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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-KSB/A-1
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission file number: 0-23607
APPLIED VOICE RECOGNITION, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 76-051318
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
4615 POST OAK PLACE, SUITE 111, HOUSTON, TEXAS 77027
(Address of Principal Executive Office) (Zip Code)
713-621-5678
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK,
PAR VALUE $.001 PER SHARE
___________________________________
(Title of Class)
___________________________________
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for past 90 days.
Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
The Issuer's revenues for the 12 months ended December 31, 1998 were $717,357.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the Closing Price on the OTC Electronic Bulletin Board on
April 29, 1999 of $1.28 was $12,818,914. As of April 30, 1999, the Issuer had
16,089,491 shares of its common stock, par value $.001 per share (the "Common
Stock"), outstanding.
Traditional Small Business Disclosure Format (check one):
Yes [_] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
ITEM Page
PART I
ITEM 1. BUSINESS....................................................... 1
ITEM 2. PROPERTIES.....................................................
ITEM 3. LEGAL PROCEEDINGS..............................................
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS............................................
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS..............................
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNT AND FINANCIAL DISCLOSURE............................
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF
THE EXCHANGE ACT...............................................
ITEM 10. EXECUTIVE COMPENSATION.........................................
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K...............................
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This report includes "forward looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements other than statements of
historical fact included in this report are forward looking statements. Such
forward looking statements include, without limitation, statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" regarding the Company's estimate
of sufficiency of existing capital resources and its ability to raise additional
capital to fund cash requirements for future operations and acquisitions.
Although the Company believes the expectations reflected in such forward looking
statements are reasonable, it can give no assurance that such expectations
reflected in such forward looking statements will prove to have been correct.
The ability to achieve the Company's expectations is contingent upon a number of
factors which include (i) 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) capital market
conditions. "e-DOCS.net(TM)" and "VoiceCOMMANDER(TM)" are our trademarks. This
Report may contain trademarks and service marks of other companies.
PART I
ITEM 1. BUSINESS
Company Overview
Applied Voice Recognition, Inc., d.b.a. e-DOCS.net (the "Company") is a growing
provider of secure Internet and automated voice recognition transcription
services to the healthcare industry. Using the recently released VoiceCOMMANDER
99 integrated voice recognition medical transcription solution, the Company
automatically converts free-form medical dictation into electronically formatted
patient records which healthcare providers use in connection with patient care
and for other administrative purposes. The Company's outsource transcription
services may enable clients to improve the accuracy of transcribed medical
reports, reduce report turnaround times, shorten billing cycles and reduce
overhead and other administrative costs. The Company believes that the
electronic capture and delivery of free-form physician dictation are key
components in the increasing implementation by healthcare providers of
electronic medical record systems.
VoiceCOMMANDER 99, which was released in February 1999, is a medical dictation
system that utilizes secure Internet communication, voice recognition, and
traditional transcription methodology to improve the quality and reduce the cost
of health care information systems. To gain market share and accelerate the
adoption of this e-commerce product, the Company will provide a high-speed
personal computer and the handheld VoiceCOMMANDER 99 system to our transcription
subscribers at no cost. VoiceCOMMANDER 99's secure e-commerce medical
transcription service utilizes voice recognition technology to pre-process the
doctor's dictation into written text. It then encrypts and transmits both the
doctor's original voice recording and the un-edited text via the Internet to the
Company's server. The editing process is completed and reviewed for accuracy by
the Company's transcriptionists, located throughout the United States and
overseas in Manila, who return a re-encrypted, fully edited e-document to the
doctor in 24 hours or less. In this manner, VoiceCOMMANDER 99 provides a mobile
solution to the documentation of the patient encounter for the busy physician.
The Company believes that VoiceCOMMANDER 99, in conjunction with its
transcription operations in Manila, will substantially lower the costs of
producing medical transcription. The Company believes this to be a competitive
advantage and is expanding its transcription pool in Manila due to lower costs
of labor.
Company History
The Company's predecessor, Voice Technology Partners, L.P., a Texas limited
partnership, was founded in 1994. In August 1996, the assets of the partnership
were contributed to a Delaware corporation. Thereafter, in December 1996, the
Company completed a share exchange with Summa Vest, Inc., a Utah corporation,
which immediately thereafter changed its name to Applied Voice Recognition, Inc.
The share exchange was accounted for as a reverse merger. In January 1998, the
Company merged with and into its wholly-owned Delaware subsidiary in order to
reincorporate as a Delaware corporation.
On December 31, 1998, Lernout & Hauspie Investment Company N.V. (LHIC) agreed to
invest up to $8.75 million in the Company, subject to the achievement of certain
performance criteria on the part of the Company. As of
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March 22, 1999, LHIC had funded $5 million of this investment. The remainder may
be invested at the option of LHIC. On February 8, 1999, the Company's Board of
Directors voted to change the Company's name to e-DOCS.net, Inc. to clearly
reflect its new focus on Internet and voice recognition based transcription
services for physicians. Additionally, the Company changed its ticker symbol to
EDOC. The Company will submit a proposal to amend its Certificate of
Incorporation to its stockholders at its upcoming annual meeting.
Business Strategy
The Company's long-term strategic objectives are to establish itself as a
leading provider of easy-to-use Internet and automated voice recognition
transcription services to the healthcare industry and to use its automated voice
recognition technology to create internal efficiencies and to enhance
profitability.
The key elements of the Company's strategy include the following:
Pursue Strategic Acquisitions. The Company intends to pursue acquisitions of
transcription companies which expand its client base, management team, network
of qualified transcriptionists or geographic presence, as well as
acquisitions, joint ventures and other relationships which expand its
technological expertise. The Company believes that it can capitalize on
consolidation opportunities within the fragmented medical transcription
industry and utilize its VoiceCOMMANDER 99 Internet medical transcription
system to increase efficiency and reduce costs. Since the adoption of its
acquisition strategy in early 1998, the Company has completed seven
acquisitions of small regional medical transcription companies.
Leverage Technology Leadership. The Company's VoiceCOMMANDER 99 medical
transcription system and the Company's technological expertise enable it to
provide a "state-of-the-art" transcription solution to the healthcare
industry. The Company intends to continue to incorporate advances in
technology to improve the efficiency of its operations, reduce costs, expand
the breadth and functionality of its services and enhance its competitive
position. In particular, the Company intends to use the Internet and its
automated voice recognition system on its traditional transcription business
in order to reduce errors, decrease turnaround time and reduce costs.
Leverage Lower Labor Costs at Overseas Transcription Facilities. The Company
believes that VoiceCOMMANDER 99, in connection with its transcription
operations in Manila, will lower the costs of producing medical transaction.
The Company believes these lower relative labor costs to be a significant
current competitive advantage and is expanding its transcription pool in
Manila in order to reduce labor costs Company-wide.
Expand Existing Client Relationships. The Company intends to expand the
existing client relationships of the acquired companies. The Company will
offer to install complete computer systems and handheld dictation devices at
no additional costs. Each client will be asked to sign a three year contract
to allow the Company to recoup the front end costs of the VoiceCOMMANDER 99
system through savings in labor, communication and delivery costs. In return
for this commitment, the client will receive a fixed transcription cost per
line the for three year term of the contract.
Extend Current Client Base. The Company is seeking to extend its base of
traditional clients and to pursue new clients such as health maintenance
organizations, out-patient clinics and physician practice groups which the
Company believes will represent a growing percentage of the available market.
Based upon input from new clients, the Company believes that references from
its existing client base represent a key component of its sales and marketing
efforts. In order to gain market share and accelerate the adoption of its
VoiceCOMMANDER 99 medical transcription system, the Company is currently
providing a high-speed personal computer and a handheld digital dictation
device to its transcription subscribers at no cost.
Transcription Company Acquisitions
In March 1998, the Company began its expansion into the healthcare transcription
industry by acquiring Transcription Resources of Dallas, Texas ("TR"). The
operation of TR during 1998 provided the Company with valuable industry
experience which enabled the Company to develop its VoiceCOMMANDER 99 integrated
solution and to formulate its acquisition plan. Since March 1998, the Company
has acquired six additional traditional transcription companies in various
markets in the U.S. and the Philippines. Part of the Company's
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strategic business plan is to continue to seek out and acquire additional
existing medical transcription companies in major markets throughout the U.S.
Once the Company has acquired a medical transcription company in a particular
market, it plans to add sales personnel and to focus efforts on building sales
within the new markets as well as converting customers of the acquired companies
to the VoiceCOMMANDER 99 suite of products.
The following table describes the Company's recent acquisitions in the
healthcare transcription industry:
<TABLE>
<CAPTION>
Company Date of Acquisition Metropolitan Area
- - ---------------------------------------------------------------------------------
<S> <C> <C>
Transcription Resources March 17, 1998 Dallas, Texas
Cornell Transcription, Inc. December 1, 1998 New York, New York,
and Miami, Florida
Outsource Transcription December 1, 1998 Manila, Philippines
Philippines, Inc.
Linda R. Wilhite December 31, 1998 Denver, Colorado
Transcription
Reyna Transcriptions, Inc. February 22, 1999 Richmond, Texas
PRN Transcription, Inc. February 22, 1999 Tyler, Texas
AM Transcription, Inc. February 26, 1999 Richardson, Texas
</TABLE>
Industry Overview
Voice Recognition Industry
The creation of written documents is a fundamental activity in the professional,
business and governmental worlds. The traditional text creation methods,
including handwriting, dictation or typing, suffer from limitations that can
make the process inefficient, slow and inaccurate. Text creation through
automated speech recognition ("ASR") can provide significant productivity gains
compared with other methods, combining the speed of dictation with the
advantages of immediate inspection and correction. The ability to create text
through a voice-activated system can eliminate a material portion of traditional
transcription and editing steps.
Although research into the uses of ASR has been conducted for over 20 years,
practical uses of the technology have only manifested recently. The two
technological breakthroughs which have allowed practical application of voice
recognition to every day business activities are (i) the increase in processing
speed of the computer chip, and (ii) the development of software "engines" that
allow continuous speech to be interpreted without pauses between words. These
software engines are programs that interact with the user's computer and
interpret the human voice into written text. The Company's early research and
development efforts focused on writing the computer programs or applications
that interface between the engine and the computer user to make the computer
user's job easier or more efficient.
The ASR industry saw dramatic developments in 1997 and 1998. Several major
software engine manufacturers, notably IBM and Dragon introduced continuous
speech versions of their ASR products during 1997. Also, processing speeds of
computer processors continued to increase, and price to performance ratios
continued to improve. Finally, the prices charged for the basic software
engines to perform continuous speech recognition dropped to under $100 per
license at the retail level. As a result, the market for ASR products has only
recently begun to develop, and is characterized by rapidly changing technology,
evolving industry standards and customer
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demands, and frequent new product introductions and enhancements. The ASR market
is highly dependent upon the increased use of speech recognition technology and
continued price and performance improvements in personal computers, as new
generations of microprocessors are developed and introduced. The Company's
future operating results will depend upon the emergence of ASR technology, the
Company's ability to develop and improve its technology, and the successful
implementation of the Company's strategic business plan.
The market for ASR products and services is highly competitive. There are no
substantial barriers to entry, and the Company expects that competition will
continue to intensify. Although the Company believes that the diverse segments
of the ASR technology market will provide opportunities for more than one
supplier of products and services similar to those of the Company, it is
possible that a single supplier may dominate one or more market segments. The
Company believes that the principal competitive factors in this market are name
recognition, performance, ease of use, variety of value-added services,
functionality and features, and quality of support. A number of companies offer
competitive products that address the healthcare transcription target market of
the Company.
Healthcare Transcription Industry
In late 1997, the Company decided to focus its research and development efforts
on developing and marketing its ASR products specifically for the healthcare
transcription market. Transcription, in the healthcare market, is the process
of reducing a physician's daily patient notes from a handwritten or recorded
format to typewritten text. Currently, most healthcare transcription is
performed by manually typing the doctors' notes. The notes are either
transcribed in-house or transmitted by phone lines or courier to an outside
service. According to the Medical Transcription Industry Alliance ("MTIA"),
physicians in the U.S. are currently spending over $6.6 billion dollars per year
on transcription. Whether it is performed in-house or outsourced to
professional transcription services, most of the costs associated with
transcription are attributable to labor in the form of typing and quality
assurance. Therefore, the Company believes that utilizing ASR technology to
eliminate the requirement of manual typing of data could significantly reduce
the costs associated with transcription. The healthcare transcription market
includes individual physicians, physician groups and hospitals. Many hospitals
have their own in-house transcription departments.
Products and Services
VoiceCOMMANDER 99
In February 1999, the Company launched VoiceCOMMANDER 99, which is an integrated
Internet based ASR product designed specifically for the healthcare
transcription market. VoiceCOMMANDER 99 provides a completely mobile dictation
solution designed to improve the quality and reduce the costs of healthcare
information needs, through the use of automated voice recognition, hand-held
digital recording technology, and encrypted Internet document delivery.
VoiceCOMMANDER 99 provides physicians and other healthcare professionals with
the choice of editing their medical records in-house or communicating their data
via the Internet to the Company for transcription and editing.
VoiceCOMMANDER 99 is a medical dictation system that utilizes secure Internet
communication, voice recognition, and traditional transcription methodology to
improve the quality and reduce the cost of health care information systems.
Physicians using VoiceCOMMANDER 99 will be provided a hand-held digital recorder
that automatically downloads speech into a computer for conversion to text. The
printed text is then edited and reviewed for accuracy in-house by either the
physician or his staff or off-site by the Company's transcriptionists.
VoiceCOMMANDER 99 provides a mobile solution to note-taking for the busy
physician.
The following are the key characteristics and features of the VoiceCOMMANDER 99:
. Utilizes inexpensive Internet connectivity to replace most of the long
distance calling;
. Employs sophisticated encryption technology to ensure protection of sensitive
information;
. Employ's hand held digital recorders to allow the Doctor flexibility in this
dictation;
. Interface to handheld devices is modular to allow the adoption of improved
devices such as Windows CE when they emerge;
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. Is built with industry standard tools from Microsoft and Oracle to ensure
stability;
. Is architected around agent technology to allow the product to be scaled
efficiently;
. Employ's voice recognition technology from the industry leader IBM; and
. Is designed to allow integration of improved voice recognition technology
when it becomes available.
The Company intends to use the technological enhancements of VoiceCOMMANDER 99
with the benefits of lower relative labor costs overseas in our Manila
transcription facility to increase its profit margin while providing physicians
with enhanced service, reduced turnaround time and lower costs for medical
transcription. Current transcription labor rates can be as much as 70% of gross
revenue. In conjunction with the cost savings generated using the Internet,
voice recognition and overseas transcriptionists, the Company believes labor
costs can be significantly reduced over the next three years.
To date, the Company has had limited revenues from sales of VoiceCOMMANDER 99
and related ASR transcription services. However, the Company expects that in
the foreseeable future it will derive substantially all of its revenues from
fees generated by its ASR and traditional transcription services and from sales
of VoiceCOMMANDER 99 and related products. As a result, any factors adversely
affecting the sales of the VoiceCOMMANDER 99 line, such as increased price
competition or the introduction of technologically superior products could have
a material adverse effect on the Company. The Company's future financial
performance will depend in significant part on its ability to develop and
introduce new releases of VoiceCOMMANDER 99 with enhanced features and
functionalities and related products. There can be no assurance that any such
new releases or products will be successfully developed or achieve market
acceptance.
As a result of the implementation of VoiceCOMMANDER 99 and the related strategy,
the Company has increased its spending in research and development, sales and
marketing, and general and administrative expenses. To the extent that such
expenditures are not followed by increased revenues, the Company's business,
results of operations and financial condition could be materially and adversely
affected.
Product Development History
Upon its formation in 1994, the Company was a development stage company,
primarily engaged in the development of its first voice recognition application,
VoiceCOMMANDER. VoiceCOMMANDER is one of the first office programs to use voice
recognition as a cost-reducing and labor-saving desktop tool for computer users.
The first version of VoiceCOMMANDER, VoiceCOMMANDER 1.0, was developed using
software licensed from Kurzweil Applied Intelligence, Inc. ("Kurzweil"), and
allowed the user to perform basic word processing tasks through the use of voice
commands, such as dictating letters and faxes, using a self contained contact
manager and pre-formatted templates. The Kurzweil software engine upon which
VoiceCOMMANDER 1.0 was based was a discreet speech voice recognition component.
The discreet speech concept required the user to pause briefly between words,
which limited dictation speeds to between 35 and 50 words per minute. Kurzweil
is now owned by Lernout & Hauspie Speech Products.
In the second quarter of 1995, the Company completed development of the second
version of VoiceCOMMANDER, VoiceCOMMANDER 2.0. VoiceCOMMANDER 2.0 had similar
features to VoiceCOMMANDER 1.0, but added certain applications such as a voice
activated phone dialer, as well as additional pre-formatted forms and templates.
VoiceCOMMANDER 2.0 was based upon Dragon Dictate, a discreet speech voice
recognition software engine developed by Dragon Systems, Inc. ("Dragon"). The
Company introduced VoiceCOMMANDER 3.0 in early 1996. VoiceCOMMANDER 3.0
included several new applications, including voice activated e-mail and Internet
access. The Company continued to use Dragon products for VoiceCOMMANDER 3.0's
voice recognition software engine. Given the Company's ongoing research and
development efforts, the Company did not undertake an extensive sales and
marketing effort regarding these earlier versions of its VoiceCOMMANDER
products, with the result that sales of these products were limited.
In December 1996, the Company concluded negotiations with International Business
Machines Corp. ("IBM") for a nonexclusive original equipment manufacturing
license (the "IBM License") for IBM's software engine, Voice Type. The Company
shortly thereafter began a new development program utilizing Voice Type. Due to
the relatively inexpensive cost of the IBM software engine, the IBM License
allowed the Company to develop voice recognition applications that could be sold
for significantly less than previous applications. In 1997, IBM developed
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the ViaVoice software engine which utilized continuous speech recognition
technology in contrast to the earlier discreet speech engines. This continuous
speech improvement eliminated the cumbersome requirement of pausing between
words. In early 1997, the Company incorporated the ViaVoice software engine into
its development program for the next generation of VoiceCOMMANDER.
VoiceCOMMANDER 4.0, which utilized the ViaVoice engine, was demonstrated in
September 1997, and subsequently released into the mass market in November 1997.
For a brief period, the Company marketed VoiceCOMMANDER 4.0 through a
combination of infomercials and catalogue sales. When this marketing effort
resulted in low sales volumes, the Company decided to market VoiceCOMMANDER 4.0
through third-party retailers and distributors with established distribution
systems and access to retail sales outlets, so that it could remain focused on
the marketing and development of a professional edition of VoiceCOMMANDER 4.0
for the healthcare industry.
A material part of the Company's strategy in marketing VoiceCOMMANDER 4.0
through third-party retailers and distributors included a joint development and
distribution agreement entered into with Voice It Worldwide, Inc. ("Voice It")
in December 1997. At the time, Voice It was a manufacturer and distributor of
digital hand-held recorders to 5,000 points of retail distribution throughout
the U.S., including major catalogue retailers such as Sharper Image and
nationwide chain retailers such as Staples and Kmart. Pursuant to the
agreement, Voice It purchased 50,000 VoiceCOMMANDER 4.0 software licenses from
the Company for resale through its retail distribution points throughout the
U.S. for an aggregate purchase price of $1 million, and the Company purchased
471,700 shares of Voice It's common stock for $500,000. In the opinion of the
Company, Voice It breached its agreement with the Company by, among other
things, failing to make the contractually agreed upon payments for the software
licenses. See "Item 3. Legal Proceedings" below. In October, 1998, Voice It
filed for Chapter 11 protection under the Federal Bankruptcy laws.
In the second quarter of 1998, the Company's marketing focus centered on the
Professional Edition of VoiceCOMMANDER 4.0 (the "Professional Edition"). The
Professional Edition was specifically designed to meet the medical dictation
needs of healthcare professionals. However, unlike VoiceCOMMANDER 99, the
Professional Edition was only sold as a stand alone unit which was primarily
used by healthcare professionals to process their in-house transcription needs.
The Professional Edition was marketed and sold as a bundled package that
included, among other peripherals, a PC and a hand-held digital recorder. This
product was sold to the medical community through the Company's Houston based
sales force. The Professional Edition allowed physicians to dictate and record
patient notes on the hand-held digital recorder as they make their patient
visits. The information was then downloaded to the pre-equipped PC where it was
automatically transcribed, via ASR technology, to formatted text, with a high
degree of accuracy and minimal transcript intervention. Professional Edition
was been sold since May 1998 as the solution to the in-house transcription needs
of physicians.
The Professional Edition included some of the functionality of the earlier
versions of VoiceCOMMANDER developed for the general market, but further
included medical lexicons, custom designed medical forms templates, and specific
medical vocabularies to increase the rate of speech recognition. The
Professional Edition included training and installation assistance from the
Company's technical personnel, and generally sold for a unit price (including
hardware) of under $15,000. Its features are included in VoiceCOMMANDER 99 and
will continue to be sold as an option to customers requesting an "in house"
medical transcription solution.
Following four years of VoiceCOMMANDER application development and targeting the
general retail market, the Company, in February 1999, released VoiceCOMMANDER 99
to the healthcare transcription market.
All of the Company's current products now utilize the ViaVoice speech
recognition technology from IBM. The Company pays IBM a license fee for each
unit of the Company's product that it sells. The Company believes that if IBM
discontinued or was unable to manufacture or support ViaVoice or terminated its
agreement with the Company that, with adequate time, the Company could develop
its products to utilize speech technology from other companies in addition to
IBM, and the Company is currently in the process of developing products for this
alternative technology. Following the investment of $5 million by LHIC, the
Company agreed to use Lernout & Hauspie Speech Products (LHSPF) technology when
it has the same or greater features than the current IBM technology utilized by
the Company. However, there can be no assurances that the Company will ever be
able to successfully develop such products. If the Company is unable to utilize
the ViaVoice technology, for any reason, and is unable
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to develop products capable of utilizing the LHSPF technology, the Company's
business, results of operations and financial condition would be materially
adversely affected.
Traditional Transcription Services
In addition to the provision of ASR electronic data transcription to the
Company's VoiceCOMMANDER 99 subscribers, the Company currently generates a
substantial portion of its revenues from the provision of traditional
transcription services to clients through the Company's recently acquired
transcription companies. The Company's traditional transcription business
provides a computer-based service for transcription of physician dictation.
While its service arrangements vary by customer, some of which require
transcription to be performed on-site, these services are primarily provided
from remote locations utilizing telecommunications capabilities. As a result,
many of its transcription employees are able to work as "telecommuters" using
networked computers in their homes. The Company currently has seven
transcription centers including the Company's center in Manila, Philippines.
The Company is typically paid for its transcription services per line
transcribed. Where transcription services are included as part of the services
provided in the Company's VoiceCOMMANDER 99 contracts, the services are provided
internally by the Company's transcription operations as part of the overall
VoiceCOMMANDER 99 services. The Company seeks wherever possible to cross-market
its transcription services with its VoiceCOMMANDER 99 services.
Support Services
The Services offered by the Company to assist its customers include in-house
training programs, on-site installation and training, a hotline for telephone
support during the maintenance period, on-line tutorial programs for new users,
and an extensive package of documentation. The Company has a site
implementation program that is designed to assist professionals in planning the
introduction of voice products into their departments. As part of this program,
the Company's employees act as consultants, using their knowledge of how best to
integrate the Company's products into a client's environment. The Company
anticipates that each market served by transcription companies acquired by the
Company will include its own technical support.
The Company also provides consulting services to customers including Lernout &
Hauspie Speech Products for interface development, specialized vocabularies, and
specific projects related to necessary customization, utilization of our
services, or future product features.
Generally, the Company's products include a three-year warranty that the
products will be free from defects in materials and workmanship and that the
software will perform in accordance with applicable specifications. The Company
is obligated to repair or replace, at its option, any products that do not meet
the warranty. The Company also provides maintenance agreements for technical
support during this period.
Marketing and Distribution Strategy
The Company's marketing strategy is to create an organization focused on selling
the VoiceCOMMANDER 99 system to the healthcare transcription market. The
Company's marketing efforts are currently done through a Houston based marketing
staff and through each of the recently acquired transcription companies. The
Company intends to acquire additional medical transcription companies in a
variety of markets in the United States. Once the Company has acquired a
medical transcription company in a particular market, the Company will train
existing personnel at each location and focuses their efforts on building sales
within each new market as well as converting customers of the acquired company
to the VoiceCOMMANDER 99 system. Although, the Company has had limited success
to date, there is no assurance that the Company will be successful in inducing
customers of any of the acquired medical transcription companies to switch from
their existing methods of transcribing medical records to those of the
VoiceCOMMANDER 99 suite of products. The Company also intends to explore
opportunities to provide VoiceCOMMANDER 99 to the physician base on a large
scale through large preferred provider organizations. The Company will continue
to search for ways to expand through these "high leverage" relationships.
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Competition
Healthcare Transcription Services Market
As the Company implements its strategy of acquiring and operating medical
transcription companies, it will compete in a highly fragmented industry that is
predominately populated by small, regional or local companies, with a limited
number of national companies. It is estimated by MTIA that the total annual
cost of transcribing medical records in the United States is greater than $6.6
billion. Of this amount, MTIA reports that approximately $1 billion is
currently outsourced to medical transcription companies.
The transcription services industry remains highly fragmented and primarily
consists of small, local or regional companies. As a result, the Company
competes with a large number of third-party transcription companies that offer
services similar to its and target the same customers and qualified
transcriptionists. In addition, there are several large national transcription
service providers: Medquist, Inc. (which recently acquired MRC Group, Inc.,
another large transcription service provider), EDIX, Transcend Services, Inc.,
Harris Corp. and Rodeer Systems, Inc. These competitors have significantly
greater resources than the Company.
These medical transcription companies provide transcription services offsite for
a fee and generally use traditional dictation methodologies. Those methods
include transcribing from handwritten documents, tapes and submissions via phone
lines. According to the MTIA, there are over 1,500 companies providing medical
transcription services in the United States; however, less than 30 of these
companies have significant sales volume and a national or regional customer
base.
The Company believes that its ability to compete depends upon many factors
within and outside of the Company's control, including the timing and market
acceptance of its new VoiceCOMMANDER 99 ASR related transcription services and
other service enhancements developed by the Company and its competitors, service
quality, performance, price, reliability, customer service and support and
ability to attract qualified transcriptionists. In addition, the potential
exists for large companies that do not currently provide transcription services,
but which currently provide other services to the healthcare industry, to enter
the transcription services field. For example, IDX Systems Corporation ("IDX")
recently announced the planned acquisition of EDIX Transcription, one of the
Company's larger competitors. IDX is a provider of health care information
services and stated that it will acquire EDIX because of perceived synergies of
the medical transcription business (data input) and health information
management businesses and is an example of an existing company that could and
has become a competitor. Such potential competitors could have substantially
greater financial, technical and marketing resources than the Company. As a
result, such potential competitors, if they were to enter the transcription
business, could be able to respond more quickly to evolving technological
developments, changing customer needs or emerging technical standards or to
devote greater resources to the development, promotion or sale of their
services.
The Company's services also compete with the in-house transcription staffs of
the Company's potential customers. While the Company believes that its growth
and earnings will benefit from the outsourcing by healthcare providers of non-
patient care functions, including transcription services, the current trend
could change direction and cause healthcare providers to bring all or some of
those services in-house. In addition, competition may increase due to
consolidation of transcription companies. Increased competition may result in
price reductions for the Company's services, reduced operating margins and an
inability to increase the Company's market share, any of which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company is not aware of any major direct competitors concentrating their
efforts on offering a complete voice-to-text medical transcription solution that
includes software, personalized training and vocabularies, and a hand-held
dictation device. Generic voice to text software providers (such as IBM,
Lernout and Hauspie, Dragon Systems, Phillips) are potential competitors in the
medical transcription marketplace. In fact, several of these voice-recognition
vendors currently offer packaged solutions to the healthcare marketplace;
however, they do not offer an overall integrated voice recognition solution to
end users that the Company is offering.
Healthcare Related ASR Products Market.
The market for healthcare related ASR products and services is also highly
competitive. There are no substantial barriers to entry, and the Company
expects that competition will continue to intensify. Although the Company
believes that the healthcare related ASR technology market will provide
opportunities for more than one supplier of
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products and services similar to those of the Company, it is possible that a
single supplier may ultimately dominate this market. The Company believes that
the principal competitive factors in this market are name recognition,
performance, ease of use, variety of value-added services, functionality and
features and quality of support.
A number of companies offer competitive products addressing the Company's target
markets. The primary competitors of the Company's products and services are
IBM, L&H, Philips and Dragon. In the future, the Company may encounter
additional competition from new input/control devices as yet undeveloped. Many
of the Company's existing competitors, as well as a number of potential new
competitors, have significantly greater financial, technical and marketing
resources than the Company. Competition from licensees of our products and
technology may also adversely affect the Company. The Company's competitors may
develop healthcare related ASR products and services that are superior to those
of the Company or that may achieve greater market acceptance than its offerings.
Moreover, a number of the Company's current customers have established
relationships with certain of the Company's competitors and future customers may
establish similar relationships. The Company may not be able to compete
successfully against its current or future competitors or competitive pressures
may have a material adverse effect on the Company's business, financial
condition and results of operations.
Government Regulation
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the outsourcing arrangements of healthcare
providers. Federal and state legislators have proposed programs to reform the
United States healthcare system and other proposals are in the development
stage. In general, these programs and proposals tend to emphasize managed care,
seek to lower reimbursement rates and otherwise attempt to control the
environment in which providers operate.
In providing its services, the Company is subject to certain statutory,
regulatory and common law requirements regarding the confidentiality of such
medical information. The Company requires its personnel to agree to keep all
medical information confidential and monitors compliance with applicable
confidentiality requirements.
Federal and state regulators are making increased efforts to investigate claims
of false billing for government reimbursement and have secured substantial
payments from healthcare providers to resolve these claims. Because these
claims often result from a lack of appropriate documentation to support billing,
these government investigative efforts may stimulate a need for more
comprehensive transcription services. Additionally, healthcare accreditation
organizations and governmental authorities have begun to require more efficient
transcription of patient medical records as part of the requirements for a
hospital or other healthcare organization to receive and maintain its
accreditation.
It presently cannot be determined if any additional healthcare legislation or
self-regulatory proposals (whether relating to reimbursement, accreditation,
billing practices, confidentiality, the healthcare industry in general or
otherwise) will be introduced, the form that any such legislation or proposals
would take, whether such legislation or proposals would be enacted or adopted
and, if enacted or adopted, what effect, if any, such legislation or proposals
would have on the healthcare industry in general and the Company in particular.
Intellectual Property
Patents
The Company regards its software as proprietary and relies on a combination of
copyright and trade secret laws in attempting to protect its rights. The
Company enters into software license agreements with end-users of its products
that outline the terms and conditions under which the Company's products can be
used. Despite these precautions, it may be possible for unauthorized third
parties to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary.
The Company has applied for five U.S. Patents on various aspects of its speech
recognition technology, and three of the applications are pending. In September
1998, the Company's U.S. patent 5,812,977 was issued on a PC-based graphical
user interface for voice applications. The patent covers the Company's
graphical user interfaces ("GUI's") integrated with voice recognition technology
as a primary interface for a PC. Additionally, it includes an intelligent,
real-time help system that tracks what the user is attempting to accomplish and
provides visual and/or vocal assistance.
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In February 1999, the Company's second U.S. Patent 5875429 was issued. This
patent covers the use of voice, combined with graphical navigation marks, that
allows a user to quickly and easily navigate and edit a document.
The Company has filed a third patent application for the voice activation of
popular games of chance. The gaming industry in places like Las Vegas has moved
increasingly to computerized games of chance. The Company's management believes
that the next logical step is to add voice recognition technology to those
games. The resultant games would not only respond to the user's voice, but
could converse with the player to enhance the entertainment experience. The
patent office challenged this patent siting prior inventions that would
logically lead to this technology. As this patent does not relate to the
companies core business it was decided not to pursue it further.
The fourth patent concerns the voice activation of direction giving kiosks.
These purpose-built kiosks would utilize voice recognition technology and voice
response to allow users to be easily guided from the kiosk location to the
location of their choice. The resultant directions and/or maps would also
provide related information such as coupons for shopping or advertisements for
related products.
The final patent describes a voice operated inventory system for the airline
industry. This wearable unit would be worn by the flight attendants, on their
belt, while they were serving drinks or renting headsets. The flight attendant
would simply say "Seat 3C, one Scotch," into the microphone, and the system
would generate a bill internally and debit inventory. The flight attendant
would then swipe the customer's credit card. All transactions would be held in
memory until landing when the unit would be plugged into a master system to
reconcile all transactions.
The patent process is lengthy and complex. Each patent must go through rigorous
examination and may involve amplifying submissions. The company reserves the
right, based upon response from the patent office, to abandon efforts on patents
that are deemed to not warrant further investment of company resources. There
can be no assurance that any patents will be issued or, if issued, will provide
the Company with significant protection against competitors. The Company's
current intention is not to development products resulting from existing
intellectual property rights the Company might have, except to the extent such
rights relate to VoiceCOMMANDER 99. However, the Company may seek to sell or
license such rights in the future.
Certain of the Company's competitors have obtained, and the Company believes
that certain of its competitors are seeking, patent protection on various
aspects of their speech recognition technology. Many of the Company's
competitors have significantly greater resources than the Company. The Company
believes that, because of the rapid pace of technological change in the software
industry, factors such as the technological and creative skills of its personnel
are more important to establishing and maintaining a technology leadership
position than are the various legal protections of its technology.
Litigation, which could result in substantial cost to and diversion of effort by
the Company, may be necessary to enforce any patent issued to the Company, to
protect trade secrets or know-how owned by the Company, or to determine the
scope and validity of the proprietary rights of others. Adverse findings in any
proceeding could subject the Company to significant liabilities to third
parties, require the Company to seek licenses from third parties, and adversely
affect the Company's ability to sell its products. The Company is not aware of
any controversy leading to litigation relating to intellectual property issues.
However, there can be no assurances that the products and services offered by
the Company will not infringe on patent or other rights of others, for which
licenses might not be available to the Company.
Trademarks
The Company has been granted U.S. Trademarks for each of APPLIED VOICE
RECOGNITION, VoiceCOMMANDER, CADCOMMANDER, and MIKE ROFONE (word mark). In
addition the Company has applied for U.S. trademarks for SPEECHCOMMANDER,
CONSOLECOMMANDER, LAWCOMMANDER, TELECOMMANDER, INFLIGHT-COMMANDER, miscellaneous
designs of the Mike Rofone character, VoiceCOMMANDER Locator, GIVING PEOPLE
POWER OVER TECHNOLOGY, It's About Time, Voice Experts, and StarCOMMANDER, all of
which are pending. There can be no assurance that any further trademark
registrations will be issued or, if issued, will provide the Company with
significant protection against competitors.
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Employees
As of March 1, 1999, the Company had approximately 174 employees, 34 of which
are located in its corporate headquarters in Houston, Texas, 44 are located at
branch locations in Texas, Florida, New Jersey and Colorado and 96 are located
in the Philippines. Of the 34 headquarters employees, 16 are administrative, 9
are technical support and the balance are in sales and marketing. At its
branches in the United States, the Company employs 17 management, quality
assurance and administrative personnel and 27 transcriptionists. The
Philippines operation is located in Manila and employs 18 management, quality
assurance and administrative personnel and 78 transcriptionists.
In addition, 76 people provide transcription services to the company from their
homes. The Company treats it's at home transcriptionists as contract employees
and compensates them based upon their performance. None of the Company's
employees are represented by a labor union and the Company considers its
relations with its employees and at home transcriptionists to be good.
Item 2. Properties and Equipment
As of December 31, 1998, the Company did not own any real property. The Company
leases office space for its headquarters in Houston, Texas, for its United
States branches in Hackensack, New Jersey, Miami, Florida, Dallas and Tyler
Texas, Denver, Colorado and an offshore transcription production facility in
Manila, the Philippines. The headquarters office, located at 4615 Post Oak
Place, Suite 111, Houston, Texas consists of approximately 8,300 square feet at
a basic rental rate of approximately $9,250 per month. Approximately one-half of
the space is leased on a month-to-month basis while the remainder is subject to
an office lease, which expires on April 30, 2000.
The Company's typical branch office ranges from 1,000 to 2,500 square feet and
lease terms vary from month to month to 2 years remaining on the lease.
Existing lease space in the Philippines is approximately 3,500 square feet and
is rented on a month to month basis. As of March 1999, the Company has acquired
additional branch operations in Houston, Dallas and Tyler, Texas and is in the
process of consolidating its previously acquired Dallas operation into its newly
acquired branch in that city. The newly acquired Houston location will be
consolidated into the Company's Houston headquarters offices. The Tyler
facility, which will not be consolidated, consists of approximately 2,200 square
feet and approximately 2 years remain on that lease commitment.
The Company is currently in negotiations to lease larger facilities in the
Philippines and may need additional office space in Houston, Texas for its
headquarters operations in the near future. The Company believes that with the
exception of its operations in the Philippines and its Houston headquarters that
existing facilities provide adequate office space for current operations. Should
the Company need to move or expand its branch operations, adequate office space
is available and minimal leasehold improvements are required in order to open a
new branch facility.
The Company has a significant investment in the latest in personal computer
hardware and software technology, which is required to develop and maintain its
sophisticated software products, as well as being available for demonstrations
in-house and at trade shows. The Company also owns personal computers and
printers that are used by its sales and administrative staff. The approximate
investment in computer hardware and software currently utilized by the Company
is $625,750 and the approximate investment in all other tangible fixed assets
currently utilized by the Company is $252,224.
Item 3. Legal Proceedings
The Company is the defendant in one case that was filed September 25, 1998 that
relates to a contract entered into by Applied Voice Technologies Partners, Ltd.,
a predecessor of the Company. The aggregate amount claimed pursuant to this
lawsuit is $150,881; however, discovery has not begun. The Company believes
that its potential liability should not exceed $100,000. While the Company also
recently sought arbitration in a matter relating to its agreements with Voice It
(see "Company Overview" above), that matter was stayed as a result of the recent
bankruptcy of Voice It. The Company has written off all receivables due to the
Company from Voice It and written off the value of its investment in Voice It.
There is no other litigation pending or, to the knowledge of the Company,
threatened to which the Company or its property is subject to or to which the
Company may be a party.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did submit any matters during the fourth quarter of the year covered
by this report to a vote of the security holders through the solicitation of
proxies or in any other manner.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
On February 5, 1997, the Company's Common Stock began trading on the Over-the-
Counter Bulletin Board (the "OTCBB") under the symbol "AVRI." On February 8,
1999 the Company's Board of Directors voted to change the Company's name to e-
DOCS.net, Inc. to clearly reflect its new focus on Internet and voice
recognition based transcription services. Additionally, the Company changed its
ticker symbol to EDOC on February 23, 1999. The Company will submit a proposal
to amend its Certificate of Incorporation to formally change its corporate name
to e-DOCS.net, Inc. to its stockholders at its upcoming annual meeting.
The following table shows, for the periods indicated, the high and low closing
bid prices of the Company common stock as reported by the OTCBB. Any market for
the common stock should be considered sporadic, illiquid and highly volatile.
Prices reflect inter-dealer quotations, without adjustment for retail markup,
markdowns or commissions, and may not represent actual transactions. The
Company's common stock did not begin trading on the OTCBB until February 5,
1999. The stock's trading range since listing on the OTCBB is as follows:
1997 HIGH LOW
---- ---- ---
1st Quarter $4.125 $2.500
2nd Quarter $4.000 $2.500
3rd Quarter $3.718 $2.562
4th Quarter $6.125 $2.750
1998 HIGH LOW
---- ---- ---
1st Quarter $3.812 $1.750
2nd Quarter $3.312 $0.875
3rd Quarter $1.875 $0.450
4th Quarter $1.531 $0.625
As of March 26, 1999 there were 16,089,491 shares of Common Stock issued and
outstanding and approximately 306 holders of record of the Common Stock. In
addition, the Company has approximately 1,963 additional beneficial
shareholders. The Company has neither declared nor paid any dividends on the
Common Stock since its inception and presently anticipates that no dividends
will be declared in the foreseeable future. Any future dividends will be
subject to the discretion of the Company's Board of Directors and will depend
upon, among other things, future earnings, the operating and financial condition
of the Company, its capital requirements, debt obligation agreements, general
business conditions and other pertinent facts. Therefore, there can be no
assurance that any dividends on the Common Stock will be paid in the future.
Recent Sales of Unregistered Securities
The following sales of unregistered securities occurred during the year ended
December 31, 1998 in private transactions, which were not included in an earlier
Form 10-QSB. For these sales, the Company relied on the exemption from
registration available under Section 4(2) of the Securities Act of 1993, as
amended (the "Securities Act"), unless otherwise indicated:
Series A Preferred Stock
On December 4, 1998, the Company issued 683,100 shares of common stock upon the
conversion of 126,500 shares of the Series A Preferred Stock by Entrepreneurial
Investors, Ltd. ("EIL"), the holder of the Company's Series A Preferred Stock.
As of December 31, 1998, the Company had declared and paid stock dividends to
EIL, totaling
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70,217 shares of common stock. The Company relied upon the exemption provided by
Section 3(a)(9) under the Securities Act for these issuances.
Series B Preferred Stock
On four occasions during the months of July and August, the Company issued
shares of common stock when the holders of the Company's Series B Preferred
Stock (the "Series B Investors") exercised their conversion rights and converted
715 shares of the Series B Preferred Stock for 1,147,171 shares of the Company's
common stock. Upon conversion, the Series B Investors received stock dividends
amounting to 22,812 shares of common stock. The Company relied upon the
exemption provided by Section 3(a)(9) under the Securities Act for these
issuances.
On March 11, 1998, the Company completed a $3,000,000 private placement by the
issuance of 3,000 shares of Series B Convertible Preferred Stock. These shares
have a par value of $.10 and were priced at $1,000 per share and were sold to
two accredited investors ("Series B Investors").
In connection with this placement, an option to purchase 150,000 shares of
common stock was granted to Continental Capital & Equity Corporation for
investor relations services.
Series C Preferred Stock
On November 12, 1998, the Company issued shares of Common Stock when certain of
the Series C Preferred Stockholders (the "Series C Investors") converted 78,250
of the Series C Preferred Stock for 782,500 shares of the Company's common
stock. As of December 31, 1998, the Company had declared and paid stock
dividends, to the Series C Investors, totaling 25,225 shares of common stock.
In addition, on January 1, 1999, the Company declared a stock dividend totaling
14,556 shares to the Series C Investors. The Company relied upon the exemption
provided by Section 3(a)(9) under the Securities Act for these issuances.
Series D Preferred Stock
On December 31, 1998, the Company entered into a Series D Preferred Stock and
Warrant Purchase Agreement to sell up to 5,000 shares of Series D Convertible
Preferred Stock to LHIC. These shares have a par value of $.10 and were priced
at $1,000 per share and were sold to LHIC, an accredited investor. This
agreement is broken down into three closings of 2,000; 1,000; and 2,000 shares,
respectively. Each closing is subject to the Company meeting certain financial
and/or operational targets.
As of December 31, 1998, the Company had met the first and second targets and
had received the funding for the first target. The Company has recorded a
receivable for the second target, as of December 31, 1998, and has reflected the
shares as issued in the Statement of Stockholders Equity. The funding for the
second target was received in January 1999. The final target was based on
results as of February 28, 1999. The Company met its February targeted results
and received the third funding under the agreement in March 1999.
Additionally, the Company granted LHIC three warrants to purchase a total of
2,500,000 shares of common stock, at exercise price of $1.25 per share. The
three warrants are to be issued in connection with the first, second, and third
closing described above to purchase common shares as follows: 1,500,000;
500,000; and 500,000, respectively. The first and second warrants were fully
vested on December 31, 1998.
Common Stock
In February 1998, the Company agreed to issue 30,000 shares of common stock, to
a third party, in exchange for consulting services, which were issued in June
1998.
On March 6, 1998, the Company issued 98,333 shares of common stock, in lieu of
cash salaries and bonus, to officers and certain employees.
On March 6, 1998, the Company issued 14,286 shares of common stock to two third
parties in consideration for their consulting services.
On April 30, 1998, the Company issued 45,113 shares of common stock to Jan
Carson Connolly upon her resignation as an officer of the Company.
On October 16, 1998, the Company issued 25,000 shares to a third party in
exchange for office furniture.
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Stock Options
On November 1, 1997, the Company granted to two consultants, options to purchase
150,000 shares of the Company's common stock, each with an exercise price of
$4.88. The options were granted in exchange for consulting services. On April
23, 1998, the terms of the related consulting agreements were extended and the
option agreement was modified to provide for immediate vesting of the options.
Of the options granted, 100,000 were granted to Michael Wilson, a board member,
whose consulting services were devoted to the development of the Company's new
transcription related product VoiceCOMMANDER 99(TM).
On June 1, 1998, the Company granted to three consultants, options to purchase
382,000 shares of the Company's common stock, each with an exercise price of
$1.88. The options were granted in exchange for consulting services. Of the
options granted, 250,000 were granted to Michael Wilson, a board member, whose
consulting services were devoted to the development of the Company's new
transcription related product VoiceCOMMANDER 99(TM).
On May 15, 1998, the Company revised options granted to the Company's Medical
Advisory Board (the "MAB") options issued to prior to 1998 to purchase 85,000
shares of the Company's
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company's current revenue is derived from: (i) the sale of licenses of its
medical dictation voice recognition software applications and training and
maintenance services associated with the installation and on-going use of the
software; (ii) the provision of ASR transcription services through its
VoiceCOMMANDER 99 Virtual Physician Network; (iii) the sale of traditional out-
sourced transcription services; and (iv) the sale of computer hardware that is
bundled with software applications at the customers request
During 1997 and early 1998, the Company's business plan and marketing efforts
focused on the sales of VoiceCOMMANDER 4.0. This version of the Company's
voice recognition software was sold to the general business community through
retail sales channels and via the Company's Houston based sales force. In the
first quarter of 1998, the Company narrowed the focus of its business plan and
began concentrating its efforts solely on the medical transcription market.
Reflecting this change in the business plan, the Company redesigned the
functionality of VoiceCOMMANDER 4.0 to meet the medical dictation needs of
healthcare professionals. This resulting new version of the Company's voice
recognition software was named VoiceCOMMANDER Professional Edition TM ("The
Professional Edition") and was introduced in the second quarter of 1998. The
Professional Edition was marketed and sold as a bundled package that included,
among other peripherals, a personal computer and a hand-held digital recorder.
The Professional Edition allowed physicians to dictate and record patient notes
on the hand-held digital recorder as they make their patient visits. The
information was then downloaded to a specially equipped personal computer where
it is automatically transcribed, via voice recognition, to formatted text. The
resulting transcription was produced with a high degree of accuracy and minimal
need for transcriptionist intervention. The Professional Edition was sold from
May 1998 to February, 1999 as a complete solution to the in-house transcription
needs of physicians.
Starting 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, named VoiceCOMMANDER 99, provides a
mobile dictation solution designed to improve the quality and reduce the costs
of healthcare information needs. Released on February 15, 1999, VoiceCOMMANDER
99 utilizes voice recognition, handheld digital recording technology, and
Internet driven technologies.
To take advantage of the cost efficiencies provided by VoiceCOMMANDER 99, the
Company has implemented its plan to acquire medical transcription companies. As
of December 31, 1998, the Company had acquired transcription operations in
Texas, Colorado, Florida, New York area and an offshore transcription factory
located in Manila, the
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Philippines. Since that time, the Company has acquired additional transcription
operations in three cities in Texas. The Company intends to continue to acquire
additional transcription companies, subject to availability of capital to
finance the acquisitions. The Company's initial geographic focus will be
centered in major metropolitan markets in the United States.
The Company intends to continue its evaluation of acquisitions. However, a
period of rapid growth could place a significant strain on the Company's
management, operations and other resources. There can be no assurance that the
Company will continue to be able to identify attractive or willing acquisition
candidates, or that the Company will be able to acquire such candidates on
economically acceptable terms. The Company's ability to grow through
acquisitions and manage such growth will require the Company to continue to
invest in its operational, financial and management information systems to
attract, retain, motivate and effectively manage its employees. The inability
of the Company's management to manage growth effectively would have a material
adverse effect on the financial condition, results of operations and business of
the Company. As the Company pursues its acquisition strategy in the future, its
financial position and results of operations may fluctuate significantly from
period to period.
As a result of the implementation of VoiceCOMMANDER 99, and the related
acquisition strategy, the Company has increased its spending in research and
development, sales and marketing, and general and administrative expenses. To
the extent that such expenditures do not result in increased revenues, the
Company's business, results of operations and financial condition could be
materially and adversely affected.
Due to the evolution of the Company's business strategy, the Company believes
that its historical results of operations for the periods presented may not be
directly comparable. The Company believes the historical results of operations
do not fully reflect the operating efficiencies and improvements that are
expected to be achieved by integrating the acquired businesses and marketing the
Company's new health care transcription product.
The following discussion should be read in conjunction with the consolidated
financial statements and the related notes thereto and other detailed
information appearing elsewhere herein.
Results of operations
Fiscal Year 1998 vs. Fiscal Year 1997
Revenues: Revenues of the Company originate from the sale of voice recognition
software licenses, hardware, and related maintenance, and for 1998 include
revenues received from the sale of transcription services. Net revenues for the
Company decreased 66% to $717,000 in 1998 down approximately $1,396,000 from
1997. The decrease is primarily attributable to a one time $1,000,000 sale of
software licenses to one customer (Voice It) in 1997. Competitive price
pressures in the retail voice recognition application marketplace in late 1997
and early 1998 led the company to refocus its business plan, software
development and marketing efforts into the medical transcription market. The
transition of the Company's sales and marketing efforts towards the retail
software market to the healthcare transcription market is responsible for a
decrease in the sales of the Company's products of approximately $810,759 from
1997 to 1998. The Company acquired three transcription operations during 1998
that generated approximately $415,000 of new revenues in 1998.
Cost of sales: Cost of sales consists primarily of hardware costs and
transcription labor costs. In addition, but not as significant, cost of sales
also includes the amortization of capitalized development costs. Cost of sales
decreased 49% in 1998 to $432,246, down approximately $421,000 from 1997. This
decrease is directly attributable to the decrease in net sales. The gross
margin for 1998 was 40%, compared to 60% for 1997. The decrease in gross margin
percentage is attributable to the increase in transcription revenue relative to
software and hardware sales in 1998 compared to 1997. Transcription revenues,
which are burdened with high labor costs, generate lower gross margin than sales
of software and hardware.
Marketing and sales expense: Marketing and sales expense consists primarily of
marketing and sales salaries and commissions and advertising/promotional
expenditures. Marketing and sales expense decreased 16% in 1998 to $1,265,927,
down approximately $233,000 from 1997. In early 1998, the Company changed its
business focus to concentrate solely on the medical transcription market and
transitioned out of the retail voice recognition software market. Advertising
costs in 1998 decreased approximately $269,000 from expenditures in 1997 as a
direct result of lower advertising cost requirements of the transcription
industry. Additionally, the Company expensed two one time marketing events,
aimed at the retail marketplace in 1997 at the cost of approximately $240,000.
These events
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were the VoiceCOMMANDER 4.0 promotional rollout and an infomercial. The
decreases in advertising costs were offset by increased 1998 marketing
compensation expense of approximately $159,000 and participate in 1998 medical
industry tradeshows that cost the Company approximately $77,000 more than the
prior year.
General and administrative expense: General and administrative expense is
comprised primarily of compensation and related expenditures for administrative
and executive personnel, professional fees associated with legal, consulting,
and accounting services, and general corporate overhead. General and
administrative expense increased 98% in 1998 to $5,640,238, up approximately
$2,788,000 from 1997's expense amount. The increase was attributable to
increases in consulting, legal and accounting and investor relations fees and
the result of hiring additional management and executive personnel.
Consulting fees increased by approximately $1,145,000 in 1998 over 1997. The
incremental consulting fees in 1998 were incurred for the development of the
medical transcription business plan and for general consulting purposes.
Legal and accounting services in 1998 increased by approximately $519,000 over
1997 expenses. Incremental Legal and accounting expenditures were incurred in
connection with the Company's acquisition program, SEC filings, the annual
audit, quarterly reviews, several tax filings, and general advisory services.
Investor relations expense in 1998 exceeded 1997 expenses by $380,000. The
increased expenditures are attributable the Company's increased efforts to raise
additional capital to support its new medical transcription business plan. All
other general and administrative costs increased approximately $481,000 due to
higher telecommunication, occupancy, travel, depreciation, and insurance and
general office expenses. These expenditures increased as the result of the
Company's overall headcount growth.
Salaries of executive and management personnel and associated recruiting costs
increased approximately $779,000 in 1998 over 1997. These increases in
personnel costs in 1998 are due to the requirements of the implementation phase
of the Company's business plan. During 1998 the Company hired a Chief Operating
Officer, Vice President of Sales, Manager of Transcription Operations, and
Manager of Mergers and Acquisitions in addition to other staff level positions.
Research and development expense: Research and development expense consists
primarily of personnel costs including salaries, benefits and consultant costs
related to the development of the Company's software products. Research and
development expense increased 4% in 1998 to $754,170, up $28,674 from the 1997
expense level. The increase in research and development costs is wholly
attributable to the increase in personnel and increased use of development
related consulting services. These additional resource were required for the
enhancement and development of the Company's, VoiceCOMMANDER PE TM, and
VoiceCOMMANDER 99 TM.
Rental income: During 1997, the Company leased several lap top computers to a
customer. This was a one-time event that occurred in that year. The total
revenue attributable to this transaction in 1997 was approximately $37,000. The
lease expired and was not renewed in 1998.
Interest income: Interest income consists primarily of interest earned on cash
and cash equivalents. Interest income increased 15% in 1998 to $72,013, up
approximately $9,000 from 1997. The increase is wholly attributable to the
current year increase in invested funds.
Interest expense: Interest expense decreased 52% in 1998 to $216,680, down
$234,396 from 1997. The decrease is wholly attributable to the current year
decrease in average debt outstanding.
Loss on investments: In 1998 the Company recorded a loss on investments of
$803,125. This is attributable to investments in the common stock of two
companies, Voice It and Wade Cook. The Company's investment in Voice It in the
amount of $500,000 was deemed worthless when Voice It was delisted from trading
on the Small Cap market for failure to comply with certain NASDAQ maintenance
standards and declared Chapter 11 bankruptcy. The Company's investment in Wade
Cook was deemed worthless upon failure to obtain a stock certificate from Wade
Cook. The original investment value of the Wade Cook investment was recorded as
$303,125 and the fair market value of Wade Cook as of December 31, 1998 when the
amount was written off, was approximately $57,000.
Income taxes: The Company has incurred losses since inception and, therefore,
has not been subject to federal income taxes. As of December 31, 1998, the
Company had generated net operating losses ("NOLs"), for financial
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reporting purposes, of approximately $12.3 million available to reduce future
federal income taxes. These carry-forwards will begin to expire in 2011. The
ability of the Company to utilize the carry-forwards is dependent upon the
Company generating sufficient taxable income, and may be affected by annual
limitations on the use of such carry-forwards if a change of control occurs due
to future sales of the Company's capital stock. The Company has recorded a
valuation allowance for all net deferred tax assets, including NOLs.
Net loss: Net loss increased approximately 100% in 1998 to $8,320,519, up
$4,151,855 from the $4,168,664 net loss recorded in 1997. This increase is
primarily attributable to increased operating expenditures of approximately
$2,584,000 the loss on investments of approximately $803,000, and decreases in
gross margin of approximately $974,000. Higher interest income and lower
interest expense offset the total negative impact to net loss for the year by
approximately $244,000.
Through the period ended December 31, 1998, the Company has incurred operating
losses, since inception, of approximately $12.3 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 it's
historical results of operations for the periods presented may not be directly
comparable.
Liquidity and capital resources
At December 31, 1998 the Company had cash and cash equivalents of $1,377,913 and
working capital in the amount of $580,727. This compares to cash and cash
equivalents of $1,207,235 and working capital of $1,104,834 as of December 31,
1997. The 1998 decrease in working capital of $524,108 is attributable to an
increase in current liabilities of $1,739,000. This increase is attributable to
the following:
. Legal and accounting fee accruals increased by approximately $415,000 in 1998
over 1997. The increase is due to incurred but not received professional fees
for, the Company's acquisition program, various SEC filings and various legal
matters in process as of December 31, 1998.
. The Company accrued at year-end 1998, $350,000 related to a commitment to
purchase software licenses from L and H Speech Products, Inc. Of this amount,
approximately $143,000 represents additional liability in 1998 over 1997.
. During the year, the Company issued stock to certain employees and officers
in lieu of cash compensation. In connection with this, the Company agreed to
pay all related payroll taxes, which amounted to approximately $84,000. This
amount was accrued at year-end 1998 and is incremental to 1997 balances.
. As the result of additional preferred stock outstanding at year-end 1998
verses year-end 1997, accrued stock dividends payable increased by
approximately $116,000.
. In connection with the Company's acquisition program, the Company agreed to
pay $708,827 of the purchase price of the acquired companies in preferred
stock. Of this amount, approximately $683,000 is payable in 1999 and
represents incremental liability in 1998 over 1997.
. The current portion of long-term debt at year end 1998 increased
approximately $475,000 over 1997 as the result of bridge loans to related
parties and short-term note payables related to two transcription company
acquisitions.
Non-material increases in current assets and other changes in other current
liabilities offset the aggregate increase in the current liabilities, described
above.
Net cash used by operating activities increased $2,568,753 from $3,466,183 for
the twelve months ended December 31, 1997 to $6,034,936 for the twelve months
ended December 31, 1998. The increased use of cash is primarily attributable to
the increase in the operating loss, of approximately $4,152,000. This increase
was offset by increased 1998 non-cash expenditures, of $1,451,246, attributable
to common stock and options and warrants issued in connection with consulting
services, employee compensation, and interest. The balance of the difference is
attributable to net changes in working capital.
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Current year investing activities totaled $1,067,853. Of this amount, $398,312
represents the cash outlay the Company incurred upon the purchase of
Transcription Resources, Cornell Transcription, Inc., Outsource Transcription
Philippines, Inc. and Linda Wilhite Transcription. The Company's other
investing activities included equipment purchases of $369,516 and software
capitalization totaling $300,025.
Net cash provided by financing activities amounted to $7,273,467. This is
comprised of the following:
. During the month of December 1998, the Company entered into various bridge
loan agreements (the "Bridge Loans") with certain officers, a former employee
and a third party. The aggregate borrowing amounted to $335,333. In
connection with the Bridge Loans, the company granted warrants to purchase
355,495 shares of common stock at exercise prices ranging from .93 to 1.06.
The Company has recognized non-cash finance costs of $121,959, attributable
to this transaction, based on an analysis using the Black-Scholes model.
. During the year, the Company paid a related party and third party lender
$126,250 and $42,882, respectively, on two notes payable.
. During the year, the Company paid $17,835 on a capital lease obligation.
. On March 11, 1998 the Company completed a private placement of 3,000 shares
of Series B Convertible Preferred Stock at a $1,000 per share for gross
proceeds of $3,000,000.
. On July 30, 1998 the Company completed a private placement of 220,750 shares
of Series C Convertible Preferred Stock for gross proceeds of $2,208,604.
These shares have a par value of $.10 and were priced at $10 per share. The
Company incurred $230,771 in costs associated with the private placement,
which resulted in net proceeds to the Company of $1,977,833.
. On December 31, 1998 the Company completed a private placement of 3,000
shares of Series D Convertible Preferred Stock, at a purchase price of $1,000
per share for gross proceeds of $2,000,000 and recorded a receivable for
$1,000,000. The Company incurred $65,000 in costs associated with the private
placement, which resulted in net proceeds to the Company of $1,935,000.
. During 1998 the Company received $90,309 in connection with 51,167 employee
and director stock options that were exercised.
The Company's cash position less known commitments and contingencies as of year
end 1998 plus outside financing received through March 31, 1999 plus cash
generated from operations for the balance of fiscal year 1999 will not be
adequate to fund the Company's on going operations in either the short-term or
the long-term. In addition, the Company continues to incur operating losses and
will continue to need additional working capital to fund its operations,
research and development, and marketing efforts for the next fiscal year.
The Company's liquidity will be reduced as amounts are expended for continuing
research and development, expansion of sales and marketing activities and
development of its administrative functions. Additionally, the Company's
liquidity will also be reduced as amount are used for purchases of capital
assets and the acquisition of transcription companies. As a result, the Company
will required to raise substantial additional capital during 1999 in order to
fund its current operations. The Company intends to raise such additional
funding through the sale of equity or convertible debt securities. However,
there can be no assurance that the Company will be able to raise such
additional capital when needed, or on terms commercially favorable to the
Company, if at all. Such option will result in additional material dilution to
the Company's stockholders.
If the company chooses to continue its current growth strategy of acquiring
additional medical transcription companies, then significant additional capital
in addition to the amounts detailed above will be required to meet these
objectives. In that case, the Company will be required to raise additional
funding though the sale of equity or convertible debt securities. There can be
no assurance the Company will be able to raise sufficient capital necessary for
the continuation of its acquisition strategy when needed, or on terms
commercially favorable to the Company, if at all.
The Company's business strategy is to reduce the costs of medical transcription
labor and increase the availability of medical transcription labor in two ways.
First, the Company's VoiceCOMMANDER 99 voice recognition software solution has
been specifically engineered to reduce these direct labor costs. Second, less
expensive offshore transcription labor will be used to further reduce labor
costs. Transcriptionist wages in countries such as India and the Philippines are
as much as 50 to 75% less than comparable wages in the United States. In both
these labor savings efforts, the Company recognizes not only cost savings but
also an increase in processing capacity.
Management is aware that there are additional business risks inherent in
dependence on offshore labor to implement its business plan. These risks include
but are not limited to; currency fluctuations, civil unrest and inadequate
services and communications infrastructure. Management believes that currency
risks are minimal since no more than 45 days operating capital are retained in
offshore accounts and all initial transfers are retained in dollar denominated
accounts. Management 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.
Implementing secure Internet and voice compression technology to transmit the
doctor's voice transcription files is also an integral part of the Company's
cost reduction strategy. The Company is not inventing new technology to achieve
its objectives here, but rather it is following the business model of other
"e-commerce" companies. Using the internet for moving data is a viable
technology and has proven cost effective, in particular when compared to
standard voice, non compressed transmission of data.
In March 1999, the Company received the final $2 million of a $5 million total
investment from L & H Investment Company. Receipt of the $2 million was
contingent upon achieving specific performance milestones. Included in these
milestones were requirement to demonstrate the functionality of the
VoiceCOMMANDER 99 software, document the Company's ability to use offshore
transcription operations to save labor costs and reach certain financial targets
with respect to completed acquisitions. The Company met or exceeded all of these
milestones as required by the agreement.
Short-term implementation of the Company's business plan will require additional
capital to be provided from sources outside of the Company. Of the capital
required, $2 million has been received as of March 1999 from L & H Investment
Company. The 1999 uses of the proceeds from this financing will be: (a) to
purchase additional medical transcription companies, (b) to finance capital
asset acquisitions of approximately $850,000, and (c) for working capital
purposes.
If the Company is successful in implementing its business plan in 1999, then
management forecasts that successful implementation of the year 2000 and 2001
business plan will require additional outside financing for acquisitions only.
Additional acquisition capital will be required to complete the Company's
acquisition plans in the years 2000 and beyond. Under the current business
plan, capital asset expenditures are expected to total approximately $1 million
in each of the years 2000 and 2001. However, if the Company is unsuccessful in
raising additional capital, it may be required to reduce such capital
expenditures. Such a reduction may have a material adverse effect on the Company
and its results of operations.
In March 1999, the Company has received $2 million of outside financing from
L & H Investment Company and debt financing in the amount of $240 thousand in
March 1999. In addition, the Company intends to borrow against projected trade
accounts receivables emanating from the implementation of the Company's business
plan to provide working capital. The Company is also actively pursuing various
sources for possible equity infusions. However, there can be no assurance that
the Company will be successful in borrowing against such receivables or raising
capital through equity investments on terms commercially favorable to the
Company, if at all.
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 suspension of its
acquisition plan, (b) acceleration of its plans to increase production capacity
in its offshore transcription facility in the Philippines and transfer the
majority of transcription work to offshore production (c) the reduction of
expenses primarily in personnel areas, 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. Additionally, the Company may not achieve the
offshore labor savings it has projected in this contingency plan.
If the Company is successful in implementing this reduced plan of operations,
management believes that the Company will generate sufficient cash flows from
operations, which will be adequate to meet current, and future operating needs.
However, the Company would not be able to continue its current acquisition
strategy. If the Company is required to implement this reduced plan of
operations, the Company will continue to pursue adequate financing to implement
its intended business plan strategy.
Year 2000
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 operation. The year 200
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.
State of Readiness. 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
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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 purchase and are certified as Year 2000 compliant by
the manufacturer. As for future enhancement 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 and Year 2000 compliant hardware.
Cost to address Year 2000 Issues. In most cases the purchased non Year 2000
complaint 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.
Risks Associated with the Year 2000 Issues. 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.
Contingency Planning. In the event of a Year 2000 problem with the Internet, the
Company would revert to processing it 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 of the Internet and the
national telephone system, the Company could continue to process transcription
utilizing couriers to move the transcription, 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 thorough audit 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 Y2K 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 system;
(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 relate to the Company's Year 2000 plans.
ITEM 7. FINANCIAL STATEMENTS
Information with respect to this item is set forth in the "Index" to
Consolidated Financial Statements on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 12, 1997, the Company's board of directors determined to replace
Malone and Bailey PLLC ("M&B") as its principal accountant with Ernst & Young
LLP ("E&Y"), effective August 12, 1997.
The report of M&B on the Company's financial statements for the last two fiscal
years did not contain an adverse opinion or a disclaimer of opinion, nor was
such opinion qualified or modified as to certainty, audit scope, or accounting
principles. During the Company's fiscal years ended 1996 and 1995 and
subsequent interim periods preceding the replacement of M&B, the Company had no
disagreements with M&B on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. During the
Company's two most recent fiscal years and subsequent interim periods preceding
the retention of E&Y, neither the Company nor anyone on the Company's behalf
consulted with E&Y regarding any matter.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
THE FOLLOWING TABLE PROVIDES INFORMATION CONCERNING EACH EXECUTIVE OFFICER AND
DIRECTOR OF THE COMPANY AS OF THE DATE HEREOF:
<TABLE>
<CAPTION>
Name Age Position
- - ------------------------------------------------------------------------------------------------
<S> <C> <C>
Timothy J. Connolly 46 CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
Robin P. Ritchie 56 CHIEF OPERATING OFFICER AND PRESIDENT
H. Russell Douglas 46 CHIEF TECHNOLOGY OFFICER AND DIRECTOR
Richard Cabrera 44 CHIEF FINANCIAL OFFICER AND SECRETARY
Milton A. Spiegelhauer 55 VICE PRESIDENT OF SALES AND MARKETING
Jan Carson Connolly 49 DIRECTOR
Jo Lernout 51 DIRECTOR
Thomas Denys 31 DIRECTOR
J. William Boyar 47 DIRECTOR
James S. Cochran, M.D. 55 DIRECTOR
Raymond Betz 54 DIRECTOR
Michael J. Wilson 45 VICE CHAIRMAN AND DIRECTOR
Daniel Dornier 37 DIRECTOR
</TABLE>
TIMOTHY J. CONNOLLY has served as Chairman of the Board, Chief Executive Officer
and President of the Company since August 1996. Mr. Connolly founded Applied
Voice Technology, LP (the Company's predecessor) in November 1994 and served as
its managing partner until August 1996. In 1984, Mr. Connolly formed Post Oak
Financial Corporation, an investment and mortgage-banking firm, and served as
President of that corporation until October 1994. Mr. Connolly graduated from
Texas A&M University with an undergraduate degree in Marketing and Management,
and a Masters Degree in Business Administration.
ROBIN P. RITCHIE has served as Chief Operating Officer since July 1998. Mr.
Ritchie was appointed President of the Company on February 8, 1999. Prior to
joining the Company, he served six years as Vice President of Operations and
Sales for Community Health Computing/ADAC Healthcare Information Systems. ADAC
Laboratories is a healthcare/clinical equipment & services company listed on the
NASDAQ National Market under the symbol "ADAC". Prior to joining ADAC, he spent
nine years with McDonnell Douglas Network Systems. Mr. Ritchie holds a BA from
the Virginia Military Institute and a Masters Degree from Texas Christian
University. He is also a retired Colonel with 26 years of service in the United
States Army.
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H. RUSSEL DOUGLAS has served as Vice President of Research and Development/Chief
Technology Officer and a director of the Company since August 1996. Mr.
Douglas was employed by Applied Voice Technology, LP from August 1995 through
August 1996. From 1989 through August 1995, Mr. Douglas was a senior manager of
Legent Corporation, an international computer software company, where Mr.
Douglas was responsible for development and worldwide support of Legent's
systems product line. Mr. Douglas began developing voice applications in 1986
as Vice President of Research and Development of VOTEK, an early voice
applications company based in Ontario, Canada. Mr. Douglas received a BSC
Degree in Economics and Commerce in 1977 from the Royal Military College of
Canada, and a Masters Equivalent in Organizational Management in 1981 from the
Canadian Military Staff School.
RICHARD CABERRA joined the Company in April 1999 as Chief Financial Officer. Mr.
Cabrera, was formerly Vice President--Financial Analysis for Browning-Ferris
International, Inc., BFI's international division. During the six-year period he
was with BFI, division revenues grew from $80 million to $1.4 billion. As part
of BFI's acquisition team, he closed the acquisition of one of Germany's largest
waste disposal company doubling the division's assets and increasing net
earnings by $82 million in the first year. Mr. Cabrera began his career with
KPMG Peat Marwick and has held positions with Alliance Exploration, Inc. and US
Ecology, Inc. Most recently, he has provided contract professional services to
Fortune 500 companies such as Portland Gas & Electric, Southern California
Edison, Edison International and Reynolds Metal Company.
MILTON A. SPIEGELHAUER joined the Company as Vice President of Sales and
Marketing in September of 1998 after serving seven years with Auspex Systems,
Inc. During his tenure there, he was promoted to the level of Senior Director,
Global Accounts in 1997. He was responsible for forming the Global Account
Organization of Auspex. His previous experience includes stints with MCI
Telecommunications, Lane Telecommunications, Inc., as well as six years with
Sperry Univac as Branch Sales Manager. Mr. Spiegelhauer graduated from the
United States Airforce Academy in Colorado Springs, Colorado with a BS in Basic
Sciences.
JAN CARSON CONNOLLY has served as a director of the Company since August 1996.
From August 1996 to April 1998, Ms. Carson served as the Company's Vice
President of Marketing. Prior to this, she was employed by Applied Voice
Technology, LP. Ms. Carson Connolly was a news anchor and reporter for ABC, NBC
and CBS in Houston, San Francisco, and several other cities from September 1983
through August 1995. Ms. Carson Connolly has over 24 years experience in
television broadcast journalism during which time she was employed as a writer,
producer, editor, reporter and news anchor. Ms. Carson Connolly graduated with a
Bachelor of Arts Degree from Benedictine College in Atchison, Kansas.
JO LERNOUT since February 1999 has served on the Company's Board of Directors.
Mr. Lernout is the co-founder of Lernout & Hauspie. He also serves as a managing
director of the Board at Lernout & Hauspie and the Fund Manager of Flanders
Language Valley Fund. Prior to founding Lernout & Hauspie in 1987,
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together with Pol Hauspie, Mr. Lernout served in various capacities for Wang
Laboratories. He served as National Commercial Director of Wang Belgium from
1985-1987 and as Sales Manager for Office Automation from 1979 to 1984. Prior
to this, Mr. Lernout served as General Manager of Garco Industries, Graphic
division, in Boston, USA and in sales at Merk Sharp & Dome and Bull. He holds a
Degree in Physics from Vlerick Management School in Ghent, Belgium.
THOMAS DENYS since February 1999 has served on the Company's Board of Directors.
He has been Managing Director of Lernout & Hauspie Investment Corp. ("LHIC")
since its incorporation. Mr. Denys was a Senior Associate at Loeff Claeys
Verbeke, the leading Benelux based law firm where he was active in developing
the business and Finance Department since 1992. Mr. Denys served as Belgium
Counsel to Lernout & Hauspie since 1994 and was involved in the IPOs of more
than a dozen other companies. Mr. Denys has been an assistant professor in
Financial Law at the Catholic University of Leuven between 1996 and 1998. Mr.
Denys holds a degree in law and a postgraduate degree in finance from the
Catholic University of Leuven and a Master's in German law. Mr. Denys serves as
a non executive director on the board of Krypton Electronic Engineering as well
as on the boards of several of LHIC's investments.
RAYMOND R. BETZ has been a director of the Company since September 1997. Mr.
Betz has served as the Chief Executive Officer of The Betz Companies, a
privately held real estate and development company headquartered in Houston,
Texas, since 1976 when he founded that company. Mr. Betz received his B.S. in
Civil Engineering from the University of Missouri at Rolla in 1966 and a Masters
Degree in Industrial Administration from the Krannert Graduate School at Purdue
University in 1969. He also is a Certified Public Accountant in the State of
Texas.
J. WILLIAM BOYAR has been a director of the Company since August 1997. Mr.Boyar
has been a shareholder in the firm of Boyar, Simon & Miller, P.C. since 1990.
Mr. Boyar started his practice with Chamberlain, Hrdlicka, White & Waters as a
corporate and partnership tax lawyer in 1976. He then joined the firm of
Waters, Townsend & Boyar in 1979, which became Boyar, Norton & Blair in 1983.
Mr. Boyar received his undergraduate degree from Tulane University, and his Law
Degree from Tulane University School of Law.
MICHAEL J. WILSON has served as a director of the Company since September 1997.
Mr. Wilson is currently President of Wilson & Associates, a privately-held
management consulting firm. Mr. Wilson has served as President and CEO of
Dynasty Technologies, Inc. from January 1996 to December 1996. Prior to joining
Dynasty, Mr. Wilson served as President and a member of the Board of Directors
of Uniface Corporation from July 1990 to January 1995. Mr. Wilson has also
served as Vice President of Sales for Ingres Corporation and UCCEL. Mr. Wilson
holds a BA Degree from Lewis University in Lockport, Illinois.
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JAMES S. COCHRAN, M.D. since February 1999 has served on the Company's Board of
Directors. Dr. Cochran currently practices with Urology Specialists &
Associates, a private practice of eight physicians in Dallas Texas. Dr. Cochran
also holds a position as Clinical Instructor in Urology at the University of
Texas Southwestern Medical School as well as the Chief Medical Officer of
Physicians Data Corp and Ultrasight, Inc. In addition to being a member of
numerous professional societies such as the American Urological Association, the
American Medical Association and the American Fertility Society, among others,
he is also a member of several National Advisory Boards including Prime Medical
Inc. and Indigo, Inc. Dr. Cochran is past president of the medical/dental staff
of Presbyterian Hospital of Dallas and is Chairman of the Urology Process
Improvement Committee.
DANIEL DORNIER since September 1998 has served on the Company's Board of
Directors. From August 1991 to June 1993, Mr. Dornier was an Investment Banker
with SBC-Warburg Dillon Reed. From June 1993 to June 1995, he served as a
Private Investment Manager for various companies owned by the Dornier family.
From 1995 to the present, Mr. Dornier has served as President of Dornier Capital
Advisors, where he manages investment portfolios for high net worth individuals
in Europe and in the United States.
BOARD CLASSES
At the Company's 1997 Annual Meeting, the shareholders approved an amendment to
the Company's Certificate of Incorporation, which divided the Company's Board of
Directors into three separate classes. Each class of the Board of Directors are
elected to serve staggered three year terms. Class I and II directors will be
elected at the 1999 Annual Meeting of Shareholders. Class I directors will serve
a term ending upon the election of their successors at the Annual Meeting of
Shareholders in 2001, while the successors to the Class II directors will be
elected at the Annual Meeting of Shareholders in 2002. Class III will be elected
at the Annual Meeting in 2000. There are no family relationships among the
directors and officers of the company, except for Timothy J. Connolly and Jan
Carson Connolly, who are husband and wife. None of the directors receive any
compensation or reimbursement of out-of-pocket expenses to attend board
meetings. However, all board members are eligible to receive stock options
pursuant to the 1997 Incentive Plan.
Each officer of the Company serves at the discretion of the Board of Directors,
subject to the terms of his employment agreement, if any, and is eligible to
receive stock options pursuant to the 1997 Incentive Plan. See Item 10
"Executive Compensation" below, for a discussion of the Company's employment
agreements. Each member of management devotes his full time to the Company's
affairs.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires a company's directors and executive
officers, and persons who own more than 10% of the equity securities of the
Company to file initial reports of ownership and reports of ownership and
reports of changes in ownership of the Common Stock with the Securities and
Exchange Commission. Officers, directors and greater than 10% shareholders are
required to furnish the Company with copies of all Section 16(a) reports they
file. The Company did not become subject to section 16(a) of the exchange act
until January 9, 1998. The Company is aware that some 10% shareholders, officers
and directors have been late in filings.
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ITEM 10. EXECUTIVE COMPENSATION
Summary of Compensation. The following table provides certain summary
information concerning compensation paid or accrued during the fiscal years
ended December 31, 1998, 1997 and 1996 to the Company's Chief Executive Officer
and to each of the other most highly compensated executive officers during the
fiscal year ended December 31, 1998 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation (1) Long-Term Compensation
-------------------------------------------------------------------------
Securities All Other
Name and Principal Other Annual Under-lying Compen-
Position Year Salary ($) Bonus ($) Compensation ($) Options/ SARs (#)sation ($)
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Timothy J. Connolly
Chief Executive Officer 1998 224,417 (3) 11,605 (2)
1997 157,833 24,399 9,433 (2) 500 (4)
1996 15,000 750 (2)
Charles Skamser (6)
Chief Operating Officer 1998 12,500 4,855 (2) 104,167 (6)
1997 101,042 7,375 6,433 (2) 500 (4)
1996 500,000 (5)
H. Russel Douglas
Chief Technology Officer 1998 188,401 (3) 9,000 (2)
1997 113,500 7,500 (2) 500 (4)
1996 210,000 (5)
William Kennedy (7) 1998 123,750 (3) 32,458 (9)
Chief Financial Officer 1997 59,167 500 (4)
1996 210,000 (5)
Carson-Connolly, Jan (8) 1998 38,100 (3) 159,587 (8)
Vice-President of 1997 82,500 15,000 500 (4)
Marketing 1996
100,000 (5)
</TABLE>
(1) Amounts exclude perquisites and other personal benefits because such
compensation did not exceed the lesser of $50,000 or 10% of the total
annual salary and bonus reported for each executive officer.
(2) This amount includes commissions and car allowance.
(3) This amount includes 32,143, 21,429, 17,857 and 12,857 shares of common
stock to Tim Connolly, H Russel Douglas, William T. Kennedy, and Jan
Carson-Connolly, respectively, in lieu of cash salaries. The value of those
transactions amounted to $76,001, $51,001, $42,500 and $30,600,
respectively.
26
<PAGE>
(4) The Company granted options to purchase 500 shares of common stock in
December, 1997 as a holiday bonus.
(5) These amounts were issued in connection with the respective employment
agreements.
(6) Mr. Skamser resigned February 1, 1998. This resulted in the forfeiture of
333,333 shares associated with an option for 500,000 shares. As a part of
his employment agreement, Mr. Skamser was paid six months salary subsequent
to his resignation date.
(7) On April 1, 1999, Mr Kennedy left the Company to pursue other interests. In
connection with his departure, Mr. Kennedy will be paid 6 months salary and
all of his employee stock options, granted to date, will fully vest.
(8) On April 30, 1998, Ms. Carson-Connolly resigned from her position as Vice-
President of Marketing. This resulted in the forfeiture of an option to
purchase 500 shares of common stock; however, the option to purchase
100,000 shares became fully vested. In addition, the Company issued 45,113
shares of common stock to Ms. Carson-Connolly upon her resignation.
(9) This amount includes 8,333 shares of common stock issued to Bill Kennedy in
lieu of a cash bonus. The value of this transaction amounted to $19,833.
Option Grants/SAR in Last Fiscal Year. There were no Options/SARs issued to
the Named Executive Officers during the Last Fiscal Year.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year Ended Option
Values. The following table provides certain information with respect to
options exercised during the fiscal year ended December 31, 1998 by the Chief
Executive Officer and each of the Named Executive Officers listed in the
preceding tables:
<TABLE>
<CAPTION>
Number of Securities Underlying
Shares Unexercised Options at Fiscal Value of Unexercised In-the-Money
Acquired On Value Year-End(#) Options at Fiscal Year-End ($)
Name Exercise (#) Realized ($) Exercisable Un-Exercisable Exercisable(1) Un-Exercisable(1)
<S> <C> <C> <C> <C> <C> <C>
Timothy Connolly - - 500 - -
H Russel Douglas - - 70,000 140,000 - -
- - 500 - - -
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
William Kennedy(2) - - 70,000 233,750 - -
- - 500
Jan Carson-Connolly(3) - - 100,000 - - -
</TABLE>
(1) The value for these options is not presented because the option price is
less than the fair market value price of the Company's common stock.
(2) In April 1999, William Kennedy resigned from the Company to pursue other
interests. In connection with his resignation, Mr. Kennedy's employee stock
options became fully vested. All options are exercisable for a period up to
three years.
(3) In April 1998, Jan Carson-Connolly resigned from the Company to pursue
other interests. Despite her resignation, Ms. Connolly continues to serve
on the Company's Board of Directors.
EMPLOYMENT AGREEMENTS WITH KEY PERSONNEL
On July 1, 1997, the Company entered into an employment agreement with Timothy
J. Connolly, the Company's Chief Executive Officer. The initial term of the
contract expires December 31, 2000. Thereafter, the contract shall be
automatically extended for successive one-year periods unless terminated by Mr.
Connolly or the Company. According to the agreement, Mr. Connolly will receive
an annual base salary of $225,000 for 1998. After this, the annual base salary
will increase to $250,000 and will remain at this amount until expiration date.
In addition to the base salary, Mr. Connolly is entitled to receive an annual
bonus. The annual bonus is determined at the beginning of each year and is
contingent upon Mr. Connolly's ability to meet certain performance criteria.
On April 1, 1997, the Company entered into an employment agreement with
Charles W. Skamser the Company's COO. This employment agreement terminated on
March 2, 1998, upon Mr. Skamser's election to leave the Company in pursuit of
other interests.
On April 1, 1997, the Company entered into an employment agreement with H.
Russel Douglas, the Company's Chief Technology Officer. The initial term of the
contract expires March 31, 2000. Thereafter, the expiration date of the contract
shall be automatically extended for successive one-year periods unless
terminated by Mr. Douglas or the Company. According to the agreement, Mr.
Douglas will receive an annual base salary of $150,000 for 1998. After this, the
annual base salary will increase to $175,000 and will remain at that amount
until the expiration date. In addition to the base salary, Mr. Douglas is
entitled to receive a quarterly bonus. The quarterly bonus is equal to 6-1/4% of
the base salary and is contingent upon Mr. Douglas' ability to meet certain
performance criteria. In accordance with the agreement, Mr. Douglas is entitled
to participate in the Company's 1997 Incentive Plan.
In May 1, 1997, the Company entered into an employment agreement with William
T. Kennedy the company's chief financial officer. The initial term of the
contract expires April 30, 2000. The contract shall be automatically extended
for successive one-year periods unless terminated by Mr. Kennedy or the Company.
According to the agreement, Mr. Kennedy will receive an annual base salary of
$125,000 from January 1, 1998 through
28
<PAGE>
December 31, 1998. After this, the annual base salary will increase to $150,000.
In addition to the base salary, Mr. Kennedy was entitled to receive quarterly
bonuses. The quarterly bonuses are equal to 6-1/4% of the base salary and were
contingent upon Mr. Kennedy's ability to meet certain performance criteria. In
accordance with the agreement, Mr. Kennedy was entitled to participate in the
Company's incentive plan. On April 1, 1999, Mr. Kennedy resigned from the
Company to pursue other interests.
In August 15, 1996, the Company entered into an employment agreement with
Janet E. Carson as the Company's VP of Marketing and Director. The initial term
of the contract was to expire on December 31, 1999. During the term of the
agreement, Ms. Carson received an annual base salary of $90,000. On April 30,
1998, the Company issued 45,113 shares of common stock to Janet E. Carson upon
her resignation and the employment agreement was terminated.
On August 1, 1998, the Company entered into an employment agreement with Robin
P. Ritchie as the Company's Chief Operating Officer. The term of the agreement
is effective until terminated by either the employer or employee. The initial
term of the contract expires July 31, 2002. Thereafter, the expiration date of
the contract shall be automatically extended for successive one-year periods.
According to the agreement, Mr. Ritchie will receive an annual base salary of
$150,000. In addition to the base salary, Mr. Ritchie is entitled to receive an
annual bonus of up to $100,000. The bonus is contingent upon Mr. Ritchie's
ability to meet certain performance criteria. In accordance with the agreement,
Mr. Ritchie is entitled to participate in the Company's incentive plan.
On April 15, 1999, the Company entered into an employment agreement with
Richard A. Cabrera as the Company's Chief Financial Officer. The initial term of
the contract expires April 14, 2002. Thereafter, the expiration date of the
contract shall be automatically extended for successive one-year periods.
According to the agreement, Mr. Cabrera will receive an annual base salary of
$140,000 from April 15, 1999 through October 15, 1999. After this, the annual
base salary will increase to $150,000 and will remain at that level until the
expiration date of the agreement. in addition to the base salary, Mr. Cabrera is
entitled to receive a quarterly bonus. The quarterly bonus is equal to 12-1/2%
of the base salary and is contingent upon Mr. Cabrera's ability to meet certain
performance criteria. In accordance with the agreement, Mr. Cabrera is entitled
to participate in the Company's incentive plan.
29
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, derived from the Company's
transfer records, filings with the Securities and Exchange Commission and other
public information, regarding the beneficial ownership of the Company's Common
Stock as of April 1, 1999 by: (i) each person who is known by the Company to
beneficially own more than five percent of the outstanding shares of Common
Stock, (ii) each of the named executive officers and directors, and (iii) all
directors and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON STOCK BENEFICIAL OWNERSHIP %
NAME AND ADDRESS OF BENEFICIAL OWNERS (1) BENEFICIALLY OWNED (2) OF SHARES
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Voice Technologies Partners Ltd. 5,920,000 (3) 36.79%
Timothy J. Connolly 4,854,622 (4)(3) 29.63%
Jan Carson Connolly 4,854,622 (3)(5) 29.63%
L&H Investment Company NV 5,833,333 (6) 26.61%
Flanders Language Valley
50-8900 Ieper
Belgium
Entrepreneurial Investors Limited 1,702,992 (7) 9.96%
Citibank Building, Second Floor
East Mall Drive
P.O. Box F-42544
Freeport, Bahamas
H. Russel Douglas 1,513,397 (3)(8) 9.35%
Jesse R. Marion 1,023,166 6.35%
7751 San Felipe, Suite 100
Houston, TX 77063
William T. Kennedy 455,857 (9) 2.76%
Michael J. Wilson 408,333 (10) 2.48%
Wilson & Associates
132 Settlers Drive
Naperville, Illinois 60565
Daniel Dornier 339,640 (11) 2.07%
25 Field Point Drive
Greenwhich, Connecticut 06830
G. Edward Powell 174,958 (12) 1.08%
Advanced Communications Group, Inc.
390 South Woods Mill Road, Suite 150
Chesterfield, Missouri 63017
H. William Boyar 124,722 (13) .77%
Boyar, Simon, & Miller
4265 San Felipe, Suite 1200
Houston, Texas 77027
Raymond R. Betz 73,958 (14) .46%
The Betz Companies
610 West Green Road
Houston, Texas 77067
Robin P. Ritchie 26,500 (16) .16%
Milton A. Spiegelhauer 25,000 (16) .16%
James S. Cochran, M.D. 11,111 (15) .07%
Urology Specialist & Associates
8210 Walnut Hill Lane #208
Dallas, Texas 75231
Jo Lernout 11,111 (15) .07%
Lernout & Hauspie Speech Products
Koning Alber I Iann 64
1780 Wemmel Belgium
Thomas Denys 11,111 (15) .07%
L&H Investment Company
Sint Kispijnstraat
B-8900 Ieper
Belgium
</TABLE>
30
<PAGE>
(1) Except as otherwise indicated, the addresses for the above-referenced
persons are at the Company.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchanges Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of April 30,1999 are
deemed outstanding. Such shares, however, are not deemed outstanding for
the purposes of computing the percentage ownership of each other person.
Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, each stockholder named in the table has
sole voting and investment power with respect to the shares set forth
opposite such stockholder's name.
(3) Mr. Connolly has voting and disposition control over the shares of Common
Stock owned by Voice Technologies Partners, L.P., by virtue of owning all
of the outstanding stock of Voice Technologies Management corp., the
managing general partner of Voice Technologies Partners, L.P. Ms. Carson
Connolly and Mr. Douglas also own partnership interests in Voice
Technologies Partners, Inc., either in their individual capacities or
through other entities in which they own ownership interests.
(4) Includes 134,662 shares of Common Stock issuable upon exercise of currently
exercisable warrants in connection with the Bridge Loan Agreements and
currently exercisable employee options. Also includes 2,587,382 shares of
Common Stock beneficially owned by his wife, Jan Carson Connolly.
(5) Includes 160,416 shares of Common Stock issuable upon exercise of
currently exercisable warrants in connection with the Bridge Loan
Agreement and currently exercisable employee options. Also includes
2,267,239 shares of Common Stock beneficially owned by her husband, Timothy
J. Connolly.
(6) Includes shares issuable upon conversion of 5,000 shares of Series D
Preferred Stock, par value $.10 per share (the "Series D Preferred Stock").
For the purpose of estimating the number of shares of common stock, the
Company calculated the number of shares of common stock issuable using the
current conversion rate of the Series D Preferred Stock of $1.50 (subject
to adjustment). This amount also includes 2,500,000 shares of common stock
issuable upon exercise of currently exercisable warrants granted in
connection with the Series D Preferred Stock Private Placement.
(7) Includes shares issuable upon conversion of 186,000 shares of Series A
Preferred Stock, par value $.10 per share (the "Series A Preferred Stock").
for the purpose of estimating the number of shares of common stock, the
Company calculated the number of shares of common stock issuable
using the current conversion rate of the Series A Preferred Stock of 5.40
shares of common stock for each share of Series A Preferred Stock (subject
to adjustment).
(8) Includes 103,834 shares of Common Stock issuable upon exercise of employee
options.
(9) Includes 429,667 shares of Common Stock issuable upon exercise of currently
exercisable warrants in connection with Bridge Loan Agreements and
currently exercisable employee options.
31
<PAGE>
(10) Includes 350,000 shares of Common Stock issuable upon exercise of currently
exercisable warrants granted in connection with consulting services and
58,333 shares of Common Stock issuable upon exercise of director options.
(11) Includes shares issuable upon conversion of 30,000 shares of Series C
Preferred Stock, par value $.10 per share (the "Series C Preferred Stock").
For the purpose of estimating the number of shares of Common Stock, the
Company calculated the number of shares of Common Stock issuable in
connection with the conversion of the Company's Series C Preferred Stock
using the current conversion rate of the Series C Preferred Stock of 10
shares of Common Stock for each share of Series C Preferred Stock (subject
to adjustment). Also included, are 36,944 shares of Common Stock issuable
upon exercise of director options.
(12) Includes 155,833 shares of Common Stock issuable upon exercise of currently
exercisable warrants in connection with Bridge Loan Agreements and director
options.
(13) Includes 114,722 shares of Common Stock issuable upon exercise of director
options.
(14) Includes 58,333 shares of Common Stock issuable upon exercise of director
options.
(15) Includes 11,111 shares of Common Stock issuable upon exercise of director
options.
(16) Includes 25,000 shares of Common Stock issuable upon exercise of currently
exercisable warrants in connection with a Bridge Loan Agreement.
32
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective November 1, 1997 the Company entered into a consulting agreement
with Michael J. Wilson, one of the Company's Directors. The agreement included
a fee of $12,500 per month, for which Mr. Wilson received $25,000 in calendar
year 1997 and $150,000 during 1998. Under this agreement, Mr. Wilson provided
consulting services to the company directly relating to corporate operations and
the implementation of the medical dictation/transcription piece of the Company's
business plan. This consulting agreement term extends through April of 1999, as
amended. In addition to the cash compensation, Mr. Wilson has been granted two
warrants to purchase 350,000 shares of common stock.
In January 1997, the Company entered into a consulting agreement with
Frederick A. Huttner one of the Company's Directors. The agreement included a
fee of $6,000 per month. Mr. Huttner provided consulting services relating to
the review of strategic and operational plans and participation in the planning
process; review of financial budgets, controls and reports; review of expansion
plans; review of investment opportunities (including, without limitation,
mergers, acquisitions, expansions or sales of majority or minority interests in
the Company); participation in communications with the Board of Directors of the
Company; and assisting the executive officers of the Company as requested. This
consulting agreement expired on February 15, 1998.
On August 14, 1997, the Company paid in full $580,000, under various bridge
loan agreements (the "1997 Bridge Loans") entered into between May 15, 1997 and
July 24, 1997, to Messrs. Connolly, Kennedy, Powell, Skamser, Mr. Robert Lopez
(then an officer of the Company), and an unrelated shareholder of the Company in
the amount of $180,000, $100,000, $50,000, $100,000, $100,000 and $50,000
respectively. The amount was paid in accordance with the provisions of the 1997
Bridge Loans, which called for full payment plus 12% interest at the earlier of
six months or the receipt of the minimum proceeds of the private placement of
$2,000,000. In connection with the Bridge Loan Agreements, the Company also
issued warrants to purchase
33
<PAGE>
580,000 shares of the Company's Common Stock at $1.60 per share, on a one
warrant to one dollar of principal amount loaned.
On September 25, 1997, the Board of Directors of the Company approved a change
in the consulting agreement with Mr. Huttner. The Board approved and Mr. Huttner
agreed that Mr. Huttner would surrender 200,000 of previously issued shares of
Common Stock and receive 150,000 options priced at $1.60 issued under the
Company's 1997 Incentive Plan and 50,000 shares of Common Stock. Additionally,
the Board approved the issuance of 10,000 shares of Company Stock and the
issuance of 50,000 of fully vested options priced at $1.60 in exchange for
financial consulting services provided by Mr. Huttner.
On September 30, 1998, the Company entered into a "Value Added Reseller
Agreement" ("VAR Agreement") with Lernout & Hauspie Speech Products (L&H). L&H
develops and licenses dictation software for use in the health care industry.
The VAR Agreement gives the Company rights to a world-wide non-exclusive license
of certain software products developed by L&H. On December 27, 1998, this
agreement was amended to include additional requirements. In accordance with the
amended agreement, the Company agreed to prepay L&H $1,000,000 (in two
installments) for software licenses. Of this amount, $650,000 was paid on
December 31, 1998 and the balance of $350,000 was paid on March 31, 1999. The
entire prepaid amount of $1,000,000, of which $560,000 is classified as long-
term, is reflected in the December 31, 1998 financial statements.
During the month of December, 1998, the Company entered into various Bridge
Loan Agreements (the "1998 Bridge Loans") with certain officers, a former
employee and a third party. The aggregate balance of the 1998 Bridge Loans
amounts to $335,333, and bear interest at 12% per annum. The 1998 Bridge Loans
plus accrued interest are payable upon the earlier of six months following the
date of the note or three business days following the receipt of $2,000,000 in
equity funding. On December 31, 1998, the Company received $2,000,000 in equity
funding and paid the 1998 Bridge Loans in January, 1999, plus accrued interest,
in accordance with the agreement. In connection with the 1998 Bridge Loans, the
Company granted warrants to purchase 355,495 shares of Common Stock resulting in
approximately $122,000 of finance cost.
On December 31, 1998, the Company entered into a Series D Preferred Stock and
warrant purchase agreement to sell up to 5,000 share of Series D Convertible
Preferred Stock to LHIC. Two Lernout & Hauspie executives, Jo Lernout and Thomas
Denys, were appointed to the Board of Directors on February 8, 1999. The
preferred shares have a par value of $.10 and were priced at $1,000 per share.
This agreement is broken down into three closings of 2,000 shares, 1,000 shares
and 2,000 shares. Each closing was subject to the Company meeting certain
financial and/or operational targets. The first closing of 2,000 shares was
completed on December 31, 1998. The second closing was completed on January 14,
1999, and the final closing was completed on March 15, 1999.
34
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits.
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2.1 Plan and Agreement of Merger between Applied Voice Recognition, Inc., a Utah corporation and the
Company dated November 7, 1997. (Exhibit 2.1 to the Company's Current Report on Form 8-K as filed
with the Commission on January 20, 1998 is incorporated herein by reference).
2.2 Asset Purchase Agreement by and between Transcription Resources dated March 17, 1998 (Exhibit 2.2
to the Company's Form 10-KSB for the period ended December 31, 1997, as filed with the Commission
on April 15, 1998, is incorporated herein by reference).
2.3 Asset purchase agreement by and among the Company, Cornell and Acquisition Sub dated December 1,
1998 (Exhibit 2.1 to the Company's Current Report on Form 8-K as filed with the Commission on
December 16, 1998 is incorporated herein by reference).
2.4 Asset purchase agreement by and among the Company and LRW Transcription dated December 31, 1998
(Exhibit 2.1 to the Company's Current Report on Form 8-K as filed with the Commission on January 1,
1999 is incorporated herein by reference).
3.1 Amended and Restated Certificate of Incorporation as filed with the Delaware Secretary of State on
January 29, 1998. (Exhibit 4.1 to the Company's Current Report on Form 8-K as filed with the
Commission on January 20, 1998 is incorporated herein by reference).
3.2 Certificate of Designation for the Series A Preferred Stock (Exhibit 4.2 to the Company's Current Report on
Form 8-K as filed with the Commission on January 20, 1998 is incorporated herein by reference).
3.3 Certificate of Ownership and Merger of Applied Voice Recognition, Inc., a Utah corporation, with and into the Company
dated January 26, 1998 (Exhibit 3.3 to the Company's Form 10-KSB for the period ended December 31, 1997, as filed with
the Commission on April 15, 1998, is incorporated herein by reference).
3.4 Certificate of Designation for the Series B Preferred Stock (Exhibit 3.4 to the Company's Form 10-KSB for the period
ended December 31, 1997, as filed with the Commission on April 15, 1998, is incorporated herein by reference).
3.5 Certificate of Designation for the Series C Preferred Stock (Exhibit 3.1 to the Company's Form 10-QSB for the period
ended June 30, 1998, as filed with the Commission on August 14, 1998, is incorporated herein by reference).
*3.6 Certificate of Designation for the Series D Preferred Stock.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.7 Certificate of Designation for the Series 1 Preferred Stock (Exhibit 4.2 to the Company's Current
Report on Form 8-K as filed with the Commission on December 16, 1998 is incorporated herein by
reference).
3.8 Series 2 Preferred Stock Certificate of Designation (Exhibit 3.1 to the Company's Current Report on
Form 8-K as filed with the Commission on January 1, 1999 is incorporated herein by reference).
3.9 Amended and Restated Bylaws of the Company as adopted on November 7, 1997 (Exhibit 4.3 to the
Company's Current Report on Form 8-K as filed with the Commission on January 20, 1998 is
incorporated herein by reference).
4.1 Registration Rights Agreement between the Company and Equity Services, ltd., a Nevis company
("ESL") dated July 31, 1997. (Exhibit 4.1 to the Company's Form 10-KSB for the period ended
December 31, 1997, as filed with the Commission on April 15, 1998, is incorporated herein by
reference).
4.2 Registration Rights Agreement between the Company and ESL dated August 12, 1997. (Exhibit 4.2 to
the Company's Form 10-KSB for the period ended December 31, 1997, as filed with the Commission on
April 15, 1998, is incorporated herein by reference).
4.3 Amended and Restated Registration Rights Agreement between the company and Entrepreneurial
Investors, Ltd., a Bahamas Company ("EIL") dated January 8, 1998. (Exhibit 4.3 to the Company's
Form 10-KSB for the period ended December 31, 1997, as filed with the Commission on April 15, 1998,
is incorporated herein by reference).
4.4 Registration Rights Agreement between the Company and EIL dated August 12, 1997. (Exhibit 4.4 to
the Company's Form 10-KSB for the period ended December 31, 1997, as filed with the Commission on
April 15, 1998, is incorporated herein by reference).
4.5 Registration Rights Agreement by and between the Company and Voice It Worldwide, Inc., a Colorado
corporation ("Voice It") dated December 31, 1997. (Exhibit 4.5 to the Company's Form 10-KSB for
the period ended December 31, 1997, as filed with the Commission on April 15, 1998, is incorporated
herein by reference).
4.6 Form of Registration Rights Agreement between the Company and the Series B Preferred Stock
investors dates March 11, 1998. (Exhibit 4.6 to the Company's Form 10-KSB for the period ended
December 31, 1997, as filed with the Commission on April 15, 1998, is incorporated herein by
reference).
4.7 Registration Rights Agreement between the Company and the Series C Preferred Stock Investors dated
July 30, 1998 (Exhibit 3.2 to the Company's Form 10-QSB for the period ended June 30, 1998, as
filed with the Commission on August 14, 1998, is incorporated herein by reference).
4.8 Unsecured promissory note payable to Cornell in the amount of $270,000 dated as of December 1, 1998
(Exhibit 4.1 to the Company's Current Report on Form 8-K as filed with the Commission on December
16, 1998 is incorporated herein by reference).
*4.9 Registration Rights Agreement between the Company and L & H Investment Company dated December 31, 1998.
*4.10 Form of Warrant issued to L & H Investment Company dated December 31, 1998.
*4.11 Investor Rights Agreement between the Company and L & H Investment Company dated December 31, 1998.
10.1 Joint Product Development Agreement by and between the Company and Voice It dated December 31,
1997. (Exhibit 10.1 to the Company's Form 10-KSB for the period ended December 31, 1997, as filed
with the Commission on April 15, 1998, is incorporated herein by reference)
10.2 OEM Distribution Agreement between the Company and IBM dated December 17, 1996. (Exhibit 10.2 to
the Company's Form 10-KSB for the period ended December 31, 1997, as filed with the Commission on
April 15, 1998, is incorporated herein by reference)
10.3 1997 Incentive Plan effective as of October 1, 1997 (Exhibit 4.1 to the Company's Form S-8 (No.
333-44191) as filed with the Commission on January 13, 1998, is incorporated herein by reference).
10.4 License Agreement between the Company and Hakeem, Inc. dated September 1996 (Exhibit 10.4 to the
Company's Form 10-KSB/A-1 for the period ended December 31, 1997, as filed with the Commission on
April 30, 1998, is incorporated herein by reference).
10.5 Warrant to Purchase Common Stock issued to Hakeem, Inc. dated September 1996 (Exhibit 10.5 to the
Company's Form 10-KSB/A-1 for the period ended December 31, 1997, as filed with the Commission on
April 30, 1998, is incorporated herein by reference).
10.6 Employment Agreement between the Company and Jan Carson Connolly (then Janet E. Carson) dated
August 15, 1996 (Exhibit 10.6 to the Company's Form 10-KSB/A-1 for the period ended December 31,
1997, as filed with the Commission on April 30, 1998, is incorporated herein by reference).
10.7 Consulting and Stockholder Agreement between the Company and Frederick A. Huttner dated January
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
15, 1997 (Exhibit 10.7 to the Company's Form 10-KSB/A-1 for the period ended December 31, 1997,
as filed with the Commission on April 30, 1998, is incorporated herein by reference).
10.8 Consulting Agreement between the Company and Huttner and Company dated January 15, 1997 (Exhibit
10.8 to the Company's Form 10-KSB/A-1 for the period ended December 31, 1997, as filed with the
Commission on April 30, 1998, is incorporated herein by reference).
10.9 Employment Agreement between the Company and H. Russel Douglas effective as of April 1, 1997
(Exhibit 10.9 to the Company's Form 10-KSB/A-1 for the period ended December 31, 1997, as filed
with the Commission on April 30, 1998, is incorporated herein by reference).
10.10 Employment Agreement between the Company and Charles W. Skamser effective as of April 1, 1997
(Exhibit 10.10 to the Company's Form 10-KSB/A-1 for the period ended December 31, 1997, as filed
with the Commission on April 30, 1998, is incorporated herein by reference).
10.11 Employment Agreement between the Company and William T. Kennedy effective as of May 1, 1997
(Exhibit 10.11 to the Company's Form 10-KSB/A-1 for the period ended December 31, 1997, as filed
with the Commission on April 30, 1998, is incorporated herein by reference).
10.12 Employment Agreement between the Company and Timothy J. Connolly effective as of July 1, 1997
(Exhibit 10.12 to the Company's Form 10-KSB/A-1 for the period ended December 31, 1997, as filed
with the Commission on April 30, 1998, is incorporated herein by reference).
10.13 Consulting Agreement between the Company and Frederick A. Huttner and Michael J. Wilson dated November 1, 1997
(Exhibit 10.13 to the Company's Form 10-KSB/A-1 for the period ended December 31, 1997, as filed
with the Commission on April 30, 1998, is incorporated herein by reference).
10.14 Form of Bridge Loan Promissory Note (Exhibit 10.14 to the Company's Form 10-KSB/A-1 for the period
ended December 31, 1997, as filed with the Commission on April 30, 1998, is incorporated herein by
reference)
10.15 Form of Bridge Loan Warrant (Exhibit 10.15 to the Company's Form 10-KSB/A-1 for the period ended
December 31, 1997, as filed with the Commission on April 30, 1998, is incorporated herein by
reference)
10.16 Agreement with Respect to Termination of Employment between the Company and Jan Carson Connolly
(f/k/a Janet E. Carson) dated as of April 30, 1998 (Exhibit 10.2 to the Company's Form 10-QSB for
the period ended March 31, 1998, as filed with the Commission on May 15, 1998, is incorporated
herein by reference).
10.17 Investor Subscription Agreement between the Company and the Series C Preferred Stock Investors
dated July 30, 1998 (Exhibit 10.1 to the Company's Form 10-QSB for the period ended June 30, 1998,
as filed with the Commission on August 14, 1998, is incorporated herein by reference).
10.18 Placement Agreement between the Company and the Placement Agent for the Series C Preferred Stock
investors dated July 30, 1998 (Exhibit 10.2 to the Company's Form 10-QSB for the period ended June
30, 1998, as filed with the Commission on August 14, 1998, is incorporated herein by reference).
10.19 First Amendment to Investor Subscription Agreement between the Company and the Series C Preferred
Investors dated July 30, 1998 (Exhibit 10.3 to the Company's Form 10-QSB for the period ended June
30, 1998, as filed with the Commission on August 14, 1998, is incorporated herein by reference).
10.20 Employment Agreement between Robin P. Ritchie and the Company dated as of August 1, 1998 (Exhibit
11.1 to the Company's Form 10-QSB for the period ended September 30, 1998, as filed with the
Commission on November 17, 1998, is incorporated herein by reference).
10.21 Employment Agreement between Milton A. Spiegelhauer and the Company dated as of August 31, 1998
(Exhibit 11.2 to the Company's Form 10-QSB for the period ended September 30, 1998, as filed with
the Commission on November 17, 1998, is incorporated herein by reference.
10.22 Value Added Reseller Agreement between Lernout & Hauspie Speech Products N.V. and the Company
effective September 1, 1998 (Exhibit 11.3 to the Company's Form 10-QSB for the period ended
September 30, 1998, as filed with the Commission on November 17, 1998, is incorporated herein by
reference).
*10.23 Stock Purchase Agreement between the Company and L & H Investment Company dated December 31, 1998.
*10.24 Voting Agreement by and among Voice Technologies Partners, Ltd., L & H Investment Company and the
Company dated December 31, 1998.
*10.25 Co-sale and Tag-along Rights Agreement by and among Voice Technologies Partners, Ltd., L & H Investment
Company and the Company dated December 31, 1998.
*10.26 Form of December 1998 Bridge Loan Promissory Note.
*10.27 Form of December 1998 Bridge Loan Warrant.
16.1 Letter dated August 12, 1997, from Malone & Bailey, PLLC to the Commission. (Exhibit 16.1 to the
Company's Form 10-QSB for the period ended June 30, 1997, as filed with the Commission on August
14, 1997, is incorporated herein by reference.)
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
*23.1 Consent of Ernst & Young LLP.
*27.1 Financial Data Schedule.
</TABLE>
_____________
* Previously filed.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on December 16, 1998, to report
the acquisition of Cornell Transcription, Inc. and Outsource Transcription
Philippines, Inc. The Form 8-K was amended to include audited financials for
the acquired companies on February 17, 1999.
In addition, the Company filed two Current Reports on Form 8-K on January 15,
1999, to report the following:
. The sale of 2,000 shares of Series D Convertible Preferred Stock for an
aggregate purchase price of $2,000,000, in a privage placement, to LHIC on
December 31, 1998; and
. The acquisition of the assets of Linda R. Willhite Transcription, a sole
proprietorship owned by Linda R. Willhite, on December 31, 1998.
38
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act and Rule 12b-15
promulgated thereunder, the Registrant caused this Amendment No. 1 to this
Report to be signed on its behalf by the undersigned, therewith duly authorized
on April 30, 1999.
April 30, 1999 APPLIED VOICE RECOGNITION, INC.
/s/ Timothy J. Connolly
________________________ Chief Executive Officer,
Timothy J. Connolly Chairman of the Board and Director
<PAGE>
APPLIED VOICE RECOGNITION, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors F-2
Balance Sheets as of December 31, 1998 and 1997 F-3
Statements of Operations for the Years Ended December 31, 1998 and 1997 F-4
Statements of Stockholders' Equity for the Years Ended December 31, 1998
and 1997 F-5
Statements of Cash Flows for the Years Ended December 31, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Applied Voice Recognition, Inc.
We have audited the accompanying consolidated balance sheets of Applied Voice
Recognition, Inc., as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Applied
Voice Recognition, Inc., at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Applied Voice Recognition, Inc. will continue as a going concern. As more
fully described in Note 2, the Company has incurred recurring operating losses
and has incurred cash deficits from operations. Without the assurance of new
capital, these conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Houston, Texas
March 27, 1999
F-2
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1998 1997
----------------- ------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,377,913 $ 1,207,235
Accounts receivable, net of allowance of $32,500 and
$435,000 for 1998 and 1997, respectively 213,305 547,902
Other receivable 1,000,000 -
Inventory 37,221 319,664
Prepaid licenses 440,000 -
Deposits, prepaid expenses and deferred financing costs 35,927 79,380
Deferred expenses 264,570 -
----------------- ------------------
Total current assets 3,368,936 2,154,181
Property and equipment, net 697,298 204,445
Other assets:
Prepaid licenses 560,000 -
Capitalized software cost, net of accumulated
amortization of $67,697 and $8,889 for
1998 and 1997, respectively 397,369 156,152
Investments - 865,346
Other intangibles 613,039 -
Goodwill, net of accumulated amortization of $15,555 657,888 -
----------------- ------------------
Total other assets 2,228,296 1,021,498
TOTAL ASSETS $ 6,294,530 $ 3,380,124
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade payable $ 356,660 $ 432,613
Royalties payable - 207,154
Accrued expenses 897,998 120,975
Stock dividend payable 156,536 40,326
Current portion of preferred stock payable 638,144 -
Common stock payable 13,500 -
Note payable to sellers 297,884 -
Note payable to related party - 126,250
Bridge loans payable 335,333 -
Current portion of capital lease obligation 41,493 9,562
Current portion of long-term debt 11,542 43,833
Deferred revenue 39,120 68,634
----------------- ------------------
Total current liabilities 2,788,210 1,049,347
Preferred stock payable, net of current portion 70,683 -
Capital lease, net of current portion 97,869 39,789
Long-term debt, net of current portion 797 11,388
----------------- ------------------
Total liabilities 2,957,559 1,100,524
Commitments and Contingencies
Stockholders' equity
Preferred stock; $.10 par value; 2,000,000 shares authorized.
Series A; 186,000 shares issued and 312,500 outstanding 18,600 31,250
Series B; 2,285 shares issued and 0 outstanding 228 -
Series C; 153,538 issued and 0 shares outstanding 15,353 -
Series D; 3,000 shares issued and outstanding 300 -
Common stock; $.001 par value; 50,000,000 shares
authorized; 16,040,994 and 12,989,820 shares issued and outstanding 16,040 12,989
Paid-in-capital 18,136,867 7,541,522
Accumulated comprehensive income - 62,221
Accumulated deficit (14,850,417) (5,368,382)
----------------- ------------------
Total stockholders equity 3,336,971 2,279,600
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,294,530 $ 3,380,124
================= ==================
</TABLE>
See notes to financial statements
F-3
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
-----------------------------------------------------
<S> <C> <C>
Net hardware, software and related revenues $ 302,254 $ 2,113,013
Net transcription service revenues 415,103 -
-----------------------------------------------------
Total net revenues 717,357 2,113,013
Hardware, software and related cost of sales 202,125 853,672
Transcription cost of services 230,121 -
-----------------------------------------------------
Total cost of sales 432,246 853,672
-----------------------------------------------------
Gross margin 285,111 1,259,341
Operating expenses:
Marketing and sales 1,265,927 1,499,280
General and administrative 5,640,238 2,851,943
Research and development 754,170 725,496
-----------------------------------------------------
Total operating expenses 7,660,335 5,076,719
-----------------------------------------------------
Operating margin (7,375,224) (3,817,378)
Other income (expenses):
Other income 2,497 -
Rental income - 37,138
Interest income 72,013 62,652
Interest expense (216,680) (451,076)
Loss on investments (803,125) -
-----------------------------------------------------
Total other expense (945,295) (351,286)
-----------------------------------------------------
Net loss $ (8,320,519) $ (4,168,664)
=====================================================
Statement of comprehensive loss:
Net loss as reported $ (8,320,519) $(4,168,664)
Unrealized holding (Loss) Gain - 62,221
-----------------------------------------------------
Comprehensive loss $ (8,320,519) $ (4,106,443)
=====================================================
Basic and diluted earnings per share $ (0.68) $ (0.36)
=====================================================
</TABLE>
F-4
<PAGE>
APPLIED VOICE RECOGNITION, INC.
FORM 10-KSB
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Preferred Stock Preferred Stock Preferred Stock Preferred Stock
Issued Issued Series A Issued Series B Issued Series C Issued Series D
-------------------- --------------- --------------- --------------- ---------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ending balance at
December 31, 1996 (Restated) 10,642,102 $10,642 - - - - - - - -
Sale of 100,000 shares of
common stock 100,000 100 - - - - - - - -
Exercise of 70,834 stock
warrants for $9,916 70,834 71 - - - - - - - -
Issuance of 50,000 shares of
common stock for consulting
services rendered 50,000 50 - - - - - - - -
Issuance of warrant to purchase
50,000 shares of common
stock for consulting
services rendered - - - - - - - - - -
Issuance of 50,000 shares of
common stock for consulting
services rendered 50,000 50 - - - - - - - -
Sale of 312,500 shares of
Series A Preferred Stock
for $2,500,000 in
connection with private
placement - - 312,500 31,250 - - - - - -
Sale of 1,595,625 shares of
common stock for $2,552,999
in connection with private
placement 1,595,625 1,596 - - - - - - - -
Issuance of 5,000 shares
of common stock for legal
services rendered in
connection with private
placement 5,000 5 - - - - - - - -
Cash expenses related to
private placement - - - - - - - - - -
Private placement expense
attributed to warrants
issued in connection with
private placement - - - - - - - - - -
Issuance of 135,159 shares
of common stock for
commissions associated
with private placement 135,159 135 - - - - - - - -
Issuance of warrant to
purchase 250,000 shares
of common stock for
consulting services
rendered - - - - - - - - - -
Issuance of warrants in
connection with bridge
loan financing - - - - - - - - - -
Exercise of 223,600
stock options 223,600 224 - - - - - - - -
Issuance of 100,000 shares
of common stock in
exchange for investment
in common stock of
Wade Cook 100,000 100 - - - - - - - -
Issuance of 10,000 shares
of common stock for
consulting services
rendered 10,000 10 - - - - - - - -
Issuance of 7,500 shares of
common stock in exchange
for advertisement 7,500 7 - - - - - - - -
Common stock dividend on
Series A Preferred Stock - - - - - - - - - -
Unrealized holding gain - - - - - - - - - -
Net loss for the twelve
months ended
December 31, 1997 - - - - - - - - - -
Ending balance at
December 31, 1997 12,989,820 $12,990 312,500 $31,250 - $ - - $ - - $ -
Issuance of 129,399 shares
of common stock in lieu
of officer's compensation 129,399 129 - - - - - - - -
Issuance of 14,407 shares
of common stock in lieu
of employee cash bonuses 14,047 14 - - - - - - - -
Issuance of 44,286 shares
of common stock for
services 44,286 44 - - - - - - - -
Issuance of additional
56,000 shares of common
stock as part of previous
stock transaction 56,250 56 - - - - - - - -
Issuance of 25,000 shares
of common stock in
connection with furniture
purchase 25,000 25 - - - - - - - -
Issuance of warrants to
purchase 532,000 shares
of common stock for
consulting services - - - - - - - - - -
</TABLE>
<TABLE>
<CAPTION>
Paid In Capital
------------------------------------------------------------------------------------
Common Preferred Series A Preferred Series B Preferred Series C Preferred Series D
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ending balance at
December 31, 1996 (Restated) - $ 1,605,789 - - - -
Sale of 100,000 shares of
common stock - 249,900 - - - -
Exercise of 70,834 stock
warrants for $9,916 - 9,845 - - - -
Issuance of 50,000 shares of
common stock for consulting
services rendered - 199,950 - - - -
Issuance of warrant to purchase
50,000 shares of common
stock for consulting
services rendered - 83,500 - - - -
Issuance of 50,000 shares of
common stock for consulting
services rendered - 74,950 - - - -
Sale of 312,500 shares of
Series A Preferred Stock
for $2,500,000 in
connection with private
placement - - 2,468,750 - - -
Sale of 1,595,625 shares of
common stock for $2,552,999
in connection with private
placement - 2,551,404 - - - -
Issuance of 5,000 shares
of common stock for legal
services rendered in
connection with private
placement - 18,745 - - - -
Cash expenses related to
private placement - - - - - -
Private placement expense
attributed to warrants
issued in connection with
private placement - 345,750 - - - -
Issuance of 135,159 shares
of common stock for
commissions associated
with private placement - 216,121 - - - -
Issuance of warrant to
purchase 250,000 shares
of common stock for
consulting services
rendered - 141,000 - - - -
Issuance of warrants in
connection with bridge
loan financing - 278,400 - - - -
Exercise of 223,600
stock options - 44,843 - - - -
Issuance of 100,000 shares
of common stock in
exchange for investment
in common stock of
Wade Cook - 303,025 - - - -
Issuance of 10,000 shares
of common stock for
consulting services
rendered - 44,990 - - - -
Issuance of 7,500 shares of
common stock in exchange
for advertisement - 44,993 - - - -
Common stock dividend on
Series A Preferred Stock - - - - - -
Unrealized holding gain - - - - - -
Net loss for the twelve
months ended
December 31, 1997 - - - - - -
Ending balance at
December 31, 1997 $ - $6,213,205 $2,468,750 $ - $ - $ -
Issuance of 129,399 shares
of common stock in lieu
of officer's compensation - 313,255 - - - -
Issuance of 14,407 shares
of common stock in lieu
of employee cash bonuses - 33,418 - - - -
Issuance of 44,286 shares
of common stock for
services - 116,956 - - - -
Issuance of additional
56,000 shares of common
stock as part of previous
stock transaction - (56) - - - -
Issuance of 25,000 shares
of common stock in
connection with furniture
purchase - 20,275 - - - -
Issuance of warrants to
purchase 532,000 shares
of common stock for
consulting services - 596,780 - - - -
</TABLE>
<TABLE>
<CAPTION>
Other
Accumulated
Reduction of Comprehensive Retained
Paid-In Capital Income (Loss) Deficit Total
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ending balance at
December 31, 1996 (Restated) - - $(1,159,392) $ 457,039
Sale of 100,000 shares of
common stock - - - 250,000
Exercise of 70,834 stock
warrants for $9,916 - - - 9,916
Issuance of 50,000 shares of
common stock for consulting
services rendered - - - 200,000
Issuance of warrant to purchase
50,000 shares of common
stock for consulting
services rendered - - - 83,500
Issuance of 50,000 shares of
common stock for consulting
services rendered - - - 75,000
Sale of 312,500 shares of
Series A Preferred Stock
for $2,500,000 in
connection with private
placement - - - 2,500,000
Sale of 1,595,625 shares of
common stock for $2,552,999
in connection with private
placement - - - 2,553,000
Issuance of 5,000 shares
of common stock for legal
services rendered in
connection with private
placement (18,750) - - -
Cash expenses related to
private placement (559,677) - - (559,677)
Private placement expense
attributed to warrants
issued in connection with
private placement (345,750) - - -
Issuance of 135,159 shares
of common stock for
commissions associated
with private placement (216,256) - - -
Issuance of warrant to
purchase 250,000 shares
of common stock for
consulting services
rendered - - - 141,000
Issuance of warrants in
connection with bridge
loan financing - - - 278,400
Exercise of 223,600
stock options - - - 45,067
Issuance of 100,000 shares
of common stock in
exchange for investment
in common stock of
Wade Cook - - - 303,125
Issuance of 10,000 shares
of common stock for
consulting services
rendered - - - 45,000
Issuance of 7,500 shares of
common stock in exchange
for advertisement - - - 45,000
Common stock dividend on
Series A Preferred Stock - - (40,326) (40,326)
Unrealized holding gain - 62,221 - 62,221
Net loss for the twelve
months ended
December 31, 1997 - - (4,168,664) (4,168,664)
Ending balance at
December 31, 1997 $(1,140,433) $62,221 $(5,368,382) $ 2,279,601
Issuance of 129,399 shares
of common stock in lieu
of officer's compensation - - - 313,384
Issuance of 14,407 shares
of common stock in lieu
of employee cash bonuses - - - 33,432
Issuance of 44,286 shares
of common stock for
services - - - 117,000
Issuance of additional
56,000 shares of common
stock as part of previous
stock transaction - - - -
Issuance of 25,000 shares
of common stock in
connection with furniture
purchase - - - 20,300
Issuance of warrants to
purchase 532,000 shares
of common stock for
consulting services - - - 596,780
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Common Stock Preferred Stock Preferred Stock Preferred Stock Preferred Stock
Issued Issued Series A Issued Series B Issued Series C Issued Series D
-------------- --------------- --------------- --------------- ---------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of warrants and
options to purchase 1,020,000
shares of common stock for
advisory services - - - - - - - - - -
Issuance of warrant to purchase
355,500 shares, in connection
with bridge loan financing - - - - - - - - - -
Exercise of options to purchase
51,167 shares of common stock 51,167 50 - - - - - - - -
Conversion of 126,500 shares of
Series A Preferred Stock in
exchange for 683,100 shares of
common stock 683,100 683 (126,500) (12,650) - - - - - -
Series A Preferred Stock
Dividend paid with common
stock 70,217 70 - - - - - - - -
Sale of 3,000 shares of Series
B Preferred stock for $3,000,000
in connection with private
placement - - - - 3,000 300 - - - -
Expected deemed dividend related
to discount on conversion of
Series B Preferred Stock - - - - - - - - - -
Issuance of warrant to purchase
150,000 shares, to third party,
in connection with Series B
Private Placement - - - - - - - - - -
Conversion of 715 shares of
Series B Preferred Stock in
exchange for 1,147,171 shares
of common stock 1,147,171 1,147 - - (715) (72) - - - -
Series B Preferred Stock
Dividend paid with
common stock 22,812 23 - - - - - - - -
Sale of 220,750 shares of
Series C Preferred Stock for
$2,207,500 in connection
with private placement - - - - - - 220,750 22,075 - -
Issuance of Series C Preferred
shares to third party in
connection with Series C
Private Placement - - - - - - 11,038 1,104 - -
Cash expenses related to
Series C Private Placement - - - - - - - - - -
Issuance of warrant to purchase
220,750 shares, to third
party, in connection with
Series C Private Placement - - - - - - - - - -
Conversion of 78,250 shares of
Series C Preferred Stock in
exchange for 782,500 shares
of common stock 782,500 783 - - - - (78,250) (7,826) - -
Series C Preferred Stock
Dividend paid with common
stock 25,225 25 - - - - - - - -
Sale of 3,000 shares of
Series D Preferred stock
for $3,000,000 in connection
with private placement - - - - - - - - 3,000 300
Cash expenses on legal and
placement costs related to
Series D Private Placement - - - - - - - - - -
Issuance of two warrants to
purchase a total of
2,000,000 shares, to
Series D Investor, in
connection with Series D
Private Placement - - - - - - - - - -
Accrued dividend on Preferred
Stock Series A & C - - - - - - - - - -
Unrealized holding loss - - - - - - - - - -
Investment write-off - - - - - - - - - -
Net loss for the twelve months
ended December 31, 1998 - - - - - - - - - -
---------------------------------------------------------------------------------------------
Ending balance at
December 31, 1998 16,040,994 $16,039 186,000 $18,600 2,285 $228 153,538 $15,353 3,000 $300
=============================================================================================
Paid In Capital
---------------------------------------------------------------
Preferred Preferred Preferred Preferred
Common Series A Series B Series C Series D
------ --------- --------- --------- ---------
Issuance of warrants and
options to purchase 1,020,000
shares of common stock for
advisory services - 390,650 - - - -
Issuance of warrant to purchase
355,500 shares, in connection
with bridge loan financing - 121,959 - - - -
Exercise of options to purchase
51,167 shares of common stock - 90,259 - - - -
Conversion of 126,500 shares of
Series A Preferred Stock in
exchange for 683,100 shares of
common stock - 1,011,317 (999,350) - - -
Series A Preferred Stock
Dividend paid with common
stock - 111,779 - - - -
Sale of 3,000 shares of Series
B Preferred stock for $3,000,000
in connection with private
placement - - - 2,999,700 - -
Expected deemed dividend related
to discount on conversion of
Series B Preferred Stock - - - 852,999 - -
Issuance of warrant to purchase
150,000 shares, to third party,
in connection with Series B
Private Placement - 93,000 - - - -
Conversion of 715 shares of
Series B Preferred Stock in
exchange for 1,147,171 shares
of common stock - 1,251,413 - (1,252,488) - -
Series B Preferred Stock
Dividend paid with
common stock - 20,275 - - - -
Sale of 220,750 shares of
Series C Preferred Stock for
$2,207,500 in connection
with private placement - - - - 2,185,425 -
Issuance of Series C Preferred
shares to third party in
connection with Series C
Private Placement - - - - 109,276 110,380
Cash expenses on legal and
placement costs related to
Series C Private Placement - - - - - -
Issuance of warrant to purchase
220,750 shares, to third
party, in connection with
Series C Private Placement - 66,225 - - - -
Conversion of 78,250 shares of
Series C Preferred Stock in
exchange for 782,500 shares
of common stock - 781,718 - - (774,675) -
Series C Preferred Stock
Dividend paid with common
stock - 20,912 - - - -
Sale of 3,000 shares of
Series D Preferred stock
for $3,000,000 in connection
with private placement - - - - - 2,999,700
Cash expenses on legal and
placement costs related to
Series D Private Placement - - - - - -
Issuance of two warrants to
purchase 2,000,000 shares, to
Series D Investor, in
connection with Series D
Private Placement - 720,000 - - - -
Accrued dividend on Preferred
Stock Series A & C - - - - - -
Unrealized holding loss - - - - -
Investment write-off - - - - -
Net loss for the twelve months
ended December 31, 1998 - - - - -
---------------------------------------------------------------------------------------------
Ending balance at
December 31, 1998 $ - $11,973,339 $1,469,400 $2,600,211 $1,520,026 $2,889,320
=============================================================================================
Other
Accumulated
Reduction of Comprehensive Retained
Paid-in Capital Income (loss) Deficit Total
--------------- ----------- -------- -----
Issuance of warrants and
options to purchase 1,020,000
shares of common stock for
advisory services - - - 390,652
Issuance of warrant to purchase
355,500 shares, in connection
with bridge loan financing - - - 121,959
Exercise of options to purchase
51,167 shares of common stock - - - 90,309
Conversion of 126,500 shares of
Series A Preferred Stock in
exchange for 683,100 shares of
common stock - - - -
Series A Preferred Stock
Dividend paid with common
stock - - (111,849) -
Sale of 3,000 shares of Series
B Preferred stock for $3,000,000
in connection with private
placement - - - 3,000,000
Expected deemed dividend related
to discount on conversion of
Series B Preferred Stock - - (852,999) -
Issuance of warrant to purchase
150,000 shares, to third party,
in connection with Series B
Private Placement (93,000) - - -
Conversion of 715 shares of
Series B Preferred Stock in
exchange for 1,147,171 shares
of common stock - - - -
Series B Preferred Stock
Dividend paid with
common stock - - (20,298) -
Sale of 220,750 shares of
Series C Preferred Stock for
$2,207,500 in connection
with private placement - - - 2,207,500
Issuance of Series C Preferred
shares to third party in
connection with Series C
Private Placement - - - -
Cash expenses on legal and
placement costs related to
Series C Private Placement (230,771) - - 0
Issuance of warrant to purchase
220,750 shares, to third
party, in connection with
Series C Private Placement (66,225) - - -
Conversion of 78,250 shares of
Series C Preferred Stock in
exchange for 782,500 shares
of common stock - - - -
Series C Preferred Stock
Dividend paid with common
stock - - (20,937) -
Sale of 3,000 shares of
Series D Preferred stock
for $3,000,000 in connection
with private placement - - - 3,000,000
Cash expenses on legal and
placement costs related to
Series D Private Placement (65,000) - - (65,000)
Issuance of two warrants to
purchase 2,000,000 shares, to
Series D Investor, in
connection with Series D
Private Placement (720,000) - - -
Accrued dividend on Preferred
Stock Series A & C - - (155,433) (155,433)
Unrealized holding loss - (675,643) - (675,643)
Investment write-off - 613,422 - 613,422
Net loss for the twelve months
ended December 31, 1998 - - (8,320,519) (8,320,519)
------------------------------------------------------------------------------------------
Ending balance at
December 31, 1998 $(2,315,429) $ - $(14,850,417) $ 3,336,971
==========================================================================================
</TABLE>
F-6
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED CASH FLOW STATEMENTS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1998 1997
----------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (8,320,519) $ (4,168,664)
Adjustments to reconcile net (loss) to cash provided by operating
activities:
Depreciation and amortization 197,713 189,131
Loss on investment write-off 803,125 -
Loss on inventory write-off 36,900 -
Stock and warrants issued for services 1,737,836 589,500
Stock and options issued as compensation 346,816 435,000
Changes in operating assets and liabilities:
Accounts receivable 334,597 (944,898)
Inventory 245,543 (270,591)
Prepaid licenses (750,000) -
Deposits, prepaid expenses, and deferred finance costs (754,523) (11,880)
Deferred revenues (29,514) 68,634
Accounts payable and accrued expenses 103,590 647,585
Common stock payable 13,500 -
----------------------------------------
NET CASH USED BY OPERATING ACTIVITIES (6,034,936) (3,466,183)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (369,516) (176,759)
Investment in Voice It - (500,000)
Cash paid for purchase of transcription companies (398,312) -
Capitalized software costs (300,025) (165,041)
----------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (1,067,853) (841,800)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bridge loans 335,333 580,000
Loan proceeds from third parties - 61,500
Principal payment on bridge loans - (580,000)
Principal payment on third party debt (42,882) (148,038)
Principal payment on related party debt (126,250) (26,250)
Principal payments under capital lease (17,835) (5,696)
Warrants and options granted in connection with bridge loans 121,959 278,400
Sale of common stock - 250,000
Sale of common stock with private placement - 2,552,999
Sale of preferred stock - Series A - 2,500,000
Sale of preferred stock - Series B 3,000,000 -
Sale of preferred stock - Series C 2,208,604 -
Sale of preferred stock - Series D 2,000,000 -
Cash expenditures related to sale of stock (295,771) (559,677)
Stock options and warrants exercised 90,309 54,983
----------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,273,467 4,958,221
NET INCREASE IN CASH 170,678 650,238
Cash at the beginning of the period 1,207,235 556,997
----------------------------------------
CASH AT END OF PERIOD $ 1,377,913 $ 1,207,235
========================================
</TABLE>
See notes to financial statements
F-7
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. THE COMPANY
NATURE OF BUSINESS
Applied Voice Recognition, Inc. (the "Company or AVRI") develops and markets
voice-enabled computer software programs tailored for general use and for the
healthcare industry. In addition, the Company provides traditional and
electronic transcription services to healthcare professionals in thirteen
states.
The Company was reincorporated as a Delaware Corporation, on January 29, 1998.
Previously, the Company was a Utah corporation by virtue of a share exchange
that was treated as a reverse merger on December 11, 1996 with Summa Vest, Inc.
On December 1, 1998, the Company formed a new wholly owned subsidiary, AVRI
Health Care Information Services, Inc. , a Delaware Corporation (AVRI Health
Care) , which was primarily formed for the purpose of acquiring companies in the
transcription service business.
2. LIQUIDITY AND MANAGEMENT'S PLAN
The Company has incurred significant losses and cash deficits since inception.
The Company has been dependant upon outside financing to develop its software
products and to provide working capital. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
Management does not believe that previous losses and cash flow deficits are
indicative of on going operations after the initial phases of implementation of
its current business plan which was initiated in mid 1998. The tactics of this
business plan are to acquire profitable transcription companies and reduce labor
costs through the use of offshore labor and the implementation of the
Company's Voice COMMANDER99, Voice recognition software product. The Company has
to date acquired six transcription operations and an offshore processing
facility in the Philippines. In addition the Company has successfully launched
its Voice COMMANDER99 into the medical transcription market.
For this strategy to be successful the Company will need to acquire additional
transcription companies and continue to incur research and development costs.
This plan has currently required and will continue to require the Company to
incur substantial corporate overhead costs. The operations estimated by the plan
will not generate positive operating cash flow in fiscal year 1999 due to
acquisition costs and corporate overhead costs, and the Company estimates it
will need to raise a minimum of $10 million to continue to fund the plan
through the remainder of 1999.
The Company is currently reliant on its ability to continue to raise capital
either through equity or debt funding and there is no guarantee that the Company
can raise the capital necessary in the near future. Therefore, the Company has
developed a worst case contingency plan that if the necessary capital is not
raised in mid 1999, (exact timing will be based on the number acquisitions the
company can complete with existing or new capital and profitability of existing
operations) the Company will suspend its acquisition and growth strategy and
return to the core operations of the companies that were acquired. The Company
will also reduce its corporate overhead costs substantially, transfer greater
capacity to its offshore labor sources, and suspend research and development on
its Voice COMMANDER products. The Company may still have difficulty generating
positive cash flow during 1999, but management believes that the shortfall of
cash will be minimal and additional capital may be necessary. There are no
assurances the capital may be obtained. If the Company must implement the
contingency plan it is unsure if the Company will be able to redirect to the
original growth plan.
3. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, and have been prepared in accordance
with generally accepted accounting principles. All significant inter-company
transactions and balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates to be made by management.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has determined, based on available market information and
appropriate valuation methodologies, that the fair value of its financial
instruments approximates carrying value. The carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable, and notes payable
approximate fair value due to the short-term maturity of the instruments. The
carrying amount of long-term debt approximates fair value because the interest
rates under the credit agreement are variable, based on current market.
STOCK OPTIONS
The Company follows Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations ("APB 25") in accounting
for its employee stock options. The pro forma disclosures required by Statement
of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation ("SFAS 123"), which established a fair-value-based method of
accounting for stock-based compensation plans, are set forth in Note 8.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
F-8
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
INVENTORIES
Inventories consist of computer equipment and are determined using actual cost
based on a first-in, first-out ("FIFO") basis. FIFO inventory is stated at the
lower of cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method using rates based on the estimated useful lives of the
related assets. Estimated useful lives used for depreciation purposes are as
follows:
Computer equipment 3 years
Third-party computer software 3 years
Office equipment 5 years
Furniture 7 Years
For the years ended December 31, 1998 and 1997, the Company incurred $123,350
and $45,242, respectively, of related depreciation expense. This includes
depreciation expense related to office equipment under capital lease.
PREPAID LICENSES
Prepaid licenses are stated at cost and are charged against cost of goods sold
as each license is sold to third party customers. Current prepaid licenses are
estimated based on management's estimate of anticipated sales for the next
twelve months. The remaining balance is classified as long-term.
CAPITALIZED SOFTWARE COSTS
The costs of direct labor and allocated overhead specific to development
activities for products that are technologically feasible are capitalized
through the date of market release. All other research and development costs are
charged against earnings in the period incurred. Amounts capitalized are
amortized on a straight-line basis over a three-year life commencing upon market
release. For the years ended December 31, 1998 and 1997, the Company incurred
$58,808 and $8,889, respectively, of related amortization expense.
INTANGIBLES AND GOODWILL
Intangibles and goodwill are amortized using the straight-line method over their
estimated useful lives, which range from 5 to 20 years. Intangibles include
trade names and customer lists. Goodwill represents the excess purchase price
over the fair value of net assets acquired for acquisition accounted for as
purchases. The Company periodically monitors intangibles and goodwill to
determine if subsequent events or circumstances have occurred that have
compromised the viability of the asset. To the extent such an event has
happened, the Company will make necessary revisions to the balance or
amortization life. Management believes that there have been no such events or
circumstances which warrant revision to the remaining useful life, or which
affect the recoverability of intangibles and goodwill. For the years ended
December 31, 1998 and 1997, the Company incurred $15,555 and $-0-, respectively,
of related amortization expense.
F-9
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
INVESTMENTS IN EQUITY SECURITIES
The Company determines the appropriate classification of investments in equity
securities at the time of the purchase and confirms such designation as of the
balance sheet date. Marketable equity securities are classified as available-
for-sale securities and are stated at fair value, with any unrealized gains and
losses, net of tax, reported as a separate component of stockholders' equity
until such time the security is sold or determined to be permanently impaired.
At that time a realized gain or loss is recorded on the income statement.
REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position 97-2, "Software Revenue Recognition"
("SOP97-2"). SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements (e.g. software products, upgrades, enhancements,
customer support, installation and training) to be allocated to each element on
the relative fair values of the elements. The fair value of an element is based
on evidence, which is specific to the vendor. The revenue allocated to software
products, including specified upgrades or enhancements, generally is recognized
upon delivery of the products. The revenue allocated to unspecified upgrades and
updates and post contract customer support generally is recognized when upgrades
are delivered or as the services are performed. If there is not appropriate
evidence of the fair value for all elements of the arrangement, all revenue from
the arrangement is deferred until such evidence exists or until all elements are
delivered. In March 1998, the AICPA issued SOP 98-4 which defers for one year
the implementation of the provisions of SOP 97-2 relating to the fair value
determination of each revenue element. The Company has adopted SOP 97-2,
however, the impact of this is not considered to be significant.
Fees for transcription-related services are based primarily on contracted per
line rates, and revenue is recognized upon the rendering of services and
delivery of transcribed materials. For the twelve months ended December 31,
1998.
MAINTENANCE REVENUES
The Company defers unearned revenues associated with maintenance contracts sold
to customers, and the term of each contract is typically one year. All deferred
revenues are amortized into revenue on a pro rata basis based on the life of the
maintenance contract.
CONCENTRATION OF CREDIT RISK
Financial instruments that could potentially subject the Company to
concentrations of credit risk are accounts receivable. The Company periodically
evaluates the creditworthiness of its customers and generally does not require
collateral. The Company's customer base consists of clinics, hospitals, sole
practitioners, and commercial companies. No customer accounted for 10% or more
of revenues for the year ended December 31, 1998. For the year ended December
31, 1997, a one-time sale to one customer accounted for more than 50% of the
Company's revenues for that year.
F-10
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
ADVERTISING
The Company expenses all advertising costs as incurred. The Company expensed
$122,242 and $391,000 in 1998 and 1997, respectively.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under
the liability method, deferred income taxes are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates that will be in effect when the differences
reverse.
LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share ("FAS 128"). FAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share exclude any dilutive
effects of options, warrants, and convertible securities. Diluted earnings per
share are very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented and,
where appropriate, restated to conform to the FAS 128 requirement.
SIGNIFICANT SUPPLIER
The Company uses and sells voice recognition computer software. The Company's
software is programmed to work with a speech recognition component, which is
supplied by two suppliers. The Company has a purchase contract with one of the
two suppliers that will allow the Company to purchase this component. This
agreement terminates on December 31, 1999; however, the contract is mutually
renewable thereafter on a month to month basis.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components. SFAS No. 130 requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were reported
separately in shareholders' equity, to be included in comprehensive income.
4. ACQUISITIONS
During 1998, the Company entered into three asset purchase agreements with
transcription companies located in Texas, New York, and Colorado. Each
acquistion was accounted for as purchases. A description of these acquisitions
follows:
Transcription Resources
On March 17, 1998, AVRI, acquired the assets of Transcription Resources
("TR") a sole proprietorship. Subsequently, during 1998, AVRI
transferred the acquired assets to AVRI Health.
TR specializes in providing transcription services to the healthcare
industry through out the country.
F-11
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Pursuant to the Asset Purchase Agreement (the "Agreement") the Company
acquired certain assets for a purchase price of $150,000, less
liabilities assumed, or $37,091 net. The net amount is payable in the
form of a non-interest bearing note with an original maturity of
December 31, 1998. The maturity date of the note has been changed to
March 31, 1999. The acquisition of TR resulted in approximately $56,000
of goodwill which will be amortized over a five-year period.
The results of operations of TR are included in the Company's
consolidated statement of Operations from March 17, 1998 forward.
Cornell Transcription, Inc.
On December 1, 1998, AVRI Health acquired certain assets and assumed
certain liabilities of Cornell Transcription, Inc. , a New York
corporation ("Cornell") and all of the common stock of Outsource
Transcription Philippines, Inc. ("OTP"), a stock corporation formed
under the laws of the Republic of the Philippines.
Cornell specializes in providing transcription services to the
healthcare industry in the New York and surrounding areas. Cornell has
offices in Hackensack, New Jersey; Miami, Florida; and Manila in the
Philippines. OTP provides transcription services to Cornell.
The total purchase price for Cornell and OTP consisted of: (i)
promissory note issued by AVRI Health in the aggregate principal amount
of $270,000 (the "Note"), (ii) $275,000 in cash, (iii) the assumption of
certain capital lease obligations, and (iv) approximately 684 shares of
the Company's Series 1 Preferred Stock, par value $.10 per share. The
agreement includes a contingent purchase price of approximately
$160,000, payable in 160 shares of Series 1 Preferred Stock, with the
attainment of certain quarterly revenue targets over the next four
calendar quarters, subsequent to the sale date.
The Note is a non-interest bearing unsecured note payable to Cornell,
which is payable as follows: (i) $150,000 on or before February 28,
1999, and (ii) $120,000 in twelve equal monthly installments of $10,000
each, payable on the first day of each month commencing on January 1,
1999, and continuing thereafter until December 1, 1999. In the case of
an Event of Default (as defined in the Note) , Cornell may accelerate
the entire unpaid principal balance of the Note. After any such
acceleration, any outstanding principal amount shall bear interest at
the rate of 18% per annum. Due to $120,000 note being non-interest
bearing, the Company recorded the discounted amount of the note of
$110,793 using an imputed interest rate of 15%, as part of the purchase
price allocation. The discounted amount will be amortized to interest
expense over the life of the note.
The Series I Preferred Stock, which will not be issued to Cornell until
December 2, 1999, carries a 10% cumulative dividend payable in cash or
in additional common or preferred shares at the Company's option. For
purchase accounting purposes a preferred stock payable of $594,666 has
been recorded for the net present value of the commitment to issue
preferred stock discounted using a rate of 15%. The discount amount of
$89,334 will be amortized to interest expense. Dividends are payable
quarterly and in arrears on the first day of each January, April, July
and October commencing on January 1, 2001. Each share of the Series 1
Preferred Stock
F-12
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
will be convertible, at any time, into a number of shares of common
stock equal to (i) $1,000 per share of Series 1 Preferred Stock being
converted, plus any earned, but unpaid dividends, if any, divided by
(ii) the average closing price of the Company's Common Stock for the
thirty day period immediately preceding the effective date of such
conversion on The Nasdaq Over-the-Counter Bulletin Board (OTCBB). Any
such shares of Common Stock issued upon conversion of the Series 1
Preferred Stock shall be registered for resale under the Securities Act
of 1933, as amended, at the expense of the Company. The shares of Series
1 Preferred Stock are not subject to automatic conversion. Any shares of
the Series 1 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 $1,000 per share plus any accrued but unpaid
dividends.
AVRI Health Care incurred approximately $80,000 of acquisition related
expenses, which has been included in the purchase price allocation. The
company has allocated the excess purchase price over net assets of
$1,060,008 to identified intangibles and customer lists of $530,004 and
to Goodwill of $530,004 and will be amortized over 10 years and 20 years
respectively.
The results of operations of this acquisition are included in the
Company's Statement of Operations from the date of acquisition.
LRW Transcriptions
On December 31, 1998, AVRI Health Care acquired the assets of Linda R.
Willhite Transcription ("LRW Transcription") a sole proprietorship owned
by Linda R. Willhite.
LRW Transcription has been in business since November 1989, and
specializes in providing transcription services to the healthcare
industry in the Denver, Colorado metropolitan area.
Pursuant to the Asset Purchase Agreement (the "Agreement") the Company
acquired certain assets owned by LRW Transcription. The total purchase
price consisted of: (i) $75,000 in cash, including amounts paid by the
Company to the creditors of LRW Transcription, (ii) and $150,000 of the
Company's Series 2 Preferred Stock, par value $.10 per share. The Series
2 Preferred Stock will be issued in three equal annual installments with
a stated value of $50,000, each installment. These installments are
payable on December 31, 1999, December 31, 2000 and December 31, 2001.
In addition, the Company may issue additional Series 2 Preferred Stock
to LRW Transcription, if LRW Transcription meets or exceeds certain
revenue targets, as set forth in the agreement, over the next three
years with a stated value of up to $125,000. Any additional
consideration will be accounted for as additional intangible assets. For
purchase accounting purposes a preferred stock payable of $114,161 has
been recorded for the net present value of the commitment to issued
preferred stock. The discounted amount of $35,839 will be amortized to
interest expense.
The Series 2 Preferred Stock 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 Series 2 Preferred Stock when issued will be
convertible, at any
F-13
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
time, into a number of shares of Common Stock equal to (i) $100 per
share of Series 2 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 OTCBB. 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
Series 2 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 Series 2 Preferred Stock shall have no voting rights.
AVRI Health Care incurred approximately $25,000 of acquisition related
expenses, which has been included in the purchase price allocation. The
company has allocated the excess purchase price over net assets of
$166,070 C to identified intangibles and customer lists of $83,035 and
to goodwill of $83,035 and will be amortized over 10 years and 20 years
respectively.
PRO FORMA DATA (UNAUDITED)
The following unaudited results of operations have been prepared assuming all
acquisitions consummated on or before December 31, 1998 had occurred as of the
beginning of the periods presented. These results are not necessarily indicative
of results of future operations, nor results that would have occurred had the
acquisitions been consummated as of the beginning of the periods presented:
Year Ended December 31
1998 1997
--------------------------
Total Net Revenues $ 2,139,576 $ 3,070,053
Net Loss $(7,206,486) $(4,435,596)
Basic and diluted loss per
share $ (0.52) $ (0.38)
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31
1998 1997
--------------------------
Computer equipment $578,770 $111,425
Third party software 47,071 8,981
Office equipment and furniture 134,126 85,621
Office equipment on capital
lease 118,098 55,744
--------------------------
878,065 261,771
F-14
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Less accumulated depreciation (180,767) (57,326)
--------------------------
Property and equipment, net $697,298 $204,445
==========================
6. INDEBTEDNESS
Indebtedness is summarized below:
December 31
1998 1997
----------------------
Note payable to a trust; unsecured; 10%
Interest; monthly payments of $300,
with balloon payment on remaining
balance due on July 1998 $ -- $23,139
Note payable to a bank; unsecured; 10%
Interest; monthly payments of $5,843;
note matures January 1998 11,686
Note payable to a bank; unsecured; 9.25%
Interest; monthly payments of $879;
note matures January 2000 12,339 20,396
-----------------------
Total $ 12,339 $55,221
-----------------------
Less current maturities 11,542 43,833
-----------------------
Net long-term debt - Due in 2000 $ 797 $11,388
=======================
F-15
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE PAYABLE TO RELATED PARTIES
The Company had a note payable to a trust of $126,250 which was unsecured and
carried 12% annual percentage rate of interest. Interest payments were due on a
quarterly basis and interest was non-compounding. In addition to this interest,
the trust received a total of 180,000 shares of Common Stock in the Company.
These shares were valued at $1.50 each, which approximated fair value at the
date of issuance, and the aggregate value of $270,000 was recorded as a finance
cost. In 1997 and 1998, the Company recorded $135,000 and $67,500,
respectively, of interest expense related to these shares. A balloon payment on
the principal balance of $125,000 was paid on May 18, 1998.
On August 14, 1997, the Company paid in full $580,000, under various bridge loan
agreements entered into between May 15, 1997 and July 24, 1997, to a stockholder
and certain officers of the Company. The amount was paid in accordance with the
provisions of the bridge loan agreement which called for full payment plus 12%
interest at the earlier of six months or the receipt of the minimum proceeds of
the private placement of $2,000,000. In connection with the bridge loans,
warrants to purchase 580,000 shares of the Company's common stock were issued
resulting in $278,400 of finance cost, using the Black Scholes method of
valuation. (See Note 17 "Warrants")
During the month of December 1998, the Company entered into various bridge loan
agreements (the "Bridge Loans") with certain officers of $144,917; a former
employee of $60,416 and to third parties of $130,000. The aggregate balance of
the Bridge Loans amounts to $335,333, and bear interest at 12% per annum. The
Bridge Loans plus accrued interest are payable upon the earlier of six months
following the date of the note or three business days following the receipt of
$2,000,000 in equity funding. On December 31, 1998, the Company received
$2,000,000 in equity funding and paid the bridge loans in January 1999, plus
accrued interest, in accordance with the agreement. In connection with the
Bridge Loans, the company granted warrants to purchase 355,495 shares of common
stock resulting in approximately $122,000 of finance cost, using the Black
Scholes method of valuation. (See Note 17 "Warrants")
7. LEASES
CAPITAL
In 1997, the Company entered into a capital lease agreement on office equipment.
The lease is classified as a capital lease and calls for monthly payments of
$1,342 through March 2002. As part of the Company's acquisitions, the Company
assumed two additional
F-16
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
leases totaling $113,488 for computer equipment that each have monthly payments
of $1,640 per month through June 2002 and $1,894 per month through April 2001.
The future minimum lease payments as of December 31, 1998 are as follows:
1999 $ 57,287
2000 27,336
2001 42,128
2002 11,712
2003 -
--------
Total Payments 138,463
Less: Amounts representing interest (29,052)
--------
Net Present Value 109,411
Less: current maturities 11,542
--------
Long-term portion $ 97,869
========
OPERATING
The Company leases various office space and equipment under non-cancelable
operating leases. The Company incurred rental expense of $149,520 and $109,110
in 1998 and 1997, respectively, in connection with operating leases on office
space and equipment. Future minimum lease payments as of December 31, 1998, are
as follows:
1999 $223,582
2000 15,784
2001 8,015
2002 3,340
2003 -
--------
Total $250,721
========
8. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue up to 2,000,000 shares of preferred stock
with a par value of $.10 per share. All dividends accrue whether or not declared
or set aside. In 1998 and in 1997, the Company sold, via private placements, the
following shares of preferred stock:
Series A Preferred Stock
During 1997, the Company completed a private placement, totaling $2,500,000 in
proceeds, by the issuance of 312,500 shares of Series A Convertible Preferred
Stock. These shares have a par value of $.10 per share and were sold for $8.00
each to two accredited investors.
The shareholders of the Series A Preferred Stock are entitled to cumulative
dividends at a rate of 4% per annum, payable in shares of the Company's Common
Stock based on a share price equal to the average closing price of such Common
Stock on the OTCBB for the 30 days prior to the particular dividend date.
F-17
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Each of the Series A shares are convertible into 5.4 shares of common stock, at
the stockholders option, at any given time. The holders of the Series A
Preferred Stock are also (a) entitled to demand the registration of Common Stock
issued upon conversion of the Series A Preferred Stock at the cost of the
Company at any time after December 31, 1997, and (b) are entitled to have such
converted shares of Common Stock registered at the Company's cost in connection
with any registration statement filed by the Company. If the holders of the
Series A Preferred Stock have not converted their shares to Common Stock within
three years of their issuance, the Company may redeem such shares for $8.00 per
share plus any accrued and unpaid dividends. The agreement with the Series A
Shareholders provides for certain specific anti-dilution adjustments and
protective provisions.
In the event of liquidation, dissolution or winding up of the Company, the
holders of Series A Preferred Stock are entitled to share in the assets
remaining, if any, after payment of all debts and liabilities of the Company, in
an amount of $8.00 per share, which right is in preference to any payment to the
holders of Common Stock.
On December 4, 1998, the Series A Investor converted 126,500 of the Series A
Preferred Stock for 683,100 shares of the Company's common stock. As of December
31, 1998, 186,000 shares of Series A Preferred Stock remained outstanding.
As of December 31, 1998, the Company had declared and paid stock dividends, to
the Series A Investor, totaling 70,217 shares of common stock. The market value
of the stock dividends, as of the dividend date, amounted to $111,849. The
Company accrued $20,536 of stock dividends payable to the Series A Investor at
December 31, 1998, which is payable to the investor on January 1, 1999.
Series B Preferred Stock
On March 11, 1998, the Company completed a $3,000,000 private placement by the
issuance of 3,000 shares of Series B Convertible Preferred Stock. These shares
have a par value of $.10 and were priced at $1,000 per share and were sold to
two accredited investors ("Series B Investors").
The preferred shares convert into common stock at a rate equal to 78% of the
five-day average closing bid price of the five consecutive days preceding the
conversion date. The discount from market price resulted in a deemed dividend of
approximately $830,000.
This series pays a 5% cumulative dividend payable in arrears at the time of each
conversion. The dividend is payable in cash or stock at the Company's option. At
any time, the Purchasers are entitled to convert the entire face amount of the
Series B Preferred Shares, plus accrued and unpaid dividends into common stock.
This series is subject to automatic conversion on March 11, 2000, if not
converted by that date. In connection with this placement, an option to purchase
150,000 shares of common stock was granted to Continental Capital & Equity
Corporation, the placement agent, and was valued at $93,000 in total using the
Black Sholes model as discussed in Stock Options, and recorded as a reduction to
Paid in Capital. In the event of liquidation, dissolution or winding up of the
Company, the holders of Series B Preferred Stock are entitled to share in the
assets, if any, remaining after payment of all debts and liabilities of the
Company, and after payment to Series A Preferred Stock holders in an amount of
$8.00 per share, which right is in preference to any payment to the holders of
Common Stock.
On four occasions during the months of July and August, the Series B Investors
exercised their conversion right and converted 715 shares of
preferred stock for 1,147,171 shares of the Company's common stock. The
preferred shares converted into
F-18
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
common stock at a rate equal to 78% of the five-day average closing bid price of
the five consecutive days preceding the date of each conversion.
Upon conversion, the Series B Investors received stock dividends amounting to
22,812 shares of common stock. The aggregate market value of the stock
dividends, as of the measurement date, was $20,275. At December 31, 1998, stock
dividends payable are estimated to be 121,444 shares. The Company accrued
$121,444 of stock dividends payable to the Series B Investors at December 31,
1998.
Series C Preferred Stock
On July 28, 1998, the Company sold in a private placement 220,750 shares of
Series C Convertible Preferred Stock (the "Series C Preferred Stock"), par value
$.10 per share, for a purchase price of $10 per share, to accredited investors
(the "Series C Investors"). The Series C Preferred Stock pay a 4% cumulative
dividend payable in arrears at the time of each conversion. Dividends are
payable quarterly and in arrears on the first day of each January, April, July,
and October commencing on October 1, 1998 in cash or stock at the Company's
option. Each of the Series C Preferred Stock converts into ten shares of common
stock and may be converted at anytime. The Series C Preferred Stock are not
subject to automatic conversion. Any shares of the Series C Preferred Stock and
any accrued but unpaid dividends may be redeemed, at the Company's option, after
the fifth anniversary of the date of their issuance, at a redemption price of
$10 per share. In addition to the above-referenced shares, an additional 11,038
Series C Preferred Stock were issued to Equity Services, LTD. ("ESL"), as part
of their compensation for placing the Series C Preferred Stock. As of July 28,
1998, the market value of the shares issued to ESL was approximately $110,000
and was recorded as a reduction to Paid in Capital. These shares were issued
under the same terms and conditions as those sold in this private placement.
On November 12, 1998, the Series C Investors converted 78,250 of the Series C
Preferred Stock for 782,500 shares of the Company's common stock.
As of December 31, 1998, the Company had declared and paid stock dividends, to
the Series C Investors, totaling 25,225 shares of common stock. The market value
of the stock dividends, as of the dividend dates, amounted to $20,912. On
January 1, 1999, the Company calculated a stock dividend totaling 14,556 shares.
In connection with this stock dividend, the Company accrued $14,556 of stock
dividends payable to the Series C Investors at December 31, 1998. In the event
of liquidation, dissolution or winding up of the Company, the holders of Series
C Preferred Stock are entitled to share in the assets, if any, remaining after
payment of all debts and liabilities of the Company, and after payment to Series
A Preferred Stock holders and Series B Preferred Stockholders, which right is in
preference to any payment at $10.00 per share to the holders of Common Stock.
Series D Preferred Stock
On December 31, 1998, the company entered into a Series D Preferred Stock and
Warrant Purchase 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 accredited investors. This agreement is
broken down into three closings of 2,000 shares, 1,000 shares, and 2,000 shares
respectively, each closing is subject to the Company meeting certain financial
and/or operational targets.
As of December 31, 1998 the Company had met the first and second targets and had
received the funding for the first target. The Company has recorded a receivable
for the second target, as of December 31, 1998, and has reflected the shares as
issued in
F-19
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
the Statement of Stockholders Equity. The funding for the second target was
received in January, 1999. The final target will be based on results as of
February 28, 1999.
The shareholders of the Series D Preferred Stock are entitled to cumulative
dividends at a rate of 10% per annum, payable in shares of the Company's Common
Stock based on a share price equal to the average closing price of such Common
Stock on the OTCBB for the quarter prior to the particular dividend date.
The Series D Preferred shares convert into common stock, and may be converted,
at the option of the holder, at any time. Each share of Series D Preferred Stock
is initially convertible into 666.67 shares of Common Stock based on a
conversion price of $1.50. In the event that the average closing price for the
Common Stock during the six month period ending November 30, 2002 is less than
$5.00 per share, the conversion price that would otherwise have been in effect,
at that date, will be reduced by 50%, and all modifications of the conversion
price, if any, after November 30, 2002 shall be computed from the reduced
conversion price. The average closing price in this calculation is based upon
the average closing price in the quarter immediately prior to the dividend date
of the Common Stock on the Nasdaq Over the Counter Bulletin Board.
Any shares of the Series D Preferred Stock that have not been converted to
Common Stock by November 30, 2004, at the Company's option, may at any time
thereafter be redeemed at a redemption price of $1,000.00 per share plus any
accrued (whether or not declared) and unpaid dividends. If the Company chooses
to redeem Series D Preferred Stock it must redeem all or none of the outstanding
shares, with a 30 day written notice.
Additionally, the Company granted the Series D shareholders three warrants to
purchase a total of 2,500,000 shares of common stock, at an exercise price of
$1.25 per share. Each of the three warrants will be issued with the first,
second, and third closing, as follows:
# of shares
underlying
Closing warrant
---------------------------------------------------
First 1,500,000
Second 500,000
Third 500,000
Using the Black Scholes valuation method, the Company recorded approximately
$720,000 of related expense, attributable to the first and second warrant, as an
offset to additional paid in capital.
The Series D Preferred Stock agreement between the Company and the Series D
Preferred Shareholders provides for certain anti-dilutive price-protection
adjustments. The Series D Preferred Stock agreement also calls for certain
protective provisions, which limit the Company's ability to amend, alter or
repeal any provisions of the Company's Certificate of Incorporation, change the
authorized number of directors on the Company's Board of Directors, change its
principle business and repurchase or redeem any securities without approval
from 66-2/3 for the Series D Preferred Shareholders.
In the event of liquidation, dissolution or winding up of the Company, the
holders of Series D Preferred Stock are entitled to share in the assets, if any,
remaining after payment of all debts and liabilities of the Company, and after
payment to Series A Preferred Stockholders, Series B Preferred Stockholders and
Series C Preferred
F-20
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Stockholders, which right is in preference to any payment to the holders of
Common Stock.
COMMON STOCK
In February 1997, the Company issued 50,000 shares of Common Stock for
consulting services. The services were valued at $75,000, and recognized as
expense in 1997.
In February 1997, after commencing active public trading, the Company issued
50,000 shares of Common Stock to a third party who performed certain consulting
and promotional services. The Company recognized $200,000 of expense, based on
the fair value of the Common Stock. The third party also received 50,000
warrants, which were valued at $83,500 (see "Warrants"). The total charge of
$283,500 for the Common Stock and the warrants was recorded in the fourth
quarter of 1997.
In August 1997, the Company completed a private placement (the "Private
Placement") of 1,595,625 shares of common stock, par value $.001 per share (the
"Common Stock"), for a purchase price of $1.60 per share and an aggregate sales
price of $2,552,999. Total expenses of the Private Placement, including broker
and consulting fees, commissions and compensation dues, and legal and accounting
fees totaled $1,140,428. Of this amount, $559,677 was paid in cash, $235,001 was
paid with 234,866 shares of Common Stock, and $345,750 was paid with 268,750
Common Stock warrants (see "Warrants").
In February 1998, the Company agreed to issue 30,000 shares of common stock, to
a third party, in exchange for consulting services which were issued in June
1998. Based on the fair market value, the Company valued the common stock
issuance at approximately $83,000 and recorded the related expense.
On March 6, 1998, the Company issued 98,323 shares of common stock, in lieu of
cash salaries and bonus, to officers and certain employees. Based on the fair
market value of the common stock, the Company recognized approximately $234,000
of related salary expense.
On March 6, 1998, the Company issued 14,286 shares of common stock to two third
parties in consideration for their consulting services. Based on the fair market
value of the common stock, the Company recognized approximately $34,000 of
related expense.
On April 30, 1998, the Company issued 45,113 shares of common stock to an
officer upon resignation. Based on the fair market value of the common stock,
the Company recognized approximately $113,000 of related expense.
On October 16, 1998, the Company issued 25,000 shares to a third party in
exchange for office furniture. Based on the fair market value of the common
stock, the Company recorded the asset at $20,300.
See Preferred Stock section for conversions to and dividends paid in common
stock related to preferred stock instruments.
STOCK OPTIONS
In August 1996, the Company adopted the 1996 Stock Option Plan (the "Plan") that
provides for the issuance of stock options to employees, directors (who are also
employees), independent contractors, and consultants. The aggregate number of
shares available for issuance under the Plan is the greater of 7,000 shares, or
7% of the number of shares of the Company's Common Stock which are outstanding
from time to time.
F-21
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Generally, options granted have five- to ten-year terms and vest and become
fully exercisable in three years. Stock options issued under the Plan can be
either incentive stock options or nonqualified stock options.
In December 1996, the Company adopted the 1996 Director Stock Option Plan (the
"Director Plan") that provides for the issuance of stock options to the
directors of the Company. The aggregate number of shares available for issuance
under the Director Plan is the greater of 3,000 shares, or 3% of the number of
shares of the Company's common stock which are outstanding from time to time.
Generally, options granted have five-year terms and vest and become fully
exercisable in three years. Stock options issued under the Director Plan can be
either incentive stock options or nonqualified stock options.
In October 1997, both the Plan and the Director Plan were amended by the 1997
Incentive Plan (the "Amended Plan"). The Amended Plan assumed all outstanding
stock options granted under the prior plans without modification. The Amended
Plan provides for the issuance of stock options, stock appreciation rights,
supplemental payments, restricted stock, performance units, performance shares,
and other stock-based awards. Designated employees, outside directors, and
consultants are eligible to participate. An aggregate of, 3,000,000 shares of
Common Stock are available for issuance under the Amended Plan. Generally,
options granted have ten-year terms and vest and become fully exercisable in
three years. Stock options issued under the Amended Plan can be either incentive
stock options or nonqualified stock options.
During 1998 and 1997, the Company issued nonqualified stock options under the
Amended Plan, which had exercise prices approximate or equal to the fair market
value of the Common Stock at the date of grant.
A summary of the Company's stock option activity and related information for
1997 and 1998 follows:
Weighted
average
exercise
Options price
----------------------------
(In thousands, except price per share)
Outstanding -- beginning of year - $ -
Granted 2,109 $3.04
Forfeited 238 $2.66
---------
Outstanding -- December 31, 1997 1,871 $3.08
Exercised 35 $2.55
Granted 1,057 $1.30
F-22
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATENENTS
DECEMBER 31, 1998
Forfeited 781 $3.17
-----
Outstanding - December 31, 1998 2,112 $2.14
Options exercisable at year-end 661 $2.58
December 31
1998 1997
--------------------------
Weighted average fair value of
options granted during the year $1.36 $2.27
Weighted average remaining
contractual life 8.9 Yrs 9.3 Yrs
Range of exercise price $.61 - $2.88 $2.78 - $5.75
The Company applies APB 25 in accounting for the Plan. Accordingly, no
compensation cost has been recognized for its fixed stock option plan. Pro forma
information regarding net income and earnings per common share is required by
SFAS 123 as if the Company had accounted for its employee stock options under
the fair value method of that statement. The fair value of these options was
estimated at the date of grant using a Black-Scholes option pricing model
("Black - Scholes") with the following assumptions:
December 31
1998 1997
--------------------------
Risk free interest rate 5.05% 5.5%
Dividend yield 0% 0%
Volatility factor .73 .47
Weighted average expected life
- - - stock options 4 Years 2 Years
Weighted average expected life
- - - warrants 1.5 Years 4 Years
The Black-Scholes model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected volatility. Because the Company's employee
stock options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
F-23
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting periods. Had compensation for the
Company's stock-based compensation plan been determined based on the fair value
at the grant dates for awards under the Plan consistent with the methods of
SFAS123, the Company's net income and earnings per common share would have been
adjusted to the pro forma amounts indicated below:
Year Ended December 31
-------------------------------------------------------
1998 1997
As Reported Pro Forma As Reported Pro Forma
-------------------------------------------------------
(In thousands, except price per share)
Net loss $(8,320,519) $(9,517,608) $(4,168,664) $(4,787,655)
Loss per common share $ (0.68) $ (0.36) $ (0.36) $ (0.41)
F-24
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
During 1998, the Company granted to employees and officers options to purchase
1,056,609 shares of the Company's common stock. The exercise price of these
options range from a low of $.61 to a high of $4.00. These options were granted
under the 1997 Incentive Plan.
WARRANTS AND NON-EMPLOYEE OPTIONS
The following is a description of the outstanding warrants and stock options
issued for services by the Company. The Company has determined the value of the
warrants issued using either the minimal value method for all warrants granted
prior to the Company's becoming effectively publicly traded on February 4, 1997,
or the Black-Scholes model and the risk-free rate, dividend rate, volatility and
weighted average expected life discussed above for stock options for all grants
subsequent to February 4, 1997.
On November 1, 1997, the Company granted to two consultants options to purchase
150,000 shares of the Company's common stock, each with an exercise price of
$4.88. The options were granted in exchange for consulting services. On April
23, 1998, the related consulting agreements were extended in term and the option
agreement was modified to provide for immediate vesting of the options. Of the
options granted, 100,000 were granted to a board member whose consulting
services were devoted to the development of the Company's new transcription
related product VoiceCOMMANDER 99(TM). As a result of these option grants, the
Company has recorded $309,000 of deferred consulting expense. The expense is
amortizable over the life of the agreement that expires on March 31, 1999. The
stock options were valued using the Black-Scholes valuation model (Assumptions
Described Above). For the year ended December 31, 1997 and 1998, the Company
has recognized approximately $0 and $247,000 of related expense, respectively.
On June 1, 1998, the Company granted to three consultants options to purchase
382,000 shares of the Company's common stock, each with an exercise price of
$1.88. The options were granted in exchange for consulting services. Of the
options granted, 250,000 were granted to a board member whose consulting
services were devoted to the development of the Company's new transcription
related product VoiceCOMMANDER 99 (TM). As a result of these option grants, the
Company has recorded $288,000 of deferred consulting expense. The expense is
amortizable over the remaining life of the consulting agreements. The stock
options were valued using the Black-Scholes valuation model (Assumptions
Described Above). For the year ended December 31, 1998, the Company has
recognized approximately $203,000 of related expense.
On May 15, 1998, the Company granted to the Company's Medical Advisory Board
(the "MAB") options to purchase 255,000 shares of the Company's common stock,
each with an exercise price of $2.06. The options were granted in exchange for
three years worth of advisory services related to the Company's business efforts
in the health care industry. On November 20, 1998 the Company and MAB mutually
agreed to disband the MAB, for business reasons. In consideration for the term
held by the MAB, the Company modified the previous grant and allowed the members
of the MAB to keep fully vested options to purchase 85,000 shares of common
stock. All other terms of the option agreements remained the same. As a result
of the option grants, the Company has recognized approximately $73,950 of
consulting expense. The stock options were valued using the Black-Scholes
valuation model (Assumptions Described Above).
In August 1996, the Company granted to officers (and founding stockholders)
250,000 stock warrants with an exercise price of $0.14 per share and to non-
employee directors of the Company 150,000 stock warrants with an exercise price
of $0.14. The warrants were granted under the Director Plan discussed above and
have a five-year life. During 1997, 294,434 of the warrants were exercised and
45,000 were forfeited. At December 31, 1997, 60,566 warrants are outstanding.
On September 16, 1996, the Company entered into a two-year Licensing Agreement
with a professional athlete to use his name and likeness in marketing and
promotional materials to be produced and published by the Company. Consideration
paid for this licensing arrangement was 500,000 shares of Common Stock (included
in the total shares outstanding at December 31, 1996) and a warrant to purchase
another 500,000 shares at $1.50 per share at any time on or before August 31,
2001. None of the warrants have been exercised as of December 31, 1998.
On January 14, 1997 and September 5, 1997, the Company made to a third party two
grants of 150,000 and 100,000 warrants, respectively, with an exercise price of
$1.60 per share for both grants. The third party was engaged to perform
consulting services to the Company during 1997. The Company has recognized
$141,000, based on an analysis using the Black-Scholes model.
On February 14, 1997, the Company granted to a third party 50,000 warrants with
an exercise price of $3.00 per share. The third party was engaged to perform
consulting and promotional services related to the Private Placement completed
in August 1997. The Company has recognized $83,500, based on an analysis using
the Black-Scholes model.
Between May 15, 1997 and July 24, 1997, the Company granted 580,000 warrants
(430,000 warrants to officers, 50,000 warrants to a director, and 100,000
warrants to others) at an exercise price of $1.60 per share. The warrants were
granted in connection with bridge loans made by these individuals to the
Company. The Company has recognized finance costs of $278,400, based on an
analysis using the Black-Scholes model as discussed above. The Company recorded
this charge in interest expense in the fourth quarter of 1997.
On July 21, 1997 the Company granted to a broker of the Private Placement a
warrant to purchase 100,000 shares of Common Stock at an exercise price of
$1.78. In addition to this, on July 23, 1997, the Company sold to the same
broker, for an aggregate price of $100, a warrant to purchase up to 168,750
shares of Common Stock for $1.78 per share. Broker fees of $345,750 were offset
against the proceeds of the Private Placement. The broker fees were estimated
using the Black-Scholes model.
F-25
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
In February 1998, the Company granted to a third party three warrants to
purchase 85,000 shares of common stock. The three warrants are structured as
follows:
# of shares
underlying Exercise
warrant price
First warrant 30,000 $4.00
Second warrant 25,000 $4.25
Third warrant 30,000 $4.50
The warrants were granted in exchange for consulting services. Using the Black
Scholes model, the Company assessed the fair value of the warrants at $118,700.
At December 31, 1998, the Company recorded related expenditures of $94,960 and
recognized a related deferred expenses of $23,740.
On March 11, 1998, the Company granted to a third party a warrant to purchase
150,000 shares of the Company's common stock, with an exercise price of $2.30.
The warrant was granted in exchange for their assistance with the private
placement of 3,000 shares of Series B Convertible Preferred Stock. As a result
of this option grant, the Company recognized approximately $93,000 of expense
allocable to paid-in-capital. The warrant was valued using the Black-Scholes
model.
On July 22, 1998, the Company granted to an investment banking firm warrants to
purchase 500,000 shares of the Company's common stock, with an exercise price of
$1.50. The warrants were granted in exchange for their financial advisory
services and assistance with private placements. As a result of these warrant
grants, the Company has recorded $140,000 of deferred consulting expense. The
expense is amortizable over the one-year life of the agreement. For the twelve
months ended December 31, 1998, the Company recognized approximately $58,000 of
consulting expense. The warrants were valued using the Black-Scholes model.
On July 31, 1998, the Company granted to a third party a warrant to purchase
220,750 shares of the Company's common stock, with an exercise price of $1.50.
The warrant was granted in exchange for the third party's assistance with the
private placement of 220,750 shares of Series C Convertible Preferred Stock. As
a result of this option grant, the Company recognized approximately $66,000 of
cost allocable to paid-in-capital. The warrant was valued using the
Black-Scholes model.
On November 20, 1998, the Company agreed to grant to a third party three
warrants. The first warrant grants the option to purchase 150,000 shares of
common stock at an exercise price of $1.00. The second warrant grants the option
to purchase 100,000 shares of common stock at an exercise price of $2.00. The
third warrant grants the option to purchase 100,000 shares of common stock at an
exercise price of $3.00. The third party was engaged to perform financial
advisory services. As a result of these grants, the Company has estimated and
recorded $59,000 of deferred consulting expense, based on an analysis using the
black Scholes model. The expense is amortizable over the remaining life of the
advisory agreement. For the twelve months ended December 31, 1998, the Company
has recognized approximately $30,000 of related expense. The warrants were
valued using the Black-Scholes model.
During December 1998, the Company granted 355,500 warrants to officers, a
director and a third party (165,084 warrants to officers, 60,416 warrants to a
director, and 130,000 warrants to a third party) at an exercise price range of
$.94 per share to $1.06 per share. The warrants were granted in connection with
bridge loans made by these
F-26
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
individuals to the Company. The Company has recognized finance costs of
approximately $122,000, based on an analysis using the Black-Scholes model. The
Company recorded this charge in interest expense in the fourth quarter.
In connection with the sale of the Series D Preferred Stock, on December 31,
1998, the Company granted to the Series D Investor a two warrants to purchase
common stock. The first and second warrant grant the Series D Investor the
option to purchase 1,500,000 and 500,000 shares of the Company's common stock,
respectively, at an exercise price of $1.25. The Company has estimated and
recorded $720,000 as a reduction to paid in capital, based on an analysis using
the Black Scholes model.
A summary of the Company's warrant activity and related information follows:
WARRANTS WEIGHTED
AVERAGE
EXERCISE
PRICE
---------------------------------------
(In thousands, except
price per share)
Outstanding - December 31, 1996 870 $.88
Granted 1,149 $1.70
Exercised 294 $.14
Forfeited 45 $.14
Outstanding - December 31, 1997 1,68O $1.57
Granted 4,lO7 $1.60
Exercised 17 $.14
Forfeited 150 $2.30
Outstanding - December 31, 1998 5,620 $1.58
Warrants exercisable at year end 5,620 $1.58
December 31
1998 1997
-------------------------
Weighted average fair value
of warrants granted during
the year $1.41 $2.65
Weighted average remaining
contractual life 2.5 Years 2.9 Years
F-27
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Range of exercise prices $0.14 - $0.14 -
$4.88 $3.00
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and dilutive loss
per share:
1998 1997
---------------------------
Numerator:
Net loss $(8,320,519) $(4,168,664)
Preferred stock dividend (1,161,516) (40,326)
----------- -----------
Numerator for basic and
diluted earnings per share
- - - loss available to Common
Stockholders $(9,482,035) $(4,208,990)
Denominator:
Denominator for basic and
dilutive earnings per share
- - - weighted average shares 13,867,732 11,594,440
outstanding
Basic and diluted loss per
share $(0.68) $(0.36)
All outstanding options and warrants are antidilutive and therefore have not
been included using the treasury stock method, for diluted computation. All
potential common shares from conversions of preferred stock are antidilutive and
have been excluded from diluted computations.
10. INCOME TAXES
At December 31, 1998 and 1997, the Company has net operating loss carryforwards
of approximately $13,000,600 and $4,642,900 expiring in 2013 and 2012,
respectively.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1998 and
1997 are as follows:
1998 1997
----------------------------
Deferred tax liabilities:
Depreciation expense $ 5,870 $12,239
Capitalized research and
development 124,905 53,092
----------------------------
F-28
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Total deferred tax liabilities 130,775 65,331
Deferred tax assets:
Net operating loss carryforward 4,420,189 1,578,586
Deferred revenues -- 23,336
Research and development credit 165,894 77,205
Stock based compensation expense 316,831 76,500
Allowance for doubtful accounts 11,050 147,900
Other 1,169 945
-----------------------------
Total deferred tax assets 4,915,133 1,904,472
-----------------------------
Net deferred tax asset 4,784,358 1,839,141
-----------------------------
Valuation allowance for
deferred tax assets (4,784,358) (1,839,141)
-----------------------------
Net deferred taxes $ - $ -
=============================
The valuation allowance for the full amount of deferred tax assets has been
reserved due to uncertainty concerning the Company's ability to utilize the
benefit of the net operating loss.
11. NONCASH TRANSACTIONS
Following is a list of noncash transactions.
Year ended December 31, 1998:
Note payable to sellers $297,884
Preferred stock payable issued in connection
with acquisitions 708,827
Capital lease obligations assumed in
connection with acquisitions 107,846
Issuance of common stock for furniture 20,300
Stock dividend payable 156,536
Stock and warrants issued for services 1,104,430
Stock issued in lieu of cash compensation 346,816
Warrants issued in connection with bridge
financing charged to interest expense 121,959
Issuance of Common Stock, Preferred Stock and
warrants for private placement fees 879,225
Issuance of Preferred Stock in connection
with Series D Funding 1,000,000
Deemed Dividend on Series B Preferred 852,995
Year ended December 31, 1997:
Capital lease obligation for equipment $ 55,047
Preferred stock dividend paid with Common
Stock 40,326
Warrants issued in connection with bridge
financing charged to interest expense 278,400
Issuance of Common Stock and warrants for
private placement fees 562,006
Common Stock issued for legal services related
to private placement 18,745
Common Stock issued for consulting services 403,500
Common Stock issued for advertising 45,000
Common Stock issued in exchange for investment
in Wade Cook stock 303,125
F-29
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
13. 401K PLAN
The Company has a 401K plan, which allows all of the company's employees to
participate. The Company does not match any of the employee's contributions.
14. FOREIGN OPERATIONS
The Company has medical transcriptions operations in the Philippines and a
immaterial amount of the Company's assets are located there.
15. JOINT PRODUCT DEVELOPMENT AND DISTRIBUTION AGREEMENT
On December 31, 1997, the Company entered into a joint product development and
distribution agreement with Voice It Worldwide ("Voice It") . Both the Company
and Voice It agreed to commit technical and financial resources as would have
been necessary to carry out the development of a joint product. In connection
with this agreement, the Company purchased 471,700 shares of Voice It common
stock at a price of $1.06 per share for a total of $500,000 and Voice It
purchased 50,000 licenses of VoiceCOMMANDER/TM/ (formerly known as
SpeechCOMMANDER) for $1,000,000. Both transactions were reflected in the
December 31, 1997 financial statements. The Company believes that Voice It has
breached its agreement with the Company by, among other things, failing to make
contractually agreed upon payments for the software licenses. Because of this
and the lack of success in the joint product development and distribution
agreement, and Voice It's Chapter 11 bankruptcy, the Company has abandoned the
strategy of joint development and distribution.
During the second quarter of 1998, the collectibility of the receivable due from
Voice It, was assessed to be uncertain. Because of this, the Company wrote-off
the remaining receivable balance of approximately $708,000.
16. VALUE ADDED RESELLER AGREEMENT
On September 30, 1998 the Company entered into a "Value Added Reseller
Agreement" ("VAR Agreement") with Lernout & Hauspie Speech Products (L&H). L&H
develops and licenses dictation software for use in the health care industry.
The VAR Agreement gives the Company rights to a world-wide non-exclusive license
of certain software products developed by L&H. On December 27, 1998, this
agreement was ammended to include
F-30
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
additional requirements. In accordance with the amended agreement, the Company
agreed to prepay L&H $1,000,000, in two installments. Of this amount, $650,000
was paid on December 31, 1998. The balance of $350,000 is due on March 15, 1999.
The entire prepaid amount of $1,000,000 is reflected in the December 31, 1998
financial statements of which $560,000 is classified as long term.
17. INVESTMENTS
On September 12, 1997, the Company entered into an agreement with Wade Cook
Financial Corporation ("Wade") . In accordance with the terms of the agreement,
the Company exchanged 100,000 shares of its Common Stock for 14,433 shares
(which subsequently have split to 129,897 shares) of Wade's common stock. The
shares acquired are not registered under the Securities Act of 1933 or under any
state securities laws. As the result of this, the Company cannot transfer or
sell the acquired shares. As of December 31, 1998, physical transfer of relevant
stock certificates between the Company and Wade had not occurred. Therefore, the
Company wrote-off this investment and realized a loss of $303,125 on this
investment.
On December 31, 1997, the Company purchased 471,700 shares of Voice It WorldWide
Inc. ("Voice It") common stock for $500,000. On April 13, 1998, Voice It's
common stock was delisted from trading on The Nasdaq Small Cap Market for
failure to comply with certain NASDAQ maintenance standards. The common stock of
Voice It is now traded on the Over The Counter Bulletin Board. Subsequent to
this event, the market price of Voice It's common stock dropped and has remained
at a lower value. Furthermore, in November 1998 Voice It declared Chapter 11
Bankruptcy. Based on these facts, the Company has deemed its investment in Voice
It to be permanently impaired and has recognized a loss of $500,000.
18. COMMITMENTS AND CONTINGENCIES
On March 22, 1997, the Company's predecessor Applied Voice Technologies
Partners, LTD and Nevada Gold & Casinos, Inc. ("Nevada Gold") completed a non-
binding letter of intent ("LOI") that called for the creation of a joint
venture for the development and marketing of voice activated gaming technology.
According to Nevada Gold, it entered into two lease agreements, on furniture and
computer equipment, pursuant to the terms of the LOI. Despite the willingness of
both parties to execute the terms of the LOI, the joint venture was never
created. On September 25, 1998, Nevada Gold filed a claim of breach of contract
and unjust enrichment against the Company for failure to reimburse Nevada Gold
for payments it made under the lease agreements. The Company has engaged legal
counsel to research the matter and vigorously defend the company.
F-31
<PAGE>
APPLIED VOICE RECOGNITION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
24. SUBSEQUENT EVENTS (UNAUDITED)
Acquisitions
Subsequent to December 31, 1998, the Company entered into three additional asset
purchase agreements with transcription companies located in Texas. A description
of these acquisitions follows:
On February 22, 1999 and February 26, 1999, Applied Voice Recognition, Inc., a
Delaware corporation ("the Company") , through its wholly-owned subsidiary,
e-Docs Health Care Information Services, Inc. , a Delaware corporation (the
"Acquisition Sub"), acquired the assets of three transcription companies: PRN
Transcription, Inc. ("PRN"); AM Transcription, Inc. ("AM"); and Reyna
Transcriptions, Inc. ("Reyna") (collectively the "Acquired Companies").
PRN Transcription has been in business since 1988, and specializes in providing
transcription services to the healthcare industry in east Texas. With its office
in Tyler Texas, PRN Transcription provides transcription services to over 20
clients.
AM Transcription has been in business since 1990, and specializes in providing
transcription services to the healthcare industry in and around the Dallas
Metropolitan
F-32
<PAGE>
APPLIED VOICE RECOGNITION FORM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Area. With its office in Richardson, Texas, AM Transcription provides
transcription services to over 50 clients.
Reyna Transcription has been in business since 1989, and specializes in
providing transcription services to the healthcare industry in and around the
Houston Metropolitan Area. With its office in Richmond, Texas, Reyna
Transcription provides transcription services to over 40 clients.
Pursuant to the three Asset Purchase Agreements (the "Agreements"), the Company
acquired certain assets owned by the Acquired Companies including tangible
personal property consisting of: equipment, computer hardware and software, and
furniture and fixtures; and general intangibles comprised of: contracts, certain
intellectual property, and certain business licenses.
The Acquired Companies were purchased for aggregate consideration of $1,451,000
consisting of:
(i) $466,857 in cash
(ii) $744,633 of the Company's Series 2 Preferred stock, par value $.10 per
share (the "Preferred Stock"). Of the $744,633, $570,634, will be issued
to PRN, and AM in three equal annual installments with a stated value of
approximately $190,000 each. The balance of $174,000 will be issued to
PRN if it meets or exceeds certain revenue targets, as set for in the
relevant agreement, over the next three years
(iii) promissory note issued by the Acquisition Sub in the aggregate principal
amount of $175,000 (the "Note") and payable to Reyna.
(iv) the assumption of certain capital lease obligation with a buyout value of
$64,509
The Preferred Stock 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 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.
The Note is an unsecured obligation of the Acquisition Sub payable to Reyna. The
Note bears interest at 8% per annum and is payable in three annual installments
of cash on the day after the first, second, and third anniversaries of the
closing date, each for the principal amount of $58,333, $58,333 and $58,334,
repectively, plus accrued interest. In the case of an Event of Default (as
defined in the Note), Reyna may accelerate the entire unpaid principal balance
of the Note. After any such acceleration, any outstanding principal amount shall
bear interest at the rate of 18% per annum.
Filing of DBA and name change
- - -----------------------------
On March 3, 1999, the Company filed a DBA that allows the Company to do business
as e-Docs.net. On the same day, the Company's subsidiary AVRI Health Care
Information Services, Inc., underwent a name change to e.Docs.net Health Care
Information Services
F-33
