<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SCHEDULE 13D
UNDER THE SECURITIES EXCHANGE ACT OF 1934
Applied Voice Recognition, Inc.
- --------------------------------------------------------------------------------
(Name of Issuer)
Common Stock
------------------------------
(Title of Class of Securities)
03828N103
------------------------------
(CUSIP Number)
Carl Dammekens
Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
Telephone: 011 32 57 228888
- --------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications)
November 5, 1999
------------------------------------------------------------------
(Date of Event Which Requires Filing of This Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following
box [ ].
NOTE: Schedules filed in paper format shall include a signed original and five
copies of the schedule, including all exhibits. See (S)240.13d-7(b) for other
parties to whom copies to be sent.
*The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
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SCHEDULE 13D
- ----------------------- ---------------------
CUSIP NO. 03828N103 PAGE 2 OF 6 PAGES
- ----------------------- ---------------------
- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Lernout & Hauspie Speech Products N.V.
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CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
2 (a) [_]
(b) [_]
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SEC USE ONLY
3
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SOURCE OF FUNDS*
4
WC
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CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
5 PURSUANT TO ITEMS 2(d) or 2(e) [_]
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CITIZENSHIP OR PLACE OF ORGANIZATION
6
Belgium
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF 5,405,406
SHARES -----------------------------------------------------------
SHARED VOTING POWER
BENEFICIALLY 8
0
OWNED BY
-----------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
9
REPORTING 5,405,406
PERSON -----------------------------------------------------------
SHARED DISPOSITIVE POWER
WITH 10
0
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
5,405,406
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
12 [_]
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13
24.4%
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TYPE OF REPORTING PERSON*
14
CO
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*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
<PAGE>
ITEM 1. SECURITY AND ISSUER.
- ------ -------------------
This Schedule 13D relates to the Common Stock (the "Common Stock") of
Applied Voice Recognition, Inc., a Delaware corporation doing business as
eDOCS.net (the "Issuer"). The principal executive offices of the Issuer are
located at 4615 Post Oak Place, Suite 111, Houston, Texas 77027.
ITEM 2. IDENTITY AND BACKGROUND.
- ------ -----------------------
(a) This statement is being filed by Lernout & Hauspie Speech Products
N.V., a Belgian corporation ("L & H"). The names and citizenship of the
executive officers and directors of L & H are set forth on Schedule A attached
----------
hereto, which Schedule is incorporated herein by reference.
(b) The executive offices and principal place of business of L & H are
located at Flanders Language Valley 50, 8900 Ieper, Belgium. The business
addresses of the executive officers and directors of L & H are set forth on
Schedule A attached hereto, which Schedule is incorporated herein by reference.
- ----------
(c) L & H is an international developer and licensor of advanced speech and
language technologies and provider of translation services. The present
principal occupations of the executive officers and directors of L & H are set
forth on Schedule A attached hereto, which Schedule is incorporated herein by
----------
reference.
(d) During the last five years, neither L & H nor, to the best of its
knowledge, any of its directors or executive officers listed on Schedule A has
----------
been convicted in a criminal proceeding (excluding traffic violations or other
similar misdemeanors).
(e) During the last five years, neither L & H nor, to the best of its
knowledge, any of its directors or executive officers listed on Schedule A has
----------
been a party to a civil proceeding of a judicial or administrative body of
competent jurisdiction and, as a result of such proceeding, was or is subject to
a judgment, decree or final order enjoining future violations of, or prohibiting
or mandating activities subject to, federal or state securities laws or finding
any violation with respect to such laws.
(f) L & H is a corporation formed under the laws of Belgium.
Item 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
- ------ -------------------------------------------------
On November 5, 1999, the Issuer issued to L & H an interest-bearing
Convertible Secured Promissory Note in the original principal amount of
$2,000,000 (the "Note") pursuant to a Convertible Secured Promissory Note
Purchase Agreement dated November 5, 1999 (the "Agreement") by and between the
Issuer and L & H. The Note is convertible at any time into Common Stock of the
Issuer based upon a per share price of $0.37 (subject to adjustment in certain
circumstances). The Agreement is attached hereto as Exhibit 1 and is
---------
incorporated herein by reference. The Note is attached hereto as Exhibit 2 and
---------
is incorporated herein by reference.
The source of L & H's consideration under the Agreement was the working
capital of L & H. L & H did not acquire any of the subject securities with
borrowed funds.
Item 4. PURPOSE OF TRANSACTION.
- ------ ----------------------
L & H entered into the Agreement with the Issuer on November 5, 1999,
pursuant to which the Issuer issued the Note to L & H for a purchase price of
$2,000,000. L & H has acquired the securities of the Issuer described herein for
investment. However, the Issuer has covenanted and agreed with L & H that, upon
the occurrence of an Event of Default under the Note, the Investor shall use its
commercially
3
<PAGE>
reasonable best efforts to cause a designee of L & H's to be elected to the
Issuer's Board of Directors, but only until such time as any such Event of
Default shall have been cured, at which point such designee shall resign from
the Board of Directors.
The foregoing summary is not intended to be a complete statement of all of
the material terms of the Agreement and the Note. The summary is qualified in
its entirety by the Agreement and Note which are filed herewith as Exhibit 1 and
---------
Exhibit 2, respectively.
- ---------
L & H is currently considering several possible alternatives for the
restructuring of its investment in the Issuer. L & H will continuously evaluate
its investment in the Issuer's Common Stock based on factors, including, without
limitation, the Issuer's business, prospects and financial condition, the market
for the Common Stock, availability of alternative investment opportunities,
general economic conditions, stock market conditions and availability of funds.
L & H expressly reserves the right to increase or decrease its holdings in the
Issuer's Common Stock on such terms or at such times as it may determine. Any
purchase or sale of the Issuer's Common Stock may be executed in the open market
or in one or more privately negotiated transactions.
Except as otherwise set forth in this Item 4, L & H has no present intent
or proposals that relate to or would result in: (i) the acquisition by any
person of additional securities of the Issuer, or the disposition of securities
of the Issuer; (ii) an extraordinary corporate transaction, such as a merger,
reorganization or liquidation, involving the Issuer or any of its subsidiaries;
(iii) a sale or transfer of a material amount of assets of the Issuer or any of
its subsidiaries; (iv) any change in the present Board of Directors or
management of the Issuer, including any plans or proposals to change the number
or term of Directors or to fill any vacancies on the Board; (v) any material
change in the present capitalization or dividend policy of the Issuer; (vi) any
other material change in the Issuer's business or corporate structure; (vii)
changes to the Issuer's Articles of Association, By-laws or instruments
corresponding thereto or other actions which may impede the acquisition of
control of the Issuer by any person; (viii) causing a class of securities to be
delisted from a national securities exchange or to cease to be authorized to be
quoted in an inter-dealer quotation system of a registered national securities
association; (ix) a class of equity securities of the Issuer becoming eligible
for termination of registration pursuant to Section 12(g)(4) of the Exchange
Act; or (x) any action similar to those enumerated above.
ITEM 5. INTEREST IN SECURITIES OF THE REGISTRANT.
- ------ ----------------------------------------
(a) The Note is convertible at any time at the election of L & H, in whole
or in part, into an aggregate of 5,405,406 shares of Common Stock (subject to
adjustment). The 5,405,406 shares of Common Stock described above represent
24.4% of the issued and outstanding shares of the Common Stock of the Issuer on
a fully diluted basis.
(b) L & H has sole voting and dispositive power over these securities.
(c) L & H has not been a party to any transaction with respect to shares of
Common Stock, other than the Agreement, in the past sixty days.
(d) Not applicable.
(e) Not applicable.
ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
- ------ ---------------------------------------------------------------------
TO SECURITIES OF THE ISSUER.
-- ------------------------
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Except as described in this Schedule 13D and the Agreement, there are no
contracts, arrangements, understandings, or relationships (legal or otherwise)
among the persons and entities named in Item 2, or between such persons or
entities and any person, with respect to any securities of the Issuer.
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS.
- ------ --------------------------------
Exhibit 1 Convertible Secured Promissory Note Purchase Agreement dated
November 5, 1999 by and between Applied Voice Recognition, Inc.
and Lernout & Hauspie Speech Products N.V.
Exhibit 2 Convertible Secured Promissory Note of Applied Voice Recognition,
Inc. in the original principal amount of $2,000,000 in favor of
Lernout & Hauspie Speech Products N.V.
5
<PAGE>
SCHEDULE 13D - SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
November 23, 1999 LERNOUT & HAUSPIE SPEECH PRODUCTS N.V
- -----------------------------------
(Date)
By: /s/ Carl Dammekens
-----------------------------------
Carl Dammekens
Senior Vice President of Finance and
Chief Financial Officer
6
<PAGE>
SCHEDULE A
OFFICERS AND DIRECTORS OF LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.
----------------------------------------------------------------
The name, business address, present principal occupation or employment, and
the name, principal business address of any corporation or other organization in
which such employment is conducted, of each of the Directors and Executive
Officers of Lernout & Hauspie Speech Products N.V. (the "Reporting Entity") is
set forth below. Unless otherwise indicated, each occupation set forth opposite
an Executive Officer's name refers to employment with the Reporting Entity.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRESENT PRINCIPAL OCCUPATION
NAME OR EMPLOYMENT AND ADDRESS
---- -------------------------
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Jo Lernout Co-Chairman of the Board and Managing Director
c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
- -----------------------------------------------------------------------------------------------------------
Pol Hauspie Co-Chairman of the Board and Managing Director
c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
- -----------------------------------------------------------------------------------------------------------
Gaston Bastiaens President and Chief Executive Officer
c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
- -----------------------------------------------------------------------------------------------------------
Nico Willaert Vice Chairman and Managing Director
c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
- -----------------------------------------------------------------------------------------------------------
Carl Dammekens Senior Vice President of Finance and Chief Financial Officer
c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
- -----------------------------------------------------------------------------------------------------------
Allan Forsey Senior Vice President of Finance and Strategic Planning
c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
- -----------------------------------------------------------------------------------------------------------
Ellen Spooren Senior Vice President of Marketing and Corporate Communications
c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
- -----------------------------------------------------------------------------------------------------------
Dr. Bert Van Coile Senior Vice President of Corporate Research and Development
c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
- -----------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRESENT PRINCIPAL OCCUPATION
NAME OR EMPLOYMENT AND ADDRESS
---- -------------------------
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Patrick De Schrijver Senior Corporate Vice President and President of the Speech and Language
Technologies and Solutions Division
c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
- -----------------------------------------------------------------------------------------------------------
Florita Mendez Senior Corporate Vice President and President of the Speech and Language
Consulting and Services Division
c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
- -----------------------------------------------------------------------------------------------------------
Anatoly Tikhman Senior Corporate Vice President and President of the Speech and Language
Applications Division
c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
- -----------------------------------------------------------------------------------------------------------
Fernand Cloet Director of Registrant
Managing Director, Tack N.V.
c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
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Marc G.H. De Pauw Director of Registrant
General Manager, National Investment Corporation
c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
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Hubert Detremmerie Director of Registrant
c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
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RVD Securities N.V., Director of Registrant
represented by Erwin Chief Financial Officer, Icos Vision Systems Corporation N.V.
Vandendriessche c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
- -----------------------------------------------------------------------------------------------------------
Dirk Cauwelier Director of Registrant
Attorney
c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
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Jan Coene Director of Registrant
President, ABB Service Worldwide
c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
- -----------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRESENT PRINCIPAL OCCUPATION
NAME OR EMPLOYMENT AND ADDRESS
---- -------------------------
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Alex Vieux Director of Registrant
Chairman, DASAR, Inc.
c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
- -----------------------------------------------------------------------------------------------------------
Gerard van Acker Director of Registrant
Chief Executive Officer, Gewestelijke Investeringsmaatschappij
Vlaanderen N.V.
c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
- -----------------------------------------------------------------------------------------------------------
Frances Vanderhoydonck Director of Registrant
Chief Executive Officer, Lernout & Hauspie Investment Company N.V.
c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
- -----------------------------------------------------------------------------------------------------------
Bernard Vergnes Director of Registrant
Chairman - Microsoft Europe
c/o Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
8900 Ieper, Belgium
- -----------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
EXHIBIT 1
---------
CONVERTIBLE SECURED PROMISSORY NOTE
PURCHASE AGREEMENT
This Convertible Secured Promissory Note Purchase Agreement (the
"Agreement") is made as of November 5, 1999, by and among Applied Voice
Recognition, Inc., a Delaware corporation doing business as e-DOCS.net (the
"Company"), and Lernout & Hauspie Speech Products, N.V., a company organized
under the laws of Belgium (the "Investor").
RECITALS
WHEREAS, the Investor desires to purchase from the Company, and the Company
desires to issue to the Investor, a Convertible Secured Promissory Note in the
aggregate principal amount of Two Million Dollars ($2,000,000) in the form of
Exhibit A attached hereto (the "Note").
- ---------
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and for good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the parties hereby agree as follows:
1. Purchase and Sale of Note.
-------------------------
1.1 Sale and Issuance of Note. Subject to the terms and conditions of
-------------------------
this Agreement, the Investor agrees to purchase at the Closing (as defined
below), and the Company agrees to sell and issue to the Investor at the Closing,
the Note, at a price equal to 100% of the principal amount thereof, less the
fees and expenses of Investor's counsel pursuant to Section 6.8 hereof (the
"Purchase Price"). At the option of the Investor, the Investor may loan to the
Company additional monies in the amount of up to Two Million Dollars
($2,000,000) to be used in connection with acquisitions by the Company. Any
such additional loan shall be made under substantially the same conditions as
the loan described herein, and in the event Investor makes such loan, the
Company shall execute an additional promissory note in the principal amount of
such additional loan, such note to be in substantially the same form as the
Note.
1.2 Closing. The purchase and sale of the Note shall take place at the
-------
offices of Boyar, Simon & Miller, 4265 San Felipe, Suite 1200, Houston, Texas at
2 p.m. on November 5, 1999, or at such other time and place as the Company and
the Investor shall mutually agree in writing (which time and place are
designated as the "Closing").
1.3 Form of Payment and Wire Instructions; Escrow. The Investor shall
---------------------------------------------
pay the Purchase Price by delivering good funds in United States Dollars by wire
transfer to Brown Rudnick Freed & Gesmer, special counsel to the Investor
("Brown Rudnick"), as Escrow
<PAGE>
Agent, in escrow against delivery of the Note as payment in full for the Note
(the "Escrow"). The wire instructions for Brown Rudnick are as follows:
<TABLE>
<CAPTION>
<S> <C>
BANK: FLEET PRIVATE BANKING
ABA: 011000138
SWIFT CODE: FLTBUS3B (For international wires only)
CITY: HARTFORD
STATE: CONNECTICUT
ACCOUNT#: 0066502267
ACCOUNT NAME: BROWN, RUDNICK, FREED & GESMER,
CLIENT TRUST FUND 019740
BRF&G ATTORNEY NAME: JAMES E. ROSENBLUTH
</TABLE>
The Escrow Agent shall deliver to the Company by wire transfer the Purchase
Price at the closing. The wire instructions for the Company are as follows:
<TABLE>
<CAPTION>
<S> <C>
BANK: SOUTHWEST BANK OF TEXAS N.A.
ABA: 113011258
SWIFT CODE: SWBKUS44
CITY: HOUSTON
STATE: TEXAS
ACCOUNT#: 332698
ACCOUNT NAME: APPLIED VOICE RECOGNITION, INC.
DBA E-DOCS.NET
</TABLE>
Upon the receipt of the Purchase Price by the Company and the delivery of the
Note pursuant to this Section 1.3, the Escrow shall terminate and the Escrow
Agent shall have no further obligation or liability whatsoever with respect to
the Escrow.
1.4 Security Agreements. The repayment of the Note shall be secured
-------------------
by (i) a Security Agreement between the Company and Investor in the form
attached hereto as Exhibit B (the "Security Agreement") , (ii) a Copyright
------------------------------------
Security Agreement between the Company and Investor in the form attached hereto
as Exhibit C (the "Copyright Security Agreement"), (iii) a Trademark Security
---------
Agreement in the form attached hereto as Exhibit D (the "Trademark Security
---------
Agreement"), (iv) a Patent Security Agreement in the form attached hereto as
Exhibit E (the "Patent Security Agreement"), and (v) a Pledge Agreement in the
- ---------
form attached hereto as Exhibit F (the "Pledge Agreement," and together with the
---------
Security Agreement, the Copyright Security Agreement, the Trademark Security
Agreement and the Patent Security Agreement, the "Security Agreements", all of
which Security Agreements are of even date herewith).
1.5 Prepayment. All or a portion of the Note may be prepaid at any
----------
time without penalty following thirty (30) days' prior written notice to
Investor. The minimum amount that can be prepaid under the Note shall be Two
Hundred Fifty Thousand Dollars ($250,000).
2
<PAGE>
2. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to and for the benefit of the Investor, with knowledge
that the Investor is relying thereon in entering into this Agreement and
purchasing the Note from the Company, that the following are true and correct:
2.1 Organization, Good Standing and Qualification. The Company is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on the operation of its business or properties.
2.2 Subsidiaries and Investments. Attached as Schedule 2.2 is a true
---------------------------- ------------
and complete list of the Company's subsidiaries (the "Subsidiaries") and
investments in other corporations and business organizations. Except as set
forth on Schedule 2.2 hereto, the Company has no subsidiaries, nor any
-------------------
investments in any other corporation or business organization.
2.3 Authorization of Transaction.
----------------------------
a. The execution and delivery by the Company of this Agreement and
the Security Agreements, the issuance, sale and delivery of the Note, the
issuance and delivery of the shares of common stock of the Company issuable upon
the conversion of the Note (the "Conversion Shares") and the performance by the
Company of its obligations hereunder and thereunder have been duly authorized by
all requisite corporate action.
b. The Note has been duly authorized and, when issued in
accordance with this Agreement, will be validly issued with no personal
liability attaching to the ownership thereof, and will be free and clear of all
liens, charges, restrictions, claims and encumbrances imposed by or through the
Company except as set forth in the Security Agreements. The issuance, sale and
delivery of the Note is not subject to any preemptive right of stockholders of
the Company or to any right of first refusal or other right in favor of any
person.
c. This Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company,
enforceable in accordance with its terms. The Note and the Security Agreements,
when executed and delivered in accordance with this Agreement, will constitute
the legal, valid and binding obligations of the Company, enforceable in
accordance with their terms.
2.4 Valid Issuance of Common Stock. The Conversion Shares have been
------------------------------
or will be duly and validly reserved for issuance and, upon issuance in
accordance with the terms of the Note shall be duly and validly issued, fully
paid and nonassessable, and issued in compliance with all applicable securities
laws, as presently in effect, of the United States and each of the states whose
securities laws govern the issuance of any of the Conversion Shares pursuant to
this Agreement. The Company and the Investor hereby acknowledge that as of the
date of execution of this Agreement, the reservation of the Conversion Shares
hereunder, when aggregated with all
3
<PAGE>
other shares of unissued common stock reserved for issuance upon conversion of
the Company's other securities, exceeds the total number of shares of common
stock of the Company authorized under the Company's Certificate of
Incorporation. At such time as Investor elects to convert the Note in accordance
with the terms thereof, the Company will use its commercially reasonable best
efforts to cause the amount of its authorized capital stock to be sufficient to
allow the issuance of the Conversion Shares to the Investor.
2.5 Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
-----------
filing with, any Federal, state, local or provincial governmental authority on
the part of the Company is required in connection with the consummation of the
transactions contemplated by this Agreement except for such filings as may be
required by applicable Federal and state securities laws.
2.6 Compliance with Other Instruments. Except as set forth on
---------------------------------
Schedule 2.6, the Company is not in violation of any provisions of its
- ------------
Certificate of Incorporation or Bylaws or in violation or default of any
instrument, judgment, order, writ, decree or contract to which it is a party or
by which it is bound or, to its knowledge, of any provision of federal or state
statute, rule or regulation applicable to the Company or otherwise in breach of
any of the terms or conditions of any contract or agreement which breach, either
individually or in the aggregate could reasonably be expected to have a
materially adverse effect on the business, properties, financial condition or
results of operations of the Company. To the Company's knowledge, no other
party to any of its material contracts or agreements is in material default
under any such contract or agreement. The execution, delivery and performance
of this Agreement, the Security Agreements and the Note, and the consummation of
the transactions contemplated hereby and thereby shall not result in any such
material violation or be in conflict with or constitute, with or without the
passage of time and giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree or contract or an event that results
in the creation of any lien, charge or encumbrance upon any assets of the
Company or the suspension, revocation, impairment, forfeiture or nonrenewal of
any material permit, license, authorization or approval applicable to the
Company, its business or operations or any of its assets or properties.
2.7 Disclosure. The Company has fully provided the Investor with all
----------
the material information which the Investor has requested for deciding whether
to purchase the Note and all material information which the Company believes is
reasonably necessary to enable the Investor to make such decision. Neither this
Agreement nor any other written statements or certificates made or delivered in
connection herewith or therewith contains any untrue statement of material fact
or omits to state a material fact necessary to make the statements in this
Agreement or therein not misleading.
2.8 Title to Properties. Except as set forth on Schedule 2.8, the
------------------- ------------
Company has good and marketable title to all properties and assets owned by it,
free and clear of all liens, restrictions or encumbrances. Except as set forth
on Schedule 2.8, all machinery and equipment included in such properties that is
------------
necessary to the business of the Company is located at the Company's offices in
Texas and is in good condition and repair, and all leases of real or personal
property to which the Company is a party are fully effective and afford the
Company peaceful and undisturbed possession of the subject matter of the lease.
The
4
<PAGE>
Company is not in violation of any zoning, building, safety or environmental
ordinance, regulation or requirement or other law or regulation applicable to
the operation of owned or leased properties, the violation of which, singly or
in the aggregate, could have a materially adverse affect on the business or
financial condition of the Company, nor has it received any notice of violation
with which it has not complied.
2.9 Intellectual Property. Set forth in Schedule 2.9 is a true and
--------------------- ------------
complete list of all patents, patent applications, trademarks, service marks,
trademark and service mark applications, trade names, and copyrights presently
owned or held by the Company, and any material license or right to any of the
foregoing. The Company owns or possesses, or can obtain by payment of royalties
which shall not materially adversely affect the business of the Company, all of
the patents, trademarks, service marks, trade names, copyrights, proprietary
rights, trade secrets, or rights or licenses to the foregoing, reasonably
necessary to the conduct of their business as presently conducted or proposed to
be conducted. Except as disclosed in Schedule 2.9, to the best of its
------------
knowledge, the business of the Company as presently conducted or as proposed to
be conducted does not and shall not cause the Company to infringe or violate any
of the patents, trademarks, service marks, trade names, copyrights, licenses,
trade secrets or other proprietary rights of any other person. The Company has
the right to use, free and clear of claims or rights of others, all trade
secrets, customer lists and processes required for or incident to its products,
and the Company is not using any confidential information or trade secrets of
any former employer of any of its past or present employees.
2.10 Litigation. Except as provided on Schedule 2.10, there is no
---------- -------------
litigation pending or, to the knowledge of the Company, threatened against the
Company and there are no outstanding court orders, court decrees, or court
stipulations to which the Company is a party which question this Agreement or
affect the transactions contemplated hereby, or which shall or could result in
any materially adverse change in the business, properties, operations,
prospects, assets or in the condition, financial or otherwise, of the Company.
2.11 Insurance. The Company maintains valid policies of insurance
---------
with respect to its properties and business of the kinds and in the amounts not
less than is customarily obtained by corporations with established reputation
engaged in the same or similar business and similarly situated, including,
without limitation, insurance against loss, damage, fire, theft, public
liability and other risks.
2.12 Taxes. Except as set forth on Schedule 2.12, the Company has
----- -------------
duly and timely filed, or has timely applied for and received extensions with
respect to, all Federal, state, local, and foreign, government income, excise,
gross receipts and franchise tax returns, real estate and personal property tax
returns, sales and use tax returns, employee tax and contribution returns and
all other tax returns, reports and declarations, or estimated taxes required to
be filed by them, with respect to all applicable taxes (the "Tax Returns")
including, without limitation, income, profit, franchise, sales, use, real
property, personal property, ad valorem, excise, employment, social security and
wage withholding taxes, severance, stamp, occupation, and windfall taxes, of
every kind, character or description imposed by any governmental or
quasi-governmental authority (domestic or foreign), and any
5
<PAGE>
interest or fines, and any and all penalties or additions relating to such
taxes, charges, fees, levies or assessments ("Taxes"). All of the Tax Returns
are complete and correct in all respects. All Taxes shown to be due on such Tax
Returns have been paid or are being contested in good faith by the Company and
such contest is being diligently pursued.
3. Representations and Warranties of the Investor. The Investor hereby
----------------------------------------------
represents and warrants to and for the benefit of the Company, with knowledge
that the Company is relying thereon in entering into this Agreement and issuing
the Note to the Investor, as follows:
3.1 Purchase Entirely for Own Account. By the Investor's execution of
---------------------------------
this Agreement, the Investor hereby confirms that the Note to be received by the
Investor and the Common Stock issuable upon conversion of the Note
(collectively, the "Securities") shall be acquired for investment for the
Investor's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and that the Investor has no present
intention of selling, granting any participation in, or otherwise distributing
the same. By executing this Agreement, the Investor further represents that the
Investor does not have any contract, undertaking, agreement or arrangement with
any person to sell, transfer or grant participation to such person or to any
third person, with respect to any of the Securities. The Investor represents
that it has full power and authority to enter into this Agreement.
3.2 Investment Experience. The Investor is an investor in securities of
---------------------
companies in the development stage and acknowledges that it is able to fend for
itself, can bear the economic risk of its investment and has such knowledge and
experience in financial or business matters that it is capable of evaluating the
merits and risks of the investment in the Securities.
3.3 Accredited Investor. The Investor is an "accredited investor"
-------------------
within the meaning of Securities and Exchange Commission Rule 501 of Regulation
D, as now in effect.
3.4 Restricted Securities. The Investor understands that the Securities
---------------------
it is and shall be purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act of 1933, as amended (the "Act"), only in certain limited
circumstances. In this connection, the Investor represents that it is familiar
with Rule 144 promulgated under the Act, as now in effect, and understands the
resale limitations imposed thereby and by the Act.
3.5 Legends. The Investor understands that the certificates evidencing
-------
the Securities may bear one or all of the following legends:
(a) The securities evidenced by this certificate have not been
registered under the Securities Act of 1933, as amended (the "Act") or the
securities laws of any state of the United States. The securities evidenced by
this certificate may not be offered, sold or transferred for value directly or
indirectly, in the absence of such registration under the Act and qualification
under applicable state laws, or pursuant to an exemption from registration under
the
6
<PAGE>
Act and qualification under applicable state laws, the availability of which
is to be established to the reasonable satisfaction of the Company.
(b) Any legend required by the laws of the states of Delaware.
(c) Any legend required to be placed on the Securities purchased
by Investor in any future sale or offering of any Securities.
(d) A legend memorializing Section 4.2 below.
4. Covenants of the Investor. The Investor covenants and agrees with the
-------------------------
Company that it will perform and observe the following covenants and provisions:
4.1 Restrictions on Disposition. Without in any way limiting the
---------------------------
representations set forth in Section 3 above, the Investor further agrees not to
make any disposition of all or any portion of the Securities unless and until
the transferee has agreed in writing for the benefit of the Company to be bound
by this Section 4, and in addition thereto, one of the following conditions is
satisfied:
(a) Securities Registered. There is then in effect a registration
---------------------
statement under the Act covering such proposed disposition and such disposition
is made in accordance with such registration statement.
(b) Registration Not Required. The Investor shall have (a) notified
-------------------------
the Company of the proposed disposition and shall have furnished the Company
with a detailed statement of the circumstances surrounding the proposed
disposition and (b) if reasonably requested by the company, furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such securities under the Act;
provided, however, that the Company will not require opinions of counsel for
transactions made pursuant to Rule 144, except in unusual circumstances.
5. Covenants of the Company. The Company covenants and agrees with the
------------------------
Investor that it will perform and observe the following covenants and
provisions:
5.1 Maintenance of Corporate Existence. Unless otherwise determined
----------------------------------
by the Board of Directors of the Company, each of the Company and its
Subsidiaries will preserve, renew and keep in full force and effect, its
corporate existence, qualification in requisite jurisdictions and rights and
privileges necessary or desirable in the normal conduct of its business.
5.2 Restrictive Agreements Prohibited. The Company shall not become
---------------------------------
a party to any agreement which by its terms restricts the Company's performance
of this Agreement, the Note, or the Security Agreements.
7
<PAGE>
5.3 Compliance with Laws. The Company shall comply with all
--------------------
applicable laws, rules, regulations and orders, noncompliance with which could
materially adversely affect its business or condition, financial or otherwise.
5.4 Rights and Franchises. The Company will keep in full force and
---------------------
effect all patents, copyrights, trademarks, service marks, tradenames and all
franchises, rights and licenses, with respect to the foregoing or otherwise
referred to in Section 2.9 hereof, now held by it and that are useful in or
valuable to the business of Company.
5.5 Use of Proceeds. The Company will use the proceeds of the sale
---------------
of the Note for general working capital purposes.
5.6 Investor's Right to Designate Director upon Event of Default.
------------------------------------------------------------
Upon the occurrence of an Event of Default, the Company shall use its
commercially reasonable best efforts to cause a designee of the Investor to be
elected to the Board of Directors of the Company. Such director shall not be
entitled to any compensation in connection with his or her service as a director
of the Company. Investor acknowledges and agrees that upon cure of the Event of
Default (to the extent such Event of Default may be cured under the terms of the
Note), Investor's designee shall resign from the Board of Directors and Investor
shall have no further right to designate a director (except in the event of the
occurrence of subsequent Events of Default, in each of which such cases Investor
shall be entitled to designate a director pursuant to this Section 5.6).
5.7 Rule 144. So long as the Company is subject to the reporting
--------
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Company will comply with the current public information
requirements of Rule 144(c)(1) under the Securities Act of 1933, as amended
("Rule 144") and at all such times as Rule 144 is available for use by the
Investor, the Company will furnish the Investor upon request with all
information within the possession of the Company required for the preparation
and filing of Form 144.
5.8 Registration Rights. As soon as practicable after the Closing
-------------------
but in no event later than twenty (20) days thereafter, the Company shall grant
to the Investor registration rights for the registration of the Conversion
Shares with the Securities Exchange Commission pursuant to a Registration Rights
Agreement containing terms not less favorable (in the reasonable judgment of
Investor) than the terms contained in any Registration Rights Agreement between
the Company and any other investor as of the date of such grant.
5.9 Certificate of Designations. The Company shall cause the
---------------------------
Certificate of Designations, Preferences, Rights and Limitations of Series F
Preferred Stock of Applied Voice Recognition, Inc. in the form attached hereto
as Exhibit G to be duly authorized by the Board of Directors and filed with the
---------
Secretary of State of Delaware as soon as practicable but in no event later than
twenty (20) days after the date hereof.
5.10 Further Assurances. The Company, at its expense, will promptly
------------------
execute and deliver promptly to the Investor upon request all such other and
further documents, agreements and instruments in compliance with or pursuant to
its covenants and agreements
8
<PAGE>
herein, and will make any recordings, file any notices, and obtain any consents
as may be necessary or appropriate in connection therewith.
6. General Provisions.
------------------
6.1 Construction. This Agreement shall be governed, construed and
------------
enforced in accordance with the internal laws of the State of Texas, without
giving effect to its conflicts of laws or principles.
6.2 Entire Agreement. This Agreement, together with the schedules,
----------------
agreements and documents referred to herein, constitutes the entire agreement
among the parties hereto with respect to the subject matter hereof and
supersedes all prior and contemporaneous negotiations, agreements and
understandings.
6.3 Notices. All notices, requests, consents and other communications
-------
hereunder shall be in writing and shall be delivered in person, mailed by
certified or registered mail, return receipt requested, or sent by telecopier or
telex, addressed as follows:
If to the Company, to:
Applied Voice Recognition, Inc.
4615 Post Oak Place
Suite 111
Houston, Texas 77027
Attention: Richard A. Cabrera
Telephone: (713) 621-5678
Facsimile: (713) 621-5870
If to the Investor, to:
Lernout & Hauspie Speech Products, N.V.
Sint-Krispijinstraat 7
8900 Ieper
Belgium
Attention: Carl Dammekens
Telephone: (32) 75442444
Facsimile: (32) 75205002
or, in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the others.
6.4 Successors and Assigns. This Agreement, and the rights and
----------------------
obligations of each of the parties hereunder, may be assigned by the Investor to
any affiliate of the Investor and to not more than five (5) non-affiliates of
the Investor without the prior written consent of the Company. This Agreement
shall inure to the benefit of, and shall be binding upon, the parties and their
successors and assigns.
9
<PAGE>
6.5 Severability. If any term, covenant or condition of this Agreement
------------
is held to be invalid, void or otherwise unenforceable by any court of competent
jurisdiction, the remainder of this Agreement shall not be affected thereby and
the term, covenant and condition of this Agreement shall be valid and
enforceable to the fullest extent permitted by law.
6.6 Modification. Any term of this Agreement may be amended and the
------------
observance of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively), with the
written consent of the Company and the Investor. Any amendment or waiver
effected in accordance with this Section 6.6 shall be binding upon all parties
to this agreement, including, without limitation, any holder who may not have
executed such amendment or waiver, and each future holder of any equity security
into which the Note is convertible.
6.7 Attorney's Fees. If any action or law or in equity is necessary to
---------------
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to an award of its reasonable attorneys' fees, costs and disbursements
in addition to any other relief to which such party may be entitled.
6.8 Counsel to the Investor. The Company agrees to pay the reasonable
-----------------------
legal fees and expenses of Brown Rudnick, in an amount not to exceed $15,000,
plus expenses. Such fees shall be withheld from the Closing pursuant to Section
1.3 hereof and Brown Rudnick, shall provide the Company with a bill for such
services within thirty (30) days of the Closing.
6.9 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
10
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement to be
effective as of the date first written above.
COMPANY:
- -------
APPLIED VOICE RECOGNITION, INC.,
a Delaware corporation, d/b/a e-DOCS.net
By: /s/ Richard A. Cabrera
--------------------------------------------
Richard A. Cabrera, Chief Financial Officer
Address:
4615 Post Oak Place
Suite 111
Houston, TX 77027
INVESTOR:
- --------
Lernout & Hauspie Speech Products, N.V.
By: /s/ Carl Dammekens
-----------------------------------------
Name: Carl Dammekens
-----------------------------------------
Title: Senior Vice President of Finance
-----------------------------------------
Address:
Sint-Krispijinstraat 7
8900 Ieper
Belgium
SIGNATURE PAGE
TO
CONVERTIBLE SECURED PROMISSORY NOTE PURCHASE AGREEMENT
11
<PAGE>
EXHIBIT 2
---------
NEITHER THIS CONVERTIBLE SECURED PROMISSORY NOTE NOR ANY OF THE SECURITIES
ISSUABLE HEREUNDER HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT
WITH RESPECT TO THE SECURITIES, OR DELIVERY TO THE COMPANY OF AN OPINION OF
COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY THAT SUCH OFFER, SALE
OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE ACT OR UNLESS
SOLD IN FULL COMPLIANCE WITH RULE 144 UNDER THE ACT.
Houston, Texas
November 5, 1999
APPLIED VOICE RECOGNITION, INC.
d/b/a e-DOCS.net
CONVERTIBLE SECURED PROMISSORY NOTE
Applied Voice Recognition, Inc., a Delaware corporation doing business as
e-DOCS.net (the "Company"), for value received, hereby promises to pay to the
order of Lernout & Hauspie Speech Products, N.V., or its successors or assigns
(collectively, the "Holder"), the principal amount of Two Million Dollars
($2,000,000) (the "Issue Price"), together with interest on the unpaid amount
thereof in accordance with the terms hereof, from the date hereof until paid or
converted in accordance with the terms hereof. Certain capitalized terms used
but not defined herein shall have the meaning ascribed to them in the
Convertible Secured Promissory Note Purchase Agreement between the Company and
the Holder of even date herewith (the "Agreement") and the Security Agreements
(as defined in the Agreement).
1. Terms of the Convertible Promissory Note (the "Note").
-----------------------------------------------------
1.1 Interest Rate. The rate of interest hereunder ("Interest Rate") shall
-------------
be twelve and one-half percent (12.5%) per annum and shall be computed on the
basis of a 365 day year for the actual number of days elapsed.
1.2 Payment. Subject to the provisions of Section 2 regarding conversion
-------
of this Note, the Issue Price plus all accrued but previously unpaid interest
thereon (the "Conversion Amount") shall become due and payable on the earliest
of (i) ninety (90) days after the date of this Note (the "Maturity Date"), (ii)
immediately prior to the closing of the acquisition of a majority of stock of
the Company by another entity by means of a transaction or a series of related
transactions or (iii) the closing of the sale of all or substantially all of the
assets of the Company, unless the Company stockholders of record prior to such
acquisition or sale set forth in (ii) and (iii) above shall hold at least fifty
percent (50%) of the voting power of the acquiring or surviving entity
immediately after such acquisition or sale (the transactions described in
subsections 1.2(ii) and (iii) being referred to collectively as a "Change of
Control"). Payment shall be made at the offices or residence of the Holder, or
at such other place as the
<PAGE>
Holder shall have designated to the Company in writing in lawful money of the
United States of America. At the option of the Holder, the ninety (90) day
period described in clause (i) above shall be extended to one hundred eighty
(180) days upon written notice from the Holder to the Company.
1.3 Defaults. An "Event of Default" occurs if:
--- --------
(i) the Company defaults in the payment of interest hereunder or under
the L&H Investment Note when the same becomes due and payable and the default
continues for a period of ten (10) days;
(ii) the Company defaults in the payment of the principal hereunder or
under the L&H Investment Note when the same becomes due and payable hereunder;
or
(iii) the Company fails to comply with any of its other covenants and
agreements in the Note, the Agreement, or under the L&H Investment Note or the
L&H Investment Agreement and the failure continues for the period and after the
notice specified below; or
(iv) the Company pursuant to or within the meaning of any Bankruptcy
Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief against it in an
involuntary case,
(C) consents to the appointment of a custodian of it or for all
or substantially all of its property,
(D) makes a general assignment for the benefit of its creditors,
or
(E) is the debtor in an involuntary case which is not dismissed
within sixty (60) days of the commencement thereof; or
(v) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
(A) provides for relief against the Company in an involuntary
case,
(B) appoints a custodian of the Company for all or substantially
all of its property, or
(C) orders the liquidation of the Company; or
2
<PAGE>
(vi) any representation or warranty made by the Company in the
Agreement or in the L&H Investment Agreement shall prove to be materially false
or incorrect on the date as of which made; or
(vii) there shall occur a Change in Control of the Company; or
(viii) the Company fails to authorize and file with the Secretary of
State of Delaware within twenty (20) days after the date hereof the Certificate
of Designations, Preferences, Rights and Limitations of Series F Preferred Stock
of Applied Voice Recognition, Inc. in the form attached as Exhibit G to the
Agreement; or
(ix) there shall occur any event or change in circumstances that has
caused or could reasonably be expected in the judgment of Holder to cause a
material adverse effect on the condition, financial or otherwise, of the assets,
operations or prospects of the Company or on the Company's ability to pay or
perform its obligations hereunder or under the Agreement, or under the L&H
Investment Agreement or the L&H Investment Note;
(A) The term "Bankruptcy Law" means Title 11, U.S. Code or any
similar federal or state law for the relief of debtors. The term "custodian"
means any receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law.
(B) A failure of the Company as described in subsection (iii) of
this Section 1.3 shall not be an Event of Default until the Holder notifies the
Company in writing of the failure to comply and the Company does not cure the
failure to comply within twenty (20) days after receipt of the notice (the "Cure
Period"). The notice must specify the failure to comply, demand that it be
remedied and state that the notice is a "Notice of Default." Notwithstanding
anything in this Section 1.3(ix)(B), a failure of the Company to comply with
Section 5.8 or Section 5.9 of the Agreement shall not be curable for the
purposes of this Section 1.3.
1.4 Acceleration.
--- ------------
(i) If an Event of Default occurs and is continuing, the Holder may
declare the principal of and accrued interest on the Note to be due and payable
and, upon any such declaration, the same shall become and be immediately due and
payable.
(ii) If an Event of Default specified in Section 1.3 (iv) or (v)
occurs, all unpaid principal and accrued interest on the Note then outstanding
shall ipso facto become and be immediately due and payable without any
----------
declaration or other act on the part of the Holder.
(iii) The Holder may rescind an acceleration and its consequences if
all existing Events of Default have been cured or waived, except nonpayment due
to acceleration, and if the rescission would not conflict with any judgement or
decree of a court of competent jurisdiction.
3
<PAGE>
1.5 Convertible Secured Promissory Note Purchase Agreement. This Note
------------------------------------------------------
is issued by the Company in connection with that certain Convertible Secured
-------
Promissory Note Purchase Agreement of even date herewith (the "Agreement"), by
and between the Company and the Holder, and is subject to, and Holder and the
Company shall be bound by, all the terms, conditions and provisions of the
Agreement.
2. Conversion.
----------
2.1 Timing. The Holder shall be entitled to convert all or a portion
------
of the Conversion Amount (as defined below) at any time, and upon the completion
of a Qualified Public Offering (as defined below), the Conversion Amount shall
be automatically converted into that number of fully paid and nonassessable
shares of the Company's common stock (the "Common Stock") as is equal to the
Conversion Amount divided by $0.37, subject to adjustment as provided in Section
2.2 below (the "Conversion Price"), with any fraction of a share rounded up to
the next whole share of common stock; provided, however, that if there is no
Qualified Public Offering before the Maturity Date, then the Note shall become
due and payable upon the demand of the Holder at any time on or after the
Maturity Date.
2.2 Anti-dilution Adjustments.
-------------------------
(i) In case the Company shall at any time change as a whole, by
subdivision or combination in any manner or by the making of a stock dividend,
the number of outstanding shares of the Company's common stock into a different
number of shares (i.e. forward or reverse stock split), (a) the number of shares
of common stock to which the holders of the Note, or the holders of Series F
Preferred Stock, as the case may be, may convert such Note or Series F Preferred
Stock shall be increased or decreased in direct proportion to such increase or
decrease of shares, as the case may be, and (b) the Conversion Price in effect
immediately prior to such change shall be increased or decreased in inverse
proportion to such increase or decrease of shares, as the case may be.
(ii) If, prior to the conversion of the Note or of all the Series
F Preferred Stock, there shall be any merger, consolidation, exchange of shares,
recapitalization, reorganization, or other similar event, as a result of which
shares of common stock of the Company shall be changed into the same or a
different number of shares of the same or another class or classes of stock or
securities of the Company or another entity or there is a sale of all or
substantially all the Company's assets, then the holders of the Note or the
Series F Preferred Stock shall thereafter receive, upon the basis and upon the
terms and conditions specified herein and in lieu of shares of common stock,
immediately theretofore issuable upon conversion, such stock, securities and/or
other assets which the holder would have been entitled to receive in such
transaction had the Note or the Series F Preferred Stock been converted
immediately prior to such transaction, and in any such case appropriate
provisions shall be made with respect to the rights and interests of the holders
of the Note or the Series F Preferred Stock to the end that the provisions
hereof shall thereafter be applicable, as nearly as may be practicable in
relation to any securities thereafter deliverable upon the conversion thereof.
4
<PAGE>
(iii) The Company will not, by amendment of its Certificate
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, share exchange, dissolution, issue or sale of securities
or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this paragraph and in the taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of the
holders of the Note or the Series F Preferred Stock against impairment.
(iv) In the event the Company shall issue additional shares of
Common Stock (including additional shares of Common Stock deemed to be issued
pursuant to paragraph (v) hereof but excluding any issued as a stock split or
combination or upon a dividend or distribution) without consideration or for a
consideration per share less than the Conversion Price in effect on the date of
and immediately prior to such issue, then and in such event, such Conversion
Price shall be reduced, concurrently with such issue, to a price (calculated to
the nearest cent) equal to the consideration per share paid in connection with
the issuance of such additional shares of Common Stock.
(v) In the event the Company shall issue any options or
convertible securities or shall fix a record date for the determination of
holders of any class of securities entitled to receive any such options or
convertible securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provisions contained therein
for a subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such options in accordance with (b) below or, in the case of
convertible securities, the maximum number of shares of Common Stock into which
they are convertible in accordance with (b) below, shall be deemed to be
additional shares of Common Stock issued as of the time of such issue or, in
case such a record date shall have been fixed, as of the close of business on
such record date, provided that additional shares of Common Stock shall not be
deemed to have been issued unless the consideration per share (determined
pursuant to paragraph (vi) hereof) of such additional shares of Common Stock
would be less than the Conversion Price in effect on the date of and immediately
prior to such issue, or such record date, as the case may be, and provided
further that in any such case in which additional shares of Common Stock are
deemed to be issued:
(a) except as provided in (b) below, no further adjustment in
the Conversion Price shall be made upon the subsequent issue of convertible
securities or shares of Common Stock upon the exercise of such options or
conversion or exchange of such convertible securities;
(b) if such options or convertible securities by their terms
provide, with the passage of time or otherwise, for any increase in the
consideration payable to the corporation, or for any decrease in the number of
shares of Common Stock issuable upon the exercise, conversion or exchange
thereof, or for the termination of the right to exercise or convert such options
or convertible securities, then the Conversion Price computed upon the
5
<PAGE>
original issue thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall, upon any such
increase, decrease or termination becoming effective, be recomputed to reflect
such increase, decrease or termination insofar as it affects such options or the
rights of conversion or exchange under such convertible securities and upon
termination such options or convertible securities shall no longer be deemed to
be outstanding; and
(c) no readjustment pursuant to sub-clause (b) above shall
have the effect of increasing the Conversion Price to an amount which exceeds
the lower of (1) the Conversion Price on the original adjustment date, or (2)
the Conversion Price that would have resulted from any issuance of additional
shares of Common Stock between the original adjustment date and such
readjustment date.
(vi) Determination of Consideration. For purposes of this Section
------------------------------
2.2, the consideration received by the corporation for the issue of any
additional shares of Common Stock shall be computed as follows:
(a) Cash and Property. Such consideration shall:
-----------------
(A) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the corporation, excluding amounts paid or
payable for accrued interest or accrued dividends;
(B) insofar as it consists of property other than cash,
be computed at the fair value thereof at the time of such issue, as determined
in good faith by the Board of Directors; and
(C) in the event additional shares of Common Stock are
issued together with other shares of securities or other assets of the
corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors.
(b) Options and Convertible Securities. The consideration per
----------------------------------
share received by the corporation for additional shares of Common Stock deemed
to have been issued pursuant to paragraph (v), relating to options and
convertible securities, shall be determined by dividing
(A) the total amount, if any, received or receivable by
the corporation as consideration for the issue of such options or convertible
securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration) payable to
the corporation upon the exercise of such options or the conversion or exchange
of such convertible securities, or in the case of options for convertible
securities, the exercise of such options for convertible securities and the
conversion or exchange of such convertible securities, by
6
<PAGE>
(B) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number) issuable upon the
exercise of such options or the conversion or exchange of such convertible
securities.
(vii) Upon the occurrence of each adjustment or readjustment
of the conversion rate pursuant to this Section 2.2, the Company at its expense
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to the holder of the Note or the holders of
the Series F Preferred Stock, as the case may be, a certificate signed by the
Chief Financial Officer of the Company setting forth (a) such adjustment or
readjustment, (b) the conversion rate at the time in effect, and (c) the number
of shares of common stock and the amount, if any of other property which at the
time would be received upon the conversion of its shares.
2.3 Issuance of Series F Preferred Stock. In the event the
------------------------------------
Company fails to cause the number of its authorized capital stock to be
sufficient to allow the issuance of the Company's common stock to the Holder
upon the Holder's election to convert the Note pursuant to Section 2.5 of the
Agreement, the Holder shall be entitled to convert all or a portion of the
Conversion Amount into such number of shares of Series F Preferred Stock as
would enable the Holder upon conversion of such Series F Preferred Stock in
accordance with its terms to receive the same number of shares of the Company's
common stock into which it is entitled to convert pursuant to Section 2.1
hereof.
2.4 Permissive Conversion. If Holder desires to convert all or
---------------------
any portion of the Note, Holder shall provide written notice to the Company at
its address set forth herein and in the Agreement, which notice shall specify
the Conversion Amount and the desired date of conversion. The Company shall,
(i) in the event of a partial conversion, issue to Holder (A) a certificate
representing the number of shares of common stock of the Company equal to the
Conversion Amount divided by the Conversion Price, and (B) a replacement
promissory note in the amount of the unconverted principal and interest under
the Note, which replacement promissory note shall contain identical terms and
provisions of the Note; or (ii) in the event of a total conversion, issue to
Holder a certificate representing the number of shares of common stock of the
Company equal to the Conversion Amount divided by the Conversion Price. The
effective date of the conversion shall be the date specified by the Holder, but
in no event later than the date of execution and issuance of the common stock.
2.5 Automatic Conversion. In the event of a Qualified Public
--------------------
Offering, written notice of a Qualified Public Offering shall be delivered to
the Holder(s) of this Note before or promptly after the closing date of the
Qualified Public Offering (the "Conversion Date"), at the address last shown on
the records of the Company for the Holder or given by the Holder to the Company
for the purpose of notice (or, if no such address appears or is given, at the
principal office of the Holder), notifying the Holder of the conversion to be
effected, including specifying the Conversion Amount (calculated as of the
Conversion Date), accompanied by copies of all relevant documentation evidencing
the Qualified Public Offering
7
<PAGE>
including any associated warrants, stock purchase agreement, stock restriction
agreement, and investor's rights agreement.
2.6 Qualified Public Offering. The term "Qualified Public
-------------------------
Offering" shall mean a public offering of the Company's common stock at any time
the Note remains unpaid, which public offering (a) yields gross proceeds of no
less than Twenty-Five Million Dollars ($25,000,000) (excluding amounts received
on conversion of the Note), (b) offers common stock at no less than $2.00 per
share (subject to adjustment for any stock dividends, combinations or splits
with respect to such shares), and (c) causes all holders of the Company's and
its subsidiaries' convertible securities to convert such securities into shares
of common stock of the Company. Notwithstanding the foregoing, the Qualified
Public Offering shall not include an equity financing that is made in connection
with either (x) any arrangement between the Company and any third party for any
research or development involving the Company (including, without limitation,
any arrangement that includes provision for research support, product
development and/or testing support), (y) any rights to commercialize any
products resulting from the research or development programs of the Company
(including, without limitation, rights to develop, make, use and/or sell any
such products), and (z) any other non-monetary consideration.
2.7 Termination of Rights Upon Conversion. Conversion of this
-------------------------------------
Note shall be deemed effective on the Conversion Date, and, in the event of a
conversion of all of the outstanding principal and interest under the Note, the
Holder of this Note shall have no further rights under this Note, whether or not
this Note is surrendered. Conversion shall be deemed effective upon issuance of
the Common Stock or Series F Preferred Stock, as the case may be, issuable to
the Holder upon any such conversion.
2.8 Delivery of Stock Certificates. As promptly as practicable
------------------------------
after any conversion of this Note and the Holder's surrender of this Note, the
Company, at its expense, shall issue and deliver to the Holder of this Note a
certificate or certificates evidencing the number of shares of the Common Stock
or Series F Preferred Stock, as the case may be, issuable to the Holder upon any
such conversion.
2.9 Security Agreements. This Note is executed contemporaneously
-------------------
with, and is secured by the terms of, the Security Agreements.
3. Miscellaneous.
-------------
3.1 Transfer of Note. This Note may be assigned by the Holder to any
-----------------
affiliate of the Holder and to not more than five (5) non-affiliates of the
Holder without the prior written consent of the Company.
3.2 Titles and Subtitles. The titles and subtitles used in this Note
--------------------
are for convenience only and are not to be considered in construing or
interpreting this Note.
3.3 Notices. Any notice required or permitted under this Note shall
-------
be given in writing and in accordance with Section 6.3 of the Agreement (for
purposes of which the term
8
<PAGE>
"Investor" shall mean the Holder hereunder), except as otherwise expressly
provided in this Note.
3.4 Attorneys' Fees. If any action at law or in equity is necessary
---------------
to enforce or interpret the terms of this Note, the Holder shall be entitled to
reasonable attorneys' fees, costs and disbursements in addition to any other
relief to which the Holder may be entitled.
3.5 Amendments and Waivers. This Note is issued by the Company
----------------------
pursuant to the Agreement. Other than the right to the payment of the Issue
Price and all accrued but unpaid interest thereon, which may only be amended or
waived with the written consent of the Holder, any other terms of this Note may
be amended and the observance of any other terms of this Note may be waived
(either generally or in a particular instance and either retroactively or
prospectively), with the written consent of the Company and the Holder, and in
accordance with the Agreement. Any amendment or waiver effected in accordance
with this Section 3.5 shall be binding upon the Holder (and of any securities
into which this Note is convertible), and the Company.
3.6 Severability. If one or more provisions of this Note are held
------------
to be unenforceable under applicable law, such provision shall be excluded from
this Note and the balance of the Note shall be interpreted as if such provision
was so excluded and shall be enforceable in accordance with its terms.
3.7 Governing Law. This Note shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of Texas, without giving
effect to its conflicts of laws principles.
APPLIED VOICE RECOGNITION, INC.,
a Delaware corporation d/b/a e-DOCS.net
By: /s/ Richard A. Cabrera
-----------------------------------------
Richard A. Cabrera
Chief Financial Officer
9
