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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-23607
APPLIED VOICE RECOGNITION, INC.
(Name of small business issuer in its charter)
DELAWARE 76-051318
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1717 St. James Place, Suite 242, Houston, Texas 77056
(Address of Principal Executive Office) (Zip Code)
(713) 621-3131
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for the 12 months ended December 31, 1999 were
$5,261,810. The aggregate market value of the voting common stock held by non-
affiliates of the registrant, based on the closing bid price on the OTC
Electronic Bulletin Board on March 23, 2000 of $1.49 was $22,589,056. As of
March 30, 2000, the issuer had 39,451,538 shares of its common stock, par value
$.001 per share, outstanding.
Documents incorporated by reference: The Registrant's Notice of
Annual Meeting of Stockholders and definitive Proxy Statement pertaining to the
2000 Annual Meeting of Stockholders (the "Proxy Statement") and filed pursuant
to Regulation 14A is incorporated herein by reference into Part III of this
report.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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TABLE OF CONTENTS
Item Page
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PART I
<TABLE>
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<S> <C> <C>
Item 1 Business....................................................... 1
Item 2 Properties and Equipment....................................... 13
Item 3 Legal Proceedings.............................................. 14
Item 4 Submission of Matters to a Vote of Security Holders............ 14
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters............................................ 14
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 16
Item 7. Consolidated Financial Statements.............................. 23
Item 8. Changes in and Disagreements with Accountants
on Account and Financial Disclosure............................ 23
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(A) of the Exchange Act............. 23
Item 10. Executive Compensation........................................ 23
Item 11. Security Ownership of Certain Beneficial Owners
and Management................................................ 23
Item 12. Certain Relationships and Related Transactions................ 23
Item 13. Exhibits and Reports on Form 8-K.............................. 24
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in and incorporated by reference into this Form 10-K are forward-
looking statements. These forward-looking statements include, without
limitation, statements regarding our estimate of the sufficiency of our existing
capital resources and our ability to raise additional capital to fund cash
requirements for future operations, and regarding the uncertainties involved in
the rate of growth and acceptance of the Internet, adoption of electronic
medical record technology by physicians and patients, facilitating e-commerce
transactions, new products, websites, and services. Although we believe that
the expectations reflected in these forward-looking statements are reasonable,
we cannot give any assurance that such expectations reflected in these forward-
looking statements will prove to have been correct.
When used in this Form 10-K, 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. Because these forward-looking statements
involve risks and uncertainties, actual results could differ materially from
those expressed or implied by these forward-looking statements for a number of
important reasons, including those discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Factors that May
Affect Future Results of Operations" and elsewhere in this Form 10-K.
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 these risk factors
and elsewhere in this Form 10-K could substantially harm our business, results
of operations and financial condition 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.
We cannot guarantee any future results, levels of activity, performance or
achievements. Except as required by law, we undertake no obligation to update
any of the forward-looking statements in this Form 10-K after the date of this
Form 10-K. "e-DOCS.net(TM)" and "VoiceCOMMANDER(TM)" are our trademarks. This
report may contain trademarks and service marks of other companies.
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PART I
ITEM 1. BUSINESS
GENERAL
Applied Voice Recognition, Inc.'s, doing business as e-DOCS.net ("e-DOCS"
or the "Company"), 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, e-DOCS still has approximately 1,200 physician transcription
clients in six states, and transcribes approximately 67,000 physician-dictated
medical records per month.
Although our most recent business strategy included the acquisition of
medical transcription operations in order 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. Even though we
recently sold several of our medical transcription operations, we plan to
maintain and improve our remaining medical transcription operations, which
currently provide our only source of revenue.
Our new business strategy is to develop an Internet-based patient record
storage system called the e-DOCS Physician Network (the "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, or "ASP", for the service of
the medical
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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, 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.
The EPN is still in the preliminary stages of development. We anticipate
the launch of the EPN by the end of 2000, provided we obtain adequate financing
to complete its development. Currently, we have designed the EPN website
architecture, and are selecting a developer to put together the main components
of the actual storage and retrieval system. Our medical transcription services
will continue to be our only source of revenue until we complete the development
of and successfully introduce the EPN.
COMPANY HISTORY
e-DOCS' predecessor, Voice Technology Partners, L.P., a Texas limited
partnership, was founded in 1994. In August 1996, the assets of the partnership
were contributed to a Delaware corporation. Thereafter, in December 1996, the
Delaware Corporation completed a share exchange with Summa Vest, Inc., a Utah
corporation, which immediately thereafter changed its name to Applied Voice
Recognition, Inc. The share exchange was accounted for as a reverse merger. In
January 1998, the Utah corporation merged with and into its wholly-owned
Delaware subsidiary in order to reincorporate as a Delaware corporation.
Prior to the first quarter of 1998, our principal efforts were focused
on the sales of VoiceCOMMANDER(TM). This version of our voice recognition
software was sold 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 our expansion into the healthcare transcription
industry by acquiring Transcription Resources of Dallas, Texas ("TR"). The
operation of TR during 1998 provided us with valuable industry experience which
enabled us to develop our VoiceCOMMANDER 99 integrated solution and to formulate
our acquisition plan. In May 1998, we began development of 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 solution designed to improve the quality and reduce the costs
of healthcare information needs. In February 1999, we introduced VoiceCOMMANDER
99 as an integrated Internet-based speech recognition product designed
specifically for the healthcare transcription market.
After ten months of usage by physicians, we recognized that the voice
recognition component of VoiceCOMMANDER 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. 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 to that of our competitors, which will
allow us to respond to technological changes in the future.
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During 1998 and 1999, we acquired eight traditional transcription
companies in various markets in the U.S. and the Philippines. On December 20,
1999, we entered into a binding letter of intent to sell four of those medical
transcription operations. Under 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 consideration of approximately
$8.5 million to Lonestar Medical Transcription USA, Inc. ("Lonestar"), a
Delaware corporation and a wholly-owned subsidiary of L&H Investment Co., N.V.,
a Belgium company ("LHIC"), and to LHIC, who was a preferred stockholder in the
Company prior to the consummation of this transaction. Additionally, Lonestar
and LHIC obtained the non-exclusive rights to our VoiceCOMMANDER 99 code.
The $8.5 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 LHIC ("LHSP"), the forgiveness of a $1.5
million promissory note held by LHIC, and the retirement of $5.0 million in
Series D Preferred Stock held by LHIC. We also converted warrants held by LHIC
to purchase approximately 3.5 million shares of our common stock at $1.25 per
share into warrants to purchase 800,000 shares of our common stock at $0.37 per
share. The LHSP promissory note, the LHIC 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.
In addition to the purchase price, Lonestar agreed to assume certain
employment contracts including those of Eric A. Black, the former President and
Chief Executive Officer of e-DOCS, and Richard A. Cabrera, the former Chief
Financial Officer and Secretary of e-DOCS. Mr. Black and Mr. Cabrera resigned
their positions with us, effective as of the close of the transaction.
We agreed to release Mr. Black and Mr. Cabrera from the non-compete clauses in
their employment contracts.
The following table describes the Company's recent acquisitions and
dispositions in the healthcare transcription industry (acquisitions which were
later sold as described above are indented):
<TABLE>
<CAPTION>
Effective Date
Company Metropolitan Area Date of Acquisition of Disposition
- -------------------------------- -------------------------- ------------------------ ------------------------------
<S> <C> <C> <C>
Transcription Resources Dallas, Texas March 17, 1998
Cornell Transcription, Inc. New York, New York December 1, 1998 December 20, 1999
and Hackensack, New Jersey
Outsource Transcription Manila, Philippines December 1, 1998 December 20, 1999
Linda R. Whilhite Transcription Denver, Colorado December 31, 1998
Reyna Transcriptions Richmond, Texas February 22, 1999 December 20, 1999
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 December 20, 1999
</TABLE>
E-DOCS's former business strategies were to (i) consolidate the
fragmented medical transcription industry by pursuing strategic acquisitions
that provide entry into new markets or compliment existing
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operations; (ii) reduce the cost of providing medical transcription services by
utilizing the Internet and VoiceCOMMANDER 99(TM) voice recognition technology;
(iii) build our capacity to provide medical transcription services by recruiting
and training additional transcriptionists, primarily in the Philippines; and
(iv) improve cash flows. Our ability to pursue these business strategies was
limited by our financial condition, and our limited ability to raise debt or
equity financing on terms favorable to our stockholders. These business
strategies have been abandoned in favor of maintaining and improving our
remaining medical transcription operations and a new focus on the healthcare
Internet business-to-business industry.
During our fiscal year ended December 31, 1998, we spent approximately
$1.06 million on research and development activities. For the fiscal year ended
December 31, 1999, we spent approximately $711,000 on research and development
activities. Those activities focused primarily on the development of our
medical transcription operations and our Internet-based voice recognition
software, 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 patient's 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 ("MTIA"), physicians in the U.S. are
currently spending over $6.6 billion dollars per year on transcription and
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 is also 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 non-core
competencies in an effort to reduce cost and administrative burdens. e-DOCS and
other out-source medical transcription service providers are utilizing emerging
technologies such as the Internet and digital imaging to improve the
transcription process and the management of electronic patient records.
The opportunity for the EPN is created by the fundamental need for the
medical 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. e-DOCS' research of 42 practices throughout Texas
and Colorado indicated only one in fourteen physicians currently use an
electronic medical record entry system. The remainder rely on handwritten
patient notes.
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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. e-DOCS' traditional transcription business provides a
computer-based service for transcription of physician dictation. While its
service arrangements vary by customer (some of which require transcription to be
performed on-site), these services are primarily provided from remote locations
utilizing telecommunications 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 per
line transcribed.
THE E-DOCS PHYSICIAN NETWORK
The EPN will be 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 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, 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 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 service will be provided to the physician at no cost. The
EPN will offer secure, long-term, Health Insurance Portability and Accounting
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
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 usage, rather than large, up-
front investments.
The important competitive advantage of the EPN 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
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.
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COMPETITION
MEDICAL TRANSCRIPTION INDUSTRY
e-DOCS competes in the highly fragmented medical transcription industry
that is predominately populated by small, regional or local companies, with a
limited number of national companies. It is estimated by the MTIA that the
total annual cost of transcribing medical records in the United States is
greater than $6.6 billion. Of this amount, the 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 customer base
and the consolidation of healthcare service providers into larger national
companies. Smaller, regional and local medical service providers are at a
disadvantage as 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 utilize 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 e-
DOCS, 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, financial condition
and results of operations.
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, such as Medicalogic, Inc., 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 solutions, they have begun to pursue a variety of
Internet strategies, some of which could provide functions competitive with
our products and services; and
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. Major Internet companies, including those not currently specializing in the
healthcare industry, which may also 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 these
proposals 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, financial condition and results of operations.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
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 is also 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 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 information.
In addition, these rules would require that safeguards be constructed to protect
this health information against unauthorized access. The proposed rules include
new penalties for violations of an individual's right to keep their health
information private. These proposed rules are expected to become final in early
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
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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,
financial condition and results of operations. 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.
A number of proposals have been made at the federal, state and local level 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, financial condition and
results of operations.
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, it may be possible for unauthorized third parties to copy aspects
of our products or to obtain and use information that we regard as proprietary.
We have applied for several U.S. Patents on various aspects of our speech
recognition user interface and Internet technology, and two of the applications
are pending. In September 1998, our U.S. Patent 5,812,977 was issued on a
PC-based graphical user interface for voice applications. The patent covers our
graphical user interfaces ("GUI's") integrated with voice recognition technology
as a primary interface for a PC. Additionally, it includes an intelligent,
real-time help system that tracks what the user is attempting to accomplish and
provides visual and/or vocal assistance.
In February 1999, e-DOCS' second U.S. Patent 5875429 was issued. This
patent covers the use of voice, combined with graphical navigation marks, that
allows a user to quickly and easily navigate and edit a document. e-DOCS has
filed a third patent application for the voice activation of popular games of
chance. The gaming industry in places like Las Vegas has moved increasingly to
computerized games of chance. e-DOCS' management believes that the next logical
step is to add voice recognition technology to those games. The resultant games
would not only respond to the user's voice, but could converse with the player
to enhance the entertainment experience. The patent office challenged this
patent citing prior inventions that would logically lead to this technology. As
this patent does not relate to our core business we decided not to pursue it
further.
The fourth patent concerns the voice activation of direction giving
kiosks. These purpose-built kiosks would utilize voice recognition technology
and voice response to allow users to be easily guided
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from the kiosk location to the location of their choice. The resultant
directions and/or maps would also provide related information such as coupons
for shopping or advertisements for related products. After a challenge from the
patent office this patent was abandoned.
The fifth patent describes a voice operated inventory system for the
airline industry. This wearable unit would be worn by the flight attendants, on
their belt, while they are serving drinks or renting headsets. The flight
attendant would simply say "Seat 3C, one Scotch," into the microphone, and the
system would generate a bill internally and debit the inventory. The flight
attendant would then swipe the customer's credit card for payment of the
transaction. All transactions would be held in memory until landing when the
unit would be plugged into a master system for reconciliation. This patent was
also challenged. While it was possible that modifications to the claims could
have been made to continue the process, it was deemed that it was not in our
best interest to pursue a patent so divergent from our emerging medical focus.
We have applied for a patent that describes the use of color or other
easily recognizable text differentiators as an indication of recognition
accuracy. The application could show text that is believed by the recognition
engine to be greater than 90% accurate in black, text that was believed to be
between 70 and 90% accurate in blue, and text that is believed to be less than
70% accurate in red. This would provide obvious visual clues to the user on
where the document needs correction.
We also have applied for a patent that describes the process for
presenting medical details about pharmaceutical products to doctors though the
use of an Internet browser. The doctor would sign on to a secure web site and
view a presentation detailing the method of application, benefits, and side
effects for particular products. Once the doctor finished viewing the
presentation she can order samples of that products from its manufacturer by a
click of the mouse to be sent to her overnight. We anticipate incorporating this
technology into the EPN.
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 to not 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 not to
develop products based on any existing intellectual property rights we may have,
except to the extent such rights relate to the development of the EPN. However,
we may seek to sell or license such 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 technology. 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 leading to litigation relating to
intellectual property issues. However, there can be no assurances that the
products and services offered by us will not infringe on patent or other rights
of others, for which licenses might not be available to us.
TRADEMARKS
e-DOCS has 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 an
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.
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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 made
by us to the VoiceCOMMANDER code. 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 code.
EMPLOYEES
As of December 31, 1999 and taking into effect the completion of our
transaction with Lonestar and LHIC, we employed 12 persons on a full-time basis,
of whom 4 were located in our corporate headquarters in Houston, Texas, and 8
were located at branch locations in Texas and Colorado.
In addition, 73 people provided transcription services to us from their
homes. We treat our at-home transcriptionists as contract employees and
compensate them based upon their performance. 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.
ITEM 2. PROPERTIES AND EQUIPMENT
As of December 31, 1999, 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 1717 St. James Place, Suite
242, Houston, Texas currently consists of approximately 1,122 square feet at a
basic rental rate of approximately $1,789 per month. We are in the process of
expanding our office space by leasing an additional 700 square feet adjacent to
our current location at a basic rental rate of $1,125 per month.
Our typical branch office ranges from 1,000 to 1,500 square feet and
lease terms vary from month to month to 2 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.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which e-DOCS is a party or
of which any of its property is the subject other than ordinary, routine claims
incidental to e-DOCS' business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters during the fourth quarter of the year
covered by this report to a vote of the security holders through the
solicitation of proxies or in any other manner.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
On February 5, 1997, our common stock began trading on the Over-the-
Counter Bulletin Board (the "OTCBB") under the symbol "AVRI." On February 8,
1999 our Board of Directors voted to adopt "e-DOCS.net, Inc." as our name for
doing business to clearly reflect our new focus on the Internet. Additionally,
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 OTCBB. Any market for the common stock
should be considered sporadic, illiquid and highly volatile. Prices reflect
inter-dealer quotations, without adjustment for retail markup, markdowns or
commissions, and may not represent actual transactions. The stock's trading
range over the previous two years on the OTCBB is as follows:
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<TABLE>
<CAPTION>
1998 HIGH LOW
- ---- ------- -------
<S> <C> <C>
1st Quarter $3.812 $1.750
2nd Quarter $3.312 $0.875
3rd Quarter $1.875 $0.450
4th Quarter $1.531 $0.625
1999 HIGH LOW
1st Quarter $2.125 $0.906
2nd Quarter $1.406 $1.063
3rd Quarter $1.688 $0.438
4th Quarter $0.530 $0.188
</TABLE>
As of March 30, 2000 there were 39,451,538 shares of common stock issued and
outstanding and 308 holders of record of the common stock. In
addition, we have approximately 4,550 additional beneficial stockholders.
e-DOCS has neither declared nor paid any dividends on the common stock since its
inception and presently anticipates that no dividends will be declared in the
foreseeable future. However, we have been required to pay stock dividends on our
preferred stock. Any future dividends will be subject to the discretion of
the Board of Directors and will depend upon, among other things, future
earnings, the operating and financial condition of e-DOCS, capital requirements,
debt obligation agreements, general business conditions and other pertinent
facts. Therefore, there can be no assurance that any dividends on the common
stock will be paid in the future.
RECENT SALES OF UNREGISTERED SECURITIES
The following sales of unregistered securities occurred during the year
ended December 31, 1999 in private transactions, which were not included in an
earlier Form 10-QSB. For these sales, e-DOCS relied on the exemption from
registration available under Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"), unless otherwise indicated:
SERIES A PREFERRED STOCK. On January 20, 2000, we entered into a Stock
Exchange Agreement with the holder of the our Series A Preferred Stock,
Entrepreneurial Investors, Ltd. ("EIL"), to exchange their shares of preferred
stock for shares of Series G Preferred Stock based on the primary terms set
forth in a Letter Agreement dated January 7, 2000. Those terms included the
Series G Preferred Stock having a reduced conversion price with a mandatory
conversion provision that requires the Series G shares to be converted into our
common stock within seven days of their issuance. The effective result being
the resetting of the conversion price for the Series A Preferred Stock from
$1.48 to $.30, followed by the prompt conversion of the preferred stock into our
common stock. On March 23, 2000, EIL converted its 186,000 of Series A Preferred
Stock into 14,880 shares of Series G Preferred Stock. Upon conversion, EIL also
received stock dividends amounting to 347.166 shares of Series G Preferred
Stock. On March 30, those 15,227.166 shares of Series G Preferred Stock
converted into 5,075,722 shares of our common stock. We relied upon the
exemption provided by Section 3(a)(9) under the Securities Act for these
issuances.
SERIES B PREFERRED STOCK. During 1999, we periodically issued shares of
common stock when the holders of our Series B Preferred Stock (the "Series B
Investors") exercised their conversion rights and converted an aggregate of 605
shares of the Series B Preferred Stock into 608,680 shares of our common stock.
As of December 31, 1999, the Series B Investors received stock dividends
amounting to 51,523 shares of common stock. On March 11, 2000, the remaining
919.715 shares of Series B Preferred Stock were automatically converted into
514,059 additional shares of our common stock in accordance with the terms of
the Certificate of Designation for the Series B Preferred Stock. Upon
conversion, the Series B Investors also received stock dividends amounting to
51,476 shares of our common stock. We relied upon the exemption provided by
Section 3(a)(9) under the Securities Act for these issuances.
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 (the
"Series C Investors") to exchange their shares of preferred stock for shares of
Series G Preferred Stock based on the primary terms set forth in a Letter
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Agreement dated January 7, 2000. Those terms included the Series G Preferred
Stock having a reduced conversion price with a mandatory conversion provision
that requires the Series G shares to be converted into our common stock within
seven days of their issuance. The effective result being the resetting of the
conversion price for the Series C Preferred Stock from $1.00 to $.30, followed
by the prompt conversion of the preferred stock into our common stock. On
March 1, 2000 and March 23, 2000 the Series C Investors converted their 153,538
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
those Series G Preferred Stock were converted into 4,838,894 shares of our
common stock, and on March 30, 2000, the remaining 1,124.458 were converted into
374,819 shares of our common stock. We relied upon the exemption provided by
Section 3(a)(9) under the Securities Act for these issuances.
SERIES E PREFERRED STOCK. On August 18, 1999, we completed a $2,000,000
private placement by the issuance of 2,000 shares of Series E Convertible
Preferred Stock. These shares have a par value of $.10 and were priced at
$1,000 per share and were sold to Greenwich AG. On February 11, 2000, we
entered into a Stock Exchange Agreement with the Greenwich AG to exchange its
shares of preferred stock for shares of Series G Preferred Stock based on the
primary terms set forth in a Letter Agreement dated January 7, 2000. Those
terms included the Series G Preferred Stock having a reduced conversion price
with a mandatory conversion provision that requires the Series G shares to be
converted into our common stock within seven days of their issuance. The
effective result being the resetting of the conversion price for the Series E
Preferred Stock from $1.00 to $.30, followed by the prompt conversion of the
preferred stock into our common stock. On March 23, 2000, Greenwich AG
conversion, Greenwich AG received stock dividends amounting to 269.448 shares
of Series G Preferred Stock. On March 8, 2000, those 20,269.448 shares of
Series G Preferred Stock were converted into 6,756,483 shares or our common
stock. We relied upon the exemption provided by Section 3(a)(9) under the
Securities Act for these issuances.
SERIES 1 PREFERRED STOCK. On December 31, 1999, we issued 448.866 shares
of Series 1 Preferred Stock as deferred payment of a portion of the purchase
price for the acquisition of Cornell Transcription, Inc. in accordance with the
terms of the Asset Purchase Agreement dated December 1, 1998. On December 31,
1999, Cornell Transcription, Inc. converted those 448.866 shares of Series 1
Preferred Stock into 1,468,539 shares of our common stock. We relied upon the
exemption provided by Section 3(a)(9) under the Securities Act for these
issuances.
SERIES 2 PREFERRED STOCK. On December 31, 1999, we issued 500 shares of
Series 2 Preferred Stock as deferred payment of a portion of the purchase price
for the acquisition of Linda Willhite Transcription in accordance with the terms
of the Asset Purchase Agreement dated December 31, 1998. On February 23, 2000,
we issued 1,256.66 shares of Series 2 Preferred Stock as deferred payment of a
portion of the purchase price for the acquisition of PRN Transcription, Inc. in
accordance with the terms of the Asset Purchase Agreement dated February 22,
1999. On March 14, 2000, we converted those 1,256.66 shares of Series 2
Preferred Stock into 82,822 shares of our common stock. We relied upon the
exemption provided by Section 3(a)(9) under the Securities Act of these
issuances.
On February 23, 2000, we issued 645.44 shares of Series 2 Preferred Stock
as deferred payment of a portion of the purchase price for the acquisition of AM
Transcription, Inc. in accordance with the terms of the Asset Purchase Agreement
dated February 26, 1999. On March 14, 2000, we converted those 645.44 shares of
Series 2 Preferred Stock into 32,953 shares of our common stock. We relied upon
the exemption provided by Section 3(a)(9) under the Securities Act for these
issuances.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
e-DOCS' current revenue is derived from the out-sourced medical
transcription of patient records for physicians, clinics and hospitals. Our
current customer base includes approximately 1,200 physicians in six states. In
the first quarter of 1998, we decreased the scope of our business plan and began
concentrating our efforts solely on the medical transcription market.
Starting in May 1998, we began development of a software product that
provided healthcare professionals with a tool for Internet-based transcription
and dictation services. The new product, named VoiceCOMMANDER 99, provided a
mobile dictation solution designed to improve the quality and reduce the costs
of healthcare information needs. Released on February 15, 1999, VoiceCOMMANDER
99 utilized voice recognition, handheld digital recording technology, and
Internet-driven technologies.
After ten months of usage by physicians, we recognized that the voice
recognition component of VoiceCOMMANDER 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. Utilizing the experience gained from our
first Internet-based service, VoiceCOMMANDER 99, we have begun development of
our next generation browser-based service, titled e-DOCS Physician Network.
While we continue to provide outsource medical transcription services, we
are developing the EPN, through our wholly-owned subsidiary the e-DOCS Physician
Network, Inc., as a medically centric, business-to-business application service
provider. The EPN will provide a secure, browser-based solution directed at the
independent transcription company and the nation's 475,000 clinical physicians,
70% of
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whom practice in groups of five or less. We are utilizing our experience
in previously acquiring eight independent transcription companies to provide a
common technology platform to these independent, capital-deficient businesses.
The EPN will be 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 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 service will be provided to the physician at no cost. The EPN
will offer secure, long-term, HIPAA-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 fourteen 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 usage, 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 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. Further, we believe the historical results of operations do not
fully reflect the operating efficiencies and improvements that are expected to
be achieved by the continued integration of our acquired businesses and the
corporate restructuring from the sale of our primary loss-generating assets.
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The following discussion should be read in conjunction with the
consolidated financial statements and the related notes thereto and other
detailed information appearing elsewhere herein.
FISCAL YEAR 1999 VS. FISCAL YEAR 1998
REVENUES
Our primary source of revenues originated from the sale of transcription
services. During 1999, we also generated revenues from the sale of bundled
products comprised of software and hardware. Net revenues increased to
$5,261,810 in 1999 up approximately $4,544,000 from 1998. The increase is
primarily attributable to our acquisition program ($4,126,590 related to
transcription operations acquired in 1999) and a full year of operations for
1998 acquisitions.
Effective December 20, 1999 the Company disposed of the assets and
related operations of their medical transcription services in New York, New
Jersey, Houston, Texas and Manila, the Philippines. Revenues of ongoing
operations approximate $2,400,000 on an annual basis.
COST OF SALES
Cost of sales consists primarily of transcription labor costs. To a
lesser extent, cost of sales also includes certain costs related to hardware and
software sales. Cost of sales increased in 1999 to $4,051,166, up approximately
$3,619,000 from 1998. This increase is directly attributable to our acquisition
program that resulted in additional direct costs associated with transcription
services. The gross margin for 1999 was 23%, compared to 40% for 1998. Because
transcription services are labor intensive, the decrease in the gross margin
percentage is consistent with the increase in transcription revenues, as a
percent of total revenues.
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 37% in 1999 to $797,745, down approximately $468,000
from 1998. 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 increased 25%
in 1999 to $7,024,097, up approximately $1,384,000 from the amount in 1998. The
increase was attributable to increases in compensation, legal fees, office rent,
depreciation and amortization.
Compensation expenditures increased approximately $855,000 primarily as a
result of personnel increases from acquisitions and severance costs related to
the termination of certain corporate officers.
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Legal fees increased by $276,000 primarily because of expenses associated with
an abandoned registration statement during 1999 and costs associated with the
conversion of preferred stock to common stock.
Our acquisitions during 1999 resulted in an increase in office rent,
depreciation expense and amortization of goodwill. Such expenses increased
approximately $653,000, in aggregate.
The total increase was offset by decreases in other expenditures related
to outside consultants. During 1998, we hired consultants to assist with
the day to day operations. As our business focus shifted to the transcription
business and they developed the internal expertise to manage operations the
company hired fewer outside consultants.
As a result of the disposition of a significant portion of the
transcription operations and a reduction in the corporate office staff from 35
to seven, general and administrative expense should significantly decrease in
future periods.
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 6% in 1999 to $711,404, down approximately $43,000
from the 1998 expense level. During 1998, we capitalized approximately $291,000
of development costs. In 1999 no costs were capitalized. The decrease in
research and development costs is attributable to our change in business focus
from software development to transcription service provider.
INTEREST EXPENSE
Interest expense is comprised of interest on indebtedness and finance
charges related to warrants granted. 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
During 1999, we extinguished indebtedness through its
forgiveness in exchange for certain net assets and related operations. The
resultant gain of $5,562,750 was reflected as an extraordinary item.
Through the period ended December 31, 1999, we have incurred operating
losses, since our inception, of approximately $21.9 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.
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LIQUIDITY AND CAPITAL RESOURCES
Prior to the disposition of assets to Lonestar and LHIC as described above,
which was effective as of December 20, 1999, we had debt totaling approximately
$4 million. After the disposition and as of December 31, 1999, we have debt of
approximately $450,000. That debt includes (i) a convertible promissory note and
warrant purchase agreement payable to a related party with a stated principal
amount of $250,000 bearing interest at 9% and would have matured in February
2000, but we are currently in negotiations to extend its maturity, (ii) a note
payable to a bank with a remaining principal amount of $31,223 at prime plus 2%
interest with monthly payments of principal and interest of $909 and maturing in
March 2003, and (iii) an unsecured note payable to an individual with a
remaining principal amount of $175,000 at 8% interest with annual principal
payments of $58,333 and maturing in February 2002.
At December 31, 1999, we had cash and cash equivalents of $53,529 and a
working capital deficiency of $1,568,752. This compares to cash and cash
equivalents of $1,377,913 and working capital of $580,726 as of December 31,
1998. The decrease in working capital of approximately $2,150,000 is
attributable to operating losses. We may incur losses on a quarterly and annual
basis in the near future on limited sales of our products and services. In
addition, we may not be successful in increasing sales of our products and
services for the long term, or be able to achieve profitability.
Net cash used by operating activities increased $819,297 from $6,034,936
for the twelve months ended December 31, 1998 to $6,854,233 for the twelve
months ended December 31, 1999. Although the net loss in the current year of
approximately $2,655,000 is substantially less than the 1998 net loss of
approximately $8,321,000, the 1999 amount included a primarily non-cash
extraordinary gain on extinguishments of debt of $5,562,750.
Current year investing activities totaled $1,450,613. Of this amount,
$775,000 represents the cash outlay the Company incurred in the purchase of PRN
Transcription, AM Transcription, Reyna Transcription and A Word Above, Inc. The
Company's other investing activity includes equipment purchases of $1,372,552.
These investing activities were offset by proceeds received from the sale of
various assets of $696,939.
Net cash provided by financing activities amounted to $6,980,462. Loans
and sales of preferred stock provided these funds. Historically, we have relied
upon the sale of equity securities and short-term loans as our primary sources
of funding to finance operations and acquisitions.
Our cash position, less known commitments and contingencies, plus outside
financing received through March 31, 2000, plus cash generated from operations
for the balance of fiscal year 2000 should be adequate to fund our on-going
operations. We currently have no significant working capital expenditure
commitments. We received approximately $810,000 from the recent exercise of
warrants and options for our common stock, which we believe will be sufficient
to fund the development of the EPN. Although we should have improved operating
results, we will still require substantial additional capital during fiscal 2000
to implement and market the EPN once its development is complete.
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 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
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<TABLE>
<CAPTION>
<S> <C>
LIMITED HISTORY OF We have incurred significant net losses since our inception and expect to
BUSINESS OPERATIONS; continue to incur significant losses on a quarterly and annual basis in the
ANTICIPATION OF future. For the year ended December 31, 1999, we recorded a net loss of
CONTINUED LOSSES $2,655,913, or $.16 per share, on net sales of $5,261,810. As of December 31,
1999, our accumulated deficit was $18,125,925. We have achieved only limited
Due to its limited revenues to date, and our ability to generate significant revenues is subject to
nature, you should substantial uncertainty. Our limited operating history makes the prediction of
not rely on our future results of operations difficult or impossible, and we may not be able to
operating history as sustain revenue growth or achieve profitability. As described in the "Company
an indicator of our History," we removed operations that incurred substantial losses in excess
future performance. of $3,600,000 annually and are now focusing on a new business plan involving
the EPN. Although the development of the EPN is in the very early
stages, we intend to integrate the EPN with our Internet-based medical
transcription service. Accordingly, we have a limited operating history upon
which you can base an evaluation of us and our current prospects. You must
consider us and our prospects in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets such as the electronic
and Internet-based medical transcription market and the emerging
business-to-business e-commerce market. To address these risks, we must respond
to competitive developments, continue to attract, retain and motivate qualified
persons, successfully implement our advertising program, continue to upgrade our
technologies, commercialize products and services incorporating such
technologies, and successfully implement our strategic business plan to penetrate
the healthcare transcription market. We may not be successful in addressing such
risks.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
RISKS ASSOCIATED WITH The medical transcription market is well established; however, the use of the
A DEVELOPING MARKET Internet in the healthcare transcription, record storage and business-to-business
AND THE ACCEPTANCE OF industries, and the Internet markets in general, have only recently begun
OUR PRODUCTS AND to develop and are characterized by rapidly changing technology, evolving industry
SERVICES standards and customer demands, and frequent new product introductions and enhancements.
The healthcare Internet markets are highly dependent upon the increased
Growth in the use of use of the Internet by healthcare professionals and continued price and
the Internet in performance improvements in personal computers. Our future operating results
the healthcare will depend upon the emergence of the Internet in the healthcare transcription, record
transcription record storage and business-to-business markets, our ability to develop and improve
storage and business- our technology and the successful implementation of our marketing plan
to-business industries and the EPN. However, the healthcare Internet markets may not develop or we may
is an important factor not achieve, market acceptance of our products and services or execute
in our business plan. our business plan successfully. As is typical in the case of a new and rapidly
evolving industry, demand and market acceptance for recently introduced products
and services are subject to a high level of uncertainty. The industry is young
and has few proven products. If widespread use of the Internet does not develop in
the healthcare transcription, record storage and business-to-business industries,
our business, results of operations and financial condition will be materially adversely
affected. Because the market for our products and services is new and evolving, it is
difficult to predict the size of this market and growth rate, if any. The market for our
products and services may not develop or the demand for our products or services may not
emerge or become sustainable. If the market fails to develop, develops more slowly than
expected or becomes saturated with competitors, or if our products and services
do not achieve or sustain market acceptance, our business, results of operations
and financial condition will be materially adversely affected.
DEPENDENCE ON Currently, we primarily derive our revenue from the sale of traditional
PRINCIPAL PRODUCTS transcription services. To date, we have had limited revenues from sales of our
AND SERVICES VOICECOMMANDER(TM) line of products and have only derived revenue from the sale
of traditional transcription services since the acquisition of our first
Our future results transcription services company in March 1998. Our future financial performance
depend primarily upon will depend in part on our ability to continue to develop and establish our
the future success of traditional and Internet-based medical transcription service, and to effectively
our latest product develop and introduce the EPN. However, we may not be successful in developing
for the healthcare these or other products or services in a manner which meets with market
transcription market, acceptance. In addition, new product releases by us, whether improved versions
the efficient of our current Internet-based products or introductions of other new products,
operation of our may contain undetected errors that require significant design modifications,
transcription resulting in a loss of customer confidence and adversely affecting the use of our
operations, and the product(s) and services. Our future success will depend in significant part on
successful our ability to develop new product releases and to continually improve the
introduction of our performance, features and reliability of our current Internet-based products in
new response to both evolving demands of the healthcare transcription marketplace and
business-to-business competitive product offerings, and we may not be successful in doing so. Any
e-commerce initiative. factors adversely affecting the traditional transcription market, such as
increased price competition or the introduction of technologically superior
products and services, could have a material adverse effect on us.
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MANAGEMENT OF GROWTH; The rapid execution necessary for us to successfully offer our products and
NEED TO ESTABLISH services and implement our business plan in a rapidly evolving market requires an
INFRASTRUCTURE; effective planning and management process. Our rapid growth places a significant
ADDITIONAL PERSONNEL strain on our managerial, operational and financial resources. In order to
manage our growth, we must:
Our success will
depend on our ability . implement and improve our operational and financial systems;
to effectively manage . expand, train and manage our employee base; and
our growth and . hire additional technical support personnel in order to convert healthcare
attract and retain professionals from traditional to Internet-related transcription methods.
additional personnel.
There can be no assurance that we have made adequate allowances for the costs and
risks associated with this expansion, that our systems, procedures or controls
will be adequate to support our operations or that our management will be able to
achieve the rapid execution necessary to successfully offer our products and
services and implement our business plan simultaneously. Our future operating
results will also depend on our ability to expand our sales and expand our
support organization commensurate with the growth of our business. Any failure
by our management to effectively anticipate, implement and manage the changes
required to sustain our growth could have a material adverse effect on our
business, results of operations and financial condition. We may not be able to
effectively manage such change.
RAPID TECHNOLOGICAL The healthcare information services industry is characterized by rapid
CHANGE technological change, evolving customer needs and emerging technical standards.
While we believe that utilizing Internet-based technology can significantly
We must respond enhance the rendering of transcription services in the healthcare information
quickly to services industry, the introduction of competing services or products
technological incorporating new technologies, and the emergence of new technical standards
developments and could render some or all of our services as unmarketable. We believe that our
evolving industry future success is dependent in part on our ability to enhance our current
standards in order to services and develop new services that keep pace with technological developments
remain competitive. and emerging technical standards, and that address the increasingly sophisticated
needs of our customers. We may not be successful in developing and marketing
enhancements to our existing services or new services that respond to
technological developments, emerging technical standards, or evolving customer
needs, on a timely basis or at all, and such enhancements or new services, if
developed and introduced, may not achieve market acceptance. The failure to
develop and introduce service enhancements and new services in a timely and
cost-effective manner in response to changing technologies or customer
requirements, would have a material adverse effect on our business, financial
condition and results of operations.
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COMPETITION The transcription services industry remains highly fragmented and primarily
consists of small, local or regional companies. As a result, we compete with a
We are in an extremely large number of third-party transcription companies that offer services similar
competitive industry to ours and that target the same customers and qualified transcriptionists. In
that is dominated by addition, there are several large national transcription service providers:
several companies Medquist, Inc. (which recently acquired MRC Group, Inc., another large
which have transcription service provider), Transcend Services, Inc., Harris Corp. and
significantly greater Rodeer Systems, Inc. These competitors have significantly greater resources than
financial, technical, us. We believe that our ability to compete depends upon many factors within and
and marketing outside of our control, including the timing and market acceptance of our
resources than we Internet-based transcription services, the successful development and market
have. acceptance of the EPN, the development of other service enhancements by us and
our competitors, service quality, performance, price, reliability, customer
service and support, and ability to attract qualified transcriptionists. In
addition, the potential exists for large companies that do not currently provide
transcription services, but which currently provide other services to the
healthcare industry, to enter the transcription services field. For example, IDX
Systems Corporation ("IDX") recently announced the acquisition of EDIX
Transcription, one of our larger competitors. IDX is a provider of healthcare
information services and stated that it acquired EDIX because of perceived
synergies of the medical transcription business (data input) and health
information management businesses and is an example of an existing company that
could and has become a competitor. Such potential competitors could have
substantially greater financial, technical and marketing resources than us. As a
result, such potential competitors, if they were to enter the transcription
business, could be able to respond more quickly to evolving technological
developments, changing customer needs or emerging technical standards or to
devote greater resources to the development, promotion or sale of their services.
Our services also compete with the in-house transcription staffs of our potential
customers. While we believe that our growth and earnings will benefit from the
outsourcing by healthcare providers of non-patient care functions, including
transcription services, the current trend could change direction and cause
healthcare providers to bring all or some of those services in-house. In
addition, competition may increase due to consolidation of transcription
companies. Increased competition may result in price reductions for our
services, reduced operating margins and an inability to increase our market
share, any of which would have a material adverse effect on our business,
financial condition and results of operations. We may not be able to compete
successfully against current or future competitors, and competitive pressures may
have a material adverse effect on our business, financial condition and results
of operations.
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DEPENDENCE ON KEY Our performance is substantially dependent on the performance of our current
PERSONNEL executive officers and key employees and the successful replacement of certain
executive officers and key employees who left the Company as part of the recent
Our success is heavily corporate restructuring. In particular, the services of Timothy J. Connolly, our
dependent upon our current Chairman, would be difficult to replace. We have entered into an
retention of certain employment agreement with Mr. Connolly, although we do not currently have a key
of our key officers. person insurance policy on his life. However, any key person life insurance
policy we do put in place for Mr. Connolly may not be sufficient to compensate as
for the loss of his services. The loss of the services of any other key
employees and/or our inability to successfully replace those executive officers
we have lost could have a material adverse effect on our business, results of
operations or financial condition. We are heavily dependent upon our ability to
attract, retain and motivate skilled technical and managerial personnel. Our
future success also depends on our continuing ability to identify, hire, train
and retain other highly qualified technical and managerial personnel.
Competition for such personnel is intense, and we may not be able to attract,
assimilate or retain other highly qualified technical and managerial personnel in
the future. The inability to attract, hire or retain the necessary technical and
managerial personnel could have a material adverse effect upon our business,
results of operations or financial condition.
ABILITY TO ATTRACT Our success is also dependent, in part, upon our ability to attract and retain
QUALIFIED qualified transcriptionists, who can provide the accuracy and turnaround time
TRANSCRIPTIONISTS required by our customers. Competition for transcriptionists is intense. We may
not be successful in attracting and retaining the personnel necessary to conduct
Competition for our business successfully. In addition, our inability to attract, hire,
qualified assimilate and retain such personnel could have a material adverse effect upon
transcriptionists is our business, financial condition and results of operations. We may ultimately
intense. prove unable to attract sufficient qualified transcriptionists to operate our
facilities.
UNCERTAINTY REGARDING The healthcare industry is subject to changing political, economic and regulatory
GOVERNMENT HEALTHCARE influences that may affect the outsourcing arrangements of healthcare providers.
REFORM AND REGULATION Several states and the United States federal government are investigating a
variety of alternatives to reform the healthcare delivery system and further
Our business may be reduce and control healthcare spending. These reform efforts include proposals
adversely affected by to limit spending on healthcare items and services, limit coverage for new
future changes in technology, limit or control directly the prices healthcare providers and drug
governmental and device manufacturers may charge for their services and products, and
regulations relating otherwise change the environment in which providers operate. The scope and
to the healthcare timing of such reforms cannot be predicted at this time, but if adopted and
industry. implemented, they could have a material adverse effect on our business.
Healthcare providers may react to these proposals and the uncertainty surrounding
such proposals by curtailing outsourcing arrangements or deferring decisions
regarding the use of outsourced services. In response to this environment, many
healthcare providers are consolidating to create larger healthcare delivery
organizations. This consolidation reduces the number of potential customers for
our products and services, and increases the bargaining power of these
organizations, which could lead to reductions in the amount we are able to charge
for our products and services. The impact of these developments in the
healthcare industry is difficult to predict and could have a material adverse
effect on our business, operating results and financial condition.
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In providing our services, we are subject to certain statutory, regulatory and
common law requirements regarding the confidentiality of such medical
information. We require our personnel to agree to keep all medical information
confidential and monitor compliance with applicable confidentiality requirements.
However, the failure to comply with such confidentiality requirements could have
a material adverse effect on our business, operating results and financial
condition.
INTELLECTUAL PROPERTY We currently have only two issued patents and three patent applications pending,
AND PROPERTY RIGHTS and rely on a combination of trade secret, copyright and trademark laws,
non-disclosure agreements and contractual provisions to protect our proprietary
Our success is heavily rights in our software and technology. However, these protections may not
dependent upon a prevent misappropriation of this technology. Moreover, third parties could
combination of independently develop competing technologies that are substantially equivalent or
proprietary software superior to our technologies. As part of our recent sale of certain of our
technology and medical transcription operations to Lonestar Medical Transcription USA, Inc., a
hardware purchased wholly-owned subsidiary of L & H Investment Co., N.V., we assigned Lonestar and
and licensed from LHIC non-exclusive rights to our VC99 code. Although we believe that our
third parties. Our services and products and the proprietary rights developed or licensed by us do
current protections not infringe patents and proprietary rights of other parties, those parties may
may not be sufficient assert infringement claims, regardless of merit, against us in the future. In
to protect these addition, we have applied for several federal service mark and trademark
technologies. registrations for certain of the marks we use, and have been granted U.S.
Trademarks for various marks, including Applied Voice Recognition and
"VOICE-COMMANDER(TM)." There can be no assurance that any further trademark
registrations will be issued or, if issued, will provide us with adequate
protection against competitors.
Any patent applications now pending or filed in the future may not result in
patents being issued or, if patents are issued, the claims allowed may not be
sufficiently broad to protect what we believe to be our proprietary rights. In
addition, pending applications or any patents licensed to us or issued or
licensed to us in the future may not afford any competitive advantages to us or
may be challenged by third parties or circumvented or designed around by others.
The cost of litigation to uphold the validity and prevent infringement of patents
and to enforce licensing rights can be substantial. Furthermore, others may
independently develop similar technologies or duplicate the technology owned by
or licensed to us or design around the patented aspects of such technology. Our
services and products may or may not infringe patents or other rights owned by
others, licenses for which may not be available to us.
POTENTIAL FLUCTUATIONS Because of our limited operating history, we do not have historical financial
IN QUARTERLY RESULTS data for any significant period of time on which to base planned operating
expenses. Our expense levels are based in part on our expectations as to future
Various market and revenues and, to a large extent, are fixed. Quarterly sales and operating
economic factors may results are generally difficult to forecast. We may not be able to adjust
cause our future spending in a timely manner to compensate for any unexpected revenue shortfall.
quarterly operating Accordingly, any significant shortfall in relation to our expectations would have
results to vary. an immediate adverse impact on our business, results of operations and financial
condition. In addition, we plan to significantly increase our operating expenses
to fund greater levels of research and development, increase our sales and
marketing operations, broaden our customer support capabilities and establish
brand identity and strategic alliances. To the extent that such expenses precede
or are not subsequently followed by
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increased revenues, our business, results of
operations and financial condition will be materially adversely affected.
Our operating results may fluctuate significantly in the future because of a
variety of factors, some of which are beyond our control. These factors include
general economic conditions, specific economic conditions in the transcription
industry in general and the healthcare transcription industry specifically, usage
of healthcare transcription related and Internet-based technology, seasonal
trends in sales, capital expenditures and other costs relating to the expansion
of operations, the introduction of new products or services by us or our
competitors, the mix of the services sold and the channels through which those
services are sold and pricing changes. As a strategic response to a changing
competitive environment, we may elect from time to time to make certain pricing,
service or marketing decisions or acquisitions that could have a material adverse
effect on our business, results of operations and financial condition. We
believe that period to period comparisons of our operating results are not
meaningful and should not be relied upon for an indication of future performance.
Due to all of the foregoing factors, it is likely that in some future quarter,
our operating results may be below the expectations of public market analysts and
investors. In such event, the price of our common stock would likely be
materially adversely affected.
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ITEM 7. FINANCIAL STATEMENTS
Information with respect to this item is set forth in the "Index" to
Consolidated Financial Statements on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On 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 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.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this item is incorporated herein by reference to
our Proxy Statement to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A in connection with our 2000 Annual Meeting, not later
than 120 days after the end of the fiscal year covered by this report.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
our Proxy Statement to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A in connection with our 2000 Annual Meeting, not later
than 120 days after the end of the fiscal year covered by this report.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
our Proxy Statement to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A in connection with our 2000 Annual Meeting, not later
than 120 days after the end of the fiscal year covered by this report.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
our Proxy Statement to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A in connection with our 2000 Annual Meeting, not later
than 120 days after the end of the fiscal year covered by this report.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
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(A) EXHIBITS.
EXHIBIT DESCRIPTION OF EXHIBIT
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2.1 Asset Purchase Agreement by and between Transcription Resources dated
March 17, 1998 (Exhibit 2.2 to the Company's Form 10-KSB for the
period ended December 31, 1997, as filed with the Commission on April
15, 1998, is incorporated herein by reference).
2.2 Asset Purchase Agreement by and among the Company, Cornell and
Acquisition Sub dated December 1, 1998 (Exhibit 2.1 to the Company's
Current Report on Form 8-K as filed with the Commission on December
16, 1998 is incorporated herein by reference).
2.3 Asset Purchase Agreement by and among the Company and LRW
Transcription dated December 31, 1998(Exhibit 2.1 to the Company's
Current Report on Form 8-K as filed with the Commission on January 1,
1999 is incorporated herein by reference).
2.4 Stock Purchase Agreement by and among Timothy E. Cook and Kay F. Cook,
A Word Above, Inc. and e-DOCS Health Care Information Services, Inc.
dated May 28, 1999 (Exhibit 2.1 to the Company's Current Report on
Form 8-K as filed with the Commission on June 14, 1999 is incorporated
herein by reference).
2.5 Asset Purchase Agreement between the Company and Lonestar Medical
Transcription USA, Inc. and L&H Investment Co., N.V., dated January 7,
2000 and effective as of December 31, 1999. (Exhibit 2.1 to the
Company's Current Report on Form 8-K as filed with the Commission on
January 24, 2000, is incorporated herein by reference).
3.1 Amended and Restated Certificate of Incorporation as filed with the
Delaware Secretary of State on January 29, 1998. (Exhibit 4.1 to the
Company's Current Report on Form 8-K as filed with the Commission on
January 20, 1998 is incorporated herein by reference).
3.2 Certificate of Designation for the Series A Preferred Stock (Exhibit
4.2 to the Company's Current Report on Form 8-K as filed with the
Commission on January 20, 1998 is incorporated herein by reference).
3.3 Certificate of Ownership and Merger of Applied Voice Recognition,
Inc., a Utah corporation, with and into the Company dated January 26,
1998 (Exhibit 3.3 to the Company's Form 10-KSB for the period ended
December 31, 1997, as filed with the Commission on April 15, 1998, is
incorporated herein by reference).
3.4 Certificate of Designation for the Series B Preferred Stock (Exhibit
3.4 to the Company's Form 10-KSB for the period ended December 31,
1997, as filed with the Commission on April 15, 1998, is incorporated
herein by reference).
3.5 Amendment to the Series B Preferred Stock Certificate of Designation
(Exhibit 3.1 to the Company's Form 10-QSB for the period ended March
31, 1999, as filed with the Commission on May 14, 1999 is incorporated
herein by reference).
3.6 Certificate of Designation for the Series C Preferred Stock (Exhibit
3.1 to the Company's Form 10-QSB for the period ended June 30, 1998,
as filed with the Commission on August 14, 1998, is incorporated
herein by reference).
3.7 Certificate of Designation for the Series D Preferred Stock. (Exhibit
3.6 to the Company's Form 10-KSB for the period ended December 31,
1998, as filed with the Commission on March 31, 1999, is incorporated
herein by reference).
3.8 Certificate of Designation for the Series E Preferred Stock. (Exhibit
3.1 to the Company's Current Report on Form 8-K as filed with the
Commission on August 27, 1999, is incorporated herein by reference).
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3.9 Form of Certificate of Designation, Preferences, Rights and
Limitations of Series F Preferred Stock of the Company. (Exhibit 3.2
to the Company's Form 10-QSB for the period ended September 30, 1999,
as filed with the Commission on November 15, 1999, is incorporated
herein by reference).
*3.10 Certificate of Designation for the Series G Preferred Stock.
3.11 Certificate of Designation for the Series 1 Preferred Stock (Exhibit
4.2 to the Company's Current Report on Form 8-K as filed with the
Commission on December 16, 1998 is incorporated herein by reference).
3.12 Certificate of Designation for the Series 2 Preferred Stock
(Exhibit 3.1 to the Company's Current Report on Form 8-K as filed
with the Commission on January 1, 1999 is incorporated herein
by reference).
3.13 Amended and Restated Bylaws of the Company as adopted on November 7,
1997 (Exhibit 4.3 to the Company's Current Report on Form 8-K as filed
with the Commission on January 20, 1998 is incorporated herein by
reference).
4.1 Registration Rights Agreement between the Company and Equity Services,
Ltd., a Nevis company ("ESL") dated July 31, 1997. (Exhibit 4.1 to the
Company's Form 10-KSB for the period ended December 31, 1997, as filed
with the Commission on April 15, 1998, is incorporated herein by
reference).
4.2 Registration Rights Agreement between the Company and ESL dated August
12, 1997. (Exhibit 4.2 to the Company's Form 10-KSB for the period
ended December 31, 1997, as filed with the Commission on April 15,
1998, is incorporated herein by reference).
4.3 Amended and Restated Registration Rights Agreement between the Company
and Entrepreneurial Investors, Ltd., a Bahamas Company ("EIL") dated
January 8, 1998. (Exhibit 4.3 to the Company's Form 10-KSB for the
period ended December 31, 1997, as filed with the Commission on April
15, 1998, is incorporated herein by reference).
4.4 Registration Rights Agreement between the Company and EIL dated August
12, 1997. (Exhibit 4.4 to the Company's Form 10-KSB for the period
ended December 31, 1997, as filed with the Commission on April 15,
1998, is incorporated herein by reference).
4.5 Registration Rights Agreement by and between the Company and Voice It
Worldwide, Inc., a Colorado corporation ("Voice It") dated December
31, 1997. (Exhibit 4.5 to the Company's Form 10-KSB for the period
ended December 31, 1997, as filed with the Commission on April 15,
1998, is incorporated herein by reference) .
4.6 Form of Registration Rights Agreement between the Company and the
Series B Preferred Stock investors dates March 11, 1998. (Exhibit 4.6
to the Company's Form 10-KSB for the period ended December 31, 1997,
as filed with the Commission on April 15, 1998, is incorporated herein
by reference).
4.7 Registration Rights Agreement between the Company and the Series C
Preferred Stock Investors dated July 30, 1998 (Exhibit 3.2 to the
Company's Form 10-QSB for the period ended June 30, 1998, as filed
with the Commission on August 14, 1998, is incorporated herein by
reference).
4.8 Unsecured promissory note payable to Cornell in the amount of $270,000
dated as of December 1, 1998 (Exhibit 4.1 to the Company's Current
Report on Form 8-K as filed with the Commission on December 16, 1998
is incorporated herein by reference).
4.9 Registration Rights Agreement between the Company and L & H Investment
Company dated December 31, 1998 (Exhibit 4.9 to the Company's Form
10-KSB for the period ended December 31, 1999, as filed with the
Commission on March 31, 1999, is incorporated herein by reference).
4.10 Form of Warrant issued to L & H Investment Company dated December 31,
1998 (Exhibit 4.10 to the Company's Form 10-KSB for the period ended
December 31, 1999, as filed with the Commission on March 31, 1999, is
incorporated herein by reference).
4.11 Investor Rights Agreement between the Company and L & H Investment
Company dated December 31, 1998 (Exhibit 4.11 to the Company's
Form 10-KSB for the period ended
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December 31, 1999, as filed with the Commission on March 31, 1999, is
incorporated herein by reference).
4.12 Registration Rights Agreement between the Company and Greenwich, AG,
dated August 18, 1999. (Exhibit 4.1 to the Company's Current Report on
Form 8-K as filed with the Commission on August 27, 1999, is
incorporated herein by reference).
4.13 Form of Warrant issued to Greenwich, AG dated August 18, 1999.
(Exhibit 4.2 to the Company's Current Report on Form 8-K as filed with
the Commission on August 27, 1999, is incorporated herein by
reference).
5.1 Opinion of Porter & Hedges, L.L.P. with respect to legality of
securities (Exhibit 5.1 to the Company's Form S-8 (No. 333-31040) as
filed with the Commission on February 24, 1999).
10.1 Joint Product Development Agreement by and between the Company and
Voice It dated December 31, 1997. (Exhibit 10.1 to the Company's Form
10-KSB for the period ended December 31, 1997, as filed with the
Commission on April 15, 1998, is incorporated herein by reference)
10.2 OEM Distribution Agreement between the Company and IBM dated December
17, 1996. (Exhibit 10.2 to the Company's Form 10-KSB for the period
ended December 31, 1997, as filed with the Commission on April 15,
1998, is incorporated herein by reference)
10.3 1997 Incentive Plan effective as of October 1, 1997 (Exhibit 4.1 to
the Company's Form S-8 (No. 333-44191) as filed with the Commission on
January 13, 1998, is incorporated herein by reference).
10.4 License Agreement between the Company and Hakeem, Inc. dated September
1996 (Exhibit 10.4 to the Company's Form 10-KSB/A-1 for the period
ended December 31, 1997, as filed with the Commission on April 30,
1998, is incorporated herein by reference).
10.5 Warrant to Purchase Common Stock issued to Hakeem, Inc. dated
September 1996 (Exhibit 10.5 to the Company's Form 10-KSB/A-1 for the
period ended December 31, 1997, as filed with the Commission on April
30, 1998, is incorporated herein by reference).
10.6 Employment Agreement between the Company and Jan Carson Connolly (then
Janet E. Carson) dated August 15, 1996 (Exhibit 10.6 to the Company's
Form 10-KSB/A-1 for the period ended December 31, 1997, as filed with
the Commission on April 30, 1998, is incorporated herein by
reference).
10.7 Consulting and Stockholder Agreement between the Company and Frederick
A. Huttner dated January 15, 1997 (Exhibit 10.7 to the Company's Form
10-KSB/A-1 for the period ended December 31, 1997, a filed with the
Commission on April 30, 1998, is incorporated herein by reference).
10.8 Consulting Agreement between the Company and Huttner and Company dated
January 15, 1997 (Exhibit 10.8 to the Company's Form 10-KSB/A-1 for
the period ended December 31, 1997, as filed with the Commission on
April 30, 1998, is incorporated herein by reference).
10.9 Employment Agreement between the Company and H. Russel Douglas
effective as of April 1, 1997 (Exhibit 10.9 to the Company's Form
10-KSB/A-1 for the period ended December 31, 1997, as filed with the
Commission on April 30, 1998, is incorporated herein by reference).
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10.10 Employment Agreement between the Company and Charles W. Skamser
effective as of April 1, 1997 (Exhibit 10.10 to the Company's Form
10-KSB/A-1 for the period ended December 31, 1997, as filed with the
Commission on April 30, 1998, is incorporated herein by reference).
10.11 Employment Agreement between the Company and William T. Kennedy
effective as of May 1, 1997 (Exhibit 10.11 to the Company's Form
10-KSB/A-1 for the period ended December 31, 1997, as filed with the
Commission on April 30, 1998, is incorporated herein by reference).
10.12 Employment Agreement between the Company and Timothy J. Connolly
effective as of July 1, 1997 (Exhibit 10.12 to the Company's Form
10-KSB/A-1 for the period ended December 31, 1997, as filed with the
Commission on April 30, 1998, is incorporated herein by reference).
10.13 Consulting Agreement between the Company and Frederick A. Huttner and
Michael J. Wilson dated November 1, 1997 (Exhibit 10.13 to the
Company's Form 10-KSB/A-1 for the period ended December 31, 1997, as
filed with the Commission on April 30, 1998, is incorporated herein by
reference).
10.14 Form of Bridge Loan Promissory Note (Exhibit 10.14 to the Company's
Form 10-KSB/A-1 for the period ended December 31, 1997, as filed with
the Commission on April 30, 1998, is incorporated herein by reference)
10.15 Form of Bridge Loan Warrant (Exhibit 10.15 to the Company's Form
10-KSB/A-1 for the period ended December 31, 1997, as filed with the
Commission on April 30, 1998, is incorporated herein by reference)
10.16 Agreement with Respect to Termination of Employment between the
Company and Jan Carson Connolly (f/k/a Janet E. Carson) dated as of
April 30, 1998 (Exhibit 10.2 to the Company's Form 10-QSB for the
period ended March 31, 1998, as filed with the Commission on May 15,
1998, is incorporated herein by reference ).
10.17 Investor Subscription Agreement between the Company and the Series C
Preferred Stock Investors dated July 30, 1998 (Exhibit 10.1 to the
Company's Form 10-QSB for the period ended June 30, 1998, as filed
with the Commission on August 14, 1998, is incorporated herein by
reference).
10.18 Placement Agreement between the Company and the Placement Agent for
the Series C Preferred Stock investors dated July 30, 1998 (Exhibit
10.2 to the Company's Form 10-QSB for the period ended June 30, 1998,
as filed with the Commission on August 14, 1998, is incorporated
herein by reference).
10.19 First Amendment to Investor Subscription Agreement between the Company
and the Series C Preferred Investors dated July 30, 1998 (Exhibit 10.3
to the Company's Form 10-QSB for the period ended June 30, 1998, as
filed with the Commission on August 14, 1998, is incorporated herein
by reference).
10.20 Employment Agreement between Robin P. Ritchie and the Company dated as
of August 1, 1998 (Exhibit 11.1 to the Company's Form 10-QSB for the
period ended September 30, 1998, as filed with the Commission on
November 17, 1998, is incorporated herein by reference).
10.21 Employment Agreement between Milton A. Spiegelhauer and the Company
dated as of August 31, 1998 (Exhibit 11.2 to the Company's Form 10-QSB
for the period ended September 30, 1998, as filed with the Commission
on November 17, 1998, is incorporated herein by reference.
10.22 Value Added Reseller Agreement between Lernout & Hauspie Speech
Products N.V. and the Company effective September 1, 1998 (Exhibit
11.3 to the Company's Form 10-QSB for the period ended September 30,
1998, as filed with the Commission on November 17, 1998, is
incorporated herein by reference).
10.23 Stock Purchase Agreement between the Company and L & H Investment
Company dated December 31, 1998. (Exhibit 10.23 to the Company's Form
10-KSB for the period ended December 31, 1999, as filed with the
Commission on March 31, 1999, is incorporated herein by reference).
10.24 Voting Agreement by and among Voice Technologies Partners, Ltd., L & H
Investment Company and the Company dated December 31, 1998. (Exhibit
10.24 to the Company's Form 10-KSB for
32
<PAGE>
the period ended December 31, 1999, as filed with the Commission on
March 31, 1999, is incorporated herein by reference).
10.25 Co-sale and Tag-along Rights Agreement by and among Voice Technologies
Partners, Ltd., L & H Investment Company and the Company dated
December 31, 1998. (Exhibit 10.25 to the Company's Form 10-KSB for the
period ended December 31, 1999, as filed with the Commission on March
31, 1999, is incorporated herein by reference).
10.26 Form of December 1998 Bridge Loan Promissory Note. (Exhibit 10.26 to
the Company's Form 10-KSB for the period ended December 31, 1999, as
filed with the Commission on March 31, 1999, is incorporated herein by
reference).
10.27 Form of December 1998 Bridge Loan Warrant. (Exhibit 10.27 to the
Company's Form 10-KSB for the period ended December 31, 1999, as filed
with the Commission on March 31, 1999, is incorporated herein by
reference).
10.28 Employment Agreement between Richard A. Cabrera and the company dated
April 7, 1999. (Exhibit 10.1 to the Company's Form 10-QSB for the
period ended March 31, 1999, as filed with the Commission on May 14,
1999 is incorporated herein by reference).
10.29 Employment Agreement by and between the Company and Kay F. Cook dated
May 28, 1999. (Exhibit 10.1 to the Company's Current Report on Form
8-K as filed with the Commission on June 14, 1999, is incorporated
herein by reference).
10.30 Convertible Promissory Note and Warrant Purchase Agreement, between
the Company and L&H Investment Co. N.V., dated May 24, 1999. (Exhibit
10.2 to the Company's Form 10-QSB for the period ended June 30, 1999,
as filed with the Commission on August 13, 1999, is incorporated
herein by reference).
10.31 Convertible Promissory Note and Warrant Purchase Agreement, between
the Company and Greenwich, AG dated July 20, 1999. (Exhibit 10.3 to
the Company's Form 10-QSB for the period ended June 30, 1999, as filed
with the Commission on August 13, 1999, is incorporated herein by
reference).
10.32 Convertible Promissory Note and Warrant Purchase Agreement, between
the Company and G-51 Capital LLC, dated July 20, 1999. (Exhibit 10.4
to the Company's Form 10-QSB for the period ended June 30, 1999, as
filed with the Commission on August 13, 1999, is incorporated herein
by reference).
10.33 Employment Agreement between Eric Black and the Company dated August
2, 1999. (Exhibit 10.5 to the Company's Form 10-QSB for the period
ended June 30, 1999, as filed with the Commission on August 13, 1999,
is incorporated herein by reference).
10.34 First Amendment to Employment Agreement by Timothy J. Connolly, dated
August 2, 1999. (Exhibit 10.6 to the Company's Form 10-QSB for the
period ended June 30, 1999, as filed with the Commission on August 13,
1999, is incorporated herein by reference).
10.35 Series E Preferred Stock and Warrant Purchase Agreement, between the
Company and Greenwich, AG dated August 18, 1999. (Exhibit 10.1 to the
Company's Current Report on Form 8-K as filed with the Commission on
August 27, 1999, is incorporated herein by reference).
10.36 Convertible Secured Promissory Note Purchase Agreement, between the
Company and Lernout & Hauspie Speech Products, N.V. dated November 5,
1999. (Exhibit 10.6 to the Company's Form 10-QSB for the period ended
September 30, 1999, as filed with the Commission on November 15, 1999,
is incorporated herein by reference).
10.37 Convertible Secured Promissory Note issued to Lernout & Hauspie Speech
Products, N.V. dated November 5, 1999. (Exhibit 10.7 to the Company's
Form 10-QSB for the period ended September 30, 1999, as filed with the
Commission on November 15, 1999, is incorporated herein by reference).
10.38 Amendment to Convertible Promissory Note, between the Company and L&H
Investment Company, N.V. dated November 5, 1999. (Exhibit 10.8 to the
Company's Form 10-QSB for the period ended September 30, 1999, as
filed with the Commission on November 15, 1999, is incorporated herein
by reference).
33
<PAGE>
*10.39 Stock Exchange Agreement between the Company and Entrepreneurial
Investors, Ltd. dated January 20, 2000.
*10.40 Stock Exchange Agreement between the Company and the holders of the
Company's Series C Preferred Stock dated February 11, 2000.
*10.41 Stock Exchange Agreement between the Company and Greenwich AG dated
February 11, 2000.
*10.42 Agreement with Respect to Termination of Employment by and between the
Company, Richard A. Cabrera, and Lonestar Medical Transcription USA,
Inc. dated effective as of December 20, 1999.
*10.43 Agreement with Respect to Termination of Employment by and between the
Company, Eric A. Black, and Lonestar Medical Transcription USA, Inc.
dated effective as of December 20, 1999.
10.44 First Amended and Restated Employment Agreement (Timothy J. Connolly)
effective as of January 1, 2000 (Exhibit 4.1 to the Company's Form S-8
(No. 333-31040) as filed with the Commission on February 24, 1999).
10.45 First Amended and Restated Employment Agreement (Milton A.
Spiegelhauer) effective as of January 1, 2000 (Exhibit 4.2 to the
Company's Form S-8 (No. 333-31040) as filed with the Commission on
February 24, 1999).
10.46 First Amended and Restated Employment Agreement (Robin P. Ritchie)
effective January 1, 2000 (Exhibit 4.3 to the Company's Form S-8
(No. 333-31040) as filed with the commission on February 24, 1999).
*10.47 Consulting Agreement between the Company and Jackson L. Nash dated
February 8, 2000.
16.1 Letter dated August 12, 1997, from Malone & Bailey, PLLC to the
Commission. (Exhibit 16.1 to the Company's Form 10-QSB for the period
ended June 30, 1997, as filed with the Commission on August 14, 1997,
is incorporated herein by reference).
16.2 Letter dated November 19,1999, from Ernst & Young LLP to the
Commission. (Exhibit 16.1 to the Company's Current Report on Form 8-K,
as filed with the Commission on November 19, 1999, is incorporated
herein by reference).
*21.1 List of Subsidiaries
*23.1 Consent of Weinstein Spira & Company, P.C.
*23.2 Consent of Ernst & Young LLP.
*27.1 Financial Data Schedule.
_____________
* Filed herewith.
(B) REPORTS ON FORM 8-K.
We filed a Current Report on Form 8-K on November 19, 1999, to report Ernst
& Young LLP's declination to stand for re-election as e-DOCS' independent
certifying accountant.
We filed a Current Report on Form 8-K on January 24, 2000, to report the
following:
. The sale of certain of our assets to Lonestar Medical Transcription USA,
Inc., a Delaware corporation and a wholly-owned subsidiary of L&H Investment
Co., N.V., a Belgium company ("LHIC"), and to LHIC for an aggregate purchase
price of $8,500,000 pursuant to an Asset Purchase Agreement dated January 7,
2000 and effective as of December 31, 1999; and
. The execution of a Letter Agreement dated January 7, 2000 between e-DOCS and
the holders of our Series A, Series C and Series E Preferred Stock. The
Letter Agreement provides for the exchange of their shares of preferred stock
for shares of Series G Preferred Stock subject to the execution of Stock
Exchange Agreements by all parties based on the primary terms set forth in
the Letter Agreement
In addition, we filed a Current Report on Form 8-K on March 15, 2000, to
report our engagement of Weinstein Spira & Company, P.C. as our independent
accountants as of March 1, 2000.
34
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
March 30, 2000
APPLIED VOICE RECOGNITION, INC.
By: /s/ Timothy J. Connolly
-----------------------------------
Timothy J. Connolly
President and Chairman
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
indicated on the 30th day of March, 2000.
Signature Title
--------- ----
/s/ Timothy J. Connolly President, Chairman of the Board and
- ---------------------------------- Director (principal executive officer)
Timothy J. Connolly
/s/ Mark E. Navarro
- ---------------------------------- Chief Accounting Officer, Controller
Mark E. Navarro and Secretary (principal financial
officer)
- ---------------------------------- Director
Daniel S. Dornier
/s/ J. William Boyar
- ---------------------------------- Director
J. William Boyar
/s/ Rudy Garza
- ---------------------------------- Director
N. Rudy Garza
- ---------------------------------- Director
James S. Cochran
35
<PAGE>
APPLIED VOICE RECOGNITION, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number
------------
Independent Auditors' Report F-1
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-20
Notes to Consolidated Financial Statements F-21
36
<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-1
<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
HOUSTON, Texas
March 27, 1999
F-2
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998
-------------- --------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 53,529 $ 1,377,913
Accounts receivable, net of allowance of $74,900 and $32,500 for 1999 and 1998, respectively 258,668 213,305
Other receivable 747,137 1,000,000
Inventory 20 37,221
Prepaid licenses 440,000
Deposits, prepaid expenses and deferred financing costs 6,054 35,927
Deferred expenses 264,570
------------ ------------
Total Current Assets 1,065,408 3,368,936
------------ ------------
PROPERTY AND EQUIPMENT, NET 858,492 697,298
------------ ------------
OTHER ASSETS
Prepaid software rights 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 $42,173 in 1999 447,310 613,039
Goodwill, net of accumulated amortization of $44,988 and $15,555 in 1999 and 1998, respectively 504,899 657,888
------------ ------------
Total Other Assets 1,923,109 2,228,296
------------ ------------
$ 3,847,009 $ 6,294,530
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade payables $ 365,639 $ 356,660
Accrued expenses 1,167,416 897,998
Stock dividend payable 246,774 156,536
Current portion of preferred stock payable 474,000 638,144
Common stock payable 13,500
Note payable to sellers 297,884
Note payable to related party 250,000
Bridge loans payable 335,333
Current portion of capital lease obligation 64,354 41,493
Current portion of long-term debt 65,977 11,542
Deferred revenue 39,120
------------ -----------
Total Current Liabilities 2,634,160 2,788,210
Preferred stock payable, net of current portion 683,460 70,683
Capital lease, net of current portion 279,670 97,869
Long-term debt, net of current portion 141,091 797
------------ -----------
Total Liabilities 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; 500 shares issued and outstanding in 1999 50
COMMON STOCK; $.001 par value; 50,000,000 shares authorized; 35,269,794 and 16,040,994 shares
issued and outstanding in 1999 and 1998, respectively 35,269 16,040
PAID-IN CAPITAL 18,199,066 18,136,867
ACCUMULATED DEFICIT (18,125,925) (14,850,417)
------------ ------------
Total Stockholders' Equity 108,628 3,336,971
------------ ------------
Total Liabilities and Stockholders' Equity $ 3,847,009 $ 6,294,530
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Net hardware, software and related revenues $ 503,843 $ 302,254
Net transcription service revenues 4,757,967 415,103
----------- -----------
Total Net Revenues 5,261,810 717,357
Hardware, software and related cost of sales 428,643 202,125
Transcription cost of services 3,622,523 230,121
----------- -----------
Total Cost of Sales 4,051,166 432,246
----------- -----------
Gross Margin 1,210,644 285,111
----------- -----------
OPERATING EXPENSES
Marketing and sales 797,745 1,265,927
General and administrative 7,024,097 5,640,238
Research and development 711,404 754,170
----------- -----------
Total Operating Expenses 8,533,246 7,660,335
----------- -----------
Operating Margin (7,322,602) (7,375,224)
----------- -----------
OTHER INCOME (EXPENSES)
Other income (expense) (52,556) 2,497
Interest income 24,397 72,013
Interest expense (867,902) (216,680)
Loss on investments (803,125)
----------- -----------
Total Other Income (Expense) (896,061) (945,295)
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM (8,218,663) (8,320,519)
Gain on extinguishment of debt 5,562,750
----------- -----------
NET LOSS $(2,655,913) $(8,320,519)
=========== ===========
BASIC AND DILUTED EARNINGS PER SHARE:
Loss before extraordinary item $(0.50) $(0.68)
Extraordinary gain 0.34
----------- -----------
NET LOSS $(0.16) $(0.68)
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<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> <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 (126,500) (12,650)
common stock
Series A Preferred Stock
Dividend paid with common stock
Sale of 3,000 shares of
Series B Preferred Stock for
$3,000,000 in connection with
private placement 3,000 $300
Expected deemed dividend related
to discount on conversion of
Series B Preferred Stock
Issuance of warrant to purchase
150,000 shares, to third party,
in connection with Series B
Private Placement
Conversion of 715 shares of
Series B Preferred Stock in
exchange for 1,147,171 shares (715) (72)
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 220,750 $22,075
private placement
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<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> <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>
See notes to consolidated financial statements.
F-6
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<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 2,000 200
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 (605) (60)
Preferred shares
Issuance of Series E Preferred
Stock and related warrants
Preferred Stock and warrants
retired in connection with
sale of assets and issuance of (5,000) (500)
warrants
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 $ $
======== ======== ====== ======== ======== ======== ======== ======
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<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
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>
See notes to consolidated financial statements.
F-8
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<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>
See notes to consolidated financial statements.
F-9
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<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
====== ====== ====== ========
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<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 129,399 129
compensation
Issuance of 14,407 shares of common
stock in lieu of employee cash 14,047 14
bonuses
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 683,100 683 $(999,350)
common stock
Series A Preferred Stock Dividend
paid with common stock 70,217 70
Sale of 3,000 shares of
Series B Preferred stock for
$3,000,000 in connection with
private placement $ 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>
See notes to consolidated financial statements.
F-11
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<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>
See notes to consolidated financial statements.
F-12
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<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 608,680 609 (606,175)
shares
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 51,523 51
Stock
Preferred Stock dividend
Net loss
---------- --------- ------------ ------------ ------------ --------------
BALANCE AT DECEMBER 31, 1999 35,269,794 $ 35,269 $ $ 1,994,035 $ $ 275,000
========== ========= ============ ============ ============ ==============
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<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
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>
See notes to consolidated financial statements.
F-14
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<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>
See notes to consolidated financial statements.
F-15
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<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
=========== ======= ===========
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<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
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>
See notes to consolidated financial statements.
F-17
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Other
Reduction of Accumulated
Paid-in Comprehensive Retained
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>
See notes to consolidated financial statements.
F-18
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Other
Reduction of Accumulated
Paid-in Comprehensive Retained
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
============ ============= ============= ===========
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE>
APPLIED VOICE RECOGNITION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1999 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $(2,655,913) $(8,320,519)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 659,775 197,713
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 206,852
Writedown of prepaid software rights 329,100
Changes in operating assets and liabilities:
Accounts receivable (179,727) 334,597
Inventory 37,201 245,543
Prepaid licenses (300,000) (750,000)
Deposits, prepaid expenses, and deferred finance costs 300,130 (754,523)
Deferred revenues (39,120) (29,514)
Accounts payable and accrued expenses (124,941) 103,590
Common stock payable (13,500) 13,500
------------ ------------
Net Cash Used in Operating Activities (6,854,233) (6,034,936)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (1,372,552) (369,516)
Proceeds from sale of assets 696,939
Cash paid for purchase of transcription companies (775,000) (398,312)
Capitalized software costs (300,025)
------------ ------------
Net Cash Used in Investing Activities (1,450,613) (1,067,853)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bridge loans 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 (45,104) (42,882)
Principal payment on related party debt (335,333) (126,250)
Principal payments under capital lease (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 - Series B 3,000,000
Sale of preferred stock - Series C 2,208,604
Sale of preferred stock - Series D 2,000,000 2,000,000
Sale of preferred stock - Series E 1,970,000
Cash expenditures related to sale of stock (295,771)
Stock options and warrants exercised 10,000 90,309
----------- -----------
Net Cash Provided by Financing Activities 6,980,462 7,273,467
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,324,384) 170,678
Cash and Cash Equivalents - Beginning of Period 1,377,913 1,207,235
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 53,529 $ 1,377,913
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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 $810,000 as of March
17, 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 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.
F-21
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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.
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.
F-22
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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
For the years ended December 31, 1999 and 1998, the Company incurred $457,425
and $123,350, respectively, of depreciation expense.
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.
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. For the years ended
December 31, 1999 and 1998, the Company incurred $202,350 and $15,555
respectively, of related amortization expense.
F-23
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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 the years ended December 31,1999 and 1998.
ADVERTISING
The Company expenses all advertising costs as incurred. The Company expensed
$350,867 and $122,242 in 1999 and 1998, respectively.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under
the liability method, deferred income taxes are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates that will be in effect when the
differences reverse.
F-24
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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.
F-25
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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 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.
F-26
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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.
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.
F-27
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
Cornell specializes in providing transcription services to the healthcare
industry in the New York and surrounding areas. Cornell has offices in
Hackensack, New Jersey; Miami, Florida; and Manila in the Philippines. OTP
provides transcription services to Cornell.
The total purchase price for Cornell and OTP consisted of: (i) promissory note
issued by AVRI Health in the aggregate principal amount of $270,000 (the
"Note"), (ii) $275,000 in cash, (iii) the assumption of certain capital lease
obligations, and (iv) approximately 684 shares of the Company's Series 1
Preferred Stock, par value $.10 per share. The agreement includes a contingent
purchase price of approximately $160,000, payable in 160 shares of Series 1
Preferred Stock, with the attainment of certain quarterly revenue targets over
the next four calendar quarters, subsequent to the sale date.
The Note is a non-interest bearing, unsecured note payable to Cornell, which is
payable as follows: (i) $150,000 on or before February 28, 1999, and (ii)
$120,000 in twelve equal monthly installments of $10,000 each, payable on the
first day of each month commencing on January 1, 1999, and continuing
thereafter until December 1, 1999. In the case of an Event of Default (as
defined in the Note), Cornell may accelerate the entire unpaid principal
balance of the Note. After any such acceleration, any outstanding principal
amount shall bear interest at the rate of 18% per annum. Due to $120,000 note
being non-interest bearing, the Company recorded the discounted amount of the
note of $110,793 using an imputed interest rate of 15%, as part of the purchase
price allocation. The discounted amount was amortized to interest expense
over the life of the note.
The Series I Preferred Stock, which were issuable to Cornell December 2, 1999,
carries 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 has been recorded for the net
present value of the commitment to issue preferred stock, discounted using a
rate of 15%. The discount amount of $89,334 is being amortized to interest
expense. Dividends are payable quarterly and in arrears on the first day of each
January, April, July and October commencing on January 1, 2001. Each share of
the Series 1 Preferred Stock will be convertible at any time into a number of
shares of common stock equal to (i) $1,000 per share of Series 1 Preferred Stock
being converted, plus any earned but unpaid dividends, if any, divided by (ii)
the average closing price of the Company's Common Stock for the thirty day
period immediately preceding the effective date of such conversion on 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.
F-28
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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 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.
F-29
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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-30
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
----------- ----------
<S> <C> <C>
Computer equipment $ 647,301 $ 578,770
Third party software 36,904 47,071
Office equipment and furniture 114,141 134,126
Office equipment on capital lease 415,136 118,098
---------- ---------
1,213,482 878,065
Less accumulated depreciation (354,990) (180,767)
---------- ---------
Property and equipment, net $ 858,492 $ 697,298
========== =========
</TABLE>
NOTE 6 - INDEBTEDNESS
Indebtedness is summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
--------- --------
<S> Long-term Debt <C> <C>
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) 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
-------- -------
207,068 12,339
Less current maturities 65,977 11,542
-------- -------
Net long-term debt $141,091 $ 797
======== =======
</TABLE>
Future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
2000 $ 65,977
2001 67,287
2002 68,249
2003 5,555
--------
$207,068
========
</TABLE>
F-31
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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:
<TABLE>
<S> <C>
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
=========
</TABLE>
F-32
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
OPERATING
The Company leases various office space and equipment under non-cancelable
operating leases. The Company incurred rental expense of $296,512 and $149,520
in 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:
<TABLE>
<S> <C>
2000 $ 64,454
2001 48,830
2002 33,585
2003 2,640
--------
Total $149,509
========
</TABLE>
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 are entitled to cumulative
dividends at a rate of 4% per annum, payable in shares of the Company's
Common Stock based on a share price equal to the average closing price of
such Common Stock on the OTCBB for the 30 days prior to the particular
dividend date.
Each of the Series A shares is convertible into 5.4 shares of common stock,
at the stockholders option, at any given time. The holders of the Series A
Preferred Stock are also (a) entitled to demand the registration of Common
Stock issued upon conversion of the Series A Preferred Stock at the cost of
the Company at any time after December 31, 1997, and (b) entitled to have
such converted shares of Common Stock registered at the Company's cost in
connection with any registration statement filed by the Company. If the
holders of the Series A Preferred Stock have not converted their shares to
Common Stock within three years of their issuance, the Company may redeem
such shares for $8.00 per share plus any accrued and unpaid dividends. The
agreement with the Series A Shareholders provides for certain specific anti-
dilution adjustments and protective provisions.
F-33
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
In the event of liquidation, dissolution or winding up of the Company, the
holders of Series A Preferred Stock are entitled to share in the assets
remaining, if any, after payment of all debts and liabilities of the Company,
in an amount of $8.00 per share, which right is in preference to any payment
to the holders of Common Stock.
On December 4, 1998, the Series A Investor converted 126,500 of the Series A
Preferred Stock for 683,100 shares of the Company's common stock. As of
December 31, 1998, 186,000 shares of Series A Preferred Stock remained
outstanding.
As of December 31, 1998, the Company had declared and paid stock dividends,
to the Series A Investor, totaling 70,217 shares of common stock. The market
value of the stock dividends, as of the dividend date, amounted to $111,849.
The Company accrued $20,536 of stock dividends payable to the Series A
Investor at December 31, 1998.
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").
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.
F-34
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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. At December 31, 1999, stock dividends payable are estimated to
be 822,599 shares. The Company accrued $246,774 of stock dividends payable
to the Series B Investors at December 31, 1999.
SERIES C PREFERRED STOCK
On July 28, 1998, the Company sold in a private placement 220,750 shares of
Series C Convertible Preferred Stock (the "Series C Preferred Stock"), par
value $.10 per share, for a purchase price of $10 per share, to accredited
investors (the "Series C Investors"). The Series C Preferred Stock pay a 4%
cumulative dividend payable in arrears at the time of each conversion.
Dividends are payable quarterly and in arrears on the first day of each
January, April, July, and October commencing on October 1, 1998, in cash or
stock at the Company's option. Each of the Series C Preferred Stock converts
into ten shares of common stock and may be converted at anytime. The Series
C Preferred Stock are not subject to automatic conversion. Any shares of the
Series C Preferred Stock and any accrued but unpaid dividends may be
redeemed, at the Company's option, after the fifth anniversary of the date of
their issuance, at a redemption price of $10 per share. In addition to the
above-referenced shares, an additional 11,038 Series C Preferred Stock were
issued to Equity Services, LTD. ("ESL"), as part of their compensation for
placing the Series C Preferred Stock. As of July 28, 1998, the market value
of the shares issued to ESL was approximately $110,000 and was recorded as a
reduction to Paid in capital. These shares were issued under the same terms
and conditions as those sold in this private placement.
On November 12, 1998, the Series C Investors converted 78,250 of the Series C
Preferred Stock for 782,500 shares of the Company's common stock.
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 have a par value of $.10 and were priced at
$1,000 per share and were sold to accredited investors. This agreement is
broken down into three closings of 2,000 shares, 1,000 shares, and 2,000
shares respectively, each closing being subject to the Company's meeting
certain financial and/or operational targets.
F-35
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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.
The shareholders of the Series D Preferred Stock are entitled to cumulative
dividends at a rate of 10% per annum, payable in shares of the Company's
Common Stock based on a share price equal to the average closing price of
such Common Stock on the OTCBB for the quarter prior to the particular
dividend date.
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 have
a par value of $.10, were priced at $1,000 per share and were sold to
accredited investors ("Series E Investors").
This series accrues a 6% cumulative dividend payable in arrears. 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. 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 1 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 1,468,539 shares of common stock.
F-36
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
COMMON STOCK
In February 1998, the Company agreed to issue 30,000 shares of common stock to
a third party in exchange for consulting services, which 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.
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.
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.
F-37
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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.
A summary of the Company's stock option activity and related information for
1999 and 1998 follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Options Price
------------------- -----------------
(In thousands, except price per share)
<S> <C> <C>
Outstanding - December 31, 1997 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
======
Options exercisable at year-end 919 $ 1.82
======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Weighted average fair value of options granted
during the year $ .82 $ 1.36
Weighted average remaining contractual life 8.4 YEARS 8.9 Years
Range of exercise price $.61 - $4.00 $.61 - $2.88
</TABLE>
F-38
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Risk free interest rate 5.0% 5.05%
Dividend yield 0% 0%
Volatility factor 1.21 .73
Weighted average expected life - stock options 3 YEARS 4 Years
Weighted average expected life - warrants 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.
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>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ------------- ------------- -------------
(in thousands, except price per share)
<S> <C> <C> <C> <C>
Net loss $(2,655,913) $(3,385,625) $(8,320,519) $(9,517,608)
Loss per common share $ (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.
F-39
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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.
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.
F-40
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
On January 14, 1997 and September 5, 1997, the Company made to a third party
two grants of 150,000 and 100,000 warrants, respectively, with an exercise
price of $1.60 per share for both grants. The third party was engaged to
perform consulting services to the Company during 1997. The Company has
recognized $141,000, based on an analysis using the Black-Scholes model.
On February 14, 1997, the Company granted to a third party 50,000 warrants with
an exercise price of $3.00 per share. The third party was engaged to perform
consulting and promotional services related to the Private Placement completed
in August 1997. The Company has recognized $83,500, based on an analysis using
the Black-Scholes model. These warrants expired in 1999.
Between May 15, 1997 and July 24, 1997, the Company granted 580,000 warrants
(430,000 warrants to officers, 50,000 warrants to a director, and 100,000
warrants to others) at an exercise price of $1.60 per share. The warrants were
granted in connection with bridge loans made by these individuals to the
Company. The Company has recognized finance costs of $278,400, based on an
analysis using the Black-Scholes model as discussed above. The Company
recorded this charge in interest expense in the fourth quarter of 1997.
On July 21, 1997 the Company granted to a broker of the Private Placement a
warrant to purchase 100,000 shares of Common Stock at an exercise price of
$1.78. In addition to this, on July 23, 1997, the Company sold to the same
broker, for an aggregate price of $100, a warrant to purchase up to 168,750
shares of Common Stock for $1.78 per share. Broker fees of $345,750 were
offset against the proceeds of the Private Placement. The broker fees were
estimated using the Black-Scholes model. 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:
<TABLE>
<CAPTION>
Number of
Shares
Underlying Exercise
Warrant Price
---------- --------
<S> <C> <C>
First warrant 30,000 $4.00
Second warrant 25,000 $4.25
Third warrant 30,000 $4.50
</TABLE>
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.
F-41
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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.
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.
F-42
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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
(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
============
DECEMBER 31,
---------------------------------
1999 1998
------------ ------------
Weighted average fair value of warrants granted
during the year $ .33 $ 1.41
Weighted average remaining contractual life 2.1 YEARS 2.5 Years
Range of exercise price $.14 - $4.88 $.14 - $4.88
</TABLE>
NOTE 9 - EARNINGS PER SHARE
The following table sets forth the computation of basic and dilutive loss per
share:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Numerator:
Net loss $(2,655,913) $(8,320,519)
Preferred stock dividend (619,595) (1,161,516)
----------- -----------
Numerator for basic and diluted earnings per share -
loss available to Common Stockholders $(3,275,508) $(9,482,035)
=========== ===========
Denominator:
Denominator for basic and dilutive earnings per share -
weighted average shares outstanding 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.
F-43
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 10 - INCOME TAXES
At December 31, 1999 and 1998, the Company has net operating loss carryforwards
of approximately $14,500,000 and $13,000,600 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-44
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 11 - NON-CASH TRANSACTIONS
Following is a list of non-cash transactions.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Preferred stock payable issued in connection with
acquisitions $975,647 $ 708,827
Capital lease obligations assumed in connection with
acquisitions 46,894 107,846
Note payable issued in connection with acquisition 175,000 297,884
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 expense 121,959
Issuance of Common Stock, Preferred Stock and
warrants for private placement fees 879,225
Issuance of Preferred Stock in connection with Series D
Funding 1,000,000
Deemed Dividend on Series B Preferred 852,995
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 609
Writedown of prepaid software resell rights 329,100
Common stock issued for dividends 39,478
</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.
F-45
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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 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.
F-46
<PAGE>
EXHIBIT 3.10
CERTIFICATE OF DESIGNATION, PREFERENCES, RIGHTS AND LIMITATIONS
OF
SERIES G PREFERRED STOCK
OF
APPLIED VOICE RECOGNITION, INC.
WHEREAS, Applied Voice Recognition, Inc., a corporation organized and
existing under the Delaware General Corporation Law (the "DGCL") (the
"Corporation") had 2,000,000 shares of preferred stock, $0.10 par value per
share (the "Preferred Stock"), authorized, of which 343,718 shares are currently
issued and outstanding; and
WHEREAS, the Board of Directors of the Corporation (the "Board"), by
unanimous written consent dated January 13, 2000, duly adopted resolutions
providing for the issuance of a series of 100,000 shares of the Corporation's
Preferred Stock, to be designated "Series G Preferred Stock" (herein referred to
as "Series G Preferred Stock"), and fixing the voting powers, preferences and
relative, participating, optional or other rights, and the qualifications,
limitations or restrictions thereof, all pursuant to this Certificate of
Designation, Rights and Preferences of Series G Preferred Stock of Applied Voice
Recognition, Inc.(the "Series G Designation"), which resolutions are and read as
follows:
NOW, THEREFORE, BE IT RESOLVED, that for purposes of these resolutions,
all references to the "Proper Officers" of the Company shall mean, at any
given time, each or any one or more of the Company's duly elected Chairman
of the Board, Chief Executive Officer, President, Chief Financial Officer,
Chief Operating Officer, any Vice President, and solely for purposes of
attesting to, or certifying the authenticity of signatures, documents,
instruments or agreements, the Secretary or any Assistant Secretary;
RESOLVED, that pursuant to the authority expressly granted and vested in
the Board in accordance with the provisions of the Corporation's
Certificate of Incorporation, there shall be established and authorized for
issuance a series of Preferred Stock designated "Series G Preferred Stock",
consisting of 100,000 shares, each of the par value of $0.10 per share, and
having the voting powers, preferences and relative, participating, optional
and other rights, and the qualifications, limitations or restrictions set
forth in the Series G Designation; and
RESOLVED FURTHER, that any one or more of the Proper Officers, be and he
hereby is authorized, empowered and directed, for, in the name and on
behalf of the Corporation, to execute and cause to be filed with the
Delaware Secretary of State the Series G Designation.
NOW THEREFORE, Applied Voice Recognition, Inc., DOES HEREBY CERTIFY that
pursuant to the authority conferred upon the Board by the Certificate of
Incorporation, as amended, and pursuant to Section 151(g) of the DGCL, that the
Series G Preferred Stock, as a
<PAGE>
series, shall have the powers and preferences, and the relative, participating,
optional and other rights, and the qualifications, limitations and restrictions
thereon set forth below:
A. DESIGNATION. The Preferred Stock having the rights, preferences,
privileges and restrictions set forth below shall be designated and known as
"Series G Preferred Stock."
B. NUMBER OF SHARES OF SERIES G PREFERRED STOCK. The number of shares
constituting all of the Series G Preferred Stock shall be 100,000.
C. NO DIVIDENDS. The holders of the Series G Preferred Stock shall not
be entitled to dividends.
D. LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution
or winding up of the Corporation, either voluntary or involuntary, the holders
of the Series G Preferred Stock shall be entitled to be paid out of the assets
of the Corporation available for distribution to its shareholders, after the
payment or declaration and setting apart for payment of any amount required with
respect to the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock, and
before any payment or declaration and setting apart for payment of any amount
shall be made with respect to the Series 1 Preferred Stock, Series 2 Preferred
Stock and Common Stock, One Hundred Dollars and 00/100 ($100.00) per share, and
no more (the "Liquidation Preference"). If upon the occurrence of such event the
assets distributable among the holders of the Series G Preferred Stock and stock
ranking on parity with the Series G Preferred Stock, if any, as to assets in
liquidation (collectively, "Parity Stock") shall be insufficient to permit the
payment of the full preferential amounts for the Series G Preferred Stock and
Parity Stock, then the assets and funds of the Corporation legally available for
distribution to such holders shall be distributed among the holders of the
Series G Preferred Stock and Parity Stock then outstanding ratably per share in
proportion to the full preferential amounts per share to which they are
respectively entitled. After the payment or distribution to the holders of the
Series G Preferred Stock and the Parity Stock of their full preferential amounts
have been made, the holders of Series G Preferred Stock shall not be entitled to
any additional distributions with respect to the Series G Preferred Stock.
E. MANDATORY CONVERSION.
(i) Each holder of shares of Series G Preferred Stock shall be required
to cause all of such shares to be converted into shares of Common Stock with
seven days of the initial date of issuance. In the event that a holder of the
shares of Series G Preferred Stock does not cause his shares to be converted by
the seventh day following the initial date of issuance, such shares shall be
automatically converted into shares of Common Stock as of the end of that day,
without notice to the holder or any action on the part of the Corporation. Each
share of Series G Preferred Stock is convertible into such number of shares of
Common Stock equal to (i) the Liquidation Preference of the Series G Preferred
Stock being converted, divided by (ii) $0.30 per share.
(ii) Each holder of Series G Preferred Stock upon conversion of all of
such shares into shares of Common Stock pursuant to paragraph (i) of this
Section E shall (A) surrender the
<PAGE>
certificate or certificates, if applicable, representing the shares of Series G
Preferred Stock being converted, duly assigned or endorsed for conversion (or
accompanied by duly executed stock powers relating thereto) and (B) provide the
Corporation with written notice of conversion, accompanied by such surrender
certificate if applicable, to the principal executive office of the Corporation
or such office or offices in the continental United States of an agent for
conversion as may from time to time be designed by notice to the holders of the
Series G Preferred Stock by the Corporation or the transfer agent for the Series
G Preferred Stock. Such notice of conversion shall specify (1) the number of
shares of Series G Preferred Stock being converted, and (2) the address to which
such holder wishes delivery to be made of such new certificates to be issued
upon such conversion.
(iii) Upon surrender of a certificate representing a share or shares of
Series G Preferred Stock for conversion pursuant to paragraph (i) of this
Section E, or in the case of the conversion of noncertificated shares of Series
G Preferred Stock either by written notice from the holder as set forth in
paragraph (ii) of this Section E. or by automatic conversion pursuant to
paragraph (i) of this Section E., the Corporation shall, within five (5)
business days of such surrender, issue and send (with receipt to be
acknowledged) to the holder thereof, at the address designated by such holder, a
certificate or certificates for the number of validly issued, fully paid and
non-assessable shares of Common Stock to which such holder shall be entitled
upon conversion.
(iv) The issuance by the Corporation of shares of Common Stock pursuant
to paragraph (i) of this Section E shall be effective as of the earlier of (1)
the delivery to such holder of the certificates representing the shares of
Common Stock issued upon conversion thereof, or (2) immediately before the close
of business on the day of surrender of the certificate or certificates for the
shares of Series G Preferred Stock to be converted, duly assigned or endorsed
for conversion (or accompanied by duly executed stock powers relating thereto)
as provided in this Certificate of Designation. On and after the effective day
of the conversion, the person or persons entitled to receive the Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock, but no allowance or adjustment
shall be made in respect of dividends payable to holders of Common Stock of
record on any date prior to such effective date.
(v) The Corporation shall not be obligated to issue and deliver any
fractional share of Common Stock upon any conversion of shares of Series G
Preferred Stock, but in lieu thereof may round up to the nearest whole share of
Common Stock following conversion of all the holder's shares of Series G
Preferred Stock.
(vi) The Corporation shall at all times reserve and keep available out of
its authorized and unissued Common Stock or treasury shares, solely for issuance
upon the conversion of shares of Series G Preferred Stock as herein provided,
free from any preemptive rights, such number of shares of Common Stock as shall
be issuable upon the conversion of all the shares of Series G Preferred Stock
then outstanding.
G. VOTING RIGHTS. Except as otherwise required by the DGCL or this
Certificate of Designation, the holders of Series G Preferred Stock shall have
no voting rights.
<PAGE>
H. PROTECTIVE PROVISION; AMENDMENT. So long as shares of Series G
Preferred Stock are outstanding, the Corporation shall not without first
obtaining the approval (by vote or written consent as provided by Delaware Law)
of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the
then outstanding Series G Preferred Stock, alter or change the rights,
preferences or privileges of the Series G Preferred Stock. Notwithstanding the
foregoing sentence, however, the Corporation may amend this Certificate of
Designation with respect to any unissued shares of Series G Preferred Stock,
including, without limitation, increasing or decreasing the number of shares
constituting the Series G Preferred Stock.
I. MISCELLANEOUS. (i) Except as specifically set forth herein, all
notices or communications provided for or permitted hereunder shall be made in
writing by hand delivery, express overnight courier, registered first class
mail, or telecopier addressed (1) if to the Corporation, to its office at 1717
St. James Place, Suite 242, Houston, Texas 77056, Attention: Chairman of the
Board, Telecopier: (713) 621-5870, and (2) if to the holder of the Series G
Preferred Stock, to such holder at the address of such holder as listed in the
stock record books of the Corporation or to such other address as the
Corporation or such holder, as the case may be, shall have designated by notice
similarly given. All such notices and communications shall be deemed to have
been duly given: when delivered by hand, if personally delivered; five (5)
business days after being deposited in the mail, registered or certified mail,
return receipt requested, postage prepaid, if mailed; when received after being
deposited in the regular mail; the next business day after being deposited with
an overnight courier, if deposited with a nationally recognized, overnight
courier service; when receipt is acknowledged, if by telecopier, so long as
followed up on the same day by overnight courier.
(iii) The Corporation shall pay any and all stock transfer and
documentary stamp taxes that may be payable in respect of any issuance or
delivery of shares of Series G Preferred Stock or shares of Common Stock issued
on account of Series G Preferred Stock pursuant hereto or certificates
representing such shares or securities. The Corporation shall not, however, be
required to pay any such tax which may be payable in respect of any transfer
involved in the issuance or delivery of shares of Series G Preferred Stock or
Common Stock or other securities in a name other than that in which the shares
of Series G Preferred Stock with respect to which such shares or other
securities are issued or delivered were registered, or in respect of any payment
to any person with respect to any such shares or securities other than a payment
to the registered holder thereof, and shall not be required to make any such
issuance, delivery or payment described in this sentence unless and until the
person otherwise entitled to such issuance, delivery or payment has paid to the
Corporation the amount of any such tax or has established, to the satisfaction
of the Corporation, that such tax has been paid or is not payable.
(iv) In the event that the holder of shares of Series G Preferred Stock
shall not by written notice designate the address to which the certificate or
certificates representing shares of Common Stock to be issued upon conversion of
such shares should be sent, the Corporation shall be entitled to send the
certificate or certificates representing such shares to the address of such
holder shown on the records of the Corporation or any transfer agent for the
Series G Preferred Stock.
<PAGE>
(ix) Nothing contained herein shall be construed to prevent the Board of
the Corporation from issuing one or more series of preferred stock with dividend
and/or liquidation preferences superior or junior to the Series G Preferred
Stock.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, Applied Voice Recognition, Inc. has caused this
Certificate of Designation to be signed by Timothy J. Connolly, its Chairman of
the Board, as of the 13th day of January, 2000.
APPLIED VOICE RECOGNITION, INC.
By: /s/ Timothy J. Connolly
-----------------------
Timothy J. Connolly
Chairman of the Board
<PAGE>
EXHIBIT 10.39
STOCK EXCHANGE AGREEMENT
This STOCK EXCHANGE AGREEMENT is entered into on this 20th day of January,
2000, between Entrepreneurial Investors, Ltd. (the "STOCKHOLDER"), who is a
holder of the Company's Series A Preferred Stock, par value $0.10 per share (the
"SERIES A PREFERRED STOCK"), and Applied Voice Recognition, Inc., a Delaware
corporation (the "COMPANY").
W I T N E S S E T H:
WHEREAS, the Company and the Stockholder are parties to a letter agreement
dated January 7, 2000 (the "LETTER AGREEMENT") pursuant to which the Company
agreed to designate a Series G Preferred Stock, par value $0.10 per share, with
a specified conversion price (the "SERIES G PREFERRED STOCK"), to exchange for
all of the outstanding Series A Preferred Stock held by the Stockholder; and
WHEREAS, the parties desire to consummate their understandings agreed upon
in the Letter Agreement with respect to the exchange of shares of the Series A
Preferred Stock for shares of the Series G Preferred Stock on the terms set
forth therein.
NOW, THEREFORE, for and in consideration of the premises, and the mutual
and dependent promises contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 CERTAIN DEFINITIONS. As used in this Agreement, each of the following
terms has the meanings set forth below:
(a) "Agreement" means and includes this Stock Exchange Agreement and
the schedules and exhibits hereto.
(b) "Claims" means any claims, demands, actions, costs, damages,
losses, diminution in value, expenses, obligations, liabilities,
recoveries, judgments, settlements, suits, proceedings, causes of action or
deficiencies, including interest, penalties (including civil and criminal
penalties) and reasonable attorneys' fees.
(c) "Encumbrance" means any security interest, mortgage, deed of
trust, pledge, lien, claim or other encumbrance of any third party of any
nature whatsoever.
<PAGE>
(d) "knowledge" means, with respect to any representation or warranty
in Article III made to the knowledge of the Stockholder or words of similar
import, receipt of notice by, or actual knowledge of any Stockholder, but
no representation or warranty made by the Stockholder in Article III may be
qualified or limited by reference to "KNOWLEDGE" unless due inquiry has
actually been made of the Stockholder.
(e) "Series A Shares" means at any date all of the shares of the
Series A Preferred Stock issued and outstanding on such date.
(f) "Person" means an individual, corporation, limited liability
company, partnership, limited partnership, joint venture, joint stock
company, firm, company, syndicate, trust, estate, association, governmental
authority, business, organization or any other incorporated or
unincorporated entity.
1.2 OTHER DEFINED TERMS. Words and terms used in this Agreement that are
defined elsewhere in this Agreement are used herein as therein defined.
1.3 OTHER DEFINITIONAL PROVISIONS.
(a) When used in this Agreement, the words "herein," "hereof" and
"hereunder" and words of similar import refer to this Agreement as a whole
and not to any provision of this Agreement, and the words "Article,"
"Section," "Schedule" and "Exhibit" refer to Articles and Sections of, and
Schedules and Exhibits to, this Agreement unless otherwise specified.
(b) Whenever the context so requires, the singular number includes the
plural and vice versa, and a reference to one gender includes the other
gender and the neuter.
(c) The words "shall" and "will" are used interchangeably and have the
same meaning.
1.4 CAPTIONS. Captions to Articles, Sections and subsections of, and
Schedules and Exhibits to, this Agreement are included for convenience of
reference only, and such captions shall not constitute a part of this Agreement
for any other purpose or in any way affect the meaning or construction of any
provision of this Agreement.
ARTICLE II
EXCHANGE OF STOCK
2.1 EXCHANGE OF PREFERRED STOCK. Subject to the terms and conditions of
this Agreement, and based upon the representations, warranties, covenants and
agreements set forth
2
<PAGE>
herein, at the Closing, Stockholder agrees to convey to the Company, free and
clear of all Encumbrances, and the Company agrees to exchange with and accept
from Stockholder, all of the Series A Shares as hereinafter provided and for the
consideration set forth in Section 2.2 hereof.
2.2 EXCHANGE. At Closing, the Stockholder shall deliver to the Company
certificates representing all the Series A Shares, each such certificate to be
duly endorsed in blank and in good form for transfer, or accompanied by stock
powers duly executed in blank, sufficient and in good form to properly transfer
such shares to the Company. In exchange therefor, the Company shall issue to
the Stockholder an aggregate of 15,227.166 shares of Series G Preferred Stock
(the "STOCK CONSIDERATION"). At Closing, the Company shall record in its books
the exchange and issuance of such shares representing the Stock Consideration to
the Stockholder registered in the name of the Stockholder for the amount of
shares set forth above.
2.3 CLOSING. Consummation of the transactions contemplated by this
Agreement (the "CLOSING") shall take place on the date hereof, via the
telephone, facsimile, e-mail and regular mail. The date upon which the Closing
occurs is referred to herein as the "CLOSING DATE."
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF STOCKHOLDER
Stockholder represents and warrants to, and agrees with, the Company that,
the following representations, warranties and agreements are true and correct as
the date hereof.
3.1 AUTHORITY AND CONSENT. Stockholder has the requisite power and
authority to enter into, and perform their obligations under this Agreement, and
no approval or consent of any Person is necessary in connection therewith. This
Agreement, together with all other agreements, documents and instruments
executed in connection herewith by Stockholder constitutes valid and legally-
binding obligations of Stockholder, and are enforceable against Stockholder in
accordance with their terms, subject to bankruptcy, receivership, insolvency,
reorganization, moratorium or other similar laws affecting or relating to
creditors' rights generally and subject to general principles of equity.
3.2 TITLE TO SERIES A SHARES. Stockholder holds good and valid title to
all of the Series A Shares set forth opposite its name on Schedule A attached
hereto and incorporated herein for all purposes, free and clear of all
Encumbrances. Stockholder possesses full authority and legal right to sell,
transfer and assign to the Company such Series A Shares, free and clear of all
Encumbrances. Upon transfer to the Company by Stockholder of such Series A
Shares, the Company will own such Series A Shares free and clear of all
Encumbrances. There are no Claims pending or, to Stockholder's knowledge,
threatened against Stockholder that concern or affect title to the Series A
Shares.
3
<PAGE>
3.3 UNREGISTERED SHARES. Stockholder acknowledges, represents and agrees
that:
(a) the Stock Consideration has not been registered under the
Securities Act of 1933, as amended (the "1933 ACT"), or registered or
qualified under any applicable state securities laws;
(b) Stockholder has had the opportunity to ask questions of, and
receive answers from, the Company's officers and directors concerning
Stockholder's acquisition of the Stock Consideration, and to obtain such
other information concerning the Company and the Stock Consideration, to
the extent they possessed the same or could acquire it without unreasonable
effort or expense, as Stockholder deemed necessary; and
(c) The Company has made no representations or warranties to the
Stockholder as to the Stockholder's federal, state, local or foreign tax
consequences from the consummation of the transactions contemplated by this
Agreement, and the Company has urged and advised the Stockholder to consult
his, her or its personal tax advisor with respect to such matters.
3.4 NO ADVERSE CONSEQUENCES. Neither the execution and delivery of this
Agreement by Stockholder nor the consummation of the transactions
contemplated by this Agreement will (a) to the knowledge of Stockholder,
violate any statute, judgment, order, injunction, decree, rule, regulation
or ruling of any governmental authority applicable to Stockholder, or (b)
either alone or with the giving of notice or the passage of time or both,
conflict with, constitute grounds for termination of, accelerate the
performance required by, accelerate the maturity of any indebtedness or
obligation under, result in the breach of the terms, conditions or
provisions of or constitute a default under any mortgage, deed of trust,
indenture, note, bond, lease, license, permit or other agreement,
instrument or obligation to which Stockholder is a party or by which it is
bound.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Stockholder that as of
the date hereof and the closing Date:
4.1 ORGANIZATION. The Company is a corporation duly organized, validly
existing and in good standing under the laws of Delaware. The Company has
all necessary corporate power and authority to own, operate, and lease its
properties and to carry on its business as now owned or leased and operated
by it. The Company is qualified to do business under the laws of any
jurisdiction in which such qualification is required.
4
<PAGE>
4.2 AUTHORITY. The Company has the requisite power and authority
to enter into and perform its obligations under this Agreement, and
except as otherwise provided herein, no approval or consent of any
Person is necessary in connection therewith. This Agreement, together
with all other agreements, documents, certificates and instruments
executed by the Company in connection herewith, constitute valid and
legally-binding obligations of the Company, and are enforceable against
the Company in accordance with their terms, subject to bankruptcy,
receivership, insolvency, reorganization, moratorium or other similar
laws affecting or relating to creditors' rights generally and subject to
general principles of equity.
4.3 VALID ISSUANCE OF STOCK CONSIDERATION. The Stock Consideration
that is being received by the Stockholder in exchange for the Series A
Shares hereunder, when issued, sold and delivered in accordance with the
terms of this Agreement for the consideration expressed herein, will be
duly and validly issued, fully paid, and nonassessable, will be free of
all Claims and restrictions on transfer other than restrictions on
transfer under this Agreement and under applicable state and federal
securities laws and will not subject the holders thereof to personal
liability by reason of being such holder. The common stock of the
Company, par value $.001per share (the "COMMON STOCK") issuable upon
conversion of the Stock Consideration purchased under this Agreement
(based on an initial conversion price of $.30 per share), has been duly
and validly reserved for issuance and, upon issuance in accordance with
the terms of the Certificate of Designation for the Series G Preferred
Stock (the "SERIES G DESIGNATION") will be duly and validly issued,
fully paid, and nonassessable and will be free of all Claims and
restrictions on transfer other than restrictions on transfer under this
Agreement and under applicable state and federal securities laws, and
will not subject the holders thereof to personal liability by reason of
being such holders.
4.4 COMPLIANCE WITH SECURITIES EXCHANGE ACT OF 1934. The Company is
in full compliance with all reporting requirements of the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and the Company's
Common Stock is quoted on the Nasdaq Over-the-Counter Bulletin Board
(trading symbol "EDOC").
4.5 GOVERNMENTAL CONSENTS. No consent, approval, qualification,
order or authorization of, or filing with, any local, state, or federal
governmental authority is required on the part of the Company in
connection with the Company's valid execution, delivery, or performance
of this Agreement, the offer, sale or issuance of the Stock
Consideration by the Company or the issuance of Common Stock upon
conversion of the Stock Consideration, except (i) the filing of the
Series G Designation with the Secretary of State of the State of
Delaware, and (ii) such filings as have been made prior to the Closing,
except that any notices of sale required to be filed with the Securities
and Exchange Commission under Regulation D of the Securities Act of
1933, as amended (the "SECURITIES ACT"), or such post-closing filings as
may be required under applicable state securities laws, which will be
timely filed within the applicable periods therefor.
4.6 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of the
Company consists, or will consist prior to the Closing, of:
5
<PAGE>
(i) Preferred Stock. 2,000,000 shares of Preferred Stock, par value $0.10
(the "PREFERRED STOCK"), 312,500 of which shares have been designated Series A
Preferred Stock, of which 186,500 are issued and outstanding, 3,000 of which
have been designated Series B Preferred Stock of which 1,680 are issued and
outstanding, 231,788 of which have been designated Series C Preferred Stock of
which 153,538 are issued and outstanding, 5,000 of which have been designated
Series D Preferred Stock of which none are issued and outstanding, 2,000 of
which have been designated Series 1 Preferred Stock of which none are issued and
outstanding, and 250,000 of which have been designated Series 2 Preferred Stock
of which 500 are issued and outstanding, 5,000 of which have been designated
Series E Preferred Stock of which 2,000 are issued and outstanding, and 100,000
of which have been designated Series G Preferred Stock of which 51,137.755 will
be issued pursuant to this Agreement and the other stock exchange agreements
that are substantially similar in form to this Agreement. The rights,
privileges and preferences of the Series G Preferred Stock will be as stated in
the Series G Designation.
(ii) Common Stock. 50,000,000 shares of Common Stock of which 16,746,875
shares are issued and outstanding.
(iii) The outstanding shares of Series A, B, C, D, E, G, 1 and 2 Preferred
Stock and Common Stock have been issued in accordance with the registration or
qualification provisions of the Securities Act and any relevant state securities
<PAGE>
ARTICLE V
CONDITIONS
5.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY. The obligations
of the Company to consummate the transactions contemplated by this Agreement
shall be subject to the satisfaction of the following conditions, or to the
waiver thereof by the Company in the manner contemplated by Section 6.2 at the
Closing:
(a) Representations and Warranties of Stockholder True on Closing Date.
The representations and warranties of Stockholder herein contained shall be true
as of and at the Closing Date in all material respects with the same effect as
though made at such date, except as affected by transactions permitted or
contemplated by this Agreement; Stockholder shall have performed and complied in
all material respects with all covenants required by this Agreement to be
performed or complied with by Stockholder before the Closing Date;
(b) Tender of Stock. Stockholder shall have delivered to the Company all
certificates or other documents or instruments representing all of the Series A
Shares, duly endorsed for transfer or accompanied by duly executed stock powers,
free and clear of any Encumbrance;
(c) Execution by All Parties to Letter Agreement. Each of the holders of
the Series A, C and E Preferred Stock that are parties to the Letter Agreement
have entered into a Stock Exchange Agreement with the Company substantially
similar in form to this Agreement.
(d) Other. All other items required to be delivered hereunder or as may be
reasonably requested by the Company to facilitate the Closing, in form and
substance reasonably satisfactory to the Company.
5.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDER. The obligations
of Stockholder to consummate the transactions contemplated by this Agreement
shall be subject to the satisfaction of the following conditions, or to the
waiver thereof by Stockholder in the manner contemplated by Section 6.2 at the
Closing:
(a) Representations and Warranties of the Company True on Closing Date.
The representations and warranties of the Company herein contained shall be true
as of and at the Closing Date in all material respects with the same effect as
though made at such date, except as affected by transactions permitted or
contemplated by this Agreement; the Company shall have performed and complied in
all material respects with all covenants required by this Agreement to be
performed or complied with by it before the Closing Date;
7
<PAGE>
(b) Tender of Stock Consideration. On the Closing Date, the Company shall
have recorded in its books the issuance of the Stock Consideration to the
Stockholder, subject to the provisions of Sections 2.1 and 2.2 hereof;
(c) Execution by All Parties to Letter Agreement. Each of the holders of
the Series A, C and E Preferred Stock that are parties to the Letter Agreement
have entered into a Stock Exchange Agreement with the Company substantially
similar in form to this Agreement.
(d) Other. All other items required to be delivered hereunder or as may be
reasonably requested by Stockholder to facilitate the Closing, in form and
substance reasonably satisfactory to Stockholder.
ARTICLE VI
MISCELLANEOUS
6.1 EXPENSES. Each of the Company and Stockholder shall bear their own
legal and accounting fees, and other costs and expenses with respect to the
negotiation, execution and delivery of this Agreement, and consummation of the
transactions contemplated hereby.
6.2 NOTICES AND WAIVERS. Any notice, instruction, authorization, request,
demand or waiver hereunder shall be in writing, and shall be delivered either by
personal delivery, by telegram, telex, telecopy or similar facsimile means, by
certified or registered mail, return receipt requested, or by courier or
delivery service, addressed to the parties hereto at the address indicated
beneath their respective signatures on the execution pages of this Agreement, or
at such other address and number as a party shall have previously designated by
written notice given to the other parties in the manner hereinabove set forth.
Notices shall be deemed given when received, if sent by facsimile means
(confirmation of such receipt by confirmed facsimile transmission being deemed
receipt of communications sent by facsimile means); and when delivered and
receipted for (or upon the date of attempted delivery where delivery is
refused), if hand-delivered, sent by express courier or delivery service, or
sent by certified or registered mail, return receipt requested.
6.3 PREVIOUS CONTRACTUAL RIGHTS. The parties to this Agreement hereby
agree that the execution of this Agreement will not change, modify or otherwise
affect (i) any rights provided to Stockholder pursuant to Section 5(g), (h), (m)
and (n) and Section 8 of the Placement Agreement dated July 23, 1997 between
Equity Services, Ltd. and the Company, (ii) any third-party rights provided to
Stockholder pursuant to the Investor Subscription Agreement dated July 31, 1997
between Stockholder and the Company, and (iii) with respect to shares of the
Series A Preferred Stock converted to Common Stock prior to the execution of
this Agreement, any rights still existing as of the date hereof provided to
Stockholder pursuant to the Registration Rights Agreement dated July 31, 1997
between Stockholder and the Company.
8
<PAGE>
6.4 DESIGNATED BOARD REPRESENTATIVE. The Company will allow one
designated representative of Equity Services, Ltd. to receive timely notice of,
attend and make comments at all meetings of its Board of Directors. Such
designated representative shall also be sent all standard communications and
notifications from the Company to the members of its Board of Directors
concerning annual and special meetings in the same fashion and on the same
basis, including with respect to timing, as he would if he were a member of the
Board of Directors.
6.5 SUCCESSORS AND ASSIGNS. This Agreement shall bind, inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and permitted assigns, and if an individual, by his executors,
administrators, and beneficiaries of his estate by will or the laws of descent
and distribution. This Agreement and the rights and obligations hereunder shall
not be assignable or delegable by any party.
6.6 APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas and of the United States
applicable in Texas. Each party hereto hereby acknowledges and agrees that it
has consulted legal counsel in connection with the negotiation of this Agreement
and that it has bargaining power equal to that of the other parties hereto in
connection with the negotiation and execution of this Agreement. Accordingly,
the parties hereto agree that the rule that an agreement shall be construed
against the draftsman shall have no applica tion in the construction or
interpretation of this Agreement.
6.7 AMENDMENT AND ENTIRETY. This Agreement may be amended, modified, or
superseded only by written instrument executed by all parties hereto. This
Agreement and the exhibits and schedules hereto sets forth the entire agreement
and understanding of the parties with respect to the transactions contemplated
hereby and supersedes all prior agreements, arrangements, and understandings
relating to the subject matter hereof. In the event of any conflict or
inconsistency between the provisions of this Agreement and the contents or
provisions of any schedule or exhibit hereto, the provisions of this Agreement
shall control.
6.8 RIGHTS OF PARTIES. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement on any Persons other than the parties hereto and their respective
successors and assigns, nor shall any provision give any third Persons any right
of subrogation or action over against any party to this Agreement. Without
limiting the generality of the foregoing, it is expressly understood that this
Agreement does not create any third party beneficiary rights.
6.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts by means of original or facsimile signature, each of which shall be
deemed an original and all which together shall constitute one and the same
instrument.
[SIGNATURE PAGE FOLLOWS]
9
<PAGE>
In Witness Whereof, this Stock Exchange Agreement is executed and delivered as
of the date first above written.
THE COMPANY:
APPLIED VOICE RECOGNITION, INC.
By: /s/ Timothy J. Connolly
-------------------------
Timothy J. Connolly
Chairman of the Board
171 St. James Place, Suite 242
Houston, Texas 77056
Telecopy No. (713) 621-5870
STOCKHOLDER:
ENTREPRENEURIAL INVESTORS, LTD.
By: /s/ Robert Cordes
---------------------
Name: Robert Cordes
--------------------
Title: President
------------------
Address: Box F42544
---------------
Freeport, Bahamas
-------------------------
Telecopy No. 242-352-393
-------------
10
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
SERIES G
SERIES A SHARES TO BE
STOCKHOLDER SHARES HELD RECEIVED
- ------------------------------- ---------------------------
<S> <C> <C>
Entrepreneurial Investors, Ltd. 186,000 15,227.166
</TABLE>
11
<PAGE>
STOCK EXCHANGE AGREEMENT
This STOCK EXCHANGE AGREEMENT is entered into on this 11th day of February,
2000, between the persons listed on the signature page under the caption
"Stockholders" (collectively, the "STOCKHOLDERS" and individually, a
"STOCKHOLDER"), who are holders of the Company's Series C Preferred Stock, par
value $0.10 per share (the "SERIES C PREFERRED STOCK"), and Applied Voice
Recognition, Inc., a Delaware corporation (the "COMPANY").
W I T N E S S E T H:
WHEREAS, the Company and the Stockholders are parties to a letter agreement
dated January 7, 2000 (the "LETTER AGREEMENT") pursuant to which the Company
agreed to designate a Series G Preferred Stock, par value $0.10 per share, with
a specified conversion price (the "SERIES G PREFERRED STOCK"), to exchange for
all of the outstanding Series C Preferred Stock held by the Stockholders; and
WHEREAS, the parties desire to consummate their understandings agreed upon
in the Letter Agreement with respect to the exchange of shares of the Series C
Preferred Stock for shares of the Series G Preferred Stock on the terms set
forth therein.
NOW, THEREFORE, for and in consideration of the premises, and the mutual
and dependent promises contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 CERTAIN DEFINITIONS. As used in this Agreement, each of the
following terms has the meanings set forth below:
(a) "Agreement" means and includes this Stock Exchange Agreement and the
schedules and exhibits hereto.
(b) "Claims" means any claims, demands, actions, costs, damages, losses,
diminution in value, expenses, obligations, liabilities, recoveries,
judgments, settlements, suits, proceedings, causes of action or
deficiencies, including interest, penalties (including civil and criminal
penalties) and reasonable attorneys' fees.
(c) "Encumbrance" means any security interest, mortgage, deed of trust,
pledge, lien, claim or other encumbrance of any third party of any nature
whatsoever.
1
<PAGE>
(d) "knowledge" means, with respect to any representation or warranty in
Article III made to the knowledge of the Stockholders or words of similar
import, receipt of notice by, or actual knowledge of any Stockholder, but
no representation or warranty made by the Stockholders in Article III may
be qualified or limited by reference to "KNOWLEDGE" unless due inquiry has
actually been made of the Stockholders.
(e) "Series C Shares" means at any date all of the shares of the Series C
Preferred Stock issued and outstanding on such date.
(f) "Person" means an individual, corporation, limited liability company,
partnership, limited partnership, joint venture, joint stock company, firm,
company, syndicate, trust, estate, association, governmental authority,
business, organization or any other incorporated or unincorporated entity.
1.2 OTHER DEFINED TERMS. Words and terms used in this Agreement that are
defined elsewhere in this Agreement are used herein as therein defined.
1.3 OTHER DEFINITIONAL PROVISIONS.
(a) When used in this Agreement, the words "herein," "hereof" and
"hereunder" and words of similar import refer to this Agreement as a whole
and not to any provision of this Agreement, and the words "Article,"
"Section," "Schedule" and "Exhibit" refer to Articles and Sections of, and
Schedules and Exhibits to, this Agreement unless otherwise specified.
(b) Whenever the context so requires, the singular number includes the
plural and vice versa, and a reference to one gender includes the other
gender and the neuter.
(c) The words "shall" and "will" are used interchangeably and have the same
meaning.
1.4 CAPTIONS. Captions to Articles, Sections and subsections of, and
Schedules and Exhibits to, this Agreement are included for convenience of
reference only, and such captions shall not constitute a part of this Agreement
for any other purpose or in any way affect the meaning or construction of any
provision of this Agreement.
ARTICLE II
EXCHANGE OF STOCK
2.1 EXCHANGE OF PREFERRED STOCK. Subject to the terms and conditions of
this Agreement, and based upon the representations, warranties, covenants and
agreements set forth herein, at the Closing, Stockholders agree to convey to the
Company, free and clear of all Encumbrances, and the Company agrees to exchange
with and accept from Stockholders, all of
2
<PAGE>
the Series C Shares as hereinafter provided and for the consideration set forth
in Section 2.2 hereof.
2.2 EXCHANGE. At Closing, the Stockholders shall deliver to the Company
certificates representing all the Series C Shares, each such certificate to be
duly endorsed in blank and in good form for transfer, or accompanied by stock
powers duly executed in blank, sufficient and in good form to properly transfer
such shares to the Company. In exchange therefor, the Company shall issue to
the Stockholders an aggregate of 15,641.14 shares of Series G Preferred Stock
(the "STOCK CONSIDERATION"). At Closing, the Company shall record in its books
the exchange and issuance of such shares representing the Stock Consideration to
the Stockholders registered in the name of the Stockholders for the amount of
shares set forth opposite each of their names on Schedule A attached hereto and
incorporated herein for all purposes.
2.3 CLOSING. Consummation of the transactions contemplated by this
Agreement (the "CLOSING") shall take place on the date hereof, via the
telephone, facsimile, e-mail and regular mail. The date upon which the Closing
occurs is referred to herein as the "CLOSING DATE."
ARTICLE III
REPRESENTATIONS AND WARRANTIESOF STOCKHOLDERS
Each Stockholder severally as to himself, herself or itself only,
represents and warrants to, and agrees with, the Company that, the following
representations, warranties and agreements are true and correct as the date
hereof.
3.1 AUTHORITY AND CONSENT. Each Stockholder has the requisite power
and authority to enter into, and perform their obligations under this Agreement,
and no approval or consent of any Person is necessary in connection therewith.
This Agreement, together with all other agreements, documents and instruments
executed in connection herewith by Each Stockholder constitute valid and
legally-binding obligations of that Stockholder, and are enforceable against
such Stockholder in accordance with their terms, subject to bankruptcy,
receivership, insolvency, reorganization, moratorium or other similar laws
affecting or relating to creditors' rights generally and subject to general
principles of equity.
3.2 TITLE TO SERIES C SHARES. Each Stockholder holds good and valid
title to all of the Series C Shares set forth opposite its name on Schedule A,
free and clear of all Encumbrances. Each Stockholder possesses full authority
and legal right to sell, transfer and assign to the Company such Series C
Shares, free and clear of all Encumbrances. Upon transfer to the Company by
each Stockholder of such Series C Shares, the Company will own such Series C
Shares free and clear of all Encumbrances. There are no Claims pending or, to
any Stockholder's knowledge, threatened against such Stockholder that concern or
affect title to the Series C Shares.
3
<PAGE>
3.3 UNREGISTERED SHARES. Each Stockholder acknowledges, represents and
agrees that:
(a) The Stock Consideration has not been registered under the Securities
Act of 1933, as amended (the "1933 ACT"), or registered or qualified under
any applicable state securities laws;
(b) Each Stockholder has had the opportunity to ask questions of, and
receive answers from, the Company's officers and directors concerning such
Stockholder's acquisition of the Stock Consideration, and to obtain such
other information concerning the Company and the Stock Consideration, to
the extent they possessed the same or could acquire it without unreasonable
effort or expense, as Each Stockholder deemed necessary; and
(c) The Company has made no representations or warranties to the
Stockholders as to the Stockholders' federal, state, local or foreign tax
consequences from the consummation of the transactions contemplated by this
Agreement, and the Company has urged and advised each Stockholder to
consult his, her or its personal tax advisor with respect to such matters.
3.4 No Adverse Consequences. Neither the execution and delivery of this
Agreement by Stockholders nor the consummation of the transactions contemplated
by this Agreement will (a) to the knowledge of each Stockholder, violate any
statute, judgment, order, injunction, decree, rule, regulation or ruling of any
governmental authority applicable to each Stockholder, or (b) either alone or
with the giving of notice or the passage of time or both, conflict with,
constitute grounds for termination of, accelerate the performance required by,
accelerate the maturity of any indebtedness or obligation under, result in the
breach of the terms, conditions or provisions of or constitute a default under
any mortgage, deed of trust, indenture, note, bond, lease, license, permit or
other agreement, instrument or obligation to which each Stockholder is a party
or by which it is bound.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Stockholders that as of the
date hereof and the Closing Date:
4.1 ORGANIZATION. The Company is a corporation duly organized, validly
existing and in good standing under the laws of Delaware. The Company has all
necessary corporate power and authority to own, operate, and lease its
properties and to carry on its business as now owned or leased and operated by
it. The Company is qualified to do business under the laws of any jurisdiction
in which such qualification is required.
4
<PAGE>
4.2 AUTHORITY. The Company has the requisite power and authority to
enter into and perform its obligations under this Agreement, and except as
otherwise provided herein, no approval or consent of any Person is necessary in
connection therewith. This Agreement, together with all other agreements,
documents, certificates and instruments executed by the Company in connection
herewith, constitute valid and legally-binding obligations of the Company, and
are enforceable against the Company in accordance with their terms, subject to
bankruptcy, receivership, insolvency, reorganization, moratorium or other
similar laws affecting or relating to creditors' rights generally and subject to
general principles of equity.
4.3 VALID ISSUANCE OF STOCK CONSIDERATION. The Stock Consideration that
is being received by each Stockholder in exchange for the Series C Shares
hereunder, when issued, sold and delivered in accordance with the terms of this
Agreement for the consideration expressed herein, will be duly and validly
issued, fully paid, and nonassessable, will be free of all Claims and
restrictions on transfer other than restrictions on transfer under this
Agreement and under applicable state and federal securities laws and will not
subject the holders thereof to personal liability by reason of being such
holder. The common stock of the Company, par value $.001per share (the "COMMON
STOCK") issuable upon conversion of the Stock Consideration purchased under this
Agreement (based on an initial conversion price of $.30 per share), has been
duly and validly reserved for issuance and, upon issuance in accordance with the
terms of the Certificate of Designation for the Series G Preferred Stock (the
"SERIES G DESIGNATION") will be duly and validly issued, fully paid, and
nonassessable and will be free of all Claims and restrictions on transfer other
than restrictions on transfer under this Agreement and under applicable state
and federal securities laws, and will not subject the holders thereof to
personal liability by reason of being such holders.
4.4 COMPLIANCE WITH SECURITIES EXCHANGE ACT OF 1934. The Company is in
full compliance with all reporting requirements of the Securities Exchange Act
of 1934, as amended (the "EXCHANGE ACT"), and the Company's Common Stock is
quoted on the Nasdaq Over-the-Counter Bulletin Board (trading symbol "EDOC").
4.5 GOVERNMENTAL CONSENTS. No consent, approval, qualification, order or
authorization of, or filing with, any local, state, or federal governmental
authority is required on the part of the Company in connection with the
Company's valid execution, delivery, or performance of this Agreement, the
offer, sale or issuance of the Stock Consideration by the Company or the
issuance of Common Stock upon conversion of the Stock Consideration, except (i)
the filing of the Series G Designation with the Secretary of State of the State
of Delaware, and (ii) such filings as have been made prior to the Closing,
except that any notices of sale required to be filed with the Securities and
Exchange Commission under Regulation D of the Securities Act of 1933, as amended
(the "SECURITIES ACT"), or such post-closing filings as may be required under
applicable state securities laws, which will be timely filed within the
applicable periods therefor.
4.6 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of the
Company consists, or will consist prior to the Closing, of:
5
<PAGE>
(i) Preferred Stock. 2,000,000 shares of Preferred Stock, par value $0.10
(the "PREFERRED STOCK"), 312,500 of which shares have been designated Series A
Preferred Stock, of which 186,500 are issued and outstanding, 3,000 of which
have been designated Series B Preferred Stock of which 1,680 are issued and
outstanding, 231,788 of which have been designated Series C Preferred Stock of
which 153,538 are issued and outstanding, 5,000 of which have been designated
Series D Preferred Stock of which none are issued and outstanding, 2,000 of
which have been designated Series 1 Preferred Stock of which none are issued and
outstanding, and 250,000 of which have been designated Series 2 Preferred Stock
of which 500 are issued and outstanding, 5,000 of which have been designated
Series E Preferred Stock of which 2,000 are issued and outstanding, and 100,000
of which have been designated Series G Preferred Stock of which 51,137.755 will
be issued pursuant to this Agreement and the other stock exchange agreements
that are substantially similar in form to this Agreement. The rights,
privileges and preferences of the Series G Preferred Stock will be as stated in
the Series G Designation.
(ii) Common Stock. 50,000,000 shares of Common Stock of which 16,746,875
shares are issued and outstanding.
(iii) The outstanding shares of Series A, B, C, D, E, G, 1 and 2 Preferred
Stock and Common Stock have been issued in accordance with the registration or
qualification provisions of the Securities Act and any relevant state securities
laws or pursuant to valid exemptions therefrom.
(iv) The Company is not a party or subject to any agreement or
understanding, and, to the best of the Company's knowledge, there is no
agreement or understanding between any persons that affects or relates to the
voting or giving of written consents with respect to any security or the voting
by a director of the Company.
4.7 No Adverse Consequences. Neither the execution and delivery of this
Agreement by the Company nor the consummation of the transactions contemplated
by this Agreement will (a) to the knowledge of the Company, violate any statute,
judgment, order, injunction, decree, rule, regulation or ruling of any
governmental authority applicable to the Company, or (b) either alone or with
the giving of notice or the passage of time or both, conflict with, constitute
grounds for termination of, accelerate the performance required by, accelerate
the maturity of any indebtedness or obligation under, result in the breach of
the terms, conditions or provisions of or constitute a default under any
mortgage, deed of trust, indenture, note, bond, lease, license, permit or other
agreement, instrument or obligation to which the Company is a party or by which
it is bound.
6
<PAGE>
ARTICLE V
CONDITIONS
5.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY. The obligations
of the Company to consummate the transactions contemplated by this Agreement
shall be subject to the satisfaction of the following conditions, or to the
waiver thereof by the Company in the manner contemplated by Section 6.2 at the
Closing:
(a) Representations and Warranties of Stockholders True on Closing Date.
The representations and warranties of Stockholders herein contained shall
be true as of and at the Closing Date in all material respects with the
same effect as though made at such date, except as affected by transactions
permitted or contemplated by this Agreement; Stockholders shall have
performed and complied in all material respects with all covenants required
by this Agreement to be performed or complied with by Stockholders before
the Closing Date;
(b) Tender of Stock. Stockholders shall have delivered to the Company all
certificates or other documents or instruments representing all of the
Series C Shares, duly endorsed for transfer or accompanied by duly executed
stock powers, free and clear of any Encumbrance;
(c) Execution by All Parties to Letter Agreement. Each of the holders of
the Series A, C and E Preferred Stock that are parties to the Letter
Agreement have entered into a Stock Exchange Agreement with the Company
substantially similar in form to this Agreement.
(d) Other. All other items required to be delivered hereunder or as may be
reasonably requested by the Company to facilitate the Closing, in form and
substance reasonably satisfactory to the Company.
5.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS. The obligations
of Stockholders to consummate the transactions contemplated by this Agreement
shall be subject to the satisfaction of the following conditions, or to the
waiver thereof by Stockholders in the manner contemplated by Section 6.2 at the
Closing:
(a) Representations and Warranties of the Company True on Closing Date.
The representations and warranties of the Company herein contained shall be
true as of and at the Closing Date in all material respects with the same
effect as though made at such date, except as affected by transactions
permitted or contemplated by this Agreement; the Company shall have
performed and complied in all material respects with all covenants required
by this Agreement to be performed or complied with by it before the Closing
Date;
7
<PAGE>
(b) Tender of Stock Consideration. On the Closing Date, the Company shall
have recorded in its books the issuance of the Stock Consideration to the
Stockholders, subject to the provisions of Sections 2.1 and 2.2 hereof;
(c) Execution by All Parties to Letter Agreement. Each of the holders of
the Series A, C and E Preferred Stock that are parties to the Letter
Agreement have entered into a Stock Exchange Agreement with the Company
substantially similar in form to this Agreement.
(d) Other. All other items required to be delivered hereunder or as may be
reasonably requested by Stockholders to facilitate the Closing, in form and
substance reasonably satisfactory to Stockholders.
ARTICLE VI
MISCELLANEOUS
6.1 EXPENSES. Each of the Company and Stockholders shall bear their own
legal and accounting fees, and other costs and expenses with respect to the
negotiation, execution and delivery of this Agreement, and consummation of the
transactions contemplated hereby.
6.2 NOTICES AND WAIVERS. Any notice, instruction, authorization,
request, demand or waiver hereunder shall be in writing, and shall be delivered
either by personal delivery, by telegram, telex, telecopy or similar facsimile
means, by certified or registered mail, return receipt requested, or by courier
or delivery service, addressed to the parties hereto at the address indicated
beneath their respective signatures on the execution pages of this Agreement, or
at such other address and number as a party shall have previously designated by
written notice given to the other parties in the manner hereinabove set forth.
Notices shall be deemed given when received, if sent by facsimile means
(confirmation of such receipt by confirmed facsimile transmission being deemed
receipt of communications sent by facsimile means); and when delivered and
receipted for (or upon the date of attempted delivery where delivery is
refused), if hand-delivered, sent by express courier or delivery service, or
sent by certified or registered mail, return receipt requested.
6.3 PREVIOUS CONTRACTUAL RIGHTS. The parties to this Agreement hereby
agree that the execution of this Agreement will not change, modify or otherwise
affect any rights provided to Stockholders pursuant to Section 5(f), (g), (m)
and (n) and Section 8 of the Placement Agreement dated July 30, 1998 between
Stockholders and the Company.
6.4 SUCCESSORS AND ASSIGNS. This Agreement shall bind, inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and permitted assigns, and if an individual, by his executors,
administrators, and beneficiaries of his estate by will or the laws of descent
and distribution. This Agreement and the rights and obligations hereunder shall
not be assignable or delegable by any party.
8
<PAGE>
6.5 APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas and of the United States
applicable in Texas. Each party hereto hereby acknowledges and agrees that it
has consulted legal counsel in connection with the negotiation of this Agreement
and that it has bargaining power equal to that of the other parties hereto in
connection with the negotiation and execution of this Agreement. Accordingly,
the parties hereto agree that the rule that an agreement shall be construed
against the draftsman shall have no application in the construction or
interpretation of this Agreement.
6.6 AMENDMENT AND ENTIRETY. This Agreement may be amended, modified, or
superseded only by written instrument executed by all parties hereto. This
Agreement and the exhibits and schedules hereto sets forth the entire agreement
and understanding of the parties with respect to the transactions contemplated
hereby and supersedes all prior agreements, arrangements, and understandings
relating to the subject matter hereof. In the event of any conflict or
inconsistency between the provisions of this Agreement and the contents or
provisions of any schedule or exhibit hereto, the provisions of this Agreement
shall control.
6.7 RIGHTS OF PARTIES. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement on any Persons other than the parties hereto and their respective
successors and assigns, nor shall any provision give any third Persons any right
of subrogation or action over against any party to this Agreement. Without
limiting the generality of the foregoing, it is expressly understood that this
Agreement does not create any third party beneficiary rights.
6.8 COUNTERPARTS. This Agreement may be executed in any number of
counterparts by means of original or facsimile signature, each of which shall be
deemed an original and all which together shall constitute one and the same
instrument.
[SIGNATURE PAGE FOLLOWS]
9
<PAGE>
In Witness Whereof, this Stock Exchange Agreement is executed and delivered
as of the date first above written.
THE COMPANY:
Applied Voice Recognition, Inc.
By: /s/ Timothy J. Connolly
-----------------------
Timothy J. Connolly
Chairman of the Board
171 St. James Place, Suite 242
Houston, Texas 77056
Telecopy No. (713) 621-5870
STOCKHOLDERS:
Equity Services, Ltd.
By: /s/ Lynn Turnquest
------------------
Name: Lynn Turnquest
----------------
Title: President
----------
Address: Box F42544
----------
Freeport, Bahamas
-----------------
Telecopy No. 242-352-3932
------------
/s/ Cornelius Dornier
---------------------
Cornelius Dornier
Address:
Telecopy No.
10
<PAGE>
/s/ Daniel Dornier
------------------
Daniel Dornier
Address:
Telecopy No.
/s/ Gabriele Dornier
--------------------
Gabriele Dornier
Address:
Telecopy No.
/s/ Matthia Dornier
-------------------
Matthia Dornier
Address:
Telecopy No.
/s/ Silvius Dornier
-------------------
Silvius Dornier
Address:
Telecopy No.
/s/ Herman Ebel
---------------
Herman Ebel
Address:
Telecopy No.
11
<PAGE>
/s/ Stephen L. Pampush
----------------------
Stephen L. Pampush
Address:
Telecopy No.
/s/ Peter Widenman
------------------
Peter Widenman
Address:
Telecopy No.
12
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
SERIES C SERIES G
STOCKHOLDERS SHARES HELD SHARES TO BE RECEIVED
- ------------- ------------------ ------------------------
<S> <C> <C>
Equity Services, Ltd. 11,038 1,124.458
Cornelius Dornier 22,500 2,292.105
Daniel Dornier 30,000 3,056.145
Gabriele Dornier 22,500 2,292.105
Matthia Dornier 15,000 1,528.074
Silvius Dornier 30,000 3,056.145
Herman Ebel 19,500 1,986.492
Stephen L. Pampush 1,500 152.808
Peter Widenman 1,500 152.808
------------------ ------------------------
153,538 15,641.140
</TABLE>
13
<PAGE>
EXHIBIT 10.41
STOCK EXCHANGE AGREEMENT
This STOCK EXCHANGE AGREEMENT is entered into on this 11th day of February,
2000, between Greenwich AG (the "STOCKHOLDER"), who is the holders of the
Company's Series E Preferred Stock, par value $0.10 per share (the "SERIES E
PREFERRED STOCK"), and Applied Voice Recognition, Inc., a Delaware corporation
(the "COMPANY").
W I T N E S S E T H:
WHEREAS, the Company and the Stockholder are parties to a letter agreement
dated January 7, 2000 (the "LETTER AGREEMENT") pursuant to which the Company
agreed to designate a Series G Preferred Stock, par value $0.10 per share, with
a specified conversion price (the "SERIES G PREFERRED STOCK"), to exchange for
all of the outstanding Series E Preferred Stock held by the Stockholder; and
WHEREAS, the parties desire to consummate their understandings agreed upon
in the Letter Agreement with respect to the exchange of shares of the Series E
Preferred Stock for shares of the Series G Preferred Stock on the terms set
forth therein.
NOW, THEREFORE, for and in consideration of the premises, and the mutual
and dependent promises contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 CERTAIN DEFINITIONS. As used in this Agreement, each of the
following terms has the meanings set forth below:
(a) "Agreement" means and includes this Stock Exchange Agreement and
the schedules and exhibits hereto.
(b) "Claims" means any claims, demands, actions, costs, damages,
losses, diminution in value, expenses, obligations, liabilities,
recoveries, judgments, settlements, suits, proceedings, causes of action or
deficiencies, including interest, penalties (including civil and criminal
penalties) and reasonable attorneys' fees.
(c) "Encumbrance" means any security interest, mortgage, deed of trust,
pledge, lien, claim or other encumbrance of any third party of any nature
whatsoever.
<PAGE>
(d) "knowledge" means, with respect to any representation or warranty
in Article III made to the knowledge of the Stockholder or words of similar
import, receipt of notice by, or actual knowledge of any Stockholder, but
no representation or warranty made by the Stockholder in Article III may be
qualified or limited by reference to "KNOWLEDGE" unless due inquiry has
actually been made of the Stockholder.
(e) "Series E Shares" means at any date all of the shares of the Series
E Preferred Stock issued and outstanding on such date.
(f) "Person" means an individual, corporation, limited liability
company, partnership, limited partnership, joint venture, joint stock
company, firm, company, syndicate, trust, estate, association, governmental
authority, business, organization or any other incorporated or
unincorporated entity.
1.2 OTHER DEFINED TERMS. Words and terms used in this Agreement that are
defined elsewhere in this Agreement are used herein as therein defined.
1.3 OTHER DEFINITIONAL PROVISIONS.
(a) When used in this Agreement, the words "herein," "hereof" and
"hereunder" and words of similar import refer to this Agreement as a whole
and not to any provision of this Agreement, and the words "Article,"
"Section," "Schedule" and "Exhibit" refer to Articles and Sections of, and
Schedules and Exhibits to, this Agreement unless otherwise specified.
(b) Whenever the context so requires, the singular number includes the
plural and vice versa, and a reference to one gender includes the other
gender and the neuter.
(c) The words "shall" and "will" are used interchangeably and have the
same meaning.
1.4 CAPTIONS. Captions to Articles, Sections and subsections of, and
Schedules and Exhibits to, this Agreement are included for convenience of
reference only, and such captions shall not constitute a part of this Agreement
for any other purpose or in any way affect the meaning or construction of any
provision of this Agreement.
ARTICLE II
EXCHANGE OF STOCK
2.1 EXCHANGE OF PREFERRED STOCK. Subject to the terms and conditions of
this Agreement, and based upon the representations, warranties, covenants and
agreements set forth herein, at the Closing, Stockholder agrees to convey to the
Company, free and clear of all Encumbrances, and the Company agrees to exchange
with and accept from Stockholder, all of
2
<PAGE>
the Series E Shares as hereinafter provided and for the consideration set forth
in Section 2.2 hereof.
2.2 EXCHANGE. At Closing, the Stockholder shall deliver to the Company
certificates representing all the Series E Shares, each such certificate to be
duly endorsed in blank and in good form for transfer, or accompanied by stock
powers duly executed in blank, sufficient and in good form to properly transfer
such shares to the Company. In exchange therefor, the Company shall issue to
the Stockholder an aggregate of 20,269.449 shares of Series G Preferred Stock
(the "STOCK CONSIDERATION"). At Closing, the Company shall record in its books
the exchange and issuance of such shares representing the Stock Consideration to
the Stockholder registered in the name of the Stockholder for the amount of
shares set forth opposite its name on Schedule A attached hereto and
incorporated herein for all purposes.
2.3 CLOSING. Consummation of the transactions contemplated by this
Agreement (the "CLOSING") shall take place on the date hereof, via the
telephone, facsimile, e-mail and regular mail. The date upon which the Closing
occurs is referred to herein as the "CLOSING DATE."
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF STOCKHOLDER
Stockholder represents and warrants to, and agrees with, the Company that,
the following representations, warranties and agreements are true and correct as
the date hereof.
3.1 AUTHORITY AND CONSENT. Stockholder has the requisite power and
authority to enter into, and perform its obligations under this Agreement, and
no approval or consent of any Person is necessary in connection therewith. This
Agreement, together with all other agreements, documents and instruments
executed in connection herewith by Stockholder constitutes valid and legally-
binding obligations of Stockholder, and are enforceable against Stockholder in
accordance with their terms, subject to bankruptcy, receivership, insolvency,
reorganization, moratorium or other similar laws affecting or relating to
creditors' rights generally and subject to general principles of equity.
3.2 TITLE TO SERIES E SHARES. Stockholder holds good and valid title to
all of the Series E Shares set forth opposite its name on Schedule A, free and
clear of all Encumbrances. Stockholder possesses full authority and legal right
to sell, transfer and assign to the Company such Series E Shares, free and clear
of all Encumbrances. Upon transfer to the Company by Stockholder of such Series
E Shares, the Company will own such Series E Shares free and clear of all
Encumbrances. There are no Claims pending or, to Stockholder's knowledge,
threatened against Stockholder that concern or affect title to the Series E
Shares.
3
<PAGE>
3.3 UNREGISTERED SHARES. Stockholder acknowledges, represents and agrees
that:
(a) the Stock Consideration has not been registered under the
Securities Act of 1933, as amended (the "1933 ACT"), or registered or
qualified under any applicable state securities laws;
(b) Stockholder has had the opportunity to ask questions of, and
receive answers from, the Company's officers and directors concerning
Stockholder's acquisition of the Stock Consideration, and to obtain such
other information concerning the Company and the Stock Consideration, to
the extent they possessed the same or could acquire it without unreasonable
effort or expense, as Stockholder deemed necessary; and
(c) The Company has made no representations or warranties to the
Stockholder as to the Stockholder's federal, state, local or foreign tax
consequences from the consummation of the transactions contemplated by this
Agreement, and the Company has urged and advised the Stockholder to consult
his, her or its personal tax advisor with respect to such matters.
3.4 NO ADVERSE CONSEQUENCES. Neither the execution and delivery of this
Agreement by Stockholder nor the consummation of the transactions contemplated
by this Agreement will (a) to the knowledge of Stockholder, violate any statute,
judgment, order, injunction, decree, rule, regulation or ruling of any
governmental authority applicable to Stockholder, or (b) either alone or with
the giving of notice or the passage of time or both, conflict with, constitute
grounds for termination of, accelerate the performance required by, accelerate
the maturity of any indebtedness or obligation under, result in the breach of
the terms, conditions or provisions of or constitute a default under any
mortgage, deed of trust, indenture, note, bond, lease, license, permit or other
agreement, instrument or obligation to which Stockholder is a party or by which
it is bound.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Stockholder that as of the
date hereof and the Closing Date:
4.1 ORGANIZATION. The Company is a corporation duly organized, validly
existing and in good standing under the laws of Delaware. The Company has all
necessary corporate power and authority to own, operate, and lease its
properties and to carry on its business as now owned or leased and operated by
it. The Company is qualified to do business under the laws of any jurisdiction
in which such qualification is required.
4.2 AUTHORITY. The Company has the requisite power and authority to
enter into and perform its obligations under this Agreement, and except as
otherwise provided herein, no approval or consent of any Person is necessary in
connection therewith. This Agreement,
4
<PAGE>
together with all other agreements, documents, certificates and instruments
executed by the Company in connection herewith, constitute valid and legally-
binding obligations of the Company, and are enforceable against the Company in
accordance with their terms, subject to bankruptcy, receivership, insolvency,
reorganization, moratorium or other similar laws affecting or relating to
creditors' rights generally and subject to general principles of equity.
4.3 VALID ISSUANCE OF STOCK CONSIDERATION. The Stock Consideration that
is being received by the Stockholder in exchange for the Series E Shares
hereunder, when issued, sold and delivered in accordance with the terms of this
Agreement for the consideration expressed herein, will be duly and validly
issued, fully paid, and nonassessable, will be free of all Claims and
restrictions on transfer other than restrictions on transfer under this
Agreement and under applicable state and federal securities laws and will not
subject the holders thereof to personal liability by reason of being such
holder. The common stock of the Company, par value $.001per share (the "COMMON
STOCK") issuable upon conversion of the Stock Consideration purchased under this
Agreement (based on an initial conversion price of $.30 per share), has been
duly and validly reserved for issuance and, upon issuance in accordance with the
terms of the Certificate of Designation for the Series G Preferred Stock (the
"SERIES G DESIGNATION") will be duly and validly issued, fully paid, and
nonassessable and will be free of all Claims and restrictions on transfer other
than restrictions on transfer under this Agreement and under applicable state
and federal securities laws, and will not subject the holders thereof to
personal liability by reason of being such holders.
4.4 COMPLIANCE WITH SECURITIES EXCHANGE ACT OF 1934. The Company is in
full compliance with all reporting requirements of the Securities Exchange Act
of 1934, as amended (the "EXCHANGE ACT"), and the Company's Common Stock is
quoted on the Nasdaq Over-the-Counter Bulletin Board (trading symbol "EDOC").
4.5 GOVERNMENTAL CONSENTS. No consent, approval, qualification, order or
authorization of, or filing with, any local, state, or federal governmental
authority is required on the part of the Company in connection with the
Company's valid execution, delivery, or performance of this Agreement, the
offer, sale or issuance of the Stock Consideration by the Company or the
issuance of Common Stock upon conversion of the Stock Consideration, except (i)
the filing of the Series G Designation with the Secretary of State of the State
of Delaware, and (ii) such filings as have been made prior to the Closing,
except that any notices of sale required to be filed with the Securities and
Exchange Commission under Regulation D of the Securities Act of 1933, as amended
(the "SECURITIES ACT"), or such post-closing filings as may be required under
applicable state securities laws, which will be timely filed within the
applicable periods therefor.
4.6 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of the
Company consists, or will consist prior to the Closing, of:
(i) Preferred Stock. 2,000,000 shares of Preferred Stock, par value
$0.10 (the "PREFERRED STOCK"), 312,500 of which shares have been designated
Series A Preferred Stock, of which 186,500 are issued and outstanding,
3,000 of which have been designated Series B Preferred Stock of which 1,680
are issued and outstanding, 231,788 of which
5
<PAGE>
have been designated Series C Preferred Stock of which 153,538 are issued
and outstanding, 5,000 of which have been designated Series D Preferred
Stock of which none are issued and outstanding, 2,000 of which have been
designated Series 1 Preferred Stock of which none are issued and
outstanding, and 250,000 of which have been designated Series 2 Preferred
Stock of which 500 are issued and outstanding, 5,000 of which have been
designated Series E Preferred Stock of which 2,000 are issued and
outstanding, and 100,000 of which have been designated Series G Preferred
Stock of which 51,137.755 will be issued pursuant to this Agreement and the
other stock exchange agreements that are substantially similar in form to
this Agreement. The rights, privileges and preferences of the Series G
Preferred Stock will be as stated in the Series G Designation.
(ii) Common Stock. 50,000,000 shares of Common Stock of which
16,746,875 shares are issued and outstanding.
(iii) The outstanding shares of Series A, B, C, D, E, G, 1 and 2
Preferred Stock and Common Stock have been issued in accordance with the
registration or qualification provisions of the Securities Act and any
relevant state securities laws or pursuant to valid exemptions therefrom.
(iv) The Company is not a party or subject to any agreement or
understanding, and, to the best of the Company's knowledge, there is no
agreement or understanding between any persons that affects or relates to
the voting or giving of written consents with respect to any security or
the voting by a director of the Company.
4.7 NO ADVERSE CONSEQUENCES. Neither the execution and delivery of this
Agreement by the Company nor the consummation of the transactions contemplated
by this Agreement will (a) to the knowledge of the Company, violate any statute,
judgment, order, injunction, decree, rule, regulation or ruling of any
governmental authority applicable to the Company, or (b) either alone or with
the giving of notice or the passage of time or both, conflict with, constitute
grounds for termination of, accelerate the performance required by, accelerate
the maturity of any indebtedness or obligation under, result in the breach of
the terms, conditions or provisions of or constitute a default under any
mortgage, deed of trust, indenture, note, bond, lease, license, permit or other
agreement, instrument or obligation to which the Company is a party or by which
it is bound.
ARTICLE V
CONDITIONS
5.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY. The obligations
of the Company to consummate the transactions contemplated by this Agreement
shall be subject to the satisfaction of the following conditions, or to the
waiver thereof by the Company in the manner contemplated by Section 6.2 at the
Closing:
6
<PAGE>
(a) Representations and Warranties of Stockholder True on Closing Date.
The representations and warranties of Stockholder herein contained shall be
true as of and at the Closing Date in all material respects with the same
effect as though made at such date, except as affected by transactions
permitted or contemplated by this Agreement; Stockholder shall have
performed and complied in all material respects with all covenants required
by this Agreement to be performed or complied with by Stockholder before
the Closing Date;
(b) Tender of Stock. Stockholder shall have delivered to the Company
all certificates or other documents or instruments representing all of the
Series E Shares, duly endorsed for transfer or accompanied by duly executed
stock powers, free and clear of any Encumbrance;
(c) Execution by All Parties to Letter Agreement. Each of the holders
of the Series A, C and E Preferred Stock that are parties to the Letter
Agreement have entered into a Stock Exchange Agreement with the Company
substantially similar in form to this Agreement.
(d) Other. All other items required to be delivered hereunder or as may
be reasonably requested by the Company to facilitate the Closing, in form
and substance reasonably satisfactory to the Company.
5.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDER. The obligations
of Stockholder to consummate the transactions contemplated by this Agreement
shall be subject to the satisfaction of the following conditions, or to the
waiver thereof by Stockholder in the manner contemplated by Section 6.2 at the
Closing:
(a) Representations and Warranties of the Company True on Closing Date.
The representations and warranties of the Company herein contained shall be
true as of and at the Closing Date in all material respects with the same
effect as though made at such date, except as affected by transactions
permitted or contemplated by this Agreement; the Company shall have
performed and complied in all material respects with all covenants required
by this Agreement to be performed or complied with by it before the Closing
Date;
(b) Tender of Stock Consideration. On the Closing Date, the Company
shall have recorded in its books the issuance of the Stock Consideration to
the Stockholder, subject to the provisions of Sections 2.1 and 2.2 hereof;
(c) Execution by All Parties to Letter Agreement. Each of the holders
of the Series A, C and E Preferred Stock that are parties to the Letter
Agreement have entered into a Stock Exchange Agreement with the Company
substantially similar in form to this Agreement.
7
<PAGE>
(d) Other. All other items required to be delivered hereunder or as may
be reasonably requested by Stockholder to facilitate the Closing, in form
and substance reasonably satisfactory to Stockholder.
ARTICLE VI
MISCELLANEOUS
6.1 EXPENSES. Each of the Company and Stockholder shall bear its own
legal and accounting fees, and other costs and expenses with respect to the
negotiation, execution and delivery of this Agreement, and consummation of the
transactions contemplated hereby.
6.2 NOTICES AND WAIVERS. Any notice, instruction, authorization,
request, demand or waiver hereunder shall be in writing, and shall be delivered
either by personal delivery, by telegram, telex, telecopy or similar facsimile
means, by certified or registered mail, return receipt requested, or by courier
or delivery service, addressed to the parties hereto at the address indicated
beneath their respective signatures on the execution pages of this Agreement, or
at such other address and number as a party shall have previously designated by
written notice given to the other parties in the manner hereinabove set forth.
Notices shall be deemed given when received, if sent by facsimile means
(confirmation of such receipt by confirmed facsimile transmission being deemed
receipt of communications sent by facsimile means); and when delivered and
receipted for (or upon the date of attempted delivery where delivery is
refused), if hand-delivered, sent by express courier or delivery service, or
sent by certified or registered mail, return receipt requested.
6.3 SUCCESSORS AND ASSIGNS. This Agreement shall bind, inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and permitted assigns, and if an individual, by his executors,
administrators, and beneficiaries of his estate by will or the laws of descent
and distribution. This Agreement and the rights and obligations hereunder shall
not be assignable or delegable by any party.
6.4 APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas and of the United States
applicable in Texas. Each party hereto hereby acknowledges and agrees that it
has consulted legal counsel in connection with the negotiation of this Agreement
and that it has bargaining power equal to that of the other parties hereto in
connection with the negotiation and execution of this Agreement. Accordingly,
the parties hereto agree that the rule that an agreement shall be construed
against the draftsman shall have no application in the construction or
interpretation of this Agreement.
6.5 AMENDMENT AND ENTIRETY. This Agreement may be amended, modified, or
superseded only by written instrument executed by all parties hereto. This
Agreement and the exhibits and schedules hereto sets forth the entire agreement
and understanding of the parties with respect to the transactions contemplated
hereby and supersedes all prior agreements, arrangements, and understandings
relating to the subject matter hereof. In the event of any
8
<PAGE>
conflict or inconsistency between the provisions of this Agreement and the
contents or provisions of any schedule or exhibit hereto, the provisions of this
Agreement shall control.
6.6 RIGHTS OF PARTIES. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement on any Persons other than the parties hereto and their respective
successors and assigns, nor shall any provision give any third Persons any right
of subrogation or action over against any party to this Agreement. Without
limiting the generality of the foregoing, it is expressly understood that this
Agreement does not create any third party beneficiary rights.
6.7 COUNTERPARTS. This Agreement may be executed in any number of
counterparts by means of original or facsimile signature, each of which shall be
deemed an original and all which together shall constitute one and the same
instrument.
[SIGNATURE PAGE FOLLOWS]
9
<PAGE>
In Witness Whereof, this Stock Exchange Agreement is executed and delivered
as of the date first above written.
THE COMPANY:
Applied Voice Recognition, Inc.
By: /s/ Timothy J. Connolly
-----------------------
Timothy J. Connolly
Chairman of the Board
171 St. James Place, Suite 242
Houston, Texas 77056
Telecopy No. (713) 621-5870
----------------
STOCKHOLDERS:
GREENWICH AG
By: /s/ Daniel Dornier
----------------------------
Name: Daniel Dornier
----------------------------
Title: CO-CEO
----------------------------
Address Neuer Wall 32
----------------------
20354 Hamburg
----------------------
Telecopy No. 040-37502332
----------------------
10
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
SERIES C SERIES G SHARES TO
STOCKHOLDER SHARES HELD BE RECEIVED
- ------------------------------- ------------------ ----------------------
<S> <C> <C>
Greenwich AG 2,000 20,269.449
</TABLE>
11
<PAGE>
EXHIBIT 10.42
AGREEMENT WITH RESPECT TO TERMINATION OF EMPLOYMENT
(Richard A. Cabrera)
This AGREEMENT WITH RESPECT TO TERMINATION OF EMPLOYMENT (this
"Termination") is executed effective as of the 20th day of December, 1999 (the
"Effective Date"), by and between APPLIED VOICE RECOGNITION, INC., a Delaware
corporation ("AVRI"), and RICHARD A. CABRERA, an individual residing in Houston,
Harris County, Texas ("Employee").
W I T N E S S E T H:
WHEREAS, AVRI and Employee entered into that certain Employment Agreement
dated as of April 15, 1999 (the "Employment Agreement");
WHEREAS, effective as of even date herewith, AVRI has entered into that
certain Asset Purchase Agreement (the "Purchase Agreement") by and among AVRI,
e-DOCS Health Care Information Systems, Inc. and A Word Above, Inc.,
collectively as the "Sellers", and Lonestar Medical Transcription USA, Inc.
("Lonestar"), L&H Investment Company, N.V. and Lernout & Hauspie Speech Products
N.V.;
WHEREAS, under the terms of the Purchase Agreement, the Sellers are
conveying certain assets to Lonestar, Employee's employment with AVRI is to be
terminated, and Lonestar is to hire Employee pursuant to the terms of a new
Employment Agreement to be executed as of even date herewith between Employee,
as employee, and Lonestar, as employer, which Employment Agreement shall include
Lonestar's agreement to assume all accrued vacation, sick leave and other
employee benefits that Employee has accrued with AVRI as of the Effective Date;
WHEREAS, AVRI and Employee have determined that Employee's employment with
AVRI shall be terminated effective as of the Effective Date and that all aspects
of the Employment Agreement shall be terminated as of the Effective Date;
NOW, THEREFORE, for and in consideration of the sum of TEN AND NO/100
DOLLARS ($10.00) and other good and valuable consideration paid by AVRI to
Employee, the receipt and sufficiency of which are hereby acknowledged by the
parties hereto, the parties hereto hereby agree as follows:
1. TERMINATION OF EMPLOYMENT. Employee and AVRI hereby confirm that
Employee's employment with AVRI shall terminate as of the Effective Date, and
Employee has received all compensation due Employee from AVRI as of that date.
2. TERMINATION OF EMPLOYMENT AGREEMENT. AVRI and Employee hereby
mutually agree that the Employment Agreement be, and hereby is, terminated
effective as of the Effective Date, and agree that no provisions of the
Employment Agreement shall survive the Effective Date.
3. RELEASE OF AVRI. In consideration of the foregoing, Employee, for
himself, his heirs, spouse, executors, administrators, successors and assigns,
does hereby release, acquit and forever discharge AVRI, for itself and its
shareholders, officers, affiliates, directors, employees,
1
<PAGE>
consultants, attorneys, agents and representatives from any and all claims,
liabilities, obligations, indebtedness, demands and causes of action, known or
unknown, existing as of the date hereof of every kind and nature, including, but
not limited to any of the foregoing, relating directly or indirectly to the
employment of Employee by AVRI or the termination of Employee's employment with
AVRI, specifically including, but not limited to, the Employment Agreement and
any other written or oral agreement between AVRI (including any and all of its
affiliated companies) and Employee, the federal employment laws and the state
employment laws, including but not limited to TITLE VII OF THE CIVIL RIGHTS ACT
OF 1964, AS AMENDED; THE CIVIL RIGHTS ACT OF 1991; THE AMERICANS WITH
DISABILITIES ACT; THE EMPLOYEE RETIREMENT AND INCOME SECURITY ACT OF 1974, AS
AMENDED; THE TEXAS COMMISSION OF HUMAN RIGHTS ACT; THE FAMILY AND MEDICAL LEAVE
ACT; SECTION 451 OF THE TEXAS LABOR CODE; and all claims for unpaid wages and
severance expenses. EMPLOYEE ACKNOWLEDGES THAT EMPLOYEE CONSULTED COUNSEL PRIOR
TO EXECUTING THIS RELEASE. EMPLOYEE, FOR EMPLOYEE'S SELF AND THROUGH EMPLOYEE'S
COUNSEL, WAIVES THE FORTY-FIVE (45) DAY REVIEW PERIOD NECESSARY TO EFFECTUATE A
RELEASE AS TO CLAIMS ARISING UNDER THE EMPLOYMENT LAWS REFERENCED IN THIS
PARAGRAPH.
4. RELEASE OF EMPLOYEE. In consideration of the foregoing, AVRI, for
itself and its shareholders, directors, officers, employees, agents and
representatives, does hereby release, acquit and forever discharge, Employee,
for Employee's self, Employee's heirs, spouse, executors, administrators,
successors and assigns, from all claims, liabilities, obligations, indebtedness,
demands and causes of action, known or unknown, existing as of the date hereof
of every kind and nature, including, but not limited to any of the foregoing,
relating, directly or indirectly, to the employment of Employee or the
termination of Employee's employment with AVRI, specifically including, but not
limited to, the Employment Agreement and any other written or oral agreement
between AVRI and Employee.
5. OWNERSHIP OF CLAIMS. Each of the parties hereto represents and
warrants that it is the sole owner and holder of any claims or causes of action
herein released, or any interest therein or portion thereof, that it has not
sold, transferred, conveyed or assigned any claims or causes of action purported
to be released hereby, or any interest therein or portion thereof, to any third
person or entity, and that its undersigned representative is authorized to
execute this Termination on its behalf.
6. GOVERNING LAW. This Termination shall be construed in accordance with
the laws of the State of Texas with respect to choice of law principals and
conflicts of law rules. Performance of this Termination shall occur solely in
Harris County, Texas.
7. FURTHER ASSURANCES. The parties hereto agree to execute and deliver
such instruments as are reasonably necessary to effectuate the transactions
contemplated by this Termination.
8. BINDING EFFECT. This Termination and all the terms and provisions
hereof, shall be binding upon and shall inure to the benefit of AVRI and
Employee, and their respective heirs, legal representatives, successors and
permitted assigns.
2
<PAGE>
9. INVALIDITY. In case any one or more of the provisions contained in
this Termination shall for any reason be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision of this Termination, and this Termination
shall be construed as if such invalid, illegal or unenforceable provision had
never been included in the Termination.
10. AMENDMENTS. No amendment, modification, or alteration of the terms of
this Termination shall be binding unless the same is in writing, dated
subsequent to the date of this Termination, and duly executed by the parties to
this Termination.
11. COUNTERPARTS. This Termination may be executed in multiple
counterparts, each of which shall constitute an original, but all of which shall
constitute one and the same Termination.
IN WITNESS WHEREOF, the parties have executed this Termination to be
effective as of the Effective Date.
AVRI:
APPLIED VOICE RECOGNITION, INC., a Delaware
corporation
By: /s/ Timothy J. Connolly
------------------------------------------
Timothy J. Connolly, Chairman of the Board
EMPLOYEE:
/s/ Richard A. Cabrera
---------------------------------------------
RICHARD A. CABRERA
Lonestar hereby executes this Termination for purposes of acknowledging
Lonestar's agreement to hire Employee pursuant to the terms of a new Employment
Agreement to be executed as of even date herewith between Employee, as employee,
and Lonestar, as employer, which Employment Agreement shall include Lonestar's
agreement to assume all accrued vacation, sick leave and other employee benefits
that Employee has accrued with AVRI as of the Effective Date.
LONESTAR MEDICAL TRANSCRIPTION USA, INC., a
Delaware corporation
By: /s/ Carl Dammekens
------------------
Name: Carl Dammekens
----------------
Title: President of Finance
--------------------
3
<PAGE>
EXHIBIT 10.43
AGREEMENT WITH RESPECT TO TERMINATION OF EMPLOYMENT
(Eric A. Black)
This AGREEMENT WITH RESPECT TO TERMINATION OF EMPLOYMENT (this
"Termination") is executed effective as of the 20th day of December, 1999 (the
"Effective Date"), by and between APPLIED VOICE RECOGNITION, INC., a Delaware
corporation ("AVRI"), and ERIC A. BLACK, an individual residing in Houston,
Harris County, Texas ("Employee").
W I T N E S S E T H:
WHEREAS, AVRI and Employee entered into that certain Employment Agreement
dated as of August 2, 1999 (the "Employment Agreement");
WHEREAS, effective as of even date herewith, AVRI has entered into that
certain Asset Purchase Agreement (the "Purchase Agreement") by and among AVRI,
e-DOCS Health Care Information Systems, Inc. and A Word Above, Inc.,
collectively as the "Sellers", and Lonestar Medical Transcription USA, Inc.
("Lonestar"), L&H Investment Company, N.V. and Lernout & Hauspie Speech Products
N.V.;
WHEREAS, under the terms of the Purchase Agreement, the Sellers are
conveying certain assets to Lonestar, Employee's employment with AVRI is to be
terminated, and Lonestar is to hire Employee pursuant to the terms of a new
Employment Agreement to be executed as of even date herewith between Employee,
as employee, and Lonestar, as employer, which Employment Agreement shall include
Lonestar's agreement to assume all accrued vacation, sick leave and other
employee benefits that Employee has accrued with AVRI as of the Effective Date;
WHEREAS, AVRI and Employee have determined that Employee's employment with
AVRI shall be terminated effective as of the Effective Date and that all aspects
of the Employment Agreement shall be terminated as of the Effective Date;
NOW, THEREFORE, for and in consideration of the sum of TEN AND NO/100
DOLLARS ($10.00) and other good and valuable consideration paid by AVRI to
Employee, the receipt and sufficiency of which are hereby acknowledged by the
parties hereto, the parties hereto hereby agree as follows:
1. TERMINATION OF EMPLOYMENT. Employee and AVRI hereby confirm that
Employee's employment with AVRI shall terminate as of the Effective Date, and
Employee has received all compensation due Employee from AVRI as of that date.
2. TERMINATION OF EMPLOYMENT AGREEMENT. AVRI and Employee hereby
mutually agree that the Employment Agreement be, and hereby is, terminated
effective as of the Effective Date, and agree that no provisions of the
Employment Agreement shall survive the Effective Date.
3. RELEASE OF AVRI. In consideration of the foregoing, Employee, for
himself, his heirs, spouse, executors, administrators, successors and assigns,
does hereby release, acquit and forever discharge AVRI, for itself and its
shareholders, officers, affiliates, directors, employees,
1
<PAGE>
consultants, attorneys, agents and representatives from any and all claims,
liabilities, obligations, indebtedness, demands and causes of action, known or
unknown, existing as of the date hereof of every kind and nature, including, but
not limited to any of the foregoing, relating directly or indirectly to the
employment of Employee by AVRI or the termination of Employee's employment with
AVRI, specifically including, but not limited to, the Employment Agreement and
any other written or oral agreement between AVRI (including any and all of its
affiliated companies) and Employee, the federal employment laws and the state
employment laws, including but not limited to TITLE VII OF THE CIVIL RIGHTS ACT
OF 1964, AS AMENDED; THE CIVIL RIGHTS ACT OF 1991; THE AMERICANS WITH
DISABILITIES ACT; THE EMPLOYEE RETIREMENT AND INCOME SECURITY ACT OF 1974, AS
AMENDED; THE TEXAS COMMISSION OF HUMAN RIGHTS ACT; THE FAMILY AND MEDICAL LEAVE
ACT; SECTION 451 OF THE TEXAS LABOR CODE; and all claims for unpaid wages and
severance expenses. EMPLOYEE ACKNOWLEDGES THAT EMPLOYEE CONSULTED COUNSEL PRIOR
TO EXECUTING THIS RELEASE. EMPLOYEE, FOR EMPLOYEE'S SELF AND THROUGH EMPLOYEE'S
COUNSEL, WAIVES THE FORTY-FIVE (45) DAY REVIEW PERIOD NECESSARY TO EFFECTUATE A
RELEASE AS TO CLAIMS ARISING UNDER THE EMPLOYMENT LAWS REFERENCED IN THIS
PARAGRAPH.
4. RELEASE OF EMPLOYEE. In consideration of the foregoing, AVRI, for
itself and its shareholders, directors, officers, employees, agents and
representatives, does hereby release, acquit and forever discharge, Employee,
for Employee's self, Employee's heirs, spouse, executors, administrators,
successors and assigns, from all claims, liabilities, obligations, indebtedness,
demands and causes of action, known or unknown, existing as of the date hereof
of every kind and nature, including, but not limited to any of the foregoing,
relating, directly or indirectly, to the employment of Employee or the
termination of Employee's employment with AVRI, specifically including, but not
limited to, the Employment Agreement and any other written or oral agreement
between AVRI and Employee.
5. OWNERSHIP OF CLAIMS. Each of the parties hereto represents and
warrants that it is the sole owner and holder of any claims or causes of action
herein released, or any interest therein or portion thereof, that it has not
sold, transferred, conveyed or assigned any claims or causes of action purported
to be released hereby, or any interest therein or portion thereof, to any third
person or entity, and that its undersigned representative is authorized to
execute this Termination on its behalf.
6. GOVERNING LAW. This Termination shall be construed in accordance with
the laws of the State of Texas with respect to choice of law principals and
conflicts of law rules. Performance of this Termination shall occur solely in
Harris County, Texas.
7. FURTHER ASSURANCES. The parties hereto agree to execute and deliver
such instruments as are reasonably necessary to effectuate the transactions
contemplated by this Termination.
8. BINDING EFFECT. This Termination and all the terms and provisions
hereof, shall be binding upon and shall inure to the benefit of AVRI and
Employee, and their respective heirs, legal representatives, successors and
permitted assigns.
2
<PAGE>
9. INVALIDITY. In case any one or more of the provisions contained in
this Termination shall for any reason be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision of this Termination, and this Termination
shall be construed as if such invalid, illegal or unenforceable provision had
never been included in the Termination.
10. AMENDMENTS. No amendment, modification, or alteration of the terms of
this Termination shall be binding unless the same is in writing, dated
subsequent to the date of this Termination, and duly executed by the parties to
this Termination.
11. COUNTERPARTS. This Termination may be executed in multiple
counterparts, each of which shall constitute an original, but all of which shall
constitute one and the same Termination.
IN WITNESS WHEREOF, the parties have executed this Termination to be
effective as of the Effective Date.
AVRI:
APPLIED VOICE RECOGNITION, INC., a Delaware
corporation
By: /s/ Timothy J. Connolly
------------------------------------------
Timothy J. Connolly, Chairman of the Board
EMPLOYEE:
/s/ Eric A. Black
------------------------------------------
ERIC A. BLACK
Lonestar hereby executes this Termination for purposes of acknowledging
Lonestar's agreement to hire Employee pursuant to the terms of a new Employment
Agreement to be executed as of even date herewith between Employee, as employee,
and Lonestar, as employer, which Employment Agreement shall include Lonestar's
agreement to assume all accrued vacation, sick leave and other employee benefits
that Employee has accrued with AVRI as of the Effective Date.
LONESTAR MEDICAL TRANSCRIPTION USA, INC., a
Delaware corporation
By: /s/ Carl Dammekens
--------------------
Name: Carl Dammekens
----------------
Title: President of Finance
----------------------
3
<PAGE>
EXHIBIT 10.47
JACKSON L. NASH
3131 Tangley
Houston, Texas 77005
February 8, 2000
The Board of Directors
Applied Voice Recognition, Inc. ("E-DOCS")
1717 St. James Place, Suite 142
Houston, Texas 77027
Dear Sirs:
This letter is to confirm the understanding of the terms and objectives of this
engagement and the nature and limitations of the services I will provide.
I will provide ongoing consulting services as requested. The nature and extent
of the services may include those normally performed by a chief financial
officer, and accordingly, I will not be independent as it regards E-DOCS. This
lack of independence will prohibit me from performing any attest, review,
compilation or similar engagements under standards promulgated by the AICPA.
Functions I may perform, as requested, may include but not be limited to the
following:
1. Assistance with periodic management and third party reports, including
SEC filings;
2. Assistance in reviewing current management information processes,
including management reporting;
3. Supervising and mentoring staff involved in the accounting process;
4. Assistance in review and monitoring of planning and budgeting;
5. Assistance in review and analysis of any acquisition or divestiture
transactions;
6. Assistance with borrowing or other financing arrangements; and
7. Other services as we agree.
From time to time, matters may arise that I believe should be communicated
directly to the Board of Directors.
Fees for my services will be billed bimonthly at a rate of $80 per hour, plus
reimbursement for out-of-pocket expenses. A retainer of $3,000 will be due upon
approval of the terms of this letter.
If this letter correctly expresses your understanding, please sign the duplicate
copy and return it to me.
Regards,
/s/ Jackson L. Nash
- ----------------------------
Jackson L. Nash
APPROVED:
By: /s/ Timothy J. Connolly
-----------------------
Title: Chairman
Date: 2/14/00
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
STATE OF
SUBSIDIARY INCORPORATION ASSUMED NAMES
- ---------- -------------- ----------------
<S> <C> <C>
e-DOCS Physician Network, Inc. Delaware None
e-DOCS Health Care Information Services, Inc. Delaware None
A Word Above, Inc. Texas None
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF WEINSTEIN SPIRA & COMPANY, P.C.,
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-24345) pertaining to the Warrant of Hakeem Olajuwan, Registration
Statement (Form S-8 No. 333-24343) pertaining to the Option to Akin Olajuwan,
Registration Statement (Form S-8 No. 333-24399) pertaining to the Warrant to Tim
Connolly, Registration Statement (Form S-8 No. 333-24397) pertaining to the
Option to Jesse Marion, Registration Statement (Form S-8 No. 333-24395)
pertaining to the Warrant to Jan Carson Connolly, Registration Statement (Form
S-8 No.333-24393) pertaining to the Warrant to H. Russell Douglas, Registration
Statement (Form S-8 No. 333-24391) pertaining to the Compensation Agreement of
Thomas C. Pritchard, Registration Statement (Form S-8 No. 333-44191) pertaining
to the Applied Voice Recognition, Inc. 1997 Incentive Plan, the Registration
Statements (Form S-3 No. 333-72115 and Form S-3 No. 333-44053) and Registration
Statement (Form S-8 No. 333-31040) pertaining to the First Amended and Restated
Employment Agreement (Timothy J. Connolly), First Amended and Restated
Employment Agreement (Milton A. Spiegelhauer), and First Amended and Restated
Employment Agreement (Robin P. Ritchie) of our report dated March 29, 2000, with
respect to the financial statements of Applied Voice Recognition, Inc. included
in the Annual Report (Form 10-KSB) for the year ended December 31, 1999.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
March 30, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-24345) pertaining to the Warrant of Hakeem Olajuwan, Registration
Statement (Form S-8 No. 333-24343) pertaining to the Option to Akin Olajuwan,
Registration Statement (Form S-8 No. 333-24399) pertaining to the Warrant to Tim
Connolly, Registration Statement (Form S-8 No. 333-24397) pertaining to the
Option to Jesse Marion, Registration Statement (Form S-8 No. 333-24395)
pertaining to the Warrant to Jan Carson Connolly, Registration Statement (Form
S-8 No. 333-24393) pertaining to the Warrant to H. Russell Douglas, Registration
Statement (Form S-8 No. 333-24391) pertaining to the Compensation Agreement of
Thomas C. Pritchard, Registration Statement (Form S-8 No. 333-44191) pertaining
to the Applied Voice Recognition, Inc. 1997 Incentive Plan, the Registration
Statements (Form S-3 333-72115 and Form S-3 333-44053) and Registration
Statement (Form S-8 No. 333-31040) pertaining to the First Amended and Restated
Employment Agreement (Timothy J. Connolly), First Amended and Restated
Employment Agreement (Milton A. Spiegelhauer), and First Amended and Restated
Employment Agreement (Robin P. Ritchie) of our report dated March 27, 1999, with
respect to the financial statements of Applied Voice Recognition, Inc. for the
year ended December 31, 1998 included in the Annual Report (Form 10-KSB) for the
year ended December 31, 1999.
ERNST & YOUNG LLP
Houston, Texas
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 53,529 1,377,913
<SECURITIES> 0 0
<RECEIVABLES> 1,080,705 1,245,805
<ALLOWANCES> (74,900) (32,500)
<INVENTORY> 0 37,221
<CURRENT-ASSETS> 1,065,408 3,368,936
<PP&E> 1,213,482 878,065
<DEPRECIATION> (354,990) (180,767)
<TOTAL-ASSETS> 3,847,009 6,294,530
<CURRENT-LIABILITIES> 2,634,160 2,788,210
<BONDS> 0 0
0 0
218 34,481
<COMMON> 34,968 16,040
<OTHER-SE> 73,442 3,286,450
<TOTAL-LIABILITY-AND-EQUITY> 3,847,009 6,294,530
<SALES> 5,261,810 717,357
<TOTAL-REVENUES> 5,261,810 717,357
<CGS> 4,051,166 432,246
<TOTAL-COSTS> 12,584,412 8,092,581
<OTHER-EXPENSES> 28,159 728,615
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 867,902 216,680
<INCOME-PRETAX> (8,218,663) (8,320,519)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (8,218,663) (8,320,519)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 5,562,750 0
<CHANGES> 0 0
<NET-INCOME> (2,655,913) (8,320,519)
<EPS-BASIC> (0.16) (0.68)
<EPS-DILUTED> (0.16) (0.68)
</TABLE>
