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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission file number: 0-23607
APPLIED VOICE RECOGNITION, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 76-051318
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
4615 POST OAK PLACE, SUITE 111, HOUSTON, TEXAS 77027
(Address of Principal Executive Office) (Zip Code)
713-621-5678
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
- ---------------------------------- -------------------------------------------
- ---------------------------------- -------------------------------------------
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK,
PAR VALUE $.001 PER SHARE
- --------------------------------------------------------------------------------
(Title of Class)
- -------------------------------------------------------------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for the 12 months ended December 31, 1997 were
$2,113,103. The aggregate market value of the voting stock held by non-
affiliates of the registrant, based on the average bid and ask price on the OTC
Electronic Bulletin Board on April 13, 1998 of $2.65 was 15,582,163. As of April
13, 1998, Issuer had 13,187,853 shares of its common stock, par value $.001 per
share (the "Common Stock"), outstanding.
[Cover page 1 of 2 pages]
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Transitional Small Business Disclosure Format (check one):
Yes [_] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Current Report on Form 8-K filed with the Commission on January 20, 1998.
Proxy Statement for the 1998 Annual Meeting of Shareholders.
[Cover page 2 of 2 pages]
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TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I
ITEM 1. BUSINESS........................................................... 1
ITEM 2. PROPERTIES......................................................... 7
ITEM 3. LEGAL PROCEEDINGS.................................................. 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS................................................ 7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................ 9
ITEM 7. FINANCIAL STATEMENTS...............................................12
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNT AND FINANCIAL DISCLOSURE...................................12
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT........13
ITEM 10. EXECUTIVE COMPENSATION............................................13
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................................13
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................13
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K..................................13
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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 limitations,
statements under (a) "Business" regarding the Company's expectations for future
product development and related expenditures, and (b) "Management's Discussion
and Analysis of Financial Condition and Results of Operation--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) the ongoing cost of research and development activities, (ii) the
effect of any current or future competitive products, (iii) the Company's
ability to manufacture and market its products commercially, (iv) the retention
of key personnel, and (v) the availability of financing on acceptable terms and
capital market conditions generally. This Report may contain trademarks and
service marks of other companies.
PART I
ITEM 1. BUSINESS
GENERAL
Applied Voice Recognition, Inc., a Delaware corporation (the "Company"),
develops and markets voice recognition computer software programs. The
Company's predecessor, Voice Technology Partners, L.P., a Texas limited
partnership (the "Partnership"), was founded in 1994. On August 15, 1996, the
Partnership was incorporated as a Delaware corporation. Thereafter, on
December 11, 1996, the Company completed a share exchange with Summa Vest, Inc.,
a Utah corporation, which immediately thereafter changed its name to Applied
Voice Recognition, Inc. The share exchange was accounted for as a reverse
merger. On January 26, 1998, the Company reincorporated as a Delaware
corporation. The Company and its predecessors are referred to herein
collectively as the "Company."
INDUSTRY BACKGROUND
The creation of written documents is a fundamental activity in the
professional, business and governmental worlds. The traditional text creation
methods, including handwriting, dictation or typing on a keyboard, suffer from
limitations that can make the process inefficient, slow or inaccurate. Voice-
activated text creation can provide significant productivity gains compared with
the other methods now available, combining the speed of dictation with the
advantages of immediate inspection and correction. The ability to create text
through a voice-activated system can eliminate a material portion of traditional
transcription and editing steps.
Although research into the uses of speech to text voice recognition has been
conducted for over 20 years, practical uses of the technology have only become
manifest recently. The two technological breakthroughs which have allowed
practical application of voice recognition to every day business activities are
(i) the increase in processing speed of the computer chip, and (ii) the
development of software "engines" which allow continuous speech to be
interpreted without pauses between words. These software "engines" are software
programs that interact with the user's computer and interpret the human voice
into written text. The Company's research and development efforts have focused
on writing the computer programs or applications that interface between the
engine and the computer user to make the computer user's job easier or more
efficient.
The voice recognition industry saw dramatic developments in 1997. Several
major software "engine" manufacturers, notably International Business Machines
Corp. ("IBM") and Dragon Systems, Inc. ("Dragon") introduced continuous speech
versions of their speech to text products during 1997. Also, processing speeds
of computer processors continued to increase and price to performance ratios
continued to improve. Finally, the prices charged for the basic software engines
to perform continuous speech recognition dropped to under $100 per license.
According to Voice Information Associates, a Boston based leader in providing
information and analysis of the automated speech recognition marketplace
("VIA"), expenditures for the automated speech recognition ("ASR") market
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were predicted to be $600 million in 1997 and are expected to grow at roughly
61% through the end of the decade, creating a speech-to-text market of
approximately $4 billion by 2001.
The ASR market has only recently begun to develop, is characterized by
rapidly changing technology, evolving industry standards and customer demands,
and frequent new product introductions and enhancements. The ASR market is
highly dependent upon the increased use of speech recognition technology and
continued price and performance improvements in personal computers, as new
generations of microprocessors are developed and introduced. The Company's
future operating results will depend upon the emergence of ASR technology, the
Company's ability to develop and improve its technology and the successful
implementation of the Company's marketing plan.
PRODUCT DEVELOPMENT
Upon its formation in 1994, the Company was a development stage company,
primarily engaged in the development of its first voice recognition application,
VoiceCOMMANDER(TM) ("VC"). The first version of VC ("VC1") was developed using
software licensed from Kurzweil Applied Intelligence, Inc. ("Kurzweil"), and
allowed the user to perform basic word processing tasks through the use of voice
commands, such as dictating letters and faxes, using a self contained contact
manager and pre-formatted templates. The Kurzweil software engine upon which
VC1 was based was a discreet speech voice recognition component. The discreet
speech concept required the user to pause briefly between words, which limited
dictation speeds to between 35 and 50 words per minute.
In the second quarter of 1995, the Company completed development of the
second version of VC, VoiceCOMMANDER 2.0 ("VC2"). VC2 had similar features
as VC1, but added certain applications such as a voice activated phone dialer,
as well as additional pre-formatted forms and templates. VC2 was based upon
Dragon Dictate, a discreet speech voice recognition software engine developed by
Dragon. The Company introduced VoiceCOMMANDER 3.0 ("VC3") in early 1996.
VC3 included several new applications, including voice activated e-mail and
internet access. The Company continued to use Dragon products for the voice
recognition software engine upon which VC3 was based. Given the Company's
ongoing research and development efforts, the Company did not undertake an
extensive sales and marketing effort regarding the VC1, VC2 and VC3 products,
with the result that sales of these products were limited.
In December 1996, the Company concluded negotiations with IBM for a
nonexclusive original equipment manufacturing license (the "IBM License") for
IBM's software engine, Voice Type. The Company shortly thereafter began a new
development program utilizing Voice Type. Due to the relatively inexpensive cost
of the IBM software engine, the IBM License allowed the Company to develop voice
recognition applications which could sell for significantly less than its
previous applications. In 1997, IBM developed the ViaVoice(TM) software engine
which utilized continuous speech recognition technology in contrast to the
earlier discreet speech engines. This continuous speech improvement eliminated
the cumbersome requirement of pausing between words. In early 1997, the Company
incorporated the ViaVoice software engine into its development program for
the next generation of VC. VoiceCOMMANDER 4.0 ("AVC4"), which utilizes the
ViaVoice engine, was demonstrated in September 1997, and subsequently
released into the mass market in November 1997.
All of the Company's current products now utilize the ViaVoice speech
recognition technology from IBM. The Company pays IBM a license fee for each
unit of the Company's product that it sells. The agreement with IBM expires on
December 17, 1998, unless renewed, and may be terminated by IBM at any time
prior to its expiration for acts or omissions that are considered to be so
serious as to warrant termination. The Company believes that if IBM
discontinued or was unable to manufacture or support ViaVoice or terminated
its agreement with the Company that, with adequate time, the Company could
develop its products to utilize speech technology from companies in addition to
IBM, and the Company is currently in the process of developing products for this
alternative technology. However, there can be no assurances that the Company
will ever be able to successfully develop such products. If the Company is
unable to utilize the ViaVoice technology, for any reason, and is unable to
develop products capable of utilizing alternative technology, the Company's
business, results of operations and financial condition would be materially
adversely affected.
For a brief period, the Company marketed VC4 through a combination of
infomercials and catalogue sales. When this marketing effort resulted in low
sales volumes, the Company decided to market VC4 through third-party retailers
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and distributors with established distribution systems and access to retail
sales outlets, so that it could remain focused on the marketing and development
of the professional edition of VC4 to the healthcare industry.
In December 1997, the Company entered into a Joint Development and
Distribution Agreement (the "Joint Agreement") with Voice It Worldwide, Inc.
("Voice It"). Voice It is a manufacturer and distributor of digital handheld
recorders to 5,000 points of retail distribution throughout the U.S., including
major catalogue retailers such as Sharper Image and nationwide chain retailers
such as Staples and Kmart. Pursuant to the Joint Agreement: (i) Voice It
purchased 50,000 VC4 software licenses from the Company for resale through its
retail distribution points throughout the U.S. for an aggregate purchase price
of $1 million, (ii) the Company purchased 471,700 shares of Voice It's
common stock for $500,000, (iii) the two companies agreed to endeavor jointly
develop, integrate and bundle Voice It's handheld digital recorder with the
Company's voice recognition software, and (iv) Voice It agreed to provide the
Company with a handheld digital recorder that is customized for the medical
dictation market. The Joint Agreement represented the first significant product
sale by the Company, and the Company intends to market the personal edition of
VC4 primarily through the Joint Agreement.
On March 17, 1998, the Company entered into a letter of intent with Voice It
(the "Letter of Intent") for the two companies to merge. The Letter of Intent
was subject to the completion of the merger negotiations by March 31, 1998. On
that date, the Letter of Intent expired according to its own terms, and the
companies announced that they do not intend to proceed with the merger.
The Company's long-term strategic objectives are to: (i) continue to develop
and improve both editions of its VoiceCOMMANDER voice recognition software,
(ii) pursue strategic acquisitions of technology which will enable the Company
to improve or expand its product offerings and provide a complete solution for
the medical transcription market, (iii) pursue strategic acquisitions in the
medical transcription area in order to establish a market for its medical
transcription solutions through vertical integration, and (iv) improve overall
profitability.
CURRENT PRODUCTS
The Company currently offers two distinct editions of VC4, VoiceCOMMANDER
4.0 personal edition (the "Personal Edition"), which is targeted towards the
mass market, and VoiceCOMMANDER 4.0 professional edition (the "Professional
Edition"), which is targeted towards the professional healthcare market. Both
products are available with computer hardware and annual maintenance.
Personal Edition. The Personal Edition allows computer users to dictate and
print letters and office memos, dictate and send faxes, dictate data into
computer based forms and maintain a database of important business and personal
contacts. This product is sold as a stand-alone product, and comes with a
training video to assist the user in the installation and use the software.
Pursuant to the Joint Agreement, Voice It is the primary distributor of the
Personal Edition which presently sells for under $125. Voice It has agreed to
purchase 50,000 units pursuant to the Joint Agreement.
Professional Edition. The Professional Edition, sold to healthcare
professionals and entities, includes some of the functionality of the Personal
Edition plus medical lexicons, custom designed medical forms templates and
specific medical vocabularies to increase the professionals rate of speech
recognition. The Professional Edition includes training and installation
assistance from the Company's technical personnel, and generally sells for a
unit price of under $3,000, without hardware. To date, a limited number of
Professional Edition units have been sold due to the recent introduction of this
product.
To date, the Company has had limited revenues from sales of its products.
However, the Company expects that in the foreseeable future it will derive
substantially all of its revenues from sales of the VC4 and related products and
from fees for related services. As a result, any factors adversely affecting the
sales of the VC4 line, such as increased price competition or the introduction
of technologically superior products, could have a material adverse effect on
the Company. The Company's future financial performance will depend in
significant part on its ability to develop and introduce new releases of VC4
with enhanced features and functionalities and related products. There can be no
assurance that any such new releases or products will be successfully developed
or achieve market acceptance.
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HEALTHCARE TRANSCRIPTION MARKET
In late 1997, the Company decided to focus its research and development
efforts on developing and marketing the Professional Edition of VC4 to the
healthcare transcription market. Transcription, in the healthcare market, is
the process of reducing a physician's daily patient notes from a handwritten or
recorded format to typewritten text. Currently, most healthcare transcription is
performed by manually typing the doctors' notes. According to the Medical
Transcription Industry Association ("MTIA"), physicians in the U.S. are
currently spending over $6.6 billion dollars per year on transcription. Whether
it is performed in-house or outsourced to professional transcription services,
most of the cost associated with transcription are attributable to labor in the
form of typing and quality assurance. Therefore, the Company believes that
utilizing voice recognition technology to eliminate the requirement of manual
typing the data could significantly reduce the costs associated with
transcription.
The Company began offering the Professional Edition of VC4, which is designed
for the healthcare transcription market during the fourth quarter of 1997. This
solution includes language models and medical vocabularies specifically designed
for the physician and his or her unique practice area, as well as training,
installation and support.
In addition, the Company is currently in the process of jointly developing a
handheld VoiceCOMMANDER digital dictation device with Voice It pursuant to
the Joint Agreement. This device, if successfully developed, will enable
physicians to dictate their patient notes remotely as they conduct their daily
business and then automatically convert this dictation at their convenience.
There can be no assurance that the Company will be successful in developing this
handheld dictation device.
As part of its healthcare transcription market focus, the Company intends to
pursue a strategy of acquiring attractive medical transcription companies in an
effort to create a vertically integrated company with a complete healthcare
transcription solution. Medical transcription companies provide transcription
services offsite for a fee and use traditional dictation methodologies. These
acquisitions, if successfully completed, will give the Company a readily
accessible market in which to introduce its transcription products. In
addition, the Company believes that acquired companies, using the Company's
voice recognition transcription products, will be well positioned to compete in
the transcription market as a result of their increased transcription labor
efficiency. In March 1998, the Company began its expansion into the
transcription segment of the healthcare industry by acquiring Transcription
Resources ("TR") of Dallas, Texas. TR has a customer base of approximately 160
physicians in ten states.
MARKETING AND DISTRIBUTION STRATEGY
In late 1997, the Company embarked on a new, two-tiered marketing strategy of
marketing the Personal Edition of VC4 into the mass market, and the Professional
Edition VC4 into the healthcare transcription market. The Company intends to
utilize third parties, such as Voice It, to market its products into the mass
market so that it can focus its internal resources on marketing to the
healthcare industry.
The Mass Market. The Company's mass-market strategy is to form strategic
partnerships with companies with established retail channels. These strategic
partners will market the Personal Edition of VC4 to the general retail
marketplace. The Joint Agreement with Voice It allows Voice It to market the
Company's Personal Edition of VC4 through Voice It's existing worldwide
distribution network. The Company intends to pursue other similar third-party
agreements to market the Personal Edition of VC4 to the retail marketplace.
Healthcare Market. The Company's healthcare market strategy is to create an
organization focused on developing and marketing the Professional Edition of VC4
and other related products to the healthcare transcription market. The Company
is currently offering a stand-alone medical dictation solution in the Houston
market. This solution includes VoiceCOMMANDER(TM) voice recognition software,
language models and medical vocabularies specifically designed for the physician
and his or her unique practice, training, installation and support. The Company
intends to focus its marketing efforts on physicians who are organized into
specialty practice groups.
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SUPPORT SERVICES
In order to achieve a high level of customer satisfaction, the Company offers
a number of services to assist its customers. These services include in-house
and regional training programs, on-site installation and training, a hot line
for telephone support during the maintenance period, on-line tutor programs for
new users, and an extensive package of documentation. The Company has a site
implementation program that is designed to assist professionals in planning the
introduction of voice products into their departments. As part of this program,
the Company's employees act as consultants, using their knowledge of how best to
integrate the Company's products into a client's environment.
Generally, the Company's products include a one-year warranty that the
products will be free from defects in materials and workmanship and that the
software will perform in accordance with applicable specifications. The Company
is obligated to repair or replace, at its option, any products that do not meet
the warranty.
The Company offers annual maintenance agreements for extended technical
support. During 1997, the Company signed an agreement with a third party to
offer first line maintenance support from 8:00 am - 10:00 pm, 7 days a week.
COMPETITION
The market for ASR products and services is highly competitive. There are no
substantial barriers to entry, and the Company expects that competition will
continue to intensify. Although the Company believes that the diverse segments
of the ASR technology market will provide opportunities for more than one
supplier of products and services similar to those of the Company, it is
possible that a single supplier may dominate one or more market segments. The
Company believes that the principal competitive factors in this market are name
recognition, performance, ease of use, variety of value-added services,
functionality and features and quality of support. A number of companies offer
competitive products addressing certain of the Company's target markets.
The Mass Market. The mass market for stand-alone voice-to-text software
products is highly competitive. There are more than 5 branded software products
that offer speech to text voice recognition for a retail customer's personal
computer. Two products currently available in the market, IBM's "ViaVoice" and
Dragon's "Naturally Speaking," have been in retail stores since the fourth
quarter of 1997. The Personal Edition of VC4, which uses IBM's ViaVoice as its
base engine, has been introduced to the retail market as a stand-alone software
product. Since it utilizes ViaVoice with a number of additional useful features
added, and sells for the same price, the Company hopes that VC4 will be
attractive to the same level of customers who would have bought the IBM or
Dragon product.
The Healthcare Transcription Market. It is estimated by MTIA that
the total annual cost of transcribing medical records in the United States is
greater than $6.6 billion. Of this amount, MTIA reports that
approximately $1 billion is currently outsourced to medical transcription
companies. This outsourced medical transcription market is highly competitive.
Medical transcription companies provide transcription services offsite for a fee
and use traditional dictation methodologies. These methods include transcribing
from handwritten documents, tapes and over the phone line submission of
dictation. According to the American Association of Medical Transcriptionists,
there are over 1,500 companies that offer medical transcription in the United
States; however, less than 30 of these companies have significant sales volume
and a national or regional customer base. The Company's strategy is to
differentiate itself from these companies by offering completed integrated,
stand-alone voice to text medical dictation software and hardware solution.
The Company is not aware of any major direct competitors currently offering a
complete voice to text medical transcription solution that includes software,
personalized training and vocabularies and a handheld dictation device.
Generic voice to text software providers (IBM, Lernout and Hauspie, Dragon
Systems, Phillips) are potential competitors in the medical transcription
marketplace. In fact, several of these voice-recognition vendors currently
offer packaged solutions to the healthcare marketplace. These vendors to date,
however sell only "off the shelf" software with some medical vocabularies but
with neither the personalized training nor a dictation device. The Company has
not identified any competitors that offer individually developed vocabularies,
internet or extranet transfers of compressed voice files in connection with a
handheld device that supports customization and integration of voice
recognition dictation into client/patient records.
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MANUFACTURING
For software production, the Company's product development organization
produces a set of master diskettes or compact disks and documentation for each
product. For the Professional Edition and units of the Personal Edition sold by
the Company, software duplication, assembly and shipping are performed by the
Company's customer support organization. Software and documentation duplication,
assembly, packaging and shipping for the Personal Edition units sold by Voice It
are currently performed by Voice It and will also be performed by any future
third-party distributors of that product.
PROPRIETARY RIGHTS
The Company regards its software as proprietary and relies on a combination
of copyright and trade secret laws in attempting to protect its rights. The
Company enters into software license agreements with end-users of its products
which outlines the terms and conditions under which the Company's products can
be used. Despite these precautions, it may be possible for unauthorized third
parties to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary.
The Company has applied for four U.S. Patents on various aspects of its
speech recognition technology, and three of the applications are pending. In
January 1998, the Company's application was allowed and all fees paid on a U.S.
Patent on a PC-based graphical user interface for voice applications. This
patent covers the Company's graphical user interfaces ("GUI's") integrated with
voice recognition technology as a primary interface for a PC. In addition, it
includes an intelligent on-line, real-time help system that tracks what the user
is attempting to accomplish and provides visual and/or vocal assistance. There
can be no assurance that any patents will be issued or, if issued, will provide
the Company with significant protection against competitors.
The Company has also applied for fifteen U.S. trademarks for each of the
following (1) APPLIED VOICE RECOGNITION, (2) VOICECOMMANDER, (3)
CONSOLECOMMANDER, (4) SPEECHCOMMANDER, (5) CADCOMMANDER, (6) LAWCOMMANDER, (7)
TELECOMMANDER, (8) INFLIGHTCOMMANDER, (9) MIKE ROFONE (word mark), (10)
miscellaneous designs of the Mike Rofone character, (11) VoiceCOMMANDERLocator,
(12) GIVE PEOPLE POWER OVER TECHNOLOGY, (13) It's About Time, (14) Voice
Experts, and (15) StarCOMMANDER. All such applications are pending. There can
be no assurance that any further trademark registrations will be issued or, if
issued, will provide the Company with significant protection against
competitors.
Certain of the Company's competitors have obtained, and the Company believes
that certain of its competitors are seeking, patent protection on various
aspects of their speech recognition technology. Substantially all of its
competitors have significantly greater resources than the Company. The Company
believes that, because of the rapid pace of technological change in the software
industry, factors such as the technological and creative skills of its personnel
are more important to establishing and maintaining a technology leadership
position than are the various legal protections of its technology.
Litigation, which could result in substantial cost to and diversion of effort
by the Company, may be necessary to enforce any patent issued to the Company, to
protect trade secrets or know-how owned by the Company or to determine the scope
and validity of the proprietary rights of others. Adverse findings in any
proceeding could subject the Company to significant liabilities to third
parties, require the Company to seek licenses from third parties and adversely
affect the Company's ability to sell its products. The Company is not aware of
any controversy leading to litigation relating to intellectual property issues.
However, there can be no assurances that the products and services offered by
the Company will not infringe on patent or other rights offered by others,
licenses for which may not be available to the Company.
EMPLOYEES
As of April 9, 1998, the Company had 40 employees including 13 in marketing,
sales and support, 6 in product research and development, 15 in management,
finance and administrative activities and 6 in transcription services. The
Company currently has 11 contractors in the medical transcription industry. None
of the Company's employees is represented by a labor union, and the Company
believes that its employee relations are good. The Company believes that the
success of its business will depend, in part, on its ability to attract and
retain qualified personnel.
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In March, 1998, Charles Skamser resigned as President of the Company to
pursue other opportunities. Tim Connolly, the Company's Chairman and CEO,
assumed the duties of President pending the selection of a new Chief Operating
Officer.
ITEM 2. PROPERTIES
The Company presently leases approximately 8,300 square feet for its
corporate office located at 4615 Post Oak Place, Suite 111, Houston, Texas
77027. Approximately half of the space is leased on a month to month basis and
the remainder is leased under a lease which expires on January 31, 2001. The
total monthly lease rate is approximately $9,250 per month.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Board of Directors of the Company, at a special meeting of the Board of
Directors held on September 26, 1997, approved the reincorporation of the
Company into the State of Delaware (the "Reincorporation") and adopted the 1997
Incentive Plan (the "Incentive Plan") allowing the Company to grant stock awards
of up to 3,000,000 shares of the Company's Common Stock. Pursuant to the
Company's Utah Articles of Incorporation and the laws of the State of Utah, the
Reincorporation and the Incentive Plan were approved by certain shareholders of
the Company who owned shares which in the aggregate represented 54.8% of the
issued and outstanding shares of the Company's Common Stock on December 3, 1997.
In addition, the Reincorporation was approved by the shareholder of 100% of the
issued and outstanding shares of the Company's Series A Preferred Stock, par
value $.10 per share (the "Series A Preferred Stock"). The Company mailed a
Notice of Action by Written Consent to the non-consenting shareholders on
December 22, 1997 which was filed as an exhibit to the Company's Current Report
on Form 8-K containing information concerning the Reincorporation and the
Incentive Plan which was filed on January 20, 1998 which is incorporated herein
by reference. The Company also filed a Registration Statement on Form S-8 on
January 13, 1998 to register the shares to be issued under the Incentive Plan.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
On February 5, 1997, the Company's Common Stock began trading on The Nasdaq
Over-the-Counter Bulletin Board (the "OTCBB") under the symbol "AVRI." The
following table shows, for the period indicated, the high and low closing bid
prices of the Company common stock as reported by the OTCBB. Any market for the
common stock should be considered sporadic, illiquid and highly volatile.
Prices reflect inter-dealer quotations, without adjustment for retail markup,
markdowns or commissions, and may not represent actual transactions. The
stock's trading range since listing on the OTCBB is as follows:
1997 HIGH LOW
(Commencing February 5, 1997) 1st Quarter $4.125 $2.500
2nd Quarter $4.000 $2.500
3rd Quarter $3.718 $2.562
4th Quarter $6.125 $2.750
As of April 10, 1998, there were 13,250,034 shares of Common Stock issued and
outstanding and approximately 650 holders of record of the Common Stock. The
Company has neither declared nor paid any dividends on the Common Stock since
its inception and presently anticipates that no dividends will be declared in
the foreseeable future. Any future dividends will be subject to the discretion
of the Company's Board of Directors and will depend upon, among other things,
future earnings, the operating and financial condition of the Company, its
capital requirements, debt
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obligation agreements, general business conditions and other pertinent facts.
Therefore, there can be no assurance that any dividends on the Common Stock will
be paid in the future.
Recent Sales of Unregistered Securities
The following sales of unregistered securities occurred during the year ended
December 31, 1997, in private transactions in which the Company, unless
otherwise indicated, relied on the exemption from registration available under
Section 4(2) of the Securities Act of 1993, as amended (the "Securities Act"):
In January 1997, the Company issued a warrant to purchase up to 150,000
shares of Common Stock at an exercise price of $1.60 to Rick Huttner, a director
of the Company, in exchange for financial consulting services.
In February 1997, the Company issued a warrant to purchase up to 50,000
shares of the Company's common stock to an individual in exchange for financial
consulting services.
In March 1997, the Company sold 100,000 shares of the Company's common stock
to an unaffiliated investor at a purchase price of $1.60 per share for a total
of $250,000.
In April 1997, the Company issued a total of 100,000 shares of the Company's
common stock to two individuals in exchange for financial consulting services.
In August and September, 1997, the Company completed the private placement of
1,595,625 shares of Common Stock for a purchase price of $1.60 per share and
312,500 shares of Series A Preferred Stock, par value $.01 per share (the
"Series A Preferred Stock") for a purchase price of $8.00 per share. The
Company closed the first offering of 125,000 shares of the Series A Preferred
Stock on August 1, 1997 for a purchase price of $8.00 per share for an aggregate
of $1,000,000, and closed the second offering of 187,500 shares of the Series A
Preferred Stock on August 11, 1997 for an aggregate of $1,500,000.
Additionally, the Company closed its offering of Common Stock on August 27, 1997
and received the aggregate purchase price of $2,553,000. In connection with
this private placement, the Company issued a total of 135,156 shares of Common
Stock to the placement agents for their services as well as an option for
168,750 shares at an exercise price of $1.78, and a warrant for 100,000 shares
with exercise prices equal to 75% of the average closing price of the Common
Stock during the 5 trading days immediately prior to the date the warrant is
exercised.
In September 1997, the Company issued 100,000 shares of Common Stock in
exchange for 14,433 shares of common stock in Wade Cook Financial Corporation as
described in footnote 11 to the financial statements included herein. Also in
September 1997, the Company issued Warrants to purchase 100,000 shares of Common
Stock to Rich Huttner, a director of the Company, in exchange for consulting
services.
In October 1997, the Company issued 7,500 shares of Common Stock as payment
for office furniture.
In November 1997, the Company issued 10,000 shares of common stock to Rick
Huttner, a director of the Company, in exchange for consulting services.
During December 1997, Akin Olajuwon exercised options for a total of 11,100
shares of Common Stock at an exercise price of $1.38 for a total amount paid to
the Company of $15,318.
Over the course of 1997, the Company issued warrants to purchase a total of
580,000 shares of Common Stock at an exercise price of $1.60 per share to a
total of 10 investors in connection with $580,000 in bridge loans to the Company
by these investors.
In addition, the Company issued options to purchase 333,332 shares of Common
Stock to its directors under the Company's 1996 Director Stock Option Plan at
exercise prices between $2.75 and $3.75, and options to purchase 1,776,000
shares of Common Stock to employees under the Company's 1996 Stock Option Plan
at exercise prices between $2.50 and $5.38.
8
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere herein.
OVERVIEW
The Company's 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. The Company purchases its computer hardware from a third
party and installs the computer software on the purchased hardware for delivery
to the customer. All sales are recognized by the Company upon delivery to and
acceptance by the customer with the exception of maintenance services which are
recognized ratably over the term of the maintenance agreement, typically one
year.
In October, 1997, the AICPA issued Statement of Position (SOP) 97-2.
"Software Revenue Recognition," which supersedes SOP 91-1. The Company will be
required to adopt Sop 97-2 for software transactions entered into beginning
January 1, 1998 and retroactive application to years prior to adoption is
prohibited. SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements (i.e., software products, upgrades/enhancements,
postcontract customer support, installation, training, etc.) to be allocated to
each element based on the relative fair values of the elements. The fair value
of an element must be based on evidence, which is specific to the vendor. The
revenue allocated to software products (including specified
upgrades/enhancements) generally is recognized upon delivery of the products.
The revenue allocated to postcontract customer support generally is recognized
ratably over the term of the support, and revenue allocated to service elements
(such as training and installation) generally is recognized as the services are
performed. If a vendor does not have evidence of the fair value for all elements
in a multiple-element arrangement, all revenue from the arrangement is deferred
until such evidence exists or until all elements are delivered. The Company's
management is in the process of evaluating the impact that the adoption of SOP
97-2 will have on the Company's results of operations.
The cost of direct labor and allocated overhead specific to research and
development activities for products that are technologically feasible are
capitalized through the date of market release of the product. All other
research and development costs are charged against earnings in the period
incurred. For the year ended 1996 no expenditures were capitalized and for the
year ended December 31, 1997 approximately $165,000 was capitalized. These
costs were incurred in association with the development of the Personal Edition
and Professional Edition of VC4. Both versions of the product became
technologically feasible during the latter part of 1997. During the year ended
December 31, 1997 the Company incurred approximately $9,000 of related software
amortization expense.
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, the Company will use both internal and external
resources to identify, correct or reprogram and test the systems for year 2000
compliance. It is anticipated that all identification of problems, and
reprogramming, if found necessary, will be complete by December 31, 1998,
allowing adequate time for testing.
The Company's voice recognition software is written to work in tandem with
speech recognition software "engines." For each software license sold the
Company pays a royalty to the developer of the software engine. In most cases
the Company's software applications sold in 1997 were written to work with the
IBM software engine.
The Company was formed in 1994, and began significant marketing efforts of
its products in 1997. As a result, the Company generated sales of $2,113,000 in
fiscal year 1997, and has incurred operating losses since inception of
approximately $4 million. To date, the Company's operations have not been
profitable and there is no assurance that they will become profitable in the
future. In addition, sales of the Personal Edition of VC4 software are subject
to seasonal fluctuations. Typically, 40% or more of the annual sales of the
product in the retail market will occur in the fourth quarter of the year. Sales
of the Professional Edition of VC4 are less sensitive to seasonal fluctuations
and are expected to occur ratably over the year. Prices charged for the
Company's software are subject to inflationary impacts as they occur from time
to time in the normal course of business. In addition, the Company plans to
significantly increase its operating expenses to fund greater levels of research
and development, increase its sales and marketing operations, develop new
distribution channels, broaden its customer support capabilities and establish
brand identity and strategic
9
<PAGE>
alliances. To the extent that such expenses precede or are not subsequently
followed by increased revenues, the Company's business, results of operations
and financial condition will be materially adversely affected.
RESULTS OF OPERATIONS:
Fiscal year 1997 vs. Fiscal Year 1996
Revenues: The Company's net revenue increased approximately $1,738,000, from
$375,000 in 1996 to $2,113,000 in 1997, an increase of 464%. Of the total
increase, $1,000,000 was due to the sale of 50,000 software licenses to Voice
It. This sale was made in conjunction with the Joint Agreement. The remaining
revenue increase of $738,000 is attributable to sales of the Professional
Edition and Personal Edition of VC4.
Cost of sales: The cost of sales increased approximately $636,000, from
$218,000 in 1996 to $854,000 in 1997, an increase of 292%. Increased royalties
paid to the voice recognition engine manufacturers accounted for approximately
$301,000 of the increase. Amortization of capitalized software development
accounted for approximately $9,000 of the increase and the remainder of the
increase of approximately $326,000 was due to increased hardware purchases
associated with the increased sales.
Marketing and sales expense: Marketing and sales expense consists primarily
of salaries and commissions of marketing and sales personnel, advertising and
promotion expense. Marketing and sales expense increased approximately
$1,332,000, from $167,000 in 1996 to $1,499,000 in 1997, an increase of 798%.
Of the total increase, approximately $540,000 is attributable to the development
of a professional sales and marketing organization to market the Company's
product in the Houston market. To increase the effectiveness of the Company's
sales efforts, the Company launched two major advertising campaigns during the
year. During the first three quarters of 1997 the Company ran a promotional and
advertising campaign featuring Hakeem Olajuwon, the NBA superstar which was
responsible for approximately $395,000 of incremental marketing and sales
expense. In the fourth quarter of 1997, the Company introduced the Personal
Edition of VC4 to the retail market and incurred approximately
$396,000 of incremental marketing and sales expenses associated with the
development of the TV infomercial and marketing the product through computer
catalogues and other retailing channels.
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 and consulting
services and general corporate overheads. General and administrative expense
increased approximately $1,470,000, from $1,382,000 in 1996 to $2,852,000 in
1997, an increase of 106%. The increase is attributable mainly to increased
administrative and executive personnel and associated recruiting costs, which
amounted to approximately $631,000 of the total increase. Another factor
contributing to the increase include additional consulting and legal expense of
approximately $333,000 incurred in association with the creation of trademark
and patent rights on proprietary products and development of benefit plan,
employment agreements and stock option plans. All other general and
administrative costs increased approximately $506,000 due to higher telephone,
occupancy, travel, bad debt and general office expenses incurred due to more
personnel and an increase in sales volume.
Research and development expense: Research and development expense consists
primarily of personnel costs including salaries and benefits and consultant
costs related to the research and development of the Company's product.
Research and development expenses increased approximately $613,000, from
$112,000 in 1996 to $725,000 in 1997, an increase of 547%. The increase is
wholly attributable to the increase in research and development personnel and
contract labor and reflects the incremental efforts focused on the enhancement
and development of VC4's Personal Edition and Professional Edition.
Rental income: During the year, the Company leased several lap top computers
to a customer. This was a one time only event and did not include the sale of
software. The total incremental revenue, attributable to this transaction
realized in 1997 was approximately $37,000. Subsequent to year-end, the lease
expired and was not renewed.
Interest income: Interest income consists primarily of interest earned on
cash and cash equivalents. Interest income increased approximately $60,000 from
$3,000 in 1996 to $63,000 in 1997. The increase is attributed to invested funds
received as the result of the Company's private placement activities during the
year, but unused in operations.
10
<PAGE>
Interest expense: Interest expense increased approximately $359,000 from
$92,000 in 1996 to $451,000 in 1997 and increase of 390%. Approximately $68,000
of the increase relates to amortized interest expense related to an $125,000
loan the Company secured from an unrelated trust in July of 1996. In exchange
for this loan, the Company agreed to pay interest at a rate of 12% and issue to
the trust 180,000 shares of the Company's Common stock. At the date of
issuance, the common stock was valued at $1.50 per share or $270,000 for the
entire issuance. This was accounted for as deferred interest and is being
amortized over the two year life of the note as interest expense. Approximately
$13,000 of the increase relates to bridge loans made by officers, director, and
others and incremental interest associated with the $125,000 loan to the
unrelated trust. The bridge loans represented aggregate borrowing by the Company
of $580,000 for the period from May 15, 1997 to July 24, 1997. Interest was paid
in accordance with the provision of the loan agreements, which specified
payment of all principal amounts plus 12% interest at the earlier of six months
or the receipt of the minimum proceeds of the private placement of $2,000,000.
The remaining incremental interest cost of approximately $278,000 was the
result of financing costs related to bridge loans. Between May 15, 1997 and July
24, 1997 The Company granted 580,000 warrants (430,000 warrants to officers,
50,000 warrants to a director, and 100,000 warrants to others) at an exercise
price of $1.60 per share. The warrants were granted in connection with bridge
loans made by these individuals. The Company borrowed $580,000 from these
individuals and the full amount of the loans was repaid on August 14, 1997. The
Company has recognized the finance costs of approximately $278,000 based on
calculations using the Black Scholes model. The Black Scholes model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. Although these costs are
incremental to 1996 the full amount of these finance cost are a non-cash
expenditure to the Company.
Income taxes: The Company has incurred losses since inception and, therefore,
has not been subject to federal income taxes. As of December 31, 1997, the
Company had generated net operating losses ("NOLs"), for financial reporting
purposes, of approximately $4.0 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. During 1996 and 1997, the Company has
recorded a valuation allowance for all net deferred tax assets, including NOLs.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997 the Company had cash and cash equivalents of
approximately $1,207,000 and working capital of $1,105,000.
Net cash used by operating activities increased approximately $2,759,000 from
$707,000 in 1996 to $3,466,000 in 1997. The increase is primarily attributable
to the $2,575,000 increase in operating losses sustained by the Company in 1997
vs. 1996. This increased use of cash between the periods was offset by net
favorable changes of approximately $528,000 in the Company's working capital
accounts between the two years.
Current year investing activities totaled approximately $842,000. Of this
total, approximately $500,000 represented the investment in a public company. On
December 31, 1997, the Company agreed to purchase 471,700 shares of Voice It
common stock at a price of $1.06 per share for a total of $500,000. The
transaction was effected in conjunction with the joint development and
distribution agreement described in Note 10 to the financial statements. In
March of 1998 the Company and Voice it signed a letter of intent to complete
merger negotiations on or before March 31, 1998. The letter of intent lapsed
without the parties completing the merger agreement. The Company's other
investing activities included purchase of capital assets, primarily computer
equipment of approximately $177,000 and software capitalization totaling
$165,000.
Net cash provided by financing activities amounted to approximately
$4,958,000. The Company has financed approximately $3.6 million dollars of 1997
operating losses with a private placement offering completed in compliance with
Regulation D of the Securities Act of 1933. The offering consisted of 1,595,625
shares of common stock, par value $.001 per share (the "Common Stock") and
312,500 shares of Series A preferred stock, par value $.01 per share (the
"Series A Preferred Stock"). The Common Stock was priced at $1.60 per share and
the Series A Preferred Stock was priced at $8.00 per share. Gross proceeds from
the sale of the Series A Preferred Stock amounted to $2,500,000 and $2,553,000
was realized from the sale of the Common Stock. Other sales of Common Stock by
the Company during 1997 amounted to $250,000, resulting in the total cash
provided by sales of capital stock for the
11
<PAGE>
year of $5,303,000. Total legal fees and commissions associated with these
transactions amounted to approximately $560,000. All other financing
transactions totaled approximately $215,000.
The Company continues to incur operating losses and will continue to need
additional working capital to fund its 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 and development of its administrative function.
Additionally, the Company's liquidity will also be reduced as amounts are used
for purchases of capital assets.
The Company decided in the fourth quarter of 1997 to issue additional equity
or debt instruments for cash. 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 are
priced at $1,000 per share. Investor relations fees of $300,000 were netted
against the proceeds. The Company believes that this funding plus anticipated
revenue will be sufficient to meet its minimum plan objectives for the next
year. This level of funding plus anticipated sales revenues should be sufficient
to allow the Company to continue its Houston focused sales efforts and the
completion of a basic medical transcription voice recognition software solution.
However, if the Company chooses to accelerate its marketing and sales efforts
beyond the Houston, Texas market and increase its product development efforts
regarding its medical transcription voice recognition solution, the Company's
current cash position plus cash generated by operations will be insufficient to
satisfy the Company's liquidity requirements. The Company is actively seeking
commitments for an additional $3,000,000 in funding. The Company has been
verbally informed that an investment group that participated in one of the
Company's previous Regulation D Private Placements will exercise its contractual
option to invest between $2,000,000 to $3,000,000 in the Company. However,
there can be no assurances that this investment group will complete this
financing, or that additional funds can be raised on acceptable terms, if the
proposed financing is not completed.
If the Company chooses to accelerate its acquisition of technology or other
companies, in particular medical transcription companies, then significant
additional capital over and above the amounts detailed above will be required to
meet these objectives. In that case, the Company may resort to additional
funding through the sale of equity or convertible debt securities. Such option
will result in additional material dilution to the Company's stockholders'.
There can be no assurance that the Company will be able to raise such capital
when needed, or on terms commercially favorable to the Company, if at all.
ITEM 7. FINANCIAL STATEMENTS
Information with respect to this item is set forth in the "Index" to
Consolidate Financial Statements on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 12, 1997 the Company's board of directors determined to replace
Malone and Bailey PLLC ("M&B") as its principal accountant with Ernst & Young
LLP ("E&Y"), effective August 12, 1997.
The report of M&B on the Company's financial statements for the last two
fiscal years did not contain an adverse opinion or a disclaimer of opinion, nor
was such opinion qualified or modified as to certainty, audit scope, or
accounting principles. During the Company's fiscal years ended 1996 and 1995
and subsequent interim periods preceding the replacement of M&B, the Company had
no disagreements with M&B on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. During the
Company's two most recent fiscal years and subsequent interim periods preceding
the retention of E&Y, neither the Company nor anyone on the Company's behalf
consulted with E&Y regarding any matter.
12
<PAGE>
PART III
Certain information required by Part III is omitted from this report. The
Registrant will file its Definitive Proxy Statement for the Annual Meeting of
Stockholders to be held May 29, 1998, pursuant to Regulation 14A of the
Securities Exchange Act of 1934 (the "Proxy Statement") no later than 120 days
after the end of the fiscal year covered by this Report. Certain information
included in the Proxy Statement is incorporated by reference herein.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information with respect executive officers, directors, promoters and
control persons of the Company is included under "Election of Director" in the
Company's Proxy Statement and is incorporated by reference herein.
ITEM 10. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included under
"Executive Compensation" in the Company's Proxy Statement and is incorporated by
reference herein.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners
and management is included under "Security Ownership of Certain Beneficial
Owners and Management" in the Company's Proxy Statement and is incorporated by
reference herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information with respect to certain relationships and related
transactions is included under "Certain Relationships and Related Transactions"
in the Company's Proxy Statement and is incorporated by reference herein.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT DESCRIPTION OF EXHIBIT
- ------- ----------------------
2.1 Plan and Agreement of Merger between Applied Voice Recognition, Inc., a
Utah corporation and the Company dated November 7, 1997. (Exhibit 2.1 to
the Company's Current Report on Form 8-K as filed with the Commission on
January 20, 1998 is incorporated herein by reference).
*2.2 Asset Purchase Agreement by and between Transcription Resources dated
March 17, 1998.
3.1 Amended and Restated Certificate of Incorporation as filed with the
Delaware Secretary of State on January 29, 1998. (Exhibit 4.1 to the
Company's Current Report on Form 8-K as filed with the Commission on
January 20, 1998 is incorporated herein by reference).
3.2 Certificate of Designation for the Series A Preferred Stock as filed
with the Delaware Secretary of State on January 29, 1998. (Exhibit 4.2
to the Comapny's Current Report on Form 8-K as filed with the Commission
on January 20, 1998 is incorporated herein by reference).
*3.3 Certificate of Ownership and Merger of Applied Voice Recognition, Inc.,
a Utah corporation, with and into the Company dated January 26, 1998 as
filed with the Delaware Secretary of State on January 29, 1998.
*3.4 Certificate of Designation for the Series B Preferred Stock as filed
with the Delaware Secretary of State on March 11, 1998.
3.5 Amended and Restated Bylaws of the Company as adopted on November 7,
1997. (Exhibit 4.3 to the Company's Current Report on Form 8-K as filed
with the Commission on January 20, 1998 is incorporated herein by
reference).
*4.1 Registration Rights Agreement between the Company and Equity Services,
Ltd., a Nevis company ("ESL") dated July 31, 1997.
*4.2 Registration Rights Agreement between the Company and ESL dated
August 12, 1997.
*4.3 Amended and Restated Registration Rights Agreement between the Company
and Entrepreneurial Investors, Ltd., a Bahamas company ("EIL") dated
January 8, 1998.
*4.4 Registration Rights Agreement between the Company and EIL dated
August 12, 1997.
*4.5 Registration Rights Agreement by and between the Company and Voice It
Worldwide, Inc., a Colorado corporation ("Voice It") dated December 31,
1997.
*4.6 Form of Registration Rights Agreement between the Company and the Series
B Preferred Stock investors dated March 11, 1998.
13
<PAGE>
EXHIBIT DESCRIPTION OF EXHIBIT
- ------- ----------------------
*10.1 Joint Product Development Agreement by and between the Company and Voice
It dated December 31, 1997.
*10.2 OEM Distribution Agreement between the Company and IBM dated December
17, 1996.
10.3 1997 Incentive Plan effective as of October 1, 1997 (Exhibit 4.1 to the
Company's Form S-8 (No. 333-44191) as filed with the Commission on
January 13, 1998, is incorporated herein by reference).
16.1 Letter dated August 12, 1997, from Malone & Bailey, PLLC to the
Commission. (Exhibit 16.1 to the Company's Form 10-QSB for the period
ended June 30, 1997, as filed with the Commission on August 14, 1997, is
incorporated herein by reference).
*23.1 Consent of Ernst & Young LLP.
*23.2 Consent of Malone & Bailey, PLLC.
*27.1 Financial Data Schedule.
___________________
* Filed herewith.
(b) Reports on Form 8-K.
None.
14
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
APPLIED VOICE RECOGNITION, INC.
/s/ Timothy J. Connolly
______________________________________
Timothy J. Connolly,
Chief Executive Officer, Chairman of
the Board and Director
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE
--------- -----
/s/ Timothy J. Connolly
- --------------------------------- Chief Executive Officer, Chairman of the
Timothy J. Connolly Board and Director
/s/ H. Russell Douglas
- --------------------------------- Vice President Research and Development and
H. Russell Douglas Director
/s/ William T. Kennedy
- --------------------------------- Chief Financial Officer and Assistant
William T. Kennedy Secretary
/s/ Jan Carson Connolly
- --------------------------------- Director and Secretary
Jan Carson Connolly
- --------------------------------- Director
Jesse R. Marion
/s/ Nolan Bedford
- --------------------------------- Director
Nolan Bedford
/s/ Frederick A. Huttner
- --------------------------------- Director
Frederick A. Huttner
- --------------------------------- Director
G. Edward Powell
- --------------------------------- Director
Michael Wilson
/s/ J. William Boyar
- --------------------------------- Director
J. William Boyar
- --------------------------------- Director
Raymond Betz
15
<PAGE>
APPLIED VOICE RECOGNITION, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors F-2
Balance Sheets as of December 31, 1997 and 1996 F-4
Statements of Operations for the Years
Ended December 31, 1996 and 1997 F-6
Statements of Stockholders' Equity for
the Years Ended December 31, 1996 and 1997 F-7
Statements of Cash Flows for the Years
Ended December 31, 1996 and 1997 F-9
Notes to Consolidated Financial Statements F-11
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Applied Voice Recognition, Inc.
We have audited the accompanying balance sheet of Applied Voice Recognition,
Inc., as of December 31, 1997, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Applied Voice Recognition,
Inc., at December 31, 1997, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Houston, Texas
April 4, 1998
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Applied Voice Recognition, Inc.
Houston, Texas
We have audited the accompanying balance sheet of Applied Voice Recognition,
Inc. (Formerly Suma Vest, Inc., Voice Technologies, Ltd., and Applied Voice
Technologies Partners, Ltd.) as of December 31, 1996, and the related statements
of income, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Applied Voice Recognition, Inc.
as of December 31, 1996, and the result of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
MALONE & BAILEY, PLLC
Houston, Texas
March 12, 19997
(Except for Note 15 as to
which the date is April 13, 1998)
F-3
<PAGE>
Applied Voice Recognition, Inc.
Balance Sheets
DECEMBER 31
1997 1996
--------------------
Restated
ASSETS
Current assets:
Cash and cash equivalents $1,207,235 $556,997
Accounts receivable, net of allowance of $435,000
and $-0- for 1997 and 1996, respectively 547,902 38,004
Inventory 319,664 49,073
Deposits, prepaid expenses, and deferred finance costs 79,380 202,500
--------------------
Total current assets 2,154,181 846,574
--------------------
Property and equipment, net 204,445 17,881
Other assets:
Capitalized software cost, net of accumulated
amortization of $8,889 for 1997 156,152 -
Investments 865,346 -
--------------------
Total other assets 1,021,498 -
Total assets $3,380,124 $864,455
====================
F-4
<PAGE>
DECEMBER 31
1997 1996
-----------------------
Restated
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payable $ 432,613 $113,157
Royalties payable 207,154 -
Accrued expenses 120,975 -
Stock dividend payable 40,326 -
Note payable to related party 126,250 27,500
Current portion of capital lease 9,562 -
Current portion of long-term debt 43,833 128,831
Deferred revenue 68,634 -
-----------------------
Total current liabilities 1,049,347 269,488
Note payable to related party, net of current portion - 125,000
Capital lease - net of current portion 39,789 -
Long-term debt, net of current portion 11,388 12,928
-----------------------
Total liabilities 1,100,524 407,416
Stockholders' equity:
Preferred stock; $.10 par value; 2,000,000 shares
authorized; 312,500 and -0- shares issued and
outstanding for 1997 and 1996, respectively 31,250 -
Common stock; $.001 par value; 50,000,000 shares
authorized; 12,989,820 and 10,642,102 shares issued
and outstanding for 1997 and 1996, respectively 12,989 10,642
Paid-in capital 7,541,522 1,605,789
Unrealized holding gain 62,221 -
Accumulated deficit (5,368,382) (1,159,392)
-----------------------
Total stockholders' equity 2,279,600 457,039
-----------------------
Total liabilities and stockholders' equity $3,380,124 $864,455
=======================
See accompanying notes.
F-5
<PAGE>
Applied Voice Recognition, Inc.
Statements of Operations
YEAR ENDED DECEMBER 31
1997 1996
-------------------------
Restated
Net revenues $ 2,113,013 $ 374,697
Cost of sales 853,672 217,855
-------------------------
Gross margin 1,259,341 156,842
Operating expenses:
Marketing and sales 1,499,280 167,233
General and administrative 2,851,943 1,381,526
Research and development 725,496 112,323
-------------------------
Total operating expenses 5,076,719 1,661,082
-------------------------
Operating margin (3,817,378) (1,504,240)
Other expense:
Rental income 37,138 -
Interest income 62,652 2,884
Interest expense (451,076) (92,081)
-------------------------
Total other expense (351,286) (89,197)
-------------------------
Net loss $(4,168,664) $(1,593,437)
=========================
Basic and diluted loss per share $(0.36) $(0.23)
=========================
See accompanying notes.
F-6
<PAGE>
Applied Voice Recognition, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Reduction Unrealized
Partners' Common Stock Issued Stock Issued Paid-In Capital of Paid-In Holding Retained
Capital Shares Amount Shares Amounts Common Preferred Capital Gain Deficit Total
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December
31, 1995 $ 63,952 - $ - - $ - $ - $ - $ - $ - $ (433,326) $ (369,374)
Contributions
of cash 35,050 - - - - - - - - - 35,050
Reduction of
officer
notes payable 214,902 - - - - - - - - - 214,902
Net loss from
January 1, 1996
through August
15, 1996 - - - - - - - - - (434,045) (434,045)
Incorporation,
August 15, 1996 (313,904) 5,820,000 5,820 - - (559,287) - - - 867,371 -
Issuance of 180,000
shares of Common
Stock with
note payable - 180,000 180 - - 269,820 - - - - 270,000
Stock issued
for cash:
August 1996 - 2,473,000 2,473 - - 132,527 - - - - 135,000
November 1996,
net of $203,787
costs of
offering - 430,311 430 - - 655,806 - - - - 656,236
Issuance of 250,000
stock options
as compensation - - - - - 340,000 - - - - 340,000
Stock issued for
services - 512,500 512 - - 768,150 - - - - 768,662
Merger with
public shell - 1,226,291 1,227 - - (1,227) - - - - -
Net loss from
August 16, 1996
through December
31, 1996 - - - - - - - - - (1,159,392) (1,159,392)
--------------------------------------------------------------------------------------------------------------
Balance at December
31, 1996 (Restated) - 10,642,102 10,642 - - 1,605,789 - - - (1,159,392) 457,039
Sale of 100,000 shares
of Common Stock
for $250,000 - 100,000 100 - - 249,900 - - - - 250,000
Exercise of 70,834
stock warrants
for $9,916 - 70,834 71 - - 9,845 - - - - 9,916
Issuance of 50,000
shares of Common
Stock for
consulting
services rendered - 50,000 50 - - 199,950 - - - - 200,000
Issuance of 50,000
warrants for consulting
services rendered - - - - - 83,500 - - - - 83,500
Issuance of 50,000
shares of Common
Stock for consulting
services - 50,000 50 - - 74,950 - - - - 75,000
Sale of 312,500 shares of
preferred stock for
$2,500,000 in
connection with
Private Placement - - - 312,500 31,250 - 2,468,750 - - - 2,500,000
Sale of 1,595,625 shares
of Common Stock for
$2,552,999 in
connection with
Private Placement - 1,595,625 1,595 - - 2,551,404 - - - - 2,552,999
Issuance of 5,000
shares of Common
Stock for legal
services rendered
in connection
with Private
Placement - 5,000 5 - - 18,745 - (18,750) - - -
Cash expenses
related to
Private Placement - - - - - - - (559,677) - - (559,677)
Private Placement
expense attributed
to warrants
issued in
connection with
Private Placement - - - - - 345,750 - (345,750) - - -
Issuance of 135,159
shares of Common
Stock for commissions
associated with
Private Placement - 135,159 135 - - 216,121 - (216,256) - - -
</TABLE>
F-7
<PAGE>
Applied Voice Recognition, Inc.
Statements of Stockholders Equity (continued)
<TABLE>
<CAPTION>
Preferred Reduction Unrealized
Partners' Common Stock Issued Stock Issued Paid-In Capital of Paid-In Holding Retained
Capital Shares Amount Shares Amounts Common Preferred Capital Gain Deficit Total
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of 250,000
warrants for
consulting
services $ - - $ - - $ - $ 141,000 $ - $ - $ - $ - $ 141,000
Fair value of
warrants issued
in connection
with bridge
loan financing - - - - - 278,400 - - - - 278,400
Exercise of 223,600
stock options - 223,600 224 - - 44,843 - - - - 45,067
Issuance of 100,000
shares of Common
Stock to Wade - 100,000 100 - - 303,025 - - - - 303,125
Issuance of 10,000
shares of Common
Stock for consul-
ting services - 10,000 10 - - 44,990 - - - - 45,000
Issuance of 7,500
shares of Common
Stock in exchange
for advertisement - 7,500 7 - - 44,993 - - - - 45,000
Common Stock dividend
on preferred stock - - - - - - - - - (40,326) (40,326)
Unrealized holding
gain - - - - - - - - 62,221 - 62,221
Net loss - - - - - - - - - (4,168,664) (4,168,664)
==============================================================================================================
Ending balance at
December 31, 1997 $ - 12,989,820 $12,989 312,500 $31,250 $6,213,205 $2,468,750 $(1,140,433) $62,221 $(5,368,382) $2,279,600
==============================================================================================================
</TABLE>
See accompanying notes.
F-8
<PAGE>
Applied Voice Recognition, Inc.
Statements of Cash Flows
Year ended December 31
1997 1996
----------------------------
Restated
OPERATING ACTIVITIES
Net loss $(4,168,664) $(1,593,437)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 189,131 74,012
Stock and warrants issued for services 589,500 768,662
Stock options granted as compensation - 340,000
Bad debt expense 435,000 -
Changes in assets and liabilities:
Accounts receivable (944,898) (32,543)
Inventory (270,591) (34,073)
Deposits, prepaid expenses, and deferred
finance costs (11,880) (270,000)
Accounts payable and accrued expenses 647,585 39,967
Deferred revenues 68,634 -
----------------------------
Net cash used in operating activities (3,466,183) (707,412)
INVESTING ACTIVITIES
Purchase of property and equipment (176,759) (1,550)
Investment in Voice It (500,000) -
Capitalized software costs (165,041) -
----------------------------
Net cash used in investing activities (841,800) (1,550)
F-9
<PAGE>
Applied Voice Recognition, Inc.
Statements of Cash Flows (continued)
Year ended December 31
1997 1996
--------------------------
Restated
FINANCING ACTIVITIES
Proceeds from note payable to related party $ - $ 145,000
Payments on note payable to related party (26,250) (16,422)
Proceeds from bridge loans 580,000 -
Payments on bridge loans (580,000) -
Proceeds from long-term debt 61,500 -
Payments on long-term debt (148,038) -
Cash contributed by stockholders - 170,050
Payments under capital lease obligation (5,696) -
Sale of Common Stock 250,000 -
Sale of Common Stock associated with private 2,552,999 656,836
placement
Sale of preferred stock associated with private 2,500,000 -
placement
Warrants granted in connection with bridge loans 278,400 -
Common Stock issued in connection with note - 270,000
payable
Private placement cash expenditures (559,677) -
Stock options and warrants exercised 54,983 -
--------------------------
Net cash provided by financing activities 4,958,221 1,225,464
--------------------------
Net increase in cash and cash equivalents 650,238 516,502
Cash and cash equivalents at beginning of year 556,997 40,495
--------------------------
Cash and cash equivalents at end of year $1,207,235 $ 556,997
==========================
DISCLOSURE OF CASH PAID FOR
Interest $ 38,214 $ 10,042
Taxes $ - $ -
See accompanying notes.
F-10
<PAGE>
Applied Voice Recognition, Inc.
Notes to Financial Statements
December 31, 1997
1. ACCOUNTING POLICIES
NATURE OF BUSINESS
Applied Voice Recognition, Inc. (the "Company"), is a Utah corporation by virtue
of a reverse merger with Summa Vest, Inc. ("SVI"), an inactive publicly traded
shell, incorporated on July 22, 1985. The Company develops and markets voice-
enabled computer software programs. In 1995, the Company introduced
VoiceCOMMANDER/TM/ ("VoiceCOMMANDER/TM/"), a voice-enabled desktop software
program, based upon state-of-the-art voice recognition technology.
On December 11, 1996, the Company merged with SVI in a transaction accounted for
as a "reverse merger" using the purchase method of accounting. The Company
issued 1,226,291 shares to investment advisors, brokers, and former shareholders
of SVI in connection with this merger. SVI was a Utah corporation, and its name
was changed to Applied Voice Recognition, Inc., effective on the date of the
merger. SVI had no assets or liabilities as of the effective date of the merger.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates by management. Actual
results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has determined, based on available market information and
appropriate valuation methodologies, that the fair value of its financial
instruments approximates carrying value. The carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable, and notes payable
approximate fair value due to the short-term maturity of the instruments. The
carrying amount of long-term debt approximates fair value because the interest
rates under the credit agreement are variable, based on current market.
F-11
<PAGE>
Applied Voice Recognition, Inc.
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
STOCK OPTIONS
The Company follows Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations ("APB 25") in accounting
for its employee stock options. The pro forma disclosures required by Statement
of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation ("SFAS 123"), which established a fair-value-based method of
accounting for stock-based compensation plans, are set forth in Note 5.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of computer equipment and are determined using actual cost
or a standard cost method based on a first-in, first-out ("FIFO") basis. FIFO
inventory is stated at the lower of cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method using rates based on the estimated useful lives of the
related assets. Estimated useful lives used for depreciation purposes are as
follows:
Computer equipment 3 years
Third-party computer software 3 years
Office equipment and furniture 5 years
For the years ended December 31, 1997 and 1996, the Company incurred $45,242 and
$6,512, respectively, of related depreciation expense. This includes
depreciation expense related to office equipment under capital lease.
F-12
<PAGE>
Applied Voice Recognition, Inc.
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED SOFTWARE COSTS
The costs of direct labor and allocated overhead specific 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 year ended December 31, 1997, the Company incurred $8,889 of related
amortization expense.
INVESTMENTS IN EQUITY SECURITIES
The Company determines the appropriate classification of investments in equity
securities at the time of the purchase and confirms such designation as of the
balance sheet date. Marketable equity securities are classified as available-
for-sale securities and are stated at fair value, with any unrealized gains and
losses, net of tax, reported as a separate component of stockholders' equity.
There were no realized gains or losses. The Company's investments are in
unregistered common stock. As of December 31, 1997, the fair value of
investments in equity securities, using quoted market prices, approximates their
carrying value.
SOFTWARE AND HARDWARE REVENUE
Revenue is recognized when products are delivered and installed at the customer
site. Accounts are written off when deemed uncollectible.
MAINTENANCE REVENUES
The Company defers unearned revenues associated with maintenance contracts sold
to customers, and the term of each contract is typically one year. All deferred
revenues are amortized into revenue on a pro rata basis based on the life of the
maintenance contract. At December 31, 1997, $68,634 of maintenance revenues was
deferred.
ADVERTISING
The Company expenses all advertising costs as incurred. The Company expensed
$391,000 and $69,000 in 1997 and 1996, respectively.
F-13
<PAGE>
Applied Voice Recognition, Inc.
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company uses the tax liability method of accounting for income taxes. Under
the liability method, deferred income taxes are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates that will be in effect when the differences
reverse.
LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share ("FAS 128"). FAS 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share exclude any dilutive
effects of options, warrants, and convertible securities. Diluted earnings per
share are very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented and,
where appropriate, restated to conform to the FAS 128 requirement.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31
1997 1996
-----------------------
Computer equipment $111,425 $ -
Third-party software 8,981 -
Office equipment and furniture 85,621 29,965
Office equipment on capital lease 55,744 -
-----------------------
261,771 29,965
Less accumulated depreciation (57,326) (12,084)
-----------------------
Property and equipment, net $204,445 $ 17,881
=======================
F-14
<PAGE>
Applied Voice Recognition, Inc.
Notes to Financial Statements (continued)
3. INDEBTEDNESS
Indebtedness is summarized below:
DECEMBER 31
1997 1996
---------------------
Note payable to a trust; unsecured; 10%
interest; monthly payments of $300, with
balloon payment on remaining balance due on
July 31, 1998 $23,139 $ 24,831
Note payable to a bank; unsecured; 10% interest;
monthly payments of $5,843; note matures January
1998 11,686 -
Note payable to a bank; unsecured; 9.25%
interest; monthly payments of $879; note 20,396 -
matures January 2000
Note payable to former owner; unsecured; -0-%
interest; $2,500 due August 1996, and $750
monthly from September 1996 through December
1997, with balloon payment due on remaining
balance on December 31, 1997 - 74,000
Note payable to third party; unsecured; -0-%
interest; monthly payments of $2,500, with
balloon payment due on remaining balance
February 1997 - 42,928
---------------------
Total $55,221 $141,759
---------------------
Less current maturities 43,833 128,831
---------------------
Net long-term debt $11,388 $ 12,928
=====================
NOTE PAYABLE TO RELATED PARTIES
The Company has a note payable to a trust of $126,250 which is unsecured and
carries 12% interest. Interest payments are due on a quarterly basis and
interest is non-compounding. In addition to this interest, the trust received a
total of 180,000 shares of Common Stock in the Company. These shares have been
valued at $1.50 each and the aggregate value of $270,000 was recorded as
deferred finance costs. In 1996 and 1997, $67,500 and $135,000, respectively,
was amortized into interest expense. At December 31, 1997, $67,500 of deferred
finance costs remained on the books. A balloon payment on the principal
balance of $125,000 is due on July 31, 1998.
F-15
<PAGE>
Applied Voice Recognition, Inc.
Notes to Financial Statements (continued)
3. INDEBTEDNESS (CONTINUED)
BRIDGE LOANS
On August 14, 1997, the Company paid in full $580,000, under various bridge loan
agreements entered into between May 15, 1997 and July 24, 1997, to a stockholder
and certain officers of the Company. The amount was paid in accordance with the
provisions of the bridge loan agreement which called for full payment plus 12%
interest at the earlier of six months or the receipt of the minimum proceeds of
the private placement of $2,000,000. In connection with the bridge loans,
warrants to purchase 580,000 shares of the Company's common stock were issued
(see Note 5).
MATURITIES
Scheduled maturities of indebtedness at December 31, 1997 are as follows:
1998 $170,083
1999 $ 9,877
2000 $ 1,511
2001 $ -
2002 $ -
--------
Total $181,471
========
4. LEASES
CAPITAL
During the year, the Company entered into a lease agreement on office equipment.
The lease is classified as a capital lease and calls for monthly payments of
$1,342 through March 2002.
F-16
<PAGE>
Applied Voice Recognition, Inc.
Notes to Financial Statements (continued)
4. LEASES (CONTINUED)
OPERATING
The Company incurred rental expense of $109,110 and $26,038 in 1997 and 1996,
respectively, in connection with operating leases on office space and equipment.
Future minimum lease payments for leases having initial or remaining
noncancelable lease terms in excess of one year are presented below:
1998 $75,457
1999 $70,585
2000 $12,514
2001 $ 7,404
2002 $ 3,702
5. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue up to 312,500 shares of preferred stock with
a par value of $.10 per share. During 1997, the Company sold in a private
placement 312,500 shares of Series A Preferred Stock, par value $.10 per share
(the "Series A Preferred Stock"), for a purchase price of $8.00 per share. The
Company closed the first offering for 125,000 of the 312,500 shares of the
Series A Preferred Stock on August 1, 1997 for a purchase price of $8.00 per
share and for an aggregate of $1,000,000, and closed the second offering for
187,500 of the 312,500 shares of the Series A Preferred Stock on August 12, 1997
for an aggregate of $1,500,000. The preferred stock is entitled to cumulative
dividends at a rate of 4% per annum. The dividends are to be paid with common
stock of the Company, using a formula based on the trailing thirty days' average
stock price as of December 31, 1997, but are recorded at fair value as of
December 31, 1997. At December 31, 1997, the Company declared a dividend of
$40,326, or 11,966 shares of common stock. The dividend has been accrued;
however, at December 31, 1997, the stock has not yet been distributed. The
312,500 shares of preferred stock are convertible into 5.4 shares of common
stock of the Company at the stockholder's option.
F-17
<PAGE>
Applied Voice Recognition, Inc.
Notes to Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
Prior to August 15, 1996, the Company was organized as three different Texas
limited partnerships. On August 15, 1996, the Company was incorporated and the
partnerships contributed all assets and liabilities in exchange for 6,000,000
shares.
On August 15, 1996, two additional stockholders purchased 2,473,000 shares of
stock for $135,000. In November 1996, 500,000 additional shares were issued for
services in connection with marketing and promotion of Company products and
100,000 shares were issued in connection with the acquisition of other voice
recognition software development technology and talent.
In October 1996, the Company commenced the sale of its common stock in a private
placement offering. Prior to the December 11, 1996 merger (Note 1), 430,311
shares had been sold at $2 per share for a total consideration of $860,023, with
$203,787 in related costs of the offering. As of December 31, 1996, a total of
10,729,602 shares of stock were outstanding.
In October 1996, the Board of Directors declared a 100-for-1 stock split which
increased the total number of authorized shares to 15,000,000 from 150,000. All
amounts in these financial statements have been adjusted for this split as if it
had occurred on January 1, 1996. The total authorized shares of 50,000,000 and
the par value used of $0.01 are characteristics of the SVI stock received in the
merger discussed in Note 1.
In February 1997, the Company issued 50,000 shares of Common Stock for
consulting services. The services were valued at $75,000. The Company has
recognized $75,000 of expense related to these services.
In February 1997, after commencing active public trading, the Company issued
50,000 shares of Common Stock to a third party who performed certain consulting
and promotional services. The Company has recognized $200,000 of expense, based
on the fair value of the Common Stock. The third party also received 50,000
warrants, which were valued at $83,500 (see "Warrants"). The total charge of
$283,500 for the Common Stock and the warrants has been recorded in the fourth
quarter.
F-18
<PAGE>
Applied Voice Recognition, Inc.
Notes to Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
In August 1997, the Company completed a private placement (the "Private
Placement") of 1,595,625 shares of common stock, par value $.001 per share (the
"Common Stock"), for a purchase price of $1.60 per share and an aggregate sales
price of $2,552,999. Total expenses of the Private Placement, including broker
and consulting fees, commissions and compensation dues, and legal and accounting
fees totaled $1,140,428. Of this amount, $559,677 was paid in cash, $235,001 was
paid with 234,866 shares of Common Stock, and $345,750 was paid with 268,750
Common Stock warrants (see "Warrants").
STOCK OPTIONS
In August 1996, the Company adopted the 1996 Stock Option Plan (the "Plan") that
provides for the issuance of stock options to employees, directors (who are also
employees), independent contractors, and consultants. The aggregate number of
shares available for issuance under the Plan is greater than 7,000 shares, or 7%
of the number of shares of the Company's Common Stock which are outstanding from
time to time.
Generally, options granted have five- to ten-year terms and vest and become
fully exercisable in three years. Stock options issued under the Plan can be
either incentive stock options or nonqualified stock options.
In December 1996, the Company adopted the 1996 Director Stock Option Plan (the
"Director Plan") that provides for the issuance of stock options to the
directors of the Company. The aggregate number of shares available for issuance
under the Director Plan is greater than 3,000 shares, or 3% of the number of
shares of the Company's common stock which are outstanding from time to time.
Generally, options granted have five-year terms and vest and become fully
exercisable in three years. Stock options issued under the Director Plan can be
either incentive stock options or nonqualified stock options.
In October 1997, both the Plan and the Director Plan were amended by the 1997
Incentive Plan (the "Amended Plan"). The Amended Plan assumed all outstanding
stock options granted under the prior plans without modification. The Amended
Plan provides for the issuance of stock options, stock appreciation rights,
supplemental payments, restricted stock, performance units, performance shares,
and other stock-based awards. Designated employees, outside directors, and
consultants are eligible to participate. An aggregate of
F-19
<PAGE>
Applied Voice Recognition, Inc.
Notes to Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
3,000,000 shares of Common Stock is available for issuance under the Amended
Plan. Generally, options granted have ten-year terms and vest and become fully
exercisable in three years. Stock options issued under the Amended Plan can be
either incentive stock options or nonqualified stock options.
During 1997, the Company issued nonqualified stock options under the Amended
Plan, which had exercise prices approximate or equal to the fair market value of
the Common Stock at the date of grant. A summary of the Company's stock option
activity and related information follows:
Year ended
December 1997
----------------------
Weighted
Average
Options Exercise
Price
----------------------
(In Thousands, except
price per share)
Outstanding - beginning of year - $ -
Granted 2,109 $3.04
Forfeited 238 $2.66
----------
Outstanding - end of year 1,871 $3.08
==========
Options exercisable at year-end 370
Weighted average fair value of options granted
during the year $ 2.27
Weighted average remaining contractual life 9.3 years
Range of exercise prices $2.78 - $5.75
F-20
<PAGE>
Applied Voice Recognition, Inc.
Notes to Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
The Company applies APB 25 in accounting for the Plan. Accordingly, no
compensation cost has been recognized for its fixed stock option plan. Pro forma
information regarding net income and earnings per common share is required by
SFAS 123 as if the Company had accounted for its employee stock options under
the fair value method of that statement. The fair value of these options was
estimated at the date of grant using a Black-Scholes option pricing model
("Black-Scholes") with the following weighted average assumptions for 1997: (i)
risk-free interest rate of 5.5%, (ii) a dividend yield of-0-%, (iii) volatility
factors of the expected market price of the Company's Common Stock of .47, and
(iv) a weighted average expected life of two years for stock options and four
years for warrants.
The Black-Scholes model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected volatility. Because the Company's employee
stock options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting periods. Had compensation for the
Company's stock-based compensation plan been determined based on the fair value
at the grant dates for awards under the Plan consistent with the methods of SFAS
123, the Company's net income and earnings per common share would have been
adjusted to the pro forma amounts indicated below:
YEAR ENDED
DECEMBER 1997
-------------------------------
AS REPORTED PRO FORMA
-------------------------------
(In thousands, except per
share amounts)
Net loss $(4,168,664) $(4,787,665)
Loss per common share $ (0.36) $ (0.41)
F-21
<PAGE>
Applied Voice Recognition, Inc.
Notes to Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
The following is a description of the outstanding warrants of the Company. The
Company has determined the value of the warrants issued using either the minimal
value method for all warrants granted prior to the Company's becoming
effectively publicly traded on February 4, 1997, or the Black-Scholes model and
the risk-free rate, dividend rate, volatility and weighted average expected life
discussed above for stock options for all grants subsequent to February 4, 1997.
In August 1996, the Company granted to officers (and founding stockholders)
250,000 stock warrants with an exercise price of $0.14 per share and to
nonemployee directors of the Company 150,000 stock warrants with an exercise
price of $0.14. The warrants were granted under the Director Plan discussed
above and have a five-year life. During the year, 294,434 of the warrants were
exercised and 45,000 were forfeited. At December 31, 1997, 60,566 warrants are
outstanding.
On September 16, 1996, the Company entered into a two-year Licensing Agreement
with a professional athlete to use his name and likeness in marketing and
promotional materials to be produced and published by the Company. Consideration
paid for this licensing arrangement was 500,000 shares of Common Stock (included
in the total shares outstanding at December 31, 1996) and a warrant to purchase
another 500,000 shares at $1.50 per share at any time on or before August 31,
2001. None of the warrants have been exercised as of December 31, 1997.
On January 14, 1997 and September 5, 1997, the Company made to a third party two
grants of 150,000 and 100,000 warrants, respectively, with an exercise price of
$1.60 per share for both grants. The third party was engaged to perform
consulting services to the Company during 1997. The Company has recognized
$141,000, based on an analysis using the Black-Scholes model as discussed above,
in general and administrative expense in 1997.
On February 14, 1997, the Company granted to a third party 50,000 warrants with
an exercise price of $3.00 per share. The third party was engaged to perform
consulting and promotional services related to the Private Placement completed
in August 1997. The Company has recognized $83,500, based on an analysis using
the Black-Scholes model as discussed above, in general and administrative
expense in 1997.
F-22
<PAGE>
Applied Voice Recognition, Inc.
Notes to Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Between May 15, 1997 and July 24, 1997, the Company granted 580,000 warrants
(430,000 warrants to officers, 50,000 warrants to a director, and 100,000
warrants to others) at an exercise price of $1.60 per share. The warrants were
granted in connection with the bridge loans as discussed in Note 3. The Company
has recognized finance costs of $278,400, based on an analysis using the Black-
Scholes model as discussed above. The Company recorded this charge in interest
expense in the fourth quarter.
On July 21, 1997, the Company granted to a broker of the Private Placement a
warrant to purchase 100,000 shares of Common Stock at an exercise price of
$1.78. In addition to this, on July 23, 1997, the Company sold to the same
broker, for an aggregate price of $100, a warrant to purchase up to 168,750
shares of Common Stock for $1.78 per share. Broker fees of $345,750 were offset
against the proceeds of the Private Placement. The broker fees were estimated
using the Black-Scholes model and related assumptions discussed above.
A summary of the Company's warrant activity and related information follows:
WEIGHTED
AVERAGE
EXERCISE
WARRANTS PRICE
----------------------------
(In thousands, except
price per share)
Outstanding - December 31, 1995 -0- $ -
Granted 870 $ .88
Outstanding - December 31, 1996 870 $ .88
Granted 1,149 $1.70
Exercised 294 $ .14
Forfeited 45 $ .14
Outstanding - December 31, 1997 1,680 $1.57
Warrants exercisable at year-end 1,680
Weighted average fair value of warrants granted
during the year $2.65
Weighted average remaining contractual life 2.9 years
Range of exercise prices $0.14 to $3.00
F-23
<PAGE>
Applied Voice Recognition, Inc.
Notes to Financial Statements (continued)
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and dilutive earnings
per share:
1997 1996
-----------------------------
(Restated)
Numerator:
Net loss $(4,168,664) $(1,593,437)
Preferred stock dividend (40,326) -
Numerator for basic and diluted earnings per
share - loss available to Common Stockholders $(4,208,990) $(1,593,437)
Denominator:
Denominator for basic and dilutive earnings
per share - weighted average shares $11,594,440 $ 6,971,287
Basic and diluted loss per share $ (0.36) $ (0.23)
F-24
<PAGE>
Applied Voice Recognition, Inc.
Notes to Financial Statements (continued)
7. INCOME TAXES
At December 31, 1997 and 1996, the Company has net operating loss carryforwards
of approximately $4,642,900 and $301,627 expiring in 2012 and 2011,
respectively.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1997 and
1996 are as follows:
1997 1996
---------------------------
Deferred tax liabilities:
Depreciation expense $ 12,239 $ -
Capitalized research and development expense 53,092 -
---------------------------
Total deferred tax liabilities 65,331 -
Deferred tax assets:
Net operating loss carryforwards 1,578,586 102,553
Deferred revenues 23,336 -
Research and development credit 77,205 -
Stock-based compensation expense 76,500 -
Allowance for doubtful accounts 147,900 -
Other 945 -
---------------------------
Total deferred tax assets 1,904,472 102,553
---------------------------
Net deferred tax asset 1,839,141 102,553
---------------------------
Valuation allowance for deferred tax assets (1,839,141) (102,553)
Net deferred taxes $ - $ -
==========================
F-25
<PAGE>
Applied Voice Recognition, Inc.
Notes to Financial Statements (continued)
8. NONCASH TRANSACTIONS
Following is a list of noncash transactions.
Year ended December 31, 1997:
Capital lease obligation for equipment $ 55,047
Preferred stock dividend paid with Common Stock 40,326
Warrants issued in connection with bridge financing charged
to interest expense 278,400
Issuance of Common Stock and warrants for private placement
fees 562,006
Common Stock issued for legal services related to private
placement 18,745
Common Stock issued for consulting services 358,500
Common Stock issued for consulting services 45,000
Common Stock issued for advertising 45,000
Common Stock issued in exchange for investment in Wade
Cook stock 303,125
Year ended December 31, 1996:
Conversion of debt to contributed capital $214,902
Common Stock issued for marketing and promotional services 768,150
Common Stock issued in connection with notes payable
recorded as deferred finance costs 270,000
Common Stock options issued for compensation 340,000
9. EMPLOYMENT AGREEMENTS
In 1997, several employment agreements were executed with key officers of the
Company. These agreements supersede previous employment agreements. The 1997
agreements call for a combined annual salary of $574,996, beginning in 1998.
10. JOINT PRODUCT DEVELOPMENT AGREEMENT
On December 31, 1997, the Company entered into a joint product development
agreement with Voice It Worldwide ("Voice It"). The agreement set the stage for
the development of a product which integrates the Company's voice recognition
product, VoiceCOMMANDER/TM/, with Voice It's "Digital Recorder" (a hand-held
digital recording
F-26
<PAGE>
Applied Voice Recognition, Inc.
Notes to Financial Statements (continued)
10. JOINT PRODUCT DEVELOPMENT AGREEMENT (CONTINUED)
unit). The resulting product will have general consumer applications and will
also be customized to meet the requirements of specific professions. Both the
Company and Voice It have agreed to commit technical and financial resources as
may be reasonably necessary to carry out the development of the product. In
addition to this, the Company agreed to purchase 471,700 shares of Voice It
common stock at a price of $1.06 per share for a total of $500,000. Voice It
agreed to purchase 50,000 licenses of VoiceCOMMANDER/TM/ (formerly known as
SpeechCOMMANDER) for $1,000,000. Both transactions are reflected in the December
31, 1997 financial statements.
11. INVESTMENTS
On September 12, 1997, the Company entered into an agreement with Wade Cook
Financial Corporation ("Wade"). In accordance with the terms of the agreement,
the Company exchanged 100,000 shares of its Common Stock for 14,433 shares
(which subsequently have split to 129,897 shares) of Wade's common stock. The
shares acquired are not registered under the Securities Act of 1933 or under any
state securities laws. As the result of this, the Company cannot transfer or
sell the acquired shares. As of April 4, 1998, physical transfer of relevant
stock certificates between the Company and Wade had not occurred. Based on the
fair value of Wade's common stock at December 31, 1997, the Company has an
unrealized gain of $62,221.
On December 31, 1997, the Company purchased 471,700 shares of Voice It common
stock for $500,000.
12. IBM VIA VOICE DISTRIBUTION AGREEMENT
Via Voice, a voice recognition engine developed by IBM, is the integral
component that drives the functionality of VoiceCOMMANDER/TM/, the Company's
voice recognition product. On September 22, 1997, IBM authorized the Company to
replicate and distribute Via Voice as VoiceCOMMANDER/TM/. In exchange for this
right, the Company agreed to pay IBM a $6.00 per license royalty fee. As of the
year ended December 31, 1997, the Company owed IBM $207,154 in royalties.
F-27
<PAGE>
Applied Voice Recognition, Inc.
Notes to Financial Statements (continued)
13. JOINT VENTURE AGREEMENT
In April 1996, the Company entered into negotiations with Nevada Gold and
Casinos, Inc. ("NGCI"), for the joint development of VoiceCommander Gambler, a
voice-activated gaming device. The execution of the agreement was contingent
upon NGCI's ability to provide financing for sales and marketing efforts. NGCI
was unable to obtain and provide the required financing. Because of this, the
potential agreement was never finalized. Currently, there are no intentions to
pursue the venture any further.
14. ACQUISITION
On September 25, 1996, the Company acquired other voice recognition software
technology and talent for 100,000 shares of Company stock and $135,000, payable
$5,000 per month for 27 months, commencing October 1996. This agreement was
terminated in February 1997, with the return of 87,500 shares and cancellation
of the remaining balance of the note payable in consideration for a release from
a noncompete agreement. The termination of this agreement is reflected in the
1996 financial statements. The remaining 12,500 shares were valued at $1.50 per
share and the Company recorded $18,750 of expense in 1996.
15. RESTATEMENT OF 1996 FINANCIAL STATEMENTS
The 1996 financial statements have been restated for the correction of the
following errors:
In 1996, the Company issued a total of 512,500 shares of Common Stock to two
individuals for services rendered and recorded nominal compensation. The Company
is restating the financial statements to reflect $768,150 of compensation
expense based on the fair value of the Common Stock related to the Common Stock
issuances.
The Company issued 250,000 stock options to certain officers and management of
the Company. Those officers and management received the stock options in lieu of
cash compensation. The Company is restating the 1996 financial statements to
record $340,000 of compensation expense related to the granting of those
options.
The Company issued 180,000 shares of Common Stock in connection with a note
payable. The Company is restating the 1996 financial statements to record
$270,000 of deferred finance costs which will be amortized over the life of the
note payable.
F-28
<PAGE>
Applied Voice Recognition, Inc.
Notes to Financial Statements (continued)
15. RESTATEMENT OF 1996 FINANCIAL STATEMENTS (CONTINUED)
Upon the reorganization on August 15, 1996, the Company did not eliminate its
precious retained deficit. The Company is restating stockholders' equity to
reflect the elimination of the cumulative retained deficit as of August 15,
1996.
16. SUBSEQUENT EVENTS
In March 1998, the Company purchased certain assets of Transcription Resources
for approximately $150,000 less liabilities to be assumed.
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 are priced at $1,000 per share.
$300,000 of private placement fees were netted against the proceeds.
F-29
<PAGE>
EXHIBIT DESCRIPTION OF EXHIBIT
- ------- ----------------------
2.1 Plan and Agreement of Merger between Applied Voice Recognition, Inc., a
Utah corporation and the Company dated November 7, 1997. (Exhibit 2.1 to
the Company's Current Report on Form 8-K as filed with the Commission on
January 20, 1998 is incorporated herein by reference).
*2.2 Asset Purchase Agreement by and between Transcription Resources dated
March 17, 1998.
3.1 Amended and Restated Certificate of Incorporation as filed with the
Delaware Secretary of State on January 29, 1998. (Exhibit 4.1 to the
Company's Current Report on Form 8-K as filed with the Commission on
January 20, 1998 is incorporated herein by reference).
3.2 Certificate of Designation for the Series A Preferred Stock as filed
with the Delaware Secretary of State on January 29, 1998. (Exhibit 4.2
to the Comapny's Current Report on Form 8-K as filed with the Commission
on January 20, 1998 is incorporated herein by reference).
*3.3 Certificate of Ownership and Merger of Applied Voice Recognition, Inc.,
a Utah corporation, with and into the Company dated January 26, 1998 as
filed with the Delaware Secretary of State on January 29, 1998.
*3.4 Certificate of Designation for the Series B Preferred Stock as filed
with the Delaware Secretary of State on March 11, 1998.
3.5 Amended and Restated Bylaws of the Company as adopted on November 7,
1997. (Exhibit 4.3 to the Company's Current Report on Form 8-K as filed
with the Commission on January 20, 1998 is incorporated herein by
reference).
*4.1 Registration Rights Agreement between the Company and Equity Services,
Ltd., a Nevis company ("ESL") dated July 31, 1997.
*4.2 Registration Rights Agreement between the Company and ESL dated
August 12, 1997.
*4.3 Amended and Restated Registration Rights Agreement between the Company
and Entrepreneurial Investors, Ltd., a Bahamas company ("EIL") dated
January 8, 1998.
*4.4 Registration Rights Agreement between the Company and EIL dated
August 12, 1997.
*4.5 Registration Rights Agreement by and between the Company and Voice It
Worldwide, Inc., a Colorado corporation ("Voice It") dated December 31,
1997.
*4.6 Form of Registration Rights Agreement between the Company and the Series
B Preferred Stock investors dated March 11, 1998.
1
<PAGE>
EXHIBIT DESCRIPTION OF EXHIBIT
- ------- ----------------------
*10.1 Joint Product Development Agreement by and between the Company and Voice
It dated December 31, 1997.
*10.2 OEM Distribution Agreement between the Company and IBM dated December
17, 1996.
10.3 1997 Incentive Plan effective as of October 1, 1997 (Exhibit 4.1 to the
Company's Form S-8 (No. 333-44191) as filed with the Commission on
January 13, 1998, is incorporated herein by reference).
16.1 Letter dated August 12, 1997, from Malone & Bailey, PLLC to the
Commission. (Exhibit 16.1 to the Company's Form 10-QSB for the period
ended June 30, 1997, as filed with the Commission on August 14, 1997, is
incorporated herein by reference).
*23.1 Consent of Ernst & Young LLP.
*23.2 Consent of Malone & Bailey, PLLC.
*27.1 Financial Data Schedule.
___________________
* Filed herewith.
(b) Reports on Form 8-K.
None.
2
<PAGE>
EXHIBIT 2.2
ASSET PURCHASE AGREEMENT
(Cathy Clemons Transcription Resources)
This ASSET PURCHASE AGREEMENT (the "Agreement"), dated as of the 17th day
of March 1998 (the "Effective Date"), is by and between CATHY CLEMONS, an
individual residing in Dallas County, Texas ("Seller"), and APPLIED VOICE
RECOGNITION, INC., a Delaware corporation ("Purchaser").
W I T N E S S E T H:
WHEREAS, Seller is the sole proprietor of, and does business as,
Transcription Resources (the "Company");
WHEREAS, Seller desires to sell to Purchaser, and Purchaser desires to
purchase from Seller, certain assets of owned by Seller and utilized by the
Company, and Seller and Purchaser desire to set forth the terms and conditions
of their agreement;
NOW THEREFORE, for and in consideration of the premises, and the mutual
promises and covenants contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Seller and Purchaser hereby agree as follows:
1. Purchase and Sale.
1.1 Purchase and Sale. On the terms and subject to the conditions of
this Agreement, Seller, at the Closing referred to in Section 7, agrees to
grant, sell, transfer, convey and deliver to Purchaser, free and clear of all
liens, claims, encumbrances and interests, and Purchaser agrees to purchase from
Seller, certain assets of Seller (collectively, the "Company Assets"), which
Company Assets shall consist of the following:
(a) All real property owned or leased by Seller for the use of the
Company, including, without limitation, that certain leased space located at
13601 Preston Road, Suite 201W, Dallas, Texas 75240, and the improvements
located within such leased space (collectively, the "Company Facilities");
(b) The machinery, equipment, furniture, fixtures, supplies,
materials and other tangible personal property (other than computer hardware and
software) that are described on Schedule 1.1(b) attached hereto (the "Company
Personal Property");
(c) All contracts and agreements listed on Schedule 1.1(c) attached
hereto (the "Assigned Contracts"); and all warranties and guarantees, if any,
originally given to Seller relating to all or any portion of the Company
Personal Property (the "Warranties");
(d) All rights of Seller in and to the computer hardware and
computer software listed on Schedule 1.1(d) attached hereto;
1
<PAGE>
(e) All rights of Seller in and to all existing or pending trade
names, trade marks, copyrights, patents and other intellectual property and all
marketing literature and other materials owned, licensed or otherwise utilized
by the Company, including, without limitation, all such rights listed on
Schedule 1.1(e) attached hereto;
(f) All existing books and records of the Company through the
Closing, including, without limitation, all of the Company's customer lists;
and
(g) The licenses, permits and certifications listed on Schedule
1.1(g) attached hereto.
1.2 Excluded Assets and Liabilities. Except for the Company Assets
specifically described herein, no other assets owned by Seller or utilized by
the Company shall be conveyed pursuant to this Agreement. Except for obligations
of Seller under the Assigned Contracts and the ad valorem taxes, if any,
relating to the Company Assets for 1998 (as described in Section 7.3 below, and
referred to herein as the "Seller's Tax Share"), Purchaser shall not assume or
be subject to, or in any way be liable or responsible for, and Seller shall
indemnify and hold Purchaser harmless from, any liabilities or obligations of
Seller of any kind or nature, known or unknown, relating to the Company Assets
or Seller.
2. Purchase Price. The purchase price for the Company Assets (the "Purchase
Price") shall be $150,000 less (a) the aggregate amount of Seller's liabilities
to be assumed by Purchaser under the Assigned Contracts, and (b) Seller's Tax
Share. The Purchase Price shall be payable by Purchaser's execution and delivery
to Seller of a promissory note in the form attached hereto as Exhibit "A" (the
"Note"). The Note shall be due and payable on or before or January 1, 1999, and,
at Seller's option, shall be payable either (i) in cash, or (ii) by the issuance
and delivery by Purchaser to Seller of the number of shares of Purchaser's
common stock determined by dividing the Purchase Price by the closing price of
Purchaser's common stock on the trading day immediately preceding the Closing
Date (the "AVRI Stock"). The AVRI Stock will be unregistered and restricted from
being sold for the period established by federal law. Seller will notify
Purchaser at least ten (10) days prior to the due date of the Note with respect
to whether Seller desires the Note to be paid in cash or the AVRI Stock.
Seller's failure to notify Purchaser of such election by such deadline shall be
deemed an election by Seller to be paid in AVRI Stock.
3. Representations and Warranties of Seller. Seller represents and warrants
to and agrees with Purchaser that:
3.1 Seller's Authority Relative to this Agreement. This Agreement has
been duly executed and delivered by Seller, and no further action is necessary
with respect to Seller to make this Agreement a valid and binding obligation of
Seller, enforceable in accordance with its terms. The conveyance evidenced by
this Agreement does not include all or substantially all of the assets of
Seller, but merely substantially all of the assets of Seller utilized by the
Company. Neither the execution, delivery nor performance of this Agreement by
Seller will:
2
<PAGE>
(a) Violate any order, writ, injunction or decree of any court,
administrative agency or governmental body;
(b) Require any consent, authorization or approval of any person,
entity or governmental authority; or
(c) Result in the creation or imposition of any lien, charge or
encumbrance upon the property of Seller.
3.2 Seller's Authority to Conduct Business. Seller has all requisite
power and authority to carry on its business as now conducted and to enter into
and perform this Agreement.
3.3 Rights to Purchase the Company Assets. Other than Purchaser pursuant
to this Agreement, no person, firm or entity has any right to purchase any of
the Company Assets or any part thereof.
3.4 Title to Company Assets. Seller has good and marketable title to the
Company Assets, is in possession of all of the Company Assets, and will convey
the Company Assets to Purchaser, free and clear of all liens, claims, security
interests and encumbrances. Other than ad valorem taxes for 1998 which are not
yet past due, there are no sales or ad valorem taxes due and unpaid by Seller.
3.5 Litigation. There are no private or governmental actions, suits,
proceedings or investigations, pending, or to Seller's knowledge threatened,
against, affecting or on behalf of Seller, the Company or the Company Assets.
3.6 Miscellaneous. All agreements, reports and other documents furnished
by Seller to Purchaser are true, accurate and complete copies of the agreements,
reports and other documents they purport to be.
3.7 Securities Representations and Warranties. In the event that Seller
elects to accept the AVRI Stock in payment of the Note, Seller will
automatically be deemed to have made, and at Purchaser's request Seller will
confirm in writing, each of the following representations and warranties to, and
agreements with, Purchaser regarding the AVRI Stock:
(a) The shares of AVRI Stock are being acquired for Seller's own
account, for investment purposes only, and not for the account of any other
person, and not with a view to distribution, assignment, or resale to others or
to fractionalization in whole or in part and that the transfer of the shares of
AVRI Stock is intended to be exempt from registration under the Securities Act
of 1933 (the "Act") by virtue of the so-called 4(2) exemption under the Act.
Seller understands that the shares of AVRI Stock are and will be "restricted
securities," as said term is defined in Rule 144 of the Rules and Regulations
promulgated under the Act, that the certificates representing the shares of AVRI
Stock will bear a legend to the effect that the transfer of the securities
represented thereby is subject to the provisions hereof; and that stop transfer
instructions will be placed with the transfer agent for the shares of AVRI
Stock. In furtherance
3
<PAGE>
thereof, Seller represents, warrants, and agrees as follows: (i) no other person
has or will have a direct or indirect beneficial interest in such shares of AVRI
Stock, and Seller will not sell, hypothecate, or otherwise transfer any of the
shares of AVRI Stock except in accordance with the Act and applicable state
securities laws or unless, in the opinion of counsel for Purchaser, an exemption
from the registration requirements of the Act and such laws is available; and
(ii) Purchaser is under no obligation to register the shares of AVRI Stock on
behalf of Seller or to assist Seller in complying with any exemption from
registration.
(b) Seller has been furnished with and has carefully read each of
(i) selected portions of the Private Placement Memorandum dated July 29, 1997;
(ii) Purchaser's Annual Report on Form 10-K for fiscal year ended December 31,
1997; (iii) Purchaser's Quarterly Report on Form 10-Q for fiscal quarter ended
June 30, 1997; and (iv) Purchaser's Quarterly Report on Form 10-Q for fiscal
quarter ended March 31, 1997. In evaluating the suitability of an investment in
Purchaser, Seller has not relied upon any representations or other information
(whether oral or written) from Purchaser or any of Purchaser's agents, and no
oral or written representations have been made or oral or written information
furnished to Seller or Seller's advisors, if any, in connection with the
acceptance of the shares of AVRI Stock in payment of the Note which were in any
way inconsistent with the information set forth in the documents listed in the
first sentence of this Section 3.7(b). In the event that Seller elects to accept
the AVRI Stock in payment of the Note, then Purchaser will provide to Seller
copies of all Quarterly Reports on 10-Q for each fiscal quarter ended after the
Effective Date, together with such additional information as Seller may
reasonably request from Purchaser that is readily available to Purchaser.
(c) Purchaser has made available to Seller all documents and
information that Seller has requested relating to an investment in Purchaser.
(d) Seller recognizes that an investment in Purchaser involves
substantial risks, and Seller has taken full cognizance of and understand all of
the risk factors related to the acceptance of the AVRI Stock in payment of the
Note.
(e) Seller has carefully considered and has, to the extent Seller
believes such discussion necessary, discussed with Seller's professional legal,
tax and financial advisers the suitability of an investment in Purchaser for
Seller's particular tax and financial situation and Seller has determined that
the AVRI Stock is a suitable investment for Seller.
(f) All information which Seller has provided to Purchaser
concerning Seller and the financial position of Seller is correct and complete
as the date set forth below.
4. Representations and Warranties of Purchaser. Purchaser represents and
warrants to and agrees with Seller that:
4.1 Purchaser's Authority Relative to this Agreement. This Agreement has
been duly executed and delivered by Purchaser, and no further corporate action
is necessary with respect to Purchaser to make this Agreement a valid and
binding obligation of Purchaser,
4
<PAGE>
enforceable in accordance with its terms. Neither the execution, delivery nor
performance of this Agreement by Purchaser will result in a violation or breach
of any term or provision under the Articles of Incorporation or Bylaws or any
resolution of the Board of Directors or shareholders of Purchaser or constitute
a default or breach of, or accelerate the performance required under, or require
the consent of any person or entity under any indenture, mortgage, deed of trust
or other contract or agreement to which Purchaser is a party or by which it or
any of its assets are bound, or violate any order, writ, injunction or decree of
any court, administrative agency or governmental body.
4.2 Organization and Existence. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power to carry on its business as now
conducted and to enter into and perform this Agreement.
5. Nature and Survival of Representations and Warranties.
5.1 Nature of Statements. All statements contained in any Schedule
hereto or in any supplemental Schedule or in any certificate or other document
executed in connection with these transactions delivered by or on behalf of
Seller or Purchaser pursuant to this Agreement, or in connection with the
transactions contemplated hereby, shall be deemed representations and warranties
by Seller or Purchaser, as the case may be.
5.2 Survival of Representations and Warranties. Regardless of any
investigation at any time made by or on behalf of any party hereto or of any
information any party may have in respect thereof, all representations and
warranties made hereunder or pursuant hereto shall survive the Closing.
6. Covenants of Seller. Seller covenants with Purchaser that:
6.1 Employees. Attached hereto as Schedule 6.1 is a list of all
employees of the Seller, other than Seller, and all independent contractors
utilized by the Seller in connection with the Company's business. Seller will
pay, on or before the Closing Date, all outstanding liability for the payment of
(i) wages, vacation pay (whether accrued or otherwise), salaries, bonuses or any
other compensation with respect to all persons employed by Seller prior to the
Closing Date, and (ii) fees and commissions with respect to independent
contractors engaged by Seller prior to the Closing Date. Purchaser shall assume
no liability, obligation or responsibility under any bonus, life insurance,
health insurance, or other plan whereby Seller provides benefits for any of its
employees, independent contractors or their respective beneficiaries, and
Purchaser shall be permitted, but not obligated, to (a) hire any of the
employees of Seller, or (b) engage any independent contractors of Seller.
6.2 No Tax Due Certificate. Promptly after the Closing, Seller will
order a certificate from the Comptroller of the State of Texas as to no sales
taxes being due and unpaid by Seller, and Seller will deliver such certificate
to Purchaser as soon thereafter after as practicable.
5
<PAGE>
7. The Closing. Seller and Purchaser hereby agree to consummate the closing
of the sale and purchase of the Company Assets (the "Closing") at the offices of
Purchaser's legal counsel, Boyar, Simon & Miller, located at 4265 San Felipe,
Suite 1200, Houston, Texas 77027 (or such other place as Purchaser and Seller so
determine) immediately following execution of this Agreement (the "Closing
Date"). At the option of Purchaser and Seller, the documents relating to the
Closing may be exchanged by overnight courier without the necessity of all
parties being present at the Closing. At the Closing, the following shall
occur:
7.1 Bill of Sale, Assignment and Assumption Agreement. Seller and
Purchaser shall execute a Bill of Sale, Assignment and Assumption Agreement (the
"Bill of Sale"), in the form attached hereto as Exhibit "B", (a) conveying good
and marketable title to the Company Assets to Purchaser free and clear of all
liens, claims, encumbrances and interests, and (b) effecting the assumption by
Purchaser of the Assigned Contracts.
7.2 Purchase Price. Purchaser shall pay the Note in the amount of the
Purchase Price pursuant to the terms of Section 2 above.
7.3 Apportionment. All ad valorem taxes, if any, shall be prorated
through the date of Closing, with such prorations based on tax rates and
assessments for the calendar year during which the Closing occurs unless such
rates and assessments are unavailable, in which event such prorations shall be
made based on the rates and assessments for the prior year. At the Closing,
Purchaser agrees to assume Seller's pro rated portion of the ad valorem taxes
and, Purchaser shall be entitled to offset such portion from the Purchase Price.
Notwithstanding that the parties intend to make a final settlement with respect
to certain items as of the Closing Date (i) all payments for utility services,
contract services, ad valorem and personal property taxes relating to the
Company Assets (which are not prorated as of the Closing Date) shall be prorated
between Seller and Purchaser as soon as reasonably practicable as of the Closing
Date, and (ii) settlement of such items shall occur within five (5) business
days after receipt of a request therefor accompanied by evidence that such
proration and payment is required hereunder.
7.4 Employment Agreement. Seller and Purchaser shall execute an
Employment Agreement in the form attached hereto as Exhibit "C" (the "Employment
Agreement"), which Employment Agreement shall provide, in addition to the other
terms set forth therein, for (i) an initial term of three (3) years, (ii) a base
salary of $5,000 per month, and (iii) Seller's agreement not to compete with
Purchaser following the termination of such Employment Agreement in accordance
with the terms of such Employment Agreement.
7.5 Option Agreement. Seller and Purchase shall execute an Nonqualified
Stock Option Agreement in the form attached hereto as Exhibit "D" (the "Option
Agreement'), which Option Agreement shall provide, in addition to the other
terms set forth therein, for (i) the grant to Seller options to acquire 50,000
shares of Purchaser's common stock (the "Stock Options") at a price per share
equal to the closing price of Purchaser's common stock on the trading day
immediately preceding the Closing Date, (ii) for so long as Seller is an
employee of Purchaser, one third (1/3) of such Stock Options will vest, if ever,
each year on the anniversary of the Closing Date, in other words, 16,667 Stock
Options will vest on the first anniversary of the Closing Date,
6
<PAGE>
16,667 Stock Options will vest on the second anniversary of the Closing Date,
and 16,666 Stock Options will vest on the third anniversary of the Closing Date,
and (iii) the Stock Options will be unregistered and restricted from being sold
for the period established by federal law.
8. Further Acts. Seller covenants and agrees that, from time to time on and
after the Closing Date, at the request of the Purchaser, Seller will execute and
deliver all consummatory bills of sale, assignments and other documents that may
reasonably be required to confirm and assure Purchaser of its title and interest
in the entirety of the Company Assets.
9. Possession. At the Closing, Seller shall be obligated to deliver to
Purchaser at the Leased Premises all tangible items constituting the Company
Assets.
10. Expenses and Commissions. Each of Seller and Purchaser will pay their
own expenses incident to the transaction contemplated by this Agreement.
Purchaser and Seller each represent to the other that there are no agents or
brokers entitled to a commission in connection with this purchase and sale of
the Company Assets. Seller hereby agrees to indemnify and hold harmless
Purchaser against any and all claims of any agent, broker, finder or similar
party claiming through Seller, and Purchaser hereby agrees to indemnify and hold
harmless Seller against any and all claims of any agent, broker, finder, or
other similar party claiming through Purchaser.
11. Miscellaneous.
11.1 Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been given if
personally delivered or mailed, first class, registered or certified mail,
postage prepaid to the following:
If to Seller, to: Cathy Clemons
13601 Preston Road, Suite 201W
Dallas, Texas 75240
Telecopy No. (214) ___-____
With a copy to: Robert Westerberg, Esq.
_____________________
Dallas, Texas 75_____
Telecopy No. (214) 745-1919
If to Purchaser, to: Applied Voice Recognition, Inc.
4615 Post Oak Place, Suite 111
Houston, Texas 77027
Attention: President
Telecopy No. (713) 621-5870
With a copy to: Brian D. Baird, Esq.
Boyar, Simon & Miller
4265 San Felipe, Suite 1200
Houston, Texas 77027
Telecopy No. (713) 552-1758
7
<PAGE>
or to such other address as shall be given in writing by any party to the
others. If sent by U.S. mail in accordance with this Section 11.1, such notices
shall be deemed given and received on the earlier to occur of (a) actual receipt
at the above specified address of the mailed addressee, or (b) the third (3rd)
business day after deposit with the U.S. Postal Service in the manner herein
provided. Notices may also be transmitted by facsimile, provided that such
facsimile transmission is confirmed within one business day thereafter by U.S.
mail in accordance with this Section 11.1. Notices delivered by any other means
shall be deemed given and received upon actual receipt of the above specified
address of the addressee.
11.2 Assignment. Except for assignment by Purchaser to an affiliate
company, this Agreement may not be assigned by either party without the prior
written consent of the other. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, personal legal
representatives, successors and permitted assigns.
11.3 Entire Agreement. This Agreement (including the Exhibits and
Schedules attached hereto) is the entire agreement among the parties hereto
regarding the subject matter dealt with herein and supersedes all prior
agreements and understandings whether written or oral.
11.4 Schedules and Exhibits. All schedules and exhibits attached to and
referenced in this Agreement are incorporated in this Agreement and made a part
hereof.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
8
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties as
of the Effective Date.
SELLER:
/s/ Cathy Clemons
___________________________________________
Cathy Clemons
PURCHASER:
APPLIED VOICE RECOGNITION, INC.,
a Delaware corporation
By: /s/ Timothy J. Connolly
________________________________________
(Signature)
Name: Timothy J. Connolly
(Printed Name)
Title: Chief Executive Officer
Schedules:
1.1(b) Company Personal Property
1.1(c) Assigned Contracts
1.1(d) List of Computer Hardware and Software
1.1(e) List of Intellectual Property
1.1(g) List of Licenses and Permits
6.1 List of Employees and Contract Workers
Exhibits:
"A" Promissory Note
"B" Bill of Sale, Assignment and Assumption Agreement
"C" Employment Agreement
"D" Nonqualified Option Agreement
9
<PAGE>
SCHEDULE 1.1(b)
To
Asset Purchase Agreement
Company Personal Property
-------------------------
8 Computer desks
1 Executive desk
1 Round conference table with five chairs
8 Secretarial chairs
1 420 Back-UPS Pro surge protector
1 700 Smart-UPS surge protectors
4 Sanyo dictaphones
7 VDI dictaphones
2 Filing cabinets
1 Refrigerator
1 Panasonic KX-F1150 plain paper fax machine
<PAGE>
SCHEDULE 1.1(c)
To
Asset Purchase Agreement
Assigned Contracts
1. LJP Leasing Business Equipment Master Lease dated October 3, 1997, by and
between LJP Leasing, as lessor, and Transcription Resources, Inc., as
lessee, with respect to (i) one Voicetech 416 with 8 ports, 93 redundant
hours, S/N 0416-0873, and (ii) ten Transcribe Stations with Foot Controls
and Headsets, S/N 27650, 27651, 27652, 27653, 27654, 27655, 27656, 27657,
27658 and 27659.
2. LJP Leasing Business Equipment Master Lease dated January 20, 1997, by and
between LJP Leasing, as lessor, and Transcription Resources, as lessee, with
respect to (i) one Voicetech 408 with 8 ports, 25 hours, 1 port outdial, S/N
4080-176, and (ii) five Transcribe Stations, S/N 21193, 21194, 21195, 21196
and 21197.
3. Office Space Lease Agreement dated as of May 6, 1997, by and between
Carillon/Alpha Limited, as Landlord, and Transcription Resources, as Tenant,
with respect to Suite 201W located at 13601 Preston Road, Dallas, Texas
75240.
4. Agreements for Transcription Services dated as of the date indicated by and
between Transcription Resources and each of the following contract parties:
Date Contract Party
a. September 26, 1997 Urology Specialty Care
b. September 11, 1997 Cardiology of Georgia, P.C.
c. January 29, 1998 Allen, Hildeith and Zenicek
d. September 18, 1997 Joseph Samaha, M.D.
e. July 16, 1997 David M. Feinstein, M.D.
f. November 3, 1997 Three Rivers Urology
g. February 19, 1998 John W. Secor, M.D.
h. April 11, 1997 Georgia Urology
i. March 3, 1997 David Witheiler, M.D.
j. November 17, 1997 Northwest Oncology/Hematology
5. All right, title and interest of Transcription Resources in and to any oral
or written agreements with the parties listed on the list attached hereto
under the column titled "Client."
<PAGE>
SCHEDULE 1.1(d)
To
Asset Purchase Agreement
List of Computer Hardware and Software
--------------------------------------
4 NEC 200 Pentium Computers
1 Compaq 486 Pentium Computer
1 Packard Bell 486 Computer
2 HP Laser Jet 6P Printers
All software licensed and loaded on computers
<PAGE>
SCHEDULE 1.1(e)
To
Asset Purchase Agreement
List of Intellectual Property
-----------------------------
1. Name: "Transcription Resources"
<PAGE>
SCHEDULE 1.1(g)
To
Asset Purchase Agreement
List of Licenses and Permits
----------------------------
1. All software licenses utilized in the operation of the business of
Transcription Resources.
<PAGE>
SCHEDULE 6.1
To
Asset Purchase Agreement
List of Employees and Independent Contractors
---------------------------------------------
(See attached list)
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF OWNERSHIP AND MERGER
OF
APPLIED VOICE RECOGNITION, INC.
(a Utah corporation)
WITH AND INTO
APPLIED VOICE RECOGNITION, INC.
(a Delaware corporation)
Pursuant to the provisions of Section 253 of the General Corporation Law of
the State of Delaware, as amended (the "DGCL"), the undersigned domestic
corporation adopts the following Certificate of Ownership and Merger for the
purpose of merging into itself Applied Voice Recognition, Inc., a Utah
corporation:
1. The name and state of incorporation of each constituent corporation is
(i) Applied Voice Recognition, Inc., a Utah corporation ("AVRI-UT"), to be
merged with and into (ii) Applied Voice Recognition, Inc., a Delaware
corporation ("AVRI-DE" and collectively with AVRI-UT, the "Constituent
Corporations"), which shall survive the merger (the "Merger").
2. The number of outstanding shares of each class of AVRI-DE is 9,073,000
shares of common stock, par value $.001 per share ("AVRI-DE Common Stock"), all
of which are owned by the AVRI-UT.
3. The following resolution was adopted by the Board of Directors of the
Merged Corporation on November 7, 1997:
RESOLVED, that Applied Voice Recognition, Inc., a Utah corporation
("AVRI-UT"), be merged with and into Applied Voice Recognition, Inc., a
Delaware corporation and wholly-owned subsidiary of AVRI-UT ("AVRI-DE"),
with AVRI-DE being the corporation which survives the Merger whereupon at
the Effective Time of the Merger automatically and without any action by
the holders thereof , each share of the common stock, par value $.001 per
share, of AVRI-UT ("AVRI-UT Common Stock") and each share of the Series A
Preferred Stock, par value $.10 per share (the "AVRI-UT Series A Preferred
Stock"), issued and outstanding immediately preceding the Effective Time of
the Merger shall, without any action on the part of the holders thereof, be
converted into an identical number of shares of the common stock, par value
$.001 per share, of AVRI-DE ("AVRI-DE Common Stock") or the Series A
Preferred, par value $.10 per share (the "AVRI-DE Series A Preferred
Stock").
4. The Merger was adopted, approved, certified, executed and acknowledged
by AVRI-UT, the parent corporation, in accordance with the laws of the State of
Utah.
<PAGE>
IN WITNESS WHEREOF, AVRI-UT has caused this Certificate of Ownership and
Merger to be executed by its Chief Executive Officer, Chief Financial Officer
and Chairman of the Board on this 26th day of January, 1998.
APPLIED VOICE RECOGNITION, INC.
(a Utah corporation)
- -------------------------------------------------------------
By: /s/ Timothy J. Connolly Attest: /s/ William T. Kennedy
------------------------- --------------------------
Timothy J. Connolly, William T. Kennedy,
Chief Executive Officer, Assistant Secretary
Chief Financial Officer and
Chairman of the Board
- -------------------------------------------------------------
<PAGE>
EXHIBIT 3.4
CERTIFICATE OF DESIGNATION, NUMBER, POWERS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL,
AND OTHER SPECIAL RIGHTS AND THE QUALIFICATIONS,
LIMITATIONS, RESTRICTIONS, AND OTHER DISTINGUISHING
CHARACTERISTICS OF SERIES B PREFERRED STOCK
OF
APPLIED VOICE RECOGNITION, INC.
APPLIED VOICE RECOGNITION, INC., (the "Company") hereby certifies that:
1. The Company is validly existing and incorporated under the laws of
the State of Delaware.
2. The Company's Certificate of Incorporation, as amended, authorizes
the issuance of 2,000,000 shares of Preferred Stock, par value $.10 per share,
and expressly vests in the Board of Directors the authority provided therein to
issue any or all of such shares in one or more series, and by resolution or
resolutions the designation, number, full or limited voting powers, preferences
and relative, participating, optional and other special rights, and the
qualifications, limitations, restrictions, and other distinguishing
characteristics of each series to be issued. Currently, there are no designated
shares of Series B Convertible Preferred Stock. The rights of the holders of
the Series B Convertible Preferred Stock shall rank senior to all issuance and
rights of the holders of all other series of Preferred Stock (other than the
Company's Series A Preferred Stock as to which the Series B Preferred Stock is
junior) hereafter issued by the Company, with respect to all preferences upon
liquidation.
3. Designation Of The Series. The Board of Directors of the Company,
pursuant to authority expressly vested in it as aforesaid, has adopted the
following, creating a Series B issue of Preferred Stock;
There shall be a series of convertible Preferred Stock designated as
"Series B Preferred Stock." The shares of such series shall be referred to
herein as the "Series B Shares." Upon initial issuance by the Company, the
price per share of the Series B Shares shall be $1,000 (the "Purchase Price").
The par value per share is $.10. The authorized number of such Series B Shares
is 3,000.
A. Voting Rights. Except as otherwise required by law, the holders
of the Series B Shares shall not be entitled to vote separately, as a series or
otherwise, on any matter submitted to a vote of the shareholders of the Company.
Notwithstanding the foregoing, without the prior written consent of the holders
of 66 2/3% ( sixty-six and two-thirds percent) of the Series B Shares;
(i) the Company shall not amend, alter, or repeal (whether by
amendment, merger, or otherwise) any of the provisions related to the Series B
1
<PAGE>
Shares of its Certificate of Incorporation, as amended, any resolutions of the
board of directors or any instrument establishing and designating the Series B
Shares in determining the relative rights and preferences thereof so as to
affect any materially adverse change in the rights, privileges, powers, or
preferences of the holders of Series B Shares; or
(ii) the Company shall not create or designate any additional
preferred stock senior in right as to dividends, voting rights, redemptions or
liquidation to the Series B Shares.
B. Dividends. The holders of the Series B Shares shall be entitled to
receive an 5% cumulative dividend payable on the date of each conversion the
"Dividend Payment Date"). The dividend shall be payable in cash or in common
stock par value $.001 per share of the Company (the "Common Stock"), at the
Company's option. Such dividends shall be payable in preference to dividends on
any Common Stock or stock of any class ranking, as to dividend rights, junior to
the Series B Shares, and shall be junior as to payment of dividends to the
Company's Series A Preferred Stock. If paid in Common Stock, the number of
shares of the Company's Common Stock to be received shall be determined by
dividing the dollar amount of the dividend by the then applicable Market Price,
as of the Dividend Payment Date. "Market Price" shall mean 78% the 5 day average
daily closing bid price, as reported by Bloomberg, LP for the five consecutive
trading days immediately preceding the Dividend Payment Date. If the dividend is
to be paid in cash, the Company shall make such payment within 10 business days
of the Dividend Payment Date. If the dividend is to be paid in Common Stock,
said Common Stock shall be delivered to the holder, or per holder's
instructions, within 10 business days of the Dividend Payment Date. Dividends
shall be fully cumulative and shall accrue (whether or not declared and whether
or not there shall be funds legally available for the payment of dividends),
without interest, and shall be payable on the Dividend Payment Date unless such
payment would be in violation of the Delaware General Corporation Law. No
interest shall accrue on any unpaid dividends on the Series B Preferred Stock.
C. Conversion Rights.
(i) Series B Shares. Upon the Company's receipt of a facsimile or
original of holder's signed Notice of Conversion, the Company shall instruct
its transfer agent to issue one or more certificates representing that number of
shares of Common Stock into which the Series B Shares are convertible in
accordance with the provisions regarding conversion set forth below. The
Company shall act as Registrar and shall maintain an appropriate ledger
containing the necessary information with respect to the Series B Shares.
(ii) Conversion Date. Such conversion shall be effectuated by
surrendering to the Company, the Series B Shares to be converted together with a
facsimile or
2
<PAGE>
original of the signed Notice of Conversion which evidences holder's intention
to convert those Series B Shares indicated. The date on which the Notice of
Conversion is effective ("Conversion Date") shall be deemed to be the date on
which the holder has delivered to the Company a facsimile or original of the
signed Notice of Conversion, as long as the original Series B Shares to be
converted are received by the Company or its designated attorney within 10
business days thereafter. As long as the Series B Shares to be converted are
received by the Company within 10 business days after it receives a facsimile or
original of the signed Notice of Conversion, the Company shall deliver to the
holder, or per the holder's instructions, the shares of Common Stock, with
restrictive legends as set forth in the Subscription Agreement, within 5
business days of receipt of the certificate(s) representing such Series B Shares
to be converted.
(iii) Common Stock to be Issued With Restrictive Legend. Upon the
conversion of any Series B Shares and upon receipt by the Company AND its
attorney of a facsimile or original of holder's signed Notice of Conversion and
the certificate or certificates representing such Series B Shares, the Company
shall instruct Company's transfer agent to issue stock certificates with the
appropriate restrictive legends in the name of holder (or its nominee) and in
such denominations to be specified at conversion representing the number of
shares of Common Stock issuable upon such conversion, as applicable. Company
warrants that no instructions, other than these instructions, have been given or
will be given to the transfer agent and that the Common Stock shall otherwise be
freely transferable on the books and records of Company.
(iv) Conversion Rate. Holder is entitled to convert, anytime after
the earlier of June 24, 1998, or the date a registration statement covering the
Common Stock to be issued upon the conversion of the Series B Shares is deemed
effective, the entire Purchase Price of the Series B Shares, plus accrued and
unpaid dividends, at 78% of the 5 day average closing bid price, as reported by
Bloomberg, LP for the 5 consecutive trading days immediately preceding the
applicable Conversion Date (the "Conversion Price"), however, until June 24,
1998, holder shall not sell any of the Company's Common Stock at a price less
than $2.25. No fractional shares or scrip representing fractions of shares will
be issued on conversion, but the number of shares issuable shall be rounded up
or down, as the case may be, to the nearest whole share.
The Series B Shares are subject to a mandatory conversion on March 11,
2000 at which time all Series B Shares outstanding will be automatically
converted, upon the terms set forth in this section ("Mandatory Conversion
Date").
(v) Nothing contained in this Certificate of Designation shall be
deemed to establish or require the payment of interest to the holder at a rate
in excess of the maximum rate permitted by governing law. In the event that the
rate of interest required to be paid exceeds the maximum rate permitted by
governing law, the rate of interest required to be paid thereunder shall be
automatically reduced to the maximum
3
<PAGE>
rate permitted under the governing law and such excess shall be returned with
reasonable promptness by the holder to the Company.
(vi) It shall be the Company's responsibility to take all necessary
actions and to bear all such costs to issue the certificate of Common Stock as
provided herein, including the responsibility and cost for delivery of an
opinion letter to the transfer agent, if so required. The person in whose name
the certificate of Common Stock is to be registered shall be treated as a
shareholder of record on and after the Conversion Date. Upon surrender of any
Series B Shares that are to be converted in part, the Company shall issue to the
holder a new certificate representing the Series B Shares equal to the
unconverted amount, if so requested by holder.
(vii) In the event the Common Stock is not delivered per the written
instructions of the holder, within five (5) business days after the receipt of
the certificate(s) representing the Series B Shares to be converted, then in
such event the Company shall pay to holder one percent (1%) in cash of the
Purchase Price of the Series B Shares being converted per each day after the
fifth (5/th/) business day following the receipt of the certificate(s)
representing the Series B Shares to be converted that the Common Stock is not
delivered.
The Company acknowledges that its failure to deliver the Common Stock
within five (5) business days after the receipt of the certificate(s)
representing the Series B Shares to be converted will cause the holder to suffer
damages in an amount that will be difficult to ascertain. Accordingly, the
parties agree that it is appropriate to include this provision for liquidated
damages. The parties acknowledge and agree that the liquidated damages
provision set forth in this section represents the parties' good faith effort to
qualify such damages and, as such, agree that the form and amount of such
liquidated damages are reasonable and will not constitute a penalty. The
payment of liquidated damages shall not relieve the Company from its obligations
to deliver the Common Stock pursuant to the terms of this Certificate of
Designation.
To the extent that the failure of the Company to issue the Common
Stock pursuant to this Section 3C is due to the unavailability of authorized but
unissued shares of Common Stock, the provisions of this Section 3C(vii) shall
not apply but instead the provisions of Section 3C(viii) shall apply.
The Company shall make any payments incurred under this Section
3C(vii) in immediately available funds within ten (10) business days from the
date of issuance of the applicable Common Stock. Nothing herein shall limit a
holder's right to pursue actual damages or cancel the conversion for the
Company's failure to issue and deliver Common Stock to the holder within ten
(10) business days after the receipt of the certificate(s) representing the
Series B Shares to be converted.
(viii) The Company shall at all times reserve and have available all
Common Stock necessary to meet conversion of the Series B Shares by all holders
4
<PAGE>
of the entire amount of Series B Shares (issued along with the purchase of the
Series B Shares) then outstanding. If, at any time holder submits a Notice of
Conversion and the Company does not have sufficient authorized but unissued
shares of Common Stock available to effect, in full, a conversion of the Series
B Shares (a "Conversion Default", the date of such default being referred to
herein as the "Conversion Default Date"), the Company shall issue to the holder
all of the shares of Common Stock which are available, and the Notice of
Conversion as to any Series B Shares requested to be converted but not converted
(the "Unconverted Series B Shares"), upon holder's sole option, may be deemed
null and void. The Company shall provide notice of such Conversion Default
("Notice of Conversion Default") to all existing holders of outstanding Series B
Shares, by facsimile, within five (5) business days of such default (with the
original delivered by overnight or two day courier), and the holder shall give
notice to the Company by facsimile within ten (10) business days of receipt of
the original Notice of Conversion Default (with the original delivered by
overnight or two day courier) of its election to either nullify or confirm the
Notice of Conversion.
The Company agrees to pay to all holders of outstanding Series B
Shares payments for a Conversion Default ("Conversion Default Payments") in the
amount of (N/365) x (.24) x the initial issuance price of the outstanding and/or
tendered but not converted Series B Shares held by each holder where N = the
number of days from the Conversion Default Date to the date (the "Authorization
Date") that the Company authorizes a sufficient number of shares of Common Stock
to effect conversion of all remaining Series B Shares. The Company shall send
notice ("Authorization Notice") to each holder of outstanding Series B Shares
that additional shares of Common Stock have been authorized, the Authorization
Date and the amount of holder's accrued Conversion Default Payments. The
accrued Conversion Default Payments shall be paid in cash or shall be
convertible into Common Stock at the Conversion Rate, at the holder's option,
payable as follows: (i) in the event holder elects to take such payment in
cash, cash payments shall be made to such holder of outstanding Series B Shares
by the fifth (5/th/) day of the following calendar month, or (ii) in the event
holder elects to take such payment in stock, the holder may convert such payment
amount into Common Stock at the conversion rate set forth in section 3C(iv) at
anytime after the fifth (5/th/) day of the calendar month following the month in
which the Authorization Notice was received, until the Mandatory Conversion
Date.
The Company acknowledges that its failure to maintain a sufficient
number of authorized but unissued shares of Common Stock to effect in full a
conversion of the Series B Shares will cause the holder to suffer damages in an
amount that will be difficult to ascertain. Accordingly, the parties agree that
it is appropriate to include in this Certificate of Designation a provision for
liquidated damages. The parties acknowledge and agree that the liquidated
damages provision set forth in this section represents the parties' good faith
effort to quantify such damages and,
5
<PAGE>
as such, agree that the form and amount of such liquidated damages are
reasonable and will not constitute a penalty. The payment of liquidated damages
shall not relieve the Company from its obligations to deliver the Common Stock
pursuant to the terms of this Certificate of Designation.
Nothing herein shall limit the holder's right to pursue actual damages
for the Company's failure to maintain a sufficient number of authorized shares
of Common Stock.
(ix) The Company shall furnish to holder such number of prospectuses
and other documents incidental to the registration of the Series B Shares of
Common Stock underlying the Series B Shares, including any amendment of or
supplements thereto.
(x) Certain Adjustments. In the event of any change in one or more
classes of capital stock of the Company by reason of any stock dividend, stock
split-up, recapitalization, reclassification, or combination, subdivision or
exchange of shares or the like, or in the event of the merger or consolidation
of the Company or the sale or transfer by the Company of all or substantially
all of its assets, then all liquidation preference, conversion and other rights
and privileges appurtenant to the Series B Shares shall be promptly and
appropriately adjusted by the Board of Directors of the Company so as to fully
protect and preserve the same (such preservation and protection to be to the
same extent and effect as if the subject event had not occurred, or the
applicable right or privilege had been exercised immediately prior to the
occurrence of the subject event, or otherwise as the case may be), it being the
intention that, following any such adjustment, the holders of the Series B
Shares shall be in the same relative position with respect to their rights and
privileges as they possessed immediately prior to the event that precipitated
the adjustment.
(xi) Costs. The Company shall pay all documentary, stamp, transfer
or other transactional taxes attributable to the issuance or delivery of shares
of Common Stock upon conversion of any Series B Shares; provided that the
Company shall not be required to pay any taxes which may be payable in respect
of any transfer involved in the issuance or delivery of any certificate for such
shares in a name other than that of the holder of the Series B Shares in respect
of which such shares are being issued.
(xii) Concerning the Securities. The issuance, sale and delivery of
the Series B Shares have been duly authorized by all required corporate action
on the part of Company, and when issued, sold and delivered in accordance with
the terms hereof and thereof for the consideration expressed herein and therein,
will be duly and validly issued and enforceable in accordance with their terms,
subject to the laws of bankruptcy and creditors' rights generally. 2,500,000
shares of Common Stock issuable upon conversion of the Series B Shares has been
duly
6
<PAGE>
and validly reserved for issuance and, upon issuance shall be duly and validly
issued, fully paid, and non-assessable (the "Reserved Shares").
Prior to conversion of all the Series B Shares, if at anytime the
conversion of all the Series B Shares outstanding results in an insufficient
number of Reserved Shares being available to cover all the conversions and
exercises, then in such event, the Company will move to call and hold a
shareholder's meeting within forty-five (45) days of such event for the sole
purpose of authorizing additional Common Stock to facilitate the conversions.
In such an event the Company shall: (1) recommend its current or future
officers, directors and other control people to vote their shares in favor of
increasing the authorized number of shares of Common Stock and (2) recommend to
all shareholders to vote their shares in favor of increasing the authorized
number of shares of Common Stock. The Company represents and warrants that under
no circumstances will it deny or prevent holder's right to convert the Series B
Shares as permitted under the terms of this Certificate of Designation.
(xiii) Redemption. The Company shall have the right to redeem any or
all of the Series B Shares for 127.5% of the Purchase Price of the Series B
Shares being redeemed, plus accrued but unpaid dividends thereon.
Redemption by the Company shall be effected by the Company notifying
the holder by facsimile at the number listed in the Company's records as to the
Company's intention to exercise its right of redemption (the "Notice of
Redemption"). The Company shall state in the Notice of Redemption the amount of
Series B Shares it intends to redeem, the amount that it will pay to effectuate
such redemption, the name and address of the escrow agent for the redemption
(the "Escrow Agent") and the date by which the holder must deliver the original
Series B Shares to be redeemed to such Escrow Agent. The Company shall give the
holder at least ten (10) business days' advance notice of the above information.
On or before the date by which the holder is to deliver the original certificate
representing the Series B Shares to the Escrow Agent, the Company shall wire to
the Escrow Agent that amount necessary to effect the redemption. Once the
Escrow Agent is in receipt of the original certificates representing the Series
B Shares being redeemed and those funds necessary to effect the redemption, the
Escrow Agent shall wire those funds to the holder and deliver the original
certificates representing the Series B Shares via overnight courier to the
Company. With respect to that portion of the Series B Shares being redeemed,
provided sufficient funds are on deposit with the Escrow Agent on the redemption
date as herein described, then in such event, after the date of redemption,
dividends shall cease to accrue on those Series B Shares being redeemed and the
holder shall have no further rights as to those Series B Shares being redeemed
other than the right to receive payments on the redemption date.
(xiv) Other than the mandatory conversion provisions contained in this
Certificate of Designation which are not limited by the following, in no other
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event shall the holder be entitled to convert that amount of Series B Shares in
excess of that amount upon conversion of which the sum of (1) the number of
shares of Common Stock beneficially owned by the holder and its affiliates, and
(2) the number of shares of Common Stock issuable upon the conversion of the
Series B Shares with respect to which the determination of this proviso is being
made, would result in beneficial ownership by the holder and its affiliates of
more than 4.9% of the outstanding shares of Common Stock of the Company. For
purposes of this provision to the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13 (d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13 D-G thereunder,
except as otherwise provided in clause (1) of such provision.
E. Liquidation.
-----------
(i) Series B Preference. Upon any liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, the holders of
Series B Shares shall be entitled, before any distribution or payment is made
upon any shares of Common Stock or any preferred stock junior in rank to the
Series B Shares, to be paid an amount per share equal to the liquidation value
described in this Section 3.E(i) (the "Liquidation Value"); provided, that the
Series B Preferred Stock shall rank junior in liquidation to the Series A
Preferred Stock. If upon the occurrence of any such event the assets
distributable among the holders of the Series B Preferred Stock and any other
class or series of capital stock ranking on parity therewith, if any, as to
assets in liquidation (collectively, the "Parity Stock"), shall be insufficient
to permit the payment of the full preferential amounts for the Series B
Preferred Stock and Parity Stock, then the entire assets and funds of the
Company legally available for distribution to its shareholders shall be
distributed ratably per share to the holders of the Series B Preferred Stock and
Parity Stock in proportion to their full preferential amounts per share to which
they are respectively entitled. The per share Liquidation Value of the Series B
Shares on any date is equal to the sum of the following:
(A) $1,000, plus
(B) an amount equal to any accrued and unpaid dividends from the date
of issuance of the Series B Shares.
Neither the consolidation nor merger of the Company with or into any other
corporation or other entities, nor the sale, transfer or lease of all or
substantially all of the assets of the Company shall itself be deemed to be a
liquidation, dissolution or winding-up of the Company within the meaning of this
Section 3E. Notice of liquidation, dissolution, or winding-up of the Company
shall be mailed, by overnight courier, postage prepaid, not less than twenty
(20) days prior to the date on which such liquidation, dissolution, or winding-
up is expected to take place or become effective, to the holders of record of
the Series B Shares at their respective
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addresses as the same appear on the books of the Company or supplied by them in
writing to the Company for the purpose of such notice, but no defect in such
notice or in the mailing thereof shall affect the validity of the liquidation,
dissolution or winding-up.
(ii) General.
(A) All of the preferential amounts to be paid to the holders of the
Series B Shares pursuant to Section 3E(i) shall be paid or set apart for payment
before the payment or setting apart for payment of any amount for, or the
distribution of any assets of the Company to, the holders of the Common Stock
or any preferred stock junior in rank to the Series B Shares in connection with
such liquidation, dissolution or winding-up.
(B) After setting apart or paying in full the preferential amounts
aforesaid to the holders of record of the issued and outstanding Series B Shares
as set forth in Section 3E(i), the holders of record of Common Stock and any
preferred stock junior in rank to the Series B Shares shall be entitled to
participate in any distribution of any remaining assets of the Company, and the
holders of record of the Series B Shares shall not be entitled to participate in
such distribution.
F. Reacquired Shares. Any Series B Shares redeemed, purchased,
converted, or otherwise acquired by the Company in any manner whatsoever shall
not be reissued as part of such Series B Preferred Stock and shall be retired
promptly after the acquisition thereof. All such Series B Shares upon their
retirement and the filing of any certificate required in connection therewith
pursuant to the Delaware Law shall become authorized but unissued shares of
preferred stock.
G. Equality. All Series B Preferred Stock holders shall be subject to
the same terms and conditions as set forth herein. No Series B Preferred Stock
holders shall be entitled to or receive terms that are more favorable than
those given to any other Series B Preferred Stock holder. In the event a Series
B Preferred Stock holder is given or receives terms more favorable than those
given to or received by any other Series B Preferred Stock holder, then in such
event all Series B Preferred Stock holders shall be given and entitled to those
more favorable terms.
H. Copies of Agreements, Instruments, Documents. Copies of any of
the agreements, instruments or other documents referred to in this Certificate
shall be furnished to any stockholder upon written request to the Company at its
principal place of business.
4. The statements contained in the foregoing, creating and
designating the said Series B Preferred Stock and fixing the number, powers,
preferences and
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relative, optional, participating, and other special rights and the
qualifications, limitations, restrictions, and other distinguishing
characteristics thereof shall, upon the effective date of said series, be deemed
to be included in and be a part of the Amended and Restated Certificate of
Incorporation, as amended, of the Company pursuant to the provisions of Section
151 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, this Certificate of Designation has been executed on behalf
of the Company by its Chief Executive Officer and attested by its Secretary or
Assistant Secretary this 11/th/ day of March, 1998, and they do hereby affirm,
under penalty of perjury, that the foregoing Certificate of Designation is the
act and deed of the Company and that the facts stated therein are true and
accurate.
Signed and attested to on March 11, 1998.
APPLIED VOICE RECOGNITION, INC.
By /s/ Timothy J. Connolly
--------------------------------
Timothy J. Connolly
Chairman and CEO
Attest:
By /s/ William T. Kennedy
------------------------------
William T. Kennedy
Chief Financial Officer
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EXHIBIT 4.1
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of the 31st day of July, 1997 by and between APPLIED VOICE
RECOGNITION, INC., a Utah corporation (the "Company") and EQUITY SERVICES, LTD.,
a Nevis company (the "Shareholder").
R E C I T A L S:
---------------
WHEREAS, the Shareholder is acquiring Thirty Three Thousand Seven Hundred
Fifty (33,750) shares (the "Shares") of the common stock, par value $0.001 per
share (the "Common Stock") of the Company pursuant to that certain Placement
Agreement by and between the Company and the Shareholder dated July 23, 1997
(the "Placement Agreement"); and
WHEREAS, the Company desires to grant to the Shareholder certain
registration rights relating to 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:
1. 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 the Shares, any Common Stock issued to Holders on account of the Shares
by way of a stock split, reorganization, merger or consolidation, and any
Common Stock issued as a dividend on the Shares. 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 delivered new
certificates or other evidences of ownership for such
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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 8 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.
2. 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 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 twenty (20) 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 commercially reasonable 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
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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.
3. Holdback Agreement - Restrictions on Public Sale by Holder.
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.
4. Expenses of Registration. The Company shall bear all expenses
incurred in connection with each registration pursuant to Section 2 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 and the selling Holders shall pay the legal fees of
their counsel in connection with such registrations.
5. 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 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
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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 5 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.
(d) Contribution. If for any reason the indemnity provided for in this
Section 5 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
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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 5, 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 5 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 5, the indemnifying
parties shall indemnify each indemnified party to the full extent provided in
Sections 5 and 5 without regard to the relative fault of said indemnifying party
or indemnified party or any other equitable consideration provided for in this
Section 5.
6. 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.
7. 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.
8. 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 there
shall be no more than twenty (20) transferees; 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
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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 8, no transfer of Registrable Stock shall cause such
Registrable Stock to lose such status.
9. 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 9 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 to register
within ninety (90) days of completion of the transaction for resale to the
public pursuant to the 1933 Act.
10. 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.
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(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 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 (followed up by overnight courier) 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 Placement
Agreement.
(l) Recitals. The recitals are hereby incorporated in the Agreement as
if fully set forth herein.
[THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written hereinabove.
APPLIED VOICE RECOGNITION, INC.
By: /s/ Timothy J. Connolly
--------------------------------------
Name: TIMOTHY J. CONNOLLY
Title: Chairman and CEO
4615 Post Oak Place
Suite 111
Houston, Texas 77027
Telephone: (713) 621-5678
Telecopier: (713) 621-4830
EQUITY SERVICES, LTD.
By: /s/ Lynn Turnquest
--------------------------------------
Name: LYNN TURNQUEST
Title: Director
Citibank Building, 2nd Floor
East Mall Drive
P.O. Box F-42544
Freeport, Bahamas
Telephone: (242) 352-7063
Telecopier: (242) 352-3932
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EXHIBIT 4.2
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of the 12th day of August, 1997 by and between APPLIED VOICE
RECOGNITION, INC., a Utah corporation (the "Company") and EQUITY SERVICES, LTD.,
a Nevis company (the "Shareholder").
R E C I T A L S:
---------------
WHEREAS, the Shareholder is acquiring (i) Fifty Thousand Six Hundred Twenty
Five (50,625) shares (the "Shares") of the common stock, par value $0.001 per
share (the "Common Stock") of the Company pursuant to that certain Placement
Agreement by and between the Company and the Shareholder dated July 23, 1997
(the "Placement Agreement"); and (ii) an option to purchase up to One Hundred
Sixty Eight Thousand Seven Hundred Fifty (168,750) shares of Common Stock
pursuant to that certain Placement Agent's Option Certificate of even date
herewith (collectively, the "Shares"); and
WHEREAS, the Company desires to grant to the Shareholder certain
registration rights relating to 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:
1. 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 the Shares, any Common Stock issued to Holders on account of the
Shares by way of a stock split, reorganization, merger or consolidation, and any
Common Stock issued as a dividend on the Shares. 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
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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 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 8 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.
2. Incidental Registration. Commencing immediately after the date
hereof, 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
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 twenty (20) 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 commercially reasonable 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
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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.
3. Holdback Agreement - Restrictions on Public Sale by Holder.
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.
4. Expenses of Registration. The Company shall bear all expenses
incurred in connection with each registration pursuant to Section 2 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 and the selling Holders shall pay the legal fees of
their counsel in connection with such registrations.
5. 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
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which a Holder is participating, each such Holder will furnish to the Company in
writing such 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 5 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.
(d) Contribution. If for any reason the indemnity provided for in this
Section 5 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
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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 5, 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 5 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 5, the indemnifying
parties shall indemnify each indemnified party to the full extent provided in
Sections 5 and 5 without regard to the relative fault of said indemnifying party
or indemnified party or any other equitable consideration provided for in this
Section 5.
6. 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.
7. 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.
8. 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 there
shall be no more than twenty (20) transferees; 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
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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 8, no transfer of Registrable Stock shall cause such Registrable Stock
to lose such status.
9. 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 9 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 to register
within ninety (90) days of completion of the transaction for resale to the
public pursuant to the 1933 Act.
10. 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.
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(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
(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 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 (followed up by overnight courier) 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
Placement Agreement.
(l) Recitals. The recitals are hereby incorporated in the Agreement as
if fully set forth herein.
[THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written hereinabove.
APPLIED VOICE RECOGNITION, INC.
By: /s/ Charles W. Skamser
--------------------------------------
Name: CHARLES W. SKAMSER
Title: President
4615 Post Oak Place
Suite 111
Houston, Texas 77027
Telephone: (713) 621-5678
Telecopier: (713) 621-4830
EQUITY SERVICES, LTD.
By: /s/ Lynn Turnquest
--------------------------------------
Name: LYNN TURNQUEST
Title: Director
Citibank Building, 2nd Floor
East Mall Drive
P.O. Box F-42544
Freeport, Bahamas
Telephone: (242) 352-7063
Telecopier: (242) 352-3932
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EXHIBIT 4.3
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
This AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this "Agreement")
is entered into as of the 8th day of January, 1998 by and between APPLIED VOICE
RECOGNITION, INC., a Utah corporation (the "Company") and ENTREPRENEURIAL
INVESTORS, LTD., a Bahamas company (the "Shareholder").
R E CI T A L S:
---------------
WHEREAS, the Shareholder acquired One Hundred Twenty Five Thousand
(125,000) shares (the "Shares") of Series A 4% Convertible Preferred Stock, par
value $0.001 per share (the "Series A Preferred Stock") pursuant to that certain
Investor Subscription Agreement by and between the Company and the Shareholder
dated July 31, 1997 (the "Investor Agreement");
WHEREAS, the Company granted to the Shareholder certain registration rights
relating to the shares of the Company's common stock, $.001 par value ("Common
Stock") issuable upon conversion of the Series A Preferred Stock pursuant to a
Registration Rights Agreement dated July 31, 1997 (the "RRA"); and
WHEREAS, the Company and the Shareholder desire to amend and restate the
RRA as 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 to amend and restate the RRA as
follows:
1. 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 issued or issuable upon the conversion
of any of the Shares (ii) any Common Stock issued by way of a stock split,
reorganization, merger or consolidation, and (iii) any Common Stock issued
as a dividend on the Shares. For purposes
<PAGE>
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 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 10 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.
2. Demand Registration.
(a) Commencing six (6) months after the date of Closing (as defined in
the Investor Agreement), but in any event, on or after December 31, 1997,
and prior to August 31, 1999, any Requesting Holders may make one (1)
written request to the Company (specifying that it is being made pursuant
to this Section 2) 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 commercially reasonable efforts to cause to be
registered under the 1933 Act all Registrable Stock that the Requesting
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<PAGE>
Holders and such other Holders have, within forty-five (45) days after the
Company has given such notice, requested be registered. Such registration
may be, at the election of the Requesting Holders, a shelf registration
statement filed on Form S-3 if the Company is eligible to use such form (a
"Shelf Registration Statement").
(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
2.(a) above, and the Company shall include such information in the written
notice referred to in clause (x) of Section 2.(a) 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 to the extent provided in this Section 2. 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 2 to the
contrary, if the managing underwriter of an underwritten offering of the
Registrable Stock requested to be registered pursuant to this Section 2
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 one (1) additional
demand registration pursuant to this Section 2. 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 2 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
3
<PAGE>
effective date of, a registration 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.
(e) The Company shall be obligated to effect and pay for a total of
only one (1) registration pursuant to this Section 2, unless increased
pursuant to Section 2.(c) hereof; provided, that a registration requested
pursuant to this Section 2 shall not be deemed to have been effected for
purposes of this Section 2.(e), 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 2.(f), (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 2.(c) hereof.
(f) The Company shall use commercially reasonable efforts to have a
Shelf Registration Statement declared effective as soon as reasonably
practicable after such filing, and to keep such Shelf Registration
Statement continuously effective until August 31, 1999; provided, however,
that the Company may voluntarily suspend the effectiveness of such Shelf
Registration Statement for a limited time, which in no event shall be
longer than one hundred twenty (120) days, if the Company has been advised
by counsel or underwriters to the Company that the offering of the shares
of Common Stock pursuant to the Shelf Registration Statement would
adversely affect, or would be improper in view of (or improper without
disclosure in a prospectus), a proposed financing, a reorganization,
recapitalization, merger, consolidation, or similar transaction involving
the Company, in which case the Company shall be required to keep such Shelf
Registration Statement effective for an additional period of time beyond
August 31, 1999 equal to the number of days the effectiveness thereof is
suspended pursuant to this proviso. Upon the occurrence of any event that
would cause the Shelf Registration Statement to contain a material
misstatement or omission or not to be effective and usable during the
period that such Shelf Registration Statement is required to be effective
and usable, the Company shall promptly file an amendment to the Shelf
Registration Statement and use its best efforts to cause such amendment to
be declared effective as soon as practicable thereafter. The Company will
bear all costs and expenses related to the Shelf Registration Statement
other than the expenses incurred by the Purchasers for underwriters'
commissions and discounts or legal fees incurred by the Purchasers. The
Purchasers shall furnish to the Company such information regarding their
holdings and the proposed manner of distribution thereof as the Company may
reasonably request and as shall be required in connection with the Shelf
Registration Statement.
3. Obligations of the Company. Whenever required under Section 2 to use
commercially reasonable efforts to effect the registration of any Registrable
Stock, the Company shall, as expeditiously as possible:
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(a) prepare and file with the Commission, not later than sixty (60)
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 commercially reasonable 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. Holders agree to cooperate with the Company in
providing information reasonably necessary to the preparation of such
registration statement;
(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 (i) six (6) months from the effective date of said
registration statement other than a Shelf Registration Statement; (ii) in
the case of a Shelf Registration Statement, for the period of time required
by Section 2(f) hereof; or (iii) 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 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 commercially reasonable 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 3.(d) hereof, (ii) subject itself to taxation
in any such jurisdiction, or (iii) consent to general service of process in
any such jurisdiction;
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(e) use commercially reasonable 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 3.(b)), 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 (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
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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 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 commercially reasonable 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 commercially reasonable efforts to cause all such Registrable
Stock to be listed on the Nasdaq SmallCap 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 3.(f) 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 3.(f) 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 3.(b)) by the number of days during the period from and including the
date of the giving of such notice pursuant to Section 3.(f) hereof to and
including the date when each selling Holder of Registrable Stock covered by such
registration
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statement shall have received the copies of the supplemented or amended
prospectus contemplated by Section 3.(f) hereof.
4. Incidental Registration. Commencing immediately after the date of
Closing (as defined in the Investor Agreement) and prior to August 31, 1999, 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
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 twenty (20) days from the date of
such notice, and advising each Holder of its right to have Registrable Stock
included in such registration. In the event such an offering is underwritten,
each such Holder's right to include its Registrable Stock in such registration
shall be conditioned upon such Holder's participation in such underwritten
offering on the same terms as provided in Section 2(b) above. 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 commercially
reasonable 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.
5. Holdback Agreement - Restrictions on Public Sale by Holder. 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.
6. Expenses of Registration. The Company shall bear all expenses
incurred in connection with each registration pursuant to Sections 2 and 4 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
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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 and Holder shall pay the legal
fees of its counsel in connection with such registrations.
7. 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 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 7.(b) 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
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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.
(d) Contribution. If for any reason the indemnity provided for in
this Section 7 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 7.(c), 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 7.(d) 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.
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If indemnification is available under this Section 7, the
indemnifying parties shall indemnify each indemnified party to the full
extent provided in Sections 7.(a) and 7.(b) without regard to the
relative fault of said indemnifying party or indemnified party or any other
equitable consideration provided for in this Section 7.
8. 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 arrangement; 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.
9. 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.
10. Transfer of Registration Rights. The registration rights of any
Holder under this Agreement with respect to any Registerable Stock may be
transferred to any Person who acquires at least 50,000 Shares; 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 10, no transfer of Registrable Stock shall cause such Registrable Stock
to lose such status.
11. 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 11 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
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acquiring corporation which the acquiring corporation has agreed to register
within ninety (90) days of completion of the transaction for resale to the
public pursuant to the 1933 Act.
12. 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 Shares and
any Registrable Stock then outstanding and held by the Holders.
(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 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
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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 (followed up by overnight courier) 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.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written hereinabove.
APPLIED VOICE RECOGNITION, INC.
By: /s/ Timothy J. Connolly
-------------------------------------
Name: TIMOTHY J. CONNOLLY
Title: Chairman and CEO
4615 Post Oak Place
Suite 111
Houston, Texas 77027
Telephone: (713) 621-5678
Telecopier: (713) 621-4830
ENTREPRENEURIAL INVESTORS, LTD.
By: /s/ Robert E. Cordes
-------------------------------------
Name: ROBERT E. CORDES
Title: Director
Citibank Building, 2nd Floor
East Mall Drive
P.O. Box 40643
Freeport, Bahamas
Telephone: (242) 352-7063
Telecopier: (242) 352-3932
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EXHIBIT 4.4
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of the 12th day of August, 1997 by and between APPLIED VOICE
RECOGNITION, INC., a Utah corporation (the "Company") and ENTREPRENEURIAL
INVESTORS, LTD., a Bahamas company (the "Shareholder").
R E C I T A L S:
---------------
WHEREAS, the Shareholder is acquiring One Hundred Eighty Seven Thousand
Five Hundred (187,500) shares (the "Shares") of Series A 4% Convertible
Preferred Stock, par value $0.001 per share (the "Series A 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 A Preferred Stock 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:
(1) 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 issued or issuable upon the conversion of
any of the Shares (ii) any Common Stock issued by way of a stock split,
reorganization, merger or consolidation, and (iii) any Common Stock issued as a
dividend on the Shares. 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
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transferred, no stop transfer order affecting such stock is in effect and the
Company has 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 10 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.
2. Demand Registration.
(a) Commencing six (6) months after the date of Closing (as defined in the
Investor Agreement), but in any event, on or after December 31, 1997, any
Requesting Holders may make a written request to the Company (specifying that it
is being made pursuant to this Section 2) 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 commercially reasonable 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 2 above, and
the Company shall include such information in the written notice referred to in
clause (x) of Section 2 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
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Holder's Registrable Stock in the underwritten offering to the extent provided
in this Section 0. 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 2 to the contrary,
if the managing underwriter of an underwritten offering of the Registrable Stock
requested to be registered pursuant to this Section 2 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 one (1) additional demand
registration pursuant to this Section 2. 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
2 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 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.
(e) The Company shall be obligated to effect and pay for a total of only
one (1) registration pursuant to this Section 2, unless increased pursuant to
Section 2 hereof; provided, that a registration requested pursuant to this
Section 2 shall not be deemed to have been effected for purposes of this Section
2, 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 3, (iii) the offering of Registrable Stock pursuant to such registration
is not
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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 2 hereof.
(f) The Company shall use commercially reasonable efforts to have such
Shelf Registration Statement declared effective as soon as reasonably
practicable after such filing, and to keep such Shelf Registration Statement
continuously effective until two (2) years following the date on which such
Shelf Registration Statement becomes effective under the Securities Act;
provided, however, that the Company may voluntarily suspend the effectiveness of
such Shelf Registration Statement for a limited time, which in no event shall be
longer than one hundred twenty (120) days, if the Company has been advised by
counsel or underwriters to the Company that the offering of the shares of Common
Stock pursuant to the Shelf Registration Statement would adversely affect, or
would be improper in view of (or improper without disclosure in a prospectus), a
proposed financing, a reorganization, recapitalization, merger, consolidation,
or similar transaction involving the Company, in which case the Company shall be
required to keep such Shelf Registration Statement effective for an additional
period of time beyond two (2) years following the date of the effectiveness
thereof equal to the number of days the effectiveness thereof is suspended
pursuant to this proviso. Upon the occurrence of any event that would cause the
Shelf Registration Statement to contain a material misstatement or omission or
not to be effective and usable during the period that such Shelf Registration
Statement is required to be effective and usable, the Company shall promptly
file an amendment to the Shelf Registration Statement and use its best efforts
to cause such amendment to be declared effective as soon as practicable
thereafter. The Company will bear all costs and expenses related to the Shelf
Registration Statement other than the expenses incurred by the Purchasers for
underwriters' commissions and discounts or legal fees incurred by the
Purchasers. The Purchasers shall furnish to the Company such information
regarding their holdings and the proposed manner of distribution thereof as the
Company may reasonably request and as shall be required in connection with the
Shelf Registration Statement.
3. Obligations of the Company. Whenever required under Section 2 to use
commercially reasonable 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 sixty (60) 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
commercially reasonable 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. Holders agree to cooperate with the Company in providing
information reasonably necessary to the preparation of such
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registration statement;
(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 (i) six
(6) months from the effective date of said registration statement; or (ii) 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 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 commercially reasonable 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 3 hereof, (ii) subject itself to taxation in any such jurisdiction, or
(iii) consent to general service of process in any such jurisdiction;
(e) use commercially reasonable 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 3), 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;
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(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 (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 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 commercially reasonable 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
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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 commercially reasonable efforts to cause all such Registrable
Stock to be listed on the Nasdaq SmallCap 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 3 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 3 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 3) by the number
of days during the period from and including the date of the giving of such
notice pursuant to Section 3 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 3 hereof.
4. 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 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 twenty (20) 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
commercially reasonable 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
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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.
5. 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 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.
6. Expenses of Registration. The Company shall bear all expenses
incurred in connection with each registration pursuant to Sections 2 and 4 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 and Holder shall pay the
legal fees of its counsel in connection with such registrations.
7. Indemnification and Contribution.
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(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 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 7 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
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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.
(d) Contribution. If for any reason the indemnity provided for in this
Section 7 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 7, 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 7 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 7, the indemnifying
parties shall indemnify each indemnified party to the full extent provided in
Sections 7 and 7 without regard to the relative fault of said indemnifying party
or indemnified party or any other equitable consideration provided for in this
Section 7.
8. 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.
9. 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
REGISTRATION RIGHTS AGREEMENT Page 10
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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.
10. Transfer of Registration Rights. The registration rights of any
Holder under this Agreement with respect to any Registerable 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
10, no transfer of Registrable Stock shall cause such Registrable Stock to lose
such status.
11. 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 11 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 to register
within ninety (90) days of completion of the transaction for resale to the
public pursuant to the 1933 Act.
12. 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.
REGISTRATION RIGHTS AGREEMENT Page 11
<PAGE>
(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 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 (followed up by overnight courier) 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.
REGISTRATION RIGHTS AGREEMENT Page 12
<PAGE>
(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.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written hereinabove.
APPLIED VOICE RECOGNITION, INC.
By: /s/ Charles W. Skamser
-----------------------------
Name: CHARLES W. SKAMSER
Title: President
4615 Post Oak Place
Suite 111
Houston, Texas 77027
Telephone: (713) 621-5678
Telecopier: (713) 621-4830
ENTREPRENEURIAL INVESTORS, LTD.
By: /s/ Robert E. Cordes
-----------------------------
Name: ROBERT E. CORDES
Title: Director
Citibank Building, 2nd Floor
East Mall Drive
P.O. Box 40643
Freeport, Bahamas
Telephone: (242) 352-7063
Telecopier: (242) 352-3932
REGISTRATION RIGHTS AGREEMENT Page 13
<PAGE>
EXHIBIT 4.5
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of the 31st day of December 1997 (the "Effective Date"), by and between
VOICE IT WORLDWIDE, INC., a Colorado corporation (the "Company") and APPLIED
VOICE RECOGNITION, INC., a Utah corporation (the "Shareholder").
R E C I T A L S:
WHEREAS, the Shareholder is acquiring 471,698 shares (the "Shares") of the
common stock, par value $.10 per share (the "Common Stock") of the Company;
and
WHEREAS, the Company desires to grant to the Shareholder certain
registration rights relating to 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:
1. 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)
the Shares, (ii) any Common Stock issued to Holders on account of the
Shares by way of a stock split, reorganization, merger or consolidation,
and (iii) any Common Stock issued as a dividend on the Shares. For
purposes of this Agreement, any Registrable Stock shall cease to be
Registrable Stock when a registration statement covering such Registrable
Stock has been declared effective.
(d) The term "Holder" shall mean the Shareholder or any transferee or assignee
thereof to whom the rights under this Agreement are assigned in
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accordance with Section 9 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.
References in this Agreement to any rules, regulations or forms promulgated
by the Commission shall include rules, regulations and forms succeeding to the
function thereof, whether or not bearing the same designation.
2. Incidental Registration. Commencing immediately after the Effective Date
and ending on the day that is one year after the Effective Date, 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 in connection with an
acquisition or to the Company's existing stockholders) or any form that would
also permit the 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 twenty (20) 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 commercially reasonable 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
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<PAGE>
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.
3. Required Registration. The Company hereby covenants and agrees that
the Company will use its commercially reasonable efforts to see that all of the
Registrable Stock is registered in a selling shareholder registration statement
under the 1933 Act or any form that would also permit the registration of the
Registrable Stock within ninety (90) days after the Effective Date. The Company
further covenants and agrees to keep such registration effective for a period of
not less than one year following the initial effective date of such
registration.
4. Holdback Agreement - Restrictions on Public Sale by Holder. 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.
5. Expenses of Registration. The Company shall bear all expenses incurred in
connection with each registration pursuant to Section 2 and Section 3 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 and the selling Holders shall pay the legal fees of
their counsel connection with such registrations.
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
3
<PAGE>
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 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 6(b) 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
4
<PAGE>
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.
(d) Contribution. If for any reason the indemnity provided for in this Section
6 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 6(c), 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 6(d) 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.
5
<PAGE>
If indemnification is available under this Section 6, the indemnifying
parties shall indemnify each indemnified party to the full extent provided in
Sections 6(a) and 6(b) without regard to the relative fault of said indemnifying
party or indemnified party or any other equitable consideration provided for in
this Section 6.
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.
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
only to by the Holder; provided that any such transfer must 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.
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 10
6
<PAGE>
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 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.
7
<PAGE>
(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 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 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 (followed up by overnight courier) 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) Recitals. The recitals are hereby incorporated in the Agreement as if
fully set forth herein.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the Effective Date.
COMPANY:
VOICE IT WORLDWIDE, INC.,
a Colorado corporation
By: /s/ D. W. Altbrandt
-------------------------------
(Signature)
Name: D. W. Altbrandt
(Printed Name)
Title: Chief Executive Officer
2643 Midpoint Drive, Suite A
Ft. Collins, Colorado 80525
Attention: Chief Financial Officer
Telephone: (800) 221-7711
Telecopier: (970) 221-2058
SHAREHOLDER:
APPLIED VOICE RECOGNITION, INC.,
a Utah corporation
By: /s/ Timothy J. Connolly
------------------------------------
Timothy J. Connolly, Chairman and
Chief Executive Officer
4615 Post Oak Place
Suite 111
Houston, Texas 77027
Telephone: (713) 621-5678
Telecopier: (713) 621-4830
Signature Page to
Registration Rights Agreement
9
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EXHIBIT 4.6
FORM OF
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") dated as of March 11,
1998, by and among APPLIED VOICE RECOGNITION, INC., a Delaware corporation (the
"Company"), and ________________ (the "Subscriber").
W I T N E S S E T H
WHEREAS, pursuant to Subscription Agreement (the "Subscription Agreement"),
by and among the Company and the Subscriber, the Company has agreed to sell and
the Subscriber has agreed to purchase an aggregate of 3,000 Series B,
Convertible Preferred Shares (the "Shares"), at $1,000 per Share, of the Company
convertible into shares of the Company's Common Stock, $.001 par value per share
(the "Common Stock"); and
WHEREAS, pursuant to the terms of, and in partial consideration for, the
Subscriber's entering into the Subscription Agreement, the Company has agreed to
provide the Subscriber with certain registration rights with respect to the
Common Stock;
NOW THEREFORE, in consideration of the mutual promises, representation,
warranties, covenants and conditions set forth in the Subscription Agreement and
this Registration Rights Agreement, the Company and the Subscriber agree as
follows:
1. Certain Definitions. As used in this Agreement the following terms
shall have the following respective meanings:
The "Act" shall mean the Securities Act of 1933, as amended, or any similar
Federal statute, and the rules and regulations of the Commission thereunder, all
as the same shall be in effect at the time.
"Closing Date" shall mean the date the funds necessary to purchase the
Shares were received by the Company.
"Commission" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Company's Common Stock, $.001 par value per
share.
"Registrable Shares" shall mean (i) the Common Stock issuable on conversion
of the Shares, (ii) any Common Stock of the Company issued or issuable in
respect of the Common Stock issued or issuable on conversion of the Shares or
upon any stock split, stock dividend, recapitalization or similar event;
provided, however, that shares of Common Stock or other securities shall no
1
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longer be treated as Registrable Shares if (a) they have been sold to or through
a broker or dealer or underwriter in a public distribution or a public
securities transaction, (b) they have been sold in a transaction exempt from the
registration and prospectus delivery requirements of the Securities Act of 1933
so that all transfer restrictions and restrictive legends with respect thereto
are removed upon consummation of such sale or (c) they are available for sale
under Rule 144 or otherwise, in the opinion of counsel to the Company, without
compliance with the registration and prospectus delivery requirements of the
Securities Act of 1933 so that no transfer restrictions or restrictive legends
will appear upon the Common Stock certificates following the consummation of
such sale.
The terms "register", "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act of 1933 and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement. Said registration shall include all amendments, post-
effective amendments and supplements to any such registration statement as may
be necessary under the Act and the regulations of the Commission to keep such
registration effective with respect to the Registrable Shares until Subscriber
has converted all the Shares and or until March 11, 2000, whichever shall occur
first.
"Registration Expenses" shall mean all expenses incurred by the Company in
compliance with Section 2 hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, reasonable fees and
disbursements of one counsel for Subscriber, and the reasonable expenses of any
special audits incident to or required by any such registration (but excluding
the compensation of regular employees of the Company, which shall be paid in any
event by the Company).
The "Reserved Shares" shall mean the shares of Common Stock issuable upon
conversion of the Shares that have been duly and validly reserved for issuance,
and upon issuance which shall be duly and validly issued, fully paid, and non-
assessable.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Shares.
2. Registration.
(a) Mandatory Registration. The Company shall prepare and file with the
SEC, no later than forty-five (45) days after the Closing Date, an amendment to
the currently filed Registration Statement on Form S-3 (or any other available
form), covering a sufficient number of shares of Common Stock for the Subscriber
but in no event less than 2,500,000 shares of Common Stock into
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which the $3,000,000 of Shares in the total offering would be convertible. Such
Registration Statement shall state that, in accordance with the Securities Act,
it also covers such indeterminate number of additional shares of Common Stock as
may become issuable to prevent dilution resulting from stock splits or stock
dividends. If at any time the number of shares of Common Stock into which the
Shares may be converted exceeds the aggregate number of shares of Common Stock
then registered, the Company shall, within ten (10) business days after receipt
of written notice from any Subscriber, either (i) amend the Registration
Statement filed by the Company pursuant to the preceding sentence, if such
Registration Statement has not been declared effective by the SEC at that time,
to register all shares of Common Stock into which the Shares may be converted,
or (ii) if such Registration Statement has been declared effective by the SEC at
that time, file with the SEC an additional Registration Statement on Form S-3(or
any other available form), to register the shares of Common Stock into which the
Shares may be converted that exceed the aggregate number of shares of Common
Stock already registered.
(b) Underwritten Offering. If any offering pursuant to a Registration
Statement pursuant to Section 2(a) hereof involves an underwritten offering, the
Subscribers acting by majority in interest of the Registrable Shares subject to
such underwritten offering shall have the right to select one legal counsel to
represent their interests, and an investment banker or bankers and manager or
managers to administer the offering, which investment banker or bankers or
manager or managers shall be reasonably satisfactory to the Company. The
Subscriber(s) who hold the Registrable Shares to be included in such
underwriting shall pay all underwriting discounts and commissions and other fees
and expenses of such investment banker or bankers and manager or managers so
selected in accordance with this Section 2(b) (other than fees and expenses
relating to registration of Registrable Shares under federal or state securities
laws, which are payable by the Company pursuant to Section 5 hereof) with
respect to their Registrable Shares and the fees and expenses of such legal
counsel so selected by the Subscriber.
(c) Certain Fees. The Company shall pay cash liquidated damages of 2.0%
of the original purchase price of the Shares then outstanding for each 30 day
period or portion thereof after which the following obligations of the Company
remain unsatisfied:
(i) if the registration ceases to remain effective during the "Registration
Period" as defined in Section 3(a); and
(ii) if the registration is not declared effective, through no fault of the
Subscriber, within one hundred (105) days after the Closing Date.
The above damages shall continue until the obligation is fulfilled, subject to a
maximum of 12 months and shall be paid within 10 business days after each 30 day
period. Failure of the Company to make payment within said 10 business days
shall
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be considered a default. The Company acknowledges that its failure to meet
any of its obligations under either Section 2(c) (i) or (ii) of this Agreement
will cause the Subscriber to suffer damages in an amount that will be difficult
to ascertain. Accordingly, the parties agree that it is appropriate to include
in this Agreement a provision for liquidated damages. The parties acknowledge
and agree that the liquidated damages provision set forth in this section
represents the parties' good faith effort to qualify such damages and, as such,
agree that the form and amount of such liquidated damages are reasonable and
will not constitute a penalty. The payment of liquidated damages shall not
relieve the Company from its obligations to deliver the Common Stock pursuant to
the terms of this Agreement and the Subscription Agreement.
3. Obligation of the Company. In connection with the registration of the
Registrable Shares, the Company shall do each of the following:
(a) Prepare promptly, and file with the SEC within forty-five (45) days of
the Closing Date, a Registration Statement with respect to not less than the
number of Registrable Shares provided in Section 2(a), above, and thereafter use
its commercially reasonable efforts to cause each Registration Statement
relating to Registrable Shares to become effective the earlier of (i) five
business days after notice from the Securities and Exchange Commission that the
Registration Statement may be declared effective, or (b) one hundred five (105)
days after the Closing Date, and keep the Registration Statement effective at
all times until the earliest of (i) March 11, 2000 or (ii) the date the
Subscriber no longer owns any of the Registrable Shares (items (i) and (ii)
cumulatively being referred to as the "Registration Period"), which Registration
Statement (including any amendments or supplements thereto and prospectuses
contained therein) shall not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading;
(b) Prepare and file with the SEC such amendments (including post-effective
amendments) and supplements to the Registration Statement and the prospectus
used in connection with the Registration Statement as may be necessary to keep
the Registration effective at all times during the Registration Period, and,
during the Registration Period, comply with the provisions of the Securities Act
with respect to the disposition of all Registrable Shares of the Company covered
by the Registration Statement until such time as all of such Registrable Shares
have been disposed of in accordance with the intended methods of disposition by
the seller or sellers thereof as set forth in the Registration Statement;
(c) Furnish to each Subscriber whose Registrable Shares are included in the
Registration Statement and its legal counsel identified to the Company, (i)
promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one (1) copy of the Registration Statement,
each
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preliminary prospectus and prospectus, and each amendment or supplement thereto,
and (ii) such number of copies of a prospectus, including a preliminary
prospectus, and all amendments and supplements thereto and such other documents,
as the Subscriber may reasonably request in order to facilitate the disposition
of the Registrable Shares owned by such Subscriber;
(d) Use reasonable efforts to (i) register and qualify the Registrable
Shares covered by the Registration Statement under such other securities or blue
sky laws of such jurisdictions as the Subscriber(s) who hold a majority in
interest of the Registrable Shares being offered reasonably request and in which
significant volumes of shares of Common Stock are traded, (ii) prepare and file
in those jurisdictions such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof at all times during the Registration Period,
(iii) take such other actions as may be necessary to maintain such registrations
and qualification in effect at all times during the Registration Period, and
(iv) take all other actions reasonably necessary or advisable to qualify the
Registrable Shares for sale in such jurisdictions: provided, however, that the
Company shall not be required in connection therewith or as a condition thereto
to (A) qualify to do business in any jurisdiction where it would not otherwise
be required to qualify but for this Section 3(d), (B) subject itself to general
taxation in any such jurisdiction, (C) file a general consent to service of
process in any such jurisdiction, (D) provide any undertakings that cause more
than nominal expense or burden to the Company, in the good faith determination
of the Company, or (E) make any change in its articles of incorporation or by-
laws or any then existing contracts, which in each case the Board of Directors
of the Company determines to be contrary to the best interests of the Company
and its stockholders;
(e) As promptly as practicable after becoming aware of such event, notify
each Subscriber of the happening of any event of which the Company has
knowledge, as a result of which the prospectus included in the Registration
Statement, as then in effect, includes any untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and uses its best efforts promptly to prepare a supplement
or amendment to the Registration Statement or other appropriate filing with the
SEC to correct such untrue statement or omission, and deliver a number of copies
of such supplement or amendment to each Subscriber as such Subscriber may
reasonably request;
(f) As promptly as practicable after becoming aware of such event, notify
each Subscriber who holds Registrable Shares being sold (or, in the event of an
underwritten offering, the managing underwriters) of the issuance by the SEC of
any notice of effectiveness or any stop order or other suspension of the
effectiveness of the Registration Statement at the earliest possible time;
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(g) Use its commercially reasonable efforts, if eligible, either to (i)
cause all the Registrable Shares covered by the Registration Statement to be
listed on each securities exchange on which securities of the same class or
series issued by the Company are then listed, if any, if the listing of such
Registrable Shares is then permitted under the rules of such exchange, or (ii)
secure designation of all the Registrable Shares covered by the Registration
Statement on the National Association of Securities Dealers Automated Quotations
System ("NASDAQ") within the meaning of Rule 11Aa2-1 of the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
quotation of the Registrable Shares on the NASDAQ National Market System; or if,
despite the Company's commercially reasonable efforts to satisfy the preceding
clause (i) or (ii), the Company is unsuccessful in doing so, to secure NASD
authorization and quotation for such Registrable Shares on either the SmallCap
Market or the over-the-counter bulletin board and, without limiting the
generality of the foregoing, to arrange for at least two market makers to
register with the National Association of Securities Dealers, Inc. ("NASD") as
such with respect to such Registrable Shares;
(h) Provide a transfer agent for the Registrable Shares not later than the
effective date of the Registration Statement;
(i) Cooperate with the Subscribers who hold Registrable Shares being
offered to facilitate the timely preparation and delivery of certificates for
the Registrable Shares to be offered pursuant to the Registration Statement and
enable such certificates for the Registrable Shares to be in such denominations
or amounts as the case may be, as the Subscribers may reasonably request and
registration in such names as the Subscribers may request; and, within ten (10)
business days after a Registration Statement which includes Registrable Shares
is ordered effective by the SEC, the Company shall deliver, and shall cause
legal counsel selected by the Company to deliver, to the transfer agent for the
Registrable Shares (with copies to the Subscribers whose Registrable Shares are
included in such Registration Statement) an appropriate instruction and opinion
of such counsel; and
(j) Take all other reasonable actions necessary to expedite and facilitate
distribution to the Subscriber of the Registrable Shares pursuant to the
Registration Statement.
The Company shall use its commercially reasonable efforts to effect such
registration (including, without limitation, the execution of an undertaking to
file amendments, post-effective amendments, and supplements appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Act and the
Regulations of the Commission) as may be so requested and as would permit or
facilitate the sale and distribution of all or such Registrable Shares as are
specified in such request.
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4. Expenses of Registration. The Company shall bear all Registration
Expenses incurred in connection with any registration, qualification or
compliance of the Registrable Shares pursuant to this Agreement. All Selling
Expenses shall be born by the Subscriber.
5. Registration Procedures. The Company shall advise the Subscriber of
the initiation of a registration under the Agreement and as to the completion
thereof. At its expenses the Company will:
(a) Prepare and file with the Commission such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act and the Regulations of the Commission with respect to the disposition of
securities covered by such registration statement; and
(b) Concerning the Securities. The issuance, sale and delivery of the
Shares have been duly authorized by all required corporate action on the part of
Company, and when issued, sold and delivered in accordance with the terms hereof
and thereof for the consideration expressed herein and therein, will be duly and
validly issued and enforceable in accordance with their terms, subject to the
laws of bankruptcy and creditors' rights generally. 2,500,000 shares of Common
Stock issuable upon conversion of the Shares have been duly and validly reserved
for issuance and, upon issuance shall be duly and validly issued, fully paid,
and non-assessable (the "Reserved Shares").
Prior to conversion of all the Shares, if at anytime the conversion of all
the Shares outstanding results in an insufficient number of Reserved Shares
being available to cover all the conversions and exercises, then in such event,
the Company will move to call and hold a shareholder's meeting within 45 days of
such event for the purpose of authorizing additional Shares to facilitate the
conversions. In such an event the Company shall: (1) recommend its current or
future officers, directors and other control people to vote their shares in
favor of increasing the authorized number of shares of Common Stock and (2)
recommend to all shareholders to vote their shares in favor of increasing the
authorized number of shares of Common Stock. Company represents and warrants
that under no circumstances will it deny or prevent Subscriber's right to
convert the Shares as permitted under the terms of the Subscription Agreement or
this Registration Rights Agreement.
6. Indemnification.
(a) The Company will indemnify and hold harmless the Subscriber, each of
its stockholders, executives, employees, representatives, affiliates, officers,
directors and partners, and each person controlling the Subscriber, with respect
to which registration has been effected pursuant to this
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Agreement against all claims, losses, damages and liabilities (or actions,
proceedings or settlements in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any prospectus or other document incident to any such registration, or based on
any omission (or alleged omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, or
any violation by the Company of the Act or any rule or regulation thereunder
applicable to the Company which relates to the Registration Statement filed
pursuant to this Agreement and will reimburse the Subscriber, each of its
stockholders, executives, employees, representatives, affiliates, officers,
directors and partners, and each person controlling the Subscriber for any
reasonable legal and any other reasonable out of pocket expenses as they are
reasonably incurred in connection with investigating and defending any such
claim, loss, damage, liability or action, provided, however, that the indemnity
contained in this Section 6(a) shall not apply to amounts paid in settlement of
any such claim, loss, damage, liability or action if such settlement is effected
without the consent of the Company, and provided further that the Company shall
not be liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by the
Subscriber and stated to be specifically for use in the Registration Statement
filed pursuant to this Agreement. The foregoing indemnity agreement is further
subject to the condition that insofar as it relates to any untrue prospectus,
such indemnity agreement shall not inure to the benefit of the foregoing
indemnified parties if copies of a final prospectus correcting the misstatement,
or alleged misstatement, omission or alleged omission upon which such loss,
liability, claim or damage is based is timely delivered to such indemnified
party and a copy thereof was not furnished to the person asserting the loss,
liability, claim or damage.
(b) The Subscriber will indemnify the Company, each of its stockholders,
executives, employers, representatives, affiliates, directors, officers and
each person who controls the Company within the meaning of the Act and the rules
and regulations thereunder against all claims, losses, damages and liabilities
(or actions, proceedings, or settlements in respect thereof) arising out of or
based on any untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus or other document incident to any such registration
or based upon any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or any violation of the Act or any rule of regulation thereunder
applicable to the Company and will reimburse the Company, and its stockholders,
executives, employers, representatives, affiliates, directors, officers,
partners, persons, underwriters or control persons for any reasonable legal or
any other reasonable out of pocket expense reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability or
action, in each case to the extent, and only to the extent, that such untrue
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statement (or alleged untrue statement) or omission or alleged omission)
relating to such holder is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in conformity with
written information furnished to the Company by the Subscriber and stated to be
specifically for use therein; provided, however, that the obligations of the
Subscriber shall be limited to an amount equal to the proceeds to the Subscriber
and provided further that such indemnification obligations shall not apply if
the Company modifies or changes to a material extent the written information
furnished by such Holder.
(c) Each party entitled to indemnification under this Section 6 (an
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party, (whose approval shall not
unreasonably be withheld or delayed), and the Indemnified Party may participate
in such defense at such Indemnified Party's expense, and provided further that
the failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Agreement. No
Indemnifying Party, in the defense of any such claim or litigation, shall except
with the consent of each Indemnified Party, 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 to such claim or litigation. Each
Indemnified Party shall furnish such information regarding itself or the claim
in question as an Indemnifying Party may reasonably request in writing and as
shall be reasonably required in connection with defense of such claim and
litigation resulting therefrom.
7. Information by Holder of Registrable Shares. The Subscriber shall
furnish to the Company such information regarding the Subscriber and the
distribution proposed by such holder of Registrable Shares as the Company may
reasonably request in writing and as shall be reasonably required in connection
with any registration referred to in this Agreement.
8. Transfers or Assignments of Registration Rights. The Subscriber's
rights under this Agreement to cause the Company to register the Registrable
Shares may be transferred or assigned by the Subscriber only to affiliates of
the Subscriber or to a purchaser of the Shares, or any portion of the Shares,
with an original purchase price of at least $500,000 or at least 500 Shares and
such assignment shall only be effective upon delivery of written notice of such
assignment to the Company within thirty (30) days of the assignment. Upon such
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assignment the assignee shall have all the rights and obligations of the
Subscriber hereunder.
9. Miscellaneous.
9.1 Governing Law. This agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without giving effect to
conflict of laws principles.
9.2 Successors and Assigns. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
9.3 Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subject
matter hereof.
9.4 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by first-class mail,
postage prepaid, or delivered by hand or by messenger or courier delivery
service, addressed (a) if to the Subscriber, at the address listed in the
Subscription Agreement or at such other address as the Subscriber shall have
furnished to the Company in writing, or (b) if to the Company, 4615 Post Oak
Place, Suite 111, Houston, TX 77027, or at such other address as the Company
shall have furnished to the Subscriber in writing.
9.5 Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to any holder of any Registrable Shares, upon any
breach or default of the Company under this Agreement, shall impair any such
right, power, or remedy of such holder nor shall it be construed to be a waiver
of any such breach or default, or an acquiesce therein, or of or in any similar
breach or default thereunder occurring; nor shall any waiver of any single
breach or default be deemed a waiver of any other breach or default thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of any holder of any breach or default under this Agreement, must be in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to any holder, shall be cumulative and not alternative.
9.6 Counterparts. This agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument. An executed facsimile counterpart of this Agreement shall be
effective as an original.
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9.7 Severability. In the case any provision of this agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
9.8 Amendments. This provision of this Agreement may be amended at any
time and from time to time, and particular provisions of this Agreement may be
waived, with and only with an agreement or consent in writing signed by the
Company and by the owners of 66 2/3% of the Registrable Shares as of the date of
such amendment or waiver.
9.9 Termination or Registration Rights. This Agreement shall terminate at
the earlier of March 11, 2000, or such time as there ceases to be any
outstanding Registrable Shares as defined herein.
9.10 Short Sales. The Subscriber and each transferee of rights under
this Agreement agree that for so long as they each hold Shares or Registrable
Shares, each such person, and their respective stockholders, executives,
employees, representatives, affiliates, officers, directors or control persons
will not engage in any short sale or short sale "against the box" transactions
of any type, loan shares or otherwise participate in any transaction which could
be considered as a "short sale" under the rules and regulations promulgated
under the Exchange Act involving the Common Stock.
The foregoing Registration Rights Agreement is hereby executed as of the
date first above written.
APPLIED VOICE RECOGNITION, INC.
By: /s/ Timothy J. Connolly
---------------------------------
Timothy J. Connolly
Chairman and CEO
ATTEST:
/s/ Jan Carson Connolly
- ------------------------------
Jan Carson Connolly
Secretary
SUBSCRIBER
__________________________
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EXHIBIT 10.1
JOINT PRODUCT DEVELOPMENT AGREEMENT
(Applied Voice Recognition, Inc. and Voice It Worldwide, Inc.)
THIS JOINT PRODUCT DEVELOPMENT AGREEMENT (this "Agreement") is entered into as
of December 31, 1997 (the "Effective Date"), by and between APPLIED VOICE
RECOGNITION, INC., a Utah corporation ("AVRI"), and VOICE IT WORLDWIDE, INC., a
Colorado corporation ("VIW").
W I T N E S S E T H:
WHEREAS, AVRI and VIW desire to integrate the VIW Digital Recorder hand-held
unit (the "Digital Recorder") with AVRI's SpeechCOMMANDER software product,
using the continuous speech recognition software developed and licensed to AVRI
by IBM known as Via VOICE ("Via VOICE") (or such other software as AVRI
determines), which resulting product will have general consumer applications and
will also be produced in customized versions dedicated to specific professional
or industry applications;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and obligations set forth in this Agreement, AVRI and VIW hereby agree
as follows:
1. AVRI's Obligations. AVRI hereby agrees to commit such technical and financial
resources as may be reasonably necessary in order to perform and complete each
of the following tasks:
a. Assist and cooperate with VIW in connection with working directly
with IBM on VIW's behalf in addressing any technical issues presented to
AVRI by VIW;
b. Assist VIW in evaluating, developing and testing a satisfactory
microphone component that will result in satisfactory audio recording
quality, which will in turn maximize the speech recognition applications;
c. Assist VIW in defining design changes to the Digital Recorder in an
effort to meet the needs of the marketplace;
d. Define, develop and/or modify AVRI's software known as
SpeechCOMMANDER or AVRI's software known as VoiceCOMMANDER Personal (as soon
as such software is available) in order to create standards for such
products to integrate with the Digital Recorder and Via VOICE, or other
voice recognition software as AVRI may determine to be appropriate in AVRI's
sole discretion;
e. Define the system protocol for the Digital Recorder and develop
software to interface to the Digital Recorder; and
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f. Define and develop an interface between Via VOICE recognition
software and the Digital Recorder, including, without limitation, the
"enroll process" using the Digital Recorder, audio interface dictation
interface and any other critical interface components as AVRI may determine
to be appropriate in AVRI's sole discretion.
Notwithstanding the foregoing, AVRI and VIW hereby further agree that AVRI shall
(i) have no obligation to provide any technical, financial, advertising or other
support to VIW or VIW's customers except as specifically set forth in this
Agreement, and (ii) be the sole liaison between VIW and IBM for all technical
issues relating to the development of the Digital Recorder or its applications.
2. VIW's Obligations. VIW hereby agrees to commit such technical and financial
resources as may be reasonably required in order to perform and complete each of
the following tasks:
a. Define, manage and obtain a new Digital Signal Processing chip (a
"DSP") that will provide speech coding and de-coding for speech recognition
applications while also providing highly compressed capabilities (the speech
encoding for speech recognition should be capable of performing at a minimum
of 92% accuracy and eventually reach accuracy of 95% or more);
b. Modify and prepare for manufacturing a printed circuit board that
will complete the hardware interface between the new DSP and the
microcontroller chip;
c. Develop software, as necessary, for the new DSP chip and added
functions;
d. Develop the systems interface protocols between the Digital Recorder
and the personal computer;
e. Identify and develop satisfactory microphone assembly and interface
for adequate audio recording for speech recognition applications;
f. Produce working prototypes of the Digital Recorder that adequately
interfaces with voice recognition software;
g. Develop software for the Digital Recorder, to AVRI specifications, to
interface with specific vertical market applications; and
h. Provide adequate manufacturing sources that can manufacture the
Digital Recorder in required quantities pursuant to Section 10.
3. Milestones. Within thirty (30) days after the Effective Date, AVRI and VIW
hereby agree to mutually set milestones and completion dates with respect to
each of AVRI's
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and VIW's tasks set forth in Section 1 and Section 2. Notwithstanding the
preceding sentence, however, the parties hereto hereby agree that (i) VIW will
deliver to AVRI a working prototype of the Digital Recorder by April 30, 1998,
and (ii) the Digital Recorder will be in full production by June 30, 1998. Each
party agrees to provide the other with a monthly report regarding the status of
their respective tasks set forth in Section 1 and Section 2, and their
respective expenses incurred with respect thereto. Such reports will be due on
the thirtieth (30th) day of each month for the prior month. Each report shall
contain a description of the current status of each task, the problems
encountered, the proposed solution to such problems, and the effect of such
problems, if any, on the milestones.
4. Purchase and Sale of VIW Stock. AVRI hereby agrees to purchase and VIW hereby
agrees to sell to AVRI 471,700 shares of VIW common stock at a price of $1.06
per share, or a total of $500,000. Such stock will be voting stock and will have
all of the same benefits and characteristics of VIW's other shares of common
stock, except that such stock, when issued, will not be registered under the
Securities Act of 1933, as amended (the "Securities Act"). The closing of such
stock purchase transaction shall take place pursuant to the terms of Section 12.
5. AVRI's Registration Rights. VIW and AVRI hereby agree that contemporaneously
with the execution of this Agreement that VIW and AVRI will execute that certain
Registration Rights Agreement effective as of even date herewith with respect to
the registration of the shares of VIW common stock owned by AVRI.
6. Attendance at Board Meetings, Etc. From and after the Effective Date and for
so long as at least 100,000 shares of VIW common stock (as adjusted for stock
splits, stock dividends and other capital events) are owned by AVRI, VIW hereby
agrees that VIW will allow one (1) designated representative of AVRI to receive
timely notice of, attend and make comments at all meetings of VIW's Board of
Directors. Such designated representative shall also be sent all standard
communications and notifications from VIW 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 such representative would if
such representative were a member of the Board of Directors.
7. Purchase and Sale of Software Licenses. VIW hereby agrees to purchase from
AVRI and AVRI hereby agrees to sell to VIW 50,000 licenses to use a complete
software package that includes SpeechCOMMANDER, Via VOICE and an on-line manual
and a training video (collectively, the "Licensed Product"), all except the
training video contained on two digitally stored "master copy" compact disks
(collectively, the "Master Copy"). The training video will be delivered on a
master videotape. The cost for each such license to use the Licensed Product
shall be $20.00. VIW and AVRI hereby agree as follows with respect to VIW's
purchase of such licenses to use the Licensed Product:
a. At the Closing (as described in Section 12), AVRI will deliver to VIW
the Master Copy. Thereafter, VIW will be responsible, at VIW's sole cost and
expense, for
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(i) copying such software from the Master Copy, and (ii) packaging,
advertising and shipping such software, in connection with VIW's sale of
licenses to use the Licensed Product.
b. VIW will reasonably cooperate with AVRI to the extent necessary to
allow AVRI to include the latest version, from time to time, of VIW PC Link
on any such Master Copy.
c. At any time after AVRI's VoiceCOMMANDER Personal software becomes
available, VIW or AVRI will have the option, in either party's discretion,
to cause VIW to thereafter discontinue selling licenses to use versions of
the Licensed Product containing SpeechCOMMANDER and to commence selling
licenses to use versions of the Licensed Product containing VoiceCOMMANDER
Personal (which licenses to use VoiceCOMMANDER shall be sold by AVRI to VIW
at the same price as the licenses to use SpeechCOMMANDER). In such event,
the party so electing will notify the other of such decision in writing and
AVRI will promptly deliver to VIW a Master Copy of the Licensed Product
containing VoiceCOMMANDER Personal. Immediately upon VIW's receipt of such
Master Copy of the Licensed Product containing VoiceCOMMANDER Personal, VIW
will return to AVRI the Master Copy of the Licensed Product containing
SpeechCOMMANDER.
d. At the Closing, VIW will deliver to AVRI a payment for $200,000,
which sum will be applied as a prepayment for the first 10,000 licenses to
use the Licensed Product to be sold by VIW. Subsequent payments for the
remaining licenses will be made by VIW to AVRI in equal payments in the
amount of $266,666.66 each on June 15, 1998, September 15, 1998 and December
15, 1998. If VIW has not yet sold the number of licenses to use the Licensed
Product for which VIW has then paid by the time the next payment is due,
then VIW's payment will be applied as a prepayment for the next licenses
sold by VIW.
e. Following the sale by VIW of the first 50,000 licenses to use the
Licensed Product, VIW will commence delivering to AVRI payment for all
additional copies of the Licensed Product within thirty (30) days after the
month during which such copies of the Licensed Product were sold. The price
for such additional copies of the Licensed Product shall be established from
time to time by AVRI, not to exceed $20 per license; provided, however, that
if AVRI's cost for additional licenses to use the Licensed Product during
any calendar quarter increases by more than ten percent (10%) above AVRI's
cost for such licenses during the prior calendar quarter, then AVRI shall be
entitled to increase the price for each license to use the Licensed Product
sold to VIW to a price in excess of $20 per license, which increase in price
per license shall be in proportion to the percentage increase in AVRI's cost
per license. Notwithstanding the foregoing, however, AVRI hereby agrees that
after the first 50,000 copies of the Licensed Product have been paid for by
VIW in any calendar year in accordance with the terms of Section 7.d., no
other customer of AVRI purchasing volumes of the Licensed Product on an
annual basis
4
<PAGE>
that are similar to the volumes purchased by VIW will receive a better price
for copies of the Licensed Product than VIW.
f. Upon VIW's and AVRI's mutual agreement, AVRI will reproduce the
Licensed Product and package the Licensed Product for VIW with respect to
sales of the Licensed Product made by VIW. AVRI will charge VIW and VIW will
pay to AVRI for such reproduction and packaging services AVRI's actual cost
for such services plus ten percent (10%). AVRI will invoice VIW on a monthly
basis for such costs. All payments will be due within thirty (30) days after
the date of AVRI's invoice to VIW.
g. VIW hereby additionally agrees to include or otherwise provide with
each VIW product that contains voice recognition technology an option to
purchase a license to use the Licensed Product.
h. AVRI hereby agrees to cause its website to provide general technical
support for frequently asked questions (FAQ's) relating to the Licensed
Product. Additionally, AVRI will make available personal technical support
by telephone to VIW's customers with respect to the Licensed Product in
accordance with AVRI's customary technical support program. Notwithstanding
AVRI's agreement to provide such technical support services to VIW's
customers, AVRI will not be responsible for, or liable to VIW's customers
for, any returns or product warranty claims with respect to the Licensed
Product, other than problems resulting from faulty reproduction of the
Licensed Product performed by AVRI pursuant to Section 7.f.
i. VIW will provide AVRI by the thirtieth (30th) of each month a
detailed report of sales activities of VIW for the prior month with respect
to VIW's sales of the Licensed Product. In the event that VIW is in default
of any of VIW's payment or reporting obligations under this Agreement, AVRI
shall be entitled at any time during VIW's normal business hours, upon at
least 24 hours prior notice and at AVRI's sole cost and expense, to inspect,
review and audit VIW's books and records at VIW's principal place of
business with respect to VIW's sales of licenses to use the Licensed
Product. VIW shall cooperate with AVRI in connection with AVRI's inspection,
review and auditing activities described in this Section. VIW shall be
deemed to be in default under the terms of this Agreement in the event that
(i) VIW fails to reasonably cooperate with AVRI in connection with AVRI's
review and audit, or (ii) AVRI determines, in AVRI's reasonable discretion,
that a material discrepancy exists between the reported sales of the
licenses to use the Licensed Product as reflected in the monthly reports
described in this Section and the actual sales of licenses to use the
Licensed Product as reflected in VIW's books and records. For purposes of
this Agreement, the terms "material discrepancy" shall mean a discrepancy of
five percent (5%) or greater. Upon any such default, AVRI will be entitled
to exercise its remedies set forth in Section 14.
j. If VIW is delinquent in the payment of any amounts owed to AVRI under
the terms of this Agreement, AVRI will charge VIW and VIW will pay to AVRI
interest
5
<PAGE>
on such past due amounts at the lesser of (i) the rate of twelve percent
(12%) per annum, or (ii) the maximum rate allowed by law.
8. Software License.
a. AVRI hereby grants to VIW the non-exclusive license to use, sell and
sublicense the Licensed Product to VIW's customers in accordance with the
terms of this Agreement. VIW will request that all purchasers of the
Licensed Product execute AVRI's standard-form license agreement as contained
in the installation routine for the Licensed Product (the "Product
License"). VIW will retain all such licenses and will make them available to
AVRI for AVRI's review upon AVRI's written request.
b. VIW hereby agrees to abide by and to be bound by the terms of the
Product License and shall not utilize such software or Licensed Product for
any purpose other than VIW's own purposes and in connection with VIW's
sublicense of the Licensed Product to VIW's customers in accordance with the
terms of this Agreement.
9. Proprietary Information.
a. VIW hereby agrees as follows:
(i) VIW recognizes the exclusive rights of AVRI to all patents,
service marks, trademarks, trade names and copyrights used in connection
with the Licensed Product, and, although no rights are intended to be
transferred to VIW, VIW hereby transfers, and agrees to transfer, all
rights it may acquire in connection with the Licensed Product to AVRI.
(ii) VIW agrees that AVRI's patents, service marks, trade names may
be used only on and with respect to the Licensed Product.
(iii) VIW agrees not to use a mark or other designation identical
with or confusingly similar to any of AVRI's service marks, trademarks
or trade names or any substantial part thereof, except with the express
prior written consent of AVRI.
(iv) Any and all packaging for the Licensed Product will contain
AVRI's logo and AVRI's "Voice Experts" attribution. If VIW desires to
utilize any packaging for the Licensed Product that does not contain
such logo and attribution, then AVRI shall have the right to approve in
advance any such packaging.
b. AVRI hereby agrees as follows:
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<PAGE>
(i) AVRI recognizes the exclusive rights of VIW to all patents,
service marks, trademarks, trade names and copyrights used in connection
with the Digital Recorder, and, although no rights are intended to be
transferred to AVRI, AVRI hereby transfers, and agrees to transfer, all
rights it may acquire in connection with the Digital Recorder to VIW.
(ii) AVRI agrees that VIW's patents, service marks, trade names may
be used only on and with respect to the Digital Recorder.
(iii) AVRI agrees not to use a mark or other designation identical
with or confusingly similar to any of VIW's service marks, trademarks or
trade names or any substantial part thereof, except with the express
prior written consent of VIW.
(iv) Any and all packaging for the Digital Recorder will contain
VIW's logo. If AVRI desires to utilize any packaging for the Digital
Recorder that does not contain such logo, then VIW shall have the right
to approve in advance any such packaging.
10. Sale and Manufacture of Digital Recorder. AVRI hereby agrees to purchase
units of the Digital Recorder and VIW hereby agrees to manufacture units of the
Digital Recorder and sell to AVRI units of the Digital Recorder on the following
terms:
a. VIW will manufacture units of the Digital Recorder based on AVRI's
specifications on an original equipment manufacturer, or "OEM" basis.
b. The first 4,000 Digital Recorders will be sold to AVRI at VIW's
actual unit cost of goods sold as reported in VIW's monthly financial
package plus 10%. Thereafter, the price for each Digital Recorder sold to
AVRI will be VIW's actual unit cost of goods sold as reported in VIW's
monthly financial package plus 30%. Notwithstanding the foregoing, however,
VIW hereby agrees that no other customer of VIW will receive a better price
for the Digital Recorder than AVRI. In the event that any customer of VIW
does receive a better price for units of the Digital Recorder than AVRI,
then VIW will promptly (i) notify AVRI of such better price in writing and
confirm that AVRI will be entitled to purchase units of the Digital Recorder
at such better price during the remaining term of this Agreement, (ii)
adjust AVRI's price for the Digital Recorder so that AVRI's price is equal
to such better price for each unit purchased by AVRI since the date of VIW's
agreement to sell units of the Digital Recorder at such better price, and
(iii) refund to AVRI the amount due to AVRI as a result of such price
adjustment, or, at AVRI's option, apply such refund in payment of amounts
owed by AVRI to VIW.
c. VIW's actual costs will be calculated and adjusted, if necessary, on
a quarterly basis based upon VIW's unit cost of goods sold as reported in
VIW's monthly financial package for the previous quarter.
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<PAGE>
d. VIW will invoice AVRI on a monthly basis for all amounts due from
AVRI to VIW under the terms of this Agreement. All payments will be due
within thirty (30) days after the date of VIW's invoice to AVRI.
e. If AVRI is delinquent in the payment of any amounts owed to VIW under
the terms of this Agreement, VIW will charge AVRI and AVRI will pay to VIW
interest on such past due amounts at the lesser of (i) the rate of twelve
percent (12%) per annum, or (ii) the maximum rate allowed by law.
f. Each month, AVRI will provide VIW with (i) a binding purchase order
for the number of units of the Digital Recorder that AVRI will purchase
during next 90-day period, which purchase order will replace the purchase
order delivered by AVRI at the beginning of the previous month, except that
the number of units ordered for the next 60-day period will be the same as
the number of units ordered for the last sixty days on the previous purchase
order, and (ii) a non-binding forecast of the number of units of the Digital
Recorder that AVRI expects to purchase during the period that is between 91
days and 180 days in advance of the date of such forecast, which non-binding
forecast will replace the forecast delivered by AVRI at the beginning of the
previous month with respect to the 91 day to 150 day period referenced in
such new forecast.
g. If (i) VIW for any reason is not able to deliver the Digital Recorder
in quantities sufficient to meet AVRI's requirements as contained in the
purchase orders and forecasts described in Section 10.f., or at a level of
quality sufficient to meet AVRI's requirements, and VIW is not able to cure
such quantity or quality deficiency within sixty (60) days after AVRI
provides VIW with written notice of such quantity or quality deficiency, or
(ii) VIW refuses, is unable, or is otherwise unavailable (as a result of
bankruptcy, court order or any other reason) to deliver to AVRI any units of
the Digital Recorder for a period of thirty (30) days, then AVRI shall have
the right, at AVRI's own cost and expense to manufacture, or cause to be
manufactured on an "OEM" basis, the Digital Recorder. In the event AVRI so
elects to manufacture the Digital Recorder, then AVRI will pay VIW a fee of
ten percent (10%) per unit sold of the unit cost of goods sold as reported
in AVRI's monthly financials, and VIW will cooperate with AVRI by (A)
providing to AVRI copies of plans and specifications for the Digital
Recorder, and (B) granting to AVRI a non-exclusive, irrevocable license to
use all patents, copyrights, trade secrets, licenses, and other proprietary
information relating to the Digital Recorder.
11. Distribution Rights. VIW hereby grants to AVRI the exclusive right to sell
and market the Digital Recorder worldwide with respect to businesses directly
engaged in the delivery of healthcare services (the "Healthcare Market"), and
VIW hereby agrees that VIW will not to compete in the Healthcare Market. VIW
also hereby grants to AVRI the exclusive right to sell the Digital Recorder to
the United States based computer catalog sales industry (the "Catalog Market");
provided, however, that VIW hereby retains, and this Agreement excludes, the
right to sell the Digital Recorder to VIW's current catalog sales customers,
Sharper Image, Brookstone
8
<PAGE>
and Hammacher Schlemmer. The Healthcare Market and the Catalog Market are
collectively referred to herein as the "Exclusive Markets." In the event that
AVRI fails to have purchased an aggregate of (A) the lesser of 10,000 Digital
Recorders, or $1,000,000 worth of Digital Recorders by the later of (i) June 1,
1999, or (ii) the one year anniversary of "full production" (as hereinafter
defined) of the Digital Recorder units (the "Commencement Date"), (B) 50,000
Digital Recorders by the end of the second anniversary of the Commencement Date,
and (C) 100,000 Digital Recorders by the end of the third anniversary of the
Commencement Date, then VIW will be entitled to immediately terminate the
exclusive nature of AVRI's right to sell and market with respect to the
Exclusive Markets; whereupon AVRI will continue to have a non-exclusive right to
sell and market the Digital Recorder in the Exclusive Markets and VIW will
continue to supply AVRI with Digital Recorders in accordance with the terms of
this Agreement. For purposes of this Agreement, "full production" shall mean
such time when VIW's production facilities are prepared and able to produce the
number of Digital Recorders set forth in AVRI's 90-day purchase order described
in Section 10.f. Notwithstanding AVRI's failure to meet the purchasing quotas
set forth in the preceding portion of this Section 11, AVRI will be entitled to
retain the exclusive right to sell and market to the Healthcare Market through
the third anniversary of the Commencement Date. After such third anniversary of
the Commencement Date, the parties hereto will determine, acting in good faith,
the minimum purchase requirements with respect to Healthcare Market and the
Catalog Market for future years.
12. Closing. The closing of the transactions provided for herein (the "Closing")
shall take place on or prior to December 31, 1997 (the "Closing Date"). At the
Closing, the following shall occur:
a. AVRI will deliver to VIW a check in the amount of $500,000
representing the purchase price for the shares of VIW common stock being
purchased by AVRI in accordance with Section 4, and VIW will deliver to AVRI
a share certificate evidencing such shares of VIW common stock, or will
immediately instruct its transfer agent to issue and forward directly to
AVRI such certificate.
b. VIW will deliver to AVRI a check in the amount of $200,000
representing the prepayment of the purchase price for the first 10,000
copies of the Licensed Product being purchased by VIW in accordance with
Section 7, and AVRI will deliver to VIW the Master Copy of the Licensed
Product containing the copy of SpeechCOMMANDER.
13. Use of Proceeds. VIW hereby covenants and agrees that the proceeds received
by VIW from AVRI with respect to AVRI's purchase of VIW's common stock, less the
purchase price paid by VIW to AVRI for the initial purchase of the licenses to
use the Licensed Product, shall be used solely for paying the costs and expenses
relating to VIW's performance of its obligations under Section 2 of this
Agreement. The parties hereby agree to mutually establish a detailed budget for
the use of such proceeds within thirty (30) days after the Effective Date.
Contemporaneously with VIW's delivery to AVRI of its monthly reports pursuant to
Section 3, VIW will also provide AVRI a monthly report illustrating its actual
costs incurred compared to the budgeted costs, both for the prior month and on
an aggregate basis for the entire project.
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<PAGE>
VIW hereby agrees to fund all cost overruns and other expenses that may arise
with respect to VIW's completion of its obligations under Section 2 in
accordance with the deadlines established under Section 3. Additionally, VIW
hereby agrees to promptly provide AVRI with copies of such additional
information and support relating to the use of such funds as AVRI may reasonably
request.
14. Remedies. Subject to the provisions of Section 14.d., in the event of a
default under the terms of this Agreement, the parties hereby agree that the
following remedies will be available:
a. In the event that either party hereto shall fail to comply with any
terms, provisions or covenants of this Agreement, and such failure is not
cured within thirty (30) days after the non-defaulting party has given
written notice to the defaulting party, specifying with reasonable
particularity the manner in which the defaulting party has failed to comply
with this Agreement, then the non-defaulting party shall be entitled to
terminate this Agreement by giving written notice to the defaulting party.
b. Notwithstanding the terms of Section 14.a., parties hereto hereby
agree as follows:
(i) That AVRI would be irreparably damaged by reason of any violation
of the provisions of Section 8, Section 9.a. or Section 11 and that any
remedy at law or pursuant to Section 14.c. for a breach of such
provisions would be inadequate. Therefore, in addition to other remedies
or relief that may be available to AVRI, AVRI shall be entitled to seek
and obtain injunctive or other equitable relief (including, but not
limited to, a temporary restraining order, a temporary injunction or a
permanent injunction) against VIW, VIW's agents, employees,
representatives and/or any and all persons directly or indirectly acting
for or with VIW for a breach or threatened breach of such provisions and
without the necessity of (i) proving actual monetary loss, and (ii)
complying with the terms of Section 14.c.
(ii) That VIW would be irreparably damaged by reason of any violation
of the provisions of Section 9.b. and that any remedy at law or pursuant
to Section 14.c. for a breach of such provisions would be inadequate.
Therefore, in addition to other remedies or relief that may be available
to VIW, VIW shall be entitled to seek and obtain injunctive or other
equitable relief (including, but not limited to, a temporary restraining
order, a temporary injunction or a permanent injunction) against AVRI,
AVRI's agents, employees, representatives and/or any and all persons
directly or indirectly acting for or with AVRI for a breach or
threatened breach of such provisions and without the necessity of (i)
proving actual monetary loss, and (ii) complying with the terms of
Section 14.c.
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c. The parties agree that all disputes or questions arising in
connection with this Agreement or its termination shall be settled by a
single arbitrator pursuant to the rules of the American Arbitration
Association in the City of Houston, Texas, and the award of the arbitrators
shall be final, non-appealable, conclusive and enforceable in a court of
competent jurisdiction.
15. No Agency; Relationship of Parties. Both AVRI and VIW are independent
contractors and neither is a legal representative or agent of the other.
Neither party is liable for the debts, accounts, obligations or other
liabilities of the other.
16. Assignment. This Agreement is personal to the parties hereto and cannot be
assigned or transferred voluntarily or by operation of law without the prior
written consent of the other party.
17. Severability. If any provision of this Agreement is illegal, invalid or
unenforceable, then that provision shall be considered to be severable from all
other parts and provisions hereof and shall not affect the legality, validity
and enforceability of the remainder of the Agreement, which shall remain in full
force and effect.
18. Entire Agreement. This Agreement constitutes the entire Agreement between
the parties with respect to the subject matter hereof. No amendment to this
Agreement shall be effective unless in writing and duly signed by both parties.
19. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, U.S.A., without giving effect to
the conflicts of laws provisions thereof.
20. Notices. A notice required to be given under this Agreement shall be in
writing and be deemed sufficient if given by certified or registered mail,
postage prepaid, telex or facsimile and addressed as follows (or at such other
address, telex or facsimile number as such party may designate from time to time
in writing). Unless otherwise provided, notices shall be deemed given for
purposes hereof, upon confirmation of telex or facsimile, or if deposited in the
mails, on the fifth (5th) day thereafter:
If to AVRI, to: Applied Voice Recognition, Inc.
4615 Post Oak Place, Suite 111
Houston, Texas 77027
Attention: Timothy J. Connolly
Facsimile No.: (713) 621-5870
With copy to: Boyar, Simon & Miller
4265 San Felipe, Suite 1200
Houston, Texas 77027
Attention: Gary W. Miller, Esq.
Facsimile No.: (713) 552-1758
11
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If to VIW, to: Voice It Worldwide, Inc.
2643 Midpoint Drive, Suite A
Ft. Collins, Colorado 80525
Attention: Chief Executive Officer
Facsimile No.: (970) 221-2058
With copy to: Andrew N. Bernstein, P.C.
5445 DTC Parkway, Suite 520
Greenwood Village, Colorado 80111
Attention: Andrew N. Bernstein
Facsimile No.: (303) 770-7332
[REST OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the Effective Date.
AVRI:
APPLIED VOICE RECOGNITION, INC.,
- a Utah corporation
By: /s/ Timothy J. Connolly
-------------------------------------
Timothy J. Connolly, Chairman of
the Board and Chief Executive
Officer
VIW:
VOICE IT WORLDWIDE, INC.,
a Colorado corporation
By: /s/ D. W. Altbrandt
-------------------------------------
(Signature)
Name: D. W. Altbrandt
(Printed Name)
Title: Chief Executive Officer
Signature Page to
Joint Product Development Agreement
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<PAGE>
EXHIBIT 10.2
PROFILE TO OEM DISTRIBUTION AGREEMENT
- --------------------------------------------------------------------------------
This profile covers the details of your authorization to market IBM Product(s)
with Your Product(s) to your Distributors and End Users. Please let us know if
you have any questions or problems with our IBM Product(s).
By signing below, each of us agrees to the terms of the following (collectively
called the "Agreement"):
1. Profile
2. OEM Distribution Agreement
3. Applicable Attachments and Exhibits referred to in the OEM
Distribution Agreement.
This Agreement is the complete agreement regarding this relationship, and
replaces any prior oral or written communications between us. Once this
Agreement is signed, 1) any reproduction of this Agreement made by reliable
means (for example, photocopy or facsimile) is considered an original and 2) all
IBM Product(s) you order and services you perform under this Agreement are
subject to it.
<TABLE>
<S> <C>
Effective Date (last date signed): 12/17/96 Duration: Two (2) Years
Agreed to: (OEM name) Agreed to:
International Business Machines Corporation
/s/ Timothy J. Connolly /s/ Ron K. Owen
By:________________________________ By:________________________________________
(authorized signature) (authorized signature)
Name: Timothy J. Connolly Name: Ron K. Owen
------------------------------ --------------------------------------
(type or print)
Title: C.E.O. Title: Contract Administrator
----------------------------- -------------------------------------
Date: 12/11/96 Date: 12/17/96
------------------------------- --------------------------------------
OEM address: IBM address:
Applied Voice Recognition, Inc. International Business Machines Corporation
4615 Post Oak Place, Suite 277 11400 Burnet Road
Houston, Texas 77027 Austin, TX 78758
Attn: OEM Software Contracts
Internal Zip 3001
NOTIFICATION ADDRESS:
OEM: IBM:
Applied Voice Recognition, Inc. International Business Machines Corporation
4615 Post Oak Place, Suite 277 11400 Burnet Road
Houston, Texas 77027 Austin, TX 78758
Attn: Tim Connolly Attn: Austin Site Counsel
Internal Zip 9452
CUSTOMER NUMBER: AGREEMENT NUMBER: C-OM-96060
</TABLE>
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YOUR PRODUCTS
-------------
Description of Your Product(s)
- ------------------------------
1. Your Designated Ship to Location:
Page 2
<PAGE>
IBM
OEM DISTRIBUTION AGREEMENT (SOFTWARE SYSTEMS)
- ---------------------------------------
1.0 DEFINITIONS
1.1 "Additional License" is the authorization from us for the End User to
make one copy of the IBM Product(s) under the terms of the IBM Proof
of Additional License.
1.2 "Code" is a computer instruction in object Code format.
1.3 "Designated locations" are any of your locations to which we ship IBM
Product(s).
1.4 "Distributors" are any business entities you use to distribute Your
Product(s).
1.5 "End Users" is a party unaffiliated with you and who acquires IBM
Product(s) from you for internal use, and not for redistribution.
1.6 "Level 1 Service" shall mean the service provided in response to the
initial phone call placed by an End User which identifies and
documents an error in the IBM Product(s). This includes problem
source identification assistance, problem analysis, problem
resolution, installation planning information and preventive and
corrective service information.
1.7 "Level 2 Service" shall mean the service provided to analyze or
reproduce the error or to determine that the error is not
reproducible. This includes problem recreation and in-depth technical
analysis.
1.8 "Level 3 Service" is the service provided to the OEM that isolates the
error to a component level of the IBM Product(s). An attempt is to be
made to provide an error correction or circumvention or notification
that no correction or circumvention is available.
1.9 "IBM Product(s)/TM/ is the IBM Software Product(s) listed in the
attached Exhibits.
1.10 "Your Product(s)" is the software product described in the Profile
which you market and distribute under your trademark(s) or product
name(s) but not in combination with anyone else=s trademark or product
name.
2.0 OUR RESPONSIBILITIES
We agree to:
2.1 provide you golden master diskettes for the IBM Product(s) listed in
the Profile. We may make new releases of the IBM Product(s) available
to you. ______, terms and conditions for such new releases may vary.
2.2 provide Level 3 Service during the time that such service is available
to all other IBM customers of the IBM Product(s). Upon our request,
you will provide your product(s) to us at no charge in order to
provide this service.
3.0 OUR MUTUAL REPRESENTATIONS
Each of us agrees:
3.1 that each of us is an independent contractor and neither of us is a
legal representative or agent of the other.
3.2 that each of us may independently develop or acquire materials which
are competitive with each others product(s) or make similar
arrangements with other parties. Each of us is free to establish our
own prices and to enter into similar agreements with other parties.
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<PAGE>
3.3 that failure by either of us to insist on strict performance or to
exercise a right when entitled, does not prevent us from doing so at a
later time, either in relation to that default or any subsequent one.
4.0 YOUR RESPONSIBILITIES
You agree to:
4.1 distribute the IBM Product(s) with a Program License Agreement
("APLA") containing terms legally sufficient to:
i) prohibit further copying and or transfer of the IBM Product(s) by
the end user, and
ii) prohibit reverse assembly, reverse completion, or other
transaction of an IBM Product(s); and
iii) notify the end user that the IBM Product(s) is copyrighted and
licensed (not sold) and that title to the IBM Product(s) is not
transferred; and
iv) notify the end user that the owner of the IBM Product(s),
ADISCLAIMS ALL WARRANTIES WITH RESPECT TO THE USE OF THE IBM
PRODUCT(S) INCLUDING WITHOUT LIMITATION) ANY WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE@; and
v) notify the end user that the owner of the IBM Product(s)
liability is limited to the amount paid by the end user for the
IBM Product(s).
4.2 provide Level 1 and Level 2 Service.
4.3 make no more than one-percent (1%) of your annual forecast as no
charge copies of the IBM Product(s) to be used solely for
demonstration purposes which must be so labeled. Additionally, we
will specify in the Profile if you are authorized to make any other no
charge copies for any other purposes. You agree not to make any
unauthorized copies.
4.4 return the golden master diskettes to us when this Agreement ends.
4.5 (1) have an agreement in place with each Distributor which will permit
you to comply with your obligations under this Agreement, and (2)
ensure that your Distributors do not conduct their business in a way
that conflicts with your responsibilities under this Agreement.
4.6 integrate IBM Product(s) only with your Product(s) that are of
comparable or higher value, and upon our request, make available to us
for our inspection and approval one copy of Your Product(s) and print
materials which use the name of the IBM Product(s), both in finished
form.
4.7 retain records for each of the transactions for three (3) years.
Records must include the number of IBM Product(s) sold, name of IBM
Product(s), and model numbers thereof, sold and/or returned, including
if IBM requests such information, end users name and address. You
agree to provide us or a mutually agreed to representative with
sufficient free and safe access to your facilities at a mutually
convenient time for us to audit these records. We may conduct surveys
of your Distributors with regard to our relationship under this
Agreement.
4.8 not assign your rights or delegate your obligations under this
Agreement to any third party without our written consent. Any attempt
to do so is void.
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<PAGE>
4.9 not make representations about the IBM Product(s) except as authorized
by us in writing.
5.0 LICENSES (IBM TO YOU) AND YOUR OBLIGATIONS
5.1 For each copy we authorize you to make, we give you a non-transferable
license to replicate and distribute to End Users or your Distributors
copies of the IBM Product(s) on Your Product(s). You are not
authorized to distribute the IBM Product(s) alone. You shall not
reverse assemble, reverse compile, sublicense, rent, lease or assign
the IBM Product(s), or any copy thereof.
5.2 We do not grant you rights to any _________ work with respect to IBM
Product(s) or any other item we supply to you.
5.3 You may provide one back-up copy of the IBM Product(s) with Your
Product(s). This copy must be identified as the back-up copy allowed
under the applicable license agreement.
6.0 INFORMATION EXCHANGE
6.1 We mutually agree that all information, exchanged between us is non-
confidential. If either of us requires the exchange or confidential
information it will be made under a signed confidentiality agreement.
7.0 CHANGES TO THIS AGREEMENT
7.1 We may change prices for IBM Products by issuing a Revised Exhibit.
We will give you thirty (30) days prior notice of any price increase.
For all other changes to be valid, both of us must sign a written
amendment.
8.0 FINANCIAL TERMS
8.1 We will specify the charges and any minimum order requirements
associated with the IBM Product(s) in the Exhibits and you shall pay
in accordance with the terms and conditions of the IBM invoice.
8.2 You shall provide IBM with an initial payment in accordance with the
exhibit for each IBM Product(s) that you distribute. This payment
must be made before any IBM Product(s) are distributed. When the
quantity associated with the initial order is exhausted, you may order
additional IBM Product(s), subject to the minimum order quantity
specified in the exhibit, by submitting a purchase order to the
address listed below.
International Business Machine Corporation
Branch Office JWQ
Accounts Receivable
Internal Zip 305
150 Kettletown Road
Southbury, CT 08488
You are responsible to ensure that sufficient quantities of the IBM
Product(s) have been ordered to cover shipments of your product. You
agree to provide IBM, upon request, documentation detailing the
quantity of IBM Product(s) distributed externally or installed
informally during the term of this agreement.
Each such accounting shall include a statement summarizing for each
county in which you or your authorized Distributors are authorized to
sell the IBM Product(s), the following: (i) the number of copies of
the IBM Product(s) distributed normally or installed informally; (ii)
normal revenue for such IBM Product(s) so placed; and (iii) an
explanation of how the payment was calculated.
Page 3
<PAGE>
8.3 If your account becomes delinquent, (more than 30 days past due) we
may revoke your license to copy or distribute IBM Product(s) until
your account is current. You shall pay IBM's attorneys fees (both in
house and outside) incurred in connection with collecting sums past
due.
8.4 You agree to provide us with relevant financial information about your
business on request, if required by us, you agree to establish a line
of credit with us.
8.5 You agree to: (1) provide us with valid reseller exemption
documentation for each applicable taxing jurisdiction, otherwise we
will charge you all applicable state and local taxes and duties and
(2) notify us promptly if this documentation is revoked or modified.
You are liable for any claims or assessments resulting from any taxing
jurisdiction in which your exemption is not recognized.
9.0 WARRANTY
9.1 THE IBM PRODUCT(S) WE PROVIDE TO YOU PURSUANT TO THIS AGREEMENT ARE
PROVIDED ON AN "AS IS" BASIS WITHOUT WARRANTY OF ANY KIND, EXPRESS OR
IMPLIED, INCLUDING BUT NOT LIMITED TO, WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
10.0 LIMITATION OF LIABILITY
10.1 WE ARE NOT LIABLE FOR ANY LOST REVENUE, LOST PROFITS, OR OTHER
CONSEQUENTIAL, INCIDENTAL OR PUNITIVE DAMAGES EVEN IF ADVISED IN
ADVANCE OF THE POSSIBILITY OF SUCH DAMAGES.
10.2 Our entire liability for claims in any way related to this Agreement
shall be limited to the greater of the monies paid by you to us for
the IBM Product(s) which caused the damage or one hundred thousand
dollars ($100,000). This limitation is cumulative. The sum of
multiple claims may not exceed this limit.
10.3 The experience of multiple claims will not discharge or extend this
limitation. You agree to release us from all obligations, liability,
claims or damages in excess of one limitation.
11.0 PATENTS, COPYRIGHTS, INDEMNIFICATIONS
11.1 You agree, at your expense, to defend us against any claim against us
based on your representations, omissions, or actions relating to this
Agreement, your product(s) or your Code. You agree to pay all costs,
damages and reasonable attorney's fees that a court finally awards as
a result of such claim. To qualify for such defense and payment, we
agree to 1) give you prompt written notice of any such claim and 2)
allow you to control and full cooperate with you in the defense of
such claims and all related settlement negotiations..
11.2 Title to our copyrights, patents and any other intellectual property
rights in the Code and IBM Product(s) documentation remain with us.
11.3 Nothing in this Agreement grants any license or other right under any
patents or patent applications to combine any item purchased from us
with any other item, or to use any such combination.
12.0 TRADEMARKS, TRADE NAMES AND PRODUCT NAMES
12.1 This Agreement does not grant you any rights in any of IBM's
trademarks, trade names or service marks. However, you may assert
that Your Product(s) include the IBM Product(s).
Page 4
<PAGE>
13.0 TERMINATION
13.1 We may terminate this Agreement upon written notice to you at any
time for acts or omissions that we consider to be so serious as to
warrant termination.
13.2 Except as otherwise provided herein, either of us may terminate this
Agreement for cause, if the cause has not been cured within thirty
(30) days following written notice to the either party, and either
party may terminate this Agreement without cause upon three months
written notice.
13.3 Upon termination of this Agreement you agree to immediately pay us
all amounts due.
13.4 The rights and obligations of this Agreement which by their nature
extend beyond its termination remain in effect until fulfilled and
apply to respective successors and assignees.
14.0 GENERAL
14.1 You shall have sole responsibility for the payment of all taxes and
duties imposed by any governmental entity, and shall at your own
expense, comply with any governmental law, statute, ordinance,
administrative order, rule or regulation relating to your duties under
this Agreement and shall procure all licenses and approvals and pay
all fees and other charges required by law thereby, as they pertain to
your duties, obligations and performance under this Agreement. You
are responsible to bear any personal property taxes assessable on the
Products on or shall delivery to the carrier at their ship-front
location.
14.2 You warrant and represent that the IBM Product(s) are exportable into
the countries to which you ship them. You shall not, nor shall you
authorize or permit your employees, agents or subcontractors to export
or re-export any IBM information or materials to any country specified
as a prohibited destination in applicable federal, state and local
laws, regulations and ordinances, including the Regulations of the
U.S. Department of Commerce and/or the U.S. State Department, without
first obtaining any ______ U.S. governmental approval. For your
information, current prohibited countries include Cuba, Iraq, Iran,
Libya, North Korea, Yugaslavia (Serbia, Montenegro).
14.3 We may assign our rights or delegate our responsibilities under this
Agreement.
14.4 Any notice required or permitted to be given pursuant to this
Agreement shall be considered given on the date of mailing if sent to
the receiving party by first class mail, postage prepaid or terminate,
and addressed to the addressees set forth in the Profile.
14.5 The laws of the State of New York and the Copyright and Patent Law of
the United States or America govern this Agreement. We both agree to
waive any right to a trial by jury for the resolution of any dispute
with respect to this Agreement. Neither of us will bring a legal
action against the other more than two years after the cause of action
arose.
14.6 The parties acknowledge that they have read this Agreement,
understand it, and agree to be bound by its terms and conditions.
Page 5
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-24345) pertaining to the Warrant of Hakeem Olajuwan, Registration
Statement (Form S-8 No. 333-24343) pertaining to the Option To Akin Olajuwan,
Registration Statement (Form S-8 No. 333-24399) pertaining to the Warrant to Tim
Connelly, Registration Statement (Form S-8 No. 333-24397) pertaining to the
Option to Jesse Marion, Registration Statement (Form S-8 No. 333-24395)
pertaining to the Warrant to Jan Carson Connelly, Registration Statement (Form
S-8 No. 333-24393) pertaining to the Warrant to H. Russell Douglas, Registration
Statement (Form S-8 No. 333-24391) pertaining to the Compensation Agreement of
Thomas C. Pritchard, and Registration Statement (Form S-8 No. 333-44191)
pertaining to the Applied Voice Recognition, Inc. 1997 Incentive Plan, of our
report dated April 4, 1998, with respect to the financial statements of Applied
Voice Recognition, Inc. included in the Annual Report (Form 10-KSB) for the year
ended December 31, 1997.
ERNST & YOUNG LLP
Houston, Texas
April 15, 1998
<PAGE>
[LETTERHEAD OF MALONE & BAILEY
APPEARS HERE]
EXHIBIT 23.2
CONSENT OF MALONE & BAILEY, PLLC, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8), pertaining to the Warrants to Hakeem, Inc., Tim Connolly, Jan
Carson Connolly, and H. Russel Douglas, Options to Akin Olajuwon and Jesse
Marion, the Compensation Agreement of Brewer & Pritchard, P.C. and the Applied
Voice Recognition, Inc. 1997 Incentive Plan of our report dated March 12, 1997
(except for Note 15, as to which the date is April 13, 1998).
MALONE & BAILEY, PLLC
Houston, Texas
April 15, 1998
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