
interest rate method. Warrants that increase the number of shares of common
stock purchasable, over time, are expensed as the Company incurs the additional
warrant obligation.
Preferred stock dividends were $160,549 and $251,665 for the three and six
months ended June 30, 1999 as compared to $45,561 for the three and six months
ended June 30 1998. The increase is due to the issuance of Series B, Series C
and Series D Preferred Stock during 1998 and 1999, net of conversions to common
stock.
Net loss to common shareholder increased primarily due to the increase in cost
of sales, general and administrative expense, interest expense and preferred
stock dividends, partially offset by the increase in revenue. Through the period
ended June 30, 1999, the Company has incurred operating losses, since inception,
of approximately $19.2 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 June 30, 1999, the Company had cash and cash equivalents of $357,984 and a
working capital deficit of $1,884,309, compared to cash and cash equivalents of
$1,377,913 and working capital of $948,906 at December 31, 1998. The decrease in
cash and cash equivalents and working capital is due to the use of cash to fund
the $3,813,295 of cash used in operating activities, debt repayments of
$600,773, and to fund the $736,857 cash portion of acquisition purchase price,
partially offset by the proceeds of $1,500,000 from the issuance of convertible
promissory notes and warrants and $3,000,000 from the issuance of Series D
preferred stock and warrants. In July 1999, the Company raised an additional
$750,000 from the issuance of convertible promissory notes and warrants.
The Company has been expanding its operations primarily by focusing on the
acquisition of medical transcription service companies and the continued
development of VoiceCOMMANDER 99(TM). The Company's development has required and
will continue to require a significant investment of cash for the initial
acquisition of businesses, the subsequent upgrade of accounting and operational
systems, the development of the Company's products and the continued sales and
marketing efforts. The Company has funded these cash requirements with various
debt and equity offerings over the past two years. The Company intends to fund
cash requirements for the foreseeable future from cash on hand, cash generated
from operations, and additional debt or equity financing. If additional debt or
equity financing were not available or not available on favorable terms to the
Company in the future, it could have an adverse effect on the Company's
liquidity.
At June 30, 1999, the Company's cash position less known commitments and
contingencies plus cash generated from operations for the balance of fiscal year
1999 will not be adequate to fund the Company's on going operations. The Company
continues to incur substantial operating losses and will continue to need
additional working capital to fund its operations, acquisitions, research and
development, and marketing efforts for the next fiscal year. If the Company is
not successful in obtaining additional debt or equity financing for its
operations during 1999, there will exist substantial doubt as to the company's
ability to continue as a going concern.
On April 29, 1999, the Company entered into an agreement with an investment bank
to provide underwriting services for a proposed offering of the Company's common
stock for sale to the public. The terms of the agreement provide for
underwriters discount, over-allotment agreement, underwriter warrants and
contains the customary restriction on the Company's issuance of additional
equity instruments. The Company and the investment bank have postponed the
pursuit of the offering until the year 2000 and are
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not currently taking any action towards completing the proposed offering. There
can be no assurance that the investment bank will ultimately be successful in
raising additional funds or that such funds will be made available on terms
favorable to the Company.
If the Company is unable to obtain the financing commitments required to
successfully implement its intended business plan, then the Company will
implement contingency plans which may include: (a) the slow down in pace of its
acquisition plan, (b) the acceleration of its plans to increase production
capacity in its offshore transcription facility in the Philippines and transfer
of the majority of transcription work to offshore production (c) the reduction
of expenses primarily through the reduction of sales and administrative
personnel and (d) the curtailment of the development and deployment of the
Company's VoiceCOMMANDER 99 products. Successful implementation of this
contingency plan is largely dependent upon hiring and training sufficient
numbers of Philippine based transcriptionists to process a material percentage
of the transcription workload of the Company. This contingency plan would
increase the Company's exposure to the risks of doing business in a foreign
country.
YEAR 2000
The year 2000 issue generally describes the various problems that may result
from the failure of computer and other mechanical systems to properly process
certain dates and date sensitive information. The Company's operations are
reliant on several third party products and service relationships. A failure by
any of these partners to adequately address the Year 2000 issue would adversely
affect the Company's operations.
The Company has undertaken initiatives to ensure that it is prepared for the
Year 2000 issue. All of the software produced by the Company is created with
industry standard tools and runs on industry standard operating systems and
databases. These tools, operating systems and databases have been certified Year
2000 compliant by the manufacturers. In addition, the current systems used by
the Company, to account for its day to day operations, were recently purchased
and are certified as Year 2000 compliant by the manufacturer. As for future
enhancements or additions to the current system, the Company has established a
clear directive that requires these to be Year 2000 ready, prior to purchase.
The Company's expansion effort into the transcription industry comes with the
risk that acquired systems may be date sensitive and Year 2000 non-compliant. To
date, the Company is aware of several acquired systems, used in the
transcription business, which are not Year 2000 compliant. To mitigate this
problem, the Company is replacing these non-compliant systems with its own
proprietary Year 2000 compliant software, other Year 2000 compliant software and
Year 2000 compliant hardware.
In most cases the purchased non-Year 2000 compliant equipment is at or near the
end of its useful life. This equipment would have to be replaced in the normal
course of operations. The cost associated with these replacements will be
reflected in the normal results of operations.
The Company believes that the risks associated with Year 2000 issues center
primarily with the continued availability of the Internet. The lack of
availability of the Internet would reduce the ability of the Company to cheaply
and effectively move transcription workload. The Company is currently finalizing
plans to ensure a reasonable level of redundant capacity utilizing Year 2000
compliant traditional transcription equipment.
In the event of a Year 2000 problem with the Internet, the Company would revert
to processing its transcription business on Year 2000 compliant transcription
recording systems. These systems are being purchased in the normal course of its
business, as part of the Company's disaster recovery plans. The lack of
availability of the Internet could require the use of traditional telephone
lines. In the event of a failure
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of the Internet and the national or international telephone system, the Company
could continue to process transcription utilizing couriers to move the
transcription data, although at a greatly reduced capacity and productivity.
The Company's Year 2000 planning process, as discussed above, represent an
ongoing process. As the company acquires new companies in the course of its
expansion, each acquired company will undergo a review to ensure that all of its
software and equipment are Year 2000 compliant. Although the Company believes it
is taking the appropriate courses of action to ensure that material
interruptions in business operations do not occur as a result of the Year 2000
conversions, there can be no assurances that the actions discussed herein will
detect and correct all Year 2000 compliance issues. To the extent that the
Company is unsuccessful in anticipating and eliminating any negative financial
consequences of the Year 2000 issues, the results of operations will be
adversely affected. Among the factors which might affect the success of the
Company's Year 2000 plans are: (i) the Company's ability to properly identify
deficient systems; (ii) the ability of third parties to adequately address Year
2000 issues or to notify the Company of potential deficiencies; (iii) the
Company's ability to adequately address any such internal or external
deficiencies; (iv) the Company's ability to complete its Year 2000 plans in a
timely manner; and (v) unforeseen expenses related to the Company's Year 2000
plans.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 7. of the Notes to Unaudited Consolidated Financial
Statements for discussion of certain legal proceedings involving the Company.
ITEM 2. CHANGES IN SECURITIES
Recent Sale of Unregistered Securities
The following sales of unregistered securities occurred during the three months
ended June 30, 1999 and through August 12, 1999 (the date of this filing), in
private transactions in which the Company relied on the exemption from
registration available under Section 4(2) of the Securities Act of 1993, as
amended, and Rule 506 of Regulation D promulgated thereunder:
On May 24, 1999, in a private placement, the Company issued a convertible
promissory note, with a stated principal of $1,500,000, and a warrant to L&H
Investment Co., N.V., an accredited investor, for aggregate proceeds of
$1,500,000. (See Notes to Unaudited Consolidated Financial Statements).
On July 29, 1999, in a private placement, the Company issued a convertible
promissory note, with a stated principal of $500,000, and a warrant to
Greenwich, AG, an accredited investor, for aggregate proceeds of $500,000 and
issued a convertible promissory note, with a stated principal amount of
$250,000, and a warrant to G-51 Capital LLC, an accredited investor, for
aggregate proceeds of $250,000. (See Notes to Unaudited Consolidated Financial
Statements).
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ITEM 5. OTHER INFORMATION
On July 15, 1999, N. Rudy Garza, president and founder of G-51 Capital, LLC
joined the Board of Directors.
On August 2, 1999, Eric Black was named chief executive officer and president of
the Company. Mr. Black held several management positions in his 23 year career
with Browning-Ferris, Inc., most recently as President and Chief Operating
Officer of Browning-Ferris International, Inc. Tim Connolly, the current
chairman and the chief executive officer immediately prior to the appointment of
Mr. Black, will remain the chairman of the board and will chair the Company's
strategic committee.
On August 2, 1999, Rob Ritchie was re-appointed from his offices as President
and Chief Operating Officer of the Company to Vice-President-International
Operations of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
2.1 Stock Purchase Agreement by and among Timothy E. Cook and Kay F. Cook, A
Word Above, Inc. and e-DOCS Health Care Information Services, Inc., dated
May 28, 1999 (Exhibit 2.1 to the Company's Current Report on Form 8-K
filed on June 14, 1999, is incorporated herein by reference).
3.1 Series 2 Preferred Stock Certificate of Designation (Exhibit 3.1 to the
Company's Form 8-K filed on January 15, 1999, is incorporated herein by
reference).
10.1 Employment Agreement by and between the Company and Kay F. Cook, dated May
28, 1999 (Exhibit 10.1 to the Company's Current Report on Form 8-K filed
on June 14, 1999, is incorporated herein by reference).
10.2 Convertible Promissory Note and Warrant Purchase Agreement, between the
Company and L&H Investment Co. N.V., dated May 24, 1999.
10.3 Convertible Promissory Note and Warrant Purchase Agreement, between the
Company and Greenwich, AG dated July 20, 1999.
10.4 Convertible Promissory Note and Warrant Purchase Agreement, between the
Company and G-51 Capital LLC, dated July 20, 1999.
10.5 Employment Agreement by Eric Black and the Company dated August 2, 1999.
10.6 First Amendment to Employment Agreement by Timothy J. Connolly, dated
August 2, 1999.
27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K
The Company filed a Form 8-K on June 14, 1999 for the acquisition of A Word
Above, Inc., a Texas corporation providing medical transcriptions services in
the greater Houston, Texas metropolitan area.
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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 on this 12th day of August, 1999.
APPLIED VOICE RECOGNITION, INC.
BY: /s/ RICHARD A. CABRERA
RICHARD A. CABRERA
CHIEF FINANCIAL OFFICER AND SECRETARY
(on behalf of the Company and
as Chief Accounting Officer)
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EXHIBIT 10.2
CONVERTIBLE PROMISSORY NOTE AND
WARRANT PURCHASE AGREEMENT
This Convertible Promissory Note and Warrant Purchase Agreement (the
"Agreement") is made as of May 19, 1999 by and among E-Docs, Inc., a Delaware
corporation (the "Company"), and the L & H Investment Co. N.V., (the
"Investor").
RECITALS
WHEREAS, the Investor desires to purchase from the Company, and the
Company desires to issue to the Investor, a Convertible Promissory Note in the
form of Exhibit A attached hereto (the "Note") in the aggregate principal amount
of One Million Five Hundred Thousand ($1,500,000.00) and
WHEREAS, the Investor desire to purchase from the Company, and the Company
desires to issue to the Investor, a Warrant in the form of Exhibit B attached
hereto on the terms and conditions set forth herein (the "Warrant"), such
Warrant to purchase that number of shares of "Next Stock" (defined below) of the
Company as determined pursuant to the terms and conditions of this Agreement and
the Warrant.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as follows:
1. PURCHASE AND SALE OF NOTE AND WARRANT.
1.1 SALE AND ISSUANCE OF NOTE AND WARRANT.
(a) Subject to the terms and conditions of this Agreement, the
Investor agree to purchase at the Closing (as defined below) and the Company
agrees to sell and issue to the Investor at the Closing (a) a Note in the form
attached hereto as Exhibit A, in the principal amount of One Million Five
Hundred Thousand ($1,500,000.00), at a price equal to 100% of the principal
amount thereof, and (b) a Warrant to purchase such variable number of shares of
the Company's Next Stock in the form attached hereto as Exhibit B.
1.2 CLOSING. The purchase and sale of the Note and the Warrant shall take
place at the offices of Brobeck, Phleger & Harrison LLP, 550 West "C" Street,
Suite 1300, San Diego, California at 2 p.m. on May 19, 1999, or at such other
time and place as the Company and
<PAGE>
the Investor shall mutually agree in writing (which time and place are
designated as the "Closing"). .
1.3 DELIVERIES. At the Closing, the Company shall deliver to the Investor
the Note and the Warrant that the Investor is purchasing against payment of one
million five hundred thousand dollars ($1,500,000.00) by wire transfer of same
day funds.
1.4 CONVERSION OF THE NOTE. Upon the Next Qualified Equity Financing (as
defined below), the principal amount of the Note plus any accrued but unpaid
interest will be automatically converted into that number of shares of the
Company's Next Stock issued in the Next Qualified Equity Financing as is equal
to the then principal balance of the Note plus any accrued but unpaid interest
divided by the price per share of the Company's Next Stock.
1.5 NEXT QUALIFIED EQUITY FINANCING. The term Next Qualified Equity
Financing shall mean the next equity financing involving the receipt by the
Company of at least Five Million Dollars ($5,000,000) (excluding amounts
received on conversion of the Note) which is completed on or before August 15,
1999. Notwithstanding the foregoing, the Next Qualified Equity Financing shall
not include an equity financing that is made in connection with either (i) any
arrangement between the Company and any third party for any research or
development involving the Company (including, without limitation, any
arrangement that includes provision for research support, product development
and/or testing support), (ii) any rights to commercialize any products resulting
from the research or development programs of the Company (including, without
limitation, rights to develop, make, use and/or sell any such products), or
(iii) any other non-monetary consideration.
If no such Next Qualified Equity Financing shall have occurred by August
15, 1999, then the Investor shall have the Note shall become due and payable
upon the election of the Holder.
1.6 NEXT STOCK. The term "Next Stock" shall mean the stock into which the
attached Note is convertible, and for which the attached Warrant is exercisable.
Next Stock shall be the same class and series and have the same rights and
limitations including, but not limited to, anti-dilution protection and
registration rights as the Company's stock, which is the subject of the Next
Qualified Equity Financing. The Investor shall not have any right to modify or
negotiate the terms upon which such stock is issued.
1.7 ALLOCATION OF PURCHASE PRICE TO THE WARRANT. The Company hereby
allocates to the Warrant a purchase price of $0.01 for each share of Next Stock
that the Warrant is exercisable into and such purchase price shall be retained
by the Company from the principal of the Investor's Note by the Company and this
amount will not accrue interest or convert into any other security. Receipt of
such consideration is hereby acknowledged by the Company.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to and for the benefit of the Investor, with knowledge
that the Investor is
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relying thereon in entering into this Agreement and purchasing the Note and the
Warrant from the Company, that the following are true and correct:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on the operation of its business or properties.
2.2 AUTHORIZATION. All corporate action on the part of the Company, its
officers, directors and stockholders necessary for the authorization, execution
and delivery of this Agreement, the Note and the Warrant, and the performance of
all obligations of the Company thereunder has been taken or will be taken prior
to the Closing, and this Agreement, the Note and the Warrant constitute valid
and legally binding obligations of the Company, enforceable against the Company
in accordance with their respective terms, except (a) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors' rights generally, (b) as limited
by laws relating to the availability of specific performance, injunctive relief
or other equitable remedies, and (c) to the extent the indemnification
provisions, if any, contained in any of such documents may be limited by
applicable federal or state securities laws.
2.3 VALID ISSUANCE OF NEXT STOCK. The shares of Next Stock of the Company
issuable upon the exercise of the Warrant which may be purchased by the Investor
pursuant to this Agreement have been or will be duly and validly reserved for
issuance and, upon issuance in accordance with the terms of the Warrant shall be
duly and validly issued, fully paid and nonassessable, and issued in compliance
with all applicable securities laws, as presently in effect, of the United
States and each of the states whose securities laws govern the issuance of any
of the Warrant pursuant to this Agreement.
2.4 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization
of, or registration, qualification, designation, declaration or filing with, any
federal, state, local or provincial governmental authority on the part of the
Company is required in connection with the consummation of the transactions
contemplated by this Agreement and such other filings as may be required by
applicable state securities laws.
2.5 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in material
violation or default of any provisions of its Certificate of Incorporation or
Bylaws or of any instrument, judgment, order, writ, decree or contract to which
it is a party or by which it is bound or, to its knowledge, of any provision of
federal or state statute, rule or regulation applicable to the Company or
otherwise in breach of any of the terms or conditions of any contract or
agreement which breach, either individually or in the aggregate, could
reasonably be expected to have a materially adverse effect on the business,
properties, financial condition or results of
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operations of the Company. To the Company's knowledge, no other party to any of
its material contracts or agreements is in material default under any such
contract or agreement. The execution, delivery and performance of this
Agreement, the Note and the Warrant, and the consummation of the transactions
contemplated hereby and thereby shall not result in any such material violation
or be in conflict with or constitute, with or without the passage of time and
giving of notice, either a default under any such provision, instrument,
judgment, order, writ, decree or contract or an event that results in the
creation of any lien, charge or encumbrance upon any assets of the Company or
the suspension, revocation, impairment, forfeiture or nonrenewal of any material
permit, license, authorization or approval applicable to the Company, its
business or operations or any of its assets or properties.
2.6 DISCLOSURE. The Company has fully provided the Investor with all the
information which the Investor have requested for deciding whether to purchase
the Note and the Warrant and all information which the Company believes is
reasonably necessary to enable the Investor to make such decision. Neither this
Agreement nor any other written statements or certificates made or delivered in
connection herewith or therewith contains any untrue statement of material fact
or omits to state a material fact necessary to make the statements in this
Agreement or therein not misleading.
2.7 OTHER INSTRUMENTS. The Company hereby acknowledges that immediately
upon the Closing, the holders of the Company's Series D Preferred Stock
(including the Investor) will be entitled to an adjustment of the Series D
Conversion Price (as that term is defined in the Company's amended and restated
certificate of incorporation) as if the Company had sold equity securities at
the Closing for one dollar per share.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor hereby
represents and warrants to and for the benefit of the Company, with knowledge
that the Company is relying thereon in entering into this Agreement and issuing
the Note and the Warrant to the Investor, as follows:
3.1 PURCHASE ENTIRELY FOR OWN ACCOUNT. By the Investor's execution of this
Agreement, the Investor hereby confirm that the Note and Warrant to be received
by the Investor, the Next stock issuable upon conversion of the Note, and the
Next Stock issuable upon exercise of the Warrant (collectively, the
"Securities") shall be acquired for investment for the Investor's own account,
not as a nominee or agent, and not with a view to the resale or distribution of
any part thereof, and that the Investor have no present intention of selling,
granting any participation in, or otherwise distributing the same. By executing
this Agreement, the Investor further represent that the Investor do not have any
contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participation to such person or to any third person, with
respect to any of the Securities. The Investor represents that it has full power
and authority to enter into this Agreement.
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3.2 INVESTMENT EXPERIENCE. The Investor is an investor in securities of
companies in the development stage and acknowledges that it is able to fend for
itself, can bear the economic risk of its investment and has such knowledge and
experience in financial or business matters that it is capable of evaluating the
merits and risks of the investment in the Securities.
3.3 ACCREDITED INVESTOR. The Investor is an "accredited investor" within
the meaning of Securities and Exchange Commission Rule 501 of Regulation D, as
now in effect.
3.4 RESTRICTED SECURITIES. The Investor understands that the Securities it
is and shall be purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act of 1933, as amended (the "Act"), only in certain limited
circumstances. In this connection, the Investor represents that it is familiar
with Rule 144 promulgated under the Act, as now in effect, and understands the
resale limitations imposed thereby and by the Act.
3.5 LEGENDS. The Investor understand that the certificates evidencing the
Securities may bear one or all of the following legends:
(a) The securities evidenced by this certificate have not been
registered under the Securities Act of 1933, as amended (the "Act") or the
securities laws of any state of the United States. The securities evidenced by
this certificate may not be offered, sold or transferred for value directly or
indirectly, in the absence of such registration under the Act and qualification
under applicable state laws, or pursuant to an exemption from registration under
the Act and qualification under applicable state laws, the availability of which
is to be established to the reasonable satisfaction of the Company.
(b) Any legend required by the laws of the states of California or
Delaware, including any legend required by the California Department of
Corporations and Sections 417 and 418 of the California Corporations Code.
(c) Any legend required to be placed on the Securities purchased by
Investor in any future sale or offering of any Securities.
(d) A legend memorializing Section 5 below.
4. RESTRICTIONS ON DISPOSITION. Without in any way limiting the
representations set forth in Section 3 above, the Investor further agrees not to
make any disposition of all or any portion of the Securities unless and until
the transferee has agreed in writing for the benefit of the Company to be bound
by this Section 4, and in addition thereto, one of the following conditions is
satisfied:
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<PAGE>
4.1 SECURITIES REGISTERED. There is then in effect a registration
statement under the Act covering such proposed disposition and such disposition
is made in accordance with such registration statement.
4.2 REGISTRATION NOT REQUIRED. The Investor shall have (i) notified the
Company of the proposed disposition and shall have furnished the Company with a
detailed statement of the circumstances surrounding the proposed disposition and
(ii) if reasonably requested by the Company, furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of such securities under the Act;
provided, however, that the Company will not require opinions of counsel for
transactions made pursuant to Rule 144, except in unusual circumstances.
5. MARKET STAND-OFF AGREEMENT. During the period of duration (not to exceed
180 days) specified by the Company and an underwriter of Common Stock or other
securities of the Company, following the effective date of a registration
statement of the Company filed under the Act, the Investor shall not, to the
extent requested by the Company and such underwriter, directly or indirectly
sell, offer to sell, contract to sell (including, without limitation, any short
sale), grant any option to purchase or otherwise transfer or dispose of (other
than to transferees or donees who agree to be similarly bound) any securities of
the Company held by it at any time during such period except Common Stock
included in such registration; provided, however, that this Section 5 shall be
applicable (a) only to the first such registration statement of the Company
pursuant to which Common Stock (or other securities) of the Company are to be
sold on its behalf to the public in an underwritten offering, and (b) only if
all officers and directors of the Company and all persons with registration
rights enter into similar agreements. In order to enforce the foregoing
covenant, the Company may impose stop-transfer instructions with respect to the
Common Stock of the Investor (and the shares or securities of every other person
subject to the foregoing restriction) until the end of such period.
6. CALIFORNIA COMMISSIONER OF CORPORATIONS.
6.1 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE
SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES
PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT
FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO
EXEMPT.
7. GENERAL PROVISIONS.
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7.1 CONSTRUCTION. This Agreement shall be governed, construed and enforced
in accordance with the internal laws of the State of Texas, without giving
effect to its conflicts of laws or principles.
7.2 ENTIRE AGREEMENT. This Agreement, together with the agreements and
documents referred to herein, constitute the entire agreement among the parties
hereto with respect to the subject matter hereof and supersede all prior and
contemporaneous negotiations, agreements and understandings.
7.3 NOTICES. All payments, notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given at the earlier of (i) the time of actual delivery or (ii) on the
third business day following the date deposited with the United States Postal
Service, postage prepaid, certified with return receipt requested, to the
parties at the following addresses or at such other address as shall be given in
writing by a party to the other parties as set forth on the signature page.
7.4 SUCCESSORS AND ASSIGNS. This Agreement, and the rights and obligations
of each of the parties hereunder, may not be assigned by the Investor without
the prior written consent of the Company. Subject to the foregoing sentence,
this Agreement shall inure to the benefit of, and shall be binding upon, the
parties and their successors and assigns.
7.5 SEVERABILITY. If any term, covenant or condition of this Agreement is
held to be invalid, void or otherwise unenforceable by any court of competent
jurisdiction, the remainder of this Agreement shall not be affected thereby and
the term, covenant and condition of this Agreement shall be valid and
enforceable to the fullest extent permitted by law.
7.6 MODIFICATION. Any term of this Agreement may be amended and the
observance of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively), with the written
consent of the Company and the Investor. Any amendment or waiver effected in
accordance with this Section shall be binding upon all parties to this
Agreement, including, without limitation, any holder who may not have executed
such amendment or waiver, and each future holder of any equity security into
which the Note is convertible and/or any holder of Next Stock that is received
upon the exercise of the Warrant.
7.7 ATTORNEY'S FEES. If any action of law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to an award of its reasonable attorneys' fees, costs and disbursements
in addition to any other relief to which such party may be entitled.
7.8 COUNSEL TO THE INVESTOR. The Company agrees to pay the reasonable
legal fees and expenses of FLV's special counsel, Brobeck, Phleger & Harrison
LLP not to exceed $5,000. Such fees shall be withheld from the Closing and
Brobeck, Phleger & Harrison LLP
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<PAGE>
shall provide the Company a bill for such services with 30 days of the Closing.
The Company acknowledges and agrees that this Agreement has been prepared by
Brobeck, Phleger & Harrison LLP, counsel to the Investor, which counsel has
represented the interests of Investor and not those of the Company with respect
to the transaction documented by this Agreement.
7.9 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement to be
effective as of the date first written above.
COMPANY:
E-DOCS, INC., a Delaware corporation
By: ____________________________________
William Connolly, President and Chief
Executive Officer
INVESTOR:
L & H Investment Co. N.V.
By: ___________________________________
Thomas Denys
L & H Investment Co. N.V.
Pla Koningsstroat 2
B-1210
Brussels, Belgium
A-1
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EXHIBIT A
FORM OF PROMISSORY NOTE
NEITHER THIS CONVERTIBLE PROMISSORY NOTE NOR ANY OF THE SECURITIES ISSUABLE
HEREUNDER HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES, OR DELIVERY TO THE COMPANY OF AN OPINION OF COUNSEL IN FORM
AND SUBSTANCE SATISFACTORY TO THE COMPANY THAT SUCH OFFER, SALE OR TRANSFER,
PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE ACT OR UNLESS SOLD IN FULL
COMPLIANCE WITH RULE 144 UNDER THE ACT.
THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS CONVERTIBLE SECURED
PROMISSORY NOTE HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF
THE STATE OF CALIFORNIA OR THE STATE OF DELAWARE OR ANY OTHER STATE AND THE
ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL,
UNLESS THE SALE OF SUCH SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION
25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE, OR APPLICABLE
PROVISIONS OF THE SECURITIES LAWS OF DELAWARE OR ANY OTHER STATE. THE RIGHTS OF
THE HOLDER OF THIS CONVERTIBLE PROMISSORY NOTE ARE EXPRESSLY CONDITIONED UPON
SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
Los Angeles, California
May ___, 1999
E-DOCS, INC.
CONVERTIBLE PROMISSORY NOTE
E-Docs, Inc., a Delaware corporation (the "Company"), for value received,
hereby promises to pay to Investor (the "Holder"), the principal amount of one
million five hundred thousand dollars ($1,500,000.00) (the "Issue Price"),
together with interest on the unpaid amount thereof in accordance with the terms
hereof, from the date hereof until paid or converted in accordance with the
terms hereof.
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<PAGE>
1. TERMS OF THE CONVERTIBLE PROMISSORY NOTE (THE "NOTE").
1.1 INTEREST RATE. The rate of interest hereunder ("Interest Rate") shall
be ten percent (10%) per annum and shall be computed on the basis of a 365 day
year for the actual number of days elapsed.
1.2 PAYMENT. Subject to the provisions of Section 2 regarding conversion
of this Note, the Issue Price plus all accrued but previously unpaid interest
thereon (the "Conversion Amount") shall become due and payable on the earliest
of (i) August 15, 1999 (ii) immediately prior to the closing of the acquisition
of a majority of stock of the Company by another entity by means of a
transaction or a series of related transactions or (iii) the closing of the sale
of all or substantially all of the assets of the Company, unless the Company
stockholders of record prior to such acquisition or sale set forth in (ii) and
(iii) above shall hold at least fifty percent (50%) of the voting power of the
acquiring or surviving entity immediately after such acquisition or sale ("Due
Date"). Payment shall be made at the offices or residence of the Holder, or at
such other place as the Holder shall have designated to the Company in writing,
in lawful money of the United States of America.
1.3 CONVERTIBLE NOTE AND WARRANT PURCHASE AGREEMENT. This Note is issued
by the Company in connection with that certain Convertible Promissory Note and
Warrant Purchase Agreement dated the date hereof (the "Agreement") among the
Company and the Holder, and is subject to, and Holder and the Company shall be
bound by, all the terms, conditions and provisions of the Agreement.
2. CONVERSION.
2.1 TIMING. Upon the completion of the Next Qualified Equity Financing (as
defined below), the Conversion Amount shall be automatically converted into that
number of fully paid and nonassessable shares of the Company's Next Stock
(defined below) issued in the Next Qualified Equity Financing as is equal to the
Conversion Amount divided by the per share purchase price of the Next Stock (the
"Per Share Price") provided that in no event shall the Per Share Price exceed
one dollar ($1.00), with any fraction of a share rounded up to the next whole
share of the Next Stock. Provided, however, that if there is no Next Qualified
Equity Financing before August 15, 1999, then the Note shall become due and
payable upon the demand of the Holder at any time on or after August 15, 1999.
2.2 NEXT QUALIFIED EQUITY FINANCING. The term "Next Qualified Equity
Financing" is defined for purposes of this Note in Section 1.4 of that certain
Convertible Promissory Note and Warrant Purchase Agreement of even date
herewith.
2.3 NEXT STOCK. The term "Next Stock" is defined for purposes of this Note
in Section 1.5 of that certain Convertible Promissory Note and Warrant Purchase
Agreement of even date herewith.
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<PAGE>
2.4 CONVERSION PROCEDURE. Written notice of the Next Qualified Equity
Financing shall be delivered to the Holders of this Note before or promptly
after the closing date of the Next Qualified Equity Financing (the "Conversion
Date"), at the address last shown on the records of the Company for the Holder
or given by the Holder to the Company for the purpose of notice (or, if no such
address appears or is given, at the residence of the Holder), notifying the
Holder of the conversion to be effected, including specifying (i) the Conversion
Amount (calculated as of the Conversion Date), (ii) the Per Share Price, (iii) a
term sheet setting forth the rights, preferences, privileges and terms and
conditions of issuance and sale of the Next Stock and the Conversion Date, and
(iv) copies of all relevant documentation evidencing the sale of the Next Stock
in the Next Qualified Entity Financing including any stock purchase agreement,
stock restriction agreement, and investor's rights agreement. The Holder shall
have no right to negotiate any of the terms or conditions upon which the Next
Stock shall be issued, which negotiation shall be conducted solely among the
Company and the purchasers of the Next Stock.
2.5 TERMINATION OF RIGHTS UPON CONVERSION. Provided notice is given by the
Company in accordance with Section 2.4, conversion shall be deemed effective on
the Conversion Date, and the Holders of this Note shall have no further rights
under this Note, whether or not this Note is surrendered. Conversion shall be
deemed effective upon issuance of Next Stock.
2.6 DELIVERY OF STOCK CERTIFICATES. As promptly as practicable after any
conversion of this Note and the Holders' surrender of this Note, the Company, at
its expense, shall issue and deliver to the Holders of this Note a certificate
or certificates evidencing the number of shares of Next Stock issuable to the
Holders upon any such conversion.
3. MISCELLANEOUS.
3.1 TRANSFER OF NOTE. This Note shall not be transferable or assignable in
any manner, except to affiliates of Investor, and no interest shall be pledged
or otherwise encumbered by the Holders without the express written consent of
the Company, and any such attempted disposition of this Note or any portion
hereof shall be of no force or effect.
3.2 TITLES AND SUBTITLES. The titles and subtitles used in this Note are
for convenience only and are not to be considered in construing or interpreting
this Note.
3.3 NOTICES. Any notice required or permitted under this Note shall be
given in writing and in accordance with Section 8.3 of the Agreement (for
purposes of which the term "Investor" shall mean the Holder hereunder), except
as otherwise expressly provided in this Note.
A-4
<PAGE>
3.4 ATTORNEYS' FEES. If any action at law or in equity is necessary to
enforce or interpret the terms of this Note, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and disbursements in addition to
any other relief to which such party may be entitled.
3.5 AMENDMENTS AND WAIVERS. This Note is issued by the Company pursuant to
that certain Convertible Promissory Note and Warrant Purchase Agreement dated
May 19, 1999. Other than the right to the payment of the Issue Price and all
accrued but unpaid interest thereon, which may only be amended or waived with
the written consent of the Holder, any other term of this Note may be amended
and the observance of any other term of this Note may be waived (either
generally or in a particular instance and either retroactively or
prospectively), with the written consent of the Company and the Holder, and in
accordance with the Agreement. Any amendment or waiver effected in accordance
with this Section 3.5 shall be binding upon the Holder of this Note (and of any
securities into which this Note is convertible), each future holder of all such
securities and the Company.
3.6 SEVERABILITY. If one or more provisions of this Note are held to be
unenforceable under applicable law, such provision shall be excluded from this
Note and the balance of the Note shall be interpreted as if such provision were
so excluded and shall be enforceable in accordance with its terms.
3.7 GOVERNING LAW. This Note shall be governed by and construed and
enforced in accordance with the laws of the State of Texas, without giving
effect to its conflicts of laws principles.
Date: May 19, 1999 E-DOCS, INC., a
Delaware corporation
By: _____________________________
William Connolly,
President and
Chief Executive Officer
[SIGNATURE PAGE TO CONVERTIBLE PROMISSORY NOTE]
A-5
<PAGE>
EXHIBIT B
FORM OF WARRANT
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<PAGE>
NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT") OR THE
SECURITIES LAWS OF ANY STATE; THEREFORE, THIS WARRANT AND THE SECURITIES
ISSUABLE UPON EXERCISE HEREOF MAY NOT BE SOLD OR TRANSFERRED EXCEPT UPON SUCH
REGISTRATION OR UPON DELIVERY TO THE CORPORATION OF AN OPINION OF COUNSEL
SATISFACTORY TO THE CORPORATION THAT REGISTRATION IS NOT REQUIRED FOR SUCH SALE
OR TRANSFER.
WARRANT TO PURCHASE COMMON STOCK
OF
APPLIED VOICE RECOGNITION, INC.
VOID AFTER MAY 31, 2002
This certifies that L & H INVESTMENT COMPANY N.V., a Belgian company
("L&H"), is entitled to purchase such number of shares of fully paid and
nonassessable shares of Common Stock, $0.001 par value (the "Common Stock") as
is described below, of Applied Voice Recognition, Inc., a Delaware corporation
doing business as e-DOCS.net (the "Company"), at a price equal to $1.25 per
share. This Warrant is issued pursuant to that certain Convertible Promissory
Note and Warrant Purchase Agreement dated of even date herewith (the "Purchase
Agreement"). Pursuant to the Purchase Agreement, the Company also issued L&H
that certain Convertible Promissory Note dated May __, 1999 (the "Note"). Shares
may be purchased at any time, in whole or in part, after the earlier of (i) the
date of the closing of the Company's Next Qualified Equity Financing (as defined
in the Purchase Agreement) or (ii) the date of the Company's repayment of all
principal and interest due under the Note; provided, however, in no event may
this Warrant be exercised later than 5:00 p.m. (Houston Time) on May 31, 2002.
The purchase price per share of Common Stock from time to time in
effect under this Warrant, and the number and character of shares covered
hereby, shall be subject to adjustments from time to time in certain instances
as follows, and the term "Exercise Price" shall mean the price
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<PAGE>
per share originally set forth in this Warrant or any price resulting from
adjustments pursuant to the terms hereof. The shares of Common Stock deliverable
upon such exercise, and as adjusted from time to time, are hereinafter sometimes
referred to as "Warrant Stock". The term "Holder" shall refer to L&H or any
person holding this Warrant in accordance with the terms hereof.
(a) EXERCISE OF WARRANT.
(1) Subject to and in accordance with the provisions hereof, this
Warrant may be exercised in whole or in part during the Exercise Period,
by presentation and surrender hereof to the Company or at the office of
its stock transfer agent, if any, with the Purchase Form annexed hereto
duly executed and accompanied by payment of the Exercise Price for the
number of shares specified in such form, together with all applicable
federal and state taxes. If this Warrant should be exercised in part only,
the Company shall, upon surrender of this Warrant for cancellation,
execute and deliver a new Warrant evidencing the right of the Holder to
purchase the balance of the shares purchasable hereunder. Upon receipt by
the Company of this Warrant at the office or agency of the Company, in
proper form for exercise and pursuant to compliance herewith, together
with payment of the Exercise Price, the Holder shall be deemed to be the
holder of record, for all purposes, of the shares of Common Stock issuable
upon such exercise, notwithstanding that the stock transfer books of the
Company shall then be closed or that certificates representing such shares
of Common Stock shall not then be actually delivered to the Holder. Upon
receipt of the required deliveries, the Company shall, as promptly as
practicable, and in any event within ten days thereafter, cause to be
issued and delivered to the Holder hereof or the transferee designated in
the Purchase Form a certificate or certificates representing the aggregate
number of full shares of Common Stock issuable upon such exercise
registered in the name of the Holder hereof, or the name of the transferee
so designated, as the case may be.
(2) In addition to the method of payment set forth in paragraph (1)
above and in lieu of any cash payment required thereunder, the Holder
shall have the right at any time and from time to time to exercise this
Warrant in full or in part by surrendering this Warrant in the manner
specified in paragraph (1) above in exchange for the number of shares of
Common Stock equal to the product of (x) the number of shares to which
this Warrant is being exercised multiplied by (y) a fraction, the
numerator of which is the Market Price (as herein defined) of the Common
Stock less the Exercise Price (as herein defined) and the denominator of
which is such Market Price. Solely for the purposes of this paragraph (2),
Market Price shall be calculated either (i) on the date on which the
Purchase Form attached hereto is deemed to have been sent to the Company
pursuant to paragraph (1) hereof
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<PAGE>
("Notice Date") or (ii) as the average of the Market Price for each of the
fifteen trading days preceding the Notice Date, whichever of (i) or (ii) is
greater.
(b) NO IMPAIRMENT. The Company hereby agrees that (i) at all times there
shall be reserved for issuance and delivery upon exercise of this Warrant such
number of shares of its Common Stock as shall be required for issuance and
delivery upon exercise of this Warrant, and (ii) it will take all action as may
be necessary in order that all shares of stock as may be issued pursuant to this
Warrant shall, upon issuance, be duly and validly issued, fully paid,
non-assessable and free from all taxes, liens and charges with respect to the
issuance thereof.
(c) FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon any exercise hereof, after
payment of the Exercise Price for such fractional share by the Holder, the
Company shall round the number of shares issued upon the exercise of this
Warrant to the next highest full share.
(d) ASSIGNMENT OF WARRANT OR WARRANT STOCK OR LOSS OF WARRANT.
(1) This Warrant may not be sold, transferred, assigned or
hypothecated at any time after its execution and delivery, except upon
compliance with the requirements of this Warrant and any applicable state
or federal securities laws. Shares of Common Stock issued pursuant to this
Warrant shall be subject to the same holding period as shares of Common
Stock issued upon conversion of the Note, which holding period is
described in the Purchase Agreement [IS THE HOLDING PERIOD DESCRIBED IN
THE PURCHASE AGREEMENT?].
(2) Any sale, assignment, transfer or hypothecation of this Warrant
shall be made by surrender of this Warrant to the Company or at the office
of its stock transfer agent, if any, with the Assignment Form annexed
hereto duly executed and accompanied with funds sufficient to pay any
transfer tax; whereupon, the Company shall, after first receiving such
evidence as the Company may reasonably require as to compliance with this
Warrant, without charge, execute and deliver a new Warrant in the name of
the assignee named in such instrument of assignment and this Warrant shall
promptly be canceled.
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(3) The term "Warrant" as used herein includes any Warrant issued in
substitution for or replacement of this Warrant. Upon receipt by the
Company of evidence of the loss, theft, destruction or mutilation of this
Warrant, and upon surrender and cancellation of this Warrant, if
mutilated, the Company will at its expense execute and deliver a new
Warrant of like tenor and date. When authorizing the execution and
delivery of a new Warrant to replace a Warrant lost, stolen or destroyed,
the Board of Directors of the Company may, in its sole discretion and as a
condition precedent thereto, require the Holder to deliver an affidavit in
a form satisfactory to the Board of Directors of the Company and to
indemnify the Company against any claim that may be made against the
Company with respect to such lost, stolen or destroyed Warrant.
(e) ANTI-DILUTION AND ADJUSTMENT PROVISIONS. The purchase price per share
of Common Stock from time to time in effect under this Warrant, and the number
and character of shares covered hereby, shall be subject to adjustments from
time to time in certain instances as follows, and the term "Exercise Price"
shall mean the price per share originally set forth in this Warrant or any price
resulting from adjustments pursuant to the terms hereof.
(1) In case the Company shall subdivide its outstanding shares of
Common Stock into a greater number of shares or shall issue in exchange
for its outstanding shares of Common Stock a greater number of shares of
Common Stock, then in each such case from and after the record date for
such subdivision or exchange, the number of shares of Common Stock covered
by this Warrant shall be increased in proportion to such increase in the
number of outstanding shares of Common Stock and the Exercise Price then
in effect shall be correspondingly decreased; and in the case the Company
shall reduce the number of shares of its Common Stock by a combination of
shares or shall issue in exchange for its outstanding shares of Common
Stock a lesser number of shares of Common Stock, then in each such case
from and after the record date for such combination or exchange, the
number of shares of Common Stock covered by this Warrant shall be
decreased in proportion to such reduction in the number of outstanding
shares of Common Stock, and the then prevailing Exercise Price shall be
correspondingly increased.
(2) In case the Company shall declare and pay a dividend upon its
Common Stock payable in Common Stock, then in each such case from and
after the record date for determining the stockholders entitled to receive
such dividend, the number of shares of Common Stock covered by this
Warrant shall be increased in proportion to the increase in the number of
outstanding shares of Common Stock through such stock dividend, and the
then prevailing Exercise Price shall be correspondingly decreased.
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(3) In case of any reclassification or change of
outstanding shares of Common Stock (other than as a result of a
subdivision, combination or stock dividend) or in case of the
consolidation or merger of the Company with or into any other corporation
(other than a merger in which the Company is the continuing corporation
and which does not result in any reclassification or change in its
outstanding shares of Common Stock), or in case of any sale by the Company
of all or substantially all of its assets to another corporation, the
Holder shall have the right thereafter to receive upon exercise of this
Warrant the amount and kind of shares of capital stock and other
securities and property entitled to be received upon such
reclassification, change, consolidation, merger or sale by a holder of the
number of shares of Common Stock of the Company covered by this Warrant at
the then prevailing Exercise Price, subject to subsequent adjustments as
provided herein.
(f) NUMBER OF SHARES. This Warrant may be exercised for the number of
shares of Common stock equal to:
X = A X B
C
A = 15% if the Next Qualified Equity Financing has occurred on
or before June__, 1999; 20% if the Next Qualified Equity Financing has occurred
after June __, 1999, but on or before July __, 1999; 30% if the Next Qualified
Equity Financing has occurred after July __, 1999, but on or before August __,
1999; 40% if the Next Qualified Equity Financing has occurred after August __,
1999, but on or before September __, 1999; 50% if the Next Qualified Equity
Financing has occurred after September __, 1999 but on or before October __,
1999; and 60% if the Next Qualified Equity Financing has occurred after October
__, 1999.
B = Original principal amount of Note.
C = The per share value of each share of the Company's Common
Stock sold at the Next Qualified Equity Financing.
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X = The number of shares of the Company's Common Stock for which
this Warrant (together with payment of the exercise price) is exercisable.
(g) NOTICES TO HOLDER. So long as this Warrant shall be outstanding and
unexercised (i) if the Company shall pay any dividend or make any distribution
upon the Common Stock, or (ii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be effected, then, in any such case, the Company shall
cause to be delivered to the Holder, at least ten days prior to the date
specified in (x) and at least thirty days prior to the date specified in (y)
below, as the case may be, a notice containing a brief description of the
proposed action and stating the date on which (x) a record is to be taken for
the purpose of such dividend, distribution or rights, or (y) such
reclassification reorganization, consolidation, merger, conveyance, lease,
dissolution, liquidation or winding up is to take place and at least twenty days
prior notice as to the date, if any is to be fixed, as of which the holders of
Common Stock of record shall be entitled to exchange their shares of Common
Stock for securities or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation, or
winding up.
(h) TRANSFER TO COMPLY WITH THE SECURITIES ACT.
(1) This Warrant or the Warrant Stock or any other security issued or
issuable upon exercise of this Warrant may not be offered or sold except
in conformity with the Securities Act, and then only against receipt of an
agreement of such person to whom such offer of sale is made to comply with
the provisions of this Section (h) with respect to any resale or other
disposition of such securities.
(2) The Company may cause the legends set forth at the top of the
first page hereof to be set forth on each Warrant and the following
legends to be set forth on each certificate representing Warrant Stock,
unless counsel for the Company is of the opinion as to any such
certificate that such legend is unnecessary:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES
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LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED
EXCEPT UPON SUCH REGISTRATION OR UPON DELIVERY TO THE CORPORATION OF
AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT
REGISTRATION IS NOT REQUIRED FOR SUCH SALE OR TRANSFER.
(i) APPLICABLE LAW. This Warrant shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
(j) NOTICE. Any notices or certificates by the Company to the Holder and
by the Holder to the Company shall be deemed delivered if in writing and
delivered personally or five (5) days after being sent by certified mail or
registered mail, return receipt requested, to the Holder. For purposes hereof,
the address of the Holder shall be Sint Krispijnstraat 7, B-8900 leper, Belgium,
Attention: Chief Operating Officer, and the address of the Company shall be 4615
Post Oak Place, Suite 111, Houston, Texas 77027, Attention: Chief Executive
Officer; provided, however, either address may be changed by notice given in
accordance herewith.
(k) NONWAIVER. No course of dealing or any delay or failure to exercise
any right, power or remedy hereunder on the part of the Holder hereof shall
operate as a waiver of or otherwise prejudice such Holder's rights, powers or
remedies.
(l) HOLDER NOT A STOCKHOLDER. Prior to the exercise of this Warrant as
hereinbefore provided, the Holder hereof shall not, by virtue of its ownership
of this Warrant, except as specifically provided herein, be entitled to any of
the rights of a stockholder of the Company including, without limitation, the
right as a stockholder to (a) vote on or consent to any proposed action of the
Company or (b) receive notice of or attend any meetings of stockholders of the
Company or notice of any other proceedings of the Company.
(m) SUCCESSORS AND ASSIGNS. This Warrant and the rights evidenced hereby
shall inure to the benefit of and be binding upon the successors and assigns of
the Company, the Holder hereof and the Holder of the shares of Common Stock
issued upon the exercise hereof, and shall be enforceable by any such Holder.
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<PAGE>
IN WITNESS WHEREOF, THE COMPANY HAS CAUSED THIS WARRANT TO BE
EXECUTED EFFECTIVE AS OF MAY __, 1999.
APPLIED VOICE RECOGNITION, INC.
By: ____________________________
Timothy J. Connolly, Chief
Executive Officer
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<PAGE>
PURCHASE FORM
The undersigned, the Holder of the within Warrant, hereby irrevocably
elects to exercise the purchase rights represented by said Warrant for, and to
purchase thereunder, ________ shares of Common Stock, $0.001 par value per
share, of Applied Voice Recognition, Inc. and herewith makes payment of
$___________ in cash therefor and requests that the certificates for such shares
be issued in the name of _________________________________________ and delivered
to ____________________________________, whose address is
_____________________________________________________ and, if such shares shall
not be all of the shares purchasable hereunder, that a new Warrant of like tenor
for the balance of the shares purchasable hereunder be delivered to the
undersigned.
Dated: _________________ ___________________________________
Name:______________________________
Title:_____________________________
Address: __________________________
__________________________
__________________________
Social Security
or Tax I.D. No. ___________________
SCHEDULE A-1
<PAGE>
ASSIGNMENT IN FULL
FOR VALUE RECEIVED, ___________________________________ hereby sells,
assigns and transfers unto _______________________________ the within Warrant
and all rights evidenced thereby and does irrevocably constitute and appoint
______________________________, attorney, to transfer the said Warrant on the
books of the within named Company.
Dated: _________________ _________________________________
_________________________________
Address: ________________________
________________________
________________________
Social Security
or Tax I.D. No. ___________________
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<PAGE>
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, ___________________________________ hereby sells,
assigns and transfers unto ________________________________ a portion of the
within Warrant and the rights evidenced thereby, TO WIT: the right to purchase
______ shares of Common Stock of __________________________ and does irrevocably
constitute and appoint _________________________, attorney, to transfer to such
extent the said Warrant on the books of the within named Corporation.
Dated: _________________ _________________________________
_________________________________
Address: ________________________
________________________
________________________
Social Security
or Tax I.D. No. ___________________
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EXHIBIT 10.3
CONVERTIBLE PROMISSORY NOTE AND
WARRANT PURCHASE AGREEMENT
This Convertible Promissory Note and Warrant Purchase Agreement (the
"Agreement") is made as of July 20, 1999 (the "Effective Date"), by and among
Applied Voice Recognition, Inc., a Delaware corporation doing business as
e-DOCS.net (the "Company"), and Greenwich, AG, a German company (the
"Investor").
RECITALS
WHEREAS, the Investor desires to purchase from the Company, and the
Company desires to issue to the Investor, a Convertible Promissory Note in the
form of Exhibit A attached hereto (the "Note") in the aggregate principal amount
of Five Hundred Thousand and No/100 Dollars ($500,000.00); and
WHEREAS, the Investor desires to purchase from the Company, and the
Company desires to issue to the Investor, a Warrant in the form of Exhibit B
attached hereto on the terms and conditions set forth herein (the "Warrant"),
such Warrant to purchase that number of shares of "Next Stock" (defined below)
of the Company as determined pursuant to the terms and conditions of this
Agreement and the Warrant.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as follows:
1. PURCHASE AND SALE OF NOTE AND WARRANT.
1.1 SALE AND ISSUANCE OF NOTE AND WARRANT. Subject to the terms and
conditions of this Agreement, the Investor agrees to purchase at the Closing (as
defined below) and the Company agrees to sell and issue to the Investor at the
Closing (a) a Note in the form attached hereto as Exhibit A, in the principal
amount of Five Hundred Thousand and No/100 Dollars ($500,000.00), at a price
equal to 100% of the principal amount thereof, and (b) a Warrant to purchase
such variable number of shares of the Company's Next Stock in the form attached
hereto as Exhibit B.
1.2 CLOSING. The purchase and sale of the Note and the Warrant shall take
place at the offices of Gardere Wynne Sewell & Riggs, LLP, 333 Clay Avenue,
Suite 800, Houston, Texas 77002 at 2:00 p.m. on July 20, 1999, or at such other
time and place as the Company and the Investor shall mutually agree in writing
(which time and place are designated as the "Closing").
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<PAGE>
1.3 DELIVERIES. At the Closing, the Company shall deliver to the Investor
the Note and the Warrant that the Investor is purchasing against payment of Five
Hundred Thousand and No/100 Dollars ($500,000.00) by wire transfer of same day
funds.
1.4 CONVERSION OF THE NOTE. Upon the Next Qualified Equity Financing (as
defined below), the principal amount of the Note plus any accrued but unpaid
interest will be automatically converted into that number of shares of the
Company's Next Stock issued in the Next Qualified Equity Financing as is equal
to the then principal balance of the Note plus any accrued but unpaid interest
divided by the price per share of the Company's Next Stock; PROVIDED, HOWEVER,
the amounts outstanding under the Note shall not be subject to conversion
without the written consent of the Investor unless, as of the closing of such
Next Qualified Equity Financing, the Chief Executive Officer candidate
previously identified to Greenwich, has entered into an employment contract with
the Company and commenced employment with the Company.
1.5 NEXT QUALIFIED EQUITY FINANCING. The term Next Qualified Equity
Financing shall mean the next equity financing involving the receipt by the
Company of at least Four Million Five Hundred Thousand Dollars ($4,500,000)
(excluding amounts received on conversion of the Note, but including amounts
received on conversion of notes from other investors) which is completed on or
before November 24, 1999. If no such Next Qualified Equity Financing shall have
occurred by November 24, 1999, then the Note shall become due and payable upon
the election of the Holder.
1.6 NEXT STOCK. The term "Next Stock" shall mean the stock into which the
attached Note is convertible, and for which the attached Warrant is exercisable.
Next Stock shall be the same class and series and have the same rights and
limitations including, but not limited to, anti-dilution protection and
registration rights as the Company's stock, which is the subject of the Next
Qualified Equity Financing. The Investor shall not have any right to modify or
negotiate the terms upon which such stock is issued.
1.7 ALLOCATION OF PURCHASE PRICE TO THE WARRANT. The Company hereby
allocates to the Warrant a purchase price of $0.01 for each share of Next Stock
that the Warrant is exercisable into and such purchase price shall be retained
by the Company from the principal of the Investor's Note by the Company and this
amount will not accrue interest or convert into any other security. Receipt of
such consideration is hereby acknowledged by the Company.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to and for the benefit of the Investor, with knowledge
that the Investor is relying thereon in entering into this Agreement and
purchasing the Note and the Warrant from the Company, that the following are
true and correct:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact
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<PAGE>
business and is in good standing in each jurisdiction in which the failure to so
qualify would have a material adverse effect on the operation of its business or
properties.
2.2 AUTHORIZATION. All corporate action on the part of the Company, its
officers, directors and stockholders necessary for the authorization, execution
and delivery of this Agreement, the Note and the Warrant, and the performance of
all obligations of the Company thereunder has been taken or will be taken prior
to the Closing, and this Agreement, the Note and the Warrant constitute valid
and legally binding obligations of the Company, enforceable against the Company
in accordance with their respective terms, except (a) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors' rights generally, (b) as limited
by laws relating to the availability of specific performance, injunctive relief
or other equitable remedies, and (c) to the extent the indemnification
provisions, if any, contained in any of such documents may be limited by
applicable federal or state securities laws.
2.3 VALID ISSUANCE OF NEXT STOCK. The shares of Next Stock of the Company
issuable upon the exercise of the Warrant which may be purchased by the Investor
pursuant to this Agreement have been or will be duly and validly reserved for
issuance and, upon issuance in accordance with the terms of the Warrant shall be
duly and validly issued, fully paid and nonassessable, and issued in compliance
with all applicable securities laws, as presently in effect, of the United
States and each of the states whose securities laws govern the issuance of any
of the Warrant pursuant to this Agreement.
2.4 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization
of, or registration, qualification, designation, declaration or filing with, any
federal, state, local or provincial governmental authority on the part of the
Company is required in connection with the consummation of the transactions
contemplated by this Agreement and such other filings as may be required by
applicable state securities laws.
2.5 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in material
violation or default of any provisions of its Certificate of Incorporation or
Bylaws or of any instrument, judgment, order, writ, decree or contract to which
it is a party or by which it is bound or, to its knowledge, of any provision of
federal or state statute, rule or regulation applicable to the Company or
otherwise in breach of any of the terms or conditions of any contract or
agreement which breach, either individually or in the aggregate, could
reasonably be expected to have a materially adverse effect on the business,
properties, financial condition or results of operations of the Company. To the
Company's knowledge, no other party to any of its material contracts or
agreements is in material default under any such contract or agreement. The
execution, delivery and performance of this Agreement, the Note and the Warrant,
and the consummation of the transactions contemplated hereby and thereby shall
not result in any such material violation or be in conflict with or constitute,
with or without the passage of time and giving of notice, either a default under
any such provision, instrument, judgment, order, writ, decree or contract or an
event that results in the creation of any lien, charge or encumbrance upon any
assets of the Company or the suspension, revocation,
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<PAGE>
impairment, forfeiture or nonrenewal of any material permit, license,
authorization or approval applicable to the Company, its business or operations
or any of its assets or properties.
2.6 DISCLOSURE. The Company has fully provided the Investor with all the
material information which the Investor has requested for deciding whether to
purchase the Note and the Warrant and all material information which the Company
believes is reasonably necessary to enable the Investor to make such decision.
Neither this Agreement nor any other written statements or certificates made or
delivered in connection herewith or therewith contains any untrue statement of
material fact or omits to state a material fact necessary to make the statements
in this Agreement or therein not misleading.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor hereby
represents and warrants to and for the benefit of the Company, with knowledge
that the Company is relying thereon in entering into this Agreement and issuing
the Note and the Warrant to the Investor, as follows:
3.1 PURCHASE ENTIRELY FOR OWN ACCOUNT. By the Investor's execution of this
Agreement, the Investor hereby confirms that the Note and Warrant to be received
by the Investor, the Next Stock issuable upon conversion of the Note, and the
Next Stock issuable upon exercise of the Warrant (collectively, the
"Securities") shall be acquired for investment for the Investor's own account,
not as a nominee or agent, and not with a view to the resale or distribution of
any part thereof, and that the Investor has no present intention of selling,
granting any participation in, or otherwise distributing the same. By executing
this Agreement, the Investor further represents that the Investor does not have
any contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participation to such person or to any third person, with
respect to any of the Securities. The Investor represents that it has full power
and authority to enter into this Agreement.
3.2 INVESTMENT EXPERIENCE. The Investor is an investor in securities of
companies in the development stage and acknowledges that it is able to fend for
itself, can bear the economic risk of its investment and has such knowledge and
experience in financial or business matters that it is capable of evaluating the
merits and risks of the investment in the Securities.
3.3 ACCREDITED INVESTOR. The Investor is an "accredited investor" within
the meaning of Securities and Exchange Commission Rule 501 of Regulation D, as
now in effect.
3.4 RESTRICTED SECURITIES. The Investor understands that the Securities it
is and shall be purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act of 1933, as amended (the "Act"), only in certain limited
circumstances. In this connection, the Investor represents that it is familiar
with Rule 144 promulgated under the Act, as now in effect, and understands the
resale limitations imposed thereby and by the Act.
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<PAGE>
3.5 LEGENDS. The Investor understands that the certificates evidencing the
Securities may bear one or all of the following legends:
(a) The securities evidenced by this certificate have not been
registered under the Securities Act of 1933, as amended (the "Act") or the
securities laws of any state of the United States. The securities evidenced by
this certificate may not be offered, sold or transferred for value directly or
indirectly, in the absence of such registration under the Act and qualification
under applicable state laws, or pursuant to an exemption from registration under
the Act and qualification under applicable state laws, the availability of which
is to be established to the reasonable satisfaction of the Company.
(b) Any legend required by the laws of the states of Delaware.
(c) Any legend required to be placed on the Securities purchased by
Investor in any future sale or offering of any Securities.
(d) A legend memorializing Section 5 below.
4. RESTRICTIONS ON DISPOSITION. Without in any way limiting the
representations set forth in Section 3 above, the Investor further agrees not to
make any disposition of all or any portion of the Securities unless and until
the transferee has agreed in writing for the benefit of the Company to be bound
by this Section 4, and in addition thereto, one of the following conditions is
satisfied:
4.1 SECURITIES REGISTERED. There is then in effect a registration
statement under the Act covering such proposed disposition and such disposition
is made in accordance with such registration statement.
4.2 REGISTRATION NOT REQUIRED. The Investor shall have (i) notified the
Company of the proposed disposition and shall have furnished the Company with a
detailed statement of the circumstances surrounding the proposed disposition and
(ii) if reasonably requested by the Company, furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of such securities under the Act;
provided, however, that the Company will not require opinions of counsel for
transactions made pursuant to Rule 144, except in unusual circumstances.
5. MARKET STAND-OFF AGREEMENT. During the period of duration (not to exceed
180 days) specified by the Company and an underwriter of Common Stock or other
securities of the Company, following the effective date of a registration
statement of the Company filed under the Act, the Investor shall not, to the
extent requested by the Company and such underwriter, directly or indirectly
sell, offer to sell, contract to sell (including, without limitation, any short
sale), grant any option to purchase or otherwise transfer or dispose of (other
than to transferees or donees who agree to be similarly bound) any securities of
the Company constituting Next Stock; provided, however, that this Section 5
shall be applicable (a) only to the first two such registration statements of
the Company pursuant to which Common Stock (or other securities) of the Company
are to be sold on its behalf to the public
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<PAGE>
in an underwritten offering, and (b) only if all officers and directors of the
Company and all persons with registration rights enter into similar agreements.
In order to enforce the foregoing covenant, the Company may impose stop-transfer
instructions with respect to the Common Stock of the Investor (and the shares or
securities of every other person subject to the foregoing restriction) until the
end of such period.
6. GENERAL PROVISIONS.
6.1 CONSTRUCTION. This Agreement shall be governed, construed and enforced
in accordance with the internal laws of the State of Texas, without giving
effect to its conflicts of laws or principles.
6.2 ENTIRE AGREEMENT. This Agreement, together with the agreements and
documents referred to herein, constitute the entire agreement among the parties
hereto with respect to the subject matter hereof and supersede all prior and
contemporaneous negotiations, agreements and understandings.
6.3 NOTICES. All payments, notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given at the earlier of (i) the time of actual delivery or (ii) on the
third business day following the date deposited with the United States Postal
Service, postage prepaid, certified with return receipt requested, to the
parties at the following addresses or at such other address as shall be given in
writing by a party to the other parties as set forth on the signature page.
6.4 SUCCESSORS AND ASSIGNS. This Agreement, and the rights and obligations
of each of the parties hereunder, may not be assigned by the Investor without
the prior written consent of the Company. Subject to the foregoing sentence,
this Agreement shall inure to the benefit of, and shall be binding upon, the
parties and their successors and assigns.
6.5 SEVERABILITY. If any term, covenant or condition of this Agreement is
held to be invalid, void or otherwise unenforceable by any court of competent
jurisdiction, the remainder of this Agreement shall not be affected thereby and
the term, covenant and condition of this Agreement shall be valid and
enforceable to the fullest extent permitted by law.
6.6 MODIFICATION. Any term of this Agreement may be amended and the
observance of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively), with the written
consent of the Company and the Investor. Any amendment or waiver effected in
accordance with this Section shall be binding upon all parties to this
Agreement, including, without limitation, any holder who may not have executed
such amendment or waiver, and each future holder of any equity security into
which the Note is convertible and/or any holder of Next Stock that is received
upon the exercise of the Warrant.
6.7 ATTORNEY'S FEES. If any action of law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to an award of its
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reasonable attorneys' fees, costs and disbursements in addition to any other
relief to which such party may be entitled.
6.8 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement to be
effective as of the Effective Date.
COMPANY:
APPLIED VOICE RECOGNITION, INC.,
a Delaware corporation, d/b/a e-DOCS.net
By: ______________________________________________
Richard A. Cabrera, Chief Financial Officer
Address:
4615 Post Oak Place
Suite 111
Houston, TX 77027
INVESTOR:
Greenwich, AG,
a German company
By: ______________________________________
Name: ________________________________
Title: _______________________________
Address:
Neuer Wall 32
20354 Hamburg, Germany
[SIGNATURE PAGE TO
CONVERTIBLE PROMISSORY NOTE
AND WARRANT PURCHASE AGREEMENT]
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<PAGE>
EXHIBIT A
FORM OF NOTE
<PAGE>
NEITHER THIS CONVERTIBLE PROMISSORY NOTE NOR ANY OF THE SECURITIES ISSUABLE
HEREUNDER HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES, OR DELIVERY TO THE COMPANY OF AN OPINION OF COUNSEL IN FORM
AND SUBSTANCE SATISFACTORY TO THE COMPANY THAT SUCH OFFER, SALE OR TRANSFER,
PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE ACT OR UNLESS SOLD IN FULL
COMPLIANCE WITH RULE 144 UNDER THE ACT. THE SALE OF THE SECURITIES WHICH ARE THE
SUBJECT OF THIS CONVERTIBLE PROMISSORY NOTE HAS NOT BEEN QUALIFIED WITH THE
STATE OF DELAWARE OR ANY OTHER STATE AND THE ISSUANCE OF SUCH SECURITIES OR THE
PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES PRIOR TO
SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SUCH SECURITIES IS EXEMPT
FROM QUALIFICATION BY APPLICABLE PROVISIONS OF THE SECURITIES LAWS OF DELAWARE
OR ANY OTHER STATE. THE RIGHTS OF THE HOLDER OF THIS CONVERTIBLE PROMISSORY NOTE
ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE
SALE IS SO EXEMPT.
Houston, Texas
July 20, 1999
APPLIED VOICE RECOGNITION, INC.
d/b/a e-DOCS.net
CONVERTIBLE PROMISSORY NOTE
Applied Voice Recognition, Inc., a Delaware corporation, doing business as
e-DOCS.net (the "Company"), for value received, hereby promises to pay to
Investor (the "Holder"), the principal amount of Five Hundred Thousand and
No/100 Dollars ($500,000.00) (the "Issue Price"), together with interest on the
unpaid amount thereof in accordance with the terms hereof, from the date hereof
until paid or converted in accordance with the terms hereof.
1. TERMS OF THE CONVERTIBLE PROMISSORY NOTE (THE "NOTE").
1.1 INTEREST RATE. The rate of interest hereunder ("Interest Rate") shall
be nine percent (9%) per annum and shall be computed on the basis of a 365 day
year for the actual number of days elapsed.
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1.2 PAYMENT. Subject to the provisions of Section 2 regarding conversion
of this Note, the Issue Price plus all accrued but previously unpaid interest
thereon (the "Conversion Amount") shall become due and payable on the earliest
of (i) November 24, 1999 (ii) immediately prior to the closing of the
acquisition of a majority of stock of the Company by another entity by means of
a transaction or a series of related transactions or (iii) the closing of the
sale of all or substantially all of the assets of the Company, unless the
Company stockholders of record prior to such acquisition or sale set forth in
(ii) and (iii) above shall hold at least fifty percent (50%) of the voting power
of the acquiring or surviving entity immediately after such acquisition or sale
("Due Date"). Payment shall be made at the offices or residence of the Holder,
or at such other place as the Holder shall have designated to the Company in
writing, in lawful money of the United States of America.
1.3 CONVERTIBLE NOTE AND WARRANT PURCHASE AGREEMENT. This Note is issued
by the Company in connection with that certain Convertible Promissory Note and
Warrant Purchase Agreement dated the date hereof (the "Agreement") among the
Company and the Holder, and is subject to, and Holder and the Company shall be
bound by, all the terms, conditions and provisions of the Agreement.
2. CONVERSION.
2.1 TIMING. Upon the completion of the Next Qualified Equity Financing (as
defined below), the Conversion Amount shall be automatically converted (subject
to the terms of Section 1.4 of the Agreement) into that number of fully paid and
nonassessable shares of the Company's Next Stock (defined below) issued in the
Next Qualified Equity Financing as is equal to the Conversion Amount divided by
the lower of (i) per share purchase price of the Next Stock or (ii) one dollar
($1.00) (the "Per Share Price"), with any fraction of a share rounded up to the
next whole share of the Next Stock. Provided, however, that if there is no Next
Qualified Equity Financing before November 24, 1999, then the Note shall become
due and payable upon the demand of the Holder at any time on or after November
24, 1999.
2.2 NEXT QUALIFIED EQUITY FINANCING. The term "Next Qualified Equity
Financing" is defined for purposes of this Note in Section 1.5 of the Agreement
of even date herewith.
2.3 NEXT STOCK. The term "Next Stock" is defined for purposes of this Note
in Section 1.6 of the Agreement.
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2.4 CONVERSION PROCEDURE. Written notice of the Next Qualified Equity
Financing shall be delivered to the Holders of this Note before or promptly
after the closing date of the Next Qualified Equity Financing (the "Conversion
Date"), at the address last shown on the records of the Company for the Holder
or given by the Holder to the Company for the purpose of notice (or, if no such
address appears or is given, at the residence of the Holder), notifying the
Holder of the conversion to be effected, including specifying (i) the Conversion
Amount (calculated as of the Conversion Date), (ii) the Per Share Price, (iii) a
term sheet setting forth the rights, preferences, privileges and terms and
conditions of issuance and sale of the Next Stock and the Conversion Date, and
(iv) copies of all relevant documentation evidencing the sale of the Next Stock
in the Next Qualified Entity Financing including any associated warrants, stock
purchase agreement, stock restriction agreement, and investor's rights
agreement. The Holder shall have no right to negotiate any of the terms or
conditions upon which the Next Stock shall be issued, which negotiation shall be
conducted solely among the Company and the purchasers of the Next Stock.
2.5 TERMINATION OF RIGHTS UPON CONVERSION. Provided notice is given by the
Company in accordance with Section 2.4, conversion shall be deemed effective on
the Conversion Date, and the Holders of this Note shall have no further rights
under this Note, whether or not this Note is surrendered. Conversion shall be
deemed effective upon issuance of Next Stock.
2.6 DELIVERY OF STOCK CERTIFICATES. As promptly as practicable after any
conversion of this Note and the Holders' surrender of this Note, the Company, at
its expense, shall issue and deliver to the Holders of this Note a certificate
or certificates evidencing the number of shares of Next Stock issuable to the
Holders upon any such conversion and any associated warrant.
3. MISCELLANEOUS.
3.1 TRANSFER OF NOTE. This Note shall not be transferable or assignable in
any manner, except to affiliates of Investor, and no interest shall be pledged
or otherwise encumbered by the Holders without the express written consent of
the Company, and any such attempted disposition of this Note or any portion
hereof shall be of no force or effect.
3.2 TITLES AND SUBTITLES. The titles and subtitles used in this Note are
for convenience only and are not to be considered in construing or interpreting
this Note.
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<PAGE>
3.3 NOTICES. Any notice required or permitted under this Note shall be
given in writing and in accordance with Section 6.3 of the Agreement (for
purposes of which the term "Investor" shall mean the Holder hereunder), except
as otherwise expressly provided in this Note.
3.4 ATTORNEYS' FEES. If any action at law or in equity is necessary to
enforce or interpret the terms of this Note, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and disbursements in addition to
any other relief to which such party may be entitled.
3.5 AMENDMENTS AND WAIVERS. This Note is issued by the Company pursuant to
that certain Convertible Promissory Note and Warrant Purchase Agreement dated
July 20, 1999. Other than the right to the payment of the Issue Price and all
accrued but unpaid interest thereon, which may only be amended or waived with
the written consent of the Holder, any other term of this Note may be amended
and the observance of any other term of this Note may be waived (either
generally or in a particular instance and either retroactively or
prospectively), with the written consent of the Company and the Holder, and in
accordance with the Agreement. Any amendment or waiver effected in accordance
with this Section 3.5 shall be binding upon the Holder of this Note (and of any
securities into which this Note is convertible), each future holder of all such
securities and the Company.
3.6 SEVERABILITY. If one or more provisions of this Note are held to be
unenforceable under applicable law, such provision shall be excluded from this
Note and the balance of the Note shall be interpreted as if such provision were
so excluded and shall be enforceable in accordance with its terms.
3.7 GOVERNING LAW. This Note shall be governed by and construed and
enforced in accordance with the laws of the State of Texas, without giving
effect to its conflicts of laws principles.
Date: July 20, 1999 APPLIED VOICE RECOGNITION, INC.,
d/b/a e-DOCS.net, a Delaware
corporation
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<PAGE>
By: ___________________________________
Richard A. Cabrera, Chief Financial
Officer
[SIGNATURE PAGE TO
CONVERTIBLE PROMISSORY NOTE]
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<PAGE>
EXHIBIT B
FORM OF WARRANT
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<PAGE>
NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT") OR
THE SECURITIES LAWS OF ANY STATE; THEREFORE, THIS WARRANT AND THE SECURITIES
ISSUABLE UPON EXERCISE HEREOF MAY NOT BE SOLD OR TRANSFERRED EXCEPT UPON SUCH
REGISTRATION OR UPON DELIVERY TO THE CORPORATION OF AN OPINION OF COUNSEL
SATISFACTORY TO THE CORPORATION THAT REGISTRATION IS NOT REQUIRED FOR SUCH SALE
OR TRANSFER.
WARRANT TO PURCHASE COMMON STOCK
OF
APPLIED VOICE RECOGNITION, INC.
VOID AFTER JULY 31, 2002
This certifies that GREENWICH, AG, a German company ("Greenwich"), is
entitled to purchase such number of shares of fully paid and nonassessable
shares of Common Stock, $0.001 par value (the "Common Stock") as is described
below, of Applied Voice Recognition, Inc., a Delaware corporation doing business
as e-DOCS.net (the "Company"), at a price equal to $1.25 per share. This Warrant
is issued pursuant to that certain Convertible Promissory Note and Warrant
Purchase Agreement dated of even date herewith (the "Purchase Agreement").
Pursuant to the Purchase Agreement, the Company also issued to Greenwich that
certain Convertible Promissory Note dated July 20, 1999 (the "Note"). Shares may
be purchased at any time, in whole or in part, after the earlier of (i) the date
of the closing of the Company's Next Qualified Equity Financing (as defined in
the Purchase Agreement), (ii) the date of the Company's repayment of all
principal and interest due under the Note, or (iii) November 24, 1999; provided,
however, in no event may this Warrant be exercised later than 5:00 p.m. (Houston
Time) on July 31, 2002 (the period during which Shares may be purchased being
referred to herein as the "Exercise Period").
The purchase price per share of Common Stock from time to time in
effect under this Warrant, and the number and character of shares covered
hereby, shall be subject to adjustments from time to time in certain instances
as follows, and the term "Exercise Price" shall mean the price
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<PAGE>
per share originally set forth in this Warrant or any price resulting from
adjustments pursuant to the terms hereof. The shares of Common Stock deliverable
upon such exercise, and as adjusted from time to time, are hereinafter sometimes
referred to as "Warrant Stock". The term "Holder" shall refer to Greenwich or
any person holding this Warrant in accordance with the terms hereof.
(a) EXERCISE OF WARRANT.
(1) Subject to and in accordance with the provisions hereof, this
Warrant may be exercised in whole or in part during the Exercise Period,
by presentation and surrender hereof to the Company or at the office of
its stock transfer agent, if any, with the Purchase Form annexed hereto
duly executed and accompanied by payment of the Exercise Price for the
number of shares specified in such form, together with all applicable
federal and state taxes. If this Warrant should be exercised in part only,
the Company shall, upon surrender of this Warrant for cancellation,
execute and deliver a new Warrant evidencing the right of the Holder to
purchase the balance of the shares purchasable hereunder. Upon receipt by
the Company of this Warrant at the office or agency of the Company, in
proper form for exercise and pursuant to compliance herewith, together
with payment of the Exercise Price, the Holder shall be deemed to be the
holder of record, for all purposes, of the shares of Common Stock issuable
upon such exercise, notwithstanding that the stock transfer books of the
Company shall then be closed or that certificates representing such shares
of Common Stock shall not then be actually delivered to the Holder. Upon
receipt of the required deliveries, the Company shall, as promptly as
practicable, and in any event within ten days thereafter, cause to be
issued and delivered to the Holder hereof or the transferee designated in
the Purchase Form a certificate or certificates representing the aggregate
number of full shares of Common Stock issuable upon such exercise
registered in the name of the Holder hereof, or the name of the transferee
so designated, as the case may be.
(2) In addition to the method of payment set forth in paragraph (1)
above and in lieu of any cash payment required thereunder, the Holder
shall have the right at any time and from time to time to exercise this
Warrant in full or in part by surrendering this Warrant in the manner
specified in paragraph (1) above in exchange for the number of shares of
Common Stock equal to the product of (x) the number of shares to which
this Warrant is being exercised multiplied by (y) a fraction, the
numerator of which is the Market Price (as herein defined) of the Common
Stock less the Exercise Price (as herein defined) and the denominator of
which is such Market Price. Solely for the purposes of this paragraph (2),
Market Price shall be calculated either (i) on the date on which the
Purchase Form attached hereto is deemed to have been sent to the Company
pursuant to paragraph (1) hereof ("Notice Date") or (ii) as the average of
the Market Price for each of the fifteen trading days preceding the Notice
Date, whichever of (i) or (ii) is greater.
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<PAGE>
(b) NO IMPAIRMENT. The Company hereby agrees that (i) at all times there
shall be reserved for issuance and delivery upon exercise of this Warrant such
number of shares of its Common Stock as shall be required for issuance and
delivery upon exercise of this Warrant, and (ii) it will take all action as may
be necessary in order that all shares of stock as may be issued pursuant to this
Warrant shall, upon issuance, be duly and validly issued, fully paid,
non-assessable and free from all taxes, liens and charges with respect to the
issuance thereof.
(c) FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon any exercise hereof, after
payment of the Exercise Price for such fractional share by the Holder, the
Company shall round the number of shares issued upon the exercise of this
Warrant to the next highest full share.
(d) ASSIGNMENT OF WARRANT OR WARRANT STOCK OR LOSS OF WARRANT.
(1) This Warrant may not be sold, transferred, assigned or
hypothecated at any time after its execution and delivery, except upon
compliance with the requirements of this Warrant and any applicable state
or federal securities laws. Shares of Common Stock issued pursuant to this
Warrant shall be subject to the same holding period as shares of Common
Stock issued upon conversion of the Note, which holding period is
described in the Purchase Agreement.
(2) Any sale, assignment, transfer or hypothecation of this Warrant
shall be made by surrender of this Warrant to the Company or at the office
of its stock transfer agent, if any, with the Assignment Form annexed
hereto duly executed and accompanied with funds sufficient to pay any
transfer tax; whereupon, the Company shall, after first receiving such
evidence as the Company may reasonably require as to compliance with this
Warrant, without charge, execute and deliver a new Warrant in the name of
the assignee named in such instrument of assignment and this Warrant shall
promptly be canceled.
(3) The term "Warrant" as used herein includes any Warrant issued in
substitution for or replacement of this Warrant. Upon receipt by the
Company of evidence of the loss, theft, destruction or mutilation of this
Warrant, and upon surrender and cancellation of this Warrant, if
mutilated, the Company will at its expense execute and deliver a new
Warrant of like tenor and date. When authorizing the execution and
delivery of a new Warrant to replace a Warrant lost, stolen or destroyed,
the Board of Directors of the Company may, in its sole discretion and as a
condition precedent thereto, require the
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<PAGE>
Holder to deliver an affidavit in a form satisfactory to the Board of Directors
of the Company and to indemnify the Company against any claim that may be made
against the Company with respect to such lost, stolen or destroyed Warrant.
(e) ANTI-DILUTION AND ADJUSTMENT PROVISIONS. The purchase price per share
of Common Stock from time to time in effect under this Warrant, and the number
and character of shares covered hereby, shall be subject to adjustments from
time to time in certain instances as follows, and the term "Exercise Price"
shall mean the price per share originally set forth in this Warrant or any price
resulting from adjustments pursuant to the terms hereof.
(1) In case the Company shall subdivide its outstanding shares of
Common Stock into a greater number of shares or shall issue in exchange
for its outstanding shares of Common Stock a greater number of shares of
Common Stock, then in each such case from and after the record date for
such subdivision or exchange, the number of shares of Common Stock covered
by this Warrant shall be increased in proportion to such increase in the
number of outstanding shares of Common Stock and the Exercise Price then
in effect shall be correspondingly decreased; and in the case the Company
shall reduce the number of shares of its Common Stock by a combination of
shares or shall issue in exchange for its outstanding shares of Common
Stock a lesser number of shares of Common Stock, then in each such case
from and after the record date for such combination or exchange, the
number of shares of Common Stock covered by this Warrant shall be
decreased in proportion to such reduction in the number of outstanding
shares of Common Stock, and the then prevailing Exercise Price shall be
correspondingly increased.
(2) In case the Company shall declare and pay a dividend upon its
Common Stock payable in Common Stock, then in each such case from and
after the record date for determining the stockholders entitled to receive
such dividend, the number of shares of Common Stock covered by this
Warrant shall be increased in proportion to the increase in the number of
outstanding shares of Common Stock through such stock dividend, and the
then prevailing Exercise Price shall be correspondingly decreased.
(3) In case of any reclassification or change of
outstanding shares of Common Stock (other than as a result of a
subdivision, combination or stock dividend) or in case of the
consolidation or merger of the Company with or into any other corporation
(other than a merger in which the Company is the continuing corporation
and which does not result in any reclassification or change in its
outstanding shares of Common Stock), or in case of any sale by the Company
of all or substantially all of its assets to another corporation, the
Holder shall have the right thereafter to receive upon exercise of this
Warrant the amount and kind of shares of capital stock and other
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<PAGE>
securities and property entitled to be received upon such
reclassification, change, consolidation, merger or sale by a holder of the
number of shares of Common Stock of the Company covered by this Warrant at
the then prevailing Exercise Price, subject to subsequent adjustments as
provided herein.
(f) NUMBER OF SHARES. This Warrant may be exercised for the number of
shares of Common stock equal to:
X = A X B
C
A = 15% if the Next Qualified Equity Financing has occurred on
or before August 20, 1999; 20% if the Next Qualified Equity Financing has
occurred after August 20, 1999, but on or before September 20, 1999; 30% if the
Next Qualified Equity Financing has occurred after September 20, 1999, but on or
before October 20, 1999; 40% if the Next Qualified Equity Financing has occurred
after October 20, 1999, but on or before November 24, 1999; and 50% if the Next
Qualified Equity Financing has not occurred on or before November 24, 1999.
B = Original principal amount of Note.
C = The per share value of each share of the Company's Common
Stock sold at the Next Qualified Equity Financing.
X = The number of shares of the Company's Common Stock for which
this Warrant (together with payment of the exercise price) is exercisable.
(g) NOTICES TO HOLDER. So long as this Warrant shall be outstanding and
unexercised (i) if the Company shall pay any dividend or make any distribution
upon the Common Stock, or (ii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be effected,
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<PAGE>
then, in any such case, the Company shall cause to be delivered to the Holder,
at least ten days prior to the date specified in (x) and at least thirty days
prior to the date specified in (y) below, as the case may be, a notice
containing a brief description of the proposed action and stating the date on
which (x) a record is to be taken for the purpose of such dividend, distribution
or rights, or (y) such reclassification reorganization, consolidation, merger,
conveyance, lease, dissolution, liquidation or winding up is to take place and
at least twenty (20) days prior notice as to the date, if any is to be fixed, as
of which the holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities or other property deliverable upon
such reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation, or winding up.
(h) TRANSFER TO COMPLY WITH THE SECURITIES ACT.
(1) This Warrant or the Warrant Stock or any other security issued or
issuable upon exercise of this Warrant may not be offered or sold except
in conformity with the Securities Act, and then only against receipt of an
agreement of such person to whom such offer of sale is made to comply with
the provisions of this Section (h) with respect to any resale or other
disposition of such securities.
(2) The Company may cause the legends set forth at the top of the
first page hereof to be set forth on each Warrant and the following
legends to be set forth on each certificate representing Warrant Stock,
unless counsel for the Company is of the opinion as to any such
certificate that such legend is unnecessary:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF
ANY STATE. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT UPON
SUCH REGISTRATION OR UPON DELIVERY TO THE CORPORATION OF AN OPINION
OF COUNSEL SATISFACTORY TO THE CORPORATION THAT REGISTRATION IS NOT
REQUIRED FOR SUCH SALE OR TRANSFER.
(i) APPLICABLE LAW. This Warrant shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
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<PAGE>
(j) NOTICE. Any notices or certificates by the Company to the Holder and
by the Holder to the Company shall be deemed delivered if in writing and
delivered personally or five (5) days after being sent by certified mail or
registered mail, return receipt requested, to the Holder. For purposes hereof,
the address of the Holder shall be Neuer Wall 32, 20354 Hamburg, Germany,
Attention: Chief Executive Officer, and the address of the Company shall be 4615
Post Oak Place, Suite 111, Houston, Texas 77027, Attention: Chief Executive
Officer; provided, however, either address may be changed by notice given in
accordance herewith.
(k) NONWAIVER. No course of dealing or any delay or failure to exercise
any right, power or remedy hereunder on the part of the Holder hereof shall
operate as a waiver of or otherwise prejudice such Holder's rights, powers or
remedies.
(l) HOLDER NOT A STOCKHOLDER. Prior to the exercise of this Warrant as
hereinbefore provided, the Holder hereof shall not, by virtue of its ownership
of this Warrant, except as specifically provided herein, be entitled to any of
the rights of a stockholder of the Company including, without limitation, the
right as a stockholder to (a) vote on or consent to any proposed action of the
Company or (b) receive notice of or attend any meetings of stockholders of the
Company or notice of any other proceedings of the Company.
(m) SUCCESSORS AND ASSIGNS. This Warrant and the rights evidenced hereby
shall inure to the benefit of and be binding upon the successors and assigns of
the Company, the Holder hereof and the Holder of the shares of Common Stock
issued upon the exercise hereof, and shall be enforceable by any such Holder.
IN WITNESS WHEREOF, THE COMPANY HAS CAUSED THIS WARRANT TO BE
EXECUTED EFFECTIVE AS OF JULY 20, 1999.
APPLIED VOICE RECOGNITION, INC.,
a Delaware corporation d/b/a e-DOCS.net
By: ___________________________________________
Richard A. Cabrera, Chief Financial Officer
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<PAGE>
PURCHASE FORM
The undersigned, the Holder of the within Warrant, hereby irrevocably
elects to exercise the purchase rights represented by said Warrant for, and to
purchase thereunder, ________ shares of Common Stock, $0.001 par value per
share, of Applied Voice Recognition, Inc., doing business as e-DOCS.net, and
herewith makes payment of $___________ in cash therefor and requests that the
certificates for such shares be issued in the name of
_________________________________________ and delivered to
____________________________________, whose address is
_____________________________________________________ and, if such shares shall
not be all of the shares purchasable hereunder, that a new Warrant of like tenor
for the balance of the shares purchasable hereunder be delivered to the
undersigned.
Dated: _________________ ___________________________________
Name:______________________________
Title:_____________________________
P
Address: __________________________
__________________________
__________________________
Social Security
or Tax I.D. No. ___________________
<PAGE>
ASSIGNMENT IN FULL
FOR VALUE RECEIVED, ___________________________________ hereby sells,
assigns and transfers unto _______________________________ the within Warrant
and all rights evidenced thereby and does irrevocably constitute and appoint
______________________________, attorney, to transfer the said Warrant on the
books of the within named Company.
Dated: _________________ __________________________________
__________________________________
Address: _________________________
_________________________
_________________________
Social Security
or Tax I.D. No. __________________
<PAGE>
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, ___________________________________ hereby sells,
assigns and transfers unto ________________________________ a portion of the
within Warrant and the rights evidenced thereby, TO WIT: the right to purchase
______ shares of Common Stock of __________________________ and does irrevocably
constitute and appoint _________________________, attorney, to transfer to such
extent the said Warrant on the books of the within named Company.
Dated: _________________ __________________________________
__________________________________
Address: _________________________
_________________________
_________________________
Social Security
or Tax I.D. No. __________________
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EXHIBIT 10.4
CONVERTIBLE PROMISSORY NOTE AND
WARRANT PURCHASE AGREEMENT
This Convertible Promissory Note and Warrant Purchase Agreement (the
"Agreement") is made as of July 20, 1999 by and among Applied Voice Recognition,
Inc., a Delaware corporation doing business as e-DOCS.net (the "Company"), and
the G-51 Capital LLC, a Texas limited liability company, (the "Investor").
RECITALS
WHEREAS, the Investor desires to purchase from the Company, and the
Company desires to issue to the Investor, a Convertible Promissory Note in the
form of Exhibit A attached hereto (the "Note") in the aggregate principal amount
of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00); and
WHEREAS, the Investor desires to purchase from the Company, and the
Company desires to issue to the Investor, a Warrant in the form of Exhibit B
attached hereto on the terms and conditions set forth herein (the "Warrant"),
such Warrant to purchase that number of shares of "Next Stock" (defined below)
of the Company as determined pursuant to the terms and conditions of this
Agreement and the Warrant.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as follows:
1. PURCHASE AND SALE OF NOTE AND WARRANT.
1.1 SALE AND ISSUANCE OF NOTE AND WARRANT. Subject to the terms and
conditions of this Agreement, the Investor agrees to purchase at the Closing (as
defined below) and the Company agrees to sell and issue to the Investor at the
Closing (a) a Note in the form attached hereto as Exhibit A, in the principal
amount of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00), at a
price equal to 100% of the principal amount thereof, and (b) a Warrant to
purchase such variable number of shares of the Company's Next Stock in the form
attached hereto as Exhibit B.
1.2 CLOSING. The purchase and sale of the Note and the Warrant shall take
place at the offices of Boyar, Simon & Miller, P.C., 4265 San Felipe, Suite
1200, Houston, Texas 77027 at 10:00 a.m. on July 20, 1999, or at such other time
and place as the Company and the Investor shall mutually agree in writing (which
time and place are designated as the "Closing").
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<PAGE>
1.3 DELIVERIES. At the Closing, the Company shall deliver to the Investor
the Note and the Warrant that the Investor is purchasing against payment of Two
Hundred Fifty Thousand and No/100 Dollars ($250,000.00) by wire transfer of same
day funds.
1.4 CONVERSION OF THE NOTE. Upon the Next Qualified Equity Financing (as
defined below), the principal amount of the Note plus any accrued but unpaid
interest will be automatically converted into that number of shares of the
Company's Next Stock issued in the Next Qualified Equity Financing as is equal
to the then principal balance of the Note plus any accrued but unpaid interest
divided by the price per share of the Company's Next Stock.
1.5 NEXT QUALIFIED EQUITY FINANCING. The term Next Qualified Equity
Financing shall mean the next equity financing involving the receipt by the
Company of at least Four Million Seven Hundred Fifty Thousand Dollars
($4,750,000) (excluding amounts received on conversion of the Note, but
including amounts received on conversion of notes from other investors) which is
completed on or before November 24, 1999. If no such Next Qualified Equity
Financing shall have occurred by November 24, 1999, then the Note shall become
due and payable upon the election of the Holder.
1.6 NEXT STOCK. The term "Next Stock" shall mean the stock into which the
attached Note is convertible, and for which the attached Warrant is exercisable.
Next Stock shall be the same class and series and have the same rights and
limitations including, but not limited to, anti-dilution protection and
registration rights as the Company's stock, which is the subject of the Next
Qualified Equity Financing. The Investor shall not have any right to modify or
negotiate the terms upon which such stock is issued.
1.7 ALLOCATION OF PURCHASE PRICE TO THE WARRANT. The Company hereby
allocates to the Warrant a purchase price of $0.01 for each share of Next Stock
that the Warrant is exercisable into and such purchase price shall be retained
by the Company from the principal of the Investor's Note by the Company and this
amount will not accrue interest or convert into any other security. Receipt of
such consideration is hereby acknowledged by the Company.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to and for the benefit of the Investor, with knowledge
that the Investor is relying thereon in entering into this Agreement and
purchasing the Note and the Warrant from the Company, that the following are
true and correct:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on the operation of its business or properties.
2.2 AUTHORIZATION. All corporate action on the part of the Company, its
officers, directors and stockholders necessary for the authorization, execution
and delivery of
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<PAGE>
this Agreement, the Note and the Warrant, and the performance of all obligations
of the Company thereunder has been taken or will be taken prior to the Closing,
and this Agreement, the Note and the Warrant constitute valid and legally
binding obligations of the Company, enforceable against the Company in
accordance with their respective terms, except (a) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors' rights generally, (b) as limited
by laws relating to the availability of specific performance, injunctive relief
or other equitable remedies, and (c) to the extent the indemnification
provisions, if any, contained in any of such documents may be limited by
applicable federal or state securities laws.
2.3 VALID ISSUANCE OF NEXT STOCK. The shares of Next Stock of the Company
issuable upon the exercise of the Warrant which may be purchased by the Investor
pursuant to this Agreement have been or will be duly and validly reserved for
issuance and, upon issuance in accordance with the terms of the Warrant shall be
duly and validly issued, fully paid and nonassessable, and issued in compliance
with all applicable securities laws, as presently in effect, of the United
States and each of the states whose securities laws govern the issuance of any
of the Warrant pursuant to this Agreement.
2.4 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization
of, or registration, qualification, designation, declaration or filing with, any
federal, state, local or provincial governmental authority on the part of the
Company is required in connection with the consummation of the transactions
contemplated by this Agreement and such other filings as may be required by
applicable state securities laws.
2.5 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in material
violation or default of any provisions of its Certificate of Incorporation or
Bylaws or of any instrument, judgment, order, writ, decree or contract to which
it is a party or by which it is bound or, to its knowledge, of any provision of
federal or state statute, rule or regulation applicable to the Company or
otherwise in breach of any of the terms or conditions of any contract or
agreement which breach, either individually or in the aggregate, could
reasonably be expected to have a materially adverse effect on the business,
properties, financial condition or results of operations of the Company. To the
Company's knowledge, no other party to any of its material contracts or
agreements is in material default under any such contract or agreement. The
execution, delivery and performance of this Agreement, the Note and the Warrant,
and the consummation of the transactions contemplated hereby and thereby shall
not result in any such material violation or be in conflict with or constitute,
with or without the passage of time and giving of notice, either a default under
any such provision, instrument, judgment, order, writ, decree or contract or an
event that results in the creation of any lien, charge or encumbrance upon any
assets of the Company or the suspension, revocation, impairment, forfeiture or
nonrenewal of any material permit, license, authorization or approval applicable
to the Company, its business or operations or any of its assets or properties.
2.6 DISCLOSURE. The Company has fully provided the Investor with all the
material information which the Investor has requested for deciding whether to
purchase the Note and the Warrant and all material information which the Company
believes is reasonably
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<PAGE>
necessary to enable the Investor to make such decision. Neither this Agreement
nor any other written statements or certificates made or delivered in connection
herewith or therewith contains any untrue statement of material fact or omits to
state a material fact necessary to make the statements in this Agreement or
therein not misleading.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor hereby
represents and warrants to and for the benefit of the Company, with knowledge
that the Company is relying thereon in entering into this Agreement and issuing
the Note and the Warrant to the Investor, as follows: 3.1 PURCHASE ENTIRELY FOR
OWN ACCOUNT. By the Investor's execution of this Agreement, the Investor hereby
confirms that the Note and Warrant to be received by the Investor, the Next
Stock issuable upon conversion of the Note, and the Next Stock issuable upon
exercise of the Warrant (collectively, the "Securities") shall be acquired for
investment for the Investor's own account, not as a nominee or agent, and not
with a view to the resale or distribution of any part thereof, and that the
Investor has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Agreement, the Investor
further represents that the Investor does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participation to such person or to any third person, with respect to any of the
Securities. The Investor represents that it has full power and authority to
enter into this Agreement.
3.2 INVESTMENT EXPERIENCE. The Investor is an investor in securities of
companies in the development stage and acknowledges that it is able to fend for
itself, can bear the economic risk of its investment and has such knowledge and
experience in financial or business matters that it is capable of evaluating the
merits and risks of the investment in the Securities.
3.3 ACCREDITED INVESTOR. The Investor is an "accredited investor" within
the meaning of Securities and Exchange Commission Rule 501 of Regulation D, as
now in effect.
3.4 RESTRICTED SECURITIES. The Investor understands that the Securities it
is and shall be purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act of 1933, as amended (the "Act"), only in certain limited
circumstances. In this connection, the Investor represents that it is familiar
with Rule 144 promulgated under the Act, as now in effect, and understands the
resale limitations imposed thereby and by the Act.
3.5 LEGENDS. The Investor understands that the certificates evidencing the
Securities may bear one or all of the following legends:
(a) The securities evidenced by this certificate have not been
registered under the Securities Act of 1933, as amended (the "Act") or the
securities laws of any state of the United States. The securities evidenced by
this certificate may not be offered,
4
<PAGE>
sold or transferred for value directly or indirectly, in the absence of such
registration under the Act and qualification under applicable state laws, or
pursuant to an exemption from registration under the Act and qualification under
applicable state laws, the availability of which is to be established to the
reasonable satisfaction of the Company.
(b) Any legend required by the laws of the states of Delaware.
(c) Any legend required to be placed on the Securities purchased by
Investor in any future sale or offering of any Securities.
(d) A legend memorializing Section 5 below.
4. RESTRICTIONS ON DISPOSITION. Without in any way limiting the
representations set forth in Section 3 above, the Investor further agrees not to
make any disposition of all or any portion of the Securities unless and until
the transferee has agreed in writing for the benefit of the Company to be bound
by this Section 4, and in addition thereto, one of the following conditions is
satisfied:
4.1 SECURITIES REGISTERED. There is then in effect a registration
statement under the Act covering such proposed disposition and such disposition
is made in accordance with such registration statement.
4.2 REGISTRATION NOT REQUIRED. The Investor shall have (i) notified the
Company of the proposed disposition and shall have furnished the Company with a
detailed statement of the circumstances surrounding the proposed disposition and
(ii) if reasonably requested by the Company, furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of such securities under the Act;
provided, however, that the Company will not require opinions of counsel for
transactions made pursuant to Rule 144, except in unusual circumstances.
5. MARKET STAND-OFF AGREEMENT. During the period of duration (not to exceed
180 days) specified by the Company and an underwriter of Common Stock or other
securities of the Company, following the effective date of a registration
statement of the Company filed under the Act, the Investor shall not, to the
extent requested by the Company and such underwriter, directly or indirectly
sell, offer to sell, contract to sell (including, without limitation, any short
sale), grant any option to purchase or otherwise transfer or dispose of (other
than to transferees or donees who agree to be similarly bound) any securities of
the Company constituting Next Stock; provided, however, that this Section 5
shall be applicable (a) only to the first two such registration statements of
the Company pursuant to which Common Stock (or other securities) of the Company
are to be sold on its behalf to the public in an underwritten offering, and (b)
only if all officers and directors of the Company and all persons with
registration rights enter into similar agreements. In order to enforce the
foregoing covenant, the Company may impose stop-transfer instructions with
respect to the Common Stock of the Investor (and the shares or securities of
every other person subject to the foregoing restriction) until the end of such
period.
5
<PAGE>
6. GENERAL PROVISIONS.
6.1 CONSTRUCTION. This Agreement shall be governed, construed and enforced in
accordance with the internal laws of the State of Texas, without giving effect
to its conflicts of laws or principles.
6.2 ENTIRE AGREEMENT. This Agreement, together with the agreements and
documents referred to herein, constitute the entire agreement among the parties
hereto with respect to the subject matter hereof and supersede all prior and
contemporaneous negotiations, agreements and understandings.
6.3 NOTICES. All payments, notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given at the earlier of (i) the time of actual delivery or (ii) on the
third business day following the date deposited with the United States Postal
Service, postage prepaid, certified with return receipt requested, to the
parties at the following addresses or at such other address as shall be given in
writing by a party to the other parties as set forth on the signature page.
6.4 SUCCESSORS AND ASSIGNS. This Agreement, and the rights and obligations
of each of the parties hereunder, may not be assigned by the Investor without
the prior written consent of the Company. Subject to the foregoing sentence,
this Agreement shall inure to the benefit of, and shall be binding upon, the
parties and their successors and assigns.
6.5 SEVERABILITY. If any term, covenant or condition of this Agreement is
held to be invalid, void or otherwise unenforceable by any court of competent
jurisdiction, the remainder of this Agreement shall not be affected thereby and
the term, covenant and condition of this Agreement shall be valid and
enforceable to the fullest extent permitted by law.
6.6 MODIFICATION. Any term of this Agreement may be amended and the
observance of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively), with the written
consent of the Company and the Investor. Any amendment or waiver effected in
accordance with this Section shall be binding upon all parties to this
Agreement, including, without limitation, any holder who may not have executed
such amendment or waiver, and each future holder of any equity security into
which the Note is convertible and/or any holder of Next Stock that is received
upon the exercise of the Warrant.
6.7 ATTORNEY'S FEES. If any action of law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to an award of its reasonable attorneys' fees, costs and disbursements
in addition to any other relief to which such party may be entitled.
6.8 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
6
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement to be
effective as of the date first written above.
COMPANY:
APPLIED VOICE RECOGNITION, INC.,
a Delaware corporation, d/b/a e-DOCS.net
By: _____________________________
Richard A. Cabrera,
Chief Financial Officer
Address:
4615 Post Oak Place
Suite 111
Houston, TX 77027
INVESTOR:
G-51 Capital LLC,
a Texas limited liability company
By: _____________________________
N. Rudy Garza, President
Address:
401 W. 29th Street
Austin, Texas 78705
[SIGNATURE PAGE TO
CONVERTIBLE PROMISSORY NOTE
AND WARRANT PURCHASE AGREEMENT]
7
<PAGE>
EXHIBIT A
FORM OF PROMISSORY NOTE
<PAGE>
NEITHER THIS CONVERTIBLE PROMISSORY NOTE NOR ANY OF THE SECURITIES ISSUABLE
HEREUNDER HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES, OR DELIVERY TO THE COMPANY OF AN OPINION OF COUNSEL IN FORM
AND SUBSTANCE SATISFACTORY TO THE COMPANY THAT SUCH OFFER, SALE OR TRANSFER,
PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE ACT OR UNLESS SOLD IN FULL
COMPLIANCE WITH RULE 144 UNDER THE ACT.
Houston, Texas
July 20, 1999
APPLIED VOICE RECOGNITION, INC.
d/b/a e-DOCS.net
CONVERTIBLE PROMISSORY NOTE
Applied Voice Recognition, Inc., a Delaware corporation, doing business as
e-DOCS.net (the "Company"), for value received, hereby promises to pay to
Investor (the "Holder"), the principal amount of Two Hundred Fifty Thousand and
No/100 Dollars ($250,000.00) (the "Issue Price"), together with interest on the
unpaid amount thereof in accordance with the terms hereof, from the date hereof
until paid or converted in accordance with the terms hereof.
1. TERMS OF THE CONVERTIBLE PROMISSORY NOTE (THE "NOTE").
1.1 INTEREST RATE. The rate of interest hereunder ("Interest Rate") shall
be nine percent (9%) per annum and shall be computed on the basis of a 365 day
year for the actual number of days elapsed.
1.2 PAYMENT. Subject to the provisions of Section 2 regarding conversion
of this Note, the Issue Price plus all accrued but previously unpaid interest
thereon (the "Conversion Amount") shall become due and payable on the earliest
of (i) November 24, 1999 (ii) immediately prior to the closing of the
acquisition of a majority of stock of the Company by another entity by means of
a transaction or a series of related transactions or (iii) the closing of the
sale of all or substantially all of the assets of the Company, unless the
Company stockholders of record prior to such acquisition or sale set forth in
(ii) and (iii) above shall hold at least fifty
<PAGE>
percent (50%) of the voting power of the acquiring or surviving entity
immediately after such acquisition or sale ("Due Date"). Payment shall be made
at the offices or residence of the Holder, or at such other place as the Holder
shall have designated to the Company in writing, in lawful money of the United
States of America.
1.3 CONVERTIBLE NOTE AND WARRANT PURCHASE AGREEMENT. This Note is issued
by the Company in connection with that certain Convertible Promissory Note and
Warrant Purchase Agreement dated the date hereof (the "Agreement") among the
Company and the Holder, and is subject to, and Holder and the Company shall be
bound by, all the terms, conditions and provisions of the Agreement.
2. CONVERSION.
2.1 TIMING. Upon the completion of the Next Qualified Equity Financing (as
defined below), the Conversion Amount shall be automatically converted into that
number of fully paid and nonassessable shares of the Company's Next Stock
(defined below) issued in the Next Qualified Equity Financing as is equal to the
Conversion Amount divided by the lower of (i) per share purchase price of the
Next Stock or (ii) one dollar ($1.00) (the "Per Share Price"), with any fraction
of a share rounded up to the next whole share of the Next Stock. Provided,
however, that if there is no Next Qualified Equity Financing before November 24,
1999, then the Note shall become due and payable upon the demand of the Holder
at any time on or after November 24, 1999.
2.2 NEXT QUALIFIED EQUITY FINANCING. The term "Next Qualified Equity
Financing" is defined for purposes of this Note in Section 1.5 of the Agreement
of even date herewith.
2.3 NEXT STOCK. The term "Next Stock" is defined for purposes of this Note
in Section 1.6 of the Agreement.
2.4 CONVERSION PROCEDURE. Written notice of the Next Qualified Equity
Financing shall be delivered to the Holders of this Note before or promptly
after the closing date of the Next Qualified Equity Financing (the "Conversion
Date"), at the address last shown on the records of the Company for the Holder
or given by the Holder to the Company for the purpose of notice (or, if no such
address appears or is given, at the residence of the Holder), notifying the
Holder of the conversion to be effected, including specifying (i) the Conversion
Amount
<PAGE>
(calculated as of the Conversion Date), (ii) the Per Share Price, (iii) a term
sheet setting forth the rights, preferences, privileges and terms and conditions
of issuance and sale of the Next Stock and the Conversion Date, and (iv) copies
of all relevant documentation evidencing the sale of the Next Stock in the Next
Qualified Entity Financing including any associated warrants, stock purchase
agreement, stock restriction agreement, and investor's rights agreement. The
Holder shall have no right to negotiate any of the terms or conditions upon
which the Next Stock shall be issued, which negotiation shall be conducted
solely among the Company and the purchasers of the Next Stock.
2.5 TERMINATION OF RIGHTS UPON CONVERSION. Provided notice is given by the
Company in accordance with Section 2.4, conversion shall be deemed effective on
the Conversion Date, and the Holders of this Note shall have no further rights
under this Note, whether or not this Note is surrendered. Conversion shall be
deemed effective upon issuance of Next Stock.
2.6 DELIVERY OF STOCK CERTIFICATES. As promptly as practicable after any
conversion of this Note and the Holders' surrender of this Note, the Company, at
its expense, shall issue and deliver to the Holders of this Note a certificate
or certificates evidencing the number of shares of Next Stock issuable to the
Holders upon any such conversion and any associated warrant.
3. MISCELLANEOUS.
3.1 TRANSFER OF NOTE. This Note shall not be transferable or assignable in
any manner, except to affiliates of Investor, and no interest shall be pledged
or otherwise encumbered by the Holders without the express written consent of
the Company, and any such attempted disposition of this Note or any portion
hereof shall be of no force or effect.
3.2 TITLES AND SUBTITLES. The titles and subtitles used in this Note are
for convenience only and are not to be considered in construing or interpreting
this Note.
3.3 NOTICES. Any notice required or permitted under this Note shall be
given in writing and in accordance with Section 6.3 of the Agreement (for
purposes of which the term "Investor" shall mean the Holder hereunder), except
as otherwise expressly provided in this Note.
<PAGE>
3.4 ATTORNEYS' FEES. If any action at law or in equity is necessary to
enforce or interpret the terms of this Note, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and disbursements in addition to
any other relief to which such party may be entitled.
3.5 AMENDMENTS AND WAIVERS. This Note is issued by the Company pursuant to
that certain Convertible Promissory Note and Warrant Purchase Agreement dated
July 20, 1999. Other than the right to the payment of the Issue Price and all
accrued but unpaid interest thereon, which may only be amended or waived with
the written consent of the Holder, any other term of this Note may be amended
and the observance of any other term of this Note may be waived (either
generally or in a particular instance and either retroactively or
prospectively), with the written consent of the Company and the Holder, and in
accordance with the Agreement. Any amendment or waiver effected in accordance
with this Section 3.5 shall be binding upon the Holder of this Note (and of any
securities into which this Note is convertible), each future holder of all such
securities and the Company.
3.6 SEVERABILITY. If one or more provisions of this Note are held to be
unenforceable under applicable law, such provision shall be excluded from this
Note and the balance of the Note shall be interpreted as if such provision were
so excluded and shall be enforceable in accordance with its terms.
3.7 GOVERNING LAW. This Note shall be governed by and construed and
enforced in accordance with the laws of the State of Texas, without giving
effect to its conflicts of laws principles.
Date: July 20, 1999 APPLIED VOICE RECOGNITION, INC.,
d/b/a e-DOCS.net, a Delaware
corporation
By: _______________________________
Richard A. Cabrera,
Chief Financial Officer
<PAGE>
[SIGNATURE PAGE TO
CONVERTIBLE PROMISSORY NOTE]
<PAGE>
EXHIBIT B
FORM OF WARRANT
-1-
<PAGE>
NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT") OR THE
SECURITIES LAWS OF ANY STATE; THEREFORE, THIS WARRANT AND THE SECURITIES
ISSUABLE UPON EXERCISE HEREOF MAY NOT BE SOLD OR TRANSFERRED EXCEPT UPON SUCH
REGISTRATION OR UPON DELIVERY TO THE CORPORATION OF AN OPINION OF COUNSEL
SATISFACTORY TO THE CORPORATION THAT REGISTRATION IS NOT REQUIRED FOR SUCH SALE
OR TRANSFER.
WARRANT TO PURCHASE COMMON STOCK
OF
APPLIED VOICE RECOGNITION, INC.
VOID AFTER JULY 31, 2002
This certifies that G-51 CAPITAL LLC, a Texas limited liability
company ("G-51"), is entitled to purchase such number of shares of fully paid
and nonassessable shares of Common Stock, $0.001 par value (the "Common Stock")
as is described below, of Applied Voice Recognition, Inc., a Delaware
corporation doing business as e-DOCS.net (the "Company"), at a price equal to
$1.25 per share. This Warrant is issued pursuant to that certain Convertible
Promissory Note and Warrant Purchase Agreement dated of even date herewith (the
"Purchase Agreement"). Pursuant to the Purchase Agreement, the Company also
issued G-51 that certain Convertible Promissory Note dated July 20, 1999 (the
"Note"). Shares may be purchased at any time, in whole or in part, after the
earlier of (i) the date of the closing of the Company's Next Qualified Equity
Financing (as defined in the Purchase Agreement), (ii) the date of the Company's
repayment of all principal and interest due under the Note, or (iii) November
24, 1999; provided, however, in no event may this Warrant be exercised later
than 5:00 p.m. (Houston Time) on July 31, 2002 (the period during which Shares
may be purchased being referred to herein as the "Exercise Period").
The purchase price per share of Common Stock from time to time in
effect under this Warrant, and the number and character of shares covered
hereby, shall be subject to adjustments from time to time in certain instances
as follows, and the term "Exercise Price" shall mean the price
-2-
<PAGE>
per share originally set forth in this Warrant or any price resulting from
adjustments pursuant to the terms hereof. The shares of Common Stock deliverable
upon such exercise, and as adjusted from time to time, are hereinafter sometimes
referred to as "Warrant Stock". The term "Holder" shall refer to G-51 or any
person holding this Warrant in accordance with the terms hereof.
(a) EXERCISE OF WARRANT.
(1) Subject to and in accordance with the provisions hereof, this
Warrant may be exercised in whole or in part during the Exercise Period,
by presentation and surrender hereof to the Company or at the office of
its stock transfer agent, if any, with the Purchase Form annexed hereto
duly executed and accompanied by payment of the Exercise Price for the
number of shares specified in such form, together with all applicable
federal and state taxes. If this Warrant should be exercised in part only,
the Company shall, upon surrender of this Warrant for cancellation,
execute and deliver a new Warrant evidencing the right of the Holder to
purchase the balance of the shares purchasable hereunder. Upon receipt by
the Company of this Warrant at the office or agency of the Company, in
proper form for exercise and pursuant to compliance herewith, together
with payment of the Exercise Price, the Holder shall be deemed to be the
holder of record, for all purposes, of the shares of Common Stock issuable
upon such exercise, notwithstanding that the stock transfer books of the
Company shall then be closed or that certificates representing such shares
of Common Stock shall not then be actually delivered to the Holder. Upon
receipt of the required deliveries, the Company shall, as promptly as
practicable, and in any event within ten days thereafter, cause to be
issued and delivered to the Holder hereof or the transferee designated in
the Purchase Form a certificate or certificates representing the aggregate
number of full shares of Common Stock issuable upon such exercise
registered in the name of the Holder hereof, or the name of the transferee
so designated, as the case may be.
(2) In addition to the method of payment set forth in paragraph (1)
above and in lieu of any cash payment required thereunder, the Holder
shall have the right at any time and from time to time to exercise this
Warrant in full or in part by surrendering this Warrant in the manner
specified in paragraph (1) above in exchange for the number of shares of
Common Stock equal to the product of (x) the number of shares to which
this Warrant is being exercised multiplied by (y) a fraction, the
numerator of which is the Market Price (as herein defined) of the Common
Stock less the Exercise Price (as herein defined) and the denominator of
which is such Market Price. Solely for the purposes of this paragraph (2),
Market Price shall be calculated either (i) on the date on which the
Purchase Form attached hereto is deemed to have been sent to the Company
pursuant to paragraph (1) hereof ("Notice Date") or (ii) as the average of
the Market Price for each of the fifteen trading days preceding the Notice
Date, whichever of (i) or (ii) is greater.
-3-
<PAGE>
(b) NO IMPAIRMENT. The Company hereby agrees that (i) at all times there
shall be reserved for issuance and delivery upon exercise of this Warrant such
number of shares of its Common Stock as shall be required for issuance and
delivery upon exercise of this Warrant, and (ii) it will take all action as may
be necessary in order that all shares of stock as may be issued pursuant to this
Warrant shall, upon issuance, be duly and validly issued, fully paid,
non-assessable and free from all taxes, liens and charges with respect to the
issuance thereof.
(c) FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon any exercise hereof, after
payment of the Exercise Price for such fractional share by the Holder, the
Company shall round the number of shares issued upon the exercise of this
Warrant to the next highest full share.
(d) ASSIGNMENT OF WARRANT OR WARRANT STOCK OR LOSS OF WARRANT.
(1) This Warrant may not be sold, transferred, assigned or
hypothecated at any time after its execution and delivery, except upon
compliance with the requirements of this Warrant and any applicable state
or federal securities laws. Shares of Common Stock issued pursuant to this
Warrant shall be subject to the same holding period as shares of Common
Stock issued upon conversion of the Note, which holding period is
described in the Purchase Agreement.
(2) Any sale, assignment, transfer or hypothecation of this Warrant
shall be made by surrender of this Warrant to the Company or at the office
of its stock transfer agent, if any, with the Assignment Form annexed
hereto duly executed and accompanied with funds sufficient to pay any
transfer tax; whereupon, the Company shall, after first receiving such
evidence as the Company may reasonably require as to compliance with this
Warrant, without charge, execute and deliver a new Warrant in the name of
the assignee named in such instrument of assignment and this Warrant shall
promptly be canceled.
(3) The term "Warrant" as used herein includes any Warrant issued in
substitution for or replacement of this Warrant. Upon receipt by the
Company of evidence of the loss, theft, destruction or mutilation of this
Warrant, and upon surrender and cancellation of this Warrant, if
mutilated, the Company will at its expense execute and deliver a new
Warrant of like tenor and date. When authorizing the execution and
delivery
-4-
<PAGE>
of a new Warrant to replace a Warrant lost, stolen or destroyed,
the Board of Directors of the Company may, in its sole discretion and as a
condition precedent thereto, require the Holder to deliver an affidavit in
a form satisfactory to the Board of Directors of the Company and to
indemnify the Company against any claim that may be made against the
Company with respect to such lost, stolen or destroyed Warrant.
(e) ANTI-DILUTION AND ADJUSTMENT PROVISIONS. The purchase price per share
of Common Stock from time to time in effect under this Warrant, and the number
and character of shares covered hereby, shall be subject to adjustments from
time to time in certain instances as follows, and the term "Exercise Price"
shall mean the price per share originally set forth in this Warrant or any price
resulting from adjustments pursuant to the terms hereof.
(1) In case the Company shall subdivide its outstanding shares of
Common Stock into a greater number of shares or shall issue in exchange
for its outstanding shares of Common Stock a greater number of shares of
Common Stock, then in each such case from and after the record date for
such subdivision or exchange, the number of shares of Common Stock covered
by this Warrant shall be increased in proportion to such increase in the
number of outstanding shares of Common Stock and the Exercise Price then
in effect shall be correspondingly decreased; and in the case the Company
shall reduce the number of shares of its Common Stock by a combination of
shares or shall issue in exchange for its outstanding shares of Common
Stock a lesser number of shares of Common Stock, then in each such case
from and after the record date for such combination or exchange, the
number of shares of Common Stock covered by this Warrant shall be
decreased in proportion to such reduction in the number of outstanding
shares of Common Stock, and the then prevailing Exercise Price shall be
correspondingly increased.
(2) In case the Company shall declare and pay a dividend upon its
Common Stock payable in Common Stock, then in each such case from and
after the record date for determining the stockholders entitled to receive
such dividend, the number of shares of Common Stock covered by this
Warrant shall be increased in proportion to the increase in the number of
outstanding shares of Common Stock through such stock dividend, and the
then prevailing Exercise Price shall be correspondingly decreased.
(3) In case of any reclassification or change of
outstanding shares of Common Stock (other than as a result of a
subdivision, combination or stock dividend) or in case of the
consolidation or merger of the Company with or into any other corporation
(other than a merger in which the Company is the continuing corporation
and which does not result in any reclassification or change in its
outstanding shares of
-5-
<PAGE>
Common Stock), or in case of any sale by the Company of all or
substantially all of its assets to another corporation, the Holder shall
have the right thereafter to receive upon exercise of this Warrant the
amount and kind of shares of capital stock and other securities and
property entitled to be received upon such reclassification, change,
consolidation, merger or sale by a holder of the number of shares of Common
Stock of the Company covered by this Warrant at the then prevailing
Exercise Price, subject to subsequent adjustments as provided herein.
(f) NUMBER OF SHARES. This Warrant may be exercised for the number of
shares of Common stock equal to:
X = A X B
C
A = 15% if the Next Qualified Equity Financing has occurred on
or before August 20, 1999; 20% if the Next Qualified Equity Financing has
occurred after August 20, 1999, but on or before September 20, 1999; 30% if the
Next Qualified Equity Financing has occurred after September 20, 1999, but on or
before October 20, 1999; 40% if the Next Qualified Equity Financing has occurred
after October 20, 1999, but on or before November 24, 1999; and 50% if the Next
Qualified Equity Financing has not occurred on or before November 24, 1999.
B = Original principal amount of Note.
C = The per share value of each share of the Company's Common
Stock sold at the Next Qualified Equity
Financing.
X = The number of shares of the Company's Common Stock for which
this Warrant (together with payment of the exercise price) is exercisable.
(g) NOTICES TO HOLDER. So long as this Warrant shall be outstanding and
unexercised (i) if the Company shall pay any dividend or make any distribution
upon the Common Stock, or (ii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company,
-6-
<PAGE>
consolidation or merger of the Company with or into another corporation, sale,
lease or transfer of all or substantially all of the property and assets of the
Company to another corporation, or voluntary or involuntary dissolution,
liquidation or winding up of the Company shall be effected, then, in any such
case, the Company shall cause to be delivered to the Holder, at least ten days
prior to the date specified in (x) and at least thirty days prior to the date
specified in (y) below, as the case may be, a notice containing a brief
description of the proposed action and stating the date on which (x) a record is
to be taken for the purpose of such dividend, distribution or rights, or (y)
such reclassification reorganization, consolidation, merger, conveyance, lease,
dissolution, liquidation or winding up is to take place and at least twenty (20)
days prior notice as to the date, if any is to be fixed, as of which the holders
of Common Stock of record shall be entitled to exchange their shares of Common
Stock for securities or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation, or
winding up.
(h) TRANSFER TO COMPLY WITH THE SECURITIES ACT.
(1) This Warrant or the Warrant Stock or any other security issued or
issuable upon exercise of this Warrant may not be offered or sold except
in conformity with the Securities Act, and then only against receipt of an
agreement of such person to whom such offer of sale is made to comply with
the provisions of this Section (h) with respect to any resale or other
disposition of such securities.
(2) The Company may cause the legends set forth at the top of the
first page hereof to be set forth on each Warrant and the following
legends to be set forth on each certificate representing Warrant Stock,
unless counsel for the Company is of the opinion as to any such
certificate that such legend is unnecessary:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE OR THE SECURITIES
LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED
EXCEPT UPON SUCH REGISTRATION OR UPON DELIVERY TO THE CORPORATION OF
AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT
REGISTRATION IS NOT REQUIRED FOR SUCH SALE OR TRANSFER.
-7-
<PAGE>
(i) APPLICABLE LAW. This Warrant shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
(j) NOTICE. Any notices or certificates by the Company to the Holder and
by the Holder to the Company shall be deemed delivered if in writing and
delivered personally or five (5) days after being sent by certified mail or
registered mail, return receipt requested, to the Holder. For purposes hereof,
the address of the Holder shall be 401 W. 29th Street, Austin, Texas 78705,
Attention: President, and the address of the Company shall be 4615 Post Oak
Place, Suite 111, Houston, Texas 77027, Attention: Chief Executive Officer;
provided, however, either address may be changed by notice given in accordance
herewith.
(k) NONWAIVER. No course of dealing or any delay or failure to exercise
any right, power or remedy hereunder on the part of the Holder hereof shall
operate as a waiver of or otherwise prejudice such Holder's rights, powers or
remedies.
(l) HOLDER NOT A STOCKHOLDER. Prior to the exercise of this Warrant as
hereinbefore provided, the Holder hereof shall not, by virtue of its ownership
of this Warrant, except as specifically provided herein, be entitled to any of
the rights of a stockholder of the Company including, without limitation, the
right as a stockholder to (a) vote on or consent to any proposed action of the
Company or (b) receive notice of or attend any meetings of stockholders of the
Company or notice of any other proceedings of the Company.
(m) SUCCESSORS AND ASSIGNS. This Warrant and the rights evidenced hereby
shall inure to the benefit of and be binding upon the successors and assigns of
the Company, the Holder hereof and the Holder of the shares of Common Stock
issued upon the exercise hereof, and shall be enforceable by any such Holder.
IN WITNESS WHEREOF, THE COMPANY HAS CAUSED THIS WARRANT TO BE
EXECUTED EFFECTIVE AS OF JULY 20, 1999.
APPLIED VOICE RECOGNITION, INC.,
a Delaware corporation d/b/a e-DOCS.net
By: ______________________________________
Richard A. Cabrera,
Chief Financial Officer
-8-
<PAGE>
PURCHASE FORM
The undersigned, the Holder of the within Warrant, hereby irrevocably
elects to exercise the purchase rights represented by said Warrant for, and to
purchase thereunder, ________ shares of Common Stock, $0.001 par value per
share, of Applied Voice Recognition, Inc., doing business as e-DOCS.net, and
herewith makes payment of $___________ in cash therefor and requests that the
certificates for such shares be issued in the name of
_________________________________________ and delivered to
____________________________________, whose address is
_____________________________________________________ and, if such shares shall
not be all of the shares purchasable hereunder, that a new Warrant of like tenor
for the balance of the shares purchasable hereunder be delivered to the
undersigned.
Dated: _________________ ___________________________________
Title:_____________________________
Address: __________________________
__________________________
__________________________
Social Security
or Tax I.D. No. ___________________
<PAGE>
ASSIGNMENT IN FULL
FOR VALUE RECEIVED, ___________________________________ hereby sells,
assigns and transfers unto _______________________________ the within Warrant
and all rights evidenced thereby and does irrevocably constitute and appoint
______________________________, attorney, to transfer the said Warrant on the
books of the within named Company.
Dated: _________________ ___________________________________
___________________________________
Address: __________________________
__________________________
__________________________
Social Security
or Tax I.D. No. ___________________
<PAGE>
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, ___________________________________ hereby sells,
assigns and transfers unto ________________________________ a portion of the
within Warrant and the rights evidenced thereby, TO WIT: the right to purchase
______ shares of Common Stock of __________________________ and does irrevocably
constitute and appoint _________________________, attorney, to transfer to such
extent the said Warrant on the books of the within named Company.
Dated: _________________ ___________________________________
___________________________________
Address: __________________________
__________________________
__________________________
Social Security
or Tax I.D. No. ___________________
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
(ERIC BLACK)
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
as of the 2nd day of August, 1999 (the "Effective Date"), by and between APPLIED
VOICE RECOGNITION, INC., a Delaware corporation doing business as E-DOCS.NET
("Employer"), and ERIC BLACK, an individual residing in Houston, 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 2, 1999 (the "Commencement Date") and shall
continue (subject to termination by either Employer or Employee or extension by
Employer and Employee, all as hereinafter provided) for an initial term (the
"Initial Term") of three (3) years expiring on August 1, 2002 (the "Expiration
Date"). Each year hereof, prior to the anniversary date of this Agreement, the
Board of Directors (acting through the Compensation Committee, if deemed
appropriate by such board) shall review the performance of Employee and the
extent to which Employee has reached his performance goals set by the
Compensation Committee of the Board of Directors. Following such review, the
Board of Directors shall consider the extension of the Term for an additional
year and upon written consent of both Employer and Employee, such Term shall be
extended. 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
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and unpaid Base Salary (as hereafter defined) under Section 3(a) and any earned
and unpaid Bonus (as hereafter defined) under Section 3(b), 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 of TWENTY THOUSAND EIGHT HUNDRED THIRTY-THREE AND
33/100 DOLLARS ($20,833.33) (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. 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),
(i) for the period beginning with the Commencement Date through December 31,
1999, Employee shall be entitled to a bonus of up to fifty percent (50%) of
Employee's Base Salary paid during such period, and (ii) for each twelve month
period thereafter, Employee shall be entitled to a bonus of up to one hundred
percent (100%) of Employee's Base Salary; provided, however, Employee shall be
entitled to such bonus if, and only if, Employee has met the performance
criteria set by the Compensation Committee of the Board of Directors of Employer
(the "Compensation Committee") for the applicable period. Criteria set by the
Compensation Committee shall be set on a quarterly basis for the quarters ending
September 30, December 31, March 31 and June 30, and bonuses earned pursuant
hereto shall be on a quarterly basis. Employee acknowledges that the criteria
for the period between the Commencement Date and December 31, 1999 have been set
by the Compensation Committee and are attached hereto as EXHIBIT "A". Employer
agrees that performance criteria for Employee's bonus to be earned commencing
January 1, 2000 shall be set on or before January 1 of each year, and Employee
shall have the opportunity to meet with and discuss such criteria with the
Compensation Committee prior to the finalization of such criteria. Upon
completion of the criteria for the applicable year, such criteria shall be
communicated 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 quarterly 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 with the Commencement Date, Employee shall be entitled during
the Term, upon satisfaction of all eligibility requirements, if any, to
participate in
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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. During the Term, Employee shall be entitled to receive three weeks of
paid vacation. In addition, Employee shall be entitled to receive paid holidays
as enjoyed by all other employees of Employer.
f. Employee shall be entitled to receive a country club allowance of up to
$5,000 per year.
g. Employee shall be entitled to reimbursement from Employer for all
expenses incurred in maintaining a dedicated facsimile and internet access line
for business use in Employee's residence.
h. If Employee's employment is terminated by Employer with or without
cause, following such termination, Employee shall be entitled to reimbursement
for the reasonable costs of relocating and moving his household from Houston,
Texas to Thomasville, North Carolina, including the cost of up to one-half of
any brokerage commissions arising out of the sale of his Houston residence. The
aggregate amount of such reimbursement shall not exceed $50,000. In the event
such move does not take place within one year of the termination of Employee's
employment hereunder, the provisions of this Section 3(h) shall terminate and be
of no further force or effect.
i. Employee shall be entitled to a reimbursement of costs of financial and
tax planning by Employee reasonably required in Employee's discretion as a
result of this Agreement, such reimbursement to be limited to $5,000 during the
first year and $2,500 for each year thereafter.
j. Employee shall be entitled to a disability policy at the expense of
Employer that provides for payments in the amount of one-half of Employee's Base
Salary during such period as Employee is disabled, as set forth in and subject
to the limitations contained in such policy.
4. DUTIES.
a. Employee is employed to act as Chief Executive Officer and President of
the Employer or 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
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<PAGE>
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 to which Employee might become exposed in
carrying out Employee's duties and responsibilities hereunder that relate to
voice recognition or medical transcription.
e. So long as Employee is the Chief Executive Officer of Employer,
Employee shall be entitled to be a member of the Board of Directors of Employer.
Employee's election to the Board of Directors of Employer shall be undertaken at
the first meeting of the Board of Directors of Employer that is held after the
Effective Date.
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 1,500,000 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 "Option Plan"). To the extent sufficient
options are not available under the Option Plan, Employer agrees to take all
reasonable steps to make such options available as soon as is reasonably
practicable. 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 $_____ per share, (ii) one-third of the Options (being options to
purchase 500,000 shares) shall vest on the first anniversary date of the
Commencement Date, and (iii) one twenty-fourth (1/24th) of the remaining Options
(being options to purchase 41,666 shares) shall vest on the last day of each
month following the first anniversary date of the Commencement Date until all
such Options have vested by August 1, 2002.
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.
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<PAGE>
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(b), (c) or (e), 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 compensation 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, (i) if such
termination occurs with one year or more remaining in the Term, Employee shall
continue to receive one-half of his Base Salary for twenty-four (24) months
following the date of such termination, and (ii) if
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<PAGE>
such termination occurs with less than one year remaining in the Term, Employee
shall continue to receive one-half of his Base Salary for the number of full
months remaining in the Term times two (the actual term in which Employee is to
receive his partial Base Salary after such termination being referred to as the
"Severance Term"). In the event of such termination, Employer shall pay for
Employee's COBRA benefits for the lesser of the Severance Term or the maximum
period in which Employee is eligible to receive COBRA; however, in no event
shall Employer be required to pay in excess of $500 per month toward such COBRA
benefits. In the event Employee is terminated without cause as provided in this
Section 6(e), Employee shall not be eligible to receive the Bonus for any
quarter beyond the quarter in which Employee's employment is terminated. If
Employee's employment under 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. If Employee is terminated without cause and a Change
in Control occurs as described in Section 13 within six (6) months after the
termination date, then the benefits of Section 13 shall apply.
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
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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 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), any termination of
Employee's employment pursuant to Section
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6(e) or the voluntary termination of employment by Employee pursuant to Section
2, directly or indirectly, within the United States, for Employee's own account
or on behalf of any direct competitors of Employer, engage in any business or
transaction involving (i) the design, installation, integration, service or
consulting with respect to voice recognition software designs and applications,
or (ii) the transcription of medical records (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 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;
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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 Employer for a duration of longer than the duration of the
twenty-four (24) month non-compete and non-solicitation period; and
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. CHANGE IN CONTROL. A "Change in Control" shall be deemed to have occurred
if (i) in the context of a single event or series of related events, more than
50% of the voting power of the Company's outstanding securities entitled to vote
in elections of directors shall be acquired by any person (as such term is used
in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended)
other than by any person which includes Employee, or (ii) as the result of a
tender offer, merger, consolidation, sale of assets or contested election, or
any combination of such transactions, the persons who were directors of Employer
immediately before the transaction shall cease to constitute a majority of the
Board of Directors of Employer or any successor to Employer. In the event of a
Change in Control and any Change in Control Qualifying Event (as herein defined)
shall occur, Employee shall be permitted to terminate his employment within six
(6) months of such Change in Control Qualifying Event and notwithstanding such
termination, Employee shall be entitled to receive his Base Salary for the
remaining Term of this Agreement. In addition, any options granted to Employee
pursuant to Section 5 shall immediately vest as of such termination date;
however, Employee shall not be eligible to receive the Bonus for any quarter
beyond the quarter in which Employee's
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employment is terminated. For purposes hereof, a Change in Control Qualifying
Event shall include (i) a significant diminution, without mutual agreement of
the parties, in the nature and scope of Employee's authority, power, functions
or duties, (ii) Employer assigns to Employee, without mutual agreement of the
parties, substantial additional duties or responsibilities which are
inconsistent with the duties of Employee under this Agreement, or (iii) Employer
transfers Employee from the principal office of the Company. Employer and
Employee agree that if Employee does a spin-off initial public offering of
e-Docs Health Care Information Services, Inc., and none of the circumstances
described in subsections (i), (ii) or (iii) above apply, such transaction will
not be a Change in Control for purposes of this Section 13, so long as
replacement stock options reasonably equivalent in value to the options granted
to Employee in Employer are granted to Employee in the spun-off company on terms
and conditions mutually acceptable to Employer and Employee.
14. GROSS-UP PROVISION. If any portion of any payments received by Employee
from Employer shall be subject to tax imposed by Section 4999 of the Internal
Revenue Code of 1986, as amended or any successor statutory provision, Employer
shall pay to Employee such additional amounts as are necessary so that, after
taking into account any tax imposed by Section 4999 (or any successor statutory
provision), and any federal and state income taxes payable on any such tax, the
Employee is in the same after-tax position that he would have been if such
Section 4999 or any successor statutory provision did not apply and no payments
were made pursuant to this Section 14.
15. 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.
16. 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: President
Facsimile No.: (713) 621-5870
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with a copy to: Boyar, Simon & Miller
4265 San Felipe, Suite 1200
Houston, Texas 77027
Attention: J. William Boyar, Esq.
Facsimile No.: (713) 552-1758
or, if to Employee, at: Mr. Eric Black
13426 Sweet Surrender Court
Houston, Texas 77041
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.
17. 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.
18. ASSIGNMENT. This Agreement may not be assigned by any party without the
prior written consent of the other parties.
19. 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.
20. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
21. 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 (or cost of arbitration, as
applicable) by the non-prevailing party.
22. 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.
23. SUBJECT TO BOARD APPROVAL. This Agreement is subject to approval of the
Board of Directors of Employer. In connection therewith, Employer agrees to
submit a
11
<PAGE>
unanimous written consent of the Board of Directors approving such
transaction on or before July 15, 1999, and to advise Employee promptly
following such meeting as to whether this Agreement was approved. In the event
this Agreement is not approved on or before such date, this Agreement shall be
void and of no further force or effect.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
2nd day of August, 1999, effective as of the Effective Date.
EMPLOYER:
APPLIED VOICE RECOGNITION, INC., a
Delaware corporation d/b/a e.DOCS.NET
By:______________________________________
Timothy J. Connolly
Chairman
EMPLOYEE:
__________________________________________
ERIC BLACK
Signature Page to Eric Black Employment Agreement
12
<PAGE>
EXHIBIT "A"
E-DOCS.NET
1999 INCENTIVE PLAN CRITERIA
Eric Black
50% OF INCENTIVE COMPENSATION BASED ON E-DOCS ACHIEVING TARGETED
REVENUE RUN RATE AND TARGETED EBITDA BY DECEMBER 31, 1999.
*OTHER CRITERIA: 50% of incentive compensation based on completion of the
following (to the satisfaction of the Compensation Committee of Employer):
20% Establish a common/integrated technology plan that addresses the
specialty and hospital market (the role of DVI, VC99, document
management, Speech Machines and VPN)
10% Define and have begun implementing the delivery of services to the
Hospital and specialty market (specific roll of all technical
resources)
10% Establish comprehensive Sales Program incorporating sales incentives
based on the quality of pricing, sales volume, customer retention and
develop a price increase program and establish for both district
personnel and senior management a quarterly incentive program with
measurable goals
10% Establish "Monthly Operating Review" process which would include a
review of past month with an action plan for the current month and a
mid-month projection and operational review and establish a budget
and cost tracking program for all departments
* Minimum of 90% of the Targeted Revenue Run Rate and Targeted EBITDA must
be achieved to qualify for "other criteria" bonus components.
Targeted Revenue Run Rate means a Revenue Run Rate based on the average
accrual basis gross revenues from medical transcription services and product
sales (but not extraordinary consulting services) for November and December,
1999 of no less than $898,000 per month. Targeted EBITDA means average EBITDA
for November and December, 1999 of no less than -$227,000 per month. Targeted
Revenue Run Rate and Targeted EBITDA will be adjusted for acquisitions made
after the Effective Date not included in Employer's July 14, 1999 Business
Plan.
13
EXHIBIT 10.6
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
(TIMOTHY J. CONNOLLY)
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is
made as of August 2, 1999 (the "Effective Date"), by and among APPLIED VOICE
RECOGNITION, INC., a Delaware corporation doing business as E-DOCS.NET
("Employer"), and TIMOTHY J. CONNOLLY, an individual residing in Harris County,
Texas ("Employee").
W I T N E S S E T H:
WHEREAS, Employer, as successor by merger of Applied Voice
Recognition, Inc., a Utah corporation, and Employee executed that certain
Employment Agreement dated effective as of July 1, 1997 (the "Agreement");
WHEREAS, Employer and Employee now desire to amend the
Agreement pursuant to the terms and provisions set forth herein;
NOW, THEREFORE, for in consideration of the premises and the mutual
covenants contained herein and in the Agreement, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, and
intending to be legally bound hereby, the parties hereby covenant and agree to
modify the Agreement as follows (all capitalized terms herein and not otherwise
defined herein shall have the meaning assigned to them in the Agreement):
1. TERM OF EMPLOYMENT. From and after the Effective Date, all
references in the Agreement to the "Expiration Date" as defined in Section 2 of
the Agreement, shall refer to December 31, 2001. Furthermore, the following
sentence will be added after the second (2nd) sentence of Section 2:
"If Employer achieves its budgeted gross revenues and EBITDA for
the year 2001, this Agreement will be automatically renewed for a one year
period expiring December 31, 2002."
2. COMPENSATION AND OTHER BENEFITS. Subsection (f) of Section 3 of
the Agreement is hereby deleted in its entirety and the following is hereby
inserted in its place:
"f. Commencing August 1, 1999, Employee shall be entitled to
receive four weeks of paid vacation for each year during the Term and
shall be entitled to receive paid holidays as enjoyed by all other
employees of Employer."
1
<PAGE>
3. COMPENSATION AND OTHER BENEFITS. Subsection (g) of Section 3 of
the Agreement is hereby amended by inserting the following at the end of the
second sentence:
", except when related to travel to other cities on behalf of
Employer."
4. COMPENSATION AND BENEFITS. Section 3 of the
Agreement is hereby amended by the deletion in its entirety of
Subsection (b).
5. COMPENSATION AND BENEFITS. Subsection (c) of Section 3 of the
Agreement is hereby deleted and replaced in its entirety with the following:
"In addition to receiving the Base Salary provided for in Section
3(a), for calendar year 1999, Employee shall be entitled to a bonus of up
to One Hundred Twenty Five Thousand Dollars ($125,000.00). Seventy Five
Thousand Dollars ($75,000) of the 1999 bonus shall be earned and paid upon
execution of this Amendment, and the remaining $50,000 shall be earned if
the performance criteria set forth on ATTACHMENT I hereto are achieved by
December 31, 1999 and paid by January 31, 2000. For each year thereafter,
Employee shall be entitled to a bonus of up to fifty percent (50%) of
Employee's Base Salary; provided, however, Employee shall be entitled to
such bonus if, and only if, Employee has met the performance criteria set
by the Compensation Committee of the Board of Directors of Employer (the
"Compensation Committee") for the applicable period. Criteria set by the
Compensation Committee shall be set on a quarterly basis for the quarters
ending March 31, June 30, September 30, December 31, and bonuses earned
pursuant hereto shall be on a quarterly basis. Employer agrees that
performance criteria for Employee's bonus to be earned commencing January
1of each year shall be set on or before January 1 of such year. Employee
shall have the opportunity to meet with and discuss such criteria with the
Compensation Committee prior to the finalization of such criteria. Upon
completion of the criteria for the applicable year, such criteria shall be
communicated 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 quarterly period. Notwithstanding the
foregoing, if the Compensation Committee and Employee fail to agree on
Performance Criteria for any bonus period, then Employee's bonus shall be
deemed to be earned if Employer's Chief Executive Officer has earned his
performance bonus for such period under his Employment Agreement with
Employer."
6. COMPENSATION AND OTHER BENEFITS. Section 3 of the Agreement is
hereby amended by the insertion of the following as Subsection (h) of such
Section 3.
"h. Employee shall be entitled to a disability policy at the expense of
Employer that provides for payments in the amount of one-half of
Employee's Base Salary during such period as Employee is disabled, as set
forth in and subject to the limitations contained in such policy."
2
<PAGE>
7. DUTIES. Subsection (a) of Section 4 of the Agreement is hereby
deleted and replaced in its entirety with the following:
"a. Employee is employed to act as Chairman of the Board of Employer
and Chairman of the Strategic and Compensation Committees of Employer.
Employee shall be available to consult with the Chief Executive Officer of
Employer on an as needed basis as reasonably determined by Employer's
Board of Director."
8. TERMINATION OF EMPLOYMENT. Subsection (c)(5) of Section 5 of the
Agreement is hereby amended by the replacement of the reference in such
subsection to "thirty days" with "ninety (90) days."
9. TERMINATION OF EMPLOYMENT. Section 5 of the Agreement is hereby
amended by the deletion of each of Subsection (e) and the last paragraph of such
Section 5.
10. STOCK OPTION PLAN. The following provision is hereby inserted as
Section 20 of the Agreement:
"On the date, if ever, that Employer completes a spin-off of any
of its wholly-owned subsidiaries in an initial public offering (the
"Spin-Off IPO"), Employee shall be granted stock options entitling Employee
to purchase two percent (2%) of the shares of the spun off subsidiary
outstanding after the completion of the Spin-Off IPO (the "Options").
Employer agrees to take all reasonable steps to make such Options available
in conjunction with the Spin-Off IPO. 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 lowest price of any
options granted to employees of Employer or such spun off subsidiary in
connection with the Spin-Off IPO, and (ii) the Options will vest monthly
over the greater of (A) 12 months after the grant or (B) the remaining term
of this Agreement. "
11. CHANGE OF CONTROL. The following provision is hereby inserted as
Section 21 of the Agreement:
"21. CHANGE OF CONTROL. A "Change in Control" shall be deemed to
have occurred if (i) in the context of a single event or series of related
events, more than 50% of the voting power of Employer's outstanding
securities entitled to vote in elections of directors shall be acquired by
any person (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended) other than by any person which
includes Employee, or (ii) as the result of a tender offer, merger,
consolidation, sale of assets or contested election, or any combination of
such transactions, the persons who were directors of Employer immediately
before the transaction shall cease to constitute a majority of the Board of
Directors of Employer or any successor to Employer. In the event of a
Change in Control and any Change in Control Qualifying
3
<PAGE>
Event (as herein defined) shall occur, Employee shall be permitted to
terminate his employment within six (6) months of such Change in Control
Qualifying Event and notwithstanding such termination, Employee shall be
entitled to receive his Base Salary for the remaining Term of this
Agreement. In addition, any stock options granted to Employee pursuant to
this Agreement shall immediately vest as of such termination date; however,
Employee shall not be eligible to receive any bonus earned pursuant to
Section 3(c) of this Agreement for any quarter beyond the quarter in which
Employee's employment is terminated. For purposes hereof, a Change in
Control Qualifying Event shall include (i) a significant diminution,
without mutual agreement of the parties, in the nature and scope of
Employee's authority, power, functions or duties, (ii) Employer assigns to
Employee, without mutual agreement of the parties, substantial additional
duties or responsibilities which are inconsistent with the duties of
Employee under this Agreement, or (iii) Employer transfers Employee from
the principal office of Employer. Employer and Employee agree that if
sEmployee does a spin-off initial public offering of e-DOCS Health Care
Information Services, Inc., and none of the circumstances described in
subsections (i), (ii) or (iii) above apply, such transaction will not be a
Change of Control for purposes of this Section 20. Employer and Employee
further agree that notwithstanding the foregoing provisions of this Section
21, there will be no Change of Control Qualifying Event if Employee and/or
his controlled entities in their capacities as shareholders of Employer
vote in favor of such transaction that results in a Change of Control if
such transaction is an all cash transaction."
12. GROSS-UP PROVISION. The following provision is hereby inserted as
Section 22 of the Agreement:
"22. GROSS-UP PROVISION. If any portion of any payments received by
Employee from Employer shall be subject to tax imposed by Section 4999 of
the Internal Revenue Code of 1986, as amended or any successor statutory
provision, Employer shall pay to Employee such additional amounts as are
necessary so that, after taking into account any tax imposed by Section
4999 (or any successor statutory provision), and any federal and state
income taxes payable on any such tax, the Employee is in the same after-tax
position that he would have been if such Section 4999 or any successor
statutory provision did not apply and no payments were made pursuant to
this Section 22."
13. OFF-SITE OFFICE. The following provision is hereby inserted as
Section 23 of the Agreement:
"23. OFF-SITE OFFICE. During the term of this Agreement, Employer
shall bear the cost of an office for Employee and Employee's executive
assistant at a location mutually acceptable to Employer and Employee,
including rent, telephone, computer, internet access, cellular phone,
office supplies and entertainment expenses, all according to budgets
established from time to time by the mutual agreement of Employer and
Employee."
4
<PAGE>
14. ATTORNEYS FEES IN CONNECTION WITH AMENDMENT. Employer agrees to
reimburse Employee for Employee's reasonable attorneys fees incurred in
connection with this Amendment up to a maximum of $5000.
15. MCDONALD LITIGATION. Employer agrees to assume responsibility for
the defense and resolution of and indemnify Employee for any loss, damages,
claims or expenses in connection with the pending litigation styled RANDALL B.
MCDONALD, JR. AND RANDALL B. MCDONALD LIFE INSURANCE TRUST II VS. TIMOTHY J.
CONNOLLY, ET AL, CASE NO. 1999-09379, DISTRICT COURT OF HARRIS COUNTY, 113TH
JUDICIAL DISTRICT (the "McDonald Litigation"). Employee agrees to cause
Employee's affiliate Applied Voice Recognition, L.P. to distribute up to 180,000
shares of common stock of Employer to Randall B. McDonald and/or the Randall B.
McDonald Life Insurance Trust II as part of the resolution of the McDonald
Litigation upon notice from Employer. Employer will promptly assume
responsibility for the defense of the McDonald Litigation and will have full
power and authority to settle such matter on terms acceptable to Employer so
long as the sole and maximum liability of Employee and/or Applied Voice
Recognition, L.P is for the 180,000 shares of stock of Employer referenced above
in this Section 15.
16. MISCELLANEOUS. This Amendment shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns
permitted pursuant to the terms of the Agreement. Except as amended hereby, the
Agreement is presently in full force and effect in accordance with its original
terms, except as previously and herein amended. If any part of this Amendment
shall be held invalid, illegal or unenforceable, then such provision shall be
deleted from this Amendment and the remainder of this Amendment shall not be
affected thereby.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment on this
2nd day of August, 1999, effective as of the Effective Date.
EMPLOYER:
APPLIED VOICE RECOGNITION, INC., a
Delaware corporation doing business
as E-DOCS.NET
By:______________________________________
Eric Black, Chief Executive Officer
and President
EMPLOYEE:
______________________________________
TIMOTHY J. CONNOLLY
Signature Page to
First Amendment to Employment Agreement
(Timothy J. Connolly)
6
<PAGE>
ATTACHMENT I
1999 BONUS PERFORMANCE CRITERIA
Employer will have achieved BOTH (i) a Revenue Run Rate based on the
average accrual basis gross revenues from medical transcription services and
sales of products (but not extraordinary consulting services) for November and
December, 1999 of no less than $898,000 per month, and (ii) average EBITDA for
November and December, 1999 of no less than -$227,000 per month.
1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OFAPPLIED VOICE RECOGNITION, INC. FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 357,984
<SECURITIES> 0
<RECEIVABLES> 1,143,159
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,650,617
<PP&E> 1,332,858
<DEPRECIATION> 278,155
<TOTAL-ASSETS> 7,299,097
<CURRENT-LIABILITIES> 3,534,926
<BONDS> 448,265
0
8,550,988
<COMMON> 9,364,214
<OTHER-SE> 2,520,984
<TOTAL-LIABILITY-AND-EQUITY> 7,299,097
<SALES> 2,350,859
<TOTAL-REVENUES> 2,350,859
<CGS> 1,348,482
<TOTAL-COSTS> 6,132,908
<OTHER-EXPENSES> 37,565
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 289,856
<INCOME-PRETAX> 4,109,470
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,109,470
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,109,470
<EPS-BASIC> (.27)
<EPS-DILUTED> (.27)
</TABLE>
