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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-23607
APPLIED VOICE RECOGNITION, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 76-0513154
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4615 Post Oak Place, Suite 111, Houston, TX 77027
(Address of principal executive offices)
(713) 621-5678
(Issuer's telephone number, including area code)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF October 29, 1999:
16,746,875
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES [ ] NO [X]
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APPLIED VOICE RECOGNITION, INC.
DBA e-DOCS.net
TABLE OF CONTENTS
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of December 31, 1998 and
September 30, 1998...................................... 4
Consolidated Statements of Operations for the three and
nine months ended September 30, 1999 and 1998........... 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1998....................... 6
Notes to Unaudited Consolidated Financial Statements...... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 20
Item 2. Changes in Securities...................................... 20
Item 5. Other Information.......................................... 20
Item 6. Exhibits and Reports on Form 8-K........................... 21
Signatures.......................................................... 22
2
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PART I.
FINANCIAL INFORMATION
THIS REPORT INCLUDES "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS OTHER THAN STATEMENTS OF
HISTORICAL FACT INCLUDED IN THIS REPORT ARE FORWARD LOOKING STATEMENTS. SUCH
FORWARD LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS AS TO
ESTIMATES, EXPECTATIONS, BELIEFS, PLANS, AND OBJECTIVES CONCERNING THE COMPANY'S
FUTURE FINANCIAL AND OPERATING PERFORMANCE, AND AS INCLUDED IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
LIQUIDITY AND CAPITAL RESOURCES" REGARDING THE COMPANY'S ESTIMATE OF SUFFICIENCY
OF EXISTING CAPITAL RESOURCES AND ITS ABILITY TO RAISE ADDITIONAL CAPITAL TO
FUND CASH REQUIREMENTS FOR FUTURE OPERATIONS AND ACQUISITIONS. THE FORWARD
LOOKING STATEMENTS ARE SUBJECT TO ASSUMPTIONS AND BELIEFS BASED ON CURRENT
INFORMATION KNOWN TO THE COMPANY AND FACTORS THAT ARE SUBJECT TO UNCERTAINTIES,
RISK AND OTHER INFLUENCES, WHICH ARE OUTSIDE THE COMPANY'S CONTROL, AND COULD
YIELD RESULTS DIFFERING MATERIALLY FROM THOSE ANTICIPATED. THE ABILITY TO
ACHIEVE THE COMPANY'S EXPECTATIONS IS CONTINGENT UPON A NUMBER OF FACTORS WHICH
INCLUDE (I) AVAILABILITY OF SUFFICIENT CAPITAL AND CAPITAL MARKET CONDITIONS,
(II) THE COMPANY'S ABILITY TO PRODUCE AND MARKET ITS PRODUCTS IN THE HEALTHCARE
TRANSCRIPTION INDUSTRY, (III) EFFECT OF ANY CURRENT OR FUTURE COMPETITIVE
PRODUCTS, (IV) ONGOING COST OF RESEARCH AND DEVELOPMENT ACTIVITIES, AND (V) THE
RETENTION OF KEY PERSONNEL. "E-DOCS.NET(TM)" AND "VOICECOMMANDER(TM)" ARE OUR
TRADEMARKS. THIS REPORT MAY CONTAIN TRADEMARKS AND SERVICE MARKS OF OTHER
COMPANIES.
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ITEM 1. FINANCIAL STATEMENTS
APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ............................................................. $ 1,377,913 $ 442,033
Accounts receivable, net .............................................................. 213,305 1,202,078
Other receivable ...................................................................... 1,000,000 --
Other current assets .................................................................. 337,718 136,464
------------ ------------
TOTAL CURRENT ASSETS ................................................................ 2,928,936 1,780,575
Prepaid licenses .......................................................................... 1,000,000 1,300,000
Property and equipment, net ............................................................... 697,298 1,590,860
Goodwill, net ............................................................................. 657,888 1,482,889
Intangible and other assets ............................................................... 1,010,408 1,744,318
------------ ------------
TOTAL ASSETS ........................................................................ $ 6,294,530 $ 7,898,642
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade payables and accruals ........................................................... $ 1,293,778 $ 1,720,274
Notes payable ......................................................................... 335,333 1,776,378
Current portion of long-term debt ..................................................... 350,919 232,183
------------ ------------
TOTAL CURRENT LIABILITIES ........................................................... 1,980,030 3,728,835
Preferred stock obligations ............................................................... 708,827 1,758,855
Obligations payable in common stock ....................................................... 170,036 566,617
Long-term debt, net of current portion .................................................... 98,666 415,556
------------ ------------
TOTAL LIABILITIES ................................................................... 2,957,559 6,469,863
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 2,000,000 shares authorized
Series A - 186,000 shares issued and outstanding .................................... 1,488,000 1,488,000
Series B - 2,285 and 1,680 shares issued and outstanding ............................ 2,507,439 1,843,343
Series C - 153,538 shares issued and outstanding .................................... 1,129,107 1,129,107
Series D - 3,000 and 5,000 shares issued and outstanding ............................ 2,215,000 3,940,000
Series E - none and 2,000 shares issued and outstanding ............................. -- 1,896,000
Common stock, $.001 par, 50,000,000 shares authorized, 16,040,994 and 16,746,875 issued
and outstanding...................................................................... 16,040 16,747
Additional paid in capital ............................................................ 8,591,424 9,971,080
Warrants .............................................................................. 2,241,483 2,360,119
Accumulated deficit ................................................................... (14,851,522) (21,215,617)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY .......................................................... 3,336,971 1,428,779
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................................... $ 6,294,530 $ 7,898,642
============ ============
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Medical Transcription ................................ $ 100,144 $ 1,455,195 $ 220,805 $ 3,336,105
Consulting, hardware, software and related............ -- -- 254,498 469,949
----------- ----------- ----------- -----------
TOTAL REVENUE ...................................... 100,144 1,455,195 475,303 3,806,054
COST OF SALES:
Medical Transcription ................................ 71,982 1,104,624 142,371 2,400,539
Consulting, hardware, software and related ........... -- -- 115,347 52,567
----------- ----------- ----------- -----------
GROSS MARGIN ....................................... 28,162 350,571 217,585 1,352,948
OPERATING EXPENSES:
Marketing and sales .................................. 191,817 131,849 943,256 480,891
General and administrative ........................... 1,374,430 1,423,852 3,642,816 5,363,371
Research and development ............................. 136,182 188,549 452,980 684,414
----------- ----------- ----------- -----------
OPERATING LOSS ..................................... (1,674,267) (1,393,679) (4,821,467) (5,175,728)
OTHER INCOME (EXPENSE):
Interest income ...................................... 38,170 13,229 61,405 34,063
Interest expense ..................................... (1,848) (304,081) (79,860) (593,937)
Other, net ........................................... (500,000) (40,450) (500,000) (98,849)
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) ....................... (463,138) (331,302) (518,455) (658,723)
----------- ----------- ----------- -----------
NET LOSS ................................................. $(2,137,405) $(1,724,981) $(5,339,922) $(5,834,451)
=========== =========== =========== ===========
PREFERRED STOCK DIVIDENDS ................................ 629,795 277,979 675,356 529,644
----------- ----------- ----------- -----------
NET LOSS TO COMMON STOCKHOLDERS .......................... $(2,767,200) $(2,002,960) $(6,015,278) $(6,364,095)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE - BASIC AND DILUTED ............ $ (.20) $ (.12) $ (.45) $ (.39)
=========== =========== =========== ===========
SHARES USED IN COMPUTING NET LOSS PER COMMON SHARE - BASIC
AND DILUTED............................................. 13,991,606 16,619,879 13,416,292 16,267,162
=========== =========== =========== ===========
STATEMENT OF COMPREHENSIVE LOSS:
Net loss ............................................. $(2,137,405) $(1,724,981) $(5,339,922) $(5,834,451)
Unrealized holding gain (loss) ....................... 17,145 -- (598,874) --
----------- ----------- ----------- -----------
COMPREHENSIVE LOSS ....................................... $(2,120,260) $(1,724,981) $(5,938,796) $(5,834,451)
=========== =========== =========== ===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................ $(5,339,922) $(5,834,451)
Adjustments to reconcile net income to cash used in operating activities:
Loss on investment .................................................... 500,000 --
Depreciation and amortization ......................................... 119,403 493,765
Stock issued for services ............................................. 79,000 5,529
Stock issued as compensation .......................................... 318,620 32,916
Stock options and warrants issued for services ........................ 145,857 --
Accretion of preferred stock obligations and warrant amortization ..... -- 472,593
Changes in operating assets and liabilities:
Accounts receivable ................................................... 443,189 (819,061)
Accounts payable and accruals ......................................... (583,408) 207,154
Other, net ............................................................ 97,184 207,426
----------- -----------
Net cash used by operating activities ............................... (4,220,077) (5,234,129)
CASH FLOW FROM INVESTING ACTIVITIES:
Cash paid for acquisitions .............................................. -- (736,857)
Purchase of equipment ................................................... (204,050) (1,019,698)
Capitalized research and development costs .............................. (302,882) --
----------- -----------
Net cash used by investing activities ............................... (506,932) (1,756,555)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock and warrants .................. 4,964,675 4,670,000
Proceeds from issuance of debt and warrants ............................. -- 2,154,965
Proceeds from the exercise of common stock options and warrants ......... 90,306 10,000
Debt repayments ......................................................... (138,906) (780,161)
----------- -----------
Net cash provided by financing activities ........................... 4,916,075 6,054,804
NET INCREASE (DECREASE) IN CASH ............................................. 189,066 (935,880)
CASH AND CASH EQUIVALENTS:
Beginning of period ..................................................... 1,207,235 1,377,913
----------- -----------
End of period ........................................................... $ 1,396,301 $ 442,033
=========== ===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Applied Voice
Recognition, Inc., a Delaware corporation (the "Company"), have been prepared in
accordance with generally accepted accounting principles and the rules of the
Securities and Exchange Commission (the "SEC"), and should be read in
conjunction with the audited financial statements and notes thereto contained in
the Company's latest Annual Report filed with the SEC on Form 10-KSB. All
significant intercompany accounts and transactions have been eliminated. In the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of financial position and the
results of operations for the interim periods presented have been reflected
herein. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year. Notes to the
financial statements which would substantially duplicate the disclosure
contained in the audited financial statements for the most recent fiscal year,
1998, as reported in the Form 10-KSB, have been omitted.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. For the year ended December
31, 1998, the Company incurred a net loss of approximately $8.3 million and had
negative cash flow from operations of approximately $6.0 million, and for the
nine months ended September 30, 1999 the Company incurred a net loss of $5.8
million and negative cash flow from operations of approximately $5.2 million.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The Company is currently pursuing additional financing,
although there can be no assurance that the Company will be successful in its
financing efforts or that such financing will be on terms favorable to the
Company. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
Certain reclassifications have been made to prior year balances in order to be
consistent with current year presentation.
2. ACQUISITIONS
The following acquisitions, all of which have been accounted for using the
purchase method of accounting, have been included in the consolidated financial
statements since the date of acquisition. The pro forma effects of these
acquisitions, individually or in the aggregate, are not material to the
Company's financial condition or the results of operations.
A WORD ABOVE. In May 1999, the Company acquired A Word Above, Inc., a medical
transcription services company operating in the greater Houston, Texas
metropolitan area since January 1988. Total consideration consisted of $300,000
in cash and a $700,000 Series 2 Preferred Stock Obligation (see description
below), payable in three annual installments.
PRN TRANSCRIPTION. In February 1999, the Company purchased the assets of PRN
Transcription, Inc., ("PRN") a medical transcription services company operating
in eastern Texas since 1988. Total consideration consisted of $200,000 in cash,
a $377,000 Series 2 Preferred Stock Obligation (see description below), payable
in three annual installments and a contingent $174,000 Series 2 Preferred Stock
Obligation. The contingent Series 2 Preferred Stock Obligation is payable upon
PRN achieving certain revenue targets, as defined.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AM TRANSCRIPTION. In February 1999, the Company purchased the assets of AM
Transcription, Inc., a medical transcription services provider operating in the
greater Dallas, Texas metropolitan area since 1990. Total consideration
consisted of $200,000 in cash, assumption of approximately $56,000 of capital
lease obligations and a $194,000 Series 2 Preferred Stock Obligation (see
description below), payable in three annual installments.
REYNA TRANSCRIPTION. In February 1999, the Company purchased the assets of Reyna
Transcriptions, Inc., a medical transcription services company operating in the
greater Houston, Texas metropolitan area since 1989. Total consideration
consisted of $75,000 in cash and a $175,000 promissory note, and assumption of
approximately $8,000 of capital lease obligations. The promissory note bears
interest at 8% and is payable in three annual installments of principal and
interest.
The Series 2 Preferred Stock Obligations require the Company to issue preferred
stock ("Preferred Stock") in three annual installments from the anniversary date
of the acquisition. The Preferred Stock will have a liquidation preference and
stated value of $100 per share and carries an 8% cumulative dividend payable in
cash or in additional shares of Preferred Stock at the Company's option.
Dividends are payable quarterly and in arrears on the first day of each January,
April, July and October commencing on January 1, 2000. Each share of the
Preferred Stock when issued will be convertible, at any time, into a number of
shares of common stock equal to (i) $100 per share of Preferred Stock being
converted, plus any earned, but unpaid dividends, if any, divided by (ii) the
greater of $1.00 per share or the average daily closing price of the Company's
Common Stock for the thirty day period immediately preceding the effective date
of any such conversion on the Over-The-Counter Bulletin Board. The Series 2
Preferred Stock Obligations have been recorded at their present value for
purposes of purchase accounting.
The Company has agreed to register such shares of common stock issued upon
conversion of the Preferred Stock for resale under the Securities Act of 1933,
as amended, at the expense of the Company. These shares of Preferred Stock are
subject to automatic conversion if the Company undertakes an underwritten public
offering with an aggregate market value of $10,000,000 or more. Any shares of
the Preferred Stock may be redeemed, at the Company's option, after the third
anniversary of the date of their issuance, at a redemption price of $100 per
share plus any accrued but unpaid dividends. Except as otherwise required by the
Delaware General Corporate Law, the holders of the Preferred Stock shall have no
voting rights.
3. SERIES D PREFERRED STOCK AND WARRANTS
On December 31, 1998, the company entered into a Series D Preferred Stock and
Warrant Purchase Agreement (the "Series D Agreement") to sell up to 5,000 shares
of Series D Convertible Preferred Stock. These shares have a par value of $.10,
were priced at $1,000 per share and were sold to L&H Investment Co., N.V.
("LHIC"). The Series D Agreement was structured into three closings of 2,000
shares, 1,000 shares, and 2,000 shares, respectively. Each closing was subject
to the Company meeting certain financial and/or operational targets. In
connection with each closing, the Company issued warrants, expiring December 31,
2003, to purchase 1,500,000, 500,000 and 500,000 shares of common stock,
respectively, at an exercise price of $1.25 per share. As the Company's average
stock price, as quoted on the Over-The-Counter Bulletin Board, was below the
minimum stock price, as defined by the Series D Preferred Stock for the second
quarter of 1999, LHIC is entitled to an additional warrant to purchase 100,000
shares of common stock at an initial exercise price of $1.25 per share. Pursuant
to the Series D Agreement, two representatives of LHIC were appointed to the
Company's board of directors.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1998, the Company had achieved the first and second targets
and received the funding for the first target. The funding for the second target
was received in January 1999. The Company achieved the third target and received
the related funding for the third closing in March 1999. The Series D
Convertible Preferred Stock and warrants have been recorded at their respective
fair values.
The initial Series D Preferred Stock conversion price of $1.50 per share of
common stock has been adjusted pursuant to the price protection provision of the
Series D Preferred Stock which reduces the conversion price of the Series D
Preferred Stock to the extent that the Company issues any common stock or
securities which are convertible into common stock, including options and
warrants, at a price below the conversion price then applicable. On August 18,
1999, the Company sold 2,000 shares of Series E Preferred Stock (see Note 4.),
which has a conversion price of $1.00 per share of common stock, reducing the
Series D Preferred Stock conversion price to $1.00 per share of common stock. On
November 5, 1999, the Company issued a $2,000,000 convertible secured promissory
note to Lernout & Hauspie Speech Products, N.V. ("LHSP"), an affiliate of LHIC
(see Note 10.), with a conversion price of $.37 per share of common stock,
reducing the Series D Preferred Stock conversion price to $.37. The 5,000 shares
of Series D Preferred Stock owned by LHIC, valued at $1,000 per share, can be
converted into 13,513,513 shares of common stock.
In addition to the Series D Agreement, the Company entered into a convertible
promissory note and warrant purchase agreement, dated May 24, 1999, with LHIC
which was amended on November 5, 1999. The Company also entered into a
value-added resellers agreement with LHSP, dated September 30, 1998 (amended
December 27, 1998) and a convertible secured promissory note with LHSP, dated
November 5, 1999. See discussion of the convertible promissory note and warrant
agreement with LHIC in Note 5., and a discussion of the related amendment in
Note 10. For a discussion of the value added resellers agreement with LHSP, see
Note 9., and for the convertible secured promissory note with LHSP, see Note 10.
4. SERIES E PREFERRED STOCK AND WARRANTS
On August 18, 1999, the Company completed the sale, in a private placement, of
2,000 shares of Series E Preferred Stock and a warrant to purchase 400,000
shares of common stock (the "Series E Warrant"), for gross proceeds of
$2,000,000. The proceeds consisted of approximately $1,500,000 cash and the
conversion of a $500,000 convertible promissory note (see July Note discussed
below). The sale of the Series E Preferred Stock and the Warrant were made to an
affiliate of a member of the Company's Board of Directors.
The Series E Preferred Stock, par $.10 per share, accrues dividends at a rate of
6% per annum on the original issue price of $1,000 per share plus accrued and
unpaid dividends. Dividends are payable quarterly in arrears, in either cash or
common stock at the Company's option. If the Company elects to pay the dividends
in common stock, the number of shares of common stock to be issued will be based
on the 30 day average closing price prior to the dividend date. The Series E
Warrant has an initial exercise price of $1.25, subject to certain anti-dilution
provisions, and expires August 31, 2003.
Each share of Series E Preferred Stock is initially convertible into 1,000
shares of common stock, subject to certain anti-dilution provisions. The Series
E Preferred Stock automatically converts upon an underwritten public offering of
the Company's securities for $25,000,000 or more, or the Company's stock begins
trading on the Nasdaq SmallCap Market. The Company may redeem any non-converted
shares of Series E Preferred Stock after August 31, 2004, at a redemption price
of $1,000 per share plus accrued but unpaid dividends, upon 30 days written
notice. The Company has agreed to register, at any
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
time after November 16, 1999, the common stock issuable pursuant to a conversion
of the Series E Preferred Stock and the exercise of the Warrant upon written
request from the Series E Preferred Stockholders, subject to a minimum request
for registration of not less than $300,000 of common stock.
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series E Preferred Stock shall
be entitled to be paid out of the assets of the Company available for
distribution to stockholders, after the payment or declaration and setting apart
for payment of any amount with respect to the Series A, Series B, Series C, and
Series D Preferred Stock, and before any payment or declaration and setting
apart for payment of any amount shall have been made with respect to Series 1 or
Series 2 Preferred Stock, $1,000 per share plus accrued dividends (the
"Liquidation Preference"). Upon a change in control of the Company, as defined
in the Series E Preferred Stock Certificate of Designation, Preferences, Rights
and Limitation, in which all of the Series E Preferred Stock is not purchased
for at least 125% of the Liquidation Preference, the Company shall offer to
redeem the outstanding shares of Series E Preferred Stock for $1,000 per share
plus accrued dividends.
The Company has agreed, as long as Daniel Dornier or any affiliate of Daniel
Dornier shall own 5% of the common stock of the Company, that the Company will
use its best efforts to have Daniel Dornier elected to the Board of Directors of
the Company. Daniel Dornier is currently a member of the Board of Directors of
the Company.
5. CONVERTIBLE PROMISSORY NOTES AND WARRANTS
The Company received aggregate proceeds of $1,500,000 from a convertible
promissory note (the "May Note") and a warrant (the "May Warrant") which were
issued pursuant to the Convertible Promissory Note and Warrant Purchase
Agreement (the "May Purchase Agreement"), dated May 24, 1999, with LHIC. The May
Note, as amended on November 5, 1999 (see Note 10.) has a principal balance of
$1,500,000, bears interest at 9% and matures February 3, 2000. As consideration
for the amendment to extend the maturity of the May Note from the original
maturity date of November 24, 1999 to February 3, 2000, the Company pledged
substantially all of the tangible and intangible assets of the Company as
collateral and amended the conversion price of the May Note to $.37 per share of
common stock.
Pursuant to the May Purchase Agreement, the Company will issue the May Warrant
to the Stockholder at an initial exercise price of $1.25 per share of common
stock, subject to anti-dilution protection as defined, expiring May 31, 2002.
The May Warrant may be exercised for the number of shares of common stock equal
to the coverage ratio (the "May Coverage Ratio") times the principal amount of
the Promissory Note divided by the per share value of the Company's common stock
sold in the next qualified equity financing. The May Coverage Ratio increased by
10% per month until it reached the maximum coverage ratio of 60% on October 24,
1999. The fair value of the May Warrant is being expensed as a finance charge in
accordance with the monthly increase in the May Coverage Ratio.
On July 20, 1999, the Company received proceeds of $500,000 and $250,000 from
two convertible promissory notes and warrants (the "July Warrants") which were
issued pursuant to two separately executed Convertible Promissory Note and
Warrant Purchase Agreements (the "July Purchase Agreements"), with companies
affiliated with two members of the Company's Board of Directors. The terms and
maturity of the convertible promissory notes are identical to the May Note. The
$500,000 convertible promissory note (the "July Note") was converted into Series
E Preferred Stock on August 18, 1999; see Note 4.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In connection with the July Purchase Agreements, the Company will issue certain
companies affiliated with the two members of the Company's Board of Directors
the July Warrants, at an initial exercise price of $1.25 per share of common
stock, subject to anti-dilution protection as defined, expiring July 31, 2002.
The July Warrants may be exercised for the number of shares of common stock
equal to the coverage ratio (the "July Coverage Ratio") times the principal
amount of the promissory note divided by the per share value of the Company's
common stock sold in the next qualified equity offering. The July Coverage Ratio
at September 30, 1999 was 30% and increases by 10% per month until the Company
completes the next qualified financing or the July Coverage Ratio reaches 50%
(after November 24, 1999).
During the three and nine month periods ended September 30, 1999, the Company
recognized $229,585 and $376,585, respectively of finance charges related to the
May Warrant and July Warrants.
6. SALES AND LEASE BACK
On March 22, 1999, the Company completed a sale and lease back agreement (the
"Agreement") with Commercial Money Center. In accordance with the Agreement, the
Company sold computer equipment, software, office equipment and furniture, with
an aggregate net book value of $202,270, for $240,000. The company recorded
$37,730 of unearned profit on the sale and will amortize this into other income
over three years.
7. STOCKHOLDERS' EQUITY
During the nine month period ended September 30, 1999, pursuant to the terms of
the Series B Preferred Stock, 605 shares of Series B Preferred stock were
converted into 608,644 shares of common stock.
During the nine month period ended September 30, 1999, warrants to purchase
585,000 shares of common stock expired. The warrants had an original fair value
of $607,000, which was reclassified from warrants to additional paid-in capital.
The Company has agreed to issue warrants to purchase 92,715 shares of common
stock at an initial exercise price of $1.375 to Series C Preferred Stockholders
as payment for penalties incurred due to the Company's late filing of a
registration statement for the Series C Preferred Stock.
8. EARNINGS PER SHARE
Basic earnings per common share is based on the weighted average number of
common shares outstanding during the period, while diluted earnings per common
share considers all potentially dilutive securities that were outstanding during
the period. The Company has potentially dilutive securities outstanding
including stock options, warrants, convertible debt and convertible preferred
stock. Both basic and diluted earnings per common share are the same for each of
the periods presented as inclusion of such potentially dilutive securities was
antidilutive.
9. COMMITMENTS AND CONTINGENCIES
LITIGATION
On March 22, 1997, the Company's predecessor Applied Voice Technologies
Partners, LTD and Nevada Gold & Casinos, Inc. ("Nevada Gold") completed a
non-binding letter of intent ("LOI") that called for the
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creation of a joint venture for the development and marketing of voice activated
gaming technology. According to Nevada Gold, it entered into two lease
agreements, on furniture and computer equipment, pursuant to the terms of the
LOI. Despite the willingness of both parties to execute the terms of the LOI,
the joint venture was never created. On September 25, 1998, Nevada Gold filed a
claim of breach of contract and unjust enrichment against the Company for
failure to reimburse Nevada Gold for payments it made under the lease
agreements. On June 17, 1999, the Company and Nevada Gold entered into a
compromise settlement agreement, pursuant to which the Company paid Nevada Gold
$10,000 and agreed to pay an additional obligation of $60,192. The additional
obligation to Nevada Gold bears interest at 12% per annum and is payable in
quarterly installments of principal and interest of $11,065 through December 15,
2000.
On August 2, 1999, the Company, pursuant to the First Amendment to Employment
Agreement by Timothy J. Connolly and the Company, assumed the responsibility for
the defense and resolution of and agreed to indemnify the employee for any loss,
damages, claims or expenses in connection with the pending litigation styled
"RANDALL B. MCDONALD, JR. AND RANDALL B. MCDONALD LIFE INSURANCE TRUST II VS.
TIMOTHY J. CONNOLLY, ET AL. CASE NO. 1999-09379, DISTRICT COURT OF HARRIS
COUNTY, 113TH JUDICIAL DISTRICT." The plaintiff was alleging improper dilution
to their ownership, which originated from the plaintiff's debt and equity
participation in Applied Voice Recognition, L.P., predecessor entity to Applied
Voice Recognition, Inc., as a limited partner. Applied Voice Recognition, L.P.
agreed to distribute 180,000 shares of the Company's common stock that the
partnership owns as full settlement of the litigation. The litigation settlement
did not result in any obligation to the Company for the settlement. The Company
estimates that it incurred less than $20,000 of legal fees related to the
lawsuit.
The Company is subject to claims and litigation in the ordinary course of
business. Management does not believe that such claims and litigation,
individually or in the aggregate, will result in a material adverse impact to
the Company's results of operations or financial position.
PURCHASE COMMITMENTS
On July 12, 1999, the Company entered into a remarketer/integrator agreement
with an equipment manufacturer, which provides the Company equipment at prices
discounted from the retail list price, provided that the Company meets certain
volume purchase requirements. The term of the agreement is for one year, with
automatic renewals for successive one year terms. The agreement may be
terminated by either party upon 30 days written notice after the completion of
the initial term and may also be terminated by the equipment manufacturer upon
any material breach, as defined, or failure to pay, or upon the equipment
manufacturer's good faith belief that the exporting of products is in violation
of applicable export laws.
CONSULTING AGREEMENTS WITH BOARD MEMBER
The Company, on June 19, 1999, entered into a consulting agreement with an
individual who was a member of the Company's Board of Directors (the "Board
Member") for business advisory services. Pursuant to the agreement, the Company
agreed to pay the Board Member an hourly rate and 1,500 options per day. The
Company anticipates that this obligation will not exceed $15,000 and 15,000
options. The options will have an exercise price of $1.125 (the closing price of
the Company's stock on the date the agreement was entered into). The Board
Member resigned from the Company's Board of Directors on September 30, 1999.
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VALUE-ADDED RESELLERS AGREEMENT WITH AN AFFILIATE OF THE STOCKHOLDER
On September 30, 1998 (amended December 27, 1998), the Company entered into a
value added reseller agreement ("VAR Agreement") with LHSP for the use of LHSP's
speech dictation software (the "LHSP Software") which is to be integrated with
the Company's VoiceCOMMANDER 99 speech recognition software in order to provide
medical transcription services at a lower cost than traditional transcription
technologies. Under the terms of the VAR Agreement, the Company will pay LHSP a
service fee equal to 50 percent of the cost savings achieved through the use of
the VoiceCOMMANDER 99 product, when it includes the LHSP Software. Pursuant to
the September 30, 1998 agreement and the December 27, 1998 amendment, the
Company made nonrefundable prepayments of service fees totaling $1,300,000. The
initial term of the VAR Agreement is until December 31, 1999 and is
automatically renewable for one year periods. The Company or LHSP may terminate
the VAR Agreement at any time, without cause, after the initial term by giving
90 days written notice. The value of the prepayments is dependent upon the (i)
successful integration of the LHSP Software with VoiceCOMMANDER 99, (ii)
customer acceptance of VoiceCOMMANDER 99 as a dictation platform (iii)
generating sufficient revenue utilizing VoiceCOMMANDER 99, and obtaining the
related cost savings, and (iv) the continuation of the VAR Agreement. There can
be no assurance that such items will take place.
10. SUBSEQUENT EVENT
On November 5, 1999, the Company borrowed $2,000,000 pursuant to a convertible
secured promissory note (the "November Note"), issued to LHSP. The November Note
bears interest at 12.5% and matures the earlier of 90 days from the date of the
November Note (February 3, 2000), a purchase of the majority of the stock of the
Company or a sale of substantially all of the Company's assets. The November
Note is subject to 90 day extension at the option of LHSP. The November Note is
secured by substantially all of the assets, tangible and intangible, of the
Company.
The November Note, and accrued but unpaid interest, is convertible into common
stock at an initial conversion price of $.37 per common share, subject to
anti-dilution provisions. The November Note is convertible in whole or in part
at the election of LHSP, and is automatically converted upon the completion of a
qualified public offering, as defined. The Company has agreed to grant to the
LHSP, as soon as practical but in no event later than 20 days, a registration
rights agreement containing terms not less favorable than the terms contained in
any registration rights agreement between the Company and any other investor.
Accordingly, the Company anticipates issuing the Affiliate registration rights
substantially in the form of demand registration rights with minimal
restrictions.
Concurrent with the issuance of the November Note, the Company amended the May
Note (see Note 5.) held by LHIC to extend the maturity date from November 24,
1999 to February 3, 2000. As consideration for the amendment to extend the
maturity of the May Note, the Company pledged substantially all of the tangible
and intangible assets of the Company as collateral and amended the conversion
price to $.37 per share of common stock, subject to certain anti-dilution
provisions.
As a result of the issuance of the November Note, the Series D Preferred Stock,
pursuant to the terms of the Certificate of Designation, Preferences, Rights and
Limitations of Series D Preferred Stock, conversion price is adjusted to the
$.37 per common share conversion price of the November Note. LHIC owns 5,000
shares of Series D Preferred Stock valued at $1,000 per share, which can be
convert into a total of 13,513,513 shares of common stock.
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In the event that the Company has insufficient authorized capital stock to be
sufficient to allow the issuance of the Company's common stock to the November
or May noteholders (collectively or individually, the "Noteholders"), then the
Noteholders shall be entitled to convert all or a portion of the November Note
or the May Note into such number of shares of Series F Preferred Stock as would
enable the Noteholders upon conversion of the Series F Preferred Stock to
receive the same number of shares of the Company's common stock which it is
entitled to convert.
In connection with the above transactions, the Company designated 6,000 shares
of the Company's preferred stock as Series F Preferred Stock, par $.10 per
share. Each share of Series F Preferred Stock is initially convertible into
2,702.7 shares of common stock, subject to certain anti-dilution provisions. In
the event of any liquidation, dissolution or winding up of the Company, either
voluntary or involuntary, the holders of Series F Preferred Stock shall be
considered on parity with the Company's common stock and shall be treated as if
all of the shares of Series F Preferred Stock had been converted to common
stock.
Series F Preferred Stock is not entitled to preferred dividends, but shall be
entitled to such dividends, if any, as are payable on shares of the Company's
common stock on an as-converted basis. The holder of Series F Preferred Stock
shall have the right to such number of votes as such holder would have been able
to vote had all of the Series F Preferred Stock been converted to the Company's
common stock.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's principal business is providing value-added medical transcription
services. Medical transcription is the conversion of dictated information into a
standard text format for inclusion in a patient's permanent medical records.
Additionally, the Company receives revenues from the sale of licenses of its
dictation voice recognition software applications (including training and
maintenance services) and the sale of computer hardware that is bundled with
software applications at the customer's request.
The Company's principal business strategies are to (i) consolidate the
fragmented medical transcription industry by pursuing strategic acquisitions
that provide entry into to new markets or compliment existing operations; (ii)
reduce the cost of providing medical transcription services by utilizing the
internet and VoiceCOMMANDER 99(TM) voice recognition technology; (iii) build the
Company's capacity to provide medical transcription services by recruiting and
training additional transcriptionists, primarily in the Philippines; and (iv)
improve cash flows. Additionally, the Company believes that communications
expense, a significant cost component of medical transcription services, can be
reduced by implementing secure internet and voice compression technology to
transmit voice and text transcription files. The Company believes utilizing this
"e-commerce" business model, with technology currently available to the Company,
significantly reduces cost of transmission as compared to standard voice,
non-compressed transmission of data.
As of September 30, 1999, the Company had acquired medical transcription service
providers in Texas, Colorado, Florida, New York and a transcription center
located in Manila, the Philippines. The Company intends to continue to pursue
acquisitions, provided that the Company is able to identify attractive and
willing acquisition candidates and that sufficient funding is made available.
There can be no assurance that such acquisition candidates can be identified or
that sufficient funding can be obtained on terms favorable to the Company.
The Company believes that significant cost savings can be achieved, by utilizing
the transcription center in the Philippines, primarily due to the availability
of transcriptionists at favorable levels of compensation. Management is aware
that there are additional business risks inherent in offshore business
operations, including, but not limited to, currency fluctuations, civil unrest
and inadequate services and communications infrastructure. Management continues
to monitor the risk factors on a on-going basis and has reviewed the existing
infrastructure in the Philippines and believes that the services and
communications infrastructure is adequate to meet the needs of the Company for
the foreseeable future.
Prior to the first quarter of 1998, the Company's principal efforts were focused
on the sales of VoiceCOMMANDER 4.0(TM). This version of the Company's voice
recognition software was sold to the general business community through retail
sales channels and the Company's internal sales force. In the first quarter of
1998, the Company narrowed the focus of its business plan to concentrate its
efforts on medical transcription services. In May 1998, the Company began
development of a software product that provides healthcare professionals with a
tool for internet based transcription and dictation services. The new product,
VoiceCOMMANDER 99, provides a mobile dictation solution designed to improve the
quality and reduce the costs of healthcare information needs.
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RESULTS OF OPERATIONS
Net revenues for the three months ended September 30, 1999 and 1998 were
$1,455,195 and $100,144, respectively, representing an increase of 1,353.1%. Net
revenues for the nine months ended September 30, 1999 and 1998, were $3,806,054
and $475,303, respectively, representing an increase of approximately 700.7%.
The increase in revenues is due to the Company, beginning in the first quarter
of 1998, transitioning its business model from the sale of speech recognition
hardware and software to providing value-added medical transcription services
and completing eight acquisitions of medical transcription companies.
Additionally, the nine month period ended September 30, 1999 includes
approximately $300,000 of consulting fees for services provided to Lernout &
Hauspie Speech Products, N.V. ("LHSP") an affiliate of a L&H Investment Co.,
N.V. ("LHIC") a stockholder of the Company, which was non-recurring in nature.
Although there can be no assurances, the Company anticipates that revenue will
continue to increase as the Company continues to implement its strategy of
acquiring medical transcription service companies and expanding its operations.
Cost of sales increased to $1,104,624 for the three months ended September 30,
1999 from $71,982 for the three months ended September 30, 1998. Cost of sales
increased to $2,453,106 for the nine months September 30, 1999 from $257,718 for
the nine months ended September 30, 1998. The increase in cost of sales is
primarily due to additional transcription labor costs resulting from the
increase transcription service revenues. As a percentage of revenue, cost of
sales increased to 75.9% and 64.5% for the three and nine months ended September
30, 1999, respectively, from 71.9% and 54.2% for the three and nine months ended
September 30, 1998. The increase as a percentage of revenue is primarily
attributable to the change in the Company's revenue mix from high margin
software and consulting sales to lower margin transcription services.
Marketing and sales expense for the three months ended September 30, 1999 and
1998 were $131,849 and $191,817, respectively, representing a decrease of
approximately 31.3%. Marketing and sales expense for the nine months ended
September 30, 1999 and 1998 were $480,891 and $943,256, respectively,
representing a decrease of approximately 49.0%. The decrease in marketing and
sales expense is primarily attributable to the Company concentrating on
providing medical transcription services and not promoting the Company's voice
recognition products for commercial sale.
General and administrative expense for the three months ended September 30, 1999
and 1998 were $1,423,852 and $1,347,430, respectively, representing an increase
of approximately 5.7%. General and administrative expense for the nine months
ended September 30, 1999 and 1998 were $5,363,371 and $3,642,816, respectively,
representing an increase of approximately 47.2%. The increase in general and
administrative expense is attributable to consulting services incurred in
connection with the beta testing, development, and roll-out of VoiceCOMMANDER
99(TM), expenses incurred for the development of information used for billing
purposes and for various performance metrics, and legal and financial advisory
fees incurred as the Company pursued additional funding. Additionally, there was
an increase in spending on administrative and executive personnel, resulting
from the development of the acquisition program and the filling of key
management positions.
The increases in general and administrative expenses were slightly offset by the
restructuring of the Company's headquarters in August 1999. The restructuring
included a reduction of personnel and related cost, and a reduction of lease
space. The impact of the restructuring on the quarter ended September 30, 1999
was reduced by the timing of the restructuring, severance expense and other
related expenses. The Company anticipates that the cost savings of the
restructuring will be in excess of $1.0 million on an annualized basis.
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Research and development expenses for the three months ended September 30, 1999
and 1998 were $188,549 and $136,182, respectively, representing an increase of
approximately 38.5%. Research and development expenses for the nine months ended
September 30, 1999 and 1998 were $684,414 and $452,980, respectively,
representing an increase of approximately 51.1%. The increase in research and
development costs is attributable to expenditures for the quality assurance
review of VoiceCOMMANDER 99(TM) and the development of macros, to be
incorporated into VoiceCOMMANDER 99(TM), which will streamline the transcription
process.
Interest expense for the three months ended September 30, 1999 and 1998 were
$304,081 and $1,848, respectively. Interest expense for the nine months ended
September 30, 1999 and 1998 were $593,937 and $79,860, respectively,
representing an increase of approximately 643.7%. The increase is primarily due
to the issuance of promissory notes, debt obligations due to former owners of
the acquired businesses and non-cash charges related to warrants issued in
connection with debt financing. The warrants are recorded at their fair values
as an original issue discount to the debt and are amortized over the life of the
related debt using the effective interest rate method. Warrants that increase
the number of shares of common stock purchasable, over time, are expensed as the
Company incurs the additional warrant obligation.
Preferred stock dividends for the three months ended September 30, 1999 and 1998
were $277,979 and $629,795, respectively, representing a decrease of
approximately 55.9%. The decrease is due the prior year including a $583,694
deemed dividend upon the conversion of Series B Preferred Stock. The preferred
stock dividends for the nine months ended September 30, 1999 and 1998 were
$529,644 and $675,356, respectively, representing a decrease of approximately
21.5%. Absent the deemed dividend, preferred stock dividends for the three
months and nine month periods ended September 30, 1999, increased 503.0% and
477.8%, respectively, from the prior year primarily due to the issuance of
Series C, Series D and Series E Preferred Stock.
Net loss to common shareholder increased primarily due to the increase in cost
of sales, general and administrative expense, interest expense and preferred
stock dividends, partially offset by the increase in revenue. Through the period
ended September 30, 1999, the Company has incurred operating losses, since
inception, of approximately $21.2 million. To date, the Company's operations
have not been profitable and there is no assurance that they will become
profitable in the future. As a result, the Company believes that its historical
results of operations for the periods presented may not be directly comparable.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash and cash equivalents of $442,033 and
a working capital deficit of $1,948,260 compared to cash and cash equivalents of
$1,377,913 and working capital of $948,906 at December 31, 1998. The decrease in
cash and cash equivalents and working capital is due to the use of cash to fund
the $5,234,129 of cash used in operating activities, debt repayments of
$780,161, $1,019,698 for purchases of equipment and to fund the $736,857 cash
portion of acquisition purchase price, partially offset by the proceeds of
$1,750,000 from the issuance of convertible promissory notes (net of conversions
to preferred stock) and warrants, approximately $405,000 of other borrowings
including equipment financing and factoring receivables, $3,000,000 from the
issuance of Series D Preferred Stock and warrants and $2,000,000 from the
issuance of Series E Preferred Stock and warrants.
The Company has been expanding its operations primarily by focusing on the
acquisition of medical transcription service companies, recruiting and training
transcriptionist and the continued development of VoiceCOMMANDER 99(TM). The
Company's development has required and will continue to require a significant
investment of cash for the initial acquisition of businesses, the subsequent
upgrade of
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accounting and operational systems, the development of the Company's products
and the continued sales and marketing efforts. The Company has funded these cash
requirements with various debt and equity offerings over the past two years. The
Company intends to fund cash requirements for the foreseeable future from cash
on hand, cash generated from operations, and additional debt or equity
financing. If additional debt or equity financing were not available or not
available on favorable terms to the Company in the future, it could have an
adverse effect on the Company's liquidity.
On November 5, 1999, the Company borrowed $2.0 million pursuant to a convertible
secured promissory note issued to LHSP. In connection with the convertible
secured promissory note, the Company extended the $1.5 million of outstanding
promissory note owed to LHIC. Both of these notes are secured by substantially
all of the tangible and intangible assets of the Company, mature February 3,
2000 and are subject to an additional 90 day extension at the option of LHSP and
LHIC. Additionally, the Company has a term sheet from LHSP to provide up to $2.0
million of additional funds, under the same terms, to the Company for the
restricted purpose of acquisitions, subject to LHSP's approval of the terms and
conditions of any such acquisitions.
The Company continues to incur substantial operating losses and will continue to
need additional working capital to fund its operations, acquisitions, research
and development, and marketing efforts for the next fiscal year. Additionally,
the Company does not anticipate that cash flow operations will provide
sufficient funds for the Company to repay the $3.5 million of aggregate debt
obligations owed to LHSP and LHIC, which mature on February 3, 2000. If the
Company is unable to repay these debt obligations or obtain the necessary
extensions on or before February 3, 2000, the Company would be in default of the
promissory notes. If the Company is not successful in obtaining additional debt
or equity financing for its operations, there will exist substantial doubt as to
the Company's ability to continue as a going concern.
If the Company is unable to obtain the financing commitments required to
successfully implement its intended business plan, then the Company will
implement contingency plans which may include: (a) the slow down in pace or
termination of its acquisition plan, (b) the acceleration of its plans to
increase production capacity in its offshore transcription facility in the
Philippines and transfer of the majority of transcription work to offshore
production, (c) the reduction of expenses primarily through the reduction of
sales and administrative personnel, (d) the curtailment of the development and
deployment of the Company's VoiceCOMMANDER 99 products and (e) the sale of
certain assets and operating subsidiaries. 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.
On April 29, 1999, the Company entered into an agreement with an investment bank
to provide underwriting services for a proposed offering of the Company's common
stock for sale to the public. The terms of the agreement provide for
underwriters discount, over-allotment agreement, underwriter warrants and
contains the customary restriction on the Company's issuance of additional
equity instruments. The Company and the investment bank have postponed the
pursuit of the offering until the year 2000 and are not currently taking any
action towards completing the proposed offering. There can be no assurance that
the investment bank will ultimately be successful in raising additional funds or
that such funds will be made available on terms favorable to the Company.
YEAR 2000
The year 2000 issue generally describes the various problems that may result
from the failure of computer and other mechanical systems to properly process
certain dates and date sensitive information. The Company's operations are
reliant on several third party products and service relationships. A failure by
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any of these partners to adequately address the Year 2000 issue would adversely
affect the Company's operations.
The Company has undertaken initiatives to ensure that it is prepared for the
Year 2000 issue. All of the software produced by the Company is created with
industry standard tools and runs on industry standard operating systems and
databases. These tools, operating systems and databases have been certified Year
2000 compliant by the manufacturers. In addition, the current systems used by
the Company, to account for its day to day operations, were recently purchased
and are certified as Year 2000 compliant by the manufacturer. As for future
enhancements or additions to the current system, the Company has established a
clear directive that requires these to be Year 2000 ready, prior to purchase.
The Company's expansion effort into the transcription industry comes with the
risk that acquired systems may be date sensitive and Year 2000 non-compliant. To
date, the Company is aware of several acquired systems, used in the
transcription business, which are not Year 2000 compliant. To mitigate this
problem, the Company is replacing these non-compliant systems with its own
proprietary Year 2000 compliant software, other Year 2000 compliant software and
Year 2000 compliant hardware.
In most cases the purchased non-Year 2000 compliant equipment is at or near the
end of its useful life. This equipment would have to be replaced in the normal
course of operations. The cost associated with these replacements will be
reflected in the normal results of operations.
The Company believes that the risks associated with Year 2000 issues center
primarily with the continued availability of the Internet. The lack of
availability of the Internet would reduce the ability of the Company to cheaply
and effectively move transcription workload. The Company is currently finalizing
plans to ensure a reasonable level of redundant capacity utilizing Year 2000
compliant traditional transcription equipment.
In the event of a Year 2000 problem with the Internet, the Company would revert
to processing its transcription business on Year 2000 compliant transcription
recording systems. These systems are being purchased in the normal course of its
business, as part of the Company's disaster recovery plans. The lack of
availability of the Internet could require the use of traditional telephone
lines. In the event of a failure of the Internet and the national or
international telephone system, the Company could continue to process
transcription utilizing couriers to move the transcription data, although at a
greatly reduced efficiency and substantially higher cost.
The Company's Year 2000 planning process, as discussed above, represent an
ongoing process. As the Company acquires new companies in the course of its
expansion, each acquired company will undergo a review to ensure that all of its
software and equipment are Year 2000 compliant. Although the Company believes it
is taking the appropriate courses of action to ensure that material
interruptions in business operations do not occur as a result of the Year 2000
conversions, there can be no assurances that the actions discussed herein will
detect and correct all Year 2000 compliance issues. To the extent that the
Company is unsuccessful in anticipating and eliminating any negative financial
consequences of the Year 2000 issues, the results of operations will be
adversely affected. Among the factors which might affect the success of the
Company's Year 2000 plans are: (i) the Company's ability to properly identify
deficient systems; (ii) the ability of third parties to adequately address Year
2000 issues or to notify the Company of potential deficiencies; (iii) the
Company's ability to adequately address any such internal or external
deficiencies; (iv) the Company's ability to complete its Year 2000 plans in a
timely manner; and (v) unforeseen expenses related to the Company's Year 2000
plans.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 9. of the Notes to Unaudited Consolidated Financial
Statements for discussion of certain legal proceedings involving the Company.
ITEM 2. CHANGES IN SECURITIES
Recent Sales of Unregistered Securities
The following sales of unregistered securities occurred during the three months
ended September 30, 1999 and through November 15, 1999 (the date of this
filing), in private transactions in which the Company relied on the exemption
from registration available under Section 4(2) of the Securities Act of 1993, as
amended, and Rule 506 of Regulation D promulgated thereunder:
On November 5, 1999, in a private placement, the Company issued a $2.0 million
convertible secured promissory note to Lernout & Hauspie Speech Products, N.V.,
an accredited investor.
On August 18, 1999, in a private placement, the Company sold 2,000 shares of
Series E Preferred Stock and warrants to purchase 400,000 shares of common stock
at an exercise price of $1.25, to Greenwich, AG, an accredited investor.
Proceeds for the sale consisted of $1,500,000 cash and the conversion of a
$500,000 convertible promissory note.
On July 29, 1999, in a private placement, the Company issued a convertible
promissory note, with a stated principal of $500,000, and a warrant to
Greenwich, AG, an accredited investor, for aggregate proceeds of $500,000 and
issued a convertible promissory note, with a stated principal amount of
$250,000, and a warrant to G-51 Capital LLC, an accredited investor, for
aggregate proceeds of $250,000. (See Notes to Unaudited Consolidated Financial
Statements).
ITEM 5. OTHER INFORMATION
On July 15, 1999, N. Rudy Garza, president and founder of G-51 Capital, LLC
joined the Board of Directors.
On August 2, 1999, Eric A. Black was named chief executive officer and president
of the Company. Mr. Black held several management positions in his 23 year
career with Browning-Ferris, Inc., most recently as President and Chief
Operating Officer of Browning-Ferris International, Inc. Tim Connolly, the
current chairman and the chief executive officer immediately prior to the
appointment of Mr. Black, will remain the chairman of the board and will chair
the Company's strategic committee.
On August 2, 1999, Rob Ritchie was re-appointed from his offices as President
and Chief Operating Officer of the Company to Vice-President-International
Operations of the Company.
On August 25, 1999, Raymond Betz tendered his resignation as Director of the
Company. Mr. Black was elected to the Board of Directors of the Company to serve
the unexpired portion of Mr. Betz term or until his successor is duly elected
and qualified.
On September 30, 1999, Michael J. Wilson tendered his resignation as Director
of the Company. Mr. Wilson's term as Director of the Company had expired on
September 6, 1999.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
3.1 Certificate of Designation, Preferences, Rights and Limitations of Series
E Preferred Stock of the Company. (Exhibit 3.1 to the Company's current
report on form 8K filed on August 27, 1999, is incorporated herein by
reference).
3.2* Form of Certificate of Designation, Preferences, Rights and Limitations of
Series F Preferred Stock of the Company.
4.1 Registration Rights Agreement between the Company and Greenwich, AG dated
August 18, 1999. (Exhibit 4.1 to the Company's current report on form 8K
filed on August 27, 1999, is incorporated herein by reference).
4.2 Form of Warrant issued to Greenwich, AG dated August 18, 1999. (Exhibit
4.2 to the Company's current report on form 8K filed on August 27, 1999,
is incorporated herein by reference).
10.1 Convertible Promissory Note and Warrant Purchase Agreement, between the
Company and Greenwich, AG dated July 20, 1999. (Exhibit 10.3, to the
Company's quarterly report on form 10Q filed on August 12, 1999, is
incorporated herein by reference).
10.2 Convertible Promissory Note and Warrant Purchase Agreement, between the
Company and G-51 Capital LLC, dated July 20, 1999. (Exhibit 10.4, to the
Company's quarterly report on form 10Q filed on August 12, 1999, is
incorporated herein by reference).
10.3 Employment Agreement by Eric Black and the Company dated August 2, 1999.
(Exhibit 10.5, to the Company's quarterly report on form 10Q filed on
August 12, 1999, is incorporated herein by reference).
10.4 First Amendment to Employment Agreement by Timothy J. Connolly, dated
August 2, 1999. (Exhibit 10.6, to the Company's quarterly report on form
10Q filed on August 12, 1999, is incorporated herein by reference).
10.5 Series E Preferred Stock and Warrant Purchase Agreement, between the
Company and Greenwich, AG dated August 18, 1999. (Exhibit 10.1 to the
Company's current report on form 8K filed on August 27, 1999, is
incorporated herein by reference).
10.6* Convertible Secured Promissory Note Purchase Agreement, between the
Company and Lernout & Hauspie Speech Products, N.V. dated November 5,
1999.
10.7* Convertible Secured Promissory Note issued to Lernout & Hauspie
Speech Products, N.V. dated November 5, 1999.
10.8* Amendment to Convertible Promissory Note, between the Company and L&H
Investment Company, N.V. dated November 5, 1999.
27.1* Financial Data Schedule
- ------------------------
* Filed herewith.
21
<PAGE>
(B) REPORTS ON FORM 8-K
The Company filed a Form 8-K on August 27, 1999 for the private placement of
2,000 shares of Series E Preferred stock.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on this 15th day of November, 1999.
APPLIED VOICE RECOGNITION, INC.
BY: /S/RICHARD A. CABRERA
RICHARD A. CABRERA
CHIEF FINANCIAL OFFICER AND
SECRETARY
(on behalf of the Company and
as Chief Accounting Officer)
22
EXHIBIT 3.2
FORM OF
CERTIFICATE OF DESIGNATION, PREFERENCES,
RIGHTS AND LIMITATIONS
OF
SERIES F 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 November __, 1999, duly adopted a resolution providing for
the issuance of a series of six thousand (6,000) shares of the Corporation's
Preferred Stock, par value $0.10 per share, to be designated "Series F 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 F 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 F Preferred Stock" (herein referred to as "Series F
Preferred Stock"), consisting of six thousand (6,000) 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 F Preferred Stock."
B. NUMBER OF SHARES OF SERIES F PREFERRED STOCK. The number of
shares constituting all of the Series F Preferred Stock shall be four
thousand (4,000).
C. DIVIDENDS. The holders of the then outstanding shares of the
Series F Preferred Stock shall not be entitled to preferred dividends, but shall
be entitled to such
<PAGE>
dividends, if any, as are payable shares on shares of Common Stock, $0.001 par
value per share, of the Corporation ("Common Stock"), as if such shares of
Series F Preferred Stock had been converted to Common Stock in accordance with
Section E below.
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 F Preferred Stock shall be considered on parity with
the Common Stock and shall be treated as if all of the shares of Series F
Preferred Stock had been converted to Common Stock in accordance with Section E
below.
E. CONVERSION RIGHTS.
(i) Each share of Series F Preferred Stock is convertible into
two thousand seven hundred two and seven-tenths (2,702.7) shares of Common Stock
(subject to adjustment as provided below) (the "Conversion Rate").
(ii) Upon the issuance of any shares of Series F Preferred
Stock, such shares shall be converted to Common Stock as soon as authorized
shares are available therefor. Promptly upon issuance of Series F Preferred
Stock, if sufficient shares are not available for conversion to Common Stock,
the Corporation shall be obligated to use commercial best efforts to amend its
Certificate of Incorporation to increase the authorized number of shares of
Common Stock of the Corporation or take such other reasonable steps necessary to
permit the issuance of the number of shares of Common Stock provided in
paragraph (i) above.
(ii) Upon the authorization of the proper number of shares of
Common Stock, the Corporation shall notify the holder of the Series F Preferred
Stock, at which time such holder shall surrender the certificate or certificates
representing the shares of Series F 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 F 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 F
Preferred Stock by the Corporation or the transfer agent for the Series F
Preferred Stock.
(iii) Upon surrender of a certificate representing a share or
shares of Series F Preferred Stock for conversion pursuant to paragraph (i) of
this Section E, 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 holder shall be entitled upon conversion. In the event that
there shall have been surrendered a certificate or certificates representing
shares of Series F 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 F Preferred Stock which
shall not have been converted.
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<PAGE>
(iv) The issuance by the Corporation of shares of Common Stock
pursuant to paragraph (i) of this Section E 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 F 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 F Preferred Stock, but in lieu thereof shall pay to the holder converting
such Series F 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.
F. 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 F Preferred Stock may convert
such Series F Preferred Stock shall be increased or decreased in direct
proportion to such increase or decrease of shares, as the case may be, and (ii)
the Conversion Rate 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 F Preferred
Stock, there shall be any merger, consolidation, exchange of shares,
recapitalization, reorganization, or other similar event, as a result of which
shares of Common Stock of the 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 of the Corporation or another entity or there is a sale of all or
substantially all the Corporation's assets, then the holders of Series F
Preferred Stock shall thereafter receive, upon the basis and upon the terms and
conditions specified herein and in lieu of shares of Common Stock, immediately
theretofore issuable upon conversion, such stock, securities and/or other assets
which the holder would have been entitled to receive in such transaction had the
Series F Preferred Stock been converted immediately prior to such transaction,
and in any such case appropriate provisions shall be made with respect to the
rights and interests of the holders of the Series F Preferred Stock to the end
that the provisions hereof shall thereafter be applicable, as nearly as may be
practicable in relation to any securities thereafter deliverable upon the
conversion thereof.
3
<PAGE>
(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 F Preferred Stock against impairment.
(iv) In the event the Corporation shall issue additional
shares of Common Stock (including additional shares of Common Stock deemed to be
issued pursuant to paragraph (v) hereof but excluding any issued as a stock
split or combination or upon a dividend or distribution) without consideration
or for a consideration per share less than the Conversion Rate in effect on the
date of and immediately prior to such issue, then and in such event, such
Conversion Rate shall be reduced, concurrently with such issue, to a price
(calculated to the nearest cent) equal to the consideration per share paid in
connection with the issuance of such additional shares of Common Stock.
(v) In the event the Corporation shall issue any options or
convertible securities or shall fix a record date for the determination of
holders of any class of securities entitled to receive any such options or
convertible securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provisions contained therein
for a subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such options in accordance with (b) below or, in the case of
convertible securities, the maximum number of shares of Common Stock into which
they are convertible in accordance with (b) below, shall be deemed to be
additional shares of Common Stock issued as of the time of such issue or, in
case such a record date shall have been fixed, as of the close of business on
such record date, provided that additional shares of Common Stock shall not be
deemed to have been issued unless the consideration per share (determined
pursuant to paragraph (vi) hereof) of such additional shares of Common Stock
would be less than the Conversion Rate in effect on the date of and immediately
prior to such issue, or such record date, as the case may be, and provided
further that in any such case in which additional shares of Common Stock are
deemed to be issued:
(a) except as provided in (b) below, no further
adjustment in the Conversion Rate shall be made upon the subsequent issue of
convertible securities or shares of Common Stock upon the exercise of such
options or conversion or exchange of such convertible securities;
(b) if such options or convertible securities by
their terms provide, with the passage of time or otherwise, for any increase in
the consideration payable to the corporation, or for any decrease in the number
of shares of Common Stock issuable upon the exercise, conversion or exchange
thereof, or for the termination of the right to exercise or convert such options
or convertible securities, then the Conversion Rate computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon any such increase,
decrease or termination becoming
4
<PAGE>
effective, be recomputed to reflect such increase, decrease or termination
insofar as it affects such options or the rights of conversion or exchange under
such convertible securities and upon termination such options or convertible
securities shall no longer be deemed to be outstanding; and
(c) no readjustment pursuant to sub-clause (b)
above shall have the effect of increasing the Conversion Rate to an amount which
exceeds the lower of (1) the Conversion Rate on the original adjustment date, or
(2) the Conversion Rate that would have resulted from any issuance of additional
shares of Common Stock between the original adjustment date and such
readjustment date.
(vi) DETERMINATION OF CONSIDERATION. For purposes of this
Section F, the consideration received by the corporation for the issue of any
additional shares of Common Stock shall be computed as follows:
(a) CASH AND PROPERTY. Such consideration shall:
(A) insofar as it consists of cash, be computed at
the aggregate amount of cash received by the corporation, excluding
amounts paid or payable for accrued interest or accrued dividends;
(B) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such
issue, as determined in good faith by the Board of Directors; and
(C) in the event additional shares of Common Stock
are issued together with other shares of securities or other assets
of the corporation for consideration which covers both, be the
proportion of such consideration so received, computed as provided
in clauses (A) and (B) above, as determined in good faith by the
Board of Directors.
(b) OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the corporation for additional shares of
Common Stock deemed to have been issued pursuant to paragraph (v), relating to
options and convertible securities, shall be determined by dividing
(A) the total amount, if any, received or
receivable by the corporation as consideration for the issue of such
options or convertible securities, plus the minimum aggregate amount
of additional consideration (as set forth in the instruments
relating thereto, without regard to any provision contained therein
for a subsequent adjustment of such consideration) payable to the
corporation upon the exercise of such options or the conversion or
exchange of such convertible securities, or in the case of options
for convertible securities, the exercise of such options for
convertible securities and the conversion or exchange of such
convertible securities, by
5
<PAGE>
(B) the maximum number of shares of Common Stock
(as set forth in the instruments relating thereto, without regard to
any provision contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such options or the conversion
or exchange of such convertible securities.
(vii) Upon the occurrence of each adjustment or readjustment
of the conversion rate pursuant to this Section F, 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 F
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.
G. VOTING RIGHTS. The holder of Series F Preferred Stock shall have
the right to such number of votes as such holder would have been able to vote
had all of the Series F Preferred Stock been converted to Common Stock. Such
shares of Series F Preferred Stock shall not vote as a separate class as the
Common Stock, but rather shall vote as if the Series F Preferred Stock had
already been converted to Common Stock.
H. MISCELLANEOUS.
(i) 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: Eric A. Black, Chief
Executive Officer and President, Telecopier: (713) 621-5870, and (2) if to the
holder of the Series F 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.
(ii) 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 F Preferred Stock or shares of Common Stock or
other securities issued on account of Series F 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 F
Preferred Stock or Common Stock or other securities in a name other than that in
which the shares of Series F 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
6
<PAGE>
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.
(iii) In the event that the holder of shares of Series F
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 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 F Preferred Stock.
(iv) The Corporation may appoint, and from time to time
discharge and change, a transfer agent of the Series F 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 F Preferred Stock.
(v) The Corporation shall appoint, and from time to time may
replace, a conversion agent for the Series F 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 F
Preferred Stock.
(vi) Any Series F Preferred Stock converted or otherwise
acquired by the Corporation in any manner whatsoever shall not be reissued as
part of such Series F Preferred Stock and shall be retired promptly after the
acquisition thereof. No shares of Series F Preferred Stock shall be issued by
the Corporation other than shares that are issuable pursuant to that certain
Convertible Secured Promissory Note dated November 5, 1999, payable by the
Corporation to Lernout & Hauspie Speech Products N.V. and that certain
Convertible Promissory Note payable by the Corporation to L&H Investment
Company, N.V. dated May 24, 1999 (collectively, the "Notes"), as such Notes may
be amended from time to time, and then only to the extent that a sufficient
number of shares of Common Stock are not available in authorized and unissued
shares to which to convert the Notes. Any shares of Series F Preferred Stock
that are not issued upon the conversion of the Notes (including any amendments
thereto), as well as any Series F Preferred Stock converted or otherwise
acquired by the Corporation, shall return to the status of undesignated shares
of preferred stock of the Corporation.
IN WITNESS WHEREOF, Applied Voice Recognition, Inc. has caused this
certificate to be signed by Eric A. Black, its Chief Executive Officer and
President, as of the 5th day of November, 1999.
7
<PAGE>
APPLIED VOICE RECOGNITION, INC., a
Delaware corporation d/b/a e-DOCS.net
By:________________________________________
Eric A. Black,
Chief Executive Officer and President
8
EXHIBIT 10.6
CONVERTIBLE SECURED PROMISSORY NOTE
PURCHASE AGREEMENT
This Convertible Secured Promissory Note Purchase Agreement (the
"Agreement") is made as of November 5, 1999, by and among Applied Voice
Recognition, Inc., a Delaware corporation doing business as e-DOCS.net (the
"Company"), and Lernout & Hauspie Speech Products, N.V., a company organized
under the laws of Belgium (the "Investor").
RECITALS
WHEREAS, the Investor desires to purchase from the Company, and the
Company desires to issue to the Investor, a Convertible Secured Promissory Note
in the aggregate principal amount of Two Million Dollars ($2,000,000) in the
form of EXHIBIT A attached hereto (the "Note").
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as follows:
1. PURCHASE AND SALE OF NOTE.
1.1 SALE AND ISSUANCE OF NOTE. Subject to the terms and conditions
of this Agreement, the Investor agrees to purchase at the Closing (as defined
below), and the Company agrees to sell and issue to the Investor at the Closing,
the Note, at a price equal to 100% of the principal amount thereof, less the
fees and expenses of Investor's counsel pursuant to Section 6.8 hereof (the
"Purchase Price"). At the option of the Investor, the Investor may loan to the
Company additional monies in the amount of up to Two Million Dollars
($2,000,000) to be used in connection with acquisitions by the Company. Any such
additional loan shall be made under substantially the same conditions as the
loan described herein, and in the event Investor makes such loan, the Company
shall execute an additional promissory note in the principal amount of such
additional loan, such note to be in substantially the same form as the Note.
1.2 CLOSING. The purchase and sale of the Note shall take place at
the offices of Boyar, Simon & Miller, 4265 San Felipe, Suite 1200, Houston,
Texas at 2 p.m. on November 5, 1999, or at such other time and place as the
Company and the Investor shall mutually agree in writing (which time and place
are designated as the "Closing").
1.3 FORM OF PAYMENT AND WIRE INSTRUCTIONS; ESCROW. The Investor
shall pay the Purchase Price by delivering good funds in United States Dollars
by wire transfer to Brown Rudnick Freed & Gesmer, special counsel to the
Investor ("Brown Rudnick"), as Escrow Agent, in escrow against delivery of the
Note as payment in full for the Note (the "Escrow"). The wire instructions for
Brown Rudnick are as follows:
BANK: FLEET PRIVATE BANKING
ABA: 011000138
SWIFT CODE: FLTBUS3B (For international wires
CITY: HARTFORD
STATE: CONNECTICUT
ACCOUNT#: 0066502267
ACCOUNT NAME: Brown, Rudnick, Freed & Gesmer,
CLIENT TRUST FUND 019740
BRF&G ATTORNEY NAME: JAMES E. ROSENBLUTH
<PAGE>
The Escrow Agent shall deliver to the Company by wire transfer the Purchase
Price at the Closing. The wire instructions for the Company are as follows:
BANK: SOUTHWEST BANK OF TEXAS N.A.
ABA: 113011258
SWIFT CODE: SWBKUS44
CITY: HOUSTON
STATE: TEXAS
ACCOUNT#: 332698
ACCOUNT NAME: APPLIED VOICE RECOGNITION, INC.
Upon the receipt of the Purchase Price by the Company and the delivery of the
Note pursuant to this Section 1.3, the Escrow shall terminate and the Escrow
Agent shall have no further obligation or liability whatsoever with respect to
the Escrow. .
1.4 SECURITY AGREEMENTS. The repayment of the Note shall be secured
by (i) a Security Agreement between the Company and Investor in the form
attached hereto as EXHIBIT B (THE "SECURITY AGREEMENT") , (ii) a Copyright
Security Agreement between the Company and Investor in the form attached hereto
as EXHIBIT C (the "Copyright Security Agreement"), (iii) a Trademark Security
Agreement in the form attached hereto as EXHIBIT D (the "Trademark Security
Agreement"), (iv) a Patent Security Agreement in the form attached hereto as
EXHIBIT E (the "Patent Security Agreement"), and (v) a Pledge Agreement in the
form attached hereto as EXHIBIT F (the "Pledge Agreement," and together with the
Security Agreement, the Copyright Security Agreement, the Trademark Security
Agreement and the Patent Security Agreement, the "Security Agreements", all of
which Security Agreements are of even date herewith).
1.5 PREPAYMENT. All or a portion of the Note may be prepaid at any
time without penalty following thirty (30) days' prior written notice to
Investor. The minimum amount that can be prepaid under the Note shall be Two
Hundred Fifty Thousand Dollars ($250,000).
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to and for the benefit of the Investor, with knowledge
that the Investor is relying thereon in entering into this Agreement and
purchasing the Note from the Company, that the following are true and correct:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on the operation of its business or properties.
2.2 SUBSIDIARIES AND INVESTMENTS. Attached as SCHEDULE 2.2 is a true
and complete list of the Company's subsidiaries (the "Subsidiaries") and
investments in other corporations and business organizations. Except as set
forth on SCHEDULE 2.2 HERETO, The Company has no subsidiaries, nor any
investments in any other corporation or business organization.
2.3 AUTHORIZATION OF TRANSACTION.
a. The execution and delivery by the Company of this Agreement
and the Security Agreements, the issuance, sale and delivery of the Note, the
issuance and delivery of the shares of common stock of the Company issuable upon
the conversion of the Note (the "Conversion Shares") and the performance by the
Company of its obligations hereunder and thereunder have been duly authorized by
all requisite corporate action.
b. The Note has been duly authorized and, when issued in
accordance with this
2
<PAGE>
Agreement, will be validly issued with no personal liability attaching to the
ownership thereof, and will be free and clear of all liens, charges,
restrictions, claims and encumbrances imposed by or through the Company except
as set forth in the Security Agreements. The issuance, sale and delivery of the
Note is not subject to any preemptive right of stockholders of the Company or to
any right of first refusal or other right in favor of any person.
c. This Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company,
enforceable in accordance with its terms. The Note and the Security Agreements,
when executed and delivered in accordance with this Agreement, will constitute
the legal, valid and binding obligations of the Company, enforceable in
accordance with their terms.
2.4 VALID ISSUANCE OF COMMON STOCK. The Conversion Shares have been
or will be duly and validly reserved for issuance and, upon issuance in
accordance with the terms of the Note shall be duly and validly issued, fully
paid and nonassessable, and issued in compliance with all applicable securities
laws, as presently in effect, of the United States and each of the states whose
securities laws govern the issuance of any of the Conversion Shares pursuant to
this Agreement. The Company and the Investor hereby acknowledge that as of the
date of execution of this Agreement, the reservation of the Conversion Shares
hereunder, when aggregated with all other shares of unissued common stock
reserved for issuance upon conversion of the Company's other securities, exceeds
the total number of shares of common stock of the Company authorized under the
Company's Certificate of Incorporation. At such time as Investor elects to
convert the Note in accordance with the terms thereof, the Company will use its
commercially reasonable best efforts to cause the amount of its authorized
capital stock to be sufficient to allow the issuance of the Conversion Shares to
the Investor.
2.5 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, DESIGNATION, declaration or
filing with, any Federal, state, local or provincial governmental authority on
the part of the Company is required in connection with the consummation of the
transactions contemplated by this Agreement except for such filings as may be
required by applicable Federal and state securities laws.
2.6 COMPLIANCE WITH OTHER INSTRUMENTS. Except as set forth on
SCHEDULE 2.6, the Company is not in violation of any provisions of its
Certificate of Incorporation or Bylaws or in violation or default of any
instrument, judgment, order, writ, decree or contract to which it is a party or
by which it is bound or, to its knowledge, of any provision of federal or state
statute, rule or regulation applicable to the Company or otherwise in breach of
any of the terms or conditions of any contract or agreement which breach, either
individually or in the aggregate could reasonably be expected to have a
materially adverse effect on the business, properties, financial condition or
results of operations of the Company. To the Company's knowledge, no other party
to any of its material contracts or agreements is in material default under any
such contract or agreement. The execution, delivery and performance of this
Agreement, the Security Agreements and the Note, and the consummation of the
transactions contemplated hereby and thereby shall not result in any such
material violation or be in conflict with or constitute, with or without the
passage of time and giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree or contract or an event that results
in the creation of any lien, charge or encumbrance upon any assets of the
Company or the suspension, revocation, impairment, forfeiture or nonrenewal of
any material permit, license, authorization or approval applicable to the
Company, its business or operations or any of its assets or properties.
2.7 DISCLOSURE. The Company has fully provided the Investor with all
the material information which the Investor has requested for deciding whether
to purchase the Note and all material information which the Company believes is
reasonably necessary to enable the Investor to make such decision. Neither this
Agreement nor any other written statements or certificates made or delivered in
connection herewith or therewith contains any untrue statement of material fact
or omits to state a material fact necessary to make the statements in this
Agreement or therein not misleading.
2.8 TITLE TO PROPERTIES. Except as set forth on SCHEDULE 2.8, the
Company has good and marketable title to all properties and assets owned by it,
free and clear of all liens, restrictions or encumbrances. Except as
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set forth on SCHEDULE 2.8, all machinery and equipment included in such
properties that is necessary to the business of the Company is located at the
Company's offices in Texas and is in good condition and repair, and all leases
of real or personal property to which the Company is a party are fully effective
and afford the Company peaceful and undisturbed possession of the subject matter
of the lease. The Company is not in violation of any zoning, building, safety or
environmental ordinance, regulation or requirement or other law or regulation
applicable to the operation of owned or leased properties, the violation of
which, singly or in the aggregate, could have a materially adverse affect on the
business or financial condition of the Company, nor has it received any notice
of violation with which it has not complied.
2.9 INTELLECTUAL PROPERTY. Set forth in SCHEDULE 2.9 is a true and
complete list of all patents, patent applications, trademarks, service marks,
trademark and service mark applications, trade names, and copyrights presently
owned or held by the Company, and any material license or right to any of the
foregoing. The Company owns or possesses, or can obtain by payment of royalties
which shall not materially adversely affect the business of the Company, all of
the patents, trademarks, service marks, trade names, copyrights, proprietary
rights, trade secrets, or rights or licenses to the foregoing, reasonably
necessary to the conduct of their business as presently conducted or proposed to
be conducted. Except as disclosed in SCHEDULE 2.9, to the best of its knowledge,
the business of the Company as presently conducted or as proposed to be
conducted does not and shall not cause the Company to infringe or violate any of
the patents, trademarks, service marks, trade names, copyrights, licenses, trade
secrets or other proprietary rights of any other person. The Company has the
right to use, free and clear of claims or rights of others, all trade secrets,
customer lists and processes required for or incident to its products, and the
Company is not using any confidential information or trade secrets of any former
employer of any of its past or present employees.
2.10 LITIGATION. Except as provided on SCHEDULE 2.10, there is no
litigation pending or, to the knowledge of the Company, threatened against the
Company and there are no outstanding court orders, court decrees, or court
stipulations to which the Company is a party which question this Agreement or
affect the transactions contemplated hereby, or which shall or could result in
any materially adverse change in the business, properties, operations,
prospects, assets or in the condition, financial or otherwise, of Company.
2.11 INSURANCE. The Company maintains valid policies of insurance
with respect to its properties and business of the kinds and in the amounts not
less than is customarily obtained by corporations with established reputation
engaged in the same or similar business and similarly situated, including,
without limitation, insurance against loss, damage, fire, theft, public
liability and other risks.
2.12 TAXES. Except as set forth on SCHEDULE 2.12, the Company has
duly and timely filed, or has timely applied for and received extensions with
respect to, all Federal, state, local, and foreign, government income, excise,
gross receipts and franchise tax returns, real estate and personal property tax
returns, sales and use tax returns, employee tax and contribution returns and
all other tax returns, reports and declarations, or estimated taxes required to
be filed by them, with respect to all applicable taxes (the "Tax Returns")
including, without limitation, income, profit, franchise, sales, use, real
property, personal property, ad valorem, excise, employment, social security and
wage withholding taxes, severance, stamp, occupation, and windfall taxes, of
every kind, character or description imposed by any governmental or
quasi-governmental authority (domestic or foreign), and any interest or fines,
and any and all penalties or additions relating to such taxes, charges, fees,
levies or assessments ("Taxes"). All of the Tax Returns are complete and correct
in all respects. All Taxes shown to be due on such
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Tax Returns have been paid or are being contested in good faith by the Company
and such contest is being diligently pursued.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor hereby
represents and warrants to and for the benefit of the Company, with knowledge
that the company is relying thereon in entering into this Agreement and issuing
the Note to the Investor, as follows:
3.1 PURCHASE ENTIRELY FOR OWN ACCOUNT. By the Investor's execution
of this Agreement, the Investor hereby confirms that the Note to be received by
the Investor and the Common Stock issuable upon conversion of the Note
(collectively, the "Securities") shall be acquired for investment for the
Investor's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and that the Investor has no present
intention of selling, granting any participation in, or otherwise distributing
the same. By executing this Agreement, the Investor further represents that the
Investor does not have any contract, undertaking, agreement or arrangement with
any person to sell, transfer or grant participation to such person or to any
third person, with respect to any of the Securities. The Investor represents
that it has full power and authority to enter into this Agreement.
3.2 INVESTMENT EXPERIENCE. The Investor is an investor in securities
of companies in the development stage and acknowledges that it is able to fend
for itself, can bear the economic risk of its investment and has such knowledge
and experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Securities.
3.3 ACCREDITED INVESTOR. The Investor is an "accredited investor"
within the meaning of Securities and Exchange Commission rule 501 of Regulation
D, as now in effect.
3.4 RESTRICTED SECURITIES. The Investor understands that the
Securities it is and shall be purchasing are characterized as "restricted
securities" under the federal securities laws inasmuch as they are being
acquired from the Company in a transaction not involving a public offering and
that under such laws and applicable regulations such securities may be resold
without registration under the Securities Act of 1933, as amended (the "Act"),
only in certain limited circumstances. In this connection, the Investor
represents that it is familiar with Rule 144 promulgated under the Act, as now
in effect, and understands the resale limitations imposed thereby and by the
Act.
3.5 LEGENDS. The Investor understands that the certificates
evidencing the Securities may bear one or all of the following legends:
(a) The securities evidenced by this certificate have not been
registered under the Securities Act of 1933, as amended (the "Act") or the
securities laws of any state of the United States. The securities evidenced by
this certificate may not be offered, sold or transferred for value directly or
indirectly, in the absence of such registration under the Act and qualification
under applicable state laws, or pursuant to an exemption from registration under
the Act and qualification under applicable state laws, the availability of which
is to be established to the reasonable satisfaction of the Company.
(b) Any legend required by the laws of the states of Delaware.
(c) Any legend required to be placed on the Securities
purchased by Investor in any future sale or offering of any Securities.
(d) A legend memorializing Section 4.2 below.
4. COVENANTS OF THE INVESTOR. The Investor covenants and agrees with the
Company that it will perform and observe the following covenants and provisions:
4.1 RESTRICTIONS ON DISPOSITION. Without in any way limiting the
representations set forth in
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Section 3 above, the Investor further agrees not to make any disposition of all
or any portion of the Securities unless and until the transferee has agreed in
writing for the benefit of the Company to be bound by this Section 4, and in
addition thereto, one of the following conditions is satisfied:
(a) SECURITIES REGISTERED. There is then in effect a registration
statement under the Act covering such proposed disposition and such disposition
is made in accordance with such registration statement.
(b) REGISTRATION NOT REQUIRED. The Investor shall have (a) notified
the Company of the proposed disposition and shall have furnished the Company
with a detailed statement of the circumstances surrounding the proposed
disposition and (b) if reasonably requested by the company, furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such securities under the Act;
provided, however, that the company will not require opinions of counsel for
transactions made pursuant to Rule 144, except in unusual circumstances.
5. COVENANTS OF THE COMPANY. The Company covenants and agrees with the
Investor that it will perform and observe the following covenants and
provisions:
5.1 MAINTENANCE OF CORPORATE EXISTENCE. Unless otherwise determined
by the Board of Directors of the Company, each of the Company and its
Subsidiaries will preserve, renew and keep in full force and effect, its
corporate existence, qualification in requisite jurisdictions and rights and
privileges necessary or desirable in the normal conduct of its business.
5.2 RESTRICTIVE AGREEMENTS PROHIBITED. The Company shall not become
a party to any agreement which by its terms restricts the Company's performance
of this Agreement, the Note, or the Security Agreements.
5.3 COMPLIANCE WITH LAWS. The Company shall comply with all
applicable laws, rules, regulations and orders, noncompliance with which could
materially adversely affect its business or condition, financial or otherwise.
5.4 RIGHTS AND Franchises. The Company will keep in full force and
effect all patents, copyrights, trademarks, service marks, tradenames and all
franchises, rights and licenses, with respect to the foregoing or otherwise
referred to in Section 2.9 hereof, now held by it and that are useful in or
valuable to the business of Company.
5.5 USE OF PROCEEDS. The Company will use the proceeds of the sale
of the Note for general working capital purposes.
5.6 INVESTOR'S RIGHT TO DESIGNATE DIRECTOR UPON EVENT OF Default.
Upon the occurrence of an Event of Default, the Company shall use its
commercially reasonable best efforts to cause a designee of the Investor to be
elected to the Board of Directors of the Company. Such director shall not be
entitled to any compensation in connection with his or her service as a director
of the Company. Investor acknowledges and agrees that upon cure of the Event of
Default (to the extent such Event of Default may be cured under the terms of the
Note), Investor's designee shall resign from the Board of Directors and Investor
shall have no further right to designate a director (except in the event of the
occurrence of subsequent Events of Default, in each of which such cases Investor
shall be entitled to designate a director pursuant to this Section 5.6).
5.7 RULE 144. So long as the Company is subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Company will comply with the current public information
requirements of Rule 144(c)(1) under the Securities Act of 1933, as amended
("Rule 144") and at all such times as Rule 144 is available for use by the
Investor, the Company will furnish the Investor upon request with all
information within the possession of the Company required for the preparation
and filing of Form 144.
5.8 REGISTRATION RIGHTS. As soon as practicable after the Closing
but in no event later than twenty (20) days thereafter, the Company shall grant
to the Investor registration rights for the registration of the
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Conversion Shares with the Securities Exchange Commission pursuant to a
Registration Rights Agreement containing terms not less favorable (in the
reasonable judgment of Investor) than the terms contained in any Registration
Rights Agreement between the Company and any other investor as of the date of
such grant.
5.9 CERTIFICATE OF DESIGNATIONS. The Company shall cause the
Certificate of Designations, Preferences, Rights and Limitations of Series F
Preferred Stock of Applied Voice Recognition, Inc. in the form attached hereto
as EXHIBIT G to be duly authorized by the Board of Directors and filed with the
Secretary of State of Delaware as soon as practicable but in no event later than
twenty (20) days after the date hereof.
5.10 FURTHER ASSURANCES. The Company, at its expense, will promptly
execute and deliver promptly to the Investor upon request all such other and
further documents, agreements and instruments in compliance with or pursuant to
its covenants and agreements herein, and will make any recordings, file any
notices, and obtain any consents as may be necessary or appropriate in
connection therewith.
6. GENERAL PROVISIONS.
6.1 CONSTRUCTION. This Agreement shall be governed, construed and
enforced in accordance with the internal laws of the State of Texas, without
giving effect to its conflicts of laws or principles.
6.2 ENTIRE AGREEMENT. This Agreement, together with the schedules,
agreements and documents referred to herein, constitutes the entire agreement
among the parties hereto with respect to the subject matter hereof and
supersedes all prior and contemporaneous negotiations, agreements and
understandings.
6.3 NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and shall be delivered in person,
mailed by certified or registered mail, return receipt requested, or sent by
telecopier or telex, addressed as follows:
If to the Company, to:
Applied Voice Recognition, Inc.
4615 Post Oak Place
Suite 111
Houston, Texas 77027
Attention: Richard A. Cabrera
Telephone: (713) 621-5678
Facsimile: (713) 621-5870
If to the Investor, to:
Lernout & Hauspie Speech Products, N.V.
Sint-Krispijinstraat 7
8900 Ieper
Belgium
Attention: Carl Dammekens
Telephone: (32) 75442444
Facsimile: (32) 75205002
or, in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the others.
6.4 SUCCESSORS AND ASSIGNS. This Agreement, and the rights and
obligations of each of the parties hereunder, may be assigned by the Investor to
any affiliate of the Investor and to not more than five (5) non-affiliates of
the Investor without the prior written consent of the Company. This Agreement
shall inure to the benefit of, and shall be binding upon, the parties and their
successors and assigns.
6.5 SEVERABILITY. If any term, covenant or condition of this
Agreement is held to be invalid,
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void or otherwise unenforceable by any court of
competent jurisdiction, the remainder of this Agreement shall not be affected
thereby and the term, covenant and condition of this Agreement shall be valid
and enforceable to the fullest extent permitted by law.
6.6 MODIFICATION. Any term of this Agreement may be amended and the
observance of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively), with the written
consent of the Company and the Investor. Any amendment or waiver effected in
accordance with this Section 6.6 shall be binding upon all parties to this
agreement, including, without limitation, any holder who may not have executed
such amendment or waiver, and each future holder of any equity security into
which the Note is convertible.
6.7 ATTORNEY'S FEES. If any action or law or in equity is necessary
to enforce or interpret the terms of this Agreement, the prevailing party shall
be entitled to an award of its reasonable attorneys' fees, costs and
disbursements in addition to any other relief to which such party may be
entitled.
6.8 COUNSEL TO THE INVESTOR. The Company agrees to pay the
reasonable legal fees and expenses of Brown Rudnick, in an amount not to exceed
$15,000, plus expenses. Such fees shall be withheld from the Closing pursuant to
Section 1.3 hereof and Brown Rudnick, shall provide the Company with a bill for
such services within thirty (30) days of the Closing.
6.9 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the undersigned have executed this Agreement to be
effective as of the date first written above.
COMPANY:
APPLIED VOICE RECOGNITION, INC.,
a Delaware corporation, d/b/a e-DOCS.net
By: /s/ Richard A. Cabrera
Richard A. Cabrera, Chief Financial Officer
Address:
4615 Post Oak Place
Suite 111
Houston, TX 77027
INVESTOR:
Lernout & Hauspie Speech Products, N.V.
By: /S/ Carl Dammekens
Name: CARL DAMMEKENS
Title: CHIEF FINANCIAL OFFICER
Address:
Sint-Krispijinstraat 7
8900 Ieper
Belgium
SIGNATURE PAGE
TO
CONVERTIBLE SECURED PROMISSORY NOTE PURCHASE AGREEMENT
8
EXHIBIT 10.7
NEITHER THIS CONVERTIBLE SECURED PROMISSORY NOTE NOR ANY OF THE SECURITIES
ISSUABLE HEREUNDER HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT
WITH RESPECT TO THE SECURITIES, OR DELIVERY TO THE COMPANY OF AN OPINION OF
COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY THAT SUCH OFFER, SALE
OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE ACT OR UNLESS
SOLD IN FULL COMPLIANCE WITH RULE 144 UNDER THE ACT.
Houston, Texas
November 5, 1999
APPLIED VOICE RECOGNITION, INC.
d/b/a e-DOCS.net
CONVERTIBLE SECURED PROMISSORY NOTE
Applied Voice Recognition, Inc., a Delaware corporation doing business as
e-DOCS.net (the "Company"), for value received, hereby promises to pay to the
order of Lernout & Hauspie Speech Products, N.V., or its successors or assigns
(collectively, the "Holder"), the principal amount of Two Million Dollars
($2,000,000) (the "Issue Price"), together with interest on the unpaid amount
thereof in accordance with the terms hereof, from the date hereof until paid or
converted in accordance with the terms hereof. Certain capitalized terms used
but not defined herein shall have the meaning ascribed to them in the
Convertible Secured Promissory Note Purchase Agreement between the Company and
the Holder of even date herewith (the "Agreement") and the Security Agreements
(as defined in the Agreement).
1. TERMS OF THE CONVERTIBLE PROMISSORY NOTE (THE "NOTE").
1.1 INTEREST RATE. The rate of interest hereunder ("Interest Rate") shall be
twelve and one-half percent (12.5%) per annum and shall be computed on the basis
of a 365 day year for the actual number of days elapsed.
1.2 PAYMENT. Subject to the provisions of Section 2 regarding conversion of this
Note, the Issue Price plus all accrued but previously unpaid interest thereon
(the "Conversion Amount") shall become due and payable on the earliest of (i)
ninety (90) days after the date of this Note (the "Maturity Date"), (ii)
immediately prior to the closing of the acquisition of a majority of stock of
the Company by another entity by means of a transaction or a series of related
transactions or (iii) the closing of the sale of all or substantially all of the
assets of the Company, unless the Company stockholders of record prior to such
acquisition or sale set forth in (ii) and (iii) above shall hold at least fifty
percent (50%) of the voting power of the acquiring or surviving entity
immediately after such acquisition or sale (the transactions described in
subsections 1.2(ii) and (iii) being referred to collectively as a "Change of
Control"). Payment
<PAGE>
shall be made at the offices or residence of the Holder, or at such other place
as the Holder shall have designated to the Company in writing in lawful money of
the United States of America. At the option of the Holder, the ninety (90) day
period described in clause (i) above shall be extended to one hundred eighty
(180) days upon written notice from the Holder to the Company.
1.3 DEFAULTS. An "Event of Default" occurs if:
(i) the Company defaults in the payment of interest hereunder
or under the L&H Investment Note when the same becomes due and payable and the
default continues for a period of ten (10) days;
(ii) the Company defaults in the payment of the principal
hereunder or under the L&H Investment Note when the same becomes due and payable
hereunder; or
(iii) the Company fails to comply with any of its other
covenants and agreements in the Note, the Agreement, or under the L&H Investment
Note or the L&H Investment Agreement and the failure continues for the period
and after the notice specified below; or
(iv) the Company pursuant to or within the meaning of any
Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief
against it in an involuntary case,
(C) consents to the appointment of a custodian of
it or for all or substantially all of its property,
(D) makes a general assignment for the benefit of
its creditors, or
(E) is the debtor in an involuntary case which is
not dismissed within sixty (60) days of the commencement thereof; or
(v) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(A) provides for relief against the Company in an
involuntary case,
(B) appoints a custodian of the Company for all or
substantially all of its property, or
(C) orders the liquidation of the Company; or
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<PAGE>
(vi) any representation or warranty made by the Company in the
Agreement or in the L&H Investment Agreement shall prove to be materially false
or incorrect on the date as of which made; or
(vii) there shall occur a Change in Control of the Company; or
(viii) the Company fails to authorize and file with the
Secretary of State of Delaware within twenty (20) days after the date hereof the
Certificate of Designations, Preferences, Rights and Limitations of Series F
Preferred Stock of Applied Voice Recognition, Inc. in the form attached as
Exhibit G to the Agreement; or
(ix) there shall occur any event or change in circumstances
that has caused or could reasonably be expected in the judgment of Holder to
cause a material adverse effect on the condition, financial or otherwise, of the
assets, operations or prospects of the Company or on the Company's ability to
pay or perform its obligations hereunder or under the Agreement, or under the
L&H Investment Agreement or the L&H Investment Note;
(A) The term "Bankruptcy Law" means Title 11, U.S.
Code or any similar federal or state law for the relief of debtors. The term
"custodian" means any receiver, trustee, assignee, liquidator or similar
official under any Bankruptcy Law.
(B) A failure of the Company as described in
subsection (iii) of this Section 1.3 shall not be an Event of Default until the
Holder notifies the Company in writing of the failure to comply and the Company
does not cure the failure to comply within twenty (20) days after receipt of the
notice (the "Cure Period"). The notice must specify the failure to comply,
demand that it be remedied and state that the notice is a "Notice of Default."
Notwithstanding anything in this Section 1.3(ix)(B), a failure of the Company to
comply with Section 5.8 or Section 5.9 of the Agreement shall not be curable for
the purposes of this Section 1.3.
1.4 ACCELERATION.
(i) If an Event of Default occurs and is continuing, the
Holder may declare the principal of and accrued interest on the Note to be due
and payable and, upon any such declaration, the same shall become and be
immediately due and payable.
(ii) If an Event of Default specified in Section 1.3 (iv) or
(v) occurs, all unpaid principal and accrued interest on the Note then
outstanding shall IPSO FACTO become and be immediately due and payable without
any declaration or other act on the part of the Holder.
(iii) The Holder may rescind an acceleration and its
consequences if all existing Events of Default have been cured or waived, except
nonpayment due to acceleration, and if the rescission would not conflict with
any judgement or decree of a court of competent jurisdiction.
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<PAGE>
1.5 CONVERTIBLE SECURED PROMISSORY NOTE PURCHASE AGREEMENT. This
Note is issued by the Company in connection with that certain Convertible
SECURED Promissory Note Purchase Agreement of even date herewith (the
"Agreement"), by and between the Company and the Holder, and is subject to, and
Holder and the Company shall be bound by, all the terms, conditions and
provisions of the Agreement.
2. CONVERSION.
2.1 TIMING. The Holder shall be entitled to convert all or a portion
of the Conversion Amount (as defined below) at any time, and upon the completion
of a Qualified Public Offering (as defined below), the Conversion Amount shall
be automatically converted into that number of fully paid and nonassessable
shares of the Company's common stock (the "Common Stock") as is equal to the
Conversion Amount divided by $0.37, subject to adjustment as provided in Section
2.2 below (the "Conversion Price"), with any fraction of a share rounded up to
the next whole share of common stock; provided, however, that if there is no
Qualified Public Offering before the Maturity Date, then the Note shall become
due and payable upon the demand of the Holder at any time on or after the
Maturity Date.
2.2 ANTI-DILUTION ADJUSTMENTS.
(i) In case the Company shall at any time change as a whole,
by subdivision or combination in any manner or by the making of a stock
dividend, the number of outstanding shares of the Company's common stock into a
different number of shares (i.e. forward or reverse stock split), (a) the number
of shares of common stock to which the holders of the Note, or the holders of
Series F Preferred Stock, as the case may be, may convert such Note or Series F
Preferred Stock shall be increased or decreased in direct proportion to such
increase or decrease of shares, as the case may be, and (b) the Conversion Price
in effect immediately prior to such change shall be increased or decreased in
inverse proportion to such increase or decrease of shares, as the case may be.
(ii) If, prior to the conversion of the Note or of all the
Series F Preferred Stock, there shall be any merger, consolidation, exchange of
shares, recapitalization, reorganization, or other similar event, as a result of
which shares of common stock of the Company shall be changed into the same or a
different number of shares of the same or another class or classes of stock or
securities of the Company or another entity or there is a sale of all or
substantially all the Company's assets, then the holders of the Note or the
Series F Preferred Stock shall thereafter receive, upon the basis and upon the
terms and conditions specified herein and in lieu of shares of common stock,
immediately theretofore issuable upon conversion, such stock, securities and/or
other assets which the holder would have been entitled to receive in such
transaction had the Note or the Series F Preferred Stock been converted
immediately prior to such transaction, and in any such case appropriate
provisions shall be made with respect to the rights and interests of the holders
of the Note or the Series F Preferred Stock to the end that the provisions
hereof shall thereafter be applicable, as nearly as may be practicable in
relation to any securities thereafter deliverable upon the conversion thereof.
(iii) The Company will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, share exchange, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but will at all
times in good faith assist in the carrying out of all the provisions of this
paragraph and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the Note
or the Series F Preferred Stock against impairment.
(iv) In the event the Company shall issue additional shares of
Common Stock (including additional shares of Common Stock deemed to be issued
pursuant to paragraph
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(v) hereof but excluding any issued as a stock split or combination or upon a
dividend or distribution) without consideration or for a consideration per share
less than the Conversion Price in effect on the date of and immediately prior to
such issue, then and in such event, such Conversion Price shall be reduced,
concurrently with such issue, to a price (calculated to the nearest cent) equal
to the consideration per share paid in connection with the issuance of such
additional shares of Common Stock.
(v) In the event the Company shall issue any options or
convertible securities or shall fix a record date for the determination of
holders of any class of securities entitled to receive any such options or
convertible securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provisions contained therein
for a subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such options in accordance with (b) below or, in the case of
convertible securities, the maximum number of shares of Common Stock into which
they are convertible in accordance with (b) below, shall be deemed to be
additional shares of Common Stock issued as of the time of such issue or, in
case such a record date shall have been fixed, as of the close of business on
such record date, provided that additional shares of Common Stock shall not be
deemed to have been issued unless the consideration per share (determined
pursuant to paragraph (vi) hereof) of such additional shares of Common Stock
would be less than the Conversion Price in effect on the date of and immediately
prior to such issue, or such record date, as the case may be, and provided
further that in any such case in which additional shares of Common Stock are
deemed to be issued:
(a) except as provided in (b) below, no further
adjustment in the Conversion Price shall be made upon the subsequent issue of
convertible securities or shares of Common Stock upon the exercise of such
options or conversion or exchange of such convertible securities;
(b) if such options or convertible securities by
their terms provide, with the passage of time or otherwise, for any increase in
the consideration payable to the corporation, or for any decrease in the number
of shares of Common Stock issuable upon the exercise, conversion or exchange
thereof, or for the termination of the right to exercise or convert such options
or convertible securities, then the Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon any such increase,
decrease or termination becoming effective, be recomputed to reflect such
increase, decrease or termination insofar as it affects such options or the
rights of conversion or exchange under such convertible securities and upon
termination such options or convertible securities shall no longer be deemed to
be outstanding; and
(c) no readjustment pursuant to sub-clause (b)
above shall have the effect of increasing the Conversion Price to an amount
which exceeds the lower of (1) the Conversion Price on the original adjustment
date, or (2) the Conversion Price that would have resulted from any issuance of
additional shares of Common Stock between the original adjustment date and such
readjustment date.
(vi) DETERMINATION OF CONSIDERATION. For purposes of this
Section 2.2, the consideration received by the corporation for the issue of any
additional shares of Common Stock shall be computed as follows:
5
<PAGE>
(a) CASH AND PROPERTY. Such consideration shall:
(A) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the corporation, excluding
amounts paid or payable for accrued interest or accrued dividends;
(B) insofar as it consists of property other
than cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
(C) in the event additional shares of Common
Stock are issued together with other shares of securities or other assets of the
corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors.
(b) OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the corporation for additional shares of
Common Stock deemed to have been issued pursuant to paragraph (v), relating to
options and convertible securities, shall be determined by dividing
(A) the total amount, if any, received or
receivable by the corporation as consideration for the issue of such options or
convertible securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the corporation upon the exercise of such options or
the conversion or exchange of such convertible securities, or in the case of
options for convertible securities, the exercise of such options for convertible
securities and the conversion or exchange of such convertible securities, by
(B) the maximum number of shares of Common
Stock (as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number) issuable
upon the exercise of such options or the conversion or exchange of such
convertible securities.
(vii) Upon the occurrence of each adjustment or readjustment
of the conversion rate pursuant to this Section 2.2, the Company at its expense
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to the holder of the Note or the holders of
the Series F Preferred Stock, as the case may be, a certificate signed by the
Chief Financial Officer of the Company setting forth (a) such adjustment or
readjustment, (b) the conversion rate at the time in effect, and (c) the number
of shares of common stock and the amount, if any of other property which at the
time would be received upon the conversion of its shares.
2.3 ISSUANCE OF SERIES F PREFERRED STOCK. In the event the Company
fails to cause the number of its authorized capital stock to be sufficient to
allow the issuance of the Company's common stock to the Holder upon the Holder's
election to convert the Note pursuant to Section 2.5 of the Agreement, the
Holder shall be entitled to convert all or a portion of the Conversion Amount
into such number of shares of Series F Preferred Stock as would enable the
Holder upon conversion of such Series F Preferred Stock in accordance with its
terms to receive the same number of shares of the Company's common stock into
which it is entitled to convert pursuant to Section 2.1 hereof.
6
<PAGE>
2.4 PERMISSIVE CONVERSION. If Holder desires to convert all or any
portion of the Note, Holder shall provide written notice to the Company at its
address set forth herein and in the Agreement, which notice shall specify the
Conversion Amount and the desired date of conversion. The Company shall, (i) in
the event of a partial conversion, issue to Holder (A) a certificate
representing the number of shares of common stock of the Company equal to the
Conversion Amount divided by the Conversion Price, and (B) a replacement
promissory note in the amount of the unconverted principal and interest under
the Note, which replacement promissory note shall contain identical terms and
provisions of the Note; or (ii) in the event of a total conversion, issue to
Holder a certificate representing the number of shares of common stock of the
Company equal to the Conversion Amount divided by the Conversion Price. The
effective date of the conversion shall be the date specified by the Holder, but
in no event later than the date of execution and issuance of the common stock.
2.5 AUTOMATIC CONVERSION. In the event of a Qualified Public
Offering, written notice of a Qualified Public Offering shall be delivered to
the Holder(s) of this Note before or promptly after the closing date of the
Qualified Public Offering (the "Conversion Date"), at the address last shown on
the records of the Company for the Holder or given by the Holder to the Company
for the purpose of notice (or, if no such address appears or is given, at the
principal office of the Holder), notifying the Holder of the conversion to be
effected, including specifying the Conversion Amount (calculated as of the
Conversion Date), accompanied by copies of all relevant documentation evidencing
the Qualified Public Offering including any associated warrants, stock purchase
agreement, stock restriction agreement, and investor's rights agreement.
2.6 QUALIFIED PUBLIC OFFERING. The term "Qualified Public Offering"
shall mean a public offering of the Company's common stock at any time the Note
remains unpaid, which public offering (a) yields gross proceeds of no less than
Twenty-Five Million Dollars ($25,000,000) (excluding amounts received on
conversion of the Note), (b) offers common stock at no less than $2.00 per share
(subject to adjustment for any stock dividends, combinations or splits with
respect to such shares), and (c) causes all holders of the Company's and its
subsidiaries' convertible securities to convert such securities into shares of
common stock of the Company. Notwithstanding the foregoing, the Qualified Public
Offering shall not include an equity financing that is made in connection with
either (x) any arrangement between the Company and any third party for any
research or development involving the Company (including, without limitation,
any arrangement that includes provision for research support, product
development and/or testing support), (y) any rights to commercialize any
products resulting from the research or development programs of the Company
(including, without limitation, rights to develop, make, use and/or sell any
such products), and (z) any other non-monetary consideration.
2.7 TERMINATION OF RIGHTS UPON CONVERSION. Conversion of this Note
shall be deemed effective on the Conversion Date, and, in the event of a
conversion of all of the outstanding principal and interest under the Note, the
Holder of this Note shall have no further rights under this Note, whether or not
this Note is surrendered. Conversion shall be deemed effective upon issuance of
the Common Stock or Series F Preferred Stock, as the case may be, issuable to
the Holder upon any such conversion.
2.8 DELIVERY OF STOCK CERTIFICATES. As promptly as practicable after
any conversion of this Note and the Holder's surrender of this Note, the
Company, at its expense,
7
<PAGE>
shall issue and deliver to the Holder of this Note a certificate or certificates
evidencing the number of shares of the Common Stock or Series F Preferred Stock,
as the case may be, issuable to the Holder upon any such conversion.
2.9 SECURITY AGREEMENTS. This Note is executed
contemporaneously with, and is secured by the terms of, the Security
Agreements.
3. MISCELLANEOUS.
3.1 TRANSFER OF NOTE. This Note may be assigned by the Holder to any
affiliate of the Holder and to not more than five (5) non-affiliates of the
Holder without the prior written consent of the Company.
3.2 TITLES AND SUBTITLES. The titles and subtitles used in this Note
are for convenience only and are not to be considered in construing or
interpreting this Note.
3.3 NOTICES. Any notice required or permitted under this Note shall
be given in writing and in accordance with Section 6.3 of the Agreement (for
purposes of which the term "Investor" shall mean the Holder hereunder), except
as otherwise expressly provided in this Note.
3.4 ATTORNEYS' FEES. If any action at law or in equity is necessary
to enforce or interpret the terms of this Note, the Holder shall be entitled to
reasonable attorneys' fees, costs and disbursements in addition to any other
relief to which the Holder may be entitled.
3.5. AMENDMENTS AND WAIVERS. This Note is issued by the Company
pursuant to the Agreement. Other than the right to the payment of the Issue
Price and all accrued but unpaid interest thereon, which may only be amended or
waived with the written consent of the Holder, any other terms of this Note may
be amended and the observance of any other terms of this Note may be waived
(either generally or in a particular instance and either retroactively or
prospectively), with the written consent of the Company and the Holder, and in
accordance with the Agreement. Any amendment or waiver effected in accordance
with this Section 3.5 shall be binding upon the Holder (and of any securities
into which this Note is convertible), and the Company.
3.6. SEVERABILITY. If one or more provisions of this Note are held
to be unenforceable under applicable law, such provision shall be excluded from
this Note and the balance of the Note shall be interpreted as if such provision
was so excluded and shall be enforceable in accordance with its terms.
3.7 GOVERNING LAW. This Note shall be governed by and construed and
enforced in accordance with the laws of the State of Texas, without giving
effect to its conflicts of laws principles.
APPLIED VOICE RECOGNITION, INC.,
a Delaware corporation d/b/a e-DOCS.net
8
<PAGE>
By: /s/ Richard A. Cabrera
Richard A. Cabrera
Chief Financial Officer
9
EXHIBIT 10.8
AMENDMENT TO CONVERTIBLE PROMISSORY NOTE
This AMENDMENT TO CONVERTIBLE PROMISSORY NOTE (the "Amendment") is made
and executed this the 5th day of November, 1999 (the "Effective Date"), by and
between Applied Voice Recognition, Inc., a Delaware corporation doing business
as e-DOCS.net ("Borrower"), and L&H INVESTMENT COMPANY N.V., a company organized
under the laws of Belgium ("Lender").
W I T N E S S E T H:
WHEREAS, Lender is the owner and holder of that certain Convertible
Promissory Note dated May 24, 1999 (the "Note"), in the original principal
amount of One Million Five Hundred Thousand Dollars ($1,500,000), executed by
Borrower and payable to the order of Lender in accordance with the terms set
forth therein;
WHEREAS, the Note was executed pursuant to that certain Convertible
Promissory Note and Warrant Purchase Agreement dated May 24, 1999 (the "$1.5
Million Purchase Agreement"), executed by and between Borrower, as the Company,
and Lender, as Investor;
WHEREAS, on even date herewith, Borrower and Lender's affiliate, Lernout &
Hauspie Speech Products, N.V. ("L&H"), have executed that certain Convertible
Promissory Note Purchase Agreement (the "$2 Million Purchase Agreement"),
whereby L&H has loaned to Borrower the sum of Two Million Dollars ($2,000,000),
and Borrower has executed a convertible promissory note in the same amount
evidencing the repayment of such loan;
WHEREAS, Borrower, Lender and L&H executed that certain Security Agreement
dated of even date herewith, that certain Copyright Security Agreement of even
date herewith, that certain Trademark Security Agreement of even date herewith,
that certain Patent Security Agreement of even date herewith and that certain
Pledge Agreement of even date herewith (collectively, the "Security
Agreements"), granting to Lender and L&H a first lien security interest in
certain assets of Borrower and Borrower's subsidiaries (including future
subsidiaries), as specified therein (the "Collateral");
WHEREAS, Borrower and Lender desire to amend the Note to reflect Lender's
security interest in the Collateral granted under the Security Agreements, and
Lender has agreed to renew and extend the maturity date of the Note until
February 3, 2000, on the terms and conditions hereinafter set forth; and
NOW, THEREFORE, for and in consideration of Ten Dollars ($10.00) and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Borrower and Lender hereby agree as follows:
<PAGE>
1. RENEWAL AND EXTENSION OF MATURITY. The maturity date of the Note is hereby
extended from November 24, 1999 to February 3, 2000 (the "Revised Maturity
Date").
2. SECURITY AGREEMENTS. The following provision is added as Section 1.4
of the Note:
1.4 SECURITY AGREEMENTS. The repayment of this Note is secured by
the security interest in certain collateral of Borrower and Borrower's
subsidiaries (including future subsidiaries) granted to Holder in the
Security Agreements.
3. MODIFICATIONS IN CONVERSION PROVISIONS. Section 2.1 through Section 2.4 of
the Note are hereby deleted and replaced in their entirety as follows:
2.1 TIMING. At any time prior to the payment in full of this Note,
upon notice from the Holder to the Company and delivery of this Note, the
Conversion Amount shall be converted into that number of fully paid and
nonassessable shares of the Common Stock as is equal to the Conversion
Amount divided by $0.37 (the "per Share Price"), with any fraction of a
share rounded up to the next whole share of Common Stock.
2.2 ANTI-DILUTION ADJUSTMENTS.
(i) In case the Company shall at any time change as a whole,
by subdivision or combination in any manner or by the making of a stock
dividend, the number of outstanding shares of the 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 the Note or the
Series F Preferred Stock, as the case may be, may convert such Note or
Series F Preferred Stock shall be increased or decreased in direct
proportion to such increase or decrease of shares, as the case may be, and
(ii) the Conversion Price in effect immediately prior to such change shall
be increased or decreased in inverse proportion to such increase or
decrease of shares, as the case may be.
(ii) If, prior to the conversion of the Note or of all the
Series F Preferred Stock, there shall be any merger, consolidation,
exchange of shares, recapitalization, reorganization, or other similar
event, as a result of which shares of common stock of the Company shall be
changed into the same or a different number of shares of the same or
another class or classes of stock or securities of the Company or another
entity or there is a sale of all or substantially all the Company's
assets, then the holders of the Note or the Series F Preferred Stock shall
thereafter receive, upon the basis and upon the terms and conditions
specified herein and in lieu of shares of common stock, immediately
theretofore issuable upon conversion, such stock, securities and/or other
assets which the holder would have been entitled to receive in such
transaction had the Note or the Series F Preferred Stock been converted
immediately prior to such transaction, and in any such case appropriate
provisions shall be made with respect to the rights and interests of the
holders of the Note or the Series F Preferred Stock to the end that the
provisions hereof shall thereafter be applicable, as nearly as may be
practicable in relation to any securities thereafter deliverable upon the
conversion thereof.
2
<PAGE>
(iii) The Company will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets,
consolidation, merger, share exchange, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but will at all 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 F Preferred Stock against
impairment.
(iv) In the event the Company shall issue additional shares of
Common Stock (including additional shares of Common Stock deemed to be
issued pursuant to paragraph (v) hereof but excluding any issued as a
stock split or combination or upon a dividend or distribution) without
consideration or for a consideration per share less than the Conversion
Price in effect on the date of and immediately prior to such issue, then
and in such event, such Conversion Price shall be reduced, concurrently
with such issue, to a price (calculated to the nearest cent) equal to the
consideration per share paid in connection with the issuance of such
additional shares of Common Stock.
(v) In the event the Company shall issue any options or
convertible securities or shall fix a record date for the determination of
holders of any class of securities entitled to receive any such options or
convertible securities, then the maximum number of shares (as set forth in
the instrument relating thereto without regard to any provisions contained
therein for a subsequent adjustment of such number) of Common Stock
issuable upon the exercise of such options in accordance with (b) below
or, in the case of convertible securities, the maximum number of shares of
Common Stock into which they are convertible in accordance with (b) below,
shall be deemed to be additional shares of Common Stock issued as of the
time of such issue or, in case such a record date shall have been fixed,
as of the close of business on such record date, provided that additional
shares of Common Stock shall not be deemed to have been issued unless the
consideration per share (determined pursuant to paragraph (vi) hereof) of
such additional shares of Common Stock would be less than the Conversion
Price in effect on the date of and immediately prior to such issue, or
such record date, as the case may be, and provided further that in any
such case in which additional shares of Common Stock are deemed to be
issued:
(a) except as provided in (b) below, no further
adjustment in the Conversion Price shall be made upon the subsequent issue
of convertible securities or shares of Common Stock upon the exercise of
such options or conversion or exchange of such convertible securities;
(b) if such options or convertible securities by their
terms provide, with the passage of time or otherwise, for any increase in
the consideration payable to the corporation, or for any decrease in the
number of shares of Common Stock issuable upon the exercise, conversion or
exchange thereof, or for the termination of the right to exercise or
convert such options or convertible securities, then the Conversion
3
<PAGE>
Price computed upon the original issue thereof (or upon the occurrence of
a record date with respect thereto), and any subsequent adjustments based
thereon, shall, upon any such increase, decrease or termination becoming
effective, be recomputed to reflect such increase, decrease or termination
insofar as it affects such options or the rights of conversion or exchange
under such convertible securities and upon termination such options or
convertible securities shall no longer be deemed to be outstanding; and
(c) no readjustment pursuant to sub-clause (b) above
shall have the effect of increasing the Conversion Price to an amount
which exceeds the lower of (1) the Conversion Price on the original
adjustment date, or (2) the Conversion Price that would have resulted from
any issuance of additional shares of Common Stock between the original
adjustment date and such readjustment date.
(vi) DETERMINATION OF CONSIDERATION. For purposes of this
Section 2.2, the consideration received by the corporation for the issue
of any additional shares of Common Stock shall be computed as follows:
(a) CASH AND PROPERTY. Such consideration shall:
(A) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the corporation,
excluding amounts paid or payable for accrued interest or accrued
dividends;
(B) insofar as it consists of property other
than cash, be computed at the fair value thereof at the time of such
issue, as determined in good faith by the Board of Directors; and
(C) in the event additional shares of Common
Stock are issued together with other shares of securities or other assets
of the corporation for consideration which covers both, be the proportion
of such consideration so received, computed as provided in clauses (A) and
(B) above, as determined in good faith by the Board of Directors.
(b) OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the corporation for additional shares
of Common Stock deemed to have been issued pursuant to paragraph (v),
relating to options and convertible securities, shall be determined by
dividing
(A) the total amount, if any, received or
receivable by the corporation as consideration for the issue of such
options or convertible securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein for a
subsequent adjustment of such consideration) payable to the corporation
upon the exercise of such options or the conversion or exchange of such
convertible securities, or in the case of options for convertible
securities, the exercise of such options for convertible securities and
the conversion or exchange of such convertible securities, by
4
<PAGE>
(B) the maximum number of shares of Common
Stock (as set forth in the instruments relating thereto, without regard to
any provision contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such options or the conversion or
exchange of such convertible securities.
(vii) Upon the occurrence of each adjustment or
readjustment of the conversion rate pursuant to this Section 2.2, the
Company at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish
to the holder of the Note or the holders of the Series F Preferred Stock,
as the case may be, a certificate signed by the Chief Financial Officer of
the Company setting forth (a) such adjustment or readjustment, (b) the
conversion rate at the time in effect, and (c) the number of shares of
common stock and the amount, if any of other property which at the time
would be received upon the conversion of its shares.
2.3 ISSUANCE OF SERIES F PREFERRED STOCK. In the event the
Company fails to cause the amount of its authorized capital stock to be
sufficient to allow the issuance of the Common Stock to the Holder upon
the Holder's election to convert the Note, the Holder shall be entitled to
convert all or a portion of the Conversion Amount into such number of
shares of the Company's Series F Preferred Stock as would entitle the
Holder upon conversion of the Series F Preferred Stock in accordance with
its terms to convert into the same number of shares of the Common Stock
into which it is entitled to convert pursuant to Section 2.1 hereof.
4. EVENTS OF DEFAULT. New Sections 1.3 and 1.4 are added to the Note as
follows:
1.3 Defaults. An "Event of Default" occurs if:
(i) the Company defaults in the payment of interest hereunder
or under the L&H Speech Note when the same becomes due and payable and the
default continues for a period of ten (10) days;
(ii) the Company defaults in the payment of the principal
hereunder or under the L&H Speech Note when the same becomes due and payable
hereunder; or
(iii) the Company fails to comply with any of its other
covenants and agreements in the Note, the Agreement, or under the L&H Speech
Note or the L&H Speech Agreement and the failure continues for the period and
after the notice specified below; or
(iv) the Company pursuant to or within the meaning of any
Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief
against it in an involuntary case,
5
<PAGE>
(C) consents to the appointment of a custodian of
it or for all or substantially all of its property,
(D) makes a general assignment for the benefit of
its creditors, or
(E) is the debtor in an involuntary case which is
not dismissed within sixty (60) days of the commencement thereof; or
(v) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(A) provides for relief against the Company in an
involuntary case,
(B) appoints a custodian of the Company for all or
substantially all of its property, or
(C) orders the liquidation of the Company; or
(vi) any representation or warranty made by the Company in the
Agreement or in the L&H Speech Agreement shall prove to be materially false or
incorrect on the date as of which made; or
(vii) there shall occur a Change in Control of the Company; or
(viii) there shall occur any event or change in circumstances
that has caused or could reasonably be expected in the judgment of Holder to
cause a material adverse effect on the condition, financial or otherwise, of the
assets, operators or prospects of the Company or on the Company's ability to pay
or perform its obligations hereunder or under the Agreement, or under the L&H
Speech Agreement or the L&H Speech Note;
(A) The term "Bankruptcy Law" means Title 11, U.S.
Code or any similar federal or state law for the relief of debtors. The term
"custodian" means any receiver, trustee, assignee, liquidator or similar
official under any Bankruptcy Law.
(B) A failure of the Company as described in
subsection (iii) of this Section 1.3 shall not be an Event of Default until the
Holder notifies the Company in writing of the failure to comply and the Company
does not cure the failure to comply within twenty (20) days after receipt of the
notice (the "Cure Period"). The notice must specify the failure to comply,
demand that it be remedied and state that the notice is a "Notice of Default."
When a failure to comply under clause (iv) of this Section 1.3 is cured, it
ceases.
1.4 ACCELERATION.
6
<PAGE>
(i) If an Event of Default occurs and is continuing, the
Holder may declare the principal of and accrued interest on the Note to be due
and payable and, upon any such declaration, the same shall become and be
immediately due and payable.
(ii) If an Event of Default specified in Section 1.3 (iv) or
(v) occurs, all unpaid principal and accrued interest on the Note then
outstanding shall IPSO FACTO become and be immediately due and payable without
any declaration or other act on the part of the Holder.
(iii) The Holder may rescind an acceleration and its
consequences if all existing Events of Default have been cured or waived, except
nonpayment due to acceleration, and if the rescission would not conflict with
any judgement or decree of a court of competent jurisdiction.
5. GOVERNING LAW. This agreement shall be governed by the laws of the
State of Texas.
6. SUCCESSOR AND ASSIGNS. The terms and provisions of this Amendment shall inure
to the benefit of, and shall be binding upon, the heirs, successors, assigns and
legal representatives of the parties hereto to the same extent as if such heirs,
successors, assigns and legal representatives had joined in the execution
hereof.
EXECUTED as of the Effective Date.
BORROWER:
APPLIED VOICE RECOGNITION, INC., a
Delaware corporation d/b/a e-DOCS.net
By: /s/ RICHARD A. CABRERA
Richard A. Cabrera
Chief Financial Officer
(Signatures Continued on Following Page)
7
<PAGE>
LENDER:
L & H INVESTMENT COMPANY, N.V.,
By: /s/ CHANTAL MESTDAGH
Name: Chantal Mestdagh
Title: Director
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OFAPPLIED VOICE RECOGNITION, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 442,033
<SECURITIES> 0
<RECEIVABLES> 1,202,078
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,780,575
<PP&E> 2,002,350
<DEPRECIATION> 411,490
<TOTAL-ASSETS> 7,898,642
<CURRENT-LIABILITIES> 3,728,835
<BONDS> 415,556
0
10,296,450
<COMMON> 9,987,827
<OTHER-SE> 2,360,119
<TOTAL-LIABILITY-AND-EQUITY> 7,898,642
<SALES> 3,806,054
<TOTAL-REVENUES> 3,806,054
<CGS> 2,453,106
<TOTAL-COSTS> 8,981,782
<OTHER-EXPENSES> 64,786
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 593,937
<INCOME-PRETAX> (5,834,451)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,834,451)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,834,451)
<EPS-BASIC> (.39)
<EPS-DILUTED> (.39)
</TABLE>
