<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ---------------
Commissions file number: 33-1210-D
APPLIED VOICE RECOGNITION, INC.
(Exact name of registrant as specified in its charter)
Utah 87-042552
---- ---------
(State or other Jurisdiction of (IRS Employer Identification No.)
incorporation or Organization)
4615 Post Oak Place, Suite 111 Houston, TX 77027
-------------------------------------------------
(Address of principal executive offices including zip code)
(713) 621-5678
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding12 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 the past 90 days.
Yes [X] No [ ]
Number of shares of Common Stock outstanding as June 30, 1997: 11,139,000
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Index to Financial Statements
Page
Balance Sheet 3
Statement of Operations 4
Statement of Cash Flows 5
Notes to Financial Statements 6
FORWARD LOOKING STATEMENTS
Included in this report are "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations reflected in such forward-looking
statements will prove to have been correct. The Company's actual results could
differ materially from those anticipated in the forward-looking statements as a
result of certain factors including those set forth under Part I, Item 2
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
2
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPLIED VOICE RECOGNITION, INC.
QUARTER ENDED JUNE 30, 1997
Balance Sheets for the periods ending
June 30, 1997 and 1996
(Unaudited)
June 30, June 30,
ASSETS 1997 1996
---------- --------
Cash 1,377 3,221
Escrow account 289,000
Accounts receivable 77,379 14,677
Inventory 49,764 15,000
Deposits and prepaids 70,982
---------- --------
TOTAL CURRENT ASSETS 488,502 32,898
Property and equipment, net of accumulated
depreciation of $32,715 and $7,090 136,472 27,952
---------- --------
TOTAL ASSETS 624,974 60,850
========== ========
LIABILITIES
Current portion of long term debt 190,476 3,950
Escrow account liability 289,000
Due to stockholders 180,000 349,270
Accounts payable and accrued expenses 286,943 124,010
---------- --------
TOTAL CURRENT LIABILITIES 946,419 477,230
Due to stockholders 125,000 -
Long term debt 21,167 101,050
Capital lease liability 43,299
---------- --------
TOTAL LIABILITIES 1,135,885 578,280
STOCKHOLDERS EQUITY
Common Stock, $.001 par value, 50,000,000
shares authorized, 11,138,769 and 5,820,000
issued and outstanding. 11,139 5,820
Paid in capital 1,440,922 56,832
Retained <deficit> (1,962,972) (580,082)
---------- --------
TOTAL STOCKHOLDERS EQUITY (510,911) (517,430)
---------- --------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY 624,974 60,850
========== ========
See notes to financial statements
3
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APPLIED VOICE RECOGNITION, INC.
QUARTER ENDED JUNE 30, 1997
Income Statements for the periods ending
June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales 453,151 215,611 237,197 97,968
Cost of sales 270,875 141,609 135,335 68,534
---------- --------- ---------- ---------
GROSS MARGIN 182,276 74,002 101,862 29,434
Selling 318,626 27,473 155,846 4,178
General and administrative 808,237 179,074 489,574 92,431
Research and development 172,361 14,911 112,428 803
---------- --------- ---------- ---------
TOTAL OPERATING EXPENSES 1,299,224 221,458 757,848 97,412
Other income and <expense>
Interest expense (13,002) (8,052) -
Interest income 5,180 1,128 -
---------- --------- ---------- ---------
NET (LOSS) (1,124,771) (147,456) (665,166) (67,978)
========== ========= ========== =========
(Loss) per common share (0.10) (0.03) (0.06) (0.01)
Weighted average
shares outstanding 10,934,385 5,820,000 10,832,494 5,820,000
</TABLE>
See notes to financial statements
4
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APPLIED VOICE RECOGNITION, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 1997
Statements of cash flows
For the periods ending June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
CASH FLOWS FROM OPERATING ACTIVITIES June 30, 1997 June 30, 1996
--------------- --------------
<S> <C> <C>
Net (Loss) (1,124,771) (147,456)
Adjustments to reconcile net income to cash
provided by operating activities
Depreciation 20,631 506
Changes in operating assets and liabilities
Accounts receivable (39,375) (9,216)
Inventory (691)
Stock issued for services 80,000 -
Deposits and prepaids (70,982)
Accounts Payable and accrued expenses 186,786 50,820
--------------- --------------
NET CASH USED BY OPERATING ACTIVITIES (948,402) (105,346)
CASH FLOWS FOR INVESTING ACTIVITIES
Purchase of equipment (139,222) (5,615)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash loaned by stockholders 180,000 103,019
Repayments of notes payable (13,026) (29,332)
Loan proceeds from third parties 50,000
Capital lease financing 48,712
Proceeds from sale of stock 266,318
--------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 532,004 73,687
--------------- --------------
NET INCREASE (DECREASE) IN CASH (555,620) (37,274)
=============== ==============
Cash at beginning of period 556,997 40,495
--------------- --------------
CASH AT END OF PERIOD 1,377 3,221
=============== ==============
See notes to financial statements
</TABLE>
5
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APPLIED VOICE RECOGNITION, INC.
NOTES TO FINANCIAL STATEMENTS
For the quarter ended June 30, 1997
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
- ------------------------------
The accompanying unaudited interim financial statements of Applied Voice
Recognition, Inc., a Utah corporation (the "Company") have been prepared in
accordance with generally accepted accounting principals 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. In the
opinion of management, all adjustments consisting of normal recurring
adjustments, necessary for the fair presentation of financial position and the
results of operations for the interim periods presented have been reflected
herein. The results of operations 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, 1996, as reported in the Form 10-KSB
have been omitted.
NOTE 2 - PRIVATE PLACEMENT OF THE COMPANY'S STOCK:
- -------------------------------------------------
On June 15, 1997 the Company initiated a private placement of the Company's
stock in compliance with section 4(2) of Regulation D of the Securities and
Exchange act of 1933. The initial offering commencing on the above referenced
date consisted of placement of $1,000,000 minimum to $5,000,000 maximum of the
company's common stock at an offering price varying from a minimum of $1.60 to a
maximum of $2.00 per share. As of July 28, 1997, the Company has amended the
private placement increasing the maximum offering to $7,500,000 by the
authorization of the issuance of $2,500,000 of convertible preferred shares
priced at $8,00 share, convertible into common shares at a ratio of 5.4 to 1 and
bearing a dividend of 4% payable annually in shares of the company.
Additionally, the Company has increased the minimum on the offering from
$1,000,000 to $2,000,000. As of June 30, 1997, $289,000 was received from
investors for the offering. These funds received ($289,000) under the offering
are being held in an escrow and the conditions for release of the funds have not
as yet been met.
NOTE 3 - BRIDGE LOANS, LOANS TO RELATED PARTIES:
- -----------------------------------------------
As of the June 30, 1997, amounts payable to stockholders and officers under a
bridge loan agreement, related to the private placement of the Company's stock
totaled $230,000. The bridge loans bear interest at 12% per annum and are
payable at the earlier of six months or the receipt of the minimum proceeds of
the private placement ($2,000,000). In addition the bridge loans entitle the
holder to one warrant to purchase one share of the Company's stock for $1.60 for
every dollar loaned to the Company.
NOTE 4 - NET INCOME (LOSS) PER COMMON SHARE:
- -------------------------------------------
Net income per common share is calculated on the basis of the weighted average
number of common shares outstanding during the period. The dilutive effect of
common stock equivalents is immaterial and therefore fully dilutive income per
share is omitted from the presentation.
NOTE 5 - COMMON STOCK:
- ---------------------
Prior to August 15, 1996, the Company was organized as three separate Texas
limited partnerships. On August 15, 1996, the Company was incorporated and the
Partnership contributed assets and liabilities in exchange for 6,000,000 shares
of the Company. Because 3% of the Company was given up as partial consideration
for a $125,000 loan made July 16, 1996, the equivalent of 5,820,000 shares is
used as the total outstanding shares for the period December 31, 1995 through
December 31, 1996.
NOTE 6 - SUBSEQUENT EVENTS:
- --------------------------
Through August 8, 1997 the Company has received $934,000 in proceeds in
conjunction with its private placement (see note 2) and incurred a total of
$605,000 in bridge loans (see note 3). The funds received in conjunction with
the private placement offering ($934,000) are being held in an escrow account
and the conditions for release of the funds have not as yet been met.
6
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Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
Applied Voice Recognition Inc. (the Company or AVRI) develops, markets and
supports speech driven computer applications. Founded in 1994, the Company was
an early entrant in Automated Speech Recognition (ASR) software application
marketplace. In 1995, the Company introduced VoiceCommander, a personal
computer windows based, speech-driven, office suite software product. The
VoiceCommander enables the user to dictate and print letters and office memos,
dictate and send faxes, dictate data and computer based forms, maintain a
database of business and personal contacts, automatically dial telephone
numbers, manage e-mail and "surf" the world-wide web all via voice commands. In
December 1996 AVRI completed a reverse merger with a public company. As a
result, the Company is now traded on the Nasdaq OTCBB under the symbol "AVRI".
For the periods under discussion in this document, sales of the VoiceCommander
product have been the primary source of revenues for AVRI.
The Company's revenues are derived from license fees for software products,
training fees for assisting the customer in the use of the Company's products,
software support and maintenance and sales of hardware used in conjunction with
the Company's software. Software licenses are typically granted on a per user
basis, however the Company may grant enterprise-wide licenses for multi users
sites. Revenues have been derived in the main from direct sales to end users
through the Company's direct field sales force. Since inception AVRI has
focused its sales and marketing resources in the Houston, Texas marketplace and
consequently most of the revenues in 1996 and 1997 are derived from this market.
During the first two quarters of 1997, the Company has significantly increased
its research and development efforts to produce a new version of its
VoiceCommander product and increased its sales, marketing and administrative
staff to capitalize on the launch of VoiceCommander 4.0. The Company
anticipates that the VoiceCommander 4.0 product will be released in the third
quarter of 1997.
The Company's operating results have fluctuated and may continue to fluctuate on
an annual and quarterly basis, as a result of a number of factors, many of which
are outside the Company's control. These factors include the timing of
significant orders, the length of the sales cycle, the timing of the release of
new products, the ability of the Company to recruit and train an effective field
sales force, the acceptance of new and enhanced versions of the Company's
product and conditions and events in the computer industry and the general
economy. Additionally, the Company has expensed all research and development
costs to date and therefore financial periods may reflect higher than normal
expenses in advance of the financial periods in which material sales revenues
can be realized on any newly developed products.
RESULTS OF OPERATIONS
REVENUES
Revenues were $237,197 and 97,968 for the three months ended June 30, 1997 and
1996 respectively, representing an increase of $139,229 or 142%. Revenues were
$453,157 and $215,611 for the six months ended June 30, 1997 and 1996
respectively, representing and increase of $237,546 or 111%. The increases for
the three months and the six months ended June 30, 1997 resulted primarily from
the addition of sales personnel in direct sales and a marketing and promotional
campaign launched in the first quarter of 1997.
7
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OPERATING EXPENSES, NONOPERATING ITEMS
Cost of sales as a percentage of revenues was 57% in the second quarter of
fiscal 1997 compared to 69% in the second quarter of fiscal 1996 and 60% for the
first two quarters of 1997 versus 66% for the first two quarters of 1996. The
favorable trend in both periods is attributable to the negotiation of favorable
contracts with suppliers of the speech engine upon which the Company's software
applications run. Additionally, the Company realized lower costs of hardware
purchased as a result of volume discounts due to increased customer sales.
Sales and marketing expenses were $155,846 in the second quarter of 1997 and
$4,178 in the second quarter of 1996 representing an increase of $151,668. For
the first two quarters of 1997 and 1996 sales and marketing expenses equaled
$318,626 and $27,473 respectively, representing and increase of $291,153. For
the current period and the year to date, the increase was attributable to the
addition of incremental salespersonnel and the launch of a radio and print
marketing campaign featuring Hakeem Olajuwon, the NBA star.
Research and development expenses increased from $803 in the second quarter of
1996 to $112,428 in the same quarter of 1997 and for the six months ended June
30, 1997, these expenses totaled $172,361 versus $14,911 for the same period in
1996. In both periods the increase was attributable to the addition of
programming personnel to develop the latest version of the Company's core
product, VoiceCommander.
General and administrative expenses were $489,574 in the second quarter of 1997
and $92,431 in the second quarter of 1996, representing an increase of
$397,143. For the six months ended June 30, 1997, general and administrative
expenses totaled $808,237, representing an increase of $629,163 over the
$179,074 incurred for the six months ended June 30, 1996. The increase in both
periods is attributable to the addition of senior level management and
administrative personnel.
Net interest expense increased by $6,924 and $7,882 over the prior year, for the
second quarter and year to date , of 1997 respectively. The increase in both
periods was due to increased debt financing.
NET INCOME (LOSS)
Net loss for the second quarter of fiscal 1997 was $665,167 compared to a net
loss of $67,978 for the same period in 1996. For the six months ended June 30,
1997, the net loss for the Company totaled $1,124,771 compared to a net loss of
$147,456 for the same period in 1996. The increases in net loss for both
periods is attributable to the incremental sales, marketing, research and
development, and general and administrative expenses incurred in conjunction
with the launch of the Company's new VoiceCommander product.
LIQUIDITY AND FINANCIAL CONDITION
Net cash used by operating activities increased to $948,402 for the six months
ended June 30, 1997 from $105,346 for the six months ended June 30, 1996. The
increase was due, in the main, to the increase in net loss for the Company for
the two periods. Net loss for the six months ended June 30, 1997 amounted to
$1,124,771 and $147,456 for the six months ended June 30, 1996.
The Company utilized $139,222 of its funds for purchasing equipment for the six
months ended June 30, 1997 versus $5,615 for the same period in 1996. The
increase of $133,607 was attributable to purchasing computer and office
equipment.
Cash flows from financing activities totaled $532,004 for the six months ended
June 30, 1997 and for the six months ended June 30, 1996 totaled $73,687. This
increase of $458,317 was attributable to $266,318 received as the result of
sales of the Company's stock, and a net increase of $191,999 of funds received
from loan proceeds and capital lease financing.
8
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The Company is currently engaged in the private placement (the "Private
Placement") of up to 3,125,000 shares of common stock, par value $.001 per share
(the "Common Stock") and up to 312,500 shares of Series A Preferred Stock, par
value $.01 per share (the Series A Preferred Stock"). The Company intends to
offer the Common Stock and Series A Preferred Stock in several separate closings
extending to December 1, 1997. The Company closed the first offering of 125,000
shares of the Series A Preferred Stock on August 1, 1997 for a purchase price of
$8.00 per share for an aggregate of $1,000,000, and closed the second offering
of 187,500 shares of the Series A Preferred Stock on August 12, 1997 for a
purchase price of $8.00 per share or an aggregate of $1,500,000. Additionally,
the Company has received funds totaling $934,000 for the purchase of Common
Stock at a purchase price of $1.60 per share. The Minimum Offering is
$2,000,000 and the Maximum Offering is $7,500,000 under the Private Placement.
See Part II, Item 2, below for a further description for the Private Placement.
The Company has received $605,000 in loan proceeds from corporate directors,
officers and outsiders in the form of a bridge loan as of August 8, 1997. The
bridge loans bear interest at 12% per annum and the maker will receive one
warrant to purchase the Company's stock for $1.60 for every dollar loaned to the
Company. The bridge loan is repayable at the sooner of six months or the
receipt of the net proceeds from the Minimum Offering.
The Company has received the $2,500,000 from the sales of the Series A Preferred
Stock and therefore has exceeded the amount of the Minimum Offering. The Company
should be able to utilize such proceeds together with the revenues generated
from the Company's existing operations to develop the Company's products and
services, and the markets for those products and services, to the extent
necessary for the Company to meet its future capital requirements for the
Company's future operations. However, if the Company receives only the net
proceeds from the Minimum Offering, it is not the intention of management to run
the Company's business in such a manner as would be required to solely depend on
such net proceeds or internally generated funds for future operations. Rather,
the Company would be managed in a manner that reflected management's intention,
at some future date to raise additional debt or equity financing. No assurance
can be given that any such financing would be available.
If the Company does not receive the proceeds of the Maximum Offering, the
Company intends to focus its sales efforts on establishing a sales force located
in Houston, Texas, interacting with the customers primarily via telephone,
internet and fax communication. If, on the other hand, the Company receives the
net proceeds from the Maximum Offering, the Company intends to focus its efforts
on establishing a field based sales force, interacting with customers primarily
via face to face communication. In connection with the latter scenario, the
Company may undertake to open additional sales offices to serve as bases for
such field based sales force.
The Company anticipates, therefore, based upon its currently proposed plans,
that upon receipt of the net proceeds from the Maximum Offering, the Company
will continue to lose money in the near term as a result of the Company
increasing its expenditures in connection with marketing its products and
services on a national scale, increasing its sales force and technical support
staff and opening additional sales offices. The Company believes, however, that
upon receipt of such Maximum Offering proceeds, the Company will be able to
utilize such proceeds together with the revenues generated from the Company's
existing operations to develop the Company's products and services and the
markets for those products and services, to the extent necessary for the Company
to meet its future capital requirements for the Company's future operations.
Notwithstanding the foregoing, the Company's business plan anticipates
additional financing in the next twelve months.
9
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There can be no assurance, however, that the Company will be able to develop its
products and services, or the markets for such products and services to the
extent required to meet its future capital requirements from the revenues
generated by the Company's future operations. If cash provided by operating
activities is insufficient to provide internal sources of liquidity, the Company
will rely upon external sources of liquidity. There can be no assurance that
the Company will be able to obtain additional cash resources from the sale of
its securities or from debt sources on reasonable terms, it at all. 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 available cash may be expected
to satisfy the Company's capital requirements.
As of the date of this report the company has no material capital commitments.
PART II: OTHER INFORMATION
Item 2: Changes in Securities
The Company is currently engaged in the private placement (the "Private
Placement") of up to 3,125,000 of common stock, par value $.001 per share (the
"Common Stock") and up to 312,500 shares of Series A Preferred Stock, par value
$.10 per share (the "Series A Preferred Stock"), all to "accredited investors"
as that term is defined in Rule 501(a) of Regulation D promulgated under the
Securities Act of 1933, as amended. The Company intends to offer the Common
Stock and Preferred Stock (collectively, the "Shares") in separate closings over
the next few weeks. The Minimum Offering is $2,000,000 and the Maximum Offering
is $7,500,000.
The Company closed the first offering of 125,000 shares of Preferred Stock on
August 1, 1997, for an aggregate of $1,000,000 and intends to close the second
offering of the remaining 187,500 shares of Preferred Stock on August 12, 1997
for the aggregate of $1,500,000. The Company intends to offer the Common Stock
at prices varying from $1.60 to $2.00 per share with the initial sale of the
Common Stock expected to close on August 15, 1997. The maximum net proceeds
expected from the sale of the Shares (after deduction of estimated commissions)
are estimated to be $6,600,000 (less expenses). The Company plans to use the
proceeds from the sale of the Shares for working capital, research and
development, repayment of indebtedness and to open additional sales offices.
Item 4: Submission of matters to a vote of the security holders
On July 27, 1997, a special meeting of the security holders of the Company was
held to amend the Company's Certificate of Incorporation to allow the company to
issue 312,500 shares of preferred stock. The matter was adopted by the
shareholders.
Item 5: Other Matters
On August 12, 1997, the Company's board of directors determined to replace
Malone & Bailey PLLC ("M&B") as its principal accountant with Ernst & Young LLP
("E&Y) effective August 12, 1997.
The report of M&B on the Company's financial statements for the last two fiscal
years did not contain an adverse opinion or a disclaimer of opinion, nor was
such opinion qualified or modified as to certainty, audit scope, or accounting
principles. During the Company's two most recent fiscal years and subsequent
interim periods preceding the replacement of M&B, the Company had no
disagreements with M&B on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. During the
Company's two most recent fiscal years and subsequent interim periods preceding
the retention of E&Y, neither the Company nor anyone on the Company's behalf,
consulted E&Y regarding any matter.
10
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The Company has provided M&B a copy of the disclosures made under Item 5 of
this report and M&B has furnished the Company with a letter addressed to the
Commission stating that it agrees with the statement made by the Company in
response to this Item. Such letter is filed as exhibit 16.1 to this Report.
Item 6: Exhibits and Reports on Form 8K
(a) Exhibits
Exhibit
No. Description of the Exhibit
3.1 Articals of Amendment to Articles of Incorporation Dated July 29,
1997.
3.2 Articles of Amendment to Articles of Incorporation.
16.1 Letter from Malone and Bailey, PLLC dated August 12, 1997.
27 Financial Data Schedule.
(b) Reports on Form 8K
None.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on it behalf by the
undersigned thereunto duly authorized.
Applied Voice Recognition Inc.
August 14, 1997 By: /s/ W. T. Kennedy
-----------------------
W. T. Kennedy
Chief Accounting Officer
12
<PAGE>
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
APPLIED VOICE RECOGNITION, INC.
To the Secretary of State:
Pursuant to the provisions of the Utah Revised Business Corporation Act,
Section 16-10a-1006, the undersigned corporation hereby amends its Articles of
Incorporation, and for that purpose, submits the following statement:
1. The name of the corporation is: Applied Voice Recognition, Inc.
2. The text of each amendment adopted is as follows:
a. Article IV is hereby deleted in its entirety and replaced with
the following:
ARTICLE IV
Capitalization
The Corporation is authorized to issue two classes of shares to be
designated common and preferred respectively. The total number of common
shares which the Corporation is authorized to issue is 50,000,000 shares,
and the par value of each such common share is $0.001 per share. The total
number of preferred shares which the Corporation is authorized to issue is
2,000,000 shares, and the par value of each such preferred share is $0.10
per share. Shares of any class of capital stock of the Corporation may be
issued for such consideration and for such corporate purposes as the Board
of Directors of the Corporation (the "Board of Directors") may from time to
time determine.
A. Preferred Shares. Pursuant to Section 16-10a-602 of the Utah
Revised Business Corporation Act (the "UBCA"), the Board of Directors shall
have authority to authorize the issuance of preferred shares in one or more
classes or series, as it deems appropriate, and with such designations,
preferences, relative, participating, optional and other special rights and
qualifications, limitations or restrictions (which may differ with respect
to each series) as the Board of Directors may fix by resolution. For each
such class or series, the Board of Directors shall establish a distinctive
serial designation and may establish, in its sole discretion, terms and
conditions of such class or series relative to the rights and restrictions
described in the foregoing sentence. Upon adopting the resolution
establishing each such class or series and prior to issuance of the shares
of
<PAGE>
such class or series, the Board of Directors shall cause the Corporation to
file with the Secretary of State the articles of amendment to the articles
of incorporation required by Section 16-10a-602 of the UBCA or any
successor provision of law.
B. Common Shares. The common shares shall have all of the voting
power of the shareholders of the Corporation not allocated to and held by
the holders of the outstanding preferred shares by virtue of their
ownership of preferred shares. Each share of common stock shall carry the
right to one vote.
b. Article IX is hereby deleted in its entirety and replaced with
the following:
ARTICLE IX
Directors
The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. In addition to the
authority and powers conferred upon the Board of Directors by the UBCA or
by the other provisions of these Articles of Incorporation (the "Articles
of Incorporation"), the Board of Directors is hereby authorized and
empowered to exercise all such powers and do all such acts and things as
may be exercised or done by the Corporation, subject to the provisions of
the UBCA, these Articles of Incorporation and the Bylaws; provided however,
that no Bylaws hereafter adopted by the shareholders of the Corporation, or
any amendments thereto, shall invalidate any prior act of the Board of
Directors that would have been valid if such Bylaws or amendment had not
been adopted.
A. Number, Election and Terms of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed from
time to time by a majority of the directors then in office and shall be
divided into three classes: Class I, Class II and Class III; provided,
however, the number of directors which shall constitute the whole Board of
Directors shall be not less than three nor more than twelve, with the
actual number within that range to be established from time to time by
resolution of the Board of Directors. Each director shall serve for a term
ending on the third annual meeting following the annual meeting at which
such director was elected; provided, however, that the directors first
elected to Class I shall serve for a term expiring at the annual meeting
next following the end of the calendar year 1997, the directors first
elected to Class II shall serve a term expiring at the annual meeting next
following the end of the calendar year 1998, and the directors first
elected to Class III shall serve for a term expiring at the annual meeting
next following the end of the calendar year 1999. Each director shall hold
office until the annual meeting at which such director's term expires and,
the foregoing notwithstanding, shall serve until his successor shall have
been duly elected and qualified or until his earlier death, resignation or
removal.
2
<PAGE>
At such annual election, the directors chosen to succeed those whose
terms then expire shall be of the same class as the directors they succeed,
unless, by reason of any intervening changes in the authorized number of
directors, the Board of Directors shall have designated one or more
directorships whose terms then expire as directorships of another class in
order to more nearly achieve equality of number of directors among the
classes.
In the event of any changes in the authorized number of directors,
each director then continuing to serve shall nevertheless continue as a
director of the class of which he is a member until the expiration of his
current term, or his prior death, resignation or removal. The Board of
Directors shall specify the class to which a newly created directorship
shall be allocated and shall specify the class to which all existing
directors are a member following the effective date of this Article IX.
Election of directors need not by written ballot unless the Bylaws of
the Corporation shall so provide.
B. Removal of Directors. No director of the Corporation shall be
removed from office as director by vote or other action of the shareholders
or otherwise except for cause, and then only by the affirmative vote of the
holders of at least a majority of the voting power of all outstanding
shares of capital stock of the Corporation generally entitled to vote in
the election of directors, voting together as a single class. Except as
may otherwise be provided by law, cause of removal of a director shall be
deemed to exist only if: (i) the director whose removal is proposed has
been convicted, or where a director is granted immunity to testify where
another has been convicted, of a felony by a court of competent
jurisdiction and such conviction is no longer subject to direct appeal;
(ii) such director has been found by the affirmative vote of a majority of
the entire Board of Directors at any regular or special meeting of the
Board of Directors called for that purpose or by a court of competent
jurisdiction to have been grossly negligent or guilty of misconduct in the
performance of his duties to the Corporation in a matter of substantial
importance to the Corporation; or (iii) such director has been adjudicated
by a court of competent jurisdiction to be mentally incompetent, which
mental incompetency directly affects his ability as a director of the
Corporation.
C. Vacancies. Newly created directorships resulting from any
increase in the number of directors and any vacancies on the Board of
Directors resulting from death, resignation, removal or other cause shall
be filled by the affirmative vote of a majority of the remaining directors
then in office, even though less than a quorum of the Board of Directors.
Any director elected in accordance with the preceding sentence shall hold
office for the remainder of the full term of the class of directors in
which the new directorship was created or the vacancy occurred and until
such director's successor shall have been elected and qualified or until
his earlier death, resignation or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
3
<PAGE>
c. A new Article XIII is hereby added as follows:
ARTICLE XIII
Shareholder Action Without Meeting
Subject to subsections (2) through (7) of section 16-10a-704 of the
UBCA, any action required by the UBCA to be taken at any annual or special
meeting of shareholders, or any action which may be taken at any annual or
special meeting of shareholders, may be taken without a meeting, without
prior notice, and without a vote, if one or more consents in writing,
setting forth the action so taken, shall be signed by the holders of shares
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Notice of the taking of any action by
shareholders without a meeting by less than unanimous written consent shall
be given to those shareholders who did not consent in writing to the taking
of such action at least 10 days before the consummation of the
transactions, action, or event authorized by the shareholder action.
3. These Articles of Amendment do not provide for any exchange,
reclassification or cancellation of issued shares.
4. These Articles of Amendment were duly adopted at a meeting of the
shareholders held on July 28, 1997, in accordance with the provisions of Section
16-10a-1003.
5. (a) The designation, number of outstanding shares, number of votes
entitled to be cast by each voting group entitled to vote separately on these
Articles of Amendment, and number of votes of each voting group indisputably
represented at the meeting, were as follows:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF
OUTSTANDING VOTES ENTITLED VOTES PRESENT
CLASS SHARES TO BE CAST AT MEETING
- -------- ----------- -------------- -------------
<S> <C> <C> <C>
Common 11,138,769 11,138,769 7,403,500
</TABLE>
(b) The total number of undisputed votes cast for the Articles of
Amendment by such voting group was 7,403,500, and the number of votes cast for
the Articles of Amendment by such voting group was sufficient for approval by
that voting group.
6. The amendments contained herein are to be effective when these
Articles of Amendment to Articles of Incorporation are filed with the Division
of Corporations and Commercial Code.
4
<PAGE>
IN WITNESS WHEREOF, said Applied Voice Recognition, Inc. has caused these
Articles of Amendment to Articles of Incorporation to be signed by its Chairman
and attested by its Assistant Secretary, this 29th day of July, 1997.
APPLIED VOICE RECOGNITION, INC.
By:_________________________________________
Timothy J. Connolly, Chairman
ATTEST:
By:___________________________________________________
William T. Kennedy, Assistant Secretary
5
<PAGE>
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
APPLIED VOICE RECOGNITION, INC.
To the Secretary of State:
Pursuant to the provisions of the Utah Revised Business Corporation Act,
Section 16-10a-1006 and as permitted by Section IV.A of the Articles of
Incorporation of the undersigned corporation, the undersigned corporation hereby
amends its Articles of Incorporation, and for that purpose, submits the
following statement:
1. The name of the corporation is: Applied Voice Recognition, Inc.
2. The following text shall be added to the end of Article IV:
Designation of Series A Preferred Stock and Statement of Preferences,
Characteristics, Limitations, and Relative Rights in Respect of Shares Thereof
A. Designation. The Preferred Stock having the rights, preferences,
privileges and restrictions set forth below shall be designated and known as
"Series A Preferred Stock."
B. Number of Shares of Series A Preferred Stock. The number of shares
constituting all of the Series A Preferred Stock shall be THREE HUNDRED TWELVE
THOUSAND FIVE HUNDRED (312,500).
C. Dividends. The holders of the then outstanding shares of the Series A
Preferred Stock shall be entitled to dividends ("Preferred Dividends") equal to
thirty two hundredths of a dollar ($0.32) per annum per share of Series A
Preferred Stock, which Preferred Dividends shall be paid in shares of Common
Stock, $0.001 par value per share, of the Corporation. The number of shares of
Common Stock to be issued as Preferred Dividends pursuant hereto shall be based
upon the thirty (30) day average closing price prior to the dividend date of the
Common Stock on the Nasdaq Over the Counter Bulletin Board (the "OTCBB"). If
the Common Stock is no longer trading on the OTCBB, then the number of shares of
Common Stock to be issued as Preferred Dividends shall be based upon such other
trading forum or exchange, if any, under which the Common Stock is trading, and
if no established market exist for the Common Stock, the Board of Directors of
the Corporation (the "Board of Directors") shall determine the number of shares
of Common Stock to be issued as Preferred Dividends in the exercise of their
reasonable discretion. Preferred Dividends shall, when and as
<PAGE>
declared by the Corporation's Board of Directors, be payable quarterly on the
first day of each April, July, October and January, commencing on the first such
date following the issuance of such shares, except that if such date is not a
business day, then such dividends shall be payable on the first day immediately
succeeding that business day. No dividend shall be declared or paid if such
declaration or payment would result in a violation of the Utah Revised Business
Corporation Act (the "UBCA").
The Preferred Dividends shall be cumulative, and no dividends shall be
declared or paid with respect to the Common Stock, nor may any distribution be
made to the holders of Common Stock, until all accrued Preferred Dividends have
been paid, or declared and shares of Common Stock are set apart for payment, for
the current and all prior dividend periods. No interest shall accumulate on any
unpaid dividends, distributions, or dividend arrearages with respect to the
Series A Preferred Stock, regardless of whether the Board of Directors has
declared such dividends. Payment of Preferred Dividends shall be in preference
to dividends on Common Stock or any other shares of stock of the Corporation
ranking junior to the Series A Preferred Stock.
D. Liquidation Preference. In the event of any liquidation, dissolution,
or winding up of the Corporation, either voluntary or involuntary, the holders
of the Series A Preferred Stock shall be entitled to be paid out of the assets
of the Corporation available for distribution to its shareholders, before any
payment or declaration and setting apart for payment of any amount shall be made
with respect to the Common Stock, or stock of any other class ranking junior as
to the assets in liquidation to the Series A Preferred Stock, Eight Dollars
($8.00) per share, and no more. If upon the occurrence of such event the assets
distributable among the holders of the Series A Preferred Stock and stock
ranking on parity with the Series A Preferred Stock, if any, as to assets in
liquidation (collectively, "Parity Stock") shall be insufficient to permit the
payment of the full preferential amounts for the Series A Preferred Stock and
Parity Stock, then the entire assets and funds of the Corporation legally
available for distribution to its shareholders shall be distributed among the
holders of the Series A Preferred Stock and Parity Stock then outstanding
ratably per share in proportion to the full preferential amounts per share to
which they are respectively entitled. After the payment or distribution to the
holders of the Series A Preferred Stock and the Parity Stock of their full
preferential amounts have been made, the holders of Series A Preferred Stock
shall not be entitled to any additional distributions with respect to the Series
A Preferred Stock.
E. Redemption. Any shares of the Series A Preferred Stock that have not
been converted to Common Stock by the third anniversary of the date of their
issuance, may, at the option of the Corporation, at any time thereafter be
redeemed at a redemption
2
<PAGE>
price of Eight Dollars ($8.00) per share plus any earned but unpaid dividends
(the actual date of redemption being referred to as the "Preferred Stock
Redemption Date"). Either all or none of the outstanding shares of Series A
Preferred Stock must be redeemed. If on or before the Preferred Stock
Redemption Date all funds necessary for such redemption shall have been set
aside by the Corporation, separate and apart from its other funds, in trust for
the pro rata benefit of the holders of the Series A Preferred Stock, so as to be
and continue to be available therefor, then from and after the Preferred Stock
Redemption Date, notwithstanding that any certificate for shares of the Series A
Preferred Stock shall not have been surrendered for cancellation, the shares
represented thereby shall no longer be deemed outstanding, and all rights with
respect to shares of the Series A Preferred Stock shall forthwith on the
Preferred Stock Redemption Date cease and terminate except only as to the right
of the holders thereof to receive the redemption price of such shares so to be
redeemed. Any monies so set aside by the Corporation and unclaimed at the end
of five (5) years from the Preferred Stock Redemption Date shall revert to the
general funds of the Corporation (provided that the holders of Series A
Preferred Stock have received notice of the redemption within 90 days after the
Preferred Stock Redemption Date).
The respective holders of record of the Series A Preferred Stock to be
redeemed shall be entitled to receive the redemption price upon actual delivery
to the Corporation of certificates for the shares to be redeemed, duly endorsed
in blank or accompanied by proper instruments of assignment and transfer duly
endorsed in blank.
F. Conversion Rights.
(i) Each holder of shares of Series A Preferred Stock shall be
entitled to cause any or all of such shares to be converted into Common
Stock. Each share of Series A Preferred Stock shall be convertible into
five and four-tenths (5.4) shares of Common Stock.
(ii) Each holder of Series A Preferred Stock desiring to convert any
or all of such shares into shares of Common Stock pursuant to paragraph (i)
of this Section F shall surrender the certificate or certificates
representing the shares of Series A Preferred Stock being converted, duly
assigned or endorsed for conversion (or accompanied by duly executed stock
powers relating thereto), at the principal executive office of the
Corporation or the offices of the transfer agent for the Series A Preferred
Stock or such office or offices in the continental United States of an
agent for conversion as may from time to time be designed by notice to the
holders of the Series A Preferred Stock by the Corporation or the transfer
agent for the Series A Preferred Stock, accompanied by written notice of
conversion. Such notice of conversion shall specify
3
<PAGE>
(1) the number of shares of Series A Preferred Stock to be converted and
(2) the address to which such holder wishes delivery to be made of such new
certificates to be issued upon such conversion.
(iii) Upon surrender of a certificate representing a share or shares
of Series A Preferred Stock for conversion pursuant to paragraph (i) of
this Section F, the Corporation shall, within five (5) business days of
such surrender, issue and send (with receipt to be acknowledged) to the
holder thereof, at the address designated by such holder, a certificate or
certificates for the number of validly issued, fully paid and non-
assessable shares of Common Stock to which such holder shall be entitled
upon conversion. In the event that there shall have been surrendered a
certificate or certificates representing shares of Series A Preferred
Stock, only part of which are to be converted, the Corporation shall issue
and deliver to such holder a new certificate or certificates representing
the number of shares of Series A Preferred Stock which shall not have been
converted.
(iv) The issuance by the Corporation of shares of Common Stock
pursuant to paragraph (i) of this Section F shall be effective as of the
earlier of (1) the delivery to such holder of the certificates representing
the shares of Common Stock issued upon conversion thereof, or (2)
immediately prior to the close of business on the day of surrender of the
certificate or certificates for the shares of Series A Preferred Stock to
be converted, duly assigned or endorsed for conversion (or accompanied by
duly executed stock powers relating thereto) as provided in these Articles
of Incorporation. On and after the effective day of the conversion, the
person or persons entitled to receive the Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock, but no allowance or adjustment
shall be made in respect of dividends payable to holders of Common Stock of
record on any date prior to such effective date.
(v) The Corporation shall not be obligated to issue and deliver any
fractional share of Common Stock upon any conversion of shares of Series A
Preferred Stock, but in lieu thereof shall pay to the holder converting
such Series A Preferred Stock an amount of cash equal to the fractional
share of Common Stock that otherwise would have been issued upon conversion
rounded to the nearest 1/100th of a share of Common Stock multiplied by the
current market price (as reasonably determined by the Corporation) on the
business day preceding the effective date of the conversion.
(vi) The Corporation shall at all times reserve and keep available out
of its authorized and unissued Common Stock or
4
<PAGE>
treasury shares, solely for issuance upon the conversion of shares of
Series A Preferred Stock as herein provided, free from any preemptive
rights, such number of shares of Common Stock as shall be issuable upon the
conversion of all the shares of Series A Preferred Stock then outstanding.
G. Anti-dilution Adjustments.
(i) In case the Corporation shall at any time change as a whole, by
subdivision or combination in any manner or by the making of a stock
dividend, the number of outstanding shares of Common Stock into a different
number of shares (i.e. forward or reverse stock split), (i) the number of
shares of Common Stock to which the holders of Series A Preferred Stock may
convert such Series A Preferred Stock shall be increased or decreased in
direct proportion to such increase or decrease of shares, as the case may
be, and (ii) the conversion price (but not the aggregate conversion price)
in effect immediately prior to such change shall be increased or decreased
in inverse proportion to such increase or decrease of shares, as the case
may be.
(ii) If, prior to the conversion of all the Series A Preferred Stock,
there shall be any merger, consolidation, exchange of shares,
recapitalization, reorganization, or other similar event, as a result of
which shares of Common Stock of the Corporation shall be changed into the
same or a different number of shares of the same or another class or
classes of stock or securities of the Corporation or another entity or
there is a sale of all or substantially all the Corporation's assets that
is not deemed to be a liquidation pursuant to Section D hereof, then the
holders of Series A Preferred Stock shall thereafter have the right to
receive upon conversion of Series A Preferred Stock, upon the basis and
upon the terms and conditions specified herein and in lieu of shares of
Common Stock, immediately theretofore issuable upon conversion, such stock,
securities and/or other assets which the holder would have been entitled to
receive in such transaction had the Series A Preferred Stock been converted
immediately prior to such transaction, and in any such case appropriate
provisions shall be made with respect to the rights and interests of the
holders of the Series A Preferred Stock to the end that the provisions
hereof (including, without limitation, provisions for the adjustment of the
conversion rate and the number of shares issuable upon conversion of the
Series A Preferred Stock) shall thereafter be applicable, as nearly as may
be practicable in relation to any securities thereafter deliverable upon
the conversion thereof. The Corporation shall not effect any transaction
described in this subsection (ii) unless (a) it first gives fifteen (15)
calendar days prior notice of such merger, consolidation, exchange of
shares, recapitalization,
5
<PAGE>
reorganization, or other similar event (during which time the holders of
the Series A Preferred stock shall be entitled to convert their Series A
Preferred Stock into shares of Common Stock to the extent permitted hereby)
and (b) the resulting successor or acquiring entity (if not the
Corporation) assumes by written instrument the obligation of the
Corporation under the Articles of Incorporated, as amended, of the
Corporation, including the obligation of this subsection (ii).
H. Voting Rights. Except as otherwise required by the UBCA or these
Articles of Incorporation, the holders of Series A Preferred Stock shall have
the following voting rights:
(i) So long as any shares of the Series A Preferred Stock are
outstanding, the Corporation shall not, without the affirmative vote or
written consent of the holders of 51% of the outstanding shares of the
Series A Preferred Stock voting separately as a class, (1) amend, alter or
repeal any provision of the Articles of Incorporation or the By-Laws of the
Corporation so as to adversely affect the relative rights, preferences,
qualifications, limitations or restrictions of the Series A Preferred
Stock, or (2) authorize or issue, or increase the authorized amount of any
then existing or additional class or series of stock or any security
convertible into stock of such class or series, ranking as to dividends or
as to distributions in the event of a liquidation, dissolution or winding
up of the Corporation, or parity with or senior to the Series A Preferred
Stock.
(ii) Except as otherwise required by the UBCA or these Articles of
Incorporation, the holders of the Series A Preferred Stock shall have no
voting rights, and no consent of any holder shall be required for the
taking of any corporate action.
I. Protective Provision. So long as shares of Series A Preferred Stock are
outstanding, the Corporation shall not without first obtaining the approval (by
vote or written consent as provided by Utah Law) of the holders of at least
sixty-six and two-thirds percent (66-2/3%) of the then outstanding Series A
Preferred Stock, and at least sixty-six and two-third percent (66-2/3%) of the
then outstanding holders of Series A Preferred Stock:
(i) alter or change the rights, preferences or privileges of the
Series A Preferred Stock or any senior securities so as to affect adversely
the Series A Preferred Stock;
(ii) create any new class or series of stock having a preference over
the Series A Preferred Stock or increase the size of the authorized number
of Series A Preferred Stock; or
6
<PAGE>
(iii) do any act or thing not authorized or contemplated by these
Articles of Incorporation, as amended, which would result in taxation of
the holders of shares of the Series A Preferred Stock under section 305 of
the Internal Revenue Code of 1986, as amended (or any comparable provision
of the Internal Revenue Code as hereafter from time to time amended).
J. Miscellaneous.
(i) Except as specifically set forth herein, all notices or
communications provided for or permitted hereunder shall be made in writing
by hand delivery, express overnight courier, registered first class mail,
or telecopied addressed (1) if to the Corporation, to its office at 4615
Post Oak Place, Suite 111, Houston, Texas 77027, Attention: Timothy J.
Connolly, Chairman and CEO, Telecopier: (713) 621-5870, and (2) if to the
holder of the Series A Preferred Stock, to such holder at the address of
such holder as listed in the stock record books of the Corporation or to
such other address as the Corporation or such holder, as the case may be,
shall have designated by notice similarly given. All such notices and
communications shall be deemed to have been duly given: when delivered by
hand, if personally delivered; five (5) business days after being deposited
in the mail, registered or certified mail, return receipt requested,
postage prepaid, if mailed; when received after being deposited in the
regular mail; the next business day after being deposited with an overnight
courier, if deposited with a nationally recognized, overnight courier
service; when receipt is acknowledged, if telecopied, so long as followed
up on the same day by overnight courier.
(ii) The Corporation shall pay any and all stock transfer and
documentary stamp taxes that may be payable in respect of any issuance or
delivery of shares of Series A Preferred Stock or shares of Common Stock or
other securities issued on account of Series A Preferred Stock pursuant
hereto or certificates representing such shares or securities. The
Corporation shall not, however, be required to pay any such tax which may
be payable in respect of any transfer involved in the issuance or delivery
of shares of Series A Preferred Stock or Common Stock or other securities
in a name other than that in which the shares of Series A Preferred Stock
with respect to which such shares or other securities are issued or
delivered were registered, or in respect of any payment to any person with
respect to any such shares or securities other than a payment to the
registered holder thereof, and shall not be required to make any such
issuance, delivery or payment described in this sentence unless and until
the person otherwise entitled to such issuance, delivery or payment has
paid to the Corporation the amount of any such tax or has established, to
the satisfaction of the Corporation, that such tax has been paid or is not
payable.
7
<PAGE>
(iii) In the event that the holder of shares of Series A Preferred
Stock shall not by written notice designate the address to which the
certificate or certificates representing shares of Common Stock to be
issued upon conversion of such shares should be sent, the Corporation shall
be entitled to send the certificate or certificates representing such
shares to the address of such holder shown on the records of the
Corporation or any transfer agent for the Series A Preferred Stock.
(iv) The Corporation may appoint, and from time to time discharge and
change, a transfer agent of the Series A Preferred Stock. Upon any such
appointment or discharge of a transfer agent, the Corporation shall send
notice thereof by first-class mail, postage prepaid, to each holder of
record of Series A Preferred Stock.
(v) The Corporation shall appoint, and from time to time may replace,
a conversion agent for the Series A Preferred Stock. Upon any such
replacement of the conversion agent, the Corporation shall send notice
thereof by first-class mail, postage prepaid, to each holder of record of
Series A Preferred Stock.
3. These Articles of Amendment do not provide for any exchange,
reclassification or cancellation of issued shares.
4. These Articles of Amendment were duly adopted by Unanimous Consent of
the Board of Directors dated as of July 29, 1997, and shareholder action was not
required in connection therewith.
5. The amendments contained herein are to be effective when these
Articles of Amendment to Articles of Incorporation are filed with the Division
of Corporations and Commercial Code.
(Remainder of Page Intentionally Left Blank)
8
<PAGE>
IN WITNESS WHEREOF, said Applied Voice Recognition, Inc. has caused these
Articles of Amendment to Articles of Incorporation to be signed by its Chairman
and attested by its Assistant Secretary, this ______ day of July, 1997.
APPLIED VOICE RECOGNITION, INC.
By:____________________________
Timothy J. Connolly,
Chairman
ATTEST:
By:_______________________________________
W. T. Kennedy, Assistant Secretary
9
<PAGE>
EXHIBIT 16.1
[Letterhead of Malone & Bailey appears here]
August 12, 1997
Securities and Exchange Commission
Mail Stop 9-5
450 5th Street, N.W.
Washington, DC 20549
Dear Sirs / Madams:
We have read agree with the comments in Part II, Item 5, of Form 10-QSB
(Commission File No. 33-1210-D) of Applied Voice Recognition, Inc.
Very truly yours,
/s/ Malone & Bailey, PLLC
_________________________
Malone & Bailey, PLLC
by John C. Malone, CPA
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 290,370 3,221
<SECURITIES> 0 0
<RECEIVABLES> 77,379 14,677
<ALLOWANCES> 0 0
<INVENTORY> 49,764 15,000
<CURRENT-ASSETS> 488,502 32,898
<PP&E> 136,472 27,952
<DEPRECIATION> 32,715 7,090
<TOTAL-ASSETS> 624,974 60,850
<CURRENT-LIABILITIES> 946,419 477,230
<BONDS> 0 0
0 0
0 0
<COMMON> 11,139 5,820
<OTHER-SE> (522,050) (523,250)
<TOTAL-LIABILITY-AND-EQUITY> 624,974 60,850
<SALES> 453,151 215,611
<TOTAL-REVENUES> 453,151 215,611
<CGS> 270,875 141,609
<TOTAL-COSTS> 270,875 141,609
<OTHER-EXPENSES> 1,299,224 221,458
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (7,822) (6,924)
<INCOME-PRETAX> (1,124,771) (147,456)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,124,771) (147,456)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,124,711) (147,456)
<EPS-PRIMARY> (.10) (.03)
<EPS-DILUTED> (.10) (.03)
</TABLE>
