<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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from January 1, 1998 to June 30, 1998
Commission file number: 0-23607
APPLIED VOICE RECOGNITION, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-051318
- --------------------------------------------------------------------------------
(State or other (IRS Employer
Jurisdiction of 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)
<PAGE>
Check 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 preceding
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 the
past90 days.
Yes [X] No [_]
Number of shares of Common Stock outstanding as of August 14, 1998: 13,982,309
<PAGE>
PART I.
FINANCIAL INFORMATION
This report includes "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. All statements other than
statements of historical fact included in this report are forward looking
statements. Such forward looking statements include, without limitation,
statements under "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources" regarding the
Company's estimate of sufficiency of existing capital resources and its ability
to raise additional capital to fund cash requirements for future operations and
acquisitions. Although the Company believes 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 ability to achieve the Company's expectations is contingent
upon a number of factors which include (i) ongoing cost of research and
development activities, (ii) effect of any current or future competitive
products, (iii) the Company's ability to produce and market its products
commercially, (iv) the retention of key personnel and (v) capital market
conditions. This Report may contain trademarks and service marks of other
companies.
ITEM 1. FINANCIAL STATEMENTS
TABLE OF CONTENTS
Item PAGE
- --------------------------------------------------------------------------------
Balance sheet as of June 30, 1998 1
Statements of operations for the three months
ended June 30, 1998 and six months ended
June 30, 1998 2
Statement of stockholders' equity for the six
months ended June 30, 1998 3
Statement of cash flows for the three months
ended June 30, 1998 and six months ended
June 30, 1998 4
Notes to financial statements 5
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APPLIED VOICE RECOGNITION, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 1998
Balance Sheet for the period ending
June 30, 1998
(Unaudited)
June 30, 1998
-------------
ASSETS
Cash and cash equivalents $ 1,021,127
Accounts receivable, net of allowance of $62,010 81,060
Inventory 205,150
Deposits, prepaid expenses, and deferred expenses 309,639
-----------
Total current assets 1,616,976
Property plant and equipment, net of accumulated
depreciation of $95,030 269,660
Other assets:
Capitalized software cost, net of accumulated
depreciation of $38,892 269,224
Investments 616,779
Goodwill, net of accumulated amortization of $3,290 53,113
-----------
Total other assets 939,116
TOTAL ASSETS $ 2,825,752
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade payable $ 120,060
Accrued expenses 77,509
Stock dividend payable 85,887
Note payable to related party 37,091
Current portion of capital lease obligation 10,148
Current portion of long-term debt 9,432
Deferred revenue 23,022
-----------
Total current libilities 363,149
Capital lease, net of current portion 33,840
Long-term debt, net of current portion 6,877
-----------
Total liabilities 403,866
Preferred stock; $.10 par value; 2,000,000 shares
authorized.
Series A; 312,500 shares issued and outstanding 31,250
Series B; 3,000 shares issued and outstanding 300
Common stock; $.001 par value; 50,000,000 shares
authorized; 13,254,719 outstanding for 1997 13,255
Paid-in-capital 11,134,326
Accumulated Comprehensive Income (Loss) (186,346)
Accumulated deficit (8,570,899)
-----------
Total stockholders equity 2,421,886
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,825,752
===========
See notes to finanical statements
1
<PAGE>
APPLIED VOICE RECOGNITION, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 1998
Statement of operations for the periods ending
June 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
--------------------------------- ----------------------------------
June 30, 1997 - June 30, 1997 -
June 30, 1998 Restated June 30, 1998 Restated
--------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 375,159 $ 453,151 $ 199,472 $ 237,197
Cost of sales 185,736 270,875 92,355 135,335
---------------------------------------------------------------------
Gross margin 189,423 182,276 107,117 101,862
Operating expenses:
Marketing and sales 751,439 318,626 471,674 155,846
General and administrative 2,364,535 1,067,737 1,178,632 619,324
Research and development 220,649 172,361 39,874 112,428
---------------------------------------------------------------------
Total operating expenses 3,336,623 1,558,724 1,690,180 887,598
Operating loss (3,147,200) (1,376,448) (1,583,063) (785,736)
Other expenses:
Interest income 22,695 5,180 13,080 1,128
Interest expense (78,012) (219,702) (37,239) (181,002)
---------------------------------------------------------------------
Total other expense (55,317) (214,522) (24,159) (179,874)
Net (Loss) $ (3,202,517) $ (1,590,970) $ (1,607,222) $ (965,610)
=====================================================================
Statement of Comprehensive Loss
Unrealized holding (Loss) Gain (248,567) - 64,079 -
---------------------------------------------------------------------
Comprehensive Loss $ (3,451,084) $ (1,590,970) $ (1,543,143) $ (965,610)
=====================================================================
Basic and diluted (loss) per share $ (0.25) $ (0.15) $ (0.12) $ (0.09)
Weighted average shares outstanding 13,149,384 10,764,708 13,149,384 10,764,708
</TABLE>
See notes to finanical statements
2
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APPLIED VOICE RECOGNITION, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 1998
STATEMENT OF STOCKHOLDERS EQUITY
QUARTER ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Common Stock Preferred Stock Preferred Stock
Issued Issued Series A Issued Series B
------------------------ -------------------- --------------------
Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance at January 1, 1998 12,989,820 $ 12,990 312,500 $ 31,250 - $ -
Issuance of 129,399 shares of common
stock in lieu of officer's compensation 129,399 129 - - - -
Issuance of 14,407 shares of common
stock in lieu of employee cash bonuses 14,047 14 - - - -
Issuance of 14,286 shares of common
stock for services 14,286 14 - - - -
Issuance of additional 56,000 shares
of common stock as part of previous
stock transaction 56,000 56 - - - -
Exercise of options to purchase
51,167 shares of common stock 51,167 51 - - - -
Sale of 3,000 shares of Series B
Preferred stock for $3,000,000 in
connection with private placement - - - - 3,000 300
Private placement expense attributed
to options issued - - - - - -
Issuance of options to purchase 350,000
shares of common stock for consulting
services - - - - - -
Common stock dividend on preferred stock - - - - - -
Unrealized holding loss - - - - - -
Net loss for the six months ended
June 30, 1998 - - - - - -
--------------------------------------------------------------------------
Ending balance at June 30, 1998 13,254,719 $ 13,255 312,500 $ 31,250 3,000 $ 300
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
PAID IN CAPITAL
-------------------------------------- REDUCTION OF ACCUMULATED
PREFERRED - PREFERRED - PAID-IN COMPREHENSIVE RETAINED
COMMON SERIES A SERIES B CAPITAL INCOME/(LOSS) DEFICIT TOTAL
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning balance at January 1, 1998 $ 6,213,204 $ 2,468,750 $ - $(1,140,433) $ 62,221 $(5,368,382) $2,279,600
Issuance of 129,399 shares of common
stock in lieu of officer's compensation 285,059 - - - - - 285,188
Issuance of 14,407 shares of common
stock in lieu of employee cash bonuses 33,418 - - - - - 33,432
Issuance of 14,286 shares of common
stock for services 33,986 - - - - - 34,001
Issuance of additional 56,000 shares
of common stock as part of previous
stock transaction (56) - - - - - -
Exercise of options to purchase
51,167 shares of common stock 90,259 - - - - - 90,310
Sale of 3,000 shares of Series B
Preferred stock for $3,000,000 in
connection with private placement - - 2,999,700 - - - 3,000,000
Private placement expense attributed
to options issued - - 61,500 (61,500) - - -
Issuance of options to purchase 350,000
shares of common stock for consulting
services 196,000 - - - - - 196,000
Common stock dividend on preferred stock (45,561) - - - - - (45,561)
Unrealized holding loss - - - - (248,567) - (248,567)
Net loss for the six months ended
June 30, 1998 - - - - - (3,202,517) (3,202,517)
-------------------------------------------------------------------------------------------
Ending balance at June 30, 1998 $ 6,806,309 $ 2,468,750 $ 3,061,200 $(1,201,933) $ (186,346) $(8,570,899) $2,421,886
===========================================================================================
</TABLE>
3
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APPLIED VOICE RECOGNITION, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 1998
Statements of Cash Flow for the periods ending
June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------------------
June 30, 1998 June 30, 1997 -
Restated
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net (loss) $ (3,202,517) $ (1,590,970)
Adjustments to reconcile net (loss) to cash provided by operating activities:
Depreciation 70,998 20,631
Stock issued for services 34,001 275,000
Stock issued as compensation 318,620 -
Stock options and warrants issued for services 196,000 363,700
Changes in operating assets and liabilities:
Accounts receivable 466,842 (39,375)
Inventory 114,514 (691)
Deposits and prepaids (286,662) (307,682)
Deferred revenues (45,612) -
Accounts payable and accrued expenses (563,173) 200,523
-------------------------------------------
NET CASH USED BY OPERATING ACTIVITIES (2,896,989) (1,078,864)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (102,919) (139,222)
Capitalized R&D costs (143,074) -
-------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (245,993) (139,222)
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds from stockholders - 180,000
Loan proceeds from third parties - 69,884
Capital lease financing - 48,712
Principal payment on stockholder debt (89,159) -
Principal payment on third party debt (38,912) (27,500)
Principal payments under capital lease (5,363) (5,413)
Warrants/options granted in connection with bridge loans - 139,200
Sale of preferred stock 3,000,000 -
Sale of common stock - 250,000
Stock options/warrants exercised 90,308 7,583
-------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,956,874 662,466
NET INCREASE (DECREASE) IN CASH (186,108) (555,620)
-------------------------------------------
CASH AT THE BEGINNING OF THE PERIOD $ 1,207,235 $ 556,997
===========================================
CASH AT END OF PERIOD $ 1,021,127 $ 1,377
===========================================
</TABLE>
See notes to financial statements
4
<PAGE>
APPLIED VOICE RECOGNITION, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Applied Voice
Recognition, Inc., a Delaware corporation (the "Company"), have been prepared in
accordance with generally accepted accounting principles and the rules of the
Securities and Exchange Commission (the "SEC"), and should be read in
conjunction with the audited financial statements and notes thereto contained in
the Company's latest Annual Report filed with the SEC on Form 10-KSB, as
amended. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of financial position
and the results of operations for the interim periods presented have been
reflected herein. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. Notes to
the financial statements which would substantially duplicate the disclosure
contained in the audited financial statements for the most recent fiscal year,
1997, as reported in the Form 10-KSB, have been omitted.
NOTE 2 - REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position 97-2, "Software Revenue Recognition"
("SOP97-2"). SOP 97-2 generally requires revenue earned on software
arrangements involving multiple elements (e.g. software products, upgrades,
enhancements and customer support, installation and training) to be allocated to
each element on the relative fair values of the elements. The fair value of an
element is based on evidence, which is specific to the vendor. The revenue
allocated to software products, including specified upgrades or enhancements,
generally is recognized upon delivery of the products. The revenue allocated to
unspecified upgrades and updates and post contract customer support generally is
recognized when upgrades are delivered or as the services are performed. If
there is not appropriate evidence of the fair value for all elements of the
arrangement, all revenue from the
5
<PAGE>
arrangement is deferred until such evidence exists or until all elements are
delivered. In March 1998, the AICPA issued SOP 98-4 which defers for one year
the implementation of the provisions of SOP 97-2 relating to the fair value
determination of each revenue element. The Company has adopted SOP 97-2,
however, the impact of this is not considered to be significant.
NOTE 3 - COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components. Statement 130 requires
unrealized gains or losses on the Company's available-for-sale securities, which
prior to adoption were reported separately in shareholders' equity, to be
included in comprehensive income.
NOTE 4 ACCOUNTS RECEIVABLE WRITE-OFF
The collectibility of the receivable due from Voice It Worldwide, Inc., was
assessed to be uncertain. Because of this, the Company has written-off the
entire receivable balance of approximately $708,000. Of this amount, $500,000
had previously been reserved. The Company will continue to pursue collection of
the receivable balance.
NOTE 5 - CAPITALIZED SOFTWARE COSTS
The costs of direct labor and allocated overhead related to research and
development activities for products which are technologically feasible are
capitalized through the date of market release. All other research and
development costs are charged against earnings in the period incurred. Amounts
capitalized are amortized on a straight-line basis over a three-year life. For
the three months ended June 30, 1998 and six months ended June 30, 1998, the
Company capitalized approximately $94,000 and $143,000, respectively, of
relevant costs.
NOTE 6 - PRIVATE PLACEMENT
On March 11, 1998, the Company sold in a private placement 3,000 shares of
Series B Convertible Preferred Stock (the "Series B Preferred Shares"), par
value $.10 per share, for a purchase price of $1,000 per share, to two
accredited
6
<PAGE>
investors ("the Purchasers"). The Series B Preferred Shares pay a 5% cumulative
dividend payable in arrears at the time of each conversion. The dividend is
payable in cash or stock at the Company's option. At any time after the earlier
of June 24, 1998 or the date on which a registration statement covering the
shares of common stock issuable upon conversion is deemed effective, the
Purchasers are entitled to convert the entire face amount of the Series B
Preferred Shares, plus accrued and unpaid dividends. The Series B Preferred
Shares, plus accrued and unpaid dividends, are subject to automatic conversion
on March 11, 2000. In both cases, the Series B Preferred Shares are convertible
at a rate equal to 78% of the five day average closing bid price for the five
consecutive trading days immediately preceding the date of conversion. This
discount from the market price will result in a deemed dividend of approximately
$830,000, to be recorded ratably upon each conversion of the Series B Preferred
Shares. At any time, the Company has the right to redeem the Series B Preferred
Shares, plus accrued dividends, at a rate equal to 127.5% of the purchase price
of the Series B Preferred Shares being redeemed.
NOTE 7 - STOCK OPTIONS GRANTED
On March 11, 1998, the Company granted to a third party options to purchase
150,000 shares of the Company's common stock, with an exercise price of $2.30.
The options were granted in exchange for their assistance with the private
placement of 3,000 shares of Series B Convertible Preferred Stock. As the
result of this option grant, the Company recognized $61,500 of expense allocable
to paid-in-capital. The expense was valued using the Black-Scholes model.
On April 1, 1998, the Company granted to two consultants options to purchase
350,000 shares of the Company's common stock, with an exercise price of $2.69.
The options were granted in exchange for consulting services. Of the options
granted, 250,000 were granted to a board member whose consulting services were
devoted to the development of the Company's new product VoiceCOMMANDER 99(TM)
As the result of these option grants, the Company has recognized $196,000 of
related expense. The expense was valued using the Black-Scholes model.
NOTE 8 - INVESTMENT VALUATION
On December 31, 1997, the Company purchased 471,700 shares of Voice It WorldWide
Inc. ("Voice It") common stock for $500,000. On April 13, 1998, Voice It's
common stock was
7
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delisted from trading on The Nasdaq Small Cap Market for failure to comply with
certain NASDAQ maintenance standards. The common stock of Voice It is now traded
on the Over The Counter Bulletin Board. Subsequent to this event, the market
price of Voice It's common stock dropped and has remained at a lower value. The
Company has reduced the carrying value of the investment by approximately
$164,000, at June, 30 1998. For the three months and six months ended June 30,
1998, the Company recorded an unrealized holding gain of approximately $64,000
and an unrealized holding loss of approximately $249,000, respectively. These
amounts are reflected in the statement of comprehensive loss.
NOTE 9 - SUBSEQUENT EVENT--PRIVATE PLACEMENT
On July 28, 1998, the Company sold in a private placement 220,750 shares of
Series C Convertible Preferred Stock (the "Series C Preferred Shares"), par
value $.10 per share, for a purchase price of $10 per share, to accredited
investors. The Series C Preferred Shares pay a 4% cumulative dividend payable in
arrears at the time of each conversion. Dividends are payable quarterly and in
arrears on the first day of each January, April, July, and October commencing on
October 1, 1998. Each of the Series C Preferred Shares converts into ten shares
of common stock and may be converted at anytime. The Series C Preferred Shares
are not subject to automatic conversion. Any shares of the Series C Preferred
Shares and any accrued but unpaid dividends may be redeemed, at the Company's
option, after the fifth anniversary of the date of their issuance, at a
redemption price of $10 per share. In addition to the above-referenced shares,
an additional 11,038 shares of the Series C preferred shares were issued to
Equity Services, LTD. ("ESL"), as part of their compensation for placing the
shares. As of July 28, 1998, the market value of the shares issued to ESL was
approximately $110,000. These shares were issued under the same terms and
conditions as those sold in this private placement.
NOTE 10 - SUBSEQUENT EVENT--PREFERRED STOCK CONVERSION
On July 1, 1998 and July 15, 1998, the investors of the Series B Convertible
Preferred Shares exercised their conversion right and converted 300 shares of
preferred stock for 697,590 shares of the Company's common stock (See Note 6 For
additional details related to the Series B Convertible Preferred Stock). The
aggregate market value of the common stock, at the date
8
<PAGE>
of issuance, was approximately $720,000. Of this amount, approximately $170,000
relate to accrued dividends through the date of conversion.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's current revenue is derived primarily from the sale of licenses and
royalties for its voice recognition computer software applications and training
and maintenance services associated with the installation of the computer
software. Computer hardware is bundled with the software application at the
customer's request.
In 1997 and early part of 1998, the Company's marketing focus centered around
two products, the Personal and Professional Editions of VoiceCOMMANDER 4.0.
These products were sold to the general business community through retail sales
channels or via the Company's Houston based sales force.
In the second quarter of 1998, the Company revised the functionality of the
Professional Edition of VoiceCOMMANDER 4.0. (the "Revised Product") to meet the
medical dictation needs of healthcare professionals. The Revised Product is
marketed and sold as a bundled package that includes, among other peripherals, a
PC and a hand-held digital recorder. The Revised Product allows Physicians to
dictate and record patient notes, on the hand-held digital recorder, as they
make their patient visits. The information is then downloaded to a pre-equipped
PC where it is automatically transcribed, via voice recognition, to formatted
text, with a high degree of accuracy and minimal transcript intervention. The
Revised Product has been sold since May 1998 as the solution to the in-house
transcription needs of physicians.
The Company has embarked on the development of a product that will provide
healthcare professionals with a tool for internet based transcription and
dictation services. The new product, named VoiceCOMMANDER 99(TM) (the "New
Product"), will provide a completely mobile dictation solution designed to
improve the quality and reduce the costs of healthcare information needs,
through the use of voice recognition, handheld digital recording technology, and
internet driven technologies.
To facilitate a quick and efficient roll-out of the New Product, the Company has
developed a plan to acquire
10
<PAGE>
medical transcription companies. While the Company may complete some
acquisitions in 1998, it anticipates that most activity under its acquisition
plan will occur in 1999 and beyond. Although, the Company's initial geographic
focus will be centered in Texas, the Company may make acquisitions outside this
area, if the Company identifies suitable acquisition targets.
As a result of the implementation of the New Product and the related strategy,
the Company has increased its spending in research and development, sales and
marketing, and general and administrative expenses. To the extent that such
expenditures are, subsequently, not followed by increased revenues, the
Company's business, results of operations and financial condition could be
materially and adversely affected.
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. The Company's manufactured software,
as it is currently written, is not date sensitive and therefore the Company does
not anticipate "Year 2000 problems". For its computer systems used in the daily
operations of the Company, all of the Company's computer systems are year 2000
ready. The Company will require future purchases of computer systems to be year
2000 compliant.
RESULTS OF OPERATIONS:
Three months ended June 30, 1998 vs. three months ended June 30, 1997 and six
months ended June 30, 1998 vs. six months ended June 30, 1997.
REVENUES: Net revenues decreased 16% in the second quarter of 1998 to
approximately $199,000, down approximately $38,000 from the second quarter of
1997. For the first six months, net sales of approximately $375,000 were
approximately $78,000 or 17% lower than the same period in 1997. This decrease
is attributable to the Company's transition to a new target market.
11
<PAGE>
COST OF SALES: Cost of sales decreased 32% in the second quarter of 1998 to
approximately $92,000, down approximately $43,000 from the second quarter of
1997. For the first six months, cost of sales of approximately $186,000 were
approximately $85,000 or 31% lower than the same period in 1997. This decrease
is directly attributable to the decrease in net sales and increased software
sales relative to hardware sales. For the three months ended June 30, 1998 and
six months ended June 30, 1998, software sales comprised 65% and 79%,
respectively of software and hardware sales combined. During the same periods
in 1997, software sales comprised 57% and 56%, respectively, of the same revenue
mix. Costs of sales related to software sales are generally lower than cost of
sales associated with hardware sales.
MARKETING AND SALES EXPENSE: Marketing and sales expense consists primarily of
salaries and commissions of marketing and sales personnel and promotional
expenditures. Marketing and sales expense increased 203% in the second quarter
of 1998 to approximately $472,000, up approximately $316,000 from the second
quarter of 1997. For the first six months of 1998, marketing and sales expense
of approximately $751,000 were approximately $433,000 or 136% higher than the
same period in 1997. Of the total increase, approximately $164,000 is
attributable to the resignation of a marketing executive and the termination of
the related employment contract. The expansion of the marketing and sales team,
has resulted in incremental expenditures of approximately $169,000. The
expansion is attributable to the Company's goal to accelerate marketing and
sales of the Company's New Product. Another item affecting the increase relates
to incremental tradeshow expenditures of approximately $56,000 for the six
months ended June 30, 1998. The balance of the increase relates to on-going
costs associated with advertising, printing and press, travel, and other
marketing related expenses. These expenditures increased as the result of the
Company's head count growth.
GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative expense is
comprised primarily of compensation and related expenditures for administrative
and executive personnel, professional fees associated with legal, consulting,
and accounting services, and general corporate overhead. General and
administrative expense increased 90% in the second quarter of 1998 to
approximately $1,179,000, up approximately $559,000 from
12
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the second quarter of 1997. For the first six months of 1998, general and
administrative expense of approximately $2,365,000 were approximately $1,297,000
or 121% higher than the same period in 1997. The increase is attributable mainly
to increased administrative and executive personnel and associated recruiting
costs, which amounted to approximately $394,000 of the total increase. Another
factor contributing to the increase includes additional consulting, legal, and
accounting services of approximately $170,000. Consulting services were incurred
in connection with the continuation of the development of a strategic plan to
assist the Company in expanding into the medical transcription market.
Consulting services were also employed to aid in the day to day operations of
the Company. In addition, legal and accounting expenditures were incurred in
association with various SEC filings, the annual audit, quarterly reviews, and
several tax filings. Another factor contributing to the increase is $150,000 of
incremental investor relation fees that were amortized into expense during the
quarter. In addition to this, approximately $345,000 of incremental bad debt was
recorded in the current year to account for a receivable that was written off.
All other general and administrative costs increased approximately $238,000 due
to higher telephone, occupancy, travel, depreciation and general office
expenses. These expenditures increased as the result of the Company's headcount
growth.
RESEARCH AND DEVELOPMENT EXPENSE: Research and development expense consists
primarily of personnel costs including salaries, benefits and consultant costs
related to the research and development of the Company's products. Research and
development expense decreased 65% in the second quarter of 1998 to approximately
$40,000, down approximately $73,000 from the second quarter of 1997. For the
first six months of 1998, research and development expense of approximately
$221,000 was approximately $48,000 or 28% higher than the same period in 1997.
The decrease in the second quarter of 1998 is primarily attributable to research
and development expenditures that were capitalized. During the second quarter
or 1998 and the second quarter of 1997, the Company capitalized approximately
$94,000 and $0, respectively, of research and development expense. Omitting any
capitalization, research and development expense for the second quarter of 1998
would have been approximately $134,000. This represents an increase over the
same period in 1997 of approximately $21,000 or 18%. The quarter to date and
year to date increase, in research and development costs, is wholly attributable
to the increase in personnel.
13
<PAGE>
The Company has increased its efforts centered around the enhancement and
development of its products including VoiceCOMMANDER (formerly known as the
SpeechCOMMANDER), the Medical Dictation Pad and the New Product,
VoiceCOMMANDER 99(TM).
INTEREST INCOME: Interest income consists primarily of interest earned on cash
and cash equivalents. Interest income increased 1,060% in the second quarter of
1998 to approximately $13,000, up approximately $12,000 from the second quarter
of 1997. For the first six months of 1998, interest income of approximately
$23,000 was approximately $18,000 or 338% higher than the same period in 1997.
The increase is wholly attributable to the current year increase in invested
funds as compared to same in prior year.
INTEREST EXPENSE: Interest expense decreased 79% in the second quarter of 1998
to approximately $37,000, down approximately $144,000 from the second quarter of
1997. For the first six months of 1998, interest expense of approximately
$78,000 was approximately $142,000 or 64% lower than the same period in 1997.
The decrease is wholly attributable to the current year decrease in average debt
outstanding.
INCOME TAXES: The Company has incurred losses since inception and, therefore,
has not been subject to federal income taxes. As of June, 1998, the Company had
generated net operating losses ("NOLs"), for financial reporting purposes, of
approximately $7.8 million available to reduce future federal income taxes.
These carryforwards will begin to expire in 2011. The ability of the Company to
utilize the carryforwards is dependent upon the Company generating sufficient
taxable income, and may be affected by annual limitations on the use of such
carryforwards if a change of control occurs due to future sales of the Company's
capital stock. The Company has recorded a valuation allowance for all net
deferred tax assets, including NOLs.
NET LOSS: Net loss increased 66% in the second quarter of 1998 to approximately
$1,607,000, up approximately $642,000 from the second quarter of 1997. For the
first six months of 1998, net loss of approximately $3,203,000 was approximately
$1,612,000 or 101% higher than the same period in 1997. The increase is
primarily attributable to
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<PAGE>
increased operating expenditures of approximately $1,778,000. The difference is
also attributable to a favorable change in gross profit and other expenses of
approximately $166,000.
Through the period ended June 30, 1998, the Company has incurred operating
losses, since inception, of approximately $9,413,000. To date, the Company's
operations have not been profitable and there is no assurance that they will
become profitable in the future. As a result, the Company believes that its
historical results of operations for the periods presented may not be directly
comparable.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998 the Company had cash and cash equivalents of approximately
$1,021,000 and working capital of approximately $1,299,000.
Net cash used by operating activities increased approximately $1,818,000 from
approximately $1,079,000 for the six months ended June 30, 1997 to approximately
$2,897,000 for the six months ended June 30, 1998. The increase is primarily
attributable to the increase in operating losses, of approximately $1,612,000,
sustained by the Company for the six months ended June 30, 1998 vs. the same
period in 1997. The balance of the increase is attributable to changes in
working capital.
For the six months ended June 30, 1998 investing activities totaled
approximately $246,000. This total is comprised of purchases of property, plant
and equipment, and capitalization of development costs of approximately $103,000
and $143,000, respectively.
Net cash provided by financing activities amounted to approximately $2,957,000.
This is primarily comprised of $3,000,000 of funding attributable to the
Company's recent private placement (as described below). The remaining
difference of approximately ($43,000) relates to outflows of approximately
($133,000) associated with principal payments on debt and a capital lease, and
inflows of approximately $90,000 attributable to stock options exercised.
The Company continues to incur operating losses and will continue to need
additional working capital to fund its
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research, development and marketing efforts for the next fiscal year. The
Company's liquidity will be reduced as amounts are expended for continuing
research and development, expansion of sales and marketing activities,
development of its administrative function, and acquisition of medical
transcription companies. Additionally, the Company's liquidity will also be
reduced as amounts are used for purchases of capital assets.
On March 11, 1998 the Company completed a private placement of $3,000,000. The
placement was comprised of 3,000 shares of Series B Convertible Preferred Stock.
These shares have a par value of $.10 and were priced at $1,000 per share.
On July 30, 1998 the Company completed a private placement of $2,207,750. The
placement was comprised of 220,750 shares of Series C Convertible Preferred
Stock. These shares have a par value of $.10 and were priced at $10 per share.
Related funding was received on July 31, 1998.
If the Company pursues its planned growth strategy, the combined funding,
received thus far, plus anticipated revenues will be not be sufficient to
sustain the Company's current year operating needs. To secure additional
funding, the Company is conducting discussions with current investors who have
expressed interest in providing additional capital and seeking other sources.
In addition to this, the Company has fostered contractual relationships with
Sands Brothers & Co. LTD to become its investment banker and KCSA Worldwide for
investor relations. If the Company is unable to obtain sufficient financing,
there can be no assurance that the Company will be able to successfully fund its
operations or implement its acquisition strategy.
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
16
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REGISTRATION STATEMENT
On June 18, 1998, the Company's S-3 Registration Statement (the"S-3") became
effective. The S-3, as amended, registered 4,810,625 shares of the Company's
common stock, par value $.001. Of These shares, 4,545,625 relate to the
Company's private placement of its Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock. The 312,500 shares of Series A
Convertible Preferred Stock are currently convertible into an aggregate of
1,687,500 of the Company's common stock (subject to adjustment). The 3,000
shares of Series B Convertible Preferred Stock, have a floating conversion rate.
These shares were convertible into an aggregate 2,304,855 shares of the
Company's common stock. For registration purposes, the Company has estimated the
maximum number of Series B Conversion Shares to be 2,500,000. In addition, the
placement agent in private placement of the Series A Preferred Stock received
89,375 shares of the Company's common stock, an option to purchase 168,750
shares of the Company's common stock and warrants to purchase 100,000 shares of
the Company's common stock. The aggregate number of shares registered in
connection with the placement agent, was 358,125 shares. The remaining 265,000
shares are comprised of 30,000 shares and 235,000 shares of the Company's common
stock issuable upon exercise of options issued to certain stockholders in
exchange for services rendered to the Company.
RECENT SALES OR ISSUANCE'S OF UNREGISTERED SECURITIES
On July 30, 1998, the Company sold in a private placement, under Rule 506 of
Regulation D, 220,750 shares of Series C Convertible Preferred Stock, par value
$.10 per share (the "Series C Private Placement") for a sales price of $10 per
share, to accredited investors. The terms of the Series C Private Placement are
discussed in footnote 9 to the financial statements included herein.
On July 30, 1998, the Company issued Equity Services, LTD 11,038 shares of the
Company's common stock in exchange for their assistance with the private
placement under Rule 506 of Regulation D.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
BOARD MEMBERS RESIGNATION: On July 31, 1998, H. Russel Douglas, J. Nolan
Bedford, and Jesse R. Marion resigned from the Board of Directors. Messrs.
Bedford and Marion resigned to pursue other interests while Mr. Douglas has
resigned in order to concentrate on his research and development activities with
the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*3.1 Certificate of Designation for the Series C Preferred Stock as
filed with the Delaware Secretary of State on July 30, 1998.
*4.1 Registration Rights Agreement between the Company and the Series
C Preferred Stock Investors dated July 30, 1998.
*10.1 Investor Subscription Agreement between the Company and the
Series C Preferred Stock Investors dated July 30, 1998.
*10.2 Placement Agreement between the Company and the Placement Agent
for the Series C Preferred Stock investors dated July 30, 1998.
*10.3 First Amendment to Investor Subscription Agreement between the
Company and the Series C Preferred Investors dated July 30, 1998.
*27.1 Financial Data Schedule.
- ----------------
*Filed herewith.
(b) Reports on Form 8-K
On May 19, 1998, the Company filed an amendment to its current report
on Form 8-K reporting the Company's share exchange with Summa Vest which was
originally filed with the Securities and Exchange Commission on January 30,
1997.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
APPLIED VOICE RECOGNITION, INC.
BY: /s/ William T. Kennedy
_____________________________
William T. Kennedy
Chief Financial Officer on
Behalf of the Company and as
Chief Accounting Officer
August 14, 1998
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CERTIFICATE OF DESIGNATION, PREFERENCES,
RIGHTS AND LIMITATIONS
OF
SERIES C PREFERRED STOCK
OF
APPLIED VOICE RECOGNITION, INC.
PURSUANT to Section 151(g) of the Delaware General Corporation Law (the
"DGCL"), APPLIED VOICE RECOGNITION, INC., a corporation organized and existing
under the DGCL (herein referred to as the "Corporation"), DOES HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors of the
Corporation by its Certificate of Incorporation, and pursuant to the provisions
of Section 151(g) of the DGCL, such Board of Directors, by unanimous consent of
the directors dated July 10, 1998, duly adopted a resolution providing for the
issuance of a series of two hundred thirty-one thousand seven hundred eight-
eight (231,788) shares of the Corporation's Preferred Stock, par value $0.10
per share, to be designated "Series C Preferred Stock," and fixing the voting
powers, preferences and relative, participating, optional or other rights, and
the qualifications, limitations or restrictions thereof, all pursuant to this
Certificate of Designation, Rights and Preferences of Series C Preferred Stock
of Applied Voice Recognition, Inc. (the "Certificate of Designation"), which
resolution is as follows:
RESOLVED, that pursuant to the authority expressly granted and vested in
the Board of Directors of the Corporation in accordance with the provisions of
its Certificate of Incorporation, there shall be established and authorized for
issuance a series of the Corporation's Preferred Stock, par value $0.10 per
share, designated "Series C Preferred Stock" (herein referred to as "Series C
Preferred Stock"), consisting of two hundred thirty-one thousand seven hundred
eight-eight (231,788) shares, each of the par value of $0.10 per share, and
having the voting powers, preferences and relative, participating, optional and
other rights, and the qualifications, limitations or restrictions set forth
below:
A. DESIGNATION. The Preferred Stock having the rights,
preferences, privileges and restrictions set forth below shall be designated and
known as "Series C Preferred Stock."
B. NUMBER OF SHARES OF SERIES C PREFERRED STOCK. The number of
shares constituting all of the Series C Preferred Stock shall be two hundred
thirty-one thousand seven hundred eight-eight (231,788).
C. DIVIDENDS. The holders of the then outstanding shares of the
Series C Preferred Stock shall be entitled to dividends ("Preferred Dividends")
equal to four percent (4%) of the aggregate Liquidation Preference (which shall
be the stated value of the Series C Preferred
<PAGE>
Stock, plus accrued but unpaid dividends, if any) per annum per share of Series
C Preferred Stock, payable quarterly in arrears, which Preferred Dividends shall
be paid in cash or in shares of Common Stock, $0.001 par value per share, of the
Corporation ("Common Stock"), at the Corporation's option. In the event the
Corporation elects to pay any such Preferred Dividends in Common Stock, 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 declared by the Corporation's Board of Directors, be payable
quarterly on the first day of each January, April, July and October, 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 DGCL. The dividends on each share of Series C Preferred Stock shall begin to
accrue and accrue from the date of issuance of the Series C Preferred Stock,
whether or not declared dividends on account of arrears for any past dividend
periods may be declared and paid at any time, without reference to any regular
dividend payment date, to holders of record on a record date fixed for such
payment by the Board of Directors of the Corporation or by a committee of such
Board duly authorized to fix such date by resolution designating such committee.
The Preferred Dividends shall be cumulative, and no dividends shall be
declared or paid with respect to the Common Stock or any class of stock ranking,
as to dividend rights, junior to the Series C Preferred Stock, until all accrued
Preferred Dividends have been paid, or declared and, if dividends are to be paid
in Common Stock, shares of Common Stock are set apart for payment, for the
current and all prior dividend periods. 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 C Preferred Stock, shall be on parity
with payment of dividends on the Corporation's Series B Preferred Stock and
shall be junior to payment of dividends on the Corporation's 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 C Preferred Stock shall be entitled to be paid out of
the assets of the Corporation available for distribution to its shareholders,
after the payment or declaration and setting apart for payment of any amount
required with respect to the Series A Preferred Stock and the Series B Preferred
Stock and 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 C Preferred
Stock ("Junior Stock"), Ten Dollars and 00/100s ($10.00) per share, plus an
amount per share equal to all earned but unpaid dividends, and no more. If upon
the occurrence of such event the assets distributable among the holders of the
Series C Preferred Stock and stock ranking on parity with the Series C 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
2
<PAGE>
Series C Preferred Stock and Parity Stock, then the assets and funds of the
Corporation legally available for distribution to such holders shall be
distributed among the holders of the Series C 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 C Preferred Stock and the Parity Stock
of their full preferential amounts have been made, the holders of Series C
Preferred Stock shall not be entitled to any additional distributions with
respect to the Series C Preferred Stock.
At each holder's option, a sale, conveyance or disposition of all or
substantially all of the assets of the Corporation to a private entity, the
common stock of which is not publicly traded, shall be deemed to be a
liquidation, dissolution or winding up within the meaning of this Section D;
provided, however, that an event described in the prior clause that the holder
does not elect to treat as a liquidation, consolidation, merger, acquisition or
other business combination of the Corporation with or into any other company or
companies shall not be treated as a liquidation, dissolution or winding up
within the meaning of this Section D, but instead shall be treated pursuant to
the terms of the following paragraph (a holder who elects to have the
transaction treated as a liquidation is herein referred to as a "Liquidating
Holder").
Prior to the closing of a transaction described in the preceding paragraph
which would constitute a liquidation event, the Corporation shall either (i)
make all cash distributions it is required to make to the Liquidating Holders
pursuant to the first sentence of the first paragraph of this Section D, (ii)
set aside sufficient funds from which the cash distributions to the Liquidating
Holders can be made, or (iii) establish an escrow or other similar arrangement
with a third party pursuant to which the proceeds payable to the Corporation
from a sale of all or substantially all of the assets of the Corporation will be
used to make the liquidating payments to the Liquidating Holders immediately
after the consummation of such sale. In the event that the Corporation has not
fully complied with either of the foregoing alternatives, the Corporation shall
either: (x) cause such closing to be postponed until such cash distributions
have been made, or (y) cancel such transaction, in which the rights of the
holders or other arrangements shall be the same as existing immediately prior to
such proposed transaction.
E. REDEMPTION. Any shares of the Series C Preferred Stock that
have not been converted to Common Stock by the fifth anniversary of the date of
their issuance, may, at the option of the Corporation, at any time thereafter be
redeemed at a redemption price of Ten Dollars and 00/100s ($10.00) 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 C 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 C
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 C 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 C
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
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<PAGE>
Preferred Stock Redemption Date shall revert to the general funds of the
Corporation (provided that the holders of Series C 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 C 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 C Preferred Stock shall be
entitled to cause any or all of such shares to be converted into Common Stock.
Each share of Series C Preferred Stock is initially convertible into ten (10)
shares of Common Stock (subject to adjustment as provided below).
(ii) Each holder of Series C 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 C 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 C 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 C Preferred Stock by the
Corporation or the transfer agent for the Series C Preferred Stock, accompanied
by written notice of conversion. Such notice of conversion shall specify (1)
the number of shares of Series C 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 C 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 C 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 C 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 C Preferred Stock to be converted, duly assigned or
endorsed for conversion (or accompanied by duly executed stock powers relating
thereto) as provided in this Certificate of 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
4
<PAGE>
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 C
Preferred Stock, but in lieu thereof shall pay to the holder converting such
Series C 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 treasury shares, solely for
issuance upon the conversion of shares of Series C 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 C 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 C Preferred Stock may convert such Series C
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 C 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
5
<PAGE>
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 C Preferred
Stock shall thereafter have the right to receive upon conversion of Series C
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 C
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 C 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 C 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
6
<PAGE>
fifteen (15) calendar days prior notice of such merger, consolidation, exchange
of shares, recapitalization, reorganization, or other similar event (during
which time the holders of the Series C Preferred stock shall be entitled to
convert their Series C 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 Certificate of Incorporation of the Corporation, including the
obligation of this subsection (ii).
(iii) The Corporation will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, share exchange, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation, but will at
all time in good faith assist in the carrying out of all the provisions of this
paragraph and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Series C Preferred Stock against impairment.
(iv) Upon the occurrence of each adjustment or readjustment of the
Conversion Rate pursuant to subparagraphs (i) and (ii) above, the Corporation at
its expense shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and prepare and furnish to each holder of Series C
Preferred Stock a certificate signed by the Chief Financial Officer of the
Corporation setting forth (i) such adjustment or readjustment, (ii) the
Conversion Rate at the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any of other property which at the time would be
received upon the conversion of his shares.
H. VOTING RIGHTS. Except as otherwise required by the DGCL or
this Certificate of Designation, the holders of Series C Preferred Stock shall
have the following voting rights:
(i) So long as any shares of the Series C Preferred Stock are
outstanding, the Corporation shall not, without the affirmative vote or written
consent of the holders of sixty-six and two-thirds percent (66-2/3%) of the
outstanding shares of the Series C Preferred Stock voting separately as a class,
(1) amend, alter or repeal any provision of the Certificate 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 C
Preferred Stock, (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, on parity with or senior to the Series C Preferred Stock or (3)
consolidate or merge with or into, or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties or assets in one
or more transactions unless (i) the successor company is a U.S. corporation;
(ii) the Series C Preferred Stock shall be converted into or exchanged for and
shall become shares of the successor company having substantially the same
powers, preferences and relative rights and qualifications that the Preferred
Stock had immediately prior to such transaction; and (iii) the Corporation shall
deliver to the transfer agent for the Corporation, prior to the consummation of
the proposed transaction, an officer's certificate and opinion of counsel, from
legal counsel reasonably acceptable to the holders of a majority of the Series C
Preferred Stock, to the effect that such sale or transfer complies with the
terms and conditions of this clause (3); provided, however, the provisions of
this clause (3) shall not be effective in the event that all the Series C
Preferred Stock shall have been purchased at an amount equal to at least One
Hundred Twenty Five Percent (125%) of the liquidation preference set forth in
Section D above.
7
<PAGE>
(ii) Except as otherwise required by the DGCL or these Articles of
Incorporation, the holders of the Series C 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 C Preferred
Stock are outstanding, the Corporation shall not without first obtaining the
approval (by vote or written consent as provided by Delaware Law) of the holders
of at least sixty-six and two-thirds percent (66 2/3%) of the then outstanding
Series C Preferred Stock, and at least sixty-six and two-third percent (66 2/3%)
of the then outstanding holders of Series C Preferred Stock:
(i) alter or change the rights, preferences or privileges of the
Series C Preferred Stock or any senior securities so as to affect adversely the
Series C Preferred Stock;
(ii) create any new class or series of stock having a preference over
the Series C Preferred Stock or increase the size of the authorized number of
Series C Preferred Stock; or (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 C 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. CHANGE OF CONTROL. Upon a Change of Control (as defined below),
the Corporation shall offer to redeem the outstanding shares of Series C
Preferred Stock at the same price per share that the holders would have received
had they been redeemed pursuant to Section E above. The Corporation agrees that
it will provide not less than ten (10) days prior notice to the holders of
Series C Preferred Stock, and any stockholders accepting such offer and
tendering the certificate(s) representing their shares of Series C Preferred
Stock prior to the date set forth in such notice shall have their shares
redeemed in the manner described in Section E. For purposes hereof "Change in
Control" shall mean:
(i) the stockholders of the Corporation approve a merger, plan of
reorganization, consolidation or share exchange with any other corporation and
immediately following such merger, plan of reorganization, consolidation or
share exchange, the holders of the voting securities of the Corporation
outstanding immediately prior thereto hold securities representing fifty percent
(50%) or less of the combined voting power of the voting securities of the
Corporation or such surviving entity outstanding immediately after such merger,
plan of reorganization, consolidation or share exchange; provided, however, that
notwithstanding the foregoing, a Change of Control shall not be deemed to have
occurred if one-half (1/2) or more of the members of the Board of the
Corporation or such surviving entity immediately after such merger, plan of
reorganization, consolidation or share exchange is comprised of persons who
served as directors of the Corporation immediately prior to such merger, plan of
reorganization, consolidation or share exchange; or
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(ii) the Corporation becomes a party to a merger, plan of
reorganization, consolidation or share exchange in which either (i) the
Corporation will not be the surviving corporation or (ii) the Corporation will
be the surviving corporation and any outstanding shares of the Corporation's
Common Stock will be converted into shares of any other company (other than a
reincorporation or the establishment of a holding company involving no change of
ownership of the Corporation) or other securities, cash or other property
(excluding payments made solely for fractional shares); or
(iii) approval by the Corporation's shareholders of a complete
liquidation and dissolution of the Corporation or the sale or other disposition
of all or substantially all of the assets of the Corporation other than to a
parent or subsidiary.
K. MISCELLANEOUS.
(i) So long as any shares of Series C Preferred Stock are outstanding,
the Corporation will not purchase, redeem or otherwise acquire or retire for
value any Junior Stock or Parity Stock (each, a "Junior Payment")"; provided,
however, that the Corporation may make Junior Payments if in any given quarter
holders of the Series C Preferred Stock shall have received payment for all
dividends due and payable in such quarter.
(ii) Except as specifically set forth herein, all notices or
communications provided for or permitted hereunder shall be made in writing by
hand delivery, express overnight courier, registered first class mail, or
telecopier addressed (1) if to the Corporation, to its office at 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 C
Preferred Stock, to such holder at the address of such holder as listed in the
stock record books of the Corporation or to such other address as the
Corporation or such holder, as the case may be, shall have designated by notice
similarly given. All such notices and communications shall be deemed to have
been duly given: when delivered by hand, if personally delivered; five (5)
business days after being deposited in the mail, registered or certified mail,
return receipt requested, postage prepaid, if mailed; when received after being
deposited in the regular mail; the next business day after being deposited with
an overnight courier, if deposited with a nationally recognized, overnight
courier service; when receipt is acknowledged, if by telecopier, so long as
followed up on the same day by overnight courier.
(iii) The Corporation shall pay any and all stock transfer
and documentary stamp taxes that may be payable in respect of any issuance or
delivery of shares of Series C Preferred Stock or shares of Common Stock or
other securities issued on account of Series C 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 C
Preferred Stock or Common Stock or other securities in a name other than that in
which the shares of Series C 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.
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(iv) In the event that the holder of shares of Series C 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 C Preferred Stock.
(v) The Corporation may appoint, and from time to time discharge and
change, a transfer agent of the Series C 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
C Preferred Stock.
(vi) The Corporation shall appoint, and from time to time may replace,
a conversion agent for the Series C 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 C Preferred
Stock.
(vii) Any Series C Preferred Stock redeemed, purchased, converted or
otherwise acquired by the Corporation in any manner whatsoever shall not be
reissued as part of such Series C Preferred Stock and shall be retired promptly
after the acquisition thereof. No shares of Series C Preferred Stock shall be
issued by the Corporation other than shares that are issued pursuant to that
certain Placement Agreement between Equity Services, Ltd. and the Corporation
dated June 1, 1998, as such Placement Agreement shall be amended from time to
time. Any shares of Series C Preferred Stock that are not issued upon the
termination date of the Placement Agreement (including any amendments thereto),
shall return to the status of undesignated shares of preferred stock of the
Corporation.
(viii) The Series C Preferred Stock shall be transferable by the
holders, provided that such transfer is made in compliance with applicable
federal and state securities laws.
(ix) Nothing contained herein shall be construed to prevent the Board
of Directors of the Corporation from issuing one or more series of preferred
stock with dividend and/or liquidation preferences junior to the Series C
Preferred Stock.
IN WITNESS WHEREOF, Applied Voice Recognition, Inc. has caused this
certificate to be signed by Timothy J. Connolly, its Chairman and Chief
Executive Officer, as of the 30th day of July, 1998.
APPLIED VOICE RECOGNITION, INC.
By: /S/ TIMOTHY J. CONNOLLY
--------------------------------
Timothy J. Connolly, Chairman and
Chief Executive Officer
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REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of the 30th day of July, 1998 by and between APPLIED VOICE
RECOGNITION, INC., a Delaware corporation (the "Company") and RALF NICKELEIT-
BONNIER.
R E C I T A L S:
---------------
WHEREAS, the Shareholder is acquiring Five Thousand (5,000) shares of the
Company's Series C 4% cumulative convertible preferred stock, stated value
$12.50 per share (the "Series C Preferred Stock") pursuant to that certain
Investor Subscription Agreement by and between the Company and the Shareholder
of even date herewith (the "Investor Agreement"); and
WHEREAS, the Company desires to grant to the Shareholder certain
registration rights relating to the shares of Common Stock issuable upon
conversion of any of the Series C Preferred Stock (the "Shares") and the
Shareholder desires to obtain such registration rights, subject to the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual premises, representations,
warranties and conditions set forth in this Agreement, the parties hereto,
intending to be legally bound, hereby agree as follows:
A. Definitions and References. For purposes of this Agreement, in addition to
the definitions set forth above and elsewhere herein, the following terms shall
have the following meanings:
(a) The term "Commission" shall mean the Securities and Exchange Commission and
any successor agency.
(b) The terms "register", "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the 1933 Act (as herein defined) and
the declaration or ordering of effectiveness of such registration statement
or document.
(c) For purposes of this Agreement, the term "Registrable Stock" shall mean (i)
any shares of Common Stock issuable upon conversion of any of the Series C
Preferred Stock, (ii) any shares of Common Stock issued by way of a stock
split, reorganization, merger or consolidation, and (iii) any Common Stock
issued as a dividend on the Series C Preferred Stock. For purposes of this
Agreement, any Registrable Stock shall cease to be Registrable Stock when
(v) a registration statement covering such Registrable Stock has been
declared effective and such Registrable Stock has been disposed of pursuant
to such effective registration statement, (w) such Registrable Stock is
sold pursuant to Rule 144 (or any similar provision then in force) under
the 1933 Act, (x) such Registrable Stock is eligible to be sold pursuant to
Rule 144(k) under the 1933 Act, (y) such Registrable Stock has been
otherwise transferred, no stop transfer order affecting such stock is in
effect and the Company has
<PAGE>
delivered new certificates or other evidences of ownership for such
Registrable Stock not bearing any legend indicating that such shares have
not been registered under the 1933 Act, or (z) such Registrable Stock is
sold by a person in a transaction in which the rights under the provisions
of this Agreement are not assigned.
(d) The term "Holder" shall mean the Shareholder or any transferee or assignee
thereof to whom the rights under this Agreement are assigned in accordance
with Section hereof, provided that the Shareholder or such transferee or
assignee shall then own the Registrable Stock.
(e) The term "1933 Act" shall mean the Securities Act of 1933, as amended.
(f) An "affiliate of such Holder" shall mean a person who controls, is
controlled by or is under common control with a Holder, or the spouse or
children (or a trust exclusively for the benefit of the spouse and/or
children) of a Holder, or, in the case of a Holder that is a partnership,
its partners.
(g) The term "Person" shall mean an individual, corporation, partnership,
trust, limited liability company, unincorporated organization or
association or other entity, including any governmental entity.
(h) The term "Requesting Holder" shall mean a Holder or Holders of in the
aggregate at least a majority of the Registrable Stock.
(i) References in this Agreement to any rules, regulations or forms promulgated
by the Commission shall include rules, regulations and forms succeeding to
the functions thereof, whether or not bearing the same designation.
1. Demand Registration.
--------------------
(a) Commencing immediately upon the date of Closing (as defined in the Investor
Agreement), any Requesting Holders may make a written request to the
Company (specifying that it is being made pursuant to this Section ) that
the Company file a registration statement under the 1933 Act (or a similar
document pursuant to any other statute then in effect corresponding to the
1933 Act) covering the registration of Registrable Stock. In such event,
the Company shall (x) within ten (10) days thereafter notify in writing all
other Holders of Registrable Stock of such request, and (y) use its best
efforts to cause to be registered under the 1933 Act all Registrable Stock
that the Requesting Holders and such other Holders have, within forty-five
(45) days after the Company has given such notice, requested be registered.
(b) If the Requesting Holders intend to distribute the Registrable Stock
covered by their request by means of an underwritten offering, they shall
so advise the Company as a part of their request pursuant to Section
above, and the Company shall include such information in the written notice
referred to
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<PAGE>
in clause (x) of Section above. In such event, the Holder's right to
include its Registrable Stock in such registration shall be conditioned
upon such Holder's participation in such underwritten offering and the
inclusion of such Holder's Registrable Stock in the underwritten offering
to the extent provided in this Section. All Holders proposing to
distribute Registrable Stock through such underwritten offering shall enter
into an underwriting agreement in customary form with the underwriter or
underwriters. Such underwriter or underwriters shall be selected by a
majority in interest of the Requesting Holders and shall be approved by the
Company, which approval shall not be unreasonably withheld; provided, that
all of the representations and warranties by, and the other agreements on
the part of, the Company to and for the benefit of such underwriters shall
also be made to and for the benefit of such Holders and that any or all of
the conditions precedent to the obligations of such underwriters under such
underwriting agreement shall be conditions precedent to the obligations of
such Holders; and provided further, that no Holder shall be required to
make any representations or warranties to or agreements with the Company or
the underwriters other than representations, warranties or agreements
regarding such Holder, the Registrable Stock of such Holder and such
Holder's intended method of distribution and any other representation
required by law or reasonably required by the underwriter.
(c) Notwithstanding any other provision of this Section to the contrary, if
the managing underwriter of an underwritten offering of the Registrable
Stock requested to be registered pursuant to this Section advises the
Requesting Holders in writing that in its opinion marketing factors require
a limitation of the number of shares to be underwritten, the Requesting
Holders shall so advise all Holders of Registrable Stock that would
otherwise be underwritten pursuant hereto, and the number of shares of
Registrable Stock that may be included in such underwritten offering shall
be allocated among all such Holders, including the Requesting Holders, in
proportion (as nearly as practicable) to the amount of Registrable Stock
requested to be included in such registration by each Holder at the time of
filing the registration statement; provided, that in the event of such
limitation of the number of shares of Registrable Stock to be underwritten,
the Holders shall be entitled to an additional demand registration pursuant
to this Section . If any Holder of Registrable Stock disapproves of the
terms of the underwriting, such Holder may elect to withdraw by written
notice to the Company, the managing underwriter and the Requesting Holders.
The securities so withdrawn shall also be withdrawn from registration.
(d) Notwithstanding any provision of this Agreement to the contrary, the
Company shall not be required to effect a registration pursuant to this
Section during the period starting with the fourteenth (14th) day
immediately preceding the date of an anticipated filing by the Company of,
and ending on a date ninety (90) days following the effective date of, a
registration
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<PAGE>
statement pertaining to a public offering of securities for the account of
the Company; provided, that the Company shall actively employ in good faith
all reasonable efforts to cause such registration statement to become
effective; and provided further, that the Company's estimate of the date of
filing such registration statement shall be made in good faith.
(c) The Company shall be obligated to effect and pay for a total of only one
(1) registration pursuant to this Section , unless increased pursuant to
Section hereof; provided, that a registration requested pursuant to this
Section shall not be deemed to have been effected for purposes of this
Section , unless (i) it has been declared effective by the Commission, (ii)
if it is a shelf registration, it has remained effective for the period set
forth in Section , (iii) the offering of Registrable Stock pursuant to such
registration is not subject to any stop order, injunction or other order or
requirement of the Commission (other than any such action prompted by any
act or omission of the Holders), and (iv) no limitation of the number of
shares of Registrable Stock to be underwritten has been required pursuant
to Section hereof.
2. Obligations of the Company. Whenever required under Section to use its
best efforts to effect the registration of any Registrable Stock, the Company
shall, as expeditiously as possible:
(a) prepare and file with the Commission, not later than ninety (90) days after
receipt of a request to file a registration statement with respect to such
Registrable Stock, a registration statement on any form for which the
Company then qualifies or which counsel for the Company shall deem
appropriate and which form shall be available for the sale of such issue of
Registrable Stock in accordance with the intended method of distribution
thereof, and use its best efforts to cause such registration statement to
become effective as promptly as practicable thereafter; provided that
before filing a registration statement or prospectus or any amendments or
supplements thereto, the Company will (i) furnish to one (1) counsel
selected by the Requesting Holders copies of all such documents proposed to
be filed, and (ii) notify each such Holder of any stop order issued or
threatened by the Commission and take all reasonable actions required to
prevent the entry of such stop order or to remove it if entered;
(b) prepare and file with the Commission such amendments and supplements to
such registration statement and the prospectus used in connection therewith
as may be necessary to keep such registration statement effective for such
period of time as would satisfy the holding period requirements of Rule
144(k) promulgated by the Commission with respect to the Shares or such
shorter period which will terminate when all Registrable Stock covered by
such registration statement has been sold (but not before the expiration of
the forty (40) or ninety (90) day period referred to in Section 4(3) of the
1933 Act and Rule 174
4
<PAGE>
thereunder, if applicable), and comply with the provisions of the 1933 Act
with respect to the disposition of all securities covered by such
registration statement during such period in accordance with the intended
methods of disposition by the sellers thereof set forth in such
registration statement;
(c) furnish to each Holder and any underwriter of Registrable Stock to be
included in a registration statement copies of such registration statement
as filed and each amendment and supplement thereto (in each case including
all exhibits thereto), the prospectus included in such registration
statement (including each preliminary prospectus) and such other documents
as such Holder may reasonably request in order to facilitate the
disposition of the Registrable Stock owned by such Holder;
(d) use its best efforts to register or qualify such Registrable Stock under
such other securities or blue sky laws of such jurisdictions as any selling
Holder or any underwriter of Registrable Stock reasonably requests, and do
any and all other acts which may be reasonably necessary or advisable to
enable such Holder to consummate the disposition in such jurisdictions of
the Registrable Stock owned by such Holder; provided that the Company will
not be required to (i) qualify generally to do business in any jurisdiction
where it would not otherwise be required to qualify but for this Section
hereof, (ii) subject itself to taxation in any such jurisdiction, or (iii)
consent to general service of process in any such jurisdiction;
(e) use its best efforts to cause the Registrable Stock covered by such
registration statement to be registered with or approved by such other
governmental agencies or other authorities as may be necessary by virtue of
the business and operations of the Company to enable the selling Holders
thereof to consummate the disposition of such Registrable Stock;
(f) notify each selling Holder of such Registrable Stock and any underwriter
thereof, at any time when a prospectus relating thereto is required to be
delivered under the 1933 Act (even if such time is after the period
referred to in Section ), of the happening of any event as a result of
which the prospectus included in such registration statement contains an
untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein
in light of the circumstances being made not misleading, and prepare a
supplement or amendment to such prospectus so that, as thereafter delivered
to the purchasers of such Registrable Stock, such prospectus will not
contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein in light of the circumstances being made not misleading;
(g) make available for inspection by any selling Holder, any underwriter
participating in any disposition pursuant to such registration statement,
and any attorney, accountant or other agent retained by any such seller or
underwriter
5
<PAGE>
(collectively, the "Inspectors"), all financial and other records,
pertinent corporate documents and properties of the Company (collectively,
the "Records"), and cause the Company's officers, directors and employees
to supply all information reasonably requested by any such Inspector, as
shall be reasonably necessary to enable them to exercise their due
diligence responsibility, in connection with such registration statement.
Records or other information which the Company determines, in good faith,
to be confidential and which it notifies the Inspectors are confidential
shall not be disclosed by the Inspectors unless (i) the disclosure of such
Records or other information is necessary to avoid or correct a
misstatement or omission in the registration statement, or (ii) the release
of such Records or other information is ordered pursuant to a subpoena or
other order from a court of competent jurisdiction. Each selling Holder
shall, upon learning that disclosure of such Records or other information
is sought in a court of competent jurisdiction, give notice to the Company
and allow the Company, at the Company's expense, to undertake appropriate
action to prevent disclosure of the Records or other information deemed
confidential;
(h) furnish, at the request of any Requesting Holder, on the date that such
shares of Registrable Stock are delivered to the underwriters for sale
pursuant to such registration or, if such Registrable Stock is not being
sold through underwriters, on the date that the registration statement with
respect to such shares of Registrable Stock becomes effective, (1) a signed
opinion, dated such date, of the legal counsel representing the Company for
the purposes of such registration, addressed to the underwriters, if any,
and if such Registrable Stock is not being sold through underwriters, then
to the Requesting Holders as to such matters as such underwriters or the
Requesting Holders, as the case may be, may reasonably request and as would
be customary in such a transaction; and (2) a letter dated such date, from
the independent certified public accountants of the Company, addressed to
the underwriters, if any, and if such Registrable Stock is not being sold
through underwriters, then to the Requesting Holders and, if such
accountants refuse to deliver such letter to such Holder, then to the
Company (i) stating that they are independent certified public accountants
within the meaning of the 1933 Act and that, in the opinion of such
accountants, the financial statements and other financial data of the
Company included in the registration statement or the prospectus, or any
amendment or supplement thereto, comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act, and (ii)
covering such other financial matters (including information as to the
period ending not more than five (5) business days prior to the date of
such letter) with respect to the registration in respect of which such
letter is being given as the Requesting Holders may reasonably request and
as would be customary in such a transaction;
(i) enter into customary agreements (including if the method of distribution is
by means of an underwriting, an
6
<PAGE>
underwriting agreement in customary form) and take such other actions as
are reasonably required in order to expedite or facilitate the disposition
of the Registrable Stock to be so included in the registration statement;
(j) otherwise use its best efforts to comply with all applicable rules and
regulations of the Commission, and make available to its security holders,
as soon as reasonably practicable, but not later than eighteen (18) months
after the effective date of the registration statement, an earnings
statement covering the period of at least twelve (12) months beginning with
the first full month after the effective date of such registration
statement, which earnings statements shall satisfy the provisions of
Section 11(a) of the 1933 Act; and
(k) use its best efforts to cause all such Registrable Stock to be listed on
The Nasdaq Small Cap Market and/or any other securities exchange on which
similar securities issued by the Company are then listed or traded.
The Company may require each selling Holder of Registrable Stock as to
which any registration is being effected to furnish to the Company such
information regarding the distribution of such Registrable Stock as the Company
may from time to time reasonably request in writing.
Each Holder agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section hereof, such Holder
will forthwith discontinue disposition of Registrable Stock pursuant to the
registration statement covering such Registrable Stock until such Holder's
receipt of the copies of the supplemented or amended prospectus contemplated by
Section hereof, and, if so directed by the Company, such Holder will deliver to
the Company (at the Company's expense) all copies, other than permanent file
copies then in such Holder's possession, of the prospectus covering such
Registrable Stock current at the time of receipt of such notice. In the event
the Company shall give any such notice, the Company shall extend the period
during which such registration statement shall be maintained effective pursuant
to this Agreement (including the period referred to in Section ) by the number
of days during the period from and including the date of the giving of such
notice pursuant to Section hereof to and including the date when each selling
Holder of Registrable Stock covered by such registration statement shall have
received the copies of the supplemented or amended prospectus contemplated by
Section hereof.
3. Incidental Registration. Commencing immediately after the date of
Closing (as defined in the Investor Agreement), if the Company determines that
it shall file a registration statement under the 1933 Act (other than a
registration statement on a Form S-4 or S-8 or filed in connection with an
exchange offer or an offering of securities solely to the Company's existing
stockholders) on any form that would also permit the
7
<PAGE>
registration of the Registrable Stock and such filing is to be on its behalf
and/or on behalf of selling holders of its securities for the general
registration of its common stock to be sold for cash, at each such time the
Company shall promptly give each Holder written notice of such determination
setting forth the date on which the Company proposes to file such registration
statement, which date shall be no earlier than thirty (30) days from the date of
such notice, and advising each Holder of its right to have Registrable Stock
included in such registration. Upon the written request of any Holder received
by the Company no later than twenty (20) days after the date of the Company's
notice, the Company shall use its best efforts to cause to be registered under
the 1933 Act all of the Registrable Stock that each such Holder has so requested
to be registered. If, in the written opinion of the managing underwriter or
underwriters (or, in the case of a non-underwritten offering, in the written
opinion of the placement agent, or if there is none, the Company), the total
amount of such securities to be so registered, including such Registrable Stock,
will exceed the maximum amount of the Company's securities which can be marketed
(i) at a price reasonably related to the then current market value of such
securities, or (ii) without otherwise materially and adversely affecting the
entire offering, then the amount of Registrable Stock to be offered for the
accounts of Holders shall be reduced pro rata to the extent necessary to reduce
the total amount of securities to be included in such offering to the
recommended amount; provided, that if securities are being offered for the
account of other Persons as well as the Company, such reduction shall not
represent a greater fraction of the number of securities intended to be offered
by Holders than the fraction of similar reductions imposed on such other Persons
other than the Company over the amount of securities they intended to offer.
4. Holdback Agreement - Restrictions on Public Sale by Holder.
----------------------------------------------------------
(a) To the extent not inconsistent with applicable law, each Holder whose
Registrable Stock is included in a registration statement agrees not to
effect any public sale or distribution of the issue being registered or a
similar security of the Company, or any securities convertible into or
exchangeable or exercisable for such securities, including a sale pursuant
to Rule 144 under the 1933 Act, during the fourteen (14) days prior to, and
during the ninety (90) day period beginning on, the effective date of such
registration statement (except as part of the registration), if and to the
extent requested by the Company in the case of a nonunderwritten public
offering or if and to the extent requested by the managing underwriter or
underwriters in the case of an underwritten public offering.
(b) Restrictions on Public Sale by the Company and Others. The Company agrees
(i) not to effect any public sale or distribution of any securities similar
to those being registered, or any securities convertible into or
exchangeable or exercisable
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<PAGE>
for such securities, during the fourteen (14) days prior to, and during the
ninety (90) day period beginning on, the effective date of any registration
statement in which Holders are participating (except as part of such
registration), if and to the extent requested by the Holders in the case of
a non-underwritten public offering or if and to the extent requested by the
managing underwriter or underwriters in the case of an underwritten public
offering; and (ii) that any agreement entered into after the date of this
Agreement pursuant to which the Company issues or agrees to issue any
securities convertible into or exchangeable or exercisable for such
securities (other than pursuant to an effective registration statement)
shall contain a provision under which holders of such securities agree not
to effect any public sale or distribution of any such securities during the
periods described in (i) above, in each case including a sale pursuant to
Rule 144 under the 1933 Act.
5. Expenses of Registration. The Company shall bear all expenses incurred
in connection with each registration pursuant to Sections and of this
Agreement, excluding underwriters' discounts and commissions, but including,
without limitation, all registration, filing and qualification fees, word
processing, duplicating, printers' and accounting fees (including the expenses
of any special audits or "cold comfort" letters required by or incident to such
performance and compliance), exchange listing fees or National Association of
Securities Dealers fees, messenger and delivery expenses, all fees and expenses
of complying with securities or blue sky laws, fees and disbursements of counsel
for the Company. The selling Holders shall bear and pay the underwriting
commissions and discounts applicable to the Registrable Stock offered for their
account in connection with any registrations, filings and qualifications made
pursuant to this Agreement.
6. Indemnification and Contribution.
(a) Indemnification by the Company. The Company agrees to indemnify, to the
full extent permitted by law, each Holder, its officers, directors and
agents and each Person who controls such Holder (within the meaning of the
1933 Act) against all losses, claims, damages, liabilities and expenses
caused by any untrue or alleged untrue statement of material fact contained
in any registration statement, prospectus or preliminary prospectus or any
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statement therein (in case of a
prospectus or preliminary prospectus, in the light of the circumstances
under which they were made) not misleading. The Company will also indemnify
any underwriters of the Registrable Stock, their officers and directors and
each Person who controls such underwriters (within the meaning of the 1933
Act) to the same extent as provided above with respect to the
indemnification of the selling Holders.
(b) Indemnification by Holders. In connection with any registration statement
in which a Holder is participating, each such Holder will furnish to the
Company in writing such
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<PAGE>
information with respect to such Holder as the Company reasonably requests
for use in connection with any such registration statement or prospectus
and agrees to indemnify, to the extent permitted by law, the Company, its
directors and officers and each Person who controls the Company (within the
meaning of the 1933 Act) against any losses, claims, damages, liabilities
and expenses resulting from any untrue or alleged untrue statement of
material fact or any omission or alleged omission of a material fact
required to be stated in the registration statement, prospectus or
preliminary prospectus or any amendment thereof or supplement thereto or
necessary to make the statements therein (in the case of a prospectus or
preliminary prospectus, in the light of the circumstances under which they
were made) not misleading, to the extent, but only to the extent, that such
untrue statement or omission is contained in any information with respect
to such Holder so furnished in writing by such Holder. Notwithstanding the
foregoing, the liability of each such Holder under this Section shall be
limited to an amount equal to the initial public offering price of the
Registrable Stock sold by such Holder, unless such liability arises out of
or is based on willful misconduct of such Holder.
(c) Conduct of Indemnification Proceedings. Any Person entitled to
indemnification hereunder agrees to give prompt written notice to the
indemnifying party after the receipt by such Person of any written notice
of the commencement of any action, suit, proceeding or investigation or
threat thereof made in writing for which such Person will claim
indemnification or contribution pursuant to this Agreement and, unless in
the reasonable judgment of such indemnified party, a conflict of interest
may exist between such indemnified party and the indemnifying party with
respect to such claim, permit the indemnifying party to assume the defense
of such claims with counsel reasonably satisfactory to such indemnified
party. Whether or not such defense is assumed by the indemnifying party,
the indemnifying party will not be subject to any liability for any
settlement made without its consent (but such consent will not be
unreasonably withheld). Failure by such Person to provide said notice to
the indemnifying party shall itself not create liability except to the
extent of any injury caused thereby. No indemnifying party will consent to
entry of any judgment or enter into any settlement which does not include
as an unconditional term thereof the giving by the claimant or plaintiff to
such indemnified party of a release from all liability in respect of such
claim or litigation. If the indemnifying party IS not entitled to, or
elects not to, assume the defense of a claim, it will not be obligated to
pay the fees and expenses of more than one (1) counsel with respect to such
claim, unless in the reasonable judgment of any indemnified party a
conflict of interest may exist between such indemnified party and any other
such indemnified parties with respect to such claim, in which event the
indemnifying party shall be obligated to pay the fees and expenses of such
additional counsel or counsels.
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<PAGE>
(d) Contribution. If for any reason the indemnity provided for in this Section
is unavailable to, or is insufficient to hold harmless, an indemnified
party, then the indemnifying party shall contribute to the amount paid or
payable by the indemnified party as a result of such losses, claims,
damages, liabilities or expenses (i) in such proportion as is appropriate
to reflect the relative benefits received by the indemnifying party on the
one hand and the indemnified party on the other, or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, or
provides a lesser sum to the indemnified party than the amount hereinafter
calculated, in such proportion as is appropriate to reflect not only the
relative benefits received by the indemnifying party on the one hand and
the indemnified party on the other but also the relative fault of the
indemnifying party and the indemnified party as well as any other relevant
equitable considerations. The relative fault of such indemnifying party
and indemnified parties shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged
untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied
by, such indemnifying party or indemnified parties; and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such action. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in
Section , any legal or other fees or expenses reasonably incurred by such
party in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section were determined by pro rata
allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any Person who was not guilty of such fraudulent misrepresentation.
If indemnification is available under this Section , the indemnifying
parties shall indemnify each indemnified party to the full extent provided
in Sections and without regard to the relative fault of said indemnifying
party or indemnified party or any other equitable consideration provided
for in this Section .
7. Participation in Underwritten Registrations. No Holder may participate
in any underwritten registration hereunder unless such Holder (a) agrees to sell
such Holder's securities on the basis provided in any underwriting arrangements
approved by the Holders entitled hereunder to approve such arrangements, and (b)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements.
11
<PAGE>
8. Rule 144. The Company covenants that it will file the reports required
to be filed by it under the 1933 Act and the Securities Exchange Act of 1934, as
amended, and the rules and regulations adopted by the Commission thereunder; and
it will take such further action as any Holder may reasonably request, all to
the extent required from time to time to enable such Holder to sell Registrable
Stock without registration under the 1933 Act within the limitation of the
exemptions provided by (a) Rule 144 under the 1933 Act, as such Rule may be
amended from time to time, or (b) any similar rule or regulation hereafter
adopted by the Commission. Upon the request of any Holder, the Company will
deliver to such Holder a written statement as to whether it has complied with
such requirements.
9. Transfer of Registration Rights. The registration rights of any Holder
under this Agreement with respect to any Registrable Stock may be transferred to
any transferee of such Registrable Stock; provided that such transfer may
otherwise be effected in accordance with applicable securities laws; provided
further, that the transferring Holder shall give the Company written notice at
or prior to the time of such transfer stating the name and address of the
transferee and identifying the securities with respect to which the rights under
this Agreement are being transferred; provided further, that such transferee
shall agree in writing, in form and substance satisfactory to the Company, to be
bound as a Holder by the provisions of this Agreement; and provided further,
that such assignment shall be effective only if immediately following such
transfer the further disposition of such securities by such transferee is
restricted under the 1933 Act. Except as set forth in this Section , no transfer
of Registrable Stock shall cause such Registrable Stock to lose such status.
10. Mergers, Etc. The Company shall not, directly or indirectly, enter into
any merger, consolidation or reorganization in which the Company shall not be
the surviving corporation unless the proposed surviving corporation shall, prior
to such merger, consolidation or reorganization, agree in writing to assume the
obligations of the Company under this Agreement, and for that purpose references
hereunder to "Registrable Stock" shall be deemed to be references to the
securities which the Holders would be entitled to receive in exchange for
Registrable Stock under any such merger, consolidation or reorganization;
provided, however, that the provisions of this Section shall not apply in the
event of any merger, consolidation or reorganization in which the Company is not
the surviving corporation if each Holder is entitled to receive in exchange for
its Registrable Stock consideration consisting solely of (i) cash, (ii)
securities of the acquiring corporation which may be immediately sold to the
public without registration under the 1933 Act, or (iii) securities of the
acquiring corporation which the acquiring corporation has agreed
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<PAGE>
to register within ninety (90) days of completion of the transaction for resale
to the public pursuant to the 1933 Act.
11. Miscellaneous.
-------------
(a) No Inconsistent Agreements. The Company will not hereafter enter into any
agreement with respect to its securities which is inconsistent with the
rights granted to the Holders in this Agreement.
(b) Remedies. Each Holder, in addition to being entitled to exercise all
rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The Company agrees
that monetary damages would not be adequate compensation for any loss
incurred by reason of a breach by it of the provisions of this Agreement
and hereby agrees to waive (to the extent permitted by law) the defense in
any action for specific performance that a remedy of law would be adequate.
(c) Amendments and Waivers. The provisions of this Agreement may not be
amended, modified or supplemented, and waivers or consents to departures
from the provisions hereof may not be given unless the Company has obtained
the written consent of the Holders of at least a majority of the
Registrable Stock then outstanding affected by such amendment,
modification, supplement, waiver or departure.
(d) Successors and Assigns. Except as otherwise expressly provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties hereto.
Nothing in this Agreement, express or implied, is intended to confer upon
any Person other than the parties hereto or their respective successors and
assigns any rights, remedies, obligations, or liabilities under or by
reason of this Agreement, except as expressly provided in this Agreement.
(e) Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Texas applicable to
contracts made and to be performed wholly within that state, without regard
to the conflict of law rules thereof.
(f) Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
(g) Headings. The headings in this Agreement are used for convenience of
reference only and are not to be considered in construing or interpreting
this Agreement.
(h) Notices. Any notice required or permitted under this Agreement shall be
given in writing and shall be delivered in person or by telecopy or by
overnight courier guaranteeing no
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<PAGE>
later than second business day delivery, directed to (i) the Company at the
address set forth below its signature hereof or (ii) a Holder at the
address of the Administrator set forth below its signature hereof. Any
party may change its address for notice by giving ten (10) days advance
written notice to the other parties. Every notice or other communication
hereunder shall be deemed to have been duly given or served on the date on
which personally delivered, or on the date actually received, if sent by
telecopy or overnight courier service, with receipt acknowledged.
(i) Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be in
any way impaired thereby, it being intended that all of the rights and
privileges of the Holders shall be enforceable to the fullest extent
permitted by law.
(j) Entire Agreement. This Agreement is intended by the parties as a final
expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings other than those set forth or referred
to herein. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter.
(k) Enforceability. This Agreement shall remain in full force and effect
notwithstanding any breach or purported breach of, or relating to, the
Investor Agreement.
(l) Recitals. The recitals are hereby incorporated in the Agreement as if
fully set forth herein.
(m) Attorneys Fees. If any action is necessary to enforce or interpret the
terms of this agreement, the prevailing party shall be entitled to
reasonable attorneys' fees and costs, in addition to any other relief to
which he is or may be entitled. This provision shall be construed as
applicable to the entire agreement.
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14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written hereinabove.
APPLIED VOICE RECOGNITION, INC.
By:
Name: TIMOTHY J. CONNOLLY
Title: Chairman & C.E.O.
4615 Post Oak Place, Suite 111
Houston, Texas 77027
Telephone: (713) 621-5678
Telecopier: (713) 621-5870
RALF NICKELEIT-BONNIER
Heimfelder Strasse 114
21075 Hamburg, Germany
Telephone: (____) ____
Telecopier: (____)
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<PAGE>
INVESTOR SUBSCRIPTION AGREEMENT
OF APPLIED VOICE RECOGNITION, INC.
THIS INVESTOR SUBSCRIPTION AGREEMENT (the "Agreement") is made and entered
into as of this 30th day of July, 1998, by and between APPLIED VOICE
RECOGNITION, INC., a Delaware corporation ("Seller"), with offices at 4615 Post
Oak Place, Suite 111, Houston, Texas 77027 and RALF NICKELEIT-BONNIER, an
individual ("Buyer"), with offices at Heimfelder Strasse 114, 21075 Hamburg,
Germany, providing for the purchase and sale of Five Thousand (5,000) shares
(the "Shares") of Series C 4% Cumulative Convertible Preferred Stock of Seller
(the "Series C Preferred Stock"), convertible into shares of the common stock,
par value $0.001 per share (the "Common Stock"), of Seller. Seller and Buyer
(collectively, the "Parties") hereby represent and agree as follows:
1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE.
--------------------------------------
(i) Buyer hereby subscribes for Five Thousand (5,000) Shares of Series C
Preferred Stock in exchange for Sixty Two Thousand Five Hundred and no/100
Dollars ($62,500.00) in cash (the "Purchase Price"). Buyer shall pay the
Purchase Price for the Shares by wire transfer of immediately available,
federal funds in United States dollars against counter-delivery of the
Shares by Seller. The closing of the purchase and sale of the Shares (the
"Closing") shall take place on or about June 15, 1998.
(ii) The rights, privileges and preferences of the Series C Preferred Stock,
shall be as set forth in the Certificate of Designation attached as Exhibit
-------
"A" to this Agreement.
---
2. BUYER'S REPRESENTATIONS AND COVENANTS.
-------------------------------------
Buyer represents, warrants and covenants to Seller as follows:
(i) This Agreement has been duly authorized, validly executed and delivered on
behalf of Buyer and is a valid and binding agreement of Buyer enforceable
in accordance with its terms, subject to general principles of equity and
of bankruptcy or other laws affecting the enforcement of creditors' rights;
(ii) Buyer is purchasing the Shares for its own account for investment purposes
only and not with a view towards distribution. Buyer understands and agrees
that it must bear the economic risks of investments for an indefinite
period of time. Buyer has received and carefully reviewed copies of the
Disclosure Documents (as defined in Section 3). No representations or
warranties have been made to Buyer by Seller, the officers or directors of
Seller, or any agent, employee or affiliate of any of them, except as
specifically set forth herein or in the placement agent's agreement between
the Seller and Equity Services, Ltd. (the "Placement Agreement"). Buyer
shall be a third party beneficiary of the representations, warranties and
covenants made by Seller in the Placement Agreement. Buyer is aware that
the purchase of the Shares involves a high degree of risk and that it may
sustain, and has the financial ability to sustain, the loss of its entire
investment. Buyer has had the opportunity to ask questions of, and receive
answers satisfactory to it from, Seller's management
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<PAGE>
regarding Seller. Buyer understands that no federal or state governmental
authority has made any finding or determination relating to the fairness of
an investment in the Shares and that no federal or state governmental
authority has recommended or endorsed, or will recommend or endorse, the
investment herein. Buyer has significant assets and upon consummation of
the purchase of the Shares will continue to have significant assets
exclusive of the Shares. Buyer has not been organized for the sole purpose
of acquiring the Shares;
(iii) Buyer (a) is not a citizen or resident of the United States of America,
(b) is not an entity organized under any laws of any state of the United
States of America, and (c) does not have offices in the United States of
America;
(iv) Buyer is an "accredited investor" within the meaning of Rule 501 of
Regulation D promulgated under the Securities Act of 1933, as amended
(the "Securities Act");
(v) Buyer understands that the Shares are being offered and sold to it in
reliance on specific provisions of federal and state securities laws and
that Seller is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgements and
understandings of Buyer set forth herein in order to determine the
applicability of such provisions;
(vi) Buyer is capable of evaluating the risks and merits of this investment by
virtue of its experience as an investor and its knowledge, experience,
and sophistication in financial and business matters;
(vii) Buyer shall execute the Registration Rights Agreement in the form
attached hereto as Exhibit "B";
(viii) Buyer has not employed any investment banker, broker or finder or
incurred any liability for any brokerage fees, commissions or finder's
fees in connection with the transactions contemplated by this Agreement;
and
(ix) Buyer understands that neither the Shares nor the shares of Common Stock
issuable upon conversion of the Series C Preferred Stock have been
registered under the Securities Act and therefore it cannot dispose of
any or all of the Shares or Common Stock unless and until such Shares or
Common Stock, as the case may be, are subsequently registered under the
Securities Act or exemptions from such registration are available. Buyer
acknowledges that a legend substantially as follows will be placed on the
certificates representing the Shares and/or Common Stock:
THE SECURITIES REPRESENTED HEREBY ARE RESTRICTED SECURITIES WITHIN THE
MEANING OF THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH
SUCH ACT AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER AND IN
ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THE ISSUER OF THESE
SECURITIES WILL NOT TRANSFER SUCH
2
<PAGE>
SECURITIES EXCEPT UPON RECEIPT OF EVIDENCE SATISFACTORY TO THE ISSUER
THAT THE REGISTRATION PROVISIONS OF SUCH ACT HAVE BEEN COMPLIED WITH OR
THAT SUCH REGISTRATION IS NOT REQUIRED AND THAT SUCH TRANSFER WILL NOT
VIOLATE ANY APPLICABLE FEDERAL OR STATE SECURITIES LAWS.
3. SELLER'S REPRESENTATIONS AND COVENANTS.
--------------------------------------
Seller represents, warrants and covenants to Buyer that Seller has not
employed any investment banker, broker or finder or incurred any liability for
any brokerage fees, commissions or finder's fees in connection with the
transaction contemplated by this Agreement except that Seller has (i) retained
directly or indirectly Equity Services, Ltd. ("ESL") and (ii) has agreed to pay
a finder's fee to Capital Solutions, Inc. ("CSI").
In addition, the representations and warranties of the Company contained in
that certain placement agreement dated July 30, 1998, by and between Seller
and ESL (the "Placement Agreement") are incorporated herein by reference and
shall be as if made herein. The aforementioned representations and warranties
of Seller shall survive the Closing.
4. INDEMNIFICATION BY SELLER.
-------------------------
(i) Seller hereby agrees to indemnify and hold harmless Buyer and its officers,
directors, shareholders, employees, agents and attorneys against any and
all losses, claims, damages, liabilities and expenses incurred by each such
person in connection with defending or investigating any such claims or
liabilities, including any costs or expenses incurred, to which any such
indemnified party may become subject under the Securities' Act, or under
any other statute, at common law or otherwise, insofar as such losses,
claims, demands, liabilities and expenses arise out of or are based upon
(x) any untrue statement or alleged untrue statement of a material fact
made by the Seller, (y) any omission or alleged omission of a material fact
with respect to the Seller, or (z) any breach of any representation,
warranty or agreement made by the Seller in this Agreement.
(ii) Buyer hereby agrees to indemnify and hold harmless Seller and its officers,
directors, shareholders, employees, agents and attorneys against any and
all losses, claims, damages, liabilities and expenses incurred by each such
person in connection with defending or any reasonable investigation of
colorable claims or liabilities, including any costs or expenses incurred,
to which any such indemnified party may become subject under the
Securities' Act, or under any other statute, at common law or otherwise,
insofar as such losses, claims, demands, liabilities and expenses arise out
of or are based upon (i) any untrue statement or alleged untrue statement
of a material fact made by Buyer, (ii) any omission or alleged omission of
a material fact with respect to Buyer, or (iii) any breach of any
representation, warranty or agreement made by Buyer in this Agreement.
3
<PAGE>
5. CONDITIONS PRECEDENT TO CLOSING.
-------------------------------
(i) Buyer shall (a) deliver payment of the Purchase Price to the Escrow
Agent; and (b) execute and deliver the Registration Rights Agreement.
(ii) Seller shall (a) deliver to the Escrow Agent certificates for the Series
C Preferred Stock in the name of the Buyer, (b) execute and deliver the
Registration Rights Agreement and (c) deliver to Buyer an opinion from
counsel for the Company, satisfactory to ESL and the Buyer, as to the
matters described in the Placement Agreement.
2. MISCELLANEOUS.
-------------
(iii) This Agreement shall be governed by and interpreted in accordance with
the laws of the State of Texas without giving effect to the rules
governing the conflicts of laws.
(iv) This Agreement may be executed by facsimile signature and in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(v) Each of the parties agrees to pay its own expenses incident to this
Agreement and the performance of its obligations hereunder, including,
but not limited to, the fees and expenses of each such party's legal
counsel.
(vi) All notices and other communications provided for or permitted hereunder
shall be made in writing by hand delivery, express overnight courier,
registered first class mail, overnight courier, or telecopied, initially
to the address set forth below, and thereafter at such other address,
notice of which is given in accordance with the provisions of this
Section 5.
if to Seller:
Applied Voice Recognition, Inc.
4615 Post Oak Place, Suite 111
Houston, Texas 77027
Attn: Timothy J. Connolly, Chairman & CEO
Telephone: (713) 621-5678
Telecopier: (713) 621-5870
with a copy (which shall not constitute notice) to:
Boyar, Simon & Miller, P.C.
4265 San Felipe, Suite 1200
Houston, Texas 77027
Attn: Gary W. Miller, Esq.
Telephone: (713) 850-7766
Telecopier: (713) 552-1758
if to Buyer:
Ralf Nickeleit-Bonnier
Heimfelder Strasse 114
21075 Hamburg, Germany
Telephone: (___) ____________________
Telecopier: (___) ____________________
4
<PAGE>
with a copy (which shall not constitute notice) to:
Gardere & Wynne, L.L.P.
3000 Thanksgiving Tower
1601 Elm Street
Dallas, Texas 75201-4761
Attn: I. Bobby Majumder, Esq.
Telephone: (214) 999-4268
Telecopier: (214) 999-4667
All such notices and communications shall be deemed to have been duly given:
when delivered by hand, if personally delivered; three (3) business days after
being deposited in the mail, registered mail, return receipt requested, postage
prepaid, if mailed; 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 (subject to follow up as
discussed above).
(vii) This Agreement together with the Exhibits hereto and the Placement
Agreement constitutes the entire agreement of the parties with respect to
the subject matter hereof and supersedes all prior oral or written
proposals or agreements relating thereto. This Agreement may not be
amended or any provision hereof waived in whole or in part, except by a
written amendment signed by both of the parties.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
5
<PAGE>
IN WITNESS WHEREOF, this Agreement was duly executed on the date first written
above.
APPLIED VOICE RECOGNITION, INC.
By:
TIMOTHY J. CONNOLLY, Chairman & CEO
RALF NICKELEIT-BONNIER
6
<PAGE>
EXHIBIT "A"
-----------
Certificate of Designation
<PAGE>
EXHIBIT "B"
-----------
Registration Rights Agreement
<PAGE>
PLACEMENT AGREEMENT
OF
APPLIED VOICE RECOGNITION, INC.
July 30, 1998
EQUITY SERVICES, LTD.
St. Andrews Court
Frederick Street Steps
P.O. Box N-4805
Nassau, Bahamas
Gentlemen:
The undersigned, APPLIED VOICE RECOGNITION, INC., a Delaware corporation
(the "Company"), confirms its agreement with Equity Services, Ltd., a Nevis
company ("ESL") as follows:
1. Description of Securities and Offering.
(a) ESL has agreed to privately place on a best efforts basis up to Three
Million Dollars ($3,000,000.00) of the Company's Series C 4% cumulative
convertible preferred stock (the "Series C Preferred Stock") (the "Shares")
(the "Private Placement") at a price of Ten and 00/100 Dollars ($10.00) per
Share (the "Private Placement Price"). The Shares shall have a cumulative
dividend of four percent (4%), payable on a fiscal quarterly basis, which
shall be paid in cash, or at the option of the Company, by the issuance of
shares of Common Stock based on the thirty (30) average closing bid price
of the Common Stock prior to the dividend date. Each Share shall be
immediately convertible into ten (10) shares of Common Stock (subject to
adjustment). The closing of the Private Placement shall occur on or before
July 15, 1998.
The Company shall grant the holders of the Shares, the holders of the
Common Stock issued as dividends on the Shares and the holders of the Common
Stock issued upon conversion of the Shares, one (1) demand registration right,
beginning immediately after the closing of the Private Placement contemplated
herein (the "Closing") and "piggyback" registration rights beginning on the date
of Closing. The terms of these registration rights shall be as set forth in a
Registration Rights Agreement (herein so called) substantially in the form
attached hereto as Exhibit "A".
(b) The commissions to which ESL shall be entitled for such placement shall be
as follows: (i) a sum equal to seven percent (7%) of the total proceeds
resulting from the placement of the Shares; and (ii) Shares with value
equal to five percent (5%) of the total proceeds resulting from the
placement of the Shares (the "Placement Agent's Shares"). ESL shall also
be paid (i) a sum equal to three percent (3%) of the total proceeds
resulting from the placement of the Shares as a non-accountable expense
allowance and (ii) an amount equal to the legal fees of ESL's counsel not
to exceed Ten Thousand and No/100 Dollars ($10,000.00). ESL will be paid
the commissions, the
1
<PAGE>
non-accountable expense allowance and the legal fees of ESL's counsel
simultaneously with the Closing.
(c) In addition, the Company agrees to sell to ESL, for an aggregate price of
$100.00, a three (3) year option ("ESL Purchase Option") to purchase shares
of Common Stock equal to up to Ten Percent (10%) of the Common Stock
underlying the Shares offered in the Private Placement ("ESL Option
Shares") at a price equal to One Hundred Fifty Percent (150%) of the
Private Placement Price divided by ten (10) per Option Share exercisable
for a period of three (3) years commencing immediately upon the Closing.
The holders of ESL Option Shares and the Placement Agent's Shares will have
registration rights as set forth in a Registration Rights Agreement (herein
so called) substantially in the form attached hereto as Exhibit "B".
2. Appointment of Placement Agent. ESL's appointment by the Company as
Placement Agent shall commence upon the date of the execution of this Agreement,
and shall continue until and through June 16, 1998, unless (i) the Shares shall
be completely sold prior to that date, (ii) the offering has been terminated by
written agreement between ESL and the Company, or (iii) this Agreement shall be
terminated at a prior date as provided herein.
3. Release of Placement Agent. ESL's commitment to serve as Placement Agent
on behalf of the Company is made subject to the release of ESL: (i) in the event
of war involving the United States of America, (ii) in the event of any material
adverse change in the business, property or financial condition of the Company
as reasonably determined by ESL, (iii) in the event of any action, suit or
proceeding at law or in equity against the Company, or by any Federal, State or
other commission, board or agency wherein any unfavorable decision would
materially affect the business, property, financial condition or income of the
Company (as reasonably determined by ESL), (iv) in the event of a breach by the
Company of any material covenant, representation or warranty contained in this
Agreement or (v) in the event of adverse market conditions (of which ESL shall
be the sole judge).
4. Representations and Warranties of the Company.
The Company represents and warrants to ESL as follows:
(a) The Company has been duly incorporated and is validly existing and in good
standing under the laws of the State of Delaware, with full corporate power
and authority to own, lease and operate its properties and to conduct its
business as currently conducted, and is duly registered and qualified to
conduct its business and is in good standing in each jurisdiction or place
where the nature of its properties or the conduct of its business requires
such registration or qualification.
(b) The Company is in full compliance with all reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and the
Common Stock is quoted on the Nasdaq Over-the Counter Bulletin Board
(trading symbol: AVRI).
2
<PAGE>
(c) The Company has furnished ESL with copies of its Business Plan dated April,
1998, its most recent Annual Report on Form 10-KSB dated April 30, 1998
filed with the Securities and Exchange Commission (the "Commission") and
all Forms 8-K and 10-QSB filed thereafter, if any (collectively, the
"Disclosure Documents"). Except as disclosed in the Company's most recent
10-KSB filing with the Commission, immediately prior to Closing there will
be no other capital stock issued and outstanding, nor will there be
outstanding any rights to acquire, commitments to issue or securities
convertible into capital stock except as a result of the exercise of
outstanding options to acquire securities of the Company, conversion of
outstanding preferred stock, or the grant of options to purchase
securities of the Company in the ordinary course of business (including the
repricing or reissuance of existing options as determined to be in the best
interests of the Company by a majority of the disinterested members of the
Company's board of directors). The Disclosure Documents at the time of
their filing did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
contained therein, in light of the circumstances under which they were made
not misleading.
(d) Except as shown on the Company's most recent audited financial statements
dated December 31, 1997, prepared by Ernst & Young, L.L.P. , the Company's
independent certified public accountants, the Company will have no other
indebtedness outstanding immediately prior to the Closing except as
incurred in the ordinary course of business or disclosed in writing prior
to Closing to ESL.
(e) Upon issuance at the Closing in accordance with this Agreement, the Shares
will be duly and validly authorized and issued, fully paid and
nonassessable, free from all encumbrances and restrictions other than
restrictions on transfer imposed by applicable securities laws and/or this
Agreement, and will not subject the holders thereof to personal liability
by reason of being such holders. The shares of Common Stock, when issued
and delivered upon conversion of the Series C Preferred Stock, the ESL
Option Shares and the Placement Agent's Shares, will be duly and validly
authorized and issued, fully paid and nonassessable, free from all
encumbrances and restrictions other than restrictions on transfer imposed
by applicable securities laws and/or this Agreement, and will not subject
the holders thereof to personal liability by reason of being such holders.
(f) This Agreement has been duly authorized, validly executed and delivered on
behalf of the Company and is a valid and binding agreement of the Company
enforceable in accordance with its terms, subject to general principles of
equity and to bankruptcy or other laws affecting the enforcement of
creditors' rights generally, and the Company has full power and authority
to execute and deliver this Agreement and the other agreements and
documents contemplated hereby and to perform its obligations hereunder and
thereunder.
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<PAGE>
(g) The execution and delivery of this Agreement, the issuance of the Shares,
the shares of Common Stock issuable upon conversion of the Series C
Preferred Stock, the ESL Option Shares, and the Placement Agent's Shares
and the consummation of the transactions contemplated by the Investor
Subscription Agreements (herein so called) by the Company, will not
conflict with or result in a breach of or a default under any of the terms
or provisions of, the Company's certificate of incorporation or By-laws, or
of any material provision of any indenture, mortgage, deed of trust or
other material agreement or instrument to which the Company is a party or
by which it or any of its properties or assets is bound, any material
provision of any law, statute, rule, regulation, or any existing applicable
decree, judgment or order by any court, federal or state regulatory body,
administrative agency, or other governmental body having jurisdiction over
the Company, or any of its properties or assets and will not result in the
creation or imposition of any material lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries pursuant to
the terms of any agreement or instrument to which any of them is a party or
by which any of them may be bound or to which any of their property or any
of them is subject.
(h) No authorization, approval, filing with or consent of any governmental body
is required for the issuance and sale of the Shares, except for filings
pursuant to Regulation D promulgated under the Securities Act of 1933, as
amended (the "Act") or any state blue sky filings.
(i) There is no action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending or threatened
against or affecting the Company, or any of its properties, which would
reasonably be anticipated to result in any material adverse change in the
condition (financial or otherwise) or in the earnings, business affairs,
business prospects, properties or assets of the Company.
(j) Subsequent to the dates as of which information is given in the Disclosure
Documents, except as contemplated herein, the Company has not incurred any
material liabilities or material obligations, direct or contingent, or
entered into any material transactions not in the ordinary course of
business, and there has not been any change in its capitalization or any
material adverse change in its condition (financial or otherwise) net
worth, results of operations or prospects.
(k) The Company has conducted, is conducting and will conduct its business so
as to comply in all material respects with all applicable statutes and
regulations, and the Company is not charged with and, to the knowledge of
the Company, is not under investigation with respect to any violation of
any statutes or regulations nor is it the subject of any pending or
threatened adverse proceedings by any regulatory authority having
jurisdiction over its business or operations.
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<PAGE>
(l) Except as set forth in the Disclosure Documents, the Company has good and
marketable title to all properties and assets described therein as owned by
it, free and clear of all liens, charges, encumbrances, or restrictions.
(m) The Company has filed all necessary federal and state income and franchise
tax returns and has paid all taxes shown as due thereon.
(n) The Company has no knowledge of any tax deficiency that might be asserted
against it that might materially and adversely affect its business or
properties.
(o) The Company maintains insurance of the types and in amounts generally
deemed adequate for its business and consistent with insurance coverage
maintained by similar companies and businesses, including, but not limited
to, insurance covering all real and personal property owned or leased by
the Company against theft, damage, destruction, acts of vandalism, products
liability and all other risks customarily insured against, all of which
insurance is in full force and effect.
(p) No labor disturbance by the employees of the Company exists or is imminent
that could reasonably be expected to have a material adverse effect on the
conduct of the business, operations, financial condition, or income of the
Company.
(q) Neither the Company nor any employee or agent of the Company has made any
payment of funds of the Company or received or retained any funds in
violation of law.
(r) Subject in part to the truth and accuracy of the subscribers'
representations set forth in the Investor Subscription Agreements, the
offer, sale and issuance of the Shares are exempt from registration
requirements of the 1933 Act, and neither the Company nor any authorized
agent acting on its behalf will take any action hereafter that will cause
the loss of such exemption.
(s) The Company has sufficient title and ownership of all trademarks, service
marks, trade names, copyrights, patents, trade secrets and other
proprietary rights necessary for its business as now conducted and as
proposed to be conducted as described in the Disclosure Documents without
any conflict with or infringement of the rights of others. Except as set
forth in the Disclosure Documents, there are no material outstanding
options, licenses or agreements of any kind relating to the foregoing, nor
is the Company bound by or party to any material options, licenses or
agreements of any kind with respect to the trademarks, service marks, trade
names, copyrights, patents, trade secrets, licenses and other proprietary
rights of any other
5
<PAGE>
person or entity. The Company is not aware that any of its executive
officers is obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency that would interfere
with the use of his or her best efforts to promote the interest of the
Company or that would conflict with the Company's business as proposed to
be conducted.
(t) Except for agreements explicitly contemplated hereby or set forth in the
Disclosure Documents, there are no agreements between the Company and any
of its officers, directors, affiliates or any affiliate thereof.
(u) As of the date of Closing, no representation or warranty of the Company
contained in this Section 4, and no statement contained in any exhibit,
schedule, certificate, list, summary or other disclosure document provided
or to be provided to ESL pursuant hereto or in connection with the
transactions contemplated hereby, contains or will contain any untrue
statement of a material fact, or omits or will omit to state any material
fact which is necessary in order to make statements contained therein not
misleading.
The representations, warranties and covenants of the Company contained in this
Agreement shall inure to the benefit of each subscriber to the Private Placement
and such subscribers shall constitute identified third-party beneficiaries under
this Agreement. No termination, modification, or waiver of the representations,
warranties and covenants of the Company contained in this Agreement shall be
permitted in any manner adversely affecting their interests without their prior
written consent. The representations and warranties of the Company contained in
this Agreement shall survive the Closing.
5. Affirmative Covenants of the Company.
For such time as at least one-third (1/3) of the Shares subscribed for in
the Private Placement are outstanding and owned by subscribers to the Private
Placement, the Company agrees as follows:
(a) Upon completion of the Private Placement and upon meeting the initial
inclusion listing requirements, the Company will use good faith efforts to
list shares of its Common Stock on The Nasdaq SmallCap Market or a national
securities exchange (such as AMEX or NYSE) and, at a minimum, to maintain
such listing for a period of five (5) years from the time of such listing;
(b) The financial statements of the Company shall be audited by a "Big Six" or
such other independent public accounting firm as ESL may consent to.
Further, the Company shall not effect a change in its accounting firm to
other than a
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<PAGE>
"Big Six" firm or such other independent public accounting firm as ESL may
consent to for a period of two (2) years following the Closing. ESL hereby
consents to the engagement of Ernst & Young, L.L.P., as the Company's
independent certified public accountants.
(c) The Company shall be responsible for and shall bear all expenses directly
and necessarily incurred in connection with the Private Placement,
including but not limited to, the cost of preparing, printing and
delivering all placement and selling documents, including but not limited
to the Placement Agreement, Investor Subscription Agreements, Registration
Rights Agreements, Placement Agent's Option Agreement and blue sky
memorandum and stock certificates; blue sky fees, filing fees, legal fees
and disbursements of counsel in connection with blue sky matters; fees and
disbursements of the transfer and warrant agent; the cost of two (2) sets
of bound closing volumes for ESL and its counsel; the cost of three (3)
tombstone advertisements, at least one (1) of which shall be in the Wall
Street Journal, one (1) of which shall be in the Houston Chronicle and one
(1) shall be in a publication chosen by ESL; an amount equal to the legal
fees of ESL's counsel, not to exceed Ten Thousand Dollars ($10,000.00) and
the cost of five (5) lucite tombstones for ESL and its counsel
(collectively, the "Company Expenses"). If the Private Placement is not
completed because the Company prevents it or because of a breach by the
Company of any covenants, representations or warranties contained herein,
the Company's liability for such expense allowance shall be limited to Ten
Thousand and No/100 Dollars ($10,000.00).
(d) The Company will, and will cause its subsidiaries, if any, to do the
following: (i) maintain and preserve its and their respective businesses;
(ii) conduct its and their respective business, taken together as a group,
in an orderly, efficient and customary manner; and (iii) keep and maintain
all of its and their respective properties in good working order and
condition.
(e) The Company will deliver to ESL for a period of three (3) years from the
Closing:
(i) within thirty (30) days after the close of each fiscal quarter, a copy of
its consolidated balance sheet as of the close of such quarter and its
profit and loss statement and surplus reconciliation for that quarter, all
prepared in accordance with generally accepted accounting principles
consistently applied, and certified as being fairly presented in all
material respects by the Company's President or its Chief Financial
Officer;
(ii) at any time within the period from thirty (30) days prior to and until
ninety (90) days after the start of any fiscal year, financial projections
of the Company and its subsidiaries, if any, for such fiscal year prepared
in reasonable detail, which financial projections shall be presented to the
Company's Board of Directors for their approval at their regular meeting
first following the preparation of such projections;
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<PAGE>
(iii) promptly upon the filing thereof, all reports and statements filed with
the Commission (or any governmental authority succeeding to any of its
functions) or with any securities exchange; and
(iv) such other information and data with respect to the Company or any of its
subsidiaries, if any, as from time to time may be reasonably requested by
ESL (including, without limitation, such other information as the Company
shall have supplied to any of its security holders in their capacity as
such) to the extent the Company possesses such information or can acquire
it without unreasonable effort or expense.
(v) The Company will continue to pay the premiums and keep in force at least
One Million and No/100 Dollars ($1,000,000.00) of "key man" life
insurance on the life of Timothy J. Connolly. Such "key man" life
insurance will be kept in force for a minimum period of either three (3)
years from the closing of the Private Placement or the term of the
employment agreement(s) between the Company and Timothy J. Connolly,
whichever is longer.
(vi) The Company will authorize ESL, at ESL's expense, for a period of three
(3) years form the Closing, to obtain copies of the Company's daily
transfer sheets.
(vii) The Company and its President shall call a meeting of the Board of
Directors at such times as may be necessary but at least once every
fiscal quarter. The Board of Directors shall include at least two (2)
non-affiliated directors, which directors shall not be officers or
employees of the Company ("Outside Directors"). In addition, the Company
will allow one (1) designated representative of ESL to receive timely
notice of, attend and make comments at all meetings of its Board of
Directors. (Such designated representative shall also be sent all
standard communications and notifications from the Company to the members
of its Board of Directors concerning annual and special meetings in the
same fashion and on the same basis, including with respect to timing, as
he would if he were a member of the Board of Directors.) Further, so long
as at least one-third (1/3) of the Shares are outstanding and owned by
the subscribers to the Private Placement, the Company will use its best
efforts to have one (1) member of the Company's Board of Directors be
chosen by ESL.
(f) The Company will cause the Board of Directors to maintain a Compensation
Committee, which shall be comprised of three (3) members, of which one
(1) member shall be a designated representative of ESL. ESL agrees that
the individual mentioned in the preceding sentence shall be the same
individual as the director designated by the holders of the Company's
Series A Preferred Stock. The Compensation Committee shall have authority
with respect to the matters set forth in clauses (i) and (ii) of
paragraph (m) of this Section 5.
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<PAGE>
(g) The Company will cause the Board of Directors to maintain an Audit
Committee, which shall be comprised of three (3) members, of which one (1)
member shall be the designated representative of ESL.
(h) The management of the Company shall prepare and deliver to each member of
the Board (including ESL's designee) monthly reports highlighting business
developments and activities, with those persons having assigned
responsibilities reporting on operations and activities in their areas of
responsibility.
(i) The Company will promptly send to each member of the Board (including ESL's
designee), in no event later than ninety (90) days following each meeting,
copies of the complete minutes of each meeting of its Board of Directors,
executive and similar committees thereof.
(j) Without in any way limiting the generality of matters which may be
appropriate for consideration or action by the Board of Directors, prior to
taking action with respect to any of the following items, the Board of
Directors or, in the case of clauses (i) and (ii), the Compensation
Committee thereof, must approve the following actions:
(i) Changes in officers and their compensation, including, without
limitation, all significant employee benefits other than health care and
similar insurance plans;
(ii) All incentive programs (and revisions thereto) for employees such as
stock option plans, equity plans, bonus plans, etc.;
(iii) Company budgets, which shall be submitted within the period from thirty
(30) days prior to and until thirty (30) days after the commencement of
each fiscal year covering sales, direct costs, indirect costs, profit
targets, capital expenditures, and cash flow;
(iv) Major appropriations in excess of Fifty Thousand Dollars ($50,000.00) for
any capital items not in the Company budget for the fiscal year;
(v) Major new facilities and their location, excluding any small leased
facilities in the local area so long as their annual rental obligation
does not exceed Fifty Thousand Dollars ($50,000.00) per year;
(vi) All matters pertaining to mergers and acquisitions, without exception;
(vii) Purchase contracts of a major nature;
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<PAGE>
(viii) Sales contracts of an unusual size or complexity;
(ix) Sale or purchase of patents, rights, or any royalty or license
agreements;
(x) Warranty and distribution policies of an unusual nature which are not
representative of industry patterns;
(xi) Financing programs and policies applicable to public offerings, private
placements, and long-term debt;
(xii) Treasury policies;
(xiii) Selection of auditors and corporate counsel;
(xiv) Banking resolutions;
(xv) Cash policies such as pension funds, investments, etc., other than
normal bank deposits;
(xvi) All matters of litigation in which the Company is to be the plaintiff or
other initiating party; and
(xvii) Conflict of interest matters.
(k) The management of the Company shall notify and consult with the Board of
Directors (by written, telegraphic or telephonic notice) prior to taking
any initial action with respect to any of the following matters (it
being understood that the Board of Directors will determine the
propriety of further or alternative action with respect to such matters
at their next meeting):
(i) All matters of personnel policies as they apply to any labor agreements
or organization of unions;
(ii) All matters of litigation that involve or may involve the Company as a
defendant;
(iii) Audit programs and policies; and
(iv) Any operating decisions which in the judgment of the President and Chief
Executive Officer should be presented to the Board.
(l) The Company shall file a Certificate of Designation with the Secretary
of State of Delaware setting forth the rights and preferences of the
Series C Preferred Stock substantially in the form attached hereto as
Exhibit "C".
(m) Within ninety (90) days of the Closing, the Company will prepare and
file with the Securities and Exchange Commission ("SEC") a registration
statement on Form S-3, covering the resale of the common stock
underlying the Shares. The Company will use its best efforts to cause
such registration
10
<PAGE>
statement to be declared effective by the SEC as soon as practicable after
the filing. In the event such registration statement is not filed within
ninety (90) days of the Closing, the Company will immediately pay to each
holder of the Shares, Twenty Cents ($0.20) per Share held by each such
holder.
6. Negative Covenants of the Company.
(a) For a period of twelve (12) months following the Closing, the Company will
not, without the prior written consent of ESL, grant any options to
purchase securities of the Company to employees that are exercisable at a
price below the greater of the Private Placement Price divided by ten (10)
or the fair market value of the securities on the date of grant.
(b) For a period of three (3) years following the Closing, the Company will
not, without the prior written consent of ESL, offer or sell any of its
securities in reliance on Regulation S of the Securities Act of 1933, as
amended.
(c) The Company will cause all of the current directors and executive officers
of the Company who individually own more than five percent (5%) of the
Company's outstanding Common Stock to agree that their shares will be
subject to the provisions of a Lock-Up Agreement (herein so called)
substantially in the form attached hereto as Exhibit "E". The shares
subject to the Lock-Up Agreement shall not be assignable or transferrable
except in accordance with the terms and provisions of the Lock-Up
Agreement. The Company will take all steps necessary to enforce the
provisions of the Lock-Up Agreements, including, but not limited to,
notifying the Company's transfer agent of the existence of the Lock-Up
Agreements. The shares subject to the Lock-Up Agreements shall be released
therefrom in accordance with the terms of the Lock-Up Agreement.
(d) The Company will not use any proceeds from the Private Placement to repay
any indebtedness of the Company, including but not limited to any
indebtedness to current executive officers or principal shareholders of the
Company.
(e) For as long as any of the Shares remain outstanding and unconverted, the
Company shall not, without the prior written consent of ESL and all holders
of the Series C Preferred Stock, create any new class or series of stock
having a dividend and/or liquidation preference senior to or parri passu
with the Series C Preferred Stock or increase the size of the authorized
number of shares of Series C Preferred Stock.
(f) The compensation of the executive officers of the Company as set forth in
the Company's 10-KSB filing dated April 30, 1998 shall not increase until
thirteen (13) months after the Closing.
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<PAGE>
(g) The Company will not issue press releases, without first providing a
written copy to ESL before release, prior to the completion of the Private
Placement and for a period of eighteen (18) months from the Closing.
In the event any of the covenants contained in Section 5 and Section 6
hereof are breached by the Company and such breach shall continue uncured for
thirty (30) business days from receipt of written notice of such breach, then
ESL shall be entitled to receive from the Company the sum of Five Hundred
Dollars ($500.00) per day for each day thereafter the breach remains uncured
(except for breaches of clauses (i) and (ii) of Section 5(d) above).
7. Representations and Warranties of ESL.
ESL represents, warrants and covenants to the Company as follows:
(a) ESL has been duly incorporated and is validly existing and in good standing
under the laws of Nevis, with full corporate power and authority to own,
lease and operate its properties and to conduct its business as currently
conducted.
(b) This Agreement has been duly authorized, validly executed and delivered on
behalf of ESL and is a valid and binding agreement of ESL enforceable in
accordance with its terms, subject to general principles of equity and to
bankruptcy or other laws affecting the enforcement of creditors' rights
generally, and ESL has full power and authority to execute and deliver this
Agreement and the other agreements and documents contemplated hereby and to
perform its obligations hereunder and thereunder.
(c) ESL agrees not to sell any shares of Common Stock that it does not own as
of the date of Closing (i.e. "short selling") for a period of two (2) years
from Closing, and, for so long as any Shares are outstanding, in the event
that ESL engages in short sale transactions of the Common Stock during the
ten (10) consecutive trading days immediately preceding any conversion
date, ESL will conduct such activities so as not to complete or effect any
such sale on any trading day during such period at a price which is lower
than the lowest sale effected on such day by persons other than ESL.
(d) ESL will not solicit subscriptions for the Shares by means of any form of
general solicitation or general advertising in the manner prohibited by the
requirements of Regulation D and the laws of any state in which ESL may
solicit subscriptions for the Shares, or to the residents of any state not
previously authorized by the Company.
(i) ESL will not publish, circulate or otherwise use any solicitation material
other than the Disclosure Documents, as amended or
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<PAGE>
supplemented, unless (A) the Company shall have agreed thereto in writing,
and (B) the delivery of such material is accompanied or preceded by the
delivery of a copy of the Disclosure Documents, as amended or supplemented,
or such material is for internal use only and is not distributed to
prospective subscribers; and ESL will not give any information or make any
representation in connection with soliciting and obtaining purchases of the
Shares other than those contained in the Disclosure Documents, as amended
or supplemented, or such other solicitation material described in (i) of
this paragraph.
(e) ESL will deliver to the Company promptly upon request copies of all
Subscription Documents theretofore received by it, and will promptly inform
the Company if it shall have knowledge of any material misstatement
contained in the Subscription Documents.
(f) Before soliciting a subscription from any prospective subscriber, ESL will
have reasonable grounds to believe and will believe that such prospective
subscriber is an "accredited investor" as defined in Rule 501(a) under the
1933 Act.
8. Indemnification. The Company hereby agrees to indemnify and hold harmless
ESL and its officers, directors, shareholders, employees, agents and attorneys
against any and all losses, claims, damages, liabilities and expenses incurred
by each such person in connection with defending or investigating any such
claims or liabilities, including any costs or expenses incurred, to which any
such indemnified party may become subject under the Securities' Act, or under
any other statute, at common law or otherwise, insofar as such losses, claims,
demands, liabilities and expenses arise out of or are based upon, in whole or in
part, (i) any untrue statement or alleged untrue statement of a material fact
made by the Company in this Agreement or any exhibit, schedule, certificate,
list, summary or Disclosure Document provided to ESL, (ii) any omission or
alleged omission of a material fact with respect to the Company in this
Agreement or any exhibit, schedule, certificate, list, summary or Disclosure
Document provided to ESL, or (iii) any breach of any representation, warranty or
agreement made by the Company in this Agreement or any exhibit, schedule,
certificate, list, summary or Disclosure Document provided to ESL.
Notwithstanding the foregoing, the Company further agrees to indemnify ESL
as set forth in the Letter of Intent between the Company and ESL dated May 20,
1998.
9. Mergers and Acquisitions.
(a) The Company agrees that ESL will be paid a finder's fee of seven percent
(7%) of the first $1,000,000.00, six percent (6%) of the second
$1,000,000.00 and five percent (5%) of the next $5,000,000.00, ranging in
$1,000,000.00 increments down to two and one-half percent (2-1/2%) of the
excess (with a reduction by one-half percent (0.5%) for each $1,000,000.00
thereafter up to $9,000,000.00), if any, over
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<PAGE>
$9,000,000.00 of the consideration involved in any transaction( including
mergers, acquisitions, joint ventures and any other business for the
Company introduced by ESL) consummated by the Company, in which ESL
introduced the other party to the Company during a period ending three (3)
years from the Closing (an "Introduced Transaction") and with whom the
Company did not have a prior relationship; and
(b) Any such finder's fee due to ESL will be paid in cash at the closing of the
particular Introduced Transaction for which the finder's fee is due.
10. Conditions Precedent to Closing.
(a) Prior to Closing, ESL shall have received legal opinions addressed to
Equity Services, Ltd. and each subscriber to the Private Placement, from
counsel for the Company, confirming the representations and warranties of
the Company contained in Sections 4(a), 4(b), 4(e), 4(f), 4(g), 4(h), 4(i),
4(k), 4(r) and 4(s) above, substantially in the form attached hereto as
Exhibit "D".
(b) ESL shall have received a fully executed Placement Agent's Option
Certificate from the Company for the options earned upon the Closing.
(c) ESL shall have received a fully-executed Lock-Up Agreement from each
executive officer and director of the Company as set forth in Paragraph
6(c) above.
(d) ESL shall have received a fully executed Registration Rights Agreement with
respect to the Placement Agent's Shares and the ESL Option Shares from the
Company for the Placement Agent's Shares earned upon the Closing and the
ESL Option Shares.
(e) ESL shall have received a certified copy of the resolution of the Board of
Directors of the Company authorizing the transactions contemplated herein.
(f) The Company shall have filed with the Office of the Secretary of State of
Delaware a Certificate of Designation acceptable to ESL, substantially in
the form attached hereto as Exhibit "C".
(g) The Company shall have amended its Bylaws in such a manner as to make its
Bylaws consistent with the terms and conditions of this Agreement and the
transactions contemplated herein, a copy of which will have been provided
to ESL prior to Closing.
(h) Prior to the Closing, MASCO, LTD. (the "Escrow Agent") shall have received
a certificate representing the Placement Agent's Shares.
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(i) Prior to Closing, the Escrow Agent shall have received a fully executed
subscription agreement from each subscriber to the Private Placement.
11. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective upon its execution by ESL.
(b) This Agreement shall terminate on the earlier of July 31, 1998, or the
consummation of the Private Placement.
12. Parties. This Agreement shall inure to the benefit of and be binding upon
ESL, the Company and ESL's and its respective successors and assigns. Except as
provided for in Section 4 hereinabove, nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person or corporation,
other than the parties hereto and their respective successors and assigns and
the controlling persons, officers, directors, employees, agents and attorneys of
the parties, any legal or equitable right, remedy or claim under or in respect
of this Agreement or any provision herein contained. This Agreement and all
conditions and provisions hereof being intended to be and being for the sole and
exclusive benefit of the parties hereto and their respective successors and
assigns and said controlling persons, officers, directors, employees, agents and
attorneys, and for the benefit of no other person or corporation.
13. Notices. All notices and other communications provided for or permitted
hereunder shall be made in writing by hand delivery, express overnight courier,
registered first class mail, overnight courier, or telecopied (followed by
registered mail or overnight courier), initially to the address set forth below,
and thereafter at such other address, notice of which is given in accordance
with the provisions of this Section 13.
if to the Company:
Applied Voice Recognition, Inc.
4615 Post Oak Place, Suite 111
Houston, Texas 77027
Attn: Timothy J. Connolly, Chairman & CEO
Telephone: (713) 621-5678
Telecopier: (713) 621-5870
with a copy (which shall not constitute notice) to:
Boyar, Simon & Miller, P.C.
4265 San Felipe, Suite 1200
Houston, Texas 77027
Attn: Gary W. Miller, Esq.
Telephone: (713) 850-7766
Telecopier: (713) 552-1758
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if to ESL:
Equity Services, Ltd
St. Andrews Court
Frederick Street Steps
P.O. Box N-4805
Nassau, Bahamas
Attn: Lynn Turnquest, Director
Telephone: (242) 352-7063
Telecopier: (242) 352-3932
with a copy (which shall not constitute notice) to:
Gardere & Wynne, L.L.P.
3000 Thanksgiving Tower
1601 Elm Street
Dallas, Texas 75201-4761
Attn: I. Bobby Majumder, Esq.
Telephone: (214) 999-4268
Telecopier: (214) 999-4667
All such notices and communications shall be deemed to have been duly given:
when delivered by hand, if personally delivered; three (3) business days after
being deposited in the mail, registered 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 (subject to follow up as discussed above).
14. Attorneys' Fees. If any action is necessary to enforce or interpret the
terms of this agreement, the prevailing party shall be entitled to reasonable
attorneys' fees and costs, in addition to any other relief to which he is or may
be entitled. This provision shall be construed as applicable to the entire
agreement.
15. Remedies. Each party hereto, in addition to being entitled to exercise
all rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The Company agrees
that monetary damages would not be adequate compensation for any loss incurred
by reason of a breach by it of the provisions of this Agreement and hereby
agrees to waive (to the extent permitted by law) the defense in any action for
specific performance that a remedy of law would be adequate.
16. Time of Essence. Time shall be of the essence of this Agreement.
17. Construction. This Agreement shall be construed in accordance with the
internal laws of the State of Texas.
16
<PAGE>
18. Execution. This Agreement may be executed in any number of counterparts
each of which taken together shall constitute one and the same instrument.
19. Joint Drafting of Agreement. This Agreement has been prepared by the
joint efforts of the respective counsel for each of the parties hereto and shall
not be construed against a particular party simply by reason of such party being
the drafting party.
20. Entire Agreement. This Agreement, together with those certain Investor
Subscription Agreements by and between the Company and each subscriber to the
Private Placement, constitute the entire understanding by and between the
parties with respect to the subject matter hereof. This Agreement can only be
modified, including any extension of the offering period, by a written agreement
duly signed by persons authorized to sign agreements on behalf of the respective
parties.
21. Facsimile Signature. This Agreement may be executed by facsimile copy and
any such facsimile copy bearing the facsimile signature of any party hereto
shall have full legal force and effect and shall be binding against the party
having executed this Agreement by facsimile.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
17
<PAGE>
If the foregoing is in accordance with your understanding, please sign
below and return to us a counterpart hereof, and upon your acceptance hereof,
this letter and the acceptance hereof shall constitute a binding agreement
between ESL and the Company.
Very truly yours,
APPLIED VOICE RECOGNITION, INC.
By: /s/ TIMOTHY J. CONNOLLY
--------------------------------
Timothy J. Connolly,
Chairman & CEO
Accepted and agreed to as of the
date first above written by:
EQUITY SERVICES, LTD.
By: /s/ LYNN TURNQUEST
-----------------------------
Lynn Turnquest, Director
18
<PAGE>
EXHIBIT "A"
Registration Rights Agreement - Subscribers to Private Placement
<PAGE>
EXHIBIT "B"
Registration Rights Agreement - ESL
<PAGE>
EXHIBIT "C"
Form of Certificate of Designation
<PAGE>
EXHIBIT "D"
Form of Opinion
<PAGE>
EXHIBIT "E"
Form of Lock-Up Agreement
<PAGE>
FIRST AMENDMENT TO
INVESTOR SUBSCRIPTION AGREEMENT
AND REGISTRATION RIGHTS AGREEMENT
OF APPLIED VOICE RECOGNITION, INC.
THIS FIRST AMENDMENT TO INVESTOR SUBSCRIPTION AGREEMENT AND REGISTRATION
RIGHTS AGREEMENT (the "Amendment") is made and entered into as of this 30th
day of July, 1998, by and between APPLIED VOICE RECOGNITION, INC., a Delaware
corporation ("Seller"), with offices at 4615 Post Oak Place, Suite 111, Houston,
Texas 77027 and RALF NICKELEIT-BONNIER, an individual ("Buyer"), with offices at
Heimfelder Strasse 114, 21075 Hamburg, Germany.
INTRODUCTORY PROVISIONS:
The following provisions are a part of and form the basis for this
Amendment:
A. Seller and Buyer previously entered into an Investor Subscription
Agreement (the "Agreement") dated June 30, 1998 whereby Buyer agreed to purchase
certain securities of Seller.
B. Seller and Buyer previously entered into a Registration Rights
Agreement (the "Registration Agreement") dated June 30, 1998 whereby Seller
granted to Buyer certain rights concerning the securities acquired by Buyer.
C. Seller and Buyer desire to modify the Agreement and the Registration
Agreement to reflect the current agreement of Seller and Buyer.
NOW, THEREFORE, Seller and Buyer (collectively, the "Parties") hereby agree
as follows:
1. Section 1 of the Agreement is deleted in its entirety and the following is
substituted therefor:
"1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE.
(i) Buyer hereby subscribes for Six Thousand Two Hundred Fifty (6,250) Shares
of Series C Preferred Stock in exchange for Sixty Two Thousand Five Hundred
and no/100 Dollars ($62,500.00) in cash (the "Purchase Price"). Buyer
shall pay the Purchase Price for the Shares by wire transfer of immediately
available, federal funds in United States dollars against counter-delivery
of the Shares by Seller. The closing of the purchase and sale of the
Shares (the "Closing") shall take place on or about July 15, 1998.
(ii) The rights, privileges and preferences of the Series C Preferred Stock,
shall be as set forth in the Certificate of Designation attached as Exhibit
"A" to this Agreement."
1
<PAGE>
1. Section 3 of the Agreement is deleted in its entirety and the following is
substituted therefor:
"2. SELLER'S REPRESENTATIONS AND COVENANTS.
Seller represents, warrants and covenants to Buyer that Seller has not
employed any investment banker, broker or finder or incurred any liability
for any brokerage fees, commissions or finder's fees in connection with the
transaction contemplated by this Agreement except that Seller has (i)
retained directly or indirectly Equity Services, Ltd. ("ESL") and (ii) has
agreed to pay a finder's fee to Capital Solutions, Inc. ("CSI").
In addition, the representations and warranties of the Company contained in
that certain placement agreement dated July _____, 1998, by and between
Seller and ESL (the "Placement Agreement") are incorporated herein by
reference and shall be as if made herein. The aforementioned
representations and warranties of Seller shall survive the Closing."
1. The first recital of the Registration Agreement is deleted in its entirety
and the following is substituted therefor:
"WHEREAS, the Shareholder is acquiring Six Thousand Two Hundred Fifty
(6,250) shares of the Company's Series C 4% cumulative convertible
preferred stock, stated value $10.00 per share (the "Series C Preferred
Stock") pursuant to that certain Investor Subscription Agreement by and
between the Company and the Shareholder dated June 30, 1998, as amended
(the "Investor Agreement"); and"
2. Capitalized terms used herein that are not defined shall have the meanings
given them in the Agreement and the Registration Agreement.
3. Except as otherwise specified herein, the terms and provisions hereof
shall in no manner impair, limit, restrict or otherwise affect the
representations, warranties, covenants and obligations of the parties hereto as
evidenced by the Agreement and the Registration Agreement (and all Exhibits
thereto).
4. This Amendment shall be construed in accordance with the internal laws of
the State of Texas.
5. This Amendment may be executed in any number of counterparts, each of
which taken together shall constitute one and the same instrument.
6. This Amendment may be executed by facsimile copy and any such facsimile
copy bearing the facsimile signature of any party hereto shall have full legal
force and effect and shall be binding against the party having executed this
Amendment by facsimile.
2
<PAGE>
EXECUTED to be effective as of the date first written hereinabove.
APPLIED VOICE RECOGNITION, INC.
By:
TIMOTHY J. CONNOLLY, Chairman & CEO
RALF NICKELEIT-BONNIER
3
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<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1999
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