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Filed Pursuant to Rule 424(B)(3)
File No. 333-72115
PROSPECTUS
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APPLIED VOICE RECOGNITION, INC.
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5,551,895 Shares
Common Stock
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Applied Voice Recognition, Inc. has prepared this prospectus for use by the
selling stockholders listed on page of this prospectus to allow them to sell
such shares without restriction. The selling stockholders have indicated that
sales may be made by the methods described in the section entitled "Plan of
Distribution" in this prospectus. We will file a supplemental prospectus if
required to do so by applicable securities laws to describe specific sales of
shares or to identify any selling stockholders not listed in this prospectus.
Our common stock trades on the Over-the-Counter Bulletin Board under the
symbol "EDOC." On April 20, 1999, the last reported sale price of the common
stock was $1.3125 per share.
We will not receive any portion of the proceeds resulting from the sale of
the shares offered by the selling stockholders under this prospectus. In
addition, we will pay for certain of the expenses relating to the registration
of the shares. However, we may receive up to approximately $3,705,000 if all of
the options and warrants held by the selling stockholders are exercised in full.
See "Plan of Distribution" and "Selling Stockholders."
Our principal executive offices are located at 4615 Post Oak Place, Suite
111, Houston, Texas 77027, and our telephone number is (713) 621-5678.
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YOU SHOULD CAREFULLY CONSIDER THE "RISK FACTORS" ON PAGES 3-12
OF THIS PROSPECTUS BEFORE DECIDING TO BUY OUR SECURITIES.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved of the securities to be issued under this prospectus or
determined if this prospectus is accurate or adequate. Any representation to
the contrary is a criminal offense.
The date of this prospectus is April 21, 1999.
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TABLE OF CONTENTS
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Where You Can Find More Information 2
Risk Factors 3
About Us 12
Use of Proceeds 12
Selling Stockholders 13
Plan of Distribution 18
Legal Matters 18
Experts 18
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-3 with the SEC to register
the securities offered hereby. This prospectus does not contain all of the
information contained in the registration statement, including its exhibits and
schedules. You should refer to the registration statement for further
information about us and the securities the selling stockholders are offering.
Statements made in this prospectus about certain contracts or other documents
are not necessarily complete. When we make such statements, we refer you to the
copies of those contracts or other documents that are filed as exhibits to the
registration statement, because those statements are qualified in all respects
by reference to those exhibits. The registration statement, including exhibits
and schedules, is on file at the offices of the SEC and may be inspected without
charge.
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings, including the registration
statement, are available to the public over the Internet at the SEC's web site
at http://www.sec.gov. You also may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C.; New York, New York; and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information about the public reference rooms.
SEC rules allow us to include some of the information required to be in the
registration statement by incorporating that information by reference to other
documents we file with them. That means we can disclose important information
to you by referring you to those documents. The information incorporated by
reference is an important part of this prospectus, and information that we file
later with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings made
with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act of
1934 until all of the securities covered by this prospectus are sold:
. Annual Report on Form 10-KSB for the year ended December 31, 1997, as
amended;
. Quarterly Reports on Form 10-QSB for the quarters ended March 31, June 30,
and September 30, 1998, as amended;
. Current Reports on Form 8-K as filed on January 20, May 19, and December
16, 1998, and January 15, 1999, as amended; and
. The description of our common stock contained in the Form 8-A effective
January 9, 1998 (Commission File No. 000-23607), including any amendments
or reports filed to update the description.
You may request a copy of these filings, which we will provide to you at no
cost, by writing or telephoning us at the following address:
Applied Voice Recognition, Inc.
4615 Post Oak Place, Suite 111
Houston, Texas 77027
Attention: Chief Financial Officer
(telephone (713) 621-5678)
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RISK FACTORS
You should carefully consider the following risk factors and other
information set forth in this prospectus before deciding to buy our securities.
SUFFICIENCY OF FUNDS
We will be required to raise additional capital in order to continue our growth
strategy.
We expect to continue to incur significant losses on a quarterly and annual
basis in the near future on limited sales of our products and services. In
addition, we may not be successful in increasing sales of our products and
services for the long term, or be able to achieve profitability. Further, we
have had working capital deficits in the past. Our long-term capital
requirements will depend on many factors, including, cash flow from operations,
working capital requirements, product development expenses and capital
expenditures. As a result, we will be required to raise substantial additional
capital during 1999 in order to fund our current operations. We will also
require substantial additional capital in order to implement our acquisition and
growth strategy. Historically, we have relied upon the sale of equity
securities and short-term loans as our primary sources of funding to finance
operations and acquisitions. To the extent that existing resources are
insufficient to fund our operations and acquisition activities in the short- or
long-term, we will need to raise additional funds through public or private
financings. We may not be able to raise additional financing on terms favorable
to us or to our stockholders without substantial dilution of their ownership and
rights. If we are unable to raise sufficient funds to satisfy either short- or
long-term requirements, there would be substantial doubt as to our ability to
continue as a going concern and we may be required to significantly curtail our
operations, significantly alter our acquisition and growth strategy, forego
market opportunities or obtain funds through arrangements with strategic
partners or others that may require us to relinquish material rights to certain
of our technologies or potential markets.
LIMITED HISTORY OF BUSINESS OPERATIONS; ANTICIPATION OF CONTINUED LOSSES
Due to its limited nature, you should not rely on our operating history as an
indicator of our future performance.
We have incurred significant net losses since our inception and expect to
continue to incur significant losses on a quarterly and annual basis in the
future. For the year ended December 31, 1999, we recorded a net loss of
$8,320,519, or $.68 per share, on net sales of $717,000. As of December 31,
1999, our accumulated deficit was $14,850,417. We have achieved only limited
revenues to date, and our ability to generate significant revenues is subject to
substantial uncertainty. Our limited operating history makes the prediction of
future results of operations difficult or impossible, and we may not be able to
sustain revenue growth or achieve profitability. Prior to January 1998, our
marketing and development efforts were focused on the creation and sale of voice
recognition word processing products intended for the general office market. In
January 1998, we began to focus on the medical transcription needs of the
healthcare industry. During this time, we redesigned our principal product to
focus on this new market, worked to develop an integrated, internet-based
complete medical transcription solution, and acquired traditional medical
transcription companies in the Dallas, Texas; New York, New York; Manila,
Phillippines; and Denver, Colorado areas. However, we have achieved limited
revenues to date from sales of our medical transcription voice recognition
software and the performance of traditional medical transcription services.
Accordingly, we have a limited operating history upon which you can base an
evaluation of us and our current prospects. You must consider us and our
prospects in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as the electronic medical
transcription market. To address these risks, we must respond to competitive
developments, continue to attract, retain and motivate qualified persons,
successfully implement our advertising program, continue to upgrade our
technologies, commercialize products and services incorporating such
technologies, and successfully implement our strategic business and acquisition
plan to penetrate the healthcare transcription market. We may not be successful
in addressing such risks.
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RISKS ASSOCIATED WITH A DEVELOPING MARKET AND THE ACCEPTANCE OF OUR PRODUCTS AND
SERVICES
Growth in the use of the Internet and automated speech recognition technology in
the healthcare transcription industry is an important factor in our business
plan.
The medical transcription market is well established; however, the use of the
Internet and automated speech recognition ("ASR") in the healthcare
transcription industry, and the Internet and ASR markets in general, have only
recently begun to develop and are characterized by rapidly changing technology,
evolving industry standards and customer demands, and frequent new product
introductions and enhancements. The healthcare transcription-related Internet
and ASR markets are highly dependent upon the increased use of the Internet and
speech recognition technology by healthcare professionals and continued price
and performance improvements in personal computers. Our future operating
results will depend upon the emergence of the Internet and ASR technology in the
healthcare transcription market, our ability to develop and improve our
technology and the successful implementation of our marketing plan. However,
the healthcare transcription-related Internet and ASR markets may not develop or
we may not achieve market acceptance of our products and services or execute our
business plan successfully. As is typical in the case of a new and rapidly
evolving industry, demand and market acceptance for recently introduced products
and services are subject to a high level of uncertainty. The industry is young
and has few proven products. If widespread use of the Internet and ASR
technology does not develop in the healthcare transcription industry, our
business, results of operations and financial condition will be materially
adversely affected. Because the market for our products and services is new and
evolving, it is difficult to predict the size of this market and growth rate, if
any. The market for our products and services may not develop or the demand for
our products or services may not emerge or become sustainable. If the market
fails to develop, develops more slowly than expected or becomes saturated with
competitors, or if our products and services do not achieve or sustain market
acceptance, our business, results of operations and financial condition will be
materially adversely affected.
DEPENDENCE ON PRINCIPAL PRODUCTS AND SERVICES
Our future results depend primarily upon the successful introduction of our
newest product for the healthcare transcription market and the efficient
integration and operation of the newly acquired transcription operations.
We primarily derive our revenue from (i) the sale of licenses of our healthcare
dictation voice recognition software applications, the VOICECOMMANDER(TM) line
of products, and training and maintenance services associated with the
installation and on-going use of the software, and (ii) the sale of traditional
and ASR transcription services. In addition, we recognize some revenue from the
sale of computer hardware that is bundled with our software application at the
customer's request. Our current product, VOICECOMMANDER(TM) 99 ("VC99") for the
healthcare transcription market, enables healthcare professionals to
automatically transcribe patient notes and records through the use of a hand-
held digital recorder and specially-equipped PC. In addition, healthcare
professionals can automatically send their encrypted dictation of the Internet
to our transcription processing centers to be transcribed, re-encrypted and
returned over the Internet in as little as 24 hours. VC99 is intended to
provide a completely mobile dictation solution designed to improve the quality
and reduce the costs of healthcare transcription needs through the use of voice
recognition, hand-held digital recording technology, and Internet driven
technologies. To date, we have had limited revenues from sales of our
VOICECOMMANDER(TM) line of products and have only derived revenue from the sale
of traditional transcription services since the acquisition of our first
transcription services company in March 1998. However, we expect that in the
foreseeable future we will derive substantially all of our revenues from fees
generated by traditional transcription services, and from the sale of VC99, our
newest Internet-based ASR product for the healthcare transcription market. Our
future financial performance will depend in significant part on our ability to
develop and introduce VC99, which was released in February 1999. However, we
may not be successful in developing this or other products or services in a
manner which meets with market acceptance. In addition, new product releases by
us, whether improved versions of our current Internet-based ASR products or
introductions of other new products, may contain undetected errors that require
significant design modifications, resulting in a loss of customer confidence and
adversely affecting the use of our product(s) and services. Our future success
will depend in significant part on our ability to develop new product releases
and to continually improve the performance, features and reliability of our
current Internet-based ASR products in response to both evolving demands of the
healthcare transcription marketplace and
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competitive product offerings, and we may not be successful in doing so. In
addition to our revenues from sales of our products, we receive revenue from
sales of traditional transcription services. As a result, any factors adversely
affecting the traditional transcription market, such as increased price
competition or the introduction of technologically superior products and
services, could have a material adverse effect on us.
RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY
Acquisition strategies present risks that could materially affect our business
and financial performance.
One element of our growth strategy is to acquire traditional healthcare
transcription companies in major US and overseas markets. Our acquisition
strategy presents risks that, singly or in any combination, could
materially adversely affect our business and financial performance.
These risks include the following:
. risks inherent in assessing the value, strengths, weaknesses,
integratability, contingent or other liabilities and potential
profitability of the acquisition candidates;
. the possibility of an adverse effect on our existing operations from
the diversion of management attention and resources to acquisitions;
. the possible loss of acquired customers and key personnel, including
sales representatives and transcriptionists; and
. the risk we may assume or acquire significant liabilities that we fail
or are unable to discover in connection with any acquisition.
The success of our acquisition strategy will depend on the extent to
which acquisition candidates continue to be available and whether we
are able to acquire, successfully integrate and profitably manage
additional transcription businesses. Since our first transcription
company acquisition in March 1998, we have acquired six additional
transcription companies. In addition, we have identified certain
possible acquisition candidates, but do not currently have the
financing in place to complete all of these acquisitions, and the
timing, size and success of our acquisition efforts and the associated
capital commitments cannot be readily predicted. Accordingly, our
acquisition strategy may not succeed.
MANAGEMENT OF GROWTH; NEED TO ESTABLISH INFRASTRUCTURE; ADDITIONAL PERSONNEL
Our success will depend on our ability to effectively manage our growth and
attract and retain additional personnel.
The rapid execution necessary for us to successfully offer our
products and services and implement our business plan and acquisition
strategy in a rapidly evolving market requires an effective planning and
management process. Our rapid growth places a significant strain on our
managerial, operational and financial resources. In order to manage our
growth, we must:
. implement and improve our operational and financial systems;
. integrate the operational and financial systems of the acquired
transcription operations into existing systems;
. expand, train and manage our employee base; and
. hire additional technical support personnel in order to convert
healthcare professionals from traditional to Internet and ASR related
transcription methods.
There can be no assurance that we have made adequate allowances for the costs
and risks associated with this expansion, that our systems, procedures or
controls will be adequate to support our operations or that our management
will be able to achieve the rapid execution necessary to successfully
offer our products and services and implement our business plan and
acquisition strategies simultaneously. Our future operating results
will also depend on our ability to expand our sales and expand our
support organization commensurate with the growth of our business.
Any failure by our management to effectively anticipate, implement and
manage the changes required to sustain our growth could have a
material adverse effect on our business, results of operations and financial
condition. We may not be able to effectively manage such change.
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RAPID TECHNOLOGICAL CHANGE
We must respond quickly to technological developments and evolving industry
standards in order to remain competitive.
The healthcare information services industry is characterized by rapid
technological change, evolving customer needs and emerging technical standards.
While we believe that utilizing Internet-based ASR technology can significantly
enhance the rendering of transcription services in the healthcare information
services industry, the introduction of competing services or products
incorporating new technologies, and the emergence of new technical standards
could render some or all of our services as unmarketable. We believe that our
future success is dependent in part on our ability to enhance our current
services and develop new services that keep pace with technological developments
and emerging technical standards, and that address the increasingly
sophisticated needs of our customers. We may not be successful in developing and
marketing enhancements to our existing services or new services that respond to
technological developments, emerging technical standards, or evolving customer
needs, on a timely basis or at all, and such enhancements or new services, if
developed and introduced, may not achieve market acceptance. The failure to
develop and introduce service enhancements and new services in a timely and
cost-effective manner in response to changing technologies or customer
requirements, would have a material adverse effect on our business, financial
condition and results of operations.
RISKS ASSOCIATED WITH OUR DEPENDENCE ON THIRD-PARTY PROPRIETARY RIGHTS
All of our software products currently utilize IBM speech recognition software
engines. The loss of this relationship would force us to redesign our products
to use alternative technology.
All of our current products utilize third-party speech recognition software
engines. There are currently four major speech recognition software engine
manufacturers: Lernout & Hauspie Speech Products USA, Inc. ("L&H"),
International Business Machines Corp. ("IBM"), Philips Electronics N.V.
("Philips"), and Dragon Systems, Inc ("Dragon"). We currently have a non-
exclusive OEM Distribution Agreement with IBM that entitles us to embed and
utilize IBM's ViaVoice(TM) technology in our products. For each unit of our
product that we license (sell), we must pay a license fee to IBM. IBM may not
continue to manufacture and support ViaVoice(TM) or our arrangement with IBM may
be terminated. The agreement with IBM may be terminated by IBM at any time for
acts or omissions that are considered to be so serious as to warrant
termination. Although we have previously purchased 10,000 licenses of
ViaVoice(TM) from IBM, which can serve the needs of 40,000 customers, we may
need to buy additional licenses from IBM. We believe that if IBM discontinued or
was unable to manufacture or support ViaVoice(TM) or terminated our agreement
with us that, with adequate time, we could develop our products to utilize
speech technology from other companies. In December 1998, we entered into an
OEM/VAR agreement with L&H. Pursuant to the agreement with L&H, we agreed to use
L&H speech products, subject to L&H developing a speech recognition software
engine of equal or superior features as IBM's ViaVoice(TM), during the term of
the agreement. If we are unable to utilize the IBM or L&H technology and are
unable to develop products capable of utilizing alternative technology, our
business, results of operations and financial condition would be materially
adversely affected.
COMPETITION
We are in an extremely competitive industry that is dominated by several
companies which have significantly greater financial, technical, and marketing
resources than we have.
Healthcare Transcription Services Market. The transcription services industry
remains highly fragmented and primarily consists of small, local or regional
companies. As a result, we compete with a large number of third-party
transcription companies that offer services similar to ours and that target the
same customers and qualified transcriptionists. In addition, there are several
large national transcription service providers: Medquist, Inc. (which recently
acquired MRC Group, Inc., another large transcription service provider),
Transcend Services, Inc., Harris Corp. and Rodeer Systems, Inc. These
competitors have significantly greater resources than us. We believe that our
ability to compete depends upon many factors within and outside of our control,
including the timing and market acceptance of our new Internet-based ASR related
transcription services and other service enhancements developed by us and our
competitors, service quality, performance, price, reliability, customer service
and support and ability to attract qualified transcriptionists. In addition, the
potential exists for large companies that do not currently provide transcription
services, but which currently provide other services to the healthcare industry,
to enter the transcription services field. For example, IDX Systems Corporation
("IDX") recently announced the acquisition of EDIX Transcription, one of our
larger competitors. IDX is a provider of health care information services and
stated that it
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acquired EDIX because of perceived synergies of the medical transcription
business (data input) and health information management businesses and is an
example of an existing company that could and has become a competitor. Such
potential competitors could have substantially greater financial, technical and
marketing resources than us. As a result, such potential competitors, if they
were to enter the transcription business, could be able to respond more quickly
to evolving technological developments, changing customer needs or emerging
technical standards or to devote greater resources to the development, promotion
or sale of their services. Our services also compete with the in-house
transcription staffs of our potential customers. While we believe that our
growth and earnings will benefit from the outsourcing by healthcare providers of
non-patient care functions, including transcription services, the current trend
could change direction and cause healthcare providers to bring all or some of
those services in-house. In addition, competition may increase due to
consolidation of transcription companies. Increased competition may result in
price reductions for our services, reduced operating margins and an inability to
increase our market share, any of which would have a material adverse effect on
our business, financial condition and results of operations. We may not be able
to compete successfully against current or future competitors, and competitive
pressures may have a material adverse effect on our business, financial
condition and results of operations.
Healthcare Related ASR Products Market. The market for healthcare
related ASR products and services is also highly competitive. There are no
substantial barriers to entry, and we expect that competition will continue
to intensify. Although we believe that the healthcare related ASR technology
market will provide opportunities for more than one supplier of products and
services similar to ours, it is possible that a single supplier may ultimately
dominate this market. We believe that the principal competitive factors in
this market are name recognition, performance, ease of use, variety of
value-added services, functionality and features and quality of support. A
number of companies offer competitive products addressing our target markets.
The primary competitors of our products and services are IBM, L&H, Philips and
Dragon. In the future, we may encounter additional competition from new
input/control devices as yet undeveloped. Many of our existing competitors, as
well as a number of potential new competitors, have significantly greater
financial, technical and marketing resources than us. Competition from licensees
of our products and technology may also adversely affect us. Our competitors may
develop healthcare related ASR products and services that are superior to ours
or that may achieve greater market acceptance than our offerings. Moreover, a
number of our current customers have established relationships with certain of
our competitors and future customers may establish similar relationships. We may
not be able to compete successfully against our current or future competitors or
competitive pressures may have a material adverse effect on our business,
financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
Our success is heavily dependent upon our retention of certain of our key
officers.
Our performance is substantially dependent on the performance of our executive
officers and key employees all of whom have worked together for a relatively
short period of time. In particular, the services of Timothy J. Connolly, H.
Russell Douglas and Robin P. Ritchie would be difficult to replace. We have
entered into employment agreements with Messrs. Connolly, Douglas and Ritchie.
In addition, we have a $1,000,000 key person life insurance policy on the life
of Mr. Connolly. However, $1,000,000 may not be sufficient to compensate us for
the loss of Mr. Connolly's services, and we do not have such policies in place
on any of our other employees. The loss of the services of any of our executive
officers or other key employees could have a material adverse effect on our
business, results of operations or financial condition. We are heavily dependent
upon our ability to attract, retain and motivate skilled technical and
managerial personnel. Our future success also depends on our continuing ability
to identify, hire, train and retain other highly qualified technical and
managerial personnel. Competition for such personnel is intense, and we may not
be able to attract, assimilate or retain other highly qualified technical and
managerial personnel in the future. The inability to attract, hire or
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retain the necessary technical and managerial personnel could have a material
adverse effect upon our business, results of operations or financial condition.
ABILITY TO ATTRACT QUALIFIED TRANSCRIPTIONISTS
Competition for qualified transcriptionists is intense.
Our success is also dependent, in part, upon our ability to attract and retain
qualified transcriptionists, who can provide the accuracy and turnaround time
required by our customers. Competition for transcriptionists is intense. We may
not be successful in attracting and retaining the personnel necessary to conduct
our business successfully. In addition, our inability to attract, hire,
assimilate and retain such personnel could have a material adverse effect upon
our business, financial condition and results of operations. In order to reduce
this risk, we purchased a transcription facility in Manila, Phillippines, to
provide an additional source of qualified transcriptionists. However, we may
ultimately prove unable to attract sufficient qualified transcriptionists to
operate this or others of our facilities.
UNCERTAINTY REGARDING GOVERNMENT HEALTHCARE REFORM AND REGULATION
Our business may be adversely affected by future changes in governmental
regulations relating to the healthcare industry.
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the outsourcing arrangements
of healthcare providers. Several states and the United States federal government
are investigating a variety of alternatives to reform the healthcare delivery
system and further reduce and control healthcare spending. These reform efforts
include proposals to limit spending on healthcare items and services, limit
coverage for new technology, limit or control directly the prices healthcare
providers and drug and device manufacturers may charge for their services and
products, and otherwise change the environment in which providers operate. The
scope and timing of such reforms cannot be predicted at this time, but if
adopted and implemented, they could have a material adverse effect on our
business. Healthcare providers may react to these proposals and the uncertainty
surrounding such proposals by curtailing outsourcing arrangements or deferring
decisions regarding the use of outsourced services. In response to this
environment, many healthcare providers are consolidating to create larger
healthcare delivery organizations. This consolidation reduces the number of
potential customers for our products and services, and increases the bargaining
power of these organizations, which could lead to reductions in the amount we
are able to charge for our products and services. The impact of these
developments in the healthcare industry is difficult to predict and could have a
material adverse effect on our business, operating results and financial
condition.
In providing our services, we are subject to certain statutory, regulatory and
common law requirements regarding the confidentiality of such medical
information. We require our personnel to agree to keep all medical information
confidential and monitor compliance with applicable confidentiality
requirements. However, the failure to comply with such confidentiality
requirements could have a material adverse effect on our business, operating
results and financial condition.
INTELLECTUAL PROPERTY AND PROPERTY RIGHTS
Our success is heavily dependent upon a combination of proprietary software
technology and hardware purchased and licensed from third parties. Our current
protections may not be sufficient to protect these technologies.
We currently have only one issued patent and three patent applications pending,
and rely on a combination of trade secret, copyright and trademark laws, non-
disclosure agreements and contractual provisions to protect our proprietary
rights in our software and technology. However, these protections may not
prevent misappropriation of this technology. Moreover, third parties could
independently develop competing technologies that are substantially equivalent
or superior to our technologies. Although we believe that our services and
products and the proprietary rights developed or licensed by it do not infringe
patents and proprietary rights of other parties, those parties may assert
infringement claims, regardless of merit, against us in the future. In addition,
we have applied for several federal service mark and trademark registrations for
certain of the marks we use, and have been granted U.S. Trademarks for various
marks, including Applied Voice Recognition and "VOICE-COMMANDER(TM)." There can
be no assurance that any further trademark registrations will be issued or, if
issued, will provide us with adequate protection against competitors.
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Any patent applications now pending or filed in the future may not result in
patents being issued or, if patents are issued, the claims allowed may not be
sufficiently broad to protect what we believe to be our proprietary rights. In
addition, pending applications or any patents licensed to us or issued or
licensed to us in the future may not afford any competitive advantages to us or
may be challenged by third parties or circumvented or designed around by others.
The cost of litigation to uphold the validity and prevent infringement of
patents and to enforce licensing rights can be substantial. Furthermore, others
may independently develop similar technologies or duplicate the technology owned
by or licensed to us or design around the patented aspects of such technology.
Our services and products may or may not infringe patents or other rights owned
by others, licenses for which may not be available to us.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
Various market and economic factors may cause our future quarterly operating
results to vary.
Because of our limited operating history, we do not have historical financial
data for any significant period of time on which to base planned operating
expenses. Our expense levels are based in part on our expectations as to future
revenues and, to a large extent, are fixed. Quarterly sales and operating
results are generally difficult to forecast. We may not be able to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall.
Accordingly, any significant shortfall in relation to our expectations would
have an immediate adverse impact on our business, results of operations and
financial condition. In addition, we plan to pursue additional strategic
acquisitions in the healthcare transcription industry and to significantly
increase our operating expenses to fund greater levels of research and
development, increase our sales and marketing operations, broaden our customer
support capabilities and establish brand identity and strategic alliances. To
the extent that such expenses precede or are not subsequently followed by
increased revenues, our business, results of operations and financial condition
will be materially adversely affected.
Our operating results may fluctuate significantly in the future because of a
variety of factors, some of which are beyond our control. These factors include
general economic conditions, specific economic conditions in the ASR industry in
general and the healthcare transcription related ASR industry specifically,
usage of healthcare transcription related and Internet-based ASR technology,
seasonal trends in sales, capital expenditures and other costs relating to the
expansion of operations, the introduction of new products or services by us or
our competitors, the mix of the services sold and the channels through which
those services are sold and pricing changes. As a strategic response to a
changing competitive environment, we may elect from time to time to make certain
pricing, service or marketing decisions or acquisitions that could have a
material adverse effect on our business, results of operations and financial
condition. We believe that period to period comparisons of our operating results
are not meaningful and should not be relied upon for an indication of future
performance. Due to all of the foregoing factors, it is likely that in some
future quarter, our operating results may be below the expectations of public
market analysts and investors. In such event, the price of our common stock
would likely be materially adversely affected.
CONCENTRATION OF STOCK OWNERSHIP
Our insiders beneficially own a majority of our common stock.
Our officers, directors and holders of more than 5% of our outstanding voting
securities beneficially own or have voting control over a total of 15,035,913
shares, which if all were issued today, would represent approximately 68.8% of
the total outstanding common stock. Accordingly, these stockholders will have
substantial influence over our policies and management, and if these
stockholders act as a group, they will be able to elect substantially all of our
directors, to dissolve, merge, or sell our assets. In addition pursuant to their
certificates of designation and other agreements, certain of our common and
preferred stockholders have the right to designate members of the Board of
Directors, as follows:
. VOICE TECHNOLOGIES PARTNERS, LTD. -- Pursuant to a voting agreement we
entered into with Voice Technologies Partners, Ltd. ("VTP") and L&H, those
parties have agreed to vote all of their shares for three members of the
Board of Directors to be nominated by VTP. The voting agreement will expire
upon the earliest to occur of
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<PAGE>
(i) December 31, 2003, (ii) the redemption or conversion of all of the shares
of Series D Preferred Stock, (iii) the sale of Applied Voice Recognition,
Inc., or (iv) the termination of our employment of Timothy J. Connolly.
. SERIES A PREFERRED STOCK -- For so long as Entrepreneurial Investors, Ltd.
("EIL") owns at least 156,250 shares of the Series A Preferred Stock, we have
agreed to use our best efforts to have one member of the Board of Directors
be chosen by Equity Services, Ltd. ("ESL"). EIL currently holds 186,000
shares of the Series A Preferred Stock.
. SERIES C PREFERRED STOCK -- For so long as the current holders of the Series
C Preferred Stock hold at least 77,263 shares of the Series C Preferred
Stock, we have agreed to use our best efforts to have one member of the Board
of Directors be chosen by ESL. The holders of the Series C Preferred Stock
currently hold 153,538 shares of the Series C Preferred Stock.
. SERIES D PREFERRED STOCK -- In addition, L&H, as the current holder of our
Series D Preferred Stock, has the right to nominate two members to the Board
of Directors, who will also serve as two of the four members of the Executive
Committee of the Board of Directors.
As a result of such director designation rights, ESL nominated Mr. Daniel S.
Dornier to our Board of Directors in July 1998, and L&H nominated Messrs. Jo
Lernout and Thomas Denys in February 1999, all of whom have been appointed to
the Board of Directors. VTP has not yet nominated its three directors.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
The market price of our common stock could be adversely affected by sales of
restricted and other securities.
As of April 20, 1999, there were approximately 16,089,491 shares of our common
stock issued and outstanding. Approximately 3,000,000 shares of common stock are
issuable upon exercise of employee and director stock options under our 1997
Incentive Plan and will become eligible for sale in the public markets at
prescribed times in the future. Our issuance of such 3,000,000 shares is
registered on a Form S-8 Registration Statement. As of April 20, 1999, other
outstanding options were exercisable to purchase approximately 435,000 shares of
common stock. We also have outstanding warrants which are exercisable into an
aggregate of 3,442,946 shares of common stock. In addition, our series of
preferred stock are convertible into additional shares of our common stock. The
following table illustrates the maximum number of shares of common stock
issuable upon the conversion of our outstanding preferred stock:
<TABLE>
<CAPTION>
PREFERRED STOCK
- -------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE INTO
ISSUED AND COMMON STOCK
CLASS OF PREFERRED AUTHORIZED OUTSTANDING (MAX.)
- ------------------ ---------- ----------- -----------------
<S> <C> <C> <C>
Series A Preferred Stock 312,500 186,000 1,004,400
Series B Preferred Stock 3,000 2,285 3,046,667
Series C Preferred Stock 231,788 153,538 1,535,380
Series D Preferred Stock 5,000 3,000 2,000,000
</TABLE>
In addition to the shares of preferred stock listed in the table above, we are
obligated to issue a total of 684 shares of Series 1 Preferred Stock and 1,500
shares of Series 2 Preferred Stock as consideration in certain of our recent
acquisitions. These shares of Series 1 Preferred Stock will be issued on
December 31, 1999, and the shares of Series 2 Preferred Stock will be issued in
three equal installments, beginning on December 31, 1999. The shares of Series 1
and 2 Preferred Stock will be convertible into an estimated maximum of 684,000
(based upon an average stock price of $1.00) and 150,000 shares, respectively.
In addition to the shares of common stock registered for resale by the selling
stockholders herein, we have registered 4,810,625 shares of common stock for
resale by certain other selling stockholders. The issuance and sale of a
significant number of shares of common
10
<PAGE>
stock upon the exercise of stock options and warrants, the conversion of our
outstanding preferred stock, or the sales of a substantial number of shares of
common stock pursuant to Rule 144 or otherwise, could adversely affect the
market price of the common stock.
CERTAIN ANTI-TAKEOVER PROVISIONS AFFECTING STOCKHOLDERS
Our Board of Directors may authorize the issuance of preferred stock without
stockholder approval.
Our Certificate of Incorporation and Bylaws contain provisions that might
diminish the likelihood that a potential acquiror would make an offer for the
common stock, impede a transaction favorable to the interest of the stockholders
or increase the difficulty of removing incumbent Board of Directors or
management. Currently, our Board of Directors has the authority, without further
stockholder approval, to issue up to 2,000,000 shares of preferred stock in one
or more series and to determine the price, rights, preferences and privileges of
those shares. We currently have six series of preferred stock designated as more
fully described in the table contained in the previous risk factor. See "Shares
Eligible for Future Sale; Registration Rights." The rights of our common
stockholders will be subject to, and may be adversely affected by, the rights of
the holders of any preferred stock that is currently issued or may be issued in
the future. The issuance of additional shares of preferred stock, while
potentially providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding voting
stock. We anticipate issuing additional shares of preferred stock through one or
more private placements during 1999, including the issuance of preferred stock
in connection with our acquisition strategy. In addition, certain provisions of
our Certificate of Incorporation, including provisions that provide for the
Board of Directors to be divided into three classes to serve for staggered
three-year terms, may have the effect of delaying or preventing a change of
control, which could adversely affect the market price of our common stock.
LIMITED MARKET FOR SECURITIES; LACK OF LIQUIDITY
The current public market for our common stock is limited and highly volatile.
The shares of common stock offered hereby are traded on the Over-the-Counter
Bulletin Board ("OTCBB"). Trading activity in our common stock should be
considered sporadic, illiquid and highly volatile, and an active trading market
for our common stock may not exist in the future. Even if a market for the
common stock offered by this prospectus continues to exist, investors may not be
able to resell their common stock at or above the purchase price for which such
investors purchased such shares. In addition, the SEC has adopted regulations
that generally define a penny stock to be any equity security that has a market
price (as defined in such regulations) of less than $5.00 per share, subject to
certain exceptions. If the common stock meets the definition of a penny stock,
it will be subjected to these regulations which impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally institutions with
assets in excess of $5,000,000 and individuals with a net worth in excess of
$1,000,000 or annual income exceeding $200,000 (individually) or $300,000
(jointly with their spouse)). These regulations are currently not applicable to
trading in our common stock, however, if they become applicable, these
regulations could affect a holder's ability to sell any of the shares offered by
this prospectus.
DIVIDENDS
We do not intend to pay cash dividends on our common stock in the near future
and are required to pay dividends on our outstanding series of preferred stock.
Our proposed operations may not result in sufficient revenues to enable us to
operate at a profitable level. We have not paid any dividends on our common
stock to date, and have no plans to pay any dividends on our common stock for
the foreseeable future. Our Series A and C Preferred Stock accrue a dividend of
4% per year, payable in shares of our common stock based on a share price equal
to the average closing price of our common stock for the 30 days prior to the
particular dividend date. Our Series B Preferred Stock accrues a dividend of 5%
per year, payable in cash or shares of our common stock based on a share price
equal to 78% of the 5 day average closing bid price of our common stock upon the
date of each conversion. Our Series D Preferred Stock accrues a dividend of 10%
per year, payable in shares of our common stock based on a share price equal to
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<PAGE>
the average closing price of our common stock for the quarter ended on the
particular dividend date. Our Series 1 and 2 Preferred Stock, when issued, will
accrue an 8% dividend payable in cash or in shares of common stock based upon
the greater of $1.00 or the average closing price of our common stock for the 30
days prior to the particular dividend date. Dividends on all of our shares of
preferred stock are cumulative. In addition, we anticipate that any preferred
stock issued in the future will also include dividend rights, including any
issued in connection with our strategy of acquiring healthcare transcription
companies.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this prospectus are based upon our management's beliefs
and expectations and may not be correct.
This Prospectus contains certain statements that are "Forward Looking
Statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended.
Those statements include, among other things, the discussions of our business
strategy and expectations concerning market position, future operations,
margins, profitability, liquidity and capital resources. Forward Looking
Statements are included in this section under "Limited History of Business
Operations; Anticipation of Continued Losses," "Sufficiency of Funds," "Risks
Associated with a Developing Market and the Acceptance of our Products and
Services," "Dependence on Principal Products and Services," "Risks Associated
with our Acquisition Strategy," "Management of Growth; Need to Establish
Infrastructure; Additional Personnel," "Rapid Technological Change," "Risks
Associated with Our Dependence on Third-Party Proprietary Rights,"
"Competition," "Dependence on Key Personnel," "Ability to Attract Qualified
Transcriptionists," "Uncertainty Regarding Government Healthcare Reform and
Regulation," "Intellectual Property and Property Rights," "Potential
Fluctuations in Quarterly Results," "Concentration of Stock Ownership," "Shares
Eligible for Future Sale; Registration Rights," "Certain Anti-Takeover
Provisions Affecting Stockholders," "Limited Market for Securities; Lack of
Liquidity" and "Dividends." Although we believe that the expectations reflected
in Forward Looking Statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. Generally, these statements relate
to business plans or strategies, projected or anticipated benefits or other
consequences of such plans or strategies, or projections involving anticipated
revenues, expenses, earnings, levels of capital expenditures, liquidity or
indebtedness or other aspects of operating results or financial position. All
phases of our operations are subject to a number of uncertainties, risks and
other influences, many of which are outside our control and any one of which, or
any combination of which, could materially affect the results of our operations
and whether the Forward Looking Statements made by us ultimately prove to be
accurate. Important factors that could cause actual results to differ materially
from our expectations are disclosed in this "Risk Factors" section of this
prospectus.
ABOUT US
We develop, market and support original, Internet-based applications for
automated speech recognition systems designed to meet the medical transcription
needs of the healthcare industry by enabling healthcare professionals to
automatically transcribe patient notes and records through the use of hand-held
digital recorders and specially-equipped PCs. In addition, we provide
traditional and ASR transcription services to healthcare professionals. Our
principal executive offices are located at 4615 Post Oak Place, Suite 111,
Houston, Texas 77027, and our telephone number is (713) 621-5678.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the common stock
offered by the selling stockholders. However, we may receive up to
approximately $3,705,000 if all of the options and warrants held by the selling
stockholders are exercised for cash.
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<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information concerning each of the
selling stockholder. Assuming that the selling stockholders offer all of their
shares of common stock, the selling stockholders will not have any beneficial
ownership. The shares are being registered to permit the selling stockholders
and certain of their respective pledgees, donees, transferors or other
successors in interest to offer the shares for resale from time to time. See
"Plan of Distribution."
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF PERCENTAGE
OWNED AND TO BE NUMBER OF SHARES OF SHARES
OWNED PRIOR TO SHARES BEING OWNED AFTER OWNED AFTER
SELLING STOCKHOLDERS OFFERING (1)(2) OFFERED (2) OFFERING (3) OFFERING
- -------------------- --------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Michael Jahr 304,381 304,381 0 *
Dr. Rainer Bischoff 76,095 76,095 0 *
Ursula Heinzel 76,095 76,095 0 *
Thomas Heinzel 76,095 76,095 0 *
Ulfert Zollner 76,095 76,095 0 *
Dr. Heinz Schmitz 121,753 121,753 0 *
Ralf Nickeleit-Bonnier 63,413 63,413 0 *
Cornelius Dornier (4)(5) 225,000 232,714 0 *
Daniel S. Dornier (4)(5) 300,000 310,286 0 *
Gabriele Dornier (4)(5) 225,000 232,714 0 *
Matthia Dornier (4)(5) 150,000 155,143 0 *
Silvius Dornier (4)(5) 300,000 310,286 0 *
Hermann Ebel (4) 195,000 201,686 0 *
Stephen L. Pampush (4) 15,000 15,514 0 *
Peter Widenmann (4) 15,000 15,514 0 *
Equity Services, Ltd.
("ESL") (4)(6) 601,955 334,914 270,825 1.29%
Entrepreneurial Investors,
Ltd. ("EIL") (7) 1,755,761 121,234 1,662,900 7.65%
Robert J. Lopez (8)(9) 100,000 100,000 0 *
William T. Kennedy (8)(10) 334,107 125,417 208,690 *
G-51 Capital, L.L.C. (8) 150,000 150,000 0 *
Voice Technologies Management
Corp ("VTMC") (8)(11) 6,374,696 95,000 6,188,613 29.69%
Timothy J. Connolly (8)(11) 6,374,696 39,667 6,188,613 29.69%
Jan Carson Connolly (8)(11) 6,374,696 60,416 6,188,613 29.69%
Kal Drooby (8) 25,000 25,000 0 *
Stephen L. Tebo (8) 60,000 60,000 0 *
Matthew McEvoy (8)(10) 25,000 25,000 0 *
Edmore Investments (8)(12) 135,792 50,000 85,792 *
John P. McEvoy (8)(10) 25,000 25,000 0 *
Charles W. Skamser (8)(13) 20,000 20,000 0 *
Paul Thomason (8) 80,000 80,000 0 *
Robin P. Ritchie (8) (14) 25,000 25,000 0 *
Milton A. Spiegelhauer (8) (15) 25,000 25,000 0 *
Dr. David E. Eisenbud (8) 30,000 30,000 0 *
Michael Wilson (16) 383,333 250,000 133,333 *
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF PERCENTAGE
OWNED AND TO BE NUMBER OF SHARES OF SHARES
OWNED PRIOR TO SHARES BEING OWNED AFTER OWNED AFTER
SELLING STOCKHOLDERS OFFERING (1)(2) OFFERED (2) OFFERING (3) OFFERING
- -------------------- --------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Frank Martin (17) 32,000 32,000 0 *
Milbery Consulting Group, L.L.C.
("Milbery") (18) 150,000 100,000 50,000 *
Hampton Porter Investment Bankers,
LLC ("Hampton") (19) 363,500 363,500 0 *
James Brodie (20) 25,000 50,000 0 *
Sands Brothers & Co., Ltd.
("Sands") (20) 125,000 250,000 0 *
Howard Sterling (20) 100,000 200,000 0 *
Dr. Stanley H. Winokur (21) 17,000 17,000 0 *
Dr. James Libby (21) 17,000 17,000 0 *
Dr. Dan B. Jones (21) 17,000 17,000 0 *
Dr. James H. Cochran (21) 17,000 17,000 0 *
Hal Scherz (21) 8,500 8,500 0 *
Davis Dermer (21) 8,500 8,500 0 *
Dominion Capital Fund, Ltd.
("Dominion") (22) 827,795 136,462 884,538 4.09%
Sovereign Partners, LP ("Sovereign")
(22) 827,795 425,501 1,068,000 4.90%
</TABLE>
* Less than 1%.
Unless otherwise noted, none of the selling stockholders has, or within the past
three years had, any position, office, or other material relationship with us or
any of our predecessors and affiliates.
(1) The selling stockholders have sole voting and sole investment power with
respect to all shares owned.
(2) Ownership is determined in accordance with Rule 13d-3 under the Exchange
Act. The actual number of shares beneficially owned and offered for sale
hereunder is subject to adjustment and could be materially less or more than
the estimated account indicated depending upon factors which we cannot
predict at this time.
(3) Assumes the sale of all shares offered hereby to persons who are not
affiliates of the selling stockholders.
(4) Represents the number of shares of common stock issuable upon conversion of
their outstanding shares of Series C Preferred Stock as calculated using the
current conversion rate for the Series C Preferred Stock of 10 shares of
common stock for each share of Series C Preferred Stock, subject to
adjustment. In addition, the Column entitled "Number of Shares Being
Offered" includes the estimated maximum number of shares of common stock
which would be issuable as dividends on the Series C Preferred Stock over
the period the Series C Preferred Stock remains outstanding. The 4%
dividends on the Series C Preferred Stock are payable on the Liquidation
Preference (which shall be the stated value of the Series C Preferred Stock
of $10, plus any accrued but unpaid dividends) on a quarterly basis on the
first day of each of January, April, July and October in cash or in common
stock at our option. When paying dividends in common stock, the number of
shares of common stock shall be based upon the thirty day average closing
price prior to the dividend date of the common stock. The estimate used
herein assumed a $1.75 average share price for the common stock over the
estimated dividend period. For so long as the current holders of the Series
C Preferred Stock hold at least 77,263 shares of the Series C Preferred
Stock, we have agreed to use our best efforts to have one member of the
Board of Directors be chosen by ESL. The holders of the Series C Preferred
Stock currently hold 153,538 shares of the Series C Preferred Stock. See
the "Risk Factor" entitled "Concentration of Stock Ownership."
(5) Mr. Daniel S. Dornier has served as one of our directors since July 1998.
Cornelius, Gabriele, Matthia and Silvius Dornier are independent adult
relatives of Mr. Daniel S. Dornier, and he expressly disclaims beneficial
ownership over any of the shares held by these individuals. In July 1998,
ESL nominated Mr. Dornier to our Board of
14
<PAGE>
Directors on behalf of certain of our preferred stockholders. See the "Risk
Factor" entitled "Concentration of Stock Ownership."
(6) Number of shares being offered includes (i) 110,380 shares issuable upon
the conversion of 11,038 shares of Series C Preferred Stock, (ii) an option
to purchase 220,750 shares of common stock at an exercise price of $1.50
per share issued in connection with the Series C Preferred Stock private
placement, and (iii) 3,784 shares issuable at our option as dividends on
the Series C Preferred Stock. The additional shares listed as beneficially
held, which will be owned after completion of this Offering, include the
following: (i) 2,075 shares of common stock issued in connection with the
Series A Preferred Stock private placement, (ii) a three-year option to
purchase 168,750 shares of common stock at an exercise price of $1.78 per
share, and (iii) a two-year warrant to purchase 100,000 shares of common
stock at an exercise price equal to 75% of the average closing sale price
of the common stock during the five trading days immediately prior to the
date of exercise (approximately $1.00 per share as of April 21, 1999). All
of these additional shares were issued in conjunction with the Series A
Preferred Stock private placement which took place in July and August 1997,
and have been registered for resale.
(7) The number of shares being offered represents the estimated maximum number
of shares of common stock which would be issuable as dividends on the
Series A Preferred Stock over the period the Series A Preferred Stock
remains outstanding using an assumed $1.00 average share price for the
common stock over the period including the shares of common stock issued as
dividends through the date of this prospectus. The 4% dividends on the
Series A Preferred Stock are payable at a rate $.32 per annum per share on
a quarterly basis on the first day of each of January, April, July and
October in common stock. When paying dividends in common stock, the number
of shares of common stock shall be based upon the 30 day average closing
price prior to the dividend date of the common stock. Through April 1,
1999, EIL had earned dividends totaling 102,319 shares of common stock and
has been issued 70,217 of these shares. During the period between April 1,
1999 and June 21, 1999 (approximately 60 days after the date of this
Prospectus), EIL will accrue approximately 9,609 additional shares of
common stock as dividends, calculated by using an estimated stock average
stock price of $1.75 per share over that period. The additional shares
listed as beneficially held, which will be owned after completion of this
offering, include 658,500 shares of common stock and 1,004,400 shares of
common stock issuable upon the conversion of the 186,000 currently
outstanding Series A Preferred Stock based upon the current conversion rate
of 5.4 shares of common stock for each share of Series A Preferred Stock
(subject to adjustment). For so long as EIL owns at least 156,250 shares of
the Series A Preferred Stock, we have agreed to use our best efforts to
have one member of the Board of Directors be chosen by ESL. See the "Risk
Factor" entitled "Concentration of Stock Ownership."
(8) Represents shares issuable upon exercises of three-year warrants issued in
connection with the certain bridgeloan financing agreements entered into
with these selling stockholders over two periods during May through July
1997, and December 1998. The warrants issued during 1997 and 1998 have
exercise prices of $1.60 and $1.00 per share, respectively, and are all
fully vested.
(9) Mr. Lopez served as our Vice President of Sales and Marketing from June to
December 1997.
(10) Mr. Kennedy has served as our Chief Financial Officer and Secretary since
December 1998. Messrs. Matthew and John McEvoy are Mr. Kennedy's adult
children, and he expressly disclaims beneficial ownership over the shares
held by these individuals. The additional shares listed as beneficially
held, which will be owned after completion of this offering, include 26,190
shares of common stock currently held by Mr. Kennedy and 182,500 shares of
common stock issuable upon exercise of currently exercisable employee stock
options.
(11) Mr. Timothy J. Connolly is the President and sole owner of VTMC, which
serves as the general partner of Voice Technologies Partners, Ltd. ("VTP").
Mr. Connolly has served as our Chief Executive Officer, Chairman of the
Board and as a Director since August 1996, and Jan Carson Connolly, his
wife, has served as one our directors since that same date. The additional
shares listed as beneficially held, which will be owned after completion of
this offering, include 5,920,000 shares of common stock owned by VTP,
32,143 shares of common stock owned by Mr. Connolly, 126,970 shares of
common stock owned by Mrs. Connolly, and 500 and 100,000 shares of common
stock issuable upon exercise of currently exercisable employee stock
options owned by Mr. and Mrs. Connolly, respectively. Pursuant to a voting
agreement we entered into with VTP and L&H, those parties have agreed to
vote all of their shares for three members of the Board of Directors to be
nominated by VTP. The voting agreement will expire upon the earliest to
occur of (i) December 31, 2003, (ii) the redemption or conversion of all of
15
<PAGE>
the shares of Series D Preferred Stock, (iii) the sale of Applied Voice
Recognition, Inc., or (iv) the termination of our employment of Timothy J.
Connolly. See the "Risk Factor" entitled "Concentration of Stock
Ownership."
(12) Mr. Edward Powell is the President and sole owner of Edmore Investments,
and has served as one of our directors since March 1997. The additional
shares listed as beneficially held, which will be owned after completion of
this offering, include 19,125 shares of common stock owned by Mr. Powell
and 66,667 shares of common stock issuable upon exercise of currently
exercisable employee stock options owned by Mr. Powell.
(13) Mr. Skamser served as our President from April 1997 to February 1998.
(14) Mr. Ritchie has served as our Chief Operating Officer since August 1998.
(15) Mr. Spiegelhauer has served as our Vice President -- Sales and Marketing
since August 1998.
(16) Represents common stock issuable upon exercise of stock options issued in
exchange for services provided pursuant to a consulting agreement dated
November 1, 1997 and amended on April 23, 1998. The agreement includes a
fee of $12,500 per month. Under this agreement, Mr. Wilson provides
consulting services directly relating to corporate operations and the
implementation of the medical dictation/transcription piece of our business
plan. This consulting agreement expired on March 31, 1999. In addition to
the cash compensation, Mr. Wilson has been granted 250,000 options. All of
the 250,000 shares to be issued upon exercise of the consulting options and
offered hereby have vested or will vest within 60 days of the date of this
prospectus. These 10-year options have an exercise price of $1.875 per
share. In addition to the 250,000 shares of common stock issuable upon
exercise of options and offered hereby, the shares beneficially held by Mr.
Wilson include 133,333 shares of common stock issuable upon the exercise of
stock options granted pursuant to our 1997 Incentive Plan. Mr. Wilson has
served as one of our directors since 1997.
(17) Represent common stock issuable upon exercise of stock options issued in
exchange for services provided pursuant to a consulting agreement dated
November 15, 1997 and amended on April 23, 1998. The agreement includes a
fee of $10,000 per month during which Mr. Martin provides a minimum of 15
days of consulting services. Under this agreement, Mr. Martin provides
consulting services to us directly relating to marketing and promotion of
our products and services. This consulting agreement expired on November
14, 1998. In addition to the cash compensation, Mr. Martin has been
granted 32,000 options. The 10-year options have an exercise price of
$1.875 per share and are fully vested.
(18) Represent common stock issuable upon exercise of stock options issued in
exchange for services provided pursuant to a consulting agreement dated
November 1, 1997, and amended on April 23, 1998. The agreement includes
a fee of $1,000 per day for each day consulting services are provided.
Under this agreement, Milbery provides consulting services to us directly
relating to the technical viability of our products. This consulting
agreement expired on March 31, 1999. In addition to the cash compensation,
Milbery was granted a ten-year option under our incentive stock plan to
purchase 50,000 shares of common stock, which is fully vested. In
addition, he has been granted a ten-year option to purchase 100,000 shares
of common stock at an exercise price of $1.875 which is fully vested.
(19) Represents 13,500 shares of common stock and options to purchase 350,000
shares of common stock issued to Hampton in exchange for their services as
investment banking advisors. The options will expire on June 22, 1999, and
have the following exercise prices: 150,000 at $1.00, 100,000 at $2.00 and
100,000 at $3.00. Hampton was formerly known as Janda & Garrington, LLC.
(20) The shares beneficially owned by these selling stockholders represent
shares issuable upon exercise of warrants issued to them in connection with
a letter agreement (the "Letter Agreement") entered into between us and
Sands dated July 22, 1998. Pursuant to the Letter Agreement, Sands has
agreed to perform financial advisory services for us through July 22, 1999,
in exchange for (i) a $50,000 non-refundable and non-accountable fee of
$50,000, and (ii) 500,000 three- year warrants to purchase common stock at
an exercise price of $1.50 issued to Sands or its designee(s). The
warrants were issued as follows: Mr. Brodie -- 50,000; Sands -- 250,000;
and Mr. Sterling 200,000. The warrants vest in four equal quarterly
installments over the term of the Letter Agreement. Of the warrants issued
to Mr. Brodie, Sands and Mr. Sterling, 25,000, 125,000 and 100,000 are
currently vested,
16
<PAGE>
respectively. An additional 12,500, 62,500 and 50,000 of the remaining
warrants for each, respectively, will vest on each of April 21 and July 21,
1999.
(21) Represents shares of common stock issuable upon exercise of options granted
to these selling stockholders, each of whom was a member of our Medical
Advisory Board. Each of these options has an exercise price of $2.062.
(22) Represents shares of common stock issuable upon conversion of 2,285 shares
of Series B Preferred Stock, par value $.10 per share (the "Series B
Preferred Stock"), in the following amounts: Dominion -- 750; and
Sovereign -- 1,535. The Series B Preferred Stock has a floating conversion
price calculated by dividing the $1,000 stated value of the shares being
converted by an amount equal to 78% of the 5 day average closing bid price
of the common stock (the "Average"); provided, however, that (i) if the
Average is between $1.60 and $1.25, the conversion price shall be $1.25;
(ii) if the Average is between $1.25 and $.75, the conversion price shall
be equal to the Average, and (iii) such conversion rate shall not be below
$.75. As of April 21, 1999, the 2,285 outstanding shares of Series B
Preferred Stock would have been convertible into an aggregate of
approximately 1,828,000 shares of common stock. For the purpose of
estimating the number of shares of common stock to be included in this
registration statement, we calculated the number of shares of common stock
issuable in connection with the conversion of our Series C Preferred Stock
using an estimated minimum average conversion price of $1.25. Since we
previously registered 2,500,000 shares of common stock for issuance upon
conversion of the Series B Preferred Stock, and only 1,169,983 shares have
been issued to date, an additional 484,538 and 845,479 shares of common
stock may be resold pursuant to the previously filed registration statement
by Dominion and Sovereign, respectively. In addition to the shares
issuable upon conversion of the Series B Preferred Stock, the Column
entitled "Number of Shares Being Offered" includes the estimated maximum
number of shares of common stock which would be issuable as dividends on
the Series B Preferred Stock over the period the Series B Preferred Stock
remains outstanding. This estimate includes 21,000 and 42,980 shares of
common stock payable as dividends to Dominion and Sovereign, respectively.
The 5% dividends on the Series B Preferred Stock are payable on the
purchase price of the Series B Preferred Stock of $1,000 upon each
conversion in cash or in common stock at our option. When paying dividends
in common stock, the number of shares of common stock shall be calculated
by dividing the amount of the dividend payable by the Average. The
estimate used herein assumed an average dividend conversion price of $1.25
over the estimated dividend period. Pursuant to a contractual limitation
contained in the Series B Preferred Stock Certificate of Designation,
neither Sovereign or Dominion are able to convert into an amount of shares
of common stock which would cause them to be deemed the beneficial owner of
more than 4.90% of the then outstanding common stock. Therefore, the
number of shares of common stock listed as owned prior to the offering
would equal 4.90% of the currently outstanding shares of common stock if
issued, and the number listed as beneficially held after the offering would
equal 4.9% of the then outstanding shares of common stock if issued unless,
in the case of Dominion, they would own fewer than that number of shares.
17
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PLAN OF DISTRIBUTION
Pursuant to this prospectus, the selling stockholders may sell shares of
common stock from time to time in transactions on such exchanges or markets as
the common stock may be listed for trading from time to time, in privately-
negotiated transactions, in an underwritten offering, or by a combination of
such methods of sale, at fixed prices which may be changed, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. As used herein, "selling stockholders" includes
pledgees, donees, transferees and other successors in interest to the selling
stockholders selling shares received from a selling stockholder after the date
of this prospectus. The selling stockholders may effect such transactions by
selling the shares of common stock to or through broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the selling stockholders or the purchasers of the shares for
whom such broker-dealers may act as agent or to whom they sell as principal, or
both (which compensation to a particular broker-dealer might be in excess of
customary commissions).
Other methods by which the shares of common stock may be sold include,
without limitation: (i) transactions which involve cross or block trades or any
other transaction permitted by the OTCBB or other trading markets, (ii) "at the
market" to or through market makers or into an existing market for the common
stock, (iii) in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected through agents,
(iv) through transactions in options or swaps or other derivatives (whether
exchange-listed or otherwise), (v) through short sales, or (vi) any combination
of any such methods of sale. The selling stockholders may also enter into
option or other transactions with broker-dealers which require the delivery to
such broker dealers of the common stock offered hereby, which common stock such
broker-dealers may resell pursuant to this prospectus. The selling stockholders
may also make sales pursuant to Rule 144 under the Securities Act of 1933, as
amended, if such exemption from registration is otherwise available.
The selling stockholders and any broker-dealers who act in connection with
the sale of shares of common stock hereunder may be deemed to be "underwriters"
as that term is defined in the Securities Act, and any commissions received by
them and profit on any resale of the Shares as principal might be deemed to be
underwriting discounts and commissions under the Securities Act.
Pursuant to certain Registration Rights Agreements with certain of the
selling stockholders, we have agreed to indemnify certain of the selling
stockholders and each underwriter, if any, against certain liabilities,
including certain liabilities under the Securities Act as amended, or will
contribute to payments such selling stockholders or underwriters may be required
to make in respect of certain losses, claims, damages or liabilities.
LEGAL MATTERS
The legality of the securities offered hereby will be passed on for us by
Porter & Hedges, L.L.P., Houston, Texas.
EXPERTS
The financial statements of Applied Voice Recognition, Inc. incorporated by
reference in Applied Voice Recognition, Inc.'s Annual Report (Form 10-KSB) for
the year ended December 31, 1997, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such financial statements are incorporated
herein by reference in reliance upon such report given on the authority of such
firm as experts in accounting and auditing.
The financial statements of Applied Voice Recognition, Inc. incorporated by
reference in Applied Voice Recognition, Inc.'s Annual Report (Form 10-KSB) for
the year ended December 31, 1996, have been audited by Malone & Bailey, PLLC,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such financial statements are incorporated
herein by reference in reliance upon such report given on the authority of such
firm as experts in accounting and auditing.
18
<PAGE>
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WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR ANY OTHER PERSON TO GIVE ANY
INFORMATION OR TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST
NOT RELY ON ANY UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT OFFER TO SELL
OR BUY ANY SHARES IN ANY JURISDICTION WHERE IT IS UNLAWFUL. THE INFORMATION IN
THIS PROSPECTUS IS CURRENT AS OF THE DATE BELOW.
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TABLE OF CONTENTS
Page
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Where You Can Find More Information 2
Risk Factors 3
About Us 12
Use of Proceeds 12
Selling Stockholders 13
Plan of Distribution 18
Legal Matters 18
Experts 18
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APPLIED VOICE RECOGNITION, INC.
5,551,895 SHARES
OF
COMMON STOCK
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PROSPECTUS
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April 21, 1999
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