<PAGE>
Filed Pursuant to Rule: 424(b)(3)
Registration No: 333-41710
PROSPECTUS SUPPLEMENT
(To Prospectus dated August 11, 2000)
21,210,176 Shares
Applied Voice Recognition, Inc.
Common Stock
This Prospectus Supplement updates certain information set forth in our
Prospectus dated August 11, 2000. The supplemental information includes, among
other things, financial information contained in our quarterly report on Form
10-QSB for the quarter ended September 30, 2000, along with an updated
Management's Discussion and Analysis of Financial Condition and Results of
Operations and various recent developments.
The date of this Prospectus Supplement is December 8, 2000.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets.............................................. S-3
Consolidated Statements of Operations.................................... S-4
Consolidated Statements of Cash Flow..................................... S-5
Notes to the Unaudited Consolidated Financial Statements................. S-6
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... S-9
Recent Developments...................................................... S-13
</TABLE>
S-2
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APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
DBA E-DOCS.NET
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
ASSETS ------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........................ $ 1,323,583 $ 53,529
Accounts receivable, net of allowance of $71,600
and $74,900, respectively....................... 468,560 258,668
Other receivable................................. -- 747,137
Deposits and prepaid expenses.................... 35,386 6,074
Deferred expense................................. 14,625 --
------------ ------------
TOTAL CURRENT ASSETS........................... 1,842,154 1,065,408
PROPERTY AND EQUIPMENT, NET........................ 600,965 858,492
OTHER ASSETS
Prepaid software rights.......................... 360,900 970,900
EPN development costs............................ 399,580 --
Other intangibles, net........................... 410,598 447,310
Goodwill, net.................................... 479,741 504,899
------------ ------------
TOTAL OTHER ASSETS............................. 1,650,819 1,923,109
------------ ------------
TOTAL ASSETS................................... $ 4,093,938 $ 3,847,009
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade payables................................... $ 254,093 $ 365,639
Accrued expenses................................. 724,258 1,167,416
Stock dividends payable.......................... 12,875 246,774
Current portion of preferred stock payable....... 473,543 474,000
Note payable to related party.................... 250,000 250,000
Convertible notes payable........................ 480,000 --
Current portion of capital lease obligations..... 82,564 64,354
Current portion of long-term debt................ 58,333 65,977
------------ ------------
TOTAL CURRENT LIABILITIES...................... 2,335,666 2,634,160
Preferred stock payable, net of current portion.... 353,247 683,460
Capital lease obligations, net of current portion.. 217,355 279,670
Long-term debt, net of current portion............. 58,334 141,091
------------ ------------
TOTAL LIABILITIES.............................. 2,964,602 3,738,381
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 2,000,000 shares
authorized
Series B, 0 and 1,680 shares issued and
outstanding, respectively..................... -- 168
Series 2, 2,978 and 500 shares issued and
outstanding, respectively..................... 297 50
Common stock, $.001 par, 50,000,000 shares
authorized, 47,251,697 and 35,269,794 shares
issued and outstanding, respectively............ 47,252 35,269
Paid-in capital.................................. 21,511,726 18,199,066
Accumulated deficit.............................. (20,429,939) (18,125,925)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY..................... 1,129,336 108,628
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..... $ 4,093,938 $ 3,847,009
============ ============
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
S-3
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APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
DBA E-DOCS.NET
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Medical Transcription.... $ 644,892 $ 1,455,195 $ 1,866,283 $ 3,336,105
Hardware, software and
related................. -- -- -- 469,949
----------- ----------- ----------- -----------
TOTAL REVENUE.......... 644,892 1,455,195 1,866,283 3,806,054
Cost of Sales:
Medical Transcription.... 470,201 1,104,624 1,408,711 2,400,539
Hardware, software and
related................. -- -- -- 52,567
----------- ----------- ----------- -----------
GROSS MARGIN........... 174,691 350,571 457,572 1,352,948
Operating expenses:
Marketing and sales...... 10,700 131,849 30,136 480,891
General and
administrative.......... 693,823 1,423,852 1,937,206 5,363,371
Write-down of prepaid
software rights......... 610,000 -- 610,000 --
Research and
development............. -- 188,549 -- 684,414
----------- ----------- ----------- -----------
OPERATING LOSS......... (1,139,832) (1,393,679) (2,119,770) (5,175,728)
Other income (expense):
Other income (expense)... -- (40,450) -- (98,849)
Interest income.......... 4,964 13,229 20,412 34,063
Interest expense......... (60,789) (304,081) (191,781) (593,937)
----------- ----------- ----------- -----------
TOTAL OTHER INCOME
(EXPENSE)............. (55,825) (331,302) (171,369) (658,723)
----------- ----------- ----------- -----------
Net loss............... $(1,195,657) $(1,724,981) $(2,291,139) $(5,834,451)
=========== =========== =========== ===========
Basic and diluted loss
per share............... $ (0.03) $ (0.12) $ (.06) $ (0.39)
=========== =========== =========== ===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
S-4
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APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
DBA E-DOCS.NET
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $(2,291,139) $(5,834,451)
Adjustments to reconcile net loss to net cash used
in operating activities:
Accretion of preferred stock obligations and
warrant amortization.............................. 92,873 472,593
Depreciation and amortization...................... 242,265 493,765
Stock issued for compensation and services......... 245,874 38,445
Write-down of prepaid software rights.............. 610,000 --
Changes in operating assets and liabilities:
Accounts receivable................................ (209,892) (819,061)
Other receivable................................... 747,137 --
Accounts payable and accruals...................... (17,068) 207,154
Other, net......................................... (43,937) 207,426
----------- -----------
Net cash used in operating activities............ (623,887) (5,234,129)
CASH FLOW FROM INVESTING ACTIVITIES:
Cash paid for acquisitions......................... -- (736,857)
Purchase of property and equipment................. (49,277) (1,019,698)
Capitalized development costs...................... (244,580) --
----------- -----------
Net cash used in investing activities............ (293,857) (1,756,555)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock and
warrants.......................................... -- 4,670,000
Proceeds from the issuance of common stock......... 1,000,000 --
Proceeds from issuance of debt and warrants........ 480,000 2,154,965
Proceeds from the exercise of common stock options
and warrants...................................... 842,304 10,000
Debt and capital lease repayments.................. (134,506) (780,161)
----------- -----------
Net cash provided by financing activities........ 2,187,798 6,054,804
NET INCREASE (DECREASE) IN CASH...................... 1,270,054 (935,880)
CASH AND CASH EQUIVALENTS:
Beginning of period................................ 53,529 1,377,913
----------- -----------
End of period...................................... $ 1,323,583 $ 442,033
=========== ===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
S-5
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APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
DBA E-DOCS.NET
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1.BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Applied Voice
Recognition, Inc., a Delaware corporation (the "Company"), have been prepared
in accordance with generally accepted accounting principles and the rules of
the Securities and Exchange Commission (the "SEC"), and should be read in
conjunction with the audited financial statements and notes thereto contained
in the Company's latest Annual Report filed with the SEC on Form 10-KSB. All
significant intercompany accounts and transactions have been eliminated. In the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the Company's financial
position and the results of operations for the interim periods presented have
been reflected herein. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. Notes
to the financial statements which would substantially duplicate the disclosure
contained in the audited financial statements for the most recent fiscal year,
1999, as reported in the Form 10-KSB, have been omitted.
The Company has incurred significant losses and cash deficits since
inception. The Company has been dependent upon outside financing to develop its
software products and to provide working capital. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Beginning in the fourth quarter of 1999, the Company suspended its
acquisitions program and focused on restructuring the core operations of the
transcription companies acquired. As of December 31, 1999, the Company had
reduced its corporate head count from 35 to 7 and had sold its operations in
Manila, New York, New Jersey and a portion of its Houston operations. These
actions reduced the monthly losses by approximately $300,000, while reducing
revenue by $250,000 per month.
Since the Company's announcement of its restructuring on January 7, 2000,
liquidity has significantly improved. Gross revenues averaging approximately
$200,000 per month have been achieved, warrants and options were exercised
resulting in net proceeds to the Company of approximately $840,000 and common
stock and convertible notes payable were sold in Private Placements for net
proceeds of approximately $1.5 million. Management believes current resources
and additional financing commitments are adequate to fund the development costs
of the e-DOCS Physician's Network (the "EPN") as well as the Company's working
capital needs through January 2001.
It will be necessary for the Company to raise additional capital for the
continued implementation and marketing of the EPN during 2001. There are no
assurances that the necessary capital will be obtained.
Certain reclassifications have been made to prior year balances in order to
be consistent with current year presentation.
2.E-DOCS PHYSICIAN NETWORK
The e-DOCS Physician Network is designed to provide a secure, browser-based
document handling solution directed at the independent transcription company
and the nation's 637,000 physicians. The EPN will provide an efficient
Internet-based delivery system for medical transcription documents and an
infrastructure for capturing, organizing, storing and retrieving medical
information. The services may include medical transcription and storage,
training, legacy system integration, and the electronic storage and retrieval
of the physician's hand written notes of a patient encounter. The EPN is
designed to simplify how physicians interact with medical information, without
attempting to change their current practice methodology. In addition, we
S-6
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APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
DBA E-DOCS.NET
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
believe the EPN will provide a streamlined, more efficient medical billing and
accounts receivable management process for physicians.
Coding on the initial version of the EPN has been completed, testing is in
process and the launch of the EPN is scheduled during the fourth quarter of
2000. The Company has completed several contracts with national service
providers to the medical community including contracts with VERISIGN to provide
internet trust services for secure e-commerce; PROFESSIONAL MEDICAL Insurance
Services ("PMIS"), which would allow EPN members to receive discounts of up to
25% on their malpractice insurance; MEDCAREERS.COM, which features the largest
online database of healthcare jobs on the Internet; FIRST BANK OF BEVERLY HILLS
to provide an array of services to secure and protect EPN transactions; as well
as MAPQUEST and ACCUWEATHER.
3.STOCKHOLDERS' EQUITY
On February 23, 2000, the Company issued 1,902 shares of Series 2 Preferred
Stock as planned deferred purchase price payments for transcription company
acquisitions. A total of 1,258 of these shares were subsequently converted into
82,822 shares of common stock.
On February 28, 2000, the Company issued 1,054,852 shares of common stock in
lieu of cash salaries, expense reimbursements, and severance pay to an officer
of the Company and to two former officers.
During the month of February 2000, the Series B Preferred Stockholders
converted 760 shares of Series B Preferred Stock in exchange for 991,888 shares
of the Company's common stock. In connection with these conversions, the
Company issued 130,526 shares of accrued common stock dividends. Effective as
of March 11, 2000, the remaining 920 shares of Series B Preferred Stock and
related accrued dividends of $96,759 were automatically converted into 560,766
shares of common stock.
In March 2000, 500 shares of Series 2 Preferred Stock, previously issued as
a planned deferred purchase price payment for the acquisition of Linda R.
Willhite Transcription, were converted into 32,953 shares of common stock.
During March and April 2000, certain employees and several third party
individuals exercised stock options and stock warrants to purchase common
stock. As the result of this, the Company issued 685,378 shares of common
stock.
In May 2000, the Company issued 163,583 shares of common stock as required
by the Forebearance Agreement between the Company and the previous owners of
Cornell Transcription, Inc.
In May 2000, the Company issued and held in escrow 2,333 shares of Series 2
Preferred Stock. The shares were part of the planned deferred payments for the
acquisition of A Word Above, Inc.
In May 2000, the Company issued 572,132 shares of common stock to Lonestar
Medical Transcription USA, Inc. in a cashless exercise of a warrant to purchase
800,000 shares of the Company's common stock.
In May 2000, the Company issued 58,000 shares of common stock as contingent
purchase price for the acquisition of PRN Transcription, Inc.
In July 2000, the Company issued 500,000 shares of common stock as payment
for software development efforts with a value of $125,000. Also in July and
August 2000 the Company issued 356,500 shares of common
S-7
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APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
DBA E-DOCS.NET
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
stock to officers, employees and consultants in lieu of cash payments of
$89,125. These shares were issued pursuant to the Company's 1997 Incentive
Plan.
In August 2000, the Company issued 109,307 shares of common stock as payment
for penalty interest of $114,663. The interest related to the inability of the
Company to register shares issued in the acquisition of Cornell Transcription,
Inc. prior to December 31, 2000.
In a Private Placement transaction in September 2000, the Company issued
6,666,666 shares of the Company's common stock for a total of $1,000,000. In
addition, a warrant to purchase 1,000,000 shares at $.15 per share was issued
to the placement agent as compensation for assistance in arranging the
transaction.
In September 2000, the Company issued six convertible notes in the aggregate
amount of $480,000. The notes are convertible into a number of shares of common
stock equal to the principal amount of the promissory notes, plus accrued and
unpaid interest, divided by the lesser of $.15 or the lowest per share price
that we have sold shares of common stock between September 1, 2000 and the
conversion date.
We currently do not have sufficient authorized common stock for issuance
upon conversion of the notes described above or certain other convertible
securities; however upon adoption of an amendment to our certificate of
incorporation to increase our authorized common stock, the convertible notes
will automatically convert into the number of shares of common stock computed
as per the agreements as described above. A proposal to increase our authorized
capital stock to 85 million will be considered and voted on at our 2000 annual
meeting of stockholders, which is anticipated to be held in December 2000.
4.COMMITMENTS AND CONTINGENCIES
A Registration Statement of Form SB-2 became effective on August 11, 2000,
registering for resale 21,210,176 shares of the Company's common stock. This
included the shares required to be registered pursuant to various agreements,
including an extension agreement with Cornell Transcription, Inc.
5.PREPAID SOFTWARE RIGHTS
During 1999, the Company shifted its business focus away from voice
recognition technology, discontinuing development of VoiceCommander99(TM).
Effective December 20, 1999, in connection with the sale of certain
transcription operations, the Company granted to Lonestar Medical Transcription
USA, Inc. ("Lonestar") the non-exclusive rights to the VoiceCommander99(TM)
code. In exchange for these rights, the Company received the rights to produce
and resell 3,254 copies of Lonestar voice recognition software. During the
third quarter of 2000, the Company contracted to market and sell the licenses
and management estimates the re-sale value of the asset, less disposal costs,
to be approximately $361,000. As a result, the Company recorded a writedown of
$610,000.
6.EARNINGS PER SHARE
Basic earnings per common share is based on the weighted average number of
common shares outstanding during the period, while diluted earnings per common
share considers all potentially dilutive securities that were outstanding
during the period. The Company has potentially dilutive securities outstanding
including stock options, warrants, convertible debt and convertible preferred
stock. Both basic and diluted earnings per common share are the same for each
of the periods presented as inclusion of such potentially dilutive securities
was antidilutive.
S-8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
e-DOCS' revenue is derived from the out-sourced medical transcription of
patient records for physicians, clinics and hospitals through our wholly owned
subsidiary e-DOCS Health Care Information Services, Inc. Our customer base
includes approximately 1,600 physicians in four states.
After ten months of use by physicians, we recognized that the voice
recognition component of our previous product, VoiceCOMMANDER99(TM), 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,
VoiceCOMMANDER99(TM), we have developed the next generation browser-based
service, which we call the e-DOCS Physician Network (the "EPN").
While we continue to provide medical transcription services, we are
developing the EPN, through our wholly-owned subsidiary, e-DOCS Physician
Network, Inc., as a medically centric, business-to-business application service
provider. The EPN is designed to provide a secure, browser-based document
handling solution directed at the independent transcription company and the
nation's 637,000 physicians, a majority of whom practice in groups of five or
less. We have used our experience in previously acquiring eight independent
transcription companies to provide a common technology platform to these
independent, capital-deficient businesses.
We are attempting to design the EPN to become the standard technology
platform for independent transcription, billing, and coding companies and the
individual practicing physician. It is being developed in response to a need
identified by our existing customer base for a simple, secure document handling
solution to the daily needs of the medical services community.
The EPN is being designed to provide an efficient Internet-based delivery
system for medical transcription documents and an infrastructure for capturing,
organizing, storing and retrieving medical information. The services may
include medical transcription and storage, training, legacy system integration,
and the electronic storage and retrieval of the physician's hand-written notes
of a patient encounter. The EPN is designed to simplify how physicians interact
with medical information, without attempting to change their current practice
methodology. In addition, we believe the EPN will provide a streamlined, more
efficient medical billing and accounts receivable management process for
physicians.
We intend to provide the services of the EPN on a monthly subscription
basis. The transcription company can deliver its medically transcribed
documents through the EPN browser, allowing physicians to review their
transcription online and digitally sign the document. It will be available all
of the time from any location upon authorization of the user.
The basic browser based service will be provided to the physician at no
cost. The EPN will offer secure, long-term, Health Insurance Portability and
Accountability Act ("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 14 physicians currently use an electronic
medical record entry system. The remainder rely on handwritten patient notes.
Our research indicates many physicians prefer a simple document solution that
does not alter the way the physician practices medicine. We believe that use of
the EPN will not disrupt the physicians' normal operating procedures.
Additionally, cost reductions in medicine demand an approach based on use,
rather than large, up-front investments.
We believe that the important competitive advantage of the EPN will be its
presentation of information to the physician rather than requiring the
physician to search the Internet to find information and services. A
S-9
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medical search engine button will always be available adjacent to the patient
record, allowing the physician instant access to this resource at all times. In
addition, we plan to provide medical billing and receivable financing through
our strategic partners. We further intend to enter into strategic relationships
with well-known providers of other services, such as banking, travel and
professional liability insurance, and an upgraded path to a more sophisticated
medical record, if desired by the physician. The EPN will also provide access
to the sale and distribution of pharmaceuticals through our site.
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.
The Company's Revenue is derived primarily from its wholly owned subsidiary
e-Docs Health Care Information Services, Inc.
Revenue
Our primary source of revenue was from the sale of transcription services.
Net transcription service revenue decreased to $644,892 for the three months
ended September 30, 2000 and $1,866,283 for the nine months ended September 30,
2000, a decrease of $810,303 and $1,469,822 respectively from the comparable
periods in 1999. The decrease is primarily attributable to the sale of the net
assets and contracts of certain of the Company's medical transcription services
effective December 20, 1999. During the nine months ended September 30, 1999,
we also generated $469,949 in revenue from the sale of bundled products
comprised of software and hardware. There were no sales of bundled products in
the three months ended September 30, 1999 or in the three and nine months ended
September 30, 2000.
Cost of Sales
Cost of sales for medical transcription consists primarily of labor costs.
Cost of sales for medical transcription decreased $634,423 and $991,828 for the
three and nine-month periods ending September 30, 2000, respectively as
compared to the same periods in 1999, as a result of the reduced transcription
revenues. Related gross margin on medical transcription services for the three
and nine months ending September 30, 2000 was $174,691 and $457,572, resulting
in a gross margin on transcription services of 27% and 25%, compared to 24% and
28% for the comparative periods in 1999. The decreased gross margin for the
nine months ending September 30, 2000 primarily reflects increases in labor
costs beginning in the third quarter 1999 resulting from a shortage in skilled
medical transcriptionists.
Cost of sales for bundled products for the nine months ended September 30,
1999 was $52,567 and related gross margin was $417,382.
Marketing and Sales Expense
Marketing and sales expense consists primarily of marketing and sales
salaries and commissions and advertising/promotional expenditures. Marketing
and sales expense decreased to $10,700 and $30,136 for the three and nine
months ended September 30, 2000, down approximately $120,000 and $450,000 for
the comparative periods in 1999. The decrease is the direct result of our
increased focus on the transcription business. The transcription industry does
not require significant marketing efforts.
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<PAGE>
General and Administrative Expense
General and administrative expense is comprised primarily of compensation
and related expenditures for administrative and executive personnel,
professional fees associated with legal, consulting, and accounting services,
and general corporate overhead. General and administrative expense decreased
for the three and nine months ended September 30, 2000 to $693,823 and
$1,924,034, a decrease of approximately $730,000 and $3,440,000 from the same
periods in 1999. The decrease was primarily attributable to decreases in
compensation, legal & accounting fees, travel and consulting in 2000 related to
the decreased level of operations, and reflecting in 1999 a high level of
acquisition related activities.
Compensation for the three and nine months ended September 30, 2000
decreased by approximately $670,000 and $1,500,000 from the same periods in
1999. The decrease reflected the headcount decreases for disposed operations,
as well as a reduction in corporate office staff from 35 to seven.
Legal and accounting fees for the nine months ending September 30, 2000
decreased by approximately $500,000 as compared to the same period in 1999. The
first six months of 1999 reflected significant professional fees as a result of
ongoing acquisition activities. The company has curtailed its acquisition
policy with an emphasis on internal growth of its transcription business and
development of the EPN. Legal and accounting fees increased by approximately
$50,000 during the three months ending September 30, 2000 as compared to the
same period in 1999, reflecting costs associated with registering for resale
previously issued common stock, and legal costs, primarily for contracts,
associated with the EPN.
Consulting fees for the three and nine months ended September 30, 2000
decreased by approximately $80,000 and $410,000 compared to the same periods in
1999. The Company utilized consultants heavily in the acquisition process
during 1999, including the assimilation of acquired companies. The company has
curtailed its acquisition policy with an emphasis on internal growth, its
transcription business and development of the EPN.
Travel related costs decreased approximately $130,000 and $280,000 for the
three and nine months ended September 30, 2000 to the comparative periods in
1999. Significant acquisition activities and a larger network of transcription
companies in 1999 were the primary reasons for the decrease.
Prepaid Software Rights
During 1999, the Company shifted its business focus away from voice
recognition technology, discontinuing development of VoiceCommander99(TM)
Effective December 20, 1999, in connection with the sale of certain
transcription operations, the Company granted to Lonestar Medical Transcription
USA, Inc. ("Lonestar") the non-exclusive rights to the VoiceCommander99(TM)
code. In exchange for these rights, the Company received the rights to produce
and resell 3,254 copies of Lonestar voice recognition software. During the
third quarter of 2000, the Company contracted to market and sell the licenses
and management estimates the re-sale value of the asset, less disposal costs,
to be approximately $361,000. As a result, the Company recorded a writedown of
$610,000.
Research and Development Expense
Research and development expense consists primarily of personnel costs
including salaries, benefits and consultant costs related to the research and
preliminary development efforts on new software products. Research and
development expense decreased to $0 and $13,172 for the three and nine months
ended September 30, 2000, down approximately $190,000 and $670,000 from the
comparative periods in 1999. The decrease in research and development costs is
attributable to our change in business focus from software development to a
transcription service provider. During 2000 the Company capitalized
approximately $400,000 in development costs related to the EPN. In 1999 no
development costs were capitalized.
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Through the period ended September 30, 2000, we have incurred operating
losses, since our inception, of approximately $23.7 million. To date, our
operations have not been profitable and there is no assurance that they will
become profitable in the future. Significant acquisitions and dispositions in
1999 distort the comparability between periods and as to future operations.
Liquidity and Capital Resources
At September 30, 2000 the Company had cash and cash equivalents of
$1,323,583 and a working capital deficiency of approximately $494,000. This
compares to cash and cash equivalents of $53,529 and a working capital
deficiency of approximately $1,569,000 at December 31, 1999. The increase in
working capital of approximately $1,075,000 is attributable to: cash received
from exercise of stock options and warrants of approximately $840,000; common
stock sold in Private Placements for $1,000,000; common stock issued for
software development costs, compensation and services of $215,000, and
approximately $370,000 from issuance of common stock reflected as a liability
in the December 31, 1999 financial statements. These increases to working
capital were offset by current year operating losses.
We believe our cash position, less known commitments and contingencies, plus
cash generated from operations should be adequate to fund our on-going
operations and fund the development of the EPN through January 31, 2001. We
will still require substantial additional capital during fiscal 2001 to
implement and market the EPN.
Our capital requirements will depend on many factors, including, cash flow
from operations, additional working capital requirements, additional product
development expenses and capital expenditures. To the extent that existing
resources are insufficient to fund our operations in the short- or long-term,
we will need to raise additional funds through public or private financings. We
may not be able to raise additional financing on terms favorable to us or to
our stockholders without substantial dilution of their ownership and rights. If
we are unable to raise sufficient funds to satisfy either short- or long-term
requirements, there would be substantial doubt as to our ability to continue as
a going concern. We may be required to significantly curtail our operations,
sell our transcription operations, significantly alter our business strategy,
forego market opportunities or obtain funds through arrangements with strategic
partners or others that may require us to relinquish material rights to certain
of our technologies or potential markets.
Recent Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements" which provides guidance related to revenue
recognition based on interpretations and practices followed by the SEC. We
believe that our revenue recognition policy is in compliance with SAB 101 and
do not believe that adoption of this Staff Accounting Bulletin has had a
material impact on our financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting of Derivative Financial
Instruments and for Hedging Activities," which will be effective for fiscal
year 2001. This statement was amended by SFAS No. 138 in June 2000 to further
clarify SFAS No. 133. These statements establish accounting and reporting
standards requiring that every derivative instrument, including derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. These statements also
require that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. SFAS 133 and SFAS 138 are
not anticipated to have a significant impact on our financial position or
results of operations when adopted, since we currently do not engage in hedging
activities.
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RECENT DEVELOPMENTS
Forbearance Agreements
On May 3, 2000, the Company entered into a Forbearance Agreement with each
of Hillel Bronstein, Stuart Szpicek, and Yaniv Dagan relating to the issuance
of 575 shares of the Company's convertible Series 1 preferred stock to Cornell
Transcription, Inc. as part of the purchase price under the terms of the Asset
Purchase Agreement between AVRI Health Care Information Services, Inc., a
Delaware corporation and wholly-owned subsidiary of the Company, and Cornell
Transcription, Inc., a New York corporation of which Mr. Bronstein, Mr.
Szpicek, and Mr. Dagan are shareholders. The terms of the Forbearance
Agreements require Mr. Bronstein, Mr. Szpicek, and Mr. Dagan to not exercise
any enforcement rights or remedies under, or with respect to, the Asset
Purchase Agreement resulting from the Company's inability to register the
shares of the Company's common stock underlying the Series 1 preferred stock
until the earlier of when the common stock is registered or August 15, 2000.
The affected shares were registered on August 11, 2000.
As consideration for the forbearance, the Company granted Mr. Bronstein
warrants to purchase 118,750 shares of common stock, granted Mr. Szpicek
warrants to purchase 118,750 shares of common stock, and granted Mr. Dagan
warrants to purchase 12,500 shares of common stock, for which the Company
estimated and recorded $70,000 as additional cost. The Company also paid in
stock interest to each of Mr. Bronstein, Mr. Szpicek and Mr. Dagan at a rate of
1% per month on the cash value of the shares of common stock held by, and owed
to under the Forbearance Agreements, Mr. Bronstein, Mr. Szpicek and Mr. Dagan
through the expiration of the forbearance period. In addition, the Company paid
the legal fees of Mr. Bronstein and Mr. Szpicek totaling $40,000.
Changes in Management
. Effective September 28, 2000, Timothy J. Connolly, our founder, resigned
his positions as president, chief executive officer and chairman of the
board of directors, but will continue to advise us and focus his efforts
on capital formation, investor relations and business development;
. Effective October 1, 2000, J. William Boyar was named chairman of the
board;
. Effective October 2, 2000, James G. Springfield became our president,
chief executive officer and vice chairman of our board of directors;
. Effective July 31, 2000, Anna M. Goss joined us as controller;
. Effective September 1, 2000, Russ M. Douglas resigned as our chief
technology officer; and
. Michael H. Leggett has been named director of technology to direct the
technical development for the EPN.
Employment Agreement
On August 29, 2000, we entered into an employment agreement with James G.
Springfield, our new president, chief executive officer and vice chairman of
our board of directors. The term of the agreement commenced October 2, 2000 and
will continue for an initial term expiring on December 31, 2003. The expiration
date automatically will be extended for successive one year periods following
the expiration of the initial term unless the agreement is otherwise terminated
in accordance with its terms. The agreement may be terminated either by Mr.
Springfield or us by written notice at least 90 days before the expiration of
the initial term or any succeeding one year term. We have agreed to pay Mr.
Springfield as follows:
. for the period from the commencement date until August 31, 2001, a
monthly base salary of $14,166;
. for the period from September 1, 2001 until August 31, 2002, a monthly
base salary of $15,000;
. for the period from September 1, 2002 until the expiration date, a
monthly base salary of $16,666.
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In addition to his base salary, Mr. Springfield is entitled to receive a
bonus of up to 100% of his base salary provided he meets certain performance
criteria set by our compensation committee. Mr. Springfield also is entitled to
participate in all health, dental, disability, life insurance and other benefit
programs we now have or may establish in the future.
We have granted Mr. Springfield incentive stock options to purchase
3,600,000 shares of our common stock, subject to our stockholders' approval of
the proposals to amend our 1997 incentive plan and to increase our authorized
common stock. The exercise price of the options is $0.31 per share, the fair
market value of our common stock on the date of grant. One-twelfth of the
options vest on the last day of each of the first 12 calendar quarters during
the initial term. The options also are subject to forfeiture if Mr. Springfield
is terminated for cause or if he terminates the agreement before the expiration
of the initial term, and are subject to accelerated vesting upon a change in
control and certain other circumstances.
We currently do not have a sufficient number of shares of common stock
available for issuance as incentive stock options under our 1997 incentive plan
to provide Mr. Springfield with all of the options granted. In addition, we do
not have a sufficient number of shares of common stock authorized for issuance
under our certificate of incorporation to issue common stock upon full exercise
of Mr. Springfield's options. Therefore, Mr. Springfield's options are subject
to our stockholders' approval of the proposal to increase the number of shares
issuable under our 1997 incentive plan, and the proposal to increase the number
of authorized shares of common stock under our certificate of incorporation.
These proposals will be considered and voted on at our 2000 annual meeting of
stockholders on December 11, 2000.
G-51 Capital
In July 1999, we entered into a convertible promissory note and warrant
purchase agreement, which was amended in November 1999, with G-51 Capital, an
affiliate of N. Rudy Garza who is a member of our board of directors. The note
had a stated principal amount of $250,000 and bore interest at 9%. The note was
secured by a security interest in certain of our assets. Effective October 26,
2000, the note was converted into 1,804,747 shares of our common stock at an
adjusted price of $0.15 per share, based on the pricing used in our September
2000 private placements. The warrant is exercisable into 833,333 shares of our
common stock at an exercise price of $1.25 per share.
Description of Capital
Under our amended and restated certificate of incorporation, our authorized
capital stock consists of 50,000,000 shares of common stock, par value $.001
per share, and 2,000,000 shares of preferred stock, par value $.10 per share.
As of October 31, 2000, we had 49,120,547 shares of our common stock
outstanding. In addition, we had:
. 2,978 shares of series 2 preferred stock outstanding, which are
convertible at the holder's option into 312,743 shares of our common
stock;
. outstanding options that are exercisable for 6,378,221 shares of our
common stock (of which 1,866,795 are currently vested);
. outstanding warrants that are currently convertible into 4,777,232 shares
of our common stock; and
. outstanding promissory notes that are convertible into 3,392,000 shares
of our common stock.
We do not currently have a sufficient number of shares of authorized common
stock to meet these obligations; however, a proposal to increase our authorized
common stock to 85,000,000 shares will be considered and voted upon at our 2000
annual meeting of stockholders on December 11, 2000.
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Need for Increase in Authorized Capital Stock
If holders of our outstanding convertible notes options and warrants were to
attempt to convert the notes or exercise the options or warrants before the
time of the adoption of an amendment to our certificate of incorporation to
sufficiently increase our authorized common stock, or if the amendment is not
ultimately adopted, then we could face substantial potential liabilities to the
holders of the convertible notes, warrants and options due to our failure to be
able to issue them the required common stock.
Name Change
A proposal to change our name to e-DOCS.MD, Inc. will be considered and
voted on at our 2000 annual meeting of stockholders on December 11, 2000. We
believe that the name e-DOCS.MD, Inc. more accurately reflects our business and
is more consistent with our ongoing operations.
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