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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-KSB/A-1
(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
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- ---------------------------- -------------------------------------------------
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 28, 1998 of $2.59 was 15,582,163. As of
April 28, 1998, Issuer had 13,187,853 shares of its common stock, par value
$.001 per share (the "Common Stock"), outstanding.
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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.
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TABLE OF CONTENTS
ITEM PAGE
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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 ........................................ 15
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 18
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................ 19
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K ............................. 21
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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.
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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 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 Voice COMMANDER 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 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 ("VC4"), 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
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.
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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 the 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 a.m. - 10:00 p.m., 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
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 hand held 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 internet or
extranet transfers of compressed voice files in connection with a handheld
devise that supports customizations 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.
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.
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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
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(Commencing February 5, 1997) 1/st/ Quarter $4.125 $2.500
2/nd/ Quarter $4.000 $2.500
3/rd/ Quarter $3.718 $2.562
4/th/ Quarter $6.125 $2.750
As of April 28, 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 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.
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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 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 1,766,000 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
9
<PAGE>
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
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 the 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 the 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 Editions 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.
10
<PAGE>
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.
Interest expense: Interest expense increased approximately $359,000 from
$92,000 in 1996 to $451,000 in 1997 an 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 carry forwards is dependent upon the Company
generating sufficient taxable income, and may be affected by annual limitations
on the use of such carry forwards if a change of control occurs due to future
sales of the Company's capital stock. During the 1996 and 1997, the Company has
recorded a valuational 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
11
<PAGE>
(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 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.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
The following table provides information concerning each executive officer
and director of the Company as of the date hereof:
<TABLE>
<CAPTION>
NAME AGE POSITION CLASS
---- --- -------- -----
<S> <C> <C> <C>
Timothy J. Connolly 45 Chief Executive Officer, President and Chairman of the Board II
Jan Carson Connolly 49 Vice President - Marketing, Secretary and Director II
H. Russel Douglas 46 Vice President - Research and Development/Chief Technology II
Officer and Director
William T. Kennedy 53 Assistant Secretary and Chief Financial Officer N/A
J. Nolan Bedford 61 Director II
Raymond R. Betz 54 Director III
J. William Boyar 47 Director I
Frederick A. Huttner 52 Director I
G. Edward Powell 62 Director I
Jesse R. Marion 44 Director III
Michael J. Wilson 45 Vice Chairman and Director III
</TABLE>
TIMOTHY J. CONNOLLY has served as Chairman of the Board, Chief Executive
Officer and President of the Company since August 1996. Mr. Connolly founded
Applied Voice Technology, LP (the Company's predecessor) in November 1994 and
served as its managing partner until August 1996. In 1984, Mr. Connolly formed
Post Oak Financial Corporation, an investment and mortgage banking firm, and
served as President of that corporation until October 1994. Mr. Connolly
graduated from Texas A&M University with an undergraduate degree in Marketing
and Management, and a Masters Degree in Business Administration.
JAN CARSON CONNOLLY has served as Vice President of Marketing and a director
of the Company since August 1996. From September 1995 until August 1996, Ms.
Carson Connolly was employed by Applied Voice Technology, L.P. Ms. Carson
Connolly was a news anchor and reporter for ABC, NBC and CBS in Houston, San
Francisco, and several other cities from September 1983 through August 1995.
Ms. Carson Connolly has over 24 years experience in television broadcast
journalism during which time she was employed as a writer, producer, editor,
reporter and news anchor. Ms. Carson Connolly graduated with a Bachelor of Arts
Degree from Benedictine College in Atchison, Kansas.
H. RUSSEL DOUGLAS has served as Vice President of Research and
Development/Chief Technology Officer and a director of the Company since August
1996. Mr. Douglas was employed by Applied Voice Technology, L.P. from August
1995 through August 1996. From 1989 through August 1995, Mr. Douglas was a
senior manager of Legent Corporation, an international computer software
company, where Mr. Douglas was responsible for development and worldwide support
of Legent's systems product line. Mr. Douglas began developing voice
applications in 1986 as Vice President of Research and Development of VOTEK, an
early voice applications company based in Ontario, Canada. Mr. Douglas received
a BSC Degree in Economics and Commerce in 1977 from the Royal Military College
of Canada, and a Masters Equivalent in Organizational Management in 1981 from
the Canadian Military Staff School.
WILLIAM T. KENNEDY joined the Company as Chief Financial Officer in May 1997.
From 1991 until joining the Company, Mr. Kennedy served as Vice President of
Finance/CFO of Bradmark, Inc., a database software company. Prior to that time,
Mr. Kennedy served as the Chief Financial Officer for CBR, Inc., a credit and
collections company with 60 business units in over 35 states, from 1987 to 1991.
Mr. Kennedy's experience also included serving as CFO for Bookstop,
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Inc., a discount bookstore chain with 23 stores. Mr. Kennedy has over 25 years
of financial accounting experience. Mr. Kennedy is a graduate of the University
of Illinois, and is a Certified Public Accountant.
J. NOLAN BEDFORD has served as director of the Company since May 1997. Mr.
Bedford has been the Vice-Chairman of Southwest Bank Holding Company, Houston,
since 1997. During his career, he has served as Chief Executive Officer for
several banks, including his most recent duties as President and Chief Executive
Officer for Pinemont Bank in Houston from 1993 to 1997. Mr. Bedford received his
B.S. in Economics from the University of Houston in 1969.
RAYMOND R. BETZ has been a director of the Company since September 1997. Mr.
Betz has served as the Chief Executive Officer of The Betz Companies, a
privately held real estate and development company headquartered in Houston,
Texas, since 1976 when he founded that company. Mr. Betz received his B.S. in
Civil Engineering from the University of Missouri at Rolla in 1966 and a Masters
Degree in Industrial Administration from the Krannert Graduate School at Purdue
University in 1969. He also is a Certified Public Accountant in the State of
Texas.
J. WILLIAM BOYAR has been a director of the Company since August 1997. Mr.
Boyar has been a shareholder in the firm of Boyar, Simon & Miller, P.C. since
1990. Mr. Boyar started his practice with Chamberlain, Hrdlicka, White & Waters
as a corporate and partnership tax lawyer in 1976. He then joined the firm of
Waters, Townsend & Boyar in 1979, which became Boyar, Norton & Blair in 1983.
Mr. Boyar received his undergraduate degree from Tulane University, and his Law
Degree from Tulane University School of Law.
FREDERICK A. HUTTNER has served as a director of the Company since September
1997. Mr. Huttner has served as President of Huttner & Company, a privately-
held management-consulting firm that specializes in assisting entrepreneurial
businesses in becoming mature, financially stable, and professionally managed
companies, since he founded that company in 1981. Prior to 1981, Mr. Huttner
held the position of Chief Financial Officer for a precision metal fabricator
and graphics manufacturer. Mr. Huttner consults with emerging growth companies,
as well as, Fortune 500 companies on issues of growth, capital and resource
development. Mr. Huttner received his B.S. from New York University's School of
Commerce in 1971. He has been a CPA for over 20 years and is currently a member
of the American Institute of Certified Public Accountants.
G. EDWARD POWELL has served as a director of the Company since March 1997.
Currently Mr. Powell is Chief Financial Officer of Advanced Communications
Group, Inc. Mr. Powell joined the professional staff of Price Waterhouse & Co.
in June 1959. In 1972, he was admitted to the partnership and was appointed
managing partner of the Houston Metropolitan Department, a multidisciplinary
practice unit dedicated to serving middle market businesses in 1973. In 1982,
he was appointed to the position of managing partner of the Houston office of
Price Waterhouse and retained that position until his retirement in 1994. Mr.
Powell received a BBA in Accounting from Texas A&M University in May 1959.
JESSE R. MARION has served as a director of the Company since August 1996.
Mr. Marion is currently President and founder of Millennium Seismic, Inc., a
privately-held oilfield seismic company. Previously, Mr. Marion served as
President and director of Seitel Data, Ltd., a wholly owned subsidiary of
Seitel, Inc. (a NYSE listed company), from January 1993 to May 1996. Mr. Marion
also served as Vice President of Sales of Seitel, Inc. from April 1992 through
May 1996. From January 1989 through March 1992, Mr. Marion was Executive Vice
President for First Seismic, Inc., a Nasdaq listed company.
MICHAEL J. WILSON has served as a director of the Company since September
1997. Mr. Wilson is currently President of Wilson & Associates, a privately-
held management consulting firm. Mr. Wilson has served as President and CEO of
Dynasty Technologies, Inc. from January 1996 to December 1996. Prior to joining
Dynasty, Mr. Wilson served as President and a member of the Board of Directors
of Uniface Corporation from July 1990 to January 1995, Mr. Wilson has also
served as Vice President of Sales for Ingres Corporation and UCCEL. Mr. Wilson
holds a BA Degree from Lewis University in Lockport, Illinois.
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At the Company's 1997 Annual Meeting, the shareholders approved an amendment
to the Company's Certificate of Incorporation which divided the Company's Board
of Directors into three separate classes. Each class of the Board of Directors
are elected to serve staggered three year terms. Class III directors will be
elected at the 1998 Annual Meeting of shareholders to be held July 3, 1998.
Classes II and I will be elected at the Annual Meetings in 1999 and 2000,
respectively. There are no family relationships among the directors and officers
of the Company, except for Timothy J. Connolly and Jan Carson Connolly, who are
husband and wife. None of the directors receive any compensation or
reimbursement of out-of-pocket expenses to attend board meetings. However, all
board members are eligible to receive stock options pursuant to the 1997
Incentive Plan. See "Item 10. Executive Compensation."
Each officer of the Company serves at the discretion of the Board of
Directors, subject to the terms of his employment agreement, if any, and is
eligible to receive stock options pursuant to the 1997 Incentive Plan. See
"Item 10. Executive Compensation" below, for a discussion of the Company's
employment agreements. Each member of management devotes his full time to the
Company's affairs.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires a company's directors and
executive officers, and persons who own more than 10% of the equity securities
of the Company to file initial reports of ownership and reports of ownership and
reports of changes in ownership of the Common Stock with the Securities and
Exchange Commission. Officers, directors and greater than 10% shareholders are
required to furnish the Company with copies of all Section 16(a) reports they
file. The Company did not become subject to Section 16(a) of the Exchange Act
until January 9, 1998. Therefore no Section 16(a) filings were required during
fiscal year 1997.
ITEM 10. EXECUTIVE COMPENSATION
Summary of Compensation. The following table provides certain summary
information concerning compensation paid or accrued during the fiscal years
ended December 31, 1997, 1996 and 1995 to the Company's Chief Executive Officer
and to each of the other most highly compensated executive officers serving at
the end of the fiscal year ended December 31, 1997 (the "Named Executive
Officers"):
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION (1) COMPENSATION
-------------------------------- ----------------------
RESTRICTED SECURITIES
STOCK UNDERLYING
NAME AND POSITION YEAR SALARY BONUS OTHER (2) AWARDS (3) OPTIONS
- ----------------- ------- -------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Timothy J. Connolly 1997 $157,833 24,399 9,433 -- 180,500 (4)
Chief Executive 1996 15,000 -- 750 --
Officer and 1995 20,000 -- -- --
Chairman of the
Board
Charles W. Skamser 1997 101,042 7,375 6,433 -- 600,500 (4)
President and Chief --
Operating Officer (5)
H. Russel Douglas 1997 113,500 -- 7,500 -- 210,500
Vice President - --
Research and
Development/
Chief Technology
Officer
</TABLE>
__________________________
(1) Amounts exclude perquisites and other personal benefits because such
compensation did not exceed the lesser of $50,000 or 10% of the total annual
salary and bonus reported for each executive officer.
(2) Comprised of commissions and car allowances.
(3) The value of the aggregate restricted stock holdings as of last fiscal year
is $8,819,680 and $3,025,550, for Messrs. Connolly and Douglas,
respectively. Mr. Skamser did not hold any restricted stock as of last
fiscal year.
(4) The amounts for Messrs. Connolly and Skamser include 180,000 and 100,000
options, respectively, which were granted in connection with bridge loans
payable to these individuals. An option to purchase one share of stock was
granted for each dollar borrowed. The notes earned interest at 12% per
annum and were outstanding for less than three months. Both notes were
paid, in full, prior to year end. None of the associated interest is
included in the summary compensation table.
(5) Subsequent to the year end, Mr. Skamser resigned. This resulted in the
forfeiture of 333,333 shares associated with an option for 500,000 shares.
15
<PAGE>
Option Grants in Last Fiscal year. The following table provides certain
information with respect to options granted to the Chief Executive Officer and
to each of the Named Executive Officers during the fiscal year ended December
31, 1997:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL EXERCISE
UNDERLYING OPTIONS GRANTED TO OR BASE GRANT DATE
OPTIONS EMPLOYEES IN FISCAL PRICE MARKET PRICE EXPIRATION
NAME GRANTED YEAR ($/SHARE) ($/SHARE) DATE(1)
- ---- ----------- ------------------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Timothy J. Connolly 180,000 7.82% 1.60 2.25 5/15/00(2)
H. Russel Douglas 210,000 9.13% 2.88 4.00 2/04/07
Charles W. Skamser 500,000 21.73% 3.38 4.25 4/01/07(3)
100,000 4.35% 1.60 2.81 6/23/00(2)
</TABLE>
__________________________
(1) Unless otherwise indicated, all options vest one-third per year over a three
year period from the date of grant.
(2) These options were granted in connection with bridge loans payable to these
individuals and were fully vested upon date of grant. An option to purchase
one share of stock was granted for each dollar borrowed. The notes earned
interest at 12% per annum and were outstanding for less than three months.
Both notes were paid, in full, prior to year end.
(3) Subsequent to year end, Mr. Skamser resigned. This resulted in the
forfeiture of 333,333 shares associated with the option.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year Ended Option
Values. The following table provides certain information with respect to
options exercised during the fiscal year ended December 31, 1997 by the Chief
Executive Officer and each of the Named Executive Officers listed in the
preceding tables:
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT
OPTIONS AT FISCAL FISCAL
YEAR-END (#) YEAR-END($)
SHARES --------------------------- --------------------------
ACQUIRED ON VALUE
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Timothy J. Connolly 182,500 578,525 180,000 -- 319,500 --
Charles W. Skamser -- -- 100,000 500,000(1) 177,500 --
H. Russel Douglas 37,500 96,675 140,000 70,000 69,300 34,650
</TABLE>
__________________________
(1) Subsequent to year end, Mr. Skamser resigned, this resulted in the
forfeiture of 333,333 shares associated with an option for 500,000 shares.
The remaining shares of 166,667 became fully vested.
EMPLOYMENT AGREEMENTS WITH KEY PERSONNEL
On July 1, 1997, the Company entered into an employment agreement with Timothy
J. Connolly, the Company's Chief Executive Officer. The term of the agreement
is effective until terminated by either the Company or the employee. The
initial term of the contract expires December 31, 2000. Thereafter, the
expiration date of the contract shall be automatically extended for successive
one-year periods. According to the agreement, Mr. Connolly will receive an
annual base salary of $225,000 for 1998. After this, the annual base salary
will increase to $250,000 and will remain at this amount until expiration date.
In addition to the base salary, Mr. Connolly is entitled to receive an annual
bonus. The annual bonus is determined at the beginning of each year and is
contingent upon Mr. Connolly's ability to meet certain performance criteria.
On April 1, 1997, the Company entered into an employment agreement with
Charles W. Skamser the Company's COO. This employment agreement terminated on
March 2, 1998, upon Mr. Skamser's election to leave the Company in pursuit of
other interests.
On April 1, 1997, the Company entered into an employment agreement with H.
Russel Douglas, the Company's Chief Technology Officer. The term of the
agreement is effective until terminated by either the Company or the employee.
The initial term of the contract expires March 31, 2000. Thereafter, the
expiration date of the contract shall be automatically extended for successive
one-year periods. According to the agreement, Mr. Douglas will receive an
annual base salary of $150,000 for 1998. After this, the annual base salary
will increase to $175,000 and will remain at that amount until the
16
<PAGE>
expiration date. In addition to the base salary, the Mr. Douglas is entitled to
receive a quarterly bonus. The quarterly bonus is equal to 6-1/4% of the base
salary and is contingent upon Mr. Douglas' ability to meet certain performance
criteria. In accordance with the agreement, Mr. Douglas is entitled to
participate in the Company's 1997 Incentive Plan.
In May 1, 1997, the Company entered into an employment agreement with William
T. Kennedy the Company's Chief Financial Officer. The term of the agreement is
effective until terminated by either the employer or the employee. The initial
term of the contract expires April 30, 2000. Thereafter, the expiration date of
the contract shall be automatically extended for successive one-year periods.
According to the agreement, Mr. Kennedy will receive an annual base salary of
$125,000 from January 1, 1998 through December 31, 1998. After this, the annual
base salary will increase to $150,000 and will remain like this until expiration
date. In addition to the base salary, Mr. Kennedy is entitled to receive a
quarterly bonus. The quarterly bonus is equal to 6-1/4% of the base salary and
is contingent upon Mr. Kennedy's ability to meet certain performance criteria.
In accordance with the agreement, Mr. Kennedy is entitled to participate in the
Company's incentive plan.
In August 15, 1996, the Company entered into an employment agreement with
Janet E. Carson as the Company's VP of Marketing and Director. The term of the
agreement is effective until terminated by either the employer or the employee.
The initial term of the contract expires December 31, 1999. Thereafter, the
expiration date of the contract shall be automatically extended for successive
one-year periods. According to the agreement, Ms. Carson will receive an annual
base salary of $90,000. This will be adjusted annually on January 1 of each
year, beginning January 1, 1998, to reflect the increase, if any, in the cost of
living. In accordance with the agreement, Ms. Carson is entitled to participate
in the Company's incentive plan.
17
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, derived from filings with
the Securities and Exchange Commission and other public information, regarding
the beneficial ownership of the Company's Common Stock as of April 28, 1998 by:
(i) each person who is known by the Company to beneficially own more than five
percent of the outstanding shares of Common Stock, (ii) each of the named
executive officers and directors, and (iii) all directors and executive officers
as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES BENEFICIAL
OF COMMON STOCK OWNERSHIP
NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED(2) % OF SHARES
- ----------------------------------------- --------------------- -----------
<S> <C> <C>
Timothy J. Connolly 6,451,500(3)(4) 47.90%
Jan Carson Connolly 6,451,500(4)(5) 47.90%
Voice Technology Partners Ltd 5,920,000(4) 44.89%
Entrepreneurial Investors Inc. 1,687,500(6) 12.80%
Citibank Building, Second Floor
East Mall Drive
P.O. Box F-42544
Freeport, Bahamas
Sovereign Partners, LP 1,123,911 7.86%
Citco Fund Services
Bahamas Financial Centre, 3rd Floor
Clarlotte & Sherley St.
P.O. Box CB-1313G
Nassau, Bahamas
Akinola S. Olajuwon 1,142,065(8) 8.66%
10375 Richmond Avenue, Suite 1105
Houston, Texas 77042
Jesse R. Marion 1,074,500 8.15%
7751 San Felipe, Suite 100
Houston, Texas 77063
Hakeem Olajuwon 1,000,000(9) 7.31%
10375 Richmond Avenue, Suite 1105
Houston, Texas 77042
Dominion Capital Fund, Ltd. 561,956(7) 4.09%
Citco Fund Services
Bahamas Financial Centre, 3rd Floor
Clarlotte & Sherley St.
P.O. Box CB-1313G
Nassau, Bahamas
Charles W. Skamser 266,667(10) 1.98%
7814 Oxfordshire Drive
Spring, Texas 77399
William T. Kennedy 196,190(11) 1.47%
Frederick A. Huttner 195,000(12) 1.46%
Huttner & Company
13634 Taylorcrest
Houston, Texas 77079
H. Russel Douglas 182,929(4)(13) 1.37%
G. Edward Powell 102,540(14) 0.77%
Advanced Communications Group, Inc.
390 South Woods Mill Road, Suite 150
Chesterfield, Missouri 63017
Michael J. Wilson 58,232 0.44%
Wilson & Associates
132 Settlers Drive
Naperville, Illinois 60565
J. Nolan Bedford 22,222(15) 0.17%
Southwest Bank of Texas
P.O. Box 27459
Houston, Texas 77227-7459
Raymond R. Betz 15,625 0.12%
The Betz Companies
610 West Greens Road
Houston, Texas 77067
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
J. William Boyar -- 0.00%
Boyar, Simon & Miller
4265 San Felipe, Suite 1200
Houston, Texas 77027
All Executive Officers and Directors as a Group (12 Persons) 8,565,424(16) 59.65%
</TABLE>
__________________________
(1) Except as otherwise indicated, the addresses for the above-referenced
persons are at the Company.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchanges Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of April 10, 1998 are
deemed outstanding. Such shares, however, are not deemed outstanding for
the purposes of computing the percentage ownership of each other person.
Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, each stockholder named in the table has
sole voting and investment power with respect to the shares set forth
opposite such stockholder's name.
(3) Includes 180,000 shares of Common Stock issuable upon exercise of currently
exercisable warrants in connection with the Bridge Loan Agreement. Also
includes 181,857 shares of Common Stock beneficially owned by his wife, Jan
Carson Connolly.
(4) Mr. Connolly has voting and disposition control over the shares of Common
Stock owned by Voice Technologies Partners, L.P., by virtue of owning all
of the outstanding stock of Voice Technologies Management Corp., the
Managing General Partner of Voice Technologies Partners, L.P. Ms. Carson
Connolly and Mr. Douglas also own partnership interests in Voice
Technologies Partners, Inc., either in their individual capacities or
through other entities in which they own ownership interests.
(5) Includes 100,000 shares of Common Stock issuable upon exercise of currently
exercisable employee options. Also includes 6,269,643 shares of Common
Stock beneficially owned by her husband, Timothy J. Connolly.
(6) Issuable upon conversion of 312,500 shares of Series A Preferred Stock, par
value $.10 per share (the "Series A Preferred Stock"). For the purpose of
estimating the number of shares of common stock, the Company calculated the
number of shares of common stock issuable in connection with the conversion
of the Company's Series A Preferred Stock using the current conversion rate
of the Series A Preferred Stock of 5.40 shares of common stock for each
share of Series A Preferred Stock (subject to adjustment).
(7) Issuable upon conversion of 3,000 shares of Series B Preferred Stock, par
value $.10 per share (the "Series B Preferred Stock"). The Series B
Preferred Stock has a floating conversion rate equal to 78% of the 5 day
average closing bid price of the common stock as reported by Bloomberg, LP.
The number of shares of Common Stock listed was calculated using the
conversion rate of $1.7795 as of March 18, 1998.
(8) Includes 5,565 shares issuable upon exercise of currently exercisable
options.
(9) Includes 500,000 shares related to the service agreement and 500,000 shares
issuable upon exercise of currently exercisable warrants.
(10) Includes 22,222 shares issuable upon exercise of currently exercisable
options.
(11) Includes 166,667 shares issuable upon exercise of currently exercisable
employee options and 100,000 shares issuable upon exercise of currently
exercisable warrants in conjunction with the Bridge Loan Agreement.
(12) Includes 50,000 shares issuable upon exercise of currently exercisable
warrants in conjunction with Bridge Loan Agreement, and 33,334 shares
issuable upon exercise of currently exercisable options.
(13) Includes 140,000 shares issuable upon exercise of currently exercisable
employee options.
(14) Includes 58,332 shares issuable upon exercise of currently exercisable
options.
(15) Includes 150,000 shares issuable upon exercise of currently exercisable
director's options.
(16) Includes 1,170,555 shares issuable upon exercise of currently exercisable
or convertible derivative securities.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 1996, Voice Technologies Partners, L.P., the Company's predecessor,
assigned substantially all of its assets to the Company in exchange for
6,000,000 shares of the Company's Common Stock. Mr. Connolly, Ms. Carson
Connolly and Mr. Douglas own 55%, 20% and 25%, respectively, of Voice
Technologies Properties, L.P., with entities controlled by Mr. Connolly and Ms.
Carson Connolly serving as general partners and Mr. Douglas serving as a limited
partner. In August 1996, as amended in October 1996, Akinola Olajuwon and Jesse
Marion each purchased 1,236,500 shares of Company Common Stock for $67,500. In
August 1996, Mr. Connolly was issued 100,000 shares of Common Stock for nominal
consideration. In October 1996, Mr. Ron McGuinn acquired 100,000 shares of
Common Stock in exchange for all of
19
<PAGE>
In August 1996, the following individuals were issued five-year warrants as
follows: (i) Mr. Connolly was issued a warrant to purchase 182,500 shares of the
Company's Common Stock at an exercise price of $.14 per share, (ii) Mr. Douglas
was issued a warrant to purchase 37,500 shares of the Company's Common Stock at
an exercise price of $.14 per share, and (iii) Ms. Carson Connolly was issued a
warrant to purchase 30,000 shares of the Company's Common Stock at an exercise
price of $.14 per share.
In September 1996, Hakeem, Inc. granted the Company a non-exclusive license to
use the name and likeness of Hakeem Olajuwon for textural and pictorial matters
pertaining to his name and likeness in promotional, display and advertisement
materials approved by Mr. Olajuwon. Mr. Olajuwon also agreed to be available on
a reasonable basis for up to two personal appearances and the production of up
to four television and radio commercials for use in promotion of the Company's
products during the two-year term of the license. The Company issued Hakeem,
Inc. 500,000 shares of Common Stock and a five-year warrant to purchase 500,000
shares of Company Common Stock at a purchase price of $1.50 per share. In
connection therewith, the Company granted Hakeem, Inc. certain piggyback
registration rights with respect to the shares of Common Stock issued and the
shares of Common Stock underlying the warrant.
Effective November 1, 1997 the Company entered into a consulting agreement
with Michael J. Wilson, one of the Company's Directors. The agreement includes
a fee of $12,500 per month, for which Mr. Wilson received $25,000 in calendar
year 1997. Under this agreement, Mr. Wilson provides consulting services to the
Company directly relating to corporate operations and the implementation of the
medical dictation/transcription piece of the Company's business plan. This
consulting agreement has a term of one year expiring on October 31, 1998. In
addition to the cash compensation, Mr. Wilson has been granted 100,000 options.
The options vest one-twelfth at the beginning of each month during the duration
of the consulting agreement.
On July 16, 1996, the Company issued a note payable to an unrelated trust
inthe amount of $126,250 which is secured certain of the personal assets of Mr.
Connolly 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.
In January 1997, the Company entered into a consulting agreement with
Frederick A. Huttner one of the Company's Directors. The agreement includes a
fee of $6,000 per month. Mr. Huttner is to provide consulting services relating
to the review of strategic and operational plans and participation in the
planning process; review of financial budgets, controls and reports; review of
expansion plans; review of investment opportunities (including, without
limitation, mergers, acquisitions, expansions or sales of majority or minority
interests in the Company); participation in communications with the Board of
Directors of the Company; and assisting the executive officers of the Company as
requested. This consulting agreement expired on February 15, 1998.
On August 14, 1997, the Company paid in full $580,000, under various bridge
loan agreements (the "Bridge Loan Agreements") entered into between May 15, 1997
and July 24, 1997, to Messrs. Connolly, Kennedy, Powell, Skamser, Mr. Robert
Lopez (then an officer of the Company), and an unrelated shareholder of the
Company in the amount of $180,000, $100,000, $50,000, $100,000, $100,000 and
$50,000 respectively. 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 Loan Agreements, the
Company also issued warrants to purchase 580,000 shares of the Company's common
stock at $1.60 per share, on a one warrant to one dollar of principal amount
loaned.
On September 25, 1997, the Board of Directors of the Company approved a
change in the consulting agreement with Mr. Huttner. In substance, the Board
approved and Mr. Huttner agreed that Mr. Huttner would surrender 200,000 of
previously issued shares of Common Stock and receive 150,000 options priced at
$1.60 issued under the Company's 1997 Stock
20
<PAGE>
Incentive Plan and 50,000 shares of Common Stock. Additionally, the board
approved the issuance of 10,000 shares of Company stock and the issuance of
50,000 of fully vested options priced at $1.60 in exchange for financial
consulting services provided by Mr. Huttner.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
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. (Exhibit 2.2 to the
Company's Form 10-KSB for the period ended December 31, 1997, as filed with the Commission on April 15,
1998, is incorporated herein by reference)
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 Company'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.
(Exhibit 3.3 to the Company's Form 10-KSB for the period ended December 31, 1997, as filed with the
Commission on April 15, 1998, is incorporated herein by reference)
3.4 Certificate of Designation for the Series B Preferred Stock as filed with the Delaware Secretary of State on
March 11, 1998. (Exhibit 3.4 to the Company's Form 10-KSB for the period ended December 31, 1997, as
filed with the Commission on April 15, 1998, is incorporated herein by reference)
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. (Exhibit 4.1 to the Company's Form 10-KSB for the period ended December 31, 1997,
as filed with the Commission on April 15, 1998, is incorporated herein by reference)
4.2 Registration Rights Agreement between the Company and ESL dated August 12, 1997. (Exhibit 4.2 to the
Company's Form 10-KSB for the period ended December 31, 1997, as filed with the Commission on April 15,
1998, is incorporated herein by reference)
4.3 Amended and Restated Registration Rights Agreement between the company and Entrepreneurial Investors,
Ltd., a Bahamas Company ("EIL") dated January 8, 1998. (Exhibit 4.3 to the Company's Form 10-KSB for
the period ended December 31, 1997, as filed with the Commission on April 15, 1998, is incorporated herein
by reference)
4.4 Registration Rights Agreement between the Company and EIL dated August 12, 1997. (Exhibit 4.4 to the
Company's Form 10-KSB for the period ended December 31, 1997, as filed with the Commission on April 15,
1998, is incorporated herein by reference)
4.5 Registration Rights Agreement by and between the Company and Voice It Worldwide, Inc., a Colorado
corporation ("Voice It") dated December 31, 1997. (Exhibit 4.5 to the Company's Form 10-KSB for the
period ended December 31, 1997, as filed with the Commission on April 15, 1998, is incorporated herein by
reference)
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
4.6 Form of Registration Rights Agreement between the Company and the Series B Preferred Stock investors dates
March 11, 1998. (Exhibit 4.6 to the Company's Form 10-KSB for the period ended December 31, 1997, as
filed with the Commission on April 15, 1998, is incorporated herein by reference)
10.1 Joint Product Development Agreement by and between the Company and Voice It dated December 31, 1997.
(Exhibit 10.1 to the Company's Form 10-KSB for the period ended December 31, 1997, as filed with the
Commission on April 15, 1998, is incorporated herein by reference)
10.2 OEM Distribution Agreement between the Company and IBM dated December 17, 1996. (Exhibit 10.2 to the
Company's Form 10-KSB for the period ended December 31, 1997, as filed with the Commission on April 15,
1998, is incorporated herein by reference)
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).
*10.4 License Agreement between the Company and Hakeem, Inc. dated September 1996.
*10.5 Warrant to Purchase Common Stock issued to Hakeem, Inc. dated September 1996.
*10.6 Employment Agreement between the Company and Jan Carson Connolly (then Janet E. Carson) dated
August 15, 1996.
*10.7 Consulting and Stockholder Agreement between the Company and Frederick A. Huttner dated January 15,
1997.
*10.8 Consulting Agreement between the Company and Huttner and Company dated January 15, 1997.
*10.9 Employment Agreement between the Company and H. Russel Douglas effective as of April 1, 1997.
*10.10 Employment Agreement between the Company and Charles W. Skamser effective as of April 1, 1997.
*10.11 Employment Agreement between the Company and William T. Kennedy effective as of May 1, 1997.
*10.12 Employment Agreement between the Company and Timothy J. Connolly effective as of July 1, 1997.
*10.13 Consulting Agreement between the Company and Huttner and Michael J. Wilson dated November 1, 1997.
*10.14 Form of Bridge Loan Promissory Note
*10.15 Form of Bridge Loan Warrant
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. (Exhibit 27.1 to the Company's Form 10-KSB for the period ended December 31,
1997, as filed with the Commission on April 15, 1998, is incorporated herein by reference)
</TABLE>
______________
* Filed herewith.
(b) Reports on Form 8-K.
None.
22
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act and Rule 12b-15
promulgated thereunder, the registrant caused this Amendment No. 1 to this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
APPLIED VOICE RECOGNITION, INC.
/s/ WILLIAM T. KENNEDY
-----------------------------------------------
William T. Kennedy
Chief Financial Officer and Assistant Secretary
April 30, 1998
23
<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 as follows:
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>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
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. (Exhibit 2.2 to the
Company's Form 10-KSB for the period ended December 31, 1997, as filed with the Commission on April 15,
1998, is incorporated herein by reference)
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 Company'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.
(Exhibit 3.3 to the Company's Form 10-KSB for the period ended December 31, 1997, as filed with the
Commission on April 15, 1998, is incorporated herein by reference)
3.4 Certificate of Designation for the Series B Preferred Stock as filed with the Delaware Secretary of State on
March 11, 1998. (Exhibit 3.4 to the Company's Form 10-KSB for the period ended December 31, 1997, as
filed with the Commission on April 15, 1998, is incorporated herein by reference)
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. (Exhibit 4.1 to the Company's Form 10-KSB for the period ended December 31, 1997,
as filed with the Commission on April 15, 1998, is incorporated herein by reference)
4.2 Registration Rights Agreement between the Company and ESL dated August 12, 1997. (Exhibit 4.2 to the
Company's Form 10-KSB for the period ended December 31, 1997, as filed with the Commission on April 15,
1998, is incorporated herein by reference)
4.3 Amended and Restated Registration Rights Agreement between the company and Entrepreneurial Investors,
Ltd., a Bahamas Company ("EIL") dated January 8, 1998. (Exhibit 4.3 to the Company's Form 10-KSB for
the period ended December 31, 1997, as filed with the Commission on April 15, 1998, is incorporated herein
by reference)
4.4 Registration Rights Agreement between the Company and EIL dated August 12, 1997. (Exhibit 4.4 to the
Company's Form 10-KSB for the period ended December 31, 1997, as filed with the Commission on April 15,
1998, is incorporated herein by reference)
4.5 Registration Rights Agreement by and between the Company and Voice It Worldwide, Inc., a Colorado
corporation ("Voice It") dated December 31, 1997. (Exhibit 4.5 to the Company's Form 10-KSB for the
period ended December 31, 1997, as filed with the Commission on April 15, 1998, is incorporated herein by
reference)
4.6 Form of Registration Rights Agreement between the Company and the Series B Preferred Stock investors dates
March 11, 1998. (Exhibit 4.6 to the Company's Form 10-KSB for the period ended December 31, 1997, as
filed with the Commission on April 15, 1998, is incorporated herein by reference)
10.1 Joint Product Development Agreement by and between the Company and Voice It dated December 31, 1997.
(Exhibit 10.1 to the Company's Form 10-KSB for the period ended December 31, 1997, as filed with the
Commission on April 15, 1998, is incorporated herein by reference)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
10.2 OEM Distribution Agreement between the Company and IBM dated December 17, 1996. (Exhibit 10.2 to the
Company's Form 10-KSB for the period ended December 31, 1997, as filed with the Commission on April 15,
1998, is incorporated herein by reference)
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).
*10.4 License Agreement between the Company and Hakeem, Inc. dated September 1996.
*10.5 Warrant to Purchase Common Stock issued to Hakeem, Inc. dated September 1996.
*10.6 Employment Agreement between the Company and Jan Carson Connolly (then Janet E. Carson) dated
August 15, 1996.
*10.7 Consulting and Stockholder Agreement between the Company and Frederick A. Huttner dated January 15,
1997.
*10.8 Consulting Agreement between the Company and Huttner and Company dated January 15, 1997.
*10.9 Employment Agreement between the Company and H. Russel Douglas effective as of April 1, 1997.
*10.10 Employment Agreement between the Company and Charles W. Skamser effective as of April 1, 1997.
*10.11 Employment Agreement between the Company and William T. Kennedy effective as of May 1, 1997.
*10.12 Employment Agreement between the Company and Timothy J. Connolly effective as of July 1, 1997.
*10.13 Consulting Agreement between the Company and Huttner and Michael J. Wilson dated November 1, 1997.
*10.14 Form of Bridge Loan Promissory Note
*10.15 Form of Bridge Loan Warrant
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. (Exhibit 27.1 to the Company's Form 10-KSB for the period ended December 31,
1997, as filed with the Commission on April 15, 1998, is incorporated herein by reference)
</TABLE>
______________
* Filed herewith.
<PAGE>
EXHIBIT 10.4
LICENSE AGREEMENT
THIS LICENSE AGREEMENT ("Agreement") is made as of September ___, 1996
("Effective Date"), between HAKEEM, INC. ("Licensor") and APPLIED VOICE
RECOGNITION, INC., ("Licensee").
ARTICLE 1
DEFINITIONS
As used in this Agreement, the following terms shall have the following
respective meanings:
"COMMON STOCK" means the Common Stock, par value $0.01 per share, of
Licensee.
"COMMISSION" means the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the Commission thereunder.
"LICENSE" has the meaning set forth in Section 2.1.
"LICENSOR COMMON STOCK" means 5,000 shares of Common Stock issuable to
Licensor pursuant to Section 3.1.
"LICENSOR WARRANT" means a warrant to purchase 5,000 shares of Common Stock
under the same terms and conditions as the Warrant being delivered to Licensor
pursuant to Section 3.1, and issuable to Licensor pursuant to Section 3.1.
"NAME AND LIKENESS" means the name and photograph or other likeness of
Hakeem Olajuwon, but does not include any photograph or other likeness of Hakeem
Olajuwon in any NBA or USA Basketball uniform, or any photograph or likeness of
Hakeem Olajuwon in any shirt or clothing which contains the name of a product or
company under which Licensor or Hakeem Olajuwon has a separate agreement.
"NOTICE OF REGISTRATION" means a notice by Licensee to the Licensor that
Licensee has determined to conduct an Underwritten Public Offering or Shelf
Registration.
"PIGGYBACK REGISTRATION" means a registration of shares of Registrable
Securities owned by the Licensor under the terms and conditions set forth in
Article 4.
"REASONABLE BASIS" means times and places mutually convenient to Hakeem
Olajuwon and Licensee, and subject to Hakeem Olajuwon's NBA Basketball schedule,
his USA Basketball "Dream
<PAGE>
Team" schedule, required appearances on behalf of his NBA and USA Basketball
teams, team meetings, practices, health, and Muslim religion holy days.
"Reasonable Basis" further requires that any request for Hakeem Olajuwon's
appearance at a photographic session, production of a television commercial, his
approval of advertising or photographs, or any requests for his autograph
requires at least two weeks' notice to Hakeem Olajuwon's assistant, Pam Greaney,
that Hakeem Olajuwon's services are needed.
"REGISTRABLE SECURITIES" means (i) the Licensor Common Stock and (ii) the
Common Stock issuable upon exercise of the Licensor Warrant.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission thereunder.
"SHELF REGISTRATION" means a registration meeting the requirements of Rule
415 under the Securities Act of any similar rule in effect under the Securities
Act.
"TERM" means a period of two (2) years, commencing on the Effective Date.
"UNDERWRITTEN PUBLIC OFFERING" means a public offering (including a Shelf
Registration) of Common Stock for cash which is offered and sold in a registered
transaction on a firm commitment underwritten basis through one or more
underwriters, pursuant to an underwriting agreement between Licensee and such
underwriters.
ARTICLE 2
GRANT OF LICENSE
2.1 GRANT. Upon the terms and conditions set forth in this Agreement
Licensor hereby grants to Licensee, and Licensee hereby accepts for the Term of
this Agreement, a non-exclusive license (the "License") to use the Name and
Likeness. During the Term Licensee will have the exclusive right to use textual
and pictorial matter pertaining to the Name and Likeness of Hakeem Olajuwon in
connection with voice activated computer software, as that term is understood in
the computer software industry.
2.2 USE. The License granted in Section 2.1 shall include the right to
use textual and pictorial matters pertaining to the Name and Likeness on any
promotional, display and advertising materials (including television
commercials) which have been personally approved in advance by Hakeem Olajuwon.
2.3 PERSONAL APPEARANCES AND TELEVISION COMMERCIALS. Licensor agrees that
it will cause Hakeem Olajuwon to be available on a Reasonable Basis for up to
two (2) personal appearances and the production of up to four (4) television or
radio commercials for use in the promotion of Licensee's products during the
Term. Hakeem Olajuwon's attendance will not be
2
<PAGE>
required for more than two (2) hours at (i) any such personal appearance, or
(ii) the production of each television or radio commercial.
2.4 APPROVALS AND QUALITY CONTROLS. No product of Licensee using the Name
and Likeness shall be sold, distributed, or used by the Licensee, and no
advertising materials may be used in connection with such products, unless
approved in writing by Hakeem Olajuwon. Any modification of such products or
advertising material must be submitted in advance for Hakeem Olajuwon's written
approval as if it were a new product or new advertising material. Licensee
agrees to provide to Hakeem Olajuwon a copy of all photographs, advertising, and
promotional materials, including television commercials to be used in connection
with this Agreement at least 14 days before his approval is required, and, those
materials shall not be released or used without prior written approval of Hakeem
Olajuwon.
2.5 RESERVATION OF RIGHTS. Licensor reserves all rights not expressly
conveyed to Licensee hereunder.
2.6 LABOR COMPLIANCE. Licensor hereby notifies, and Licensee hereby
acknowledges, that Licensor's employee, Hakeem Olajuwon, is a member of the
Screen Actors Guild (the "Guild") and the American Federation of Television and
Radio Artists ("AFTRA"). Therefore, Licensee agrees that Hakeem Olajuwon shall
not be requested or expected to participate in any commercial contemplated under
this Agreement unless the producer for said commercial has executed a basis
minimum agreement with the Guild and/or AFTRA, which is in full force and
effect, and is currently a signatory in good standing to the Guild and/or AFTRA
basic agreements at the time the commercial is made. In addition, Hakeem
Olajuwon shall not be requested or expected to perform any services by
participating in the making of any commercial for any producer against whom the
Guild and/or AFTRA is conducting a strike, nor shall Hakeem Olajuwon be
requested or expected to perform any service which would otherwise violate any
strike order of the Guild and/or AFTRA.
In sum, Licensee agrees that no services requested or expected of Hakeem
Olajuwon, and nothing in this Agreement shall violate the provisions of the
applicable collective bargaining agreement(s) of the Guild and/or AFTRA.
Licensee agrees that nothing in this Agreement will cause Licensor's employee,
the performer Hakeem Olajuwon, to violate the membership rules of the Guild or
AFTRA.
ARTICLE 3
CONSIDERATION
3.1 CONSIDERATION TO LICENSOR. As consideration for Licensor's execution
of this Agreement, Licensee shall, upon execution of this Agreement, deliver to
Licensor a certificate representing the Licensor Common Stock and the Licensor
Warrants.
3
<PAGE>
3.2 PAYMENT OF EXPENSES. If Hakeem Olajuwon is required to travel outside
of the City of Houston in connection with any personal appearance, Licensee
shall provide Hakeem Olajuwon and one (1) companion or business representative
with round trip air fair and limousine ground transportation, meals, room and
lodging, all of which shall be on a "first class" basis. Licensee shall further
pay all other reasonable out-of-pocket expenses, if any, incurred by Hakeem
Olajuwon in connection with such appearance(s) within five (5) days of receipt
of an invoice from Licensor itemizing such expenses in reasonable detail.
ARTICLE 4
REGISTRATION
4.1 PIGGYBACK REGISTRATION. If at any time or from time to time after the
date hereof Licensee shall determine to make an Underwritten Public Offering or
Shelf Registration for its own account (but not including an offering that is
registered on Commission Forms S-4, S-8 or any successor forms thereto), then
Licensee will (i) promptly give to Licensor a Notice of Registration, and (ii)
use its best efforts to include in such registration (and any related
qualification or compliance under Blue Sky laws), and in any Underwritten Public
Offering or Shelf Offering involved therein, all the Registrable Securities
specified in any written request or requests by Licensor received by Licensee
within 10 days after such Notice of Registration is given.
4.2 LIMITATIONS ON PIGGYBACK REGISTRATIONS. Licensor may make a request
for the inclusion of all or any portion of its Registrable Securities in any
registration effect pursuant to Section 4.1 at any time after the date hereof
through the third anniversary of the date hereof under the procedures set forth
herein.
4.2.1 EXECUTION OF UNDERWRITING AGREEMENT. The right of Licensor to
participate in an Underwritten Public Offering pursuant to Section 4, shall
be conditioned upon the inclusion of Licensor's Registrable Securities in
the Underwritten Public Offering to the extent provided herein. Licensee
and Licensor shall enter into an underwriting agreement in customary form
with the underwriter or underwriters selected by Licensee for such
Underwritten Public Offering.
4.2.2 LIMITATION ON REGISTRATION. Notwithstanding any other
provisions of this Agreement, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten the managing underwriter and Licensee may limited the
Registrable Securities to be included in any Underwritten Public Offering
as set forth below. In such event, Licensee shall so advise Licensor, and
the number of shares of Registrable Securities that will be included in the
registration and Underwritten Public Offering shall be allocated pro rata
between Licensee and Licensor. No Registrable Securities excluded from the
Underwritten Public Offering by reason of the managing underwriter's
marketing limitation shall be included in such registration. If Licensor
disapproves of the terms of the Underwritten Public Offering, Licensor may
elect to withdraw therefrom by
4
<PAGE>
written notice to Licensee and the managing underwriter. The Registrable
Securities so withdrawn also shall be withdrawn from registration.
4.2.3 TERMINATION OF REGISTRATION. Notwithstanding any other
provision of this Agreement at any time before or after the filing of a
registration statement that is subject to Section 4.1, Licensee may, in its
sole discretion abandon or terminate an Underwritten Public Offering
without the Consent of Licensor.
4.2.4 REGISTRATION EXPENSES. All expenses of any registration under
this Agreement (including, but not limited to, any qualifications under the
Blue Sky or other state securities laws, compliance with governmental
requirements of preparing and filing any post-effective amendments required
for the lawful distribution of the Registrable Securities to the public and
of supplying prospectuses, offering circulars or other documents), will be
paid by Licensee provided however, that Licensor shall be responsible for
the fees and expenses of its counsel.
4.3 REGISTRATION PROCEDURES. Licensee will at its expense:
4.3.1 PREPARATION OF REGISTRATION STATEMENT. Prepare and file with
the Commission a registration statement with respect to the Registrable
Securities to be registered, and use its best efforts to cause such
registration statement to become and remain effective for three years or
until Licensor no longer owns any of the Registrable Securities;
4.3.2 AMENDMENTS. Prepare and file with the Commission such
amendments to such registration statement and supplements to the prospectus
contained therein as may be necessary to keep such registration statement
effective for the periods set forth in Section 4.3.1;
4.3.3 COPIES OF REGISTRATION STATEMENT AND PROSPECTUS. Furnish to
Licensor such reasonable number of copies of the registration statement,
preliminary prospectus, final prospectus and such other documents as
Licensor may reasonably request to facilitate the public offering of the
Registrable Securities;
4.3.4 BLUE SKY QUALIFICATION. Use its diligent good faith efforts to
register or qualify the Registrable Securities covered by such registration
statement under such state securities or Blue Sky laws of such
jurisdictions, as Licensor may reasonably request;
4.3.5 NOTICE OF EFFECTIVENESS. Notify counsel for Licensor, promptly
after it shall receive notice thereof, of the time when such registration
statement has become effective under the Securities Act or a supplement to
any prospectus forming a part of such registration statement has been
filed;
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4.3.6 COMMISSION REQUESTS FOR INFORMATION. Notify counsel for
Licensor promptly of any request by the Commission for the amending or
supplementing of such registration statement or prospectus or for
additional information;
4.3.7 ADDITIONAL AMENDMENTS. Prepare and file with the Commission,
promptly upon the request of Licensor, any amendments or supplements to
such registration statement or prospectus which in the opinion of counsel
for Licensor (and concurred in by counsel for Licensee), is required under
the Securities Act or the rules arid regulations thereunder in connection
with the distribution of the Registrable Securities;
4.3.8 NOTICE AND FILING OF AMENDMENTS. Prepare and promptly file with
the Commission and promptly notify counsel for Licensor of the filing of
such amendment or supplement to any such registration statement or
prospectus as may be necessary to correct any statements or omissions if,
at the time when a prospectus relating to the Registrable Securities is
required to be delivered under the Securities Act, any event shall have
occurred as the result of which any such prospectus or any other prospectus
then in effect would include an untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein, in the
light of the circumstances in which they were made, not misleading;
4.3.9 ISSUANCE OF STOP ORDERS. Advise counsel for Licensor, promptly
after it shall receive notice or obtain knowledge thereof, of the issuance
of any stop order by the Commission suspending the effectiveness of such
registration statement under the Securities Act or the initiation or
threatening of any proceeding for such purpose, and promptly use its best
efforts to prevent the issuance of any stop order or to obtain its
withdrawal if such stop order should be issued;
4.3.10 COMPLIANCE WITH SECURITIES ACT. Not file any amendment or
supplement to such registration statement or prospectus, if in the opinion
of counsel for Licensor, such amendment or supplement does not comply in
all material respects with the requirements of the Securities Act and "the
rules and regulations thereunder, after having been furnished with a copy
substantially in the form thereof at least two business days before the
filing thereof; provided however, that if in the opinion of counsel for
Licensee the filing of such amendment or supplement is reasonably necessary
to protect Licensee from any liabilities under any applicable federal or
state law and such filing will not violate applicable law, Licensee may
make such filing, and
4.3.11 LISTING. List the Registrable Securities on any national
securities exchange on which the Common Stock is approved for listing;
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4.4 INDEMNIFICATION.
4.4.1 INDEMNIFICATION BY LICENSEE. Licensee agrees to indemnify,
defend and hold harmless Licensor, its officers and directors, each
underwriter of the Registrable Securities, and each person who controls
Licensor or any such underwriter within the meaning of Section 15 of the
Securities Act, against any and all losses, claims, damages or liabilities
(including reasonable attorneys' fees) to which they or any of them may
become subject under the Securities Act or any other statute or common law,
including any amount paid in settlement of any litigation, commenced or
threatened, if such settlement is effected with the written consent of
Licensee (subject to Section 4.4.3), insofar as any such losses, claims,
damages, liabilities or actions arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
registration statement, any preliminary prospectus or final prospectus
contained therein or any amendment or supplement thereto, or in any Blue
Sky application, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the
indemnification agreement contained in this Section 4.4.1 shall not (i)
apply to such losses, claims, damages, liabilities or actions arising out
of, or based upon, any such untrue statement or alleged untrue statement,
or any such omission or alleged omission, if such statement or omission was
made in reliance upon and in conformity with information furnished to
Licensee in writing by Licensor or any such underwriter for use in
connection with the preparation of the registration statement or any
preliminary prospectus or prospectus contained in the registration
statement or any amendment thereof or supplement thereto, or (ii) inure to
the benefit of any person to the extent such person's claim fur
indemnification thereunder arises out of or is based on any violation by
such person of applicable law.
During the term of this Agreement, and continuing after the expiration
or termination of this Agreement, Licensee agrees that it shall indemnify,
defend and hold harmless Licensor arid its employee, Hakeem Olajuwon, and
their against, representatives or employees, from and against any claims,
demands, suits, judgments, loss, liability, damages, cost or expense
(including attorney's fees), or from any liability of whatever kind or
nature which arise from or are in any way connected with the License which
is the subject of this Agreement, the use and quality thereof, and
Licensee's use of the Name and Likeness in connection therewith, including,
but not limited to, that which may be brought or made against Licensor or
Hakeem Olajuwon by reason of: (a) any unauthorized use of Hakeem Olajuwon's
name or Likeness; (b) Licensee's failure to comply with any applicable
federal, state, local, common law, or with any applicable government
regulations, including, but not limited to, product, trademark, copyright,
or patent laws; (c) damage to property; (d) the failure or alleged failure
of, or a defect or alleged defect in, or other dissatisfaction by
customers, marketers, distributors, or sellers, with the Licensee's
products for any reason; (e) any advertising by Licensee which is alleged
to be false, misleading, fraudulent, incorrect, or otherwise contrary to
any applicable federal, state local, common law, or to any applicable
government regulations; or (f) any failure or alleged failure of Licensee
to promptly pay or meet its duties and responsibilities under any
agreements, whether oral or in writing, with customers, manufacturers,
distributors,
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marketers, or sellers, or with any persons or entities connected in any way
whatsoever with the process of the design, manufacture, marketing
distribution or sale of the Licensee's products. Licensee shall pay the
costs and expenses incurred by Licensor and/or Hakeem Olajuwon in
connection with such indemnification as such costs and expenses are
incurred. Licensor and/or Hakeem Olajuwon shall give prompt notice of, and
full cooperation and assistance to Licensee relative to any such claim or
suit, and Licensee shall have the obligation to undertake and conduct the
defense of any such claim or suit brought; provided however, that Licensor
and/or Hakeem Olajuwon has the right to approve the selection of any
counsel which represent Licensor and/or Hakeem Olajuwon and the right to
dismiss any counsel representing Licensor and/or Hakeem Olajuwon if the
representation of said counsel is unsatisfactory to Licensor and/or Hakeem
Olajuwon.
4.4.2 INDEMNIFICATION BY LICENSOR. Licensor shall, in the same
manner and to the same extent as set forth in Section 4.4.1, indemnify and
hold harmless Licensee and each person, if any, who controls Licensee
within the meaning of Section 15 of the Securities Act, and its directors
and officers, with respect to any untrue statement or alleged untrue
statement in, or omission or alleged omission from, such registration
statement or any post-effective amendment thereof or any preliminary
prospectus or final prospectus (as amended or supplemented, if amended or
supplemented as aforesaid) contained in such registration statement, if
such statement or omission was made in reliance upon and in conformity with
information furnished in writing to Licensee by Licensor for use in
connection with the preparation of such registration statement or any
preliminary prospectus or final prospectus contained in such registration
statement or any such amendment thereof or supplement thereto.
4.4.3 INDEMNIFICATION PROCEDURES. Each person to be indemnified
pursuant to this Section 4.4 will, promptly after its receipt of written
notice of the commencement of any action against such indemnified person in
respect of which indemnity may be sought from an indemnifying person under
Section 4.4.1 or Section 4.4.2, notify the indemnifying person in writing
of the commencement thereof; provided however, that the failure of any
person to give notice as provided herein shall not relieve the indemnifying
party of its obligations under this Agreement except to the extent that
such indemnifying party is actually prejudiced by such failure to give
notice. If any such action shall be brought against any indemnified person
and it shall notify an indemnifying person of the commencement thereof, the
indemnifying person will be entitled to participate therein, and, to the
extent it may desire, jointly with any other indemnifying person similarly
notified, to assume the defense thereof with counsel satisfactory to such
indemnified person, and after notice from the indemnifying person to such
indemnified person of its election so to assume the defense thereof, the
indemnifying person will not be liable to such Indemnified person under
this Article 4 for any legal or other expenses subsequently incurred by
such indemnified person in connection with the defense thereof other than
reasonable costs of investigation unless (i) the indemnified person shall
have employed counsel in an action in which the indemnified person and
indemnifying person are both defendants and there is a conflict of interest
between such parties that would prevent
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counsel from adequately representing both parties, (ii) the indemnifying
person shall not have employed counsel satisfactory within the exercise of
reasonable judgment of the indemnified person to represent the indemnified
person within a reasonable time after the notice of the commencement of the
action or (iii) the indemnifying person has authorized the employment of
counsel for the indemnified person at the expense of the indemnifying
person. The undertaking contained in this Article 4 shall be in addition to
any liabilities which the indemnifying person may have pursuant to law.
4.5 INFORMATION BY LICENSOR. Licensor shall furnish to Licensee such
information regarding Licensor as Licensee may request and as shall be
reasonably required in connection with the registration, qualification or
compliance referred to in Section 4.1
4.6 RIGHTS NON-TRANSFERABLE. The registration rights provided by this
Agreement are for the sole benefit of Licensor, are personal in nature, and
shall not be available to any subsequent holder of the Registrable Securities;
provided, however, that Licensor may assign all or any portion of the
Registrable Securities to Hakeem Olajuwon. To the extent Hakeem Olajuwon becomes
a transferee of Registrable Securities, he shall have the right to participate
in the Piggyback Registrations provided for in Section 4.1. If Hakeem Olajuwon
participates in any such Piggyback Registration, then the indemnification by
Licensee set forth in Section 4.4.1 shall also apply to Hakeem Olajuwon and
Hakeem Olajuwon shall be required to indemnify Licensee to the same extent
Licensor is indemnifying Licensee pursuant to Section 4.4.2.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF LICENSOR
5.1 REPRESENTATIONS WARRANTIES OF LICENSOR. Licensor hereby represents
and warrants that:
5.1.1 ORGANIZATION. Licensor is a corporation duly organized,
validly existing, and in good standing under the laws of the State of
Texas. Licensor has all corporate power and authority to carry on its
business as now being conducted, to own or hold under lease the properties
which it owns or holds under lease, and to perform all its obligations
under the agreements and instruments to which it is a party or by which its
assets are affected. Licensor is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each state or other
jurisdiction in which failure to qualify would have a material adverse
effect on Licensor.
5.1.2 AUTHORITY AND CONSENT. Licensor has the right, power, legal
capacity, and authority to enter into, and perform its obligations under
this Agreement, and no approvals or consents of any person are necessary in
connection herewith or therewith except as have been obtained. The
execution, delivery and performance by Licensor of this Agreement has been
duly authorized by all necessary corporate action by Licensor and in
accordance with
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all applicable laws This Agreement constitutes a valid and legally-binding
obligations of Licensor, and is enforceable against Licensor in accordance
with its terms, except as such enforceability is limited by bankruptcy,
insolvency, reorganization, moratorium, or other laws of general
application relating to or affecting enforcement of creditor's rights.
5.1.3 DEFAULTS. Neither the execution and delivery of this Agreement
by Licensor nor the consummation of the transactions contemplated hereby
will (i) violate or conflict with any provision of the certificate or
articles of incorporation or bylaws of Licensor as amended to date; (ii)
violate or conflict with any provision of any law, statute, rule, or
regulation material to the operation of Licensor, or any order, permit,
certificate, writ, judgment, injunction, decree, determination, award, or
other decision of any court, arbitrator, or governmental authority to which
Licensor is a party; or (iii) result in a breach of, or constitute a
default (or with notice or lapse of time or both result in a breach of or
constitute a default) under or otherwise give any person the right to
terminate or accelerate payment under or performance of any note, bond,
loan agreement, contract, lease or license, or under any other material
agreement or instrument to which Licensor is a party or to which its assets
are subject the default, breach, termination or acceleration of which would
have a material adverse effect on Licensor. Licensor is not in default
under, nor has any event occurred with lapse of time or action by a third
party, could result in a default under (a) the articles of incorporation or
bylaws of Licensor as amended to date, (b) any provision of any law,
statute, rule or regulation material to the operation of Licensor, or any
permit, certificate, writ, judgment, settlement, order, injunction, decree,
determination, award, or other decision of any court, arbitrator, or
governmental authority to which Licensor is a party, (c) any outstanding
note, bond, mortgage, loan agreement, indenture, lease, or license, or (d)
any other material agreement to which Licensor is a party or to which its
assets are subject.
5.1.4 COMPLIANCE WITH LICENSING REQUIREMENTS. Licensor has obtained
all approvals, authorizations, consents, permits, licenses and orders of
all governmental authorities required by the nature of its business to
permit the continued lawful operation of its business as presently
conducted, which, if not held by Licensor, would have a material adverse
effect on Licensor. There is no action pending or, to the best knowledge
of Licensor, threatened, by any governmental authority seeking to revoke,
cancel, modify, or deny any such licenses and permits or to deny any
applications made to obtain, renew, or modify any such licenses and
permits.
5.1.5 FURTHER ASSURANCES. Licensor will, promptly upon reasonable
request of Licensee, execute and deliver all such other documents, and take
all such other actions as may be necessary to fully effect the intent and
provisions of this Agreement.
5.1.6 ABSENCE OF BROKERS. Neither Licensor nor any of its affiliates
has employed any broker, agent or finder, or incurred any liability for any
brokerage fees, agent's fees, concessions or finder's fees in connection
with the transactions contemplated herein.
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ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF LICENSEE
6.1 REPRESENTATIONS AND WARRANTIES OF LICENSEE. Licensee hereby
represents and warrants that:
6.1.1 VALIDITY OF SHARES. The Licensor Common Stock and the Licensor
Warrant are in due and proper form and have been duly authorized by all
necessary corporate action on the part of Licensee. The Licensor Common
Stock being issued to Licensor hereunder and the Licensor Common Stock
issuable upon exercise of the Licensor Warrant when issued, will be validly
issued, fully paid and non-assessable shares of Common Stock, free of
preemptive rights. Licensor will acquire valid and marketable title to the
Licensor Common Stock being issued to Licensor hereunder, the Licensor
Warrant and the Common Stock issuable upon exercisable of the Licensor
Warrant free and clear of any encumbrances.
6.1.2 ORGANIZATION. Licensee is a corporation duly organized,
validly existing, and in good standing under the laws of the State of
Delaware. Licensee has all corporate power and authority to carry on its
business as now being conducted, and to perform all its obligations under
the agreements and instruments to which it is a party. Licensee is duly
qualified to do business as a foreign corporation and is in good standing
under the laws of each state or other jurisdiction in which failure would
have a material adverse effect on Licensee.
6.1.3 AUTHORITY AND CONSENT. Licensee has the right, power, legal
capacity, and authority to enter into, and perform its obligations under
this Agreement and no approvals or consents of any person are necessary in
connection therewith except as have been obtained. The execution, delivery
and performance by Licensee of this Agreement has been duly authorized by
all necessary corporate action by Licensee and in accordance with all
applicable laws. This Agreement constitutes a valid and legally-binding
obligation of Licensee, and is enforceable against Licensee in accordance
with its terms, except as such enforceability is limited by bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting enforcement of creditor's rights.
6.1.4 DEFAULTS. Neither the execution and delivery of this Agreement
by Licensee nor the consummation of the transactions contemplated hereby
will (i) violate or conflict with any provisions of the certificate or
articles of incorporation or bylaws of Licensee as amended to date (ii)
violate or conflict with any provision of any law, statute, rule, or
regulation material to the operation of Licensee, or any order, permit,
certificate, writ, judgment, injunction decree, determination, award, or
other decision of any court, arbitrator, or governmental authority to which
Licensee is a party, or (iii) result in a breach of, or constitute a
default (or with notice or lapse of time or both result in a breach of or
constitute a default) under or otherwise give any person the right to
terminate or accelerate payment under or
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performance of any note, bond, loan agreement, contract, lease or license,
or under any other material agreement or instrument to which Licensee is a
party or to which its assets are subject the default, breach, termination
or acceleration of which would have a material adverse effect on Licensee.
Licensee is not in default under, nor has any event occurred which, with
lapse of time or action by a third party, could result in a default under
(a) the articles of incorporation or bylaws of Licensee as amended to date,
(b) any provision of any law, statute, rule or regulation material to the
operation of Licensee, or any permit, certificate, writ, judgment,
settlement, order, injunction, decree, determination, award, or other
decision of any court, arbitrator, or governmental authority to which
Licensee is a party, (c) any outstanding note, bond, mortgage, loan
agreement, indenture, lease, or license, or (d) any other material
agreement to which Licensee is a party or to which its assets are subject.
6.1.5 COMPLIANCE WITH LAW. Licensee acknowledges that neither
Hakeem, Inc. nor its employee, Hakeem Olajuwon, have obtained any expert or
legal advice regarding copyright, trademark, or patent infringement and
that Hakeem, Inc. and its employee, Hakeem Olajuwon, are relying upon
Licensee to obtain any such expert or legal advice, and to ensure that the
products of Licensee using the name and Likeness and the advertising,
marketing, and distribution thereof are in compliance with the copyright,
trademark, and patent infringement laws of the United States, or any state
in which such products are advertised, marketed, published, sold or
distributed, Licensee will obtain the necessary expert or legal advice to
ensure that the products of Licensee using the Name and Likeness, and the
advertising, marketing and distribution thereof, are in compliance with the
laws of the United States, or of any state or country in which such
products are advertised, marketed, published, sold or distributed.
6.1.6 COMPLIANCE WITH LICENSING REQUIREMENTS. Licensee has obtained
all approvals, authorizations, consents, permits and orders of all
governmental authorities required by the nature of its business to permit
the continued lawful operation of its business as presently conducted,
which, if not held by Licensee, would have a material adverse effect on
Licensee. There is no action pending or, to the best knowledge of
Licensee, threatened, by any governmental authority seeking to revoke,
cancel, modify, or deny any such licenses and permits or to deny any
applications made to obtain, renew, or modify any such licenses and
permits.
6.1.7 COMPLIANCE WITH COPYRIGHT, TRADEMARK OR PATENT INTERESTS,
INCLUDING RIGHTS OF THE NBA, USA BASKETBALL AND/OR NCAA. During the Term,
Licensee will at all times comply with all government laws and regulations
relating to the manufacture, sale, advertising or use of the products of
Licensee. Licensee shall comply with any regulations of any agencies that
shall have jurisdiction over such products and shall procure and maintain
in force any and all permissions, certifications and other authorizations
from governmental and other official authorities that may be required in
relation thereto. The products distributed hereunder shall comply with all
applicable laws and regulations. Licensee represents that it has obtained
or will obtain as required all necessary approvals,
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authorizations, consents, permits, licenses and orders of all NBA, USA
Basketball and NCAA authorities required for any products of Licensee using
the name and Likeness or any advertising thereof, which, if not held by
Licensee, would have a material adverse effect on Licensor or Licensee.
During the Term, Licensee will, at all times, comply with all NBA, USA
Basketball, and/or NCAA rules and regulations or the copyright or trademark
interests of those entities relating to the information contained in or on
the products of Licensee using the Name and Likeness, and any design,
manufacture, advertising or use of such products. Licensee shall comply
with the rules, regulations or copyright interests of such agencies such
that neither the products using the Name and Likeness nor the advertising
thereof are in violation of any such interests, or shall procure and
maintain in force any and all licenses, permissions or other authorizations
from the NBA, USA Basketball or the NCAA and the official authorities that
may be required in relation thereto. In addition, Licensee warrants that it
has obtained or will obtain as required licenses, authorizations, or
written appropriate required permission, from any and all persons,
companies, or entities whose art or work is protected by copyright,
trademark or patent laws, and used in connection with the design,
manufacture, distribution and sale of the products using the name and
Likeness, including, but not limited to, photographs, used on the products
of Licensee using the Name and Likeness or in its advertising.
6.1.8 FURTHER ASSURANCES. Licensee will, promptly upon the
reasonable request of Licensor, execute and deliver all such other
documents, and take all such other actions as may be reasonably necessary
to fully effect the intent and provisions of this Agreement.
6.1.9 COMPLIANCE WITH LICENSING REQUIREMENTS. Licensee has obtained
an approvals, authorizations, consents, permits, licenses and orders of all
governmental authorities required by the nature of its business to permit
the continued lawful operation of its business as presently conducted,
which, if not held Licensee, would have a material adverse effect on
Licensee. There is no action pending or, to the best knowledge of License,
threatened, by any governmental authority or entity seeking to revoke,
cancel, modify, or deny any such licenses and permits or to deny any
applications made to obtain, renew, or modify any such licenses and
permits.
6.1.10 PROTECTING THE ATHLETE ENDORSEMENT. Licensee agrees that
Licensee, its owners, directors, officers and employees, will take all
necessary steps during the term of this Agreement to protect the athlete
endorsement, the name of Hakeem, Inc., the Name and Likeness of its
employee, Hakeem Olajuwon, the nickname "The Dream", or any facsimile
thereof, in connection with the advertisement, promotion, distribution and
sales of products of Licensee using the name and Likeness.
6.1.11 FAVORED NATIONS. Licensee agrees that during the period of
this Agreement, it shall enter into no contractual arrangement with any
other athlete or company, for athlete endorsement, with compensation or
other terms more favorable than those provided to
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Licensor, without first making such more favorable compensation or other
terms available to Licensor.
6.1.12 ABSENCE OF BROKERS. Neither Licensee nor any of its
affiliates has employed any agent or finder, or incurred any liability for
any agent's fees, commissions or finder's fees in connection with the
transactions contemplated herein, other than as contemplated by this
agreement.
ARTICLE 7
TERMINATION
7.1 TERMINATION BY LICENSOR. Subject to Section 7.3, Licensor shall have
the right to terminate this Agreement, without prejudice to any rights it may
have, whether pursuant to the provisions of this Agreement, at law or in equity,
upon the occurrence of any one or more of the following events:
7.1.1 FAILURE TO PERFORM. The Licensee defaults in the performance
of any of its material obligations set forth in this agreement;
7.1.2 VALIDITY OF REPRESENTATIONS AND WARRANTIES. Any representation
and warranty made by Licensee under this Agreement fails to continue to be
true and accurate, and as a result of such failure, there is a material
adverse effect on the ability of Licensee to perform its obligations under
this Agreement;
7.1.3 INSOLVENCY. Licensee is unable to pay its debts when due, or
makes any assignment for the benefit of creditors, or files any petition
under the bankruptcy or insolvency laws of any jurisdiction, country or
place, or suffers a receiver or trustee to be appointed for its business or
property, or is adjudicated a bankrupt or an insolvent;
7.1.4 NAME AND REPUTATION. If the name and reputation, or commercial
value thereof of Hakeem Olajuwon is endangered by reason of its association
with Licensee, or its divisions or subsidiary corporations, or its
directors, officers or principals, because of a conviction of any such
directors, officers or principals of a felony or a misdemeanor, involving
moral turpitude, or because of allegations that such companies or persons
committed fraud or made misrepresentations concerning this License and the
products of Licensee using the Name and Likeness to be distributed under
this Agreement, or that Licensee or its directors, officers or principals
acted in, violation of trademark, copyright or patent laws, or in violation
of NBA, USA Basketball and NCAA rules and regulations, or their trademark
or copyright interests; or
7.1.5 MISREPRESENTATIONS CONCERNING RELATIONSHIP OF LICENSE. This
Agreement is a non-exclusive License Agreement, and any representations or
"holding out" by Licensee,
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its directors officers or employees that this License is more than it is,
or that Licensee has any rights other than those actually conveyed, or that
Licensee or its owners, directors, officers or employees is the agent of
Licensor or Hakeem Olajuwon, or that a partnership or joint venture exists
between Licensor or Hakeem Olajuwon, and Licensee, shall be considered to
be a material breach of this License Agreement and grounds for termination.
7.2 TERMINATION BY LICENSEE. Subject to Section 7.3, Licensee shall have
the right to terminate this Agreement, without prejudice to any rights it may
have, pursuant to the provisions of this Agreement, at law or in equity, on the
occurrence of any one or more of the following events:
7.2.1 FAILURE TO PERFORM. The Licensor defaults in the performance
of and of its material obligations set forth in this Agreement; or
7.2.2 FAILURE OF REPRESENTATIONS AND WARRANTIES. Any representation
or warranty of the Licensor under this Agreement fails to continue to be
true and accurate, and as a result of such failure, the ability of Licensee
to perform its obligations hereunder, is materially impaired.
7.3 TERMINATION PROCEDURES. If any event described in Sections 7.1 or 7.2
giving rise to a right to terminate this Agreement occurs, the non-defaulting
party shall give notice of termination in writing to the defaulting party as
provided in Section 9.1. The defaulting party shall have ten (10) days from the
date of the giving of such notice to correct the default, and failing such cure,
this Agreement shall thereupon immediately terminate.
7.4 EFFECT OF TERMINATION. Licensee agrees that upon termination of this
Agreement for any reason whatsoever, Licensee will thereafter cease using the
Name and Likeness for any purpose.
ARTICLE 8
DISPUTE RESOLUTION
8.1 SETTLEMENT OF DISPUTES. Except as provided in Section 8.3, any dispute
or controversy between the parties hereto arising from or relating to this
Agreement or the construction, validity, interpretation, meaning, performance,
non-performance, enforcement, operation or breach of this Agreement shall be
Submitted to mediation, and if such mediation is unsuccessful then to mandatory,
final and binding arbitration.
8.2 MEDIATION AND ARBITRATION PROCEDURES. Any mediation or arbitration
under this Agreement shall take place pursuant to the following procedures:
8.2.1 DEMAND FOR MEDIATION. If a dispute or controversy arises,
either party may, in a written notice delivered to the other party, demand
mediation. The notice shall briefly state the matter in controversy.
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8.2.2 APPOINTMENT OF MEDIATOR. If the parties do not resolve the
dispute within ten (10) days after delivery of the notice of mediation,
either party may request that Judicial Arbitration and Mediation Service
("JAMS") (or similar mediation service of a similar national scope if JAMS
no longer then exists) appoint an independent mediator, who shall serve as
mediator for all purposes hereof. Each party shall pay one-half of the
cost of the mediator's services, in advance upon request by the mediator or
any party.
8.2.3 MEDIATION. Within (10) days after appointment of the mediator,
the mediator shall schedule a meeting among the parties and the mediator
for the purpose of mediating the dispute. If the parties do not resolve the
dispute with thirty (30) days after appointment of the mediator, the
dispute shall be resolved in arbitration and either party may, in a written
notice delivered to the other party, demand arbitration. The notice shall
name and appoint an arbitrator selected by the party demanding arbitration.
8.2.4 APPOINTMENT OF ARBITRATOR. Within thirty (30) days after
receiving a demand for arbitration, the receiving party shall, in a written
notice delivered to the demanding party, name and appoint its own
arbitrator. If the receiving party fails to name and appoint an
arbitrator timely, then an arbitrator shall be appointed for the receiving
party by the Senior United States District Judge for the United States
District Court in Houston, Texas. The two arbitrators so appointed shall
appoint a third arbitrator within thirty (30) days, and the appointment may
be made either by agreement of the two arbitrators or by the Senior United
States District Judge for the United States District Court in Houston,
Texas at the request of the two arbitrators.
8.2.5 ARBITRATION RULES. Each party shall bear its own arbitration
fees, costs and expenses, provided, however, that fees, costs and expenses
associated with judicial proceedings may be awarded by a court under
Section 8.2.7. The arbitration hearing shall be held in Houston, Texas at a
location designated by a majority of the arbitrators. The Commercial
Arbitration Rules of the American Arbitration Association, as supplemented
hereby, shall apply to the arbitration. The substantive laws of the State
of Texas (excluding conflict of laws provisions) shall also apply to the
arbitration,
8.2.6 ARBITRATION AWARD. The arbitration hearing shall be concluded
within ten (10) days unless otherwise ordered by a majority of the
arbitrators, and the award thereon shall be made within fifteen (15) days
after the close of submission of evidence. An award rendered by a majority
of the arbitrators shall be final and binding on all parties to the
proceeding and non-appealable, and judgment on the award may be entered by
either party in a court of competent jurisdiction.
8.2.7 EFFECT OF ARBITRATION AWARD. The parties stipulate that the
provisions of this Section 8.2.7 shall be a complete defense to any suit,
action or proceeding instituted in any federal, state or local court or
before any administrative tribunal with respect to any controversy or
dispute arising out of this Agreement between the parties, and the parties
16
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waive any right to have the award of the arbitrators appealed. The
arbitration provisions of this Agreement shall, with respect to such
controversy or dispute, survive the termination or expiration of this
Agreement. Should any party institute judicial proceedings seeking to avoid
the mediation or arbitration provisions of this Agreement, or should any
party in judicial proceedings unsuccessfully contest an arbitration award
rendered under this Section 8.2, the other party shall be entitled to
recover reasonable attorney's fees, costs and expenses associated with the
judicial proceedings, with the amount of attorney's fees, costs and
expenses to be determined by the Court. If a party fails to comply with the
terms of an arbitration award made under this Agreement, the other patty
shall be entitled to recover reasonable attorney's fees, costs and expenses
incurred in seeking judicial confirmation of the award, with the amount of
attorney's fees, costs and expenses to be determined by the court. Failure
to comply with the terms of an arbitration award shall Include without
limitation the failure to pay the full amount due under an arbitration
award within the time specified in the arbitration award.
8.2.8 DAMAGE AWARDS. In determining any award under this Section
8.2, the arbitrators may not award amounts for special damages,
consequential damages, incidental damages, lost profits, damages for lost
business opportunity, punitive damages or exemplary damages.
Neither any party hereto nor the arbitrators may disclose the
existence or results of any arbitration hereunder without the prior
written consent of the other party; nor may any party hereto disclose to
any third party any confidential information disclosed by any other party
hereto in the course of an arbitration hereunder without the prior written
consent of such other party.
8.3 EMERGENCY RELIEF. Notwithstanding anything in this Article VIII to
the contrary, either party may seek from a court any provisional remedy that may
be necessary to protect any rights or property of such party pending the
establishment of the arbitral tribunal or its determination of the merits of the
controversy.
8.3.1 JURISDICTION. In connection only with the provisions of
Section 8.3, each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the United States District Court in Houston, Texas, and, if
such court does not have jurisdiction, of the courts of the State of Texas
in Harris County, for the purposes of any action arising out of this
Agreement or the subject matter of this Agreement brought by any other
party under Section 8.3.
8.3.2 WAIVER OF DEFENSES. In connection only with the provisions of
this Section 8.3, to the extent permitted by applicable law, each party
hereby waives and agrees not to assert, by way of motion, as a defense or
otherwise, in any such action under this Section 8.3, any claim (i) that it
is not personally subject to the jurisdiction of the above-named courts,
(ii) that the action is brought in an inconvenient forum, (iii) that it is
immune from any legal
17
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process with respect to itself or its property, (iv) that the venue of the
suit, action or proceeding is improper, or (v) that this Agreement or the
subject matter of this Agreement may not be enforced in or by such courts.
8.3.3 SERVICE OF PROCESS. In connection only with the provisions of
this Section 8.3, Licensor and Licensee agree that, even if at any time
during the term of this Agreement, Licensor is not qualified to do business
as a foreign corporation in the State of Texas, or Licensee is not
qualified to do business as a foreign corporation in the State of Texas,
Licensor and Licensee each shall and do hereby irrevocably designate and
appoint the Secretary of State of the State of Texas as its agent for
service of process in any action with respect to any matter as to which it
submits to jurisdiction as set forth above; it being agreed that any method
of service upon such agent, with a copy sent to Licensor or Licensee, as
the case may be, in the manner set forth in Section 9.1, shall constitute
valid service upon Licensor or Licensee, as the case may be.
ARTICLE 9
MISCELLANEOUS
9.1 NOTICES. Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement shall be in writing and shall be
personally delivered or sent by registered or certified mail, postage prepaid,
return receipt requested, or by prepaid telex, telecopy, or telegram (with
messenger delivery specified) to Licensee or Licensor, as the case may be, at
the addresses set forth below, or to such other addresses as either may from
time to time designate to the other in writing:
Licensor: Hakeern, Inc
6420 Hillcroft
Suite 218
Houston, Texas 77081
Attn: Hakeem Olajuwon
Telecopy No.: (713) 995-1623
With a copy to: Denice Smith, Esq.
Attorney at Law
2727 Allen Parkway
Suite 800
Houston, Texas 77027
Telecopy No.: (713) 520-2525
18
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With a copy to: Olajuwon Holdings, Inc.
10375 Richmond Avenue Suite 1105
Houston, Texas 77042
Attn: Akinola "Akin" S. Olajuwon
Telecopy No.: (713) 266-2005
Licensee: Applied Voice Recognition, Inc.
4615 Post Oak Place, Suite 277
Houston, Texas 77027
Attn: Timothy J. Connolly
Telecopy No.: (713) 621-5870
With a copy to: Boyar, Simon & Miller
4265 San Felipe, Suite 1200
Houston, Texas 77027
Attn.: J. William Boyar
Telecopy No.: (713) 552-1758
All such notices shall be deemed to have been given when deposited, postage
prepaid, in the United States mail, by return receipt requested, or when
delivered by facsimile transmission or by overnight delivery service at the
applicable address set forth above.
9.2 CHOICE OF LAW AND VENUE. This Agreement is performable in Houston,
Harris County, Texas, and the validity of this Agreement, its construction,
interpretation, and enforcement, and the rights of the parties hereto with
respect to all matters arising hereunder or related thereto, shall be determined
under, governed by, and construed in accordance with the laws of the State of
Texas.
9.3 INJUNCTIVE RELIEF. The parties hereto recognize and acknowledge that
a breach of any of the covenants, agreements or undertakings hereunder will
cause irreparable damage that cannot be readily remedied in damages in an action
at law, thereby entitling the non-breaching party to equitable remedies and
costs.
9.4 SURVIVAL. The obligations of the parties hereto shall survive until
the expiration of the Term.
9.5 AMENDMENT, WAIVER, MODIFICATION, ETC. No amendment, waiver,
modification or cancellation of any term or condition of this Agreement shall be
effective unless it is executed in writing by the party charged therewith. The
fact that a party has not previously insisted upon the other party's express
compliance with any provision of this Agreement shall not be deemed to be a
waiver of the other party's future right to require compliance. If any term or
provision of this Agreement is held to be invalid or unenforceable by any court
of competent jurisdiction or by any other authority vested with jurisdiction,
that holding shall not affect the validity or enforceability of
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any other term or provision hereof, and this Agreement shall be interpreted and
construed if that term or provision, to the extent it shall have been held to be
invalid, illegal or unenforceable, had never been contained herein.
9.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one
arid the same agreement.
9.7 INTEGRATION. This Agreement reflects the entire understanding and
agreement of the parties with respect to the transactions contemplated hereby
and shall not be contradicted, modified, or qualified by any oral agreement,
whether before or after the date hereof. This Agreement may not be changed
orally, but only in agreement in writing, signed by the party against whom
enforcement of any waiver, change, modification extension, or discharge is made.
9.8 RELATIONSHIP OF THE PARTIES. This Agreement does not constitute and
shall not be construed as giving any rights of agency, or constituting a
partnership or joint venture between Hakeem Olajuwon and Licensee. Neither
Licensee, nor its shareholders, directors, officers or employees shall have any
right to obligate or bind Hakeem Olajuwon in any manner whatsoever, or to
represent to any third party that it has the right to obligate or bind Hakeem
Olajuwon, or that Licensee is the agent of Hakeem Olajuwon or that a partnership
or joint venture exists between Licensee and Licensor, and nothing herein
contained shall give, or is intended to give, any rights of any kind to any
third persons. Neither party is hereby constituted an agent or representative
of the other party hereto, and neither is granted any right or authority
hereunder to assume or create any obligation express or implied, or to make any
representation, covenant, warranty or guaranty on behalf of the other, except as
expressly granted or made in this Agreement. The parties agree that they shall
not make any representation except as expressly granted or made in this
Agreement.
9.9 NON-ASSIGNABILITY. This Agreement shall bind and inure to the benefit
of Licensee, its successors and permitted assigns. This Agreement is personal
to Licensee, and Licensee shall not sub-license nor franchise its right
hereunder, and neither this Agreement nor any of the rights of Licensee
hereunder shall be sold, transferred or assigned by Licensee, and no rights
hereunder shall devolve by operation of law or otherwise upon ally receiver,
liquidator, trustee or other party.
9.10 EXPENSES. Except as otherwise provided herein, each of the parties
hereto agrees to pay its own respective expenses and attorney's fees incurred in
connection with the negotiation, preparation, execution, and delivery of this
Agreement.
9.11 DESCRIPTIVE HEADINGS. Descriptive headings herein are for
convenience only, and shall not control or affect the meaning or construction of
any provision of this Agreement.
9.12 ATTORNEY'S FEES. In the event any suit or other legal proceedings is
brought for the enforcement of any of the provisions of this Agreement, or by
reason of the breach of either party to this Agreement the parties hereto agree
that the prevailing party shall be entitled to recover from the
20
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other, upon final judgment on the merits by a court of last resort, reasonable
attorneys' fees, including attorneys' fees for any appeal, and its costs
incurred in bring such suit, proceeding and/or appeals.
9.13 TIME OF THE ESSENCE. Time is of the essence in the performance by
the parties hereto of their obligations hereunder, including, without
limitation, the payment by Licensee of all compensation due Licensor hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the Effective Date.
LICENSOR:
HAKEEM, INC.
By: /S/ HAKEEM OLAJUWON
-------------------------------
Hakeem Olajuwon, President
LICENSEE:
APPLIED VOICE RECOGNITION, INC.
By: /S/ TIMOTHY J. CONNOLLY
--------------------------------
Timothy J. Connolly, President
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EXHIBIT 10.5
WARRANT NO. 2 TO PURCHASE COMMON STOCK
OF
APPLIED VOICE RECOGNITION, INC.
VOID AFTER AUGUST 31, 2001
This certifies that HAKEEM, INC., a Texas corporation, is entitled to
purchase at any time prior to August 31, 2001 FIVE THOUSAND (5,000) Shares of
fully paid and nonassessable Common Stock, $0.01 par value (the "Common Stock"),
of Applied Voice Recognition, Inc., a Delaware corporation (the "Company"), at a
price of $150.00 per share, subject to adjustment as provided herein, by
surrendering this Warrant with the subscription form hereinafter set forth fully
executed, at the principal office of the Company in Houston, Texas, accompanied
by payment of the full purchase price of the shares so purchased in cash, and
upon compliance with and subject to the conditions set forth herein. The
purchase price per share and the number of shares covered by this Warrant are
subject to adjustment from time to time as hereinafter set forth.
This Warrant may not be exercised until such time as the Company has
either (i) completed a merger with a public shell, or (ii) completed an initial
public offering of its Common Stock.
The purchase price per share of Common Stock from time to time in
effect under this Warrant, and the number and character of shares covered
hereby, shall be subject to adjustments from time to time in certain instances
as follows, and the term "Warrant Price" shall mean the price per share
originally set forth in this Warrant or any price resulting from adjustments
pursuant to the terms hereof.
1. In case the Company shall subdivide its outstanding shares of
Common Stock into a greater number of shares or shall issue in exchange for its
outstanding shares of Common Stock a greater number of shares of Common Stock,
then in each such case from and after the record date for such subdivision or
exchange, the number of shares of Common Stock covered by this Warrant shall be
increased in proportion to such increase in the number of outstanding shares of
Common Stock and the Warrant Price then in effect shall be correspondingly
decreased; and in the case the Company shall reduce the number of shares of its
Common Stock by a combination of shares or shall issue in exchange for its
outstanding shares of Common Stock a lesser number of shares of Common Stock,
then in each such case from and after the record date for such combination or
exchange, the number of shares of Common Stock covered by this Warrant shall be
decreased in proportion to such reduction in the number of outstanding shares of
Common Stock, and the then prevailing Warrant Price shall be correspondingly
increased.
2. In case the Company shall declare and pay a dividend upon its
Common Stock payable in Common Stock, then in each such case from and after the
record date for determining the
<PAGE>
stockholders entitled to receive such dividend, the number of shares of Common
Stock covered by this Warrant shall be increased in proportion to the increase
in the number of outstanding shares of Common Stock through such stock dividend,
and the then prevailing Warrant Price shall be correspondingly decreased.
3. In case of any reclassification or change of outstanding shares
of Common Stock (other than as a result of a subdivision, combination or stock
dividend) or in case of the consolidation or merger of the Company with or into
any other corporation (other than a merger in which the Company is the
continuing corporation and which does not result in any reclassification or
change in its outstanding shares of Common Stock), or in case of any sale by the
Company of all or substantially all of its assets to another corporation, the
holder of this Warrant shall have the right thereafter to receive upon exercise
hereof the amount and kind of shares of capital stock and other securities and
property entitled to be received upon such reclassification, change,
consolidation, merger or sale by a holder of the number of shares of Common
Stock of the Company covered by such Warrant at the then prevailing Warrant
Price, subject to subsequent adjustments as provided herein.
4. In case at any time:
(a) the Company shall declare any dividend upon its Common Stock
or make any other distribution to the holders of its Common Stock; or
(b) the Company shall propose to offer for subscription to the
holders of its Common Stock any additional shares of stock of any class of
any other securities or rights; or
(c) the Company shall propose any reclassification or change of
outstanding shares of Common Stock, or any consolidation or merger of the
Company or any sale by the Company of its assets to which paragraphs 1, 2
or 3 would be applicable, then, in any one or more of such cases, the
Company shall cause at least twenty (20) days' prior notice to be mailed to
the registered holder of this Warrant on the date on which the books of the
Company shall close or a record shall be taken for such dividend,
distribution or subscription rights, or for a vote upon such
reclassification, change, consolidation, merger or sale, as the case may
be. In addition, the Company shall mail to the registered holder of this
Warrant copies of each report of communication of the Company mailed to the
holders of its Common Stock simultaneously with such mailing to holders of
Common Stock.
5. (a) As a condition precedent to the taking of any action which
would cause an adjustment reducing the Warrant Price below the then par value of
the shares of Common Stock issuable upon the exercise hereof, the Company will
take such corporate action as may be necessary in order that it may validly and
legally issue fully paid and nonassessable shares of such Common Stock at such
adjusted Warrant Price.
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(b) No adjustment shall be made in the number of shares purchasable
upon exercise of this Warrant in any case in which the adjustment would result
in a change of less than 2/100ths of a share of Common Stock, as such Common
Stock is constituted immediately subsequent to the event giving rise to the
proposed adjustment, except that any action taken by the Company which otherwise
would occasion an adjustment in an amount less than 2/100ths of a share shall be
carried forward and taken into account at the time of any subsequent adjustment
in the number of shares purchasable hereunder.
6. (a) This Warrant and all rights hereunder are transferable, in
whole or in part, on the books of the Company maintained at is principal office
in Houston, Texas, by the registered holder hereof, in person or by duly
authorized attorney, upon surrender of this Warrant, properly endorsed and with
the signature of such endorsement either notarized or guaranteed by a commercial
bank or trust company or by a firm which is a member of the New York Stock
Exchange or the American Stock Exchange Clearing Corporation, and upon payment
of any necessary transfer tax or other governmental charge imposed upon such
transfer. Upon any partial transfer the Company will issue and deliver to such
holder a new Warrant or Warrants with respect to the Common Stock subject to the
Warrants not so transferred.
(b) Each taker and holder of this Warrant, by taking or holding the
same, consents and agrees that this Warrant, when endorsed in blank, shall be
deemed negotiable, and that when this Warrant shall have been so endorsed, the
holder hereof may be treated by the Company and all other persons dealing with
this Warrant as the absolute owner hereof, for any purpose and as the person
entitled to exercise the rights represented hereby, or to the transfer hereof on
the books of the Company, any notice to the contrary notwithstanding (with the
exception of the notice provided by any transfer restrictions noted on the
assignment form hereinafter set forth); but until such transfer on such books,
the Company may treat the registered holder hereof as the owner for all
purposes.
7. (a) This Warrant may be exercised for all or part of the shares
covered hereby. In the event of a partial exercise of this Warrant, the Company
will issue to the holder hereof the number of shares of Common Stock purchased
under this Warrant, together with a new, similar Warrant for the unused portion.
This Warrant may be subdivided into or combined with similar Warrants at any
time, at the option of the holder hereof, at the principal office of the Company
in Houston, Texas.
(b) The Company shall not be required to issued fractional shares of
Common Stock upon any exercise of Warrants. As to any final fraction of a share
in which the same holder of one or more Warrants, the rights under which are
exercised in the same transaction, would otherwise be entitled to purchase upon
such exercise, the Company shall pay a sum in cash equal to the excess of the
market value of such fractional share (determined in such reasonable manner as
the Board of Directors of the Company may prescribe) over the proportional part
of the exercise price represented by such fractional share.
8. The holder of this Warrant shall not be entitled, as such, to any
of the rights of a stockholder of the Company.
3
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IN WITNESS WHEREOF, THE COMPANY HAS CAUSED THIS WARRANT TO BE EXECUTED
BY THE PRESIDENT AS OF SEPTEMBER __, 1996.
APPLIED VOICE RECOGNITION, INC.
By: /S/ TIMOTHY J. CONNOLLY
-------------------------------
Timothy J. Connolly, President
4
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EXHIBIT 10.6
EMPLOYMENT AGREEMENT
(JANET E. CARSON)
This Employment Agreement ("Agreement") is made as of August 15, 1996 (the
"Effective Date"), by and among APPLIED VOICE RECOGNITION, INC., a Delaware
corporation ("Employer") and JANET E. CARSON, an individual residing in Harris
County, Texas ("Employee").
W I T N E S S E T H:
--------------------
WHEREAS, Employee has been an at will employee of Voice Technologies
Partners, L.P. ("VTPLP");
WHEREAS, as of even date herewith, Employer has acquired certain of the
assets and liabilities of VTPLP;
WHEREAS, Employer and Employee desire to enter into an agreement regarding
Employee's employment with Employer pursuant to the terms and conditions set
forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and intending to be legally bound
hereby, the parties covenant and agree as follows:
1. EMPLOYMENT. Employer hereby employs Employee and Employee hereby
accepts employment with Employer on the terms and conditions set forth in this
Agreement.
2. TERM OF EMPLOYMENT. The term of Employee's employment hereunder (the
"Term") shall commence as of the Effective Date and shall continue (subject to
termination by either Employer or Employee as hereinafter provided) for an
initial term (the "Initial Term") expiring on December 31, 1999 (the "Expiration
Date"). The Expiration Date shall be automatically extended, unless terminated
by Employer or Employee for successive one (1) year periods following the
expiration of the Initial Term. If Employer desires to terminate Employee's
employment under this Agreement at the end of the Initial Term or at the end of
any succeeding one year term, Employer shall give written notice of such desire
to Employee at least six (6) months prior to the expiration of the Initial Term
or any succeeding one year term. If Employee desires to terminate Employee's
employment under this Agreement at the end of the Initial Term or at the end of
any succeeding one year term, Employee shall give written notice of such desire
to Employer at least three (3) months prior to the expiration of the Initial
Term or any succeeding one year term. At the expiration of the then existing
term, Employer shall have no further obligation to Employee except as set forth
in Section 6(c), and Employee shall have no further obligation to Employer
except as set forth in Section 7.
<PAGE>
3. COMPENSATION AND OTHER BENEFITS.
(a) As compensation for all services rendered by Employee in
performance of her duties or obligations under this Agreement, Employer
shall pay Employee the following annual base salary:
(1) during the remainder of 1996, based on an annual salary of
SIXTY THOUSAND AND NO/100 DOLLARS ($60,000.00);
(2) during 1997 and thereafter as adjusted in accordance with
this Section 3, NINETY THOUSAND AND NO/100 DOLLARS ($90,000.00); and
(during any particular period, the "Base Salary"), payable in qual semi-
monthly installments or in the manner and on the timetable which Employer's
payroll is customarily handled or at such intervals as Employer and
Employee may hereafter agree to from time to time. Employer and Employee
agree that the Base Salary shall be adjusted annually on January 1 of each
year, commencing January 1, 1998, to reflect the increase, if any, in the
cost-of-living. The adjustment shall be made by adding to such Base Salary
an amount obtained by multiplying the Base Salary by the percentage by
which the level of the Consumer Price Index for the Houston, Texas
Metropolitan Area as reported on the last day of the preceding calendar
year by the Bureau of Labor Statistics of the United States Department of
Labor, has increased over its level as of December 31, 1997. Following the
end of each calendar year after December 31, 1997, and within thirty (30)
days after the release by the Bureau of Labor Statistics of the figures for
the preceding year, Employer shall pay to Employee the amount of additional
compensation to which she is entitled on account of the cost-of-living
adjustment made to the Employee's salary. In no event shall the Base
Salary ever be decreased as a result of a decrease in the cost-of-living.
(b) In addition to receiving the Base Salary provided for in Section
3(a), Employee shall be entitled during the Term, upon satisfaction of all
eligibility requirements, if any, to participate in all health, dental,
disability, life insurance and other benefit programs now or hereafter
established by Employer which cover substantially all other of Employer's
employees and shall receive such other benefits as may be approved from
time to time by Employer.
(c) Employee shall be entitled to receive three (3) weeks of paid
vacation for each year during the Term and shall be entitled to receive
paid holidays as enjoyed by all other employees of Employer.
4. DUTIES. Employee is employed to act as Vice President and Secretary
of Employer, at least until calendar year 1999 as a member of the Board of
Directors of Employer, and in such other office or position as shall be assigned
to Employee from time to time by Employer, and to perform such duties as are
commensurate with Employee's position with Employer. Employee agrees that
Employee shall devote a substantial portion (but not all) of her time to as an
employee of
<PAGE>
Employer, shall use Employee's best efforts to perform the duties of
Employee's position in an efficient and competent manner and shall use
Employee's best efforts to promote the interests of Employer and any affiliated
companies. Employee further agrees that Employee shall refer to Employer all
opportunities in the computer industry related to voice recognition software
designs and applications to which Employee might become exposed in carrying out
Employee's duties and responsibilities hereunder.
5. PARTICIPATION IN EMPLOYER'S STOCK OPTION PLAN. As an additional
inducement to Employee to accept employment upon the terms set forth herein and
in consideration of her execution of this Agreement, Employee shall be entitled
to participate in Employer's 1996 Stock Option Plan, as described in that
certain document entitled "APPLIED VOICE RECOGNITION, INC. 1996 STOCK OPTION
PLAN", as amended from time to time.
6. TERMINATION OF EMPLOYMENT.
(a) Employee's employment pursuant hereto shall terminate in the event
of the death of Employee.
(b) Employer may terminate Employee's employment under this Agreement
for cause without any prior notice, upon the occurrence of any of the
following events;
(1) any embezzlement or wrongful diversion of funds of Employer
or any affiliate of Employer by Employee;
(2) gross malfeasance by Employee in the conduct of her duties;
(3) material breach of Section 7 of this Agreement;
(4) the failure by Employee on account of a medical disability to
substantially perform Employee's duties of employment and achieve
expected customary results for a period of one hundred eighty (180)
days and the finding by Employer, in the exercise of its reasonable
discretion, that Employee will not be able to substantially perform
her duties for at least a period of an additional one hundred eighty
(180) days during the term of this Agreement; or
(5) gross neglect by Employee in carrying out Employee's duties.
(c) If Employee's employment is terminated for any of the reasons
specified in Section 6(a) or (b) or if Employee should voluntarily
terminate Employee's employment, Employer shall no longer be obligated to
make the payments specified under Section 3 or to pay to Employee any other
compensation or benefits whatsoever, except as may otherwise be provided in
Section 6(d). Notwithstanding the foregoing, if for any reason Employee's
employment is terminated hereunder, any salary payable under Section 3(a)
which shall have
<PAGE>
been earned but not yet paid shall be paid by Employer to Employee or
Employee's estate, as the case may be.
(d) Employee shall have the right to terminate Employee's employment
hereunder upon ninety (90) days' notice to Employer after the occurrence of
any of the following events:
(1) a sale of all or substantially all of the assets of Employer
to a third party for which Employee does not continue in employment;
or
(2) a merger or consolidation of Employer with an entity for
which Employee does not continue in employment.
The foregoing provision of this Section 6(d) shall not apply if the change
of ownership that would otherwise trigger Employee's termination right is caused
by the registration by Employer or Employer's successor, of any class of equity
securities pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended, or the merger of Employer or Employer's successor into a public shell.
7. DISCLOSURE OF CONFIDENTIAL INFORMATION. During the Term and at all
times thereafter, Employee shall use Employee's best efforts and shall take all
reasonable precautions to prevent the disclosure, except to the extent required
in the performance of Employee's duties or obligations to Employer hereunder or
by express prior written consent of a duly authorized officer or director of
Employer (other than Employee), of trade secrets, secret methods or
"Confidential Information" of Employer. As sued herein, the term "Confidential
Information" means any and all information relating directly or indirectly to
Employer that is not generally ascertainable from public or published
information or trade sources and that represents proprietary information to
Employer, excluding, however, (i) Employees' business contracts, (ii)
information already known to Employee prior to Employee's employment with
Employer, and (iii) information required to be divulged in any legal or
administrative proceeding in which Employee is involved.
Employer agrees that during the term of this Agreement, Employee will be
granted access to Employer's Confidential Information, including specifically
without limitation customer lists, pricing lists, existing customer contracts,
customer correspondence and technical specifications relating to Employer's
products, procedures and methods, to the extent access to such Confidential
Information is reasonably necessary to the performance of Employee's duties
under this Agreement.
Upon the expiration or earlier termination of this Agreement for any
reason, Employee shall immediately return to Employer any and all Confidential
Information in Employee's possession or control, including, but not limited to,
any originals or copies of, or computer discs or other magnetic media containing
policies, procedures, customer lists, pricing lists, customer correspondence, or
billing information. Employee shall to retain any Confidential Information in
any form (e.g., computer hard drive, microfilm, etc.) upon the expiration or
earlier termination of this Agreement.
<PAGE>
8. ARBITRATION. The parties agree that all disputes or questions arising
in connection with this Agreement and/or the termination of Employee's
employment hereunder 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, conclusive and enforceable in a
court of competent jurisdiction; provided, however, notwithstanding the
foregoing, in no event shall any dispute, claim or disagreement arising under
Section 6 of this Agreement that requires injunctive or other equitable relief
be required to be submitted to arbitration pursuant to this provision or
otherwise.
9. NOTICES. Any notice, request, reply, instruction, or other
communication provided or permitted in this Agreement must be given in writing
and may be served by hand delivery or by depositing same in the United States
mail in certified or registered form, postage prepaid, return receipt requested.
If to Employer, at: Applied Voice Recognition, Inc.
4615 Post Oak Place, Suite 277
Houston, Texas 77027
Attention: Chairman of the Board
or, if to Employee, at: Ms. Janet E. Carson
4615 Post Oak Place, Suite 277
Houston, Texas 77027
with a copy in all instances to: Boyar, Simon & Miller
4265 San Felipe, Suite 1200
Houston, Texas 77027
Attention: J. William Boyar, Esq.
or to such other address as may be specified in a notice given in accordance
with this Section. Unless actual receipt is required by any provision of this
Agreement, notice delivered by hand in the manner herein prescribed shall be
effective upon receipt by the addressee and notice deposited in the Untied
States mail in the manner herein prescribed shall be effective three (3)
business days after deposit.
10. SEVERABILITY. If any provision of this Agreement is rendered or
declared illegal or unenforceable by reason of any existing or subsequently
enacted legislation or by decree of a court of last resort, Employer and
Employee shall promptly meet and negotiate substitute provisions for those
rendered or declared illegal or unenforceable, but all the remaining provisions
of this Agreement shall remain in full force and effect.
11. ASSIGNMENT. This Agreement may not be assigned by any party without
the prior written consent of the other parties.
<PAGE>
12. BINDING AGREEMENT. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto, and their respective legal
representatives, heirs, successors and permitted assigns.
13. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
14. ATTORNEYS FEES. In the event of any dispute between the parties
regarding this Agreement, the prevailing party shall be entitled to be
reimbursed for its or her attorneys fees by the non-prevailing party.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
EMPLOYER:
APPLIED VOICE RECOGNITION, INC., a Delaware
corporation
By: /S/ TIMOTHY J. CONNOLLY
-------------------------------
Timothy J. Connolly,
President
EMPLOYEE:
/S/ JANET E. CARSON
----------------------------
JANET E. CARSON
<PAGE>
EXHIBIT 10.7
CONSULTING AND STOCKHOLDER AGREEMENT
This Consulting and Stockholder Agreement (this "Agreement"), effective as
of the 15th day of January, 1997 (the "Effective Date"), is by and between
APPLIED VOICE RECOGNITION, INC., a Utah corporation with its principal offices
in Houston, Texas (the "Company"), and FREDERICK A. HUTTNER, an individual
residing in Houston, Texas (the "Consultant").
The parties agree as to the following:
1. Engagement. The Company agrees to engage the Consultant on a non-
exclusive basis and the Consultant accepts such engagement for the period
beginning on January 15, 1997 and ending on February 15, 1998, unless earlier
terminated in accordance with the terms of Section 5 (the "Consulting Period").
2. Consulting Services. During the Consulting Period, the services
rendered by the Consultant shall include, without limitation, review of
strategic and operational plans and participation in the planning process;
review of financial budgets, controls and reports; review of expansion plans;
review of investment opportunities (including, without limitation, mergers,
acquisitions, expansions or sale of majority or minority interests in the
Company); participation in communications with the Board of Directors of the
Company; and assisting the Chairman of the Board of Directors and the President
of the Company as requested. The services to be performed by the Consultant
pursuant to this Agreement shall be referred to herein as the "Services."
Notwithstanding anything in this Agreement to the contrary, during the term of
this Agreement, the Consultant shall not be prohibited from and shall be allowed
to provide services (including services identical to the Services) to persons or
entities other than the Company; provided, however, that the performance of such
services by the Consultant shall not prevent the Consultant from performing, or
relieve the Consultant of Consultant's obligation to perform, the Services
pursuant to this Agreement.
3. Time. During the Consulting Period, the Consultant shall render at
least two (2) full eight (8) hour days per calendar month for the period from
the Effective Date through June 30, 1997, and at least two (2) full eight (8)
hour days per calendar month for the period from July 1, 1997 through February
15, 1998 (including attendance at meetings of the Board of Directors of the
Company) of Services.
4. Award of Common Stock. The Company hereby agrees to grant (the
"Grant"), as of January 15, 1997, to the Consultant 200,000 shares of common
stock, $.001 par value (the "Common Stock") of the Company which shall be
subject to the restrictions set forth in Section 12(c) (the "Restrictions")
(such shares being referred to herein in the aggregate as the "Shares").
5. Termination. Consultant's engagement and this Agreement shall
terminate upon the earliest to occur of any of the following events (the actual
date of such termination being referred to herein as the "Termination Date"):
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(a) The death of the Consultant;
(b) The written agreement of the Consultant and the Company;
(c) At the Company's option, immediately in the event of the
violation of any provisions of this Agreement by the Consultant or if the
Consultant fails to perform the Services requested of the Consultant pursuant to
this Agreement and such failure continues for a period of ten (10) days
following written notice from the Company to the Consultant; or
(d) At either party's option and in such party's sole discretion,
upon thirty (30) days' prior written notice to the other party.
6. Demand Registration.
(a) From and after February 15, 1998, subject to the limitations set
forth in this Agreement and prior to the fifth year anniversary of the Effective
Date, the Consultant shall be entitled to demand in writing that the Company
file a registration statement, at the Consultant's sole cost and expense, on
either Form S-3 or Form S-8 under the Securities Act of 1933, as amended (the
"Securities Act"). Upon the Company's receipt of such written demand, the
Company shall use its reasonable efforts to as expeditiously as reasonably
practicable effect the registration of the Shares under the Securities Act;
provided, however, that the Company shall not be required to file a registration
statement, register the Shares under the Securities Act or otherwise undertake
any action based on such demand by the Consultant (i) if the use of the Form S-3
or Form S-8 to register the Shares is not available to the Company for any
reason; or (ii) for a period of one hundred fifty (150) days following the
effective date of any letter of intent between the Company and a securities
underwriter regarding a registration of the Company's stock, provided that the
Company gives written notice of the execution of any such letter of intent to
the Consultant within ten (10) days following the effective date of such letter
of intent.
(b) If, in the opinion of the Company's underwriter, it is appropriate
because of marketing factors to limit the number of Shares to be included in the
offering, then the Company shall be required to include in the registration only
that number of Shares, if any, which the Company's underwriter believes should
be included therein. If the number of Shares to be included in the offering in
accordance with the foregoing is less than the total number of Shares which the
Consultant has requested to be included, then the Consultant and the other
holders of securities entitled to be included in such registration shall
participate in the registration pro rata based upon their total ownership of
shares of unregistered Common Stock.
(c) The Consultant shall be solely responsible for paying all
registration expenses relating to any registration under the terms of this
Section 6; provided, however, that if after the Consultant's demand for
registration the Company or other holders of securities of the Company desire
and are entitled to participate in such registration, then the Consultant and
the other holders of securities to be included in such registration shall share
the cost of such registration pro rata based
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<PAGE>
upon their respective number of shares of unregistered Common Stock included
within such registration. For purposes of this Section 6, the term "registration
expenses" shall mean all expenses incurred by the Company in complying with this
Section 6, including, without limitation, all registration and filing fees,
exchange listing fees, printing expenses, fees and expenses of counsel for the
Company and the fees and expenses of any counsel selected by the Consultant and
the other owners of the Company's securities participating in such registration
to represent such parties, state blue sky fees and expenses, and the expense of
any special audits incident to or required by any such registration, and also
including underwriting discounts and selling commissions.
7. Piggy Back Registration.
(a) If, at any time after February 15, 1998 and prior to the date on
which the Company files the registration statement required under Section 6, the
Company proposes to file a registration statement with respect to an offering of
Ten Million Dollars ($10,000,000) or more of Common Stock, the Company will,
prior to such filing, give written notice to the Consultant of its intention to
do so. Upon the written request of the Consultant given within 10 days after the
Company provides such notice (which request shall state the intended method of
disposition of such Shares), the Company shall use its best efforts to cause all
Shares which the Company has been requested by the Consultant to register to be
registered under the Securities Act to the extent necessary to permit their sale
or other disposition in accordance with the intended methods of distribution
specified in the Consultant's request; provided, however, that the Company shall
have the right to postpone or withdraw any registration effected pursuant to
this Section 7 without any obligation to the Consultant whatsoever.
(b) In connection with any registration under this Section 7 involving
an underwritten offering, the Company shall not be required to include any
Shares in such registration unless the Consultant accepts the terms of the
underwriting as agreed upon between the Company and the underwriters selected by
it. If, in the opinion of the Company's underwriter, it is appropriate because
of marketing factors to limit the number of Shares to be included in the
offering, then the Company shall be required to include in the registration only
that number of Shares, if any, which the underwriter believes should be included
therein, and shall be entitled to include before such Shares up to the number of
shares of Common Stock to be issued by the Company in the offering. If the
number of Shares to be included in the offering in accordance with the foregoing
is less than the total number of Shares which the Consultant has requested to be
included, then the Consultant and the other holders of securities entitled to be
included in such registration shall participate in the registration pro rata
based upon their total ownership of shares of unregistered Common Stock.
(c) The Company will pay all registration expenses relating to all
registrations under this Section 7. For purposes of this Section 7, the term
"registration expenses" shall mean all expenses incurred by the Company in
complying with this Section 7, including, without limitation, all registration
and filing fees, exchange listing fees, printing expenses, fees and expenses of
counsel for the Company and the reasonable fees and expenses of any counsel
selected by the Consultant and the other owners of the Company's securities
participating in such registration to represent such
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parties, state blue sky fees and expenses, and the expense of any special audits
incident to or required by any such registration, but excluding underwriting
discounts, selling commissions and the fees and expenses of the Consultant's
separate counsel (other than the counsel selected to represent the Consultant
and the other owners of the Company's securities participating in such
registration).
8. Registration Procedures. If and whenever the Company is required by
the provisions of this Agreement to use its best efforts to effect the
registration of any of the Shares under the Securities Act, the Company shall:
(a) File within a reasonable period of time with the Securities and
Exchange Commission (or any other federal agency at the time administering the
Securities Act) (the "Commission") a registration statement with respect to such
Shares and use its best efforts to cause that registration statement to become
and remain effective;
(b) As expeditiously as possible prepare and file with the Commission
any amendments and supplements to such registration statement and the prospectus
included in such registration statement as may be necessary to keep such
registration statement effective, in the case of a firm commitment underwritten
public offering, until each underwriter has completed the distribution of all
securities purchased by it but not more than 9 months after the effective date
and, in the case of any other offering, until the earlier of the sale of all
Shares covered thereby or 120 days after the effective date thereof;
(c) As expeditiously as possible furnish to the Consultant such
reasonable numbers of copies of the prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act, and such
other documents as the Consultant may reasonably request in order to facilitate
the public sale or other disposition of the Shares owned by the Consultant; and
(d) As expeditiously as possible use the Company's best efforts to
register or qualify the Shares covered by such registration statement under the
securities or blue sky laws of such states as the Consultant shall reasonably
request, and do any and all other acts and things that may be necessary or
desirable to enable the Consultant to consummate the public sale or other
disposition in such states of the Shares owned by the Consultant; provided,
however, that the Company shall not be required in connection with this Section
8(d) to qualify as a foreign corporation or execute a general consent to service
of process in any jurisdiction.
If the Company has delivered preliminary or final prospectuses to the
Consultant and after having done so the prospectus is amended to comply with the
requirements of the Securities Act, the Company shall promptly notify the
Consultant and, if requested, the Consultant shall immediately cease making
offers of Shares and return all prospectuses to the Company. The Company shall
promptly provide the Consultant with revised prospectuses and, following receipt
of the revised prospectuses, the Consultant shall be free to resume making
offers of the Shares.
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<PAGE>
9. Indemnification.
(a) In the event of any registration of any of the Shares under the
Securities Act pursuant to this Agreement, the Company will indemnify and hold
harmless the seller of such Shares, each underwriter of such Shares, and each
other person, if any, who controls such seller or underwriter within the meaning
of the Securities Act or the Securities Exchange Act of 1934, as amended (or any
similar federal statute and the rules and regulations promulgated thereunder)
(the "Exchange Act") against any losses, claims, damages or liabilities, joint
or several, to which such seller, underwriter or controlling person may become
subject under the Securities Act, the Exchange Act, state securities or blue sky
laws or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in any registration
statement under which such Shares were registered under the Securities Act, any
preliminary prospectus or final prospectus contained in such he registration
statement, or any amendment or supplement to such registration statement, or
arise out of or are based upon the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and the Company will reimburse such seller, underwriter
and each such controlling person for any legal or any other expenses reasonably
incurred by such seller, underwriter or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon any untrue statement or omission made in such registration statement,
preliminary prospectus or final prospectus, or any such amendment or supplement,
(i) in reliance upon and in conformity with information furnished to the
Company, in writing, by or on behalf of such seller, underwriter or controlling
person specifically for use in the preparation thereof, or (ii) which untrue
statement was corrected by the Company and delivered to the seller prior to
consummation of the sale by the seller resulting in such loss, claim, damage or
liability.
(b) In the event of any registration of any of the Shares under the
Securities Act pursuant to this Agreement, the Consultant will indemnify and
hold harmless the Company, each of its directors and officers and each
underwriter (if any) and each person, if any, who controls the Company or any
such underwriter within the meaning of the Securities Act or the Exchange Act,
against any losses, claims, damages or liabilities, joint or several, to which
the Company, such directors and officers, underwriter or controlling person may
become subject under the Securities Act, Exchange Act, state securities or blue
sky laws or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement under which such Shares were registered under the
Securities Act, any preliminary prospectus or final prospectus contained in such
registration statement, or any amendment or supplement to such registration
statement, or arise out of or are based upon any omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, provided that such statement or omission was
made in reliance upon and in conformity with information relating to the
Consultant furnished in writing to the Company by and on behalf of the
Consultant specifically for use in connection with the preparation of such
registration statement, prospectus, amendment or supplement; provided, however,
that the obligations of the Consultant hereunder shall
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<PAGE>
be limited to an amount equal to the proceeds received by the Consultant for the
Shares sold in connection with such registration.
(c) Each party entitled to indemnification under this Section 9 (the
"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, however, that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not be
unreasonably withheld); 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 Section 9, except to the extent
that such delay prejudices such indemnifying party. The Indemnified Party may
participate in such defense at such party's expense; provided, however, that the
Indemnifying Party shall pay such expense if representation of such Indemnified
Party by the counsel retained by the Indemnifying Party would be inappropriate
due to actual or potential differing interests between the Indemnified Party and
any other party represented by such counsel in such proceeding. 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 of such claim or litigation, and no Indemnified Party
shall consent to entry of any judgment or settle such claim or litigation
without the prior written consent of the Indemnifying Party.
10. Indemnification with Respect to Underwritten Offering. In the event
that the Shares are sold pursuant to a registration statement in an underwritten
offering pursuant to Section 6, the Company agrees to enter into an underwriting
agreement containing customary representations and warranties with respect to
the business and operations of an issuer of the securities being registered and
customary covenants and agreements to be performed by such issuer, including
without limitation customary provisions with respect to indemnification by the
Company of the underwriters of such offering.
11. Information by the Consultant. In the event the Consultant includes
Shares in any registration, the Consultant shall furnish to the Company such
information regarding the Consultant and the distribution proposed by the
Consultant as the Company may reasonably request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to in this Agreement.
12. Restricted Period.
(a) Subject to the limitations set forth in Sections 12(c) through
12(h) of this Agreement, for a period commencing on January 15, 1997, and ending
February 15, 1998 (the "Restricted Period") the Shares shall be subject to the
Restrictions as set forth in this Agreement; provided, however, that during the
Consulting Period, upon the occurrence of each of the dates set
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forth below (separately, a "Restriction Release Date"), the Restrictions shall
expire on the number of Shares set forth opposite each respective Restriction
Release Date:
Restriction Release Date # of Shares Released
------------------------ --------------------
May 15, 1997 50,000 shares
August 15, 1997 50,000 shares
November 15, 1997 50,000 shares
February 15, 1998 50,000 shares
The Shares which from time to time remain subject to the Restrictions after
application of the schedule set forth above shall hereinafter be referred to as
"Restricted Shares."
(b) Notwithstanding the schedule of Restriction Release Dates set
forth in Section 12(a), if during the Restriction Period one or more new capital
sources contribute or otherwise invest in the aggregate in excess of TWO MILLION
AND NO/100 DOLLARS ($2,000,000) of new capital in the Company (net of any fees
and costs relating to such investment(s)), then upon the Company's receipt of
such funds the Restrictions shall immediately expire with respect to any
remaining Restricted Shares.
(c) During the Restricted Period, (1) the Shares, the right to vote
the Shares and the right to receive dividends on the Shares may not be sold,
assigned, transferred, exchanged, pledged, hypothecated, or otherwise
encumbered, and (2) no such sale, assignment, transfer, exchange, pledge,
hypothecation or encumbrance, whether made or created by voluntary act of the
Consultant or any agent of the Consultant or by operation of law, shall be
recognized by, or be binding upon, or shall in any manner affect the rights of,
the Company or any agent or any custodian holding certificates for the Shares.
(d) The Company shall effect the issuance of the Shares, and the
issuance of a certificate or certificates for the Shares, as soon as
practicable. Each certificate issued for Shares to the Consultant shall be
registered in the Consultant's name and shall be either deposited with the
Secretary of the Company or its designee in an escrow account or held by the
Secretary of the Company, together with stock powers or other instruments of
transfer appropriately endorsed in blank by the Consultant (the Consultant
hereby agreeing to execute such stock powers or other instruments of transfer as
requested by the Company). Such certificate or certificates shall remain in such
escrow account or with the Secretary of the Company until the expiration of the
Restricted Period. Certificates representing the Restricted Shares shall bear
the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN
COMPLIANCE WITH THE CONDITIONS SPECIFIED IN A CONSULTING AND STOCKHOLDER
AGREEMENT DATED AS OF JANUARY 15, 1997 BETWEEN APPLIED VOICE RECOGNITION,
INC. (THE
7
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"COMPANY") AND FREDERICK A. HUTTNER. A COMPLETE AND CORRECT COPY OF SUCH
CONSULTING STOCKHOLDER AGREEMENT IS AVAILABLE FOR INSPECTION AT THE
PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED WITHOUT CHARGE TO THE
HOLDER OF SUCH SHARES UPON WRITTEN REQUEST.
(e) The Consultant shall, during the Restricted Period, have all of
the other rights of a shareholder with respect to the Shares including, but not
limited to, the right to receive dividends, if any, as may be declared on such
Shares from time to time, and the right to vote (in person or by proxy) such
Shares at any meeting of shareholders of the Company.
(f) If the Termination Date shall occur prior to the expiration of
the Restricted Period:
(1) The Restrictions shall expire on a number of Restricted
Shares determined by multiplying the number of Shares for which the
Restrictions would have expired on the Restriction Release Date that
immediately follows the Termination Date by a fraction, the numerator
of which is the number of days that have elapsed between the
Restriction Release Date that immediately precedes the Termination
Date and the Termination Date and the denominator of which shall be
the number of days between the Restriction Release Date that
immediately precedes the Termination Date and the Release Restriction
Date that immediately follows the Termination Date; and
(2) Except as set forth in Section 12(f)(1), any Restricted
Shares for which the Restrictions shall not have expired shall be
forfeited by the Consultant to the Company (the "Forfeited Shares"),
without the payment of any consideration or further consideration by
the Company, and neither the Consultant nor any heirs, personal
representatives, successors or assigns of the Consultant shall
thereafter have any further rights or interest in the Forfeited Shares
or certificates therefor, and the Consultant's name shall thereupon be
deleted from the list of the Company's stockholders with respect to
the Forfeited Shares.
(g) If (i) the Company shall not be the surviving entity in any merger
or consolidation (or survives only as a subsidiary of another entity), (ii) the
Company sells all or substantially all of its assets to any other person or
entity (other than a wholly-owned subsidiary), (iii) any person or entity
(including a "group" as contemplated by Section 13(d)(3) of the Securities
Exchange Act of 1934) acquires or gains ownership or control of (including,
without limitation, power to vote) more than 50% of the outstanding shares of
Common Stock, (iv) the Company is to be dissolved and liquidated, or (v) as a
result of or in connection with a contested election of directors, the persons
who were directors of the Company before such election shall cease to constitute
a majority of the Company's Board of Directors, any Restrictions on the
Restricted Shares
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set forth in this Agreement shall be deemed to have expired, and the Restricted
Shares shall thereby be free of the Restrictions set forth in the Section 12(c).
(h) If the Termination Date shall occur prior to the expiration of the
Restricted Period, and there exists a dispute between the Consultant and the
Company as to the satisfaction of the conditions to the release of the Shares
from the Restrictions hereunder or the terms and conditions of the Grant, the
Shares shall remain subject to the Restrictions until the resolution of such
dispute, regardless of any intervening expiration of the Restricted Period,
except that any dividends that may be payable to the holders of record of Common
Stock as of a date during the period from termination of the Consultant's
engagement to the resolution of such dispute (the "Suspension Period") shall:
(1) To the extent to which such dividends would have been payable
to the Consultant on the Shares, be held by the Company as part of its
general funds, and shall be paid to or for the account of the Consultant
only upon, and in the event of, a resolution of such dispute in a manner
favorable to the Consultant, and then only with respect to such of the
Shares as to which such resolution shall be so favorable; and
(2) Be canceled upon, and in the event of, a resolution of such
dispute in a manner unfavorable to the Consultant, and then only with
respect to such of the Shares as to which such resolution shall be so
unfavorable.
(i) Upon expiration of the Restricted Period, and upon compliance by
the Consultant with all obligations of the Consultant hereunder, the Restricted
Shares shall be released from all further restrictions and prohibitions
hereunder and the Company shall thereupon deliver or cause to be delivered to
the Consultant or the Consultant's legal representative the certificate or
certificates for the Shares free of any legend provided in Section 12(d) of this
Agreement.
13. Confidential Information. During the term of this Agreement, the
Consultant may have access to confidential information of the Company including,
but not limited to, financial information, personnel information, lists of
financial information, personnel information lists of customers and suppliers
and other trade secrets. To insure the continued secrecy of this confidential
information, the Consultant agrees that he will not at any time while engaged as
a Consultant pursuant to this Agreement at any time or thereafter divulge such
confidential information to any party not associated with the Company. The
Consultant shall not take from the premises of the Company, or otherwise retain,
and shall surrender to the Company, any such confidential information and any
records, files or other documents, or copies thereof, relating to the business
or affairs of the Company.
14. Compliance with Securities Laws. Prior to the issuance of a
certificate(s) for any Shares, the Consultant shall enter into such written
representations, warranties and agreements as the Board of Directors of the
Company may reasonably request in order to comply with applicable federal
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and state securities laws or with this Agreement. In addition to the foregoing,
the Consultant hereby represents and warrants to the Company as follows:
(a) The Consultant acknowledges that the Shares constitute securities
under the Securities Act, and the applicable state securities laws (the
Securities Act and such state securities laws being collectively referred to as
the "Acts").
(b) The Consultant understands and agrees that notwithstanding any
other provision in this Agreement the transfer of the Shares has not been
registered under the Acts in reliance upon exemptions therefrom from non-public
offerings and that the certificates representing the Shares will be legended in
the manner set forth below, the Shares must be held indefinitely and the
Consultant may not be able to sell or dispose of any of the Shares unless the
sale thereof is subsequently registered under the Acts or an exemption or
exemptions from such registration are available, except as set forth in Section
6 of this Agreement, the Company has no obligation to so register any of the
Shares, and, if and until such time as the Shares are registered pursuant to
Section 6 above, that prior to any proposed transfer of any of the Shares by the
Consultant, the Consultant must provide the Company with an opinion reasonably
satisfactory to its counsel, that any proposed transfer of Shares by the
Consultant does not violate any applicable federal or state securities laws.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS
(THE "ACTS"). THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SUCH ACTS OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS
NOT REQUIRED.
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Such certificates shall also be conspicuously endorsed on the front thereof
substantially as follows:
SEE RESTRICTIVE LEGENDS ON REVERSE SIDE
(c) The Consultant is an "accredited investor" as such term is
defined in Rule 501 (a) under the Securities Act.
(d) The Consultant has such knowledge and experience in financial and
business matters that the Consultant is capable of evaluating the merits and
risks of his acquisition of the Shares.
(e) The Consultant has had access to and an opportunity to inspect all
relevant information relating to the Company to enable the Consultant to
evaluate the merits and risks of Consultant's acquisition of the Shares. The
Consultant also has had the opportunity to ask questions and receive answers
respecting, and to obtain such additional information as the Consultant has
desired regarding the business, financial condition and affairs of the Company.
(f) The Consultant's acquisition of the Shares is for the Consultant's
own account, is for investment purposes, and is without a view to, or for offer
or sale for the Company in connection with, any distribution of the Shares. The
Consultant is not participating and does not have a participation in any such
distribution or the underwriting of any such distribution.
15. Dispute Resolution. The parties agree that all disputes or questions
arising in connection with this Agreement and/or the termination of Employee's
employment hereunder 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.
16. General.
(a) Changes in Capital Structure. The existence of the Company's
commitment to issue the Shares shall not affect in any way the right or power of
the Company or its shareholders to make or authorize any or all adjustments,
recapitalization, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issuance of Common Stock or subscription rights thereto, or any issuance of
bonds, debentures, or preferred stock ahead of or affecting the Shares or the
rights thereof, or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business, or any other corporate
act or proceedings, whether of a similar character or otherwise. However, if
the outstanding shares of Common Stock of the Company shall at any time be
changed or exchanged by declaration of a stock dividend, stock split,
combination of shares, or recapitalization, the number and kind of shares
subject to this Agreement shall be appropriately and equitably adjusted so as to
maintain the proportionate number of shares.
11
<PAGE>
(b) Compliance With Other Laws. Notwithstanding any of the other
provisions of this Agreement, the Consultant agrees that the Company's
obligation to issue any Shares pursuant to this Agreement, shall be subject to
and limited by the Company's obligation to comply with all laws or regulations
of any governmental authority.
(c) Assignment. This Agreement and the rights and obligations of the
Consultant hereunder shall not be transferable or assignable by the Consultant
without the prior written consent of the Company.
(d) Notices. Any notice, demand or request which may be permitted,
required or desired to be given in connection therewith shall be given in
writing and directed to the Company and the Consultant as follows:
If to the Company: Applied Voice Recognition, Inc.
4615 Post Oak Place, Suite 277
Houston, Texas 77027
Attention: President
Facsimile No.: (713) 621-5870
With Copy to: Boyar, Simon & Miller
4265 San Felipe, Suite 1200
Houston, Texas 77027
Attention: J. William Boyar, Esq.
Facsimile No.: (713) 552-1758
If to the Consultant: Mr. Frederick A. Huttner
13634 Taylorcrest Road
Houston, Texas 77079
Facsimile No.: (713) 464-5288
Notices shall be deemed properly delivered and received when and if either: (i)
personally delivered; (ii) delivered by nationally-recognized overnight courier;
(iii) when deposited in the U.S. Mail, by registered or certified mail, return
receipt requested, postage prepaid or (iv) sent via facsimile transmission with
confirmation mailed by regular U.S. mail. Any party may change its notice
address for purposes hereof to any address within the continental United States
by giving written notice of such change to the other parties hereto at least
fifteen (15) days prior to the intended effective date of such change.
(e) Entire Agreement; Amendments and Waivers; Successors and Assigns.
This Agreement constitutes the entire agreement between the parties hereto
pertaining to the subject matter hereof and supersede all prior agreements,
understandings, negotiations and discussions, whether oral or written, of the
parties, and there are no warranties, representations or other agreements
between the parties in connection with the subject matter hereof except as set
forth
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<PAGE>
specifically herein or contemplated hereby. No supplement, modification or
waiver of this Agreement shall be binding unless executed in writing by the
party to be bound thereby. The failure of a party to exercise any right or
remedy shall not be deemed or constitute a waiver of such right or remedy in the
future. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provision hereof (regardless of whether
similar), nor shall any such waiver constitute a continuing waiver unless
otherwise expressly provided. This Agreement is intended to bind and inure to
the benefit of and be enforceable by the Consultant, the Company and their
respective successors and permitted assigns, provided that in no event shall
Consultant's obligation to perform future services for the Company be delegated
or transferred by the Consultant.
(f) Severability. If any provision of the Agreement is rendered or
declared invalid, illegal or unenforceable by reason of any existing or
subsequently enacted legislation or by decree of a court of last resort, such
invalidity, illegality or unenforceability will not affect any other provision
or any other jurisdiction, but this Agreement will be reformed, construed or
enforced in such jurisdiction as if such invalid, illegal or unenforceable
provision had never been contained herein.
(g) Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which shall
constitute one instrument
(h) Governing Law. The provisions of this Agreement shall be governed
by and construed and enforced in accordance with the laws of the State of Texas
(excluding any conflicts-of-law rule or principle that might refer same to the
laws of another jurisdiction).
(i) Independent Contractor. The Consultant is an independent
contractor with the responsibility for, and control over, the details and means
of performing the Services. Nothing contained in this Agreement shall be
construed as constituting the Consultant as agent, representative or employee of
the Company and the Consultant shall not represent to the contrary to any
person. The Consultant shall not be entitled to any benefits afforded to
employees of the Company, except as otherwise specifically contemplated herein.
(j) Defined Terms. Each of the following terms is defined in the part
or Section of this Agreement set forth opposite such term:
Term Section
---- -------
Acts 14(a)
Agreement Preamble
Commission 8(a)
Common Stock 4
Company Preamble
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<PAGE>
Term Section
---- -------
Consultant Preamble
Consulting Period 1
Effective Date Preamble
Exchange Act 9(a)
Forfeited Shares 12(f)(2)
Grant 4
Indemnified Party 9(c)
Indemnifying Party 9(c)
Registration Expenses 6(c) and 7(c)
Restricted Period 12(a)
Restricted Shares 12(a)
Restriction Release Date 12(a)
Restrictions 4
Securities Act 6(a)
Services 2
Shares 4
Suspension Period 12(h)
Termination Date 5
[REST OF PAGE INTENTIONALLY LEFT BLANK]
14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be
effective as of the Effective Date.
COMPANY:
APPLIED VOICE RECOGNITION, INC., a Utah
corporation
By: /S/ TIMOTHY J. CONNOLLY
----------------------------------------
Timothy J. Connolly, President
CONSULTANT:
/S/ FREDERICK A. HUTTNER
-----------------------------------------
FREDERICK A. HUTTNER
Signature Page to
Consulting and Stockholder Agreement
15
<PAGE>
EXHIBIT 10.8
CONSULTING AGREEMENT
This Consulting Agreement (this "Agreement"), effective as of the 15th day
of January, 1997 (the "Effective Date"), is by and between APPLIED VOICE
RECOGNITION, INC., a Utah corporation with its principal offices in Houston,
Texas (the "Company"), and HUTTNER AND COMPANY, a Texas corporation (the
"Consultant").
The parties agree as to the following:
1. Engagement. The Company agrees to engage the Consultant on a non-
exclusive basis and the Consultant accepts such engagement for the period
beginning on January 15, 1997 and ending on February 15, 1998, unless earlier
terminated in accordance with the terms of Section 5 (the "Consulting Period").
2. Consulting Services. During the Consulting Period, the services
rendered by the Consultant shall be performed exclusively by Frederick A.
Huttner, an employee of Consultant, or by another employee or associate of
Consultant, provided that such other employee or associate is under Mr.
Huttner's supervision has been approved in advance by the Company. Such
services shall include, without limitation, review of strategic and operational
plans and participation in the planning process; review of financial budgets,
controls and reports; review of expansion plans; review of investment
opportunities (including, without limitation, mergers, acquisitions, expansions
or sale of majority or minority interests in the Company); participation in
communications with the Board of Directors of the Company; and assisting the
Chairman of the Board of Directors and the President of the Company as
requested. The services to be performed by the Consultant pursuant to this
Agreement shall be referred to herein as the "Services." Notwithstanding
anything in this Agreement to the contrary, during the term of this Agreement,
the Consultant shall not be prohibited from and shall be allowed to provide
services (including services identical to the Services) to persons or entities
other than the Company; provided, however, that the performance of such services
by the Consultant shall not prevent the Consultant from performing, or relieve
the Consultant of Consultant's obligation to perform, the Services pursuant to
this Agreement.
3. Time. During the Consulting Period, the Consultant's employee,
Frederick A. Huttner, shall render at least two (2) full eight (8) hour days per
calendar month for the period from the Effective Date through June 30, 1997, and
at least one (1) full eight (8) hour day per calendar month for the period from
July 1, 1997 through February 15, 1998 (including attendance at meetings of the
Board of Directors of the Company) of Services.
4. Consulting Fee. The Consultant will be paid a fee of SIX THOUSAND AND
NO/100 DOLLARS ($6,000.00) per month during the Consulting Period (the
"Consulting Fee"). The Consulting Fee shall be payable on the first day of each
month. In addition, Consultant will be reimbursed by the Company for reasonable
business expenses incurred by the Consultant, which shall
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<PAGE>
be pre-approved and supported by such documentation as shall be reasonably
requested by the Company and paid promptly upon the Company's receipt of such
documentation.
5. Termination. Consultant's engagement and this Agreement shall
terminate upon the earliest to occur of any of the following events (the actual
date of such termination being referred to herein as the "Termination Date"):
(a) The death of the Consultant;
(b) The written agreement of the Consultant and the Company;
(c) At the Company's option, immediately in the event of the violation
of any provisions of this Agreement by the Consultant or if the Consultant fails
to perform the Services requested of the Consultant pursuant to this Agreement
and such failure continues for a period of ten (10) days following written
notice from the Company to the Consultant; or
(d) At either party's option and in such party's sole discretion, upon
thirty (30) days' prior written notice to the other party.
6. Confidential Information. During the term of this Agreement, the
Consultant may have access to confidential information of the Company including,
but not limited to, financial information, personnel information, lists of
financial information, personnel information lists of customers and suppliers
and other trade secrets. To insure the continued secrecy of this confidential
information, the Consultant agrees that Consultant will not, and Consultant
agrees to ensure that Consultant's employees will not, at any time while engaged
as a Consultant pursuant to this Agreement at any time or thereafter divulge
such confidential information to any party not associated with the Company. The
Consultant shall not take from the premises of the Company, or otherwise retain,
and shall surrender to the Company, any such confidential information and any
records, files or other documents, or copies thereof, relating to the business
or affairs of the Company.
7. Dispute Resolution. The parties agree that all disputes or questions
arising in connection with this Agreement and/or the termination of Employee's
employment hereunder 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.
8. General.
(a) Assignment. This Agreement and the rights and obligations of the
Consultant hereunder shall not be transferable or assignable by the Consultant
without the prior written consent of the Company.
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<PAGE>
(b) Notices. Any notice, demand or request which may be permitted,
required or desired to be given in connection therewith shall be given in
writing and directed to the Company and the Consultant as follows:
If to the Company: Applied Voice Recognition, Inc.
4615 Post Oak Place, Suite 277
Houston, Texas 77027
Attention: President
Facsimile No.: (713) 621-5870
With Copy to: Boyar, Simon & Miller
4265 San Felipe, Suite 1200
Houston, Texas 77027
Attention: J. William Boyar, Esq.
Facsimile No.: (713) 552-1758
If to the Consultant: Huttner and Company
13634 Taylorcrest Road
Houston, Texas 77079
Attention: Mr. Frederick A. Huttner
Facsimile No.: (713) 464-5288
Notices shall be deemed properly delivered and received when and if either: (i)
personally delivered; (ii) delivered by nationally-recognized overnight courier;
(iii) when deposited in the U.S. Mail, by registered or certified mail, return
receipt requested, postage prepaid or (iv) sent via facsimile transmission with
confirmation mailed by regular U.S. mail. Any party may change its notice
address for purposes hereof to any address within the continental United States
by giving written notice of such change to the other parties hereto at least
fifteen (15) days prior to the intended effective date of such change.
(c) Entire Agreement; Amendments and Waivers; Successors and Assigns.
This Agreement constitutes the entire agreement between the parties hereto
pertaining to the subject matter hereof and supersede all prior agreements,
understandings, negotiations and discussions, whether oral or written, of the
parties, and there are no warranties, representations or other agreements
between the parties in connection with the subject matter hereof except as set
forth specifically herein or contemplated hereby. No supplement, modification
or waiver of this Agreement shall be binding unless executed in writing by the
party to be bound thereby. The failure of a party to exercise any right or
remedy shall not be deemed or constitute a waiver of such right or remedy in the
future. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provision hereof (regardless of whether
similar), nor shall any such waiver constitute a continuing waiver unless
otherwise expressly provided. This Agreement is intended to bind and inure to
the benefit of and be enforceable by the Consultant, the Company and
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<PAGE>
their respective successors and permitted assigns, provided that in no event
shall Consultant's obligation to perform future services for the Company be
delegated or transferred by the Consultant.
(d) Severability. If any provision of the Agreement is rendered or
declared invalid, illegal or unenforceable by reason of any existing or
subsequently enacted legislation or by decree of a court of last resort, such
invalidity, illegality or unenforceability will not affect any other provision
or any other jurisdiction, but this Agreement will be reformed, construed or
enforced in such jurisdiction as if such invalid, illegal or unenforceable
provision had never been contained herein.
(e) Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which shall
constitute one instrument
(f) Governing Law. The provisions of this Agreement shall be governed
by and construed and enforced in accordance with the laws of the State of Texas
(excluding any conflicts-of-law rule or principle that might refer same to the
laws of another jurisdiction).
(g) Independent Contractor. The Consultant is an independent
contractor with the responsibility for, and control over, the details and means
of performing the Services. Nothing contained in this Agreement shall be
construed as constituting the Consultant as agent, representative or employee of
the Company and the Consultant shall not represent to the contrary to any
person. The Consultant shall not be entitled to any benefits afforded to
employees of the Company, except as otherwise specifically contemplated herein.
(h) Defined Terms. Each of the following terms is defined in the part
or Section of this Agreement set forth opposite such term:
Term Section
- ------------------- --------
Agreement Preamble
Company Preamble
Consultant Preamble
Consulting Fee 4
Consulting Period 1
Effective Date Preamble
Services 2
Termination Date 5
[REST OF PAGE INTENTIONALLY LEFT BLANK]
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be
effective as of the Effective Date.
COMPANY:
APPLIED VOICE RECOGNITION, INC., a Utah
corporation
By: /S/ TIMOTHY J. CONNOLLY
----------------------------------
Timothy J. Connolly, President
CONSULTANT:
HUNTER AND COMPANY, a Texas corporation
By: /S/ FREDERICK A. HUTTNER
------------------------------------
Frederick A. Huttner, President
Signature Page to
Consulting Agreement
5
<PAGE>
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
(H. RUSSEL DOUGLAS)
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of April 1,
1997 (the "Effective Date"), by and among APPLIED VOICE RECOGNITION, INC., a
Utah corporation ("Employer"), and H. RUSSEL DOUGLAS, an individual residing in
Harris County, Texas ("Employee").
W I T N E S S E T H:
-------------------
WHEREAS, Employer and Employee desire to enter into an agreement
regarding Employee's employment with Employer pursuant to the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, and intending to be
legally bound hereby, the parties covenant and agree as follows:
1. EMPLOYMENT. Employer hereby employs Employee and Employee hereby
accepts employment with Employer on the terms and conditions set forth in this
Agreement.
2. TERM OF EMPLOYMENT. The term of Employee's employment hereunder
(the "Term") shall commence as of April 1, 1997 (the "Commencement Date") and
shall continue (subject to termination by either Employer or Employee as
hereinafter provided) for an initial term (the "Initial Term") expiring on March
31, 2000 (the "Expiration Date"). The Expiration Date shall be automatically
extended unless terminated by Employer or Employee for successive one-year
periods following the expiration of the Initial Term. If Employer desires to
terminate Employee's employment under this Agreement at the end of the Initial
Term or at the end of any succeeding one year term, Employer shall give written
notice of such desire to Employee at least one month prior to the expiration of
the Initial Term or any succeeding one year term. If Employee desires to
terminate Employee's employment under this Agreement at the end of the Initial
Term or at the end of any succeeding one year term, Employee shall give written
notice of such desire to Employer at least one month prior to the expiration of
the Initial Term or any succeeding one year term. At the expiration of the then
existing term, Employer shall have no further obligation to Employee other than
payment of any earned and unpaid Base Salary (as hereafter defined) under
Section 3(a) and Bonus (as hereafter defined) under Section 3(b), and Employee
shall have no further obligation to Employer except as set forth in Sections 7,
8, 9 and 10.
<PAGE>
3. COMPENSATION AND OTHER BENEFITS.
a. As compensation for all services rendered by Employee in
performance of Employee's duties or obligations under this Agreement, Employer
shall pay Employee the following base salary (the "Base Salary"):
(1) from April 1, 1997 until September 15, 1997, a monthly
base salary of TEN THOUSAND AND 00/100 DOLLARS ($10,000.00);
(2) from September 16, 1997 until December 31, 1997, a
monthly base salary of ELEVEN THOUSAND AND 00/100 DOLLARS ($11,000.00)
(3) from January 1, 1998 until December 31, 1998, a monthly
base salary of TWELVE THOUSAND FIVE HUNDRED AND 00/100 DOLLARS
($12,500.00); and
(4) from January 1, 1999 until the Expiration Date, a
monthly base salary of FOURTEEN THOUSAND FIVE HUNDRED EIGHTY-THREE AND
33/100 DOLLARS ($14,583.33).
Employee's Base Salary shall be payable in equal semi-monthly installments or in
the manner and on the timetable which Employer's payroll is customarily handled
or at such intervals as Employer and Employee may hereafter agree to from time
to time.
b. In addition to receiving the Base Salary provided for in
Section 3(a), Employee shall be entitled to a quarterly bonus equal to six and
one-quarter percent (6-1/4%) of his Base Salary for the applicable year (the
"Bonus"). The Bonus shall be earned if, and only if, Employee has met the
criteria set by Employer for the applicable quarter. In connection therewith,
Employer agrees that prior to the end of each quarter, it shall set criteria for
Employee's Bonus to be earned during the following quarter and shall communicate
such criteria to Employee in writing. If Employee successfully meets the
criteria established by Employer (in the discretion of Employer), Employer shall
pay to Employee the quarterly Bonus within thirty (30) days of the end of the
applicable quarter.
c. Employee shall be entitled to be reimbursed by Employer
for all reasonable and necessary expenses incurred by Employee in carrying out
Employee's duties under this Agreement in accordance with Employer's standard
policies regarding such reimbursements.
d. Employee shall be entitled during the Term, upon
satisfaction of all eligibility requirements, if any, to participate in all
health, dental, disability, life insurance and other benefit programs now or
hereafter established by Employer which cover substantially all other of
Employer's employees and shall receive such other benefits as may be approved
from time to time by Employer.
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<PAGE>
e. Employee shall be entitled to receive two weeks of paid
vacation for each year during the Term following the first anniversary of the
Commencement Date and shall be entitled to receive paid holidays as enjoyed by
all other employees of Employer.
f. Effective as of September 1, 1997, Employee shall be
entitled to receive an automobile allowance of $500 per month, payable on the
first day of each month during the remainder of the Term. Employee shall be
responsible for paying all costs related to ownership of Employee's vehicle,
including maintenance and repairs, insurance and fuel.
4. DUTIES.
a. Employee is employed to act as Chief Technical Officer of
the Employer and in such other office or position as shall be assigned to
Employee from time to time by Employer, and to perform such duties as are
commensurate with Employee's position with Employer.
b. Employee agrees that during the period of employment,
Employee shall devote full-time efforts to Employee's duties as an employee of
Employer and Employee shall use Employee's best efforts to perform the duties of
Employee's position in an efficient and competent manner and shall use
Employee's best efforts to promote the interests of Employer and any affiliated
companies.
c. During the period of employment, Employee agrees not to
(i) solely or jointly with others undertake or join any planning for or
organization of any business activity competitive with the business activities
of Employer, and (ii) directly or indirectly, engage or participate in any other
activities in conflict with the best interests of Employer.
d. Employee agrees that during the period of employment
Employee shall refer to Employer all opportunities in the computer industry
related to voice recognition software designs and applications to which Employee
might become exposed in carrying out Employee's duties and responsibilities
hereunder.
5. STOCK OPTION PLAN. As a further inducement to Employee to accept
employment upon the terms set forth herein and in consideration of Employee's
execution of this Agreement, Employee shall be granted options entitling
Employee to purchase 210,000 shares of Employer's common stock, par value $0.001
(the "Initial Options"), pursuant to, and Employee shall be entitled to
otherwise participate in, that certain Applied Voice Recognition, Inc. 1997
Incentive Plan, as amended from time to time. The granting instrument for the
Initial Options will provide, in addition to other terms set forth therein, that
(i) the purchase price for the Initial Options shall be the average bid and ask
price for Employer's shares of common stock on the NASDAQ OTCBB (or any national
securities exchange hereafter listing Employer's common stock) on the day prior
to the Commencement Date, and (ii) one third of the Initial Options (being
options to purchase 70,000 shares) will vest on each yearly anniversary date of
the Commencement Date for a total of three years.
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<PAGE>
6. TERMINATION OF EMPLOYMENT. Employee's employment and this
Agreement shall terminate upon the earliest to occur of any of the following
events (the actual date of such termination being referred to herein as the
"Termination Date"):
a. The termination of the Agreement pursuant to Section 2.
b. Employee's employment pursuant hereto shall terminate in
the event of the death of Employee.
c. Employer may terminate Employee's employment under this
Agreement for cause without any prior notice, upon the occurrence of any of the
following events:
(1) any embezzlement or wrongful diversion of funds of
Employer or any affiliate of Employer by Employee;
(2) gross malfeasance by Employee in the conduct of
Employee's duties;
(3) material breach of this Agreement;
(4) gross neglect by Employee in carrying out Employee's
duties; or
(5) the failure of Employee to be able to perform
Employee's duties hereunder for a period of not less than thirty days
by reason of disability. For purposes of this Agreement, Employee
shall be deemed to have become disabled when the Board of Directors of
Employer, upon the advice of a qualified physician, shall have
determined that Employee has become physically or mentally incapable
(excluding infrequent and temporary absences due to ordinary illness)
of performing Employee's duties under this Agreement. Before making
any termination decision pursuant to this Section 6(c)(5), the Board
of Directors of Employer shall determine whether there is any
reasonable accommodation (within the meaning of the Americans with
Disabilities Act) which would enable Employee to perform the essential
functions of Employee's position under this Agreement despite the
existence of any such disability. If such a reasonable accommodation
is possible, Employer shall make that accommodation and shall not
terminate Employee's employment hereunder based on such disability.
d. If Employee's employment is terminated for any of the
reasons specified in Section 6(b), (c) or (f), Employer shall no longer be
obligated to make the payments specified under Section 3 or to pay to Employee
any other compensation or benefits whatsoever, except as may otherwise be
provided in Section 6(e) or (f). Notwithstanding the foregoing, if for any
reason Employee's employment is terminated hereunder, any compensation payable
under Sections 3(a) or 3(b) which shall have been earned but not yet paid shall
be paid by Employer to Employee or Employee's estate, as the case may be.
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<PAGE>
e. Employee shall have the right to terminate Employee's
employment hereunder upon ninety days' notice to Employer after the occurrence
of any of the following events:
(1) a sale of all or substantially all of the assets of
Employer to a third party for which Employee does not continue in
employment; or
(2) a merger or consolidation of Employer with an entity for
which Employee does not continue in employment.
If this Agreement is terminated by Employee under this Section 6(e), any
then unvested Initial Options shall automatically become fully vested
immediately upon termination. The foregoing provisions of this Section 6(e)
shall not apply if the change of ownership that would otherwise trigger
Employee's termination right is caused by the registration by Employer or its
successors, of any class of equity securities pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended.
f. Employer shall have the right to terminate Employee's
employment hereunder without prior notice and without cause; provided, however,
in such event, Employee shall continue to receive his Base Salary for six (6)
months following the date of such termination. In such event, Employee shall
not be eligible to receive the Bonus for any quarter beyond the quarter in which
Employee's employment is terminated. If this Agreement is terminated by
Employer under this Section 6(f), any Initial Options that would otherwise vest
on or before the next anniversary date of the Commencement Date shall
automatically become fully vested immediately upon termination; however, any
additional unvested Initial Options shall be cancelled upon termination.
7. INVENTIONS AND CREATIONS BELONG TO EMPLOYER.
a. Any and all inventions, discoveries, improvements or
creations (collectively, "Creations") which Employee has conceived or made or
may conceive or make during the period of employment in any way, directly or
indirectly, connected with Employer's business shall be the sole and exclusive
property of Employer. Employee agrees that all copyrightable works created by
Employee or under Employer's direction in connection with Employer's business
are "works made for hire" and shall be the sole and complete property of
Employer and that any and all copyrights to such works shall belong to Employer.
To the extent any of the works described in the preceding sentence are not
deemed to be "works made for hire," Employee hereby assigns all proprietary
rights, including copyright, in these works to Employer without further
compensation.
b. Employee further agrees to (i) disclose promptly to
Employer all such Creations which Employee has made or may make solely, jointly
or commonly with others during the period of employment to the extent connected
with Employer's business, (ii) assign all such Creations to Employer, and (iii)
execute and sign any and all applications, assignments or other instruments
which Employer may deem necessary in order to enable Employer, at Employer's
expense, to apply for, prosecute and obtain copyrights, patents or other
proprietary rights in the United States and foreign countries or in order to
transfer to Employer all right, title and interest in said Creations.
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8. CONFIDENTIALITY; OWNERSHIP OF INFORMATION. Employer promises that
Employer will, during the Term, provide Employee with access to such
Confidential Information (as defined in Section 8(a)) owned by Employer and that
is used in the operation of Employer's business as reasonably necessary to allow
Employee to perform Employee's obligations hereunder. Employee acknowledges
that Employer has agreed to provide Employee with a definite term of employment
and with access to such Confidential Information of Employer during that term of
employment.
a. DEFINITION. For purposes of this Agreement,
"Confidential Information" means any and all information relating directly or
indirectly to Employer that is not generally ascertainable from public or
published information or trade sources and that represents proprietary
information to Employer, excluding, however, (i) Employees' business contacts,
(ii) information already known to Employee prior to Employee's employment with
Employer, and (iii) information required to be divulged in any legal or
administrative proceeding in which Employee is involved. Confidential
Information shall consist of, for example, and not intending to be inclusive,
(A) software (source and object codes), algorithms, computer processing systems,
techniques, methodologies, formulae, processes, compilations of information,
drawings, proposals, job notes, reports, records and specifications, and (B)
information concerning any matters relating to the business of Employer, any of
its customers, prospective customers, customer contacts, licenses, the prices it
obtains or has obtained for the licensing of its software products and services,
or any other information concerning the business of Employer and Employer's good
will.
b. NO DISCLOSURE. During the Term and at all times
thereafter, Employee shall not disclose or use in any manner, directly or
indirectly, and shall use Employee's best efforts and shall take all reasonable
precautions to prevent the disclosure of, any such trade secrets or other
Confidential Information, except to the extent required in the performance of
Employee's duties or obligations to Employer hereunder or by express prior
written consent of a duly authorized officer or director of Employer (other than
Employee).
c. OWNERSHIP OF INFORMATION. Such Confidential Information
is and shall remain the sole and exclusive property and proprietary information
of Employer or Employer's customers, as the case may be, and is disclosed in
confidence by Employer or permitted to be acquired from such customers in
reliance on Employee's agreement to maintain such Confidential Information in
confidence and not to use or disclose such Confidential Information to any other
person except in furtherance of Employer's business.
d. RETURN OF MATERIAL. Upon the expiration or earlier
termination of this Agreement for any reason, Employee shall immediately turn
over to Employer all documents, disks or other magnetic media, or other material
in Employee's possession or under Employee's control that (i) may contain or be
derived from Creations or Confidential Information, or (ii) are connected with
or derived from Employee's services to Employer. Employee shall not retain any
Confidential Information in any form (e.g., computer hard drive, microfilm,
etc.) upon the expiration or earlier termination of this Agreement.
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9. NONCOMPETE; WORKING FOR COMPETITOR. In consideration of
Employee's employment by Employer, Employee will not, at any time during the
Term or at any time for twenty-four (24) months subsequent to any termination of
Employee's employment pursuant to the provisions of Section 6(c) or the
voluntary termination of employment by Employee pursuant to Section 2, directly
or indirectly, within the United States, Canada, Mexico, South America or
Europe, for Employee's own account or on behalf of any direct competitors of
Employer, engage in any business or transaction involving the design,
installation, integration, service or consulting with respect to voice
recognition software designs and applications (whether as an employee, employer,
independent contractor, consultant, agent, principal, partner, stockholder,
corporate officer, director or in any other individual or representative
capacity), without the prior written consent of Employer, which consent may be
withheld by Employer in Employer's sole and absolute discretion.
10. NON-SOLICITATION OF EMPLOYEES. During the Term and for a period
of twenty-four (24) months after the date of termination of employment, Employee
will not in any way, directly or indirectly (i) induce or attempt to induce any
employee of Employer to quit employment with Employer; (ii) otherwise interfere
with or disrupt Employer's relationship with its employees; (iii) solicit,
entice or hire away any employee of Employer; or (iv) hire or engage any
employee of Employer or any former employee of Employer whose employment with
Employer ceased less than one year before the date of such hiring or engagement.
Employee acknowledges that any attempt on the part of Employee to induce others
to leave Employer's employ, or any effort by Employee to interfere with
Employer's relationship with its other employees would be harmful and damaging
to Employer.
11. EMPLOYEE'S ACKNOWLEDGEMENT. It is the express intention of
Employee and Employer to comply with sections 15.50 et seq. of the Texas
Business and Commerce Code in effect as of the date of execution hereof.
Employee stipulates that the provisions of this Agreement are not oppressive or
overly burdensome to Employee and will not prevent Employee from earning an
income following termination of this Agreement. Employee warrants and
represents that:
a. Employee is familiar with non-compete and non-
solicitation covenants;
b. Employee has discussed or acknowledges the opportunity to
discuss the provisions of the non-compete and non-solicitation covenants
contained herein with Employee's attorney and has concluded that such provisions
(including, without limitation, the right to equitable relief and the length of
time provided for herein) are fair, reasonable and just under the circumstances;
c. Employee is fully aware of the obligations, limitations
and liabilities included in the non-compete and non-solicitation covenants
contained in this Agreement;
d. The scope of activities covered hereby are substantially
similar to those activities to be performed by Employee under this Agreement;
e. The twenty-four (24) month non-compete and non-
solicitation period is a reasonable restriction, giving consideration to the
following factors: (1) Employee and Employer
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reasonably anticipate that this Agreement, although terminable under certain
provisions, will continue in effect for sufficient duration to allow Employee to
attain superior bargaining strength and an ability for unfair competition with
respect to the customers covered hereby; (2) the duration of the twenty-four
(24) month non-compete and non-solicitation period is a reasonably necessary
period to allow Employer to restore its position of equivalent bargaining
strength and fair competition with respect to those customers covered hereby;
and (3) historically, employees of all types have remained with Employee for a
duration of longer than the duration of the twenty-four (24) month non-compete
and non-solicitation period; and
f. The limitations contained in this Agreement with respect
to geographic area, duration and scope of activity are reasonable; however, if
any court shall determine that the geographic area, duration or scope of
activity of any restriction contained in this Agreement is unenforceable, it is
the intention of the parties that such restrictive covenants set forth herein
shall not thereby be terminated, but shall be deemed amended to the extent
required to render such covenants valid and enforceable.
12. REMEDIES; INJUNCTION. In the event of a breach or threatened
breach by Employee of any of the provisions of this Agreement, Employee agrees
that Employer, in addition to and not in limitation of any other rights,
remedies or damages available to Employer at law or in equity, shall be entitled
to a permanent injunction without the necessity of proving actual monetary loss
in order to prevent or restrain any such breach by Employee or by Employee's
partners, agents, representatives, servants, employees and/or any and all
persons directly or indirectly acting for or with Employee. It is expressly
understood between the parties that this injunctive or other equitable relief
shall not be Employer's exclusive remedy for any breach of this Agreement, and
Employer shall be entitled to seek any other relief or remedy which it may have
by contract, statute, law or otherwise for any breach hereof.
13. ARBITRATION. The parties agree that all disputes or questions
arising in connection with this Agreement and/or the termination of Employee's
employment hereunder 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; provided, however,
notwithstanding the foregoing, in no event shall any dispute, claim or
disagreement arising under Sections 7, 8, 9 and 10 of this Agreement that
requires injunctive or other equitable relief be required to be submitted to
arbitration pursuant to this provision or otherwise.
14. NOTICES. Any notice, demand or request which may be permitted,
required or desired to be given in connection therewith shall be given in
writing and directed to Employer and Employee as follows:
If to Employer, at: Applied Voice Recognition, Inc.
4615 Post Oak Place, Suite 111
Houston, Texas 77027
Attention: President
Facsimile No.: (713) 621-5870
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with a copy to: Boyar, Simon & Miller
4265 San Felipe, Suite 1200
Houston, Texas 77027
Attention: J. William Boyar, Esq.
Facsimile No.: (713) 552-1758
or, if to Employee, at: Mr. H. Russel Douglas
26 Harbor View Drive
Sugar Land, Texas 77479
Notices shall be deemed properly delivered and received when and if either: (i)
personally delivered; (ii) delivered by nationally-recognized overnight courier;
(iii) when deposited in the U.S. Mail, by registered or certified mail, return
receipt requested, postage prepaid; or (iv) sent via facsimile transmission with
confirmation mailed by regular U.S. mail. Any party may change its notice
address for purposes hereof to any address within the continental United States
by giving written notice of such change to the other parties hereto at least
fifteen days prior to the intended effective date of such change.
15. SEVERABILITY. If any provision of this Agreement is rendered or
declared illegal or unenforceable by reason of any existing or subsequently
enacted legislation or by decree of a court of last resort, Employer and
Employee shall promptly meet and negotiate substitute provisions for those
rendered or declared illegal or unenforceable, but all the remaining provisions
of this Agreement shall remain in full force and effect.
16. ASSIGNMENT. This Agreement may not be assigned by any party
without the prior written consent of the other parties.
17. BINDING AGREEMENT. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto, and their respective legal
representatives, heirs, successors and permitted assigns.
18. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas.
19. ATTORNEYS FEES. In the event of any dispute between the parties
regarding this Agreement, the prevailing party shall be entitled to be
reimbursed for such prevailing party's attorneys fees and costs of court (or
cost of arbitration, as applicable) by the non-prevailing party.
20. AGREEMENT READ, UNDERSTOOD AND FAIR. Employee has carefully read
and considered all provisions of this Agreement and agrees that all of the
restrictions set forth are fair and reasonable and are reasonably required for
the protection of the interests of Employer.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on this
1st day of September, 1997, effective as of the Effective Date.
EMPLOYER:
APPLIED VOICE RECOGNITION, INC., a Utah
corporation
By: /S/ TIMOTHY J. CONNOLLY
-------------------------------
Timothy J. Connolly, Chairman
EMPLOYEE:
/S/ H. RUSSEL DOUGLAS
----------------------------------
H. RUSSEL DOUGLAS
Signature Page to
Employment Agreement
(H. Russel Douglas)
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EXHIBIT 10.10
EMPLOYMENT AGREEMENT
(CHARLES W. SKAMSER)
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of April 1,
1997 (the "Effective Date"), by and among APPLIED VOICE RECOGNITION, INC., a
Utah corporation ("Employer"), and CHARLES W. SKAMSER, an individual residing in
Harris County, Texas ("Employee").
W I T N E S S E T H:
-------------------
WHEREAS, Employer and Employee desire to enter into an agreement
regarding Employee's employment with Employer pursuant to the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, and intending to be
legally bound hereby, the parties covenant and agree as follows:
1. EMPLOYMENT. Employer hereby employs Employee and Employee hereby
accepts employment with Employer on the terms and conditions set forth in this
Agreement.
2. TERM OF EMPLOYMENT. The term of Employee's employment hereunder
(the "Term") shall commence as of April 1, 1997 (the "Commencement Date") and
shall continue (subject to termination by either Employer or Employee as
hereinafter provided) for an initial term (the "Initial Term") expiring on March
31, 2000 (the "Expiration Date"). The Expiration Date shall be automatically
extended unless terminated by Employer or Employee for successive one year
periods following the expiration of the Initial Term. If Employer desires to
terminate Employee's employment under this Agreement at the end of the Initial
Term or at the end of any succeeding one year term, Employer shall give written
notice of such desire to Employee at least one month prior to the expiration of
the Initial Term or any succeeding one year term. If Employee desires to
terminate Employee's employment under this Agreement at the end of the Initial
Term or at the end of any succeeding one year term, Employee shall give written
notice of such desire to Employer at least one month prior to the expiration of
the Initial Term or any succeeding one year term. At the expiration of the then
existing term, Employer shall have no further obligation to Employee other than
payment of earned and unpaid Commissions (as hereafter defined) under Section
3(b), and Employee shall have no further obligation to Employer except as set
forth in Sections 7, 8, 9 and 10.
3. COMPENSATION AND OTHER BENEFITS.
a. As compensation for all services rendered by Employee in
performance of Employee's duties or obligations under this Agreement, Employer
shall pay Employee the following base salary (the "Base Salary"):
<PAGE>
(1) from April 1, 1997 until September 30, 1997, a monthly
base salary of TEN THOUSAND FOUR HUNDRED SIXTEEN AND 16/100 DOLLARS
($10,416.67)
(2) from September 15, 1997 until December 31, 1997, a
monthly base salary of TWELVE THOUSAND FIVE HUNDRED AND 00/100 DOLLARS
($12,500.00);
(3) from January 1, 1998 until December 31, 1998, a monthly
base salary of FOURTEEN THOUSAND FIVE HUNDRED EIGHTY-THREE AND 33/100
DOLLARS ($14,583.33); and
(4) from January 1, 1999 until the Expiration Date, a
monthly base salary of SIXTEEN THOUSAND SIX HUNDRED SIXTY-SIX AND
66/100 DOLLARS ($16,666.66).
Employee's Base Salary shall be payable in equal semi-monthly installments or in
the manner and on the timetable which Employer's payroll is customarily handled
or at such intervals as Employer and Employee may hereafter agree to from time
to time.
b. In addition to receiving the Base Salary provided for in
Section 3(a), beginning April 1, 1997 and through December 31, 1997,
Employee shall be entitled to receive a monthly commission (the
"Commission") as follows:
(1) For each month of the period from April 1, 1997 through
December 31, 1997, the Commission will be calculated by multiplying (i) the
total amount of revenues actually received by Employer during a particular
month, by (ii) one and one half percent (1-1/2%).
(2) The Commission shall be paid by Employer to Employee along
with Employee's semi-monthly installment of Base Salary, but in any event
within forty-five (45) days after the last day of the month during which
such Commission was earned.
c. In addition to receiving the Base Salary provided for in
Section 3(a), for the year beginning January 1, 1998 and thereafter during
the Term hereof, Employee shall be entitled to a bonus if, and only if,
Employee has met the performance criteria set by Employer for the
applicable year. In connection therewith, Employer agrees that by January
31 of each year, it shall set the performance criteria for Employee=s bonus
to be earned during the applicable year and shall communicate such criteria
to Employee in writing. If Employee successfully meets the performance
criteria established by Employer (in the discretion of Employer), Employer
shall pay to Employee the bonus within thirty (30) days of the end of the
applicable year.
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<PAGE>
d. Employee shall be entitled to be reimbursed by Employer for all
reasonable and necessary expenses incurred by Employee in carrying out
Employee's duties under this Agreement in accordance with Employer's standard
policies regarding such reimbursements.
e. Employee shall be entitled during the Term, upon
satisfaction of all eligibility requirements, if any, to participate in all
health, dental, disability, life insurance and other benefit programs now or
hereafter established by Employer which cover substantially all other of
Employer's employees and shall receive such other benefits as may be approved
from time to time by Employer.
f. Employee shall be entitled to receive two weeks of paid
vacation for each year during the Term following the first anniversary of the
Commencement Date and shall be entitled to receive paid holidays as enjoyed by
all other employees of Employer.
g. Effective as of September 1, 1997, Employee shall be
entitled to receive an automobile allowance of $750 per month, payable on the
first day of each month during the remainder of the Term. Employee shall be
responsible for paying all costs related to ownership of Employee's vehicle,
including maintenance and repairs, insurance and fuel.
4. DUTIES.
a. Employee is employed to act as President and Chief
Operating Officer of the Employer and in such other office or position as shall
be assigned to Employee from time to time by Employer, and to perform such
duties as are commensurate with Employee's position with Employer.
b. Employee agrees that during the period of employment,
Employee shall devote full-time efforts to Employee's duties as an employee of
Employer and Employee shall use Employee's best efforts to perform the duties of
Employee's position in an efficient and competent manner and shall use
Employee's best efforts to promote the interests of Employer and any affiliated
companies.
c. During the period of employment, Employee agrees not to
(i) solely or jointly with others undertake or join any planning for or
organization of any business activity competitive with the business activities
of Employer, and (ii) directly or indirectly, engage or participate in any other
activities in conflict with the best interests of Employer.
d. Employee agrees that during the period of employment
Employee shall refer to Employer all opportunities in the computer industry
related to voice recognition software designs and applications to which Employee
might become exposed in carrying out Employee's duties and responsibilities
hereunder.
5. STOCK OPTION PLAN. As a further inducement to Employee to accept
employment upon the terms set forth herein and in consideration of Employee's
execution of this
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<PAGE>
Agreement, Employee shall be granted options entitling Employee to purchase
500,000 shares of Employer's common stock, par value $0.001 (the "Initial
Options"), pursuant to, and Employee shall be entitled to otherwise participate
in, that certain Applied Voice Recognition, Inc. 1997 Incentive Plan, as amended
from time to time. The granting instrument for the Initial Options will
provide, in addition to other terms set forth therein, that (i) the purchase
price for the Initial Options shall be the average bid and ask price for
Employer's shares of common stock on the NASDAQ OTCBB (or any national
securities exchange hereafter listing Employer's common stock) on the day prior
to the Commencement Date, and (ii) one third of the Initial Options (being
options to purchase 166,667 shares) will vest on each yearly anniversary date of
the Commencement Date for a total of three years (except that on the third
yearly anniversary date, only 166,666 shares will vest).
6. TERMINATION OF EMPLOYMENT. Employee's employment and this
Agreement shall terminate upon the earliest to occur of any of the following
events (the actual date of such termination being referred to herein as the
"Termination Date"):
a. The termination of the Agreement pursuant to Section 2.
b. Employee's employment pursuant hereto shall terminate in
the event of the death of Employee.
c. Employer may terminate Employee's employment under this
Agreement for cause without any prior notice, upon the occurrence of any of the
following events:
(1) any embezzlement or wrongful diversion of funds of
Employer or any affiliate of Employer by Employee;
(2) gross malfeasance by Employee in the conduct of
Employee's duties;
(3) material breach of this Agreement;
(4) gross neglect by Employee in carrying out Employee's
duties; or
(5) the failure of Employee to be able to perform
Employee's duties hereunder for a period of not less than thirty days
by reason of disability. For purposes of this Agreement, Employee
shall be deemed to have become disabled when the Board of Directors of
Employer, upon the advice of a qualified physician, shall have
determined that Employee has become physically or mentally incapable
(excluding infrequent and temporary absences due to ordinary illness)
of performing Employee's duties under this Agreement. Before making
any termination decision pursuant to this Section 6(c)(5), the Board
of Directors of Employer shall determine whether there is any
reasonable accommodation (within the meaning of the Americans with
Disabilities Act) which would enable Employee to perform the essential
functions of Employee's position under this Agreement despite the
existence of any such
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<PAGE>
disability. If such a reasonable accommodation is possible, Employer
shall make that accommodation and shall not terminate Employee's
employment hereunder based on such disability.
d. If Employee's employment is terminated for any of the
reasons specified in Section 6(b), (c) or (f), Employer shall no longer be
obligated to make the payments specified under Section 3 or to pay to Employee
any other compensation or benefits whatsoever, except as may otherwise be
provided in Section 6(e) or (f). Notwithstanding the foregoing, if for any
reason Employee's employment is terminated hereunder, any salary payable under
Sections 3(a) or 3(b) which shall have been earned but not yet paid shall be
paid by Employer to Employee or Employee's estate, as the case may be.
e. Employee shall have the right to terminate Employee's
employment hereunder upon ninety days' notice to Employer after the occurrence
of any of the following events:
(1) a sale of all or substantially all of the assets of
Employer to a third party for which Employee does not continue in
employment; or
(2) a merger or consolidation of Employer with an entity for
which Employee does not continue in employment.
If this Agreement is terminated by Employee under this Section 6(e), any
then unvested Initial Options shall automatically become fully vested
immediately upon termination. The foregoing provisions of this Section 6(e)
shall not apply if the change of ownership that would otherwise trigger
Employee's termination right is caused by the registration by Employer or its
successors, of any class of equity securities pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended.
f. Employer shall have the right to terminate Employee's
employment hereunder without prior notice and without cause; provided, however,
in such event, Employee shall continue to receive his Base Salary for six (6)
months following the date of such termination. In such event, Employee shall
not receive the Commission as it relates to sales made following the date of
termination, but will continue to receive the Commission as it relates to the
period prior to termination, even though certain of the payments might be made
after the date of termination. If this Agreement is terminated by Employer
under this Section 6(f), any Initial Options that would otherwise vest on or
before the next anniversary date of the Commencement Date shall automatically
become fully vested immediately upon termination; however, any additional
unvested Initial Options shall be cancelled upon termination.
7. INVENTIONS AND CREATIONS BELONG TO EMPLOYER.
a. Any and all inventions, discoveries, improvements or
creations (collectively, "Creations") which Employee has conceived or made or
may conceive or make during the period of employment in any way, directly or
indirectly, connected with Employer's business shall be the sole and exclusive
property of Employer. Employee agrees that all copyrightable works
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<PAGE>
created by Employee or under Employer's direction in connection with Employer's
business are "works made for hire" and shall be the sole and complete property
of Employer and that any and all copyrights to such works shall belong to
Employer. To the extent any of the works described in the preceding sentence
are not deemed to be "works made for hire," Employee hereby assigns all
proprietary rights, including copyright, in these works to Employer without
further compensation.
b. Employee further agrees to (i) disclose promptly to
Employer all such Creations which Employee has made or may make solely, jointly
or commonly with others during the period of employment to the extent connected
with Employer's business, (ii) assign all such Creations to Employer, and (iii)
execute and sign any and all applications, assignments or other instruments
which Employer may deem necessary in order to enable Employer, at Employer's
expense, to apply for, prosecute and obtain copyrights, patents or other
proprietary rights in the United States and foreign countries or in order to
transfer to Employer all right, title and interest in said Creations.
8. CONFIDENTIALITY; OWNERSHIP OF INFORMATION. Employer promises
that Employer will, during the Term, provide Employee with access to such
Confidential Information (as defined in Section 8(a)) owned by Employer and that
is used in the operation of Employer's business as reasonably necessary to allow
Employee to perform Employee's obligations hereunder. Employee acknowledges
that Employer has agreed to provide Employee with a definite term of employment
and with access to such Confidential Information of Employer during that term of
employment.
a. DEFINITION. For purposes of this Agreement,
"Confidential Information" means any and all information relating directly or
indirectly to Employer that is not generally ascertainable from public or
published information or trade sources and that represents proprietary
information to Employer, excluding, however, (i) Employees' business contacts,
(ii) information already known to Employee prior to Employee's employment with
Employer, and (iii) information required to be divulged in any legal or
administrative proceeding in which Employee is involved. Confidential
Information shall consist of, for example, and not intending to be inclusive,
(A) software (source and object codes), algorithms, computer processing systems,
techniques, methodologies, formulae, processes, compilations of information,
drawings, proposals, job notes, reports, records and specifications, and (B)
information concerning any matters relating to the business of Employer, any of
its customers, prospective customers, customer contacts, licenses, the prices it
obtains or has obtained for the licensing of its software products and services,
or any other information concerning the business of Employer and Employer's good
will.
b. NO DISCLOSURE. During the Term and at all times
thereafter, Employee shall not disclose or use in any manner, directly or
indirectly, and shall use Employee's best efforts and shall take all reasonable
precautions to prevent the disclosure of, any such trade secrets or other
Confidential Information, except to the extent required in the performance of
Employee's duties or obligations to Employer hereunder or by express prior
written consent of a duly authorized officer or director of Employer (other than
Employee).
c. OWNERSHIP OF INFORMATION. Such Confidential Information
is and shall remain the sole and exclusive property and proprietary information
of Employer or Employer's
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<PAGE>
customers, as the case may be, and is disclosed in confidence by Employer or
permitted to be acquired from such customers in reliance on Employee's agreement
to maintain such Confidential Information in confidence and not to use or
disclose such Confidential Information to any other person except in furtherance
of Employer's business.
d. RETURN OF MATERIAL. Upon the expiration or earlier
termination of this Agreement for any reason, Employee shall immediately turn
over to Employer all documents, disks or other magnetic media, or other material
in Employee's possession or under Employee's control that (i) may contain or be
derived from Creations or Confidential Information, or (ii) are connected with
or derived from Employee's services to Employer. Employee shall not retain any
Confidential Information in any form (e.g., computer hard drive, microfilm,
etc.) upon the expiration or earlier termination of this Agreement.
9. NONCOMPETE; WORKING FOR COMPETITOR. In consideration of
Employee's employment by Employer, Employee will not, at any time during the
Term or at any time for twenty-four (24) months subsequent to any termination of
Employee's employment pursuant to the provisions of Section 6(c) or the
voluntary termination of employment by Employee pursuant to Section 2, directly
or indirectly, within the United States, Canada, Mexico, South America or
Europe, for Employee's own account or on behalf of any direct competitors of
Employer, engage in any business or transaction involving the design,
installation, integration, service or consulting with respect to voice
recognition software designs and applications (whether as an employee, employer,
independent contractor, consultant, agent, principal, partner, stockholder,
corporate officer, director or in any other individual or representative
capacity), without the prior written consent of Employer, which consent may be
withheld by Employer in Employer's sole and absolute discretion.
10. NON-SOLICITATION OF EMPLOYEES. During the Term and for a period
of twenty-four (24) months after the date of termination of employment, Employee
will not in any way, directly or indirectly (i) induce or attempt to induce any
employee of Employer to quit employment with Employer; (ii) otherwise interfere
with or disrupt Employer's relationship with its employees; (iii) solicit,
entice or hire away any employee of Employer; or (iv) hire or engage any
employee of Employer or any former employee of Employer whose employment with
Employer ceased less than one year before the date of such hiring or engagement.
Employee acknowledges that any attempt on the part of Employee to induce others
to leave Employer's employ, or any effort by Employee to interfere with
Employer's relationship with its other employees would be harmful and damaging
to Employer.
11. EMPLOYEE'S ACKNOWLEDGEMENT. It is the express intention of
Employee and Employer to comply with sections 15.50 et seq. of the Texas
Business and Commerce Code in effect as of the date of execution hereof.
Employee stipulates that the provisions of this Agreement are not oppressive or
overly burdensome to Employee and will not prevent Employee from earning an
income following termination of this Agreement. Employee warrants and
represents that:
a. Employee is familiar with non-compete and non-
solicitation covenants;
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b. Employee has discussed or acknowledges the opportunity to
discuss the provisions of the non-compete and non-solicitation covenants
contained herein with Employee's attorney and has concluded that such provisions
(including, without limitation, the right to equitable relief and the length of
time provided for herein) are fair, reasonable and just under the circumstances;
c. Employee is fully aware of the obligations, limitations
and liabilities included in the non-compete and non-solicitation covenants
contained in this Agreement;
d. The scope of activities covered hereby are substantially
similar to those activities to be performed by Employee under this Agreement;
e. The twenty-four (24) month non-compete and non-
solicitation period is a reasonable restriction, giving consideration to the
following factors: (1) Employee and Employer reasonably anticipate that this
Agreement, although terminable under certain provisions, will continue in effect
for sufficient duration to allow Employee to attain superior bargaining strength
and an ability for unfair competition with respect to the customers covered
hereby; (2) the duration of the twenty-four (24) month non-compete and non-
solicitation period is a reasonably necessary period to allow Employer to
restore its position of equivalent bargaining strength and fair competition with
respect to those customers covered hereby; and (3) historically, employees of
all types have remained with Employee for a duration of longer than the duration
of the twenty-four (24) month non-compete and non-solicitation period; and
f. The limitations contained in this Agreement with respect
to geographic area, duration and scope of activity are reasonable; however, if
any court shall determine that the geographic area, duration or scope of
activity of any restriction contained in this Agreement is unenforceable, it is
the intention of the parties that such restrictive covenants set forth herein
shall not thereby be terminated, but shall be deemed amended to the extent
required to render such covenants valid and enforceable.
12. REMEDIES; INJUNCTION. In the event of a breach or threatened
breach by Employee of any of the provisions of this Agreement, Employee agrees
that Employer, in addition to and not in limitation of any other rights,
remedies or damages available to Employer at law or in equity, shall be entitled
to a permanent injunction without the necessity of proving actual monetary loss
in order to prevent or restrain any such breach by Employee or by Employee's
partners, agents, representatives, servants, employees and/or any and all
persons directly or indirectly acting for or with Employee. It is expressly
understood between the parties that this injunctive or other equitable relief
shall not be Employer's exclusive remedy for any breach of this Agreement, and
Employer shall be entitled to seek any other relief or remedy which it may have
by contract, statute, law or otherwise for any breach hereof.
13. ARBITRATION. The parties agree that all disputes or questions
arising in connection with this Agreement and/or the termination of Employee's
employment hereunder 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
8
<PAGE>
enforceable in a court of competent jurisdiction; provided, however,
notwithstanding the foregoing, in no event shall any dispute, claim or
disagreement arising under Sections 7, 8, 9 and 10 of this Agreement that
requires injunctive or other equitable relief be required to be submitted to
arbitration pursuant to this provision or otherwise.
14. NOTICES. Any notice, demand or request which may be permitted,
required or desired to be given in connection therewith shall be given in
writing and directed to Employer and Employee as follows:
If to Employer, at: Applied Voice Recognition, Inc.
4615 Post Oak Place, Suite 111
Houston, Texas 77027
Attention: Chairman
Facsimile No.: (713) 621-5870
9
<PAGE>
with a copy to: Boyar, Simon & Miller
4265 San Felipe, Suite 1200
Houston, Texas 77027
Attention: J. William Boyar, Esq.
Facsimile No.: (713) 552-1758
or, if to Employee, at: Mr. Charles W. Skamser
7814 Oxfordshire Drive
Spring, Texas 77379
Notices shall be deemed properly delivered and received when and if either: (i)
personally delivered; (ii) delivered by nationally-recognized overnight courier;
(iii) when deposited in the U.S. Mail, by registered or certified mail, return
receipt requested, postage prepaid; or (iv) sent via facsimile transmission with
confirmation mailed by regular U.S. mail. Any party may change its notice
address for purposes hereof to any address within the continental United States
by giving written notice of such change to the other parties hereto at least
fifteen days prior to the intended effective date of such change.
15. SEVERABILITY. If any provision of this Agreement is rendered or
declared illegal or unenforceable by reason of any existing or subsequently
enacted legislation or by decree of a court of last resort, Employer and
Employee shall promptly meet and negotiate substitute provisions for those
rendered or declared illegal or unenforceable, but all the remaining provisions
of this Agreement shall remain in full force and effect.
16. ASSIGNMENT. This Agreement may not be assigned by any party
without the prior written consent of the other parties.
17. BINDING AGREEMENT. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto, and their respective legal
representatives, heirs, successors and permitted assigns.
18. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas.
19. ATTORNEYS FEES. In the event of any dispute between the parties
regarding this Agreement, the prevailing party shall be entitled to be
reimbursed for such prevailing party's attorneys fees and costs of court by the
non-prevailing party.
20. AGREEMENT READ, UNDERSTOOD AND FAIR. Employee has carefully read
and considered all provisions of this Agreement and agrees that all of the
restrictions set forth are fair and reasonable and are reasonably required for
the protection of the interests of Employer.
10
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on this
1st day of September, 1997, effective as of the Effective Date.
EMPLOYER:
APPLIED VOICE RECOGNITION, INC., a Utah
corporation
By: /S/ TIMOTHY J. CONNOLLY
-------------------------------
Timothy J. Connolly, Chairman
EMPLOYEE:
/S/ CHARLES W. SKAMSER
--------------------------------
CHARLES W. SKAMSER
Signature Page to
Employment Agreement
(Charles W. Skamser)
11
<PAGE>
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
(WILLIAM T. KENNEDY)
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of May 1, 1997
(the "Effective Date"), by and among APPLIED VOICE RECOGNITION, INC., a Utah
corporation ("Employer"), and WILLIAM T. KENNEDY, an individual residing in
Harris County, Texas ("Employee").
W I T N E S S E T H:
-------------------
WHEREAS, Employer and Employee desire to enter into an agreement
regarding Employee's employment with Employer pursuant to the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, and intending to be
legally bound hereby, the parties covenant and agree as follows:
1. EMPLOYMENT. Employer hereby employs Employee and Employee hereby
accepts employment with Employer on the terms and conditions set forth in this
Agreement.
2. TERM OF EMPLOYMENT. The term of Employee's employment hereunder
(the "Term") shall commence as of May 1, 1997 (the "Commencement Date") and
shall continue (subject to termination by either Employer or Employee as
hereinafter provided) for an initial term (the "Initial Term") expiring on April
30, 2000 (the "Expiration Date"). The Expiration Date shall be automatically
extended unless terminated by Employer or Employee for successive one-year
periods following the expiration of the Initial Term. If Employer desires to
terminate Employee's employment under this Agreement at the end of the Initial
Term or at the end of any succeeding one year term, Employer shall give written
notice of such desire to Employee at least one month prior to the expiration of
the Initial Term or any succeeding one year term. If Employee desires to
terminate Employee's employment under this Agreement at the end of the Initial
Term or at the end of any succeeding one year term, Employee shall give written
notice of such desire to Employer at least one month prior to the expiration of
the Initial Term or any succeeding one year term. At the expiration of the then
existing term, Employer shall have no further obligation to Employee other than
payment of any earned and unpaid Base Salary (as hereafter defined) under
Section 3(a) and Bonus (as hereafter defined) under Section 3(b), and Employee
shall have no further obligation to Employer except as set forth in Sections 7,
8, 9 and 10.
<PAGE>
3. COMPENSATION AND OTHER BENEFITS.
a. As compensation for all services rendered by Employee in
performance of Employee's duties or obligations under this Agreement, Employer
shall pay Employee the following base salary (the "Base Salary"):
(1) from May 1, 1997 until September 15, 1997, a monthly
base salary of SEVEN THOUSAND FIVE HUNDRED AND 00/100 DOLLARS
($7,500.00);
(2) from September 16, 1997 until December 31, 1997, a
monthly base salary of EIGHT THOUSAND THREE HUNDRED THIRTY- THREE AND
33/100 DOLLARS ($8,333.33)
(3) from January 1, 1998 until December 31, 1998, a monthly
base salary of TEN THOUSAND FOUR HUNDRED SIXTEEN AND 66/100 DOLLARS
($10,416.66); and
(4) from January 1, 1999 until the Expiration Date, a
monthly base salary of TWELVE THOUSAND FIVE HUNDRED AND 00/100 DOLLARS
($12,500.00).
Employee's Base Salary shall be payable in equal semi-monthly installments or in
the manner and on the timetable which Employer's payroll is customarily handled
or at such intervals as Employer and Employee may hereafter agree to from time
to time.
b. In addition to receiving the Base Salary provided for in
Section 3(a), Employee shall be entitled to a quarterly bonus equal to six and
one-quarter percent (6-1/4%) of his Base Salary for the applicable year (the
"Bonus"). The Bonus shall be earned if, and only if, Employee has met the
criteria set by Employer for the applicable quarter. In connection therewith,
Employer agrees that prior to the end of each quarter, it shall set criteria for
Employee's Bonus to be earned during the following quarter and shall communicate
such criteria to Employee in writing. If Employee successfully meets the
criteria established by Employer (in the discretion of Employer), Employer shall
pay to Employee the quarterly Bonus within thirty (30) days of the end of the
applicable quarter.
c. Employee shall be entitled to be reimbursed by Employer
for all reasonable and necessary expenses incurred by Employee in carrying out
Employee's duties under this Agreement in accordance with Employer's standard
policies regarding such reimbursements.
d. Employee shall be entitled during the Term, upon
satisfaction of all eligibility requirements, if any, to participate in all
health, dental, disability, life insurance and other benefit programs now or
hereafter established by Employer which cover substantially all other of
2
<PAGE>
Employer's employees and shall receive such other benefits as may be approved
from time to time by Employer.
e. Employee shall be entitled to receive two weeks of paid
vacation for each year during the Term following the first anniversary of the
Commencement Date and shall be entitled to receive paid holidays as enjoyed by
all other employees of Employer.
4. DUTIES.
a. Employee is employed to act as Chief Financial Officer of
the Employer and in such other office or position as shall be assigned to
Employee from time to time by Employer, and to perform such duties as are
commensurate with Employee's position with Employer.
b. Employee agrees that during the period of employment,
Employee shall devote full-time efforts to Employee's duties as an employee of
Employer and Employee shall use Employee's best efforts to perform the duties of
Employee's position in an efficient and competent manner and shall use
Employee's best efforts to promote the interests of Employer and any affiliated
companies.
c. During the period of employment, Employee agrees not to
(i) solely or jointly with others undertake or join any planning for or
organization of any business activity competitive with the business activities
of Employer, and (ii) directly or indirectly, engage or participate in any other
activities in conflict with the best interests of Employer.
d. Employee agrees that during the period of employment
Employee shall refer to Employer all opportunities in the computer industry
related to voice recognition software designs and applications to which Employee
might become exposed in carrying out Employee's duties and responsibilities
hereunder.
5. STOCK OPTION PLAN. As a further inducement to Employee to accept
employment upon the terms set forth herein and in consideration of Employee's
execution of this Agreement, Employee shall be granted options entitling
Employee to purchase 210,000 shares of Employer's common stock, par value $0.001
(the "Initial Options"), pursuant to, and Employee shall be entitled to
otherwise participate in, that certain Applied Voice Recognition, Inc. 1997
Incentive Plan, as amended from time to time. The granting instrument for the
Initial Options will provide, in addition to other terms set forth therein, that
(i) the purchase price for the Initial Options shall be the average bid and ask
price for Employer's shares of common stock on the NASDAQ OTCBB (or any national
securities exchange hereafter listing Employer's common stock) on the day prior
to the Commencement Date, and (ii) one third of the Initial Options (being
options to purchase 70,000 shares) will vest on each yearly anniversary date of
the Commencement Date for a total of three years.
3
<PAGE>
6. TERMINATION OF EMPLOYMENT. Employee's employment and this
Agreement shall terminate upon the earliest to occur of any of the following
events (the actual date of such termination being referred to herein as the
"Termination Date"):
a. The termination of the Agreement pursuant to Section 2.
b. Employee's employment pursuant hereto shall terminate in
the event of the death of Employee.
c. Employer may terminate Employee's employment under this
Agreement for cause without any prior notice, upon the occurrence of any of the
following events:
(1) any embezzlement or wrongful diversion of funds of
Employer or any affiliate of Employer by Employee;
(2) gross malfeasance by Employee in the conduct of
Employee's duties;
(3) material breach of this Agreement;
(4) gross neglect by Employee in carrying out Employee's
duties; or
(5) the failure of Employee to be able to perform
Employee's duties hereunder for a period of not less than thirty days
by reason of disability. For purposes of this Agreement, Employee
shall be deemed to have become disabled when the Board of Directors of
Employer, upon the advice of a qualified physician, shall have
determined that Employee has become physically or mentally incapable
(excluding infrequent and temporary absences due to ordinary illness)
of performing Employee's duties under this Agreement. Before making
any termination decision pursuant to this Section 6(c)(5), the Board
of Directors of Employer shall determine whether there is any
reasonable accommodation (within the meaning of the Americans with
Disabilities Act) which would enable Employee to perform the essential
functions of Employee's position under this Agreement despite the
existence of any such disability. If such a reasonable accommodation
is possible, Employer shall make that accommodation and shall not
terminate Employee's employment hereunder based on such disability.
d. If Employee's employment is terminated for any of the
reasons specified in Section 6(b), (c) or (f), Employer shall no longer be
obligated to make the payments specified under Section 3 or to pay to Employee
any other compensation or benefits whatsoever, except as may otherwise be
provided in Section 6(e) or (f). Notwithstanding the foregoing, if for any
reason Employee's employment is terminated hereunder, any compensation payable
under Sections 3(a) or 3(b) which shall have been earned but not yet paid shall
be paid by Employer to Employee or Employee's estate, as the case may be.
4
<PAGE>
e. Employee shall have the right to terminate Employee's
employment hereunder upon ninety days' notice to Employer after the occurrence
of any of the following events:
(1) a sale of all or substantially all of the assets of
Employer to a third party for which Employee does not continue in
employment; or
(2) a merger or consolidation of Employer with an entity for
which Employee does not continue in employment.
If this Agreement is terminated by Employee under this Section 6(e), any
then unvested Initial Options shall automatically become fully vested
immediately upon termination. The foregoing provisions of this Section 6(e)
shall not apply if the change of ownership that would otherwise trigger
Employee's termination right is caused by the registration by Employer or its
successors, of any class of equity securities pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended.
f. Employer shall have the right to terminate Employee's
employment hereunder without prior notice and without cause; provided, however,
in such event, Employee shall continue to receive his Base Salary for six (6)
months following the date of such termination. In such event, Employee shall
not be eligible to receive the Bonus for any quarter beyond the quarter in which
Employee's employment is terminated. If this Agreement is terminated by
Employer under this Section 6(f), any Initial Options that would otherwise vest
on or before the next anniversary date of the Commencement Date shall
automatically become fully vested immediately upon termination; however, any
additional unvested Initial Options shall be cancelled upon termination.
7. INVENTIONS AND CREATIONS BELONG TO EMPLOYER.
a. Any and all inventions, discoveries, improvements or
creations (collectively, "Creations") which Employee has conceived or made or
may conceive or make during the period of employment in any way, directly or
indirectly, connected with Employer's business shall be the sole and exclusive
property of Employer. Employee agrees that all copyrightable works created by
Employee or under Employer's direction in connection with Employer's business
are "works made for hire" and shall be the sole and complete property of
Employer and that any and all copyrights to such works shall belong to Employer.
To the extent any of the works described in the preceding sentence are not
deemed to be "works made for hire," Employee hereby assigns all proprietary
rights, including copyright, in these works to Employer without further
compensation.
b. Employee further agrees to (i) disclose promptly to
Employer all such Creations which Employee has made or may make solely, jointly
or commonly with others during the period of employment to the extent connected
with Employer's business, (ii) assign all such Creations to Employer, and (iii)
execute and sign any and all applications, assignments or other instruments
which Employer may deem necessary in order to enable Employer, at Employer's
expense, to apply for, prosecute and obtain copyrights, patents or other
proprietary rights in the United States and foreign countries or in order to
transfer to Employer all right, title and interest in said Creations.
5
<PAGE>
8. CONFIDENTIALITY; OWNERSHIP OF INFORMATION. Employer promises that
Employer will, during the Term, provide Employee with access to such
Confidential Information (as defined in Section 8(a)) owned by Employer and that
is used in the operation of Employer's business as reasonably necessary to allow
Employee to perform Employee's obligations hereunder. Employee acknowledges
that Employer has agreed to provide Employee with a definite term of employment
and with access to such Confidential Information of Employer during that term of
employment.
a. DEFINITION. For purposes of this Agreement,
"Confidential Information" means any and all information relating directly or
indirectly to Employer that is not generally ascertainable from public or
published information or trade sources and that represents proprietary
information to Employer, excluding, however, (i) Employees' business contacts,
(ii) information already known to Employee prior to Employee's employment with
Employer, and (iii) information required to be divulged in any legal or
administrative proceeding in which Employee is involved. Confidential
Information shall consist of, for example, and not intending to be inclusive,
(A) software (source and object codes), algorithms, computer processing systems,
techniques, methodologies, formulae, processes, compilations of information,
drawings, proposals, job notes, reports, records and specifications, and (B)
information concerning any matters relating to the business of Employer, any of
its customers, prospective customers, customer contacts, licenses, the prices it
obtains or has obtained for the licensing of its software products and services,
or any other information concerning the business of Employer and Employer's good
will.
b. NO DISCLOSURE. During the Term and at all times
thereafter, Employee shall not disclose or use in any manner, directly or
indirectly, and shall use Employee's best efforts and shall take all reasonable
precautions to prevent the disclosure of, any such trade secrets or other
Confidential Information, except to the extent required in the performance of
Employee's duties or obligations to Employer hereunder or by express prior
written consent of a duly authorized officer or director of Employer (other than
Employee).
c. OWNERSHIP OF INFORMATION. Such Confidential Information
is and shall remain the sole and exclusive property and proprietary information
of Employer or Employer's customers, as the case may be, and is disclosed in
confidence by Employer or permitted to be acquired from such customers in
reliance on Employee's agreement to maintain such Confidential Information in
confidence and not to use or disclose such Confidential Information to any other
person except in furtherance of Employer's business.
d. RETURN OF MATERIAL. Upon the expiration or earlier
termination of this Agreement for any reason, Employee shall immediately turn
over to Employer all documents, disks or other magnetic media, or other material
in Employee's possession or under Employee's control that (i) may contain or be
derived from Creations or Confidential Information, or (ii) are connected with
or derived from Employee's services to Employer. Employee shall not retain any
Confidential Information in any form (e.g., computer hard drive, microfilm,
etc.) upon the expiration or earlier termination of this Agreement.
6
<PAGE>
9. NONCOMPETE; WORKING FOR COMPETITOR. In consideration of
Employee's employment by Employer, Employee will not, at any time during the
Term or at any time for twenty-four (24) months subsequent to any termination of
Employee's employment pursuant to the provisions of Section 6(c) or the
voluntary termination of employment by Employee pursuant to Section 2, directly
or indirectly, within the United States, Canada, Mexico, South America or
Europe, for Employee's own account or on behalf of any direct competitors of
Employer, engage in any business or transaction involving the design,
installation, integration, service or consulting with respect to voice
recognition software designs and applications (whether as an employee, employer,
independent contractor, consultant, agent, principal, partner, stockholder,
corporate officer, director or in any other individual or representative
capacity), without the prior written consent of Employer, which consent may be
withheld by Employer in Employer's sole and absolute discretion.
10. NON-SOLICITATION OF EMPLOYEES. During the Term and for a period
of twenty-four (24) months after the date of termination of employment, Employee
will not in any way, directly or indirectly (i) induce or attempt to induce any
employee of Employer to quit employment with Employer; (ii) otherwise interfere
with or disrupt Employer's relationship with its employees; (iii) solicit,
entice or hire away any employee of Employer; or (iv) hire or engage any
employee of Employer or any former employee of Employer whose employment with
Employer ceased less than one year before the date of such hiring or engagement.
Employee acknowledges that any attempt on the part of Employee to induce others
to leave Employer's employ, or any effort by Employee to interfere with
Employer's relationship with its other employees would be harmful and damaging
to Employer.
11. EMPLOYEE'S ACKNOWLEDGEMENT. It is the express intention of
Employee and Employer to comply with sections 15.50 et seq. of the Texas
Business and Commerce Code in effect as of the date of execution hereof.
Employee stipulates that the provisions of this Agreement are not oppressive or
overly burdensome to Employee and will not prevent Employee from earning an
income following termination of this Agreement. Employee warrants and
represents that:
a. Employee is familiar with non-compete and non-
solicitation covenants;
b. Employee has discussed or acknowledges the opportunity to
discuss the provisions of the non-compete and non-solicitation covenants
contained herein with Employee's attorney and has concluded that such provisions
(including, without limitation, the right to equitable relief and the length of
time provided for herein) are fair, reasonable and just under the circumstances;
c. Employee is fully aware of the obligations, limitations
and liabilities included in the non-compete and non-solicitation covenants
contained in this Agreement;
d. The scope of activities covered hereby are substantially
similar to those activities to be performed by Employee under this Agreement;
e. The twenty-four (24) month non-compete and non-
solicitation period is a reasonable restriction, giving consideration to the
following factors: (1) Employee and Employer
7
<PAGE>
reasonably anticipate that this Agreement, although terminable under certain
provisions, will continue in effect for sufficient duration to allow Employee to
attain superior bargaining strength and an ability for unfair competition with
respect to the customers covered hereby; (2) the duration of the twenty-four
(24) month non-compete and non-solicitation period is a reasonably necessary
period to allow Employer to restore its position of equivalent bargaining
strength and fair competition with respect to those customers covered hereby;
and (3) historically, employees of all types have remained with Employee for a
duration of longer than the duration of the twenty-four (24) month non-compete
and non-solicitation period; and
f. The limitations contained in this Agreement with respect
to geographic area, duration and scope of activity are reasonable; however, if
any court shall determine that the geographic area, duration or scope of
activity of any restriction contained in this Agreement is unenforceable, it is
the intention of the parties that such restrictive covenants set forth herein
shall not thereby be terminated, but shall be deemed amended to the extent
required to render such covenants valid and enforceable.
12. REMEDIES; INJUNCTION. In the event of a breach or threatened
breach by Employee of any of the provisions of this Agreement, Employee agrees
that Employer, in addition to and not in limitation of any other rights,
remedies or damages available to Employer at law or in equity, shall be entitled
to a permanent injunction without the necessity of proving actual monetary loss
in order to prevent or restrain any such breach by Employee or by Employee's
partners, agents, representatives, servants, employees and/or any and all
persons directly or indirectly acting for or with Employee. It is expressly
understood between the parties that this injunctive or other equitable relief
shall not be Employer's exclusive remedy for any breach of this Agreement, and
Employer shall be entitled to seek any other relief or remedy which it may have
by contract, statute, law or otherwise for any breach hereof.
13. ARBITRATION. The parties agree that all disputes or questions
arising in connection with this Agreement and/or the termination of Employee's
employment hereunder 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; provided, however,
notwithstanding the foregoing, in no event shall any dispute, claim or
disagreement arising under Sections 7, 8, 9 and 10 of this Agreement that
requires injunctive or other equitable relief be required to be submitted to
arbitration pursuant to this provision or otherwise.
14. NOTICES. Any notice, demand or request which may be permitted,
required or desired to be given in connection therewith shall be given in
writing and directed to Employer and Employee as follows:
If to Employer, at: Applied Voice Recognition, Inc.
4615 Post Oak Place, Suite 111
Houston, Texas 77027
Attention: President
8
<PAGE>
Facsimile No.: (713) 621-5870
with a copy to: Boyar, Simon & Miller
4265 San Felipe, Suite 1200
Houston, Texas 77027
Attention: J. William Boyar, Esq.
Facsimile No.: (713) 552-1758
or, if to Employee, at: Mr. William T. Kennedy
1100 South Shepherd
Houston, Texas 77019
Notices shall be deemed properly delivered and received when and if either: (i)
personally delivered; (ii) delivered by nationally-recognized overnight courier;
(iii) when deposited in the U.S. Mail, by registered or certified mail, return
receipt requested, postage prepaid; or (iv) sent via facsimile transmission with
confirmation mailed by regular U.S. mail. Any party may change its notice
address for purposes hereof to any address within the continental United States
by giving written notice of such change to the other parties hereto at least
fifteen days prior to the intended effective date of such change.
15. SEVERABILITY. If any provision of this Agreement is rendered or
declared illegal or unenforceable by reason of any existing or subsequently
enacted legislation or by decree of a court of last resort, Employer and
Employee shall promptly meet and negotiate substitute provisions for those
rendered or declared illegal or unenforceable, but all the remaining provisions
of this Agreement shall remain in full force and effect.
16. ASSIGNMENT. This Agreement may not be assigned by any party
without the prior written consent of the other parties.
17. BINDING AGREEMENT. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto, and their respective legal
representatives, heirs, successors and permitted assigns.
18. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas.
19. ATTORNEYS FEES. In the event of any dispute between the parties
regarding this Agreement, the prevailing party shall be entitled to be
reimbursed for such prevailing party's attorneys fees and costs of court (or
cost of arbitration, as applicable) by the non-prevailing party.
20. AGREEMENT READ, UNDERSTOOD AND FAIR. Employee has carefully read
and considered all provisions of this Agreement and agrees that all of the
restrictions set forth are fair and reasonable and are reasonably required for
the protection of the interests of Employer.
9
<PAGE>
(Remainder of Page Intentionally Left Blank)
10
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on this
1st day of October, 1997, effective as of the Effective Date.
EMPLOYER:
APPLIED VOICE RECOGNITION, INC., a Utah
corporation
By: /S/ CHARLES W. SKAMSER
------------------------------
Charles W. Skamser, President
EMPLOYEE:
/S/ WILLIAM T. KENNEDY
-------------------------------
WILLIAM T. KENNEDY
Signature Page to
Employment Agreement
(William T. Kennedy)
11
<PAGE>
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
(TIMOTHY J. CONNOLLY)
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of July 1, 1997
(the "Effective Date"), by and among APPLIED VOICE RECOGNITION, INC., a Utah
corporation ("Employer"), and TIMOTHY J. CONNOLLY, an individual residing in
Harris County, Texas ("Employee").
W I T N E S S E T H:
-------------------
WHEREAS, Employer and Employee desire to enter into an agreement
regarding Employee's employment with Employer pursuant to the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, and intending to be
legally bound hereby, the parties covenant and agree as follows:
1. EMPLOYMENT. Employer hereby employs Employee and Employee hereby
accepts employment with Employer on the terms and conditions set forth in this
Agreement.
2. TERM OF EMPLOYMENT. The term of Employee's employment hereunder
(the "Term") shall commence as of July 1, 1997 (the "Commencement Date") and
shall continue (subject to termination by either Employer or Employee as
hereinafter provided) for an initial term (the "Initial Term") expiring on
December 31, 2000 (the "Expiration Date"). The Expiration Date shall be
automatically extended unless terminated by Employer or Employee for successive
one year periods following the expiration of the Initial Term. If Employer
desires to terminate Employee's employment under this Agreement at the end of
the Initial Term or at the end of any succeeding one year term, Employer shall
give written notice of such desire to Employee at least one month prior to the
expiration of the Initial Term or any succeeding one year term. If Employee
desires to terminate Employee's employment under this Agreement at the end of
the Initial Term or at the end of any succeeding one year term, Employee shall
give written notice of such desire to Employer at least one month prior to the
expiration of the Initial Term or any succeeding one year term. At the
expiration of the then existing term, Employer shall have no further obligation
to Employee other than payment of earned and unpaid Commissions (as hereafter
defined) under Section 3(b), and Employee shall have no further obligation to
Employer except as set forth in Sections 7, 8, 9 and 10.
3. COMPENSATION AND OTHER BENEFITS.
a. As compensation for all services rendered by Employee in
performance of Employee's duties or obligations under this Agreement, Employer
shall pay Employee the following base salary (the "Base Salary"):
(1) from July 1, 1997 until December 31, 1997, a monthly
base salary of SIXTEEN THOUSAND SIX HUNDRED SIXTY-SIX AND 66/100
DOLLARS ($16,666.66);
(2) from January 1, 1998 until December 31, 1998, a monthly
base salary of EIGHTEEN THOUSAND SEVEN HUNDRED FIFTY AND 00/100
DOLLARS ($18,750.00); and
(3) from January 1, 1999 until the Expiration Date, a
monthly base salary of TWENTY THOUSAND EIGHT HUNDRED THRITY-THREE AND
33/100 DOLLARS ($20,833.33).
Employee's Base Salary shall be payable in equal semi-monthly installments or in
the manner and on the timetable which Employer's payroll is customarily handled
or at such intervals as Employer and Employee may hereafter agree to from time
to time.
<PAGE>
b. In addition to receiving the Base Salary provided for in Section
3(a), beginning July 1, 1997 and through December 31, 1997, Employee shall be
entitled to receive a monthly commission (the "Commission") as follows:
(1) For each month of the period from July 1, 1997 through
December 31, 1997, the Commission will be calculated by multiplying (i) the
total amount of revenues actually received by Employer during a particular
month, by (ii) one and one half percent (1-1/2%).
(2) The Commission shall be paid by Employer to Employee along
with Employee's semi-monthly installment of Base Salary, but in any event
within forty-five (45) days after the last day of the month during which
such Commission was earned.
c. In addition to receiving the Base Salary provided for in Section
3(a), for the year beginning January 1, 1998 and thereafter during the Term
hereof, Employee shall be entitled to a bonus if, and only if, Employee has met
the performance criteria set by Employer for the applicable year. In connection
therewith, Employer agrees that by January 31 of each year, it shall set the
performance criteria for Employee's bonus to be earned during the applicable
year and shall communicate such criteria to Employee in writing. If Employee
successfully meets the performance criteria established by Employer (in the
discretion of Employer), Employer shall pay to Employee the bonus within thirty
(30) days of the end of the applicable year.
d. Employee shall be entitled to be reimbursed by Employer for all
reasonable and necessary expenses incurred by Employee in carrying out
Employee's duties under this Agreement in accordance with Employer's standard
policies regarding such reimbursements.
e. Employee shall be entitled during the Term, upon satisfaction of
all eligibility requirements, if any, to participate in all health, dental,
disability, life insurance and other benefit programs now or hereafter
established by Employer which cover substantially all other of Employer's
employees and shall receive such other benefits as may be approved from time to
time by Employer.
f. Employee shall be entitled to receive two weeks of paid vacation
for each year during the Term following the first anniversary of the
Commencement Date and shall be entitled to receive paid holidays as enjoyed by
all other employees of Employer.
g. Effective as of September 1, 1997, Employee shall be entitled to
receive an automobile allowance of $750 per month, payable on the first day of
each month during the remainder of the Term. Employee shall be responsible for
paying all costs related to ownership of Employee's vehicle, including
maintenance and repairs, insurance and fuel.
4. DUTIES.
a. Employee is employed to act as Chairman and Chief Executive Officer
of the Employer and in such other office or position as shall be assigned to
Employee from time to time by Employer, and to perform such duties as are
commensurate with Employee's position with Employer.
b. Employee agrees that during the period of employment, Employee
shall devote full-time efforts to Employee's duties as an employee of Employer
and Employee shall use Employee's best efforts to perform the duties of
Employee's position in an efficient and competent manner and shall use
Employee's best efforts to promote the interests of Employer and any affiliated
companies.
c. During the period of employment, Employee agrees not to (i) solely
or jointly with others undertake or join any planning for or organization of any
business activity competitive with the business activities of Employer, and (ii)
directly or indirectly, engage or participate in any other activities in
conflict with the best interests of Employer.
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<PAGE>
d. Employee agrees that during the period of employment Employee shall
refer to Employer all opportunities in the computer industry related to voice
recognition software designs and applications to which Employee might become
exposed in carrying out Employee's duties and responsibilities hereunder.
5. TERMINATION OF EMPLOYMENT. Employee's employment and this
Agreement shall terminate upon the earliest to occur of any of the following
events (the actual date of such termination being referred to herein as the
"Termination Date"):
a. The termination of the Agreement pursuant to Section 2.
b. Employee's employment pursuant hereto shall terminate in the event
of the death of Employee.
c. Employer may terminate Employee's employment under this Agreement
for cause without any prior notice, upon the occurrence of any of the following
events:
(1) any embezzlement or wrongful diversion of funds of
Employer or any affiliate of Employer by Employee;
(2) gross malfeasance by Employee in the conduct of
Employee's duties;
(3) material breach of this Agreement;
(4) gross neglect by Employee in carrying out Employee's
duties; or
(5) the failure of Employee to be able to perform
Employee's duties hereunder for a period of not less than thirty days
by reason of disability. For purposes of this Agreement, Employee
shall be deemed to have become disabled when the Board of Directors of
Employer, upon the advice of a qualified physician, shall have
determined that Employee has become physically or mentally incapable
(excluding infrequent and temporary absences due to ordinary illness)
of performing Employee's duties under this Agreement. Before making
any termination decision pursuant to this Section 5 (c)(5), the Board
of Directors of Employer shall determine whether there is any
reasonable accommodation (within the meaning of the Americans with
Disabilities Act) which would enable Employee to perform the essential
functions of Employee's position under this Agreement despite the
existence of any such disability. If such a reasonable accommodation
is possible, Employer shall make that accommodation and shall not
terminate Employee's employment hereunder based on such disability.
d. If Employee's employment is terminated for any of the reasons
specified in Section 5(b), (c) or (f), Employer shall no longer be obligated to
make the payments specified under Section 3 or to pay to Employee any other
compensation or benefits whatsoever, except as may otherwise be provided in
Section 5(e) or (f). Notwithstanding the foregoing, if for any reason Employee's
employment is terminated hereunder, any salary payable under Sections 3(a) or
3(b) which shall have been earned but not yet paid shall be paid by Employer to
Employee or Employee's estate, as the case may be.
e. Employee shall have the right to terminate Employee's employment
hereunder upon ninety days' notice to Employer after the occurrence of any of
the following events:
(1) a sale of all or substantially all of the assets of
Employer to a third party for which Employee does not continue in
employment; or
(2) a merger or consolidation of Employer with an entity for
which Employee does not continue in employment.
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<PAGE>
If this Agreement is terminated by Employee under this Section 5(e), any
then unvested Initial Options shall automatically become fully vested
immediately upon termination. The foregoing provisions of this Section 5(e)
shall not apply if the change of ownership that would otherwise trigger
Employee's termination right is caused by the registration by Employer or its
successors, of any class of equity securities pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended.
6. INVENTIONS AND CREATIONS BELONG TO EMPLOYER.
a. Any and all inventions, discoveries, improvements or creations
(collectively, "Creations") which Employee has conceived or made or may conceive
or make during the period of employment in any way, directly or indirectly,
connected with Employer's business shall be the sole and exclusive property of
Employer. Employee agrees that all copyrightable works created by Employee or
under Employer's direction in connection with Employer's business are "works
made for hire" and shall be the sole and complete property of Employer and that
any and all copyrights to such works shall belong to Employer. To the extent any
of the works described in the preceding sentence are not deemed to be "works
made for hire," Employee hereby assigns all proprietary rights, including
copyright, in these works to Employer without further compensation.
b. Employee further agrees to (i) disclose promptly to Employer all
such Creations which Employee has made or may make solely, jointly or commonly
with others during the period of employment to the extent connected with
Employer's business, (ii) assign all such Creations to Employer, and (iii)
execute and sign any and all applications, assignments or other instruments
which Employer may deem necessary in order to enable Employer, at Employer's
expense, to apply for, prosecute and obtain copyrights, patents or other
proprietary rights in the United States and foreign countries or in order to
transfer to Employer all right, title and interest in said Creations.
7. CONFIDENTIALITY; OWNERSHIP OF INFORMATION. Employer promises
that Employer will, during the Term, provide Employee with access to such
Confidential Information (as defined in Section 7(a)) owned by Employer and that
is used in the operation of Employer's business as reasonably necessary to allow
Employee to perform Employee's obligations hereunder. Employee acknowledges
that Employer has agreed to provide Employee with a definite term of employment
and with access to such Confidential Information of Employer during that term of
employment.
a. DEFINITION. For purposes of this Agreement, "Confidential
Information" means any and all information relating directly or indirectly to
Employer that is not generally ascertainable from public or published
information or trade sources and that represents proprietary information to
Employer, excluding, however, (i) Employees' business contacts, (ii) information
already known to Employee prior to Employee's employment with Employer, and
(iii) information required to be divulged in any legal or administrative
proceeding in which Employee is involved. Confidential Information shall consist
of, for example, and not intending to be inclusive, (A) software (source and
object codes), algorithms, computer processing systems, techniques,
methodologies, formulae, processes, compilations of information, drawings,
proposals, job notes, reports, records and specifications, and (B) information
concerning any matters relating to the business of Employer, any of its
customers, prospective customers, customer contacts, licenses, the prices it
obtains or has obtained for the licensing of its software products and services,
or any other information concerning the business of Employer and Employer's good
will.
b. NO DISCLOSURE. During the Term and at all times thereafter,
Employee shall not disclose or use in any manner, directly or indirectly, and
shall use Employee's best efforts and shall take all reasonable precautions to
prevent the disclosure of, any such trade secrets or other Confidential
Information, except to the extent required in the performance of Employee's
duties or obligations to Employer hereunder or by express prior written consent
of a duly authorized officer or director of Employer (other than Employee).
c. OWNERSHIP OF INFORMATION. Such Confidential Information is and
shall remain the sole and exclusive property and proprietary information of
Employer or Employer's customers, as the case may be, and is disclosed in
confidence by Employer or permitted to be acquired from such customers in
reliance on Employee's agreement
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<PAGE>
to maintain such Confidential Information in confidence and not to use or
disclose such Confidential Information to any other person except in furtherance
of Employer's business.
d. RETURN OF MATERIAL. Upon the expiration or earlier termination of
this Agreement for any reason, Employee shall immediately turn over to Employer
all documents, disks or other magnetic media, or other material in Employee's
possession or under Employee's control that (i) may contain or be derived from
Creations or Confidential Information, or (ii) are connected with or derived
from Employee's services to Employer. Employee shall not retain any Confidential
Information in any form (e.g., computer hard drive, microfilm, etc.) upon the
expiration or earlier termination of this Agreement.
8. NONCOMPETE; WORKING FOR COMPETITOR. In consideration of
Employee's employment by Employer, Employee will not, at any time during the
Term or at any time for twenty-four (24) months subsequent to any termination of
Employee's employment pursuant to the provisions of Section 5(c) or the
voluntary termination of employment by Employee pursuant to Section 2, directly
or indirectly, within the United States, Canada, Mexico, South America or
Europe, for Employee's own account or on behalf of any direct competitors of
Employer, engage in any business or transaction involving the design,
installation, integration, service or consulting with respect to voice
recognition software designs and applications (whether as an employee, employer,
independent contractor, consultant, agent, principal, partner, stockholder,
corporate officer, director or in any other individual or representative
capacity), without the prior written consent of Employer, which consent may be
withheld by Employer in Employer's sole and absolute discretion.
9. NON-SOLICITATION OF EMPLOYEES. During the Term and for a period
of twenty-four (24) months after the date of termination of employment, Employee
will not in any way, directly or indirectly (i) induce or attempt to induce any
employee of Employer to quit employment with Employer; (ii) otherwise interfere
with or disrupt Employer's relationship with its employees; (iii) solicit,
entice or hire away any employee of Employer; or (iv) hire or engage any
employee of Employer or any former employee of Employer whose employment with
Employer ceased less than one year before the date of such hiring or engagement.
Employee acknowledges that any attempt on the part of Employee to induce others
to leave Employer's employ, or any effort by Employee to interfere with
Employer's relationship with its other employees would be harmful and damaging
to Employer.
10. EMPLOYEE'S ACKNOWLEDGEMENT. It is the express intention of
Employee and Employer to comply with sections 15.50 et seq. of the Texas
Business and Commerce Code in effect as of the date of execution hereof.
Employee stipulates that the provisions of this Agreement are not oppressive or
overly burdensome to Employee and will not prevent Employee from earning an
income following termination of this Agreement. Employee warrants and
represents that:
a. Employee is familiar with non-compete and non-solicitation
covenants;
b. Employee has discussed or acknowledges the opportunity to discuss
the provisions of the non-compete and non-solicitation covenants contained
herein with Employee's attorney and has concluded that such provisions
(including, without limitation, the right to equitable relief and the length of
time provided for herein) are fair, reasonable and just under the circumstances;
c. Employee is fully aware of the obligations, limitations and
liabilities included in the non-compete and non-solicitation covenants contained
in this Agreement;
d. The scope of activities covered hereby are substantially similar to
those activities to be performed by Employee under this Agreement;
e. The twenty-four (24) month non-compete and non-solicitation period
is a reasonable restriction, giving consideration to the following factors: (1)
Employee and Employer reasonably anticipate that this Agreement, although
terminable under certain provisions, will continue in effect for sufficient
duration to allow Employee to attain superior bargaining strength and an ability
for unfair competition with respect to the customers covered hereby; (2) the
duration of the twenty-four (24) month non-compete and non-solicitation period
is a reasonably necessary period to allow
5
<PAGE>
Employer to restore its position of equivalent bargaining strength and fair
competition with respect to those customers covered hereby; and (3)
historically, employees of all types have remained with Employee for a duration
of longer than the duration of the twenty-four (24) month non-compete and non-
solicitation period; and
f. The limitations contained in this Agreement with respect to
geographic area, duration and scope of activity are reasonable; however, if any
court shall determine that the geographic area, duration or scope of activity of
any restriction contained in this Agreement is unenforceable, it is the
intention of the parties that such restrictive covenants set forth herein shall
not thereby be terminated, but shall be deemed amended to the extent required to
render such covenants valid and enforceable.
11. REMEDIES; INJUNCTION. In the event of a breach or threatened
breach by Employee of any of the provisions of this Agreement, Employee agrees
that Employer, in addition to and not in limitation of any other rights,
remedies or damages available to Employer at law or in equity, shall be entitled
to a permanent injunction without the necessity of proving actual monetary loss
in order to prevent or restrain any such breach by Employee or by Employee's
partners, agents, representatives, servants, employees and/or any and all
persons directly or indirectly acting for or with Employee. It is expressly
understood between the parties that this injunctive or other equitable relief
shall not be Employer's exclusive remedy for any breach of this Agreement, and
Employer shall be entitled to seek any other relief or remedy which it may have
by contract, statute, law or otherwise for any breach hereof.
12. ARBITRATION. The parties agree that all disputes or questions
arising in connection with this Agreement and/or the termination of Employee's
employment hereunder 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; provided, however,
notwithstanding the foregoing, in no event shall any dispute, claim or
disagreement arising under Sections 6, 7, 8, and 9 of this Agreement that
requires injunctive or other equitable relief be required to be submitted to
arbitration pursuant to this provision or otherwise.
13. NOTICES. Any notice, demand or request which may be permitted,
required or desired to be given in connection therewith shall be given in
writing and directed to Employer and Employee as follows:
If to Employer, at: Applied Voice Recognition, Inc.
4615 Post Oak Place, Suite 111
Houston, Texas 77027
Attention: President
Facsimile No.: (713) 621-5870
with a copy to: Boyar, Simon & Miller
4265 San Felipe, Suite 1200
Houston, Texas 77027
Attention: J. William Boyar, Esq.
Facsimile No.: (713) 552-1758
or, if to Employee, at: Mr. Timothy J. Connolly
8602 Pasture View Lane
Houston, Texas 77024
Notices shall be deemed properly delivered and received when and if either: (i)
personally delivered; (ii) delivered by nationally-recognized overnight courier;
(iii) when deposited in the U.S. Mail, by registered or certified mail, return
receipt requested, postage prepaid; or (iv) sent via facsimile transmission with
confirmation mailed by regular U.S. mail. Any party may change its notice
address for purposes hereof to any address within the continental United States
by giving written notice of such change to the other parties hereto at least
fifteen days prior to the intended effective date of such change.
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<PAGE>
14. SEVERABILITY. If any provision of this Agreement is rendered or
declared illegal or unenforceable by reason of any existing or subsequently
enacted legislation or by decree of a court of last resort, Employer and
Employee shall promptly meet and negotiate substitute provisions for those
rendered or declared illegal or unenforceable, but all the remaining provisions
of this Agreement shall remain in full force and effect.
15. ASSIGNMENT. This Agreement may not be assigned by any party
without the prior written consent of the other parties.
16. BINDING AGREEMENT. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto, and their respective legal
representatives, heirs, successors and permitted assigns.
17. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas.
18. ATTORNEYS FEES. In the event of any dispute between the parties
regarding this Agreement, the prevailing party shall be entitled to be
reimbursed for such prevailing party's attorneys fees and costs of court by the
non-prevailing party.
19. AGREEMENT READ, UNDERSTOOD AND FAIR. Employee has carefully read
and considered all provisions of this Agreement and agrees that all of the
restrictions set forth are fair and reasonable and are reasonably required for
the protection of the interests of Employer.
(Remainder of Page Intentionally Left Blank)
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on this
1st day of September, 1997, effective as of the Effective Date.
EMPLOYER:
APPLIED VOICE RECOGNITION, INC., a Utah
corporation
By: /S/ CHARLES W. SKAMSER
---------------------------------
Charles W. Skamser, President
EMPLOYEE:
/S/ TIMOTHY J. CONNOLLY
---------------------------------
TIMOTHY J. CONNOLLY
Signature Page to
Employment Agreement
(Timothy J. Connolly)
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<PAGE>
EXHIBIT 10.13
CONSULTING AGREEMENT
(MICHAEL J. WILSON)
THIS CONSULTING AGREEMENT (the "Agreement") is made as of November 1,
1997 (the "Effective Date"), by and among APPLIED VOICE RECOGNITION, INC., a
Utah corporation (the "company"), and MICHAEL J. WILSON, an individual residing
in Chicago, Illinois ("consultant").
W I T N E S S E T H:
WHEREAS, the Company and Consultant desire to enter into an agreement
regarding the providing of certain consulting services by Consultant to the
Company pursuant to the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, and intending to be
legally bound hereby, the parties covenant and agree as follows:
1. ENGAGEMENT. The Company hereby engages Consultant and Consultant
hereby accepts the engagement with the Company on the terms and conditions set
forth in this Agreement.
2. TERM OF ENGAGEMENT. The term of Consultant's engagement
hereunder (the "term") shall commence as of November 1, 1997 and shall continue
(subject to termination as hereinafter provided) for a one year term expiring on
October 31, 1998 (the "Expiration Date"). At the expiration of the Term, the
Company shall have no further obligation to Consultant other than payment of any
earned and unpaid fees under Section 3(a), the payment of reimbursable amounts
pursuant to Section 3(b), any amount payable pursuant to Section 6 and any right
under the Stock Option Agreement (as herein defined), and Consultant shall have
no further obligation to the Company except as set forth in Sections 7, 8, 9 and
10.
3. COMPENSATION AND OTHER BENEFITS.
a. As compensation for all services rendered by Consultant in
performance of Consultant's duties or obligations under this Agreement, the
Company shall pay Consultant a fee of twelve thousand five hundred dollars
($12,500) per month. The consulting fee provided for herein shall be payable in
equal semi-monthly installments on or about the first and fifteenth of each
month or at such other intervals as the Company and Consultant may hereafter
agree to from time to time; provided, however, any payment due as of the
execution of this Agreement shall be paid upon execution of this Agreement.
(b) The Company shall reimburse Consultant for all expenses
reasonably incurred by Consultant in connection with performing services
hereunder, including, without limitation, business class travel and other
business expenses and costs. Amounts reimbursable by the Company to Consultant
hereunder shall be paid by the Company to Consultant within thirty days after
receipt by the Company of Consultant's invoice therefor.
4. DUTIES.
a. During the term hereof, Consultant shall provide and perform
for the Company up to one hundred (100) days of services that generally conform
to the description of services described on EXHIBIT AA@ attached hereto and that
are designated by the Chairman or the President of the Company from time to
time. For purposes hereof, a day of service shall be approximately equal to
seven and one half working hours, but shall not include travel time. Consultant
agrees to provide to the Company a monthly accounting of time spent performing
services hereunder, including a brief description of the services performed.
Consultant shall retain full direction and control of the means and methods by
which Consultant performs the above services and of the places at which such
services are to be rendered.
<PAGE>
b. During the Term, Consultant agrees not to solely or jointly
with others undertake or join any planning for or organization of any business
activity directly in the area of voice recognition software designs and
applications.
c. Consultant agrees that during the Term Consultant shall
refer to the Company all opportunities in the computer industry related to voice
recognition software designs and applications to which Consultant might become
exposed in carrying out Consultant's duties and responsibilities hereunder.
5. STOCK OPTION PLAN. As a further inducement to Consultant to
accept the consulting engagement upon the terms set forth herein and in
consideration of Consultant=s execution of this Agreement, Consultant shall be
granted, under the Applied Voice Recognition, Inc. 1997 Incentive Plan, options
to purchase 100,000 shares of the Company's common stock, par value $0.001 (the
"options"), pursuant to the Stock Option Agreement in the form attached hereto
as EXHIBIT AB@ (the "Stock Option Agreement"). The Stock Option Agreement shall
(i) be executed by the Company and Consultant immediately upon execution of this
Agreement, (ii) specify an exercise price per share (subject to adjustment as
set forth in the Stock Option Agreement) equal to the last reported trade of the
Company's common stock on the Nasdaq OTC Bulletin Board on the date prior to the
date this Agreement becomes fully executed by the parties hereto, and (iii)
include a provision providing for vesting of the stock options at the rate of
one thousand (1,000) shares per day for each day of services performed by
Consultant hereunder; provided, that any options not vested on the Expiration
Date shall, to the extent that the Term was not sooner terminated, become vested
on the Expiration Date. In the event Consultant's engagement is terminated for
any reason as described herein, Consultant shall be eligible to retain all
Options that have vested, but following such termination, any additional
unvested Options shall be cancelled.
6. TERMINATION OF ENGAGEMENT. Either of the Company or the
Consultant shall have the right to terminate Consultant's engagement hereunder
without prior notice and without cause; provided, however, (a) if Consultant's
engagement was terminated by the Company, Consultant shall continue to receive
the compensation described in Section 3 above for a period of one (1) month
following the date of such termination; and (b) in the event the aggregate
compensation paid by the Company to Consultant pursuant to Section 3(a),
including the one (1) month severance described above (if applicable),
aggregates less than $1,500 per day for each day of service Consultant has
rendered to the Company pursuant hereto, the Company shall pay to Consultant
such difference. Notwithstanding the foregoing, the aggregate compensation to
be paid to Consultant pursuant to this Agreement shall not exceed $150,000.
7. INVENTIONS AND CREATIONS BELONG TO THE COMPANY.
a. Any and all inventions, discoveries, improvements or
creations which Consultant has conceived or made or may conceive or make during
the Term and that in any way, directly or indirectly, are connected with the
Company's business (collectively, "creations") shall be the sole and exclusive
property of the Company. Consultant agrees that all Creations that are
copyrightable works created by Consultant are "works made for hire" and shall be
the sole and complete property of the Company and that any and all copyrights to
such works shall belong to the Company. To the extent any of the works
described in the preceding sentence are not deemed to be "works made for hire,"
Consultant hereby assigns all proprietary rights, including copyright, in these
works to the Company without further compensation.
b. Consultant further agrees to (i) disclose promptly to the
Company all such Creations, (ii) assign all such Creations to the Company, and
(iii) execute and sign any and all applications, assignments or other
instruments which the Company may deem necessary in order to enable the Company,
at the Company's expense, to apply for, prosecute and obtain copyrights, patents
or other proprietary rights in the United States and foreign countries or in
order to transfer to the Company all right, title and interest in said
Creations.
8. CONFIDENTIALITY; OWNERSHIP OF INFORMATION. The Company promises
that the Company will, during the Term, provide Consultant with access to such
Confidential Information (as defined in Section 8(a)) owned by the Company and
that is used in the operation of the Company's business as reasonably necessary
to allow Consultant to perform Consultant's obligations hereunder. Consultant
acknowledges that the Company has agreed to provide Consultant with access to
such Confidential Information of the Company during the Term.
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<PAGE>
a. DEFINITION. For purposes of this Agreement, "Confidential
Information" means any and all information relating directly or indirectly to
the Company that is not or does not become generally ascertainable from public
or published information or trade sources and that represents proprietary
information to the Company, excluding, however, (i) Consultants' business
contacts, (ii) information already known to Consultant prior to Consultant's
engagement with the Company, (iii) information disclosed to Consultant without
confidential or proprietary restriction by a third party who rightfully
possesses the information (without confidential or proprietary restriction) and
did not learn of it, directly or indirectly, from the Company, or (iv)
information required to be divulged in any legal or administrative proceeding in
which Consultant is involved. Confidential Information shall consist of, for
example, and not intending to be inclusive, (A) software (source and object
codes), algorithms, computer processing systems, techniques, methodologies,
formulae, processes, compilations of information, drawings, proposals, job
notes, reports, records and specifications, and (B) information concerning any
matters relating to the business of the Company, any of its customers,
prospective customers, customer contacts, licenses, the prices it obtains or has
obtained for the licensing of its software products and services, or any other
information concerning the business of the Company and the Company's good will.
b. NO DISCLOSURE. During the Term and at all times thereafter,
Consultant shall not disclose or use in any manner, directly or indirectly, and
shall use Consultant's best efforts and shall take all reasonable precautions to
prevent the disclosure of, any such Confidential Information, except to the
extent required in the performance of Consultant's duties or obligations to the
Company hereunder or by express prior written consent of a duly authorized
officer or director of the Company.
c. OWNERSHIP OF INFORMATION. Such Confidential Information is
and shall remain the sole and exclusive property and proprietary information of
the Company or the Company's customers, as the case may be, and is disclosed in
confidence by the Company or permitted to be acquired from such customers in
reliance on Consultant's agreement to maintain such Confidential Information in
confidence and not to use or disclose such Confidential Information to any other
person except in furtherance of the Company's business.
d. RETURN OF MATERIAL. Upon the expiration of the Term or
earlier termination of the engagement for any reason, Consultant shall
immediately turn over to the Company all documents, disks or other magnetic
media, or other material in Consultant's possession or under Consultant's
control that may contain or be derived from Creations or Confidential
Information. Consultant shall not retain any Confidential Information in any
form (e.g., computer hard drive, microfilm, etc.) upon the expiration of the
Term or earlier termination of the engagement.
9. NONCOMPETE; WORKING FOR COMPETITOR. In consideration of
Consultant's engagement by the Company, Consultant will not, at any time during
the Term or at any time for one (1) year subsequent to any expiration or, if
earlier, termination of the Term, directly or indirectly, within the United
States, Canada, Mexico, South America or Europe, for Consultant's own account or
on behalf of any direct competitors of the Company, engage in any business or
transaction directly involving the design, installation, integration, service or
consulting with respect to voice recognition software designs and applications
(whether as an employee, employer, independent contractor, consultant, agent,
principal, partner, stockholder, corporate officer, director or in any other
individual or representative capacity), without the prior written consent of the
Company, which consent may be withheld by the Company in the Company's sole and
absolute discretion; provided, that nothing herein shall prohibit Consultant
from acquiring or holding securities of any publicly traded company.
10. NON-SOLICITATION OF EMPLOYEES. During the Term and for a period
of one (1) year after the date of expiration or, if earlier, termination of the
Term, Consultant will not in any way (i) induce or attempt to induce any
employee of the Company to quit employment with the Company; (ii) otherwise
intentionally interfere with or intentionally disrupt the Company's relationship
with its employees; (iii) solicit or entice any employee of the Company to leave
the employ of the Company other than by general advertisement or other
solicitation not directed specifically to such employee; or (iv) hire or engage
(whether for his own account or the account of others) any person Consultant
knew to be an employee of the Company or hire or engage any person Consultant
knew to be a former employee of the Company whose employment with the Company
ceased less than one year before the date of such hiring or engagement. With
regard to the foregoing, Consultant agrees that he will use reasonable means to
determine whether any person hired by Consultant during the applicable period
meets the provisions of clause (iv) above. Consultant acknowledges that the
Company claims that any
3
<PAGE>
attempt on the part of Consultant to induce others to leave the Company's
employ, or any effort by Consultant to interfere with the Company's relationship
with its employees would be harmful and damaging to the Company.
11. CONSULTANT'S ACKNOWLEDGEMENT. It is the express intention of
Consultant and the Company to comply with sections 15.50 et seq. of the Texas
Business and Commerce Code in effect as of the date of execution hereof.
Consultant stipulates that the provisions of this Agreement are not oppressive
or overly burdensome to Consultant and will not prevent Consultant from earning
an income following termination of this Agreement. Consultant warrants and
represents that:
a. Consultant is familiar with non-compete and non-solicitation
covenants;
b. Consultant has discussed or acknowledges the opportunity to
discuss the provisions of the non-compete and non-solicitation covenants
contained herein with Consultant's attorney and has concluded that such
provisions (including, without limitation, the right to equitable relief and the
length of time provided for herein) are fair, reasonable and just under the
circumstances;
c. Consultant is fully aware of the obligations, limitations
and liabilities included in the non-compete and non-solicitation covenants
contained in this Agreement;
d. The scope of activities covered hereby are substantially
similar to those activities to be performed by Consultant under this Agreement;
e. The one (1) year non-compete and non-solicitation period is
a reasonable restriction, giving consideration to the following factors: (1)
Consultant and the Company reasonably anticipate that this Agreement, although
terminable under certain provisions, will continue in effect for sufficient
duration to allow Consultant to attain superior bargaining strength and an
ability for unfair competition with respect to the customers covered hereby; (2)
the duration of the one (1) year non-compete and non-solicitation period is a
reasonably necessary period to allow the Company to restore its position of
equivalent bargaining strength and fair competition with respect to those
customers covered hereby; and (3) historically, consultants and employees of all
types have remained with the Company for a duration of longer than the duration
of the one (1) year non-compete and non-solicitation period; and
f. The limitations contained in this Agreement with respect to
geographic area, duration and scope of activity are reasonable; however, if any
court shall determine that the geographic area, duration or scope of activity of
any restriction contained in this Agreement is unenforceable, it is the
intention of the parties that such restrictive covenants set forth herein shall
not thereby be terminated, but shall be deemed amended to the extent required to
render such covenants valid and enforceable.
12. REMEDIES; INJUNCTION. In the event of a breach or threatened
breach by Consultant of any of the provisions of this Agreement, Consultant
agrees that the Company, in addition to and not in limitation of any other
rights, remedies or damages available to the Company at law or in equity, shall
be entitled to a permanent injunction without the necessity of proving actual
monetary loss in order to prevent or restrain any such breach by Consultant or
by Consultant's partners, agents, representatives, servants, employees and/or
any and all persons directly or indirectly acting for or with Consultant. It is
expressly understood between the parties that this injunctive or other equitable
relief shall not be the Company's exclusive remedy for any breach of this
Agreement, and the Company shall be entitled to seek any other relief or remedy
which it may have by contract, statute, law or otherwise for any breach hereof.
13. ARBITRATION. The parties agree that all disputes or questions
arising in connection with this Agreement and/or the termination of Consultant's
engagement hereunder 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; provided, however,
notwithstanding the foregoing, in no event shall any dispute, claim or
disagreement arising under Sections 7, 8, 9 and 10 of this Agreement that
requires injunctive or other equitable relief be required to be submitted to
arbitration pursuant to this provision or otherwise.
4
<PAGE>
14. NOTICES. Any notice, demand or request which may be permitted,
required or desired to be given in connection therewith shall be given in
writing and directed to the Company and Consultant as follows:
5
<PAGE>
If to the Company, at: Applied Voice Recognition, Inc.
4615 Post Oak Place, Suite 111
Houston, Texas 77027
Attention: President
Facsimile No.: (713) 621-5870
with a copy to: Boyar, Simon & Miller
4265 San Felipe, Suite 1200
Houston, Texas 77027
Attention: J. William Boyar, Esq.
Facsimile No.: (713) 552-1758
or, if to Consultant, at: Mr. Michael J. Wilson
132 Settlers Drive
Naperville, Illinois 60565
Facsimile No.: (630) 637-1816
Notices shall be deemed properly delivered and received when and if either: (i)
personally delivered; (ii) delivered by nationally-recognized overnight courier;
(iii) when deposited in the U.S. Mail, by registered or certified mail, return
receipt requested, postage prepaid; or (iv) sent via facsimile transmission with
confirmation mailed by regular U.S. mail. Any party may change its notice
address for purposes hereof to any address within the continental United States
by giving written notice of such change to the other parties hereto at least
fifteen days prior to the intended effective date of such change.
15. SEVERABILITY. If any provision of this Agreement is rendered or
declared illegal or unenforceable by reason of any existing or subsequently
enacted legislation or by decree of a court of last resort, the Company and
Consultant shall promptly meet and negotiate substitute provisions for those
rendered or declared illegal or unenforceable, but all the remaining provisions
of this Agreement shall remain in full force and effect.
16. ASSIGNMENT. This Agreement may not be assigned by any party
without the prior written consent of the other parties.
17. BINDING AGREEMENT. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto, and their respective legal
representatives, heirs, successors and permitted assigns.
18. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas.
19. ATTORNEYS FEES. In the event of any dispute between the parties
regarding this Agreement, the prevailing party shall be entitled to be
reimbursed for such prevailing party's attorneys fees and costs of court (or
cost of arbitration, as applicable) by the non-prevailing party.
20. AGREEMENT READ, UNDERSTOOD AND FAIR. Consultant has carefully
read and considered all provisions of this Agreement and agrees that all of the
restrictions set forth are fair and reasonable and are reasonably required for
the protection of the interests of the Company.
21. INDEPENDENT CONTRACTOR. Consultant shall operate at all times as
an independent contractor of the Company, and is in no way considered an
employee of he Company. This Agreement does not authorize the Consultant to act
for the Company as its agent or to make commitments on behalf of the Company.
22. AMENDMENTS. This Agreement may not be modified or amended except
by an instrument in writing, signed by the Consultant and by a duly authorized
representative of the Company.
6
<PAGE>
23. ENTIRE AGREEMENT. The terms of this Agreement are intended by
the parties to be the final expression of their agreement with respect to the
retention of Consultant by the Company and may not be contradicted by evidence
of any prior or contemporaneous agreement. The parties further intend that this
Agreement shall constitute the complete and exclusive statement of its terms and
that no extrinsic evidence whatsoever may be introduced in any judicial,
administrative, or other legal proceeding involving this Agreement.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on this
1st day of November, 1997, effective as of the Effective Date.
THE COMPANY:
APPLIED VOICE RECOGNITION, INC., a Utah
corporation
By: /S/ TIMOTHY J. CONNOLLY
----------------------------------------
Timothy J. Connolly, Chairman and Chief
Executive Officer
CONSULTANT:
/S/ MICHAEL J. WILSON
----------------------------------------
MICHAEL J. WILSON
Signature Page to
Consulting Agreement
(Michael J. Wilson)
8
<PAGE>
EXHIBIT 10.14
[FROM OF BRIDGE LOAN PROMISSORY NOTE]
PROMISSORY NOTE
July __, 1997
The undersigned, APPLIED VOICE RECOGNITION, INC., a Utah corporation
("Maker"), whose address is 4615 Post Oak Place, Suite 111, Houston, Texas
77027, for value received, promises to pay to the order of ("Payee") in lawful
money of the United States of America, the principal sum of [amount loaned to
the Company], plus accrued interest on the unpaid principal amount outstanding
on this note at a per annum rate equal to twelve percent (12%) per annum. All
principal and any interest hereunder shall be payable at 4615 Post Oak Place,
Suite 111, Houston, Texas 77027 or such other place which Payee may hereinafter
designate in writing. In addition to the interest provided for herein, upon
execution of this Note and the advancement of the proceeds evidenced hereby,
Maker shall deliver to Payee a Warrant for the purchase of [one warrant for each
dollar loaned to the Company] shares of common stock of Maker with an exercise
price equal to the purchase price of the first shares sold pursuant to the
Private Placement Memorandum (as defined below).
This Note is due upon the sooner to occur of six (6) months following
the date of this Note, or three (3) business days following the completion of
the sale of securities to investors (and receipt of first funds therefrom)
pursuant to that certain Confidential Private Placement Memorandum dated June 5,
1997 (the "Private Placement Memorandum") or such other private placement
memorandum as may be produced by Maker from time to time. All payments
hereunder shall be first credited against any accrued and unpaid interest
hereunder, with all remaining amounts credited against unpaid principal. In the
event a payment is past due hereunder, interest shall accrue on the entire
remaining principal balance hereunder at the lessor of eighteen percent (18%)
per annum or the maximum rate allowed by law. All interest that shall accrue in
accordance herewith on the indebtedness evidenced by this Note shall be computed
on the basis of a year of 365 or 366 days, as the case may be.
In addition to all principal and accrued interest on this Note, Maker
agrees to pay (i) all reasonable costs and expenses incurred by all owners and
holders of this Note in collecting this Note through reorganization, bankruptcy,
receivership or any other proceeding and (ii) reasonable attorney's fees when
and if this Note is placed in the hands of an attorney for collection after
default.
It is the intention of the parties hereto to conform strictly to
applicable usury laws as in effect from time to time during the term of this
Note. Accordingly, if any transaction or transactions contemplated hereby would
be usurious under applicable law (including the laws of the United States of
America, or of any other jurisdiction whose laws may be mandatorily applicable),
then, in that event, notwithstanding anything to the contrary in this Note, it
is agreed as follows: (i) the provisions of this paragraph shall govern and
control; (ii) the aggregate of all interest under applicable laws that is
contracted for, charged or received under this Note shall under no circumstances
exceed the maximum amount of interest allowed by applicable law, and any excess
shall be promptly credited to Maker by Payee (or, if such consideration shall
have been paid in full, such excess shall be promptly refunded to Maker by
Payee) (iii) neither Maker nor any other person or entity now or hereafter
liable in connection with this Note shall be obligated to pay the amount of such
interest to the extent that it is in excess of the maximum interest permitted by
the applicable usury laws; and (iv) the effective rate of interest shall be ipso
facto reduced to the maximum lawful interest rate.
Maker and any other co-makers, endorsors, guarantors and sureties
severally (i) waive notice (including, but not limited to, notice of protest,
notice of dishonor and notice of intent to accelerate or notice of
acceleration), demand, presentment of payment, protest and filing of suit for
the purpose of fixing liability, (ii) consent that the time of payment hereof
may be extended without notice to them or any of them, (iii) expressly agree
that it will not be necessary for any holder hereof, in order to enforce payment
of this Note by them, to first institute suit or exhaust its remedies against
Maker or any others liable herefor, or to enforce its rights against any
security herefor and (iv) consent to any extensions or postponements of time of
payment of this Note or any other indulgences with respect hereto without notice
thereof to any of them.
<PAGE>
IN WITNESS WHEREOF, Maker has executed this Note effective as of the
date first above written on this ___ day of ___________, 1997.
APPLIED VOICE RECOGNITION, INC.
By:
----------------------------------
Print Name:
--------------------------
Title:
-------------------------------
2
<PAGE>
EXHIBIT 10.15
[FORM OF BRIDGE LOAN WARRANT]
NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT") OR THE
SECURITIES LAWS OF ANY STATE; THEREFORE, THIS WARRANT AND THE SECURITIES
ISSUABLE UPON EXERCISE HEREOF MAY NOT BE SOLD OR TRANSFERRED EXCEPT UPON SUCH
REGISTRATION OR UPON DELIVERY TO THE CORPORATION OF AN OPINION OF COUNSEL
SATISFACTORY TO THE CORPORATION THAT REGISTRATION IS NOT REQUIRED FOR SUCH SALE
OR TRANSFER.
WARRANT TO PURCHASE COMMON STOCK
OF
APPLIED VOICE RECOGNITION, INC.
VOID AFTER [THREE YEARS AFTER DATE OF ISSUANCE]
This certifies that, an individual residing in Houston, Texas
("Holder"), is entitled to purchase at any time on or prior to [three years
after date of issuance], [one warrant for each dollar loaned to the Company]
Shares of fully paid and nonassessable shares of Common Stock, $0.01 par value
(the "Common Stock"), of Applied Voice Recognition, Inc., a Utah corporation
(the "Company"), at a price equal to $1.60 per share. This Warrant may be
exercised by surrendering this Warrant with the subscription form hereinafter
set forth fully executed, at the principal office of the Company in Houston,
Texas, accompanied by payment of the full purchase price of the shares so
purchased in cash, and upon compliance with and subject to the conditions set
forth herein. The purchase price per share and the number of shares covered by
this Warrant are subject to adjustment from time to time as hereinafter set
forth.
The purchase price per share of Common Stock from time to time in
effect under this Warrant, and the number and character of shares covered
hereby, shall be subject to adjustments from time to time in certain instances
as follows, and the term "Warrant Price" shall mean the price per share
originally set forth in this Warrant or any price resulting from adjustments
pursuant to the terms hereof.
1. In case the Company shall subdivide its outstanding shares of
Common Stock into a greater number of shares or shall issue in exchange for its
outstanding shares of Common Stock a greater number of shares of Common Stock,
then in each such case from and after the record date for such subdivision or
exchange, the number of shares of Common Stock covered by this Warrant shall be
increased in proportion to such increase in the number of outstanding shares of
Common Stock and the Warrant Price then in effect shall be correspondingly
decreased; and in the case the Company shall reduce the number of shares of its
Common Stock by a combination of shares or shall issue in exchange for its
outstanding shares of Common Stock a lesser number of shares of Common
<PAGE>
Stock, then in each such case from and after the record date for such
combination or exchange, the number of shares of Common Stock covered by this
Warrant shall be decreased in proportion to such reduction in the number of
outstanding shares of Common Stock, and the then prevailing Warrant Price shall
be correspondingly increased.
2. In case the Company shall declare and pay a dividend upon its
Common Stock payable in Common Stock, then in each such case from and after the
record date for determining the stockholders entitled to receive such dividend,
the number of shares of Common Stock covered by this Warrant shall be increased
in proportion to the increase in the number of outstanding shares of Common
Stock through such stock dividend, and the then prevailing Warrant Price shall
be correspondingly decreased.
3. In case of any reclassification or change of outstanding shares
of Common Stock (other than as a result of a subdivision, combination or stock
dividend) or in case of the consolidation or merger of the Company with or into
any other corporation (other than a merger in which the Company is the
continuing corporation and which does not result in any reclassification or
change in its outstanding shares of Common Stock), or in case of any sale by the
Company of all or substantially all of its assets to another corporation, the
holder of this Warrant shall have the right thereafter to receive upon exercise
hereof the amount and kind of shares of capital stock and other securities and
property entitled to be received upon such reclassification, change,
consolidation, merger or sale by a holder of the number of shares of Common
Stock of the Company covered by such Warrant at the then prevailing Warrant
Price, subject to subsequent adjustments as provided herein.
4. In case at any time:
(a) the Company shall declare any dividend upon its Common Stock
or make any other distribution to the holders of its Common Stock; or
(b) the Company shall propose to offer for subscription to the
holders of its Common Stock any additional shares of stock of any class of
any other securities or rights; or
(c) the Company shall propose any reclassification or change of
outstanding shares of Common Stock, or any consolidation or merger of the
Company or any sale by the Company of its assets to which paragraphs 1, 2
or 3 would be applicable, then, in any one or more of such cases, the
Company shall cause at least twenty (20) days' prior notice to be mailed to
the registered holder of this Warrant on the date on which the books of the
Company shall close or a record shall be taken for such dividend,
distribution or subscription rights, or for a vote upon such
reclassification, change, consolidation, merger or sale, as the case may
be. In addition, the Company shall mail to the registered holder of this
Warrant copies of each report of communication of the Company mailed to the
holders of its Common Stock simultaneously with such mailing to holders of
Common Stock.
2
<PAGE>
5. (a) As a condition precedent to the taking of any action which
would cause an adjustment reducing the Warrant Price below the then par value of
the shares of Common Stock issuable upon the exercise hereof, the Company will
take such corporate action as may be necessary in order that it may validly and
legally issue fully paid and nonassessable shares of such Common Stock at such
adjusted Warrant Price.
(b) No adjustment shall be made in the number of shares purchasable
upon exercise of this Warrant in any case in which the adjustment would result
in a change of less than 2/100ths of a share of Common Stock, as such Common
Stock is constituted immediately subsequent to the event giving rise to the
proposed adjustment, except that any action taken by the Company which otherwise
would occasion an adjustment in an amount less than 2/100ths of a share shall be
carried forward and taken into account at the time of any subsequent adjustment
in the number of shares purchasable hereunder.
6. (a) This Warrant or any security issued or issuable upon
exercise of this Warrant may not be offered or sold except in conformity with
the 1933 Act.
(b) The Company may cause the legends set forth at the top of the
first page hereof to be set forth on each Warrant and the following legend to be
set forth on each certificate representing Common Stock issued upon exercise of
this Warrant, unless counsel for the Company is of the opinion as to any such
certificate that such legend is unnecessary:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE OR THE
SECURITIES LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED EXCEPT UPON SUCH REGISTRATION OR UPON DELIVERY TO THE
CORPORATION OF AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION
THAT REGISTRATION IS NOT REQUIRED FOR SUCH SALE OR TRANSFER.
7. (a) This Warrant may be exercised for all or part of the
shares covered hereby. In the event of a partial exercise of this Warrant, the
Company will issue to the holder hereof the number of shares of Common Stock
purchased under this Warrant, together with a new, similar Warrant for the
unused portion. This Warrant may be subdivided into or combined with similar
Warrants at any time, at the option of the holder hereof, at the principal
office of the Company in Houston, Texas.
(b) The Company shall not be required to issued fractional shares of
Common Stock upon any exercise of Warrants. As to any final fraction of a share
in which the same holder of one or more Warrants, the rights under which are
exercised in the same transaction, would otherwise be entitled to purchase upon
such exercise, the Company shall pay a sum in cash equal to the excess of the
market value of such fractional share (determined in such reasonable manner as
the
3
<PAGE>
Board of Directors of the Company may prescribe) over the proportional part of
the exercise price represented by such fractional share.
8. The holder of this Warrant shall not be entitled, as such, to any
of the rights of a stockholder of the Company.
9. This Warrant is being issued in connection with that certain
series of bridge loans made to the Company by Holder and certain other parties.
The Company hereby represents and warrants that the form of promissory note and
warrant given to each of the parties making the above described bridge loans
will be identical in substance other than the identity of the parties making the
loan, the amount of the various loans and the amount of the various warrants.
The Company further represents and warrants that for each party making a bridge
loan to the Company, the number of shares that can be purchased pursuant to the
warrant (prior to any adjustment as set forth in such warrant) shall be equal to
the dollar amount of the loan.
IN WITNESS WHEREOF, THE COMPANY HAS CAUSED THIS WARRANT TO BE EXECUTED
BY THE PRESIDENT EFFECTIVE AS OF JUNE ____, 1997 ON THIS ____ DAY OF JULY, 1997.
APPLIED VOICE RECOGNITION, INC.
By:
-----------------------------------
Charles W. Skamser, President
4
<PAGE>
PURCHASE FORM
The undersigned, the Holder of the within Warrant, hereby irrevocably
elects to exercise the purchase rights represented by said Warrant for, and to
purchase thereunder, ________ shares of Common Stock, $0.01 par value per share,
of Applied Voice Recognition, Inc. and herewith makes payment of $___________ in
cash therefor and requests that the certificates for such shares be issued in
the name of _________________________________________ and delivered to
____________________________________, whose address is
_____________________________________________________ and, if such shares shall
not be all of the shares purchasable hereunder, that a new Warrant of like tenor
for the balance of the shares purchasable hereunder be delivered to the
undersigned.
Dated:
---------------------- ------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
Address:
----------------------------------
Social Security
or Tax I.D. No.
---------------------------
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
Connolly, 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 Connolly, 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 30, 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 30, 1998
