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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-KSB
(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 average bid and ask price on the OTC Electronic
Bulletin Board on March 26, 1999 of $1.281 was $12,828,929. As of March 29,
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
The Issuer has incorporated its Proxy Statement for its 1999 Annual Meeting of
Stockholders into Part III of this Form 10KSB.
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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
The information required by this item is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission in connection with the
Company's 1999 Annual Meeting.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission in connection with the
Company's 1999 Annual Meeting.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission in connection with the
Company's 1999 Annual Meeting.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission in connection with the
Company's 1999 Annual Meeting.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits.
EXHIBIT DESCRIPTION OF EXHIBIT
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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.
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EXHIBIT DESCRIPTION OF EXHIBIT
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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
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EXHIBIT DESCRIPTION OF EXHIBIT
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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>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
*23.1 Consent of Ernst & Young LLP.
*27.1 Financial Data Schedule.
</TABLE>
_____________
* Filed herewith.
(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.
25
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
March 31, 1999 APPLIED VOICE RECOGNITION, INC.
/s/ WILLIAM T. KENNEDY
-------------------------------------
William T. Kennedy
Chief Financial Officer and Secretary
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on
the 31st day of March, 1999.
/s/ Timothy J. Connolly
________________________ Chief Executive Officer, Chairman of the Board and
Timothy J. Connolly Director
/s/ William T. Kennedy
________________________ Chief Accounting Officer, Chief Financial Officer and
William T. Kennedy Secretary
/s/ Jan Carson Connolly
________________________ Director
Jan Carson Connolly
________________________ Director
Daniel S. Dornier
/s/ G. Edward Powell
________________________ Director
G. Edward Powell
________________________ Director
Michael J. Wilson
/s/ J. William Boyar
________________________ Director
J. William Boyar
/s/ Raymond R. Betz
________________________ Director
Raymond R. Betz
/s/ H. Russel Douglas
________________________ Director
H. Russel Douglas
________________________ Director
James Cochran
________________________ Director
Jo Lernout
________________________ Director
Thomas Denys
26
<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
<PAGE>
EXHIBIT 3.6
CERTIFICATE OF DESIGNATION, PREFERENCES,
RIGHTS AND LIMITATIONS
OF
SERIES D PREFERRED STOCK
OF
APPLIED VOICE RECOGNITION, INC.
PURSUANT to Section 151(g) of the Delaware General Corporation Law (the
"DGCL"), APPLIED VOICE RECOGNITION, INC., a corporation organized and existing
under the DGCL (herein referred to as the "Corporation"), DOES HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors of the
Corporation by its Certificate of Incorporation, and pursuant to the provisions
of Section 151(g) of the DGCL, such Board of Directors, by unanimous consent of
the directors dated December 23, 1998, duly adopted a resolution providing for
the issuance of a series of five thousand (5,000) shares of the Corporation's
Preferred Stock, par value $0.10 per share, to be designated "Series D Preferred
Stock," and fixing the voting powers, preferences and relative, participating,
optional or other rights, and the qualifications, limitations or restrictions
thereof, all pursuant to this Certificate of Designation, Rights and Preferences
of Series D Preferred Stock of Applied Voice Recognition, Inc. (the "Certificate
of Designation"), which resolution is as follows:
RESOLVED, that pursuant to the authority expressly granted and vested in
the Board of Directors of the Corporation in accordance with the provisions of
its Certificate of Incorporation, there shall be established and authorized for
issuance a series of the Corporation's Preferred Stock, par value $0.10 per
share, designated "Series D Preferred Stock" (herein referred to as "Series D
Preferred Stock"), consisting of five thousand (5,000) shares, each of the par
value of $0.10 per share, and having the voting powers, preferences and
relative, participating, optional and other rights, and the qualifications,
limitations or restrictions set forth below:
A. DESIGNATION. The Preferred Stock having the rights, preferences,
-----------
privileges and restrictions set forth below shall be designated and known as
"Series D Preferred Stock."
B. NUMBER OF SHARES OF SERIES D PREFERRED STOCK. The number of
--------------------------------------------
shares constituting all of the Series D Preferred Stock shall be five thousand
(5,000).
C. DIVIDENDS. The holders of the then outstanding shares of the
---------
Series D Preferred Stock shall be entitled to dividends ("Preferred Dividends")
equal to the original issue price of $1,000 per share, plus accrued (whether or
not declared) and unpaid dividends (the "Liquidation Preference") times ten
percent (10%) per annum per share of Series D Preferred Stock, payable quarterly
in arrears, which Preferred Dividends shall be paid in cash or in shares of
Common
<PAGE>
Stock, $0.001 par value per share, of the Corporation ("Common Stock"), at the
Corporation's option. In the event the Corporation elects to pay any such
Preferred Dividends in Common Stock, the number of shares of Common Stock to be
issued as Preferred Dividends pursuant hereto shall be 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 (the "OTCBB"). If the
Common Stock is no longer trading on the OTCBB, then the number of shares of
Common Stock to be issued as Preferred Dividends shall be based upon such other
trading forum or exchange, if any, under which the Common Stock is trading, and
if no established market exists for the Common Stock, the Board of Directors of
the Corporation (the "Board of Directors") shall determine the number of shares
of Common Stock to be issued as Preferred Dividends in the exercise of their
reasonable discretion. Preferred Dividends shall, when and as declared by the
Corporation's Board of Directors, be payable quarterly on the first day of each
January, April, July and October, commencing upon the later of April 1, 1999, or
on the first such date following the issuance of such shares, except that if
such date is not a business day, then such dividends shall be payable on the
first day immediately succeeding that business day. No dividend shall be
declared or paid if such declaration or payment would result in a violation of
the DGCL. The dividends on each share of Series D Preferred Stock shall begin to
accrue from the date of issuance of the Series D Preferred Stock. Dividends in
arrears for any past dividend periods may be declared and paid at any time,
without reference to any regular dividend payment date, to holders of record on
a record date fixed for such payment by the Board of Directors of the
Corporation.
The Preferred Dividends shall be cumulative, and no dividends shall be
declared or paid with respect to the Common Stock or any class of stock ranking,
as to dividend rights, junior to the Series D Preferred Stock, until all accrued
Preferred Dividends have been paid, or declared and, if dividends are to be paid
in Common Stock, shares of Common Stock are set apart for payment, for the
current and all prior dividend periods. Payment of Preferred Dividends shall be
in preference to dividends on Common Stock or any other shares of stock of the
Corporation ranking junior to the Series D Preferred Stock, and shall be junior
to payment of dividends on the Corporation's Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock.
D. LIQUIDATION PREFERENCE. In the event of any liquidation,
----------------------
dissolution or winding up of the Corporation, either voluntary or involuntary,
the holders of the Series D Preferred Stock shall be entitled to be paid out of
the assets of the Corporation available for distribution to its shareholders,
after the payment or declaration and setting apart for payment of any amount
required with respect to the Series A Preferred Stock, the Series B Preferred
Stock and the Series C Preferred Stock (collectively, the "Senior Stock"), and
before any payment or declaration and setting apart for payment of any amount
shall have been made with respect to the Junior Stock (which shall consist of
Common Stock as well as the stock of any other class or series other than the
Senior Stock), One Thousand Dollars and 00/100s ($1,000.00) per share, plus an
amount per share equal to all accrued (whether or not declared) but unpaid
dividends, and no more. If upon the occurrence of such event the assets
distributable among the holders of the Series D Preferred Stock shall be
insufficient to permit the payment of the full preferential amounts for the
Series D Preferred Stock, then the assets and funds of the Corporation legally
available for distribution to such holders shall be distributed among the
holders of the Series D Preferred Stock then outstanding ratably per share in
proportion to the full preferential amounts per share to which they are
respectively entitled. After the payment or distribution to the holders of the
Series D Preferred Stock of their full preferential amounts have
2
<PAGE>
been made, the holders of Series D Preferred Stock shall not be entitled to any
additional distributions with respect to the Series D Preferred Stock.
At each holder's option, a sale, conveyance or disposition of all or
substantially all of the assets of the Corporation, shall be deemed to be a
liquidation, dissolution or winding up within the meaning of this Section D.
Any event described in the prior clause that the holder elects to treat as a
liquidation, shall be treated pursuant to the terms of the following paragraph
(a holder who elects to have the transaction treated as a liquidation is herein
referred to as a "Liquidating Holder"). Any event described in the first
sentence of this paragraph that the holder does not elect to be treated as a
liquidation shall be treated pursuant to the terms of paragraph G(ii) below.
The Corporation shall not effect any transaction described in this paragraph
unless it first gives fifteen (15) calendar days prior written notice of such
liquidation event (during which time the holders of the Series D Preferred stock
shall be entitled to convert their Series D Preferred Stock into shares of
Common Stock to the extent permitted hereby).
Prior to the closing of a transaction described in the preceding paragraph
which would constitute a liquidation event, the Corporation shall either (i)
make all cash distributions it is required to make to the Liquidating Holders
pursuant to the first sentence of the first paragraph of this Section D, (ii)
set aside sufficient funds from which the cash distributions to the Liquidating
Holders can be made, or (iii) establish an escrow or other similar arrangement
with a third party pursuant to which the proceeds payable to the Corporation
from a sale of all or substantially all of the assets of the Corporation will be
used to make the liquidating payments to the Liquidating Holders immediately
after the consummation of such sale. In the event that the Corporation has not
fully complied with either of the foregoing alternatives, the Corporation shall
either: (x) cause such closing to be postponed until such cash distributions
have been made, or (y) cancel such transaction, in which case the rights of the
holders or other arrangements shall be the same as existing immediately prior to
such proposed transaction.
E. REDEMPTION.
----------
(i) Any shares of the Series D Preferred Stock that have not
been converted to Common Stock by November 30, 2004, may, at the option of the
Corporation, at any time thereafter be redeemed at a redemption price of One
Thousand Dollars and 00/100s ($1,000.00) per share plus any accrued (whether or
not declared) but unpaid dividends (the actual date of redemption being referred
to as the "Preferred Stock Redemption Date"). In such instance, either all or
none of the outstanding shares of Series D Preferred Stock must be redeemed. The
Corporation agrees to provide at least thirty (30) days prior notice of such
redemption. After receiving such notice, the holders of Series D Preferred Stock
shall be permitted to convert such shares to Common Stock prior to the Preferred
Stock Redemption Date, which conversion shall be pursuant to Section F below.
(ii) If on or before the Preferred Stock Redemption Date all
funds necessary for such redemption have been set aside by the Corporation,
separate and apart from its other funds in trust for the pro rata benefit of the
holders of the Series D Preferred Stock, so as to be and continue to be
available therefor, then from and after the Preferred Stock Redemption Date,
notwithstanding that any certificate for shares of the Series D Preferred Stock
shall not have been
3
<PAGE>
surrendered for cancellation, the shares represented thereby shall no longer be
deemed outstanding, and all rights with respect to shares of the Series D
Preferred Stock shall forthwith on the Preferred Stock Redemption Date cease and
terminate except only as to the right of the holders thereof to receive the
redemption price of such shares so to be redeemed. Any monies so set aside by
the Corporation and unclaimed at the end of five (5) years from the Preferred
Stock Redemption Date shall revert to the general funds of the Corporation
(provided that the holders of Series D Preferred Stock have received notice of
the redemption within 90 days after the Preferred Stock Redemption Date).
(iii) The respective holders of record of the Series D Preferred
Stock to be redeemed shall be entitled to receive the redemption price upon
actual delivery to the Corporation of certificates for the shares to be
redeemed, duly endorsed in blank or accompanied by proper instruments of
assignment and transfer duly endorsed in blank.
F. CONVERSION RIGHTS.
-----------------
(i) Each holder of shares of Series D Preferred Stock shall be
entitled to cause any or all of such shares to be converted into Common Stock.
Each share of Series D Preferred Stock is initially convertible into six hundred
sixty-six and sixty-seven hundredths (666.67) shares of Common Stock (subject
to adjustment as provided below). The initial conversion price shall be $1.50
per share (such price, as adjusted in accordance herewith being referred to as
the "Conversion Price"). Notwithstanding the foregoing, 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 as of November 30, 2002 shall be reduced by fifty
percent (50%), and all modifications of the Conversion Price, if any, after
November 30, 2002 shall be computed from the reduced Conversion Price as
provided in this sentence. Computations of the average closing price for the
Common Stock made pursuant to this Section F shall be made in the same manner as
in Section C above.
(ii) Each holder of Series D Preferred Stock desiring to convert
any or all of such shares into shares of Common Stock pursuant to paragraph (i)
of this Section F shall surrender the certificate or certificates representing
the shares of Series D Preferred Stock being converted, duly assigned or
endorsed for conversion (or accompanied by duly executed stock powers relating
thereto), at the principal executive office of the Corporation or the offices of
the transfer agent for the Series D Preferred Stock or such office or offices in
the continental United States of an agent for conversion as may from time to
time be designed by notice to the holders of the Series D Preferred Stock by the
Corporation or the transfer agent for the Series D Preferred Stock, accompanied
by written notice of conversion. Such notice of conversion shall specify (1) the
number of shares of Series D Preferred Stock to be converted and (2) the address
to which such holder wishes delivery to be made of such new certificates to be
issued upon such conversion.
(iii) Upon surrender of a certificate representing a share or
shares of Series D Preferred Stock for conversion pursuant to paragraph (i) of
this Section F, the Corporation shall, within five (5) business days of such
surrender, issue and send (with receipt to be acknowledged) to the holder
thereof, at the address designated by such holder, a certificate or certificates
for the number of validly issued, fully paid and non-assessable shares of Common
Stock to which such
4
<PAGE>
holder shall be entitled upon conversion. In the event that there shall have
been surrendered a certificate or certificates representing shares of Series D
Preferred Stock, only part of which are to be converted, the Corporation shall
issue and deliver to such holder a new certificate or certificates representing
the number of shares of Series D Preferred Stock which shall not have been
converted.
(iv) The issuance by the Corporation of shares of Common Stock
pursuant to paragraph (i) of this Section F shall be effective as of the earlier
of (1) the delivery to such holder of the certificates representing the shares
of Common Stock issued upon conversion thereof, or (2) immediately prior to the
close of business on the day of surrender of the certificate or certificates for
the shares of Series D Preferred Stock to be converted, duly assigned or
endorsed for conversion (or accompanied by duly executed stock powers relating
thereto) as provided in this Certificate of Incorporation. On and after the
effective day of the conversion, the person or persons entitled to receive the
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of Common Stock, but no allowance or
adjustment shall be made in respect of dividends payable to holders of Common
Stock of record on any date prior to such effective date.
(v) The Corporation shall not be obligated to issue and deliver
any fractional share of Common Stock upon any conversion of shares of Series D
Preferred Stock, but in lieu thereof shall pay to the holder converting such
Series D Preferred Stock an amount of cash equal to the fractional share of
Common Stock that otherwise would have been issued upon conversion rounded to
the nearest 1/100th of a share of Common Stock multiplied by the current market
price (as reasonably determined by the Corporation) on the business day
preceding the effective date of the conversion.
(vi) The Corporation shall at all times reserve and keep
available out of its authorized and unissued Common Stock or treasury shares,
solely for issuance upon the conversion of shares of Series D Preferred Stock as
herein provided, free from any preemptive rights, such number of shares of
Common Stock as shall be issuable upon the conversion of all the shares of
Series D Preferred Stock then outstanding at the then current Conversion Price.
G. ANTI-DILUTION ADJUSTMENTS.
-------------------------
(i) In case the Corporation 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 Common Stock into a different
number of shares (i.e. forward or reverse stock split), (i) the number of shares
of Common Stock to which the holders of Series D Preferred Stock may convert
such Series D Preferred Stock shall be increased or decreased in direct
proportion to such increase or decrease of shares, as the case may be, and (ii)
the Conversion Price (but not the aggregate 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 all the Series D 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 Corporation shall be changed into the same or a
different number of shares of the same or another class or classes of stock or
securities
5
<PAGE>
of the Corporation or another entity or there is a sale of all or substantially
all the Corporation's assets that is not deemed to be a liquidation pursuant to
Section D hereof, then the holders of Series D Preferred Stock shall thereafter
have the right to receive upon conversion of Series D Preferred Stock, 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 Series D 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 Series D Preferred Stock to the end that the provisions hereof
(including, without limitation, provisions for the adjustment of the conversion
rate and the number of shares issuable upon conversion of the Series D Preferred
Stock) shall thereafter be applicable, as nearly as may be practicable in
relation to any securities thereafter deliverable upon the conversion thereof.
The Corporation shall not effect any transaction described in this subsection
(ii) unless (a) it first gives fifteen (15) calendar days prior notice of such
merger, consolidation, exchange of shares, recapitalization, reorganization, or
other similar event (during which time the holders of the Series D Preferred
stock shall be entitled to convert their Series D Preferred Stock into shares of
Common Stock to the extent permitted hereby) and (b) the resulting successor or
acquiring entity (if not the Corporation) assumes by written instrument the
obligation of the Corporation under the Certificate of Incorporation of the
Corporation, including the obligation of this subsection (ii).
(iii) The Corporation 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
Corporation, but will at all time 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 Series D Preferred Stock against impairment.
(iv) Upon the occurrence of each adjustment or readjustment of
the conversion rate pursuant to subparagraphs (i) and (ii) above, the
Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series D Preferred Stock a certificate signed by the Chief Financial
Officer of the Corporation 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 his shares.
H. PRICE PROTECTION.
----------------
(i) Except as provided below, in case the Corporation shall at
any time after the date hereof issue or sell any shares of Common Stock or
securities which are convertible into Common Stock, including shares held in the
Corporation's treasury and including options or warrants for the purchase of
Common Stock, for a consideration per share less than the Conversion Price
immediately prior to such issuance or without consideration, then forthwith upon
such issuance or sale, the Conversion Price shall (until another such issuance
or sale) be reduced by the amount by which the additional shares were issued
below the Conversion Price that was in effect immediately prior to such
issuance. The foregoing adjustment of the Conversion Price shall not,
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however, apply to Excluded Stock, as defined below. This ratchet antidilution
protection shall exist for a period equal to the shorter of two years from the
first date in which shares of Series D Preferred Stock were issued by the
Corporation, or completion of a secondary offering of equity by the Corporation
of at least $15,000,000 at a price of at least $1.50 per share.
(ii) Excluded Stock shall mean (a) shares of Common Stock issued
or reserved for issuance by the Corporation as a stock dividend payable in
shares of Common Stock on shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock or Series D Preferred Stock, (b) shares of
Common Stock issued upon conversion of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock,
(c) shares of Common Stock authorized as of the date hereof under the
Corporation's 1997 Incentive Plan, whether or not such options were actually
granted as of the date hereof, (d) shares of Common Stock issued pursuant to
options or warrants outstanding as of the date hereof, and (e) shares of Common
Stock issued in connection with bona fide acquisitions, mergers or joint
ventures.
(iii) In the case of the issuance of Common Stock for cash, the
consideration shall be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by the Corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.
(iv) In the case of the issuance of the Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair value thereof as determined by the Board of
Directors irrespective of any accounting treatment.
(v) In the case of the issuance of options to purchase or
rights to subscribe for Common Stock, securities by their terms convertible into
or exchangeable for Common Stock or options to purchase or rights to subscribe
for such convertible or exchangeable securities, the following provisions shall
apply for all purposes of this Section H:
(a) The aggregate maximum number of shares of Common Stock
deliverable upon exercise (to the extent then exercisable) of such options
to purchase or rights to subscribe for Common Stock shall be deemed to have
been issued at the time such options or rights were issued and for a
consideration equal to the consideration, if any, received by the
Corporation upon the issuance of such options or rights plus the minimum
exercise price provided in such options or rights for the Common Stock
covered thereby.
(b) The aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange (to the extent then
convertible or exchangeable) for any such convertible or exchangeable
securities or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed to have been issued at the
time such securities were issued or such options or rights were issued and
for a consideration equal to the consideration, if any, received by the
Corporation for any such securities and related options or rights
(excluding any cash received on account of accrued interest or accrued
dividends), plus the minimum additional consideration, if any, to be
received by the Corporation upon the conversion or exchange of such
securities or the exercise of any related options or rights.
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<PAGE>
(c) In the event of any change in the number of shares of
Common Stock deliverable or in the consideration payable to the Corporation
upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities, including, but
not limited to, a change resulting from the antidilution provisions
thereof, the Conversion Price, to the extent in any way affected by or
computed using such options, rights or securities, shall be recomputed to
reflect such change, but no further adjustment shall be made for the actual
issuance of Common Stock or any payment of such consideration upon the
exercise of any such options or rights or the conversion or exchange of
such securities.
(d) Upon the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the expiration of
any options or rights related to such convertible or exchangeable
securities, the Conversion Price, to the extent in any way affected by or
computed using such options, rights or securities or options or rights
related to such securities, shall be recomputed to reflect the issuance of
only the number of shares of Common Stock (and convertible or exchangeable
securities which remain in effect) actually issued upon the exercise of
such options or rights, upon the conversion or exchange of such securities
or upon the exercise of the options or rights related to such securities.
I. VOTING RIGHTS. Except as otherwise required by the DGCL or as
-------------
provided in Section J below, the holders of Series D Preferred Stock shall have
no voting rights, and no consent of any holder shall be required for the taking
of any corporate action.
J. PROTECTIVE PROVISION. So long as shares of Series D Preferred
--------------------
Stock are outstanding, the Corporation shall not, without the affirmative vote
or written consent of the holders of sixty-six and two-thirds percent (66-2/3%)
of the outstanding shares of the Series D Preferred Stock voting separately as a
class:
(i) amend, alter or repeal any provision of the Certificate of
Incorporation (including this Certificate of Designation) of the Corporation so
as to adversely affect the relative rights, preferences, qualifications,
limitations or restrictions of the Series D Preferred Stock or any senior
securities so as to affect adversely the Series D Preferred Stock;
(ii) authorize or issue, or increase the authorized amount of
any then existing or additional class or series of stock or any security
convertible into stock of such class or series, ranking as to dividends or as to
distributions in the event of a liquidation, dissolution or winding up of the
Corporation, on parity with or senior to the Series D Preferred Stock;
(iii) do any act or thing not authorized or contemplated by this
Certificate of Designation, which would result in taxation of the holders of
shares of the Series D Preferred Stock under section 305 of the Internal Revenue
Code of 1986, as amended (or any comparable provision of the Internal Revenue
Code as hereafter from time to time amended);
(iv) engage in any business other than the business engaged in
by the Corporation at the time of original issuance of the Series D Preferred
Stock;
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(v) increase or decrease the authorized number of directors
constituting the Board of Directors of the Corporation;
(vi) repurchase or redeem any securities;
(vii) amend the Bylaws of the Corporation; or
(viii) consolidate or merge with or into, or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more transactions unless (a) the successor
company is a U.S. corporation; (b) the Series D Preferred Stock shall be
converted into or exchanged for and shall become shares of the successor company
having substantially the same powers, preferences and relative rights and
qualifications that the Series D Preferred Stock had immediately prior to such
transaction; and (c) the Corporation shall deliver to the transfer agent for the
Corporation, prior to the consummation of the proposed transaction, an officer's
certificate and opinion of counsel to the effect that such sale or transfer
complies with the terms and conditions of this clause (iv); provided, however,
the provisions of this clause (iv) shall not be effective in the event that all
the Series D Preferred Stock shall have been purchased at an amount equal to at
least One Hundred Twenty Five Percent (125%) of the liquidation preference set
forth in Section D above.
K. CHANGE OF CONTROL. Upon a Change of Control (as defined below) in
-----------------
which all of the Series D Preferred Stock is not purchased for an amount equal
to at least One Hundred Twenty Five Percent (125%) of the liquidation preference
set forth in Section D above, the Corporation shall offer to redeem the
outstanding shares of Series D Preferred Stock at the same price per share that
the holders would have received had they been redeemed pursuant to Section E
above. The Corporation agrees that it will provide not less than ten (10) days
prior notice to the holders of Series D Preferred Stock, and any stockholders
accepting such offer and tendering the certificate(s) representing their shares
of Series D Preferred Stock prior to the date set forth in such notice shall
have their shares redeemed in the manner described in Section E at or before the
effective date of the Change of Control. For purposes hereof "Change in
Control" shall mean:
(i) the stockholders of the Corporation approve a merger, plan
of reorganization, consolidation or share exchange with any other corporation
and immediately following such merger, plan of reorganization, consolidation or
share exchange, the holders of the voting securities of the Corporation
outstanding immediately prior thereto hold securities representing fifty percent
(50%) or less of the combined voting power of the voting securities of the
Corporation or such surviving entity outstanding immediately after such merger,
plan of reorganization, consolidation or share exchange; provided, however, that
notwithstanding the foregoing, a Change of Control shall not be deemed to have
occurred if one-half (1/2) or more of the members of the Board of the
Corporation or such surviving entity immediately after such merger, plan of
reorganization, consolidation or share exchange is comprised of persons who
served as directors of the Corporation immediately prior to such merger, plan of
reorganization, consolidation or share exchange; or
(ii) the Corporation becomes a party to a merger, plan of
reorganization, consolidation or share exchange in which either (i) the
Corporation will not be the surviving
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<PAGE>
corporation or (ii) the Corporation will be the surviving corporation and any
outstanding shares of the Corporation's Common Stock will be converted into
shares of any other company (other than a reincorporation or the establishment
of a holding company involving no change of ownership of the Corporation) or
other securities, cash or other property (excluding payments made solely for
fractional shares).
L. MISCELLANEOUS.
-------------
(i) So long as any shares of Series D Preferred Stock are
outstanding, the Corporation will not purchase, redeem or otherwise acquire or
retire for value any Junior Stock (each, a "Junior Payment")"; provided,
however, that the Corporation may make Junior Payments if in any given quarter
holders of the Series D Preferred Stock shall have received payment for all
dividends due and payable in such quarter.
(ii) Except as specifically set forth herein, all notices or
communications provided for or permitted hereunder shall be made in writing by
hand delivery, express overnight courier, registered first class mail, or
telecopier addressed (1) if to the Corporation, to its office at 4615 Post Oak
Place, Suite 111, Houston, Texas 77027, Attention: Timothy J. Connolly, Chairman
and CEO, Telecopier: (713) 621-5870, and (2) if to the holder of the Series D
Preferred Stock, to such holder at the address of such holder as listed in the
stock record books of the Corporation or to such other address as the
Corporation or such holder, as the case may be, shall have designated by notice
similarly given. All such notices and communications shall be deemed to have
been duly given: when delivered by hand, if personally delivered; five (5)
business days after being deposited in the mail, registered or certified mail,
return receipt requested, postage prepaid, if mailed; when received after being
deposited in the regular mail; the next business day after being deposited with
an overnight courier, if deposited with a nationally recognized, overnight
courier service; when receipt is acknowledged, if by telecopier, so long as
followed up on the same day by overnight courier.
(iii) The Corporation shall pay any and all stock transfer and
documentary stamp taxes that may be payable in respect of any issuance or
delivery of shares of Series D Preferred Stock or shares of Common Stock or
other securities issued on account of Series D Preferred Stock pursuant hereto
or certificates representing such shares or securities. The Corporation shall
not, however, be required to pay any such tax which may be payable in respect of
any transfer involved in the issuance or delivery of shares of Series D
Preferred Stock or Common Stock or other securities in a name other than that in
which the shares of Series D Preferred Stock with respect to which such shares
or other securities are issued or delivered were registered, or in respect of
any payment to any person with respect to any such shares or securities other
than a payment to the registered holder thereof, and shall not be required to
make any such issuance, delivery or payment described in this sentence unless
and until the person otherwise entitled to such issuance, delivery or payment
has paid to the Corporation the amount of any such tax or has established, to
the satisfaction of the Corporation, that such tax has been paid or is not
payable.
(iv) In the event that the holder of shares of Series D
Preferred Stock shall not by written notice designate the address to which the
certificate or certificates representing shares of Common Stock to be issued
upon conversion of such shares should be sent, the Corporation shall
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<PAGE>
be entitled to send the certificate or certificates representing such shares to
the address of such holder shown on the records of the Corporation or any
transfer agent for the Series D Preferred Stock.
(v) The Corporation may appoint, and from time to time
discharge and change, a transfer agent of the Series D Preferred Stock. Upon any
such appointment or discharge of a transfer agent, the Corporation shall send
notice thereof by first-class mail, postage prepaid, to each holder of record of
Series D Preferred Stock.
(vi) The Corporation shall appoint, and from time to time may
replace, a conversion agent for the Series D Preferred Stock. Upon any such
replacement of the conversion agent, the Corporation shall send notice thereof
by first-class mail, postage prepaid, to each holder of record of Series D
Preferred Stock.
(vii) Any Series D Preferred Stock redeemed, purchased,
converted or otherwise acquired by the Corporation in any manner whatsoever
shall not be reissued as part of such Series D Preferred Stock and shall be
retired promptly after the acquisition thereof. No shares of Series D Preferred
Stock shall be issued by the Corporation other than shares that are issued
pursuant to that certain Applied Voice Recognition, Inc. Series D Preferred
Stock and Warrant Purchase Agreement between the Corporation and the investor
described therein dated December 31, 1998 (the "Purchase Agreement"), as such
Purchase Agreement shall be amended from time to time. Any shares of Series D
Preferred Stock that are not issued upon the completion of all sales pursuant to
the Purchase Agreement (including any amendments thereto), as well as any Series
D Preferred Stock redeemed, purchased, converted or otherwise acquired by the
Corporation, shall return to the status of undesignated shares of preferred
stock of the Corporation.
(viii) The Series D Preferred Stock shall be transferable by the
holders, provided that such transfer is made in compliance with the Purchase
Agreement and applicable federal and state securities laws.
(ix) Nothing contained herein shall be construed to prevent the
Board of Directors of the Corporation from issuing one or more series of
preferred stock with dividend and/or liquidation preferences junior to the
Series D Preferred Stock.
IN WITNESS WHEREOF, Applied Voice Recognition, Inc. has caused this
certificate to be signed by Timothy J. Connolly, its Chairman and Chief
Executive Officer, as of the 30/th/ day of December, 1998.
APPLIED VOICE RECOGNITION, INC.
By: /s/ Timothy J. Connolly
--------------------------------------
Timothy J. Connolly, Chairman and
Chief Executive Officer
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EXHIBIT 4.9
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of the 31st day of December, 1998 by and between APPLIED VOICE
RECOGNITION, INC., a Delaware corporation (the "Company"), and L & H INVESTMENT
COMPANY N.V., a Belgian company (the "Shareholder").
R E C I T A L S:
---------------
WHEREAS, the Shareholder is acquiring up to Five Thousand (5,000) shares of
the Company's Series D Preferred Stock, par value $0.10 per share (such number
of shares as are actually issued to the Shareholder being referred to as the
"Series D Preferred Stock") pursuant to that certain Applied Voice Recognition,
Inc. Series D Preferred Stock and Warrant Purchase Agreement dated of even date
herewith (the "Purchase Agreement");
WHEREAS, the Series D Preferred Stock is convertible into shares of the
Company's common stock, $0.001 par value per share (the "Common Stock");
WHEREAS, pursuant to the terms of the Purchase Agreement, the Company has
issued in favor of the Shareholder a warrant to purchase 1,500,000 share shares
of Common Stock of the Company, and may issue additional warrants to the
Shareholder pursuant to the terms of the Purchase Agreement (such warrants as
are actually issued pursuant to the Purchase Agreement being referred to as the
"Warrants"); and
WHEREAS, the Company desires to grant to the Shareholder certain
registration rights relating to the shares of Common Stock issuable upon
conversion of any of the Series D Preferred Stock and upon exercise of any one
or more of the Warrants (the "Shares"), and the Shareholder desires to obtain
such registration rights, subject to the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual premises, representations,
warranties and conditions set forth in this Agreement, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. Definitions and References. For purposes of this Agreement, in addition
--------------------------
to the definitions set forth above and elsewhere herein, the following terms
shall have the following meanings:
(a) The term "Commission" shall mean the Securities and Exchange
Commission and any successor agency.
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(b) The terms "register", "registered" and "registration" shall refer
to a registration effected by preparing and filing a registration statement
or similar document in compliance with the 1933 Act (as herein defined) and
the declaration or ordering of effectiveness of such registration statement
or document.
(c) For purposes of this Agreement, the term "Registrable Stock" shall
mean (i) any Shares, (ii) any shares of Common Stock issued to the Holder,
relating to the Shares, by way of a stock split, reorganization, merger or
consolidation; and (iii) any Common Stock issued to the Holder, relating to
the Shares, as a dividend on the Shares. For purposes of this Agreement,
any Registrable Stock shall cease to be Registrable Stock when (u) five
years have passed since an underwritten public offering has been completed
by the Company, (v) a registration statement covering such Registrable
Stock has been declared effective and such Registrable Stock has been
disposed of pursuant to such effective registration statement, (w) such
Registrable Stock is sold pursuant to Rule 144 (or any similar provision
then in force) under the 1933 Act, (x) such Registrable Stock is eligible
to be sold pursuant to Rule 144(k) under the 1933 Act, (y) such Registrable
Stock has been otherwise transferred, no stop transfer order affecting such
stock is in effect and the Company has delivered new certificates or other
evidences of ownership for such Registrable Stock not bearing any legend
indicating that such shares have not been registered under the 1933 Act, or
(z) such Registrable Stock is sold by a person in a transaction in which
the rights under the provisions of this Agreement are not assigned. Nothing
contained in this Agreement shall be construed as requiring the Holder(s)
to exercise their Warrants prior to the initial filing of any registration
statement or the effectiveness thereof.
(d) The term "Holder" shall mean the Holder or any transferee or
assignee thereof to whom the rights under this Agreement are assigned in
accordance with Section 10 hereof, provided that the Holder or such
--------
transferee or assignee shall then own the Registrable Stock.
(e) The term "1933 Act" shall mean the Securities Act of 1933, as
amended.
(f) An "affiliate of such holder" shall mean a person who controls, is
controlled by or is under common control with a Holder, or the spouse or
children (or a trust exclusively for the benefit of the spouse and/or
children) of a Holder, or, in the case of a Holder that is a partnership,
its partners.
(g) The term "Person" shall mean an individual, corporation,
partnership, trust, limited liability company, unincorporated organization
or association or other entity, including any governmental entity.
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<PAGE>
(h) The term "Requesting Holder" shall mean a Holder or Holders of in
the aggregate at least seventy-five percent (75%) of the Registrable Stock.
(i) References in this Agreement to any rules, regulations or forms
promulgated by the Commission shall include rules, regulations and forms
succeeding to the functions thereof, whether or not bearing the same
designation.
2. Demand Registration.
--------------------
(a) Commencing three years following the date hereof, any Requesting
Holders may make a written request to the Company (specifying that it is
being made pursuant to this Section 2) that the Company file a registration
statement under the 1933 Act (or a similar document pursuant to any other
statute then in effect corresponding to the 1933 Act) covering the
registration of Registrable Stock. In such event, the Company shall (x)
within five (5) days thereafter notify in writing all other Holders of
Registrable Stock of such request, and (y) use its reasonable efforts to
cause to be registered under the 1933 Act all Registrable Stock that the
Requesting Holders and such other Holders have, within fifteen (15) days
after the Company has given such notice, requested be registered.
Notwithstanding the foregoing, the Company shall not be obligated to file
the above described registration statement if the aggregate proceeds from
the registration would reasonably be expected to be less than $500,000.
(b) If the Requesting Holders intend to distribute the Registrable
Stock covered by their request by means of an underwritten offering, they
shall so advise the Company as a part of their request pursuant to Section
2(a) above, and the Company shall include such information in the written
notice referred to in clause (x) of Section 2(a) above. In such event, the
Holder's right to include its Registrable Stock in such registration shall
be conditioned upon such Holder's participation in such underwritten
offering and the inclusion of such Holder's Registrable Stock in the
underwritten offering to the extent provided in this Section 2. All
holders proposing to distribute Registrable Stock through such underwritten
offering shall enter into an underwriting agreement in customary form with
the underwriter or underwriters. Such underwriter or underwriters shall be
selected by a majority in interest of the Requesting Holders and shall be
approved by the Company, which approval shall not be unreasonably withheld;
provided, that all of the representations and warranties by, and the other
--------
agreements on the part of, the Company to and for the benefit of such
underwriters shall also be made to and for the benefit of such Holders and
that any or all of the conditions precedent to the obligations of such
underwriters under such underwriting agreement shall be conditions
precedent to the obligations of such Holders; and provided further, that no
----------------
holder shall be required to make any representations or warranties to or
agreements with the Company or the underwriters other than representations,
warranties or agreements regarding such Holder, the Registrable Stock of
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<PAGE>
such Holder and such Holder's intended method of distribution and any other
representation required by law or reasonably required by the underwriter.
(c) Notwithstanding any other provision of this Section 2 to the
contrary, if the managing underwriter of an underwritten offering of the
Registrable Stock requested to be registered pursuant to this Section 2
advises the Requesting Holders in writing that in its opinion marketing
factors require a limitation of the number of shares to be underwritten,
the Requesting Holders shall so advise all Holders of Registrable Stock
that would otherwise be underwritten pursuant hereto, and the number of
shares of Registrable Stock that may be included in such underwritten
offering shall be allocated among all such Holders, including the
Requesting Holders, in proportion (as nearly as practicable) to the amount
of Registrable Stock requested to be included in such registration by each
Holder at the time of filing the registration statement; provided, that in
--------
the event of such limitation of the number of shares of Registrable Stock
to be underwritten, such registration shall not count against the number of
demand registrations the Requesting Holders are permitted to request
hereunder. If any Holder of Registrable Stock disapproves of the terms of
the underwriting, such Holder may elect to withdraw by written notice to
the Company, the managing underwriter and the Requesting Holders. The
securities so withdrawn shall also be withdrawn from registration.
(d) Notwithstanding any provision of this Agreement to the contrary,
the Company shall not be required to effect a registration pursuant to this
Section 2 during the period starting with the fourteenth (14th) day
immediately preceding the date of an anticipated filing by the Company of,
and ending on a date ninety (90) days following the effective date of, a
registration statement pertaining to an underwritten public offering of
securities for the account of the Company; provided, that the Company shall
--------
actively employ in good faith all reasonable efforts to cause such
registration statement to become effective; and provided further, that the
----------------
Company's estimate of the date of filing such registration statement shall
be made in good faith.
(e) The Company shall use Form S-3 for registrations pursuant hereto
if such form is available to the Company. If federal law precludes the use
of Form S-3, the Company shall use whatever form is necessary; however, the
Company shall not be obligated to use such non Form S-3 forms more than a
total of three times, unless increased pursuant to Section 2(c) hereof;
provided, that a registration requested pursuant to this Section 2 shall
--------
not be deemed to have been effected for purposes of this Section 2(e),
unless (i) it has been declared effective by the Commission, (ii) if it is
a shelf registration, it has remained effective for the period set forth in
Section 3(b), (iii) the offering of Registrable Stock pursuant to such
registration is not subject to any stop order, injunction or other order or
requirement of the Commission (other than any such action prompted by any
act or omission of the Holders), and (iv) no limitation of the number of
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<PAGE>
shares of Registrable Stock to be underwritten has been required pursuant
to Section 2(c) hereof.
3. Obligations of the Company. Whenever required under Section 2 to use
--------------------------
its reasonable efforts to effect the registration of any Registrable Stock, the
Company shall, as expeditiously as possible:
(a) prepare and file with the Commission, not later than ninety (90)
days after receipt of a request to file a registration statement with
respect to such Registrable Stock, a registration statement on Form S-3 if
available or, if not, any form for which the Company then qualifies or
which counsel for the Company shall deem appropriate and which form shall
be available for the sale of such issue of Registrable Stock in accordance
with the intended method of distribution thereof, and use its reasonable
efforts to cause such registration statement to become effective as
promptly as practicable thereafter; provided that before filing a
--------
registration statement or prospectus or any amendments or supplements
thereto, the Company will (i) furnish to one (1) counsel selected by the
Requesting Holders copies of all such documents proposed to be filed, and
(ii) notify each such Holder of any stop order issued or threatened by the
Commission and take all reasonable actions required to prevent the entry of
such stop order or to remove it if entered;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for such period of time as would satisfy the holding
period requirements of Rule 144(k) promulgated by the Commission with
respect to the Shares or such shorter period which will terminate when all
Registrable Stock covered by such registration statement has been sold (but
not before the expiration of the forty (40) or ninety (90) day period
referred to in Section 4(3) of the 1933 Act and Rule 174 thereunder, if
applicable), and comply with the provisions of the 1933 Act with respect to
the disposition of all securities covered by such registration statement
during such period in accordance with the intended methods of disposition
by the sellers thereof set forth in such registration statement;
(c) furnish to each Holder and any underwriter of Registrable Stock to
be included in a registration statement copies of such registration
statement as filed and each amendment and supplement thereto (in each case
including all exhibits thereto), the prospectus included in such
registration statement (including each preliminary prospectus) and such
other documents as such Holder may reasonably request in order to
facilitate the disposition of the Registrable Stock owned by such Holder;
(d) use its reasonable efforts to register or qualify such Registrable
Stock under such other securities or blue sky laws of such jurisdictions as
any selling Holder or any
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<PAGE>
underwriter of Registrable Stock reasonably requests, and do any and all
other acts which may be reasonably necessary or advisable to enable such
Holder to consummate the disposition in such jurisdictions of the
Registrable Stock owned by such Holder; provided that the Company will not
--------
be required to (i) qualify generally to do business in any jurisdiction
where it would not otherwise be required to qualify but for this Section
3(d) hereof, (ii) subject itself to taxation in any such jurisdiction, or
(iii) consent to general service of process in any such jurisdiction;
(e) use its reasonable efforts to cause the Registrable Stock covered
by such registration statement to be registered with or approved by such
other governmental agencies or other authorities as may be necessary by
virtue of the business and operations of the Company to enable the selling
Holders thereof to consummate the disposition of such Registrable Stock;
(f) notify each selling Holder of such Registrable Stock and any
underwriter thereof, at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act (even if such time is after the
period referred to in Section 3(b)), of the happening of any event as a
result of which the prospectus included in such registration statement
contains an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the
statements therein in light of the circumstances being made not misleading,
and prepare a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such Registrable Stock, such
prospectus will not contain an untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein in light of the circumstances being made not
misleading;
(g) make available for inspection by any selling Holder, any
underwriter participating in any disposition pursuant to such registration
statement, and any attorney, accountant or other agent retained by any such
seller or underwriter (collectively, the "Inspectors"), all financial and
other records, pertinent corporate documents and properties of the Company
(collectively, the "Records"), and cause the Company's officers, directors
and employees to supply all information reasonably requested by any such
Inspector, as shall be reasonably necessary to enable them to exercise
their due diligence responsibility, in connection with such registration
statement. Records or other information which the Company determines, in
good faith, to be confidential and which it notifies the Inspectors are
confidential shall not be disclosed by the Inspectors unless (i) the
disclosure of such Records or other information is necessary to avoid or
correct a misstatement or omission in the registration statement, or (ii)
the release of such Records or other information is ordered pursuant to a
subpoena or other order from a court of competent jurisdiction. Each
selling Holder shall, upon learning that disclosure of such Records or
other information is sought in a court of competent jurisdiction, give
notice to the Company and allow the
-6-
<PAGE>
Company, at the Company's expense, to undertake appropriate action to
prevent disclosure of the Records or other information deemed confidential;
(h) furnish, at the request of any Requesting Holder, on the date
that such shares of Registrable Stock are delivered to the underwriters for
sale pursuant to such registration or, if such Registrable Stock is not
being sold through underwriters, on the date that the registration
statement with respect to such shares of Registrable Stock becomes
effective, (1) a signed opinion, dated such date, of the legal counsel
representing the Company for the purposes of such registration, addressed
to the underwriters, if any, and if such Registrable Stock is not being
sold through underwriters, then to the Requesting holders as to such
matters as such underwriters or the Requesting holders, as the case may be,
may reasonably request and as would be customary in such a transaction; and
(2) a letter dated such date, from the independent certified public
accountants of the Company, addressed to the underwriters, if any, and if
such Registrable Stock is not being sold through underwriters, then to the
Requesting Holders and, if such accountants refuse to deliver such letter
to such Holder, then to the Company (i) stating that they are independent
certified public accountants within the meaning of the 1933 Act and that,
in the opinion of such accountants, the financial statements and other
financial data of the Company included in the registration statement or the
prospectus, or any amendment or supplement thereto, comply as to form in
all material respects with the applicable accounting requirements of the
1933 Act, and (ii) covering such other financial matters (including
information as to the period ending not more than five (5) business days
prior to the date of such letter) with respect to the registration in
respect of which such letter is being given as the Requesting Holders may
reasonably request and as would be customary in such a transaction; and
(i) enter into customary agreements (including if the method of
distribution is by means of an underwriting, an underwriting agreement in
customary form) and take such other actions as are reasonably required in
order to expedite or facilitate the disposition of the Registrable Stock to
be so included in the registration statement.
The Company may require each selling Holder of Registrable Stock as to
which any registration is being effected to furnish to the Company such
information regarding the distribution of such Registrable Stock as the Company
may from time to time reasonably request in writing.
Each Holder agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 3(f) hereof, such Holder
will forthwith discontinue disposition of Registrable Stock pursuant to the
registration statement covering such Registrable Stock until such Holder's
receipt of the copies of the supplemented or amended prospectus contemplated by
Section 3(f) hereof, and, if so directed by the Company, such Holder will
deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in such Holder's possession, of the prospectus
covering such Registrable Stock current at the time
-7-
<PAGE>
of receipt of such notice. In the event the Company shall give any such notice,
the Company shall extend the period during which such registration statement
shall be maintained effective pursuant to this Agreement (including the period
referred to in Section 3(b)) by the number of days during the period from and
including the date of the giving of such notice pursuant to Section 3(f) hereof
to and including the date when each selling Holder of Registrable Stock covered
by such registration statement shall have received the copies of the
supplemented or amended prospectus contemplated by Section 3(f) hereof.
4. Incidental Registration. Commencing three years after the date hereof,
-----------------------
if the Company determines that it shall file a registration statement under the
1933 Act (other than a registration statement on a Form S-4 or S-8 or filed in
connection with an exchange offer or an offering of securities solely to the
Company's existing stockholders) on any form that would also permit the
registration of the Registrable Stock and such filing is to be on its behalf
and/or on behalf of selling holders of its securities for the general
registration of its common stock to be sold for cash, at each such time the
Company shall promptly give each Holder written notice of such determination
setting forth the date on which the Company proposes to file such registration
statement, which date shall be no earlier than thirty (30) days from the date of
such notice, and advising each Holder of its right to have Registrable Stock
included in such registration. Upon the written request of any Holder received
by the Company no later than twenty (20) days after the date of the Company's
notice, the Company shall include the shares in such registration statement and
use its reasonable efforts to cause to be registered under the 1933 Act all of
the Registrable Stock that each such Holder has so requested to be registered.
If, in the written opinion of the managing underwriter or underwriters (or, in
the case of a non-underwritten offering, in the written opinion of the placement
agent, or if there is none, the Company), the total amount of such securities to
be so registered, including such Registrable Stock, will exceed the maximum
amount of the Company's securities which can be marketed (i) at a price
reasonably related to the then current market value of such securities, or (ii)
without otherwise materially and adversely affecting the entire offering, then
the amount of Registrable Stock to be offered for the accounts of Holders shall
be reduced pro rata to the extent necessary to reduce the total amount of
securities to be included in such offering to the recommended amount; provided,
--------
that if securities are being offered for the account of other Persons as well as
the Company, such reduction shall not represent a greater fraction of the number
of securities intended to be offered by Holders than the fraction of similar
reductions imposed on such other Persons other than the Company over the amount
of securities they intended to offer; and provided, further, that the
-----------------
Registrable Stock to be offered for the account of Holders and for the account
of other Persons in any secondary offering shall not be reduced without the
consent of the Holders to less than thirty percent of the aggregate offering.
5. Holdback Agreement - Restrictions on Public Sale by Holder. To the
----------------------------------------------------------
extent not inconsistent with applicable law, each Holder agrees not to effect
any public sale or distribution of the issue being registered or a similar
security of the Company, or any securities convertible into or exchangeable or
exercisable for such securities, including a sale pursuant to Rule 144 under the
1933 Act, during the fourteen (14) days prior to, and during the thirty (30) day
period
-8-
<PAGE>
beginning on, the effective date of any registration statement filed by the
Company in connection with an underwritten public offering in which the Holder
is not participating, if and to the extent requested by the managing underwriter
or underwriters.
6. Expenses of Registration. The Company shall bear all expenses incurred
------------------------
in connection with each registration pursuant to Sections 2 and 4 of this
Agreement, excluding underwriters' discounts and commissions, but including,
without limitation, all registration, filing and qualification fees, word
processing, duplicating, printers' and accounting fees (including the expenses
of any special audits or "cold comfort" letters required by or incident to such
performance and compliance), exchange listing fees or National Association of
Securities Dealers fees, messenger and delivery expenses, all fees and expenses
of complying with securities or blue sky laws, fees and disbursements of counsel
for the Company. The selling Holders shall bear and pay the underwriting
commissions and discounts applicable to the Registrable Stock offered for their
account in connection with any registrations, filings and qualifications made
pursuant to this Agreement and fees of their counsel.
7. Indemnification and Contribution.
--------------------------------
(a) Indemnification by the Company. The Company agrees to indemnify, to
------------------------------
the full extent permitted by law, each Holder, its officers, directors and
agents and each Person who controls such Holder (within the meaning of the
1933 Act) against all losses, claims, damages, liabilities and expenses
caused by any untrue or alleged untrue statement of material fact contained
in any registration statement, prospectus or preliminary prospectus or any
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statement therein (in case of a
prospectus or preliminary prospectus, in the light of the circumstances
under which they were made) not misleading. The Company will also indemnify
any underwriters of the Registrable Stock, their officers and directors and
each Person who controls such underwriters (within the meaning of the 1933
Act) to the same extent as provided above with respect to the
indemnification of the selling Holders.
(b) Indemnification by Holders. In connection with any registration
--------------------------
statement in which a Holder is participating, each such Holder will furnish
to the Company in writing such information with respect to such Holder as
the Company reasonably requests for use in connection with any such
registration statement or prospectus and agrees to indemnify, to the extent
permitted by law, the Company, its directors and officers and each Person
who controls the Company (within the meaning of the 1933 Act) against any
losses, claims, damages, liabilities and expenses resulting from any untrue
or alleged untrue statement of material fact or any omission or alleged
omission of a material fact required to be stated in the registration
statement, prospectus or preliminary prospectus or any amendment thereof or
supplement thereto or necessary to make the statements therein (in the case
of a prospectus or preliminary prospectus, in the light of the
circumstances under
-9-
<PAGE>
which they were made) not misleading, to the extent, but only to the
extent, that such untrue statement or omission is contained in any
information with respect to such Holder so furnished in writing by such
Holder.
(c) Conduct of Indemnification Proceedings. Any Person entitled to
--------------------------------------
indemnification hereunder agrees to give prompt written notice to the
indemnifying party after the receipt by such Person of any written notice
of the commencement of any action, suit, proceeding or investigation or
threat thereof made in writing for which such Person will claim
indemnification or contribution pursuant to this Agreement and, unless in
the reasonable judgment of such indemnified party, a conflict of interest
may exist between such indemnified party and the indemnifying party with
respect to such claim, permit the indemnifying party to assume the defense
of such claims with counsel reasonably satisfactory to such indemnified
party. Whether or not such defense is assumed by the indemnifying party,
the indemnifying party will not be subject to any liability for any
settlement made without its consent (but such consent will not be
unreasonably withheld). Failure by such Person to provide said notice to
the indemnifying party shall itself not create liability except to the
extent of any injury caused thereby. No indemnifying party will consent to
entry of any judgment or enter into any settlement which does not include
as an unconditional term thereof the giving by the claimant or plaintiff to
such indemnified party of a release from all liability in respect of such
claim or litigation. If the indemnifying party is not entitled to, or
elects not to, assume the defense of a claim, it will not be obligated to
pay the fees and expenses of more than one (1) counsel with respect to such
claim, unless in the reasonable judgment of any indemnified party a
conflict of interest may exist between such indemnified party and any other
such indemnified parties with respect to such claim, in which event the
indemnifying party shall be obligated to pay the fees and expenses of such
additional counsel or counsels.
(d) Contribution. If for any reason the indemnity provided for in this
------------
Section 7 is unavailable to, or is insufficient to hold harmless, an
indemnified party, then the indemnifying party shall contribute to the
amount paid or payable by the indemnified party as a result of such losses,
claims, damages, liabilities or expenses (i) in such proportion as is
appropriate to reflect the relative benefits received by the indemnifying
party on the one hand and the indemnified party on the other, or (ii) if
the allocation provided by clause (i) above is not permitted by applicable
law, or provides a lesser sum to the indemnified party than the amount
hereinafter calculated, in such proportion as is appropriate to reflect not
only the relative benefits received by the indemnifying party on the one
hand and the indemnified party on the other but also the relative fault of
the indemnifying party and the indemnified party as well as any other
relevant equitable considerations. The relative fault of such indemnifying
party and indemnified parties shall be determined by reference to, among
other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission
to state a material fact, has been made by, or relates to information
supplied by, such indemnifying party or
-10-
<PAGE>
indemnified parties; and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action. The amount
paid or payable by a party as a result of the losses, claims, damages,
liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Section 7(c), any legal or other
fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 7(d) were determined by pro rata
allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any Person who was not guilty of such fraudulent misrepresentation.
If indemnification is available under this Section 7, the indemnifying
parties shall indemnify each indemnified party to the full extent provided
in Sections 7(a) and 7(b) without regard to the relative fault of said
indemnifying party or indemnified party or any other equitable
consideration provided for in this Section 7.
8. Participation in Underwritten Registrations. No Holder may participate
-------------------------------------------
in any underwritten registration hereunder unless such Holder (a) agrees to sell
such Holder's securities on the basis provided in any underwriting arrangements
approved by the Holders entitled hereunder to approve such arrangements, and (b)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements.
9. Reports Under Securities Exchange Act of 1934. With a view to making
---------------------------------------------
available to the Holder the benefits of Rule 144 promulgated under the 1933 Act
and any other rule or regulation of the Commission that may at any time permit
the Holder to sell securities of the Company to the public without registration,
the Company agrees to: (a) make and keep public information available, as those
terms are understood and defined in Rule 144, at all times after the date
hereof; (b) file with the Commission in a timely manner all reports and other
documents required of the Company under the 1933 Act and the Securities Exchange
Act of 1934, as amended (the "1934 Act"); and (c) furnish to the Holder, so long
as the Holder owns any Registrable Securities, forthwith upon request (i) a
written statement by the Company that it has complied with the reporting
requirements of Rule 144, the 1933 Act and the 1934 Act (ii) a copy of the most
recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may be
reasonably requested in availing the Holder of any rule or regulation of the
Commission which permits the selling of any such securities without registration
or pursuant to such form.
-11-
<PAGE>
10. Transfer of Registration Rights. The registration rights of any
-------------------------------
Holder under this Agreement with respect to any Registrable Stock may only be
transferred to an affiliate of Holder or to a transferee of at least $500,000 in
Registrable Stock; provided that such transfer may otherwise be effected in
--------
accordance with applicable securities laws; provided further, that the
----------------
transferring Holder shall give the Company written notice at or prior to the
time of such transfer stating the name and address of the transferee and
identifying the securities with respect to which the rights under this Agreement
are being transferred; provided further, that such transferee shall agree in
----------------
writing, in form and substance satisfactory to the Company, to be bound as a
Holder by the provisions of this Agreement; provided further, that all
----------------
registration rights shall terminate upon the termination of registration rights
of any Holder under this Agreement as a result of any Registrable Stock being
eligible to be sold pursuant to Rule 144(k) under the 1933 Act,; provided
--------
further, that no transfer may be made while a registration statement with
- - -------
respect to the Shares is on file; and provided further, that such assignment
----------------
shall be effective only if immediately following such transfer the further
disposition of such securities by such transferee is restricted under the 1933
Act. Except as set forth in this Section 10, no transfer of Registrable Stock
shall cause such Registrable Stock to lose such status.
11. Mergers, Etc. The Company shall not, directly or indirectly, enter
------------
into any merger, consolidation or reorganization in which the Company shall not
be the surviving corporation unless the proposed surviving corporation shall,
prior to such merger, consolidation or reorganization, agree in writing to
assume the obligations of the Company under this Agreement, and for that purpose
references hereunder to "Registrable Stock" shall be deemed to be references to
the securities which the Holders would be entitled to receive in exchange for
Registrable Stock under any such merger, consolidation or reorganization;
provided, however, that the provisions of this Section 11 shall not apply in the
- - -------- -------
event of any merger, consolidation or reorganization in which the Company is not
the surviving corporation if each Holder is entitled to receive in exchange for
its Registrable Stock consideration consisting solely of (i) cash, (ii)
securities of the acquiring corporation which may be immediately sold to the
public without registration under the 1933 Act, or (iii) securities of the
acquiring corporation which the acquiring corporation has agreed to register
within ninety (90) days of completion of the transaction for resale to the
public pursuant to the 1933 Act.
12. Miscellaneous.
-------------
(a) No Inconsistent or Senior Agreements. The Company will not
------------------------------------
hereafter enter into any agreement with respect to its securities which is
inconsistent with the rights granted to the Holders in this Agreement. The
Company will not hereafter enter into any agreement with respect to its
securities which confers upon any party any registration rights that would
pre-empt the registration rights granted pursuant hereto
(b) Remedies. Each Holder, in addition to being entitled to exercise
--------
all rights granted by law, including recovery of damages, will be entitled
to specific performance
-12-
<PAGE>
of its rights under this Agreement. The Company agrees that monetary
damages would not be adequate compensation for any loss incurred by reason
of a breach by it of the provisions of this Agreement and hereby agrees to
waive (to the extent permitted by law) the defense in any action for
specific performance that a remedy of law would be adequate.
(c) Amendments and Waivers. The provisions of this Agreement may not
----------------------
be amended, modified or supplemented, and waivers or consents to departures
from the provisions hereof may not be given unless the Company has obtained
the written consent of the Holders of at least a majority of the
Registrable Stock then outstanding affected by such amendment,
modification, supplement, waiver or departure.
(d) Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective successors and assigns of the
parties hereto. Nothing in this Agreement, express or implied, is intended
to confer upon any Person other than the parties hereto or their respective
successors and assigns any rights, remedies, obligations, or liabilities
under or by reason of this Agreement, except as expressly provided in this
Agreement.
(e) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the internal laws of the State of Delaware applicable to
contracts made and to be performed wholly within that state, without regard
to the conflict of law rules thereof.
(f) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(g) Headings. The headings in this Agreement are used for convenience
--------
of reference only and are not to be considered in construing or
interpreting this Agreement.
(h) Notices. Any notice required or permitted under this Agreement
-------
shall be given in writing and shall be delivered in person or by telecopy
or by overnight courier guaranteeing no later than second business day
delivery, directed to (i) the Company at the address set forth below its
signature hereof or (ii) a Holder at the address of the Administrator set
forth below its signature hereof. Any party may change its address for
notice by giving ten (10) days advance written notice to the other parties.
Every notice or other communication hereunder shall be deemed to have been
duly given or served on the date on which personally delivered, or on the
date actually received, if sent by telecopy or overnight courier service,
with receipt acknowledged.
-13-
<PAGE>
(i) Severability. In the event that any one or more of the provisions
------------
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be in
any way impaired thereby, it being intended that all of the rights and
privileges of the Holders shall be enforceable to the fullest extent
permitted by law.
(j) Entire Agreement. This Agreement is intended by the parties as a
----------------
final expression of their agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the parties
hereto in respect of the subject matter contained herein. There are no
restrictions, promises, warranties or undertakings other than those set
forth or referred to herein. This Agreement supersedes all prior agreements
and understandings between the parties with respect to such subject matter.
(k) Enforceability. This Agreement shall remain in full force and
--------------
effect notwithstanding any breach or purported breach of, or relating to,
the Investor Agreement.
(l) Recitals. The recitals are hereby incorporated in the Agreement as
--------
if fully set forth herein.
(m) Attorneys Fees. If any action is necessary to enforce or interpret
--------------
the terms of this agreement, the prevailing party shall be entitled to
reasonable attorneys' fees and costs, in addition to any other relief to
which he is or may be entitled. This provision shall be construed as
applicable to the entire agreement.
(n) Arbitration. All disputes, claims, and/or requests for specific
-----------
contractual performance, or other equitable relief, or damages or any other
matters in question between the parties arising out of this Agreement shall
be submitted for arbitration, provided that the parties have first made a
good faith effort to resolve such matters together. Demand shall be made to
the American Arbitration Association ("AAA") and shall be conducted in New
York, New York by a panel of three (3) arbitrators. The Shareholder and the
Company shall each choose one (1) panel member from a panel of person
having experience with and knowledge of the purchase and sale of
securities. The third member shall be an independent party, chosen by the
first two members. At least one member of the panel must have a legal
background. Arbitration shall be in accordance with the commercial rules of
the AAA. The Award of the Arbitrators shall be final and judgement may be
entered upon it in any court having jurisdiction thereof, and the
prevailing party shall be entitled to costs and reasonable attorneys' fees
arising out of Arbitration.
-14-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written hereinabove.
APPLIED VOICE RECOGNITION, INC.
By: /s/ Timothy J. Connolly
-------------------------------------
Name: TIMOTHY J. CONNOLLY
Title: Chairman & C.E.O.
4615 Post Oak Place, Suite 111
Houston, Texas 77027
Telephone: (713) 621-5678
Telecopier: (713) 621-5870
L & H INVESTMENT COMPANY N.V.
By: /s/ Thomas Denys
-------------------------------------
C.V.B.A. Thomas Denys, Director
And By: /s/ Francis Vanderhooydonck
---------------------------------
C.V.B.A.Francis Vanderhooydonck,
Director
Sint-Krispijnstraat 7
8900 Ieper
Belgium
Telephone: 011-32-5-722-9540
Telecopier: 011-32-5-722-9545
[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]
-15-
<PAGE>
EXHIBIT 4.10
NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT") OR THE
SECURITIES LAWS OF ANY STATE; THEREFORE, THIS WARRANT AND THE SECURITIES
ISSUABLE UPON EXERCISE HEREOF MAY NOT BE SOLD OR TRANSFERRED EXCEPT UPON SUCH
REGISTRATION OR UPON DELIVERY TO THE CORPORATION OF AN OPINION OF COUNSEL
SATISFACTORY TO THE CORPORATION THAT REGISTRATION IS NOT REQUIRED FOR SUCH SALE
OR TRANSFER.
WARRANT TO PURCHASE COMMON STOCK
OF
APPLIED VOICE RECOGNITION, INC.
VOID AFTER DECEMBER 31, 2003
This certifies that L & H INVESTMENT COMPANY N.V., a Belgian company
("L&H"), is entitled to purchase ONE MILLION FIVE HUNDRED THOUSAND (1,500,000)
Shares of fully paid and nonassessable shares of Common Stock, $0.001 par value
(the "Common Stock"), of Applied Voice Recognition, Inc., a Delaware corporation
(the "Company"), at a price equal to $1.25 per share. Shares may be purchased at
any time, in whole or in part, until the expiration of this Warrant. This
Warrant is issued pursuant to that certain Applied Voice Recognition, Inc.
Series D Preferred Stock and Warrant Purchase Agreement dated of even date
herewith (the "Purchase Agreement"). This Warrant and the Common Stock issuable
upon exercise of this Warrant is subject to the terms of a Registration Rights
Agreement dated December 31, 1998 between L&H and the Company which agreement
provides certain piggyback and demand registration rights in favor of L&H.
The purchase price per share of Common Stock from time to time in
effect under this Warrant, and the number and character of shares covered
hereby, shall be subject to adjustments from time to time in certain instances
as follows, and the term "Exercise Price" shall mean the price per share
originally set forth in this Warrant or any price resulting from adjustments
pursuant to the terms hereof. The shares of Common Stock deliverable upon such
exercise, and as adjusted from time to time, are hereinafter sometimes referred
to as "Warrant Stock". The term "Holder" shall refer to L&H or any person
holding this Warrant in accordance with the terms hereof.
(a) Exercise of Warrant.
-------------------
(1) Subject to and in accordance with the provisions hereof, this
Warrant may be exercised in whole or in part after the date appearing above
the signature of the Company below (the "Effective Date"), but not later
than 5:00 p.m., Houston time, on December 31, 2003; or if such day is a day
on which United States government offices
-1-
<PAGE>
are closed, then on the next succeeding day which shall not be such a day,
by presentation and surrender hereof to the Company or at the office of its
stock transfer agent, if any, with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price for the number of
shares specified in such form, together with all applicable federal and
state taxes. If this Warrant should be exercised in part only, the Company
shall, upon surrender of this Warrant for cancellation, execute and deliver
a new Warrant evidencing the right of the Holder to purchase the balance of
the shares purchasable hereunder. Upon receipt by the Company of this
Warrant at the office or agency of the Company, in proper form for exercise
and pursuant to compliance herewith, together with payment of the Exercise
Price, the Holder shall be deemed to be the holder of record, for all
purposes, of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such shares of Common Stock shall
not then be actually delivered to the Holder. Upon receipt of the required
deliveries, the Company shall, as promptly as practicable, and in any event
within ten days thereafter, cause to be issued and delivered to the Holder
hereof or the transferee designated in the Purchase Form a certificate or
certificates representing the aggregate number of full shares of Common
Stock issuable upon such exercise registered in the name of the Holder
hereof, or the name of the transferee so designated, as the case may be.
(2) In addition to the method of payment set forth in paragraph (1)
above and in lieu of any cash payment required thereunder, the Holder shall
have the right at any time and from time to time to exercise this Warrant
in full or in part by surrendering this Warrant in the manner specified in
paragraph (1) above in exchange for the number of shares of Common Stock
equal to the product of (x) the number of shares to which this Warrant is
being exercised multiplied by (y) a fraction, the numerator of which is the
Market Price (as herein defined) of the Common Stock less the Exercise
Price (as herein defined) and the denominator of which is such Market
Price. Solely for the purposes of this paragraph (2), Market Price shall
be calculated either (i) on the date on which the Purchase Form attached
hereto is deemed to have been sent to the Company pursuant to paragraph (1)
hereof ("Notice Date") or (ii) as the average of the Market Price for each
of the fifteen trading days preceding the Notice Date, whichever of (i) or
(ii) is greater.
(b) No Impairment. The Company hereby agrees that (i) at all times there
-------------
shall be reserved for issuance and delivery upon exercise of this Warrant such
number of shares of its Common Stock as shall be required for issuance and
delivery upon exercise of this Warrant, and (ii) it will take all action as may
be necessary in order that all shares of stock as may be issued pursuant to this
Warrant shall, upon issuance, be duly and validly issued, fully paid, non-
assessable and free from all taxes, liens and charges with respect to the
issuance thereof.
(c) Fractional Shares. No fractional shares or scrip representing
-----------------
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon any exercise hereof, after
payment of the Exercise Price for such fractional share by the
-2-
<PAGE>
Holder, the Company shall round the number of shares issued upon the exercise of
this Warrant to the next highest full share.
(d) Assignment of Warrant or Warrant Stock or Loss of Warrant.
---------------------------------------------------------
(1) This Warrant may not be sold, transferred, assigned or hypothecated
at any time after its execution and delivery, except upon compliance with
the requirements of this Warrant and any applicable state or federal
securities laws. Shares of Common Stock issued pursuant to this Warrant
shall be subject to the same holding period as shares of Common Stock
issued upon conversion of the Series D Preferred Stock of the Company,
which holding period is described in the Purchase Agreement.
(2) Any sale, assignment, transfer or hypothecation of this Warrant
shall be made by surrender of this Warrant to the Company or at the office
of its stock transfer agent, if any, with the Assignment Form annexed
hereto duly executed and accompanied with funds sufficient to pay any
transfer tax; whereupon, the Company shall, after first receiving such
evidence as the Company may reasonably require as to compliance with this
Warrant, without charge, execute and deliver a new Warrant in the name of
the assignee named in such instrument of assignment and this Warrant shall
promptly be canceled.
(3) The term "Warrant" as used herein includes any Warrant issued in
substitution for or replacement of this Warrant. Upon receipt by the
Company of evidence of the loss, theft, destruction or mutilation of this
Warrant, and upon surrender and cancellation of this Warrant, if mutilated,
the Company will at its expense execute and deliver a new Warrant of like
tenor and date. When authorizing the execution and delivery of a new
Warrant to replace a Warrant lost, stolen or destroyed, the Board of
Directors of the Company may, in its sole discretion and as a condition
precedent thereto, require the Holder to deliver an affidavit in a form
satisfactory to the Board of Directors of the Company and to indemnify the
Company against any claim that may be made against the Company with respect
to such lost, stolen or destroyed Warrant.
(e) Anti-dilution and Adjustment Provisions. The purchase price per share
---------------------------------------
of Common Stock from time to time in effect under this Warrant, and the number
and character of shares covered hereby, shall be subject to adjustments from
time to time in certain instances as follows, and the term "Exercise Price"
shall mean the price per share originally set forth in this Warrant or any price
resulting from adjustments pursuant to the terms hereof.
(1) In case the Company shall subdivide its outstanding shares of
Common Stock into a greater number of shares or shall issue in exchange for
its outstanding shares of Common Stock a greater number of shares of Common
Stock, then in each such case from and after the record date for such
subdivision or exchange, the number of shares of Common Stock covered by
this Warrant shall be increased in proportion to such increase in the
number of outstanding shares of Common Stock and the Exercise Price then in
-3-
<PAGE>
effect shall be correspondingly decreased; and in the case the Company
shall reduce the number of shares of its Common Stock by a combination of
shares or shall issue in exchange for its outstanding shares of Common
Stock a lesser number of shares of Common Stock, then in each such case
from and after the record date for such combination or exchange, the number
of shares of Common Stock covered by this Warrant shall be decreased in
proportion to such reduction in the number of outstanding shares of Common
Stock, and the then prevailing Exercise Price shall be correspondingly
increased.
(2) In case the Company shall declare and pay a dividend upon its
Common Stock payable in Common Stock, then in each such case from and after
the record date for determining the stockholders entitled to receive such
dividend, the number of shares of Common Stock covered by this Warrant
shall be increased in proportion to the increase in the number of
outstanding shares of Common Stock through such stock dividend, and the
then prevailing Exercise Price shall be correspondingly decreased.
(3) In case of any reclassification or change of outstanding shares of
Common Stock (other than as a result of a subdivision, combination or stock
dividend) or in case of the consolidation or merger of the Company with or
into any other corporation (other than a merger in which the Company is the
continuing corporation and which does not result in any reclassification or
change in its outstanding shares of Common Stock), or in case of any sale
by the Company of all or substantially all of its assets to another
corporation, the Holder shall have the right thereafter to receive upon
exercise of this Warrant the amount and kind of shares of capital stock and
other securities and property entitled to be received upon such
reclassification, change, consolidation, merger or sale by a holder of the
number of shares of Common Stock of the Company covered by this Warrant at
the then prevailing Exercise Price, subject to subsequent adjustments as
provided herein.
(4) In the event that the average closing price of the Common Stock on
the Nasdaq Over the Counter Bulletin Board (the "OTCBB") during the second
quarter of 1999 is lower than $1.25, then the number of shares of Common
Stock covered by this Warrant shall be increased proportionally up to a
maximum of a 20% increase. If the Common Stock is no longer trading on the
OTCBB, then the average closing price of the Common Stock shall be based
upon such other trading forum or exchange, if any, on which the Common
Stock is trading, and if no established market exist for the Common Stock
during the second quarter of 1999, the number of shares of Common Stock
covered by this Warrant shall be increased by the maximum 20% increase.
The formula for computing the percentage increase in the number of shares
of Common Stock covered by this Warrant is [I = ($1.25 - P) * 0.8 * 100%],
where P is equal to the average closing price during the second quarter of
1999 (which is below $1.25) and I is equal to the percentage increase in
the number of shares subject to this Warrant; provided, however, I shall
not exceed 20% even if I, as calculated by the foregoing formula, exceeds
20%. Following the conclusion of the second quarter of 1999, the Company
shall make a
-4-
<PAGE>
determination as to whether this Warrant should be increased
as a result of this paragraph (4) and by what amount. Thereafter, on or
before July 31, 1999, the Company shall provide the Holder with written
notice as to the impact of this paragraph (4), which notice shall include
the actual closing price of the Common Stock during each trading day of the
second quarter of 1999, the average closing price during such quarter and a
statement as to the percentage increase and share increase in the Warrant
Stock issuable upon exercise of this Warrant (if any) necessitated by this
paragraph (4). Thereafter, without issuance of an additional warrant or
any additional action on the part of the Company or the Holder, the Warrant
Stock issuable upon exercise of this Warrant shall automatically be
increased by the amount required under this paragraph (4).
(f) Notices to Holder. So long as this Warrant shall be outstanding and
-----------------
unexercised (i) if the Company shall pay any dividend or make any distribution
upon the Common Stock, or (ii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be effected, then, in any such case, the Company shall
cause to be delivered to the Holder, at least ten days prior to the date
specified in (x) and at least thirty days prior to the date specified in (y)
below, as the case may be, a notice containing a brief description of the
proposed action and stating the date on which (x) a record is to be taken for
the purpose of such dividend, distribution or rights, or (y) such
reclassification reorganization, consolidation, merger, conveyance, lease,
dissolution, liquidation or winding up is to take place and at least twenty days
prior notice as to the date, if any is to be fixed, as of which the holders of
Common Stock of record shall be entitled to exchange their shares of Common
Stock for securities or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation, or
winding up.
(g) Transfer to Comply with the Securities Act.
------------------------------------------
(1) This Warrant or the Warrant Stock or any other security issued or
issuable upon exercise of this Warrant may not be offered or sold except in
conformity with the Securities Act, and then only against receipt of an
agreement of such person to whom such offer of sale is made to comply with
the provisions of this Section (g) with respect to any resale or other
disposition of such securities.
(2) The Company may cause the legends set forth at the top of the
first page hereof to be set forth on each Warrant and the following legends
to be set forth on each certificate representing Warrant Stock, unless
counsel for the Company is of the opinion as to any such certificate that
such legend is unnecessary:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE OR THE
-5-
<PAGE>
SECURITIES LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED EXCEPT UPON SUCH REGISTRATION OR UPON DELIVERY TO THE
CORPORATION OF AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION
THAT REGISTRATION IS NOT REQUIRED FOR SUCH SALE OR TRANSFER.
(h) Applicable Law. This Warrant shall be governed by, and construed in
--------------
accordance with, the laws of the State of Delaware.
(i) Notice. Any notices or certificates by the Company to the Holder and
------
by the Holder to the Company shall be deemed delivered if in writing and
delivered personally or five (5) days after being sent by certified mail or
registered mail, return receipt requested, to the Holder. For purposes hereof,
the address of the Holder shall be Sint Krispijnstraat 7, B-8900 leper, Belgium,
Attention: Chief Operating Officer, and the address of the Company shall be 4615
Post Oak Place, Suite 111, Houston, Texas 77027, Attention: Chief Executive
Officer; provided, however, either address may be changed by notice given in
accordance herewith.
(j) Nonwaiver. No course of dealing or any delay or failure to exercise
---------
any right, power or remedy hereunder on the part of the Holder hereof shall
operate as a waiver of or otherwise prejudice such Holder's rights, powers or
remedies.
(k) Holder Not a Stockholder. Prior to the exercise of this Warrant as
------------------------
hereinbefore provided, the Holder hereof shall not, by virtue of its ownership
of this Warrant, except as specifically provided herein, be entitled to any of
the rights of a stockholder of the Company including, without limitation, the
right as a stockholder to (a) vote on or consent to any proposed action of the
Company or (b) receive notice of or attend any meetings of stockholders of the
Company or notice of any other proceedings of the Company.
(l) Successors and Assigns. This Warrant and the rights evidenced hereby
----------------------
shall inure to the benefit of and be binding upon the successors and assigns of
the Company, the Holder hereof and the Holder of the shares of Common Stock
issued upon the exercise hereof, and shall be enforceable by any such Holder.
IN WITNESS WHEREOF, THE COMPANY HAS CAUSED THIS WARRANT TO BE EXECUTED
EFFECTIVE AS OF DECEMBER __, 1998.
APPLIED VOICE RECOGNITION, INC.
By:____________________________
Timothy J. Connolly, Chief
Executive Officer
-6-
<PAGE>
PURCHASE FORM
The undersigned, the Holder of the within Warrant, hereby irrevocably
elects to exercise the purchase rights represented by said Warrant for, and to
purchase thereunder, ________ shares of Common Stock, $0.001 par value per
share, of Applied Voice Recognition, Inc. and herewith makes payment of
$___________ in cash therefor and requests that the certificates for such shares
be issued in the name of _________________________________________ and delivered
to ____________________________________, whose address is
_____________________________________________________ and, if such shares shall
not be all of the shares purchasable hereunder, that a new Warrant of like tenor
for the balance of the shares purchasable hereunder be delivered to the
undersigned.
Dated: _________________ _________________________________
Name:____________________________
Title:_____________________________
Address: ________________________
________________________
________________________
Social Security
or Tax I.D. No. _________________
<PAGE>
ASSIGNMENT IN FULL
FOR VALUE RECEIVED, ___________________________________ hereby sells,
assigns and transfers unto _______________________________ the within Warrant
and all rights evidenced thereby and does irrevocably constitute and appoint
______________________________, attorney, to transfer the said Warrant on the
books of the within named Company.
Dated: _________________ _________________________________
_________________________________
Address: ________________________
________________________
________________________
Social Security
or Tax I.D. No. _________________
<PAGE>
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, ___________________________________ hereby sells,
assigns and transfers unto ________________________________ a portion of the
within Warrant and the rights evidenced thereby, to wit: the right to purchase
-- ---
______ shares of Common Stock of __________________________ and does irrevocably
constitute and appoint _________________________, attorney, to transfer to such
extent the said Warrant on the books of the within named Corporation.
Dated: _________________ _________________________________
_________________________________
Address: ________________________
________________________
________________________
Social Security
or Tax I.D. No. _________________
<PAGE>
EXHIBIT 4.11
APPLIED VOICE RECOGNITION, INC.
INVESTOR'S RIGHTS AGREEMENT
----------------
December 31, 1998
1
<PAGE>
INVESTORS' RIGHTS AGREEMENT
This Investor' Rights Agreement (this "Agreement') is made as of the 31st
day of December, 1998, by and between APPLIED VOICE RECOGNITION, INC., a
Delaware corporation (the "Company"), and L & H INVESTMENT COMPANY, N.V., a
Belgium company (the "Investor").
RECITALS
The Company and the Investor are parties to that certain Series D Preferred
Stock and Warrant Purchase Agreement of even date herewith (the "Series D
Agreement"); and
WHEREAS, in order to induce the Company to enter into the Series D Agreement
and to induce the Investor to invest funds in the Company pursuant to the Series
D Agreement, the Investor and the Company hereby agree that this Agreement shall
govern certain rights of the Investor with respect to the Company.
NOW, THEREFORE, the parties hereby agree as follows:
ARTICLE I
COVENANTS OF THE COMPANY
1.01 Delivery of Financial Statements. The Company shall deliver to the
Investor so long as it holds a minimum of 500 shares of Series D Preferred Stock
(subject to appropriate adjustment for stock splits, stock dividends,
combinations and other recapitalizations):
(a) as soon as practicable, but in any event within 135 days after the
end of each fiscal year of the Company, an income statement for such fiscal
year, a balance sheet of the Company and statement of stockholder's equity
as of the end of such year, and a schedule as to the sources and
applications of funds for such year, such year-end financial reports to be
in reasonable detail, prepared in accordance with generally accepted
accounting principles, audited by independent public accountants selected by
the Company;
(b) as soon as practicable, but in any event within 135 days after the
end of each of the first three (3) quarters of each fiscal year of the
Company, an unaudited profit or loss statement, schedule as to the sources
and application of funds for such fiscal quarter and an unaudited balance
sheet as of the end of such fiscal quarter;
2
<PAGE>
(c) within twenty-one (21) days of the end of each month, an unaudited
income statement and schedule as to the sources and application of funds and
balance sheet for and as of the end of such month, in reasonable detail;
(d) as soon as practicable, but in any event no later than sixty (60)
days prior to the end of each fiscal year, a budget and business plan for
the next fiscal year, prepared on a monthly basis, including budgeted
balance sheets and sources and applications of funds statements for such
months and, as soon as reasonably practicable after having been prepared,
any other budgets or revised budgets prepared by the Company; provided,
however, notwithstanding the foregoing, the budget and business plan for
1999 shall be due no later than January 31, 1999.
1.02 Inspection. The Company shall permit the Investor, at such Investor's
expense, to visit and inspect the Company's properties, to examine its books of
account and records and to discuss the Company's affairs, finances and accounts
with its officers, all at such reasonable times as may be requested by the
Investor and without unreasonably disrupting the Company; provided, however,
that the Company shall not be obligated pursuant to this Section 1.02 to provide
access to any information which it reasonably considers to be a trade secret or
similar confidential information.
1.03 Proprietary Information and Inventions Agreements. The Company will
cause each person now or hereafter employed by it or any subsidiary with access
to confidential information to enter into a proprietary information and
inventions agreement substantially in the form approved by the Board of
Directors.
1.04 Right of First Offer. Subject to the terms and conditions specified in
this Section 1.04 and the provisions of Section 1.05 below, the Company hereby
grants to the Investor so long as the investor holds shares of Series D
Preferred Stock and this agreement has not been terminated in accordance with
the terms hereof, a right of first offer with respect to future sales by the
Company of its Shares (as hereinafter defined). For purposes of this Section
1.04, the Investor includes any general partners and affiliates of the Investor.
The Investor shall be entitled to apportion the right of first offer hereby
granted it among itself and its partners and affiliates in such proportions as
it deems appropriate.
Each time the Company proposes to offer any shares of, or securities
convertible into or exercisable for any shares of, any class of its capital
stock in a private sale ("Shares"), the Company shall first make an offering of
such Shares to the Investor in accordance with the following provisions:
(a) The Company shall deliver a written in accordance herewith
("Notice") to the Investor stating (i) its bona fide intention to offer such
Shares, (ii) the number of such Shares to be offered, and (iii) the price
and terms, if any, upon which it proposes to offer such Shares.
(b) By written notification received by the Company within five (5)
calendar days after receipt of the Notice, the Investor may elect to
purchase or obtain, at the price
3
<PAGE>
and on the terms specified in the Notice, all of such Shares or may request
(without guarantee by the Company) to purchase up to that number of the
Shares which equals the proportion that the number of shares of Common Stock
of the Company ("Common Stock") issued and held, or issuable upon conversion
of the Series D Preferred Stock then held, by the Investor bears to the
total number of shares of Common Stock then outstanding (assuming full
conversion and exercise of all convertible and exercisable securities) as of
the date of the Notice. If the Investor elects to purchase all Shares, the
Company shall promptly use its best efforts to bring about such sale.
(c) If the Investor does not elect to purchase all Shares referred to in
the Notice as provided in subsection 1.04(b) hereof, the Company may, during
the sixty (60)-day period following, offer the Shares to any person or
persons at a price not less than 95% of the purchase price, and upon terms
no more favorable to the offeree than those specified in the Notice. The
Company shall use reasonable efforts to arrange such a sale allowing the
Investor to purchase its pro rata portion of the Shares (as described
above). If the Company does not consummate such sale within the sixty
(60)-day period, the right provided hereunder shall be deemed to be revived
and such Shares shall not be offered unless first reoffered to the Investor
in accordance herewith.
(d) The right of first offer in this Section 1.04 shall not be
applicable (i) to the issuance or sale of shares of Common Stock (or options
therefor) to employees, consultants or directors of this Company pursuant to
the plan as currently approved by the Company's Board of Directors, (ii) to
a public offering of the Company's equity securities, (iii) to the issuance
of securities pursuant to the conversion or exercise of convertible or
exercisable securities, (iv) to the issuance of securities in connection
with a bona fide business acquisition of or by the Company, whether by
merger, consolidation, sale of assets, sale or exchange of stock or
otherwise that is approved by the Board of Directors or (v) to the issuance
of stock, warrants or other securities or rights to persons or entities with
which the Company has or is establishing business relationships that is
approved by the Board of Directors provided such issuances are for other
than primarily equity financing purposes.
1.05 Termination of Rights. The rights set forth in Section 1.04 hereof
shall terminate and be of no further force or effect upon the earlier of (i) the
sale of more than $15 million of securities pursuant to a registration statement
filed by the Company under the Securities Act of 1933, as amended, in connection
with the firm commitment underwritten offering of its securities to the general
public, or (ii) December 31, 2000.
ARTICLE II
MISCELLANEOUS
2.01 Successors and Assigns. Except as otherwise provided herein, the terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the respective successors and permitted assigns of the parties. Nothing in
this Agreement, express or implied,
4
<PAGE>
is intended to confer upon any party other than the parties hereto or their
respective successors and permitted assigns any rights, remedies, obligations,
or liabilities under or by reason of this Agreement, except as expressly
provided in this Agreement. This Agreement may not be assigned by either party
without the permission of the other; however, the Company will not unreasonably
withhold permission for the Investor to transfer all of its rights hereunder to
a single party so long as the Investor simultaneously transfers all of its
shares of Series D Preferred Stock and the transferee assumes any obligations of
the Investor hereunder.
2.02 Governing Law. This Agreement shall be governed by and construed under
the laws of the State of Delaware as applied to agreements among Delaware
residents entered into and to be performed entirely within Delaware.
2.03 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
2.04 Titles and Subtitles. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
2.05 Notices. Any notice required or permitted under this Agreement shall be
given in writing and shall be delivered in person or by telecopy or by overnight
courier guaranteeing no later than second business day delivery, or five days
after deposit with the United States Post Office, by registered or certified
mail, postage prepaid, in any case directed to the appropriate party at the
address set forth below its signature hereto. Any party may change its address
for notice by giving ten (10) days advance written notice to the other parties.
Every notice or other communication hereunder shall be deemed to have been duly
given or served on the date on which personally delivered, or on the date
actually received, if sent by telecopy or overnight courier service, with
receipt acknowledged.
2.06 Expenses. If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorneys' fees, costs and necessary disbursements in addition to any
other relief to which such party may be entitled.
2.07 Amendments and Waivers. 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), only with
the written consent of the parties hereto.
5
<PAGE>
2.08 Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
2.09 Arbitration. All disputes, claims, and/or requests for specific
contractual performance, or other equitable relief, or damages or any other
matters in question between the parties arising out of this Agreement shall be
submitted for arbitration, provided that the parties have first made a good
faith effort to resolve such matters together. Demand shall be made to the
American Arbitration Association ("AAA") and shall be conducted in New York, New
York by a panel of three (3) arbitrators. The Investor and the Company shall
each choose one (1) panel member from a panel of person having experience with
and knowledge of the purchase and sale of securities. The third member shall be
an independent party, chosen by the first two members. At least one member of
the panel must have a legal background. Arbitration shall be in accordance with
the commercial rules of the AAA. The Award of the Arbitrators shall be final and
judgement may be entered upon it in any court having jurisdiction thereof, and
the prevailing party shall be entitled to costs and reasonable attorneys' fees
arising out of Arbitration
2.10 Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COMPANY:
APPLIED VOICE RECOGNITION, INC.
By: ____________________________________________
Timothy J. Connolly, Chief Executive Officer
Address: 4015 Post Oak Place
Suite 111
Houston, TX 77027
Telephone: (713) 621-5678
Telecopier: (713) 621-5870
INVESTOR:
L & H INVESTMENT COMPANY N.V.
/s/ Thomas Denys
By: ____________________________________________
C.V.B.A. Thomas Denys, Director
Address: Sint-Krispijnstraat 7
8900 Ieper
Belgium
Telephone: 011-32-5-722-9540
Telecopier: 011-32-5-722-9545
SIGNATURE PAGE TO INVESTOR'S RIGHTS AGREEMENT]
7
<PAGE>
sale of securities. The third member shall be an independent party, chosen by
the first two members. At least one member of the panel must have a legal
background. Arbitration shall be in accordance with the commercial rules of the
AAA. The Award of the Arbitrators shall be, final and judgement may be entered
upon it in any court having jurisdiction therof, and the prevailing party shall
be entitled to costs and reasonable attorneys' fees arising out of Arbitration.
2.10 Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COMPANY:
APPLIED VOICE RECOGNITION, INC.
/s/ Timothy J. Connolly
By: _______________________________________________
Timothy J. Connolly, Chief Executive Officer
Address: 4015 Post Oak place
Suite 111
Houston, TX 77027
Telephone: (713) 621-5678
Telecopier: (713) 621-5870
INVESTOR:
L & H INVESTMENT COMPANY N.V.
By: _______________________________________________
C.V.B.A. Thomas Denys, Director
Address: Sint-Krispijnstrast 7
8900 Ieper
Belgium
Telephone: 011-32-5-722-9540
Telecopier: 011-32-5-722-9545
[SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT]
5
<PAGE>
EXHIBIT 10.23
APPLIED VOICE RECOGNITION, INC.
SERIES D PREFERRED STOCK
AND WARRANT
PURCHASE AGREEMENT
_______________
DECEMBER 31, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Purchase and Sale of Stock......................................................................... 1
--------------------------
1.1 Sale and Issuance of Series D Preferred Stock and Common Stock Purchase Warrants.......... 1
--------------------------------------------------------------------------------
1.2 First Closing............................................................................. 1
-------------
1.3 Second Closing............................................................................ 1
--------------
1.4 Third Closing............................................................................. 2
-------------
2. Representations and Warranties of the Company...................................................... 2
---------------------------------------------
2.1 Organization; Good Standing; Qualification................................................ 2
------------------------------------------
2.2 Authorization............................................................................. 3
-------------
2.3 Valid Issuance of Preferred and Common Stock.............................................. 3
--------------------------------------------
2.4 Governmental Consents..................................................................... 3
---------------------
2.5 Capitalization and Voting Rights.......................................................... 4
--------------------------------
2.6 Subsidiaries.............................................................................. 5
------------
2.7 Contracts and Other Commitments........................................................... 5
-------------------------------
2.8 Related-Party Transactions................................................................ 5
--------------------------
2.9 Registration Rights....................................................................... 5
-------------------
2.10 Permits................................................................................... 5
-------
2.11 Compliance with Other Instruments......................................................... 6
---------------------------------
2.12 Litigation................................................................................ 6
----------
2.13 Disclosure................................................................................ 6
----------
2.14 Business Plan............................................................................. 6
-------------
2.15 Offering.................................................................................. 7
--------
2.16 Title to Property and Assets; Leases...................................................... 7
------------------------------------
2.17 Financial Statements...................................................................... 7
--------------------
2.18 Changes................................................................................... 8
-------
2.19 Patents and Trademarks.................................................................... 9
----------------------
2.20 Employees; Employee Compensation.......................................................... 9
--------------------------------
2.21 Proprietary Information and Inventions Agreements......................................... 10
-------------------------------------------------
2.22 Tax Returns, Payments, and Elections...................................................... 10
------------------------------------
2.23 Insurance................................................................................. 11
---------
2.24 Environmental and Safety Laws............................................................. 11
-----------------------------
2.25 Minute Books.............................................................................. 11
------------
2.26 Real Property Holding Corporation......................................................... 11
---------------------------------
3. Representations and Warranties of the Investors.................................................... 11
-----------------------------------------------
3.1 Authorization............................................................................. 11
-------------
3.2 Purchase Entirely for Own Account......................................................... 11
---------------------------------
3.3 Reliance Upon Investors' Representations.................................................. 12
----------------------------------------
3.4 Receipt of Information.................................................................... 12
----------------------
3.5 Investment Experience..................................................................... 12
---------------------
3.6 Accredited Investor....................................................................... 12
-------------------
3.7 Restricted Securities..................................................................... 14
---------------------
</TABLE>
<PAGE>
TABLE OF CONTENTS
Continued
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
3.8 Legends................................................................................. 14
-------
3.9 Public Sale............................................................................. 14
-----------
4. Conditions of Investor's Obligations at Closing.................................................. 15
-----------------------------------------------
4.1 Representations and Warranties.......................................................... 15
------------------------------
4.2 Performance............................................................................. 15
-----------
4.3 Compliance Certificate.................................................................. 15
----------------------
4.4 Qualifications.......................................................................... 15
--------------
4.5 Proceedings and Documents............................................................... 16
-------------------------
4.6 Bylaws.................................................................................. 16
------
4.7 Board of Directors...................................................................... 16
------------------
4.8 Opinion of Company Counsel.............................................................. 16
--------------------------
4.9 Registration Rights Agreement........................................................... 18
-----------------------------
4.10 Co-Sale Agreements...................................................................... 18
------------------
5. Conditions of the Company's Obligations at Closing............................................... 18
--------------------------------------------------
5.1 Representations and Warranties.......................................................... 18
------------------------------
5.2 Qualifications.......................................................................... 19
--------------
6. Covenants........................................................................................ 19
---------
6.1 Common Stock............................................................................ 19
------------
6.2 Nasdaq and AMEX......................................................................... 19
---------------
7. Miscellaneous.................................................................................... 19
-------------
7.1 Entire Agreement........................................................................ 19
----------------
7.2 Survival of Warranties.................................................................. 19
----------------------
7.3 Successors and Assigns.................................................................. 19
----------------------
7.4 Governing Law........................................................................... 20
-------------
7.5 Counterparts............................................................................ 20
------------
7.6 Titles and Subtitles.................................................................... 20
--------------------
7.7 Notices................................................................................. 20
-------
7.8 Finder's Fees........................................................................... 20
-------------
7.9 Expenses................................................................................ 21
--------
7.10 Attorneys Fees.......................................................................... 21
--------------
7.11 Amendments and Waivers.................................................................. 21
----------------------
7.12 Severability............................................................................ 21
------------
7.13 Arbitration............................................................................. 21
-----------
SCHEDULE A Closings Schedule...................................................................Schedule A
SCHEDULE B Milestones Required for Third Closing...............................................Schedule B
SCHEDULE C Schedule of Exceptions..............................................................Schedule C
EXHIBIT A Certificate of Designation of Series D Preferred Stock................................ A-1
EXHIBIT B Form of Warrant to be tendered at First Closing....................................... B-1
EXHIBIT C Form of Warrant to be tendered at Second Closing...................................... C-1
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
Continued
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXHIBIT D Form of Warrant to be tendered at Third Closing....................................... D-1
EXHIBIT E Registration Rights Agreement......................................................... E-1
EXHIBIT F Co-Sale and Tag-Along Rights Agreement................................................ F-1
EXHIBIT G Investor's Rights Agreement.......................................................... G-7
</TABLE>
iii
<PAGE>
APPLIED VOICE RECOGNITION, INC.
SERIES D PREFERRED STOCK
AND WARRANT
PURCHASE AGREEMENT
THIS SERIES D PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT (the
"Agreement") is made as of the 31st of December, 1998, by and between Applied
Voice Recognition, Inc., a Delaware corporation (the "Company"), and L & H
Investment Company N.V., a Belgium Corporation (the "Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
--------------------------
1.1 Sale and Issuance of Series D Preferred Stock and Common Stock
--------------------------------------------------------------
Purchase Warrants.
- - -----------------
(a) The Company shall adopt and file with the Secretary of State
of Delaware on or before the First Closing (as defined below) a Certificate of
Designation, Preferences, Rights and Limitations of Series D Preferred Stock in
the form attached hereto as Exhibit A (the "Certificate of Designation").
(b) Subject to the terms and conditions of this Agreement, the
Investor agrees to purchase at each Closing and the Company agrees to sell and
issue to the Investor, at each Closing that number of shares of the Company's
Series D Preferred Stock set forth opposite each closing on Schedule A hereto at
a price of $1,000.00 per share. The First Closing must occur before or
simultaneous with the Second and/or Third Closings; however, the Third Closing,
so long as all other requirements are met, may occur either before or after the
Second Closing. All three closings are hereafter the "Closings" and all three
warrants are the "Warrants."
1.2 First Closing. The purchase and sale of (a) 2,000 shares of
-------------
Series D Preferred Stock and (b) a Warrant for the purchase of 1,500,000 shares
of the Company's Common Stock shall take place at the offices of Boyar, Simon &
Miller, P.C., Houston, Texas, at 11:30 a.m., on December 31, 1998, or at such
other time and place as the Company and Investor shall mutually agree, either
orally or in writing (which time and place are designated as the "First
Closing"). At the First Closing, the Company shall deliver to the Investor (a) a
Warrant in the form attached hereto as Exhibit B, and (b) a certificate
representing the shares of Series D Preferred Stock that the Investor is
purchasing against payment of the purchase price therefor by wire transfer or
such other form of payment as shall be mutually agreed upon by the Investor and
the Company.
1.3 Second Closing. The Second Closing shall take place as of the
--------------
date that the Company and Lernout & Hauspie Speech Product N.V.'s, a Belgium
Corporation, ("L&HSP"), amend that certain Value Added Reseller Agreement by and
between the Company and L&HSP under which the Company integrates Speech Machine
PLC's, a British limited company, services and L&HSP's speech engine into its
operations. The Second Closing shall
<PAGE>
occur on the same day that the Company notifies the Investor that the Second
Closing requirement has been met. At the Second Closing, (a) the Company shall
execute the aforementioned amendment of the Value Added Reseller Agreement (if
it has not already been executed by the Company), and (b) the purchase and sale
of (i) 1,000 shares of Series D Preferred Stock, and (ii) a Warrant for the
purchase of 500,000 shares of the Company's Common Stock shall take place at the
offices of Boyar, Simon & Miller, P.C., Houston, Texas or at such other location
as the Company and the Investor shall mutually agree. At the Second Closing, the
Company shall deliver to the Investor (a) a Warrant in the form attached hereto
as Exhibit C, and (b) a certificate representing the shares of Series D
Preferred Stock that the Investor is purchasing against payment, which shall be
fully paid within 10 days of the Second Closing, of the purchase price therefor
by wire transfer or such other form of payment as shall be mutually agreed upon
by the Investor and the Company. The Company shall be permitted to deliver such
Warrant and certificate in trust to counsel for Investor; provided, that the
terms of such escrow permit counsel to release the Warrant and certificate upon
receipt of funding for the Second Closing.
1.4 Third Closing. The Third Closing shall take place after the
-------------
Company completes all of the objectives listed in Schedule B hereof. Upon the
Company notifying the Investor that the Third Closing requirements have been met
(subject to Investor's right to verify such facts), the Investor and the Company
shall get a mutually agreeable date, within 10 days of the notice, to execute
the Third Closing. At the Third Closing, the purchase and sale of (a) 2,000
shares of Series D Preferred Stock, and (b) a Warrant for the purchase of
500,000 shares of the Company's Common Stock shall take place at the offices of
Boyar, Simon & Miller, P.C., Houston, Texas or at such other location as the
Company and the Investor shall mutually agree. At the Third Closing, the Company
shall deliver to the Investor (a) a Warrant in the form attached hereto as
Exhibit D, and (b) a certificate representing the shares of Series D Preferred
Stock that the Investor is purchasing against payment of the purchase price
therefor by wire transfer or such other form of payment as shall be mutually
agreed upon by the Investor and the Company.
2. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Investor that, except as set forth on a Schedule
of Exceptions attached hereto as Schedule C and furnished to the Investor and
special counsel for the Investor, specifically identifying the relevant
subparagraph(s) hereof, which exceptions shall be deemed to be representations
and warranties as if made hereunder:
2.1 Organization; Good Standing; Qualification. The Company is a
------------------------------------------
corporation duly organized, validly existing, and in good standing under the
laws of the State of Delaware, has all requisite corporate power and authority
to own and operate its properties and assets and to carry on its business as now
conducted and as proposed to be conducted, to execute and deliver this
Agreement, the Registration Rights Agreement (attached hereto as Exhibit E), the
Investor's Rights Agreement (attached hereto as Exhibit F), the Co-Sale
Agreement (attached hereto as Exhibit G) and any other agreement to which the
Company is a party and the execution and delivery of which is contemplated
hereby (the "Ancillary Agreements"), to issue and sell the Series D Preferred
Stock, the Warrants and the Common Stock issuable upon conversion or exercise
thereof, and to carry out the provisions of this Agreement, the Registration
Rights
2.
<PAGE>
Agreement, the Investor's Rights Agreement, the Certificate of Designation and
any Ancillary Agreement. The Company is duly qualified to transact business and
is in good standing in each jurisdiction in which the failure so to qualify
would have a material adverse effect on its business, properties, prospects or
financial condition.
2.2 Authorization. All corporate action on the part of the Company,
-------------
its officers, directors, and stockholders necessary for the authorization,
execution and delivery of this Agreement, the Registration Rights Agreement, the
Investor's Rights Agreement and any Ancillary Agreement, the performance of all
obligations of the Company hereunder and thereunder at the Closings and the
authorization, issuance (or reservation for issuance), sale, and delivery of the
Series D Preferred Stock and Warrants being sold hereunder and the Common Stock
issuable upon conversion or exercise thereof has been taken or will be taken
prior to the Closings, and this Agreement, the Registration Rights Agreement,
the Investor's Rights Agreement and any Ancillary Agreement constitute valid and
legally binding obligations of the Company, enforceable in accordance with their
respective terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally (ii) as limited by laws relating to
the availability of specific performance, injunctive relief, or other equitable
remedies, and (iii) to the extent the indemnification provisions contained in
the Registration Rights Agreement may be limited by applicable federal or state
securities law.
2.3 Valid Issuance of Preferred and Common Stock. The Series D
--------------------------------------------
Preferred Stock that is being purchased by the Investor hereunder, when issued,
sold and delivered in accordance with the terms of this Agreement for the
consideration expressed herein, will be duly and validly issued, fully paid, and
nonassessable, and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement and the Registration Rights
Agreement and under applicable state and federal securities laws. The Common
Stock issuable upon conversion of the Series D Preferred Stock purchased under
this Agreement (based on an initial conversion price of $1.50 per share) and
upon exercise of the Warrants purchased under this Agreement, has been duly and
validly reserved for issuance and, upon issuance in accordance with the terms of
the Certificate of Incorporation, will be duly and validly issued, fully paid,
and nonassessable and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement and the Registration Rights
Agreement and under applicable state and federal securities laws.
2.4 Governmental Consents. No consent, approval, qualification, order
---------------------
or authorization of, or filing with, any local, state, or federal governmental
authority is required on the part of the Company in connection with the
Company's valid execution, delivery, or performance of this Agreement, the
offer, sale or issuance of the Series D Preferred Stock by the Company or the
sale and issuance of the Warrants or the issuance of Common Stock upon
conversion of the Series D Preferred Stock or exercise of the Warrants, except
(i) the filing of the Certificate of Designation with the Secretary of State of
the State of Delaware, and (ii) such filings as have been made prior to the
Closing, except that any notices of sale required to be filed with the
Securities and Exchange Commission under Regulation D of the Securities Act of
1933, as amended (the "Securities Act"), or such post-closing filings as may be
required under applicable state securities laws, which will be timely filed
within the applicable periods therefor.
3.
<PAGE>
2.5 Capitalization and Voting Rights. The authorized capital of the
--------------------------------
Company consists, or will consist prior to the Closing, of:
(i) Preferred Stock. 2,000,000 shares of Preferred Stock, par
---------------
value $0.10 (the "Preferred Stock"), of which 312,500 shares have been
designated Series A Preferred Stock, 186,000 of which are issued and
outstanding, 3,000 of which have been designated Series B Preferred Stock of
which 2,285 are issued and outstanding, 231,788 have been designated Series C
Preferred Stock of which 153,538 are issued and outstanding, 2,000 shares of
Series 1 Preferred Stock of which none are issued and outstanding and 5,000
shares have been designated Series D Preferred Stock, up to all of which may be
sold pursuant to this Agreement. The rights, privileges and preferences of the
Series D Preferred Stock will be as stated in the Certificate of Designation.
(ii) Common Stock. 50,000,000 shares of common stock ("Common
------------
Stock"), par value $.001, of which 15,382,891 shares are issued and outstanding.
(iii) The outstanding shares of Series A, B and C Preferred
Stock and Common Stock have been issued in accordance with the registration or
qualification provisions of the Securities Act of 1933 and any relevant state
securities laws or pursuant to valid exemptions therefrom.
(iv) Except for (A) the conversion privileges of the Series A,
B, C, and D Preferred Stock, (B) the rights provided in paragraph 1.04 of the
Investor's Rights Agreement, (C) currently outstanding options to purchase
2,262,331 shares of Common Stock granted to employees and directors pursuant to
the Company's 1997 Incentive Plan (the "Option Plan"), (D) additional Warrants
and options to purchase an aggregate of 3,765,132 shares of Common Stock and (E)
shares issuable upon exercise of the Warrants sold pursuant to this Agreement,
there are not outstanding any options, warrants, rights (including conversion or
preemptive rights and rights of first refusal) or agreements for the purchase or
acquisition from the Company of any shares of its capital stock. In addition to
the aforementioned options, the Company has reserved an additional 737,669
shares of its Common Stock for purchase upon exercise of options to be granted
in the future under the Option Plan. The Company is not a party or subject to
any agreement or understanding, and, to the best of the Company's knowledge,
there is no agreement or understanding between any persons that affects or
relates to the voting or giving of written consents with respect to any security
or the voting by a director of the Company.
2.6 Subsidiaries. The Company does not own or control, directly or
------------
indirectly, any interest in any other corporation, association, or other
business entity. The Company is not a participant in any joint venture,
partnership, or similar arrangement.
2.7 Contracts and Other Commitments. The Company does not have any
-------------------------------
contract, agreement, lease, commitment or proposed transaction, written or oral,
absolute or contingent, other than (i) contracts for the purchase of supplies
and services that were entered into in the ordinary course of business and that
do not involve more than $100,000, and do not extend for more than one (1) year
beyond the date hereof, (ii) sales contracts entered into in the ordinary course
of business, and (iii) contracts terminable at will by the Company on no more
than thirty (30) days notice without cost or liability to the Company and that
do not involve any
4.
<PAGE>
employment or consulting arrangement and are not material to the conduct of the
Company's business. For the purpose of this paragraph, employment and consulting
contracts and contracts with labor unions, and license agreements and any other
agreements relating to the acquisition or disposition of the Company's
technology, shall not be considered to be contracts entered into in the ordinary
course of business.
2.8 Related-Party Transactions. No employee, officer, or director of
--------------------------
the Company or member of his or her immediate family thereof is indebted to the
Company, nor is the Company indebted (or committed to make loans or extend or
guarantee credit) to any of them. To the best of the Company's knowledge, none
of such persons has any direct or indirect ownership interest in any firm or
corporation with which the Company is affiliated or with which the Company has a
business relationship, or any firm or corporation that competes with the
Company, except that employees, officers or directors of the Company and members
of their immediate families may own stock in publicly traded companies that may
compete with the Company. To the best of the Company's knowledge, no officer or
director or any member of their immediate families is, directly or indirectly,
interested in any material contract with the Company.
2.9 Registration Rights. Except as provided in the Registration
-------------------
Rights Agreement, the Company is not obligated to register under the Securities
Act any of its presently outstanding securities or any of its securities that
may subsequently be issued.
2.10 Permits. The Company has all franchises, permits, licenses, and
-------
any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects or financial condition of the Company and
believes it can obtain, without undue burden or expense, any similar authority
for the conduct of its business as planned to be conducted. The Company is not
in default in any material respect under any of such franchises, permits,
licenses or other similar authority.
2.11 Compliance with Other Instruments. The Company is not in
---------------------------------
violation or default in any material respect of any provision of its Certificate
of Incorporation as amended, or Bylaws or in any material respect of any
provision of any mortgage, indenture, agreement, instrument or contract to which
it is a party or by which it is bound or, to the best of its knowledge, of any
federal or state judgment, order, writ, decree, statute, rule or regulation
applicable to the Company. The execution, delivery and performance by the
Company of this Agreement, the Registration Rights Agreement, the Investor's
Rights Agreement and any Ancillary Agreement, and the consummation of the
transactions contemplated hereby and thereby will not result in any such
violation or be in material conflict with or constitute, with or without the
passage of time or giving of notice, either a material default under any such
provision or an event that results in the creation of any material 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.
2.12 Litigation. There is no action, suit, proceeding or investigation
----------
pending or to the knowledge of the Company currently threatened against the
Company that questions the
5.
<PAGE>
validity of this Agreement, the Registration Rights Agreement, the Investor's
Rights Agreement or any Ancillary Agreement or the right of the Company to enter
into such agreements, or to consummate the transactions contemplated hereby or
thereby, or that might result, either individually or in the aggregate, in any
material adverse change in the assets, business properties, prospects or
financial condition of the Company, or in any material change in the current
equity ownership of the Company. The foregoing includes, without limitation, any
action, suit, proceeding, or investigation pending or currently threatened
involving the prior employment of any of the Company's employees, their use in
connection with the Company's business of any information or techniques
allegedly proprietary to any of their former employers, their obligations under
any agreements with prior employers, or negotiations by the Company with
potential backers of, or investors in, the Company or its proposed business. The
Company is not a party to, or to the best of its knowledge, named in any order,
writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit or proceeding by the Company currently
pending or that the Company currently intends to initiate.
2.13 Disclosure. The Company has provided the Investor with all the
----------
information reasonably available to it without undue expense that the Investor
has requested for deciding whether to purchase the Series D Preferred Stock and
all information which the Company believes is reasonably necessary to enable the
Investor to make such decision. To the best of the Company's knowledge after
reasonable investigation, neither this Agreement nor any other written
statements or certificates made or delivered in connection herewith contains any
untrue statement of a material fact or omits to state a material fact necessary
to make the statements herein or therein not misleading.
2.14 Business Plan. The Business Plan dated October 22, 1998
-------------
previously delivered to the Investor (the "Business Plan") was prepared in good
faith by the Company and does not, to the best of the Company's knowledge after
reasonable investigation, contain any untrue statement of a material fact nor
does it omit to state a material fact necessary to make the statements therein
not misleading, except that with respect to projections and expressions of
opinion or predictions contained in the Business Plan, the Company represents
only that such projections and expressions of opinion and predictions were made
in good faith and that the Company believes there is a reasonable basis
therefor.
2.15 Offering. Subject in part to the truth and accuracy of the
--------
Investor's representations set forth in this Agreement, the offer, sale and
issuance of the Series D Preferred Stock as contemplated by this Agreement are
exempt from the registration requirements of the Securities Act, and neither the
Company nor any authorized agent acting on its behalf will take any action
hereafter that would cause the loss of such exemption.
2.16 Title to Property and Assets; Leases. Except (a) as reflected in
------------------------------------
the Financial Statements (defined in paragraph 2.17), (b) for liens for current
taxes not yet delinquent, (c) for liens imposed by law and incurred in the
ordinary course of business for obligations not past due to carriers,
warehousemen, laborers, materialmen and the like, (d) for liens in respect of
pledges or deposits under workers' compensation laws or similar legislation, or
(e) for minor defects in title, none of which, individually or in the aggregate
materially interferes with the use of such property, the Company owns its
property and assets free and clear of all mortgages, liens, claims and
encumbrances. With respect to the property and assets it
6.
<PAGE>
leases, the Company is in compliance with such leases and, to the best of its
knowledge, holds a valid leasehold interest free of any liens, claims or
encumbrances, subject to clauses (a)-(e) above.
2.17 Financial Statements. The Company has delivered to the Investor
--------------------
its audited financial statements (balance sheet and profit and loss statement,
statement of stockholders' equity and statement of changes in financial position
including notes thereto) at December 31, 1997 and for the fiscal year then ended
and its unaudited financial statements (balance sheet and profit and loss
statement including notes thereto) as at and for the nine month period ended
September 30, 1998 (the "Financial Statements"). The Financial Statements have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods indicated and with each
other, except that unaudited Financial Statements may not contain all footnotes
required by generally accepted accounting principles. The Financial Statements
fairly present the financial condition and operating results of the Company as
of the dates, and for the periods, indicated therein, subject in the case of
unaudited Financial Statements to normal year-end audit adjustments. Except as
set forth in the Financial Statements, the Company has no material liabilities,
contingent or otherwise, other than (i) liabilities incurred in the ordinary
course of business subsequent to September 30, 1998 and (ii) obligations under
contracts and commitments incurred in the ordinary course of business and not
required under generally accepted accounting principles to be reflected in the
Financial Statements, which, in both cases, individually or in the aggregate,
are not material to the financial condition or operating results of the Company.
Except as disclosed in the Financial Statements, the Company is not a guarantor
or indemnitor of any indebtedness of any other person, firm or corporation. The
Company maintains and will continue to maintain a standard system of accounting
established and administered in accordance with generally accepted accounting
principles.
2.18 Changes. To the best of the Company's knowledge, since September
-------
30, 1998, there has not been:
(a) Any change in the assets, liabilities, financial condition
or operating results of the Company from that reflected in the Financial
Statements, except changes in the ordinary course of business that have not
been, in the aggregate, materially adverse.
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the business, properties,
prospects or financial condition of the Company (as such business is presently
conducted and as it is proposed to be conducted);
(c) any waiver or compromise by the Company of a valuable right
or of a material debt owed to it;
(d) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business and which is not material to the business, properties,
prospects or financial condition of the Company (as such business is presently
conducted and as it is proposed to be conducted);
7.
<PAGE>
(e) any material change to a material contract or arrangement by
which the Company or any of its assets is bound or subject;
(f) any material change in any compensation arrangement or
agreement with any employee, officer, director, or stockholder;
(g) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(h) any resignation or termination of employment of any key
officer of the Company; and the Company, to the best of its knowledge, does not
know of the impending resignation or termination of employment of any such
officer;
(i) receipt of notice that there has been a loss of, or material
order cancellation by, any major customer of the Company;
(j) any mortgage, pledge, transfer of a security interest in, or
lien, created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;
(k) any loans or guarantees made by the Company to or for the
benefit of its employees, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business;
(l) any declaration, setting aside or payment or other
distribution in respect of any of the Company's capital stock, or any direct or
indirect redemption, purchase or other acquisition of any of such stock by the
Company;
(m) to the best of the Company's knowledge, any other event or
condition of any character that might materially and adversely affect the
business, properties, prospects or financial condition of the Company (as such
business is presently conducted and as it is proposed to be conducted); or
(n) any agreement or commitment by the Company to do any of the
things described in this Section 2.18.
2.19 Patents and Trademarks. To the best of its knowledge (but without
----------------------
having conducted any special investigation or patent search) the Company owns or
possesses sufficient legal rights to all patents, trademarks, servicemarks,
trade names, copyrights, trade secrets, licenses, information, proprietary
rights and processes necessary for its business as now conducted and as proposed
to be conducted . The Company has not received notice that any of its
intellectual property conflicts with or infringes on the rights of others. The
Schedule of Exceptions contains a complete list of patents and pending patent
applications of the Company. Except for agreements with its own employees or
consultants, substantially in the form referenced in paragraph 2.21 below, there
are no outstanding options, licenses, or agreements of any kind relating to the
foregoing, nor is the Company bound by or a party to any options, licenses or
agreements of any kind with respect to the patents, trademarks, service marks,
trade names, copyrights, trade secrets, licenses, information, proprietary
rights and processes of any
8.
<PAGE>
other person or entity. The Company has not received any communications alleging
that the Company has violated or, by conducting its business as proposed, would
violate any of the patents, trademarks, service marks, trade names, copyrights,
trade secrets or other proprietary rights of any other person or entity. The
Company is not aware that any of it employees is obligated under any contract
(including licenses, covenants or commitments of any nature) or other agreement,
or subject to any judgment, decree or order of any court or administrative
agency, that would interfere with the use of such employee's best efforts to
promote the interests of the Company or that would conflict with the Company's
business as proposed to be conducted. Neither the execution nor delivery of this
Agreement, nor the carrying on of the Company's business by the employees of the
Company, nor the conduct of the Company's business as proposed, will, to the
best of the Company's knowledge, conflict with or result in a breach of the
terms, conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employees is now obligated. The
Company does not believe it is or will be necessary to use any inventions of any
of its employees (or persons it currently intends to hire) made prior to their
employment by the Company.
2.20 Employees; Employee Compensation. To the best of the knowledge of
--------------------------------
the Company, there is no strike, or labor dispute or union organization
activities pending or threatened between it and its employees. None of the
Company's employees belongs to any union or collective bargaining unit. To the
best of its knowledge, the Company has complied in all material respects with
all applicable state and federal equal employment opportunity and other laws
related to employment. To the best of the Company's knowledge, no employee of
the Company is or will be in violation of any judgment, decree or order, or any
term of any employment contract, patent disclosure agreement or other contract
or agreement relating to the relationship of any such employee with the Company
or any other party because of the nature of the business conducted or to be
conducted by the Company or to the utilization by the employee of his best
efforts with respect to such business. The Company is not party to or bound by
any currently effective employment contract, deferred compensation agreement,
bonus plan, incentive plan, profit sharing plan, retirement agreement, or other
employee compensation agreement. The Company is not aware that any officer or
key employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a present intention to
terminate the employment of any of the foregoing. Subject to general principles
related to wrongful termination of employees, the employment of each officer and
employee of the Company is terminable at the will of the Company.
2.21 Proprietary Information and Inventions Agreements. Each
-------------------------------------------------
managerial and technical employee and officer of the Company has executed an
Agreement with the Company with respect to proprietary information and
inventions substantially in the form or forms that have been delivered to
special counsel for the Investor.
2.22 Tax Returns, Payments, and Elections. The Company has filed all
------------------------------------
tax returns and reports as required by law. These returns and reports are true
and correct in all material respects. The Company has paid all taxes and other
assessments due, except those contested by it in good faith. The provision for
taxes of the Company as shown in the Financial Statements is adequate for taxes
due or accrued as of the date thereof. The Company has not elected pursuant to
the Internal Revenue Code of 1986, as amended ("Code"), to be treated as an S
corporation or a collapsible corporation pursuant to Section 341(f) of Section
1362(a) of the
9.
<PAGE>
Code, nor has it made any other elections pursuant to the Code (other than
elections which relate solely to methods of accounting, depreciation or
amortization) which would have a material effect on the business, properties,
prospects or financial condition of the Company. The Company has never had any
tax deficiency proposed or assessed against it and has not executed any waiver
of any statute of limitations on the assessment or collection of any tax or
governmental charge. None of the Company's federal income tax returns and none
of its state income or franchise tax or sales or use tax returns has ever been
audited by governmental authorities. Since the date of the Financial Statements,
the Company has made adequate provisions on its books of account for all taxes,
assessments and governmental charges with respect to its business, properties
and operations for such period. The Company has in all material respects
withheld or collected from each payment made to each of its employees, the
amount of all taxes (including, but not limited to, federal income taxes,
Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes)
required to be withheld or collected therefrom, and has paid the same to the
proper tax receiving officers or authorized depositaries.
2.23 Insurance. The Company has in full force and effect fire and
---------
casualty insurance policies sufficient in amount (subject to reasonable
deductibles) to allow it to replace any of its properties that might be damaged
or destroyed. The Company has in full force and effect term life insurance,
payable to the Company, on the life of Timothy J. Connolly in the amount of
$1,000,000. The Company has in full force and effect products liability
insurance in amounts customary for companies similarly situated.
2.24 Environmental and Safety Laws. To the best of its knowledge, the
-----------------------------
Company is not in violation of any applicable statute, law, or regulation
relating to the environment or occupational health and safety, and to the best
of its knowledge, no material expenditures are or will be required in order to
comply with any such existing statute, law, or regulation.
2.25 Minute Books. The copy of the minute books of the Company
------------
provided to the Investor's special counsel contain minutes of all meetings of
directors and stockholders and all actions by written consent without a meeting
by the directors and stockholders since the time of incorporation and reflect
all actions by the directors (and any committee of directors) and stockholders
with respect to all transactions referred to in such minutes accurately in all
material respects.
2.26 Real Property Holding Corporation. The Company is not a real
---------------------------------
property holding corporation within the meaning of Internal Revenue Code Section
897(c)(2) and any regulations promulgated thereunder.
3. Representations and Warranties of the Investors. The Investor hereby
-----------------------------------------------
represents and warrants that:
3.1 Authorization. Investor represents that it has full power and
-------------
authority to enter into this Agreement and that this Agreement constitutes a
valid and legally binding obligation of the Investor.
10.
<PAGE>
3.2 Purchase Entirely for Own Account. This Agreement is made with
---------------------------------
the Investor in reliance upon Investor's representation to the Company, which by
the Investor's execution of this Agreement the Investor hereby confirms, that
the Series D Preferred Stock to be purchased by the Investor and the Common
Stock issuable upon conversion thereof (collectively, the "Securities") will be
acquired for investment for 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
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
participations to such person or to any third person, with respect to any of the
Securities.
3.3 Reliance Upon Investors' Representations. The Investor
----------------------------------------
understands that the Series D Preferred Stock is not, and any Common Stock
acquired on conversion thereof at the time of issuance may not be, registered
under the 1933 Act on the ground that the sale provided for in this Agreement
and the issuance of securities hereunder is exempt from registration under the
1933 Act pursuant to section 4(2) thereof, and that the Company's reliance on
such exemption is predicated on the Investor's representations set forth herein.
The Investor realizes that the basis for the exemption may not be present if,
notwithstanding such representations, the Investor has in mind merely acquiring
shares of the Stock for a fixed or determinable period in the future, or for a
market rise, or for sale if the market does not rise. Investor has no such
intention.
3.4 Receipt of Information. The Investor believes it has received all
----------------------
the information it considers necessary or appropriate for deciding whether to
purchase the Series D Preferred Stock. The Investor further represents that it
has had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Series D Preferred
Stock and the business, properties, prospects and financial condition of the
Company and to obtain additional information (to the extent the Company
possessed such information or could acquire it without unreasonable effort or
expense) necessary to verify the accuracy of any information furnished to it or
to which it had access. The foregoing, however, does not limit or modify the
representations and warranties of the Company in Section 2 of this Agreement or
the right of the Investor to rely thereon.
3.5 Investment Experience. The Investor represents that it is
---------------------
experienced in evaluating and investing 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 Series D Preferred Stock. The Investor also
represents it has not been organized for the sole purpose of acquiring the
Series D Preferred Stock.
3.6 Accredited Investor.
-------------------
(a) The term "Accredited Investor" as used herein refers to a
person or entity who:
(1) is a director or executive officer of the Company; or
11.
<PAGE>
(2) Any bank as defined in section 3(a)(2) of the Act, or any
savings and loan association or other institution as defined in section
3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity;
any broker or dealer registered pursuant to section 15 of the Securities
Exchange Act of 1934; insurance company as defined in section 2(13) of the Act;
investment company registered under the Investment Company Act of 1940 or a
business development company as defined in section 2(a)(48) of that Act; Small
Business Investment Company licensed by the U.S. Small Business Administration
under section 301(c) or (d) of the Small Business Investment Act of 1958;
employee benefit Retirement Income Security Act of 1974, if the investment
decision is made by a plan fiduciary, as defined in section 3(21) of such Act,
which is either a bank, savings and loan association, insurance company, or
registered investment adviser, or if the employee benefit plan has total assets
in excess of $5,000,000 or, if a self-directed plan, with investment decisions
made solely by persons that are accredited investors;
(3) Any private business development company as defined in
section 202(a)(22) of the Investment Advisers Act of 1940;
(4) Any organization described in section 501(c)(3) of the
Internal Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000;
(5) Any natural person whose individual net worth, or joint net
worth with that person's spouse, at the time of his purchase exceeds $1,000,000;
(6) Any natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that person's
spouse in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year;
(7) Any trust, with total assets in excess of $5,000,000, not
formed for the specific purpose of acquiring the securities offered, whose
purchase is directed by a person who has such knowledge and experience in
financial and business matters that he is capable of evaluating the merits and
risks of the prospective investment; or
(8) Any entity in which all of the equity owners are accredited
investors.
As used in this Section 3.6(a), the term "net worth" means the excess
of total assets over total liabilities. For the purpose of determining a
person's net worth, the principal residence owned by an individual should be
valued at fair market value, including the cost of improvements, net of current
encumbrances. As used in this Section 3.6(a), "income" means actual economic
income, which may differ from adjusted gross income for income tax purposes.
Accordingly, the undersigned should consider whether it should add any or all of
the following items to its adjusted gross income for income tax purposes in
order to reflect more accurately its actual economic income: any amounts
attributable to tax-exempt income received, losses
12.
<PAGE>
claimed as a limited partner in any limited partnership, deductions claimed for
depletion, contributions to an IRA or Keogh retirement plan, and alimony
payments.
(b) The Investor as to itself severally and not jointly further
represents to the Company that Investor is an Accredited Investor.
3.7 Restricted Securities. The Investor understands that the Stock
---------------------
(and any Common Stock issued on conversion thereof) may not be sold,
transferred, or otherwise disposed of without registration under the 1933 Act or
an exemption therefrom, and that in the absence of an effective registration
statement covering the Stock (or the Common Stock issued on conversion thereof)
or an available exemption from registration under the 1933 Act, the Stock (and
any Common Stock issued on conversion thereof) must be held indefinitely. In
particular, the Investor is aware that the Stock (and any Common Stock issued on
conversion thereof) may not be sold pursuant to Rule 144 promulgated under the
1933 Act unless all of the conditions of that Rule are met. Among the conditions
for use of Rule 144 is the availability of current information to the public
about the Company.
3.8 Legends. To the extent applicable, each certificate or other
-------
document evidencing any of the Series D Preferred Stock or any Common Stock
issued upon conversion thereof shall be endorsed with the legends set forth
below, and the Investor covenants that, except to the extent such restrictions
are waived by the Company, the Investor shall not transfer the shares
represented by any such certificate without complying with the restrictions on
transfer described in the legends endorsed on such certificate:
(a) The following legend under the Act:
"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR COMPLIANCE WITH
RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS
RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND
ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED."
3.9 Public Sale. The Investor agrees not to make, without the prior
-----------
written consent of the Company, any public offering or sale of the Series D
Preferred Stock or the Warrants, or any Common Stock issued upon the conversion
or exercise thereof, although permitted to do so pursuant to Rule 144(k)
promulgated under the Securities Act, until three years after the First Closing
and such restriction shall apply to any and all purchases of the Company's
Warrants, Series D Preferred Stock and Common Stock.
3.10 The Investor is not a U.S. Person and the Investor hereby
represents that it has satisfied itself as to the full observance of the laws of
its jurisdiction in connection with any invitation to subscribe for the Stock or
any use of this Agreement, including (i) the legal requirements within his or
her jurisdiction for the purchase of the Stock, (ii) any foreign
13.
<PAGE>
exchange restrictions applicable to such purchase, (iii) any governmental or
other consents which may need to be obtained, and (iv) the income tax and other
tax consequences, if any, which may be relevant to the purchase, holding,
redemption, sale or transfer of the Interest. The Investor's subscription and
payment for, and its continued beneficial ownership of the Stock will not
violate any applicable securities or other laws of its jurisdiction.
4. Conditions of Investor's Obligations at Closing. The obligations of
-----------------------------------------------
the Investor under subparagraph 1.1(b) of this Agreement are subject to the
fulfillment on or before each Closing of each of the following conditions
(except for Section 4.7 which shall only be true as of the First Closing except
as it pertains to Jo Lernout and either Thomas Denys or Francis
Vanderhooydonck), the waiver of which shall not be effective against Investor
unless Investor consents in writing thereto:
4.1 Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be true on and as of each
Closing with the same effect as though such representations and warranties had
been made on and as of the date of each Closing.
4.2 Performance. The Company shall have performed and complied with
-----------
all agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before each Closing.
4.3 Compliance Certificate. The President of the Company shall
----------------------
deliver to each Investor at the Closing a certificate certifying that the
conditions specified in paragraphs 4.1, 4.2, 4.4, 4.6, 4.7, 4.9 and 4.10 have
been fulfilled (the certificate for the Second and Third Closings need not
reference nor make the representation described in Section 4.7 except to state
that Jo Lernout and either Thomas Denys or Francis Vanderhooydonck are members
of the Board of Directors.
4.4 Qualifications. All authorizations, approvals, or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Stock pursuant to this Agreement shall be duly obtained and effective as of
each Closing.
4.5 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at each Closing and all documents
incident thereto shall be reasonably satisfactory in form and substance to the
Investor's special counsel, which shall have received all such counterpart
original and certified or other copies of such documents as it may reasonably
request.
4.6 Bylaws. Section 2.2 of the Bylaws of the Company shall provide
------
that the authorized number of directors of the Company shall be not more than
twelve (12), which number shall not be changed without consent of holders of a
majority of the Series D Preferred Stock according the Certificate of
Designation.
4.7 Board of Directors. The board of directors of the Company shall
------------------
be Messrs. Timothy J. Connolly, Janet E. Carson, H. Russel Douglas, Fredrick A.
Huttner, G. Edward Powell, Michael J. Wilson, William Boyar, Raymond Betz and
Daniel Dornier. Within
14.
<PAGE>
10 days of the First Closing, Jo Lernout and either Francis Vanderhooydonck or
Thomas Denys (upon the Investor's selection) shall be elected to the Board of
Directors of the Company.
4.8 Opinion of Company Counsel. The Investor shall have received from
--------------------------
Boyar, Simon & Miller, P.C., counsel for the Company, an opinion, dated the date
of the Closing, in form and substance satisfactory to special counsel to the
Investor, to the effect that:
a. The Company has been duly incorporated and organized and is a validly
existing corporation in good standing under the laws of the State of Delaware.
b. The Company has the requisite corporate power to own its properties
and assets and to conduct its business as it is currently being conducted and,
to the best of our knowledge, is qualified as a foreign corporation to do
business and is in good standing in each jurisdiction in the United States of
America in which the ownership of its property or the conduct of its business
requires such qualification and where any statutory fines or penalties or any
corporate disability imposed for the failure to qualify would materially and
adversely affect the Company, its assets, financial condition or operations.
c. Each of (i) the Purchase Agreement, (ii) that certain Registration
Rights Agreement dated December 31, 1998, between the Company and certain
shareholders of the Company (the "Registration Rights Agreement"), (iii) that
certain Voting Agreement dated December 31, 1998, among the Company, the
Investor and Voice Technologies Partners, Ltd. (the "Voting Agreement"), (iv)
that certain Warrant to purchase 1,500,000 shares of common stock of the Company
issued by the Company to the Investor and dated December 31, 1998, and (v) that
certain Warrant to purchase 500,000 shares of common stock of the Company issued
by the Company to the Investor and dated December 31, 1998 ("Warrant Two") has
been duly and validly authorized, executed and delivered by the Company and
constitutes a valid and binding agreement of the Company enforceable in
accordance with its terms, except (x) as to rights to indemnity under Section 7
of the Registration Rights Agreement may be limited by applicable laws, (y) as
enforcement may be limited by applicable bankruptcy, insolvency, reorganization,
arrangement, moratorium or other similar laws from time to time in effect and
affecting the rights of creditors generally, and (z) Warrant Two may not be
considered delivered until funding of the Second Closing in accordance with the
Purchase Agreement and Warrant Two is released from escrow, all of the foregoing
being subject to general equity principles and to limitations on availability of
equitable relief, including specific performance.
d. The Capital stock of the Company is as follows:
(i) 2,000,000 shares of Preferred Stock, par value $0.10 per share,
of which (i) 312,500 shares have been designated Series A Preferred
Stock, of which 186,000 are issued and outstanding, (ii) 3,000 shares
have been designated Series B Preferred Stock, of which 2,285 are
issued and outstanding, (iii) 231,788 shares have been designated
Series C Preferred Stock, of which 153,538 are issued and outstanding,
(iv) 2,000 of which have been designated Series 1 Preferred Stock, of
which zero are issued and outstanding, and (v) 5,000 shares have been
designated Series D Preferred Stock, of which 2,000 are duly issued
and delivered and are validly outstanding, fully paid and
nonassessable and an additional 1,000 shares will be duly
15.
<PAGE>
issued and delivered and will be validly outstanding, fully paid and
nonassessable upon funding of the Second Closing as described in the
Purchase Agreement. The respective rights, privileges and preferences
of the Series D Preferred Stock are as stated in that certain
Certificate of Designation, Preferences, Rights and Limitations of
Series D Preferred Stock of Applied Voice Recognition, Inc. (the
"Certificate of Designation"). The Common Stock issuable upon the
conversion of the Series D Preferred Stock purchased under the
Purchase Agreement (based upon the initial conversion price, as
described in the Company's Certificate of Designation) has been duly
and validly reserved for issuance and, when issued in accordance with
the Company's Certificate of Designation, will be validly issued,
fully paid and nonassessable.
(ii) 50,000,000 shares of Common Stock have been duly authorized, of
which we have no knowledge that more than 15,382,891 shares are issued
and outstanding. In addition, we have no knowledge that options to
purchase more than 2,262,331 shares of Common Stock under the Option
Plan or options and warrants to purchase more than an aggregate of
3,765,132 additional shares of Common Stock outside of the Option Plan
are currently outstanding.
f. The certificates representing the Shares are in due and proper form
and have been validly executed.
g. The execution, delivery and performance of the Purchase Agreement and
the Registration Rights Agreement by the Company on or prior to the Closing and
the issuance of the Shares pursuant to the Purchase Agreement do not violate any
provision of the Company's Certificate of Incorporation or Bylaws, and do not
constitute a material default under the provisions of any material agreement
known to us to which the Company is a party or by which it is bound, and do not
violate or contravene (a) any governmental statute, rule or regulation
applicable to the Company or (b) any order, writ, judgment, injunction, decree,
determination or award which has been entered against the Company and of which
we are aware, the violation or contravention of any of which would materially
and adversely affect the Company, its assets, financial condition or operations.
h. To the best of our knowledge, there is no action, proceeding or
investigation pending or overtly threatened against the Company before any court
or administrative agency that questions the validity of the Purchase Agreement
or the Registration Rights Agreement or might result, either individually or in
the aggregate, in any material adverse change in the assets, financial
condition, or operations of the Company.
i. All consents, approvals, authorizations, or orders of, and filings,
registration and qualifications with, any regulatory authority or governmental
body in the State of Texas, the State of Delaware or the federal government of
the United States of America required for the consummation by the Company of the
transactions contemplated by the Purchase Agreement, have been made or obtained,
except for the filing of a Form D pursuant to Securities and Exchange Commission
Regulation D.
16.
<PAGE>
j. Subject to the truth and accuracy of the Investor's information,
representations and warranties set forth in the Purchase Agreement, the offer
and sale of the Shares is, and the issuance of the Common Stock upon conversion
of the Shares would be, exempt from the registration requirements of the
Securities Act of 1933, as amended to date.
4.9 Registration Rights Agreement. The Company and the Investor shall
-----------------------------
have entered into the Registration Rights Agreement in the form attached as
Exhibit E.
4.10 Co-Sale Agreements. Voice Technologies Partners, Ltd., a Texas
------------------
limited partnership, shall have entered into a Co-Sale and Tag-Along Rights
Agreement in the form attached hereto as Exhibit F.
5. Conditions of the Company's Obligations at Closing. The obligations of
--------------------------------------------------
the Company to the Investor under this Agreement are subject to the fulfillment
on or before each Closing of each of the following conditions by the Investor:
5.1 Representations and Warranties. The representations and
------------------------------
warranties of the Investor contained in Section 3 shall be true on and as of
each Closing with the same effect as though such representations and warranties
had been made on and as of each Closing.
5.2 Qualifications. All authorizations, approvals, or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Stock pursuant to this Agreement shall be duly obtained and effective as of
each Closing.
6. Covenants. The following Covenant shall be an obligation of the
---------
Company from the date hereof until such date as when there are no shares of
Series D Preferred Stock outstanding.
6.1 Common Stock. The Company shall take all necessary corporate
------------
action to maintain, or increase when and if necessary, a sufficient number of
shares of authorized and unissued shares of Common Stock to allow the conversion
of all outstanding Series D Preferred Stock at the then current Conversion
Price.
6.2 Nasdaq and AMEX. The Company shall use its best efforts and
---------------
continue to use its best efforts to (i) meet the listing requirements of either
Nasdaq National Market or the AMEX stock exchange within a reasonable period of
time following the First Closing., (ii) get its stock listed on either Nasdaq
National Market or the AMEX stock exchange within a reasonable period of time
following the First Closing, and (iii) maintain its stock on either Nasdaq
National Market or the AMEX stock exchange.
7. Miscellaneous.
-------------
7.1 Entire Agreement. This Agreement and the documents referred to
----------------
herein constitute the entire agreement among the parties and no party shall be
liable or bound to any
17.
<PAGE>
other party in any manner by any warranties, representations, or covenants
except as specifically set forth herein or therein.
7.2 Survival of Warranties. The warranties, representations and
----------------------
covenants of the Company and the Investor contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closings.
7.3 Successors and Assigns. Except as otherwise provided herein, the
----------------------
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
permitted transferees of any shares of Series D Preferred Stock and the Warrants
sold hereunder or any Common Stock issued upon conversion or exercise thereof).
Nothing in this Agreement, express or implied, is intended to confer upon any
party other than the parties hereto or their respective successors and assigns
any rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
7.4 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of Delaware as applied to agreements among Delaware
residents entered into and to be performed entirely within Delaware.
7.5 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.6 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
7.7 Notices. Unless otherwise provided, any notice required or
-------
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified by
facsimile, hand or professional courier service or five days after deposit with
the United States Post Office, by registered or certified mail, postage prepaid
and addressed to the party to be notified at the address indicated for such
party on the signature page hereof, or at such other address as such party may
designate by ten (10) days' advance written notice to the other parties.
7.8 Finder's Fees. Each party represents that it neither is nor will
-------------
be obligated for any finders' fee or commission in connection with this
transaction.
The Investor agrees to indemnify and to hold harmless the Company from
any liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Investor or any of its officers, partners, employees,
or representatives is responsible.
The Company agrees to indemnify and hold harmless the Investor from
any liability for any commission or compensation in the nature of a finders' fee
(and the costs and
18.
<PAGE>
expenses of defending against such liability or asserted liability) for which
the Company or any of its officers, employees or representatives is responsible.
7.9 Expenses. Irrespective of whether any Closing is effected, except
--------
as set forth in the following sentence, each of the Company and shall pay all
costs and expenses that it incurs with respect to the negotiation, execution,
delivery and performance of this Agreement. If the First Closing is effected,
the Company shall, at the First Closing, reimburse the reasonable fees and
expenses of special counsel for the Investor not to exceed $15,000 which shall
be withdrawn from the purchase price at the First Closing.
7.10 Attorneys Fees. If any action at law or in equity is necessary to
--------------
enforce or interpret the terms of this Agreement, the Registration Rights
Agreement, the Investor's Rights Agreement or the Certificate of Incorporation,
the prevailing party shall be entitled to reasonable attorney's fees, costs and
necessary disbursements in addition to any other relief to which such party may
be entitled.
7.11 Amendments and Waivers. 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), only
with the written consent of the Company and the holders of more than 66-2/3% of
the Common Stock (that has not been sold to the public) issued or issuable upon
conversion of the Series D Preferred Stock. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each holder of any
securities purchased under this Agreement at the time outstanding (including
securities into which such securities have been converted), each future holder
of all such securities, and the Company.
7.12 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
7.13 Arbitration. All disputes, claims, and/or requests for specific
-----------
contractual performance, or other equitable relief, or damages or any other
matters in question between the parties arising out of this Agreement shall be
submitted for arbitration, provided that the parties have first made a good
faith effort to resolve such matters together. Demand shall be made to the
American Arbitration Association ("AAA") and shall be conducted in New York, New
York by a panel of three (3) arbitrators. The Investors (as a group if more than
one) and the Company shall each choose one (1) panel member from a panel of
person having experience with and knowledge of the purchase and sale of
securities. The third member shall be an independent party, chosen by the first
two members. At least one member of the panel must have a legal background.
Arbitration shall be in accordance with the commercial rules of the AAA. The
Award of the Arbitrators shall be final and judgement may be entered upon it in
any court having jurisdiction thereof, and the prevailing party shall be
entitled to costs and reasonable attorneys' fees arising out of Arbitration
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
19.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
APPLIED VOICE RECOGNITION, INC.
By: /s/ Timothy J. Connolly
----------------------------------
Timothy J. Connolly, Chief
Executive Officer
4015 Post Oak Place
Suite 111
Houston, TX 77027
INVESTOR:
L&H INVESTMENT COMPANY N.V.
By: /s/ Thomas Denys
----------------------------------
C.V.B.A. Thomas Denys, Director
and By: /s/ Francis Vanderhooydonck
----------------------------------
C.V.B.A. Francis Vanderhooydonck,
Director
Address:
Sint-Krispijnstraat 7
8900 Ieper
Belgium
fax: 011-32-57-22-95-45
[SIGNATURE PAGES TO SERIES D PREFERRED
STOCK AND WARRANT PURCHASE AGREEMENT]
<PAGE>
SCHEDULE A
CLOSING SCHEDULE
- - ----------------
PURCHASE NUMBER OF
CLOSING PRICE SHARES
------------------------------------------------------------------
First Closing $2,000,000 2,000 shares
Second Closing $1,000,000 1,000 shares
Third Closing $2,000,000 2,000 shares
A-1
<PAGE>
SCHEDULE B
MILESTONES REQUIRED FOR
THIRD CLOSING
- - -------------
1) AVRI shall be able to demonstrate to the reasonable satisfaction of L&H the
following functionality of Voice Commander 99:
a) Clients can dictate into Olympus hand-held device;
b) Olympus card can plug into PC or PC Reader;
c) Dictation recognized by IBM engine, compressed and encrypted;
d) Dictation can be sent over Internet to transcription workstation,
unencrypted and transcribed and transcribed document then encrypted
and sent over Internet to client for signature.
2) AVRI will complete Beta tests for Voice Commander 99 in five customer
accounts. Representatives of each of such five accounts will be made
reasonably available to discuss the results of the Beta test with L&H.
3) Acquisition objectives: For each acquisition completed by AVRI, the
following objectives shall be met:
a) Acquisitions shall be purchased at a valuation of less than 6 times
EBITDA; and
b) All acquisitions shall be accretive to earnings based upon restated
and adjusted run-rate calculations ("run-rate" meaning that an
acquisition completed at any time during the month will be treated as
if it was completed on the first day of the month).
4) Monthly Revenue objectives:
a) Transcription revenues exceed $250,000 for the month on a run rate
basis as of 2/28/99 (Note: These revenues include $80,000 per month
for acquisitions, which are identified but not under contract as of
December 10, 1998;
b) Voice Commander Professional edition revenues average $75,000 per
month for January and February, 1999;
c) If transcription revenues do not exceed $250,000 per month or Voice
Commander Professional edition revenues do not average $75,000 per
month as stated above, the monthly revenue objectives shall still be
deemed met if aggregate run-rate revenues equal or exceed $325,000 for
February, 1999.
d) Monthly Corporate overhead expense objectives:
B-1
<PAGE>
e) Corporate overhead expenses (as stated on an accrual basis) are less
than $425,000 per month for both January and February 1999. These
expenses exclude the following: financing costs, options and warrant
valuations, professional fees related to acquisitions, capital
formation and the dispute between AVRI and the Dominion/Sovereign
funds, and depreciation and amortization.
f) AVRI shall document the capability of Voice Commander 99 to save labor
cost in transcribing data as compared to the that incurred in
transcribing the same data using traditional transcription methods. In
addition, AVRI shall document the capability of the use of offshore
transcription operations to save labor cost over the same operations
in the United States.
5) AVRI shall have begun selling Voice Commander 99 to its target market,
including internet workflow and hand-held devices prior to February 28,
1999.
B-2
<PAGE>
SCHEDULE C
SCHEDULE OF EXCEPTIONS
TO
APPLIED VOICE RECOGNITION, INC.
SERIES D PREFERRED STOCK
AND
WARRANT PURCHASE AGREEMENT
1. SECTION 2.1 - None.
-----------
2. SECTION 2.2 - None.
-----------
3. SECTION 2.3 - None.
-----------
4. SECTION 2.4 - None.
-----------
5. SECTION 2.5
-----------
(a) The Company has issued warrants and/or options outside of the
1997 Incentive Plan to the individuals or entities set forth on EXHIBIT "A"
-----------
attached hereto and incorporated herein, to purchase the number of shares
of common stock of the Company as set forth opposite their respective
names.
(b) The Company has issued options under the 1997 Incentive Plan to
the individuals set forth on EXHIBIT "B" attached hereto and incorporated
-----------
herein by this reference, to purchase the number of shares of common stock
of the Company as set forth opposite their respective names.
(c) The holders of Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock each have rights to convert their shares of
preferred stock into shares of common stock.
(d) It is anticipated that Voice Technologies Partners, Ltd. will
enter into a Voting Agreement with the Corporation and the Investor in
connection with the L&H transaction. Pursuant to agreement, all shares of
Voice Technologies Partners, Ltd. are voted by Timothy J. Connolly.
(e) Pursuant to the Placement Agreement dated July 23, 1997 between
Equity Services, Ltd. and the Company, the Company has agreed to use its
best efforts to have one member of the Board of Directors be chosen by
Equity Services, Ltd.
B-3
<PAGE>
6. SECTION 2.6 - The Company owns all of the issued stock of its
-----------
subsidiary, AVRI Health Care Information Services, Inc., a Delaware corporation,
and 897 shares out of 900 shares of common stock outstanding of Outsource
Transcription Philippines, Inc., a Philippines corporation.
7. SECTION 2.7 - The Company has executed the following agreements with
-----------
each of the following:
(a) Employment Agreement dated May 1, 1997, executed by and between
the Company and William T. Kennedy;
(b) Employment Agreement dated August 31, 1998, executed by and
between the Company and Milton A. Spiegelhauer;
(c) Employment Agreement dated August 1, 1998, executed by and
between the Company and Robin P. Ritchie;
(d) Employment Agreement dated July 1, 1997, executed by and between
the Company and Timothy J. Connolly;
(e) Employment Agreement dated April 1, 1997, executed by and between
the Company and H. Russel Douglas;
(f) Employment Agreement dated June 1, 1997, executed by and between
the Company and Robert J. Lopez (terminated);
(g) Employment Agreement dated April 1, 1997, executed by and between
the Company and Charles W. Skamser (terminated);
(h) Consulting Agreement dated November 1, 1997, executed by the
Company and Michael J. Wilson, as amended by Amendment to Consulting
Agreement dated April 23, 1998;
(i) Consulting Agreement dated November 1, 1997, executed by and
between the Company and Milbery Consulting Group, L.L.C., as amended by
that certain Amendment to Consulting Agreement dated April 23, 1998;
(j) Consulting Agreement dated November 15, 1997, executed by and
between the Company and Frank Martin;
(k) Consulting and Stockholder Agreement dated effective January 15,
1997, executed by and between the Company and Frederick Huttner (expired);
B-4
<PAGE>
(l) Consulting Agreement dated effective January 15, 1998, executed
by and between the Company and Huttner & Company (expired);
(m) Consulting Agreement dated February 14, 1997, executed by and
between the Company and Steven Reid (expired);
(n) Office Lease dated May 4, 1996, executed by and between the
Company and T. Rowe Price Renaissance Fund, Ltd.;
(o) Office Lease dated May 6, 1997, executed by and between
Transcription Resources and Pengo Realty, assigned to the Company by
Assignment of Interest in Lease dated March 18, 1998;
(p) Licensing Agreement dated September 16, 1996, executed by and
between the Company and Hakeem, Inc. (expired);
(q) Extended Hardware Support Agreement dated March 20, 1998,
executed by and between the Company and National Warranty Corporation;
(r) Support Agreement dated December 5, 1997, executed by and between
the Company and National Warranty Corporation;
(s) Investment Banking Agreement dated June 22, 1998, executed by and
Between the Company and Fortress Financial Group, Ltd.
(t) Letter Agreement regarding financial advising services dated July
22, 1998, executed by and between the Company and Sands Brothers & Co.,
Ltd.;
(u) License Agreement dated June 30, 1998, by and between the Company
and Noise Cancellation Technologies, Inc.; and
(v) Letter Agreement regarding investment relations dated June 15,
1998, executed by and between the Company and KCSA Worldwide.
8. SECTION 2.8
-----------
(a) Pursuant to the December, 1998 bridge loan financing of the
Company, the Company is indebted to each of the following employees in the
amounts set forth opposite their respective names (including in some cases,
salary deferral):
Timothy J. Connolly $39,584;
------
Milton J. Spiegelhauer $25,000;
------
Jan Carson Connolly $60,416;
------
Robin P. Ritchie $25,000; and
------
B-5
<PAGE>
William T. Kennedy $75,000.
------
(b) With respect to agreements with employees of the Company, in
addition to the employment and consulting agreements of Section 2.7, which
is incorporated herein reference, the Company executed that certain
Termination Agreement dated April 30, 1998, with Janet E. Carson.
(c) Timothy J. Connolly, Janet E. Carson and Russ Douglas are
partners in Voice Technologies Partners, Ltd., a limited partnership that
owns in excess of 5.9 million shares of common Stock of the Company and is
an affiliate of the Company.
(d) The Company is indebted for legal fees and expenses to the law
firm of Boyar, Simon & Miller, P.C. ($63,191 as of November 30, 1998). J.
William Boyar is a director of the Company and a member of the firm of
Boyar, Simon & Miller, P.C.
9. SECTION 2.9 - The Company is a party to the following Registration
-----------
Rights Agreements:
(a) Registration Rights Agreement dated July 31, 1997, by and between
the Company and Equity Services, Ltd. ("ESL"), relating to registration
rights for 33,750 shares of common stock of the Company held by ESL;
(b) Registration Rights Agreement dated August 12, 1997, by and
between the Company and ESL, relating to registration rights for 50,625
shares of common stock of the Company held by ESL and an additional 168,750
shares of common stock of the Company granted pursuant to an Option
Certificate dated of even date therewith granted to ESL;
(c) Registration Rights Agreement dated July 31, 1997, as amended and
restated by Amended and Restated Registration Rights Agreement dated
January 8, 1998, by and between the Company and Entrepreneurial Investors,
Ltd. ("EIL"), relating to registration rights for shares of common stock of
the Company issuable upon conversion of 125,000 shares of Series A
preferred stock of the Company held by EIL;
(d) Registration Rights Agreement dated August 12, 1997, by and
between the Company and EIL, relating to registration rights for shares of
common stock of the Company issuable upon conversion of 187,500 shares of
Series A preferred stock of the Company held by EIL;
(e) Registration Rights Agreement dated December 31, 1997, by and
between the Company and Voice It Worldwide, Inc. ("Voice It"), relating to
registration rights for 471,698 shares of common stock of the Company held
by Voice It;
B-6
<PAGE>
(f) Registration Rights Agreement dated July 30, 1998, by and between
the Company and E SL, relating to registration rights for shares of common
stock of the Company issuable upon conversion of 11,038 shares of Series C
preferred stock of the Company held by ESL and an additional 220,750 shares
of common stock of the Company granted pursuant to an Option Certificate
dated of even date therewith;
(g) Registration Rights Agreement dated July 30, 1998, by and between
the Company and Rainer Bischoff ("Bischoff"), relating to registration
rights for shares of common stock of the Company issuable upon conversion
of 7,500 shares of Series C preferred stock of the Company held by
Bischoff;
(h) Registration Rights Agreement dated July 30, 1998, by and between
the Company and Ralf Nickeleit-Bonnier ("Bonnier"), relating to
registration rights for shares of common stock of the Company issuable upon
conversion of 6,250 shares of Series C preferred stock of the Company held
by Bonnier;
(i) Registration Rights Agreement dated July 30, 1998, by and between
the Company and Cornelius Dornier ("C. Dornier"), relating to registration
rights for shares of common stock of the Company issuable upon conversion
of 22,500 shares of Series C preferred stock of the Company held by C.
Dornier;
(j) Registration Rights Agreement dated July 30, 1998, by and between
the Company and Daniel Dornier ("D. Dornier"), relating to registration
rights for shares of common stock of the Company issuable upon conversion
of 30,000 shares of Series C preferred stock of the Company held by D.
Dornier;
(k) Registration Rights Agreement dated July 30, 1998, by and between
the Company and Gabrielle Dornier ("G. Dornier"), relating to registration
rights for shares of common stock of the Company issuable upon conversion
of 22,500 shares of Series C preferred stock of the Company held by G.
Dornier;
(l) Registration Rights Agreement dated July 30, 1998, by and between
the Company and Matthia Dornier ("M. Dornier"), relating to registration
rights for shares of common stock of the Company issuable upon conversion
of 15,000 shares of Series C preferred stock of the Company held by M.
Dornier;
(m) Registration Rights Agreement dated July 30, 1998, by and between
the Company and Silvius Dornier ("S. Dornier"), relating to registration
rights for shares of common stock of the Company issuable upon conversion
of 30,000 shares of Series C preferred stock of the Company held by S.
Dornier;
B-7
<PAGE>
(n) Registration Rights Agreement dated July 30, 1998, by and between
the Company and Herman Ebel ("Ebel"), relating to registration rights for
shares of common stock of the Company issuable upon conversion of 19,500
shares of Series C preferred stock of the Company held by Ebel;
(o) Registration Rights Agreement dated July 30, 1998, by and between
the Company and Thomas Heinzel (T. Heinzel"), relating to registration
rights for shares of common stock of the Company issuable upon conversion
of 7,500 shares of Series C preferred stock of the Company held by T.
Heinzel;
(p) Registration Rights Agreement dated July 30, 1998, by and between
the Company and Ursula Heinzel ("U. Heinzel"), relating to registration
rights for shares of common stock of the Company issuable upon conversion
of 7,500 shares of Series C preferred stock of the Company held by U.
Heinzel;
(q) Registration Rights Agreement dated July 30, 1998, by and between
the Company and Michael Jahr ("Jahr"), relating to registration rights for
shares of common stock of the Company issuable upon conversion of 30,000
shares of Series C preferred stock of the Company held by Jahr;
(r) Registration Rights Agreement dated July 30, 1998, by and between
the Company and Stephen L. Pampush ("Pampush"), relating to registration
rights for shares of common stock of the Company issuable upon conversion
of 1,500 shares of Series C preferred stock of the Company held by Pampush;
(s) Registration Rights Agreement dated July 30, 1998, by and between
the Company and Dr. Heinz Schmitz ("Schmitz"), relating to registration
rights for shares of common stock of the Company issuable upon conversion
of 12,000 shares of Series C preferred stock of the Company held by
Schmitz;
(t) Registration Rights Agreement dated July 30, 1998, by and between
the Company and Peter Widenmann ("Widenmann"), relating to registration
rights for shares of common stock of the Company issuable upon conversion
of 1,500 shares of Series C preferred stock of the Company held by
Widenmann;
(u) Registration Rights Agreement dated July 30, 1998, by and between
the Company and Ulfert Zollner ("Zollner"), relating to registration rights
for shares of common stock of the Company issuable upon conversion of 9,500
shares of Series C preferred stock of the Company held by Zollner;
(v) Registration Rights Agreement dated July 30, 1998, by and between
the Company and Sovereign Partners, Ltd. ("Sovereign"), relating to
B-8
<PAGE>
registration rights for shares of common stock of the Company issuable upon
conversion of 3,000 shares of Series B preferred stock of the Company held
by Sovereign; and
(w) Registration Rights Agreement dated July 30, 1998, by and between
the Company and Dominion Capital Fund, Ltd. ("Dominion"), relating to
registration rights for shares of common stock of the Company issuable upon
conversion of 3,000 shares of Series B preferred stock of the Company held
by Dominion.
10. SECTION 2.10 - None.
------------
11. SECTION 2.11 - The Company has received a letter from counsel for
------------
Equity Services Ltd. claiming that the Company is in default under various
covenants requiring the delivery of information contained in the Placement
Agreement dated July 23, 1997.
12. SECTION 2.12
------------
(a) Cause No. 9843946, Nevada Gold & Casinos, Inc. v. the Company, in
the 164th Judicial District Court of Harris County, Texas.
(b). The Company is also in the process of arbitrating a dispute with
Voice It Worldwide, Inc., a Delaware corporation. The dispute alleges
breach of contract and fraud by Voice It under a software sales and
licensing agreement.
(c) The Company intends to seek mediation of a dispute with the
purchasers of the Company's Series B Preferred Stock arising out of such
purchasers' apparent short selling of the Company's common stock in
violation of agreements between such purchaser and the Company.
(d) The Company has received a letter from counsel for Equity
Services Ltd. claiming that the Company is in default under various
covenants requiring the delivery of information contained in the Placement
Agreement dated July 23, 1997.
13. SECTION 2.13 - None.
------------
14. SECTION 2.14 - None.
------------
15. SECTION 2.15 - None.
------------
16. SECTION 2.16
------------
(a) The Company has entered into a sale/leaseback transaction with
Commercial Money Center, Inc. ("Lessor") pursuant to which the Company has
B-9
<PAGE>
sold certain fixed assets to Lessor and leased back such assets. As of
December 22, 1998, such transaction had not been funded by Lessor.
(b) The Company executed a capital lease with Intertel, Inc. on February
15, 1997 for the lease/purchase of telephone equipment.
(c) Equipment Leases each dated May 13, 1998, executed by Cornell
Transcription, Inc., as lessee, and Sterling National Bank, as lessor, as
each assigned to the Company under those certain Assignments of
Lease/Security Agreement and Assumption of Obligations each dated effective
as of December 1, 1998.
17. SECTION 2.17
------------
(a) The Company has entered into a sale/leaseback transaction with
Commercial Money Center, Inc. ("Lessor") pursuant to which the Company has
sold certain fixed assets to Lessor and leased back such assets. As of
December 22, 1998, such transaction had not been funded by Lessor.
(b) Equipment Leases each dated May 13, 1998, executed by Cornell
Transcription, Inc., as lessee, and Sterling National Bank, as lessor, each
assigned to the Company under those certain Assignments of Lease/Security
Agreement and Assumption of Obligations each dated effective as of December
1, 1998.
18. SECTION 2.18
------------
(a) The Company has entered into a sale/leaseback transaction with
Commercial Money Center, Inc. ("Lessor") pursuant to which the Company has
sold certain fixed assets to Lessor and leased back such assets. As of
December 22, 1998, such transaction had not been funded by Lessor.
(b) During December, 1998, the Company received bridge loans aggregating
$355,417 from certain of its officers and directors, as well as outside
investors. In connection therewith, each lender received warrants to
purchase a number of shares of common stock of the Company (at an exercise
price equal to the closing bid price of the Company's common stock on the
date of funding) equal to the number of dollars loaned.
(c) Effective October 1998, the Company received notice that Voice It
Technologies, Inc. had filed bankruptcy under Chapter 11 of the Federal
Bankruptcy laws. Voice It was obligated to purchaser for payment for
software products sold and delivered to Voice It by the Company in
December, 1997.
(d) The Company has paid dividends as required to the holders of its
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock.
B-10
<PAGE>
(e) Equipment Leases each dated May 13, 1998, executed by Cornell
Transcription, Inc., as lessee, and Sterling National Bank, as lessor, each
assigned to the Company under those certain Assignments of Lease/Security
Agreement and Assumption of Obligations each dated effective as of December
1, 1998.
19. SECTION 2.19 - The Company owns, or has applied for, as indicated, the
------------
following patents and trademarks:
<TABLE>
<CAPTION>
Mark File No. Serial No. Status
---- -------- ---------- ------
<S> <C> <C> <C>
Applied Voice Recognition 12557 75/112,287 Published 9/22/98
VoiceCOMMANDER 12621 2,168,908 Registered
SpeechCOMMANDER 12815 75/271,908 Abandoned
LawCOMMANDER 12816 2,194,983 Registered
TeleCOMMANDER 12817 75/271,909 Refusal Withdrawn
ConsoleCOMMANDER 12818 75/271,910 Abandoned
CadCOMMANDER 12819 75/271.911 Allowed
InflightCOMMANDER 12820 75/271,988 Published 9/22/98
VoiceCOMMANDER
Locator 12821 75/271,989 Allowed
Mike Rofone (word mark) 12828 2,201,084 Registered
Designs of Mike Rofone
Character 12829 2,161,767 Registered
Giving People Power Over
Technology 12905 75/310,333 Allowed
It's About Time 12968 75/363,236 Pending
Voice Experts 13002 75/362,975 Pending
StarCOMMANDER 13003 75/363,233 Pending
VoiceCOMMANDER
(CTM) 13154
PalmCOMMANDER 13199 75/478,828 Pending
SOS-The VoiceCOMMANDER
Speech Operating System 13341 Pending
SOS 13342 Pending
Airborne Order System 12409 08/813,538 Pending
Locator System in a Store 12410 Abandoned
Voice Actuated Gaming
System 12459 08/630,773 To be abandoned
Voice Interface for
Common Subroutines 12469 5,812,977 Issued
Apparatus for Editing 12852 08/859,127 Issue fee paid
Healthcare Information
System 13313 Awaiting Disclosure
</TABLE>
B-11
<PAGE>
20. SECTION 2.20 - See agreements set forth in Sections 2.7 and 2.8 above,
------------
incorporated herein by this reference.
21. SECTION 2.21 - None.
------------
22. SECTION 2.22 - None.
------------
23. SECTION 2.23 - None.
------------
24. SECTION 2.24 - None.
------------
25. SECTION 2.25 - None.
------------
26. SECTION 2.26 - None.
------------
B-12
<PAGE>
EXHIBIT 10.24
VOTING AGREEMENT
This VOTING AGREEMENT (the "Agreement") is entered into as of the 31/st/
day of December, 1998 (the "Effective Date"), by and among VOICE TECHNOLOGIES
PARTNERS, LTD., a Texas limited partnership ("Partners"), L & H INVESTMENT
COMPANY N.V., a Belgium corporation ("L&H"), and APPLIED VOICE RECOGNITION,
INC., a Delaware corporation (the "Company"), with respect to all of the issued
and outstanding common stock and preferred stock of the Company (the "Shares"),
presently or hereinafter owned by Partners and L&H (Partners, L&H and the
Company are sometimes hereinafter referred to individually as a "Party" and
collectively as the "Parties").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, L&H and the Company are parties to that certain Applied Voice
Recognition, Inc. Series D Preferred Stock and Warrant Purchase Agreement dated
of even date herewith (the "Purchase Agreement"), pursuant to which L&H has
acquired two thousand (2,000) shares of Series D Preferred Stock, $0.10 par
value, of the Company ("Series D Preferred Stock"), and may acquire up to three
thousand (3,000) additional shares of Series D Preferred Stock;
WHEREAS, Partners currently owns five million nine hundred twenty thousand
(5,920,000) shares of common stock, $0.001 par value, of the Company ("Common
Stock"); and
WHEREAS, it is the desire of the Parties to ensure that Partners shall have
the right to designate three (3) of the directors of the Company and that L&H
shall have the right to designate two (2) of the directors of the Company;
NOW THEREFORE, in consideration of the promises, mutual representations,
agreements and covenants herein contained, the Parties hereby mutually covenant
and agree as follows:
ARTICLE I
VOTING OF SHARES
----------------
1.1 VOTING FOR DIRECTOR DESIGNEES. Until the termination of this
-----------------------------
Agreement or as set forth in Section 1.3 below, in any election of the directors
of the Company, all of the Shares of the Company subject to this Agreement shall
be voted (a) for each of three (3) directors designated by Partners (the
"Partners' Directors"), and (b) for each of two (2) directors designated by L&H
(the "L&H Directors"). One of the L&H Directors shall be Joe Lernout for so long
as he is willing and able to carry of the duties of a director of the Company.
Each person nominated by L&H as an L&H Director and each person nominated by
Partners as a Partners' Director must be qualified and shall be subject to the
approval of a majority of the members of the Board of Directors of the Company,
which approval shall not unreasonably be withheld.
-1-
<PAGE>
1.2 ADDITIONAL VOTING AGREEMENTS. Each of the Parties agrees to use its
-----------------------------
best efforts to cause designees to be elected to the Board of Directors as
provided in Section 1.1. In the event of any vacancy in the Board of Directors,
each of Partners and L&H agrees to vote all Shares owned or controlled by such
stockholder and to otherwise use such stockholder's best efforts to fill such
vacancy so that the Board of Directors of the Company will include directors
designated as provided in Section 1.1. Each of Partners and L&H agrees to vote
all Shares owned or controlled by such stockholder for the removal of a director
whenever (but only whenever) there shall be presented to the Board of Directors
the written consent that such director be removed, signed (i) by Partners, in
the case of any Partners' Director, or (ii) by L&H, in the case of any L&H
Director.
1.3 TERMINATION WITH RESPECT TO ELECTION OF PARTNERS' DIRECTORS. Any and
-----------------------------------------------------------
all obligations of the parties hereto to cause designees of Partners to be
elected to the Board of Directors shall terminate upon termination of that
certain Co-Sale and Tag-Along Rights Agreement among the Parties dated December
31, 1998.
ARTICLE II
RESTRICTION ON CERTIFICATES
---------------------------
2.1 LEGEND. The Parties agree that all certificates representing all
------
Shares of the Company which at any time are subject to the provisions of this
Agreement shall have conspicuously placed upon their faces the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE PROVISIONS OF
A VOTING AGREEMENT DATED AS OF DECEMBER 31, 1998, BY AND AMONG CERTAIN
STOCKHOLDERS OF THE CORPORATION AND THE CORPORATION, A COPY OF WHICH IS ON
FILE WITH THE SECRETARY OF THE CORPORATION AT ITS PRINCIPAL PLACE OF
BUSINESS AND SHALL BE SUBJECT TO THE SAME RIGHT OF EXAMINATION BY A
STOCKHOLDER OF THE CORPORATION, IN PERSON OR BY AGENT OR ATTORNEY, AS ARE
THE BOOKS AND RECORDS OF THE CORPORATION.
2.2 EFFECT OF SALE OR TRANSFER. Unless the Parties agree otherwise, any
--------------------------
sale or other transfer of any of the Shares subject hereto shall cause the
provisions of this Agreement to be inapplicable to any such transferee and the
Shares so transferred, unless such transfer is to an affiliate of the
transferring party.
-2-
<PAGE>
ARTICLE III
COPY OF AGREEMENT ON FILE
-------------------------
A copy of this Agreement shall be placed on file at the Company's principal
place of business and shall be subject to the same right of examination by a
stockholder of the Company, in person or by agent or attorney, as are the books
and records of the Company.
ARTICLE IV
TERMINATION OF AGREEMENT
------------------------
This Agreement shall terminate and be of no further force and effect upon
the happening of any of the following:
(a) The written agreement of all of the Parties;
(b) The dissolution of the Company;
(c) Such time as all Parties shall cease to own any Shares of the
Company; or
(d) The conversion to Common Stock of at least 90% of the originally
issued Series D Preferred Stock.
Upon any such termination, the Parties shall submit the certificates
representing all Shares of the Company which are at such time subject to the
provisions of this Agreement and which have had placed on their face the legend
set forth in Article II in order that the Company reissue the Shares deleting
said legend.
ARTICLE V
MISCELLANEOUS PROVISIONS
------------------------
5.1 AGREEMENT TO PERFORM NECESSARY ACTS. Each of the Parties agrees to
-----------------------------------
perform any further acts and execute and deliver any documents that may be
reasonably necessary to carry out the provisions of this Agreement.
5.2 AMENDMENTS. The provisions of this Agreement may be waived, altered,
----------
amended, or repealed, in whole or in part, only on the written consent of each
of the Parties.
5.3 SEVERABILITY. In the event that any of the provisions or portions
------------
thereof, of this Agreement are held to be unenforceable or invalid by any court
of competent jurisdiction, the validity and enforceability of the remaining
provisions, or portions thereof, shall not be affected thereby.
-3-
<PAGE>
5.4 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall inure
----------------------
to the benefit of and shall be binding on the assigns, successors in interest,
personal representatives, estates, heirs and legatees of each of the Parties.
5.5 ENTIRE AGREEMENT. This Agreement contains the entire understanding
----------------
between the Parties concerning the subject matter contained herein. There are
no representations, agreements, arrangements, or understandings, oral or
written, between or among the Parties, relating to the subject matter of this
Agreement, which are not fully expressed herein.
5.6 SPECIFIC ENFORCEMENT. This Agreement shall be specifically
--------------------
enforceable by the Parties.
5.7 CONSIDERATION. This Agreement is made by the Parties in consideration
-------------
of the mutual promises contained herein and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged.
5.8 GENDER AND NUMBER. Whenever required by the context of this
-----------------
Agreement, the singular includes the plural, the masculine includes the feminine
or the neuter and the feminine includes the masculine or the neuter.
5.9 GOVERNING LAW. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware.
5.10 NOTICE. Any notice required or permitted under this Agreement
------
shall be given in writing and shall be delivered in person or by telecopy or by
overnight courier guaranteeing no later than second business day delivery, or
five days after deposit with the United States Post Office, by registered or
certified mail, postage prepaid, in any case directed to the appropriate party
at the address set forth below its signature hereto. Any party may change its
address for notice by giving ten (10) days advance written notice to the other
parties. Every notice or other communication hereunder shall be deemed to have
been duly given or served on the date on which personally delivered, or on the
date actually received, if sent by telecopy or overnight courier service, with
receipt acknowledged.
5.11 ARBITRATION. All disputes, claims, and/or requests for specific
-----------
contractual performance, or other equitable relief, or damages or any other
matters in question between the parties arising out of this Agreement shall be
submitted for arbitration, provided that the parties have first made a good
faith effort to resolve such matters together. Demand shall be made to the
American Arbitration Association ("AAA") and shall be conducted in New York, New
York by a panel of three (3) arbitrators. L&H and the Company shall each choose
one (1) panel member (unless L&H is not a party to the dispute, in which case
Partners and the Company shall each choose one (1) panel member) from a panel of
person having experience with and knowledge of the purchase and sale of
securities. The third member shall be an independent party, chosen by the first
two members. At least one member of the panel must have a legal background.
Arbitration shall be in accordance with the commercial rules of the AAA. The
Award of the Arbitrators shall be final and judgement may be entered upon it in
any court having jurisdiction
-4-
<PAGE>
thereof, and the prevailing party shall be entitled to costs and reasonable
attorneys' fees arising out of Arbitration.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
Effective Date.
PARTNERS:
--------
Address for Notice: VOICE TECHNOLOGIES PARTNERS,
LTD., a Texas limited partnership
4615 Post Oak Place, Suite 111
Houston, Texas 77027 By: Voice Technologies Management Corp.,
Telephone: (713) 621-5678 a Texas corporation, its general partner
Telecopier: (713) 621-5870
/s/ Timothy J. Connolly
By:______________________________________
Timothy J. Connolly, President
L&H:
---
Address for Notice: L & H INVESTMENT COMPANY N.V.
Sint-Krispijnstraat 7
8900 Ieper
Belgium /s/ Thomas Denys
Telephone: 011-32-5-722-9540 By:______________________________________
Telecopier: 011-32-5-722-9545 C.V.B.A. Thomas Denys, Director
THE COMPANY:
-----------
Address for Notice: APPLIED VOICE RECOGNITION, INC.,
a Delaware corporation
4615 Post Oak Place, Suite 111
Houston, Texas 77027 /s/ Timothy J. Connolly
Telephone: (713) 621-5678 By:______________________________________
Telecopier: 011-32-5-722-9545 Timothy J. Connolly, Chief
Executive Officer
[SIGNATURE PAGE TO VOTING AGREEMENT]
-5-
<PAGE>
EXHIBIT 10.25
Co-Sale and Tag-Along Rights Agreement
By
Applied Voice Recognition, Inc.
and
L & H Investment Company N.V.
This Co-Sale and Tag-Along Rights Agreement is made as of the 31st day of
December, 1998 by and among Voice Technologies Partners LTD, a Texas limited
partnership (the "Partner"), Applied Voice Recognition, Inc., a Delaware
corporation (the "Company"), and L & H Investment Company N.V., a Belgium
corporation ("L & H").
In consideration of the mutual covenants set forth herein, the parties agree
as follows:
1. Definitions.
(a) "Partner's Stock" shall mean shares of the Company's Common
Stock now owned by Partner.
(b) "Preferred Stock" shall mean the Company's outstanding Series D
Preferred Stock.
(b) "Common Stock" shall mean the Company's Common Stock and
shares of Common Stock issued or issuable upon conversion of the
Company's outstanding Series D Preferred Stock.
(c) "Stockholder" shall mean L & H
2. Sales by Partner - Co-Sale Rights.
(a) If Partner proposes to sell or transfer or does actually sell or
transfer any shares of Partner's Stock in the Company in excess of any of 60,000
shares per calendar month, then Partner shall promptly give written notice (the
"Notice") to the Company and the Stockholder of such sale or transfer. Such
Notice shall certify whether the identity of the purchaser(s) of the shares
being sold is known to the Partner. If Partner knows the identity of the
purchaser(s) then Sections 2(c-h) apply.
(b) If the Notice certifies that the identity is not known (e.g., the
sale is taking place on the open market) (an "Unidentified Sale Notice") then
Partner must give the Notice no later than the close of business on the day the
sale is completed and Partner may make such sale without any action on the part
of L & H. The Notice shall state under which subparagraph of this Agreement the
sale or transfer is being made. Upon receipt of such Unidentified Sale Notice
issued by virtue of Subparagraph 2(a), L & H may sell a Pro Rata Portion
(defined below) of its shares (despite its agreement not to in the Series D
Preferred Stock and Warrant Purchase Agreement of even date herewith) for a
period of 20 days following receipt of the Notice. For purposes of this
paragraph (b) "Pro Rata Portion" shall equal the
<PAGE>
number of shares of Common Stock times a fraction the numerator of which is the
number of shares of stock to which the Notice pertained and the denominator of
which is the number of shares of Common Stock then held by Partner.
(c) However, if Partner certifies that it knows the identity of the
purchaser(s), then the Notice shall be given to L & H at least 10 days before
the proposed sale and it must describe in reasonable detail the proposed sale or
transfer including, without limitation, the number of shares of Partner's Stock
to be sold or transferred, the nature of such sale or transfer, the
consideration to be paid, and the name and address of each prospective purchaser
or transferee (an "Identified Sale Notice"). The Notice shall state under which
paragraph of this Agreement the sale or transfer is being made.
(d) Stockholder shall have the right, exercisable upon written notice or
by facsimile notice to Partner within 15 days after receipt of the Identified
Sale Notice, to participate in such sale of Common Stock on the same terms and
conditions.
(e) Stockholder may sell all or any part of that number of shares of
Stock equal to the product obtained by multiplying (i) the aggregate number of
shares of Partner's Stock covered by the Notice by (ii) a fraction the numerator
of which is the number of shares of Common Stock owned by the Stockholder at the
time of the sale or transfer and the denominator of which is the total number of
shares of Common Stock owned by Partner and the Stockholder at the time of the
sale or transfer.
(f) Stockholder shall effect its participation in the sale by promptly
delivering to Partner for transfer to the prospective purchaser one or more
certificates, properly endorsed for transfer, which represent:
(i) the type and number of shares of Common Stock which Stockholder
elects to sell; or
(ii) that number of shares of Series D Preferred Stock which is at
such time convertible into the number of shares of Common Stock which
Stockholder elects to sell; provided, however, that if the prospective purchaser
objects to the delivery of Series D Preferred Stock in lieu of Common Stock,
Stockholder shall convert such Preferred Stock into Common Stock and deliver
Common Stock as provided in subparagraph 2(f)(i) above. The Company agrees to
make any such conversion concurrent with the actual transfer of such shares to
the purchaser.
(g) The stock certificate or certificates that Stockholder delivers to
Partners pursuant to paragraph 2(f) shall be transferred to the prospective
purchaser in consummation of the sale of the Stock pursuant to the terms and
conditions specified in the Notice, and Partner shall concurrently therewith
remit to Stockholder that portion of the sale proceeds to which such Participant
is entitled by reason of its participation in such sale. To the extent that any
prospective purchaser (or purchasers) prohibits such assignment or otherwise
refuses to purchase shares or other securities from Stockholder exercising its
rights of co-sale hereunder, Partner shall not sell to such prospective
purchaser or purchasers any Stock unless
2
<PAGE>
and until, simultaneously with such sale, Partner shall purchase such shares or
other securities from Stockholder.
(h) The exercise or non-exercise of the rights of the Stockholder
hereunder to participate in one or more sales of Stock made by Partners shall
not adversely affect its rights to participate in subsequent sales of Stock
subject to paragraphs 2(a-c).
(i) In each calendar year, upon duly notifying L & H, Partner may pledge
up to 480,000 shares of Partner's Stock free from any of L & H's rights to sell
shares with or in addition to Partner's Stock imposed by this Section 2 and
without the legend required by Section 6 so long as the pledge is subject to
bona fide loan and stock pledge agreements. In such case, the shares pledged
under this Subsection (i) shall be in place of the 60,000 share per month
exemption provided for in Section 2(a) (For example: if the full 480,000 shares
are pledged, there may be no additional shares sold or transferred under the
60,000 per month exemption in Section 2(a) for eight months following the
pledge.) Further, any shares pledged under this Subsection (i) shall count
toward the aggregate 50% limit described in Section 3 below.
3. Sales by Partner - Tag-Along Rights. In the event that Partner sells in
one transaction, or in a series of transactions, in aggregate, fifty percent
(50%) or more of the Partner's Shares held as of December 31, 1998, then the
Stockholder shall have the right to have all of its Common Stock sold prior to
the sale of additional shares of the Partner's Stock and accordingly, Partner
must:
(a) Promptly give Notice to the Company and the Stockholder at least 10
days prior to the closing of such sale or transfer. The Notice shall describe in
reasonable detail the proposed sale or transfer including, without limitation,
the number of shares of Partner's Stock to be sold or transferred, the nature of
such sale or transfer, the consideration to be paid, and the name and address of
each prospective purchaser or transferee. The Notice shall state under which
paragraph of this Agreement the sale or transfer is being made;
(b) Stockholder shall have the right, exercisable upon written notice to
such Partner within 15 days after receipt of the Notice, to participate in such
sale of Common Stock on the same terms and conditions;
(c) Stockholder shall effect its participation in the sale by promptly
delivering to Partner for transfer to the prospective purchaser one or more
certificates, properly endorsed for transfer, which represent:
(i) the type and number of shares of Common Stock which Stockholder
elects to sell; or
(ii) that number of shares of Series D Preferred Stock which is at
such time convertible into the number of shares of Common Stock which
Stockholder elects to sell; provided, however, that if the prospective purchaser
objects to the delivery of Series D Preferred Stock in lieu of Common Stock,
such Participant shall convert such Preferred Stock into Common Stock and
deliver Common Stock as provided in subparagraph 2(f)(i) above. The
3
<PAGE>
Company agrees to make any such conversion concurrent with the actual transfer
of such shares to the purchaser.
(d) The stock certificate or certificates that Stockholder delivers to
Partner pursuant to paragraph 2(e) shall be transferred to the prospective
purchaser in consummation of the sale of the Stock pursuant to the terms and
conditions specified in the Notice, and Partner shall concurrently therewith
remit to such Stockholder that portion of the sale proceeds to which such
Stockholder is entitled by reason of its participation in such sale. To the
extent that any prospective purchaser or purchasers prohibits such assignment or
otherwise refuses to purchase shares or other securities from Stockholder
exercising its rights of co-sale hereunder, Partner shall not sell to such
prospective purchaser or purchasers any Stock unless and until, simultaneously
with such sale, Partner shall purchase such shares or other securities from
Stockholder.
(e) The exercise or non-exercise of the rights of the Stockholder
hereunder to participate in one or more sales of Partner's Stock made by Partner
shall not adversely affect their rights to participate in subsequent sales of
Partner's Stock subject to paragraph 2(a).
4. Exempt Transfers.
(a) Notwithstanding the foregoing, the co-sale rights of the Stockholder
in Section 2 and the Tag Along Rights in Section 3 shall not apply to (i) any
pledge of Stock made pursuant to a bona fide loan transaction that creates a
mere security interest, (ii) any transfer to the ancestors, descendants or
spouse of Partner or to trusts for the benefit of such persons listed in this
subsection 4(a)(ii) or of Partner; or (iii) any bona fide gift; provided that
(A) Partner shall inform the Stockholder of such pledge, transfer or gift prior
to effecting it and (B) the pledgee, transferee or donee shall furnish the
Stockholder with a written agreement to be bound by and comply with all
provisions of Section 2. Stock transferred under this subsection 4(a) shall
remain "Stock" hereunder, and such pledgee, transferee or donee shall be treated
as a "Partner" for purposes of this Agreement.
(b) Notwithstanding the foregoing, the co-sale rights of the Stockholder
in Section 2 and the Tag Along Rights in Section 3 shall not apply to the sale
of any Partner's Stock (i) to employees, officers or directors of the
Corporation pursuant to stock option or stock purchase plans or agreements on
terms approved by the Board of Directors or (ii) if prior to such sale, Partner
held less than 5% of the Company's outstanding shares.
5. Prohibited Transfers.
(a) In the event a Partner should sell any Stock in contravention of the
co-sale rights of the Stockholder in Section 2 or the Tag Along Rights in
Section 3 under this agreement (a "Prohibited Transfer"), the Stockholder, in
addition to such other remedies as may be available at law, in equity or
hereunder, shall have the put option provided below, and Partner shall be bound
by the applicable provisions of such option.
4
<PAGE>
(b) In the event of a Prohibited Transfer, Stockholder shall have the
right to sell to Partner the type and number of shares of Stock equal to the
number of shares Stockholder would have been entitled to transfer to the
purchaser had the Prohibited Transfer under Section 2(c) or Section 3(c), as the
case may be, hereof been effected pursuant to and in compliance with the terms
hereof. Such sale shall be made on the following terms and conditions:
(i) The price per share at which the shares are to be sold to Partner
shall be equal to the price per share paid by the purchaser to Partner in the
Prohibited Transfer. Partner shall also reimburse Stockholder for any and all
fees and expense, including legal fees and expense, incurred pursuant to the
exercise or the attempted exercise of the Stockholder's rights under Section 2
and Section 3, whichever is applicable.
(ii) Within 90 days after the later of the dates on which the
Stockholder (A) received notice of the Prohibited Transfer, or (B) otherwise
become aware of the Prohibited Transfer, Stockholder shall, if exercising the
option created hereby, deliver to Partner the certificate or certificates
representing shares to be sold, each certificate to be properly endorsed for
transfer.
(iii) Partner shall, upon receipt of the certificate or certificates
for the shares to be sold by Stockholder, pursuant to this subparagraph 4(b),
pay the aggregate purchase price therefor and the amount of reimbursable fees
and expense, as specified in subparagraph 4(b)(i), in cash or by other means
acceptable to the Stockholder.
(iv) Notwithstanding the foregoing, any attempt by Partner to
transfer Partner's Stock in violation of Section 2 and Section 3 hereof shall be
void and the Company agrees it will not effect such a transfer nor will it treat
any alleged transferee as the holder of such shares without the written consent
of the Stockholder.
6. Legend.
(a) Each certificate representing shares of Stock now or hereafter owned
by Partner or issued to any person in connection with a transfer pursuant to
Section 4(a) hereof shall be endorsed with the following legend:
"THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES REPRESENTED
BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN CO-SALE
AND TAG-ALONG AGREEMENT BY AND BETWEEN THE STOCKHOLDER, THE CORPORATION AND
CERTAIN HOLDERS OF STOCK OF THE CORPORATION. COPIES OF SUCH AGREEMENT MAY BE
OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION."
(b) The Company and Partner shall, within 20 days of the date of this
Agreement instruct the Company's transfer agent to impose transfer restrictions
on the shares represented by certificates bearing the legend referred to in
Section 6(a) above to enforce the
5
<PAGE>
provisions of this Agreement. They shall also instruct the transfer agent to
analyze each sale made by Partner, and if such sale is found to be within the
volume limitations described in Section 2(a) or if such shall is pursuant to an
Unidentified Sale Notice, to remove the legend prior to the transfer of such
shares. In the alternative, if the transfer agent is unwilling or unable to make
the analysis described above, then upon each proposed transfer or sale, Partner
shall provide the transfer agent an opinion of the Company's counsel that the
transfer or sale is permitted under this Agreement and that the legend may be
removed in which event the transfer agent shall be instructed to remove the
legend with respect to the shares covered by the certificate. Further, the
transfer agent shall be instructed to remove the legend upon termination of this
Agreement.
7. Miscellaneous.
7.1 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of Delaware.
7.2 Amendment. Any provision may be amended and the observance thereof
may be waived (either generally or in a particular instance and either
retroactively or prospectively), only by the written consent of (i) as to the
Company, only by the Company, (ii) as to each Stockholder, such Stockholder,
provided that any Stockholder may waive any of his rights hereunder without
obtaining the consent of any other Stockholder. Any amendment or waiver effected
in accordance with clauses (i) and (ii) of this paragraph shall be binding upon
each Stockholder, its successors and assigns, the Company and Partner.
7.3 Assignment of Rights. This Agreement and the rights and obligations
of the parties hereunder shall inure to the benefit of, and be binding upon,
their respective successors, assigns and legal representatives. The rights of
the Stockholder hereunder are only assignable (i) by each of such Stockholders
to any other Stockholder or (ii) to an assignee or transferee who acquires all
of the Common Stock purchased by a Stockholder or at least 500,000 shares of
such Common Stock.
7.4 Term. This Agreement shall terminate upon the earlier of (i) the
redemption or conversion of all shares of Series D Preferred Stock, (ii)
December 31, 2003, (iii) closing of the Company's sale of all or substantially
all of its assets or the acquisition of the Company by another entity by means
of merger or consolidation resulting in the exchange of the outstanding shares
of the Company's capital stock for securities or consideration issued, or caused
to be issued, by the acquiring entity or its subsidiary, or (iv) the termination
by the Company of Timothy J. Connolly's employment or the failure of the Company
to renew his employment contract; however, if Timothy J. Connolly chooses to
continue working for the Company without an employment contract then this
Agreement does not terminate under this Section 7.4.
7.5 Ownership. Partners represents and warrants that it is the sole legal
and beneficial owner of 5,920,000 shares of the Company's Common Stock and that
no other person has any interest (other than a community property interest) in
such shares.
6
<PAGE>
7.6 Notices. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given upon personal delivery or
facsimile to the party to be notified or five (5) days after deposit in the
United States mail, by registered or certified mail, postage prepaid and
properly addressed to the party to be notified as set forth on the signature
page hereof or at such other address as such party may designate by ten (10)
days advance written notice to the other parties hereto. Notwithstanding the
foregoing, the facsimile notice permitted by Section 2(d) shall be effective at
the time it is given.
7.7 Severability. In the event one or more of the provisions of this
Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision, had
never been contained herein.
7.8 Attorney Fees. In the event that any dispute among the parties to
this Agreement should result in litigation, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
7.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.10 Arbitration. All disputes, claims, and/or requests for specific
contractual performance, or other equitable relief, or damages or any other
matters in question between the parties arising out of this Agreement shall be
submitted for arbitration, provided that the parties have first made a good
faith effort to resolve such matters together. Demand shall be made to the
American Arbitration Association ("AAA") and shall be conducted in New York, New
York by a panel of three (3) arbitrators. The Shareholder and the Company shall
each choose one (1) panel member from a panel of person having experience with
and knowledge of the purchase and sale of securities. The third member shall be
an independent party, chosen by the first two members. At least one member of
the panel must have a legal background. Arbitration shall be in accordance with
the commercial rules of the AAA. The Award of the Arbitrators shall be final and
judgement may be entered upon it in any court having jurisdiction thereof, and
the prevailing party shall be entitled to costs and reasonable attorneys' fees
arising out of Arbitration.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
7
<PAGE>
The foregoing agreement is hereby executed as of the date first above, written.
APPLIED VOICE RECOGNITION, INC., a
Delaware corporation,
/s/ Timothy J. Connolly
_______________________________________________________
By: Timothy J. Connolly,
Its President
L & H INVESTMENT CO. N.V. a Belgium
corporation
_______________________________________________________
By: C.V.B.A. Thomas Denys,
its Director
_______________________________________________________
and By: C.V.B.A. Francis Vanderhonydonok,
its Director
Address L & H Investment Co.
Merghelynck
B-8900 Ieper
Brussels, BELGIUM
Fax: 011-32-5-722-9545
VOICE TECHNOLOGIES PARTNERS,
LTD., a Texas limited partnership
By: Voice Technologies Management Corp.
a Texas limited corporation, its general partner
/s/ Timothy J. Connolly
By: _________________________________________________
Timothy J. Connolly, its President
Address 4615 Post Oak Lane, Suite 111
Houston, Texas 77027
Fax: 713-621-5870
[SIGNATURE PAGE TO CO-SALE AND TAG-ALONG RIGHTS AGREEMENT]
<PAGE>
7.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
The foregoing agreement is hereby executed as of the date first above
written.
APPLIED VOICE RECOGNITION, INC, a
Delaware corporation
_______________________________________________________
By: Timothy J. Connolly,
its President
L & H INVESTMENT CO. N.V. a Belgium
corporation
/s/ Thomas Denys
_______________________________________________________
By: C.V.B.A. Thomas Denys,
its Director
_______________________________________________________
and By: C.V.B.A. Francis Vanderhooydonck,
its Director
Address L & H Investment Co.
Merghelynek
B-8900 Ieper
Brussels, BELGIUM
Fax: 01 1-32-5-722-9545
VOICE TECHNOLOGIES PARTNERS,
LTD., a Texas limited partnership
By: Voice Technologies management Corp.,
a Texas corporation, its general partner
By __________________________________________________
Timothy J. Connolly, its President
Address 4615 Post Oak Place, Suite 111
Houston, Texas 77027
Fax: 713-621-5870
[SIGNATURE PAGE TO CO-SALE AND TAG-ALONG RIGHTS AGREEMENT]
7
<PAGE>
7.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
The foregoing agreement is hereby executed as of the date first above
written.
APPLIED VOICE RECOGNITION, INC. a
Delaware corporation
______________________________________________________
By: Timothy J. Connolly,
its President
L & H INVESTMENT CO. N.V. a Belgium
corporation
/s/ Thomas Denys
______________________________________________________
By: C.V.B.A. Thomas Denys,
its Director
/s/ Francis Vanderhorydonck
______________________________________________________
and By: C.V.B.A. Francis Vanderhorydonck,
its Director
Address L & H Investment Co.
Marghelynck
B-8900 Ieper
Brussels, BELGIUM
Fax: 011-32-5-722-9545
VOICE TECHNOLOGIES PARTNERS,
LTD., a Texas limited partnership
By: Voice Technologies Management Corp.,
a Texas corporation, its general partner
By _________________________________________________
Timothy J. Connolly, its President
Address 4615 Post Oak Place, Suite 111
Houston, Texas 77027
Fax: 713-621-5870
[SIGNATURE PAGE TO CO-SALE AND TAG-ALONG RIGHTS AGREEMENT]
7
<PAGE>
EXHIBIT 10.26
FORM OF BRIDGE LOAN
PROMISSORY NOTE
---------------
$ December , 1998
The undersigned, APPLIED VOICE RECOGNITION, INC., a Delaware
corporation ("Maker"), whose address is 4615 Post Oak Place, Suite 111, Houston,
Texas 77027, for value received, promises to pay to the order of
("Payee"), in lawful money of the United States of America, the principal sum of
Dollars ($ ), plus accrued interest on the
unpaid principal amount outstanding on this note at a per annum rate equal to
twelve percent (12%) per annum. All principal and any interest hereunder shall
be payable at or such other place
which Payee may hereinafter designate in writing. In addition to the interest
provided for herein, upon execution of this Note and the advancement of the
proceeds evidenced hereby, Maker shall deliver to Payee a three year warrant for
the purchase of shares of common stock of Maker with an exercise price
as set forth in such warrant.
This Note is due upon the sooner to occur of six (6) months following
the date of this Note, or three (3) business days following the receipt by Maker
of a minimum of $2,000,000 in equity or receipt by Maker of such other funding
as is determined by Maker to be on a more permanent basis that the Bridge Loan.
All payments hereunder shall be first credited against any accrued and unpaid
interest hereunder, with all remaining amounts credited against unpaid
principal. In the event a payment is past due hereunder, interest shall accrue
on the entire remaining principal balance hereunder at the lessor of eighteen
percent (18%) per annum or the maximum rate allowed by law. All interest that
shall accrue in accordance herewith on the indebtedness evidenced by this Note
shall be computed on the basis of a year of 365 or 366 days, as the case may be.
In addition to all principal and accrued interest on this Note, Maker
agrees to pay (i) all reasonable costs and expenses incurred by all owners and
holders of this Note in collecting this Note through reorganization, bankruptcy,
receivership or any other proceeding and (ii) reasonable attorney's fees when
and if this Note is placed in the hands of an attorney for collection after
default.
It is the intention of the parties hereto to conform strictly to
applicable usury laws as in effect from time to time during the term of this
Note. Accordingly, if any transaction or transactions contemplated hereby would
be usurious under applicable law (including the laws of the United States of
America, or of any other jurisdiction whose laws may be mandatorily applicable),
then, in that event, notwithstanding anything to the contrary in this Note, it
is agreed as follows: (i) the provisions of this paragraph shall govern and
control; (ii) the aggregate of all interest under applicable laws that is
contracted for, charged or received under this Note shall under no circumstances
exceed the maximum amount of interest allowed by applicable law, and any excess
<PAGE>
shall be promptly credited to Maker by Payee (or, if such consideration shall
have been paid in full, such excess shall be promptly refunded to Maker by
Payee) (iii) neither Maker nor any other person or entity now or hereafter
liable in connection with this Note shall be obligated to pay the amount of such
interest to the extent that it is in excess of the maximum interest permitted by
the applicable usury laws; and (iv) the effective rate of interest shall be ipso
----
facto reduced to the maximum lawful interest rate.
- - -----
Maker and any other co-makers, endorsors, guarantors and sureties
severally (i) waive notice (including, but not limited to, notice of protest,
notice of dishonor and notice of intent to accelerate or notice of
acceleration), demand, presentment of payment, protest and filing of suit for
the purpose of fixing liability, (ii) consent that the time of payment hereof
may be extended without notice to them or any of them, (iii) expressly agree
that it will not be necessary for any holder hereof, in order to enforce payment
of this Note by them, to first institute suit or exhaust its remedies against
Maker or any others liable herefor, or to enforce its rights against any
security herefor and (iv) consent to any extensions or postponements of time of
payment of this Note or any other indulgences with respect hereto without notice
thereof to any of them.
IN WITNESS WHEREOF, Maker has executed this Note effective as of the
date first above written as of the 7/th/ day of December, 1998.
APPLIED VOICE RECOGNITION, INC.
By:____________________________________
Print Name:____________________________
Title:_________________________________
<PAGE>
EXHIBIT 10.27
NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT') OR THE
SECURITIES LAWS OF ANY STATE; THEREFORE, THIS WARRANT AND THE SECURITIES
ISSUABLE UPON EXERCISE HEREOF MAY NOT BE SOLD OR TRANSFERRED EXCEPT UPON SUCH
REGISTRATION OR UPON DELIVERY TO THE CORPORATION OF AN OPINION OF COUNSEL
SATISFACTORY TO THE CORPORATION THAT REGISTRATION IS NOT REQUIRED FOR SUCH SALE
OR TRANSFER.
[FORM OF BRIDGE LOAN]
WARRANT TO PURCHASE COMMON STOCK
OF
APPLIED VOICE RECOGNITION, INC.
VOID AFTER DECEMBER 1, 2001
This certifies that
("Holder"), is entitled to purchase at any time on or prior to
December 1, 2001, ( ) Shares of fully paid and
nonassessable shares of Common Stock, $0.001 par value (the "Common Stock"), of
Applied Voice Recognition, Inc., a Delaware corporation (the "Company"), at a
price equal to $0.9375 per share. This Warrant may be exercised by surrendering
this Warrant with the subscription form hereinafter set forth fully executed, at
the principal office of the Company in Houston, Texas, accompanied by payment of
the full purchase price of the shares so purchased in cash, and upon compliance
with and subject to the conditions set forth herein. The purchase price per
share and the number of shares covered by this Warrant are subject to adjustment
from time to time as hereinafter set forth.
The purchase price per share of Common Stock from time to time in
effect under this Warrant, and the number and character of shares covered
hereby, shall be subject to adjustments from time to time in certain instances
as follows, and the term "Warrant Price" shall mean the price per share
originally set forth in this Warrant or any price resulting from adjustments
pursuant to the terms hereof.
1. In case the Company shall subdivide its outstanding shares of
Common Stock into a greater number of shares or shall issue in exchange for its
outstanding shares of Common Stock a greater number of shares of Common Stock,
then in each such case from and after the record date for such subdivision or
exchange, the number of shares of Common Stock covered by this Warrant shall be
increased in proportion to such increase in the number of outstanding shares of
Common Stock and the Warrant Price then in effect shall be correspondingly
decreased; and in the case the Company shall reduce the number of shares of its
Common Stock by a combination of shares or shall issue in exchange for its
outstanding shares of Common Stock a lesser number of shares of Common Stock,
then in each such case from and after the record date for
-1-
<PAGE>
such combination or exchange, the number of shares of Common Stock covered by
this Warrant shall be decreased in proportion to such reduction in the number of
outstanding shares of Common Stock, and the then prevailing Warrant Price shall
be correspondingly increased.
2. In case the Company shall declare and pay a dividend upon its
Common Stock payable in Common Stock, then in each such case from and after the
record date for determining the stockholders entitled to receive such dividend,
the number of shares of Common Stock covered by this Warrant shall be increased
in proportion to the increase in the number of outstanding shares of Common
Stock through such stock dividend, and the then prevailing Warrant Price shall
be correspondingly decreased.
3. In case of any reclassification or change of outstanding shares
of Common Stock (other than as a result of a subdivision, combination or stock
dividend) or in case of the consolidation or merger of the Company with or into
any other corporation (other than a merger in which the Company is the
continuing corporation and which does not result in any reclassification or
change in its outstanding shares of Common Stock), or in case of any sale by the
Company of all or substantially all of its assets to another corporation, the
holder of this Warrant shall have the right thereafter to receive upon exercise
hereof the amount and kind of shares of capital stock and other securities and
property entitled to be received upon such reclassification, change,
consolidation, merger or sale by a holder of the number of shares of Common
Stock of the Company covered by such Warrant at the then prevailing Warrant
Price, subject to subsequent adjustments as provided herein.
4. In case at any time:
(a) the Company shall declare any dividend upon its Common Stock
or make any other distribution to the holders of its Common Stock; or
(b) the Company shall propose to offer for subscription to the
holders of its Common Stock any additional shares of stock of any class of
any other securities or rights; or
(c) the Company shall propose any reclassification or change of
outstanding shares of Common Stock, or any consolidation or merger of the
Company or any sale by the Company of its assets to which paragraphs 1, 2
or 3 would be applicable, then, in any one or more of such cases, the
Company shall cause at least twenty (20) days' prior notice to be mailed to
the registered holder of this Warrant on the date on which the books of the
Company shall close or a record shall be taken for such dividend,
distribution or subscription rights, or for a vote upon such
reclassification, change, consolidation, merger or sale, as the case may
be. In addition, the Company shall mail to the registered holder of this
Warrant copies of each report of communication of the Company mailed to the
holders of its Common Stock simultaneously with such mailing to holders of
Common Stock.
-2-
<PAGE>
5. (a) As a condition precedent to the taking of any action which
would cause an adjustment reducing the Warrant Price below the then par value of
the shares of Common Stock issuable upon the exercise hereof, the Company will
take such corporate action as may be necessary in order that it may validly and
legally issue fully paid and nonassessable shares of such Common Stock at such
adjusted Warrant Price.
(b) No adjustment shall be made in the number of shares
purchasable upon exercise of this Warrant in any case in which the adjustment
would result in a change of less than 2/100ths of a share of Common Stock, as
such Common Stock is constituted immediately subsequent to the event giving rise
to the proposed adjustment, except that any action taken by the Company which
otherwise would occasion an adjustment in an amount less than 2/100ths of a
share shall be carried forward and taken into account at the time of any
subsequent adjustment in the number of shares purchasable hereunder.
6. (a) This Warrant or any security issued or issuable upon
exercise of this Warrant may not be offered or sold except in conformity with
the 1933 Act.
(b) The Company may cause the legends set forth at the top of
the first page hereof to be set forth on each Warrant and the following legend
to be set forth on each certificate representing Common Stock issued upon
exercise of this Warrant, unless counsel for the Company is of the opinion as to
any such certificate that such legend is unnecessary:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED EXCEPT UPON SUCH REGISTRATION OR UPON DELIVERY TO THE
CORPORATION OF AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION
THAT REGISTRATION IS NOT REQUIRED FOR SUCH SALE OR TRANSFER.
7. (a) This Warrant may be exercised for all or part of the shares
covered hereby. In the event of a partial exercise of this Warrant, the Company
will issue to the holder hereof the number of shares of Common Stock purchased
under this Warrant, together with a new, similar Warrant for the unused portion.
This Warrant may be subdivided into or combined with similar Warrants at any
time, at the option of the holder hereof, at the principal office of the Company
in Houston, Texas.
(b) The Company shall not be required to issued fractional
shares of Common Stock upon any exercise of Warrants. As to any final fraction
of a share in which the same holder of one or more Warrants, the rights under
which are exercised in the same transaction, would otherwise be entitled to
purchase upon such exercise, the Company shall pay a sum in cash
-3-
<PAGE>
equal to the excess of the market value of such fractional share (determined in
such reasonable manner as the Board of Directors of the Company may prescribe)
over the proportional part of the exercise price represented by such fractional
share.
8. The holder of this Warrant shall not be entitled, as such, to any
of the rights of a stockholder of the Company.
9. This Warrant is being issued in connection with that certain
series of bridge loans made to the Company by Holder and certain other
parties. The Company hereby represents and warrants that the form of promissory
note (or in the case of employees of the Company deferring salary, the letter
agreement entered into in lieu of a promissory note) and warrant given to each
of the parties making the above described bridge loans will be identical in
substance other than the identity of the parties making the loan, the amount of
the various loans, the exercise price of the warrants (which in all cases will
be equal to the closing bid price of the Company's Common Stock on the date the
loan was received or, in the case of employees of the Company who are deferring
salary in order to fund the loan, the closing bid price on the effective date
the agreement was executed to defer salary) and the amount of the various
warrants. The Company further represents and warrants that for each party
making a bridge loan to the Company, the number of shares that can be purchased
pursuant to the warrant (prior to any adjustment as set forth in such warrant)
shall be equal to the dollar amount of the loan.
10. On or before January 31, 1999, the Company will prepare and file
with the Securities and Exchange Commission (the "SEC") a registration statement
on Form S-3, covering the resale of the Common Stock underlying the Warrant.
The Company will use its reasonable efforts to cause such registration statement
to be declared effective by the SEC as soon as practicable after the filing.
IN WITNESS WHEREOF, THE COMPANY HAS CAUSED THIS WARRANT TO BE EXECUTED
BY ITS DULY AUTHORIZED REPRESENTATIVE AS OF THE 7/TH/ DAY OF DECEMBER, 1998.
APPLIED VOICE RECOGNITION, INC.
By:________________________________
Timothy J. Connolly, Chief Executive
Officer
-4-
<PAGE>
PURCHASE FORM
The undersigned, the Holder of the within Warrant, hereby irrevocably
elects to exercise the purchase rights represented by said Warrant for, and to
purchase thereunder, ________ shares of Common Stock, $0.001 par value per
share, of Applied Voice Recognition, Inc. and herewith makes payment of
$___________ in cash therefor and requests that the certificates for such shares
be issued in the name of _________________________________________ and delivered
to ____________________________________, whose address is
_____________________________________________________ and, if such shares shall
not be all of the shares purchasable hereunder, that a new Warrant of like tenor
for the balance of the shares purchasable hereunder be delivered to the
undersigned.
Dated: _____________________
______________________________________
Name: ________________________________
Title: _______________________________
Address: _____________________________
__________________________________
__________________________________
Social Security
or Tax I.D. No. _________________
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-24345) pertaining to the Warrant of Hakeem Olajuwan, Registration
Statement (Form S-8 No. 333-24343) pertaining to the Option To Akin
Olajuwan, Registration Statement (Form S-8 No. 333-24399) pertaining to the
Warrant to Tim Connolly, Registration Statement (Form S-8 No. 333-24397)
pertaining to the Option to Jesse Marion, Registration Statement (Form S-8 No.
333-24395) pertaining to the Warrant to Jan Carson Connolly, Registration
Statement (Form S-8 No. 333-24393) pertaining to the Warrant to H. Russell
Douglas, Registration Statement (Form S-8 No. 333-24391) pertaining to the
Compensation Agreement of Thomas C. Pritchard, Registration Statement (Form S-8
No. 333-44191) pertaining to the Applied Voice Recognition Inc. 1997 Incentive
Plan and the Registration Statements (Form S-3 333-72115 and Form S-3 333-44053)
of our report dated March 27, 1999, with respect to the financial statements of
Applied Voice Recognition, Inc. included in the Annual Report (Form 10-KSB) for
the years ended December 31, 1998 and 1997.
ERNST & YOUNG LLP
Houston, Texas
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 1,377,913 1,207,235
<SECURITIES> 0 0
<RECEIVABLES> 245,805 982,902
<ALLOWANCES> (32,500) (435,000)
<INVENTORY> 37,221 319,664
<CURRENT-ASSETS> 3,368,936 2,154,181
<PP&E> 878,065 261,771
<DEPRECIATION> (180,767) (57,326)
<TOTAL-ASSETS> 6,294,530 3,380,124
<CURRENT-LIABILITIES> 2,788,210 1,049,347
<BONDS> 0 0
0 0
34,481 31,250
<COMMON> 16,040 12,989
<OTHER-SE> 3,286,450 2,235,361
<TOTAL-LIABILITY-AND-EQUITY> 6,294,530 3,380,124
<SALES> 717,357 2,113,013
<TOTAL-REVENUES> 717,357 2,113,013
<CGS> 432,246 853,672
<TOTAL-COSTS> 7,660,335 5,076,719
<OTHER-EXPENSES> 728,615 (99,790)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 216,680 451,076
<INCOME-PRETAX> 8,320,519 4,168,664
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 8,320,519 4,168,664
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8,320,519 4,168,664
<EPS-PRIMARY> (0.68) (0.36)
<EPS-DILUTED> (0.68) (0.36)
</TABLE>
