U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
- --------------------------------------------------------------------------------
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
APPLIED VOICE RECOGNITION, INC.
(Exact name of registrant as specified in its charter)
Commission file number: 33-1210-D
Utah 87-042552
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
4615 Post Oak Place, Suite 111, Houston, Texas 77027
(Address of Principal Executive Office) (Zip Code)
713-621-5678
(Registrant'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: None
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. [X]
Issuer's revenues for the 12 months ended December 31, 1996 were $374,697.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the average bid and ask price on the OTC Electronic
Bulletin Board on March 26, 1997 was $3.81. As of March 26, 1997 registrant has
10,829,602 shares of Common Stock outstanding.
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TABLE OF CONTENTS
ITEMS PAGE
PART I ----
ITEM 1. BUSINESS...........................................................3
ITEM 2. PROPERTIES.........................................................8
ITEM 3. LEGAL PROCEEDINGS..................................................8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS................................................9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................9
ITEM 7. FINANCIAL STATEMENTS..............................................11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNT AND FINANCIAL DISCLOSURE..................................11
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT........11
ITEM 10. EXECUTIVE COMPENSATION............................................13
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT....................................................13
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................14
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K..................................15
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PART I
ITEM 1. BUSINESS
The Company develops, markets and supports original applications for
automated speech recognition systems used to create documents and interact with
computers by voice. In the first quarter 1995, the Company introduced
VOICECOMMANDER, a discrete and continuous speech product designed for creating
general purpose written documents by voice. The Company believes that there is a
potentially large market for voice-activated general purpose, free text,
document creation technology for the generation of letters, memos, articles,
books and other written materials and custom applications specific to industry
demands.
In December 1996, the Company, formerly known as Summa Vest, Inc., a
Utah corporation incorporated in July 1985, acquired all of the issued and
outstanding shares of capital stock of Applied Voice Recognition, Inc., a
Delaware corporation ("Subsidiary"). In connection with such acquisition, the
company issued an aggregate of 9,073,000 shares of authorized but unissued
common stock, $0.001 par value, to the shareholders of Subsidiary
("Shareholders"). The Shareholders exchanged an aggregate of 9,073,000 shares of
Subsidiary common stock for the 9,073,000 shares of Company common stock.
Currently therewith, the Company issued 949,400 shares of common stock to
certain consultants, for services rendered, in non-capital raising transactions,
pursuant to a registration statement filed on Form S-8 and 204,404 shares of
common stock to an entity for services rendered pursuant to Regulation S.
Furthermore, concurrently with the reorganization, the Company issued 380,000
shares of common stock at a subscription price of $2.00 per share, to be
utilized for working capital. Of the 380,000 shares of Company common stock
issued, 105,000 shares were issued pursuant to Regulation S and 275,000 shares
were issued pursuant to Regulation D. Upon the closing of the reorganization,
the Company changed its name to Applied Voice Recognition, Inc.
In connection with the reorganization, Christopher Earl, Don Morrison
and Jeffrey Jenson resigned as directors and officers and were replaced by the
following: Timothy J. Connolly, Chairman of the Board of Directors, President,
and Chief Executive Officer; Jan Carson Connolly, Vice President - Operations,
Marketing and Director; H. Russel Douglas, Vice President - Research and
Development and Director; Akin Olajuwon, Director; Jesse Marion, Director; and
David Klausmeyer, Director. These persons will hold office until the next
respective annual meeting of the stockholders and directors or until their
respective successors have been elected and qualified or their prior
resignations or terminations.
Upon the closing of the above-referenced transactions, there were
10,729,602 shares of Company common stock outstanding.
MARKET OVERVIEW
The creation of written documents is a fundamental activity in the
professional, business and governmental worlds. The traditional text creation
methods, including handwriting, dictation or typing on a keyboard, suffer from
limitations that can make the process inefficient, slow or inaccurate.
Voice-activated text creation can provide significant productivity gains
compared with the other methods now available, combining the speed of dictation
with the advantages of immediate inspection and correction. The ability to
create text through a voice-activated system can eliminate traditional
transcription and editing steps. The Company believes many organizations have
significant transcription problems, such as high cost, slow turnaround time, and
overall poor report quality, and could use speech recognition technology to
improve their report generation systems.
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The market for voice-activated document creation has two principal
segments: "structured" reporting and general or free text document creation.
Structured reports have an underlying logical and organized framework or
structure. The need to create such reports is prevalent in the professional,
business and governmental worlds, such as the medical, financial service and
legal fields.
The other principal market segment is the general purpose, free text,
document creation market, where speech input is used to create written materials
in a variety of forms, such as letters, memos, articles and books, without
constraints as to vocabulary or structure. The Company believes that the future
expansion of this market will depend in part on the advancement of speech
recognition technology by the Company and on continuing price and performance
improvements in personal computers, as new generations of microprocessors are
developed and introduced. The current focus of the Company's marketing efforts
for VOICECOMMANDER, its general purpose, free text, document creation product,
is anyone who wishes to simplify their word processing needs and individuals who
do not have full use of their hands. The Company's strategy is to address a
broader market as the cost of the Company's discrete speech recognition system
and the cost of third party computer hardware continues to decrease.
In addition to facilitating document creation, the Company believes
that its original application development capabilities and speech recognition
technology can be the basis for a user interface with computers which is more
natural and in most cases faster than existing alternatives.
STRUCTURED REPORTING
The structured reporting group under development includes:
SPEECHCOMMANDER, used primarily by educational institutions, the disabled, and
entry level business users; CADCOMMANDER, used primarily by engineers and
architects; LAWCOMMANDER, used primarily by attorneys; and VOICECOMMANDER, used
primarily by business users and other professionals. Each of these applications
has a targeted vocabulary specific to the primary user group and a general
vocabulary of approximately 120,000 words up to 180,000 words.
The products in the structured reporting market have the potential to
provide significant productivity improvements in a cost effective manner. The
targeted markets have a particularly vital need for the production and
distribution of timely, complete, accurate and legible documents.
The Company believes that its voice-activated reporting systems can
assist professionals in responding to the needs of their industry for creation
of timely, complete and accurate documents. The use of voice- activated
reporting systems permits the creation of high quality documents in less time
than is required by conventional methods, permitting professionals to spend more
time with customers or clients and less time documenting the work product.
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SPEECH RECOGNITION TECHNOLOGY
Automated speech recognition occurs in three major stages. In the
SIGNAL PROCESSING STAGE, analog sound signals are converted to digital signals.
The stream of digital information is analyzed for acoustic- phonetic content and
transformed into discrete segments of information that can be processed in the
next stage. In the PHONETIC ANALYSIS STAGE, the information from the signal
processing stage is compared with a database of known vocabulary items of
sublexical units (word fragments). The output of this stage is a list of
candidate words or other units which is examined more closely in the following
stage. In the FINAL RECOGNITION STAGE, words or other units which are
recognition candidates are evaluated to determine which one is most likely to be
the word spoken. In the simplest systems, the selection of the best candidate is
done strictly on the basis of phonetic analysis. In more sophisticated systems,
such as the Company's products, other factors, such as syntax and other
statistical analyses, may be used to eliminate some candidates and confirm
others.
Speech recognition systems relying on a "pattern matching" approach to
comparing input signals (spoken words) with stored reference patterns
(vocabulary items) have serious limitations due to the large amount of
variability in how individuals pronounce words without changing their meaning.
Words may be spoken in many different ways; for example, slowly or rapidly, in
different dialects, crisply or hoarsely, or slurred.
A variety of approaches have been explored to enhance the accuracy of
computer speech recognition. One is the statistical approach in which
probabilities of different pronunciations are estimated by examining many
examples of previously recognized speech. This approach requires in-depth
knowledge of the statistical relationships of all the words in the vocabulary
and thus is computationally intensive, and the addition of new words to the
vocabulary may be difficult. Another approach is based on recognition of
phonemes, the basic sound combinations from which words are built. There are far
fewer phonemes than words, and the difficulty of recognizing words is
substantially reduced if phonemes can be recognized very accurately. The
disadvantage of the phoneme recognition approach used alone is that there is a
high variability in the pronunciation of phonemes. In addition, phonemes are
frequently slurred or omitted entirely by some speakers in certain
circumstances. Finally, another approach is based on linguistics, and applies
grammatic and syntactic rules in determining the most likely word used in a
specific context. By taking into account the structure of language, the system
can increase the accuracy of its decision making process.
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SPEECH RECOGNITION APPLICATIONS
The Company believes that voice recognition will become successful by
carefully designing solutions specific to the requirements of the customer. AVR
has surveyed computer users and non-users alike. The result of this research has
identified the consumers' desire to solve everyday professional and personal
requirements using voice recognition programs. The more carefully these
expectations and requirements are defined, the more likely a successful voice
recognition solution can be implemented.
As a result of extensive research in the legal, business, engineering,
education, retailing, government, architecture and aerospace industries, the
Company has identified a demand for an entire line of voice recognition products
specifically tailored for the needs of these industries. Management believes
that these products should be fully developed and marketed within the next 12
months. Other applications are in prototype, with patents pending, with expected
product delivery within the next 24 months.
The Company intends to continue specializing in developing applications
which incorporate the improving technology provided by the major voice
recognition engine suppliers, such as IBM, Dragon Dictate, Kurzweil, ATT Watson
and others. AVR principals and employees have an aggregate of 50 years of
experience in computing and voice recognition development and the Company
believes they have assembled one of the most skilled and creative teams in the
development of voice recognition applications available today.
SPEECH RECOGNITION MARKET(1)
Indications point to the fact that both public awareness and
utilization of voice-recognition technology will increase significantly in the
next few years. All of the market segments identified by Voice Information
Associates ( a national voice recognition research firm) estimate growth at an
overall average rate of 28.4% annually, with average growth rates for each
individual segment ranging from 18.0% - 33.4% over the same period. Management
believes that companies offering more sophisticated voice recognition products
will find application developers adopting the technology and looking to develop
applications on high-speed platforms.
In the three-to-six- year time frame voice recognition is projected to
become an integral part of all computers and completely accepted for
applications such as legal and medical dictation as well as various
telephone-based applications. Many of these applications will be driven by the
acceptance of consumers and development of natural interfaces for voice
recognition with computers.
By the end of the decade, management believes that virtually all
computer users will be utilizing speech recognition in one form or another. It
is expected that voice will become one of the major input and output modalities
for "smart" machines - whether computers or hybrid "infocomputainment" centers.
Even palm-top devices will not be excluded from this trend. The new intelligent
hybrid machines will provide information and reports from voice dialogs and be
capable of restricting access to authorized users at various levels of voice
verification security. Integrated telephone/PC devices will allow sophisticated
real-time language translation.
- -------------
(1) The above information obtained from Voice Information Associates,
January, 1996.
6
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SUPPORT SERVICES
Achieving a high level of customer satisfaction is a priority of the
Company. To this end, the Company offers a number of services to assist the
customer in becoming a successful user at no additional charge to the customer.
These services include in-house and regional training programs, on-site
installation and training, a hot-line for telephone support during the warranty
period (available 8:00 a.m. to 6:00 p.m., Central Standard Time, Monday through
Friday), an on-line tutor program for new users, and an extensive package of
documentation. The Company has a site implementation program that is designed to
assist professionals in planning the introduction of voice products into their
departments. As part of this program, the Company's employees act as
consultants, bringing with them their first-hand knowledge of how best to
integrate the Company's products into their environments.
Generally, the Company's products include a one year warranty that the
products will be free from defects in materials and workmanship and that the
software will perform in accordance with applicable specifications. The Company
is obligated to repair or replace, at its option, any products that do not meet
the warranty.
The Company offers annual maintenance agreements for extended technical
support. The Company put in place a program to emphasize to its customers the
benefit of its maintenance contracts. These benefits include upgrades of the
Company's software, replacement of defective hardware components and continued
access to the hot-line for telephone support.
MANUFACTURING
For software production, the Company's product development organization
produces a set of master diskettes or compact disks and documentation for each
product. Software duplication, assembly and shipping are performed by the
Company's manufacturing organization.
To date, the Company has not experienced any material difficulties or
delays in production of its hardware and software and related documentation and
packaging.
COMPETITION
The speech recognition industry is highly competitive and characterized
by rapidly advancing technology. In order to maintain or improve its position in
this industry, the Company must enhance its current products continually and
develop and introduce new products which address the rapidly changing needs of
the marketplace. The Company expects to encounter significant competition in the
broader market for the creation of general purpose documents by voice and other
speech recognition products. Many companies, including Microsoft, AT&T and
Apple, have either announced or are known to be involved in speech recognition
research and development activities. Dragon Systems, Inc. sells a large
vocabulary speech recognition product. IBM has announced two large vocabulary,
speaker-dependent products for operation on its RS/6000 system and has
demonstrated large vocabulary speaker-dependent technology running on a personal
computer. Similarly, in Japan, Nippon Telegraph and Telephone Corporation, NEC
Corporation, Fujitsu Limited and Hitachi, Ltd. have either announced or are
known to be involved in Japanese language speech recognition research and
development activities, including the Advanced Telephony Research project, a
consortium of Japanese companies and universities seeking to develop a telephone
that translates speech from one language to another. Many of the Company's
potential competitors in this market have financial, technical and marketing
resources that are substantially greater than those available to AVR.
7
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PROPRIETARY RIGHTS
The Company regards its software as proprietary and relies on a
combination of copyright and trade secret laws in attempting to protect its
rights. The Company enters into software license agreements with end-users of
its products. Despite these precautions, it may be possible for unauthorized
third parties to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. The Company has applied for
four United States patents on various aspects of its speech recognition
technology, and all four applications are pending. There can be no assurance
that any patents will be issued or, if issued, will provide the Company with
significant protection against competitors. Certain of the Company's competitors
have obtained and the Company believes that certain of its competitors are
seeking patent protection on various aspects of their speech recognition
technology. Substantially all of its competitors have significantly greater
resources than the Company. The Company believes that, because of the rapid pace
of technological change in the software industry, factors such as the
technological and creative skills of its personnel are more important to
establishing and maintaining a technology leadership position than are the
various legal protections of its technology.
EMPLOYEES
As of February 28, 1997, the Company has 25 employees and consultants,
including nine in marketing, sales and support, six in product research and
development, two in manufacturing, systems integration and testing and eight in
management, finance and administrative activities. None of the Company's
employees is represented by a labor union. The Company believes that its
employee relations are good.
ITEM 2. PROPERTIES
The Company presently leases approximately 4,165 square feet for its
corporate office located at 4615 Post Oak Place, Suite 111, Houston, Texas
77027. The lease provides for a basic rental rate of approximately $4,425 per
month and expires on January 31, 2001.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
On February 5, 1997, the Company began trading its common stock on the
Nasdaq OTC Electronic Bulletin Board. The following table shows, for the period
indicated, the high and low closing bid prices of the Company common stock as
reported by Nasdaq. 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 since listing on NASDAQ is as follows:
1997 FISCAL YEAR HIGH LOW
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1st Quarter 4 1/8 2 1/2
(Commencing February 5, 1997)
As of March 26, 1997, there were approximately 350 holders of record of
the Company's common stock. The Company has not paid any dividends on its common
stock and expects to retain any future earning for use in its business
development.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements and notes thereto included elsewhere herein.
GENERAL
The Company and its predecessors are engaged in business of developing
and selling Micro-Computer Voice Recognition Software to commercial and
government markets. Revenue is recognized by the Company when purchase orders
are signed. (Description of capitalized software development costs, if
applicable). Research and development costs are charged to expense as incurred.
For the fiscal years 1996 and 1995, research and development costs were $112,323
and $39,535 respectively. Management expects that additional amounts will be
expended on research and development for future periods. Among the principal
costs to market and sell the Company's products are advertising and promotion
costs, sales, salaries and commissions, and general and administrative expenses.
RESULTS OF OPERATIONS
1996 Fiscal Year and 1995 Fiscal Year.
Net sales for the 1996 fiscal year were $274,697 versus $422,697 for
1995 fiscal year, a decrease of 35 percent. This decrease is primarily due to an
increased emphasis on software sales and a decreased emphasis on hardware sales
resulting in a lower cost per unit.
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Cost of sales was $217,855 in 1996 versus $290,435 in 1995, a decrease
of 25 percent. The decrease was the result of less sales effected in 1996.
The Company's gross margin in 1996 was $156,842 versus $132,260 in
1995, an increase of 18.6 percent. This increase was primarily due to lower
costs resulting in higher margins.
Selling expenses increased to $167,233 in 1996 from $113,592 in 1995,
an increase of 47.2 percent. This increase was primarily due to the addition of
sales personnel.
General and administrative expenses decreased to $273,464 in 1996 from
$230,018 in 1995, a decrease of 18.9 percent. This decrease is primarily due to
management implementing salary reductions.
Research and development costs increased to $112,323 in 1996 from
$39,535 in 1995, an increase of 184.1 percent. This increase is primarily due to
the addition of new programmers for product development.
The net loss in 1996 was $404,875 compared with a net loss of $352,883
in 1995 an increase of 14.7 percent. The increase in the amount of loss was due
to an overall increase in programming and sales staff.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had working capital of $387,586,
compared to a working capital deficit of $35,605 at December 31, 1995. This
increase in the Company's working capital was primarily due to the sale of
430,311 shares of Company common stock for gross proceeds of $860,623. At
December 31, 1996, the Company had stockholders equity of $267,539, which
reflected the private placement of shares in October 1996.
Net cash used by operating activities was $437,412 and $66,042 in 1996
and 1995 fiscal years, respectively. The increase in net cash used by operating
activities resulted largely from an increase in the net loss in fiscal 1996 as
well as the payment of certain compensation which was accrued in 1995. Net cash
provided by financing activities was $955,464 and $95,031 in 1996 and 1995,
respectively. The significant increase in net cash provided by the financing
activities resulted primarily from the $145,000 of cash loaned by stockholders
and $826,886 of cash contributed by stockholders.
The Company has financed its growth primarily through borrowings from
its stockholders, as well as from the sale of its common stock. The Company has
not entered into any loan agreements with any financial institution. As of
December 31, 1996, the Company's sources of internal/external financing were
limited. It is not expected that internal sources of liquidity will improve
until net cash is provided by operating activities, and until such time, the
company will rely upon external sources for liquidity. There can be no assurance
that the Company will be able to obtain additional cash resources from the sale
of its securities unreasonable terms, if at all. Management believes, however,
that its current cash position will provide adequate liquidity to meet the
Company's capital requirements for the balance of 1997. Lower than expected
revenues resulting from adverse economic conditions or otherwise, could restrict
the Company's ability to expand its business as planned, and if severe enough,
may shorten the period during which its current cash proceeds may be expected to
satisfy the Company's capital requirements. As of December 31, 1996, the Company
has no material capital commitments.
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ITEM 7. FINANCIAL STATEMENTS
Information with respect to this item is set forth in the "Index" to Consolidate
Financial Statements on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNT
AND FINANCIAL DISCLOSURE
In December of 1996, the Company merged with Summa Vest, Inc., an
inactive "publicly traded shell," and a transaction accounted for as a "reverse
merger": using the purchase method of accounting. The independent Certified
Public Accounts for Summa Vest, Inc. were Mantyla, McReynolds & Associates,
which accounting firm audited Summa Vest, Inc.'s financial statements for the
fiscal years ended December 31, 1995 and 1994. Malone & Bailey, PLLC. has
audited the financial statements of the Company for the last two years. The
Company did not have any disagreement with the principal independent accountant
for Summa Vest, Inc. on any matter of accounting principals or practices,
financial statement disclosure, or auditing scope or procedure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
As of the date hereof Company's directors and executive officers are:
NAME AGE POSITION
---- --- --------
Timothy J. Connolly 43 Chief Executive Officer, President and
Chairman of the Board
Jan Carson Connolly 47 Vice President - Operations and Director
H. Russel Douglas 44 Vice President - Research and Development
and Director
G. Edward Powell 60 Director
Jesse Marion 42 Director
TIMOTHY J. CONNOLLY has served as chairman of the board, chief
executive officer and president of the Company since August 1996. Mr. Connolly
founded Applied Voice Technology, L.P. (the Company's predecessor) in November
1994 and served as its managing partner until August 1996. In 1984, Mr. Connolly
formed Post Oak Financial Corporation, an investment and mortgage banking firm,
and served as president of that corporation until October 1994. Mr. Connolly
graduated from Texas A&M University with an undergraduate degree in marketing
and management, and a Masters Degree in business administration. In December
1989, Mr. Connolly filed for protection under Chapter 7 of the Federal
Bankruptcy Code, which petition was discharged in October 1992.
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JAN CARSON CONNOLLY has served as vice president of operations and
marketing and a director of the Company since August 1996. From September 1995
until August 1996, Ms. Carson Connolly was employed by Applied Voice Technology,
L.P. Ms. Carson Connolly was a news anchor and reporter for KPRC-TV in Houston,
Texas, from September 1983 through August 1995. Ms. Carson Connolly has over 24
years experience in television broadcast and journalism during which time she
was employed by five television stations as a writer, producer, editor, reporter
and news anchor and she is familiar with all aspects of communication, media,
advertising and marketing.
H. RUSSEL DOUGLAS has served as vice president of research and
development and a director of the Company since August 1996. Mr. Douglas was
employed by Applied Voice Technology, L.P. from August 1995 through August 1996.
From 1989 through August 1995, Mr. Douglas was senior manager of Legent
Corporation, an international computer software company, where Mr. Douglas was
responsible for development and worldwide support of Legent's systems product
line.
G. EDWARD POWELL has served as a director of the Company since March
1997. Mr. Powell joined the professional staff of Price Waterhouse & Co. in June
1959. In 1972, he was admitted to the partnership and in 1973 was appointed
managing partner of the Houston Metropolitan Department, a multidisciplinary
practice unit dedicated to serving middle market businesses. In 1976, he was
assigned a three month tour of duty in the firm's national office in New York.
In 1982, he was appointed to the position of managing partner of the Houston
office and retained that position until his retirement in 1994. Mr. Powell
received a BBA in accounting from Texas A&M University in May 1959.
JESSE MARION has served as a director of the Company since August 1996.
Mr. Marion served as president of Seitel Data, Ltd., a wholly-owned subsidiary
of Seitel, Inc., a NYSE listed company from January 1993 to May 1996. Mr. Marion
also served as a director of Seitel, Inc. Mr. Marion also served as vice
president of sales of Seitel, Inc. from April 1992 through May 1996. From
January 1989 through March 1992, Mr. Marion was executive vice president for
First Seismic, Inc., a Nasdaq listed company. Mr. Marion currently serves as a
director for Citadel Computer Systems, Inc., a Nasdaq -- OTC Electronic Bulletin
Board company.
CHARLES W. SKAMSER will become the Company's President and Chief
Operating Officer effective April 1, 1997. From 1991 through November 1996, Mr.
Skamser was a co-founder and served as Vice President of Worldwide Business
Development for Dynast Technologies, a leading provider of enterprise class
client/server application development tools. Prior to 1991, Mr. Skamser
co-founded and served as an executive with several high technology companies
that were successfully sold. Mr. Skamser graduated from Macalaster College with
a degree in Political Science and Economics in 1981.
All directors are elected to serve for a term of one year or until the
next annual meeting of shareholders, whichever first occurs, and until their
respective successors are elected and qualified. The officers of the Company are
elected by the board of directors. Officers have the authority and
responsibilities which are normally incident to their offices and as given them
by the board of directors, and each hold office until his successor is elected
and qualified unless a different term is specified by the board. There are no
family relationships among the directors and officers of the Company, except for
Timothy J. Connolly and Jan Carson Connolly, who are husband and wife. None of
the directors receive any compensation or reimbursement of out-of-pocket
expenses to attend board meetings.
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EMPLOYMENT AGREEMENTS
In August 1996, the Company entered into a three year employment
agreement with Mr. Connolly, providing for an annual salary of $132,000
commencing in 1997. In August 1996, the Company entered into a three year
employment agreement with Mr. Douglas, providing for an annual salary of
$120,000 commencing in 1997. In August 1996, the Company entered into a three
year employment agreement with Jan Carson Connolly, providing for an annual
salary of $90,000 commencing in 1997.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation paid by the Company to the Chief Executive Officer for services
rendered in all capacities during the fiscal year ended December 31, 1996. One
other executive officer received compensation in excess of $100,000 for the
fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------- -----------------------------------------
NAME AND PRINCIPAL FISCAL OTHER ANNUAL STOCK ALL OTHER
POSITION YEAR SALARY COMPENSATION ISSUANCES OPTIONS COMPENSATION
- -------------- ----- ------ ------------- --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Timothy J Connolly, 1996 $ 15,000 $ 0 -- -- --
--------- ------- ------------
Chief Executive 1995 $ 20,000(1) $ 750(2)
Officer 1994 $ - $ - -- -- --
- -------------- ----- --------- ----------- --------- ------- ------------
</TABLE>
- ---------------
1 Paid by Applied Voice Technology, L.P. a predecessor entity.
2 Comprised of a car allowance.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth the number and percentage of
outstanding shares of Company Common Stock owned by (i) each person known to the
Company to beneficially own more than 5% of its outstanding Common Stock, (ii)
each director, and (iii) all officers and directors as a group.
13
<PAGE>
NAME AND ADDRESS OF NUMBER OF SHARES OF PERCENT OF
BENEFICIAL OWNER(1) COMMON STOCK VOTING
BENEFICIALLY OWNED POWER
Voice Technologies Partners, L.P... 5,920,000 (2) 54.6%
Timothy J. Connolly................ 6,102,500 (2)(3) 55.9%
Jan Carson Connolly................ 5,950,000 (2)(4) 54.8%
H. Russel Douglas.................. 5,957,500 (2)(5) 54.8%
Akinola S. Olajuwon................ 1,286,500 (6) 11.9%
Jesse Marion....................... 1,286,500 (6) 11.9%
Hakeem, Inc........................ 1,000,000 (7) 9.2%
All officers and directors
as a group (5 persons)............ 7,456,500 (8) 66.9%
- -----------------------
(*) less than 1%
(1) The addresses for the above-referenced persons are at the Company.
(2) Mr. Connolly, Ms. Carson Connolly and Mr. Douglas have voting and
disposition control over the shares of Common Stock owned by Voice
Technologies Partners, L.P.
(3) Includes 182,500 shares of Common Stock exercisable under an outstanding
warrant.
(4) Includes 30,000 shares of Common Stock exercisable under an outstanding
warrant.
(5) Includes 37,500 shares of Common Stock exercisable under an outstanding
warrant.
(6) Includes 50,000 shares of Common Stock underlying a currently exercisable
option.
(7) Includes 500,000 shares of Common Stock underlying a currently exercisable
warrant.
(8) Includes 300,000 shares of Common Stock underlying currently exercisable
optionsv and warrants.
ITEM 12
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1994, Voice Technologies Partners, L.P. (predecessor to
Company) was formed with Voice Technologies Management Corp, the general partner
owning a 60% interest, and Smart Smile, Inc., the limited partner, owning a 40%
interest. Voice Technologies Management Corp. paid $19,000 for its ownership
interest and contributed certain furniture and fixtures valued at $28,415, the
name "Voice Technologies," copyrights of computer operating applications,
programs and computer data used in connection with Voice Technologies software
valued at nominal consideration. Smart Smile, Inc. paid $40,000 for its
ownership interest. In August 1995, Voice Technologies Partners, L.P. redeemed
Smart Smile, Inc.'s interest for $80,000 through the issuance of a promissory
note providing for monthly payments with a balloon payment in December 1997. In
September 1995, Mr. Douglas acquired a 15% limited partnership interest in Voice
Technologies Partners, L.P. for nominal consideration. In October 1995, Ms.
Carson Connolly was issued a general partnership interest in Voice Technologies
Partners, L.P for nominal consideration. In August 1996, Voice Technologies
Partners, L.P. assigned substantially all of its assets to the Company in
exchange for 6,000,000 shares of Company Common Stock. Mr. Connolly, Ms. Carson
Connolly and Mr. Douglas own 55%, 20% and 25%, respectively, of Voice
Technologies Properties, L.P., with entities controlled by Mr. Connolly and Ms.
Carson Connolly serving as general partners and Mr. Douglas serving as a limited
partner. In August 1996, as amended in October 1996, Akinola Olajuwon and Jesse
Marion each purchased 1,236,500 shares of Company Common Stock for $67,500. In
August 1996, Mr. Connolly was issued 100,000 shares of Common Stock
14
<PAGE>
for nominal consideration. In October 1996, Mr. Ron McGuinn acquired 100,000
shares of Common Stock in exchange for all of Mr. McGuinn's assets of Ron
McGuinn & Associates, this agreement has been rescinded and Mr McGuinn has
agreed to return 100,000 shares and reissued 12,500 shares of stock.
In August 1996, the following individuals were issued five-year
warrants as follows: (i) Mr. Connolly was issued a warrant to purchase 182,500
shares of Company Common Stock at an exercise price of $.14 per share; (ii) Mr.
Douglas was issued a warrant to purchase 37,500 shares of Company Common Stock
at an exercise price of $.14 per share; and (iii) Ms. Carson Connolly was issued
a warrant to purchase 30,000 shares of Company Common Stock at an exercise price
of $.14 per share.
In September 1996, Hakeem, Inc. granted the Company a non-exclusive
license to use the name and likeness of Hakeem Olajuwon for textural and
pictorial matters pertaining to his name and likeness in the promotional,
display and advertisement materials approved by Mr. Olajuwon. Mr. Olajuwon also
agreed to be available on a reasonable basis for up to two personal appearances
and the production of up to four television and radio commercials for use in
promotion of the Company's products during the two-year term of the license. The
Company issued Hakeem, Inc. 500,000 shares of Common Stock and a five-year
warrant to purchase 500,000 shares of Company Common Stock at a purchase price
of $1.50 per share. In connection therewith, the Company granted Hakeem, Inc.
certain piggyback registration rights with respect to the shares of Common Stock
issued and the shares of Common Stock underlying the warrant.
In August 1996, Jack Shepard was issued a five year warrant to purchase
20,000 shares of Company Common Stock which will become exercisable upon (i) a
completed merger with a public shell, or (ii) an initial public offering. The
exercise price for these warrants shall be the average closing bid price for the
twenty (20) days prior to the merger or initial public offering.
ITEM 13. EXHIBITS
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
- ---------- -------------------------
2(1) Reorganization Agreement
3.1(2)(3) Articles of Incorporation of the Company and
Amendments thereto
3.2(2) By-Laws of the Company and
Amendments thereto
10 Material Contracts
- -------------------
(1) Incorporated by reference to the exhibits filed in the Company's 8-K filed
December 24, 1996.
(2) Incorporated by reference to the exhibits filed in the Company's 10-KSB
filed November 15, 1996.
(3) Incorporated by reference to the exhibits filed in the Company's 8K-A filed
January 30, 1997.
15
<PAGE>
APPLIED VOICE RECOGNITION, INC.
(formerly Summa Vest, Inc.,
Voice Technologies, Ltd., and
Applied Voice Technologies Partners, Ltd.)
Financial Statements
Two Years Ended December 31, 1996 and 1995
March 12, 1997
<PAGE>
[MALONE & BAILEY, PLLC LETTERHEAD]
March 12, 1997
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Applied Voice Recognition, Inc.
Houston, Texas
We have audited the accompanying balance sheet of Applied Voice Recognition,
Inc. (formerly Summa Vest, Inc., Voice Technologies, Ltd., and Applied Voice
Technologies Partners, Ltd.) as of December 31, 1996 and 1995, and the related
statements of income, stockholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits 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 financial statements referred to above present fairly, in
all material respects, the financial position of Applied Voice Recognition, Inc.
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
MALONE & BAILEY, PLLC
<PAGE>
APPLIED VOICE RECOGNITION, INC.
Balance Sheets
December 31, 1996 and 1995
1996 1995
----------- ---------
ASSETS
Cash ............................................ $ 556,997 $ 40,495
Accounts receivable ............................. 38,004 5,461
Inventory ....................................... 49,073 15,000
----------- ---------
Total Current Assets ........................ 644,074 60,956
----------- ---------
Property and equipment, net of accumulated
depreciation of $12,084 and $5,572 ........... 17,881 22,843
----------- ---------
TOTAL ASSETS ................................ $ 661,955 $ 83,799
=========== =========
LIABILITIES
Current portion of long-term debt ............... $ 128,831 $ 15,871
Due to stockholders ............................. 27,500 7,500
Accounts payable and accrued expenses ........... 100,157 73,190
----------- ---------
Total Current Liabilities ....................... 256,488 96,561
DUE TO STOCKHOLDERS ............................. 125,000 214,902
LONG-TERM DEBT .................................. 12,928 142,310
----------- ---------
TOTAL LIABILITIES .......................... 394,416 453,773
----------- ---------
STOCKHOLDERS' EQUITY
Common stock, $.001 par value, 50,000,000
shares authorized, 10,729,602 and
5,820,000 shares issued and outstanding .... 10,730 5,820
Paid in capital ................................. 1,095,010 58,132
Retained (deficit) .............................. (838,201) (433,926)
----------- ---------
TOTAL STOCKHOLDERS' EQUITY ................. 267,539 (369,974)
----------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY .................... $ 661,955 $ 83,799
=========== =========
See notes to financial statements.
2
<PAGE>
APPLIED VOICE RECOGNITION, INC.
INCOME STATEMENTS
Years Ended December 31, 1996 and 1995
1996 1995
----------- -----------
Net sales ................................... $ 374,697 $ 422,697
Cost of sales ............................... 217,855 290,435
----------- -----------
Gross Margin ............................ 156,842 132,262
Selling ..................................... 167,233 113,592
General and administrative .................. 273,464 330,018
Research and development .................... 112,323 39,535
----------- -----------
Total operating expenses ................ 553,020 483,145
----------- -----------
Operating Deficit ....................... (396,178) (350,883)
Other income and (expense)
Interest expense ......................... (11,581) (2,000)
Interest income .......................... 2,884
=========== ===========
Net (Loss) .............................. $ (404,875) $ (352,883)
=========== ===========
(Loss) Per Common Share ...................... $ (.06) $ (.06)
Weighted Average Shares Outstanding ......... 6,971,287 5,820,000
See notes to financial statements.
3
<PAGE>
APPLIED VOICE RECOGNITION, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
PARTNERS' COMMON STOCK PAID IN RETAINED
CAPITAL SHARES $ CAPITAL (DEFICIT) TOTALS
--------- ---------- ------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
At December 31, 1994 .................... $ 87,302 $ (81,043) $ 6,259
Contributions of cash ..................... 70,013 70,013
Prior year partner subscriptions
received ................................ (12,500) (12,500)
Adjustment to prior year
property contribution .................. (863)
Purchase of partner's interest
by issuance of note payable ............ (80,000) (80,000)
Net deficit ............................... (352,883) (352,883)
--------- --------- ---------
At December 31, 1995 ...................... 63,952 (433,926) (369,974)
Contributions of cash ..................... 35,050 35,050
Reduction of officer notes
payable ................................. 214,902 214,902
Incorporation, August 15, 1996 ............ (313,904) 6,000,000 $ 6,000 $ 307,904
Stock issued for cash
- August, 1996 ......................... 2,473,000 2,473 132,527 135,000
- November, 1996, net of
$203,787 costs of offering ........... 430,311 430 656,406 656,836
Stock issued for services ................. 600,000 600 600
Merger with public shell .................. 1,226,291 1,227 (1,227)
Net deficit ............................... (404,875) (404,875)
--------- ---------- ------- ----------- --------- ---------
At December 31, 1996 ...................... $ 0 10,729,602 $10,730 $ 1,095,610 $(838,801) $ 267,539
========= ========== ======= =========== ========= =========
</TABLE>
See notes to financial statements.
4
<PAGE>
APPLIED VOICE RECOGNITION, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996 and 1995
1996 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) ........................................ $(404,875) $(352,882)
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation ................................. 6,512 4,108
Stock issued for services .................... 600 --
Changes in Due to Stockholders for
unpaid compensation and out-of-pocket
expense reimbursements .................... -- 179,441
Changes in operating assets and liabilities:
Accounts receivable .......................... (32,543) (5,461)
Inventory .................................... (34,073) (15,000)
Accounts payable and accrued expenses ........ 26,967 123,771
--------- ---------
NET CASH USED BY OPERATING ACTIVITIES ............. (437,412) (66,024)
--------- ---------
CASH FLOWS FOR INVESTING ACTIVITIES
Purchase of equipment ............................. (1,550) --
CASH FLOWS FROM FINANCING ACTIVITIES
Cash loaned by stockholders ....................... 145,000 --
Cash contributed by stockholders .................. 826,886 70,013
Repayments of notes payable ....................... (16,422) --
Loan proceeds from third parties .................. -- 25,000
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES ......... 955,464 95,013
--------- ---------
NET INCREASE IN CASH ................................. 516,502 28,989
Cash at beginning of period .......................... 40,495 11,506
--------- ---------
Cash at end of period ................................ $ 556,997 $ 40,495
========= =========
Supplemental Disclosure of Cash Paid For:
Interest .......................................... $ 11,581 $ 2,000
In 1995, the Company bought out a partner
by the issuance of an $80,000 note payable
In 1996, the Company converted $214,902 in
founding stockholder debt to paid in capital
See notes to financial statements
5
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 1 - ACCOUNTING POLICIES
NATURE OF BUSINESS. Applied Voice Recognition, Inc. ("Company") was incorporated
in Delaware on August 15, 1996. Prior to this date, it operated as various Texas
Limited Partnerships, including Voice Technologies, Ltd., created November 14,
1994; Applied Voice Technologies Partners, Ltd., created September 1, 1995; and
Applied Voice Recognition, L.P., created July 16, 1996. The Company and its
predecessors were formed for the purpose of developing and selling
micro-computer voice recognition software to commercial and government markets.
On December 11, 1996, the Company merged with Summa Vest, Inc. ("SVI"), an
inactive "publicly traded shell", in a transaction accounted for as a "reverse
merger" using the purchase method of accounting. The Company issued 1,226,291
shares, or 11.4% of its current total outstanding stock, to investment advisors,
brokers and former shareholders of SVI in connection with this merger. SVI is a
Utah corporation, and its name was changed to Applied Voice Recognition, Inc.,
effective on the date of the merger. SVI had no assets or liabilities as of the
effective date of the merger.
REVENUE is recognized when products are installed at customer locations.
Accounts are written off when deemed uncollectible. As of December 31, 1996 and
1995, no accounts receivable were considered uncollectible.
INVENTORY, which consists of computer hardware, is stated at cost.
OFFICE EQUIPMENT consists of computers, software and furniture. Depreciation is
computed using the straight-line method, based on an estimated useful life of 5
years.
ACCOUNTS PAYABLE was $78,221 and ACCRUED EXPENSES was $21,936, totaling
$100,157, as of December 31, 1996.
COMMON STOCK. In October, 1996, the Board of Directors declared a 100 for 1
stock split and increased the total number of authorized shares to 15,000,000
from 150,000. All amounts in this financial statement have been adjusted for
this split as if it had occurred on January 1, 1995. The total authorized shares
of 50,000,000 and the par value used of $.001 are characteristics of the SVI
stock received in the merger as described above.
INCOME TAXES are not due as the Company was a partnership prior to August 15,
1996, and has experienced losses from inception to date. SVI prior losses are
not deductible by the Company because of Internal Revenue Code Section 382
limitations. Net
6
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1995
operating losses available to offset future income of the Company total $240,000
as of December 31, 1996.
EARNINGS PER SHARE is computed based on a weighted average number of shares
outstanding during the year. The Company was a partnership prior to August 15,
1996, and issued a 15 for 1 stock split in October, 1996. Earnings per share
have been restated as if both events had occurred on January 1, 1995. Options
and warrants (see Note 5) are included in the weighted average calculation as of
the date issued.
NOTE 2 - LONG-TERM DEBT
1996 1995
--------- ---------
Note payable to a former owner, with no
interest, due $2,500 August, 1996, and $750
per month from September, 1996 through
December, 1997, with a balloon due of the
remainder on December 31, 1997 ................... $ 74,000 $ 80,000
Note payable to American Express, with no
interest, due $2,500 per month, beginning
September, 1996, with a balloon due of the
remainder if the Company "goes public" and
raises a minimum of $1,000,000 in net stock
sales ............................................ 42,928 53,181
Note payable to a trust, with interest at
10% APR, due $300 per month from September,
1996 through December, 1997, with a balloon
due of the remainder on December 31, 1997 ........ 24,831 25,000
--------- ---------
Total ............................................ 141,759 158,181
Less: current maturities ......................... (128,831) (15,871)
--------- ---------
Net long-term debt ............................... $ 12,928 $ 142,310
========= =========
The balance of long-term debt is due $12,928 in 1997.
7
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 3 - NOTES PAYABLE TO RELATED PARTIES
As of December 31, 1995, amounts payable to founding stockholders was $222,402
and was payable on demand, carried no interest and was mostly accrued
compensation. As of July 16, 1996, amounts due of $214,902 were contributed in a
recapitalization of the Company in consideration for a $125,000 note payable.
The balance owed to these founding stockholders as of December 31, 1996, was
$27,500, all of which was repaid by the Company in February, 1997.
In connection with the $125,000 loan (made by an unrelated trust), the trust and
the individual beneficiary received a total of 3% ownership (the equivalent of
180,000 shares) in the Company. 12% interest is payable quarterly on the loan,
with the principal balance due in July, 1998.
NOTE 4 - COMMON STOCK
Prior to August 15, 1996, the Company was organized as three different Texas
limited partnerships (see Note 1). On August 15, 1996, the Company was
incorporated and the Partnership contributed all assets and liabilities in
exchange for 6,000,000 shares. Because 3% of the Company was given up as partial
consideration for a $125,000 loan made July 16, 1996 (see Note 3), an equivalent
5,820,000 shares is used as the total outstanding shares as of December 31,
1995.
On August 15, 1996, 2 additional stockholders purchased 2,473,000 shares of
stock for $135,000. In November, 1996, 500,000 additional shares were issued for
services in connection with marketing and promotion of Company products (see
Note 5) and 100,000 shares were issued in connection with the acquisition of
other voice recognition software development technology and talent (see Note 8).
In October, 1996, the Company commenced the sale of its common stock in a
private placement offering. Prior to the December 11, 1996, merger, 430,311
shares had been sold at $2 per share for a total consideration of $860,623, with
$203,787 related costs of the offering.
As of December 31, 1996, a total of 10,729,602 shares of stock were outstanding.
8
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 5 - STOCK OPTIONS / WARRANTS
On August 15, 1996, the Company enacted Employee and Director Stock Option
Plans. Each Plan allows for the creation / granting of both qualified (as
defined by the Internal Revenue Service) and non-qualified options. Pursuant to
this plan, the Company authorized an immediate grant of 5-year warrants to
purchase 250,000 shares to officers (and founding stockholders) at $.14 per
share and 5-year options to purchase 150,000 shares to non-employee directors,
also at $.14 per share.
On September 16, 1996, the Company entered into a 2 Year Licensing Agreement
with Hakeem Olajuwon 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, given in Note 4 above), and a
warrant to purchase another 500,000 shares at $1.50 per share anytime on or
before August 31, 2001.
NOTE 6 - JOINT VENTURE AGREEMENT
In April, 1996, the Company entered into negotiations with Nevada Gold and
Casinos, Inc. ("NGCI") for the joint development of Voice Commander Gambler, a
voice activated gaming device. The Company will contribute the name and
technology and NGCI is to put up all sales and marketing monies, with profits to
be split 50/50 after all expenses are recovered. No activity has occurred to
date.
NOTE 7 - ACQUISITION
On September 25, 1996, the Company acquired other voice recognition software
technology and talent for 100,000 shares of Company stock and $135,000, payable
$5,000 per month for 27 months, commencing October, 1996. This agreement was
terminated in February, 1997, with the return of 87,500 shares and cancellation
of the remaining balance of the note payable in consideration for a release from
a non-compete agreement.
NOTE 8 - EMPLOYMENT AGREEMENTS
On August 15, 1996, the Company signed 3 employment agreements with current
officers for annual salaries aggregating $360,000 per year, beginning in 1997.
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 9 - OPERATING LEASES
The Company is obligated on two small equipment leases and an office lease, with
total monthly payments of $5,095. Future minimum lease payments are $33,496 for
1996, $56,211 for 1997, $56,676 for 1998, $55,186 for 1999 and $4,425 for 2000.
NOTE 10 - SUBSEQUENT STOCK SALES
In March, 1997, the Company sold 100,000 shares of stock to an investor for
$250,000.
NOTE 11 - SUBSEQUENT DEBT
In January, 1997, the Company purchased a telephone system under a capital lease
with a present value of $64,663. Monthly payments, including interest at 9%, are
$1,342 for 60 months. Principal portions are due of $10,723 in 1997, $11,729 in
1998, $12,829 in 1999, $14,033 in 2000, and the remainder of $15,349 in 2001.
10
<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.
APPLIED VOICE RECOGNITION, INC.
Timothy J. Connolly
President
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 and on
the dates indicated.
MARCH 31, 1997 /S/ TIMOTHY J. CONNOLLY
TIMOTHY J. CONNOLLY Timothy J. Connolly
President, Chief Executive Officer,
Principal Financial Officer,
Principal Accounting Officer and
Chairman of the Board
JAN CARSON CONNOLLY /S/JAN CONNOLLY CARSON
Jan Connolly Carson
Director
H. RUSSEL DOUGLAS /S/ H. RUSSEL DOUGLAS
H. Russel Douglas
Director
JESSE MARION /S/ JESSE MARION
Jesse Marion
Director
16
APPLIED VOICE RECOGNITION
4615 POST OAK PLACE, SUITE 277 TEL (713) 621-5678
HOUSTON, TEXAS 77027 FAX (713) 621-5870
December 31, 1996
Steven Reid
1323 Driftwood Drive
Palm Springs, CA 92264
Dear Steve,
Pursuant to our conversation, Applied Voice Recognition, Inc. would be pleased
to have you cover our company as its primary analyst. Our understanding is that
you will charge $10,000 to write the original analysis and summary for
distribution to your database. We will pay you $5,000 upon execution of this
agreement and $1,000 per month for the next five months the 15th day of each
month commencing February, 1997.
We will additionally compensate you for handling all shareholder inquiries
regarding the company with 50,000 options exercisable to $3.00 which are fully
vested after six months from execution of this agreement. Should the company
undertake a secondary offering or placement of any kind after this six month
interval, you will voluntarily restrict yourself during the offering period from
exercising any warrants. You will receive 50,000 shares of 144 stock as further
compensation. This agreement is for a period of two years and may be renewed
upon the mutual agreement of both parties.
Furthermore, you agree to fully disclose any shares held by you to present the
appearance of any conflict or impropriety in this regard. We appreciate the
willingness to accept compensation in stock and certainly agree this
demonstrates your faith in Applied Voice Recognition. If this letter accurately
reflects our agreement, please sign in the space provided below for your
signature. If I can help, please call me at 621-5678.
//S// TIM CONNOLLY
Tim Connolly
//S// STEVEN REID
Steven Reid
<PAGE>
APPLIED VOICE RECOGNITION
4615 POST OAK PLACE, SUITE 277 TEL (713) 621-5678
HOUSTON, TEXAS 77027 FAX (713) 621-5870
MEMO
TO: CHRIS HELFRICK
FROM: TIM CONNOLLY
DATE: FEBRUARY 5, 1997
SUBJECT: APPLIED VOICE RECOGNITION COMPENSATION AGREEMENT
- ----------------------------------------------------------------------
The board of directors has approved the following compensation arrangement for
your Consulting in the dissemination of information regarding our company to the
investment community. You will be issued 10,000 options immediately at $3 per
share, 20,000 options exercisable after three months, 20,000 exercisable after
six months and 30,000 shares of 144 stock. The documentation of this will be
completed after approval of the name change by NASD. If you have any questions
or comments, please do not hesitate to call me at 713-621-5678.
Sincerely,
Timothy J.Connolly
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM APPLIED VOICE RECOGNITION, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 556,997
<SECURITIES> 0
<RECEIVABLES> 38,004
<ALLOWANCES> 0
<INVENTORY> 49,073
<CURRENT-ASSETS> 644,074
<PP&E> 29,965
<DEPRECIATION> 12,084
<TOTAL-ASSETS> 661,955
<CURRENT-LIABILITIES> 256,488
<BONDS> 0
0
0
<COMMON> 10,730
<OTHER-SE> 256,809
<TOTAL-LIABILITY-AND-EQUITY> 661,955
<SALES> 374,697
<TOTAL-REVENUES> 374,697
<CGS> 217,855
<TOTAL-COSTS> 553,020
<OTHER-EXPENSES> (2,884)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,581
<INCOME-PRETAX> (404,875)
<INCOME-TAX> 0
<INCOME-CONTINUING> (404,875)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (404,875)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> 0
</TABLE>
