<PAGE>
Filed Pursuant to Rule No.: 424(b)(3)
Registration No: 333-41710
--------------------------------------------------------------------------------
P R O S P E C T U S S U P P L E M E N T
(To Prospectus dated August 11, 2000)
--------------------------------------------------------------------------------
21,210,176 Shares
APPLIED VOICE RECOGNITION, INC.
Common Stock
This Prospectus Supplement updates certain information set forth in our
Prospectus dated August 11, 2000. The supplemental information includes, among
other things, financial information contained in our quarterly report on Form
10-QSB for the quarter ended June 30, 2000, along with an updated Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The date of this Prospectus Supplement is August 30, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Consolidated Balance Sheets..................................................................... S-3
Consolidated Statements of Operations........................................................... S-4
Consolidated Statements of Cash Flow............................................................ S-5
Notes to the Consolidated Financial Statements.................................................. S-6
Management's Discussion and Analysis of Financial Condition and Results of Operations........... S-8
Recent Developments............................................................................. S-11
</TABLE>
S-2
<PAGE>
APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
DBA E-DOCS.NET
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
ASSETS JUNE 30, DECEMBER 31,
2000 1999
------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.......................................................... $ 399,340 $ 53,529
Accounts receivable, net of allowance of $74,900 and $74,900, respectively......... 478,049 258,668
Other receivable................................................................... -- 747,137
Deposits and prepaid expenses...................................................... 3,550 6,074
Deferred expense................................................................... 101,466 --
------------ ------------
TOTAL CURRENT ASSETS............................................................... 982,405 1,065,408
PROPERTY AND EQUIPMENT, NET........................................................ 648,019 858,492
OTHER ASSETS
Prepaid software rights............................................................ 970,900 970,900
EPN software development costs..................................................... 207,320 --
Other intangibles, net............................................................. 422,835 447,310
Goodwill, net...................................................................... 488,881 504,899
------------ ------------
TOTAL OTHER ASSETS................................................................. 2,089,936 1,923,109
------------ ------------
TOTAL ASSETS....................................................................... $ 3,720,360 $ 3,847,009
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade payables..................................................................... 343,770 365,639
Accrued expenses................................................................... 915,649 1,167,416
Stock dividend payable............................................................. -- 246,774
Current portion of preferred stock payables........................................ 473,543 474,000
Note payable to related party...................................................... 250,000 250,000
Current portion of capital lease obligation........................................ 71,915 64,354
Current portion of long term debt.................................................. 58,333 65,977
------------ ------------
TOTAL CURRENT LIABILITIES.......................................................... 2,113,210 2,634,160
------------ ------------
Preferred stock payables, net of current portion................................... 327,894 683,460
Capital lease liability, net of current portion.................................... 241,699 279,670
Long-term debt, net of current portion............................................. 58,334 141,091
------------ ------------
TOTAL LIABILITIES.................................................................. 2,741,137 3,738,381
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 2,000,000 shares authorized
Series B, 0 and 1,680 shares issued and outstanding, respectively............... -- 168
Series 2, 2,977 and 500 shares issued and outstanding, respectively............. 297 50
Common stock, $.001 par, 50,000,000 shares authorized, 39,616,793 and 35,269,794
shares issued and outstanding, respectively...................................... 39,617 35,269
Paid in capital.................................................................... 20,160,716 18,199,066
Accumulated deficit................................................................ (19,221,407) (18,125,925)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY......................................................... 979,223 108,628
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................................... $ 3,720,360 $ 3,847,009
============ ============
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
S-3
<PAGE>
APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
DBA E-DOCS.NET
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Medical Transcription......................... $ 614,016 $ 1,131,741 $ 1,221,390 $ 1,880,910
Consulting, hardware, software and related.... -- -- -- 469,949
--------- ----------- ----------- -----------
TOTAL REVENUE................................. 614,016 1,131,741 1,221,390 2,350,859
Cost of Sales:
Medical Transcription......................... 466,225 795,170 938,510 1,295,915
Consulting, hardware, software and related.... -- -- -- 52,567
--------- ----------- ----------- -----------
GROSS MARGIN.................................. 147,791 336,571 282,880 1,002,377
Operating expenses:
Marketing and sales........................... 14,571 179,750 19,436 349,042
General and administrative.................... 720,548 2,414,192 1,228,954 3,939,519
Research and development...................... -- 232,624 13,172 495,865
--------- ----------- ----------- -----------
OPERATING LOSS................................ (587,328) (2,489,995) (978,682) (3,782,049)
Other income (expense):
Other income (expense)........................ 74 (66,002) (1,256) (58,399)
Interest income............................... 7,823 8,873 15,448 20,834
Interest expense.............................. (56,368) (243,023) (130,992) (289,856)
--------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE).................. (48,471) (300,152) (116,800) (327,421)
--------- ----------- ----------- -----------
Net loss...................................... $(635,799) $(2,790,147) $(1,095,482) $(4,109,470)
========= =========== =========== ===========
Statement of comprehensive loss:
Comprehensive loss............................ $(635,799) $(2,790,147) $(1,095,482) $(4,109,470)
========= =========== =========== ===========
Basic and diluted loss per share.............. $ (0.02) $ (0.18) $ (.03) $ (0.27)
========= =========== =========== ===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
S-4
<PAGE>
APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
DBA E-DOCS.NET
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2000 1999
-------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................. $(1,095,482) $(4,109,470)
Adjustments to reconcile net loss to cash provided by (used in) operating
activities:
Accretion of interest on preferred stock payable and warrant
amortization............................................................. 67,520 207,077
Depreciation and amortization............................................. 164,819 285,661
Amortization of deferred compensation..................................... 125,426 --
Stock issued for services and compensation................................ -- 38,445
Changes in operating assets and liabilities:
Accounts receivable....................................................... (219,381) (760,142)
Other receivable.......................................................... 747,137 --
Deposits and prepaid expenses............................................. 2,524 192,763
Accounts payable and accruals............................................. 79,336 332,371
----------- -----------
Net cash used in operating activities..................................... (128,101) (3,813,295)
CASH FLOW FROM INVESTING ACTIVITIES:
Cash paid for acquisitions................................................ -- (736,857)
Purchase of equipment..................................................... (40,261) (321,533)
Capitalized software development costs.................................... (207,320) --
----------- -----------
Net cash used in investing activities..................................... (247,581) (1,058,390)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock................................. -- 2,700,000
Proceeds from issuance of debt and warrants............................... -- 1,742,529
Proceeds from the exercise of common stock options and warrants........... 842,304 10,000
Debt and capital lease repayment.......................................... (120,811) (600,773)
----------- -----------
Net cash provided by financing activities................................. 721,493 3,851,756
NET INCREASE (DECREASE) IN CASH........................................... 345,811 (1,019,929)
CASH AND CASH EQUIVALENTS:
Beginning of period....................................................... 53,529 1,377,913
----------- -----------
End of period............................................................. $ 399,340 $ 357,984
=========== ===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
S-5
<PAGE>
APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
DBA E-DOCS.NET
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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,
1999, as reported in the Form 10-KSB, have been omitted.
The Company has incurred significant losses and cash deficits since inception.
The Company has been dependent upon outside financing to develop its software
products and to provide working capital. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
Beginning in the fourth quarter of 1999, the Company suspended its acquisitions
program and focused on restructuring the core operations of the transcription
companies acquired. As of December 31, 1999, the Company had reduced its
corporate head count from 35 to 7 and had sold its operations in Manila, New
York, New Jersey and a portion of its Houston operations. These actions reduced
the monthly losses by approximately $300,000, while reducing revenue by $250,000
per month.
Since the Company's announcement of its restructuring on January 7, 2000,
liquidity has significantly improved. Gross revenues averaging $200,000 per
month have been achieved, and warrants and options have been exercised,
resulting in net proceeds to the Company of approximately $842,000 as of June
30, 2000. Management believes current resources and additional financing
commitments are adequate to fund the development costs of the e-Docs Physician's
Network (EPN) as well as the Company's working capital needs through December
31, 2000.
It will be necessary for the Company to raise additional capital for the rollout
of EPN intended to occur in the fourth quarter of 2000. While management is
confident capital is available, there are no assurances that the necessary
capital can be obtained.
Certain reclassifications have been made to prior year balances in order to be
consistent with current year presentation.
2. E-DOCS PHYSICIAN NETWORK (EPN)
The e-DOCS Physician Network (EPN) is a secure, browser based document handling
system for physician offices, currently under development by e-DOCS.net. It will
encrypt, store and retrieve patient records, both medically transcribed and the
Physicians' own hand written notes. The EPN will be provided on an Application
Service Provider basis for a quarterly fee paid by the Physician. A selection
of other services requested by Physicians and their staff will also be available
on the EPN.
The Company has a contract with Thought Interactive of Austin, Texas to develop
the EPN. The Coding has been completed, with Beta testing scheduled for
September and general release in October. The Company is negotiating contracts
with national service providers to the medical community. Agreements completed
include: VERISIGN to provide internet trust services for secure e-commerce;
PROFESSIONAL MEDICAL Insurance Services (PMIS), which would allow EPN members to
receive discounts of up to 25% on their malpractice insurance; MEDCAREERS.COM,
which features the largest online database of healthcare jobs on the internet;
FIRST BANK OF BEVERLY HILLS to provide an array of services to secure and
protect EPN transactions; and MAPQUEST and ACCUWEATHER.
S-6
<PAGE>
APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
DBA E-DOCS.NET
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. STOCKHOLDERS' EQUITY
Effective as of March 11, 2000 the then remaining 920 shares of Series B
Preferred Stock and related accrued dividends of $96,759 were automatically
converted into 560,766 shares of common stock.
On February 23, 2000, the Company issued 1,911 shares of Series 2 Preferred
Stock as planned deferred purchase price payments for transcription company
acquisitions. These shares were subsequently converted into 115,755 shares of
common stock.
In May 2000, the Company issued 163,583 shares of common stock as required by
the Forbearance Agreements.
In May 2000, the Company issued and held in escrow 2,333 shares of Series 2
Preferred Stock. The shares were part of the planned deferred payments for the
acquisition of A Word Above, Inc.
In May 2000, the Company issued 572,132 shares of common stock to Lonestar
Medical Transcription USA, Inc. in a cashless exercise of a warrant to purchase
800,000 shares of the Company's common stock.
In May 2000, the Company issued 58,000 shares of common stock as contingent
purchase price for the acquisition of PRN Transcription, Inc.
4. COMMITMENTS AND CONTINGENCIES
A Registration Statement of Form SB-2 became effective on August 12, 2000,
registering for resale 21,210,176 shares of the Company's common stock. This
included the shares required to be registered pursuant to various agreements,
including an extension agreement with Cornell Transcription, Inc.
5. 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.
S-7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Our current revenue is derived from the out-sourced medical transcription of
patient records for physicians, clinics and hospitals through our wholly owned
subsidiary, e-DOCS Health Care Information Systems ("EDOCS HCIS"). Our current
customer base includes approximately 1,200 physicians in six states.
After ten months of use by physicians, we recognized that the voice
recognition component of our previous product, VoiceCOMMANDER 99, was not
generating the cost and labor savings previously believed possible. However, the
market clearly indicated a preference for a browser-oriented tool for Internet-
based transcription and medical records storage services. Using the experience
gained from our first Internet-based service, VoiceCOMMANDER 99, we have begun
development of our next generation browser-based service, which we call the e-
DOCS Physician Network.
While we continue to provide outsource medical transcription services, we are
developing the EPN, through our wholly-owned subsidiary, e-DOCS Physician
Network, Inc., as a medically centric, business-to-business application service
provider. The EPN will be designed to provide a secure, browser-based document
handling solution directed at the independent transcription company and the
nation's 475,000 clinical physicians, 70% of whom practice in groups of five or
less. We are using our experience in previously acquiring eight independent
transcription companies to provide a common technology platform to these
independent, capital-deficient businesses.
We are attempting to design the EPN to become the standard technology platform
for the independent transcription company and the individual practicing
physician. It is being developed in response to a need identified by our
existing customer base for a simple, secure document handling solution to the
daily needs of the medical services community.
The EPN is being designed to provide an efficient Internet-based delivery
system for medical transcription documents and an infrastructure for capturing,
organizing, storing and retrieving medical information. The services may include
medical transcription and storage, training, legacy system integration, and the
electronic storage and retrieval of the physician's hand-written notes of a
patient encounter. The EPN will be designed to simplify how physicians interact
with medical information, without attempting to change their current practice
methodology. It will also support opportunities for other physician interests
and alliances into content, services and products.
We intend to provide the services of the EPN on a monthly subscription basis.
Medical transcription companies will pay a basic monthly fee for maintenance of
their web page on the system. This will entitle the transcription company to
deliver its medically transcribed documents through the EPN browser, allowing
physicians to review their transcription online and digitally sign the document.
It will be available all of the time from any location upon authorization of the
user.
The basic browser based service will be provided to the physician at no cost.
The EPN will offer secure, long-term, Health Insurance Portability and
Accountability Act-compliant document storage for a monthly subscription fee.
Other services anticipated to be provided include a basic online medical record,
including the capture of the physician's handwritten patient notes without
scanning. Our study of 42 practices throughout Texas and Colorado showed that
only one in 14 physicians currently use an electronic medical record entry
system. The remainder rely on handwritten patient notes. Our research indicates
many physicians prefer a simple document solution that does not alter the way
the physician practices medicine. Additionally, cost reductions in medicine
demand an approach based on use, rather than large, up-front investments.
We believe that the important competitive advantage of the EPN will be its
presentation of information to the physician rather than requiring the physician
to search the net to find information and services. A medical search engine
button will always be available adjacent to the patient record, allowing the
physician instant access to this
S-8
<PAGE>
resource at all times. We further intend to enter into strategic relationships
with well-known providers of other services, such as banking, medical and office
supplies, and an upgrade path to a more sophisticated medical record, if desired
by the physician.
Furthermore, the EPN will provide enabling infrastructure and services for
secure, online medical transactions. It will provide an integrated service
solution designed specifically for healthcare that will include roaming user
credentials, complete audit trail, fraud detection and directed delegation of
authority to medical records. Thus, the EPN is being designed to be a secure
facility with "state of the art" protection.
RESULTS OF OPERATIONS
Due to the evolution of our business strategy, we believe that our historical
results of operations for the periods presented may not be directly comparable.
REVENUE
Our primary source of revenue originated from the sale of transcription
services. During the six months ended June 30, 1999, we also generated $469,949
in revenue from the sale of bundled products comprised of software and
hardware. There were no sales of bundled products in the three months ended June
30, 2000 or 1999. Net transcription service revenue decreased to $614,016 for
the three months ended June 30, 2000 and $1,221,390 for the six months ended
June 30, 2000, a decrease of $517,125 and $659,520, respectively, from the
comparable periods in 1999. The decrease is primarily attributable to the sale
of the net assets and contracts of certain of our medical transcription services
effective December 20, 1999.
COST OF SALES
Cost of sales for medical transcription consists primarily of labor costs.
Cost of sales for medical transcription decreased $328,945 and $357,405 for the
three and six months periods ending June 30, 2000, respectively, as compared to
the same period in 1999, as a result of reduced transcription revenue. Related
gross margin on medical transcription services for the three and six months
ending June 30, 2000 was $147,791 and $282,880, resulting in a gross margin on
transcription services of 24% and 23%, compared to 30% and 31% for the
comparative periods in 1999.The decreased gross margin primarily reflects
increases in labor costs resulting from a shortage in skilled medical
transcriptionists.
Cost of sales for bundled products for the six months ended June 30, 1999 was
$52,567 and related gross margin was $417,382.
MARKETING AND SALES EXPENSE
Marketing and sales expense consists primarily of marketing and sales salaries
and commissions and advertising/promotional expenditures. Marketing and sales
expense decreased to $14,571 and $19,436 for the three and six months ended June
30, 2000, down approximately $165,000 and $330,000 for the comparative periods
in 1999. The decrease is the direct result of our increased focus on the
transcription business. The transcription industry does not require significant
marketing efforts.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense is comprised primarily of compensation and
related expenditures for administrative and executive personnel, professional
fees associated with legal, consulting, and accounting services, and general
corporate overhead. General and administrative expense decreased for the three
and six months ended June 30, 2000 to $720,548 and $1,228,954, respectively, a
decrease of approximately $1,690,000 and $2,710,000, respectively, from the same
periods in 1999. The decrease was primarily attributable to decreases in
compensation, legal and accounting fees, travel and consulting in 2000 related
to the decreased level of operations, and reflecting in 1999 a high level of
acquisition related activities.
S-9
<PAGE>
Compensation for the three and six months ended June 30, 2000 decreased by
approximately $700,000 and $1,075,000 from the same periods in 1999. The
decrease reflected the headcount decreases for disposed operations, as well as a
reduction in corporate office staff from 35 to seven.
Legal and accounting fees for the three and six months ended June 30, 2000
decreased by approximately $400,000 and $550,000 and consulting fees for the
same periods decreased by approximately $60,000 and $325,000 all as compared to
the corresponding periods in 1999. The first half of 1999 reflected significant
professional fees as a result of ongoing acquisition activities. We have
curtailed our acquisition policy with an emphasis on internal growth of our
transcription business and development of the EPN.
Travel related costs decreased approximately $60,000 and $150,000 for the
three and six months ended June 30, 2000 to the corresponding periods in 1999.
Significant acquisition activities and a larger network of transcription
companies in 1999 were the primary reasons for the decrease.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense consists primarily of personnel costs
including salaries, benefits and consultant costs related to the research and
preliminary development efforts on new software products. Research and
development expense decreased to $0 and $13,172 for the three and six months
ended June 30, 2000, down approximately $232,000 and $482,000 from the
corresponding periods in 1999. The decrease in research and development costs is
attributable to our change in business focus from software development to a
transcription service provider. During 2000, we capitalized approximately
$207,000 in development costs related to the EPN. In 1999 no development costs
were capitalized. Development costs associated with the EPN will largely be
incurred in the second and third quarters of 2000.
Through the period ended June 30, 2000, we have incurred operating losses,
since our inception, of approximately $23.1 million. To date, our operations
have not been profitable and there is no assurance that they will become
profitable in the future. Significant acquisitions and dispositions in 1999
distort the comparability between periods and as to future operations.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, we had cash and cash equivalents of $399,340 and a working
capital deficiency of $1,130,085. This compares to cash and cash equivalents of
$53,529 and a working capital deficiency of $1,568,752 at December 31,1999. The
increase in working capital of approximately $438,000 is attributable to:
. cash received from exercise of stock options and warrants of approximately
$825,000; and
. approximately $370,000 from issuance of common stock reflected as a
liability in the December 31, 1999 financial statements;
. which were offset by current year operating losses.
We believe our cash position, less known commitments and contingencies, plus
outside financing received and additional financing commitments plus cash
generated from operations should be adequate to fund our on-going operations and
fund the development of the EPN through December 31, 2000. We will require
substantial additional capital during fiscal 2001 to implement and market the
EPN.
Our capital requirements will depend on many factors, including, cash flow
from operations, additional working capital requirements, additional product
development expenses and capital expenditures. To the extent that existing
resources are insufficient to fund our operations 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. We may be required to significantly curtail our operations,
sell our
S-10
<PAGE>
transcription operations, significantly alter our business 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.
RECENT DEVELOPMENTS
On May 3, 2000, we entered into a Forbearance Agreement with each of Hillel
Bronstein, Stuart Szpicek, and Yaniv Dagan relating to the issuance of 575
shares of our convertible Series 1 preferred stock to Cornell Transcription,
Inc. as part of the purchase price under the terms of the Asset Purchase
Agreement between the AVRI Health Care Information Services, Inc., a Delaware
corporation and our wholly-owned subsidiary, and Cornell Transcription, Inc., a
New York corporation of which Mr. Bronstein, Mr. Szpicek, and Mr. Dagan are
shareholders. The terms of the Forbearance Agreements require Mr. Bronstein, Mr.
Szpicek, and Mr. Dagan to not exercise any enforcement rights or remedies under,
or with respect to, the Asset Purchase Agreement resulting from our inability to
register the shares of our common stock underlying the Series 1 preferred stock
until the earlier of when the common stock is registered or August 15, 2000. The
affected shares were registered on August 11, 2000.
As consideration for the forbearance, we:
. granted Mr. Bronstein warrants to purchase 118,750 shares of common stock,
granted Mr. Szpicek warrants to purchase 118,750 shares of common stock,
and granted Mr. Dagan warrants to purchase 12,500 shares of common stock;
and
. accrued interest to each of Mr. Bronstein, Mr. Szpicek and Mr. Dagan at a
rate of 1% per month on the cash value of the shares of common stock held
by, and owed to them under the Forbearance Agreements through the
expiration of the forbearance period. In addition, we paid the legal fees
of Mr. Bronstein and Mr. Szpicek totaling $40,000.
S-11
<PAGE>
PROSPECTUS
----------
Applied Voice Recognition, Inc.
21,210,176 Shares
Common Stock
This prospectus relates to the resale by some of our stockholders of
21,210,176 shares of our common stock. These shares consist of 19,198,479
issued and outstanding shares, 250,000 shares underlying issued and outstanding
warrants, 342,730 shares to be issued in lieu of cash interest payments, 355,878
shares underlying our issued and outstanding series 2 preferred stock and
1,063,089 shares underlying our series 2 preferred stock to be issued for
deferred and contingent purchase price payments related to acquisitions we made
in 1998 and 1999. We will not receive any of the proceeds from the resale of
shares offered by the selling stockholders under this prospectus. We will,
however, receive $437,500 from the issuance of our common stock upon the selling
stockholders' exercise of warrants, if exercised in full.
Our common stock is traded on the Over-the-Counter Bulletin Board under the
symbol "EDOC." On August 8, 2000, the last reported sale price of our common
stock was $0.25 per share.
This investment involves risks. See "Risk Factors" beginning on page 4.
--------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has approved or disapproved
of these securities or determined if this prospectus is accurate or complete.
Any representation to the contrary is a criminal offense.
--------------------------------------------------------------------------------
The date of this prospectus is August 11, 2000.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary................................................................................ 3
Risk Factors........................................................................... 4
Cautionary Note Regarding Forward Looking Statements................................... 5
Capitalization......................................................................... 6
Common Stock Price Range and Dividend Policy........................................... 7
Use of Proceeds........................................................................ 7
Management's Discussion and Analysis of Financial Condition and Results of Operations.. 8
Business and Properties................................................................ 11
Management............................................................................. 19
Security Ownership of Certain Beneficial Owners and Management......................... 24
Certain Transactions................................................................... 25
Description of Capital Stock........................................................... 28
Selling Stockholders................................................................... 30
Plan of Distribution................................................................... 31
Legal Matters.......................................................................... 32
Experts................................................................................ 33
Changes in Accountants................................................................. 33
Index to Consolidated Financial Statements............................................. F-1
</TABLE>
WHERE YOU CAN FIND MORE INFORMATION
This prospectus constitutes a part of a registration statement on Form SB-2
that we have filed with the SEC under the Securities Act. This prospectus omits
certain of the information contained in the registration statement, and
reference is made to the registration statement for further information about us
and the securities offered by this prospectus. Any statements contained in this
prospectus concerning any document filed as an exhibit to the registration
statement or otherwise filed with the SEC is not necessarily complete, and in
each instance, reference is made to the copy of the documents that have been
filed.
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any of these documents,
including this registration statement, at the Public Reference Section of the
SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. You
may also read and copy any document we file at the SEC's public reference rooms
in New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-
0330 for further information about the public reference rooms. In addition, the
SEC maintains a site on the Internet at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file reports electronically with the SEC.
2
<PAGE>
SUMMARY
Applied Voice Recognition, Inc.
Our current principal business is providing traditional and Internet-based
medical transcription services. As of the end of 1999, we had acquired eight
medical transcription service providers in Texas, Colorado, Florida, New York
and the Manila, Philippines, of which four have recently been sold. After the
sale of those four operations, we still have approximately 1,200 physician
transcription clients in six states and transcribed approximately 67,000
physician dictated medical records per month. Our remaining medical
transcription operations currently provide our only source of revenue.
Although our most recent business strategy included the acquisition of
medical transcription operations to consolidate the fragmented market, we have
abandoned the acquisition aspect of that strategy due to the lack of capital
available to us. We have also ceased development of our Internet-based voice
recognition software since it did not provide the type of cost savings for our
medical transcription services we had initially anticipated.
Our new business strategy is to develop an Internet-based patient record
storage system called the e-DOCS Physician Network, or "EPN." The EPN will be a
secure, business-to-business Internet application for the electronic
organization, storage and retrieval of medical transcription services and
physicians' handwritten notes of patient encounters. The EPN will be accessible
24 hours a day, seven days a week. Ultimately, it will create a direct link to
the physician by facilitating improvements to the existing channel for
transcription and medical information.
The EPN is still in development. We anticipate the launch of the EPN early
in the first quarter 2001, provided we obtain adequate financing to complete its
offering to the market. If other capital resources are not available to us, we
may sell some or all of our transcription operations to finance the EPN.
Our principal executive offices are at 1770 St. James Place, Suite 116,
Houston, Texas 77056, and our telephone number at that address is (713) 621-
3131.
The Offering
Some of our stockholders are offering for resale an aggregate 21,210,176
shares of our common stock. These shares consist of 19,198,479 issued and
outstanding shares, 250,000 shares underlying issued and outstanding warrants,
342,730 shares to be issued in lieu of cash interest payments, 355,878 shares
underlying our issued and outstanding series 2 preferred stock and 1,063,089
shares underlying our series 2 preferred stock to be issued for deferred and
contingent purchase price payments related to acquisitions we made in 1998 and
1999. We will not receive any of the proceeds from the resale of shares offered
by selling stockholders under this prospectus. We will, however, receive
$437,500 from the issuance of our common stock upon the selling stockholders'
exercise of warrants, if exercised in full.
3
<PAGE>
RISK FACTORS
<TABLE>
<S> <C>
Sufficiency of Funds We expect to continue to incur significant losses in the near future and we may not be
successful in increasing sales for the long term or achieve profitability. We have had
We must raise additional working capital deficits in the past. We will be required to raise substantial additional
capital to continue capital during 2000 to fund our current operations. We will also require substantial
operations and additional capital to implement our new business-to-business e-commerce initiative, the
implement our business e-DOCS Physician Network(TM), which we call our "EPN," and to maintain and improve our
plan. current medical transcription operations. If we are unable to raise sufficient funds to
satisfy our 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.
Limited History of We have incurred significant net losses since our inception and expect to continue to
Business Operations incur significant losses in the future. For the year ended December 31, 1999, we recorded
a net loss of $2,655,913, or $.16 per share, on net sales of $5,261,810. As of March 31,
Due to its limited 2000, our accumulated deficit was $18,585,608. Our limited operating history makes
nature, you should not predicting future results of operations difficult, and we may not be able to sustain
rely on our operating revenue growth or achieve profitability. You should consider our prospects in light of the
history as an indicator risks, expenses and difficulties frequently encountered by companies in the early stage of
of our future development, particularly companies in new and rapidly evolving markets such as the
performance. electronic and Internet-based medical transcription market, and the emerging
business-to-business e-commerce market.
Dependence on Principal Our future financial performance will depend in part on our ability to continue to develop
Products and Services and establish our traditional and Internet-based medical transcription service, and to
effectively develop and introduce the EPN. However, we may not be successful in
Our future results will developing these or other products or services in a manner that meets with market
depend upon the success acceptance. In addition, new product releases may contain undetected errors that require
of our current significant design modifications, resulting in a loss of customer confidence and adversely
operations, and the affecting the use of our products and services.
successful introduction
of our new
business-to-business
e-commerce initiative.
Ability to Attract Our success in the medical transcription business will be dependent upon our ability to
Qualified attract and retain qualified transcriptionists who can provide the accuracy and turnaround
Transcriptionists time required for our customers. Competition for transcriptionists is intense. We may
not be successful in attracting and retaining the personnel necessary to conduct our
Competition for business successfully. In addition, our inability to attract, hire, assimilate and retain
qualified qualified personnel could have a material adverse effect upon our business. We may
transcriptionists is ultimately prove unable to attract sufficient qualified transcriptionists to operate our
intense. facilities.
Intellectual Property We currently have only two issued patents and three patent applications pending, and rely
and Property Rights 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
Our success will be technology. However, these protections may not prevent misappropriation of the
dependent upon a technology. Moreover, third parties could independently develop competing technologies
combination of that are substantially equivalent or superior to our technologies. Although we believe
proprietary software that our services and products and the proprietary rights we develop or license do not
technology and hardware infringe patents and proprietary rights of other parties, those parties may assert
purchased and licensed infringement claims, regardless of merit, against us in the future.
from third parties.
Our current protections
may not be sufficient
to protect these
technologies.
</TABLE>
4
<PAGE>
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This registration statement contains forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934. When used in this registration statement, the words
"expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and
similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying words.
These forward-looking statements include statements regarding:
. our estimate of the sufficiency of our existing capital resources;
. our ability to raise additional capital to fund cash requirements for
future operations;
. the uncertainties involved in the rate of growth and acceptance of the
Internet;
. the adoption of electronic medical record technology by physicians and
patients; and
. the facilitating of e-commerce transactions.
You should read these statements carefully because they discuss our
expectations about our future performance, contain projections of our future
operating results or our future financial condition, or state other "forward-
looking" information. Before you invest in our common stock, you should be
aware that the occurrence of any of the events described in this prospectus
under the caption "Risk Factors" and elsewhere in this registration statement
could substantially harm our business, and that upon the occurrence of any of
these events, the trading price of our common stock could decline, and you could
lose all or part of your investment.
5
<PAGE>
CAPITALIZATION
The following table sets forth our unaudited capitalization as of March 31,
2000. You should read this table along with our selected consolidated financial
information and our consolidated financial statements and notes thereto include
elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31,
2000
-------------------
<S> <C>
Cash and cash equivalents............................................ $ 1,093,467
===================
Current portion of long-term obligations:
Preferred stock payable............................................ $ 320,887
Note payable to related party...................................... 250,000
Capital lease...................................................... 64,354
Long-term debt..................................................... 58,333
-------------------
Total current portion of long-term obligations................... 693,574
Long-term obligations, net of current portion:
Preferred stock payable............................................ 683,460
Capital lease...................................................... 239,424
Long-term debt..................................................... 54,698
-------------------
Total long-term obligations, net of current portion.............. 977,582
Stockholders' Equity:
Preferred stock, series 2, $.10 par value per share................ 64
Common stock, $.001 par value per share............................ 38,808
Paid-in capital.................................................... 19,741,893
Accumulated deficit................................................ (18,585,608)
-------------------
Total stockholders' equity....................................... 1,195,157
-------------------
Total capitalization............................................. $ 2,866,313
===================
</TABLE>
6
<PAGE>
COMMON STOCK PRICE RANGE AND DIVIDEND POLICY
Common Stock Price Range
Our common stock began trading on the Over-the-Counter Bulletin Board on
February 5, 1997, under the symbol "AVRI." We changed our ticker symbol to
"EDOC" on February 23, 1999.
The following table shows, for the periods indicated, the range of high and
low bid information for our common stock as reported by the Over-the-Counter
Bulletin Board. Any market for our common stock should be considered sporadic,
illiquid and highly volatile. Prices reflect inter-dealer quotations, without
adjustment for retail markup, markdowns or commissions, and may not represent
actual transactions. Our common stock's trading range during the periods
indicated is as follows:
<TABLE>
<CAPTION>
1998 High Low
-----------
<S> <C> <C>
1/st/ quarter........................................ $3.812 $1.750
2/nd/ quarter........................................ $3.312 $0.875
3/rd/ quarter........................................ $1.875 $0.450
4/th/ quarter........................................ $1.531 $0.625
1999 High Low
-----------
1/st/ quarter........................................ $2.125 $0.906
2/nd/ quarter........................................ $1.406 $1.062
3/rd/ quarter........................................ $1.688 $0.438
4/th/ quarter........................................ $0.530 $0.188
2000 High Low
-----------
1/st/ quarter........................................ $4.000 $0.250
2/nd/ quarter........................................ $1.562 $0.398
3/rd/ quarter........................................ $0.468 $0.250
(through
August 8, 2000)
</TABLE>
As of July 31, 2000 there were 41,146,979 shares of common stock issued and
outstanding, 295 holders of record and approximately 4500 beneficial owners of
our common stock.
Dividend Policy
We have neither declared nor paid any dividends on our common stock since
our inception. Presently, we intend to retain our earnings, if any, to provide
funds for reinvestment in the development of our business plan. Therefore, we
do not anticipate declaring or paying cash dividends on our common stock in the
foreseeable future. Any future dividends will be subject to the discretion of
our board of directors and will depend upon, among other things, future
earnings, our operating and financial condition, our capital requirements, debt
obligation agreements, general business conditions and other pertinent facts.
USE OF PROCEEDS
We will not receive any of the proceeds of the sale of the common stock
offered by this prospectus. We will, however, receive $437,500 from the
issuance of our common stock upon the selling stockholders' exercise of
warrants, if exercised in full.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and the related notes thereto and other
detailed information appearing elsewhere in this prospectus.
Overview
Our revenues are derived from the out-sourced medical transcription of
patient records for physicians, clinics and hospitals through our wholly-owned
subsidiary, e-DOCS Health Care Information Systems. Our current customer base
includes approximately 1,200 physicians in six states.
After ten months of use by physicians in 1999, we recognized that the voice
recognition component of our previous product, VoiceCOMMANDER 99, was not
generating cost and labor savings for our customers as previously believed
possible. However, the market indicated a preference for a browser-oriented
tool for Internet-based transcription and medical records storage services.
Using the experience gained from VoiceCOMMANDER 99, we have begun development of
our next generation browser-based service, titled e-DOCS Physician Network, or
EPN.
Through the period from our inception through March 31, 2000, we have
incurred operating losses of approximately $18.5 million. To date, our
operations have not been profitable and there is no assurance that they will
become profitable in the future. Significant acquisitions and dispositions in
1999 distort the comparability between periods and as to future operations.
Quarter Ended March 31, 2000 vs. March 31, 1999
Revenues. Revenues decreased 50% from $1,219,118 in the first quarter 1999
to $607,375 in the first quarter 2000, because of our suspension in late 1999 of
VoiceCOMMANDER 99. VoiceCOMMANDER 99 generated $469,949 in hardware and
software revenues in the first quarter 1999. Net transcription service revenues
declined 19% from $749,169 in the first quarter 1999 to $607,375 in the first
quarter 2000. This $141,794 decrease was attributable to the sale of the net
assets and contracts of certain of our medical transcription services effective
December 20, 1999.
Cost of Sales. Cost of sales decreased 15% from $553,312 in the first
quarter 1999 to $472,285 in the first quarter 2000. The suspension of
VoiceCOMMANDER 99 reduced hardware and software costs by $52,567. Transcription
cost of services declined 6% from $500,745 in the first quarter 1999 to $472,285
in the first quarter 2000. This $28,460 decrease was a result of reduced
transcription revenues. Gross margin on transcription services was 22% in the
first quarter 2000 compared with 33% in the first quarter of 1999. The
decreased margin primarily reflects increased labor costs resulting from a
shortage in skilled medical transcriptionists.
Marketing and Sales Expense. Marketing and sales expense decreased 93%
from $169,292 in the first quarter 1999 to $12,156 in the first quarter 2000.
This decrease resulted from our suspension of VoiceCOMMANDER 99 and our
increased focus on the transcription business, which does not require
significant marketing efforts.
General and Administrative Expense. General and administrative expense
decreased 67% from $1,525,327 in the first quarter of 1999 to $500,535 in the
first quarter of 2000. This $1,024,792 decline was primarily attributable to
decreased administrative and executive compensation costs of approximately
$450,000, decreased legal and accounting fees of approximately $150,000,
decreased consulting fees of approximately $250,000 and decreased travel costs
of approximately $100,000. These declines reflect our reduced level of
operations in 2000, and our high level of acquisition and disposition activities
in 1999. We had a net reduction of 9 in headcount from our acquisition and
disposition activities, and we reduced our corporate office staff from 35 to
seven between the first quarter of 1999 and 2000.
Research and Development Expense. Research and development expense
decreased 95% from $263,241 in the first quarter 1999 to $13,752 in the first
quarter 2000. This $249,489 decrease was attributable to our change
8
<PAGE>
in business focus from software development to transcription service provider.
During 2000, we capitalized approximately $35,000 in development costs related
to the EPN. In 1999 no development costs were capitalized.
Fiscal Year 1999 vs. Fiscal Year 1998
Revenues. Revenues increased $4,544,453 from $717,357 in 1998 to
$5,261,810 in 1999. The increase was attributable to our acquisition program
($4,126,590 related to transcription operations acquired in 1999) and a full
year of operations for our 1998 acquisitions.
Effective December 20, 1999, we disposed of the assets and related
operations of our medical transcription services in New York, New Jersey,
Houston, Texas and Manila, the Philippines. Revenues of ongoing operations are
expected to decline in 2000.
Cost of Sales. Cost of sales increased $3,618,920 from $432,246 in 1998 to
$4,051,166 in 1999. This increase was attributable to direct costs associated
with transcription operations acquired. Gross margins were 23% in 1999 compared
with 40% in 1998, reflecting the higher fixed costs and labor intensive nature
of our increased transcription operations.
Marketing and Sales Expense. Marketing and sales expense decreased 37% from
$1,265,927 in 1998 to $797,745 in 1999. This $468,182 decrease is the result of
our increased focus on the transcription business, which does not require
significant marketing efforts.
General and Administrative Expense. General and administrative expense
increased 25% from $5,640,238 in 1998 to $7,024,097 in 1999, up $1,383,859.
Administrative and executive compensation increased approximately $855,000
primarily as a result of personnel increases from acquisitions and severance
costs related to the termination of certain corporate officers.
Legal fees increased by $276,000 primarily because of expenses associated
with an abandoned registration statement, our exchange of assets, extinguishment
of debt and costs associated with the conversion of our preferred stock into our
common stock.
Our acquisitions during 1999 resulted in increased office rent,
depreciation and goodwill amortization. These expenses increased approximately
$653,000.
These increases were offset by decreases in other expenditures related to
outside consultants. As our business focus shifted to the transcription
business, and we developed the internal expertise to manage operations, we hired
fewer outside consultants.
Research and Development Expense. Research and development expense
decreased 6% from $754,170 in 1998 to $711,404 in 1999 down $42,766. During
1998, we capitalized approximately $291,000 of development costs. In 1999 no
costs were capitalized. These decreases were attributable to our change in focus
from software development to transcription service provider.
Interest Expense. Interest expense increased $651,222 from $216,680 in
1998 to $867,902 in 1999. Interest expense increased primarily because of
increased finance charges related to warrants issued in connection with debt and
preferred stock. Higher amounts of outstanding indebtedness and accretion of
discounts on preferred stock payables also contributed to the increase. Finance
charges associated with warrants and accretion of discounts on preferred stock
payables did not exist in 1998.
Extraordinary Gain on Extinguishments of Debt. In December 1999, some of
our indebtedness was forgiven in exchange for certain of our net assets and
related operations. The resulting gain of $5,562,750 was reflected as an
extraordinary item.
9
<PAGE>
Liquidity and Capital Resources
At March 31, 2000 the Company had cash and cash equivalents of $1,093,467
and a working capital deficiency of $422,152. This compares to cash and cash
equivalents of $53,529 and a working capital deficiency of $1,568,752 at
December 31,1999. The increase in working capital of $1,146,600 is attributable
to:
. cash received from exercise of stock options and warrants of
approximately $825,000; and
. approximately $370,000 from the issuance of common stock in satisfaction
of a liability in the December 31, 1999 financial statements;
. which were partially offset by current year operating losses.
We anticipate that our existing capital resources and our cash generated
from operations for the balance of fiscal year 2000 should be adequate to fund
our on going operations and fund the initial development of the EPN through
August 31, 2000. We will require substantial additional capital during fiscal
2000 to develop, implement and market the EPN.
Our ability to meet our capital requirements is contingent on many factors,
including:
. cash flow from operations;
. additional working capital requirements;
. additional product development expenses; and
. capital expenditures.
To the extent that our existing resources are insufficient to fund our
operations and implement the EPN in the short- or long-term, we will need to
raise additional funds through public or private financings, or through sales of
our existing transcription operations. We may not be able to raise additional
funds 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
business 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.
10
<PAGE>
BUSINESS AND PROPERTIES
General
Our current principal business is providing traditional and Internet-based
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. As of the end of 1999, we had acquired eight medical
transcription service providers in Texas, Colorado, Florida, and New York, and
Manila, the Philippines, of which four have been recently sold to relieve us of
significant loss-producing assets. Following the sale of those four operations,
we still have approximately 1,200 physician transcription clients in six states,
and transcribe approximately 67,000 physician-dictated medical records per
month. Our remaining medical transcription operations currently provide our
only source of revenue.
Although our most recent business strategy included the acquisition of
medical transcription operations to consolidate the fragmented market, we have
abandoned the acquisition aspect of that strategy due to the lack of capital
available to us. We have also ceased development of our Internet-based voice
recognition software since it did not provide the type of cost savings for our
medical transcription services we had initially anticipated.
Our new business strategy is to develop an Internet-based patient record
storage system called the e-DOCS Physician Network, or "EPN," using the
experience we gained from acquiring eight independent transcription companies
and developing Internet-based software. The EPN will be a vertical Internet
business-to-business application service provider for the service of the medical
community operated through our wholly-owned subsidiary e-DOCS Physicians
Network, Inc. It will be directed at independent transcription companies like
the ones we acquired and at the nation's 475,000 clinical physicians, 70% of
whom practice in groups of five or less. We intend to provide a common
technology platform for these types of independent, capital-deficient
businesses. The EPN will be a secure, business-to-business Internet application
for the electronic organization, storage and retrieval of medical transcription
services and physicians' handwritten notes of patient encounters. It will also
provide access to this medical information 24 hours a day, seven days a week.
Ultimately, the EPN will create a direct link to the physician by facilitating
improvements to the existing channel for transcription and medical information.
We anticipate the launch of the EPN early in the first quarter 2001,
provided we obtain adequate financing to complete its offering to the market.
If other capital resources are not available to us, we may sell some or all of
our transcription operations to finance the EPN. We have designed the EPN
website architecture, and have selected a developer to put together the main
components of the actual storage and retrieval system. The developer has
substantially completed programming and is selecting sample user groups to test
the system.
Company History
Our predecessor, Voice Technology Partners, L.P., a Texas limited
partnership, was founded in 1994. In August 1996, the partnership's assets were
contributed to a Delaware corporation. In December 1996, the Delaware
corporation completed a share exchange with Summa Vest, Inc., a Utah
corporation, which immediately changed its name to Applied Voice Recognition,
Inc. In January 1998, the Utah corporation reincorporated in Delaware. In
March 1999 we began using the assumed name e-DOCS.net.
Before the first quarter of 1998, our principal efforts were focused on the
sales of VoiceCOMMANDER(TM). We sold this voice recognition software to the
general business community through retail sales channels and our internal sales
force. In the first quarter of 1998, we narrowed the focus of our business plan
to concentrate our efforts on medical transcription services.
In March 1998, we began expanding into the healthcare transcription
industry by acquiring Transcription Resources of Dallas, Texas. The operation
of Transcription Resources during 1998 provided us with valuable industry
experience that enabled us to develop a software product that provides
healthcare professionals with a tool for Internet-based transcription and
dictation services. The product, VoiceCOMMANDER 99, provided a mobile dictation
technology designed to improve the quality and reduce the costs of healthcare
information needs.
11
<PAGE>
After ten months of use by physicians, we recognized that the voice
recognition component of VoiceCOMMANDER 99 was not generating the cost and labor
savings previously believed possible. However, the market indicated a
preference for a browser-oriented tool for Internet-based transcription and
medical records storage services. We never derived significant revenues from
VoiceCOMMANDER 99, and have ceased the development and use of it as part of our
business plan. Nevertheless, we believe that our use of VoiceCOMMANDER 99 has
provided us with a unique experience that will allow us to respond to
technological changes in the future.
During 1998 and 1999, we acquired eight traditional transcription companies
in various markets in the U.S. and the Philippines. Under an Asset Purchase
Agreement dated January 7, 2000, and effective as of December 20, 1999, we sold
the net assets and contracts of four of these medical transcription service
operations, which were based in New York, New Jersey, Houston, Texas and Manila
the Philippines, for consideration of approximately $9.4 million. The
purchasers were Lonestar Medical Transcription USA, Inc., a Delaware corporation
and a wholly-owned subsidiary of L&H Investment Co., N.V., a Belgium company,
and L&H Investment, which was one of our preferred stockholders before the
consummation of the sale. Additionally, Lonestar and L&H Investment obtained
the non-exclusive rights to our VoiceCOMMANDER 99 code.
The $9.4 million purchase price consisted of:
. the forgiveness of a $2.0 million promissory note held by Lernout &
Hauspie Speech Products, N.V., a Belgium company and an affiliate of L&H
Investment;
. the forgiveness of a $1.5 million promissory note held by L&H
Investment;
. the forgiveness of approximately $94,000 in interest;
. the retirement of $5.0 million in Series D Preferred Stock held by L&H
Investment and forgiveness of approximately $318,000 in dividends; and
. approximately $457,000 in cash for our accounts receivables sold.
We also converted warrants held by L&H Investment to purchase approximately
3.5 million shares of our common stock at $1.25 per share into a warrant to
purchase 800,000 shares of our common stock at $0.37 per share. Lonestar became
the holder of this warrant and in May 2000 performed a cashless exercise of the
warrant for 572,132 shares of our common stock. The Lernont & Hauspie
promissory note, the L&H Investment promissory note and the Series D Preferred
Stock were convertible into 5,405,405, 4,054,054 and 13,513,513 shares of our
common stock, respectively. The disposition removed substantial indebtedness
from our books and potential dilution to our common stockholders.
12
<PAGE>
The following table describes our recent acquisitions and dispositions in
the healthcare transcription industry (acquisitions that were later sold as
described above are italicized and indented):
<TABLE>
<CAPTION>
Company Metropolitan Area Date of Acquisition Date of Disposition
-------------------------------- ------------------------- ----------------------- ------------------------
<S> <C> <C> <C>
Transcription Resources Dallas, Texas March 17, 1998
Cornell Transcription, Inc. New York, New York December 1, 1998 January 7, 2000
and New Jersey
Outsource Transcription Manila, Philippines December 1, 1998 January 7, 2000
Linda R. Willhite Transcription Denver, Colorado December 31, 1998
Reyna Transcriptions, Inc. Richmond, Texas February 22, 1999 January 7, 2000
PRN Transcription, Inc. Tyler, Texas February 22, 1999
AM Transcription, Inc. Richardson, Texas February 26, 1999
A Word Above, Inc. Houston, Texas May 31, 1999 January 7, 2000
</TABLE>
During our fiscal years ended December 31, 1998 and 1999, we spent
approximately $754,000 million and $711,000, respectively on research and
development activities. Those activities focused primarily on the development
of our medical transcription operations and VoiceCOMMANDER 99. During those two
years we did not have any expenditures on the development of the EPN.
Industry Overview
Medical Transcription Industry. Medical transcription is the conversion of
dictated information into a standard text format for inclusion in a patients'
permanent medical records. Increasingly, patient's permanent medical records are
being maintained as electronic patient records. The notes are either
transcribed in-house or transmitted by phone lines or courier to an outside
service. According to the Medical Transcription Industry Alliance, physicians
in the U.S. are currently spending over $6.6 billion dollars per year on
transcription, growing at a rate of 15-20% annually. Whether it is performed
in-house or out-sourced to professional transcription services, most of the
costs associated with transcription are attributable to labor in the form of
typing and quality assurance. Further, the medical transcription industry also
is very fragmented, with approximately 1,500 transcription companies
domestically according to the MTIA. The medical transcription market includes
individual physicians, physician groups and hospitals.
Healthcare Internet Industry. The healthcare industry is in a period of
rapid change, which is being influenced by government regulation, industry
consolidation, quality of care issues and technological change. Healthcare
providers are outsourcing administrative activities in an effort to reduce
costs. We and other out-source medical transcription service providers are using
emerging technologies like the Internet and digital imaging to improve the
transcription process and the management of electronic patient records.
Products and Services
Medical Transcription. We derive substantially all of our revenue from
providing value-added medical transcription services to clients through our four
remaining transcription operations. Our traditional transcription business
provides a computer-based service for transcription of physician dictation.
While our service arrangements vary by customer (some of which require
transcription to be performed on-site), these services are primarily provided
from remote locations using telecommunications and internet capabilities. As a
result, many of our transcription employees are able to work as "telecommuters"
using networked computers in their homes. Our transcription services are
typically paid for on a per line transcribed basis.
13
<PAGE>
The e-DOCS Physician Network. Our research indicates many physicians prefer
a simple document technology that does not alter the way the physician practices
medicine. The EPN is designed to become the standard technology platform for
the independent transcription company and the individual practicing physician.
It is being developed in response to a need identified by our existing customer
base for a simple, secure solution to the daily needs of the medical services
community.
The opportunity for the EPN is created by the fundamental need for the
medical transcription industry to have a direct connection to physicians. With
approximately 637,000 actively practicing physicians in the U.S., the physician
office market accounts for $215 billion of healthcare spending and directs up to
another $600 billion in spending, as reported by Wit Capital. Physician office
services are expected to exceed $400 billion by 2008. The physician market is
extremely fragmented, with nearly 70% in groups of less than five doctors
according to the American Medical Association. Our research of 42 practices
throughout Texas and Colorado indicated only one in 14 physicians currently use
an electronic medical record entry system. The remainder rely on handwritten
patient notes.
The EPN is being designed to provide an efficient Internet-based delivery
system for medical transcription documents and an infrastructure for capturing,
organizing, storing and retrieving medical information. The services may
include medical transcription and storage, training, legacy system integration,
and the electronic storage and retrieval of the physician's hand-written notes
of a patient encounter. The EPN is being designed to simplify how physicians
interact with medical information without attempting to change their current
practice methodology. It also will support opportunities for other physician
interests and alliances into content, services and products, such as medical
supplies, banking, travel, and office supplies.
We intend to provide the services of the EPN on a monthly subscription
basis. Medical transcription companies will pay a basic monthly fee for
maintenance of their web page on the system. This will entitle the
transcription company to deliver its medically transcribed documents through the
EPN browser, allowing physicians to review their transcriptions online and
digitally sign the documents. It will be available all of the time from any
location upon authorization of the user.
The basic service will be provided to the physician at no cost. The EPN
will offer secure, long-term, Health Insurance Portability and Accountability
Act-compliant document storage for a monthly subscription fee. Other services
anticipated to be provided include a basic online medical record, including the
capture of the physician's handwritten patient notes without scanning.
Additionally, cost reductions in medicine demand an approach based on use,
rather than large, up-front investments.
The EPN's important competitive advantage will be its presentation of
information to the physician rather than requiring the physician to search the
Internet to find information and services. A medical search engine button will
always be available adjacent to the patient record, allowing the physician
instant access to this resource at all times. We further intend to enter into
strategic relationships with well-known providers of other services, such as
banking, medical and office supplies, and an upgrade path to a more
sophisticated medical record, if desired by the physician.
Furthermore, the EPN will provide enabling infrastructure and services for
secure, online medical transactions. It will provide an integrated service
technology designed specifically for healthcare that will include roaming user
credentials, complete audit trail, fraud detection and directed delegation of
authority to medical records.
Competition
Medical Transcription Industry. We compete in the highly fragmented
medical transcription industry that is predominately populated by small,
regional or local companies, with a limited number of national companies. MTIA
estimates that the total annual cost of transcribing medical records in the
United States is greater than $6.6 billion. Of this amount, MTIA reports that
approximately $1 billion is currently outsourced to medical transcription
companies.
While the transcription services industry remains highly fragmented, there
has been a significant trend towards consolidation. We believe that this trend
is in response to the greater technological demands of the
14
<PAGE>
customer base and the consolidation of healthcare service providers into larger
national companies. Smaller, regional and local medical service providers are at
a disadvantage because they are not able to achieve sufficient economies of
scale to obtain a return on significant investments in technology. The
consolidation of healthcare service providers is reducing the number of
potential medical transcription customers, while increasing the information
management requirements of those customers. We believe that the larger
healthcare service providers prefer to use a smaller number of larger, more
technologically-advanced, medical transcription service providers.
The number of large national transcription service providers has decreased
in recent years due to industry consolidation. The largest medical
transcription service providers are Medquist, Inc., Rodeer Systems, Inc. and
Transcend Services, Inc. Additionally, other service providers to the
healthcare industry, such as LHSP, which has recently been buying medical
transcription service providers in addition to the operations purchased from us,
may enter into the medical transcription service industry. We believe that our
ability to compete with these providers and others depends upon many factors
within and outside of our control, including the timing and market acceptance of
our transcription services, service quality, performance, price, reliability,
customer service and support and the ability to attract qualified
transcriptionists.
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.
Healthcare Internet Industry. High growth, intense competition, and
technological change characterize the market for electronic healthcare
information services and e-commerce. In addition to the direct competitors that
we will be facing in the electronic medical records market, we will face
competition from many companies with significantly greater financial resources,
well-established brand names and large installed customer bases. We expect
significant competition from:
. Traditional healthcare information system vendors, including Cerner
Corporation, Epic Systems Corporation, IDX Corporation, McKesson/HBOC,
Medic, a division of Misys PLC, and Shared Medical Systems Corporation,
each of which focus on providing information systems to large healthcare
enterprises and physician practice groups. They also have large
installed bases of customers. Although they have not traditionally
focused on providing electronic medical record services, they have begun
to pursue a variety of Internet strategies, some of which could provide
functions competitive with our products and services; and
. Major Internet companies, including those not currently specializing in
the healthcare industry, which also may enter our markets. Many of these
companies have longer operating histories, larger customer bases,
substantially greater financial, technical, sales and marketing
resources and greater name recognition than we do, and we may be unable
to compete successfully against them. The most significant competitive
factors include clinical focus, service reliability, breadth of product
offerings, price performance ratio, network security, ease of access and
use, content bundling, customer support, brand recognition and operating
experience. However, we believe we will be able to compete favorably in
most of these areas by targeting the smaller healthcare enterprises and
physician practice groups.
Government Regulation and Healthcare Reform
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation of
healthcare organizations. Proposals to reform the U.S. healthcare system have
been and will continue to be considered by the U.S. Congress. These programs may
contain proposals to increase or decrease government involvement in healthcare
or change the operating environment for our potential customers. Healthcare
organizations may react to these proposals and the uncertainty surrounding them
by curtailing or deferring investments, including those for our products and
services. On the other hand, changes in the regulatory environment have in the
past increased, and may continue to increase, the needs of healthcare
organizations for cost-effective information management, which may enhance the
marketability of our applications and services. We cannot predict with any
certainty what impact, if any, these proposals or any future healthcare reforms
might have on our business.
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<PAGE>
The Health Insurance Portability and Accountability Act of 1996 mandates
the use of standard transactions and identifiers, prescribed security measures
and other provisions within two years after the adoption of final regulations by
the Department of Health and Human Services. It will be necessary for our
products and services to be in compliance with the proposed regulations.
Congress also is likely to consider legislation that would establish rules about
individuals' rights to access their own or someone else's medical information
within legislation known as a "patient bill of rights". This legislation, if
enacted, would likely define what is to be considered protected health care
information and outline steps to ensure the confidentiality of this information.
The confidentiality of patient records and the circumstances under which
records may be released for inclusion in our EPN databases are subject to
substantial and rapidly evolving regulation governing both the disclosure and
the use of confidential patient medical record information. Legislation
governing the dissemination of medical record information has been proposed at
both the state and federal levels. This legislation may require holders of
medical records to implement security measures that may require substantial
expenditures by us or materially restrict the ability of healthcare providers to
submit information from patient records using our applications.
In October 1999, the Department of Health and Human Services proposed new
rules under the HIPAA. The proposed rules would require the formulation of
policies and systems that give individuals access to their health care
information. In addition, these rules would require that safeguards be
constructed to protect this information against unauthorized access. The
proposed rules include new penalties for violations of an individual's right to
keep his health information private. These proposed rules are expected to
become final in 2000.
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may be
adopted that address issues such as online content, user privacy, pricing and
characteristics and quality of applications and services. For example, although
two key provisions of the act were held unconstitutional, the Communications
Decency Act of 1996 prohibited the transmission over the Internet of some types
of information and content.
Internet user privacy has become an issue in the United States. Current
United States privacy law consists of a few disparate statutes directed at
specific industries that collect personal data, none of which specifically
covers the collection of personal information online. The United States or any
state may adopt legislation to attempt to protect this privacy. Any legislation
addressing these issues could affect the way in which we are allowed to conduct
our business, especially those aspects that involve the collection or use of
personal information, and could have a material adverse effect on our business.
Moreover, it may take years to determine the extent to which existing laws
governing issues such as property ownership, libel, negligence and personal
privacy are applicable to the Internet.
The tax treatment of the Internet and e-commerce is currently unsettled.
Several proposals have been made at the federal, state and local levels and by
some foreign governments that could impose taxes on the sale of goods and
services and some other Internet activities. A recently passed law places a
temporary moratorium on specific types of taxation on e-commerce. We cannot
predict the effect of current attempts at taxing or regulating commerce over the
Internet. Any legislation that substantially impairs the growth of e-commerce
could have a material adverse effect on our business.
Intellectual Property
Patents. We regard our software as proprietary and rely on a combination
of copyright and trade secret laws in attempting to protect those rights. We
enter into software license agreements with end-users of our products that
outline the terms and conditions under which our products can be used. Despite
these precautions, unauthorized third parties may be able to copy aspects of our
products or to obtain and use information that we regard as proprietary.
We are applying for a patent that describes the process for presenting
medical details about pharmaceutical products to doctors though the use of an
Internet browser. We also hold a variety of patents and have made patent
applications that are useful to our transcription business. These patents and
applications relate to various aspects of our speech recognition, user interface
and Internet technology.
16
<PAGE>
The patent process is lengthy and complex. Each patent must go through
rigorous examination and may involve amplifying submissions. We may, based upon
response from the patent office, abandon efforts on any patents that are deemed
not to warrant further investment of our resources. There can be no assurance
that any patents will be issued or, if issued, will provide us with significant
protection against competitors. Our current intention is to develop products
based on our existing intellectual property rights only to the extent these
rights relate to the development of the EPN. However, we may seek to sell or
license these rights in the future.
Certain of our competitors have obtained, and we believe that certain of
our competitors are seeking, patent protection on various aspects of their
speech recognition technologies. Many of our competitors have significantly
greater resources than we do. We believe that, because of the rapid pace of
technological change in the software industry, factors such as the technological
and creative skills of our personnel are more important to establishing and
maintaining a technology leadership position than are the various legal
protections of our technology.
Litigation, which could result in substantial cost to and diversion of
effort by us, may be necessary to enforce any patent issued to us, to protect
trade secrets or know-how owned by us, or to determine the scope and validity of
the proprietary rights of others. Adverse findings in any proceeding could
subject us to significant liabilities to third parties, require us to seek
licenses from third parties, and adversely affect our ability to sell our
products. We are not aware of any controversy likely to lead to litigation
relating to intellectual property issues. However, there can be no assurances
that our products and services will not infringe on patent or other rights of
others, for which licenses might not be available to us.
Trademarks. We have been granted U.S. Trademarks for each of APPLIED VOICE
RECOGNITION, VoiceCOMMANDER, LAWCOMMANDER, VOICECOMMANDER (CTM), GIVING PEOPLE
POWER OVER TECHNOLOGY, and MIKE ROFONE (word mark) plus miscellaneous designs of
the Mike Rofone character. In addition the Company has applied for U.S.
trademarks for It's About Time, Physician Internet Portal, P.I.P., e-DOCS.net
(trademark), e-DOCS.net (service mark), Virtual Physician Private Network, e-
DOCS (trademark), e-DOCS (service mark), MedVault, and e-DOCS Physician Network,
all of which are pending. The U.S. Trademark Office has notified us that our
application for the e-DOCS trademark may not be approved under the notion that
the term "e-DOCS" may now be generic. There can be no assurance that any of our
pending or future trademark registrations will be issued or, if issued, will
provide us with significant protection against competitors.
Assignments. Pursuant to our transaction with Lonestar and LHIC as
described above, we provided each with the non-exclusive right to our
VoiceCOMMANDER 99 code. However, those rights do not include the right to any
future improvements we may make. Furthermore, we are not entitled to receive
any licensing fee or other form of compensation for Lonestar's and LHIC's use of
the VoiceCOMMANDER 99 code.
Employees
As of July 31, 2000, we employed 87 persons on a full-time basis, of whom
8 were located in our corporate headquarters in Houston, Texas, and 80 were
located at branch locations in Texas and Colorado. Included in the branch
location totals are 71 people who provide transcription services to us from
their homes, of which 21 are independent contractors. None of our employees are
represented by a labor union, and we consider our relations with our employees
and at-home transcriptionists to be good.
Properties and Equipment
As of July 31, 2000, we did not own any real property. We lease office
space for our headquarters in Houston, Texas, and for our branch operations.
The headquarters office, located at 1770 St. James Place, Suite 116, Houston,
Texas currently consists of approximately 2,200 square feet at a basic rental
rate of $3,750 per month.
We have branch offices in Dallas, Texas, Tyler, Texas and Denver, Colorado.
Our branch offices range from 1,000 to 1,500 square feet and lease terms vary
from month to month to two years remaining on the lease.
We have a significant investment in the latest in personal computer
hardware and software technology, which is required to develop and maintain our
sophisticated software products, as well as being available for demonstrations
in-house and at trade shows. We also own personal computers and printers that
are used by our sales and administrative staffs.
17
<PAGE>
Legal Proceedings
There are no material legal proceedings to which we are a party or of which
any of our property is the subject other than ordinary, routine claims
incidental to our business.
18
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table provides information concerning each executive officer
and director of the Company as of the date hereof:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Timothy J. Connolly...................... 47 President and Chairman of the Board
H. Russel Douglas........................ 47 Chief Technology Officer
Jackson L. Nash.......................... 55 Chief Financial and Accounting Officer; and Secretary
J. William Boyar......................... 49 Director
Daniel Dornier........................... 38 Director
James S. Cochran, M.D.................... 56 Director
N. Rudy Garza............................ 41 Director
I. Bobby Majumder........................ 31 Director
</TABLE>
Timothy J. Connolly has served as chairman of the board since August 1996.
From August 1996 to July 1999, Mr. Connolly also served as chief executive
officer and president. As of December 20, 1999, Mr. Connolly was again made
president. Mr. Connolly founded Applied Voice Technology, LP (our predecessor)
in November 1994 and served as its managing partner until August 1996. In 1984,
Mr. Connolly formed Post Oak Financial Corporation, an investment and mortgage-
banking firm, and served as its president until October 1994. Mr. Connolly
graduated from Texas A&M University with an undergraduate degree in Marketing
and Management, and a Masters Degree in Business Administration.
H. Russel Douglas served as vice president of research and
development/chief technology officer and as a director from August 1996 through
December 1999. Following a brief stint with Lernout & Hauspie Speech Products,
N.V. starting in January 2000, Mr. Douglas returned to us in April 2000 as chief
technology officer. Mr. Douglas was employed by Applied Voice Technology, LP
from August 1995 through August 1996. From 1989 through August 1995, Mr.
Douglas was a senior manager of Legent Corporation, an international computer
software company, where Mr. Douglas was responsible for development and
worldwide support of Legent's systems product line. Mr. Douglas began developing
voice applications in 1986 as vice president of research and development of
VOTEK, an early voice applications company based in Ontario, Canada. Mr. Douglas
received a BSC Degree in Economics and Commerce in 1977 from the Royal Military
College of Canada, and a Masters Equivalent in Organizational Management in 1981
from the Canadian Military Staff School.
Jackson L. Nash has served as chief financial officer and secretary since
February 2000. Mr. Nash was vice president and chief financial officer of
Windsor Frozen Food Company, Ltd. from June 1996 to March 1999, and vice
president, chief financial officer and secretary of Trans American Refining
Corporation during 1994 and 1995. Mr. Nash was with Ernst & Young for 20 years,
leaving the firm as an audit partner in 1992, to become an independent
consultant. Mr. Nash received his undergraduate degree in Accounting from the
University of Texas and is a certified public accountant in the state of Texas.
J. William Boyar has been a director since August 1997. Mr. Boyar has been
a shareholder in the firm of Boyar & Miller, P.C. since 1990. Boyar & Miller,
P.C. represents us as outside counsel on various legal matters. Mr. Boyar has
been practicing corporate and real estate law since 1976. Mr. Boyar received his
undergraduate degree in English from Tulane University and his J.D. from Tulane
University School of Law.
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<PAGE>
Daniel Dornier has served as a director since September 1998. From August
1991 to June 1993, Mr. Dornier was an investment banker with SBC-Warburg Dillon
Reed. From June 1993 to June 1995, he served as a private investment manager
for various companies owned by the Dornier family. From 1995 to the present, Mr.
Dornier has served as president of Dornier Capital Advisors, where he manages
investment portfolios for high net worth individuals in Europe and in the United
States. Mr. Dornier studied business at the University of Nuertingen, Germany
and received an MBA from the Swiss Campus of City University in Bellevue,
Washington.
James S. Cochran, M.D. has been a director since February 1999. Since 1978,
Dr. Cochran has been practicing medicine with Urology Specialists & Associates,
a private practice of eight physicians in Dallas, Texas. Dr. Cochran also holds
a position as clinical instructor in urology at the University of Texas
Southwestern Medical School as well as the position of chief medical officer of
Physicians Data Corp and Ultrasight, Inc. In addition to being a member of
numerous professional societies, such as the American Urological Association,
the American Medical Association and the American Fertility Society, among
others, he is also a member of several national advisory boards including Prime
Medical Inc. and Indigo, Inc. Dr. Cochran is the former president of the
medical/dental staff of Presbyterian Hospital of Dallas and is chairman of the
urology process improvement committee. Dr. Cochran received his undergraduate
degree in Biochemistry from Rice University and Doctor of Medicine from the
University of Texas Southwestern Medical School.
N. Rudy Garza has been a director since September 1999. From 1983 to 1996,
Mr. Garza served as vice president and chief executive officer of S. D. Garza
Engineering, Inc., a civil and environmental engineering company, and was
involved in mergers, acquisitions and the raising of equity. In 1996, Mr. Garza
founded G-51 Capital, LLC and has served as its president since then. Mr. Garza
is a seed and early stage venture capitalist specializing in Texas centric
Internet and software companies. Mr. Garza received his undergraduate degree in
finance from St. Edward's University and his MBA from the University of Texas.
I. Bobby Majumder has been a director since May 2000. Mr. Majumder is a
partner in the law firm of Gardere & Wynne, L.L.P. and has been practicing
corporate and securities law since 1993. Mr. Majumder earned his undergraduate
degree in Philosophy from Trinity University and his J.D. from Washington & Lee
University.
Director Compensation
None of the directors receive any compensation or reimbursement of out- of-
pocket expenses to attend board meetings. However, all board members are
eligible to receive stock options pursuant to our 1997 Incentive Plan. In
February 2000, Messrs. Connolly, Boyar, Cochran, Dornier and Garza each were
granted options to purchase 100,000 shares of our common stock at an exercise
price of $0.453 per share. These options vest and become exercisable in equal
monthly installments over a three-year period beginning February 22, 2000. In
May 2000, Mr. Majumder was granted options to purchase 100,000 shares of our
common stock at an exercise price of $0.625 per share. Mr. Majumder's options
vest and become exercisable in equal monthly installments over a three-year
period beginning May 3, 2000.
Employment Agreements
Each officer serves at the discretion of the board of directors, subject to
the terms of his employment agreement, if any, and is eligible to receive stock
options pursuant to our 1997 Incentive Plan.
Timothy J. Connolly. On July 1, 1997, we entered into an employment
agreement with Timothy J. Connolly, our chief executive officer. On August 2,
1999, the employment agreement was amended to reflect Mr. Connolly's sole
position as chairman of the board. As of December 20, 1999, Mr. Connolly was
also named president. The initial term of the contract expires December 31,
2001. Thereafter, the contract will be automatically extended for successive
one-year periods unless terminated by Mr. Connolly or us. According to the
agreement, Mr. Connolly will receive an annual base salary of $250,000 for 2000.
Effective as of January 1, 2000, Mr. Connolly's employment agreement was amended
to allow him, at his option, to be paid additional shares of common stock in
lieu of his future cash salary on terms agreeable to Mr. Connolly and us. In
addition to the base salary, Mr. Connolly is entitled to receive an annual
bonus. The annual bonus is determined at the beginning of each year and is
contingent upon Mr. Connolly's ability to meet certain performance criteria.
Mr. Connolly is entitled to terminate employment with us and receive 100% of the
base salary under his contract if a change of control occurs as defined in his
contract.
20
<PAGE>
H. Russel Douglas. On April 1, 2000, we entered into an employment
agreement with H. Russel Douglas, our chief technology officer. The initial
term of the contract is to expire on September 30, 2000. According to the
agreement, Mr. Douglas will receive an annual base salary of $131,247 for 2000.
In addition to the base salary, Mr. Douglas is entitled to receive a bonus equal
to 12 1/2% of his base salary, contingent upon Mr. Douglas' ability to meet
certain performance criteria.
Jackson L. Nash. On February 14, 2000, we entered into a letter agreement
with Jackson L. Nash as our chief financial officer. The term of the agreement
is effective until terminated by either the employer or the employee. The
contract provides for payment at a rate of $80 per hour.
Other Employment Agreements
In connection with our reorganization effective December 20, 1999, several
of our executive officers' employment agreements were terminated. These
executives were Eric A. Black our former chief executive officer, Richard A.
Cabrera our former chief financial officer, Milton A. Spiegelhaur our former
vice president of sales and marketing, and Robin P. Ritchie our former chief
operating officer.
21
<PAGE>
Executive Compensation
The following table provides certain summary information concerning
compensation paid or accrued during the fiscal years ended December 31, 1999,
1998 and 1997 to our chief executive officer and to each of the other most
highly compensated executive officers during the fiscal year ended December 31,
1999 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------------------ ------------------------------
Securities
Name and Principal Other Annual Underlying All Other
Position Year Salary Bonus Compensation (1) Options/Sars Compensation
------------------------- ------ ---------- ---------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Eric A. Black (3) 1999 $104,167 25,000 -- 1,500,000 (4) --
chief executive officer
Timothy J. Connolly 1999 $250,000 $109,250 -- -- --
chairman of the board 1998 $224,417 (5) -- $11,605 (2) -- --
1997 $157,833 24,399 9,433 (2) 500 --
Robin P. Ritchie (3) 1999 $161,665 -- -- -- --
chief operating officer 1998 $ 50,000 -- -- 300,000 (6) --
H. Russell Douglas 1999 $178,675 $ 15,020 -- -- --
chief technology officer 1998 $188,401 (5) -- 9,000 (2) 110,000 --
1997 $113,500 -- 7,500 (2) 100,500 --
Richard A. Cabrera (3) 1999 $103,979 $ 25,000 -- 210,000 (4) --
chief financial officer -- --
Milton A. Speigelhauer (3) 1999 $159,842 -- -- 150,000 (6) --
vice-president of 1998 -- -- -- -- --
marketing and sales
</TABLE>
_________________
(1) Amounts exclude perquisites and other personal benefits because such
compensation did not exceed the lesser of $50,000 or 10% of the total annual
salary and bonus reported for each executive officer.
(2) This amount includes commissions and car allowance, if pertinent.
(3) On December 20, 1999, Mr. Black, Mr. Ritchie, Mr. Cabrera, and Mr.
Spiegelhauer agreed to terminate their employment contracts.
(4) These options were forfeited upon the termination of employment contracts.
(5) Includes 32,143 and 21,429 shares of common stock issued to Timothy J.
Connolly and H. Russel Douglas, respectively, in lieu of cash salaries. The
value of this amounted to $76,001 and $51,001, respectively.
(6) The unvested options were forfeited upon the termination of employment.
With respect to the vested options, we agreed to extend the exercisable
period for an additional three years from December 20, 1999.
22
<PAGE>
Option Grants/SAR in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------------------------------
Number of % of Total
Securities Options/SAR's
Underlying granted to Exercise or
Option/SAR's employees in Base Price Expiration
Name granted fiscal year ($/share) Date
------------------------------------- ------------------ ------------------- ------------------ --------------
<S> <C> <C> <C> <C>
Eric A. Black (1).................... 1,500,000 71.14% $1.03 8/2/09
Richard A. Cabrera (1)............... 210,000 9.96% $1.25 4/15/09
</TABLE>
(1) On December 20, 1999 Erick A. Black's and Richard A Cabrera's employment
contracts terminated in connection with our reorganization. Upon
termination, the Company and Mr. Black and Mr. Cabrera mutually agreed to
forfeit the vested and unvested shares of the option grants.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year Ended Option
Values
The following table provides certain information with respect to options
exercised during the fiscal year ended December 31, 1999 by the Chief Executive
Officer and each of the Named Executive Officers listed in the preceding tables:
<TABLE>
<CAPTION>
Number Number of Securities Value of Unexercised
of Underlying Unexercised In-the-Money Options at
Shares Options at Fiscal Year-End (#) Fiscal Year-End ($)
Acquired on Value ---------------------------------- ---------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---------------------------- ----------- ------------- ---------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Eric A. Black (2)........... - - - - - -
Timothy J. Connolly......... - - 333 167 - -
Robin P. Ritchie (3)........ - - 140,625 - - -
H. Russel Douglas........... - - 100,000 110,000 - -
333 167
Richard A. Cabrera (2)...... - - - - - -
Milton A. Speigelhauer (3).. - - 66,667 - - -
Jackson L. Nash............. - - - - - -
</TABLE>
__________________
(1) The value for these options is not presented because the fair market value
price of our common stock is less than the option price.
(2) During 1999, Eric A. Black and Richard A. Cabrera were granted options to
purchase 1,500,000 and 210,000 shares of our common stock, respectively, in
connection with their employment agreements. On December 20, 1999, Mr.
Black's and Mr. Cabrera's contracts terminated as the result of our
reorganization. Upon termination, Mr. Black and Mr. Cabrera agreed to
forfeit the vested and unvested options.
(3) On December 20, 1999, Robin P. Ritchie's and Milton A. Spiegelhauer's
employment contracts terminated in connection with our reorganization.
Upon termination, Mr. Ritchie and Mr. Spiegelhauer agreed to forfeit the
unvested options. We extended the life of the vested options for an
additional three years from December 20, 1999.
23
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, derived from our
transfer records, filings with the Securities and Exchange Commission and other
public information, regarding the beneficial ownership of common stock as of
July 31, 2000 by each person who is known by us to beneficially own more than
five percent of the outstanding shares of common stock, each of the named
executive officers and directors, and all directors and executive officers as a
group.
<TABLE>
<CAPTION>
Number
of Shares of Percent of Class
Name and Address of Beneficial Owner (1) Common Stock (2) (2)
----------------------------------------- -----------------------------------------------------
<S> <C> <C>
Greenwich, AG.................................................. 7,156,483 (3) 17.23%
Neuer Wall 32
20354 Hamburg, Germany
Voice Technologies Partners, Ltd............................... 5,590,000 13.59%
Entrepreneurial Investors Limited.............................. 5,498,739 13.36%
Citibank Building, Second Floor
East Mall Drive
P.O. Box F-42544
Freeport, Bahamas
Timothy J. Connolly............................................ 4,704,319 (4), (5) 11.34%
Jan Carson Connolly............................................ 4,704,319 (4), (6) 11.34%
Daniel Dornier................................................. 8,257,893 (7) 19.84%
25 Field Point Drive
Greenwich, Connecticut 06830
H. Russel Douglas.............................................. 1,583,646 (4), (8) 3.83%
N. Rudy Garza.................................................. 180,555 (9) *
J. William Boyar............................................... 176,110 (10) *
James S. Cochran, M.D.......................................... 87,055 (11) *
I. Bobby Majumder.............................................. 16,666 (12) *
Jackson L. Nash................................................ 97,334 (13) *
All directors and executive officers as a group (8 persons).... 15,103,578 35.44%
</TABLE>
___________
* Indicates less than one percent.
24
<PAGE>
(1) Except as otherwise indicated, the addresses for the above-referenced
persons are at the Company.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of June 30, 2000 are
deemed outstanding. Such shares, however, are not deemed outstanding for
the purposes of computing the percentage ownership of each other person.
Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, each stockholder named in the table has
sole voting and investment power with respect to the shares set forth
opposite such stockholder's name.
(3) Includes 400,000 shares of common stock issuable upon exercise of currently
exercisable warrants in connection with the Bridge Loan Agreement.
(4) Mr. Connolly has voting and disposition control over the shares of common
stock owned by Voice Technologies Partners, L.P., by virtue of owning all
of the outstanding stock of Voice Technologies Management Corp., the
managing general partner of Voice Technologies Partners, L.P. Ms. Carson
Connolly and Mr. Douglas also own partnership interests in Voice
Technologies Partners, L.P., either in their individual capacities or
through other entities in which they have ownership interests.
(5) Includes 157,217 shares of common stock issuable upon exercise of currently
exercisable warrants in connection with the Bridge Loan Agreements and
employee and director stock options. Also includes 2,077,712 shares of
common stock and warrants beneficially owned by his wife, Jan Carson
Connolly.
(6) Includes 160,416 shares of common stock issuable upon exercise of currently
exercisable warrants in connection with the Bridge Loan Agreement. Also
includes 2,618,275 shares of common stock beneficially owned by her
husband, Timothy J. Connolly.
(7) Includes 79,999 shares of common stock issuable upon exercise of director
stock options. In addition, Mr. Dornier beneficially owns 6,756,483 shares
and 400,000 shares of the common stock and warrant holdings, respectively,
of Greenwich, AG, by virtue of being a director and chief executive officer
of Greenwich, AG.
(8) Includes 181,999 shares of common stock issuable upon exercise of employee
stock options.
(9) Includes 180,555 shares of common stock issuable upon exercise of currently
exercisable warrants in connection with Bridge Loan Agreements and director
stock options.
(10) Includes 166,110 shares of common stock issuable upon exercise of director
stock options.
(11) Includes 87,055 shares of common stock issuable upon exercise of director
stock options.
(12) Includes 16,666 shares of common stock issuable upon exercise of director
stock options.
(13) Includes 33,334 shares of common stock issuable upon exercise of employee
options.
CERTAIN TRANSACTIONS
Garza Agreement
On February 22, 2000, we entered into a one-time oral consulting agreement
with N. Rudy Garza, one of our directors, that paid Mr. Garza a fee of $10,000
to provide consulting services relating to the preparation and review of our
business plan.
G-51 Capital
In November 1999, we entered into a convertible promissory note and warrant
purchase agreement, as amended, with G-51 Capital, an affiliate of N. Rudy Garza
who is a member of our board of directors. The note has a stated principal
amount of $250,000 and bears interest at 9%. The note is secured by a security
interest in certain of our assets. The note is convertible into our common
stock at a price of $0.37 per share. The conversion price is adjustable downward
based on the pricing of future common stock issues or issuances of subsequent
convertible issues with more favorable conversion terms. Contingent warrants may
be issuable as a result of future equity transactions.
Greenwich, AG
In July 1999, we entered into a convertible promissory note and warrant
purchase agreement with Greenwich, AG, an affiliate of Daniel Dornier who is a
member of our board of directors. The note, which we repaid in December 1999,
had a stated principal amount of $500,000 and bore interest at 9%. The warrant
entitles Greenwich, AG to purchase 400,000 shares of our common stock at $1.25
per share and is currently exercisable.
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<PAGE>
Lernout & Hauspie Affiliates
Jo Lernout and Thomas Denys, were appointed to our board of directors on
February 8, 1999 and resigned as of December 20, 1999, in connection with our
reorganization. Mr. Lernout is an executive with Lernout & Hauspie Speech
Products and Mr. Denys is an executive with L&H Investment Co., N.V. The
following summarizes agreements between us and Lernout & Hauspie and its
affiliates, L&H Investment Co., N.V. and Lonestar Medical Transcription USA,
Inc.
Value Added Reseller Agreement. On September 30, 1998, we entered into a
value added reseller agreement with Lernout & Hauspie. Lernout & Hauspie
develops and licenses dictation software for use in the health care industry.
The agreement gives us rights to a world-wide non-exclusive license of software
products developed by Lernout & Hauspie. On December 27, 1998, this agreement
was amended to include additional requirements. In accordance with the amended
agreement, we agreed to prepay Lernout & Hauspie $1,000,000 (in two
installments) for software licenses. Of this amount, $650,000 was paid on
December 31, 1998 and the balance of $350,000 was paid on March 31, 1999.
Series D Preferred Stock Agreement. On December 31, 1998, we entered into
a series D preferred stock and warrant purchase agreement to sell up to 5,000
shares of series D convertible preferred stock to L&H Investment. The preferred
shares have a par value of $.10 and were priced at $1,000 per share. As of
December 20, 1999, the shares were cancelled.
Lonestar Medical Transcription USA, Inc. Pursuant to an asset purchase
agreement dated January 7, 2000 and effective as of December 20, 1999, we sold
the net assets and contracts of our medical transcription service operations
based in New York, New Jersey, Houston, Texas and Manila the Philippines for
approximately $9.4 million to Lonestar and its parent company L&H Investment.
Additionally, Lonestar and L&H Investment obtained non-exclusive rights to our
VoiceCOMMANDER 99 code.
The $9.4 million purchase price consisted of:
. the forgiveness of a $2.0 million promissory note held by Lernout &
Hauspie;
. the forgiveness of a $1.5 million promissory note held by L&H
Investment;
. the forgiveness of approximately $94,000 in interest;
. the retirement of $5.0 million in series D preferred stock held by L&H
Investment and forgiveness of approximately $318,000 in dividends; and
. approximately $457,000 in cash for our accounts receivable sold.
We also converted warrants held by L&H Investment to purchase approximately
3.5 million shares of our common stock at $1.25 per share into a warrant to
purchase 800,000 shares of our common stock at $0.37 per share. Lonestar became
the holder of this warrant and in May 2000 performed a cashless exercise of the
warrant for 572,132 shares of our common stock.
In addition to the purchase price, Lonestar agreed to assume certain
employment contracts including those of Eric A. Black, president and chief
executive officer, and Richard A. Cabrera, chief financial officer and
secretary. Mr. Black and Mr. Cabrera resigned their positions with us, effective
as of December 20, 1999. We agreed to release Mr. Black and Mr. Cabrera from
the non-compete clauses of their employment contracts.
Bridge Loan Agreements
During the month of December 1998, we entered into various bridge loan
agreements with: Timothy J. Connolly, William T. Kennedy, Robin P. Ritchie and
Milton A. Speigelhauer, who were officers; N. Rudy Garza, one of our directors;
a former employee; and a third party. The aggregate balance of the 1998 bridge
loans was $335,333, and bears interest at 12% per annum. The bridge loans plus
accrued interest are payable upon the earlier of six months following the date
of the note or three business days following our receipt of $2,000,000 in equity
funding. On December 31, 1998, we received $2,000,000 in equity
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<PAGE>
funding and paid the 1998 bridge loans in January, 1999. In connection with the
1998 bridge loans, we granted warrants to purchase 355,495 shares of common
stock at exercise prices ranging from $0.94 per share to $1.06 per share.
Series E Preferred Stock Agreement
On August 18, 1999, we entered into a series E preferred stock purchase
agreement to sell up to 2,000 shares of series E convertible preferred stock for
$2,000,000 to Greenwich, AG, of which Daniel Dornier is a director. The
preferred shares have a par value of $.10 and were priced at $1,000 per share.
Series G Preferred Stock Agreements
On January 7, 2000, we entered into a Letter Agreement pursuant to which
certain of our preferred stockholders agreed to exchange their shares of
preferred stock for a new series G preferred stock. The series G preferred
stock reduced the conversion price of the existing series of preferred stock and
contained a mandatory conversion provision that required the series G preferred
stock to be converted into common stock within seven days of issuance. The
result of these transactions was the resetting of the conversion price for each
existing series of preferred stock followed by an automatic conversion of the
new series G preferred stock into our common stock. Each of these series G
preferred stock exchange agreements are described below.
Entrepreneurial Investors, Ltd. On January 20, 2000, we entered into a
Stock Exchange Agreement with the Entrepreneurial Investors, Ltd., to exchange
their shares of our series A preferred stock for shares of series G preferred
stock. On March 23, 2000, Entrepreneurial Investors converted its 186,000 shares
of series A preferred stock into 14,880 shares of series G preferred stock. Upon
conversion, Entrepreneurial Investors also received stock dividends amounting to
347.166 shares of series G preferred stock. On March 30, 2000, the entire
15,227.166 shares of series G preferred stock automatically converted into
5,075,722 shares of our common stock.
Holders of Series C Preferred Stock. On February 11, 2000, we entered into
a Stock Exchange Agreement with the holders of the our series C preferred stock,
which includes Daniel Dornier and certain of his relatives, to exchange their
shares of series C preferred stock. On March 1, 2000 and March 23, 2000, the
series C investors converted their 153,538.8 series C shares into 15,353.8
shares of series G preferred stock. Upon conversion, the holders of the series
C preferred stock received stock dividends amounting to 287.34 shares of series
G preferred stock. On March 8, 2000, 14,516.68 shares of series G preferred
stock were automatically converted into 4,838,894 shares of our common stock,
and on March 30, 2000, the remaining 1,124.458 shares were converted into
374,819 shares of our common stock.
Greenwich, AG. On February 11, 2000, we entered into a Stock Exchange
Agreement with Greenwich, AG to exchange its shares of series E preferred stock
for shares of series G preferred stock based on the primary terms set forth in a
Letter Agreement dated January 7, 2000. In March of 2000, Greenwich, AG
converted their 2,000 shares of series E preferred stock into 20,000 shares of
series G preferred stock and received stock dividends amounting to 269.448
shares of series G preferred stock. Those 20,269.448 shares of series G
preferred stock were converted into 6,756,483 shares or our common stock in
March of 2000.
Boyar & Miller, P.C.
During 1999, we paid Boyar & Miller, P.C. a total of $450,905 in legal fees
and expenses for legal work performed as our outside counsel. J. William Boyar,
a director, is a shareholder, director and the chairman of Boyar & Miller. The
payments represented 8.56% of Boyar & Miller's gross revenues for 1999.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Under our amended and restated certificate of incorporation, our authorized
capital stock consists of 50,000,000 shares of common stock, par value $.001 per
share, and 2,000,000 shares of preferred stock, par value $.10 per share. As of
July 31, 2000, we had approximately 41,146,979 shares of common stock and 2,978
shares of series 2 preferred stock outstanding. As of July 31, 2000, we had
reserved 1,586,000 shares of common stock for issuance upon exercise of
outstanding options and 4,019,571 shares of common stock for issuance upon
exercise of warrants.
Common Stock
Holders of common stock are entitled to one vote per share in the election
of directors and on all other matters on which stockholders are entitled or
permitted to vote. Holders of common stock are not entitled to cumulative
voting rights. Therefore, holders of a majority of the shares voting for the
election of directors can elect all the directors. Subject to the terms of any
outstanding series of preferred stock, the holders of common stock are entitled
to dividends in such amounts and at such times as may be declared by our board
of directors out of funds legally available therefor. Upon liquidation or
dissolution, holders of common stock are entitled to share ratably in all net
assets available for distribution to stockholders after payment of any
liquidation preferences to holders of preferred stock. Holders of common stock
have no redemption, conversion or preemptive rights.
Preferred Stock
The board of directors, without any action by our stockholders, is
authorized to issue up to a total of 2,000,000 shares of preferred stock in one
or more series and to determine the voting rights (including the right to vote
as a series on particular matters), preferences as to dividends and in
liquidation and the conversion and other rights of each such series. The board
of directors could issue a series of preferred stock that could, depending on
the terms of such series, provide for a liquidation preference over the common
stock or impede the completion of a merger, tender offer or other takeover
attempt. The board of directors, in so acting, could issue preferred stock
having terms that discourage an acquisition attempt through which an acquiror
may be otherwise able to change the composition of the board of directors,
including a tender or exchange offer or other transaction that some, or a
majority, of the Company's stockholders might believe to be in their best
interest. In addition, the issuance of preferred stock could adversely affect
the voting power of the holders of common stock.
Series 2 Preferred Stock. Set forth below is a summary of the terms of our
outstanding series 2 preferred stock.
Dividends. The shares of series 2 preferred stock are entitled to
dividends payable quarterly in arrears on the first day of January, April,
July and October of each year. The dividend rate from the date of issuance
is 8.0% per annum. Dividends are payable, at our option, in cash or in
additional shares of series 2 preferred stock.
Liquidation Preference. In the event of any liquidation, dissolution or
winding up, voluntary or involuntary, the shares of series 2 preferred
stock are entitled to a liquidation preference over the common stock of
$100 per share, plus an amount per share equal to all earned but unpaid
dividends.
Conversion. The series 2 preferred stock will be convertible at the
holder's option into a number of shares of common stock equal to (i) $100
per share of series 2 preferred stock being converted, plus any earned but
unpaid dividends, if any, divided by (ii) the greater of $1.00 per share or
the average daily closing price of our common stock for the thirty day
period immediately preceding the effective date of any such conversion on
the Nasdaq Over-the-Counter Bulletin Board. We have agreed to register such
shares of common stock issued upon conversion of the series 2 preferred
stock for resale under the Securities Act of 1933, as amended, at our
expense. These shares of series 2 preferred stock are subject to automatic
conversion if we undertake an underwritten public offering with an
aggregate market value of $10,000,000 or more.
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<PAGE>
Redemption. Any shares of the series 2 preferred stock may be redeemed, at
our 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.
Ranking. The series 2 preferred stock will be subordinate to all lettered
series of preferred stock and to claims of creditors, including holders of
our outstanding debt instruments.
Voting Rights. The series 2 preferred stock has no voting rights before
conversion except as provided by law.
Provisions of the Certificate of Incorporation and Delaware Law
Our bylaws direct that special meetings of the stockholders may only be
called by a majority of the members of the board of directors, the chairman of
the board of directors or the president. The Bylaws further provide that
stockholders' nominations to the board of directors and other stockholder
business proposed to be transacted at stockholder meetings must be timely
received by us in a proper written form which meets the prescribed content
requirements. These provisions may have the effect of deterring certain tender
offers or hostile takeovers or may delay or prevent changes in control of our
management.
Limitation of Director Liability. Section 102(b)(7) of the Delaware
General Corporation Law authorizes corporations to limit or eliminate the
personal liability of directors to corporations and their stockholders for
monetary damages for breach of directors' fiduciary duty of care. Although
section 102(b) does not change directors' duty of care, it enables corporations
to limit available relief to equitable remedies such as injunction or
rescission. Our certificate of incorporation limits the liability of our
directors to us and to our stockholders (in their capacity as directors but not
in their capacity as officers) to the fullest extent permitted by section
102(b)(7). Specifically, our directors will not be personally liable for
monetary damages for breach of a director's fiduciary duty as a director, except
for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in section 174 of the Delaware General
Corporation Law; or
. for any transaction from which the director derived an improper personal
benefit.
Indemnification. To the maximum extent permitted by law, our certificate
of incorporation and bylaws provide for mandatory indemnification of our
directors and officers, and permit indemnification of our employees and agents
against all expense, liability and loss to which they may become subject or
which they may incur as a result of being or having been a director, officer,
employee or agent. In addition, we must advance or reimburse our directors and
officers, and may advance or reimburse employees and agents, for expenses
incurred by them in connection with indemnifiable claims.
Insofar as we may permit indemnification for liabilities arising under the
Securities Act of 1933 to our directors, officers and controlling persons, we
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable.
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<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information concerning the selling
stockholders.
<TABLE>
<CAPTION>
Number of Shares Number of
Owned and to be Number of Shares Percentage of
Owned Prior to Shares Being Owned After Shares owned
Selling Stockholders Offering (1)(2) Offered (2) Offering after Offering
------------------------------------------ ------------------ --------------- --------------- --------------
<S> <C> <C> <C> <C>
Hillel Bronstein (3)(4)(5)(6)............. 971,232 971,232 -- *
Stuart Szpicek (3)(4)(5)(6)............... 996,212 996,212 -- *
Yaniv Dagan(3)(4)(5)(7)................... 144,616 89,940 54,676 *
Colleen McBrien (8)....................... 508,155 508,155 -- *
James McBrien (8)......................... 508,155 508,155 -- *
Linda Willhite (9)(10).................... 137,953 132,953 5,000(10) *
Anita Morrison (11)....................... 193,634 193,634 -- *
Timothy Cook (12)......................... 700,000 700,000 -- *
Kay Cook (12)............................. 700,000 700,000 -- *
Lonestar Medical Transcription USA, Inc.
(13).................................... 572,132 572,132 -- *
Entrepreneurial Investors LTD (14)(15)... 5,475,422 5,075,722 399,700 *
Cornelius Dornier (15)(16)............... 766,057 764,035 2,022 *
Daniel Dornier(15)(16)(17)............... 8,257,893 7,775,198 482,695 1.16%
Gabriele Dornier(15)(16)................. 766,057 764,035 2,022 *
Matthia Dornier(15)(16).................. 510,706 509,358 1,348 *
Silvius Dornier(15)(16).................. 1,021,411 1,018,715 2,696 *
Herman Ebel(15)(16)...................... 663,916 662,164 1,752 *
Stephen L. Pampush(15)(16)............... 51,071 50,936 135 *
Peter Widenman(15(16).................... 51,071 50,936 135 *
Entrepreneurial Services LTD (15)16)..... 375,811 374,819 992 *
Greenwich, AG (15)(18)................... 7,156,483 6,756,483 400,000 *
</TABLE>
_____________
* Indicates less than one percent.
(1) The selling stockholders have sole voting and sole investment power with
respect to all shares owned, except as otherwise noted.
(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) Includes 613,126 shares held by Mr. Bronstein, 633,369 shares held by Mr.
Szpicek and 54,576 shares held by Mr. Dagan that we issued upon the
conversion of Cornell Transcription, Inc's holdings of our series 1
preferred stock in December 1999, and that Cornell subsequently transferred
to the holder. We issued the series 1 preferred stock in December 1999, as
a deferred payment of a portion of the purchase price for our acquisition
of assets from Cornell.
(4) Includes 77,702 shares held by each of Messrs. Bronstein and Szpicek and
8,179 shares held by Mr. Dagan that we issued in settlement of potential
offset claims as set forth in the Forbearance Agreements dated May 4, 2000.
(5) Includes 161,654 shares to be issued to Mr. Bronstein, 166,391 shares to be
issued to Mr. Szpicek and 14,685 shares to be issued to Mr. Dagan in lieu
of cash interest payable under the terms set forth in the Forbearance
Agreements dated May 4, 2000. We estimated these share amounts based on our
current stock price.
(6) Includes 118,750 shares underlying warrants to purchase our common stock.
These warrants were issued in connection with a May 2000, agreement between
us and the holder to extend our deadline for registering the holder's
shares of common stock for resale.
(7) Includes 12,500 shares underlying warrants to purchase our common stock.
These warrants were issued in connection with a May 2000, agreement between
us and the holder to extend our deadline for registering the holder's
shares of common stock for resale. Mr. Dagan was employed by us in a sales
position from December 1998 through December 1999.
(8) Includes 140,822 shares issued in connection with the conversion of our
series 2 preferred stock. 71,819 of these shares are held by Ms. McBrien
and 69,003 shares are held by Mr. McBrien, who are married to each other.
The McBriens were issued the series 2 preferred stock in connection with
our acquisition of PRN Transcription, Inc. in February 1999. Also includes
a total of 367,333 shares underlying our series 2 preferred stock to be
issued in February 2001 and February 2002, for deferred and contingent
purchase price payments in connection with the PRN Transcription
acquisition. 187,340 and 179,993 of these shares will be owned by
Ms. McBrien and Mr. McBrien, respectively. We estimated the deferred and
contingent share amounts based on our current stock price .
(9) Includes 32,953 shares issued in connection with the conversion of our
series 2 preferred stock. Ms. Willhite was issued shares of our series 2
preferred stock in connection with our December 1998, acquisition of the
assets of Linda R. Willhite Transcription. Also includes a total of 100,000
shares underlying our series 2 preferred stock to be issued in December
2000 and December 2001, for deferred purchase price in connection with the
LRW Transcription acquisition. We estimated this deferred share amount
based on our current stock
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<PAGE>
price. Ms. Willhite was employed as a manager of one of our divisions from
December 1998 through June 2000.
(10) Includes 5,000 shares underlying exercisable stock options issued under our
1997 Incentive Stock Option Plan.
(11) Includes 64,544 shares issuable upon conversion of our series 2 preferred
stock. Ms. Morrison was issued shares of our series 2 preferred stock in
connection with our acquisition of AM Transcription, Inc. in February 1999.
Also includes a total of 129,090 shares underlying our series 2 preferred
stock to be issued in February 2001 and February 2002, for deferred
purchase price in connection with the AM Transcription acquisition. We
estimated this deferred share amount based on our current stock price.
(12) Includes 233,334 shares issuable upon conversion of our series 2 preferred
stock held by Ms. and Mr. Cook, who are married to each other. 116,667 of
these shares will be owned by each of Mr. and Ms. Cook. Mr. and Ms. Cook
were issued shares of our series 2 preferred stock in connection with our
May 1999, acquisition of the stock of A Word Above, Inc. Also includes a
total of 466,666 shares underlying our series 2 preferred stock to be
issued in May 2001 and May 2002, for deferred purchase price in connection
with the A Word Above acquisition. 233,333 of these shares will be owned by
each of Mr. and Ms. Cook. We estimated this deferred share amount based on
our current stock price. Ms. Cook was employed as a manager of one of our
wholly-owned subsidiaries from May 1999 through December 1999.
(13) Represents shares issued in connection with the May 2000 cashless exercise
of a warrant to purchase our common stock. We issued this warrant in
January 2000, in connection with our sale of assets to Lonestar and its
parent company.
(14) Entrepreneurial Investors LTD was previously a holder of our series A
preferred stock, which was converted into our series G preferred stock in
March 2000.
(15) The shares being offered represent shares issued in connection with the
conversion of our series G preferred stock in March 2000.
(16) Represents previous holders of our series C preferred stock, which was
converted into our series G preferred stock in March 2000. Although some
of these holders are related to Daniel Dornier, a member of our board of
directors, none are married to, minor children of or members of Mr.
Dornier's household.
(17) Mr. Dornier is a member of our board of directors. His holdings include
79,999 shares of common stock issuable upon exercise of director stock
options. In addition, Mr. Dornier beneficially owns 6,756,483 and 400,000
shares of the common stock and warrant holdings, respectively, in
Greenwich, AG. Mr. Dornier is a member of Greenwich, AG's board of
directors.
(18) Greenwich, AG was previously a holder of our series E preferred stock,
which was converted into our series G preferred stock in March 2000.
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 separately-
negotiated transactions, in an underwritten offering, or by a combination of
these methods of sale, at fixed prices that may be changed, at market prices
prevailing at the time of sale, at prices related to prevailing market prices or
at negotiated prices. As used in this prospectus, "selling stockholders"
includes pledgees, donees, transferees and other successors in interest to a
selling stockholder, who are selling shares received from a selling stockholder
after the date of this prospectus. The selling stockholders may sell their
common stock to or through broker-dealers, and the 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 the 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:
. transactions which involve cross or block trades or any other
transaction permitted by the OTCBB or other trading markets;
. "at the market" to or through market makers or into an existing market
for the common stock;
. in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected through
agents;
. through transactions in options or swaps or other derivatives (whether
exchange-listed or otherwise);
. through short sales; or
. any combination of these methods of sale.
The selling stockholders may also enter into option or other transactions
with broker-dealers that require the delivery to the 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, 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 will be subject to prospectus
delivery requirements because they may be deemed to be "underwriters" as that
term is defined in the Securities Act of 1933, 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 of 1933.
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<PAGE>
After we are notified by a selling stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of common
stock through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act of 1933, disclosing:
. the name of each such selling stockholder and of the participating
broker-dealer(s);
. the type and number of securities involved;
. the price at which such securities were sold;
. the commissions paid or discounts or concessions allowed to such broker-
dealer(s), where applicable;
. that such broker-dealer(s) did not conduct any investigations to verify
the information set out or incorporated by reference in this prospectus;
and
. other facts material to the transaction.
We will bear all costs, expenses and fees in connection with the
registration of the common stock offered hereby. Brokerage commissions
attributable to the sale of common stock, if any, will be borne by the selling
stockholders. We have informed the selling stockholders that the anti-
manipulative provisions of Regulation M promulgated under the Securities
Exchange Act of 1934 may apply to their sales.
LEGAL MATTERS
The legality of the securities offered hereby will be passed on for us by
Porter & Hedges, L.L.P., Houston, Texas.
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EXPERTS
The consolidated financial statements of Applied Voice Recognition, Inc. at
December 31, 1998, and for the year then ended, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon (which contain an explanatory
paragraph describing conditions that raise substantial doubt about the Company's
ability to continue as a going concern as described in Note 2 to the
consolidated financial statements) appearing elsewhere herein, and are included
in reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
Our consolidated financial statements for the year ended December 31, 1999
included in this prospectus have been audited by Weinstein Spira & Company,
P.C., independent auditors, as stated in their report thereon (which contains an
explanatory paragraph describing conditions that raise substantial doubt about
our ability to continue as a going concern as described in Note 2 to the
consolidated financial statements) and have been so included in reliance upon
the report of Weinstein Spira & Company, P.C. given their authority as experts
in accounting and auditing.
CHANGES IN ACCOUNTANTS
On November 17, 1999, Ernst & Young LLP notified us that it was declining
to stand for re-election as our independent certifying accountant. The opinion
on the financial statements for the year ended December 31, 1998 included an
explanatory paragraph describing our financial condition and issues related to
the uncertainty as to our ability to continue as a going concern. We and Ernst &
Young LLP had no disagreements on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
On March 1, 2000, we engaged Weinstein Spira & Company, P.C. as our
independent accountants. We did not consult Weinstein Spira & Company, P.C. on
any accounting, auditing or financial reporting issue prior to its appointment.
33
<PAGE>
APPLIED VOICE RECOGNITION, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report................................................................ F-2
Report of Independent Auditors.............................................................. F-3
Consolidated Balance Sheets................................................................. F-4
Consolidated Statements of Operations....................................................... F-6
Consolidated Statements of Stockholders' Equity............................................. F-7
Consolidated Statements of Cash Flows....................................................... F-22
Notes to Consolidated Financial Statements.................................................. F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Applied Voice Recognition, Inc.
Houston, Texas
We have audited the accompanying Consolidated Balance Sheet of Applied
Voice Recognition, Inc. as of December 31, 1999, and the related Consolidated
Statements of Operations, Stockholders' Equity, and Cash Flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Applied Voice Recognition, Inc. as of December 31, 1999, and the consolidated
results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that Applied Voice Recognition, Inc. will continue as a going concern.
As more fully described in Note 2, the Company has incurred recurring operating
losses and cash deficits from operations. Without the assurance of new capital,
these conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
March 29, 2000
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Applied Voice Recognition, Inc.
Houston, Texas
We have audited the accompanying Consolidated Balance Sheet of Applied
Voice Recognition, Inc. as of December 31, 1998, and the related Consolidated
Statements of Operations, Stockholders' Equity, and Cash Flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Applied Voice Recognition, Inc. as of December 31, 1998, and the results of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming that Applied Voice Recognition, Inc. will continue as a going concern.
As more fully described in Note 2, the Company has incurred recurring operating
losses and has incurred cash deficits from operations. Without the assurance of
new capital, these conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
ERNST & YOUNG, LLP
HOUSTON, Texas
March 27, 1999
F-3
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
---------------------------------
2000 1999 1998
--------------- -------------- ---------------
<S> <C> <C> <C>
CURRENT ASSETS (unaudited)
Cash and cash equivalents......................................... $1,093,467 $ 53,529 $1,377,913
Accounts receivable, net of allowance of $74,900 at March 31,
2000 and $74,900 and $32,500 for 1999 and 1998, respectively.... 303,521 258,668 213,305
Other receivable.................................................. -- 747,137 1,000,000
Inventory......................................................... 4,434 20 37,221
Prepaid licenses.................................................. -- -- 440,000
Deposits, prepaid expenses and deferred financing costs........... 18,344 6,054 35,927
Deferred expenses................................................. 167,092 264,570
--------------- -------------- ---------------
Total Current Assets............................................ 1,586,858 1,065,408 3,368,936
PROPERTY AND EQUIPMENT, NET....................................... 692,262 858,492 697,298
--------------- -------------- ---------------
OTHER ASSETS
Prepaid software rights........................................... 970,900 970,900 560,000
Capitalized software cost, net of accumulated amortization of
$67,697 in 1998................................................. -- -- 397,369
Other intangibles, net of accumulated amortization of $53,514
at March 31, 2000 and $42,173 in 1999........................... 435,969 447,310 613,039
Goodwill, net of accumulated amortization of $54,141 at
March 31, 2000 and $44,988 and $15,555 in 1999 and 1998,
respectively.................................................... 495,760 504,899 657,888
--------------- -------------- ---------------
Total Other Assets.............................................. 1,902,629 1,923,109 2,228,296
--------------- -------------- ---------------
$4,181,749 $3,847,009 $6,294,530
=============== ============== ===============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
--------------------------------------
2000 1999 1998
----------------- ---------------- ------------------
<S> <C> <C> <C>
CURRENT LIABILITIES (Unaudited)
Trade payables.............................................. $ 255,362 $ 365,639 $ 356,660
Accrued expenses............................................ 1,060,074 1,167,416 897,998
Stock dividend payable...................................... -- 246,774 156,536
Current portion of preferred stock payable.................. 320,887 474,000 638,144
Common stock payable........................................ -- -- 13,500
Note payable to sellers..................................... -- -- 297,884
Note payable to related party............................... 250,000 250,000
Bridge loans payable........................................ -- -- 335,333
Current portion of capital lease obligation................. 64,354 64,354 41,493
Current portion of long-term debt........................... 58,333 65,977 11,542
Deferred revenue............................................ -- -- 39,120
----------------- ---------------- ------------------
Total Current Liabilities................................. 2,009,010 2,634,160 2,788,210
----------------- ---------------- ------------------
Preferred stock payable, net of current portion............. 683,460 683,460 70,683
Capital lease, net of current portion....................... 239,424 279,670 97,869
Long-term debt, net of current portion...................... 54,698 141,091 797
----------------- ---------------- ------------------
Total Liabilities......................................... 2,986,592 3,738,381 2,957,559
----------------- ---------------- ------------------
STOCKHOLDERS' EQUITY
Preferred Stock; $.10 par value; 2,000,000 shares authorized
Series A; 186,000 shares issued and outstanding in 1998.... -- -- 18,600
Series B; 1,680 and 2,285 shares issued and outstanding in
1999 and 1998, respectively................................ -- 168 228
Series C; 153,538 issued and outstanding in 1998............ -- -- 15,353
Series D; 3,000 shares issued and outstanding in 1998....... -- -- 300
Series 2; 644 shares and 500 shares issued and outstanding
in 2000 and 1999, respectively............................. 64 50
Common Stock; $.001 par value; 50,000,000 shares authorized;
38,808,083, 35,269,794 and 16,040,994 shares issued and
outstanding in 2000, 1999 and 1998, respectively........... 38,808 35,269 16,040
Paid-in Capital............................................. 19,741,893 18,199,066 18,136,867
Accumulated Deficit......................................... (18,585,608) (18,125,925) (14,850,417)
----------------- ---------------- ------------------
Total Stockholders' Equity.................................. 1,195,157 108,628 3,336,971
----------------- ---------------- ------------------
Total Liabilities and Stockholders' Equity.................. $ 4,181,749 $ 3,847,009 $ 6,294,530
================= ================ ==================
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended For the Year Ended
March 31, December 31,
--------------------------------- ------------------------------------
2000 1999 1999 1998
-------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
(unaudited)
Net hardware, software and related revenues....... -- $ 469,949 $ 503,843 $ 302,254
Net transcription service revenues................ $ 607,375 749,169 4,757,967 415,103
-------------- --------------- ---------------- ---------------
Total Net Revenues.................. 607,375 1,219,118 5,261,810 717,357
Hardware, software and related cost of sales...... -- 52,567 428,643 202,125
Transcription cost of services.................... 472,285 500,745 3,622,523 230,121
-------------- --------------- ---------------- ---------------
Total Cost of Sales................. 472,285 553,312 4,051,166 432,246
-------------- --------------- ---------------- ---------------
Gross Margin...................................... 135,090 665,806 1,210,644 285,111
-------------- --------------- ---------------- ---------------
OPERATING EXPENSES
Marketing and sales............................... 12,156 169,292 797,745 1,265,927
General and administrative........................ 500,535 1,525,327 7,024,097 5,640,238
Research and development.......................... 13,752 263,241 711,404 754,170
-------------- --------------- ---------------- ---------------
Total Operating Expenses............ 526,443 1,957,860 8,533,246 7,660,335
-------------- --------------- ---------------- ---------------
Operating Margin.................................. (391,353) (1,292,054) (7,322,602) (7,375,224)
-------------- --------------- ---------------- ---------------
OTHER INCOME (EXPENSES)
Other income (expense)............................ (1,330) 7,603 (52,556) 2,497
Interest income................................... -- 11,961 24,397 72,013
Interest expense.................................. (67,000) (46,833) (867,902) (216,680)
Loss on investments............................... -- -- -- (803,125)
-------------- --------------- ---------------- ---------------
Total Other Income (Expense)........ (68,330) (27,269) (896,061) (945,295)
-------------- --------------- ---------------- ---------------
LOSS BEFORE EXTRAORDINARY ITEM.................... (459,683) (1,319,323) (8,218,663) (8,320,519)
Gain on extinguishment of debt.................... -- -- 5,562,750 --
-------------- --------------- ---------------- ---------------
NET LOSS.......................................... $(459,683) $(1,319,323) $(2,655,913) $(8,320,519)
============== =============== ================ ===============
BASIC AND DILUTED EARNINGS PER SHARE:
Loss before extraordinary item.................... $(0.01) $(0.09) $(0.50) $(0.68)
Extraordinary gain................................ -- -- 0.34 --
-------------- --------------- ---------------- ---------------
NET LOSS $(0.01) $(0.09) $(0.16) $(0.68)
============== =============== ================ ===============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999 and 1998 and the Quarter Ended March 31,
2000
<TABLE>
<CAPTION>
Preferred Stock
-------------------
Series A Series B Series C Series D
-------- -------- -------- --------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 312,500 $ 31,250 -- $ -- -- $ -- -- $ --
Issuance of 129,399 shares
of common stock in lieu of
officer's compensation
Issuance of 14,407 shares of
common stock in lieu of
employee cash bonuses
Issuance of 44,286 shares of
common stock for services
Issuance of additional
56,000 shares of common
stock as part of previous
stock transaction
Issuance of 25,000 shares of
common stock in connection
with furniture purchase
Issuance of warrants to
purchase 532,000 shares of
common stock for consulting
services
Issuance of warrants and
options to purchase
1,020,000 shares of common
stock for advisory services
Issuance of warrant to
purchase 355,500 shares in
connection with bridge loan
financing
Exercise of options to
purchase 51,167 shares of
common stock
Conversion of 126,500 shares
of Series A Preferred Stock
in exchange for 683,100
shares of common stock (126,500) (12,650)
Series A Preferred Stock
Dividend paid with common
stock
Sale of 3,000 shares of
shares of Series B
Preferred Stock for
$3,000,000 in connection
with private placement 3,000 300
Expected deemed dividend
related to discount on
conversion of Series B
Preferred Stock
Issuance of warrant to
purchase 150,000 shares, to
third party, in connection
with Series B Private
Placement
Conversion of 715 shares of
Series B Preferred Stock in
exchange for 1,147,171
shares of common stock (715) (72)
Series B Preferred Stock
Dividend paid with common
stock
Sale of 220,750 shares of
Series C Preferred Stock
for $2,207,500 in
connection with private
placement 220,750 22,075
</TABLE>
F-7
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
For the Years Ended December 31, 1999 and 1998 and the Quarter Ended March 31,
2000
<TABLE>
<CAPTION>
Preferred Stock
---------------
Series A Series B Series C Series D
-------- -------- -------- --------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Series C Preferred shares, to third
party, in connection with Series C Private
Placement 11,038 1,104
Cash expense related to Series C Private Placement
Issuance of warrant to purchase 220,750 shares,
to third party, in connection with Series C
Private Placement
Conversion of 78,250 shares of Series C Preferred
Stock in exchange for 782,500 shares of common
stock (78,250) (7,826)
Series C Preferred Stock dividend paid with
common stock
Sale of 3,000 shares of Series D Preferred Stock
for $3,000,000 in connection with private
placement 3,000 300
Cash expenses on legal and placement costs
related to Series D Private Placement
Issuance of two warrants to purchase a total of
2,000,000 shares, to Series D Investor, in
connection with Series D Private Placement
Accrued dividend on Preferred Stock Series A & C
Unrealized holding loss
Investment write-off
Net loss for the twelve months ended December 31,
1998
------- ------- ----- ---- ------- ------- ----- ----
Balance at December 31, 1998 186,000 $18,600 2,285 $228 153,538 $15,353 3,000 $300
</TABLE>
F-8
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
For the Years Ended December 31, 1999 and 1998 and the Quarter Ended March 31,
2000
<TABLE>
<CAPTION>
Preferred Stock
---------------
Series A Series B Series C Series D
-------------------- ---------------- -------------------- ----------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------- --------- ------- ------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of stock options
Issuance of 2,000 shares of Series D
Preferred Stock and related warrants 2,000 200
Expiration of warrants
Stock bonus paid to employees
Common Stock issued for services
Issuance of warrants in connection with
promissory note
Conversion of Series B Preferred shares (605) (60)
Issuance of Series E Preferred Stock and
related warrants
Preferred Stock and warrants retired in
connection with sale of assets and
issuance of warrants (5,000) (500)
Conversion of A, C and E Preferred Stock
to Common Stock (186,000) (18,600) (153,538) (15,353)
Issuance of Preferred Stock for debt
Issuance of Common Stock for debt
Common Stock issued for payment of
accrued dividends on Preferred Stock
Preferred Stock dividend
Net loss
--------- --------- ------- ------- --------- --------- ------- -------
Balance at December 31, 1999 -- $ -- 1,680 $ 168 -- $ -- -- $ --
Conversion of Series B
Preferred Stock (1,680) (168)
Issuance of Series 2 Preferred Stock for
payment of preferred stock payable
Issuance of common stock for officer's
compensation and expense reimbursement
Issuance of common stock for former
officer's severance pay
Accrued dividends on preferred stock
Series B
Conversion of Series 2 Preferred Stock
Warrant and stock option exercises
Reclassification
Net loss
--------- --------- ------- ------- --------- --------- ------- -------
Balance at March 31, 2000 -- $ -- -- $ -- -- $ -- -- $ --
========= ========= ======= ======= ========= ========= ======= =======
</TABLE>
F-9
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
For the Years Ended December 31, 1999 and 1998 and the Quarter Ended March 31,
2000
<TABLE>
<CAPTION>
Preferred Stock
---------------
Series E Series 2
---------- ----------
Shares Amount Shares Amount
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 -- $ -- -- $ --
Issuance of 129,399 shares of common
stock in lieu of officer's compensation
Issuance of 14,407 shares of common
stock in lieu of employee cash bonuses
Issuance of 44,286 shares of common
stock for services
Issuance of additional 56,000 shares of
common stock as part of previous
stock transaction
Issuance of 25,000 shares of common
stock in connection with furniture
purchase
Issuance of warrants to purchase
532,000 shares of common stock for
consulting services
Issuance of warrants and options to
purchase 1,020,000 shares of common
stock for advisory services
Issuance of warrant to purchase 355,500
shares in connection with bridge loan
financing
Exercise of options to purchase 51,167
shares of common stock
Conversion of 126,500 shares of Series A
Preferred Stock in exchange for
683,100 shares of common stock
Series A Preferred Stock Dividend paid
with common stock
Sale of 3,000 shares of shares of Series B
Preferred Stock for $3,000,000 in
connection with private placement
Expected deemed dividend related to
discount on conversion of Series B
Preferred Stock
Issuance of warrant to purchase 150,000
shares, to third party, in connection
with Series B Private Placement
Conversion of 715 shares of Series B
Preferred Stock in exchange for
1,147,171 shares of common stock
Series B Preferred Stock Dividend paid
with common stock
Sale of 220,750 shares of Series C
Preferred Stock for $2,207,500 in
connection with private placement
</TABLE>
F-10
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
For the Years Ended December 31, 1999 and 1998 and the Quarter Ended March 31,
2000
<TABLE>
<CAPTION>
Preferred Stock
---------------
Series E Series 2
---------- ----------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Issuance of Series C
Preferred shares, to third
party, in connection with
Series C Private Placement
Cash expense related to
Series C Private Placement
Issuance of warrant to
purchase 220,750 shares, to
third party, in connection
with Series C Private
Placement
Conversion of 78,250 shares
of Series C Preferred Stock
in exchange for 782,500
shares of common stock
Series C Preferred Stock
dividend paid with common
stock
Sale of 3,000 shares of
Series D Preferred Stock
for $3,000,000 in
connection with private
placement
Cash expenses on legal and
placement costs related to
Series D Private Placement
Issuance of two warrants to
purchase a total of
2,000,000 shares, to Series
D Investor, in connection
with Series D Private
Placement
Accrued dividend on
Preferred Stock Series A & C
Unrealized holding loss
Investment write-off
Net loss for the twelve
months ended December 31,
1998
======== ========= ========= ========
Balance at December 31, 1998 -- $ -- -- $ --
</TABLE>
F-11
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
For the Years Ended December 31, 1999 and 1998 and the Quarter Ended March 31,
2000
<TABLE>
<CAPTION>
Preferred Stock
---------------
Series E Series 2
---------- ---------
Shares Amount Shares Amount
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Exercise of stock options
Issuance of 2,000 shares of Series D
Preferred Stock and related warrants
Expiration of warrants
Stock bonus paid to employees
Common Stock issued for services
Issuance of warrants in connection with
promissory note
Conversion of Series B Preferred shares
Issuance of Series E Preferred Stock and
related warrants 2,000 200
Preferred Stock and warrants retired in
connection with sale of assets and
issuance of warrants
Conversion of A, C and E Preferred Stock
to Common Stock (2,000) (200)
Issuance of Preferred Stock for debt 500 50
Issuance of Common Stock for debt
Common Stock issued for payment of
accrued dividends on Preferred Stock
Preferred Stock dividend
Net loss
---------- ---------- --------- ---------
Balance at December 31, 1999 -- $ -- 500 $ 50
Conversion of Series B Preferred Stock
Issuance of Series 2 Preferred Stock for
payment of preferred stock payable 1,902 190
Issuance of common stock for officer's
compensation and expense reimbursement
Issuance of common stock for former
officer's severance pay
Accrued dividends on preferred stock
Series B
Conversion of Series 2
Preferred Stock (1,758) (176)
Warrant and stock option exercises
Reclassification
Net loss
---------- ---------- --------- ---------
Balance at March 31, 2000 -- $ -- 644 $ 64
========== ========== ========= =========
</TABLE>
F-12
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
For the Years Ended December 31, 1999 and 1998 and the Quarter Ended March 31,
2000
<TABLE>
<CAPTION>
Common Stock Additional Paid-in Capital
-------------------------- --------------------------------------------------------
Shares Amount Series A Series B Series C Series D
------------ ------------ ------------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 12,989,820 $ 12,991 $2,468,750 $ -- $ -- $ --
Issuance of 129,399 shares of common
stock in lieu of officer's compensation 129,399 129
Issuance of 14,407 shares of common
stock in lieu of employee cash bonuses 14,047 14
Issuance of 44,286 shares of common
stock for services 44,286 44
Issuance of additional 56,000 shares of
common stock as part of previous
stock transaction 56,250 56
Issuance of 25,000 shares of common
stock in connection with furniture
purchase 25,000 25
Issuance of warrants to purchase
532,000 shares of common stock for
consulting services
Issuance of warrants and options to
purchase 1,020,000 shares of common
stock for advisory services
Issuance of warrant to purchase 355,500
shares in connection with bridge loan
financing
Exercise of options to purchase 51,167
shares of common stock 51,167 50
Conversion of 126,500 shares of Series A
Preferred Stock in exchange for
683,100 shares of common stock 683,100 683 (999,350)
Series A Preferred Stock Dividend paid
with common stock 70,217 70
Sale of 3,000 shares of shares of Series B
Preferred stock for $3,000,000 in
connection with private placement
2,999,700
Expected deemed dividend related to
discount on conversion of Series B
Preferred Stock 852,998
Issuance of warrant to purchase 150,000
shares, to third party, in connection
with Series B Private Placement
Conversion of 715 shares of Series B
Preferred Stock in exchange for
1,147,171 shares of common stock 1,147,171 1,147 (1,252,488)
Series B Preferred Stock Dividend paid
with common stock 22,812 23
Sale of 220,750 shares of Series C
Preferred Stock for $2,207,500 in
connection with private placement 2,185,425
</TABLE>
F-13
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
For the Years Ended December 31, 1999 and 1998 and the Quarter Ended March 31,
2000
<TABLE>
<CAPTION>
Common Stock Additional Paid-in Capital
------------------ --------------------------------------------
Shares Amount Series A Series B Series C Series D
---------- ------ --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Series C Preferred shares, to
third party, in connection with Series C
Private Placement
Cash expense related to Series C Private
Placement
Issuance of warrant to purchase 220,750
shares, to third party, in connection
with Series C Private Placement
Conversion of 78,250 shares of Series C
Preferred Stock in exchange for
782,500 shares of common stock 782,500 783 (774,675)
Series C Preferred Stock dividend paid
with common stock 25,225 25
Sale of 3,000 shares of Series D Preferred
Stock for $3,000,000 in connection
with private placement 2,999,700
Cash expenses on legal and placement
costs related to Series D Private
Placement
Issuance of two warrants to purchase a
total of 2,000,000 shares, to Series D
Investor, in connection with Series D
Private Placement
Accrued dividend on Preferred Stock
Series A & C
Unrealized holding loss
Investment write-off
Net loss for the twelve months ended
December 31, 1998
---------- ------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 16,040,994 $16,040 $1,469,400 $2,600,210 $1,410,750 $2,999,700
</TABLE>
F-14
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
For the Years Ended December 31, 1999 and 1998 and the Quarter Ended March 31,
2000
<TABLE>
<CAPTION>
Common Stock Additional Paid-in Capital
-------------------- ------------------------------------------------------
Shares Amount Series A Series B Series C Series D
---------- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Exercise of stock options 10,000 10
Issuance of 2,000 shares of Series D
Preferred Stock and related warrants 2,274,800
Expiration of warrants
Stock bonus paid to employees 26,320 26
Common Stock issued for services 17,820 18
Issuance of warrants in connection with
promissory note
Conversion of Series B Preferred shares 608,680 609 (606,175)
Issuance of Series E Preferred Stock and
related warrants
Preferred Stock and warrants retired in
connection with sale of assets and
issuance of warrants (4,999,500)
Conversion of A, C and E Preferred Stock
to Common Stock 17,045,918 17,046 (1,469,400) (1,410,750)
Issuance of Preferred Stock for debt
Issuance of Common Stock for debt 1,468,539 1,469
Common Stock issued for payment of
accrued dividends on Preferred Stock 51,523 51
Preferred Stock dividend
Net loss
---------- -------- ------------ ------------ ------------ ------------
Balance at December 31, 1999 35,269,794 $ 35,269 $ -- $ 1,994,035 $ -- $ 275,000
Conversion of Series B
Preferred Stock 1,672,020 1,672 (1,994,035)
Issuance of Series 2 Preferred Stock for
payment of preferred stock payable
Issuance of common stock for officer's
compensation and expense reimbursement 654,703 656
Issuance of common stock for former
officer's severance pay 398,149 398
Accrued dividends on preferred stock
Series B
Conversion of Series 2 Preferred Stock 143,039 143
Warrant and stock option exercises 670,378 670
Reclassification (275,000)
Net loss
---------- -------- ------------ ------------ ------------ ------------
Balance at March 31, 2000 38,808,083 $ 38,808 $ -- $ -- $ -- $ --
========== ======== ============ ============ ============ ============
</TABLE>
F-15
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
For the Years Ended December 31, 1999 and 1998 and the Quarter Ended March 31,
2000
<TABLE>
<CAPTION>
Additional Paid-in Capital
--------------------------
Series E Series 2 Common
----------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1997 $ -- $ -- $ 6,212,101
Issuance of 129,399 shares of common
stock in lieu of officer's compensation 313,255
Issuance of 14,407 shares of common
stock in lieu of employee cash bonuses 33,418
Issuance of 44,286 shares of common
stock for services 116,956
Issuance of additional 56,000 shares of
common stock as part of previous
stock transaction (56)
Issuance of 25,000 shares of common
stock in connection with furniture
purchase 20,275
Issuance of warrants to purchase
532,000 shares of common stock for
consulting services 596,780
Issuance of warrants and options to
purchase 1,020,000 shares of common
stock for advisory services 390,650
Issuance of warrant to purchase 355,500
shares in connection with bridge loan
financing 121,959
Exercise of options to purchase 51,167
shares of common stock 90,259
Conversion of 126,500 shares of Series A
Preferred Stock in exchange for
683,100 shares of common stock 1,011,317
Series A Preferred Stock Dividend paid
with common stock 111,779
Sale of 3,000 shares of shares of Series B
Preferred Stock for $3,000,000 in
connection with private placement
Expected deemed dividend related to
discount on conversion of Series B
Preferred Stock
Issuance of warrant to purchase 150,000
shares, to third party, in connection
with Series B Private Placement 93,000
Conversion of 715 shares of Series B
Preferred Stock in exchange for
1,147,171 shares of common stock 1,251,413
Series B Preferred Stock Dividend paid
with common stock 20,275
Sale of 220,750 shares of Series C
Preferred Stock for $2,207,500 in
connection with private placement
</TABLE>
F-16
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
For the Years Ended December 31, 1999 and 1998 and the Quarter Ended March 31,
2000
<TABLE>
<CAPTION>
Additional Paid-in Capital
--------------------------
Series E Series 2 Common
----------- ----------- -------------
<S> <C> <C> <C>
Issuance of Series C Preferred shares, to
third party, in connection with Series C
Private Placement
Cash expense related to Series C Private
Placement
Issuance of warrant to purchase 220,750
shares, to third party, in connection
with Series C Private Placement 66,225
Conversion of 78,250 shares of Series C
Preferred Stock in exchange for
782,500 shares of common stock 781,718
Series C Preferred Stock dividend paid
with common stock 20,912
Sale of 3,000 shares of Series D Preferred
Stock for $3,000,000 in connection
with private placement
Cash expenses on legal and placement
costs related to Series D Private
Placement
Issuance of two warrants to purchase a
total of 2,000,000 shares, to Series D
Investor, in connection with Series D
Private Placement 720,000
Accrued dividend on Preferred Stock
Series A & C
Unrealized holding loss
Investment write-off
Net loss for the twelve months ended
December 31, 1998
----------- ----------- -------------
Balance at December 31, 1998 $ -- $ -- $ 11,972,236
</TABLE>
F-17
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
For the Years Ended December 31, 1999 and 1998 and the Quarter Ended March 31,
2000
<TABLE>
<CAPTION>
Additional Paid-in Capital
---------------------------
Series E Series 2 Common
----------------- --------------- ------------
<S> <C> <C> <C>
Exercise of stock options 9,990
Issuance of 2,000 shares of Series D
Preferred Stock and related warrants
Expiration of warrants (606,949)
Stock bonus paid to employees 32,890
Common Stock issued for services 19,016
Issuance of warrants in connection with
promissory note 436,710
Conversion of Series B Preferred shares 605,626
Issuance of Series E Preferred Stock and
related warrants 1,999,800 74,000
Preferred Stock and warrants retired in
connection with sale of assets and
issuance of warrants (1,126,260)
Conversion of A, C and E Preferred Stock
to Common Stock (1,999,800) 4,964,478
Issuance of Preferred Stock for debt 49,950
Issuance of Common Stock for debt 447,397
Common Stock issued for payment of 39,427
accrued dividends on Preferred Stock
Preferred Stock dividend
Net loss
----------------- --------------- ------------
Balance at December 31, 1999 $ -- $ 49,950 $16,868,561
Conversion of Series B
Preferred Stock 2,163,367
Issuance of Series 2 Preferred Stock for
payment of preferred stock payable 190,020
Issuance of common stock for officer's
compensation and expense reimbursement 226,236
Issuance of common stock for former
officer's severance pay 112,952
Accrued dividends on preferred stock
Series B 18,770
Conversion of Series 2 Preferred Stock (175,490) 175,523
Warrant and stock option exercises 825,484
Reclassification 275,000
Net loss
----------------- --------------- ------------
Balance at March 31, 2000 $ -- $ 64,480 $ 20,665,893
================= =============== ============
</TABLE>
F-18
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
For the Years Ended December 31, 1999 and 1998 and the Quarter Ended March 31,
2000
<TABLE>
<CAPTION>
Other
Reduction of Accumulated
Paid-in Comprehensive Accumulated
Capital Income (Loss) Deficit Total
------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 $ (1,140,433) $ 62,221 $ (5,367,280) $ 2,279,600
Issuance of 129,399 shares of common
stock in lieu of officer's compensation 313,384
Issuance of 14,407 shares of common
stock in lieu of employee cash bonuses 33,432
Issuance of 44,286 shares of common
stock for services 117,000
Issuance of additional 56,000 shares
of common stock as part of previous
stock transaction
Issuance of 25,000 shares of common
stock in connection with furniture
purchase 20,300
Issuance of warrants to purchase
532,000 shares of common stock for
consulting services 596,780
Issuance of warrants and options to
purchase 1,020,000 shares of common
stock for advisory services 390,650
Issuance of warrant to purchase 355,500
shares in connection with bridge loan
financing 121,959
Exercise of options to purchase 51,167
shares of common stock 90,309
Conversion of 126,500 shares of Series A
Preferred Stock in exchange for 683,100
shares of common stock
Series A Preferred Stock Dividend paid
with common stock (111,849)
Sale of 3,000 shares of shares of Series B
Preferred stock for $3,000,000 in
connection with private placement 3,000,000
Expected deemed dividend related to
discount on conversion of Series B
Preferred Stock (852,998)
Issuance of warrant to purchase 150,000
shares, to third party, in connection
with Series B Private Placement (93,000)
Conversion of 715 shares of Series B
Preferred Stock in exchange for
1,147,171 shares of common stock
Series B Preferred Stock Dividend paid
with common stock (20,298)
Sale of 220,750 shares of Series C
Preferred Stock for $2,207,500 in
connection with private placement 2,207,500
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
Other
Reduction of Accumulated
Paid-in Comprehensive Accumulated
Capital Income (Loss) Deficit Total
------------- -------------- ------------ ----------
<S> <C> <C> <C> <C>
Issuance of Series C Preferred shares,
to third party, in connection with Series
C Private Placement 1,104
Cash expense related to Series C Private
Placement (230,771) (230,771)
Issuance of warrant to purchase 220,750 shares,
to third party, in connection with Series
C Private Placement (66,225)
Conversion of 78,250 shares of Series C Preferred
Stock in exchange for 782,500 shares of common
stock
Series C Preferred Stock dividend paid with
common stock (20,937)
Sale of 3,000 shares of Series D Preferred Stock
for $3,000,000 in connection with private
placement 3,000,000
Cash expenses on legal and placement costs
related to Series D Private Placement (65,000) (65,000)
Issuance of two warrants to purchase a total of
2,000,000 shares, to Series D Investor, in
connection with Series D Private Placement (720,000)
Accrued dividend on Preferred Stock Series A & C (156,536) (156,536)
Unrealized holding loss (675,643) (675,643)
Investment write-off 613,422 613,422
Net loss for the twelve months ended December 31,
1998 -- (8,320,519) (8,320,519)
----------- --------- ------------ -----------
Balance at December 31, 1998 $(2,315,429) $ -- $(14,850,417) $ 3,336,971
</TABLE>
F-20
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
For the Years Ended December 31, 1999 and 1998 and the Quarter Ended March 31,
2000
<TABLE>
<CAPTION>
Other
Reduction of Accumulated
Paid-in Comprehensive Accumulated
Capital Income (Loss) Deficit Total
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Exercise of stock options 10,000
Issuance of 2,000 shares of Series D Preferred
Stock and related warrants (275,000) 2,000,000
Expiration of warrants 606,949
Stock bonus paid to employees 32,916
Common Stock issued for services 19,034
Issuance of warrants in connection with
promissory note 436,710
Conversion of Series B Preferred shares
Issuance of Series E Preferred Stock and related
warrants (104,000) 1,970,000
Preferred Stock and warrants retired in
connection with sale of assets and issuance of
warrants 995,000 (5,131,260)
Conversion of A, C and E Preferred Stock to
Common Stock 104,000 171,421
Issuance of Preferred Stock for debt 50,000
Issuance of Common Stock for debt 448,866
Common Stock issued for payment of accrued
dividends on Preferred Stock 39,478
Preferred Stock dividend (619,595) (619,595)
Net loss (2,655,913) (2,655,913)
--------- ---------- ------------ -----------
Balance at December 31, 1999 $(988,480) $ -- $(18,125,925) $ 108,628
Conversion of Series B Preferred Stock 170,836
Issuance of Series 2 Preferred Stock for payment
of preferred stock payable 190,210
Issuance of common stock for officer's
compensation and expense reimbursement 226,892
Issuance of common stock for former
officer's severance pay 113,350
Accrued dividends on preferred stock Series B 18,770
Conversion of Series 2 Preferred Stock --
Warrant and stock option exercises 826,154
Reclassification
Net loss (459,683) (459,683)
------------ ------------- ------------ -------------
Balance at March 31, 2000 $ (988,480) $ -- $(18,585,608) $ 1,195,157
============ ============= ============ =============
</TABLE>
F-21
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended For the Year Ended
March 31, December 31,
------------------------------- -----------------------------
2000 1999 1999 1998
------------- ------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss....................................................... $ (459,683) $ (1,319,323) $ (2,655,913) $ (8,320,519)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization.............................. 80,101 122,575 659,775 197,713
Amortization of deferred compensation.................... 59,144 -- -- --
Loss on investment write-off............................... -- -- -- 803,125
Loss on inventory write-off................................ -- -- -- 36,900
Stock and warrants issued for services and finance costs... -- -- 455,744 1,737,836
Stock and options issued as compensation................... -- -- 32,916 346,816
Gain on extinguishment of debt............................. -- -- (5,562,750) --
Interest on preferred stock payable........................ 37,097 -- 206,852 --
Write-down of prepaid software rights...................... -- -- 329,100 --
Changes in operating assets and liabilities:
Accounts receivable..................................... (44,853) (599,346) (179,727) 334,597
Other receivable........................................ 747,137 -- -- --
Inventory............................................... (4,414) (21,038) 37,201 245,543
Prepaid licenses........................................ -- -- (300,000) (750,000)
Deposits, prepaid expenses, deferred finance costs, and
other assets........................................... (12,290) (114,150) 300,130 (754,523)
Deferred revenues....................................... -- (26,500) (39,120) (29,514)
Accounts payable and accrued expenses................... (15,476) (336,251) (124,941) 103,590
Common stock payable.................................... -- -- (13,500) 13,500
------------- ------------- ------------- -------------
Net Cash Used in Operating Activities...................... 386,763 (2,294,033) (6,854,233) (6,034,936)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment.......................................... (19,799) (105,516) (1,372,552) (369,516)
Proceeds from sale of assets................................... -- -- 696,939 --
Cash paid for purchase of transcription companies.............. -- (490,000) (775,000) (398,312)
Capitalized software costs..................................... (18,896) -- -- (300,025)
------------- ------------- ------------- -------------
Net Cash Used in Investing Activities...................... (38,695) (595,516) (1,450,613) (1,067,853)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bridge loans..................................... -- 240,000 4,000,000 335,333
Principal payment on seller debt............................... -- -- (297,884) --
Principal payment on bridge loans.............................. -- -- (500,000) --
Principal payment on third party debt.......................... (94,037) (528,506) (45,104) (42,882)
Principal payment on related party debt........................ -- -- (335,333) (126,250)
Principal payments under capital lease......................... (40,246) (6,327) (71,217) (17,835)
Warrants and options granted in connection with bridge loans... -- -- -- 121,959
Proceeds from related party debt............................... -- -- 250,000 --
Sale of preferred stock........................................ -- 3,000,000 3,970,000 7,208,604
Cash expenditures related to sale of stock..................... -- -- -- (295,771)
Stock options and warrants exercised........................... 826,153 10,000 10,000 90,309
------------- ------------- ------------- -------------
Net Cash Provided by Financing Activities.................. 691,870 2,715,167 6,980,462 7,273,467
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. 1,039,938 (174,382) (1,324,384) 170,678
Cash and Cash Equivalents - Beginning of Period................... 53,529 1,377,913 1,377,913 1,207,235
------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS - END OF PERIOD......................... $ 1,093,467 $ 1,203,531 $ 53,529 $ 1,377,913
============= ============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-22
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998 AND MARCH 31, 2000
(Information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)
NOTE 1 - DESCRIPTION OF BUSINESS
Applied Voice Recognition, Inc. (the "Company" or "AVRI") provides
traditional and electronic transcription services to approximately 1,200
physicians in six states. The Company has begun development of the e-Docs
Physician's Network (EPN) through a newly formed subsidiary, Virtual Physicians
Network, Inc. The EPN is being designed to provide a secure browser-based
service which would allow transcription companies to deliver their product and
doctors to review transcriptions online. The EPN would include a document
storage service that will allow physicians to access their records 24 hours a
day online.
The Company was reincorporated as a Delaware Corporation on January 29,
1998. Previously, the Company was a Utah corporation by virtue of a share
exchange that was treated as a reverse merger on December 11, 1996 with Summa
Vest, Inc.
On December 1, 1998, the Company formed a new wholly owned subsidiary, AVRI
Health Care Information Services, Inc., a Delaware Corporation (AVRI Health
Care), which was primarily formed for the purpose of acquiring companies in the
transcription service business.
NOTE 2 - LIQUIDITY AND MANAGEMENT'S PLAN
The Company has incurred significant losses and cash deficits since
inception. The Company has been dependent upon outside financing to develop its
software products and to provide working capital. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Beginning in the fourth quarter of 1999, the Company suspended its
acquisitions program and focused on restructuring the core operations of the
transcription companies acquired. As of December 31, 1999, the Company had
reduced its corporate head count from 35 to 7 and had sold its operations in
Manila, New York, New Jersey and a portion of its Houston operations. These
actions reduced the monthly losses by approximately $300,000, while reducing
revenue by $250,000 per month.
Since the Company's announcement of its restructuring on January 7, 2000,
liquidity has significantly improved. Gross revenues averaging $200,000 per
month have been achieved, and warrants and options have been exercised,
resulting in net proceeds to the Company of approximately $825,000 through March
31, 2000. Management believes current resources are adequate for the development
costs of the e-Docs Physician's Network (EPN) as well as the Company's working
capital needs through September 30, 2000.
It will be necessary for the Company to raise additional capital for the
rollout of EPN intended to occur in the fourth quarter of 2000. While management
is confident capital is available, there are no assurances that the necessary
capital can be obtained.
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, and have been prepared in
accordance with generally accepted accounting principles. All significant
intercompany transactions and balances have been eliminated.
F-23
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates to be made by
management. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company has determined, based on available market information and
appropriate valuation methodologies, that the fair value of its financial
instruments approximates carrying value. The carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable, and notes payable
approximate fair value due to the short-term maturity of the instruments. The
carrying amount of long-term debt approximates fair value because the interest
rates under the credit agreement are variable, based on current market.
Stock Options
The Company follows Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations ("APB 25") in
accounting for its employee stock options. The pro forma disclosures required by
Statement of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation ("SFAS 123"), which established a fair-value-based method of
accounting for stock-based compensation plans, are set forth in Note 8.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
Inventories
Inventories consist of computer equipment and are determined using actual
cost based on a first-in, first-out ("FIFO") basis. FIFO inventory is stated at
the lower of cost or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method using rates based on the estimated useful lives of the
related assets. Estimated useful lives used for depreciation purposes are as
follows:
Computer equipment 3 Years
Third party software 3 Years
Office equipment 5 Years
Furniture 7 Years
Prepaid Licenses and Prepaid Software Rights
Prepaid licenses were stated at cost. During 1999, the Company shifted its
business focus, discontinuing development of the license related technology. The
vendor agreed to exchange the license related payments for rights to produce and
resell 3,291 units of a completed market transcription product. At December 31,
1999, prepaid software resale rights are stated at estimated resale value less
disposal costs, resulting in a charge to 1999 operations of $329,100.
F-24
<PAGE>
Capitalized Software Costs
The costs of direct labor and allocated overhead specific to development
activities for products that are technologically feasible are capitalized
through the date of market release. All other research and development costs are
charged against operations in the period incurred. Amounts capitalized are
amortized on a straight-line basis over a three-year life commencing upon market
release. For the year ended December 31, 1998, the Company incurred $58,808 of
related amortization expense.
As a result of the December 20, 1999 disposition of assets, the Company
expensed the remaining $397,369 of capitalized software costs included as an
offset to the extraordinary gain on extinguishment of debt.
Intangibles and Goodwill
Intangibles and goodwill are amortized using the straight-line method over
their estimated useful lives, which range from 10 to 20 years. Intangibles
include trade names and customer lists. Goodwill represents the excess purchase
price over the fair value of net assets acquired for acquisitions accounted for
as purchases. The Company periodically monitors intangibles and goodwill to
determine if subsequent events or circumstances have occurred that have
compromised the viability of the asset. To the extent such an event has
happened, the Company will make necessary revisions to the balance or
amortization life. Management believes that there have been no such events or
circumstances which warrant revision to the remaining useful life, or which
affect the recoverability of intangibles and goodwill. Intangibles and goodwill
associated with disposed operations are reflected in the calculation of the
extraordinary gain on extinguishment of debt.
Revenue Recognition
In October 1997, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"). SOP 97-2 generally requires revenue earned on software
arrangements involving multiple elements (e.g. software products, upgrades,
enhancements, customer support, installation and training) to be allocated to
each element on the relative fair values of the elements. The fair value of an
element is based on evidence, which is specific to the vendor. The revenue
allocated to software products, including specified upgrades or enhancements,
generally is recognized upon delivery of the products. The revenue allocated to
unspecified upgrades and updates and post contract customer support generally is
recognized when upgrades are delivered or as the services are performed. If
there is not appropriate evidence of the fair value for all elements of the
arrangement, all revenue from the arrangement is deferred until such evidence
exists or until all elements are delivered. In March 1998, the AICPA issued SOP
98-4 which defers for one year the implementation of the provisions of SOP 97-2
relating to the fair value determination of each revenue element. The Company
has adopted SOP 97-2, however, the impact of this is not considered to be
significant.
Fees for transcription-related services are based primarily on contracted
per line rates, and revenue is recognized upon the rendering of services and
delivery of transcribed materials.
Maintenance Revenues
The Company defers unearned revenues associated with maintenance contracts
sold to customers, and the term of each contract is typically one year. All
deferred revenues are amortized into revenue on a pro rata basis based on the
life of the maintenance contract.
Concentration of Credit Risk
Financial instruments that could potentially subject the Company to
concentrations of credit risk are accounts receivable. The Company periodically
evaluates the creditworthiness of its customers and generally does not require
collateral. The Company's customer base consists of clinics, hospitals, sole
practitioners, and commercial companies. No customer accounted for 10% or more
of revenues for any of the periods presented.
F-25
<PAGE>
Advertising
The Company expenses all advertising costs as incurred. The Company
expensed $350,867 and $122,242 in 1999 and 1998, respectively. For the quarter
ended March 31, 2000, the Company expensed $4,262.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under
the liability method, deferred income taxes are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates that will be in effect when the differences
reverse.
Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"), which
establishes new rules for the reporting and display of comprehensive income and
its components. SFAS No. 130 requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were reported
separately in shareholders' equity, to be included in comprehensive income.
NOTE 4 - ACQUISITIONS AND DISPOSITIONS
During 1999, the Company entered into four asset purchase agreements with
transcription companies located in Texas. Each acquisition was accounted for as
a purchase. The results of operations of acquisitions are included in the
Company's Statement of Operations from the date of acquisition. A description of
these acquisitions follows:
Reyna Transcriptions, Inc. On February 22, 1999, e-Docs Health Care
Information Services, Inc., a wholly owned subsidiary of AVRI, acquired the
assets of Reyna Transcriptions ("Transcription Plus"). Transcription Plus
provides medical transcription services.
Pursuant to the Asset Purchase Agreement, the Company acquired certain
assets for a purchase price of $75,000 in cash and an unsecured note in the
amount of $175,000 payable in three equal annual payments beginning February 22,
2000, bearing interest at 8%. The Company allocated purchase price in excess of
net assets acquired to identifiable intangible assets and customer lists in the
amount of $122,500, and to goodwill in the amount of $122,500, which will be
amortized over 10 and 20 years, respectively.
PRN Transcription, Inc. On February 22, 1999, e-Docs Health Care
Information Services, Inc., a wholly owned subsidiary of AVRI, acquired the
assets of PRN Transcription, Inc. ("PRN"). PRN provides medical transcription
services.
Pursuant to the Asset Purchase Agreement (the "Agreement"), the Company
acquired certain assets and assumed certain liabilities of PRN. The total
purchase price consisted of: (i) $200,000 in cash and (ii) $377,000 of the
Company's Series 2 Preferred Stock, par value $.10 per share. The Series 2
Preferred Stock will be issued in three equal annual installments with a stated
value of $125,667 each installment. These installments are payable on February
23, 2000, February 23, 2001 and February 23, 2002. In addition, the Company may
issue additional Series 2 Preferred Stock with a stated value of up to $174,000
to PRN, if PRN meets or exceeds certain revenue targets, as set forth in the
agreement, over the next three years. Any additional consideration will be
accounted for as additional intangible assets. For purchase accounting purposes,
a preferred stock payable of $292,608 has been recorded for the net present
value of the commitment to issued preferred stock. The discounted amount of
$84,392 is being amortized to interest expense.
The Series 2 Preferred Stock carries an 8% cumulative dividend payable in
cash or in additional shares of Preferred Stock at the Company's option.
Dividends are payable quarterly and in arrears on the first day of each January,
April, July and October commencing on January 1, 2000. Each share of the Series
2 Preferred Stock when issued will be convertible at any time into a number of
shares of Common Stock equal to (i) $100 per share of Series 2
F-26
<PAGE>
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 Nasdaq Over-the-
Counter Bulletin Board (OTCBB). The Company has agreed to register such shares
of Common Stock issued upon conversion of the Preferred Stock for resale under
the Securities Act of 1933, as amended, at the expense of the Company. These
shares of preferred stock are subject to automatic conversion if the Company
undertakes an underwritten public offering with an aggregate market value of
$10,000,000 or more. Any shares of the Series 2 Preferred Stock may be redeemed,
at the Company's option, after the third anniversary of the date of their
issuance, at a redemption price of $100 per share plus any accrued but unpaid
dividends. Except as otherwise required by the Delaware General Corporate Law,
the holders of the Series 2 Preferred Stock shall have no voting rights.
AVRI incurred approximately $5,000 of acquisition related expenses, which
has been included in the purchase price allocation. The Company allocated the
excess purchase price over net assets acquired of $477,608 to identified
intangibles and customer lists in the amount of $238,804, and to goodwill in the
amount of $238,804, which will be amortized over 10 years and 20 years,
respectively.
Am Transcription, Inc. On February 26, 1999, e-Docs Health Care Information
Services, Inc., a wholly owned subsidiary of AVRI, acquired the assets of AM
Transcription, Inc. ("AM"). AM provides medical transcription services. Pursuant
to the Asset Purchase Agreement (the "Agreement") the Company acquired certain
assets and assumed certain liabilities of AM. The total purchase price consisted
of: (i) $200,000 in cash and (ii) $250,000 of the Company's Series 2 Preferred
Stock, par value $.10 per share, less liabilities assumed of $56,365. The Series
2 Preferred Stock will be issued in three equal annual installments with a
stated value of $64,545 each installment. These installments are payable on
February 27, 2000, February 27, 2001 and February 27, 2002. For purchase
accounting purposes, a preferred stock payable of $150,287 has been recorded for
the net present value of the commitment to issued preferred stock. The
discounted amount of $43,348 is being amortized to interest expense.
AVRI incurred approximately $5,000 of acquisition related expenses, which
has been included in the purchase price allocation. The Company allocated the
excess purchase price over net assets of $335,287 to identified intangibles and
customer lists in the amount of $167,643, and to goodwill in the amount of
$167,644, which will be amortized over 10 years and 20 years, respectively.
A Word Above, Inc. On May 28, 1999, e-Docs Health Care Information
Services, Inc., a wholly owned subsidiary of AVRI, acquired the assets of A Word
Above, Inc. ("A Word Above"). A Word Above provides medical transcription
services.
Pursuant to the Stock Purchase Agreement (the "Agreement") the Company
acquired all of the common stock of A Word Above. The Agreement excluded certain
assets and liabilities from the transaction. The total purchase price consisted
of: (i) $300,000 payable in cash and (ii) $700,000 of the Company's Series 2
Preferred Stock, par value $.10 per share. The Series 2 Preferred Stock will be
issued in three equal annual installments with a stated value of $233,333 each
installment. These installments are payable on May 29, 2000, May 29, 2001 and
May 29, 2002. For purchase accounting purposes, a preferred stock payable of
$532,752 has been recorded for the net present value of the commitment to issued
preferred stock. The discounted amount of $167,248 is being amortized to
interest expense.
AVRI incurred approximately $7,000 of acquisition related expenses, which
has been included in the purchase price allocation. The Company allocated the
excess purchase price over net assets acquired of $714,364 to identified
intangibles and customer lists of $357,182, and to goodwill of $357,182, which
will be amortized over 10 years and 20 years, respectively.
During 1998, the Company entered into three asset purchase agreements with
transcription companies located in Texas, New York, and Colorado. Each
acquisition was accounted for as a purchase. A description of these acquisitions
follows:
Transcription Resources. On March 17, 1998, AVRI, acquired the assets of
Transcription Resources ("TR") a sole proprietorship. Subsequently, during 1998,
AVRI transferred the acquired assets to AVRI Health.
F-27
<PAGE>
TR specializes in providing transcription services to the healthcare
industry throughout the country.
Pursuant to the Asset Purchase Agreement (the "Agreement"), the Company
acquired certain assets for a purchase price of $150,000, less liabilities
assumed, or $37,091 net. The net amount is payable in the form of a non-interest
bearing note with an original maturity of December 31, 1998. The note was repaid
in 1999. The acquisition of TR resulted in approximately $56,000 of goodwill
which will be amortized over a five-year period.
Cornell Transcription, Inc. On December 1, 1998, AVRI Health acquired
certain assets and assumed certain liabilities of Cornell Transcription, Inc., a
New York corporation ("Cornell") and all of the common stock of Outsource
Transcription Philippines, Inc. ("OTP"), a stock corporation formed under the
laws of the Republic of the Philippines.
Cornell specializes in providing transcription services to the healthcare
industry in the New York and surrounding areas. Cornell has offices in
Hackensack, New Jersey; Miami, Florida; and Manila in the Philippines. OTP
provides transcription services to Cornell.
The total purchase price for Cornell and OTP consisted of: (i) promissory
note issued by AVRI Health in the aggregate principal amount of $270,000 (the
"Note"), (ii) $275,000 in cash, (iii) the assumption of certain capital lease
obligations, and (iv) approximately 684 shares of the Company's Series 1
Preferred Stock, par value $.10 per share. The agreement includes a contingent
purchase price of approximately $160,000, payable in 160 shares of Series 1
Preferred Stock, with the attainment of certain quarterly revenue targets over
the next four calendar quarters, subsequent to the sale date.
The Note is a non-interest bearing, unsecured note payable to Cornell,
which was payable as follows: (i) $150,000 on or before February 28, 1999, and
(ii) $120,000 in twelve equal monthly installments of $10,000 each, payable on
the first day of each month commencing on January 1, 1999, and continuing
thereafter until December 1, 1999. Due to the $120,000 note being non-interest
bearing, the Company recorded the discounted amount of the note of $110,793
using an imputed interest rate of 15%, as part of the purchase price allocation.
The discounted amount was amortized to interest expense over the life of the
note.
The Series I Preferred Stock, which was issuable to Cornell December 2,
1999, carried a 10% cumulative dividend payable in cash or in additional common
or preferred shares at the Company's option. (See Note 8.) For purchase
accounting purposes, a preferred stock payable of $594,666 was recorded for the
net present value of the commitment to issue preferred stock, discounted using a
rate of 15%. The discount amount of $89,334 was amortized to interest expense.
Each share of the Series 1 Preferred Stock was convertible at any time into a
number of shares of common stock equal to (i) $1,000 per share of Series 1
Preferred Stock being converted, plus any earned but unpaid dividends, if any,
divided by (ii) the average closing price of the Company's Common Stock for the
thirty day period immediately preceding the effective date of such conversion on
OTCBB. Any such shares of Common Stock issued upon conversion of the Series 1
Preferred Stock shall be registered for resale under the Securities Act of 1933,
as amended, at the expense of the Company.
The shares of Series 1 Preferred Stock are not subject to automatic
conversion. Any shares of the Series 1 Preferred Stock may be redeemed, at the
Company's option, after the third anniversary of the date of their issuance, at
a redemption price of $1,000 per share plus any accrued but unpaid dividends.
AVRI Health Care incurred approximately $80,000 of acquisition related
expenses, which has been included in the purchase price allocation. The Company
allocated the excess purchase price over net assets of $1,060,008 to identified
intangibles and customer lists in the amount of $530,004, and to goodwill in the
amount of 530,004, which will be amortized over 10 years and 20 years,
respectively.
LRW Transcription. On December 31, 1998, AVRI Health Care acquired the
assets of Linda R. Willhite Transcription ("LRW Transcription") a sole
proprietorship owned by Linda R. Willhite. LRW Transcription specializes in
providing transcription services to the healthcare industry in the Denver,
Colorado metropolitan area.
Pursuant to the Asset Purchase Agreement (the "Agreement"), the Company
acquired certain assets owned by LRW Transcription. The total purchase price
consisted of: (i) $75,000 in cash, including amounts paid by the
F-28
<PAGE>
Company to the creditors of LRW Transcription, (ii) and $150,000 of the
Company's Series 2 Preferred Stock, par value $.10 per share. The Series 2
Preferred Stock will be issued in three equal annual installments with a stated
value of $50,000 each installment. These installments are payable on December
31, 1999, December 31, 2000 and December 31, 2001. In addition, the Company may
issue additional Series 2 Preferred Stock with a stated value of up to $125,000
to LRW Transcription, if LRW Transcription meets or exceeds certain revenue
targets, as set forth in the agreement, over the next three years. Any
additional consideration will be accounted for as additional intangible assets.
For purchase accounting purposes a preferred stock payable of $114,161 has been
recorded for the net present value of the commitment to issued preferred stock.
The discounted amount of $35,839 is being amortized to interest expense.
The Series 2 Preferred Stock carries an 8% cumulative dividend payable in
cash or in additional shares of Preferred Stock at the Company's option.
Dividends are payable quarterly and in arrears on the first day of each January,
April, July and October commencing on January 1, 2000. Each share of the Series
2 Preferred Stock when issued will be convertible at any time into a number of
shares of Common Stock equal to (i) $100 per share of Series 2 Preferred Stock
being converted, plus any earned but unpaid dividends, if any, divided by (ii)
the greater of $1.00 per share or the average daily closing price of the
Company's Common Stock for the thirty day period immediately preceding the
effective date of any such conversion on the OTCBB. The Company has agreed to
register such shares of Common Stock issued upon conversion of the Preferred
Stock for resale under the Securities Act of 1933, as amended, at the expense of
the Company. These shares of preferred stock are subject to automatic conversion
if the Company undertakes an underwritten public offering with an aggregate
market value of $10,000,000 or more. Any shares of the Series 2 Preferred Stock
may be redeemed, at the Company's option, after the third anniversary of the
date of their issuance, at a redemption price of $100 per share plus any accrued
but unpaid dividends. Except as otherwise required by the Delaware General
Corporate Law, the holders of the Series 2 Preferred Stock shall have no voting
rights.
AVRI Health Care incurred approximately $25,000 of acquisition related
expenses, which has been included in the purchase price allocation. The Company
allocated the excess purchase price over net assets of $166,070 to identified
intangibles and customer lists in the amount of $83,035, and to goodwill in the
amount of $83,035, which is being amortized over 10 years and 20 years,
respectively.
Dispositions
Effective December 20, 1999, AVRI and its wholly owned subsidiaries, e-Docs
Health Care Information Services, Inc. and A Word Above, sold the net assets and
contracts of the Company's medical transcription service operations based in New
York, New Jersey, Houston, Texas and the Philippines and granted the non-
exclusive rights to the VoiceCommander99(TM) code to Lonestar Medical
Transcription USA, Inc. ("Lonestar"). The parent of Lonestar, L&H Investment
Co., N.V. ("LHIC") was a preferred stockholder prior to the purchase.
Pursuant to the Asset Purchase Agreement (the "Agreement") the Company sold
certain assets and Lonestar assumed certain liabilities of AVRI. The total
purchase price consisted of: (i) $456,939 in cash, representing the value of 80%
of the accounts receivable purchased; (ii) forgiveness of a $2.0 million
promissory note held by an affiliate of the purchaser; (iii) forgiveness of a
$1.5 million promissory note held by LHIC; (iv) forgiveness of $94,360 of
accrued interest; and (v) retirement of $5.0 million in Series D Preferred Stock
held by LHIC and forgiveness of $318,458 accrued, unpaid dividends; and (v)
conversion of warrants to purchase 3.5 million shares of AVRI common stock at
$1.25 a share to warrants to purchase 800,000 shares of AVRI common stock at
$.37 per share. The new warrants were valued at $200,000 using the Black-Scholes
valuation model.
Amounts collected on accounts receivable in excess of the 80% included in
the purchase price are to be remitted to AVRI by Lonestar.
The gain on the extinguishment of debt has been reflected in the financial
statements as an extraordinary gain of $5,562,750.
After the effect of the dispositions, the Company offers transcription
services in six states from offices in Houston, Dallas, and Tyler, Texas; and
Denver, Colorado.
F-29
<PAGE>
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
----------------------
2000 1999 1998
------------ ---------- ----------
<S> <C> <C> <C>
Computer equipment $ 497,301 $ 647,301 $ 578,770
Third party software 20,991 36,904 47,071
Office equipment and furniture 203,305 114,141 134,126
Office equipment on capital lease 384,380 415,136 118,098
------------ ---------- ----------
1,105,977 1,213,482 878,065
Less accumulated depreciation (413,715) (354,990) (180,767)
------------ ---------- ----------
Property and equipment, net $ 692,262 $ 858,492 $ 697,298
============ ========== ==========
</TABLE>
NOTE 6 - INDEBTEDNESS
Indebtedness is summarized below:
<TABLE>
<CAPTION>
March 31, December 31,
-----------------------
2000 1999 1998
---------- --------- ----------
<S> <C> <C> <C>
Long-term Debt:
Note payable to a bank, secured by accounts receivable, fixtures and
equipment, prime plus 2% interest, monthly payments of principal
and interest of $909, note matures March 2003............................ -- $ 31,223 --
Note payable to individual, unsecured, 8% interest due annually, annual
principal payments of $58,333, note matures February 2002 (see
Note 4).................................................................. $ 113,031 175,000 --
Note payable to a bank, unsecured, 9.25% interest, monthly payments
of principal and interest of $879, note matures January 2000............. -- 845 $ 12,339
---------- --------- ----------
113,031 207,068 12,339
Less current maturities...................................................... 58,333 65,977 11,542
---------- --------- ----------
Net long-term debt........................................................... $ 54,698 $ 141,091 $ 797
========== ========= ==========
</TABLE>
Future maturities of long-term debt as of December 31, 1999, are as
follows:
2000............. $ 65,977
2001............. 67,287
2002............. 68,249
2003............. 5,555
--------
$207,068
========
F-30
<PAGE>
NOTE PAYABLE TO RELATED PARTIES
During 1999, the Company entered into a Convertible Promissory Note and
Warrant Purchase Agreement, as amended with a shareholder. The note has a stated
principal amount of $250,000 and bears interest at 9%. The note is secured by a
security interest in certain assets of the Company. The note is convertible into
Common Stock at a price of $.37 common share. The conversion price is adjustable
downward based on the pricing of future common stock issues or issuances of
subsequent convertible issues with more favorable conversion terms. Contingent
warrants may be issuable as a result of future equity transactions.
During 1998, the Company had a note payable to a trust of $126,250 which
was unsecured and carried 12% annual percentage rate of interest. Interest
payments were due on a quarterly basis and interest was non-compounding. In
addition to this interest, the trust received a total of 180,000 shares of
Common Stock in the Company. These shares were valued at $1.50 each, which
approximated fair value at the date of issuance, and the aggregate value of
$270,000 was recorded as a finance cost. In 1998, the Company recorded $67,500
of interest expense related to these shares. A balloon payment on the principal
balance of $125,000 was paid on May 18, 1998.
During the month of December 1998, the Company entered into various bridge
loan agreements (the "Bridge Loans") with certain officers of $144,917, a former
employee of $60,416 and to third parties of $130,000. The aggregate balance of
the Bridge Loans amounted to $335,333, and bore interest at 12% per annum. The
Bridge Loans plus accrued interest were payable upon the earlier of six months
following the date of the note or three business days following the receipt of
$2,000,000 in equity funding. On December 31, 1998, the Company received
$2,000,000 in equity funding and paid the Bridge Loans in January 1999, plus
accrued interest, in accordance with the agreement. In connection with the
Bridge Loans, the Company granted warrants to purchase 355,495 shares of common
stock resulting in approximately $122,000 of finance cost, using the Black
Scholes method of valuation. (See Note 8 "Warrants")
NOTE 7 - LEASES
Capital
The future minimum lease payments on office equipment as of December 31,
1999 are as follows:
2000.................................... $ 153,744
2001.................................... 153,744
2002.................................... 129,773
2003.................................... 108,730
2004.................................... 44,128
---------
Total payments.......................... 590,119
Less: Amounts representing interest..... (246,095)
---------
Net present value....................... 344,024
Less: Current maturities................ (64,354)
---------
Long-term portion....................... $ 279,670
=========
F-31
<PAGE>
Operating
The Company leases various office space and equipment under non-cancelable
operating leases. The Company incurred rental expense of $21,029, $55,871,
$296,512 and $149,520 for the three months ending March 31, 2000 and 1999 and
for the years ending December 31, 1999 and 1998, respectively, in connection
with operating leases on office space and equipment. Future minimum lease
payments as of December 31, 1999, are as follows:
2000.................... $ 64,454
2001.................... 48,830
2002.................... 33,585
2003.................... 2,640
----------
Total................... $ 149,509
==========
NOTE 8 - STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue up to 2,000,000 shares of preferred
stock with a par value of $.10 per share. All dividends accrue whether or not
declared or set aside. Since inception, the Company sold, via private
placements, the following shares of preferred stock:
Series A Preferred Stock. During 1997, the Company completed a private
placement, totaling $2,500,000 in proceeds, by the issuance of 312,500 shares of
Series A Convertible Preferred Stock. These shares have a par value of $.10 per
share and were sold for $8.00 each to two accredited investors ("Series A
Investors").
The shareholders of the Series A Preferred Stock were entitled to
cumulative dividends at a rate of 4% per annum, payable in shares of the
Company's Common Stock based on a share price equal to the average closing price
of such Common Stock on the OTCBB for the 30 days prior to the particular
dividend date.
Each of the Series A shares was convertible into 5.4 shares of common
stock, at the stockholders option, at any given time. The holders of the Series
A Preferred Stock were also (a) entitled to demand the registration of Common
Stock issued upon conversion of the Series A Preferred Stock at the cost of the
Company at any time after December 31, 1997, and (b) entitled to have such
converted shares of Common Stock registered at the Company's cost in connection
with any registration statement filed by the Company. If the holders of the
Series A Preferred Stock had not converted their shares to Common Stock within
three years of their issuance, the Company could redeem such shares for $8.00
per share plus any accrued and unpaid dividends. The agreement with the Series A
Shareholders provided for certain specific anti-dilution adjustments and
protective provisions.
On December 4, 1998, the Series A Investor converted 126,500 of the Series
A Preferred Stock for 683,100 shares of the Company's common stock. As of
December 31, 1998, 186,000 shares of Series A Preferred Stock remained
outstanding.
As of December 31, 1998, the Company had declared and paid stock dividends,
to the Series A Investor, totaling 70,217 shares of common stock. The market
value of the stock dividends, as of the dividend date, amounted to $111,849. The
Company accrued $20,536 of stock dividends payable to the Series A Investor at
December 31, 1998.
Effective December 31, 1999, all shares of Series A Preferred stock and
related accrued unpaid dividends were converted to common stock. (See below)
Series B Preferred Stock. On March 11, 1998, the Company completed a
$3,000,000 private placement by the issuance of 3,000 shares of Series B
Convertible Preferred Stock. These shares have a par value of $.10 and were
priced at $1,000 per share and were sold to two accredited investors ("Series B
Investors").
F-32
<PAGE>
The preferred shares convert into common stock at a rate equal to 78% of
the five-day average closing bid price of the five consecutive days preceding
the conversion date. The discount from market price resulted in a deemed
dividend of approximately $830,000.
This series pays a 5% cumulative dividend payable in arrears at the time of
each conversion. The dividend is payable in cash or stock at the Company's
option. At any time, the Purchasers are entitled to convert the entire face
amount of the Series B Preferred Shares, plus accrued and unpaid dividends into
common stock. This series is subject to automatic conversion on March 11,
2000, if not converted by that date. In connection with this placement, an
option to purchase 150,000 shares of common stock was granted to Continental
Capital & Equity Corporation, the placement agent, and was valued at $93,000 in
total using the Black Scholes model as discussed in Stock Options, and recorded
as a reduction to Paid in Capital. In the event of liquidation, dissolution or
winding up of the Company, the holders of Series B Preferred Stock are entitled
to share in the assets, if any, remaining after payment of all debts and
liabilities of the Company, and after payment to Series A Preferred Stock
holders in an amount of $8.00 per share, which right is in preference to any
payment to the holders of Common Stock.
During the months of July and August 1998, the Series B Investors exercised
their conversion right and converted 715 shares of preferred stock for 1,147,171
shares of the Company's Common Stock. During 1999, the Series B Investors
converted 605 shares of preferred stock for 425,769 shares of Common Stock.
Upon conversion in 1998, the Series B Investors received stock dividends
amounting to 22,812 shares of common stock. The aggregate market value of the
stock dividends, as of the measurement date, was $20,275. At December 31, 1998,
stock dividends payable are estimated to be 121,444 shares. The Company accrued
$121,444 of stock dividends payable to the Series B Investors at December 31,
1998. Upon conversion in 1999, the Series B Investors received stock dividends
amounting to 51,523 shares of common stock. The aggregate market value of the
stock dividends, as of the measurement date, was $39,478.
During the month of February 2000, the Series B Preferred Stockholders
converted 760 shares of Series B Preferred Stock in exchange for 991,888 shares
of the Company's Common Stock. In connection with these conversions, the
Company issued 119,367 shares of accrued Common Stock dividends.
Effective as of March 11, 2000, the remaining 920 shares of Series B
Preferred Stock and related accrued dividends of $96,759 were automatically
converted into 560,766 shares of Common Stock.
Series C Preferred Stock. On July 28, 1998, the Company sold in a private
placement 220,750 shares of Series C Convertible Preferred Stock (the "Series C
Preferred Stock"), par value $.10 per share, for a purchase price of $10 per
share, to accredited investors (the "Series C Investors"). The Series C
Preferred Stock pay a 4% cumulative dividend payable in arrears at the time of
each conversion. Dividends were payable quarterly and in arrears on the first
day of each January, April, July, and October commencing on October 1, 1998, in
cash or stock at the Company's option. Each of the Series C Preferred Stock
converted into ten shares of common stock. In addition to the above-referenced
shares, an additional 11,038 Series C Preferred Stock were issued to Equity
Services, LTD. ("ESL"), as part of their compensation for placing the Series C
Preferred Stock. As of July 28, 1998, the market value of the shares issued to
ESL was approximately $110,000 and was recorded as a reduction to Paid in
capital.
On November 12, 1998, the Series C Investors converted 78,250 of the Series
C Preferred Stock for 782,500 shares of the Company's common stock.
Effective December 31, 1999, all shares of Series C Preferred Stock and
accrued unpaid dividends were converted to common stock. (See below)
Series D Preferred Stock. On December 31, 1998, the company entered into a
Series D Preferred Stock and Warrant Purchase Agreement to sell up to 5,000
shares of Series D Convertible Preferred Stock. These shares had a par value of
$.10 and were priced at $1,000 per share and were sold to accredited investors.
This agreement is broken down into three closings of 2,000 shares, 1,000 shares,
and 2,000 shares respectively, each closing being subject to the Company's
meeting certain financial and/or operational targets.
F-33
<PAGE>
As of December 31, 1998 the Company had met the first and second targets
and had received the funding for the first target. The Company recorded a
receivable for the second target, as of December 31, 1998, and reflected the
shares as issued in the Statement of Stockholders Equity. The funding for the
second target was received in January 1999. The final target was reached as of
February 28, 1999, and the final shares issued.
Additionally, the Company granted the Series D shareholders three warrants
to purchase a total of 2,500,000 shares of common stock, at an exercise price of
$1.25 per share. Using the Black Scholes valuation method, the Company recorded
approximately $720,000 of related cost, attributable to the first and second
issuances, and $275,000 attributable to the third issuance, as an offset to
additional paid in capital.
All of the Series D Convertible Preferred shares, warrants and accrued
dividends were forgiven as part of the sale transaction discussed in Note 4.
Series E Preferred Stock. On August 18, 1999, the Company completed a
$2,000,000 private placement by the issuance of 2,000 shares of Series E
Preferred Stock. These shares had a par value of $.10, were priced at $1,000 per
share and were sold to accredited investors ("Series E Investors").
At any time, the Purchasers were entitled to convert the entire face amount
of the Series B Preferred Shares, plus accrued and unpaid dividends into common
stock. In connection with this placement, warrants to purchase 400,000 shares
of common stock at a price of $1.25 per share were issued to the Series E
Investors, and was valued at $74,000 in total using the Black Scholes model as
discussed in Stock Options, and recorded as a reduction to paid in capital.
An agreement was entered into on January 7, 2000, which would convert all
shares of Series A Preferred Stock, Series C Preferred Stock and Series E
Preferred Stock and accrued dividends to a new Series G Preferred Stock, which
in 7 days would convert to common stock. To induce conversion, the Series G
Preferred Shares would be converted based on a common share price of $.30 per
share, resulting in the issuance of 17,045,918 shares of common stock. Although
the conversion took place in March 2000, the conversion transaction has been
reflected in the accompanying statements as though it occurred during 1999. The
market price of the Company's common stock was $.27 at December 31, 1999.
Series I and Series 2 Preferred Stock. On December 2, 1999, the Company
was required to issue Series 1 Preferred Stock as part of the 1998 acquisition
of Cornell Transcription, Inc. Pre-acquisition liabilities reduced the issuable
preferred shares downward by 250 shares, resulting in an adjustment of the
purchase price by approximately $250,000. On December 31, 1999, the holders of
the preferred shares elected to convert their preferred shares to 1,464,654
shares of common stock.
On February 23, 2000, the Company issued 1,911 shares of Series 2 Preferred
Stock as planned deferred purchase price payments for transcription company
acquisitions. These shares were subsequently converted into 115,755 shares of
Common Stock.
During the month of March 2000, the Series 2 Preferred Stockholders
converted 1,757 shares of Series 2 Preferred Stock in exchange for 143,039
shares of the Company's Common Stock.
Common Stock
In February 1998, the Company agreed to issue 30,000 shares of Common Stock
to a third party in exchange for consulting services, which shares were issued
in June 1998. Based on the fair market value, the Company valued the Common
Stock issuance at approximately $83,000 and recorded the related expense.
On March 6, 1998, the Company issued 98,323 shares of common stock in lieu
of cash salaries and bonuses to officers and certain employees. Based on the
fair market value of the common stock, the Company recognized approximately
$234,000 of related salary expense.
F-34
<PAGE>
On March 6, 1998, the Company issued 14,286 shares of common stock to two
third parties in consideration for their consulting services. Based on the fair
market value of the common stock, the Company recognized approximately $34,000
of related expense.
On April 30, 1998, the Company issued 45,113 shares of common stock to an
officer upon resignation. Based on the fair market value of the common stock,
the Company recognized approximately $113,000 of related expense.
On October 16, 1998, the Company issued 25,000 shares to a third party in
exchange for office furniture. Based on the fair market value of the common
stock, the Company recorded the asset at $20,300.
During 1999, the Company issued 17,820 shares for services. Based on the
fair market value of the common stock, the Company recorded $19,034 of related
expense.
On February 28, 2000, the Company issued 1,054,852 shares of Common Stock
in lieu of cash salaries, expense reimbursements, and severance pay to an
officer of the Company and to two former officers.
During the month of March 2000, certain employees and several third party
individuals exercised stock options and stock warrants. As the result of this,
the Company issued 670,378 shares of Common Stock.
See Preferred Stock section for conversions to and dividends paid in Common
Stock related to preferred stock instruments.
Stock Options
In August 1996, the Company adopted the 1996 Stock Option Plan (the "Plan")
that provides for the issuance of stock options to employees, directors (who are
also employees), independent contractors, and consultants. The aggregate number
of shares available for issuance under the Plan is the greater of 7,000 shares,
or 7% of the number of shares of the Company's Common Stock which are
outstanding from time to time.
Generally, options granted have five- to ten-year terms and vest and become
fully exercisable in three years. Stock options issued under the Plan can be
either incentive stock options or nonqualified stock options.
In December 1996, the Company adopted the 1996 Director Stock Option Plan
(the "Director Plan") that provides for the issuance of stock options to the
directors of the Company. The aggregate number of shares available for issuance
under the Director Plan is the greater of 3,000 shares, or 3% of the number of
shares of the Company's common stock which are outstanding from time to time.
Generally, options granted have five-year terms and vest and become fully
exercisable in three years. Stock options issued under the Director Plan can be
either incentive stock options or nonqualified stock options.
In October 1997, both the Plan and the Director Plan were amended by the
1997 Incentive Plan (the "Amended Plan"). The Amended Plan assumed all
outstanding stock options granted under the prior plans without modification.
The Amended Plan provides for the issuance of stock options, stock appreciation
rights, supplemental payments, restricted stock, performance units, performance
shares, and other stock-based awards. Designated employees, outside directors,
and consultants are eligible to participate. An aggregate of 3,000,000 shares
of Common Stock is available for issuance under the Amended Plan. Generally,
options granted have ten-year terms and vest and become fully exercisable in
three years. Stock options issued under the Amended Plan can be either
incentive stock options or nonqualified stock options.
During 1999 and 1998, the Company issued nonqualified stock options under
the Amended Plan, which had exercise prices approximate or equal to the fair
market value of the Common Stock at the date of grant.
F-35
<PAGE>
A summary of the Company's stock option activity and related information
follows:
Weighted
Average Exercise
Options Price
------------ ------------
(In thousands, except price
per share)
Outstanding - December 31,.............. 1,871 $3.08
Exercised............................... (35) $2.55
Granted................................. 1,057 $1.30
Forfeited............................... (781) $3.17
--------- ---------
Outstanding - December 31, 1998......... 2,112 $2.14
Exercised............................... (10) $1.00
Granted................................. 2,108 $1.07
Forfeited............................... (2,720) $1.41
--------- ---------
Outstanding - December 31, 1999......... 1,490 $1.95
Exercised............................... (474) $1.46
Granted................................. 710 $0.56
Forfeited............................... (215) $2.31
--------- ---------
Outstanding March 31, 2000.............. 1,511 $1.52
========= =========
Options exercisable at March 31, 2000... 736 $1.73
========= =========
<TABLE>
<CAPTION>
March 31, December 31,
----------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average fair value of options granted
during the period................................. $0.41 $0.82 $1.36
Weighted average remaining contractual life......... 8.4 Years 8.4 Years 8.9 Years
Range of exercise price............................. $.56 - $3.88 $.61 - $4.00 $.61 - $2.88
</TABLE>
The Company applies APB 25 in accounting for the Plan. Accordingly, no
compensation cost has been recognized for its fixed stock option plan. Pro
forma information regarding net income and earnings per common share is required
by SFAS 123 as if the Company had accounted for its employee stock options under
the fair value method of that statement. The fair value of these options was
estimated at the date of grant using a Black-Scholes option pricing model
("Black - Scholes") with the following assumptions:
<TABLE>
<CAPTION>
March 31, December 31,
----------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Risk free interest rate......................... 5.0% 5.0% 5.05%
Dividend yield.................................. 0% 0% 0%
Volatility factor............................... 1.21 1.21 .73
Weighted average expected life - stock options.. 3 Years 3 Years 4 Years
Weighted average expected life - warrants....... 1.5 Years 1.5 Years 1.5 Years
</TABLE>
The Black-Scholes model was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions, including the expected volatility. Because the Company's employee
stock options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
F-36
<PAGE>
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting periods. Had
compensation for the Company's stock-based compensation plan been determined
based on the fair value at the grant dates for awards under the Plan consistent
with the methods of SFAS123, the Company's net income and earnings per common
share would have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Quarter Ended March 31, Year Ended December 31,
----------------------------- -----------------------------------------------------------
2000 1999 1998
----------------------------- ---------------------------- ----------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
------------- ------------- ------------ ------------ ------------- ------------
(in thousands, except price per share)
<S> <C> <C> <C> <C> <C> <C>
Net loss......................... $(459,683.00) $(590,144.00) $(2,655,913) $(3,385,625) $(8,320,519) $(9,517,608)
Loss per common share............ $ (0.01) $ (0.02) $ (0.16) $ (0.24) $ (0.68) $ (0.77)
</TABLE>
Warrants and Non-employee Options
The following is a description of the outstanding warrants and stock
options issued for services by the Company. The Company has determined the
value of the warrants issued using either the minimal value method for all
warrants granted prior to the Company's becoming effectively publicly traded on
February 4, 1997, or the Black-Scholes model and the risk-free rate, dividend
rate, volatility and weighted average expected life discussed above for stock
options for all grants subsequent to February 4, 1997.
On November 1, 1997, the Company granted to two consultants options to
purchase 150,000 shares of the Company's common stock, each with an exercise
price of $4.88. The options were granted in exchange for consulting services. On
April 23, 1998, the related consulting agreements were extended in term and the
option agreement was modified to provide for immediate vesting of the options.
Of the options granted, 100,000 were granted to a board member whose consulting
services were devoted to the development of the Company's new transcription
related product VoiceCommander99(TM). As a result of these option grants, the
Company has recorded $309,000 of deferred consulting expense. The expense was
amortized over the life of the agreement that expired on March 31, 1999. The
stock options were valued using the Black-Scholes valuation model (assumptions
described above). For the years ended December 31, 1999 and 1998, the Company
has recognized approximately $62,000 and $247,000 of related expense,
respectively.
On June 1, 1998, the Company granted to three consultants options to
purchase 382,000 shares of the Company's common stock, each with an exercise
price of $1.88. The options were granted in exchange for consulting services.
Of the options granted, 250,000 were granted to a board member whose consulting
services were devoted to the development of the Company's new transcription
related product VoiceCommander99(TM). As a result of these option grants, the
Company has recorded $288,000 of deferred consulting expense. The expense is
amortizable over the remaining life of the consulting agreements. The stock
options were valued using the Black-Scholes valuation model (assumptions
described above). For the years ended December 31, 1999 and 1998, the Company
has recognized approximately $85,000 and $203,000, respectively, of related
expense.
On May 15, 1998, the Company granted to the Company's Medical Advisory
Board(the "MAB") options to purchase 255,000 shares of the Company's common
stock, each with an exercise price of $2.06. The options were granted in
exchange for three years worth of advisory services related to the Company's
business efforts in the health care industry. On November 20, 1998 the Company
and MAB mutually agreed to disband the MAB, for business reasons. In
consideration for the term held by the MAB, the Company modified the previous
grant and allowed the members of the MAB to keep fully vested options to
purchase 85,000 shares of common stock. All other terms of the option
agreements remained the same. As a result of the option grants, the Company has
recognized approximately $73,950 of consulting expense. The stock options were
valued using the Black-Scholes valuation model (assumptions described above).
In August 1996, the Company granted to officers (and founding stockholders)
250,000 stock warrants with an exercise price of $0.14 per share, and to non-
employee directors of the Company 150,000 stock warrants with an exercise price
of $0.14. The warrants were granted under the Director Plan discussed above and
have a five-year life. At December 31, 1999, 20,000 warrants are outstanding.
F-37
<PAGE>
On September 16, 1996, the Company entered into a two-year Licensing
Agreement with a professional athlete to use his name and likeness in marketing
and promotional materials to be produced and published by the Company.
Consideration paid for this licensing arrangement was 500,000 shares of Common
Stock (included in the total shares outstanding at December 31, 1996) and a
warrant to purchase another 500,000 shares at $1.50 per share at any time on or
before August 31, 2001. None of the warrants have been exercised as of December
31, 1999.
On July 21, 1997 the Company granted to a broker of the Private Placement a
warrant to purchase 100,000 shares of Common Stock at an exercise price of
$1.78. In addition to this, on July 23, 1997, the Company sold to the same
broker, for an aggregate price of $100, a warrant to purchase up to 168,750
shares of Common Stock for $1.78 per share. Broker fees of $345,750 were offset
against the proceeds of the Private Placement. The broker fees were estimated
using the Black-Scholes model. These warrants expired in 1999.
In February 1998, the Company granted to a third party three warrants to
purchase 85,000 shares of common stock. The three warrants are structured as
follows:
Number of Shares
Underlying Exercise
Warrant Price
------------------ ----------
First warrant 30,000 $4.00
Second warrant 25,000 $4.25
Third warrant 30,000 $4.50
The warrants were granted in exchange for consulting services. Using the
Black Scholes model, the Company assessed the fair value of the warrants at
$118,700. At December 31, 1998, the Company recorded related expenditures of
$94,960 and recognized related deferred expenses of $23,740. These warrants
expired in 1999.
On March 11, 1998, the Company granted to a third party a warrant to
purchase 150,000 shares of the Company's common stock, with an exercise price of
$2.30. The warrant was granted in exchange for their assistance with the
private placement of 3,000 shares of Series B Convertible Preferred Stock. As a
result of this option grant, the Company recognized approximately $93,000 of
expense allocable to paid in capital. The warrant was valued using the Black-
Scholes model.
On July 22, 1998, the Company granted to an investment banking firm
warrants to purchase 500,000 shares of the Company's common stock, with an
exercise price of $1.50. The warrants were granted in exchange for their
financial advisory services and assistance with private placements. As a result
of these warrant grants, the Company has recorded $140,000 of deferred
consulting expense. The expense is amortizable over the one-year life of the
agreement. For the years ended December 31, 1999 and 1998, the Company
recognized approximately $82,000 and $58,000 of consulting expense,
respectively. The warrants were valued using the Black-Scholes model.
On July 31, 1998, the Company granted to a third party a warrant to
purchase 220,750 shares of the Company's common stock, with an exercise price of
$1.50. The warrant was granted in exchange for the third party's assistance
with the private placement of 220,750 shares of Series C Convertible Preferred
Stock. As a result of this option grant, the Company recognized approximately
$66,000 of cost allocable to paid-in-capital. The warrant was valued using the
Black-Scholes model.
On November 20, 1998, the Company agreed to grant to a third party three
warrants. The first warrant grants the option to purchase 150,000 shares of
common stock at an exercise price of $1.00. The second warrant grants the
option to purchase 100,000 shares of common stock at an exercise price of $2.00.
The third warrant grants the option to purchase 100,000 shares of common stock
at an exercise price of $3.00. The third party was engaged to perform financial
advisory services. As a result of these grants, the Company has estimated and
recorded $59,000 of deferred consulting expense, based on an analysis using the
Black-Scholes model. The expense is amortizable over the remaining life of the
advisory agreement. For the years ended December 31, 1999 and 1998, the Company
has recognized approximately $29,000 and $30,000, respectively, of related
expense. The warrants were valued using the Black-Scholes model. These warrants
expired in 1999.
F-38
<PAGE>
During December 1998, the Company granted 355,500 warrants to officers, a
director and a third party (165,084 warrants to officers, 60,416 warrants to a
director, and 130,000 warrants to a third party) at an exercise price range of
$.94 per share to $1.06 per share. The warrants were granted in connection with
Bridge Loans made by these individuals to the Company. The Company has
recognized finance costs of approximately $122,000, based on an analysis using
the Black-Scholes model. The Company recorded this charge in interest expense in
the fourth quarter.
In connection with the sale of the Series D Preferred Stock, on December
31, 1998, the Company granted to the Series D Investors two warrants to purchase
common stock. The first and second warrant grant the Series D Investor the
option to purchase 1,500,000 and 500,000 shares of the Company's common stock,
respectively, at an exercise price of $1.25. The Company has estimated and
recorded $720,000 as a reduction to paid in capital, based on an analysis using
the Black Scholes model.
In connection with the sale of 2,000 shares of Series D Preferred Stock in
1999, the Company granted to the Series D Investors a warrant to purchase
500,000 shares of the Company's common stock at $1.25 per share. In connection
with debt related to the Series D Investors, an additional 1,125,000 warrants
were issued in 1999. The Company recorded $394,000 in finance charges, based on
an analysis using the Black-Scholes model. As part of the extinguishment
transaction, all of the warrants issued to Series D Investors in 1999 and 1998
were forgiven, and a new warrant to purchase 800,000 shares of stock at $.37 per
share was issued.
During 1999, in connection with the sale of Series E Preferred Stock, a
total of 550,000 warrants to purchase common stock were granted at an exercise
price of $1.25. The Company recorded $74,000 as a reduction to paid-in capital,
and $42,000 was recorded as finance charges.
A summary of the Company's warrant activity and related information
follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Warrants Price
----------------- ---------------
(In thousands, except price per share)
<S> <C> <C>
Outstanding - December 31, 1997.................... 1,680 $1.57
Exercised.......................................... (17) $ .14
Granted............................................ 4,107 $1.60
Forfeited.......................................... (150) $2.30
----------------- ---------------
Outstanding - December 31, 1998.................... 5,620 $1.58
Granted............................................ 2,975 $1.01
Forfeited.......................................... (4,379) $1.26
----------------- ---------------
Outstanding - December 31, 1999.................... 4,216 $1.39
Exercised.......................................... (196) $ .71
----------------- ---------------
Outstanding - March 31, 2000....................... 4,020 $1.42
================= ===============
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
--------------- --------------------------------
2000 1999 1998
--------------- -------------- --------------
<S> <C> <C> <C>
Weighted average fair value of warrants granted during the period...... N/A $ .33 $ 1.41
Weighted average remaining contractual life............................ 2.1 Years 2.1 Years 2.5 Years
Range of exercise price................................................ $1.06 - $4.88 $.14 - $4.88 $.14 - $4.88
</TABLE>
F-39
<PAGE>
NOTE 9 - EARNINGS PER SHARE
The following table sets forth the computation of basic and dilutive loss
per share:
<TABLE>
<CAPTION>
Quarter Ended
March 31,
2000 1999 1998
------------------ ------------------ -------------------
<S> <C> <C> <C>
Numerator:
Net loss................................................ $ (459,683) $(2,655,913) $(8,320,519)
Preferred stock dividend................................ (11,497) (619,595) (1,161,516)
------------------ ------------------ -------------------
Numerator for basic and diluted earnings per share -
loss available to Common Stockholders................ $ (471,180) $(3,275,508) $(9,482,035)
================== ================== ===================
Denominator:
Denominator for basic and diluted earnings per share -
weighted average shares outstanding.................. 38,307,317 16,367,383 13,867,732
</TABLE>
All outstanding options and warrants are antidilutive and therefore have
not been included using the treasury stock method for diluted computation. All
potential common shares from conversions of preferred stock are antidilutive and
have been excluded from diluted computations.
NOTE 10 - INCOME TAXES
At December 31, 1999, the Company had a net operating loss carryforward of
approximately $14,500,000 expiring between 2010 and 2019.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ -------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation expense.............................................. $ 14,370 $ 5,870
Capitalized research and development.............................. 124,905
------------------ -------------------
Total deferred tax liabilities.................................... 14,370 130,775
------------------ -------------------
Deferred tax assets:
Net operating loss carryforward................................... 4,914,811 4,420,189
Research and development credit................................... 245,894 165,894
Stock based compensation expense.................................. 560,878 316,831
Allowance for doubtful accounts................................... 25,466 11,050
Other............................................................. 1,169 1,169
------------------ -------------------
Total deferred tax assets......................................... 5,748,218 4,915,133
------------------ -------------------
Net deferred tax asset............................................ 5,733,848 4,784,358
Valuation allowance for deferred tax assets....................... (5,733,848) (4,784,358)
------------------ -------------------
Net deferred taxes................................................ $ -- $ --
================== ===================
</TABLE>
The valuation allowance for the full amount of deferred tax assets has been
reserved due to uncertainty concerning the Company's ability to utilize the
benefit of the net operating loss.
F-40
<PAGE>
NOTE 11 - NON-CASH TRANSACTIONS
Following is a list of non-cash transactions.
<TABLE>
<CAPTION>
For the Three Months Ended For the Year Ended
March 31, December 31,
------------------------------ -----------------------------
2000 1999 1999 1998
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Preferred stock payable issued in connection with
acquisitions........................................... $ $ 442,895 $ 975,647 $ 708,827
Capital lease obligations assumed in connection
with acquisitions...................................... 46,894 107,846
Note payable issued in connection with
acquisition............................................ 175,000 175,000 297,884
Issuance of common stock for furniture................. -- 20,300
Stock dividend payable................................. 619,595 156,536
Stock and warrants issued for services and finance
costs.................................................. 455,744 1,104,430
Stock issued in lieu of cash compensation.............. 32,916 346,816
Warrants issued in connection with bridge financing
charged to interest expenses........................... -- 121,959
Issuance of Common Stock, Preferred Stock and
warrants for private placement fees.................... -- 879,225
Issuance of Preferred Stock in connection with
Series D Funding....................................... -- 1,000,000
Deemed Divided on Series B Preferred................... 852,995
Preferred stock issued in payment of debt.............. 498,866 --
Conversion of Series A, Series C and Series E and
related dividend to common stock....................... 205,575 --
Conversion of Series B to common stock................. 1,672 609 --
Writedown of prepaid software resell rights............ 329,100 --
Common stock issued for dividends...................... 189,606 39,478 --
Issuance of Common Stock for Accrued Liabilities....... 113,350 -- -- --
Payment of Preferred Stock payable in Common Stock..... 190,210 -- -- --
Issuance of Common Stock for Deferred Compensation..... 226,892 -- -- --
</TABLE>
NOTE 12 - 401(K) PLAN
The Company has a 401(K) plan, which allows all of the company's employees to
participate. The Company does not match any of the employee's contributions.
NOTE 13 - FOREIGN OPERATIONS
The Company had medical transcriptions operations in the Philippines which
were sold during 1999.
NOTE 14 - JOINT PRODUCT DEVELOPMENT AND DISTRIBUTION AGREEMENT
On December 31, 1997, the Company entered into a joint product development and
distribution agreement with Voice It Worldwide ("Voice It"). Both the Company
and Voice It agreed to commit technical and financial resources as would have
been necessary to carry out the development of a joint product. In connection
with this agreement, the Company purchased 471,700 shares of Voice It common
stock at a price of $1.06 per share for a total of $500,000 and Voice It
purchased 50,000 licenses of VoiceCommander(TM) (formerly known as
SpeechCommander) for $1,000,000. Both transactions were reflected in the
December 31, 1997 financial statements. The Company believes that Voice It has
breached its agreement with the Company by, among other things, failing to make
contractually agreed upon payments for the software licenses. Because of this
and the lack of success in the joint product development and
F-41
<PAGE>
distribution agreement, and Voice It's Chapter 11 bankruptcy, the Company has
abandoned the strategy of joint development and distribution.
During the second quarter of 1998, the collectibility of the receivable due
from Voice It was assessed to be uncertain. Because of this, the Company wrote-
off the remaining receivable balance of approximately $708,000.
On April 13, 1998, Voice It's common stock was delisted from trading on The
Nasdaq Small Cap Market for failure to comply with certain NASDAQ maintenance
standards. The common stock of Voice It is now traded on the Over The Counter
Bulletin Board. Subsequent to this event, the market price of Voice It's common
stock dropped and has remained at a lower value. Furthermore, in November 1998,
Voice It declared Chapter 11 Bankruptcy. Based on these facts, at the end of
1998 the Company deemed its investment in Voice It to be permanently impaired
and has recognized a loss of $500,000.
NOTE 15 - VALUE ADDED RESELLER AGREEMENT
On September 30, 1998 the Company entered into a "Value Added Reseller
Agreement" ("VAR Agreement") with Lernout & Hauspie Speech Products (L&H). L&H
develops and licenses dictation software for use in the health care industry.
The VAR Agreement gave the Company rights to a world-wide non-exclusive
license of certain software products developed by L&H. On December 27, 1998,
this agreement was amended to include additional requirements. In accordance
with the amended agreement, the Company prepaid L&H $1,000,000. The entire
prepaid amount of $1,000,000 is reflected in the December 31, 1998 financial
statements of which $560,000 is classified as long term.
During 1999 the Company made additional payments of $ 300,000. During late
1999, the Company shifted its business focus, discontinuing development of the
license related technology. The vendor agreed to exchange the license related
payments for rights to produce and resell 3,291 units of a completed market
transcription product. At December 31, 1999 prepaid software resale rights are
stated at estimated resale value less disposal costs, resulting in a charge to
1999 operations of $329,100.
NOTE 16 - INVESTMENTS
On September 12, 1997, the Company entered into an agreement with Wade Cook
Financial Corporation ("Wade"). In accordance with the terms of the agreement,
the Company exchanged 100,000 shares of its Common Stock for 14,433 shares
(which subsequently have split to 129,897 shares) of Wade's common stock. The
shares acquired are not registered under the Securities Act of 1933 or under any
state securities laws. As the result of this, the Company cannot transfer or
sell the acquired shares. As of December 31, 1998, physical transfer of relevant
stock certificates between the Company and Wade had not occurred. Therefore, the
Company wrote-off this investment and realized a loss of $303,125 on this
investment.
NOTE 17 - COMMITMENTS AND CONTINGENCIES
The Company was obligated to register the shares issued in the acquisition of
Cornell Transcription, Inc. on or before December 31, 1999. The Company was
unable to register these shares on a timely basis and entered into an agreement
granting the Company an extension until August 15, 2000 to register the shares.
The Company has agreed to pay interest of 1% per month based on the market value
of the securities to be registered. The market value is calculated using the
average final transaction price for the 30 day period prior to May 5, 2000. The
agreed market value of the securities is $1,523,240. In addition, warrants to
purchase 250,000 shares of Common Stock at $1.04 per share were issued as
warrants and an estimate of interest to be incurred through August 15, 2000 was
included in accrued liabilities at December 31, 1999. If the Company does not
complete the registration by August 15, 2000, the interest rate increases to
1.5% per month, and for each day until registration, additional warrants to
purchase 3,300 common shares will be issued.
F-42
